Good morning. Thank you for standing by, and welcome to Sodexo H1 fiscal year 2026 results conference call. After the presentation, there will be an opportunity to ask questions by pressing star one at any time. I advise you that this conference is being recorded today on Friday, April 10th, 2026. At this time, I would like to hand the conference over to the Sodexo team. Please go ahead.
Good morning, everyone. Thank you for joining us for our H1 fiscal 2026 results call. I'm Juliette Klein, Head of Investor Relations. With me on the call today are Thierry Delaporte, our CEO, and Sébastien de Tramasure, our CFO. Thierry will start by sharing his assessment and key messages, followed by Sébastien, who will cover the financials. After that, we will open the line for questions. As usual, we'll ask you to please limit yourself to two questions and one follow-up. If you have additional questions after the call, please don't hesitate to reach out to the IR team. With that, I'll now hand over to Thierry.
[Non-English content] Thank you, Juliette. Good morning, everyone, and thank you for joining the call. This is my first earnings call as CEO of Sodexo. I'm very pleased to be speaking with you today. What I'll do is I'll share my perspective on where the company stands today, what we are already doing, but also the priorities we are setting. We are preparing a more comprehensive update for July 16th. Based on our current assessment of the business and the actions we are implementing, there are also some near-term financial considerations. I want to provide context on how this shape our outlook for 2026. Over the last five months, I've spent most of my time in the field with clients, with teams in operations, and with our partners. I've been traveling across the U.S. where I'm spending half of my time, but also in Asia, in Europe.
I joined Sodexo because I'm genuinely attracted to this business. I know B2B people-intensive services well. I know how much value can be created when execution, discipline, and client focus come together. Sodexo, let me tell you, is a special company. The quality of our people, the pride they take in serving clients every day, and the expertise on the ground absolutely stands out. We often operate in an environment where reliability, quality, continuity are critical, so delivering this consistently every day and at our scale is no mean feat. The Group was built by Pierre Bellon on a clear entrepreneurial ambition and a strong client mindset. I fully adhere to these foundations. Our priority now is to bring them back to life everywhere. At the same time, this business is different from what I have known before. It's complex in a different way.
It's operational, physical, highly decentralized, and diversified by nature. We have thousands of sites running every day in real-time. Discipline, execution, and attention to every single detail make the difference. The real challenge, therefore, is driving rigor, discipline, and consistent performance at scale. It's about how we lead, organize, and execute. Too often, great people are held back by layers, processes, and administration instead of being fully focused on clients. My conviction is clear. Growth is the solution, and growth comes from an obsession with clients on the ground every single day. It's earned contract- by- contract, site- by- site, by building trusted relationships and creating value at the client level. In our model, growth is not just an outcome, it's a catalyst. It drives operating leverage to support profitability enhancement. It basically fuels the organization with energy, talent, and confidence.
Let me start with a balanced picture of Sodexo today, our strengths and the realities we need to address. We operate in resilient and growing markets with strong long-term growth drivers. Demand for outsourced services in both food and facility management continues to expand. We also have a global and highly diversified client portfolio, as I said, across geographies, segments, services. In many cases, we are the best partner to self-deliver an integrated proposition with one governance across multiple geographies. This strengthens client relationships and gives us additional levers to grow alongside them. Another key strength is our people-led service culture, teams who care, who show up for clients every day, and we take pride in delivering. In a people-intensive business like ours, this is fundamental. It's a foundation we will build on as we restore execution and growth.
We also have to face the facts. The facts are we have consistently underperformed our market and our peers. We underinvested in key capabilities that are critical to run well this business at scale and build a repeatable model. We have not been consistent enough in deploying a best-in-class offer in execution and in the predictability of our delivery and guidance. What has held us back? The root causes go back a long time, and there is no single fix. First, commercial intensity. We have not shown enough appetite to win, not enough hunger to fight for clients, to stay close to them, to truly understand their expectations, to anticipate and even surprise them. We have not been consistent enough in the way we drive growth and retention, winning, defending, expanding key accounts, always with discipline and cadence.
In a service business, you just can't review sales momentum once in a while and expect intensity to magically appear. It requires systematic follow-up and accountability and sharper engagement with clients. That is changing. Second, empowerment and decisiveness. Decision rights, accountability have become diluted across layers. The heavy structures slow you down, creates interference, and reduces the permission to act close to the clients and the operations. Third, the prioritization and focus. Past organizational choices and too many parallel initiatives wasted attention and resources. We were not consistently putting our people and capital towards the highest value priorities. Sometimes short-term trade-offs prevailed over long-term value creation. As a consequence, we have not invested enough in the capabilities that make execution predictable, sales effectiveness, account management, processes, systems, and tools.
Now, let me move to what we are doing differently starting now, and with a clear focus. We are turning the entire organization towards growth, restoring execution discipline, and creating a real sense of accountability and urgency across the Board. The first decision I made was to take direct leadership of North America. I wanted to go deep into the business, understand what works and what doesn't, and make the necessary changes at the right pace.
Over the past months, we have changed around 2/3 of the leadership team in North America. This is about bringing the right mix of experience, energy, accountability. We combine internal talent with external hires to better serve our clients and execute more consistently across America. In parallel, we simplified the global leadership structure and we reshaped the Executive Committee to be more execution-focused. We removed the zone layer with regional CEOs now reporting directly to me.
This inevitably shortens decision paths, strengthens accountability, and brings leadership much closer to clients and operations. The Executive Committee now brings together the business leaders and a very limited number of global functions, and it has a clear mandate, enable execution across the Group with discipline and urgency. We also reanchored incentives on growth to reinforce focus and accountability across the organization. In parallel, we are reinforcing sales capabilities, not only in the U.S. but everywhere. Beyond resources, we are strengthening our commercial engine by tightening discipline and governance. We're now consistently running a monthly review of commercial performance, which was not the case, clarifying account ownership, and reinforcing the role of account managers. They are key leaders in the organization, fully accountable for client development and retention. We are also accelerating investments in technology.
This work had already started, you know that. But i t's clear, we need to move faster. The focus is on strengthening our core systems, notably finance and HR, and scaling client-facing digital solutions. To me, these are no option. They are required to improve our productivity, to speed and overall performance for our teams and for our clients. Finally, we have reinforced the disciplined and systematic reassessment of contract and assets, taking into account changes in the environment, but also the strategic choices we make. Sébastien will explain how this has translated into the numbers. These measures for sure have a short-term impact on margin. This is deliberate. We are choosing to fix the engine properly rather than optimize around the edges that allow us to raise execution standards immediately, then over time, to reaccelerate growth in a sustainable way.
Now, looking forward, our next priority are also very clear. First, we are aligning the organization around a single execution agenda, one set of priorities and clear choices on where we play, how we operate, and where we invest. Our choices are grounded in our strengths, our clients' needs and market trends. We call this program Shift and Grow because that is what it is about, shifting the business to grow faster.
Second, we are changing how we run the company. Decision-making is being pushed closer to the client. Operational teams are being empowered. Headquarters are refocused on supporting execution rather than adding layers. At the same time, we are restoring competitiveness across the model, starting with labor. In my view, while a lot has already been done on supply, workforce management is where we see the biggest opportunity, actively managing the workforce pyramid, improving on-site utilization, better matching staffing to client demand. That's what I've done for years. We're going to do it here, all of this supported by stronger processes and tools. Let's be clear, these actions are already in motion.
Finally, we are reinforcing a strong client focus. Every day, I'm talking to some of our clients. I make it a priority. In all our leadership meetings, we start with client cases. We're keeping this focus front and center, and I want every leader to personally own the client relationship and performance. We are also strengthening our performance culture. We are developing internal talent, bringing in external capabilities where needed, and raising the bar on delivery. This is about empowerment and accountability. All of this has clear implications for how we invest, allocate capital, and approach the year. That brings me to the recalibrated baseline we are setting for the fiscal year 2026.
Turning to H1. The numbers reflect both ongoing execution challenges and deliberate management actions to establish a more disciplined baseline. Organic growth was +1.7%, consistent with what we laid out in January, but frankly, below what this business should be delivering. Looking at our commercial indicators, retention over the last 12 months was 93.4%, and development 5.3%, thus leading to negative net new business, levels that are not where they should be, reflecting both execution issues and an insufficient quality of pipeline and win rates. The underlying operating profit margin was 3.7%, which is down 140 basis point year-on-year. This reflects operational challenges in specific areas for sure, and the impact of the deep review of contracts and assets we have conducted in the last few weeks and days.
As we look to the full-year, weaker than net new business in the first half will obviously weigh on organic growth in the second half, as well as lower volumes in an uncertain external environment. Lower operating leverage, execution issues in H1, and the actions we are taking are reflected in our outlook. Taken together, this leads to set a recalibrated starting point for FY 2026, with now an organic growth expected between +0.5% and 1%, and an underlying operating profit margin between 3.2% and 3.4%.
Before I hand over to Sébastien, I want to say I'm confident in the directions we are taking. The work is well underway. We clearly see where the levers are for improvements, we are operating in markets that are fundamentally attractive, and we are convinced of the relevance of our model. We are already seeing tangible changes in how teams work together, how decisions are made, and how we go to market. With that, I'll now hand over to Sébastien to walk you through the H1 performance in more details, and we'll talk later. Thank you.
Thank you, Thierry, and good morning, everyone. I will now walk you through our first half financial performance in more detail. Let me start with revenue and organic growth at Group level. Reported revenue growth in the first half was significantly impacted by foreign exchange, with a negative impact of 5.3%, mainly driven by the U.S. dollar depreciation. M&A had no material impact in the first half, as the acquisition of Grupo Mediterránea was completed at the very end of February. Organic growth for the Group was +1.7%. Pricing contributed around 2.4%. Like-for-like volume growth was around 0.2%, supported by cross-selling, especially in Healthcare, offset by a strong comparable in Sodexo Live! in the first half of last year, which benefited from an exceptional level of events.
Net new business was negative at around -0.6%, reflecting prior year contract losses, mainly in Education and Business & Administration. Finally, we had an impact of around -0.3% from a contract reclassification in North America Business & Administration. This follows the renewal of a contract where the economics and contractual terms evolved, leading to revenue being recognized on a net basis rather than on a gross basis, fully in line with IFRS requirements. As a reminder, the annualized impact of this reclassification is around 100 basis points at Group level, and will therefore weigh more in the second half of the year. Turning now to Underlying Operating Profit margins, which stood at 3.7%. Year-over-year, the Group's underlying profit margin declined by approximately 150 basis points in the first half, including a negative foreign exchange impact of 6 basis points.
This evolution can be explained by three main factors. First, operations mix and leverage representing around -50 basis points. This reflects mobilization cost and new contract, underperformance on a limited number of contracts, an unfavorable portfolio mix, and softer organic growth in the first half. At the same time, we are actively addressing these execution challenges and continuing to drive efficiency and productivity across the Group, especially through shared services and efficiency initiatives. Second, the acceleration of investment for around -20 basis points. These are deliberate investment, notably in technology, system, supply, and commercial capabilities, fully aligned with the execution priorities Thierry outlined earlier. Finally, the review of contract and asset that Thierry mentioned had an impact of around -70 basis points. Depending on their nature, the outcome of this review affect either underlying operating profit or other operating income and expenses.
The impact at underlying operating profit level mainly reflects contract-specific provision following a detailed assessment of actual contract performance, credit risk exposure, and litigation matters based on an updated assumption in the current market environment where appropriate. This review was also about improving visibility, reducing future volatility, reflecting clear management choices to address risk earlier and establish a more robust and predictable baseline going forward. Now that we have covered the group picture on both growth and margin, let me turn to the regional view, starting with North America. Organic growth was down 1.8%, mainly due to contract losses in Education and Business & Administration, changes in scope on certain Business & Administration contract, and the one-off reclassification effect. Healthcare continued to deliver strong growth driven by new contracts, while Sodexo Live! was softer due to a tough prior year comparison.
In Europe, organic growth was 2.8%, supported by Healthcare & Seniors, as well as strong activity in Sodexo Live! across airport lounges and events, while Education remained softer. Rest of the World deliver organic growth of 9.2%, driven by new contract ramp-ups and strong underlying dynamic across market, especially in India, Australia, and Brazil. From a margin perspective, the decline was more pronounced in North America, where the underlying operating margin decreased by around 200 basis points year-on-year, and this largely reflects the execution challenges, the accelerated investment, and the action referenced earlier. In Europe and Rest of the World, margins also declined year-on-year, mainly reflecting the impact of management action related to the review of contracts and asset, while underlying operational performance remained broadly stable.
Now, moving to the income statement. Having covered revenue and underlying profit, and before coming back to the other operating income and expenses in the next slide, let me complete the picture with financial result, tax, and net profit. Net financial expense increased by EUR 24 million year-over-year, mainly reflecting a higher gross cost of debt following the issuance of the U.S. dollar bonds in May 2025 at higher coupons. As a reminder, these bonds were issued in anticipation of the April and June 2026 debt maturities, which we intend to repay from cash reserves. The effective tax rate was 25.9% compared to 19.5% last year. Last year was impacted by one-off positive items, including the update of tax risk related to the Sodexo S.A. tax audit.
Net profit for the first half was EUR 188 million, and on an underlying basis, net profit was EUR 285 million, down 37% year-on-year, reflecting lower underlying operating profit and adverse currency effects. Turning to other operating income and expenses, the increase versus last year mainly reflects higher restructuring and rationalization costs linked to organizational changes, leadership adjustment, and transformation project. Amortization of purchase intangible assets was stable year-on-year, and other items mainly reflect some assets and footprint rationalization decision, including the write-off of certain production and operational assets. For example, following the rationalization of central production units, where capacity has been consolidated into fewer, more efficient sites. They also include pension-related items driven by a legislative change in labor law in India, as well as the recognition of one-off costs related to multi-employer pension plan in the U.S.
Turning now to cash flow. Operating cash flow was EUR 616 million, up EUR 16 million year-on-year, and this reflects the fact that last year included an exceptional tax outflow related to the Sodexo S.A. tax audit, partially offset this year by lower operating profit. The change in working capital was -EUR 490 million, and as a reminder, the first half is seasonal low point for our cash generation, and we expect working capital to normalize by the end of the year.
Net capital expenditure increase year-on-year mainly due to one-off client investment in the context of contracts renewals. Free cash flow was therefore broadly flat year-on-year at -EUR 243 million. Net acquisition amounted to EUR 256 million, mainly reflecting the acquisition of Grupo Mediterránea alongside smaller bolt-on acquisition in Europe. As a result, our net debt increased to EUR 3.6 billion, corresponding to a net debt to EBITDA ratio of 2.7x.
This reflects the usual seasonality of cash flow in the first half, but also a lower EBITDA base than last year. As always, we expect a seasonal improvement in net debt in the second half. That said, based on the revised full-year fiscal 2026 guidance and the recalibrated baseline, it implies we now expect to end the year with a net debt to EBITDA ratio above our target range of 1x-2x. Let me close by coming back to our guidance for the year and giving you a bit of additional color. As Thierry has outlined, this is the guidance we are providing today reflecting our current assumption and the action we are taking. We now expect fiscal year 2026 organic growth to be between 0.5% and 1%.
This reflects weaker than expected commercial performance, and in particular, in retention, impacting the second half, as well as lower volume in certain external environment. Underlying operating profit margin is now expected to be between 3.2% and 3.4%. This reflects reduced operating leverage from a softer top line, ongoing operational execution challenges, the continued impact of our review of contract and asset over the full-year, and the accelerated investment we are making to strengthen execution. Let me also share a few key modeling assumptions for clarity. Based on current spot rates, we assume a full-year 2026 currency impact of around -3% on reported revenue. We also assume a positive M&A impact of around 0.5% on revenue, mainly from the acquisition of Grupo Mediterránea, offset by few small disposal.
On other operating income and expenses, reflecting the level already recorded in the first half, we now expect the full-year amount in fiscal 2026 to be around -EUR 300 million, of which roughly half is restructuring. Net financial expenses are still expected to be around -EUR 140 million, and our effective tax rates to be around 26%. To conclude, the first half reflects a demanding environment, but also clear and decisive management action on contracts, assets, organization, and investment now reflected in today's guidance. As Thierry outlined earlier, this action weigh on the near term, but are necessary to reset a realistic baseline and strengthen execution, competitiveness, and sustainable performance over the time. With that, Thierry and I will be happy to take your 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 touch-tone 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. First question is from Jamie Rollo, Morgan Stanley.
Thanks. Good morning, everyone. Good morning, Thierry. Thank you very much for that frank appraisal. Two questions. The first one is just on the margin guidance, 3.2%-3.4%. That's obviously a very helpful, clear range, but there's a lot of numbers in that, and you've given us a helpful bridge for the first half. It would be quite helpful to get that bridge for the full-year margin, particularly to quantify the contract asset write-down, because obviously that's a one-off, and that suggests that 2027 margins should increase naturally.
Thierry, maybe your July review will lead to another step up in investment next year. Any sort of flavor for what the real underlying base margin might be would be very helpful. The second question was just on the leverage, as you say, well above the target. I appreciate you've got no covenants. You're pretty well all fixed debt. What sort of constraints might this have on CapEx spend or bolt-on M&A going forward? Thank you.
Jamie, thank you. What I'll do is, I'll take the first part of your question and give a bit of context, and then I'll take the second one on the leverage, and then I'll ask Sébastien to add a lot more details and probably on the bridge you're asking for H2. What we've done, Jamie, is clear. We've done, as we said, really the objective, and that's why it's my ask for Sébastien and the team is do a comprehensive review of contracts, assets, risk by the end of the quarter. Literally, and you know that we do at Sodexo, things are going to change. Until now, there's one single process or forecast per quarter. This is changing to a monthly process now.
What we've done is a very deep review of the risks in the contracts and really assess the situation and provision where appropriate. This is not a kitchen sinking. This is really looking at the existence of risk that we have and the level of provision we have against that. For sure, given this, there's a disciplined risk review embedded into our processes going forward at each closing. This review we've done is a pretty extensive one, for sure.
Objective, simple, improve visibility, reduce the volatility and limit the surprise, which has been the issue of Sodexo for the last quarters. Okay? Let's be honest, what we've done is create a more solid earnings floor and a stronger base for growth. That's the philosophy. Now, to your point on the guidance and the bridge for H2, you want to cover it, and then I'll come back on the leverage target question, okay?
Thank you, Jamie. If you look at the bridge we share with you for H1, three drivers. When we look at the full-year bridge, drivers are broadly the same as the one in the first half. I would say that the impact of the operation mix and leverage, we are not expecting any change between H1 and H2. We will accelerate the investment. It means that the investment weight will be a bit more on the full-year and in H2. The review of the contract and asset will be lower in the second half of the year.
You asked for 2027 as well, Jamie. For sure we're not guiding for 2027. All I can say is, I think you can consider 2026 guidance as a floor. Now, to your second point, leverage, right? You're absolutely right. The capital allocation framework is a result of a strategy. Right now the strategy is to regain performance. Let's be clear, okay? It's a special year, you can see that, and it wouldn't make much sense to, I would say, give detailed capital allocation messages without first setting a clear direction of travel.
That's what we will do in July. If you can hold on this one for two months, three months, we'll tell more. Until then, priority is execution and performance recovery. Everything else follows work from that. The leverage, fully aware, may be temporarily above our historical range, is reflecting lower margins during the reset phase and the investments we are making to stabilize the execution but also rebuild the business. This, and that's an important point as well to me, this does not limit our flexibility or block any of our actions.
If I may, we remain a strong cash-generative business and we will keep and retain a good access to funding. Again, this temporary effect on leverage are clearly not structural.
Okay, thank you. Just to clarify then, we'll hear more about the capital allocation in July. Also in July, you're going to be giving, I assume, some medium-term targets and framework. Anything else we should be expecting in July?
The Investor Update in July will give for sure greater visibility on FY 2027, indeed, yes, medium-term financial ambition. What we'll do there, Jamie, is we will articulate where we want to position the Group versus the best-in-class benchmarks. That's our ambition for sure, including a clear ambition to narrow the growth gap versus the strongest players in the market. We will also, for sure, present a detailed action plan underpinning that ambition with, you will see, clear strategy priorities and financial levers over the medium term. That's what you should expect.
Thank you very much.
You're welcome.
Next question is from Jaafar Mestari, BNP Paribas Exane.
Hi, good morning. I have two questions, please. The first one is just an open-ended question on the review of contracts and assets. Can you give us more concrete examples of what you're reviewing and changes you're making? It was interesting you mentioned some central kitchens are being consolidated into a smaller number of sites, for example. Just keen to hear more on those, what sort of measures you're taking. It seems pretty broad-ranging, and I'm really mostly interested in the ones that fall into adjusted profits, not on the stuff that is exceptionals, please. Secondly on management compensation, there was an undisclosed margin target for full-y ear 2026 in your cash bonus for this year. You never said what it was because it was commercially sensitive.
Are you not getting paid on this part of the targets because you've ended up lower? Would you expect the Board to adjust these compensation targets because of the voluntary nature of some of the measures you're taking? Related to that, can you remind us factually what's the policy on stock option awards? If I'm correct, Mr. Delaporte, you still have not been awarded your performance shares for this year. I understand why the Board did this after disappointing full-year results. If you were awarded them immediately after today's announcement, it would also look perhaps like you're not exactly in the same boat as investors yet. Thank you very much.
So Jaafar, I'll try to take the points, and I hope you'll tell me if I don't cover well all the points, okay? On the first one about the contracts and assets. What's for sure is that when we look at contracts, the operational performance on contracts, fortunately the most of them are performing well and delivering results for the client and for ourselves. In cases there are delivery issues, how do we provide for it? How do we make sure that we are investing into addressing those concern? And therefore, how does it change the financial profile of this deal?
When we are in financial distress on an account, how do we handle it? Are we renegotiating with clients? Are we improving the way we are delivering? Or are we exiting the contracts? All these questions have been addressed and covered in the way we were looking at the contracts. You're right regarding assets. I'll let Sébastien, but the point was again to look at assets we have and are they long-term investments for us or not? Does it require decisions to be made? Over to you, Sébastien.
On the impact of the review of the contract and asset impact on underlying operating profit. One part is really the assessment and the reassessment of the credit risk, around 25%. When we look at also contract and contract litigation, related claims, so we have also covered part of that. It's, again, around 25% of the impact in term of UOP. Also we have looked in the performance of the contract and that impacted also for additional provision. On the write-off of asset, this is really the part impacting the other income and expenses below the line. Here, yes, we look at the footprint of our offsite production, and we took, in some geographies, a very deliberate decision to consolidate part of that. This implies some write-offs and impairment in our balance sheet.
Okay, thanks. On the second point, management compensation. Since you're talking about leadership compensation, or mine, let's cover both if you want. What I've done is, for the leadership team is, we have made sure that while they are committed to delivering the forecast, the budget of the year, we are refocusing in H2, more part of their incentive on the growth. Because this is what we need now to get ready for FY 2027. I didn't want us to waste another six months, and really push on the accelerator now. As for my compensation, I think, honestly, this is not me to comment on. It's a Board decision that will have to be approved by the General Assembly. All I can tell you is that it includes certainly financial KPIs about growth and profitability, so I'm not immune, for sure.
As for LTI plan, the LTI plan will be launched in the next weeks. It's not related with the communication today. I think last year was the same timing in the year, so I think it just follow the same logic. Also we are changing the scheme for our people to make it more a performance-based LTI as opposed to presence-based LTI. That's the philosophy.
Thank you. Just on the contract reviews and just to be very clear, should we expect that you formalize a revenue figure for contracts that you'll be exiting, or is it less explicit than that?
Again, at that time, when we look at this review of contract and assets, it's case-by-case, and there is nothing to exiting a large portfolio of activities or even any specific contract. We have booked some provision for onerous contract in that case, because the contract was not performing at the right level.
Yeah. Let's be clear, we have done what we had to do. It's just normal practice. Probably, I'm injecting my way of drive a certain level of prudence in the way we are looking at risk, for sure.
Thank you.
Next question is from Estelle Weingrod, JP Morgan.
Good morning, and thanks for taking my question. You mentioned lower retention and volumes impacting the remainder of the year. I may have missed it, but can you provide details on the new contract losses and who you lost them to? What volumes you are budgeting for H2? Are they gonna be in negative territory? Thank you.
Thank you, Estelle. Yes, when you look at our annual guidance between 0.5% and 1%, if you take the midpoint, it implies a negative organic growth in the second half of the year. If we look at the different drivers, pricing was 2.4% in H1. We are expecting something very similar for the second half of the year. You have the net new contributions -0.6% in H1.
Same here, we're expecting something very similar for the second half of the year. We need to keep in mind, sorry, that we also have the impact of the contract reclassification. We will have a full semester impact on organic growth for around 100 basis points. The remaining part is linked to volume. It's true that we are taking a more cautious stance regarding volume. This is clearly linked to the overall environment, macro geopolitics as well. We know also that we have some volatility in our revenues linked to volume, what we decided to include.
Your more cautious stance on volumes, is it driven by a specific region, like is it more North America or is it broad-based?
It's broad-based.
Okay, thank you.
Next question is from Simon Lechipre for Jefferies.
Yes, good morning. Three questions, please. First of all, a follow-up on the margin bridge for H2. Could you be a bit more specific in terms of the investment? Should we expect this is going to double in H2 relative to H1? Should we expect some incremental investment in 2027 as well? Second thing is in terms of top line going forward and looking at the last 12 months net new, it was -1.3%. You expect net new at -0.5% in H2. Should we expect net new to still be negative in the first part of 2027?
More broadly speaking, how do you think about the path in terms of top-line acceleration, and when do you expect maybe to see the benefits of the actions you have taken and you are currently implementing? Lastly, in terms of the U.S. and the management team, what's the roadmap here? Are you actively looking for someone? Do you intend to still remain CEO for the region as of now? Thank you.
Yep. Simon, thank you. Taking your questions in no particular order, if you don't mind. The first one on the U.S. management team. I joined on November 10th. Literally first days, it appeared to me that I needed to make some leadership change in America. America is our greatest market, the biggest, and it's a strategic market for us. I was coming from a different industry. It was critical for me to dive into the operations. America was my priority. I dove into it. I took it over. It's basically what I decided, and I'm very pleased with that because it allows me to really spend time in America, as I said, 50% of it. I've spent 20 years in America, so I know well this market and shaping the team is absolutely key. We have great talent in America.
We have great accounts, great team as well. I have wonderful leaders. We had significant weaknesses as well, and so we had to fix it. I've been working on it. I've made a lot of change in the leadership team over the last weeks and months, and reinjecting energy and ambition in America. The team is great, is well-mobilized. In the meantime, I'm looking for talent to take over the North American role from me. Do not consider that I stay in this role forever. I'm not in a hurry because I feel that being very close to the operations is greatly fruitful for me and for the operations. Yes, for sure, there will be a leader for America at some point in time. On the point number one, that is the margin. Margin bridge for H2, I will let you say it.
One thing I can tell you, because your question around the investment for FY 2027. For sure we are doing investments now. We couldn't wait in the situation where we need to inject, accelerate fuel, if you like, into our growth. It's the time to invest. We have started to invest now, and we know damn well that this is impacting our margin in H2. For sure we will not stop the investment on August 31st. For sure it will continue in FY 2027. The objective for sure is that, as we progress steadily, the growth will come back and pick up to support it by the investment we are making now. That's the whole logic. You'll know more about the sequence in the next interactions. Over to you, Sébastien.
Yeah. On the margin, as I said, if you look at again at the bridge H1, H2, full-year, the part related to operation and mix leverage remains the same around -50 basis points. You will have more impact of investment, of the acceleration of the investment in the second half of the year. With a higher weight of that on the bridge, and we will have lower impact coming from the review of contract and assets for the second half of the year.
Thank you.
Next question is from Kate Xiao, Bank of America.
Good morning. Thank you very much for taking my questions. First I still want to ask a couple questions on contract assessment and provisions. Has this process affected your retention rate and development numbers, because both of these two numbers are down compared to FY 2025 and as of last quarter? I understand that this is an ongoing process. Hence, would there be scope for reversal for some of the provisions if contracts actually turn out to be better than expected? My second question is around just like a simple one. When you mentioned, Thierry, that there's early positive signals, can you talk to us a little bit more about these signals? Thank you.
Yes, correct. Okay. Kate, on the first one, contract assessment, it has been occasionally that indeed, but I don't think it's a huge impact on the retention, honestly. So those are two different things. For the scope for potential reversal of provision, for sure, that's the objective. We are covering the risk, but we are not giving up on it. We are fighting, but we are in a logic where when there is risk, we provide for it, and then we try to mitigate the risk, as opposed to we have a risk and we hope it doesn't materialize, and when it materialize, it blows up and we are surprised.
So that's the change in philosophy. Last early positive signals are sales performance, intensity in the market. There are several deals, I know for a fact several deals that we were about to lose that we haven't lost. The energy in the system, the mobilization from the team is really great. A lot of good signals honestly, Kate. It's still early. I'm not gonna tell you other than that.
Can I just quickly follow up on retention rate? If there's not a big impact from the reassessment of contracts, what has led to the lower rate at 93.4% now versus 94%? Was there more contract losses that you can kind of tell us a bit more about? Would you see this as a trough?
Well, let me tell you one thing first, Kate, on the assessment of retention rate. For us, where it stand is a signal for sure. I consider that every time we lose a contract, it's dramatic, okay? We have to stop accepting the fact that we are losing contracts. It's in us, and we are very active on that. Now, in a given quarter, you might have more or less contract to retain, and so just looking at this ratio just for one quarter or two is not necessarily enough to draw a conclusion. Except that, our ambition is to be closer to 95%-96%. I think today it is 95%, but the objective is to continue to improve, and we have some work to do. That's what we are working on at the moment. Sébastien, you want to say more? No? All right. Thank you, Kate.
Thank you.
Next question is from Pravin Gondhale, Barclays.
Hello, good morning. Thanks for taking my questions. Firstly, on the incentives aligned to growth that you talked about, sorry if I'm being nuanced, but could you please clarify, are these incentives linked to gross growth or net growth, i.e., incentives for both gross development and retention or just the gross development here? Secondly, on the review of contracts, is this all done and then fully captured in your H2 guide annualizing in H1 next year? Is there any tail left to review further down the line? Thank you.
Pravin, thanks. I'll take the first one. On the incentive, first, KPIs have been reset for my direct report in H2 to really get the growth target for H2, and that's revised growth target. What does it entail? It's what we call commercial growth, net commercial growth, which basically takes net development, I mean, new development plus retention plus cross-sell. Okay? That's the combination of all. All right? Then after, when you look at the organization, it depends. Those who are focused on retention, those who are focusing on closing new deals, for sure, they have different set of KPIs. The objective here is to set clear accountability, but also drive focus across the organization. Okay? Now, just to be clear, even if you haven't asked, growth incentive do not mean volume at any cost.
We continue to keep an eye, for sure, on the level of profitability expected from the deals, for sure. Review of contract, is it all done? Well, first of all, we've done a very good job, I think, to review the contract in a very short time frame, and I think the team has done a great job. I'm pleased about that. Will it be a continuation? I mean, the fact that we will review contract and assess the risk is a discipline. We will do it every single quarter. This will not change. Are we expecting further impact going forward? I mean, our objective is precisely to have done the jobs.
This is clear, thank you.
Thank you.
Next question is from Neil Tyler, Rothschild & Co Redburn.
Yeah, good morning. Thank you. Two questions, please. Firstly, on the contract review, I wonder if you could share any sort of insights that you drew from those contracts that you've had to provide against, whether there's any commonalities emerging from the contracts, either in terms of regions, duration, or sort of start point, those that needed to be reassessed. Secondly, back to the incentive program, have the altered incentives been or will they reach further into the organization than they have done in the past in order to alter the selling behavior deeper into the organization rather than just at the management level? Thank you.
Maybe I do not fully understand the equation, Neil, on the incentive. My point is, we have implemented a new set of KPIs across the organization. It's not only for managers, it's across the organization for H2. Okay? On the contract reviews, insights. You want to take this, Sébastien?
Yeah, I can take this one. In term of framework, I can tell you that we applied this framework across all regions, okay, all segment. Around 50% of the adjustment are into the review related to Europe, 1/3 is North America, and the remaining part is the Rest of the World. When we look at the framework, again, was done really case by case, contract by contract, asset by asset. On the commonalities, again, as I mentioned, it was linked to the credit risk, credit exposure, again, across a portfolio of contract.
It was also linked to legal risk, litigation, again, across all region. We look at the performance of some of the contract, as I said, and we apply, again, a new calculation again on the potential adjustment needed in term of onerous provision. It's really the same framework across the globe on a contract basis and the case-by-case basis approach.
Thank you, that's helpful. Can I just ask within that, was there any difference between food service and facilities management contracts, in terms of how those materialized?
The type of risk may differ, but again, the methodology and the framework are exactly the same.
Okay, thank you very much.
Next question is from André Juillard, Deutsche Bank.
Good morning, and thank you for taking my question. First one is about CapEx. Could you give us some more color about what you plan to do, considering that historically, Sodexo had a lower level compared to its main peers, and I wanted to understand if you have a clear view on what we could expect on that side? Second one, about dividend. We know that historically, the dividend has been important for Sodexo and for its main shareholder. Do you have a view on what you could do on that side? Thank you.
André, thank you for the two questions. My answer is going to be quite similar on both. We'll meet at the Capital Markets Day. CapEx, consider that, as I said, I covered it. For me right now, strategy is to regain performance, focus on the performance. We'll discuss the capital allocation messages when we are together mid-July 2026. On dividend, same thing. Too early to tell. We are very aware of this. We will certainly discuss at the Board as well. We'll get back to you. Not now.
Okay, thank you.
Okay.
Next question is from Julien Richer, Kepler Cheuvreux.
Yes, good morning. Quick follow-up on growth and strategy. We recently had some comments from the French government about a structural decline in the number of kids at school due to the demographic situation in the country, and this is not only the case of France, I suppose. How do you see your Education division going forward and you on this point? Thank you.
For sure, Julien, obviously, as you can imagine, as we are working on our strategy and refining it, and we spend more time on it at the Capital Markets Day, there are time focused on looking at for each of the segments we operate in, where there is more growth to expect. Sometimes, you have different elements that have an implication. There's the market growth itself. There's the level of outsourced, right? In some cases, you may have markets where the growth is not necessarily significant, but there's a wave of outsourcing that we can trigger to drive new type of clients. There are, for sure, a prioritization on those investments. Without being specific, we are very aware of those decline headcount or population decline in schools in France over in the next few years.
It's elements that we are considering for the way we are investing into our segments. Again, we do it by country. Within segments, we look at the services that are more relevant, the one that are little less. To be clear, Education is one of our big segments, and we'll continue to invest in Education for sure.
Thank you.
Next question is from Sabrina Blanc, Bernstein.
Good morning, everybody. I have two questions from my part. The first one is regarding the review of the contract, just to understand if you have a schedule potentially to exit some contract or potentially to exit some assets. For example, we know already that the number of countries has been reduced. Do you intend to go further?
Yes.
My second question, I can perhaps answer directly that I should expect the Capital Markets Day, but could we have visibility on free cash flow and potentially on conversion rate?
Thank you, Sabrina. Our first question, the review of contracts. Again, we are taking decisions. We have taken decisions on some situations. If you are in a situation where you do not foresee opportunities to be profitable, exit is one scenario. I'll keep this freedom. Going forward, it may happen at times that a good decision sometimes is to recognize the fact that it's just not working.
We feel we have done the job, but we'll keep an eye on it and make sure that when we are signing contracts, we are signing good contracts, and that it doesn't end up being an issue for the client or for ourselves. Exiting countries, no. We have no plans of exiting more countries. In fact, if I can tell you, I believe it's a strength of Sodexo to offer to a lot of our global clients a global presence, and we want to build on this. As for our free cash flow, over to you, Sébastien.
Thank you, Thierry. On the free cash flow, as I said, we remain a cash generative business, so we'll keep a strong focus on that. We are expecting again to have underlying conversion rates that mean for this year that will be very in line with, and consistent with prior years on the underlying path. On the future, as you said, Thierry, right now, we come back to that during the Capital Markets Day.
Finally, Ivar, or do we have someone?
Next question is from Ivar Billfalk-Kelly, UBS.
Good morning, everyone. Thank you for the presentation, and welcome to the company as well. I want to talk a little bit more about the market as a whole. You mentioned commercial momentum being slightly weaker than expected. Does that indicate any slowdown in the market itself, or is it simply due to your execution? In other words, are we still seeing strong levels of new business across the market as a whole, or have recent developments had an impact?
Secondly, and this may be somewhat minor. You mentioned that your refinancing costs, particularly with debt this year, are not expected to be an issue. However, you still have a significant amount of debt to refinance in the coming years, much of which was issued at a very low coupon. As that debt gets refinanced, how might this impact your ability to compete with peers who may not face the same level of pressure in this area?
Yeah. On the cost of the financing, it's true that if we look at where we are today, the average interest rate on the bond, we are around 2.7%. I told you about the financial cost for fiscal 2026 will be circa EUR 140 million. It's true that for the coming years, we are expecting also an increase of the financial cost linked to the renewal and the refinancing of the bond in 2027. Yeah, the cost of financing will increase again in the next 3-4 years around EUR 30 million. We would be around EUR 170 million-EUR 190 million in term of annual cost in three-four years. This will be an average cost, circa 4%-4.5%.
That's great, thank you.
It will depend, obviously, on the market rates.
That's clear.
All right.
Sodexo team, we have no more questions registered at this time.
All right. Thank you for your questions. Thank you for the conversation today and for the time. We are very aware of where we need to improve, and we're fully focused on execution and getting the basics right again. We'll have the opportunity, as we discussed, to go into our plan and ambitions in July, and I'm looking forward to continuing the dialogue with you. Thank you very much for joining us.