Earnings Transcript for SW.PA - Q1 Fiscal Year 2025

Operator: Good morning. Thank you for standing by, and welcome to Sodexo's Q1 Fiscal 2025 Revenues Conference Call. [Operator Instructions] I advise you that this conference is being recorded today on Tuesday, January 7, 2025. At this time, I would like to hand the conference over to the Sodexo team. Please go ahead.

Juliette Klein: 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 Q1 fiscal 2025 revenues call. On the call today is Sebastien De Tramasure, our Chief Financial Officer, to take us through the presentation. After Sebastien's remarks, we will open the line to take your questions. The slides and press release are available on sodexo.com. 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 Sebastien.

Sebastien De Tramasure: Thank you, Juliette, and good morning, everyone. I wish you all a very happy, healthy and successful 2025. And welcome to this fiscal year 2025 Q1 revenue presentation. First, and as discussed during our full year results, we anticipated a slowdown in organic growth during H1 with a step-up in H2 for fiscal year 2025. And the Q1 outturn is consistent with that and in line with our expectations. Now let's turn to Slide 4 to go through the numbers. So revenues for the quarter were EUR6.4 billion, up 1.9%. We did experience negative contribution from both scope and currencies. The minus 2% currency impact is mainly due to the depreciation of the Brazilian real since May 2024, and to the depreciation of the U.S. dollar against the euro during the summer of 2024, despite its recovery since October. And looking ahead and assuming current exchange rate remains stable, we expect this negative impact to reverse in the next quarters. And the minus 0.8% scope impact is mainly linked to the disposal of the [homecare] (ph) business in October 2023. Organic growth for the quarter was at 4.6% or 4.9% when adjusted for last year Rugby World Cup and this year Paralympics in September. The organic growth included a pricing contribution of around 3% and the remainder was driven by net new business and some volume growth. Now if we break down by service line, Food Service delivered solid organic growth of 5.7%, while Facility Management came in at 2.4%. However, excluding the Rugby World Cup ticketing activity from the last year, Facility Management growth would have been at plus 3.5%. That said, Facilities Management organic growth faced some challenges this quarter, especially in Europe. We observed reduced activity at certain sites, along with lower project volume and decline in noncontractual activities. Before we move on to the detailed review of organic growth by region, I'd like to highlight the good commercial momentum we had in Q1 and elaborate with a few examples. First, in Australia, Sodexo has been endorsed as a preferred partner by Rio Tinto for the co-design of Rio next IFM contract, following a thorough partner selection process. Sodexo has been operating this contract, and this contract is the largest contract at the group level since 2016. And the current agreement with -- that’s due to expire in 2026 will now evolve into a co-design partnership for the future. And this decision reflects Rio Tinto's confidence in Sodexo, and it highlights our ability to deliver innovative and high-performing solution at scale, while maintaining a strong safety culture and operational excellence. Now turning to another major achievement. STH, a Sodexo Live! dedicated organization has been chosen to design and commercialize hospitality services for the three upcoming Rugby World Cup, England 2025 for women, Australia 2027 for men, and Australia 2027 for women. And the revenue impact will be most significant in Sodexo fiscal year 2028. This is the sixth time that World Rugby has entrusted us with an exclusive contract for the sale of its hospitality package. And these prestigious events represent a unique opportunity to engage fans, elevate the Rugby experience, and set new standard in event hospitality. More broadly, we are very pleased with the strong commercial momentum at the start of this fiscal year. As anticipated, marked by significant contract wins such as two additional lounges for airport dimension in the U.S., a first-time outsourcing with ESNEFT NHS Foundation Trust in the Southeast of the U.K., a new agreement also with a leading tech giant in the U.S. following successful partnership with the same client in Brazil, in Chile and in Asia as well. Our pipeline remains extremely strong, and new signing, if we include cross-selling in the quarter, exceeded EUR500 million, and this is more than 50% higher [indiscernible] in Q1 versus last year. Let's now turn to the review of activities by region, starting with North America, where revenue reached EUR3.1 billion in the fourth quarter, up 5.9% organically. Overall, it's a mixed performance with solid growth in Sodexo Live!, Corporate, and Healthcare, and some headwinds in Education. Sodexo Live! benefited from strong attendance at venues, growth in airline lounges with higher volume and the impact of new contracts, and the timing of key events. Corporate continued to see momentum with more people returning to offices and strong performance in Food Services. Education faced a tougher condition with lower enrollment in universities and weather-related closure in school and last year contract losses, but prices increase helped soften the impact. Healthcare also delivered a solid growth, driven by price increase, volume growth and cross-sell, although this was partially offset by losses from last year in Senior. Now let's move to Europe, where first quarter revenue reached EUR2.2 billion, up 2% organically or 2.7%, excluding the impact of major sporting events. Overall, the performance was softer compared to previous quarter with slower activity in Facility Management to last year due to last year's site closure and some decline in project work. In Business & Administration, growth was supported by price revision, volume increase, new opening in Belgium, partially offset by some site closure and lower project activity in hard FM. Sodexo Live! saw a decline due to last year's Rugby World Cup, but excluding this impact, this event, growth was driven by higher volume in airport lounges and stadium in the U.K., although this was offset by weather tourist activity -- by weaker, sorry, tourist activity in France following the Olympics and unfavorable weather. Education grew modestly, benefiting from price revision, but held back by the exit of some low-performing contracts in France last year. Healthcare & Seniors delivered strong growth, thanks to volume increase, price revision and new business in France alongside inflation pass-through in the U.K. and Ireland. Rest of the world. So in the Rest of the World, first quarter revenue reached EUR1.1 billion, up 6.4% organically. This strong performance was driven by robust growth in key markets like India, Brazil and Australia. The zone benefited from increased volume, new business, solid development in this largest market, while some areas faced challenges such as Peru with the impact of last year's site losses, and China where the environment remained challenging despite some sign of recovery. Looking ahead, we remain confident in our performance for the year. In quarter one, we delivered moderate organic growth of 4.6%, and we anticipate quarter two to be similar, while with North America expected to temporarily slow compared to Q1, reflecting the prior year leap year and the impact of the large FM contract loss last year. In contrast, Europe is expected to show some improvement. Organic growth is projected to accelerate in the second half of the year, supported by the timing of the net new business contribution and the strong commercial momentum observed at the start of the year. With this in mind, we are maintaining our full year guidance. We expect organic gross revenue growth to be between 5.5% and 6.5%, and our underlying operating profit margin to improve by 30 to 40 bps at constant rate. Thank you for your attention. I'm happy now to take questions. Operator, can you please open the Q&A session. Thank you.

Operator: Certainly, sir. Thank you very much. Excuse me, this is the conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Julien Richer of Kepler.

Julien Richer: Good morning, everyone. Best wishes. I have three questions, if I may. The first one, if you can give us a little bit more details on the net new business and volume performance in Q1, and how you see those two items evolving for the rest of the year? And if there is any change compared to what you mentioned during your full year call? The second point is on the Facility Management performance in Europe. Is it possible to have just the performance of Facility Management in Europe and not at the group level, but just in that region? And last one, more generally speaking, on Europe, your view or more detail or granularity on the environment in Europe, the underlying situation, because you are talking about tourist activity in France that is weak, site closure on the B&I activity. On an underlying basis, how do you see that evolving going forward? Thank you.

Sebastien De Tramasure: Thank you, Julien, for your question. So on your first question on the net new business and the impact and the evolution. So as you know, we don't give the split between the like-for-like volume and the net contribution during the year given the porosity, if I may say, between this bucket, and there is also some irregular phasing of mobilization and demobilization. But as I said, excluding the one-off from the Rugby World Cup and the Paralympics, volume growth, including the net contribution, was close to 2%. And in terms of evolution, we expect net new contribution to be modest during the first half. So something very similar between Q1 and Q2. And then we are expecting the ramp-up of mobilization during the second half of the year, as we said, with a much higher contribution of net new during the second half of the year. On the FM performance in Europe, if we look really at FM, Facility Management in Europe, it was more or less flat versus last year. And on the underlying evolution of the FM business, the Facility Management business in Europe, as I said, it's true that we have seen some challenges in some sectors, in some industry, in particular, in the manufacturing sector. And this has an impact in some extra work. But overall, when we look at the trend in Food Services in Europe remain very solid. And also, if you put aside again the project work, we have to say that the Facility Management, it's a resilient -- quite resilient activity. And we have seen that during the COVID period with, again, a good trend in terms of underlying activity for Facility Management.

Julien Richer: And more overall, globally speaking -- yes, please. Sorry.

Sebastien De Tramasure: Yes. And so you mentioned also the tourist activity in France. It's true that it was weaker, but this was really due to the weather. As you know, the weather between September and December was awful in France. And this has definitely an impact in the Sodexo Live! activity for the first quarter of the year.

Julien Richer: Okay. Thank you.

Operator: The next question is from Jamie Rollo of Morgan Stanley.

Jamie Rollo: Thanks. Good morning. Happy New Year to all. Just sort of following up from those questions, if I may. First of all, I think if volumes are up around 2%, that implies pretty [indiscernible] net new business contribution in Q1, and you're saying that should be similar in Q2. So are you still expecting 2% for the year, which would imply a step-up to 4% in the second half? Secondly, I know you don't give retention figures with the quarterly results, but it sounds like things are going pretty well in terms of renewals in Q1. So presumably, you're not expecting any sort of lumpy further contract losses for the remainder of this year. And then thirdly, back to Europe, there's quite a lot to unpack in the numbers there. B&I does look quite weak, up 1%, but you're saying Food Service is still solid. Perhaps you could just please quantify some of the project work losses that you mentioned and site closures, too? Thank you.

Sebastien De Tramasure: Thank you, Jamie, for your questions. So first, on net new, yes, so we are expecting Q1, Q2 to be basically very similar, and then a strong step-up and increase during the second half of the year. Again, as I said initially during the call, I mean we had a very strong start in terms of commercial development with some signing that will open during Q3. Large contracts in some of them in France, in the U.K., also a big contract that we just signed in Australia in Energy & Resources as well. All those new signings will definitely help and help the net contribution during the second half of the year. And then the second question on retention. So it's a little bit early to talk about retention. As you know, we don't provide any specific retention number for Q1, and we'll share much more detail at the half year mark. But I can share with you some key points while looking ahead to our fiscal year 2025. First of all, and we mentioned that during the last call, fiscal year 2025 is quite dense in terms of rebid. Fiscal year 2026 will be much lighter, but this year is quite dense. It's dense also regarding our global accounts. We also mentioned that this year we have six large global accounts that are up for renewal. The good news is that we already secured three of them. So we started the year pretty well on that matter. There are the other three where we are progressing well, and we are expecting outcome late H1 or early H2. And we mentioned that also during the call related to Q4, we have observed a more aggressive competitive environment in some countries, some regions, and on some segments, so especially in Latin America and energy and resources with player adopting very aggressive pricing strategy. And this has resulted in some few disappointments, but nothing particularly material at this stage. And the last topic on retention, I also want to remind you that the rolling 12 month figure that we shared at half year will not be at 95%. It will still reflect the weaker performance of H2 from last year. And we will no longer benefit from the very strong, very good performance we had in H1 last year in fiscal year 2024. To recall the 12 month retention rate at the end of H1 last year was 95.5%. So all of this said, we remain fully focused and very, very disciplined in our approach for retention. We are actively addressing areas for improvement. And our objective for the year remains to achieve 95%, and we are confident that with the right action, we'll be on track to achieve it. So the second question -- the third question on Food. So yes, definitely, the Food growth is still very solid for Q1. And it's in line with also the good performance we had in Food also in fiscal year 2024 and in Q4 2024. Then regarding the project work, so it's not really linked to the loss of project work. I mean, we have contracts in Facility Management. And then within those contracts, we have the opportunities to execute some additional project work. So it could be some redesign of office space, could be replacing the traditional lighting with LED system. It could be also some specific work regarding air conditioning, HVAC system. So this is really, again, depending on our clients. So it's there. We have this option, this opportunity within our contract. And then it really depends on the willingness of the client to execute those project work. So it's true that given current circumstances in some sectors in Europe, especially manufacturing, we have seen some lower activity on those project works.

Jamie Rollo: That’s really helpful. Thank you very much.

Sebastien De Tramasure: Thank you, Jamie.

Operator: The next question is from Vicki Stern of Barclays.

Vicki Lee: Yes, good morning. Happy New Year. Just following up on the last point, any reason to sort of think that the project work activity -- was there a particularly tough comp there in Q1? Would you be assuming within your guidance that this slightly softer project activity would continue into future quarters? Or there's any reason to think there was something a bit specific about Q1? Second one is on the margin growth. Any risk to the targets there if there's been a slightly softer volume backdrop? I'm guessing that there could be decently material drop-through on lost volumes. So just anything to think about there that could be meaningful. And related to that, how should we be thinking about the phasing of that margin growth H1 versus H2? Just lastly, just to follow back. I didn't hear -- did you actually -- did you confirm the net new for the full year at 2%? I got the reacceleration in the second half, but I wasn't clear. If you'd confirm 2% is still a good number for the full year?

Sebastien De Tramasure: Thank you, Vicki. So regarding your first question of lower project work, I would say that at this stage, we are not expecting a big increase of project work in the coming quarter. This is fully factored in our growth for the year. Then it's only three months. And again, the weight of project work in the coming quarter is not so significant. So I would say that we are not expecting any material change in terms of trends related to project work. Then in terms of margin, we do confirm our guidance in terms of UOP improvement between 30 and 40 basis points. In terms of phasing, we are not expecting a very significant difference between the margin improvement in H1 and in H2. H2 might be slightly higher in terms of margin improvement versus H1, mainly driven by additional top line and further dilution of our SG&A. And also, we do expect some savings also and some efficiency related to the GBS, Global Business Services project, we mentioned also during our prior call. So we should see some positive impact in the second half of the year helping the increase of margin. And yes, and to your last question, Vicki, yes, we do confirm the overall net new contribution at 2% for the fiscal year 2025.

Vicki Lee: Okay. Thanks very much.

Operator: The next question is from Simon LeChipre of Jefferies.

Simon LeChipre: Yes. Good morning. Three questions, please. First of all, coming back on Q2 organic growth. So you were saying Q2 should be similar to Q1, but you were also saying net new wins should be similar in Q2 with Q1. So I mean, how do you expect to offset the leap year comps, which I think is 80 bps negative impact? And also, I think you have two additional contracts which are going to be demobilized from Jan. So yes, curious around the building blocks of Q2 at around 4.5%. Secondly, if you could please give us some details on the savings you expect this year and next year on the [GBS] (ph) initiative? And lastly, you touched on the competitive environment in LatAm, but I would be curious to get your thoughts on the competitive environment in Europe. I mean, we have seen Compass accelerating quite a bit in the region, doing some acquisitions, notably in France. So did you notice any change in the competitive landscape here? Thank you.

Sebastien De Tramasure: Thank you for your questions. So regarding first, the phasing in terms of organic growth. So we said that net new will be similar Q2 compared to Q1. So we have a clear visibility of the ramp-up of the new contract. So we do expect really this increase of the contribution from commercial and new development during the second half of the year. Then in terms of -- you asked a question about the savings. So we do expect some savings for the fiscal year 2025, even if -- it's a three year program. So we should have higher saving in 2026 and then be almost at full scale in 2027, and then in 2028. It's not -- it's around what -- the savings we're expecting for fiscal year 2025 around EUR10 million for the full year. And again, main part of it during the second half of the year. And then the last question about the competitive environment. So we do observe today this tougher competitive environment, especially in LatAm. We don't see any major change in the competitive environment in Europe at this stage.

Simon LeChipre: Okay. And just to follow up on my question around Q2, I mean you said net new in Q2 similar to Q1. So basically, my question is, how are you going to offset the leap year comp, which is another basically 80 bps headwind quarter-to-quarter?

Sebastien De Tramasure: Well, overall, what we said -- sorry, I was not clear. But overall, what we said that we are expecting an organic growth in Q2 overall -- total organic growth very similar to Q1. But we are expecting some ramp-up in terms of net new contribution for Q2.

Simon LeChipre: So net new would be better in Q2 than Q1?

Sebastien De Tramasure: It will be slightly better in Q2 than Q1.

Simon LeChipre: Okay. Thank you.

Operator: The next question comes from Simona Sarli of Bank of America.

Simona Sarli: Yes. Good morning [indiscernible]. Happy New Year. And thanks for taking my question. So I have just a couple of them left. So first of all, it's on pricing. So considering it has already normalized to 3%, which is in line with your guidance for the full fiscal year, how comfortable you are that you can sustain that for the rest of the year? And also if this 3% is potentially also inflated by the contribution of high inflation countries. So that's the first question. And then second question, again, going back to your guidance for Q2, if you can elaborate a little bit more on the like-for-like volume growth that is expected in Q2 versus Q1. So if that will be substantially better and potentially also explaining the bridge to get to overall an organic growth similar to Q1? Thank you.

Sebastien De Tramasure: Okay. Thank you, Simona. To your first question on pricing. So as I said, pricing was around 3%. It's fairly consistent across all regions, except in the U.K., where it was slightly higher, and this reflects higher wage inflation in the region. Labor cost inflation was around 4.5%, slightly higher in LatAm and Brazil and in the U.K. and Ireland. And food inflation, it's around 2%, again, slightly lower in Europe than in the U.S. And as I said, this is fully in line with our expectation. And we do accept -- expect, sorry, a similar trend during the year. And again, when we look at the number across all the regions, 3% in Q1 and 3% for the full year seems to be reasonable. Then in terms of guidance for Q2, again, we don't give the breakdown by quarter, but overall volume plus like-for-like should be the same, leap year being compensated by better net new development.

Simona Sarli: Thank you.

Operator: The next question is from Jaafar Mestari of BNP Paribas.

Jaafar Mestari: Hi. Good morning. I'm sorry, there's just a couple of things I will ask you to confirm or repeat. Apologies. So on that Q2 organic growth discussion, I just want to clarify, when you say very similar to Q1, does this refer to the reported number of 4.6%, in which case, this discussion of leap year being compensated by net new? Or do you mean the underlying trend will be similar at 4.9%? And similarly, on new business signings, I'm sorry, I didn't quite hear the number. I think you gave a euro million number for the signings you achieved in Q1, and you said it's more than 50% higher than Q1 last year. If you could please confirm that number. Thank you.

Sebastien De Tramasure: Thank you, Jaafar. So to your second question, the signing for Q1 is EUR500 million, and it's development, new client plus cross selling additional services. And it's 50% more than Q1 fiscal year 2024. So then to your to your first question on the organic growth Q2, Q1, we are taking more or less the same reporting number, again, but we can't be that precise at this stage, but we are talking about a reported number, not underlying.

Jaafar Mestari: Super. Thank you. And so in terms of signings, the EUR500 million, I just want to clarify, this is comparable to EUR1.9 billion for last year. Is there normally a phasing of those signings? If you're signing a quarter of that in Q1 already, that’s good news? I'm sorry, we usually don't have that quarterly number. So just asking for a bit more detail here.

Sebastien De Tramasure: So it's definitely a good news. It's a very, very strong start. And we do have some phasing in terms of development, because usually Q4 is a very strong quarter, especially in Education in North America.

Jaafar Mestari: Thank you very much.

Sebastien De Tramasure: And the fact that it's better than last year at the same period, if we compare Q1 this year to Q1 last year, it's definitely a very good news.

Jaafar Mestari: Yes. I mean sometimes your peers mention numbers like that, and then it turns out that your one contract has moved from one week to the other. And so around that end of August cutoff, it can be just a question of which day exactly you sign it, but you're saying it's underlying strong, no big phasing impact.

Sebastien De Tramasure: Yes. And to your point, I mean, H2 last year was very strong. Q4 was strong. Q1 this year is strong, and we have a very solid pipeline, very confident also for the development for Q2 and the coming quarters and for the full year.

Jaafar Mestari: Thank you.

Operator: The next question is from Neil Tyler of Redburn Atlantic.

Neil Tyler: Hey, good morning. Thank you. Happy New Year, everybody. A couple of questions, please. Firstly, just coming back to the project activity, Vicki's question. In terms of the noncontractual activities within Facilities Management, where do these sort of stand as a percentage of the total compared to a sort of normal run rate? Just to try to understand, get perhaps the point as to whether this year's dip is back to a normal level or taking you to sort of a below normal level of non-project -- noncontractual revenue? Second question, U.S. Education. You mentioned university enrollment is down. Can you just clarify whether that's sort of broadly across your venues or enrollment into your meal plans? And the net new negative that you've called out in the schools revenues, is that something that you were expecting given sort of contract renewals and losses? And then final question on margin, can I just confirm the -- you're assuming no material margin drag from mobilization costs in the second half of the year on the net new ramp-up? Thank you.

Sebastien De Tramasure: Thank you. So first question on the project work. So what I can say on this one is, it's below the normal usual level of project work, okay? We'll not quantify exactly the percentage on our total FM revenue, but yes, it's below the normal underlying volume of project work we used to have in Europe. To your second question on the U.S. and on the enrollment. So we were expecting definitely a negative impact from net new contribution, because it's a result of the sales and commercial performance from last year. We do have a lower enrollment and especially with freshmen, and this has an impact on our meal plan, obviously. And this is partly due to some issue with the student federal aid, the FAFSA. And this has impacted the ability of students to secure financial aid on time. And so this has been reducing enrollment for the full semester, and we do expect some increase and upside for the spring semester. So then to your last question in terms of margin. So you are right. I mean, on mobilization and new ramp-up of new clients, we do have a lower gross margin. However, overall, we see an increase in terms of revenue for H2. Even if the gross margin is lower, it has an accretive impact in terms of UOP, and it will help definitely to dilute our SG&A and help improving our margin in the second half of the year.

Neil Tyler: Got it. Understood. Thank you. That’s very helpful.

Sebastien De Tramasure: Thank you.

Operator: The next question is from Estelle Weingrod of JPMorgan.

Estelle Weingrod: Hi, good morning. Two quick questions from my side. Just back to organic growth. Sorry, I mean, we ask a lot of questions on this one. But Q2, we understand, is not going to be too dissimilar to Q1. Q4 is a relatively small quarter for you typically, and you have the Olympics comp. So correct me if I'm wrong. So this implies a very strong Q3 to make the guidance. My question is what's giving you confidence in that Q3 inflection? And just the last one on the phasing of margin expansion. I mean you said it would not be too dissimilar between H1 and H2, perhaps a bit more expansion in H2 despite the mobilization cost. But in any case, we're still expecting H1 margin expansion within the 30 to 40 basis point guidance range. Thank you.

Sebastien De Tramasure: Thank you for your question. So in terms of ramp-up of net new contribution, I mentioned it, we had a very good start in terms of development. I mentioned a few contracts, but it's sizable contract during the call. I mentioned, again, ESNEFT NHS Foundation Trust, sizable contract to start in April. Last year, we signed a large contract with a large health care system in the U.S. The ramp-up of this contract will start in Q3. I mentioned the airport dimension contract as well that will start in Q3. In France, we signed also a very large public contract, around EUR100 million, will start in April. I mentioned also during earlier that we signed a sizable contract in Australia with a major oil and gas company, sizable contract, EUR660 million annual revenue, and this contract will start also in April. So yes, because of that, we are very confident on the increase of our organic growth for the second half of the year. And this will start, obviously, with an increase of the organic growth in Q3 with a much higher contribution from net new. And on your second question on margin, so what I said and we do confirm our guidance, full year guidance with an increase between 30 and 40 basis points, not expecting major difference between H1 and H2, but we do accept -- expect, sorry, a higher margin improvement in H2 versus H1 because of the two items I mentioned earlier, the GBS project and the further dilution of our SG&A with increase of our top line.

Estelle Weingrod: Okay. Thank you.

Operator: [Operator Instructions] Sir, there are no questions registered at this time. Would you like to make any closing remarks?

Sebastien De Tramasure: Thank you. No. Thank you all for joining us today. We look forward to speaking with all of you again for the half year's results on the 4th of April. Thank you again, and have a great day.

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