Hello, welcome to the Elior Group First Quarter 2022, 2023 Revenues Conference Call. Please note this call is being recorded, and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad. If you require assistance at any point, please press star zero, and you will be connected to an operator. I will now hand you over to your host, Mrs. Esther Gaide, Group Chief Financial Officer, to begin today's conference. Thank you.
Thank you, operator. Good afternoon, ladies and gentlemen. Welcome to Elior Group's first quarter 2022, 2023 revenue conference call. I'm joined by Didier Grandpré, Group Financial Officer, and Philippe Ronceau, our Head of Investor Relations. We have provided detailed financial information in our press release issued earlier today, which is available on Elior's website. I am going to make a few comments about our first quarter revenues and the outlook for the rest of the year before concluding with a quick update about our key strategic initiatives. Then we will be available to answer your questions. Revenues reached EUR 1.2 billion in the first quarter, growing organically by 11.7% in line with our expectations. Like-for-like increased by 10.2%, reflecting price increases of 3.8%.
Elior is still benefiting from a COVID volume recovery effect, bearing in mind the impact of Omicron's first wave a year ago, notably to our French operations. Business development has remained strong, contributing to an organic growth of 10%. The retention rate was 91.5% at the end of December 2022, up slightly versus 91.3% a year ago despite voluntary exits. Excluding voluntary exits of unprofitable contracts, retention would have achieved 92.6%. In France, revenues were EUR 533 million, up 9% organically. Internationally, revenues totaled EUR 688 million, up 14% organically. In the USA, organic growth was boosted by the conversion of former Preferred Meals contracts into new cook-on-site contracts.
VNI organic growth jumped 16.2%, while education improved by 85%, and health and welfare rose by 9%, reflecting the Omicron recovery effect year on year as well as price increases. Elior available liquidity as of December 31, 2022 was in line with our expectations due to seasonal working capital requirements amid strong organic growth, notably the conversion of Preferred Meals contracts to cook-on-site in the USA. As for the outlook for the rest of the year, we expect the COVID catch-up effect to continue into the second quarter before normalizing in the second half of our fiscal year. At the same time, our strong commercial momentum and the price increase negotiated with our clients should continue to support organic growth. Inflationary pressures remain high, notably with regards to food costs.
We are continuing to actively engage with our clients to mitigate these, particularly in the public sector, notably in France. All in all, assuming a stable public health situation, we maintain our guidance for the full year with at least an 8% organic revenue growth, generating an Adjusted EBITDA margin between 1.5% and 2% and a CapEx between 1.5% and 1.7% of revenues. We are also maintaining our 2024 ambitions, which you may find in detail in the press release. Before opening up for your questions, a few points regarding our key strategic initiatives. At the end of November, when we announced our full year 2021, 2022 results, we presented four key areas of self-help initiatives to improve profitability in France. Tangible improvement measures are now being rolled out.
We will of course provide a detailed update at the time of our half year results. Lastly, the project to acquire Derichebourg Multiservices, which aims to accelerate Elior's turnaround, is proceeding according to the initial timetable. This should lead to an extraordinary general meeting of shareholders taking place sometime between April and May. As required by law, the relevant employee representatives within the group have been informed and consulted with respect to the transaction. Thank you for your attention. We are now ready to answer your questions. Operator, would you please take the first question?
Sure. As a reminder, if you would like to ask a question, please press star one on your keypad. To withdraw your question, please press star two. The first question comes from the line of Leo Carrington calling from Citi. Please go ahead.
Good afternoon. Thank you for taking my questions. If I might ask two. Firstly, on the retention rate in Q1, while I appreciate the year-over-year comparison is a step down from Q3 and what was implied for Q4. First question would be how do you expect the retention rate to progress over the rest of the year? Is Q1 a number that we should extrapolate the rest of the year, or do you think there'll be an improvement? Secondly, on the contract losses on renegotiation, it seems around 6% of contracts that were renegotiated contributed to 1% contract losses. Is that the same kind of run rate that could be expected for the year? Also how does this compare to your expectations going into the quarter as to contract losses? Thank you.
First, on the contract losses, it's a very small amount. I'm not sure your computation. I mean, I, we haven't been looking at that like that just because it's really customer by customer that we look at that. For the time being, as we have exactly the same kind of trend, which is we have very few losses, because customer prefer to renegotiate with us than move to another supplier because you need to go through a tender, and in any case, you end up with a, with a higher expense. We are in line with what we expected totally. Actually, again, it's really customer by customer.
Second point, and the first thing is when we discuss with customers, we see that most of them are willing to, when they can, and we can come back on public contracts, when they can, they prefer to stay with us. The second point on the retention, we compare quarter to quarter because from 1Q to another it's very, very different. We expect the retention rate to remain high. The reason why and why we are confident is because the development rate, as you may recall last year, it was the first time in the last 5 years that the retention, the return, the development rate was positive, which means in net, we were gaining more contract than we lost.
That's what we see also in Q1, which is a very good news for us.
Thank you. On the first topic, I was referring to the deliberate contract terminations which had a 1.1 percentage points impact. Given that that's not been disclosed before, my analysis I suppose was based on that being purely incremental and landing in the quarter.
Yeah. You may recall that at the end of September of 2022, meaning at the end of our previous fiscal year, we had almost no impact of voluntary exits. We communicated actually the retention rate with and without the voluntary exit. It was at that time a 0.1 point impact. Some contracts have been actually exited at the end of September, that's why you see the impact of these voluntary exits in Q1. You're right to say that this is about 1.1 point, and this is what you should expect along the year, considering that since they have been exited at the end of September, they will impact the full fiscal year 2023.
Thanks for that clarity. The full year FY 2023 impact should be something like 1.1%.
Well, that's what we expect now. again, as I mentioned.
Okay.
It's gonna be customer by customer.
It could widen the best as you...
As you know, what we've left to the big chunk of what we need to discuss now is on public contracts, and that's something that's difficult to exit. It's very difficult to forecast how that stuff is gonna be closing in the end. Still, we the this impact we have in Q1, because it started in September, we are pretty sure we should be around that.
Okay. Thank you. Last clarification, if I may. Esther, when you said the retention rates to remain high, do you see the H2 2022 95% as the level that could be achieved in the remaining quarters of the year or thereabout?
We hope so. If you recall what we guided a long time ago with Philippe Guillemot, we said that one of our goals, objectives was to have to increase our retention rate because that's the recipe for success in terms of improving margins. When you retain customers, it's usually better than when you have new customers because the first years of a contract is always, you need to adjust to the customer and usually your margin is not as good as when you retain a customer.
Okay. Thank you very much.
You're welcome.
The next question comes from the line of Pravin Tambe, calling from Barclays. Please go ahead.
Hi, good afternoon. Thanks for taking my questions. First one is on, net new business development. It was around about 1.5% positive in Q1. How much of that is retained, Preferred Meals revenue, which was converted to, on-site catering and treated as, new business wins? The second one is on, what's your outlook, on the H1 margins, and then the free cash flow, to the year, development to the year?
I will not be able to give you more color on the second point. As you know, we are on a Q1 revenue call. The Preferred Meals, maybe, Didier, you can answer that. The Preferred Meals on the net development, net business, development.
it's the Preferred Meals is around 3% organic growth on international part. it's 3% out of the 14 for the international.
On an underlying basis, is it correct to assume that at our at the group level, the net new business development was nearly flat excluding Preferred Meals? Is that correct?
It should remain slightly positive, because we have 2.6%, at the level of a group, and international just representing a bit more than half of the revenue.
Right. Okay. Thanks. That's helpful. Secondly, on the free cash flow or liquidity progression through the year, basically. The liquidity was down to EUR 307 million Q1. Can you just give us some more colors on the moving parts of that and your expectation of the free cash flow through the year?
I will not be able to give you any guidance on the free cash flow. As you know, we haven't been guiding on the free cash flow this year. As we mentioned, the liquidity is totally in line with our expectations. The main reason is the seasonal working capital requirements. As you know, I mean, the growth, the organic growth seems important, and that has impacts on the working capital.
Oh, right. That's helpful. Thank you very much.
You're welcome.
We currently have no question coming through. As a final reminder, if you'd like to ask a question, please press star one now. This question comes from the line of André Juillard calling from Deutsche Bank. Please go ahead.
Good afternoon. Thank you for taking my question. Just one, to come back on the cash burn that you had in Q1. If my calculation is right, you burned more or less EUR 92 million in Q1 versus EUR 39 million in Q1 2022. Just wanted to understand where the difference was coming from. Thank you.
I actually the main driver of cash consumption and the difference between this year and last year is around the receivables. We had actually a stronger organic growth in France in the last two months of the quarter. 'Cause, you know, as a matter of fact, considering our average payment terms, what counts are the last two months of the quarter, so namely November and December of this year. Where last year we have been impacted by the COVID, in particular in France. This is one element. The second one is that we have been converting the former Preferred Meals contracts into new cook-on-site that started at the beginning of the school year.
Here we had to build completely the new working capital, which is also different, compared to what we had last year.
That means that you'll have a negative effect, more or less all year long coming from Preferred Meals.
At some point, we will have the end of the school year.
In August.
In August. That's where you don't generate any new receivable, but you are collecting the old invoices, if I may say so. From that perspective, it is really a seasonal effect. I think the modeling details we provided between EUR -20 and EUR 0 working capital consumption for this year. We should take this impact into account.
Yeah, that means that we cannot anticipate a positive working cap for this year. It will surely be negative if we start the year with such a level of cash burn.
You have always the seasonality in our working capital. Meaning at the same time, you cannot consider that the cash consumption if you want to remain for the rest of the year.
No, I understand, but the proportion is significant because one more time, we have more or less 3 times more cash burn in this Q1 compared to last year. I can understand that progressively, the cash generation should become more positive during the year. I don't see how you could become positive on a yearly basis with such a start of the fiscal year. Maybe am I wrong? I don't understand.
We, I mean, we cannot confirm on that. The thing is, as you may have seen, we have been very cautious every time on managing our working cap. That's what we've been doing the last three or four years. That means for instance, that last year, we gained in globally five days in terms of DSO.
Yes.
That's something we are very cautious in all countries. Yes, on this Q1, we had this impact in the US. We also had the strong growth in Q1 in France. That also impacts the working cap. It's something we are working on continuously.
Okay. In terms of net debt anticipation for the year, could you give us some elements so that we can build our anticipation?
Again, as you know, it's a core on revenues. We are not giving any anticipation on that.
Okay, thank you.
The next question comes from the line of Sabrina Blanc, calling from Societe Generale. Please go ahead.
Yes, good afternoon. I have a quick question, if I may. The first one is regarding the corporate and industry volumes. Can you say that we are now fully back to pre-COVID level? What is missing? The second question is regarding the actions that you are taking on the public sector. Can you provide more color? Lastly, regarding the guidance of at least 8% organic sales growth, does that include the voluntary exit of contract from one part and on the other part, the positive effect of the Preferred Meals contract?
Maybe starting by the last one. The answer is yes to both questions. Meaning that we have actually factored in our guidance, the expected level of voluntary exits. Second, the conversion. First, the exit of Preferred Meals activities is excluding from our organic growth calculation because this is at a constant perimeter. And second, the conversion of the Preferred Meals activities of contracts into new cook-on-site contracts are actually part of the development. Both are included in our organic growth. Maybe I can continue with your first question. Actually, we consider it's not that relevant anymore to provide the percentage of revenue compared to.
2019. Yeah, 2019.
Pre-COVID in 2019. Since now there are many factors impacting our revenue evolution. To give you nevertheless an idea, we were in Q1 at 94% versus 95% in Q4, which is pretty stable. Actually, now we consider we are in what we could call a new, a new norm in terms of level of revenue.
Considering on the public sector, as you know, Sabrina, even if the French State clearly say that public contract prices could legally be adjusted beyond standard indexation clauses, we are not there. I think we mentioned when we did the call on full year, that we were sending at the end of the year 160 letters to public bodies, and to many towns and local authorities. Today, this action is really very, very slow to take place. Which is very different from the other countries including European, some European countries where they accept to discuss. It's something we are...
I know that we are, we have competitors that in exactly the same case that we are. The only way is to either to go out and try to get out from the contract. It's really something that is a difficult part of the business these days.
Right. Thank you very much.
Welcome.
The next question comes from, Jordan Van der Straeten, calling from Oddo BHF. Please go ahead.
Yes, good afternoon. Just very quick one from me. Could you remind us please, the impact of the Omicron variant, back in Q2 2022, please?
I think we need to come back to you because that stuff, I don't have it with me now.
In, in-
In Q2.
I think we're around EUR 50 million.
Let's be more precise and.
Yeah.
We'll come back to you and give you the numbers.
Okay, thank you.
The next question comes from Yi Zhiong, calling from AlphaValue. Please go ahead.
Hi. Thanks for taking my questions. I am wondering if you would have any further comments on your contract renegotiations. The completion rate was up from 67% at the end of September to only 73% at the end of December. If I'm not mistaken, the target was set at 90%, right? Are you facing difficulties to convince your clients only in France? Thank you.
On this one, as you may recall from the full year publication, which was in the autumn, and as we communicated at that time, it was just after the French State Council said that public contract prices could be legally adjusted beyond standard indication clauses that we do have in these, in those contracts. Which gave us, I would say the hope at the time that we would move forward and renegotiate around 90% of our contract by the end of the year, as you said. As Esther explained, as a matter of fact, we need to negotiate each of these contracts with municipalities and local authorities. I mean, they all receive a strong recommendation from the French government to open discussion, but it takes time. It's difficult. It's from that perspective different than what you may find in other countries. Actually, we do need as well to take into account that there are some clauses where you cannot freely exit from these contracts without penalties or replacing or compensating the customer for the price difference. That's why now the 165 contracts that Esther was mentioning are still work in progress. I mean, they are not fully closed from that perspective. Some of them have been renegotiating. It's still a small percentage, still some work to be done, but not yet finalized at this stage.
Okay, great. Are there any new targets?
Actually, we are fixing now the new targets for the incentives the commercial people have on that. For the timing, I cannot give it to you, but it's a rather high number to make sure because obviously it's, we started with a, with a number, but inflation, as you know, has been going on, and then we need to increase the targets. There are some contracts that we are already renegotiate twice, and they are starting to think to go back for the third time. It's... Yeah, we are, we have, we'll be able to give you at some stage the new targets, but they are higher.
Very nice. Thank you.
You're welcome.
There are no further questions, so I will hand you back to your host to conclude today's conference.
Yes. Thank you. Thank you for attending and for joining us today. The next financial publication will be our half year results scheduled for the 17th of May. Thank you and have an excellent rest of your day. Bye.
Thank you. Bye.
Thank you for joining today's call. You may now disconnect. Host, please stay connected on the line.