Sodexo: Solid revenue growth in Fiscal 2019

• Organic revenue growth for the year, at +3.6%, is above the original guidance range of +2 to +3% given in November 2018 and the revised guidance of “around +3%” in July 2019. The underlying operating profit margin was in line with our comments in July and at the lower end of the original guidance range (5.5% to 5.7%, excluding currency impact) at 5.5%. 
• On-site Services organic revenue growth of +3.3% has significantly improved relative to previous years, reflecting:
  • A return to growth in revenue in North America, at +1.8% for the full year, and sustained growth of +4.6% in all other regions.
  • Mixed performance on key indicators:
    • Client retention rate has decreased 50 bps to 93.3% due to losses in Healthcare in the second half. Excluding the one large contract exited, retention was up 10bps. All other regions and segments are stable or improved;
    • New sales development was down 50 bps to 6.3%, due to stricter selectivity in the bidding process;
    • Same site sales growth was +3.1%, up from +2.6% in Fiscal 2018, reflecting a combination of more inflation pass-through, solid cross-selling, offset somewhat by a net negative impact from IFRS 15 implementation of about 20bps.
    • With the award of the Summer 2020 Olympics hospitality contract, the two major sports events in Japan (the Rugby World Cup and the Olympics) should contribute approximately 100 bps of comparable site growth for Fiscal 2020.
• Benefits & Rewards Services organic revenue growth was +8.5%, well balanced between Europe, Asia and USA at +8.6% and Latin America at +8.3%.
• The underlying operating margin was stable at 5.5% as published and excluding the currency impact. Productivity gains compensated investments in growth. 
• Other operating income and expenses reached 141 million euro, compared to 131 million euro the previous year. Restructuring costs amounted to 46 million euro in Fiscal 2019 compared to 42 million euro in Fiscal 2018. Lower acquisition costs and higher gains on the sale of assets nearly offset higher amortization and depreciation of acquired intangible assets.
• Reported net profit was 665 million euro, up +2.2%. Basic EPS was 4.56€ up +3.6%, helped by a lower average share count following the share buy-back program in Fiscal 2018. 
• Underlying Net profit totaled 765 million euro, up +8.3%, with underlying EPS at 5.25€, up +10.1%.
• The dividend to be proposed at the Shareholders meeting on January 21, 2020, is 2.90€, up +5.5% on the previous year, compared to an EPS up +3.6%. As a result, the pay-out is at 64%, or 55% relative to Underlying EPS.
• Free cash flow reached 907 million euro, representing a strong performance following an exceptional performance in Fiscal 2018 at 1,076 million euro³ and despite a significant increase in net capex at 415 million, or 1.9% of revenues, against 298 million euro in the previous year. As a result, cash conversion remained high at 136% vs 165% in Fiscal 2018.
• After taking into account acquisitions and dividends, consolidated net debt at the end of the period was down slightly to 1,213 million euro compared to 1,260 million euro at August 31, 2018. As a result, the Group’s financial position remained strong, with a net debt ratio at 0.9, just below the target level of 1-2.
• Acquisitions, net of disposals, amounted to 301 million euro for the year, including:
  • In On-site food services, Novae and Alliance in Partnership, strengthening the Group’s presence in high end Corporate Services in Switzerland and public-sector Education in the United Kingdom,
  • In Homecare, several companies, strengthening the Group’s positions in North America, France, and the United Kingdom, and entering the Brazilian market and Asia,
  • In Childcare, with the acquisition of Crèche de France, doubling our presence in the French market and entering the German market with Elly & Stoffl,
  • During the year, the Group also acquired minority stakes in the digital/tech companies Meican in China and Zeta in India, which were already providing On-site and Benefits & Rewards operations with technology platforms in their home countries. The strategy is to deploy these platforms in other countries around the world.
• Sodexo’s engagement in Corporate Responsibility continues to be recognized within the investment community, by remaining the top-rated company in its sector within the Dow Jones Sustainability Index (DJSI) for the 15th consecutive year, and the highest marks in SAMs “Sustainability Yearbook” for the 12th consecutive year in 2018.
• Evolution in Governance:

            At the next Shareholders meeting, on the recommendation of the Nominating Committee, the Board will propose, as independent Directors:

• The following appointments:
  • Véronique Laury, the former Chief Executive Officer of Kingfisher, a UK retail FTSE100 company, with the Castorama and B&Q brands. She will bring to the Board her strong consumer knowledge, as well as sales and marketing expertise in a B to C environment. 
  • Luc Messier has both Canadian and American citizenships. He will bring significant international operational experience, notably in the energy sector, through executive management positions held with large French and American multinational companies (ConocoPhilips, Technip, Bouygues, Pomerleau).
• The following reappointments:
  • Sophie Stabile, notably for her experience in operations and finance in the services sector as well as her expertise in mergers and acquisitions.
  • Cécile Tandeau de Marsac, notably for her experience in marketing and in human resources in an international group undergoing significant organizational changes.

In addition, the Board offers its sincere thanks for their tremendous contributions to the Board to:

• Robert Baconnier, whose mandate expires at the Annual shareholders meeting to be held on January 21, 2020, and who has announced his intention to retire as Director, which he has been since February 8, 2005.
• Astrid Bellon who has expressed her wish to no longer be a Board director from January 21, 2020, which she has been since July 26, 1989, to fully devote herself to her role on the Orientation Committee of the Pierre Bellon Foundation as well as to her personal projects.

Should these appointments and renewals be approved by shareholders at the General meeting on January 21, 2020, the Board would be composed of 12 members, including 2 employee representatives. Amongst the 10 elected members, 7 are independent, 6 are female and the average age is 55 years old.

Outlook

The Focus on Growth strategic agenda has delivered growth of more than 3% this year. There are many action plans around the group with initiatives to enhance quality of new and renewed contracts, operational efficiency and growth.

For Fiscal 2020, while growth in North America remains challenging as the Healthcare contract losses fall out of revenues and with net new business being only neutral in Education, growth in all other areas and segments should continue to accelerate.

This year also benefits from two major sports events in Japan, with the Rugby World Cup in the first quarter and the 2020 Summer Olympics in the fourth quarter. 

The Group is continuing to identify new Fit for the Future initiatives to generate SG&A savings. This will complement the operational productivity coming through due to more discipline and STEP implementation. These savings will continue to be reinvested in accelerating growth.

As a result, for Fiscal 2020 the Group is expecting:

• organic revenue growth of around 4%,
  including the major sports events.
• Stable underlying operating profit margin for the year,
  excluding the currency impact and any impact from IFRS 16 implementation.

Mid-term, the Group aims to deliver market leading profitable growth. Current Group investments, activity mix and geographic presence provide us with the opportunities to capture this growth. Sodexo is capable of accelerating organic growth over the years to come while ensuring a sustainable and inclusive business model.

As organic growth increases, growth investments will be kept under control, so that the effects of enhanced discipline and efficiency gains will feed margin expansion.

Denis Machuel and the Board extend their sincere thanks to the 470,000 employees who have each in their own way, contributed to the improved financial performance in Fiscal 2019 while at the same time making the quality of life of others part of their daily work.  

Conference call

Sodexo will hold a conference call (in English) today at 9:00 a.m. (Paris time), 8:00 a.m. (London time) to comment on its results for Fiscal 2019. Those who wish to connect from the UK may dial +44 2071 928 000 or from France + 33 1 76 70 07 94, or from the USA +1 631-510-7495, followed by the passcode 52 72 754.

The press release, presentation and webcast will be available on the Group website www.sodexo.com in both the "Latest News" section and the "Finance - Financial Results" section.

Fiscal 2020 financial calendar

About Sodexo

Founded in Marseille in 1966 by Pierre Bellon, Sodexo is the global leader in services that improve Quality of Life, an essential factor in individual and organizational performance. Operating in 67 countries, Sodexo serves 100 million consumers each day through its unique combination of On-site Services, Benefits and Rewards Services and Personal and Home Services. Sodexo provides clients an integrated offering developed over more than 50 years of experience: from foodservices, reception, maintenance and cleaning, to facilities and equipment management; from services and programs fostering employees’ engagement to solutions that simplify and optimize their mobility and expenses management, to in-home assistance, child care centers and concierge services. Sodexo’s success and performance are founded on its independence, its sustainable business model and its ability to continuously develop and engage its 470,000 employees throughout the world.

Sodexo is included in the CAC 40, FTSE 4 Good and DJSI indices.

Contacts

FINANCIAL REPORT
FISCAL 2019

Fiscal year ended August 31, 2019

FISCAL 2019 ACTIVITY REPORT

FISCAL 2019 YEAR HIGHLIGHTS

Focus on Growth

The Group’s strategic agenda Focus on Growth has oriented the actions to generate productivity, by enhancing operational efficiency, to free up the means to continue to invest in growth by being more client and consumer centric. There has been a focused effort to put food back into the heart of everything we do. We are reinforcing discipline into our organization, by nurturing talent with new training, a new performance development framework Aspire, and considerable management changes, particularly in North America.

Anchoring corporate responsibility is exemplified by the launch in Fiscal 2019 of a global focus on food waste, with the program Waste-Watch, powered by Leanpath, to be deployed in 3,000 sites by the end of Fiscal 2020.

The STEP project, Sodexo’s performance management framework, is expected to focus management on the operational KPIs. The deployment is progressing in line with plan. The standardized cloud-based dashboard including 21 operational KPIs, with cost of worked hour, spend per consumer or food costs for example, went live in September 2019, for certain segments, in six countries and is expected to be available on 7,500 sites by February 2020.

Enhanced discipline across the Group

The reignition of growth in Fiscal 2019 has been accompanied by signs of renewed discipline in the organization.

This is demonstrated by the following elements:

• Our Lost time injury rate (LTIR) has continued to improve, down 11.3% in Fiscal 2019, to reach 0.86.
• While revenue retention was at 93.3%, due in particular to the exit of one large contract in Healthcare, gross profit retention was higher at 95%.
• The gross profit margin of new contracts signed during the year was 20 bps higher in Fiscal 2019 than in the previous year.
• In Corporate Services, the share of local contracts in the sales pipeline represented 80%. These smaller, local contracts ramp-up faster and can offset the impact of the larger start-ups, which ramp-up more slowly. 

Growth investments financed by productivity

In line with the strategic agenda, productivity gains are being achieved. Onsite, clear signs of better control of food costs and labor management are coming through, although some of this has been offset by continued wage inflation, particularly in North America. Offsite, the results of the Fit for the Future program to streamline, standardize and mutualize SG&A costs are also helping to reduce costs.

This productivity has been reinvested back into the business. The key focus has been to accelerate growth, not just on a short-term basis, but also on a medium and long-term basis. The increase in investments in Onsite Services has been directed towards widening and improving our digital offers, data management, IT upgrade, improving and digitalizing sales and marketing. In Benefits and Rewards, the focus has been on transforming the organization with a new sales model, digital marketing, data management optimization, innovative payment solutions, enhancing the platforms and infrastructures for the digital solutions of the traditional benefits business.

FISCAL 2019 PERFORMANCE

Consolidated income statement

Currency effect

Exchange rate fluctuations do not generate operational risks, because each subsidiary bills its revenues and incurs its expenses in the same currency. However, given the weight of the Benefit & Rewards business in Brazil, and the high level of the margins relative to the Group, when the Brazilian Real declines against the euro, it has a negative effect on the underlying operating margin due to a change in the mix of margins. Conversely, when the Brazilian Real improves, Group margins increase.

Sodexo operates in 67 countries. The percentage of total revenues and underlying operating profit denominated in the main currencies are as follows:

The currency effect is determined by applying the previous year’s average exchange rates to the current year figures except in hyper-inflationary economies where all figures are converted at the latest closing rate for both periods when the impact is significant.

As a result, for the calculation of organic growth of the On-site Services activities in Argentina, Peso figures for Fiscal 2019 and Fiscal 2018 have been converted at the exchange rate of 1€ = 63.975 ARS vs 44.302 ARS for Fiscal 2018.

Starting Fiscal 2019 Venezuela is accounted for using the equity method. Consequently, Venezuela is no longer included in revenue.

Revenues

Revenues by activity 

Fiscal 2019 consolidated revenues totaled 22 billion euro, up +7.6% year-on-year. This growth is the result of organic growth of +3.6%, a contribution from acquisitions of +2.6%, with in particular the full year impact of the Centerplate acquisition, and positive currency movements for +1.5%, helped by the strength of the US dollar more than offsetting the weakness in the Brazilian Real.

On-site Services

On-site Services organic revenue growth was +3.3% in Fiscal 2019, the highest rate of growth achieved in the last 7 years. All regions and segments contributed to this growth. 

The Fiscal 2019 KPIs were mixed: net new business was neutral with Development at 6.3%, compensating for Retention at 93.3%. Comparable site sales growth was strong at +3.1%.

• Client retention impacted by large Healthcare contract exit in North America

Retention was 93.3% in Fiscal 2019, down 50 bps relative to Fiscal 2018. Excluding a large contract exit in Healthcare North America, where profitability was inadequate, retention would have been up 10bps. This large contract will terminate in the first quarter of Fiscal 2020.

The primary focus of the new Healthcare management team in North America is to return to operational excellence on existing contracts and improving productivity, and where this is impossible closing the contract.

• Development strong in most regions

At 6.3%, the development rate was down 50 bps. This reflects a more active selection process to identify the contracts where the Group believes it can add value to the client while generating good margins. The Corporate Services strategy to improve the mix of signatures between large global accounts which ramp-up over years and small local accounts which ramp-up rapidly is also having an impact. In Healthcare, the new management team is regenerating the pipeline. In Sports & Leisure, as expected, development was low, due to the successful and substantial renewals program in North America which mobilized the teams. All other regions and segments have improved their development rates and Sodexo was chosen recently to manage hospitality for the 2020 Summer Olympics in Japan. The contribution of the Rugby World Cup and the Olympics will add around 100bps to comparable unit growth in Fiscal 2020.

• Solid comparable site sales growth

Comparable site sales growth of +3,1% is up 50 bps relative to Fiscal 2018, reflecting a combination of more inflation pass-through and solid cross-selling, offset somewhat by a net negative impact from the IFRS 15 implementation of about 20bps.

In Fiscal 2019, food services organic growth improved, while non-food services continue to perform well with high single-digit growth. Non-food services represent 34% of On-site Services revenue.

On-site Services Revenues by Region

Outside North America, representing 55% of On-site Services revenue, organic growth was +4.6%.

Business & Administrations

Revenues

Fiscal 2019 Business & Administrations revenues totaled 11.6 billion euro, with organic growth of +3.5%.

In North America organic growth was up +1.9% reflecting strong growth in Corporate Services, driven by same site sales growth, new contracts and solid retention, compensating weaker organic growth in other segments. Government & Agencies same site sales growth was impacted negatively by the renewal of the US Marines Corp contract, although the trend is improving progressively quarter by quarter, as the new contract ramps-up. In Sports & Leisure, organic growth was negative due to the exit of some less profitable contracts. The very substantial and successful contract renewal program this year mobilized the sales teams, resulting in low levels of new development. Energy & Resources remains volatile, quarter by quarter, and impacted by a tough comparable base in the first quarter due to a large one-off project in Fiscal 2018.

In Europe, sales were up +2.5% organically. Corporate Services continued to generate solid growth due to cross-selling, an easier comparative base in Benelux, and strong growth in southern and eastern Europe. Summer tourism in Paris was better than expected partially compensating a contract loss in France. Government & Agencies improved quarter by quarter during the year. Energy & Resources turned positive in the second half.

In Africa, Asia, Australia, Latin America, Middle East organic revenue growth remains strong at +6.8% for the year, reflecting strong growth in same site sales and new business in Corporate Services in all regions, progressive improvement quarter by quarter in Energy & Resources growth, and a successful Pan-American Games in August in Peru.

Healthcare & Seniors

Healthcare & Seniors revenues amounted to 5.2 billion euro, up +2.1% organically.

In North America, organic growth was +1.5%. The renewed management team is focused on improving execution and productivity, generating more cross-selling on existing contracts, passing through inflation and putting more discipline into the sales process. Retention was impacted this year due to the loss of several contracts and one large contract exit for which profitability has been an issue. These contracts started to fall out of revenues in the fourth quarter but will continue to do so in the first half of Fiscal 2020. Development has also been slow due to a much more selective process, impacting the pipeline of opportunities. However, the contracts signed are more robust. Seniors organic growth improved progressively quarter by quarter, after the loss of a significant contract in the first quarter.

In Europe, organic growth was +0.9%. The slow market dynamic in both Hospitals and Seniors and the resulting negative net new business in most countries has hampered growth. On the other hand, same site sales growth was strong, particularly in northern Europe. The pipeline is showing signs of improvement, particularly in the UK.

In Africa, Asia, Australia, Latin America, Middle East organic revenue growth has remained strong all year, at +17.4% despite the comparable base becoming more and more challenging quarter after quarter. The growth reflects new contract startups in Brazil and Asia, as clients seek to benefit from the transfer of the Group’s expertise, and particularly strong same site sales growth across the regions. The development rate has slowed down slightly during the year but remains well over the average for the segment.

Education

Revenues in Education were 4.3 billion euro, up +4.7% organically.

North America was up +2.2%, or +3.6% excluding the IFRS 15 impact⁴. While net new business from last year was neutral, same site sales growth has been solid, helped by inflation pass-through, some impact from extra working days, and solid summer works. The selling season in Fiscal 2019 remained broadly neutral, with higher retention but lower development.   

In Europe, organic growth was +12%. This strong performance is driven by solid prior year contract wins in the UK and the start-up in January of the new School contract in the Yvelines department, the biggest School contract ever signed in France, combining both food and facilities management services. 

In Africa, Asia, Australia, Latin America, and the Middle East, organic growth was +12.3%, despite an ever higher comparable base, resulting from the opening of several new School and University contracts in China, Singapore and India.

Benefits and Rewards Services

Benefits & Rewards Services revenue amounted to 892 million euro, up +4.9%. Currencies had a negative impact of -3.7%, due principally to the weakness of the Brazilian real and the Turkish lira. The scope change was negligible. Organic growth in revenues was strong at +8.5%, with a very strong first nine months, and then a slowing down against a higher comparable base in the fourth quarter.

*Including Incentive & Recognition, Mobility & Expenses and Public Benefits

Employee Benefit revenues were up +9.4% organically, compared to organic growth in issue volume (13.5 billion euro) of +7.1%. In Brazil, growth was strong in the first half, slowing down in the second due to the strong comparable base and economic environment which became progressively more difficult. Growth was strong in Europe.

Services Diversification was up +5% organically, or +18.7% excluding some portfolio rationalization in Incentive & Recognition, resulting from strong double-digit growth in Mobility & Expense and rapid development in Corporate Health & Wellness offers.

Operating revenues were up +8.4%, with solid growth in western Europe, double digit growth in eastern and southern Europe and strong growth in Latin America. Financial revenues were up +9.1% as a result of continued volume growth across the regions this year and an increase in interest rates in Turkey, Czech Republic and Romania, where we also had an exceptionally high float due to exceptionally high issuance at the end of the previous fiscal year. Growth was slower in the fourth quarter due to the decline in Brazilian interest rates.  

In Europe, Asia and USA, organic growth in revenues remains strong at +8.6%. This performance is due to a solid performance in western Europe, double-digit growth in eastern and southern Europe, and Turkey. Rydoo, the end-to-end travel and expense management system is growing very strongly as are the Corporate Health and Wellness offers.

Organic growth in Latin America was +8.3% reflects strong growth in activity in the first half of the year, following on from the strong pick-up in Brazil in the third quarter of Fiscal 2018. Growth slowed down in the fourth quarter due to the higher comparable base. Momentum in Mexico remained good and growth in Chile was strong.

Underlying operating profit

Fiscal 2019 Underlying operating profit amounted to 1.2 billion euro, up +6.4%, or +6% excluding the currency effect. Underlying operating margin was 5.5%, stable relative to the previous year, on current and constant exchange rates. The On-site Services margin was stable at 5% and the Benefits & Rewards Services margin at 31% was up 20 bps, or +110 bps, excluding the currency mix effect of the weakness of the Brazilian Real.

In On-site Services, underlying operating profit was up 6.4%, or 3.9% excluding the currency impact. Margin was stable. The performance by segment, excluding the currency effect, is as follows:

• Business & Administrations Underlying operating profit increased by +7.1% and the operating margin was stable at 4.2%. As expected the productivity generated by the business during the year was reinjected into more sales, marketing, digital spend, new offers to accelerate growth. The timing differences between investments and productivity gains, visible in the first half figures, were covered as expected, helped by some client renegotiations to establish better levels of profitability in some of the larger contracts started up recently, and in particular for the US Marine Corps contract (USMC).
• In Healthcare & Seniors the increase in Underlying operating profit and margin was respectively +6.3% and +20 bps, reflecting the enhanced discipline of the new team, particularly in North America. Productivity is improving due to the introduction of new systems to better manage staffing and food costs and generally, more rigorous management of the STEP operational KPIs. Inflation is covered by price increases.
• In Education, underlying operating profit fell by -5.7% and the margin by -70 bps due to previous year churn, particularly in North America and the start-up of many new contracts. The first half was also impacted by strikes in France. North American wage inflation has been passed through. However, wage inflation has continued in Fiscal 2019, absorbing most of the productivity achieved during the year.

In Benefits & Rewards Services, underlying operating profit and margin were up respectively
+12.7% and +110 bps, excluding currency impacts. This is due to the strong recovery in volumes and a relative stabilization of interest rates in Brazil, despite weakness in the last quarter. Investments are continuing, to implement the digital transformation of the organization.

Group net profit

Other operating income and expenses were 141 million euro versus 131 million euro in the previous year. Restructuring costs reached 46 million euro compared to 42 million euro in the previous year. While amortization and depreciation of acquired intangible assets were up against the previous year linked principally to the ongoing effects of the Centerplate acquisition and some intangibles impairment, this was nearly compensated by lower acquisition costs and net gains from the sale of subsidiaries, linked to the exit of some countries.

As a result, the Operating Profit was 1,059 million euro, up +6.2%.

Net financial expenses increased by 10 million euro, to 100 million euros essentially due to the absence of the exceptional interest payment from the French State on the dividend tax reimbursement of 7 million euro last year. The remainder is due to higher debt resulting from the acquisition of Centerplate in January 2018 and the share buy-backs last year and the related refinancing. A new 9-year sterling bond was issued in June 2019, partially offsetting a repayment of a tranche from the 2014 USPP in March 2019. Though they have reduced the Group’s short-term funding from commercial paper at negative interest rates, these operations have ensured that the average debt maturity remains over 5 years and provided a hedge for sterling cashflow. The blended cost of debt was 2.6% as of August 31, 2019, compared to 2.5% at the end of Fiscal 2018.

The effective tax rate returned to a more normal level at 29.0% after the exceptional 27.1% in Fiscal Year 2018 which benefited from a positive one-off in France from the reimbursement of the 3% contribution on distributed dividends over the period 2013-2017. It now fully reflects the positive impact of the tax rate reduction in the USA.

The share of profit of other companies consolidated by the equity method was 4 million euro. Profit attributed to non-controlling interests was 21 million euro, after 13 million euro in the previous year due notably to the contribution from the joint venture managing the Rugby World Cup.

As a result, Group net profit was 665 million euro, up +2.2%. Underlying net profit amounted to 765 million euro, up +8.3%, or +7.8% excluding the currency impact, adjusted for Other operating income and expenses at a normalized tax rate.

Earnings per share

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