Compass Group PLC (CPG) Earnings Call Transcript & Summary

Good morning, and welcome to our 2025 Half Year results. We've delivered another strong first half performance. A double-digit increase in profit was driven by 8.5% organic revenue growth and further margin progress. And in line with our algorithm, we're continuing to achieve profit growth ahead of revenue growth. Importantly, net new business was 4.4%, within our 4% to 5% target range for the fourth year running now. Our client retention rate continues to be strong. It's above 96%, and the outsourcing market remains buoyant, with 45% of new business wins now coming from first-time outsourcing. We are investing for growth and have acquired attractive businesses to help expand our addressable market through further sub-sectorization. Following the reshaping of our portfolio, we're now an even more focused business. Our diverse sector portfolio, wide-ranging client base, flexible operating models and significant local purchasing scale all provide the business with significant resilience. We have flexibility to mitigate macroeconomic challenges, and we're well placed to capitalize on any increased outsourcing opportunities that may arise. I'll come back with more details on how we're successfully executing our strategy later. But first, over to Petros to give you more details on the financials.

Thanks, Dominic. Good morning, everyone. We've made great progress across our key metrics in the first half, delivering another strong financial performance. We were pleased to deliver double-digit growth in operating profit and earnings per share. Let's start by looking at the components of revenue growth. Mobilized net new business continues to be excellent and in the middle of our 4% to 5% target range. Like-for-likes remained strong at around 4%, with pricing and volumes normalizing as expected. We continue to expect positive volume growth, driven by our attractive value proposition, increased user technology and additional events. And whilst we're not immune to macro pressure, our significant value gap to the high street drives higher participation in our restaurants helping to mitigate any potential volatility. As you know, following our portfolio reshaping, we combine rest of world with Europe to form a new international region. Both North America and international delivered strong organic revenue growth and margin progression with double-digit growth in operating profit. Operating profit was up by nearly 12% to over $1.6 billion. Interest increased to around $150 million, mainly due to higher debt. We continue to expect our interest charge to be around $300 million for the full year. As anticipated, our effective tax rate was 25.5%. This is also expected to be the rate for the full year. Earnings per share were up by nearly 11% in constant currency. Turning to cash now. CapEx was 3% of revenue, and we continue to expect CapEx to be around 3.5% of revenue for the full year. The working capital outflow reflects the usual seasonality of our business and the timing of events in Sports & Leisure. We expect our working capital position to improve in the second half and be broadly flat for the full year. Our strong cash generation and balance sheet gives us the most capacity in the industry to invest in growth. In the first 6 months, we invested $1.7 billion in CapEx and M&A. During the period, we acquired Dupont in France and 4Service in Norway which accounted for most of our M&A spend. Leverage ended the period at 1.5x net debt to EBITDA as we expected. We anticipate leverage to reduce at the full year depending on the M&A activity. M&A is integral to our strategy of unlocking further growth opportunities in our core markets. Targets are normally sourced locally, having been known to us for several years. We've already established relationships with them and they are a good cultural fit to Compass. We look for quality brands with complementary capabilities and entrepreneurial management teams. They typically come with strong revenue growth, synergy benefits and attractive cash flows. As you know, in recent years, we've increased our M&A focus on Europe. Recent acquisitions such as CH&CO in the U.K. and Hofmann's in Germany are performing well and are delivering their investment cases or better. Our capital allocation model is consistent and well known. As a growth business our priorities to continue to invest in the business through CapEx and M&A. After paying an ordinary dividend we then distribute any further surplus capital to shareholders, whilst maintaining a strong balance sheet. Our fiscal year '25 guidance is unchanged. We continue to expect high single-digit operating profit growth driven by organic revenue growth above 7.5% with continued margin improvement. Now back to Dominic.

Thanks, Petros. We operate in an attractive market where changing consumer trends and increasing complexities help us unlock first-time opportunities. Many organizations that are facing cost pressures are looking for efficiencies, and as experience has shown, this can trigger further outsourcing. The market opportunity plus our unique competitive advantages, such as sectorization, procurement scale and operational expertise give us the best combination to continue gaining market share. Looking ahead, emerging megatrends are offering further growth opportunities in all sectors, whether it's personalized, integrated nutrition aging populations, lifetime learning with the global reach of major sports and events franchises. These trends are creating growth pathways for us in the future. For some time now, we've been expanding our market in North America through the organic creation of 14 mini subsectors with niche expertise. They capture parts of the market we couldn't reach before. Our sectorization is being further enhanced through strategic M&A, which supplements or supports our existing capabilities within core markets. Recently, we've added Dupont and 4Service to our portfolio in Europe, following our blueprint of buying best-in-class businesses with exciting growth potential. Over time, we've proven M&A creates value by accelerating growth, increasing procurement scale and removing overhead costs. It's a key part of our business model as value compounds year after year. We have a resilient business mix with many different clients across multiple industries. Our diverse portfolio of sectors benefits from mostly captive audiences and limited exposure to discretionary spend. History has shown us that pressures in the short term often leads to more outsourcing and higher win rates as clients and consumers look for help navigating cost pressures. Our value gap to the High Street continues to grow from procurement scale and operational expertise, providing an even more attractive offer to consumers. North America has a resilient operating model. With the vast majority of procurement sourced locally, the market is well insulated from import tariffs. Our chefs have full autonomy over the menu and work together with our procurement experts to find alternative ingredients or to price it accordingly. In healthcare and education, the majority of our clients are privately funded and therefore, mostly insulated from potential federal spending cuts. Technology and data are transforming the clients and consumer experience, reducing friction and increasing personalization. There's even greater potential in our back-of-house processes. Advanced digital tools are optimizing performance by integrating processes such as fully costing meals, on-demand labor scheduling and real-time management information. Some of you may be familiar with the Intuit Dome, home to the LA Clippers. Facial recognition technology powers the entire fan experience. Through our partnership with the stadium, we leverage camera technology for all food and drink purchases, offering a seamless experience with no need for a device. Positive market trends and ongoing investments in growth will continue to drive strong new business wins. The annualized new signings stands at $3.6 billion, and the pipeline is attractive with the brand of first-time outsourcing and market share gain opportunity. With our focus on preempting initiatives and the improvements in Europe, retention is trending above 96%. It's the combined strength of these factors, which underpins our expectation for net new business growth to remain within the 4% to 5% range. We've said before, margin growth is incremental and continues to rebuild back to our peak and beyond. The improvement is driven by scale, retention, overhead leverage and unit performance. This potential everywhere to leverage fixed costs and back-of-house tech solutions. Europe will continue to benefit from expanding scale, retention gains and growth maturity. In summary, our resilient business model and favorable market dynamics give us confidence in our medium-term growth algorithm. We expect mid- to high single-digit organic revenue growth with margin progression back to our peak and beyond, leading to profit growth ahead of revenue growth as we continue to deliver long-term compounding shareholder returns. Our strong half year results highlight the resilience of our business model. Our competitive advantages enhanced by our world-class talent creates a powerful circle of growth and value creation. With significant growth opportunities, clear priorities and energized teams, we're excited for the future. Now over to Q&A. The operator will share instructions on how to ask questions. Please remember that you must be connected by phone to ask a question. Operator, over to you.

Ladies and gentlemen, this call is being recorded. [Operator Instructions] And our first question today comes from Jamie Rollo from Morgan Stanley.

Three questions, please. Just digging a bit into North America, obviously, a very good second quarter organic sales growth of 7.5% but it did slow quite sharply from the first quarter, which I think was 9.7%. And you saw a much, much smaller only, I think, a 20 basis point slowdown in the international division. So why the bigger slowdown in the U.S.? And are you seeing any underlying weakness or any change in behavior there? Secondly, just I guess a more technical question on the revenue line. It looks like the impact of disposals and M&A were actually a positive 70 basis points in the half and the full year guidance is still minus 100 basis points. So are you still sticking to that? Should we still expect something like negative 3% in the second half to get to that number? And then finally, just on the cash flow, the working capital for outflow in all 3 lines, which is a bit unusual. It looks like some of that could be contingent consideration on past M&A. But if you could please talk about and your expectation for full year working capital?

Thanks, Jamie. I'll take the first question, then let Petros take the second and third. Look, we're not seeing any underlying weakness or any change in behavior at all in North America. The second quarter was very solid as has P7 trading be. So we're very pleased with what we're seeing there. Net new in North America is strongly within the range of 4% to 5%. Remember, we are lapping a leap year last year. And we're also -- we've had a few sort of weather-related and other events in the U.S. in that quarter in particular. So we think the underlying is a continuation of the trends that we saw in Q1 and is our expectation as we go into the second half. With regard to international, we've just seen a slight acceleration in net new in the second quarter which effectively, we've seen a continuation of the net new trends in North America. So very positive in net new for international and a slightly stronger net new quarter for us as a group.

Good morning Jamie, on the disposals, no change to what we discussed in Q1. It's a bit of a timing in there. Remember, we closed all of the LATAM disposal in some other markets, January and February, there will be a drag in the second half, so consistent with what we discussed before. On cash flow, what you see in working capital, you see a seasonal outflow we have. You see a bit of a timing of advanced sports and less calendar change between half 1 and half 2. We remain confident we know this trend will invest in the second half and remain on track on broadly flat working capital for the full year.

And we're moving on to a question from Simona Sarli from Bank of America.

So first of all, something on client retention that it was at 96.2% and can you provide a little bit more color if that was effectively stable in Q1 and Q2? And is there any scope for further improvement in the second half of the year? And then if you can give a little bit more color again going back to the international in trends between EMEA and rest of the world? And lastly, on share buyback, in case there should be no further M&A until the year-end. Is there still any scope for potentially announcing a share buyback?

Simona, thank you for the questions. Again, I'll take the first question and then give the second and third to Petros. Look, on retention, we're really pleased. We continue to trend above 96%, as you rightly say. It's, again, a continuation of the trends we saw in the first quarter. We're hopeful that we can continue to do better from here. Retention in our international region is at record levels. And our forward-looking retention based on -- our retention performance in the first 6 months of the new financial year as you were is tracking above our best levels in North America as well. So we feel good about that. That gives us the confidence that we can sustain the 4% to 5% net new business run rate, not just in the balance of this year but into 2026. As we said in the statement today, that's the fourth year that we've been sustaining those net new contract win rates in our reported results and not just in the forward-looking indicators, which we feel it really is the underpin of the quality of this business. Thank you, Simona. Over to Petros.

On international, both EMEA and rest of the world performed strongly within the range of net new cut pricing and good volumes. And actually, on retention, we're sustaining an improved level of retention to historic levels in mid-90s consistently. When it goes to the buybacks, I think you shared is talking about us prioritizing CapEx and M&A. I think the same calls true. There might be a couple of opportunities for the second half. If they mature, we will take them. If not, we're going to rebalance between buybacks and M&A as we go forward.

And from Jefferies, we now have Simon LeChipre with our next question. Please go ahead.

I have 3, please. First of all, on the U.S. retention, so it improved nicely in H1, could you perhaps comment on the performance across the different sectors? I mean any particular sectors driving this uptick? And are you confident to maintain this 97% in the second half? Secondly, on volumes, it was up 1% in H1. Are you confident to positive volume in the second half? And lastly, any update on inflation and how does it track compared with your expectation? And what does that mean for your kind of guidance you have 2% to 3% pricing for the year?

Thank you, Simon. Yes, look, on retention, the retention performance is strong across all of our sectors in the U.S. We're really pleased with that. It's a nice balanced picture. We focus very, very much on -- you've heard us talk about our SAG process, the Strategic Alliance Group, which focuses on the key or larger accounts, that covers about 70% of our business. We continue to deploy our processes with discipline there. In fact, we are, at record levels of preempt, which underpins those SAC processes and gives us great confidence in our retention rates. What we're also doing that differently in the U.S. is, we focus on the tail of other accounts, and we deployed a number of new processes, which allow our operators to focus even more using effectively a satellite process. And we're seeing improved retention from that. Look, we've always been at industry-leading levels of retention in North America, and they've led the way in the Compass business. So we're never complacent but we'd like to think that we can continue to make marginal improvements from here through greater focus. Yes, volumes were positive in the first half, 1%. We expect that positive trend to continue into the second half. We have talked to you previously that in like-for-like, there is a degree of normalization of the sporting calendar a normalization of return to office. And also, as Petros' sure will come on to say, we are pricing slightly lower as we see inflation fall, that's all within like-for-like. But specifically within volumes, we continue to anticipate a positive outlook for the half year -- for the second half year.

Simon, on inflation, very consistent to what we have guided and what we took in the forecast. Remember, Q1 was north of 3%, in Q2 a bit touched down. We do expect this to be within the range of 2% to 3% in the second half. Two realities there. Europe, you have a bit of lower inflation. In the U.S., we see more volatility in -- if you look at the 10-year treasury bonds, net-net, 2% to 3% is the right range for us.

And next, we have Ivar Billfalk-Kelly from UBS.

You mentioned that uncertainty could be beneficial for first-time outsourcing. Given that we have had a couple of months of uncertainty, have you actually seen any uptick in tendering? And if not from your historic experience, when we actually expect after what sort of a period of time when we expect tendering levels to increase. Secondly, you mentioned vending as a potential area of growth. And my understanding is that it should be a higher-margin business, potentially even significantly higher margin. So it'd be great if you could touch a little bit on how the growth from a top line and a margin perspective is trending in that both in the half and looking forward. And then maybe slightly longer term. I mean, you do have the ambition to grow at mid- to single -- mid- to high single-digit revenue growth in the future But given the bigger you're going to get, the harder that is going to be to maintain. So given that, that opportunity is still there, why not grow your new business at a higher rate? What are the obstacles for that stage and why not go at sort of 10% rather than maybe the 8% that you're doing?

Thank you, Ivar for those questions. Yes. Look, first of all, on the question of the sort of lead time of global macro, the uncertainties as you call it, feeding into an acceleration in net new. It's an art, not a science. It creates more opportunity for us to have conversations with our existing clients and gives us an opportunity for greater preempt. So that's something that we are working on at the moment. It creates the opportunity to have more conversations about there being a tipping point in the environment for clients to bring their particularly self-operated business to market for the first time. But that's not going to happen in a matter of weeks or even months. That is going to be over a couple of quarters. Certainly what we saw last time in the global financial crisis. It was probably about a half year before we started to see that pick up in the win rate and the scale of business being brought to market. So that would be broadly our expectation again. I have to say at the moment, I don't think this level of uncertainty is as much as a trigger as we've previously seen. So we think it's -- the environment is absolutely fine. We've got super pipelines in all of our regions. Our win rates are improving. We're very, very excited about the growth opportunity ahead of us. And yes, look, if we can use this to advantage in those conversations and use it as a bit of an accelerant, and that would be super too. So look, we're positive on the outlook for growth. With regard to your point on vending, yes, look, part of our business portfolio of services and countries do have different margin profiles and therefore, we seek to grow where we've got the greatest opportunity. But it is part of the portfolio. And yes, you are right, vending has been a good contributor to our margin progression. As we've always said, we try and create margin wherever we can, and we reinvest it for growth whilst growing profit ahead of revenue growth. And I think that formula works really well for us and vending would be one of the contributors of margin that we can reinvest across the business. And I think that's why you see the consistency of net new delivery in our business because we have that sort of tried and trusted formula of reinvestments and deploying margin where we can create it. But it is also why we're very interested in micro markets and vending across other regions and countries. So we've got a great blueprint in North America. We've now entered the U.K. We made a number of acquisitions, which have brought us both the technology and the regional, and national reach. So that we can provide of vending and micro market solution to our clients. We're going to continue to build that capability first in the U.K. and then we'll look where else we can deploy it. And with that, hopefully, we'll come margin opportunity and again, the ability to sustain our broader growth. And then finally, look, great question on the growth opportunity. We are very confident that we can sustain this growth algorithm. Look, we can see the pipeline ahead for many years. We know the size of the market. We know the huge opportunity in first-time outsourcing. We know the fantastic opportunity that we've got from taking share. What we're super focused on at the moment is continuing to build out that total addressable market in all of our country sectors and regions so that there's always headroom for growth. We talk about that all of the time with the U.S. business. How to answer your question, how we can grow at scale as the absolute numbers get bigger, how can we sustain this algorithm. But the point I would make is there is a balance to all of this, right? And if we get ahead of our skis and we rush for growth, we risk mobilizing back. We were recently not having the overhead structure to support that. We need to invest one-off to do that, and we'd rather grow incrementally and sustainably and have a consistent profile. And that's why we feel that this 4% to 5% range, plus 2% to 3% on like-for-like and a point or so ahead of that from profit growth and margin expansion consistently delivered is a much more sustainable, predictable and reliable model and the one that we feel is right for us.

And our next question now comes from Andre Juillard from Deutsche Bank.

Congratulations for the results. Two follow-up questions, if I may. First one is about labor in the U.S. particularly, do you tensions coming up with the actual environment in the U.S.? And do you have any fear about potential inflation on that or potential attention to find some people? Second good question on the balance sheet. You are guiding to remain around 1.5x net debt on EBITDA. Could you consider to go a little bit higher on that side or not?

Thank you Andre for those questions. I'll take the first and then Petros on the balance sheet. Yes, look, you're right. But I think that on labor in the U.S., it's a positive for us, right? If labor is tight, if it's cost wise costly, it makes self-operation harder, it makes being a smaller player harder. We believe that we can address those challenges better than anyone. I'm delighted that our retention rates have improved month-over-month now nearly 2 years across all of our regions. And that really tells me we're getting something right in terms of it of employment conditions we offer, pay rewards benefits, the environment that we're offering to our colleagues and the opportunities they have to grow their careers for the longer term. Our labor turnover rates sits at around 30% to 35% in most parts of our business, which is extremely low relative to other hospitality businesses and particularly relative to the QSR and high street restaurantation industry, that level of retention gives us greater quality of service. And it means we have more opportunity to work with our colleagues on how we can build their careers for the longer term. So look, we've often said a bit of inflation is good for us, a bit of tension in the labor pool is good for us because it's how we can differentiate and improve our clients and to our colleagues that we're the best partner for each of them.

On balance sheet, I think you have seen in the first half, we have been 1.5. We expect this to reduce in the second half as we go subject to M&A. Our range is appropriate. It gives us the capacity to continue to invest in the business. And I think the 1.5 is the right range.

And we're now moving on to a question from Jaafar Mestari from BNP Paribas.

I have 3 questions, if that's all right. Firstly, on the full year guidance, at least 7.5% for the full year, after which you delivered in this H1, it means at least 6.5% in the second half. And I appreciate this is a floor. Can you talk maybe about some of the ranges in your assumptions that could make 6.5% the right number? You need to be at the very, very low end of your net new and pricing ranges and no contribution to volumes. So just curious what's the scenario in which H2 is only 6.5% for the group? And then just slightly technical on margins, you expected to make year-on-year and sequential progress this half at the group level, you have achieved that. In international, there was no sequential progress. Is there a marked seasonal margin pattern in the new international division that we should be aware of. There was some of that in rest of the world previously. I don't think in Europe, there was any market seasonality. So is it just new reporting? Or is there any ramp up there, synergy delivery, any other reasons for H1 to be sequentially down? And just on U.S. client retention, you gave some more forward-looking color than usual, which is very helpful. So I just wanted to clarify those figures. I think you said forward-looking retention based on the first 6 months is at historical highs. Does that mean your success rates in the first 6 months in the year was higher than usual? Is that comparable to the metric that some peers use where they say first day of the fiscal year retention is 100% and then we work down? Or do you mean you could be at 97% and stay there over the next 6 months as well?

Thank you, Jaafar. Look, I'll answer the first and third and then ask Petros to speak to margins. Actually taking the U.S. client retention first, the answer to your question is yes, we are trending on a 6-month basis at historical highs, which means that we are retaining all contracts over that 6-month period that have either been preempted or gone out to bid at levels above anything we've experienced before. We don't normally talk to that. We prefer to talk to the actual in the year retention impact. But I think that gives you a good indication that if we can sustain those levels, then we should be improving -- we should be performing strongly in retention in North America on a go-forward basis. In terms of full year guidance that we've had -- we're really, really pleased with the first half. We're talking about retaining net new in the 4% to 5% range. We'll continue to price and we see some positive volume. So look, 7.5% on a full year basis is a floor, we would expect to see better. But look, as we all know, the world is an uncertain place at the moment, and we'd rather have a touch conservatism at this point and see how we go in the second half.

On your margin question, you see good progress, both in U.S. and international, very consistent to showing more progress in international. You do see progress versus last year. You see progress versus the second half of last year, and we'd expect to continue to see sequential progress as we talk in half 2.

On international, is that the 5.8% margin for H1 this year?

Yes, that's exactly right. It's 5.8%. last year it was 6%, exactly it's 20 basis points to last year.

Yes, correct. H1 and then H2, my question was H2 last year was higher. In rest of the world, there was this seasonal pattern where H2 was always higher. And just asking if in the new international division, there's also going to be a marked seasonal pattern where..

I think it's immaterial. I'm not sure there is anything in there.

Jaafar, after disposal of the markets, the rest of that region is less than 5% of total portfolio. It's going to have very little impact on the profile of the international region with Europe included.

Our final question for today comes from Neil Tyler from Redburn Atlantic.

And it will be just one. Business & Industry, please. You mentioned in the release, the strength of net new continues in that business, which has obviously been a theme for some time in a market that's already very well penetrated. Can you help us understand the sort of the, I suppose, the contributors to that net new, whether that's equally coming from first-time outsourcing or perhaps from competitors or whether really the -- I suppose, the TAM, the rate at which the addressable market there is growing faster than certainly I had anticipated historically.

Yes. Thank you, Neil. That's a great question. Yes, look, B&I is a super sector. It really is -- it's been the core of business and continues to perform really strongly. Why is that? We see new institutions, we see clients expanding their sites. We see first-time outsourcing opportunity. We see share gain opportunity. And we also see an expansion of services, right? So the ability to sell in micro markets and vending to selling the fine dining and catering and hospitality solutions. So I think what we've learned with B&I is when you're anchored with the client, you continue to expand on their estate with other service offers within food as well as having all of the TAM market opportunity that you described as well. So I think one of the things we've learned is certainly we never complacent but be complacent about the core because there's so much opportunity that continues. And we see that not just in the near term but we see it in our pipelines and the opportunity over time as well. And that's what makes us so excited about the business.

And that concludes today's Q&A session. So I'd like to hand back over to Dominic Blakemore for any additional or closing remarks.

Yes, thank you very much, and thank you all for your questions this morning. Before we conclude, I'd like to share a few final thoughts. We operate in a highly attractive market where emerging trends and new capabilities we've acquired continue to unlock significant growth opportunities as you've heard us say this morning. And our business is resilient supported by a flexible operating model. It helps us mitigate any volatility we might see. And our experience has shown us that macro pressures can lead to increased outsourcing and accelerated growth in the medium to long term. Thank you very much. Enjoy the rest of spring and summer, and we'll speak to you again in July.