Earnings Call: H1 2018

Apr 12, 2018

Good morning and welcome to Sodexo First Half Fiscal Twenty 18 Results Conference Call. Today's conference is being recorded. At this time, I would like to now hand the conference over to the Sodexa team. Please go ahead. Thank you very much. Good morning, everyone. Welcome to this first half fiscal twenty eighteen results call. On this call today are CEO and Denis Machuel and CFO, Mark Conner. As usual, the slides and press releases can be downloaded from the from our 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 a forward looking statement and as such may not relate strictly to historical or current facts. These statements represent management's views as of the date they are made and we assume no obligation to update them. You are cautioned not to place undue reliance on our forward looking statements. I remind you that the next announcement will be the 3rd quarter figures on Thursday, 5th July. And please get back to the IR team if you have any questions, after the call. I now turn you over to Denis Mashur. Denis? Thank you, Virginia, and good morning, everyone. This is Denis Machuel, and I'm here with Marc Holland, our CFO. We spoke to you a few weeks ago when we announced analytic results and our revised guidance for the year. And Mark and I will provide you today with more details on the results themselves and provide clarity on how we view the second half of the year. We will outline our action plan to achieve our fiscal 2018 objectives. And secondly, how we will embed the improvements as part of our long term strategy Capital Markets Day in September. But let's start with some of the highlights of the first half. As we announced 2 weeks ago, Sodexo delivered an organic revenue growth and an underlying profit margin below our previous expectations. Organic revenue growth was 1.7% or 1.9% excluding the impact of the change in calendar from weekly to monthly reporting in North America. And this represents one less day in the first half. The underlying profit margin was 6.1%, which is down 70 basis points, excluding the currency mix effect of the weakness of the Brazilian real. This performance is disappointing. And having recently taken up the position as CEO, I want to assure you that we that will address these issues, both in the short and medium term. While the areas of on the performance are clearly a focus for us as a management team. I would also like to stress that business overall is financially strong with 1000000 of operating free cash flow for H1. I'm happy with the markets in which we operate and Sodex was positioned within those markets. We are well placed to win more business and maintain a relentless focus on clients. So now let's look in more detail at revenues at on-site services and benefits and awards. So on-site services revenues rose 1.6%. I'd like to highlight that excluding North America, on-site revenues were up 4.4%. Businesses and illustrations, benefited from a modest pickup in France and ramp ups in the energy and resources business. And overall, this performance more than offsets a decline in education and flat sales in health care. Benefits And Rewards Services revenues grew 2.9 percent on an organic basis, with strong growth in Europe and the USA. A weak performance in Latin America was due to a decline in interest rates in Brazil and continuing high unemployment. Now in terms of profitability, underlying operating profit was EUR627,000,000, which is down 15% or -7.4 percent excluding the impact of foreign exchange. As I mentioned earlier, underlying operating margin was 6.1% which is down 80 basis points or 70 basis points when we exclude the currency mix effect of the weakness in the real, in Brazil, in particular. Our decline in operating profit is attributed to a mixture of factors, some that we have had anticipated and some that we hadn't. We had anticipated some margin decline due to the deconsolidation of several businesses and due to lower interest rates And I remind you, we were committed to reinvesting the savings from the Adaptation and simplification program into accelerating investments in new offers, establishing new growth initiatives, investing in sales and marketing, and enhancing our digital capabilities. And I can assure you that all this has been ongoing. What we hadn't anticipated was the margin decline from Education And Healthcare Businesses in North America. Despite the fact that we had anticipated weak sales performance. So the poor execution of planned measures to increase efficiencies that were made to compensate the weak sales this year has created a shortfall of about 25 basis points. And on top of that, a further shortfall of, around 25 basis points came from the slower than expected ramp up of profitability in a small number of large contracts. The positive elements are that net profits are up, helped by much reduced restructuring costs and an exceptionally low tax rate. Our balance sheet remains healthy with a net debt ratio of 1.1x or gearing of 49%. Thanks to our strong free cash flow of EUR 125,000,000. In the first half, we spent EUR 674 1,000,000 in acquisitions with the largest, you know, being a centerplate, as you know, which I can confirm is being integrated really well into our organization. Since January, There are already significant synergies identified and implemented. The sales team are working hard and well together and more and more food purchasing synergies are being achieved as we speak. Overall, net acquisitions contributed 1.3 percent to revenues. And regarding M and A, We have the means to remain acquisitive, but we will examine any potential target with rigor and discipline to ensure that we don't disrupt the action plans which are the key priorities for us at present. And furthermore, in underscoring the confidence in the group's prospects, the board approved on Tuesday a 1,000,000 share buyback program, which we will aim to execute by the end of this fiscal year. So I'll now turn over to Mark to talk more about the financial performance. Marc? Yes. Thank you, Denis, and good morning, everyone. So I'm very pleased to be here with you this morning. Please note that as usual, we have defined all alternative performance measures in the appendix. In particular, I would profit. And you will find the detail of the other income and expenses which are reported below the underlying operating profit in the notes to the accounts. If we move to the P and L on Slide 10, the revenues are at 10,300,000,000, and we're down 3.2% or up 3% excluding the currency effect. The currency impact was significant this period accounting for between 6% 9% at each line of the P and L. I'll remind you that this is a translation impact only as all our costs and revenues are local. So I should focus on performance excluding currencies. The underlying operating profit reached $627,000,000 down 7.4% excluding currencies. As previously noted, the margin fell 70 basis points. Denise has already explained the shortfall and which will go into the detail by segments in a minute. Other income and expenses amounted to 1,000,000 which is well below the 153,000,000 from last year. As you remember, last year, we had the final trench of the cost of the Adaptation and simplification program. This year, the major elements are 1,000,000 of restructuring costs, 1,000,000 of depreciation and write offs of intangibles, such as client relationships and grants, 1,000,000 of losses associated with scope changes and million of acquisition cost in particular Centerplate. As a result, operating profit was $554,000,000, up 4.1% excluding the currency impact. Net financial expenses decreased by EUR 12,000,000 to EUR 44,000,000 for the first half fiscal twenty eighteen. The blended rates for our debt at the end of the period was 2.2% broadly stable. Last year's first half included an early redemption in M and A of EUR 11,000,000 And this year, there is a EUR 7,000,001 of interest income related to the reimbursement of past dividend taxes. The effective tax rate fell to 25.9 percent from 32.6 percent in the first half last year. This was due on the one hand to a positive one off of EUR 43,000,000 from the reimbursement of past historical dividend taxes. In France. And on the other hand, to a negative one off of $23,000,000 linked to the effect of the realignment of deferred taxes as well as a deemed repatriation tax in the USA resulting from the tax reform. The effect of the lower tax rate kicks in progressively for us given that we should have a blended rate for this year due to our year end in August. Turning to cash flow on Slide 11. Operating cash flow grew strongly on last year to 1,000,000 from 1,000,000 last year, mainly due to substantially lower tax outflows, as I have just mentioned. The exceptional dividend tax reimbursement, but also the cashing in of some safe receivables. The change in working capital was broadly flat relative to life reflecting the typical seasonal impact. Net CapEx was slightly higher. As a result of all these factors, free cash flow grew from 1,000,000 last year to 1,000,000. Net M and A spend in H1 was double the amount for the wall of last year at 674,000,000. Last year's dividend increase of 14.6 percent is reflected in the dividend paid out this past February of $411,000,000. As a result, our net debt grew nearly billion during H1. Despite the seasonally higher level of debt at the end of the first half and the significant amount spent on acquisitions since year end, the group's financial position remains very strong with a net debt ratio of 1.1x and a gearing of 49%. Operating cash stood at nearly SEK 2,400,000,000 of which SEK 2,000,000,000 is related to the benefit and reward activities. Slide 14 shows the significant currency impact due in particular to the weakness of the dollar the real and to a lesser extent sterling relative to the euro. Scope changes were plus 1.3% which is a net of acquisition contribution and the disposals of Viva box and entities in the region Africa Middle East. This will increase progressively in Q3 and Q4 as the negative effect of scope changes diminishes and as a contribution of Centerplate will be for a full quarter Q3 onwards. Organic growth was 1.9% excluding the 53rd week effect. On-site services were up 1.6% and benefits and rewards is up 2.9%. On Slide 15, let me just make sure that this Easter field week is clear for all. Last year, we had to sit at the year end and we had 3 70 days in the year in comparison to a year fiscal year 2016, which adds 52 weeks or 3 64 days. This year is a normal calendar year and 3 65 days, and it compares to a prior year the fiscal year 2017, which had 3 70 days. We are, therefore, down 5 days versus prior year. Quarter by quarter, the 53rd week impact gives us 1 less day in Q2, 1 more day in Q3, which means flat versus last year after 9 months and then 5 less days in Q4 and for the full year. On top of this, we have classic calendar impacts, which vary from quarter to quarter and particularly in schools and universities, and it can have significant impacts when holiday changed slightly. And to this point, North America Universities will be affected by 5 less board days in Q3 due to the calendar shift. Let us now go into the detail by segments and regions. Business and administration represents 54% of our on-site services revenue. B and A organic growth was up 4.5% and is positive in all regions. North America was up 2.7% boosted in particular by increased activity in air pump launches, as well as significant project work in Q1 and solid same site sales growth. In Europe, which represents 50% of B and A revenue. The recovery in tourism in France is definitely there. We are pleased also with the growth in government and agencies. Also, we have not yet felt the effect of the loss of the STI accounts in the UK which will start to have a significant impact in Q3. Energy And Resources continued to remain very weak in Europe, down 17% and we've just lost the contract in Norway, which means that it is likely to stay very negative for a while. We had a very strong performance in Africa, Asia's Latin America and the Middle East with organic growth of 12.4 percent, reflecting the ramp up of new contracts signed last year in Energy And Resources, and good development in specified sales in most of the countries in corporate services. Moving on to Healthcare and seniors. Revenues remained stable at 1,000,000,000. In North America, which is 66% of the business, revenues declined by 1.6% due to a lack of new business. While retentions remained stable in H1, same site sales have been much weaker than expected. Given the current level of new pieces and several recent losses in the period hand, we expect revenue performance to deteriorate rather than improve over the next few quarters. In Europe, site closures elsewhere. However, retention and same site sales growth are good. Growth in Africa, Asia, Australia, Latin America and the Middle East was particularly strong as plus 16.6% with a lot of site openings in Brazil and solid growth in Asia. Looking now at the next slide, education revenue for the first half fell 2.7% on an organic basis. I remind you that North America accounts for 77% of this segment and this is where the performance is for due mainly to a very low prior year retention. As a result, organic decline in sales in North America was 4.1%. Samsung sales growth remains solid and the retention rate in universities is improving. Although, I remind you, we are only just entering peak sales season to decision of Tilrayer. In Europe, organic growth was plus 0.7% with strong growth in UK schools due to new contracts and particularly in the private sector. France and Italy benefited from 2 extra school days each, which boosted same site sales growth in Southern Europe. In Africa, Asia Australia, Latin America and the Middle East, organic growth remained strong at 15.8% with the ramp up of several new school contracts in China, Singapore, but also India. Turning to benefits and rewards. Organic growth was 2.9% and on issue volume up 5.6%. Clearly, published revenue was severely affected by currencies and the effects of the disposal. I'll remind you that Viva Box is a very seasonal business around year end as a result of 5.1 percent impact on H1 revenue will be less significant in H2. In Europe, Asia and USA, organic growth in issue volume and revenue was strong despite a solid comparative base in the previous year, at +5.9percent+7.1percent, respectively. This performance was driven by solid growth and issue volume in most countries in Europe and in particular by double digit growth in Romania Czech Republic and for instance, Turkey. Activity in India was temporarily affected by the mandatory transfer from paper to card and the loss of a large client. Revenue growth was stronger than issue volume growth due to the solid growth in the incentive and recognition activities particular in the UK district period. I'll remind you that incentive and recognition activities do not generate issue volume. In Latin America, revenues fell 2% while issue volumes saw growth at 5.3%. Growth in Chile and Mexico has remained strong, but Brazil is more challenging. Base value are continuing to increase, but this is offset by lower interest rates, which are currently around 6.5%. No improvement in unemployment and the market which remains very competitive. Now turning to operating profit on Slide 22. Our underlying operating profit in the first half was 627,000,000 a decline of 15% of which 7.6% is related to the currency effect. The underlying operating margin was point 1 percent, down 80 basis points or 70 basis points, it should strip out the currency mix effect. Digging deeper into the performance by segments, excluding currency impact. Business And Administration operating profit decreased by 2.2% and the operating margin was down 40 basis points, reflecting some high margin account losses and delays in the ramping up of profitability of a small number of recent large contracts. These large contracts are complex, the ramp up phase is always challenging and with some time and counter issues. In Healthcare and seniors, the underlying operating profit fell 1.3% and the margin was 20 basis points to become compensated by the result of SKU rationalization program. However, the program has been delayed about 6 months. It is now just starting to contribute. On top of that, we have weaker than expected performance in some large contracts, But remember also that it does compare to a particularly strong first half last year. In education, underlying operating profit fell by 8.9% and the margin declined by 60 basis points. Reflecting the decline in revenues increase in labor and operations since January and poor execution of the Performance Improvement Plan. Issues have been rectifying during the course of the second quarter, but not enough to offset the issues during the first quarter. Finally, turning to benefits and reward services, underlying operating profits fell 11.5% after adjusting for the negative effect of the weakness in the Brazilian reais. The margin was down 320 basis points, and it was expected About half of this is due to the reduction in interest revenue due to the decline in rates in Brazil. The other half is linked to the combination of accelerated migration costs due to the number of countries moving from paper to card, particularly in India, Czech Republic as well as France and the impact of the growth in the newer mobility and expense management activities which is a lower margin business and the traditional food and meal activities and which is also investing in its development. So to summarize, the margin deterioration we have experienced across our on-site services businesses was primarily a result of internal execution issues and not a reflection of any fundamental weakness in our operating markets. We have identified the areas where we need to improve performance and as Denis will outline shortly, as a comprehensive set of action plans in place. In benefits and rewards, The margin deterioration is due to the fall in interest rates and the investments we are making in the new businesses. Thank you for your attention. And I will now hand over to Denis for the outlook. Thank you, Mark. And so let's turn now on our reversed guidance for the current financial year. As we said 2 weeks ago, we are anticipating organic revenue growth of between 1% 1.5% and an underlying operating margin at constant currency of around 5.7%. So let me spend a few minutes explaining the drivers behind this new guidance. We have already gone through the H1 performance with Mark. So I'll focus on the factors we believe will have an impact more specifically on H2. So let's start with 1st, organic revenue growth. 1st, the level of signatures has been particularly low this past few years and especially since the beginning of the financial year. Therefore, there is less revenue to flow through relative to our expectations. We have really looked into this to identify the underlying trends. There's a mix of reasons. In health care in North America, we've been losing same site sales by losing small pieces of contracts. In education, there will be a negative calendar effect in Q3 as May will lose 5 days of term time. Before the summer holidays in North America. From Q3, we will also start to fill the UK army contractors. And in energy and resources, we will have substantially less contribution from ramp ups in the second half due to a lack of recent signatures. As a result, we are now expecting second half growth to be only marginally positive. And this creates a significant shortfall in revenues and therefore, in gross profit relative to our expectations. Added to this, we will have the compounded effects of the delays in the ramp up of the efficiency programs And in this respect, we will see a further deterioration in health care before the efficiency program delivers enough results probably only next year. As far as the last contracts are concerned, we are expecting an improvement in the second half but we will not reach the level expected 6 months ago for H2, and it will take longer. All of this has added up to a more cautious view for this year. However, the right actions and the necessary time to execute them will address these issues. And now, so let me set out the remedial actions that we are taking both immediately and in the medium term. So on Slide 27, you can see the immediate action plan which has been designed for North America, but which is also being implemented more generally across the regions as and where it makes sense. This plan is based on improving efficiency quickly but in a smart enough way so that we can generate sustainable efficiency for the future of the group. In terms of food cost management, the SKU rationalization, which Mark was talking about, has, that has started far too slowly within health care, but which is currently ramping up will also be generalized to the rest of activities in North America. Work is also being done on the food supply and delivery frequency on our sites, and there is a big push to further increase supplier and SKU compliance by our sites. We are also accelerating purchasing synergies with a specific and very active action at celebrate, as I said earlier. On the labor front, we are really hitting scheduling to be demand based in education This is going to be generalized across the segments in North America. This has significant results in both reducing labor costs and at the same time, better responding to consumer needs. We are going to drive this down onto every significant account of sites. We also have specific programs on improving overtime management and temp labor rationalization. And we are also looking at a much longer term program to re engineer our full time part time mix in labor. In addition, we an action plan across the group to reduce discretionary spent everywhere and fast. But from a more strategic view, we are accelerating a plan to completely redesign our SG and A expenses. While doing this, we aim to simplify the organization to right size the teams at global and local levels. We are also in the process of consolidating our back offices for recent acquisitions, but also for a marginal point of view. This is not new and some of the projects are already getting on the way at the moment. And the 4th leg in terms of efficiency is to address low performing contracts. We are composing detailed action plans for We intend to enhance claim management and launch client renegotiations to rapidly return to the plan trajectory in terms of profitability. And I have imposed to a member of the executive committee, to that he becomes personally responsible for each contract. Finally, we are also strengthening the teams in North America The teams that we put in place 2 years ago have not function properly. So we need to rebuild our talent pool over there. For instance, we sent 2 of our most experienced CFOs out together serves our North America headquarters for health care and for education, where both segments are based. In addition, Satya Menar is now transitioning into his new role as CEO of Education. And as I speak, the health care team in North America is being restructured with a new regional CEO. We brought in very strong new people from our side, and we've also transferred experienced people from within the group. There's a lot to do. And much of this is getting back to the basic discipline of retaining our clients cross selling, being compliant with group purchasing, large catalogs, standard menu systems, etcetera. So these immediate actions that we're taking are good business practices and they will become embedded in our long term strategic agenda. So as said before that there needs to be more discipline and rigor in everything that we do. Believe me, discipline is the new watchword across the organization and will be at the center of my strategic agenda for the next few years. What is this strategic agenda? As you can see on Slide 28, we will focus on 4 core pillars: to return the group to delivering strong and profitable growth. Our key priority into the immediate term is to improve operating efficiency across our businesses. We will revitalize our growth capabilities by reigniting our approach to sales and marketing to have compelling go to market strategy and therefore ensuring that we're better placed to capitalize on the attractive growth opportunities that are available to us. Critically, the investments that we will make in developing our new business capabilities will be financed out of our operating efficiencies and savings. This will of course be underpinned by strengthening our talent pool across the organization. And also retaining and improving our leadership position in corporate responsibility, which is a key factor of differentiation for Sodexo. So in order to execute successfully against these strategic priorities, we will redesign the way we operate and reinvigorate where we sell. And to, enable this, we will do that through the group wide implementation of a new program management program, which is called Step. And as you can see in Slide 29, the step program will ensure that we are really focused on basic operational drivers in our business. Like retention, targeting, cross selling, increasing spend, managing over time, set to our work, etcetera. Refocusing on managing dissent teams or the sense or the pennies or whatever, which is essential in our business, This will drive performance and financial results. And we will come back to you on this in much more detail in September as our Capital Markets Day, but I wanted to provide this initial preview of this program which we'll be launching in the next few weeks. On these seven areas of focus that you see, we have already, piloted step3, labor efficiency. And give you some color, we have an initial focus on North America, on France and the UK, and we will onboard Benelux, Med and Brazil before the summer with Asia Pacific and the Nordics to follow. Typically, we choose a number of KPIs to analyze and follow-up the cost of labor. Average cost of an hour worked internally share of adjusted staff in total personal costs, etcetera. And to monitor as well more efficiencies of labor. Typically, the revenue for our order worked, the share of over time in internal hours, etcetera. So to summarize, it's true that we have challenging that we are facing at the moment, but our business remains solid and we are well placed to, with attractive growth markets. However, there are clearly areas where we must improve where we need to take a more disciplined approach to ensure better execution. We need to refocus our teams on operational excellence. And to do this, with a specific focus on North America. We have a clear set of immediate action plans. We have a refreshed management team, and we will be driving step And so it's sort of a back to basics program, right? So at the same time, we are reintegrating our performance based, our client focused culture and our client portfolio. And while we pursue our global multi service contract strategy, we also must reinforce our focus on winning local contracts on winning midsized contracts and also food service risk contract, of course, The more efficient business will enable us to invest in our capabilities. To ensure that we are best placed to take advantage of the multiple growth opportunities that are available to us to us, thanks to our quality of life positioning, which is the differentiation. I'm absolutely confident we will build our own performance back to where it should be. Thanks a lot for your attention. And of course, we are Mark and I are, of course, open to answer questions. You. To reach out. We'll now take our first question from Simone Leship from Raymond James. Please go ahead. Good morning. I would have three questions please. The first one on your share buyback announcement does that mean you do not see any M and A opportunities in the short term? And, I was also wondering if your target of net debt to EBITDA of around 1.5 times is still valid? My second question is on Health Care in Europe, you mentioned in your press release some contract losses. So could you maybe give us some details on those contracts? And also, is there any read across we can make with the situation in North America in Healthcare? And, my final question, you're approaching a very large number of countries. Do you think it could make sense for you to exit some countries where maybe you do not have enough scale to have sufficient margin level. Thank you. Thank you, Simon. And so to answer your first question, we have a very solid balance sheet and, the share buyback program will not prevent us from doing acquisitions. Of course, on acquisitions will be, very focused to ensure that they are not disruptive to our, short term action plans that will deliver revenue and margin growth. So, but we will remain acquisitive because we have the balance sheet that allows us to do so. And on the ratio, net debt to EBITDA, the share buyback is actually increasing this ratio by 0.2x. And so when I project additional M and A for the end of the year, I think we probably be around 1.5. So we've got room because we guided for 1 to 2. So we can't do further acquisition, in the future. So there is no issue around that. We're getting your second questions, I want to be very clear. There is no systemic, you know, difficulties in health care. You know, we have lost yet. It's true. We have lost some contracts in Europe, but they are not, you know, major ones and we can recover and we still conquer, some more so interesting contracts in Europe. The situation in North America is specific as you have understood. As I said earlier, we are reengineering our, you know, our people structure there. We've put a new, regional CEO and, so we address that separately. So There is no link between the 2. And as far as your third question, we are we have already pulled out recently of some countries, we are scanning the OD countries where we are. To ensure that wherever we are, it makes sense. It generates, profitable growth, or has perspective to generate on the short term profitable growth. So, we have no taboo in revisiting potentially the number of countries where we are. Okay. Thank you very much. Our next question comes from Jamie Rollo from Morgan Stanley. Please, but maybe I'll ask them individually. So first, just drilling down on sort of margin performance in business and administration. You have pretty good organic sales there. And you put the 40 basis point margin drop down to 2 things. So could you talk about, the loss of those high margin accounts who you lost into, why you lost them? And on the other factor, the lower expected ramp on recent contracts, was that just due to poor collection of signings? Was that due to competition? And when should those contracts reach sort of margin maturity? That's the first one. Yes. On the first question, in business and administration, there is a natural rotation of contracts you win, you lose. And in the recent quarters, we've been losing contracts and some of them were very decent margins. While we're re signing contracts and did some growth, the balance was more towards very large contract. And so those margins tend to have a more takes more time to ramp up and the margin is slightly less than the one we lost. So the portfolio churn we experienced was a negative to our margin. Now we are aware that and then you mentioned it that we need to balance more the win rates between very large, medium, local, food, non food, single multi services and so forth, so that we have a more positive rotation of our port for you. And at the same time, we signed in the past few years a very large contract and and we have difficulties in some part of those contracts to ramp up our margin. When you take a large contract, you can have dozens of sites 100 of services, we while we do master, I will say 80% of the services and 80% of the sites, there is 20% where it is more difficult. Some services are more difficult. And what we see is that probably we had been too ambitious in the ramp up plan and we are not delivering after our ramp up plan. So which means that the margins are the margin basis erosion is visible, but they will ramp up And we are seeing them ramping up. What we see is what we mentioned about difficulties on the last contracts. It's only a a small number of them. And as Mark said, it takes, given the size of magnitude the number of services that we operate, it takes a bit of time for the ramp up, but what we see overall is that on the longer term, those large contracts are delivering the profit that we expect. There are also virtues in terms of the level of excellence that, that they force us to achieve, which is very good because we deliver the values for the clients. And so we are are positive on that, but it's true that it's there are small numbers that we need to fix. And is that loss of contracts to the first point. Is there a sort of trend there on who you're losing them to? And do you see that continuing or is it just an unusual period? There's, I wouldn't call it a trend. You know, it still happens, but this is not a trend. And, as I said earlier, the focus on retaining our clients is very important and I'll put a specific emphasis in the way we will look at retention. Okay. And then the second question on the full year margin guidance of 5.7%. I think my math is right. That implies about a 9 basis point margin drop in the second half after a 70 basis point drop in the first half or constant currency. But in the first half, about a third of a drop was due to the VIVA block sort of scope issue and interest rates, which sort of shouldn't continue into the second half. So is it therefore fair to say that OSS margins, which were down, I think, 50 basis points in the first half. Those should be a lot worse year on year. In the second half? And if that's the case, won't that annualize into the first half of twenty nineteen? The the slow ramp up of all our performance improvement plan or SKU rationalization plan in S1. By the time they were turning into H2, they were supposed to be, you know, delivering kind of full steam ahead And right now, because there are delays, the impact, the compounded impact in H2 of those delays is significant, in H2. Same with the ramp up of contracts, we were expecting some of the contracts to ramp up, those large contracts. And because they are delayed, again, I mean, the company impact on H2 is significant. Now for me, the main issue is the fact that we've been very, very soft on growth and that we have a significant shortage of revenue in H2 versus what we were expecting at the beginning of the year, we will as we said, I mean, the the expectation now for H2 is around 1%. We were expecting 3% to 4% at the beginning of the year given the pipeline we were seeing. And that revenue gap is also a margin gap, which is significant And in H1, we had 1.9% which was comparable to last year, 1.9% So the key question for the coming year is our win rates in H2. For instance, we have a good pipeline in universities and If we find better in universities, it will help tremendously next year. We are not expecting improvement short term in Healthcare And North America because we've seen some losses and the same store sales is weak, but fundamentally with the SKU rationalization plan kicking in and whatsoever we are implementing in plan, we should see the margin stabilizing in in next year. So I hope I've got you the picture here, but it's a mix of revenue loss and delays in the implementation plan. Okay. So if I could ask the question in a different way, does your full year margin guidance imply OSS margins will be down more year on year in the second half? Versus the 50 basis point drop in the first half? Or is that a re or is it down 50, a reasonable guide for the second half? It seems to me your guidance implies OHS gets worse in the second half for margin? I think it's about the same of 50 to 60 basis points dropped in the second half. Okay, thanks. And just a final one, sorry. On the STEP program, it sounds a bit companies in that program, I mean, did they started with a real focus on cost for several years as you're doing and then switch to a sales focus several years later. I'm just wondering about, I know we're going to discuss it more in September, but when we should start see the real focus on sales at Sodexo. Are you considering, for example, lowering your internal margin or return targets? Yeah, well, I think we, we've already worked somehow on cost And I wouldn't compare what happened, 12 years ago, we are with Compass. But what is true is, we will focus, on sales now that this is something which is important. We know, and Mark mentioned it, growth brings, brings margin. So we want to reignite growth And we think that it's absolutely not contradictory to, re engineer and reenergize our sales force and our sales energy, and at the same time, work some of our fundamentals of operational efficiency. Our next question comes from Julien Rajee from Kepler. Good morning, everyone. Just three questions for me, please. The first one, if we look to your peers, they have a geographical based approach and according to them, it's a better way to mid demand. Do you see your business segment based approach as a threat for revenue growth in the short term? Although I understand the fact that in the long term, it has a positive impact for the contract, etcetera. But in the short term, do you think it's a liability? 2nd question on the new management team in North America, when do you expect the team to be fully in place and to start having an impact on the business? And last one in terms of labor inflation in North America? Is inflation impacting the same way, both facility management and the continuing activity, I. E, do we have the same capacity to pass this inflation through to clients at the end of the year during the anniversary of the contract? Thank you, Julian. First, on the first question, we are convinced that our segmented organization is bringing value I want to highlight the fact that we have definitely a we have global segments that in each country, in each region, we have a CEO, for each segment, which is responsible for developing the local business that CEO has all the power and his objectives and he's assessed on his capacity to retain our clients, to develop the clients and come up with the right offers. His CEO benefits from the global segments as an inspiration, as a support, as you know, as marketing support, etcetera. But we run, more than 90% of our business on a local basis is true that this global organization has also allowed us to embark into these large contracts that bring value, as I said earlier, but I think it's important that you understand that The vast majority of the way we run our business is local with local CUs responsible for growth and everything that goes with it. On the second question, we are we are the due management is in place. Of course, there'll still be some adjustments As I said, we have to renew the talent pool. So, it's work in progress. We've done some significant moves As I said, in health care, in education, we will also look at the performance of our sales teams, of course. We will look at the performance that we have at site and regional level. So This will be an important program that will cover the months to come. It's a very important focus that we have. We focus on the performance here. And on the labor, the key topic of the labor is not so much FMO food is whether your contract is a fixed cost or fee contract. And if it's a fee contract, if it's a real fee contract or a fee contract with the maximum price. And so when when we look at the hourly labor, as I mentioned last time, the average hourly labor experienced in the US over the past 4, 5 months was 3.5%. It varies a lot from geography to geography. Actually within North America, they are focused on power delivery, which is very high, for instance, in California or in Texas. So it's not so much what you do, but where you do it and what type of contracts you have. I take the case of education. In education, 80% of our contracts are what we call fixed price contracts. They are P and L contracts. So when you suffer a surge of inflation, you suffer it immediately, while you are passing it to the clients through retail increase or board plan increase at the next occasion, at the next revision, but it takes a few quarters and the revision is an annual average while you may have a surge of inflation, which is immediate. So we will pass inflation to clients because I think we have a very good track record in the US to do so. But when you have surge of inflation, our passing inflation to the client is based on average analyzed. And so you can squeeze a little bit for a while and then it catches up the next few quarters. So It has nothing to do with SM. It's got to do with more the nature of the contract. It depends where you operate, and there is a time lag when you have a search, but we will pass it on. Thank you. Our next question comes from Richard Clark from Bernstein. Good morning. Yes, I've got 3 questions, please. The first one is just on the looking back at the simplification and adaptation program. You spent 1,000,000 on that, over the preceding 2 years. Mean, it seems like a lot of your plan today is to continue to enact that. Do you need to spend more? How much is new beyond that? And what happened to that $245,000,000? Is there any way to claw any of that back, given that it seems like that hasn't delivered what you would have expected it to? Second question, somewhat related on Slide 7, you set out what you expected and what was kind of unplanned. If we look just at the expected portion, was flat margin guidance ever realistic for this year, given what you expected? And it's a shortfall all to do with sort of the surprise sort of unplanned points. And then the last one is on, You mentioned when you pre released a couple of weeks ago that you needed to change accountability within the business. Has there been any changes to the sort of incentive plan around the way that these regions forecast or what they're going to be incented on that you can talk to today? Yes. On the simplification plan, as I mentioned in the previous year, the plan is was very, very detailed and we can track the number of initiatives and, you know, the savings versus the cost committed to some So I mean, we see the settings and they are there. I will say the simplification plan was more a cost plan. So we give the opportunity for the team to cut costs here and there. What we are aiming to do and this is what Denis referred to is, we need to redesign the way we operate in certain areas and certain functions, it's not just about trailing costs, it's about rethinking the way we operate. We can bring tools, we can bring new processes, new way of workings and so forth. In some places, we've had accumulated years of fixed experiences without truly challenging the way we were delivering those services internally. And this is what we have to do with in what we call 0 based redesign so to speak. And so when I look at the simplification program, it was more cost cutting and it delivered and in the past few years, our margins have gone up, we committed to make some reinvestment and Swyle, I mean, they are not factored in the margins this year, but the savings are there. What we now plan is more a redesign of the way we operate and then therefore, allow us to generate pockets of SG And A that we should be able to reinvest in what will make a difference in terms of growth, offers, tools, digital, and we need to do investments in IT, for instance, and we plan to reallocate the future savings into such investments. On expected versus expected. There were a number of things, we were expecting, for instance, We knew we had lost business in universities. We knew it will have a volume impact in GP. We knew, and we told you that the interest rates are at up significantly in Brazil and that we will suffer 1,000,000. We have committed to a number of investments and we are delivering and we are implementing those investments. But at the same time, we had very ambitious, and maybe not as robust as expected plan in universities and indication in general and in health care, for instance, and we've been late. Now we see that those plans are back on track but we are late a solid 6 months on those. And so those were the unexpected. We had a lot of performance improvement plan which did not deliver in the first half. And we need now, but we are focusing on putting them back on track and delivering. And as far as your third question, Richard, I think we are, definitely we are redesigning, the way we incentivize, our people I want to put more empowerment and accountability and accountability, from, you know, from site level above, It's, it's very important. We have to we are currently, you know, redesigning our global incentive plan we are also, rethinking the way we incentivize our sales team, and, and this will kick in, you know, from next fiscal year onwards. So, yeah, I can tell you the focus on accountability will be strong. Just to maybe just a quick follow-up on the first part. So I'm just wondering, you spent the $245,000,000 on the simplification program the last 2 years. What is going to be the cost to deliver the new plan in terms of exceptional cost restructuring costs over the next couple of years? I think we'll give more details on that. In the Capital Markets Day, it's a bit too early. We already have some, some broad views but we just embarked a few weeks ago on that. We have, a perspective on our side, but it's too early We'll give a greater details, you know, in September. What is sure is that Yes, sorry, go ahead. Our next question comes from David Holmes from Bank of America Merrill Lynch. Please go ahead, David Holmes. Make sure that you're not muted. Sorry, hi. It's actually Angus Tweeddy from Merrill Lynch. Just a couple of questions, please. It's Firstly, could you discuss the client investments on your balance sheet? There's been a bit of a move in those, about a million negative change year over year. Could you explain what's driven that and what those relate to? And then secondly, on the BRS margins, could you just talk through the phasing a bit more, particularly, how we should think about the investment costs for the new mobility initiatives and how those move over the next couple of years, particularly in 2018, how we can think about the phasing of the drag from the Brazilian FX and the acceleration in Yes, on the balance sheet, I will look into more details and I will tell you, we can have a broader conversation next week when we meet. But as far as that concerned, there is no massive changes. And it I think it is related to the integration of Centerplate with we did early Jan. But no, I don't see anything very, very specific other than that. Also, you must be careful because our balance sheet is actually very much impacted by churn impact at the same time. So I'll look more into it and we can discuss in more detail next week. And as far as benefits around margins, I think we have, there are several factors that impact this margin, we have the, the fall of Brazilian interest rates. And overall, for the last the past few years, we have seen this decrease in interest rates that has impacted our profitability. We the diver that we do at the moment in incentive recognition and in mobility has an impact on profitability. We know also that those activities, while generating top line growth, do not operate at the profitability level that we have on the traditional meat and food business. So that has an impact and their growth rate will of course have an impact on the overall stability. The car migration, that we see in several countries, this this, of course, has a cost, but we think that on the longer term, when we move to car, this, this generates margin improvements. It generates efficiencies, operating in a full digital model is much more profitable than operating a dual system. And typically, we We hope that in some geographies, particularly in India, for example, we just got out from the dual system where we have paper and card, and we hope that this will generate improved margins in the future. Can I just follow-up on that? In terms of just thinking about timing then this year, if we had 320 basis points, underlying margin contraction, the half of which about half was due to the new mobility and diversification. Is it fair to assume say a similar amount in the second half will be impacted by that. And therefore, of the remaining 160 basis points, let's say, is it fair to think about half of that in the first half was due to Brazilian interest rates and the other half is due to the acceleration of this Indian migration? Yes. I think this is what I in H1 results. Out of the 320 basis points, we can say broadly half of it is due to the interest rates drop and any interest rates are not going up any time now. So you can expect to send. What we said, last time we spoke that we were impacting a 1,000,000 impact, 7.5 per servicer, and this is what we observe. The investment in mobility and expenses management are going to be broadly the same in H1 and H2. And I will send the paper to call migration So I think you can you can factor in the same impact or similar impact in H2. Okay, lovely. That's really helpful. Thank you. Our next question comes from Tim Ramskow from Credit Suisse. Thank you. Actually my first question is sticking with the same theme. So if we look at the sort of more medium term outlook for the margins within benefits and rewards, Just picking up on some of your comments there about the lower profitability of the other solutions. I guess margins in this business were as high as 39%, they're probably going to end up this year about 30%. What would you expect the kind of medium term trajectory of margins to be, could there be sustained at 30 or do you think they'll be drifting down over time? That's my first question. Second question, you observed kind of growth brings with it margin. And obviously, you're very focused on trying to improve the growth of the business, but I wonder if you could just talk about whether growth will also bring any changes in CapEx for the business, you believe? And also whether if you do start to see a ramp up in growth, whether there will be any negative mix effects, again, as you talked about, contracts tend to be sort of lower margin in the early stages of their life. And therefore, if growth comes, will that be a margin headwind as well? And then my third question is just sort of a couple of numbers you points. Can you just remind us on the scale of the UK contract losses as they sort of start to kick in through Q3? And then also the sort of the mention you make of low performing contracts in the opportunity to renegotiate there, could you give us some sense as to how significant that portion of your business is that you believe is in that low performing category? Thank you, Tim. For PRs, what we we told you the past few quarters is that it was more and more difficult for us to give you a guided as a margin rate, because when we were at 39%, for the activity, we were almost a pure player in 1,000,000 food activity. And today, when I look at the meat and food activity, the margins are the same than they were 5 years ago or 3 years ago. There is no change. The margin are very healthy, very big. But we are also expanding and we've been doing this the past 2 year in incentive and recognition in mobility and expense management in fuel and fleet and so forth. And we said the past few quarters that those activities are quite good in terms of margin for the group average, but they are dilutive for PRS and we will more in the future, what we want to do is guide on VR as an EBIT growth or UOP growth, not so much as a UOP margin. So I think you must expect dilution of margin because of the diversification. Now what we have to come to you is what is going to be the average growth of the underlying operating profit of PRS in the coming years. And this is what we will do in more details, I think, at the Capital Markets Day. What anything to change about CapEx? I will say, no. I mean, the message is to the team and is a message to you is we are not CapEx adverse. We are approving regularly bids with large amounts of CapEx and now it's up to us to win them and to spend those CapEx. So as I said, I mean, we've been around 1.5% of revenue for a while. I will not be shocked if we were getting to 2, but we are not yet at too, but we are not nothing against CapEx on this topic. Sure. We have space, which is pretty good. And the teams, teams know that. So it's more how we reignite growth, and sales synergies that will leverage that possibility on CapEx spend for clients. As far as the negative mix effects of contracts, I think it would take a global approach on that because you, it's true that when you, as I said earlier, when you start large, complex contracts, you know, of course, it had an impact on the profitability because the ramp up is sometimes difficult. But that's why we also said that we have to also put in very important focus on midsize local contracts, but also food contracts, single service They balance pretty well with those hard ones. And, when we operate those smaller ones, they they are eager to operate, they are eager to mobilize. So the ramp up of profitability is, is, is better. So that's that's also how we have to, look at as far as our contract development. As far as your question on the UK contract, we mentioned this a few times, the government and agencies. So ACR, which is a procurement body for government contracts in the different sector and so forth, launched massive tenders and all the contracts were re tendered, in the past few years. As we said, we want our share at the very early stage of the process and we actually lost existing contracts at the very end of the tendering process. Right now and up to Q2, we had, I would say, the positive impact, I'm expecting Q3 to be done by Q33 and Q4 to be done by EUR 45,000,000 to EUR 50,000,000 because of those losses and now starting as a negative variance in H2. So I think you can retain 1,000,000 to 1,000,000. And as far as the the low performing contracts. We don't comment on those ones. We mentioned the impact that it had on the 25 basis points of shortfall that we got on the profitability And then, you know, we don't, we don't comment on this, you know, that we have clients behind. And so we are cautious in the way we, you know, we talk about that. Okay. But again, we're talking a small number of controls. Okay. Great. And then so, Markus, just to be absolutely certain I'm clear on this, so the UK business, that's 1,000,000 to 1,000,000 in H2 then a similar amount, obviously, therefore, in the first half of next year? Yes, slightly less because we've got some impact already in Q3 that we don't because it's covered by wins, but I'm expecting some impact to or let's say slightly less next year, but also second magnitude, yeah. Okay. Thank you very much. Our next question comes from Naved Elkhathir from Berenberg. Good morning, everyone. Jessica, you're operating in and about 80 countries and which is generated about 85 and only four it generates about 85 percent of the group EBIT. Do you see any scope in terms of, in terms of rationalization there? And my second question is in relation to the low performing contract, can you at least tell us in which region or which segment do you seeing those non performing contracts? Thank you. For your first question is, yes, we are in 80 countries. We've shot a few in the past, I would say, 6 9 months. And as we said, we are reviewing the portfolio. We don't have to be everywhere. This is we clearly don't have to be in all the places where we are. And we want to stay in places if it makes sense in terms of growth and in terms of profitability. Because what we want to do is focus on the big picture and the eightytwenty. So I mean, if those countries are distractions or we see them as distractions, no disrespect for those countries, but then we will refocus on what matters to us And as we said for a while, I mean, North America matters to us, we've made an acquisition we set to place. We want to grow bigger in North America. And if we have to reduce the scope, we will reduce the scope. And if it gives us rationalization opportunity, obviously, because you've got less travel, less things to do, less entities to consolidate and to supervise. And as far as the low performing contracts, again, They are a small number. And I'd say there's not, again, there's not a systemic place where we have them. They can be across, several geographies. I won't come into places exactly, but, there's not one region where it's happening. But it's, again, it's a small number. And in this environment, in these regions, we have good contracts as well. Thank you very much. Can I just follow-up with one more question? Could you please quantify the impact on your margin from the immediate action plan that you that you have highlighted in terms of improving food cost management, optimizing the SG and A. Could you quantify each of these the 4 areas that you will be working on, how much it would you expecting in terms of impact to margin? Well, this what we've said for this year is the action plan that we put in place are included in the guidance that we, that we gave. As far as their impact on the future, Again, we will give more details as we move on. And I will re insist on the fact that the the growth will come from better operational efficiencies, and will come from a recognition of our sales. And this in turn, we bring margin improvement. Thank you very much. Our next question comes from Sabrina Block from Societe Generale. Yes. Good morning, everybody. I have a quick question. I'm sorry, we cannot hear you. I am. Much better. Thank you. Thank you. Yes, I have 3 questions, please. The first one is regarding the North America market. Can you come back on the Q2 performance and the impact of the calendar impact? And and the last of the contracts that you have mentioned. The second question is regarding the impact of a reduction of discretionary spend, how can you give some more color on that and how you you said that you can return or attract people? And regarding this last point, can you come back and see a new regional CEO where it's come from and then specifically on the education segment also, please. Okay. The new Regional Seal in Healthcare is is coming from GE has a strong experience in the health care sector. It's a very energetic woman whom we trust very much and has already had an impact on the teams. And, I think we're We're very confident in her success. As far as the reduction of this crisp fiscretionary spend, sorry, we, you know, it's quite simple. We reduce traveling and that has an immediate impact. It impacts also on the quality of life of the people, actually, because when you do more video confs, you, you have better question of life. We, of course, we look at all the unnecessary spend, we reduce consulting we do the traditional, watch out on all those things that can be done immediately. And it's also fine that I signal, but I said internally on being frugal in the way to move forward. I I have absolutely no fear of us not being attractive or capacity to retain our people, the the good people in sodexo and there are numerous. They are motivated. They are motivated by who we are, by our values, by the perspective that we can offer them. And, you know, it's not because we do a program of, reduction of discourse discretionary spend that also goes in many, many other companies that, we will reduced in motivation of our people? Yes. On your first question, the calendar impact that we are calculating for North America is more an organic growth restatement than the margin restatement. So as we are talking about only one day The one I spoke about, which is going to be significant, it's in Q3 universities in number of board days. So it is in Q3. It's not in Q2. When we go back to Q2 performance in North America, what I said earlier is that We had observed a gap in Q1 in universities, but they had what was perceived as a robust performance improvement plan And it's true that it's improved in Q2, but it did not compensate the shortfall of Q1, but at some point, we were expecting that the the action plan was actually going to be, giving us a neutral, variance versus last year for H1 and in bid note. In health care and seniors, I would tend to say Q1 was actually very resourceable and comparable to last year, but the SKU rationalization plan did not produce in Q2 and they started having a soft same store sales and some losses and not enough wins. And so the margin started to dip. On top of this, as I mentioned, we had the labor inflation, the hourly labor patient, which was really visible, as the semester evolves, it was actually getting more and more visible in January February and so forth. So it's a mix of things in North America. Some of it was in Q1, we were working on it. Some of it came from Q2 like health care and the inflation really started kicking in in Q2 more than in Q1. Thank you very much. Our next question comes from Jeffrey Halloun from Deutsche Bank. Hey, good morning. Jean Francois speaking from Deutsche Bank. I would have two questions, please. The first one is Have you seen any impact from the strikes in France so far? I mean, maybe with seeing less people attending the Cantins in the BNI segment. This is the first question. And the second question is you have, gave comments regarding your medium term targets, 3 weeks ago, just wanted if you confirm this target as you said 3 weeks ago? Thank you. Okay. Impact from traction front, yes. It's just the beginning. And, hopefully, this won't last too long. But we see, yes, we see an impact. It's still difficult to quantify. We see an impact in a few percent of, of course, people not being in the office and not going to the restaurants that we run. So that this will have an impact very, very difficult to anticipate at the moment. And, I hope this won't last too long for us, but also for the country. As far as your second question, you know, our priority on, you know, is to concentrate on the our short term action plan and the execution of STEP, okay? Now of course, you know, I'm absolutely convinced that we have long term, attractive market opportunities. So that's such type of target that we had, is not unrealistic, but we are you have to be conscious that we haven't achieved our long term guidance for the last few years, we have achieved the operating profit target, but not the revenue growth target. So What I want first is to demonstrate that we get results and prove you that we can get back to significant growth. So as we move on, we will give you more insights on our execution plan on what we do to reignite growth on how we strengthen our execution and how we look at the future at the Capital Market Day. That's going to be the most. There are no further questions over the phone. Okay. Well, thank you very much, for attending this call. I just want to reiterate, the fact that we are very conscious of the situation that we have a clear action plan that is being put in place that will deliver results that we will, we have a big focus on reigniting growth as we move on, ensure that we improve our operational efficiency And, we have great perspectives. I'm absolutely confident in our markets. And, this we will share more information as we move on looking forward to interacting with you live in September. Of course, we have the Q3 results in July. Thanks a lot for attending the call. This concludes today's call. Thank you for participation. You may now disconnect.