Compass Group PLC (CPG) Earnings Call Transcript & Summary

Welcome to the Compass Group's Third Quarter Trading Update Conference Call hosted by Dominic Blakemore, Group Chief Executive Officer. This call is being recorded. [Operator Instructions] I will now turn the call over to Dominic Blakemore for his opening remarks. Please go ahead, sir.

Thank you. Good morning, and welcome to our third quarter trading update. As usual, Petros is alongside me. I'll start with some highlights on recent trading before discussing the exciting strategic platform acquisition in Europe that we've also announced today. The group delivered another strong quarter with organic revenue growth of 8.6%. While both regions performed well, North America was particularly strong across all sectors. Net new business continued in the middle of our 4% to 5% range, supported by strong client retention of above 96%. Our M&A is performing better than expected with the integration of recent acquisitions progressing well. As a result, we're upgrading our full year guidance. We now expect constant currency underlying operating profit growth to be towards 11%, driven by organic revenue growth above 8% and ongoing margin progression. Now turning to the acquisition of Vermaat, which is subject to regulatory approval. Vermaat is an exceptional business and a unique asset, which will help us accelerate sectorization and provide a strong platform for expansion in Europe. It specializes in tailored on-site food concepts, delivered in solutions and strong consumer-focused retail expertise, which will significantly strengthen our premium offer across the region. The exceptional leadership team has a strong track record of performance, delivering a compound annual growth rate of nearly 20% over the last 15 years and industry-leading margins. Its high retention rate reflects the quality of the offer and strong customer relationships. In North America, we've leveraged acquisitions to build a high-growth market leader, and we're replicating the same strategy in Europe. Its margin and EPS accretive to Compass in the first full year of ownership and represents a step change in our capabilities and offer. So in summary, our trading performance remains strong, and we're upgrading our profit guidance for the year. We're excited about the potential acquisition of another fantastic business with an exceptional management team. The business is in great shape. The market remains strong, and we're hugely excited about the future. Thank you. Now over to the operator, and we'll take your questions.

[Operator Instructions] And our first question is from Jamie Rollo from Morgan Stanley.

Three questions, please. Just on the trading update first, the North America and international organic sales growth figures diverged quite materially in Q3, sort of 3-point spread. They were very similar in the first half. You've obviously called out a couple of items in the statement. But how should we think about the underlying rate of those 2 regions and what that means for the Q4 exit rate and also 2026? Secondly, it looks like most of the profit guidance upgrade is that better acquisition performance. Are there any sort of changes to your underlying margin assumptions or thoughts for either this year or indeed next year? And then finally, just on Vermaat, the return on capital looks somewhat low if you're paying sort of 20x EBIT on that double-digit margin. I mean, can margins go any higher given where they are? And secondarily, presumably with leverage at 1.5x next year, that puts a buyback sort of off the table for maybe 1.5 years or so.

Thank you very much, Jamie. I'm going to hand you over to Petros for those questions, and then I'll come back at the end.

Let me just put a quick color on North America and international. So we continue to be pleased on North America performance, broad-based sector performance. If you look at the run rate in Q3, we have been positively surprised by some additional hospitality events that is driving quarter 3. And you see some good recovery from Q2. We talked about a couple of noise in the Q2 numbers. Retention remains to be very strong across all of the sectors. And we expect to have some moderation of the trends in Q4, which is factored in our guidance. I will come to our guidance in a second. When I go to international, practically, there is about a point difference behind inflation between international and North America. And then we have a bit of a timing mobilization between Q2 and Q3 for the international business. We had a quite large event in Sports & Leisure in Australia in the first half of the year. We do expect the run rates of international in Q4 to do better than what we see in Q3. If you think about our guidance for the full year, we expect to be above 8%, which practically we factor in the additional events not to repeat in Q4. If they were to repeat, we're going to do a little better on a full year guidance. When it comes to profit upgrade, you have seen our guidance is towards 11%. Pretty much the upgrade is based on strong underlying organic growth above 8%. And we have a better-than-expected M&A. Remember, we are through 4 acquisitions. We are having a bit better synergies than what we thought, which is very pleasing to see. And on top of this, the timing we had assumed on some of these deals, we managed to close them a little faster. So no change on the underlying margin. It's pretty much better M&A behind these 2 drivers I mentioned. When I go to the -- your third question was on the Vermaat. Dominic is going to reference a few points here. So my -- our view here is Vermaat is an exceptional business. It is a platform asset that helps us to further sectorize Europe. Its roots and founding is on a retail consumer-facing offer that the business has built over time. It's an exceptional management team. It reflects the quality of the business on a high single-digit growth rates consistently for many, many years with double-digit operating profit growth, and this is reflected in the valuation. The experience we have so far from the deals we have executed is we deliver on the synergies. So we expect synergies to help us to drive over the medium term, attractive returns. And we do expect with this acquisition to be around 1.5x leverage by end of September '26. Within this, we have also the opportunity to continue to execute our bolt-ons in fiscal year '26. I'll take a pause, and I'm going to pass it to Dominic.

Yes. Thanks, Petros, and thank you, Jamie. I think all I'd add to that is just really to say we really do believe that Vermaat is an exceptional business. I think it's the best-in-class independent foodservice business outside of North America. I think it truly compares to both Restaurant Associates and Bon Appétit when we acquired those businesses. It operates in the premium segment of B&I and also in certain other sectors. And we believe it can continue to grow at these levels in the 3 markets where it currently operates, Netherlands, France and Germany. But it also has the potential to provide us with that premium B&I offer across other European markets. I think what we see with this acquisition is we've now built the foundations to be able to really address sub-sectorization in B&I across Europe. That means having a premium brand and a core brand. It also means we can address SMEs as well as large-scale businesses on site. Vermaat has an exceptional delivered in offer through its joint technology program, a very high-quality offer, which is produced off-site. And with the other acquisitions that we have made, we now have the ability to provide services to multi-tenanted buildings as well as large-scale single-tenanted buildings and SMEs. So we really do feel both across the types of clients we have and the types of offer that those clients want. We've now built or are building a sectorization of offers that can serve all of those different communities. And for that, we think this is very exciting. As you rightly say, look, it commands a premium multiple is a very attractive high-quality business, and it will be accretive to us in growth, margin and earnings in the first year. And we're very confident that those attributes that we've described will ensure that we deliver attractive returns over the short and medium term.

And the question about the buyback, presumably that's unlikely now until 2027. And are there any more deals in the hopper?

I would say by -- for next full year end of September '26, you shouldn't expect any buybacks. We'll be able to do -- to continue to do some bolt-ons for North America and International. In '27, we're going to reconsider what is the best allocation of capital. And remember, our priorities remain the same on how we deploy capital.

In terms of your question, Jamie, on other acquisitions, so -- there is one remaining deal we are interested in, again, the European region, but that would be in the sort of low single-digit hundreds of millions, not anything like the scale of the deal we've announced today and would fit within our bolt-on strategy. I think this really is for us sort of the end of this phase of building the platform assets that we feel we need so that we've got confidence in our offer in Europe to replicate that North American strategy. And it's very much about consistent execution. And we think what this does is really gives us the ability to sit in that medium to high single-digit organic growth range in the international region consistently.

Our next question is from Simona Sarli from Bank of America.

There are a couple of follow-ups on what has been discussed previously. Can you give a little bit more color on what is the synergy potential and phasing? And also here, try to split it a little bit between cost and revenue synergies? And also, can you elaborate a little bit more on the lumpiness in mobilization in Europe? So what has been causing that? And what gives you confidence that you are on track for some of this to come back in Q4?

Sure. Thanks, Simona. I mean, look, you wouldn't expect us to quantify the synergies on a deal of this size, but the synergies would be typically the ones that you would expect from our MAP 3 and food purchasing in particular and from our overhead leverage, particularly in the main market of the Netherlands. And that would be similar to other deals that we've done, and we're confident from past experience that we have good line of sight to those synergies and that we can execute strongly against them. In terms of lumpiness things, as Petro says, it really is all about the Melbourne tennis where the Australian Open is the biggest single event in that contract. It happens in the second quarter of our calendar year. So you'll have seen that our Sports & Leisure performance was very strong in international in the first half. Obviously, we continue to operate that contract, but there's less events, so it slows a little. But we're confident in our net new in International, and we're confident in the run rate of organic growth in International for the fourth quarter that it will revert to something more like the group average.

And just 1 last one in -- on client retention that you mentioned is above 96%. Can you explain a little bit if it is sequentially -- slightly sequentially better compared to Q2 or flat? And also, if you can elaborate a little bit between International and North America and the sequential trends there?

Yes. I mean it's broadly flat half-on-quarter and quarter-on-quarter around that 96% level. Retention in North America is slightly better than International. We've had a very strong run on retention in North America. Again, but those trends are broadly in line with what we've seen before, what we would expect and how we expect to trend as we go forward.

We will now move to our next question from Simon LeChipre from Jefferies.

Three, if I may. First of all, a follow-up on retention. In the previous earnings call, you shared some forward-looking data on retention. So wondering if you have any update and if these forward-looking indicators continue to point towards retention above 96% for the coming quarters? Secondly, on new business wins, I think it stood at $3.6 billion in H1. So could you provide an update on where does it stand by Q3? And lastly, on Vermaat, on the double-digit growth achieved over the past years, was it purely organic? Or did the company completed any acquisitions?

Thank you, Simon. I mean, look, on retention, I think we said it in the previous question that we aim to remain above that 96% level as we go forward. I think we've talked on previous calls about the opportunities we see to continue to improve sequentially what we do on retention. We're very focused on the disciplines of the strategic alliance group across all of our major markets and also deploying our retention processes on the tail of [ non-tech ] accounts, and we think there's always more that we can do there. So we remain super focused. But yes, staying above 96% is the aim. In terms of new business wins, I think we -- LTM new business signings, the last 12 months new business signings at the end of the third quarter was around $3.7 billion, which was up sort of 6% or 7% on the same metric a year ago. So I think we're going in the right direction there. And then finally, just on the Vermaat growth, it was about half-half. So half organic, half inorganic. And that has been part of their model as they have consolidated and brought in the smaller businesses, very similar to what we've done, but a very attractive organic growth rate within that as well.

Just to add to Dominic's point on -- just keep in mind, first-time outsourcing remains very positive. The trends continue to be intact. We're capitalizing opportunities. Q3 was about 48% of new business wins, and we look forward to driving this further.

And our next question is from Jaafar Mestari from BNP Paribas Exane.

Two questions, please, on things you said. On North America, you've mentioned you expect a moderation of the trends into Q4. I just wanted to clarify that this applies entirely to your point on like-for-like volumes being strong in Q3. And then on Vermaat, what are the acquisitions we need to keep in mind when assessing the growth of the business over time? There's a few different ways you've talked about this. They all look very strong. I think in the press release, you say 20% over 15 years, obviously, from a small business. On this call, double-digit operating profit growth. So just trying to get a sense of just adding this business to your international platform, how much stronger would organic growth instantly be before you maybe start cross-pollinizing and benefiting from their digital and branding superiority, et cetera?

Thank you, Jaafar. If I take the Vermaat question, then I'll hand to Petros for the question on North America. I mean, look, you've heard me just say that the Vermaat growth has been double-digit organic. So look, that would be slightly accretive to our international growth rate as it stands today. But what we really see in Vermaat is the opportunity and ability to allow us to sustain the mid- to high single-digit organic growth rate sustainably, and consistently over time in giving ourselves that premium brand in B&I. We really do think that the combination of our subsectors allows us to consistently perform and deliver over time. I think that's the key. We also said, look, it's got a double-digit operating margin. So it would be accretive off the bat from a margin standpoint. And then, of course, there will be synergies on top of that as well. Look, we're still awaiting competition approval for it. So we will give you more color on that when we speak to you in November.

On North America, Jaafar, it's all driven by volumes were positively surprised in Q3, came stronger than what we anticipated. We do expect some of this to moderate in Q4, and this is what is factored in the guidance.

Yes. I mean I think it's worth saying as well, we had a very good Q3 in both B&I and Education, so double-digit growth in both of those sectors in North America as well as the events in the Levy and Sports & Leisure. So those events are broad-based and positive. And as Petros has rightly said, we're not factoring that into the guidance, but should we see that in the run rate, that would be an upside to where we stand today.

And we will now take our next question from Pravin Gondhale from Barclays.

Firstly, on the volume growth. Can you share a bit more color on the volume growth, the underlying volume growth in Q3 and excluding the one-off hospitality contribution in this quarter and sort of confidence you have in delivering positive volume growth next year? And then on Vermaat acquisition, can you just talk a bit more about more recent performance of the business in more recent year, especially after Q4? Yes, you talked -- I mean, you talked about double-digit organic growth here, but more on the margin front there as well. That would be helpful.

Pravin, thank you. You wouldn't expect us to go into that level of specificity around ongoing acquisition, I think. But just as we said, the performance has been consistent over 15 years with double-digit organic growth in recent years. We're very excited about the potential of that business within the Compass Group. When it comes to the point about volume, we said around a point of positive volume. This year, we expect volume to continue to be positive next year, but we would expect it to moderate a fraction from what we're seeing. And that's our view in the short term for next year. Petros, would you add anything to that?

I was going to say, practically, you see the manifestation of our volume gap to the High Street. We talked this in the past. We saw about the gap when consumers are using our offer, we see our clients having more events in the premises. It's quite competitive out there when you go high street. And this is what we keep enjoying in North America and International.

And our next question is from Andre Juillard from Deutsche Bank.

Congratulations for this strong publication. Three questions, if I may. First one about the U.S. Could you give us some more color about the health care trend and in general, the way you see inflation evolving? Second question about Europe. Could you give us some more granularity about the profitability you're expecting to register in this region, considering that historically, the profitability has been lower compared to the U.S. Last small question about leverage. You said this morning in the press release that you are targeting 1.5x net debt on EBITDA at the end of '26. Could you give us some more visibility about the midterm target for leverage, considering that, correct me if I'm wrong, it was more or less 1x before today's acquisition.

Yes. Thank you. I'll let Petros take the first and third question. And then just with regard to Europe, I mean, I think we look at it really in terms of sort of North America and International. There's about a 2-point gap between the 2 regions. We expect over time that the margin in North America should continue to incrementally progress as we enjoy operational and overhead leverage at the growth levels that we're delivering there. We'd expect the margin in the international region to incrementally grow but faster than North America to start to close that gap. Part of that will be leverage, part of that will be acquisitions and part of that will be the efficiency opportunities that we see. I think you have to remember that we have a different business model in International than we do in North America. We don't enjoy the scale of North America. We don't have the scale of Foodbuy, but we see opportunities to build some of those attributes into our operating model outside of North America and continue to close the gap. But as North America grows itself, and that will contribute to ongoing consistent sequential margin progression at a group level.

Andre, on U.S.A., on health care, we continue to perform well. I'm sure you have seen a lot of Medicaid articles. We haven't seen anything to our business yet. We're not complacent. We're well placed and very close to our clients to see how these things evolve. I just want to tell you, historically, this sector has been always under pressure with Medicaid, Medicare and somehow the system was able to digest some changes. If this is not the case, I think it's going to lead to more first-time outsourcing for us. Remember, health care in the U.S., half of this is in-house. So it's going to give us some good opportunities if we were to see any adverse impacts. But so far, we haven't seen anything. When it comes to debt-to-EBITDA, our leverage ratio continues to be 1x to 1.5x. In the last 3 years, we have hovered anywhere between 1.3x to 1.4x. I don't recall we were close to 1x in the last 3 years or so. We'll continue to be there. I think what is interesting is by September '26, we'll be able, subject to regulatory approval, to have digested this acquisition of Vermaat. We have opportunity to continue to invest in bolt-ons. And this is going to give us further scope for '26. We'll start by deleveraging '26 and we're going to revisit the capital allocation decisions.

Okay. Just a follow-up maybe on Vermaat. You are expecting the closing to take place at the end of the fiscal year and therefore, to have a full contribution in '26 or it's too short?

We don't know. This is all subject to approval. It may take -- we have to follow the process. So we'll let you know once we have an update.

Our next question is from Leo Carrington from Citi.

Three questions from me also. Firstly, just quickly on Vermaat, how does the maybe EUR 500 million of Netherlands revenue you're acquiring compared to your existing footprint in the country? Secondly, in North America, you mentioned hospitality volumes again. It feels like Sports & Leisure is often positively surprising on volumes. Can you just outline latest trends in terms of attendance numbers at your venues versus the success of your offer and the per cap? And then lastly, on margins, maybe this is something for the full year, but North America margins eventually back to 2019 levels. What's the right way to look at International given that some higher-margin businesses have been disposed of. Should we really be expecting better underlying international margin expansion going forward?

Thank you for those questions here. Let me just tackle margins first. Look, we talk about the sort of pre-COVID margin level. And I think we have to recognize that we are, in many ways, a different business today. We've disposed of a number of companies, and you rightly say some of them did have higher margins, but were more volatile and less attractive for longer term. At the same time, we've obviously been through a very significant spike in cost inflation that we've had to recover through pricing and efficiencies. So I think the margin structure today is different. All of that said, we do believe that we'll be trending toward 2019 levels at -- on a group basis as we exit this year toward or at, and we will continue to make progress from there. And yes, I think it's absolutely right that you should expect us to make progress from here in international. We've got attractive -- we made attractive acquisitions, as you've heard us say today, that are performing well, and we see lots of opportunity to grow the margin from here. In terms of the point on volumes, yes, the hospitality volumes in B&I are positive, and that's exciting. In Sports & Leisure, we largely see increased footfall across most of the different sporting codes in North America and strong per capita spend patterns. As you'd expect that we're probably seeing those starting to sort of flatten rather than be incremental period-on-period. That's still positive. But it's not quite the level of growth that we experienced as we talked through about what we described as sort of the revenge spend post-pandemic. I think that has now started to normalize in the Sports & Leisure sector, which again is fine. It's not negative, but it's not quite as positive as we were experiencing.

To your question on Vermaat, just to remind you, the geographical presence of Vermaat, Netherlands, Germany, France, we align to our top 10 group markets. These 3 markets, Netherlands, Germany and France is about half of Continental Europe market size. We'll be able to take opportunities on. Netherlands is pretty much 3/4 of the Vermaat business, nearly double the size of our business in Netherlands that gives us opportunity to grow more. And in Germany and France, we have great opportunities to build on the successful model the Vermaat team has launched to date. And on top of this, as Dominic referenced before, we have an opportunity to roll out the premium offer of Vermaat within other Continental European markets.

And our next question from Estelle Weingrod from JPMorgan.

Not too many questions left from me. The first one on Higher Education in North America. We've now entered the summer months, so you probably have slightly better visibility into the fall term ahead. Is there anything worth flagging? And then just another question. I mean, across the board, more generally speaking, any signs of some sort of macro weakness and slowdown in decision-making process in Europe or North America? I mean, obviously, your results are not pointing to any weakness whatsoever.

Thank you, Estelle. I mean just on the second question first. I mean the simple answer at this point is no. I mean you've heard us talk about a further increase in our gross new signings over the last 12 months, a continuation in our retention trends and positive like-for-like volumes. So look, I think the macro environment remains pretty positive for us. Why do I say that? Again, we talked to you a lot about -- we do believe that our operating model is resilient. We think our operating model is even more resilient now that we've focused the portfolio of countries in which we operate. And I think the point that Petros made earlier remains really relevant that we talk about this value gap to the High Street. We've seen the pressure the High Street is under for many reasons, whether it's NI costs in the U.K., it's minimum wage, costs across the piece. It's the food cost inflation that continues and has spiked again in North America. All of those factors are leading to, we believe, a significant cost advantage in our business model to that of the High Street. And we think that's very attractive to outsourcing and to the first-time outsourcing trends that we again referenced today being sort of nearly 50% of our total wins. So look, it feels like we're a resilient business and performing well in the current macro, and we're not seeing any particular signs of weakness affecting that here and now. Petros on Higher Ed?

On Higher Education, as Dominic referenced, we keep performing well. To be honest, your question on enrollment, we're going to have a better view as we go towards September. So far, we haven't seen anything worrying us. I just want to remind you the opportunities we have on first-time outsourcing and higher education are quite significant. If they're going to go through more cost pressure, will create opportunities for us, and this has been the case in the past. And what we're seeing in Higher Education, we're seeing more of a multi-tiered offer that spans different consumer base, not only the students, it's the board, it's the visitors, it's the faculty. So we expect this to be fairly resilient. We're going to monitor enrollments and provide an update as we go in the full year.

And we'll now take our final question today from Ivar Billfalk-Kelly from UBS.

Sorry if I missed it, but I think you mentioned that inflation is tracking below -- in Europe, it's tracking below where it is in North America. But given inflation seems to be pretty sticky, what does that actually mean going into next year? And secondly, looking at Vermaat, it looks like it actually operates in some segments which aren't core operations for you like travel retail. Does that actually represent a potential expansion of your planned scope of addressable markets? And then lastly, maybe you can give us some color, even if it's only qualitative on how -- sorry, compliance rather is tracking within Foodbuy and how this acquisition of Vermaat feeds into the potential for GPOs in Europe in the future?

Thank you for those questions. Look, in terms of inflation, what we're seeing at the moment is inflation in Europe tracking around sort of 3% on food, slightly higher in North America and around 4.5% on labor and slightly higher again in North America. So around about 1 point of delta in the aggregate between the 2 regions. Obviously, we managed to mitigate some of that before we take pricing. At present, we probably expect to see those trends continue. We continue to see pressure on -- upward pressure on minimum wage, upward pressure on labor supply. And obviously, we're seeing some of the -- we're seeing both labor -- those higher labor levels feed into food conversion costs as well as seeing the impact of -- to a degree, a little bit of the tariffs in North America on the food supply system. But again, all of that, we think, is fine. We can manage inflation at those levels. We will take some pricing accordingly. And it goes back to my earlier point that when we see those levels of inflation, we're able to differentiate our offer to that of the High Street because we believe we can deal with it for the reasons we've explained to you on previous calls with greater agility than the high street and many of our competitors. In terms of Vermaat's position in other sectors, yes, it has some operations in sectors that aren't typical to us today. It's a very small part of what they do. They're very attractive businesses. It's part of what Petros referenced earlier, their heritage of having been a High Street restaurant, which actually is what we believe gives them their sort of culinary culture and attributes, which are slightly different to what we have and actually is the history of both restaurant associates in North America and Levy in Sports & Leisure in North America. So we think it is attractive and it may give us opportunities that we haven't seen in other parts of our business.

Maybe 1 word on compliance. I think you have heard us talking also in the deep dive. One of our key KPIs is making sure we channel our purchasing through the best commercial deals. We'll continue to do this. The interesting part about Vermaat is, the CEO, Rick, the first years of his career was in purchasing within the business. So he's very, I would say, knowledgeable about this, which gives us a very nice opportunity as we go through the integration, subject to regulatory approval to capitalize the opportunities there. You will continue to see Dominic spoke about International business growing margin faster than North America. And one of the key drivers there is improved compliance and purchasing excellence.

Thank you. And this was the last question today. With this, I'd like to hand the call back over to Dominic Blakemore for closing remarks.

Thank you very much. Thank you all for joining us today. As you've heard, we're both excited about our underlying trading performance, the performance of recent acquisitions, and we're very excited by the announced acquisition of Vermaat today and everything that, that can bring to our European business. We look forward to speaking to you in November with our full year earnings update. Thank you.