And welcome to the Compass Group Quarter 1 Trading Update Call. Throughout the call, all participants will be in a listen only mode. And afterwards, there will be a question and answer session. Just to remind you, this conference call is being recorded. Today, I am pleased to present Dominic Blakemore, CEO and Palmer Brown, Interim Group Finance Director.
Please go ahead with your meeting.
Good morning, ladies and gentlemen. Thanks for thank you all for dialing in. With me this morning, I have our Interim Group Finance Director, Palmer Brown. I'd like to say a few words about our performance and outlook before opening the call to questions. We're really pleased with the performance this quarter.
Group organic revenue growth was 6.9% for Q1, with good performances across all three of our regions. This was driven by strong levels of new business wins, continued good retention rates and bolstered by the impact of the new UK defense contracts and a positive sporting events calendar. Excluding these last two factors, our underlying growth was around 5.5%. We continue to generate efficiencies through our management and performance program, which allows us to offset inflationary headwinds. Now turning to the regions.
In North America, organic revenue was up 8%. Growth was very good across all sectors, and particularly in vending, business and industry and sports and leisure, the latter of which benefited from the timing of certain events. Excluding these one off revenues, our underlying growth in North America was approximately 7%. Europe reported 6.4% organic revenue growth in the Q1, reflecting continued momentum from new business wins notably the significant impact of defense contracts in the UK, which we mobilized in the second half of last year a favorable calendar in Sports and Leisure as well as continued good growth in Continental Europe. The underlying performance was more like 3.5% in the quarter.
In Rest of World, organic revenue increased by 2.8%, with ongoing good performance in developing markets, partially offset by the runoff of the last major offshore construction project in Australia. Excluding offshore and remote, our growth was 4.5% in the region. On acquisitions, we spent GBP 197,000,000 during the quarter on acquisitions in North America. Targeted and disciplined bolt on acquisitions focused on our core food offerings strengthen our capabilities, and there's a good pipeline of opportunities across the group. Currency movements compared to the same quarter last year had a positive translation impact on revenues of GBP 107,000,000 and on profit of GBP 10,000,000 With current spot rates which continue for the remainder of this year, foreign exchange translation would positively impact 2018 revenue by GBP 508,000,000 and our operating profit by GBP 43,000,000 So in summary, we've had an excellent start to the year.
We now expect to be slightly above the middle of our target 4% to 6% organic growth range for the full year and with some modest margin progression. In the longer term, we remain excited about the significant structural growth opportunities globally and the potential for further revenue and margin expansion. Thank you, and we'd now be happy to take your questions.
Thank you, sir. We will now take the first question from Vicki Stern of Barclays. Please go ahead.
Yes, morning. I've got three questions. Just firstly on Europe, obviously, quite a nice step up in the underlying growth rates, I think, coming from the Continental Europe in particular. Just who are you taking share from? Is it share gains?
And where is the extra growth coming from? Secondly, on margins,
I think you previously used
to call out what quarterly margins were running out. Just any commentary on how margin is progressing so far this year? And then just finally on the acquisitions, just perhaps a few more details on what you've acquired in Q1 and what sorts of prices and what sorts of margins we should have in mind? Thanks.
Thanks, Dickene. Good morning. I'll take the Europe question, and I'll hand over to Palmer for the margin and M and A. Yes, I mean, first of all, we're really pleased with the overall European performance, and I think it's worth being really clear on the numbers there. 6.4% is really exceptional for the quarter in Europe, including the U.
K. And as we said, that is driven by nearly 14% growth in the U. K, half of which is coming from the defense contracts. And the other 7% will be benefited or touched by Sports and Measure. So we think that the U.
K. Growth rate is sort of closer to 5% to 6% underlying, which is still a good run rate, but I just want to make sure we've cautioned that the 14% is truly exceptional. In terms of Continental Europe, we're growing at 2.2%, and that's on the back of 2.5% in the Q4 of last year. So we're really pleased with that continued momentum over 2 quarters. And frankly, that's a couple of points better than we've done for quite some time in the Continental European region.
I think the single biggest delta of improvement is retention, where we're seeing a stronger retention rate across the region. And obviously, we've been working very hard on putting measures in place for some time now, which have resulted in that improvement, and we'll continue to focus on it. I think the other maybe the other point or so is coming from better new business in sort of our northern business units, Benelux, Nordics, DAC. And I think that's been largely driven by taking a little bit of share, but also some first time outsourcing as well. So I think it's a balanced picture.
And I don't think it's one that's being predominantly driven by taking market share. I think it's all factors that drive our net new business. Over to Palmer for the other 2.
Yes. On the margin point, I don't think anything's really changed from what we're seeing. We're still excited about the margin opportunities we see across the group. We've just gone through most of our business units over the course of the last 3 or 4 months. There are opportunities that exist across the patch.
But at the same time, we've got a number of headwinds we're dealing with. We've got inflation in most countries. Some of those countries are pronounced. We look at the U. K, in particular, on both the food and the labor.
The labor within the U. S. And some other pockets as well. There are uncertainties that exist across the globe as well. And when we look at our model, of course, with these higher growth rates, we the mobilization and start up calls.
So it's another something we have to overcome. That said, I think we still feel comfortable that we are seeing some margin progression for the full year. It will probably be a bit second half weighted. But in the grand scheme of things, we remain excited about the opportunities and thus far we've been able to combat the headwinds. On the acquisitions question, thus far the all the acquisition spend in the quarter was in North America.
We bought a couple of vending office coffee and micro market companies in a similar vein to what we've done in the past. Similarly, we bought a couple of Foodbuy related companies, again, similar to what we've done in the past. We view both of these as sort of core business for us, key drivers for our growth going forward. We are excited about the pipeline both within North America and outside of North America. I think we've become more confident about our ability to do acquisitions outside of North America.
We have seen some good opportunities there and I think we want to be opportunistic where those opportunities arise. On the margin question regarding the acquisitions, I think keep in mind, we've got the acquisitions and the disposals happening at the same time. There's a bit of a timing issue as to when these will occur. As we look at it, we expect them to be roughly neutral when it all washes out, but there may be a little bit of toing and froing month to month or quarter to quarter, but largely neutral once it all washes out.
We will now take our next question from Jafar Mestari of Exane BNP Paribas. Please go
ahead. Hi, good morning. A couple of questions for me, please. The first one is just following up on this point about disposals and acquisitions, which you just said should broadly neutral to revenue once it's all reflected. Could we just maybe discuss the cash side of that?
And do you think the disposal proceeds for the full year could cover a large part or a material part of your M and A spends? Or are you going to be a net buyer, net seller? And then my second question is on the U. S. Health care market, which you'd only talk about in today's comments.
Competitors Sodexo last month flagged uncertainty around U. S. Health care contract renewals this year looking a bit tough. Do you feel like this is market wide, something you're also noticing with clients' higher expectations? Or is your impression that this is maybe Sodexo specific and may even be an opportunity for you to take share in U.
S. Health care?
I'll handle the North America Health Care, and then I'll pass back to Palmer on the margin question and the cash question on M and A GFR. GFR. So I think to cut to the chase, I think it is specific timing on individual contracts. We had a very nice run-in Healthcare, as you know, over the last 18 months. We expect that growth in Healthcare to moderate a touch as we go through this year, but we still see lots of good opportunity.
And I think particularly, there are moments in time when a group of contracts may come up to rebid simultaneously. I think that can cause some pressure. We don't see that in our portfolio today.
Separate, I
think it's probably worth saying that we talk a lot about the negative side of the labor pressures that we've seen in the U. S, both inflation and availability of labor. I think that can also be, as we said before, a positive for outsourcing. I mean, increasingly, it becomes a driver of the decision to outsource particularly first time contracts. So I think there is an opportunity in a number of sectors as a result of that as well.
On the acquisition point, again, there's a bit of timing issues and unpredictability that's built in. One of the things that's very clear is that we have done the $200,000,000 of acquisitions in the quarter, so that's done and dusted. We have a couple of disposals that should happen in the first half. I think if you look forward to the full year, I think it's a reasonable expectation that we will be a net buyer just given the timing of the way things will happen. The disposal program will continue into 2020.
We're probably roughly 40 percent of the way through it now. Lots of good activity that's happening. And I think just given the start of the year where we are on acquisitions and anticipated timing, I think it's a reasonable expectation that we'll be a net buyer. The quantity and magnitude of that remains to be seen.
All right. Thank you very much.
We will now take our next question from Jarrod Castle of UBS. Please go ahead.
Thank you. Good morning, gentlemen. 3 from me. 1, just looking at some of the results you mentioned positive sporting calendar. I just wanted to get a view if you think this continues during the year or is this just a shift between quarters?
2, you gave a bit of color on retention rates, but can you give a bit of color maybe per geography and what you're seeing? And then lastly, U. S. Shutdown, if that's had any impact on your business in the U. S.
During the current quarter?
Thanks, Jared. Let me pick up on retention rates, and then I'll hand to Palmer on the other 2 U. S.-related questions. So firstly, on the retention rates, I mean, look, we continue to trend in North America at the level of retention that we achieved at the end of last year. I think we've seen an improvement in Europe of 1 point or so, let's say.
But conversely, in Rest of World, we've obviously got the runoff of some big business, which is just going the other way a touch. So in the round, I think we're slightly better at a group level, but of course, it's retention is a fairly imprecise number. I think the good news is we've got reasonable confidence that our retention rates will continue to trend at the levels you've seen for the group as we look forward.
Good morning, Jared. On the your sports and leisure calendar question, I think there are a couple of things that are happening there. One is a bit of a just a shift within the schedule in terms of our teams compared to prior years. So we may have gains that have fallen earlier into the schedule, whereas they would have been later last year given that and the lumpiness of the sporting events, 1 or 2 games can cause a bit of a difference. You also have a bit of one time events that can distort things a bit.
So for instance, in North America, we operate in a lot of arenas where the NBA and the hockey teams play. Those are also the venues where most of the concerts occur. And so concert schedules and calendars can cause a bit of inflation compared to prior year. So we've had a bit of that. The 2 countries where we're seeing this primarily are in the UK and the U.
S. And in fairness, they're the biggest countries we have in the sports and leisure sector. Your question regarding the U. S. Shutdown, we do have some business with the U.
S. Government. It's not a lot. The business we do have is deemed to be nonessential by the U. S.
Government, which means that in a shutdown phase, those businesses are in fact shut down. So it's not military type business that we continue to operate. That being said, the impacts that we've had thus far are not material, and we don't expect them to be material even if the shutdown commences once again.
We will now take our next question from Tim Barrett of Numis. Please go ahead.
Good morning, everyone. I had one specific thing on Europe and then one bigger picture question. On Europe, I think at the end of last year, we were talking quite a lot about the UK being in quite pronounced negative volume territory. And if I understood it, you're now saying 5% to 6% underlying organic. But can you just try and could you marry the 2 up for us and talk about the trend?
And then secondly, in the past, I think you've said at the top end of your organic guidance range, it will be more difficult to eke out margin progression. And is there something different about this year? Thanks a lot.
Thanks for those questions, Tim. And firstly, on Europe and the UK, yes, you're absolutely right. I mean, we haven't talked on this call about Brexit, and it's probably worth just a moment on how we're seeing that because I think that's the driver of the underlying question. What we saw in the Q1 is very much a continuation of what we talked about at the end of last year. So we're seeing higher inflation.
We're seeing a slowdown in some client decision making and higher increases. And that and we believe weakened consumer sentiment has resulted in negative volumes, which have continued through the Q1 in the UK. So where we've got those direct consumer volumes, effectively where it's mapped to business to the consumer, We've continued to see negative volumes at the order of 3%. That has also largely been offset by price as the actions that we've taken have now flowed through in full. So our like for like within the sort of MAP 2 consumer segment is broadly neutral.
So when I talk to 5% to 6% organic growth in the UK, that's largely net new business coupled with our sort of sports and leisure volumes as well. So again, in the round, we believe at this point that we are mitigating those impacts. The actions we took last year are allowing us to mitigate both inflation and the negative consumer volumes. And we're obviously lapping the actions we took in the first half of last year. But of course, we're incurring the mobilization on the strong growth.
So sort of in and around the UK margin, it was broadly flat, but we're still seeing those negative consumer volumes. In terms of the Compass model, as we call it, I mean, yes, absolutely, we believe that in that 4% to 6 percent organic growth range, if we're at the top end of it, we will expect minimal margin progression. And it's very much in fact, I think this year is a case study and this quarter is a case study with the sorts of growth rates that we're enjoying. And with it coming from better net new business in the main, that puts pressure on us from a sort of mobilization standpoint on the new. But also, as we've always said, where we're improving our retention rates, that does have an impact on the margin of the business in the short term.
So that becomes a drag in the short term on top of the normal headwinds that we face and that we're mitigating every day in the business. But in the round, we've always been very, very excited by the higher growth levels. We think it's right for the business. It gives us more volume in purchasing, more consumers to retail to and more opportunity in the medium term. But we recognize that it will put it means minimal margin growth.
But by the same definition, at the lower end of those growth range, we think that's when we should start to enjoy the opportunity to manage the margin
up.
We will now take our next question from Richard Clarke of Bernstein. Please go ahead.
Good morning. Couple of questions for me, please. The first one is on the U. S. You called out the strong business and industry performance leverage you have carrying on from last year.
I'm just wondering what's driving that. Is that continued strong growth in things like vending and the coffee shop offers you've got in? Or is it kind of broadly across the spectrum of the business and industry? And then second one, clearly, you're kind of doing some M and A. Any comment you can make on what impact they might have on potential cash returns this year?
I'll let Palmer pick up on the North America B and I plan, and then I'll handle the M and A one. So it's Palmer first.
Sure. Richard, to your B and I question,
we've got a strong B and
I business within North America. I think it's grown nicely over time. And when we look at the last year and the Q1 of this year, I think the growth that you're seeing is pretty widespread throughout the types of businesses that we have. You mentioned our vending office coffee micro markets business. We have seen nice growth in those segments, and that is certainly the case in the Q1.
So that momentum continues. It's still a relatively smaller portion of the overall B and I business we have, but the growth rates that we're seeing there are quite nice. I would say we continue to enjoy nice growth in the tech areas as well. The I guess, some of the industrial businesses, we're seeing some nice growth. So I think it's pretty widespread.
I would consider our B and I business fairly healthy overall, and we remain excited about the prospects looking forward.
Great. Thanks, Palmer. On the M and A point, I mean, really just to kind of ground us back in our sort of capital allocation framework, we still believe that it's that our priorities are to invest in the business. We said that, that investment through CapEx will be up to 3.5%, and that's the guidance we maintain for this year, especially as we're enjoying the higher growth rates. Secondly, I think we've got a renewed focus on M and A, but more particularly outside of North America.
We think there's a very important part for bolt on, so nontransformational M and A to play for us as a group. There are some exciting opportunities in food only businesses, which add scale, great management and good brands. And that's the pipeline of opportunities we'd like to pursue. We will prioritize CapEx and M and A to the extent that there is surplus capital in the balance sheet either within a year or as we look forward at that M and A pipeline over several years, then we'll consider returns. I think it's more appropriate that we should update the half year and the full year on exactly what that looks like as both some of the disposals and acquisitions start to crystallize.
We will now take the next question from Jamie Rollo of Morgan Stanley.
Two questions, please. First, just on the margin guidance again for the full year. I think for Europe, you were talking about up 5% to up 10% this year back in November. I know a lot of the sales growth is new contract wins. But is that guidance still there?
Because obviously, last year, margins fell quite a lot. So I'm wondering if they could bounce back a bit more with that strong top line. And secondly, on the full year sales guidance of just above 5%, I mean, probably splitting hairs here, but it implies the rest of the year is going to be below 5. I know Q1, there was a one off there, but they're not going to be reversing. So are we not looking at something nearer 5.5 plus this year like last year?
Yes. Jamie, thanks for those questions. I mean, first of all, on the margin guidance for Europe, I think the answer is yes. We still expect to make margin progression second half weighted in the UK and contributing to Europe. So that guidance remains unchanged despite those higher levels of growth that we've enjoyed and will enjoy in the first half of the year.
In terms of full year guidance, look, I mean, all I can really say at this point is we've made an excellent start to the year, but it's only a quarter.
The world feels a bit
of an uncertain place at the moment. We haven't talked a lot about Brexit, but that's a risk. We may see more from the government shutdown. And there's obviously been Quedejune activity in France, which has caught on some other European countries. So we remain a touch cautious and conservative in the outlook as a result of those factors, and I think rightly so.
And it's probably right to say as well that the quality of our second half will be predicated on our retention in new business performance in the first half of this year, and it's still early days. So at the moment, I think we feel good about slightly above the midpoint of the range. And we'll talk to you again in the half year.
Okay. Thanks a lot.
It appears there are no further questions at this time. So I'd like to hand the call back over to Taze Host for any additional or closing remarks.
Thank you very much, and thank you, everyone, for your questions. And we'll speak to you again at the half year results in May, and have a good day.