Sodexo S.A.

Virginia Jeanson - IR Denis Machuel - CEO Marc Rolland - CFO

Simon LeChipre - Raymond James Jamie Rollo - Morgan Stanley Julien Richer - Kepler Cheuvreux Richard Clarke - Bernstein Angus Tweedie - Bank of America Merrill Lynch Tim Ramskill - Credit Suisse Najet El Kassir - Berenberg Sabrina Blanc - Societe Generale Geoffrey d'Halluin - Deutsche Bank

Thank you very much. Good morning everyone.

Welcome to this first-half fiscal 2018 results call. On this call today are CEO, Denis Machuel, and CFO, Marc Rolland.

As usual, the slide and press releases can be downloaded from our Web site, and you'll be able to access this call on our Web site for the next 12 months. The call is being recorded and may not be reproduced or transmitted without out consent.

I remind you that this presentation contains statements that may be considered as forward-looking statements and, as such, may not relate strictly to historical or current facts. These statements represent management's views as of the date they are made, and we assume no obligation to update them.

You are cautioned not to place undue reliance on our forward-looking statements. I remind you that the next announcement will be the third quarter figures on Thursday, 5th of July.

And please get back to the IR team if you have any questions after the call. I now turn you over to Denis Machuel.

Denis?

Thank you, Virginia, and good morning everyone. This is Denis Machuel, and I'm here with Marc Rolland, our CFO.

We spoke to you a few weeks ago when we announced unedited [ph] results and our revised guidance for the year. And Marc and I will provide you today with more details on the results themselves, and provide clarity on how we view the second-half of the year.

We will outline our action plan to achieve our fiscal 2018 objectives, and secondly, how we will embed the improvements as part of our long-term strategy to return Sodexo to sustainable growth, which we will talk about in greater detail at our Capital Markets Day in September. But let's start with some of the highlights of the first-half.

As we announced two weeks ago, Sodexo delivered an organic revenue growth and an underlying profit margin below our previous expectations. Organic revenue growth was 1.7% or 1.9% excluding the impact of the change in calendar from weekly to monthly reporting in North America.

And this represents one less day in the first-half. The underlying profit margin was 6.1%, which is down 70 basis points, excluding the currency mix affect of the weakness of the Brazilian real.

This performance is disappointing, and having recently taken up the position as CEO, I want to assure you that we don't waste any time as we are already implementing a clear set of actions that will address these issues both in the short and medium-term. While the areas of underperformance are clearly a focus for us as a management team, I would also like to stress that business overall is financially strong with €125 million of operating free cash flow for H1.

I'm happy with the markets in which we operate, and Sodexo's position within those markets. We are well placed to win more business and to grow sustainable as long as we operate efficiently and maintain a relentless focus on clients.

So now let's look in more detail at revenues at On-site Services and Benefits and Rewards. So On-site Services revenues rose 1.6%.

I'd like to highlight that excluding North America, On-site revenues were up 4.4%. Business & Administrations benefited from a modest pickup in France and ramp-ups in the Energy & Resources business.

And overall this performance more than offsets a decline in education and flat sales in healthcare. Benefits and Rewards Services revenues grew 2.9% on an organic basis with strong growth in Europe and the USA.

A weak performance in Latin America was due to a decline in interest rates in Brazil and continuing high unemployment. Now, in terms of profitability, underlying operating profit was €627 million, which is down 15% or minus 7.4% excluding the impact of foreign exchange.

As I mentioned earlier of underlying operating margin, was 6.1%, which is down 80 basis points or 70 basis points when we exclude the currency mix affect of the weakness in the real in Brazil in particular. Our decline in operating profit is attributed to a mixture of factors, some that we had anticipated, and some that we hadn't.

We had anticipated some margin decline due to the deconsolidation of several businesses, and due to lower interest rates in Brazil. And I remind you we were committed to reinvesting the savings from the adaptation and simplification program into accelerating investments in new offers, establishing new growth initiatives, investing in sales and marketing, and enhancing our digital capabilities.

And I can assure you that all this has been ongoing. What we hadn't anticipated was the margin decline from education and healthcare businesses in North America despite the fact that we had anticipated weak sales performance.

So the poor execution of planned measures to increase efficiencies that were meant to compensate the weak sales this year has created a shortfall of about 25 basis points. And on top of that a further shortfall of around 25 basis points came from the slower-than-expected ramp-up of profitability in a small number of large contracts.

The positive elements are that net profits are up, helped by much reduced restructuring costs, and an exceptionally low tax rate. Our balance sheet remains healthy with a net debt ratio of 1.1 times or a gearing of 49%; thanks to our strong free cash flow of €125 million.

In the first-half, we spent €674 million on acquisitions, with the largest being Centerplate, as you know, which I can confirm is being integrated really well into our organization. Since January, there are already significant synergies identified and implemented.

The sales team are working hard and well together, and more and more food purchasing synergies are being achieved as we speak. Overall, net acquisitions contributed 1.3% to revenues.

And regarding M&A, we have the means to remain acquisitive, but we will examine any potential target with rigor and discipline to ensure that we don't disrupt the action plans which are the key priorities for us at present. And furthermore and underscoring the confidence in the group's prospects, the Board approved on Tuesday a €300 million share buyback program which we will aim to execute by the end of this fiscal year.

So, I'll now turn over the Marc to talk more about the financial performance. Marc.

Yes, thank you, Denis, and good morning everyone. So I'm very pleased to be here with you this morning.

Please note that, as usual, we have defined all items as if performance measures in the appendix. In particular, I would like to highlight that our P&L has changed to include an underlying operating profit.

And you will find the detail of the other income and expenses which are reported below the underlying operating profit in the notes together [indiscernible]. If we move to the P&L on slide 10, the revenues are at €10.3 billion, they were down 3.2% or up 3% excluding the currency effect.

The currency impact was significantly higher, accounting for between 6% and 9% at each line of the P&L. I remind you that this is a translation impact only as all our cost and revenues are local.

So I shall focus on performance excluding currency. The underlying operating profit reached €627 million, down 7.4% excluding currencies.

As previously noted, the margins are down 70 basis points. Denis has already explained the shortfall and we shall go into the detail by segment in a minute.

Other income and expenses amounted to €73 million, which is well below the €153 million from last year. As you remember, last year we had the final tranche of the cost of the adaptation and simplification program.

This year the major element are €7 million of restructuring cost, €31 million of differentiation and write-offs of intangibles such as client relationships and rent, €18 million of losses associated with [indiscernible] changes, and €14 million of acquisition cost, in particular Centerplate. As a result, operating profit was €554 million, up 4.1% excluding the currency impacts.

Net financial expenses decreased by €12 million to €44 million for the first-half fiscal '18. The blended rate for outfits at the end of the period was 2.2% broadly stable.

Last year's first-half included an early redemption indemnity of €11 million, and this year there is a €7 million one-off interest income related to the reimbursement of past dividend taxes. The effective tax rate fell to 25.9% from 32.6% in the first-half last year.

This was due on the one hand to a positive one-off of €43 million from the reimbursement of past historical dividend taxes in France. And on the other hand, to a negative one-off of €23 million linked to the effect of the realignment of different taxes as well as the deemed repatriation tax in the USA resulting from the tax reform.

The effect of the lower tax rate kicks in progressively forward given that we should have a blended rate for this year due to our year-end in August. Turning to cash flow on slide 11, operating cash flow grew strongly on last year to €650 million from €523 million last year mainly due to substantially lower tax outflows as I have just mentioned, the exceptional dividend tax reimbursement but also the cashing in of some sales here receivable.

The change in working capital was broadly flat relative to last year reflecting the typical seasonal impact. Next CapEx was slightly higher.

As a result of all these factors, free cash flow grew from €30 million last year to €125 million. Net M&A spend in H1 was double the amount for the whole of last year at 674 million.

Last year's dividend increase of 14.6% is reflected in the dividend paid out this past February of 411 million. As a result, our net debt grew nearly €1.1 billion during H1.

Despite the seasonally higher level of debt at the end of the first-half and the significant amount of spend on acquisitions since year-end, the group's financial position remains very strong with a net debt ratio 1.1 time and gearing of 49%. Operating cash stood at nearly 2.4 billion.

Of which, 2 billion is related to the Benefit and Reward activities. Slide 14 shows a significant currency impact due in particular to weakness of the dollar, the real, and to a lesser extent sterling relative to the euro.

Scope changes were +1.3% which is a net of acquisition contribution and the disposable of Vivabox and entities in the region Africa, Middle East. This was increased progressively in Q3 and Q4 as a negative effect of scope changes diminishes and as the contribution of Centerplate will be for a full quarter from Q3 onward.

Organic growth was 1.9% excluding the 53rd week effect. On-site services were up 1.6%, and Benefits and Rewards is up 2.9%.

On slide 15, let me just make sure that 53rd week is clear for all. Last year, we had [indiscernible] and we had 370 days in the year in comparison to your fiscal year '16 which has 52 weeks or 364 days.

This year is a normal calendar year and 365 days and it compares to a prior year the fiscal year '17 which had 370 days. We are therefore down five days versus prior year.

Quarter by quarter, the 53rd week impact gives us one less day in Q2, one more day in Q3 which means flat versus last year after nine months, and then five less days in Q4 and for the full year. On top of this, we have classic calendar impact which vary from quarter to quarter and particularly in schools and universities.

And it can have significant impact when holiday change slightly. And to this point, North America universities will be affected by five less board days in Q3 due to the calendar shift.

Let us now go into the detail by segment and region. Business and administration represents 54% of our onsite services revenue.

B&A organic growth was up 4.5% and is positive in all regions. North America was up 2.7% boosted in particular by increased activity in airport lounges as well as significant project work in Q1 and solid same site sales growth.

In Europe, which represent 50% of B&A revenue, recovery of tourism in France is definitely there. We are pleased also with the growth in government agencies.

Also, we have not yet felt the affect of the loss of the STI account in the U.K. which will start to have a significant impact in Q3.

Energy & resources continue to remain very weak in Europe, down 17%. And we just lost a contract in Norway, which means that it is likely to stay very negative for a while.

We had very strong performance in Africa, Asia, Australia, Latin America, and the Middle East with organic growth of 12.4% reflecting the ramp up of new contract signed last year in energy & resources and good development in same site sales in most of the countries in corporate services. Moving now to Healthcare & Senior; revenues remained stable at €2.4 billion.

In North America which is 66% of the business, revenues declined by 1.6% due to a lack of new business. While retention remained stable in H1, same site sales have been much weaker than expected.

Given the current level of new business and several recent losses in the [indiscernible], we expect revenue performance to deteriorate rather than improve over the next few quarters. In Europe, revenues were more or less stable, down 0.2%.

Contract wins in the U.K. did not compensate site closures elsewhere.

However, retention and same site sales growth are good. Grow in Africa, Asia, Australia, Latin America, and the Middle East was particularly strong at +16.6% with a lot of site openings in Brazil and solid growth in Asia.

Looking now at the next slide, Education revenue for the first-half fell 2.7% on an organic basis. I will remind you that North America accounts for 77% of this segment.

And this is where the performance is poor due mainly to a very low prior year retention. As a result, organic decline in sales in North America was 4.1%.

Same site sales growth remained solid. And the retention rate in universities is improving although I will remind you we are only just entering peak sales season [indiscernible].

In Europe, organic growth was +2.7% with strong growth in U.K. schools due to new contract and particularly in the private sector.

France and Italy benefited from two extra school days each which boosted same site sales growth in Southern Europe. In Africa, Asia, Australia, Latin America and the Middle East, organic growth remains strong at 15.8% with a ramp up of several new school contracts in China, Singapore but also India.

Turning to Benefits and Reward, organic growth was 2.9% up and issue volume up 5.6%. Clearly, published revenue was severely affected by currencies and the effect of the disposal.

I will remind that Vivabox is very seasonal business around year-end. As a result, the 5.1% impact on H1 revenue will be less significant in H2.

In Europe, Asia, U.S.A., organic growth in issue volume and revenue was strong despite a solid comparative base in the previous year at +5.9% and +7.1% respectively. This performance was driven by solid growth in issue volume in most countries in Europe and in particular by double-digit growth in Romania, Czech Republic and Turkey.

Activity in India was temporarily affected by the mandatory transfer from paper to card and the loss of a large client. Revenue growth was stronger than issue volume growth due to the solid growth in the incentive and recognition activities particular in the U.K.

this period. I will remind you that incentive and recognition activities do not generate issue volume.

In Latin America, revenues fell 2% while issue volumes showed growth at 5.3%. Growth in Chile and Mexico has remained strong, but Brazil is more challenging.

Base values are continuing to increase but this offset by lower interest rate, which are currently around 6.5%. No improvement in unemployment and the market which remains very competitive.

Now turning to operating profit on slide 22, our underlying operating profit in the first-half was 627 million, a decline of 15%, of which 7.6% is related to the currency effect. The underlying operating margin was 6.1%, down 80 basis point or 70 basis points issues of the currency mix effect.

Digging deeper into the performance by segment excluding currency impact, business & administration operating profit decreased by 2.2%, and the operating margin was down 40 basis point, reflecting some high margin and comp losses and delays in the ramping up of profitability of a small number of recent large contract. These large contracts are complex.

The ramp up size is always challenging and we sometime encounter issues. In healthcare $ senior, the underlying operating profit fell 1.3% and the margin was 20 basis lower at 6.1%.

The lack of growth in North America was expected to become compensated by the result of SKU rationalization program. However, the program has been delayed about six months; it is now just starting to contribute.

On top of that, we have weaker-than-expected performance in some large contracts. But remember also that it does compare to a particularly strong first-half last year.

In Education, underlying operating profit fell by 8.9%, and the margin declined by 60 basis points, reflecting the decline in revenues in North America due to net losses last year. This was exacerbated by sharp increase in labor inflations since January, and poor execution of the performance improvement plan.

This execution issues have been rectifying during the course of the second quarter, but not enough to offset the issues during the first quarter. Finally, turning to Benefits and Rewards Services, underlying operating profit fell 11.5% after adjusting for the negative effect of the weakness in the Brazilian Reais.

The margin was down 320 basis points, and it was expected. About half of this is due to the reduction in interest revenue due to the declining rate in Brazil.

The another half is into the combination of accelerated migration costs due to the number of countries moving from paper to card, particularly in India, Czech Republic, as well as France, and the impact of the growth in the newer mobility and expense management activities, which is a lower margin business and the tradition of mill activities and which is also investing in its development. So to summarize, the margin deterioration we have experienced across our On-site Services businesses was primarily a result of internal execution issues, and not the reflection of any fundamental weakness in our operating market.

We have identified the areas where we need to improve performance, and as Denis will outline shortly, has a comprehensive set of action plans in place. In Benefits and Rewards, the margin deterioration is due to the falling interest rates and the investments we are making in the new businesses.

Thank you for your attention, and I will now hand over to Denis for the outlook.

Thank you, Marc. And so let's turn now on our revised guidance for the current financial year.

As we said two weeks ago, we are anticipating organic revenue growth of between 1% and 1.5%, and an underling operating margin at constant currency of around 5.7%. So, let me spend a few minutes explaining the drivers behind this new guidance.

We have already gone through the H1 performance with Marc. So I will focus on the factors we believe will have an impact more specifically on H2.

So we will start with first organic revenue growth. First, the level of signatures has been particularly low this past few years and especially since the beginning of the financial year.

Therefore, there is less revenue to flow through relative to our expectations. We have really looking to this to identify the underlying trends.

There is a mix of reasons. In healthcare in North America, we have been losing same site sales by losing small pieces of contracts.

In Education, there will be negative calendar effect in Q3 as May will lose five days of turn time before the summer holidays in North America. From Q3, we will also start to fill the U.K.

Army contract losses, and in Energy & Resources, we will have substantial less contribution from ramp ups in the second-half due to the lack of recent signatures. As a result, we are now expecting second-half growth to be only marginally positive.

And this creates a significant shortfall in revenues and therefore in gross profit relative to our expectations. Added to this, we will have a compounded effect of the delays in the ramp up of the efficiency programs.

And in this respect, we will see a further deterioration in healthcare before the efficiency program delivers enough result probably only next year. As far the loss contracts are concerned, we are expecting an improvement in the second-half, but we will not reach the level expected six months ago for H2, and it will take longer.

All of this has headed up to a more pushes you for this year. However, the right actions and necessary time to execute them will address these issues.

And now, so let me set out the remedial actions that we are taking both immediately and in the immediate turn. So, on slide 27, you can see the immediate action plan which has been designed for North America but which is also being implemented more generally across the regions as and where it makes sense.

This plan is based on improving efficiency quickly but in a smart enough way, so that we can generate sustainable efficiency for the future of the group. In terms of food cost management, the SKU rationalization which Mark was talking about has that are started hard to slowly within healthcare but which is currently ramping up will also be generalized to the rest of activities in North America.

Work is also being done on the food supply did at frequency on our sites and there is a big push to further increase supply year and SKU compliance by our sites. We are also accelerating purchasing synergies with a specific and very active action at Centerplate as I said earlier.

On the labor front, we are really getting scheduling to be demand based in education and this is going to be generalized across the segments in North America. This has significant results in both reducing labor costs and at the same time better responding to consumer needs.

We're going to drive this down onto every significant account or site. We also have specific programs on improving all the time management and temp labor rationalization.

And we're also looking at much longer term program to reengineer our full time, part time mix in neighbor. In addition, we have an action plan across the group to reduce discretionary spent everywhere and fast but from a more strategic view.

We are accelerating a plan to completely redesign our SG&A expenses, why during this we aim to simply the organization to right sized teams at global and local levels. We're also in the process of consolidating our [indiscernible] for recent acquisitions, but also for more general point of view.

This is not new, and some of the projects are really getting underway at the moment. And a fourth leg in terms of efficiency is to address low performing contracts.

We are composing detailed action plans for each of these contracts. We intend to enhance plan management and launch client's renegotiations to rapidly return to the plan trajectory in terms of profitability.

And I have imposed to a member of the executive committee that he becomes personally responsible for each contract. Finally, we are also strengthening the teams in North America.

The teams that we put in place two years ago have not functioned properly, so we need to rebuild our tenant build over there. For instance, we sent two of our most experienced CFOs altogether first, our North American headquarters for healthcare and for education where both statements are based upon.

In addition, Satya Menard is now transitioning into new role as CEO of Education. And as I speak, the healthcare team in North America has been restructured with the new regional CEO.

We've brought in very strong new people from outside and we've also transfer experienced people from within the group. There's a lot to do and much of this is getting back to the basic discipline of retaining our clients, cross-selling big compliant with group purchasing, large catalogs, standard menu systems etcetera.

So these immediate actions that we're taking are, good business practices and they will become embedded in our long-term strategic agenda. So I've said before that there needs to be more discipline and rigor in everything that we do.

Believe me discipline is the new watch word across the organization and will be at the center of my strategic agenda for the next few years, but what is this strategic agenda? As you can see on slide 28, we will focus on four core pillars to re-tour the group to delivering strong and profitable growth.

Our key priority is the immediate term is to improve operating efficiency across our businesses. At the same time, we will predetermine our growth capabilities by reigniting our approach to sales and marketing.

To have comparing go-to-market strategy and therefore ensuring that we better placed to capitalize on the attractive growth opportunities that are available to us. Critically, the investments that we will make in developing our new business capabilities will be financed out of our operating efficiencies and savings.

This will of course be underpinned by strengthening our talent pool across the organization. And also retaining and improving our leadership position in corporate responsibility which is a key factor of differentiation for Sodexo.

So, in order to execute successfully against these strategic priorities we will redesign the way we operate and reinvigorate where we sell. And to enable this we will do that through the group line implementation of a new program management program which is called step.

And as you can see in slide 29, the Step program we didn't sure that we refocus on basic operational drivers in our business like retention, targeting, cross-selling, increasing spent, managing over time, sales work, etcetera. Refocusing on managing the cent or the cents or the pennies or whatever which is essentially in our business.

This will drive performance in financial results. And we will come back to you on this in much more detail in September at our capital markets day but, I wanted to provide this initial preview of this program which we'll be launching in the next few weeks.

On this seven areas of focus that you would as you see, we have already piloted step three labor efficiency and to give you some color we have an initial focus on North America, on France, and the U.K. and we have on board Belarus, and Brazil before the summer with Asia-Pacific and Northeast to follow.

Typically we choose a number of KPIs to analyze and follow-up the cost of labor. Average cost of an hour work internally, share of adjust staffing, total personnel cost etcetera, and to monitor us well more efficient use of labor, typically, the revenue per hour worked to share are other time within hour etcetera.

So, to summarize, it's true that we have challenging that we are facing at the moment, but our business remains solid, and we are well-placed to -- with attracted grow markets. However, there are cleanly areas where we must improve, where we need to take a more disciplined approach to ensure better education.

We need to refocus our teams on operational excellence. And to do this with a specific focus on North America, we have a clear set of immediate action plans.

We have a refreshed management team, and we will be driving step and set this sort of back to basics program, right? So, at the same time, we are reintegrating our performance-based, our client-focused culture, and our client portfolio.

And why do we push you our global market service contract strategy? We also most reinforce our focus on winning local contacts, on winning mid-sized contracts, and also food services contract of course.

A more efficient business will enable us to invest in our capabilities to ensure that we are best based to take advantage of the multiple growth opportunities that are available to us thanks to our quality of life positioning which is a differentiation. I am absolutely confident we will build our performance back to where it should be.

Thanks a lot for your attention. And of course we are -- Marc and I are of course open to answer your questions.

Operator, over to you.

Good morning. I will ask three questions please.

The first one on your share buyback announcement, does that mean you do not see any M&A opportunities in the short-term. And I was also wondering if your target of net debt to EBITDA of around 1.5 times is still valid.

My second question is on healthcare in Europe, you mentioned in your press release some contract losses. So could you maybe give us some details on those contract, and also is there any read-across we can make with the situation in North America with the healthcare.

And my final questions, you operate in a very large number of countries. Do you think it could make sense for you to exit some countries where maybe you do not have enough scale to have sufficient margin.

Thank you.

Thank you, Simon. So to answer your first question, we have a very solid balance sheet.

And the share buyback program will not prevent us from doing acquisitions. Of course on acquisitions we'll be very focused to ensure that they are not disruptive to our short-term action plans, that will deliver revenue and margin growth.

But we will remain acquisitive because we have the balance sheet that allows us to do so.

And on the ratio of net debt to EBITDA, the share buyback is actually increasing this ratio by 0.2 times, and so when I project additional M&A for the end of the year I think we should probably be around 1.5. So we've got room because we guided for one to two, so we can do further acquisition in the future, so there is no issue around that.

Regarding your second questions, I want to be very clear there is no systemic difficulties in healthcare. We have lost -- yes, it's true, we have lost some contract in Europe but they are not major ones.

And we can recovery and we still conquer some also interesting contracts in Europe. The situation in North America is specific, as you have understood.

As I said earlier, we are reengineering our people structure there. We've put a new regional CEO.

And so we address that separately, so there is no link between the two. And as far as your third question, we have already pulled out recently off some countries.

We are scanning the countries where we are to ensure that wherever we are it makes sense; it generates profitable growth or has perspective to generate on the short-term profitable growth. So we have no taboo in revisiting potentially the number of countries where we are.

Okay, thank you very much.

Thanks, good morning. Three questions, please.

But maybe I'll ask them individually. So first, just drilling down on to the margin performance in Business & Administration, you have pretty good organic sales there, and you've put the 40 basis point margin dropdown down to two things.

Could you talk about the loss of those high margin accounts, who you lost them to, why you lost them? And then the other factor, the lower expected ramp on recent contracts.

Was that just due to poor collection of signings, was that due to competition, and when should those contracts reach sort of margin maturity? That's the first one, thank you.

Yes, on your first question, in Business & Administration there is a natural rotation of contracts, you win, you lose. And in the recent cases, quarters, we've been losing contracts, and some of them were very decent margin.

While we resigned contracts and did some growth the balance was more toward very large contract. And so those margins tend to have -- takes more time to ramp up, and the margin is slightly less than the one we lost.

So the portfolio churn we experienced was actually negative to our margin. Now we are aware of that.

And Denis mentioned it that we need to balance more the win rate between very large, medium, local, food, non-food, single multi-services, and so forth so that we have a more positive rotation of our portfolio. And as the same time we've signed in the past few years very large contracts, and we had difficulties in some part of those contracts to ramp up our margin.

When you take a large contract you can have dozen of sites, hundreds of services. While we do mature, I will say, 80% of the services and 80% of the site, there is 20% where it is more difficult.

Some services are more difficult. And what we see is that probably we had been too ambitious in the ramp up plan and we are not delivering as per our ramp up plan, so which means that the margin basis erosion is visible.

But they will ramp up, and we are seeing them ramping up.

What we see is, what we mentioned about difficulties on the large contracts it's only a small number of them. And as Marc said, it takes, given the size and magnitude and the number of services that we operate, it takes a bit of time for the ramp up.

But what we see overall is that on the longer term those large contracts are delivering the profit that we expect. They are also virtuous in terms of the level of excellence that they force us to achieve which is very good, because we deliver the values for the clients.

And so we are positioned on that, but it's true that there are small numbers that we need to fix.

And is that loss of contracts, the first point. Is there also a trend there on who you're losing them to, and do you see that continuing or was it just an unusual period?

No, I wouldn't call it a trend. It so happens, but this is not a trend.

And as I said earlier, the focus on retaining our clients is very important. And I'll put specific emphasis in the way we will look at redemption.

Okay. And then the second question on the full-year margin guidance, of 5.7%, I think my math is right, that implies about a 90 basis point margin drop in the second-half after a 70 basis point drop in the first-half, all constant currency.

But in the first-half about a third of the drop was due to the Vivabox sort of scope issue and interest rates which sort of shouldn't continue into the second-half. So is it therefore fair to say that OSS [ph] margins, which were down I think 50 basis points in the first-half, those should be a lot worse year-on-year in the second-half?

And if that's the case won't that annualize into the first-half of 2019?

The slow ramp up of all our performance improvement plan or SKU rationalization plan in S1, by the time they were turning into H2 they were supposed to be delivering kind of full stem ahead. And right now, because they are delayed, the impact -- the component that impact in H2 of those deals is significant in H2.

Same with the ramp up of contracts, we were expecting some of the contracts to ramp up, those large contracts. And because they are delayed again, I mean, the component impact on H2 is significant.

Now, for me the main issue is the fact that we've been very, very soft of growth, and that we have a significant shortage of revenue in H2 versus what we were expecting at the beginning of the year. We will, as we said, the expectation now for H2 is around 1%.

We were expecting 3% to 4% at the beginning of the year given the pipeline we were seeing. And that revenue gap is also a margin gap which is significant.

And in H1 we had 1.9% which was compared above to last year 1.9%. So the key question for the coming year is our win rate in H2.

For instance, we have a good pipeline in universities. And if we sign better in universities it will help tremendously next year.

We are not expecting improvement short-term in healthcare North America because we've seen some losses and the same-store sales is weak. But fundamentally with the SKU rationalization plan kicking in and whatever we are implementing in plan, we should see the margin stabilizing in next year.

So I hope I've got you the picture here, but it's a mix of revenue loss and delays in the implementation plan.

So, if you could ask the question in a different way, does your full-year margin guidance imply OSS margins will be down more year-on-year in the second-half versus the 50 basis point drop in the first-half? Or is it down 50 a reasonable guide for the second-half?

It seems to me your guidance implies OSS gets worse in the second-half for margin.

I think it's about the same, of 50 to 60 basis points drop in the second-half.

Okay, thanks. And just a final one, on the STEP program it sounds a bit like Compass's mass [ph] program.

I mean that they started with a real focus on costs for several years, as you're doing, and then switched to a sort of sales focus several years later. I'm just wondering about, I know you're going to discuss it more in September, but when we should start to see the real focus on sales at Sodexo.

Are you considering, for example, lowering your internal margin or return targets? Thank you.

I think we've already worked somehow on cost. And I wouldn't compare what happened 12 years ago with Compass.

But what is true is we will focus on sales now. That this is something which is important, we know, and Marc mentioned it.

Growth brings margin. So want to reignite growth.

And we think that it's absolutely not contradictory to -- we reengineer and reenergize our sales force and our sales energy, and at the same time work on some of our fundamentals of operational efficiency.

Thank you very much.

Good morning everyone. Three questions for me, please.

The first one, if we look to your peers, they have geographical base approach, and according to them it's a better way to meet demand; do you see your business segment based approach as a threat for revenue growth in the short-term or do I understand the fact that in the long term it has a positive impact for big contracts, but in the short-term do you think it's a liability? Second question on the new management team in North America, when do you expect the team to be fully in place and to start having an impact on the business?

And last one, in terms of labor inflation in North America, is inflation impacting the same both facility management and the content activity, i.e., do you have the same capacity to pass this inflation through to clients at the end of the year or during the anniversary of the contract? Thank you.

First, on the first question, we are convinced that our segmented organization is bringing value. I want to highlight the fact that we have definitely -- we have global segments that in each country, in each region we have a CEO for each segment which is responsible for developing the local business.

That's CEO has all the power and his objectives, and he's assessed on his capacity to retain our clients, to develop the clients, and come up with the right offers. This CEO benefits from the global segments as an inspiration, as a support, as marking support, et cetera.

But we run more than 90% of our business on a local basis. It's true that this global organization has also allowed us to embark into these large contracts that bring value, as I said earlier.

But I think it's important that you understand that the vast majority of the way we run our business is local with local CEOs responsible for growth and everything that goes with it. On the second question we are -- the new management is in place.

Of course, there'll still be some adjustments. As I said, we have to renew the talent pool.

So it's work in progress. We've done some significant moves, as I said, in healthcare, in education.

We will also look at the performance of our sales teams of course. We will look at the performance that we have at site and regional level.

So this will be an important program that will cover the months to come. It's a very important focus that we have.

We focus on the performance here.

And on the labor, the key topic of the labor is not so much -- food, it's whether your contract is a fixed cost or fee contract, and if it's a fee contract, if it's a real fee contract or a fee contract with a maximum price. And so when we look at the hourly labor, and as I mentioned last time, the average hourly labor experience in the U.S.

over the past four, five months was 3.5%. It varies a lot from geography to geography.

Actually within North Americas they are focused on hourly labor which is very high, for instance in California or in Texas. So it's not so much what you do but where you do it and what type of contracts you have.

I take the case of education, in education 80% of our contracts are what we call fixed price contracts, they are P&L contracts. So when you suffer a surge of inflation you suffer it immediately.

While you are passing it to the client through a retail increase or board plan increase at the next occasion, at the next revision, but this takes a few quarters. And the revision is an annual average, while you may have a surge of inflation which is immediate.

So we will pass inflation to clients because I think we have a very good track record in the U.S. to do so.

But when you have surge of inflation our passing inflation to the clients is based on average annualized. And so you can squeeze a little bit for a while, and then it catches up the next few quarters.

So it is nothing to do with FM, it's got to do with more of the nature of the contract. It depends on where you operate and there is a time lag when you have a surge, but we will pass it on.

Very clear. Thank you.

Good morning. Yes, I've got three questions please.

The first one is just on the -- looking back at the simplification and adaptation program. And you spent €245 million on that over the preceding two years.

I mean, it seems like a lot of your plan today is to continue to enact that. Do you need to spend more?

How much is new beyond that? And what happened to that €245 million, is there any way to claw any of that back given that it seems like that hasn't delivered what you would've expected it to?

Second question, somewhat related, on slide seven you set out what you expect and what was kind of unplanned. If we look just at the expected portion, was flat margin guidance ever realistic for this year given what you expect?

And is the shortfall all to do with sort of a surprise, sort of unplanned points? And then the last one is on, you mentioned when you pre-released a couple of weeks ago that you needed to change accountability within the business.

Have there been any changes to the sort of incentive plan around the way that these regions forecast or what they're kind of be incentive -- you can talk through today.

Yes, on the simplification plan, as I mentioned in the previous year, the plan was very, very detailed and we can track the number of initiatives and the savings versus the cost committed to some initiatives. So I mean, we see the savings and they are there.

I will say the simplification plan was more a cost reduction plan. So we gave the opportunity for the team to cut cost here and there.

What we are aiming to do, and this is what Denis referred to is, we need to redesign the way we operate in certain areas and certain functions. It's not just about trimming cost, it's about rethinking the way we operate; we can bring tools, we can bring new processes, new way of workings and so forth.

In some places we have accumulated years of experiences without truly challenging the way we were delivering those services internally. And this is what we have to do with what we call, "Zero-based Redesign," so to speak.

And so, when I look at the simplification program, it was more cost cutting and it delivered. In the past few years, our margins have gone up, we committed to make some reinvestments hence while I mean they have not factored in the margin in this year, but the settings are there.

What we now plan is more a redesign of the way we operate, and then therefore allow us to generate focus of SG&A that we should be able to reinvest in what will make a difference in terms of growth, offers, tools, digital and we need to do investments in IT, for instance, and we plan to reallocate the future savings into such investments. Your second question on expected versus unexpected, there were a number of things we were expecting; for instance, we knew we have loss business in universities, we knew it will have volume impact in GP, we knew and we told you that the interest rates have dropped significantly in Brazil and that we will suffer €15 million.

We had committed to a number of investments, and we are delivering, and we are implementing those investments. But at the same time, we had very ambitious and maybe not have robust as expected plans in universities an indication in general and in healthcare for instance and we've been late.

Now, we see that those plans are back on track but we are late solely six months on those, and so those were the unexpected. We have a lot of performance improvement plans which is not delivered in the first-half and we need now but we are focusing on putting them back on track and delivering.

And as far as your third question, Richard, I think we are definitely we are redesigning the way we incentivize our people, want to put more empowerment and accountability and from site label, it's very important we have to we are currently redesigning our global incentive plan. We are also rethinking the way we incentivize our sales team, and this will kick in from next fiscal year onwards.

So yes, I can tell you the focus and accountability will be strong.

Just maybe there is a quick follow-up on the first-half, I was just wondering you spent the €245 million on the simple vacation program the last two years, what is going to be the cost to deliver the new plan in terms of exceptional cost and restructuring cost over the next couple of years?

It is I think we will give more details on that in the custom market, it is bit too early we already have some broad use but we just embarked two weeks ago on that we have perspective on our side but it's too early we will give greater details in September. What is sure is that -- yes, sorry; go ahead, yes sorry.

No, that's it. Thanks.

Sorry. Hi, this is actually Angus Tweedie from Merrill Lynch, just a couple of questions please.

Firstly, could you discuss the client investments on your balance sheet, there has been a bit of a move in those about a 40 billion mix of change year-over-year and could you explain what's driven that, what those relate too? And then secondly on the BRS margins could you just talk through the facing a bit more particularly, how we should think about the investment cost to the new mobility initiatives and how those move over the next couple of years and particularly in 2018 and how we can think about the facing of the drag from the Brazilin FX and the acceleration in the migration.

Thank you.

Yes, on the balance sheet I will look into more details and I will tell you we can have a broader conversation next week when we meet that I start that content there is no massive changes and it, I think it is related to the integration of sensor plate we did early Jan, but no, I don't see anything very, specific closer than that also we must be careful because our balance sheet is actually very much impacted by just impact at the same time so I look more into it and we get discuss in more detail next week.

And as far as benefit was margins, I think we have -- there are several factors that impact this margin we have the full of virgin interest rates and overall for the last the past few years we have seen this decrease in interest rates that has impacted our profitability and the diversification that we do at the moment in take a very good mission in mobility has an impact. On profitability we know also that those activities why it will be generating top line growth do not operate at the profitability level that we have the traditional media and food business.

So that has an impact and their grow rate will of course have an impact on the overall profitability. The card migration that we see in several countries, this of course has a cost that we think that on the longer term when we move to card this is generate margin improvements, it generate efficiencies, operating in a full digital model is much more profitable than operating a dual system.

And typically we hope that in some geographies particularly in India fronts up all, we just get from this is your system where we have paper in card and we hope that this would generate improved margins in the future.

I just follow-up on that in terms of just thinking about the timing then this year, if we had the 320 basis points underling margin contraction in the first-half of which by half due to the new mobility and diversification is if had you to seem the similar amount in the second-half will be impacted by that and that whole the remaining the 160 basis points, let's say, is the first thing about half of that in the first off was due to Brazilian interest rates and the other half was is due to the acceleration of this Indian migration?

Yes, I think this is what I commented in H1 results. Out of the 320 basis point, severally half is due to interest rate through our and interest rates are not going up any time now, so you can expect that then what we said last time we spoke that we were expecting a €50 million impact 7.5, they are so mature, and this is what we observe.

The investment in mobility and expenses management are going to be broadly is the same what in H1 and H2 and I will said the paper to card migration too. So I think you can factor in the same impact or similar impact in H2.

Okay, lovely. That's really helpful.

Thank you.

Thank you. Actually my first person is sticking with the same theme, so if we look at the sort of more medium term outlook for the margins within Benefits and Rewards, just picking up on some of your comments about the lower profitability of the other solutions.

I guess margins in this business were as high as 39%. They are probably going to end up this year about 30.

What would you expect kind of medium-term trajectory of margins to be? Could they be sustained at 30 or do you think they will be 50 down over time?

That's my first question. And second question, you observed that kind of growth brings with it margin.

And obviously you are very focused on trying to improve the growth of the business. But, I wonder if you could just talk about whether growth will also bring any changes in CapEx for the business you believe.

And also whether if you do start to see a ramp up in growth, whether there will be any negative mix effect? Again as you talked about contracts tend to be sort of lower margin in the early stages of their life and therefore if growth comes, will that be a margin hit as well?

And then my third question is just for the couple of numbers you point, can you just remind us on the scale of the U.K. contract losses as they start to kick in through Q3?

And then also the sort of the mention you made of low performing contracts and the opportunity to renegotiate that. Could you give us some sense as to how significant that portion of your business is that you believe is in that low performing category?

Thank you.

Thank you, Tim. For BRS, what we told you in the past few quarters is that it was more and more difficult for us to give you a guidance as margin rate because when we were at 39% for the activity, we were almost a pure player in meal and food activity.

And today when I look at the meal and food activity, the margin are the same as they were five years or three years ago. There is no change.

The margins are very healthy, very big. But we are also expanding.

And we have been doing this past few years in incentive and recognition and mobility and expense management in fuel and fleet and so forth. And we said the past few quarters that those activities are quite good in term of margin for the group average, but they are dilutive for BRS.

Hence in the future, what we want do is guide on BRS as an EBIT margin. So I think you must expect dilution of margin because of the diversification.

Now what we have to come to you is what is going to be the average growth of the underlying operating profit of BRS in the coming years. And this what we will do in more detail.

I think at the Capital Market Day. Anything to change about CapEx, I will say no.

I mean the message is to the team and the message to you is we are not CapEx averse. We are approving regularly bids with large amounts of CapEx.

Now it is up to us to bring them and to spend those CapEx. So as I said, I mean, we bid around 1.5% of revenue for a while.

I will not be shocked if we are getting to 2. But we are not yet at 2.

But we have nothing against CapEx on this topic.

Sure, we have space.

Yes.

Which is pretty good, and the teams know that. You see it's more how we ignite growth and sales energy that will leverage the opportunity on CapEx spend for clients.

As far as the negative mix effects of contracts, I think I would take a global approach on that because it's true that when you -- as I said earlier, when you start large complex contract of course, it has an impact on the profitability because the ramp up is sometimes difficult. But that's why we also said that we have also put a very warm focus on midsized local contracts and also food contract single service.

Their balance we will with those large ones. And when we operate those smaller ones, they are easier to operate.

They are easier to mobilize. So, the ramp up of profitability is better.

So, that's also we have to look at as far as our contract development. As far as your question on the U.K.

contract, we mentioned this a few times that governmental agencies, so STI which is a procurement body for government contracts in the defense sector and so forth launched massive tenders and all the contracts were retendered in the past few years. As we said, we want our share at the very early stage of the process.

And we actually lost existing contract at the very end of the tendering process. Right now and up to Q2, we had I would say the positive impact.

I am expecting Q3 to be done -- Q3 and Q4 to be done by €45 million to €50 million because of those losses and now starting as a negative balance in H2. So, I think you can retain 45 million to 50 million more.

And as far as the low performing contracts, we don't comment on those ones. We mentioned the impacts it had on the 25 basis points shortfall that we got on the profitability.

And we don't comment on this. You know that we have clients behind.

And so we are cautious in a way we talk about that. Again we are talking a small number of contracts.

Okay, great. And then so Marc just to be absolutely certain on -- the U.K.

business, that's 45 million to 50 million in H2. And then a similar amount obviously therefore in the first-half of next year?

Slightly less because we've got some impact already in Q3 that we don't see because it's covered by wins. But I am expecting some impact or let's say slightly less than next year but also same magnitude, yes.

Okay, thank you very much.

Good morning, everyone. Just quick on the operating and in about 80 countries and which generate about 85 -- and only four countries generate about 85% of the group EBIT.

Do you see any scope in terms of rationalization there? And my second question is in relation to low performing contract.

Can you at least tell us in which region or which segment are you seeing those non-performing contract? Thank you.

To your first question is yes, we are in 80 countries. We have shut a few in the past I will say six to nine months.

And as we said, we are reviewing the portfolio. We don't have to be everywhere.

This is -- we clearly don't have to be in all the places where we are. And we want to stay in those places if it makes sense in term of growth and in term of profitability because what we want to do is focus on the big picture and 80:20.

So I mean if those countries are distraction or we see them as distraction, no disrespect for those countries, but then we will refocus on what matters to us. And as we said for a while, I mean North America matters to us.

We have made an acquisition with Centerplate. We want to grow bigger in North America.

And if we have to reduce the scope, we will reduce the scope. And it gives us rationalization opportunity obviously because you have got less travel, less things to do, less entities to consolidate and to supervise.

And as far as the low performing contracts again they are small number. And I would say -- again they don't sit in place where we have them.

They can be across several geographies. I won't comment the places exactly.

But there is not one region where it's happening. But it's again it's a small number.

And in these regions, we have good contracts as well.

Thank you very much. Can I just follow-up with one more question.

Could you please quantify the impact on your margin from the immediate action plan that you have highlighted in terms of improving food cost management, optimizing SG&A? Could you quantify each of the four areas that you will be working on, how much are you expecting in terms of impact on margin?

Well, what we have said for this year is the action plan that we have put in place are included in the guidance that we gave. As far as their impact on the future, again we will give more details as we move on.

And I will re-insist on the fact that the growth we have come from better operational efficiencies and we have come re-ignition of our sales. And this in turn will bring margin improvement.

Thank you very much.

Yes, good morning everybody. I have two or three questions please.

I am sorry. We cannot hear you.

Good morning. Can you hear me?

Yes, much better.

Thank you.

Thank you.

Yes. I have three questions please.

The first one is regarding your North American market. Can you come back on the Q2 performance and impact of -- your calendar impact and the loss of the contract that you have mentioned?

And the second question is regarding the impact of reduction of discretionary spend, can you give us some more color on that? And how you estimate that you can retain and attract people?

And regarding the [indiscernible], can you come back on the new regional CEO where she come from, and specifically on the education segment also please?

Okay. The new regional CEO in healthcare is coming from GE.

Has a strong experience in the healthcare sector. She is a very energetic woman whom we trust very much.

And has already had impact on the teams and I think we are very confident in her success. As far as the reduction of discretionary spend, sorry, it's quite simple.

We reduced traveling and that has an immediate impact, impact also on the quality of life of the people actually because when you do more video conf, you have better quality of life. And of course, we look at all the unnecessary spend.

We have reduced consulting. We do the traditional watch out on those things that can be done immediately.

It's our first sign that -- signal but I said internally on being frugal in the way to move forward. I have absolutely no fear of us not being attractive or capacity to retain our people.

There are good people in Sodexo and there are numerous. They are motivated.

They are motivated by who we are, by our values, by the perspective that we can offer them. And it's not because we do a program of reduction of discretionary spend that also goes in many many other companies that we will reduce in motivation of our people.

Yes, on your first question the calendar impact that we are calculating for North America is more an organic growth restatement than a margin restatement. And we are talking about only one.

The one I spoke about which is going to be significant is in Q3 universities in number of board days, so it is Q3. It's not in Q2.

When we go back to Q2 performance in North America, what I said earlier is that we had observed a gap in Q1 in universities. But they had what was perceived as a robust performance improvement plan.

And it's true that it improved in Q2, but it did not compensate the shortfall of Q1 while at some point we were expecting that the action plan was actually going to be giving us a neutral balance versus last year for H1, and it did not. In healthcare & seniors, I would tend say Q1 was actually very relatable and comparable to last year.

But the SKU rationalization plan did not produce in Q2 and they started adding a soft same store sales and some losses and not enough wins. And so, the margin started to dip.

On top of this, as I mentioned, we had the labor inflation. They hourly labor inflation which was really visible as the semester evolves.

It was actually getting more and more visible in January and February and so forth. So it's a mix of things in North America.

Some of it would in Q1 we were working on it. Some of it came from Q2 like healthcare and the inflation really started kicking in Q2 more than in Q1.

Okay, thank you very much.

Hey, good morning. Geoff speaking from Deutsche Bank, I would ask two questions please.

The first one is have you seen any impact from the strikes in France so far? I mean maybe we are seeing less people attending the B&I segment, which is the first question.

And the second question is you gave comments regarding your medium term target three weeks ago, just wanted if you confirm this target as you said three weeks ago? Thank you.

Okay. As far the impact from strikes in France, yes, it's just a beginning and hopefully this won't last too long.

But, we see an impact. It's still difficult to quantify.

We see an impact in few percent of course people not being in office and not going to the restaurants that we run, so that this will have an impact; very, very difficult to anticipate at the moment. And I hope this won't last too long for us but also for the country.

As far as your second question, our priority is to concentrate on our short-term action plan and the educational STEP, okay? Now of course, I am absolutely convinced that we have long-term attractive market opportunities so that such of target that we had is not unrealistic.

But we are -- you have to conscious that we haven't achieved our long-term guidance for the last few years. We have achieved the operating profit target, but not the revenue growth target.

So what I want first is to demonstrate that we get results and improve you that we can get back to significant growth. So as we move on, we will give you more insights on our execution plan, on what we do to re-ignite growth, on how we strengthen our execution, and how we look at the future at the Capital Market Day.

That's going to be one.

Thank you very much.

Okay. Well, thank you very much for attending this call.

I just want to reiterate the fact that we are very conscious of the situation, that we have a clear action plan that is being put in place that will deliver results, that we have a big focus on re-igniting growth as we move on, ensure that we improve our operational efficiency and we have great perspectives. I am absolutely confident in our market, and we will share more information as we move on.

Looking forward to interacting with you live in September. Of course, we have the Q3 result in July.

Thanks a lot for attending the call.