Sodexo S/Adr

Good morning, everyone. Welcome to our first half fiscal 2024 results poll. On the call today, we have Sophie Belland, Chairwoman and CEO, and Marc Rolland, CFO. As usual, we'll start with a presentation and then open up the call for your questions. If you haven't already downloaded them, the slides and press releases 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 reproduced or transmitted without our consent. Don't hesitate to get back to the IR team if you have any further questions after the call. Please note that the Q3 revenues will be on the 2nd of July, and I now turn the call over to Sophie.

Thanks, Virginia. Good morning, everyone, and thanks for being with us today. I know that for many of you it is a busy morning with both Plexi and Sodexo. We shall go back to a more normal date for Sodexo's H1 announcement next year. So this has been a busy first half for us at Sodexo. And I'm really proud of the fact that the spin-off and listing of Plexi was effective on February 1st. It has been hard work for the teams, but we have managed to pull it off in record time with no interruption to the underlying businesses and a successful stock market trajectory so far. Sodexo has now become a pure player in food and facility management, and we're excited by the profitable growth opportunities that exist in a market over 600 billion euros. In the meantime, we've had a solid H1 performance on track for our guidance, and we have made steady progress on net new wins with record retention. We have also executed at pace on our strategic development. With a strong increase in branded food volumes, Modern Recipe is now deployed in 12 countries, 400 sites, and organic sales growth is 22% year-on-year. We're also progressing on client adoption of low-carbon meals, and I shall show you a client testimony in a couple of minutes. And finally, we have disposed of the home care activities, freeing up cash and allowing us to refocus our energy on transforming our core food business. Organic growth revenue for the first half was 8.5%, accelerating in Q2 to 8.9%, helped by the leap year boosting volume across the board, but especially in education and Sodexo Live, combining a large number of events, much more travelers in the airport lounges, and strong new business. The strength of the growth in food services at plus 10.7% is across all zones, And FM organic growth has remained solid to a 4.5% or 5.4%, excluding the accounting change, and very similar in all regions. The underlying operating margin was up 40 basis points at 5.1%, a good sign for our fiscal year 24 guidance, even though the inflation sweet spot benefit is short-lived. The last 12 months, client retention hit a new record at 95.5%, up 30 basis points relative to year-end 2023. And as a result, the last 12 months net new is up 20 basis points. Before I start on the detail, I wanted to highlight that we have changed the KPI to last 12 months numbers, and you will find the six months numbers in the appendix if you want to check them. As I already said in the previous slide, client retention is on a good trend at 95.5%. Last 12 months development on the other end is below the range of 7% to 8%, and this is due to phasing. we are confident that we will be in the range for the year, and we are totally focused on our targeting and also on signing better margins than before. Despite this fading issue, we are making steady progress in net new signing, which are at 2.4 on last 12 month basis. To illustrate this commercial dynamic, let me highlight a few contracts which are symbolic for us. Sodexo Live, has just won a significant multi-year contract for 23 American airline lounges in North America. It includes key locations of Charlotte, Miami, Philadelphia, and New York, where circa 500 Sodexo Magic employees will provide complimentary snack, premium food, and beverage to guests each day. This contract is effective since January, with progressive operational transitions since then. Over the past few years, we have developed a solid expertise in airline lounges and a strong airline client portfolio. We have strengthened our European partnership with Clariane by retaining the procurement and advisory food service in France and Spain and with a new contract in Belgium, where Clariane is outsourcing for the first time. The contract covers 550 sites in total. We are proud of the trusting relationship built over the years and the successful collaboration between our companies to enhance food offers to consumers and provide technical assistance to our clients. In this contract, we shall be creating a culinary identity in each country, training staff to deploy hospitality-level standards, and providing digital solutions to enhance services. We shall also be providing Clariane with help in reaching its CSR objective by deploying Westwatch, measuring the menu carbon footprint, promoting low-carbon recipes, implementing initiatives around responsible and inclusive procurement, and developing a health and safety culture. We have also renewed and extended our now integrated food and FM services contract with the Heineken Company in Brazil. We are their single food supplier in Brazil with the Sabor Brazil brand implemented for all of their administrative, factory, and distribution centers. By integrating a large suite of services, We will standardize their site operation and optimize costs across their properties and support them in achieving their CSR targets. For instance, the eco-efficient performance of the Cocina Intelligente, the smart kitchen, will reduce organic waste by 30%, oil use by 60%, and electricity by 32%. On slide 8, you can see how we have accompanied the New York City hospitals in their move towards low-carbon meals. We have been working with them for the last 15 years. In 2019, they started with Meatless Mondays. And then, in 2022, plant-based dishes were provided as the primary and default dishes to all patients. Last month, I was in New York to celebrate the 1.2 million plant-based meals served for our clients. And look at what Kate McKenzie from the New York City office said. We are proud of New York Health and Hospitals for taking on the challenge of creatively developing delicious and culturally relevant plant-forward dishes. Their uptake is proof of their popularity. So we have even published a recipe book to extend good practices outside the hospital. And with a 90% patient satisfaction for food service, a 90% patient acceptance, and a 36% carbon reduction year-on-year, this contract has become a showcase for New York City and also for Sodexo. I would also like to say that our actions on the ground are also recognized by some very prestigious organizations. For the first time, we are one of the world's most ethical companies as per Ethics Fair. There are no other food service companies out of the 125 recognized companies, and we have also reintegrated the CDP Climate A-list, again, the only one in our sector. I'm sincerely very proud of this recognition because we work hard to improve our practices on a permanent basis. It is part of our DNA, and through the discussion I have with our clients, I know that they are taking these subjects more and more seriously and are choosing their suppliers for their values and their capacity to help them achieve their CSR targets. And now, pass you on to Marc for the details of our first half numbers. Marc?

Thank you, Sophie, and good morning, everyone. Before I start, don't forget to look at the appendices. You have the detail of the alternative performance measure definition along with the modeling slide. Let's now have a look at the P&L performance for first half fiscal 24 without Plexi. You will find the Plexi contribution in the appendices and the management report. We have given you all the major details in our Q1 announcement. For those of you who still follow Plexi, I'm sure you have a full grasp of their H1. So in H1, as Sophie has shown, we've made solid progress. Revenues were up 4.5% or 7.8% at constant currencies. The underlying operating profit was up 12.3%, and nearly 17% at constant currencies, resulting in a margin of 5.1% up 40 bps. Thanks to the gain on the sale of the home care activities as of October 23, other operating income and expenses were positive at 30 million euros. I'll come back to this on the next slide. Net financial expenses were 46 million euros up 3 million euros. Gross interest on the bonds was more or less stable Higher dollar floating rates were offset by the reimbursement of two bonds. And just as a reminder, the first one was in November 23 for 300 million, and it was due in 2025, but this was the only bond that refused a spin-off related consent process. The second for 500 million euros was at maturity in January 24. I remind you that these two bonds were at very low interest rates. The first half fiscal 24 effective tax rate was very low at 16.6% due to the capital gain on the sale of the home care activity, compared to 26.2% last year. As a result of all these items, group net income from continuing activities increased by 46.3% to 496 million euros. Adjusted for other operating income and expense after tax, the H1 underlying net profit from continuing activities amounted to €427 million, up 15.4% or plus 21% at constant currency. As I have just said, other operating income and expenses were a net positive of €30 million, including €83 million of net gains from disposal. This was offset slightly by some limited restructuring costs of €15 million and, as usual, the amortization of purchased intangible assets for €17 million. This plus €30 million compares to minus €36 million last year. Please note that we are expecting about €40 million of negative OIE for the full year, including the last of the spin-off costs and a bit more above-side restructuring. Before I turn to the cash flow, I wanted to highlight a few changes that we have made to some of our metrics to bring them more in line with those used by our peers and which we hope will simplify your reading of our accounts. You have already seen with Sophie that we have moved to a last 12 months retention and development. This will help the understanding of the KPI trends. You have also probably seen that by geographic zone, we have split our sports and leisure from BNA. I hope this extra disclosure will also help you to better understand the revenue dynamics. And now, a more technical change. Under IFRS 15, the amortization of client investment is deducted from the revenue. Therefore, it had always impacted negatively the operating cash flow, despite being a non-cash item, and was then corrected through a reduction of capex to balance the free cash flow. From H1 onwards, we treat this as a non-cash item within the operating cash flow, which therefore goes up. As a result, our operating cash flow and our underlying EBITDA are up. The next CAPEX is adjusted up to... We now have alignment of our net CAPEX and our CAPEX guidance, and we believe we are now aligned with our two main competitors. So with all of that in this table, the first column shows you the previous definition. In the second column, you will find the amortization adjustments, and then in the third column, the new definition, which gives us a capex to cells of 2% versus 1.4% previously, an underlying EBITDA margin of 6.7% versus 6.1%, and a net debt to underlying EBITDA of 2.3 turns versus 2.6%. And just to be sure, the new net capex includes normal capex plus new client investment, net of asset disposal. In the last two columns, we've also added the IFRS 16 adjustment. This is for information only. I still do not believe that this adjustment reflects the fair situation for the group. This will improve the EBITDA margin to 7.5%, but also increase the net debt to EBITDA to 2.5 turns. Now let's take a look at the cash flow. This is the free cash flow excluding Plexi. Operating cash flow was 739 million euros. The limited improvement despite the increase in operating profit was linked to the unfavorable variation of income tax paid following significant positive one-offs last year. The seasonal outflow in working capital was reduced by more than 100 million to 513 million euros during first half fiscal 24. Net capital expenditure was stable at 246 million euros, corresponding to 2% of revenue. The capex-to-sales ratio is expected to be higher in the second half due to the timing of investments. We are maintaining our expectation for a net capex-to-sales of 2.5% in fiscal 25. As a result, first half fiscal 24, free cash outflow was minus 102 million euros and better than last year. Acquisition net of disposal were positive at 100 million euros thanks to the disposal of the home care business and despite several small acquisitions in North America inconvenience. On the other hand, the dividend was increased by 100 million euros compared to the previous year. As a result of this, Consolidated net debt increased by only 434 million during the first half to reach 3.4 billion euros at February 29, as we shall see on the next slide. Now on the balance sheet, here you can see that the assets and liabilities held for sale have gone. We are now a pure player. Our balance sheet is smaller. The intercompany loans have disappeared, and we have not replaced the bonds that we reimbursed. As a result, gross borrowings are now down to 4.8 billion euros from 5.6 at year-end and in February last year. Given the higher level of interest rates going forward, we intend to manage our balance sheet more frugally in terms of gross debt and cash balances. Net debt is up against last August as it always is, but down substantially since February last year. So gearing is down to 75.9% from almost 100% last year. The net debt to EBITDA ratio was contained to 2.3 turns, only 0.1 turn more than a year at your hand. Also helped by the improvement in the underlying EBITDA. Let's now turn to the review of operations. On slide 17, you'll find the breakdown of organic growth. First half fiscal 24 revenues were 12.1 billion euros, up 4.5%. Currency impact was minus 3.3%, linked to the significant year-on-year movement of the euro last year in Q1, which led to a very substantial minus 5% in Q1. Since then, the comparison is less negative. If rates remain where they are now, we expect the annual impact to be around minus 2%. The scope effect reduced revenues by 0.7%. This is due to the disposal of the home care business from October. Depending upon the level of acquisition close in the second half, we will probably be running at about minus 1% for the full year. As a result, organic growth was a solid 8.5%. I shall come back to the detailed geographic performance in the next slide. North America achieved double-digit growth. Europe was up 8%, helped a bit by the Rugby World Cup, and the rest of the world was up 5.7% or plus 8.4%, excluding the accounting change, which will be reversed anyway in Q4. Food services continued to perform well, up 10.7%. FM services activity continued to grow, but more modestly, up 4.5%. We are definitely in a more favorable operating environment from an inflationary point of view. Food inflation continues to average out at low to middle single digits with a continued downward trend in Europe. Labor inflation remains stable at around 5%. Pricing was close to 4.5% for the first half. It is decreasing in line with the softening of food inflation. we now expect pricing to be close to 4% for the year, at the top hand of our previous expectation of 3% to 4%. And while this level of inflation is much more comfortable, the supply management teams are monitoring trends very carefully because in certain countries where the fall had been most significant, we are seeing inflation moving back up. Now let's turn to the detail by geography. North America revenues reached 5.8 billion, up 10% organically, driven by new business, some volume growth, and pricing of just under plus 4%. Organic growth in business and administration, now incorporating corporate services, government, and energy and resources, but excluding Sodexo Live, reached 13.2%, driven by the contribution of new business, strong growth in food from the continuing return to office, project works, and strong retail sales growth. Antigua revenue growth was also accretive. The organic growth of Sodexo Live was plus 23.3%, driven by robust activity in all venues, and in particular, strong per capita spend in sports stadiums. Airport lounge also benefited from increased passenger count, added scope on existing contracts, and mobilization of new business. In education, organic revenue growth was plus 7%, benefiting from price and volume increases with meal counts, retail sales, catering events all up strongly. Healthcare and seniors, restated organic growth was 6.3%, with good performance in hospitals through a combination of price increases, volume, retail growth, and favorable net new business. somewhat offset by senior site closure at the end of the prior fiscal year. In Europe, revenue reached €4.2 billion and organic growth was 8%. It was boosted by the Rugby World Cup by 0.8%, as well as increased food volumes and pricing of around 5%. Business and administration, excluding sports and leisure, organic growth was 6.3%, helped by both price increases and higher office attendance, coupled with new business in government in the United Kingdom. Organic growth in Sodexolai was very strong at 25.4% boosted by the Rugby World Cup in Q1. It was still 12.5% excluding the rugby. This was driven by improved attendance and pricing, particularly in the UK in stadiums, strong performance in our restaurants in the Eiffel Tower, and other cultural destinations, as well as recovery in air pump launches, which were only just starting to pick up in early fiscal 23 post-pandemic. Education was up 7.3% organically, reflecting price revision, particularly in France, and a favorable working-day impact. Healthcare and seniors' organic growth was 7.8%, driven by new business in Spain and inflation pass-through in the United Kingdom, as well as favorable volume and price revision in seniors in France. Rest of the world revenues were 2.1 billion euros in H1, up 5.7% organically. As a reminder, this was impacted negatively by the change in revenue recognition of project works in energy and resources. We have already discussed this in the last two quarters. We took the full impact in Q4 last year, so this year you have the negative impact each quarter for the first three quarters, which will then be reversed in Q4. So it is much better to look at the underlying trend, which was plus 8.4%, including a pricing impact of around 4.5%. The organic growth of business and administration with the sports and leisure activities stripped out was 5.1% or 8.3%, excluding the accounting change. We are benefiting from very strong growth in food in India, driven by both new and existing business, and in Australia from a pricing catch-up and new opening in mining. Brazil and Latin America are still growing high single-digit, although with a slight deceleration in the second quarter due to a lower pricing impact and slower demand. This performance was slightly offset by a much more modest improvement in China, impacted by client restructuring and side closures last year, and in the Middle East due to contracts lost last year. So Dixo Live revenue tripled off a very low base. This is principally an airport lounges business, and the performance is linked to the COVID restriction in airlines only being lifted from January 23, as well as the opening of new lounges in Hong Kong. Education is only 2% of rest of the world's sales. It was up 10.5%, fueled by strong growth in China coming off a low base last year due to school closures. and sustained growth in Brazil and India, boosted by both new business and existing site growth. Healthcare and seniors organic growth was 1.4% organically, with regular strong growth in India, a significant pickup in growth in Latin America, offset by slow growth in China, and the impact of the exit of low-performing contracts in Brazil during the second quarter last year. There was a solid increase in the UOP in each zone and a 10% reduction in HQ cost. The margin improvement is 30 bps in each zone, even though rounding helped in North America and for the group as a whole, which was really only up 35 bps at current rates, right in the middle of the 30 to 40 bps range expected for the full year. H1 did benefit from the inflation sweetpot with pricing catching up and inflation coming off. However, mitigation measures are also being reversed in many client sites. Of course, structuring ongoing actions are also contributing with on-site productivity and in particular in supply management, higher retention and better margins in signing, strict above-site cost management and not just at HQ level, and at the same time, we are continuing to invest in sales, marketing, IT, and data to support our future growth. Thanks for listening. As you all know, this is my last presentation. Sébastien and I have been working very closely together over the last four months. I assure you that you will be in good hands. And now, Sophie, back to you.