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Edited Transcript of ELIS.PA earnings conference call or presentation 24-Jul-19 4:00pm GMT

Half Year 2019 Elis SA Earnings Call

PUTEAUX Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Elis SA earnings conference call or presentation Wednesday, July 24, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Louis Guyot

Elis SA - CFO, Administrative & Financial Director & Member of the Management Board

* Xavier Martiré

Elis SA - Chairman of the Management Board & CEO

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Conference Call Participants

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* Anna Patrice

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Chirag Vadhia

HSBC, Research Division - Research Analyst

* Daniel James Hobden

Crédit Suisse AG, Research Division - Research Analyst

* Florent Thy-Tine

Midcap Partners, Research Division - Deputy Head of Research

* Nicolas Tabor

MainFirst Bank AG, Research Division - Analyst

* Peter Testa

One Investments S.A.G.L. - Analyst

* Sabrina Blanc

Societe Generale Cross Asset Research - Equity Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's H1 2019 results conference call. (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday, the 24th of July 2019. And now I would like to hand the conference over to one of your speakers today, Mr. Martiré. Please go ahead.

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Xavier Martiré, Elis SA - Chairman of the Management Board & CEO [2]

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Yes, good afternoon, everyone. Welcome to our 2019 half year results conference call, which is also webcasted. The speakers on this call will be Louis Guyot, CFO; and myself. So after an overview of the H1 business highlights, I will hand over to Louis. He will detail the first half financial performance. I will then come back to provide you with some comments on our strategy and our full-year outlook.

So let me start with the highlights of our H1 performance, our 2019 H1 results are very satisfactory. Revenue of EUR 1.6 billion was up 5.1% at constant FX rate. Organic growth accelerated in Q2, which led to 3% for the first half. EBITDA margin was slightly down minus 20 bps excluding IFRS 16, which is totally in line with our expected annual phasing. Headline net results reached EUR 104 million, up 8.1%. H1 free cash flow is lower than H1 2018, mainly due to some base effects. Nevertheless, it will increase in 2019 compared to 2018 for the full year. These results are the consequence of very dynamic commercial activity in many countries as well as the reduction in the churn rate in the U.K. But most importantly, they reflect our pricing power across the board, in other words, our capacity to pass on the inflation of our cost base to our customers. The balance and integration process is still perfectly on track, and I'm therefore happy to confirm first, that we are perfectly in line with the target of EUR 70 million cumulated synergies at the end of 2019, and second, that the rollout of the CapEx program is on track and will be finished by the end of the year as expected. Finally, we continued to reinforce our balance sheet with the refinancing of our 5-year bond at much better conditions leading to a cheaper cost of debt at below 2%, with extended maturities, which we come back to this later in this presentation.

Looking at organic growth first, the good 3% number reached in H1 was driven by a very good Q2 at 3.5%. The acceleration between Q1 and Q2 is partly due to calendar effect as there was 1 less billing day in Q1 2019 compared to the previous year with a reverse positive effect in Q2. Our usual fast-growing geographies Southern Europe and Latin America continued to deliver very good growth. Scandinavia and Eastern Europe also posted a very strong growth at nearly 4% organic. And finally the U.K., as expected, remained down at minus 1.4% mainly reflecting the carryover effects of the Workwear contracts lost last year.

Moving on to the next slide, we see that H1 2019 organic performance was quite outstanding, marking a sharp acceleration compared to the 2.1% we delivered in H1 last year. The drivers of this acceleration are twofold. First, our very efficient pricing dynamics. As you know, we are facing several inflation drivers leading to an increase of our cost in some of our European countries mostly regarding wages and energy. Second, a very good and efficient commercial activity in many countries where our teams did a very good job of growing our portfolio either by signing new clients or by servicing new products to existing clients.

Looking at margins now, the main topic for us in H1 was as you know, to counter the effect of inflation by pushing price increases to our clients, especially in Spain, in the U.K. and in Germany where wage inflation was the strongest. With a very limited margin decline in 20 bps in H1 2019, we controlled the margin quite efficiently. This highlights our capacity to pass on price increase to our customers on the back of a good market share we generally have in our country. Margin in France and in Scandinavia and Eastern Europe remain very high quite significantly above group average. We continue to deliver strong margin improvements in Latin America on the back of additional productivity improvement. Southern Europe margin was slightly up despite the very sharp 22% increase in minimum wage in the country. As expected, the U.K. margin was down mostly due to product mix effect, but operational KPIs continued to improve. The only disappointing result on margin was in Central Europe where we continued to face challenges in Germany and I will come back to this in a few minutes.

Let's now take an in-depth look at what was a key area of focus in first half: pricing. Our teams have been made aware of the importance of passing on price increases to our customers, and I must say, we are very satisfied with what we delivered. In all the countries subject to inflation, we successfully managed to reflect most of our cost base increase in our prices. The only exception again was Germany where you can see the orange light. Everywhere else, pricing was very dynamic, which leaves us quite confident for the future. As you know, there was a lag effect in H1 as most of our cost base increase was in the books as early as January 1, whereas price increases have been negotiated throughout the half with implementation sometimes spread over the year and creating the mechanical negative short-term effect on margin. But looking at 2020, we should see a significant positive effect.

Let's now quickly review the main H1 highlights for each geographic starting with France. The performance was good in H1 with a dynamic top line with slight margin improvements. Commercial momentum remained very good and the impact from the Yellow Vests protest on our Hospitality business was quite limited. Pricing was good driven little bit by the new tools we started to implement around 4 years ago and which proved to be increasingly efficient. The French market is also helping with a competitive landscape now totally rational. The slight margin improvement was driven by some efficiency gains in our plants as a result of our permanent focus on productivity and methods.

Central Europe is a basket of around 10 countries, which are most very well oriented such as the Netherlands, Poland, Czech Republic, Slovakia, Hungary, but the largest country of the region is Germany, which is without doubt the most difficult market and where we continue to face some problem in H1.

As you know, we operate in 3 different segments in Germany, which have very different dynamics. The most satisfactory market is Workwear where we delivered good and stable margins along with good topline growth. As a result, we decided to strengthen our commercial teams in this segment to further boost our development. The second market is hospitality, which is very difficult. It is very fragmented market with many small regional players leading to prices that are very low. And we are not very optimistic about the potential short-term turnaround and we are not pushing for growth in this segment. The third market is Healthcare where we are the leader. We have been consolidating the market for quite some time now and we are still doing so. The main growth driver in this market is nursing homes business supported by the aging of the German population. We aim at leveraging our leadership in this business to improve pricing. Today our German operations face 3 main challenges. The main one is recruitment. The unemployment rate in the country is very low, leading both to blue-collar wage inflation and to a shortage of high-caliber managers. To address these recruitment difficulties, we have put in place an in-depth HR action plan to improve our access to blue collars as well as the quality of our management teams. The second challenge is the pricing, which remains too low especially in flat linen. So here consolidation of the Healthcare market would be the main driver for improvement. Finally, the high number of acquisitions we have carried out in Germany over the last years including Berendsen, but also all the other smaller businesses that we acquired have required a lot of focus on integration and occasionally some operational disruptions here and there. We are, therefore, reinforce some of our central teams in Germany with a small impact of margin. So all these challenges are clearly identified and are being addressed. Nevertheless, as far as H1 is concerned, margin was down in Germany with a direct impact on margin in the region.

Moving on to Scandinavia and Eastern Europe. Top line performance was very good across the board with strong commercial momentum and double-digit organic growth in some countries. Furthermore, the implementation of Elis' multiservice approach in Norway was very successful. So we now have in Norway, exactly like in France, light trucks that deliver in 1 run different services to the same clients with an immediate impact on customer satisfaction and productivity gains on logistics. Margin remains very high and quite significantly above group margin, but was a bit down in H1 due to 3 main effects. The negative for the mix effects in some countries like Sweden where we won some significant flat linen contracts. The margin was very good but not as high as margin we get in Workwear or mats so it's creating a slight margin dilution in these countries in the first half. Second point, margin also reflected a mix effect in the zone due to the country top line dynamics as countries with lower margin delivered stronger growth in H1. And lastly, we decided to reinforce our commercial and marketing teams to further accelerate the pace of topline growth in these very profitable region leading to a slight impact on H1 margin. At the end of the day, we delivered good topline growth in the region while keeping profitability at a very high level, and the small decrease of the margin in H1 is not in any way structural.

Moving on to the U.K. As a reminder, our 2 main priorities are first to improve churn rate in our very profitable Workwear business; and second, to significantly improve pricing in hospitality in the context of strong wage inflation. You can see on the left-hand side of the slide that churn has steadily been improving over the last 3 years. We were at 11% in H1, which remains way too high. But nevertheless, the trend is good and we are on the right track. Unfortunately, one significant retail client has decided to shut down part of its business with around 2% additional churn impact until the rest of the year. As far as pricing in Hospitality is concerned, you can see that we have delivered good progress over the last year. Our average price increase has crossed the 5% threshold upward in March, which is good. Also we must be in mind that 5% is roughly the impact of inflation on our cost base since the beginning of the year. This means that we will need to continue our efforts in order to fully pass on inflation to our customers.

Additionally in some cases, clients did not accept the price increase we were seeking, leading us to decide not to renew their contracts. This resulted in some contained volume losses in H1 for Hospitality. So bottom line, we saw slight top line decrease in H1 in the U.K. and 130 bps margin decline because of the negative product mix effect in our very profitable Workwear business and the decline in top line where our top line is stable in Hospitality, but with margin lower than Workwear.

Moving on to Southern Europe, H1 was very satisfactory. We managed to improve margin in the region despite a very sharp increase in minimum wage in Spain as of January 1. We have been very efficient in our pricing negotiations with our clients who have perfectly understood the inflation impact on our business. Consequently, top line was strong driven by these pricing momentum along with slight margin improvements. As far as activities concerned, we see a pretty good rebound in the hospitality business in Catalonia as well as a very good performance in Workwear where we continue to push for outsourcing, delivering double-digit growth in the segment in H1 in both Spain and Portugal. Talking about Portugal, activity remained very good across the board with double-digit organic growth in H1.

To conclude this world tour, let's touch base on Latin America where performance was very good in H1. Organic growth was strong driven by outsourcing. We also launched some very conclusive tests with small clients in the center of São Paulo, and we will be looking at expanding this further in the future. Margin improved by 240 bps on the back on further productivity improvements. This is in line with what we expected following the acquisition of Lavebras and I can confirm that margin in Brazil will reach 30% by the end of the year. As far as Chile and Colombia are concerned, they remain small contributors but we are very happy with their H1 performance.

So last slide of this first part of the presentation is on M&A, which remains one of the key pillars of our strategy for profitable growth. We have been quite good in H1 with 5 deals closed in 5 different European countries including some countries coming from the Berendsen Corp such as Sweden and Denmark.

All in, the M&A impact in H1 was just above 2% of top line and we expected to be at over 1.7% for the full year with what has already been disclosed to the market. We are ever so far in the divestment of the single-use activity of Clinical Solutions, which we have identified as non-core. The divestment of the remaining part should follow in H2.

I will now hand over to Louis to comment further on the financial results.

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Louis Guyot, Elis SA - CFO, Administrative & Financial Director & Member of the Management Board [3]

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Thank you, Xavier. Good afternoon, everyone. Before I go through the numbers, I'd like to make some preliminary comments on the IFRS standards to help you with the accounts. First, we have illustrated the H1 2018 accounts with application of IFRS 3, which corresponds to the allocation of Berendsen's goodwill. As you can see, there is a EUR 1.3 million impact on G&A, which corresponds to the revolution of Berendsen IT assets. The EUR 29.9 million impact and amortization of PPA, which corresponds to the revolution of Berendsen customer relations. Second, with regards to the IFRS 5, which shows the option to report Clinical Solutions in discontinued activities since 2018 when the group initiated the divestment process. So '19 and '18 figures do not take into account the activity of Clinical Solutions. Xavier just gave you an update on the finalization of the sales process.

Moving to the next page. Another important change for the '19 accounts is new application of IFRS 16, which requires to recognize a financial lease only with a term of 1 year for an asset bought more than $5,000. As far as it is concerned, the impact is a restatement of EUR 64 million of operational leases for the full year in EBITDA, meaning EUR 32 million for the first half. The large part of this amount ends up in G&A so that the full year impact on EBIT is at EUR 3.8 million meaning EUR 1.9 million for half year.

In the balance sheet, that translates into a new asset of EUR 366 million and a new liability, which is not a financial debt of the same amount. An important point is that the standard restates 2019, but not 2018. So in this presentation every time we compare '19 with '18, we fully disclose IFRS 16 impact to compare apple with apple.

Now let's move onto the figures by geography to fully illustrates what Xavier detailed about the half year performance. In France, organic growth is 2.6% with 34% EBITDA margin of 20 bps. This performance reflects a very good momentum both on top and bottom line. Activities remained good in France with low impact of Yellow Vests while our pricing discipline is now well in place.

In Central Europe, the performance is more mixed. We have, on the one hand, some very successful countries like Netherlands, Poland and Czech Republic, while Germany and Switzerland are more difficult especially in flat linen. Overall, organic growth was good at 2.2%, but all the headwinds in Germany detailed by Xavier led to difficulties in pushing price increase to the customers. Moreover, the shortage of staff doesn't allow for strong industrial performance. This has resulted in 150 bps decline in EBITDA margin.

Scandinavia and Eastern Europe delivered another very good organic performance, around 4%. This illustrates a very strong commercial dynamics in these countries. EBITDA margin in the region remained very high circa 36% despite a negative country and client mix effects on the reinforcement of some local teams as explained earlier by Xavier.

In the U.K. and Ireland, all operational KPIs continued to improve in H1. Pricing in hospitality above 56%, churn in Workwear below 11%. However, we faced many headwinds. First, inflation of around 5%. Second, a carryover of the 18 Workwear contracts leases, and third, negative mix effect as the most profitable segment Workwear has a decrease in top line while Hospitality is growing but comes with much lower profitability. All in, organic growth was down 1.4% and EBITDA margin down 130 bps.

In Southern Europe, organic growth of more than 7% reflects the commercial dynamism and the ability to pass prices on to the customers. All that being the proof of the successful integration of Indusal. We also not marked [addressing] trend in Workwear in Spain and Portugal. The slight 10 bps margin improvement despite a high level of wage inflation reflects a strong top line momentum as well as further productivity improvement in connection with a very (inaudible) of the integration.

In Latin America, organic growth was also strong, more than 6%. This highlights our success in committing our outsourcing model to new clients. The strong EBITDA performance of 240 bps illustrates the successful integration of Lavebras on some further operational [synergy].

Now let's have a look at the full P&L. We present the reported H1 '19 figures as well as IFRS 16 impact to make them comparable year-on-year. The low EBITDA, which I just commented region by region, which is at EBIT margin is slightly up effecting a kind of normalization in the G&A. For the PPA amortization, 2018 was strong because it still has the last months of the amortization of the [207 deal]. Therefore, the H1 '19 number is you are most aware but now normative. Noncurrent [around 0] is the addition of EUR 7 million last Berendsen was the restructuring cost, EUR 3 million of acquisition costs, all of that being offset by the reversal of a provision for EUR 11 million. The thing to highlight is the fact that restructuring cost are now decreasing significantly as the synergy implementation plan near the end. The financial results of EUR 73 million is mostly made up of EUR 46 million of cash interest, EUR 9 million of amortization of issuance cost, EUR 5 million corresponding to the IFRS 16 treatment and EUR 6 million of one-off expenses corresponding to the breakup fees paid in connection to the refinancing of the EUR 800 million bond beginning of '19. Tax rate is normative around 30%. All in all, H1 headline net result is at 8.1% year-on-year on a frozen GAAP basis.

You are now accustomed to the reconciliation between net result on the headline net result. The main items restricted are the PP depreciation, noncash IFRS 2 expenses for free shares plans, breakup cost related to the refinancing of the bond, and the restructuring costs, these items being net of the tax effect when appropriate.

The next slide which is interest that we actually paid in H1 are on the left, the P&L charge, and second, the cash outflow on the right. We have already touched on the P&L chart, so looking at cash flow, you see the impact of IFRS 16, the breakup fees on the cost of interest rates hedging for a total of EUR 17 million to be added to the EUR 46 million.

Let's have a look now at the cash flow statement precisely. Exceptional items are related to the remaining restructuring cost of Berendsen. We expect the normalization of around EUR 15 million this year probably, EUR 10 million, EUR 15 million in the next year. CapEx to sales ratio are around 20% in H1 in line with our full-year target for '19 before returning to a more normative level of 18% for the next year. Change in working capital is normative for first half with a significant cash outflow. Furthermore, 29th and 30th of June were a weekend, which penalized the amount of cash received from the clients. A lot of that came on Monday, July 1. The level of working capital requirement as of the December 31 should be around EUR 50 million, which is kind of normative. The cost of debt is what I'll described in the previous slide. We can highlight that the average cost of debt is now below 2% including hedging costs, and our full-year target is in the region of EUR 80 million excluding refinancing cost. Please note that last year it was abnormally low due to a miss in yearly bond payment of around EUR 20 million. The tax paid in H1 '19 is normative. The rule being that is based on the previous financial year. The same reason explained why H1 '18 was abnormally low as 2017 was a year of massive cost due to Berendsen acquisition.

For the full year '19, we can expect the cash tax rate of circa 25% in the region of EUR 90 million. All these items lead to classic H1 free cash flow in line with the full-year expectation. Keep in mind that last year H1 was abnormally high due to some one-off which were corrected in H2, so that you shall see for the full year an improvement of the free cash flow, of course as expected. Items below free cash flow are the new lease payments required by IFRS 16, the dividends which have been paid in May, the acquisition cost related to the acquisition closed in H1 [where under source purchase of some control limit] in Denmark and Brazil. Total net debt variance was EUR 171 million, classical of the first half.

Finally, let's have a look at our debt structure. We obtained our first investment-grade rating with DBRS at triple B low, stable. We have benefited from the excellent condition in the market refinance of 2022, EUR 800 million bond at 3% with 2 new bonds. A 10 years EUR 300 million USPP at 2.7%, and 5 years EUR 500 million classical bond at 1.75%. This led to extended maturities at a reduced average cost of our debt that is now at 1.8% before interest rate hedging, which cost to debt, 20 bps, but of course would disappear then.

As a conclusion, I would like to highlight first very good half with organic growth at 3%, which illustrates our ability to pass on inflation while sustaining strong commercial activity which was the main question mark from the market at the beginning of the year. Second, a very good control of EBITDA margin in line with our annual expected phasing and despite negative ForEx mix. And third, an improvement in headline net result on the reinforced debt structure with extended maturity on lowered cost.

I will now hand over to Xavier, who will provide you with a quick reminder on our strategy and outlook.

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Xavier Martiré, Elis SA - Chairman of the Management Board & CEO [4]

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Thank you, Louis. So we'd like to regularly mention one of the key characteristics of the group, which is the resilience of the business. Looking at this graph you see the evolution of the top line and the margin performance over the last 2 decades. The backbone of this resilience is twofold. First, the diversified geographical footprint with France now representing less than the 1/3 of our business, and second, the diversified portfolio of clients in terms of size and end markets. Consequently, you can see on the graph that margins are constantly being evolving in high and stable levels within 200 bps range. On top of that, one very interesting characteristic of our business is that linen investment come hand-in-hand with top line growth, that means that conversely they mechanically go down during the bad top line years, which have favorable impact on cash generation.

The table on the next slide perfectly illustrates the group's strategy by transferring our know-how along with consolidating our existing markets we aim at increasing our EBITDA margins everywhere to 35% and above. As of today, around half of our business is generated in countries with a margin above 35%. The remaining half being below 30%. So we want to keep the high-margin countries where they are and bring the other countries above the 30% threshold. This concerns 4 sizeable countries with significant margin improvement potential, Germany, the U.K., Spain and finally Brazil, which given the H1 results should be the first to move it. Further commercial progress along with positivity gains should be the main drivers in the U.K. whereas we will be aiming at more consolidation in Germany.

Finally, our good H1 performance allows us to confirm our 2019 outlook as given in March. So we are talking about full-year organic growth of around 3% and EBITDA margin between 31.2% and 31.6%. It is fair to say that organic growth was very satisfactory in H1 due to the successful pricing negotiations, but also due to good activity [across the board]. And by definition activity is not to be taken for granted so we want to remain careful, especially as the summer season is not fully in the books yet. We have so called (inaudible) our 20% CapEx to sales number for 2019, the exceptional Berendsen CapEx program will be finished by the end of this year and we should come back to around 18% as early as 2020. Finally, we target net debt-to-EBITDA ratio at 3.3x at year-end. Deleveraging should accelerate next year along with improvement of the cash generation. So thank you for your attention and we are ready now to open the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from the line of Daniel Hobden from Crédit Suisse.

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Daniel James Hobden, Crédit Suisse AG, Research Division - Research Analyst [2]

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Just 3 for me if I may. And I was just wondering if you can make some comment on the M&A pipeline into Q -- into H2? And secondly, I was wondering if you could -- if you had any comments around the inflation levels that you were thinking or potentially seeing for 2020? I believe EUR 25 million was a normative. Obviously, it was much higher this year and hence the margin impact. Do you take any views as to whether that is structural and it will stay that high or if it will revert in 2020? And then the final one about the U.K. or the U.K. rental client adding 2% to churn impact for the rest of the year. I was wondering what sort of impact you could guide that to have on organic growth in the H2 margin as well, if I may?

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Xavier Martiré, Elis SA - Chairman of the Management Board & CEO [3]

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Okay, so first question, M&A pipe. It's always very complex to make any comments on this, as you know, because when it is not signed, it is not signed. So we have as usual some discussion with some players in our existing countries. So we follow the classical road and I think nothing more to add at this stage. For our view for inflation in 2020, probably less important than what we have seen in this year, mainly for energy for example. So the first forecast we have for 2020 in gas particularly seems to be better, so it will be -- at least not be next -- another increase in gas. So we are more optimistic for the energy part. For salary, it's always a point to take under control because normally for U.K. we can expect the same level of increase of the minimum wage next year in 2020 for U.K., around 5%. For Germany, the increase of the cost of labor is more linked to the shortage of blue-collar, so I think it could continue next year. And for France we don't expect any major issue, it was -- by the way it was the same in '19 and not big increase of cost of salary in France. And the question could be around Spain and I think it will depend on the event of these coming days with what would be the new union to govern the country. If Pedro Sanchez signs an agreement with Podemos, we have learned that, they are probably in line to increase again the minimum wage in Spain in 2020. The first figures we have read are far below the 22% of gross. So all in all, I think that the inflation in 2020 in our business should be more limited, that's what we are seeing in '19. Last question was around the H2 margin in U.K. So I am not confident to see an improvement of the margin in H2 in U.K. due to the mix that is still deferrable. We still continue to lose too much customer in Workwear, and we stabilized the situation in -- on top line with Hospitality. We have increased the prices nevertheless, the gap between the margin in Workwear and margin in Hospitality is so huge, it's 1 for 2, that with this trend on the top line, I don't see how we could reverse the dynamism of the margin in H2 in U.K.

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Operator [4]

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So the next question comes from the line of from Florent Thy-Tine from Midcap.

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Florent Thy-Tine, Midcap Partners, Research Division - Deputy Head of Research [5]

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Two question on my side. As a first one on your guidance, you just confirmed it, but it seems not cautious both on growth and EBITDA margin as we will have a positive price effect in H2. So why are you so cautious on H2? And my second question is, can we have the price and volume effect as a split between price and volume effect on the organic growth in H1?

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Xavier Martiré, Elis SA - Chairman of the Management Board & CEO [6]

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So I don't know if you can say that it is a too-cautious guidance. What I see is, okay, we are happy with the -- honestly, we are happy with the results of the first semester. And it's clearly a good signal that we have been able to pass through the market the impact of the cost inflation. It's clear. And nevertheless, in the organic growth and in the margin, you have also the impact of the volumes. And it's a little too early, as I said, to bet now on what will be the -- how will be the season for hospitality. July, August and September are 3 key months, and it's too early to say what will happen.

We have also some countries, as you know, where the general price increase is implemented in -- during the summer, so it's a little too early for these countries to say what we will have in the pocket at the end.

And specifically for the margin, you have also some small topics, but the mix effect is important. You can see that we have a strong growth in Latam and in the Southern Europe where the margin are far below the average margin of the group. So that's why you also have to take into account this mix effect at the group level. And you have also some impact of the FX because the Swedish krona was quite weak this year, and it is a country -- large country with a very high level of margin. It was not the same with the pound. That was quite better than expected in a country where the margin is very low. It had also an impact at the group level, a small impact in the margin. So that's why with all this effect, we still have some [asset] uncertainties that could cause us to not take the wheel to change the guidance at this stage and to confirm and to keep the guidance where they were 3 months ago, 4 months ago in March. The split between the breakdown in the growth between price and volume is more or less half-half to try to give you some global figures.

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Operator [7]

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And the next question comes from the line of Nicolas Tabor from MainFirst Bank.

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Nicolas Tabor, MainFirst Bank AG, Research Division - Analyst [8]

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First question, very short, would be, could you give us the revenue figure for Kings Laundry in 2018 and update from 2017? Could you give us also more broadly an update on the -- on Ireland and how it's evolving there in terms of organic growth and margin perspective for the historical scope of Berendsen? Then could you also shortly update us on the calendar effect on both organic growth and margin impact for Q2 and what you see for Q3? And then on U.K., could you give us some more color on the short press release that was given by Johnson Service Group where they were saying that they were seeing something stronger in Workwear and in the environment overall despite Brexit? Do you see the same? Or is it that they are gaining market share? What's the competition impact here? And then finally, very shortly, you said in the previous question that there was a number of countries which will have their price increase implementing during summer. Could you give us some of these countries as a matter of example to see where there will be more price increase in H2 than in H1, in which geographies?

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Xavier Martiré, Elis SA - Chairman of the Management Board & CEO [9]

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Okay. So lot of questions. Kings, turnover of Kings is a little more than GBP 30 million. Ireland, the situation was quite stable on the top line and margin for this year. Clearly, the country has been a little disturbed by the -- this potential acquisition with Kings, and it has limited a bit in terms of improvement of the operation in Ireland. So that's why it was very good news to receive some answer -- positive answer from the CCPC in Ireland to be able to close the deal at the end of the year. Perhaps, I will have Louis to answer for calendar effect Q2 to Q3, small comment on U.K. in Johnson.

The good performance of Johnson, I think that we have the same situation than in the past. That means that the growth of Johnson Workwear is clearly against us. And as you have 2 major player on Workwear in U.K., Johnson and Elis. So clearly, the high level of churn in our portfolio is benefiting to Johnson. So clearly, they are taking some market share in Workwear against us. And as last year, it is not the same for hospitality, so I don't know what is the precise figures of Johnson in organic growth in hospitality. They are benefiting like us of the price increase of the on-months in hospitality. So they are increasing for sure their price like us. And for the rest, the [ease they have taken in] our market share, it was not against us in hospitality. And the last question was that...

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Nicolas Tabor, MainFirst Bank AG, Research Division - Analyst [10]

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So I think the -- on the -- on pricing perhaps.

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Louis Guyot, Elis SA - CFO, Administrative & Financial Director & Member of the Management Board [11]

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So calendar effect, it's clean to our billing system, as you are aware of. Impacts, for example, flat in France, but not uniform. Impacts, for example, Sweden, but not the market. So that's not something absolutely general. We mentioned that for Q1, because there was a shift, when the Q1 to March to April, yes, there was a shift, June to July, when we speak a couple of million euros that shift from one month to the other. Just to restate, March was around 2% organic growth, and clearly, it was around 6%, gives you an idea of the shift. But be careful. There was -- it was doubled by the Easter holiday that shifted also month-to-month.

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Xavier Martiré, Elis SA - Chairman of the Management Board & CEO [12]

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And the last question was which country are concerned by the price increase during summer. You have some small country, like Italy, but it's so small that it is not significant to the group level. The main country is France, so that is where we implemented a new price increase in France this summer. But it is for small customer only because for all the big customer in France, it's always a negotiation at the beginning of the year or at the anniversary date of the contract. And it is contract by contract that we have negotiated it, mainly in the first semester. So it will concern the portfolio of small and midsized customers in France. But of course, it is our main country, so it is quite significant at the group level.

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Operator [13]

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And the next question come from the line of Anna Patrice from Berenberg.

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [14]

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This is Anna Patrice from Berenberg. Just couple of follow-up questions because I didn't understand exactly the answer. First, if you could again quantify, I'm sorry for repeating this, the calendar impact, Q2 and Q1. My understanding also that in the H2, you will have better calendar impact in terms of the number of working days. So what I want to understand is the calendar impact, plus the Easter impact in Q2 and the calendar impact on the H2. Another question is on the U.K. price, cost inflation and price increases, you are showing that now the run rate is roughly 5% price increase. My understanding that there was already cost inflation last year. And so are you just offsetting the cost inflation from next year and, hence, actually you're not really offsetting the cost inflation from this year? And given next year, there will be again cost inflation, you're basically always trying to run behind, but it has negatively impact your margins. Question on financial expenses again. Sorry, but could you repeat once again what should be the full year financial expenses in 2019 on the P&L and on the cash flow? And last question on the lease payments. You were saying that before, those were in the free cash flow. Now you put them outside of the free cash flow. So would it make sense to leave them in the free cash flow and just compare apples and apples? And I would imagine that if the cash expense that analysts and investors would appreciate if it was in the free cash flow.

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Xavier Martiré, Elis SA - Chairman of the Management Board & CEO [15]

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So I will start with the situation of price in U.K. and cost inflation and impact of margin. And after that, Louis will take the 3 other question. So it's totally true that it's not the end of the game when we increase the price by 5% for hospitality. And it is something that we will have to replicate, of course, because 5% for hospitality, it is more or less the level of our increase of cost. You have the regular increase of minimum wage and the impact of the energy. So at the end, we needed this year 5% just to offset this impact. It will be probably perhaps a little less next year because we don't expect such a big increase in the cost of energy. But for labor, it will be probably the same amount. So that means that if we want, and you know that it is our strategy, mitigate the low level of cost on average in hospitality, we need to, in average, to pass more than just inflation of our cost to the market. So that's why it is an ongoing action plans that we'll request next year to be as offensive this year in terms of price increase in the market in hospitality. You have already kept in mind that in some -- we have some example of contracts with some customer. We have always need to agree the new price increase in 2020, it was part of the negotiation. We will make a small improvement or small increase or part of the increase this year and the second part of next year. So clearly, the 5% offset the impact of the inflation of cost this year, but we needed to go further for the next year in U.K. if we want to mitigate the impact of the low price we have on the market today. And then I will leave the floor to Louis for the 3 other questions.

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Louis Guyot, Elis SA - CFO, Administrative & Financial Director & Member of the Management Board [16]

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So Anna, I mentioned the shift Q1 to Q2, if you make some rough calculation, you are in the mid 10 -- mid-teens million euro, more or less, for one day. Regarding financial interest, so what I mentioned is...

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [17]

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Sorry, sorry. The line was very, very bad. Could you repeat it again please? Sorry, the line was bad.

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Louis Guyot, Elis SA - CFO, Administrative & Financial Director & Member of the Management Board [18]

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(inaudible) it's EUR 5 million for one day, but that's pretty rough as you can guess.

Financial interest, what I mentioned is on the cash flow side without financing costs, EUR 80 million is a good idea to keep in mind.

On the P&L, you depreciate on top of that, like, EUR 20 million, more or less, under past financing fee.

Now regarding the lease payment, yes, indeed, I don't write the IFRS on that. I'm very sorry, but the application, what you can say, though, is that, indeed, the free cash flow is restated by the IFRS 16. The impact being in the region is EUR 25 million due to the fact that you take into account the EUR 5 million of notional interest. We'll give you more details, of course, for that.

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Operator [19]

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And the last question comes from the line of Peter Testa from One Investments.

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Peter Testa, One Investments S.A.G.L. - Analyst [20]

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Just 3 questions, please. On Germany, when looking at the process to get the margins up, you had the hospitality part, which, I guess, is going to be remain challenging. You have the reorganization and integration of your businesses and management teams, which, I guess, leaves something under your control to improve the margins. And then you have the health care business as an opportunity requiring consolidation. Within that German question, can you help us understand the sort of sequence and timing you think you can swing that margin direction to a positive way? Then on the U.K., very briefly on the -- following on the question, Johnson and Workwear, can you talk about your efforts to push back on the market share while maintaining your price discipline there? And then lastly on Spain, the process of getting this country towards 35% margin, to what extent will harmonizing the pricing of the acquired units in Spain get you there? And to what extent do you need other steps to reach this margin goal in Spain?

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Xavier Martiré, Elis SA - Chairman of the Management Board & CEO [21]

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So in Germany, I think that we have also under that subject that will help us to increase the margin. It is a very profitable business we have in Workwear, and that's why we have decided to increase the number of sales reps in this end market because it's light in U.K. It's -- if you compare the margin in flat linen and the margin in our dedicated one for Workwear, you will have 1 to 2. So at the difference of U.K., we are growing in this end market in Germany. So this positive impact of the mix of growth, it's -- if I may, it is an immediate positive impact on the margin.

For improvement of the process, it will take time. We are just on the situation to hire some new manager in the country. We have launched a dedicated program, for instance, to find some young German talent speaking French that will come to spend one year in some French operations to learn about the business and to come back in Germany after. So you can imagine that it's a question of several semester to see the impact of the improvement of the operation in some flat linen plants.

For the health care, I think that the improvement could be -- could come on the shorter term linked to the control of the price of the market. We are now leader. We have made some acquisition to consolidate the market, so we'll start to see some better dynamics in our negotiation with major or continued care. And we were talking about the pipe of acquisition we had at the beginning of the Q&A session. Clearly, we have also some other German company operating in the health care segment where we could have some good news in the coming months. So that's why this better control of price on the market in health care, it's, of course, shorter-term improvements than control of operations, globally speaking for flat linen.

You had question about effort [we need] to keep market share in U.K. for Workwear. Clearly, the strategy is to keep a good level of prices in Workwear. So -- and to be honest, Johnson is not taking market share by destroying the quality of the market. And thanks to price, it's not the case. It is -- as you remember when we explained the issue, it's lack of proximity and efficiency at the commercial part of our business that explained why we are losing a lot of small customers to Johnson. And it is not due to a question of price. So it's a good news. I think that the market remains very good and very stable in terms of price for Workwear. And we don't want to destroy it. So that's why that we will do both, keep doing a lot of effort to improve the quality of the relationship with all our small customer. And you have seen during the presentation that we have a bit of churn in H1 that what it was last year and even better than 2017. So we are on track to improve the situation.

On the same time, we will increase also the number of sales reps on the road because the exiting outsource market in the industry -- Workwear for industry in U.K. is not huge. That means that it remains a lot to do. And it will be also a way to come back to a positive growth in this so profitable market to not only reduce the churn, but also to increase the level of new sales with new customers that will outsource Workwear with us. So it is a strategy for these end markets in U.K.

Spain. So Spain, clearly, it was a big trouble around the negotiation on the impact of the increase of minimum wage in the first semester. Nevertheless, we still have some improvement to do in operations as with the integration of Indusal. And we have room of improvement in productivity. We have demonstrated, I think, with this H1 figure that we have been able to control prices on market and to pass through the market the impact of inflation. So it's positive things for the future. And the growth -- the mix of growth is also very positive because we have a double-digit growth in Workwear. The same as elsewhere. It's very profitable growth. So we remain very confident to which the 30% target of EBITDA also in Spain in the future.

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Peter Testa, One Investments S.A.G.L. - Analyst [22]

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Okay. And if I could ask just one final question. If you look at the EBITDA margin by the end of the half year, by the end of the half year, were you up on EBITDA margin, i.e., in June?

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Xavier Martiré, Elis SA - Chairman of the Management Board & CEO [23]

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I'm not sure to understand your question.

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Peter Testa, One Investments S.A.G.L. - Analyst [24]

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I'm trying to follow the sequence of pricing versus cost and trying to understand, by the end of the first half, so say for the month of June, whether you had reached the point for the group whereby the EBITDA margin had increased.

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Xavier Martiré, Elis SA - Chairman of the Management Board & CEO [25]

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So I think that you come back another way to try to highlight the guidance, if too cautious or not too cautious, no. What we can say is, clearly, you had for 2020. In 2020, we will benefit from the full impact of the price increase. And it will be very favorable to increase the margin in 2020. At this stage, for 2019, we prefer to keep the level of guidance described 3 or 4 months ago in March because we still have some -- we will have impact of level of activity during the summer. And as I said, if we keep this very strong organic growth in our country as less profitable than the others, it has a negative mix impact at the group level that could offset the positive trend of flow that you described that is a price increase will be better in the H2 than in the H1. So that's why we prefer to remain with the previous level of guidance for '19.

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Operator [26]

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And the next question comes from the line of Chirag Vadhia from HSBC.

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Chirag Vadhia, HSBC, Research Division - Research Analyst [27]

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Just 3, if I may. Firstly, on organic growth, on second half, how much of this do you expect will be volume versus how much is passing through these costs in terms of pricing? And secondly, how do you see the end markets performing in France? And do you see any particular areas of subduedness? And finally, considering the acquisition pipe, how do you feel about your current level of leverage?

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Xavier Martiré, Elis SA - Chairman of the Management Board & CEO [28]

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So organic growth, so we don't -- it's too early to give you some precise figures on this, of course, for the second semester. So I don't see any reason why to have a big change in the breakdown of the organic growth in the second semester for -- between volume and price.

For market in France, everything is okay. I think that the other players are much more rational than what we have seen 4 years or 5 years ago. So that's why we are quite confident with the evolution of the market. The hospitality had some good performance in France in 2019, despite the disturbance mainly in Paris at the beginning of year with all the trouble made by the Yellow Jacket. Nevertheless, the markets are quite good. And the level of employment in this region is not so bad, so we have some positive figures also in different markets. So I'm quite confident with the French market.

For M&A and leverage, as usual, we want to keep and to remain very strict on this point. So that means that we have clearly understood the position of the market with the leverage. So if we don't have any major acquisition and only small bolt-on, it doesn't disturb really the leverage because these are very small and paid not so far from our existing leverage, so no major impact. That means that if it is just a small deal, we can pay it with our cash flow without any impact on the leverage. And for the rest, it's very hypothetical. It would depend on the -- do we have big deal or not, but it is not on the table today.

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Louis Guyot, Elis SA - CFO, Administrative & Financial Director & Member of the Management Board [29]

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Just to clarify on that point. When Xavier guided to 3.3x at the end of the year, we, of course, take into consideration the acquisition disclosed -- closed so far, including the [left in] (inaudible) and the ones that may happen statistically until the end of the year. So of course, that is for us business as usual. Understandable, we are able to make the acquisition without deteriorating the leverage. And you are fully aware that next year shall be a year of strong improvement, even with the gain of run rate base that we have in terms of bolt-ons.

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Operator [30]

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(Operator Instructions) And the next question comes from the line of Anna Patrice of Berenberg.

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [31]

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A follow-up question. On your net debt to EBITDA, you're saying that 3.3x, that will include the possible cash out for future bolt-on acquisitions to be done this year. Do you then also include the pro forma EBITDA of those possible acquisitions? Or how do you calculate it? Because then actually, the possibility is it won't be that manifold given that you spend money, but you also acquired the EBITDA, so one should partially offset another. Then on the -- lots of questions were asked on if you are conservative, not conservative on your outlook as you gave 3% organic growth. You have support from price increases, full run rate like you did in Q2. So question mark, why then the growth slowed down? And it means that actually it's volume growth that should significantly slow down given that the price will slightly accelerate. Is there something in the current trading or in the comparison basis that make you a bit more prudent to say that, yes, the growth should slow down? And you reiterate the guidance for this year. What about EBITDA margins in the future in Scandinavia or in the U.K. or in Spain? What kind of profitability do you expect in 2020? Do you expect Spanish margins to be full year run rate next year 30%? Or do you think that will be a bit too optimistic? Do you think that margins in the U.K. next year will also not yet improve because you still will have the negative product mix? So what do you think about the margin expansion based on the synergies, et cetera, or based on operational efficiency in the years to come?

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Xavier Martiré, Elis SA - Chairman of the Management Board & CEO [32]

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I will start with the organic growth. I will be very cautious with margin for 2020 because it's not totally the purpose of the call to give you pretax guidance per region for 2020. So for organic growth, clearly, I understand your point. The pricing effect will be bigger in the second semester than the first semester. Nevertheless, the organic growth link to commercial gain, level of activity of facing customer was quite high in the first semester. So that's why, even if we will have some better price increases in the second half, it's for us it seems that it's more cautious to keep exactly the same guidance given 4 months ago without any bad news or if we don't, so it's not linked to bad news that we have in the pocket. That explains why we have kept this guidance, despite better impact of the price increase in the second semester, to be clear.

In terms of margins, so it's always a difficult exercise. We are at mid-'19, so it's not the time to give you precise guidance, I think, for 2020 per region. So we have just confirmed that at the end of the year, we will have reached the target of 30% for Brazil. I think that Spain, you mentioned this country, it's a very positive result in the context of the inflation of the cost to have been able to increase the margin in '19. It's too early to say what it will be in 2020. But for sure, not 30%. We don't dream, and we will not increase so significantly the margin in Spain in one year only. But we would see later in the -- some more precise guidance for the other country, like you were talking about, Scandinavia and so on. As we say, the -- for the -- generally speaking, for the country, very profitable above 35%. The goal and the target is to keep this very high level of performance. And the last question I think was probably for...

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [33]

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And the margins in the U.K. next year. Sorry.

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Xavier Martiré, Elis SA - Chairman of the Management Board & CEO [34]

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Sorry, margin of what?

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [35]

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In the U.K., the margins next year.

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Xavier Martiré, Elis SA - Chairman of the Management Board & CEO [36]

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In U.K., so it will depend on the evolution of the mix and with what we see today with the -- we still have a decline of the very profitable top line in U.K. So we are not very push on the margin in U.K. in 2020. But as I said, it's too early and it's not the purpose of this call to give some guidance of the margin for 2020.

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Louis Guyot, Elis SA - CFO, Administrative & Financial Director & Member of the Management Board [37]

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And then there was a question about covenant definition. So the definition is one we have in the debt documentation, which takes financial debt as described in the accounts divided by EBITDA to which we add the pro forma full year for the acquisition, as if we have done the acquisition the 1st of January. There are other some very limited amount of synergies that we can demonstrate -- we can perform during the 12 last months of the acquisition, which is, of course, of limited amount. So it is a definition of the bank documentation. Of course, it is frozen GAAP, meaning without the IFRS 16 impact.

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Operator [38]

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And the next question comes from the line of Sabrina Blanc from Societe Generale.

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Sabrina Blanc, Societe Generale Cross Asset Research - Equity Analyst [39]

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I have just one question regarding the difference of margin evolution between EBITDA and EBIT, excluding the IFRS 16. We can say that we have a deterioration at the EBITDA level, while we have an improvement at EBIT. Can you give us more color on that and perhaps a guidance for the full year?

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Louis Guyot, Elis SA - CFO, Administrative & Financial Director & Member of the Management Board [40]

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What you see here is a kind of normalization of the G&A. The good way to look at G&A is to look at kind of CapEx 2 or 3 years ago. That is why -- but the problem is that you have to take it pro forma for the acquisition performed. So what we see with the kind of normalization of the G&A is the big ramp-up in investment made by Berendsen in '15 and '16. You remember that when the gentlemen joined, CapEx was 0. All of a sudden, we opened the -- all the floors for CapEx, especially for the linen or whatever. That increased the G&A for Berendsen very importantly. Now we can see that this is kind of declining or at least stabilizing. So that is what we observed, with G&A increasing less than the turnover. So that we see on the -- that's a kind of [tugboat] very slow to move on, so you can, of course, look for the trend to grow.

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Operator [41]

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(Operator Instructions) And there is no questions at the moment, so please go ahead.

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Xavier Martiré, Elis SA - Chairman of the Management Board & CEO [42]

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Yes. So just to thank you to be there for this conference call, which highlights the good performance of the company in the first semester. Thank you, and enjoy your summer.

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Operator [43]

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And that does conclude our conference call for today. Thank you for participating. You may all disconnect.