Sodexo S/Adr

Good morning, thank you for standing by and welcome to the Sodexo's Q3 fiscal 2025 revenues presentation. After the presentation, there will be an opportunity to ask questions by pressing star and one at any time. I advise you that the conference is being recorded today on July 1st, 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 Revenue Score. On the call today is CFO Sébastien Depremadur to take us through the presentation. After Sébastien's remark, we will open the line to take your questions. We ask you to please limit yourselves to two questions and one 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 expectations. Back in April, when we presented our first health 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 worn in H1, while experiencing a softer selling season in education in North America. Now let's begin with the headline figures on slide three. Group revenues for the third quarter reached 6.1 billion euros, up 0.8% reported. Currency effects remain negative at minus 2.1%, largely due to the depreciation of the US 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 nine months of the year stand 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 continue to weigh on growth, mainly the initial global facility management contract lost last year, and to a lesser extent, some losses in education. Business and administration is benefiting from the ramp-up of new business, even if this is partially upset by the impact from contract exits linked to prior period buses. So DexterLine continues to perform well, with growth supported by higher passenger volumes in airline lunges. Education shows a slight improvement held by favorable calendar days and extra campus activity but it's still affected by past contracts. Healthcare and Seniors is solid in healthcare in the US, 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 back of prior period exits. That said, our recent sales and retention season in universities was below our expectation. A few large client decisions went against us, which will have an impact on Q4 and on our organic growth trajectory into fiscal year 26. We have taken an outlook at what happened. It comes down mainly to two things, market dynamics, including some competitive pressure on this, and turnover, within client organizations and 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 as a university 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 S-care and senior across the board, and solid activity in SudXRI, which benefited from strong volume in the UK airport lounges and stadiums, as well as the robust tourism activities in France. In business and 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 exits. Education remained slightly positive overall, thanks to pricing, but continued to reflect the impact of low-performing contract exits from prior years. So while the external environment remained mixed, we are seeing encouraging signs in several segments, and remains focused on execution and commercial delivery. We have successfully renewed several contracts in France and in the UK, and our mobilization of our mid-size contract opening in April is progressing well. The rest of the world continues 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 light with excellent plan feedback regarding service quality, professionalism, and execution under challenging conditions. So, altogether, a solid culture for the 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 two months to go and given the improved visibility on recent business trends in retention dynamics in the U.S. and earlier, our current expectation is to land at the lower end of the range for both organic growth and margins. And please keep in mind that fiscal 25 includes a base effect of around 50 basis points from the non-recurring 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 160 million euros. 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.

Thank you, sir. 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 touchstone telephone. To remove your question, press star and two. In the interest of time, we remind you to please limit yourself to two questions per caller. The first question is from Julien Richer of Kepler.

Yes, good morning, everyone. 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 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-to-business and like-for-like for next year, please. Thank you.

So, thank you for your question. So, first, regarding Q4 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're 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 expectation 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 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 in line with what you had in mind, or is it maybe softer than what you initially expected?

No. As a roundup of the major, I would say, major contract we opened in QC, it's really in line with the expectation. We are talking about the justice contract in France, SNF in the UK, and as you said, Santos in Australia, and this will have an impact in the Q4 organic growth. expected to really contribute in fiscal year 25. It will be really in fiscal year 26, even if we sign two contracts within the CAPTCS member. But again, the ramp-up and the contribution in terms of organic growth will be progressive in fiscal year 26.

Thank you very much.

The next question is from Jamie Rollo of Morgan Stanley.

Thanks. Morning, everyone. My first question is just, are you seeing in North America any weakness in underlying volumes in either business and administrations or sports and more uncertain economic and political environments in the US? 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, Ginny. So to your first question, when we look at our number in front of me, we don't see any weakness in underlying volume at this stage now. and either in BNI or in SodexoLine. And regarding your second question on margin, so our ambition is clearly to improve margins, but over time. We know our key levers to improve margin, and it's with procurement, supply, better labor management. And we continue to find both operation and our back office function. So this we continue to deliver in the coming years. And at the same time, we know that also we need to invest in business. We would have to invest in sales, especially in North America, to invest in our brands. in our tech data and digital initiative. And this will be needed to obviously accelerate our organic growth. So it's really a balance of leveraging our creative middle-of-the-page and back-office functions to improve profitability and invest at the same time in key capabilities. And we share a more detailed view of our margin trajectory in October with the full year results.

Thanks. And just for clarity, that October results outlook, is that just going to be a one-year guidance, or will you be giving a multi-year target framework again?

We'll focus on the Schedule 26 guidance at the end of October, and we'll give some color as well on the mid-term guidance. Thank you very much.

The next question comes from Pravin Gondahil of Barclays.

Hi, morning. Thanks for taking my questions. Firstly, can you give a bit more color on 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 changed since standing in Q3? And is there any lumpiness over the next few months in terms of contract renewals? Thank you.

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 We have a very strong pipeline, so overall we are very happy with our level of development. Thank you. And you just repeat your third question.

Your last question, sorry. 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 result in education in North America, but we are not expecting any major rebates and renewals by the end of the year.

Thank you. Thank you very much.

The next question is from Ivar Bilsalk Kelly of UBS.

Thank you very much for taking the questions. Can you please give us a breakdown of the growth between food services and facilities management? At 2K, 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 lost 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 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? Thank you.

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 remains 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 is... It's a 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%.

Thank you. To follow up on the first question, specifically around project work, because I understand that that was one of the key drivers why FN 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. Fans remain quite cautious on their budget.

Thank you.

The next question is from Simon Lushiplay of Jefferies.

Yes, good morning. So two 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, 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 reinvestment 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 from PERP and reinvestment and so on? Thank you.

Okay, so first question on retention. So on retention, there is two elements to keep in mind. First, as I mentioned earlier, the recent education losses exist. that will wait 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 effects will have obviously an impact on the retention rate for the year. So with current visibility and again, better visibility, especially in North America, our expectation now is to be a little below 95% including the FM loss or above 94% sorry, 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, I think that for fiscal year 26, I already answered the question. And then for fiscal year 25, as I said, we expect to be at the lower range of our guidance between 10 and 20 basis funds.

Okay, thank you.

The next question is from Estelle Weingraud of J.P. Morgan. Hi, good morning.

Three questions on my side. The first one, what changed between March when you downgraded the guidance and today? Second one, North America, what is your organic growth run rate within education, excluding the impact of favorable calendar and additional campus events? When will you start lapping contractors? Is there And the last one, very quick one, what's driving the higher other income and expense increase today? Thanks.

Okay. So to your first question, when we talk to you in April about the new guidance for the year, we believe that We took at what we have in terms of assumption. We believe that it was a reasonable assumption, again, based on the pipeline, based on the client feedback and the momentum we were seeing at that time. And now our visibility is better. Our visibility is stronger. We are already embedding more discipline in planning when we look at our forecasts. And we'll do that obviously also when we'll come to plan our Fiscal Year 26 outlook. So this is really the main differences between March and today. We just have better visibility on the sales activity and on our underlying assumptions. Then on your second question on North America, run rate excluding a calendar and an event. So it's true that Q3 is held by favorable calendar impact and some specific event, but if you exclude that, organic growth is negative because we are still absorbing negative impact from the net new from prior losses. And I'm talking obviously about North America organic growth for education. And on the higher OIE, well, there is more program in terms of transformation and in terms of restructuring across the countries and regions.

Okay, thank you. The next question is from Jafar Mestari of BNP Paribas.

Hi, good morning. I have two questions, please. Firstly, on the U.S. education selling season, you mentioned that you had a number of new losses in U.S. education since March. It's very unusual for the U.S. education selling season to come this early in the year while universities are effectively still open. Do you think it's now over? It was all much earlier than usual this year for some reason? Or did we just have a handful of early RFPs? And as we move into July and August, we still have, as every year, a large number of universities that are still to award their contracts for the next full semester. And then on the margins, if I calculate what the... updated guidance means for H2, it means flat margins up a couple of basis points in H2. You had some planned ramp-up from cost efficiencies, the shared services centers, etc. So is there a very rough bridge to explain that? Is the underlying trend slightly negative, but then you have efficiencies? Or is the underlying trend flattish and then the efficiencies are taking a bit more time or are reinvested.

So thank you, I think, Jafar, for your question. So to your first question, I would not say that it's unusual. I mean, yeah, we had some RFE. We got the answer very recently. And again, as I said, we are not expecting now in any measure decision in our case when we look at our portfolio for the remaining weeks until the end of the fiscal year. And then regarding margin, so again, different driver to explain the evolution of our margin for the second half of the year. We are expecting a slight improvement in terms of margin for the second half of fiscal year. versus last year, and there is a combination of different effects. So, yeah, we are working on efficiency, and I mentioned last time that our global business services program, so we get efficiency and margin improvement with this overall program. And then there is some reimbursement as well, and then there is a mobilization cost, because when you look at the opening, end of Q3, Q4, really at the beginning of the ramp-up of the contract, this trigger obviously some opening costs that have an impact in our margin.

Thank you.

The next question comes from Neil Tyler of Rothschild and Company.

Good morning. Good morning. Thank you. Just two left from me, please. Similarly, on the education business in North America, do the current selling season experiences reflect probably a negative net use?

Excuse me, Mr. Tyler. I'm sorry, sir. We can't hear you very well. Could you speak closer to the microphone?

Apologies. Apologies. Is that better? Can you hear me better now?

Yes, sir. Yes, it is better.

Yeah. Yeah, thanks. Yeah, sorry. So back to the selling season in education in North America. Does this limit your optimism that you can deliver positive net new for North America education in FY26? Is that more likely to be a sort of neutral to negative net new in that business? And then second question on healthcare in North America. The The slower ramp up, are you still confident this is a sort of slower progression to the same point? Or do you think it might reflect a lower absolute level of revenue opportunity at those sites? Thank you.

Okay, so to your first question regarding the schedule 26, I would say organic growth trend for education in the U.S. Again, we'll have different drivers. So we'll have, yes, we'll have the impact of the new contribution in fiscal year 26 coming from the seeding season from 19, coming from the seeding season in 2025. And, yes, based on what I said, it will not be positive. Then we'll have also the impact of pricing, and we'll have the impact of volume as being overall the organic growth education in North America. And then regarding your question on healthcare, we are happy with our performance in healthcare in the U.S. overall, and we have a very strong momentum in terms of retention and sales. There is a negative impact mainly coming from the losses, prior losses in senior segment and in Canada. But overall, the underlying trend for healthcare in the U.S. are really positive.

Okay, thank you. That's helpful.

The next question is from Sabrina Blanc of Bernstein.

Yes. Good morning, everybody. I have two questions for my part. The first one is regarding the potential impact of currency on the full year basis. It looks like that you have a negative impact in Q3, which looks like to deteriorate at the end of the year. So can we assume, let's say, minus 1.3% currency impact plus a negative 0.3% scope impact for the full year? And my second question is regarding the development of GPUs in Europe. You have mentioned an acquisition in France, but can we have more color globally in Europe and specifically in France?

Okay. So thank you, Savannah, for your question. So on the first one, yeah, we are estimating at this stage a negative impact around minus 1.5% for the full year coming from the currencies. And then to your second question on the GPO in Europe, so clearly the development of the GPO Integra in Europe is really part of our strategy. We really want to accelerate the growth of our GPU activity in Europe. So the acquisition of Agapo, we mentioned recently, is really fitting within this strategy. We are now in around 10 countries. We are growing and developing pretty well. And we have a pipeline of small and mid-sized acquisition in Integra also for for the coming period as well.

Thank you. And just for coming back on the question on change and on the scope effect, shall we assume 0.3 or something like that? Yeah, we maintain around.

Yeah, the scope impact will be around minus 0.5%, slightly below 0.5%.

Thank you very much. The next question is from Andre Joulard of Deutsche Bank.

Good morning. Two follow-up questions, if I may. First one about reinvestment that you mentioned. Could you give us some more color about the split between CAPEX and OPEX? second one about the labor in north america do you see any tension uh regarding the actual environment and the politic of the actual government and what is your forecast for the next few months in term of wages and if you see some tension and volume thank you okay so uh

When I think earlier about investment, I was mainly talking about OPEX investment at this stage, and we need investment again in sales, in marketing to support our brand, and in the transformation. Then in terms of CAPEX, the objective should be around 2.5%, and this will help also the transformation in terms of IS&T, and it will help also to strengthen development and retention. And on labor, well, the labor situation in North America is always, I would say, a challenge. There is some pressure on the labor markets that's new. And since the change, the recent change in the politics, again, there is some pressure, But we can manage that. At this stage, it's not creating really operational challenges, and we are closely monitoring the situation.

Okay, thank you.

As a reminder, please press star and 1 on your telephone for questions. Okay. Management, there are no more questions registered at this time. Excuse me, we do have a follow-up from Simon Luchiple of Jefferies.

Yes, a very quick follow-up on margin and the FX impact. Do you expect any negative FX impact on margin, given the mixed effect and the recent move of the U.S. dollar, or it should be more or less neutral?

It's very minor. Okay, thank you. One big response. Okay.

So thank you all for being with us this morning and looking forward to talking with all of you for the year-end result on the 23rd of October. Thank you and have a good day.

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