Hello, ladies and gentlemen, and welcome to the Compass Group first quarter trading update call. Throughout this, all participants will be in listen only mode, and afterwards there will be a question and answer session. Just to remind you, this call is being recorded. Today I'm pleased to present Dominic Blakemore, CEO, and Johnny Thomson, Group Finance Director. Dominic, please go ahead.
Thank you, and good morning, ladies and gentlemen. Thank you all for dialing in. With me this morning, I have Group Finance Director Johnny Thomson. This is the first time we've spoken to you since the tragic death of Richard Cousins and his family. I'd like to take this opportunity to thank you all for the many kind messages we've received since his passing. He was an extraordinary man who built Compass into the business it is today, and he will be greatly missed. Richard left the business in great shape, and that's further evidenced by our strong first quarter. I'd like to say a few words about our performance and outlook before opening the call to questions. Group organic revenue growth was 5.9% for the three months to the end of December. This was driven by strong levels of new business wins, excellent retention, and good like-for-like revenues.
We continue to generate efficiencies, and we are taking action to offset above-average cost pressures in the U.K., the benefits of which will come through in our operating margin in the second half of the year. Turning to the regions. In North America, organic revenue was up 8.2%. While we've seen very good growth across all sectors, healthcare and seniors, vending, and sports and leisure were particularly strong. Europe reported 2.1% organic growth in the first quarter due to good growth in U.K. business and industry and a favorable calendar in sports and leisure. In the rest of the world, organic revenue increased by 4%, driven by strong performances in Turkey and some of our Spanish-speaking Latin American businesses. Offshore and remote declined by 1.6%, better than we expected due to delays in the transition from construction to production at certain sites.
Growth in the rest of the world region, excluding offshore and remote, was therefore 6.1%. On acquisitions, we spent GBP 265 million during the quarter, the largest of which was Unidine. Unidine is a pure play food service provider in the rapidly growing healthcare and seniors market in the U.S. It has annual revenues of around $220 million and margins broadly in line with our North American business. Currency movements compared to the same quarter last year had a negative translation impact on revenues of GBP 288 million and on profit of GBP 24 million. If current spot rates were to continue for the remainder of the year, foreign exchange translation would negatively impact revenue by GBP 1.2 billion and operating profit by GBP 97 million. In summary, we had a strong first quarter, and our outlook for 2018 is positive.
We continue to focus on driving efficiencies through the business and expect modest margin progression on a full-year basis, albeit this will be second-half weighted. Growth in North America is excellent, and both Europe and the rest of the world are performing better than planned. Therefore, we now expect to be above the middle of our target 4%-6% organic growth rate for the full year. In the longer term, we remain excited about the significant structural growth opportunities globally and the potential for further revenue and margin growth. Thank you. Now we have to take your questions.
Thank you. Ladies and gentlemen, if you wish to ask a question, could you please press zero and then one on your phone keypad now in order to enter the queue. Then after I announce you, just ask that question. If you find that question has been answered before it's your turn to speak, just press zero and then two to cancel. There'll be a brief pause while the questions are being registered. This question is to the line of Jamie Rollo at Morgan Stanley. Please go ahead. Your line is open.
Thanks. Good morning, everyone. Two questions, please. First, clearly very good sales figures. You didn't mention margins in the period itself. I'm just wondering if you could give us a feeling for what those were, and also what the sort of cadence will be between the first and the second half through the year. The second question was just on U.S. tax reform. It's probably too early to say, but any change in behavior either from your clients or from competitors passing on savings through perhaps more aggressive fees? Thank you.
Okay, Jamie. As you know, we don't give out Quarter One margin. We never have done. Just to reemphasize what Dominic was saying, we do expect on a full-year basis that our margins will move forward, albeit modestly. We said to you, I think, in November, say again that we're taking some actions right now to face into some labor pressures, particularly in the U.K. business. The cost of those actions will hit us in the first half, so our margins will be fractionally down 5-10 basis points maximum. Then the benefits, of course, will come through in the second half to get us to that full-year margin. We're doing those actions now, we're still very confident of that guidance. On the tax point, of course, it's very early to say. It's so complex that people are still working it through.
In fact, while it's obviously been a nice benefit to Compass and to others, there's still a lot to do in terms of how the IRS and the states will interpret the tax. I think it's a little early for us to say or to envisage what might happen with clients and competitors at this stage.
Thank you very much.
Thanks, Jamie.
It's over to the line of Vicki Stern at Barclays. Please go ahead. Your line is open.
Hi, morning. Just sort of picking up on that last question, I suppose regardless of impacts of tax, we certainly are seeing a pickup come through from Aramark, particularly in terms of their organic growth rates in the U.S. Doesn't feel like you're seeing that particularly in the numbers you've just printed. Just more broadly, if you can talk about the competitive backdrop and perhaps you're seeing anything on the new bids and retention side, maybe as some of their procurement savings come through. Then, again, a bit related to the other question, you touched on it there in terms of the inflationary pressures, could you just remind us again sort of which are the real challenge markets in terms of cost?
Where are you seeing the biggest pressures, What exactly are the actions that you're taking to mitigate those that give you confidence in the full year margin higher? Thanks.
Okay. Thanks, Vicki, Good morning. I'll take the question on the U.S., Then Johnny Thomson will pick up the question on the inflationary pressures. I think first, I'd just like to say, I think we've sustained very good levels of organic growth in the North American business over a number of years now. I think this quarter has been particularly strong. I think you recognize that we've had some benefit from the positive calendar in sports and leisure. Underlying, that growth rate is 7% to 7.5% in the U.S. or in North America for the quarter and for the year is very positive. I think when we look at our U.S. business, the pipeline looks strong. The pipeline looks as strong as it's looked over the last few years. It's very broad-based across all sectors.
We see good opportunity in healthcare and seniors in particular, Hence the acquisition we've made in that sector. I think the business model that we've got, which is sector and multi-sector or sub-sector based, with the scale that we get through food buying and the leverage in MAP 5, will allow us to maintain and hopefully extend our market position. We remain just very positive on the North American performance. Frankly, in the short term, we think that it's more than sustainable.
Just on the inflation point, Vicki, obviously, as you'll be aware, the labor inflation is slightly above the historic trend at the moment. Although on the flip side, food inflation in general is a fraction lower. In terms of where we're seeing that, it is across many of our geographies. The U.S. with the employment levels being as they are, of course, the availability of labor puts some pressure on inflation in the U.S. business. I'd say probably most relevant, though, at the moment for us is the U.K. business. Of course, minimum wage had been moving up, but on top of that, the devaluation of sterling has also impacted our food costs, too. Inflation in the U.K. has been a bit above par.
In terms of what we do, well, as you'll expect us to say, the MAP framework is really how we go about running the business and ensuring that we execute against it. Specifics such as labor scheduling to manage our labor, to optimize it in this environment, and procurement and overhead management as well, of course, as passing on and pricing where we have to. It's the usual MAP execution to see us through.
Thanks. Just to follow up, are there any specific contracts? I know you've talked about the support services having some challenges in the past. Any specific areas where you think actually potentially of an exit from some of those categories?
Yeah, look, we'll always consider our portfolio and reflect on what we think is appropriate business. We are food focused. I think we'll be increasingly food focused as we go forward. I think that means we'll be more selective around our growth. We're very confident operating a soft multi-service bundle in the defense offshore remote sector and in healthcare in particular, but within B&I, within education, within sports and leisure, our preference is for food. I think you should just expect us to review our portfolio and make the right decisions selectively as we go forward.
Okay. Thanks very much.
Over to the line of Angus Tweedie at Bank of America Merrill Lynch. Please go ahead, Angus. Your line is open.
Morning, guys. Couple of questions from me. Firstly, on healthcare, you put it out as an area that you're seeing very strong growth in. It's one of the areas your peers are finding it a bit tougher. I don't know if you can give us a bit more color on the market there. Secondly, looking at the seniors and particularly the Unidine acquisition, are there any capabilities that's going to give you that you didn't have before?
Okay. Clearly the healthcare picture is different across markets, and the comments we've made this morning would be specific to the U.S. We've seen good growth there in the last 18 months or so. We've won some good accounts. I think we've got a strong operating model in the healthcare sector, and we remain excited about the opportunities, and we've got some good partnerships with strong accounts. They also tend to acquire other hospitals within the U.S. footprint, and when they do that, they tend to roll our services out into those acquired hospitals or healthcare systems as they expand. Clearly with global population trends, it will remain a sector of higher growth and interest to us. We're very focused on making sure we have the right offer, that we segment that offer, and that it's different in public sector, private hospital care.
Even within that, we're able to offer premium and more of a mass catering offer, as it were. We're excited because you have the ability to retail, to feed the staff, the surgical staff, and visitors as well as the patients. It's a broad range of services we can provide into a single offer and scale unit. It is exciting. With regard to Unidine, it's a great acquisition for us, a very good business, well-positioned in senior living. It brings with us a good geographic footprint in the sector, a good management team, and it allows us to consolidate our senior living sector and start to think about how we play our brands into that sector across the country.
Thanks. Just sorry, another question for Johnny. Given the really strong growth we've seen in the first quarter, are you still happy with where your CapEx guidance is for the full year?
Yes, I think so. As we said in November, our CapEx this year will be a fraction above the 3%, principally because of the investment we made in an important client, the L.A. Dodgers. I wouldn't change that guidance at this point, no.
Lovely. Thanks very much.
Thanks.
We'll have Richard Clarke at Bernstein. Please go ahead, Richard. Your line is open.
Good morning, Dominic and Johnny. A couple of questions from me. Just one on the previous guidance you had, the shape of the year, that growth was going to be accelerating in the second half. Just wondering, what's happened to bring the growth forward? Is it contracts ramping up quicker or some signed earlier? Therefore, what would you expect going and you can keep this performance up? Then another one just on employment, and maybe probably following on a bit from Vicki's question, but I noticed in your annual report that you published a few months ago that your total employees went up 11% in 2017. By my calculation, your average wage per employee, if I adjust for currency, went down by about 9%. Is this a move towards using more flexible labor?
Maybe you can talk about the kind of risks associated with that, given some of the sort of changes that we've seen regarding Uber drivers, et cetera. I'm not saying you're using zero-hour contracts, but along that line.
If I just take your first question there. Look, as we've indicated today, we're feeling very good about the top line. We're encouraging people maybe to move up a little bit from 5% towards 5.5 for the full year. Clearly, the underlying trading of the business is a bit more positive than we expected. There are some one-offs in the first quarter, we have to take that into account, particularly in sports and leisure events, and the delay of the construction cycle in Australia. Nevertheless, the half is stronger. I previously indicated that maybe we would be more second-half weighted on revenue growth. I think now, having banked this first quarter, I would say they'll be a little more evenly spread between the two quarters.
In terms of what's driving that, I think it's across all of our regions, our new business continues to be strong. Retention was a fraction better than expected. Again, the like-for-like volume is just a bit up because of some of these one-off events in sports and leisure. Yes, underlying trading is very positive.
With regard to the question on employment levels, yes, you are right. As we introduce more flexibility, it increases the absolute number of employees. That isn't the FTE number that we give you. The absolute number of any employees increases, particularly, yes, zero-hour contracts in the U.K., but greater flexibility in our contracts, more part-time working, which allows us to schedule labor more accurately to the peaks and troughs of demand. That absolutely is the model that we're looking for as we go forward. We've got to look for more and more productivity gains as we see the higher than average labor inflation going through the system.
We would expect that trend to continue into this year as well of more employees and lower wages per employee?
Broadly, yes.
Yeah. Okay. Thank you very much.
We now have the line of Jaafar Mestari at JP Morgan. Please go ahead. Your line is open.
Hi. Good morning. I've got two questions, please. The first one on North America, are there any individually significant large contracts to flag in the very good performance in Q1? Obviously, you have delivered around 8% organic growth several times in the past. Sometimes like in 2016, it was described as broad base, then sometimes like in 2015, it was held by some individual large wins like Texas A&M. Just wondering if there's anything to flag in this quarter. My second question on rest of the world, you're flagging some delays in the transition from construction to production. Do you have any visibility from your clients on when those sites are going to be moving into production? Is this a question of one quarter, or could these delays be for longer?
Yeah. Thank you for those questions, Jaafar. I'll take the first, then Johnny the second. With regard to North America, I think that it's a very positive answer in that no, we haven't seen significant large contracts in those growth rates. This is good, broad-based growth in medium-sized contracts across the sectors, which I think is very positive. Just to unpack it a little bit, our new business in North America would have been around the 8% level. In fact, our retention is really very strong at 97%, which means our net new is 5%. Sustaining those retention levels is really important. It means that our like-for-like growth in North America was around 3%, which was probably a bit more price than volume, and the volume benefiting from the one-off Canada that we discussed earlier.
No, good growth, good retention, broad base, no reliance on major contracts. Just a final point on that is those contracts that we talked to you about in the past, the likes of Ascension and Texas A&M, they continue to grow. The estate grows, and we pick up more volume through that. No, we haven't seen any major contracts of that nature since.
Just picking up on the question with regard to the construction contracts. You can imagine the complexity of some of these LNG projects, and therefore, for us as a provider, it is quite difficult for us to foresee and predict exactly when these will move into production. We had expected it to be at the beginning of the year. I'm now expecting it to be in the second half of this year, but again, it's difficult for me to commit to that. Over the long term, what we are seeing is that the underlying trading in the rest of the world as a whole is a bit more positive than we expected, and there are some good performances in the rest of the world. Turkey, India, China, and Spanish-speaking Latin America are all doing very well.
I think we're nudging up our guidance on the rest of the world, albeit because of construction, it will be more linear across the year at 4% rather than accumulating during the year.
All right. Thank you very much.
Philip, it's Jeffrey Harwood at Stifel. Please go ahead, Jeffrey. Your line is open.
Yes. Good morning. I wondered if you could touch upon trading in Europe outside of the U.K., please.
Sure, Jeffrey. Let me take that. I will touch on the U.K. first, actually. We report Europe now as the U.K. and Continental Europe combined. Our U.K. growth was around 5.5% in the first quarter, and we expect that to accelerate from here on in in the balance of the year. Quite a positive growth picture in the U.K. Continental Europe in the quarter was flat, and that's the trend that we expect on a full-year basis. Within that, there is a different picture across the markets. France started the year well, growing around 4%, but benefiting about 2% from the extra trading day. The Nordics region was held back still by the decline in the oil and gas volumes, which is still running through the system at the moment. In DACH, Germany, Austria, Switzerland, Germany was disappointing, down about a percentage point.
We're expecting some good growth in the balance of the year in Austria and Switzerland, which should see that sub-region integrate later in the year. Italy was negative, largely because we're exiting a number of support service contracts. Spain was positive, and Benelux was positive. In the round, it's a mixed picture. There are some good performance, some areas where we need to do better. In general, our retention rates aren't strong enough in continental Europe, and we're very focused on that. We continue to win reasonable levels of new business, and we see a reasonable like-for-like picture with both price and a little bit of volume.
Okay. Thank you very much. Thanks.
Thank you, Jeffrey. I think we've now come to an end. Are there any more questions? Okay. Well, thank you all very much for your time this morning, and we'll speak to you again about our half year results in May. Thank you, and have a great day.