Morning and thank you for joining us. With a busy agenda today, I'll begin by making
a few comments on the highlights of the half. Johnny will then take you through the financials, and I'll come back for a more detailed review of our operating performance and our strategy going forward. Now we thank you for your time for questions and answers again.
I'm pleased to report that Compass had another strong half. Organic revenue was up by 4.8 percent and excluding the impact of Easter and weather, our growth was 5.3%. Our operating margin was 7.5%. We've taken significant cost actions to address inflation pressures in the UK with benefits to come in the second half.
The business continues to be very cash generative with free cash flow of GBP 465,000,000 in the first half. EPS on a constant currency basis was up by 10%, and we're proposing to increase the interim dividend by the same amount.
The business is trading well and our full year expectations are unchanged. And on that
positive note, I'd like to hand over to John. Thank you, Dominic, and good morning, everyone. So let's start by taking a look at revenue. The recent strength of sterling against our other trading currencies had a negative impact of £700,000,000 on 20 17 half year revenues. North America grew by 7.3%.
Growth was broad based across all sectors. New business was excellent and retention was also very strong at 97%. Europe grew by 0.5%. Performance in Q2 was impacted by the timing of Easter and adverse weather conditions in the UK, France and Germany. Mid single digit growth in the UK was mostly offset by subdued trading across Continental Europe.
Rest of world grew by 3.4%. Strong performances in Turkey, China, India and Spanish speaking Latin America drove growth of 5.3%. Our commodity business declined by 1.7 percent better than expected at this stage due to the delayed transition from construction to production in Australia. As a result of these movements, group organic revenue grew by 4.8% in the first half. If we exclude the impact of the timing of Easter and bad weather, we estimate growth would have been 5.3%.
FX reduced operating profit by £57,000,000 Growth in absolute operating profit of £44,000,000 £10,000,000 in North America and Rest of World respectively was offset by a £21,000,000 decline in
Europe. Associates and lower overheads added £5,000,000 resulting in a 4.5% increase in constant currency operating profit.
Margins in North America remained high at 8.5% as a continued focus on pricing and efficiencies offset labor headwinds and the impact of snowstorms in quarter 2. At these exciting top line growth rates, we expect margins for the full year to be unchanged. In Europe, inflation and cost of change actions in the UK and the impact of the weather across the region diluted margins by 80 basis points in the half. The benefits of the cost actions in the UK will come through in the second half. However, margins for the region will still decline year on year.
Margins in rest of world improved by 40 basis points. We're leveraging our overheads better in growth markets such as Turkey and continue to see benefits from the restructuring we did a few years ago in markets like Australia.
We expect margin progression for this full year to be similar. The mix benefit of higher margins in North America and the excellent improvements in rest of world, combined with group overhead leverage, mostly offset the decline in Europe, resulting in an operating margin decline for
the group of 10 basis points in the half as anticipated. And we continue to expect modest margin progression for the full year. As you know, FX has a translation impact only for Compass. The strengthening of Sterling has a negative translation impact of £57,000,000 on operating profit. To give you a sensitivity, a 1% move in sterling against all of our trading currencies would change full year 2017 operating profit by around £15,000,000 As current spot rates continue through 2018, FX would negatively impact profit by £90,000,000 Further details regarding FX sensitivities can be found in the supplementary slides.
So let's take a look at the bottom of the income statement in more detail. Net finance costs were £55,000,000 slightly above last year due to the interest on additional debt to fund the special dividend. We continue to expect net finance costs for the full year to be around GBP 120,000,000 As a result of the changes in tax legislation in the U. S. And as announced in January, our tax rate was 24% in
the half. This remains our expectation for the full year, although we note that the
tax environment continues to be uncertain. Constant currency EPS grew by 10% boosted by last year's share consolidation and this year's tax benefit. In line with our policy, we are proposing to increase the half year dividend by the same amount. Moving on now to cash flow. Depreciation and amortization increased slightly to £244,000,000 due to our investments in Gross capital expenditure was 3.5 percent of revenue as planned, reflecting the investment into LA Dodgers contract in the first half.
We expect full year CapEx to be between 3% and 3.5%, and we will continue to use CapEx as a
tool to support strong growth rates with high returns. Dominic will talk a bit more about our future CapEx expectations in a second. Working capital was a £27,000,000 outflow.
For the full year, we continue to expect working capital to be an inflow of around £40,000,000 as the impact of the extra payroll in 2016 in the UK and the U. S. Reverses. Operating cash was marginally down due to FX movements. Positively, we have absorbed the investment in the Dodgers to deliver operating cash conversion in line with last year.
Post employment benefits were unchanged year on year and we expect the full year payment to be around £15,000,000 Net interest was higher due to the additional debt to fund the £1,000,000,000 special dividend. The cash tax rate reduced to 18.5 percent due to the unusual timing differences in the first half and the lower U. S. Tax rate. For the full year, we expect the rate to be between 19% 22%.
Excluding the impact of FX, absolute free cash flow would have been in line with last year. Free cash flow conversion was 53% and we expect full year cash conversion to be back within our target range of 55% to 60%.
Looking at the balance sheet, and again starting on the left of
the chart, opening net debt was £3,400,000,000 and the business generated cash of £834,000,000
before CapEx. We invested £369,000,000 in CapEx to support our long term growth, while net acquisitions totaled £318,000,000
The acquisition of Unidyne completed on 31 December 2017 and we're excited about the contribution this business will make to our senior living sector. We returned £353,000,000 to shareholders in the form of ordinary
dividends. FX and
other items reduced net debt by £87,000,000 and so on 31 March 2018 net debt to EBITDA was £1.6 as we continue to deleverage following the additional debt to fund the special dividend. As usual, I pulled together some of the key 2018 full year assumptions on one page as reference for your modeling.
And in conclusion, we're pleased with the first half. The business is performing as expected and we continue to grow organic revenue strongly, have industry leading margins, invest in the business and grow dividends in line with constant currency EPS. Now back to Dominic. Thanks, Johnny.
I'm really pleased with our revenue performance in the half. We continue to see good new business wins across the group. Retention is strong at nearly 95% and like for like revenue reflects sensible pricing. Let's look at the performance of each of the regions in turn.
Starting with North America, which had another very strong half. Our organic revenue grew by 7.3 percent with good growth in B and I, healthcare, vending and sports and leisure. The retention was particularly strong at 97%. Margins remained at 8.5% despite this strong growth rate and the above average labor cost pressure. I'm really pleased with the balance of
our North American business amongst the different sectors. We aren't over or underexposed to any particular sector, which I believe allows us to drive sustainable growth. This is enhanced by our strategy of sectorization and subsectorization, which allows us to really focus on the different client requirements and ensure we have a tailored offer to meet that client's needs. Essentially, subsectorization makes us more like a regional player, but with the cost advantage of being a big one. A great example of this is Northwestern University and the Kellogg Business School.
It's a significant account on a campus with 25,000 students that we've recently won as a result
of our differentiated offer. It's a great example of
how our sub sectors drive growth independently, but can also combine to maximum effect on these bigger accounts. Chartwells is providing the core Higher Ed offer. Leaving is arranging food services for the athletics facilities. Flick will oversee dining and retail at the Kellogg Business School. Canteen offers the latest technology in vending and unattended mini market, excuse me.
And Bon Appetit is assisting with the culinary and sustainability of that. And our sources of growth in North America has been remarkably stable over time, with about a third of our growth coming from first time outsourcing, a third from small regional players and a third coming from
the larger players. And pleasingly, our pipeline reflects this shape as we look forward as well.
So we've developed a successful model for consistent long term growth in North America.
We sectorized and subsectorized the business, differentiating the offer and unlocking exciting market opportunities. We use our scale and exclude costs and overhead. And most importantly, we have the right culture and pizza.
These ingredients combined with a dynamic outsourcing market made me very optimistic about the future of Animal's American business. In Europe, the picture is mixed. Good growth in the UK driven by new business in B and I and Healthcare continues to be offset by a more subdued performance on
the continent. As expected, margins were down due to
the inflationary pressures we saw in the UK. We are taking actions to address this, including labor efficiency programs, intensifying our pricing conversations with clients and increasing our purchasing savings. And we fully expect the benefits of these actions to come through in the second half. Although the outsourcing environment on the continent is not as dynamic as it
is in the UK, we're taking actions to improve our growth prospects in the region. We've begun to subsectorize our largest market. In France, we're launching a new premium B and I brand.
In Germany, we've made 3 small acquisitions, Canacafe, a retail health sector specialist with revenues of around €30,000,000 and Royal Business and Leonardo, 2 premium B and I brands with combined revenues of around
€30,000,000 We now have
a small Continental European leadership team and the 7 business units we've talked to you about before are now fully in place. So we can now start to leverage our regional and sub regional scale. For example, we've increased our Continental European procurement and the savings are now starting to capture. I'm pleased with the improved performance in our Rest of the World region, where organic revenue is up by 3.5%. Strong growth in Turkey, India, China and the Spanish speaking Latin American countries was offset by continued weakness in our commodity business in Australia.
Margins improved by 40 basis points as we continue to see the benefit from the restructuring we had a few years ago coming into.
And so in summary, North America continues to perform very strongly. In Europe,
the UK is driving the growth. We are taking actions to strengthen our prospects on
the company. And performance in the rest
of the world is improving. For the full year, we expect continued strong organic revenue growth and modest margin improvement.
So moving on to strategy.
Compass has delivered an excellent performance over the last decade.
We focused on food services, where we can truly differentiate our product and use the cost advance U. S. Scale. We've taken a very limited approach to support services, which we mainly do in our defense, offshore and remote sector and in healthcare in North America and in some of our bigger markets around the world. We're selective in terms of acquisition.
We've avoided large deals focusing on small bolt ons,
which improve our capability in
this sector or a subset. And last but not least, we focus on great execution
with a real emphasis on quality and innovation. Our organic revenue growth has been between 4% and 6%, and we've continued to improve margins modestly whilst achieving a strong return on capital employed. This model generates significant amounts of cash, which is either reinvest in the business or return to shareholders. Given the success of our strategy of Focus on Food, we're really excited about the market opportunity we're seeing within
the food services. With the
global market leader and yet we only have a 10% share, There's a structural growth opportunity from the 75% of the market that is currently serviced by small regional players or in house providers that don't have the cost advantage of our scale.
And I believe we've developed significant competitive advantages. We delivered strong and disciplined organic revenue growth. This is mainly due
to our decentralized structure and our strategy of sectorization and subsectorization. This has given us unique scale in purchasing and overheads, particularly in North America. We are great people, a strong talent pipeline and a clear culture of performance and accountability. I believe that this ability to grow and use our scale gives us an advantage that is very hard to replicate. We've always adapted to changing
circumstances. Inflation is returning and we are facing increasing competition for labor. And at
the same time, our consumers are becoming more demanding and there's an increased focus on the social and environmental impact we have as
a business. Over the years, we've remained flexible and reacted swiftly to changes
and I'm committed that that should continue to be paid. We're not complacent and we're increasing our intensity around the 3 P's performance, people and purpose. We will continue to drive our performance with an even greater focus on operational execution in our core business. We need to attract, retain and develop the very best people in our industry and will integrate our community, social and environmental purpose into the group's day
to day operational strategy. Historically, we've taken a relatively informal approach to sharing best practice. This means that we've often found ourselves unnecessarily reinventing the wheel in a number of our markets. I want this to change. We'll create a small core central team of experts to identify and roll out best practice in a more systematic and disciplined way with greater emphasis on common technology platforms.
This will save us the cost of funding similar initiatives across the group, whilst increasing the commitment and accountability of our market and ensuring consistency and speed of execution. We will greatly drive performance using our management and performance framework, MAP. It's the way we run the business.
We'll double down on MAP. And there
are 4 areas that we'll execute with more intensity and greater sharing of best practices. In MAP 1, our approach to sectorization and subsectorization continuously improving our core offer with an emphasis on quality and innovation. In MAPS 1 and 2, our approach to pricing. In an inflationary environment, we need to improve our capabilities in this area.
In MAP 3, our approach to food cost, I want us
to be more consistent in terms of our core food purchasing processes and systems across the group. And in MAPS 45, our approach to labor, whether it's in unit or overhead, we'll be more productive and efficient in managing our biggest cost side. To manage our workforce more effectively, we'll invest in systems to improve time and attendance and the use of overtime, agents and temporary labor. We need to remove our predictive work, simplifying our processes and being more intelligent in how we design our work activities. Technology such as cashless and cashier solutions and apps that allow consumers to pre order and prepay all help improve volatility.
And finally, we'll improve our hiring, onboarding and back office processes to leverage our overhead costs across the group more effectively. To continue to drive our performance, we also need to tighten our portfolio of businesses. Targeted and disciplined bolt on acquisitions strengthen our capabilities. M and A is a really important way to support our organic growth potential.
It has also proven to be an extraordinary source of talent over the year. We're also looking at disposals to simplify
the portfolio and we'll consider them based on potential, be that market growth, scalability or our own market position and capability. People are at the center of our business
and we will increase our focus on our teams going forward. We're leveraging our position as an attractive employer with a great culture to attract the right people, retain an engagement with initiatives such as better onboarding, provide more training and better career development with access to both technical and professional qualification. We'll have succession plans much deeper within the operational workforce.
We currently employ around 600,000 people, with women accounting for around 55% of our total workforce. However, amongst our top 400 leaders, the male to female ratio is 70% versus. Our target is for them to be at least 40% of the leadership team with an ambition of parity over time. And finally, we've purposed some corporate responsibility. We have 4 areas of focus, which we've aligned to the 7 United Nations' sustainability goals where we believe we can make the most impact.
For example, on 27th April, we held our 2nd Stop Food Waste Day, where 30 countries held activities to increase awareness and reduce waste in our units at home and throughout the supply chain, communicating directly with up to 10,000,000 consumers on a single day. We've made great progress in the past few years, and we're developing our purpose to articulate better our ongoing contribution to society. Bringing all of this together, the current model and excellent past performance is sustainable. This is a clear strategy of continuity and consistency. But the priorities I outlined will allow us to adapt to an ever changing environment.
We aim to deliver between 4% 6% organic revenue growth with modest margin improvement.
We'll grow the ordinary dividend in line with constant currency earnings. CapEx will be up
to 3.5% of revenues as we continue to invest in attractive opportunities across the group.
And we'll do bolt on M
and A to strengthen our capabilities whilst exiting non core businesses with dilute management focus, returning any surplus cash to shareholders, whilst keeping net debt to EBITDA at around 1.5 times. And so in summary, we will focus on food. We're increasing our intensity around Mac in the systematic rollout of best practices and technology.
We're reviewing the portfolio to strengthen our capabilities and simplify the business. We're attracting and retaining the very best talent and will integrate our social and environmental ambitions into our strategy in day to day operations.
I believe we're very well placed to generate sustainable long term shareholder value. Thank you for your time this morning. And now
we'll take
Good morning. Vicki Sterner for Barclays. Three questions. Just firstly, you touched on disposals. Just any more detail as to what those might look like, either that sort of regions you're talking about, segments, are there a profitability, anything that you can call out there?
Secondly, just on the return on invested capital on that incremental CapEx. I think you're sort of willing to go up to around 3.5% of sales. How does the return look like on that CapEx? And how does that perhaps vary by region? And finally, just on the acquisitions, is the plan still very much bolt ons?
Or would you consider any larger acquisitions?
I take the questions on disposals and acquisitions, and then I'll hand the road question over to Jonny. First of all, in terms of disposal, I think we set out this one in the criteria by which we'll review the portfolio. It's very much whether we've got a strong market position, whether we can grow those businesses in line with the organic growth rate of the group. Also whether we have the management capabilities and strength to operate those service lines in subsectors. I think in the round, we estimate that we're considering around 5% of the total revenues of the group.
At this point, we would expect them to be pretty much neutral to both growth and margin. But I think what's really important is it will allow us to really redouble our efforts on the core of the business and therefore drive the performance priorities that you've heard me talk about this morning. We think that, that tail is distracting to management, particularly where it's outside of the core food services. In terms of acquisitions, it remains our preference remains bolt on M and A, not the larger deals. Again, it's very much about building out our offer in the core sectors within the core market.
We are excited by potentials within Trud, but they'll still sit within that bolt on criteria that you've seen as truthful. Yes, just on return on capital, Vicki. I guess the first thing to say is that our financial model is unchanged. We still expect to see 4% to 6% organic revenue growth. We still expect to see some modest margin improvement over time.
So that remains unchanged. I think the CapEx up to 3.5% is at the margins in small incremental when it comes to return on capital. It really just gives us the extra space to invest where in the opportunities as they arise, such as the LA Dodgers, We may not spend 3.5 percent of the time. That just gives us that little bit of space. So we're comfortable that we can maintain at least these high levels of the terms in capital into the future.
Just in terms of the regional split in that, as we've said in the past, I would expect to continue a larger proportion of our capital goes into the North American business where, of course, we see some of the exciting opportunities coming through. A lower proportion of our capital goes into the rest of the world business, principally because for cultural reasons, they consume less CapEx.
And I think the point is
we won't constrain ourselves, so we see opportunity in either CapEx or M and
Hi, I'm Harry Martin from Bernstein. Just firstly on the sharpening of the focus on food. Is there anything that's materially changed in your view of support services? And what is it about the North American healthcare market that makes support services there attractive? And then secondly on Europe margins, given the comments about leverage, we're leveraging scale there, but also cost headwinds, can you just give a bit more color on where you see the margin trajectory over the next few years?
And then is there any update on Foodbuy in Europe?
If I take the first couple and then Johnny will deal with margins in Europe Foodbuy. In terms of the sharpening of focus, this isn't about Exton Support Services as a group. We have a compelling multiservice offer in defense, offshore, remote and also within healthcare. I think we are at our best when we focus on food, but within those sectors, I think we have all of the capability to be able to deliver a compelling offer. And this isn't just about North American Healthcare.
We have the same work within the UK and within another of our rest of the world operations. It's typically at its most successful where you have a captive community on a scale asset for prolonged periods of time where it's not just about managing the services. The services and the broad suite of services are all valued, and it's also about the ability to manage labor to those locations. So we think that those attributes make it a successful model that we've built out. We're less likely towards support services where it's single line, particularly in B and I, and we'll certainly be looking at those as part of our review.
And just on the margin question, for Europe particularly, we've taken fairly firm robust action in the UK, as I talked about in the presentation. And we're confident that the UK and the European margins will rebound nicely in the second half of the year. In terms of looking further forward, we still expect margins in Europe to move forward. We've got plenty of opportunities. We're doing further work on the business units.
We are to your point on procurement, we are increasingly consolidating, albeit from a small base, our procurement across the European continent. It will never be to quite the same level that we can do in the U. S. Obvious reasons. It's not as homogenous a market, but we are starting to increase the volume purchases.
In time, I would expect that Foodbuy may become a greater consideration,
but for
the moment, it's really about core base extension to Europe.
Jeffrey Harwood from Stifel. Two questions. First of all, can you touch on the pipeline of new business? And secondly, on the disposals, obviously, in absolute terms, quite a big figure here. Should we expect a series of piecemeal disposals?
Or could there be a sort of block transaction?
Just tackling the question on new business first. I think our pipeline looking forward very much reflects the growth levels that you've seen us deliver in the last several years and the first half of this year. The pipeline in North America is vibrant. We're growing as a group at 8.5%, and the pipeline supports that. The pipeline of new business in Europe is similar.
So I think we feel we're in good shape on the pipeline. I think if anything in terms of our net new performance, the area of improvement that we're looking to drive further is our retention levels in Continental Europe. Then just in terms of disposals, I think we feel 5% is a modest number. It's likely to be piecemeal. It's likely to take 12 to 24 months to transact.
And so we'll keep you updated as we go.
It's Angus from Merrill Lynch. Can I ask firstly on North American organic growth? Can you help quantify the impact of weather that you saw in the Q2? And give us any sort of idea of the run rate growth year to date? And then secondly, on the CapEx, can you discuss which industries it's going into?
And I mean, is this going into education given we saw very strong retention rates there but not necessarily good new business wins in the last quarter?
Yes. Just on this first point, North American growth rate in quarter 2 was 6.3%. The impact of Easter and weather was about a percentage point, obviously taking you up to 7.3%. So I guess the 8.2% that we reported in the first half, as we discussed in January, was perhaps a little generous because we had some one off sports and leisure events. So I guess the answer for a run rate is somewhere in the middle, which is why we retain our full year expectations of 7.5 percent for North America.
And just on the CapEx point, we look at opportunities across all sectors and all subsectors. And so we're pretty open minded about that. I would say that in general, higher education and sports and leisure can be a little bit more CapEx intensive. And therefore, we're clearly disciplined about how we review those with the appropriate return on capital triggers. We are increasingly, however, putting CapEx into other opportunities too.
And our Canteen business and the success of that business and how we've invested in rolling out the network would be a good example of that. There's plenty of opportunities. I think your point is right. CapEx is very helpful at adding retention. It tends to increase the average contract longevity.
So it's very helpful for us. Okay. There's no more question on the floor. We'll move to the sky. So any questions over the conference please.
Okay.
This now concludes our call. Thank you all very much for attending. You may now disconnect your lines.