Thank you very much, and good morning to everyone. As usual, I'm joined by Karen Witts this morning, our CFO, to answer your questions on our 2020 results. Of course, no year is the same, but 2020 has been a challenging one for Compass. Although we continue to live in uncertain times, we're entering the new fiscal year in good shape. We're controlling the controllable. We're evolving our strategy, adapting our operations, and focusing on execution and improving the quality of the business so we can emerge from the pandemic stronger than we've ever been. Thank you. Now we're happy to take your questions.
We'll now take our first question from Jamie Rollo of Morgan Stanley. Please go ahead.
Thanks. Morning, everyone. I've got three questions, please. You've helpfully given us the margin guidance for Q1 of 2.5%, and you're saying you can get to 7% on a lower revenue base than the company used to do. Just thinking about the path back to that 7%, should that be sort of fairly linear with the revenue recovery or are there any sort of bumps in the road where we should be aware of? What sort of loss of revenue should we think about to get back to that 7%? Is it 5%? Is it 10%, for example? Secondly, on the prerecorded presentation, you were talking about 4%-6% of revenues potentially being permanently lost from working from home and online learning. It'd just be helpful to run through the math behind that calculation and also what the profit impact would be from that.
Just finally, dividend's mentioned quite a few times, keen to bring it back when appropriate. I'm not sure what appropriate means. If we can help to think about the boundaries of what might need to happen. Does it also mean that leverage needs to be below the sort of 1- 1.5, or within the bounds of the 1- 1.5 times new leverage target? Thank you.
Thank you, Jamie, and good morning. Let me tackle the margin question first and then maybe I'll ask Karen to add any more color. Look, we're really pleased to have guided this morning to 2.5% in the first quarter. That's a continued improvement over the final quarter of last year without really seeing any more volume growth. We broadly think the first quarter of the new financial year will have volumes down around a third against the prior year. That really is about seeing the actions that we've already put in place coming through. When we talk about getting to 7%, obviously we've done our internal planning. We can see the levers that we can pull. We've taken significant actions around gross margins with menu standardization, which allows us to rationalize our SKUs and suppliers and create value.
We've talked a lot in the presentation today about labor flexibility, how we introduce that through the use of central kitchen through labor pooling, and of course, Karen's shown you the action that we've already taken on restructuring and will continue to take across both in unit and our overheads. When we add all of that together, we can see a path to good margin recovery, which isn't predicated on full volume recovery, but does obviously require us to see an improvement from where we are. Will the margin recovery be linear? I think we're in too uncertain a world to really say that. Look, we've had the second wave impact, and we've taken that into account in our guidance in this quarter. Will we see another third wave impact in the new year? Possibly. Will that slow us a little from what we could do? Potentially.
That's why we feel unable to guide beyond the first quarter right now. Of course, on the positive side, if the vaccines kick in and give us a momentum into the second half of the year, potentially things could accelerate from there. I think it would be unwise of us to say it's linear. It would be unwise of us to guide too far out. Of course, the other part of this for us is that we have choices. You have to remember at the moment we continue to have overhead invested in the business for recovery and for a bigger business. We have overhead within sports and leisure. We have costs within the vending business where we're seeing much lower margins. Of course, in a number of contracts, whilst we're recovering losses, we aren't effectively invoicing a margin on lower volumes.
All of those will come back over time, too. Yes, that could be lumpy if we see sports and leisure open up in any meaningful way in the second half of the year. What we have got is we've got confidence on the 7% and we've got confidence that we can take choices along the way which will show our progress in getting there. That was a full answer, Karen, I don't think there's anything more you'd add to that?
Nothing. No.
Karen seems happy with that. On the 4%-6% of revenues, the first thing to say is you called it permanently lost. I wouldn't describe it as permanently lost. What we've attempted to do today is give you a sensible view on what the risk could be. Why don't I say how we size that? For everyone's benefit, our B&I business is 40% of the total. Around half of that is office-based business subsector. At the moment, we're seeing quite different trends in industry, which is predominantly manufacturing, where we have seen clearly a return to that working environment. Within the office environment, and particularly within major cities, we see the potential greater risk of more permanent working from home trends. Again, just to give you a few data points on that.
Pre-COVID, we think on average, an employee in that sector was working one to one and a half days from home, and it was on a quite unstructured basis, really at the employee's choice rather than managed by the employer. The 4%-6% assumes broadly that that will rise to two to two and a half days, and therefore could be about a 25% impact on that 20% of our business. I would say, I think the pendulum is swinging in both directions at the moment. At the beginning of the pandemic, we heard an awful lot about how effective it is using technology to work from home. We know that for a lot of CEOs, that's attractive around cost containment and management.
What we're also hearing now is how important it is to be in the office for creativity, for team working, for projects, for coaching and development. We know there are cohorts of people out there for whom the home environment isn't great. They either live in multi-tenanted houses or don't necessarily have the technology, and are desperately missing the office environment. We conducted a survey, through the pandemic of 23,000 employees of our clients in 25 countries, and it was resounding that people want to have a balance between office and home that allows them to have access to teams, to coaching, to personal development. Of course, we're also seeing a lot of the mental health concerns emerging as well. We've quantified it in both B&I and higher ed on the basis I just described at around a 4%-6% risk. Could it be less?
We're working very hard to mitigate that as well by looking at other revenue opportunities that we've talked about with acquisitions like Feedr or an EAT Club, which give us tech-enabled food service models into smaller businesses, as well as targeting other sectors. I think we've been thoughtful and cautious on the risk, but we're clearly taking all the actions you'd expect to mitigate that and actually take the opportunity. Then on the dividend point, let me just hand over to Karen.
Thanks, Dominic. Hello, Jamie. Well, on the dividend, we recognize the importance of the dividend to our stakeholders, and I hope you've heard from us already this morning that we are confident that we will, A, regain our margin position, and B, from what Dominic just said, that we don't believe that the pandemic has structurally damaged our business. We were very pleased that we said we'd get to breakeven, in Q4, and we got to 2.6%+ margins, and we've given you some guidance for Q1. I would say we are very early in this recovery. From a leverage perspective, yes, we have reset our target one to one and a half times. It is important to remember that our peak leverage is going to be in March 2021.
The way the net debt to EBITDA ratio is calculated, it will take the full hit of the pandemic into that calculation. I just feel that it is too early to say anything just now. We will continue to update when we give you these trading updates.
Thanks. Sorry, Dominic, can I just come back on the first question? Could we look at it another way such that margins, you're saying, would be above the 7.5% if you get back to full revenues as you do expect to do? Is that what you're saying? Is that another way to look at it?
I think you're possibly putting words in my mouth there, Jamie. Now we're saying we see a path back to our historic level of margin. What's really important is, look, we've learned a lot through this pandemic, haven't we? We've rationalized our menus to create value in purchasing. We've introduced greater flexibility than we've ever had before. We found new ways of being lean within our overhead. Look, if the volumes do come back, we said we'd get back over 7% without the full volumes. If the volumes could come back, is that a path to our historic level of margin? Are we creating opportunity for the future? We'd like to think so.
Okay, thanks.
Our next question comes from Bilal Aziz of UBS. Please go ahead.
Good morning, everyone. Thank you very much for taking my questions. Just three quick ones from me, please. Just thinking a bit ahead, how should we think about major moving pieces when we start to think about the margin drivers, particularly into the second half, i.e., is there anything structurally different with regards to the way we should think about your conversion margins? Secondly, with regard to first time outsourcing, is anything fundamentally different with the new contract wins you are now seeing with regards to capital intensity or contract structure at this stage? Finally, probably a bit early to comment on this, but do you have any visibility or guidance for resizing costs you may need to incur right there on 2021, or do you think you're done with the majority of that? Thank you.
Thank you, Bilal. Thank you. Why don't I cover the first two and then Karen can update you on the resizing costs. Look, when it comes to the margin drivers, I'm not sure we're seeing anything dramatically different as you would expect within our operating model. What we are seeing is, as I described earlier, greater flexibility within our offer, creating value. That might sound a bit counterintuitive when I say we've rationalized menus, but in order to provide digital technology, digital apps to our consumers, necessarily, we've had to have a more standardized menu, and that creates value. Now that does create opportunity within gross margin for us from using the technology.
We're also seeing within labor the opportunity to, again, using technology, have less front-of-house labor or to redeploy it elsewhere, using the pooling of labor, having created new labor agreements, but also offering our employees the opportunity to work across healthcare or education and B&I in a given city in a way that perhaps they haven't done before. Allows us to have greater labor flexibility, less reliance on agency cost. Does that give us a marginal opportunity in unit labor? Yes. Clearly, you've seen today, we've taken a run rate, GBP 70 million out of our above unit overheads. In pre-COVID terms, that would be as much as GBP 25 or 30 bits of margin.
We'd like to think that we can drive towards a sort of a lower cost overhead base as well, and only put that overhead back where it's really creating value or is necessitated by a volume recovery. I'm not sure that we see different margin drivers, but I think it's an evolution of the existing P&L, as it were, but in a very exciting way. Just in terms of first time outsourcing, we're really excited by the book of business that we signed in the last eight months. It's been across all sectors. Obviously, some of that hasn't yet opened up and will mobilize as we get the other side of lockdowns and hopefully into a vaccine-led world. That has been good. What we're seeing is, we're still deploying capital. We believe it's a competitive advantage.
We're using it in slightly different sectors, so we're seeing a bit more demand in healthcare than there's been before. That first-time outsourcing is really If you think post-financial crisis, it was cost-led. I think we're now seeing it capability-led. This is about institutions having suppliers they can trust that are resilient and reliable in their supply chain, but also can really help lead them on health and safety. The learnings we've had from this will apply in healthcare and education for years to come, and we truly believe that we offer that. There's an exciting pipeline. There's good opportunities, there's incomings, but we do believe that using capital, again, as we've done before, will differentiate us in that space. Over to Karen for the resizing guidance.
Let's just put the resizing into a bit of context. Any resizing that we do depends on combination of factors. One is the speed at which volumes come back. The second is the levels of government support that might be in place, which are there to help protect jobs. The third is labor legislation and the flexibility of the labor legislation. Back in Q3, we announced some early resizing, and that early resizing was in the U.S. and Latin America, and that's where the labor legislation more easily allows you to restructure. We've announced a bit more now in this update, and that is more focused on Europe. The objective with this resizing is really to do two things.
I've alluded to the government support, and that government support, we received more than GBP 400 million of it in FY 2020, but it has been tailing off from its peak. In order not to carry excess costs, we've got to make sure that our labor patterns and our return to work mirrors what's happening with labor legislation. The resizing that we've announced focuses on the combination of MAP 4 costs, which is primarily going to be cost avoidance, and MAP 5 costs, which is primarily our overhead, our management layer costs. We're announcing a GBP 122 million charge for the restructuring, and that will avoid GBP 280 million of MAP 4 costs and GBP 70 million of the MAP 5.
That GBP 70 million is going to be one of the important building blocks for getting our margin back to the place that we want to get it to. If we have to do more right-sizing going forward, then we will do that. That really is going to be dependent on how quickly or slowly the volumes come back, and the extent to which we're still receiving government support. That's a bit of a moving target. The governments themselves are changing their view quite frequently.
Brilliant. Thank you. Just a very quick follow-up, please. Do you see any material impact in the U.S. minimum wages going up to $15 for your business in next year, please?
Sorry, was the question, do we gain from it?
Your broader margin impact from that.
Sure. We obviously need to recover the increase of any minimum wage or living wage inflation. We'll typically do that through negotiation with our clients or through driving further efficiency. It's always been a balance of the two. Typically, we seek to protect our margin on any higher revenues from those actions.
Thank you very much.
Our next question comes from Vicki Stern of Barclays. Please go ahead.
Hi, morning. Just firstly, coming back on the net new business wins. Historically, you were doing around 3% net new a year, and obviously you talk quite positively today about the signings, particularly in North America, the strong pipeline. Looking through the next 12 months, I appreciate the slower mobilization point, but just can you talk about your view on whether you can get back to that sort of 3%+ level that you saw previously on net new? Coming back on remote learning, you gave some more details on the work from home assumptions that are part of that 4%-6% structural change. Could you just flesh out a little bit more what you're saying on remote learning and just more broadly there, your view on the opportunity for new business wins in higher education.
Is it as attractive a segment going forward, are you likely to do as much there? Then finally, on delivery. Just overall, would you say COVID's been a positive or a negative catalyst for B2B delivery rollout to offices? My perception would've been this has been a positive catalyst for that because we've got more, I suppose, demand for flexibility as work from home becomes more pronounced. You also talked about the incremental safety concerns and considerations for businesses allowing delivery in. Just overall, how do you see that for the market going forward? Do you think that offers much to your sort of mix in terms of where delivery can be in the next two to three years? How material will that be for you, do you think?
Vicki, thank you very much. Let me take net new business first. Yeah, look, we said today that the book of business we signed in the second half was really positive. One thing I do want to call out is you'd have seen in our sector analysis today that healthcare grew on an annual basis and was back in growth in the fourth quarter. Despite, clearly there's been a significant volume impact in that sector from the suspension of elective surgery. What's underlying that has been a very good net new business wins contribution in healthcare. I think we're sort of leading the industry in that sector, which is a sector that we want to focus on as we look forward. I think that's a great case study of where we see opportunity. The pipeline looks good.
We do believe there'll be an acceleration in first time outsourcing. Those are the trends that have underpinned the 3% historically, and therefore, we absolutely believe that we can get back there. Finally, we're seeing even as you strip everything back, I think a very resilient performance in the rest of world region. We continue to believe that we will do better in Europe over time. We saw, I think, the first blushes of that pre-COVID, and I think we're hopeful that we will see that with the strategic changes that we're making there. When it comes to remote learning, look, we've said how we've modeled it out. I think what we're seeing is, we're seeing either remote learning, a hybrid model of taught and remote.
What we're seeing, and I know the academic sector reasonably well now, I think there's a flight to quality within there as well, where remote is not just about students coming to a given campus, but truly doing it remotely from other countries. I think you're going to see all sorts of trends within that sector. Fundamentally, again, our research that we've done with students and with academics tells us that students, they still want the full on-campus experience, and therefore it will remain an exciting sector. Of course, that particular consumer is most open to a digitally enabled solution, which can be collected from different points on campus, which can be delivered to residents. I think there's all sorts of options for us there. I think it remains an exciting sector.
Of course, you've seen how tremendous these campuses can be for us in North America, where there is a huge scale. There's lots of different audiences. You've got the academics, you've got the students, you've got the alumni, you've got the sporting events, I believe all of those things will remain true. Therefore, we think that it's an exciting sector to invest in as we look forward. Lastly, on delivery. Look, we've learned a lot. Very honestly, things have accelerated. We made three acquisitions, two pre-COVID, one post. We couldn't have made those at a better time, if I'm brutally honest.
SmartQ in India, very small acquisition, but we got some phenomenal technologists there who developed an app called Time2 Eat, which we've rolled out in 10 countries through the pandemic and will continue to roll out, which allows you to pre-order, prepay, book a spot in the cafeteria, have your meal delivered to you, have a meal kit taken to you that you can take home for the evenings. I think we've learned an awful lot there from the technology acquisitions. We've acquired EAT Club on the West Coast of the U.S. now. Clearly their volumes as depressed right now as most of the smaller tech companies are closed. Pre-COVID, they had volumes of around GBP 130 million. We've got circa GBP 400 million all in delivered food solutions in North America already.
When we've built these sub-sectors, the way we've built vending, the way we've built office coffee, we've invested in them as a combination of CapEx and M&A. We've grown them to scale, and that would be our hope and expectation of this form of delivery. We recognize the price point is different. There's logistics and cost to deliver. There may be challenging access to certain locations as we go forward. Actually, we think as the incumbent caterer, it gives us an advantage, and I think it becomes a net positive for us now that we've got proper tested business models that we can roll forward.
Thank you. Just a follow-up on that. You talked in the presentation earlier about obviously complexities alongside it, and you've mentioned there sort of different price points. Would you be confident that that business could get to sort of similar margins above 7%, or would that be a structurally lower business but still an attractive one to be in?
Yeah. Look, I think all of our evidence tells us that we can get the margins to the right place, because the cost base is different. We can produce at scale in commissaries or central kitchens in a way that we can't on-site. Those central kitchens don't need to be in high real estate locations. We understand that the consumer is willing to pay a significant portion of the delivery cost to have the experience in the office and of a high quality. I think there's ways and means for us to address those challenges.
Great. Thanks very much.
Our next question comes from James Ainley of Citi. Please go ahead.
Morning, everybody. Three questions from me as well, please. First one, could you give us a bit of color what universities are saying to you about their plans to return to in-person teaching in January, the vaccine in particular? Second, in your presentation you mentioned DOR decline related to the macro environment, just to get a bit of color about what you're seeing there and should we expect that to continue into 2021? Finally, on net new business trends, again, from the presentation, notable that Europe clearly lagging here, just to hear thoughts about action plans post-COVID to improve that performance. Thank you.
Thank you, James. Look, when it comes to universities return to teaching, I think, quite frankly, all bets are off in the second term or semester right now. I think every government is unveiling its winter plans. We're seeing greater lockdowns in the U.S. and that may now change also under a Democrat regime. We really are planning for very dull volumes in our second quarter up to our half year, and our margin actions are being taken almost independently and exclusively of a volume recovery. I think, the sorts of -35% that we've talked about across the piece in the quarters is really our planning assumption until we see the benefit of better testing, better vaccines or vaccines, sorry, and better weather.
We hope to see those starting to kick in on our second half of the financial year, and particularly in the higher ed sector as well. Sorry, the comment on DOR due to macro, we've seen a little bit of tightening in volume production, but not a lot. Actually, I had a call yesterday with our LATAM team, and we're actually starting to see volumes picking up quite significantly there. It's been a very resilient sector for us through the pandemic. We've won a lot of very good new business in that sector, and as we called out today in a couple of our major markets, and we would benefit from any infrastructural investment that governments pursue as part of economic recoveries within that sector. Of course, now that portfolio to us now is largely production and not construction.
It isn't a sector that runs off, it's a sector that benefits from increased headcount driven by volume. Just on Europe, I think Europe has been our most impacted region, because of its huge B&I, and that's shown up in volumes and in new business, and also retention. I think it's difficult to read the trends of the second half, particularly because we've seen probably the biggest slowdown in activity. In recent weeks, we've won some great new business in both the U.K. and Continental Europe. We're excited about the pipeline. We've invested in our regional teams. We've worked very hard on having digital offers to deploy faster in those markets.
It's a combination of activities that we think will help us, and we also think, as we're seeing already in the U.K., governments will invest in public sectors, particularly around education and healthcare, and we think that that will be a net benefit to our exposure to those markets.
Thanks. Just to follow up on that, how long do you think it's going to take for net new business trends to improve in Continental Europe?
Look, it's very difficult to say, James, right now, because we've got to navigate through the volume recovery first. Look, we'll keep updating you. We're very open to the question. We know we've got to do better in Europe, we'll shine a light on it as we do these presentations.
Thank you.
Our next question comes from Richard Clarke from Bernstein. Please go ahead.
Good morning. Thanks for taking my questions. First one on the coming back to the 4%-6%. You mentioned in the presentation, you'll be looking to mitigate that through new business wins. Want to confirm what that means. Do you mean mitigating back to 2019 levels? Do you think you'll be able to mitigate back to where you would've been if it wasn't for the pandemic, i.e., there will be 4%-6% new revenue streams that wouldn't have existed, positive new revenue streams that exist if it wasn't because of the pandemic? Second question, following up on from what Vicki said about the net new wins this year. You mentioned the 5.7% is impacted. Any hint on what that number is on a more normalized level?
What did you actually win in terms of normalized revenues in 2020? Just on the similarly, you've given the CapEx guidance, GBP 350-GBP 400. I think in first half of 2019, you did GBP 395, albeit, I'm mixing net and gross up a little bit there. Should we therefore think about a similar amount of new wins in the first half of 2021 compared to the first half of 2019, or are there other components there that CapEx away from new wins?
Thank you, Richard. Let me take the first two, and then I'll hand over to Karen on CapEx. If I may be so bold, your first question was definitely an analyst question. Our first, second, and third base is to restore this business to its scale and profitability of pre-COVID, taking into account social distancing, recession, potentially, as well as the impact of B&I remote trends. We're confident we can do that over time through the combination of factors that we've set out today. Look, we need to see how we travel, don't we? When we talk about mitigating, look, it's a combination of factors, again. In part, we believe the delivery models that we are piloting access new markets to us. We've talked about SMEs or smaller companies who wouldn't previously have had cafeterias or rooms for kitchens. We can now access that with these models.
It gives us alternative solutions for our existing clients, which may allow us to drive footfall and volume within existing accounts. We're going to work very hard on the like for like component within B&I as well as the new client base that we couldn't previously get to. Of course, we've talked today about we want to increase our exposure to healthcare and education. We think we'll see more opportunity from first time outsourcing. We're gearing our sales teams up to focus on that. It's going to be a combination of factors within B&I and across the sectors too. Net new business, how impacted is it?
Look, it depends on the mix of business and which sectors it's come from, but broadly, our second half volumes have been down 35%-40%, and therefore, second half new business has been depressed by at least that, if not more. If you annualize that, is that 20%-25% and would you gross up new business for that? I think those are maths and directionally, it tells us on full volumes, we've done a lot better than the number that we reported today, but we can't give you a precise value for that because new business is calculated as volumes on site on a new contract over last year, and some of our wins won't even have opened. Karen, CapEx.
On the CapEx, morning, Richard. The CapEx guidance in a way is actually linked back to the high level of new business wins because that guidance of GBP 350 million-GBP 400 million for the first half that we've given, we're saying about 75% of that is already committed. That means it relates to what we have won. Clearly, there could be a little bit of variability on that number when it finally comes through because it will depend on where and when we mobilize those contracts.
Thanks. Maybe just a quick follow-up on the CapEx. You mentioned the gross was 3.7%, and the net is 3.5%. What's the difference there? What were you able to sell in 2020 to get you back to 3.5%?
It's a very small number. It's just some reductions of assets, sales of assets. In overall, we sit within a normal year, we sit within the guidance of 3%-3.5%. I think that we will have likely a smaller absolute number in 2021, but it is important to us that we invest in good contracts for growth.
Yeah. It remains a very important part of our model. We've tested ourselves on returns that we've achieved previously, and we're confident that those returns are of the levels that we communicate and will continue to be so. We have strong approval processes, post-audits. Look, if the opportunity comes in the pipeline, then we'd like to exploit that opportunity if it's a moment in time. If we go back to earlier questions, can we accelerate net new? Can we restore the business to pre-COVID levels? This is really important part of the strategy.
Thanks very much.
Our next question comes from Leo Carrington of Credit Suisse. Please go ahead.
Thank you. Morning. Firstly, can I ask on the central production units you mentioned and I guess Grab & Go as well. Are the CPUs mostly to support vending and delivery, or are they also to, in a way, replace some of the traditional kitchens? In vending itself, has there been any change in the competitive landscape in the U.S.? Sodexo, I guess, mentions vending at their capital markets day. Just looking back, why has Europe not been such a place in the past or not been such an opportunity in the past? Just a quick follow-up on new business again, sorry for the end question. Can you see from your pipeline if there's likely to be a wave of new business from first time outsourcing as a consequence of the pandemic, then normalization?
Would you say it's actually a sustained step up in new business as the value of outsourcing has been proven through this period?
Thank you, Leo. Yeah, let me take the last question first. I think it's too early to say whether this is likely to be a sustained step up. What we do see is, we see a robust pipeline and within that, a strong component of first time outsourcing. We also see and hear a lot of incomings that we'd like to convert into sales opportunities. I think, we talked about, we've seen the early signs of an acceleration. I think that's how we'd describe it. It's now up to us. These things don't just happen. I've said this before, after the financial crisis, we enjoyed real success in first time outsourcing because we invested in sales teams, we invested in the proposition, and we converted the mood of the moment. That's up to us to do.
Again, we will report how we progress on that to you. When it comes to vending, we don't see a change in the landscape in North America at all. Vending has been a terrific part of our portfolio. Over the last five or six years, it's been growing double digit top and bottom line. Why? Because actually, it was enabled by technology sooner than many other parts of our business. It benefited from cashless, it benefited from open vending, it benefited from cashierless vending. What we're now focused on is to really touch into your CPU question. It's about having hot meal offers delivered into the vending solution that a consumer would typically expect to see of the quality of the high street. We do that from central kitchens. As we said today, we've got 70 around the world.
They have been used for various different purposes. Some would have been used for large scale production to deliver into healthcare or schools. Some of them would be to produce hot meal solutions into vending. Others would be for the packaged snacks in vending. What we're seeking to do now is repurpose them so that it gives us all of the options across all sectors. We have that network across all of our major markets. We've got them in France, Spain, Germany, U.K., U.S., Australia. We're excited about the potential there. Of course, if clients become sub-scale on site, then the economics work for us to use them. It also gives us the opportunity to have a more relevant and more varied offer. Then just, I think your question was on vending in Europe. We have invested in North America. We've built the network.
We always had a vending business, and you actually struggled for a while when there was a lot of price sensitivity when the machines weren't able to accommodate all of the different SKUs that the consumer wanted, as consumer choices changed. We've learned a lot through that. Whilst we don't have that vending presence in our European business today, we're looking at how we can provide that sort of offer to the consumer in different ways.
Thank you.
Our next question comes from Kean Marden of Jefferies.
Morning, all. I have two. Apologies, Dominic, I think the first one you may characterize as an analyst type question. I appreciate you're slightly reluctant to think about incremental margins as the business recovers. Would the math be correct that if we look at the sort of revenue and margin narrative that you've communicated today, it suggests something like a 25% margin on the sequential improvement in revenues, sort of H1 this year on the second half of next year? A quick question for Karen. You mentioned earlier that interestingly, your contracts bit was still a third, a third, a third. I guess the characteristics of those contracts have changed quite a bit. You sort of referenced this a little bit when you talked about putting some floors in place.
Maybe if you could sort of dwell on those and potentially what reverts back to sort of prior contract norms, as the post-COVID environment improves.
Thank you for those questions. I'll take the first one and then hand to Karen. On that incremental margin performance, I think what we have to remember is, from quarter four to first of all, quarter three to quarter four, and then quarter four to quarter one guidance, we've probably only seen 10 points of volume improvement. What you first get is the step change from the contract negotiations that we've entered into and the benefit of resizing to the expense that's flowing into the P&L and isn't replacing government support for previously furloughed roles as such. You inevitably get step changes in our operating margin that won't be linear, and therefore I don't think the 25% rule can apply. If you think about it, we went through a very deep process through the depths of the pandemic to renegotiate all contracts.
In many instances what we were doing there is agreeing with clients that we could invoice our losses. As we see the benefit of that gets us a step change in margin. When the volumes come back, we then need to have another conversation with our clients which says, what's a fair margin on lower volumes, and how do we get back to the old structures? There's an awful lot going on there in how we build back that margin that means it's not a linear, and it's difficult to apply a rule of thumb to. As you've heard us say today, we expect to make strong progress in the first quarter.
I mean, to have gone from guiding to 2.5% from -5% to 2.5% with only 10% of volume improvement, I think really shows the strength of the actions. We'll continue to work it from here.
I think Dominic started to answer some of that question, but let me just continue with that. You're right, our contracts are still about a third, a third, a third. We actually like that portfolio. Clearly, given the impact of the pandemic, we have to be able to open our business units profitably. We've had very great response from our clients in general. We have renegotiated pretty much everything that needed to be renegotiated. We have got tens of thousands of contracts around the group. The teams have done a phenomenal job here. Some of those renegotiations will be of a temporary nature, some will be more permanent. What we're making sure that we are doing when we're signing new contracts is make sure that we have got the robust protections that we feel that we are going to need going forward.
We've always had CapEx buyback protections in our contracts, but now we're working with clients to get the right kind of volume protections in place too.
Great. Thank you, Karen.
Our next question comes from Tim Barrett of Numis.
Hi, morning, everybody. Just one topic left on mine, I think. Can you talk a bit more about sports and leisure? I know it's only 10%-ish, but clearly a very profitable part of your business. The fact you haven't talked about it within the 4%-6% revenues, I guess, tells us you think there are no permanent changes. What are your clients telling you about resumption in sports and leisure, and how do you feel about that longer term? Thanks very much.
I feel quite positive about sports and leisure, if I may. Is it binary? I think the advent of a vaccine will allow us to get back into stadia. Between now and then, I think we will see bolder reopening plans, albeit at lower levels. A lot of our business is done in hospitality, which is likely to open first. I think that is a positive for us. I think there's an incredible will, publicly and privately, to get these sorts of events back open for everyone to benefit from. I feel positive about it.
We've been very deliberate in sports and leisure that we believe we've got the best operators in the industry in the U.K. and the U.S., and we've kept our management teams as intact as we possibly can, because we believe being able to reopen is going to be quite challenging in the near term, and we want to do it flawlessly to enhance our reputation. We also believe that that will allow us to be a net winner over time. I hope we're not being naive. I think the vaccine is important, but I also believe that there's very strong will and a huge amount of pent-up demand, as we can all imagine.
Okay. Nothing assumes in the margin recovery in the first quarter, I guess, because you say it is pretty binary.
No, we very much assumed the sports and leisure recovery in line with the slow recovery case we talked about back in May, which would see some activity in the second half.
Great. Thanks, Dominic.
Thank you. Thanks.
Ladies and gentlemen, this concludes our question and answer session for today. I would now like to turn the call back to Dominic Blakemore for any additional or closing comments.
I'd just like to say thank you all very much for your contributions this morning. We've got to know each other very well over the years, and it's been a very challenging year for all of us. We'd like to wish you from Compass, a very peaceful and restful Christmas break. We look forward to talking to you in the new year and hopefully having some more positive updates and hopefully further news on the impact of a vaccine positively for our business. Thank you.
This concludes today's call. Thank you for your participation. You may now disconnect.