Sodexo (SDXOF) CEO Michel Landel on Q2 2016 Results - Earnings Call Transcript

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Sodexo (OTC:SDXOF) Q2 2016 Earnings Conference Call April 14, 2016 2:30 AM ET

Executives

Virginia Jeanson - Investor relations

Michel Landel - Chief Executive Officer

Marc Rolland - Group Chief Financial Officer

Analysts

Jarrod Castle - UBS

Jaafar Mestari - JPMorgan

Jamie Rollo - Morgan Stanley

James Ainley - Citi

Vicki Stern - Barclays

Ed Birkin - Credit Suisse

Nadia del Kasir - Berenberg

Pascal Hautcoeur - Redburn

Tim Ramskill - Credit Suisse

Operator

Welcome to the First Half Fiscal 2016 Results Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session, [Operator Instructions]. I must advise you that this conference is being recorded today, Thursday, April 14, 2016.

And I would now like to hand the conference over to your speaker today, Virginia Jeanson. Please go ahead.

Virginia Jeanson

Thank you. Good morning, everyone. Welcome to our first half fiscal 2016 results call. On the call today, we have Michel Landel, Chief Executive Officer; and Marc Rolland, Chief Financial Officer.

As usual, the slide and press release can be downloaded from the website. There will be an audio replay of this call available from 10:30 this morning Paris Time. You can dial 44-1452-550-000 and the access code will be 56653365 and that will be available until April 28. Or much easier you can access this call on our website for the next 12 months. This call is being recorded and may not be reproduced or transmitted without our consent.

This presentation contains statements that may be considered as forward-looking statements and as such may not relate strictly to historical or current facts. These statements represent management’s views as of the date they are made and we assume no obligation to update them. You are cautioned not to place undue reliance on our forward-looking statements.

I’d now turn the call over to Michel Landel. Michel?

Michel Landel

Thank you, Virginia, and good morning, everyone. Thank you for being with us today. So, I will comment this result with Marc. And before we get into the numbers, I just want to highlight few points, which marked this first half of fiscal 2016.

Number one, this year Sodexo is celebrating its fifth year’s first day and Sophie Bellon is now replacing Pierre Bellon as Chairman Executive of the Board. And I think that’s a strong commitment from the Group to our mission and our values. A strong commitment to our culture, to our growth model and to our strategy to deliver integrated quality of life services worldwide.

The second point I’d like to mention is that Sodexo has entered the CAC 40 and I think this proves the confidence of the financial community in our growth strategy also recognizes our ability to deliver consistent solid financial results over time and also I think it also increases the visibility of the service industry as an engine for value creation in the economy.

The third point I want to make is to tell you that we are proud to have signed a very big partnership with Rio Tinto in Australia, a partnership of AUD2.5 billion over 10 years. I think that really validates our strong commitment on our strategy and our unique integrated Quality of Life services and actually I will comment this contract in more detail a little bit later in this presentation.

And lastly, I also want to mention that Sodexo continuous to be recognized by Dow Jones for our sustainable development efforts as the industry leader and that’s very important for us and also by the United Nation for our commitment to women’s empowerment.

So, along with these important milestones in the semester, we had a good set of results. Our first half revenue is just over €10 billion, up 6.7%, of which 3.7% is organic boosted by the Rugby World Cup, without Rugby World Cup organic growth would still have been 2.5%. Operating profit before exceptionals and excluding exchange rate effects was up 7.9%. So, the trend in operating profit margin excluding currencies also remained solid up by 30 basis points.

Our new measures to adapt and simplify our organization as started as you know with €37 million of cost booked in this semester. In terms of net income before exceptional is up 11.2% excluding exchange rates and after exceptionals is up 4.6%. We have generated €54 million of free cash flow after operational investments versus €51 million last year at the same time.

So, now I will hand over to Marc, who will take you through the financials and I will be back a little bit later. Marc?

Marc Rolland

Thank you, Michel, and good morning, everyone. I’m very pleased to be with you this morning. Let’s start with revenue growth. You can see the total growth is 6.7%, it was helped by a 2.9% contribution from currency, mainly the dollar and the sterling, somewhat offset by the Brazilian real. There is a minor perimeter change about 0.1% and as a result we generated an organic growth of 3.7% of which 3.6% in our on-site services activity and 6.3% in benefits and rewards services. I shall comeback on this later.

If we now move to next slide, our operating profit before exceptional cost and excluding the currency effect is up 7.9%. The margin at constant rate is also up by 30 bps. However, at current rate, the margin is flat at 6.2%. As you can see, the net currency effect weighed on the margin this semester. It is due to the particular weakness of the real with the drop of 27% in our average rated [ph] services last year. I still remember that this semester we get the full effect of the decline of the real, which only started to fall from last summer. You will find the real, the dollar and the sterling details in the appendix on slide 42.

With regard to the adaptation and signification program, in this semester, we have booked €37 million of cost. We expect to see this amount right to about €100 million by the end of the year and reach to €200 million in total costs by end February, 2017. We will start getting some benefit of those measures already in H2 and this will rise progressively so that we achieved the full €200 million of saving in full year 2018. So far and given the project that we have already approved, we see that approximately one-third will be reducing cost in unit and two-third reducing support function cost. Hence this should be 80% to 90% cash spend with about a profit delay between booking and cash outflow.

Moving onto the P&L, revenues reached €10.6 billion, up 6.7% as mentioned earlier by the strength of the U.S. and sterling. Before exceptional items, the operating profit reached €658 million, up 6.1% at current rate, thus increasing by 7.9% excluding currencies effect. Currencies, as I have already said, weighed on the operating margin, but the operating margin was plus 30 bps excluding the currency impact.

After taking into account, €37 million of exceptional costs, the operating profit was €621 million or flat on last year. The net financial cost were down €30 million, it is principally due to the reduction in the borrowing cost resulting from the full-year positive impact of the dollar reimbursement in January 2015, the reimbursement of the US PP trench in September and the reimbursement of the remains of some real debt in February.

Today, average interest cost on our debt is now at 3.4% for the first half, down further 40 bps related to last year. The tax rate is stable at 55.5% and should not change materially for the full-year. Therefore, net profit before exceptional cost is up 11.2% excluding currency. After the exceptional cost, net profit is up 4.7% and earnings per share is about the same at 4.5%.

The effect of the share buyback program is not yet visible as we started buying back from mid-January and we also serve some production [ph] programs. You will see more significant impact in H2 and you will find the full detail of the shares in the appendix slide page 41.

Now, if we look at our cash flow, operating cash flow is up 21.5% or €104 million, driven by our earnings before exceptional cost not cashed out yet or higher amortization intangible linked to the Rugby and lower interest paid, thanks to refinancing.

The deterioration in terms of working capital versus last year is mainly due to the Rugby. Since much of the cash income in H2 last year and virtually all the cash out was in the first half. We can also feel some pressure on receivable [indiscernible] mainly in the U.S. As a result, net cash provided by operating activity was up 16%. The increase in CapEx is mainly due to the Rugby otherwise, there will have been no increase.

Therefore, free cash flow stands at €54 million, a little similar to the one last year for the same period. The other main feature in this first half are €193 million related to share buyback program and I just want to highlight that we have spent further €44 million in the end of the period, the detail can also be found in appendix slide 41.

€355 million of dividend paid, which represents an increase of €60 million versus prior year driven by the significant 22% dividend increase for fiscal 2015. And therefore, the increase of net debt during this first half is €583 million.

Looking now at the balance sheet, the key movement this February versus last year is the returning cash level. It is used with the share buyback program and a higher dividend than a year before and the debt reimbursement of the US PP during H1. Otherwise, the seasonality of our February balance sheet linked to the tenant of the dividend during the first half is visible in the higher gearing of 26%, last year it was 23%.

Now, let’s go into the detail of the On-site business. Looking at the detail of the on-site services organic growth for segment, and we are on slide 16, we can see that corporate grew at plus 5%. There is obviously a positive rugby impact, but the remote site activity suffers and they more or less compensated one another. This therefore highlights that the trend in corporate outside rugby and remote site was very solid this first half and above 5%.

In healthcare and seniors, the 2.7% improvement is explained by a pick-up in North America, which is very satisfying after a period of slower performance. The exit of the ManorCare contract last year, new business singed last year, which boosted this first half, but self development remains limited in UK and continental Europe and we have some contract in France. In education, plus 1.5% improving slightly from Q1, we have remained selected in our billing process especially in Europe and the bulk of the growth is coming from same-store sales.

Now taking you to the region split, North America is improving from quarter-to-quarter at plus 3.6% for this semester. The UK is very strong, thanks to the Rugby, but not only the 12.2% increase excluding Rugby, thanks to last year’s Justice and corporate opening, which are also contributing strongly.

Continental Europe has 1.6% is also progressing slightly better quarter-over-quarter and particularly in our corporate activity. The rest of the world is down 4.4% seriously impacted by the remote site where the [indiscernible]. But, please note that the rest of the business is holding up well at plus 7.2%.

Now looking at North America revenues, Corporate has remained strong at plus 7.5%, with continues solid growth in FM activities, as we offered more integrated services account such as Sybron, Zurich or GSK. Health care and Seniors is up plus 4.6%. We are benefiting from the rest of our contracts on last year and Seniors is now back into Q2 with the end of the impact of the exit of ManorCare, and the pipelines looks encouraging with some solid new opportunities.

In education, we are up 0.8% thanks to good volume on the existing site and especially in University and we have already mentioned there is limited new business this semester, the selling season is just starting now for opening in August.

On North American operating profit, we can see that the operating margin continues to grow, up 40 basis to 7.5%, overhead has continues to contract, food purchasing optimization has progressed well and the standardization of offers and menus has been strengthened. Looking at Europe, Continental Europe is up 1.6%, it is slightly better than last year, but still a mixed bag. France remains week and is down slightly each quarter.

However the rest of Europe and particularly Spain, Germany and some other Eastern Europe countries such as Russia versus Turkey are doing much better. The trend in Corporate is better up 3.3%. [Fuco corporate] is slightly better thanks to solid same-store sales. FM is still growing strongly whereas food volumes remain weak.

Healthcare and Seniors on the other hand remain difficult at minus 3.1%, with trick selectivity this year and particularly in France. Education at 2.1% is better this year with good volume increase and especially in Germany and France. Looking at the margin, despite the relatively modest growth in revenues, site productivity improvement and food processing efficiencies are held to build the margin by a further 30 bps.

A 27% the UK growth is heavily influenced by Rugby, which took place in Q1. Nevertheless, H1 growth is still good, excluding the Rugby at 12%. Corporate is up almost 36% or 15% excluding Rugby. This is thanks to the exceptionally large mobilization of contract last year, including transforming realization, which started up last February’15 as the Diageo and GSK account incorporate amongst others.

I want to remind you that this [indiscernible] and that there has been no significant new signatures since. So the pipeline is beginning to look a bit more healthy. Healthcare is showing a more or less 1.3% growth, there is no major new wins in Imperial Hospitals. Education is strong and due to good contract win last year such as Exeter School, [indiscernible] Brentwood and Europe University more recently.

So I must remind you that the UK growth is not going to be so good in H2. Due to the full-year impact in H1contract last year and the high contribution from transforming rehabilitation in H2 last year coming from the mobilization phase, which is now behind us. But even though we are not as fine as much new business to date in the UK, we are confident that findings will pick up as the pipeline has improved.

The strong revenue growth has boosted profit growth too. Margin was up 160 basis points to a comparable base, which was affected by the service cost last year. Efficiency gains are overhead, optimized food purchasing, and the contribution of the Rugby as well. Now, looking at rest of the world, as you can see on slide 24, the rest of the world is down minus 4.4%, due to an 18% decline in the Remote Site activity.

Excluding Remote Site, organic growth is very solid at plus 7.2%. The Remote Site accounts for about half of the revenue of the region incorporate and they explain the weakness of our corporate activities, which declined by 6.1%. The corporate, excluding Remote Site is growing at 6.2% with good growth for instance in India and Middle East. But the business environment remains strong in Brazil with negative same store sales.

In Remote Site, the bulk of the reduction comes from the drop in same store sales and particularly difficult environment in Chile with volume issues with sub contract losses. It should be noted that in the Remote Site, the pipeline and the business development activity even though slower than in the past remain active and encouraging. Even if small in comparison to corporate, we’ve had a very strong development in healthcare and seniors, especially in Asia and Latin America, resulting a 20.6% organic growth.

Education remains small and are seeing mixed impact in our geography. We can see that the operating profit has been impacted by the very top environment in oil and gas and mining and more particularly in Latin America. In Remote Site and Latham even though we significantly adjusted our in unit operating cost, it has not compensated the volume effect. The gross profit margins are holding up decently though because the volume losses weigh on the operating profit margin.

A quick word on Rio Tinto, winning the project will contribute to the revenue in H2 and there are mobilization costs, which will also reduce the margin. Overall, for rest of the world, we do not expect the change in the trend of the margin in H2. Now, let’s move onto benefits and rewards. Issue volume at 8.2 billion euro and revenues at 393 million are clearly affected by the significant Brazilin real currency drop, where we lost 27% versus last year.

Organic growth at 6.5% on volume and 6.3% on revenue, operating resilient thanks to sustained growth in Latin America, despite tough environment in Brazil and counting growth are a bit slower in Europe and Asia. Let’s see the performance by region starting with Latin America. Volumes on revenues organic growth are up 96% and 95%, respectively. Volumes have been held by increased face values due to inflation and interest rates are contributing well on the revenue side.

On issue volume in Brazil, we have shared some decline in a number of beneficiary at existing clients, but the inflation effect on volume is strong and the overall net new loss impact remains positive too. On the revenue in Brazil, the top competition in this more difficult volume environment is weighing on the revenue growth, which currently sits at the bottom of our 5% to 7% range. Growth in Mexico and Chile remains very strong.

In Europe and Asia, Western Europe is growing certainly over time so that revenue growth is much more dynamic in Turkey, Czech Republic, and Asia. On slide 30, we see that the operating profit of benefits and rewards was very badly affected by the weakness of the real, as the result, operating profit is down 16% at current rate. However, excluding currencies, the operating profit was up 13.1% and the margin improved 90 bps as a result of strict control of overhead and purchasing cost.

I now pass you back to Michel for the outlook.

Michel Landel

Thank you, Marc. So, based on this first half, as far as the outlook is concerned we are confident and we confirm our guidance for the year. We should have organic growth of about 3% and operating profit growth of about 8% and that’s excluding currency impact and exceptional costs. So that’s for this fiscal year, but I would like to mention as well that as far as currencies are concerned, the negative effect of the Brazilian Real should continue in the second half, while the favorable effect of the U.S. dollar should decline.

However, as you know, this is exclusively a convergent effect with no operational impact. Now, concerning the medium term, we remained confident that the Brazilian economy will pick up itself back up and the oil and other commodity price will rise, which will help us to achieve our objective of revenue growth of between 4% and 7% per annum and an annual operating profit growth, excluding exchange rate impact of 8% to 10%.

So before we go to the Q&A, I just want to say a few words about Rio Tinto, the Rio Tinto contract. Rio Tinto wanted a single partner to deliver a technically sophisticated, integrated facility management solution across the entire operation in the Pilbara region, which is – the size is enormous, it’s like actually France. So it’s very big and doing all this while reducing cost and energy consumption. It was also very important for Rio Tinto to work with a partner who had demonstrated commitments to local Aboriginal communities and a strong track record in corporate social responsibility.

So this win really validates our strategy. It demonstrates the strength of our new segmented and specialized organization because we were able to mobilize a very strong international team of nearly 100 industry leaders and experts to design the specific solution for Rio Tinto and just as an example, among the services, our teams will be performing, we’re talking about accommodation services, building maintenance, you know we’re managing airports, so we will deal with baggage handling and runway maintenance, of course catering services, cleaning services, but also property management, transport services, town services, ground maintenance, security and many others.

One key aspect of this contract for Sodexo is the way we will deliver through innovation notably with our information and communication digital platform. Rio Tinto has requested a single portal to manage all the work streams and drive KPI reporting. So, we have designed a specific platform for them and a system that gives our clients’ real-time dashboards on performance that can be dialed into at any point, at any size in this big region to monitor what’s happening on the ground.

Now, one of the thing that we do is we serve people, men and women who work on this sites and this is a very remote place for people and these people they fly from their homes to work in shifts, jointly two weeks on and one week off and Sodexo service provides a, what we can home away from home to these workers and we really take care of their quality of life. So, we do everything from driving the [Buffy services] that takes them to the worksites to providing the on-site services and accommodation that they live whole day and spend the night.

We also managing swimming pools and health and witness and fitness, we have trainers. We manage movies rooms, headdress, hairdressers many, many and many, many services. We also operate towns, where Rio Tinto workers live with their families. So, we run these times much like a council wood taking care of the grounds keeping and running the grocery stores, driving cinemas, gas station, handing garbage collection and lentil services. We also take care of Churches on community home, like in any small town.

So as you can see it’s an extremely comprehensive and sophisticated offer, which really is a strong proof of the fact that the strategy that we have developed over the last several years is really paying us because we see many, many clients today in the world really want to mutualize their purchase of services and that’s a very, very comprehensive case. So, at this point, with Marc we’re ready to answer your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] You have few questions coming through and your first question comes from the line of Jarrod Castle. Your line is now open.

Jarrod Castle

Thank you and good morning. Three questions please. Firstly, just coming back to Rio Tinto, will there be any additional CapEx that you might have to spend in terms of ramping up this contract and also once the contract is ramped up, can we expect the margin, which is at least in line with the onsite margin in terms of your thinking? Secondly, you are coming towards the end of your buyback, I guess there is 60 million euros left, any additional thoughts on maybe extending the buyback program? And then lastly, any thoughts in terms of the minimum wage increases in the UK and any impact on your contracts at the moment. Thanks.

Michel Landel

Okay. On the Rio Tinto, yes we will have some CapEx on these contracts. Marc how much we will have on that one.

Marc Rolland

Actually, maybe I saw the equation differently, it is going to weigh on our cash this year and it would progress in the year we cover, so our energy impacted service is going to be circulating in euros and half of this is going to be CapEx. The margins of Rio Tinto are going to be in the lower end once we are experimenting as a group and the ramp up will take a little bit of time and as I mentioned it is going to be, there will be some additional cost this year. It will be neutral to positive next year and then normal margin from fiscal year 2018 or more.

Michel Landel

Thank you. In terms of extension buyback, no we don’t have in mind to go over the 300 million that we have discussed with you back in November. It’s going well actually as Marc has mentioned, you know we are - at the end of February we were at 193 million, so we would be finishing in the next few weeks. In terms of minimum wage in the UK, well it will not affect us very much. Actually, it’s part of our margin outlook that we gave to you, it’s included in this. We of course pass these increases to our clients most of the time, otherwise it would be a negotiation, but really overall we are in good shape and we should be able to pass that to our clients. I think we answered your question.

Jarrod Castle

Thank you very much.

Operator

Thank you. And your next question comes from the line of Jaafar Mestari. Please ask your question.

Jaafar Mestari

Hi good morning everyone. I have just a quick question on the margin trends and you are making your comments that the underlying margins have improved by 30 bps and if I read the commentary in the release, you mentioned the optimization of procurement several times and it looks like food costs are down 30 bps as a pursuit of revenue, is that really the biggest part of what’s driving the margin improvements and now that you have started the implementation of the cost savings plan can you maybe break it down a little bit more in terms of which cost items are going to benefit from those 200 million benefits.

Michel Landel

Well Jaafar thanks. You know this margin improvement comes from many directions. Of course food optimization has always been a focus, so we continue to work on food cost reduction, but also this program that we have launched back in September is really also focused on our organization, adapting the organization, simplifying this organization mutualizing more some of the resources we have worldwide. So, the impact is very much on people cost and G&A, so at this point we’ve said that we - the first semester we have 37 million. Most of these costs are actually G&A. So, overall on the 200 million probably I would say 80%, 70% to 80% would be G&A.

Jaafar Mestari

Okay, thanks.

Operator

Thank you. And your next question comes from the line of Jamie Rollo. Please ask your question.

Jamie Rollo

Yes thanks, good morning. The first question is could you please quantify how big a benefit the Rugby World Cup was to margins in the UK in H1? Secondly, just following on from the last questions on savings, are we to take it that through a minimal G&A savings in H1, I think you said the benefits of the restructuring would really start from the second half of the year, so could we assume those gross margins sort of continue from here? And then finally, if you look at the second half of the year where you need another sort of 8% underlying growth in EBIT you did in H1, I think you said a few times comps are tougher in some of the markets, you’ve also had obviously a bigger gain in the UK in the first half and if you look at the second half of last year you had quite a big increase in margins in North America, so I was wondering about some of the margin guidance by regions in the second half and whether, and really how confident you are to get to that 8% please?

Michel Landel

Jamie on the Rugby World Cup unfortunately we don’t give the profitability by contract, so I guess you understand why we don’t do this. We give revenue and as far as revenue is concerned is 131 million and you know it is a contract which has a normal profitability. So, in terms of saving in H1 may be Marc you can answer the question.

Marc Rolland

In H1, the 37 million plus we were referring to our other cost of implementation of the program in H1. They are savings in H2 and in H2 I mean we are estimating with savings to be in line with our previous program where there were 28 million in the first year. Here we are expecting between 25 and 30 in year one. So that is the question on saving. On the second half, we don’t give you guidance region by region, segment by segment, I can give some perspective for UK and rest of the world, but we are confident because we have the portfolio of activity that, and when we look at all our geographies and segments and we look also the fact that we have the contribution from the program, we are confident that we are going to achieve the 8% [indiscernible] for the year.

Michel Landel

Even with the comp growth, which is tougher, but this has been actually the trend for many, many quarters actually. So, hopefully we answered your question.

Jamie Rollo

If I could just follow-up on North America, you had a very strong second half margin performance last year, very strong in deed. I’m wondering whether you expect the second of this year to be up similar amount in the first half around 40 basis points or whether the growth out there will slow?

Michel Landel

You know we have said that in North America over time we will be able to improve margins around 20 basis points on average, so this year we will improve margins between 30 basis points and 40 basis points, I think.

Jamie Rollo

Thank you very much.

Michel Landel

You are welcome.

Operator

Thank you. And your next question comes from the line of James Ainley. Please ask your question.

James Ainley

Yeah, two questions please. The first one is on benefits and rewards. You saw quite a nice pick-up in like-for-like issue volume growth in the second quarter versus the first quarter. Could you perhaps give us a bit more color on the drivers behind that, in particular whether that was seasonal effects, whether that was – or if you can quantify the impact to face values? And then the second question is can you just give us some color on what you are seeing in terms of like-for-like volume trends around your businesses around the world? Thank you.

Michel Landel

Your second question is related to benefits and rewards, so –

James Ainley

Sorry. No, that was related to OSS.

Michel Landel

Okay. So you take the first one, Marc?

Marc Rolland

Yeah, while Q2 volumes have improved on Q1 mainly in LATAM, and the greater volumes has been good. The difficulty we have with benefits and rewards is the volume on one quarter is very difficult to interpret that. I think they make more sense now with the first half; it’s more stable, no kind of issue. We are seeing the volume trending at those levels for the rest of the year. As I said, on the revenue side, it seems a little to provide now in Brazil, but we maintain our guidance on the BRS folios and revenues as we said in Q1.

Michel Landel

Yeah, and volumes were driven by face value and interest rates mainly South America. But as Marc said, Brazil is under a lot of pressure. As you know, we are not concerned about Brazil on a medium term, of course, this year it’s tough and probably next year will continue to be tough in Brazil, but we are not concerned by Brazil on the medium term point of view.

In terms of volume in OSS around the world, you’ve seen that volumes were very affected in our mining and oil related business and also in South America mainly in Brazil. We don’t see these volumes picking up to be honest with you on existing contracts. Nevertheless in remote sites, we think that with the fact that there is a demand for new business from the clients, again, who wants to consolidate their providers and a good example is Rio Tinto, but there are others that are doing – working on this in the world. So we are quite confident that probably next year we will see these volumes maybe starting to pick up a little bit, but it’s very difficult to set because nobody is able to tell us what’s the price of oil is going to be in six months, but we will see new business coming in. So…

James Ainley

Can you comment on what volume trends you are seeing in North America and in Europe as well?

Michel Landel

Well, in North America, it’s up, so it’s – North America is in good shape and in Europe actually it’s slightly up, but it’s not massive, but it’s not negative, right, I’m talking about food volumes.

James Ainley

Yes, yeah.

Michel Landel

So it’s a better trend than it used to be.

James Ainley

So that’s an improvement since the last time we spoke?

Michel Landel

Yeah, yes, we saw the improvements. Yes, yes.

James Ainley

Yeah, okay, thanks.

Operator

Thank you. [Operator Instructions] And your next question comes from the line of Vicki Stern. Please ask your question.

Vicki Stern

Yes, morning. Just firstly on the UK, you talked about the UK outlook for organic growth. I think you described it as not so good given the pipeline or given limited signings. Any ability to quantify that? And how should we think about organic growth into H2 and then into 2017 for the UK? And just coming back on Jarrod’s question around cash share buybacks. I appreciate obviously you’re still in the midst of the €300 million to no intention to announce anything further yet. But just bigger picture, more broadly, how should we be thinking about your approach to the balance sheet? I suppose if you don't achieve a number of acquisitions this year, do you get to a situation where perhaps in November or into next year you’d be looking at further share buybacks, or is that not the intention?

Michel Landel

Okay. Thank you, Vicki. Marc can you answer the question?

Marc Rolland

Yeah. On the UK, I try to give you as much color as possible, the comps are very tough for the UK in H2 transforming rehabilitation last year was in its mobilization phase and we generated revenue because we were reorganizing the centers and that’s revenues of, I think – that reorganization revenues was around €30 million, so we don’t have these figures. So the comparable is very tough. All the corporate accounts were mobilized during that period as well and were ramping up. So we are expecting H2 to be flat in UK.

Michel Landel

So we should end up for the UK around 10% for the year. Right?

Marc Rolland

Yeah.

Michel Landel

And next year will be probably much lower than that.

Marc Rolland

Because of the rugby.

Michel Landel

Yeah, because of the rugby of course. Right, so for your second question share buyback, well, it’s very early in the year to say what we are going to do. We said to you last year in November when we started this – we announced that buyback that was something that we did which was exceptional. We are not intend to do that on the regular basis because we want to continue to finance our growth, invest in the business, look at some acquisition of course, but in terms of acquisition with no change the way we look at it. For the on-site it would be small to medium size FM businesses and in terms of benefits and rewards, it would be local acquisitions of course, so – and we might do some small acquisition in digital or in small businesses like that. So we will tell you what we do in November, but it’s probably – you will – probably will not do another share buyback this year.

Vicki Stern

Okay. Thanks very much.

Michel Landel

You are welcome.

Operator

Thank you. And your next question comes from the line of Ed Birkin. Please ask your question.

Ed Birkin

Good morning. So can you just clarify on the UK when you said 10%, is that excluding World Cup this year for the growth or including the World Cup? In terms of rest of world, operating profit margin 2.8% in the first half, should that be improving significantly in H2 with the cost saving program – we’re going to see a large part of that €25 million to €30 million saving coming in rest of world margin. In terms of your net finance costs, obviously, you’ve got the kind of negative coming from the share buyback, but then also on the CapEx from Rio Tinto you’ve got the benefit of low interest rate. Should we expect the H2 finance costs to be broadly in line with the €49 million in H1? And then maybe you could just talk a little bit about the underlying margin in 2017 excluding the cost saving program given the downward pressure put from the Rio Tinto contract, should we be seeing a kind of stable margin in 2017 rather than any underlying margin improvements?

Michel Landel

Yeah, many questions. In terms of first, of course, Rugby World Cup is including the 10%. Yes, sure. Rest of the world margin, we’ve seen this significant drop, it’s mainly driven by volumes and it’s the result of, of course, remote site and Brazil situation. We have reduced operating cost, but we also have kept some of our G&A to support the upcoming growth which of course Rio Tinto that will hopefully have other contracts, so we want to be ready for that. But it is sure that the program is also directed towards rest of the world, so it will have a small impact but margins will not really improve in the next six months for that part of the world. Yes.

Marc Rolland

The finance costs will be in H2 to similar to H1. We have no renegotiation or repayments or reimbursements of any line of credit for a while. It’s followed by short term financing and you know the short term interest rates right now, so we’re not expecting any change in our financial cost during H2.

Michel Landel

And underlying margin in 2017, we said that in average we expect to grow our operating margins around 8% to 10% but it’s actually very, very too early to say what’s going to happen in 2017 but we keep this overall objective that we have set back in November.

Ed Birkin

Okay and that was included in the Castile program.

Michel Landel

Yes, of course.

Ed Birkin

Okay. Thanks very much.

Operator

Thank you. And your last question come from the line of Nadia del Kasir. Please ask your question.

Nadia del Kasir

Good morning, everyone. Just two question please, one is on the gross margin, it seems to be down by 50 basis points. Could you please help us to understand what has driven that? And my second question is in relation to the working capital, which seems to have been impacted by $20 million in H2 2015 which seems to be related to the benefits and rewards, could you also help us to understand what has been driven that? Thank you.

Michel Landel

Gross margins are not down by 50 bps, absolutely not.

Marc Rolland

I think our gross margin has been holding up pretty steady in spite of the downturn in energy and resources worldwide. So that way I think we’ve been quite active at managing our unit cost in oil and gas and remote site and we have managed globally to maintain our gross profit…

Michel Landel

So gross margins are not down 50 basis points, and the working capital?

Marc Rolland

Looking at our current rates, [indiscernible] I didn’t understand your question. Could you repeat the question?

Nadia del Kasir

It seems like there is an impact of $20 million from the benefits and reward in H1 2016. It was $24 million in 2015, $43 million?

Marc Rolland

It’s a technical measure. It is about what we call financial business of three months and it’s a retreatment because before that the line was merged into white single line and it’s been split. So you’ve got compensating effect on the working cap, so it’s just a treatment that we have. I don’t think you should worry about this and we can explain you the detail later but do not worry about this, it’s just the way the presentation is done.

Nadia del Kasir

Okay. Thank you.

Operator

Thank you. And you actually have one more question coming from the line of Pascal Hautcoeur. Please ask your question.

Pascal Hautcoeur

Yes, good morning. I have two questions, first one, coming back on the Rio Tinto contract, what visibility do you have on the profitability of this contract, i.e. is there a risk in two years you come back to us and say okay, it’s a bit like the ManorCare contract. The contract cannot be profitable, so we have to restore on this contract.

Secondly, regarding specific management, you have gained quite a lot of major contract for the past few years like Unilever or Procter. Is there a need – can you just remind us of a need when you were at the time of this major contract, i.e. is it next year or into Europe as major contracts could be up for renewal. And certainly in U.S. education, what's happening in terms of new business currently?

Michel Landel

Yes, okay. On Rio Tinto contract, yes, we have visibility. No, there is no risk that – there is always a risk once you sign a contract but frankly I think we have a very strong contract here. There is no risk like we had in – you mentioned ManorCare which is a specific situation which has nothing to do with that. No, there is no risk. We have visibility as told you. We’ll stop to be a credit next year and then moving forward it will be profitable as noble contract to Sodexo in the same range of profitability.

In terms of integrated contract like Unilever or all these big contracts, frankly we have been renewed this contract as we speak. And so the Unilever has been renewed recently. On P&G, it was done a couple of years ago. We had 100% attention on these contracts, actually we were able to grow them from within, add new services and new countries and new plans. So it’s one of the benefits of these big contracts, right.

In terms of new business – excuse me, do you have further question concerning this one?

Pascal Hautcoeur

No, no.

Michel Landel

And in terms of new business in U.S. education, as you know, the selling season stopped now. So we are under negotiation, under rebid situation as well from let’s say February until June, July. Decisions are made in the summer and contracts are starting end of August, early September. So it’s too early to say but it would be a better season than last year I can say that right now.

Hopefully, we answered your questions.

Pascal Hautcoeur

Okay, thank you. Can I add a further question maybe on France?

Michel Landel

Sure.

Pascal Hautcoeur

When do you see you will be able to turnaround your performance there because you have been I think losing market share there? So I think there is your contract shedding certainly but when do you see you could resume with positive organic growth?

Michel Landel

Yes, good question. In France, we have first really privilege profitability for the last couple of years. We have put off energy on improved profitability and because it was very important to us. We will get back to growth in France whether it’s probably next year or the year after but we are not happy with this situation but we – it’s a situation that we have to manage consciously and we’ll get back to growth. And we have a very strong offer which is unique and there is absolutely no reason that in France we’ll not be able to grow the business.

Pascal Hautcoeur

Okay. Is your…

Michel Landel

We are confident.

Pascal Hautcoeur

And is your profitability above your open [ph] average or?

Michel Landel

The profitability has improved. Profitability has been really attacked by the regulation in France and taxes and everything. So we’ve been able to improve this profitability. We also have organized France differently. So we are working on the fundamentals and fixing some of few things that needed to be fixed. So we’re in good shape.

Operator

Thank you. And we have two more questions. [Operator Instructions] And your next question comes from the line of Nadia del Kasir. Please ask your question.

Nadia del Kasir

Sorry, just a follow-up on the gross margin. If I look at the P&L on the press release page 19, it seems like this year its $1,636 million. Last year, it was $1,582 million. If we calculate the margin, seems like the margin is down by 50 basis points.

Marc Rolland

This is our current rate. So the fact is we are comparing two years. That’s why I was saying when you and it [indiscernible] (59:56) when we calculate gross profit at constant rate and like-for-like actually our margins are growing up by 10 basis points.

Nadia del Kasir

Okay.

Marc Rolland

Now at current rate as you’ve seen, we have a very strong Brazilian real impact and the benefit and reward activity has a very high gross profit. So when you look at it at current rates, there is a conversion effect which you cannot capture, but in performance we are improving.

Nadia del Kasir

Okay.

Michel Landel

Operational performance is good.

Nadia del Kasir

Okay. Thank you.

Michel Landel

You’re welcome.

Operator

Thank you. And your next question comes from the line of Ed Birkin. Please ask your question.

Tim Ramskill

Hi. It's actually Tim Ramskill here, Ed's colleague. Just a couple of quick questions around remote sites, please. The first is in terms of the Rio contract, do you think that was in any way impacted by the backdrop in those industries, in other words the move by Rio to use one partner? Was that linked to the difficult trading environment? And then the second question is you've obviously gained that contract. You've alluded to the fact you've lost some business in Chile. Overall do you think in remote sites and the mining and extraction space you're gaining or losing market share at the moment?

Michel Landel

Of course Rio Tinto has put all its business in Australia to bid. They wanted one partner. Of course it’s to leverage their size. And as you know and as we know, all the year the price of commodities is very, very low today. So I think the Rio is a very well managed company and I guess they’re looking at their business to make sure that they leverage their size, so that’s the reason why they put that to bid I guess, right. And we were able to provide the right solution and I don’t think there were many companies able to do that actually. Yes, we’ve lost business - to take your second question, we have lost business in Chile and we told you that was last year. To be honest with you I think we are actually not losing market share in Remote Site and in mining. We actually signed a few other contracts in South America in the last six months. So, we are holding in and some of the issues that we had in Chile, we’re fixing them. So, we should be in good shape moving forward.

Tim Ramskill

Alright, thank you.

Michel Landel

You’re welcome.

Operator

Thank you. And there is no further question at this time. Please continue.

Michel Landel

So, any other question, we will be happy to answer. Okay, if not let’s go ahead.

Virginia Jeanson

So thank you very much for listening to the call. Please get back to the IR team if you have any further questions. I remind you that the next management will be the third quarter figures on Friday, July 8. Thank you.

Michel Landel

Thank you so much, and have a great day. Thank you, bye, bye. Will talk to you later.

Operator

Thank you. And this does conclude our conference for today. Thank you for participating, you may all disconnect.

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