Welcome to the Compass Group Q1 trading update call. Today's call is recorded. Hosting today's call is Dominic Blakemore, Group Chief Executive. Following the opening remarks, you will have the opportunity to ask questions. In order to ask a question, please press star one on your telephones. Please be sure to unmute your line before doing so. I will now turn the call over to Dominic Blakemore for opening remarks. Please go ahead, sir.
Thank you, Emma. Good morning, and thank you all for dialing in. As usual, I'm joined by Karen Witts, our CFO. I'm sure you've read this morning's statement. Before opening the call to questions, I'd like to say a few words on our performance and outlook. Q1 revenues were similar to Q4 and in line with expectations given the anticipated second wave and continued containment measures taken by governments around the world. B&I and sports and leisure revenues remained broadly unchanged. Revenues in education softened slightly in North America as students didn't return to school after Thanksgiving. Revenues in defense offshore and remote and healthcare and seniors saw a continued improvement. I'm very pleased with our excellent retention of 95.7%, which is as high as it's ever been. I'm very encouraged by new business wins, although they're yet to contribute meaningfully to our revenue base.
In the quarter, new business growth was suppressed by delayed openings and lower volumes. Despite the lack of improvements in volumes quarter-on-quarter, the group's operating margin increased by over 200 basis points from 0.6% in quarter four to 2.7% in the first quarter. This is due to the series of actions we've taken over the last year to adapt our operations and to manage our cost base more flexibly, including contract renegotiations and resizing of the business. Although the vaccination rollout is underway, the pace of volume recovery continues to be uncertain. We anticipate Q2 revenues and volumes will be broadly in line with the first quarter. Encouragingly, we continue to make good progress managing costs and expect our second quarter operating margin to improve by a further 50 basis points-100 basis points.
By achieving this, we'll be halfway to recovering our pre-COVID margin, putting us firmly on track to rebuilding our underlying margin above 7%. In summary, we focused on controlling the controllable. We've improved margins again without significant volume improvement. We're excited about the strong pipeline, particularly in the more defensive sectors of healthcare and seniors, education, and defense offshore and remote, which will diversify and broaden our revenue base. We continue to be excited by the significant structural market opportunity globally. These opportunities, combined with innovation and a more efficient operating model, will help us to emerge from the pandemic stronger than we've ever been and will allow us to further consolidate our position as the industry leader in food services. We'll update the market again on the 25th of March. Thank you. Now we're very happy to take your questions.
Ladies and gentlemen, if you'd like to ask a question, you can do so now by pressing star one on your telephones. That's star one to ask a question. We will now take our first question from Bilal Aziz from UBS. Please go ahead. Your line is open.
Good morning, everyone. It's Bilal from UBS. Thank you very much for taking my questions. Three from my side, please. Firstly, just on the pace of margin improvement with additional 50 basis points- 100 basis points expected in Q2. You very helpfully detailed out all the cost actions you've taken in the full year's result, with structural costs ending with GBP 70 million. I guess, with the volume environment as it is right now, when do we get to annualize some of those benefits into a more steady state and then rely more so on volumes? Number two, the net win rate in North America was, I think, close to about 6.1% in the fourth quarter. Can you perhaps provide any color on how that's trended in Q1, please? Lastly, just on Q2 guidance, were there any notable differences between the months in Q1 with regards to organic growth trend?
Just thinking of the shape of volumes ahead. By memory, I think you might be annualizing about two weeks of the COVID impact in Europe in Q2, although I appreciate it's smaller than a group basis. Thank you.
Thank you, Bilal, for those questions. If I take the first two, then I'll pass the third on the Q2 trends to Karen. Look, firstly, on the pace of margin improvement, I just want to reiterate, we're really pleased with what we've achieved and what we're guiding to in Q2. We've come from -5% in the third quarter of last year to what will be around +3.5% in Q2, with little or no volume recovery in the last six months. We've only seen 10 percentage points of volume come back and sees us at about 2/3 of our pre-COVID volume. We think that is very significant margin improvements. Obviously, we have a series of plans that each quarter's actions will annualize as we go forward, and we have a series of plans in place that are volume agnostic.
Should volumes not recover, we will continue to make margin progress as a result of those actions. As and when volumes do recover, we would expect the pace to pick up somewhat. Obviously, we said before, we don't expect the volume recovery to be linear. It will be lumpy. I think what you've seen in the fourth quarter and first quarter was significant change of t he benefits of the actions that we've taken.
Obviously, in quarter two, we're guiding to a slightly slower pace as we see the volumes flatten. We do have confidence that we continue to make margin progress regardless of volume as we look forward, that can accelerate with volume. Secondly, on the point of the new business or net new business win rate in North America, we were around 5% as a group last year. We're at the same level in the first quarter of this year. That really is suppressed by two things. One, delayed openings and secondly, by lower volumes on the business that has opened. Once those contracts are annualized and volumes do recover, that will obviously go through like- for- like, as we said before.
The absolute number of contracts we're winning is very positive in all of our regions, and especially in North America, where the win rates and number of new contracts that we're winning is as good as we've seen. That is biased towards healthcare and education at the moment, with less within B&I and sports and leisure. You're seeing an uptick in first-time outsourcing. All of that feels very positive for the medium-term future as volumes recover. Yeah, we're pleased with the continuing trends and the pipelines look good across all of the regions as well as they do within North America. Karen, over to you for the Q2 trends.
Thanks, Dominic. Well, as you know, it's the revenue that really remains uncertain. As we entered the second quarter, we saw varying lockdown measures in place across our key markets, and some of them a bit different from what we've seen pre-Christmas. Our view is that we anticipate that Q2 revenues and volumes will be broadly in line with Q1. It is worth noting from an organic revenue perspective that in P6 we start to annualize the COVID impact. Last year we had two weeks in March which were impacted by COVID, compared with a whole one quarter with the varying lockdown measures that are in place.
That's very clear. Thank you very much.
Thank you. We will now take our next question from Jamie Rollo from Morgan Stanley. Please go ahead.
Yeah, thanks. Morning, everyone. Just coming back on one of those questions, please. Just to be clear, the comment about the second quarter being similar to the first quarter, you're talking in sterling revenue, yeah? Because as you say, your March figures last year were down about, I think, 20%. Are you either saying it's down 34% versus 2019, or is that down 34% versus 2020? I'm just wondering whether you're stripping out those two weeks. Second question, is there anything, Dominic, you can give us perhaps on that pipeline? Anything to draw out in terms of whether we might see an acceleration in contract gains, anything to draw out by industry or by region. Finally, just on that margin progression, I appreciate it's not linear. You're saying it should still move ahead.
I think consensus margins are about 4% for the year, which is 5% for the second half. That would imply a continued nearly 100 basis points sequential progression, which is obviously no additional slowdown from here when it has slowed quite a lot. I was wondering how you feel about that 5% second half margin. Thank you.
Thanks, Jamie, and good morning. If I take the first two and then pass the third question on to Karen. Look, firstly, yeah, the sort of down a third, it is against the 2019 sort of pre-COVID impact. What we will have to do as we go forward is ensure we show you both organic growth against the prior period, whether it was COVID impacted or prior. Then separately, we want to anchor ourselves in our scale and volumes against the pre-COVID equivalent periods, because we believe this recovery is first about margin, then deleverage, and then it's about restoring scale to pre-COVID levels as quickly as we can. We want to stay anchored in that. Yes, we believe we'll continue to be about a third down against the pre-COVID volumes, as it were. Secondly, on pipeline color.
Look, really growth starts with retention, the one thing I would call out is we're reporting today retention of 95.7%. That's close to a point better than our historic average. We don't believe that particularly about deferred processes. Processes are continuing, albeit virtually. We do believe it's about what we're describing as the flight to trust and the quality of our client relationships. I think it also shows that we're not compromising service for margin. That's very, very important. That retention is good. It's improved across all of the regions. As we look at what we've achieved in the first quarter, those trends continue to be very positive. When we're talking about the new business pipeline, again, it's very strong in all three of our regions.
In North America, it spans towards healthcare, education, with the upweighting we've talked about in first-time outsourcing. We've seen a little bit of a slowdown in B&I, and more so in sports and leisure, as you would expect, where there's greater uncertainty about when events will start again. In Europe, it's been a strong performance, a strong pipeline in B&I and healthcare in particular, which we're very pleased with. We've made a good start in Europe on new business. In the rest of the world, it's actually across all of our sectors. We're seeing good wins and good pipelines, nicely balanced, and the same across the more developed markets in the rest of the world, and emerging as well. It feels a positive start to the year from new and retention with a good pipeline of opportunities ahead of us.
Karen, over to you for the margin progression point into the rest of the year.
Thanks, Dominic. Thanks, Jamie, for your questions. Given the uncertainty that we're facing into at the moment, our focus is on looking out a quarter at a time, and we're trying to give you as much color as we possibly can on that. As you know, we actually withdrew our full year guidance. Saying that, our ambition is certainly to continue to improve the margins quarter- on- quarter. We don't think that the margin improvement will necessarily be linear, and we've seen that. Q1 had a big step-up from Q4 as the benefits from the initiatives that we've taken have come through. We've guided you to further step up between Q1 and Q2. If volumes do come back, then our margin will improve more quickly than if they don't come back in the short term.
As Dominic said just a bit earlier on this call today, there are choices around costs that we can make, and we will take as necessary, as we look at the environment around us. Then in the longer term, we still expect the margin to return to above 7% before we recover the pre-COVID volumes.
Thanks. Just to ask it another way, perhaps, that 50 basis points-100 basis points improvement in Q2, from a volume agnostic basis, could we assume that continues into the second half of the year?
I think we'll continue to.
Go ahead, Karen.
No, sorry, Dominic. Go ahead.
I was just going to say, look, we expect to continue to make progress and we'll update at the half year on what we think that is for the second half once we've got, in particular, a better view on volumes.
Okay. Thank you.
Thanks, Jamie.
Thank you. We will now take our next question from Jaafar Mestari from Exane BNP Paribas. Please go ahead. Your line is open.
Hi. Good morning, everyone. I've got two questions, if that's okay. Firstly, on margins, maybe on the mechanics rather than on the numbers, to understand how it's going to work going forward. You now have some visibility on some contract level margins with a number of clients. Of course, they're not covering your background overheads, the clients, and the clients are not covering your central costs, et cetera. They're basically covering the on-site costs, I assume. Conceptually, how wide is the range of group margins once you take into account overheads and central costs, if revenue had ended up 10% below or 10% above for Q1? Secondly, on labor costs, if this becomes a theme in the U.S., what do you think is the best precedent for case study in terms of your track record?
I'm thinking the U.K., your experience in managing the implementation of the National Living Wage. It does look like you had significant margin pressure, but I do remember there was also a lot of like-for-like issues in the U.K. market. What would you say is your track record and ability to manage through potential significant labor cost increases?
Hey, Jaafar, thank you very much for those questions. If I take first and then maybe hand labor costs on to Karen. In terms of the mechanics on margin, you're absolutely right. We're doing a few things. We're obviously working hard with our clients to renegotiate contracts, either to recover costs in units, as you said, or cost plus our normal margin and offer a smaller base to protect that margin. We're working incredibly hard on in-unit efficiencies, that's around labor flexibility, increased use of CPUs. We're introducing greater food and labor flexibility. We're seeing the rewards for that. Of course, we're working very hard on our overhead within sectors and above sectors within countries and region group. In all of that, the latter element of that, we do continue to have choices and likewise even within our MAP forecast.
If volumes are going to be sustained at lower levels for longer, we already know there are actions that we can take and when we can take them that will contribute towards further margin progress, and allow us to get closer to historic margins at lower volume levels. If those volumes come back sooner, then we know we don't have to take those actions and it will come back with volume. There's a trade-off in the middle there between the levels of ongoing government support, which is dramatically reduced at this point and when we take those actions. That's really the mechanics as we see it. When you talk about the ranges of margins, I prefer to think about it at a sector level, which is our best benchmark globally and which would be pre-country and region overhead.
Right now we've got two of our five sectors, healthcare and DOR, are operating close to historic levels. Both of those have been affected by the loss of retail, where social distancing and the closure of our retail outlets on those sites has been impacted. We're managing to offset that with other initiatives, so we're pleased with the outcome there. If you look at the three other sectors, education has lost about a third of the margin from stop-start containment measures impacting, as well as the loss of some of the on-site retail, particularly in the higher ed space. Look, I think as we look forward, we recognize that most governments want to get children back at school, and most universities and higher education institutions believe in the campus on-site experience. We think there will be a natural volume recovery there.
It will be, of the three other sectors, the one which is likely to recover soonest. When we look at the other two, the B&I margin, the industry sector, has performed well as employees and clients have continued to operate on-site. B, as we've talked about previously, particularly with the tech sectors, financial services and others, has been much reduced. That's where the choices remain on a margin recovery and where we can take further action. Sports and leisure effectively has almost completely stopped at this point, and we're carrying a run rate of overhead within that, which will either get lifted by the volume recovery or we have further choices ahead of us. That's really how we look at it. Therefore, there is, to your point, a ±10% of volumes. That's how we're thinking and planning quarter- on- quarter.
If the volume comes back, what do we need to do? If the volume doesn't, what do we need to do? Making sure that we're making those choices in the best interests of the medium-term business rather than a quarterly margin progression. I hope that's answered the question. Then just over to Karen on labor cost inflation.
Thanks for the color. Thank you.
Thanks, Dominic. Some of what Dominic has actually described is pertinent to the way that we will and do manage labor costs. We've got a strong track record of managing labor costs across the group. Over the last few years, we have seen increases in minimum wages, et cetera. Just in terms of managing any labor cost inflation in the U.S., then we'll do what we usually do, which is we look at a combination of pricing and efficiency. Pricing conversations are conversations that are ongoing with our clients and indeed have been a real part of the conversations that we've been having as we've gone through the pandemic, and we have renegotiated contracts. We will continue to have pricing conversations with clients. The other element is efficiency.
Some of the work that we've been doing, again, across the group to manage the pressures of COVID, actually put us in a good place going forward with regards to efficiency. The work that we're doing on labor flexibility, on digital innovation, and automation. The labor model in the U.S. is quite a flexible one. We can move in an agile way to man up and man down where that's appropriate, and I think we've seen that again throughout this pandemic period, where we moved a lot of people at the start of the pandemic, and you see that coming through in the current margins that we've got in the U.S.
We also have, if our clients want this, we have things like Avenue C, cashier-less elements to their offer, unmanned innovation, particularly in our Canteen and vending sector. It's a combination of all those things, the pricing and the efficiency, that helps us manage the labor cost.
If I may just add to that.
Thank you very much for that.
In terms of precedent, they predate Karen. The National Living Wage in the U.K. was around a time when we had more P&L contracts in the U.K., and that did affect volume. I think the best precedent really is North America, where we had the Obamacare legislation and managed to recover all of that cost inflation through either cost plus or efficiencies as well. I think the track record is there, and we know what we need to do.
Super. That makes sense. Thank you very much.
Thank you. We will now take our next question from Richard Clarke from Bernstein. Please go ahead.
Good morning. Thanks for taking the questions. Three, if I may. Just on your flat volume assumption into Q2, I'm just wondering what you're kind of assuming in there on education reopening, given we've seen a little bit of good news in the U.S. I think Utah and another state have opened their schools. Is that feeding into there? Then we've seen basketball let fans in as well. Could this give you some upside, or is it too small to move the needle? Second question on Foodbuy, how are volumes through Foodbuy working, what does that do to your food cost this year? Is that having an impact, slowing an impact on your margin?
Then third question, maybe a little bit sort of Your margin range of 50 basis points for Q2 is quite wide by historical Compass standards. For Q1 you were able to give a quite specific guidance of 2.5%. What will determine which end of that range you hit in Q2?
Let me take the first and third questions and then pass the Foodbuy volume question on to Karen. Just with regard to the volumes in Q2. Look, we're already a month through, and that obviously informs the guidance we've given. In U.K. and Europe, we think we're unlikely to see any sort of material school reopenings that move the needle before the summer term. Though, obviously we are hopeful about the summer term. We are more weighted to higher ed in North America, and it does appear that the second semester is going to continue either as virtual or hybrid, and those trends will continue. Really what we might see in sort of K- 12, the lower ed space in North America is unlikely to be material for us.
Yeah, I think, the trial events that we're seeing are positive in sports and leisure because we really want to see ways through this where fans in stadia can open safely. Again, our expectation is that we won't see anything significant until the second half of the year. On the margin range, look, a good question. 50 basis points-100 basis points. We'd like to think we'll be firmly and solidly within that range, if the volume environment that we've called today plays out. I think the caution and the conservatism is obviously, if things were to turn down any more than we're seeing, which, look, given that we're into the second wave containment measures, that hopefully feels unlikely. I think it's right and proper for us to remain cautious at this point.
If the environment plays out as we see it, and the action plans we've got in place will be firmly and strongly within that range. Karen, over to you on Foodbuy.
Thanks, Richard. Well, in fact, I would say, we've actually seen and been managing the impact of Foodbuy over these last months because we're clearly operating with much lower volumes going through the system. The way that we're managing the food cost to maintain our food cost benefit is through fewer SKUs. We can do that through compliance or through menu simplification. We also have got increasing external Foodbuy client base in resilient sectors. Really that's an improvement in some areas in the third-party element of Foodbuy. We work well with our suppliers, and we've got long-term relationships with them. We haven't seen a deterioration in the levels of purchasing income that we've been achieving.
Great. If I can just ask for one quick clarification. Obviously you're giving us the Q1 to Q2 margin. Is there any difference in a normal year between Q1 and Q2 margin?
Just on seasonality, I think the first quarter and second quarter and first half are typically, I think, 10 basis points, 20 basis points ahead of the second half. There is a touch of seasonality in there for us. Obviously, the second half has the summer months. At this point, given the actions that we're coming from, we don't really see seasonality as being a factor in the pace of the margin progression.
Very clear. Thank you.
Thank you. As a reminder, if you'd like to ask a question, please do so now by pressing star one on your telephones. That's star one if you'd like to ask a question. We will now take our next question from Leo Carrington from Credit Suisse.
Good morning. Thank you for taking my questions. A few from me. Firstly, on the competitive landscape. I think there's been a surprising, or in my view, a surprising lack of visible strain in contract catering companies. I did see a comment from the U.S. that competition is increasing in schools as B&I operators or other operators shift their focus. Is that something you've seen, and can you perhaps offer some comments on what you see in terms of competition? Secondly, just another one on the margin progression. The most significant sequential improvement looks to be in Europe. Can you just help us understand why, and is Europe the main source of the further margin progression you're expecting for Q2? Lastly, DOR saw solid sequential revenue improvement. Is this new contracts ramping up or actual scope on old contracts?
More broadly, you've called out at full year and again now of DOR having a particularly good pipeline. Is this better market activity or improved competitiveness from yourselves? Thank you.
Leo, thank you for those questions. I'll take the first and third, and then hand over the European margin question to Karen. Look on the competitive landscape. I don't think we are seeing that entry of new players into other sectors or spaces. In fact, I'd argue the reverse. What we're seeing in our conversations with clients is they want proven, best-in-class, best-in-sector operators. Given the experience of COVID. I think that's really pertinent to the non-B&I sectors. Again, just reflecting on what that means in healthcare, it's proven processes. It's being able to protect our employees in those environments. It's being able to offer more frequent and broader hygiene and disinfection services. I think that rules out non-sector expert players.
In education, we've seen that uptick for demand in competence around hygiene process and PPE protection, which again, we have as a business and other players don't. Within DOR, there's been quite a lot of change because obviously you're managing entire communities in remote locations, whether it's defense or it's the mineral sector. There's a need there for the expertise that we bring by sector. We actually believe that at this point, sectorization, sub-sectorization, family of expert brands plays very strongly into the needs of our clients. I think it's more difficult for a generalist player to switch sectors and try to compete on price at this point. I think I'd describe at the moment that it is very much about quality and capability and as we said on several occasions, that right to trust.
I think that's what's showing up in our retention and new business. Just answering the question on DOR, yes, we're very pleased with the quarter-on-quarter improvement. You're right, it's a number of factors. We won a substantial piece of business in Australia with BHP, which has been rolled out across their estate, and that's benefiting the numbers. We won significant business in Chile with Antofagasta, and that's rolling out. The mineral companies have continued to produce strongly in a strong market for them, which has meant production volumes are high. The POB, people on board, as they call it, is high, and we need to service those volumes. That's positive. Also, rather than the traditional canteen or restaurant service, which would be a buffet, it's now about boxed meals and table service, which means there's more value in it for us.
It's a number of factors that are driving that. That good pipeline is across defense, offshore, and remote. It's all of the sub-sectors and particularly in the rest of the world. As I said earlier, we're seeing good opportunities in all sectors in the rest of the world right now. Karen, over to you for the margin in Europe question.
Yep. Thank you, Dominic. What we're seeing in terms of margin in Europe is really a combination of two factors. The first is that Europe has experienced the most protracted and restricted containment measures. I mean, for all of us sitting here in the U.K., we can see that and we can feel that. In terms of the recovery, the actions that we're taking to recover in Europe are exactly the same as for the rest of the group. Working on contract renegotiations, working on labor flexibility and right-sizing, and working on general costs and food costs. It's taken us a bit longer to resize in Europe, given, first of all, the multiple countries that are involved, and secondly, the tighter labor laws.
You remember that we did some right-sizing at the end of last year in North America and LatAm, and we did that because we had the flexibility to move very quickly there. It takes a bit longer in Europe, so you're just starting to see the benefits coming through this quarter.
Perfect. Thank you very much.
Thank you. We will now take our next question from Vicki Stern from Barclays. Please go ahead. Your line is open.
Yeah, morning. Just coming back on the net new business wins. Obviously, you talked with a lot of confidence there about the high retention rate and the pace of signings. And you've explained why clearly it's hard to see that coming through in the numbers currently. Two questions, really. Just in terms of your perception of what that pace means in terms of signings, you think that's consistent with the prior levels of net new business, 3% per annum as we get into actually seeing the contribution from those contracts or better or worse than those prior levels? Just so we can understand it because it's obviously hard to see in the numbers today. Yeah, sort of related to that, when should we start to see the benefit? Is that really just when we start to lap the comps and work off different base?
Just secondly on contract renegotiations. Obviously, this is only a part of the cost-cutting measures and how you're getting margins up. Obviously some of those are short-term discussions. Do you just happen to understand how much of that is a sort of long-term contract renegotiation today, and how much of that is you're going to need to go back on those contracts in 6- 12 months' time to sort of set terms for the future? Thanks.
Thanks, Vicki. Good morning. If I take the growth question, and then Karen can do the contract renegotiations. Yeah, look, it's tricky, isn't it? Because of how the calculations are done to actually see the trends. Retention is a clear calculation, so it's pre-COVID volumes lost over pre-COVID total group volumes. It's a sort of pure calculation in this quarter. As we start to lapse the pandemic, it will then be post-COVID volumes lost over post-COVID total group volumes. Retention will remain, I think, a pure like-for-like measure that we can look at. As we said today, at 95.7%, it's 60 basis points better than last year and close to one point better than the historic average. If we can sustain that would be positive for net new.
Obviously, we would never declare victory after a quarter, but it's a good start, right? On the new business, we measure it internally on what would be pre-COVID volumes. We know what the value of the contracts we've won in the first quarter is compared to the value of contracts we would've won in a pre-COVID world. It looks very positive and comparable to those levels. That should in principle mean that we would be able to see a return to the net new levels that we enjoyed previously. Obviously, the challenge for that is a number of those contracts will be delayed for opening. A number of those contracts, when they are opening, are opening in new world volumes. We'll either see within the first 12 months the volumes recover, and that will flow through new business.
We'll see them annualize and then flow through like slide. I think the net new measure is going to be a bit muddy to navigate for a while yet until we've truly lapsed through the 12 months of the crisis. We'll do everything we can to sort of pull out that trend, particularly as we get to the half year, so that we can show you how we're doing. In old money, as it were, it feels good. In the absolute number of contracts that we're winning, it feels good. Again, this is only a quarter, and we're keen to see how we perform as we get to the half and beyond. Karen, over to you on the contract renegotiation.
Okay, thanks. Hello, Vicki. In terms of our overall portfolio of contracts, the profile hasn't really changed over this pandemic phase. We're still about a third, a third, a third in terms of cost plus fixed price and P&L. By implication, that does actually mean that the conversations that we're having with our clients are temporary measures, and I think that works for us, and it works for them. The focus that we have been having up until now is very much on ensuring that where sites are open, and sometimes where they're not open, that we work with clients to make sure that we're passing through costs. We're also getting some more permanent benefits just in terms of, particularly in North America, extension of length of contract. We might see that in the sports and leisure sector where that's completely inactive at the moment.
We're working with clients to extend the length of the contract there. We're really very happy with the support that we're getting from clients just now. We do recognize that contract renegotiation is ongoing. In fact, that's very helpful for us. There's a question earlier about inflation, and it actually helps to make sure that if there are inflationary pressures, they're getting passed on too.
Great. Thanks very much.
If I might just add one comment there. I think what it also demonstrates is the weight of pressure on the operations of the business. That this isn't a silver bullet, and it's done once. We need to be thoughtful about how we do it best in the context of maintaining strong client relationships. Everybody wants to see the volumes come back and the old structures in place. We need to make sure we balance being fairly treated in the short term with a strong client relationship and where we expect to be over time. That means it's constant effort, which I think we're very well-placed to do and very well-disciplined to do.
All right. Thank you.
Thank you. We will now take our next question from André Juillard from Deutsche Bank. Please go ahead.
Good morning, everyone, and thank you for taking my question. A few questions, if I may, more qualitative than quantitative. If you look at the landscape and your main competitor, especially local and regional players, do you see any player being in difficulty and explaining part of your market share growth? First question. Second question is about your clients, especially on the B&I and sports segment. Do you see their request, and I'm still talking about qualitative, evolving for the next few years? Do they more talk about digital evolution and things really changing about the way they ask you to provide your service? Second question. Regarding the pricing power, this is a kind of follow-up about your last question. Do you see any evolution on your pricing power, your capability to reflect the evolution of the food price and so on? Thank you.
Thank you, André. Let me take those. First of all, with regard to the landscape. All I can say is that in the first instance, we believe that bidding processes are happening with greater discipline. We think that's positive in the use of CapEx and the costs of service. We do see a number of players that are perhaps finding the circumstances challenging. As I said before, if you are a dedicated B&I or sports and leisure sector player, then right now you don't have the breadth of portfolio like ourselves, where you've got two sectors which are 40% of the business, which is performing as it were before, and is able to help manage the overall costs of operation. We are seeing that, and we may well see consolidation in the sector as a result.
With regards to the B&I and sports and leisure and the requests, our manufacturing clients are still largely operational. The conversations that we're having with the industry clients is about how do we operate safely with the right protocols, and if some of those protocols have to stay for longer, what does that look like? The focus there is very pragmatic about the operation. Within B&I and sports and leisure, the conversation is probably as you would expect, within the B, it's about what does the workplace of the future look like, and what role does hospitality and catering have to play in that? How do we operate safely? What does it mean in terms of the numbers of people that can congregate within particular spaces? How do we use our footprint within their office space differently?
That absolutely does mean there's a greater emphasis on digital desk delivery and personalization, and that is coming through loud and clear in the bids that we're seeing. I'd also say there's an uptick of interest within health and wellness, and everything, again, we've learned about maintaining appropriate diets for the wider health implications. I think, again, those give us the opportunity to differentiate ourselves with our clients. In sports and leisure, it's about how do we deliver great experiences with the right price structure to potentially smaller attendance levels or step changes in attendance levels. Look, if we go back to 2,000, then 5,000, then 25%, then 50% of capacity, what does that offer look like? Those are all ongoing conversations with current as well as prospective clients.
Some different things happening there, and that's where the broader expertise of the business can really help us out. Then on pricing power and the evolution of pricing power. Look, I think it's fair to say, we've always managed food and labor cost inflation reasonably well through that combination of contract protections that we've got, either in cost plus or P&L, where we control the shelf price and the efficiencies, and we'll continue to look for efficiencies. One of the benefits of the experience we've had here is that we're introducing greater flexibility to labor and food. That hopefully gives us the efficiency to deal with what can't be passed on.
Having said all of that, I think there's a greater understanding of the importance of our services in many of our sectors, and therefore, potentially a fairer hearing on pricing and negotiations than we've seen before. I think there's a combination of factors at play there, but I don't believe in any way has it been detrimental to our pricing power.
Okay, thank you. Just maybe a follow-up question on the B&I segment. Do you have some requests from corporates asking you to deliver some more food meal directly to their employees when they are working from home? Is it something which is not substantial at the moment?
We have had. I would say it's at the margin, and I don't think that it has significantly grown as we've experienced longer lockdowns. The one comment I would make on B&I is, if the longer this persists, the more I hear increased desire from our clients to be back in the workplace and for the workplace to be valued in a different way by everyone. Now, that may not mean back to the levels of attendance we experienced before, but certainly that the workplace is important and plays an important part in the balance of our lives. We quantified the work from home risk, but as we navigate our way through this, I think there's a degree of optimism about the role of the office as we go forward and our role within it.
Okay. Thank you.
Thank you. We will now take our next question from Stuart Gordon from Berenberg. Please go ahead. Your line is open.
Good morning. Probably same question in two parts. In terms of the cash flow, looking for an update on how that's going in terms of cash burn and also in terms of contract wins and the pipeline, how do you see the CapEx for that unfolding through the year? I would imagine that the initial costs that you may incur will not be necessarily representative of the anticipated volumes that you've got. As a second part in the cash flow, obviously, does the way things are going in terms of the margin give you increasing confidence to use the cash that you built up last year with the capital increase for investing in the business as we move through, hopefully, the tail end of the pandemic.
Karen, I think those firmly are squarely with you. Thank you, Stuart.
Thanks, Dominic. Okay. All right. Well, we're not actually updating on cash flow until the half year. What we did say in November with our full year results was that as we've got to positive operating margin, then we had stemmed the cash burn that we were seeing. Also at the half year when we commented on our cash, we said that we had done particularly well on collections and reducing days sales outstanding in a way that we thought that we could continue. We are continuing to win new business, as Dominic has explained. We believe that in certain instances, CapEx is a really valuable part of winning that new business. We see that particularly in North America, where CapEx gets deployed into typically a larger contract and contracts that are of a longer length than in contracts where CapEx isn't deployed.
In North America, our average contract length is seven to eight years. We have said that because we're going to continue to invest and because we are still winning new business, our CapEx for the half year should be at a gross level in the region of GBP 350 million-GBP 400 million. A lot of that is actually CapEx that was committed in prior periods when we signed new business, and we're waiting for the new business to open. When we're working with clients on new bids and tenders for new business, we are still prepared to put CapEx into those contracts. Clearly, we work with our own internal hurdle rates and making sure that the CapEx that we're investing helps to support our long-term ROCE.
It may be that volumes are a bit suppressed in the short term, but working with clients, we're also finding some opportunities to wait a bit before the CapEx is deployed until some of the volumes are coming back. On your third question, just in terms of whether or not we've got confidence to use the cash that we've built up. Absolutely. It was thought through and a deliberate part of our strategy to create balance sheet resilience so that we could use that, the resilience and the means within that balance sheet to take advantage of our competitive position, whether that was from the CapEx that I've just described or, and I think we've discussed this earlier on the call, whether it might be from M&A opportunities as and when they come along.
Okay. Thank you very much.
Thanks, Stuart.
Thank you. We will now take our final question from Kean Marden, Jefferies. Please go ahead. Your line is open.
Morning, all. Three very quick ones from me. Would you mind sharing what the impact from government furlough schemes, the benefit was to the EBIT line in the first quarter, please, and whether that all drops away in Q2? Secondly, some U.S. universities at the moment are canceling spring break. Would that have any potential tailwinds to your business in March? Is the fact that most sites are remote or hybrid mean that won't be the case? Finally, I've got a few IB messages from clients just trying to nail down the Q2 organic revenue growth guidance.
Is the right way to think about this that on a pre-COVID basis, organic revenue growth down about a third, but the COVID impact on the business in the first quarter of last year was about 7 percentage points all concentrated in the last couple of weeks in March, and therefore, when we see the numbers that you print for the second quarter, it would be more like sort of 26%, 27% instead? Thanks.
I'll allow Karen, if you could do the government furlough and the organic growth point. Then just on the universities point, Kean. Yeah, look, I think we're hearing across some of the education estate plans to try and catch up some of the lost teaching time. We've heard plans mooted in national education systems of certain countries, that might either be through summer schools or it might be through spring break. That would obviously only be a benefit to us if it is on campus, on site, physical teaching. Yes, that could be a potential benefit, but certainly not something that we're building into our numbers at this point until there's greater clarity. Karen, over to you on the others.
Thanks, Will do. Just in terms of the government support that we are receiving, have received, in quarter one, it was just about GBP 50 million of government support, and that is now really concentrated in Europe. Any other government support has pretty much tailed away. We see that reducing to something more like GBP 40 million in quarter two, and then our current line of sight has it tailing off very significantly. There's one or two countries in continental Europe that have committed to a bit more support going out further. What we tend to see is that governments will communicate what they're going to do in terms of support about a quarter out, and obviously this is very dependent on the external environment.
We understand that to get back to our historic margins, that means that we've got to move off government support, and we've got to get the business right-sized for the long-term revenues and long-term volumes that we're going to be seeing. About GBP 50 million quarter one, about GBP 40 million quarter two, and probably a lot less thereafter. Your question around nailing down quarter two organic revenue guidance. I'll just reiterate, this is uncertain. We are living in uncertain times. We think that the volumes and the revenue in quarter two could be similar to the volumes and revenues that were in quarter one, but the point that you make around what we saw in March last year, and therefore the impact that might have on organic revenue guidance. In terms of arithmetic, yeah. I understand the arithmetic.
Very kind. Thank you very much.
Thank you. That will conclude the questions for today's session. I will now turn the call back to your host for closing remarks.
Just let me say thank you all very much for joining us today, and we look forward to speaking to you at the half year in May. Thank you. Have a good day.
Ladies and gentlemen, that will conclude today's call. You may now all disconnect.