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Good morning. Thank you for standing by, and welcome to the Sodexo First Quarter 2019 Revenue Conference Call. I advise you that this conference is being recorded today, on Thursday, January 10, 2019. I would like now to hand over the conference over to Sodexo team. Please go ahead.
Thank you, Ben. Good morning, everyone. Welcome to our first quarter fiscal 2019 revenue call. On the call today are our CEO, Denis Machuel; and CFO, Marc Rolland. As usual, I hope you all found the slides and press releases, which can be downloaded from the website. And you'll be able to access this call on our website for the next 12 months. The call is being recorded and may not be reproduced or transmitted without our consent. I remind you that this presentation contains statements that may be considered as forward-looking statements and, as such, may not relate strictly to historical or current facts. These statements represent management's views as of the date they are made, and we assume no obligation to update them. You are cautioned not to place undue reliance on our forward-looking statements. So please get back to the IR team if you have any further questions after the call. I remind you that the next announcement will be the half-year figures on Thursday, 11th of April. And now I turn the call over to Denis Machuel.
Thank you, Virginia, and good morning, everyone. Happy New Year to all of you, and thanks for joining us on this first quarter fiscal '19 call. Let's start directly with the presentation on Slide 5 with the organic growth, which is in line with our expectations. Our Q1 organic growth has been solid in the middle of the range of our guidance for the year. And thanks to a nearly 5% impact of acquisitions and very little currency impact, we are back to growth in the top line, with the total revenue up 6.8%. On-site organic growth has been 2.3%, with the U.S. flat. And outside of North America, we are up 4.2%. There has been an improvement both in Health Care and in Education in North America. However, we remain cautious because we still see retention risks in Health Care and Education even though there were some encouraging contract wins in Health Care. Business & Administration was slow due to lower revenues in Government & Agencies, as expected, and the very high comparative base in Energy & Resources in Q1 last year, which was linked to an exceptionally big project. Benefits & Rewards had a good quarter at 9.5% with continuous recovery in Brazil and a solid growth in Europe. If we now turn to Slide 6 and the M&A contribution. We've made several good bolt-on acquisitions so far this year, starting with Novae in Switzerland in high-end food services. And it turns out that in Switzerland, we had up to now little or no presence in food services. We also made a strategic move into seniors home care in Brazil with the acquisition of Pronep. And we consolidated our position in schools food services in the U.K. with the acquisition of Alliance in Partnership. We also doubled our presence in child care centers in France. So this quarter, we benefit from a contribution from acquisitions of 4.8% with the combination of Centerplate, and this is a very large part of the acquisition contribution, and also the last effects of Morris and Kim Yew that we acquired in Q1 last year as well as the first contribution from Crèches de France. At this stage, we expect the full M&A contribution to be over 2% for this year. If we turn now to Slide 7 and talk a little bit about Centerplate. Since it's been a year since we acquired Centerplate, we felt important to update you on the integration, which is going extremely well. We've won some exciting and prestigious new contracts, providing high-end food and beverage services at key venues like the Ronald Reagan Presidential Library and Museum in California, St. John's Convention Centre in Canada or the Bristol Mountain ski resort in New York. And very importantly, we have secured the retention of a number of significant contracts in the last few months. Retention highlights include the Orange County Convention Center in Orlando; the Hard Rock Stadium, which is home to the Miami Dolphins football team, and here we're talking American football, of course; and the Mercedes-Benz Superdome in New Orleans. We are also well advanced in obtaining the $25 million in synergies that we were expecting to take 4 years to achieve. These are split approximately 50-50 between support functions and procurement. Already in fiscal '18, we were at a run rate of 45%, and we expect to be at a run rate of 75% by the end of this fiscal year '19. So let me now hand you over to Marc for the details of the first quarter revenues, and I'll come back later on the action plans and the outlook.
Thank you, Denis. And good morning, everyone, and my best wishes to all of you for 2019. So let us turn to Slide 9. Revenues came in at EUR 5.7 billion for the quarter, up 6.8%. The currency impact was small this quarter at only minus 0.6%, which is a relief after the last year. Scope changes accounted for 4.8%. This gives us an organic growth of 2.6%, with On-site at 2.3% and BRS at 9.5%. Turning to Slide 11 for On-site Services. You can see that North America is flat at 0.2% and will have been even better if it has not been for the exceptional project work in Q1 last year. We are making some progress with our plans with the recovery in the region, and I think this is a very encouraging time. Europe is up 2.8%, and it's balanced across the main regions, maybe except Benelux. Africa, Asia, Australia, LatAm and Middle East achieved a sturdy 7.9% organic growth, down somewhat from the double-digit performance of last year, but it remains a strong performance. As a result, On-site, excluding North America, is up 4.2%. Turning to Slide 12. Business & Administrations organic growth was up 0.9% on last year's published figures. However, restated for the reallocation of contract between segments, organic growth was 2.5%. And on this restatement, you'll find the full disclosure in appendix 5 of this presentation. The main one concerns some previously unsegmented countries in Europe, which, after several years of restructuring, have now been segmented for the first time, within particular the transfer of some Health Care & Senior business out of Business & Administrations, which is where you will find all the non-segmented business. We have also provided in appendix the adjustments to be made for each quarter for the fiscal year '18 figures. These transfers, obviously, do not impact total On-site performance or geographic performance. They reflect changing organization as to where it makes sense to segment and where it does not. So back to Business & Administration. In North America, organic growth was minus 1.3%. If you remember, the first quarter last year was boosted by significant project work in Energy & Resources. Excluding this project work, the regional organic growth would have been positive. To be noted in North America, the Government & Agencies segment is impacted by the renewal of the U.S. Marine Corps contract at lower comparable unit sales. I remind you that this has been renewed for potential of up to 8 years, and it will take time to ramp up to the profitability of prior years. On the other hand, Corporate Services continues to benefit from solid same-site sales growth due to cross-selling in facilities management. In Europe, organic growth was up plus 1.9%. Sports & Leisure was strong, thanks to a strong autumn tourist season in Paris. Corporate Services continued to generate modest growth with solid net contract wins. Energy & Resources is stabilizing. However, Government & Agencies still impacted by the exit of the British Army contract, which happened progressively through fiscal '18. The last losses on those contracts are -- will be impacting us until January '19, and it will then be over. In Africa, Asia, Australia, Latin America and the Middle East, organic growth remained solid at 7.1%. The mining and onshore subsegment of E&R are continuing to grow but more slowly than they've done in previous quarters. The current instability of the oil price is impacting the number of new projects being launched, and therefore, new business opportunities in the oil sector are currently weak. In the Corporate segment, we are continuing to sign new contracts, and we are also building our activity with existing clients and see significant opportunity in all region. In Health Care & Seniors, restated organic growth was 1.9%. In North America, there was some improvement in organic growth at plus 0.8%. In hospitals, we are benefiting from some new contract, and there is an improvement in comparable unit growth and a solid improvement in retention. However, in Seniors, the retention is still under pressure. Overall, although the trend looks more positive, there's still further risk of some of our existing contracts. In Europe, organic growth was 1.7%, in line with previous quarters. This is helped by last year's development in Belgium and the U.K. Activity in the Nordics was impacted by negative net lost business. Elsewhere, retention remains high as bidding remains very selective. Despite the much higher comparable base last year, in Africa, Asia, Australia, Latin America and the Middle East, growth was particularly strong at plus 15.3% due to contract startups and solid same-site sales growth throughout the region but most particularly in Brazil. Education organic growth was plus 2.5%, with a very strong quarter in Europe and Asia and North America slightly positive, as we expected. Organic growth in North America was positive at plus 0.7% (sic) [ 0.6% ]. As anticipated, net new business is neutral, no longer negatively impacting revenues. Price increases are also coming through. Schools continue to generate solid growth, and universities are improving slowly but surely. In Europe, organic growth was plus 8.9% due to new business in private school in the U.K. and the positive trend emerging in student living for European universities with several noticeable wins in the U.K. There was also an extra day in France in Education. And from January, the figures will also include the new contract for the Yvelines, servicing 114 colleges in the department, representing 48,000 meals per day out of 19 kitchens around the department, and it started up just this Monday. The recently announced acquisition of Alliance in Partnership, specialized in the U.K. state school system, will also be consolidated from January '19. Organic growth in Africa, Asia, Australia, Latin America and the Middle East remains strong at plus 12%, resulting from several new School and University contracts in China, Singapore and India. Now let's move on to Benefits & Rewards Services. And as we showed you last quarter, we have changed the reporting of this. So firstly, let's look at revenues by service line. Total revenues were up 9.5%. This is due to 10.5% organic growth of the traditional meal and food employee benefits, backed by an issue volume of 8.4%. The improvements related to previous quarters reflects the improving trend in Brazil. The other activities from the diversification are up 6.1%, with strong growth in Mobility & Expense and Health & Wellness but a relatively modest performance in Incentive & Recognition, particularly in the U.K., relative to a very strong quarter last year. In Europe, Asia and U.S.A., organic growth in revenues remained strong this quarter at plus 7.6%, with solid growth in mature Europe and double-digit growth in Eastern Europe, helped by a particularly large issue volume at the end of the previous fiscal year in Romania and strong growth in the Czech Republic and Turkey. Incentive & Recognition activities continue to grow, although a bit more modestly in the last quarter at this stage. However, there's been a very strong start to the commercialization of Rydoo end-to-end travel and expense management system. Organic growth in Latin America continued to improve from the fiscal '18 Q3 and Q4 growth rate, with revenues up 11.8%. This reflects the continued recovery in both the traditional meal and food card as well as the fuel card in Brazil with face value increases, recovery in the number of beneficiaries, some new business, too, and stability in interest rates. Growth remains very strong in Mexico as well. Operating revenue were up 9.2%. Financial revenues were up for the first time in a while at plus 12.7% as the result of the stabilization in rates in Brazil, an exceptional high issue volume in Romania in Q4 last year and particularly strong growth in Turkey this quarter, where interest rates are high. Thank you for your attention. I now hand you back to Denis for the strategic agenda and the outlook.
Thank you, Marc. And now let's turn to Slide 20, where I'd like to give you an update on our focus on growth strategic agenda. This agenda has 4 pillars. And if we start with the client and consumer-centric pillar, I'd like to give you a highlight on what we've done on our food delivery acquisition. The acquisition of FoodChéri in France that we did last January helped us to really enrich our offer with fresh, healthy, sustainable food delivery services with fully digital distribution channels. So some figures around FoodChéri. We have now 12 -- more than 12,000 meals that are prepared every week. We have 200 companies that propose FoodChéri for their employees. The sales have grown in fiscal year '18 61%. And we've launched a new offer in March, which is called Seazon, and it's the first ready-to-eat subscription meal offering in France. It's quite innovative. And FoodChéri is now expanding geographically and now available in Lyon. So -- and it's good to be -- to know that the -- since the acquisition, we've also developed synergies between our On-site Services and FoodChéri, which helps have a greater B2B positioning for FoodChéri. Regarding operational efficiency, I'd like this quarter to talk about labor KPIs in North America. As you know, we've talked about the STEP program and the fact that STEP 3 around labor productivity is the first to be introduced and tested. The systems are now up and running, and we have now solid data coming out of North America universities, where we've implemented the system. The good news is that we have reduced temporary labor spend by 10.1%. At the same time, we've also been working on a better mix between full-time and part-time work contracts, and we have achieved an improvement of 150 basis points in this ratio. The scheduling is having an effect as well with the 3.4% increase in revenues per productive hour. On the other hand, we also have to cope with the 3.8% inflation in average hourly rate -- hourly wage rates. And while we have passed through price increases this summer to the clients, it always makes it a bit more difficult to keep all the efficiency gains. On the third pillar regarding anchoring corporate responsibility in our activities, let me highlight some important initiatives in the U.S. and in the U.K., where they're really taking action to reduce single-use plastic, typically eliminating plastic straws, stirrers, bags and food containers progressively across our site. We have to realize that Sodexo US will eliminate over time more than 245 million pieces of plastic. It's a massive endeavor. Sodexo's people are critical to the success of our focus goal -- focus on growth agenda. And as we shared with you during the Capital Markets Day, nurturing talent is a fundamental pillar of this strategic agenda. One of the training initiatives we've launched to ensure our teams have the necessary skills base for future success is the On-Site Manager Academy. This program focuses on key areas: first, people management to ensure that we drive engagement of operational teams to deliver our promises daily; the second is managing contracts effectively to ensure that we can increase CUGR through effective identification of cross-sell opportunities; the third area is understanding client and consumers, so contributing to our client retention through improved client relationships; and the fourth is with regards to how we develop behaviors to increase effectiveness and safety and is particularly driving operational efficiency with a focus on health and safety. So this program will be live in all regions in the world by the end of this fiscal year '19. Now if we turn to Slide 21. I'm really pleased to announce the appointment of Sarosh Mistry as Region Chair for North America as of March 1, replacing Lorna Donatone, who will be retiring. Some of you will have met Sarosh at the Capital Markets Day if you took part in the seniors workshop. He's been CEO of the home care activities in North America for Sodexo since 2012, and he's been also CEO, Worldwide Home Care since 2016. It is the right time for Lorna to take her retirement and for Sarosh to bring a new dynamic and new ideas to accelerate our growth in North America. Sarosh has experience across the whole range of our services in North America. He knows the market, he's worked for our -- some of our competitors, and he has very well-managed growth businesses. His role will be to support the segments in reigniting growth and ensure that we align all our initiatives to reignite growth. Sarosh will join the Group Executive Committee effective immediately. So now as we finish the presentation, I just want to reiterate that, first, growth in Q1 was absolutely in line with our expectations; second, that the action plans are delivering, and the productivity is being reinvested in growth initiatives. I'd like to add that in this process of reinvestments, we expect some timing differences between productivity gains and investments, which will weigh slightly on the first half underlying operating profit margin. However, the group maintains its objectives for the full year, which are an organic revenue growth between 2% and 3% and an underlying operating profit margin between 5.5% and 5.7%, excluding the currency impact. Finally, let me remind you that our strategic agenda is aimed at delivering market-leading growth. And I can ensure you that the ComEx and I will not rest until we have achieved this. The first steps to return to this performance are to achieve an organic growth of more than 3% during fiscal year 2020 and then progressively improve margins back up to over 6% sustainably. And as explained during the Capital Markets Day, margin improvements will come more easily with the right levers of growth. Let me now open the call for your questions. So operator, if you can please open the Q&A session.
[Operator Instructions] We have a few questions on the line. We'll take the first one from Jamie Rollo, Morgan Stanley.
Three questions, please. First of all, just in Europe, if you could touch briefly on any impact from gilets jaunes and particularly on the French leisure business. And also in the U.K., your tone sounds quite strong on contract wins, so is that taking market share from a competitor? Secondly, North America, a flat performance in the first quarter, and you're signaling a bit of potential risk still in Health Care. I'm just wondering whether North America should be positive for organic sales for the year. And then finally, on FoodChéri and delivery, how many of the 200 clients of theirs are existing OSS clients? And do you expect any cannibalization as you extend FoodChéri to your other OSS contracts?
Thank you, Jamie. Regarding the gilets jaunes impact, the impact is negligible in Q1. It'll be a little bit higher in December. As an example, we had the Lido close for 3 Saturdays. But it's not going to be very, very significant. The issue that we see more regarding gilets jaunes is -- looking forward is more the impact that it can have for spring and summer over tourism. People are doing their -- the bookings as we speak, and the climate and what we see on TV doesn't help. So we're cautious about this. There is also an impact on the social climate and, of course, impact on the salary negotiations, which are happening right now. So we expect an impact; still difficult to estimate how much. Of course, we'll do everything we can to cover that, but so we're still unsure, and we don't know how long the gilets jaunes crisis will last, and that's part of the uncertainty that we have ahead of us.
In the U.K., I mean, I specifically spoke about the Education business, which is doing pretty well. I must say the team have done a very good job. And yes, it is a clear focus, Education, the Schools and University in the U.K. And we are seeing significant growth. What's happening also in the U.K. is that we've had a much better performance in the North Sea. I mean, we are not declining anymore. Last year, we stabilized, but now we have some growth. Obviously, I mean, the base is much lower than it used to be. As you know also, we've had some contract wins last year in Health Care. It's not a brilliant growth, but it is some growth. And the Corporate is doing fine. So actually, the U.K., the first quarter performance are very decent. Now are we taking market share? Difficult to say.
Yes.
I'm saying I'm not sure the U.K. market as a whole is growing that fast. So if we are growing, maybe we are taking a little bit of market share. But it is a very young growth, so I mean, I will not capitalize for the moment. Let's say...
Yes.
It's an encouraging situation we are currently seeing for the past 2, 3 quarters in U.K.
I wouldn't call it massive, but it's encouraging.
It's encouraging.
Regarding NorAm, we are both cautious. We are pleased with what we -- the trend that we start to see in Health Care and Education. We said in our last call that we were entering the year with a net new loss, new fall in Education, which is a good sign. We are cautious in -- both in Health Care and Education regarding retention because we are still unsure about how much we will retain of our clients' portfolio. The impact, of course, as you know, in Education will be more towards the summer and the beginning of next year. Health Care can happen during the year, so we're cautious. What we see, though, is we have encouraging contract wins in Health Care. Not much going on in Education, again, because of the sales cycle, which happens more during summertime. But Health Care is more encouraging on the sales side. Regarding FoodChéri, to be frank, the acquisition is very recent. There are not that many of these 200 clients that are coming from On-site. We have some interesting leads coming up, and I would say some leads are coming both from On-site and also from Benefits & Rewards. So we see some interesting synergies to come yet to be fully materialized, but we see the dynamic. Regarding the cannibalization, our business is already being cannibalized by -- yes, by the consumer trends, okay, and we've mentioned that during the Capital Markets Day. So what we do with FoodChéri is we capture part of this cannibalization with our services, so we see more as a complementary what's happening. And again, as we build stronger synergies between FoodChéri and the -- typically, the On-site business, I think we'll have a comprehensive offer that will help us capture more of a share of wallet of our consumers on a particular site.
And just on the NorAm outlook, do you expect that sort of flat first quarter performance to improve through the year then? Should we be looking for something nearer 2% then?
No. I don't think we'll be that high as, again, we ended the year with negative -- as you know, negative full year growth. So we are barely positive this first quarter. We hope that we -- well, we are reasonably confident that we will continue this trend, but we -- I don't think we'll get back to 2% by this year.
We'll take our next question from Jarrod Castle from UBS.
Three from me as well. Just coming back to FoodChéri, whether or not you're thinking about doing more on this front in terms of outside of France that kind of delivery and whether or not that might entail some further acquisitions. Kind of related to acquisitions, is more on the disposal front, if there's any assets you've identified to dispose of during the course of the year, if you could give some color on that and potential scale. And then just lastly, any further commentary on inflation? I think you touched on it with regards to North America, but commentary on kind of how clients are absorbing increases and the rest of the world.
Thanks, Jarrod. We don't -- regarding FoodChéri, we are active on the food delivery part. As you know, we've also invested a minority stake in EAT Club in -- on the West Coast. We are looking at possibly some acquisitions. We are not absolutely obsessed by that. We can also -- we believe that we've typically also -- with the Benefits & Rewards platforms that we're building, we believe also that we are building internal capabilities to develop food delivery services. So there is -- there could be some acquisitions. We are cautious also on the valuation of those acquisitions because it's quite trendy at the moment. You can have very high valuation, so we're cautious about that; cautious about the models, the business models and the profitability of those models. But yes, we are active. We know that it complements our services, so you'll see more about this. The way we will do it will be -- will depend upon the geographies, the situation in emerging markets and the difference from the U.S. or Europe. So you'll see more of that. We're active, but we are also cautious on acquisitions.
Yes. On disposals, actually, I will say on scope -- or on the geographic scope in general, so there are 2 countries where we decided to focus purely on large -- strategic large accounts, and we will be reducing the other activities. There are 2 countries that we will most probably close because it's not going to be easy to sell. And there are 3 countries for which we have an active sales process. Info memo have been circulated and so forth, and so, I mean, I'm expecting an outcome on those 3 countries during the year. And in total, we're not talking a lot of revenues, so I -- don't be worried about the impact on the revenue, but as we said, it's part of our simplification drive. As we explained, we've reduced 1 region; last year, 2, so we are focusing on this, and it's going step by step. On inflation, just to go back to the U.S., we are still seeing, obviously, an hourly labor inflation. Our estimations for Q1 was for North America, about 3.5%. And the labor inflation we are expecting between the mix of admin labor and for fixed labor and hourly labor is around 3%. We are passing inflation to our clients, as we said, and I think we -- there is no delay or no issues impacting the inflation. It's just that it's an ongoing process, and so we are passing it well. As you saw in the example of Universities, we are tracking it with quite a level of detail. So it -- the combined inflation on labor in the U.S. currently in sales, that's about 3%.
We'll take our next question from Jaafar Mestari.
Just 2 questions from me, please. Firstly, just coming back on North America Health Care, could you maybe give us a bit more detail on the contract risks? Because the factors you've mentioned in the previous answer all looked like they're -- they've been there forever, the fact that Education is a bit more seasonal, and Health Care can happen through the year. So I was wondering if anything has changed. Is it just a coincidence that you have a large number of contracts up for renewal in '19? And is the client base more consolidated? Are you seeing practice renewals? I don't remember you flagging this risk back in November. And then my second question is on BRS and the margin prospects there. You invested in some new services last year. Overall, service diversification is actually still growing below the average, but definitely, pockets like mobility seem to be doing really well. So I was wondering what your approach was there. Are you going to be focusing on just a couple of segments in new services? Or are there any new services that you want to invest more into this year to reaccelerate?
Okay. Thanks, Jaafar. On NorAm, what we said, yes, it's true that the sales cycles in Health Care tells us that it can happen at any time. There is not a rhythm like new year for school or universities. I wouldn't say that things have changed in terms of -- I mentioned in previous calls that because of, in the past years, we experienced operational issues, this has created situations with clients that maybe they start to think about changing their supplier. So we're very, very active in being with the client, understanding their needs, fixing operational issues, and I think we're really improving there. But as you've -- with these operational issues, we have generated some questions in the minds of the clients, so that's what I'm saying, we're cautious on retention, we do our very maximum, our very best to secure all our clients. We are talking hundreds of clients in the U.S., so that's what I'm -- that's why I'm cautious. The teams are very, very active. And on the mid-, long term, I'm very confident they do the right things. But when a client starts to go for a bid, there is always an uncertainty that comes out of it. So that's -- it's more that message that I want to deliver. But I can tell you that with the new management team, it's -- we have a new sales director. We have, as I said, new CEO for Health Care in North America. They are assessing the old teams, so we are doing the hard work to really secure all our portfolio but -- yes.
And just on that, I think something interesting you say...
Yes.
You're talking about a trend across hundreds of clients. You're not talking about any specific handful of big accounts that you're worried about.
No, no, I said we have hundreds -- I'm not talking about a massive trend of operational issues. We have -- we had operational issues on several clients, but it's true that the -- when we talk about retention, we have to -- we want to retain all our clients, and so we have to ensure that we maximize our -- the efficiency and the quality of our services across all our clients. So it's -- the size is massive. The places where we have potential issues, they are, of course, not that many, but still given the size of that business, it's quite important.
With regards to BRS, I think we explained that we have invested in Travel & Expense. We are very much focused also on food cards. But we now also -- for a couple of years, we've been investing in Health & Wellness, and it's actually getting good traction. We see serious growth in Health & Wellness. And obviously, we have the Incentive & Recognition. We believe that today, we have a portfolio which is good. We are not yet planning to develop into other area. But what is very encouraging is what -- the growth we are experiencing in Health & Wellness and Travel & Expense are very, very strong. It's still small, but it's growing fast and with actually very innovative offers which is also good for the brand of Benefits & Rewards. In terms of margin evolution, we said that we wanted to grow the margin this year high single digit in terms of UOP. We are not focusing on the margin rates anymore but more on the growth rate of the UOP. And we believe we are on track to deliver what we said for BRS this year with the very strong momentum on those new services. And as you can see, the employee benefits momentum is not suffering either. I mean, it's very strong. It's been, obviously, boosted by Brazil this last 2 quarters. But in Europe, it's also very strong. So I mean, it's a good start of the year with -- for BRS.
We'll take our next question from Julien Richer from Kepler.
A couple of questions from me, please. The first one, in France, when you discuss about the contribution of Yvelines in France, could you please give us the -- what you expect in terms of contribution for 2019 from that specific contract? Looking to -- or coming back on the North American contract, is it possible to have an idea of a worst case scenario? So on the Health Care segment, if the retention rate is not in line with what you expect, what might be the impact on organic growth? And the last one, just to have your view on Brazil on the Benefits & Rewards segment with the new political environment, the new President, how do you see things evolving in that country for your activity?
In France, so it started on Monday. As you've seen, it's over 100 schools. We are expecting -- obviously, I mean, the September-December season is the highest season, so -- but -- because we are expecting something like EUR 30 million of revenue out of that contract in this coming year, obviously, I mean, it's a heavy mobilization, there was a lot of people involved, CapEx involved and so forth, so we are expecting this contract to ramp up through the year. In Health Care, so far, and we are in January, retention has been very decent in Health Care, slightly improving on last year in North America. So if we had an issue with retention in Health Care, it's more going to be next year impact than this year impact. So I think we'll touch base with you on the retention in Health Care with the half year results. But as we grow, that the impact now will mostly be, if we have an impact, for next year. So we don't believe that it will impact the guidance. And on Brazil, Denis?
On Brazil, I think we -- as Marc mentioned, I think we see good indicators. We see clients recruiting employees that become beneficiaries. We've seen stable interest rates and -- but we have yet to see the full impact of the new government. What we see is that the -- let's say, the business world is pretty -- at the moment, pretty positive on the decisions that the government could take from an economic perspective. And we know also that the program, the food -- Workers' Food Program has more than 4 years in Brazil. It's really solid. We haven't heard anything from the new President or from the government regarding any changes on that, so I think we're pretty confident on the fact that if there is more positive economic outlook, that we will profit from that and continue to see new beneficiaries coming in and, I would say, stable financial interest rates particularly which help our business.
We will take our next question from Vicki Stern from Barclays.
Just firstly -- I have 3 questions. Firstly, could you give any sense just how much of an impact the timing mismatch will have on margins in the first half and, I guess more importantly, just your level of confidence in them being flat by the full year? Second question is just around government shutdown in the U.S. I imagine pretty small impact so far, but just wanted to check your thoughts on that. And then just finally, on CapEx, obviously, you've signaled that you want CapEx to ultimately be higher as you find more opportunities to invest. With a little visibility now following the recent business wins, just any sense of where that CapEx might be tracking for this year.
Thanks, Vicki. So we don't comment in Q1 what we will do in H1. So what we've said is there is a phasing impact between the productivity gains and the investments. So we said that this will weigh on H1, but we won't comment further on that. Regarding the government shutdown, yes...
Yes, I mean, we start feeling some impact, especially, I mean, for our contracts in Washington and -- I mean, we have a good Government & Agency business in the U.S. So yes, there will be some impact. It's a little too early to say how much, but we will be tracking this and update you if this is becoming significant, but we're not expecting this to be major. We've had this in the past and...
And on the CapEx, yes, we've seen some signs of more CapEx than the year before. And so I mean, the -- yes, I mean, there will be -- this should be a year with more CapEx spend than the previous year average. You see, for instance, the Yvelines, I mean, we've had some good retention and good wins in Centerplate. And there was some CapEx in Education as well. So I think we see a more CapEx-dynamic environment since the beginning of the year. Now it's difficult to give you a full number, but it's there.
Yes.
As a trend.
Yes, as sales ramp up, we can expect a little bit more CapEx, as you mentioned, in Sports & Leisure, in the Universities but more for, let's say, next year.
But we feel it in our numbers right now.
Yes.
So now how it will consolidate for the year, it's too early to say, but the trend is there.
And you know that we've also encouraged our teams to improve our retention, to spend here and there some CapEx. It is good CapEx when you get a lengthy contract, so...
Yes.
Yes, as Marc said, you'll see more of that is coming.
Just circling back on the first question. I appreciate you don't want to get into the granularity for H1, but really the second part of my question, just the confidence that the sort of timing mismatch piece may resolve itself by the full year.
Yes, we've maintained today the guidance for the year. So yes, we're working on it.
[Operator Instructions] We'll take the next question from Richard Clarke from Bernstein.
Two questions from me. First one is circling back on inflation. So you talked about University labor inflation of 3.8%. But the organic growth in U.S. Education is just 0.6%, which you say is on flat net wins. So just how to reconcile that, is that some weak volumes, or are you not managing to pass pricing on in that particular segment? And then the second question is on -- I noticed you signed a couple more franchise brands this year, Firehouse Subs and a pizza brand. And you got a fair stable of brands, about 50 now in the U.S. Is that something you're seeing clients becoming more demanding for, is to put High Street brands into the contract? And what does that do to the margin profile of the contract if you're paying those franchise fees back? Is that hurting it, or can you offset that with higher prices?
On the inflation, in the example of University we gave you, I mean, the average wage increase experienced for hourly labor is 3.8%, but the revenue per productive hour is increasing by 3.4%. When we are blending this with the ratio of full time and part time, which is improving and the reduction of temp labor, we see that our labor cost-to-revenue ratio is actually very stable. So what we are giving by this example is that, yes, we have labor inflation, but because we sell more per hour worked, and we control the temp labor cost better, and we also get the mix probably, in this case, even better, we are actually stabilizing our labor cost to revenue. And obviously, I mean, everything I'm giving you here is like-for-like, so that's why you can still have those KPI whether you're growing or degrowing, it's corrected for that. But what we wanted to illustrate is that STEP 3, which was launched first in University in North America and given all the troubles we had last year during Q1 and Q2, is actually working well. And that granularity of analysis is done site by site, contract by contract and on a very regular basis with the operators. And this is how we are mitigating the impact of inflation. Now we are passing inflation to our clients, but as we said before, we are passing it at the anniversary of the contract with the index, which is a blended index between labor and food. And curiously, I mean, the blended index between labor and food is not 3.5%, it's about 2.4%, 2.5%. So I think we are passing inflation -- the blended inflation, we are passing it to clients.
Regarding brand or even High Street brands, yes, clients and consumers appreciate to see -- to have an offer that encompasses some High Street brands. We've been used to that. We have -- in several of our contracts in the U.S. was -- they're typically High Street brands. I think we have good terms when we talk about franchising those brands. We're used to managing that, and we will increase that. We also develop our own brands for consumers, and we'll do more of that. And as I mentioned during the Capital Markets Day, so we're talking here B2C brands. But even on the B2B side, we're also -- as I mentioned, we're also rethinking about the way we address the markets maybe with more and different brands, specifically the Centerplate brand, The Good Eating Company brand, et cetera. I think we should take the last question now, right?
And it appears there are no further questions at this time. I would like to turn the conference back to the Sodexo team for any additional or closing remarks.
All right. Thank you, everyone. Once again, let me wish you a very nice 2019. And I just want to reiterate the fact that we're -- we've demonstrated confidence in the future. We see growth coming up as we expected. North America is recovering, and we have a new management there. We announced that we have now a new Region Chair, that will bring also new ideas. And we have a good trend in Health Care and Education. We're cautious, but we are confident on the midterm, so we maintain our guidance and looking forward to announcing H1 and continue all the effort that the teams do to recover the growth and reach 3% plus for next fiscal year and more. Thank you very much to all of you.
Thank you.
That concludes today's conference. Thank you, everyone, for your participation.