Compass Group PLC

LSE:CPG

Earnings Call Transcript 2023-Q2

[Dominic Blakemore, executive]

Good morning, everyone. As usual, I'll begin 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 a.m. U.K. time. Details are on our website and press release.

We've had a strong first half, and we're establishing a new track record of performance. Operating profit was over GBP 1 billion and is now higher than during the first half of 2019. Organic growth of 25% was ahead of our expectations, and we continue to improve margins to 6.6%, an 80 basis point improvement year-on-year.

We delivered strong operating cash flow of GBP 870 million, which contributed to a further reduction in our leverage to 1.1x. The strength of our balance sheet, along with our confidence in the future prospects for the business, gives us the platform on which to provide further returns to shareholders. So today, we're announcing an interim dividend of 15p per share and a further share buyback of GBP 750 million, taking our total buyback program to GBP 1.5 billion since May of last year.

Looking ahead, we're confident about the growth prospects for the group. The food service market and the large structural growth opportunities are very attractive. Inflation, operational complexity and changing clients and consumer expectations are driving outsourcing trends, which we believe are here to stay.

As a result, we expect mid- to high single-digit organic revenue growth and continued margin progression to deliver profit growth ahead of revenue growth. Our strong cash generation, robust balance sheet and disciplined capital allocation will continue to drive compounding earnings per share and shareholder returns.

Before I tell you more, I'll hand over to Palmer to cover the results.

[Palmer Brown, executive]

Thanks, Dominic, and good morning, everyone. Starting with revenue. Despite some pockets of macroeconomic weakness, organic revenue growth was 25%. Net new business continued to be excellent at just over 5%. That's in line with our full year guidance and 2 percentage points higher than the historical level. This reflects the buoyancy of the outsourcing market and our growth initiatives.

We also benefited from strong pricing and like-for-like volume recovery. Going forward, we expect the contribution from volumes to reduce as the year progresses, given the strength of sites reopening in the second half of last year.

Here, you can see our regional performance. We especially like the balanced growth and particularly net new growth above 5% across all our regions. We are pleased with the impacts of our growth initiatives in Europe and Rest of World. Remember, too, that these regions took longer to recover from the pandemic than North America, thus providing different comps.

Year-on-year, group operating margin increased by 80 basis points to 6.6%, with Europe up by 110 basis points and North America ahead by 80 basis points. Rest of World margin declined slightly due to some post-COVID labor shortages in Australia and our Defense, Offshore & Remote business. Overall, our group margin was up 10 basis points compared to the second half of last year, slightly ahead of our expectations.

While inflation has remained heightened, it has stabilized in the U.S., our largest market. In the first half, we faced a blended rate of around 9%, the same as we experienced last year. We continue to mitigate and price appropriately while continuing to demonstrate value versus the high street. Of course, inflation remains a double-edged sword. It also drives increased levels of outsourcing on which we are capitalizing.

As a result of our strong growth and margin improvement, operating profit was over GBP 1 billion and is now 10% higher than in the first half of 2019. For fiscal '23, we now expect our interest charge to be around GBP 140 million and our effective tax rate for the full year will be 23.5% to 24%. Our interim dividend increased in line with earnings to 15p, 15% higher than our 2019 interim dividend.

Turning to cash flow. Our operating cash flow conversion was 83%. CapEx was only 2.3% of revenue. And as a result, we now expect CapEx for the full year to be in the range of 3% to 3.5%. Our strong cash generation helped reduce leverage and provided the basis for a further share buyback of up to GBP 750 million during the remainder of the calendar year.

We continue to sharpen our focus on the right opportunities. Recently, we exited 6 tail countries, where we had relatively small operations with limited growth opportunities and reviewed certain lines of business. These changes resulted in a non-underlying charge of GBP 70 million.

We also continue to invest in M&A where appropriate. In the first half, we spent GBP 210 million, the largest 2 acquisitions being Parks Coffee, further enhancing our office coffee and vending proposition in North America; and Regency Purchasing, strengthening our food bought GPO in the U.K.

The portfolio reshaping is nothing new. However, it enables us to better focus on the growth opportunities in more attractive segments and markets. With over 3/4 of profit now derived from North America, we have decided to change our reporting currency to U.S. dollars from October 1 this year. This will significantly reduce our earnings volatility due to foreign exchange translation, which we've seen over recent weeks, and so improved transparency. We will provide U.S. dollar comparatives in June.

For the avoidance of doubt, this does not signal any change to our U.K. listing, which is not under review. Our capital allocation model remains unchanged. First and foremost, we invest in CapEx and M&A to drive growth and to enhance our strong portfolio of brands and capabilities. Excess capital has been returned to shareholders, while keeping leverage within the target range of 1 to 1.5x net to EBITDA. The strengthening of our operating model and good levels of cash generation mean we are able to reward our shareholders with additional returns. Including the interim dividend and GBP 750 million buyback announced today, we will have returned GBP 11 billion in capital since 2011.

Following our strong first half performance, we are upgrading our full year guidance. We now expect operating profit growth towards 30% on a constant currency basis. This is to be delivered through organic revenue growth of around 18%. Our operating margin is expected to improve further, getting close to 7% in the second half, so in the range of 6.7% to 6.8% for the full year.

Thank you, and now back to Dominic.

[Dominic Blakemore, executive]

Thanks, Palmer. We operate in an industry that has very exciting structural growth prospects. Our teams have clear priorities to capture these opportunities by focusing on the fundamentals and by continuing to evolve our operating model in line with changing clients and consumer needs.

We're continuously reviewing our portfolio. Exiting small tail markets, we're focusing on the core sectors in our core countries to sustain accelerated growth. We're also reducing further volatility by reporting in U.S. dollars from next year. This balance of growth gives us confidence that we are on a path to establishing a new track record of financial performance.

With a large market opportunity of GBP 250 billion with half of it still self-operated, there's a significant runway of growth for many years to come. There's an even bigger opportunity in the more defensive sectors of education and health care and in the growing senior living subsector, and vending and targeted support services are in addition to this.

Our balanced growth across our regions is the best it's ever been. Our historical net new of about 3% for the group was previously driven by consistently strong performance in North America. Last year, their growth was exceptional due to pent-up new business wins and the significant mobilization of new contracts. This year, even with a larger base business, net new trending is around 5% as expected.

In our other 2 regions, we've seen a step change in performance, which has now been sustained over 18 months. This success is partly due to strong outsourcing trends, but more importantly, to prioritizing growth and business fundamentals.

In Europe, we're better at qualifying our potential pipeline, which is at 60% larger than pre-pandemic. Our focus on growth has materialized in a higher conversion rate, and we're winning 50% more business now than before the pandemic. There are significant opportunities across all regions, and we expect group net new business growth to be sustained around 4% to 5%, which is 1% to 2% above our historical level.

In North America, the focus is on sustaining our historically high levels of growth by further enhancing our subsector approach. We're also expanding our vending and micro market footprint, scaling digital innovation and maximizing procurement benefits. In Europe and the rest of the world, the focus is on embedding the growth mentality, building a strong portfolio of brands and strengthening our competitive advantage. There are many drivers of growth, and they're here to stay.

Even if inflation was [ weak ], the evolving client and consumer needs along with increasing regulations, we'll continue to underpin growth for the foreseeable future. I'll look now at some of these growth drivers in more detail.

The list of client requirements is long and includes sustainability, inclusion, well-being and digital. Equally, consumers are seeking more variety with food trends evolving quickly, particularly amongst younger consumers concerned about the environment. Convenience and digital solutions are also shaping our operating model.

And with the increasing cost of living across all of our markets, consumers are looking for value for many options, which plays to our strengths with our offer often at a significant and growing discount to the high streets.

Our chefs are core to everything. And as such, we're elevating their role in the organization, a global culinary forum with chefs from around 20 countries now reports to our PLC Board every year. This group collaborates on various solutions, bringing culinary aspects into commercial decisions. Recent topics included inflation mitigation and sustainability with nearly 2,500 culinarians holding a webinar on food waste reduction in April.

Involving our frontline chef teams is a practical way of driving better commercial outcomes. We're meeting our environmental commitment, whilst also contributing to our clients' own ESG targets. By targeting food waste, this is good for the environment and helps mitigate inflation in our operating units.

The U.K. business continues to lead the way, and we delighted their first impact report to a 20% reduction in Scope 3 emissions on food and drink purchases. Our growing authority in this area is giving us a competitive advantage in winning and retaining new business as clients use our achievements to contribute towards their own targets. We also have the scale and opportunity to create meaningful social change.

Our U.K. business released its first ethnicity pay gap report, which showed that our ethnic minority pay was positive, and our gender pay gap reduced by 1/4 year-on-year. In North America, our 25-year long partnership with Thompson Hospitality provides social mobility opportunities for minorities and a gateway to minority-owned suppliers, which benefits those [indiscernible], as well as providing rich cultural experiences for our consumers.

Our proven model of value creation is intact and is quickly being restored to generate long-term, compounding shareholder returns. Looking ahead, we expect to drive accelerated revenue growth in the mid- to high single digits for profit growth to exceed rate growth through the margin progress, continued strong cash generation, enabling furtherness in the business whilst maintaining strong balance sheet and rewarding shareholders with ordinary dividends and additional returns to generate long-term compounding returns.

So in conclusion, we're extremely pleased with our performance in the first half of the year, especially with the balanced profile of our growth. We [indiscernible] the group is in the [ best ] its ever been. The growth prospects are exciting. And with our value creation model in TAT, we're establishing a new track record of strong international performance to reward shareholders with compounding returns over the long term. I look forward to speaking to you on the call at 9 a.m. Thank you.