Earnings Transcript for CMPGY - Q1 Fiscal Year 2024

Dominic Blakemore: Thank you. Good morning everyone and welcome to the first quarter results call. I'm delighted to have Petros here with me today, who took over as our CFO in December. We've had a great start to the year, with strong organic revenue growth and a couple of exciting strategic acquisitions. Growth was strong across all of our regions, but we're particularly pleased with Europe, which continues to build a solid track record of performance. We were positively surprised by the like-for-like volumes particularly in B&I, which has benefited from more return to office and hospitality events around Christmas compared to the year before. The outsourcing environment continues to be strong with good recent wins and our first-time outsourcing rate is in line with last year. As we focus on core markets with significant growth opportunities, we're using our scale and the strength of our balance sheet to invest both organically and through M&A. This quarter, we completed the acquisition of HOFMANNs in Germany and agreed to buy CH&CO in the UK. Both businesses have exciting growth potential through exposure to a diverse portfolio of subsectors and more flexible operating models. Two weeks ago, we also announced the disposal of our small operations in China. Until these deals complete, our guidance remains unchanged. Operating profit growth is expected to be towards 13%, delivered through high single-digit organic revenue growth and ongoing margin progression. You'll remember that we said in November, there'll be some lumpiness this year, the first half benefiting from stronger pricing with net new weighted towards the second half of the year. It's been a great quarter and we're delivering on our strategic growth priorities. By focusing on the attractive opportunities in our core markets and investing in CapEx and M&A, we're unlocking future growth. As a result, profit growth will continue to exceed revenue, generating strong cash generation and long-term compounding shareholder returns. Thank you. And we'll now turn the line back to the operator to take your questions.

Operator: Thank you. [Operator Instructions] We will now take our first question from Jamie Rollo with Morgan Stanley. Please go ahead.

Jamie Rollo: Thanks. Good morning, everyone. Three questions please. First, it'd be great if you could please break down the organic sales number into price like-for-like volume and net new and perhaps just elaborate a little bit more on that lumpiness and timing of contract mobilization. Secondly, do you think your guidance is a tad conservative? Because I do think it factors in any volume growth for the year and also that volume growth should be quite accretive to margins. And then just on the M&A side, that's two quite big transactions in Europe. Are you sort of aiming to replicate what the company did in the US 20 to 30 years ago with a sort of broader-based portfolio of brands? And should we therefore expect several more years of heightened M&A? And we're looking for more disclosure on these two deals. Thank you.

Dominic Blakemore: Yes, thanks, Jamie. Good morning. I'll take one and three, and then let Petros comment on guidance and probably add some color in on M&A as well. Well, first of all on organic, you've heard us say, we're really pleased with the first quarter performance. And I think what's most striking as you rightly say is the positive volumes that we're seeing. And whilst we do attribute some of that to seasonal events in December, we've clearly got some momentum and tailwind within the return to office. So, we are tracking that and looking to see what that means for the second quarter and beyond as we go. In terms of the 12% for the first quarter, broadly half of that is price which would have been in line with our expectations; and the balance net new and volume. And when it comes to net new, we did signal some lumpiness. I think a couple of reasons there. We had a couple of losses in the second half of last year, which will annualize by the half year of '24. In addition, there's been a couple of large accounts which have -- their mobilization on the new business side has been deferred out a quarter and in a couple of cases into the second half. So we feel on a net new standpoint confidence that in our 4% to 5% guidance for the full year, we expect that to probably be around the 3.5% in the first. And then obviously that means that we'll be in the higher end of our range in the second half, I mean at and above in the high 4s in the second half of the year. And that's supported both by our view of mobilizations of new business, but also by the quality of new business that we've continued to win in the first quarter. So we made a really good start on new business, particularly in North America and Europe. So our gross new business ARO is tracking about $3.3 billion on an LTM basis, consistent with last year, so very strong. It's probably fair to say that, we've seen a little bit of slowness in the UK and APAC but we do anticipate that that's going to come through very positively in the second quarter. So we're highly optimistic about our new business win opportunities in 2024. And with that also still seeing 45% plus coming from first-time outsourcing, which we've always said is particularly positive for us. I think on M&A, I think you've really hit the nail on the head. We do genuinely believe that the acquisitions that we've made in the US have truly differentiated our business model. They've given us the sub-sectorization within sectors, which we think is compelling. Within a number of our sectors now, within a given client, we can operate as many as five or six different sub-sectors. And we just don't believe that that can be replicated within the industry. I think given the confidence that we've now got in our performance outside of North America and particularly in Europe, it feels like the right time for us to be prosecuting the M&A agenda in Europe. I think I'd remind you that Fazer was probably the first of those bigger deals in Europe that brought us the subset to richness within B&I. I think we would have perhaps done more had it not been for the intervention of COVID. But again it feels like the time is right now. Opportunities are coming to market. We've been building relationships for a number of years. We've announced CH&CO, which is an absolutely terrific business. It's got a fantastic management team. It's a business we've been talking to for many years. We've had these deal discussions before but COVID intervened, cost of living intervened, inflation intervened. It feels now is the right time. And when we look at that we know there's a huge complementarity of sub-sector but also regional presence. So we don't believe their businesses would compete with one another. They can exist together. And I'm sure, Petros will come on to the financials they're very attractive with the opportunity for growth acceleration and cost synergy over time. So I think that's a great example of how the North American template can be replicated outside of North America and create real value for us. And I think because of some of the market conditions with cost for finance again, it feels like some of those – more of those opportunities are coming to market now. And I think we're in a great place with our leverage balance sheet strength and the strategic synergies we can bring to really exploit them. Petros do you want to add anything on M&A and then on the guidance point?

Petros Parras: Thank you, Dominic. Good morning, Jamie. Maybe on guidance just to remind everyone we guided towards 13% back in November. A great start of the year as Dominic talked backed on the high single-digit, full year guidance, positive surprise on like-for-like. Maybe a few points to call out here. We will be data-driven. We're seeing in Q1 volumes to come in nicely, particularly in B&I. Within Europe you have seen some of the numbers there. There is some seasonality in there also some very nice activity with clients on hospitality banqueting some nice volumes in Sports & Leisure. So I think when you put it all together, our guidance remains unchanged. We're going to get more data points as we go to quarter two and then we'll provide an update in half one. On the M&A maybe two thoughts. I think it starts with the optionality in the balance sheet we have talked for quite some time now. This gives us a nice opportunity to entertain M&A acquisitions. Dominic spoke about the sub-sector differentiation and operating flexible models. I think it's fair to say the blueprint of North America has generated some very attractive financial returns. We continue to remain disciplined in where we invest. Dominic spoke about the discipline on how long some of these deals take. These two opportunities for us represent a nice financial return opportunity. They will be in excess of our WACC by end of year two. And we see over the long term, they will provide a really nice value creation within the business. And keep in mind, we'll continue to invest organically in CapEx, as this is a very big lever of a business to continue to grow the business.

Jamie Rollo: Thank you. Sorry, Dominic just to come back. I think you said 3.5% net new was your first half. And so was that also within the 6% that was both volume and net new? Is that also the Q1 number 3.5%, or was it a bit lower than that?

Dominic Blakemore: It is in that range. It's in that range Jamie.

Jamie Rollo: Thank you very much.

Operator: We'll now move on to our next question from Vicki Stern with Barclays. Your line is open. Please go ahead.

Vicki Stern: Good morning. First one, you sounded very confident now on the signings run rate so far. Just how about on retention? And just based on what you're seeing across both retention and signings, how confident you're feeling not just in the 4% to 5% guide for the full year, but that net sort of medium-term net new guide of 4% to 5% that you'd laid out a year or so back? Second one is on the win rate. So you talked about FTO is still very strong. Just curious about the wins on the small and large competitors, just some color there on the movement on both parts seeing some of your large competitors being a bit more active. So just curious on your side. And then finally, on the profitability. So Aramark were talking the other day about inflation paring back perhaps a little bit faster than they had expected so far this year. How is that running for you versus your initial expectations? And with that, I guess any sort of initial thoughts on margins and that path back to the pre-COVID levels more medium term? Thanks.

Dominic Blakemore: Yeah. Thanks, Vicki. Good morning. I'll hand over to Petros on the profitability point in a second, but why don't I tackle some of those growth questions. I mean first of all, sorry, we're sad to say and as I said earlier in the call, we had a couple of losses in the second half of last year in one particular sector which is -- which tend to a little bit the run rate on retention, nothing particularly material. But we'll be annualizing that by the half year of 2024. We've got very good line of sight of our -- of those contracts that are out to bid. And we expect to see very strong retention on a full year basis again for 2024 and beyond. So I think we're in really good shape there. I think -- thank you for the question on sort of the medium-term guidance on net new because I think it's very easy to obsess quarter-by-quarter. Running individual accounts and the timings of mobilization and demobilization can affect the numbers in a quarter very easily. I think it's fair to say, we're more confident today than we've ever been on our ability to sustain an acceleration in net new. So we've always talked about being one point or so better than historically. That was our ambition and we've got more confidence in being able to achieve that than ever. We've got qualified pipelines in all of our regions that are at record levels. That's the start point. We need to scale the business to achieve growth and we're very focused on that, not least in talent. So we are actively driving our talent agenda everywhere in the business because we truly believe that talent is the only limiting factor in our ability to grow and manage the volumes that we believe we can win in the marketplace and acquire through M&A. So I think -- and I'd also like to add to that that the performance -- we've always said this isn't a track record yet in Europe and we want to build that track record over many, many years. But we are now starting to get into three years and four years of consistent performance outside of North America. We are tracking another very positive year in our European business in 2024. So I think we're really excited. And I'd probably say the businesses we see today is in as good shape as it's ever been in my tenure with Compass. I think if we add to that what we see at the moment is, how we place a few bets to sustain the medium-term growth rate at these levels in a bigger business. And I think that's what you've seen us do with Hofmann it's what you've seen us do with CH&CO and it's where we're very obsessed at the moment. It's how we unlock those other subsectors and growth opportunity such that they can contribute to sustaining the elevated levels of growth, because growing at 4% to 5% net new will support our medium-term ambition of mid- to high single-digit organic growth, as and when we see pricing and inflation come off a bit. So I think that's really, really important. First-time outsourcing win rate remains very positive. And in terms of performance against competitors, I mean we continue to be a net winner in all quadrants of the market, as we look at them whether that's against the big international competitors the regional players or the smaller players. So it's a continuation of the trends that we see. And we think a lot of that is about, as we've always said the ability to combine our disproportionate scale, which is now bigger than ever it's been in the marketplace with that very niche front-end sub-sector offer. Petros?

Petros Parras : Thank you, Dominic. Vicki I think maybe I'll touch on inflation shortly and then I will share a few thoughts on profitability. You recall last year on inflation, we're running around 7% towards the end of last year. In the first half, we see this around 6%, which is consistent with the pricing you're seeing on the organic. The components of this we do see some easiness on the food cost. Bear in mind European market is still low double-digit. We talked before you recall the stickiness on the labor on the labor inflation. This is in the P&L and we believe is going to be there for the medium run. All-in-all, what you see in quarter one, you see inflation and pricing to progress at similar rates. And remember what we discussed last year on the operating profit growth that this is for example we talked a lot on how the business is naturally hedged to deliver a nice profit growth regardless of inflation will be higher or lower. And obviously you will see some ongoing margin progression. Recall last year half one margin was 6.6%. We're going to see some really nice operating profit growth in the first half. You're going to see margin progression because of the comparators of last year.

Vicki Stern : Thank you for that. Sorry, just circling back on the medium-term margin the sort of ability to get back to that 7.5% are you still confident in that in time?

Petros Parras : Yes, of course, we're confident. We said in the previous calls, we don't see a ceiling to this. You will continue to experience an operating profit growth and an ongoing margin progression as we go.

Vicki Stern : All right. Thanks very much.

Operator: Thank you. And we'll now move on to our next question from Jaafar Mestari with BNP Paribas. Your line is open. Please go ahead.

Jaafar Mestari: Hi. Good morning. Yes quite a few moving parts today on growth and I appreciate this is a revenue trading update, but could you maybe take these different points and remind us just in theory what they do to margins? So in particular what's the flow-through from one point better like-for-like volumes? Is it 30%, 25%? Is it below because it's related to events in part so more costs? So that's one point. On the deferrals to some contracts what's that do to margins in H1? Do you already have start-up costs in H1 already, or is it all happening within H2 when they are a week from actually starting? And I guess the last point is on net new. So, full year very much in line with guidance. But if it's slightly lower retention what does that do again to your margin profile between H1 and H2 please?

Dominic Blakemore : Yes. I mean, Jaafar, I think, we have to be careful not to attribute too much science to those different drivers. In reality, we're talking about 30 bps, 40 bps, 50 bps of difference in each of the drivers in a quarter. So we don't obsess about that. I think the truth is our net new performance will come at lower margins, as we've always said. Why is that? Because when we open new accounts, they'll start at lower margin and will have mobilization costs. When we retain big business we'll inevitably offer cost savings to our clients. And therefore there will be a drag from periods of more retention activity. Those things are going on in the business all the time. You're right where we see volume, it can tend to drop through with a higher margin, but it really does depend where that volume is. If we enjoy volume in Sports & Leisure often the benefit or the upside is for the client. And we have a fixed return on those higher volumes. So it's very difficult to read straight through as it were. And look we probably look at the margin impact of net new on an annual basis rather than a half year or a quarter. And as we sit within our guidance it has the impact that we anticipate within our margin. I think what's most important for us is, we've guided to high-levels of growth and margin progression. And that's what you'll see this year.

Jaafar Mestari: Thank you. So no big impact there and then, I guess, on the margin sequence then if this doesn't change as much, do you still think H1 is broadly in line with the Q4 exit rate? So it's up year-on-year, but it's continuing on that Q4 2023 exit rate. And then there's more progress in H2? Is that still the sequence?

Petros Parras: I think that's about right.

Dominic Blakemore: So sorry. Yeah.

Jaafar Mestari: Super. Thank you very much.

Operator: Thank you. And we'll now – sorry -- And we'll now take our next question from Julien Richer with Kepler. Your line is open. Please go ahead.

Julien Richer: Good morning everyone. Two quick questions for me, please. The first one on Sports & Leisure and Volume, you have been talking about volume being a little bit better on that division. Can you please tell us, if it's true for both Europe and the US or if it's really specific to the US and if there is any increase in spend ahead also? And second question on pricing. So if pricing has to slow down in the future because of inflation normalizing also, have you started to see that type of slowdown on pricing during the negotiation and discussion with your clients already? Thank you.

Petros Parras: All right. Thank you. Thank you, Julien. I think in Sports & Leisure, what you will see, you will see similar trends in the North American business and in the Rest of the World. I think it's a combination of both more participation in venues that we're very pleased with. Keep in mind within a venue, we may have multiple offers. It's not only about one offer in there. At more participation venues, we're seeing average ticket value to go higher. And overall, quite some support from our clients to get the event going and very pleasing for our consumers. On the -- on your second question on inflation, I think the way to think about this, and we discussed this also in the past, we will not try to predict what is going to happen in the second half. I think we referenced in the first half, we do see a similar rate of inflation and pricing. We will see how this pans out, for the second half. We continue to take pricing where appropriately. But keep in mind, we also referenced in the past, it starts with mitigation as well so what is the value we offer to our clients, as we go through in these conversations. And this is where pricing most likely is the second component in this conversation starts of what is the value we're offering there. We keep always an eye in there and then we expect to give an update for the rest of the year in half one?

Dominic Blakemore: Yeah. If I may, Julien, just had a couple of thoughts to both those questions. The first is, I'm incredibly optimistic about Sports & Leisure for us as a sector and as a business. The recovery post-COVID has been incredibly positive. The consumer reaction to price inflation has been very positive. And I think what we see emerging is potentially a new consumer within that category. We've got travel tourists who will come to major cities across Europe and the US to experience Sports & Leisure and who really want to spend to enjoy those occasions. We've seen sort of competing demand for tickets at the higher end. And many of our clients are working on how they develop Super-Premium offers which plays brilliantly well to what we are doing and our sub- sectorization. So we're actually very, very excited about the potential. We're building our Sports & Leisure presence across Europe, in a way that we haven't done before. And we're taking the established brand of Levy, alongside some very powerful local operators to create a compelling offering in that sector. So we really feel good about Sports & Leisure in the medium-term. And I think just on the pricing inflation, I think Petros called it out, but labor is sticky, right? And I think that's going to really be the sort of delta over the course of the next year. I think we can all see food inflation coming off and coming off sequentially. But I think labor is sticky in the system and will be for a while. And I think that's good for us right? We've always said let's just take it back to where we were in the 2010s. We had what one point of blended cost inflation. We had to see all of that off. I think blended cost inflation of the 2% to 3% in the new normal will be helpful for us because we can demonstrate the value of our offer and we can still take pricing meaningfully. So, I think we feel that sort of as things calm, it's really all about what we see on the labor side of things going forward.

Julien Richer: Very good. Thank you.

Operator: Thank you. And we'll now take our next question from Jarrod Castle with UBS. Your line is open, please go ahead.

Jarrod Castle: Good morning everyone. Just coming a little bit back to M&A, but from the other angle you said you've exited China. And I guess over a number of years you've exited a number of smaller markets. So, just wanted to get some color on why you decided to exit China. And then also just on that theme, have you entered any kind of new markets? And what is your view on kind of more nascent markets where you see some exciting growth opportunities? And then obviously very strong labor market still especially in the US. So, I just wanted to get some color in terms of ability to get staff ability to mobilize very good net new contract wins? And then I guess just coming back to kind of recent M&A, I mean you paid over one times sales for CH&CO. I know a different business, but Fazer was under one times and 12 times EBITDA, I think when you disclosed it. So, I mean is CH&CO very profitable, or is it because you see very good synergies from that business? And I guess in broad terms I mean generally how much additional margin can you bring to acquisitions? I mean how much in general at a discount to your margin are these companies at? Thanks.

Dominic Blakemore: Hey Jarrod thank you. Some really good questions there. And we have a I'll take the M&A question first. I mean first of all it's a misnomer to believe that our M&A targets are trading at lower margins than we are. So, I think that's the start point. Some of the businesses in the industry have excellent margin structures because they offer something different to us and they're able to price according for that. So, I think that's really exciting. When we look at the M&A we've done over years, particularly in North America, they have contributed margin as well as growth over time. So, we think that's an aspect that we really do need to focus on. The recent acquisitions we've done will both be accretive to the European region off the bat as well as from a margin standpoint as well as offering further synergy over time. And that's why these businesses are particularly premium and attractive to us. So, we see the opportunity in M&A as being first of all, sustaining our accelerated growth levels; secondly, bringing us brilliant management teams; and thirdly, there has to be of course the margin opportunity as well. When it comes to the labor market, I'm delighted to say that our LTM labor turnover rates in all of the five regions that we report internally have fallen over the last quarter, which is a fantastic statistic for us that we track relentlessly. And they're at levels now which are back pre-COVID and below. So, I think that tells you that from a Compass labor standpoint, we are attracting labor. We're retaining that those colleagues better than we've ever done. And we're incredibly focused on that because we know that that drives incredible efficiency and consistency in our operations. So, a lot more to do as there is in all parts of our business. But we're excited there and we think we've really sort of dealt with the pig in the pipe and as it were of reopening post-COVID. And then just your first question last on exit. So, you're right, I think now in pretty much 18 months, we've exited 10 countries. I think we're probably about two-thirds of our way through a program that we've been looking at. We're now in 34 countries. Now, does that mean we could be in around 30? Yes. If I remind you why that is we've always set up -- I think the right attribute to this business to be in organized developed markets where there's an opportunity to premiumize our offer. And it's not driven by a commoditized value offer where we can deliver scale not just nationally, but within sectors and subsectors. We see huge opportunity within our top 20 countries. In a number of our top 20 countries, we're still not present in all of our core sectors. There's opportunity there. There's opportunity organically and inorganically. There's opportunity from unattended and micro-markets, across the core countries. We've seen that in the US. There's more for us to do in many of the countries. The opportunities are absolutely huge in our core. And I've now become convinced that we distract ourselves by managing a tail. As I said, we've exited 10 countries. I don't think you guys at the analyst community have barely even seen the numbers move as a result, yet, I can promise you that the amount of management time that we can now dedicate back into the core, is materially different from how it was before. With regard to China, look, rightly or wrongly we've been trying there for 20 years. We're still a $100 million business. I don't believe our product is as valued as we would like, and there is sufficient scale in organized international clients for us to be able to grow that business. So it feels right to be honest and step out and move on. As I said, there'll be a few more still to do, but I think we're at the tail end of the program. And excitingly, I think we're now at a point where we can double down on the core and really start to accelerate there through M&A. In terms of the question about other market entries, there's nothing on the list. I think actually some of what we've been doing recently stepping away from countries, we entered chasing growth. And I think we've learned a few lessons through that. And certainly, we won't be repeating those in the near term. So, I think we feel really good about where the portfolio is and the opportunities as we go forward.

Jarrod Castle: All right. Thanks, Dominic

Operator: Thank you. And we'll now take our last question from Neil Tyler with Redburn Atlantic. Your line is open. Please go ahead.

Q – Neil Tyler: Good morning. Thank you very much. Dom, I'd just like to come back to your comments on M&A that you touched on earlier, that some of the processes had been interrupted by COVID. But I wanted to ask whether perhaps, the list of opportunities might have grown as a consequence of how some smaller competitors are viewing their position post-COVID. I think you talked about the financing market, and how that had played a part. But I wonder, if you wouldn't mind sharing your thoughts a little bit, on the sort of lengthening or otherwise of the list of opportunities.

Dominic Blakemore: Yes, no thank you, Neil. That's a good question. And look I think there's a couple of things at play. COVID meant that people had to go deep and manage their businesses through a difficult time. I think what it also meant is, that a number of owner-managers potentially have to go a term longer than they had anticipated, in realizing their own time frame and when was right for them to step away from the business. As a result, I think now as we see businesses have either stabilized post-COVID, post-inflation, post-pricing or actually on the flip side have maybe been a little bit damaged by that, they're more ready to consider the opportunities to partner. What we can do is, we can be the big brother to some of those owner-managers and provide the environments in which they can realize, a level of performance that can get to their original kind of personal targets, in quite a different way and that feels exciting. I think that the cost of finance does of course play into that. I think there was probably a hiatus of deals for around 18 months because of that. And I think we now see some of those assets coming back to market. So yes, there is a pipeline. It is exciting. I think we found a way of working particularly, with owner-managers that it's much more creative and collaborative to realize value mutually. And I think that makes us a really good partner. But I should finish by saying, we have three current and former CFOs on the Board. So, we're nothing if not disciplined. And where we do spend money we will be doing it, within all of the returns criteria that we've always said. And I just want to echo the point that Petros made earlier, there is so much opportunity from using our CapEx organically for growth as well. We have to make sure that M&A is the right distraction and bringing in the right managers, for us to be able to do everything.

Q – Neil Tyler: Thank you. That’s really helpful. Thanks very much.