Sodexo's (SDXOF) CEO Michel Landel on Q4 2016 Results - Earnings Call Transcript

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SODEXO (OTC:SDXOF) Q4 2016 Earnings Conference Call November 17, 2016 3:00 AM ET

Executives

Virginia Jeanson - Investor Relations

Michel Landel - Chief Executive Officer

Marc Rolland - Group Chief Financial Officer

Analysts

Jamie Rollo - Morgan Stanley

Tim Ramskill - Credit Suisse

Jarrod Castle - UBS

Vicki Stern - Barclays

Nadia del Kasir - Berenberg

Jaafar Mestari - JPMorgan

Pascal Hautcoeur - Redburn

Operator

Good day and welcome to the Fiscal 2016 Sodexo Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Virginia Jeanson. Please go ahead.

Virginia Jeanson

Thank you. Good morning, everybody. Welcome to our full year fiscal 2016 results call. We have CEO, Michel Landel; and CFO, Marc Rolland here with us today.

As usual, the slides and press release can be downloaded from the website. There will be an audio replay of this call available from 11:00 a.m. Paris Time later this morning. Please dial the UK number 44-203-427-0598 and the access code will be 9302765. It will be available for a week until 27th, November. Otherwise, of course you can access the code at any time on our website at sodexo.com.

This call is being recorded and may not be reproduced or transmitted without our consent. I would like to read out the forward-looking statement disclaimer. 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 also wanted to mention that in accordance with the new AMS requirements, we now have defined all alternative performance measures commonly known as APMs i.e. figures that are not specifically mentioned in the IFRS accounts. So each time an APM is used in the presentation, you will find an asterisk on the slide which is force you to the destinations and reconciliations in the presentation in Chapter 7 and in the press release at the end of Chapter 1.

And now I’m very pleased to turn the call over to Michel.

Michel Landel

Thank you, Virginia. Good morning to all of you. Thank you for joining us this morning. With Marc, we are going to comment this fiscal 2016 numbers.

And as you probably have seen already, we had a solid financial performance. Organic growth in revenue is 2.5%. Operating profit before exceptional and currencies up 8.2% which is in line with our objectives and which shows 30 basis point improvement in the margin. And also we have a strong cash flow and our balance sheet remain very strong.

From an operational point of view, I want to highlight a few things for this last fiscal year. First, of course it has been a year of massive changes in turn in April [ph] a lot of people as we learn to operate in a different way, moving from a geographical organization to a global segment organization. But I am really pleased to be able to say when you are down the road that the new organization is already enhancing opportunities for development.

Second thing I would like to mention is that we have really started to drive innovation and consumer digital solutions.

Third, after two years, very focused on organic growth. We want to be much more proactive with acquisition and actually we’ve done already three from the beginning of the year, the start of the year.

And lastly, I am proud to say that Sodexo will continue to be recognized by all our stakeholders for our corporate responsibility initiatives. And I’ll be back on that in a moment. And I want to thank all our team around the world for their commitments and involvement.

So if you turn to Slide 6, the financial performance. In terms of revenue, we are EUR20.2 billion, which is up 2.2% and 2.5% on an organic basis. This growth was impacted by 16% decline in the Remote Site business as customers kill down production to meet the cost issues of the sever decline in commodity pricing. Excluding this one area, accounting for about 7% of our revenues, the rest of the activity was up 4%.

I also want to highlight that we were disappointed by the growth of Q4 and I will let Marc comment on the details on that part.

Operational profits before exceptional rose to just over EUR1.2 billion, up 8.2% excluding currencies. This is in line with our objective for the year. The good momentum in operating profit margins also remained solid, up by 30 basis point excluding the currency effect, which is you know the consequence of the strong management cost and operational productivity in many region and the first savings from our Adaptation and Simplification program which is going very well.

As you can see on the slide, we’ve booked EUR108 million of expenses during the year to finance the program. We expect to have the equivalent savings by fiscal 2018 of 100% return on cost.

On Slide 7, the net income before non-recurring items reached EUR721 million, up 5.2% excluding currency effect. The non-recurring items include not only the exceptional cost linked to the Adaptation and Simplification program but also the exceptional indemnities that we had on the financial restructuring. And Marc again will comment on that in detail. Finally, EPS before non-recurring items was up EUR4.77 which means plus 5.8%.

So on Slide 8, despite the 300 million share buyback, we have maintained a strong balance sheet. Free cash flow reached almost 600 million despite some significant negative impact on working capital due to the Rugby World Cup event and investment linked to our new Rio Tinto contract as you know. The net debt reached EUR407 million representing a modest hearing of 11% versus 9% last year.

As a result, the board has decided to propose a dividend of EUR2.40, up 9.1% representing a 50% payout on EPS before non-recurring items in line with our historical practice and policies.

Given the fact that acquisition expense remained very low, again in 2016, the board has also decided a further 300 million share buyback representing about 1.9% of the capital of the group.

On the Slide 9, as I said previously, our new organization by global segments has started enhancing business opportunities. Beside you know our historic Rio Tinto contract which you all know about already, further positive news is our wins with Shell and Seadrill, who have both extended and broaden their contracts. These clients have made a strategic choice to have a single Sodexo point of contract on many of their sites around the world rather than hundreds of different suppliers to deal with on each site. So we can ensure business continuity and in fact productivity.

Segmentation is also driving development into what we call white spaces. For incidence, the prison segment in Australia, we had no justice services activity in Australia. And in just a few months, we’re able to mobilize resources from around the world and to win the contract to operate a loss prison near Perth, a 250 inmate women prisons that will be fully mobilized in December. We also have been shortlisted for another tender to design, finance, maintain and operate a 700 bed prison which would be Australia’s largest in New South Wales.

So what made a difference for Sodexo, I think we’re credible with the prison authority because of our philosophy, our focus on rehabilitation and reintegration as well as our successful track record in justice services specifically in the U.K.

Segmentation is also enhancing business opportunities by fostering more meaningful relationship with our clients. We are seeing more discussion with clients on contract expansions either through new SM services or extended current contracts to cover new geographies. This also needs more agility in the management of large global contract.

Also seeing the developments of a more integrated service approach between benefits and reward and on-site which obviously is a big differentiate in the market place.

So let me give you a few examples of SM contract extension and development. One contract with global Chinese telecom company Huawei in Shenzhen, China, we’re already working with Huawei in India and Romania. We will provide our integrated Quality of Life platform close to 15,000 Huawei employees at their campus in Shenzhen. This is a five year deal where which involve 300 people from Sodexo.

In terms of geographic extension, I would like to mention our relationship with Pfizer. We are now providing IFM services across 200 Pfizer sites in 12 countries in Asia. Sodexo has strong pharma references in India and China and in the rest of the world. And this contract gives us opportunities to develop capabilities across Asia and developing our presence in countries such as Taiwan, Korea and Japan.

And I also would like to mention, Bancolombia which is an example of a client’s where we have integrated Benefits and Rewards and On-site in our service offering. We stated providing cleaning services for Bancolombia in 1997 and we progressively expanded our partnership and now supports 800 branch offices of this company for 24,000 employees with a full food and FM Quality of Life offering and we also provide food cost to Bancolombia staff.

Now I would like to highlight the culture of innovation that we are fostering at Sodexo. Our goal is to harness the collective intelligent frond through our organization to create more value. We had actually a lot of importance to innovation initiatives driven by our operational teams in the field. They are in direct contact with our consumers and clients and they know very well what these clients and consumers need and what. So we recently re-launched I would say an internal innovation challenge which is precisely aimed us to capturing this value. We had strong participation from across the organization, 2,000 teams responded from all around the world. They presented a project through a web platform allowing everyone to share, to support and enrich ideas with innovative community.

So you see that innovation is a kind of virtue circle where we capture learning to enrich our offer which in turn turns leads to grow and value creation. And co-innovation with partners is equally important. Sodexo has a growing network of partners, incubators and suppliers we can work with and on co-developing initiatives and offers. We today have four relationships with our partnership Publicis in Paris, the innovation Paris & Co as a camp. So we are really working on this opportunity.

And in fiscal 2015, we had also taken a major step forward on digital developments with significant new digital enablers to anticipate new consumer needs and behaviors and better serve at the end of the day our clients.

And in this slide, I just want to highlight a few of our recent digital initiatives that are responding to today’s societal trend and are the beginning of a journey we are accelerating.

For example to enhance senior’s quality of life by keeping them active and engage with their families. Comfort Keepers in the U.S. has teamed up with partners to connect seniors to the digital world. These seniors are trained in how to use the tablets which are specifically adapted to the senior usage. They can video call, send picture to their families as well as play games, to stay or access news and so on and so forth.

Another example is So Happy, we’ve launched in schools with close to 10,000 users in Germany. It is an app which keeps parents connected to their kid’s school day allowing them to choose daily manuals, getting allergen and nutritional information on their meals, giving feedback, receiving recipes.

At the end you know consumers are also demanding more flexibility and personalization. In China, we are developing services directly using the number one social media WeChat. In Israel and France, My Sodexo mobile application enables us beneficiaries to pay for meals, access to information on menus, prices, waiting time, book a table at the local restaurant and the like. Equally all the solution have been development internally such as Bites in the USA, a solution that provides menu information, news and special promotion on-site and full nutritional information, specification is available today to 200 and 500 location in United States.

Consumers are also looking for enhance experience. And an example in befits and rewards, experience comes with customize rewards, thanks to Happy Loyalty in Mexico which is a mobile app and management system for business to communicate with consumers and provide loyalty scheme. Everything is embedded, show card, meal card, gift card, merchant location close to you, menus and the like. So as you can see, we are engaging in the journey here which will clearly transform our business.

As you have seen, we also have launched Sodexo Ventures, a EUR50 million venture capital fund which will invest in start-ups with high growth potential in areas ranging from food-tech, smart buildings, health and wellness to digitalization of Benefits and Rewards, an innovative retail experiences. Sodexo Ventures will invest in start-ups but will not acquire them. Investments made via the fund are strategic enablers for Sodexo. Sodexo Ventures represents a long term commitment to transform our business in anticipation of the future challenges facing our societies and evolving needs of our consumers.

We made the first investment in Wynd, which is a French start-up specialized in digital solution for retail and restaurants. It is a cutting edge technology that allows retailer and restaurant to digitize their point of sales and provide a customer experience that is cross-channel. Cross-channel means laptop, tablet, mobile, in-person online anywhere, anytime, any device. And Wynd proposes solutions that are tailor made and had been created brick by brick according to consumer needs and expectations. That is why retailer and restaurants are taking advantage of this technology which has proven to increase sales and customer satisfaction. So we'll be able to deploy this unique technology across our own sites which will greatly enhance our service offer.

Now I would like to come back on something we’re very proud which is our results, in our latest employee engagement survey, we are people business and for the first time, the survey that we did in last year was 100% online and was designed to reach all of our employees around the world. And over 220,000 people completed the survey which showed employee engagement rising ninety points since 2014 to 68%. So we have exceeded not only our internal objective of 65% engagement, said five years ago, but also the external benchmark which have the time of setting was 60%.

Other findings from the survey are that 80% of our employees consider Sodexo to be a socially and environmentally responsible company and 86% prefer working for Sodexo than for a competitor. As well 21 of our Group’s entities achieved best employee certification from Aon Hewitt benchmark. These are critical TPIs for Sodexo as you know. We are people business again and our peoples’ engagement in development is essential for our successful delivery of Quality of Life services.

Now I want to comment on our corporate responsibility commitment. I won’t take you through all of these recognition in details, I just want to highlight the Sodexo continues to be recognized for its commitment to corporate responsibility. We were confirmed as industry leader by the Dow Jones Sustainability Index for the 12th year running. And in terms of gender balance, we were honored to be recognized at the United Nation Women's Empowerment Principle Award. The United Nation recognized Sodexo for commitment to advancing and empowering women in the workplace, in the marketplace, and in the community.

Among all of these partnerships and commitments, I want to focus on what Sodexo is doing to fight food waste, which is a very important ethical, economic and environmental issue in the world we live today. You may know that one third of the food which is produced in the world is wasted. And if I take European example, in Europe, around 88 million tons of food is wasted every year and the associated cost of this are estimated is over €143 billion, so just one quarter of the food wasted globally in the world would feed 870 million people who currently go hungry around the world.

So to tackle this issue, Sodexo last year joined forces and initiate a coalition between Ardo, McCain, PepsiCo, SCA, Unilever Food and the WWF to launch an International Food Waste Coalition in order to combat food waste throughout the food services value chain. So we are very proud of that. In addition, Sodexo and the WWF had work together to design and deployed best practice to lessen the environmental impact of the group services at its client site, including through a program to reduce food waste and the adoption of technologies that will get energy used by 12% to 45%.

So with that I now want to hand over to Marc which he’ll go through in detail of performance last year. So Marc?

Marc Rolland

Thank you, Michel, and good morning, everyone. I'm very pleased to be with you this morning. And I just want to take a few seconds to reiterate that we have define all alternative performance measure then that you can find them in Chapter 7.

The total revenue growth is at 2.2%. The currency contributing negatively for 0.4%, it is mainly due to the Brazilian real, the sterling and the Canadian dollar nearly offset by the positive U.S. dollar contribution. There is a minor positive perimeter change with 0.1%, as a result, we generated an organic growth of 2.5%. As we've been saying throughout the year, our growth was badly affected by the very significant decline in the Remote Site activity without which organic growth will have been at 4%.

On-site services was up 2.4% and Benefits and Rewards services were also up 4.7%. I shall come back on this a bit later.

If we now move to Slide 19, operating profit before exceptional cost that excluding the currency effect is up 8.2% in line with our objective. The margin was up 30 bps at constant rate. And even including the impact of the currencies, the margin was up 10 bps to 5.9%. This result is due to a lot of focus on SG&A control and on-site operational performance. Operating margins were up in four regions or activities except for the Rest of the World.

Next slide, I wanted to take the opportunity to highlight the positive momentum of our margins, an increase of 70 basis points excluding the currency impact in two years. The operating profit is up 24.5% over that period and we intend to maintain a strong momentum of between 25 basis points and 30 basis points for annum in the coming years.

Next slide adaption and simplification program, what we can say, it is advancing well. It help to accelerate on-site operational efficiency for instance on the labor management, but mostly it help to reduce layered and decrease SG&A. In fiscal 2016, we booked €108 million of project cost and we've achieved €32 million of cost reduction. The adaption and simplification program is made of hundreds of projects. Those projects are spread across all segments and all regions. But we can find about how in three countries the U.S., France and Germany about two thirds of the savings will be in SG&A. And finally, we have good visibility of the full €200 million saving for fiscal 2018.

Moving on to the next slide on the P&L. So revenues reached €20.2 billion, up 2.2%. Before exceptional items, the operating profit reached €1.203 billion up 5.2% or 8.2% excluding currencies. Margins were up 30 basis points excluding the currency impact on the mix of margin. After taking into account, the €108 million of exceptional cost, the operating profit was €1,95 billion, down from the €1.143 billion of last year.

Net financial expenses were up slightly at €111million, but growth borrowing costs are actually significantly down versus last year, they reduced by about €40 million. However, other financing costs including the €21 million indemnity for the early repayment of parts of the USPP debt in August. And I would like to remind you that last year, we had the exceptional disposal gain of the construction PFI for €24 million booked in financial results.

Average interest rates on our debt were 3.2% last year, down 60 basis points versus fiscal year 2015 where it was 3.8%. The tax rate is up at 33.7% against an exceptionally low level last year, due in particular to the use in fiscal year 2015 of previously unrecognized tax losses relating to laundries disposal. Therefore, net profit before non-recurring items is up 5.2% excluding currencies. These non-recurring items include the exceptional expense of power plant and the early debt repayments indemnity both of them were €84 million on the net income. After net, non-recurring items net profit is down 9%.

On the next slide, before non-recurring items, net profit was up 3% and earnings per share was up 3.7%. On the one hand, we can sell 3.4 million shares, but on the other hand we carried slightly less treasury share this year as we intend to maintain the lower level of treasury shares for the employee share plan. As the result, the average number of shares declined by only 0.5% this year. You will find the full detail of the shares in the appendix.

Over the summer, we decided to restructure some of our event to increase average maturity and significantly reduced cost. So we repaid U.S. $360 million of debt on which we were paying an average rate of 5%. It is confident $35 million of which two thirds was in fiscal 2016, explaining the EUR21 million of indemnity. But we shall be selling $53 million of insurance over the next seven years. In October, to take advantage of historically lower rates, we issued EUR600 million bond with the yield of 0.875 and 10.5 share maturity. So we have not only increased the average maturity of our debt to 7.5 shares, we have also reduced the average cost of our debt to 2.7% from 3.2% in fiscal 2016.

Now, if we look at our cash flow, operating cash flow is up 4.7% even though it was affected negatively by currencies and the adaptation pair. The negative change in working capital versus last year is mainly due to the Rugby World Cup. I remind you that last year we got a lot of cash need in fiscal 2015 and we had most of the spend in fiscal 2016. I think we spoke about it in H1 already. But we noted also its client payment delays also increased somewhat particularly in North America. As a result, net cash provided by the operating activities was down 7% at EUR945 million. CapEx in client investments represented 2% of revenues, up from the 1.8% last year. This increase is principally due to the EUR64 million of investment for the Rio Tinto start-up.

As a result of all these, free cash flows stands at EUR595 million, down EUR93 million from last year more than entirely explained by the significant impact of Rio Tinto and the Rugby World Cup. The other main picture in the year are EUR300 million related to share buy-back and EUR335 millions of dividends paid. The increase of net debt during the year remained modest at EUR67 million.

Now, since many of you have been asking the question, we still think might be useful to clarify our position and how we see the use of our balance sheet going forward. Firstly, approximately one search will be dedicated to CapEx, for the right client contract at the right terms. This year, we have reached EUR398 million due to the significant start-up CapEx on the Rio. And other search should finance the dividend which will continue to increase regularly over time, maintaining it’s circa 50% payout. And then, the last earnings called M&A, depending on the availability.

In fiscal year 2016, we have a third successful year with very low level of acquisition and the share buyback as an adjustment valuable. The good news is that already in fiscal 2017, we have succeeding in finding a few operation, Inspirus in the U.S. incorporates employee loyalty services, PSL purchasing expert in the U.K. a small portfolio of prestigious contracts with Benson & Bernie [ph] in London and investments in Wynd in France.

We have reactivated the process taken on the few extra people and the pipeline of opportunities filling up.

With regards to net debt to EBITDA, the good target for us is between 1 and 2, whereas today we are 0.3. And of course, we intend to maintain this strong investment grade.

If we have a look at the balance sheet, the key challenge to the balance sheet at the end of fiscal 2016 are the reduction in growth debt and cash positions versus last year due to the low repayment which happened last year for about EUR500 million in total. The net debt only increased by EUR67 million to EUR407 million and the gearing was at 11% at year end.

So after a solid balance sheet, the natural conclusion is growth in the dividend. The board proposes to increase the dividend by 9.1% which represents a 57% pay-out on published EPS and then 50% payout on our EPS before non-recurring items. I shall come back to this in a moment.

Once approve by the AGM, it will be paid out of February 8th, next year. The board also decided further 300 million share buyback program given the lack of M&A spend in fiscal 2016.

From the previous slide, you saw the dividend is up 9.1% for this year versus a net profit which was on 9%, a net profit before non-recurring items up 5.2%. So, why such an increase, while if you remember in fiscal 2015, the increase of our EPS was held by capital gain on the sale of a UKPSI and an exceptionally low tax charge, we increased our dividend by 22%, but not as much as the EPS growth. This year, we are catching up on the dividend. So that over the past two years, both net income and dividend of circa 30%.

And here in this slide, you can see the regularity not only of the dividend growth, but also the payout ratio over the last 10 years and we payout slightly more when they are exceptional cost and around 50% the other years.

Now, let’s go into the detail of the On-site businesses. So North America was up 3.8% significantly better than last year where it was at 1.5%. U.K. and Ireland have 11.3% was boosted by the Rugby World Cup event. And the event without the Rugby, the rent of the activity was up 5.3% due to strong ramp up to prior year.

Continental Europe even though slightly better than last year was disappointingly up only by 1% impacted by the difficulties in France which offset most of the growth elsewhere. But the year was mainly characterized by a very severe decline in the Remote Sites activity which clients being forced to react to the significant drop in commodity prices.

As a result, the Remote Site activity was down 16% and the Rest of the World region was down 3.2%. All other activities in the Rest of the World grew by 7%. Overall, excluding the decline in Remote Sites businesses, the growth was plus 4%.

Looking at Corporate, Corporate was up 5.8% excluding the Remote Site boosted by the Rugby and strong development and integrated services particularly in North America and the U.K. Even without the Rugby and Remote Site, the growth in Corporate will have been plus 4.7%.

Health Care and Seniors were up 3.4% with good growth in all regions except in France and the U.K. where market conditions are limiting the number of contracts wins.

Education was up 1.2% versus minus 0.7% last year with strong new business in the U.K and Asia. But it was still weak in North America due to the lack of success in the prior year self-campaign.

Looking on growth indicators, client retention was stable, masking an improvement in the U.S. and in the U.K. as larger contract to get longer and come for rebid less offer. This was offset by a decline in the Rest of the World and particularly in Latin America where we lost some mining contract in Chile and clients were trying to diversify this supply base due to the particularly tough economic and social environment there.

Development was down 30 basis points, the significant Rest of the World new business including the Rio Tinto contract was offset by slow new business, particularly in universities in the U.S. and in the U.K in general. In the U.K. the significant numbers of mobilization and the renewals across all segments that the teams are managing have led to slow new business in this past year. Elsewhere, new business was stable.

Comparable unit growth was 2.1% similar to last year. The significant volume decline in Remote Sites was compensated by contract extension in Facility Management Services are across new geographies for existing clients in all other segment.

Sales in North America were up 3.8% organically. At 7.1%, Corporate was very strong, throughout the year benefitting from new contract wins and strong cross selling of new services. Health Care and Seniors return to a solid rate of growth of 4.9% due to the ramp up of new contract and strong same site growth.

On the other hand, Education was slightly positive at 0.4% compared to minus 0.6% last year. To be noted in Education that same site sales were strong in universities but offset by modest but improving development.

We had a disappoint in Q4 in Education generally with the lower number of school days during the quarter, late winter recovery days, later start of the academic calendar, and also less project than expected over the summer. Of the positive side from fiscal 2017, we should start to benefit from some good new contract win such as Washington DC Public School and an extension of our contract with the Chicago Public School.

The operating profit in North America rose by 9.3% excluding currencies, and the operating margin is up by 30 bps. This strong improvement was due a reduction in SG&A across the board as well as ever stronger management and cost control on-site. The Adaptation and Simplification program as clearly contributed to this improvement as a team is where quick to take of the program. To be noted, since fiscal year 2014, the progress of the operating margin in North America in an impressive 130 bps to now reach 6.8%.

On Continental Europe, organic growth with the modest 1% compared to 0.6% the year before affected by the weakness of the French market in a very difficult environment. Corporate was up 1.7% with for instance strong growth in Russia, Turkey but also Germany. However, the French market was difficult and worsen in Q4. The Sports and Leisure activities in Paris were significantly below our expectation with the shortfall in revenue of about 45 million in the year of which more than half in the fourth quarter.

Health Care and Seniors were down 1.3%. The decline was many in France, due to a very seductive and prudent approach to new contract or contract renewals. On the other hand in Senior, the Korian contract is ramping up progressively and we also seeing strong growth in Health Care in Sweden following on from a new contract signed last year.

In Education, the 1.8% increase in revenue would due to growth in two key markets Germany but also France.

Despite the low growth environment, margins improved significantly, thanks to productivity gains and existing sites, more efficient management of the SG&A and the ongoing aspects of being much more selective on new contracts. Operating profit rose 18.4% excluding currency impact and the margin increased by 70 basis points.

In the U.K., revenues were up strongly in fiscal year 2016. Firstly, we benefited from the Rugby, this alone provided 8% of the growth. But even excluding the Rugby, Corporate revenue growth was at 35.3%. This came from a lot of big new contract on of the prior year as well as the lot of extension to existing contract as customer build up their confidence in integrated services.

Health Care and Seniors were down 0.9% due to low new business development and pricing was just inadequate. The good news is as retention is improving. Education as particularly good year up 15.1% with the lot of good quality schools contract, one has started up during the year. 50% growth in operating profit and 170 bps of margin improvement was due to a real focus on operational profitability and the continuation of stronger G&A control initiatives over the past year but this year was boosted by the very successful Rugby World Cup.

The Rest of the World region, as we have already mentioned has had a tough year. Our clients in the oil and gas and mining sectors have had to cut back capacity radically, both in its provision but also in production. In Chile, the economic situation was combined with the particularly difficult social environment, which means that many of our clients decided to spread their risk and we’ve had to close down some significant contracts.

So in the Remote Site business, our revenue were down 16% in fiscal year 2016 which explain the 3.2% decline for the region and the 4.9% decline in corporate. Overall and excluding Remote Site, the activity has continued to progress up 7% with very strong development in the rest of Corporate and Health Care.

In Education, the stagnation is due to the exit of contracts in Africa. We’ll have that in terms of activity outside of Remote Site; we've seen some improvement in that Latin America and in Brazil in particular in the last quarters. However, we are seeing the opposite in Africa and the Middle East as the oil prices crisis prolongs really affecting spending power and therefore development in oil related economy.

Last but not least, Rio Tinto has mobilized safely and successfully, even though the revenue in Q4 are lower than what we had expected. This was mainly due to some timing issues. We have now caught up and are backed where we expected in terms of the plan. I'll remind you that it is a ten year project, so let’s make us worried about the few weeks.

In margin, the operating margin suffered, down 150 basis points, due to the radical decline in the revenues in particular in the Remote Site business. Gross profit margin rates were affected, but decided by our team. The bulk of the euro impact in gross profit comes from the reduced volumes. However, given the active development opportunities in energy and resource and even though we adopted our SG&A, severely cutting SG&A was not the retain option.

Now let’s move on to Benefits and Rewards. The Benefits and Rewards activity has been affected significantly by the decline of the Brazilian real. Excluding currencies, organic growth for the issue volume was plus 6.9% and 4.7% in revenues.

Let’s go into the detail by region. But quickly, let’s talk briefly about currencies. The real fell by almost 19% on average during the year. However, the good news is that the closing rate is up 14% on August 15 level and it’s holding up well around the 3.6%-3.7% level.

For the Venezuelan Bolivar, it is important to note that we have significantly adjusted the exchange rate in the last two quarters. First in Q3 to VEF 521 bolivars for USD 1 versus VEF 199 for USD 1 in H1. And then again in Q4 to VEF 645 to a USD 1. And those impacts significantly the weight of Venezuelan our books. Those rates have been retain and the other one at which we could do some repartition of dollars. And on this because we follow hyperinflation accounting, we believe this is the only fair way of doing it.

Now excluding those currencies impact, our organic growth rate in LATAM was 7.8% for issue volume and 6.1% for revenue. The issue volume growth is made up of higher face value in Brazil and strong growth in Mexico, Venezuela and Chile. In Brazil, on the issue volume, the number of employees at our clients has come down a little. The net new loss is now slightly negative, but we are still facing inflation very well and some cross selling takes place. All in all, we have maintained the issue volume well even though it got tougher through the year.

On the revenues, the highly competitive environment for retention and new business in Brazil has put more and more pressure on client commission resulting in revenue growth deteriorating and finishing beyond around expected. But it is to be noted that financial revenues and aggregate revenues are good and in line with volume growth.

Interestingly, we have noted that the On-site activity has fixed up in the recent two quarters and it could be a sign of a better outlook for BRS too, but it will take time to come through into BRS and the trending H1 of fiscal year 2017 should be similar to the last two quarters.

In Europe and Asia, issue volume was up at a very solid 6.2% but here again the revenue gap was significant with only 3.1% growth in revenue. This was clearly due to much lower interest rate in Western Europe somewhere in the flat here also in the Italy for invest and softer clients’ revenue. In terms of volume and revenues, we also saw strong development in Turkey and continued market penetration in Asia.

On Slide 47, we see that the operating profit of Benefits and Rewards was very well affected by currencies. It is the impacts of the real drop in average rate. However, excluding currencies, the operating profit was up 8.8% and the margin was up 110 basis points. Thanks to continued tight control of overhead and processing costs.

And now before I turn back to Michel for the outlook, I would just like to talk about the change we are making to our account from the start of the fiscal 2017. As you know, we changed our organization significantly last September from a geographical organization to a new organization by global segments.

We are now organized by client segments, corporate services, healthcare, energy and resources et cetera. This is now where the P&L responsibility lie. Then we have the services operations and transitional functions which also global to ensure that all the segment are optimizing processes and spreading best practice across all regions.

So from 1st of September, we have gone light and we are running the business for global segment. We plan to have a meeting on the day of our Q1 announcement in January in London to present a pro forma 2016 figures and as you understand our restated members. We shall have three primary segments, Business and Administration, which includes corporate services; ENR; government and agencies; and sports and leisure, representing just under 50% of the total and it is today. Health Care and Seniors, 25%. And Education including schools and universities.

These segments will then be spread by geography; North America, Europe including the U.K. and Ireland and Africa, Asia, Australia, LATAM and Middle East. BRS remains as it is today.

So as far as revenue is concerned, you will be able to more or less reverse your revenue model. From fiscal 2017 that will only be the new reporting available. We shall provide you with the Q1, H1, nine months and fiscal year 2016 revenue figures for each of the segments and geographies and you will also have the H1 in fiscal year 2016 operating profit and differentiation.

Functional cost, HR, finance et cetera and service operation will be allocated to each segments.

The work is still being finalized which is why we cannot give it to you earlier than in January. We needed to finalize the 2016 accounts before being able to make the final restatement. With the complicated process and very hard work for older consorting teams around the world and at our head office, but we are nearing the end of the process, surround in January for more on this.

I now turn it back to Michelle for the outlook.

Michel Landel

Thank you. Thank you, Marc. So in ease and settlement to conclude this presentation, I reiterate our confidence in the outlook for Sodexo. Marc talked about it, in Energy and Resources, we have now seen the sector is stabilizing over several quarters and we have ramp up of our new contracts. U.S. Education while being on the way weak, we will benefit from the new school business. We should have an easier comparative base in France and we also have a good M&A pipeline.

But overall, I’m convinced that the segmentation is offering us more opportunities for development. We have gone through an enormous reorganization over the last year, but between contract extensions, white spaces as we talk about them. And standardize processes we have the long term capacity to boost growth very profitably.

On top of it, digital innovation in which we investing will pave the way also for new opportunities, of course in the very short term, we have Q1 hurdle which you know Marc elaborated on, but the ramp up of the Adaptation and Simplification program savings and continued tight control of SG&A as well as ongoing operation efficiency programs and lower financing cost all going in the same direction.

And I can assure you that the management teams towards the world is totally focused on accelerating growth and increasing margins. So despite challenging comparables in the first half, we have confidence in achieving organic revenue growth of 3% and growth in operating profit between 8% and 9% excluding currency effect and exceptional items related to the adaptation and simplification program is for 2017 fiscal year. And moving forward, we also maintain our medium term objective of average annual growth in revenue between 4% and 7% and operating profit of between 8% to 10% all excluding currencies.

And before we take question, let me end by reminding you of our major strengths. We have a very robust financial model that allows Sodexo to sell finances development. We have a unique range of quality of life services particularly well align with evolving client demand worldwide. We have significant market potential. We have a global network covering close to 80 countries with undisputed leadership in developing economies. And more than anything, we have a strong culture very engaged teams with the security of independence, thanks to the Bellon’s family strong commitment as a shareholder.

So thank you for listening. And now with Marc, we will answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will now take our first question from Jamie Rollo from Morgan Stanley. Please go ahead. Your line is open.

Jamie Rollo

Thank you very much. Good morning, everyone. I've got three questions please. First is on Continental Europe, sales at 1%. Could you please break out what France was within that and particularly talk about France in the fourth quarter and whether you see that weakness spreading into 2017 and also sticking with Continental Europe, the margins in the second half were up very strongly over 100 basis points despite negative fourth quarter sales, I’m just wondering how that was delivered because profit screw by more than the cost savings? That’s the first question.

Secondly on the U.K. also on the margin in the second half rose over 200 basis points and of course those in there rock being that in that period this year. So I was wondering what drove that and whether through any sort of one off gains again this year?

And final question is when do you think you’ll move to the one to two times leverage? Thank you.

Michel Landel

The third question is what? Excuse me. Okay. So the first question is about Continental Europe, as we said, we have a mixed pack in Continental Europe, we have you know Germany, Spain, Russia, Turkey are which growing fast, not fast but good, strong, and some fast actually. We have also some countries where which is little bit more difficult, specifically Benelux, Holland and Belgium and France, specifically France. In France, the growth in the fourth quarter was negative, clearly we are affected by the as I said before and Marc mentioned it as well, we had the terrorist attack, we had the flooding and we also had the strikes.

Now you know the situation in France is not going - is not getting better in terms of the tourism. If you read and if you look at the statistics in terms of tourism, it's not improving actually. Hopefully it will you know overtime. But that's you know historically is taking time to catch up. Now the situation is also very stable because of the election. We don't see many, many you know decision made, people are waiting. As you know in every period of this election is always like this.

So France probably should stabilize this year hopefully. But last year was overall negative, more negative in the fourth quarter and hopefully will stabilize in 2017.

In terms of margin in Europe, Marc?

Marc Rolland

Yeah in terms of margins in H2, we've been quite - we’ve been pushing very hard on all the buttons. So obviously I mean we had the adaptation plan and as I said Europe was a big contributor of the plan. And so because we did a lot in H1, so we started get something in H2. We also pushed hard on the On-site cost on labor management, on food cost, so it was a hard push in H2 in Europe. So, this what has driven margin. There were some one-off elements but they were reasonable.

So in the U.K. we did the same. In the U.K. the fact is also - the fact that we had less mobilization and so forth, so less mobilization cost. We also push very hard. The U.K. has started on the SG&A reduction program a year earlier than the rest of the group and it paid off in H2. So the growth in H2 in the U.K. margin I think is circa 20% if we are comparing H2 versus H2, so that was a good momentum.

Now because of the Rugby World Cup contribution, we are not expecting that the U.K. margin will remain at that level next year. There will be a drop in margins, I think the margins in the U.K this year 6.8% and next year, we are expecting them above 6% but between 6% and 6.5%. They will not stay at 6.8%.

In term of leverage, if we are looking at our cash flow for this year with a bit of M&A and a share buyback, I think we should get closer to 1%, but not yet at one. Ideally we would like to be above 1% within two to three years, but I think this is the time frame for being between 1% and 2%.

Michel Landel

And you know we - it depends on - if their targets which are attractive for us of course at the end of day.

Marc Rolland

One minute, I wanted to highlight also in margins, is that you know when you are selling less, unfortunately one of the benefit is that you have less mobilization cost, so that also helping H2 in France. But we have been a lot more selective and that also helps improving the margin. Now we want to sell more, so definitely I mean these make change in the future.

Jamie Rollo

And so, just on getting to the one time plus leverage target, did you expect to get pass through mainly through M&A or through a combination of M&A and additional buybacks?

Michel Landel

Well you know buyback is not something that we expect to continue. We expect to do this through M&A. And as Marc told you, the use of cash is clearly explained by Marc and we are using and avoided it. It is happy to use the share buyback this year, because for the last several years, we were still in making acquisitions, because we were concentrated reorganizing the company. That was one of the reasons. Now we are re-energize if I may say our teams have been investing but that's what we are hoping to do.

Jamie Rollo

So it just one that this M&A is only one third of your free cash flow and the rest is dividends and CapEx, you would never get to one time is really because you're not going to be spending more than your free cash flows your net debt will not go up. So does that mean that M&A will exceed one third of your free cash flow?

Marc Rolland

It could. We are not setting up limitation of M&A. What we wanted to illustrate is the fact that we will rather spend the cash on M&A than on share buyback. And so we are not giving ourselves constraints in M&A. We are not looking at transformational M&A. We want to do mid-sized, single countries deals mostly in FM and Benefits and Rewards, but we are looking at spending potentially a little bit more than a one third of our cash flow in M&A.

Jamie Rollo

Thank you very much.

Michel Landel

You’re welcome.

Operator

We will now take our next question from Tim Ramskill from Credit Suisse. Please go ahead, your line is open.

Tim Ramskill

Good morning. I have one sort of numbers question and a couple of sort of more strategic questions. In terms of just following-up on Jamie in regards to the progression of European margins in the second half I know very strong. If you sort of see no improvement in margins in the second half of next year, but the momentum you just delivered carries through into H1 we like to see sort of 50 basis points of margin improvement for Continental Europe in next year.

And then in terms of the more strategic stuff just in segmentation obviously you’ve talked a lot about it this morning. Your approach the segmentation is fundamentally very different to compost that if anything is sort of further sub splitting its sectors and segments in a market like the U.S. So I just wonder if you could compare your approach to there and what you think it’s superior.

And then the final question is in terms of your acquisition in the U.K. in the food purchasing business under that's quite small, but could you maybe take the opportunity to speak just little bit about Integra your U.S. food purchasing business just in terms of the scale of that, and again what advantage you believe that brings to the group? Thanks.

Michel Landel

Okay, thank you. Marc, could you answer the question in the first part - first question?

Marc Rolland

Yeah, you see the Continental Europe, the margin had been behind the rest of the group and so that's why we are focusing on the margins in Continental Europe. So there was a very strong momentum in H2. We push hard. We intend to carry of that efforts tin fiscal year 2017. So what we are saying is that with the 8% to 9% EBIT growth this year, we are aiming at 25 bps to 50 bps margin increase, some of which will come from the U.S. The U.K. will probably drop. So Europe has got to carry its weight. And we are expecting margin enhancement in Europe. Obviously they will also be margin enhancement in the Rest of the World. So I would say yes, margin in Europe will be pushed or and it consolidate at a higher level than what we had.

Michel Landel

About - you know going back to your question about segmentation; we've always been very keen to segment our business because we know when we see that clients want specialist in front of them. So we have traditionally segmented our countries, when we’re geographically organized. We've moved to this organization, because markets are becoming global. We have more and more global clients around the world in any - in these segments. We also have global customers and the customers today are becoming you know covering around the world. They have expectations which could be very similar.

So we have to have this approach as specialist of hospitals, of seniors, of education and you know it's also a way for us to leverage resources, and leverage the intelligence of the group, because when we are organized by geography, of course P&Ls are managed by country, and it is much more difficult to leverage the knowledge, the expertise and the intelligence of the group.

So we think and we've always been convinced that if we are close to our clients very close to our customers on the long term, it's a way for us to position our offering much more effectively and to respond to the needs of our clients and customers much more effectively. That's why we’ve done this, you know it’s not something that you do over night, it takes time, but on the long term, we really want and we really believe this.

Now we respect Compass, Compass is doing extremely well. But they have a different strategy, so that's it. Now we've seen you know through Rio Tinto, through the growth of justice, win that we had in Australia, the benefits of this segment. And as we move forward, I think we would see more in that.

Now in terms of you know the purchase for the company, the acquisition we made in the U.K. as you know we have develop Integra as a GPO for many years in the U.S. It's been successful It’s really a way to leverage our purchasing power. We believe that there is - but there are opportunities in Europe and this company that we bought in the U.S. is a real specialist, and we want to build through them and actually expand in other part of Europe. We also can really leverage the experience that we have with Integra with the experience which we build in the U.S. - in the U.K. sorry, with this new acquisition and to grow our business which is a very good business for us.

Tim Ramskill

Okay, just one quick follow-up on the last one. So I think Compass talk about $20 billion of food purchase in the U.S. what does Integra purchase price for your needs on for third parties?

Michel Landel

I think it's close to - it's between 10 billion and 15 billion.

Tim Ramskill

Okay. Thank you.

Operator

We will now take our next question from Jarrod Castle from UBS. Please go ahead, your line is open.

Jarrod Castle

Good morning, gentlemen. Three if I may. Just in terms of your margin, you said you would expect 25 basis points to 30 basis points group margin increase in each year in the coming years. I mean how many years do you think you could do something like that in terms of that kind of increase?

Secondly just in terms of the U.K. business, it's been a number of FM plays in the U.K. one in particular I'm thinking of who had profit warnings in terms of impact the minimum wage and kind of slowing - bit of slowing on outsourcing, so any commentary on that?

And just on your CapEx to sales looking at about 2% is that what we can expect in the future slightly higher than in the past? Thanks.

Michel Landel

In terms of CapEx, can you answer that?

Marc Rolland

Yeah, in term of CapEx, we’re happy at 2%, it is for contract, good business. I mean there is no for us a real limitation as what we should do is what we like is good business. So if it's 2% or even 2.1% why not. On the margin, we have a plan, adaptation plan till fiscal year 2018, so I will say that we have to commit to that level at least to fiscal year 2018 that obviously we expect this to have a momentum in the year after, so I would say two to three years.

Michel Landel

And you know as I said before with this reorganization, I think we have many opportunities to leverage even better our resources and the capabilities, and the intelligence of the group. So we still have some very good opportunities here. In terms of the U.K., in U.K. as we said, we've grown tremendously in the prison business, in defense, and in corporate, our big growth has been through large accounts where we have been able to develop our IFM integrated facilities and quality of life offering.

We think that this momentum in large organization will continue because we see globally companies which are mutualizing their purchase of services and looking for opportunities to decrease cost. So far the U.K. is still a good market for us and we'll continue to be with the Brexit, we might see some tension on public contract, but so far, we've been able to manage through this. We're confident in the U.K.

Jarrod Castle

Okay, thanks. And just on the CapEx to sales. The 50 million that you're investing in BC, is that included in the guidance and?

Marc Rolland

No, it’s in the CapEx detail.

Jarrod Castle

Okay. Okay, thanks a lot.

Michel Landel

You’re welcome.

Operator

Our next question is from Vicki Stern from Barclays. Please go ahead. Your line is open.

Vicki Stern

Yeah hi, just a couple of questions. With regards to the acquisition, just can you share what sort of multiples you're expecting to pay at least in those - in the short term line of sight in the pipeline? And reminder please on what kind of return on capital employed targets you have on acquisitions?

And then just secondly on inflation, just curious to know your thinking around how worried you are about rising inflation in terms of putting pressure on margins. Something historically the company's managed pretty well, but just keen to know your thoughts here given that's a pretty relevant topic right now? Thanks.

Michel Landel

In terms of capital employ, objective has always been over 15% and actually we've been successful, because our capital employee today average mark is around 20%.

Marc Rolland

Yeah, it’s 18.7% unpublished, but it’s over 20% on restated of the exceptional cost.

Michel Landel

Yeah, what was the first part of your question?

Vicki Stern

Multiple.

Michel Landel

Yeah, multiple. We want to pay the right price and we will.

Marc Rolland

Though we're careful with the multiple, it all depends what we buy obviously so it depends if it's more strategic asset or filling assets, so I would say it for the right assets, we pull be similar to - it’s a double-digit multiple but most of the time we’ll like to stay around 10% or below 10% if it’s normal assets. On the fact that what we are looking for the Roche and we are looking at the Roche in the long term view, and so the capital employee of the group are mostly done of goodwill, if you look at our balance sheet most of the capital employed comes from goodwill.

So obviously when we do M&A, we had goodwill. What is important for us is that we won't overall to have Roche above 15%. Right now, we are almost at 20% or even more than 20% so it for us between 15% and 20% is good. So we are looking at this from a Knowledgistic point of view in over long period of time and not just you know short period of times.

Michel Landel

In terms of inflation that so far we've not seen any movements, recent movements in inflation. Today we are between there are countries which are close to 0%, some are more than that specifically in emerging markets like Brazil and Asia which was close to 6% to 8%. But in general inflation on average is between 0% and 1% and 1.5%. And we don't see today any movement, but it can change. But I remind you that we've been used to this over time and we are able to pass that to our clients when we see those movements.

Vicki Stern

Thanks very much.

Michel Landel

Thank you.

Operator

[Operator Instructions] We will now take our next question from Nadia del Kasir from Berenberg. Please go ahead, your line is open.

Nadia del Kasir

Good morning, everyone. Just on the Benefits and Rewards margin, it seems has gone down, and I know that constant currency shouldn't have an impact on your margin given that the sales and costs are done in the same currency. Can you help us to understand why margin has been going down?

And secondly it seems like the sales here is expected to increase next year. Can you please quantify the benefits from this?

Marc Rolland

Okay. Number of things accounted in Benefits and Rewards. The margin that concentrate is actually increasing by 110 basis points. So we grow from 34.5% to 35.6%. The fact that the margin in Brazil expressed obviously in Brazilian real is high and the size of Brazil and you can see it in our MG&A you've got the impact on operating profits for the Brazilian business together, this is why our margin are dropping at curios rate, because of the depreciation of the Brazilian real by 19%.

Now like-for-like exchange rate being constant, it’s going up, because we've had tight control in processing cost for SG&A and BRS. So the margin of BRS like-for-like is going up. The drop is mainly due to the drop in Brazilian real. And you can see the detail in MG&A add that’s to the communicate price. I think in Brazil, we have a negative impact in operating margin BRS and outside about EUR40 million. This is the headwind we got from the margin.

Nadia del Kasir

Okay, thank you. And on this year…

Marc Rolland

What you need to understand is that because now the rates are going up, real is stronger you know we had an average rate of 4.07 last year average. Now we have currently around 360- 370 just this is giving us an uplift of 10% on the margin express in real. So if we were to remain at 3.6%, you will see an increase in margin just by the conversion of the real at a stronger rate.

Nadia del Kasir

Thank you and on…

Marc Rolland

On sales, I don't have the number in mind here, so we are a significant contributor of beneficiary of here.

Michel Landel

But I don't think that’s…

Marc Rolland

And we grew up to 40 million last year. I don't think we were expecting an increase, so I need to check that.

Michel Landel

No, no, we are not.

Nadia del Kasir

Okay, thank you.

Marc Rolland

But that will be good news if there is an improvement.

Nadia del Kasir

Thank you very much gentlemen.

Michel Landel

Thank you.

Operator

We will take our next question from Jaafar Mestari from JPMorgan. Please go ahead. Your line is open.

Jaafar Mestari

Hi good morning, everyone. Just two questions from me on acquisitions and Remote Sites. So just on acquisitions, 2016 has actually been quite busy for M&A and across your industry mid-sized but quite busy, so what was wrong with the companies that we've seen being acquired by Compass and even some sense of why the peers, where that just not quite in terms of valuation or is it the geographies and specific businesses you are looking for? And from Rest of the World - sorry if you want to answer that first?

Michel Landel

No, no, ask your second question, sorry.

Jaafar Mestari

On Rest of the World and specifically Remote Sites within that, could you maybe talk us through the different moving parts in the minus 16% organic contraction you've seen in Remote sites and in terms of the different bits there; one, what do you think the underlying commodities markets were doing; and two, what do you think the new contract has contributed in full year 2016 to date. And do you have a sort of idea of how fully ramp up things like Rio Tinto are. And three, are there specific large losses we need to be aware of. In the press release, you mentioned contract exits in Latin America and in Education in Africa in the past you've talked about cases like Chile, so are there any specific headwinds we need to be aware of before we start counting the wins like Rio Tinto?

Michel Landel

Okay, thank you for your question. On the acquisition side, as I said you know we in the last couple of years, we've been focused on the On-site part of the business, on this reorganization we've looked at some acquisition, we need very few and very small that edge, if we to be honest with you, if we had to pursue one of them which would have been very, very important for us, we would have done that, but we didn't you know. So it's not a question of price or this, it's was a question of focus. Now we said that we are this reorganization is underway, it's not completely finished, but way, way underway. So we can move to look at more acquisition moving forward, we will do that. So we’ll be more mature active. But that’s a very, very simple reason, right.

In terms of the Rest of the World and you know may Marc?

Marc Rolland

Yeah, once we can’t say, the product we’ve had in Chile are taking back from the second half of fiscal year 2015 and that's why we've been talking about it over the past few quarters now. I think in Chile it’s definitely getting better, it's not yet perfect, we are not winning enough, but it's getting better. If we are looking at I would say Australia, Australia is definitely doing better, it’s also stabilized and then we have Rio Tinto. The offshore market is still very top, we had some nice win with Seadrill, but it’s a very tough market.

The North Sea also is quite tough, I mean you know if you're looking at the U.K., Norway, Holland those are tough market and I don't think they have recovered yet. The Gulf of Mexico and Canada was doing out actually a lot better. So all in all, the portfolio in Energy and Resources we believe when we are looking at Qs over Qs not versus last year, we believe the turnover now is stabilizing that comparable are going to get better, easier. So we are expecting a growth in Energy and Resources next year, so at least a mild growth and then the addition of Rio Tinto.

Michel Landel

And I would add that we have projects in the pipeline which are renewal, extension, so the market is not inactive right, the existing market is not inactive. We don't see you know any massive new investments in the mining in the oil and gas industry, but we see some churn in the business. So we might beneficent from that, right. So we are confident that this year we will grow, we will come back and go.

Marc Rolland

Now overall the Q1 is going to be very soft, because we have the Rugby last year. And the Rugby in Q1 last year contributed 2.4% of organic growth. So this we have now this as a comparable basis. So Q1 will probably be very small or slightly negative, but H1 shall recover and then we are expecting the bulk of our growth to be visible in H2. I think what is important in H2 also is that in Q4 we are going to have an upside, because we are going to align in the U.S. weekly reporting to a calendar reporting, we are doing this in fiscal year 2017 and there will be a few extra days of turnover that will be accounted at the end of August 17th. And then as it comparison it will increase the same store sales so to speak for the year. So that will have an impact and we are expecting this impact to be 0.5% to 0.6% on overall.

Jaafar Mestari

Okay, thanks, that’s really, really helpful. And maybe just to round up on the contract wins, you seem to be saying no major losses to be aware of. In terms of the wins, Rio Tinto looks like almost entirely in net new business, what about Seadrill and Shell for example which you've communicated on. Do you have a broad sense of what percentage of that is net new versus the book that looks like a renewal?

Michel Landel

Well actually Rio Tinto is not entire new business. It's I would say two third new business you know. But anyway on Seadrill and Shell, I think it's 25% we had big - we had contracts with Seadrill. We had contracts we Shell. I think it's overall an increase of 20%.

Jaafar Mestari

Right, thank you very much.

Michel Landel

Good news because it is consolidation, it’s very good.

Jaafar Mestari

Yeah, it's really helpful, thanks.

Operator

[Operator Instructions] We will now take our next question from Tim Ramskill from Credit Suisse. Please go ahead, your line is open.

Tim Ramskill

Hi thanks. I just wanted to very quickly follow-up on your comments regarding that change in the reporting in the calendar for 2017 that 0.5% to 0.6%, is that firstly on the group level and is that included within your around 3% organic growth guidance for 2017?

Michel Landel

Yes, it’s at the group level and it’s included, yeah.

Tim Ramskill

Okay, thank you.

Operator

We will now take our next question from Nadia del Kasir from Berenberg. Please go ahead, your line is open.

Nadia del Kasir

So just to follow-up on the tax rate, it seems like it has been quite low this year and last year well below 35%, should we think about the rate that you had today, should we think about in normal rate that we should expect going forward?

Marc Rolland

Yeah I think it's - I would say circa 34%, we're at 33.7% I think it's a good rate going forward.

Nadia del Kasir

Thank you.

Operator

We will now take our next question from Jamie Rollo from Morgan Stanley. Please go ahead, your line is open.

Jamie Rollo

Thanks. So I have another follow-up on that 0.5% to 0.6%. So that's group, was that for the full year or was that for the fourth quarter?

Michel Landel

No, it’s the full year.

Jamie Rollo

Okay. And it's partly reversal of lost days this quarter in Q4 this year, because you mentioned that or is that going to reverse in turn in 2018?

Marc Rolland

No the fact is that, I don't know if you remember Jamie, but for a number of year as we’ve had a weekly reporting in the U.S. So many years, we have50 weeks and every so often we have to catch up and we have a 53rd week. The last time we had a 53rd week was in 2012 and then because we are catching up one day year or two days on these five year, we were supposed to have the next 53rd week in 2018 because we are going through a massive simplification program in the U.S., the team have suggested that we aligned the calendar in 2017 because there is a benefit in term of simplification in our season. So we are aligning the calendar of this year and there will be extra day feature, it will be the final year. So obviously it’s going to be a calendar shift then after coming in 2016, we will have a normal 365 days in a year. So there could be some impact on the other way.

And the evaluation of what it’s represented, it’s difficult because it is during the summer when the volumes are lower in schools and education, so - but we are expecting an upside.

Michel Landel

Okay that would simply obviously our processes right, so which is very great.

Jamie Rollo

I want to go to - talk about some rationalization of U.S. healthcare providers that doesn’t affect your fourth quarter results, but any comment about that?

Michel Landel

No, I don’t have any comment to make, doesn’t affect us so far.

Jamie Rollo

And any guidance on net interest give the lower cost of debt in the recent bond?

Marc Rolland

What I said earlier is that we are expecting the borrowing cost on our debt to be 2.7% this year.

Jamie Rollo

Okay, thanks.

Michel Landel

A significant decrease.

Marc Rolland

Yeah, it came from 3.8% to 3.2% to 2.7%, yeah.

Jamie Rollo

Thanks.

Operator

We will now take our next question from Jarrod Castle from UBS. Please go ahead, your line is open.

Jarrod Castle

Thanks. Can you just some updated guidance in terms of exceptional items in terms of the cost of us going through your P&L in 2017? Thanks.

Marc Rolland

You know that we booked 108. We’re aiming for 100 this year, so we are slightly ahead of what we’re aiming but just mildly. We are expecting to spend the EUR200 million, so we have visibility on that, so mathematically, we will be spending EUR92 million in the first half.

Jarrod Castle

Okay, thank you.

Operator

We will now take our next question from Pascal Hautcoeur from Redburn. Please go ahead, your line is open.

Pascal Hautcoeur

Yes, I have three questions. First of all, in U.S. education, give the pipe in terms of new business, what kind of organic growth you would expect in the next 12 months?

Secondly on the cost savings of 200 million, given that you want to accelerate organic growth, how much of the savings you plan to reinvest in the business?

And thirdly, what is your cash tax rate in the U.S., it’s cash not P&L tax rate in the U.S.?

Michel Landel

You know in terms of your second question, as we said that we will improve our operating margins you know in the range of 20-30 basis point, that includes the investments and reinvestment that we are doing. We are investing lot of resources in digital and development and growth, sales and everything. So that will be part of it.

In terms of the U.S. education, this year combined we would probably grow between 1% and 2%, right.

And the last question was the cost of …?

Pascal Hautcoeur

U.S. cash tax rate.

Marc Rolland

To U.S. cash tax rate, I don’t have anything to tell right now. I had to drop you an email later. And on the indication, I think it’s slightly stronger in schools and universities, but I think the teams are doing good work and the pipeline is being reworked and worked on so. And I said, we’ve signed two contract in schools with Washington DC Public School and we’ve had a good extension of our FX contractors got [ph] big schools, so the school seems to be a little bit active right now plus we are doing good work in universities.

Michel Landel

And the other thing we did is we restructured our sales organization in education specifically in higher education in last year, so we should probably this year have a better selling right, because when we signed to train people, to put them at the right level. So we should be better this year.

Pascal Hautcoeur

Okay.

Operator

[Operator Instructions]

Virginia Jeanson

I think this should be the last question, it’s possible.

Operator

There are no further questions in the queue.

Michel Landel

Alright, well thank you for all this. Thank you so much. You want to - if you have nothing…

Virginia Jeanson

So thank you very much for listening the call. Don’t hesitate to get back to the IR team if you have any questions. I can see the emails are coming in. So I suspect there will be some calls. We look forward to the next call which will be on the 4th of January for the Q1 revenue figure.

Michel Landel

But before that, we are looking forward to seeing you during the next few weeks during the road show. So thanks very much. Have a good day.

Marc Rolland

Thank you. Bye-bye.

Operator

That will conclude today’s conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.

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