Sodexo S.A. (SW) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the First Half Fiscal 2022 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] Now I'd like to hand the conference over to Sodexo team. Please go ahead.

Thank you very much. Good morning, everyone. Welcome to our first half fiscal year 2022 results conference call. I'm here with Sophie Bellon, our Chairwoman and CEO; and Marc Rolland, our CFO. They'll go through the presentation and then take your questions. As usual, if you haven't already done so, the slides and press releases are available at sodexo.com. You'll be able to access this call on our website for the next 12 months. And I remind you that this call is being recorded and may not be reproduced or transmitted without our consent. Please get back to me later if you have any questions. And I'll now turn the call over to Sophie.

Thank you very much, Virginia. Good morning, everyone. Thanks for being with us today. We are very satisfied with our numbers, and the recovery out of COVID is well on its way even if uncertainties remain. I suggest that we turn directly to Slide 4. Overall, our revenue growth was 19.4%. Organic revenue growth was 16.7% with strong recovery in Education, Corporate Services and Sports & Leisure. The underlying operating margin was up 210 basis points at 5.2%. On-site Services were up 17% with a margin back at 4.9%. And Benefits & Rewards saw strong growth at 9.3% with a margin of 26.7%, with double-digit growth in Employee Benefits and in Brazil in the second quarter. We have rarely been able to show such a clear improvement across the board. Retention was up 60 basis points, with improvement in all regions and segments. However, to be fair, last year, we had the loss of the very large transforming rehabilitation in the U.K., which weighed heavily. Nevertheless, this is a great performance. Development has also been very solid, up 90 basis points. And I'm really pleased to say that on top of the improvement, the average margin is also up 80 basis points. The pipeline is also solid for between now and the end of the year. Comparable unit growth reversed up 19.8%, thanks to the strong recovery in food service, particularly in Education, Corporate Services and Sports & Leisure. As you have just seen, the momentum in contract wins has been good in this first half. So let me take you through a few of these case studies. Since January, at Disneyland Paris, we are providing cast members with 21 points of sales, partnering with brands such as La Brioche Dorée, Caffe Del Arte, Colombus Café and Prêt à Manger, combining traditional seated restaurants, fast food counters and Click & Collect facilities. We're serving a wide variety of dishes from around the world 22 hours a day, 365 days a year with a team of 280 people at a rate of 2.5 million meals per annum. In Education in the U.S., the South Dakota Board of Regents has moved to a system-wide food services solution for its 6 public universities and 2 schools serving special K-12 population in an effort to reduce cost and chosen Sodexo to accompany them. On a very different scale, using our new food model, we have widened our scope with LinkedIn to Singapore office where we are delivering a data-driven food program from a micro production kitchen and accompanied by the Vital Spaces value proposition, which is deployed for the first time in Asia Pacific. In U.S. Healthcare, we have renewed and expanded our partnership with university hospitals in Ohio. This is one of our largest integrated services health care clients in the country, and we provide patient nutrition and retail for patients and staff as well as facilities and construction management and health care technology management. The system includes 21 hospitals, 48 health centers and 226 ambulatory care sites. I just wanted to add that Benefits & Rewards has also had a good retention and development in this first half. The team renewed its contract with Telefónica in Brazil and expanded its contract with Amazon in Israel. On the next slide, I want to go through a new contract that we won for the Austrian Post Office. But before I do, I congratulate the team that each day demonstrates Sodexo's capacity to propose services that are adapted to the needs of our clients and consumers. So the BRS Austrian team has just started a great project of a fully digital food pass for Austrian Post. As one of the major employees in Austria and leading logistics and postal services provider, Austrian Post is committed to digital responsibility as part of its sustainability road map. A decision was, therefore, taken to digitalize its in-house paper food subsidy vouchers. Drawing on our global assets, including Sodexo Connect and Sodexo E-payment, our teams worked with Austrian Post to create a local app solution. The fully digital Sodexo solution was added to My Sodexo app in January 2022. Enabled with 8,000 merchants, the solution integrates mobile payments with Android and Apple Pay for more than 16,000 users, a completely new onboarding process and consumer information. Congratulations to our global, regional and local team for their very close and successful collaboration on this contract. As I am sure you all remember, when I took over from Denis back in October, I set the organization 4 key priorities. So let me give you a flavor of the momentum that's building in each of them. Firstly, boost our U.S. growth. I have focused a lot of energy on the NorAm team, and I am pleased to report that we're really seeing improved momentum. We've had robust development with continued improvement in health care. The immediate pipeline is looking good, so we are also confident for the full year development level. And retention is also very solid. As you all know, it is too early for Education to play significantly into these numbers since the selling season is really concentrated in the last month of the academic year, but the outlook for the year is also encouraging. Another piece of good news is that first-time outsourcing now accounts for around 40% of the signatures in North America. During the period, we also continued to invest in marketing and sales resources, 4 new sales leaders in schools, government, sales operation and the proposal development center have joined the company. And we have also increased the number of sales reps in most areas. A new data training has recently gone live. And very importantly, a specific U.S. long-term incentive scheme was awarded to the leadership team last month. The new food transformation is accelerating. The addition of frontline has significantly added kitchen capacities, smart fridges technologies and a lot of experienced people in the team. Now on our second priority, the acceleration of the food model transformation. Firstly, I want to say that having just got back from the U.S., I can tell you that clients need help in bringing people back to the office, and they are looking for really attractive and new offers. We have to accelerate our capacities in this field, and I'm even more convinced that we have to move fast, very fast. Let me run you through some of the things that we're doing, starting with the development of on-site brands and offers. We are actively scaling up the Good Eating Company in the U.S. It is gaining traction. And in fact, given the recent signatures has overtaken its British countertop. What is exciting is that the new contracts we are signing with our new food model brands are being very successful in the tech and finance market, where we have been traditionally less present. We're also developing partnership with high brands to support the new food model in North America. And we have recently signed an exclusive 10-year contract with ForFive Coffee, a premium coffee and food company based in New York. I met up with the CEO in New York 10 days ago, and we're gaining traction with clients on this brand. And the ForFive food menus are also available on our fully restaurant aggregator platform. We are also digitalizing the consumer experience in China with our partnership with Meican. It's allowing us to find significant new business by leveraging their digital on-site terminal, their layout design, their online ordering facilities, mobile app and smart waiters. All of this is allowing companies to provide more food choices in more and more expensive downtown sites with very small kitchens. In the States, we've just signed with Kiwibot to expand our fleet from 200 robots to 10 campuses to over 1,000 robots on 50 locations by the end of the year. Finally, progressively, we're going to transform production and logistics with off-site kitchens. All our recent acquisitions have brought us new facilities, kitchens and expertise. In October, we also opened our own kitchen in the Boston area, and we are ramping up progressively with currently 50 clients from all segments. We have also just invented in China an off-site kitchen -- invested, sorry, in China in an offsite kitchen to serve a very large local client. We are moving forward on all fronts, and I'm very happy with the progress. Third, our portfolio management has been very active in the last 6 months. We have made some strategic acquisitions to enhance our new food model, strengthen our GPO presence in Europe and accelerating the technical equipment management field in the health care segment with an acquisition in China. We have also completed the disposal of a lot of non-core activities where we add neither scale nor density. In on-site, we have sold our activities in Morocco and the Congo, and we have sold nonstrategic account portfolios in Australia and Czech Republic. We got out our Benefits & Rewards -- we got out of Russia for Benefits & Rewards in December. And we also sold our sports card in Romania and Spain. And in both cases, we have commercial agreements to distribute the offers, but we will no longer actually manage the product. And the sale of our child care activities was completed on March 14. There are other actions in preparation, but it is still too early to talk about them, and we are now down to 55 countries. In terms of simplifying our organization and rendering it more efficient, the CEOs of the schools and government, energy global segments have not been replaced now that the activities have been put back into the region. Annick de Vanssay has been appointed as Chief Human Resource Officer, having held the role on an interim basis since September. And since joining, she has restructured the HR function to better align with the need of the business with a global HR expertise center and a global HR operation organization. Annick has defined a road map around 4 key pillars: employee centricity, talent nurturing, the digitalization of HR tools and supporting change and culture. Alexandra Serizay is appointed to be our new Chief Strategy Officer to replace Sylvia Metayer, who has decided to take a retirement. Alexandra has been my right hand for the last year or so after several years in strategy and operation in Corporate Services at Sodexo as well as previous experiences, including as Deputy Head of HSBC's retail banking operation in France, where she led the transformation to multichannel model. And now before I pass you on to Marc, I just wanted to say that we're also managing a tight ship. Our GAAP cost saving program closed ahead of its objectives. Client CapEx is recovering even though our 1.5 CapEx to sales ratio remains below our 2.5 ambition. Free cash flow has been impacted by the exceptional elements that we highlighted to you back in October. Recurring free cash flow remains strong, and I confirm that our balance sheet is solid. I'll now pass you on to Marc for the details of our first half numbers. Marc?

Thank you, Sophie, and good morning, everyone. I am very pleased to be here with you this morning. As usual, you will find the alternative performance measures definition along with some information to help you with your modeling in the appendices. Let's now have a look at the P&L performance for first half fiscal 2022. After a difficult last year, this first half, our revenues are up 19.4%. Even the currencies have gone in the right direction at plus 3.5%. And excluding currency, the revenue were up 15.9%. This translates into a doubling of the underlying profit to EUR 538 million and the margin, which is up 210 bps at 5.2%. I should come back to the analysis of this performance by activity and segment later. Our other operating income and expenses were minus EUR 1 million, down from a net expense of minus EUR 128 million last year. And I shall come back to this in the next slide. Financial expenses amounted to EUR 53 million versus EUR 50 million last year. This is directly related to the increased cost debt resulting from the U.S. dollar bond issue in April '21, which was partially offset by the EUR 600 million reimbursement of the Eurobond in October '21. The blended cost of our gross debt at the end of February was 1.5% against 1.6% a year ago. The tax charge was up strongly in value at EUR 136 million, but the effective tax rate has returned to a more normal 28.3% versus the 63% of last year. As a result of all these items, the group net profit was multiplied by 10 to reach EUR 337 million versus EUR 33 million for the first half fiscal 2021. Given that the other operating income and expense were particularly low this year, the underlying profit was very close to the net profit at EUR 339 million, more than doubling relative to the previous year. On inflation, first, I can say that after having passed about 2% in Q1, we are now above 3% for H1. Most of the comments I have made on inflation in Q1 remain valid. Inflation continues to rise in all regions. In the first semester, we have been able to absorb a large part of it and protect our margins through price increases and mitigation actions implemented since the start of the year. In North America, we have witnessed an acceleration in labor inflation coming from both annual salary increases and labor shortages. However, we've been able to pass more inflation to our customers than in Q1 and have had a special focus on workforce management in Q2. Our team in North America have also been proactively preparing the contractual pricing campaign in schools and universities for the next school year. In France, raw material inflation has accelerated in January and February. In addition, the year-end salary negotiations led to an increase in the cost of labor since January. While we remain confident that we will be able to renegotiate our contracts in the private sector in the upcoming months, we anticipate more difficulties or delays of the public contracts, notably in Education. In the U.K., inflation has picked up in the second quarter, not so much on food, but more in equipment and materials, which are much more significant for us in the U.K. due to the particularly large share of the business in FM. As previously indicated, we are well armed in the U.K. with cost-plus contracts and strong indexation mechanism embedded in our big contracts. In Brazil, we believe that we've reached a peak in Q2, but our teams keep demonstrating strong operational mitigation and their ability to pass through inflation to clients. Trying to look ahead, we still expect a 4% to 5% impact on the top line for the full year and remain confident that we will be able to mitigate inflation costs. However, we shall remain prudent and that it's difficult to anticipate the consequence of the Ukraine war. I'm not going to spend much more time on other income and expense. The key elements are there are only EUR 3 million of restructuring costs, gains and losses on the sale of assets more or less offset each other, and we collected EUR 34 million on our claim against Hungary. The GET program has closed above its ambitions in terms of cost reductions and savings. As you can see in the slide, the total cost of the program was EUR 327 million, slightly below the allocated amount, with the cash impact expected at EUR 305 million. Annualized savings are EUR 382 million, nicely above the EUR 350 million target and give the ratio of savings to cost of 117% better than we expected. At first sight, the free cash flow performance of minus EUR 75 million does not look particularly good. But here are several reasons why it is better than it looks. I remind you that, traditionally, we don't generate much cash in the first half because of the seasonality. And last year, in the first half, we had exceptional free cash flow because we were carrying a lot of cash at BRS due to the lower reimbursement flows, and we had a lot of government support. As a result, we generated a record amount of cash during the period last year. Before I turn to that, I just wanted to point out the operating cash flow was up significantly, thanks to the improvement in profitability. CapEx recovered partially to EUR 159 million, which represents 1.5% of revenue versus an exceptionally low level last year. Finally, you can see the resumption of the dividend payment this year. So let's see what weighed on our free cash flow in the first half. First, we had EUR 37 million of cash out from the restructuring from the previous year. Then we have won EUR 100 million of government support in the form of COVID-related payment measures. As far as the Tokyo Olympic Games are concerned, we have reimbursed EUR 55 million of ticketing, and we also decided to inject GBP 60 million in the U.K. pension fund. Then we have received EUR 34 million of compensation from the foreclosure of our Hungarian activities. But on the other hand, we made payments to the French competition authorities for an amount of EUR 27 million during the semester. After taking into account all of this, our recurring free cash flow is EUR 182 million, which is a solid performance for our first half. So let's see how this has all impacted the balance sheet. Gross debt is higher than a year ago due to the net of the $1.25 billion bond issue in April and the reimbursement of the EUR 600 million bond in October. Net debt is up EUR 361 million year-on-year. And as you saw in the cash flow side, up EUR 564 million relative to August. Gearing is stable year-on-year. On the other hand, our net debt-to-EBITDA ratio has fallen back down to 1.8x back into our targeted range of 1 to 2, thanks to the recovery on the underlying EBITDA. Let's now turn to the review of operations. The first half 2022 revenue showed a significant recovery, up 19.4% for the group as a whole at EUR 10.3 billion. Currencies, due to the weakness of the euro, contributed a 3.5% boost. The scope effect shaved 0.8% of the revenue due to the sale of nonstrategic activities that Sophie has already talked about. So organic growth was 16.7%, of which On-site up 17% and Benefits & Rewards up 9.3%. So let's look first at the On-site business, starting with Business & Administration. In H1, B&A organic growth was up 19.5% as the recovery came through in Corporate Services and Sports & Leisure. North America bounced back, up 45.2%. The return to work in North America remains slow but regularly throughout the first half. The impact of Omicron may have stalled the recovery, but there was no obvious fallback. Sports & Leisure was up very strongly from a very low base. There was a bit of a setback in the recovery in January and February, but it looks that it was very temporary. While Government & Agencies were subdued during the first half, Energy & Resources growth was strong, with the combination of new contract start-ups and the return of support workers on site. In Europe, first half revenue were up 15.1% organically, boosted by the strong recovery in Corporate Services and Sports & Leisure. Also, the speed of recovery stalled in the second quarter due to the protective measures put in place for Omicron. On the other hand, the contribution from new contracts in the Government & Agencies and Energy & Resources segment was not enough to compensate the loss of transforming rehabilitation contract in the U.K. from last summer. In Asia Pacific, Lat Am, Middle East and Africa, organic revenue growth was 10.8%. The Corporate Services segment continued to grow double digit as activity picked up strongly in India and remain strongly in all other regions. Energy & Resources continued to achieve very solid growth. New business ramp-up and strong underlying growth in the energy sector compensated some contract losses in the mining sector. Healthcare & Seniors remained much more resilient than the other segments during the pandemic. So of course, there is no recovery-type performance. Overall, segment organic growth was 5%. In North America, organic growth was plus 4.7%, helped by some inflation and recovery in Seniors occupancy. Hospital activity has been growing in volume, but retail activity is still at only 70% of pre-COVID levels. In Europe, organic growth was 4.8% for the first half, but with a reduction in the second quarter, which was down minus 1.5%. In the first quarter, we had our strongest quarter at the testing centers contract in the U.K. But by the second quarter, those volume reduced and compared to a strong Q2 quarter last year. This contract ended on March 31 earlier than was expected. In Asia Pacific, Lat Am, Middle East and Africa, organic revenue growth was 9.6% due to strong volume growth related to new contracts in Asia and solid same-site growth in Brazil. Education organic growth was 29.5% in the first half. North America was up 40.4% with all schools and colleges opened since the summer. The recovery stalled in the second quarter compared to the first quarter due to Omicron and the full impact of the Chicago Public Schools contract termination. In universities, student board plans are nearly back up to fiscal '19 levels. However, the retail and events activities were impacted by staff shortages and lower footfall. In Europe, revenue was up 3.1% organically. Again, schools were fully open, but has been already across most of the region in the previous year, except maybe for the U.K. where there was a significant lockdown at the beginning of 2021. However, attendance rates were still below normal levels due to Delta in the third quarter and in greater proportions of Omicron in the second quarter. In Asia Pacific, Lat Am, Middle East and Africa, organic growth was 27.7% , reflecting very rapid ramp-up in attendance in schools and university in India. In H1, On-site underlying profit doubled and the margin rose to 4.9%, up by 200 basis points relative to H1 2021. What is important to note is that margin has improved progressively each semester as volumes have picked up, thanks to ongoing strict cost control; inflation compensation, thanks to indexation clauses; contract renegotiation and efficiencies, particularly on the supply side. The positive impact of the GET program contributed, too. In Business & Administration, underlying operating profit increased sevenfold from a very low level in fiscal 2021. As a result, the underlying operating margin was up 230 bps to 2.7%, while the margin has recovered significantly in Corporate Services and is back to breakeven in Sports & Leisure. The margin in Energy & Resources has been temporarily impacted by high levels of Omicron-linked absences, particularly in the mining sector and some major contract ramp-ups. In Healthcare & Senior, the underlying profit margin is flat year-on-year at 6.4%, but higher than in the first half fiscal 2020 pre-COVID at 6.3%. Net new business is accretive to margins, and inflation is being passed on or compensated by productivity measures. In Education, underlying operating profit more than doubled and the margin was up by 410 bps to 8.5%, back to the level in the first half fiscal 2020. In other words, the seasonality of the margin has come back. Now we turn to BRS. Let me remind you that the first half fiscal 2022 Benefits & Rewards Services revenue amounted to EUR 398 million, up 9.3% organically, with a double-digit organic growth of 11.4% in Q2. Employee Benefits organic growth was back up to double digit at plus 14.5% compared to an issue volume up 13.3%. Reimbursement activity has now nearly caught up with issue volumes. Services diversification was down 7.6% organically due to the decline in the COVID-related public benefit, only partially offset by the strength of the strong fuel and fleet activity. Europe, Asia and U.S.A. organic growth was 9.9%, boosted by strong new development and, in particular, in the second quarter, strong growth in issue volume. To catch up in reimbursement program is now complete. There was also good growth in Gift solutions this semester. In Latin America, organic growth was 8.2%, solid throughout the region. In the second quarter, we saw a significant improvement in Brazil with a return to a double-digit growth on a double-digit growth in issue volumes, too. While I'm on the subject of Brazil, I just wanted to point out that all planets appear to be aligned at the moment, with interest rates back up at well over 11% against only 3% a year ago. The Brazilian real back up at 5.3 to the euro and inflation also back up to 10.5%, and therefore, strong issue volume growth. This business is a correct inflection stage. And finally, you can see in this slide the organic growth in financial revenues of plus 16.6% and actually plus 25.5% in the second quarter, thanks to the Brazilian Selic. BRS underlying operating profit and margin are recovering from the low in the second half of fiscal '20. This performance is a result of operating leverage from the revenue growth, lower production costs linked to the increasing share of digital, the result of the restructuring program and very strict control of SG&A cost. And this is despite ongoing investments in digital and business development. The currency impact on the margin remained slightly negative due to the very significant decline in Turkish lira during the period. Thank you for your attention. And now I will hand over to Sophie for the conclusion.

Thank you, Marc. So let's turn on to the outlook. So the world is full of uncertainty. And since we presented our guidance in October 2022, we've had Omicron combined with the resurgence of localized COVID outbreaks, for instance, in China at the moment. And at the same time, in the U.K., the government has taken the decision to close its testing centers much earlier than expected. And we have the Ukrainian-Russian war. Our exposure to Russia is limited, but we're expecting significant contract startups in Russia, which are now obviously interrupted. As a result of these different elements, we now believe that our organic growth will be around the bottom level of the range 15 to 18 range that we gave you in October. The good news in euro million is that, at today's rate, we have tailwind from currency into the second half. And our teams are highly mobilized to manage these uncertainties and especially the additional inflation resulting from the supply disruption and ensuing inflation from the Ukraine war. So we continue to expect a European margin at close to 5% at constant rate. Looking further out, I confirm that we expect On-site Services to rapidly exceed pre-COVID levels and the performance of Benefits & Rewards to accelerate out of the crisis. Our aim is that the group returns to regular and sustained growth with, as a first step, a return to the pre-COVID underlying operating margin and then, as a second step, a margin that is back over 6%. The structural reduction in SG&A, a more effective organization, enhanced execution on U.S. turnaround and accelerated deployment of the new food model and a more active portfolio management will all contribute. Thank you very much for your attention. And now Marc and I are available to answer all your questions. Operator, could you launch the Q&A session, please?

[Operator Instructions] Your first question today comes from the line of Bilal Aziz from UBS.

Just 3 from my side, please. Firstly, just on the new organic growth guidance, well, the deterioration of it but towards the lower end. Can you perhaps talk us through the building blocks of that? So what do you -- relative to your previous expectations, how lower is Russia now? How big were the testing contracts in total impact that you've lost? And what do you think about pricing in that as well? The first question. Second question, just on your confidence around the margin being close to 5%, perhaps you could take us through the upside and downside risks around that as well, please. And then finally, you talked a lot around new development today. Perhaps, Sophie, any update on Education where you clearly reorganized the business there? Yes, perhaps a bit of an update there, what exactly you're seeing in terms of improvements there, please.

Thank you for your question. So on the revenue, there are 3 elements which are not controllable elements. The first is that Omicron impacted us in our Q2 for an estimate of EUR 60 million. And yes, EUR 60 million because of lower attendance and protocols in Corporate Services and Education. The second item is Russia. In Russia, we had sold contracts late last year and earlier this year. We were supposed to ramp up in H2. And now we are terminating those contracts, and that will weigh EUR 40 million on the organic growth. It was quite -- our business in Russia is small, but it was growing fast. So we are losing EUR 40 million of organic growth on this one. And then the testing center, the run rate of the testing center was EUR 100 million per quarter. We started experiencing a drop in Q2 already. And we will be missing a few months because, obviously, we closed the contract as of yesterday, and it was not meant to close before the end of the year. So we estimate that the testing center short revenue is about EUR 150 million. So altogether, those 3 elements represent EUR 250 million of organic growth, which is about 150 basis points. On Education, Sophie?

So on Education, as you have seen, our retention rate is better in -- is better at the semester. We've -- in the last 5 years, we've never been at above 98%. So we are pleased with our retention. And it is also improving in Education. Though in Education, the first semester is not still yet relevant. And on new development update, we have -- and if we look at NorAm, for example, we have a big weight in university. And as you know, so we have started well the season. We have a good pipeline. But as you know, most of the contract will not be signed before the end of the academic year. So it's going to be more in the spring. But we are confident that our net development and that our new development will be good in Education.

In terms of upside and downside on margin guidance, in terms of pricing of inflation, we -- I said at the end of Q1 that we were expecting to pass 4% to 5% to our clients this year, and I confirm that number of 4% to 5%. As I said in the presentation, we've already passed 3%, above 3% in H1. So 4% to 5% is the right range of what we will pass to clients. So the -- I will say the inflation we were experiencing before the Ukraine war appears to be under control, and our teams have factored in the actions. The new inflation coming from -- resulting from the Ukraine war right now, we are expecting an impact in Q4. And relatively limited impact in Q4 because it's not also our strongest month. So this is what we have to watch. But right now, this is factored in our numbers.

Your next question comes from the line of Neil Tyler from Redburn.

I've got 2 questions, actually. I'll start with a follow-up to the answer you just gave on inflation. Does that -- your comments on the Q4 impact suggests a greater, a much greater impact, therefore, in the next fiscal year, and therefore, sort of a difference in the phasing of the margin as you recover that through the second half of fiscal '23. That's the first question. The second question I'd like to ask about participation rates really, footfall versus average per capita spend. And particularly whether you see current participation rates in Education and, I suppose, Corporate Services as sustainable and whether there are any sequential trends that are worth calling out in those participation rates.

Yes. Thank you for your question. Yes, you're quite right. As I said, given the relationship we have with suppliers and the contracts we have and so forth, the impact of the Ukraine war inflation is purely on Q4. And so we've made some hypothesis in Q4. We believe with our hypothesis so we are fine. Now it's true that it's going to be embarking inflation into next year, and what we have done is remobilize our teams to go and adjust our pricing with clients. But it's a new effort that we have to do on this. And right now, it's starting. And it's important also we don't do it too early because we don't yet know the magnitude of the Ukraine war inflation, if I may call it that way. So yes, we will work between Q4 and Q1 to adjust our pricing. The question is how fast can we adjust it to start the year on the good food. This is what we are working on, and it's too early to comment. But we are working on that.

Yes. Thank you, Marc. And on your second question on the footfall participant rate in Education and Corporate Services, do we expect changes in trends? No. The recovery is there. And we saw regular improvement before Omicron and a pickup since. We saw a strong pickup in universities in the U.S., and it's absolutely going to stay. What we know is that we have to -- and as I said in my speech, we have to offer different offer because the students are not going to eat. They want the best food anywhere, anytime. So it's going to be different. We will be innovative. We will bring our innovation to the campuses. And I can also tell you, we've heard a lot from -- and I'm sure you've heard also from the company you follow, but -- and I was amazed by the difference between Europe and the U.S. I think companies are desperate to have people come back to the office. And the discussion that I had, for example, with our partner, ForFive partner in New York, is that, yes, companies are willing to want more innovation because they want people back in the office, and they want to create an experience for their employees so that they don't stay home and they want to go back. And it's -- so I think it's a big opportunity for us. And so I don't see the trend is going to come back.

Okay. And being more specific, though, if you compare in Education, Corporate Services the per capita spend currently to pre-pandemic levels, can you give us any indication of where that stands? Is that sort of in line, above or below?

I think in Corporate, it's clearly above. In Education, I will reserve my comments on this when I'll have more data. But yes, in Corporate, the average spend is higher.

Your next question comes from the line of Karl Green from RBC.

Just 2 questions from me. Firstly, Sophie, I think you mentioned that you'd introduced a new long-term incentive scheme for the U.S. leadership team. If you could perhaps provide a little more detail about the criteria there, that would be helpful. And then the second question, again, just coming back to inflation. Are you able to indicate the magnitude of the gap between what your food and consumable suppliers are actually asking for and what you're actually agreeing to? Just trying to get a sense there as to how the pressure is being shared upstream rather than obviously you passing on the price increases downstream.

Okay. Thank you for your question. So first, let me talk to you about the long-term incentive plan. Now we've had, every year, long-term incentive plan for our team. But prior to this year, we had a global long-term incentive plan. Meaning all our leaders and around 2,000 leaders benefit from this plan, where incentive on group targets, group revenue and UOP revenue, plus TSR plus CSR indicators. And we decided considering the importance of our business in North America and the importance of boosting our growth and our performance. In North America, we decided for the first time in January, when we launched our long-term incentive plan to -- for the American leaders to make a specific plan with the UOP and revenue and UOP. That is not the group performance, but North American performance. And so -- and we have increased the amount of the plan. And so we're -- it gives us the opportunity to align the North American team on their plan and on the realization of that plan. So -- and it was very well received by our team, and I think it's a very good thing.

On your question on inflation, when I look at our model for inflation on food cost and on revenue, there is obviously a little gap. We are experiencing more inflation on food costs than we are passing to clients because of the usual lag it takes and the indexation, and that gap in our model is about 100 basis points. So -- but case by case, it depends on the relationships you have with a certain supplier. And what's important is that -- what we explained is that when the inflation goes up, there is a lack of what we can pass to clients in B2B. There is no real lag in B2C or -- and it's almost immediate in cost plus. But in P&L contracts in B2B, there is a lag. Hence, why we have a gap at the start of inflation. And currently, this gap is model at about 100 basis points. But it will narrow and reverse over time. So what could happen with the Ukraine war inflation is that this gap increased short term a little bit until we pass it on to clients.

That's very helpful, Marc. But just to be clear there, so typically, if a food supplier is asking for x percent increase year-on-year, you're typically accepting that. So they're not having to forbear the greater elements of the food in place. So...

No, we are negotiating. We are. I never said we were uptaking the price increase. What we do is we are negotiating. We are changing suppliers. We are seeing -- but the relationship with suppliers is built over a long period of time. And so it's not just we buy the cheapest now available on the market. We try to build relationship, having a reasonable sourcing. And this is built over time. So if somebody wants a price increase, we've discussed, I explained in Q1 that in some countries, we had locked the price for a year like in the U.K. and France. In the U.K., it was locked until February. In France, it was locked, I think, until January. So now we are having to set new prices. Now there is a Ukraine war and there is embarked in new inflation. It's all about negotiation, but we try to establish long-term relationship and make sure that we have a reasonable price increase from our suppliers and then pass a reasonable price increase to our clients.

Your next question comes from the line of Harry Martin from Bernstein.

I've got 3 questions, if I may. The first one is on the sort of the cadence of growth for the rest of the year. And you're sort of particularly thinking about versus 2019 levels. Just any comments you have trying to square the comments of rapidly going back above pre-COVID levels compared to the sort of the lower end of the organic growth guidance range, which, on my numbers, seems to suggest that we might get a little bit of a step back from the sort of 95%, 96% that we saw in Q2. The second question is just on CapEx going to 2.5% of sales. I mean that will be a high level, obviously, than you've seen in the past. Can you give any commentary on sort of what level of net new wins that relies on and how quickly you expect to get there? And then the final question, a bigger picture question. Just any sort of thoughts you have on the sort of long-term growth algorithm that Sodexo can do sort of beyond the pandemic, what level of organic growth, margin expansion and any sort of cash returns that you think you can sort of deliver on an ongoing basis. I'd love to hear your thoughts on that.

On the growth, we were at 95% of fiscal year '19 in Q1. We are at 94% in Q2. RM has been since the beginning of the year to be 95% for the year. So this remains the target. H2 will be double-digit growth. So clearly, I mean it's going to be a significant growth. I just explained what were the impacts we are suffering that are not interesting to the organization: Omicron, Russia and the testing centers. So I hope I answered your question like this. On the CapEx, that 2.5%, yes, it needs a stronger net new win definitely. And that stronger net new win is 3% to 4%. But it also needs a focus on certain segments where there is more CapEx. And notoriously, there is more CapEx in universities, in Sports & Leisure and in some bids. Well, in health care, there is also a need for larger CapEx or client investment. So it also depends on where do we win and what do we win. So but definitely, needs better sales, which we are aiming to. I mean clearly, I mean, we are working to have better sales and better retention. So a stronger net new loss. And we are also targeting the segments where there is more CapEx.

And then on the organic growth or the margin expansion post-COVID, as we said, we want to get back to our post-COVID level and the sooner the better. And we're close to it. We will be close to it this fiscal year. So I'm not giving any guidance for next year, but that's what -- where we want to be next year. And as I said before, we want to return to quickly to pre-COVID underlying operating margin, which was at 5.5%. And -- but we don't want to stop there. In the second step, we want to be back over 6%.

[Operator Instructions] Your next question comes from the line of Jaafar from BNP Paribas.

It's Jaafar Mestari. And just one question for me on gross new business. So if I calculate correctly, 3.7% annualized is EUR 650 million signed in the last 6 months. And if my math is correct, this is stepping up from around EUR 620 million in H2 last year and EUR 540 million in H1 last year. So definitely continuing to nudge up. But in a normal year before COVID, you would routinely sign EUR 1.4 billion of new business. So my question here would be, what's not getting you there? What's not getting you to over EUR 700 million per half year? Is it because the pipeline of opportunities is not as big, which would sound strange. Is it because your win rates are lower? Or is there any timing factor? Are you bidding for larger stuff, more first-time outsourcing that takes more time to materialize?

Well, I will not get done -- I will not get to check your math. You must be right. No, but the fact is that, clearly, it's been a focus on targeting new sales. We clearly have worked a lot on the pipeline. As Sophie said, in the U.S., we worked a lot on the structuring of the team, the size of the team, the training. We are now, in the U.S., signing 40% first-time outsourcing. We have a better development rate than we had last year. And when I look back 3, 4 years, I think it's a better start of the year that we've had for 3 or 4 years. So I think we are on a good track. As we said also, we want to sign more and still signing quality. So the fact that we sign more but with better gross margin is a good sign. We want to take it step-by-step, and -- but I think it will take us maybe a couple of years, but we will get there.

Yes. And we are...

And 7% set development rate -- a 7% development rate is a good target. As we said in the past, 7% to 8% is a good target for development rate.

And maybe I don't want to go, as Marc said, in the detail of your math. But the base, our base is lower today. It's like -- so of course, when we talk about 3.7%, if it was below 2 years ago pre-COVID in value, it was a bigger number. But now we're -- we have a lower base.

Yes. I thought that actually helped you to actually if the opportunity out there is bigger today if the win rates are similar on -- than if you win something similar on the lower base, it should be a bigger number.

Right. The fact is we are working on the win rate to improve it, but we believe the pipeline is very solid and large. So for us, it's now a question of focus and attention to get to the 7% development rate, but it's feasible.

Yes. So 7% on the repaired revenue base, so really quite big, not 7% on your current revenue base.

And looking at my numbers, which I'm not going to give you, but in the last -- even in 2019, it was not exactly what you said. It was below. So I think even in value, over the last 4 years, we have improved very much the contract -- amount of contract that we won. And I'm looking at my H1 figures, and we were much below in value in our first semester of 2019, so pre-COVID level.

It fluctuates. It was 1.3 in '19, 1.4 in '18, et cetera. Yes, no, you're right, there's differences.

[Operator Instructions] Your next question comes from the line of Vicki Stern from Barclays.

Yes. Just first, if you could just give us an update on the strategic review that you have on the BRS business and perhaps, if it's not too much to ask today, just sort of expected time frame for when you think we might be able to hear more news. And then just secondly, on the free cash flow, I think you often sort of guide to free cash flow conversion for the full year. If you could just update us on what that looks like. Any sort of additional color about the moving parts for that cash in the second half?

Well, thank you, Vicki, for your questions. So we are still for the BRS topic. We're still in the process of working on our strategic options. The strategic plan is advancing. We are going through an external process that we should be ready for a decision in the next several months, anyway, before the summer. And as I said before, the ambition is to accelerate the growth and the diversification of BRS through organic and M&A development, but without losing the control of the activity. And to do this, we intend and we have started to render Benefits & Rewards more autonomous with its governance in order to ensure that this strategic plan can be executed. Marc, do you want to add on this?

Yes. On the cash flow, I mean, we are aiming at a cash conversion of 100% like we do usually. But I just want to point out, like we did earlier in this year, that in Appendix 7, you have the nonrecurring cash impact like the one I described for H1. In H1, they were EUR 257 million. And we believe that for the full year, it will be EUR 350 million. So it's 100% cash conversion on a recurring basis, and then you need to take into account the Appendix 7.

Sorry, just a follow-up back on the comments about BRS and the M&A point. What sort of businesses would you be looking to buy? Are there any sort of specific areas you're looking out on geographies?

Well, we're clearly focusing on what we call core and near core to BRS. Right now, we are not yet ready to go into a major diversification. But we believe core and near-core, there is plenty of targets with synergies and so forth. And this is what we want to focus on.

There are no further questions. I will hand the call back for closing remarks.

Well, thank you very much. Thank you very much for your attention today and for being with us. And stay well, and thank you very much.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.