DBRS Morningstar Confirms BBB (low) Issuer Rating of Elis S.A.

DBRS Ratings GmbH (DBRS Morningstar) confirmed its BBB (low) Issuer Rating of Elis S.A. (Elis or the Company). The trend remains Stable. The rating confirmation reflects DBRS Morningstar’s view that Elis’ ability to withstand the unprecedented Coronavirus Disease (COVID-19) disruptions and the relative stability of the business support the current rating, despite deterioration in credit metrics. In addition, Elis’s industry-leading position, efficient and large-scale operations and strong brand name recognition continue to support the rating. In 2020, Elis took a number of precautionary and proactive measures aimed at preserving earnings, cash flows, and liquidity against the coronavirus-related disruptions but, despite these, credit metrics deteriorated. However, DBRS Morningstar’s expectation has been and remains that Elis' credit metrics will improve in 2021, compared with 2020, to levels more in line with the current rating, albeit slightly higher than when DBRS Morningstar initiated the rating. While Elis’ hospitality segment is by far the most heavily affected by travel restrictions and lockdowns, the Company’s diversification in terms of its customer base and end-markets, without necessarily fully compensating for the lost revenues, continues to provide some level of support and visibility. In particular, Elis’ EBITDA margin and free cash flow (as defined by DBRS Morningstar) improved in 2020 compared with 2019, showing the resilience of the Company’s variable cost structure during uncertain times. The rating is also supported, in a normal business environment, by the long-term nature of the contracts and high renewal rates leading to strong revenue visibility, and the expectation that the Company’s surplus cash flow generation will be used towards deleveraging. However, the rating is constrained by the Company’s exposure to markets that have limited organic growth prospects or are being hit hard by the coronavirus, such as the hospitality sector, and the high capital intensity of its business model, which could all potentially limit earnings and cash flow growth and therefore deleveraging.

Elis benefits from its industry-leading position and strong brand name recognition in the flat linen, workwear, hygiene, and well-being service markets. As such, the Company has developed efficient operations with solid economies of scale, creating strong pricing power. The Company benefits from a dense network in its French core market, which supports efficient operations and deliveries to customers, and, following acquisitions over the past few years, it has replicated its French model in other countries. Beyond its primary markets, Elis has been actively growing its footprint in Europe and Latin America through both organic growth and acquisitions with several smaller bolt-on acquisitions as well as larger and transformative ones, such as Berendsen in September 2017, which added about EUR 1.3 billion in annual revenues. Elis’ acquisition strategy does not currently affect the rating, but if it were to undertake heavily debt-funded acquisitions and/or be less successful integrating such acquisitions, this could negatively affect the rating. In addition, the Company has shown resiliency through market downturns and was able to maintain EBITDA margins above 30% since 2001, keeping margins stable during the 2008-09 crisis and even improving them slightly in 2020. Elis’ revenue visibility and margins consistency are supported by its long-term contracts (four years on average), limited customer concentration, high retention rates, and a variable cost and capex structure in particular, which help soften the disruptions caused by the coronavirus pandemic. The Company is fairly diversified by the type of services it offers and customers it serves, softening the effects of cyclicality or volatility in any one particular sector. In 2020, for example, a reduction of around 50% of revenues from hospitality was partially compensated with close to breakeven revenue performance from other sectors (Trade and Services, Industrial, Healthcare). The Company also benefits from the fact that it provides an essential service to its customers, which often represents a relatively small portion of their costs base, allowing Elis to pass on increased costs. Many of Elis’ customers are also small and do not have strong price negotiating power, a positive for the Company.

The rating also takes into consideration the limited organic growth prospects in mature markets such as Western Europe, particularly France, its largest single market. However, the Company’s acquisition strategy has mitigated its reliance on the French market, which currently contributes about 31% of its revenue, down from about 70% in 2014. Furthermore, the flat linen business line, because of replacement requirements, demands high maintenance capital expenditures, which, while variable to a certain extent, can potentially limit cash available for debt repayment in a market slowdown. In 2020, however, Elis was able to limit spending related to linen, because of its inherent variable nature, and reduce other variable costs in its operations, which led to a solid free cash flow generation.

In 2021, DBRS Morningstar expects that once the coronavirus-related disruptions gradually subside, the Company’s financial metrics will return to what is considered consistent with a low investment-grade rating such as DBRS Morningstar-adjusted debt-to-EBITDA trending towards 3.75 times and DBRS Morningstar-adjusted cash-flow-to-debt increasing above 20%. The strong business risk profile, expectation of free cash flow surpluses, and the efforts and commitment from management to reduce leverage all give DBRS Morningstar comfort that these credit metrics are tenable on a sustainable basis. However, if the negative effects of the coronavirus were to last much longer than currently expected, due in particular to a slower easing of lockdowns and travel restrictions that would lead leverage to stay elevated for an extended period of time, DBRS Morningstar could consider a negative rating action. In addition, a return to more aggressive financial policies or the debt funding of large acquisitions could also lead DBRS Morningstar to take a negative rating action. While unlikely in the near term, the rating could be upgraded if the Company significantly improved its operating performance and its financial metrics on a sustained basis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is the Rating Companies in the Services Industry (29 January 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (2 November 2020), https://www.dbrsmorningstar.com/research/369167/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships, and DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Elis’ audited and interim financial statements, investor presentations, forecasts, budgets and presentations provided by Elis S.A.. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

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

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

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

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/375348.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Giuseppe Fresta, Vice President
Rating Committee Chair: Charles Halam-Andres, Managing Director
Initial Rating Date: 28 March 2019
Last Rating Date: 27 March 2020

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-- Rating Companies in the Services Industry (29 January 2021), https://www.dbrsmorningstar.com/research/372947/rating-companies-in-the-services-industry.
-- DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (2 November 2020), https://www.dbrsmorningstar.com/research/369167/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.