Morning. Thank you for joining us. We have 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. I'll come back for a more detailed review of our operating performance and our strategy going forward. There'll be plenty of time for questions and answers at the end. I'm pleased to report that Compass had another strong half. Organic revenue was up by 4.8%, 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 U.K., with benefits to come in the second half. The business continues to be very cash generative, with free cash flow of GBP 465 million in the first half.
EPS on a constant currency basis was up by 10%. We are proposing to increase the interim dividend by the same amount. The business is trading well. Our full-year expectations are unchanged. On that positive note, I'd like to hand over to Johnny.
Thank you, Dominic. Good morning, everyone. Let's start by taking a look at revenue. The recent strength of sterling against our other trading currencies had a negative impact of GBP 700 million on 2017 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 U.K., France, and Germany. Mid-single-digit growth in the U.K. 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%, 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 GBP 57 million. Growth in absolute operating profit of GBP 44 million and GBP 10 million in North America and Rest of World, respectively, was offset by a GBP 21 million decline in Europe. Associates and lower overheads added GBP 5 million, 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 two. 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 U.K. 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 U.K. 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 are 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 mixed 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. 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 GBP 57 million 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 GBP 15 million. If current spot rates continue through 2018, FX would negatively impact profit by GBP 90 million. Further details regarding FX sensitivities can be found in the supplementary slides.
Let's take a look at the bottom of the income statement in more detail. Net finance costs were GBP 55 million, 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 million. 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 benefits. 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 GBP 244 million due to our investments in CapEx. Gross capital expenditure was 3.5% of revenue, as planned, reflecting the investment in the L.A. Dodgers contract in the first half. We expect full-year CapEx to be between 3%-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 GBP 27 million outflow. For the full year, we continue to expect working capital to be an inflow of around GBP 40 million as the impact of the extra payroll in 2016 in the U.K. and 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. We expect the full-year payment to be around GBP 15 million. Net interest was higher due to the additional debt to fund the GBP 1 billion special dividend. The cash tax rate reduced to 18.5% due to the usual 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% and 22%. Excluding the impact of FX, absolute free cash flow would have been in line with last year. Free cash flow conversion was 63%, and we expect full-year cash conversion to be back within our target range of 55%-60%. Looking at the balance sheet. Again, starting on the left of the chart, opening net debt was GBP 3.4 billion, and the business generated cash of GBP 834 million before CapEx.
We invested GBP 369 million in CapEx to support our long-term growth, while net acquisitions totaled GBP 318 million. The acquisition of Unidine completed on 31st of December 2017. We're excited about the contribution this business will make to our senior living sector. We returned GBP 353 million to shareholders in the form of ordinary dividends. FX and other items reduced net debt by GBP 87 million. On 31st of March 2018, net debt to EBITDA was 1.6 times 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. In conclusion, we're pleased with the first half.
The business is performing as expected. 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%. Like-for-like revenues reflect 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%, with good growth in B&I, healthcare, vending, and sports and leisure. Retention was particularly strong at 97%. Margins remained at 8.5%, despite this strong growth rate and the above-average labor cost pressures. 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 subsectors drive growth independently, but can also combine to maximum effect on these bigger accounts. Chartwells is providing the core higher ed offer. Levy is arranging food services for the athletics facilities. FLIK will oversee dining and refurb of the Kellogg Business School. Canteen offers the latest technology in vending and unattended mini markets to the students.
Bon Appétit is assisting with the culinary and sustainability offer. Our sources of growth in North America have 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. Pleasingly, our pipeline reflects this shape as we look forward as well. We've developed a successful model for consistent long-term growth in North America. We sectorize and subsectorize the business, differentiating the offer and unlocking exciting market opportunities. We use our scale in food costs and overhead, and most importantly, we have the right culture and people. These ingredients, combined with a dynamic outsourcing market, make me very optimistic about the future of our North American business. In Europe, the picture is mixed.
Good growth in the U.K., driven by new business in B&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 U.K. We are taking actions to address this, including labor efficiency programs, intensifying our pricing conversations with clients, and increasing our purchasing savings. 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 U.K., 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&I brand.
In Germany, we've made three small acquisitions: Kanne Café, a retail health sector specialist with revenues of around EUR 30 million; Royal Business and Leonardi, two premium B&I brands with combined revenues of around EUR 30 million. We now have a small Continental European leadership team, and the seven business units we've talked to you about before are now fully in place. We can now start to leverage our regional and subregional scale. For example, we've increased our Continental European procurement, and the savings are now starting to come through. 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 is 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 did a few years ago coming through. In summary, North America continues to perform very strongly. In Europe, the U.K. is driving the growth. We are taking actions to strengthen our prospects on the continent. Performance in the Rest of the World is improving. For the full year, we expect continued strong organic revenue growth and modest margin improvement. 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 advantage of our 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 acquisitions. We've avoided large deals, focusing on small bolt-ons which improve our capability in the sector or subsector. 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 we've either reinvested in the business or returned to shareholders. Given the success of our strategy of focus on food, we're really excited about the market opportunity we see within food services. We're 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.
I believe we've developed significant competitive advantages. We deliver strong and disciplined organic revenue growth, which is mainly due to our decentralized structure and our strategy of sectorization and subsectorization. This has given us unique scale on purchasing and overheads, particularly in North America. We have 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. 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 the case.
We're not complacent, and we're increasing our intensity around the three Ps, performance, people and purpose. We'll continue to drive our performance with an even greater focus on operational execution in our core food business. We need to attract, retain, and develop the very best people in our industry, and we'll 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 markets and ensuring consistency and speed of execution. We already 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 four areas that we'll execute with more intensity and greater sharing of best practice. In MAP 1, our approach to sectorization and sub-sectorization, 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.
In MAPs 4 and 5, our approach to labor, whether it's in-unit or overhead. We'll be more productive and efficient in managing our biggest cost item. To manage our workforce more effectively, we'll invest in systems to improve time and attendance and the use of overtime, agency, and temporary labor. We need to remove unproductive work, simplifying our processes, and be more intelligent in how we design our work activities. Technology such as cashless and cashierless solutions and apps that allow consumers to pre-order and pre-pay all help improve productivity. 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&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 years. We're also looking at disposals to simplify the portfolio. We'll consider them based on potential. Be that market growth, scalability, or our own market position and capabilities. People are at the center of our business. 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, retention and engagement with initiatives such as better onboarding, provide more training and better career development with access to both technical and professional qualifications. We'll have succession plans much deeper within the operational workforce. We currently employ around 600,000 people, with women accounting for around 65% of our total workforce. However, amongst our top 400 leaders, the male to female ratio is 70/30.
Our target is for women to be at least 40% of the leadership team with an ambition of parity over time. Finally, with purpose and corporate responsibility. We have four areas of focus, which we've aligned to the seven United Nations sustainability goals where we believe we can make the most impact. For example, on 27th of April, we held our second Stop Food Waste Day, where 30 countries held activities to increase awareness and reduce waste in our units, at home, and throughout our supply chain, communicating directly with up to 10 million consumers on a single day. We've made great progress in the past few years. 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.
The priorities I outlined will allow us to adapt to an ever-changing environment. We aim to deliver between 4% and 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. We'll do bolt on M&A to strengthen our capabilities whilst exiting non-core businesses that dilute management focus, returning any surplus cash to shareholders whilst keeping net debt to EBITDA to around 1.5 times. In summary, we will focus on food. We're increasing our intensity around MAP and 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. We'll 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. Now we'll take questions.
If you're on the phones and you have a question, please press 0 and then 1 on your phone keypad now to enter the queue. After I announce you, just ask that question.
Vicki?
Morning. It's Vicki Stern for Barclays. Three questions. Firstly, you touched on disposals. Just any more detail as to what those might look like? Is that sort of regions you're talking about, segments? Are they lower 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? Finally, just on the acquisitions, is the plan still very much bolt-ons, or would you consider any larger acquisitions?
I'll take the questions on disposals and acquisitions, then I'll hand the road question over to Johnny. First of all, in terms of disposals, I think we set out this morning the criteria by which we'll review the portfolio. It's very much whether we've got a strong market position, whether we believe 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 and sub-sectors. 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.
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, our preference remains bolt-on M&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 food, but they'll still sit within that bolt-on criteria that you've seen us do before.
Yeah. 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%-6% organic revenue growth. We still expect to see some modest margin improvement over time. That remains unchanged. I think the CapEx up to 3.5% is at the margins and 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 L.A. Dodgers. We may not spend 3.5% every time, but it just gives us that little bit of space. We're comfortable that we can maintain at least these high levels of return on capital into the future.
Just in terms of the regional splits in that, as we've said in the past, and 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. That's it.
I think the point is we won't constrain ourselves where we see opportunity in either CapEx or M&A.
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? What is it about the North American healthcare market that makes support services there attractive? Secondly, on Europe margins. Given the comments about 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? 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, look, this isn't about exiting support services as a group. We have a compelling multi-service offer in defense, offshore, remote, and also within healthcare. I think we are at our best when we focus on food. Within those sectors, I think we have all of the capability to be able to deliver a compelling offer. This isn't just about North American healthcare. We have the same model within the U.K. 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. We think that those attributes make it a successful model that we've built out. We're less minded towards support services where it's single line, particularly in B&I, and we'll certainly be looking at those as part of our review.
Just on the margin question. For Europe particularly, we have taken fairly firm, robust action in the U.K., as I talked about in the presentation. We are confident that the U.K. 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 have got plenty of opportunities. We are doing further work on the business units. 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. for obvious reasons. It is not as homogenous a market. We are starting to increase the volume purchases. In time, I would expect that Foodbuy may become a greater consideration.
For the moment, it is really about core basics around procurement in Europe.
Once again, if you are on the phones, please press zero and then one on your phone keypad now, we will announce you after questions from the floor.
Thank you. Jeffrey Harwood from Stifel. Two questions. First of all, can you touch on the pipeline of new business? 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. 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. 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 second quarter, and give us any sort of idea of the run rate growth year to date? Then secondly, on the CapEx, can you discuss which industries it's going into? 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?
Just on the first point, North American growth rate in quarter two was 6.3%. The impact of Easter and weather was about a percentage point, obviously taking it up to 7.3%. 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. 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% for North America. Just on the CapEx point, we look at opportunities across all sectors and all subsectors. 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, 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, 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 aiding 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. Any questions over there on the conference, please.
Okay, one more time. If anyone has any final questions on the phones, please press zero and then one on your phone keypad now.
Okay. I think that's it. Thank you all very much for joining us. Thank you for your time today.
This now concludes our call. Thank you all very much for attending. You may now disconnect your lines.