Compass Group Plc Ord New

Good morning and welcome to Compass Group Q3 Trading Update. Hosting today's call will be Dominic Blakemore, Rupchave Executive Officer. Following the opening remarks, you will have the opportunity to ask questions. In order to ask a question, please press star 1 on your telephone keypad. This call is being recorded. I will now turn the call over to Dominic Blakemore. Please go ahead. Thank you.

Thank you very much. Good morning, everyone. As usual, I'm here with Petros FCFO. We've had another strong quarter with all regions performing well. We're particularly pleased with the acceleration in net new business, which is now in the middle of our range, with improvements in retention to above 96%. We're also continuing to see a positive trend in volumes. Industry trends remain very positive, and we have an exciting pipeline of new business opportunities to support growth organically, and through strategic M&A. As a result of the stronger-than-expected top-line performance, we've upgraded guidance for the full year. We now expect underlying operating profit growth to be above 15%, driven by higher organic revenue growth of above 10%. Let's move now to Q&A.

Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Thank you. We will now take our first question from Jamie Rollo of Melbourne Stanley. Your line is open. Please go ahead.

Thank you. Good morning, everyone. Three questions, please. First, as you note, very good, better than expected volume growth. What's driving that? And were there any sort of one-offs in the Europe figure given that acceleration from Q2? Secondly, just sticking with the volume numbers, clearly there's a pretty high drop through margin benefit on those, but it doesn't look like you're changing your implied margin guidance. Is that just natural conservatism or is that the offset from the accelerating net new business in the second half? And finally, it might be a little bit early, but I do think we'll hear from you next till November. So how are you feeling about next year in the context of the 4% to 5% net business wins and also what consensus is expecting? Thank you.

Thanks, Jamie, and good morning. I'll take the first and third, and then Petros can pick up on your question around drop-through or margin. First of all, no one-offs in the EMU number. It's a clean read. In terms of the strength and volume growth, obviously, we expect and have seen some moderation as we've lapsed. strong comparatives in the prior year. But we're pleased to see volume growth is holding up around the 2% level. We think in part that's due to the value that we offer that we talked about previously relative to the high street as we managed inflation. So we think that's a positive for the story. In terms of next year and your reference to net new, we're in the midpoint of the net new range in Q3. We expect further slight acceleration in Q4, which means we've got good momentum going into next year. As you know, we can probably see about six months out, so that's positive for the first half of the year. In terms of ARO new business, we're now at $3.5 billion, which is $100 million. stronger than the LTM read at the end of the first half of this year. The pipeline looks good. So we've got every reason to be optimistic on gross new business. Retention rates are above 96% now. So we've seen those above 95% here, above 96% in the other two regions. So we're in a good place on retention. I think all the indicators are positive. And we'd expect to be in the 4% to 5% range on a four-year basis for next year. Just taking that a little further in terms of what that means for growth in 2025, as you know, pricing will moderate as inflation moderates, and we expect to see that sequentially occur through the next 12 months or so. And also volumes, as we continue to lap the very strong comparatives, we expect to come up a little, although we remain optimistic on what we're seeing in terms of value as I described. So look, all in all, our guidance as we look forward is for mid to high single digit organic growth. And at the moment, we'd expect to be in the middle of that range for next year on the basis of the various different inputs of net year price, like for like volumes as we see them today. Yeah.

Morning, Jamie. I think we continue to be pleased on the volume with plus two for the quarter. I think on margin progression, there is not any change versus what we get in half one. As you rightly said, you know, net new accelerates in the second half. So we expect, you know, to continue to make progress in the second half of margin, half of the rate of the first half we had for the year.

Okay. Thank you very much indeed.

Thank you, Emily. And I'll take our next question from Vijay Singh of Barclays. Your line is open. Please go ahead. Yeah.

Hi, morning. Just firstly, I wanted to come back on some of those comments there, Dominic, on the like for likes for next year. So just on price, obviously, I guess price for you within like for like has a sort of time lag effect of what we're actually seeing on inflation. I think one of your competitors is signaling something like 3% price growth expected next year. Clearly, you're talking about a moderation from the 4% or so currently, but just any sort of flavor as to you still expect overall an elevated level of price growth next year, just obviously slower than the pace we're seeing at the moment. Second one on retention, you talked about now being back above 96%. I guess really just your confidence level now and being able to sustain that above 96% level as we go forward from here. And then the last one's just on the balance sheet, sort of the same old question really on share buybacks versus M&A to understand sort of are you still very much more minded to focus on M&A from here? I know there's still a share buyback program underway for the remainder of this year, but how should we think about the next sort of allocation of capital? Thanks.

Thank you, Vicky, and good morning. I mean, obviously we're talking about inflation and price trends for the next 15, for us to be doing that. But we've seen pricing come off sequentially through the course of this year to, as you rightly say, the 4% level that we're seeing in the course of three from around 5% in the first half. If you look at the inflation trends we're looking at at the moment, sort of globally blended food inflation is 2%, 2.5%. Labor is around 5%. So it gives us around 4% cost inflation. We probably expect to see the labor inflation trend downwards now, which will drive cost inflation down and therefore will have an impact on pricing as well. two to three percent on a four-year basis i think that would feel sensible planning assumption for everything you see today and most likely sort of elevated in first half and and slowing again in the second half um but we'll we'll update you on that as we go um and then we'd expect to see positive volumes um maybe again uh a little bit of a sort of sequential coming off as we lap the the the kind of strong prior year recovery but we still expect to see volumes being positive as we go forward And then in terms of retention, everything we've seen today suggests that we can maintain retention above the 96% level. We're super focused on retention, really pleased to be back where we were. We know the pipeline of business that's out for re-bid. We've just shared amongst our leadership some super initiatives we're doing. You're very familiar with our strategic alliance group approach to the key accounts. But we're also now working much harder on the tail of smaller business and how we improve retention levels there. And we've got some great best practices that we've been sharing around the business. So we always think that there is more to do that can potentially gain us marginal, provide us with marginal gains as we go forward. But absolutely sustaining the retention of over 96% is our ambition and our belief that we can achieve.

Morning, Vicky. I think on balance sheet, as you rightly said, we will continue to execute the sell-by-back by end of this calendar year. We're happily placed within the 1 to 1.5 range in the leverage. And I think as we continue to entertain some M&A opportunities we discussed in the past, we'll provide some update in the full year results on what is going to be the plan for next year, you know, vis-a-vis M&A and sell-by-backs.

Thanks very much. Thank you. And we'll now move on to our next question from Ivo Belfort-Kelly of UBS. Your line is open. Please go ahead.

Good morning, everyone. I want to touch on volumes again. And you mentioned specifically the value gap versus the high series being a driver of that. And presumably, there's an element of macro linkage to that. And in future, if we actually see the macro environment improving from where we are at the moment, do you see risks to those volumes? And secondly, could you update us on your portfolio rationalization? I don't believe there's anything new on disposal this quarter. And then finally, just in the U.S., if after the election there might be an increase in domestic manufacturing, could that be a driver of higher future revenue growth expectations given your high exposure there? Thank you.

Thank you, Serge. Taking the question on the U.S. first, I mean, we've actually seen the benefits of the expansion in manufacturing through the Inflation Act. under the Biden administration, that's been beneficial to us. Of course, if we do see onshoring of manufacturing in the U.S. post the election again, we believe we're very well placed to benefit from that. In terms of the value gap, I mean, you'll be familiar with that. It's in part due to structural nature of our industry where we don't pay rent rates, commissions, and so forth. And we're also able to better manage inflation when we're able in particular to change our menu mix more than high street restaurants would be able to do. So we believe that that gap has widened through the last several years and makes us more attractive to our consumers. If the macro were to improve, the gap is still there and we're still attractive to our consumers. I think at this point in the cycle, there's still a lot of focus from very savvy consumers on where they get the best return for their money, and we think that that places us

I think on your second point on disposals, just to remind us, I think our strategy to streamline the portfolio and exit tail countries has served us really well. We're able to double down on the core, invest in the focus market and capitalize the structural runway. I think you rightly said you haven't seen any further disposal. We're largely completing the program. You know, there might be few tail countries, I would say, in the future, but nothing material for the group as we move forward.

That's great. Thank you very much.

Thank you. And we'll now take our next question from Kian Martin of Jefferies. The line is open. Please go ahead.

Thank you. Good morning, all. I wonder if you just might provide a little bit more insight into the bid pipeline. Please appreciate some. You're generally a little reluctant to put a dollar amount around it. But any narrative around that would be helpful. And just how the competition, particularly looking at first-time outsourcing, has changed or remained stable. And then a few questions on M&A, if I may. So have you added a few more bolt-on acquisitions recently? I've heard potentially there's a bolt-on in France. Do you feel that the net impact of acquisitions and disposals encompasses revenue in fiscal 25? Is the bank neutral, or might you now be in a position where there's a small tailwind from that? And then also on M&A, the process is now getting a little bit more competitive perhaps as private equity becomes a bit more engaged and therefore the implications for exit multiples. Thank you.

Thanks again. Thanks for those questions. I'll let Patrick respond on. Just in terms of the bid pipeline, as we said in a number of these calls, it looks as good as it's ever looked. We have a gross pipeline and the coverage that we need to be able to deliver the growth in new business we require to be able to deliver the four to five percent. So we feel good about that. In terms of the first time outsourcing, we're trending at broadly the same levels in first time outsourcing contribution to growth in the third quarter as we have done through the last year and a half or so. which is very positive. We think we feel that the pipeline, particularly in North America, is a bit more skewed to first-time outsourcing in this next phase, which is, again, very positive. So we feel good about the great prospects across all three of our regions as we go forward, and we're closing the year quite positively.

Morning, Kian. I think on the M&A, let me just try to answer your three points. I think we will continue to entertain the Bolton acquisitions. They have served us really well across the globe. In terms of guidance for next year, it has remained unchanged. There is a bit of tailwind. There is about 200 million reduction revenue with average margin. As we move to next year, we have guided this in the first half. You know, and I think on the private equity point you made, I think what we're witnessing, we're witnessing more opportunities to present themselves. We think this is a consequence of a higher interest rate for some of the funds, you know, to realize value. And we found ourselves to be nicely placed to capitalize some of these opportunities if we think it's the right thing for us within the strategic framework we have.

Okay, thank you. So just to be clear, despite probably a few more bolt-ons, we're still looking at a small revenue headwind from M&A fiscal 25, Petros?

Yeah, yeah. We got it. It's about a $200 million reduction in revenue for next year with average profit margin flow down. Yeah, okay. Thank you very much, Petros.

Thank you very much for that. As we close, any further M&A? Understood. Thank you very much.

Thank you. And we'll move on to our next question from Neil Tyler of Redburn Atlantic. Your line is open. Please go ahead.

Oh, good morning. Thank you. Just one follow-up really on the like-for-like volume trend, particularly in Europe. I suppose in previous calls more recently, you've pointed to BNI and the return to office and higher participation. But could you shed a little bit more detail on the trends within that strong growth that you're seeing in Europe currently and how you view those trends and the backdrop supporting them? Thank you.

Thank you, Neil. We've seen good growth across all of our sectors and all of our regions, which is extremely positive. The volume growth is positive in all sectors and, again, in all regions. So positive in Europe, but equally positive in North America, which is very good. Yeah, I mean, look, in BNI, I think we're still seeing the return to office benefits us, but I think we've got other things going on as well. We still have, you know, a higher than previous level of event catering. We're seeing higher caps in sports and leisure. We're seeing higher spend happens in higher education. So, you know, it's really across the piece. And as we said a few times on this call, I think, you know, what we think is most relevant is, you know, how keen our pricing is relative to the high street. And I think that's very visible now as some of the high street price points are attaining new levels, which are very noticeable. And therefore, the discount that we offer is increasing all the time.

Okay, super. Thank you.

Thank you. Once again, as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Thank you. And we'll now take our next question from Jafar Astari of BNP Paribas. Your line is open. Please go ahead.

Hi, good morning. Just a couple on acquisitions for me, please. In the release, you specified that the disposal of Brazil happened in May. If I'm correct, the disposal of China also happened in April, in the quarter. I guess where I'm going here is because of the disposals, it's slightly difficult for me to assess disposals. how much you've been spending on top of the very clear medium-sized deals you flagged like CH&Co and Hoffman. So yeah, just confirmation of when those will happen, please. And more fundamentally, can you give us some quantum for how much... money you've spent elsewhere other than CH&Co and Hoffman. What's the quantum of the really small deals that we haven't seen in the trade press? What sort of extra scale have you been adding and in which regions, please, beyond the headline deals?

Thank you, Jafar. Good morning. Let me pass that to Petros.

Good morning, Jafar. I think, as you rightly said, we completed Brazil in May. China was in April. Our net M&A spend on a year-to-date basis is $836 million. In terms of acquisition costs, we have disclosed, you know, CH&Co being around $590 million. Hoffman's around $290 million. And the balance in acquisitions is North America, which is about $150 million. And this gets you to the $836 million net of the proceeds from the disposals.

Thank you very much. That's very clear. And so I guess it does look like it's mostly those two headline food service deals, CH and Cohen-Hoffmann, and then the North America. There isn't a long tail of extra additions or extra scale you've been adding in France, Netherlands?

No. Again, if you think what our level of spend has been historically since the $300 million to $400 million on the bolts on infills, those have typically been in North America. We've been trending slightly below that level. We may return to that level as we go forward. There's still a healthy pipeline of smaller deals it's really all about. It's all about timing. We remain very excited by the input. They bring us scale and capability. They help with our margin. They help with our geographic and regional footprint, particularly in vending in North America. So we're excited by that. The bigger deals, as you've seen, have been in Europe. There's a few more that we remain interested in, which are active processes. And we'll share with you both the strategic intent behind those, the returns and so forth, as and when we close them. And I think over time there'll be an opportunity for smaller infill in Europe as well as we start to build some of the same capabilities. So we feel pretty excited about what M&A can bring us and how that inorganic growth can very, very much complement the strong organic growth we see.

Super. Thank you.

Thank you. And our final question comes from Joe Tolmas of HSBC. Your line is open. Please go ahead.

Good morning. Three questions, if you wouldn't mind, please. Firstly, I think you mentioned that you were talking about new business mobilization in Q4. And I think the implication was that there might have been a bit of a drag on margin in Q4. Could you just clarify whether that is the case and what the scale of that drag might be? And then related to that, the usual question about any update on recovery to sort of historic margin levels and how long you think that's likely to take. And finally, I think, Dominic, you seem quite optimistic about the cost outlook. One of your competitors has talked about pockets of some food cost inflation. And I just wondered if there was any of that that you're seeing at all or anything that we need to keep an eye on there. That's it. Thank you.

Thank you, Joe, for those. Look, in terms of quarter four new business, it's all baked into the guidance we've shared today. So as Petros said, we made 50 bits margin regression in the first half, we expect 25 in the second half. Within that, there is the expectation of higher new business in the third and fourth quarters. So we've already taken account of that as we go, as it were. In terms of recovery to historic margin, we see no impediment to attaining historic margin, and we see no impediment to going above historic margins as we go forward. We think particularly with the work we've done on the portfolio, the work we've done on the M&A, the fact that we've demonstrated that we can manage the heightened cost inflation, we expect to see ongoing margin progression as we go now. We're not putting a time frame on when we get there because, as we said before, if we enjoy higher growth, The margin progression may be a bit slower. If growth were to come off, we'd expect margins to go a bit faster. But you should expect to see us making steady ongoing progression year over year from here. And then actually just in terms of the cost outlook, I mean, I've spoken to blended inflation around the 2.5% level. That takes account of, as you rightly say, some pockets of higher inflation in certain markets. But broadly, we've seen food inflation come up quicker. As you would expect, particularly as we've seen the energy cost levels come down and the contribution that makes to food manufacturing costs. So, you know, we feel that that's what we're seeing at the moment. We obviously reserve the rights of things change to come back. But, you know, as we've shown, I think what's most important is when inflation picks up, we've been able to price for it. When inflation slows down, you see the impact on pricing. And what we have to ensure we're doing is that we've been super fair to our clients all the way through on this. And that's absolutely the way we think about it.

Thank you.

Thank you. That was our last question. I will now hand it back to Dominic for closing remarks.

Thank you all for your questions today. As you've heard in conclusion, we've had another strong quarter and we're particularly pleased with the acceleration in that new business growth and the improvements in retention. Have a great summer and we'll speak to you again in the autumn.