Just to remind you, this conference call is being recorded. Today, I am pleased to present Dominic Blakemore, CEO, and Karen Witts, Group Finance Director. Please go ahead with your opening.
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 Witts, our Compass Group CFO. I'm sure you've all read the statement. Before opening 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 at industry-leading margins, whilst at the same time continuing to invest for the future, both through internal initiatives, our three 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 4-6% 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 third quarter to 6.7%, excluding the impact of Easter, to bring the group's organic growth for the nine months to 6.5%. The excellent momentum in North America has continued. The business delivered 8.5% 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, 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 B&I. Despite this weakness, we still delivered 2.9% organic growth in Q3, excluding Easter, and 4.3% year-to-date. It has resulted in margin pressure, which was down by a similar amount to the half-year. The 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 shows some good progression over last year. We continue to make good progress with M&A, further strengthening our position as the global leader in food services. During the period, we announced the acquisition of Fazer Food Services in the Nordics and spent a further GBP 100 million 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. 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.
In summary, Compass 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. Now we're very happy to take any questions.
Thank you. Ladies and gentlemen on the phone, if you wish to ask a question, please press star one on your telephone keypad. Please ensure that the mute function is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Once again, it's star one if you wish to ask a question. We will pause for just a moment to allow everyone to signal. Our first question comes from Jamie Rollo from Morgan Stanley. Please go ahead, caller. Your line is now open.
Thanks. 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 GBP 200 million of execution losses that Philip had talked about? Does that mean you're seeing a higher mix of new contracts coming from the bigger competitors in North America? Secondly, on Europe margins, we could have expected that seems to be just like volume trend. Are you taking any sort of additional action there? Are you still reviewing that business? If you haven't yet, what additional margin impact could that entail, please? Finally, perhaps it's more of an observation, for the second year running, because that weak Europe margin performance has been sort of offset by much better-than-expected Rest of World performance in margins.
Despite the very tough comps in Rest of World last year, I think second half margin up over 100 basis points. You're still keeping that going. I'm wondering for how much longer the Rest of World keep coming to Europe's rescue. Thank you.
Thank you, Jamie, and morning. I'll take the question on North America performance and your third question around margins in Rest of World, and then I'll ask Karen to answer on European margins. Firstly, on North America performance, as you can see, we're absolutely delighted with the growth rate in North America in the quarter and year to date. The growth rate is sustained through good new business, excellent retention, and strong likes for likes as well. It's a good balance of growth across the 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 healthcare performance this year as well.
We're delighted with both of those sectors. We continue to take some share from our competitors, but in the round, the balance of growth remains the sort of third that we've talked to. Again, that's equally pleasing. In terms of your question on Europe versus rest of world margin. Look, Karen will talk to you about what's going on with the European margin. It's definitely a tricky time right now. We're delighted that managing the full portfolio, 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. 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.
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 were higher margin in some of our bigger businesses where we're seeing those initiatives paying off. I don't think we should get carried away. Whilst we're lapping 100 basis points 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 of that order of magnitude as we go forward. Karen, do you want to just take the Europe question?
Sure. Well, the Europe margins are being impacted by macroeconomic uncertainty, particularly in the U.K., Germany, and France. It's having weaker volumes than we had anticipated at the half year. That's what's changed the outlook on margin performance for Europe. The kinds of things that we're seeing there are primarily related to the B&I sector. For instance, in Germany, I was reading the newspaper this morning, manufacturing output at the moment is the worst for seven years. Factory activity in the Eurozone is weak. The Purchasing Managers' Index has shrunk again. That's for the sixth month in a row. Germany's particularly being hit in the automotive sector. In the U.K., B&I volumes are also weaker in the corporate sector. Just to some extent, that volume impact in the U.K. is being offset a bit by a more favorable sports and leisure calendar.
For instance, Rugby World Cup and the new Tottenham stadium. In France, similarly, a bit of B&I softness. 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. If you put all of those things into the mix, then that is really what is impacting our European volumes. I would say, though, that that is despite the fact that we are seeing a better top-line growth than we've seen for a while in Europe. Jamie, you asked about action 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 investment that we're making in our pricing with productivity and procurement initiatives. In terms of going out further, what do we see? Actually, I don't know. It just feels very uncertain at the moment.
If I finish that, I'd just finish that answer if I may, just by adding the additional 20 basis points of decline in the quarter. Each 10 basis points in Europe is one and a half million GBP. It is small numbers which have had that impact in the quarter. I think we should remind ourselves of that. Of course, Jamie, you'll know that when we've seen significant problems, we have taken action in the past.
Great. Thank you very much.
Thank you. We will now take our next question from Jarrod Castle from UBS London. Please go ahead. Your line is open.
Thank you. Good morning. Just sticking with margin, I was wondering if you could provide some color. 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. I guess if growth is 1% lower organic, what would that have meant for margin? Just some color around that. Secondly, in terms of Europe, it seems like your financial position is fine, but has it been an impact in terms of cash collection and conversion of profits? Lastly, just in terms of rest of the world, can you maybe just give some color in terms of some of your main markets, how things are going? Thanks.
Okay. Morning, Jarrod. Thank you for the questions. Why don't I take questions one and three, and then ask Karen to pick up on the Europe cash question? Just with regards to margin, 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%-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%-6% range, then the North American growth range is 5%-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 a strategic project group, which actually manages the mobilization of major contracts. That's an investment we've chosen to make, and we make at 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 are seeing volume growth within sports and leisure, 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. I think hopefully that gives you a bit of flavor around why at higher levels of growth, we see less margin opportunity. Of course, at lower levels, I guess the point is that those contracts are maturing. We would expect to be mapping 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. 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, to start with Asia Pacific, we just back from a 10-day visit to India and Japan with the board to review the markets there.
Starting with Australia, we talked about Q3 being the lapping of the final major construction project, which went into production and had a significant reduction in [Namkar] and therefore camp guests. That has now happened. 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. We've seen both growth and margin progression. Within the remote sector, where it's production camps, we've seen ourselves taking share. We're really pleased with that performance. As we look forward, we would expect Australia to return to growth. If you look at the rest of the region, the big countries, in 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. We now have some success, and we're taking over between one and one and a half 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. In the round, I think our actions are all looking forward positively. In India, we've got growth of over 35% in our food service business, which we're delighted with. We've just been to 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. I think the volume and the emergence of a higher value dining solution is really starting to come through. I think that part of the business looks exciting. China's been a bit more difficult for us. We lost a couple of contracts within the higher ed space, which are all within the private school space, which has just held us back. Growth within B&I remains positive. If you look at the sort of CAMEA region, we've seen good performances really across the piece there. The oil and gas countries, we made some investments, and we've seen some investment by clients, which means higher headcounts in those markets and good growth coming through. Turkey continues to perform very well. We're 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. Lastly, within Brazil and Latam, I think our Latam countries, as we called out in the statement, are performing well. The four 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. 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 us a little bit of time for that to come through.
Just on rest of the 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.
If I just pick up the question around whether or not if we're seeing weaker volumes, particularly in U.K. B&I and Germany, are we seeing any impact on cash collection and conversion? The short answer is actually no. As you can imagine, it's something that I'm very focused on and been asking finance directors to pay particular attention to this area. At the moment, we're not seeing any increase, really, in bad or DPD.
Okay. Thank you very much.
Thank you. Our next question comes from Jaafar Mestari 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, Fazer is all Europe, but also the smaller deals that you've done, you seem to be commenting are focused on Europe. Those acquisitions together will bring quite a big change in scale for the region. I'm guessing from EUR 5.5 billion of revenue, possibly at EUR 7 billion. Are you just going to treat this as ongoing in the field acquisitions? 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? If you want to take this one first.
No, go ahead. Do the second, then I'll come back.
Yes. Related question on capital allocation. If I add together the GBP 417 million that you spent to date, and the GBP 430 million which you've agreed for Fazer, you'd be already around GBP 900 million, which would be the biggest M&A spend in 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 disposals, for example, by the end of the year to 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're slightly overstating the M&A in Europe. It's actually the numbers you quoted are euros, not pounds. We believe that the acquisition made in Europe would probably increase the region's revenues by around EUR 500 million, EUR 5.5 billion-EUR 6 billion, not EUR 7 billion. If I think about the acquisitions we've made, other than Fazer, they truly are very small infill bolt-ons of GBP 30 million or EUR 30 million, around that level, which effectively are like large contract wins as opposed to material M&A. With regard to Fazer, it's a super business. It's one we've tracked for a long time, and one where we've had conversations for a long time. It's entirely food service focused, highly innovative, very quality oriented, very high sustainability value.
We think it's going to be a terrific strategic fit. The Nordic region has been a region that has performed above par for us in Europe over the last two 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. 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 two. 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 Fazer in particular. In terms of a master plan for Europe, I think we've been pretty clear. I think there's an opportunity for us to grow.
Absolutely short-term impacts that we're seeing. There's an opportunity for us to grow top and bottom line together. We've obviously got to work hard on our efficiency agenda to do that. I think we have to look at the different markets of Europe individually, because we've got different competitor sets in the different markets and different outsourcing behaviors with different sector opportunities. 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, Jaafar, I'll probably just start off by saying that our capital allocation priorities are unchanged. Just to recap on those, they allow us the CapEx of up to 3.5% of revenues. It allows for bolt-on opportunities and M&A, allows us to grow the ordinary dividends in line with constant currency earnings. 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 surplus to shareholders. Somebody relatively new into the organization, I've had a look at this methodology, and I actually quite like it. I think it's sensible, and it gives us flexibility. It actually allows for lumpy M&A, because M&A by its very nature is destined to be lumpy.
You have picked out the fact that this year has been a very big year for us compared with previous years. Nevertheless, aside from the Fazer acquisition, how we have gone about our M&A targeting is still in terms of bolt-on acquisitions. I would say, the timing of going through the competition authority with the Fazer acquisition is a little bit uncertain. Where we actually end up at the end of the year compared with that 1.5 times ratio is very much dependent on how fast or how slowly that regulatory process works. If we come in a bit under, it will be because the Fazer deal has tipped into next year.
All right. Thank you very much for that. Just to follow up on Europe and the numbers, just to think that Fazer alone is EUR 600 million roughly, right? I was trying to get to a thoughtful number if I take your comment that the other EUR 470 million spends, which doesn't include Fazer, is mostly Europe, I think you're saying. I'm sure you're not paying higher than 1x EBIT sales there. Is that another half billion to have to de- Europe scale in the next financial year?
No. We can take you through the numbers in more detail, but I think outside of Fazer, it still remains broadly North American acquisitions. It's in quarter three that it's been more sort of balanced between Europe and North America.
Okay. Just to ask that question. All right. Thank you very much.
Okay, thank you. We will now take our next question from Kean Marden from Jefferies. Please go ahead. Your line is open.
Good morning. First of all, on Europe, would we be correct in assuming that the like-for-likes in U.K., France, and Germany deteriorated during the quarter? What was May and June, I think noticeably weaker than preceding months. 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. Did you take Europe and the like-for-likes? Yeah. Simply put, the volume declines in those three 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 third quarter 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 third quarter, whether that is politics, weather, and or pressure on B&I volumes, I think time will tell. In Germany, absolutely, we saw pressure on volumes in the third quarter. I think Karen's articulated what we've all seen around the worsening of the manufacturing data.
Of course, our B&I business in Germany is highly exposed to manufacturing as well as tech. Tech gives exposure to the automotive sector and the parts manufacturers, the OEMs of the automotive sector. It has been definitely worsening there. I think the U.K. picture is a combination both of we're not seeing clients increase head count and reduce it, and we're definitely seeing a consumer that's spending less. I think that's very much what is being also seen on the high streets. Karen, do you want to pick up on the second question?
On the inflation. Well, 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 food cost inflation and wage rate inflation. The way that we're set up allows us to deal pretty effectively with the impacts of inflation. We can use our scale to buy better, and that certainly helps on the food cost inflation. I referred earlier to the fact that we're very focused on what we call our PPP, so Price, Productivity, and Procurement, and we've been working hard on 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.
We understand that we're just going to have to put the hard yards into this. It can't always be offset completely.
Just on that point, I suppose less a question around the implication for margins. 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 tailwind from the price pass-through is making maybe 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 think if you break it down, our new business is probably at the 8.5% level, and our retention is at the 27% level. Strong net new business. Probably a fraction more price. We're seeing 1 to 1.5 points of price and about the same on volumes given the strong sports and leisure calendar. The net is at the 8. I think a fraction more price in North America. I think given the buoyancy of the economy, it's probably what you would expect and also given the higher inflation we're seeing.
Very clear. Thank you very much.
As a reminder, ladies and gentlemen, it's star one if you wish to ask a question. We will take our next question from Richard Clarke from Bernstein. Please go ahead. Your line is open.
Good morning. A quick question from me, if I may. Given the higher growth guidance for the year, just wondering what this means for 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 Fazer. I think the press acquisition, the press release, if I remember rightly, showed Fazer had about 4.5% margins. Is that likely to meet the amount of 30 basis points dilution to margin next year, or is there anything that maybe could offset that in Europe, that's 30 basis points for Europe next year? The third question is more conceptually. We've seen Just Eat make an acquisition in the B2B space of City Pantry.
Any of the volume losses you're seeing in the U.K. coming, do you think from the move towards some of these digital B2B offers, or is it more just macro situation? I'll ask Karen to take the CapEx question, and I'll do the next two.
We, I keep saying our CapEx guidance is at 3.5% of revenue, allows us to take advantage of big contracts that might need some more CapEx. 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. If you just remember at the half year, we were a little bit under the 3.5% at 3.3%.
Great. Thanks, Karen. Just with regard 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 first couple of years, which would benefit that. From a technical standpoint, yes, there's probably a few bips 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. Finally, just on the Just Eat acquisition of City Pantry. Yeah, we obviously saw that acquisition. We are very aware of the trends that we're seeing within B2B delivery and working very hard to understand that, and actually what opportunity that can present us with.
Clearly, we have a significant estate of kitchens with significant capacity. We recognize there may be an opportunity for us too 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. We're looking to see how we can replicate the experience of delivered in. How can we provide the apps that allow our consumers to have desk delivery, pre-order, prepaid type offers? I think that's 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. Okay. Thanks very much.
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 big picture things? The first was around the shape of growth in the first quarter. Were you able to say that, or give us the mix between net new and like-for-like? Just also secondly, to understand your margin guidance, what's behind the slightly more modest guidance now? Is it more to do with European operational gearing, or to do with North America and the mobilization, or a bit of both? Thank you.
I'll take the second question first. In terms of margin, I still think it's simply about the higher growth that we're seeing. As you've always said, that 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-for-like, I don't think it's any different to that that we've seen this year. It is obviously a fraction stronger in volume because of the sports and leisure calendar that we called out, both in the U.K. and the U.S. That would show up in volume. It would be existing clients that are having more events or more spectators. That would have driven the volume and also the US Open golf tournament, which has occurred in Q3 for us this year and Q4 for us last year.
That would probably be the only difference. I think otherwise, look, our group new business is probably trending at around about 8%, 8.5%. Lost our retention ratio at 95%. We're at net new business at 3.5%, like-for-like at 3% or so, on a run rate basis.
Okay, thanks. When we think about where the margin change is, it'll be where the outlook revision to growth has come.
Yes.
Okay. Thanks very much.
Thank you. We will now take our next question from Vicki Stern from Barclays. Please go ahead. Your line is open.
Morning. Just sticking actually with the food delivery question. Another one of the food delivery companies is just announcing a 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 lost to one of your competitors. It seems like things have stabilized, but perhaps an update there on the growth of Foodbuy too. Thanks.
Thanks. 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 GPOs that exist today. There's high street restaurants that club together to buy better through retailers. I imagine it's sort of more of the same. We're working very hard on our own Foodbuy UK and growing those Foodbuy third-party volumes. With regard to Foodbuy North America and the contracts, we recognize that the contract was lost last year. We pretty much replaced all of that volume. We're back to the GBP 10 billion 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.
Thanks. Just a follow on from that. The acquisitions you made across Europe, those procurement businesses as well?
No, those were principally food service businesses. All food service businesses.
Thanks very much.
Thank you. 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 want to say thank you all very much for your questions. We'll obviously speak to you again at our full year results in November. Just wishing you all a very enjoyable summer.
This will conclude today's conference. Thank you all for your participation. You may disconnect.