Elis SA (ELIS) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Elis H1 2026 Results Presentation Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Mr. Xavier Martire, CEO. Please go ahead, sir.

Thank you. Good afternoon to our participants in Europe, and good morning to everyone joining from across the Americas. Welcome to Elis 2026 Half Year Results Presentation. I'm Xavier Martire, CEO of Elis, speaking to you from Paris, and I'm joined by our CFO, Louis Guyot. I will begin with a brief overview of the key highlights from the first half of the year. Then I will hand over to Louis, who will walk you through the financial results in detail. After that, I will return to share our main CSR achievements and provide an update on our outlook for the remainder of 2026. We then open the floor for Q&A session. And as always, Nicolas Buron will be available after the call to address any further questions. Before we begin, please take a moment to read the disclaimer. The first half of 2026 confirms Elis' ability to deliver resilient, diversified growth in a demanding macroeconomic context marked by a challenging backdrop across the globe. Revenue reached EUR 2,457.1 million in the first half, up 4.9%, including 3.2% organic growth with a similar pace of organic growth in Q2 at 3.2%. Adjusted EBITDA increased by 4.9% to EUR 853.8 million with margin flat year-on-year at 35.7%. Adjusted EBIT rose by plus 4.6% to EUR 370 million with the margin also flat at 15.1%. Headline net income per share was up plus 5.1%, reaching EUR 0.89 on a diluted basis, once again outpacing top line growth, reflecting the accretive effect of our share buyback program. Free cash flow stood at negative EUR 30.1 million. As I will come back to later, this is purely working capital timing effect, and we remain fully on track with the full year trajectory we had in mind. The financial leverage ratio as of June 30, 2026 stood at 2.09x. Despite significant macro headwinds, this performance reflects the continued strength of our model, and I want to highlight five things in particular. Our recent investments in the sales force are clearly paying off with a record level of new contract signings in H1 and continued productivity gains across all geographies supporting margin. The Middle East crisis had no meaningful impact on Elis' activity. Our hedging policy shielded us from energy costs, and the limited cost inflation we did see is being addressed through a dedicated cost-saving plan and targeted pricing actions. We continue to execute on value-accretive bolt-on M&A with four new acquisitions, strengthening our footprint and a pipeline that remains rich heading into H2. And on capital returns, our EUR 500 million share buyback program was completed in mid-July alongside the planned exercise of the soft call option on our OCEANE 2029 convertible bond. Taken together, this gives us confidence to confirm all of our 2026 financial objectives on the back of the expected sequential improvement in the second half. Let's now move on the next slide, which focus on top line growth drivers in the first half of '26. Our recent investments in the sales force are paying off. The group reached a record level of new contract signing in H1, capturing strong outsourcing demand across all geography with new client wins outpacing churn and cross-selling of growth services, Flat Linen, Workwear, Hygiene, gaining traction. We will come back to this in more detail shortly as we go through each of our geographies. On pricing, we implemented adjustments across our full geographic footprint in the context of high cost base inflation, especially on workforce costs. Importantly, we saw no significant direct activity derived from geopolitics. Bolt-on acquisition added plus 1.1% to H1 growth, consistent with our value-accretive consolidation strategy in fragmented market and our pipeline remains rich leading into the second half. Finally, we recorded a plus 0.6% FX tailwind, reflecting favorable Latin American currency trends. Let's now turn to Slide 7, which highlights our long-term ambition to replicate the successful French model in terms of footprint, scale and breadth of services across all our geographies. Strong momentum in Workwear continued driven by the acceleration in outsourcing, and we recorded additional cross-selling successes in pest control and clean room. As local network density increase, we continue to progressive rollout -- the progressive rollout of our services offer to small clients. This strategy remains a key lever for organic growth. Elis is continuously reinforcing its sales force in many countries to harness this organic growth opportunity and we remain committed to investing in local sales team going forward. As already mentioned, we are clearly seeing these investments pay off where they have been made, and we'll come back to this in more detail as we go through geography. Our ultimate goal remains unchanged, replicate the French footprint and service launch in all our other geographies. Moving on to the next slide. Let me spend a moment on the macro backdrop, which remained difficult across Europe in the first half. France posting record high insolvencies, Germany, its highest level of Q2 corporate insolvency since 2005 to name just two examples. Despite the very global European macro environment, this slide presents Elis organic revenue growth in H1 across a number of our European markets. And as you can see, the trend remains solid despite the difficult context with group organic growth comfortably above 3% over the period. This isn't about chasing spectacular growth in any single market. It's about the structural resilient nature of the markets we operate in and outsourcing trends that keep advancing regardless of the broader economic cycle. That's precisely what allows us to keep delivering solid growth year in, year out even when the macro backdrop turns difficult. This is once again the clearest illustration of the resilience of our diversified model in a challenging macro environment. Turning to the next slide. Let me address the Middle East crisis directly as I know it's on many of your minds. So in Q1, hospitality activity in Paris was briefly penalized by lower hotel occupancy following the outbreak of the conflict, but with a rapid return to normal. We saw no transport disruption for our Asia sourced linen. On costs, we did see a material increase in gas and electricity spot prices since the beginning of the conflict of around plus 50%. Thanks to our progressive hedging policy, roughly 1/3 of volumes locked in each year for N+3, '26, '27 and '28 are largely shield. We are 93% hedged on gas and 94% on electricity for '26, 81% and 87% respectively for '27 and 61% and 53% for '28. We did see some inflation on other commodities used by the group, fuel, paper and chemicals, representing a EUR 7 million impact on cost in H1. To address this temporary cost increase, the cost saving plan has been implemented alongside additional temporary pricing surcharges. And looking further out, our 2027 pricing indexation should be strong, reflecting the evolution of oil prices. All told, we expect energy cost of around EUR 190 million in '26 below the '25 level, and we have already secured a further reduction for 2027. Moving on to Slide 10. Let me highlight two of our fastest growing activities. Clean room posted plus 6% revenue growth in H1, reaching EUR 145 million, supported by favorable market drivers. We operate in a structurally growing clean room market at plus 5% to plus 7% per annum, driven by pharma, biotech and semiconductor investments. We continue to differentiate through innovation, real-time monitoring, connected devices, smart garment, predictive analytics and our international footprint supports growing demand for rationalization and harmonization at key accounts. Pest Control posted plus 16% volume growth in H1, reaching EUR 45 million. Growth was broad-based across all geographies where the service is deployed and solid execution by our dedicated pest control team supported continued expansion. Our growing network of regional technical centers and sales representatives is driving growth ahead of the overall market in a highly fragmented industry. Let's now take a look at each of our geographies, starting with France. So France delivered good commercial dynamism across segments in the first half with revenue growth at plus 2.5%, of which plus 2% was organic. Hospitality showed an encouraging level of activity despite the slight decrease in Paris hotel occupancy in Q1 with a rapid return to normal and some softness during the June heat wave. Pricing adjustments implemented at the start of the year helped to offset labor cost inflation. The EBITDA margin further improved to 42.7%, up plus 90 bps driven by sustained operational efficiency, workshop productivity, logistic optimization, lower water and energy consumption and improved purchasing condition. Moving on to next 12. Central Europe posted revenue growth of plus 5.9% in the first half, including plus 3.2% organic growth. We recorded many commercial successes in Workwear in both standard and cleanroom despite a difficult macro environment and performance was solid in Belux, Poland and the Czech Republic. Growth in Germany was still impacted by a selective commercial approach in the Healthcare segment, reflecting ongoing budget pressures on clients. Nevertheless, some encouraging signs are emerging with improving churn and some new signings to be implemented towards year-end. We are also seeing interesting developments in the nursing home market with growing outsourcing driven by a search for higher quality of service. And this is a promising market where we intend to step up our focus going forward. We also secured a contract with a leading German private Healthcare group to be implemented in late H2, which is expected to bring around 20 million in additional revenue on this contract in '27. Four acquisition in Germany and Switzerland contributed to plus 2.3% in the half year growth. On profitability, the EBITDA margin came in at 32% in H1, down 30 basis points, reflecting the temporary dilutive effect from the numerous acquisition in the region as well as a significant increase in the minimum legal salary in Germany, which remains difficult to fully pass through. Moving on to the next slide. Scandinavia and Eastern Europe is a region made up of relatively small mature markets where the group already holds a strong market position. Reported revenue was up plus 3.4%, including plus 1.6% organic growth -- of organic. Finland, Norway and the Baltics are still benefiting from outsourcing demand and the competitive environment normalized in Denmark even if the markets remain subdued overall. We also benefited from a plus 1.8% positive FX impact on half year growth. The EBITDA margin improved slightly by 10 basis points to 34.5%. The margin is now stabilized at a high level. Limited top line growth currently makes it difficult to benefit from operating leverage. Moving on to the next slide. Let's now turn to the U.K. and Ireland. Organic revenue growth ended well at plus 1.6% in the first half. Reported revenue, however, was down minus 0.8%, reflecting the negative evolution of the British pound, which had a minus 2.4% impact on revenue. Despite a difficult macro environment, the U.K. performed well with strong contract wins in hospitality supported by an expanded sales force and Elis recognized quality of service, all while maintaining pricing discipline and a selective approach to winning new clients. Healthcare, for its part, remains stable. Turning to Ireland, the picture was more challenging with increased competition in hospitality weighing on performance. The EBITDA margin of the region came in at 31.8%, down 10 bps. The significant U.K. minimum wage increase remains difficult to fully pass through in a competitive environment. Let's now move on to Latin America. Revenue was up plus 15.4% in the first half, including plus 8% organic growth and benefited from a plus 5.6% positive impact from local currency movement. Brazil delivered solid commercial performance, posting plus 8.6% organic growth in H1. In Mexico meanwhile, a public tender has been launched to reset all volumes following a reorganization of the Mexican federal healthcare system. This tender was previously structured as a single lot but has now shifted to a multi-lot format and a diversifying supplier to optimize prices even at the potential expense of the service quality as the phenomenon that we have already seen play out in the Healthcare market in Europe in the past. As a result, 50% of the volume has been lost, representing around EUR 2 million per month since June or an expected EUR 14 million impact on full year 2026. That said, despite this episode, revenue in Mexico still stands more than 36% above its level at our entry into the country in '22 in local currency, and this should be kept in [perspective]. More broadly, this is naturally part of the business we operate in tenders get reset, contracts get won and lost, and it is worth weighing this against the German Healthcare add-on I mentioned a moment ago. Across our footprint, these puts and takes tend to balance out over time, and this is precisely why our diversified model continues to deliver resilient growth overall. Against this backdrop, the group continues to expand its offering in Mexico, notably with Workwear for industry and Flat Linen for hospitality, while in Brazil, the acquisition of Aquaflash contributed to plus 1.8% to H1 growth. On the profitability side, the EBITDA margin declined by 180 bps to 30.8%, impacted by workforce cost increase in the region and by the volume losses in Mexico. Labor cost inflation has been particularly strong since the start of the year with, for instance, a plus 23% minimum wage increase in Colombia and a plus 13% increase in Mexico, and this could not be fully passed through to pricing in H1, reflecting the typical lag between cost increase and pricing adjustments, an effect set to ease in H2. The Mexico volume loss late in H1 temporarily lower capacity utilization. The necessary operation adjustment have since been implemented to limit the impact on margin. We now conclude our geographic review on Slide 16 with Southern Europe. Reported revenue increased by 8.1%, included 5.7% organic growth. We recorded many commercial successes in all geographies, notably in workwear and performance was strong in Spain, supported by a good start to the summer season in hospitality. Acquisition in Spain contributed 2.4% to growth. On profitability, EBITDA margin further improved in H1 to 32.1%, up 30 basis points, driven by industrial process optimization delivering further productivity gains. Solid top line growth also generated some operating leverage helping margin progression. Moving on to the next slide to conclude on M&A. The group continued to execute its targeted bolt-on acquisition strategy with M&A contributing plus 1.1% to revenue growth in the first half. Four recent acquisitions have further strengthened our presence in key geographies and strategic market segments. In Germany, we acquired Adrett located in Schuby close to the Danish border offering rental services for Flat Linen and serving hospitality customer with EUR 12 million of revenue in '25. In Switzerland, we acquired Wäsche Perle one laundry facility in Interlaken at the heart of one of Switzerland's leading tourist destinations, addressing Flat Linen for hospitality clients with EUR 13.5 million of revenue in '25. In Spain, we acquired RS10, one plant located in the northeast of Barcelona, servicing healthcare customer primarily and hospitality clients in both Flat Linen and Workwear with EUR 5.5 million of revenue in '25. And in Brazil, we acquired ServBrasil in July, which operates from 20 small-scale laundry across five states in the Central and Northeastern regions in the country located directly within its client facilities, serving isolated hospitals with Flat Linen rental and maintenance services. It generated EUR 5 million of revenue in '25. This is a new client source for the group of the Brazilian market, and we are very excited about the opportunity. All these acquisitions are fully aligned with our bolt-on strategy and our pipeline remains very solid heading into H2. With that, I will now hand over to Louis, who will provide more detail on our H1 '26 financial performance.

Thank you, Xavier. Good afternoon, everyone. Let us start with this chart that we like a lot and the best testimony of our success. It illustrates the evolution of Elis revenue and EBITDA margin over 25 years and demonstrates the resilience and profitability of our business model. You see indeed a regular growth with some push from major deals while keeping the margin in a narrow bandwidth whatever happens. Indeed, you see on this chart the 2009 financial crisis, the 2012 social crisis, the COVID period, the energy crisis, wage inflation and so on. It is a result of a consistent strategy and pristine execution. Our cash generation model has remained strong through every crisis, with steady free cash flow growth expected going forward. Moving on to the next slide, let me walk you through the usual H1 '26 revenue breakdown by activity, end market and geography, which illustrates Elis highly diversified and well-balanced profile. Whichever angle you look at it from activity, then market geography, you will see that Elis is not dependent on any single category, which remains a key strength of the group, especially in times of macro uncertainty. By activity, our offering spans the 39 workwear, hygiene, wellbeing mix, a mix that reflects the breadth of our service portfolio and our ability to serve a client across multiple needs at once, deepening the relationship over time. On the market side, we serve four major end markets: healthcare, industry, hospitality, and trade and service. It's driven by different fundamentals and offering complementary growth drivers, which adds to the overall stability of our model. Looking at geography, France represents now less than 30% of group revenue, illustrating how the rest of our footprint keeps gaining relative weight with a solid balance between mature regions such as Central Europe, U.K., Ireland, Scandinavia, Eastern Europe, and more dynamic regions such as Latin America, Southern Europe, which continue to offer strong structural growth potential. This well-balanced diversification is no coincidence. It's a result of a disciplined long-term strategy built on marketing, commercial execution, targeted M&A. And it's precisely what allows us to keep delivering resilient growth even when individual markets or segments go through a rougher patch. Moving on to the next slide, let's take a look at revenue growth and EBITDA margin by geography. As Xavier mentioned, total revenue growth of 4.9% includes 1.1% from M&A, 0.6% ForEx impact, mainly reflecting favorable Latin America currency trends. Organic growth is 3.2%. In a nutshell, looking at the growth, we keep in mind that the ForEx is very positive in LatAm, negative in U.K. So we focus on organic. As expressed in the geographic split, we have Latin America and Southern Europe [indiscernible] with organic growth at 8% and 5.7% respectively, which reflects both our commercial successes while addressing the need for outsourcing and probably more dynamic economic trends. On the other hand, the rest of Europe is more moderate, between 1.6% and 3.2%, which is all in pretty decent. It's a mix of more mature markets and tougher macro environments. For margin, Xavier discussed the evolution per region. At group level, the margin stands flat at 34.7% with some headwind from inflation coming first from staff costs, with LatAm countries and Germany increasing strongly the cost [indiscernible] on the benefits and second from the Middle East crisis with fuel costs spreading to other commodities. Let's now take a look at the full P&L for the first half. Revenue reached EUR 245.1 billion, up 4.9% year-on-year. Adjusted EBITDA increased to EUR 853.8 million with the margin flat at 34.7%. We discussed that already. Depreciation represented EUR 483.8 million, resulting in adjusted EBIT of EUR 317 million, with the margin also flat at 15.1%. The D&A to sales ratio has stabilized, reflecting a decrease in the linen CapEx to sales ratio, now more in the 12% region on a full year basis, which is partially offset by higher rent. The main items between EBIT and operating income are [indiscernible]operating income expenses, which amounted to minus EUR 12 million, slightly higher than last year. Figure of '26 is standard for M&A cost, integration cost, restructuring cost, while H1 '25 was lower than the usual average. IFRS 2 expenses, it is accounting treatment of the free share plans. It decreased to EUR 16.3 million compared to EUR 21.1 million last year. H1 2026 is normalized, whereas H1 '25 included a one-off charge related to the increase in French employer contribution of free share allocation. Amortization of intangible assets from past acquisition decreased to EUR 40.2 million, reflecting the end of the amortization period for, A, the Industrial contracts, B, the Mexican brand. As a result, operating income increased by 7.1% to EUR 300.2 million. Below operating income, net financial expense increased to EUR 73.9 million from EUR 64.9 million, reflecting higher average net debt related to the extraordinary 2026 share buyback program and the higher average interest cost following recent refinancings. Income tax expense came in at EUR 62.8 million, roughly stable year-on-year. H1 '26 reflects a normal tax rate of 25.8% plus the French business tax, the CVAE, while H1 '25 was impacted by the French surtax, which is no longer applicable to the group in 2026. Finally, net income rose by 3.3%, reaching EUR 163.6 million compared to EUR 152.4 million last year. Moving to the next slide. Let's have a look now at H1 '26 fully diluted headline net income per share or EPS. As usual, the main adjustments to get to headline net income include the amortization of intangible assets recognized in past acquisitions. Also, IFRS 2 expenses and non-current operating income and expense. All in, headline net income for the first half stood at EUR 215.5 million, up 1.1% year-on-year. This translates into EUR 0.96 per share on a basis -- [indiscernible] up 5.3% on EUR 0.90, on a fully diluted basis, up 5.1%. It's worth noting that the growth in headline net income per share significantly outpaces the growth in headline net income itself. This is explained by the reduction in our [indiscernible] both basic, -4%, and fully diluted, -3.6%, reflecting the impact of our share buyback program. Moving on to the next slide. Let's now review our free cash flow performance for the first half '26. Adjusted EBITDA came in at EUR 853.8 million and remains the starting point of our cash generation. After the usual non-cash adjustments, this brings us to a cash flow before net financial cost on tax of EUR 830.8 million, up from EUR 796.9 million. Net CapEx stood at EUR 479.1 million or 19.5% of revenue, against 18.4% last year. This increase reflects a phasing effect, with many major industrial projects developing in the first half to follow the strong growth. For example, in Workwear in Poland and Spain, and [indiscernible] in Germany. So we are confident that the full-year ratio should be just above 18%. Change in working capital requirement was negative at EUR 164 million, against EUR 113 million last year. These kind of figures are usual for us, due to the seasonality of the business. For H1 '26, we can outline some Flat Linen stock building ahead of the hospitality season, some Workwear stock building to improve service quality, and a slight deterioration in the cash collection. Net interest paid decreased to EUR 51.8 million from EUR 66 million. This is explained by two coupons less in '26 due to reimbursement of bonds in '25. We still expect circa EUR 90 million for the full year. Tax paid amounted to EUR 74.8 million, up from EUR 67.7 million, with the cash tax rate stable at 24.5%. Lease liabilities payments totaled EUR 91.1 million, up from EUR 87.3 million, in line with activity levels. The group is also benefiting from a rent-free period on the new headquarters, running until December 28. All in, free cash flow came to negative EUR 30.1 million for the first half, slightly penalized by the seasonality of the CapEx on the working capital, but within the usual bandwidth of H1. You remember, of course, that nearly all the free cash flow is generated in the second half in our business, reason why we still expect to grow the free cash flow mid-single digit this year. Below free cash flow, the capital allocation was split between EUR 36 million for M&A, EUR 105.6 million for the dividend, and EUR 466.8 million for the share buyback program. As a result, net financial debt stood at EUR 3,670 million at the end of June, compared to EUR 3,020 million at the end of '25. Moving on to the next slide. Let's look at the debt in detail. On March 16, Elis successfully priced a EUR 600 million bond at 3.875%, maturing in March '32, further extending our maturity profile. As a reminder, we are rated investment grade by Standard & Poor's at BBB minus stable, and by Moody's at Baa3 stable. End of June, we had EUR 1.3 billion [indiscernible] comprising EUR 447 million of cash and EUR 900 million of unrolled capacity under the bank revolver line. Financial leverage ratio stood at 2.9x as of June 30. Moving on to the next slide. Net financial leverage [indiscernible] have increased to 2.09 from 1.92 in June '25. As you remember, '26 is not exactly a normative year for the debt evolution, with two events out of the usual. First, EUR 500 million buyback program nearly completed in H1, and second, the probable conversion of the convertible in H2. So looking at the full-year trajectory, we continue to expect a reduction of the leverage of 0.1 times versus full year '25, in line with our capital allocation policy. Moving on to the next slide. Reminder of Elis's capital allocation policy, which we clarified last year. It starts with the free cash flow generation and the structure around three clear priorities. First, pursuing our bolt-on acquisition strategy with the usual investment between EUR 50 million-EUR 150 million per year. Second, consolidating our investment grade rating with further de-levering of the balance sheet, circa 0.1 per year. And finally, allocating the remaining cash to shareholder returns through a regular dividend complemented by share buyback or, where appropriate, a special dividend. You remember that the year '25 was typical, with nearly EUR 360 million free cash flow split between M&A for EUR 143 million, dividends for EUR 105 million, and buyback for EUR 150 million, leading to a leveraged done by 0.1 at 175x. Moving on to the next slide. Let me detail our shareholder returns for the first half '26, which again, is more out of the ordinary. End of June, nearly 180 million share were repurchased at a weighted average price of EUR 26.25 for a total cash out of EUR 466.8 million. This is part of a EUR 500 million buyback program, which was fully completed in mid-July. This comes on top of the cash dividend at EUR 0.48 per share, up 7% nominal versus [indiscernible] paid on May 28 for a total of EUR 105.6 million. Moving on to the last slide of this section, let me give you an update on our convertible bond. Elis intends to exercise its soft call option on the OCEANE '29 bonds effective from mid-October '26, subject to market conditions. In this context, as previously flagged, Elis announced in March 2026 a share buyback program of EUR 500 million for the year. As of July 28, the group held 18.3 million treasury shares. In the event of the exercise of the soft call option on the exercise of the share allocation right, Elis could be required to deliver up to 23.8 million shares to holders of the OCEANE '29. Looking at the impact on our share count on factoring in the soft call exercise in mid-October '26, we expect the average basic share count to decrease by 3.5% by year-end on the average fully-diluted share count to decrease by circa 5%. I will now hand back to Xavier, who will give you an update on our CSR achievements in the first half.

Thank you, Louis. Let me now take a few moments to walk through our CSR achievements for the first half of '26. On slide 31 so we roll out our CSR strategy [indiscernible] integrating innovative topics such as avoided emissions or absenteeism, and communicated it widely, both internally and externally. Regarding our circular services benefit for the market, Elis received an award at a major recycling textile event in Europe for its Workwear to Workwear project, and new products are to be launched soon. We also launched new calculator to demonstrate the environmental benefits of our circular services on mops for the clean room activity versus single-use products and on cotton rolls versus paper solutions. Anther highlights, our alternative vehicle fleet continues to expand with 174 more electric vehicles to be delivered in France by year-end. Thermal efficiency in our European laundries improved by around 20% between January and May '26 versus the same period in '25. And the Elis Foundation is expanding into the Netherlands and Sweden, which will allow us to support more and more young talent in our community. Finally, last June, Elis joined the board of the UN Global Compact Network France. Moving on to the next slide. Our CSR performance continues to be acknowledged by leading non-financial rating agencies. We reached the platinum medal from EcoVadis, with our highest-ever score of 92 out of 100, positioning Elis among the top 1% of 150,000 assessed companies. Elis was included in the CDP A list for the second time out of the 23,000 companies assessed, with only 4% making the A list. We are among the top 56 French companies recognized. On MSCI, following methodology change across the industry, Elis was ranked BBB. The data update is still pending from MSCI. And for the S&P Global and ISS ESG ratings, we came in at 52 and 55.3 out of 100 respectively in the prime category. Taken together, these results are strong recognition of our strategy, and above all, of the dedication and day-to-day commitment of our teams across the group. Let's now turn to our 2026 outlook on slide 34. On organic revenue growth, through the first part of the year, we were actually tracking ahead of our full-year guidance, and the volume losses in Mexico have brought us back in line with the indication we gave in March. And we continue to expect organic revenue growth slightly below the 2025 level. It is worth reemphasizing that we recorded a record level of new contract signings in H1, which will progressively kick in and drive sequential organic growth improvement in the second half. We expect a slight expansion of both the adjusted EBITDA margin and the adjusted EBIT margin, driven by further productivity gains and the implementation of a cost saving plan, which is helping to offset the increase in certain cost inputs such as fuel linked to the Middle East conflict. We continue to anticipate high single-digit growth in diluted headline net income per share. On free cash flow, the negative H1 figure should not be read as a signal. It is entirely a working capital timing effect, and we remain fully in line with what we had in mind back in March. Free cash flow is still expected to grow at a mid-single-digit rate, reflecting the seasonal cash generation pattern of the business with very strong cash generation expected in the second half of the year. And we expect the financial leverage ratio to decline by around minus 0.1x versus 2025 to around 1.65x by year-end as previously guided. All of our 2026 financial objectives as communicated in March are therefore confirmed. Let me wrap up with this slide, which for me really captures why we are so confident in EBIT going forward. First, we have a highly resilient business model, proven time and again through successive crisis, and we keep compounding it further by combining organic growth with value-creative bolt-on acquisition. Second, we have an outstanding track record of high margins and strong cash generation year after year, and we intend to keep extending that track record. Third, our EPS growth is consistently outpacing top line growth this year and in the years ahead, which is exactly the kind of operating leverage that translates into real value creation for shareholder. Fourth, our ROCE keeps progressing with a pretax ROCE expected above 15% in 2026, a truly best-in-class level for our industry. And finally, we offer one of the most shareholder-friendly capital allocation policies out there, combining regular growing dividends with meaningful share buybacks. Put simply, Elis is a resilient high-quality compounder, and we have every reason to be excited about what lies ahead. That concludes our presentation. Thank you for your attention, and we are now happy to take your questions. Operator over to you.

[Operator Instructions] And the first question today comes from the line of Annelies Vermeulen from Morgan Stanley.

I have two questions, please. So just firstly, on price relative to volume. Given you've lost some volume in Q2 in Mexico, but you're also implementing pricing adjustments to offset cost inflation. Could you talk about how pricing has developed as a component of organic growth relative to Q1? And do you expect pricing to be a larger component of growth in the second half? And then secondly, on Mexico, the EUR 14 million impact that you expect for full year '26, does that assume that you don't win any of that volume back of that 50%? Or is there a possibility that you do reach some agreement and you can reclaim some of that contract in the second half?

So the gap between price and volume, so it is slightly more price and volume in Q2 and for the full year. I don't share exactly your analysis for the second half when you say that less volume in Mexico and extra pricing, yes. But on top of that, we have also implementation of all the big signatures of contracts in H1 that will start to invoice in H2. And so it will bring some additional volume. So I think that will keep more or less the same breakdown between price and volume for the full year. And second part of your question, Mexico. So for now, we have got the half of the volume. At every moment, they can decide to stop with a small supplier because we know that they have a lot of trouble in quality of service. But at this stage, I have no evidence that it can happen. So yes, it's possible, and we could recover some hospitals that are too much desperate from the low quality of service, but it's impossible for me to say that I'm sure, and it is not included in our forecast for the year '26.

Very clear. And just as a follow-up on those contract signings. I think when we've spoken previously about during periods of macro uncertainty, customers are sometimes more reluctant to sign new contracts, but it doesn't sound like you're seeing that at the moment. So is there anything else driving that record level of signings that you talked about?

So it is a fair comment. Yes, the job is more complex in a context where small customer mainly will be more reluctant to engage for four years and so. But good performance that we have and it is a record level of signature, is just the consequence of all our efforts and also the consequence of all our investments. If you remember what we have always said over the last two to three years, we invest regularly in marketing and sales to protect the organic growth and to develop the organic growth of the company. We always say that over the last two years, we could have delivered a better margin, but just by keeping the level of investment we were preferring a small increase of the margin, but a strong investment in additional marketing and sales effort. So that's why we -- it is normal, if I may, to see this good level of signature. It is a consequence of all our efforts. So it's nice to see that we are able to do that despite the macro environment that is really complex as you highlight.

Your next question today comes from the line of Ben Wild from Deutsche Bank.

Three questions from me, please. Firstly, back to Mexico. Given you're the market leader in that market with significant capacity, do you believe that your volumes can be redirected to any other customers? And is this really a question of waiting for the customer to come back with a more sensible price offer and then you can reengage? And then two questions on the cash flow. Firstly, you've highlighted the normal seasonality in the cash flow, but there's also a deterioration in DSOs in the half. Is that -- is there anything further going on in the working capital beyond typical seasonality that we should think about for the full year? And then secondly, on cash and CapEx in particular, the 19.5% of sales versus 18.5% last year. I think in the release, you talked about investments in industrial capacity in Flat Linen and in Workwear. Is there anything in particular inside the additional CapEx that you would particularly call out? And is this a sign that maybe you're feeling a bit more confident on the growth outlook for the rest of this year and into next year and therefore, driving up the CapEx as a result of that?

So Mexico and capacity of the landscape of competitor and so on. So it's clear that the number of capacity is limited. And so that's why we know that many, many hospitals today that have switched to a super small competitor are suffering because the quality of service is not at the level expected because they are not able to deliver all the volume needed. In some cases also because part of the gain that we had with [indiscernible] hospital, very often it was by closing the internal laundry. And so, we have some situation probably where the small supplier is not able to deliver the full service and I'm sure that some hospitals are forced to reopen part of their equipment to process some additional volume. So it doesn't change significantly the fact that the market today is not able to offer a lot of capacity and it doesn't change the incredible strong position that we have for the mid long term in Mexico. Regarding the cash, Louis will cover the DSO subject. For CapEx, it's just a question of timing during the year. So no -- nothing behind. And when you will see for the full year '26, we will be close to the 18%. So it's just that we have some big project of new plants that has been delivered in the first semester. We can be happy that our industrial team has been super efficient and we have some projects that have been delivered on time in the first semester, even before what we were expecting. And so that's why we have this extra CapEx in the first semester in percentage, but it's absolutely not a structural change. And we will have for the full year '26 the amount expected in percentage of sales, so close to the 18%, slightly above, but super close to the 18%. No other signal behind this level of CapEx in the first semester and now perhaps DSO following.

Yeah. I would say the same for DSO. We are speaking a couple of days. You remember that we are around 60 days at group level. So couple of days, it's the kind of things that -- can happen one month and another month. It just take, I don't know, this now being 1st of July instead of 30 of June. So I will not overread that even if, of course, it's a key priority of local management to follow on track as the clients even more when times are tough and, of course, it's not always the priority of the clients.

Maybe just one more, if I may. Obviously, there's a huge amount of news flow at the moment in Europe regarding fires. Is there any impact to the business operations from wildfires ongoing currently?

So we have two plants in the region, one inside the city of Bordeaux, so the plant is still open and not concerned by risk and one precisely in [indiscernible]. So here, this plant is stopped because people are not able to reach the plant. We have protected the plant around to avoid any major risk. We have been able to be super active, and we have transferred all the volume in other plants. One in the north in [indiscernible], one in the south in Bayonne, another one in Pau. People have been, as always, incredible to make a lot of effort to work during the night in the three plants to assume all the volume that we have moved to these plants. So no disruption in the service that we provide to the customer is the first topic. Second topic, what is the impact? We lose some turnover, of course, because we have some customers that are closed now, but it is not so meaningful for the group because we estimate that we have probably a risk for this summer around 1 million, not more than that for this lack of volume in hospitality in this region. It is the magnitude of what we could lose.

Your next question today comes from the line of Simon LeChipre from Jefferies.

Just two from me. First of all, on margin, could you quantify the amount of the cost savings you are mentioning? And are those savings permanent or just temporary savings to offset the ongoing inflationary pressure? And secondly, on France, how do you feel about the country as we are going to head into the next election over the coming months? Do you anticipate some sort of volatility in the business ahead of the election?

For cost savings, so it's -- the magnitude of the cost savings, we are talking about something that will be close to EUR 10 million at the group level, it is more or less the impact. So for the full year, the Middle East extra cost due to fuel, chemical and so on, of course, it will depend on the length of the war. And so we have a kind of uncertainty there. But let's say that it could be EUR 20 million to EUR 25 million. And what we have in mind to offset that is a part with some temporary price increase linked to some indexes. So it's a temporary additional fees and second half with the cost saving program. So this cost saving program, the majority it is temporary cost savings. So we postponed some projects and only a small part is definitive savings. So that's why for '27 because it can be the second part of your question, what will happen in '27. In '27, we will be much more stronger to start the year, thanks to the indexes that will sustain the price negotiation at the end of the year '26 because we see today all the indexes related, of course, to labor cost and wages, but also all the indexes related to the other component of our P&L, so energy, fuel, even textile and so on, everything is growing fast. So we'll have some strong indexes during the negotiation that will take place end of '26 that will support some super nice price increase in '27. And so with this permanent price increase in '27, we will be in a good position to stop the temporary cost saving program that we have put in place for '26. France now. So I would say that I know that everything is under severe pressure and super worry about French election in '27 and so on, but it was the mess in '26 and so on. When you see the mess, we have a budget and the super bad economic climate for all the small customer. We know that this year, it is a record level of bankruptcy in the French economy. So really, the country is in a bad shape even in '26. And I think that when you see the level of performance in this context., you can understand why we are quite relaxed even for '27 in France because we are so strong and we are exposed to so many, many end market type of customer. We have such a broad level of services that we provide in the country. And of course, we would prefer to have less volatility to have a more stable parliament, to have a president in '27 that is business friendly. Of course, we would prefer that. But I think that during all the crises that we have known in France, we have always demonstrated that the resilience of our business, especially in France, it's so impressive that we are not so -- we don't worry too much what will happen in '27 with the French election.

Your next question today comes from the line of Christoph Greulich from Berenberg.