Morningstar DBRS Confirms Elis S.A. at BBB With a Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed Elis S.A.'s (Elis or the Company) Issuer Rating and Senior Unsecured Notes credit rating at BBB with Stable trends. The credit rating confirmations are underpinned by Elis' prolonged positive performance in F2024, which are broadly aligned with expectations, reflected by mid-single-digit organic growth and EBITDA margin improvements. Morningstar DBRS also expects the Company to maintain leverage adequate for the current BBB credit rating in the foreseeable future after posting 2.7 times (x) debt-to-EBITDA in F2024, sustaining the Stable trend in the absence of major acquisitions.

KEY CREDIT RATING CONSIDERATIONS
The Company's stable and high operating margin support the credit ratings, with good revenue visibility thanks to medium-term contracts, low churn rate, and a very large customer base. Elis' industry-leading position, efficient and large-scale operations, and strong brand recognition in key markets such as France and the UK also underpin the credit ratings.

However, the credit ratings are constrained by the Company's exposure to few lines of services, as rental services of flat linen and workwear represent around 80% of the Group's annual sales, along with the limited switching cost to alternative providers for customers. In addition, despite being increasingly geographically diversified, France still accounted for 30% of total sales as of F2024.

Furthermore, Elis' business model is highly capital intensive, leading to lower free cash flow compared with asset-light service companies with similar EBITDA margins. Elis' acquisition strategy does not currently affect the credit ratings, but if the Company undertook heavily debt-funded acquisitions and/or was less successful in integrating such acquisitions, this could negatively impact on the credit ratings.

CREDIT RATING DRIVERS
Morningstar DBRS may consider an upgrade if, in combination with a strengthening in Elis' business risk profile in areas such as market position and diversification, the Company manages to keep the gross leverage ratio consistently below 2.00x.

Morningstar DBRS may consider a negative credit rating action if Elis' operating performance weakens, leading to deteriorated financial metrics, such as the gross leverage consistently faring above 3.00x and/or operating cash flow-to-gross debt dropping below 25%. In addition, a more aggressive financial policy and/or large debt-funded acquisitions could also lead to a negative credit rating action.

EARNINGS OUTLOOK
Looking ahead, Morningstar DBRS expects Elis to continue to post positive organic sales between 3.0% and 3.5% over the next two to four years, on the back of prolonged price inflation and mild volume growth. This should lead revenue to surpass EUR 4.8 billion by 2026. In terms of profitability, Morningstar DBRS considers Elis to have reached a mature level in key geographies such as France, where it enjoys an EBITDA margin above 40%. Morningstar DBRS also expects the Company to maintain its adjusted EBITDA margin close to 35% (34.5% in F2024), balancing competitive pressures in markets such as Scandinavia, with margin improvements in others such as Germany, where profitability is lower than the Company's average.

FINANCIAL OUTLOOK
Elis' gross leverage stood at 2.7x as of December 2024, 0.2x lower than the previous year. This is due to relatively stable gross debt and EBITDA growth of around 10% year over year. Morningstar DBRS expects the Company to maintain its conservative financial policy and to continue deleveraging over the coming years by around 0.1x per annum, as announced during the F2024 presentation, also thanks to a stable EBITDA margin and prolonged revenue growth. Morningstar DBRS only considered bolt-on acquisitions in its assumptions, accounting to EUR100 million each year, in line with Elis' guidance of EUR 50 million to EUR 150 million.

CREDIT RATING RATIONALE
Comprehensive Business Risk Assessment (CBRA): BBB/BBBL
Elis' Business Risk Assessment lies between BBB and BBBL, with all factors aligned within this range. The Company benefits from strong operating efficiency thanks to its ability to pass increasing input costs, such as energy and wages, onto its customers, which it can achieve through a transparent pricing mechanism and the low cost of its services compared with the clients' total cost base (<10%). This has helped the Company to navigate through high inflationary periods, such as 2021-22, while maintaining high and stable margins. Furthermore, Elis has been able to export its efficient operating model to countries other than France, such as the UK, and it is currently looking to expand and consolidate in more regions. Currently Elis is among the top-three players in France, the UK, and Germany, although these markets are generally fragmented and growing markets shares organically is challenging, leading to intense mergers and acquisitions activity. Finally, some elements of Elis' business leans towards the lower end of the BBB range, such as (1) limited switching costs to alternative providers, (2) Elis' focus on few lines of business, and (3) exposure to some cyclical end-markets such as hospitality.

Comprehensive Financial Risk Assessment (CBRA): BBBH/BBB
Elis' financial metrics are strong, based on our forward-looking assumptions. The Company benefits from healthy cash flow generation and limited financial debt. Liquidity was also adequate as of December 2024 on the back of EUR 622 million of cash and cash equivalent, along with EUR 870 million of an undrawn revolving credit facility maturing in November 2028. Elis also benefits from a well-spread maturity schedule. Nevertheless, Morningstar DBRS applied a two-notch negative adjustment to reflect the high capital expenditure (capex) needs for the replacement of linen and garments, which have a lifespan of around three years. In F2024, Elis spent an equivalent of 19% of revenue for capex, which is high for a services provider company. This leads to an elevated annual depreciation and amortisation cost, at around 20% of sales, and improves EBITDA-based and Operating Cash Flow-based metrics, as used in Morningstar DBRS' methodology, hence the negative adjustment applied.

Intrinsic Assessment (IA): BBB
The IA is based on the CFRA and CBRA. Taking into consideration peer comparisons, among other factors, Morningstar DBRS places the IA in the middle of the Intrinsic Assessment Range.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781.

Further details on the Issuer's Intrinsic Assessment can be found at https://dbrs.morningstar.com/research/449825.

Notes:
All figures are in euros unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
Global Methodology for Rating Companies in Services Industries (3 February 2025),
https://dbrs.morningstar.com/research/447184

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (13 August 2024;
https://dbrs.morningstar.com/research/437781), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (13 August 2024),
https://dbrs.morningstar.com/research/437781.

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

A description of how Morningstar DBRS analyses corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The primary sources of information used for these credit ratings include audited annual accounts and interim financial statements, investor presentations, and some information directly provided by the Company to Morningstar DBRS. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

Morningstar DBRS does not audit the information it receives in connection with the credit 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/449810.

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

Lead Analyst: Edoardo Danieli, Vice President
Rating Committee Chair: Anke Rindermann, Managing Director
Initial Rating Date: 28 March 2019
Last Rating Date: 13 March 2024

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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