Compass Group PLC (CPG) Earnings Call Transcript & Summary

Good morning, and welcome to Compass Group's Quarter 1 Trading Update Call. Hosting today's call will be Dominic Blakemore, Group Chief Executive Officer. This call is being recorded. [Operator Instructions] I will now turn the call over to Dominic Blakemore. Please go ahead, sir. Thank you.

Thank you very much. Good morning, everyone. As usual, I'm here with Palmer, our CFO. We've had a good start to the year, and we're delighted by the continued strong performance of the business. Group organic revenue increased by 24% as we continue to benefit from strong outsourcing trends and high client retention. Net new business growth was 5.5%, significantly above our historical rate of around 3% and in line with last year. And we're particularly pleased with the balance of growth with all regions growing at around the same rate. Our European business continues to perform well, benefiting from the increased focus on growth, supported by investments we've made in recent years. Like-for-like volumes were particularly strong in business and industry as employees continued their return to offices and in Sports & Leisure, where participation rates remained high. With persistent high inflation, we continue to work closely with our clients to mitigate this pressure, both operationally and through appropriate pricing in line with recent trends. And while consumer demand has been resilient, we're mindful about the uncertain macro and any potential impact that may have on discretionary spending. We remain positive for the full year, and we're reiterating our guidance. We expect operating profit growth above 20% on a constant currency basis, with organic revenue growth of around 15% weighted towards the first half of the year and an underlying operating margin above 6.5%. Longer term, we remain excited about the significant structural growth opportunities globally and the continued strong levels of outsourcing. The combination of an increasingly complex operating environment and trends that include sustainability and digitalization as well as our market-leading offer mean we're best placed to capture these opportunities. Overall, a good start to the year. And let's move to Q&A.

[Operator Instructions] We will take the first question from Jamie Rollo from Morgan Stanley.

I've got 3 questions around the net contract sales contribution, please. The first is, I mean, 5.5% is clearly a very good figure. But I guess the critics would say it's a bit slower than the 7% you delivered in the second half of last year. We've also seen a sort of weaker recent performance from your 2 large peers in terms of net contribution. Is there any change you're seeing in the outsourcing environment? Or is there any sort of seasonality or lumpiness that we should be aware of? Secondly, in terms of some KPIs on most figures, it would be great if we just get sort of mix of first-time outsourcing and maybe quantify the pipeline which you have in the past? And then finally, if we are sort of gliding down to more normalized figure, is that 5.5%, is that like your higher watermark for the year? Or can that be sustained do you think for the rest of the year? And are you so confident in delivering sort of 1 to 2 points better than the 3% that you did pre-COVID?

Jamie, thank you for those questions. Let me tackle the first and then maybe pass on to Palmer for the next 2. I mean, look, first of all, yes, you're absolutely right. There is lumpiness in net new, so we have seen Sports & Leisure, in particular, which would benefit the fourth quarter of last year as we saw openings in the sports season. And we also have a degree of seasonality within higher education as well. So there will always be a bit of lumpiness within the quarters. We were super pleased with quarter 4 of last year. We're super pleased with 5.5% in quarter 1. Yes, it's 20 bps lower than the full year 5.7%, we need to see where we play out on a full year basis. I think what's really important and maybe going to your third question is we talked about sustaining 1 to 2 percentage points better than our historic rates. That would be on top of our historic organic of 6% and gets us to sort of the mid- to high single-digit aspiration on a go-forward basis. And we feel confident about that. And I think this number in the first quarter fully supports that level of performance. Palmer?

In terms of first-time outsourcing for the trailing 12 months, we're at about 42% of our wins from first-time outsourcing. So up still significantly from historical levels of around 30% or so. In terms of pipelines, we just -- we've almost completed business reviews for all of our subregions. I think we have one left. And we're doing a deep dive into the sales processes. And one of the things we're looking at is pipeline coverage, and we've never had better coverage. We're looking at coverage through all the stages of the sales process. One of the things we're most excited about, frankly, perhaps what we are most excited about is the balance of the growth among all the regions. And we worked really, really hard at improving that growth outside of North America. And that's just embedding the processes doing the right things, the mentalities. It's starting to show up the results. We're taking a more granular look at the processes and where we are in the stages. So there's lots of reasons to believe it can continue.

And just to add to that, just to build on Palmer's answer. But North America, it's growing organically historically at 8%. And within that would be 5% to 5.5% of net new. I think what's brilliant about what was being achieved last year and in the first quarter is we've seen those levels of net new outside of North America, which would support a group 8% organic growth rate. So I think that's what's exciting. And of course, whilst we suggest that 1% to 2% is our ambition over time of an acceleration of net new, we're clearly working on building pipelines, putting in the sales resource, developing the offer to sustain the types of levels that we're seeing today.

We will take the next question from line Vicki Stern from Barclays.

Just sticking with that same first. I think you said 42% on the first [indiscernible] outsourcing. And what's going on in terms of the other sources of growth? Are you seeing any uptick in terms of the contribution from the small regional players or potentially any sort of change on the large competitors, I guess, with some of your big peers potentially being a little bit better themselves? And secondly, just more broadly on the full year guide of 15%, I guess, given 24% organic growth in the first quarter, that now does imply quite a decent deceleration across the year, clearly, the comps are going to get tougher, but still, would you say your guidance conservatively struck? Or are you genuinely expecting a sort of contraction in volumes? And I guess, if so, from where you can talk perhaps around the U.S. tech job vest cetera, what you're seeing there? And then just finally on the margin bridge. Can you helpfully walked us through that sort of bridge back at the full year results between the 6.5% you're at the moment and the 7.5% pre-COVID level? I think the first of the buckets you said was obviously inflation. Based on what you're seeing today, I suppose what is going on in terms of your levels of inflation? Are we sort of likely to see that tipping point moment for margins there in coming months where that's also sort of improved for you? And similarly, the sort of drag from net new on margin, how we should think about the evolution as we enter sort of back end of this year and into next year?

Yes. Thanks, Vicki. Let me tackle the second one and then over to Palmer for a bit of color on the others. Yes, just in terms of the 15% to your question around deceleration. Look, I think we've seen in the first quarter, 5.5% net new, around the same level of pricing as last year, so about the same level as net new. And then obviously, double-digit volume recovery. We broadly expect similar rich momentum in the second quarter as we [indiscernible] impacted comparator. And as we go into the second half, broadly we would expect the same levels of net new and pricing. So the real delta for us is volume. And that is, I guess, where the conservatism plays in. We're lapping a strong volume recovery in the second half of last year. As we've said today, there is some macro uncertainty around discretionary spend. And you can -- you reference the impact on certain parts of the B&I portfolio of recent restructurings or resets. So I think that is the delta that we need to see how it develops in the second half before we would revise any guidance. But I think we are more optimistic on that than not as we were. And then specifically, you asked about U.S. tech. I think important to say of our total global portfolio, tech is 5%. And I think the broad levels of restructuring that we've seen being announced across that sector sort of 5%, 6%, 7%. So it's sort of less than 0.5 point impact to us. And on the other hand, I think we're still benefiting from a return to office within that sector that is likely to accelerate, we believe, over the coming quarters. So I think that's less of a material factor than perhaps we've seen on the surface. So I think broadly super pleased with Q1 strong trends. I think the elements of uncertainty is just volume as we lap that strong recovery in half 2. I think Palmer, a couple of questions there.

Yes. In terms of the sources of growth, are they changing? I mean we're seeing a continuation of the themes from last year. Really, the macro environment -- the challenging macro environment is presenting a lot of challenges on the day-to-day operations. So when you think about heightened inflation, when you think about supply chain, labor availability. And in terms of client propositions, their desires for wellness and sustainability, more digital diversity and inclusion. Those kind of things are really playing to the benefit of the bigger players. And we think we've positioned ourselves very well with respect to each of those areas. So really, it's -- I think the bigger players are benefiting more in this environment. I mean you're still seeing some of the regionals doing quite nicely in some of their niches. But overall, it's playing to the benefit of the bigger players, first-time outsourcing would be the most pronounced movement of all. In terms of the margin and the margin progression, we still -- we don't see any margin impairment whatsoever. We do expect to see ongoing margin progression certainly year-over-year. What we've seen in the first quarter has been in line with our expectations, which are flattish first half from the second half of last year with some margin progression in the second half of this year. And it's really, as you say, Vicki, it's tied to some degree to the rates of inflation and net new business, the business mobilizations. We are seeing some signs of inflation stabilizing. It's still at the high single digits. We're not really seeing any regression in those rates of inflation. But we are seeing the signs that it's stabilizing overall. When you think about when inflation really started to get to those heightened levels, it was about at the midpoint of last year. So as we start to get to that point of this year and then with perhaps a slightly improving macro environment, we'd like to think that those rates could subside a bit. We do expect them to be at heightened levels compared to where they've been historically, but perhaps a bit lower than where they are right now. We think that can help the margin progression a bit. We've got some pricing activities that have been ongoing for a while or mitigation activities that are there and as the volumes continue to increase to be able to produce that leverage. So that element is there. The other element is the net new business. It's still very much heightened compared to where we've been historically. And we think there are reasons to believe it can stay that way. But it is getting to a more normalized level than perhaps in an exceptional level that we experienced in the second half of last year. And certainly, that will have a bit of a benefit as well. So overall, confirming our margin guidance for the year above 6.5% with that progression really coming in the second half.

If I may, Vicki, I just build on one of the points Palmer made. Palmer and I did a tour of the U.S. and we've also visited Europe in January, meeting clients, representing more than 10% of the revenues of the business. And I've never heard more clearly those drivers of digital diversity and sustainability being what's really important to our clients. And we believe our ability to address those is a true differentiator in our ability to take share some of our first-time outsourcing. And I think we identified these as the key things as we came out of COVID. I think they are absolutely must win battles for us over the next phase. And I doubt you already -- or if you haven't already, the U.K. business has just published its sustainability report. And I think what's striking in that is the level of specificity, data and science behind all of this. And I think that was a bit of a hard moment for me even when I saw that to realize what it takes to get this right and have the credentials to demonstrate that you're truly delivering. And I think that's where the differentiation in this complex world really can take us.

We will take the next question from line of Jarrod Castle from UBS London.

You mentioned a strong pipeline of acquisitions. So should we expect the acceleration on the $55 million per quarter as we move through the year? Secondly, just given the run rate of your buybacks, it looks like probably complete late 2Q, early 3Q. Do you still see buybacks as a preferred way of returning capital? And related to the acquisition pipeline, do you see any acquisitions that might hinder the ability to do further buybacks or anything pretty chunky, I guess? And then maybe just thinking about the balance sheet, you don't have much refinancing to do this year, but next year, there's $1 billion. How do you see the financing markets at the moment for you? And again, how does that kind of play into capital returns versus kind of paying it down from internally generated...

So Dominic just give me the signal that I'm supposed to take all of those.

I told you do that, Palmer.

No problem. Yes, light start to the year in terms of M&A. It's still very much part of our strategy and we're looking at M&A opportunities in all the regions, but it is a light start to the year. That said, I do expect us to do some more as the year progresses, so you should expect those numbers to increase, albeit nothing really in a significant range. I think it's -- we've got to be mindful about how we go about M&A. We talk about the challenging operating environment for our operators on a day-to-day basis. It is really tough for them. And if we're going to introduce something that could perhaps be a distraction for them, it needs to be very, very compelling. You've always seen us have a disciplined approach to M&A before. Certainly, that's playing out now. We don't want to buy just to buy scale. It really should be about how does it help us grow. And if it can help us grow overall, combination of the acquired business, coupled with our current business. I think that needs to be the sort of the litmus test, the telltale sign in addition to those normal financial hurdles. But no, it is something that's part of the strategy, and we do want to see more of it as we go forward. In terms of the capital returns, the buyback is progressing, as you say, it should be complete by the -- by the half year. We are cognizant that with -- where we are financially with the buyback, the M&A projections and the like that leverage will be somewhere around 1.3x at the half year. We will take a look at the overall landscape both internally and externally and make some decisions. Our capital allocation framework is pretty clear. We love to invest internally as much as we can. We'd like to do M&A where it makes sense and then we'll return excess to shareholders. In terms of the form that takes, I think you've seen us adopt various forms over time. I think it's incumbent of us to look at all options and make the best decisions based on that time period. Thus far, that's been share buybacks more recently. But it's when we'll always keep all the different return mechanisms in mind. But we're cognizant about where we are. It's all about maintaining optionality and we think we have that optionality, the happier.

And Palmer, just on refinancing for next year?

Yes. No. In terms of that, you're right, we don't anticipate any further refinancings for this year. We're looking at next win absent anything different, perhaps in the summer of '24. Certainly, interest rates, the interest rate environment is one we're keeping an eye on and is factoring into our decisions in terms of capital allocation, capital returns and the like. So no secret, it's been a material impact on all companies, and we're not immune. I think our credit rating and our overall balance sheet works in our favor relative to others, but is still a significant increase when we look to refinancing. So it's got to be part of the equation. We've got no problem obtaining capital, of course. It's just a decision as to whether that makes sense.

We will take the next question from Leo Carrington from Citi.

I have 2 questions. The first on pricing for Q1, if you could just elaborate on the risks and opportunities that you see now. Is there any evidence that the underlying consumer is struggling to accept the inflationary price rises that are going through the outlets and altering their spend or mix? Or on the flip side, could it be that, that you have evidence that given the broad inflationary pressure that Foodbuy and mitigation actions are preventing the competitiveness of your offer versus high street has increased. So how do you see the balance of those 2 factors? And then separately, on the retention rates, I think I see the retention rate in the release. Can you perhaps give us that KPI? And then on retention, I think elevated levels are a combination of your success in [indiscernible] retraction and clients wanting disruption of a switch during the pandemic. Any sign that sort of retention rates might slip down going forward as has the client [indiscernible] themselves?

Thank you very much, those are 2 great questions. I'll take retention and pass pricing to Palmer. Look, on retention, we didn't report the numbers, but they are in line with Q4 of last year. So Q4 last year was 96.9%, we're at the same level in Q1 of this year, which again is a significant improvement on the historic run rate and really pleasingly means that 2 of our regions besides North America are above 96% now, which is really where the delta of improvement we were looking for a very positive in Europe and Rest of World. In terms of your question on retention, I think it's a bit of a misconception that there wasn't rebidding contracts through COVID. It did actually continue and pretty much at the same levels as we saw historically. Obviously, these things were done virtually. But many people had the opportunity in the downtime to run those processes. So actually, it was almost counterintuitive for us too, that, that was the case. So I'm not sure that is what it's playing in. I think there's definitely an element that because of the pressures during and after the pandemic, we've been able to demonstrate to our clients the benefits we can bring to them. And I think that's given a greater appreciation of our services and therefore, a greater opportunity to retain contracts and that may be true of the industry more broadly. As we look forward, I think we likely, particularly in a higher inflationary environment, to see more pressure from clients on what we can do to help them with efficiency. And so look, I think that the pressure to retain business will be as acute as ever. We're very focused on that. And I think a lot of that plays into the first question you asked about the efficiency we can deliver through our scale and in particular, in Foodbuy.

On your pricing question, Leo, those inflationary pressures, the way they're coming through in the business, we always have to start with mitigation. That's the first place that we need to start. Our clients expect us to mitigate the best way we can. We've got to continue to show the value proposition to them. Pricing is really a secondary type of approach, but we've got to show the mitigation, the value proposition. And as you alluded to, Foodbuy is a big part of that. We are seeing some stabilization of the supply chain compared to where we've been. Now it's still not normal. But it's been very much disruptive for a couple of years now and we're seeing gradual return to normalization there, which is helping. What we're also seeing, too, is the benefits of a lot of the initiatives we put in place the last 2 years really starting to come through. So that is helping us significantly in that respect, and we expect it can continue as we go forward. This normalization continues. And then when we do price on the client side and with the consumer, we have been able to get pricing. You'll see it in the first quarter, it's been about 6.5%, which is actually a little bit higher than where we were over the course of last year and the like. The consumer spending still remains strong. We have thought that it could perhaps regress a bit, but we're not seeing it really. The per caps, the check averages and the like and Sports & Leisure, in particular, remain very much elevated. But it is something that, if you'll recall, we flagged at the end of the full year, we're keeping an eye on that. It's one of the -- one of the cautionary factors we're looking at it as the year progresses, but we're really not seeing it thus far yet.