Executives: Richard Cousins - Group Chief Executive Johnny Thomson - Group Finance

Director
Analysts: Jamie Rollo - Morgan Stanley Vicki Stern - Barclays Erik Karlsson - Bodenholm Capital David Phillips - Redburn Jarrod Castle - UBS Angus Tweedie - Bank of America El Kassir - Berenberg Tim Ramskill - Credit

Suisse
Operator: Ladies and gentlemen, welcome to the Compass Group Q3 Trading Update Call. Throughout the call, all participants will be in listen-only mode and afterwards there will be a question-and-answer session. Just to remind you, this call is being recorded. I'm now pleased to present our host, Richard Cousins, Group Chief Executive. Please begin.

Richard Cousins: Thank you. Good morning, ladies and gentlemen, and thanks for dialing in. With me this morning I have our Group Finance Director, Johnny Thomson. Hopefully you've all had chance to read the statement. But I'll give you a brief overview of the key highlights and outlook for the rest of the year before opening the call to questions.

Compass continues to have a really good year. The business accelerated with organic revenue growth in the third quarter of 3.9%, and perhaps more importantly, if we exclude the impact of Easter, it was a very encouraging 5%. The operating margin for the nine-month period was up by 20 basis points. We continue to drive efficiencies, which we are partly reinvesting in exciting growth opportunities around the Group. This year, we're also benefiting from the end of the restructuring program in our Offshore & Remote business.

Let's look at each of the regions in turn. Our performance in North America remains excellent. Organic revenue in the third quarter grew by 7.1% or 7.8% if we exclude Easter. Growth continues to be nicely diversified with all sectors, except our oil and gas business, performing strongly. Margins for the nine-months till June 30 improved modestly.

In Europe, organic revenue declined 0.3% in the third quarter but was up by 2.2% excluding Easter. We continue to drive efficiencies that have improved the margin by around 10 basis points in the nine months. Turning now to the Rest of the World. Organic revenue declined by 1.3% in the third quarter, or 1.1% excluding Easter. Our non-commodity related business grew by 3.6%, and although trading in our Offshore & Remote business remains challenging, it is improving.

The end of the commodity construction cycle in Australia continued to have a modest impact on the operation margin, which declined by 10 basis points in the nine months year-to-date. In summary, Compass had a good third quarter and our overall expectations for the full-year remain positive and unchanged. North America is performing strongly and we anticipate further progress in Europe and Rest of the World in the fourth quarter. We remain focused on driving efficiencies throughout the business, and our operating - and our margin expectations for the full-year are also unchanged. Looking to the longer term, we are excited about the significant structural market opportunity globally and the potential for further revenue growth, margin improvement and continued returns to shareholders.

Thank you. And I'll now hand back to Mark for your questions.

Operator: Thank you. [Operator Instructions]. Our first question comes from Jamie Rollo of Morgan Stanley.

Please go ahead. Your line is open.

Jamie Rollo: Yes, thanks. Good morning, everyone. Two questions please.

First, just sticking in a bit to North America where clearly you've had a very good performance. Can you talk a bit about the healthcare market there? Clearly your two big competitors have faced issues. Are you just simply taking a share from them and do you see any risk to your strong performance, given the U.S. health care reform and some of the consolidation reference in that markets? And then the other question was - apologies for this, but the nine months run rate of 3.7%. If we take the calendar adjusted numbers for Q2 and Q3, it looks like it's more like 3.9%.

So is your underlying run rate a bit better than the 3.7% that you're presenting today? Thank you.

Richard Cousins: Okay. Let's do those in reverse order because I didn't understand the second question but Johnny is really intelligent this morning.

Johnny Thomson: Yes, Jamie, thanks. The run rate, as Richard pointed out earlier in quarter three on underlying basis is around about 5%.

That's broadly what we expect as a carry-forward rate through quarter four into next year. I've said that that is a little bit of noise around quarters over the last few periods, particularly to do with the Easter and the leap year but I think over the round in the full year that will be immaterial.

Richard Cousins: And if we look at U.S. healthcare, similarly we need to talk about the U.S., I think our U.S. business in general is in terrific shape and it's firing on lots of cylinders.

The healthcare market really has been strong for some years now as hospitals have reacted to Obama Care and have outsourced more and I think we've naturally won more than our par amount. I don't like to say that we are taking share. I think we are earning share by the quality of the food and the services that we offer. I think we are in the process of opening about 240 hospitals at this moment, including some truly elite healthcare chains. So I think the business is in great shape.

I actually remain optimistic about U.S. healthcare. Clearly there is some uncertainties around the political environment but whatever happens, cost needs to come out of the system and likely there are many others a way of hospitals taking out cost is to outsource their services to people like us. So we feel quite bullish and the pipeline is strong.

Jamie Rollo: Thank you very much.

Operator: Thank you. And our next question comes from Vicki Stern at Barclays. Please go ahead. Your line is open.

Vicki Stern: Good morning.

Just a quick one on Europe. Just anything in regards to the macro backdrop? How are European volumes? Is there sort of any shift in trend there and obviously fair acceleration coming through within the quarter and expected into next year, just sort of key countries that are driving that? Thanks.

Richard Cousins: When you say volumes, Vicki, do you mean like-for-like volumes?

Vicki Stern: Like-for-like volumes. I do, yes.

Richard Cousins: Okay.

I think they are pretty dull but not bad. I mean, as you know the protracted European crises or the global financial crisis followed by the Euro run was very difficult for us and others. Clearly there has been some economic stabilization and indeed a little bit of an improvement in some of the continent. I can't say we are noticing that. And if you look at our revenue overall with all the engines of revenue, I would describe the Continental Europe as okay, really no better, but we are feeling quite positive about the U.K.

really due to our focus on the food, our win rate has improved and our retention rate is much improved and we're also feeling quite good about Turkey. So Europe is sort of three stories, very strong in U.K., very strong in Turkey and a bit dull in the middle.

Vicki Stern: Great. Thanks very much.

Operator: Thank you.

And our next question comes from [indiscernible]. Please go ahead. Your line is open.

Unidentified Analyst: Hi. It's either might be.

It's Peter Martin [ph] from Jefferies.

Richard Cousins: Is it now?

Unidentified Analyst: Excellent. Thank you very much. I had a quick question regarding margin progression. So at least relative to my model your nine-month margins are a little bit stronger than expected, and therefore Q3 obviously much more stronger than expected.

If we look to your full-year guidance remaining unchanged, is that because you have a difficult comp particularly in Q4, or are you looking to step-up reinvestment or the mixed factors that you might want to flag up?

Johnny Thomson: To be honest, don't recognize Q3 margin being necessarily stronger than the run rate to be honest with you. We're still about on track for our 20 basis points through consistently actually through the quarters and that's the same as that what we are expecting for quarter four. Margins are - it is tough out there on margins. Labor inflation is particularly difficult, as you know, around U.S., U.K. and elsewhere but we're working hard on and clearly we are pleased about the fact that we are going to add 20 basis points of improvement this year.

Unidentified Analyst: Okay. Thanks for clarification. Thanks.

Operator: Thank you. And our next question comes from Erik Karlsson of Bodenholm.

Please go ahead. Your line is open.

Erik Karlsson: Yes, thanks for taking my question. You commented on the much improved retention rate in the U.K., and I was wondering if you could also give us an update what you're seeing in terms of retention in the rest of Europe and also in North America, please?

Richard Cousins: Okay. North America remains very strong, half way between 96% and 97%, and as I'm sure you know we've been delivering that for many, many years in North America.

U.K. I think is the biggest delta. I think we have got our act together on food and service and process as well, I think, and people I supposed. Retention is a function of all of those things, so I don't have room a number in front of me for the U.K. but I'm going to guess it's of the order of 92%.

It was around about 88% for some years and is now about 92% in U.K. And European retention rates are always lower than North American because the average length of the contract is much shorter. And then on the Continent, we are around about 90%, 91%, which is also slightly up on where we used to be.

Erik Karlsson: A follow-up, if I may as well. Where would you see the biggest upside potential in the retention rate globally from the current levels?

Richard Cousins: I think North America is pretty optimal, so we wouldn't expect to do much better there.

I think we would hope to inch up in both Europe and the Rest of the World. I don't - unless you get too carried away and expect a massing improvement because clearly it's an implicit within our spot underlying revenue growth of 5%, which we think is about par for this business. The Rest of the World in general and commodities in particular clearly has had a tough period with oil and gas and mining, and the white losses as we call them, i.e., the cycle [indiscernible]. We would expect that to improve as the cycle begins to turn over the next 12 or 18 months. So I don't want to get too carried away because we think our spot revenue growth at 5% is impressive and about par.

Erik Karlsson: Very helpful. Thank you very much.

Operator: Thank you. And our next question comes from David Phillips of Redburn. Please go ahead.

Your line is open.

David Phillips: Thanks, and good morning everyone. Can I just ask about the non-commodity growth that you reported in Rest of the World, which is 3.6%? Is it possible to break that down between emerging market countries and developed market countries?

Richard Cousins: It's a fair question. This is incredibly complicated one with countries like Japan, Australia, New Zealand on the rich end of the scale and then obviously you've got India, China, Latin America and so on. Johnny, can you add a little bit of shape to that?

Johnny Thomson: Yes, I think if you look around the patch, the Japanese growth is between - is around about 1% to 2% and the Brazilian growth is still in decline towards 10% decline but improving as we go forward.

We are pleased as we just said about what we're doing in New Zealand and some of the non-commodity elements of the Australian business and they are 5 percentage plus. And then when you look at the some of the Asian emerging markets we are in double digits, some of them higher double-digit growth there. So it's a bit of our mix but that gives you, I think, a broad spectrum of what gets us to a consolidated 3.6%.

David Phillips: Great. That's helpful.

Can I ask a follow-up on Brazil, Latin America specifically, and sort of anticipated time scale of that improvement, given that there is one or two the macro indicators start to recover better?

Johnny Thomson: Yes, I mean, that's still being tough this year of course. I mean, unemployment levels are very, very high still and we have largely B&I business, so that's the affected us. We've been working hard on price and cost, increasingly working on retention, perhaps we've been a bit disappointed with the retention in the last few months but that's starting to get better. So I indicated a minus 10% for this year. I think that will get better for next year and we'd hope to be closer towards breakeven next year.

David Phillips: Okay, great. Thank you very much.

Richard Cousins: It's quite an interesting one, Rest of the World and an incredibly complicated with all of the trends Johnny just described, plus of course the Offshore & Remote business. But we do anticipate that the Rest of the World would be modest, very modest growth in Q4. So I think that really is quite encouraging as we look at the next year or two in this business.

David Phillips: Excellent. Thank you.

Operator: Thank you. And our next question comes from Jarrod Castle of UBS. Please go ahead.

Your line is open.

Jarrod Castle: Thank you. Good morning. You said you're very positive on the U.K. I was just wondering is that kind of more B2B? Are you seeing any slowdown in the B2C elements or is both areas very strong at the moment? And then just oil and gas, where overall are we in terms of the organic growth situation in that sub-sector? Thanks.

Richard Cousins: Okay, let's do them in the reverse order. Johnny, oil and gas?

Johnny Thomson: Yes, I mean, we haven't hit the absolute bottom in dollar terms on oil and gas but the rates of decline of course is improving. So if you look at the quarterly, just to give you an indication of the numbers, we were at minus 23% in that business in quarter one, minus 15% in quarter two. We are now are about minus 10%. So you can see the trend as it develops.

Richard mentioned that will be soon into growth in Rest of the World. I think it will be mid-ish 2018 for us by the time we get into back into growth in the oil and gas.

Richard Cousins: And if we look at the U.K., so the B2B, the MAP 1 as we would call it, is very strong for us in the U.K. I'm delighted with our win rate and our improved retention. The B2C, or the MAP 2 as we would call it, is sort of fine.

It's dullish really. Now of course there are some concerns about the U.K. economy and the impact of Brexit and so on. We haven't noticed that yet but we were - only time will tell. But I think we shouldn't underestimate the importance of the improvement in the U.K.

to our business. Some of you with the longer memory will recall our performance in the year, first decade or some of this century was a pretty poor. So we are delighted with the turnaround revenue growth in the U.K. are really exciting. As Johnny said five minutes ago, margin is okay but there are some inflationary pressures in the U.K.

that we need to be aware of but the top line looks really positive.

Jarrod Castle: Thanks very much.

Operator: Thank you. And our next question comes from Angus Tweedie of Bank of America. Please go ahead.

Your line is open.

Angus Tweedie: Thanks very much. Two questions please. Firstly, in your comments talking about phasing for the fourth quarter. You didn't pull out the U.S.

as being stronger. Could you give us some color around that? And secondly, on the U.K. I don't know if it's possible but could we get a sort of idea of the delta between 2Q and 3Q terms of organic performance there? That will be really helpful. Thanks.

Richard Cousins: Reverse order, Johnny I'm struggling with the U.K.

one.

Johnny Thomson: Yes, I mean, U.K. obviously came up from a flat quarter one and improved to a couple of percent in quarter two and we've seen a couple of more percent in quarter three. So we are in the kind of 4% to 5% in quarter three. We expect it to be a fraction better than that in quarter four to carry into next year.

So obviously improves the overall European average, as Richard just said, we feel very positive about it.

Richard Cousins: And in terms of North America because Canada is quite tough with the oil and gas trends. In terms of North America, we obviously did 7.8% in Q3. I think that is above par. So it would be - we'd be quite optimistic to assume repeat that in Q4, we will see.

All I can say is that the U.S. business is looking very strong.

Angus Tweedie: Perfect. Thank you very much.

Operator: Thank you.

And our next question comes from El Kassir of Berenberg. Please go ahead your line is open.

El Kassir: Good morning, everyone. Could you please give us a little bit more color on price and volume in the U.S. as well as in Rest of the World, please?

Richard Cousins: Okay.

Well, the Rest of the World is incredibly complicated. In the DOR [ph] world, oil and gas and mining world, volumes are strong the negative and prices are tough as well because we have to be competitive where now clients are clearly looking for value for money. So they are clearly negative. And in the rest of the Rest of the World, it's a complex hotchpotch but by and large Japanese volumes remain down. Australia, New Zealand, okay.

Pricing tends to be about the same as inflation or a bit less and obviously clients expect us to mitigate the rest. In terms of the U.S., food inflation is probably slightly below average but labor inflation slightly above, and I think is the trend we are seeing in the U.S. and U.K. and other countries as well. So our pricing trends in the U.S.

would be half way between zero and the rate of inflation as is usually the case. And volumes fairly steady really, slightly positive but only slightly.

El Kassir: Thank you.

Operator: Thank you. [Operator Instructions].

We have one further question coming through so far from Julia Pennington of Credit Suisse. Please go ahead. Your line is open.

Tim Ramskill: Well, it's actually Tim Ramskill here. Hi guys.

Just a quick question on the U.S. Richard, I know you've talked in recent months really wanting to emphasize to people that sustaining growth above 7% was going to be difficult. I think you talked about sort of 6%-plus-plus. Do you sort of stand by that? I guess, again Q3 was very strong. What are your thoughts on 2018, please?

Richard Cousins: Yes.

It's a great question, Tim. I still think in the medium term - that's a clever phrase, doesn't it, because that takes out [indiscernible]. In the medium term, 6%-plus-plus is a sensible number when you look at the market, the economy, competitors and so on, but I have to tell you the pipeline in the U.S. is the strongest it's ever been.

Tim Ramskill: Okay.

Great stuff. Thank you.

Operator: Thank you. [Operator Instructions]. Okay, there seems to be no further questions on the line, so I'll hand back Richard for the closing comments.

Richard Cousins: Okay. Thank you, Mark. Thank you everyone for joining us. Just wanted to say enjoy the rest of the summer, although looking out of the window, I think, summer is cancelled. We will you see you at the results in November.

Thank you very much.

Operator: This now concludes the conference. Thank you all very much for attending. You may now disconnect.