Executives: Dominic Blakemore - Group Chief Executive & Director Jonathan Thomson - Group Finance Director & Executive

Director
Analysts: Jamie Rollo - Morgan Stanley Vicki Stern - Barclays PLC Angus Tweedie - Bank of America Merrill Lynch Richard Clarke - Sanford C. Bernstein & Co. Jaafar Mestari - JPMorgan Chase & Co. Jeffrey Harwood - Stifel, Nicolaus &

Company
Operator: Hello, ladies and gentlemen, and welcome to the Compass Group First Quarter Trading Update Call. [Operator Instructions].

Just to remind you, this call is being recorded. So today, I'm pleased to present Dominic Blakemore, CEO; and Johnny Thomson, Group Finance Director. Dominic, please go ahead.

Dominic Blakemore: Thank you, and good morning, ladies and gentlemen. Thank you all for dialing in.

With me this morning, I have Group Finance Director, Johnny Thomson. This is the first time we've spoken to you since the tragic death of Richard Cousins and his family. I'd like to take this opportunity to thank you all for the many kind messages we've received since his passing. He was an extraordinary man who built Compass into the business it is today and he will be greatly missed. Richard left the business in great shape and that's further evidenced by a strong first quarter.

I'd like to say a few words about our performance and outlook before opening the call to questions. Group organic revenue growth was 5.9% for the three months to the end of December. This was driven by strong levels of new business wins, excellent retention and good like-for-like revenues. We continue to generate efficiencies and we're taking actions to offset above-average cost pressures in the U.K, the benefits of which will come through in our operating margin in the second half of the year. Now turning to the regions.

In North America, organic revenue was up 8.2%. While we're seeing very good growth across all sectors, Healthcare & Seniors, Vending and Sports & Leisure were particularly strong. Europe reported 2.1% organic growth in the first quarter, due to good growth in UK Business & Industry, and a favorable calendar in Sports & Leisure. In the rest of the world, organic revenue increased by 4%, driven by strong performances in Turkey and some of our Spanish speaking Latin American businesses. Offshore & Remote declined by 1.6%, better than we expected due to delays in the transition from construction to production at certain sites.

Growth in the rest of the world region, excluding Offshore & Remote was therefore 6.1%. On acquisitions, we spent £265 million during the quarter, the largest of which was Unidine. Unidine is a pure-play food service provider in the rapidly growing Healthcare & Seniors market in the United States. It has annual revenues of around $220 million and margins broadly in line with our North American business. Currency movements compared to the same quarter last year had a negative translation impact on revenues at £288 million and on profit of £24 million.

If current spot rates were to continue for the remainder of the year, foreign exchange translation would negatively impact revenue by £1.2 billion and operating profit by £97 million. In summary, we had a strong first quarter, and our outlook for 2018 is positive. We continue to focus on driving efficiencies through the business and expect modest margin progression on a full year basis, albeit this will be second half weighted. Growth in North America was excellent. And both Europe and the rest of the world are performing better than planned.

Therefore, we now expect to be above the middle of our target, 4% to 6% organic growth rate, for the full year. In the longer term, we remain excited about the significant structural growth opportunities globally and the potential for further revenue and margin growth. Thank you. And now we're happy to take your questions.

Operator: [Operator Instructions].

This question is from the line of Jamie Rollo at Morgan Stanley.

Jamie Rollo: Two questions please. First, clearly very good sales figures. You didn't mention margins in the period itself. I'm just wondering if you could give us a feeling for what those were? And also what the sort of cadence will be between the first and the second half through the year? And the second question was just on U.S.

tax reform. It's probably too early to say, but any change in behavior either from your clients or from competitors passing on savings through perhaps more aggressive fees.

Jonathan Thomson: Okay, Jamie. As you know, we don't give out quarter one margin. We never have done.

But just to reemphasize what Dominic was saying, we do expect on a full year basis that our margins will move forward, albeit modestly. We said to you, I think, in November, and say again that we're taking some actions right now to phase into some labor pressures, particularly in the U.K. business. And the cost of those actions will hit us in the first half, and so our margins will be fractionally down 5 to 10 basis points maximum. And then the benefits, of course, will come through in the second half to get us to that full year margin.

We're doing those actions now and we're still very confident of that guidance. On the tax points, of course, it's very, very early to say. It's so complex that the people are still working it through. In fact, while it's, obviously, been a nice benefit to Compass and to others, there's still a lot to do in terms of how the IRS and the states will interpret the tax. So I think it's a little early for us to say or to envisage what might happen with clients and competitors at this stage.

Operator: We turn to the line of Vicki Stern of Barclays.

Vicki Stern: Just sort of picking up on that last question regarding the impact of tax. We certainly are seeing a pickup come through from our market, particularly in terms of the organic growth rates in the U.S. Don't feel like you're seeing that particularly in the numbers you just printed. Just more broadly, if you can talk about the competitive backdrop and perhaps you're seeing anything on the new bids and retention side, maybe some of the procurement savings come through? And then, again a bit related to the other question, you touched on it there in terms of the inflationary pressures, but could you just remind us again sort of which is the real challenged market in terms of cost and where are you seeing the biggest pressures and what exactly are the actions that you're taking to mitigate those to give you confidence in the full year margin higher?

Dominic Blakemore: Okay.

Thanks, Vicki, and good morning. I'll take the question on the U.S., and then Johnny will pick up the question on the inflationary pressures. I think first, I'd just like to say, I think, we've sustained very good levels of organic growth in the North American business over a number of years now. I think this quarter has been particularly strong. I think you recognize that we've had some benefit from the positive calendar in Sports & Leisure.

But underlying that growth rate of 7% to 7.5% in U.S. - in North America for the quarter and for the year is very positive. I think when we look at our U.S. business, the pipeline looks strong. The pipeline looks as strong as it looked over the last few years.

It's very broad-based across all sectors. We see good opportunity in Healthcare & Seniors in particular, and hence the acquisition we've made in that sector. And I think the business model that we've got, which is sector and multisector or subsector based with the scale that we get through food by leveraging in MAP 5, will allow us to maintain and hopefully extend our market position. So we remain just very positive on the North American performance. And frankly, in the short term, we think that, that is more than sustainable.

Jonathan Thomson: And just on the inflation points, Vicki, obviously, as you'll be aware that labor inflation is slightly above the historic trend at the moment. Although on the flip side, food inflation, in general, is a fraction lower. In terms of where we're seeing that, it is across many of our geographies. The U.S. with the employment levels being as they're, of course, the availability of labor puts some pressure on inflation in the U.S.

business. I'd say probably most relevant though at the moment for us is the U.K. business. Of course, minimum wage has been moving up, but on top of that, the devaluation of sterling has also impacted our food costs too. So inflation in the U.K.

has been a bit above par. In terms of what we do, well, as you'll expect us to say, I mean, the MAP framework is really how we go about running the business and ensuring that we execute against it. So specifics, such as labor scheduling to manage our labor to optimize it in this environment and procurement and overhead management as well, of course, as passing on in pricing where we have to. So it's the usual MAP execution to see it through.

Vicki Stern: Just a follow-up.

Are there any contracts, specific contracts? I know you've talked about support services having some challenges in the past. Any specific areas where you think actually to choose as an exit from some of those categories?

Dominic Blakemore: Yes. I mean, look, we'll always consider our portfolio and reflect some what we think is appropriate business. We are food focused. I think we'll be increasingly food focused as we go forward.

I think that means we'll be more selective around that growth. We're very confident in operating a soft multiservice bundle in the defense Offshore & Remote sector and in Healthcare in particular, but within B&I, within education, within Sports & Leisure, our preference is for food. So I think you should expect us to review our portfolio and make the right decision selectively as we go forward.

Operator: Move to the line of Angus Tweedie at Bank of America Merrill Lynch.

Angus Tweedie: Couple of questions for me.

Firstly, on Healthcare. You put out a scenario that you're seeing very strong growth. I mean, it's one of the areas that your peers are finding a bit tougher. I don't know if you could give us a bit more color on the market there? And then secondly, looking at Seniors, and particularly the Unidine acquisition, are there any capabilities that it's going to give you that you didn't have before?

Dominic Blakemore: Okay. I mean, clearly the Healthcare picture is different across markets and the comments we've made this morning would be specific to the U.S.

I mean, we've seen good growth there. In the last 18 months or so we've won some good accounts. I think we've got a strong operating model in the health care sector and we remain excited about the opportunities. And we got some good partnerships with strong accounts. They also tend to acquire other hospitals within the U.S.

footprint. And when they do that, they tend to roll our services out into those acquired hospitals or health care systems as they expand. I mean, clearly with global population trends, it will remain a sector of higher growth and interest to us. We're very focused on making sure we have the right offer, that we segment that offer and that it is different in public sector, private hospital care. And even within that, we're able to offer premium and more of a mass catering offer, as it were.

And we're excited because we have the ability to retail, to feed the staff, the surgical staff and visitors as well as the patients. So it's a broad range of services we can provide into single often scale units. So it is exciting. With regard to Unidine, it's a great acquisition for us, a very good business, well positioned in Senior Living. It brings with us a good geographic footprint in the sector, a good management team and it allows us to consolidate our Senior Living sector and start to think about how we play our brands into that sector across the country.

Angus Tweedie: And then just - sorry, another question for Johnny. I mean, given the really strong growth we've seen in the first quarter, are you still happy with where your CapEx guidance is for the full year?

Jonathan Thomson: Yes, I think so. As we said in November, our CapEx this year will be a fraction above the 3%, principally because of the investment we made in an important client, the L.A. Dodgers. And I wouldn't change that guidance at this point, no.

Operator: Now Richard Clarke at Bernstein.

Richard Clarke: Just a couple of questions for me. Just one on the previous guidance you had, the shape of the year, that growth was going to be accelerating in the second half. So just wondering, what's going to happen to bring the growth forward? Is it contracts ramping up quicker or some signed earlier? And then therefore what would you expect kind of going - that you can kind of keep this performance up? And then another one just on employment. I know, probably following on a bit on from Vicki's question, but I noticed in your annual reports that you published a few months ago, that your total employees went up 11% in 2017.

And by my calculation, your average wage per employee, if I adjust for currency, went down by that 9%. Is this a move towards using more flexible labor? And maybe you can talk about the kind of risks associated with that, given some of the sort of changes that we've seen regarding [indiscernible], et cetera. I'm not saying you're using zero-hour contracts, but along that lines?

Jonathan Thomson: Look, if I just take your first question there, look, as we've indicated that today we're feeling very good about the top line. We're encouraging people maybe to move up a little bit from 5% towards 5.5% for the full year. So clearly the underlying trading of the business is a bit more positive than we expected.

There are some of one-offs in the first quarter. So we have to take that into account, particularly in Sports & Leisure events and the delay of the construction cycle in Australia. But nevertheless, the half is stronger. I previously indicated that maybe we would be more second half weighted on revenue growth. But I think now having banks this first quarter, I would say they'd be a little more evenly spread between the two quarters.

And in terms of what's driving that, I mean, I think it's across all of our regions, and we - our new business continues to be strong, retention was a bit - a fraction better than expected. And again, the like-for-like volume is just a bit up because of some of these one-off events in Sports & Leisure. So yes, underlying trading is very positive.

Dominic Blakemore: And then with regard to the question on employment levels. Yes, you are right.

As we introduce more flexibility, it increases the absolute number of employees, that is in the FTE number that we give you. So the absolute number of employees increases. Yes, there are zero-hour contracts in U.K., but greater flexibility in our contracts, more part-time work and which allows us to schedule labor more accurate to the peaks and troughs of demand. And that absolutely is the model that we're looking for as we go forward. We've got to look for more and more productivity gains as we see the higher than average labor inflation going through the system.

Richard Clarke: So we would expect that trend to continue into this year as well, of more employees and lower wages per employee?

Jonathan Thomson: Broadly, yes.

Operator: We'll now open the line of Jaafar Mestari at JPMorgan.

Jaafar Mestari: I've got two questions, please. The first one on North America. Are there any individually significant large contracts to flag in the very good performance in Q1? I mean, obviously, you have delivered around 8% organic growth several times in the past.

But sometimes back in '16, it was described as broad-based and then sometime back in '15, it was held by some individual large wins, like Texas A&M. So I was just wondering if there's anything to flag in, in this quarter? And then my second question on rest of the world, you're flagging some delays in the transition from construction to production. Do you have any visibility from your clients on when those sites are going to be moving into production? Is this is a question of one quarter or could these delays be for longer?

Dominic Blakemore: Thank you for the question, Jaafar. I'll take the first, and then Johnny will take the second. With regard to North America, I think that it's a very positive answer and no, we haven't seen significant large contracts in those growth rates.

So this is good broad-based growth in a medium-size contracts across the sectors, which I think is very positive. Just to unpack it a little bit, our new business in North America would have been around the 8% level. And in fact our retention is really very strong at 97%, which means our net new is 5%. So sustaining those retention levels is really important. And it means that our like-for-like growth in North America is around 3%, which is probably a bit more price than volume, and the volume benefiting from the one-off comment that we discussed earlier.

But no, good growth, good retention, broad-based, no reliance on major contracts. And just a final point on that is those contracts that we talked to you about in the past, the likes of Ascension and Texas A&M, they continue to grow, the stake grows, and we pick up more volume through that. But no, we haven't seen any major contracts of that nature since.

Jonathan Thomson: And just picking up on the question with regard to the construction contracts. I mean, you can imagine the complexity of some of these LNG projects.

And therefore for us as a provider, it is quite difficult for us to foresee and predict exactly when these will move into production. We had expected it to be in the beginning of the year. I'm now expecting it to be in the second half of this year, but again, it's difficult for me to commit to that. Over the long term, what we are seeing is that the underlying trading in rest of the world as a whole is a bit more positive than we expected and there's some - there are some good performances in rest of the world, Turkey, India, China, Spanish speaking Latin America are all doing very well. So I think we're nudging up our guidance on rest of the world, and albeit because of construction it will be more linear across the year at 4%, rather than accumulating during the year.

Operator: Let's open it to Jeffrey Harwood at Stiefel.

Jeffrey Harwood: I wondered if you could touch upon trading in Europe outside of the U.K., please?

Jonathan Thomson: Sure, Jeff, let me take that. So I will touch on the U.K. first. Actually, we do report - we report Europe now as the U.K.

and Continental Europe combined. Our U.K. growth was around 5.5% in the first quarter, and we expect that to accelerate from hereon into the balance of the year. So quite a positive growth picture in the U.K. Continental Europe in the quarter was flat, and that's the trend that we expect on a full year basis.

Within that, there is a different picture across the market. So France started the year well, growing around 4%, but benefiting about 2% from the extra trading day. And Nordics region was held back still by the decline in the oil and gas volumes, which is still running through the system at the moment. In DACH, Germany, Austria, Switzerland, Germany was disappointing, down about a percentage point, but we're expecting some good growth in the balance of the year in Austria and Switzerland, which should see that subregion into growth later in the year. Italy was negative, but largely because we're exiting a number of support service contracts.

Spain was positive, and Benelux is positive. So in the round, it's a mixed picture, there's some good performance scenarios where we need to do better. I mean, in general our retention rates aren't strong enough in Continental Europe and we're very focused on that. We continue to win reasonable levels of new business. And we see a reasonable like-for-like picture with both price and a little bit of volume.

Dominic Blakemore: I think we've now comes to an end. Are there any more questions? Okay, thank you all very much for your time this morning. And we'll speak to you again at our half year results in May. Thank you, and have a great day.