Earnings Call: Q3 2020

Jul 7, 2020

Good morning and thank you for standing by and welcome to the Sodexo Q3 fiscal 2020 revenues conference call. I advise you that this conference is being recorded today. Tuesday, July 7, 2020. I would now like to hand the conference over to the Sodexa team. Please go ahead. Thank you. Good morning, everyone. Welcome to our Q3 twenty twenty revenue call. On the call today are CEO, Denis Machuel and CFO, Marc Holland, 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 October 2020. Thank you. And now over to Dennis. Thank you, Berjina, and good morning, everyone. To do with you today. 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 2, 3 figures only. You will find the 9 months figures in the appendix. Obviously, since the end of February, we are in a very different world. A COVID-nineteen impacted world. And our industry has never seen a crisis like this. So on Slide 4, you see that Q3 revenues fell 29.9%. Slightly better than our hypothesis of minus 33 percent, 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 percent 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 minus 12.9%, but not as good as our initial hypothesis. Benefits and rewards was down 22.8% versus our hypothesis of minus 20%. On slide 5, after a month of adaptation in March, we have strongly controlled our costs. The flow through is now below 25% due to a combination of the use of the follow systems but also separating from staff when there were no other alternatives and strictly controlling all SG and A. On Slide 6, 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 continue to pay our suppliers for previous will realign on the new revenue levels and our protective measures came into play. So the cash burn only lasted 1 month. On Slide 7, as I'm sure you have seen, we have decided to reimburse our USPP of US1.6 billion dollars. 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. So by the end of August, these notes will be reimbursed and we will be carbon free. Now if we move to Slide 9, You see that from day 1, we adapted our services into 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-nineteen patients. The building was empty. There was no kitchen or any IT infrastructure. And we've managed to cut away in 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. And this means that more than 4000 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 1 central kitchen in Marseille to prepare 5000 plus meals daily to the most in need highly impacted by the pandemic. In the United States, despite many schools and universities closing, Our teams continue to provide schools, children, and students with access to food by preparing more than 4,000,000 meals per week. And 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 UK, teams from sports And Leisure And Healthcare got together to support the NHS to set up COVID-nineteen 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 Greta Partage, And in Brazil, with daily express, 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 postcode in the world. And as many countries are emerging progressively from confinement, employees need to be reassured that they can feel safe within the workplace. We can't contribute to people's confidence every step of the day minimize risk and enhance safety for our employees, clients and consumers with a comprehensive range of services. We created Sodexo's Medical Advisory Council, comprised of experts from around the world in epidemiology, family medicine, Nutrition of occupational health and behavioral health and pandemic planning and operations. This council support 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, will be a net sensor 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 Williams lies 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, We 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 and personal home services. Integrating over 20 essential services retail, grab and go and kneel carts from home workers to disinfection, contactless services, deep cleaning, air control, digital concierge services and office reorganization. This program was designed and delivered in only 3 weeks and is now live in North America in the UK and France and planned for global deployment in the coming months. I now turn over to you, Mark, as we go through the operations. Thank you, Denis, and good morning, everyone. So let us turn to Slide 13. Q3 revenues came in at EUR 3,900,000,000, down 31.2%. The currency impact was minus 1.7% due to the strength of the euro related 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 on reward was down 22.8%. Before going into the detail, I would like us to show you how resilient some of our activities were. As Denis said, we've never seen such a crisis in our industry. But 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. Epeb represents 33% of our on-site business and is down only 2%. And with FM more resilient throughout the global integrated account, which represents about 10% of our on-site revenue, which are flat, also helped by a sector bias towards FMCG And Pharmaceuticals. We also have a solid fiftyfifty mix of blue versus white collar workers in our corporate services activities. Blue collar workers can't work for 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. Although 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 pandemic perhaps not having even reached its peak in the U. S. Or Latin America. Finally, we also have 2 segments, which have been very resilient, E and R, thanks to mining and government and agencies, which has military bases and presence in the portfolio. Together, these segments that come for 13% of the group's revenues and together, we're actually up 2.7% in Q3. So FM sales were down 2%, while food sales on the contrary were down 44%. And in fact, FEM 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% and look at the recovery in China. This is just one country, and China is particularly blue collar, particularly SM, and that's taken a very proactive approach to getting back to work. So I'm certainly not going to guarantee that the end of London will look like this everywhere, but by end May, China was only down 1% year on year. SM was well above last year due to new services, many of which are part of the ride with Sodexo offer. Janice, do you want to go through the next slide? Yes, thanks, Mark. And As you just said, our global integrated accounts, which we've been building over the past 15 years, have been an important level 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 square meters including the HQ in Shanghai, 6 factories and additional offices in Beijing. Our teams moved into action from day 1 to address the client's main challenges such as physical sanitization of enormous facilities social distancing and the need for new and increased entry protection for thousands of people moving around in these facilities. From the distribution of essential material, food 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 5 100 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, I'll now turn you back to March to go through the segment slide. Thank you. So business and administration, Q3 revenues were down organically by 28.5 percent, slightly better than the hypothesis. The COVID-nineteen impact was very significant on the business despite the resilience of the energy and resources and government and agency segments, the SM activities generally and more particularly within the global integrated FM accounts. Corporate services was down 27% and portal leisure was down 84%. North America was down 44.5%, particularly in 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 fifty-fifty pleased 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 Account. The 2% decline in Pacific, Latin America, Middle East and Africa reflect the strong recovery in China, the end of its lockdown, extra FM services for the protection of mining employees in order to avoid closure and the lesser COVID-nineteen lockdown in Latin America. Ask Care And Seniors Q3 revenues were down 12.9 percent 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 extract COVID-nineteen linked services. In North America, activity was down 15.3%, a bit more than the average due to the loss of several optical contracts from fourth quarter fiscal 2019 and 1 large contract exit in the first quarter fiscal 2020. FM cross selling initiatives linked to COVID 19 helped to ensure that seniors and FM sales were flat. In Europe, the minus 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 UK. In Asia Pac, Latin America, Middle East and Africa, the 7.6% decline was principally due to reduced volume 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, but actually better than the minus 60% hypothesis. North America was down only -52.2 percent, 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 minus 59.3%. In France, schools started reopening in May, but very progressively. And usually with very limited food services, In Asia Pacific, Latin America, Middle East and Africa, organic growth was minus 47.3%. In China, schools started opening mid May. However, 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 and rewards services. The decline of 22.8 percent was a bit below our hypothesis. However, this was particularly due to services diversification. We should come back to this in a minute. Employee benefits, which represent 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 7 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 7 countries. We managed to sell meal benefits to on-site home workers, for instance, 20,000 on-site services consumers when become temporary home workers were signed up in the Czech Republic. The good news is that Lesish legislation is also helping us. In some countries, we are seeing the face value limit being increased to help consumers during the crisis. And 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 400,000,000 of COVID-nineteen related ed for different authorities and NGOs. Let me remind you of the model in PRS for the employee benefit. There are 3 main sources of revenue, client commissions on issue volume, interest from the float, and merchant revenues linked to reimbursement. Issue volumes were down 12% due to furlough measures, but don't forget home workers continue to get their benefits. The reduction in issue volume impact the size of the floats but this was compensated by a more significant decline in reimbursement volumes. At the restaurant, we are close, consumers were slower to use their card But this is just a phasing 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, but 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 restart. 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 hand chart, you can see that the food issue volume, which mostly in Latin America with more resilient than the mill volumes, which is 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 8 for specific uses. Being able to guarantee that the aid or the benefits are spent where they should be spent is the strength of our model. We have a public benefit business in 19 countries, servicing 7,800,000 beneficiaries. Given our network of merchants and our systems, we can be very agile in mobilizing our forces to provide immediate aid in crisis situation 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 SME. Equivalent to EUR 5000 per SME. Sodexo has ensured fast and accurate payments of about EUR 300,000,000 to SME. So Dixo is also the exclusive issue 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. So XO has already driven more than EUR 40,000,000 of regional subsidies to home care services provider and household helpers. In Panama, the government approved the $100,000,000 solidarity program to support deprived families. Sodexo has been tasked to distribute $45,000,000 to 550,000 families spread out all around the country. The Philippine Disaster resilience foundation and carried us Manila in partnership with the country's biggest business group was able to distribute grocery vouchers to 1,400,000 families in the most challenged communities of the Greater Mandela area using a sodexo food voucher. Overall, we signed circa 400,000,000 of tissue volumes in April and May. Now if we go into the detailed figures, the 22.8% decline in VRS revenue was split -18.3 percent in employee benefit 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 RISEU platform, which will probably remain low for a while. The expense management part of the service continued to perform reasonably well. In Europe, USA 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-nineteen 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. 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 up about 20%. This is due to the weakness of all the major currencies in the region, and especially the reais. Financial revenues were down 22.1% due principally to the continued significant fall in interest rates in Brazil. I'll remind you that the CELIC 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, Mark. So 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%. Today, 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 hyper cases 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 administration with corporate services down 25% and Sports And Leisure down 90%. Our hypothesis for education have not changed, but 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 health care, we are not expecting any recovery has the hospitals remained 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 minus 28 percent or around minus 1,000,000,000 of revenues lost. So 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 minus 25% previously. Strong mitigating measures taken on-site and strict reduction of SG and A expenses are coming through. So we estimate the underlying operating profit flow through to be better than the 25% or originally assumed for H2. It should be between 20% 23%. This improvement will more or less compensate the weaker top line hypothesis at the underlying operating profit level. And given the trend in the last three months, we expect a second half free cash flow in a range of minus 1000000 to plus 1000000, excluding the USDP make whole of EUR 149,000,000. We are confident that our strong and unique positioning and diversified portfolio of services and our solid financial structure are key strengths to better 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 November of this year, just after our full year results. To update you on how we are progressing and give you more information or perspectives moving forward. I now open the call for your questions. Operator, can you please open the Q And A session? Thank you. Thank you. The first question is coming from the line of Jamie Kahya from Morgan Stanley. Please go ahead. Thanks. Good morning, everyone. Just, yes, the first question is just from the new hotspot it's the down 27% for the 4th quarter. It's not dramatically better than the 3rd quarter number. So I was just wondering it'd 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's actually been improving over the last 2 months? And also what that slow improvement between Q3 and Q4 might imply for maybe the first half of twenty twenty one? The second question is just more general. You just talked about increased out sourcing trends, accelerated services integration. It would be quite helpful if you can maybe give us some numbers of what that might mean for the company in terms of net contract gains, whether there's any impact actually improving within the organic sales number you're giving us? And then thirdly, just finally, on the Capital Markets Day in November, should we be expecting any targets or any change in strategy? Jamie, thanks for your questions. Well, what we see, for Q3 in the beginning Q4 are pretty much in line with what we've said. So there's 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. So, nothing major the it's very 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 volume picking up. And we expect corporate services to to accelerate, but to what level it's still difficult to anticipate. So that's, but you cannot expect the Q1 significantly better than the Q3 and Q4. But hard to go into deeper details. As far as the increasing outsourcing trends, yeah, we see we believe that, at this moment, some of our clients or some prospects have seen that the services that we that we deliver and some of them were doing it in house, there, those services are getting more and more complex. And we engage a lot with content prospects to do cross selling and also engage into first time outsourcing because we demonstrated that our service and protocols are very solid and help business restarts. 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, we are at this moment, we've, we're still getting out of the big shock And but we are pretty optimistic on the fact that we will be able to get new contracts. Post COVID-nineteen peak. In terms of Capital Market Day, we will of course, give some guidance for we'll first give a better view on how we started the year. And sub guidance for 'twenty one. Too early again to give you any details on that. Dated, I don't expect any dramatic change in strategy. What I can tell you is that COVID-nineteen crisis has told us is what we started to do before the crisis has to accelerate. So the big move that we've started to do, the digitization of our services, the focus on more multichannel food services, the convergence that we start between on-site NBRs, for example, all those things are to accelerate. And that's also what we want to to tell you in the Capital Markets Day is how we will accelerate to take all the opportunities that, that we have ahead of us. And we believe that this crisis has also created some opportunities for us to catch. Thank you. Just on the first question, I'm just I would have thought that mid March was a bit better than down 30. So it would just be helped to get a feeding for, just roughly those 3 months to see whether maybe there is a better improvement that it looks like between the third and 4th quarters? Jamie, for you to appreciate the step between Q3 and Q4, think that the 29.9 percent we've achieved, though, we've seen in decline in Q3 is done in two and a half months and that the 1st 2 weeks of March were balanced. It will give you an idea if you redo the measurements to the improvement Q3 to Q4. Okay. So it sounds like within the last 2 months, there was no actual improvement between April May. That they were falling down in the late What I'm saying is that if you want to appreciate the Q4 number versus Q3, don't compare 2729.9, you have to recalculate the 29.9 over 2.5 months. On the first product, we're normal almost almost normal. So there is a step, there is an improvement between Q3 and Q4. Next question is coming from the line of Simon Le Schibre from MaumFirst. Please go ahead. Yes. Good morning, Simone. I mean, first. 3 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? Secondly, 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. And lastly, if you could also comment on the commercial activity during this second half, been the development retention if you have anything to share on retention in health care in North America, you mentioned in the last call some contract was still at risk. Yes. Hello, Simon. So Yes, on the corporate side, definitely what we've seen is, a big take up of, of course, of home working. But we have to separate what's long term for this and what's short term Definitely, you have different types of clients. You have the ones that have really discovered working from home that I've never done that before and we're forced to go into it. You had the ones who had already some, some proportion of working from home. And I've just extended it. And the one we're already massively in working from home. And The ones that I've discovered it will of course keep some portion of it, but not, 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 won't get people back to the office now. So 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 the place, the workplace is safe. And of course, that's where we've become very relevant with all our services and particularly with our rise with Sodexo offer. So 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. There means 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 recruits and, do the proper induction for young professionals or new employees that join the company. So there are many aspects that, are extremely important for companies And, this, that remote that working from home trend will remain, but it had already started before. So it will continue to progress, but not at all with the magnitude that we believed through the COVID. So we have to adapt, of course, our teams and our offers to the number of people on the sites that's what we've done over the years. And but also what I want to highlight is that the working from home also brings us opportunities for benefits and, typically, to, combine meal carts from home workers with on-site services. And that's the compelling offer that we've started to distribute to our clients, but also personal and home services. So that creates an opportunity that we probably accelerate some convergence services that we're building. On the drop? Yes, 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. So if you are at 6% or 30%. The drops we mathematically cannot be the same because what you lose is if you were totally flexible, what you lose is your U and P margin. So obviously, the dropshore in PRS is higher than the dropshore in on-site. When we look at On-site, the key question is how do how can we flexibilize the cost we have on the site And we've been very active obviously managing the food costs and the inventories. And then makes the labor cost flexible, which is the key components of our cost. So 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. Inconsible Europe in general, the labor market is stricter in terms of flexibility. But we benefited from the program the government puts in place. So for instance, in France, we benefited from the program of Shoemache Pardier But at the same time, there is still 20 odd persons, which remain at our expenses. And then we've got the oldest direct costs. And in the other direct costs, I will say a large majority of them are flexible, except when you have depreciation or except when you were paying a rent, You have to go and renegotiate. It's not fully flexible. So the drivers are numerous. And then after you have the SG and A, The SG and A by nature in our industry is a lot of labor costs, so you can try to flexibilize. And then you've got the variable cost, which we completely stopped. I mean, there was no traveling, no subcontracting, no consulting, no labor. So, but the SG and A by nature a bit more rigid than the custom side. So 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 UK and I will say in Asia Pac, it is less good in Continental Europe where the labor markets are stricter and more rigid. And on your third question, Simon, the, obviously, the retention rate has improved. During this crisis and end of development has slowed down. But we have a better increase in retention than the decrease in development, but with a slight difference. And so and it's true across all our segments even in the health care, but the retention level in health care last year at that time was not good. So we've improved a little 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 health care 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. And of course, we are actively working on keeping them. So that's the situation today. Next question is coming from the line of Jaafar Mastari 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 6. It looks like you're probably around $300,000,000 of total cash burn between March, April, and May. So looking at your guidance for H2 as a whole, Is it the right way to look at it, so you think that's going forward, you definitely expect it to be each month between breakeven and, positive. So something like GBP 400,000,000 positive free cash flow, from here at the top end. Secondly, still on cash flow and specifically in terms of working capital in BRS, So for Q3, you said merchant redemption was slow. Now 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? And 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? Mean, we didn't give you numbers, but the proportions are relatively easy to check. And I don't your hypothesis is wrong. So and yes, we've what happened on the free cash flow is that in March, And in the early days of April, we've lost our cash sales. And you lose them only once. Once you've lost them, you've lost them. At the same time, we were paying suppliers that we procured stuff from in December January. So 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 activities. What's very positive for us is that April and May were positive. And so and we are expecting we're not expecting wonders from June to August, but we're expecting them to be slightly positive. Normally, H2 is our largest and free cash flow semester. And as we said, I mean, we think we should be around 0 between minus 200 and plus 200 for H2 because there are still a lot of moving parts. But, yes, we are expecting the monthly free cash flow to be slightly positive every month, which will allow the Q3 to to get within the minus 200 to plus 200 in H2. Working capital in BRS, working capital in BRS, it's actually a slight positive, because, yes, the reimbursements are lower than issue volume. But some clients have not been paying us as fast also. So I think the Q3 movements are very minimal. And so 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 over dues that some clients have not been paying us. So we are estimating the model for PRs to be to be relative positive to neutral over H2. And then as far as the synergies or convergence are concerned, definitely, we gave this example in Czech Rep because it's particularly striking. Have 20,000 people getting, you know, our milk cans. But we are accelerating that in geographies where, of course, we have Benefitster Awards. And where also there is a particularly important proportion of homeworking 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, but in many countries in Europe, we are accelerating this. We're moving towards this this convergence in France, actively selling. At the moment, companies are still figuring out the new normal, how will homeworking be organized in a more regular way. But we have very active conversations and bringing those 2 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 is coming from the line of James Hamley from Citi. Please go ahead. Yes, good morning, everybody. Thanks for taking my questions. A couple for me, please. First is, how should we think about the drop through to profit as revenue recovers, is the 20% to 23% range applicable for that? 2nd, 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, are international and the risk there? And then third, how are you thinking about M And A in the current environment? Do you think are you seeing opportunities to to pick up smaller competitors who have maybe distressed? No, when revenue recovers, what we've told our teams is that we can't be talking about through anymore. Drop through is really when revenue falls, and not when revenue picks up or a ramp up, So we're talking margin and we are comparing margin with pre COVID margins and expectations and so forth. So what we said is that, the drops will improve over time because at the very beginning, you flexibilize and then you stabilize and then you refine and you reduce SG and A and so forth. So the drop through what we experienced is that it improved months over months. Now as we ramp up and we don't ramp up everywhere we ramp up for instance, corporate services, we don't ramp up yet in sports and leisure. So we're still experiencing drops through in sports and leisure and in schools in July and so forth. So But when we ramp up, we're talking gross margin and the target is to recover the gross margin over time and reopen positive, obviously. So in terms of universities, and I think the question is, is, goes beyond the news that Trump has announced. 1st, it's still to be to be organized, which is certainly not easy. And the big question that we have is, is, and there's still uncertainty on how universities will organize the coming year. Lots of them are us are wandering still, which should have a much better view by probably mid 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 to go some will go full online for the 1st semester. Some will start earlier in August. Some will start later. There are many, many moving parts. And this is this, those all those questions go much beyond what will happen to foreign students. The proportion of internal students that we have in our portfolio is, is not very different from the average in the U. S. It, of course, depends on the universities. So, yeah, it's a double digit number, but not massive. And, definitely, we the magnitude of changes that will happen for this coming year is still difficult to assess. So our all our efforts are to engaging discussions with the universities to understand what they plan, adjust our labor force to the number of people that they expect on campus. And 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. So we have to adjust our workforce, adjust our services, and we will we'll have more news in the weeks to come. That's a but we still believe that that segment is interesting for us definitely. It's an important segment for us. 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, pick and collect, delete food delivery are of course, going to be very interesting for clients, for students. So, there's a big question on the volumes, but we think that, that segment is still, of course, interesting on the on, of course, on the mid long term. This year, it's going to be difficult. On the M and A, Yes, sorry. Between higher ed and, secondary education or children's education is in America, please. The breakdown between universities and schools in the States. It's across the world. With more probably in North America. 1 third school, 2 third universities. Okay. Overall. Yes. Thank you. There's a bit more in states. Yes. In the universities, it's more we have a greater proportion of universities and schools. As far as M and A is concerned, we the first thing that we see if some of our smaller competitors are in trouble is to go with, to go organic growth. We can capture clients that have a failing supplier And so we see that as a 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 will be organic growth. Thanks James. The next question is coming from the line of Neil Tarrington 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. So aside from potentially lower shortfall, you think you can fully recoup extra cleaning costs, from from clients? And does the, that the risk of longer opening hours to allow for social distancing negatively or potentially positively change the impacts for you? And then a second question in terms of group purchasing. How does the reduction in volumes going through the business as, as well as third parties change your purchasing power in coming quarters. And I guess in particular looking out to next year? Well, yes, well, 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 is a lot of supply now So 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. And of course, we discussed with our clients but the new conditions. And 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. So I must say we negotiate with 1000 of our clients to pass through the maximum of our costs. We've also moved some of our P and L contracts to cost plus during the crisis to better adjust to the changes with due to the crisis. We will get back to P and L as soon as we see that we are really in a in a normal phase, but it's too early to, to say when we will be there. And we've been very strict back to the earlier remark or answer that Ma gave we are very strict on managing our gross margins, to ensure that as we restart, we manage our costs and our pricing accordingly. And on purchasing, the purchasing income we generate is a reflection of long relationship with the suppliers and long term partnering. So the way it's structured, some of it is fixed in value, some of it is percentage to volumes. And obviously, I mean, when you buy less, you get less. Our overall percentage of purchasing income is actually a very resilient obviously, the volume of money we receive will be less, but it's already included in our drop through. So I mean, it's factored in in our model, Vincent, going forward, as the volume will come back, the purchasing income will grow back in euro value. Next question is coming from the line of Richard Slarky from Bernstein. Please go ahead. Good morning, everybody. Thanks. Thanks for taking my questions. Just 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 GBP 100,000,000, and it's GBP 400,000,000 on free cash flow. So why such a a big gap between the two guidances on those two points. And then 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 facility management or does that move towards food still hold? Thanks Richard. As far as the the Q4 outlook, again, lots of moving parts, but we expect yeah, Europe and to pick up progressively. But summer is always, you were talking not massive volumes, and 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 particular corporate services. It's not our biggest segment there. So, the questions are more around universities, as I mentioned, that really corporate services. We also think overall in our Q4, but also in, you know, moving forward in our 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, we are more expecting smart lockdowns where people would still, most of people would still go back to work or still a significant part of that, a part of them. We have seen recently in Beijing, in a recent lockdown in Beijing that, there were only 30% to 50% of employees in corporate services that went, to work from home. Show a significant part of people remain in the office. So that's also what we expect moving forward in Q4 and possibly Q1 on our hypothesis. In terms of your 3rd question, when I said when you say pivoting back to food, actually what I've said in the Capital Markets Day 2 years back was that, we had been doing great development in FM services and 9.6% over the on average per year over the last 10 years. And I was we were very happy about it. But you know, development in food was not enough. So we will keep and we have reignited food development while keeping a strong momentum on FM. So this has demonstrated I think, a good balance and particularly during this crisis. So we will continue our development in FM we are and we'll give more precisions in the Capital Market Day. We are, we are readjusting our portfolio of services in hard to be more efficient. And we'll talk about that in November, but we still believe that HADFM is important to Sodexo. So SoftIFM obviously in this circumstances has demonstrated a great value, and we will definitely continue to, to develop food because it's very complementary. So As I said earlier, we are not we will not radically change the strategy, but accelerate some of the things that we've started to do. On the second question? Yes. I'm sorry, Richard. We didn't understand your question. Can you reformulate Yes. Okay. So maybe just simplistically, why is there a $400,000,000 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 EBIT guidance implied EBIT guidance is much tighter than that. So why is free cash flow having such a wide range? Okay. Got you. Because the moving parts on the cash are quite significant. And so, give you an example, in Japan, with the Tokyo 20 '20 now, which is becoming Tokyo 2021, we had some cash in, the timing of the cash out, whether We're rolling forward the tickets for next year. We're reimbursing them. We're reimbursing them now. We're reimbursing them mid September. It's big. I mean, this alone is counted in tens of 1,000,000. We're also working hard on the over dues, but we may meet seeing some payments and clients have been tweaking catching them to make payments at the right date is 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. And then the last point is on BRS. We said that the working capital should be neutral, ARS, you know, rebalancing issue volume reimbursement and over dues, But if reimbursement were to be super strong, then we'll be very good for the revenue, but it will not be good for the cash flow. So there are many moving parts, which makes the 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. And so 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. Think this needs to be the last question. The last question is coming from the line of Kean Nannen from Jefferies. Please go ahead. Good morning all. I have a few questions on the facilities management business. So you touched on some of the components earlier. Could you just give us a very broad top down splitter of revenue by services, so maybe cleaning, security, hard FM? And then any other areas that you'd like to call out And then your revenues obviously held up very well there. Have you benefited from sort of one off project work in that business over the last few weeks sorry, last few months, and is project work? Does that tend to come through at a slightly higher margin for you in FM than the contracted base? So we, thanks for your question. We don't give the split by service. But obviously, cleaning and the infection are an important part of our FM services. Security is not massive, but there are lots 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 two examples, of course, in health care, in senior homes, we had more cleaning services, more disinfection services, in corporate services, we have that and we will see that in our in the companies that we start. And 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. So 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 there are can be a bit higher, but overall, they are in line. In terms of education, we usually, the works happen. We've seen a bit more works doing, done being the doing the lockdown, schools where we're close to, 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 those works are decided at the very last minute. And given the uncertainty, particularly on the university side, it's too early to say what we will see in July August. Sure. Okay. So maybe thanks a lot for being with us this morning. I just wanted to, again, thank you, and wish you the best take care. Just at the conclusion 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 to the crisis. And that diversification, this strong portfolio of services, countries and activities, I think, give us an important advantage for the future. So thanks a lot and, take care. Bye bye.