Compass Group PLC

LSE:CPG

Earnings Call Transcript 2022-Q2

[Dominic Blakemore, executive]

Good morning, everyone. As usual, I'll begin this presentation with a summary before handing to Palmer, who will cover the financials. You'll be able to ask questions on our conference call, which is at 9:00 a.m. U.K. time. Details are on our website and press release.

Before we start, though, a few words on Ukraine. We've all been shocked and saddened by the tragic events unfolding there. Whilst we have no operations in the country, we provided financial, food and other support to charities on the ground. We've also exited our small business in Russia.

Now on to our half year results. Our clear focus on growth is delivering results. We continue to recover strongly with revenues now above 2019 levels on a run rate basis. We achieved another record for new business wins and client retention. We're excited about the continued strong contribution from Europe, while self-help is really starting to pay off. And although global inflationary pressures are impacting all of us, we have the operational tools to help mitigate this challenge whilst benefiting from the tailwind to outsourcing. Our business model is resilient in times of volatility, and our balanced footprint is limiting risk.

As you know, we reinstated the dividend last year. And today, we announced a further step-up in shareholder returns in the form of a share buyback program, reflecting our increased confidence in the business. We're confident about the prospects for our business and are strongly positioned for long-term sustainable growth and continued margin recovery. Now over to Palmer.

[Palmer Brown, executive]

Thanks, Dominic, and good morning, everyone. Starting with the financial highlights. Our positive momentum continued during the half year. Revenues were 98% of our 2019 level. And as Dominic just mentioned, are now above 100% on a run rate basis. Operating margin was 5.8%, in line with our guidance. Over the last 12 months, we had another record of new business wins worth GBP 2.5 billion of annual revenue. Client retention was its highest ever at 95.8%. We've declared an interim dividend of 9.4p and our increasing capital returns through a share buyback program with up to GBP 500 million over the remainder of this year. Organic growth was impressive at nearly 38%. While the most significant driver continues to be like-for-like volume recovery, net new business and pricing, the items most within our control were also very strong. We added over $500 million of net new business growth in the first half, which is higher than we achieved in all of 2021.

Drilling down into verticals. We saw good revenue recovery across all of our sectors. In Q2, B&I and education performed very well, increasing to 83% and 107%, respectively, of 2019 revenues. While the group traded at 99% of its 2019 level, this included net new growth in pricing. We believe there is still around 15% of potential base recovery yet to occur. This is spread across all of our sectors, even those operating above 2019 levels. For example, much of health care retail remains closed. There is a backlog of medical procedures and hospitals as well as postponed events in Sports & Leisure.

Now turning to the regions. Organic growth was strongest in North America at 103% of 2019 revenues. The region benefited from excellent net new growth of over 8%, double last year's rate. Operating margin increased to 7%, an 80 basis point improvement on Q4. Europe's organic growth was just over 28%. Our focus on growth is starting to pay off with net new business increasing to 3.7%, which is significantly higher than historical levels. Operating margin was predominantly impacted by mobilization costs due to higher growth as well as lower levels of government support. Rest of World revenue was at 90% of its 2019 level with operating margin impacted by COVID-related lockdowns.

While the business is trading well, we are mindful of global inflationary pressures. Although we are not immune to inflation, we have procurement and operational tools, which can help mitigate its impact. As well as mitigating, we also work with our clients to pass on costs through the usual contractual mechanisms. Roughly 70% of our contracts are either cost plus or consumer paid where we can recover inflation relatively quickly. The remaining 30% is fixed price where there is an inherent lag on pricing.

We have successfully managed inflation in the first half, and we'll continue to work hard as we expect inflation to increase in the second half and to remain in the medium term. Remember, too, that inflation also impacts our potential clients who were not as well positioned to navigate these challenges, thus providing a tailwind to outsourcing.

Turning to cash, where our conversion is returning to more normalized levels. The swing in working capital was due to the prior half year benefiting from tax deferrals and this half year being impacted by the restarting of bonus payments. Although CapEx was only 2.6% of revenue, this will increase in the second half, and we expect full year CapEx to be around 3.5%. You will recognize our capital allocation model. First and foremost, we invest in CapEx and M&A to drive and enhance our strong portfolio of brands and capabilities. Then we return excess capital back to shareholders, targeting net debt to EBITDA of 1 to 1.5x. With cash flow and profit increasing, leverage is down to 1.3x and within our target range.

In line with our model, we are returning excess capital to shareholders in the form of a share buyback program with up to GBP 500 million over the remainder of this year. We are pleased to recommence capital returns and the quantum of future returns will be considered in the context of M&A activity and the macro environment.

Now turning to guidance. Based on our strong growth in the first half and positive outlook, we have increased our full year organic revenue growth guidance to around 30%. We -- although we are mindful about the inflationary environment, we still expect to achieve an underlying operating margin of over 6% for the full year, with an exit rate of around 7% by year-end. Thank you. And now back to Dominic.

[Dominic Blakemore, executive]

Thanks, Palmer. Now turning to strategy. We have a clear strategy to capture the exciting growth opportunity by utilizing our scale, focus and expertise, the strength of our operating model, which now has even greater agility and innovation and our market-leading offer, particularly in the areas of digital and sustainability. In addition, we have a balanced portfolio, which limits risk and a disciplined capital allocation model with low levels of leverage.

As you know, there is a huge addressable food services market with at least GBP 220 billion. There are also further growth opportunities in vending, delivery and support services, which are in addition to this market analysis. That's a significant runway for growth, particularly if you consider that 3/4 of the market is still self-operated or in the hands of regional players.

More than 60% out of Healthcare & Senior Living alone is self-operated. And this is one of the highest growth sectors. The drivers for outsourcing are evolving and the list of must- haves is increasing. We have the capabilities and resources to address all of these needs. One common misnomer is that outsourcing is all about cost reduction. While this might be important for some clients, particularly at the time of heightened inflation, other clients are placing increasing value on wider capabilities such as innovation or a focus on sustainability.

Overall, we view operational challenges and complexity as an emphasis for outsourcing. Our offer becomes more relevant as we continue to innovate and evolve. Our people are highly engaged, and we have a strong customer-focused culture. We offer our clients tailored solutions through sectorization, and we pride ourselves on being close to our clients to better address their ever-evolving requirements.

Our ability to respond to these with agilities reinforce through our scale, investments and best practice sharing to ensure our long-term success. We're focusing on digital investments and have a strong in-house capability with a range of digital channels. They only doesn't improve the clients and customer experience that helps us to increase productivity and reduce costs.

We've made great progress so far, but there's plenty more to do. Our ESG focus is also a competitive advantage. And our group philosophy is to maximize the positive impact we create on our entire value chain.

Under our social promise, we continue to look for ways to attract diverse talent through social mobility initiatives such as [indiscernible] in France. We offer training and career progression and make the recruitment process flexible.

On the environmental side, our health care teams have used their engineering skills to help their clients increase energy efficiency, reaching carbon reduction targets and in turn, reducing costs. is an example of how we've moved from a traditional to a more sustainable digital food offer at Brunel University. Students order their food via an app or self-checkout kiosks for pickup or delivery on or off site. Multiple food options are available all day, and we are benefiting from higher average transaction values. We've prepared a food in a central kitchen, which is cooked to order, having us reduce food waste by 1/3. So it's a much more environmentally friendly proposition. And with 30% of our sales being delivered off campus. This model is also opening up new growth opportunities for us.

All of this hard work has led to yet another record of new business wins. Over the last 12 months, we secured GBP 2.5 billion of new business, a 20% increase on 2021. Whilst North America is continuing to grow strongly, we're excited to see a step change in our other 2 regions, both in terms of wins, but also retention. The strong results are due to an increased focus on sales, more proactive targeting of opportunities as well as an accelerator in first-time outsourcing. Our focus on retention has helped us to continue to grow net new business.

Rebased to 2019, net new is now 1.5% higher than our historical run rate of around 3%. Higher net new, combined with base volume recovery means that we are very well positioned to continue our current growth trajectory. Our portfolio is more balanced. The less cyclical sectors of Healthcare & Senior and education are now nearly half of our business compared to 35% 10 years ago. We've exited higher-risk countries and noncore businesses.

Our revenues are diversified across countries and clients. 95% of revenues come from 20 countries, and our top 10 clients only account for around 10% of revenues.

And so in summary, we believe the current level of accelerated growth is sustainable, given our offer and team, along with extremely strong market dynamics. We have a resilient business model and the operational tools to help mitigate inflation. Given our strong performance in the first half and our confidence in the future, we're increasing our organic revenue growth guidance and commencing a share buyback program.

Longer term, we expect revenue and profit growth above historical rates, returning margin to prepandemic levels. I look forward to speaking to you on the call at 9 a.m. Thank you.