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

Director
Analysts: Vicki Stern - Barclays Harry Martin - Bernstein Jeffrey Harwood - Stifel Angus Tweedie - Merrill Lynch

Dominic Blakemore: Good morning and thank you for joining us. We have a busy agenda today. I will begin by making a few comments on the highlights of the half. Johnny will then take you through the financials and I will come back for a more detailed review of our operating performance and our strategy going forward. And there will be plenty of time for question and answers at the end.

I am pleased to report that Compass had another strong half. Organic revenue was up by 4.8% and excluding the impact of Easter and weather, our growth was 5.3%. Our operating margin was 7.5%. We have taken significant cost actions to address inflationary pressures in the U.K., with benefits to come in the second half. The business continues to be very cash generative with free cash flow of GBP465 million in the first half.

EPS, on a constant currency basis, was up by 10% and we are proposing to increase the interim dividend by the same amount. The business is trading well and our full year expectations are unchanged. And on that positive note, I would like to hand over to Johnny.

Jonathan Thomson: Thank you Dominic and good morning everyone. So let's start by taking a look at revenue.

The recent strength of sterling against our other trading currencies had a negative impact of GBP700 million on 2017 half year revenues. North America grew by 7.3%. Growth was broad-based across all sectors. New business was excellent and retention was also very strong at 97%. Europe grew by 0.5%.

Performance in Q2 was impacted by the timing of Easter and adverse weather conditions in the U.K., France and Germany. Mid-single-digit growth in the U.K. was mostly offset by subdued trading across Continental Europe. Rest of world grew by 3.4%. Strong performances in Turkey, China, India and Spanish-speaking Latin America drove growth of 5.3%.

Our commodity business declined by 1.7%, better than expected at this stage due to the delayed transition from construction to production in Australia. As a result of these movements, group organic revenue grew by 4.8% in the first half. If we exclude the impact of the timing of Easter and bad weather, we estimate growth would have been 5.3%. FX reduced operating profit by GBP57 million. Growth in absolute operating profit of GBP44 million and GBP10 million in North America and rest of world respectively was offset by a GBP21 million decline in Europe.

Associates and lower overheads added GBP5 million resulting in a 4.5% increase in constant currency operating profits. Margins in North America remained high at 8.5% as our continued focus on pricing and efficiencies offset labor headwinds and the impact of snowstorms in quarter two. At these exciting topline growth rates, we expect margins for the full year to be unchanged. In Europe, inflation and cost of change actions in the U.K. and the impact of the weather across the region diluted margin by 80 basis points in the half.

The benefits of the cost actions in the U.K. will come through in the second half. However, margins for the region will still decline year-on-year. Margins in rest of world improved by 40 basis points. We are leveraging our overheads better in growth markets such as Turkey and continue to see benefits from the restructuring we did a few years ago in markets like Australia.

We expect margin progression for the full year to be similar. The mix benefit of higher margins in North America and the excellent improvements in rest of world combined with group overhead leverage mostly offset the decline in Europe, resulting in an operating margin declined for the group of 10 basis points in the half, as anticipated. And we continue to expect modest margin progression for the full year. As you know, FX has a translation impact only for Compass. The strengthening of sterling has a negative translation impact of GBP57 million on operating profit.

To give you a sensitivity, a 1% move in sterling against all of our trading currencies would change full year 2017 operating profit by around GBP15 million. If current spot rates continue through 2018, FX would negatively impact profit by GBP90 million. Further details regarding FX sensitivities can be found in the supplementary slides. So let's take a look at the bottom of the income statement in more detail. Net finance costs were GBP55 million, slightly above last year due to the interest on additional debt to fund the special dividend.

We continue to expect net finance costs for the full year to be around GBP120 million. As a result of the changes in tax legislation in the U.S. that was announced in January, our tax rate was 24% in the half. This remains our expectation for the full year, although we know that the tax environment continues to be uncertain. Constant currency EPS grew by 10%, boosted by last year's share consolidation and this year's tax benefit.

In line with our policy, we are proposing to increase the half year dividend by the same amount. Moving on now to cash flow. Depreciation and amortization increased slightly to GBP244 million due to our investments in CapEx. Gross capital expenditure was 3.5% of revenue, as planned, reflecting the investment in the LA Dodgers contract in the first half. We expect full year CapEx to be between 3% and 3.5% and we will continue to use CapEx as a tool to support strong growth rates with high returns.

Dominic will talk a bit more about our future CapEx expectations in a second. Working capital was a GBP27 million outflow. For the full year, we continue to expect working capital to be an inflow of around GBP40 million as the impact of the extra payroll in 2016 in the U.K. and U.S. reverses.

Operating cash was marginally down due to FX movements. Positively, we have absorbed the investments in the Dodgers to deliver operating cash conversion in line with last year. Post-employment benefits were unchanged year-on-year and we expect the full year payments to be around GBP15 million. Net interest was higher due to the additional debt to fund the GBP1 billion special dividend. The cash tax rate reduced to 18.5% due to the usual timing differences in the first half and the lower U.S.

tax rates. For the full year, we expect the rate to be between 19% and 22%. Excluding the impact of FX, absolute free cash flow would have been in line with last year. Free cash flow conversion was 53% and we expect full year cash conversion to be back within our target range of 55% to 60%. Looking at the balance sheet and again starting on the left of the chart.

Opening net debt was GBP3.4 billion and the business generated cash of GBP834 million before CapEx. We invested GBP369 million in CapEx to support our long-term growth while net acquisitions totaled GBP318 million. The acquisition of Unidine completed on December 31, 2017 and we are excited about the contribution this business will make to our senior living sector. We returned GBP353 million to shareholders in the form of ordinary dividends. FX and other items reduced net debt by GBP87 million.

And so, on March 31, 2018, net debt-to-EBITDA was 1.6 times as we continue to deleverage following the additional debt to fund the special dividends. As usual, I have pulled together some of the key 2018 full year assumptions on one page as reference for your modeling. And in conclusion, we are pleased with the first half. The business is performing as expected and we continue to grow organic revenue strongly, have industry-leading margins, invest in the business and grow dividends in line with constant currency EPS. Now back to Dominic.

Dominic Blakemore: Thanks Johnny. I am really pleased with our revenue performance in the half. We continue to see good new business wins across the group. Retention is strong at nearly 95% and like-for-like revenues reflect sensible pricing. Let's look at the performance of each of the regions in turn.

Starting with North America, which had another very strong half. Our organic revenue grew by 7.3% with good growth in the B&I, healthcare, vending and sports and leisure. And retention was particularly strong at 97%. Margins remained at 8.5% despite this strong growth rate and the above average labor cost pressures. I am really pleased with the balance of our North American business amongst the different sectors.

We aren't over or underexposed to any particular sector, which I believe allows us to drive sustainable growth. This is enhanced by our strategy of sectorization and sub-sectorization which allows us to really focus on the different client requirements and ensure we have a tailored offer to meet our clients' needs. Essentially, sub-sectorization makes us more like a regional player, but with the cost advantage of being a big one. A great example of this is Northwestern University and the Kellogg Business School. It's a significant account on a campus with 25,000 students that we have recently won as a result of our differentiated offer.

It's a great example of how sub-sectors drive growth independently, but can also combine to maximum some effect on these bigger accounts. Chartwells is providing the core higher ed offer. Levy is arranging food services for the Athletes facilities. FLIK will oversee dining and retail at the Kellogg Business School. Canteen offers the latest technology in vending and unattended mini-markets to the students.

And Bon Appétit is assisting with the culinary and sustainability offer. And our sources of growth in North America have been remarkably stable over time, with about a third of our growth coming from first time outsourcing, a third from small regional players and a third coming from the larger players. And pleasingly, our pipeline reflects the shape as we look forward as well. So, we have developed a successful model for consistent long-term growth in North America. We sectorize and sub-sectorize the business, differentiating the offer and unlocking exciting market opportunities.

We use our scale in food costs and overheads and most importantly, we have the right culture and people. These ingredients combined with a dynamic outsourcing market make me very optimistic about the future of our North American business. In Europe, the picture is mixed. Good growth in the U.K., driven by new business in B&I and healthcare, continues to be offset by a more subdued performance on the continent. As expected, margins are down due to the inflationary pressures we saw in the U.K.

We are taking actions to address this including labor efficiency programs, intensifying our pricing conversations with client and increasing our purchasing savings. And we fully expect the benefits of these actions to come through in the second half. Although the outsourcing environment on the continent is not as dynamic as it is in the U.K., we are taking actions to improve our growth prospects in the region. We have begun to sub-sectorize our largest markets. In France, we are launching a new premium B&I brand.

And in Germany, we have made three small acquisitions, Kanne Café, a retail health sector specialist with revenues of around EUR30 million and Royal Business and Leonardi, two premium B&I brands with combined revenues of around EUR30 million. We now have a small Continental European leadership team and the seven business units we talked to you about before are now falling in place. So we can now start to leverage our regional and sub-regional scale. For example, we have increased our Continental European procurement and the savings are now starting to coming through. I am pleased with the improving performance in our rest of the world region where organic revenues are up by 3.5%.

Strong growth in Turkey, India, China and the Spanish-speaking Latin American countries was offset by continued weakness in our commodity business in Australia. Margins improved by 40 basis points as we continue to see the benefit from the restructuring we did a few years ago coming through. And so in summary, North America continues to perform very strongly. In Europe, the U.K. is driving the growth and we are taking actions to strengthen our prospects on the continent and performance in the rest of the world is improving.

For the full year, we expect continued strong organic revenue growth and modest margin improvement. So moving on to strategy. Compass has delivered an excellent performance over the last decade. We focused on food services where we can truly differentiate our products and use the cost advantage of our scale. We have taken a very limited approach to support services, which we mainly do in our defense, offshore and remote sector and in healthcare in North America and in some of our bigger markets around the world.

We are selective in terms of acquisition, have avoided large deals focusing on small bolt-ons which improve our capability in the sector or the sub-sector. And last but not least, we focus on great execution with a real emphasis on quality and innovation. Our organic revenue growth has been between 4% and 6% and we have continued to improve margins modestly whilst achieving a strong return on capital employed. This model generates significant amounts of cash which we have either reinvested in the business or returned to shareholders. Given the success of our strategy of focus on food, we are really excited by the market opportunity we see in food services.

We are the global market leader and yet we only have a 10% share. There is a structural growth opportunity from the 75% of the market that is currently serviced by small regional players or in-house providers that don't have the cost advantage of our scale. And I believe we have developed significant competitive advantages. We deliver strong and disciplined organic revenue growth. This is mainly due to our decentralized structure and our strategy of sectorization and sub-sectorization.

This has given us unique scale in purchasing and overheads, particularly in North America. We have great people and strong talent pipeline and a clear culture of performance and accountability. I believe that this ability to grow and use our scale gives us an advantage that is very hard to replicate. We have always adapted to changing circumstances, inflations returning and we are facing increasing competition for labor. And at the same time, our consumers are becoming more demanding and there's an increased focus on the social and environmental impacts we have as a business.

Over the years, we have remained flexible and reacted swiftly to changes and I am committed that that should continue to be the case. We are not complacent and we are increasing our intensity around the 3Ps of performance, people and purpose. We will continue to drive our performance with an even greater focus on operational execution in our core food business. We need to attract, retain and develop the very best people in our industry and we will integrate our community, social and environmental purpose into the group's day-to-day operation and strategy. Historically, we have taken a relatively informal approach to sharing best practice.

This means that we have often found ourselves unnecessarily reinventing the wheel in a number of our markets. I want this to change. We will create a small, core, central team of experts to identify and roll-out best practice in a more systematic and disciplined way, with greater emphasis on common technology platforms. This will save us the cost of funding similar initiatives across the group whilst increasing the commitment and accountability of our market and ensuring consistency and speed of execution. We already drive performance using our management and performance framework, MAP.

It's the way we run the business. We will double down on MAP and there are four areas that we will execute with more intensity and greater sharing of best practice. In MAP 1, our approach to sectorization and sub-sectorization, continuously improving our core offer, with an emphasis on quality and innovation. In MAPs 1 and 2, our approach to pricing. In an inflation environment, we need to improve our capabilities in this area.

In MAP 3, our approach to food cost. I want us to be more consistent in terms of our core food purchasing processes and systems across the group. And in MAPs 4 and 5, our approach to labor, whether it's in units or overheads. We will be more productive and efficient in managing our biggest cost items. To manage our workforce more effectively, we will invest in systems to improve time and attendance and the use of overtime, agency and temporary labor.

We need to remove unproductive work, simplifying our processes and being more intelligent in how we design our work activities. Technology, such as cashless and cashierless solutions and apps that allow consumers to pre-order and prepay, all help to improve productivity. And finally, we will improve our hiring, onboarding and back-office processes that leverage our overhead costs across the group more effectively. To continue to drive our performance, we also need to tighten our portfolio of businesses. Targeted and disciplined bolt-on acquisitions strengthen our capabilities.

M&A is a really important way to support our organic growth potential. It is also prudent to be an extraordinary source of talent over the years. We are also looking at disposals to simplify the portfolio and we will consider them based on potential, be that market growth, scalability or our own market position and capabilities. People are the center of our business and we will increase our focus on our teams going forward. We are leveraging our position as an attractive employer with a great culture to attract the right people, retain and engage them with initiatives such as better on-boarding, provide more training and better career development with access to both technical and professional qualifications and we will have succession plans much deeper within the operational work flow.

We currently employ around 600,000 people with women accounting for around 55% of that total workforce. However, amongst our top 400 leaders, the male-to-female ratio is 70-30. Our target is for women to be at least 40% of the leadership team with an ambition of parity overtime. And finally, we have purpose and corporate responsibility. We have four areas of focus which we have aligned to the seven United Nations' Sustainability Goals where we believe we can make the most impact.

For example on April 27, we held our second Stop Food Waste Day where 30 countries held activities to increase awareness and reduce waste in our units, at home and throughout the supply chain, communicating directly with up to 10 million consumers on a single day. We have made great progress in the past few years and we are developing our purpose to articulate better our ongoing contribution to society. Bringing all of this together, the current model and excellent past performance is sustainable. This is a clear strategy of continuity and consistency. But the priorities I outlined will allow us to adapt to an ever-changing environment.

We aim to deliver between 4% and 6% organic revenue growth with modest margin improvement. We will grow the only dividend in line with constant currency earnings. CapEx will be up to 3.5% of revenues as we continue to invest in attractive opportunities across the group. And we will do bolt-on M&A to strengthen our capabilities whilst exiting non-core businesses that dilute management focus, returning any surplus cash to shareholders, whilst keeping net debt-to-EBITDA at around 1.5 times. And so in summary, we will focus on food.

We are increasing our intensity around of systematic roll out of best practices and technology. We are reviewing the portfolio to strengthen our capabilities and simplify the business. We are attracting and retaining the very best talent and would integrate our social and environmental ambitions into our strategy in day-to-day operations. I believe we are very well placed to generate sustainable long-term shareholder value. Thank you for your time this morning and now we will take your questions.

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Dominic Blakemore: So if we could just ask you for your name and your firm and then we will take calls on the line later in the meeting. Vicki?

Vicki Stern: Good morning. It's Vicki Stern from Barclays. Three questions, Just firstly, you touched on disposals. Just any more detail as to what those might look like? Is that the regions you are talking about, segments? So there are profitability, anything you can call out there? Secondly, just on the return of invested capital on that incremental CapEx.

So I think you are sort of willing to go up to around 3.5% of sales. How does the return look like on that CapEx? And how does that perhaps vary by region? And finally, just on the acquisitions, is the plan still very much bolt-ons? Or would you consider any larger acquisitions?

Dominic Blakemore: I will take the questions on disposals and acquisitions and then I will hand the ROIC question over to Johnny. First of all, in terms of disposal, I think we set out this one the criteria by which we review the portfolio. It's very much whether we have got a strong market position, whether really we can grow those businesses in line with the organic growth rate of the group. And also whether we have the management capabilities and strength to operate those service lines in sub-sectors.

I think in the round, we estimate that we are considering around 5% of the total revenues of the group. At this point, we would expect them to be pretty much neutral to both growth and margin. But I think what's really important is, it will allow us to redouble our efforts on the course of business and therefore drive the performance priorities that you have heard me talk about this morning. We think that that tail is distracting to management, particularly where it's outside of the core food services. In terms of acquisitions, our preference remains bolt-on M&A, not the larger deals.

Again, it's very much about building out our offering the core sectors within the core markets. We are excited by potentials within food, but they all still sit within that bolt-on criteria that you have seen us do before.

Jonathan Thomson: Yes. Just on return on capital, Vicki. I guess the first thing to say is that our financial model is unchanged and we still expect to see 4% to 6% organic revenue growth.

We still expect to see some modest margin improvement over time. So that remains unchanged. I think the CapEx up to 3.5% is at the margins and small incremental when it comes to return on capital. It really just gives us the extra space to invest in the opportunities as they arrive, such as the LA Dodgers. We may not spend 3.5% every time.

But it just gives that little bit of space. So we are comfortable that we can maintain at least these high levels of return on capital into the future. Just in terms of the regional split in that, as we have said in the past that I would expect to continue a larger proportion of our capital goes into the North American business where, of course, we see some of the exciting opportunities currently. A lower proportion of our capital goes into the rest of the world business, principally because for cultural reasons, they consume less CapEx. That's it.

Dominic Blakemore: But I think the point is, we won't constrain ourselves where we see opportunity in either CapEx or M&A.

Harry Martin: Hi. I am Harry Martin from Bernstein. Just firstly on the sharpening of the focus on food, is there anything that's materially changed in your view of support services? And what is it about the North American healthcare market that makes support services very attractive? And then secondly on Europe margins, given the comments about re-leveraging scale there but also cost headwinds, can you just give a bit more color on where you see the margin trajectory over the next few years? And then, is there any update on Foodbuy in Europe.

Dominic Blakemore: Okay.

I will take the first couple and then Johnny will deal with the margins in Europe and Foodbuy. In terms of the sharpening of focus, this isn't about exiting support services as a group. We have a compelling multi-service offer in defense, offshore and remote and also within healthcare. I think we are at our best when we focus on food. But within those sectors, I think we have all of the capabilities to be able to deliver a compelling offer.

And this isn't just about North American healthcare. We have the same offer within the U.K. and within other of our rest of the world operations. It's typically at its most successful where you have a captive community on a scale asset for prolonged periods of time where it's not just about managing the services. The services and the broad suite of services are all valued.

And it's also about the ability to manage labor to those locations. So we think that those attributes make it a successful model that we have built out. With less money towards support services, we are at single line, particularly in B&I and we will certainly be looking at those as part of our review.

Jonathan Thomson: And just on the margin question. For Europe particularly, we have taken a pretty firm, robust action in the U.K.

as I talked about in the presentation and we are confident that the U.K. and the European margins will rebound nicely in the second half of the year. In terms of looking further forward, we still expect margins in Europe to move forward. We have got plenty of opportunities. We are doing further work on the business units.

To your point on procurement, we are increasingly consolidating, albeit from a small base, our procurement across the European Continent. It will never be at quite the same level that we can do in the U.S. for obvious reasons. It's not as homogenous a market. But we are starting to increase the volume purchases.

In time, I would expect that Foodbuy may become a greater consideration but for the moment is really about core basics in procurement in Europe. Jeffrey

Robert Harwood: Thank you. Jeffrey Harwood from Stifel. I have two questions. First of all, can you touch on the pipeline of new business? And secondly, on the disposals, obviously in absolute terms, quite a big figure here.

Should we expect a series of piecemeal disposals? Or could there be a sort of block transaction?

Dominic Blakemore: Just tackling the question on new businesses first. I think our pipeline, looking forward, very much reflects the growth levels that you have seen us deliver in the last several years and in first half of this year. The pipeline in North America is vibrant. We are growing, as a group, at 8.5% and the pipeline supports that. The pipeline in new business in Europe is similar.

So I think we feel we are in good shape on the pipeline. I think if anything in terms of our net new performance, the area of improvement we are looking to drive further is our retention levels in Continental Europe. And then, just in terms of disposals. I think we feel 5% is a modest number. These are likely to be piecemeal.

It's likely to take 12 to 24 months to transact. And so we will keep you updated as we go.

Angus Tweedie: It's Angus from Merrill Lynch. Can I ask firstly on North American organic growth? Can you help quantify the impacts of weather that you saw in the second quarter and give us any sort of idea of the run rate growth year-to-date? And then secondly, on the CapEx, can you discuss which industries it's going into? I mean is this going into education, given we saw very strong retention rates there but not necessarily good new business wins in the last quarter?

Dominic Blakemore: Yes. Just starting with the first point.

North American growth rates in quarter two was 6.3%. The impact of Easter and weather was about a percentage point, obviously taking you up to 7.3%. So I guess the 8.2% that we reported in the first half, as we discussed in January, was perhaps a little generous because we had some one-offs sports and leisure event. So I guess the answer for our run rate is somewhere in the middle, which is why we would say, you know, our full year expectations of 7.5% for North America. And just on the CapEx point, we look at opportunities across all sectors and all sub-sectors and so we are pretty open minded about that.

I would say that, in general, higher education and sports and leisure can be able a little bit more CapEx intensive and therefore we are clearly disciplined about how we review those with the appropriate return on capital triggers. We are increasingly, however, putting CapEx into other opportunities too. Our canteen business and the success of that business and how we invested in rolling out the network would be a good example of that. So there's plenty of opportunities.

Jonathan Thomson: I think your point is right.

CapEx is very helpful at aiding retention. It tends to increase the average contract longevity. So it's very helpful for us.

Dominic Blakemore: Okay. As there are no more questions on the floor we will move to the Sky.

So any questions over the conference call line?

Operator: [Operator Instructions].

Dominic Blakemore: Okay, I think that's it. So thank you very much for joining us. Thank you for your time today.