Compass Group PLC

Dominic Blakemore - Group Finance Director Richard Cousins - Group Chief Executive

Jamie Rollo - Morgan Stanley Jarrod Castle - UBS Vicki Stern - Barclays Nick Edelman - Goldman Sachs Jeffrey Harwood - Oriel Securities Ian Rennardson - Jefferies David Phillips - Redburn Tim Barrett - Nomura

Good morning ladies and gentlemen and thanks for coming to our 2014 Full Year Results Presentation. This morning we have the usual agenda and of course there will be plenty of time for questions and answers at the end.

Before Dominic takes you through the financial detail I would like to begin by making a few comments on the business highlights. We have delivered another strong full year performance with organic revenue up by 4.1% and a further 10 basis points of margin expansion.

Importantly our earnings per share is up by 10.5% and we’re proposing to do the same with the dividend. The consistency and the sustainability of our cash flows are enabling us to invest in the business, create a more efficient balance sheet and reward shareholders.

In July, we returned a £1 billion of cash and the £500 million share buyback announced last November is ongoing. And on that positive note I will now handover to Dominic.

Thanks Richard. Good morning everyone.

First let's take a look at revenue organic growth for the full year was 4.1%, the strengthening is starting during the year has given rise to 6.9% negative impact from currency translation. So overall reported revenue declined by 2.8%.

We have again delivered a strong performance in North America with growth of 6.8%. This has been driven by high levels of new business across all sectors and excellent retention rates.

Europe and Japan delivered an organic decline of 1.5% which is a good improvement on the 3% decline of the previous year. Growth in the emerging markets with organic growth of around 12.5% is driven by strong levels of new business and the ongoing structural shift to outsourcing.

The expected slowdown in the Australian mining sector moderated the growth in that region which was 8.1%. Reported operating profit at 1.245 billion is lower than 2013 reflecting the £89 million negative impact caused by the significant strengthening of sterling in the year.

Acquisition and disposal activity which has been largely focused in North America in small to medium sized infill deals in-line with our strategy contributed a net £4 million to operating profit. I’ve already talked about the currency impacts on 2014 results, looking forward however if the current stop rates were to continue through 2015 we would expect to positive currency impacts around £26 million on the 2014 profits.

Taking a look at operating profits and a margin on a constant currency basis. North America has made further good progress with 7.9% profit growth and with significant investments in growth we have delivered five basis points of margin progression.

Despite continued revenue declines good progress on the cost reduction plans and ongoing operational efficiencies in Europe and Japan have allowed us to deliver an increase in profits and further margin progression of 20 basis points. Operating profit was 7.6% in fast growing and emerging with flat margins reflects the balance between revenue growth, delivery of efficiencies and reinvestments in management and infrastructure.

Overall we have delivered a 5.9% increase in constant currency operating profits, a move to group margin forward a further 10 basis points to 7.2%. Let's look now at the income statement, focusing on the underlying columns, the net finance cost has increased by £9 million to £86 million.

This reflects the additional debt required to finance the £1 billion return of cash. For 2015 we expect the cost to increase to around 150 million reflecting the full year cost of the additional debts.

This equates to an effective interest rate of around 4% on gross debts. The reduction in the underlying tax rate 25% largely reflects the fall in the UK corporate tax rate and we expect the P&L rate to continue to average out around 25% in the short to medium term.

So overall we have delivered an underlying basic earnings per share of 48.7 pence. If you now look at the progression in underlying earnings on a constant currency basis, you can see the 6% increase in operating profits convert to 7% to the attributable profit level with the increase in the net finance cost broadly offset by the benefits of the tax rate reduction.

And combined with the reduced number of shares following the buyback programs we have delivered a 10.5% increase in constant currency EPS. We have delivered another year of good free cash flow performance generating £741 million.

Before the £58 million of cash outflow in relation to the European exceptional net of tax. And there are three areas which are holding back year-on-year progress on cash flow.

Firstly the strengthening of sterling against most currencies reduced this year's operating profit. Secondly we delivered an exceptionally strong performance in working capital in 2013, so it's all in '14 is from a tougher base.

We continue to expect annual working capital movements to be brought to neutral. And finally tax, the outflow is £261 million represents an underlying cash tax rate of 23% compared to 22% last year.

So overall we have good progress in generating free cash flow over the last few years and we remain positive about the future. If you now take a look at the balance sheet, opening net debt was £1.2 billion, we spent £110 million on M&A and £444 million on dividends.

The purchase own shares includes the completion of the £400 million buyback program which we announced in November 2012 and around a £75 million is the current £500 million program which is on track to complete in the middle of 2015. And of course there is a £1 billion of cash that was paid in the end of July.

So closing net debt was 2.3 billion equivalent to net debt to EBITDA ratio of around 1.5 times. We have clear priorities on how we use our strong cash flow.

We will continue to invest to support the growth agenda and expect CapEx to be around 2.5% of revenues. Our strategy on M&A is unchanged.

Our strong preference is for small to medium sized infill acquisitions which will help accelerate growth. We remain committed to growing the dividend in-line with constant currency earnings and after making these investments we will maintain efficient balance sheet to return to shareholders.

Our aim is to retain strong investor grade credit ratings and we believe that the targets net debt to EBITDA of 1.5 times is consistent with this. We returned £1 billion in cash earlier this year which will have a 4% earnings per share benefit in 2015 and we continue to execute the £500 million buyback program.

So to conclude as you can see from the slide we did have a strong financial performance across the Board. And with that I will hand back to Richard.

Thanks Dominic. Over the next 20 minutes or so I will cover our strategy, a review of performance by region and take a look at the significant opportunities for growth we see across the group.

Let's start with our business model, it remains clear and unchanged. Top of our agenda is growth and we continue to put more focus on resources behind both MAP 1 and 2 driving new business and retention and consumer sales.

Our obsession with cost that’s MAPs 3, 4 and 5, food, labor and overheads is never ending and there are still considerable opportunity to improve margins, where investors is required to support growth and create value for our shareholders by delivering a balanced package of EPS growth, a strong and progressive dividend and returns of surplus capital where that’s appropriate. It's a proven and sustainable model.

Our strategy is also clear and unchanged. Food is our core competent accounting for over 80% of revenues and we take an incremental approach to support services.

The contract food service market is estimated a bit more than £200 billion. There is a large structural opportunity for growth given that over 80% is still operated by either in-house providers or small regional players.

Finally our business has a balance and exciting geographical spread with an excellent business in North America, a healthy turnaround in Europe and Japan and whilst Australia is tough we’re seeing a clear acceleration in the emerging markets. 2014 was a really important year for us, given our strong cash flow and cautious approach to M&A we have reevaluated our balance sheet strategy and returned a £1 billion of cash to shareholders.

In parallel we’re increasing our focus on organic growth and our performance in the second half of the year and especially in Q4 is encouraging. However we will keep our relentless focus on margin.

We’re targeting strong growth with discipline. Let's look at our revenue performance in 2014 which is starting to reflect tis increased focus on growth.

New business grew 8.5% driven by strong performance in North America and emerging markets. We have 6.5% of loss business which includes the impact of the planned exists in Europe and the slowdown in Australia.

Like-for-like revenue growth of 2.1% reflects price increases and generally flat volumes. So overall organic revenue growth was 4.1%.

We never get bored of margins, the group's 10 basis points expansion in the year was derived from a complex mixture of positives and negatives. The principle headwinds were a normal rate of food and labor inflation and some reinvestment cost to support growth.

This includes additional sales and marketing resources and higher mobilization costs. However we remain relentlessly focused on offsetting these challenges through cost reductions and efficiencies, improving overhead leverage and sensible price increases.

Let's now take a look at each of our regions in turn, our largest one and the group's core growth engine is North America where we had another excellent year. Organic revenue growth was 6.8% driven by strong new business and especially high retention with momentum building into the final quarter.

Volumes remain broadly flat. We continue to make good progress on efficiencies and on leverage in the overhead base.

Local management reinvested part of the additional profits to support the high levels of organic growth while also delivering a further five basis points progression on the operating margin. Once might think the market is quite mature, we’re really excited about the growth opportunities with a solid economic and perhaps just as importantly a huge market still to play for.

We are continually innovating and over the next few slides I will take you through some examples at how we’re sustaining momentum in this key region. The refresh program where we invest an existing unit outside of any contractual requirements to drive sales and solidify our client relationship.

It might only imply an inexpensive lick of paint or a more significant refurbishment in the layout, point of sale, signage and furniture. The program usually increases like-for-like volumes by around 5% and has returns of more than 20%.

It's been rolled out so far in 750 units with an additional 400 in the pipeline. It's a very simple but really positive program.

Another exciting piece of innovation is Avenue C, an unattended vending solution. It's a micro market convenience store that requires no labor.

We have over 1000 units installed thus far in accounts such as Microsoft and Boeing and we're opening around 60 new units a month. We're also expanding the range of services with existing clients.

Now I've talked about Mount Sinai before. It's a healthcare system in New York made up of seven hospitals and a school of medicine where over the last 12 years, revenue has expanded from $4 million to $70 million.

Services now include patient and retail dining, office coffee and vending, as well as patient transportation and light maintenance. We're also pleased with progress in Canada where there is also a large market opportunity.

Our own business has historically focused on DOL; that's defense, offshore and remote. However, best practices developed south of the border have been adapted to local requirements and as a result, growth is accelerating and is more balanced across different sectors.

The Canadian business has also improved its margins by integrating its food procurement with the U.S. to leverage scale and, of course, reduce costs.

Moving to Europe and Japan, we're encouraged that the rate of revenue decline has halved from 3% to 1.5%. This was largely due to an improved rate of contract wins and greater focus on retention.

Margins improved by 20 basis points for the full year. We drove significant efficiencies in purchasing and labor which were partly reinvested in sales and retention to return the top line to growth.

As a result, margin progression in the second half was 10 basis points which is close to what we would expect going forward. Although the economies in our Europe and Japan region are mature, the opportunity for outsourcing is still significant and so now that we have restructured the organization, we are changing our priorities from cost to growth, this is important.

However, we need to be clear. Whilst some European economies have shown some signs of stabilization, the picture remains very mixed and many of our clients continue to reduce their costs and hence headcount.

We're still noticing this and remain cautious therefore about like-for-like volume trends. So our focus is on MAP 1, we’ve increased sales and retention resources and improved processes.

There is no doubt that our performance is now improving. Put very simply, we're transferring best practice into Europe and it's beginning to work.

In the fast growing and emerging markets, we delivered good growth throughout the year with organic revenue up 8%. Despite the mixed economic backdrop, growth in the emerging markets accelerated nicely with strong levels of new business offsetting the slowdown in Australia.

Operating margins improved in H2 and were flat for the year as a whole, as we continued to reinvest in MAP 1 initiatives in the region. Emerging markets now account for around 70% of the region and we're excited by the opportunities for outsourced foodservice.

Let me now take you through each of the sub-regions in a bit more detail. Let's begin with CAMEAT, Central Asia, Middle East, Africa and Turkey.

Despite a tough trading environment, we had good growth in Turkey with strong new business and like-for-like revenue growth. In the UAE, we enjoyed a healthy retention rate and have successfully extended the range of services provided to existing clients.

We also have an exciting pipeline of new contracts as the region starts to prepare for the 2020 Expo in Dubai and in South Africa, we saw good growth and won a large contract to provide food to Netcare, a healthcare system with 52 hospitals. Performance in Asia Pac was obviously impacted by the slowdown in Australian commodities.

In response, we’re taking swift and decisive action to restructure our operations and reduce costs. We're increasing our focus on innovation and best practice and focusing on other sectors where we have already had some encouraging contract wins.

The rest of the region enjoyed good revenue growth. The trend to outsourcing seems to be accelerating driven by an increased focus on health, safety and of course governance.

We saw excellent growth in both India, where we’ve won food service contracts with Intel and Capgemini and in China, where we have won contracts with Tencent and the International School of Beijing. I've just come back from a LatAm tour and I must say that despite a volatile economic environment our business in the region is beginning to look rather interesting.

In Brazil, we grew in all sectors. New contract wins were driven by first-time outsourcing and we’ve a strong pipeline of projects.

Retention improved and helped offset soft like-for-like volumes. We are the market leader and our offer is increasingly competitive as the business gains scale and becomes more efficient.

Mexico and Colombia are markets with significant potential, but our performance in these countries is still work in progress. In Argentina, despite the really challenging economy, we won good new business and we’ve strong contractual pricing adjustments to deal with the difficult inflationary environment.

And our offshore and remote sector has also performed well, particularly due to growth in Chilean copper mining. And so to summarize, it's been another really good year with solid organic revenue growth and margin progression.

Our business in North America is in great shape and growing strongly and we're seeing a clear acceleration in the emerging markets and the trends in our European business are improving. We optimized our balance sheet and returned £1 billion to shareholders in addition to our normal dividend and buyback program.

And we're increasing our focus on strong growth, but we will always maintain our discipline. Thank you and it's now time to take your questions.

If in the usual way you could wait for a microphone, state your name and only one question at a time, please.

Jamie Rollo from Morgan Stanley. Just one question on the increasing emphasis on new sales in particular MAP 1.

Could you talk a bit about what that might mean for mobilization costs and the sales margin trade off and also, what the timeframe might be about those new contract wins starting to accelerate, how long it really takes from now? Thank you.

We really started investing more behind growth 18 - 24 months ago and it takes a while before you get rewarded for that. And I think we're seeing nice trends in Europe, Japan and the emerging markets.

And even in the U.S., we've put more resource there even though that's had a great track record for many years. We're not going to take our focus off margin.

We're determined to push margins forward. But I think as you implied in your question, there is a bit of a tradeoff and we've obviously made the decision that the way we're beginning to run this business with more emphasis on growth and some emphasis on margin rather than just on margin is a more balanced, sustainable and exciting model.

So it is a significant shift in the way Compass is being run and personally, I'm very excited about it.

Jarrod Castle from UBS. Just on the Avenue C and the vending machines, I take it the margins are higher.

Can you give some scale there in terms of the magnitude? And also can you talk maybe a little bit about the returns from that?

Thanks.

Yes. The margins are not necessarily higher.

They're good, solid vending margins. I think Avenue C is a great small case study.

I must say, when I saw it five years ago I said this will never work. I was completely wrong.

So scale would be about $200 million, I think of that order. It's growing at double digit, solid margins and like most of the CapEx we invest, it makes good returns I think of the order of about 20%, but I would need to check that.

I mean within the vending space, we also have a business called office coffee which tends to share a vaguely similar logistical framework with vending. We’ve 84 vending branches across the U.S.

and they often co-locate with office coffee where we deliver coffee right into offices, particularly in urban areas and so on. That's growing incredibly well and making great returns.

So like everything else we do, no rocket science, but good, sensible innovation can accelerate your growth.

Vicki Stern from Barclays. Just a question on the U.S.

So you're still obviously not seeing any volume recovery coming through. Just I suppose firstly, curious as to your views on that and does your guidance of 5.5% to 6% still assume no volume recovery?

And final point on that is just is there still a 25% drop through if that does come back? Thanks.

Yes. It's a complex debate is that one and it's mixed.

Some of our clients, as you know we're very strong in technology in Silicon Valley and so on and we are seeing good like-for-like there. But financial services, where we're probably slightly overweight is still not enjoying strong like for like.

So I think overall, the position is roughly flat. We had a good couple of months so does that signal it's getting better?

I don't know. I don't think we should get carried away.

You mentioned 5.5% to 6% as a top line. I think that remains a sensible medium term target.

I figure we might do a little bit better than that in H1. We'll have to see.

We have had a remarkably strong period for retention and it can be a bit lumpy, so we would assume that we're going to lose the odd contract. We've been very, very strong for recent months.

But big picture, we feel very bullish about North America. The propensity to outsourcing is really healthy and we're seeing that in healthcare.

I mean healthcare is a competitive market, but we’re seeing exciting growth, but we are in B&I and vending and sports and leisure and all the sectors. So I think it's the balance, it's the scale, it's the market leadership.

Everything is coming together in North America to make it a terrific business.

Nick Edelman from Goldman Sachs. Just one question on procurement, please, just with respect to your comment that you further -- well, you've integrated Canada into North America.

Can you just remind us where you are in Europe in terms of shared procurement and whether there is anything to do there as well, please?

Yes. I mean really in Europe, our procurement largely remains on a national basis.

We've still got lots of opportunity to roll out many of the processes that we utilize in North America. We've recently made a small acquisition in the UK which will allow us to go on a journey to replicate in some way the food buy model in the UK.

And there is some regional or continental procurement that we're slowly moving towards as well. So it's not of the scale or order of magnitude of the U.S., but we certainly see more opportunity to procure more smartly in Europe.

Jeffrey Harwood from Oriel. I've got two questions.

First of all, in terms of the better trend in food price inflation, do you see that providing much benefit to you this year? And secondly, on the outlook for Australia, has anything changed since the last update?

And could that business bottom out this year?

Yes. In terms of food price inflation, I think we actually saw probably a more benign year in 2014.

As we look forward into 2015, really if you take it by region, in North America we anticipate the food cost inflation of the order of 2% to 3% which is really the historic average. And predominantly that's being driven by quite high protein prices at the moment.

So we anticipated normal inflation in North America. In Europe and Japan, we think inflation is coming off a touch, but it's still in the system, so probably 1% to 2% across all of our markets.

And then in fast growing, emerging, it remains mid-single digit. It is different by country and some of the markets are suffering higher inflation than others, but mid-single digits in the round is about right for SG&A.

In terms of Australia, I mean the truth is we had 10 great years and we'll probably have to see some readjustment there. So I think it could be tough for a couple of years.

I would not expect it to bottom yet. But I think as I said in my script, it's really important as to how we react to that trend.

We could mope and feel sorry for ourselves or we could get on an airplane, as Dominic and I have done several times in the last few months. So I'm delighted with progress in Australia.

We’re reducing our costs very sharply.

Ian Rennardson from Jefferies. In terms of M&A activity, what sort of criteria are you looking at now for something that might be a bit larger?

And you've talked a little bit about vending today. I seem to remember you got out of vending in a big way a few years ago.

Any thoughts about making a move back?

No. We sold our European vending business which was largely high street and therefore not appropriate to our model.

We've stayed in U.S. vending because that's client based and it gels very nicely with our core B&I, but also healthcare and education and so on.

So we like North American vending very much and are excited by that. Sorry.

What was your first question?

With regard M&A.

So M&A, no change. We keep looking, we keep talking to people but as you know we’re not minded to do the big, glamorous stuff.

That's not our style. We continue to look at the small to medium.

Its two years on the trot now we've only spent roughly £100 million. So we're going to keep our financial discipline, same criteria that we've discussed many times before.

We generally want to get ahead of WACC by the end of year two, that remains our financial model. The key strategic element is it's got to add something to our business.

It's probably going to be in food. It may occasionally be in soft support services.

Keep looking, but I think the fact that we're more focused on organic growth is an increasingly positive part of our model. It's much lower risk.

We get better returns and it seems to be accelerating. What's not to love?

David Phillips from Redburn, could I just ask a couple of slides in the main statement you've referenced support services and amongst that slide you talked about doing other things with the customer. Do you think you can do that whilst sustaining the same level of margin that you get in food service?

And maybe in a couple of years' time if that gets bigger will there be another bar on your bridge showing mix effect so faster revenue growth but maybe a little bit lower profit?

No. Our approach to support services is a bit tighter today than it was actually two or three years ago.

We did do a number of acquisitions and we backed off that. There are parts of the world where we think support services is excellent and it works nicely with our food.

Equally, there are other countries, other sectors where we don't think that model is appropriate. So I think you should expect support services to remain roughly where it is.

I think it's just about 10% of pure support services then 6% or 7% when we mix it up with food. I think that will continue.

We make good, solid margins in support services, happy with it. But our core competence is food.

Tim Barrett from Nomura. In the statement, you talked just a little bit about France and Italy and volumes.

Is that a concern or did you just flesh it out to be complete?

Yes, it is a concern and it really provided the substance for my comments in the script about parts of Continental Europe are pretty tough. Many corporations are reducing headcount and we're noticing that in our restaurants.

France and Italy would be two good examples of that. So there is nothing we can do other than make sure our costs remain very low and I think the restructuring program we announced 2 - 2.5 years ago has gone particularly well.

We'll keep focusing on our costs. But as we've explained, we're also now putting more resources behind MAP 1 driving more contact wins and retention and that seems to be working.

So if you take those two countries particularly France, our MAP 1 performance in France is really good. Same store like-for-like volumes are quite tough.

Other expenses, there is mere 5 million reduction, whereas in labor and cost of inventories [indiscernible] it's towards a couple of hundred million, obviously because of currency. Can you just talk about what didn't happen in other expenses by comparison to the other two main cost categories?

So, Nigel, you've won the Nigel Hicks award for the most detailed question so far. Actually, you've won it every year.

Dominic?

Thank you, Richard. Where are you calling other expenses from?

Is that above the unit overheads?

It's on page 31 of the -- it's in the breakdown of costs that you've got there on note two, I think it was.

I think we're within 10 seconds of saying we'll be delighted to talk to you afterwards, Nigel. How does that work?

Yes. Within other non-cash expenses, we've got largely amortization of intangibles and general costs, so I think it's difficult to call that compared to the other numbers.

Delighted to talk to you afterwards, Nigel. Next question, please.

Any more questions? Jamie?

[Technical Difficulty]. U.S.

labor, given Obamacare and minimum wage and recently some more unionization pressure in the fast-food segment. Any change to your thinking on labor costs in North America?

Yes. It is a good point because it is demanding and I think we need to -- cost reduction we talk about it as if it's easy.

It's often very hard work. I think our American colleagues are addressing this extremely well and effectively.

It is a headwind, but personally I rather like headwinds because I think we should always do better than the in-house people and our competitors, but it is tough, but we're dealing with it well.

[Technical Difficulty]. Fast-growing and emerging markets and the focus there, there is obviously quite a lot of minerals, oil and mining focus.

And whilst obviously you're driving the business through a trend towards outsourcing, how concerned are you about general commodity trends and that business could start to slow down significantly?

Yes, it's interesting. Australia, obviously, we have noticed that significantly, but in other parts of the world, Latin America, South Africa, the Middle East, Azerbaijan, Kazakhstan off the South East Asian coast and so on we're accelerating.

And actually our business is beginning to look more balanced. Perhaps in our offshore and remote space we were a little too dominated by Australia and I think the inevitable slowdown has forced us to be more entrepreneurial in other parts of the world.

So strangely, we feel more positive today than we did a year ago despite the obvious price falls that you describe. Any more questions from the floor?

Because in a minute, we'll go to the ether to see if there's anybody on the phone.

It's Jarrod again from UBS. Just following on from Jamie and, I guess, Jeff's question about inflation, wage inflation.

Historically, you've got indexation clauses. You're able to pass it on, it helps the top line.

Turning the question on -- the previous question on the head, is it a negative in a world where wage inflation is actually very low or real wages actually in decline?

I don't think so. We tend to pay a small premium to minimum wage, therefore related to minimum wage which tends to have political intervention and therefore one does see fairly steady inflation in our labor bill.

I don't think it's a doubter at all. I think it's pretty consistent and I think we've got a good track record of managing it.

So we're not concerned one way or the other. Any more questions?

Any calls on the phone?

Okay. If there is no further questions, thank you for your time everybody.

Have a good Christmas, if it's not too early to say that. Thank you.