Good morning. Thank you for standing by. Welcome to the Sodexo Q3 fiscal 2020 revenues conference call. If you wish to ask a question, please press star and one on your telephone keypad. I advise you that this conference is being recorded today, Tuesday, July the 7th, 2020. I will now like to hand the conference over to the Sodexo team. Please go ahead.
Thank you. Good morning, everyone. Welcome to our Q3 2020 revenue call. On the call today are CEO, Denis Machuel, and CFO, Marc Rolland. As usual, the slides and press release 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're made, and we assume no obligation to update them. You're cautioned not to place undue reliance on our forward-looking statements. 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 full-year figures on Thursday, 29th of October, 2020. Thank you. Now over to Denis.
Thank you, Virginia, and good morning, everyone. It's great to be with you today, and I sincerely hope that you are all well. Thanks for joining us. To make things easier for you, unlike normal practice, we've decided to comment Q3 figures only. You will find the nine months figures in the appendix. Obviously, since the end of February, we are in a very different world, a COVID-19 impacted world, and our industry has never seen a crisis like this. On slide four, you see that Q3 revenues fell 29.9%, slightly better than our hypothesis of -33%, the hypothesis that we gave in April. In business and administration , sales were down 28.5%, with corporate services down 27% and sports and leisure down 84%. Education was down 53.9%, with schools at only -48%, despite most schools being closed around the world from mid-March.
This is due to the fact that most districts in the U.S. decided to supply meals to children in need. Healthcare and seniors were more resilient at -12.9%, but not as good as our initial hypothesis. Benefits & Rewards was down 22.8% versus our hypothesis of -20%. On slide five, after a month of adaptation in March, we have strongly controlled our costs. The drop-through is now below 25% due to a combination of the use of the chômage partiel, but also separating from staff when there were no other alternatives, and strictly controlling all SG&A. On slide six, you see that we had a major cash outflow in March due to an abrupt interruption of cash sales as sites closed. On the other hand, we continued to pay our suppliers for previous weeks' food supplies.
Already in April, our cash flow was again positive as working capital realigned on the new revenue levels and our protective measures came into play, the cash burn only lasted one month. On slide seven, as I am sure you have seen, we have decided to reimburse our USPP of $1.6 billion. Given our strong liquidity, we were not prepared to accept the conditions that the note holders were trying to impose. We want the freedom to be able to decide whether we invest, we restructure, or we pay the dividend or not. By the end of August, these notes will be reimbursed, and we will be covenant-free. If we move to slide nine, you see that from day one, we adapted our services and took key initiatives to ensure business continuity. First, we provided critical support to local health systems.
In California, for example, in only 13 days, we helped reopen the Los Angeles Surge Hospital dedicated to COVID-19 patients. The building was empty. There was no kitchen nor any IT infrastructure, we managed the catering, cleaning, biomedical engineering, and maintenance for nearly 270 patients. We also immediately redeployed our people whose workplace closed to other sites urgently requiring additional team members. This means that more than 4,000 employees have been redeployed, primarily in North America and in Europe, in hospitals and in retirement homes. Support for educational communities has been critical in our adaptation to the crisis.
We reopened one central kitchen in Marseille to prepare 5,000+ meals daily to the most in need, highly impacted by the pandemic. In the U.S., despite many schools and universities closing, our teams continue to provide school children and students with access to food by preparing more than 4 million meals per week. While sports and leisure sites closed down completely, we did our best to adapt our activity. In the Hard Rock Stadium in Miami, for example, having provided catering services for the Super Bowl in February, we reinvented ourselves and prepared more than 625,000 meals for seniors in the city. In the U.K., teams from sports and leisure and healthcare got together to support the NHS to set up COVID-19 drive-through testing centers for key workers. Healthcare had the client relationship, and sports and leisure had the people.
Finally, we launched B2C delivery services in France with Traiteur de Paris and in Brazil with Deli Express by Sodexo. In this fast-growing market in Brazil, we are leveraging our existing kitchens to expand from a B2B to a B2C model. We already established partnerships with delivery apps such as Rappi and are discussing also with other platforms. Now on slide 10. Reinforced health and safety protocols have become essential in the post-COVID-19 world. As many countries are emerging progressively from confinement, employees need to be reassured that they can feel safe within the workplace. We can contribute to people's confidence every step of the day to minimize risk and enhance safety for our employees, clients, and consumers with a comprehensive range of services. We created Sodexo Medical Advisory Council, comprised of experts from around the world in epidemiology, family medicine, nutrition, occupational health, and behavioral health, and pandemic planning and operations.
This council supports the development of new protocols and standards, including COVID-19-related services. With the same pragmatic approach, we joined forces with Bureau Veritas to introduce a hygiene verification label for our procedures and services. Further proof of our commitment to getting people back on-site with complete confidence. In the same way, on slide 11, we have been an essential partner for our clients during the COVID-19 crisis. We'll be an essential partner as they restart. We are convinced that trust will be the cornerstone of the successful adaptation to the post-COVID new reality. This is why we launched Rise with Sodexo, a global program to meet the health, operational, and confidence challenges that clients are facing when restarting their business.
Our unique expertise, as well as the lessons recently learned from our experience in dealing with the pandemic, particularly in Asia, will allow our clients to conduct their operations with confidence and in complete security. Rise with Sodexo is based on the seamless integration of our services across On-site, Benefits & Rewards, and personal home services. Integrating over 20 essential services from simplified restaurant services, including retail, grab and go, and meal cards for home workers. To disinfection, contactless services, deep cleaning, air control, digital concierge services, and office reorganization. This program was designed and delivered in only three weeks and is now live in North America, in the U.K. and France, and planned for global deployment in the coming months. I now turn over to you, Marc, as we go through the operations.
Thank you, Denis, and good morning, everyone. Let us turn to slide 13. Q3 revenues came in at EUR 3.9 billion, down 31.2%. The currency impact was -1.7% due to the strength of the euro relative to most currencies except for the dollar. Scope change accounted for 0.3%. This gives us an organic decline of 29.9%, slightly better than our hypothesis. On-site was down 30.1%, and benefits and reward was down 22.8%. Before going into the detail, I would like just to show you how resilient some of our activities were. As Denis said, we've never seen such a crisis in our industry. Interestingly, on slide 15, our FM services that we've been building up around the world over the last 15 years has provided us with resilience. FM represents 33% of our On-site business and is down only 2%.
With FM more resilient, so are the global integrated accounts, which represent about 10% of our on-site revenues, which are flat. Helped by a sector bias towards FMCG and pharmaceuticals. We also have a solid 50/50 mix of blue versus white-collar workers in our corporate services activities. Blue-collar workers can't work from home, and for those that are in essential industries, they continue to come to work even through lockdown. The fact that more than half of corporate services contracts in North America are cost-plus has also helped us. Whereas elsewhere, we've had to negotiate with each of our clients to revise the contract. This is happening, it takes more time. The diversity of our geographical presence has also helped. The 16% in Asia and Latin America has been very resilient.
Except in schools, lockdown has not been as strict in all countries either, and to a certain extent, some countries are behind the curve, with the COVID-19 pandemic perhaps not having even reached its peak in the U.S. or Latin America. Finally, we also have two segments which have been very resilient, E&R, thanks to mining, and government and agencies, which has military bases and prisons in the portfolio. Together, these segments account for 13% of the group's revenues, and together were actually up 2.7% in Q3. FM sales were down 2%, while food sales, on the contrary, were down 44%. In fact, FM was flat if you strip out education. In slide 17, you can see that while North America and Europe were down by more than 30% each, Asia Pacific, Latin America, and the Middle East and Africa was down only 4%.
Look at the recovery in China. This is just one country, and China is particularly blue-collar, particularly FM, and has taken a very proactive approach to getting back to work. I'm certainly not going to guarantee that the end of lockdown will look like this everywhere. By end May, China was only down 1% year-on-year. FM was well above last year due to new services, many of which are part of the Rise with Sodexo offer. Denis, do you want to go through the next slide?
Yes. Thanks, Marc. As you just said, our global integrated accounts, which we've been building over the past 15 years, have been an important lever of resilience. I wanted to share with you the example of one of our clients, a worldwide pharmaceutical leader, and explain how we supported this client in adapting its operations in China during the pandemic. The area to be secured represented more than 210,000 sq m, including the HQ in Shanghai, six factories, and additional offices in Beijing. Our teams moved into action from day one to address the client's main challenges, such as physical sanitization of enormous facilities, social distancing, and the need for new and increased sanitary protection for thousands of people moving around in these facilities.
From the distribution of essential material, full disinfection, preparation, and distribution of food with the highest standards of health and safety, access control, epidemic outbreak simulations, and logistics, this large pharmaceutical company is supported by a team of more than 500 Sodexo employees. The outstanding and effective protection measures of the Sodexo team were rewarded by the Vice Mayor of Shanghai, who praised the team's logistical support and were widely recognized by our clients, who promoted our work internally. As you can see from this example, our integrated services business model is pretty resilient. I now turn you back to Marc to go through the segment slides. Thank you.
Business and administration Q3 revenues were down organically by 28.5%, slightly better than the hypothesis. The COVID-19 impact was very significant on the business despite the resilience of the Energy and Resources and Government and Agency segments, the FM activities generally, and more particularly within the global integrated FM accounts. Corporate Services was down 27% and Sports and Leisure was down 84%. North America was down 44.5%, particularly impacted by the substantial decline in Sports and Leisure, with all sites closed from mid-March. Corporate Services was impacted by the closing of many client sites due to client and state decisions to lock down. However, the combination of a 50/50 split between blue-collar and white-collar consumer, the high level of cost-plus contracts, and the weight of FM services and global accounts provided some resilience in the U.S. In Europe, sales were down 33.1%.
While all segments were impacted by lockdown, the performance was relatively resilient thanks to the overall weight of government services, energy and resources, FM services, and global accounts. The 2% decline in Asia Pacific, Latin America, Middle East, and Africa reflect a strong recovery in China at the end of its lockdown, extra FM services for the protection of mining employees in order to avoid closure, and the lesser COVID-19 lockdown in Latin America. Healthcare and seniors Q3 revenues were down 12.9% organically, a bit more than what we anticipated in our hypothesis. In fact, many hospitals heavily reduced elective surgery, and we also suffered a significant drop in retail activities. This was not fully mitigated by extra COVID-19-linked services.
In North America, activity was down 15.3%, a bit more than the average due to the loss of several hospital contracts from the fourth quarter of fiscal 2019 and one large contract exit in the first quarter of fiscal 2020. FM cross-selling initiatives linked to COVID-19 helped to ensure that seniors and FM sales were flat. In Europe, the -9% decline was due to the loss of retail sales, particularly in Southern Europe, slightly offset by higher volumes for cleaning and infection control, and a new contract for COVID testing centers in the U.K. In Asia Pac, Latin America, Middle East, and Africa, the 7.6% decline was principally due to reduced volumes due to COVID and site exits in LATAM. Asia, and particularly India, was more or less stable.
Education was down 53.9%, heavily impacted by the closure of schools and universities in most countries, actually better than the -60% hypothesis. North America was down only -52.2%, thanks to local meal plans for children in need, as Denis has already mentioned. In Europe, the lockdown was more severe and started a bit earlier. As a result, the revenue decline was also more severe at -59.3%. In France, schools started reopening in May, very progressively, and usually with very limited food services. In Asia Pacific, Latin America, Middle East, and Africa, organic growth was -47.3%. In China, schools started opening mid-May. As international schools are a large proportion of our contract, this was very progressive given the absence of many of the international pupils. Now let's move on to Benefits & Rewards Services. The decline of 22.8% was a bit below our hypothesis.
This was particularly due to services diversification. We should come back to this in a minute. Employee benefits, which represents 80% of BRS activities, was more resilient with issue volume down only 12% in Q3. Latin America employee benefits issue volume was also much more resilient, down only 7%. Digital conversion increased by seven points because paper vouchers were not distributable in most countries during lockdown. We also have substantially increased the number of delivery company partnerships. We have 15 today in seven countries. We managed to sell meal benefits to on-site home workers. For instance, 20,000 on-site services consumers who had become temporary home workers were signed up in the Czech Republic. The good news is that legislation is also helping us. In some countries, we are seeing the face value limits being increased to help consumers during the crisis.
In others, such as France, the maximum daily spend in meal benefits has been doubled since the reopening of restaurants. In April and May, we also signed and put in place solutions to direct around EUR 400 million of COVID-19 related aid for different authorities and NGOs. Let me remind you of the model in BRS for the employee benefit. There are three main sources of revenue, client commission on issue volume, interest from the float, and merchant revenues linked to reimbursement. Issue volumes were down 12% due to furlough measures. Don't forget, home workers continue to get their benefits. The reduction in issue volume impact the size of the float, but this was compensated by a more significant decline in reimbursement volumes. As the restaurants were closed, consumers were slower to use their cards. This is just a fading impact on merchant revenue.
They will pick up as restaurants reopen. As you saw, employee benefit issue volume was down 12%. It was much more resilient in digital at only minus 4%, while paper vouchers volume was down 41%. In Italy, paper vouchers continued to be printed. Elsewhere, they were not considered essential products, which made it difficult to issue vouchers during confinement. Some of the loss of activity will be recouped in Q4 as production restarts. The good news is that the move to digital is accelerating in those countries where it has been slow up to now. We are now at over 80% digital. The real challenge is France, which is still only at 28%.
In the middle and right end chart, you can see that the food issue volume, which is mostly in Latin America, was more resilient than the meal volumes, which were impacted particularly by a more severe lockdown in Europe. As some of you may know, we also have a public benefits activity within our diversified services. We leverage our expertise to help public authorities or NGOs distribute aid for specific uses. Being able to guarantee that the aid or the benefits are spent where they should be spent is a strength of our model. We have a public benefit business in 19 countries servicing 7.8 million beneficiaries. Given our network of merchants and our system, we can be very agile in mobilizing our forces to provide immediate aid in crisis situations at low cost to government and NGOs.
Here are a few examples. In Belgium, Sodexo was given the management of the payment of the Walloon region COVID subsidy to SMEs, equivalent to EUR 5,000 per SME. Sodexo has ensured fast and accurate payment of about EUR 300 million to SMEs. Sodexo is also the exclusive issuer of service vouchers to pay for home services in Belgium. This activity was badly hit during lockdown. However, the same systems were used to channel financial support to certified home care providers and their employees. Sodexo has already driven more than EUR 40 million of regional subsidies to home care services provider and household helpers. In Panama, the government approved a EUR 100 million solidarity program to support deprived families. Sodexo has been tasked to distribute EUR 45 million to 550,000 families spread out all around the country.
The Philippine Disaster Resilience Foundation and Caritas Manila, in partnership with the country's biggest business group, was able to distribute grocery vouchers to 1.4 million families in the most challenged communities of the greater Manila area using a Sodexo food voucher. Overall, we signed circa EUR 400 million of issue volumes in April and May. Now, if we go into the detailed figures, the 22.8% decline in BRS revenue was split -18.3% in employee benefits, as we have already seen, and the diversification services were down 38.8%. This much more significant impact from the COVID pandemic is due to a sharp decline in the home services benefits in Belgium, which could not be used during lockdown, and the collapse in corporate travel on the Rydoo platform, which will probably remain low for a while. The expense management part of the service continued to perform reasonably well.
In Europe, U.S.A., and Asia, all that organic growth in revenue was down 27%, particularly impacted by the decline in the diversified services. Sales were a bit more resilient in Latin America, down 17.4%, thanks to the more progressive impact of COVID-19 in the region. The Brazilian market, which had already been weak for several quarters, affected by the falling interest rates and a more competitive environment, was down a bit more due to COVID-19. There was a significant decline also in Chile and Peru. Mexico, on the other hand, continued to grow. I just wanted to point out the very significant currency impact in Latin America of about 20%. This is due to the weakness of all the major currencies in the region, and especially the Real. Financial revenues were down 22.1%, due principally to the continued significant fall in interest rates in Brazil.
I'll remind you that the Selic was at 6% this time last year, and is currently running at 2.25%. The float was actually more or less stable during the period, with slower reimbursement compensating the lower issue volume. Thank you for your attention. I now hand you back to Denis for the outlook.
Thank you, Marc. Let's turn to the outlook for the end of our fiscal year on slide 31. As you have seen, the Q3 performance is slightly better than our initial April hypothesis predicting a decline revenue of 33%. To date, while China and Europe are coming out of lockdown, the recovery is still very slow. The pandemic is still strong in North America, Latin America, and India. As a result, our updated Q4 top-line hypothesis are more prudent. As of today, we expect Q4 group revenues to be down circa 27%, versus 15% anticipated back in April. Our modeling this time suggests no recovery in business and administration, with corporate services down 25% and sports and leisure down 90%. Our hypothesis for education have not changed.
Q4 is a small quarter due to school and university holidays, and we were already very cautious on the start of the academic year in North America. For healthcare, we are not expecting any recovery, as the hospitals remain significantly impacted by COVID protocols, and therefore, elective surgery and retail sales are picking up very slowly. Finally, BRS should see less of a decline as reimbursement volumes catch up with issue volumes. This brings the H2 decline to -28%, or around minus EUR 3 billion of revenues lost. If you go to now to slide 32, as I just said, our new hypothesis give us an H2 organic revenue decline of 28% versus -25% previously. Strong mitigating measures taken on site and strict reduction of SG&A expenses are coming through. We estimate the underlying operating profit flow-through to be better than the 25% originally assumed for H2.
It should be between 20% and 23%. This improvement will more or less compensate the weaker top-line hypothesis at the underlying operating profit level. Given the trend in the last three months, we expect a second half free cash flow in a range of -EUR 200 million to +EUR 200 million, excluding the USPP make-whole of EUR 149 million. We are confident that our strong and unique positioning and diversified portfolio of services and our solid financial structure are our key strengths to take better advantage of the emerging trends in the post-COVID world, such as increased outsourcing trends, further market consolidation to the benefit of larger players, and accelerated services integration. We will organize a capital markets day on Monday, 2nd of November of this year, just after our full year results, to update you on how we are progressing and give you more information on perspectives moving forward.
I now open the call for your questions. Operator, can you please open the Q&A session? Thank you.
Thank you. The first question is coming from the line of Jamie Rubio from Morgan Stanley. Please go ahead.
Hi. Thanks. Morning, everyone. The first question is just on the new hypothesis, the down 27% for the fourth quarter. It's not dramatically better than the third quarter number . I was just wondering, it would be quite helpful if you can give us what the monthly figures were in the first quarter, so we can get a feeling for whether that actually been improving over the last two months. Also what that slow improvement between Q3 and Q4 might imply for maybe the first half of 2021. The second question is just more general. You just talked about increased outsourcing trends, accelerated services integration. It'd be quite helpful if you can maybe give us some numbers on what that might mean for the company in terms of net contract gains, whether there's any signs that actually improving within the organic sales number you're giving us.
Thirdly, just finally, on the capital markets day in November, should we be expecting any targets or any change in strategy? Thank you.
Hi, Jamie. Thanks for your questions. What we see for Q3 and the beginning of Q4 are pretty much in line with what we've said. There is no major change. The ramp-up that we see with schools reopening is slow because summer will come, and volumes are very slow in summer. There are very progressive restart in corporations. Nothing major. It's much too early to say something about Q1. We know that Q1 will not be fantastic. There are still a lot of question marks on how universities will restart in North America. Lots of question marks. Schools will restart progressively, of course. We will have the volumes picking up. We expect corporate services to accelerate. To what level, it's still difficult to anticipate. You cannot expect the Q1 significantly better than the Q3 and Q4. Hard to go into deeper details.
As far as the increasing outsourcing trends, we believe that at this moment, some of our clients or some prospects have seen that the services that we deliver, and some of them were doing it in-house, those services are getting more and more complex. We engage a lot with clients and prospects to do cross-selling, and also engaging to first-time outsourcing, because we demonstrated that our service and protocols are very solid and help business restart. We see opportunities for first-time outsourcing, particularly in education and hospitals. We see some things coming up there. Too early to really say the magnitude of what this will mean in terms of new business, contract gains. At this moment, we're still getting out of the big shock, but we're pretty optimistic on the fact that we will be able to get new contracts post-COVID-19 peak.
In terms of Capital Market Day , we will, of course, give some guidance. We'll first give a better view on how we started the year and some guidance for 2021. Too early, again, to give you any details on that. I don't expect any dramatic change in strategy. What I can tell you is that the COVID-19 crisis has told us is what we started to do before the crisis has to accelerate. The big move that we started, the digitization of our services, the focus on more multi-channel food services, the convergence that we start between on-site B&RS, for example, all those things are to accelerate. That's also what we want to tell you in the capital markets, is how we will accelerate to take all the opportunities that we have ahead of us.
We believe that this crisis has also created some opportunities for us to catch.
Thank you. Just on the first question, I would've thought that mid-March was a bit better than down 30. It would just be helpful to get a feeling for just roughly those three months to see whether maybe there is a better improvement than it looks like between the third and fourth quarters.
Jamie, for you to appreciate the step between Q3 and Q4, think that the 29.9% we've achieved or we've seen in decline in Q3, is done in two and a half months, and that the first two weeks of March were balanced. It will give you an idea, if you redo the math, as to the improvement from Q3 to Q4.
Okay. It sounds like within the last two months then, there's no actual improvement between April and May. That those were running down in the-
What I'm saying is that if you want to appreciate the Q4 number versus Q3, don't compare EUR 27 and EUR 29.9. You have to recalculate the EUR 29.9 over two and a half months.
Understood.
The first two weeks of March were normal.
Almost.
Almost normal. There is a step, there is an improvement between Q3 and Q4.
Okay, thanks.
Next question is coming from the line of Simon LeChipre from MainFirst. Please go ahead.
Yes, good morning. Simon LeChipre, MainFirst. Three questions, please. First of all, if you have any update to share from discussions you have with clients on working from home, and in which extent they want to implement this in the future. If you could please come back on the key drivers of the better than expected drop-through for H2 compared to your initial 25%, and any details on how it differs between On-site Services and Benefits and Rewards. That would be very helpful. Lastly, if you could also comment on the commercial activity during this second half, in the development retention, and if you have anything to share on retention in healthcare, in North America. You mentioned in the last call some contract were still at risk. Thank you.
Yes. Hello, Simon. Definitely what we've seen is a big take-up of course of home working. We have to separate what's long-term and what's short-term. Definitely, you have different types of clients. You have the ones that have really discovered working from home, that had never done that before and were forced to go into it. You had the ones who had already some proportion of working from home and have just extended it. The one we're already massively in working from home. The ones that have discovered it, will of course keep some portion of it, but of course not to the extent that was done during the confinement lockdown. The ones who were already into it will increase to some extent, but not massively.
What we hear from many of our clients is that they want their people back to the office now. People being back in the office will happen progressively, and we see that at the beginning there were some fears of people not willing to come back, but now companies are very actively promoting the fact that the workplace is safe. Of course, that's where we've become very relevant with all our services and particularly with our Rise with Sodexo offer. Really, we are extremely active to support our clients there. What we see is people and companies, when people are all working remotely, they miss this sense of belonging. They miss this ideation and collective intelligence that happens when people are together. They miss the feeling of being part of that community.
It's also hard to recruit and do the proper induction for young professionals or your new employees that join the company. There are many aspects that are extremely important for companies and that remote working from home trend will remain, but it had already started before. It will continue to progress, but not at all with the magnitude that we've lived through the COVID. We have to adapt, of course, our teams and our offers to the number of people on the site. That's what we've done over the years. But also what I want to highlight is that the working from home also brings us opportunities for benefit awards and typically to combine meal cards from home workers with On-site Services. That's a compelling offer that we've started to distribute to our clients, but also personal and home services.
That creates opportunities that we probably accelerate some convergence services that we're building. On the drop-through.
On the drop-through, first, between On-site and BRS, you must understand that the drop-through is a reflection also of your margin pre-COVID-19. If you are at 6% or 30%, the drop-through mathematically cannot be the same, because what you lose is, if you were totally flexible, what you lose is your EBIT margin. Obviously the drop-through in BRS is higher than the drop-through in On-site. When we look at On-site, the key question is how can we flexibilize the cost we have on the site? We've been very active, obviously, at managing the food costs and the inventories and then make the labor cost flexible, which is the key component of our cost. In some geographies, it's naturally easier, like in the U.S. because you have hourly workers. In some other countries, it's less flexible.
In continental Europe in general, the labor markets are stricter in term of flexibility, but we benefited from the programs the government put in place. For instance, in France, we benefited from the program of chômage partiel, but at the same time, there is still 20 odd persons which remain at our expenses. You've got the other direct costs. In the other direct costs, I would say a large majority of them are flexible, except when you have depreciation or except when you are paying a rent, you have to go and renegotiate. It's not fully flexible. The drivers are numerous. After you have the SG&A. The SG&A by nature in our industry, it's a lot of labor costs, so you can try to flexibilize. You've got the variable costs, which we completely stopped.
There is no traveling, no subcontracting, no consulting, no whatever. The SG&A are by nature a bit more rigid than the cost on site. All this put together, the drop-through is actually pretty good in the U.S. It's better than the group average in the U.S. It's good in the U.K. and I would say in Asia Pac. It is less good in continental Europe where the labor markets are stricter and more rigid.
On your third question, Simon, obviously the retention rate has improved during this crisis and the development has slowed down. We have a better increase in retention than the decrease in development, but with a slight difference. It's true across all our segments, even in the Healthcare, but the retention level in Healthcare last year at that time was not good. We've improved it a bit. However, we have lost one of the I was telling you in the previous calls that we were unsure about the retention of some of our contracts in Healthcare in North America, and we have unfortunately lost one of the large ones we were unsure of. At that moment, we only have now, let's say, a few sizable contracts that are up for a bit. Of course, we are actively working on keeping them. That's the situation today.
Okay. Thank you very much.
Next question is coming from the line of Jaafar Mestari from Exane BNP Paribas. Please go ahead.
Hi. Good morning, everyone. I've got three questions, if that's okay. The first one is on cash burn. You're not showing detailed monthly amounts on slide six. It looks like you're probably around EUR 300 million of total cash burn between March, April and May. Looking at your guidance for H2 as a whole, is it the right way to look at it to think that going forward, you definitely expect to be each month between breakeven and positive, so something like EUR 400 million positive free cash flow from here at the top end? Secondly, still on cash flow and specifically in terms of working capital in BRS. For Q3, you said merchant redemption was slow. As many restaurants will start to reopen and to redeem again, what sort of working capital outflow have you assumed from BRS in your H2 guidance, please?
The last question, when you talk about synergies between OSS and BRS, you mentioned meal vouchers being issued to OSS clients in the Czech Republic. Is that something you could consider expanding more widely across geographies or are you just mentioning Czech Republic anecdotally and is this already happening in your major BRS geographies?
We didn't give you numbers, but the proportions are relatively easy to check, and I don't think your hypothesis is wrong. What happened on the free cash flow is that in March, in the early days of April, we've lost our cash sales. You lose them only once. Once you've lost them, you've lost them. At the same time, we were paying the suppliers that we procured stuff from in December and January. The cash in March was obviously a very difficult month because of those cash sales reducing immediately and payments still linked to your pre-COVID activity. What's very positive for us is that April and May were positive. We're not expecting wonders from June to August, but we're expecting them to be slightly positive. Normally, H2 is our largest free cash flow semester.
As we said, we think we should be around 0, between EUR -200 and EUR +200 for H2 because there are still a lot of moving parts. Yes, we are expecting the monthly free cash flow to be slightly positive every month, which will allow the Q3 to get within the EUR -200 to EUR +200 in H2. Working capital in B&RS, it's actually a slight positive, because yes, the reimbursements are lower than our issue volume, but some clients have not been paying us as fast also. I think the Q3 movements are very minimal. We are expecting Q4 to be more or less the same. We're not expecting big swing because, yes, we will reimburse more, but we will also collect those overdues that some clients have not been paying us. We are estimating the model for B&RS to be relative positive to neutral over H2.
As far as the synergies or convergence are concerned, definitely, we gave this example in Czech Republic because it's particularly striking to have 20,000 people getting our meal cards. We are accelerating that in geographies where, of course, we have Benefits & Rewards and where also there is a particular important proportion of home working for corporate services. Typically, Brazil, where our portfolio is more skewed towards blue collar workers and manufacturing, there won't be massive synergies there because there is not much of home working on our portfolio. In many countries in Europe, we are accelerating this. We're moving towards this convergence in France, actively selling. At the moment, companies are still figuring out the new normal, how will home working be organized in a more regular way.
We have very active conversations and bringing those two activities together will definitely, I'm sure generate very interesting leads. We have some interesting leads at the moment with clients, for sure.
Super. Thank you very much.
Next question.
Thanks, Sacha.
It's coming from the line of James Hamley from Citi. Please go ahead.
Yeah. Good morning, everybody. Thanks for taking my questions. A couple from me, please. First is, how should we think about the drop-through to profits as revenue recovers? Is the 20%-23% range applicable for that? Second, there's also been some news about Trump wanting to repatriate foreign students from the U.S. if their courses go online. Could you give us some sense of kind of what percentage of North American higher education students are international and the risk there? Then third, how are you thinking about M&A in the current environment? Are you seeing opportunities to pick up smaller competitors who are maybe distressed?
When revenue recovers, what we've told our teams is that we can't be talking about drop-through anymore. Drop-through is really when revenue falls, and not when revenue picks up or ramp up. We're talking margin, and we are comparing margin with pre-COVID margins and expectations and so forth. What we said is that the drop-through will improve over time because at the very beginning, you flexibilize, and then you stabilize, and then you refine, and you reduce SG&A and so forth. The drop-through, what we experienced is that it improved month-over-month. As we ramp up, and we don't ramp up everywhere. We ramp up, for instance, in corporate services. We don't ramp up yet in sports and leisure. We're still experiencing drop-through in sports and leisure and in schools in July and so forth.
When we ramp up, we're talking gross margin, and the target is to recover the gross margin over time and reopen positive, obviously.
In terms of universities, I think the question goes beyond the news that Trump has announced. First, it's still to be organized, which is certainly not easy. The big question that we have is, and there is still uncertainty on how universities will organize the coming year. Lots of them are wondering still, we should have a much better view by probably mid, late July, but there's still lots of uncertainty in how they want to organize a proportion of what's on-site, on campus and what's virtual. There's also a big question mark on the enrollment, and that enrollment is also linked to the decisions of universities. Some will go full online for the first semester. Some will start earlier in August, some will start later. There are many moving parts. All those questions go much beyond what will happen to foreign students.
The proportion of international students that we have in our portfolio is not very different from the average in the U.S. It, of course, depends on the universities. Yeah, it's a double-digit number, but not massive. Definitely, the magnitude of changes that will happen for this coming year is still difficult to assess. All our efforts are to engage in discussions with the universities to understand what they plan, adjust our labor force to the number of people that they expect on campus. As I said, there's still a big question mark on, they still don't know what the enrollment will be for most of our clients. We have to adjust our workforce, adjust our services, and then we'll have more news in the weeks to come. We still believe that segment is interesting for us, definitely. It's an important segment for us.
We believe that some of our FM services are going to be very relevant, particularly the cleaning and disinfection services. The digitization of our services with grab and go, click and collect, dedicated food delivery are, of course, going to be very interesting for students. There is a big question on the volumes, but we think that segment is still, of course, interesting, of course, on the mid, long term. This year is going to be difficult.
Can you just say what the split-
Yeah, sorry.
Between higher ed and secondary education or children's education is in North America, please.
Sorry, you mean.
Higher education.
Yeah.
The breakdown between universities and schools in the States. It's one-third.
Yeah, exactly.
across the world. Bit more probably in North America. One-third schools, two-thirds-
One-third schools, two-third universities.
Okay.
Overall.
Yeah. Thank you.
There's a bit more in the States.
Yeah, in the universities, we have a greater proportion of universities than schools.
Thank you.
As far as M&A is concerned, the first thing that we see, if some of our smaller competitors are in trouble, is to go organic growth. We can capture clients that have a failing supplier. We see that as the biggest opportunity. If here and there, we see some smaller companies that would be open for an acquisition, maybe, but it's not our priority. We don't exclude that, but it's not our priority. Our priority would be organic growth.
Okay, clear. Thank you very much.
Thanks, James.
Next question is coming from the line of Leo Carrington from Credit Suisse. Please go ahead.
Thank you. Good morning. I was wondering if you could help in terms of the potential for changed economics of serving clients through and after the worst point of the pandemic. Aside from potentially lower footfall, do you think you can fully recoup extra cleaning costs from clients? Does the risk of longer opening hours to allow for social distancing negatively or potentially positively change the impacts for you? A second question, in terms of group purchasing, how does the reduction in volumes going through the business as well as third parties change your purchasing power in coming quarters, and I guess in particular, looking out to next year? Thank you.
Of course, we have some increase in our operating costs. I must say that the cost of the PPEs, which we saw increasing during the crisis, have now drastically decreased because there's a lot of supply now. This is not the most important topic. It's more how we adjust labor, because when we deliver food services with different protocols, some of our disinfection services require more time to be put in place. Of course, we discuss with our clients these new conditions. It's overall, I must say, in this restart of the activities, there are lots of negotiations that we are doing with our clients because the volumes are not the same, the way we deliver the service are not the same. I must say, we negotiate with thousands of our clients to pass through the maximum of our costs.
We've also moved some of our P&L contracts to cost-plus during the crisis, to better adjust to the changes due to the crisis. We will get back to P&L as soon as we see that we are really in a normal phase, but it's too early to say when we'll be there. We've been very strict, back to the earlier remark or answer that Marc gave. We are very strict on managing our gross margins, to ensure that as we restart, we manage our cost and our pricing accordingly.
On purchasing, the purchasing income we generate is a reflection of long relationship with the suppliers and long-term partnering. The way it's structured, some of it is fixed in value, some of it is percentage to volumes. Obviously, when you buy less, you get less. Our overall percentage of purchasing income is actually very resilient, but obviously the volume of money we receive will be less. It's already included in our drop-through, so it's factored in our model. Going forward, as the volume will come back, the purchasing income will grow back in Euro value.
Thank you.
Next question is coming from the line of Richard Clarke from Bernstein. Please go ahead.
Good morning, everybody. Thanks for taking my questions. Wondering in terms of your Q4 outlook, how we can think about that regionally. Are you expecting Europe to continue to pick up, and what are you expecting in the U.S.? Are you expecting things to step back there with the rising cases and maybe also the rest of the world? Second question is, the guidance range on EBIT seems to be about EUR 100 million, and it's EUR 400 million on free cash flow. Why such a big gap between the two guidances on those two points? Lastly, at your last Capital Markets Day, you were talking about sort of pivoting back towards food. It sounds today like you're talking a little bit more glowingly about facility management and the protection it's given you.
Would you expect to be pivoting back towards facilities management, or does that move towards food still hold?
Thanks, Richard. As far as the Q4 outlook, again, lots of moving parts, but we expect Europe to pick up progressively. Summer is always. We're talking not massive volumes. Overall, same thing for North America. There is a question in North America about how the pandemic will, this sort of second wave that comes, will impact particularly corporate services. It's not our biggest segment there. The questions are more around universities, as I mentioned, than really corporate services. We also think, and overall, in our Q4, but also in moving forward in how we see the beginning of the year, we don't expect any full lockdowns as we've seen in the past months. We are more expecting, if lockdown happens, smart lockdowns where most of people will still go back to work, or still a significant part of them.
We have seen recently in Beijing, in a recent lockdown in Beijing, that there were only 30%-50% of employees in corporate services that went to work from home. A significant part of people remained in the office. That's also what we expect moving forward in Q4 and possibly Q1 on our hypothesis. In terms of your third question, when I said pivoting back to food, actually what I've said in the Capital Markets Day two years back was that we had been doing great development in FM services and 9.6% on average per year over the last 10 years, and we were very happy about it. Development in food was not enough. We will keep, and we have reignited our food development while keeping a strong momentum on FM. This has demonstrated, I think, a good balance, and particularly during this crisis.
We will continue our development in FM. We are, and we'll give more precisions in the capital market day, we are readjusting our portfolio of services in hard FM to be more efficient. We'll talk about that in November. We still believe that hard FM is important to Sodexo. Soft FM, obviously in the circumstances, has demonstrated a great value, and we will definitely continue to develop food, because it's very complementary. As I said earlier, we will not radically change the strategy, but accelerate some of the things that we've started to do. On the second question-
Yeah. I’m sorry, Richard, we didn’t understand your question. Can you reformulate it?
Yeah. Okay. Maybe just simplistically, why is there a EUR 400 million guidance range for free cash flow, given we've only got a couple of months still to go in the quarter? It looks like your implied EBIT guidance is much tighter than that. Why is free cash flow having such a wide range?
Okay, got you. The moving parts on the cash are quite significant. Give you an example, in Japan with the Tokyo 2020 now, which is becoming Tokyo 2021, we had some cash in. The timing of the cash out, whether are we rolling forward the tickets for next year? Are we reimbursing them? Are we reimbursing them now? Are we reimbursing them mid-September? It's big. This alone is counted in tens of millions. We also working hard on the overdues, but we may be missing some payments. Clients have been tricky. Catching them to make payments at the right date is a bit more tricky than it was in prior years. The ramping up in food volume, building up the supply chain payables is relatively well seen. The last point is on BRS. We said that the working capital should be neutral.
BRS, balancing issue volume, reimbursement and overdues. If reimbursement were to be super strong, then it will be very good for the revenue, but it will not be good for the cash flow. There are many moving parts which make this cash flow a bit more volatile. I think what we wanted to share with you, the good news is that we were positive in April and May, and the fall was contained within March. What we are saying is that the working capital has re-stabilized. Now giving you a precise guidance on the cash is a little tricky.
Thanks very much, François.
I think this needs to be the last question.
The last question is coming from the line of Kean Marden from Jefferies. Please go ahead.
Morning, all. I have a few questions on the facilities management business. You touched on some of the components earlier. Could you please give us a very broad top-down split of revenue by services, so maybe cleaning, security, hard FM, and then any other areas that you'd like to call out? Your revenue's obviously held up very well there. Have you benefited from sort of one-off project work in that business over the last few months? Does project work tend to come through at a slightly higher margin for you in FM than the contracted base? Thanks.
Thanks for your question. We don't give the split by service, but obviously, cleaning and disinfection are an important part of our FM services. Security is not massive, but there are lots of sort of soft services that we engage with our clients, that particularly when we sell integrated services, tens of services that we can deliver. Yes, we have benefited from some one-off services or an acceleration or more intense level of services. Particularly, to give you two examples, of course, in healthcare, in senior homes, we had more cleaning services, more disinfection services. We will see that in the companies that we start. We also had a significant increase in energy and resources, because particularly in the mining sector, our clients cannot afford to have a mine being stopped due to COVID.
We had some significant increase in delivering FM services for those clients. Are they at a higher or lower margin? They are more or less in line. Sometimes they can be a bit higher. Overall, they are in line. In terms of education, usually the works happen. We've seen a bit more works done during the lockdown. Schools were closed, so they could do some works. It's not massive, and there's still a question mark on how much of these works will happen during summertime, which is too early to say. Those works are decided at the very last minute. Given the uncertainty, particularly on the university side, it's too early to say what we will see in July and August.
Right. Very kind. Thank you, Denis.
Sure. Okay. Thanks a lot for being with us this morning. I just wanted to again thank you and wish you the best. Take care. Just as a conclusion, I think we have demonstrated that our positioning and the broad range of services that we have and activities, has helped us go as best as we could through the crisis. That diversification, this strong portfolio of services, countries, and activities, I think give us an important advantage for the future. Thanks a lot, and take care.
Bye-bye.