Compass Group plc (OTCPK:CMPGF) Q3 2016 Trading Update Conference Call July 28, 2016 3:30 AM ET
Richard Cousins – Chief Executive
Johnny Thomson – Group Finance Director
Jamie Rollo – Morgan Stanley
Jeffrey Harwood – Stifel
James Rowland Clark – Barclays
Good morning, ladies and gentlemen. Welcome to the Compass Group Quarter 3 Trading Update Call. [Operator Instructions]. Just to remind you, the conference call is being recorded and your personal data will be held in the United States. If you do not consent to the call being recorded, or your personal data being transferred to the United States, please hang up now. Today, I am very pleased to present Richard Cousins, Chief Executive. Please begin.
Thank you, Richard. Good morning, ladies and gentlemen, and thanking you for dialing in. With me this morning I have our Group Finance Director, Johnny Thomson. I’ll start by giving you a brief overview of our third quarter trading, then say a few words on the outlook, before opening the call to questions.
Compass continues to have a good year. Organic revenue growth was 5.6% for the nine months to the end of June and, 5.2% in the third quarter. The operating margin for the nine-month period was flat, excluding restructuring costs. Let’s look at the regions individually to understand what drove results in the third quarter.
Firstly, performance in North America continues to be very good, with organic revenue growth of 8.3% in the quarter and for the nine months to the end of June. We’re still seeing strong growth across all sectors, with exception of oil and gas. Margins, including the dilutive impact of the CulinArt acquisition, were flat for the nine months to June 30, 2016.
In Europe, organic revenue grew 3.7% in the quarter and in the nine months to the end of June. We continue to deliver efficiencies which has allowed us to further reinvest in sales and retention and to improve the year-to-date margins slightly.
Turning now to the rest of the world, organic revenue grew by 9.2% in the nine months to the end of June and declined by 2.8% in the third quarter. Trading in our offshore and remote business is as expected, rather challenging. Revenues were down 9% in the quarter as large construction projects in Australia came to an end.
Our non-commodity related business in the rest of the world, however, grew by 4% in the third quarter, with good rates of net new business across the region, partially offset by continued economic weakness in Brazil. Our ongoing efficiency program and the restructuring announced in July of last year has partially offset the pressures in our mining and oil and gas businesses, as well as soft volumes in some emerging markets.
However, due to the impact of the construction cliff in Australia, the operating margin for the nine months to June declined by 50 basis points, as expected. In summary, Compass has had a good third quarter, and our overall expectations for the full year are unchanged. Growth in North America is very good, and our future pipeline is strong. Although we are pleased with the recovery in Europe, the macroeconomic outlook has become a little uncertain.
In the rest of world, trading is more challenging, but we continue to manage the region tightly. We remain focused on costs and efficiencies, which combined with the expected restructuring savings, will allow us to deliver a flat operating margin for the full year, including restructuring costs. Looking to the longer term, we remain really excited about the significant structural market growth opportunity and the potential for revenue growth, margin improvement and continued returns to shareholders.
Thank you, and now I’ll hand back now I’ll hand back to Richard and we’ll obviously be happy to take your questions.
[Operator Instructions] And our first question comes from the line of Jamie Rollo from Morgan Stanley. Please go ahead, your line is now open.
Thanks. Good morning, everyone. Two questions, please. First, on rest of world. Could you talk a bit about what has caused this additional slowdown. I think back in May, you were look for 0% growth, well 0% organic for the year; back in November looking at plus 3%; and it looks given the trajectory it’s going to be slightly negative now. So is that more or the mining side, or more on the EM side or a bit of both? And when does that decline bottom out? And the other question is, if we just take your comments on the rest of world trajectory and Europe being a bit more uncertain, how does that leave organic sales growth for 2017 in the context of your 4% to 6% medium-term target guidance? Thank you.
Okay, thanks Jamie. Johnny do you want to take the first one and I’ll take the second?
On rest of the world, Jamie, I think as Richard said at the front, we obviously declined by 2.8% in the quarter versus growth of 1.7% in the half; it is of course challenging as Richard noted. You should note of course that it is 15% of the Group at this stage. The O&R business, the offshore and remote business, the commodities part of it, declined by 9% from minus 4% in the first half. Now to a large degree that’s as expected, as Australia has gone down the construction cliff. So Australia has gone from minus 5% first half, to minus 16% in the quarter and that’s largely within our expectations.
Within the O&R sector, what I would say is, it’s probably slightly down overall because of Chile, I would say, would be the one area where maybe there’s been some acceleration in the slowdown in our volumes in our Chilean mining business. But other than that, we largely expected the declines. In non-offshore and remote business, the non-commodities based business, we grew by 5% in the first half and 3% in the quarter, so it’s just come off slightly. I would note that Brazil continues to be really tough. It is a challenging environment there. Although we expect things to pick up in Brazil in the longer term, and we’re still very positive about it, it is still a challenging environment. So I’d say we’ve just come off a little bit, and as you roll forward into next year, I would expect something similar somewhere in the minus 1%, minus 2%, minus 3% contraction for next year.
Okay, so that’s in the rest of the world. If we look globally at 2017, I think we’re going to have another good year. We talked at our shareholder conference, four, five weeks ago about that 4% to 6% ranges you refer to, Jamie. We would certainly expect to be within that range next year. This year, it looks as if we’re going to be in the upper half. Next year, I think we might be in the lower half. If you look at Europe, I’m delighted with our European recovery relative to where we were three/four years ago at minus 3%. It looks as if we’re going to finish this year at north of plus 3%; so that’s a terrific turnaround. I do think, however, perhaps the first six/nine months of this year have flattered us just a fraction.
If you look at some of the challenges with the French economy in general, and specifically related to terrorism, where I think we have noticed some volume weakness. We obviously have some concerns about Turkey following the coup. And the UK economy I think is uncertain. So I think we would see Europe still doing well next year, but fractionally weaker. And rest of the world, I think Johnny has just described. Finally, of course, that leaves us with the flagship, which I think is clearly North America, is in great shape, particularly the US. We would expect another very strong year next. Perhaps not quite at the 8-and-a-bit %, but certainly very strong.
Thank you very much.
Thank you. Our next question comes from the line of Jeffrey Harwood from Stifel. Please go ahead, your line is now open.
Yes. Good morning. Just on the comments on the European prospects. Does that really relate to your views on what might happen next, as opposed to anything you’re seeing at the moment?
Yes. I think that’s a fair point, Jeffrey. I mean Q3 was the same as H1 at 3.7%. But we’ve been through our forecasts very carefully for our fourth quarter; we haven’t finished the budgetary process for 2017 yet, but obviously we have a draft budget. And, yes, I think it is more what we expect to happen than what we’ve seen thus far. But those three countries that I referred to, France, Turkey and the UK, I think that the concerns are fairly obviously. I think it would be naive of us to assume that we won’t see a little bit of a slowdown relative to the first six/nine months. But I do want to keep stressing, relative to where we were three or four years ago, I still feel very positive about Europe.
Okay, thank you.
Thank you. Our next question comes from the line of James Rowland Clark from Barclays. Please go ahead, your line is now open.
James Rowland Clark
Hi, good morning. Just one question, please. When you’re thinking about dividend growth going forwards, given recent currency movements, should we be thinking about this on underlying or reported earnings?
Yes, thank you. I’ll just talk about FX in general, but specifically to your point on dividends. Our dividend policy, as you know, is to grow the dividend in line with underlying constant currency EPS growth. I think that’s just a good reminder for everyone, in terms of their models, to make sure that you’re reflecting constant currency and not reported EPS growth. If I could just take advantage of that to widen the FX a little. You’ll have seen from our statement that the FX impact on our earnings for the first nine months was GBP30 million.
Sorry, that’s not in the statement. But at spot rates for the full year, we would expect the impact to be a £60 million tailwind to our earnings. I would say also for your models that on interest and tax, we expect a very, very modest impact and, therefore, to be absorbed within our current guidance. The only other point I would mention on FX would be the impact on our net debt to EBITDA ratio, again, mentioned in our statement. At spot rates, clearly the closing rates at a weaker sterling to the average rate, will increase our net debt to EBITDA to round about 1.7 times, we expect. Although we also still target and expect, on an underlying basis, constant currency basis, that our net debt to EBITDA will be 1.5 times. Again, that should unwind next year as average rates catch up with closing rates.
James Rowland Clark
Thank you. Our next question comes from the line of Jarrod Castle from UBS. Please go ahead, your line is now open.
Thanks and good morning, gentlemen. Two questions. Just sticking with currency, you make mention of a GBP700 million revenue benefit and GBP60 million total benefit at the operating level. If I look at the implied margin, that’s 8.6% and obviously none of your divisions are at that margin. So is there some kind of cost risk revenue allocation, i.e., how does that that implied margin of 8.6% get there? And then just secondly, just on organic growth, can you give some color on pricing versus volume growth? Thanks.
Okay, well your first question was so complicated we’re going to think about that one for five seconds. Organic growth; it’s always complicated, isn’t it, when you’ve got our wins, our losses, you’ve got like-for-like pricing. I think what we’ve seen in the third quarter has been pretty consistent with H1, whereby good, steady new business wins, retention continue to be very strong in North America and better than we were in Europe and rest of the world. Although I think, structurally, those retention rates will never be as good as North America. In terms of like-for-like volume, as ever, it’s a combination of volume and price. Steady and slightly positive in North America; smaller increments in Europe; and the rest of the world, of course, an extremely complex story with on average, above average inflation and, therefore, pricing reflecting that. But clearly some volume pressures in both the commodity businesses and some of the emerging markets. So it’s a complex picture. In terms of your first question; Johnny?
Yes, I think, just if I understand your question correctly, what I’d say is that we do take some reported margin benefit, because of the mix of business between the regions. Of course, with North America being 55%/56% of the Group, and at the highest margin, the impact of currency when you consolidate the three regions does give us a few basis points of margin kick. However, I would say that comes and goes, of course, as currency goes and we’ve had the opposite in recent years. So I think that’s within the normal course of business.
Okay, thanks, I guess. Thanks.
Thank you [Operator Instructions] Okay. As there appear to be no further questions, I return the conference to yourself, Richard.
My word, that was the shortest-ever call. Thank you, everyone, for attending. We’ll see you at our full-year results in November. Have a good summer. Thank you.
Thank you. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!