Good morning. Thank you for standing by, and welcome to the Sodexo First Quarter 2020 Revenues conference call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press star one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today, Thursday, the 9th of January, 2020. I would now like to hand the conference over to the Sodexo team. Please go ahead.
Thank you. Good morning, everyone. Welcome to our Q1 fiscal 2020 revenues call. On the call today are CEO, Denis Machuel, and CFO, Marc Rolland. As usual, if you haven't already done so, the slides and press releases are available at sodexo.com, 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. Please get back to Sarah and I, the IR team, if you have any further questions after the call. I remind you that the next announcement will be the first half figures on April 9th. I now turn the call over to Denis.
Thank you, Virginia. Hello everyone. Good morning, happy New Year on behalf of the whole Sodexo team to all of you. Thanks for joining this call. Let's start right away with slide number four, where we describe the organic growth in Q1 that was indeed boosted by the 2019 Rugby World Cup. All our Q1 revenues grew by 7.1%, our Q1 organic growth was at 3.8%. The on-site organic growth was also 3.8%, which is in line with the previous quarter's trend, thanks to the 150 basis points contribution of the Rugby World Cup. As a result, sales outside North America grew by 8.5%. However, North America is down 0.9%, impacted by the healthcare contract losses that we saw in Q4, plus the large contract exits, which started to come out of the figures during this Q1 quarter.
Benefits and Rewards was up 4.2% with double-digit growth in Europe, but with a slowdown in Latin America due to lower interest rates and a very competitive environment in Brazil. Let's now focus a few minutes on the Rugby World Cup. For the fifth time in a row, through our dedicated subsidiary, which is called Sports Travel and Hospitality, STH, we partnered with World Rugby in the organization of the 2019 Rugby World Cup. I'm very proud of our team who tackled technical challenges, as well as helping to ensure that Japan's first hosting of the Rugby World Cup was memorable. We designed, we developed, we marketed all of the hospitality services with international flights, domestic transport, catering, accommodation, et cetera, to create truly seamless and memorable experiences for sports fans in a country where the notion of global sports hospitality is relatively unknown.
We provided hospitality services at all 12 host stadiums across Japan, including the flagship Webb Ellis Hospitality Pavilion, a temporary structure at the International Stadium Yokohama with 19 private suites for 600 people, a 700-seat restaurant that served 8,600 guests during the tournament. We provided innovative guest experiences such as the Diamond Dinner Package, a formal sit-down dinner with live entertainment on evenings before key matches, and the Champions Package, where guests attended the final and the following night, the black-tie World Rugby Awards. We provided an equally memorable experience through a more simple fare. The Premium Seat Package was an exciting and successful innovation for the 2019 Rugby World Cup, created for the domestic market in Japan. Premium Seat is targeted at entry-level hospitality in stadiums with little or no physical capacity.
Catering is provided in the form of a bento box and still providing category A seats. Ahead of budget, more than 130,000 official Rugby World Cup travel packages were sold in more than 100 countries, as well as 60,000 hospitality packages. The feedback has been outstanding from consumers, clients, and sales agents alike. Despite the typhoons, for which we were insured, this has been a very successful event, and we have demonstrated what a successful event can be in Japan, and significant interest has already been generated for the Olympic hospitality program in Tokyo this summer, which we, as you know, are also creating, selling, and delivering. It's a very good start as the Olympics project kicks off. I'd also like to talk about a large benefits and rewards contract renewal, the Belgian service voucher. Sodexo has been responsible for managing the Belgian service voucher since 2008.
In 2016, the system was regionalized, effectively making it three separate systems, which are now tendered separately. We are beginning to see regional differences emerging. The service voucher provides registered users with a financial aid, around EUR 14, of a total cost of EUR 23 for household services such as cleaning, shopping, transporting elderly people. This is a very technical contract, servicing one in four households in Belgium, or 1.2 active users, which actively promotes declared employment in all three regions, Flanders, Brussels, and Wallonia, retendered in 2019 for the period 2020 to 2023. Brussels and Wallonia focused largely on maintaining the current systems at a reasonable price, while Flanders opted for a more fundamental improvement in user experience. We won each of these markets. The team opted to offer a full rethinking of the user experience.
The informative website and user platforms were completely redeveloped from the ground up and rendered fully interactive. In addition, new applications have been developed. Specifically for Flanders, an online payment option is also provided, and the login is fully integrated in the Flemish citizen identity management system. Our strong position, our technical knowhow and service delivery in this market has allowed us to remain highly competitive and innovative in all three regions with very good client relations. We won the contract for 4 years in Brussels and 2 years with 2 further annual extensions in Flanders and Wallonia. The total service vouchers market represents a 2019 issue volume of about EUR 3.1 billion. This finances the revenues of about 2,000 companies active exclusively in the voucher finance home services sector. These companies represent 161,000 employees, and they represent one of the largest employment sectors in Belgium.
I'm very proud of the teams in Belgium. Let me now hand you over to Marc for the details in the first quarter reviews, and I'll come back on the action plans and the outlook.
Thank you, Denis, and good morning, everyone, and my best wishes to all of you for a prosperous 2020. Let us turn to slide eight. Revenues came in at EUR 6.1 billion for the quarter, up 7.1%. The currency impact was a positive 2% thanks to the dollar and the sterling. Scope changes accounted for 1.3% linked to the acquisition from last year. This gives us an organic growth of 3.8% in line with the Q4 performance of fiscal 2019. Onsite was also up +3.8% and in line as well with Q4 of fiscal 2019, boosted by the Rugby World Cup, which compensated for the expected weaknesses elsewhere. I remind you of what we said at the full year announcement that Q4 had benefited from better than expected summer works in education, the Paris tourism upside, and a number of significant client negotiations.
The underlying trend in Q1 was +2.3%. Benefits and Rewards was up 4.2%. Turning now to slide 10. North America is down 0.9%, impacted by contract losses and the exit of one very large contract in healthcare, as well as the portfolio rationalization in sports and leisure. Europe is up 7.4%, boosted by the Rugby World Cup. As a reminder, all our large sporting events are managed through our specialist U.K. subsidiary, and excluding the rugby, European organic growth was a solid 3.3%. Africa, Asia, Australia, LATAM, and Middle East were up double digits at 10.3%. As a result, onsite, excluding North America, is up +8.3% or 5.3% excluding the Rugby World Cup. Turning to slide 11, Business and Administrations organic growth was up 9% on last year's published figures. However, restated for the reallocation of some of the business between segments, organic growth was +6.6%.
You will find the full disclosure of the restatement in the appendix of this presentation. The main one concerns some previously segmented countries in Europe and Asia, which have now been brought together to reduce structural costs as part of our Fit for the Future program. There has been a transfer of some healthcare and education business into Business & Administrations, which is where all the non-segmented business is consolidated. We have provided you with the adjustments to be made for each quarter to the 2019 figures. These transfers obviously do not impact total onsite performance or geographic performance. Back to B&A. In North America, organic growth was more or less flat at minus 0.2%. On the one hand, growth was solid in corporate services and government agencies, helped by the ongoing improvement in the U.S. Marines contract, as well as some good new business.
This offset the weakness in sports and leisure due to the ongoing effect of the exit of some less profitable contracts last year. In sports and leisure, the pipeline is currently being rebuilt. Energy and Resources was flat, impacted by construction contract closures. In Europe, organic growth was 9%, boosted by the significant contribution of the Rugby World Cup, which is consolidated in the U.K. Excluding this, organic growth was plus 3%, slightly better than in Q3 and Q4 last year. Corporate Services was held by some new business. This quarter was characterized by the very strong improvement in Government and Agencies, driven by higher comparable unit growth, as well as the trend in Energy and Resources, which is also much better since Q4. In Africa, Asia, Australia, Latin America, and the Middle East, organic growth was strong at 9.9%.
Growth remains strong in corporate services, driven by new business and comparable unit growth in both Asia and Latin America. E&R is also continuing to grow, particularly in the mining sector. We are prudent for the next quarter given the situation in Chile, where the protests continue. So far, people and installations are safe, but activity is impacted. I just want to remind you that Chile accounts for 18% of DNA in Africa, Asia, Australia, Latin America, and the Middle East. In healthcare and seniors, restated organic growth was down 2%. In North America, organic growth was minus 4.3%. This is due to the loss of several hospital contracts, which had already impacted Q4 last year, and the exit of one very large contract, which started to impact this quarter.
You can expect this trend to continue into the second and third quarter, as new business signings are still slow. While the teams are very focused, we remain prudent for the next 12 months. Seniors has improved slightly with some signings and solid growth selling. In Europe, organic growth was flat. Despite some good signatures, the lack of new business opportunity in the segment and the resulting negative net new business in most countries has hampered growth. On the other hand, same-site sales growth was good, particularly in Northern Europe. The pipeline is showing signs of improvement in France and the U.K. The growth in Africa, Asia, Australia, Latin America, and the Middle East remains very strong at 13.9% due to contract startups and solid same-site sales growth throughout the region, but most particularly Brazil, China, and India.
Education organic growth was +3.1%, with a very strong quarter in Europe and Asia, and North America slightly positive as expected. Organic growth in North America was up 1.1%. As anticipated, net new business is neutral and inflation is boosting comparable unit growth, and we have seen also higher meal counts in schools. In Europe, organic growth was +9.6% due to the ongoing positive effect of the Yvelines contract opened in January 2019. During this quarter, this was offset somewhat by one less day in France and a tougher comparable base in the U.K. after several major ramp-ups in the previous year. Organic growth in Africa, Asia, Australia, Latin America, and the Middle East remains strong at 13.2%, resulting from several new school and university contracts in China and Singapore and strong comparable unit growth in India.
On the other hand, Hong Kong has been severely impacted by the student demonstrations. Let's move on to Benefits and Rewards Services. As you have already seen, Benefits and Rewards organic growth this quarter slowed to 4.2%. This is due to 3.9% organic growth in the traditional employee benefits, in line with issue volume up 3.5%. While Europe is still growing very strongly, Latin America has been affected by the activity in Brazil, suffering from lower interest rates and a very competitive environment. Services diversification is up 5.3% and 18.9% excluding the incentive and recognition portfolio rationalization. This is due to strong growth in mobility and expenses, as well as in health and wellness.
In Europe, Asia, and U.S., organic growth in revenue was double digits this quarter at 11.1%, with solid growth in mature Europe and strong double-digit growth in Eastern Europe, but also in Asia despite a tough comparative phase in Q1 last year. Sorry. Organic growth at -3.8% in Latin America was impacted by a significant downturn in Brazil due to a much more competitive environment and also lower interest rates. The rest of the region continued to grow strongly. Operating revenues were solid at +5.2%, however financial revenues were down -5.3%, entirely due to the decline in interest rates in Brazil. Thanks for your attention. I now hand you back to Denis for the strategic agenda and the outlook.
Thank you, Marc. Now let's just come back to the four pillars of our strategic agenda. As you know, every time on every quarterly announcement, I like to update you on some initiatives that we have. Here we talk about the client and consumer-centric pillar and present the new offer that we've designed and are deploying. We launched it, we are deploying it in the Paris region. Enjoy responds to the needs of certain types of clients in specific contexts. It's very innovative. We are selling it into buildings or individual workplaces, which traditionally have never had a canteen. We are opening possibly new markets. Enjoy is for clients for whom attracting and retaining talent is important, where co- and nomad working exists, and where communal spaces exist, but where there is no room for a kitchen.
Enjoy is for consumers that expect to eat healthy food and who work in a flexible manner. The Enjoy offer requires a small modular space. It includes an Enjoy officer, who will ensure that fresh, seasonal, and locally produced food is provided all day in a clean and friendly environment, facilitated by the So Happy app. The Enjoy officer can also provide concierge-type services. Importantly, the model uses a Sodexo kitchen in the vicinity for optimal cost and low carbon footprint. Of course, we have strict policies on waste management and recyclable disposables. We have currently 15 sites being deployed and many more on our roadmap. Now on slide 21. Let me just reiterate that growth in Q1 was in line with expectations, with a very successful Rugby World Cup in Japan, offsetting the contract losses and exits in North American healthcare.
For the year, North America remains challenging as the healthcare contract exit and losses fall out of revenues and with net new business being only neutral in education. However, the contribution of the Rugby World Cup in the first quarter and the 2020 Summer Olympics in the fourth quarter for about 100 basis points combined, with strong growth in the developing economies and steady progress in Europe, should more than compensate. The group is continuing to identify additional Fit for the Future initiatives to generate SG&A savings. This will complement operational productivity due to our enhanced discipline and the implementation of STEP, our performance framework. These savings will continue to be reinvested in accelerating growth. As a result, we are expecting the yearly organic revenue growth of around 4%, including the major sports event.
Stable underlying operating profit margin for the year, excluding the currency impacts and any impact of IFRS 15 implementation. Midterm, Sodexo aims to deliver market-leading profitable growth. Current group investments, activity mix, and geographic presence provide us with the opportunities to capture this growth. Sodexo is capable of accelerating organic growth over the years to come while ensuring a sustainable and inclusive business model. As organic growth increases, growth investments will be kept under control so that the effects of enhanced discipline and efficiency gains will feed margin expansion. Let me now open the call for your questions. Operator, can you please open the Q&A session?
Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, please press star one if you wish to ask a question. Your first question comes from the line of Jamie Rollo from Morgan Stanley. Please go ahead.
Thanks. Hello. Happy New Year, everyone. Just a few questions, please. On North America, the comment on sports and leisure portfolio rationalization, is that just the same as the comments, post the Centerplate deal, or are there any new losses there? On the healthcare losses, you said they started to come through in the first quarter, so it would be helpful just to quantify, please, maybe the revenue loss in Q1 and then what that might be in Q2, annualized. I think it originally was a EUR 200 million loss in total, both for the big exit and the losses. Finally, in Europe, any signs of deterioration in the corporate services or B&A segment in terms of like-for-like volumes, please?
Hello, Jamie. Happy New Year to you. For first question, on sports and leisure, yes, it's indeed the same comments that we've done. We've looked at what has happened after the integration of Centerplate. We've concentrated on, of course, retaining the clients that we wanted to retain. We've done some portfolio cleanup that was necessary. It's absolutely in line with what we said earlier. Concerning Europe, I think we still see solid situation in Europe in corporate services. We have still a reasonably good situation in the U.K., in France. Mediterranean, Southern Europe overall is solid. Eastern Europe as well. I think for the moment, we're quite happy with our performance in Europe for corporate services. Now, regarding healthcare, Marc?
Yeah. In healthcare, the large contract we are talking about actually came out of our revenue in, I think it was in October.
Yeah.
We've had an impact, which is, I will say, probably half a quarter impact in Q1, and it will be a full impact in Q2. I think in Q1, the impact was around EUR 15 million, and it will be slightly more in Q2.
Thanks. One more, if I may. I might be splitting hairs here, but it looks like the Rugby contribution beat your guidance. Your full-year guidance is still 4%. Is it fair to say that the guidance for underlying sales growth, excluding sporting events, is now perhaps a little below 3%? Is that just too marginal to make a view?
The rugby number came up just a handful of EUR millions above what we were expecting. It does not change the overall picture.
Yeah.
We had high expectation of the rugby. We've done the numbers in spite of the typhoon. That's why we're quite happy on the numbers. It does not change globally the full picture for the year.
Okay. Thanks a lot.
Thank you. Your next question comes from the line of Vicki Stern from Barclays. Please go ahead.
Good morning, and happy New Year. I have a few questions. Firstly, just as we look into Q2, obviously, you gave the color there on the impact of the healthcare losses across the quarter, but just a few other moving parts, I think, in Q2. Obviously, the strikes in France. Any comment on the magnitude of that impact? Also calendar, I think you've got obviously a leap year this year. Just, if you can sort of call out any moving features. Generally, how should we think about the underlying organic growth, ex the sporting events progressing over the next few quarters? Secondly, just on BRS, you sort of mentioned there this significant downturn in Brazil. Again, please just sort of fleshing that out a little and the outlook there?
Do you think you can still do within the 5%-10% sort of long-term guidance for organic growth for benefits and rewards? Finally, I know obviously you don't give quarterly figures for retention and new business wins, but just anecdotally, I suppose, compared with when we last spoke at the full year results, anything to call out in terms of progress on either new business or retention? Thanks.
Thank you, Vicki, and happy New Year to you. Regarding Q2, definitely, the strikes in France have an impact. Still difficult to absolutely model everything because it started in December. We're still computing the numbers. What you have to have in mind, we suffer not only from the strikes in France, but also from some other situations, the riots in Chile that have been also disturbing our business. We also suffer from the situation in Hong Kong. Marc mentioned it earlier. Still hard to evaluate the impact of Australian fires. Not massive, but still can be a bit disruptive. Overall, what we estimate is the impact of all these elements together should be between 30 basis points and 50 basis points in Q2, which would make around 10 basis points for the full year in terms of top line impact. Right.
With regard to the leap year, it actually does not bring an extra working day. I think it's an extra weekend day that it bring. It was already factored in our targets and guidance. We are not expecting that it will have a major impact on Q2. Therefore, we were expecting when we gave our original guidance, a weaker Q2, and so we've got the large contract in healthcare exit in North America, but we've also got the Yvelines contract, which started last year in January, and which has been supporting the growth, and it will have less of an impact in Q2. Q2 will normally be softer than Q1. That was as we planned it this year. Nothing surprising.
Yep, absolutely. If we talk about benefits and rewards, particularly in Brazil, overall, I must say we're used to bumpy roads in Brazil in benefits and rewards. The situation is deteriorating. We've gone that in the past. This team, I can tell you the team is working very hard in innovating new offers and deploying digital solution at full speed. It's true that the decreasing interest rates, the Selic went from 6.5 to 4.5 at the moment. It has, of course, a significant impact given the financial volumes that we manage. The competitive landscape is being tougher than it's been in the past. We've known in the past, we've done some very tough moments and some, let's say, more calm moments. It's a bit of a difficult period at the moment.
I strongly believe that we can absolutely keep this guidance 5% to 10% organic growth in benefits and rewards. It's still absolutely a target that we have. I'm confident. I think what we see, and we're really happy with the performance. Apart from Brazil, Latin America is solid. We have good performance in Mexico. We still have good numbers in Chile despite the events. Europe is really solid. Asia is picking up also very well. India is good. I think the rest of the business is really in a good shape. Now, for your third question, I would say, as you said, we don't give KPIs on quarterly announcement. I must say that the retention is more or less in line with last year. Development is a bit better as at the end of December, which is encouraging.
In terms of same-site sales growth, we're quite happy. I think we have a good dynamic and in almost every segment. I think that's very encouraging in the way we are able to pass on inflation, we're able to cross-sell services. We're doing overall, I think, a good business on a daily good operations in our business. Just one thing back to Benefits and Rewards, sorry. Yeah, definitely, given where we are in Q1 and given the difficulties that we have in Brazil, we are guiding, of course, more this year at the bottom end of the range, of course. Sorry for this.
Okay. It's very clear. Thanks very much.
Sure.
Thank you. Your next question comes from James Ainley from Citigroup. Please go ahead.
Yeah. Morning, everyone. Happy New Year to everyone. Two more questions, please. Following on from that on BRS, could you talk a bit more about the nature of the competitiveness in the Brazilian market? Maybe give us a sense of how the impact split between the impact of interest rates, underlying issued volume and the competitive nature of it in terms of contract losses. Then second, a question on food inflation. We're seeing some indicators that food inflation is accelerating on the back of African swine flu and other issues. Can you talk about what you are seeing, please, on food inflation, and are you still confident in your ability to pass that on to clients?
Right. With regards to BRS, I think, we don't split the impact of interest rates and issue volume. What we know is definitely the competition is tougher, probably also linked to the economic environment. There is more fight because on the last contract, the price pressure is very, very high, and the development in the small and medium companies is not as active as it has been given. I would say the fact that some of the small and medium companies are not in necessarily healthy situations. That's definitely, we have a decrease in issue volume. We believe that we can turn this around as time goes on. At the moment, yeah, we're struggling. In terms of food inflation, it is relatively modest now. We see some price increase on protein in certain geographies, linked also to the Chinese crisis on pork. It's still relatively moderate.
What we see on inflation is more an ongoing labor inflation in the U.S., where the hourly labor continue on the same trend on prior years. There is a slight pickup of food inflation in the U.S. also. Currently, we are passing this well onto clients. In France, inflation is very moderate. Even in the U.K., we have moderate inflation. Now, what's going to happen is that the National Living Wage increased by 6.2%, that will actually obviously create a labor inflation. We had anticipated a significant increase anyway. We were expecting, this year, a significant increase in the National Living Wage in the U.K. Last year we had also a significant inflation, which we passed well to the clients. The fact that it is an official labor inflation, it makes it easier to pass it on to clients.
We are not too worried about the labor inflation in the U.K.
Okay. Thank you very much.
You know what Denis said on the same-site sales growth, we have a very dynamic same-site sales growth.
Yeah
in this beginning part of the year, better than last year. This is also the reflection of us passing well the inflation. It's not just the inflation. We also have some volume increases, but the health of the same-site sales growth shows that we are passing inflation well.
Very good. Thank you.
Thank you. Your next question comes from the line of Jarrod Castle from UBS. Please go ahead.
Thanks. Good morning. Two from me, please. Happy New Year. One, can you give any color on how the acquisition pipeline is looking and what the run rate you think would be on external growth? Should we be thinking around 1%? Just secondly, any color on the importance of ESG now when you come to market, if that's increased or decreased over the last 12 months. Thanks.
Yeah. On the M&A pipeline, we kept on the trend from last year. We clearly told the on-site services team to focus on developing a pipeline, selling more. Less distraction from M&A. There is very little or no activity on the on-site. We are also active on the disposal side, so the M&A team is more working on the disposal. There is still some activity in PHS. Small activities. There is a pipeline of M&A in PHS, and it's very moderate also in BRS, but there are some projects in BRS. Do not expect a lot of M&A this year, given the current pipeline. The 1.3% scope change impact in Q1 will probably transform itself into a 0.4%-0.5% impact for the full year at that stage with what we have in the pipeline today.
Regarding your question on ESG, Jarrod, definitely we see an increased focus and requests from clients on those topics. It depends on the geographies. Definitely in Europe it's coming stronger and stronger. In the U.S., it depends on the clients and the sectors. Definitely, first the request for healthy food, local food, is more and more important. The questions around sustainability, plastic, food waste, all this comes into play. We have several very interesting, let's say, I would say showcase prospects in the pipeline where we really would demonstrate the fact that we are leading the way on that. As you probably know we are absolutely ahead of competition in the way we manage food waste to a massive scale. Of course, it's meaningful for our clients, for our consumers, and for the economic of Sodexo.
Definitely we see that this is coming more and more, and I would say we are well prepared. We have very strong assets and knowledge and practices on that. I'm very positive on this.
Okay. Thanks very much.
Thanks, Jarrod.
Thank you. Your next question comes from the line of Jaafar Mestari from Exane BNP Paribas. Please go ahead.
Hi, morning. It's Jaafar from Exane BNP Paribas. Just on a few questions, if that's okay. The first one on the-
Jaafar, we cannot hear you very well. Sorry.
Hi, apologies. Is that better?
Okay, much better. Thank you.
Sorry. Firstly on the various disruptions. If I'm correct, the French strikes only started in December. The Australian bush fires, it's really in November, December, they started to really go out of control. I'm not sure we should assume they were included in your guidance. Do you simply mean that what you've seen so far in December, January for the French strikes, is just not material enough to change the guidance? Second question on U.S. healthcare. I also just wanted to clarify whether -4.3% in Q1 was in line with your expectations. When you say you remain prudent on full-year 2020, is it basically the same message? Would you mean increasingly prudent? Lastly, on product innovation. You keep sharing some of these new initiatives.
Today you talk about Enjoy, which you launch in Paris, Sodexo in France, Novae in Switzerland, The Good Eating Company in the U.K. I'm just wondering if North America is still basically the problematic region within the group. Could you maybe share a few more examples of that sort of product innovation and new offers in North America?
Yeah. On your first question, when we gave you guidance for the year, we were expecting Q2 to be a softer quarter, not because of the events, but because of the rhythm of losses and exits and the ramp-up of evening contract and so forth. We knew Q2 will be softer, will be our softer quarter among the four quarters. What we've just said is that the events
Will add some softness to it. The events in Chile started mid-November. Hong Kong has been going on now for a few months. The strikes are all in Q2, and the bushfires are just starting, but I'm expecting very mild impact from the bushfires in Australia. All of this is currently estimated at 30 to 50 basis points, and this was not in our original target, but what was in our original target was the fact that Q2 will be our softer quarter of the year. On your second question, yeah, the Q1 in healthcare is in line with what we expected. Nothing more. As we get impacted by this contract exit and losses, this will continue for some months. Are we increasingly prudent? No. Are we prudent? Yes. Definitely. It's not prudent to be prudent.
It's because, as I mentioned, we still have a significant pipeline of renewal coming up. There's always an uncertainty. We are all hands on deck on retention, but there are still some unknowns. I must say also that the healthcare sector in the U.S. is a troubled sector. Some of our clients are living through financial difficulties. It's not new, but it's quite live at the moment. The pressure on price is very high. Because we also put a very strong emphasis on margins and particularly gross margins, we will not play at any price, because we want to also ensure profitability. At this moment, we are cautious both on, of course, on the retention part, but also on ensuring that we have reasonable profitability in what we retain or in what we gain.
Combination of both makes me prudent as I've always been for the last year or so. On the third question. I think you're guiding me into next publication, next announcement to give you more insights into what we do in North America. Definitely North America, I think we are experiencing some growth issues and some difficulty in healthcare and in education, as you know. North America remains a big region of innovation. We are very advanced in digital, with lots of apps being deployed, being consumer-facing. As you might have heard, we've developed robots on campuses that has helped us increase our same sales growth, particularly for breakfast, for students who didn't want to leave their bed to get their breakfast. We've developed a Future 50 Foods to put new vegetables and new foodstuff in our menus that are very innovative, protecting biodiversity.
This has been live in North America. We are also very active in food waste. There are many offers that are live in North America. Of course, in the last one or two announcements, we've talked a lot about things that were happening in India and in Europe. Okay, I think it's a good point that you make and we'll also communicate more into what we do in North America because it remains a country of innovation. I'm very confident we are able to win very good contracts in the U.S., retain some very good contracts. We have the right offers. The main issue that we have in North America is the consistency, is to be good everywhere. That's the point. We have some very good offers and capabilities there.
All right. Thank you very much for all of that.
Sure.
Thank you, ladies and gentlemen. As a reminder, if you'd like to ask a question, please press star and one on your telephone. Your next question comes from the line of Richard Clarke from Bernstein. Please go ahead.
Good morning, and Happy New Year. three questions from me, if I may. The first one, you've mentioned a few times in the presentation, the market for new businesses is quite tough. You mentioned it in relation to European healthcare, U.S. education. Just wondering why you expect that to be the case. You've said in the past you expect sort of weaker macro can drive outsourcing. Why are we not seeing that? Second question. There's been quite a lot of press on industrial action at your site, the NHS hospitals, obviously the university where the Democratic debate was. Is that just hitting the news more, or are we seeing any spike in industrial action, and what impact is that maybe having on your labor costs?
Thirdly, you talked very sort of effusively about the Japan World Cup, but there was a press report saying you've not bid for the French Rugby World Cup. What's the current attitude to these big events, and why are you not bidding for that one going forward?
All right. Thanks, Richard. Happy New Year to you. I think the new business, European healthcare overall is not the most dynamic at the moment. The outsourcing, and particularly if I take the case of France, there is a vast potential in the public sector, but they are very slow in turning into outsourcing for many, sometimes for political reasons. NORAM Education, I mean, schools, we have a good dynamic in schools. Not such a good dynamic in universities, but it's linked to us, and I wouldn't say it's linked to the markets. As you say, we've had some weaknesses in our teams, in our sales development, et cetera, and two also in healthcare, NORAM. NORAM Healthcare, NORAM Education are still active market.
There is a specificity in NORAM healthcare linked to, let's say, the price competitiveness, in line with some of the difficult economic situations that some of our clients are living through. Very specific things. Overall, the drive force outsourcing is still there. When particularly, of course, still in North America, but when you look at the rest of the world, it's still, and particularly the emerging markets, it's massive. The strikes, yeah, we have two very different phenomenon on the strikes in North America and in France. France, it's linked to the pension question that the government is working on. It's very specific. The strike in North America, in the place where the presidential debate had happened is also very specific. The trade unions, with which we have an excellent relationship nationwide.
Some people locally have, of course, I would say, taken the opportunity of that presidential debate to put pressure on the conditions in which they were working. We've settled a deal, which is very local, which is a good deal for both parties, and that's it. It was very, I would say, very opportunistic coming from the local section of a national trade union. Again, very specific. On the Japan World Cup and the French World Cup, well, I think the conditions, the contractual conditions and the contractual environment and the stakeholders around the Japan World Cup are very different from the overall ecosystem of the French World Cup.
So far, we haven't bid for the French World Cup because we felt that we wouldn't be able to develop and have the space to develop relevant offers of hospitality offers for the French Rugby World Cup, as we've done in the past. It's very linked to the, what I would call the ecosystems around the French Rugby World Cup. There's different stakeholders making the decisions.
On that last one, there's no change in attitude towards these large events. We can expect to see you doing Olympics and World Cup still going forward.
Sure. Absolutely. Nothing linked to the French World Cup, we decided not to bid for the Olympics in Rio for other reasons. We felt that, again, the transparency of those markets for Rio were not at the level that we expected, we decided not to bid. There are some specificities per countries that push us to decide not to play, but overall, we still believe that those big events are great. As you know, we've done also the Pan American Games in Lima. It has been a big success. We had a standing ovation from all the athletes at the end for our teams. It's a great showcase of our know-how, but we are picky to ensure that we can do our business the way we want to do it and showcase our expertise as we wish to do.
Thanks very much.
Sure.
Thank you. There are currently no further questions, sir. Please continue.
All right. In that case, let me again wish you a very nice year for 2020, and looking forward to meeting you and exchanging with you in the H1 announcement. In the meantime, we are all hands on deck, and do our best to continue to grow and develop the business in Sodexo. Thank you for your trust.