Good morning, and welcome to Compass Group Q3 trading update. Hosting today's call will be Dominic Blakemore, Group Chief Executive Officer. Following the opening remarks, you will have the opportunity to ask questions. In order to ask a question, please press star one on your telephone keypad. This call is being recorded. I will now turn the call over to Dominic Blakemore. Please go ahead. Thank you.
Thank you very much. Good morning, everyone. As usual, I'm here with Petros, our CFO. We've had another strong quarter with all regions performing well. We're particularly pleased with the acceleration in net new business, which is now in the middle of our range, with improvements in retention to above 96%. We're also continuing to see a positive trend in volumes.
Industry trends remain very positive, and we have an exciting pipeline of new business opportunities to support growth organically and through strategic M&A. As a result of the stronger than expected top line performance, we've upgraded guidance for the full year. We now expect underlying operating profit growth to be above 15%, driven by higher organic revenue growth of above 10%. Let's move now to Q&A.
Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one on your telephone keypad. Thank you. We will now take our first question from Jamie Rollo of Morgan Stanley. Your line is open, please go ahead.
Thank you, good morning, everyone. Three questions, please. First, as you note, very good, better than expected volume growth. What's driving that? And were there any sort of one-offs in the Europe figure, given that acceleration from Q2? Secondly, just sticking with the volume numbers, clearly there's a pretty high drop-through margin benefit on those, but it doesn't look like you're changing your implied margin guidance.
Is that just natural conservatism, or is that the offset from the accelerating net business wins in the second half? And finally, it might be a little bit early, but I don't think we'll hear from you next till November. So how are you feeling about next year in the context of the 4%-5% net business wins, and also what consensus is expecting? Thank you.
Thanks, Jamie, and good morning. I'll take the first and third, and then Petros can pick up on your question around drop-through on margin. First of all, no one-offs in the EMEA number. It's a clean read. In terms of the strength of volume growth, obviously we expected and have seen some moderation as we've lapped strong comparatives in the prior year.
But we're pleased to see volume growth is holding up around the sort of 2% level. And we think in part that's due to the value that we offer that we talked about previously, relative to the high street as we managed inflation. So we think that's a positive for the story.
In terms of next year, and you referenced the net new, we're in the midpoint of the net new range in Q3. We expect a further slight acceleration in Q4, which means we've got good momentum going into next year. As you know, you know, we can probably see about six months out, so that's positive for the first half of the year. In terms of Gross new business, we're going to have $3.5 billion, which is $100 million stronger than the LTM read at the end of the first half of this year. The pipeline looks good, so we've got every reason to be optimistic on gross new business. Retention rates are above 96% now.
So we've seen those above 95% in Europe, above 96% in the other two regions. So we're in a good place on retention. I think all the indicators are positive, and we'd expect to be in the 4%-5% range on a full year basis for next year.
Just taking that a little further in terms of what that means for growth in 25. You know, as you know, pricing will moderate as inflation moderates, and we expect to see that sequentially occur through the next twelve months or so. And also volumes, as we continue to lap the very strong comparatives we expect to come off a little, although we remain optimistic on what we're seeing in terms of value, as I described.
So look, all in all, our guidance, as we look forward, is for mid- to high-single-digit organic growth. At the moment, we'd expect to be in the middle of that range for next year on the basis of the various different inputs of net new price, like-for-like volumes as we see them today. Petros, do you want to pick up on that?
Yeah, morning, Jamie. I think we continue to be pleased on the volume with +2 for the quarter. I think on margin progression, there is not any change versus what we guide on half one. As you rightly said, you know, net new accelerates in the second half. So we expect, you know, to continue to make progress in the second half of margin, half of the rate of the first half we had for the year.
Okay. Thank you very much indeed.
Thank you, and we'll now take our next question from Vicky Stern of Barclays. Your line is open. Please go ahead.
Yeah. Hi, morning. Just firstly wanted to come back on some of those comments there, Dominic, on the like-for-like for next year. So just on price, obviously, I guess price for you within like-for-like has a sort of time lag effect of what we're actually seeing on inflation. I think one of your competitors is signaling something like 3% price growth expected next year. Clearly, you're talking about a moderation from the 4% or so currently, but just any sort of flavor as to ... Do you still expect overall an elevated level of price growth next year? Just obviously slower than the pace we're seeing at the moment.
... Second one on retention. You talked about, now being back above 96%. I guess, really just your confidence level now in being able to sustain that above 96% level as we go forward from here. And then the last one is just on the balance sheet. Sort of same old question really on share buybacks versus M&A, to understand sort of are you still very much more minded to focus on M&A from here? I know there's still a share buyback program underway for the remainder of this year, but how should we think about the next sort of allocation of capital? Thanks.
Well, thank you, Vijay, and good morning. I mean, obviously, look, we're talking about, inflation and price trends for the next 15 months, and we're giving guidance for next year, so it's still a little early for us to be doing that. But we've seen pricing come off sequentially, through the course of this year, to, as you rightly said, at the 4% level, that we've seen again in quarter three from, around 5% in, the first half. If you look at the inflation trends we're looking at, at the moment, sort of globally, branded food inflation is 2.5%. Labor's around 5, so it gives us, you know, around 4% cost inflation.
We probably expect to see the labor inflation trend downwards now, which will drive cost inflation down, and therefore will have an impact on pricing as well. So I think at this point, if we were thinking of sort of 2%-3% on a full year basis, I think that would feel sensible planning assumption for everything we see today, and most likely sort of elevated in first half and slowing again in the second half.
But we'll update you on that as we go. And then we'd expect to see positive volumes, maybe again a little bit of a sort of sequential coming off as we lap the kind of strong prior year recovery, but we still expect to see volumes being positive as we go forward.
And then in terms of retention, you know, everything we see today suggests that we can maintain retention above the 96% level. We're super focused on retention, really pleased to be back where we were. We know the pipeline of business that's out for rebid. We've just shared amongst our leadership some super initiatives we're doing.
You're very familiar with our strategic alliance group approach to the key accounts, but we're also now working much harder on the tail of smaller business, and how we improve retention levels there. And we've got some great best practices that we've been sharing around the business. So we always think that there is more to do, that can potentially gain us marginal gains as we go forward. But absolutely, sustaining the retention above 96% is our ambition and I believe that we can achieve.
Morning, Vicky. I think on balance sheet, as you rightly said, we will continue to execute the share buyback by end of this calendar year. We're happily placed within the 1-1.5 range in the leverage. I think as we continue to entertain some M&A opportunities we discussed in the past, we'll provide some update in the full year results on what is gonna be the plan for next year, you know, vis-a-vis M&A and share buybacks.
Thanks very much.
Thank you, and we'll now move on to our next question from Ivor Billfould Kelly of UBS. Your line is open. Please go ahead.
Good morning, everyone. I wanna touch on volumes again, and you mentioned specifically the value gap versus the high streets being a driver of, of that, and presumably there's an element of macro linkage to that. And in future, if we actually see the macro environment improving from where we are at the moment, do you see risks to those volumes?
And secondly, could you update us on your portfolio rationalization? I don't believe there's anything new on disposal this quarter. And then finally, just in the U.S., if after the election, there might be an increase in domestic manufacturing, could that be a driver of higher future revenue growth expectations, given your high exposure there? Thank you.
Thank you for those. Taking the question on the U.S. first, I mean, we've actually seen the benefits of the expansion in manufacturing through the Inflation Reduction Act under the Biden administration. That's been beneficial to us. Yeah, of course, if we do see onshoring of manufacturing in the U.S. post the election again, then we believe we're very well placed to benefit from that.
In terms of the value gap, I mean, you'll be familiar with that. It's in part due to structural nature of our industry, where we don't pay rent, rates, commissions, and so forth. And we're also able to better manage inflation, when we're able, in particular, to change our menu mix more than high street restaurants would be able to do.
So we believe that that gap has widened through the last several years and makes us more attractive to our consumers. But if, if the macro were to improve, you know, the gap is still there, and we're still attractive to our consumers. You know, I think, I think at this point in, in, in the cycle, there's still a lot of focus from very savvy consumers on where they get the best, the best return for their money, and we think that that places us.
I think on your second point on disposals, just to remind us, I think our strategy to streamline the portfolio in exit tail countries has served us really well. We're able to double down on the core, invest in the focus markets, and capitalize the structural runway. I think you rightly said you haven't seen any further disposal. We're largely completing the program. You know, there might be two tail countries, I would say in the future, but nothing material for the group as we move forward.
That's great. Thank you very much.
Thank you, and we'll now take our next question from Kean Marden of Jefferies. Line is open. Please go ahead.
... thank you. Good morning, all. I wonder if you just might provide a little bit more insight into the bid pipeline. You're generally a little reluctant to put a dollar amount around it. But any narrative around that would be helpful. Just how the composition, particularly looking at first-time outsourcing, has changed or remained stable?
Then a few questions on M&A, if I may. So, have you added a few more bolt-on acquisitions recently? I've heard potentially there's a bolt-on in France. Do you feel that the net impact of acquisitions and disposals encompasses revenue in fiscal 2025 is about neutral?
Or might you now be in a position where there's a small tailwind from that? And then also on M&A, are processes now getting a little bit more competitive, perhaps as private equity becomes a bit more engaged, and therefore the implication for exit multiples. Thank you.
Thanks again. Thanks for those questions. I'll let Petros respond on M&A. Just in terms of the bid pipeline, you know, as you said, in a number of these calls, it looks as good as it's ever looked. We have a growth pipeline and the coverage that we need to be able to deliver the growth in new business we require to be able to deliver the 4%-5%.
So we feel, you know, good about that. In terms of the first time outsourcing, you know, we're trending at broadly the same levels in first time outsourcing contribution to growth in the third quarter, as we have done through the last year and a half or so, which is very positive.
We think we feel that the pipeline, particularly in North America, is a bit more skewed to first time outsourcing in this next phase, which is, again, very positive. So we feel good about the growth prospects across all three of our regions, as we go forward, and we're closing the year quite positively.
Morning, Kian. I think, I think on the M&A, let me, let me just try to answer your three points. I think we will continue, we will continue to entertain the bolt-on acquisitions. They have served us really well across the globe. In terms of guidance for next year, it has remained unchanged. There is a bit of tailwind. There is about GBP 200 million reduction in revenue, with average margin. As we move to next year, we have guided this in the first half.
Okay.
You know, and I think on the private equity point you made, I think what we're witnessing is more opportunities to present themselves. We think this is a consequence of the higher interest rates for some of the funds in order to realize value. And we found ourselves to be nicely placed to capitalize on some of these opportunities if we think it's the right thing for us within the strategic framework we have.
Okay. Thank you. Understood. So just to be clear, despite probably a few more bolt-ons, we're still looking at a small revenue headwind from M&A, fiscal 2025, Petros?
Yeah, yeah. Kian, we guided it's about $200 million reduction in revenue for next year-
Yes.
with average profit margin flow down.
Yeah. Okay. Thank you very much, Petros.
On that, as we close any further M&A.
Understood. Thank you very much.
Thank you, and we'll now move on to our next question from Neil Tyler of Redburn Atlantic. Your line is open. Please go ahead.
Oh, good morning. Thank you. Just, just one follow-up, really, on the like-for-like volume trend, particularly in Europe. You know, I suppose in previous calls, more recently, you've pointed to B2B and the return to office and higher participation. But could you shed a little bit more light on the trends within that strong growth that you're seeing in Europe currently? And how you view those trends, you know, and the backdrop supporting them. Thank you.
Thank you, Neil. We've seen good growth across all of our sectors and all of our regions, which is extremely positive. The volume growth is positive in all sectors, and again, in all regions. So, positive in Europe, but equally positive in North America, which is very good. Yeah, I mean, look, in B&I, I think we're still seeing the return to office benefits us, but I think we've got other things going on as well.
We still have, you know, a higher than previous level of event catering. We're seeing higher caps in sports and leisure. We're seeing higher spend happens in higher education. So you know, it's broadly across the piece.
And as we said a few times on this call, I think, you know, what we think is most relevant is, you know, how keen our pricing is relative to the high street. And I think that's very visible now, as some of the high street price points are attaining new levels, which are very noticeable. And therefore, the discount that we offer is increasing all the time.
Okay, super. Thank you.
Thank you. Once again, as a reminder, if you would like to ask a question, please press star one on your telephone keypad. Thank you. We'll now take our next question from Jafar Istiari of BNP Paribas. Your line is open. Please go ahead.
Hi, good morning. Just a couple on acquisitions for me, please. In the release, you specified that the disposal of Brazil happened in May. If I'm correct, the disposal of Turkey and China also happened in April, in the quarter. I guess where I'm going here is because of the disposals, it's slightly difficult for me to assess how much you've been spending on top of the very clear medium-sized deals you flagged, like CH&CO and Hofmanns .
So yeah, just confirmation of when those disposals happened, please. And you know, more fundamentally, can you give us some quantum for how much money you spent elsewhere, other than CH&CO and Hofmanns? What's the quantum of the really small deals that we haven't seen in the trade press? What sort of extra scale have you been adding, and in which regions, please, beyond the headline deals?
Thank you, Jafar. Good morning. Let me pass that to Petros.
Morning, Jafar. I think as you rightly said, we completed, we completed Brazil in May. China was in April. Our net M&A spend on a year-to-date basis, $836 million. In terms of acquisition costs, we have disclosed, you know, CH&CO being around $590 million. Hofmann's, Hofmann's around $290 million, and the balancing acquisitions is North America, which is about $150. And, and this gets you to the eight thirty-six net of the proceeds from the disposals.
Thank you very much. That’s very clear. And so I guess it does look like it’s mostly those two headline food service deals, CH&CO and HOFMANNs, and then the North America. There isn’t a long tail of extra additions or extra scale you’ve been adding in France, Netherlands?
No.
No, no. I mean, if you, again, if you, if you think, what our level of spend has been historically, it's been $300-$400 million on, on, the, the bolt-on infills. Those have typically been, typically been in North America. We've been trending slightly below that level. You know, we may return to that level as we go forward. There's still a healthy pipeline of smaller deals. It's really all about, all about timing. We remain very excited by the infill.
They bring us, scale and capability, that they help with our margin, and they help with our geographic and, and regional footprint, particularly in expanding in North America. So we're excited by that. The, the bigger deals, as you've seen, have been in Europe.
There's a few more that we remain interested in, which are active processes, and we'll share with you both the strategic intent behind those, the returns and so forth, as and when we close them. And I think over time, there'll be an opportunity for smaller infill in Europe, as well, as we start to build some of the same capabilities. So we feel pretty excited about what M&A can bring us and how that inorganic growth can very, very much complement the strong organic growth we see.
Super. Thank you.
You're welcome.
Thank you. Our final question comes from Joe Thomas of HSBC. Your line is open, please go ahead.
Good morning. Three questions, if you wouldn't mind, please. Firstly, I think you mentioned that you were talking about new business mobilization in Q4, and I think the implication was that there might have been a bit of a drag on margin in Q4. Could you just clarify whether that is the case and what the scale of that drag might be?
And then, related to that, the usual question about any update on recovery to sort of historic margin levels and how long you think that's likely to take. And finally, I think, Dominic, you seem quite optimistic about the cost outlook. One of your competitors has talked about pockets of some food cost inflation. I just wondered if there was any of that you're seeing at all, or anything that we need to keep an eye on there? That's it. Thank you.
Thank you, Joe, for those. Look, in terms of quarter four new business, it's all baked into the guidance we've shared today. So as Petros said, we made a bit of margin progression in the first half, we expect 25 in the second half. Within that, there is the expectation of higher new business in the third and fourth quarters. So we've already taken account of that as we go, as it were. In terms of recovery to historic margin, we see no impediment to attaining historic margin, and we see no impediment to going above historic margins as we go forward.
We think particularly with the work we've done on the portfolio, the work we've done on the M&A, the fact that we think we've demonstrated that we can manage the heightened cost inflation, we expect to see ongoing margin progression as we go now. We're not putting a timeframe on when we get there, because, as we said before, if we enjoy higher growth, the margin progression may be a bit slower.
If growth were to come off, we'd expect margin to go a bit faster. But you should expect to see us making steady, ongoing progression year-over-year from here. And then actually, just in terms of the cost outlook, I mean, I've spoken to blended inflation around a 2.5% level.
That takes account of, as you rightly say, some pockets of higher inflation in certain markets. But broadly, we've seen food inflation come off quicker, as you would expect, particularly as we've seen the energy cost levels come down and the contribution that makes to food manufacturing costs. So, you know, look, we feel that that's what we're seeing at the moment
. We obviously reserve the right should things change to come back, but, you know, as we've shown, I think what's most important is when inflation picks up, we've been able to price it for it. When inflation slows down, you see the impact on pricing, and what we have to ensure we're doing is that we're being super fair to our clients all the way through on this. You know, that's absolutely the way we think about it.
Thank you.
Thank you. That was our last question. I will now hand it back to Dominic for closing remarks.
Thank you all for your, your questions today. As you've heard, in conclusion, we've had another strong quarter, and we're particularly pleased with the acceleration in that new business growth and the improvements in retention. Have a great summer, and we'll speak to you again in the autumn.