Accor SA (OTCPK:ACRFF) H1 2023 Results Earnings Conference Call July 30, 2023 2:30 AM ET
Company Participants
Martine Gerow – Group Chief Finance Officer
Conference Call Participants
Vicki Stern – Barclays Capital
Richard Clarke – Bernstein Research
Jaina Mistry – Jefferies
Leo Carrington – Citigroup
Jarrod Castle – UBS
Jaafar Mestari – Exane BNP Paribas
Andre Juillard – Deutsche Bank
Simon Lechipre – Stifel Financial Corp.
Operator
Thank you for standing by. My name is Ellie and I will be your conference operator for today. At this time, I would like to welcome you to the Accor 2023 Half Year Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you.
I’d now like to hand you over to Martine Gerow, Group CFO. Martine, you may now start the session.
Martine Gerow
Thank you. And good morning, ladies and gentlemen. And thank you for joining us on this call, which is my first earnings call as the CFO for Accor. So let’s just dive right into the presentation for our first half results.
I’m going to start with the financials on slide 3 of the presentation. So, we were very pleased with the performance in the first half. We’ve seen continued solid growth momentum and strong earnings and cash flow. Our RevPAR is up a very healthy 38% versus prior year. That’s on a like-for-like basis in the first half. And 25% in the second quarter, which is also very solid. And as compared to 2019, we actually saw an acceleration of the growth in the second quarter.
Our pricing momentum continues, contributing about two-third of the overall RevPAR growth, with occupancy gains contributing for about one-third.
Our net unit growth actually accelerated this quarter, reaching 3.5% when you measure it over the last 12 months. And that was driven both by a higher number of openings as well as lower churn. And this translated into group revenue of €2.4 billion, which is an increase of 35% versus prior year, again, on a like-for-like basis.
Now moving to earnings and cash flow. We delivered strong earnings and cash flow in the first half. Our EBITDA more than doubled versus last year to €447 million, and services to owners was positive in the first half, which is in line with the STO guidance we shared with you during the Capital Markets Day.
Recurring free cash flow also significantly improved versus prior to €157 million, primarily driven by EBITDA growth, and that was partially offset by higher working capital, reflecting the higher activity. And I’ll remind everyone that we do have a seasonal working capital with H1 being much lower than H2 because of working capital.
So in light of these results, we have raised the full year guidance for EBITDA to €930 million to €970 million for 2023.
So let’s dive in, starting with RevPAR, which is presented on slide 4, which is well balanced across both divisions. And we’ve shown in red the contribution of rates and, in blue, the contribution of occupancy to the growth in RevPAR.
So starting on the left, Premium, Midscale & Economy division posted a RevPAR growth of 26% in the quarter versus prior year. And as you can see, that’s driven by strong pricing gains and occupancy, which is actually now close to 2019 levels.
Moving to the region, Europe and North Africa, RevPAR was up 20% in the second quarter versus prior year. And just to give you a bit of color on some of our key markets, France remains strong with large inflows of international leisure and business guests in Paris for large events. So, we had the Bourget Air Show, VivaTech and, of course, Roland-Garros.
Now to note that riots in early July did not have a significant impact on our summer booking thus far.
In the UK, we saw very, very balanced performance across London and the province. And Germany, we’re pleased, improved significantly in the second quarter. it’s actually now back above 2019 levels.
Now moving to the MEASPAC. Second quarter was up 37% RevPAR versus last year. Really, really good performance in Middle East, Africa despite difficult comps, particularly in Saudi Arabia. Growth in the Pacific is in line with the previous quarters, which is encouraging considering that Australia recovered earlier, as you may recall. Southeast Asia and India is well above 2019, notably in large cities, and that’s supported by the return of international business guests. And in China, we’ve seen a strong acceleration, despite what is still a very limited flight capacity in this region.
So moving to the Americas, which, as you know, is dominated by South America for Premium, Midscale & Economy. The RevPAR in the second quarter was up 24%, with stable occupancy as the region recovered faster than the other regions. And Brazil, which is our main market in this region, occupancy slightly above 2019’s and rates are significantly better.
And I will now move to Luxury & Lifestyle on the right. So we posted a RevPAR growth in the quarter of 24% versus prior year with – as you can see here, pretty balanced across occupancy and rate gains. But the growth in the segment is in line with the growth in PM&E. And that is good because you may recall, again, that that segment recovered faster.
For luxury, second quarter RevPAR was up 25% versus the second quarter. Luxury accounts for about actually slightly over 70% of the room revenue of the division and it’s mainly Fairmont and Sofitel. And as we saw in PM&E, the region MEASPAC was a key contributor to the growth. Our brands have a very strong presence in this region.
And finally, lifestyle second quarter RevPAR was up 20% versus last year and, like for luxury, lifestyle had recovered somewhat faster in 2022. But to note that RevPAR is now more than twice the level of 2019 and this is actually driven by the resorts component of our lifestyle portfolio.
Speaking of portfolio, let’s move now to slide 5 where we see the breakdown of our hotel portfolio by division with Premium, Midscale & Economy on the left side of this slide and Luxury & Lifestyle on the right.
So as indicated in my introduction, overall net unit growth for the group accelerated to 3.5% in the second quarter, again on an LTM basis, and was well balanced across both divisions. The majority of openings came from conversions, which demonstrates the strength of the Accor brand portfolio.
Premium, Midscale & Economy net portfolio grew by 3.6% over the last 12 months, driven by MEASPAC and China, which demonstrates the strong recovery in the momentum in this region.
Luxury & Lifestyle portfolio grew by 3.4% over the last 12 months, driven primarily by Ennismore which, as you know, is our lifestyle brand. We do expect the growth to pick up materially in the second half based on the planned openings for Luxury & Lifestyle.
Total pipeline is 217,000 room, notably driven by PM&E, which benefitted from strong findings in the quarter. And you can see our fee per room is in line with the guidance that we shared with you at the CMD, and to note the 1 to 3 ratio in favor of Luxury & Lifestyle.
Overall, we confirm our annual net unit growth guidance between 2% and 3%. Bear in mind that, in the last 12 months, that computation of 3.5%, it does embark a strong second half of 2022. And that effect will subside as we lap over those two quarters.
I will now move to slide 6 with the revenue breakdown by segment. So, the group revenue again reached €2.4 billion in the first half, up 35% on a like-for-like basis. On a reported basis, you see the growth is a bit higher at 39% due to the consolidation of Paris Society, which fits in in the hotel assets and other segments and which we acquired at the end of last year.
For Premium, Midscale & Economy, like-for-like revenue growth is 34% versus prior year, with a revenue of €1.4 billion. Management and franchise revenue was up a very healthy 39%, which is well above RevPAR, thanks to a strong recovery in incentive fees. And we’re actually very pleased with that strong growth in incentive fees in the first half. And this demonstrates the solid operational performance of the hotels across really all regions and segments.
Now, services to owners also grew slightly faster than RevPAR. And finally, hotel assets and others was up 24%, which is primarily driven by Australia. And again, the recovery took place earlier in this region, hence the somewhat lower growth in this activity.
Turning to Luxury & Lifestyle, like-for-like revenue was up 40% in the first half to reach slightly over €1 billion. Management and franchise revenue was up 58%, again significantly outperforming the RevPAR growth, driven again by the very significant growth in incentive fees. Services to owners in line with RevPAR and hotel and assets on a reported basis mainly reflects the acquisition of Paris Society.
Let’s take a closer look at M&F fees on slide 7. For Premium, Midscale & Economy, all the regions are delivering solid growth with MEASPAC leading the pack, if I may say, with 68% growth in the first half.
Growth in Luxury & Lifestyle M&F fees was also very strong at 58%, with both activities growing well above RevPAR and again driven by the growth in incentive fees. The share of incentive fees within M&F fees is actually now back to 2019 levels.
So I will now turn to slide 8. As again in the introduction, the group’s overall EBITDA in the first half more than doubled versus last year, reaching €447 million. And it’s really the combination of strong recovery in M&F EBITDA, driven by solid growth in both divisions and cost discipline on services to owners, which led to a positive €21 million EBITDA for STO as compared to an €87 million loss in 2022.
Regarding Premium, Midscale & Economy, EBITDA is up 71% on a like-for-like to €330 million. M&F EBITDA is up 33%. STO EBITDA is back in positive territory again after being negative last year due to the step up in marketing efforts that we did to support the rebound of travel. And as for hotel assets and other, EBITDA slight decreases is related to cost pressure we’ve seen in our Australian operations.
Turning to Luxury & Lifestyle, EBITDA more than doubled to €174 million in H1, driving about 50% of the growth in EBITDA for the group. M&F EBITDA jumped by 76% like-for-like with very solid operating leverage. For STO, I’ll make the same comment as for PM&E, which – with EBITDA slightly positive as well. And as for hotel assets and other, again, EBITDA mainly reflects the acquisition of Paris Society.
And finally, to point that we have held our holding costs – the cost of the holdings flat to prior year.
So, moving on to the rest of the income statement. On slide 9, we achieved a net profit of €248 million in the first half versus €32 million in the prior year.
Now I’m not going to go through all the elements of the income statement. Just point out a few highlights. And I’ll start with a share of net profit of associates and JV, which turned positive at €9 million versus a loss of €27 million in prior year. And this improvement essentially stems from our 30% share in AccorInvest. With the recovery of the European activity, AccorInvest has reported a significant result improvement as well.
Our non-recurring items were essentially not material in the first half. Net financial expenses benefited from higher interest income and cash equivalents, but was negatively impacted by non-cash items which included FX and change in fair value of investments.
Speaking about cash flow, I’ll now move to slide 10. The recurring free cash flow reached €157 million in the first half as compared to €41 million in prior year, and it’s really mainly driven by the growth in EBITDA.
So the main highlights on cash flow, I’d point out three. First one, the cash cost of net debt decreased to €28 million and that’s, again, mainly due to higher interest income as over 90% of our debt is fixed.
Recurring investments slightly increased to €80 million in the first half. For the full year, we continue to plan a level of around €200 million for recurring investments. And that really reflects the group’s acceleration in the development of Luxury & Lifestyle, which requires higher [indiscernible].
And finally, the working capital change is negative €88 million versus the negative €25 million last year and that really reflects a strong growth in the business. And as I pointed out, our working capital is seasonal, our recurring free cash flow is seasonal, and we do expect this working capital impact to reverse in the second half.
Finally, net debt reaches €1.8 billion, a slight increase versus December of 2022. And this is due to some one-off items essentially, such as the [indiscernible] advance payment reversal and the précompte tax arbitration.
So to close this presentation, before I turn the call back to you, let us move to slide 11 with the key takeaways of the first half. As I just shared with you, we had a solid momentum in the second quarter. And we expect a sound demand this summer, which is on the back of high comps. We had also a good summer last year.
And so, with this backdrop and taking into consideration the current macroeconomic uncertainties, we have raised our guidance for the full year of 2023. The growth in RevPAR is now expected at the top end of the 15% to 20% range. And our consolidated EBITDA is now expected between €930 million and €970 million for the full year.
So I thank you for your attention. And I will now open the floor for questions.
Question-and-Answer Session
Operator
We have our first question coming from Vicki Stern from Barclays.
Vicki Stern
First question is just talking about the RevPAR for the Q2 did come in a little bit better than consensus was expecting, but EBITDA was pretty much in line. So just trying to get if there’s anything to call out there in terms of phasing of cost, incentive recognitions, the first half as the second half, really just sort of the implied drop through on that RevPAR, which does seemed just a little bit lighter than expectations.
Second one on the demand outlook. Obviously, it all sounds pretty confident. Are there any cracks anywhere? And specifically, just Australia, which does seem to have flatlined now, is one of your biggest markets, so just thoughts there on the outlook and the potential to continue to see year-on-year growth in that market or any risks that you think it could turn backwards?
And then finally, when you see the trends playing through in the luxury segment in the US where some of that very extreme pricing growth we’ve seen is now starting to pare back a bit, how does that leave you feeling about the potential to sustain the current sort of very significant price increases you’re seeing in some areas? And I’m thinking more into the next 6, 12 months? Thanks.
Martine Gerow
In terms of the RevPAR growth being slightly above consensus, really nothing to signal here. As you know, we recognize incentives on a quarterly basis, on a best estimate basis. So there is some, let’s say, judgment that comes into that, but nothing underlying on that.
Regarding the outlook, as I commented, Australia did recover faster. And so, you see a softening, let’s say, of the growth of Australia, but that’s to be expected. As you come closer to the recovery, your sequential growth rate will slow down. But on the other hand, China, which is also in this region, has accelerated and still has very strong potential, given the very limited flight capacity in this region.
And I think your last question was, is there any crack in the model. Again, thus far, we see very sustained demand going into the summer and no sign of slowing down, other than the, obviously, quarter-over-quarter growth rate, which as we lap over recovery periods, will somewhat soften.
Vicki Stern
Just coming back on the first one then about that flow through to EBITDA. Is the point then that the way in which you receive the incentives or you sort of account for the incentives is more sort of back end skewed and, therefore, you sort of effectively have a better EBITDA/revenue flow through from the RevPAR H2 versus H1?
Martine Gerow
I’m not sure I would say it’s back-end loaded, but we have a really full visibility of the incentive fees at the end of the year. And so, during the year, we do estimates, and they’re obviously fairly linear in that respect.
Operator
[Technical Difficulty] is going to come from Richard Clarke from Bernstein.
Richard Clarke
Just, I guess, this is your first session as new CFO at Accor and the release looks very similar to a normal core release. Any sense of what you might change? You’ve mentioned incentive fees a few times already. Will you start systematically reporting that anything you’d like to change in the presentation?
Second question, just on the NUG, we had Hilton report yesterday. And they were saying that we’re in this kind of air pocket at the moment, but guided that NUG would accelerate by a percentage point into next year and then another percentage point eventually into the year after that, is that what you’re expecting as well, you’ll begin to kind of build back up to that 5% NUG you did pre-COVID over the next couple of years?
And then just the third question, appreciating the Potel et Chabot deal is very small, but a little bit of a departure from the message at the CMD that no M&A was being looked at, really. Are there other deals like that? This is a simplifying deal. But are there other JV assets that you want to consolidate? What’s the sort of scope of that sort of consolidation investment phase that we might see?
Martine Gerow
With respect to your first question, I have not thus far informed you as to whether there’s anything that I like to change in the earnings release. Allow me some time to do that, if at all.
Regarding the net unit growth, we do see – and we have communicated this at the Capital Markets Day. We do see an acceleration as we build in the outer years. And that will be, as you recall, primarily driven by the Luxury & Lifestyle and actually the openings that are planned in this portfolios or in this division for the next year at least is very strong.
With respect to Potel et Chabot, that’s part of the strategy that we have to simplify our portfolio of investments. And we have no plans to make further M&A deals at this point as we discussed in the CMD. And Potel et Chabot, we’re already a 37% shareholder. And this investment is part of the strategy that we have to expand our food and beverage offering, particularly in the lifestyle and the meeting and events segment.
Operator
We have our next question from Jaina Mistry from Jefferies.
Jaina Mistry
I’ve also got three questions. The first question kind of going back to Vicki’s question, but I appreciate there are some big events coming up in H2 and also the Olympics next year. How are you thinking about reinvestments and potential for more marketing required to really capture on these events and growth in H2 and H1 next year?
And just on the back of that, how should we think about the sensitivity of EBITDA to RevPAR growth? Can you give any guidance as you used to in the past around 1 percentage point of RevPAR translates to x of EBITDA?
And my second question is around the shape of growth really for next year. We’ve spoken about net unit growth being a bit more challenged versus history. But macro aside, do you think that price growth can offset any weakness in supply? Anything you can say to help us think about the shape of growth would be very helpful.
And then, lastly, in terms of your pipeline, do you have any visibility around what proportion of your pipeline is under construction today?
Martine Gerow
With respect to the RevPAR and the big events and whether we need to invest more into marketing, we’ve invested what we need to invest in marketing. As you know, there was a big investment that was made last year and we’ve made a strong commitment and met that commitment in the first half of STO being positive. So we will remain on that path.
In terms of the shape of the growth, as you may recall from the Capital Markets Day, what we’ve guided in the medium term is a RevPAR growth of 3% to 4% for the group. So we have, in some sense, factored in the fact that the recovery is obviously well underway, and the rate of growth will slow down as a matter of fact. We also have a 3% to 5% net unit growth in the medium term as per the Capital Markets Day. So, when you combine the two, it still gives you a revenue growth, which is in the mid-single digit.
In terms of the pipeline, I can’t comment on what is new construction versus what is actually under development, but what I can say is that our conversion rate remains very, very strong. And that’s the strength of the group because of the preference, but also the depth of the portfolio of brands. And our conversion rate is above 50% for the pipeline, which is a very, very strong conversion rate.
Jaina Mistry
And then just going back to the first question, do you have any guidance around the sensitivity of EBITDA to RevPAR growth today?
Martine Gerow
We don’t give sensitivity on RevPAR. There’s many elements that go into this. And so, this is not a data that we communicate on.
Operator
We have our next question from Leo Carrington from Citi.
Leo Carrington
If I could follow up on some of the earlier questions – on Richard’s question on the unit growth progression, the pipeline is, obviously, stepping on very well. Can you give an indication on how the signings are progressing within that? I assume this is signings driven. And how do the pipeline signings tie in to the pressure on openings for the rest of the year? Are you finding projects are sitting in the pipeline for longer between signing and ground breaks, and so we can expect a bit more of a pipeline build into H2? Anything on signings would be really helpful.
Secondly, and tying into this theme, if we can get some more color on the portfolio conversion deal in Japan, how that deal originated, what the implications are for the business in that region, and more broadly, the scope for further similar deals.
And then, lastly, in terms of the credit rating, I know it’s out of your control, but is it reasonable for us to expect that the ratings agency will revisit the ratings again this year? [indiscernible] I’m conscious of the performances, Accor’s performance is tracking well, well, ahead of the S&P assumptions from earlier this year.
Martine Gerow
With respect to the pipeline, we don’t see a, I would say, longer conversion time between kind of signing and opening. As I mentioned, we do expect a very strong opening in the second half and our conversion market is strong. And actually, what we see is a growth in the pipeline in the next 6 to 12 months.
With respect to Japan, what that allows us to do is to double the number of properties we have in Japan. Japan is a really, really good market. It’s a market in which our incentive fees, in particular, are very strong. So we’re quite pleased with this deal.
And with respect to the credit rating, it’s not entirely in our control. But we do have a regular dialogue with the agencies and we were obviously planning to meet with them following the release of our first half earnings, although that will be post summer. And we will take it one step at a time, but strong results in the first half should certainly help.
Leo Carrington
If I might just follow up on the second one on Japan. Does the doubling your size there mean potentially an ability to grow more in the country going forwards, given more scale? Or what might the implications of the doubling of size be? And then just very briefly, on scope for further deals, similar deals, not necessarily in Japan, but elsewhere?
Martine Gerow
Clearly, having a base that’s twice the size gives us further growth potential in Japan, and this is actually when I was talking about the region for MEASPAC. Japan, we saw good growth in Japan cities, in particular, in the first half. They do tend to travel. They have high purchasing power. This is actually an objective we had to significantly grow our presence in Japan. So, again, we’re quite pleased with the deal. Mercure is now a strong brand.
The other market that we’re looking at is India. I think I said – as I commented on the Capital Markets Day, this is a market that has really, really good growth potential, given the emergence of the middle class and very good growth potential for us.
Operator
Our next question comes from Jarrod Castle from UBS.
Jarrod Castle
I’m going to take slightly opposite angle to some of the questions and just revisit, basically. Firstly, just on your pipeline, actually, it’s gone backwards. It was 216,000 rooms at year-end, and then that was 214,000 at Q1. It’s now 213,000. So do you think you’ll finish the year up on last year’s pipeline? Is it getting more difficult to sign people in? Are people more worried about high interest rates outlook? Just interested on your thoughts there.
And then just China, there’s been obviously flags around slowing China or not recovering at the same pace as people expected. And I think some of the recent RevPAR data has also been a bit lackluster compared to kind of expectations at the very least. So, are you seeing anything there recently? I’m talking about like May, June or July.
And then just lastly, anything you can say on conversations about disposals at the moment such as AccorInvest?
Martine Gerow
On the pipeline, our pipeline at the end of June is actually 217,000. So, it is up versus where we were at the end of 2022. We haven’t seen yet signs of slowing down in China. As you know, we have a very strong master franchise in this area.
And for your last question, which was on AccorInvest, there’s no change to the communication we’ve had before on this subject. I think the priority for AccorInvest is really to dispose of some of its assets and refinance instead.
Operator
Our next question comes from Jaafar Mestari from BNP Paribas.
Jaafar Mestari
I’ve got three if that’s all right. Firstly, on incentive fees, can you remind us when exactly they reached 35%. What I mean by that is they’ve been fully recovered, but for exactly how long are they still a tailwind into Q3 and Q4. Or has it been at max levels for more than 12 months already?
On operating leverage, I appreciate you do not have a communicated RevPAR sensitivity. But if I take the midpoint of guidance, you’re now expecting 2 or 3 points better RevPAR for the full year. And in terms of EBITDA, you’re expecting about €10 million better. I’m sure you don’t want us to think that the RevPAR sensitivity is only €4 million per point of RevPAR. So, could you maybe talk about some of the other [Technical Difficulty], I think you’ve alluded to, or are you just baking in a wider range of macro scenarios?
And then lastly, could we get a short update on refurbishments and on the rollout of revenue management systems because, at the CMD, I think there you sounded like two very exciting drivers of RevPAR that aren’t just macro. So curious if you’re doing more of this, if you’re pausing refurbishments for the summer and resuming later? Or is there a lot you can do before the end of the full year on those two points?
Martine Gerow
On incentive fees there back to 2019 levels as we indicated, that being said, they’re very much related to the operational performance of the hotel. So, what they represent as a percent of M&F fees is important, but if the hotel continues on strong, the growth in that portion of our M&F fees will continue to improve. So you really need to take both into consideration.
With respect to the RevPAR guidance versus the EBITDA guidance, so RevPAR guidance was between 15% to 20%. Right? So, the midpoint was 17.5%. We’re guiding now towards the top end of the guidance. And we have raised our EBITDA guidance, and I think we’ll be able to give you a view on that as well as we publish our H2 results.
The summer is an important quarter for us. And so, we’ll keep you updated at that point in time if that is relevant to do so. But we feel that the guidance we put out right now is probably a good balance, as we see it today.
Jaafar Mestari
And then just this last question on anything micro you can do to support RevPAR. At the CMD, you brought up refurbishments and you brought up revenue management systems? Is that something that’s making a ton of progress in 2023? Or is that more medium term?
Martine Gerow
On the RMS, this is more of – obviously, we’re starting to deploy that. But this will be more of an impact in 2024. And the refurbishment, we continue to do that. It’s more of a three year program. So that should have an impact, I would say, on a relatively consistent basis. No big one-off, but really consistent support of RevPAR.
Operator
Our next question comes from Andre Juillard.
Andre Juillard
Congratulations for the strong result. Two questions on my side. First one is on the type of clientele. We saw that the recovery first came with the leisure clientele. What do you see on the corporate side, and especially the MICE segment? Do you see some big events being back especially in some hotels, such as Pullman and so on?
Second question around the split of RevPAR by regions. The recovery in China is a little bit more painful than what we could have expected initially. What do you see in the rest of Asia? Do you see that the recovery is taking place month after month or not? And in terms of pipeline, the pressure is improving on the pipeline almost everywhere. And Hilton confirmed that yesterday, as already mentioned. Could you give us some more quarter about the split by region of your pipeline?
Martine Gerow
With respect to the user leisure versus corporate and MICE, so, yes, we definitely see a solid growth in corporate and event. In the MICE space, in particular, we’re seeing a very good recovery of events, which is obviously going to benefit hotels such as Pullman, but also Fairmont, which has a material MICE activity.
In terms of the RevPAR, China, again, is growing very strongly, which is to be expected, given where they are on the recovery curve. This is primarily domestic China because the inbound traffic is still fairly restricted. So there is further growth potential there.
With respect to the other Southeast Asian countries, we’ve got good growth as well. And I mentioned, the big cities. For example, Thailand is doing very well in this region. Australia is really the one that MEASPAC – where the growth is a bit more subdued. But again, Australia recovered faster. So it’s just a different point on that recovery curve.
And I think you had a question on pipeline by region. Where we see particularly strong pipeline is in the Asia Pacific region and the Middle East, in particular. Those two regions are quite important in our pipeline development.
Operator
Our next question comes from Simon Lechipre.
Simon Lechipre
Just one for me, follow-up question on the operating leverage. And I’m sorry if I missed some of your previous comments. But I think the management and franchise EBITDA margin for the PME division was declining in H1. I’m a bit surprised given the strength of RevPAR. So, what’s the reason for this? And do you expect margin for the year for the division to improve year-on-year?
Martine Gerow
Two comments on that. One is, you have to remember that, when you compare it to the first half of 2022, I’m not speaking about services to owner, STO part, because we did make an investment in that area, but with respect to the M&F cost base, we entered 2022, obviously, with Omicron. So we were very, very prudent – not to say very cautious – in terms of growing up cost base because there was uncertainties with respect to them. So, you start from [indiscernible] cost base and if you were to look at the drop through for M&F in 2022 versus 2021, you would see that it was a very, very significant drop-through. So you had that baseline effect when you look at M&F for PM&E in the first half, and we do expect this effect to essentially reverse in the second half and the margin to improve as compared to the first half.
Simon Lechipre
So, for the specific division, 2023 margin should be pro rated to 2022 or…?
Martine Gerow
Yes. Slightly.
Operator
Looks like we don’t have any other questions. I’d now like to hand over back to the management for the closing remarks.
Martine Gerow
Thank you. And thank you for your questions. Thank you for attending. And I wish everyone a good rest of the day and a good summer. And we’ll speak again in the fall. Thank you.
