Good day, welcome to today's Compass Group third quarter trading update conference call. This meeting is being recorded. At this time, I'd.
Across all of our regions, the right levels of pricing and strong like-for-like volumes. Of course, this is despite lapping the full reopening of our sectors last year. Our client retention rate remains excellent at 96.7%, and we have an exciting pipeline of new business opportunities across all of our regions. Despite persistent inflationary pressures, we're encouraged with our margin progress. Food inflation appears to have peaked and is easing in some regions, we expect our basket of cost inflation to be above CPI and historic levels for some time to come. We expect our basket of cost inflation to be above CPI and historic levels for some time to come. We're well-placed to manage this with mitigation and sensible pricing, whilst increasing our competitiveness relatively to the high street.
Of course, these cost pressures accelerate outsourcing. We're very pleased with the continued strong momentum and performance of the group, and we reiterate our full year guidance. Longer term, we expect these growth opportunities to sustain mid to high single digit organic growth and incremental margin progression, leading to profit growth above revenue growth. Our proven value creation model will continue to reward shareholders with compounding returns. Let's now move to Q&A.
Thank you, sir. Ladies and gentlemen, as a reminder to ask a question at this time, please signal by pressing star one on your telephone keypad, and please make sure the mute function on your phone is switched off to allow your signal to reach our equipment. If you wish to cancel your request, please press star two. Again, to ask a question, please signal by pressing star one. Our first question comes from Jarrod Castle from UBS. Please go ahead.
Great, good morning, everyone. I'll ask the normal three. You said that, you know, cost pressures are helping outsourcing, but I'd also like to just get some color, if you're still seeing customers being attracted more to the larger players in contract catering in terms of consolidating around the larger players rather than the regional smaller players? Two questions just around margin. Obviously, the Americas, you know, very tough base effect is delivering lower organic growth to other geographies. That's gonna obviously have a mixed impact on your margin, given it is your highest margin business. How do you see the ability to offset that, you know, given rises in both the rest of the world, maybe in North America and obviously Europe?
Just linked to, you know, your, I guess, your goal of getting back to previous margin levels. Any view on kind of time frames or, is this just gonna be dependent on kind of the organic growth you deliver? Thanks.
Yeah, thank you, Jarrod, and good morning. Let me have a go at and let Palmer then add some color to each and take the second question. I mean, first of all, in terms of your question around cost pressures and whom it most impacts, if you take a step back, you know, we believe that at a time like this, with significant inflationary pressures and the complexities of operating in this environment that we've signaled for a while, the benefits of scale are very significant. Now, that applies first and foremost to self-op, where those pressures are most keenly felt, but equally applies to smaller players that don't have the benefit of our buying power, our ability to manage menus at scale and so forth.
Yes, you know, we do believe that it's creating opportunity for us, you know, against really both in the first-time outsourcing opportunity and with the small players. We think that, you know, that is set to continue with the sorts of inflationary levels that we anticipate for a while yet, as you heard me say. In terms of the margin levels, you know, I think what's really important is we now need to focus as much on profit growth as we have on margins. We're growing profit significantly above the levels that we did pre-COVID. We believe that our revenue growth is going to accelerate into the range we've discussed on a sustainable long-term basis, and that our profit growth will be above that with incremental margin progression.
We've always said there's nothing to hold us back from getting back to the pre-COVID margin. We're very focused on that accelerated profit growth, and really seeing margin as the outcome of that. I think it's also fair to say, and I'm sure Palmer will touch on it, you know, with the level of cost inflation that we've absorbed, and by doing the right thing, vis-a-vis our clients, which is to price for the net cost inflation without pricing for margin on that represents a margin drag that we've had to offset. Really, there's been a bit of a reset within our margin structure, and therefore, you know, we're super focused on the profit growth as the right KPI for the business going forward.
Just some color on the last point before I get to your question on North America, Jarrod. On the cost inflation, in the past year, we faced over GBP a billion and a half of inflationary pressures on our cost base. It's over GBP 3 billion over the last two years.
This year, we have been able to keep our unit margin flat, facing those inflationary pressures. That comes from massive mitigation efforts, massive efficiency efforts, and a sensible level of pricing. When you look at just the margin drag from pricing alone, it's worth about 100 basis points. Think about that when we're able to keep our unit margins flat through the course of the year in the face of this inflationary environment. What that means, of course, is that the overall margin progress that we've made is by leveraging our above unit costs. When you think about that as we look into the future, once you have our top line growth rate, which it'll be there, thereabouts next year, just given the comps and the like, the margin progress will be much smaller if these inflationary pressures continue at this level.
I think we've perhaps done not a, not a sufficient job of explaining the inflationary pressures and the mitigation efforts that we've had to face into. With respect to North America, the lower growth rate is all about the comps first and foremost. If you go back to last year, you saw significantly increased reopenings as the year progressed. The first half of last year, as a group, we were operating at about 98% of 2019 revenues. In the second half, that stepped up to 113%, so a massive step up, H1 to H2. That was led by North America. North America was really the first of our regions to reopen in a big way.
What you're seeing now is more of a normalization from North America that the other regions are catching up to. North America is still growing significantly, and we expect that to continue going forward.
Great, thank you.
Thank you. We'll now move to our next question from Vicki Stern from Barclays. Please go ahead.
Good morning. Just wanted to follow up on the margin point. You mentioned that, Dominic, of drag, 100 basis points of drag. I put that in the sort of previously, when we were bringing back to the pre-COVID margin, 40 inflation and another 40 bits from sort of net new ramp up. You now say 40 bits from inflation is now more like 100, I suppose just thinking about when inflation may normalize, is that 100 that you think you ultimately get back, or should we think about that as some of that you ultimately get back in time? Just secondly, an update, please, on signings. Obviously, you got current signings pace for indication of the future pipeline.
Just so keen to know what those look like, if that's still sort of as consistent with that kind of 4%- 5% net new. Thanks.
Thank you, Vicky. First of all, just on margin, I think, you know, look, what we said is we anticipate we'll continue to make margin progress. We've said there's no reason, you know, we absolutely see a path back to pre-COVID margin, and we see no cap on the margin as we go forward. I think what we're just trying to do today is explain the pressures that the heightened inflation for a prolonged period is placed on the business and our ability to mitigate that. Do we think we'll get that full 100 bits back over time? No, because in reality, it's been a reset of the cost base.
Of course, we've benefited from that through the top line, on which we've earned a slightly lower margin, but still a good margin, I think is the way we look at it, and that's why I think you have to focus on the absolute pounds and the profit growth. I think what's really important is, you know, we still see a path back to pre-COVID margin. We'll get there over time. You know, I think a lot will be about when conditions normalize, and we'll update you, as we always do, as we go. In terms of signings, we've signed GBP 2.5 billion new business ARO over the last 12 months. We still expect this full financial year to be another record year of new business signings. We've got a very strong pipeline.
We're anticipating a strong fourth quarter. It's that in combination with the very strong retention rate, which is giving us that confidence around sustaining the net new business at sort of 4% to 5%, therefore underpinning that mid to high single digit growth as we go forward.
Great. Thanks very much.
Our next question comes from Leo Carrington from Citi. Please go ahead.
Good morning, Dominic Blakemore. Thanks for taking my questions. First, if I could ask a couple on the regional growth trends. It seems like the last six months, the last two quarters in Europe, have seen the best sequential progression. I get the point about the catch-up effect. Just in the last two quarters, I'm curious to know the specific drivers. Connected to this, perhaps, I think there's also been a higher than usual sequence of contract announcements in contract win-wins in the U.K. Perhaps if this does tie in, any color on the drivers behind this, specifically for Europe. In terms of the headline KPIs, backing out for Q3 implies something like three percentage points of like-for-like volume growth.
That seems remarkably good, given the maturity of the recovery. Again, may tie into previous questions, if you could outline, the drivers and the expectations going forward, that would be very helpful. Thank you.
Okay, great. Thank you, thank you for those questions. I'll take growth and then Palmer talks about volume. Yeah, we've as we've said at the half year and, you know, I'll repeat today, we're really pleased with the performance in Europe. You know, the performance we talked to at the half year, we've sustained through the quarter, anticipating sustaining through the full year. Again, I think you have to just kind of strip back the components of growth in Europe. As Palmer rightly said, North America reopened first, Europe next, and then the rest of world laterally. We're seeing that effect on the volume recovery and that lag through the regions, as it were, and hence why we're seeing the North American growth sort of come off first from a volume standpoint.
If you look at net new, we've got North America and rest of world trending just around the 5%, whilst Europe is slightly above that. That's really the positive delta for us, to see Europe above the net new growth rates of the other regions. That, as you rightly say, has been predicated on, you know, the best retention performance we've seen in the region, and that applies across both the UK and continental Europe, as well as very strong new business signings, as you referenced. We're excited by what we're seeing in Europe. The winds are coming across, you know, all of our core sectors in the U.K. and in continental Europe.
The pipeline remains exciting, and we're optimistic about the level of signings we'll see in the balance of this year, and our ability to sustain net new growth in Europe into the next financial year as well.
With respect to your question, Leo, on the volume growth, you're right, the math implies about a three or slightly over like-for-like volume in the quarter. That's 9% year-to-date. This is something we anticipated at the beginning of the year. If you'll recall, we called that out, just a gradual regression of that like-for-like volume, all about the timing of the recovery in the comps, just as we talked about before. Really, what we saw in Q3 was just a bit of perhaps the last of the recovery volumes. As we look forward to Q4, really, at this point, we feel like from a revenue perspective, we're fully normalized.
Henceforth, any volume growth would be incremental volume growth comparable to, you know, to what you've seen from us historically, and not really any noise from the recovery. That's really the way we're looking at it going forward.
Thank you, Palmer. Thanks, Dominic.
Thank you. We will now move to our next question from Kean Marden from Jefferies. Please go ahead.
Thank you. Good morning, all. I appreciate your help with two questions, please. First of all, just looking at logistics issues, in the U.S. at the moment with strikes and bankruptcies, just wonder if you can provide some insight into how you manage to provide any integrity for that risk? More broadly, given the increase in U.S. bankruptcy rates we've seen over the last few months, just present your thoughts, Palmer, regarding debt aging risk, and the size of it generally.
Okay, Keane, thank you for those. We struggled a little with your line, but I think I got them. I think the first was logistics issues in the U.S.
Yeah.
Surrounding strikes and bankruptcies, I think you said.
Correct.
Secondly, the debtor aging profile in North America.
That's correct. Thank you.
Debtor aging. Okay, got it. Was that specifically, Keane, the debtor aging, specifically in the U.S. or globally, was the question?
Just we've seen bankruptcies increase in the U.S., so mainly maybe skewed towards that territory, yeah.
We've got it. Thank you.
Yeah, I'll take those. Yeah, we are seeing a bit more activity on the strikes piece, the labor front, and a bit more financial pressure on some of our clients, particularly in the healthcare sector, and the like. Bankruptcies really aren't affecting us, so we're not seeing that in any real meaningful way. Really not seeing anything cross my desk on that front. It probably speaks to, you know, the level that we're really seeing there. We do know there's a lot more activity. There's always some bit of activity, so we're just managing it, as we normally do. With respect to the debtor aging profile, I think there are a couple things that are happening there.
One, just the shape of the business is a bit different. When you look at business mix, that's a bit more focused on what we call MAP 1 or client pay, versus MAP 2 or consumer pay, it inherently uses a bit more capital. The same thing is if it's a bit more on the management fee structure versus a P&L structure, there's a bit more working capital that's involved. There's also a bit of geography mix as well, where we're seeing higher growth rates out of Europe, which is much more focused on the client pay than the consumer pay. There's a bit of that. There's a lot of a mixed aspect to it that's there.
Then also, just as we touched before, there is a bit of financial pressure, that's coming in each of the regions, although it's not material, in the round.
Thank you very much.
Thank you, and we'll take our next question from Neil Tyler from Redburn.
Yeah, good morning. Thank you. A couple more from me, please. I'd like to ask you both for slightly more perspective on the like-for-like volume growth again, return to that topic. You mentioned that there's a small contribution, you know, outside of North America from recovery. Away from that, can you share some perspective on the sort of split of what's left between changes in participation rates, perhaps sequentially? I'm thinking particularly in B&I and, you know, sports venues, leisure venues. What might be left from ramping up of new contracts? That's the first question. Secondly, retention rates, obviously very, very healthy.
Previously, you've talked about the efforts you put in during the pandemic around contract renegotiations. I wonder, if we think sort of two, three, four years out from here, whether you believe the sort of retention rate is benefiting from having locked in customers who might, in previous times, have already put those contracts out to tender, and whether, you know, or whether there's something else, you know, that's changed in the business that more structurally can support retention rates at the current level for the longer term. Thank you.
Thanks, Neil. Yeah, look, it's really pretty difficult to pull apart the like-for-like volume growth in a quarter, given that there are so many different moving parts. You know, as we said, we signaled that there would be a slowing in volume recovery as we lap the reopening. I think it is fair to say we're pleased with the volume growth we saw in the third quarter, and I think you're absolutely right. Within that, there are a number of elements. First, we are still seeing some reopening benefit in Europe and the rest of the world, albeit that really, I think, we feel will come to an end in the third quarter, and we'll see little of that in the fourth.
I think we continue to see some return to office benefit, and that so whilst there has been a reopening, we still see an increase in office attendance and in participation, which is positive. That is, of course, being offset by some of the redundancy programs that we've seen announced previously in tech and in financial services more recently. There are sort of trends and counter trends within that. You're absolutely right. We had sort of pent-up openings a year ago in B&I, in particular. As those contracts have matured into year two, we're still seeing some volume growth on them.
I think we feel pretty good that when you sort of add up all of those puts and takes, we're into strong, positive volume territory. You know, our guidance and expectations for quarter four is that, you know, that's broadly flat to slightly positive. If it were to be better, that's where we might see any upside. In terms of your question on contract renegotiation, whether that's benefiting retention, I think there's, I mean, I don't really look much past the same factors as we're seeing impacting new business, positively impacting retention. In this very challenging world with high inflation, I do believe that we're best placed to manage those pressures for our clients. That they've seen it, you know, firsthand through the pandemic, through reopening, and through the cost of living crisis.
Therefore, when we do come to the retention discussions, there's real evidence of the benefits we can bring them that makes us a more compelling partner. I think the reasons we are winning more is the reason we're also retaining better. I think we've established an awful lot of goodwill over the last few years in the manner in which we've dealt with the various issues that we faced, I would say not least in the manner in which we've priced. You know, it's, you know, as Palmer referenced earlier, I think we've been very transparent with our pricing. We've demonstrated the gross cost inflation, we've demonstrated the absolute GBP millions mitigation that we can deliver for our clients, We've only sought to pass on that real net cost inflation after we can do everything.
You know, we've sought to offset the margin dilution through our own other initiatives. I think, you know, that combination of the sort of the approach that we've led to these various issues has left us in a good place with our client base. You know, we think we've seen a bit more go out for retention in the last six months or so, and yet we're sustaining these very positive levels of retention. You know, we feel good about where we are. Of course, yes, you know, those positive levels of retention will underpin our growth over the next few years.
Just a couple more thoughts on the retention piece. As Dom mentioned before, the macro, the macro status helps on the retention side, just as he touched on earlier. Also, as he touched on earlier, with respect to Europe, we've done a lot to improve our processes and our focus within Europe. That's the region where we've seen the biggest step up in terms of retention rates, and it's been a massive priority for us, and it's great to see that come through. This is a record rate. We've kept it for, you know, several quarters now.
We look at it on one hand as a record, on the other hand, if you look at it in the inverse, that means we're still losing upwards of GBP 700 million or so of business. We think we can do better. We take a very much of a micro focus on how we try to drive retention. That's paying off.
Very helpful. Thank you very much.
Thank you. As a reminder, to ask a question, please signal by pressing star button. Please make sure the mute function is switched out to allow your signal to reach our equipment. Once you have asked your question, please mute back your line. Thank you. We will now move to our next question from Harry Martin from Bernstein. Please go ahead.
Hi, yeah, good morning, everyone. Thanks for having me on. A couple of questions from me. The first one is on sports and leisure within North America. Some of the commentary we've seen on attendance of and post-COVID spending has still, you know, suggested that the sports and leisure season is running very well. I wondered if you could comment on where that stands potentially next to the 14% organic growth for the entire North America business. Is sports and leisure running ahead? And then the second question is on new wins. Now that the key selling season in education is, I understand, mostly over, you know, where are we tracking relative to the GBP 2.5 billion annualized wins you did last year?
Do you expect that to be, you know, flat or slightly up compared to last year, or a little bit down? Thank you very much.
On your first one, Harry, North America, sports and leisure. You've heard from us previously that the consumer spending has been very strong, surprisingly strong in that segment. That is continuing. We're not seeing any signs of weakness thus far. That trend is staying consistent. Similar to the theme from some prior conversations, you saw a massive reopening of sports and leisure really in the second half of last year. You're starting to lap that a bit. The consumer spending within that, even though today, you know, continues to be strong. On the new wins side of things, just as Dominic referenced before, over the last year, we're at $2.5 billion. We've got a very strong pipeline.
We're excited about the pipeline. We think this year can be a record-setting year for us. As you know, it's lumpy and the timing's unpredictable and uncertain, you know, we're always focusing on expanding that pipeline and raising our conversion rate, so it's something we feel good about.
Thank you. We will now move to our next question from Jaafar Mestari, from BNP Paribas.
Hi, morning. I have two, if that's all right. Firstly, on the environment you described today, just curious whether it means anything for the balance sheet. Is this an environment where you'd be fully comfortable with 1.5x net debt to EBITDA, or would your preference be to be slightly below, like you're likely to be post buyback at the end of the year, until some of the remaining uncertainties have completely abated? Just secondly, wanted to come back on one prior question. When margins were 6.5%, that was 100 basis points below pre-COVID levels, and you were describing precisely where that came from.
I think you were saying 40 bips drag from inflation, 40 bips drag from startup costs, strong new business, and then 20 bips drag from OPEX into the general capability, digital investments, et cetera. Is that a bridge that you have updated now that you're closer to seven, or at seven for H2, and startup costs in particular, and digital OPEX, are they being phased out as you expected, or at least are they being better amortized with the higher revenue now?
With respect to the balance sheet, we've got a capital allocation framework that we apply. We start by looking at organic opportunities. You know, that comes in the form of CapEx. One thing to really call out there, we said at the half year, we expected CapEx for the full year to be in the 3%-3.5% range. We now expect that to be at the low end, so closer to 3%, for the full year. Not exactly sure, again, that that's a permanent trend. It's something we're keeping an eye on, but certainly for this year, that's where we expect it to be. First and foremost, we take advantage of organic growth opportunities. We look at inorganic, mainly in the form of M&A.
You'll see we've done, what, about GBP 272 million or so of spend year to date. Very little in Q3. We are looking at a number of opportunities currently in all of our regions. Some of that may happen in Q4 or may extend into next year. We will keep an eye on the level of activity and the quantum there. Any excess above the target leverage, we will return to shareholders. We do expect that target leverage to be in the midpoint of our range by the end of the year, when we complete our current GBP 750 million buyback. We'll look at the, you know, the landscape, including the M&A landscape, and we'll make some decisions there.
I think we'll look at it in the same way that we've been looking at it the prior two quarters. We are very cognizant of the interest rate environment, and, you know, the raising of additional debt and what that does. There's a constant balancing of this there. On the margins front, Vicky touched on this a little bit earlier as well. I think at this point, it's more weighted towards the inflationary pressures. You are seeing a normalization of the mobilizations. As that continues to move forward, that particular drag declines, but inflation has been, you know, stubbornly high, for a while now.
I think we've shown we can manage it fairly well through our mitigation efforts. Partnering with our clients is a big piece of it as well. It's really hard to unpick that precisely. It would be more weighted towards the inflationary aspect now.
Thank you. Then just that extra, this on the digital OPEX and general investment in your, global capabilities there, is that something that plays to scale well, or is the 20 bips something but long term?
Yeah, I mean, I think what's really important is, you know, we need to continue to invest in our business. We need to invest in sales, retention, operations. We need to have the best talent in the industry. We need to have digital and data-led solutions for our clients, and we're not gonna hold back on those investments. They're absolutely the right things to do. I think as you know, you rightly said, we're touching 7% in the second half. We've made significant progress this year on margin. I think it's 50 basis points on a full year basis, despite the, you know, the very significant inflationary pressures, and we will continue to make margin progress from here. That will be in addition to higher growth.
I think we just need to balance the need to invest in this business to sustain mid to high single digit growth over multiple years, and to maximize the opportunity that we think are of a very, very exciting market. I mean, this market today has got more growth opportunity in it than I've ever seen.
Thank you. Very clear. Thanks.
Thank you. As there are no further questions in the queue, I'd like to hand the call back over to Dominic Blakemore for any additional or closing remarks. Over to you, sir.
Simply just say thank you very much for joining us. We wish you a very, very restful and enjoyable summer, and we look forward to speaking with you again in November. Thank you.
Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.