Elis SA (ELIS) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Elis Third Quarter 2023 Revenue Presentation Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to our speaker today, Xavier Martire, CEO. Please go ahead.

Thank you. Good afternoon, and welcome to Elis Q3 2023 trading update presentation. I'm Xavier Martire, CEO of Elis; and I am here in Paris with our CFO, Louis Guyot. After an overview on the Q3 2023 business highlights, I will hand over to Louis. He will detail the quarter performance by geography. I will then come back to provide you with a summary of our recent CSR announcements and then share with you our views on the remainder of '23. 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, as usual, please take the time to read the disclaimer. So Q3 revenue reached EUR 1.12 billion with a very solid organic growth of plus 9.5% despite a negative calendar effect of around 50 basis points. The performance was driven by the significant pricing adjustments negotiated in '22 to offset inflation of our cost base, as well as the additional adjustments implemented since the beginning of 2023. Along with these pricing adjustments, the group displayed strong pricing discipline, which led to a moderate increase in churn in the quarter. We fundamentally believe that this discipline will lead to further margin improvement going forward. Furthermore, commercial momentum remained good in Q3 with many additional new contract signed in Workwear. In Hospitality, the comparable base was difficult. Summer '22 was strong and we observed a mixed picture in '23. Our volumes were in line, globally speaking, with '22 at group level, with some geographies being slightly above last year, some others below. The good news is that September showed some improvement across the board. This good trading performance allowed us to confirm all our '23 objectives, and our relentless pricing makes me very confident looking at 2024. I will come back to this at the end of the presentation. In Q3, we also continued to deleverage the group. Financial leverage stood at 2.2x at the end of September, perfectly on track to get to slightly below 2.1x at year-end, which is a line with an investment-grade rating. On that note, Moody's raised Elis outlook to positive from stable at the beginning of October, which is an encouraging sign. The next slide provides an organic growth breakdown for Q3 and the first 9 months. Year-to-date organic growth at the end of September was above 13%, driven by strong price effect to offset inflation, with some differences between countries depending on the local evolution of wages. Catch-up in Hospitality in the third quarter also led to some uplifts on revenue, with France, the U.K., and Southern Europe the beneficiaries of this catch-up. The Q3 dynamics remained the same, with Central Europe, U.K. and Ireland, Latin America, and Southern Europe still delivering double-digit organic growth. Louis will provide you shortly with a detailed review of every geography. Moving on to the next slide. We continued to sign many new Workwear contracts in the third quarter. 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 notified by Elis and we built up our salesforce 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 with a specific salesforce. And unlike other countries such as France, those markets are still largely fragmented among small independent players that usually insource washing. We currently observe some market consolidation going on along with an overall professionalization of the industry. These bigger players that emerge generally opt to transition to outsourcing linen washing and we work on and on with them in that process. In the Healthcare market, we also signed several new contracts since the beginning of the year with public hospitals in the U.K., France, and Brazil. The post-COVID environment remains very favorable for Elis, with an increasing need for hygiene in general, notably for Pest control and Cleanroom business, which continued to deliver strong double-digit growth year-to-date to reach cumulative revenue close to EUR 200 million in the first 9 months. Elis is already the European leader in reusable cleanroom garments, cleaning systems, goggles, and related contamination control solutions. Our existing client base provides us with many cross-selling opportunities in these very technical and 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 or 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 logistic 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. Moving on to the next slide. I'm very satisfied with how we have been able to offset inflation since the beginning of the year. 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 inflation of our cost base to our clients is because we always have been very transparent with them, disclosing our main cost indicator 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 clients to understand the evolution of our cost base. Second, our services are essential to our clients' activity. Hotel and hospital 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 only a fairly small component in our clients' P&L. As an example, we charge only EUR 5 to EUR 10 for the linen of a hotel room, depending on whether we are talking about a low-budget hotel or a 5-star palace. So compared to the actual price of a hotel room, you can see that the cost of our service is not very material. Also, our service is fundamental. When looking at our other end markets, the cost of our service is actually even less material for clients than in Hospitality. So bottom line, when we apply a plus 10% or plus 20% price increase, we are talking about between EUR 1 and EUR 2 more for a hotel room that is often sold for more than EUR 300 a night. So this is not material for most of our clients. Additionally, in most cases and in most 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. Re-insourcing is not really an option. We don't see this happening in our markets as it would result in higher costs for our clients. Furthermore, our competitors have more or less the same cost base as ours and there is no risk of disruption from an alternative way of providing the service. It means that everybody is facing the same inflation problem, and we have noticed overall rational behavior from our competitors in most of our markets. These 4 reasons combined explain why we have been successful with our pricing adjustments in this challenging cost environment. Nevertheless, we saw this year a moderate increase of our churn rate due to this pricing discipline. 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 cost, whereas energy costs only account for around 10%. In 2023, our energy bill will be slightly higher than in '22, because a share of our '22 volumes had been negotiated before the energy crisis, so at low prices. All in, we expect the inflation of our costs to be at around plus 9% in 2023. 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 will not continue to pass on some pricing adjustments in 2024. Let me now hand over to Louis.

Thank you, Xavier, and good evening to everyone. Let's start on Slide 10 with France, where organic revenue growth was 8.8% in Q3. This was driven by 2 main factors. First, a very good commercial momentum as shown by the record number of new Workwear contracts signed. It is a clear illustration of what Xavier has explained on the growing trend for outsourcing in Workwear and the sales organization we have set up to answer these needs. As an illustration, the value of the Workwear contracts signed in '23 so far is 10% above what we did last year. Pest control is also very dynamic, with a strong organization both for sales and for technical support to answer the growing needs of the customers. Second driver, the good pricing level, corresponding to the carry forward effect of the adjustments negotiated through '22, and some new adjustments to offset cost inflation beginning of January. On the other hand, the Hospitality activity was slightly lower than in '22 in July and August. You have seen French hotels speaking of a drop of 2% in volume. September was better. And we see a good pick up in October due to the Rugby World Cup and the good weather. Clients are optimistic for the rest of the year, and the signatures of new contracts are good. With that said, we note a comeback of the default rate among the small clients, which returned to pre-crisis level. Moving on to the next slide. Central Europe delivered organic revenue growth of 12.3%. Price effect was especially strong as a lot of negotiations initiated in 2022 took some time to unfold and were implemented either late last year or from January 1 onward this year. You remember that minimum wage in Germany increased by 25% in '22, with the biggest increase in October. It was a massive shock to pass to clients not accustomed to price increases, especially in Healthcare. That drove a couple of tough discussions [ to undo ] some losses as we have been very disciplined to pass inflation. The other markets are very well oriented, starting with Workwear, where the strong developments are still going on. In Germany, Netherlands, Poland, Czech Republic, the outsourcing trend doesn't slow down. We have a strong sales organization to answer it. As an illustration, the value of the Workwear contracts signed in '23 in Germany so far is 2.5x what we did in '22. In Netherlands, it's 27% above last year. We are also very happy with the Hospitality market in Germany. As in U.K., it has now moved to a profitable market with decent prices, and we are signing a lot of new profitable contracts. Scandinavia and Eastern Europe now, organic growth was a plus 5% in Q3. The Workwear market is still dynamic, especially Cleanroom, with outsourcing trends on new business implemented. Our organization is strong to answer those needs in all the countries of the zone, the 4 countries of Scandinavia, of course, but also Baltics, where the growth is impressive. In Hospitality, activity was good during summer, especially in September. Clients are optimistic for the rest of the year. Our pricing policy is consistent in the region with lower impact than other geographies due to the share of public healthcare clients in the mix. Moving on to the next slide. Growth was very satisfactory in U.K. and Ireland with organic revenue growth of 11.6%. One important driver is still our great pricing discipline in Hospitality, coupled with pristine quality of service, but where we assume temporarily some contract losses. We now have a profitable market, which was not the case some years ago, and allow us to push more for new contracts. The level of sales this year is twice the level of last year. Apart that, the activity during summer was slightly below last year. The Workwear business is going well with losses under control and further commercial developments on the back of a massive investment in salesforce in the segment, which is now delivering. As an illustration, the value of the Workwear contracts signed in '23 so far is 28% above what we did last year. That being said, the economic situation is not excellent, as you know, so we see there -- on there some lower activity of the clients, for example, in retail. Last segment, Healthcare. We have still excellent relationship with NHS trustees, which allows both for pricing fairness and commercial development. Moving on to the next slide. The success story continues in Latin America with 10.9% organic revenue growth in Q3. We continue to open the market in the region in Healthcare with many new clients outsourcing for the first time, public or private. As you know, the potential market is massive and we see the path for a long time development. The potential to unlock is the Workwear, where the growth is impressive, but the outsourcing rate is still very low. In all the countries of the zone, the inflation is now receding in the region of 5%, but the natural lag of the pricing set it above as it is usually the case in this situation. In Southern Europe, organic growth is still very dynamic at 10.3% in Q3. Our pricing policy remains strong, with some marginal losses in Hospitality. In this segment, Hospitality, activity was good during the summer, especially in September, and the clients are optimistic for the end of the year. We have a good trend of new contracts signed way above last year. In Healthcare, the situation is stable with good retention and decent pricing discussion. We are still opening the Workwear for industry, mainly in food processing and pharma. As you know, the outsourcing rate is very low and we are educating the market with some push from regulation and more aspiration for health and safety. As an illustration, the value of the Workwear contracts signed in '23 so far is 22% above what we did in '22. So moving to the next slide. Net financial leverage decreased below 2.2x at the end of September, exactly 2.16x, which surely paves the way to the full year target of 2.1x. You can see on the chart that we have made strong efforts in '19 to reduce the net debt in absolute level, which is now EUR 200 million below '19 despite COVID and despite the Mexican acquisition fully paid in cash. At the same time, we have clearly stated our willingness to reduce leverage below 2x and obtain investment-grade status. The deleveraging trajectory that we anticipate is in line with this investment-grade rating requirement. Once obtained, the group's financial policy will aim at maintaining this rating. Let's now [Audio Gap]

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Hello?

Dear Speakers, you are back.

Yes. So I assume you got the Page 16. So let me now jump back on Page 17, well-diversified debt profile. So I was speaking about financial costs, and we hear sometimes that increasing rates may hit the free cash flow. We believe this will not be the case. First, let's remember that we entered into this financial new era with a good maturity schedule from 2024 to 2035 with nearly everything at fixed rates. It allows us to pay around EUR 90 million financial costs out of EUR 3 billion debt this year. Second, we have already secured today the liquidities for the 2024 bond. So there will be no major refinancing before the 2025 bond. As we deliver strong cash flow, we shall be able to refinance this EUR 500 million bond with a much smaller one, which will limit additional costs even if the rate is higher. Besides, we believe that we shall be investment-grade by then, enabling another contraction of the Elis spread, which has always been one of the best of its rating category. So at the end of the day, our financial costs will show only a limited increase in the coming years. With that, I will now hand back to Xavier.

Thank you, Louis. So as you probably know, Elis is a real actor of the circular economy, promoting usage rather than ownership, which creates a real virtuous pattern. Our circular economy business model contributes to reduce the consumption of natural resources and extend the lifespan of our products. It is a sustainable solution to address current environmental challenges and a much better option compared to far less environmentally friendly offers that exist on the market, such as do-it-yourself washing and disposable or single-use products. We always search for extending durability when conceiving 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 these efforts will bring further organic growth opportunities in the future, given that our clients are increasingly concerned about this subject. In '22, we committed to redefining our climate strategy and setting objectives aligned with the Paris Agreement and based on the science-based target methodology. Our climate change actions and performance has been recognized by leading rating agencies. In early October, we proudly announced that our ambitious climate objectives has been validated by the SBTi, an internationally recognized initiative which supports companies in setting targets to reduce their CO2 emissions, enabling them to contribute at their own scale to the global challenge of keeping the temperature increase below 1.5 degrees. These targets cover all 3 emission scopes. Our objective for Scopes 1 and 2 is to achieve a reduction of 47.5% of our emissions between 2019 and 2030. We will optimize even further our energy use in our laundries, increase our renewable energy use, and reduce the environmental footprint of our logistic fleet by optimizing delivery routes and accelerating the transition toward alternative vehicles. For Scope 3, we aim to reduce our absolute emissions from purchased goods and services, upstream transportation, upstream of energy, employee commuting, and end-of-life treatment of sold products by 28% by optimizing the laundry management process, further reducing the quantities of textile articles consumed, and building new partnerships with our suppliers to help them to reduce their own CO2 emissions. We look forward to working with all stakeholders to achieve these ambitious objectives and contribute to the global effort required. Now before moving to our 2023 outlook, let's take a quick look at the graph that we present every quarter. There you see the evolution of top line and margin performance over more than 2 decades, and it is fair to say that the last few years have clearly demonstrated the resilience of our business model and our strong pricing power. The backbone of our resilience is twofold: first, the diversified geographical footprint with France representing less than a 1/3 of our business; and second, a 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, one very interesting characteristic of our business that we saw in 2020 is that linen investments come on and 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 of cash generation during the COVID years in '20 and '21. In 2022, 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 '23. And going forward, it should continue to improve every year on the back of top line dynamism and progressive normalization of the change in working cap requirements. 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 rarely #3. When we enter in 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 offers a second to none supply security for all our clients. At the end of the day, this strong network density is both a key competitive advantage for us and a high barrier to entry for other competitors as replicating such a network is virtually impossible. Moving on to the next slide. We did notice some effects of the economic slowdown in the U.K., but we still do not see anything supporting the case of a general slowdown in Europe. Also, as mentioned earlier, we saw some small clients sometimes cutting some non-essential services in Q3. But if such a slowdown were to come, I would like to remind you of Elis' very resilient model. In an industry set, a large part of our clients operate in very resilient sectors such as food processing, pharmaceuticals and weight 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' level. Second, Healthcare is resilient by nature. Third, in Trade and Services, just like in industry, we charge our clients with a fixed fee regardless of their activity level. Therefore, this end market is very resilient too. At the end of the day, we consider that only our Hospitality end market, which accounts for 25% of total revenue, could be somewhat impacted by a global economic slowdown, even if we continue to see many construction or upgrade projects in the hotel sector in all our geographies, which should be a mitigating factor in case of downturn. You should also keep in mind that we are fundamentally less cyclical than hotel players, as the main reason why restaurants goes down in times of crisis is a decrease in hotel prices, not occupancy rates. And we charge based on occupancy regardless of room price. 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 clients need for hygiene products, possibility, and sourcing security that obviously intensified after the pandemic and contributes to accelerating the development of our outsourcing. The need for a more secure supply chain also materialized as some clients reshored production operations from Asia back to Europe. So many shortages that appeared in Europe during the pandemic highlighted the importance of industry resilience in Europe and paved 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 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 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, the increasing share of our revenues 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 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. We are very confident that these internal initiatives combined with sustainable positive market trends will support our organic growth going forward. So now let's talk about our '23 outlooks that we upgraded last July and which we fully confirm today. Organic growth should be around 12%. This number factors in the volume losses due to our strict pricing discipline in all countries. We estimate that the impact from these losses will represent around 1% on a yearly basis. Thanks to the good efforts we made to neutralize the impact of inflation as well as the productivity gains we achieved, we expect EBITDA margin to be up circa plus 70 bps and EBIT to be above EUR 660 million. Headline net income should be above EUR 410 million. 2023 free cash flow is expected above EUR 260 million and financial leverage at year-end will be just slightly below 2.1x. Looking at '24, it is, of course, too early to provide any preset targets, but I can say we feel very optimistic. First, the pricing effect will be significant next year in the context of an inflation expected at around 4% in Europe. And even though some macro constraints remain, there is no reason to believe that there will be any significant change from our regular volume growth. Second, the increase in our cost base will be under control, with a significant share of cost components being either already fixed, such as energy costs, or perfectly known by the market and therefore easily adjustable, such as wages. Therefore, we are confident that '24 will be another year of improvement in our main financial indicator. 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] Now we're going to take the first question, and it comes from the line of David Cerdan from Kepler Cheuvreux.

Thank you for taking my question and to report some numbers quite in line with the expectation. I have some questions regarding 2024. So can you maybe more develop what you expect in terms of pricing and volume for 2024? Can you give us some numbers on those items? And my second question is related to your investment grade status. So this is an objective and you say that you want to stay investment grade. So my question, is it compatible with a big deal? Have you some opportunities regarding some big deals? And if so, would you be okay to change this strategy to remain investment grade?

So 2024, you easily understand that it's not time to give you a very precise target for the organic growth. So what we can expect is a price increase close to the global inflation, so let's say around 3%, 4%, and volume expectation, so between 1% to 2%. So that means to expect something close to 5% at this stage is a good range of our own expectation. But of course, we will be much more precise when we will start the year '24. And the second question, investment grade, yes, it's very important. So I hope that -- it is a question of weeks now to have this improvement of the rating of Elis. We have clearly the willingness to stay at this level. It's clear, it's part of the strategy of the group to control the level of debt. To the second part of your question, do you have any big deal in the pipe? The answer is, no, nothing today. So no additional comment to make because we -- it's totally impossible to imagine anything how we -- you finance and so on and so on and so on. Because of course, it depends on the nature of the deal, the size of the synergies, the pace to extract the synergies. And so it's too much theoretical at this stage to talk about such kind of potential way to finance a deal that does not exist at this stage.

Okay. Just on the margin, what do you expect for 2024, to continue to progress?

Yes, it was clearly our statement since this summer. We said that we have some good view on how we will still continue to improve the margin. A mix of classical improvement of our operations and productivity gains as always. And also, the fact that we expect a positive balance of inflation in 2024. That will be quite unique for us. Because due to the policy of coverage of the cost of energy, we expect a decrease of the total cost of energy at this level in 2024. But of course, we will keep price increase close to the level of inflation. So we will have a positive balance of inflation that, as I said, is for me totally unique. I have never seen this over the last 50 years. So it is the reason why we are so comfortable with another improvement of the margin in '24. And by the way, another strong increase of the cash also in '24, because you remember that in '23 we have a calendar effect that is very negative in December. The last 2 days are Saturday, Sunday. So a huge part of the money collected from the customer will arrive in 2024. So that's why when you see the guidance of EUR 260 million in free cash flow in '23, it's take into account this negative calendar effect. And of course, we will have the natural improvement of the performance of the group in '24, plus this favorable impact in the calendar.

And the next question comes to the line of Annelies Vermeulen from Morgan Stanley.

I have 3, please. So firstly, could you, as always, quantify the price-volume mix in your organic growth in the third quarter? Clearly you had, I think, double-digit price growth in the first half. But given you were already putting in price increases towards the end of 2022, I'm wondering if that pricing effect has come down within the mix. Then secondly, given the free cash flow that you expect to generate for next year and given the leverage is close to 2x nearly already basically, how should we think about capital allocation for 2024? Clearly -- I know you wanted -- you hope to do more deals, but given the M&A activity has been relatively quiet in the last few quarters, could we see more of a return of cash to shareholders? And then just, lastly, on the contract losses that would lower margin, can you quantify that, please, either in terms of basis points or millions of euros in terms of the contracts that you exited or didn't -- chose not to renew? That would be helpful.

Yes. So last question, magnitude of exceptional losses due to price, if I may. We are close to one point of the turnover, so something around EUR 40 million on a yearly basis. First question, the breakdown between price and volume in the quarter 3. We are at around 8% price and 2% volume with minus 0.5 in calendar effect that will affect both. But it is true and it was totally expected that the price effect will slow down regularly in -- over the year '23, because we -- of course, we -- in '22, we increased the price regularly all over the year. In '23, it was more in January '23, at the beginning of the year. So it is a reason why the pricing effect will slow down regularly all over the year '23. But what we have seen in Q3 is perfectly in line with what we expected. Then capital allocation for '24. So it's -- we will re-price everything, of course, when we present the guidance '24 with the presentation of the result '23. So it will be in March '24. What we can say at this stage is -- so you have understood that the free cash flow will increase significantly in '24. In terms of M&A, we expect slightly more deals in '24 than in '23, because '23 we had a lot of projects due to some family willingness to wait a little because they wanted to have a full year normative -- with normative activity before to sell. So probably we will have perhaps slightly more bolt-ons than '23, for sure more than '23. So we can imagine that the classical year of bolt-on will be between EUR 50 million and EUR 100 million of cash spent for this bolt-on. On top of that, we have some millions also for the earn-out of the Mexican deal. Then for the dividends, we have in mind to have a regular and small increase of the dividends, all paid in cash. So it will be something between EUR 90 million or EUR 100 million, something like this. And all the rest will be dedicated to decrease the debt in euro. So it is the capital allocation that we have in mind for the year '24.

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

Just firstly, on the growth in Scandinavia, which seemed to slow down quite significantly in Q3. Can you just touch a bit more on what's happening in that market, particularly with those public health customers? And whether you'll be able to pass on higher inflation in the form of higher prices next year? And then secondly, on the Central European market, a similar question around your public health -- your public healthcare customers. Are you expecting to be able to pass on significant price rises? What are the dynamics in that market? And can you explain perhaps in a bit more detail the margin dynamics into next year?

So first question, growth in Scandinavia. First, we need to carefully monitor some figures quarter-by-quarter. As you know, we have some calendar effects that will depend not only on the geographies, but also service provided. And in Scandinavia, we have a lot of invoices that are sent weekly, on a weekly basis. So that means that the impact of the calendar is slightly more important there than at the group level. So it has a small impact. Nevertheless, it's true and you are totally right when you say that with some public big contracts in Scandinavia, it was quite complex to pass some price increase. And it explains also why the price effect is more limited there and why we have this more limited and more moderate level of organic growth in this part of the group. Globally speaking, to come back to your second question, what is the dynamics behind the negotiation with the public Healthcare? At the end, let's be clear, it is a question of market share and position of the market. So we are clearly in position to say that if the contract is not profitable, we are ready to take some risk. And depending on the market position we have, of course, it works well with no losses or we have more trouble. So when you are in U.K. or in France, where we have solid market share, we have been able to have some agreement with the customer. Or when you have a tender that will be renewed, we have some chance to win. In Germany, the market share of Elis is more limited. Even if we are leader in Healthcare, we have only probably 30% on market share. And so sometimes to times, you will have a family laundry that will accept some price that we consider too low to take some volume. But even if it represents a loss at the group level, of course, that is slightly above what we used to have as a churn rate. I want also to highlight the fact that it is still very, very limited. When you see the effort of the group in terms of price increase over the last 2 to 3 years, you remember that the net price increase last year in '22 was 7%. The net price increase in '23 will be 9%. We expect something close to the inflation, so 3%, 4% net price increase again in 2024. And despite this -- that represents a shock on the market, uh? In the past, we used to increase prices by 1% only. Despite this, we say that we will perhaps have 1 point more in churn, not more. So that's why it's not so massive. And so that means that even with public healthcare, in vast majority of cases at the end, we have the ability to find an agreement. They are not totally stupid. They understand that the request of price increase is totally fair and totally backed by some increase of our cost.

Just as a follow-up and given my colleague's questions on capital allocation, maybe I'll also ask a question on capital allocation. You mentioned in your answer to the second question about market shares and previous answers have referenced accelerating bolt-on deals next year. When we think about M&A next year and beyond, are the priorities primarily about continuing to consolidate your existing markets? Or are you thinking about potential new markets for you to enter? And which markets would you consider to be the most attractive?

So as always, definitely the bolt-on strategy is the priority. It makes so much sense to increase our market share and to increase our position where we are that it is by far the priority. And when we say that we expect more bolt-on next year, it's more bolt-on in comparison to '23. That is a very small year in terms of bolt-on. And so our expectation, globally speaking, for M&A next year is to be back to a normative year. So that's why I guess that we will spend between EUR 50 million and EUR 100 million for acquisition. For the rest, nothing is today on the table or in the pipe for opening a brand new market or something like this. So I cannot discuss on this topic. That is too much theoretical at this stage.

[Operator Instructions] And now we're going to take our next question and it comes from the line of Simona Sarli from Bank of America.

So first of all, you commented a little bit on the trends in Hospitality in September. Could you please talk also about exit rate for the other divisions if you have seen any significant changes throughout the quarter? Also, you talked about the resilience in volumes and that typically clients are charged for the inventory in place. But could you please also comment on price evolution in a recessionary environment? And lastly, apologies for missing the number, but you were referencing to the free cash flow improvement expected in 2024. Could you please go back to that? And also, what should be the positive impact from the 2 incremental working days?

So first, trend in Hospitality. Yes. So September slightly better. By the way, additional information, the 2 first week of October are very good. So it's even better than the global trend of September. Too early to be too much optimistic, but it's always good to see. And our clients are quite optimistic. For the other end market, no major subject. As we say, we don't see any sign of a global recession in Europe. So some time to times, as explained, for France, very small customer. When it is the end of the contract, they will try to perhaps to cancel one of -- all the service we provide to make some savings. For instance, when it is not essential for them, they will keep uniform, but they will start to stop the service for [ mats ], for instance. But it is very exceptional and absolutely no impact in our Q3 performance. And then what happens when we have a kind of a slowdown in the activity and what is our ability to negotiate price increase and so on? For me, it's not -- the link is very limited. At the end, as always, it's a combination of, are they able to find another way to have the service with a better condition? So insourcing is never, never a subject. So they cannot do that. It would be more costly. All the other competitors will have the same subject of cost increase due to wages. I think that as a market leader, we are able to control a little the behavior of the others and they don't want to open any kind of price war against us. So that means that even when we have -- we could consider more capacity due to potential recession. First -- don't forget that it will be limited because we are talking about a small decrease of potential volume in case of a huge recession. As a reminder, 2008, instead of 2% organic growth, we provided 0. So that means that even in a tough recession, the impact is very limited. So that means that the extra capacity in the market due to a potential recession will be limited. And at the end, the market is quite mature on this pricing subject. Let's have a look on the last big crisis in volume, so COVID. Everybody stayed calm. Even during COVID period where everybody were looking for additional volume, we have not seen any crazy behavior on the pricing effect. In '22, we were not back to the normative level of volume at the beginning of the year. Nevertheless, we have been able to increase significantly our price to offset the impact of the inflation. So that's why I don't see any major risk of a link between global recession and more difficulty to increase our price. '24 free cash flow, it is not because you have not well heard. It is because I didn't give the precise figures for '24. It's too early to make a precise guidance for the full year '24 for the free cash flow. The magnitude of the cash that will move from December to January, perhaps, Louis, you can give some idea.

It depends on the effort we'll be able to push on the last day. But we are speaking of EUR 20 million to EUR 30 million that can move 1 year on the other.

And then the question comes to the line of David Cerdan from Kepler Cheuvreux.

Yes, very rapidly on -- can we have an update on the integration of the Mexican company? Second question is regarding your shareholding structure. So now you have a new shareholder. So what are the benefits from this Brazilian shareholder? And the last one is regarding the U.S. Are you contemplating this market? Is it in your plan?

So Mexico integration is perfect. Absolutely no subject. We are still by far above the expectation. It's a big pleasure to work with the family in place. You know that they have an earn-out to improve also the value for them. And everybody's happy. They can have more money at the end through the earn-out. We have by far more everything, sales, margin, cash than expected. We are by far the leader and 20x bigger than the #2. So we don't see any kind of a huge competition against us. So it's a question of outsourcing. The potential is massive. Potential of outsourcing in Mexico still remains very huge. So we have a potential of a double organic growth like this year for a long period of time and with very solid margin. So absolutely a perfect integration. So new shareholders, it's a very good news. We have started to discuss and to meet the new shareholders BW for more than 4 years. So it was a kind of regular discussion in between us. It's very interesting for the company to have such kind of quality of new shareholders. It's family owned with a very long-term commitment with the company, with the ability to follow us and to in case of a new project -- we know that they have the willingness to follow the company. So it's very interesting. On top of that, it's clear and everybody knows that they want to have more involvement in the company in terms of ownership. So they started with a block of 6%. But you know that, for instance, when they invested in Verallia, they significantly increased their stake in the company. So it's very probable that they try to increase in the future their ownership also in Elis. And it's always interesting to have this quality of shareholders to discuss also about, of course, Elis in LATAM, but a more broader view on what we can do in the future. And it is a transition to the last question, so U.S. It's not new that we are always studying this big market. It is the biggest market of the world. The company was there 25 years ago. So we are regularly studying this market. But nothing on the table, nothing in the pipe for the short term in U.S.

But just for the U.S., just to understand your point, some people could say, okay, is it a market in which Elis has a potential to enter, to develop, to be different from the existing market? And so at the end, why do you spend time on the U.S.?

So it is the biggest market of the world. So I think that it wouldn't be very serious from the company not to have a view on what are the trends in this market, what can we expect? And the situation of today could change because you don't know what will be the evolution of flat linen, for instance. We say that today it's totally fragmented, only some small players. But we start to see a kind of consolidation. So we need to stay agile to see what happens. As it is a market -- and it would be -- if one day we decide to enter, probably it will not be with a new service, totally new for Elis and so on. It will be on what we know, so Workwear or flat linen. And we have demonstrated every time in the past that we have the opportunity to deliver a strong improvement. When -- you could have exactly the same question some years ago with LATAM. What are you doing in LATAM to enter in 2014 in Brazil, far, far, far from your bases? You have so many things to do in Europe and you enter with the company as a 21% EBITDA. It could be seen as a risk and stupid and so on. But 9 years after, we are very happy to be there. We have now EUR 0.5 billion of business in LATAM with a margin that is at least at the group level. So Brazil -- we are at close to 34%, 35% EBITDA in Brazil 9 years after. And this business mitigates the risk of the company. Because let's imagine -- it is what a lot of people are imagining, that we could have a kind of recession in Europe in '24. We will be very happy to have EUR 0.5 billion in LATAM, not exposed at all to the recession in Europe because we have 80% in Healthcare there, with a potential of more than 10% organic growth. And it was not the case, by the way, in 2008 when we had the last recession in Europe. So it's a question of mitigating the risk and a better balanced portfolio of opportunities. So that's why if one day -- but as I said, we have nothing on the table at this stage. But if one day we enter in the U.S., I do believe that if we stick in what we know, Workwear, hygiene, flat linen, if we stick there, of course, we'll create some value, of course, we will bring some know-how. And it's a question of time. But of course, we will be able to deliver some improvement. If you remember, David, when we made the acquisition of Berendsen -- I remember precisely in 2018 when we made the Investor Day to present the case, we had some question, "Why don't you sell U.K.? The performance is very weak. You will have some trouble to improve. You should sell." And we said, "No, no, no, we will not sell U.K., because due to the fact that the performance is very weak, it's perfect because we will create some value by improving the situation." And we started in 2018 in U.K. with the EBITDA margin at 22%, 23%, something like this. Now, despite COVID, Brexit, inflation, crisis of energy and so on, we are now above 30%. So we have created a lot of value and in a short period of time. So that's why I think that even if we have no synergy day 1, if one day we enter in U.S., we have a way to create some value.

There are no further questions. I would now like to hand the conference over to Xavier Martire for any closing remarks.

No, no special remarks. Just thank you for taking the time to assist to this call. And I wish you a wonderful evening. Bye-bye.

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.