Good morning. Thank you for joining us today. At our meeting in May, I highlighted the significant competitive advantages that Compass has established. Today, we'll show you how those advantages are allowing us to capitalize on the structural growth opportunities in our industry. Back in May, I talked through our strategic priorities, what we call the three Ps of performance, people, and purpose that underpin sustainable profitable growth. After Karen has walked you through the financials, I'll talk about how our three Ps have contributed the strong performance we're reporting today, and how they underpin our potential for the future. First, I'd like to look at the results we're reporting today, the performance in our regions, and the decisive actions we're taking, which give us real confidence in our positive outlook for the future. We've delivered another good year, as you can see here.
Organic revenue growth was 6.4%. That's ahead of our target range of 4%-6%, and the highest organic growth we've delivered in over a decade now. Operating profits increased to GBP 1.9 billion, and we maintained our strong group margin at 7.4%. The business continues to be really cash generative with free cash flow of GBP 1.2 billion. On a constant currency basis, EPS was up by 6%, and we're proposing to increase the full-year dividend by a similar amount. I'm really pleased with our organic revenue growth in the year. We continue to win good new business from first-time outsourcing, and those wins reinforce our confidence in the structural growth opportunity. We're also gaining market share from both large and regional players. Our client retention remains strong at 95%, and we grew net new business at 2.7%.
Like-for-like revenues also grew nicely, up 3.7%, as we benefited from both pricing initiatives as well as good volume growth, particularly in sports and leisure. I'd now like to look at the performance of the regions. North America, which now accounts for 62% of the group, is in really good shape. We had another very positive year, delivering organic revenue growth of 7.7%. That growth has been broad-based and was particularly strong in B&I, and sports and leisure, as you can see from the graph on the right. Encouragingly, 40% of our new business wins continue to come from first-time outsourcing, and our retention rates remain high at 96.4%. North America profits grew 9%, and our margins remain very strong at 8.2%. That's a great outcome against the background of the higher labor inflation and mobilization costs, which we continue to mitigate.
We see a great opportunity for Compass in the North American market. Around 70% of the market is either still self-operated or in the hands of regional players. We remain really excited about the structural growth opportunities. We're also delivering great growth in B&I, which is the most penetrated sector. We're doing that by using innovative culinary and technology concepts, such as in our Canteen Vending business, which is particularly relevant for clients who don't have the space for traditional restaurants. I'll say a bit more on this later. In Europe, we increased organic revenue by 4.1%. We generated good levels of new business, such as winning the U.K. defense contracts and Puy du Fou, a theme park in France. Our retention rates in Europe have slightly improved from last year, and like-for-like revenues have performed well.
A favorable sports and leisure events calendar in the U.K. has led to our generating strong volumes, which more than offset the increasingly challenging B&I trading environment. The margin in Europe declined 60 basis points, due in part to the higher mobilization costs associated with the new contract wins I've talked about, and more significantly, due to the decline in B&I volumes that we saw in the later part of the year. We recently appointed Venki Shantaram , a member of our executive committee, who was previously responsible for our Middle East, Africa, and Turkey region, to now lead the continental European team following the retirement of his predecessor. We've made good progress in recent years to improve the quality of our European business. To improve efficiency, particularly in the way we buy things, we've organized our countries into regional clusters.
We've also exited non-core businesses, such as our security and cleaning businesses in the U.K. We're becoming even more food-focused and we're increasing our capability to create sub-sectors through targeted acquisitions. I'll talk more about this later on. We believe the structural growth opportunity in Europe remains really attractive with relatively low penetration rates and over GBP 40 billion of the market still self-operated. The business in Europe is in good shape, but we're not immune to the wider macroeconomic challenges. We reminded you at Q3 that we were seeing pressures on our business, particularly in our larger markets. The graph shows the decline in Eurozone manufacturing, which is trending today in a similar way to 2012, when we took prompt action to restructure our Southern European business. Some of our manufacturing, automotive, and financial service clients are reducing headcounts or changing their shift patterns.
In turn, that leads to lower employment levels and fewer people eating in our restaurants. This uncertain macroeconomic environment is also resulting in delayed decision-making, that impacts new business opportunities, particularly in the U.K. In the fourth quarter, the decline in B&I volume accelerated, that hurts our European margin. We're taking decisive action to address these challenges. In particular, we're adjusting our MAP 4 and MAP 5 cost base, principally in Europe. We have also extended those activities to certain markets in the rest of world in response to other trends that we're seeing. These actions will help offset short-term margin pressure and will importantly allow us to capitalize on future growth opportunities. Karen will provide further details on the numbers. The performance in our rest-of-world region continues to improve.
Organic revenue growth increased to 4.3% compared to 2.9% last year. That includes strong performances in Turkey, India, and Spanish-speaking LatAm. Our profits grew 5.9%, and our margin improved by 40 basis points. That improvement came mainly from our investments in the pricing, purchasing, and productivity initiatives, as well as the changes we've made to our portfolio. 2019 was a good year. We delivered organic growth above 6%. We've made excellent progress in North America. Europe has delivered good organic revenue growth despite the weakness we saw in B&I. We're taking prompt action to mitigate volume pressures on margin. Finally, in the rest-of-world region, our performance continues to improve. I'll now hand over to Karen to take you through the performance in more detail.
Good morning, everyone. Let's start with revenue. As Dominic highlighted, our growth in North America continues to be excellent. We improved organic revenues by 7.7%, and all of our sectors put in a strong performance. Our new business pipeline remains encouraging, and we expect another good year in 2020. Europe's organic revenues increased by 4.1%, principally driven by the U.K. For the first time since 2016, continental Europe was also in growth, but at a lower rate than the U.K., and organic growth in the rest of the world was also good at 4.3%. The absolute increase was lower because we disposed of some non-core businesses. Historically, rest of the world included Turkey. Following the recent management change that Dominic mentioned, it will now be reported in Europe, and there's a slide in the back of the pack to help you model this change.
In total, group organic revenue grew by 6.4%, slightly above the top end of our target, 4%-6% range. Turning to profit. We increased group operating profit by GBP 84 million. That's on a constant currency basis. In North America, profit was up by GBP 106 million. We delivered a high level of organic revenue growth at a consistently strong margin. In Europe, although organic growth was good, profit declined. That decline was principally due to the impact of reducing volumes in our B&I sector and investment in new business. Rest-of-world profit increased by GBP 16 million with our teams delivering both higher revenue and increased margins. We invested a further GBP 12 million in capability to support our growth agenda, investing in the Purchasing, Pricing, and Productivity initiatives, expanding our international clients team. Margin in North America remained very strong at 8.2%.
In Europe, the margin fell by 60 basis points. As Dominic said, our margin erosion in Europe was primarily due to the weak macro environment hitting B&I volumes. We're taking Cost Actions to mitigate the impact of that decline. We're pleased that rest-of-world margins improved by 40 basis points, benefiting from investment in our pricing, purchasing, and productivity initiatives, and changes to the portfolio. For the group as a whole, the mixed benefit of higher margins in North America offset the decline in Europe. Overall, we delivered a flat margin for the full year. In 2020, we expect group margin to remain stable. Here you can see the financial impact of our Cost Actions program. That program will result in a non-underlying charge of around GBP 300 million. Of the GBP 300 million, GBP 190 million has been accounted for in 2019. The remainder should be incurred in 2020.
It's important to highlight GBP 160 million of the charge is cash. That relates mainly to MAP 4 and MAP 5 labor costs. It has a payback of around two years. GBP 140 million of the charge is non-cash and principally comes from onerous contracts in our European B&I sector. These contracts have been impacted by the recent deterioration in business and in consumer confidence. We now consider these contracts to be structurally loss-making, and they've been impaired. We expect an annualized benefit from these actions of around GBP 90 million from 2021 onwards. The slide also illustrates the full year impact of lower B&I volumes at different levels of decline on both revenue and profit in Europe. We're currently experiencing B&I volume declines of between 5% and 6% in our larger European markets.
In the table, you can see how a 6% decline in European volumes for a full year would impact profit by approximately GBP 60 million, and therefore, how the actions we're taking and the savings we expect to generate would offset the impact of these economic headwinds and underpin our group guidance of continued strong margin. Looking at the remainder of the income statement, our net finance costs were GBP 110 million. That's slightly lower than last year. We expect net finance costs in 2020 to remain at around that same GBP 110 million. Our effective tax rate was 23.3%. It was down a bit from 2018 because it reflects the full year impact of the U.S. federal tax rate introduced by the Tax Cuts and Jobs Act. Our current expectation is that the 2020 ETR will be around 24%.
Constant currency EPS is up by 6%. In line with our dividend policy, we're proposing to increase the full-year dividend by a similar amount. Moving on to operating cash flow. Depreciation and amortization increased to GBP 577 million. That increase from GBP 521 million last year was the result of our continuing investments in CapEx. Gross capital expenditure was 3.4% of revenue, in line with our guidance. CapEx is an important tool for driving strong growth rates and delivering solid returns. For 2020, we're reconfirming our guidance of up to 3.5%. Improved cash collections helped drive a working capital inflow of GBP 59 million. Operating cash flow was therefore up by 7% with a strong conversion at 90%. Our free cash flow conversion was also very strong at 66%. Net interest of GBP 107 million was up due to the timing of interest payments.
The underlying cash tax rate reduced to 19%, but we expect that to increase in 2020 to approximately 28%. A significant contributor to this is the change to the U.K. tax payment schedule to six payments in the year, which impacts all large U.K. corporate taxpayers. From 2021 onwards, it reverts back to four payments per year. Our opening net debt was GBP 3.4 billion. During the year, the business generated cash of just over GBP 2 billion. That's before CapEx. We invested GBP 806 million in net CapEx to support long-term growth. Our acquisitions totaled GBP 478 million, with disposals generating GBP 101 million of proceeds, netting to a total of GBP 377 million. We returned GBP 611 million to shareholders in the form of ordinary dividends. Foreign exchange and other items increased net debt by GBP 148 million. Our closing net debt to EBITDA ratio was 1.3 times.
Including Fazer, which is expected to complete shortly, our leverage would have been 1.5 times, in line with our target. As you know, we're actively managing our portfolio and disposing of non-core businesses to sharpen our focus on food. We're making good progress. Far, we've sold or exited GBP 670 million of annual revenues and received GBP 130 million of proceeds. Since the half year, we've disposed of our business in the Japanese sports and leisure sector and some other small businesses. While in total, this review is expected to be margin and growth neutral, businesses we've already sold have been operating at lower than the average group margin, or they've been loss-making. The disposals were modestly accretive to margins in 2019, and this will unwind as we dispose of the higher margin businesses. We continue to be excited by the structural growth opportunity in our sector.
To support that opportunity, we will invest up to 3.5% of sales in CapEx. We'll also pursue bolt-on acquisition opportunities where they strengthen our capabilities and meet our strict returns criteria. Our aim is to maintain a strong investment-grade credit rating. We're targeting a full-year net debt to EBITDA ratio of around 1.5 times. We'll also continue to increase the ordinary dividend in line with constant currency earnings growth, and we will return any surplus cash to shareholders through share buybacks or special dividends. It's worth noting that this leverage target is prior to IFRS 16, which will apply to our 2020 results. For Compass, the main impact will be on debt as we bring operating leases onto the balance sheet. Our initial estimate is that net debt will increase by around GBP 1 billion, and leverage will go up by around 0.3 times.
Since this is purely an accounting change, we expect to raise our leverage target to 1.8 times in line with this increase. We expect no impact to our credit rating, and the change doesn't impact net cash flows. In terms of our income statement, we expect IFRS to be immaterial to earnings per share. We'll give you more detail at our half year results in May. Thank you for listening. Now back to Dominic.
Thank you, Karen. I'd now like to take you through the progress we've made on our Performance, People, and Purpose priorities, and how they position us for better quality, more sustainable long-term growth. First, I'd like to recap on the strong business we have today. Compass has built significant competitive advantages, which lets us exploit the very real structural growth opportunity in food services. We're the global leader with just over a 10% market share. This position we're incredibly proud of, but as I've said many times before, we're not complacent. We're focused on keeping our leadership position by maximizing the attractive future growth opportunities that we see around the world. As I said right at the start of today's meeting, we're continuing to make progress in optimizing our portfolio to become an even more food-focused business.
Our core competency is in food services, and that's where we believe we can differentiate ourselves and add the most value. We're divesting non-core businesses in geographies which are either subscale or lack growth potential. We're reinvesting the capital we raise from these disposals, along with the cash we generate from our core businesses, into bolt-on acquisitions. That means buying food-focused businesses, which further enhance our proposition and deliver more innovation for our clients and consumers. The proposed acquisition of Fazer Food Services is a great example of this strategy and will be one of our largest transactions in Europe. Fazer is a leading contract catering business in the Nordics, with sales of around €600 million. It has a clear focus on food, sustainability, and culinary innovation.
It's an excellent strategic fit for Compass, we'll be able to enhance our current offering and better capitalize on what is a very large addressable market opportunity. We continue to see a long-term growth opportunity in Europe. We're copying the approach we use in North America, where sectorization and sub-sectorization has been key to our success. In fact, a lot of our U.S. brands were originally acquisitions. In Europe, historically, we mainly use the U.S. brand across the B&I sector. We've had to address a broad and diverse client base. Over the last couple of years, we've been investing in high quality and innovative brands and concepts across the region and also across our sectors. Recent purchases include Artusi in France, Dine in the U.K., and Gourmet Invent in Belgium. We've also built brands like Food Affairs in Germany and Exalt in France. Exalt is a great example.
It's a high-end B&I brand, principally in Paris, which in just a few years has grown sales to nearly EUR 90 million. These acquisitions and in-house developments will allow us to sub-sectorize in Europe, build scale, and develop our own in-house expertise. It's not just about the offer and its importance, it's also about operational excellence, which we continue to manage through our MAP framework. Back in May, I talked to you about the progress we were making on codifying and sharing our best practices around the group. I'd now like to expand on that theme and give you some further examples of how we're driving revenues in both MAPs 1 and 2, and delivering purchasing efficiencies in MAP 3. First, I'd like to talk to you about our growth acceleration program.
We know that where our businesses are strong, it's because we have a joined up approach to new business, client retention, and the consumer offer, which creates a virtuous circle of growth. Our program builds on existing processes and tools to get all markets to a common standard. Building the right capability in each market will set us up for growth in the future. We've created blueprints, tools, and training for each stage of the wheel to support our businesses. Ultimately, it's about having the right solutions at the right time, and of course, they must be at the right price. At the half year results, I touched on the consumer experience. As I mentioned then, consumers are demanding more variety and convenience from their food service providers. As the global leader, we're really well positioned to capitalize on changing consumer dynamics.
Our decentralized structure means we can innovate locally and identify concepts that can be rolled out globally. We've been investing in and piloting various new concepts for a number of years now. They're mainly in the U.S., and include pop-up aggregators like our own FoodWorks business, which I'll talk more about in a minute, as well as Compass-owned delivery businesses like CxRA and Occasions Catering on the East Coast, and LiveFeed and Cosmopolitan Catering, which serve parts of Silicon Valley. We also have a number of relatively early-stage partnership pilots with B2C delivery players. We see these propositions as being particularly relevant for certain sectors of the market, such as B&I and higher education. Although they're currently relatively small in scale, they still account for around $250 million in revenue, and they're profitable.
In many ways, this is a natural evolution for parts of our business and are an interesting incremental growth opportunity for Compass. FoodWorks is an innovative aggregator which has a roster of popular local restaurants that help provide variety for our clients and consumers. The pop-ups can either supplement the existing food offer or provide a curated offer for small businesses that don't have the necessary kitchen infrastructure. FoodWorks already operates in 21 cities across 7 sub-sectors in North America. Each vendor has to pass strict qualifying criteria, and we have frequent health and food safety audits. Moving on to MAP 3. As you know, one of our competitive advantages is the scale we have in North America when it comes to procurement. It isn't just about the scale. Having the right processes, the data, and technology are also hugely important in driving purchasing efficiencies.
We're now improving the way we transfer expertise from our best-in-class markets by again applying this blueprint approach to other countries. That includes improving our category management, closer aligning our purchasing and operations, and making sure that our countries are being supported by the right in-house expertise. For example, this year we launched a common data-driven online ordering platform for our unit managers throughout Foodbuy UK. This has the advantage of better controlling and standardizing how we buy. It removes our dependence on other third-party systems, as well as being able to build in Compass-specific requirements, such as allergen management. In 2019, we purchased over 130 million items through this platform, amounting to a total spend of over GBP 800 million. Moving on to people, where we're continuing to make great progress. It's critical that our colleagues are highly engaged and passionate about working for Compass.
Last year, we conducted a study to better understand what's really important to our people. As a result, in September, we launched our three commitments of respect, growth, and teamwork. This year, we also launched a global engagement survey. The results of the survey will allow us to identify areas where we need to take action and provide support. In turn, this allows us to improve our employee retention and our customer service. Unit manager training is an important initiative which we launched earlier in the year in July. So far, over 2,000 unit managers have participated in this tailored off-site training program. Finally, on diversity and inclusion, I'm pleased to report now that 36% of our PLC board and 38% of the executive committee positions are held by female colleagues. We're continuing to invest in initiatives to further increase diversity beyond gender across the wider group.
On to our purpose agenda. You'll now be familiar with our nine action platforms. Last time, we talked about Stop Food Waste Day under the environmental game changers pillar. Today, I'll describe some of the actions we're taking to promote health and well-being. Last year, we served over 5.5 billion meals, that really does put us in a unique position to improve the health and well-being of our consumers. Nutrition is becoming an increasingly important part of our proposition, we're working with our clients and consumers to help raise awareness and influence their nutritional choices. We've salt, fat, sugar, and calorie reduction programs in place across most of our key markets now. We're offering more vegetarian options, we're encouraging healthier choices through behavioral economics.
A good example of this is increasing the prominence of healthy items and changing the menu language and presentation to encourage our consumers. On mental health, we've been taking steps to support the well-being of our own employees through several global initiatives which raise awareness, build support programs, and reduce the stigma associated with mental health problems. We recently completed a successful biometric mental health monitoring trial with Medibio with volunteer employees from our U.K. business. A wearable device and inputs into a smartphone app allow for early identification of signs of anxiety or depression, and the employees then receive personalized support and coping strategies. We really believe programs like this, combined with healthy food choices, can be good for our people and have real commercial value to our clients as they focus on the total well-being of their people. In conclusion, Compass had another strong year.
We're making good strategic progress by having a really disciplined focus on our performance, people, and purpose initiatives. As we've explained, we've continued to reshape our portfolio. We remain excited about the significant structural growth opportunities that we see globally. Our expectations for the group in 2020 are positive, although we do remain cautious on Europe. The pipeline of new contracts in North America is really strong. Rest of world is improving, and we're addressing the European challenges decisively. As a result, we're confident of continued good progress, and we expect organic growth to be around the midpoint of our 4%-6% range, whilst at the same time maintaining our strong group margin. Thank you. Now we'll take your questions.
Kashu.
Morning. Hi, it's Vicki Stern, Barclays. Just firstly, on Europe, with regard to the volume weakness, you'd mentioned a few items, including within that changing shift patterns. Just curious, is this all macro, or do you think there's anything structural going on around flexible working, anything around delivery? If you can just talk to the sort of macro versus structural elements of that. Also, why do you think your competitors aren't sort of calling it out as much in their reporting? Secondly, Rest of World, I think even if we strip back sort of contract exits in Q4, that the underlying run rate there seems to be around 6.5% in the quarter. Just sort of any reason why that kind of high pace of growth shouldn't continue into next year?
Finally, just around like-for-like, the mix between price and volume, what you're seeing in terms of price pass-through and any sort of regional color you can give us, particularly for North America, please.
Okay. I'll take the first and third questions, then Karen, why don't you pick up on Rest of World afterwards? First of all, with regard to Europe. I mean, absolutely, we believe it's macro rather than structural. Yes, we see a little bit of working from home on Fridays. This is predominantly about the macroeconomic conditions. We've called out major economies, U.K., France, Germany. We're seeing it in some of the other European countries as well. I think it's probably right to say, we've seen a number of multinationals who've announced significant global restructuring programs across financial services, automotive, manufacturing, and telecoms. Our European businesses in Continental Europe, 60% B&I, and across the whole of Europe, 50%, so we are exposed to that.
We believe, right now, it's absolutely the right thing to do for us to adjust our cost base in line with the reduced volumes that we see at our client sites. For those of you who remember 2012, it's very analogous. We've decided to take actions quickly and deeply, and we believe that the savings that we generate will allow us to address the trends we called out in quarter four, and a potential worsening of those as we walk into 2020, and beyond. Again, for those of you who remember that, as a result, we grew both our profits and our margins in Europe. We'd like to think that the actions we're taking now are very similar. In terms of competitors, I mean, we can't really talk to what they're seeing.
I know we have slightly different footprints in the fact that we have a greater exposure to B&I and also to some of the Northern European markets. We can only respond to what we're seeing and take the actions that we think are appropriate, and that's exactly what we're doing and announcing today. On like-for-like and price volume pass-through, I think it's important to call out the strong quarter four volumes were in sports and leisure. Those come with a slightly below average unit margin, they're not pure pass-through. I think the volume there is good, profitable volume growth we saw in the fourth quarter. In terms of price as we go forward, we are, as we said before, seeing a little bit more price across all markets as we've seen higher inflation both on food and labor. We don't expect that to dissipate.
We continue to expect to see a bit more price. I think the only significant volume change is what we've called out today in Europe, where we would expect to see that trend in B&I of 5%-6% negative to continue through 2020, which would weigh a couple of points on the European regional revenue growth. Rest of World.
Rest of World. Vicki, I think it was a strong quarter, but probably a couple of things that are worth drawing out. We actually sold one of our non-core businesses, a sports and leisure business in Japan. Because we don't restate the full year, there's a benefit of that to the tune of about 1% that's sitting in the Rest of World Q4 organic growth. The second thing that I would tend to draw out, which we referred to when we presented quarter three, was that we are seeing the end or a reduction to the drag of offshore and remote in that Rest of World region.
Thanks. Jamie Rollo from Morgan Stanley. Three questions as well, please. First of all, on the 7.9% gross contract wins, I was sort of surprised. That was quite a big slowdown from last year. Obviously, still a good number, but your weakest number for a decade, despite sort of quite high CapEx to sales. If you could talk a bit about that, please, that would be helpful. Secondly, on the restructuring, on the non-cash side, is that just simply writing off prior CapEx spend? Just to clarify that, please. Finally, on the margin guidance, I assume that the guidance for flat margins includes the dilution from Fazer coming on initially, at least, and also the dilution from selling above average margin businesses. Thank you.
Again, why don't I take the first and third questions, then I'll pass you the restructuring question, Karen. First one on margin guidance, absolutely, Jamie. Our margin guidance includes all factors, which would be any impact of M&A, which, as you quite rightly say, on acquisitions and on disposals will be dilutive to margin. It also includes the impact of the run rate that we anticipate on the European B&I volumes, and also the benefit of the actions we're taking. Our margin guidance is all in for all of those factors. Secondly, in terms of the gross contract wins, we're still very pleased with the gross contract wins. At 8%, we think it's still a very good performance. If you actually take a look at it in its regional breakdown, we've got over 8% gross new contract wins in North America.
We had our best ever year of new business sales last year in North America, and the pipeline remains as buoyant as it's ever been. In terms of that region, which is 62% of the group, we remain very positive. Our new business wins in Rest of World were 9%, which is again, I think, a very good performance across that footprint. What's markedly different between 2018 and 2019 is our new contract wins in Europe. If you recall, in 2018, we would've been reporting new business, particularly in U.K. defense, which was very material. As we've said today in the release, and I said when I spoke earlier, we are absolutely seeing a slowdown in decision-making in Europe in the short term. That's marked in the U.K. currently as we walk through the Brexit situation. We would hope that that is something that improves.
As you've heard today, all our efforts are about, in the medium term, continuing to grow new business in Europe.
In terms of the restructuring. The non-cash charge of GBP 120 million relates to contracts that we deem to be structurally loss-making. That means that even taking management action wouldn't put them back into profit-making territory. It is a relatively small number of contracts. We're talking tens of contracts in the context of a business that's got tens of thousands of contracts. They are in the sectors that Dominic has talked about, where we can see our clients actually taking action to reduce headcount. In terms of what the charge comprises, the accounting rules say that to the extent that you are providing for onerous contracts, then you need to first of all impair anything that you've got, either on tangible assets or intangible assets. There's a chunk of that charge that relates to that. Then you take a provision for ongoing losses.
There's kind of two elements to it. These are not contracts that were written recently. Yes, they do have a little bit of CapEx that we are now writing off.
What's the mix?
It's a little bit more impairment than ongoing losses.
I think-
About 60-40.
If that was GBP 50, 60 million, it compares to GBP 800 million a year of CapEx spend.
Yes.
Obviously these contracts were built up over a number of years. Jarrod?
Good morning. Thank you. It's Jarrod Castle from UBS. You talk about a GBP 90 million ongoing benefit from full year 2021, which, if you kept 100% of that, would be about 150 basis point uplift on your Europe margin. Should we be thinking maybe half of that you keep, so you get back to 7%? You also said that the margin decline in Europe could be split between new contracts and obviously the pressures you're seeing. Can you maybe just give a bit of color on that, please? Just lastly, looking ahead, obviously Sodexo called out both the Olympics and the Rugby as a 1% organic growth benefit in their financial year. Would you care to give some color from your perspective? Thanks.
I'll take your second and third questions, and then Karen, you can pick up on the restructuring point. First of all, when I talked about an impact on new business, it wasn't with reference to margin in Europe, it was specifically with reference to growth. I think as we look forward, we'll see two factors impacting European growth. One will be the slowdown in decision-making on new business, and the other will be the decline in B&I volumes. We're guiding today to European growth, which we anticipate will be sort of 0%-1% within our overarching, call it 5% group growth. That takes account of both of those factors as we see them today and would imply a 2%-3% drag on European growth from the volume declines, to make that absolutely clear.
With regard to sporting events, as you will recall, we've always shied away from major one-off sporting events. We find them particularly difficult to mobilize and operate and are higher risk to our day-to-day business. We prefer just the blocking and tackling of the core calendar, as it were. You won't be seeing any of that impact in our rest of world region next year. Just before Karen talks to the detail on the restructuring, I think it's important for us to say as well, we've talked today about a number of clients that operate in a number of sectors. We do feel we're a bit of a bellwether for the economies that we operate in. I think we have got that track record of taking action quickly and deeply.
I think you'll hear in Karen's response that we're trying to build in all the necessary contingency for thoughtful management of that.
Just to that point, we have been dealing with volume decline for a while, and we saw it accelerate in Q4. In Q4, in B&I in Europe, we saw some volume declines of about 5%-6%. Therefore, we thought, well, from a position of strength, we'll actually take some decisive action. What you've got in the pack here is just an illustration of what that could mean. The illustration in the pack says, for sure, the actions that we're taking will have an annualized effect of about GBP 90 million by 2021. If we assumed that volumes, and only volumes, declined by 6%, so that's the high end of what we saw at the end of Q4, then with no other changes, that could impact us by about GBP 60 million.
As you can imagine, we're trying to build in a little bit of contingency to protect us against things that we can't really predict at this time of the year. We've only just started the new year. There's a whole lot of other things that go into the mix. At the moment, I think we are trying to manage what we're seeing. If there's any upside, then that would be great.
Do you think you can get back towards a 7% margin for the business?
The first thing I'd say is, look, in a matter of just a couple of weeks, we saw six or seven clients announce 100,000 job losses across multi-year, multi-country. I think that's the sort of territory we're dealing with and the uncertainty and volatility. We're taking what we think are the right actions. Does it mean we can get back to 7% margin? We've always said we believe there's more margin potential in this business. It will be a balance of factors in any one year as to the headwinds and tailwinds that we're facing. We think we're taking the right action for what we see today. Will it give us an upside benefit? We don't know.
Hi, morning. It's Jaafar Mestari from Exane BNP Paribas. Just two questions for me. The first one on the Europe plan. You're obviously right that 2012 offers a good track record, I suppose, on that basis. It was slightly different because there were material business exits, entire country exits at the time. You shed 3% of your revenue. It was a bit easier to understand how you're going to deliver that. As you correctly said, margins improved 70 basis points on net basis. It probably is not fully comparable. If you could maybe elaborate on the differences here and how you're going to achieve those savings? My second question is on the U.S., where the healthcare segment has been a star for years.
This year, I think if I look at your qualitative descriptions, this bar chart shows that four of your seven healthcare segments are actually below North America average. Two of them are right at the bottom. Looks like a 2%. This year, sports and leisure saved the day. What's the plan for next year? Is U.S. healthcare going to improve? Can you see any other segments saving the day again if that growth driver is a little bit less of a contributor?
Surprised by the phrase "saving the day." I'll take the question in the spirit it was intended. Yeah, look, absolutely, healthcare has been a terrific business for us. If you go back two and three years, it performed above average. I think we've always said when you go through growth spurts, that after that, we sometimes see slightly lesser growth as we digest what we've won in previous years. I think that's absolutely what's happened here. I think you will see a very strong performance from sports and leisure next year or in 2020. Likewise, we've seen we've had a couple of years of lesser growth in higher ed. We've seen a very strong year from higher ed. That is also a sector which uses more CapEx. I think to reassure you there that we feel positive about North American growth into 2020.
The mix of that growth may be different. I think you'll always see that. With regard to your questions on Europe, I mean, first of all, yes, you're right, aren't you? The conditions of 2012 are different to today. 2012 was sovereign debt risk. It was about public sector clients. It was predominantly Southern Europe. Where I see it being analogous is that we took the same actions. We had to address particular contracts, we had to address particular client exposures. We had to address our labor efficiency levels, both on-site and within our head offices as a result of the new activity levels. That's what's analogous. I think the risk now is in different markets and across private rather than public sector.
In terms of the savings, we've announced today it's a two-year payback on the cash cost elements, which I think you would also see is broadly in line with where we were then. I think what you'd probably expect in those markets. I'll leave it to you to draw your conclusions to what you're seeing across other clients in those industries and markets. Sure, yeah, Jeff.
Thanks. James Ainley from Citi. Two questions, please. Just first on the GBP 90 million annualized cost savings, can you just split them down, please, between the onerous contract provisions and then the kind of cash labor cost savings? Second, if I look in the pack, your return on capital employed weaker in North America, I guess impacted by the mix of business and the demands for CapEx in different areas. Can you talk about the returns you're targeting and you're achieving on that CapEx investment in North America? I think you said in the past that you're targeting it to be at least in line with the group average, therefore, should we expect North American returns to continue to decline?
I'll take the second question, then pass the first to Karen. Look, in terms of CapEx, we're still really excited by using CapEx in the North American business. It's given us great growth. It's given us longer than average contract life. We said before, where we deploy CapEx, we get an eight-year contract life. The average for North America is now at seven, in part because of that use of contract. That means we have less retention risk, we print a better retention number, and we're more tipped to growth. We think it's a really important use of CapEx in North America. The returns get tested, as do the returns on all capital proposals in all parts of the group, and approved at various levels within the group. Yes, we're targeting returns in North America which are above the group average.
In terms of the GBP 90 million annualized cost savings, those are coming from the labor cost savings? Yeah.
Morning, Tim Barrett from Numis. Could I just ask another question about slide 17, the sensitivity analysis? It looks like you're suggesting there a 36% drop through from revenue to profit of the volume changes. Can you talk about the logic of that and how conservative it might be or otherwise? Just a high level question about labor costs next year. Do you expect any change in the cost inflation on labor versus this year?
Well, I think the 35% is broadly the level we've always talked about in Europe, which is about the fixed labor cost, post variable labor, and includes other overhead costs within the P&Ls of the units, which we consider to be fixed. Our European labor mix is obviously quite different to North America, where we have, for example, greater labor turnover and the ability to flex labor within turnover more dynamically, and also with much lesser labor protection and therefore cost. Quite a different model to touch on that. The second point?
The labor inflation, similar-ish to what we've seen this year.
Hi, good morning. Richard Clarke from Bernstein. Just two questions from me. The cost savings you're putting through, maybe you can just give a little bit more detail. What labor are you actually taking out? Why are you taking out now if that opportunity has existed for a few years? What opportunities will there be to take that out if, say, volume started declining in the U.S. as well? Could we expect similar offsets? The second question is just a largely political one, but given you're one of the U.K. companies with a big rest of world exposure, are there any contingency plans in place for a Labor government relisting in the U.S. or anything similar?
First of all, just talking about labor. Look, we didn't have the need to adjust labor in previous years, right? We didn't have the volume declines, and our industry is also about quality of service. You need to have the right resourcing levels to provide a quality of service to the participation or number of people eating in our restaurants. It's as simple as that. We've seen that need in the second half of the last financial year, and we've seen it accelerate very quickly, and therefore we're taking the actions that we're taking. We've said before, look, our labor turnover rates in a number of our European markets would be below 5%. That's quite different to North America, where it would be at still 35%-40%. You get a lot of natural churn, which allows you to dynamically flex your labor model.
Of course, as we all know, protections in northern Europe around labor cost and so on are much greater. I think that's the combination of factors that's quite different. The conclusion, of course, is that our U.S. business should be able to deal with any of these circumstances, should they ever pertain, much more dynamically. In terms of politically, of course, you would expect us to be considering all scenarios at all times. It's been a matter of board review. I think that's all I really need to say. Sorry, Vicki. Yeah, please.
Sorry. Just changing tack slightly. Just interested in what you were saying around the delivery. You said you're signing up a few, the trial B2C delivery partnerships. Just what do they look like? Are they around specific B2B from those B2C guys? Just a bit more color on what that might evolve to look like. Second, on FoodWorks, where you're using that to supplement an existing contract, I appreciate the economics of FoodWorks can be very attractive as it's commission-based, but where it's used as a supplement, are you net-net seeing less profitability out of those units? I guess you've got to give a profit share to the outside restaurant. Thanks.
Yeah. I think the principle with both is how do we bring the variety and excitement of the high street into the office? I think that both are alternative ways of us being able to do that. Firstly, with Foodworks, we obviously partner with high street restaurants. We have the technology, we have the delivery through our Canteen Vending operations to be able to provide that. It shows up as an app where our clients can choose the combination of outside restaurants that they want to bring in. We earn a commission. What we've actually seen is where we've got it fully up and running, we've seen incremental footfall in our units rather than any cannibalization. I think those people who were previously choosing not to dine with us and go onto the high street are now captured within our sites as they see greater choice.
As you said, we've grown now to 21 cities and $250 million of revenues. We're making money. We're really pleased with that. With regards to the B2C partnership, I think it's again, just an example of how can we combine technology and delivery to provide alternative offers to our client base. It's particularly relevant within event catering as opposed to the standard lunchtime offer, where we can partner with a number of different providers. The B2C model allows us to use that in effect in a B2B basis. We believe it can work to provide scale and volume to those partners as well as alternative choices to our clients. We think it's an exciting and thoughtful way of capturing that trend. Very good. Jamie again.
Just a couple more, please. I may have missed the answer, but on the like-for-like sales of 3.7%, could you break that down into volume and price on a full year basis, please? On the rest of world margins leapt again in the second half, up 70 basis points, though up 130 basis points H2 last year. I just don't understand where that is coming from and why it's always second half weighted. What's the margin guidance for rest of world next year and what's going on, please?
On the first question, like-for-like sales at 3.7%, it was about half-half. Obviously those volumes were supported by the strong sports and leisure calendar and Karen on rest of world margins.
Rest of world margins. For FY 2020, then let's just assume at this stage that they'll be about flat. The reason that they were weighted to second half of the year, was a function of changes that we were making in the portfolio, where we were disposing of the low margin businesses, and that just happened to weight itself into the second half of the year. Then actually, as we are ramping up our activities around what we call the three little Ps, around the pricing, purchasing, and productivity, that's a relatively new set of initiatives for us. We're seeing some good results come in in rest of the world. Japan and Turkey I'd probably pick out in terms of better pricing. Then just seeing some work in that region around labor management, both in terms of scheduling, but also in terms of retention.
Good. Any more questions? Any questions on the phone, no? Well, thank you all very much, and we look forward to seeing you at May for the half year results. Have a good day.
Thank you.