Good morning. Thank you for standing by, welcome to the Sodexo First Quarter 2018 Revenues conference call. I advise that this conference is being recorded today on Thursday, January 11th, 2018. I would now like to hand the conference over to the Sodexo team. Please go ahead.
Thank you. Good morning, everybody. Welcome to our first quarter fiscal 2018 call. On the call today, we have CEO, Michel Landel, Deputy CEO, Denis Machuel, CFO, Marc Rolland. As usual, the slides and press releases can be downloaded from the website, you'll be able to access this call on our website for the next 12 months. The call is being recorded and may not be reproduced or transmitted without our consent. I remind you that this presentation contains statements that may be considered as forward-looking statements, as such, may not relate strictly to historical or current facts. These statements represent management's views as of the date they are made, we assume no obligation to update them. You are cautioned not to place undue reliance on our forward-looking statements. Please get back to the IR team if you have any questions after the call.
I remind you that the next announcement will be the half-year figures on Thursday, 12th of April. Thank you. I now hand you over to Michel.
Good morning, everyone, happy New Year to all of you who are joining us this morning. Thank you for being with us. I am with Denis and Marc. I will do an introduction. Marc will go into the details of our performance, Denis will talk about the objectives for our fiscal year and moving forward. This quarter, as expected, we had a relatively soft start. Organic growth is 1.9%, on-site services is 1.8%, Benefits and Rewards grew at 3.8%. On the one hand, we had a good momentum in Business & Administrations. It was an improving trend in Energy & Resources, the confirmation of a pickup in France, a continued very strong momentum in developing countries. Healthcare was once again very strong in developing economies, but still slow in Europe and North America.
On the other hand, education, again, as we said back in November, is suffering from poor prior retention in universities and fewer working days. Benefits and rewards growth was the lowest it has been for a long time due to the expected slowdown in inflation and the decline in interest rates in Brazil. We have a solid pipeline, we are of course, signing many very good contracts, our revenue growth should progressively improve in the coming quarters. A few examples on slide 6 of contracts that we are continuing to expand, within the scope of services. Ruijin Hospital, which is a very prestigious hospital in Shanghai. Fannie Mae in the U.S., which is an important contract for us. We added FM services to a number of locations in different states. The momentum in Energy & Resources is still very good.
We signed an important contract with Biopalma da Amazônia, which is a palm oil producer, a new client in Brazil. Even in Europe, where business has been challenging, as you remember, in the offshore segment, we've seen some encouraging signs. I can mention Aker BP in Norway, where we are going to deliver services on five rigs for five years. As well, a contract that we won in the U.K., B.V. Marine, which is, of course, for full FM and catering services. On slide 7, you can see that this quarter we've signed an important 5-year master service agreement with Cathay Pacific. We will start by opening their six lounges in Hong Kong for an annual value of roughly EUR 35 million. We should, from that, expand internationally as we move forward.
This is a typical example where our global client segment and sub-segmentation organization has really helped us being successful in our development. Just to give you a perspective on this sub-segment, we began this airline lounge business with one United Airlines lounge in Denver, Colorado, in the U.S., steadily grew in North America, to make actually a global contract for a few years. We expanded outside the U.S., starting with an initial contract with Virgin Atlantic at London Gatwick Airport. This grew to a global contract with Virgin that we signed in 2009 and that we recently renewed. We also now, as I said, have a global agreement with United. In parallel, we have developed business with other carriers, as in France, Air France, Singapore Airlines, Emirates, Delta, American Airlines.
Overall, today we provide services at 200 lounges in 80 cities, we have a strong pipeline. Clearly, our global footprint and specialized expertise in this sub-segment makes us a strong partner for airlines who want to create a unique branded customer lounge experience at airports around the world. On slide 8, I would like to highlight the good momentum in food service contract signings. This is a trend which is confirmed by new business won with clients in France, for example, such as Total. We signed a contract for all their sites in France. Covéa, and the new courts of justice in Paris. This is on top of what we announced last November. We already spoke to you about a significant contract with Michelin.
In the U.K., we also signed a 10-year patient dining and retail service contract with Doncaster and Bassetlaw Teaching Hospitals, which is actually a first generation of outsourcing. On slide nine, I wanted to point out also that after The Good Eating Company, that's in September 2017, and Peyton & Byrne in October 2016, we continue to bring new innovative business models into the group with the recent investments in FoodChéri in France, we announced it today, where we have the majority, and the Eat Club in the USA, where we took a minority stake. While FoodChéri's business is currently primarily B2C and Eat Club B2B, both are innovative, entrepreneurial startups at the forefront of the digital dining revolution. We will help them expand their business, and they will help us enrich our offer. Thank you. Now, Marc will go into the details of our financial performance.
Marc?
Thank you, Michel. Good morning, everyone. I am very pleased to be here with you this morning, and I wish you all a Happy New Year. Before I start, I just want to remind you that all the alternative performance measures used in this presentation are defined on slide 24. Turning to slide 11. First of all, the detail on growth. Revenues for the quarter were down 2.6% due to a very strong EUR against all other currencies, especially the U.S. dollar, the Brazilian real, and GBP. I remind you that these currency impacts are only impacting translation into EUR because all our costs are in the currency of our revenues. Scope changes were also negative at 0.3%.
This was due to the deconsolidation of Vivabox, which is seasonally heavy pre-Christmas, as well as some of our activities in the EMEA region closed down last year, and finally, disposal of businesses in New Caledonia and Hungary. As far as the acquisitions are concerned, this quarter only includes one month of Morris and two months of The Good Eating Company. It does not include yet anything from Centerplate. For next quarter, we should go back to a positive contribution from scope changes. This bring us to 1.9% organic growth for the group, of which on-site is up 1.8% and BRS is up 3.8%. Let us now take the individual segments of the on-site activities one by one, starting on slide 12 with Business & Administrations.
Organic growth in revenue was strong at 5.2%, supported by the pickup in the tourism in France and a recovery in Energy & Resources. In North America, organic growth was +5.9%. We had strong growth in the airport lounge activity, which Michel talked about earlier, but activity was also boosted by projects. This rate of growth will probably not be sustainable for the next few quarters. In Europe, sales were up 1.3%, reflecting quite a few startups and a continued recovery in tourism in France, as well as growth in the U.K. Although the growth in the U.K. will not last as we should start to feel the progressive impact of the loss of some Army contracts from Q2. The regions Africa, Asia, Australia, Latin America, and the Middle East were up 12.2%, with robust growth in corporate, driven by new business and comparable unit sales growth.
The momentum in E&R also remained very strong with a recovery in mining and onshore sub-segment and contract startups. I remind you that this is the last quarter of the big Rio Tinto contract ramp-up. Moving on to healthcare in slide 13. As expected, organic growth was muted at 1%. North America was impacted by the lack of new business and some general uncertainty in the sector. We remain very confident in the long-term opportunity in North America healthcare. However, the current environment is complicated by a lot of merger activity, poor financial health of the sector, and the need for this industry to enhance productivity and reduce costs. In Europe, organic growth was up 0.5%. Some comparable unit growth was achieved, but this was offset by the shortfall in new business as the teams remained highly selective in their bids due to very competitive pricing.
The positive news is that there have been several good hospital wins in the U.K. in the last few months, so hopefully things are looking up. In Asia, Latin America, and Brazil, healthcare was up 17.7%, thanks to strong new business and comparable unit growth. There were, for instance, many contract startups in Brazil alone in this segment during the quarter. In education, we had a very slow start to the year, which was down 4%. In North America, the segment was impacted by one and a half fewer days than in the previous quarter. We are expecting to recoup half a day in Q2. However, underlying that is the impact of the loss of business last year, despite some good wins. In Europe, sales were up 0.9% with high single-digit growth in the U.K. and solid growth in the MED region.
France suffered from some strike as we closed down a central kitchen near Paris. We continue to generate strong growth in Asia, with the region up 18%, thanks to ramp-ups in China, Singapore, and India. On slide 14, the organic growth by region comes out at -1% for North America, with a strong Business & Administrations activity offset by weakness in healthcare and education. Europe was up 1.1% with a recovery in France, but we suffer from ongoing weakness in the oil industry, even though there are signs of improvement with the signature of several new contracts in the North Sea. The 12.8% growth in Africa, Asia, Australia, Latin America, and the Middle East is proof of the enormous opportunity in all these regions and in all segments to grow the business. Let's move on to Benefits and Rewards Services performance.
On slide 16, issue volume organic growth was +5.9%, perfectly in line with previous quarters. Revenue organic growth was up only 3.8%. The reason for this slowdown is in the different regions. In Europe, Asia, and U.S., the growth has remained strong in both issue volumes at +6.9% and even more so in revenues at +8.6%. I remind you that last year, Q1 was already very good, up nearly 10%. The traditional voucher activities remained strong during the quarter, and particularly in Central Europe, offsetting some weakness in India, where the imminent transfer to the card from January 1st had an impact on orders. The very strong momentum in revenue growth was amplified by the strength of the incentive and recognition activity in the U.K. and the U.S., which by nature does not impact the issue volume.
Of course, you can see here the deconsolidation impact of Vivabox, which I remind you is very seasonally weighted to the first four months of the year. On the other hand, in Latam, things are more difficult, specifically in Brazil. The issue volume remains positive. However, revenues were impacted by the decline in interest rate and inflation in Brazil, whereas the expected growth in beneficiaries has not yet come through. As I said in November, I expect the interest rates drop to have a EUR 15 million impact on annual revenues and profit. Thank you for your attention. I now hand you to Denis, who's going to cover the outlook.
Thank you, Marc, and hello to all of you. I just want to say that as a conclusion, that we maintain our fiscal 2018 objectives that we expressed a few months back. We see France being positive. We see an improvement in Energy & Resources, as Marc was mentioning. We see also a strong growth in developing economies. This is compensating for the lack of growth that we have in North America, in education, and in healthcare. We maintain our organic revenue growth guidance between 2% and 4% before the impact of the 53rd week. Let me remind you that this impact was 0.7% last year. We also maintain our guidance for stable underlying operating profit margin at 6.5%. Thank you for your attention, and I now pass you back to Michel to manage the last Q&A session with all of you.
Thank you. We are ready, the three of us, to answer your questions.
Thank you. Ladies and gentlemen, if you'd like to ask a question over the phone at this time, please press the star or asterisk key, followed by the digit 1 on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star 2. Again, please press star 1 to ask a question. We will pause just for a moment to allow everyone the opportunity to signal. Now we'll take our first person from the queue. Jamie Rollo from Morgan Stanley, please go ahead. Your line is now open.
Thanks. Good morning, everyone. I've got three questions, please. The first is on BRS and that 1.5% organic sales drop in Latam, which I think is your first decline ever. That's a very wide 600 basis points gap to issue volume. It looks like the interest income
Was, as you say, EUR 3 million to EUR 4 million in the quarter, so maybe 3% to 4% of that difference. Is it therefore fair to say that commission pressure was a negative 2% to 3%? Also, what's your revenue guidance in the full year for BRS overall? Secondly, on OSS North America Education, one and a half days is about 2% to revenues. Is it fair to say the sort of underlying decline was minus 3%? When do you annualize that issue about the lower prior year retention? Finally, I know this is only a sales call, but if we just think about the mix impact on margins, you've seen double-digit growth in rest of world and not much in North America or Europe. Your rest of world margins, when you used to report them, were significantly lower.
Also, you've seen much stronger growth in B&A than in healthcare and education, and your margins are much lower in B&A. I calculate that mix impact to be about a 10 basis point headwind to group margins. Do you agree with that? Is that in your full year margin guidance? Thank you.
Okay. Do you, Marc, answer-
Yeah.
The BRS question?
To start with your first question on BRS. Indeed, the pressure on interest rates is an annualized value of EUR 15 million. It is not actually quite linear because the interest rates were very high in Q1 last year. I will say that the pressure just for interest rates is probably 4%-5% alone in Q1. There is continuous pressure on client commissions, given the competition in Brazil. There has been a gap for quite a while now between the revenue growth and the BRS growth because of that competitive pressure. This quarter is particularly enhanced by the drop in interest rates, which is quite heavy on the growth.
Maybe for the yearly outlook, as you asked, Jamie, we expect to be probably around 5%.
Yeah. For the overall BRS, given the strength of the growth in Europe and in incentive and recognition, we reckon that the guidance of around 5% should be maintained for BRS.
The second question on education. We expected a significant drop because we had a very poor performance in retention last year, and we discussed that during the annual results presentations. That's a mathematical impact. As you know, the selling season is late in that business, and we will have results of that selling season in May, June, July, right? Hopefully we'll have a better selling season this year. As we discussed, we have made many changes in that business. We are continuing to make changes in that business, because our CEO of that business left. We're taking the opportunity to reshape the organization. We are confident because, again, it's a good business and we have very good footprint. We'll be able to turn this business around. The other thing is that same store sales have been weak also, right?
We are all working on all this, and we should, as we move forward in the coming years, recover growth in education in North America. Right. The third question, Marc?
Just to wrap up this, I think when you do the math of the one and a half days, what we see is that we will not totally recover that one and a half day for the full year. I will tend to say the underlying de-growth, so negative growth is actually around 2.5% currently. Till we sign new contract in universities, it's going to be there. In schools, we've had quite a few ramp-ups of contracts. We signed extension with Chicago Public Schools, and this is coming up. The underlying growth is correct. With regard to the mix impact on margin, North America is our highest margin territory. Currently, it does put some pressure, and we have to work very hard. We believe that over the year, we should be able to maintain our guidance on margins.
Okay. Thank you very much.
Thank you. Now we'll take our next person from the queue, Julian Bichard from Kepler Cheuvreux. Please go ahead. Your line is now open.
Good morning, everyone. Two questions for me, please. The first one on the education segment in North America. You are talking about weak comparable unit growth due to the calendar impact. Excluding that calendar impact, is there any change in terms of unit growth on that segment? Second question, in terms of the pickup in France, is this mainly because of tourism activity that is recovering, or is it also related to better volumes on site for your corporate clients? Thank you.
Well, on education, it's the overall environment and the fact that the population on these campuses are probably spending less. Overall, we have, in working on marketing programs, new offering, we discussed in November some new offers that we are putting in place. We are confident that we can build that momentum back and grow the business, as I said, and recover positive growth in the years to come. Now, in France, it's clear that it's the signing of new contract. It's the fact that we have had a very good retention rate last year, that we signed some good contracts. We have a positive momentum. Of course, the business in Paris, on the river and everything, and the tourism is picking up a little bit, but it's not the main reason of the positive growth.
It's the underlying business and the new business, which is growing favorably and which is very good news. Very good news.
Okay. Thank you.
France has been negative for a few years in the past, and for the last, I would say, three quarters have been significantly more positive, and it's a good trend and solid trend.
Thank you.
Thank you. Now we take our next person, Vicki Stern from Barclays. Please go ahead. Your line is now open.
Hi. Morning. Three questions. Firstly, on U.S. healthcare. You obviously talked about education, but on healthcare in the U.S., any comments there on thinking around pipeline and retention rates? U.K., again, similar sort of question. Backdrop in terms of volumes. I think that you described those have been somewhat tough last quarter. Again, on business wins and retention. Finally, some updated comments, please, on tax reform following, obviously, the recent changes. Thanks.
On U.S. healthcare, retention last year was weaker than the years before but still strong, close to 95%. Of course, it has an impact this year. In healthcare, the reason for the soft growth is mainly new business. Again, as we mentioned, for the last few months, we had many changes in the U.S. in the teams. We've changed many teams. We are rebuilding those teams. In healthcare, again, we should recover this good growth in the years to come. Marc mentioned the fact that this business has a lot of potential. Of course, there is economic pressure on this segment. It is a good and strong business for us, and we are putting the necessary efforts and resources to come back on positive growth. For the U.K.?
The U.K. had a positive quarter and supported by growth in many different segments. The positive in the U.K. is the fact that the healthcare division is signing more, and that's new after a period where it was very soft. We've also benefited, and this is what I try to comment. The entire defense business was put to rebid, and we won lots at the beginning of the process. Currently, we are carrying the wins we had. Unfortunately, later in the process, we lost some lots, and those losses will hit us in H2. Currently, we have the benefit of those defense early wins, but we don't yet have the later losses, which are going to hit us in H2. The U.K. so far is doing good otherwise in other segments. With regard to the tax reform, now we have a bit more visibility.
It does correspond in broad lines to what we had commented earlier. In the U.S., there will be a negative impact about the deferred tax, that we were carrying deferred tax, and obviously with the tax rate drop, we will have an impact. There is an impact of the deemed repatriation tax, which is because Canada was a subsidiary of the U.S. We had left the dividend in Canada. Now we will have to pay the tax on those dividends. That's for the two negative. The positive is that the impact of the tax reform is going to be prorated this year. We were expecting the tax reform to impact us only next fiscal year. Actually, it's now impacting us from January. That's good because it helps the ETR of the U.S. right in the first year.
We have had some mixed news on the tax credit and allowances that we were using. I think we will be able to recover if I use some this year, but even though we will lose them in the future. In France, the good news on the 3% dividend tax is confirmed, and we will book it. What we do expect is that now all in, we expect the ETR of the group to be around 28% this year. While I think earlier in November, I guided for 32%. It is a significant improvement on the ETR. Going forward, because of the CICE reforms and the allowances which are going to disappear gradually, we believe that we should be between 28% and 30% as a tax rate. It will also depend on the mix, obviously, of profit by countries and so forth.
I would say 28% for this year, all in, with all the pluses and minuses, and 28%-30% going forward from fiscal year 2019, 2020, and so forth.
Great. That's really helpful. Thanks.
Yeah.
Thank you. Now we'll take our next person from the queue. Simon LeChipre from Raymond James. Please go ahead. Your line is now open.
Good morning. Thank you for taking my question. Just two from me, please. The first one on M&A, if you could comment, please, on the pipeline. Do you expect to strike some new deals in the next few months? The second one, on the rest of the world region, you clearly have very positive momentum. Do you expect this trend to continue the coming quarters, given you will no longer benefit from the ramp-up of the Rio Tinto contract? Thank you.
On M&A pipeline, Simon, we don't comment the M&A pipeline. Obviously, we are working, and we are looking at things, but it's not something I will want to comment. Let's say we are active. Rest of the world, E&R was particularly strong this quarter because it was an alignment of various things, among which the last effect of the ramp-up. When we look at Q2, obviously, it may slow down a little bit, but it will remain, let's say, in the high single digits at least for Q2, and we'll see for H2, depending on the signing. We are signing contracts and the momentum is good.
The momentum is strong and Asia will continue. China is good.
Lots of ramp-up in Latin America.
Brazil is good as well.
The only dark spot is the North Sea, as we commented. Even though we've seen some positive signs because it was getting better in Norway, we had a few wins. The Cougar is still very negative. There is a watch point in the North Sea for the moment.
Okay. Thank you very much.
Thank you. Now we take our next person. Jaafar Mestari from JPMorgan. Please go ahead. Your line is now open.
Hi. Good morning. I have two questions, please. Firstly, on North America Healthcare and Education, you have flagged that disruptive impact of your reorganization on retention. I think that was last July, so three quarters ago. Of course, this will annualize, but can you explain maybe in more detail what changes you've made in the U.S. Education and Healthcare business to help turn that around? When you say you've reshaped the organization, is it new hires in sales, more investments in retention? When you say new offers, is it about introducing more brands? Is it about a different mix of services, et cetera? My second question is on meal delivery. How do you view this market with the acquisitions of FoodChéri and the Eat Club? Is it a service that you intend to cross-sell to your existing clients for their smaller sites, for example, where there's no canteen?
Is it a service you think will bring you new clients, SMEs or even maybe B2C?
Thank you for your question. On North America, we explained, as you mentioned at the end of last fiscal year, that we made a lot of changes in the U.S. for the last few years. We had the early retirement plan, so many people left, and was expecting as we expecting. We also made a lot of change in the middle management. We cut off some position. We've really reorganized this business. We are continuing to do this because it takes time. We're changing people, we're modifying some of the organization and some of the regions within North America. Frankly, this should pay off. We're convinced of that because it's not the first time that we've been through this kind of reorganization, but this one was significant. In terms of new business and new developing offers, we've discussed that.
In education, we've signed some very good contract last year. Actually, based on new offers that we've developed, and actually we took these new business at a price which was not the lowest priced. Frankly, it was attractive. It's a big business. It takes some time. This year, hopefully we'll have a better retention that we had last year in these two businesses. We also will have, hopefully, more good new signing. We are rebuilding the momentums step after step. Those business are good. Just a matter of managing our internal issues. Of course, Denis is on top of it, and he's working on it as we speak. Isn't it, Denis?
Definitely, Michel.
We are confident that this business will recover some good growth in the future. Now, for the second question, Denis, maybe you should take it.
Yeah. On the meal delivery part, both companies, Eat Club and FoodChéri, have a very interesting know-how with central kitchens that cook and then we deliver, mainly in B2B in the U.S., and both in B2B and B2C in France. We see that definitely, to your question so far, we see that very much also, of course, as a cross-sell to our existing clients and consumers within our existing portfolio, of course, particularly in corporate services. We also see, of course, this bringing us additional clients from the small and medium business segment, which is already the case for Eat Club and for FoodChéri. We also see that in some geographies, like in France, we see synergies, possible synergies coming from our sales team in Benefits Rewards, which addresses, of course, small and medium businesses. We think that there is leverage there.
It's definitely both. It's a way also to adapt ourselves to a trend of our consumers, particularly in corporate services, but we can imagine that as well in other segments. A trend of this food delivery trend is something that it's really picking up. It's a way for us to enter into that market, to learn, and to also profit from the agility of these startups, which will be coveted and taken care by their founders. The founders stay within the business. That was important for us to profit from their dynamic and their vision of the market.
Thank you. Maybe just following up on that last point, when Elior launched their own delivery service or Delivery Plus service last year, they have quantified the market at EUR 5 billion in France, basically saying the market is the vouchers market. Do you think that in the future, the choice is either vouchers or delivery, or you think it's actually a service you can sell on top of?
Yeah, I don't think you can oppose one to the other.
No.
I think it's a combination of both.
Exactly.
We haven't seemed to be frank, we haven't seen the Elior offer jeopardizing our voucher business. It's more a combination of both, actually.
All right. Thank you very much.
Thank you. Now we take our next person from the queue, Tim Ramskill from Credit Suisse. Please go ahead. Your line is now open.
Morning, Happy New Year. Two questions from me, please. The first is just around your comments about expected acceleration through the course of the year. I guess, Marc, in your pre-prepared comments, particularly on Business & Administrations, you talked about less sustainable growth in North America, the loss of army contracts in the U.K., the end of the Rio Tinto ramp up. Just kind of interested to understand what the kind of key positive elements you see coming through to see that acceleration. In particular, I guess to reach the top end of your organic guidance, you'd need something like 5% organic growth every quarter for the rest of the year, which would seem like an enormous improvement. Just why you think the top end of that range is even relevant.
Then my second question is a little bit similar to Jamie's around margin, but within BRS. Within BRS historically, particularly as we've seen big FX changes, the margins you've noted are higher in LATAM, and that's had some impact, as I say, more previously because of FX. Given the different growth dynamics in terms of geographical regions, is that margin differential, again, something to bear in mind? Maybe you could just give us a sense as to whether there is still a meaningful gap in profitability, LATAM versus Europe, European and other regions. Thank you.
Yeah. In B&A, we had a very strong quarter. It doesn't mean that Q2 is going to fall from the cliff. It is not going to stay at the strengths of what it was in Q1, because it was very strong. It will remain strong. What we are expecting also, the emerging countries are still going to be strong. France is showing some good signs also of remaining strong. The U.K., we have this difficulty with the army contract, which is going to start hitting us in H2, but Q2 shall remain strong. We're having also a development in the MED region, which is good.
Energy & Resources.
Energy & Resources remain, as I said, high single digit at least for what we see in the next quarter. Now, the key in healthcare and education. In education, there is a ramp-up in schools. The key now is actually the pipeline and the signature and the speed of mobilization. We are actually busy mobilizing contracts. Those contracts will ramp up through the year. It is a challenge to reach the upper range. When we say two to four is going to be a challenge, but the pipeline is there, and we've got currently good signs. The retention is also improving. The KPIs are heading into the right direction. Now it's to solidify them quarter after quarter. With regards to the margin, I think we spoke in November that there was a FX impact.
You're quite right, Brazil is probably our highest margin business. When the Brazilian real is depreciating, it will have an impact of the blended margin, so to speak. The falling interest rates are having an impact of EUR 15 million. There is no secret here. It impacts revenue, and it also impacts EBIT. There is no cost in front of it. This is 100% negative flow, unfortunately. Yes, there will be an impact on the BRS margin. I don't think this is new. This is as expected. For us, we factored it into our guidance, and we've been very clear on that.
We also said last time that you should look less at BRS as a margin rate, but more as the evolution of EBIT in volume, because this is making more sense, especially with the development of incentive and recognition, the new acquisition with different models, the expansion in mobility and so forth. The margin rates that we were displaying over the years were clearly when we were a pure player of meal and food it was making sense. Now that we are diversifying in other services, it is a lot more challenging to predict and analyze.
Those margins are strong.
Strong.
They are-
They are better than the group average.
They are good for the group.
Yeah.
Relative for the group margins.
Okay, excellent. Thank you.
Thank you. Now we take our next person, Richard Clarke from Bernstein. Please go ahead, your line is now open.
Good morning, everybody. Two questions from me, please. One is on the U.S. healthcare. One of them you brought out is that you're seeing a need for cost-cutting in that segment. Normally, you'd expect that to be a positive for the outsourcing business. Are you being undercut by rivals? What's happening there that you're not picking up from that trend? The second one is just following on from Vicki's question on tax reform. You've given us the way you expect your tax rate to come up. Are you seeing any change in behavior from your clients? Are they less willing to outsource, more willing to outsource, more willing to spend more on a higher quality product, given the fact that they'll have higher cash flow for themselves? Thank you.
In healthcare, the challenge of the hospital industry is not new, right? It's been like this for many, many years. Of course, today with all the reforms and the uncertainty about this business, there's still more pressure. We see more and more mergers and acquisitions. We are definitely doing not as good as Compass. We all know that, and we've discussed that many times with you, and this is why we're working on reorganizing our business. Compared to the others, I'm not sure, and I'm actually not convinced that we are not doing less good than themselves. This is why Marc said again that this business is a good business. It's a business where we should grow, and we will recover growth. Again, I've said that many times in the last few months, the challenge in healthcare is our problem.
We have to fix our issues, and we are fixing them, right?
Yeah. Just to bring some color, the past few years, we had a very strong same-store sales in healthcare. Because of the cost-cutting and synergy searching and so forth, the same-store sale is not as strong, and this is where I was heading you to. The fact that they are looking at cost reduction is good for the midterm. In the short term, they are squeezing. In the midterm, it means that a lot more things will come our way.
In terms of tax reform, we have not seen any of our clients modifying. It's very early. We're not expecting any significant movement on that side from No. Most of our contracts are triennial contracts. They've got indexation. They don't have a tax rate clause. Maybe at the next renewal, I don't know. No, I'm not expecting much pressure-
No, I don't think so
on the fact that the tax rate in the U.S. was knowingly very high. Now it's back into a more reasonable rate. No, I'm not expecting pressure on that. Too early to say.
Thanks for that. Thank you very much.
Thank you. Now we'll take our next person, Jarrod Castle from UBS. Please go ahead, your line is now open.
Good morning, gentlemen, Michel, I guess one of your last calls, thanks for everything. Just two from me, please. One, just coming back to page nine and your platform businesses. Can you quantify how big they are at the moment in terms of future revenue generation, if you look across the whole group, this business model? Secondly, most of the catering companies have, to some extent, steered away from airline catering, even though it's a big market. Given that some of these activities are centralized, given the fact that you're also now doing airline lounges, would that be something of an opportunity for you? Then just lastly, any update on your reinvestment program on the digital front, i.e., the reason for the flat margins, how that's progressed through the quarter? Thanks.
Okay, Jarrod. Thank you for your question. Yes, it is not actually one of my last call, it is my last call. Denis will take over in the next few weeks.
Yeah.
Just I would answer on the lounges business is managing lounges. It has nothing to do with airline catering, which is an industrial business where we provide trays and meals for the planes. We are not in this business, and we will not be in this business. We have looked at this business many times, and this is not a business that we want to be in. The lounge business is a very different business. It's an opportunity for us to have large contracts to provide services to these airlines and help them provide a customer experience which is consistent around the world. We have developed capabilities, specific teams, and specific programs, and it's actually paying off. It's, as I said, a benefit of our segmentation and sub-segmentation, and hopefully that will continue to grow. Denis, on the question of FoodChéri?
On the food delivery platform.
Yeah, mm-hmm.
I think, of course, those are startups, so the revenue.
Small
are very small and not significant at group level. The experience that it creates for our clients is significant, and our consumers. It's also, for us, a learning path towards extended offers, more consumer centricity, and also digital marketing and sales. For us, it's very interesting. As far as your last question regarding our digital investments, we are progressing. We continue to do the investment that we mentioned. As you might know now, we will do this capital market day early September, and we will have the opportunity to describe in more detail where we invest and what we are doing. What I can tell you is we have a good momentum, and it delivers as expected.
Thanks very much, gentlemen.
Thanks, Jarrod.
Thank you. Now we take our next person, Madjid Ait-Qassir from Berenberg. Please go ahead, your line is now open.
Good morning, everyone. If you can please give us a little bit of color in terms of European voucher, what are the main drivers of growth? Is it volume or prices? Also, same thing on the catering. Can you give us a little bit of color on the volume and prices trend that you're seeing? Thank you.
Well, in terms of the beneficiary business, Europe is, we have good momentum because the economy in Europe is really going well, being in Western or in Eastern Europe. We have good pickup on volume with good employment and beneficiaries pickup. We also have some increase in face value in some countries, that also helped. It's overall, and I would say it's across all our countries. It's a general trend across all our countries.
I would say on the revenue side, we have no more negative impact of falling interest rates because they are all at zero.
Exactly.
Now it can only get better. For the past three years, it was going down and down, and we had pressure. Now we don't have anymore.
Regarding prices, of course, the situation can differ depending upon the countries. In some countries you have higher tension and higher competition. Overall, I would qualify the situation in Europe as reasonably stable, particularly when we compare to what we know in Brazil.
In the on-site business, I would say the same. There is nothing special in terms of pricing. It's always been and will be a competitive business, but it's nothing to say more than what happened in the past.
I will say what makes a difference is the offer. We see that when we have the right offer, we win the contract. It's not just about price, but the offer. This is why an acquisition like FoodChéri is also very important because it enriches the offer. It was the same also in the U.K. with The Good Eating Company and Peyton & Byrne. We have to have sharper offer, more focused, segmented, and I think this is how we will grow the business in food in Europe.
Thank you very much.
Thank you. Now we take our next person, Akhil Sheth from Bank of America. Please go ahead. Your line is now open.
Hi. Morning. Thanks for taking my questions. Just a very quick one. I was hoping in B&A, you could help quantify the scale of the project work in Q1 that impacted North America, and also remind us of the scale of the impact in rest of world from the Rio Tinto ramp-up. Thanks.
I think the size of the project in Business & Administrations in Q1 was about EUR 17 million.
Yeah.
The ramp-up in Rio Tinto, I think now we are at maturity in terms of revenue, we are talking, I will say probably the ramp-up this Q1 was about EUR 5 million extra versus Q4. I think now we are where we should be.
Yeah. We got to the full volume last year in December, I think. Yeah.
That's really helpful. Thank you.
Thank you. Let me remind you, ladies and gentlemen, that I want to ask a question over the phone.
Do you have any more questions?
If there are no further questions at this time, I would like to hand the call back to the Sodexo team for any additional or closing remarks.
Well, thank you very much for being with us today. I wish you all the best. Bye-bye. Thank you.
Thank you.
Thank you. Ladies and gentlemen, that will conclude today's Sodexo first quarter 2018 revenues conference call. Thank you for your participation. You may now disconnect.