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

Director
Analysts: Jamie Rollo - Morgan Stanley Richard Clarke - Bernstein Tim Ramskill - Credit Suisse Jeffrey Harwood - Stifel Angus Tweedie - Merrill Lynch Mark Fortescue - Panmure Tim Barrett - Numis Vicki Stern - Barclays Erik Karlsson - IAP

Richard Cousins: Good morning ladies and gentleman and thank you for joining us. Today, we have the usual agenda and there will be plenty of time for question and answers at the end. Before we get going I would like to take the opportunity to reintroduce Dominic Blakemore. As you know, Dominic was recently appointed as deputy CEO and will take over from me at Easter. I would like to congratulate him and wish him every success in the future.

And you will hear from Dominic at the half year results in May. I would like to begin by making a few comments on the highlights for this year, and then Johnny will take you through the financials as usual. Compass has had another strong year. Organic revenue was up by 4% with growth waits to the second half as we expected. Our operating margin improved by 20 basis points, reflecting the generation of efficiencies in the business and the absence of restructure and costs.

Free cash flow was up by 7% due to good cash conversion and FX. EPS on a reported basis was up by 18% but more honestly constant currency earnings per share were up maybe 6% on the proposing to increase the dividend by the same amount. The business continues to throw off significant amounts of cash. This year, after investing in the business, we returned some £1.6 billion to shareholders. And on that positive note, I would like to hand it over to Johnny.

Jonathan Thomson: Thank you, Richard and good morning, everyone. So, let’s start with revenue. Working from left to right turning weakness against all of our major trading currencies benefited revenues by ₤2.1 billion which gives us a rebased 2016, which gives a rebased 2016. North America grew organic revenue by 7.1%. New business wins were very good, particularly in health care, Vending and B&I.

Our retention remained excellent at 96.4%. Like-for-likes reflected modest price increases and flat volumes. Revenue in Europe grew by 1.6% for the full year. Exciting growth in the UK and Turkey was partly offset by subdued trading on the continent, particularly France and Germany. We continue to work on improving retention, and like-for-like revenues were up slightly due to some price increases.

Rest of World, excluding Offshore & Remote, grew by 3%. Strong performances in Spanish-speaking Latin America, India and China were partly offset by challenges in Brazil. Our offshore and remote business contracted by 14% as expected due to the impact of the construction cycle in Australia and continued weakness in our commodity related business around the region. Taking all of these movements together, Group organic revenue grew by 4%. Starting on the left of the chart, FX was a £169 million benefit to operating profit.

The strong performance in North America and some improvement in Europe increased operating profit by £70 million and £5 million, respectively. And Rest of World a decline of £12 million in Australia offset a better-than-expected improvement of £7 million elsewhere. And finally, the absence of restructuring and other costs added £21 million. So, taking all these movements together, the group's constant currency operating profit grew by 5.6%. In North America, margins remained strong at 8.1%.

The business generated efficiencies which together with price increases offset significant labour headwinds on a continued impact of weak volumes in oil and gas. In Europe, margins were flat at 7.2% as efficiencies and pricing were offset by labour cost inflation, particularly in our UK support services business. Our margin and Rest of World was better than expected. Benefits from last year's restructuring more than offset the impact of weak volumes in our Offshore & Remote sector and in Brazil. The absence of restructuring costs and FX also benefited margin this year.

Overall, the group's margin improved by almost 20 basis points. As you know, FX has only a translation impact for us. Given the recent strengthening of sterling, if current spot rates continue through 2018, FX would reduce full year 2017 operating profit by around £40 million. And 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 £15 million. Further details regarding FX sensitivities can be found in the appendices to the presentation.

Net finance costs were £114 million slightly above last year due to FX and one quarter of additional interest incurred on the debt to fund the special dividend. As we previously indicated, this year's underlying tax rate was up by almost 1% at 25.4%, mainly due to changes in international tax rules as part of the OECD BEPS project. At this stage, we expect continued upward pressure of around 1 percentage point on the rate for 2018. The impact of any potential changes in US tax legislation remains at this stage unclear. Constant currency EPS grew by 5.7%, and we're proposing to increase the full year dividend by the same amount in line with our policy.

Let’s talk about cash. Depreciation and amortization increased to £483 million due in equal parts to currency and our investments in CapEx. Growth capital expenditure was 3.1% of revenues and 2018 we expect CapEx to be again just over 3% and include an investment and an exciting long-term partnership with the L.A. Dodgers in the US Working capital was a £62 million outflow. The lumpiness of the last two years was generated by timing differences.

In 2018, we expect working capital to be an inflow of around £40 million as the impact of the extra payroll in 2016 reverses. Operating cash grew by 9.7% and operating cash conversion was 83%. Post-employment benefits were £14 million, and we expect to pay around £20 million in 2018. The cash tax rate was 20.9%, and for 2018, we again expect the rate to be between 20% and 23%. Our free cash flow therefore grew by 7.3%, and at 57% our conversion was in the middle of our target range of 55% to 60%.

Looking now at the balance sheet, again starting on the left of the chart. Opening net debt was £2.9 billion, and the business generated cash of £1.7 billion before CapEx. We reinvested £760 million to support our long-term growth, including £77 million on M&A. We returned £1.6 billion to shareholders, including the £1 billion special dividend paid in July. FX and other items were £84 million.

And so, on 30th September, 2017, net debt-to-EBITDA was 1.6x as we continued to delever following the special dividend. Our priories for uses of cash remain unchanged. We continue to be excited about the structural growth opportunity in our sector and invest in the business via CapEx and M&A to support our long-term growth ambitions. To that end, we have just purchased, subject to regulatory approval, 80% of Unidine in the US for $280 million. They're a pure-play food services provider predominantly in health care with revenues of around $220 million.

This acquisition significantly enhances our capability in the fast-growing senior living sector and meets our returns criteria. Our aim is to maintain a strong investment-grade credit rating, and we will continue to return any surplus cash to shareholders through share buybacks or special dividends to target a full year net debt-to-EBITDA ratio of around 1.5x. As usual, I pulled together some of the key 2018 full year assumptions on one page as reference for your modelling. A word on phasing. I'm optimistic about our outlook for 2018.

We expect full year revenue growth to be in the middle of our 4% to 6% range with modest margin improvement. However, revenue margin and free cash flow generation will all be second half weighted. In terms of revenue, we are expecting an acceleration in our growth in Europe and rest of world as the year progresses. And do not forget that Easter will have an impact albeit less than last year. On margins, we're taking actions to offset labour cost headwinds, particularly in Europe, which will yield benefits towards the back end of the year.

And finally, our free cash flow in the first half will be impacted by our investment in the L.A. Dodgers. In conclusion, we are pleased with our results. The business is performing as expected, and we continue to deliver strong organic growth, improve the margin, generate significant amounts of cash, invest in the business, and finally, return cash to shareholders. Back to you, Richard.

Richard Cousins: Thanks, Johnny. New business wins were 8.7% driven by strong performances in all regions. Lost business was 5.7% and like-for-like revenue was up a bit, with sensible price increases around the world partly offset by weak volumes in our commodity-related businesses. As a result, organic revenue growth was 4% for the year. We remain focused on margins.

The business generated some margin improvement as we successfully offset headwinds particularly in labour, through efficiencies overhead levers and cost saving. In the absence of restructuring cost this year increased margins further. Let's now turn to the regions beginning with the most important one. North America, the group's core growth engine, continues to perform exceptionally well. New business wins are strong, retention is high and like-for-likes are good.

Efficiencies are offset in labour cost pressures, and our margins remained strong at 8.1%. Our sectorization and sub-sectorization approach continues to drive growth across the board, with the exception only of DOR. We've been able to innovate and sharpen our offer to win and retain business with several flagship organizations. In addition to the L.A. Dodgers in sports and leisure, we've won the Mayo and Cleveland clinics in health care, the University of Houston in education and Qualcomm in B&I.

This also resulted in a nicely balanced business across the four main sectors. As I’ve said before, innovation is not only about the glamorous consumer facing activities. Our American colaces are doing some exciting and innovative things in labour. They developed a tool to source hourly associates in a more efficient way. It reduces the amount of time the unit managers spend on this activity and improves associate retention rates and the quality of our hires.

They're also undertaking a significant simplification project to reduce non-value-added tasks. Both examples reduce costs and free up the unit managers' time to focus on our clients and consumers. Europe in performing as expecting with organic revenue growth of 1.6% whilst the creation of the business unit continues to deliver efficiencies, this was partly offset by labour cost pressures. Passing all of these increases on to support services clients in UK has been particularly difficult. Performance in Continental Europe remains a little subdued.

And in the North Sea, weak oil prices and high extraction costs have made for difficult trading. The UK and Turkey were the main engines of growth in 2017, and they also offer the greatest European potential in the new year. The UK will accelerate nicely during 2018 and 2019, with the mobilization of defence and sports contracts. The strong Turkish pipeline is underpinned by our leading market position and the expansion of our footprint into education. Performance in the rest of the world is beginning to improve.

Excluding Offshore & Remote, revenue was up by 3%, driven by strong performances in Spanish-speaking Latin America, India and China. Margins improved as a result of the restructuring generating better than expected savings. As you know, our commodity-related business turned the corner in the first quarter of this year. I remain excited about the rest of the world as a whole. While we're not going to get back to growth levels of perhaps five years ago, we believe the top line will return to reasonable growth in 2018 and continue to accelerate from that base.

In the medium term, Latin America, India and China all provide exciting opportunities. I will use this moment talk about our future strategy, however as we got four months to go I tune to focus on why I remained excited by the future of Compass Group. There's a large structural growth opportunity with significant potential for first time outsourcing and share gains. Importantly, we are focused on food. It is our core strength.

Our scale gives us a cost and competitive advantage, and we remain focused on efficiencies and operational performance. Finally, we have a hugely experienced and talented management team. Given these strong fundamentals, I'm confident Dominic will lead Compass from strength to strength. And so, to summarize, it is being another good year. North America is in great shape.

Europe's performance is reasonable and Rest of World is improving. With our strong cash flow, we've been able to return £1.6 billion to shareholders. And as we look forward to the new year, 2018 will see modest expansion in the margin, and importantly, exciting growth on the top line. Before we take your questions, I just like to make a quick personal comment. This is my last results presentation with Compass, and I would like to take this opportunity to thank you and others in the investment community for your support over the last 11 or nearly 12 years.

It is being a privilege to run Compass, and it is being fun most of the time. Thank you for your time and attention. I would now like to take your questions in the normal way. If you’d wait for the microphone and, of course, introduce yourself, we’d be grateful. Jamie, up in front here.

Q -

Jamie Rollo: Thank you. Jamie Rollo from Morgan Stanley. Actually, perhaps my question, but just to put you on the spot a bit, I just say it is your last set of results, so I think we should recognize your remarkable achievement even over the last 12 years. Thank you very much. It is not in our nature to congratulate CEOs as analysts, but thank you very much and best of luck for your retirement.

So, I have a question on the competitive environment and your first half sales guidance. Clearly, we've had a lot of fairly weak comments, and numbers two to four recently on outlook on both sales and margin. How to begin a change in the environment, firstly? And secondly, why you expecting a pickup in sales in the second half of the year? What gives you that confidence, particularly as your comps are much easier in the first half of the year?

Richard Cousins: Yes, that's an interesting question. Firstly, thank you for your comment Jamie. I do not think there’s been any change in the industry.

Obviously, I only got a comment about Compass. We feel very good about our position. I think the H1, H2 phasing in terms of revenue won't be that marked. H2 will be stronger than H1, but I still think H1 will be stronger than the number we just reported, i.e., 4%. If you exclude Offshore & Remote, which is clearly been completely rebased over the last two or three years, in 2017 we grew it just over 5%.

And as we look over the next 12, 18 months, we pursue moving back positive Australia in particular, and Offshore & Remote in general also going back positive. I feel really very bullish about our top line. North America specifically the US, let's be honest, US is a great, great business, and the momentum we see at this moment is as strong as I can recall. So, we feel very good about Compass, and that's all I care about.

Jamie Rollo: And if I could, one more.

In terms of the CapEx going over 3% and your depreciation is about 2% of sales. Are these two going to align, because depreciation charges moving up much faster than the sales? Is it still 10 to 15 basis points headwinds over the last couple of years? How should we sort of see that affecting the P&L margin impact?

Jonathan Thomson: Well, I think we are, the first thing I would say in terms of trends. The depreciation to CapEx, which remain fairly stable over the last 5 to 10 years of around 70%. So that hasn't changed much, Jamie. And as you know, we feel very good about reinvesting in the business.

So, whether it is 3.1 or 3 or just under, around about that mark seems like a good balancing point for us. And of course, as long as it continues to generate industry-leading growth with industry-leading returns, then that's where we should put our cash. So, we feel good about it. Richard Clarke : Hey good morning. Richard Clarke from Bernstein.

First one just on cash returns. You are finishing the year at 1.6 times net debt-to-EBITDA we know that the pound is going to be a bit of a headwind going into this year. And then you made a comment about how you're -- in the release about how your distributable reserves at the parent company are only around £1.1 billion. So how could we think about special dividends this year going forward? And then a second question on the acquisition you've announced today, Unidine, I think I hope I've got the name right. You've said in the past that you like to buy management teams, not just scale.

So, can you comment on what expertise, what technology they bring to Compass's own?

Richard Cousins: Before we get into that, you said we know FX. Well, we don't know anything. We were only 15% of the way through the year. Richard Clarke : Where you are now.

Richard Cousins: Johnny?

Jonathan Thomson: We will continue to deliver since we did funding for the special dividend 1.6 times we are coming off quite quickly because we are highly cash generative as you know and we are always reviewing at the board when is the right time to be returning, and what format because, of course, we've done buybacks and special dividends.

I would say at this stage that having done the Unidine acquisition or just about to complete it, I would expect therefore the consideration of when we start to do returns to push out into the back half of the year as a result. So probably will come back to you in the half with a better understanding of exactly when that might be and in what format.

Richard Cousins: And in terms of Unidine, as Johnny said, it is largely senior living and other health care, strong management team, excellent growth characteristics, good margin, excellent business. In front row?

Tim Ramskill: Tim Ramskill from Credit Suisse. Just specifically on the US transparent sector.

Selectively pretty honest you’ve come across the board in the healthcare and education arena. So, to what extent is that benefited this year? Or you got some more to come from that next year? Have you been a winner in that sort of area? And then the second question, which when you talked about UK support services and the challenges sort of passing through labour inflation, does that have a particular readthrough in terms of your views on food versus support services and the merits of being more labour-intensive segment?

Richard Cousins: Okay. So, in terms of the US or North American growth, we've seen par growth rates in B&I and Education, which would be around about 6-ish. We see strong growth in Canteen, sports and leisure and health care. And then obviously, negative in DOR.

So as usual, I'm not going to comment about competitors. But when we sat down with North American management the other day, their pipeline is excellent, it really is. So, do we feel good about 2018? I just answered the question. UK support services, we're better at food. We have really improved our UK business over the last two, three years.

I think we got our food mojo back in the UK, quality service, innovation, growth, retention is all moving in the right direction. It is a better business than support services I would say.

Jeffrey Harwood: Jeffrey Harwood from Stifel. Two questions. First of all, on the Unidine acquisition, can you give some idea as to the profitability or what it might make this year?

Richard Cousins: No.

Jeffrey Harwood: And secondly, on...

Richard Cousins: I just thought I would save your breath. It is a good business, satisfies our investment criteria, which as you know, is to get above WAC] by the end of year two, it is a good business.

Jeffrey Harwood: Okay. And secondly then, on the tax charge, like other things being equal, is 26.5% the new norm or might it rise further?

Jonathan Thomson: I think the tax environment is very difficult to predict right now, and I'm deliberately, year-on-year giving one year guidance only for that reason because as I'm sure you're all aware, it is very volatile out there.

So, for the moment, 1% increase is right. What it looks like beyond that, I think it is too difficult to say. The US legislation, as we all know, is ongoing and under discussion. For us, actually, I would not assume a big upside from that. It is funny that both the House of Representatives and the Senate bills are both very different and will have different impacts on us.

So, at this stage, we just don't know. So, I can't really give you guidance beyond 2018, and I just -- I would just do want to emphasize not to assume significant upside from the US legislation.

Richard Cousins: In the front row?

Angus Tweedie: Angus Tweedie from Merrill Lynch. Can you talk a bit more about labour inflation across the different regions? And in fact, you've sort of pulled up cost inflation as a risk in 2017. And then, Johnny, if you could help us on the CapEx figure, if you didn't have the L.A.

Dodgers in there, could you give us some idea of the quantum on that?

Richard Cousins: So why don't you do the CapEx first, Johnny, and then I'll talk about labour?

Jonathan Thomson: Yes, as I've said before we'll be in just over 3%, I would estimate at this stage. So, you can take from that what you want. I would guess we were just under 3% if it wasn't for the LA Dodgers, so that's at the margins.

Richard Cousins: In terms of inflation, if we just talk about Western world inflation because it is easier obviously, food and labour generally go with CPI LPI. On average, UK obviously, we got weak sterling.

On average in the Western world, I would say food inflation is slightly below par at the moment, but labour inflation is slightly above it. Because the UK, Spain and then in a different way but more local way, the US all have significant minimal wage pressures. Sometimes, we pay well above the minimum wage, but there's still a relationship between the two. So yes, we are noticing that. I think in the short term, it is a headwind.

We have to work harder on productivity and pricing and so on. However, in the long term, if you look how the US health care system is reacted to Obamacare, which of course is a significant increase in labour costs, then there's clearly been an acceleration in outsourcing, and we've benefited from that. So, whilst, as I said, in short term, it is a headwind, we can't winch too much because I think it will, these labour pressures, will drive more outsourcing.

Mark Fortescue: Mark Fortescue from Panmure. Just one on DOR please, and the oil prices.

Is there a level of the oil spot price where you start to see confidence in oil and mining companies starting to invest again from the last cycle? Or is it different every cycle?

Richard Cousins: Well, we have a department of hundred analysts forecasting the price of oil.

Mark Fortescue: That's more than enough.

Richard Cousins: I pause for comic effect. How clever do you think we are? The business doesn't work like that. In the end, of course, we reflect activity in the industry, exploration, construction of sites, production, and so one.

So of course, there is a correlation. But short-term movements in the spot price of oil are not really what our business is about. And of course, it is not just oil. Iron ore has been a terrific business for us, Copper in Chile, and those cycles have changed. I think what really matters is as we look at 2018, we're going to bottom, perhaps third or fourth quarter of 2018 will turn.

And then in 2019, we expect modest growth. So, I mean, we're reporting 4% top line today, underlying, underlying, I think it is over 5% because of the Offshore will remain precious. So, I actually feel we've weathered the two to three years storm quite well.

Tim Barrett: Tim Barrett from Numis. Richard, given what you just said on cost, could you talk particularly about the one-third of your business where you don't have automatic pass-through of costs? And how pricing power feels to you at the moment around the world? And specifically, I was just interested in the support services business in the UK What that is? What issues?

Richard Cousins: That's a good question.

I'm going to hand that one on to Johnny.

Jonathan Thomson: Well, as you know, as you correctly point out, one third of the business is fixed price, and that is the one where it takes us a fraction longer to pass it on. So, we have across the world, different negotiation clauses, contract clauses, etc, which allow us to do that. It generally takes some time. But for the most part, we are able to get it through, and I would say, particularly in food, and particularly, actually in higher inflation environments that are more accustomed to it, we tend to move it through quite quickly.

Now you're right to point out that in general, right now, the corporate environment just seems to be under a little more pressure from margin perspective. And therefore, with labour inflation as it is, then perhaps there's a fraction tougher than it has been particularly, I would say in Europe. And then, of course, you layer on top of that the support services element, where we have less pricing power, and therefore it becomes tougher still. So, I guess to the point, my answer would be that Europe is a little tougher right now on the fixed-price contracts and support services specifically. And that's why we're taking action as we are right now, and we are taking some cost out, which the cost of which will affect our margin in the first half.

The benefits will rebound in the second half. So as a group, therefore, from a margin perspective, just to give clarity on this margin, the first half will be flat, perhaps a [indiscernible] negative, but it will rebound strongly in the second half such that our margin overall will show some modest improvement. And to my point earlier, just to finish, Europe, of course, is particularly acute in the sense, and therefore, what I've just explained in profile will be a bit exaggerated in the European region.

Tim Barrett: Is it possible to quantify the restructuring piece or to?

Jonathan Thomson: I wouldn't say it is restructuring. I think that's a strong word.

What we really doing is unit level productivity here. So, to call it restructuring is a little much. It is almost our daily business in a more difficult environment. So, at this stage, I'm not going to quantify it because it is ongoing.

Vicki Stern: Vicki Stern from Barclays.

I'm just sort of following that on. Could you then talk a little bit about the medium term? Margin growth is sort of, I think you've talked in the past 5 to 10 bps. Is that still relevant? Or is it just a little bit more challenging to think about that now?

Richard Cousins: Well. I still think that longer-term margin progress is very much possible, and we have the opportunities to be able to deliver on that. I think probably 10 basis points would be a little tough, to be honest with you for the longer term.

But certainly, mid-single digits margin progress in the longer term is very much within our grasp. As we're talking about today, I think 2018 just looks a fraction tougher, so it may be a few bps less than that in this year. I think this is a really important point. Modest margin expansion is very much part of the model, and I know that Dominic will talk to you about that in May. Not massive amounts, but steady amount in expansion matters.

Okay. Any more questions? Whilst you think about it, is there one in this space? I can't see.

Operator: I do have one question on the phone. This is from Erik Karlsson of IAP.

Erik Karlsson: You talked about the European margin challenges.

Could you just help us, whether there are any other tailwinds or headwinds to the business in fiscal 2018 when it comes to EBIT margins besides from the European phenomenon?

Jonathan Thomson: Yes, we'll just go to the other two regions then. North America, we have to say when we're growing at these kinds of rates. We do not expect significant margin progress, as you can imagine. I mean the cost of mobilization, et cetera, mean that's 7% growth that we wouldn't expect margin improvement. And we're very happy with 7 and 1 or 2 bps.

Labour pressures are still quite significant in the U.S., so we shouldn't underestimate the work that has to go on, on efficiencies and on pricing to offset that. Before the moment, we would see the continuation of that 7% growth with a few bps in North America. We go to the Rest of World, as I said earlier in the presentation, we've been really pleased with the Rest of World margin in the old year in 2017. Some of the restructuring we've been doing over the last couple of years has really come through strong, so that's great from a margin perspective there. We see that carrying on into the new year.

So, I'll expect 10, maybe 20 basis points of improvement in Rest of World. But don't get me wrong. There are still pockets of labour inflation and indeed food inflation in some of our Rest of World margins. But I think also, we have the opportunity in some of our smaller businesses by -- through creation of scale to continue to generate efficiencies, and therefore, margin improvement.

Richard Cousins: Thank you.

Any more questions on the phone?

Operator: None at this time. [Operator Instructions]

Richard Cousins: Any more questions in the room? In that case, thank you, ladies and gentlemen, for coming. Have a good day.