Compass Group PLC (CPG) Earnings Call Transcript & Summary

Welcome to 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.

Thank you. Hello, and thank you for joining today's call, which is a little later than usual as Petros and I are in the U.S. meeting clients and supply chain partners. We delivered another strong quarter with organic revenue growth over 7%, the continued excellent client retention of 96% and net new business growth accelerating back into our 4% to 5% target range. We remain on track to deliver net new business growth at this level, which represents over $2.2 billion for the fifth consecutive year. As such, we're demonstrating our ability to grow consistently at scale over the long term. Our performance reflects the strength of our sector focused model, disciplined execution and strong client demand. We continue to win market share across multiple sectors supported by a record pipeline. Over the last 12 months, we secured $4.3 billion of new business wins, which is up 16% year-on-year with around half coming from first-time outsourcing. Business & Industry remains our strongest performing sector, delivering double-digit organic growth and more than $2 billion of new business wins. With a record sales season in U.S. Education, 6 of our top 20 biggest wins coming in health care. International Sports & Leisure growing double digits and great new account wins in U.S. defense and data centers supporting our progress in DOR. We have broad-based growth across all of our sectors. Given our strong execution and continued momentum, we are reiterating our 2026 guidance of above 11% underlying operating profit growth in constant currency. This is being driven by a combination of strong organic revenue growth, acquisitions and ongoing margin contribution. With that, let's open the call up for questions. Obviously, operator.

[Operator Instructions] We'll now take our first question from Jamie Rollo of Morgan Stanley.

Three questions, if I may. First, on net new, you sounded very confident on the first half call that we'd see the midpoint of 4% to 5% in the second half, and you've come in, in the low 4s in the first quarter. Should we expect that figure to improve again into the fourth quarter? And how should we think about 2027 is sort of 4%, the new 4% to 5%, if you like. Is that really a 4% ongoing run rate? Secondly, on international, perhaps a little bit light, given that was our easiest comp last year. Could you talk a bit more about this pricing slowdown in the events calendar? I think you said Sports & Leisure was up double digit in international. So again, is that a segment you're expecting to pick up in Q4 on OSG? And then just finally, big picture, no really M&A in the quarter. What's your sort of view going forward there? And should we think maybe that's a more balanced capital allocation at year-end and maybe a buyback?

Jamie, thank you for those questions. Let me just touch on each of them and maybe hand over to Petros to give you more detail on them all. I mean, first of all, just on net new, we're really pleased with the progress we've made quarter-on-quarter, and we do anticipate further acceleration in the fourth quarter. Our guidance of being between 4 and 5 is because we will oscillate as we've seen. That guidance is on a 12-month basis, and we will assert between that. We performed in the higher end of it being at the lower end of, it really depends on timing of some of the mobilizations. And as we said, we will expect to do better as we progress through this year. . Yes. I mean international really pleased with the sports and leisure performance, but yet impacted by the timing events in the prior year calendar. Petros, do you want to pick up on a bit more data?

Just a couple of things, Jamie. On net new, let's recognize, we have been delivering 4% to 5% for fifth consecutive year. What is really interesting here is we have sustained a level of retention of 96% over 4 years with international being sustained at 95%, a significant improvement to the pre-COVID performance. As Dominic referenced, the first time outsourcing trends we're seeing has been the strongest over the last 4, 5 years. And we're making really good progress across all sectors. Just to realize 1 thing, we will be a $50 billion business this year, ourselves growing within the 4% to 5% sustainably is giving us very material share gains in the market in a very fragmented $360 billion size. When it comes to international, the only thing I will add to Dominic's point is, we do see lower inflation in international. We discussed this in half 1 call, predominantly is behind food compared to North America. On the M&A, you have seen our spend has been the same with half 1. We have discussed before we have completed our sectorization, the medium-sized deals with international. We continue to focus on GPOs and attending and vending. And we do think as we go to end of September full year results to be in a position to evaluate the balancing between the M&A and buybacks. Just to remind everyone, we will be a fraction higher than the 1.5 leverage on September, and we deleverage as we go forward in '27.

And our question will come from Leo Carrington of Citi.

If I could ask 3, please, on a slightly separate topic. Firstly, on CapEx, beyond that point you made about the phasing of openings and the phasing of net new increasing the CapEx potential sales this year, are there any other factors to draw about impacting this potentially vending in micromarkets sort of lifting the CapEx intensity? Secondly, on ARO, which is developing very well, but beyond that University of Kentucky contract, are there any particular large contracts to flag? Or is this the bulk of signings being more typical size? And then lastly, on the topic of construction phase data centers, I know Don said that these projects are just 1 strand of the growth from. Has there been any evolution in this market since then that you can update us on?

Let me speak to the ARO development. Then I'll hand over to Petros for the CapEx and data center construction. Again, just revisiting our LTM signings are now $4.3 billion on a 12-month basis, 50% from first-time outsourcing. We believe that's 2 to 3x the size of our international competitors combined. So we feel we're doing extremely well on the winning of new business against what we believe is a record pipeline. You're absolutely right, within that, we have a very significant contract with the University of Kentucky. Over the years, we've had major contract wins over time, so this is unusual for us. And in fact, we're actually lapping significant contract wins in the prior year and prior years, which effectively, we need to continue to deliver, and we believe we can and we see in our pipeline. In terms of other significant contracts, yes, there are deals, which are in the high tens of millions, low hundred million. We see those in sports and how should we see those in the defense sector. That wouldn't be unusual for us. At the same time, that's balanced by a very, very healthy pipeline of lower contract value wins, which really is the bread and butter of our business, whether that's in international or North America. We're very positive about those. We're very positive about the balance of our book of wins, at the balance of that book of opportunity in the pipeline.

Thank you, Dom. On CapEx, just to be clear here, we don't see any change in the underlying intensity of CapEx in the business. This is true to do with lumpiness. We have some couple of sizable contracts. Last year, we closed the year at 3.3%, this year at 3.7%. If you're going to take an average 4, 5 years, we're just around 2.5%, which we think is the underlying funding requirements for our business. I just want to also call out this year, we're going to spend $1.6 billion in CapEx, somewhere around 20% of this is not client-facing CapEx, which goes technology data AI, all of the things we have talked in the past, that gives us a really good investment in the business. We have been increased for many years in our ability to keep making progress in the efficiency and investing in data tech for growth. When it comes to data centers, first thing to say is that in the last 9 to 12 months, we have been awarded a couple of hundred million dollars in data centers through our 5 out of 6 MAG partners we have, for which we have the largest offering wallet. We keep expanding this capability. I want to remind you, we do have a very strong support services businesses in North America and international that support food and nonfood service for our clients. In addition to this, our teams are on opportunities on the construction phase, and we'll take them as they come.

And our next question comes from Neil Tyler from Rothschild & Co Redburn.

Three for me as well, please. Firstly, within the $4.3 billion, you mentioned $2 billion of that is within B&I. Just trying to unpack that a little bit more, if you're able to share any details around the momentum of that $2 billion sort of relative to the 16% growth overall, please? And then, thinking about the -- I suppose, the like-for-like growth or maybe sort of new wins alongside the M&A that you've undertaken over the last couple of years, could you please update us on your thoughts on the timing of revenue synergy delivery and maybe update some comments on that delivery as it pertains to the acquisitions you've made? And then finally, in the release, you mentioned with regards to Sports & Leisure and specifically in the International business, customers maximizing the commercial potential of their operations. Can you sort of expand on that a little bit? And maybe if we're able to give some examples of how that's translating into either like-for-like or new wins. Okay.

Thank you, Neil. Let me just tackle the revenue synergy point and then Petros will pick up on B&I Sports & Leisure. I mean I think it's important to say, if you look back at our track record of revenue synergy delivery, you will see that our rationale for doing many of these deals is that their contribution to organic growth year after year once the -- we've lapped that first year of acquisition has been growth accretive to our model. We've proven that with Bonaparte, we've proven that we believe, we've proven that with restaurant associates, we've proven it with. We do believe that the case is the same for the acquisitions that we've made with CMCo with the mat for service and others. We're seeing that in parts. That will accelerate, we believe, over time as they become embedded into our model. But that becomes part of our ordinary course growth and very much the rationale for the acquisitions that we've made that we believe will increasingly give our international region, the attributes of our North American business model. Petros?

On your $4.3 billion, just a give a bit of color. Just remember, our B&I is the most sectorized business grows on financial services, banking stations, all the way to an attending vending. We have a very broad footprint there. And we do see this actually firing across all of the subsectors with also 1/3 of this being first time outsourcing with clients mobilizing new locations. When it comes to education, I would say it's above, and this $4.3 billion. We had record wins within North America, some really positive developments in K-12. Sports & Leisure international, definitely above our share. We're growing 10%, double digits on the year-to-date, and we do have a very strong pipeline. Health care, we have grown 6 out of our top 15 wins, which is really promising signs there, a fraction lower than the first, but with good opportunities as go forward, and we remain positive on this. If I go on the Sports & Leisure -- but actually, the backdrop here is the fun experience and our ability to trade up and trade across within our offer. The key thing is maybe 10 years ago, we used to have 2 offers, the VIP boxes, we used to call them in the concessions. If you go to our accounts now, you will see a vertical offer up to 7 or 8 years spanning a very, very high-end hospitality all the way down to an amazing concessions. In addition to this, we are running fund zones within the stadiums, and it's a partnership with our clients, long-term partnership with our clients to keep improving the offer and growing these accounts organically as we go. The last thing I'm going to say, we have invested a lot in data and AI in this phase. You imagine a very big event. We have to deliver exceptional revenue in a very short period of time, and technology is really helping us and demonstrate to our clients the value we can add to the operations.

If I may, I might just add a couple of comments to that, I think as we came out of the pandemic, we talked a lot about the strength of sports and leisure being around this thing we call even spend. I think increasingly, we're now seeing this being baked into exactly what Petros has described the fan experience. It's very clear to us that the consumer is willing to pay for a great experience and a unique experience. It's extremely important to our client partners that they can generate competitive revenues from the food and beverage and hospitality experience to support their underlying operation. . And what we're seeing is exactly what Petros has described, a tiering of the hospitality experiences, which hits different price points and has very premium experiences at the top end of that. Having visited Wimbledon this year, we operated over 5 partner restaurants with Chase, Mitchell & Star, providing different types of experience across the entirety of the estate as well as the broader fan base concession experience. I think this World Cup has been another demonstration of the willingness of the fans to spend on great experience. And we think there's a lot more to come in global sporting events, international sporting events and local sporting events in individual markets. So we think it's an area of great opportunity and one where we partner, we think, brilliantly with our clients because our interests are so mutually aligned.

We will now take our next question from Kate Xiao of Bank of America.

Petros. I have 2 questions. The first 1 on net new acceleration trajectory. Your ARO, obviously up $4.3 billion, is a 16% year-on-year growth. When I look at -- when I think about the trajectory of that ARO number, about a year ago, it was at mid-single-digit kind of growth, and that has accelerated to low teens and now 16%. So your ARO has accelerated for the past 3 or 4 quarters. Does that mean -- and obviously, your net new with retention being stable has just started to accelerate? Does that mean we should think of the next 3 to 4 quarters as net new acceleration as well as a reflection of your ARO acceleration in the past couple of quarters? That was the first question. And the second question, I just want to ask around the data center opportunities, particularly around construction side. Obviously, the space and opportunity is very big, and -- but there is asset-heavy and asset-light operators, right? So can you talk to us about the kind of opportunities with your capabilities that you are seeing? Are you -- do you intend to operate asset-heavy when it's required? Or are you only looking at asset-light opportunities? And if so, can you tell us a bit about the size of the opportunities and the relative share of those opportunities within the overall, I guess, TAM in the construction phase data center?

Yes. Kate, thank you. Let me tackle the data center question. Maybe Petros might have some further color, and then, he can pick up on the ARO acceleration point. And I think the first thing I'd say to this is, look, it's happening very fast, right. And I think we are -- if we're all genuinely honest, we're all learning as we go. It's a super opportunity on that. It's been sized differently by different commentators. It's a very significant marketplace. It's multi tens of billions, hundreds of billions in both the construction phase and the ongoing operational phase. And of course, there are different partners. So in some instances, we'll be partnering directly with the major tech players. In others, it's with the data center owners and operators where they typically franchise their capacity to a number of different customers. And in others, it will be through EPC and EPCM, so constructing the data centers on behalf of those owners. So we're working through this to understand what a different client base looks like. What we do believe is we have a compelling offer. We are already operating many data centers for, in particular, the Mag7. I think Petros referenced it earlier, the 6 of the 7 that outsourced. We are the almost exclusive partner to 5 of the 6. So we have very significant volumes on their existing estate. It gives us the opportunity to speak to them about data center construction and data center provision of services. We're working more and more on building out our relationships with the individual data center owners and operators. And in terms of your question regarding sort of asset heavy, asset light, I mean, a lot of this depends on the relative remoteness of the facility. Our preference would be for the asset-light model. We don't rule anything out if the opportunity is significant. I think we've demonstrated that in the remote sector in Australia, where we have co-invested in facilities in the short to medium term, where the economics are attractive. We'll feel our way through this. We ensure we do what is absolutely right from a CapEx and return standpoint. And we're building those capabilities all at the time. I would stress as well as, as Petros referenced earlier, let's not forget our capability when it comes to the support services and some of the maintenance facilities. We have those capabilities through our businesses in Canada in the ESS effectively, the remote mining and construction sites in Canada, which have been franchising to the U.S. We have ASFM, which is support services of facility management businesses. In the Nordic region, for example, we have 4 services. In a number of the European countries, we've got support service businesses as well. And in Australia, we've got Delta FM, which provides facility management alongside food. So I guess the reason I make that point is that the solution here on the construction phase of data centers is beyond food as it will be in the operational delivery thereafter. And we believe we have a compelling combination of both food and support services that we can bring together under acknowledged and recognized brands in the industry by our clients. So we feel we're very well placed. We started strongly. I think there's a lot to go after. I think we'll see this sort of play out over time. And a lot of it is about partnering with the right individual client partners, as we go to build those relationships.