Executives: Dominic Blakemore - Group Chief Executive Johnny Thomson - Group Finance

Director
Analysts: Richard Clarke - Bernstein Jamie Rollo - Morgan Stanley Kean Marden - Jefferies Tim Ramskill - Crédit Suisse James Ainley - Citi Tim Barrett - Numis

Dominic Blakemore: Good morning, and thanks for joining us. Once again, we've got a full agenda today. So I'll begin by making a few comments on the highlights of the year. Johnny will then take you through the financials and I'll come back for a more detailed review of our operating performance and our strategy going forward. And of course, there will be plenty of time for questions and answers at the end of the session.

I'm delighted to say that 2018 was another really good year for Compass. Organic revenue is up by 5.5% towards the higher end of our target range. Our operating margin was 7.4%, up slightly as expected, as we continue to generate efficiencies to offset cost pressures. Cash continues to be strong with over GBP 1.1 billion of free cash generated in the year, up by 17%. Constant currency earnings per share was up by 12.5%, and we're proposing to increase the dividend by that same amount.

So on that positive note, I'd like to hand over to Johnny.

Johnny Thomson: Thank you, Dominic, and good morning, everyone. So let's start, as usual, with revenue. The recent strength of sterling against other trading currencies had a negative impact of GBP 1 billion on 2017 revenues. Growth in North America continues to be exceptional with revenues up 7.8%, driven by strong growth in B&I, Vending, Healthcare and Sports & Leisure.

New business wins were excellent and retention was, again, very strong at 97%. Like-for-like revenues reflected sensible pricing and stable volumes. The pipeline remains encouraging, and we expect another good year in 2019. Europe grew by 2.1%, second half weighted as expected, and driven by strong net new business in the UK We're also seeing improvements in retention in Continental Europe. Finally, we had some exciting new business wins in France and Germany in quarter 4.

Organic growth in Rest of World was 2.9%, driven by strong performances in Turkey, China, India and Spanish-speaking Latin America. In the fourth quarter, the final Australian LNG product began to transition from construction to production. This together with ongoing challenges in the Brazilian market will continue to subdue Rest of World growth in 2019. As a result of these movements, group organic revenue grew by 5.5% at the top end of our financial model. FX reduced operating profit by GBP 79 million.

Growth in absolute operating profit of GBP 94 million in North America and GBP 35 million in Rest of World was offset by an GBP 18 million decline in Europe, due to the challenging conditions in the UK As a result of these movements, we saw a 7.1% increase in constant currency operating profit. Margins in North America remained strong at 8.1% as we continue to drive efficiencies and take some pricing, enabling us to offset labor headwinds and the incremental cost of exciting growth. Given North America's excellent top line, we expect margins for 2019 to remain unchanged. In Europe, margins fell by 50 basis points as expected and due entirely to continued inflation and weak volumes in the UK The benefits of the actions we've taken this year will flow into next year, and we expect that margins will begin to improve again in 2019, but we note that the UK market remains uncertain. We were very pleased that margins in Rest of World improved by 80 basis points.

It's been a key area of focus. We continue to drive MAP efficiencies, enjoy the benefits of the 2015 restructuring and are improving our overhead leverage in growth, higher growth markets, such as Turkey. For the group as a whole, the mixed benefit of higher margins in North America and the excellent improvement in Rest of World offset the decline in Europe. As a result, as we expected, we delivered modest margin improvement in the year. FX has a translation impact only for Compass.

The strengthening of sterling has a negative translation impact of GBP 79 million on operating profit. A 1% move in sterling against all of our trading currencies would change full year 2018 operating profit by around GBP 15 million. This is important to note given potential future FX volatility. If current spot rates continue through 2019, FX would positively benefit 2018 by GBP 58 million. Further details regarding FX sensitivities are found in the supplementary slides.

Let's take a look now at the bottom of the income statement. Net finance costs were GBP 114 million, in line with last year. We expect net finance costs in 2019 to be around GBP 120 million, slightly above this year primarily due to higher rates in the U.S. The enactment of the U.S. Tax Cuts and Jobs Act in December 2017 had a positive impact on our effective tax rate, reducing it from 25.5% last year to 24% this year.

Our current expectations are that the 2019 ETR will remain consistent at around 24%. However, the tax environment continues to be very uncertain with more intense tax authority positions globally. We await the results of the European commission's investigation into the UK controlled foreign company rules, although at this stage we do not expect it to have a significant impact on our ETR. Constant currency EPS grew by 12.5%, boosted by last year's share consolidation and this year's tax benefit with underlying trading EPS growth of around 8%. In line with our dividend policy, we're proposing to increase the full year dividend by the same 12.5%.

So moving on to cash flow. Depreciation and amortization increased slightly to GBP 500 million, due to our continuing investments in CapEx. Gross capital expenditure was 3.5% of revenue. We continue to see CapEx as an important tool in driving our strong growth rates and excellent returns. CapEx helps improve retention.

Contracts with CapEx have an average life of 8 years versus the overall average contract length of 5 years. We expect CapEx to be up to 3.5% in 2019. Working capital performance was very strong. We were expecting a working capital inflow of around GBP 50 million as the impact of the extra payroll in 2016 in the UK and U.S. reversed.

However, the performance was even better than expected as we worked hard to mitigate the operational impact of a weekend year-end. In 2019, we expect working capital to return to its normal small outflow. As a result of these movements, operating cash was up by 11% on a reported basis and 17% on a constant currency basis with conversion at the top end of the range at 91%. Net interest was broadly flat. The cash tax rate was 20%, slightly better than last year, mainly due to the lower tax rate in the U.S.

For 2019, we expect the cash tax rate to be between 20% and 22%. So for all these reasons, free cash flow was up 17% and conversion was strong at 66%, above our target range of 55% to 60%. We maintained guidance in the target range for free cash flow conversion in 2019. Looking at the balance sheet, and again starting on the left of the chart. Opening net debt was £3.4 billion and the business generated cash of £1.9 billion before CapEx.

We invested £757 million in net CapEx to support our long-term growth. Acquisitions totaled £452 million, principally that of Unidine in December 2017 and disposals £39 million, netting to a total £413 million. We returned £548 million to shareholders in the form of ordinary dividends. FX and other items have increased net debt by £117 million. Therefore, our net debt-to-EBITDA on 30th September 2018 returned to our target leverage level of 1.5 times.

As you know, we are actively managing our portfolio to increase our focus on food in our core markets. As a result, we are disposing off some noncore businesses totaling up to 5% of group revenues. Examples of deals done include Bateman, a meals on wheels business in the U.S. and VSG, a security business in the UK. We're making good progress and thus far have sold or exited £300 million of annual revenues and received £50 million of proceeds.

We booked a net loss on sale and closure of these businesses of £58 million, mostly non-cash asset impairments and exit provisions. The portfolio review is not expected to change our overall organic growth and margin profile and indeed this year's disposals are expected to be margin neutral. I've summarized on the slide the disposals and acquisitions that completed so far so you can update your models accordingly. We continue to be excited by the structural growth opportunity in our sector and to invest in the business via CapEx of up to 3.5% of revenues. We pursue bolt-on opportunities that strengthen our capabilities, support our long-term growth ambitions and meet our strict returns criteria.

Our aim is to maintain a strong investment grade credit rating, and we'll 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 1.5 times. The disposal program does not change our priorities for uses of cash. Proceeds will be used to fund attractive bolt-on acquisitions or returned to shareholders. Due to the uncertainty of the timing of any such acquisitions or proceeds from disposals, we will update you at the half year on our expectations for cash available for returns. A quick word on the new accounting standard, IFRS 15 revenue from contracts with customers, which we will adopt in 2019.

The adoption of this standard will have a minimal impact on our financials given that we have a straightforward revenue recognition policy and do not undertake any long-term contract accounting. Importantly, the new standard will not impact our KPIs of organic growth nor margin progression. As usual, I've pulled together some of the key 2019 full year assumptions on one page as a reference for your modeling. In conclusion, 2018 has been another excellent year of performance delivery for Compass. We continue to deliver strong organic growth, improve our industry-leading margin, generate significant amounts of cash, invest in the business and grow the dividend.

Dominic, over to you.

Dominic Blakemore: Thanks, Johnny. And given this is your last results presentation after nearly a decade of contribution to Compass, I just want to say a personal thank you, and we wish you all, every success in your future. Thank you. So starting with growth.

We continued to perform really well in new business wins, which was strong at 9.1% across the group. Retention is excellent at 95% as we benefit from improved retention processes, especially in Europe. Like-for-like revenues reflect sensible pricing, partly offset by the weaker volumes in the UK and our Offshore & Remote business. As a result, our organic revenue growth was 5.5%. Let's now look at the performance of each of the regions in turn.

I'll start with North America, which now accounts for 60% of the group and where we had another excellent year. Organic revenue grew by 7.8% with good growth in B&I, Healthcare, Vending, and Sports & Leisure. Retention, a key metric for us, was 97%. Margins remained at 8.1%, despite the strong growth rate and the continued above-average labor inflation. I'm really pleased that most of our growth in North America comes from relatively small- to medium-sized accounts across all sectors.

For me that's a testament to the health of the business and the future sustainability of this performance. It's also, of course, the result of our strategy of sectorization and sub-sectorization, which means we can really focus on different client requirements, ensuring we have a tailored offer to meet all of our client needs. As a result, we've a portfolio of really well-known clients that include 98 of the companies in the Fortune 500 and a wide range of accounts like Google, the Harvard Business School, the Mayo Clinic and the U.S. Open. And the sources of our growth in North America are reassuringly consistent with 1/3 of our growth coming from first time outsourcing, 1/3 coming from regional players and 1/3 coming from larger players.

And our pipeline for 2019 continues to reflect this shape as well. Labor inflation in North America has been a theme for some years now, and we relentlessly focus on efficiencies to offset this continued headwinds. Basic labor management, improving productivity and work design are all levers that we continue to pull to manage cost headwinds. And to the extent that availability of labor is also a challenge, we're consistently improving our recruitment and retention processes. For example, this year, we consolidated our recruiting onto the success factor system and used video interviewing, artificial intelligence, and pre-employment assessments toward improved hiring.

This combined with better on-boarding and better training has resulted in a 2 percentage point reduction in our overall staff turnover, which, of course, lowers cost and also improves efficiency. As we've always said in our business, it's all about operational execution and I think that's a great example. In Europe, the picture remains mixed. Net new business in the UK continues to be very good, driven by new business wins in B&I, Defence, Healthcare and Sports & Leisure, so broad-based across the business. But meanwhile, growth on the continent has been more subdued.

Although we're pleased to say growth has accelerated in the fourth quarter, driven by good wins in both France and Germany. Margins were down in the region in the year due to the challenges we've been seeing in the UK And the benefits of labor efficiency programs, pricing and increased purchasing savings were offset by weaker volumes. Although the run rate has improved, the impact Brexit will have on the UK clearly remains unclear. Performance in our Rest of World region is improving. Organic revenue is up by 2.9%.

But excluding our commodities business, we saw 5% growth driven by 20%-plus growth in Turkey, India, China, and our Spanish-speaking LATAM countries. Brazil remains tough for us, but we're taking actions to improve our performance here. Margins improved by 80 basis points as we leveraged less scale and continue to drive efficiencies throughout the region. In the fourth quarter, we began the final transition from construction to production of a major project in our Offshore & Remote business. So I now expect that the commodity drag in the region will end by the second half of 2019.

Moving on now to strategy. We've been successful with our strategy of focusing on food, and we remain really excited about the ongoing market opportunity in food services. We're the global market leader today, and yet we still only have a 10% share. We've built significant competitive advantages that allow us to exploit the structural growth opportunity in our industry and deliver consistent long-term growth. I first introduced our strategic priorities of performance, people and purpose, and our half year results in May.

People and purpose are becoming evermore important drivers of financial and operating performance. We really need to focus on them to manage an increasingly challenging labor environment and to deliver better quality, more sustainable long-term growth. At the end of October, we held our global leadership conference where we officially launched the 3 Ps and shared with a wider team the details of how we're going to rollout and execute these strategic priorities and track our progress going forward. I'd like to take you through some of the highlights. Starting with performance and the importance of continuing to drive organic growth.

We've got great sales and retention processes, and these are really, really well embedded throughout our organization. When we combine these with our sectorization and sub-sectorization approach and the scale that we have in our major markets, it results in improved win rates and better retention across all of our regions. We're actively simplifying the portfolio by disposing about 5% of revenues of noncore assets. To be clear, these businesses are in either single line support services such as cleaning and security in the UK, noncore geographies like Gabon or their noncore food businesses such as some of our smaller travel concessions business. And we continue to look at bolt-on acquisitions to strengthen our capability.

I think a really good example of this was Unidine, which enhanced our capability in the attractive senior living subsector and brought some great management talent on board. And we've 3 operational priorities to unlock further efficiencies in the business. These are pricing, purchasing and productivity. We've drawn up a set of blueprint best practices and broken them into subprocesses, and we'll roll these out and implement them across our top 10 market, modeled on a bronze, silver, gold approach, which we've previously used to successfully adopt other initiatives across the company. For example, in pricing, we'll have a dedicated resource that ensures consistent contract compliance.

In purchasing, we’ll use product level data consistently across our markets to reduce the number of our suppliers. And in productivity, we'll consistently use both labor scheduling and time and attendance tools to manage our labor costs. There remains much to do, and of course, lots of opportunity. Given the challenges we're facing with cost and availability of labor, improving our employment proposition and becoming a true people business is key to attracting and retaining the best talent. We've identified the main pillars to enhance our employee proposition, and we're now rolling the mat across the group.

These include new unit manager training programs and simplifying the frontline processes to enable our unit managers to spend more time with their team and with our clients. A high performing and engaged workforce with low turnover means we'll deliver great food and experience to our clients and consumers, and importantly, we'll be more efficient and cost effective. Having a sense of purpose to manage social and environmental masses is really important to our clients, our consumers and all of our employees. Safety continues to be the foundation. We track our employees' safety rate and our global food safety rate on a monthly basis by country, by unit.

Both have improved by more than 30% in the last 5 years, and we expect to make meaningful progress in the years to come. We're combining those initiatives with a new level of commitment to sustainability. With regards to first health and well-being through nutritional education of our consumers, the environment by promoting a reduction in food waste and making the world a better place, for example, by working with our suppliers to encourage responsible sourcing. We've set clear initiatives and commitments and we record and report our progress against these criteria. With our scale and reach, we have a fantastic opportunity to make a difference there.

Bringing all of this together, by focusing on performance, people, and purpose, and on the operational priorities of pricing, purchasing and productivity, we'll continue to deliver the Compass model. We aim to grow organic revenue by 4% to 6% with modest margin improvement. When we're at the higher end of that growth range, margin improvements is minimal and at the lower end, margin improvements is more meaningful. We'll grow the ordinary dividend in line with constant currency earnings, and we'll invest up to 3.5% of our revenues in CapEx to support some really attractive growth opportunities across the group. We'll continue to do bolt-on acquisitions to strengthen our capabilities, and we're in the process of exiting noncore businesses that dilute management focus.

We'll then return any surplus cash to shareholders whilst keeping net debt-to-EBITDA at around 1.5 times. So in summary, 2018 was another excellent year. We've launched our strategic and operational priorities and the focus is now on execution. Our outlook for 2019 is positive, and we expect organic growth to be in the middle of that 4% to 6% range with some modest margin progression. Thank you for your time.

We're now happy to take any questions. And of course, as always, can you please state your name, the company you represent before asking the questions. Thank you. Q -

Richard Clarke: Good morning. Richard Clarke from Bernstein.

I have 3 questions, and I'll ask them each in turn if that's all right. Just starting on labor inflation and your like-for-like growth. We know, obviously, you're head-on on new business wins, but your like-for-like growth has lagged some what your peers have pointed by about 50 to 100 basis points whereas maybe we'd have expected the opposite given your food focus. So is there something about your strategy or your portfolio that means you're not able to pass pricing on and you haven't used efficiencies to offset labor inflation more?

Johnny Thomson: Well, I won't comment on what our peers have said. Our like-for-likes are around 2%.

It's worth bearing in mind that over the course of the last year or 2 to 3 years that we have seen some volume depression, principally because of the commodities sector so therefore pricing, of course, has been a fraction higher and that reflects the scenario with labor inflation. We're also working very hard in MAP 2, as you would expect us to do in the U.S., which should in time continue to develop our like-for-like capabilities. So I think we're feeling comfortable with it.

Richard Clarke: Second question on CapEx. Just maybe start with a point of clarification.

The release says around 3.5% this year, presentation says up to 3.5%. And then maybe as a follow on to that, this year was explained away by the L.A. Dodgers contract that you're staying, you're therefore expecting CapEx to increase again as your revenue increases over there. More one-offs or is this now the sustainable level you're expecting to be?

Johnny Thomson: Well, I mean, I think, I'd start by saying that we're very positive about investing CapEx into our business. I mean, I think the nature of your question is slightly negative.

We actually see the other way round. We're delighted to be investing in some of the opportunities that we've got. And as long as we can continue to drive like in a premium growth level and excellent returns of 20%-plus, then from my perspective that's a very good use of our cash. Now specifically to your question, we did get to 3.5%, we did first of all, half year say up to 3.5% would be our new guidance. This year, as you correctly pointed out, we had the L.A.

Dodgers, which took us to the top end. For next year, we're guiding up to, so not necessarily at 3.5%, but up to. But, again, if we see opportunities to invest in good pieces of business then we'll take them.

Richard Clarke: Okay, great. And maybe the last one.

I'll try not to ask it negatively. But the strategy refresh you talk about in the release and you've talked about more focus on sustainability and working for all stakeholders, just, is this an enhancement? Do you think this opens yourself up to new contracts, get yourself into areas or would you say this is something maybe you're a little bit weaker on and you needed to improve to match maybe some peers or to open yourself up to clients?

Dominic Blakemore: I think it's really exciting. I think the more we talk to our clients and our consumers, the more personally interested they are in seeing stronger and better commitments from all of their partners. I think it's one of our major clients has run a sustainability RFI process before even it moves to a food quality and cost process. So I think that demonstrates quite how important it is in this space.

I think it's going to create lots of new opportunity. I think we've done lots of good things across our business. We haven't been as thoughtful about joining them up and using scale to drive them with real intent. So I think a great example of why we're doing that is to stop food waste they've started in the U.S. businesses, single day on the 27th of April, 2 years ago.

We've now rolled that out across 20 countries, and we'll do it across all of our portfolio and much deeper as well. And it's not just about a 1-day event, it's about creating awareness throughout the year by tracking and measuring food waste in restaurants and how we can reduce that meaningfully alongside our consumer. So I think those things will enhance our operational performance and enhance our client proposition and therefore we see it is a real positive.

Jamie Rollo: Jamie Rollo from Morgan Stanley. Again, 3 please, but I guess, I'll ask them in turn.

You had an excellent fourth quarter in North America, so 9.5% or so. I don't recall a quarter that strong for many years at Compass. What, were there any sort of one-off you might call MAP benefits there? And also if we're talking about North America, could you discuss the GPO market, whether there would be many changes there. Specifically, what might the commission impact been from that contract loss to one of your competitors on that third party Dining Alliance revenue. We're getting some questions from investors on that.

Dominic Blakemore: So was that 2 or 3 questions?

Jamie Rollo: That was one, I'm afraid, that was a general question about North America competitive environment.

Dominic Blakemore: We could be here a while. Well, I'll take quarter 4, and then Johnny can talk to the GPO position. I mean, first of all, I think it's fair to say we're delighted with the fourth quarter, not just in North America, but across the group. So whilst you talk about the near 9.5% in North America, we also enjoyed a very strong quarter in Europe, in the UK and in Continental Europe.

So we're very excited about that. Specifically, with reference to North America, we were lapping a little bit of weather in the previous year. We also had a strong Sports & Leisure calendar. So I think there was probably a percentage point or more of froth in that number. But that said, it's still a very strong number in the quarter for North America.

And with the group at to 6.5% in the quarter, we probably think that more like a 6%, but with strong momentum going into next year. So I think it gives us good confidence for 2019.

Johnny Thomson: And on the GPO, it's a dynamic environment right now, I'd say. Of course, we were a fraction disappointed on the Dining Alliance contact that you alluded to, Jamie, but that was for commercial reasons that we decided that wasn't the one for us. What I would say though is the growth in our GPO is still significant and actually runs at a higher rate than the U.S.

top line. So we're still managing to grow nicely. And actually since that, we've replenished fully the GBP 23 billion of procurement that we do through GPO. So we're still very, very positive about it. And I still think that we have significant competitive advantage, not just because of scale and absolute numbers, but the real importance here and how you drive the advantage is through compliance.

Because what you have to do is not just buy the certain, the total volume, but you also have to have in-unit compliance, which sounds very operational, but if you're not buying the right products and units then that execution doesn't generate the efficiency that you would want. And I think in our instance, our execution and therefore our compliance is excellent which helps us still to maintain a significant advantage.

Jamie Rollo: And then on the contract disposals. I guess, by definition from the slide you gave us, it's fair for us to say that the future disposals would be above average group margin given the 2%? And what, how should we think about proceeds on those. You've made about 8 times EBIT on the small amount you sold so far.

The balance sheet holding value for discontinued is a pretty low number. Is that 8 times the right sort of number? And is there any impact on your 4% to 6% organic versus old disposals as no exits within that number?

Johnny Thomson: Yes. I think the 4% to 6% remains intact. I think what you say about margin profile is correct. We've obviously, what we've completed so far is at a lower margin.

The, as you'll expect, we've sought to exit those businesses with, of lower margin earlier as you would expect. The businesses that we will exit will be of higher margin. And in fact, just yesterday, for example, we signed a deal for South African business, which is above the group's average margin. So again, there will be puts and calls, but overall I would expect that disposals and acquisitions will be neutral on the group's margin and on the top line in 2019.

Dominic Blakemore: And in fact I'd just add to that.

We're really pleased with the progress we've made. So following the disposal Johnny talked about in South Africa, we're about 1/3 of the way through the program with active processes ongoing for others. So I think we're managing it with pace. It feels cathartic in the business, but we're able to focus really hard on the call. And was it anything that changes the 4% to 6% growth range? I think it gives us confidence that over time we'll access the higher ends of that range with a tight and more focused call.

Jamie Rollo: Proceeds?

Johnny Thomson: Oh, yes, proceeds. Well, the multiples, Jamie, I wouldn't necessarily comment on exact multiples. We would expect that the proceeds of the businesses that we are about to sell in the future, of course, will be significantly higher than those that we have sold. So yes, multiples will be better, and therefore you would expect profits on disposal coming through the rest of this year and into '20.

Jamie Rollo: And just final quick one on your working capital inflow.

You had quite a big benefit from trade payables, about GBP 260 million increase on the balance sheet, so you're obviously delaying or taking longer to pay suppliers. Is that, is some of that going to reverse in '19 or '20?

Johnny Thomson: No, I don't think so. I think, as I said, when I was making the presentation, we worked hard across the balance sheet on our working capital. We were concerned, sounds very operational, but when the year-end falls in the weekend, that can have damaging effects on your working capital. So we worked very hard not just on the trade payables, but on the receivables too.

So I don't think it'll have a significant impact into 2019. You should also mention that in the size of business that we are, I think these kinds of swings in working capital are not necessarily unusual, and we've had them over recent years too. So we'll guide you to a small outflow, but you will see some puts and calls in that in future years.

Kean Marden: Good morning, it's Kean Marden from Jefferies. May I just return to the labor market in the States.

To Johnny, could you provide some insight into what your staff churn number is in aggregate in the U.S.? And you mentioned, Johnny, that you'd seen a 2 percentage point improvement during the year. This obviously been quite a big shift in some of the hiring conditions in the U.S. labor market in the second half with some big employers changing their employment stances. So maybe you can give us some understanding if how that trended during the year? And then finally, on that topic, how should we think about sort of on-boarding costs for field business, so training, uniform, those type of things which one might expect to pick up in line with the staff churn number? Thanks.

Johnny Thomson: Sure.

I mean, I think the first thing to say is we're quite pleased with the progress we've made in North America on managing both labor cost and availability. I think, secondly, this hasn't been a phenomenon over the last 1 or 2 years. But really, I think post ObamaCare, when we saw the pickup in labor rates then. We've been working really, really hard on a variety of initiatives and again highly operational. So I think, we're pleased with how we're managing it.

First and foremost, it's all about mitigating the cost inflation and better managing churn or turnover is one of those tools. Our labor turnover, typically the industry turnover is around 30% to 40%, so actually improving that 30% to 40% by 2% or 5% improvement is meaningful. So we're pleased with what we've done there. And a lot of that has been about better information, data and systems and a lot of basic blocking and tackling. So I think that's been very important for us.

I think the other point around labor in the U.S. is, we're currently looking at a buoyant economy, and our food cost inflation is lower than the labor inflation. We have contracts which allows to pass inflation through quicker than we have in Europe. So I think in the round, a good package of efficiency initiatives combined with those contracts and maybe a more winning consumer, where we see less volume sensitivity and a client that is in growth mode makes it a different conversation to that which we're seeing in the UK, for example. So I think we've made good progress.

I mean, in terms of the on-boarding costs, I wouldn't have a rate or a specific figure for you. I mean, it's just another great area of opportunity. We have a line within our P&Ls called union overheads, and that's where we absorb all of those costs, and we're constantly looking at what we can do to manage those costs there.

Tim Ramskill: Good morning, Tim Ramskill from Crédit Suisse. I've got, I think, 3 as well.

Just sticking with the same topic of labor, just another nuance, in terms of your use of contract labor or temps, again, is that a consideration set in a very tight labor market, maybe just comment on how you're managing that? Second question is very specific around questions I've had from investors about some of your approach towards CapEx, and how you're writing off intangibles. Your intangibles seem to be written off over 7 or 8 years, yet you would talk about typical contract lengths of 3 to 5 years. Is it maybe just the fact that those more capital-intensive contracts run for longer. Is there anything that you would add on that one? And then finally around sort of Foodbuy. Just talk us through kind of how you've utilized Foodbuy in terms of your price positioning in the marketplace? And how you feel your price offering declines has involved over time?

Dominic Blakemore: If I take the first and the third and then Johnny can reflect on the CapEx point.

I mean, in terms of contract labor, I haven't got the specific numbers to hand, but I think it's about more than 80%, possibly even 90% of our labor is fixed contracted labor, where we have the direct relationship with the employee and then the balance we pick up through more flexible variable contract labor arrangements. And obviously given the scale of our business, it allows us to have sensible conversations with the agencies around the cost of that labor. And we work very, very hard to ensure that we're managing that labor through particularly time and attendance processes with great diligence. So I think it's more of the same for us. I don't see that as being a particularly different issue.

But again, it's something that we're managing very closely. In terms of Foodbuy, look, I think we've talked a lot about Foodbuy in the past. It is part of our success in North America. Undoubtedly, it's one of several strategic differentiators, I believe, in terms of the scale. But as you heard Johnny today, Johnny said earlier, it isn't just about scale, it's about compliance, it's about process, it's about data, and I think that we've got an advantage there with the information that we have and how we manage the levels of compliance and over that.

I think, undoubtedly, there is more opportunity to grow our volumes with third parties. We've signed a couple of exciting deals this year into new sectors where we'll be managing the food and beverage spend into new hospitality segment where actually the runway is quite significant. So we think there's continued opportunity as we look forward. As we know it comes with both a fee, which covers the overheads of running the business, but more importantly, it gives us, I guess, disproportional aggregated scale, which, of course, allows us to price, it ensures we can have the best cost, but also the best quality for our clients. And this clearly isn't something, which is unavailable to the competitors.

Our competitors are running similar models of significant scale also. So I don't think it's something, which is going to change dramatically overnight.

Johnny Thomson: Glad you asked about intangibles, an opportunity for me to clear it up. We've got just over £1 billion in the balance sheet of client contracts intangibles. For the most part, just to clarify, those are related to kitchen refurbishments or kitchen equipment, et cetera.

So in nature, we see them as very close to PPE and therefore for that reason take the accounting decision to amortize them through operating profit and that hasn't changed through the IFRS 15 and wouldn't change through IFRS 15. But the key commercial point is, as I said in my presentation that those contracts that do attract CapEx such as these intangibles have a contract life of 8 years as opposed to our overall contract life of 5 years. So therefore, from our perspective, it is working to drive better retention and therefore better growth rates through the long term. So we think it's an important tool to do that.

James Ainley: Thank you.

It's James Ainley from Citi. Question on delivery, please. I see a lot of questions around the impact of delivery on your business going forward. Are you seeing any evidence so far of declining volumes or declining participation rates in contracts where there is delivery threat? And then secondly, moving on from that, one of your competitors at CMD talked about investing its own delivery expertise. Can you talk about what investments Compass is making in sort of technology to future-proof its business?

Dominic Blakemore: Yes.

I mean, first of all, I think that you have a few statistics around the delivery model. I mean, from what we understand in the U.S., more than 80% of total delivered food is for at-home consumption and typically takes place sort of Friday to Sunday. So it's only a small element of that around somewhere under fifth is delivered into offices. In many ways, we see it as bringing the high street into an office for those consumers, which would in part be going into the high street in any event. I think the positive about it is, it creates quite a lot of excitement around the food experience again.

We're very focused on what types of food are being delivered in, how we have to adjust our offer to give consumers on site something as exciting or as vibrant a choice. And I think it creates positive noise within our industry. As with anything, there are number of trends that are going on both positive and negative within the food space at work. I think in the round, we're not seeing any dramatic negatives, but we're not complacent. In terms of an own delivery model, we have looked at it and considered it.

We have got a digital team dedicated to exploring how we can use innovation or digital solutions within the contract catering market and on site to our clients. And that's one amongst other things that we'll consider around doing things on. I don't think it's sufficiently material part of what we do for us to really talk about it any further.

Tim Barrett: Tim Barrett from Numis. Going to ask 2 quick things.

Firstly, you sounded a bit more excited about Europe, concerning to Europe in the fourth quarter. Do you expect that momentum to continue through this year? And then just another quick thing on labor. Is there anything you can do on contract specification around passing labor costs on, specifically is it Germany included whether there is a fixed price plus indexation clause.

Dominic Blakemore: I'll take the question on labor and then Johnny can pick up on, I'll pick up the question on Europe, Johnny can pick up on labor. Yes.

I mean, I think, we're pleased with the fourth quarter performance in the year, in Europe, but it's only a quarter. So we remain cautious. I think what's important is we're seeing an improvement in retention in Europe and in forward-looking retention, which gives us the confidence that we should see it sustain for a while. We know we've won well in Europe, but retention has been the Achilles heel. So I think that improvements in retention is meaningful.

I think on the flip side, as we've talked about at a number of previous meetings, we've been working very hard on our European offer. So we've put our business into business units to ensure a consistency of offer across broader scale. We've made a number of acquisitions of small, niche higher end catering companies. So I think that gives us something different to offer. We've created a premium B&I brand in the French market, which is something we look at doing elsewhere.

So in a number of ways, I think we've done, put in place a number of building blocks, and we're seeing positive momentum. So we're excited as we look forward. That in, specifically referenced is Continental Europe. On top of that, we've talked about decent growth and momentum in the UK, where we've grown in the order of 6% and we'd expect to do so again next year. So it's a more positive picture, but still early days and lots to do.

Johnny Thomson: And just on the pass through pricing. We obviously have different contract structures. Almost every single contract is different in its own nature. But in general, we have 3 different kinds of contracts, a P&L contract, a cost plus and a fixed price. I'd say the 2 are, I guess, more straightforward and quicker for us to pass through cost, the latter perhaps takes some time in negotiation, although typically we would have indexation clauses even in those fixed price contracts related to labor and to food costs such that our teams were able to negotiate with some contractual background.

I would just point out also that it's important, of course, for us to be passing on to price, but we do see it as our responsibility and our opportunity in fact to differentiate ourselves by working first and foremost on efficiencies as the key value proposition for our client and we focus on that first and foremost.

Dominic Blakemore: Any more questions from the floor? Okay. Well, thank you all very much for your time and attention today. And we look forward to seeing you at the half year.