Compass Group PLC
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Compass Group PLC
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Hello, and welcome to the Compass Group Q3 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 Karen Witts, Group Finance Director. Please go ahead with your meeting.
Thank you, Christian. Good morning, ladies and gentlemen. Thank you all for dialing in. I'm delighted to be joined for the first time by Karen Witts, our Compass Group CFO. I'm sure you've all read the statement, but before I open the call to questions, I'd like to say a few words on our performance and outlook. Compass continues to perform extremely well. We're delivering strong market-leading growth at industry-leading margins whilst at the same time, continuing to invest for the future both through internal initiatives; our 3Ps, our Performance, People and Purpose; and through bolt-on acquisitions. For the full year, we now expect to deliver organic growth at the top of our 4% to 6% range. Consistent with this high level of growth, we now expect margins to be flat compared to the prior year. Compass is a market-leading business, which continues to get stronger. We saw an acceleration in revenue growth during the third quarter to 6.7% excluding the impact of Easter, to bring the group's organic growth for the 9 months to 6.5%. The excellent momentum in North America has continued. The business delivered 8.5% organic growth in Q3 and 8.1% year-to-date. This is thanks to continued good levels of new business wins across all of our sectors, but also a significant benefit from a favorable Sports & Leisure calendar. The business also maintained margin, a really pleasing result given the high level of growth. In Europe, we're seeing some impact from the weaker macroeconomic environments on our volumes, particularly within B&I. Despite this weakness, we still delivered 2.9% organic growth in Q3 excluding Easter and 4.3% year-to-date. However, it has resulted in margin pressure, which was down by a similar amount to the half year. The performance in Rest of World is improving. The business grew 3.6% in Q3 and is up 3.2% year-to-date. The pricing and productivity initiatives are beginning to deliver benefits and the margin shows some good progression over last year. We continue to make good progress with M&A, further strengthening our position as the global leader in foodservices. During the period, we announced the position of Fazer Food Services in the Nordics and spent a further GBP 100 million on bolt-on acquisitions in Europe and North America. I'm a firm believer in benefits of focus. These acquisitions provide us with opportunities to deliver more compelling and innovative solutions for our clients and consumers. And finally, we're continuing to invest for the future. We're beginning to see benefits from our strategy, particularly in Rest of World where the pricing and productivity initiatives are having an impact, and we're investing more in the business where appropriate.So in summary, Compass continues to perform strongly with an excellent performance in North America and Rest of World improving, offsetting a more difficult volume environment in Europe. We continue to be excited about the significant structural market opportunity globally and the potential for further revenue, margin and profit growth combined with further returns to shareholders over time. Thank you. And now we're very happy to take any questions.
[Operator Instructions] Our first question comes from Jamie Rollo from Morgan Stanley.
Three questions, please. First, obviously, a very good performance in North America with a strong outlook. Is it fair for us to assume that the company took the $200 million of education losses that Sodexo had talked about? So does that mean you're seeing a higher mix of new contracts coming from the bigger competitors in North America? And secondly on Europe margins, weaker than expected, that seems to be just like volume trends. So are you taking any sort of additional action there? Are you still reviewing that business? And if you haven't yet, what additional margin impact could that entail, please? And then finally, perhaps it's more of an observation, but for the second year running, that weak Europe margin performance has been sort of offset by a much better-than-expected Rest of World performance in margins. And despite very tough comps in Rest of World last year, I think second half margins are up over 100 basis points, you're still keeping that going. So I'm just wondering for how much longer can sort of Rest of World keep coming to Europe's rescue?
Thank you, Jamie. I'll take the question on North American performance and your third question around margins in Rest of World and then I'll ask Karen to answer on European margins. So firstly on North American performance. As you can see, we're absolutely delighted with the growth rate in North America in the quarter and year-to-date. The growth rate is sustained through new good business, excellent retention and strong like-for-likes as well. So it's a good balance of growth across the piece. We are winning new business at the levels we would like. We see a very strong pipeline. We see those wins coming across all sectors. We talked about a weaker higher education performance in the previous year. We're seeing a strong higher education performance this year, but we're also seeing a strong health care performance this year as well. So we're delighted with both of those sectors. Yes, we continue to take some share from our competitors, but in the round, the balance of growth remains sort of 1/3, 1/3, 1/3 that we've talked to. And again, that's equally pleasing. In terms of your question on Europe versus Rest of World margin, Karen will talk to you about what's going on with the European margin. It's definitely a tricky time right now. So we're delighted that managing the full portfolio of the business, better mix from North America and the strong performance in Rest of World, we're managing to maintain a very strong group margin. Yes, we're pleased also with Rest of World performance. We believe that we've seen that the early returns from our focusing on pricing, productivity and purchasing, particularly in the number of Rest of World margins. And let's remember as well, there's always been an opportunity in margin in those countries where they are either lower margin with an opportunity to scale up over higher margins, some of our bigger businesses where we're seeing those initiatives paying off. And I don't think we should get carried away, whilst we're lapping out 100 bps last year and that was on the back of, if you recall, the restructuring we did at the time across the oil and gas markets in particular, we're now seeing 10 to 20 basis points of margin progression, which is much more modest than we would hope to see something of that order of magnitude as we go forward. Karen, do you want to just take the Europe question?
Yes. Sure. Well, I mean the Europe margins are being impacted by macroeconomic uncertainty particularly in the U.K., Germany and France. It's causing weaker volumes than we had anticipated at half year, and that sort of changed our outlook on margin performance for Europe. The kinds of things that we're seeing there are primarily related to the B&I sector. So for instance, in Germany, I was reading the newspaper this morning, manufacturing output at the moment is the worst for 7 years, factory activity in the Eurozone is weak and the purchasing managers index has shrunk again, that's for the sixth month in a row. Germany is particularly being hit in the automotive sector. In the U.K., B&I volumes are also weaker than the corporate sector. Just to some extent, that volume impact in the U.K. is being offset a bit by a more favorable Sports & Leisure calendar, for instance, Cricket World Cup and the new Tottenham Stadium. And then in France, similarly, a bit of B&I softness. I can't really go through this call without talking about Brexit-related uncertainty. With what we are seeing in our business, it's slower decision-making. So if you put all of those things into the mix then that is really what is impacting our European volumes. And I would say though that is despite the fact that we are seeing a better top line growth than we've seen for a while in Europe. And Jamie, you asked about action that we might take. Well, definitely, when we see and we feel pressure, then we have to take action. We think that we're well placed to act when we need to, by doing a variety of things including reaping the benefits of the investment that we're making in our pricing, productivity and procurement initiative. And in terms of going out further, what do we see? Actually, I don't know. It just feels very uncertain at the moment.
Jamie, I'll just finish the answer, if I may, just by adding the additional 20 bps of decline in the quarter. Each 10 bps in Europe is GBP 1.5 million. So it is small numbers, which we've had that impact in the quarter. I think we should remind ourselves with that. And of course, Jamie, you'll know when we've seen significant problems, we have taken action in the past.
We will now take our next question from Jarrod Castle from UBS London.
Just sticking with margin. I was wondering if you could try and give some color, and I know you have said some things in the past in terms of the interplay between growth versus margin especially in the North American business. So -- and I guess if growth is 1% lower organic, what would have that meant for margin and just some color around that? Secondly, just in terms of Europe, it seems like your financial position is fine, but has there been any impact in terms of cash collection and conversion of profits? And then lastly, just in terms of Rest of the World, can you maybe just give some color in terms of some of your main markets, how things are going?
Okay. Jarrod, thank you for the questions. Why don't I take questions 1 and 3 and then ask Karen to pick up on your cash question. So just with regards to margin, I mean, I think we've best explained it with the Compass model, which is we believe that with the runway of growth that we see in the group and across all 3 of the regions that we should reasonably expect ourselves to grow within that range of 4% to 6%. At the higher end of that, we would expect little margin progress. At the lower end, we would expect to make some margin progress. And I think that equally applies to each of the regions themselves. We've always talked to the U.S. about having a range of growth of, if the group growth is 4% to 6% range, then the North American growth range is 5% to 8%. And we wouldn't expect margin progress at those higher levels. Why? These contracts come with significant mobilization investments. Remember, every year, the absolute dollar value of new business that we're mobilizing is increasing significantly. We've made investments, for example, in something called the strategic projects group, which actually manages the mobilization of major contracts, and that's the investment we've chosen to make and we make at times when growth is higher to enable us to really manage with intensity major contract mobilizations. That also diminishes the opportunity for margin in the short term, but it's the right thing to do to sustain those higher levels of growth. I think the other issue that we should speak to is just the sources of growth. If we're seeing volume growth in Sports & Leisure, typically, the upside there doesn't drop through at an incremental margin. We typically only earn our average contract margin because the upside from the higher volumes goes to our clients, that's why they outsource. So I think, hopefully, that gives you a bit of flavor around why at higher levels of growth, we see less margin opportunity. And of course, at lower levels, I guess the point is that those contracts are maturing, we would expect to be lapping higher levels of mobilization. We'd expect to be getting to the contract maturity margin levels at the mid to later years, and that gives us the opportunity to reap the margin. And of course, we're probably investing a fraction less in the growth model. In terms of Rest of World and going around the respective regions, I mean to start with Asia Pacific, we just got back from a 10-day visit to India and Japan with the Board to review the markets there. I mean, look, starting with Australia, we talked about Q3 being the lapping of the final major construction projects which went into production and had a significant reduction in manpower. And therefore, camp, camp guests, that has now happened. So we're starting to see the revenues of the Australian business broadly flat. We've performed strongly within the nonoffshore remote part of the business, and we've seen both growth and margin progression. And within the remote sector where it's production camps, we've seen ourselves taking share. So we're really pleased with that performance. And as we look forward, we would expect Australia to return to growth. If we look at the rest of the region, the big countries, I mean, Japan, we're very focused on the opportunity within foodservices, which I think is significant. We're seeing an acceleration in the growth within the core sectors. We're very focused on the margin opportunity there, too, and how we can reinvest in that for growth in Japan. We're having some success with pricing. It's been a very difficult market for pricing for a number of years because of deflation and the habits that, that has driven. But we're now having some success, and we're taking over between 1 and 1.5 points of pricing there, which again we're pleased with. There's a bit of a challenge around the labor pool in Japan and the availability of labor, which we're working very hard on. But in and around, I think our actions are all looking forward positively. In India, we've got growth of over 35% in our foodservice business, which we're delighted with. We've just been to a visit there where we went to a number of our major clients. I think there are some terrific opportunities. The value is obviously small, but I think the volume and the emergence of a higher value dining solution is really starting to come through. So I think that part of the business looks exciting. China has been a bit more difficult for us. We've lost a couple of contracts within the higher ed space, which is -- which are all within the private school space, which just held us back. But growth within B&I remains positive. If you look at the sort of CAMEA region, we're seeing good performances really across the piece there. The oil and gas countries have -- we made some investments, and we've seen some investments by clients, which means higher headcounts in those markets and good growth coming through. Turkey continues to perform very well. We're market-leading, taking significant share and growing at over 25% year-to-date. Obviously, there is some inflation within that, but our net new contract wins continue to be very, very strong. And then lastly, within Brazil and Lat Am, I think our Lat Am countries, as we've called out in the statement, are performing well, the 4 Spanish-speaking countries, growing strongly for us. Brazil remains more difficult, I think, both the macro in Brazil and it's weighing on volumes as well as our own performance in that market where we've done less well in retaining and selling new business. So we've installed a new management team. We're working very hard on the call processes. We've made some further changes, and we're working hard on our offer. I think it will take a little bit of time for that to come through. So just on Rest of the World in and around, I think it's a better picture in Q3 than it was in the first half. And I think as we look forward and fully lap the mobilization of the construction project, then I think we can expect an acceleration. Our aim is to see how we can do better across all of those major markets.
And if I just pick up the question around whether or not -- if we're seeing weaker volumes particularly in U.K., France and Germany, are we seeing any impact on cash collection and conversion. And the short answer is, actually, no. As you can imagine, there's some things that I'm very focused on and have been asking finance directors to pay particular attention to this area. But at the moment, we're not seeing any increase really in bad or doubtful debt.
Our next question comes from Jaafar Mestari from Exane BNP Paribas.
I've got 2 questions, please. The first one is on Europe where obviously in terms of acquisitions, Fazer is all Europe, but also the smaller deals that you've done you seem to be commenting are focused on Europe. So those acquisitions together will bring quite a big change in the scale for the region. I'm guessing from GBP 5.5 billion of revenue, it could possibly end up at GBP 7 billion. Are you just going to treat this as ongoing infill acquisitions or at some stage, is there a sort of master plan for Europe that we should expect you to announce in terms of how you're going to transform the region further and deliver synergies more explicitly on those deals? And my second question is on -- if you want to take this one first.
No. Jaafar, go ahead and do the second, and I'll come back.
Yes. And then just on -- related question on capital allocation. If I add together the GBP 470 million that you've spent to date and the GBP 430 million that you've agreed for Fazer, you'd be already around GBP 900 million, which would be the biggest M&A spend in at least 14 years. Does this effectively rule out any cash returns to shareholders this year? Or can you close on some of the portfolio disposals, for example, by the end of the year to have a little bit more headroom?
Okay. Jaafar, I'll take the first question and ask Karen to take the capital allocation question. I mean, if I may, I think, first of all, you're slightly overstating the M&A in Europe. So you touched -- the numbers you quoted are euros, not pounds. So we believe that the acquisitions made in Europe would probably increase the region's revenues by around GBP 500 million. So GBP 5.5 billion to GBP 6 billion, not GBP 7 billion. If I think about the acquisitions we've made other than Fazer, they truly are very small infill bolt-ons of GBP 30 million -- or euros around that level, which effectively are like large contract wins as opposed to material M&A. With regard to Fazer, it's a super business. It's one we've tracked for a long time and one where we've had conversations for a long time. It's highly foodservice-focused, highly innovative, very quality-oriented, very high sustainability value. So we think it's going to be a terrific strategic fit. The Nordic region has been a region that has performed above par for us in Europe over the last 2 years and was one of the least impacted by the Eurozone downturn. We think it's very solid. There's good trends of outsourcing within public sector as well as private sector and a significant runway for growth opportunity. So all in, we think it's a good acquisition. The returns, we believe will be strong and will certainly meet our target returns by year 2. In -- I think in this industry, you have to be slightly opportunistic about when these opportunities arise and can be converted, and I think the timing has played out that way on Fazer in particular. In terms of master plan for Europe, I think it's really -- I think we've been pretty clear. I think there's an opportunity for us to grow. Absent the short-term impacts that we're seeing, there's an opportunity for us to do -- to grow top and bottom line together. We've obviously got to work hard on our efficiency agenda to do that. And I think we have to look at the different markets of Europe individually because we've got different competitive sets in the different markets. There's different outsourcing behaviors, the different sector opportunities. So it's quite difficult to give a grand answer on that as it were. But I think we feel very good about the acquisitions that we've made thus far. Karen, on the capital allocation?
Sure. Well, just -- probably I'll just start off by saying that our capital allocation priorities are unchanged. And just to recap on those, it -- they allow of CapEx of up to 3.5% of revenue, it allows for bolt-on opportunities in M&A, it allows us to grow the ordinary dividend in line with constant currency earnings. And then, depending on where the net debt-to-EBITDA ratio is versus the target of 1.5, we may have the opportunity to return any surplus to shareholders. And as somebody relatively new into the organization, I've had to look at this methodology, and I actually quite like it. I think it's sensible, and it gives us flexibility. It actually allows for lumpy M&A because M&A by its very nature tends to be lumpy, and you have picked out the fact that this year has been a very big year for us compared with previous years. But nevertheless, aside from the Fazer acquisition, how we have gone about our M&A targeting is still in terms of bolt-on acquisitions. So I would say the timing of going through the competition authority with the Fazer acquisition is a little bit uncertain. So where we actually end up at the end of the year compared to that 1.5x ratio is very much dependent on how fast or how slowly that regulatory process work. But if we come in a bit under, it will be because the Fazer deal has tipped into next year.
All right. And just to follow-up on Europe and the numbers, just 2 things. Fazer alone is EUR 600 million revenue, right? So I was trying to get to a total number, if I take your comments that the other GBP 470 million spent, which doesn't include Fazer, is mostly Europe, I think you're saying and I'm sure you're not paying higher than 1x EV to sales there. So is that another GBP 500 million to add to the Europe scale in the next year?
No. I mean we can take you through the numbers in more detail, but I think the non -- outside of Fazer, it still remains broadly North American acquisitions. It's in quarter 3, that it's been more sort of balanced between Europe and North America.
We will now take our next question from Kean Marden from Jefferies.
First of all, on Europe, could you -- would it be correct in assuming that the like-for-like trends in U.K., France and Germany deteriorated during the quarter? So it was May and June, I think noticeably weaker than preceding months. And then secondly, has the contributions from revenue growth in North America from price inflation increased over the year as you successfully pass through wage rate and food inflation?
Okay. I'll take the first again, and then I'll ask Karen to take the second question. So just on Europe and the like-for-like, yes. I mean simply put that the volume declines in those 3 major markets was worse than we've seen in the first half of the year. If you recall, we signaled volume weakness in the U.K. in the third quarter of last financial year, and we're now seeing volume declines on volume declines, which is causing, I guess, the incremental pain that we are describing today. In France, we saw some pressure in the third quarter. Whether that is politics, weather and/or pressure on B&I volumes, I think time will tell. And in Germany, absolutely, we saw pressure on volumes in the third quarter, and Karen's articulated what we've all seen around the worsening of the manufacturing data. And of course, our B&I business in Germany is highly exposed to manufacturing as well as tech, so particular exposure to the automotive sector and the parts manufacturers, the OEMs of the automotive sector. So it has been a definite worsening there. I think the U.K. picture is a combination both of -- we're not seeing clients increase headcount and reduce it, and we're definitely seeing the consumers are spending less, and I think that's very much what has been also seeing on the High Streets. Karen, do you want to pick up on the pricing?
On North American pricing. I mean inflation is something that we are used to managing. We are maybe seeing a little bit more inflation this year than we've seen in previous years, not just in North America, but certainly in Europe as well, both food price -- food cost inflation and wage rate inflation. But the way that we're set up allows us to deal pretty effectively with the impacts of inflation. We can use our scale to buy better, and that certainly helps on the food cost inflation. And I referred earlier to the fact that we're very focused on what we call our 3Ps, so Price, Productivity and Procurement, and we've been working hard on all of those things. As you can imagine, these are not easy things to do. We have to put a lot of effort into it where we're actually investing behind the stuff ourselves, but we understand that we're just going to have to fit the hard yards into this. But it can't always be offset completely.
Just on that point, it was less a question around the implication for the margins, but just trying to get an assessment. Your organic revenue growth in North America has been pretty impressive over the last few quarters. I'm just wondering to what extent the tailwind from the price pass-through is making maybe an incrementally slightly bigger contribution to that over the last few quarters. Or would you very much characterize it as being the function of retention in new business wins that you touched on earlier?
I mean I think if you break it down, our new business is probably at the 8%, 8.5% level and our retention is at the 27% level, so strong net new business. Probably a fraction more price. We're seeing 1 to 1.5 points of price and about the same on volumes given the strong Sports & Leisure calendar, so then that gets you the 8. So I think a fraction more price in North America. But I think given the buoyancy of the economy, it's probably what you would expect and also given the higher inflation we're seeing.
[Operator Instructions] We will take our next question from Richard Clarke from Bernstein.
Three questions from me, if I may. Given the higher growth guidance for the year, I'm just wondering what this means to your CapEx guidance. Are you likely to be closer to the 3.5% of sales or could you exceed that? And the second question is on the Fazer. I think the press acquisition -- the press release, if I remember right, it showed Fazer had about 4.5% margins. Is that likely to mean about 30 basis points dilution to margins next year? Or is there anything that may be could offset that in Europe, those 30 basis points for Europe next year? And then third question is more conceptually, we've seen Just Eat make an acquisition in the B2B space of City Pantry. Any of the volume losses you're seeing in the U.K. coming, do you think from the move toward some of these digital B2B offers? Or is it more just macro situation?
Okay. So I'll ask Karen to take the CapEx question, and I'll do the next two.
So the -- actually, setting a CapEx guidance at 3.5% of revenue allows us to take advantage of a big contract that might need some more CapEx. And at the end of this year, I am not assuming that we will go above the 3.5% even with the upgrade to our top line organic revenue growth. You just remember, at the half year, we were a little bit under the 3.5%, at 3.3%.
Great. Thanks, Karen. And then just with regards to margin. I think you'll find that the margin that we announced in the press release was close to slightly above 5%. Of course, you are right, it's still slightly dilutive to our European margin and group margin. Of course, we would expect to unlock synergies over the first couple of years, which would benefit that. But from a technical standpoint, yes, there's probably a few bps of dilution in the group margin from the acquisition. We clearly think it's the right thing to do from a returns and growth standpoint. And then finally, just on the Just Eat acquisition of City Pantry. Yes, we obviously saw that acquisition. We are very aware of the trends that we're seeing within B2B delivery and working very hard to understand that, and actually what opportunity that can present us with. So clearly, we have a significant estate of kitchens with significant capacity. We recognize there may be an opportunity for us to be able to deliver into SMEs who we currently probably wouldn't target as clients because they're at relatively smaller scale. Likewise, it's putting pressure on us to make sure that the offer we have on site is as good as anything that can be delivered in. And we're looking to see how we can replicate the experience of delivered in. So how can we provide the apps that allow our consumers to have best delivery pre-order, prepaid type offers. So I think that's how what we're seeing, how we're responding. We don't believe, at this point, it's having an impact on volumes. We think the impact that we're seeing is more about headcount levels and average spend levels.
We will take our next question from Tim Barrett from Numis.
Could I just clarify a couple of big-picture things? The first was around the shape of growth in the third quarter. You're able to say or give us the mix between net new and like-for-like?And then just also secondly, to understand your margin guidance, what's behind the slightly more modest guidance now. Is it to do with -- more to do with European operational gearing? Or to do with North America and the mobilization? Or a bit of both?
I'll take the second question first. In terms of the margin, I was looking -- it's simply about the higher growth that we're seeing. And as you've always said, the higher growth comes at a bit of a drag, and I think that's what we're seeing come through. In terms of the Q3 split between net new and like-for-like, I don't think it's any different to that, that we've seen this year. It will be -- it is obviously a fraction stronger in volume because of the Sports & Leisure calendar that we called out both in the U.K. and the U.S, so that would show up in volume. It would be existing clients that having more events or more spectators, so that would have driven the volume. And also, the US Open Golf Tournament, which has occurred in Q3 for us this year and Q4 for us last year. So that will probably be the only difference. I think, otherwise, look, our group new business is probably trending at around about 8%, 8.5%, plus the -- our retention ratio at 95%. So we're at new business of 3.5% like-for-like. It's 3% or so on a run rate basis.
Okay. And so when we think about where the margin changes, it would be where the upwards revision to growth has come?
Yes.
We will now take our next question from Vicki Stern from Barclays.
Speaking actually with the food delivery question, so another one, a food delivery company has just announced they're going to set up a procurement type business. Just any thoughts on that dynamic. And I guess related, an update on Foodbuy. Obviously, last year, there was a significant contract loss to one of your competitors. It seems like things have stabilized, but perhaps an update there on the growth of Foodbuy, please.
Yes. Thanks. I haven't seen the announcements about the procurements in food delivery. There's an awful lot that goes on within the food industry as you would expect. There's GPOs that exist today. There's High Street restaurants that club together to buy better through retailers. So I imagine it's also more of the same. We're working very hard on our own Foodbuy U.K. and growing those Foodbuy third-party volumes. With regard to Foodbuy North America and the contracts, yes, we recognize that the contract was lost last year. We pretty much replaced all of that volume, so we're back to the GBP 23 billion we talked about and we see some really exciting opportunities with other third parties and with GPOs as we look forward to further aggregate and accelerate our scale.
And just a follow-up on that. And then the other acquisitions you made across Europe, are those procurement businesses as well?
No. Those were principally foodservice businesses. All foodservice businesses.
As there are no further questions in the phone queue at this time, I would like to hand the call back over to you, Mr. Blakemore, for any additional or closing remarks.
Just want to say thank you all very much for your questions. We'll obviously speak to you again at our full year results in November, and just wishing you all a very enjoyable summer.
This will conclude today's conference. Thank you all for your participation. You may now disconnect.