Just to remind you, this conference call is being recorded. Today, I am pleased to present Dominic Blakemore, CEO and Karen Wits, Group Finance Director. Please go ahead with your question.
Thank you, Christian. Good morning, ladies and gentlemen. Thank you all for dialing in. I'm delighted to be joined for the first time by Karen Wits, our Compass Group CFO. I'm sure you've all read the statement.
But before I open the call to questions, I'd like to say a few words on our performance and outlook. Compass continues to perform extremely well, delivering strong market leading growth and industry leading margins, whilst at the same time continuing to invest for the future, both through internal initiatives, our 3 Ps of performance, people and purpose and through bolt on acquisitions. For the full year, we now expect to deliver organic growth at the top of our 4% to 6% range. Consistent with this higher level of growth, we now expect margins to be flat compared to the prior year. Compass is a market leading business which continues to get stronger.
We saw an acceleration in revenue growth during the 3rd quarter to 6.7%, excluding the impact of Easter, to bring the group's organic growth for the 9 months to 6.5%. The excellent momentum in North America has continued. The business delivered 8.5 percent organic growth in Q3 and 8.1% year to date. This is thanks to continued good levels of new business wins across all of our sectors, but also a significant benefit from a favorable sports and leisure calendar. The business also maintained margin, a really pleasing result given the high level of growth.
In Europe, we're feeling some impact from the weaker economic environment on our volumes, particularly within BNI. Despite this weakness, we still think of a 2.9% organic growth in Q3, excluding Easter, and 4.3% year to date. However, that has resulted in margin pressure, which was down by a similar amount to the half year. Our performance in Rest of World is improving. The business grew 3.6% in Q3 and is up 3.2% year to date.
The pricing and productivity initiatives are beginning to deliver benefits, and the margin showed some good progression over last year. We continue to make good progress with M and A, further strengthening our position as the global leader in food services. During the period, we announced the acquisition of Faxa Food Services in the Nordics and strengthened further £100,000,000 on bolt on acquisitions in Europe and North America. I'm a firm believer in benefits of Focus. These acquisitions provide us with opportunities to deliver more compelling and innovative solutions for our clients and consumers.
And finally, we're continuing to invest for the future. We're beginning to see benefits from our strategy, particularly in rest of world, where the pricing and productivity initiatives are having an impact, and we're investing more in the business where appropriate. So in summary, Telkis continues to perform strongly with an excellent performance in North America and rest of world improving, offsetting a more difficult volume environment in Europe. We continue to be excited about the significant structural market opportunity globally and the potential for further revenue, margin and profit growth, combined with further returns to shareholders over time. Thank you.
And now we're very happy to take any questions.
Thank Our first question comes from Jamie Rollo from Morgan Stanley. Please go ahead, caller.
Your line
is now open.
Thanks. Good morning, everyone. Three questions, please. First, obviously, a very good performance in North America with a strong outlook. Is it fair for us to assume that the company took the $200,000,000 of execution losses that Rex had talked about?
So does that mean you're seeing a higher mix of new contracts coming from the bigger competitors in North America? And secondly, on Europe margins, we could have expected that seems to be just like volume trends. So
are you taking any sort
of additional action there? Are you still reviewing that business? And if you haven't yet, what additional margin impact could that entail, please? And then finally, perhaps it's more of an observation, but for the 2nd year running, that weak year, your margin performance has been sort of offset by a much better than expected rest of world performance in margins. And despite the very tough comps in rest of world last year, I think second half margin cut was over 100 basis points.
So you're still keeping that going. So I'm wondering how much longer does the Rest of World keep coming to Europe Trust
Trustee? I'll take the question on North American performance and your third question around margins in Rest of World. And then I'll ask Karen to answer on European margins. So first, on North American performance. As you can see, we're absolutely delighted with the growth rate in North America in the quarter year to date.
The growth rate is sustained through good new business, excellent retention and strong like for likes as well. So it's a good balance across the cost of piece. We are winning new business at the levels we would like. We see a very strong pipeline. We see those wins coming across all sectors.
We talked about a weaker higher education performance in the previous year. We're seeing a strong higher education performance this year, but we're also seeing a strong health care performance this year as well. So we're delighted with both of those sectors. Yes, we continue to take some share from our competitors. But in the round, the balance of growth remains the sort of third, third, third that we've talked to.
And again, that's equally pleasing. In terms of your question on Europe versus rest of world margin, And look, Karen will talk to you about what's going on with the European margin. It's definitely a tricky time right now. So we're delighted that managing the full portfolio of the business, with the mix from North America and the strong performance in Rest of World, we're managing to maintain a very strong group margin. Yes, we're pleased also with the Rest of World performance.
We believe that we're seeing the early returns from our focusing on pricing, productivity and purchasing, particularly in the number of rest of world margins. And let's remember as well that there's always been an opportunity in margin in those countries where they're either lower margin with an opportunity to scale up or higher margin in some of our bigger businesses where we're seeing those initiatives paying off. And I don't think if you get carried away whilst we're lapping 100 bps last year, and that was on the back of, if you recall, the restructuring we did at the time across the oil and gas markets in particular. We're now seeing 10 to 20 basis points of margin progression, which is much more modest, and we would hope to see something about order of magnitude as we go forward. Karen, do you want to just take the Europe question?
Yes, sure. Well, the Europe margins are being impacted by macroeconomic uncertainties, particularly in the U. K, Germany and France. It's having weaker volumes we had anticipated at the half year, and that's what changed our outlook on margin performance for Europe. The kinds of things that we're seeing there are primarily related to the B and I sector.
So for instance, in Germany, I'm reading the newspaper this morning, manufacturing output at the moment is the worst for 7 years. Factory activity in Eurozone is weak and the purchasing managers index has shrunk again. That's for the 6 months in the raw, Germany is particularly being hit in the automotive sector. In the UK, B and I volumes are also weaker in the corporate sector. Just to some extent, that volume impact in the UK is being offset by a more favorable sports and leisure calendar, for instance, World Cup and the new Tottenham stadium.
And then in France, similarly, a bit of B and I softness. I can't really go through this call without talking about Brexit related uncertainty. I think what we are seeing in our business is slower decision making. So if you put all those things into the mix, then that is really what is impacting our European volumes. And I would say, though, that is despite the fact that we are seeing a better top line growth than we've seen for a while in Europe.
And Jamie, you asked about that we might take. Well, definitely, when we see and we feel pressure, then we have to take action. We think that we're well placed to act and we need to. We're doing a variety of things, including reaping the benefits of the investments that we're making in our pricing, productivity and procurement initiatives. And in terms of going out further, what do we see?
Actually, I don't know. I mean, it just feels very uncertain at the moment.
Okay. And just finish I just pinch the answer if I may just by adding, I mean, the additional 20 bps of decline in the quarter, each 10 bps in Europe is £1,500,000. So it is small numbers which have had that impact in the quarter. I think we should remind ourselves of that. And of course, Jane, you'll know, when you've seen significant problems, we have taken action in the past.
Great, Claire. Thank you very much.
We will now take our next question from Jarrod Castle from UBS London.
London. Just speaking with margin, I was wondering if you tried to comment on that. I know you have said some things in the past in terms of the interplay between growth versus margin, especially in the North American business. So I guess if growth is 1 percent lower organically, what would that have meant for margin? And just some color around that.
Secondly, in terms of Europe, it seems like your financial position is fine, but has there been any impact in terms of cash collection and conversion of profits? And then lastly, just in terms of Rest of the World, can you maybe just give some color in terms of some of your main markets, and how things are going?
Okay. Good morning, Jarren. Thank you for the questions. Why don't I take questions 1 and 3 and then ask Dan to pick up on the year of cash question. So just with regards to margin, I mean, I think we've best explained it with the Compass model, which is we believe with the runway of growth that we see in the group and across all three of the regions that we should reasonably expect ourselves to grow within that range of 4% to 6%.
At the higher end
of that, we would expect little margin progress. At the lower end, we would expect to make some margin progress. I think that equally applies to each of the regions themselves. We've always talked to the U. S.
About having a range of growth of if the group growth is a 4% to 6% range, then the North American growth range is 5% to 8%. We wouldn't expect margin progress at those higher levels. Why? These contracts come with significant mobilization investments. Remember, every year, the absolute dollar value of new business that we're mobilizing is increasing significantly.
We've made investments, for example, in something called Strategic Projects Group, which actually manages the mobilization of major contracts. And that's an investment we've chosen to make, and we make it times when growth is higher to enable us to really manage with intensity major contract mobilizations. That also diminishes the opportunity for margin in the short term, But it's the right thing to do to sustain those higher levels of growth. I think the other issue that we should speak to is just the sources of growth. If we're seeing volume growth within Sports and Measure, typically, the upside there doesn't drop through at an incremental margin.
We typically only earn our average contract margin because the upside from the higher volumes goes to our clients, and that's why they outsource. So I think, hopefully, that gives you a bit of flavor around why at higher levels of growth, we see less margin opportunity. And of course, at lower levels, I guess the point is that those contracts are maturing. We would expect to be lapping higher levels of mobilization. We'd expect to be getting to the contract maturity margin levels of the mid to later years, and that gives us the opportunity to reap the margin.
And of course, we'd probably be investing a fraction less in the growth model. In terms of Rest of World and going around the respective regions, I mean, if I start with Asia Pacific, which is back from a tender visit to India and Japan with the Board to review the markets there. I mean, look, starting with Australia, we talked about Q3 being the lapping of the final major construction projects, which went into production and had a significant reduction in Lancatter and therefore, camp guests. That has now happened. So we're starting to see the revenues of the Australian business broadly flat.
We've performed strongly within the non offshore remote part of the business, and we've seen both growth and margin progression. And within the remote sector, where it's production camps, we've seen ourselves taking share. So we're really pleased with that performance. And as we look forward, we would expect Australia to return to growth. If you look at the rest of the region, the big countries, I mean, Japan, we're very focused on the opportunity in Food Services, which we think is significant.
We're seeing an acceleration in the growth within the core sectors. We're very focused on the margin opportunity there, too, and how we can reinvest that for growth in Japan. Having some success with pricing. It's been a very difficult market for pricing for a number of years because of deflation and the habits that, that has driven. But we're now having some success, and we're taking over between 1 and 1.5 points of pricing there, which again, we're pleased with.
There's a bit of a challenge around the labor pool in Japan and the availability of labor, which we're working very hard on. But in the round, I think our actions are all looking forward positively. In India, we've got growth of over 35% in our Foodservice business, which we're delighted with. We've just been through a visit there where we went to a number of our major clients. I think there's some terrific opportunities.
The value is obviously small, but I think the volume and the emergence of a higher value dining solution is really starting to come through. So I think that part of the business is exciting. China has been a bit more difficult for us. We've lost a couple of contracts within the higher ed space, which is all within the private school space, which is just how this pack. But growth within B and I remains positive.
If you look at the sort of Kamiak region, we've seen good performance across the piece there. The oil and gas countries have we made some investments, and we've seen some investment by clients, which means higher headcount in those markets and good growth coming through. Turkey continues to perform very well with market leading, taking significant share and growing at over 25% year to date. Obviously, there's some inflation within that, but our net new contract wins continue to be very, very strong. And then lastly, within Brazil and LatAm.
I think our LatAm countries, as we called out in the statement, are performing well. The 4 Spanish speaking countries growing strongly for us. Brazil remains more difficult. I think there's a macro in Brazil, and it's weighing on volumes as well as our own performance in that market where we've done less well in retaining and selling new business. So we've installed a new management team.
We're working very hard on the core processes. We've made some further changes, and we're working hard on our offer. I think it will take a little bit of time for that to come through. Just on Rest of World in the round, I think it's a better picture in Q3 than it was in the first half. I think as we look forward and fully lap the demobilization of the construction project, then I think we can expect an acceleration.
Our aim is to see how we can do better across all of those major markets.
And if I just pick up the question around whether or not if we're seeing weaker volumes, particularly in the U. S. France and Germany, are we seeing any impact on cash collection and conversion? And the short answer is actually no. As you can imagine, it's something that I'm very focused on and I've been asking finance directors directors to pay particular attention to this area.
But at the moment, we're not seeing any increase really in bad or debt to debt.
Our next question comes from Jaafar Messari from Exane BNP Paribas.
Hi, good morning. I've got two questions, please. The first one is on Europe, where obviously in terms of acquisitions, Pfizer is all Europe, but also the smaller deals that you've done, you seem to be commencing, are focused on Europe. So those acquisitions together will bring quite a big change in scale for the region. I'm guessing some €5,500,000,000 of revenue possibly €7,000,000,000 Are you just going to treat this as ongoing in the field acquisitions?
Or at some stage, is there a sort of master plan for Europe that we should expect you to announce in terms of how you're going to transform the region further and deliver synergies more explicitly on those deals. And my second question is on if you want to take this one first.
Go ahead, do the check, and then I'll come back.
And then just a
related question on capital allocation. If I add together the €470,000,000 that you spent to date and the €430,000,000 which you've agreed for faster, you'd be already around €900,000,000 which would be the biggest M and A spend of at least 14 years. Does this effectively rule out any cash returns to shareholders this year? Or can you close on some of the portfolio's totals, for example, by the end of the year, if you have
a little bit more headroom?
Okay. I'll take the first question and ask Karen to take the capital allocation question. If I may, I think, first of all, you slightly are just stating the M and A in Europe. So it's actually the numbers you quoted are euros, not pounds. So we believe that the acquisition menu will probably increase the region's revenues by around €500,000,000 So 5,500,000 to €6,000,000 not €7,000,000 If I think about the acquisitions we've made, other than Baxter, they truly are very small infill bolt ons of £30,000,000 or euros around that level, which effectively are like large contract wins as opposed to material M and A.
With regard to fabs, it's a super business. It's one we track for a long time and one where we've had conversations for a long time. It's entirely foodservice focused, highly innovative, very quality oriented, very high sustainability value. So we think it's going to be a terrific strategic fit. The Nordic region has been a region that has performed a best part for us in Europe over the last 2 years and was one of the least impacted by the Eurozone downturn.
We think it's very solid. There's good trends of outsourcing within public sector as well as private sector and a significant runway for growth opportunity. So all in, we think it's a good acquisition. The returns, we believe, will be strong, and we'll certainly meet our target returns by year 2. In I think in this industry, you have to be slightly opportunistic about when these opportunities arise and can be converted.
I think the timing has played out that way on Factor in particular. In terms of Mastercard for Europe, I think it's really I think we've been pretty clear. I think there's an opportunity for us to grow. Absent the short term impacts that we're seeing, there's an opportunity for us to do to grow top and bottom line together. We've obviously got to work hard on our high efficiency agenda to do that.
And I think we have to look at the different markets of Europe individually because we've got different competitive sets in the different markets and different outsourcing behaviors with different sector opportunities. And it's quite difficult to give a bland answer on that, as it were. I think we feel very good about the acquisitions that we've made thus far. Karen, on the capital allocation?
Sure. Well, I'll probably just start off by saying that our capital allocation priorities are unchanged. Just to recap on those, they allow the CapEx of up to 3.5% of revenues, it allows the bolt on opportunities in M and A, allows us to grow the ordinary dividend in line with constant currency earnings. And then, depending on where the net debt to EBITDA ratio is versus the target of 1.5%, we may have the opportunity to return to any debt to shareholders. And some of the relatively new into the organization, I've had a look at this methodology, and I actually quite like it.
I think it's principle, and it gives us flexibility. It actually allows for lumpy M and A because M and A by its very nature has been to be lumpy and you have picked out the fact that this year has been very big year for us compared with previous years. But nevertheless, aside from the LAPSA acquisition, how we have gone about our M and A targeting is still in terms of bolt on acquisitions. So I would say the timing of going through the competition authority with the PAPSA acquisition is a little bit uncertain. So we actually end up at the end of the year compared to that 1.5x ratio is very much dependent on how fast or how slowly that regulatory process works.
But if we come in at the under, it will just be because the path that the deal has tipped into next year.
All right. Thank you very much for that. And just to follow-up on Europe and the numbers. This 2,000,000 fabsor alone is €600,000,000 perhaps you're right. So I was trying to get to a total number if I take your comments that the other EUR 470,000,000, which doesn't include FAFSA, which is mostly Europe, I think you're saying.
And I'm sure you're not paying higher than onetime CDBG sales there. So is that another €500,000,000 to have to the Europe scale in the next year?
No. I mean, we'll take you through the numbers in more detail. But I think being on outside of Factor, it still remains broadly North American acquisitions. It's in quarter 3 but it's been more sort of balanced between Europe and North America.
Just this quarter.
All right. Thank you very
We will now take our next question from Tim Martin from Jefferies.
Just first of all, on Europe. Could you would you correct in assuming that the like for like trends in U. K, France and Germany deteriorated during the quarter? So was May June I think noticeably weaker than preceding months? And then secondly, the contribution to revenue growth in North America from price inflation increased over the year as you successfully passed through wage rate and food inflation?
Okay. I'll take the first again, and then I'll ask Karen to take the second question. So just in Europe and the like for likes, yes. I mean, simply put, the volume declines in those 3 major markets was worse than we've seen in the first half of the year. If you recall, we signaled volume weakness in the U.
K. In the Q3 of last financial year, And we're now seeing volume declines on volume declines, which is causing the incremental pain that we are describing today. In France, we saw some pressure in the Q3. Whether that is politics, weather and or pressure on V and I volumes, I think time will tell. And in Germany, absolutely, we saw pressure on volumes in the third quarter.
And Karen articulated what we've all seen around the worsening of the manufacturing data. And of course, our B and I business in Germany is highly exposed to manufacturing as well as tech, exposure to the automotive sector and the parts manufacturers, the OEMs of the automotive sector. So it has been worsening there. I think the UK picture is a combination both of we're not seeing clients increase headcount and reduce it. And we're definitely seeing a consumer that's spending less.
And I think that's very much what is being also seen on the high strength. Karen, do you
want to pick up on the second pricing?
On the second pricing, well, I mean, inflation is something that we are used to managing. We are maybe seeing a little bit more inflation this year than we've seen in previous years, not just in North America, but certainly in Europe as well, both price food cost inflation and wage rate inflation. The way that we set up allows us to deal pretty effectively with the impact of inflation. We can use our scale to divide it and that certainly helps on the food customization. And I referred earlier to the fact that we're very focused on what we call fees for price, productivity and procurement.
And we've been working hard and all of those things. As you can imagine, these are not easy things to do. We have to put a lot of effort into it. We're actually investing behind the stuff ourselves. But we understand that we're just going to have to put a hard yard into this.
So it can't always be offset completely.
Just on that, I suppose, a lesser question around implication for margins, but just trying to get an assessment. Your organic revenue growth in North America has been pretty impressive over the last few quarters. I'm just wondering to what extent the tailwinds from the price pass through is making an incrementally slightly bigger contribution to that over the last few quarters? Or would you very much characterize it as being the function of retention and new business wins that you touched on earlier?
I mean, I think if you break it down, our new business is probably okay, 8.5% level, and our retention is at the 27% level, so strong net new business. Probably a fraction more price. We're seeing 1 to 1.5 tons of price and about the same in volumes given the strong sports and leisure calendar. So the next question is, I think, a fraction more price in North America. But I think given the buoyancy of the economy, it's probably what you would expect and also given the high inflation we're seeing.
We will take our next question from Richard Clarke from Bernstein. Please go ahead. Your line is open.
Good morning. Good morning. Good question for me, if I may. Given the higher growth guidance for the year, just wondering what this means to your CapEx guidance. Are you likely to be closer to the 3.5% of sales?
Or could you exceed that? The second question is on the PHASR. I think the press acquisition, the press release, if I remember right, it showed PHASR had 4.5% margins. Is that likely to meet the amount of 30 basis points dilution to margins next year? Or is there anything that maybe could offset that in Europe, that's 30 basis points for Europe next year?
And then third question is more conceptually. We've seen Just Eat make an acquisition in the B2C space of City Pantry. Any of the volume losses you're seeing in the UK coming, do you think, from the move towards some of these digital B2B offers? Or is it more just macro situation? So I'll ask Karen to take the CapEx question, I'll do the next 2.
So we actually setting a CapEx guidance that 3.5 percent of revenues, allows us to take advantage of big contracts that might need more CapEx. And at the end of this year, I am not assuming that we will go above the 3.5% even with the upgrade to our top line organic revenue growth. You just remember at the half year, we were a little bit under the 3.5% to 3.3
percent. Right.
Thanks, Karen. And then just with regards to margin, I think you'll find that the margin that we announced in the press release was slightly above 5%. Of course, you are right. It's still slightly dilutive to our European margin and group margin. Of course, we would expect to unlock synergies over the 1st couple of years, which would benefit that.
But from a technical standpoint, yes, there's probably a few bps of dilution in the group margin from that acquisition. We clearly think it's the right thing to do from a returns and growth standpoint. And then finally, just on the Jiffy acquisition of City Pantry, yes, we obviously saw that acquisition. We are very aware of the trends that we're seeing within B2B delivery. I'm working very hard to understand that and actually what opportunity that can present us with.
So clearly, we have a significant estate of kitchens with significant capacity. We recognize there may be an opportunity for us to be able to deliver into SMEs who we currently probably wouldn't target as clients because of their relatively smaller scale. Likewise, it's putting pressure on us to make sure that the offer we have on-site is as good as anything that can be delivered in. And we're looking to see how we can replicate the experience of delivered in. So how can we provide the apps that allow our consumers to have best delivery, preorder, prepaid type offers?
So I think that's how what we're seeing, how we're responding. We don't believe at this point it's having an impact on volumes. We think the impact that we're seeing is more about headcount levels and average spend levels.
Thank you. We will take our next question from Tim Barrett from Numis. Please go ahead. Your line is open.
Good morning, everyone. Could you just clarify a couple of few things? The first was around the shape of growth in the Q3. You're able to say that or give us the mix between net new and like for like. And then just also secondly to understand your margin guidance.
What's behind the slightly more modest guidance now? Is it to do with is it more to do with European operational gearing or to do with North America and the mobilization or a bit of both?
I think the second question first. In terms of emerging, I'd say it's simply about the higher growth that we're seeing. And as you've always said, the higher growth comes at a bit of a drag. I think that's what we're seeing come through. In terms of the Q3 split between net new and like like, I don't think it's any different to that that we've seen this year.
It will be it is obviously a fraction stronger in volume because of the sports and leisure calendar that we call that both in the U. K. And the U. S. So that would show up in volume.
It would be existing clients that are having more events or more spectators. So that would have driven the volume. And also the U. S. Open Golf Tournament, which has occurred in Q3 for us this year and Q4 for us last year.
So that would probably be the only difference. I think otherwise, look, our group new business is probably trending at around about 8%, 8.5% loss to our retention ratio at 95%. So we're at new business at 3.5 like for like of 3 or so on a run rate basis.
Okay. And so when we think about where the margin changes, it will be where the average revision to growth has come?
Yes.
We will now take our next question from BT Stern from Barclays. Please go ahead. Your line is open.
Good morning. Just speaking actually with the food delivery question. So another one on food delivery companies is just announcing a type of procurement type business. Just any thoughts on that dynamic and I guess related an update please on Foodbuy. Obviously, last year, there was a significant contract loss on your competitors.
It seems like things have stabilized, but perhaps not take there on the growth of food by, please?
Yes. I haven't seen the announcements Yes. I haven't seen the announcements about the procurements in food delivery. There's an awful lot that goes on within the food industry, as you would expect. There's BPOs that exist today, the high street restaurants that are clubbed together to buy better through retailers.
So I imagine it's sort of more of the same. We're working very hard on our own Foodbuy UK and growing those Foodbuy 3rd party volumes. With regard to Food Bank North America and the contracts, yes, we do recognize that the contract was lost last year. We pretty much replaced all of that volume. So we're back to the $250,000,000,000 we talked about, and we see some really exciting opportunities with other third parties and with GPOs as we look forward to further aggregate and accelerate that scale.
Just a follow-up on that. And then with the conditions related to Europe, those were your businesses as well?
No. Those were principally foodservice businesses. All foodservice businesses.
Thanks very much. As there are no further questions in the phone queue at this time, I would like to hand the call back over to you, Mr. Blakemore, for any additional or closing remarks.
Just wanted to thank you very much for your questions. We'll obviously speak to you again at our full year results in November. I'm just wishing you all a very enjoyable summer.
This concludes today's conference. Thank you all for your participation.