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

Good morning. Thank you for standing by, and welcome to the Sodexo First Half Fiscal 2025 Estimates and Full Year Guidance Update Call this morning [Operator Instructions]. I advise you that this conference is being recorded today Thursday, the 20th of March 2025. I would now like to hand the conference over to the Sodexo team. Please go ahead.

Good morning, everyone. Thank you for joining us on short notice. I'm Juliette Klein, Head of Investor Relations. And on the call today are Chairwoman and CEO, Sophie Bellon; and CFO, Sebastien De Tramasure. After their remarks, we'll open the line for questions. [Operator Instructions] The press release is available on sodexo.com. Please note that this call is being recorded and may not be shared without our consent. This call includes certain nonaudited financial data for H1 fiscal 2025. The full audited results will be published on April 4 followed by our usual analyst and investor call. Management's comments today will be limited to the disclosures in the press release. With that, I'll now hand over to Sophie.

Good morning, everyone, and thank you for joining us today. Sebastien and I will provide you with more details on this morning's press release. The Q2 performance and particularly in its final months, came in below expectation, and in turn, triggered a necessity to revise our guidance for the full year. We saw growth broadly in line in many areas across Europe and rest of the world. For example, performance was good in Europe, Healthcare and Seniors as well as in Australia, India and Brazil. However, in North America was more challenging. And even though we had a dynamic growth in Business & Administration and Sodexo Live!, U.S. Education continued to be affected by soft volumes and negative net new while U.S. Healthcare faced delays in the opening of new contracts. The low growth had a knock-on impact on the margin side. Whilst we were confident of our Q1 publication in January and until recently, our full year expectation could be met, we have to address the slowdown in North America and in particular, the volume dynamics and the new start-ups. We are taking decisive action in the U.S. and especially in Education. In universities, we recently appointed a new leader to strengthen and accelerate our operational execution. In Healthcare, we see new revenue materializing less quickly than anticipated and in Seniors, a continued volume challenge. This has led to revising our guidance to 3% to 4% organic growth and a 10% to 20% UOP margin improvement. On the forward outlook for retention, we also wanted to update you on the previously communicated 6 global contracts up for renewal. We secured 5 of them and one will not be renewed. The revenue impact will only start in H2 2026 and '27. This was disappointing, but importantly, the unusually dense contract renewal cycle is now behind us with no rebid until '27. Let me hand over to Sebastien for a few comments on how we look at the bridge, both our revenues and UOP versus initial guidance.

Thank you, Sophie. So based on our initial guidance and Q1 publication, I appreciate that this is a substantial change, driven largely by Q2 performance, lower volume growth in Q2 and anticipated for H2 as well and the reassessment of new openings over the year. We had anticipated Q2 to come in broadly in line with Q1 and a subsequent improvement in Q3 and Q4. Now when we -- when comparing our updated guidance of 3% to 4% to initial guidance, we are looking at approximately 2.5 points delta. Roughly 60% of this is due to lower volume while the remainder comes from delayed ramp-up of new business. And for the second half of the year, organic growth should be between 2.5% and 4.5%. So furthermore, the revised guidance in margin reflects the margin improvement achieved in H1 and the revenue shortfall expected in H2 on which we miss operational leverage through reduced contribution to profitability. We have taken swift actions that should enable us to improve by 10 to 20 basis points for fiscal year '25. And we remain focused on delivering continued margin progression beyond '25.

Okay. Thank you. Now we are -- thank you, Sebastien. And now let's open to questions. So we open the door for questions.

[Operator Instructions] The first question is from Jaafar Mestari, BNP Paribas.

I have a couple and then a follow-up. Firstly, you do not mentioned retention in today's press release. Do you have an early estimate of where it stands at the end of H1? Or roughly are you above 94%? And secondly, this is large health care contract, first time outsourcing, if I understand correctly that you expected to ramp up and just seems to be off schedule. There's a number of those from your previous comments that you're expecting to open on time and on budget from the month of April. Could you update us briefly on these other large contracts and their status? I think it's the U.K. ESNEFT NHS Trust. It's the French prisons. It's one large tech company in the U.S. and Santos in Australia. Is there anything else? And are they all except from U.S. health care 100% opening in April and 100% on budget?

Okay. I'm not sure I got the last question. Okay. So let me -- thank you for your questions. So let me answer your first question on retention. So now on retention, we are aiming for retention -- we had a good start in the year. But -- and we are aiming for a retention rate between 94% and 94.5% including the large global accounts we just lost even though it will not have an impact on our growth this year, but it will start in H2 next year. And so it still reflects a solid underlying performance, especially if we don't take into account that contract.

And I can take the second question. So Jaafar, basically the only change on the big contracts I mentioned during the Q1 call is really coming from the large health care system in the U.S. We were expecting some ramp-up during the second half of the year. It's first time outsourcing. So this ramp-up will not come. We are discussing with the client to define the new time line for the deployment. And it will start really in fiscal year '26. We may have a small impact in Q4, but definitely below our initial expectation. And on the other major contract I mentioned also during the call, so they are all in line with what I said on assets, the [indiscernible] contract, Santos contract in Australia. They will open in the end of Q3, beginning of Q4, as expected. The major change in terms of ramp-up of new development is really coming off -- from the other parts of the portfolio of development for the year. But on the key one, again, if we put aside the large health care system in the U.S. it's in line with our expectation.

And then if I may have a follow-up. Is there anything you can say on cash flow, unaudited at this stage, please?

On cash flow, we come back during the publication and call in the beginning of April, but we had a robust cash flow for the first half of the year.

The next question is from Leo Carrington, Citi.

Please, could I focus on the North America Education segment? Firstly, I think I'm correct in saying that the issues you've flagged there mostly in higher education. Can you just talk about and perhaps update us on enrollment trends, but also the meal packages and volume? And then away from higher education, if I think about K-12, what's your view on the -- on this part of the education system? I think there's some potential concern around the free meals program, if that could be cut or reduced? General update on education would be very helpful.

Okay. So regarding education and university in the U.S., yes, we told you about lower enrollment in Q1 and lower volume. This is really what we also observed during the full H1, and it's one of the reason also of lower volume in H2. In our mix of portfolio of universities, we clearly see lower enrollment. I acknowledge that might not be the case overall the U.S. market, but we have more universities in the Northeast and the Midwest. And in this part of the U.S., we see clearly lower enrollment and lower voluntary main plan. Then on the K-12 segment, at this stage, again, when we look at our performance during the first half of the year, there is obviously an impact of development and retention from last year. This was obviously anticipated -- anticipating in our guidance. We see soft meal participation overall. And to your question about a potential change, we -- at this stage, again, we do not include any impact in our H2 number. Then we can expect also alternative state of private funding source to help offset potential revenue loss. Again, it's still to be clarified and we'll obviously keep an eye on it.

Okay. Let me -- on the higher education, let me give you a little more detail. So yes, Sebastien said, we are lower than expected on meal plan. That's why we need to push the voluntary meal plan because mandatory meal plan also were a little lower because of our geographic exposure. And as you may have seen, we appointed a few weeks ago, a new leader for University. This leader knows the industry. He has the right profile to grow the business, especially as well the retail business. So we are working on a number of initiatives. For the mandatory meal plan, we have developed a new offer and one and all that is going to be developed and started a number of sites in the spring. And we expect to grow the volume with that new offer. We are also accelerating our retail strategy and the convenience on the campus with a number of innovation, for example, Just Baked, which is a very digital convenience machine, and we are developing -- we have a plan of developing 200 sites by '26. And also, we want to broaden the pipeline, continue to work on a preemptive bid because it's really a segment where there is the opportunity to do that, especially when you bring new innovation and broaden the pipeline. So that's the action that were already worked on. And now, as I said, we want to accelerate the operational and the execution of those actions.

The next question is from Neil Tyler, Redburn Atlantic.

Actually, just picking up on the same topic of U.S. Education, please. I'm just interested that you've made the move to appoint a new leader there. Can you help us within some of the target KPIs that you just described. So if you sort of help us understand the time frame within which you anticipate that new leadership needing to or having to improve those KPIs? Because I think it's not -- you mentioned it's not in your prepared remarks. It's not just like-for-like volume issue. It's -- there's also a net new challenge to be addressed there. So that's the first question, just in terms of the time frame of the turnaround that you anticipate. And then secondly, of those -- of that one global contract that you mentioned, the impact of which wouldn't be seen until later in fiscal '26, can you just help us frame the impact on net new that, that contract will have on the sort of full year annualized basis, please?

Okay. Thank you, Neil, for your question. So it's a little too early for the time frame. But for me, I think we appointed the right leader. He's a respected leader in foodservice, bringing over 25 years of multi-sector experience. He has a proven track record of driving operational excellence and building high teams and creating customer-first strategy. I think we have significant opportunities, and we already have a number of initiatives that we are working on. So yes, we need to give you -- it's difficult to say, but I hope for an immediate impact. Is it going to translate in the number immediately? Well, that we will see. But I hope for an immediate impact of this leadership. For the GSA account, first, I want to remind you that between '24 and '25, we have been -- we have had an unusually dense activity in terms of contract expiration for our global accounts because over those 2 years, 80% of our global portfolio, representing approximately EUR 1.6 billion came up for renewal, including EUR 0.9 billion in fiscal year '25 alone. And I think it's very important to remind you that. Among those 6 global contracts set to expire in fiscal year '25, we are in the process of securing 5 of them. And this is a significant achievement, and it reflects also the strong relationship that we have built with these large clients over the years. We did lose one contract, which will phase out the start with -- as I said, it will only start in H2 '26, and meaning it will have no impact on this year. And we anticipate that contract to have a full year impact between 70 and 80 basis points, but for next year, only between 30 and 40 basis points impact for '26. I hope that answers your question.

The next question is from Vicki Stern, Barclays.

Actually just firstly, circling back on the comment you just made there on the 70 to 80 bps impact. When you suggested for this year, you think retention is probably going to land in the 94% to 94.5% range, that includes -- obviously, I know it doesn't come through in the revenue this year...

It does.

But when you report retention -- that captures that 70 to 80 bps of headwinds within the 94% to 94.5%, Okay. I just wanted to step back a little bit and talk more broadly about volume. Are you seeing -- given good color on what you're seeing, obviously there on the Education side from the enrollment piece. To what extent, if any, are you seeing any impact from sort of broader macro in the U.S. government job cuts specifically coming through in any areas at all that you're seeing? And then last question was just around the development pace. I think back at Q1, Sebastien you suggested that development was running exceptionally well around 50% up year-on-year. How is that development trending now?

Thank you, Vicki, for your questions. Yes, for the first -- your first question on retention, when I said 94% to 94.5%, it included that 70 to 80 basis point impact of that DSA account. And I'm not able to say exactly because we're still in negotiation. We might keep some services, but it will definitely have an impact. So it shows that the underlying retention is still progressing. And with that, that contract, we would be at hopefully, we will be at the 95% target. In terms of volume and beyond, more on the macro side, yes, we cannot -- we all know that -- first it's a little too early to say, but it's obvious that 2 segments might be affected, the Healthcare segment through the cuts in Medicare and Medicaid funding and also in schools, if in some public school, the funding also they stop funding the feeding of the students. So -- but what we -- there are a lot of uncertainties. We all watch the news every day, and there are a lot of uncertainties and changes. And we are very -- we're very vigilant on the topic. And -- but at this stage, for this year, we don't see any impact. But I cannot say that some things might happen. But on the positive -- yes.

And maybe just to add, Sophie, we don't have a lot of exposure to government and agency in the U.S. It's less than 4% of our turnover revenues in the U.S. and half of it is with the U.S. Marine Corp contract with less exposure to any cut. So I think that exposure to government agency is pretty low in the U.S.

And then for your last question on development rate, the trend is very good. No, we achieved over EUR 1 billion sales globally in H1. It's the first time ever in terms of volume for us. So we are very happy with the beginning of the year, and we want to, of course, continue.

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

So first of all, if you could please help me understand the moving parts, if we start from the organic revenue growth in North America in Q1 which, if I remember correctly, it was close to 5.9%. And now in Q2, effectively implies a 1.1% organic revenue growth. So if you can please like quantify a little bit the moving parts for this sequential deceleration? And again, what we should expect for the second half of the year. So probably starting from this, please.

So to your first question, when you look at the shift between Q1 and Q2, so you are right, Q1 was at 5.9% and the organic growth is 0.9% in Q2. We had the impact, obviously, of the leap year during Q2. This was anticipated. But then, as I mentioned before, we have seen lower volume especially in Education. Then also, the organic growth for Sodexo Live! was very, very strong in Q1, and we had some lot of very big events that helped the organic growth during the first quarter and with not the same impact in Q2. And then also, we spoke about the loss of the global contract last year, and this has an impact in January and February, and it impacted also the growth we have in Business & Administrations.

And on the second part of the question, so what should we expect in terms of trends for the second half of the year? And then if you could please quantify also what are currently the pricing trends, please.

For the second half of the year, we are expecting in the U.S. an organic growth around 3.5% is a very similar to the one in H1. Again, then the construction is not exactly the same, obviously. We do forecast some lower sales volume also for H2, as I mentioned earlier, but we will have a ramp-up of net new over the H2. And this will help obviously the organic growth for the quarter 4. And in terms of pricing, it's around 3%. So it was 3% in Q1. It's around 3% for Q2. And at this stage, we do factor around 3% for the second half of the year as well.

And can you elaborate a little bit more on the ramp-up in net new that you are expecting in the second half? So how much visibility do you have and in terms of trends by sector, so which ones will be contributing the most?

We are expecting a ramp-up in net new especially in Healthcare & Seniors because we had a very good development last year, good development first half of the year as well. So this will translate in terms of net new during the second half of the year. I would say that contribution will come mainly from the Healthcare segment. Now I'm talking about the U.S., talking about North America.

The next question is from Jack Cummings of Berenberg.

Just one, please. You flagged in Europe, continued soft growth in Facilities Management. Has trends in Q2 in Facilities Management mirrored the trends in Q1? Or has there been any decline or improvement? And how we think about Facilities Management for the remainder of the year?

So I mentioned that the same was notable in Q1. We were expecting something flat during the Q2. But unfortunately, it was even lower than expected. And we did factor in Europe, especially in Europe in Facility Management. And we did factor single trend during the second half of the year. It's 1 of the reasons also of the reduction in terms of organic growth for the second half.

[Operator Instructions] There are no more questions registered at this time. I turn the conference back to you for any closing remarks.

Well, thank you very much for taking the time to listen to the call. We will speak to you in 2 weeks from now on April 4 for our H1 announcement, and have a good day. Thank you.

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.