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

Good morning. Thank you for standing by, and welcome to the Sodexo's Q3 Fiscal 2025 Revenues Presentation. [Operator Instructions] I advise you that the conference is being recorded today on July 1, 2025. At this time, I would like to hand the conference over to the Sodexo team. Please go ahead.

Good morning, everyone, and thank you for joining us today. I'm Juliette Klein, Head of Investor Relations, and I'm pleased to welcome you to our Q3 fiscal 2025 revenues call. On the call today is CFO, Sébastien de Tramasure, to take us through the presentation. After Sébastien's remarks, we will open the line to take your questions. We ask you to please limit yourselves to 2 questions and 1 follow-up. The slides and the press release are available on sodexo.com, and you'll be able to access this call on our website for the next 12 months. The call is being recorded, but may not be shared without our consent. Please get back to the IR team if you have any further questions after the call. With that, I'll now hand over to Sébastien.

Thank you, Juliette, and good morning, everyone. Welcome to our Q3 fiscal '25 revenue presentation. And let me start by saying that our third quarter performance is in line with our expectation. Back in April, when we presented our first half results, we shared a detailed view of the underlying dynamics, notably the softer performance in some areas of North America, contrasting with better trends in others. And our third quarter performance reflects a continuation of these dynamics. We also began to see early contribution from key contracts won in H1, while experiencing a softer selling season in Education in North America. Now let's begin with the headline figures on Slide 3. Group revenues for the third quarter reached EUR 6.1 billion, up 0.8% reported. Currency effects remained negative at minus 2.1%, largely due to the depreciation of the U.S. dollar and some Latin America currencies. Scope effects were limited at minus 0.2%. And organic growth came in at plus 3%, in line with expectations. And just for reference, organic growth for the first 9 months of the year stands at plus 3.4%. Now let's look at some operational trends by geographies. In North America, third quarter organic growth was 1.2%, slightly above Q2, as expected. Pricing momentum remains healthy, and new business is contributing. However, prior period contract losses continued to weigh on growth, mainly the major global facility management contract lost last year and, to a lesser extent, some losses in Education. Business & Administration is benefiting from the ramp-up of new business, even if this is partially offset by the impact from contract exit linked to prior period losses. Sodexo Live! continued to perform well, with growth supported by higher passenger volumes in airline lounges. Education showed a slight improvement, helped by favorable calendar days and extra campus activity, but it's still affected by past contract exits. Healthcare & Senior is solid in Healthcare in the U.S., thanks to pricing and scope gains, but impacted by site losses in Canada and in Seniors. So overall, we are seeing some contribution for new business and healthy pricing while continuing to absorb the impact of prior period exits. That said, our recent sales and retention season in universities was below our expectation. A few large client decision went against us, which will have an impact on Q4 and on our organic growth trajectory into fiscal year '26. We have taken a hard look at what happened. It comes down mainly to 2 things, market dynamics, including some competitive pressure on mix, and turnover within client organization, which has disrupted long-standing relationships. In parallel, we are still working hard on internal initiatives, and we are pushing to accelerate the outcome on this area. And looking ahead, fiscal '26 will require disciplined execution and focused leadership as the university segment continue to face a more complex operating environment. We have a renewed leadership team in place, and we remain committed to investing and growing in this important market. In Europe, organic growth of plus 3.3% improved compared to the previous quarter, with clear momentum in Healthcare & Senior across the board and solid activity in Sodexo Live!, which benefited from strong volume in the U.K. airport lounges and stadium as well as the robust tourism activities in France. In Business & Administration, growth was driven by pricing and new site openings. However, this was partly offset by softer volumes, reflecting broader macro headwinds and the impact of contract exit. Education remains slightly positive overall, thanks to pricing, but continue to reflect the impact of low-performing contract exit from prior year. So while the external environment remained mixed, we are seeing encouraging sign in several segments and remain focused on execution and commercial delivery. We have successfully renewed several contracts in France and in the U.K., and our mobilization of our midsized contract opened in April is progressing well. Rest of the World continued to deliver a solid organic growth of plus 7.5% this quarter, driven by strong performances across key geographies. India, Brazil and Australia all contributed meaningfully. In Australia, the successful mobilization of the Santos contract during the spring was a clear highlight, with excellent client feedback regarding service quality, professionalism and execution under challenging conditions. So altogether, a solid quarter for Rest of the World, with balanced growth across segments and regions. As a reminder, in April, we guided for full year organic growth between 3% and 4% and underlying operating margin improvement of 10 to 20 basis points. With 2 months to go and given the improved visibility on recent business trends, including retention dynamics in the U.S., as mentioned earlier, our current expectation is to land at the lower end of the range for both organic growth and margin. And please keep in mind that fiscal '25 includes a base effect of around 50 basis points from the nonrecurring positive item in the prior year. And for Q4 alone, the year-on-year comparison would be affected by 120 basis points contribution from last year Paris Olympics. And as usual, you will find our assumptions for items below underlying operating profit in the modeling slide in Appendix 4. And please note a slight change compared to last quarter. Other income and expenses are now expected at around minus EUR 160 million. Overall, we continue to navigate a more complex environment, and we are working with our teams with discipline and agility to monitor closely our operation and to implement the right changes where needed, with a clear focus on execution and client development. So thank you for your attention. I'm now ready to take your questions.

[Operator Instructions] The first question is from Julien Richer of Kepler.

Two questions for me, please. The first one, if you could give us a little bit more detail on your Q4 implicit growth because you -- so you initially expected Q4 to be above Q3. So now it seems that it's going to be below. And if I take the low end of the 3% to 4% range, it means that Q4 might be below 2%. And can you please give us the impact of retention and impact of development in Q4? And then the second question on 2026. Any guidance you can give at this stage or any color you can give at this stage in terms of the evolution of retention rate and the evolution of the like-for-like, so the net new business and like-for-like for next year, please?

So thank you, Julien, for your questions. So first, regarding Q4 on organic growth. So again, keep in mind that we'll have a negative impact from the Olympics for around 120 basis points at the group level. So -- and excluding this Olympics impact, we are expecting to have Q4 underlying organic growth being slightly above Q3 as expected, with a higher impact coming from the net new contribution. To your second question, so as you know, we will not guide on fiscal year '26 at this stage. And the full fiscal year '26 guidance will be given when we report full year results at the end of October. But I can share some color about expectations for '26. So based on our current visibility, in-year net contribution from fiscal year '25 will be relatively modest. And as a reminder, this will be impacted by the loss of the large global facility management contract and recent losses in Education as I said earlier. But the good news is that the commercial momentum remains strong, and we have a very strong pipeline. But the conversion into revenue will be progressively, during the year, as usual. And then the overall fiscal year '26 will depend obviously on inflation trends and on the broader macro environment, and both will play a key role in shaping the year. And again, as I said at the beginning, we'll be in a much better position to share the full year guidance for '26 at the end of October.

And regarding Q4, when you are looking at your ramp-up of recently signed contracts, is it the likes of Santos that was expected to mobilize? And Q3, the Captis contract, is it in line with what you had in mind? Or is it maybe softer than what you initially expected?

As the ramp-up of the major -- I would say, major contract we opened in Q3 is really in line with expectation. We are talking about the Justice contract in France, ESNEFT in the U.K. and, as you said, Santos in Australia, and this will have an impact in the Q4 organic growth. And Captis is not expected to already contribute in fiscal year '25. It will be really in fiscal year '26, even if we sign 2 contracts within the Captis number. But again, the ramp-up and the contribution in terms of organic growth will be progressive in fiscal year '26.

The next question is from Jamie Rollo of Morgan Stanley.

My first question is just, are you seeing in North America any weakness in underlying volumes in either Business & Administrations or Sports & Leisure from the sort of more uncertain economic and political environment in the U.S.? And then the other one, just again, if I can get back to 2026, I know you're not guiding yet, but consensus has got margin growth of 20 basis points. And obviously, this year, we're going to be more like 10 basis points. And you just talked a bit about reinvestment on the call then. So just really wondering, early days, how you're sort of feeling about margin progression next year.

So thank you, Jamie. So to your first question, when we look at our number in -- for North America in Q3, we don't see any weakness in underlying volume at this stage, neither in B&I or in Sodexo Live!. And then regarding your second question on margins. So our ambition is clearly to improve margins, but over time. We know our key levers to improve margin and with procurement, supply, better labor management. And in parallel, we continue to streamline both operation and our back-office functions. So this, we continue to deliver in the coming years. And at the same time, we know that also we need to invest in the business. We will have to invest in sales, especially in North America. We continue to invest in our brand, in our tech, data and digital initiatives. And this will be needed to obviously accelerate our organic growth. So it's really a balance of leveraging our key initiative, middle-of-the-page and back-office functions to improve profitability and invest at the same time in key capabilities. And again, we'll share a more detailed view of our margin trajectory in October with the full year results.

And just for clarity, that October results outlook, is that just going to be a 1-year guidance? Or will you be giving a multiyear target framework again?

We'll focus on fiscal year '26 guidance at the end of October, and we'll give some color as well on the midterm guidance.

The next question comes from Pravin Gondhale of Barclays.

Firstly, can you give a bit more color or details of net new and volume performance in Q3 and if there has been any change in signing momentum compared to what you mentioned during your H1 call? And then secondly, I know you don't give retention figures with quarterly results, but can you share some more color on how this has trended since -- has trended in Q3? And is there any lumpiness over the next few months in terms of contract renewals?

So regarding the driver of the organic growth for Q3, so the main driver is pricing being close to 3%. And then the remaining is really small positive with volume and net contribution. In terms of development, as we said, we have a pretty strong momentum in terms of development. If we look at new contract plus cross-sell, we should end the year around 8%, and we have a very strong pipeline. So overall, we are very happy with our level of development. And you just -- yes, repeat your third question, if you -- your last question, sorry.

Yes, if there is any lumpiness over the next few months in terms of contract renewals.

Well, as I said, in terms of retention, we are slightly disappointing by the results in Education in North America. But we are not expecting any major rebid and renewal by the end of the year.

The next question is from Ivar Billfalk-Kelly of UBS.

Can you please give us a breakdown of the growth between food services and facilities management. At 2Q, you did highlight that FM was weak in part because of lower project work. Are you hearing from any clients that this could effectively be phasing with a backlog of work that needs to be done that can provide support for future quarters? Or should we actually see that as just a loss growth that won't be recovered in the future? And secondly, on the pricing, you mentioned 3%. But if I look at the inflation indexes in the America, it seems that food-away-from-home inflation is trending closer to 4%. So what is it that means that your pricing isn't actually able to keep up? And equally, could we actually expect that you should try and recover this to an extent in next year?

Okay. So to your first question, in terms of dynamics between food and facility management, when we look at the year-to-date, we are around 4% for food, and we are around 2% for facility management. So the trend in food remain better than in facility management. And it's the same trend for Q3. We have a higher organic growth in food versus facility management as expected. Then in terms of inflation, what we need to look at, it's the CPU, food-away-from-home for North America. And when we look overall at the trend in terms of pricing for North America, it's very similar to what we have at the group level. I mean it's a pricing impact close to 3%.

Just follow up on the first question, specifically around project work, I mean, because I understand that was one of the key drivers why FM is weak. Is that expected to recover at any point? And could you see tailwinds from recovery of a backlog that was missed?

Yes. So we are not expecting a major recovery in Q4 regarding project work. So there is no material change in the environment at this stage and remain quite cautious on the budget.

The next question is from Simon LeChipre of Jefferies.

So 2 questions. First of all, are you able to confirm the retention target of above 94% for the end of this year given the outcome of the selling season in U.S. Education? And secondly, a follow-up on margins. Your updated guidance seems to imply flat margin year-over-year in H2. And I mean, given the kind of lower growth trajectory for next year and the reinvestments you were talking about, I mean, is it realistic to assume some year-on-year margin improvement next year? Or should we be a bit more cautious given the slower growth ramp-up and reinvestment and so on?

Okay. So first question on retention. So on retention, there is 2 elements to keep in mind. First, as I mentioned earlier, the recent Education losses exit that will weigh on the figure overall. And in addition to that, the scope of the large FM, facility management loss we flagged in March is still under discussion. And both effect will have obviously an impact on the retention rate for the year. So with current visibility and, again, better visibility, especially on the -- in the North America, our expectation now is to be a little below 95%, including the FM loss or above 95% -- 94% -- yes, sorry, a little below the 94%, including the FM loss, or above 94%, if you exclude the large FM loss for the year. And in terms of margin, so for -- I think that for fiscal year '26, I already answered as a question. And then for fiscal year 2025, as I said, we expect to be at the lower range of our guidance between 10 and 20 basis points.