Q3 2016 Earnings Conference Call
July 08, 2016 02:30 AM ET
Virginia Jeanson - IR
Michel Landel - CEO
Marc Rolland - Group CFO
Jarrod Castle - UBS
Jamie Rollo - Morgan Stanley
Tim Ramskill - Credit Suisse
James Ainley - Citigroup
Najet El Kassir - Berenberg
Johanna Jourdain - Natixis
Thank you. Good morning, everyone. Welcome to our Nine Months Year-to-Date Fiscal 2016 Conference Call. On the call today, we have CEO, Michel Landel and CFO, Marc Rolland. As usual, the slides and press release can be downloaded from the Web site. There will be an audio replay of this call available from 10:30 Paris Time this morning. Please dial for that, either the UK number 44-203-427-0598 or French number 017-4202-2800 and the access code is 5360634 or you can get back to us through those numbers if you want.
The call will be available until the 21 of July. Of course much more easily you can access it on our Web site 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 statement 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 now turn the call over to Michel.
Thank you, Virginia, and good morning to all of you. And thank you for being with us this morning for our nine months year-to-date revenue figures. So with Marc, we will comment these results, I will this morning quick introduction and Marc will give you more details and then we’ll open up for Q&A. So if we go to Slide 4, you see that our revenue growth has been quite good for the first nine months 3.7%. So excluding very modest net positive currency and acquisition contribution organic growth was 3.3%, which splits between on-sites for 3.2 and benefits and rewards of 5.7. These numbers are perfectly in line with our guidance for the year.
So during this quarter, we signed many new partnerships, which are reinforcing our position to propose integrated Quality Of Life solutions. I’ll comment on a few examples. First, we expanded our partnership with Publicis in Paris with a strong innovative and digitalized catering solutions, for their very modern new campus in the city. This is a very exciting contract. We also partnered with the business school of Lyon for its first region campus. Actually, this is the first integrated service contract in higher education in France and the school is really willing to showcase the City of Lyon in Paris actually.
And for them we are managing all Quality Of Life services for the entire population, the students, the faculty, the staff, the visitors, so another exciting contract. And I will also comment on United Airlines, who has made Sodexo its single service partner for all United Club and Global First lounges as part of their commitment to raise customer experience. And that’s a contract which is a worldwide contract, which is a big contract actually it’s €80 million per annum and Sodexo will provide business travelers with a premium lounge experience.
Actually, these examples are reinforcing our conviction that there is a real trend today in the world in corporation, in healthcare, in education institution, which are focusing on their workplace and how can they enhance the experience of their clients and their people, the Quality Of Life has a driver of performance. So it’s a reinforcement of our conviction that is our very unique offer, really meets market needs and client needs.
So with that, I will ask Marc to give us more detail.
Thank you, Michel. Good morning, everyone. So as Michel showed you on-site services organic growth was plus 3.2%. Let’s look at it by segment on Chart 8. Corporate was up 3.7%, it has been boosted by the ramp-up of new integrated services contract in both North America and the UK. The contribution from the Rugby World Cup, all in Q1 was more than offset by the very significant decline in volume of our Remote Sites activity, which nonetheless stabilized quarter-on-quarter in Q3. Health Care and Seniors is benefiting from a good momentum in the United States, but suffered from limited contract wins in Europe. Education is improving quarter-on-quarter up 2% year-to-date as a result of more working days in France and Italy during Q3 and the ramp-up of new business in United Kingdom in schools and universities.
Moving on to Slide 9, geographically the on-site services organic growth of plus 3.2% is very different from one region to another. North America is improving from quarter-to-quarter at 4% for the 9 months up to 2.9% in Q1 and 3.6% in H1. Continental Europe at 1.8% is also progressing from quarter-to-quarter and particularly in our corporate activities. Continental Europe was up 1% in Q1 and 1.6% in H1. The UK is growing at 18.1% helped by the rugby, but remember that it was up 27% in H1 and it’s been flat in Q3. The rest of the world is down 3.9% impacted by downsizing in the oil and gas and mining sectors, but it is better than H1 where it was down 4.4%.
Now if we go and look at North America, corporate has remained strong at plus 7.6% with continued steady growth in FM activities as we open up more integrated services accounts such as Chevron or Zurich. Healthcare and senior is also up 4.8% as we are benefitting from the ramp-up of contracts won last year and we have also achieved good sales growth on existing sites through cross-selling and projects. Education is up 1.4% thanks to good volumes on existing sites, especially in universities with board plan increases and more retail sales. New schools contracts are being finalized and the beginning season in Universities is slightly better than last year.
On Slide 11 you can see that Continental Europe is up 1.8% implying a further small improvement in Q3 versus H1. The trend in corporate is better and up 3.3% while France remains impacted by one of the worst tourists season we’ve ever known effected by salaries and bad weather, the rest of Europe and particularly Spain, Germany but also Russia and Turkey are doing well. Solid sales growth from existing accounts such as extra project work, cross-selling but also extra working days in May will help.
On the other hand, healthcare and seniors remains difficult at minus 2.1%. The effect of strict selectivity this year means little new business and letting go of contracts that were not profitable enough particularly in France have been somewhat offset in the third quarter by the ramp-up of the new offer for Korian in seniors. The 2.3% growth in education is again slightly better quarter-on-quarter helped by extra working days in most European countries in Q3.
The UK at 8.1%, the UK and Ireland growth is strong, heavily influenced by the Rugby which took place in Q1, but even without this event revenue growth has been solid up 8.4%. This growth is particularly strong in corporate with ramp-ups from last year contract wins such as transforming rehabilitation, Diageo and others playing through much of the nine months. Healthcare on the other hand is down minus 0.5% reflecting the end of the ramp-up at Imperial Hospitals no longer compensating for the exiting of the low performing hospital contract in South of England. Education remains very strong due to contract wins from last year and this year such as Exeter Schools, Wycombe Abbey, Brentwood and the universities of Europe, Birmingham City and Glasgow Clyde more recently.
With all this good news, I must also remind you that UK growth was not so good in Q3, even though it has been better than forecast and is going to be negative in Q4. The rest of the world as you can see now in Slide 13 is down 3.9% due to the remote site activity which has been badly affected by the collapse in commodity prices. The rest of the business excluding remote sites is holding up well at plus 6.5%. The remote sites accounts for about half the revenue of the region and they explain the weakness of our corporate activities which declined by 5.7%. The growth remains solid in India, it slightly improved in Latin America but it is weakening in Africa and the Middle East as the economies there are more and more affected by the low oil prices.
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 in a plus 21.3% organic growth. Education remained small and has seen mixed impact in valued geographies resulting in actually zero growth. Coming back to our remote site activity, the good news is that in Q3 the volumes in euros have stabilized quarter-on-quarter and with easier Q4 comparables as well as the first contribution from the new Rio Tinto contract, revenue for the first quarter shall be better.
If we now move on to benefit and rewards, the year-to-date issued volume at €12.2 billion and revenue at 576 million are clearly affected by the significant Brazilian real currency drop where we lost 24% versus last year. But it has picked up in the last couple of months, it was minus 27% at the end of the first half and it should improve gradually over Q4. Organic growth at 7% in issue volume at 5.7% in revenue is pretty resilient, thanks to sustained growth in Latin America despite the tough environment in Brazil, continued growth albeit slower in Europe and Asia and it was helped a bit too in May by some extra working days in Europe.
Latin America on Slide 16, issue volume and revenues organic growth was 8.2% and 7.9% respectively, slowing down slightly in Q3 due to the slowdown in the activity in Brazil. Now, in Brazil, issue volumes have been helped continuously by increased face value due to inflation and it is more than compensating for the decline in number of beneficiaries. Revenue was impacted by this reduced volume growth and increased level of competition among issuers. It was somewhat partially mitigated by our interest rates which are contributing well on the revenue side. Brazil is now sitting at the bottom-end of our range of expected growth between 5% and 7%. In the rest of LATAM growth in other countries and especially in Mexico and Chile have remained very strong.
In Europe and Asia, Western Europe demand is continuing to grow steadily helped in particularly in Q3 by some extra working days. Growth is dynamic in Turkey in Czech Republic, in Asia and also in Belgium in the last quarter. On the other hand interest rates particularly in the euro zone are at historically low level which weighs on our revenue growth.
I now pass you back to Michel for the outlook.
Thank you, Mark. So, all-in-all you see the Q3 performance was in line with our expectations and so we are on-track to deliver our guidance for the year of organic growth of about 3% and increasing our operating profit up around 8% and these numbers have to be taken excluding currency impact and exceptional costs which are linked to our adaptation and simplification measures that we've announced back in November.
So, thank you for listening and now with Marc we're happy to answer your questions.
[Operator Instructions] We will now take our first question and it comes from Jarrod Castle from UBS London. Please go ahead, your line is open.
If I may, some questions around benefits and rewards and one other. You said the face value is going up in Brazil and the volumes are down. Could you give an idea of the split, if you can, please? And then just in terms of has there been any progress in terms of changing the reporting structure? I think there was talk obviously about going from geography to an industry level. What's going on there? And then lastly, obviously your buyback program has finished. Is it still no change in views from the half-year set of results in terms of buybacks, capital returns? Thanks.
Can you, Marc answer the first question on benefits and rewards?
On inflation and average face value we are passing about currently 75% to 80% so it's a significant high single-digit number that we're passing through inflation. On the number of beneficiaries, it's negative and it's a small negative, so it's not a huge negative, but it's significant because it used to be very positive in the past. And to complement this our net new loss, the difference between what we win and what we lose is positive and we have also a bit of cross selling so all of this makes our volume growth.
All right, for your second question which is changing the organization, yes of course we are way well engaged in this reorganization, we actually reorganized at the beginning of our fiscal FY16 back September 1st. So we are now organized by client segments, corporation, healthcare, education, and alike. So it’s going well, of course it’s a big reorganization, because we have 420,000 people in 80 countries. But it’s going well and it’s moving along and of course when we did that, when we announced that it will take several years, but we’re right on-track and things are going to fine. Now on the share buyback program, as you know we’ve completed in the third quarter, so it’s done and it was a good program. Now next, we still have not taken any position for the year-end. We will tell you and comment on this in November, when we meet with you for our annual numbers, right.
We will now take our next question and it’s come from Jamie Rollo from Morgan Stanley. Please go ahead. Your line is open.
Three questions, please. First of all, could you please quantify the benefit of the extra working days? Secondly, you talked about Europe in OSS improving, but it looks like Q3 revenue growth is similar to Q2 at about 2%. So I’m just wondering how bad France was. And maybe you can just help us quantify France so we can see what maybe the rest of Europe was. And then finally, again, lots of talk about new partnerships, cross-selling, FM. Could you just please talk generally a bit about the pipeline and whether the sort of gross contract win rate is actually accelerating? Or are things similar to where they were a year ago? Thank you.
Okay. Marc, can you take the first questions on [Multiple Speakers]?
Yes. The extra working days have helped in some activities across Europe and in some countries in various ways. For instance, in Italy and France, we’ve had a couple of days more in schools. In corporate also and especially in France, we saw some activity increasing because of 1st and 8th of May being on Sundays. That was good. So I will say, yes, you could assume a couple of days in some activities, but not all of them. And in France, the activity overall in France is a small negative, I mean it’s still difficult. But when in the context of Europe, when you saw that the Europe is improving, it’s really means that the rest of Continental Europe is pulling Europe up.
Yes. There was another question.
Then there was, yes, quantify benefits are and cross-selling.
Our cross-selling and FM pipeline, actually the pipeline is good, is solid. And it’s solid in every dimension. Probably the best is in the corporate world, but also in healthcare. It’s probably a little bit less in education, but I would say that, it’s probably similar to what we had a year ago, but we had some good opportunities in Remote Site actually. I think we will see probably some good things happening in next year in Remote Sites. But overall it’s very solid. As we have said consistently, the growth in FM services is three-four times faster than the food service, the food service is stabilizing. So it’s pretty good.
Can you just try and quantify, please, the calendar impact? And if you can give us the figure for what France was that would be really helpful?
The calendar impact for Europe you mean?
Well, I think what we said, I think, it’s varying from segment-to-segment. But the France was negative in Q3, France was negative in Q3 almost 2% right. And well Europe was growing 1% in Q1, 1.6% in Q2, 1.8% in Q3 right. So it’s progressing step-by-step. And in that environment, France is still lagging behind with the decline of 2%, the effects of the weather, the strike and everything is of course playing a role here in France.
And was the calendar effect for Europe material in Q3? Was it more than 1%?
No it was not more than, overall it was not more than 1% but it is helping sustaining the activities in Q3. On the other hand you know that in France we signed I mentioned two contracts that we’ve signed in the Paris region, the activity in France is good in integrated services we have large contracts so at one point we will recover positive growth in France.
We will now take our next question from Tim Ramskill from Credit Suisse. Please go ahead your line is open.
Three questions, please. The first is just perhaps a little bit more time spent on the UK business. You point to the fact that you're expected to be negative in Q4 and you've talked in the statement about the win rate being a little bit subdued, so just an update on what's happening in the UK market and why we're seeing those trends. Second question is regarding remote sites. As you say, quarter on quarter the pace of decline has steadied. What's your general thinking on the outlook for the remote site business into 2017, please? Do you think it will be back to some growth, flat or still declining? And then the final question, I suppose a bit more of a long-term question. As we all know, the penetration rates of contract catering in education and healthcare are much lower than they are in the corporate world, yet the organic growth rates in education and healthcare have been inferior to the corporate world for quite a good number of years. I just wondered what your thoughts were on that differential between the potential versus the lack of growth coming through.
Can you take the first part, the first question?
Yes, the UK last year we had the mobilization of transforming rehabilitation and as part of that mobilization in the first six months we were paid to reorganize the activity and that generated extra works. Those extra works represented about €35 million to €40 million of revenue in the second half and the bulk of it was in Q4. So we aren’t going to have those extra works this year because now we are operating the contract as a run rate, so we are short of that revenues in the comparable. And as we said, we were very busy this year mobilizing the new contract, the Rugby and so forth and the selling has been relatively limited. So we have also finished ramp-ups of everything we won last year. So there is no more ramping up of things happening right now, nothing significant so to speak. So the comparable are very tough and that’s why we are expecting a negative Q4. Now at this stage, the pipeline in the UK is very strong and the selling activity is very strong and it does not impair the outlook for fiscal year ’17. So it is really just the end of a strict year with the rugby in Q1, the mobilization of TR last year and so forth but we have no worries about the UK in the medium-term.
Thank you, Marc. For the remote site business, Mark mentioned that in Q3 the volumes in Europe have stabilized quarter-on-quarter, that’s a good news and actually that’s what we announced several quarters ago. So in that business with the stabilization of the oil price, we should see positive growth next year, of course we have Rio Tinto which will, which is kicking in right now, we’ve just opened and the ramp-up of the opening will take several months but by the beginning of fiscal ’17 we will have the effect of that. We also have the effect of comparison next year, right so and as I said there is good commercial activity in the business as we speak. So we should have a much better year next year.
And in terms of your third part of our question, there is a very strong movement of outsourcing of course for food but also for integrated services and that’s the strategy that we have engaged several years ago and we’re very confident that the demand for integration of services will be strong in the corporate world, in healthcare, in education worldwide. Now, it’s true that in healthcare and education over the last several years we had a performance which was not as good as in previous years, on the other hand as you can see in the U.S. and we’ve said that now for several quarters, we see growth coming back, we had a good solid new business year, retention is solid, so we will see healthcare in North America strong next year.
In Europe, as we said we in France we have been very focused on profitability and we’ve refused to sign some of the contracts which for us was not profitable enough. But we are very confident in healthcare because in the rest of the world Brazil for example, Asia are strong they are still small in comparison with the rest of the business worldwide but the growth is very, very dynamic. So, yes we will see strong growth in these education and healthcare market in the next several years and we are very confident that on top of it the fact that we are proposing integration of services will give us also an advantage.
We would now take our next question and it comes from James Ainley from Citi. Please go ahead the line open.
I had a question on benefits and rewards, please. If I look at the commission rates in the business, it looked like they've contracted about 30 basis points year on year. Can you talk about a bit more about the competitive environment? I mean you mentioned the environment in Latin America being more competitive, but actually when I look at the European commission rate that looks like it's also contracting too, so some color on that would be helpful? Thank you.
Yes, in benefit and reward I commented on the Brazil intense competition, it's true I mean I think I mentioned it already in H1 today the volume in Brazil are less there is less going and to be shared between the issuers and we've seen also the couple of issuers being a bit more aggressive than usual. So, there is a price impact because we are all chasing a shrinking market right now. So, growing the volume makes an impact on our client commission. The fact is that in Brazil we have very good interest rates and that helps mitigating the overall factor. In Europe, there is also some intensity I mean the moving from paper to cards then so forth, the new entrants all of this is generating also intensity in the competition. But in Europe also we're suffering from very low interest rates I mean everybody knows now we're really at the bottom of our financial revenue in Europe and that does not help for our overall revenue in Europe.
And how much of the sort of 30 basis point contraction in the commission or the margin related to financial revenue in Europe?
I would say two-thirds intensity of competition and one-thirds of financial revenue.
We will now take our next question from Najet El Kassir from Berenberg. Please go ahead the line is open.
Najet El Kassir
My question has been answered. Thank you very much.
[Operator Instructions] We will now take our next question from Johanna Jourdain from Natixis. Please go ahead the line is open.
Just two questions from me, please. The first one, could you give me or could you give us some color on the education segment in North America as it seems to get slightly better? So what can we expect from next year in the segment? And my second question is how would you qualify your M&A pipeline so far? Thank you very much.
So, education you want to take that?
Education what we are pleased in education is that we see our like-for-like sales picking up I mean it's been very decent this year and we are expecting this to be decent next year. Retention is good, so I will tend to say schools we are waiting for some good news in Universities it's been a mixed diet we want something we didn’t win others it’s better than what we had last year. So, we're expecting the growth momentum in education in North America to continue, it's not going to be a firework but it's going to grow steadily so we feel that the momentum is there and we shall have a better next year than we have this year. But don't expect huge numbers but this is growth.
So, thank you Marc. And in terms of M&A pipeline, well, it's for a Company our size it's always active. We have small business and medium size that we're looking for in our businesses and nothing in the very short-term but probably next year, right. But things in benefits and rewards some a minor thing in on-sites, but we also very big activity in start-ups in digital. So, we’re looking on all these opportunities as we speak.
We have no further questions. I’d like now to turn the call back to the speakers for any additional or closing remarks. Thank you.
Well, if there are no other questions, we want to remind you that, yes, that the next announcement will be the full year fiscal 2016, it will be on November 17. And so we’re looking forward to talk to you at that time, in the meantime I hope you have a good summer and wish you all the best. And thank you for your participation today.
Have a good day.