Sodexo S/Adr

Good morning, everyone. Happy New Year to you all. Welcome to our Q1 fiscal 2024 revenues call. On the call today, we have Mark Holland to take us through the numbers and ask your questions. If you haven't already downloaded them, the slides and press releases are now 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 reproduced or transmitted without our consent. I now turn the call over to Mark.

Thank you, Virginia, and good morning, everyone. I wish you all a very happy, healthy, and successful 2024. And welcome to this fiscal 2024 Q1 revenues presentation. On slide two, I wanted to highlight several contextual points. We shall focus on Sodexo continuing activities only, as Plexi has been classified since our year-end last year as a discontinued operation, which means that we only consolidate Plexi at the net income level. Plexi's Q1 will be announced at its capital market day on January 10, 2024. In this presentation, Sodexo refers to Sodexo's continuing activities only. The expected impact of the Plexi deconsolidation has been added to the modeling assumptions for fiscal year 2024. Please do look at Appendix 1, slide 15. So, let's go through the numbers in slide 5. Revenue were €6.3 billion, up 3.1%. You can see that we had a negative contribution from scope and currencies. The minus 4.8% currency impact is linked to the strength of the euro against most currencies from the beginning of calendar year 2023. As a result, at current rates for the rest of the year, this negative impact is expected to subside progressively over the year. Organic growth came out at 8.2%. only slightly lower than the fourth quarter exit rate. In that 8.2%, there is the impact of the accounting change in energy and resources of minus 0.6%, which will impact the first three quarters of the year and then reverse out in the fourth quarter. In this fiscal quarter, it was actually compensated by the positive contribution from the Rugby World Cup, which was more or less equivalent at plus 0.6%. By region, North America was up 8.7%, Europe 9.2%, and the rest of the world 4.7%. But if you strip out the Rugby World Cup and the accounting change, Europe was up 7.6% and the rest of the world 8.1%. As you can also see, the food sales recovery continued with sales up 10% organically and FM services growth was solid at 4.7%. This quarter, we've had our share of good news in terms of new business, renewals, and extensions. In North America, we retained for a further 10 years our Tufts Medicine contract and doubled the contract with additional locations. We manage food and FM services there. In particular, we have implemented our room service model to enhance patient experience. In the U.K., We have successfully extended six public sector contracts for a combined value of £34 million to provide catering services for employees of the London Underground, the British Transport Police, the Metropolitan Police, and London Bus Drivers for a further two years. For London Underground, we are also introducing the Kitchen Works brand. We have also extended our contract with His Majesty Revenue and Customs for FM services on 48 sites, including 10 of their 14 regional centers, and also for our long-standing clients, Haven and Somerset Police, providing essential services, including catering and hospitality services, cleaning services for over 3,000 police officers and personnel at 54 police stations and sites. In Australia, we have signed a new contract for Glencore's marine-marine operation, one of the largest nickel and cobalt producers in the world. The five-year contract went live on the 16th of December for the provision of village and plant services for a total of 1,200 rooms, including village management, catering services, wellness, tavern and retail, industrial cleaning, and many other FM services. The Sodexo food offering includes a village resident app for order-away and cook-to-order operations scan-and-go retail, and premium grab-and-go offers. Pricing is in line with expectation at circa 4.5% in the first quarter, coming up from more than 5% in Q4 fiscal 23. This is in line with our expectation for an annual pricing contribution of between 3% and 4%. Food inflation is coming down substantially in most regions, currently at low to mid single digit, but with Europe still at high single digit. On the other hand, employee costs are still rising in all regions, running at about 5% in Q1. So let's start with North America. In North America, first quarter fiscal 2024 revenues were just over 3 billion euros, up 8.7% organically. Organic growth in business and administration was up 12.1%, helped by a favorable impact of new business. Volume growth also remained solid, with higher attendance in the convention center's activity and increased passenger count in airport lounges, as well as continued increase in the return to the workplace. Pricing was around plus 4%. In healthcare and seniors, organic growth was 6.3%, due to the combination of price increases, retail growth, and favorable net new contribution. On the other hand, lost sites in seniors are offsetting some of this performance. In education, organic revenue growth was 7.5%, boosted in particular by price increases and ongoing growth in meal count, increased retail, and more event catering. Europe revenues amounted to 2.2 billion euros, up 9.2% organically, and up a healthy 7.6% without the Rugby World Cup event. In business and administration, the 10.1% organic growth was boosted by the Rugby World Cup food sales in our stadiums and package sales to some of the national rugby organizations. There were also price increases across the board, But on the other hand, French tourism was affected in November by the deterioration of the security environment and relative to a record activity in the previous year. In healthcare and seniors, organic growth was solid at 8.9%, resulting from strong new business in Spain, strong pricing in the UK, and better activity and price revisions in seniors in France. In education, organic revenue growth was 6.2% due to higher pricing, somewhat offset by net contract losses, in particular in France. First quarter fiscal 2020 for revenues in the rest of the world were 1.1 billion euros, up 4.7% organically, impacted by the accounting change made in Q4-23, retroactively for the full year. Excluding this change, zone organic growth would have been 8.1%. Activity in most regions is strong, except in China, where the weaker economy is affecting all our activities. Business and administration was up 8.9%, excluding the accounting change. There was a solid performance in India, Australia, and Latin America. However, activity stalled in China due to the post-COVID economic slowdown and quite a lot of restructuring at some of our clients, particularly in the tech sector. And to be noted, the Middle East was impacted by account losses too. Healthcare and seniors was up 2.6%. Strong growth in India and Latin America was offset by slower growth in China and last year exit of low-performing contracts in Brazil. In education, organic growth was 3.3% due to a decline in China, offset by double-digit growth in Brazil and India, boosted by new business and ramp-up of existing sites. Now let's turn to our guidance for Sodexo Standalone on slide 12. The first quarter is in line with expectations. Volume are increasing progressively. New business is ramping up. Net new signings are also in line with expectations. We are on track with our fiscal 2024 and 2025 plan. So we confirm our guidance of 6% to 8% organic growth in fiscal 2024 and 2025, and a margin improvement of 30 to 40 BIPs points in each of the two years. I thank you for your attention, and I'm now ready to answer your questions.

This is the conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touch-tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. The first question is from Julianne Reacher with Kepler. Please go ahead.

Good morning, everyone. I have three questions, if I may. The first one on staff inflation, could you please give us a little bit of granularity on the staff inflation evolution over the last few months and the situation by region? Do you see more staff inflation in some locations more than others? The second one is on development. Do you still see development in the 7% to 8% range? Has anything changed on this point? And how has the first-time outsourcing evolved in Q1? It was increasing in North America and Europe. Is it still the case? And the last one on the facility management, it was up 3% organically last year and is now up close to 5%. What's the driver of that? Is it just volatility from one quarter to another or is it really something underlying? Thank you.

Thank you for your question, Julien. Inflation for staff, yeah, we are at 5%. Last year we were nearing 6%. So what we are experiencing is not very, very different from what we had. If I look by zone, there is a bit more staff inflation in the rest of the world, especially in regions like Latam and Brazil. We've had above average also staff inflation in the UK and I, and I think we are at 5% for North America. So that's the color I can give you. In terms of development, with regard to the 7% to 8% range, what we have in terms of retention and development at Q1 is in line with our target for the year and what we said was the range for the development of 7% to 8%. First time outsourcing, the pipeline is good, but it's difficult to give you a trend with just a Q1 of data. So there is always a little bit of volatility when you come in Q1. So I don't think the trends are significant right now. In terms of FM, yes, 4.7% is good. I will say I can't read something special in the trend compared to last year. We said we will continue growing in FM, and we are, but we said we will grow faster in food, and we are. So it's an indication of the focus on food and be selective of FM. This is what we want to illustrate, and I think the numbers for Q1 are illustrating it. Thank you very much. And last year, do not forget that last year we had the negative impact of the testing sensors as well.

Got it. Thank you.

The next question is from Vicky Stern with Barclays. Please go ahead.

Yeah, morning. Just firstly, coming back on inflation. So you obviously talked there about the inflation trends. Overall, though, just curious, Are they tracking broadly in line with what you'd expected when you set the margin framework back in October or in any case running sort of better or worse anywhere? Second one's on retention. I know you're not going to get into specific numbers for Q1, but just could you frame the sort of comfort level with at least retaining the 95.2% from last year and broadly, you know, when you might expect to reach that 96%. And then just finally coming back on that comment about Paris tourism, you mentioned that softness in November. Just curious what you've seen since November and generally your outlook there for that piece. Thanks.

Thank you, Vicky. Inflation, what we've experienced in Q1 is clearly in line with our expectation of 3% to 4% for the year. As we said, we were expecting to pass inflation because the indices are calculated 12 months in our errors, so we are still passing inflation, but in our modeling, it's It's really close to what we were expecting. It has come down from Q4 last year to Q1 this year, and it will come down progressively to be within the range of 3% to 4%. On the food cost, we've seen it go down, and we were expecting it. It happens... very close also to what we were expecting. And the labor, you know, the labor do not vary a lot from one quarter to the other. So I think having the labor on average at around 5% is also very close to what we had in mind. So from a margin impact point of view, I mean, it's aligned with our 30 to 40 bps margin improvement guidance. In terms of retention, yes, we are comfortable with, let's say, reproducing the 95.2% of last year. The beginning of the year has been good. So, I mean, there is no fear on that side. The 96%, yes, it's an ambition. It's never going to be soon enough for SOFI, but it will be there at some point. I can't comment further as to when it will happen. In Paris, November was not good. I mean, November, there was a lot of events around security, but there was also a lot of rain. It rained a lot in Paris in November. So November was not very good for tourists. While last year, Q1 was very strong. So tourists were strong until October, but it was a weak month in November. I haven't seen the numbers for December, but I will not expect December to be a lot better because the security threats are still there and the weather was even milder, was still very wet. So I'm not expecting an improvement soon. And now we are in the midst of winter.

Perfect. Thanks very much. Thank you.

The next question is from Gerald Castle with UBS. Please go ahead.

Great morning and happy New Year to everyone on the call. I'm just wondering, we've got this Plexi demerger CMD next week. Have there been any disruption, you think, to the on-site business as it's being demerged or any dis-synergies? If you can give any comments on that and Secondly, I mean, you've given a lot of commentary around, you know, development and retention, but is it possible to split out in your net new slash like for like in that 4% number to just give us an idea of what the split would be? And then just lastly, you know, Compass obviously talking a lot more about M&A to just wanted to get some of your views on how you see the pipeline for potential bolts on M&A as you move through the year. Thanks very much.

Thank you. Thank you, Jared. The Plexi team merger, in terms of disruption, it's been clearly a focus of the Sodexo corporate team for now quite a while. At HQ level, we've been very much focused on this, and it has taken quite a bit of our bandwidth. But from a business point of view and from an operational point of view, there was no disruption because the businesses were run very separately with different teams, with different back offices, even with different legal entities. So the disruption at operational level is negligible. Is there some dis-synergies? But I think we commented on the HQ dis-synergies, the fact that we started reducing the HQ gradually over 23 already and coming from 22 and that we want to reduce further the HQ cost. So from a Sodexo point of view, we did some work on the HQ cost and we need to do further work on the HQ cost. I think we are very clear on that. And there are some disenergies from the Plexi side because they were not a listed company before, and now they are a listed company, so they have additional costs. And I think we commented on those already at the year-end conference call. What I can tell you is that as far as the contribution is concerned, we are in line with the expectation of above 2% for the year. And it is included in the nearly 4% volume contribution. What we can tell you is that the like-for-like volume are not as strong as they were the prior because today now we have less, you know, the post-COVID ramp-up is over, so we have less of this and more of net new. But I will not comment further. M&A pipeline is a good question. Actually, Sophie has asked us to work a bit more on that. Again, this past year, we were very focused on the spin-off, so we didn't have much bandwidth to do that. But it will become an area of focus in the coming quarters. And I remind you that we guided for an envelope of around 300 million for M&A. Right now, we dispose of the home care, so we are under negative scope change, but it could be changing over the year at project pop-ups.

Okay. Thanks very much.

The next question is from Leo Carrington with CT. Please go ahead.

Good morning. Thank you. If I could also ask three, please. Firstly, I thought across the regions, DNA organic growth was noticeably strong. Is there still a like-to-like volume catch-up in this segment, or is this in fact the contribution of net new development? And then just a couple of follow-ups on previous questions, please. Firstly, on the food versus facilities management growth, is this gap magnified by the accounting change and the rugby, or is that immaterial? And then also on pricing, would the Q1 figure be significantly different or lower if you excluded education and corrections, or again, is the impact fairly similar across the various business lines?

Thank you.

In terms of growth and BNA, I think what I commented in my introduction speech was the fact that, for instance, in North America, we've had good attendance in convention centers, we've had good passenger counts in airlines, and we have more people in the office in the corporate services that we had before. So I think that's clearly like-for-like volume and obviously we had the advanced food model on which we invested quite significantly in the U.S. with all the branding and so forth. So I think the like-for-like in the U.S. is very strong. In the other regions, I would say it depends. I mean, it's more balanced between like for like and net new. Food versus FM. The rugby was quite a lot of food, so mostly food, actually. But the accounting change is in FM. You're quite right. which means that the FM growth, if we were to restate the FM growth, the FM growth will be more than 4.7%. In terms of pricing, education had a catch-up, and clearly education was above average. So I would say if you stripped out education, the pricing for the rest of the activities will be lower than what we are showing at circa 4.5%. Okay.

Thank you very much. Thank you. Once again, if you wish to ask a question, please press star and 1 on your telephone.

For any further questions, please press star and one on your telephone. The next question is from Joe Thomas with HSBC. Please go ahead.

Good morning, Mark. I would like to explore the angle of cross-sell a bit more, please, if you wouldn't mind. It was part of the plan that you laid out at the Capital Markets Day back in 2022. I'm just wondering what we take from these results as evidence of cross-sell. I'm thinking particularly the strength in facilities management, which you're sort of playing down, but I'm wondering if it's coming through there or if we should be looking somewhere else for that coming through. And then secondly, could you just give a brief update on where you are with Integra as well and how that's rolling out? Thanks.

I think to understand how we are performing in cross-sell, we have to tell you because it's difficult to read across all the numbers. So cross-sell is clearly your focus. It's not easy to give you a trend out of three months of training. I think cross-sell is better looked at at least half year or full year as an outcome. It's a clear focus of the team to work on cross-sell, and I don't think you can read in the 4.7% something for cross-sell. In terms of Antegra, Antegra is doing well. As you know, we had a plan to double in size from, I think, 21 to 25. We are clearly on track with that. We've done some M&A in Europe and we are busy integrating it. And integration is very key to consolidate the volume. I think the Antecra business is doing good.

Thanks a lot.

The next question is from Simona Sarli with Bank of America. Please go ahead.

Yes, good morning, everybody, and thanks for taking my questions. I just have a couple of them left. One is just a clarification on a senior in North America. You talk about the sites being lost. So how much of that is related to bankruptcies versus lost contracts that potentially were up for rebidding? And also during the fiscal year 2023 period, results presentation, you talked about net new development contribution accelerating throughout the year. So what has changed since then? Second question is related to Europe education and the fact that you talk about negative net new business. What has been driving that and how should we expect that to evolve through the year? Thank you.

Thank you. Yeah, clarification on seniors in the U.S. Clearly, last year, we lost business. And even though retention in North America was good, we lost more in proportion in seniors than we lost in other segments. So that's weighing on the health care growth. If I were to strip out the senior growth, out of Q1, the health care standalone growth will be very healthy. So I think seniors, we had a loss of contract last year, and we have also some issues with clients not paying us where we had to stop. But I would say the bulk of it comes from the loss from last year, and then the balance from clients having issues with their financial strength. The 2023 new dev, I'm not sure I understood the question on net new development. We're not commenting the net new in Q1 because it's very volatile. But what I said, this is what we are observing for the net new in Q1 is clearly in line with our expectation of a net new above 2% for fiscal year 24. It's all good there. Europe education. Why did we lose business in Europe education? Simply because some of the contracts turned out to be loss-making because of indexation being weak. We could not increase the prices, and we were incurring costs on the food costs and labor, and then profitable contracts turned into loss-making contracts. So we terminated quite a few. The fact is that in Europe, the education growth, I think, is 6.3%. There is inflation. Clearly, I mean, the like-for-like volume in education is not positive, but at least it's good, it's better for our margins, and this is what we had planned to do. So I think the action plan in education in Europe is in line with our expectations.

Thank you. But just a follow-up, for Europe education, So I understand why volume growth was not good, but I was wondering also why you talk about net new business being negative.

Because some of the public contracts we had with some local authorities had to be closed because we could not increase the price. They were not allowing us to increase the pricing as we wanted and as we needed, actually. and we had to terminate those contracts. And we were not keen on signing new contracts until the pricing was sorted out. So we were not signing a lot, and we terminated the contract. We could not renegotiate. That's why the net new is negative.

Thank you.

The last question is from Estelle Wengrod with JP Morgan. Please go ahead.

Good morning. I just have one question related to the meal voucher in France. I know it's on the focus today, but any update on the ongoing regulatory review there, and what would you expect to happen on that front, also timing-wise?

Well, not much happened during the holidays, but the CMD of Pluxy is only five days away, so I will... I will park that question, and I suggest you ask Aurélien next week.

OK, thanks. So Tim, there are no more questions registered at this time.

OK, thank you, Mark.

Thanks for all your questions. Don't hesitate to get back to the IR team if you have any further ones. I just wanted to point out that the H1 results announcement has changed to April the 19th. The release will come out as usual at 7 a.m. and the call will be a bit later than usual, probably around 10.30, but we'll get back to you on that. The reason for this change in date is that we should be consolidating Plexi's first five months net income in our results. So we'll both publish on the 19th of April. giving them a bit more time to do their first solo consolidation. Finally, don't forget Plexus Capital Markets. It's on Wednesday. I hope you've all signed up for it if you're coming physically. Please confirm by email if you haven't already done so to Pauline, Jero, or myself to make sure that you're on the list. Thank you very much, and I wish you all an excellent weekend.