Compass Group PLC (OTCPK:CMPGF) Q3 2024 Sales Call July 23, 2024 4:00 AM ET
Company Participants
Dominic Blakemore - Chief Executive Officer
Petros Parras - Chief Financial Officer
Conference Call Participants
Jamie Rollo - Morgan Stanley
Vicki Stern - Barclays
Ivar Billfalk-Kelly - UBS
Kean Marden - Jefferies
Neil Tyler - Redburn Atlantic
Jaafar Mestari - BNP Paribas
Joe Thomas - HSBC
Operator
Good morning and welcome to Compass Group Q3 Trading Update. Hosting today’s call will be Dominic Blakemore, Group Chief Executive Officer. [Operator Instructions] This call is being recorded. I will now turn the call over to Dominic Blakemore. Please go ahead. Thank you.
Dominic Blakemore
Thank you very much. Good morning, everyone. As usual, I am here with Petros, our CFO. We have had another strong quarter, with all regions performing well. We are particularly pleased with the acceleration in net new business, which is now in the middle of our range, with improvements in retention to about 96%. We are 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 have 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.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] We will now take our first question from Jamie Rollo of Morgan Stanley. Your line is open. Please go ahead.0
Jamie Rollo
Thank you. Good morning, everyone. Three questions, please. First, as you know 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 is a pretty high drop-through margin benefit on those, but it doesn’t look like you are changing your implied margin guidance. Is that just natural conservatism or is that the offset from accelerating net new business in the second half? And finally, it might be a little bit early, but I don’t 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.
Dominic Blakemore
Thanks, Jamie and good morning. I’ll take the first and third and then Petros can pick up on your question around drop-through on margin. First of all, no one-offs in the EMEA number, it’s a clean read. In terms of the strength in volume growth, obviously, we expect and have seen some moderation as we’ve lapped strong comparatives in the prior year. But we are pleased to see volume growth is holding up around sort of 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 a further slight acceleration in Q4, which means we have got good momentum going into next year. As you know, we can probably see about 6 months out, so that’s positive for the first half of the year. In terms of ARO new business, we have $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 have seen there is above 95% in – above 96% in the other two regions. So we are in 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 full year basis for next year.
Just taking that a little further in terms of what that means for growth in ‘25. As you know, pricing will moderate if 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 are 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 would expect to be in the middle of that range for next year on the basis of the various different inputs of net new price and like-for-like volumes as we see them today. Petros, do you want to take that one?
Petros Parras
Yes. Good 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 guide on half one. As you rightly said, net new accelerated in the second half. So we are expecting to continue to make progress in the second half of March and half of the rate of the first half we had for the year.
Jamie Rollo
Okay. Thank you very much indeed.
Operator
Thank you. And we’ll now take our next question from Vicki Stern of Barclays. Your line is open. Please go ahead.
Vicki Stern
Yes, hi, morning. Just firstly, I wanted to come back on some of those comments of Dominic on the like-for-likes for next year. So just on price, obviously, I guess, price for you within like-for-like has the sort of time lag effect of what we are actually seeing on inflation. I think one of your competitors is signaling something like 3% price growth expected next year. Clearly, you are 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 are seeing at the moment. Second one on retention, you talked about now being back above 96%. I guess, really, just your confidence level now in being able to sustain that above 96% level as we go forward from here. And then the last one just on the balance sheet, sort of 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 is still a share buyback program underway for the remainder of this year. But how should we think about the next allocation of capital? Thanks.
Dominic Blakemore
Thanks, Vicki and good morning. Obviously, we are talking about inflation and price trend into the next 15 months when we are giving guidance for next year. So it’s still a little early for us to be doing that. But we have seen pricing come up sequentially through the course of this year to, as you rightly said, the 4% level that we are seeing in quarter three from around 5% in the first half. If you look at the inflation trends we are looking at, at the moment, sort of globally branded 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. But I think, at this point, if we were thinking of sort of 2% to 3% on a full year basis, I think that we feel sensible planning assumption for everything we see today and most likely sort of elevated in first half and seeing again in the second half. But we’ll update you on that as we go. And then we would expect to see positive volumes. You may see, again, a little bit of a sort of sequential coming off as we lap 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 about the 96% level. We are super focused on retention, really pleased to be back where we were. We know the pipeline of business that’s out for rebid. We’ve just shared amongst that our leadership and the super initiatives we’re doing. You’re very familiar with the strategic alliance group approach to the key accounts, but we’re also now working much harder on the tailored 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 margin and provides us marginal gains as we go forward. But actually, sustaining the retention above 96% is our ambition, and I believe that we can achieve.
Petros Parras
Good morning, Vicki, I think on balance sheet, as you rightly said, we will continue to execute the share buyback 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 will provide some update in the full year results on what is going to be the plan for next year, vis-a-vis M&A and share buybacks.
Vicki Stern
Great. Thanks very much.
Operator
Thank you. And we will now move on to our next question from Ivar Billfalk-Kelly of UBS. Your line is open. Please go ahead.
Ivar Billfalk-Kelly
Yes. Good morning, everyone. I want to touch on volume again, and you mentioned specifically the value gap versus high street as being a driver of that, and presume there’s an element of macro linked into that. And in the future, if we actually see the macro environment improving from where we are at the moment, 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 disposals 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.
Dominic Blakemore
Thank you for those. Taking the question on the U.S. first, 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 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, 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 were 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 pleases us.
Petros Parras
I think on your second point on disposals, just to remind us, I think our strategy to streamline the portfolio in exiting those countries has served us really well. We’re able to double down on the core, invest in the focused markets and capitalize structural runway. I think you rightly said you haven’t seen any further disposal. We’re largely completing the program. There might be Q tail countries, I would say, in the future, but nothing material for the group as we move forward.
Ivar Billfalk-Kelly
That’s great. Thank you very much.
Operator
Thank you. And we will now take our next question from Kean Marden of Jefferies. Your line is open. Please go ahead.
Kean Marden
Thank you. Good morning, all. I wonder if you just might provide a little bit more insight into the big pipeline. We would appreciate some. You’ve generally had some reluctance to put a dollar amount around it. But any narrative around that would be helpful. And just how the composition, particularly looking at first in 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? 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 about neutral? Or might you now be in a position where there’s a small tailwind from that? And then also on M&A, on processing 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.
Dominic Blakemore
Thanks, Kean. Thanks for those questions. I’ll let Petros respond on M&A. Just in terms of the bid pipeline, as we said in a number of these calls, it looks as good as it’s ever been. You 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 4% to 5%. 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 1.5 years 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 growth prospects across all three of our regions as we go forward, and we’re closing the year quite positively.
Petros Parras
Good morning, Kean. I think on the M&A, let me just try to answer your three points. I think we will continue to entertain the bolt-on acquisitions. They have serviced 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 in reduction in revenue with average margin as we move to next year. We have guided this in the first half.
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 higher interest rates for some of the funds in unrealized 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.
Kean Marden
Okay. Thank you. Understood. So just to be clear, the – despite probably a few more bolt-ons, we’re sort of looking at a small revenue headwinds from M&A this fiscal ‘25, Petros.
Petros Parras
Yes, yes. Kean, we guided it’s about $200 million reduction in revenue for next year with average profit margin flow down.
Kean Marden
Yes, okay. Thank you very much, Petros.
Dominic Blakemore
If you get it from that as we close any further M&A.
Kean Marden
Understood. Thank you very much.
Operator
Thank you. And we will now move on to our next question from Neil Tyler of Redburn Atlantic. Your line is open. Please go ahead.
Neil Tyler
Well, good morning. Thank you. And just one follow-up really on the like-for-like volume trend, particularly in Europe, I suppose in previous calls, more recently, you have pointed to B&I and the return to office and high participation. But could you shed a little bit more detail on the trends within that strong growth that you are seeing in Europe currently and how you view those trends and the backdrop supporting them? Thank you.
Dominic Blakemore
Thank you, Neil. We have seen good growth across all of our centers and all of our regions, which is we are seeing positive. The volume growth is positive in all centers, and again, in all regions. So, positive in Europe, very positive in North America, which is very good. Yes, I mean look, in B&I, I think we are still seeing the return to office benefits us. But I think we have got other things going on as well. We still have a higher than previous level of event catering. We are seeing higher caps in sports and leisure. We are seeing higher spend happens in higher education. So, it’s broadly across the piece. And as we said a few times on this call, I think what we think is most relevant is 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.
Neil Tyler
Okay. Super. Thank you.
Operator
[Operator Instructions] And we will now take our next question from Jaafar Mestari of BNP Paribas. Your line is open. Please go ahead.
Jaafar Mestari
Hi. Good morning and just a couple on acquisitions for me, please. In the release, you specified that the disposal of Brazil happened in May. And if I am correct, the disposals of China also happened in April in the quarter. And I guess, where I am going here is because of the disposals, it’s slightly difficult for me to assess how much you have been spending on top of the very clear medium-sized deals you flagged like CH&CO and Hofmann. So, yes, just a confirmation of when the disposal happen, please? And more fundamentally, can you give us some quantum for how much money you spent elsewhere other than CH&CO and Hofmann? 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?
Dominic Blakemore
Thank you, Jaafar. Good morning and let me pass that to Petros.
Petros Parras
Good morning Jaafar. I think as you rightly said, we completed with Brazil in May. China was in April. Our net M&A spend on a year-to-date basis, $836 million. In terms of acquisition costs, we have disclosed CH&CO being around $590 million, Hofmann is around $290 million, and the balance in acquisitions in North America, which is about $150 million. And this gets you to the $836 million net of the proceeds from the disposals.
Jaafar Mestari
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&CO and Hofmann, and then the North America. There isn’t a long tail of extra additions or extra scale you have been adding in France, Netherlands.
Dominic Blakemore
No. I mean there are a few – again, if you think what our level of spend has been historic, it’s in the $300 million to $400 million on the bolt-on infills, as it’s typically even in the North America. We have been trending slightly below that level. We may return to that level as we go forward. We still have a healthy pipeline. As smaller deals, it’s really all about timing. We remain very excited by the infill. They bring us scale and capability that they have with their margin and they have with their geographic and regional footprint, particularly in vending in North America. So, we are excited by that. The bigger deals, as you have seen, have been in Europe. There is a few more of the – we remain interested in, which are active processes, and we will share with you both the strategic intent behind those, the returns and so forth as and when we closed those. And I think over time, there will 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 to us and how that inorganic growth can very, very much complement the strong organic growth we are seeing.
Jaafar Mestari
Thank you.
Operator
Thank you. And our final question comes from Joe Thomas of HSBC. Your line is open. Please go ahead.
Joe Thomas
Hi. 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, 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 are seeing at all or anything that we need to keep an eye on there. Thank you.
Dominic Blakemore
Thank you, Joe, for those. Look, in terms of quarter four new business, it’s all baked into the guidance we have shared today. So, as Petros said, we may see this margin progression in the first half. We expect [Technical Difficulty] in the second half. Within that, there is the expectation of higher new business in the third and fourth quarters. So, we have already taken an account of that as we go, as it were. In terms of recovery to historic margin, we see no impairment to attaining historic margin, and we see no impairment to going above historic margins as we go forward. We think particularly with the work we have done on the portfolio, the work we have done on the M&A, the fact that we think we demonstrated that we can manage the heightened cost inflation. We expect to see ongoing margin progression as we go now. We are not putting a timeframe 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 up, we would expect margin 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 have spoken to blended inflation, around [ph] the 2.5% level. That takes account of, as you rightly say, some pockets of higher inflation in certain markets. But broadly, we have seen food inflation come up quicker as you would expect, particularly as we have seen the energy cost levels come down and the contribution that makes to food manufacturing costs. So, we feel that, that’s what we are seeing at the moment. We obviously reserve the right should things change to come back. But as we have shown I think what’s most important is when inflation picks up, we have been able to price for it. When inflation slows down, you see the impact on pricing. And what we have to ensure we are doing is that we have been super fair to our clients all the way through on this. And that’s really the way we think about.
Joe Thomas
Thank you.
Operator
Thank you. That was our last question. I will now hand it back to Dominic for closing remarks.
Dominic Blakemore
Thank you all for your questions today. As you have heard in conclusion, we have had another strong quarter, and we are particularly pleased with the acceleration in net new business growth and the improvements in retention. Have a great summer, and we will speak to you again in the autumn.