Elis SA (ELIS) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the First Half 2024 Results Presentation. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Mr. Martire, CEO. Please go ahead.

Thank you. Good afternoon, and welcome to Elis H1 2024 results presentation. I am Xavier Martire, CEO of Elis. And here in Paris with our CFO, Louis Guyot. After an overview of Elis' half year highlights, I will hand over to Louis. He will detail the results for the first half. I will then come back to provide you with an update on our CSR journey and our strategy before updating you on our upward revision of our full year outlook. Finally, we will have a Q&A session to answer your question. And after our call, Nicolas Buron, will be available to answer any of your questions off-line. Before we start, please take the time to read the disclaimer. So I'm very happy to report very solid financial performance in the first half with sound revenue growth, marked improvement EBITDA margin and good cash generation. Top line momentum was strong with a growth of plus 6.9% of which 5.5% on an organic basis to reach nearly EUR 2.5 billion, a record number for Elis for first half. EBITDA reached EUR 774 million, with EBITDA margin up plus 120 basis points at 34.5%. EBIT came at EUR 344 million, with EBIT margin up plus 20 bps at 15.3%. Headline net income per share was up 1.6% and reached EUR 0.83 on a fully diluted basis. Free cash flow was good for the first half at more than EUR 55 million, bearing in mind that Elis traditionally generates most of its free cash in the second half of the year. Finally, the financial leverage ratio at the end of June was at 2.06x which puts us on track to achieve our full year guidance of 1.8x. In the first half, our commercial activity was well oriented, and we continue to sign many new contracts in all our geographies as a result of new outsourcing and growing needs in hygiene, traceability of products and sustainable services. Pricing remains solid to offset the -- to inflation of our cost base, and I'm happy to report that we recorded a good evolution of our churn with client retention returning to where it was before the very unusual inflation year we had in '23. I will give you more detail in this presentation. Finally, we continue to deliver significant productivity gains, thanks to better efficiency in our plants and improved logistics. This good first half performance and the visibility we have in the second half allow us to upgrade our organic growth and EBITDA margin objectives for the full year, and we confirm with great comfort all the other objectives that we gave in March. I will come back to this at the end of the presentation. Moving on to the next slide. Revenue growth in H1 was driven by strong commercial activity in workwear with many new contracts signed, Central Europe and Southern Europe were both especially well oriented and benefited from the ongoing outsourcing trend in many industry end markets. In the first half, we maintained a very strict pricing policy to offset the inflation of our cost base, which is mainly driven by the increase in salaries. As far as energy prices are concerned, the hedging we gradually put in place since '22 led to a favorable effect in the first half with the overall inflation of our cost base below our average price increase. Overall, inflation is slowing down in all geographies, so we expect a slight decrease in the pricing effect going forward. In the first half, despite continued strong pricing discipline, we managed to improve our churn. This normalization of the retention rate clearly underscores the very tight relationship Elis enjoys with its clients. However, the contract loss last year had a mechanical carryforward effect in the first half of 2024. In hospitality, the picture is mixed. Occupancy rates are higher in Southern Europe with projected record numbers in Spain for the summer. The U.K. and France were more disappointing as bad weather in May and June as well as the general elections organized in both countries had a negative impact on activities. Furthermore, as of now, the Olympics have had a negative effect on activity in Paris with several professional events originally scheduled in June deferred to September or October. M&A had a plus 1% impact in H1 '24 revenue growth corresponding to plus EUR 22 million uplift, essentially driven by the acquisition of Moderna consolidated from the beginning of '24. Lastly, FX had a plus 0.4% impact on revenue in H1 '24, mostly driven by the evolution of the pound and the Mexican pesos. Moving on to the next slide. We continue to deploy our services in all our geographies and commercial momentum was good in the first half of the year. The growing need for more hygiene, as well as the European regulation that changed market standards results in a steady development of the outsourcing. Our circular services perfectly address these evolving needs, and we continue to record many successes in workwear and with small clients. More generally, we continue to roll out the offering of our services to SMEs when our network density allowed it as our ability to efficiently sell small clients is essentially linked to the density we have in a specific country. Furthermore, the post-COVID environment remains very favorable for this with an increasing need for hygiene in general, notably for pest control and the clean room business, which delivered more than 10% organic growth over the last few years and continued to record very strong growth in the first half. Pest control is a perfect example of a margin accretive service that we added to our offering. Over time, we have signed many pest control contracts with existing customers, leveraging our strong commercial relationship and second to non-network density. Even in more mature markets such as Hospitality or Healthcare, opportunities are still there, thanks to the development of nursing home markets and the steady trend of new hotel openings in Europe. All these opportunities have been identified by Elis early in the cycle, and we are currently reinforcing our sales force in many countries to capture an even bigger piece of this growing cake. The total investment represents a cost of around EUR 20 million in '24. Moving on to the next slide. One big achievement of the first half was churn level rate to 6% at group level. As a reminder, we saw a 1 point increase in '23 as a result of the significant price increase we had to pass on to offset the increase in our cost base. In some very hard cases, some clients, most of them being public entities in Central Europe and Scandinavia did not recognize a very unusual situation we were going through and refused to enter pricing negotiations. We then decided not to renew these contracts or even terminate them when we could. In the first half of '24, things returned to normal, thanks to our first-class quality service. The close commercial relationship we have with our customers and the fact that our services, which are essential to our clients' activity generally represent only a fraction of their P&L. We monitor our clients satisfaction using a set of tools, an independent department at Elis, notably run thousands of direct interviews every year. In the first half, we reached score close to 90%, a record level. These good results are perfectly consistent with all the internal KPIs we track regarding service quality, such as the speed at which we actually start to operate a contract once it has been signed or the in-full metric which module the accuracy of the quantity of linen delivered compared to what was ordered, and all these KPIs have shown some good progress in the first half, and we'll keep up the good work. Let's now take a look at each of our geography. France first, where revenue growth was entirely organic at plus 3.6% in the first half. This was driven by commercial momentum in workwear especially in Industry, for Industry and Trade & Services. However, hospitality activity was impacted in Q2 by poor weather in May and June, the Olympics preparation in Paris and the general elections, which seems to have somewhat limited weekend trips. Furthermore, several professional events such as company seminars have been rescheduled from Q2 to September or October. This, along with a good level of bookings led our hospitality clients quite optimistic for the second half of the year. EBITDA margin was up, plus 190 bps to reach nearly 41%, thanks to the neutral balance of inflationary impacts and some further productivity gains, especially on logistics and energy consumptions. Finally, margin also benefited from the stable level of fixed costs, which creates some operating leverage. Moving on to the next slide. Our stock price lost around 15% since the dissolution of the French National Assembly, which seems exaggerated given the actual risk that this political instability represent for Elis. So what would be the impact of a potential shift in the French economy policy. First, the increase in medium wage would translate into inflation of our cost base, and I believe we have proven on many occasions, our ability to efficiently reflect the inflation in our pricing. With that in mind, we could expect an additional revenue increase of between 1% to 2%, resulting from higher pricing with stable margin percentage. Second, in case of a significant slowdown in France GDP, revenue should remain stable due to the high diversification in terms of end markets and the fact that a large part of our revenue in the country correspond to monthly fixed fee invoicing. Looking at what happened back in 2009 during the last big economic crisis, we would expect to lose between 1 and 2 percentage points on revenue in France. Furthermore, we clearly demonstrated during the last pandemic, our ability to quickly adjust our cost structure in case of a meaningful activity slowdown. So we would not expect any margin impact or free cash flow shortfall. Therefore, we believe that even a significant political shift in France will not have any major impact for us. Moving on to the next slide. Central Europe delivered a strong performance, notably due to the significant progress recorded in Germany. Organic growth was strong at plus 7.7%, driven by good commercial momentum in workwear across the board with Germany posting a plus 15% growth in this business line in H1. Additionally, the significant wage inflation in the region led to material price increase and the acquisition of Moderna consolidated since the beginning of March '24 contributed another plus 3.6% to the region's growth in H1. EBITDA margin showed significant improvement, up plus 180 bps compared to the same period last year at 31.3%. Again, Germany was especially strong with margin improvement by 350 bps in the semester following some organizational management changes in the country. Furthermore, energy purchasing conditions improved in the first half compared to last year. This also contributed to the margin expansion. Moving on to the next slide, also organic growth and margin in Scandinavia and Eastern Europe are solid. It is the only region where margin went down in the first half. Organic growth was driven by the performance of Sweden and the Baltics, where the outsourcing trend continues, but Denmark was tougher with some exceptional losses due to our pricing discipline. EBITDA margin remained high in H1 at close to 35%, but decreased minus 50 bps. We have a significant number of clients in the public sector in Sweden and Denmark whose contracts have a specific and unusual clause that make pricing adjustments less flexible than in our standard contract. This is a small drag for margin in the region. Moving on to the next slide. The U.K. and Ireland continue to be well oriented with solid organic growth, plus 5.1% and significant EBITDA margin improvement. The reinforcement of our sales team has paid off with many successes in workwear for both health care and industry clients. Pricing was also a significant top line growth driver in the context of significantly wage increase in the region. EBITDA margin was 31.1%, up plus 130 bps. With a favorable evolution in our energy purchasing conditions as well as continuous productivity gains on industrial processes and logistics. Moving on to the next Slide. Performance in Latin America was also very satisfactory with organic revenue growth at plus 7.5% and EBITDA margin close to 35%. Mexico continued to be very strong with organic growth of around 10% and a record level of EBITDA margin at 42%. Latin America continues to offer many growth prospects with a steady outsourcing trend occurring in Workwear for industry and in Flat Linen for health care, where we continue to see hospitals closing their internal laundry and switching to outsourcing. Next slide, next region, Southern Europe posted very significant EBITDA margin in the first half, up 250 bps, up [32%]. The organic performance of plus 6.6% was driven by good commercial momentum in Workwear and strong activity in hospitality, which by the way looks very promising for the summer, too. On top of this volume uplift, the better purchasing condition of energy and further productivity gains led to around 250 bps margin improvement to nearly 32%. Moving on to the next slide. We acquired Moderna, a quite big company in the Netherlands at the end of February. Moderna is a EUR 50 million top line business, which provides flat linen, Workwear and hygiene and well-being services to clients in the hospitality, industrial and trade and services industry. This acquisition complements Elis existing network in the Netherlands, especially in the dynamic Workwear market and allows the group to address the Flat linen market in the country, which was not the case before. The business generated 26% EBITDA and 13% EBIT margin in '23, with a lower share of rental services than the group average, and therefore, less textile amortization. It is consolidated in our accounts since the beginning of March. Its integration is going very well and is perfectly on track. Moderna employs around 400 people and operates a plot that is very modern and has been very well invested in the last few years. This plant, which has become one of the largest of the group is located in the northeastern region of the country, close to the German border and can address the entire Dutch territory, thanks to the 2 supply center. This network combined with the elite network in the country that was already very dense leaves room for very significant logistic optimization going forward. Moving on to the next slide to conclude on M&A. We also announced the acquisition of Wonway in Malaysia, early July. Wonway is a family business that was founded in the '80s. The group employs around 200 employees and can address the entire Malaysian territory, thanks to 3 specialized laundries. It provides usable garment services in clean room to mainly international groups operating in semiconductors, medical devices and chemical industries. In 2023, Wonway delivered revenue close to EUR 6 million. It is, therefore, a small acquisition, but with interesting prospects going forward, given the very strong momentum of the Cleanroom market in Malaysia. Additionally, this acquisition reinforced Elis' leadership position in the global Cleanroom market. So this is the end of the first part of the presentation, and let me now hand over to Louis, who will give you more color on our first half financial performance.

Thank you, Xavier. Good evening, everyone. Let me first go through the usual revenue breakdown by activity and market on geography to illustrate the group's high level of diversification which provides us with a highly resilient model in terms of crisis. Whichever way you look at these graphs, you will see that Elis positioning is well balanced, which contributes significantly with resilience. In terms of activity, Flat linen and Workwear are generally represent 47%, 37%, and 17% of revenue, respectively. Looking at our end markets, Hospitality is now back to a normalized level on our [4 end markets], which all have different growth drivers, which mostly account for 1 quarter of our activity, which is a key strength in times of crisis. In terms of geographies, France represents now only 30% of our total turnover, and we have a balanced mix with on the one hand, Central Europe, coming out here being more mature on the other hand, Southern Europe, Latin America, offering higher growth prospects. With good diversification in terms of activity client 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 revenue growth and the EBITDA margin by geography. As explained by Xavier, the growth of 6.9% is strong. It encompassed 1% of M&A with mainly Moderna, 0.4% of positive ForEx on the back of the recovery of currencies like British pound, and last 5.5% of organic growth. The organic growth embedded in majority price, as inflation is still high in several countries like Germany, U.K. and Spain. It's worth noting that inflation is now below 5% in LatAm, thus below a lot of European countries. In addition, volumes are recovering as the losses of '23 are behind us in terms of delayed effect. And as the efforts put in strengthening our sales force are paying off a significant commercial development in the half. Indeed, in hospitality, the contracts signed in H1 '24 are at 12% above H1 '23, the major countries being France, Spain, U.K. and Germany. In health care, the level of contract signings is also a record, notably in Brazil, Mexico, Germany and France. In Industry Trade and Service, we set a new record for new contracts with Germany, Spain, Brazil, Poland, Denmark and Netherlands leading the way. And the only cyclical part of the business, which is hospitality, we note disappointing occupation rate of the hotel in Q2 in France and U.K. due to weather, Olympics preparation and elections, whereas it's been good in Spain. The other major satisfaction of the H1 is, of course, margin with another significant improvement of C bps, the 3 geographies that have historically lagged behind are closing the gap, Central Europe, U.K., Ireland and Southern Europe are above 31% in H1. They benefit from the strong top line development, the continued progress in productivity and better energy purchasing conditions. The 2 mature geographies, Nordics and LatAm are still very strong, around 35% while France performance is again amazing at above 30%. As you know, France is a laboratory for every new productivity idea and will always be ahead of the pack. Let's now look at the full P&L. Below EBITDA, depreciation is normalizing at 19.2% of sales after 18.2% in H1 '23, this reflects the return to a normal depreciation quantum following the decrease in Linen CapEx recorded in '20 and in '21. As you know, linen depreciated over 3 years. This led to an EBIT margin of 15.3%, up 20 bps year-on-year. The main items between EBIT and operating income are as follows. First noncurrent operating expenses for EUR 40.8 million. This is mainly from another increase in the [panel provision] in Mexico for EUR 25 million as the new forecast for Mexico is above the last one. As a reminder, this annual provision was EUR 16 million in '23. The IFRS 2 expenses represent the dilution cost of the LTIP, the increase being linked to the higher share price. And last, the intangible amortization is stable as the main part is linked to Berendsen goodwill in 2017. Below operating income, you will find the financial results, EUR 10 million above EUR 23 million as we anticipated due to the new financing being more costly, please note that encompass EUR 9 million earn-out taxation, more or less like in '23. The last slide is corporate tax, which has a normative average tax rate of 26% that has EUR 50 million of cost above are not deductible, like earn-outs and LTIP, the visual tax and EBIT is above that. Note that in H1 '23, we recognize a deferred tax asset for around EUR 10 million, which explains the lower tax rate. At the end of the day, these accounting effects have a negative impact on the results, which is below H1 '23, but we know that H2 will be -- will have opposite effects and that the full year net result will be significantly above '23. By the way, part of these effects are restated in the EPS. As you can see, the main items restated between net result on -- current results are always the same. This is amortization of intangible assets in this tax, IFRS 2 expenses, which is without tax, accretion and revolution of earnout, which is without tax and noncurrent expenses, which is with tax. As a result, headline net income is around 1% above last year. In addition, the reimbursement of the OCEANE in October '23 has led to fewer potential shares being created. So fully diluted EPS is around 2% above last year. You remember that for the full year, we expect an improvement of around [12%], above EUR 1.75. Moving to the next slide. Elis generated a free cash flow of EUR 55 million in the first half compared to EUR 17 million in the first half in '23. That's an improvement of EUR 39 million. Let's take a take a detailed look at the cash flow statement, CapEx stands at 19.2% below '23. The main difference comes from linen, which benefits from better purchasing conditions. Working capital is very negative, but not for the same reason as last year. In Q2 '23, growth was still very high, creating an important receivables effect. In Q2 '24 it is the calendar, which has a major impact on receivables as the last 2 days of June were Saturday and Sunday, and as a result we lost 3 days of DSO between May '24 and June '24. It's still very good 55 days, but of course, with an important impact of minus EUR 68 million in H1. The net interest paid reflects the higher cost of the new refinancing for example, we raised a EUR 400 million bond in Q1 at 3.75% to repay the EUR 500 million bond in '25, at 1%. The tax paid stands at a normalized 24% rate without the accounting effect you have seen in the P&L. The lead in increase in with the development of the assets under lease and the increase of the index, which are like a [Indiscernible]. All in, free cash flow was EUR 55.5 million, which is a record for the first half, reflecting the sharp improvement in EBITDA and the better ratio of Linen on working capital. With the free cash flow, we saw 2 main cash outs. First, acquisitions with Moderna on the second Mexican earnout. As the remainder, there will be a final one in '25. Second, dividend payment in June fully paid in cash. You remember that last year, the scrip option was proposed and the amount paid only represented 60% of dividend payments. The debt showed a normal increase at end June, above EUR 3.2 billion with leverage under control at 2.06. Let's look at the debt in detail. We have been active on the financing side in the first half with the issuance of a 6-year EUR 400 million bond at 3.75% coupon dedicated to the refinancing of the [Indiscernible] bond due April '25. In line with the strategy, the debt is well spread between 25% and 35% at fixed rates. Going forward, we will remain opportunistic about potential refinancing. We are also committed to continuing to improve the group's [Indiscernible] risk profile in the future and keep our investment grade rating. So moving on to the next slide. Net financial leverage was 2.06 at the end of June, which puts us well on track to reach our full year objective of 1.8x. You remember that H1 is always much below H2 in term of cash flow, notably because of working capital and dividend payments. As we forecast continuous EBITDA growth along with debt reduction, the financial leverage ratio will continue to decrease in the coming years, which is consistent with the strategy followed since 2019. To conclude this section, the key H1 takeaways are: first, a strong top line growth on the back of pricing discipline, churn normalization and commercial momentum allowing us to improve our full year guidance. Second, a further significant improvement in EBITDA margin, allowing us to improve our full year guidance. Third, EPS growth in line with the full year target above EUR 1.75. Fourth, an excellent free cash flow in H1, in line with our leverage target of circa 1.8x end '24. I will now run back to Xavier, who will give you an update on our CSR achievements in the first half of the year.

Thank you, Louis. So let me present the highlights of our recent initiatives and achievements. First, we were recently awarded several recognitions for CSR engagement and leadership regarding CSR and circular economy. In particular, we received a special mention at the Sustainable Transformation Summit. We were also ranking in the top 500 most sustainable companies in the world by the Time and Statista, position in Elis as the 25th French company listed. Regarding our logistic split, the number of our alternative vehicles continues to increase, 75 electric EV trucks will be delivered over the summer in France, along with 45 biofuel trucks by the end of the year. We also continue the development of our GLAD tool, aiming at optimizing logistic routes, which means fewer kilometers and therefore, lower fuel consumption. On another topic, so innovative and alternative range are expecting -- expanding, sorry, our textile to textile project with Zero Waste Apron is now made available in many of our countries. We also recently launched new products in our recycled dispenser range, Phoenix. The new Mats with high recycled content, name Retech and transition one of our biggest Workwear range, Motion. We are also happy to share that we are making significant improvements in health and safety within the group. Our frequency rate is down by more than 14% on the 12-month basis, as of end of May '24. Another [Indiscernible] achievement of thermal energy efficiency is still improving with about plus 1.5% improvement year-to-date. Finally, we have just closed our fifth cohort of young talent for the Elis Foundation, this young talent who have the ambition of pursuing a competitive academic curriculum, but are facing financial difficulties will be supported economically by the foundation while also being mentored by an Elis employee. Moving on to the next slide, the group engagement and actions have been rewarded by several CSR rating agencies also. In '23, MSCI improved its rating from BBB to A, recognizing the group's CSR performance. Furthermore, Elis was rated A minus by the carbon disclosure project, positioning the group in the leadership level. We also wanted among the top 5% of 100,000 assessed companies by EcoVadis with the gold medal. We also maintain our certainty rating at low risk and more recently, our Moody's ESG rating was significantly improved from 50 to 61 positioning the group way higher than its sectors. So let's now turn to our strategy and outlook. The very solid performance delivered by Elis over the last years is the result of a sound strategy that we have been applying for more than a decade. This strategy relies on 4 pillars. First, the development of sustainable services and promotion of the circular economy which has always been at the heart of our business model. Second, our industrial and commercial excellence to generate continuous productivity improvement and create valuable trusting relationships with our customers. So the consolidation of current positions, which leads to network density and create both a key competitive advantage for us and [Indiscernible] other competitors. And last, the expansion of our network, which over time, provided the group with a more balanced geographical and end market mix. Now before moving to our '24 outlook, let's take a quick look at this graph that we like to present regularly. There, you see the evolution of top line and margin performance over the last 2 decades, and it is fair to say that the last few years has clearly demonstrated the resilience of our business model and our strong pricing power. The backbone of our resilience is twofold. Further diversified geographical footprint I already touched on, with France representing less than 1/3 of our business; and second, the diversified portfolio of clients in terms of size and end markets. It is worth noting that this resilient profile while significantly improved with the acquisition of Berendsen and the addition of new countries in Central Europe and Scandinavia. Consequently, you can see on the graph that margin has constantly been evolving at high and stable levels within a 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 in on with top line growth. That means that conversely, they mechanically go down during bad top line years with a favorable impact on cash generation. The cash generation trajectory has been impressive over the last 4 years with free cash flow increasing from EUR 186 million in 2019 to more than EUR 300 million in '23, and we expect this trajectory to continue in the coming years. So now let's talk about our '24 outlook. Starting with organic growth that we expect to be better than anticipated between plus 5.2% and plus 5.5% driven by churn improvement and good commercial momentum in Workwear. This compares to our initial guidance of around plus 5%. Adjusted EBITDA margin should also be better than anticipated between 35.2% and 35.5% driven by operating leverage, further productivity gains and hedging in place on energy purchases. As a reminder, our initial target was close to 35%. All the other objectives that we indicated in March remain valid, and we feel very comfortable about our capacity to meet these numbers. Our next communication will be for Q3 revenue on October 30, after market. 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] And the first question comes from the line of David Cerdan from Kepler Cheuvreux.

David Cerdan from Kepler. Great results. I would like just to come back on what you said. My first question is related to the Workwear. What has really changed in this segment. You say that there is some new regulation. So can you give us some example of a new regulation? And how long do you think that this favorable momentum in Workwear will continue in Europe? My second question is related to France. You gave an example but what was your assumption regarding the minimum wage upgrade? So in other words, if the minimum wage in France is up 10%, by how much do you expect to increase the pricing to compensate. And is there a risk of lower demand because your services will be too much expensive for some clients? And I have a last question regarding your mix of activities. So yes, you progress in the EBITDA margin. This is not the case for the EBIT margin. Is it also because of the Workwear that is maybe more important in your business than the linen?

Yes, so lots of questions that is so. Okay. And so let me -- let's start with Workwear. So what has changed, it is not 1 massive change in H1. It is a regular trend regarding more hygiene, more regulation and the changes in Workwear are the following: Workwear are more and more considered as protective -- personal protective equipment. And when you consider it as a protective equipment, then you have immediately a regulation in Europe. So I have already given some example where we were talking about high visibility, for instance, so I remember the regulation in Europe. When you have high visibility jackets, if it is considered. So if you want to protect your employees, this is considered as personal protective equipment and then the rule in Europe is after 50 washes you need to destroy the jacket. It is not considered anymore as a protective equipment. So that means that for a company with employees working outside, you need to protect them regarding the risk if they were during the night, for instance. So you provide a jacket with high visibility [ bond ]. And you need to follow the number of washes. So if you don't work with a company like Elis, you cannot provide this data. And you take the risk to not to be able to demonstrate in case of accidents that your employee was protected. So it is not -- as I said, it's not 1 big major event that changed the rules in H1 '24. It is a natural trend that is regularly reinforced, reinforced, reinforced. Same story for more and more hygiene. And so you know that we have a large part of our portfolio in industry like pharmaceutical industry or food processing. And then it's even regulation regarding hygiene is reinforced regularly and they need absolutely to be sure that when the employee starts the day, he has a proper uniform and you cannot have this insurance if you ask your employees to wash at home. You have also the risk of cross contamination with their own personal clothes that explains why more and more companies want to outsource with us. The second part of your question, on Workwear was, do we see limit regarding this potential of growth. And today, the answer is no because it is clearly the end market and the service where the level of outsourcing is more limited even in Europe, in some mature markets. It's quite interesting to see what happened in Germany, for instance. You see in Germany, you could consider that it is, by definition, a very mature market, not in a good shape in terms of what is the GDP growth expected, what is the trend, the macro trend for industry in Germany. So normally, everything is in place to deliver a low level of organic growth. And there, as we said during the call, we have been able to deliver 15% organic growth in Workwear for industry in Germany. So it's -- I like that we have a lot of room to still continue to develop our business. And it is also the reason why we could be considered as quite immune in case of a big GDP slowdown. Second part of your question. So minimum wage and what is the impact. So it's -- we are talking about something close to 2% to 3% of additional pricing to digest in case of more than 10% is the minimum wage. So it's not a drama. We have seen that Spain in the past increased by even more than that. Germany increased by more than that. This year, it was more or less the magnitude of the increase in Ireland or in U.K. In LatAm, it is also the magnitude of the salary increase that we have to digest regularly. So that's why it's not a major chunk in our P&L. You can imagine that when we had the price multiplied by 10 in gas, it was a more massive shock to digest. And then your comments -- your third comment is about do we have the risk after that, that the cost of the Elis service start to be too expensive for the customer in the market. And here, the answer is, clearly not. Let's come back to what is the weight of Elis Services in the P&L of our customers for industry. So Workwear for industry. It's nothing, absolutely nothing. For the sole end market where it is more important, it is hospitality. But even in hospitality, we are talking about, as we said, less than EUR 10, EUR 5 to EUR 10 of linen per room where they charge between EUR 200 and EUR 500 for each room. And so even if we have to increase by 1%, 2%, 3%, EUR 10, it's nothing in comparison to the total price charged to their final customer. And at the end, the question is not only is it too expensive or not the service of Elis. It is more, can they work without the service of Elis and the answer is not easy because to provide the room without linen inside. I'm not sure that it is the best idea from -- for the hospitality market. And to be able to provide the service on another way, like, for instance, reopening some internal laundries. They will be less efficient than us. So at the end, if you have the minimum wage very costly in France. If a hotel decides to open internal laundry, they will have the same huge cost of labor to manage the laundry. So at the end, they will not be less expensive than us. It is the opposite. So that's why for us, it's not at all a major concern. And the last topic regarding EBIT, it's more largely the -- more than the breakdown between flat linen and Workwear. I want more to highlight the fact that we have more commercial dynamism. If you compare what is the organic growth rate of Elis now and where we were 3, 4, 5 years ago, we say now that we'll deliver on a regular and constant basis, at least 4% of organic growth, even with an environment of very low level of inflation. So that means that we signed more contracts and this acceleration of the commercial development has put more need of new linen because you know that in our industry, we invest totality of the stock of linen day 1 when we sign a contract. So that's why if you analyze the evolution of the EBIT margin, you have 2 subjects. First one, quite technical. It is as we have depreciation of linen in 3 years, and we don't -- we have not invested a lot during COVID years so '20 and '21. Of course, we had the kind of lag effect with low depreciation and it is also the reason why EBITDA has improved faster than EBIT. Nevertheless, on top of that, the level of CapEx, globally speaking, is now more in the round of 19% due to this increase of the commercial performance of the company.

We will now take our next question. The next question comes from the line of Ben Wild from Deutsche Bank.

Three questions for me, please. Firstly, just on energy. You talked about better purchasing conditions for energy across the group. Can you just clarify, when you look at the energy prices that you're paying, given the hedge rates that you entered in previous years and compare them with the spot rates, what kind of multiple are you paying on spot. And when do you expect the rates that you pay to converge to spot rates in the market available today. A second question on margins. You're clearly very focused on several initiatives across the group to drive margins higher, including through energy, as you've discussed. When you put these initiatives together, what is your ambition for the EBITDA margin level of the group? And what do you think you can achieve in terms of ongoing margin expansion over the coming years? And then a third and final question on the free cash flow. You're raising your organic growth guidance. You've raised the EBITDA guidance at the half year. And in H1, CapEx in proportion to sales is lower year-on-year. When I put those together, the FCF guide looks pretty conservative. Is there any reason in particular why you've not raised the FCF guide at this stage and can we expect maybe some conservatism baked into the EUR 340 million number?

So energy, it is perfectly in line with what we have already disclosed to the market. And you know that close to 90%, 95% of the prices hedged for '24 with massive savings, we are talking around between EUR 30 million and EUR 40 million of savings in comparison to what we paid in '23. And what we said, that is exactly the same for the year '25 and '26. We expect more or less the same magnitude of savings for '25. It's we can say that it is more or less already done because we have now a level of hedge in place that covers vast majority. We are close to 90% or so of our expected needs of energy for '25. And we know that in '26, we will have another savings to reach at the end of '26, the actual level of spot price. So it's, let's say, 3 steps of close to EUR 30 million every year in '24, in '25 and in '26. In terms of margin ambition, so it's clear that we expect a regular improvement of the margin at the group level. We know that during 3 years, we had this nice to have a decrease of energy price and where we don't give back 100% to the market and stay in our pocket. By the way, it has allowed us also to increase investment in the future, in the commercial future. You remember that in '24 with all the new positions that we have created in all our geographies to be able to push the top line dynamism. It was an effort of EUR 20 million. Then we have been able to digest it thanks to the natural improvement of the margin. So it's clear that we still continue to improve the margin in the years to come. It's quite complex for me at this day to give you a final long-term ambition for the margin. But you have seen that even in our best countries, we are able to deliver a margin above 40% with regular improvement like in France, like in Mexico. We have a lot of further examples like this. So that's why I will not define today limit on the margin expansion. Guidance for, we have decided to improve the guidance where it was totally clear that we have an evidence that we will be significantly above what we previously said for all [ geographies ], when it is not an evidence that we are massively above the initial guidance we have preferred to stay cautious. What is behind is mainly linen -- linen CapEx because you have understood that the top line reacts better than expected. We are losing less customers. We have a better commercial performance. So it's consumed more linen than expected and the impact with more linen will be more depreciation, so we stay cautious with EBIT. And so if we are cautious with EBIT, we are cautious with EPS and linen CapEx, it's also cash. So that's why, as we said, we are very comfortable with the guidance given at the beginning of the year, but not enough headroom to improve all the KPIs at this stage after the first semester.

Will now take our next question and the next question comes from the line of Sabrina Blanc from Bernstein.

I have 3 questions, if I may. The first one is regarding the margin in Scandinavia that you have mentioned a slowdown due to the exposure to the public segment. And could you provide more color on that? And notably, the part of your business coming from the [indiscernible] . And the second question is regarding the very good performance in Germany and with a price increase. You have mentioned that the churn has improved, but could we have more granularity and notably the difference of margin between Workwear and health care. And the latest question is regarding the Asian strategy following your [ authorization ] in Malaysia. How do you see the market and do you see other opportunities in other countries?

Thank you, Sabrina, so margin in Scandinavia. So it's a small slowdown, clearly, 50 bps. We are quite confident when we analyze the full year expectation for Scandinavia and we expect to be close to what we delivered last year as a margin. So last year, remember, we were at 36.5%, something like this. And so we should be close to that. So that means that it's not a huge trend, drama with something totally new in the market. So it's [ let this ] listed with Scandinavia. When we talk about Sweden or Denmark. At the end, it's a small industry, small country. You have 5 million to 6 million inhabitants in Denmark. We have more than EUR 240 million of business. So it is not where we will find the higher level of -- highest level of potential of organic growth. So it is also countries where we don't put a lot of industrial CapEx. So it's more for us the kind of area where we have a kind of [ cash cow ]. So we will keep a decent and solid margin when we talk about -- close to 36.5%, if not nothing with a high level of cash. So it's clear that we have a part, I don't have the precise figure demand of public contracts where in terms of inflation, it was more challenging to pass everything in the price with them. Nevertheless, we -- to summarize, it is a stable area for Elis, [ cash cow ], high level of cash generation, small expectation of organic growth. And so no operating leverage due to this lack of huge organic growth. So stabilization of the margin at a very high level with very good cash. So Germany, Germany, it's a very interesting country for us because it is a sizable country and it is a second country of Elis. We deliver our business on a full year basis that will be at around EUR 600 million. So it's quite sizable. When you are able to deliver more than 300 bps margin improvement as in H1, 350 bps. It starts to be quite -- with a nice impact at the group level. It is a mix of different things. So clearly, we are more efficient with a better management team at every level in Germany. So all the efforts put in place for years now start to bear fruits. We are very happy with the improvement of productivity. The mix of the growth is very good. We -- it was part of your question and the magnitude of the difference in margin can be simple to the double if we compare the margin in Workwear in comparison to the margin in flat linen for health care, for instance. And due to the high level of growth in Workwear, we are talking about 15% in H1. It's clear that it drives also a better margin at the end at the country level. The churn now we have lost less customers due to a price increase even in Germany, and we are back even in this country to a more normative level of losses that conduct at the group level to be able to say that now the point -- the 100 basis point of gross lost in '23 due to extra losses, it is behind us. And when we analyze the level of losses at the group level and also in Germany, we are back to what we had in the past at a normative level. Asia. So the strategy you have understood that it is a very long-term strategy and the impact is very limited at the group level with the first acquisition, EUR 6 million. It highlights, by the way, the fact that today, the market in Asia is very fragmented. We have conducted several market studies in different countries in China, in South Korea, in Malaysia and Singapore. And we have not seen all this list of countries. We have not seen marvelous jewel, like in Mexico where we could enter directly with a sizable company. It's not the case. Nevertheless, we know that for very long term of the company, it makes sense. So that's why we decided to make a first move in Malaysia, small move. Interesting also to see that it is in a very nice end market for us, so the cleanroom business, where we are one of the worldwide leader. It is a market that is quite consolidated, the cleanroom business in terms of customer. And so we have a lot of international customers that are quite happy to see us entering in Asia. So it's interesting. What will be the next step of the story. So we will have a look in Malaysia, of course, and probably also in Singapore that is very close to see if we can develop a little through bolt-on the first step. But as I said, all the market study shows that we have not a big company there. So it will be always a very small step.

Perhaps just to be precise on the Nordics part. So as you know, a lot of services are done by municipalities, like health care or whatever. So we have a higher part of public clients there, but probably in the 25% region, those are points that we are -- historically, the Nordics have focused on big clients, so major or industrial clients or big clients, which are also [indiscernible] in terms of pricing. That's why one of the strategy in the Nordics is to push for smaller clients developments, as we mentioned earlier.

We will now take our next question and the next question comes from the line of Sylvia Barker from JPMorgan.

One question left for me, please. Just your comment around inflation slowing down. Could you clarify the inflation impact in Q2 and then the expectations for Q3 and Q4 more precise and if that's actually moved quicker, moved down quicker than you expected.

So we cannot say that inflation will decrease quicker than expected because all in, when we analyze why we are able to increase the guidance for the top line and the organic growth. We can say that more or less, we are quite happy with the level of price increase during the year and it will be slightly above what we could expect even at the beginning of the year. So it's not -- so we knew that we will have this regular decrease of the level of inflation all over the year. Nevertheless, we have seen that on the same time, the level of -- the impact of losses will be less important. The report effect of losses in '23 will be less important all of the year '24 so it will more than mitigate the gap in inflation. And in losses, we'll deliver a better performance than expected in the year. For commercial success, we are happy with the performance, slightly better than expected. And for activity in the sole cyclical part of our business for 25%, 30% of the business that is hospitality. Here, we are clearly below our expectation for the full year. We have made the comment of bad results in the activity in June in France and the U.K. The first days of July are quite weak also around the event of Olympics in Paris. And so here, in terms of activity in hospitality, our forecast is below our initial expectation at the beginning of the year. So it is a mix of everything that explains that all in, we are better than expected in the level of growth. So pricing even it was anticipated that the momentum of inflation will decrease regularly over the year. But at the end, the pricing performance is better than expected for the full year for Elis, churn better than expected, commercial development and signature new contracts slightly better and we are disappointed by the volume in hospitality.

Okay. Maybe just checking on the volume in hospitality. Could you just comment on how much of that do you think comes back? And how much is just lost as people are obviously not going to be able to use down their holidays?

A small part will come back -- can come back in the second part of the year. We are quite cautious in our forecast, and we don't expect to see everything lost in June and July coming back in September and October, it wouldn't be very cautious. So what our customers said is they start to see some better occupancy rates starting next week in Paris. So that means that they expect and they have some better figures for next week. Probably August will be better than usual, but it was expected in our forecast, initial forecast and so on. We expect a small improvement in September and October, but we are very, very cautious in our full year guidance with the volume in hospitality, and we don't expect any miracle even in the second semester.

We will now take our next question. And the next question comes from the line of Christoph Greulich from Berenberg.

Yes, 2 from my side, please. First, on the Olympics. So you have already selected as a headwind for the business, given the slowdown of some hospitality clients. Just -- is it possible for you to quantify roughly what will you expect in terms of lost revenues kind of stemming from that event for Elis? And then secondly, just also a follow-up on the prior question on inflation. Would you be willing to give us the numbers, how much pricing has contributed to the organic growth in Q2? And then what you're expecting for H2?

Yes. So the impact, what we see today for the volume and what we -- the so-called loss due to Olympics we are talking about something close to EUR 2 million to EUR 3 million expected in this period of June, July. So it is a magnitude of this you can see that it's not a drama in comparison to the size of the group. Nevertheless, it's quite disappointing and we could have expected more. Hopefully, if you remember, we have always been very careful with the impact of Olympics. And if you remember, when we had discussion at the end of '23 to design the guidance for '24 and so on, we have always said that, we don't take too much into consideration for the impact of Olympics because we had the experience of Rio 2014, where it was not massive improvement in volume. So that's why it is below last year, so it is disappointing, but not a drama. For Rio Olympics 2016, sorry, it was a world cup in '14. So inflation, so we are in the round of what we said. The price effect for Elis for the full year will be around -- between 3% and 4% as we have always mentioned. So it's a good year of price increase. And it will be -- so you can make a model where it is less and less quarter by quarter, but to finish between 3 and 4 at the full year level.

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

Yes. A quick question regarding the earnout for the Mexican acquisition. Is it correct that next year we can anticipate something like EUR 50 million, 5-0?

Yes. It depends on the EBIT of '24, but it's the magnitude of what can be expected in cash indeed.

Okay. And second question is to challenge you on Asia, okay? You go to Malaysia. What do you think about, I would say, the Western countries like Japan and Australia. Is this something that could have some interest for you? And second question is in terms of capital allocation, how do you reconciliate the local risk to the profitability and some other options to use your cash flow?

So all the countries that you mentioned that you know that 1 of the 4 pillars of the strategy to regularly open some new area. So of course, we try to have a look on every potential area for Elis. You know also that we have already worked a little on Australia in the past. We were monitoring the situation. We decided not to go there, it was 7 years ago. It was more or less at the same time than the Berendsen acquisition, we had the opportunity to have a look on some companies in Australia. But at the end, we decided not to enter. So I can just say that, of course, we are always looking to any potential new area for Elis, it is part of the strategy. But we are very cautious with the use of the cash of the company. And I'm not sure that we can talk about any kind of capital allocation when we see an acquisition of EUR 6 million in Malaysia. So it is like a small bolt-on paid with the cash, so it does not change a lot the situation and the capital allocation, I think.

So does it mean that you don't expect to invest a lot of millions in Asia in the next 1, 2 years? Or because today, it's only EUR 6 million, but if you're ambitious, you will target something more important.

No. And then I'm back to what I described as the result of the different market study, David. That means that today, we -- the targets are very small and the markets are totally fragmented. So even if we wanted to push a lot and to be quite aggressive in the development of the business in Asia. We don't have the target in the countries that we -- that we are highlighting. So Malaysia, Singapore and so on. So we will probably, in the coming years, still continue to make some small bolt-on to regularly develop this position. But it is much more a strategy like Colombia than Mexico to give you a comparison of what we did in LatAm. So Mexico, we had a very massive and super leader. So it was a big move day 1. Colombia, we made the market study, but you had no leader clearly in place. So it has been story of very small acquisition, small bolt-on. Now we are by far the leader in Colombia by the way, with a very nice margin. but only with a very small move, some millions of revenue each time, but not more. And it is probably the situation that we will have in the future in the country that we have targeted in Asia.

[Operator Instructions] As there are no further questions, I would like to hand back to Mr. Martire for closing remarks.

So I think that David gave the conclusion. I wish everybody a wonderful summer and happy to see you in September, October and so on and for the Q3 performance of the group. Bye-bye.

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