Good day, thank you for standing by. Welcome to the Elis Full Year 2022 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you will need to press star one and one on your telephone. You will hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Martiré, CEO. Please go ahead, sir.
Thank you. Good morning, and welcome to Elis, 2022 Annual Results Presentation, which is also webcasted and recorded. I'm Xavier Martiré, CEO of Elis, and I am here in Paris with our CFO, Louis Guyot. After an overview of the 2022 business highlights, I will hand over to Louis. He will detail the year's financial performance. I will then come back to provide you with an update on our recent CSR achievements, and then share with you our views on 2023. Finally, we'll have a Q&A session to answer your questions. After our call, Nicolas Buron will be available to answer any of your questions offline. Before we start, as usual, please take the time to read the disclaimer.
I'm very happy to report very solid financial performance in 2022, with almost all our financial KPIs at record level, which is an achievement I'm very proud of, given the difficult environment with macroeconomic and geopolitical instability, as well as strong inflation. 2022 was a year of strong revenue increase for Elis, with growth of +25%, of which 21% on an organic basis, to reach more than EUR 3.8 billion, reflecting the high number of new contract wins in industry and trade and services, a rebound in hospitality and pricing adjustments, notably to offset surging energy costs.
The group reached record EBITDA level at nearly EUR 1.3 billion, up 20%, while the dilutive effect from inflation had a negative effect on margin, which, as expected, was down to 33%, but this should start to reverse in 2023. EBIT reach record level of EUR 544 million, up 40%, along with 150 basis points EBIT margin improvement. Net income and headline net income all reach record level too in 2022, and EPS was up 57% year-on-year at EUR 1.54 per share. Free cash flow was better than expected at EUR 225 million, nearly at last year's record level, despite significant headwinds from a change in working capital requirements due to the strong top-line increase.
Finally, financial leverage ratio decreased 0.5x to 2.5x at the end of December. We expect this material deleveraging trend to continue in 2023. This great set of results will allow us to propose a distribution of a dividend of EUR 0.41 per share at the next AGM, up +10% year-on-year. Business-wise, the main topic of the year was obviously inflation. Our challenge, like many other businesses, was to quickly adjust our pricing to contain the impact on our profitability. I will come back to this shortly. In a nutshell, we have been very efficient on this issue. We managed to nearly offset in euro terms the +11% inflation of our cost base by a +7% price effect, while maintaining very strong commercial momentum.
Through 2022, we have been able to negotiate fixed- rate tariffs for energy supply for 2023 and the following year. This, along with a stronger embedded price effect that is already in the books for the year and the absence of any sign of slowdown, leaves us very optimistic for 2023, and we expect further improvement of all our financial KPIs for this year. I will come back to this at the end of this presentation. The next slide provides a bridge between 2021 and 2022 revenue, which increased +25% year-on-year. Nearly half of the total EUR 800 million increase from one year to the next came from higher volumes. This is a consequence of both the sharp rebound in hospitality that we recorded, especially from Q2 2022 onwards, and the uplift from our commercial initiatives on our other end markets.
The 2022 price effect represented a total of nearly EUR 260 million of additional revenue to offset a very large part of the inflation of our cost base. This pricing adjustments have been negotiated throughout 2022, with a strong ramp-up over the year and an even stronger embedded effect entering into 2023, with another set of price adjustments being implemented since January 1st. Our Mexican acquisition, closed in July, contributed EUR 50 million in 2022. Nearly another EUR 50 million correspond to the acquisition we announced in Germany, Denmark, and Chile in H1 last year. Lastly, FX was very favorable last year, with an impact of nearly EUR 40 million in revenue in 2022, essentially due to the evolution of the Brazilian real. Moving on to the next slide, I'm very satisfied with how we have been able to handle inflation.
Our pricing negotiation often generated some minor lag between cost increase and revenue uplift. This clearly highlights Elis' pricing power, which is a key component of our business model and one of the group's biggest strengths. I want to give you some color on the reasons of this success. First, our services are essential to our client's activity. Hotels and hospitals simply cannot operate without linen. The same goes for industrialized clients. Uniforms are very often mandatory, and they need our service to properly run their business. Second, the cost of our service represent only a fairly small component in our clients' P&L. As an example, we charge only between EUR 5 and EUR 10 for the linen of a hotel room. Compare to the actual price of a hotel room, you can see that the cost of our service is not very material.
Also, our service is fundamental. When looking at our other end markets, the cost of our service is actually even less material for our clients than in hospitality. Bottom line, when we apply a 10%-20% price increase, we are talking about between EUR 1 and EUR 2 more for a hotel room that is often sold for more than EUR 200 a night, so this is virtually not material for our clients. Additionally, in most cases, and in most geographies, pricing negotiations were made a lot easier by the fact that average room prices also significantly increased over 2022. Third and last, alternative solution to our services are very limited. Reinsourcing is not really an option, and we don't see this happening in our markets as it would result in a higher cost for our clients.
Furthermore, our competitors have more or less the same cost base as ours, and there is no risk of disruption from an alternative way of providing the service. It means that everybody is facing the same inflation problem, and we have noticed overall rational behavior from our competitors in most of our markets. These three reasons combined explain why we have been successful with our pricing adjustments in 2022. Moving on to the next slide. Hospitality has shown steady gradual improvements throughout 2022, with a good summer season and a very strong year-end. The first weeks of 2023 look very promising, too, with a good activity during winter holidays. Activity is now above its 2019 level in both France and Spain. In the U.K., we are still a touch below where we were.
In 2023, the comparable base in Q1 will be easy, as Q1 last year was somewhat impacted by the Omicron variant. This should lead to a favorable effect of around EUR 50 million, fully in the first quarter. Moving on to the next slide. Our three other end markets, healthcare, industry, and trade and services, were strong in 2022 due to some structural activity drivers and to a record year in terms of commercial activity for Elis. Outsourcing is one strong growth drivers for us in Eastern Europe, Southern Europe, and LatAm, where more and more companies have decided to manage the washing of their employees' uniforms and do not want to take the risk of letting their employees do it over at home. As a leader in the industry with a very strong network density, Elis offers second -to- none reliability in supply.
This is a key factor, given that without our uniforms, most of our clients simply cannot operate their business. We continue to roll out specific initiatives in some countries, including services that have already been deployed in France, such as services for care homes in Spain and in the U.K. or services for small clients in Sweden and Brazil. We also continue to record an improvement in our churn rates, especially in the U.K., re-rewarding our efforts to always maintain very high standards in terms of service quality and reliability. Finally, the post-COVID environment remains very favorable for Elis, with the increasing need for hygiene, sourcing security, and traceability translating into higher revenue for the group. Moving on to the next slide to talk more about inflation, which was obviously one of the main topics for 2022.
Overall, our cost base increased around +11%, with energy costs representing a cost increase of EUR 140 million, around 50% of the total inflation-related cost increase for the year. This does not come as a surprise and reflects the surge in gas, electricity, and fuel prices over the last 18 months or so. Throughout 2022, we progressively negotiated fixed energy tariffs, so we should now be immune to such market price peaks. I will come back to that in a minute. Personnel costs, which represent 80% cost line, increased around EUR 85 million in 2022, so around a +6% increase. Other items represent a combined additional cost of around EUR 50 million.
All in, the impact from inflation on our cost base was around EUR 275 million in 2022, with H2 being, of course, higher than H1. We had the full half effect of some wage increase that were implemented during H1 and some additional wage increase that kicked in a number of countries such as Germany from October onwards and France from August onwards. Let me give you some details on gas and electricity pricing, which has been, and still is to some extent, a stress factor for the market. As we just saw, energy and especially gas was the main contributor to the cost base increase in 2022. In 2022, only half of our gas volumes were hedged, meaning that we paid the spot price for the remaining half in a somewhat irrational market.
Throughout the year, we have negotiated fixed- rate tariffs starting in H2 2022 and covering 2023, 2024, and 2025 volumes. As far as 2023 is concerned, 95% of our gas volume are hedged at around EUR 80 per megawatt hour, and 90% of our electricity volumes are hedged at EUR 235 per megawatt hour. All in, this fixed price going forward make me feel reasonably relaxed about gas pricing for the coming years, and the EUR 340 million energy bill that we recorded in 2022 should increase at a slower pace than revenue in 2023. Looking beyond 2023, the energy bill should somewhat stabilize as our internal policy is now to secure our tariff for gas and electricity for the years ahead. Moving on to the next slide.
Let's have a look at two bridges which provide a good summary of the impact of inflation and pricing on our 2022 EBITDA and EBITDA margin. On the left-hand side chart, we can see that the EUR 275 million increase in our cost base was largely offset by price increases, with a rebound in hospitality activity contributing to nearly EUR 150 million in EBITDA increase in 2022. As usual, we also recorded some good productivity gains with some specific action plans, leading to a reduction of around 8% to our energy consumption, which contributed to a EUR 35 million total productivity gain. At the end of the day, we delivered a EUR 210 million increase in EBITDA for the year. Looking at EBITDA margin on the right-hand side chart.
The fact that we only offset the amount of inflation in EUR term led to a mechanical dilutive effect on EBITDA margin as a nearly EUR 260 million of additional revenue coming from pricing to offset inflation do not contribute to margin. This had a -320 basis points negative effect on margin in 2022. This was partially compensated by the positive effect from strong activity volumes and from productivity gain. Overall, EBITDA increased by more than EUR 200 million, with a controlled EBITDA margin decrease of 150 basis points in line with our guidance. Moving on to the next slide, let's have a look at the EBITDA performance in our different geographies. The first general comment is that inflation, of course, impacted margin in all geographies.
Geographies where top-line growth was strong due to the recovery in hospitality could somewhat control this margin decline, such as France and the U.K. and Ireland, where margin was down only -70 basis points, as well as Southern Europe with -140 basis points. In Central Europe, pricing negotiation were tough in Germany, especially with large public healthcare players, which account for a significant part of revenue. In Northern Europe, also hospitality is a profitable business. It is less profitable than our other businesses in the region, and the rebound in hospitality, therefore, had a dilutive effect on margin. LatAm finally deliver margin improvement of 30 basis points driven by the accretive effect from our newly acquired operations in Mexico. Let's now look at our M&A activity in 2022. We closed four major deals, including the Mexican acquisition early July.
In March, we acquired Jöckel in Germany, a player with revenue of around EUR 20 million in the healthcare market, further enhancing our position in this market. In March, we acquired Golden Clean in Chile, which was the number two player in the market, enabling us to further consolidate the market and strengthen our leadership position in the country. In May, we acquired Centralvaskeriet in Denmark, a player that offers flat linen for clients in hospitality as well as workwear and mats. The acquisition reinforced our number one position in Denmark. Part of our acquisition strategy is also to open new geographies regularly, especially in LatAm, where we acquired the leader of the Mexican market in July. We'll come back to this on the next slide. All in, these acquisitions had an impact of +3.1% on our 2022 revenue.
Moving on to the next slide, I'll already had the opportunity to present to you several times the acquisition in Mexico that we finalized early July. I'm very happy with the rollout of the integration plan and by the current trading that is currently significantly above budget. As a reminder, we acquired a century-old family business and the only player in the country with a national network. The group is a market leader, 20 times larger than the number two. Activity is very resilient and stable, with healthcare clients accounting for more than 85% of total revenue. There are 11 plants and 12 distribution centers to optimize the coverage, with a total of 2,600 employees. Management has been in place for more than 20 years and stayed on board with some earn-outs to align their interests with ours in the coming years.
The company delivered revenue of EUR 85 million in 2021 and EUR 50 million in only six months in 2022, which is very encouraging. Historical organic revenue growth were generally above 10%, and both EBITDA margin and EBIT margin are best in class. In the second half of 2022, EBITDA margin was at 42%, which is among the best Elis countries. 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. Most industrial companies are still buying their uniforms, so we will do our best to open the market like we did in Brazil and accelerate the move toward the rental model.
Hospitality is also a very big market in Mexico, with 25% more rooms in the country than in France. Most of the hotels still don't outsource the washing of their 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 represent another area of potential growth for us. This concludes the first part of the presentation, and let me now hand over to Louis for a presentation of the 2022 financials.
Thank you, Xavier. Good morning, everyone. Let me first go through the usual revenue breakdown by activity, end market, and geography to illustrate the group's high level of diversification, which provide us with a highly resilient model in times of crisis. Either way you look at the graphs, you will see that Elis's positioning is well-balanced and complementary, which contributes significantly to its resilience. In terms of activity, flat linen and workwear represent 45% and 37% of revenue respectively. Looking at our end markets, hospitality is now back to a normative level, and our four end markets, which all have different growth drivers, each weight for nearly 1/4 of our activity, which is a key strength in times of crisis.
In terms of geographies, France represents a bit less than a third of our total turnover, and we have a balanced mix with, on the one, Central Europe and Scandinavia being more mature and stable, and on the other hand, Southern Europe and Latin America offering higher opportunities for outsourcing. This good diversification in terms of activity, clients, and 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 on to the next slide, let's look at the evolution of organic growth and EBITDA margin by geography. Some general comments first. As Xavier explained earlier, the spectacular organic growth of 21% was pushed by a strong pricing impact contributing for 8% and the recovery in hospitality for circa 10%.
The rest coming from the regular trend of commercial dynamism, development of outsourcing, CSR-linked contract wins, and churn improvement. In terms of EBITDA, despite 20% growth, we recorded, as expected, 1.5 point decrease in the margin. The main reason is a lag in implementing price adjustments given how sudden the inflation was in 2022. At the end of the day, we could not fully compensate in EUR the increase of our cost base with our pricing adjustments. You know that we expect to reverse that in 2023. Margin evolution by region, depending on the speed to pass inflation into prices, depending on how cultural that is in the country, especially when they are the bigger part of large clients, public clients, or the healthcare clients with whom the negotiation can be more complicated and longer. Diving geography by geography. In France, revenue was up 25% organically.
Hospitality was one-third of the portfolio before COVID. Of course, the rebound is contributing a lot, especially as we are above 19 levels. Globally, all end markets showed very good commercial momentum, especially workwear and pest control. Margin-wise, the strong rise in energy price in 2022 weighed on our cost. Gas purchases were not hedged. We had strong volumes in flattening business, which is highly gas intensive. Even with a good pricing dynamic, there was a lag between inflation and price adjustments, leading to - 70 bps in EBITDA margin. In Central Europe, revenue was up 15% on an organic basis. Hospitality rebound contributed to strong growth in Switzerland and Benelux. Everywhere, the development of workwear is impressive, with double-digit organic in Netherlands and Poland, for example.
In Germany, pricing momentum was very good in hospitality, but remained insufficient in healthcare and workwear, considering the inflation level. You remember that the minimum wage increased by 25% in 2022. That said, commercial development remains dynamic, especially in industrial workwear and in hospitality. Profitability-wise, the COVID-related absenteeism, which is paid by the companies, and recruitment difficulties had an impact on our logistics and workshop productivity. Furthermore, price adjustment negotiation were more difficult with big clients in healthcare and workwear, which represent a significant part of the region's revenue. This has led to -2.90 in EBITDA margin at 29.6%. Scandinavia and Eastern Europe, revenue was up 15% on an organic basis. All countries in the region posted strong organic revenue growth. Pricing negotiation took longer due to mix of clients, but eventually came to a positive conclusion.
Hospitality sharply rebounded in Denmark and Sweden through 2022, commercial momentum is strong, notably in workwear. Just like Central Europe, profitability was impacted by COVID-related absenteeism. The lag in implementing price adjustments for big clients in healthcare and workwear and the pickup in hospitality that had a dilutive effect on the margin led to a decrease of 230 bps in EBITDA margin, which at 36.2% remains a very good level. In the U.K. and Ireland, revenue was up 29% on organic basis. Activity in hospitality continued to pick up, although the pace was slower than in the other regions. However, pricing momentum is well-oriented in the region, especially in hospitality and in healthcare. Extra capacity is limited, most players focus on pricing rather than volumes.
We are still improving the churn rate, while the commercial developments are strong in healthcare and in workwear business. Very strong inflation, while offset in value by the rebound in hospitality and pricing dynamics, had a dilutive effect on margins. This led to - 70 basis points adjusted EBITDA margin decrease at 30%. In Latin America, revenue was up 48.3%, of which 15% of currency effect and 25% corresponding to the acquisition of the leader in Mexican market, consolidated since July. Pricing dynamic was good in the regions, volume were slightly down following the end of temporary contracts signed in Brazil during the pandemic. As far as EBITDA margin is concerned, the acquisition in Mexico market had a negative effect on margin.
Productivity is improving in all countries, and inflation has been easing, which generates a favorable effect on the back of strong pricing adjustments that have been kicking in with a time lag. All in, EBITDA margin of the region was up 30 basis points compared to 2021, at 33.5%. In Southern Europe, finally, revenue was up 40.1% organically. The region has a high exposure to hospitality, and the market rebound in activities for so 2022 drove growth. In workwear, good commercial momentum continued on the back of an acceleration of outsourcing. Pricing momentum in the region was satisfactory. EBITDA margin was down 140 basis points compared to 2021, at 27.2%.
Just like France, the cost base was impacted by the fact that gas purchases were unhedged and by the high share of flattening, which is more gas intensive. Let's now look at the full P&L. We already have commented on 2022 revenue and EBITDA, up 25% and 20% respectively. Below EBITDA, all aggregates showed strong growth compared to 2021. D&A only increased by 8%, which triggers a very material EBIT margin improvement at 14.2%, up 150 basis points, which corresponds to EUR 155 million increase. This EBITDA evolution did not come as a surprise. We announced this back in 2020. It is a direct consequence of the lower linen CapEx investment during COVID years, with an impact over the three-year depreciation period. This effect will therefore continue in 2023. The main items between EBIT and operating income are as follows.
First, expenses related to free share plans correspond to the requirements of the IFRS2 accounting standards and accounts for circa EUR 20 million per year. Second, the amortization of intangible assets recognized in a business combination is mainly related to the goodwill allocation of Berendsen. In 2022, the aggregate was stable compared to 2021, circa EUR 80 million. Third, goodwill impairment at the end of June in accordance with accounting standards. Also, our forecast for the country has not materially changed since the end of last year. We booked a EUR 59 million goodwill impairment regarding our asset in Russia based on a 26.3% WACC compared to 11.4% end of 2021. Fourth and last, non-current operating expenses amounted to EUR 9 million in 2022, now stabilized at a low level.
Net financial expense was down around EUR 4 million on year at EUR 87 million, despite the various recent refinancing. Usual tax rate is normalizing around 28%. You know that this shall go down to 26% with the French tax CVAE disappearing, half in 2023 and the rest in 2024. At the end of the day, net income increased by nearly 80% year-on-year at EUR 205 million. Now, let's have a look at pre-tax ROCE, which is defined as EBIT divided by capital employed. A detailed breakdown of the capital employed we use is available in the appendix of this presentation.
Ending 2022, it stood at EUR 4.6 billion because it excludes EUR 1.5 billion of goodwill recognized in relation with the group's last LBO holding company back in 2007, which therefore was not invested into Elis operation and is restated from the capital employed. In 2022, ROCE before tax was 11.6% compared to 8.4% in 2021. If you take a normative tax of 24%, 2022 ROCE was 8.8%. Moving on to the next slide, ROCE is obviously a KPI we look at carefully 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 where significant linen must be purchased, or when contemplating an acquisition.
For example, 10% ROCE after tax means just below 8x EBIT for an acquisition. We use it also to monitor the long-term value creation. For example, starting at 9% after Berendsen deal, we had a regular improvement since, of course hidden during COVID, but clearly today on its way to our target at 15%. Moving on to the next slide, I'm now looking at 2022 headline net income per share. The main items restated are the same as usual, PPA depreciation, non-cash IFRS2 expense for LTIP, and the non-current operating income and expenses, which were very limited in 2022. Additionally, we restated the goodwill impairment as well as a positive effect coming from the early repurchase of the 2023 convertible bond.
In headline net income stand at EUR 353 million, up nearly 60% year-on-year, which corresponds to an EPS of EUR 1.54, or EUR 1.46 on a fully diluted basis. Both KPIs are up more than 50% year-on-year. The fully diluted number of shares takes into account the potential dilutive effect from the convertible and the LTIP, in which case we also restate the convertible insurance expense, of course. Moving on to the next slide, you can see that Elis has on average been delivering more than 11% EPS increase per year since IPO, from less than EUR 0.70 to nearly EUR 1.05. We expect this trend to continue going forward.
It is important to note that except in COVID years, the group delivered EPS growth every year, including when we made some major acquisition like Indusal, Lavebras, Berendsen in 2016 and 2017. Let's now look at the cash flow statement with the free cash flow at EUR 225 million in 2022, in line with 2021, despite strong headwinds in the working capital. CapEx stood at EUR 692 million in 2022, which correspond to 18.1% of revenue, meaning in the region where we want to be. CapEx increased by around EUR 122 million, notably driven by the linen on the back of volumes recovery on inflation on linen of circa 20%.
Change in working capital was strongly negative, around -EUR 53 million, reflecting the impact on trade receivables of the strong activity pickup and high inventories, both in terms on volumes and on price, in the context of tension on the worldwide supply chain. However, the group recorded good cash collection ratio. Average payment time was 53 days end of the year. All other items in the table are normative. In terms of capital allocation, we spent EUR 222 million on M&A in 2022, mainly corresponding to the acquisition in Mexico, whose pro forma EBIT is around EUR 20 million. We paid dividend in cash for EUR 23 million, as 60% of the rights were exercised in favor of the payment in shares.
At the end of the day, net financial debt increased by EUR 34 million to just below EUR 3.2 billion at year-end. Looking at the debt structure, we don't have any refinancing maturity before April 2024. The financing is diversified with well spread maturities on everything at a fixed rate, which is circa 2%. To limit the future interest to be paid, our strategy is to reduce the debt in absolute value, so as to minimize the amount to refinance every year and rapidly obtain an investment grade rating to reduce the spread. Last September, Moody's already upgraded rating from Ba2 to Ba1, which is a good signal, of course. We will be committed to continue to reduce the group's perceived risk profile in the future, as we believe it has been one key reason for the underperformance of the stock since 2018.
Deleveraging the balance sheet is obviously the name of the game. Moving on to the next slide, net financial leverage continued to decrease in 2022, and we reached 2.5x at the end of December, exactly 2.46, down 0.5x year-on-year. As a reminder, financial leverage remained above 3x between 2017 and 2019, as we implemented a three-year CapEx plan to upgrade the entire network. The pandemic started in 2020 with a negative impact on the 2020 ratio. Since then, deleveraging has accelerated, and we shall be just above 2x at the end of 2023, which is probably the good level to be around.
To conclude this financial section, the key message, top line growth was very strong with 21% organic revenue growth, driven by recovering hospitality, good commercial momentum, and pricing adjustments tied to the inflation. Second, top line EBITDA margin was done at 33%, mostly due to the lag effect between the sudden cost increase on pricing adjustments, but EBIT margin was up above 14%. Third are EPS KPIs, basic and fully diluted, both showed more than 50% improvement year-on-year. Finally, financial deleveraging accelerated and leverage stands at 2.5x at the end of December, down 0.5x compared to the previous year. We expect the deleveraging to go down to 2.1x in 2023. Let me now hand back to Xavier, who will give you an update on our CSR achievement in 2022.
Thank you, Louis. As you probably know, Elis is a real actor of the circular economy, promoting usage rather than ownership, which creates a real virtuous pattern. It means that we always search for longer durability when conserving our products. This can be achieved through maintenance and mending, and we also work very hard on the reuse of end-of-life articles. We are totally convinced that these efforts will bring further organic growth opportunities in the future, given our clients are increasingly concerned about these subjects. Moving on to the next slide. Our circular approach is an alternative option to far less environmentally friendly offers that exist on the market, such as do it yourself washing and disposable or single-use products.
We are firmly convinced that our CSR approach will be an increasingly important growth driver, and we already see more and more tenders with significant CSR components, as our clients are more and more careful about their indirect CO2 emissions and the exemplarity of their supplies with regard to CSR subjects. Our business model, together with our efforts to improve our CSR approach at every layer of Elis, is becoming a real competitive advantage for us. As an example, you see on the slide some clients who we recently won contract with, many thanks, mainly thanks to the quality of our proposal on CSR criteria.
Moving on to the next slide, we help our clients reduce their CO2 emissions and some in-depth studies clearly demonstrate that. We have been running several studies to better assess the decrease in CO2 emissions when using our service compared to buying textile and washing in-house or to disposable solutions. As an example, using a reusable hand towel decreases CO2 emission by more than 30% compared to a disposable paper solution. Similarly, the use of reusable hospital scrub suits in healthcare establishments allows an up to 62% reduction in CO2 emissions compared to disposable ones that generally that are sold generally in Asia. Finally, our rental and washing solution for workwear allows our clients to decrease their CO2 emission by 37% compared to a situation where they would buy and wash their uniform themselves.
Moving on to the next slide, let me provide you with some examples of projects we implemented or continue to roll out in 2022. First, I would like to say a few words about the workwear to workwear project. We are now capable of reusing old uniforms instead of simply throwing them away by completely dismantling the linen to reconstruct a fiber ball that will be used to manufacture new uniforms. This project has been launched in France in 2022. We are aiming at rolling it across the group in the future. Second, we launched a new collection of soap or paper dispensers that is 100% made from recycled plastics. Some more examples, with the acceleration of the green transition, our logistics shift towards alternative vehicles and more generally, the decrease in the environmental impact of our logistics.
The number of our alternative vehicles have more than doubled, nearly tripled over the last two years, with 715 vehicles to date. We also deployed a project aiming at optimizing logistics routes, which means lower kilometers and therefore lower fuel consumption. Finally, as you know, we now have a dedicated CSR committee linked to the Supervisory Board and the CSR director will directly report to me. Furthermore, the LTI program for our top 500 executives comes with CSR criteria. Moving on to the next slide, let me now provide you with a quick update on our different objective set for 2025. Overall, the 2022 performance is at least in line with our roadmap for every item, and we continue to deliver some impressive results regarding our water and energy consumption.
Furthermore, our direct CO2 emissions, so Scope 1 and 2, have decreased by 25% over the last 10 years with an acceleration in the decrease over the last few years as we are down 18% since 2019. Finally, water consumption per kilogram of linen wash went down 43% since 2010. These achievements have been rewarded by most of Elis rating agencies. Elis was rated A- by the Carbon Disclosure Project, a rating improvement compared to 2021. We also obtained the platinum certification by EcoVadis after five consecutive years at gold level, which ranks us among the top 100% of 90,000 assessed companies. Finally, we also progress in our Sustainalytics and Gaïa ratings.
Now before moving to our 2023 outlook, I would like to show this graph that we have been presenting at least twice a year since the 2015 IPO. There you see the evolution of top line and margin performance over the last two decades. It is fair to say that the last few years have clearly emphasized the strength and resilience of our business model. The backbone of this resilience is twofold. First, a diversified geographical footprint, with France representing less than a third of our business. Second, the diversified portfolio of clients in terms of size and end markets. It is worth noting that this resilient profile was significantly improved with the acquisition of Berendsen and the addition of new countries in Central Europe and in Scandinavia.
Consequently, you can see on the graph that margin has constantly been evolving at high and stable levels within a very narrow range, regardless of external events, 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 investment come hand in hand with top line growth. That means that conversely, they mechanically go down during bad top line years with a favorable impact on cash generation. This led to two very strong years for cash generation during the COVID years. As we explained, 2022 free cash flow was nearly at 2021 level, and I expect steady free cash flow growth going forward on the back of the top-l ine dynamism and progressive normalization of change in working capital requirements.
Moving on to the next slide. Everyone expect to slow down in growth this year. I want to repeat that we still don't see any sign suggesting the beginning of a downturn in any of our markets. In any case, I would like to remind you of Elis very resilient model. In industry, first, a large part of our clients operate in very resilient sectors such as food processing, pharmaceuticals, and waste management. Furthermore, with the fixed fee invoicing methodology we have in place with these clients, we basically charge them for the inventory in place. It means we are not impacted in case of a temporary and limited activity slowdown at our clients. Second, healthcare is very resilient by nature. Third, trade and services, where just like in industry, we charge our clients with a fixed fee regardless of their activity level.
Therefore, this end market is very resilient too. At the end of the day, we consider that only our hospitality end market, which account for 25% of total revenue, could be somewhat impacted by a global economic slowdown, even if we continue to see many construction or upgrade projects in the hotel sector in all our geographies, which should be a mitigating factor in case of downturn. Looking to 2023, as I already said, the first two months of the year have been very encouraging, and our hospitality clients seem quite confident for the rest of the year. You should also keep in mind that we are fundamentally less cyclical than hotel players, as the main reason why RevPAR goes down in times of crisis is a decrease in hotel prices, not occupancy rates. We charge based on occupancy and volume regardless of room prices.
Moving on to the next slide, I would like to return to our significantly improved growth profile compared to before the pandemic. We have already discussed our better churn rate, the structurally increasing need by clients for hygiene products, traceability, and the sourcing security that obviously came strongly after the pandemic and contributes to accelerate the development of outsourcing. The need for a more secure supply chain also materialized as some clients brought their production operation from Asia back to Europe. The main shortages that appeared in Europe during the pandemic highlighted the importance of industry resilience in Europe and paved the way for some industrialization. This is clearly an opportunity for Elis. As I told you before, we have already won some contracts, like with a big semiconductor manufacturer that recently reopened a plant in Ireland.
There should be more opportunities like this in the near future. This should further drive the growth of our workwear activity. I also want to mention the steady development of the nursing home market because of an aging population and the increasing share of Elis fast-growing market in our mix, which mechanically helps to accelerate the group's overall growth. It is worth repeating that an increasing number of tenders come with CSR components, an area in which Elis as an industry leader is well advanced compared to its small competitors. Finally, the increasing share of our revenue that is generated in countries with strong organic revenue growth, such as in Latin America or in Eastern Europe, will mechanically contribute to the improvement of the group total organic growth. In this respect, the deal we finalize in Mexico will be another catalyst. Moving on to the next slide.
Winning some new contract is nice. Keeping the existing contract is also key. Quality of service has always been a big focus for us. I'm very happy to note that our quality KPIs have constantly been improving over the last years, especially in the U.K., where all the efforts put in place in the acquisition of Berendsen are bearing fruit. It was a real area of focus, notably for industry workwear, and we are very happy with the progress made, which led to the normalization of the churn rate in the country. Now let's talk about our 2023 outlook, starting with organic growth that we still expect to be strong between +11% and +13%.
This range correspond to, first, a price effect of at least +9%, with most of it corresponding to the additional pricing adjustment implemented since January 1st, already in the books. Second, the hospitality catch-up in Q1 that I mentioned earlier in the presentation. Third, volume growth from commercial activity. Adjusted EBITDA margin should be up around +50 basis points, driven by top-line dynamism, productivity gains, and the implementation of fixed- price contracts for most energy items, which will allow us to better control the inflation of our cost base. Adjusted EBIT should increase by more than EUR 100 million to at least EUR 650 million. Minimum increase of +20% year-on-year on the back, top- line dynamism and a slight decrease in D&A as a percentage of revenue.
Headline net income is expected above EUR 405 million, up at least +15% year-on-year, which correspond to a fully diluted EPS of at least EUR 1.65 for 2023. On the cash side, we expect a first step-up of free cash flow to at least EUR 260 million, up at least +16% year-on-year, driven by top- line dynamism and progressive normalization of change in working capital requirement. As far as debt is concerned, we expect financial average ratio to be at around 2.1x at the end of 2023. We believe that this deleveraging trajectory should quickly make Elis eligible for investment-grade rating consideration. Before we move on to the Q&A session, I would like to highlight the main takeaways of this presentation.
In a difficult macro environment, Elis delivered strong financial performance in 2022, with the most financial metrics showing sharp improvement. It underscores once again our strong industrial know and our valuable commercial relationships, allowing us to adjust to many external constraints. Our capacity to almost entirely offset inflation in euro terms led to a limited EBITDA margin decline in 22, and paved the way for margin improvement in 23. Finally, we accelerated the deleveraging of our balance sheet and intend to further decrease this leverage in 23. This concludes the presentation. I thank you all for your attention and we can now move on to the Q&A. Operator, back to you.
Thank you very much. To ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Once again, if you'd like to ask a question, please press star one and one. We will now go to your first question. One moment, please. Your first question comes from the line of Annelies Vermeulen from Morgan Stanley. Please go ahead, your line is open.
Hi. Good morning, Xavier and Louis. Thank you for the update. I have three questions, please. I'll take them one by one. Firstly, going back to slides, I think nine and 10, on the cost base part, you mentioned you had cost base inflation of 11% in 2022. Given the hedging that you have in place and your expectations for wage cost inflation, particularly in Europe in 2023, what sort of percentage cost base increase should we be thinking about for 2023? Similarly on the energy costs, you mentioned EUR 340 million of energy bill in 2022, and that this should be stable going forward.
Again, based on the hedging you have in place, is EUR 340 the right kind of level for 2023, or will it be below that based on the hedging you have in place?
Okay. If we start with energy, don't forget that the half of the volume were not hedged in 2022. The half was hedged with very low price coming from the 2020, negotiated in 2020 or 2021. That means that in average, the energy cost for the group in 2023 will increase. It will increase less than the top line, so it's a positive effect for the margin. Nevertheless, it will increase. All in, what we expect for the first part of your question, the evolution of the cost base for 2023 is something close to the 9%. It is what we have, for instance, for wages.
The expectation of wage increase at the group level in 2023 is around 9%, and it is more or less what we'll have also for energy and for all the other part of the cost base.
That's very helpful. Thank you. Secondly, thinking about your EBITDA margins. You're guiding to 50 basis points increase for this year. Over what sort of timeframe should we think about margins sort of going back above 34%? You know, as was the case previously. Is that something that you think will come in 2024, or is that more of a medium-term trend as you, as you know, you further consolidate your markets? How should we think about that?
We are presenting the guidance 2023, it's quite early stage to talk about margin 2024. Nevertheless, we are still very comfortable to confirm that the margin should increase again in 2024 and after that. It will come from different points. Improvement in some geographies, of course. I think that we should also benefit from a decrease of the cost of energy. Thanks to the pricing power we have, we know also that we are able not to decrease the prices in case of strong decrease of energy price. Normally, we should still continue to increase the regularly the margin after 2023. It's not stupid to say that we'll reach on the short mid-term the 34%.
That's great. Thank you. Just lastly, quite a specific one. If you think about those structural growth drivers that you outlined, specifically on some of the industrial production moving back to Europe, could you comment a little bit on sort of which countries specifically that's benefiting and also in which industries you're seeing that? I think you mentioned semiconductors as one of them. Any color on that would be helpful.
I think that it will concern a lot of different countries and different industries. We were talking about a semiconductor project in Ireland. By the way, we have the same nice story of a semiconductor player increasing the activity in France. We have already talked about the all behind electric car with a battery manufacturer and where we signed a huge contract in Sweden. We have example also of re-industrialization of production of solar panel. You probably read last week that a big project should come in the south of France. We have a lot of example in many different industries, and it will concern a lot of different countries in Europe.
That's great. Thank you very much.
Thank you. We will now go to our next question. One moment, please. Your next question comes from the line of Sylvia Barker from JP Morgan. Please go ahead. Your line is open.
Thank you. Hi. Morning, everyone. Firstly, could I check your thoughts on depreciation for 2023 and then the step up that we will see in 2024, just mechanically? Similarly, secondly, could you talk about the interest cost you will see on the P&L in 2023? How should we think about any impact from the hedges for gas and electricity on that interest line? Finally, you mentioned that you've got a project optimizing routes. What is the current state of play in terms of IT and kind of route planning and scheduling within the group? What countries kind of have that installed? What might be the upside? What might be the investment that you need if you were to upgrade the system there? Thank you.
I will start with the route optimization. It's the additional cost is marginal and totally included in the traditional CapEx line of the group. No extra costs to be expected there. Today it's concerned we have started with France, where we have more than half of the operations that have already the new IT system in place. It will be progressively a rollout in all our geographies in the next two years maximum, which will concern all the countries. For the two other questions, depreciation, interest cost, I will ask Louis to answer.
You have your own model. It is linked to the fact that the linen is depreciated over three years. If you have the math with the guidance in EUR in EBIT 2023, you have understood that again in 2023, depreciation will increase at a lower pace than top line, leading to another margin improvement in EBIT. Then a lot of factors can happen 2024 or 2025, but at the end of the day, you understand it shall normalize on the evaluating in parallel
In terms of interest, both for P&L and free cash flow, there shall be a small rise, linked to the refinancing occurred in 2022 that you have followed. It shall be quite limited in terms of evolution. Your question regarding the impact of energy hedge. In fact, it's probably a shortcut we have taken. We are not hedging. We are buying in advance. That has no impact on financial result.
Okay. Thank you. Just to clarify the financial result, maybe kind of EUR 90, EUR 95-ish for this year. If I could push you a bit, is that the right level?
Yes. Yes. It makes sense.
Okay. Understood. All right. Thank you so much.
Thank you. As a reminder, if you would like to ask a question, please press star one and one on your telephone and wait for your name to be announced. We will now go to the next question. One moment, please. The question comes from the line of Christoph Greulich from Berenberg. Please go ahead. Your line is open.
Good morning, Xavier. Good morning, Louis. Thanks a lot for taking my questions too, from my side, please. Yeah, first, just a brief clarification on the convertible bond and the share count. You've shown the share count on slide 20. The number that you're showing there for 2022, the fully diluted one, is that the one that you've been using for the EPS guidance for this year? Just also on the numbers, what exactly is included in that? Does that assume the full conversion of the convertible that was issued last year, and no dilution from the old outstanding convertible that will mature this year?
Also maybe just to clarify that you don't have any intentions to buy back any of the convertible that was issued last year now that the share price is very close to the conversion price. Secondly, if you just could provide, you know, a little bit of color on the M&A pipeline for this year and what are your plans. Thank you.
Yes. For the, thank you for your question. Page 20, we provide detail of the way we calculate the share count because there has been some question around that. Very simply, we indeed take into account the full conversion of the new convertible bond. You have all the elements, plus the full emission in new shares of the potential LTIPs as if 100% was succeeded, which is kind of a worst case, worst case scenario, I would say, leading to a 248 million number of shares. Yes. The two other questions. First, in terms of capital allocation, financial strategy. As we said, the clear priority is to de-leverage to...
To reduce the pressure of the debt, it will be more the strategy than to buy back to buy some shares to put shares in front of the impact of convertible. Your question is more for the future, for probably 2024 and the year after, what do we do with the excess cash? It's not yet decided, but clearly the priority now is to de-leverage. After that, it will be time of course, to decide what do we do with the excess of cash. More or less, how do we give back the money to the shareholders, whether through dividends, whether it is also something that is studied today to see if we can buy some shares to avoid the dilution related to the convertible.
As I said, it's not for 2023, where the de-leverage clearly the priority. M&A, last part of your question. Nothing special to comment. We have a classical activity with a classical number of potential deals that are studied. We should deliver in 2023 a classical year of a small bolt-on. Nothing special under the study now.
Yeah, that's very helpful. Thanks a lot. Could I just quickly follow up on the balance sheet side of things? You've also given a thing that the leverage guidance of 2.1x by the end of this year. Does that assume the convertible as debt or as equity?
It's debt, of course, yeah.
That would be prior to any conversion?
Yeah, absolutely.
Perfect. All right. Thank you very much.
Thank you. Once again, if you would like to ask a question, please press star one and one on your telephone and wait for your name to be announced. We will now go to our next question. One moment, please. The question comes from the line of Ben Wild from Deutsche Bank. Please go ahead. Your line is open.
Good morning, everybody. Thanks for taking my questions. I've got two. Just firstly on pricing. Obviously you put through significant price rises in October and in January again. Just on the ongoing pricing discussions with your, with your clients, are you still planning to put through further price rises in July as normal? Thinking forward or further forward, given falling energy prices, even if we don't expect your pricing to actually fall, should we expect lower than normal price rises in the future to reflect that falling energy component? On the second question, I will come back.
Okay. For we still expect a small price increase in July because you know that for major customer, it is more in the beginning of the year. We have a lot of countries where we move price on the beginning of the year. We have some countries where we move prices in July, but it is more for small customers. It's still expected to do it as a classical year in July. The main part of the job in terms of price increase has been done. It is the impact of the report impact of the negotiation occurred in 2022, and what has been agreed and implemented in January 2023. Second part of your question, what could we expect in the years to come with energy that could decrease?
I'm very optimistic on these topics, because the large part of our cost is coming from wages. Wages will still continue to increase, probably quite significantly by the way in 2023. You remember that we had in our expectation a +9% impact of wage increase. It is the half of our cost, in that context, even if we have a small decrease of energy, it will never be significant in comparison to the strong increase of wages. That's why we will never decrease the prices due to the energy impact. If we are back in a normal world of low inflation, let's say 2%, we still continue to say that normally in this context, we can expect 1% price increase.
It is what we had in the past. In a B2B world, it's quite classical to give a part of your productivity to the customer. The classical year was a 2% inflation, 1% price. It will be probably less inflation coming from energy, but probably more coming from wages. Due to the fact that you have a kind of a lack of workforce, globally speaking in Europe, that will push and conduct to regular wage increase. That's why I consider that in the future, if we are back to a normal world with 2% inflation, as I said, we will not have any kind of pressure due to energy, and we will be able to increase normally our price by 1%.
Thanks. That's a very helpful answer. Just secondly, on the cost base inflation that you've touched on there, that you expect wage inflation of 9% this year for 50% of the cost base. For the rest of the cost base, it seems somewhat conservative to assume close to 9% as well. Just any kind of color? Is there anything specific we should be aware of, or is that kind of a, is there a degree of caution baked into those assumptions?
No, it's, you can take your own assumption, of course, to say that it is cautious or not. Today, when you analyze the level of inflation in Europe, we are not in a situation where we are back in a normal of a normal year, and 9% is not so far from the actual level of global inflation in our main market. That's why for me, it's, I don't know if it is so conservative. The half of the cost for this is wages. For wages, I'm sure that it will be close to 9%.
Okay. Very helpful. Just final question on the balance sheet. Just coming back, just to confirm, going forward, the kind of 2x net debt at the EBITDA range is the kind of target for the future. Is that correct?
It can be below. It can be below, because we will reach, we will be very close to 2x at the end of 2023, 2.1. When you take the natural trajectory of deleveraging of the group with the level of cash that we'll be able to deliver, that, as I said, will be back to the shareholder, totally normal. We have a trajectory of natural decrease of the leverage, it will be below 2, after 2023.
Okay. That's all my questions. Thank you very much.
Thank you. There are currently no further questions. I will hand the call back for closing remarks.
Thank you for your participation this morning. We, as we said, Nicolas is available for any further questions. Thank you. Have a good day. Bye-bye.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.