Good morning. Thank you for standing by, and welcome to the Sodexo First Half Fiscal 2025 Estimates and Full Year Guidance Update call this morning. After the presentation, there will be an opportunity to ask questions by pressing star and one at any time. I advise you that this conference is being recorded today, Thursday, the 20th of March, 2025. I would now like to hand the conference over to the Sodexo team. Please go ahead.
Good morning, everyone. Thank you for joining us on short notice. I'm Juliette Klein, Head of Investor Relations, and on the call today are Chairwoman and CEO Sophie Bellon and CFO Sébastien de Tramasure. After their remarks, we'll open the line for questions. We'll ask you to please limit yourselves to two questions and one follow-up. The press release is available on sodexo.com. Please note that this call is being recorded and may not be shared without our consent. This call includes certain non-audited financial data for H1 Fiscal 2025. The full audited results will be published on April 4, followed by our usual analyst and investor call. Management's comments today will be limited to the disclosures in the press release. With that, I'll now hand over to Sophie.
Good morning, everyone, and thank you for joining us today. Sébastien and I will provide you with more details on this morning's press release. The Q2 performance, and particularly in its final months, came in below expectation and, in turn, triggered a necessity to revise our guidance for the full year. We saw growth broadly in line in many areas across Europe and the rest of the world. For example, performance was good in Europe, healthcare, and seniors, as well as in Australia, India, and Brazil. However, in North America, it was more challenging. Even though we had a dynamic growth in Business & Administrations and Sodexo Live, U.S. education continued to be affected by soft volumes and negative net new, while U.S. healthcare faced delays in the opening of new contracts. The low growth had a knock-on impact on the margin side.
While we were confident of our Q1 publication in January and until recently that our full year expectation could be met, we have to address the slowdown in North America and, in particular, the volume dynamics and the new startups. We are taking decisions in action in the U.S., and especially in education. In universities, we have recently appointed a new leader to strengthen and accelerate our operational execution. In healthcare, we see new revenue materializing less quickly than anticipated, and in seniors, a continued volume challenge. This has led to revising our guidance to 3%-4% organic growth and a 10-20 basis points UOP margin improvement. On the forward outlook for retention, we also wanted to update you on the previously communicated six global contracts up for renewal. We secured five of them, and one will not be renewed.
The revenue impact will only start in H2 2026 and 2027. This was disappointing, but importantly, the unusually dense contract renewal cycle is now behind us with no rebate until 2027. Let me hand over to Sébastien for a few comments on how we look at the bridge both for revenues and UOP versus initial guidance.
Thank you, Sophie. Based on our initial guidance and Q1 publication, I appreciate that this is a substantial change driven largely by Q2 performance, lower volume growth in Q2, and anticipated for H2 as well, and the reassessment of new openings over the year. We had anticipated Q2 to come in broadly in line with Q1 and a subsequent improvement in Q3 and Q4. Now, when comparing our updated guidance of 3%-4% to the initial guidance, we are looking at approximately 2.5 percentage points delta. Roughly 60% of this is due to lower volume, while the remainder comes from delayed ramp-up of new business. For the second half of the year, organic growth should be between 2.5% and 4.5%.
Furthermore, the revised guidance in margin reflects the margin improvement achieved in H1 and the revenue shortfall expected in H2, on which we miss operational leverage through reduced contribution to profitability. We have taken three actions that should enable us to improve by 10-20 basis points for fiscal year 2025, and we remain focused on delivering continued margin progression beyond 2025.
Okay. Thank you. Thank you, Sébastien, and now let's open to questions. We open the door for questions.
Thank you. This is the conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Jaafar Mestari, BNP Paribas. Please go ahead.
Hi, good morning. I have a couple of follow-ups. Firstly, you do not mention retention in today's press release. Do you have an early estimate of where it stands at the end of H1, or roughly, are you above 94%? Secondly, there's this large healthcare contract, first-time outsourcing, if I understand correctly, that you expected to ramp up and then seems to be off schedule. There's a number of those from your previous comments that you were expecting to open on time and on budget from the month of April. Could you update us briefly on these other large contracts and their statuses? I think it's the U.K., NHS Trusts. It's the French prisons. It's one large tech company in the U.S. and Santos in Australia. Is there anything else? Are they all, except from U.S. healthcare, 100% opening in April and 100% on budget?
Okay. I'm not sure I've got the last question. Okay. Hello, Jaafar. Thank you for your questions. Let me answer your first question on retention. Now, on retention, we are aiming for retention. We had a good start in the year, but we are aiming for a retention rate between 94% and 94.5%, including the large global accounts we just lost, even though it will not have an impact on our growth this year, but it will start in H2 next year. It still reflects a solid underlying performance, especially if we do not take into account that contract.
I can take the second question. Jaafar, basically, the only change on the big contract I mentioned during the Q1 call is really coming from the large healthcare system in the U.S. We were expecting some ramp-up during the second half of the year. It's first-time outsourcing, so this ramp-up will not come. We are discussing with the client to define the new timeline for the deployment, and it will start really in fiscal year 2026. We may have a small impact in Q4, but definitely below our initial expectation. On the other major contract I mentioned also during the call, they are all in line with what I said on assets, the GSK contract, Santos contract in Australia. They will open in the end of Q3, beginning of Q4, I expected.
The major change in terms of ramp-up of new development is really coming from the other part of the portfolio of development for the year. On the key one, again, if we put aside the large healthcare system in the U.S., it's in line with our expectation.
Thank you. If I'm allowed to follow up, is there anything you can say on cash flow un-audited at this stage, please?
On cash flow, we'll come back during the publication and call in the beginning of April, but we had a robust cash flow for the first half of the year.
Okay. Thank you.
Thank you.
The next question is from Leo Carrington, Citi. Please go ahead.
Good morning. Please, could I focus on the North America education segment? Firstly, I think I'm correct in saying that the issues you flagged there are mostly in higher education. Can you just talk about and perhaps update us on enrollment trends, but also the meal packages and volume? Away from higher education, if you think about K-12, what's your view on this part of the education system? I think there's some potential concern around the free meals program, if that could be cut or reduced. General updates on education would be very helpful. Thank you.
Okay. Regarding education and university in the U.S., yeah, we told you about lower enrollment in Q1 and lower volume. This is really what we also observed during the full H1, and it is one of the reasons also of lower volume in H2. In our mix of portfolio of universities, we clearly see lower enrollment. I acknowledge that might not be the case overall in the U.S. market, but we have more universities in the Northeast and the Midwest, and in this part of the U.S., we see clearly lower enrollment and lower voluntary meal plan. On the K-12 segment, at this stage, again, when we look at our performance during the first half of the year, there is obviously an impact of development and retention from last year. This was obviously anticipated in our guidance. We see soft meal participation overall.
To your question about potential change, at this stage, again, we do not include any impact in our H2 number. We can expect also alternative state or private funding source to help offset potential revenue loss. Again, it's still to be clarified, and we'll obviously keep an eye on it.
Okay. On the higher education, let me give you a little more detail. Yes, Sébastien said we are lower than expected on meal plan. That is why we need to push the voluntary meal plan because mandatory meal plan also were a little lower because of our geographic exposure. As you may have seen, we appointed a few weeks ago a new leader for university. This leader knows the industry. He has the right profile to grow the business, especially he knows well the retail business. We are working on a number of initiatives. For the mandatory meal plan, we have developed a new offer and One & All that is going to be developed and started a number of sites in the spring. We expect to grow the volume with that new offer.
We are also accelerating our retail strategy and the convenience on campus with a number of innovations. For example, Just Baked, which is a very digital convenience machine, and we have a plan of developing 200 sites by 2026. We want to broaden the pipeline, continue to work on a preemptive bid because it's really a segment where there is the opportunity to do that, especially when you bring new innovation and broaden the pipeline. That's the action that we're already worked on. Now, as I said, we want to accelerate the operational and the execution of those actions.
Thank you, Sophie. Thank you, Sébastien.
The next question is from Neil Tyler, Redburn Atlantic. Please go ahead.
Yeah, good morning. Thank you. Actually, just picking up on the same topic of U.S. education, please. I'm just interested that you've made the move to appoint a new leader there. Can you help us within some of the targets, KPIs that you just described, Sophie? Help us understand the timeframe within which you anticipate that new leadership needing to or having to improve those KPIs? Because I think it's not, you mentioned it's not in your pre-prepared remarks. It's not just a like-for-like volume issue. There's also a net new challenge to be addressed there. That's the first question, just in terms of the timeframe of the turnaround that you anticipate.
Secondly, of that one global contract that you mentioned, the impact of which would not be seen until later in fiscal 2026, can you just help us frame the impact on net new that that contract will have on a sort of full-year annualized basis, please? Thank you.
Okay. Thank you, Neil, for your question. It is a little too early for the timeframe, but for me, I think we appointed the right leader. He is a respected leader in food service, bringing over 25 years of multisector experience. He has a proven track record of driving operational excellence and building high teams and creating customer-first strategy. I think we have significant opportunities, and we already have a number of initiatives that we are working on. Yeah, we need to give him, it is difficult to say, but I hope for an immediate impact. Is it going to translate in the number immediately? That we will see, but I hope for an immediate impact of this leadership.
For the GSC account, first, I want to remind you that between 2024 and 2025, we have had an unusually dense activity in terms of contract expiration for our global accounts. Because over those two years, 80% of our global portfolio, representing approximately EUR 1.6 billion, came up for renewal, including EUR 0.9 billion in fiscal year 2025 alone. I think it's very important to remind you that. Among those six global contracts set to expire in fiscal year 2025, we are in the process of securing five of them. This is a significant achievement, and it reflects also the strong relationship that we have built with these large clients over the years. We did lose one contract, which will phase out the start. As I said, it will only start in H2 2026, meaning it will have no impact on this year.
We anticipate that contract to have a full-year impact between 70-80 basis points, but for next year, only between 30-40 basis points impact for 2026. I hope that answers your question.
That's very helpful. Thank you very much.
The next question is from Vicki Stern, Barclays. Please go ahead.
Hi, morning. Actually, just firstly circling back on the comment you just made there on the 70- 80 basis points impact. When you suggested for this year, you think retention is probably going to land in the 94%-94.5% range. That includes—obviously, I know it does not come through in the revenue this year, but you do report retention. That captures that 70-80 basis points of headwind within the 94%-94.5%. Okay. Just wanted to step back a little bit and talk more broadly about volume. You have given good color on what you are seeing, obviously, there on the education side from the enrollment piece. To what extent, if any, are you seeing any impact from sort of broader macro in the U.S., government job cuts specifically coming through in any areas at all that you are seeing? The last question was just around the development pace.
I think back at Q1, Sébastien, you suggested that development was running exceptionally well, around 50% up year on year. How is that development trending now? Thanks.
Thank you, Vicki, for your question. For your first question on retention, when I said 94%-95%, it included that 70-80 basis point impact of that GSC account. I'm not able to say exactly because we're still in negotiation. We might keep some services, but it will definitely have an impact. It shows that the underlying retention is still progressing. Without that contract, we would be at—hopefully, we will be at the 95% target. In terms of volume and beyond, more on the macro side, we cannot—we all know that first, it's a little too early to say, but it's obvious that two segments might be affected: the healthcare segment through the cuts in Medicare and Medicaid funding, and also in schools. In some public schools, the funding also—they stop funding the feeding of the students.
There are a lot of uncertainties. We all watch the news every day, and there are a lot of uncertainties and changes. We are very vigilant on the topic. At this stage, for this year, we do not see any impact. I cannot say that some things might not be happening. On the positive, yeah.
Maybe just to add, Sophie, we do not have a lot of exposure to government and agency in the U.S. It is less than 4% of our total revenues in the U.S., and half of it is with the U.S. Marine Corps contract, with less exposure to any cuts. I think that exposure to government agencies is pretty low in the U.S.
Yeah. For your last question on development rate, the trend is very good. We achieved over EUR 1 billion sales globally in H1. It is the first time ever in terms of volume for us. We are very happy with the beginning of the year, and we want to, of course, continue.
Thanks very much. The next question is from Simona Sarli, Bank of America. Please go ahead.
Yes, good morning, and thanks for taking my questions. First of all, if you could please help me understand the moving parts, if we start from the organic revenue growth in North America in Q1, which, if I remember correctly, it was close to 5.9%, and now in Q2, effectively implies a 1.1% organic revenue growth. If you can please quantify a little bit the moving parts for this sequential deceleration and, again, what we should expect for the second half of the year. Probably starting from this, please.
To your first question, when you look at the shift between Q1 and Q2, you are right, Q1 was at 5.9%, and the organic growth is 0.9% in Q2. We have the impact, obviously, of the leap year during Q2. This was anticipated. As I mentioned before, we have seen lower volume, especially in education. Also, the organic growth for Sodexo Live was very, very strong in Q1. We had a lot of very big events that helped the organic growth during the first quarter, and we have noticed the same impact in Q2. We spoke about the loss of the global contract last year, and this had an impact in January and February, and it impacted also the growth we have in Business & Administrations .
Thank you. On the second part of the question, what should we expect in terms of trends for the second half of the year? If you could please quantify also what are currently the pricing trends, please. Thank you.
For the second half of the year, we are expecting in the U.S., an organic growth around 3.5%, very similar to the one in H1. Again, the construction is not exactly the same, obviously. We do forecast some lower soft volume also for H2, as I mentioned earlier, but we have a ramp-up of net new over the H2. This will help, obviously, the organic growth for the quarter four. In terms of pricing, it's around 3%. It was 3% in Q1. It's around 3% for Q2. At this stage, we do factor around 3% for the second half of the year as well.
Thank you. Can you elaborate a little bit more on the ramp-up in net new that you are expecting in the second half? How much visibility do you have in terms of trends by sector? Which ones will be contributing the most? Thank you.
We are expecting a ramp-up in net new, especially in healthcare and senior, because we had a very good development last year, good development first half of the year as well. This will translate in terms of net new during the second half of the year. I would say that contribution will come mainly from the healthcare segment. No, I'm talking about the U.S., looking about North America.
Thank you.
The next question is from Jack Cummings of Berenberg. Please go ahead.
Good morning. Thanks for taking the question. Just one, please. You flag in Europe continued soft growth in facilities management. Has the trends in Q2 in facilities management mirrored the trends in Q1, or has there been any decline or improvement? How should we think about facilities management for the remainder of the year? Thanks.
I mentioned that the trend was not good in Q1. We were expecting something flat during Q2, but unfortunately, it was even lower than expected. We did factor in Europe, especially in Europe in facility management. We did factor similar trends during the second half of the year. It is one of the reasons also of the reduction in terms of organic growth for the second half.
Thank you.
As a reminder, if you wish to register for a question, please press star and one on your telephone. For any further questions, please press star and one on your telephone. Gentlemen, there are no more questions registered at this time. I turn the conference back to you for any closing remarks.
Thank you very much for taking the time to listen to the call. We will speak to you in two weeks from now on April 4th for our H1 announcement. Have a good day. Thank you.
Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect.