Compass Group PLC
LSE:CPG
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Compass Group PLC
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Welcome to Compass Group's First Quarter Trading Update. Hosting today's call will be Dominic Blakemore, Group Chief Executive Officer. Please note that this conference is being recorded. [Operator Instructions]I'll now turn the call to Dominic Blakemore to begin. Thank you.
Thank you, Josh, and good morning. Thank you all for dialing in. As usual, I'm joined by Palmer Brown, our CFO.I'm sure you've all seen today's trading statement.Before opening the call to questions, I'd like to say a few brief words on our first quarter performance and our outlook.We're really pleased and encouraged by our start to the year. Growth was driven by an improved performance across all sectors, with a limited impact from the Omicron variant in the first quarter. Almost 2 years after the start of the pandemic, the group is nearly back to pre-COVID revenues, reaching 97% in the quarter. Of course, the mix is now different. And while our accelerated new business growth and our sector strength is compensated for the loss in our base, particularly in B&I, we're still more than 15% of like-for-like revenues to return as economies reopen. This, along with record new business signings and maintaining excellent levels of retention, will sustain our strong growth momentum from prior quarters.While we're mindful of the impact from Omicron in the second quarter, nothing we see today changes our views on full year guidance. And we remain as excited and as well positioned as we've ever been to capitalize on the structural growth opportunity that lies ahead of us in both first-time outsourcing and M&A.Now let's open the call to questions.
[Operator Instructions] And the first question comes from the line of Bilal Aziz from UBS.
Firstly, just a quick query on the revenue guidance, which you've kept unchanged for now, and I appreciate there's still uncertain out there. But can you give us any state for 2Q to the extent that you think things may slow down? You flagged education, in particular. Just interested to see what you are hearing there.And number two, just within the quarter, can you perhaps break out new wins versus price impact, please? I know, Dominic, you just mentioned 15% is the revenue decline in volume terms at least.And then lastly, just on mid-term, the composition of your revenue could be quite materially different from 2019, given new business and inflation. So is there any change to how the new business ramps up to divisional average margins? Just trying to get a sense of how you expect the dilutive impact to last.
Yes. Thank you, Bilal. I'll take the first 2 questions and then pass the third to Palmer. With regard to revenue guidance for the full year and the outlook for Q2, I mean, as we said today, we're maintaining our full year guidance. We expect to see a little bit of softness in quarter 2 from Omicron across those markets, which have been lagging the U.K. And of course, we will be lapping strong comparatives in the second half of the year. So if you recall, we were growing around 30% in the second half of 2021, and we will be lapping that. So for now, we remain very comfortable with the guidance that we provided on revenue.Specifically with regard to quarter 2, we would expect the strong trends in new business and retention to continue, perhaps a touch of acceleration in pricing. I think the delta between quarter 1 and quarter 2 will really all be about the Omicron impact, which could be a few points. But as we've seen in the U.K., we hope that it's short and sharp and that we can then accelerate beyond that into the second half.With regard to your question around the breakdown of components of growth in the quarter, our new business was around 10%; our retention around 95.5%, so the net new at the 5.5% level; pricing around sort of 2.5% to 3%; and the balance would be the volume recovery that we've enjoyed in the quarter. Now obviously, that net new 5.5% really benefits from the computation against the sort of effective base. And I think we feel that it would be more like a 4% net new on a 2019 basis and that for a run rate basis. But clearly, a strong improvement on our historic rates of 3%.And Palmer, if you could add some.
Sure. Just with respect to the sector margins and new business margins, actually, when you look at it on an EBIT basis, our sector margins are fairly similar. EBITDA would reflect a bit of the capital intensity differences in the businesses with Sports & Leisure, Higher Ed, a bit of ending being a bit higher. But when you net it down to an EBIT basis, they're fairly similar. And that would be reflective in the sort of the startup and the trajectory, a bit more mobilization costs on some of the big ones, as you would expect within Sports & Leisure and higher education. But it's fairly [Audio Gap]
Our next question comes from the line of Jamie Rollo from Morgan Stanley.
Just picking up from the last point, please. So you're running at sort of 84%, 85% of 2019 on volume. And I think the last time you reported, it was around 80%. [Audio Gap] Assuming a full volume recovery, you're sort of running really in the mid-teens or 115-ish percent versus '19 without any sort of further gains from here. Just mathematically, is that what we should be thinking about as the sort of medium-term opportunity without any more gains?Secondly, given the weight of contract gains in the period, is there any impact there on margins given sort of mobilization costs and so on? I know you've not given the margins I think at this time, but should we expect to have a weaker performance in the first half than the previous guidance?And then finally, is there any change to the CapEx guidance? Because you're winning sort of more than an expected, are you still looking at 3.5% of sales still for this year?
Thanks, Jamie. Just with regards to the volume recovery, yes, your math is right. I think just kind of one caveat is, obviously, we're yet to see what impact sort of B&I hybrid working or working from home trends will have on that base volume. So that is the gross number. And we do expect, as we've always said, some dilution of that from those trends.I think the positive for us is, as we've said, we are seeing food programs being used to entice colleagues back into the office, which is very attractive for us. We're seeing higher participation than we would previously have seen and also upweighted spend. So there will be, obviously, some counterbalance to that risk, which is exciting. And as you also pointed out, right now, we're expecting sort of higher net new as we go forward towards adding to that equation. So yes, I think it's an exciting growth and revenue recovery outlook.Over to Palmer on the other two, I think.
Sure. With the new business wins being as strong as they are, we've certainly seen the mobilization costs, the drag on margins, in addition to just the normal increasing margin trajectory within the contract life cycle. This is something we talked about at the full year. We fully expected to see that this year, and it's one of the big reasons why we said that margin recovery would be strongly second half weighted. That is certainly the case. We've reiterated our guidance, including in that is the margin we fully expect to be north of 6% for the year exiting around 7%. I think we flagged at the end of the full year that we wouldn't expect to see much margin progression at all in the first half. We still see that and expect that to be the case for the first half. So it's playing out in line with what we expected.With respect to CapEx, we're still anticipating the same level of CapEx around 3.5%. Although what you hear from us in general is that we are very opportunistic. When we see opportunities, we're not going to shy away from them. So while we see that as being the case and expect that to be the case, we certainly reserve the right to take a relook.
And I think just to add to that, one further point is I think the shape of CapEx is possibly changing in touch. So sort of less upfront on signing or investment in client facilities and more around digitalization, more around delivered in operating model solutions, which is really exciting because it is an incremental CapEx. It's the same CapEx being used differently, potentially with better outcomes.
So just on the margin point, why has the high level of contract wins not had an additional mobilization cost or drag? I mean you've maintained the margin guidance. Is there other savings in there? Or what's going on to offset that?
I think it's a combination of the ongoing growth within the net new since '19. So we get a bit of volume leverage that comes through, and we're managing it well. I mean, I think that's the key thing. And that's one of the things we look at with our full year guidance. The revenue is going to be a bit difficult. That's why we're keeping a pause on things given the Omicron variant that we're facing right now. But we expect to see that margin shape really come through the way we outlined it.
The next question comes from the line of Vicki Stern from Barclays.
Firstly on use of cash. So I think back in November, you said you'd like to be spending similar levels on M&A to those you were spending before COVID. But there weren't that many deals attractive enough to get over the line. Obviously, you signed a few in the first quarter. But just more broadly, where do we stand now in terms of M&A expectations? And obviously, related to that, when you look at the balance sheet, sort of when is the right time to start thinking about share buybacks again?Second question. You also mentioned in the press release that Compass could have revenue and profit growth above historic levels in the future. Could you just sort of flesh out what you're thinking is there? For COVID, I think the guidance was 4% to 6% organic growth. Just yes, sort of how you're thinking about that might shape up in the future with some of the points you've made around net new, et cetera.And then just on net new, is this level of signings, that value of signings that you gave us back at full year is still running around the 15% ahead of 2019 levels? And is it still sort of skewed towards first-time outsourcing? And related to that, just the pipeline, is that still also looking as attractive as you should signaled back then?
Yes. Thank you, Vicki. Yes. Look, with regards to use of cash, we think there is an exciting opportunity for M&A ahead. It will likely be more of what we've done before, which will be infill in sort of small, medium-sized deals. You've seen a few things closing in this quarter. The pipeline is attractive. As we've always said, it's lumpy. But we're absolutely seeing a little bit of a moment in time where I think everything that we've experienced over the last couple of years is bringing those opportunities into the pipeline. We'll maintain our discipline, and hopefully, we'll have the opportunity to convert some of those.Again, as we've always said, our capital allocation framework remains the same. So to the extent we don't close those deals, we will look at shareholder returns. But I think the right time to update you on that would be around the half year as we've got a little bit more experience around the M&A pipeline under our belts.And then just in terms of the revenue and profit growth above historical levels, yes, I think you're absolutely right. The components of it that we're influencing is obviously net new, and we're talking about a percentage point of acceleration in our net new. And that's what we would hope and expect to be the component parts of revenue that can accelerate over time.And when we talk about profit growth, we're talking about that being driven by accelerated revenue growth, and therefore, the 2 of them operating in tandem.Palmer, any more color on those and then answer the third question, I think.
No. I think the third is just in line with what you just said on the revenue growth. The new business wins being the biggest driver, albeit we're seeing some improved retention as well. But on the new business win side, certainly in line with what we had last year. I think we had a good start to the year. Just as M&A, we said new business wins can be lumpy, and I gave you some examples of that before with some big wins.But what we're seeing on a quarterly basis, trailing 12-month basis is very much in line with which you heard from us at the end of last year. I think it's reflective of the structural opportunities we see in the marketplace and how we position ourselves. Within that, we're still seeing the uptick in the first-time outsourcing component, which we like very much. And we anticipate that, that will continue at least for the foreseeable future.
So I think the final point to add would just be in terms of future growth. It may well be the higher levels of inflation that we'll need to recover through pricing. It could also flat at the top line. I think in all form of view as to how temporary or semi-permanent that might be, and we'll have to work very hard as we've always done to recover that inflation and protect margins. But I think the real delta of improvement, which talks to the quality of the business will be outperformance in net new, and that's what we're really focused on.
[Operator Instructions] Next question comes from the line of Rich Clarke from Bernstein.
Just the first one, following on from Jamie's question about what's still to come. So the 85% you talked about was on your 2019 volumes. And then you talked about a lot of the progress you've had is on contracts you've signed since 2019. So those contracts you've seen -- you've won since 2019, what percentage are those running at now? Is there still a substantial volume improvement still to come on the sort of 2020/'21 win cohort?Second question, age old topic of inflation. You said your pricing was running about 2% to 3%. That's obviously presumably below what you're seeing in terms of input cost inflation. So maybe you can sort of confirm what you're seeing there. And maybe just some color around how you're able to absorb that, if not passing it on through price.And then the third question, just on the rest of the world. Your commentary around rest of the world qualitatively is quite good on DOR, but the number relative to 29 just stepped back 1%. So just what's driving that very modest step back in the rest of the world quarter-on-quarter?
Yes. Let me take the first and the third, and then Palmer talk to pricing and inflation. In terms of still to come, I mean, yes, there will be because some of the new business we're mobilizing, depending on sector, is mobilizing in the context of containment measures, lockdowns and so forth. And therefore, we would expect some modest volume growth in those contract wins in the last couple of years, too. But I think the real prize is a recovery in the base volumes of the existing business pre-COVID.And then with regard to Rest of World, just something to call out is there is an M&A effect in the regions, which doesn't affect the total group numbers. It's awash between acquisitions and disposals. So sort of M&A adjusted like-for-like volumes are around the 97% for the group. But because we made a number of disposals in the Rest of World region, South African business and some parts of our Japanese business, we're actually running above 100% in Rest of World, like North America compared to 2019 levels. And the quarter-on-quarter change is really about seasonality. And then of course, the delta there is Europe, which is probably 3 or 4 points like-for-like weaker than we've reported because we acquired the Fazer business in the Nordics, which has given us some volumes. But of course, the European business is most highly exposed to B&I and where we would expect the volume recovery to come back over time.
With respect to the pricing inflation question that, Richard, you asked, we're certainly seeing the heightened levels of inflation. In fact, we're probably seeing a tick higher than we even discussed at the end of the fiscal year. And that's been holding true. We are seeing although a bit of signs of improvement within the supply chain and on the labor side. I think when you look at job applicant flow, the duration of job postings, we're seeing some improvements there that give us some signs that, that will continue. It is certainly still tougher than it was historically. The same thing on the supply chain side of things, we're seeing less disruption on the distributor side of things. So while we anticipate challenges for the rest of the year, we do anticipate that they will improve. Certainly, we mitigate the best we can, and then we price. And our business model allows for that within our contract structures, our relationships with clients.Keep in mind that the inherent delay in pricing that's there. We're typically able to price on the consumer-facing side of things fairly nimbly. But within the client-facing side of things, it's a bit more structured and it's a bit more tied to lagging indicators such as inflation indices, CPI, ECI, food away from home, that kind of thing. So those have to be a bit more planned and structured. January is a big pricing month for us overall, as you could appreciate. And certainly, our teams across the globe have been quite busy in that respect. That's one of the big reasons why we expect to see the margin shape that we outlined being very much second half weighted is this delayed effect of pricing.
Just to follow up then, just to be clear. So the 2% to 3%, that should probably go up as we go through the year? You'll get a bigger pricing component as we progress through the year?
If we're doing it right, absolutely, we should.
Our next question comes from the line of Leo Carrington from Credit Suisse.
Firstly, around the M&A in the quarter, can you give some color on the sectors and split between acquisition of small operators versus of new technologies or concepts? And then just for our models, would it be right to expect a kind of one-to-one flow through into our acquired growth expectations for this year?And then partly separately at least, now that the recovery is taking shape and you have experience of operating in the new normal, can you give an update on to what extent clients are still looking for off-site preparation? And importantly, what the returns are like for you on operating these new restaurant concepts and dark kitchens?
Yes. Maybe I'll talk to the third question first and then allow Palmer to take the first two. When we speak to the recovery in new normal, I'm not sure we're there yet. I think we are going to take a while before we've established what we consider to be new trends. The reality is that I think confidence in the return to the office was shaken by Omicron. I think our clients are yet to determine what their operating model is going to be. We understand there's lots of complexity around that. We still see confidence levels of individual employees returning to the office through transit systems. We've always talked about, is it a 3-day week in the office? And if so, which days? And how the colleagues get brought together for the most effective type of work? And we also know that our different clients in different sectors and different industries have got different perspectives on what they want from the office. So I think we're some way away from the new normal, and I think it's going to be a bit of socket and see over time.That said, we think the ability to operate delivered in solutions is critical to the future. What it gives us is an ability to vary our offer away from the traditional restaurant-style dining into much more grab and go with attractive hot meal solutions. So typically, we would see this as being able to operate commissary kitchens or central kitchens, which we could then deliver into finishing kitchens, freeing up space on site and allow our consumers to have hot and cold food offers at any time of the day. So it's an attractive sort of new tool in the kit bag really for how we provide great quality and an attractive offer to our clients and their employees. So I think there is a way to go. We -- Palmer will talk to some of the new operating models that we're acquiring as well as building. We're seeing strong growth in them. And it also opens up a different part of the market to us in those potential clients that have smaller colleague bases. So it is attractive. And the economics remain attractive because, obviously, we can produce at scale with batches that then get delivered into multiple clients. So if we're doing this right, we should be at least protecting sort of pre-COVID margins and with the opportunity to potentially do better as well.
The acquisitions that we completed in Q1 are right in line with that evolving operating model. All of them in Q1 were in North America. And the biggest piece is really related to the continuing build-out of our commissary network across the country. And so it's certainly tapping into the evolving operating model. We're using technology that both -- we've created ourselves as well as acquired previously to combine with the ghost kitchens, the off-site central production kitchens and the like to fulfill this evolving operating model that Dom just described. So that's the biggest chunk that you see there, with the micro markets certainly being a component within that. That is a core part of our strategy, and you'll see that continue to be a line of focus for us.In terms of the model, the revenue expectations, it's a little bit better than the 100%. It's closer to about 100, 150 or so in terms of ratio to what we paid. Now that just happens to be on this batch. Everything is going to be really case by case. I will say, on the M&A front, it wasn't completed in Q1. It was just completed earlier this week. But the acquisition of the Sodexo Australian business that had been discussed previously, we completed 2 days ago. It's not material in terms of quantity, but it's significant in terms of strategy. So we're very pleased to have that completed.
[Operator Instructions] Our next question comes from the line of Jaafar Mestari from BNP Paribas.
I've got 3, if that's okay. Firstly, just on contract structures, just so we have the right thinking into the next leg of the volume recovery. Could you give us an update on how much of your portfolio is currently cost plus compared to the higher mix of cost plus reached at the peak of the crisis and 33% before COVID, presumably somewhere in between now as it's normalizing a little bit?And then 2 questions on delivered in. Firstly, how many central kitchens does GBP 87 million by you? I think you started with around 70 at the group level and then peers sometimes much smaller that are a lot more advanced there have close to 200. So where does Compass Group needs to end in terms of that infrastructure? And separately, is there another option if you're going to go for more delivered in to actually go for outsourcing? There's lots of players out there that offer soups and meals to be finished, and there's very big high 3 chains that do rely on that. Is that something you can do? Or is that something that wouldn't quite work with clients?
I'll take the second one first and then pass the first to Palmer. Just in terms of central kitchen, so you're absolutely right, sort of in the 70s. Palmer will give you the detail on what we acquired. Just one comment though. We have to remember, we are probably the biggest sort of ghost kitchen operator in the world with all of the existing facilities we have that can be used to produce for other sites. So we're very selective and judicious where we feel it is right and proper to invest in commissaries or central kitchens because we don't have the opportunities to use in the portfolio. We can aggregate the scale, and it's right for the location and the number of client opportunities we see around that. So that is and remains an exciting strategic option going forward. And we'll look at it both in terms of our existing footprint, our existing central kitchen and where we can acquire as well as build. And yes, we do have some of the things you described delivered in today. We obviously do many of them ourselves. We'll always look at the individual economics and the quality of the offer to determine what is right for us. I'm sure Palmer's got more to add to that and then the first question, too.
I mean, I think I would say on the central production kitchens is they're not all created equally. I mean, they're different. They're different sizes. They're different scales. What we're really talking about here are dedicated units that we can put high volumes through. They're shared within -- across sectors, to a large degree. They're more pronounced in the urban areas as you would appreciate. But in addition to that, we certainly have what we would refer to as the central kitchens rather than the units, which are the kitchens that we already have within our client network that we're sharing across different units. So all of this is very much of a scale game, and it's certainly one that we're, again, focused on.With respect to the deals in the first quarter, we've got about half a dozen within that batch of acquisitions. And keep in mind, these aren't just empty central production units. They are fully operating. They have income. They are profitable as it is now. And that's great because what it enables us to do is to migrate the capacity to our network while still in a profitable position on the units themselves. So it's something that we very much focus on. It's part of our due diligence when we look at those kind of deals.I think your first question was with respect to contract structures. You're right. Historically, we're looking at about 1/3 across the primary types of structures, the P&L, the cost plus, the fixed price. That very much was indexed more towards the cost plus, the cost reimbursable models during COVID. And that still remains the case right now. That is, just as I described at the full year, an ongoing dialogue with clients. You -- what you would have seen and we would have seen during the first quarter as volumes increased, particularly on the education side of things compared to where they were, the conversations in structures started to migrate back towards the P&L where they were before. But it's very much on a case-by-case basis. The vast majority of B&I remains cost plus. In some sectors, in some countries, it would be 100% cost plus. So that's an ongoing dialogue. I don't really view that as a bright line at any point in time. It's just something that will evolve.
Our next question comes from the line of Tim Barrett from Numis.
I just have one question left on the segments. And if you look at the segments and the most COVID-centric ones, Sports & Leisure back at 107% jumps out. Can you talk around what the drivers are there? Is it simply sporting calendar? Or is more going on underlying that?
Yes. It's a combination of the two. But the biggest piece is, frankly, the new business wins. We've had a number of new business wins since the onset of COVID, frankly, which were delayed in terms of mobilization, in terms of wrap up. And we had a few new NFL teams and American football that had great seasons this year that certainly had an impact, some Minor League soccer in some places within North America. So we're certainly seeing the benefit of the new business wins come through. We did see some one-offs, some nonrecurring events within the quarter. So when you look at some NFL playoff games, both on -- in terms of the new business, but really in terms of the business that we already had, that's not something that you necessarily expect to recur. Similarly, we had a big Formula 1 event in Mexico. It actually turned out a lot bigger than we anticipated initially. We were the benefit of that. That's not necessarily recurring.One thing to note within that, within Q2, we're experiencing some postponements of sporting events. And while there are some cancellations, we fully expect most of these to be postponements, and therefore, just a timing issue. Although I will say that we are aware of some cancellations. And unfortunately, we're seeing some events that were in our venues, just from a timing issue, having to move to venues, which we don't operate. So it's one that's that kind of thing we're keeping an eye on. But overall, in the Sports & Leisure, it's just the same trend that we've been highlighting, which is just the strong net new business.
Okay. So that's a sector where you're slightly below the average of base revenue recovery? Is that fair to say?
Yes. It's still to some degree. Keep in mind there too that we're seeing very, very high per cap spending. So when the events are occurring, even though attendance might be down where it's regulated, where it's not restricted, we're seeing very full attendance and very high spending. So we're seeing the benefit of that throughout the portfolio. How long that lasts, I think, remains to be seen. But certainly, that's still continuing now.
I will now hand back over to Dominic. Thank you.
Thank you very much for your questions today. And I wish you all a good day, and look forward to speaking to you at the half year.
Thank you very much for joining today's call. You may now disconnect your handsets.