Compass Group PLC

LSE:CPG

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Compass Group PLC First Quarter Trading Update Call, hosted by Dominic Blakemore, Chief Executive Officer; and Karen Witts, Chief Financial Officer. [Operator Instructions]I would now like to hand the call over to Dominic Blakemore. Sir, you may begin.

[Dominic Blakemore, Group Chief Executive & Director]

Thank you. Good morning, ladies and gentlemen, and thank you for dialing in. As usual, I'm joined by Karen Witts, our CFO. I'm sure you've read this morning's statement. And before opening the call to questions, I'd like to say a few words on our performance and outlook.We've had an encouraging start to the year. We continue to perform well and to deliver industry-leading growth and margins, whilst at the same time, we continue to invest in the business to drive long term, sustainable, profitable growth. The cost action program we announced in November is progressing as planned and delivering the savings to offset the anticipated volume declines in our European business. For the full year, our guidance is unchanged. We expect to deliver organic growth around the midpoint of our 4% to 6% range with stable margins. Now looking at our regions. Our strong momentum in North America has continued. The business delivered 7.5% organic growth in quarter 1. This was thanks, in particular, to good growth in B&I, Healthcare and Education. Our European performance was in line with our expectations. Organic growth was flat due to the anticipated softness in B&I volumes and the less favorable Sports & Leisure calendar. If we normalize for the Sports & Leisure effect, our underlying growth is just above 1%. We also saw a good performance in Turkey and Central Europe.The impact from the strikes in France wasn't material, reducing organic growth in Europe in the first quarter by around 20 bps. Our businesses in Rest of World grew 4.7% with good performances in Australia and LATAM.I'm pleased to announce that the acquisition of Fazer Food Services was completed at the end of January. This results in the payments of initial consideration of approximately EUR 420 million. We're excited that the Fazer colleagues are joining our business, and I'd like to take this opportunity to publicly welcome them to the Compass family. We also made some small bolt-on acquisitions in the quarter for a consideration of GBP 40 million, further strengthening our position as the global leader in food services. So in summary, Compass continues to perform strongly with the excellent growth in North America and improving Rest of World more than offsetting the expected difficult volume environment in our European B&I business. We continue to be excited about the significant structural market opportunity globally and the potential for further revenue and profit growth combined with further returns to shareholders over time.Thank you. And now we're very happy to take any questions.

[Operator]

[Operator Instructions] We will now take our first question from Jamie Rollo from Morgan Stanley.

[Jamie David William Rollo, Managing Director]

Three questions, please. First, it'd be very helpful to get the split of the 5.3% between like-for-likes and net contract gains just broadly, given the sort of slowdown we saw in net contract gains in H2 last year.Secondly, clearly, it's very good performance overall versus the competitors that have reported so far in Q1. I'm just wondering, is there any sort of change in the competitive environment you've seen, particularly in U.S. Healthcare and Education? There's some sort of weak spots called out by a couple of your bigger peers there.And then finally, it would be helpful to get a bit more color in Europe, maybe breaking out the main geographies and perhaps some of the verticals.

[Dominic Blakemore, Group Chief Executive & Director]

Jamie, thank you for the questions. If I take the first 2, I'll pass the third to Karen on Europe. First of all, with regard to the 5.3%, at a quarter, we don't give the split in any more detail. But what I would say is the trends of both new and like-for-like continue in the first quarter as we saw in 2019. And the one thing I would say is that you just have to remember that our new business was flattered in 2018 and the first half of 2019 by the very strong, [ hastier ] growth. So I think that, that touch of slowdown in new in the second half of last year can largely be attributed to that. Second, in terms of comparison to competitors, I think we see no real change either by market or sector, so conditions remain very much the same.And then on the third question on Europe, just handing over to Karen.

[Karen Witts, CFO & Director]

Okay. Jamie, well, we don't really break down into the individual countries or sectors. But just to reiterate what Dominic has said about the overall group, what we're seeing is really the trends that we said we would see from the year-end. So from a sector perspective, at the end of last year, we called out the volume weakness in the B&I sector. And that's what we're continuing to see in the way that we described at the end of the year. On a country-by-country perspective, we've got Turkey doing well, the Nordics doing well, Central and Eastern Europe, and then as we had pointed out that, that softness related to B&I, which is primarily around France, Germany and U.K.

[Operator]

We will now take our next question from Vicki Stern from Barclays.

[Victoria Jane Lee Stern, MD & Equity Analyst]

Just firstly, your comps are going to progressively ease across the next few quarters. And I guess you'll also get a little bit of help from the leap year in Q2. Just is there anything coming up in the calendar or any other reasons, like coronavirus or anything else, why you'd expect at this stage you can't at least hold similar levels of organic growth as we go out through the rest of the year? And secondly, on margins, so I guess both the Fazer deal and the disposal, just disposal is slightly dilutive to margins this year. So are you still confident you can mitigate both of those and achieve flat? And if so, aside from the European restructuring program, can you just remind us of the other key areas of cost improvements that are helping you to support margins?And then just finally, back on Europe, obviously, you gave that helpful kind of anecdotal commentary back in November about some of your key clients, some of the restructuring programs that they were seeing at that time. Any other sort of anecdotal commentary as we think about what the outlook might be for volumes in Europe?

[Dominic Blakemore, Group Chief Executive & Director]

Yes. I'll take the first and third questions and then pass the margin on M&A over to Karen. Firstly, just in terms of whether comps are easing and leap year, I mean, first, I think it's fair to say, look, it's a very encouraging start to the year, but it is only a quarter. As we know, there's lots of things going on with the strikes we've seen in Chile and Paris and the potential impact of the coronavirus. But in the round, we don't see those particularly having a material impact. We are holding guidance today, but it's been an encouraging start. So we're pleased with where we are. And one of the things I would just call out is specifically on the European performance. Again, I said in the -- as I spoke upfront, if we normalize for that Sports & Leisure calendar, we think the growth in Europe was closer to 1%, so towards the higher end of our guidance on an underlying basis. On the third point on Europe and what we're seeing, I mean it's very, very much in line with what we told you at the end of last year. The volume trends in the first quarter are similar to those we saw in quarter 4. The impacts are within the sectors and subsectors of B&I that we anticipated. We feel confident at this point that what we're seeing is very much in line with our expectations, that the restructuring actions that we're taking are allowing us to offset the profit impact. And we're very, very focused on where our opportunity is for future growth within the region.

[Karen Witts, CFO & Director]

Yes. I think it's a combination of Dominic and Vicki have picked up most of that. Yes, Vicki, as we said, Fazer slightly dilutes the margins in the first instance, but we've taken that into consideration in our full year guidance just as we've taken into consideration any weakness in B&I volumes. That's what the cost actions are there to offset. And then just in terms of what else have we got that might be supporting margins, we invest in what we call our 3 little Ps. So we're doing work on purchasing, our productivity and price.

[Operator]

We will now take our next question from James Ainley from Citi.

[James Robert Garforth Ainley, Director and European Hotels and Leisure Analyst]

Three questions from me as well, please. First one is, could you just comment more broadly on some of these geopolitical headwinds, I'm thinking the fires in Australia, coronavirus and so on? And what, if any, impacts you're seeing on business on the ground in those locations? Secondly, what food cost headwinds have you've been seeing from, again, from the more recent developments like African swine flu and, again, the Australian bushfires?And then third, the like-for-like volume environment was very strong last year, particularly in North America. Has that continued into the current year?

[Dominic Blakemore, Group Chief Executive & Director]

Okay. Again, let me take the first and third, and then I'll pass the second on to Karen. Thank you, James. With regards to the geopolitical headwinds, if I just sort of take each in turn, we've obviously -- we have a reasonably small business in Chile, and we've seen the demonstrations there. Those have now subsided and at least for the time being, and all of the impact we've dealt with within the quarter. The strikes in Paris is, again, within our quarterly guidance and within the 20 bps of impact on Europe that I talked to you today. And again, at least for the time being, that appears to have subsided. We've seen little impact from the bushfires, fortunately, on the business as of now.So the bigger issue is obviously the impacts of coronavirus. And I think it's fair to say, first and foremost, our #1 priority in any situation like this is with the health and safety of our employees and our consumers. So we're working very, very hard right now with a dedicated steering group that are managing the situation on a daily basis. I think it's really important also to size it for you. So our China and Hong Kong business in combination is less than 0.5 point of group revenues. So it is a very, very small part of our global portfolio. So for now, any impact we anticipate would be immaterial and has no impact on our guidance for the full year.However, again, we do remain cautious in the event that we see a secondary impact in other markets at a point in the future. So we're very careful around that. But in the round, we don't see any of those as we see them today having an impact on our guidance, which remains unchanged for the full year. With regards to the like-for-like volumes in North America, yes, we saw a good performance last year, and we continue to see that in the first quarter.

[Karen Witts, CFO & Director]

And then on your question about food cost headwinds, well, I think at this stage, it would be too early to predict what the impact of any of these geopolitical-related issues might be, but we are used to dealing with food cost inflation. And indeed, we have been dealing with the impact of the Asian (sic) [ African ] swine flu for some time now, and that's actually one of the reasons why we have these productivity initiatives in place.

[Operator]

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

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

Three as well. It seems like the restructuring program is going to plan. I just want to kind of check in terms of the time line for its completion, are you still on track there as well as the cost of completing the restructuring program? Secondly, it seems like in North America, B&I is doing well. Is that across all industry groups? Or is there some, in particular, which are doing well compared to others?And then just lastly, M&A, you've done a little bit during the current quarter. How should we think about the pipeline for that going forward?

[Dominic Blakemore, Group Chief Executive & Director]

Okay. So I'll let Karen come back on the restructuring program when I've answered the other 2 questions there, Jarrod, if I may. So first of all, North American B&I, I mean I think it's a similar trend to what we've seen over recent years. Our B&I success is broad-based. It's across the multiple of our B&I sector and subsector brands as well as canteen vending business. In terms of particular industry sectors that we're benefiting from, I don't think it will surprise you that we continue to see good growth in our tech business, in particular. With regard to M&A, we've done a few small deals in the first quarter, principally in North America. Right now, there remains an attractive pipeline across the group. And we will continue to pursue attractive foodservice opportunities where we see them. As we've always said, it's a lumpy pipeline. It's difficult to predict, so I think we just have to leave it at that. But we remain very focused on bolt-on opportunities and of the size and order that you would be used to.

[Karen Witts, CFO & Director]

And the restructuring is going to plan. We started it last year. We'll be broadly finished in -- well, it's certainly on track both in terms of the time and, indeed, in the costs. And it's something that I monitor on a very regular basis.

[Operator]

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

[Richard J. Clarke, Research Analyst]

Three questions, if I may. Earlier this week, we had ARAMARK calling out some weakness in university enrollment, the sort of level of employment. Is that something you're also seeing, some weakness in the volumes in universities?And then just a couple of questions on labor. We have the news that your Google employees are unionizing about, I think, about 1-and-a-bit percent of your U.S. workforce. Is that a wider trend, an impact on cost inflation there? And equally, some of the new predictive scheduling legislation in the U.S. as well sort of removing the equivalent of zero-hour contracts, is that having any impact on your business? You obviously kind of moved to a more flexible workforce. Is there anything you need to roll back on that?

[Dominic Blakemore, Group Chief Executive & Director]

Thank you, Richard. I mean, first of all, we're not seeing any weakness in the volumes in our higher ed sector. I presume the question was specifically directed to North America, so that is something to recognize -- it isn't something we recognize. And then secondly, with regard to the unionization of workers, we've been working on the particular situation that you referenced with our client, with the unions and with our employees for some time now. We've come to a successful outcome and -- as part of a cost-plus contract, something which is funded. So it is something which we're pleased with, with the resolution. With regard to any trend towards unionization, I think it's actually slightly the reverse. If you look at the trends over time, we see a slight reduction in the levels of unionization of our workforce across North America. So again, isn't something which we would recognize as a particular headwind. And then with regard to flexibility of labor, yes, there is changes to legislation, there are in many of our markets. I think it's incumbent on us to try and find innovative solutions, one of which is that we're developing our own sort of internal employment agency, which gives us greater flexibility with temporary labor and in a manner which I think is very appealing to our employees. So again, I think it's about how do you find those innovative solutions.

[Operator]

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

[Jaafar Mestari, Analyst]

I've got just one question, please, in terms of your B&I volumes in Europe. Other than just the general macro environment, last year, you made some client-specific comments. You mentioned large layoff plans at some of your large sites. I was just curious how you see those plans progressing at your clients? And in other words, does the Q1 '20 performance reflect the totality of those and layoffs, is it done? Or do you expect to see those client layoffs increase in the next quarters?

[Dominic Blakemore, Group Chief Executive & Director]

Thank you, Jaafar. I mean as you would expect, we built our plans on the basis of the information that we had to hand. As we've said today, the volumes are trending in line with our expectations. Our restructuring is on track. So there are no surprises there. And the guidance we've given for the full year would encompass our expectations on a full year basis.

[Operator]

[Operator Instructions] It appears there are no further questions, so I'd like to hand the call back to our host for any additional or closing remarks.

[Dominic Blakemore, Group Chief Executive & Director]

I'd just like to say thank you very much for dialing in today, and thank you for your questions. And we look forward to seeing you at the half year results.

[Operator]

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