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Good morning, everyone. Welcome to our Q3 trading update conference call, which is also webcasted. After a brief reminder on the reporting scopes, we will detail performance by geography and then wrap up with a full year outlook.I will start first with a few preliminary comments. As you know, we have changed our geographical breakdown since the Berendsen acquisition, and this breakdown is now a combination of 6 scopes, 3 geographies that fully correspond to the former Elis scope: France, Southern Europe, Latin America. Two geographies are entirely made up of Berendsen's former scope: Scandinavia, Eastern Europe as well as U.K., Ireland. And finally, one geography, Central Europe, is a combination of the overlapping countries: Germany, Benelux, Czech Republic. Our position on U.K., Ireland. As you know, we have decided in H1 to divest in Clinical Solutions. This is a U.K. stand-alone business unit, posting around EUR 70 million of revenues every year, acquired by Berendsen 10 years ago and never really integrated. It provides services to hospitals, just as consumables and single-use items and surgery procedure packs. We have conducted a strategic overview of the portfolio, and we are of the opinion that Clinical Solutions is a noncore activity that that will be better managed and valued outside Europe. We expect the disposal to occur within the next 9 months. And secondary to IFRS 5 rule, we have excluded Clinical Solutions from our numbers for both Q3 '17 and Q3 '18.Finally, along with the reported figures, we will also comment figures on a pro forma basis, which means comparing Q3 '18 with Q3 '17 that has been restated as if Berendsen had been consolidated since beginning of '17. The combination of these two remarks underline the fact that when we look at '17 pro forma, it is strictly comparable with '18, meaning with Berendsen in full but without Clinical Solutions in both cases. I underline the point because I have read some false comments on it.Now let's dive into the numbers. The overall picture in Q3 is a solid performance, with a reported growth of plus 38.7%, a negative forex impact of around 2 points on the pro forma organic growth of 2.4%, showing a sequential improvement relative to Q2, mainly driven by the improvement in the U.K. and Central Europe. Looking at the 9-month now, reported growth of 63.9% includes a negative forex impact of nearly 2 points on pro forma organic growth of 2.2%.Now you may wonder why we don't show reported organic growth. That is because we have celebrated the anniversary of the consolidation of Berendsen. It means that in Q3 '17 reported, you have 3 months of Elis scope, but only 1 month of the Berendsen scope. So to compare Q3 '18 with Q3 '17 makes no sense. That being said, we have made a graphic of comparing Q3 '18 Elis-only with Q3 '17, which is a bit tricky, of course, due to the overlapping countries. But the calculation, given organic growth for Q3, slightly below 2.4%, which is due to the calendar effect I will just comment, and year-to-date is slightly above 2.5%. That is to compare with what we reported before as reported organic growth in Q1 and Q2.We'll now look at deeper dive in France. In France, the Q3 organic growth is 1.8%, which is in line with the calendar quarter. So we have a negative calendar effect in September, as I said, with one less billing day compared to last year for [indiscernible]. It's an impact of nearly 50 bps that we will recover in full in October.Regarding our end markets. Hospitality was driven by different a decent summer, with very good activity in Paris, stable in the French Riviera and slightly down in the rest of the country. As for industry, trade and service, the market is still well oriented. Only Healthcare is still impacted by the delayed effect of the 2 contracts, public, that we have lost at the end of '17, but like-for-like activity is improving.In Central Europe, the organic growth is very solid at 3.2%, driven by Poland and the Netherlands, where we note strong commercial momentum in the Workwear business. In Germany, revenue is sequentially improving relative to Q2. And in Switzerland, the situation is improving despite a marginal decline in revenue. Please note that we have appointed a new Country Manager at the beginning of October.Scandinavia, Eastern Europe, results are strong, with organic growth up 2.6% despite the same calendar effect as in France, which had an impact of 50 bps that we should recover in October. Please note also a negative forex impact of minus 4% due to the Swedish krona. Commercial momentum remains very good in all the countries, both the mature ones like Sweden, Norway, Denmark and the emerging ones like Finland, Baltics and Russia.U.K., Ireland is improving sequentially, with minus 0.7% organic growth pro forma. We have improved the quality of service in hospitality, which allows us to gradually bring back prices to a better level, especially in the context of a significant cost inflation. In Workwear, the price levels are good. We are focusing on client retention. All these commercial initiatives contribute to the top line improvement in the U.K., where organic growth has been consistently recovering since the closing of the acquisition. In the same time, we continue to roll out our integration plan with the reshaping of the logistics network and the implementation of the catch-up CapEx plan.In Southern Europe, there has been a significant slowdown of the hospitality industry in Spain this summer due to the comeback of low-cost destinations, such as North Africa, Turkey and Greece. That said, our commercial momentum remain well oriented in the other end markets, such as Industry and Healthcare. All in, organic growth was up 1.9% in Q3, which is a very decent performance, bearing in mind that the overall Spanish hospitality market, which accounts for around 70% of revenue in the country, was down.In Latin America, organic growth was up 4.6%. The slowdown compared to Q2 is largely due to base effect. As you know, Lavebras was integrated in June '17. We -- therefore, the growth in Q3 is calculated from the base, which is a double of Q2. As it is usual that the organic growth of the family business is the worst the first year, there's time for us to shift to a more classical, professional, sensible development. Secondly, in Brazil, we had a warm winter season, so the volumes of hospital covers to be washed, we are not sure where. That said, we continue to have good flexibility on pricing, and commercial development remains very good. So we are very happy overall of the country and remain very bullish.Now moving to the next slide. I will take the opportunity to answer some question we had recently regarding Elis' resilience during the cycle. You see here something we have never shown, an 18-year series, with revenue and EBITDA margin evolution. What is first striking is that the revenue has grown continuously on the back of M&A and organic growth, with year-on-year improvement every single year. We could even have shown organic growth, which has been positive all those years despite the cycle. You know that the main reason for that is the fragmentation of our client base, the diversification of our end market and our mix. Second, it is quite extraordinary to see how EBITDA margin has remained stable around the cycle despite a number of global macro downturns. What is even more remarkable is that Elis has totally changed in size and mix during this period, coming from EUR 0.5 billion business, 90% French, to a EUR 3 billion more business, 70% international, in 28 countries. This is the realization of our strategy, being a pure player but very big and dense in all the geographies we are in, so that all of them target the French model with a good market share and 35% plus EBITDA margin.There's a small shift in the margin year after year, mainly due to mix effect, like the first international development between 2001 and 2005 and then the 3 big acquisition in '16 and '17. Please note that the chart would have looked even more regular with cash flow because you know that we have a natural [ amortizer ] with the linen CapEx year-on-year cycle. As we buy linen when we have new clients or no activity, we reduce drastically linen CapEx in the long term.Now moving to the next slide. I would like to quickly touch base on our current debt breakdown. Since the financing early in the year, we now have debt, which is both long term and cheap, with extended maturities on an average cost slightly above 2%. We now have a good level of liquidity available as we have around EUR 0.5 billion of revolving credit available, and more than 80% of this debt is either fixed or hedged and immune to interest rate variations. In the next months, we will have the opportunity to work on developing a more linear maturity profile in order to avoid having a large amount due in 2022. We will soon be looking at refinancing the EUR 800 million bond, which is, today, more expensive than what we could find in the market. So our goal will be to look for a '24 or '25 in order to fill the gaps and extend the range of maturity for that.Just to conclude, let's have a look at your full year outlook. From a top line standpoint, we should see a further slight improvement of pro forma organic growth in Q4, around 2.5%, which, by the way, is a trend we currently see on the historic Elis scope. So when we come back into the initial guidance of 2.5%, 3% for Elis Corp full year, we'll be probably in the left side of the record but above 2.5%. When we look at EBITDA margin, we forecast EBITDA to be slightly above 31.5%, with all geographies showing improvement. And we know that in the first stage, we said everybody will improve, France being stable. So it is an improvement for France. We confirm our CapEx self-guidance, around 20% for the year. Compare that to a normative level of 17% to 18%. And lastly, our net debt-to-EBITDA ratio should stand around 3.2x at year-end 2018.So that takes care of the presentation. Thank you very much for your attention. And we now can move on to Q&A.
[Operator Instructions] We will now take our first question from David Cerdan from Kepler.
David Cerdan from Kepler Cheuvreux. I have a few questions for you. The first one is related to Latam. There's a significant deceleration in Q3. What do you expect for the end of the year? And can you explain this relative weak performance in Q3 for Latam? So can we have maybe some details between Brazil and the other countries? The second one is for the same kind of question for South Europe. Do you expect the trend to be better in Q4? And globally speaking, as you expect Q4 to be stronger than the trend at the end of September, what part of the region where you expect the trend to accelerate in Q4 versus Q3? And last question is related to the free cash flow. Can you give us an idea of your free cash flow you expect for 2018 -- operational free cash flow?
So a couple of questions. In, I'd say, Brazil and Southern Europe, some kind of unsure. Things will be better in Q4. Considering Brazil, possibly, there are 2 reasons for that. The first one is something very consumptional, which is the winter weather, which will not appear, of course, around the spring. You know that 70% of the business is done with hospitals. So of course, during winter, to wash -- there's no heating system, as you know, in Brazil. So all hospitals have cover with them. And when it's warm, we wash a lot less cover. So it's an element of fluctuation year-on-year. Of course, that will not happen in Q4. That's the first point. The second point is commercial development on the Lavebras scope, which we have taken with no momentum at present, which is very classical regarding a family business The guy just said on the -- he has not been focused on development in the last year. So it takes for us like 1 year to install or set forth and to develop our model of selling, which doesn't stand on only one guy selling the services, but a whole sales force. And as our the commercial influence is a smooth tune at -- both smooth tune. Of course, the reporting effect takes a bit of time. So this part is accelerating, so we expect the Q4 on the next year to be better. Southern Europe, I would say that the effect is comparable as the first one I mentioned, meaning a consumptional one focused on summer. And this is linked to the summer season for hotels in Spain, which has been very poor as every hotel in Spain has claimed. You remember that we have seen figures at minus 5% for the hotels declined in -- was it July? And even August. So it's remarkable to post something positive as you know that 70% of the business is made with hotels. Of course, in Q4 it will be better because the summer season is over and now are taking over more classical business, like Workwear and Healthcare, which are posting good figures. So in general, when you look at Q4, you have -- you will have better figures because, first, of the technical effect, which is calendar 1. So I mentioned in France, we are missing about EUR 1 billion of revenues due to one billing day less that we will have in October. And we have the same effect in Workwear billing in the majority of the Berendsen in countries. That will recover as well in October. So that is the first technical point. And the second one is when we -- I look at the trends in the U.K., improving sequentially quarter-after-quarter, especially, as you remember, we were linked to the Compass contract in Q4. So it will -- of course, we hope that it will have a positive impact. For cash flow, you -- so initially, we comment on the turnover. But when you look at the H1 cash flow, we had a change -- total change in debt of minus EUR 130 million. What is usual for us is to have the reverse effect in H2. It depends a lot, of course, on the M&A. But when you look at line by line, for example, working cap was down [ 46 ]. It shall be up in the region of, I don't know, [ 20 ], [ 30 ], something like that. CapEx, that will be a bit different from usual. It will be a bit higher than H1 because we have the ramp up of some major projects, but slightly above. Cost of net indebtedness shall be the same and income tax paid in the same range. So the EBITDA improvement in H2, I mean, I said H2 is always better than H1. We saw some free cash flow much higher than H1. And then we don't pay dividends, and we have less M&A and exceptional. You should see total cash flow quite the reverse and better than the H1.
We will now take our next question from Matija Gergolet from Goldman Sachs.
A couple of questions for me. First one, just on the -- no, net debt guidance for year-end of 3.2. Can you just tell us, if you can, what's in your assumptions specifically? Now do you assume that you have the disposal of the Clinical Solutions already by year-end? And also, now, do you assume in this period that you will have the acquisition of Kings Laundry in Ireland already by year-end? So I'm just interested to understand what is exactly in the 3.2 as an assumption. And secondly, a more technical thing on Brazil. I think in the past that you were talking about merging the local companies to be able to get the benefit of a good amortization so as to pay lower cash taxes. I'd like to know if that has now taken place. One more, just on your comment about organic growth. So you mentioned you have 2.5% of organic growth, no guidance for the fourth quarter. But you hinted that it will probably be slightly ahead of that, if I understood correctly. Can you just clarify that? And then lastly, just on the macro. So could you tell us if you're seeing any, say, change in trend, particularly, say, in the U.K. or Central Europe, say, in the month of September or in early October? I mean, it seems that the market is concerned about like an economic slowdown. You're seeing, say, less demand for your services in September, October.
So your first question, assumption about the leverage. No, we -- I mean, it's a cautious approach on what we expect. We think that we will sell Clinical Solutions probably early '19 because even if we have a lot of interest, a lot of buyers, we know that a closing like that with a carve-out takes a bit of time. As for Kings Laundry, we take the cautious approach that we may have the longer discussion with the anti-trust so that it may delay to early year '19 as well for the takeover. Just to be clear, it means that we will have full net debt that will compare with an EBITDA without clinical, as you're aware, because according to IFRS 5, clinical is out of the P&L. Tax value. So the question is whether we merge Atmosfera with Lavebras, which triggers a tax benefit. So this has not been done yet. We are still remaining all the consequences of such a move in terms of tax, but also business and so on. So it's not done yet. We shall communicate on that next [ year ]. Organic growth for Q4, yes, you heard me with some good signals around: first, the technical effect; second, U.K., while -- to better level of success than we said. So 2.5% is a good point to keep in mind. And then change in the market. So what we look for when we look at small signals of what's going on is there is a uniform because you know that hotels can be up and down. It's really linked to external factor like, I don't know, the Fashion Week in Paris or they have this kind of event or whatever. So we can't exactly rely on these type of things. But uniform doesn't lie, meaning that on the -- in the majority of the countries that we have, we see the activity of the clients well oriented, coming -- starting with France. So of course, it takes a bit of time to show exactly the figures. But it means that we probably start the year with a bit of momentum on this part. So no, we don't see any slowdown from the macro, I would say, in the countries. And even in U.K., where seems to be strange regarding the Brexit negotiation. People are really quiet on the stiff upper lip, so we are all in a wait-and-see situation, but not very alarmed about what could happen.
[Operator Instructions] We will now take our next question from Rajesh Kumar from HSBC.
Just one quick one from me. You have very kindly presented a long history of Elis' revenue. I'm shown how defensive it has been because of all the M&A. Can you say the same thing about the organic performance of the business? As in, do you continue to -- as in, from what we know about Paris, and for example, in 2009, organic was down about 3.84%. So if you look at the combined entity, Berendsen and Elis, could you say the same thing in terms of its long-term defensiveness?
Well, that's supposed to be the beauty of the model. And what we -- that's why we communicate so much about pro forma because it's really what's going on in terms of trends quarter-over-quarter. What we mentioned is when we see the global trend. From the different unit side, widespread of countries, of exposure of markets and so on so that we are much less dependent from the 1 country or 1 market. So -- and typically, which is at today, we see a bit of weakness in Southern Europe. But I would say Netherlands and Sweden is taking the lead. We see [indiscernible] some future growth coming up with Baltic and Ricoh today. It's very small, but growing more than 20% today. So it -- can be really have growth. So we have -- so real balance of the portfolio is one to think. And then, when we look at market. What will make this shift is U.K. Meaning that if we're able to stabilize the U.K. EBIT, which -- and you remember that the top line is not the priority for us, right? So really, it's operations and the control of quality, of course. But top line terms comes along, I would say. For example, when you see what happened in hotels, we have stabilized the quality. And of course, we have stopped to stop triumphs. It's kind of a natural consequence. So if we are really about to -- and it seems that we are on the good way other than that to stabilize U.K. I mean, one of the -- there's a #2 country being negative today, is of course not helping the organic growth. So we will look to -- if it comes positive, it will help a lot. Unless, of course, a couple of small commercial initiative, as you are aware, to push from 1 project there and to push alternative model in some countries. So we could opt for a bit of push-up in the year. So a bit early to mention organic growth, but this ignores our slightly positive.
Understood. Now that does offer some color. Just on the balance integration. How many of the contracts are up for renewal in the next, say, 12 to 18 months? And what have you seen when it -- within what you've renewed already? What sort of retention rates are you seeing when it comes to contract renewals, especially for Lavebras balance and the big acquisitions you've done recently?
Well, we look at it country by country. Nobody -- we -- so to see -- to keep in mind, first, we don't have super big clients. Meaning that -- I mean, the biggest clients might be a EUR 10 million to EUR 15 million. So there is never something huge coming up, which is a major party or a group or even 1 country, first. So it's statically very well splits in 4 to 5 years. So I would say that every year, 1/4 of the portfolio continue overall. Approximately, a large number of which is automatically renewed without discussion. So the retention rate is globally -- look at it -- looked at country by country. So -- and we -- so we took over Berendsen with countries with very satisfactory level of retention. I would say, I would mention Sweden, first of all, with a churn rate in the 2% region are Denmark and also, which is very even better than France, to be a help. Germany, it's same in one way in that. More complicated in scale as for Elis. So of course, the reconciliation is helping the retention because part of the problem was Elis stealing Berendsen clients from their different offer. So that is over now. But the main country we look at, of course, is U.K. And you remember, we took over with the global churn in the region of 15%, which is, like, incredible. And now the churn is below 10% and much lower in hotels thanks to the quality of service that goes fast. Still not satisfactory in uniform, and we are working actively on that. So that is the main challenge, as you know.
That's very helpful color. Just your terms of the contract, the balance and how different were they? Did you have a different duration of contract, different terms of service? Are you trying to harmonize that when you are renewing these contracts?
Largely, it was not so different. Same cost, same roots, same consequence. I mean, as we are buying the linen, they have the same duration of life, everybody has contracts in the region of 4 years. There's no [indiscernible] here, but sometimes you get 5 years, even 10 years. But to linen, it's in the region of 4 years. The price is going to churn near to index. When we get stronger -- every time we get strong in a country, we try to push a formula which are better relevancy for us, meaning more affecting our [ real ] cost than the macro inflation because there may be a gap between our cost on inflation. But all in, it's on that target. It's country by country because of the kind of control habits or whatever. So no big revolution on the contractual side.
And finally on CICE, do we have to think about any impact from the changes that are coming through?
Now CICE, is a complicated French story. Sorry about that. To make a long story short, let's say that last year, we had the benefit of EUR 17.5 million in EBITDA. This year, it was a negative impact because the benefit was only EUR 15 million. Next year, it will be the same as the EBITDA there. Next year, it will be the same at EUR 15 million, because there have been some reform with the delay. And then in 2020, that we will have the full impact of EUR 17.7 million, so plus to 2.7. So to summarize, the EBITDA this year, we have lost 2.5, next year, different 0. In 2020, plus EUR 2.7 million. And that's seeking EBITDA.
And do you see an offset of the tax rate?
Yes. And below. So this year, it was 0, as I mentioned. Next year, small negative on tax EBITDA. So we may lose like EUR 4 million of tax. Literally, we will look over exactly the demand, some to the reform of the [ hub ], which is another of trends of cash flow which is the activity of the rest. So all in, the 2 reforms, and we make one alone in there. And that is for '19. And then '20, the gain of EBITDA will follow below.
We will now take our next question from Daniel Hobden from Crédit Suisse.
Just 2 for me, if I may. The first one is around wage and cost inflation. And I was wondering if you seeing that either accelerate or at higher levels than you've historically seen? And the second one is around M&A. Is M&A -- certainly, bolt-on M&A still very much on the table? Or if not, is that because you're taking time to integrate what you have? Or is it around the leverage level? And if it's around the leverage level, I suppose, what sort of leverage level is acceptable for you to then carry on your M&A bolt-on strategy?
Situation is different country by country. So typically, in France, where we have already at the bigger cost of human resource of Europe. And I'm not speaking only of wages, but wages plus cost. As you know, we have a lot of cost associated in France. No government is at the risk of course of pushing the minimum wage because it will trigger unemployment. So we see a very nice level, at between 1.5% and 2% max. I will say that Germany, they have done the job 5 years ago to push minimum wage and remember we have plenty of people that secure that way and that was lying in the region of EUR 9, EUR 9.5. We, in Latin America, it's a lean to inflation so it's upon then that we can push it easily. Now the point today is U.K. because it was introduced last year, the minimum wage. And in 3 years, we will make -- so let's say it was [ 36.6 ]. This year, 4.4 and next year, it was already 4.5%. So it's other question about pushing that into the price. And we are lucky to be in the market where the players are sound and reasonable and are doing the job of pushing inflation into the price. But it is -- we know that it is a challenge in U.K. So that's the [ position ] in U.K. In terms of Europe, we see some political trends to push minimum wage. But they are not in the same situation as U.K. and Germany because U.K. and Germany can resolve because they have low unemployment. Whereas we have high single digit -- high double digit in unemployment rate in Spain, so can't do everything. Again, at the end of the day, it's a question of pricing power, being able to push any kind of inflation inside your price. Regarding M&A. Yes, you may notice that we have not announced an acquisition in Q3. Well, we don't have -- we don't consider it is mandatory for us to make regular M&A. And so we have a pipeline. We have entered looking after acquisitions. I would say the pipeline is as sound as it were and even more because we have now target in Sweden or Denmark or Norway and all over the U.K. So it's just take time to go to -- to come to maturity. It's not a question of leverage because you know that for small M&A, we buy for cheaper that it has no impact on the leverage. So it's just a question of okay, one quarter is rich and one quarter is poor. But I guess, we will see some [ growing ] activity at the end of the year.
[Operator Instructions] We will now take our next question from Christophe Chaput from ODDO.
A quick one for me. You upgrade slightly to guidance on EBITDA margin. So the question is, is there a specific area about your expectation? Is it linked with the synergy from Berendsen? Or what's the factor to explain the great mix effect, the scope effect or whatever?
Well, part comes from France. What has changed during the year is France is performing well. We have seen not quite yet competition. We have mentioned -- I mentioned uniform trends, which are showing great. So I would say more quiet market competitive side, good figures, return. So that explain the reason why France has a bit of momentum. At the end of the day, we are speaking of a couple of bps on, but still, it's good to catch.
Okay. And just one question. Again, you provide us before the pro forma for 2017. So the only retreatment we have to do is regarding Clinical Solutions, I mean, on top line, is Clinical Solutions, with a top line of roughly EUR 70 million. That is?
Yes. So the full year revenue of Clinical Solutions is EUR 70 million. On the line, the fact that when we re-treat the Clinical Solutions it is both from '17 figure and '18 figure. So it means that really, when we compare pro forma '18 and pro forma '17, it's fully comparable.
Sure. I mean, for 2017, for the full year, you provided us, if I remember well, and then you will say EUR 3,075,000,000. So as pro forma, you are going to provide us for the Q4 is the EUR 3.075 billion minus the EUR 75 million of Clinical Solutions. That is the only retreatment we have to do, right?
Right, right, right.
This concludes today's question-and-answer session. I would now like to turn the conference back to Mr. Louis Guyot for any additional or closing remarks.
Well, thank you very much. You all have a good day. And we'll speak next year -- So at the last for the full year on the [indiscernible] . Thanks a lot, bye.