Good morning, welcome to the Compass Group Half Year Results Conference Call. Hosting today's call will be Dominic Blakemore, Group Chief Executive Officer. This call is being recorded. Following the opening remarks, you will have the opportunity to ask questions. In order to ask questions, please press star one on your telephone keypad. I will now turn over the call to Dominic Blakemore. Please go ahead, sir. Thank you.
Caroline, good morning, everyone, thank you for joining us. As usual, I have Palmer with me here today. We're very pleased with our first half results. We're establishing a new track record of strong performance for the group. Profit for the first half was over GBP 1 billion for the first time. Strong organic revenue growth and margin progression, which were both ahead of our expectations. We're pleased with the balance of revenue growth across the business, with all regions now delivering net new above 5%. This represents a sustainable improvement in Europe's performance over the last 18 months. The region continues to benefit from the focus on growth. Margin improved by 80 basis points to 6.6% year-over-year, by 10 basis points from the second half of 2020.
We continue to digest mobilization costs from new business wins, while managing heightened levels of inflation. Strong cash flow and leverage of 1.1x , we today announced an interim dividend of 15 pence per share and a further GBP 750 million share buyback to be completed in 2023. This takes the total program to date to GBP 1.5 billion. In terms of outlook, we're raising our full year guidance and now expect full year profit growth towards 30%. Organic growth is expected to be around 18%, with our margin in the range of 6.7%-6.8%, towards 7% in the second half. With around three-quarters of our profit in North America, we'll start reporting in US dollars from the October 1st, 2023 to reduce currency volatility.
To be clear, we have no intention to list in the U.S. Looking ahead, we're confident about the growth prospects for the group. The foodservice market and the large structural growth opportunities are very attractive. Inflation, operational complexity, and changing clients and consumer expectations are driving outsourcing trends which we believe are here to stay. We believe the group is in the best shape it's ever been in. With our value creation model intact, we're establishing a new track record of performance. Longer term, we expect mid to high single-digit organic revenue growth and continued margin progression, delivering profit growth ahead of revenue growth. Our strong cash generation, robust balance sheet, and disciplined capital allocation will continue to drive compounding earnings per share and shareholder returns. Now let's turn the call over to your questions.
If you would like to ask a question, please signal by pressing Star One on your telephone keypad. We will take the first question from line Vicki Stern from Barclays. The line is open now. Please go ahead.
Yeah, morning. Just firstly wanted to start on the signings. Just what is the signings pace running at now? Still in line with the levels of last year or is anything fading there a bit? I noticed in the presentation you're talking about a sort of 4%-5% net new compared with the 5.7% you did last year. Is that because you're seeing anything fade on the signings or it's just sort of higher revenue base? And generally your expectations there. Obviously, still substantially above the 3% you were doing pre-COVID, but yeah, just trying to understand how much of that 5.7% last year was exceptional and what the run rate's like going forward. Secondly, on inflation. Your two large competitors are flagging higher inflation and they're sort of paring back their margin expectations.
Today you're lifting your margin expectations. Could you just help us understand what you're seeing in terms of inflation headwinds right now and how it is you're able to offset those better? Finally on CapEx. I think this is probably now the third year in a row where CapEx seems to be coming in below that 3.5% level. You're guiding now slightly below for the full year, could you just remind us why CapEx is coming through below, and if there's a case for now expecting that CapEx to remain sustainably lower than it was in the past? Thanks.
Thanks, Vicki, and good morning. In terms of the signings pace, yeah, look, on an LTM basis, at the end of the first half, we were around GBP 2.5 billion, so broadly in line with the prior financial year on an LTM basis. If you recall, the first quarter of 2022 had a couple of very large contract wins in North America, which are over $100 million, which have contributed to the in-year performance in 2022 that we saw in the 5.7. In the first six months, the run rate for the six months was GBP 1.4 billion of new contract signings, so a strong first half performance.
Based on the pipeline that we see today for the balance of this year, we have every expectation that we'll have another record year of new business on a full year basis. Just to add to that, when we look at the 5.7 in the prior year, probably worth saying we had a number of stored up openings that opened simultaneously. A couple of years of wins, particularly in Sports & Leisure, that opened in the second half of last year, and therefore contributed to the very strong second half in the year, new business run rate.
Also contributes to that 5.7. You know, at 5.2 year to date, we're very, very pleased. We've always talked about, you know, we're now a business that's 25% bigger than 2019. If we can sustain one to two points of acceleration on that historic THREE, and obviously our ambition is to be in the higher ends of that range, and we're above that right now, then we would be very happy. That's what's underpinning, you know, our expectations of mid to high single organic growth over time and as inflation subsides. Hopefully that gives you some color on the sort of gross new business and this.
In terms of inflation, it's one of the biggest surprises, frankly, that we've seen this year. It's just been that inflation remains fairly high at this point. Beginning of the year, we thought that it would start to subside as we started to lap high rates of inflation in the prior year. That's not happening. We're seeing a blended 9% or so across the entirety of our business. That's with our, you know, main inputs of labor and food, and across the regions as well. That's starting to stabilize a bit. Food cost is starting to stabilize a bit within the U.S., but it's still accelerating in Europe. That's something that surprised us a bit.
When you look at the margin progression year-on-year, that 80 basis points of margin progression, the bulk of that would be operational leverage, just driving that top line growth and leveraging our, you know, above unit costs within that. We're pricing to try to keep pace with inflation. Our pricing within the half was about 7%. Our model is to mitigate roughly a third and try to price for the remainder. We're always giving our clients options. We need to show the value for clients and consumers relative to the high street. We think that value proposition is expanding. We're able to deliver that. One of the things that's helping is supply chain is starting to normalize a bit.
We think that the supply chain is roughly 90% normalized versus, you know, a supply chain that's been largely disrupted in the past. That is helping us a bit and hopefully can help us as we go forward. In terms of CapEx, you're right, Vicki, CapEx 2.3% in the half. That's lower than what we anticipated, the model of 3.5% or so. Given that, we are lowering our CapEx expectations for the full year to somewhere between 3%-3.5%. We think the bulk of that is timing related. We know of some additional timing expenditures that will occur in the second half of the year.
There's also some opportunities for, you know, further investment that, of course, we'll take advantage of, when they present themselves. There's a bit of a potential mix shift we're keeping an eye on, but it's a little too early to tell at this point. We think the bulk of it's timing related, so we're not necessarily changing our model at this point.
Thank you. Sorry, just to follow up on that, the margin point. I think back at the full year results, you talked about sort of bridging the gap from 6.5% to 7.5%, 40 basis points inflation, 40 basis points net new and 20 basis points of other. Obviously you're at 6.6%, not 6.5%. Is that still the right sort of bridge between the different components?
Yeah. Thereabouts. It's gonna change a little bit, but it's there or thereabout still.
Great. Thanks very much.
Thank you. We will take the next question from Jamie Rollo from Morgan Stanley. The line is open now. Please go ahead.
Hi. Good morning. I have three questions as well, please. First of all, just on margins, you're gonna be around 7% in the second half, and your net new is slowing a little bit, and you're starting to get, in the U.S. it sounds like at least cost stabilizing. Do you think you can get back to sort of 7.5% as soon as next year, or is that a bit too early? Secondly, I think this is the first time you've given the mid to high single-digit long-term growth figure in writing. I know you've mentioned on various calls, and you've also said you expect net new to be one to two points higher than pre-COVID.
Why not just formally change your pre-COVID guidance from 4%-6% to 5%-8%, or are you gonna stick to the sort of mid to high single digit range? On the balance sheet, using your new guidance, it looks like it'll still be sort of pretty strong at 1.2, maybe 1.3x at the end of this year, which on a pre-IFRS 16 basis is about 1x , so well below the pre-COVID target. Is there any scope to return to your pre-COVID leverage targets, which would be about a half a turn higher? Thank you.
Thanks, Jamie, and good morning. On margin, I think the most important thing to say is we see no reason. Well, first of all, we see a path back to pre-COVID margins. Secondly, you know, we believe we can make progress from there. Will we achieve all of that next year? I think too early to tell. You know, the near-term progress will really be dictated by sort of net new and what we see tracking with inflation. We think it's very positive that we'll be around 7% in the second half, and of course, that will be our base for further progress next year. I think we're very pleased with where we are.
Of course, in a business that's tracking 25%-30% bigger than pre-COVID, with a margin around 7%, we're printing a lot more absolute pounds than we did pre-COVID, which is very important for us to focus on. Also, you know, we think, you know, we've shown it today
Seeing the business outside of North America growing above 5% sustainably is very, very important. We getting the margin structure right to sustain that in the near term and then enjoy leverage over time is also very important. You know, we won't compromise sustaining this very high quality of growth. Yeah, you're absolutely right. Whether we use words or numbers, I think we're in the same place on the revenue guidance. I think we'll stick with the words for now. Yes, you interpreted it right.
In terms of the capital allocation and the leverage, we've got a capital allocation framework and a leverage target that we think is appropriate for our business in this environment. We think it strikes the right balance between allowing us to invest in the business organically, at whatever the level and the timing of that is to take advantage of M&A opportunities as they present themselves and then, you know, return cash to shareholders. You're right, Jamie. The leverage at the half year of 1.1 is at the low end of the range.
The GBP 750 million buyback that we're announcing today over the remainder of the calendar year, we think will get us to the midpoint of that range by the end of the fiscal year. We think that's just a good balance for us at this time.
Okay. Thank you very much.
Thank you. We will take the next question from line, Jared Castle from UBS. The line is open now. Please go ahead.
Good morning, everyone. Also three for me. The Rest of World margin went backwards and, I guess you highlighted inflation as one of the issues. Is that kind of behind us? How should we think about the second half and, indeed 2024 in terms of Rest of World margin? Secondly, you kind of number of times mentioned a strong retention rate, but I actually couldn't find that rate in the release. Can you just give some color on where things stand on retention at the moment? Just coming back to kind of organic growth over the medium term, I guess maybe this is nuanced, but what is the classification of medium term? I mean, is at some point, will you start to go back to the 4%-6% organic growth target or rate that you were previously guiding pre-COVID? Thanks.
Thank you, Jared. First of all, in terms of retention rate, the retention rate for the first half was 96.7%. A very pleasing level of retention. That's been driven by sustained levels of high retention in North America, also, you know, continued strong performance outside of North America, which we're very pleased by. Actually underpinning the net new of 5% is both an improvement in gross new contract wins and also improved retention. We're sort of driving it on both fronts. Clearly we need to sustain that. When it comes to, you know, how long is the medium term for organic growth? I mean, look, I think we've introduced a framework which we'd like to think that we can operate within consistently going forward.
You know, that said, we're 18 months into strong growth in the business outside of North America. We showed it in today's presentation. It's sort of our twin opportunities and priorities are sustaining the level of industry outperformance in North America. We've shown you in the presentation how we feel we can do that. Separately, it's really focusing on, you know, the growth initiatives and basics outside of North America to sustain that level. You know, we think the marketplace is there. We believe we have the processes, we believe we have the efficiency of offer, we believe we're now monitoring with data in a way that we haven't done before. Look, if we can sustain those levels, can this model become the new normal?
That is our, absolutely our ambition and aspiration.
To Rest of World margin, the biggest driver there is the ripple effect from COVID in the form of labor shortages. Australia, which would be the biggest country in Rest of World and our Defence, Offshore & Remote business, which is more pronounced in Rest of World than the other regions. Each of those are experiencing significant labor shortages there. That's something that we're seeing some early signs of easing, but we think we're gonna be dealing with it for a while. This is not something that's necessarily going to go away quickly. We think we'll be dealing with it for a while. Just to put it in perspective, this 20 bits of margin in Rest of World is GBP 3 million.
It's not significant in the grand scheme of things, although it is something we're managing as closely as possible.
Great. Thanks very much, both.
Thank you. As a reminder, if you would like to ask a question, please signal by pressing Star One on your telephone keypad. We will take the next question from line Jaafar Mestari from BNP Paribas. The line is open now. Please go ahead.
Hi, good morning. I had two, if that's all right. Firstly, I just wanted to come back on that signings figure. Thank you for sharing. If I'm correct, 2.5 is exactly in line with the run rate for last year. That would imply something like GBP 1.5 billion for the last six months. I just found it interesting that you flagged how H1 2022 was helped by a couple of particularly large contracts, but you seem to be running at exactly the same record high, GBP 1.5 billion base of signings for this H1. Did you find another couple of large contracts? Is it that Europe's really helping? Is it more broad-based?
Just to confirm the math there on the last six months being as strong as the highest you've shown for last year. Secondly on Europe, I think investors have occasionally seen a strong quarter or occasionally seen a strong half year in Europe. It hasn't always been very sustainable. You talked about some fundamental changes to the processes, et cetera. I guess on the downside, what are things you're doing differently today to make sure that you don't have a bit of a, you know, U.K. pressure from Germany, the bits that have every couple of years sort of caused problems in Europe. How are they addressed?
Jaafar, thank you for those questions. To be clear, the six months new signings is closer to GBP 1.4 billion than GBP 1.5 billion, but regardless, your point is absolutely right. It's a very strong half, and it's a half that we've achieved very high levels of signings without any individually significant contracts. What that means for us, we believe, is it's almost a more attractive book, and it's a sort of almost a higher quality achievement rather than relying on the big ones. There will always be big ones, they'll be lumpy, but being able to sustain this level with the more of the mid-size contracts is important. Of course, within that, North America continues to play its part with a very, very attractive level of signings and forecast for this year.
What we're seeing, as we've said, is a very strong performance outside of North America, an attractive pipeline to the balance of the year. As we called out, and it sort of leads into your second question, what's underpinning that is a qualified universal opportunity that is 60% larger than we historically had and a win rate that is 50% better than we historically had. Those metrics still lack North America, so this sort of goes on to answer your second question, why we believe there's even more opportunity. We believe there's still a bigger universe for us to identify, which means we can qualify a high quality pipeline, which is bigger than we've ever seen.
Within that, we're being much more proactive in understanding the market rather than being reactive in responding to tenders that come to us. In many ways, we think the pandemic allowed us a sort of foot on the ball moment, to use a sporting analogy, which allowed us to sort of reset our approach. We need to keep working with discipline on that. You know, I think, look, your point is very fair. We have seen glimmers of improved performance. I don't think we've yet sustained it over 18 months as we've done thus far, and with our forecast for the balance of this year, you know, we have reasonable confidence that we'll do that over two years. You know, we've now got a database that covers all of our European countries which is centrally managed.
We have processes and routines and disciplines that weren't in place before. We've adjusted incentives, we've upweighted a number of sellers. Most importantly, we've changed the mood around growth in a sustainable way, I believe. You know, within that, you know, we shouldn't underestimate our focus on purchasing excellence in our major European markets means that we feel we can be more efficient and more effective in our bidding. I think all of those things are coming together and give us, you know, a good level of confidence around what we're seeing and that it's sustainable. As you're absolutely right, you asked me what is my biggest opportunity and biggest challenge today, it is maintaining this level of performance. I say it is absolutely an opportunity. We need to stick to the basics and continue as we are today.
Just one thing to add there, Dominic. I referenced a number of things on the new business win side of the equation within Europe. Just as important and, and frankly, even perhaps a bit more important is the improvement in the retention rate. Over two years, we've improved retention from sub 94% to 96%. Within that, I mean, we've improved our preemption conversion by a quarter. That's really focusing on the basic processes and trainings, just as Dominic referenced for the new business that's applying for the retention side of things too. Focusing on what we refer to as these micro inputs producing these good results gives us faith that these results are sustainable as we look ahead.
Super. Thank you very much.
Thank you. We will take the next question from Leo Carrington from Citi. The line is open now. Please go ahead.
Thank you. Good morning. Also three questions for me, please. In terms of your exit of those six countries, just in terms of the bigger picture on footprint, is it fully optimized now for other countries that you consider exiting? Indeed, regions that you might still need to acquire into to build your footprint as you did with Fazer in 2019. You certainly seem to have the balance sheet to do so. Secondly, interested to see the acquisition of the Parks Coffee asset in B&I. Can you just give an indication of what the current offer you have in Parks Coffee is? Is there a significant further penetration opportunity into your current set of contracts?
Just if you could indicate on the growth so far, the revenue growth from coffee offers in the past decade been accretive to overall group growth? If so, or if not, how might that change? Lastly, on Education and Healthcare, referencing the bigger opportunity in the presentation, Dominic, can you outline why? Is this to do with your relative competitive advantage? Or is it because of the outsourcing propensity? Some more color would be great. Thank you.
Thanks, Leo. Let me just tackle that last question first. I mean, healthcare and education, I think first and foremost, we've called it out because it's the least penetrated or the lesser penetrated sectors of the five in which we compete. That means there's more opportunity. I think that for us means all of the factors we've talked about, whether it be inflation, labor availability, compliance or regulation, really play into those two sectors, particularly where you see some of the net zero requirements mandated by governments upon those sectors. It can accelerate the outsourcing. In terms, certainly in terms of healthcare, typically you need a bundle, which may include other services like janitorial and cleaning. In the bigger markets we have those, which means we can play into that space very capably.
You know, as we've said many times, support, soft support services are almost more valued by the clients for the obvious reasons of hygiene in those environments. I think when you add those up, they're attractive sectors. I would say for both and equally for the subsector of Senior Living, you know, what we're learning is there are, you know, there are a number of criteria that make those attractive by market. We have to be very analytical in understanding where we want to play and then determining how we play with what offer and how we build the capability or buy the capability. We're very, very focused on that.
In terms of the portfolio, I'll hand over to Palmer to talk about the portfolio and the and the acquisitions in coffee in a second. What I would say is you know, one of my big observations, now I haven't been in this business a while, is we are at our best when we go narrow and deep. There is so much opportunity for us of the core processes and in our core sectors and some of the adjacencies, that will provide us with the runway for growth for a considerable period going forward. You know, the worst thing we can do is distract our teams with tail markets or countries which just don't represent anywhere near the opportunity.
I think the six countries that we've sold or exited and announced in this half represent no more than 1% of our total revenues. I think that says a lot. You know, if I talk to my head of sales in Europe, he would say, you know, it's just freed him up to focus on the tree big markets where we can really make a difference. That's really important for us. Look, you know, we're not complete in doing what we're doing. We will continue to look at the portfolio. We'll continue to optimize it. More importantly, we'll continue to do M&A that more than offsets the disposals to give us access to those core sectors where we believe we can grow faster.
All of this goes back to the, you know, the repeated questions of today to give us confidence we can sustain that level of net new outperformance against the historical levels.
In terms of the exits, to Dominic's point, our top 10 countries represent just about 90% of revenue and profit. That's a fairly long tail that's there. It's something that we've been taking a look at. We will continue to review as we go forward. Just to frame it, as Dominic said, we're continuing to invest. We're doing M&A, mostly in our core markets. The M&A role from last year and the M&A that we've done this year will more than offset the 6 exits that we've undertaken. We think that can be a bit of a model as we go forward.
I think just to keep it all in context, we will review the tail, but we will continue to invest in our core markets where we think we have substantial competitive advantages and significant growth opportunities. In terms of acquisitions in North America, specifically the office coffee piece. I mean, office coffee, micro markets, vending is all part of our Canteen operation. It's a big business. It's a very successful business within the U.S. and North America as a whole. Predominantly within B&I, but not all. We have some in education, healthcare, and the like. We've seen nice growth over time, in that area. B&I has been the biggest driver of the growth, in the first half of this year. Certainly, the Canteen growth would be a component of that.
We see office coffee, micro markets, vending is very much core to our business. It's something we've invested in in terms of infill acquisitions in the past and something we will continue to look to as we look forward.
Thank you, Palmer. Thanks, Dominic.
Thank you.
Thank you. As a reminder, if you would like to ask a question, please signal by pressing star one on your telephone keypad. We will take the next question from line Harry Martin from Bernstein. The line is open now. Please go ahead.
Yeah, thank you. Good morning, everyone. A couple of questions from me. The first one on the B&I performance. I mean, you know, we see headlines about layoffs and reduced subsidy levels, you know, your revenue there is now 16% ahead of 2019. I wonder if you could give an update on where per capita usage is running, subsidy levels and how sustainable, yeah, the growth is in that business from here. The second one is really on the long-term margin potential in Europe. You talked about improving procurement practices. You know, as this market accelerates and drives more revenue growth, what are the opportunities for the margin in that business?
You know, does the European business always have a structurally lower margin than the U.S., even if the scale eventually gets to quite a similar level? Yeah, any color that you have there will be really useful for us.
Yeah. Morning, Harry, and thanks. The B&I performance, we're very, very pleased with the B&I performance. I think there was a lot of concern about the sector as we emerged from the pandemic and its long-term attractiveness. You know, what's underpinned, of course, a little bit of inflation, but more importantly, it's been very significant contract wins that has increased the scale of our B&I business. You know, what we're seeing, yes, we are seeing restructurings happening in, you know, certain sectors within B&I. Of course, that's been right now more than offset by the tailwind of return to office. You know, what we're witnessing is a continued strong return to office.
You know, broadly in our major portfolios in major cities, Tuesday, Wednesday, Thursday are back to pre-pandemic levels, if not higher. Mondays are coming back. The narrative now, I believe, from everyone I talk to in our client base is greater encouragement of colleagues to return to the office. I think we're all seeing that, aren't we, as we talk and hear about sort of loneliness of working from home and mental health pressures and so forth. you know, we feel very optimistic about our B&I portfolio going forward. In fact, in Europe, we are a largely B&I business with a very significant market opportunity in B&I, and we believe we've learned a lot about how to adapt our operating model to that environment to win. Look, we're excited about B&I.
At the same time, it's fair to say it's great that B&I is a lesser part of our portfolio today and that we've got greater diversity of sector than we've ever had. I think that gives us greater protections to events as we go forward. I think all round it's a good thing. Then look on the long-term margin potential in Europe, it's probably fair to say we've still got, you know, a reasonable delta of improvement to come from the pandemic in Europe. Look, that said, and I said it earlier on the call, the most important thing for us is that we sustain the growth we're seeing outside of North America.
If we've got margins in the second half north of 7% and we make progress from there, even if that progress is incremental and we sustain the growth outperformance, we will be happy because we know that the growth gives us purchasing opportunity, gives us consumers to retail to, it gives us overhead leverage, and sustaining the growth model is critical. You know, again, we're optimistic on that point. You know what? If we never close the gap to North America, we won't mind as long as we keep growing our margin in North America as well.
Great. Thank you very much.
Thank you. We will take the next question from line. Kean Marden from Jefferies. The line is open now. Please go ahead.
Thank you. Morning, all. Two quick ones from me. Just first of all, would you call out any particular parts of the business where the outsourcing penetration rate has already contributed more than anticipated over the last sort of 12-18 months, and any sort of potential laggards? I know you sort of presented some data giving us some insight into marking structure over the last sort of 10 years, just really looking to sort of update how momentum has progressed since we last looked at the, that data, which I think from memory referenced sort of 2019. Secondly, your comments on your pricing sitting at a significant and growing discount to the high street caught my attention.
I'm just wondering if you can expand on that, to a greater degree, please. Thanks.
I mean, maybe if I just take the pricing point. I mean, clearly our model is one where we've enjoyed in various different contracts, either client subsidy or the fact that we don't have the full range of costs experienced by our high street operator, be it rent, rates, energy, utilities, and so forth. You know, we've always been able to price at an attractive discount to the high street. You know, that depends very much on contracts and contractual arrangements with clients. As we predominantly pass through pricing associated with just food and labor, that is at a lower level than we're seeing in some high street outlets where they've got the full range of costs that they're having to recover.
Therefore, whilst we're putting prices up, our prices are going up at a lesser, a lesser amount than the high street and therefore widening the discounts. You know, we think that makes us more attractive to the consumer, and we, you know, we're working hard to demonstrate that value that we offer by staying on-site, and therefore driving footfall and participation, which we see as an opportunity. Also, it's very clear, you know, that's how we generate client excitement and attention by being able to show how we can, you know, in first-time outsourcing, not just unlock the 20%-30% cost advantage that our scale presents against a self-op. Also maintain that over time, against ongoing higher than historic inflation.
you know, I think the pricing and the management inflation is, you know, can be a positive to us both through the consumer and the client lens at this point in time.
Do you have a sense, Dominic, to what extent that pricing gap has widened over the last six months? I appreciate it's difficult to generalize, obviously you did point it out early on.
I mean, I'd be guessing 'cause it's so different...
Sure
market to market and contract to contract. If over the last several years we've taken 5%-6% average pricing, you know, I think we're all seeing what we're seeing on the high street arm, which is probably closer to an average of double-digit.
Thank you. That's helpful.
In terms of the outsourcing, overall with growth, it's been fairly balanced across the sectors. It's been led by B&I and Sports & Leisure. You know, a lot of the common thinking is that B&I and Sports & Leisure being mostly outsourced, that we don't get much, you know, first-time outsourcing that's occurring, but that's not necessarily the case. There is a good bit that's happening in each of those sectors. It's been fairly broad-based overall. As we look ahead, again, the biggest structural opportunity is in healthcare and education. We are seeing some pressure in healthcare, particularly in the U.S. We're seeing a lot of healthcare systems, and individual healthcare clients, under financial pressure that's there.
We think that while it's difficult to manage on a daily basis, ultimately that presents outsourcing opportunities because we can provide value propositions and cost savings to clients. It's not completely unlike what we saw several years ago with the Affordable Care Act that presented a lot of growth opportunities for us in healthcare. As we look ahead, we think that's an opportunity. We continue to see good outsourcing opportunities across all of our business.
Right. Thanks, Palmer. Thanks, Dominic.
Thank you. We will take the next question from Neil Tyler from Redburn. The line is open now. Please go ahead.
Yeah. Thank you. Good morning. A couple there from me as well, please. In terms of the, I suppose first of all, coming back to the previous question or answer and the source of those new wins, you've mentioned consistently that you know, first time outsourcing was the lion's share, and we're hearing from your competitors that, you know, retention at both of those companies has improved as well. Presumably there's less attrition amongst the largest players. Between those two, are you seeing any change in dynamic driven by the operational complexities from, you know, mid-market and regional players? That's the first question. Secondly, the foot on the ball moment that you mentioned, can you perhaps expand on that as to how it's perhaps changed the contract structures?
You've been able to live alter those to allow yourselves to be more nimble should costs fluctuate significantly. Then the final question, I'll I want to try and ask you to sort of expand a little bit on the Foodbuy business. You talked about the, you know, the expanding scale and scale advantage. How, you know, the, the inflation we've seen has altered the size scale and any numbers you care to share, if we compare that business to in terms of sales, maybe even sort of margin, compared to pre-pandemic. Thank you.
Thanks, Neil. In terms of, you know, that question around sort of competitive dynamic of large and medium. You know, I think, you know, you have a point. On the one hand, you know, in this environment, the greatest challenge is for the self-op. In this environment, the greatest opportunity to demonstrate value and quality of our services is for the large players who's got scale and proven processes and tenure and longevity of operator. I think it is playing to the strengths of the big right now, and I think that's benefiting all of the bigger players. I think that's perhaps what we're seeing in retention.
I think it's perhaps what we're seeing in higher pre-em rates and perhaps less coming to market, that's in the hands of the bigger operators, as it were. I think that's also why we're seeing more first time outsourcing. I think they are, you know, the two sides of the same coin. You know, bit in the middle, we don't talk a lot about it to sort of smaller players and, you know, it's a continuum I think. It's sort of if you're a, you know, you are going to... If you haven't got the buying scale, you're going to get squeezed on your ability to mitigate costs for clients, and that is gonna create more opportunity for the bigger players.
That said, there are some great businesses in our industry which either have, you know, independent USP or, you know, or something niche that makes them attractive to their clients. And, you know, we really like those businesses. We keep an eye on all of them, and they've been, you know, as you know, a great source of growth opportunity for us in the past, you know, whether it was a Fazer or a Bon Appétit or a Unidine. And, you know, we'll continue to keep an eye on those businesses as we go forward. But, but broadly, I think that, you know, it's a positive marketplace for, you know, for ourselves at this point in.
With respect to the contract structures, the base contract structures are really no different from where they've been historically. What you might see is a few variations on the fringes. Maybe allowing a bit more operational flexibility, maybe a bit more, you know, ability to discuss changes if volumes drop, different scheduling aspects that may come into play. Look, we're in a very different inflationary environment than most folks in this industry have ever seen before, the ability to deal with that. We referenced some of the pressures in the Rest of World business around labor shortages.
Just some flexibility in contracts for those type of items that might arise that are outside of our control, but yet to try to create contract structures and complete alignment that work with our clients. Really with structures, we're seeing some of those changes on the fringes there. Overall from respect to the base structure is really not much different. With respect to, you know, to Foodbuy, is, you know, is an important part of our business as a whole. A lot of folks think of Foodbuy as third party GPO purchasing and that is right in what we think of as the Foodbuy model.
We're only doing that in a handful of countries globally. To Foodbuy, you know, is an important part of our business as a whole. A lot of folks think of Foodbuy as third party GPO purchasing and that is right in what we think of as the Foodbuy model. We're only doing that in a handful of countries globally. It's in the countries where we have more mature markets, more mature processes. Other business as a whole. A lot of folks think of Foodbuy as third party GPO purchasing and that is right in what we think of as the Foodbuy model.
We're only doing that in a handful of countries globally. It's in the countries where we have more mature markets, more mature processes. Other Business as a whole. A lot of folks think of Foodbuy as third party GPO purchasing and that is right in what we think of as the Foodbuy model. We're only doing that in a handful of countries globally. It's in the countries where we have
Thing. You've said that volumes slowed down in the second half of the year. Is that purely comps, or is there any sort of contingency in there for consumer weakness or anything else that you'd care to mention? Thanks.
Maybe I can tackle the and then hand Martin over to Palmer. Look, on labor costs, and labor availability in North America, you know, it isn't easy, given the growth we're enjoying and given some of the more heightened churn in frontline labor. It is of course a challenge, but what's a challenge for us is a challenge for everyone, and I think we are managing it well. We're putting new measures in place all of the time, which make us a more attractive employer. You know, we will continue to focus on that. I think we're managing the situation well, and we'll continue to do so and look to make it a point advantage.
In terms of volumes slowing, it is absolutely a fact of lapping the restored pre-COVID base in the second half of 2022. If you recall, we were at somewhere between 110 and 115% half of 2022. We're now lapping that. You know, our guidance today assumes that sort of volumes will be flat to slightly positive. That's probably how we see it at this point. about that.
I mean, just to frame it, that the comps the first half last year on the blended basis was 98% of 2019, second half was 113. Saw the big step up in the comps from first half to second half last year. That's the biggest driver of that growth slowdown that you'll see the second half of this year on the volumes thing. Any real volume that we get in the second half we view as a bit of upside opportunity for us. With respect to the margins, just as you heard from, you know, from Vicki at the start of the call, just a rough framework, 40% of drag from the new business, 40% inflation of the, you know, the remainder being investments in the business.
We see that the new business growth normalizing, that will start to subside in terms of the growth drag. You'll have the mobilization element of the growth drag start to decrease. There will be a bit of, you know, ongoing efficiency improvement that occurs in those new contracts that can take upwards to, you know, two or three years in even in the bigger contracts. That will start to subside as we go forward. That's a rough breakdown and a rough way to think about it.
Thanks.
Thank you. We will take the last question from line. Karl Green from RBC. The line is open now. Please go ahead.
Yeah, thanks very much. I've got a couple of questions. The first one sort of breaks down into a smattering of sort of sub-divisional questions. Just on the strategic restructuring cost, can you break down the gross charge, the GBP 99 million between the country exits, not necessarily by country, but the country exits and then the site closures, contract renegotiations, and terminations in the U.K. Following on from that, what kind of costs should we be expecting in the second half of the fiscal year? Unrelatedly, the second question, just in terms of your longer term guidance, and thinking around organic growth, have you had any thoughts yet around the longer term impact of ChatGPT and AI on B&I volumes specifically, please? Thanks very much.
Perhaps let me take your second question. I mean, look, you know, it along with other factors is something that, you know, could have a positive or negative effect on volumes going forward. I think what's important we said today is we were delighted with the recovery of B&I, also B&I is a smaller part of our broader portfolio. We're in considerations and conversations with a number of partners right now to understand how AI can improve our own internal processes. You know, it may create opportunity for roles within the tech sector. It may diminish roles in others. I think we have to take that in the round as we've always done. Again, the sort of broad-based portfolio gives us confidence.
In terms of the portfolio review, the non-underlying charge. The bulk of the GBP 99 million that you referenced relates to the U.K. businesses that are there. You know, addressing those U.K. lines of business, right sizing those with respect to the new volumes that are there. The lesser amount relates to the six country exits that happened. With respect to that former category, sort of the right sizing of the business, we've reviewed not only the U.K. business, but in all the businesses elsewhere, and we think that is all there is to occur there. We don't expect any more of that type. With respect to the ongoing portfolio piece you referenced, you referenced the tail. We talked about it earlier.
We will continue to address that tail as we go forward. Just as we said, we will continue to invest in our core businesses via M&A and organically.
Okay, thanks very much. Just following up, just in terms of right sizing the U.K., I mean, is it fair to assume that that is just a legacy impact of structural changes post pandemic or is it something else structurally that's happened in that country?
No. Exactly. That's exactly what it is.
Okay, thanks very much.
Thank you. There's no further question at this time. I'll hand it back over to your host for closing remarks.
Thank you all very much for joining us today. We look forward to speaking to you at the, later in the year. Thanks. Have a great day.