DBRS Morningstar Confirms Ratings on Elis S.A. at BBB (low), Changes Trends to Positive from Stable

DBRS Ratings GmbH (DBRS Morningstar) confirmed Elis S.A.’s (Elis or the Company) Issuer Rating and Senior Unsecured Notes rating both at BBB (low) and changed the trends on the ratings to Positive from Stable. The trend change reflects DBRS Morningstar’s expectation that Elis’ financial performance and credit metrics will continue to improve over the next 12 to 18 months. Elis is well positioned to withstand the macroeconomic headwinds expected in 2023, owing to its resilient operating performance and demonstrated ability to manage the impact of inflationary pressures.

KEY RATING CONSIDERATIONS
In 2022, Elis’ operating performance was strong, supported by the recovery in the hospitality sector, the strong pricing power, and increased customer needs for hygiene as well as the Company’s ability to manage increased and volatile energy costs. Elis’ credit metrics have improved and DBRS Morningstar expects this to continue over the next 12 to 18 months such that they will be commensurate with the BBB rating category despite DBRS Morningstar’s expectation of deteriorating in macroeconomic conditions in Europe in 2023. In fact, Elis benefits from strong end-customer diversification and a relatively variable operating cost structure that help it navigate economic downturns, as proven during the recent Coronavirus Disease (COVID-19) pandemic. The Positive trend also reflects Elis’ commitment to further decreasing its leverage metrics.

The Company’s diversification, the essential nature of its service offering, and its ability to capture new business opportunities, such as cleaning and disinfection services and through traceability, helped to generate growth such that 2022 revenues were about 16% above 2019 levels. The Company’s EBITDA continued to improve in 2022 compared with 2021 despite the overall wage and input cost inflation as well as the rapid and extreme swings in energy costs, in particular natural gas. Cost inflation negatively affected the EBITDA margin in 2022 but strong volumes and productivity gains, in particular around energy consumption, helped soften the impact. DBRS Morningstar notes that the impact of volatility in energy prices will be less felt going forward as Elis is actively hedging its natural gas and electricity needs. Free cash flow (FCF; as defined by DBRS Morningstar) slightly decreased compared with 2021, due to the resumption of dividends and a negative impact from working capital, the latter driven by the mechanical effect of increased revenues as well as some unfavourable timing lag in receivables from customers. In 2023, DBRS Morningstar expects Elis’ financial performance and credit metrics to continue to improve, such that they will be consistent with a higher rating.

The ratings are supported by the long-term nature of the contracts and high renewal rates leading to strong revenue visibility, as well as the expectation that the Company will use its surplus cash flow generation towards deleveraging. Furthermore, Elis’ industry-leading position, efficient and large-scale operations, and strong brand name recognition in the flat linen, workwear, hygiene, and well-being service markets also help to support the ratings. The Company benefits from a dense network in its French core market, which supports efficient operations and deliveries to customers. Furthermore, following acquisitions over the past few years, Elis has replicated its French model in other countries such that France, its single largest market, now accounts for 31% of its revenues, down from 70% in 2014. Elis is also fairly diversified by the type of services it offers and customers it serves, softening the effects of cyclicality or volatility in any particular sector, as seen in the hospitality sector during the coronavirus pandemic.

The Company also benefits from the essentiality of its service, which often represents a relatively small portion of the customer’s cost base, allowing Elis to pass on increased costs. Finally, in recent years and in particular since the pandemic, Elis has captured new business through its cleaning, disinfection, and sustainable service offerings centred around the circular economy. However, the ratings are constrained by the Company’s exposure to markets that have limited organic growth prospects, such as in western Europe, or are more discretionary in nature and exposed to economic downturns, such as the hospitality sector; together with the high capital intensity of its business model, these challenges could potentially limit earnings and cash flow growth and therefore deleveraging. Elis’ acquisition strategy does not currently affect the ratings, but if the Company undertook heavily debt-funded acquisitions and/or was less successful in integrating such acquisitions, this could negatively affect the ratings.

RATING DRIVERS
In 2023, DBRS Morningstar expects the Company’s financial metrics to continue to improve and be consistent with the BBB rating category, (i.e., DBRS Morningstar-adjusted debt-to-EBITDA of less than 3.0 times (x) and DBRS Morningstar-adjusted cash-flow-to-debt of higher than 30%). Elis’ strong business risk profile, expectation of FCF surpluses, and management’s efforts and commitment to manage leverage in a conservative manner all give DBRS Morningstar comfort that these credit metrics are tenable on a sustainable basis, which would lead to a ratings upgrade. However, if Elis’ earnings, cash flows, and leverage metrics were negatively affected, DBRS Morningstar could consider a negative rating action. In addition, a return to more aggressive financial policies or debt funding for large acquisitions could also lead to a negative rating action.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (17 May 2022).

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is the “Global Methodology for Rating Companies in the Services Industry”; https://www.dbrsmorningstar.com/research/409773/global-methodology-for-rating-companies-in-the-services-industry. (14 February 2023).

-- Global Methodology for Rating Companies in the Services Industry (14 February 2023), https://www.dbrsmorningstar.com/research/409773/global-methodology-for-rating-companies-in-the-services-industry.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022),
https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-andgovernance-risk-factors-in-credit-ratings.

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyses corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

The primary sources of information used for these ratings include publicly available information from Elis S.A.’s website, including the 2022 audited financial statements, 2022 half-year report, quarterly sales updates, investor presentations, and some information directly provided by the Company to DBRS Morningstar. DBRS Morningstar considers the information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/410884.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Giuseppe Fresta, Senior Vice President
Rating Committee Chair: Tim O’Brien, Managing Director
Initial Rating Date: 28 March 2019
Last Rating Date: 16 March 2022

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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