Compass Group PLC

LSE:CPG

Earnings Call Transcript 2019-Q1

[Operator]

Hello, and welcome to the Compass Group Quarter 1 Trading Update Call.[Operator Instructions] Just to remind you, this conference call is being recorded.Today, I am pleased to present Dominic Blakemore, CEO; and Palmer Brown, Interim Group Finance Director.Please go ahead with your meeting.

[Dominic Blakemore, Group Chief Executive & Director]

Good morning, ladies and gentlemen. Thanks for -- thank you all for dialing in.With me this morning, I have our Interim Group Finance Director Palmer Brown.I'd like to say a few words about our performance and outlook before opening the call to questions.We're really pleased with the performance this quarter. Group organic revenue growth was 6.9% for Q1, with good performances across all 3 of our regions. This was driven by strong levels of new business wins, continued good retention rates; and bolstered by the impact of the new U.K. defense contracts and a positive sporting events calendar. Excluding these last 2 factors, our underlying growth was around 5.5%. We continued to generate efficiencies through our management and performance program, which allowed us to offset inflationary headwinds.Now turning to the regions. In North America, organic revenue was up 8%. Growth was very good across all sectors and particularly in vending, Business & Industry and Sports & Leisure, the latter of which benefited from the timing of certain events. Excluding these one-off revenues, our underlying growth in North America was approximately 7%.Europe reported 6.4% organic revenue growth in the first quarter, reflecting continued momentum from new business wins and notably the significant impact of defense contracts in the U.K. which we mobilized in the second half of last year, a favorable calendar in Sports & Leisure as well as continued good growth in Continental Europe. The underlying performance was more like 3.5% in the quarter.In Rest of World, organic revenue increased by 2.8%, with ongoing good performance in developing markets partially offset by the runoff of the last major offshore construction project in Australia. Excluding Offshore & Remote, our growth was 4.5% in the region.On acquisitions, we spent GBP 197 million during the quarter on acquisitions in North America. Targeted and disciplined bolt-on acquisitions focused on our core food offering strengthen our capabilities, and there's a good pipeline of opportunities across the group.Currency movements, compared to the same quarter last year, had a positive translation impact on revenues of GBP 107 million and on profit of GBP 10 million. If current spot rates were to continue for the remainder of this year, foreign exchange translation would positively impact 2018 revenue by GBP 508 million and our operating profit by GBP 43 million.So in summary, we've had an excellent start to the year. We now expect to be slightly above the middle of our target 4% to 6% organic growth range for the full year and with some modest margin progression. In the longer term, we remain excited about the significant structural growth opportunities globally and the potential for further revenue and margin expansion.Thank you, and we'd now be happy to take your questions.

[Operator]

[Operator Instructions] We will now take the first question from Vicki Stern of Barclays.

[Victoria Jane Lee Stern, MD & Equity Analyst]

I've got 3 questions. Just firstly, on Europe, obviously quite a nice step-up in the underlying growth rates, I think, coming from the Continental Europe in particular. Just who were you taking share from? Is it share gains? Where is the extra growth coming from? Secondly, on margins. I think you previously used to call out what quarterly margins were running at. Just any commentary on how margin is progressing so far this year. And then just finally, on the acquisitions, just perhaps a few more details on what you've acquired in Q1 and what sorts of prices and what sorts of margins we should have in mind.

[Dominic Blakemore, Group Chief Executive & Director]

Thanks, Vicki. I'll take the Europe question, and then I'll hand over to Palmer for the margin and M&A. Yes, I mean, first of all, we're really pleased with the overall European performance. And I think it's worth being really clear on the numbers there. 6.4% is really exceptional for the quarter in Europe, including the U.K. And as we said, that is driven by nearly 14% growth in the U.K., half of which is coming from the defense contracts and the other 7% will be benefited a touch by Sports & Leisure. So we think that the U.K. growth rate is sort of closer to 5% to 6% underlying, which is still a good run rate, but I just want to make sure we caution that the 14% is purely exceptional. In terms of Continental Europe, we're growing at 2.2%, and that's on the back of 2.5% in the fourth quarter of last year. So we're really pleased with that continued momentum over 2 quarters. And frankly, that's a couple of points better than we've done for quite some time in the Continental European region. I think the single biggest delta of improvement is retention, where we're seeing a stronger retention rate across the region. And obviously, we've been working very hard and putting measures in place for some time now, which should result in that improvement. And we'll continue to focus on it. I think the other maybe other point also is coming from better new business in some of our Northern business units Benelux, Nordics, DACH. And I think that's being largely driven by taking a little bit of share but also some first-time outsourcing as well. So I think it's a balanced picture. And I don't think it's one that's being predominantly driven by taking market share. I think it's all factors that drive our net new business. Over to Palmer for the other two.

[Palmer Brown]

Yes. On the margin point, I don't think anything has really changed from what we're seeing. We're still excited about the margin opportunities we see across the group. We've just gone through most of our business units over the course of the last 3 or 4 months. There are opportunities that exist across the patch, but at the same time we've got a number of headwinds we're dealing with. We've got inflation in most countries. Some of those countries are pronounced. We look at the U.K. in particular on both the food and the labor, the labor within the U.S. and some other pockets as well. There are uncertainties that exist across the globe as well. And when we look at our model, of course, with these higher growth rates we -- the mobilization and startup costs, so it's another something we have to overcome. That said, I think we still feel comfortable that we are seeing some margin progression for the full year. It will probably be a bit second-half weighted, but in the grand scheme of things we remain excited about the opportunities and thus far we've been able to combat the headwinds. On the acquisitions question, thus far, the -- all the acquisition spend in the quarter was in North America. We bought a couple of vending, office coffee and micro market companies in a similar vein to what we've done in the past. Similarly, we bought a couple of Foodbuy-related companies, again similar to what we've done in the past. We view both of these as sort of core business for us, key drivers for our growth going forward. We are excited about the pipeline both within North America and outside of North America. I think we've become more confident about our ability to do acquisitions outside of North America. We have seen some good opportunities there, and I think we want to be opportunistic where those opportunities arise. On the margin question regarding the acquisitions, I think, keep in mind we've got the acquisitions and the disposals happening at the same time. There's a bit of a timing issue as to when these will occur. As we look at it, we expect them to be roughly neutral when it all washes out, but there may be a little bit of to-ing and fro-ing month-to-month or quarter-to-quarter. But largely neutral once it all washes out.

[Operator]

[Operator Instructions] We will now take our next question from Jaafar Mestari of Exane BNP Paribas.

[Jaafar Mestari, Analyst]

A couple of questions from me, please. And first one is just following up on this point about disposals and acquisitions, which as you said should be broadly neutral to revenue once it's all reflected. Can we just maybe discuss the cash side of that? And do you think the disposal proceeds for the full year could cover a large part or a material part of your M&A spend? Or are you going to be a net buyer, net seller? And then my second question is on the U.S. health care market, which you don't really talk about in today's comments. Competitor Sodexo last month flagged uncertainty around U.S. health care, contract renewals this year looking a bit tough. Do you feel like this is market wide, something you're also noticing, big clients, higher expectations? And -- or is your impression that this is maybe Sodexo specific and may even give opportunities to take share in U.S. health care?

[Dominic Blakemore, Group Chief Executive & Director]

I'll handle the North America health care and then I'll pass back to Palmer on the margin question -- on the cash question on M&A, Jaafar. So I think -- to cut to the chase, I think it is specific timing on individual contracts. We had a very nice run in health care, as you know, over the last 18 months. We expect growth in health care to moderate a touch as we go through this year, but we still see lots of good opportunity. And I think particularly there are moments in time when a group of contracts may come up for rebids simultaneously, and I think that can cause some pressure. We don't see that within our portfolio today. Separately, I think it's probably worth saying that we talk a lot about the negative side of the labor pressures that we've seen in the U.S., both inflation and availability of labor. I think that can also be, as we've said before, a positive for outsourcing. I mean increasingly it becomes a driver of the decision to outsource, particularly first-time contracts. So I think there is an opportunity in a number of our sectors as a result of that as well.

[Palmer Brown]

On the acquisition point, again it's there's a bit of timing issues and unpredictability that's built in. One of the things that's very clear is that we have done the GBP 200 million of acquisitions in the quarter. So that's done and dusted. We have a couple of disposals that should happen in the first half. I think -- if you look forward to the full year, I think it's a reasonable expectation that we will be a net buyer just given the timing of the way things will happen. The disposal program will continue into -- [ particularly in ] '20. We're probably roughly 40% of the way through it now, lots of good activity that's happening. And I think -- just given the start of the year, where we are on acquisitions and anticipated timing, I think it's a reasonable expectation that we'll be a net buyer. The quantity and magnitude of that remains to be seen.

[Operator]

We will now take our next question from Jarrod Castle of UBS.

[Jarrod Castle, MD, Head of the Travel & Leisure Sector and Co]

Three from me, one just looking at some of the results. You mentioned positive sporting calendar. And I just wanted to get a view if you think this continues during the year or if it's just a shift between quarters. Two, you gave a bit of color on retention rates, but would -- can you give a bit of color maybe per geography and what you're seeing? And then lastly, U.S. shutdown, if that's had any impacts on your business in the U.S. during the current quarter.

[Dominic Blakemore, Group Chief Executive & Director]

Thanks, Jarrod. Let me pick up on retention rates, and then I'll hand to Palmer on the other 2 U.S.-related questions. So firstly, on the retention rates, I mean, look, we continue to trend in North America at the level of retention that we achieved at the end of last year. I think we've seen an improvement in Europe of a point or so, let's say, but conversely in Rest of World we've obviously got the runoff of some big business which is just going the other way a touch. So in the round, I think we're slightly better on a group level, but a quarter's retention is a fairly imprecise number. I think the good news is we've got reasonable confidence that our retention rates will continue to trend at the levels you've seen for the group as we look forward.

[Palmer Brown]

Jarrod, on the sporting, Sports & Leisure calendar question, I think there are a couple things that are happening there. One is a bit of a just a shift within the schedule in terms of our teams compared to prior years. So we may have gains that have fallen earlier into the schedule, whereas they would have been later last year. Given that and the lumpiness of the sporting events, 1 or 2 gains can cause a bit of a difference. You also have a bit of onetime events that can distort things a bit. So for instance, in North America we operate in a lot of arenas where the NBA and the hockey teams play. Those are also the venues where most of the concerts occur. And so concert schedules and calendars can cause a bit of inflation compared to prior years. So we've had a bit of that. The 2 countries where we're seeing this primarily are in the U.K. and the U.S. And in fairness, those are the biggest countries we have in the Sports & Leisure sector. Your question regarding the U.S. shutdown: We do have some business with the U.S. government. It's not a lot. The business we do have is deemed to be nonessential by the U.S. government, which means that in a shutdown phase those businesses are in fact shut down. So it's not military-type business that we continue to operate. That being said, the impacts that we've had thus far are not material, and we don't expect them to be material even if the shutdown commences once again.

[Operator]

[Operator Instructions] We will now take our next question from Tim Barrett of Numis.

[Timothy William Barrett, Leisure Analyst]

I had one specific thing on Europe and then one bigger picture question. On Europe, I think, at the end of last year, we were talking quite a lot about the U.K. being in quite pronounced negative volume territory. And if I understood it, you're now saying 5% to 6% underlying organic, but can you just try and -- could you marry the two up for us and talk about the trend? And then secondly, in the past, I think you've said at the top end of your organic guidance range it will be more difficult to eke out margin progression. And is there something different about this year?

[Dominic Blakemore, Group Chief Executive & Director]

Yes. Thanks for those questions, Tim. I mean, firstly, on Europe and the U.K., yes, you're absolutely right. I mean we haven't talked on this call about Brexit, and it's probably worth -- just a moment on how we're seeing that because I think that's the driver of the underlying question. What we saw in the first quarter is very much a continuation of what we talked about at the end of last year. So we're seeing higher inflation. We're seeing a slowdown in some client decision making and hiring freezes. And that and, we believe, weakened consumer sentiment has resulted in negative volumes, which have continued through the first quarter in the U.K. So where we've got those direct consumer volumes effectively where it's MAP 2 business to the consumer, we've continued to see negative volumes of the order of 3%. That has also largely been offset by price, as the actions that we've taken have now flowed through in full. So our like-for-like within the sort of MAP 2 consumer segment is broadly neutral, so when I talk to 5% to 6% organic growth in the U.K., that's largely net new business coupled with our sort of Sports & Leisure volumes as well. So again, in the round, we believe at this point that we are mitigating those impacts. The actions we took last year are allowing us to mitigate both inflation and the negative consumer volumes. And we're obviously lapping the actions we took in the first half of last year, but of course we're incurring the mobilization on the strong growth. So sort of in the round, the U.K. margin, that was broadly flat, but we are still seeing those negative consumer volumes. In terms of the Compass model, as we call it, I mean, yes, absolutely. We believe that in that 4% to 6% organic growth range, if we were at the top end of it, we will expect minimal margin progression. And it's very much -- I mean, in fact, I think this year is a case study and this quarter is a case study. With the sorts of growth rates that we are enjoying and with it coming from better net new business in the main, that puts pressure on us from a sort of mobilization standpoint on the new, but also as we've always said, where we are improving our retention rates, that does have an impact on the margin of the business in the short term. So that becomes a drag in the short term on top of the normal headwinds that we face and that we're mitigating every day in the business. But in the round, we've always been very, very excited by the higher growth levels. We think it's right for the business. It gives us more volume in purchasing, more consumers to retail to and more opportunity in the medium term, but we recognize that it will put -- it means minimal margin growth. But by the same definition, at the lower end of those growth ranges we think that's when we should start to enjoy the opportunity to manage the margin up.

[Operator]

We will now take our next question from Richard Clarke of Bernstein.

[Richard J. Clarke, Research Analyst]

A couple questions from me, please. The first one, just on the U.S. You called out the strong Business & Industry performance there, not just carrying on from last year. I'm just wondering what's driving that. Is that continued strong growth in things like vending and the coffee shop offers you've got in? Or is it kind of broadly across the spectrum of the Business & Industry? And then second one, clearly you're kind of doing some M&A. Any comment you can make on what impact that might have on potential cash returns this year?

[Dominic Blakemore, Group Chief Executive & Director]

I'll let Palmer pick up on that North America B&I point, and then I'll handle the M&A one. So over to Palmer first.

[Palmer Brown]

Sure. Richard, to your B&I question, we've got a strong B&I business within North America. I think it's grown nicely over time. And when we look at the -- last year and the first quarter of this year, I think the growth that you're seeing is pretty widespread throughout the types of businesses that we have. You mentioned our vending, office coffee, micro markets business. We have seen nice growth in those segments. And that is certainly the case in the first quarter, so that momentum continues. It's still a relatively smaller portion of the overall B&I business we have, but the growth rates that we're seeing there are quite nice. I would say we continue to enjoy nice growth in the tech areas as well. The -- and I guess in some of the industrial businesses we're seeing some nice growth, so I think it's pretty widespread. I would consider our B&I business fairly healthy overall, and we remain excited about the prospects looking forward.

[Dominic Blakemore, Group Chief Executive & Director]

Great, thanks, Palmer. On the M&A point, I mean, Richard, to kind of ground us back in our sort of capital allocation framework. We still believe that it's -- that our priorities are to invest in the business. We said that our investments through CapEx will be up to 3.5%. And that's the guidance we maintain for this year, especially as we're enjoying the higher growth rates. Secondly, I think we've got a renewed focus on M&A but more particularly outside of North America. We think there's a very important part for bolt-on, so nontransformational M&A to play for us as a group. There are some exciting opportunities in food-only businesses which add scale, great management and good brands; and that's the pipeline of opportunities we'd like to pursue. We will prioritize CapEx in M&A. To the extent that there is surplus capital in the balance sheet either within a year or as we look forward at our M&A pipeline over several years, then we'll consider returns. And I think it's more appropriate that we should update at the half year and the full year on exactly what that looks like, as most -- some of the disposals and acquisitions start to crystallize.

[Operator]

[Operator Instructions] We will now take the next question from Jamie Rollo of Morgan Stanley.

[Jamie David William Rollo, Managing Director]

Two questions, please. First, just on the margin guidance again. For the full year, I think for Europe you were talking about up 5% to up 10% this year back in November. I know a lot of the sales growth is new contract wins, but is that guidance still there? Because obviously, last year, margins fell quite a lot, so I'm wondering if they can bounce back a bit more to have strong top line. Secondly, on the full year sales guidance of just above 5%, I mean probably splitting hairs here, but it implies the rest of the year is going to be below 5%. I know in Q1 there were some one-offs there, but they're not going to be reversing. So are we looking at something nearer 5.5%-plus this year like last year?

[Dominic Blakemore, Group Chief Executive & Director]

Yes. Jamie, thanks for those questions. I mean, first of all, on the margin guidance for Europe I think the answer is yes. We still expect to make margin progression second-half weighted in the U.K. and contributing to Europe. So that guidance remains unchanged despite those higher levels of growth that we've enjoyed and will enjoy in the first half of the year. In terms of full year guidance, look, I mean, all I can really say at this point is we've made an excellent start to the year, but it's only a quarter. The world feels a bit of an uncertain place at the moment. We haven't talked a lot about Brexit, but that's a risk. We may see more from the government shutdown. And it's obviously been gilets jaunes activity in France which has caught on in some other European countries. So we remain a touch cautious and conservative in the outlook as a result of those factors and, I think, rightly so. And it's probably right to say as well that the quality of our second half will be predicated on our retention and new business performance in the first half of this year. And it's still early days. So at the moment, I think we feel good about slightly above the midpoint of the range, and we'll talk to you again in the half year.

[Operator]

[Operator Instructions] It appears there are no further questions at this time, so we'd like to hand the call back over to today's hosts for any additional or closing remarks.

[Dominic Blakemore, Group Chief Executive & Director]

Thank you very much. And thank you, everyone, for your questions. We'll speak to you again at the half year results in May. And have a good day.

[Operator]

Ladies and gentlemen, this concludes today's conference. Thank you all for your participation. You may now disconnect.