Elis SA (ELIS) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Elis Full Year 2023 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the call over to Mr. Martire, Chief Executive Officer. Thank you. Please go ahead.

Thank you. Good morning, and welcome to Elis 2023 Annual Results Presentation. I'm Xavier Martire, CEO of Elis. And I am here in Paris with our CFO, Louis Guyot. After an overview of the highlights of the year for Elis, I will hand over to Louis, he will detail the '23 results. I will then come back to provide you with an update on our CSR journey and our strategy before detailing our outlook for 2024. 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. And before we start, please take the time to read the disclaimer. I'm very happy to report a great financial performance in '23 with marked improvements of all profitability KPIs along with strong cash flow generation and deleveraging. Top line momentum was strong with growth of plus 12.8%, of which 11.8% on an organic basis to reach more than EUR 4.3 billion, a record number for Elis. EBITDA reached EUR 1,475 million, with EBITDA margin up plus 130 basis points at 34.2%. EBIT was up more than 25% at EUR 683 million, with EBIT margin up plus 160 bps at [ 19.9% ] (sic) [ 15.9% ]. Full year headline net income per share was up more than 18% and reached a record level of EUR 1.70 on a fully diluted basis. Return on capital employed also reached a record level at 13.9%. Free cash flow was especially strong at nearly EUR 304 million, showing a 35% improvement year-on-year with very good cash collection at year-end. Finally, financial leverage ratio at the end of December '23 decreased by 0.5x to 2.2x, which is better than what we anticipated. This strong financial performance will enable us to propose a cash dividend of EUR 0.43 per share at the next AGM up circa 5% year-on-year. The remarkable financial performance achieved in '23 results from Elis' operational -- results from Elis' operational excellence with many productivity gains generated throughout the year, notably on logistic costs. We also continue to record many commercial successes, especially in workwear where outsourcing continue to develop. Finally, our ability to efficiently adjust our prices to reflect cost base inflation was also a significant driver of our performance. The visibility for 2024 is good, and we have entered the year with confidence. '24 should be another year of profitable growth for Elis with around circa 5% organic revenue growth, along with EBITDA margin close to 35% and free cash flow close to EUR 340 million. The financial leverage ratio should decrease by 0.2x at the end of '24. I will come back to this at the end of the presentation. The next slide provides a bridge between '22 and '23 revenue, which increased nearly plus 13% year-on-year to a record level of EUR 4.3 billion. Volumes were driven by good commercial dynamics, especially in workwear with further outsourcing. We also benefited from a catch-up in Hospitality in Q1 on the back of an easy comparable base. Around 70% of the total EUR 488 million increase year-on-year came from pricing, which corresponds to an effect of circa 9%, in line with the inflation of our cost base. Our strong pricing discipline when signing a new contract or renewing an existing one resulted a moderate increase in churn for the year. Our Mexican acquisition closed in July '22, contributed EUR 55 million entirely in H1 and other acquisitions contributed another [ EUR 30 million ], so a total impact of plus 1.8% of revenue. Lastly, FX had a minus [ 0.8% ] impact on revenue in '23, which corresponds to a shortfall of EUR 30 million, especially due to the evolution of the Swedish krona, the Norwegian krone, and the British pound. Moving on to the next slide. The many initiatives we launched to improve Elis' organic growth profile are gradually bearing fruit, and commercial momentum was good in workwear in '23. This reflects the accelerating outsourcing trend that we have noted since the pandemic. This outsourcing trend has been notified by Elis early in the cycle, and we built up our sales force in many countries to capture, as many opportunities as possible. We believe that this outsourcing trend will continue going forward, driven by 3 main factors: first, the need for more hygiene; second, the evolution in European regulations that change market standards; and third, the reindustrialization of Europe. Now looking at the healthcare market, we have -- we are being proactive in opening the nursing home market in both Spain and the U.K., where we launched dedicated offers with specific sales force. Unlike other countries such as France, those markets are still largely fragmented among small independent players that usually insource washing, and there is therefore growth potential for [ it there ]. The post-COVID environment remains very favorable for Elis, with an increasing need for hygiene in general, notably for pest control and the cleanroom business, which delivered more than 10% organic growth in '23 to reach cumulative revenue of close to EUR 300 million. I will provide you with more details on these 2 businesses on the next slide. In 2023, we also continued to roll out the offering of our services to small clients when our network density [indiscernible] and our ability to efficiently serve small clients is essentially linked to the density we have in a specific country. [indiscernible] recorded great success in '23 in Sweden and in Brazil. Going forward, the improvement of our network density through M&A or organic growth will make more countries eligible for the addition of the offer for small clients. This should contribute to margin expansion in the future, as a very efficient logistics in place with service to small clients generally leads to good margins. Moving on to the next slide, I would like to give you an update on our pest control business, which has been growing at nearly 30% per year over the last decade, and whose development has been accelerating since the end of the pandemic. Pest control is a perfect example of the margin accretive service that we added to our wholesale portfolio. Over time, we have signed many pest control contracts with existing customers, leveraging our strong customer relationships and second-to-none network density. Over the last decade, we have developed our pest control network through small bolt-on acquisitions, creating local platforms able to address more and more clients in our geographies. And today, we propose our pest control services in 10 countries with around 380 specialized technicians. The business unit has at the same time work to develop innovative traceability and prevention solutions, as well as more responsible alternative solutions. In some countries, the offering is also now available to individual customers. Over time, Elis pest control has also increased its level of professionalism, and we believe our technical know-how is comparable to what pure pest control players are offering. In 2023, Elis revenue in pest control was at nearly EUR 60 million. The acquisition of Gruppo Indaco in Italy and Levante in Spain will help us create local platform to boost the development of our pest control offer in these 2 countries. Going forward, we hope to continue to significantly grow revenue through cross-selling, further bolt-on and the launch of the service in some group countries. where it is not offered today. Moving on to the next slide, let me talk about our cleanroom business, which is another fast-growing high profitability service that we propose. We are, by far, the largest European player in that field with a network of 30 cleanrooms. We offer a large variety of products such as reusable cleanroom garments, cleaning systems, goggles and related contamination control solutions. Our existing client base provides us with many cross-selling opportunities in this very technical and highly profitable markets. The business has historically delivered double-digit revenue growth with a marked acceleration since the pandemic. To support this activity growth, we have also been active on the M&A side, like in 2021 with the acquisition of Scaldis in Belgium. The cleanroom business structurally benefits from the reopening of some pharma and microelectronics plants in Europe, and we believe Elis will get the lion's share of the market development in Europe in the coming years. On to the next slide, I'm very satisfied with how we have been able to offset inflation in both '22 and '23. 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 results 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 have always been very transparent with them disclosing our main cost inductor. At the end of the day, the price of these cost items are public data. So our customers know perfectly well that our pricing adjustments are legitimate. 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 business. Third, the cost of our service represents generally only around 4% of our clients' P&L. So even when we apply a 10% or -- to 20% price increase, the increase in euro for customer is generally not material for most of them. Fourth and last, alternative solutions to our services are very limited. Re-insourcing is not really an option, and we don't see this happening in our market, and it would result in higher costs for our clients. And furthermore, competitors have more or less the same cost base, as a whole, 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. [ For results ] combined explain why we have been successful with our pricing adjustments in these times of strong inflation. Nevertheless, we saw a moderate increase of our churn rate in '23 due to our strict pricing discipline. Moving on to the next slide, price effect for 2023 was at plus 9%, in line with the increase of our cost base. And as a reminder, salaries accounts for more -- for around 60% of our cost base and are by far the main trigger for Elis' pricing adjustments. Energy costs account for around 10%. And the remainder is made up of several smaller costs such as chemical products or paper. Looking at '24, inflation is still present in all geographies, and while it continue to increase everywhere, this will mechanically impact our cost base, and we have already adjusted or we adjust our prices accordingly in the course of '24 on the back of the pricing indexation formula that is in our contract. Moving on to the next slide, I would like to focus again on the Mexican acquisition we closed in July '22, which therefore had a 6-month impact on scope effect for '23. The performance delivered since the acquisition has been above our expectations. In '23, it reached total revenue of EUR 120 million with plus 18% of revenue growth in H2 '23, which can be broken down between around 9.5% price effect and 8.5% volume growth driven by strong outsourcing momentum in the country. In terms of margin, the performance is also exceptional with EBITDA margin above 40%. The Group is a market leader, [ 20x ] bigger than the #2 with a very experienced management team. Activity is very resilient with healthcare clients accounting for more than 85% of total revenue. And going forward, our objective is to continue to deliver double-digit organic growth in the country and by doing so, further improve the Group's organic growth profile. The outsourcing potential in the country is big, especially in workwear [Technical Difficulty] uniforms, so we'll do our best to open the market like we did in Brazil and accelerate the move towards the rental model with 25% more rooms in the country than in France. Most of the hotels still don't outsource washing of linen. So we also see some significant growth potential there. The healthcare market is also growing on the back of public funding with modern hospitals and clinics being constructed, which therefore represented the area of potential growth for us. Finally, the previous [ orders ] of the business have been in place for more than 20 years and decided to stay on board with some earnouts to align their interest with ours. Given the business strong performance, EUR 31 million were paid in '23 and another EUR 80 million will be paid in '24. In '23, M&A activity was a bit subdued with an impact of just 1.8% of revenue, very likely because potential sellers wanted to wait for fully normalized annual results before putting their assets on the market. Nevertheless, as I told you before, we acquired a couple of nice B2B pest control business in Italy and in Spain, both of which have operations across the respective countries, which will bring additional combined revenue of around EUR 10 million per year on an annualized basis. Looking at 2024, we recently announced the closing of the acquisition of Moderna in the Netherlands, the business with top line of around EUR 50 million. This acquisition will broaden the Group's offering in the Netherlands, especially in flat linen for hospitals. This market, which is still very fragmented in the country, is showing significant growth. In addition, this operation will strengthen the Group's existing offer on the workwear and wipers market, which are very profitable. As far as other potential deals are concerned, our M&A strategy remains the same with very strict pricing discipline in terms of valuation. The pipeline of bolt-on acquisition is big, and we expect total acquired revenue to be in a range between EUR 100 million and EUR 150 million on an annualized basis, including Moderna that I just mentioned. Moving on to the next slide, productivity gains were a significant driver of the margin improvement delivered in '23, and logistics is an area, where Elis has been significantly progressing over the last few years. The Group has developed and implemented an internal software called GLAD. In a nutshell, it provides a variety of analytical data that helps optimize delivery routes based on the location of all our clients. Implementation of GLAD started in January '22 and where implemented, GLAD generated 1% to 2% of yearly savings on logistic costs. So we are doing our best to accelerate its rollout, which should be complemented by 2025 with a total of around 3,700 routes being monitored in all our geographies. Moving on to the next slide, another [ path of ] -- for margin improvement is industrial efficiency, which encompasses several levels such as equipment efficiency, human efficiency, plant organization and so on. As for plants, people often think that the laundry business cannot be very complicated from an industrial standpoint, while it's actually pretty complex and requires significant know-how. Organizing the workforce without knowing what will be coming back for the clients, optimizing the setup of complex machines, organizing an efficient flow in the plants require very deep know-how. And we have a team of in-house specialists, who are going through our plants to roll out the Group's best practices, optimize the consumption of resources and assess the quality of the maintenance actions that are taken. This leads to steady productivity gains and [indiscernible] significant synergy generation when it comes to a newly acquired plant. The industrial equipment is also reviewed every year, as part of the yearly CapEx budget. This CapEx notably aims at improving our industrial performance, contributes to our productivity gains and to the decrease in our consumption of resources. As a result, we have seen steady improvement of productivity KPIs between 2018 and 2023, with some example being listed on the right-hand side of the slide. In '23, logistic costs and workshop costs decreased by 70 bps, as a percentage of revenue. Moving on to the next slide, I would like to share with you the great achievement we have been delivering in the U.K. since the acquisition of the Berendsen operation at the end of 2017. This is a good example of our capacity to integrate new businesses and improve their profitability and therefore, improve the Group's overall margin. If you remember, we had a lot on our plate in the U.K. When we took over Berendsen, the business was doing poorly, both commercially and industrially. We first changed the organization by putting in place a very experienced COO from Elis and hiring some talent in order to reinforce the quality of local teams. We then applied Elis' decentralized approach, where Berendsen in the U.K. was totally centralized, with little to no decision-making power at plant level. [ We then ] heavily reinvented in the industrial assets, as the business has been underinvested for many years before the acquisition. From 2018 onwards, we also progressively increased the number of multi-service plants, as all the plants in the U.K. were specialized is dedicated to workwear for -- or flat linen for healthcare or flat linen for hospitality, then we had to recreate a trusting relationship with the customer, while putting strong emphasize on pricing discipline, as Berendsen in the U.K. was losing a high number of clients at the time of the acquisition despite abnormally low prices, essentially due to poor quality of service and delivery mismatch. Bottom line, the workload was very high for us. So I'm even more satisfied to see that the shape of the business today is in no way comparable to what it was back in 2017. All the KPIs, be the commercial, industrial or social are showing sharp progression compared to their level at the time of the acquisition. We have been managed to navigate through the COVID year quite smoothly. Our great flexibility and the strong commitment from our employees allowed us to maintain a high quality of service during the crisis. And looking at numbers now, we have been able to generate steady organic growth with plus 5% per year in average since 2019. Margin is now close to 31% from 28.5% before [indiscernible] COVID, and we believe there is still room for further growth. So I am taking this opportunity to congratulate all our U.K. team for the great work that has been achieved. Let me now hand over to Louis, he will give you more color on our 2023 financial performance.

Thank you, Xavier. Good morning, everyone. Let me first go through the usual revenue breakdown by activity and market and geography to illustrate the Group's high level of diversification, which provides us with a highly resilient model in times of crisis. Whichever way you look at this graph, you will see that Elis positioning is well balanced, which contributes significantly to its resilience. In terms of activity, flat linen, workwear, hygiene and well-being represents 47%, 36% and 17% of revenue, respectively. Looking at our end markets, hospitality is now back to a normalized level. And our 4 end markets, which are -- which all have different growth drivers, each roughly account for [ 1/4 ] for activity, which is a key strength in times of crisis. In terms of geographies, France represents a bit less than 1/3 of the total turnover, and we have a balanced mix with on the one hand, Central Europe, Scandinavia being more mature, on the other hand, Southern Europe, Latin America, offering higher growth prospects. This good diversification in terms of activity, clients, geographies does not come about by chance, it is a consequence of a long-term strategy, backed by product innovation, commercial efficiency and M&A. Moving to the next slide, let's have a look now at organic growth and EBITDA margin by geography. All in, the 11.8% full year growth organic, is largely driven by pricing [ for 9% ]. The recovery of hospitality in Q1, roughly 1%, and the other volume growth FX accounts for 2%. Pricing has been strong everywhere, but especially in the higher inflation countries like Germany and U.K. The recovery of hospitality impacted mostly France, Southern Europe and U.K., as they are the main contributors to this market. The regular volume effect was driven largely by workwear, where the volume of new contracts signed was 14%, 14% above last year, especially in the Netherlands, Germany, Southern Europe, U.K. and France. Healthcare also contributed with new contracts, 3% above '22, whereas hospitality dynamics were more subdued. All these successes were balanced with a slight 1% increase in churn on the back of our discipline and pricing at the beginning of the year. As far as EBITDA margin is concerned, we posted 130 bps improvement at 34.2%, and we are very happy that now all geographies are above 30%. Globally, this improvement is driven in all geographies by productivity gains and logistics and industrial performance. Please note that in '23, pricing and energy costs were margin neutral at Group level, as they were in line with group inflation. But the story, of course, can be different zone by zone. So let's have a look now per geography. For example, in France, logistics savings on industrial performance were very strong, along with good pricing and positive impact of energy hedging, leading to this record margin of 40.3%. In Central Europe, productivity progress were also good, but pricing, however, strong was lower than inflation, especially as energy costs increased in '23, leading to this 30.5% the lower of the Group. Please note that in H2, the margin improvement was plus 180 bps, paving the path for '24 improvement. In Scandinavia, Eastern Europe, productivity progress were also good. We faced sometimes tough pricing negotiation with clients from the public healthcare sector, but the margin improved in H2 by 100 bps. In the U.K. alone, pricing and productivity were very strong, but energy was a headwind and the limited improvement, leading to 30.7%. There also, the margin improvement in H2 was much better at 160 bps. Latin America, the industrial progress are regular, so inflation was less impressive than in Europe. The integration of Mexico was a tailwind to the margin, which stands now above the Group average. In Southern Europe, strong revenue increase, productivity savings, along with positive impact of energy led to a spectacular [ 3.60 ] (sic) [ 360 bps ] improvement in adjusted EBITDA margin at 30.8%. Let's now look at the full P&L. Below EBITDA, all aggregates showed stronger growth compared to '22. In '23, D&A only increased by 11%, reflecting the decrease in linen CapEx recording in 2021. And the inertia in industrial CapEx depreciation in relation to inflation is depreciation period being much stronger than linen. '23 was the last year to benefit from this lower D&A compared to normative levels, and we expect the ratio to be back at 19% in '24. This led to a record EBIT margin level at 15.9%, a level that we'll be able to maintain in the future. The main items between EBIT and operating income are as follows. First, expenses related to free-share plan corresponds to the requirement of the IFRS 2 accounting standard increased compared to '22 at EUR 31 million, as a result of the share price increase. Second, the amortization of intangible assets recognized in a business combination is mainly related to the goodwill allocation of Berendsen in '23, the aggregate was stable compared to last year. It will sharply decrease after '28. Third, non-current operating expenses strongly increased due to the reevaluation of the earnout of the Mexican acquisition for EUR 49 million. The financial outlook of the acquired group has been revised upwards twice in H1 and in H2, given the performance delivered. Those items are limited on [indiscernible] [ IT development under SaaS ] and depletion provision. Furthermore, net financial charge was up EUR 38 million compared to EUR 22 million. This increase can be broken down between first, around EUR 20 million corresponding to the increase in interest charges linked to the '22 and '23 refinancing with interest rates higher than in the previous year. Second, EUR 12 million corresponding to a [ net accretion ] expense resulting from the earnout of the Mexican acquisition, quite technical. Third, EUR 6 million corresponding to a negative ForEx impact versus positive in [ '22 ]. The tax rate is around 30% because you remember the IFRS 2 treatment is non-cash and not taxable. At the end of the day, the net income increased by nearly 30% year-on-year to EUR 262 million. Moving to the next slide, the ROCE is obviously KPI, we carefully track, as it measures the value creation from our investments. We use it daily when making an investment decision, for example, an industrial investment or a big contract were significant linen might be purchased or, of course, when completing M&A. Our pre-tax ROCE is defined as EBIT divided by the capital employed. The detailed breakdown of the capital employed we use is presented in the appendix. Beginning of '23, it stood at EUR 4.9 billion. It excludes EUR 1.5 billion of intangible assets recognized in the Group's last LBO in [ 2007 ], which have therefore, nothing to do with Elis' operation. We look back at [ '20, '19 ], '18, the year '18 because it's the first year after the big merger with Indusal, Lavebras, and Berendsen, where the revenue jumped from [ EUR 1.5 billion ] to more than EUR 3 billion. So it was a big transformation of the Group. You can see on this chart how successful have been this integration with ROCE going from 9% for nearly 14% in '23 clear signal that the acquisitions are delivering along with the traditional business. Moving to the next slide, I'm now looking at '23 headline net income per share, the many items were stated are the usual ones. PPA depreciation and non-cash IFRS 2 expense for future plans, non-current operating income and expenses, mostly corresponding to the revaluation of the earnouts related to Mexico, as well as the corresponding accretion expense impact on the financial result showing headline net income stands at EUR 433 million, up 23% year-on-year, which corresponds to an EPS of EUR 1.86 and EUR 1.70 on a fully diluted basis, up 22% and 18%, respectively. As a reminder, the fully diluted number factored in the potential dilutive effect from the free-share plans and the convertible bond, in which case, we rested [indiscernible]. Moving to the next slide, you can see that Elis' fully diluted headline EPS is now more than 50% above 2019 level. We expect this trend to continue going forward with EPS growth every year, as has always been the case historically with the exception, of course, of the pandemic. It's another way to look at the value creation since the big merger in 2017, along with the ROCE we already mentioned. Since IPO in 2015, the EPS growth has been steady circa 11% in average [ value ]. Moving to the next slide, Elis generated a record free cash flow in '23 at EUR 304 million, up 35% year-on-year. Let's have a look, sale at this -- just below EBITDA, you have around EUR 14 million, which corresponds to [indiscernible]. The CapEx stood at EUR 821 million in '23, around EUR 130 million more than in '22, as a percentage of revenue, representing 19% compared to 18.1% in the same period last year. This ratio increase reflects the implementation of [indiscernible] contracts, as well as marginally a slight evolution of the '23 mix towards more linen products and less washroom. '23 change in working capital was negative at minus EUR 6 million compared to minus EUR 43 million [Technical Difficulty] reflects the decrease of central linen inventories and the good cash collection at year-end. This performance of cash collection is very impressive, as the last 2 days were Saturday 30 and Sunday 31. Usually, this has a very negative impact on DSO. It happened, for example, in April '23, but our process are much better since COVID times, and we were able to keep the DSO at 55 days, only 1 day above ' 22. We estimate this overperformance to be around EUR 25 million positive impact. That, of course, we will see as a counterpart in the -- we have seen in the counterpart in the early days of January '24. All other items in the table are normative. Interest increased due to the higher cost of the new bonds despite the reduction of the debt. Cash tax paid is 24%. In terms of capital allocation, we spent EUR 82 million on M&A, including the first earnout for Mexico. We paid EUR 62 million in dividends, which is net bearing in mind that 35% of the dividend has been paid in shares, as the option was available, and you will see that its not anymore the case in '24. At the end of the day, net financial debt decreased by EUR 153 million in '23 to [ EUR 3.25 billion ], which corresponds to a leverage ratio of 2x at the end of December. Moving to the next slide, we've been active on the financing side in '23 with the implementation of a securitization program of circa EUR 180 million on the 12-year USPP for EUR 183 million. These proceeds added to the cash generated by the business will be used to refinance our EUR 500 million bond maturing in April '24. Last October, Moody's raised its outlook from stable to positive. And in November, Standard & Poor's upgraded us to investment grade with a BBB- rating, which is an important achievement for us. Going forward, we will remain very opportunistic about potential refinancings, and we will be committed to continuing to reduce [Technical Difficulty] risk profile in the future. We can assume that the cash interest will remain low, as we will refinance less than the reimbursement at a cost, which is now dropping fast. We see cash interest around EUR 100 million in '24 versus EUR 90 million in '23. So moving to the next slide, net financial leverage decreased to 2x at the end of December compared to 2.5x at the end of December '22. This marked decrease reflects strong EBITDA growth [ along the EUR 153 million ] net debt reduction. A reminder, the pandemic had a negative impact on the [ '20 ratio ]. But since then, deleveraging has accelerated and [ expect to reach ] 0.2x EBIT at the end of '24. To conclude [Technical Difficulty], first, an overall, financial performance was very strong in Q3 with a record level for all financial indicators. In particular, EBITDA margin was up 130 bps with all geographies now above 30%, notably due to significant productivity gains in '23. The steady growth in return of capital employed highlights the successful integration of the major deals of 2017, along with great discipline in cash allocation and continuous operational improvement. Finally, the excellent results enable us to present the next shareholder meeting, the payment of a dividend in cash of EUR 0.43 per share, 5% above last year. Now I will hand back to Xavier, who will give you an update on our CSR achievements in '23.

Thank you, Louis. As you probably know, Elis unveiled its new Raison d'Etre in May 2023. It embodies a long-term commitment of Elis by delivering circular services at work for hygiene, well-being and protection everywhere, every day in a sustainable way. The services offered by Elis are sustainable alternative to simple purchase or use of products or disposable products and enable our clients to avoid CO2 emissions and contribute for reduction of their own emissions. [Technical Difficulty] of the day, business model based on the circular economy is one of Elis' greatest assets. Moving on to the next slide, we also announced in September our climate strategy validated by SBTi. Our objective for Scopes 1 and 2 is to achieve a reduction of 75% of our [Technical Difficulty] 41:44 so we further optimize our energy use in our laundries, increase the consumption of renewable energy and reduce the environmental footprint for logistic fleets by optimizing delivery routes and accelerating the [ position ] towards alternative vehicles. For Scope 3, we aim at reducing our absolute emissions by 28% by optimizing our linen management, for example, through reduction of textile [ losses ] or reusing and repairing even more. We will work also on reducing the environmental footprint [Technical Difficulty] and reduce the impact of transportation, the upstream, but also by supporting our employees in a transition towards less polluting modes of transport. '19 to '23 checkpoints show that we reduced our Scope 1 and 2 emissions by 14.6% and Scope 3 emission by 3.6%. We look forward to working with all stakeholders to achieve this on and contribute to the global efforts required. Moving on to the next slide, let me now provide with -- you with a quick update on our different objectives set for 2025. Overall, the [ '23 ] performance showcased progress in every item, and we continue to deliver some impressive results regarding our water and energy consumption, down 46% and 28%, respectively, compared to [ 2% ]. 2023, the Group continued to put better emphasis the share of women managers, and we also recorded a more than 10% decrease in the frequency rate of accident. Finally, we further increased the funds granted to our foundation, which helps deserving [Technical Difficulty] advantages social background. Moving on to the next slide, let me present you some examples of recent initiatives. Regarding our logistics fleet, the number of our alternative vehicles are clearly between [Technical Difficulty] with more than 1,200 vehicles to date. We also received this year, more than 50 electric EV vehicles [Technical Difficulty] positioning Elis as a pioneer. As I explained earlier, we also deployed the GLAD tool aiming at optimizing logistic routes, which means fewer kilometers and therefore, lower fuel consumption. Our initiative [ closed the loop ] projects aiming at making new textile products [Technical Difficulty] recognition in '23 and reach a new step with the development [Technical Difficulty]. See, we made significant improvements in health and safety within the Group [Technical Difficulty] 11.4% compared to [Technical Difficulty], and we integrated [Technical Difficulty] some plant manager to drive [indiscernible] services. Furthermore, in December '23, [Technical Difficulty] integrated EUR 900 million [Technical Difficulty] top of the previous CSR KPIs that were already [Technical Difficulty]. Finally, in '23, internal survey, an internal survey revealed that 84% of Elis employees, where the CSR is a key value for the Group, which rewards all the initiatives taken by Elis in that field. Moving on to the next slide, the group engagement and actions have been rewarded by several CSR rating agencies. In 2023, MSCI improved its rating from BBB to A, recognizing Group's CSR perform. Furthermore, Elis was rated A minus by the Carbon Disclosure Project, positioning Group in the leadership level. We are also ranked among the top 5% of 100,000 assessed companies by EcoVadis, with a Gold Medal. Finally, we also maintained our Sustainalytics rating to low risk. Let's now turn to our strategy and outlook. The very solid 2023 performance is a result of a sound strategy that we have been applying for years. This strategy relies on 4 pillars, development of sustainable services and promotion of the circular economy; our industrial and commercial excellence; consolidation of current position; and expansion of our network. First, circularity has always been at the heart of our business model and Elis' service client products that are maintained, repair, [ reviewed ] and reemployed to optimize their usage and lifespan. The Group, therefore, select its textile products based on sustainability criteria to ensure frequent washing and also operate repair workshops. Elis' conviction is that the circular economy model, which notably aims at reducing consumption of natural resources by optimizing the lifespan of products is a sustainable solution to address today's environmental challenges. Services offered by Elis are a sustainable alternative, simple purchase for used products or to single-use products, which allow our clients to decrease their environmental impact. Second, industrial and commercial excellence. Every day, we serve around 400,000 clients in our 29 countries. Geographical proximity for clients [Technical Difficulty] to be very responsive and to create over time a valuable trusting relation. [ Somehow ], Elis has always saw continuous improvement of its logistics and industrial process. Our very experienced methods [Technical Difficulty] defines standard [Technical Difficulty] industrial production and then roll out some best practices [Technical Difficulty] [indiscernible] plants. The approach guarantees a quick success integration of our acquisitions. Third, the consolidation of current position. When we enter a new country, we aim at becoming a market leader immediately or over a short period of time. Leadership position ultimately leads to dense plant network, which enable us to provide best-in-class commercial responsiveness and to optimize our logistic costs through operating larger and more productive plants. We become a leader through dynamic M&A activity, as well as organic momentum with the second [indiscernible] deployment of Elis' [ whole product ] portfolio. This map shows we are #1 in the majority of our 29 countries, sometimes #2 and very rarely #3. At the end of the day, this strong network density is both a competitive advantage for us and a high barrier to entry, [ other ] competitor as replicate such a network [indiscernible]. Fourth, expansion of our network. Elis [indiscernible] started on, at the end of the 19th century, but the European expansion only started in 1970s, essentially in Southern Europe. And we identified Latin America as a great area for potential growth and [indiscernible] [Technical Difficulty] acquisition in 2014 in Brazil and then in Chile and Colombia, the following year. More recently, we completed our presence in the region with Mexico, where we entered in '22. Part of the rationale to invest in Latin America was to benefit from very dynamic [ outcomes ], which usually leads to double-digit organic growth rates in the region and therefore drive the Group's total organic growth number. The [ site ] from Latin America basically doubled its size in 2017 with the acquisition of Berendsen, which provide the Group with a [Technical Difficulty] acquisition has proven its capacity to successfully integrate assets to value sites, generate profitable growth [Technical Difficulty] America or in the U.K. Before moving -- so before moving towards 2024 outlook, let's take a quick look at the [Technical Difficulty] that we like to present regularly. There you see the evolution of the top line and margin performance over the last 2 decades. And it is fair to say that the last few years have clearly emphasized the resilience of our business and our strong pricing power [Technical Difficulty] backbone of our resilience. First, [Technical Difficulty] geographical footprint [Technical Difficulty] less than 1/3 of our business. And second, the diversified [Technical Difficulty] in a constant evolving at high and stable health. The narrow [ range ] we have less of external events and taking into consideration the impact of IFRS 16 from 2019 onwards. On top of that, a very interesting characteristic of our business that we saw in '23 is that linen investments from [indiscernible] with top line growth that actually they mechanically go down during bad top line years [Technical Difficulty] cash generation. The cash generation trajectory has been impressive over the last 4 years. The free cash flow increased from [ EUR 183 million ] [Technical Difficulty] in [ '23 ], and we expect the trajectory to continue. Now let's talk about our 2024 outlook, starting with organic growth that we expect at around plus 5% with a price effect slightly [Technical Difficulty] volume growth. Adjusted EBITDA margin should be expected close to 35%, driven by operating leverage, further productivity gains and hedging placed on energy purchases and despite an additional cost of [Technical Difficulty] from the development [indiscernible]. Adjusted EBIT margin, stable year-on-year at [Technical Difficulty], which corresponds to D&A returning to a normalized level of 19%. As a reminder, '23 was the last year to benefit from lower D&A compared to normative levels correlated with linen investments that were also lower than normative level during the pandemic. All this should lead to a fully diluted headline net income per share above EUR 1.75. On the cash side, we expect free cash flow at around EUR 340 million, driven by EBITDA improvement and by further normalization of change in working capital requirements. Bearing in mind the cash collection at the year-end '23 were already very good. Finally, the deleveraging of the company will continue, and we expect financial leverage ratio to decrease by a further 0.2x at the end of 2024. So this concludes this presentation, and I thank you all for your attention, and we can now move on to the Q&A [indiscernible].

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

Yes. There are 3 on my side. I would go one by one. Just to start with on the guidance for '24, so the 1.75 headline EPS fully diluted basis. It's, I think, about a 3% increase year-over-year. If I look at the adjusted EBIT guidance, I think it would be including the already done M&A about 7% or 8% increase year-over-year. So just trying to understand why the EPS should grow slower than the adjusted EBIT?

Yes. When you look -- so this is -- thank for your question. Globally speaking, what we -- you have the model with EBITDA, I guess. So the question is what's happening below and below, you can expect a slight increase of the financial cost on the back of the increase of the interest rate on the recent refinancing. So you can make the modeling around that.

So if you look at the interest cost in '24, I mean, we had about -- I think with -- if I remember correctly, about EUR 18 million of, let's call it, non-recurring expenses in '23 with the FX expense and the earn-out-related one from Mexico. So that means, yes, maybe going from about EUR 106 million, EUR 107 million in '23 on a recurring basis towards EUR 115 million, EUR 120 million or how should we think about financial expenses in the P&L this year?

So what we say is that the cash interest shall move from EUR 90 million to EUR 100 million. And as you remember, in the headline EPS, we restated what is very exceptional. So at the end of the day, the increase of the cash interest reflects into the P&L interest, okay?

Okay. That was actually already one of my other questions. So then just one last one also related to the headline EPS figure that fully diluted one. If I look at the share count, so the gap between the basic and the fully diluted share count increased in '23. So if I remember correctly, the convertible was issued in September '22. So that shouldn't have contributed to the increase in the CapEx in basically fully diluted. So just trying to understand why this gap has increased by, I think, it's about 9 million shares in '23?

So the calculation is -- the difference with normal the number of shares. So it's an average, as you remember, for the number of shares. And the fully diluted takes into account what can happen with free shares on the first hand. And on the second, with the convertible bond which was issued recently that you have in mind. So that's the way it's calculated. And the detail is in the accounts. So you can have some gaps from 1 year to the other linked to the modalities.

Again, I will have a look at the details and we'll get back in the queue.

Our next question comes from Ben Wild from Deutsche Bank.

3 from me, please. Firstly, Louis, I think you mentioned that prices on energy costs were margin neutral in 2023. I assume energy costs were up in line with the inflation of your broader cost base. Would you expect prices on energy costs to be margin neutral in 2024? And given the power prices and gas prices have come down quite significantly even in the last few months and weeks, how do you see passing that benefit on to your customers over time? Second question is on the CapEx and D&A. Prices, as just discussed, have risen significantly in the last 3 years, driven primarily by energy and wages. Can you just help us understand how CapEx and D&A are growing above revenue given volume growth last year and this year coming up is due to be more modest? And then thirdly, on capital allocation and M&A and potential shareholder returns. Do you think about that 1.8x that you've guided to stay as a ceiling going forward regardless of any M&A that you would do? And what would be the trigger for accelerating shareholder returns going forward?

So first question, evolution of energy cost for the company, you know that we have a hedging policy in place. So that means that the cost for this is not correlated any more fully with the spot price. It was the case in '23 and because the spot price decreased sharply, but not the cost for Elis. In '24, as we said some months ago, that we'll benefit from a better level of hedging in place for energy. And we have a savings in euro that is around EUR 30 million. So it's of course a good benefit for us and for the margin for the Group, of course. For the years to come, we expect more or less the same kind of savings. So we should have the same saving in '25 and the same savings probably in '26. And of course, all the key subject on price negotiations with our customer was more a question for '23 than for the '24 and the years to come. And in '23, we have been able to resist and to keep our position, putting on the table the evolution of the salaries and so on. So that's why I'm very confident that we can keep this good momentum in '24 and the years to come. And we saw it in the negotiation of price at the beginning of the year '24 where we were discussing much more about wages because view from the customer, the price of energy in '24 are quite comparable to '23, slight decrease, but not significant. And that's why we were able to just discuss about the impact of wages and so on. So it is the reason why we -- when we analyze the evolution of the cost base for Elis in comparison to the evolution of the price increase, we will have a positive impact in '24. And we can guess that we will have the same positive impact in '25. I will take the third question and give the floor to Louis for the second part. So cash allocation, so you have understood that we have a strong pipeline of small bolt-on M&A in '24. So that means that if we analyze what we will do with the cash, the EUR 340 million, something close to EUR 100 million for the dividend and the rest will be used probably for the acquisition with earn-out in Mexico and to pay the strong pipe that we have in '24. So probably, a marginal amount to decrease modestly the debt in Europe, but with increase of the EBITDA, of course, the leverage will go down to 1.8x. For the year after, it's too early to answer to your question. We'll see, depending on the evolution of the type of acquisition and the condition of the market and so on. We'll decide later what will be the cash allocation in '25 and the years after. And then the second question for evolution of CapEx and D&A for Louis.

Yes. so you need to look at the details a bit, for example. So starting with the CapEx, when you look at linen, so the ratio linen to sales at 13.6%, which is a bit high, as you know. In '23, namely, you had 2 effects. First, inflation of linen was higher than pricing effect at the Group level. And the second is that we had a lot of workwear developments. And as you know, when you sign a contract in workwear, before you earn the first euro of service, you have to buy all the linen, which can be like 18 months of revenue. So of course, there are the discrepancy between revenue and the CapEx in this case if you run faster on workwear development. The second item is those are CapEx-driven mainly by the industrial CapEx. It was a bit low in '22. You remember that there was a lot of disruption on the supply chain from the providers. So it was low at 4.5% to sales. In '23, there is a kind of catch-up with some investment of '22 have been pushed to '23, so 5.5%. What can we expect in the future? Probably, 19% is something to keep in mind. Probably, linen ratio shall go a little bit on the back of inflation receding. But as you know, we are very intensive on development. And so we can expect industrial CapEx to be in the region of 6% as where we need in the future capacity and better machines to sustain our productivity road map. Now when you look at depreciation, it's even more complicated, I'm sorry. The linen depreciate on 3 years, as you know. So you have ups and downs where 2021 with COVID, but then very fast after '22, '23, you had a strong inflation on linen, and of course, that will reflect in the future depreciation. So that's the first point. So you can expect circa 12% of linen depreciation to sales. And then the other round, industrial other depreciation is more regular, but encompass, as you know, the IFRS 16 treatment for the rent, so the lease. And that is now still in the region of 7%, which is a combination of the industrial CapEx depreciation, which can be between 5 and 50 years. The real estate, which is not depreciated, as you know, and the leases that comes here through the regular life -- the duration of the life of the asset which is financed. So that I guess that's clearer to you now.

Yes. Just maybe one follow-up, particularly to Xavier's comments. Given the energy cost benefit that you described and the pricing effect that you would be procuring for this year, the guidance from EBITDA down seems to me to be quite conservative. I know you're putting some investment in sales and maybe some other investments in capacity elsewhere, but can you just comment on how much conservatism you've built into the current guidance framework?

Indeed, a smart question. We are only in March.

[Operator Instructions] We do have the last question coming in, one moment, please. Your next question comes from the line of Sabrina Blanc from SocGen.

Yes. I have 2 questions from my part. The first one is regarding the pricing and your expectation for '24. If you can provide more color on what you have already negotiated, for example? And your view by areas? For example, you have mentioned in the past, Germany, we were lagging, but on which you are catching up? And the second key question is regarding the churn. You said that you were able to limit the impact of price increase on the churn, but can we have more color then notably by countries or by segment?

So pricing, we expect a global effect that will be between 3% and 4% for the full year '24. Of course, we will push more in countries where we have the highest level of wage increase. You can see, for instance, that in Ireland, the minimum wage has been by 12% beginning of January '24. In U.K., it would be increased by nearly 10% in April. And so of course, we will need to push more there. On the second point, that will drive some strong price increases, the lack of profitability in comparison of the balance of inflation, not yet correct. If we analyze the last 2 to 3 years. And here, we are talking about mainly Germany and healthcare in Germany where we are still pushing to come back to a more balanced level. For the rest, it will be more or less in line with the evolution of the inflation country-by-country, depending on, as I said, at the evolution of the minimum wage that is a key driver of the evolution of our costs. But all in, let's say, between 3% and 4%. A significant part of this price increase has been already negotiated. So it is the reason why we started the outlook for '24 with the fact that we have a very good view on what will happen in '24 and a high level of confidence. For the churn, so we assume that in some countries where the level of profitability in the market was not enough, like healthcare in Germany, we assumed that we were ready to take some risk by answering to some tenders and driving more losses than usual. We can consider that in '23, we have lost around 1 point of growth due to this policy with some report effect in '24 and our last estimation is still around 1 point of lack of growth in '24 due to this pricing policy. But it is -- I still consider that it is a good strategy for the Group. And when we see the strong improvement of the margin all in at the Group level, the strong improvement of the cash and so on, I have absolutely no regret it is a good strategy. And at the end, an impact on the top-line that is very limited. And we are still able to deliver 5% organic growth in '24 in the context that is not so easy for the other companies. So I still believe that it is the right strategy.

[Operator Instructions] At this time, there are no further questions. I beg your pardon. The question comes from the line of Tatiana Velandia from Stifel.

I have just 2 questions. The first one is from the productivity gains across the different regions. How do you see this going forward? For example, there are still 2 regions, particularly Europe and Scandinavia that are still below the peak levels. How do you see this going forward? Do you still expect these margins to come to the peak? And in regions like France that already reached record levels at 40%, how do you see this going forward? Do you still expect further productivity gain for the margin expansion in these kind of regions? And the second one on the U.S. The pipeline that you have today in the U.S., you are looking for to buy something in the U.S. or this is still not the time?

So I will start with the U.S. question. So U.S., nothing on the table and it is not scheduled to do anything at this time, at this stage. For productivity gains and evolution of the margin, so we are perhaps more optimistic in France than in Scandinavia. I think that our position in France is probably better. And we have seen that we have been stronger in the price negotiation in France than in Scandinavia where with some public tender for healthcare, notably, it was not so obvious. And so for the years to come, I think that we can continue to improve marginally, of course, the level of EBITDA in France and the improvement will be smaller probably in Scandinavia.

There are no more questions from the phone line. Allow me to hand the call back to management for closing.

Thank you for your interest and your participation to this call this morning. And I wish you a wonderful day. Bye, bye.

That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.