Compass Group PLC (CMPGF) Q2 2023 Earnings Call Transcript


[Operator Instructions] We will take the first question from the line of Vicki Stern from Barclays.

Vicki Stern

Just firstly, I wanted to start on the signings. Just what is the signings pace running at now? Still in line with the levels of last year or is anything fading there a bit? I noticed in the presentation, you’re talking about sort of 4% to 5% net new compared with the 5.7% you did last year. So is that because you’re seeing anything fade on the signings or it’s just sort of higher revenue base? And generally, your expectations there, obviously, still substantially above the 3% you were doing pre-COVID, but yes, just trying to understand how much of that 5.7% last year was exceptional and what the run rate is like going forward.

Secondly, on inflation, so your two large competitors are flagging higher inflation and they’re sort of paring back their margin expectations. Obviously, today, you’re lifting your margin expectations. So could you just help us understand what you’re seeing in terms of inflation headwinds right now and how it is you’re able to offset those better?

And then finally, on CapEx, I think this is probably now the third year in a row where CapEx seems to be coming in below that 3.5% level. Obviously, you’re guiding now slightly below for the full year. But could you just remind us why CapEx is coming through below and if there’s a case we’re now expecting that CapEx to remain sustainably lower than it was in the past?

Dominic Blakemore

Thanks, Vicki. In terms of the signings pace, yes, look, on an LTM basis at the end of the first half, we were around £2.5 billion, so broadly in line with the prior financial year on an LTM basis. If you recall, the first quarter of ’22 had a couple of very large contract wins in North America, which are over $100 million, which have contributed to the in-year performance in ’22 that we saw in the 5.7%.

In the first six months, the run rate for the six months was £1.4 billion of new contract signings, so a strong first half performance. And based on the pipeline that we see today for the balance of this year, we have every expectation that we’ll have another record year of new business on a full year basis.

Just to add to that, when we look at the 5.7% in the prior year, probably worth saying we had a number of stored-up openings that opened simultaneously. So a couple of years of wins particularly in Sports & Leisure that opened in the second half of last year and, therefore, contributed to the very strong second half in the year, new business run rate and also contributed to that 5.7%. So the 5.2% year-to-date, we’re very, very pleased.

We’ve always talked about, we’re now a business that’s 25% bigger than 2019. So if we can sustain one to two points of acceleration on that historic rate, then obviously, our ambition is to be in the higher end of that range. And we’re above that right now, then we would be very happy. And that’s what’s underpinning our expectations of mid- to high-single organic growth over time and as inflation subsides. So hopefully that gives you some color on sort of gross new business in this.


Palmer Brown

In terms of inflation, it’s one of the biggest surprises, frankly, that we’ve seen this year. It’s just been that inflation remains fairly high at this point. Beginning of the year, we thought that it would start to subside as we started to lap high rates of inflation in the prior year, but that’s not happening. We’re seeing a blended 9% or so across the entirety of our business. That’s with our main inputs of labor and food and across the regions as well.

That’s starting to stabilize a bit. Food cost is starting to stabilize a bit within the U.S., but it’s still accelerating in Europe. So that’s something that surprised us a bit. When you look at the margin progression year-on-year, that 80 bps of margin progression, the bulk of that would be operational leverage just driving that top line growth and leveraging our above-unit costs within that.

We’re pricing to try to keep pace with inflation. Our pricing within the half was about 7%. So our model is to mitigate roughly 1/3 and try to price for the remainder. We’re always giving our clients options. We need to show the value for clients and consumers relative to the High Street. We think that value proposition is expanding. So we’re able to deliver that.

One of the things that’s helping is supply chain is starting to normalize a bit. We think that the supply chain is roughly 90% normalized versus a supply chain that’s been largely disrupted in the past. So that is helping us a bit and hopefully can help us as we go forward.

In terms of CapEx, you’re right, Vicki, CapEx, 2.3% in the half. That’s lower than what we anticipated of the model of 3.5% or so. Given that, we are lowering our CapEx expectations for the full year to somewhere between 3% and 3.5%.

We think the bulk of that is timing-related. We know of some additional timing expenditures that will occur in the second half of the year. There’s also some opportunities for further investment that, of course, we’ll take advantage of when they present themselves.

There’s a bit of a potential mix shift we’re keeping an eye on, but it’s a little too early to tell at this point. We think the bulk of it is timing-related. So we’re not necessarily changing our model at this point.

Vicki Stern

And sorry, just to follow up on the margin point. I think back at the full year results, you talked about bridging the gap from 6.5% to 7.5%, 40 bps inflation, 40 bps net new and 20 bps of other. Obviously, you’re at 6.6%, not 6.5%. But is that still the right sort of bridge between the different components?

Palmer Brown

Yes, there or thereabouts. It’s going to change a little bit, but it’s there or thereabouts still.


We will take the next question from the line of Jamie Rollo from Morgan Stanley.

Jamie Rollo

I have three questions as well, please. First of all, just on margins, you’re going to be around 7% in the second half, and your net new is slowing a little bit and the softer it gets in the U.S., it sounds like at least cost stabilizing. So just if you can get back to sort of 7.5% as soon as next year or is that a bit too early?

Secondly, I think this is the first time you’ve given the mid- to high-single-digit long-term growth figure in writing. I know you’ve mentioned it on various calls, and you’ve also said you expect net new to be one to two points higher than pre-COVID. So why don’t you formally change your pre-COVID guidance from 4% to 6% to 5% to 8%? Or are you going to stick to the sort of mid- to high-single-digit range?

And then on the balance sheet, using your new guidance, it looks like it will still be sort of pretty strong at 1.2, maybe 1.3x at the end of this year, which on a pre-IFRS 16 basis is about 1x, so well below the pre-COVID target. Is there any scope to return to your pre-COVID leverage target, which would be about 0.5x higher?

Dominic Blakemore

Thanks, Jamie. Yes, look, on margin, I think the most important thing to say is we see no reason — well, first of all, we see a path back to pre-COVID margins. And secondly, we believe we can make progress from there.

Will we achieve all of that next year? I think too early to tell. The near-term progress will really be dictated by sort of net new and what we see tracking with inflation. We think it’s very positive that we’ll be around 7% in the second half. And of course, that will be our base for further progress next year.

So I think we’re very pleased with where we are. And of course, in a business that’s tracking 25% to 30% bigger than pre-COVID with a margin around 7%, we’re printing a lot more absolute pounds than we did pre-COVID, which is very important for us to focus on.

And also, we think we’ve shown it today, seeing the business outside of North America growing above 5% sustainably is very, very important. And we’re getting the margin structure right to sustain that in the near term and then enjoy leverage over time is also very important. So we won’t compromise sustaining this very high quality of growth.

Yes, you’re absolutely right, whether we use words or numbers, I think we’re in the same place on the revenue guidance. So I think we’ll stick with the words for now, but yes, you interpreted it right.

Palmer Brown

And in terms of the capital allocation and the leverage, we’ve got a capital allocation framework and a leverage target that we think is appropriate for our business in this environment. We think it strikes the right balance between allowing us to invest in the business organically at whatever the level and the timing that, that is to take advantage of M&A opportunities as they present themselves and then returning cash to shareholders.

You’re right, Jamie, the leverage at the half year of 1.1 is just the low end of the range. The £750 million buyback that we’re announcing today over the remainder of the calendar year, we think, will get us to the midpoint of that range by the end of the fiscal year. And we think that’s just a good balance for us at this time.


We will take the next question from the line of Jarrod Castle from UBS.

Jarrod Castle

Also three for me. The Rest of the World margin went backwards, and I guess you highlighted inflation was one of the issues. Is that kind of behind us? How should we think about the second half and indeed ’24 in terms of Rest of the World margin?

And then secondly, you kind of a number of times mentioned a strong retention rate, but I actually couldn’t find that right in the release. Can you just give some color on where things stand on retention at the moment?

And then just coming back to kind of organic growth over the medium term, I guess maybe this is a nuance, but what is the classification of medium term? And I mean, is it — at some point, will you start to go back to the 4% to 6% organic growth target or rate that you were previously guiding pre-COVID?

Dominic Blakemore

Thank you, Jarrod. First of all, in terms of retention rate, the retention rate for the first half was 96.7%. So a very pleasing level of retention. That’s been driven by sustained levels of high retention in North America, but also continued strong performance outside of North America, which we’re very pleased by. So actually, underpinning the net new of 5% is both an improvement in gross new contract wins and also improved retention. So we’re sort of driving it on both fronts. Clearly, we need to sustain that.

When it comes to how long is the medium term for organic growth, I mean, look, I think we’ve introduced a framework, which we’d like to think that we can operate within consistently going forward. That said, we’re 18 months into a strong growth in the business outside of North America. We showed it in today’s presentation, sort of our twin opportunities and priorities are sustaining the level of industry outperformance in North America. And we’ve shown you in the presentation how we think — we feel we can do that.

And then separately, it’s really focusing on the growth initiatives and basics outside of North America to sustain that level. We think the marketplace is there. We believe we have the processes. We believe we have the efficiency of offer. We believe we’re now monitoring with data in a way that we haven’t done before. So look, if we can sustain those levels, can this model become the new normal? That is absolutely our ambition and aspiration.

Palmer Brown

Back to Rest of World margin, the biggest driver there is the ripple effect from COVID in the form of labor shortages. Australia, which would be the biggest country in Rest of World, and our Defence, Offshore & Remote business, which is more pronounced in Rest of World than the other regions, each of those are experiencing significant labor shortages there.

That’s something that we’re seeing some early signs of easing, but we think we’re going to be dealing with it for a while. So this is not something that’s necessarily going to go away quickly. We think we’ll be dealing with it for a while. But just to put it in perspective, this 20 bps of margin in Rest of World is £3 million. So it’s not significant in the grand scheme of things, although it is something we’re managing as closely as possible.


[Operator Instructions] We will take the next question from the line of Jaafar Mestari from BNP Paribas.

Jaafar Mestari

I had two, if that’s all right. Firstly, I just wanted to come back on that signings figure. Thank you for sharing. If I’m correct, £2.5 billion is exactly in line with the run rate for last year, and that would imply something like £1.5 billion for the last six months. But I just found it interesting that you flagged how H1 ’22 was helped by a couple of particularly large contracts, but you seem to be running at exactly the same record high £1.5 billion pace of signings for this H1. So did you find another couple of large contracts? Is it that Europe is really helping? Is it more broad-based? Just to confirm the math there on the last six months being as strong as the highest you’ve shown for last year.

And then secondly, on Europe, I think investors have occasionally seen a strong quarter or occasionally seen a strong half year in Europe. It hasn’t always been very sustainable. You talked about some fundamental changes to the processes, et cetera. I guess, on the downside, what are things you’re doing differently today to make sure that you don’t have a bit of a U.K. pressure, pressure from Germany, the bits to have every couple of years sort of caused problems in Europe, how are they addressed?

Dominic Blakemore

Jaafar, thank you for those questions. To be clear, the 6-months new signings is closer to £1.4 billion than £1.5 billion. But regardless, your point is absolutely right, it’s a very strong half, and it’s a half that we’ve achieved very high levels of signings without any individually significant contracts. What that means for us, we believe, is it’s almost a more attractive book. And it’s sort of almost a high-quality achievement rather than relying on the big ones. There will always be big ones. They will be lumpy, but being able to sustain this level with more of the midsized contracts is important.

And of course, within that, North America continues to play its part with a very attractive level of signings and forecast for this year. But what we’re seeing, as we’ve said, is a very strong performance outside of North America, an attractive pipeline for the balance of the year. And as we called out, and it sort of leads into your second question, what’s underpinning that is a qualified universe of opportunity that is 60% larger than we historically had and a win rate that is 50% better than we historically had.

Now those metrics still lack North America. So this sort of goes on to answer your second question, why we believe there’s even more opportunity. We believe there’s still a bigger universe for us to identify, which means we can qualify a high-quality pipeline, which is bigger than we’ve ever seen. Within that, we’re being much more proactive in understanding the market rather than being reactive in responding to tenders that come to us. And in many ways, we think that the pandemic allowed us a sort of foot-on-the-ball moment, to use a sporting analogy, which allowed us to sort of reset our approach. We need to keep working with discipline on that.

I think, look, your point is very fair, we have seen glimmers of improved performance. I don’t think we’ve yet sustained it over 18 months as we’ve done thus far. And with our forecast for the balance of this year, we have reasonable confidence that we’ll do that over two years. We’ve now got a database that covers all of our European countries, which is centrally managed. We have processes and routines and disciplines that weren’t in place before.

We’ve adjusted incentives. We’ve included — we’ve up-weighted a number of sellers. Most importantly, we’ve changed the mood around growth in a sustainable way, I believe. Within that, we shouldn’t underestimate our focus on purchasing [accidents] in our major European markets, means that we feel we can be more efficient and more effective in our bidding.

So I think all of those things are coming together and give us a good level of confidence around what we’re seeing and that it’s sustainable. But as you’re absolutely right, you asked me what is my biggest opportunity and biggest challenge today, it is maintaining this level of performance. And I say there’s absolutely an opportunity, but we need to stick to the basics and continue to as we are today.

Palmer Brown

Just to add here, Dominic, I referenced a number of things on the new business win side of the equation within Europe. But just as important, and frankly, even perhaps a bit more important is the improvement in the retention rate. Over two years, we’ve improved retention from sub-94% to 96%. Within that, I mean, we’ve improved our preemption conversion by a quarter.

So — and that’s really focusing on the basic processes and trainings, just as Dominic referenced, for the new business that’s applying for the retention side of things, too. Focusing on what we refer to as these micro-inputs producing these good results gives us faith that these results are sustainable as we’ve ever had.


We will take the next question from the line of Leo Carrington from Citi.

Leo Carrington

Also three questions for me, please. In terms of your exits of those six countries, just in terms of the bigger picture on footprint, is it fully optimized now for other countries that you consider exiting and, indeed, regions that you might still need to acquire into to build your footprint, as you did with Fazer in 2019? You certainly seem to have the balance sheet to do so.

And then secondly, interested to see the acquisition of the coffee assets in B&I. Can you just give an indication of what the current offer you have in coffee is? Is there a significant further penetration opportunity into your current set of contracts? And just if you could indicate on the growth so far. Has the revenue growth from coffee offers in the past decade been accretive to overall group growth? And if so or if not, how might that change?

And then lastly, on Education and Healthcare, referencing the bigger opportunity presentation, Dominic, can you just outline why it has to do with your relative competitive advantage? Or is it because of the outsourcing propensity? Some more color would be great.

Dominic Blakemore

Thanks, Leo. Let me just tackle that last question first. I mean Healthcare and Education, I think, first and foremost, it’s — we’ve called it out because it’s the least penetrated or the lesser penetrated sectors of the five in which we compete. That means there’s more opportunity. I think that for us means all of the factors we’ve talked about, whether it be inflation, labor availability, compliance or regulation, really play into those two sectors. Particularly where you see some of the net-zero requirements mandated by governments upon those sectors, it can accelerate the outsourcing.

In terms of Healthcare, typically, you need a bundle, which may include other services like janitorial and cleaning. And in the bigger markets, we have those, which means we can play into that space very capably. And as we said many times, support — soft support services are almost more valued by the clients for the obvious reasons of hygiene in those environments.

So I think when you add those up, they’re attractive sectors. But I would say for both and equally for the subsector of Senior Living, what we’re learning is there are a number of criteria that make those attractive by market. And we have to be very analytical in understanding where we want to play and then determining how we play with what offer and how we build the capability or buy the capability, and we’re very, very focused on that.

In terms of the portfolio, I’ll hand over to Palmer to talk about the portfolio and the acquisitions in coffee in a second. But what I would say is my — one of my big observations, and I haven’t been in this business a while, is we are at our best when we go narrow and deep. There is so much opportunity for us at the core processes and in our core sectors and some of the adjacencies. That will provide us with the runway for growth for a considerable period going forward.

And the worst thing we can do is distract our teams with tail markets or countries which just don’t represent anywhere near the opportunity. I think the six countries that we’ve sold or exited and announced in this half represent no more than 1% of our total revenues. I think that says a lot. And if I talk to my Head of Sales in Europe, he would say it has freed him up to focus on the three big markets where we can really make a difference. And that’s really, really important for us.

And so, look, we’re not complete in doing what we’re doing. We will continue to look at the portfolio. We’ll continue to optimize. And more importantly, we’ll continue to do M&A that more than offsets the disposals to give us access to those core sectors where we believe we can grow faster. And all of this goes back to the repeated questions today to give us confidence we can sustain that level of net new outperformance against the historical levels.

Palmer Brown

In terms of the exits, to Dominic’s point, our top 10 countries represent just about 90% of revenue and profit. So that’s a fairly long tail that’s there. And it’s something that we’ve been taking a look at, we will continue to review as we go forward.

But just to frame it, as Dominic said, we’re continuing to invest. We’re doing M&A, mostly in our core markets. The M&A roll from last year and the M&A that we’ve done this year will more than offset the six exits that we’ve undertaken. So we think that can be a bit of a model as we go forward. So I think just to keep it all in context, we will review the tail, but we will continue to invest in our core markets where we think we have substantial competitive advantages and significant growth opportunities.

In terms of acquisitions in North America, specifically the office coffee piece, I mean, office coffee, micro-markets vending, is all part of our Canteen operation. It’s a big business. It’s a very successful business within the U.S. and North America as a whole, predominantly within B&I, but not all. We have some in Education, Healthcare and the like. We’ve seen nice growth over time in that area. B&I has been the biggest driver of the growth in the first half of this year. Certainly, the Canteen growth would be a component of that. We see office coffee, micro-markets, vending is very much core to our business. It’s something we’ve invested in, in terms of infill acquisitions in the past and something we will continue to look to as we look forward.


[Operator Instructions] We will take the next question from the line of Harry Martin from Bernstein.

Harry Martin

A couple of questions from me. The first one, on the B&I performance, I mean we see headlines about layoffs and reduced subsidy levels, but your revenue there is now 16% ahead of 2019. But can you give an update on where per capita usage is running, subsidy levels and how sustainable the growth is in that business from here?

And then the second one is really on the long-term margin potential in Europe. You talked about improving procurement practices. As this market accelerates and drives more revenue growth, what are the opportunities for the margin in that business? And does the European business always have a structurally lower margin than the U.S., even if the scale eventually gets to quite a similar level? Any color that you have there will be really useful for us.

Dominic Blakemore

Harry, thanks. The B&I performance, we’re very, very pleased with the B&I performance. I think there was a lot of concern about the sector as we emerge in the pandemic and its long-term attractiveness. What’s underpinned, of course, a little bit of inflation, but more importantly, it’s been very significant contract wins that has increased the scale of our B&I business. What we’re seeing, yes, we are seeing restructurings happening in certain sectors within B&I. But of course, that’s being right now more than offset by the tailwind of return to office.

What we’re witnessing is a continued strong return to office. Broadly, in our major portfolios in major cities, Tuesday, Wednesday, Thursday are back to pre-pandemic levels, if not higher. Mondays are coming back. The narrative now, I believe, from everyone I talk to in our client base is greater encouragement of colleagues to return to the office. I think we’re all seeing that arm as we talk and hear about sort of loneliness of working from home and mental health pressures and so forth.

So we feel very optimistic about our B&I portfolio going forward. In fact, in Europe, we are a largely B&I business with a very significant market opportunity in B&I. And we believe we’ve learned a lot about how to adapt our operating model to that environment to win. So look, we’re excited about B&I. At the same time, it’s fair to say it’s great that B&I is a lesser part of our portfolio today. And then we’ve got greater diversity of sector than we’ve ever had. I think that gives us greater protections to events as we go forward. So I think all around, it’s a good thing.

And then, look, on the long-term margin potential in Europe, it’s probably fair to say we still got a reasonable delta of improvement to come from the pandemic in Europe. But look, that said, and I said it earlier on the call, the most important thing for us is that we sustain the growth we’re seeing outside of North America.

If we’ve got margins in the second half north of 7% and we made progress from there, even if that progress is incremental and we sustain the growth outperformance, we will be happy because we know that the growth gives us purchasing opportunity, gives us consumers to retail, too, it gives us overhead leverage, and sustaining the growth model is critical. So again, we’re optimistic on that point. You know what, if we never close the gap to North America, we won’t mind as long as we keep growing our margin in North America as well.


We will take the next question from the line of Kean Marden from Jefferies.

Kean Marden

Two quick ones from me. Just first of all, would you call out any particular parts of the business where the outsourcing penetration rates has already contributed more than anticipated over the last sort of 12 to 18 months? And any sort of potential laggards? So I know you’ve sort of presented some data, giving us some insight into marketing structure over the last sort of 10 years. Just really looking to sort of update how momentum has progressed since we last looked at that data, which I think from memory referenced sort of 2019.

And then secondly, your comments on your pricing sitting at a significant and growing discount to the High Street caught my attention. I’m just wondering if you could expand on that to [indiscernible], please.

Dominic Blakemore

I mean maybe if I’d just take the pricing point, I mean, clearly, our model is one where we’ve enjoyed in various different contracts like the client subsidy over the fact that we don’t have the full range of costs experienced by our High Street operator, be it rent rates, energy, utilities and so forth. We’ve always been able to price at an attractive discount to the High Street. That depends very much on contracts and contractual arrangements with clients.

But as we predominantly pass-through pricing associated with just food and labor, that is at a lower level than we’re seeing in some High Street outlets where they’ve got the full range of costs that they’re having to recover. Therefore, whilst we’re putting prices up, our prices are going up at a lesser amount than the High Street and, therefore, widening the discount. We think that makes us more attractive to the consumer. And we’re working hard to demonstrate that value that we offer by staying on site and, therefore, driving footfall and participation, which we see as an opportunity.

And also, it’s very clear, that’s how we generate client excitement and attention by being able to show how we can, in first-time outsourcing, not just unlock the 20% to 30% cost advantage that our scale presents against itself up, but also maintain that over time against ongoing higher-than-historic inflation. So I think the pricing and the management of inflation is — can be a positive to us, both through the consumer and the client lens at this point in time.

Kean Marden

And do you have a sense, Dominic, to what extent that pricing gap has widened over the last six months? I appreciate it’s difficult to generalize, but obviously, you did point it out earlier on.

Dominic Blakemore

Yes. I mean I’d be guessing because it’s so different market to market and contract to contract. But if over the last several years, we’ve taken 5% to 6% average pricing, I think we’re all seeing what we’re seeing on the High Street arm, which is probably closer to an average of double digit.

Palmer Brown

In terms of the outsourcing, look, overall, with growth, it’s been fairly balanced across the sectors. It’s been led by B&I and Sports & Leisure. And a lot of the common thinking is that B&I and Sports & Leisure, being mostly outsourced, that we don’t get much first-time outsourcing that’s occurring, but that’s not necessarily the case. There is a good bit that’s happening in each of those sectors. So it’s been fairly broad-based overall.

As we look ahead, again, the biggest structural opportunity is in Healthcare and Education. We are seeing some pressure in health care, particularly in the U.S. We’re seeing a lot of health care systems and individual health care clients under financial pressure, that’s there. We think that while it’s difficult to manage on a daily basis, ultimately, that presents outsourcing opportunities because we can provide value propositions and cost savings to clients. It’s not completely unlike what we saw several years ago with the Affordable Care Act that presented a lot of growth opportunities for us in Healthcare. So as we look ahead, we think that’s an opportunity. But we continue to see good outsourcing opportunities across all of our business.


We will take the next question from the line of Neil Tyler from Redburn.

Neil Tyler

A couple left for me as well, please. In terms of the — I suppose, first of all, coming back to the previous question or answer and the source of those new wins, you’ve mentioned consistently that first-time outsourcing was the lion’s share. And we’re hearing from your competitors that retention at both of those companies has improved as well. So presumably, there’s less attrition amongst the largest players. But between those two, are you seeing any change in dynamic driven by the operational complexities from mid-market and regional players? That’s the first question.

Secondly, the foot-on-the-ball moment that you mentioned, could you perhaps expand on that as to how it’s perhaps changed the contract structures? You’ve been able to live all to those to allow yourselves to be more nimble, [shows] costs fluctuate significantly.

And then the final question, I wanted to try and ask you to sort of expand a little bit on the Foodbuy business. You talked about the expanding scale and scale advantage. How that has — how the inflation we’ve seen has altered the size, scale, and any numbers you care to share if we compare that business to, in terms of sales, maybe even to the margin, compared to pre-pandemic?

Dominic Blakemore

Thanks, Neil. In terms of that question around competitive dynamic of large and medium, I think you have a point. On the one hand, in this environment, the greatest challenge is for the sale talk. In this environment, the greatest opportunity to demonstrate value and quality of our services is for the large players who’s got scale and proven processes and can even longevity of operator.

So I think it is playing to the strengths of the big right now, and I think that’s benefiting all of the bigger players. I think that’s perhaps what we’re seeing in retention. I think it’s perhaps what we’re seeing in higher [preempt] trades and perhaps less coming to market that’s in the hands of the bigger operators as it were. I think that’s also why we’re seeing more first-time outsourcing. So I think they are the two sides of the same coin.

The bit in the middle, we don’t talk a lot, but perhaps it’s the sort of smaller players. And it’s a continuum, I think, it’s sort of — if you’re a — you are going to — if you haven’t got the buying scale, you’re going to get squeezed on your ability to mitigate costs for clients, and that is going to create more opportunity for the bigger players.

That said, there are some great businesses in our industry, which either have independent U.S. pay or something niche that makes them attractive to their clients. And we really like those businesses. We keep an eye on all of them. And they’ve been, as you know, a great source of growth opportunity for us in the past, whether it was a Fazer or a Bon Appétit or a Unidine, and we’ll continue to keep an eye on those businesses as we go forward. But broadly, I think that it’s a positive marketplace for ourselves at this point since.

On the others?

Palmer Brown

With respect to the contract structures, the base contract structures are really no different from where they’ve been historically. But what you might see is a few variations on the fringes. So maybe allowing a bit more operational flexibility, maybe a bit more ability to discuss changes if volumes drop, different scheduling aspects that may come into play.

Look, we’re in a very different inflationary environment than most folks in this industry have ever seen before, so the ability to deal with that. We referenced some of the pressures in the Rest of World business around labor shortages, just some flexibility in contracts for those type of items that might arise that are outside of our control, but yet to try to create contract structures in complete alignment that work with our clients.

So really with these structures, we’re seeing some of those changes on the fringes there. But overall, from respect to the base structure, it’s really not much different. And with respect to Foodbuy, Foodbuy is an important part of our business as a whole. A lot of folks think of Foodbuy as third-party GPO purchasing, and that is right in what we think of as the Foodbuy model. But we’re only doing that in a handful of countries globally. It’s in the countries where we have more mature markets, more mature processes and other [indiscernible].

Neil Tyler

And then the third thing, you’ve said that volumes slowed down in the second half of the year. Is that purely comps? Or is there any sort of contingency in there for consumer weakness or anything else you’d care to mention?

Dominic Blakemore

Maybe I can tackle that and then hand — march it over to Palmer. Look, on labor costs and labor availability in North America, it isn’t easy given the growth we’re enjoying and given some of the more heightened churn in frontline labor. It is, of course, a challenge. But what’s a challenge for us is a challenge for everyone, and I think we are managing it well. We’re putting new measures in place all of the time, which make us a more attractive employer. And we will continue to focus on that. So I think we’re managing the situation well, and we’ll continue to do so and look to make it a point [advantage].

In terms of volume selling, it is absolutely a fact of lapping the restored pre-COVID base in the second half of 2022. If you recall, we were at somewhere between 110% and 115% [second] half of ’22. And we’re now lapping that. Our guidance today assumes that sort of volumes will be flat to slightly positive. That’s probably how we see it at this point.

Palmer, as well there?

Palmer Brown

I mean just to frame it, that the comps, the first half last year on a blended basis was 98% of 2019, second half was 113%. So the big step-up in the comps from first half to second half last year, that’s the biggest driver of that growth slowdown that you’ll see the second half of this year on the volumes thing. Any real volume that we get in the second half, we view as a bit of upside opportunity for us.

With respect to the margins, just as you heard from Vicki part of the call, just a rough framework, 40% drag from the new business, 40% inflation, the remainder being investments in the business. However, we do see that the new business growth normalizing, that will start to subside in terms of the growth drag. So you’ll have the mobilization element of the growth drag start to decrease. There will be a bit of ongoing efficiency improvement that occurs in those new contracts that can take upwards to two or three years even in the bigger contracts. So that will start to subside as we go forward. But that’s a rough breakdown and a rough way to think about it.


We will take the last question from the line of Karl Green from RBC.

Karl Green

I’ve got a couple of questions. The first one sort of breaks down into a smattering of sort of subdivisional questions. Just on the strategic restructuring cost, can you break down the gross charge, the £99 million, between the country exits, not necessarily by country, but the country exits and then the site closures, contract renegotiations and terminations in the U.K.? And following on from that, what kind of costs should we be expecting in the second half of the fiscal year?

And then unrelatedly, the second question, just in terms of your longer-term guidance and thinking around organic growth, have you had any thoughts yet around the longer-term impact of ChatGPT and AI on B&I volumes specifically, please?

Dominic Blakemore

Perhaps let me take your second question. I mean, look, it’s along with other factors. It’s something that could have a positive or negative effect on volumes going forward. I think what’s important we said today is we were delighted with the recovery of B&I, but also B&I is a smaller part of our broader portfolio.

We’re in considerations and conversations with a number of partners right now to understand how AI can improve our own internal processes. It may create opportunity for roles within the tech sector. It may diminish roles in others. So I think we have to take that in the round as we’ve always done. And again, the sort of broad-based portfolio gives us confidence.

Palmer Brown

In terms of the portfolio review, the non-underlying charge, the bulk of the £99 million that you referenced relates to the U.K. businesses that are there addressing those U.K. lines of business, rightsizing those with respect to the new volumes that are there. The lesser amount relates to the six country exits that happened.

With respect to that former category, the sort of the rightsizing of the business, we’ve reviewed not only the U.K. business, but in all the businesses elsewhere. And we think that is all there is to occur there. So we don’t expect any more of that type.

With respect to the ongoing portfolio piece you referenced, you referenced the tail, we talked about it earlier, we will continue to address that tail as we go forward. And just as we said, we will continue to invest in our core businesses via M&A and organically.

Karl Green

Okay. And just following up, so just in terms of rightsizing the U.K., is it fair to assume that, that is just a legacy impact of structural changes post-pandemic? Or is it something else structurally that’s happened in that country?

Palmer Brown

No, exactly, that’s exactly what it is.


There are no further questions at this time. I’ll hand it back over to your host for closing remarks.

Dominic Blakemore

Thank you all very much for joining us today, and we look forward to speaking to you later in the year. Thanks. Have a great day.