Sodexo S.A.

Thank you, Tracy. Good morning, everyone.

Welcome to our First Half Fiscal 2019 Results Call. On the call today, we have Denis Machuel, CEO; and Marc Rolland, CFO.

As usual, the slides and press releases can be downloaded from the website. And the webcast will remain available on our website for the next 12 months.

The call is being recorded and may not be reproduced or transmitted without our 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 now turn the call over to Denis.

Thank you, Virginia and good morning, everyone. Thank you for being with us for this first half fiscal year ‘19 call.

Let's go straight to slide number 5 when, as I'm sure, you will have seen, at 3.1%, our first half organic growth was pretty good. The uplift in Q2 was very satisfying.

However, it was probably our easiest comparative base this year. On-site organic growth in the first half was 2.8%, with the US up 1.2% and outside North America, up 4.1%.

In Q2, North America was up 2.4%, which is a sharp improvement on the 0.2% in Q1. Business and administrations was also up in H1, growth is still impacted by lower revenues in government and agencies due to the US Marine Corps renewal at lower pricing levels.

However, growth in Q2 compensated the weak Q1, which was impacted by the high comparative base in energy and resources last year, linked to a one-off hurricanes related project. Benefits and rewards had a good first half, at 10.1%, with strong recovery in Brazil and solid growth in Europe.

On slide 6, we can see an encouraging evolution of on-site growth indicators. I'm really encouraged by the steady progress of all our growth indicators in on-site services.

But just a quick point of clarification here, as it’s the first time that we present these indicators at half year, these indicators represent six months of wins and losses and not rolling 12-month measurement. What matters then is the evolution of the indicator versus the previous half year.

So on this base, client retention in H1 is up 40 basis points. Regarding healthcare and seniors in North America, we had a good H1, but we still have retention risks.

Our teams are working really hard to resolve any potential issues with their clients. And I'm convinced that we are on the right path.

For education, also in North America, it's too early to say anything as the selling season hasn't really started yet. On existing sites, our comparable unit growth has also improved by 20 basis points.

The US Marine Corps contract this year and one-off energy and resources contract last year have impacted the CUGR by 20 basis points each. However, this has been more than compensated for by inflation pass through and good volume growth in many areas.

Business Development is also much better, up 70 basis points, and it's better in all segments, except in energy and resources, where there have been few bidding opportunities and virtually no new projects. The good news is that the energy and resources pipeline does appear to be filling up progressively.

On slide 7, we can see that at constant rate, underlying operating profit was up 3.3%. However, as expected, the margins were down slightly by 20 basis points.

In on-site, the margin was down 30 basis points, excluding currency impacts. This is principally due to the timing differences between the investments in growth that are being made and the planned efficiency gains coming through.

There was also the impact of the US Marine contract renewal in September. This is a big contract that dates back to 2001.

In each renewal year, we know that we are going to be negatively impacted. And then over the many years of the contract, we’ve progressively rebuilt the revenues and the margins.

Benefits and rewards margin was up 30 basis points, excluding currencies. We have turned the corner, helped by strong recovery in Brazil, and also lower spend on migration this year, after a bigger last year in which India and the Czech Republic moved away from paper.

If we move to slide 8, the improvement in retention in education last year and the excellent performance on Centerplate’s retention this year has led to an increase in CapEx of EUR82 million in this first half to EUR200 million, representing 1.9% of revenues. 70% of the increase is due to these two segments.

On the other hand, net acquisitions are much lower than this time last year. We've spent EUR234 million in the first half with some excellent bolt-ons.

With Novae, we've entered the high end food services market in Switzerland. We have consolidated our position in schools food services in the UK with alliance in partnership.

We've doubled our presence in Childcare in France with Crèche de France and we've also made a strategic move into the Brazilian home care market with Pronep. And in the last couple of days, we've doubled our size in home care in the UK with the Good Care Group.

During this first half, we benefited from a contribution to growth from acquisitions of 3.7%, with Centerplate being a large part of this through to January. At this stage, we expect the full M&A contribution to be between 2% and 2.5%.

As a result of all this, we have a solid balance sheet, with our net debt ratio at 1.3 and our gearing at 45%. I now hand you over to Marc for the details of the first half figures and I'll come back later on action plans and outlook.

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

Please note that as usual, we have defined all alternative performance measures in the appendix. If we now move to the P&L on slide 10, revenues at EUR11 billion were up 7.3%.

This is 3.6%, excluding the currency and 3.1% of organic growth. As you can see, the currency impact was limited this period and coming principally from the reais and the dollar.

We had the 3.7% impact from scope change, which is mainly the contribution of Centerplate from September to December. The underlying operating profit reached 647 million, up 3.3%, excluding currencies.

However, given the strong growth in revenues, the margin was down 20 bps, whether at constant or current rates. This slight decline in margin is linked to timing differences between the efficiency improvements coming out of the business and the investments going into the growth of the business.

I should come back to this by segment in a moment. Other income and expense amounted to EUR69 million, more or less stable on last year, and I shall cover this in the next slide.

As a result, operating profit was 578 million, up 4.1%, excluding the currency impact. Net financial expenses increased by EUR10 million to EUR54 million in the first half, relative to the previous year.

This is due to the exceptional interest payments of EUR7 million in France related to the reimbursement of past dividend taxes, [cash fee] [ph] last year. And it's also due to new debt, raised in H2 last year to refinance the Centerplate acquisition and the share buyback.

The blended interest rate at the end of the period was 2.3%, slightly up versus 2.2% for the same period last year. The effective tax rate has moved back up to a more sustainable rate of 28.8%, relative to the exceptionally low 25.9% in the first half last year, which was helped by some net positive one-offs.

This year, the major elements in other income and expense are firstly EUR19 million of restructuring costs in the first half. This seems to be a good run rate each half for your modeling.

Last year, we spent EUR42 million in 12 months. Acquisition related costs were down substantially, as the size of our acquisitions this year are much lower.

Amortization and impairment of clients relationships and trademarks was 43 million this first half, up on the previous year due to further brand impairment of EUR24 million. Turning to cash flow on slide 12, operating cash flow was more or less stable due to higher cash taxes and net interest paid.

I’ll remind you that last year, we benefited from the EUR43 million exceptional dividend tax reimbursement and the EUR7 million associated interest payment. This year, cash taxes amounted to EUR64 million versus EUR46 million last year.

The traditional negative working capital variation is principally due to the difference in activity levels between August 31 and February 28. As Denis has already explained, net CapEx increased substantially to EUR205 million for the period, representing 1.9% of revenues versus EUR123 million or 1.2% of revenue in the first half last year.

More than two-thirds of this EUR82 million increase in CapEx is attributable to the education and sports and leisure segments. Free cash flow was EUR14 million.

Given the substantial increase in CapEx of 82 million and the absence of the exceptional elements last year for 50 million, this represents the solid performance. Net acquisition and disposal of subsidiaries amounted to 234 million, down from the higher levels of the prior year linked to the acquisition of Centerplate.

The dividend was down a bit. This is due to the fact that the dividend was held stable on the smaller number of shares, following the share buyback.

As a result of all this, consolidated net debt rose during the period by circa EUR600 million to EUR1.8 billion at February 28, 19. We have provided a little bit of history to put the CapEx and free cash flow performance into perspective.

CapEx has moved back up, more in line to prior year levels in the first half, both in millions of euro and in percentage of revenues. In this chart, you can also clearly see the extent of the exceptional performance last year on the free cash flow, which was inflated by about EUR50 million by the dividend tax reimbursement and related interest payments, but also by low CapEx.

Moving on to the balance sheet, net debt has increased to EUR1.8 billion at the end of the period from 1.3 billion at the end of the prior fiscal year end and compares to 1.7 billion at the end of the first half last year. Operating cash also increased since year end and last year, standing at EUR2.9 billion at the end of the period, of which 2.2 billion is related to the benefits and reward activities.

Despite the seasonally high level of debt at the end of the first half, the group financial position remains strong with a net debt ratio of 1.3 times and a gearing of 45%. You will note that the gearing has actually fallen 4 points despite the higher debt.

This is due to the significant increase in shareholders’ equity, which is linked to the application of IFRS9 since September 1. The first application of IFRS9 and the subsequent updates through OCI in the first half have had a EUR512 million impact on shareholders’ equity, mainly due to the revaluation of some financial assets.

The major part of this revaluation is linked to the stake that the group holds in [indiscernible]. Having been accounted for at its historical cost of EUR32 million until now, today, it stands in the balance sheet at EUR662 million and is therefore one of the significant component of the increase in non-current assets.

More information on IFRS9 is available in the appendix and in the notes to the financial statements. Slide 16 shows a significant M&A impact on revenue.

This is due to Centerplate, but this quarter has seen the last impact. We expect the full year M&A impact to be between 2% and 2.5%.

The modest currency impacted due in particular to the strength of the dollar, more than offsetting the impact of the weakness in the Brazilian reais and to a much lesser extent pound sterling. Organic growth was therefore 3.1%.

This splits out as on-site services, up 2.8% and benefits and rewards up 10.1% As you can see on slide 18, North America is doing much better, well out of the rest and have 1.2%, with the marked rebound in Q2 at plus 2.4%. Europe is steady at plus 3%.

The Africa, Asia, Australia, LatAm and Middle East business are still growing fast at plus 6.9% on an ever growing comparative base. On slide 19, business and administration, representing 56% of our on-site services revenue, B&A organic growth was up 2.8% when restated for inter-segment’s reclassification.

It is now positive in all regions. North America was up 0.8%, turning positive in Q2 after a 1.3% decline in Q1 due to a major one-off energy and resources contract in Q1 last year.

The underlying activity in E&R remains challenging due to the impact of site closures over the last 18 months and the lack of new signings. The US Marine Corps contract has put considerable pressure on comparable unit sales growth in government and agencies.

In sports and leisure, Centerplate is currently going through a significant renewal process. Most contracts have been successfully renewed and often expanded, some less profitable ones have been exited, which of course will weigh on short term organic growth.

All this is compensated by strong growth in corporate services due to solid growth in same site sales and new contracts. In Europe, which represent 48% of B&A revenues, sales were up 2.1%.

After a strong Q1, tourism in Paris slowed down in the second quarter. Corporate services continued to generate solid growth due to cross selling in all countries.

Government and agency stabilized in the second quarter, as the British Army contract losses last year came out of the comparable base. Energy and resources performance is stabilizing too.

Also, growth has come up slightly. Africa, Asia, Australia, Latin America and Middle East were still up, plus 5.9% against last year base, which was up more than 12%.

This growth reflects, on the one hand, strong new business and same site sales growth in Corporate services and on the other hand, the end of several large construction project and a low level of contract signatures in energy and resources. Moving on to healthcare and seniors in slide 20, organic growth was 2.2% for the first half.

In North America, which represents 63% of the business, growth was plus 1.3%, moving gently up from quarter to quarter, with solid same store sales and inflation pass through. Whilst senior has lost a large contract at the beginning of the period, healthcare retention has been solid to date and development has been trending upwards.

The teams are totally focused on resolving retention issues going forward. In Europe, organic growth was plus 1.7%, boosted by strong same-site sales through cross selling and the startup of a new contract in Benelux.

It is more difficult in the UK, as last year's contract wins are now in the comparable base. Growth in Africa, Asia, Australia, Latin America and Middle East remains very strong at plus 16.9%, reflecting many new contract startups in Brazil, India and China.

Note that these regions now account for 6% of the segment’s revenues. Looking now at slide 21 and education, revenues for the first half rose 3.6% on an organic basis.

In North America, which accounts for 75% of the education segment, revenues were up 1.4%, accelerating in the second quarter from only 0.6% in Q1. Net new business from last year is neutral.

However, on the positive side, same-site sales growth has been solid, helped by inflation pass through. One less working day was more than compensated by strong retail sales in universities and good project work in schools.

In Europe, organic growth was plus 10.4%. This performance is supported during Q2 by the startup in January of the new schools contract in the Yveline departments.

This is a great contract. But it is a tough one, and it's taking a bit of time to settle down.

But we have also benefited from solid prior year contract wins in the UK, two additional days in Italy. On the negative side, we've also suffered some strikes and one less working day in Q2 in France.

In Africa, Asia, Australia, Latin America and the Middle East, organic growth was plus 10.5%, resulting from the opening of several new school and university contracts in China, Singapore and India. In the slide 22, you can see that the on-site services’ underlying operating profit was up 1.2% at constant rate.

The margin was actually down 30 basis points at 5.5%. So excluding currencies, underlying operating profit was up 1.3% in business and administration, but the margin was down 30 bps.

The principal reason for this is the weight of the rebasing of the US Marine Corps contract following its renewal. We are confident that we shall get the revenues and the margins up, but it will take a bit of time.

And as we have earlier said, there is a timing difference between the efficiency improvement and the efforts made to accelerate growth. Healthcare and seniors had a good semester.

UFP was up 5.8% and margins were up 20 bps, excluding currencies. This is a result of tight management by the new team in the US, solid same-site sales growth and inflation that is also being passed through.

Education has been more difficult. There is a combination of factors.

We've had lots of renewals with margin investment in schools. We also have the dilutive impact on the large subset of the Yveline school contract in France in January.

Again, in France, in a difficult social environment, we've had strikes in some central kitchens. In North America, university margins were broadly stable in H1 versus last year, but not yet back up.

There is still more work required to reestablish the discipline. Turning to benefits and rewards, organic growth was up 10.1%.

I just wanted to point out that in BRS, we had a significant currency effects of minus 6.3% due to the weakness of the Brazilian reais and the Turkish Lira. You can see this impact particularly in the chart on employee benefits.

Going back to organic growth, employee benefits revenues were up 11.4% compared to total issue volume up plus 8.1%. Diversification services were up 5%, with strong double digit growth in mobility and expense and incorporate health and wellness, offsetting a small decline in incentive and recognition, which have been particularly strong last year.

On slide 26, organic revenue growth in Latin America is plus 12.5%, in line with previous quarters, and reflecting the improved economic environment in Brazil. We have seen growth in volumes with solid new business wins, a slightly more moderate competitive environment and stable interest rates.

Growth in Mexico remains strong. In Europe, Asia and the USA, organic growth remains extremely solid at 8.2%.

We are, for instance, continuing to see double digit growth in Eastern and Southern Europe, particularly in the traditional benefits. The newer mobility and health and wellness activities are more than compensating weaker incentive and the recognition activity during the period.

Rydoo is doing exceptionally well and is already ranked in the top three expense management solutions in the world. Financial revenue growth is aligned with operating revenue growth, but it's mainly due to the high interest rates in Turkey and an exceptionally high float in Romania since Q4 last year.

It is important to note though that the interest rates have been stable in Brazil for a few quarters now. Now turning to underlying operating profit, the benefits and rewards underlying operating profit in the first half was EUR125 million, up by 11.8% at constant rate and up 1% at current rates.

It’s due to the very weak reais in the first half relative to the same period last year. The underlying operating margin was 29.1%, down 90 bps as published, but up 30 basis points when adjusted for the currency mix effect.

The first half benefited from the strong recovery in Brazil with good volume growth and standardization of interest rate. Processing costs are increasing more slowly as recent migration in India and the Czech Republic are now behind us.

Thank you for your attention. I now pass you back to Denis for the rest of the presentation.

Thank you very much, Marc. And let's now focus on our growth, strategic agenda and I'd like to give you an update of some elements of the things that we do.

And particularly, so if we start with the client and consumer centric pillar, I'd like to talk about the work that we're doing on synergies. This is something I feel very strongly about and I wanted to highlight some examples of what is being achieved by the French team at the moment.

Two great client examples. First, Zurich Insurance has been a client of benefits and rewards for 10 years.

Zurich HR teams wanted to be able to offer their employees in their Paris offices access to a wide variety of nutritionally balanced menus and our benefit and rewards and on-site teams, they work together to propose an integrated offer to these key clients. The solution is that Zurich Insurance employees can now have lunch in a Sodexo restaurant, located near their offices, using for payments, either their Sodexo pass card, or their company badge, which integrates the employer subsidy.

Pierre Fabre has been a client of our food services for almost 50 years. Actually, we initiated our first contract in 1970.

In 2018, we renewed our contract with this long term client, extending it with one additional site in the south of France, serving more than 1500 meals daily. Very soon after this successful renewal, we were consulted by our client who wanted to provide some food solutions for their employees who do not have a restaurant on their site.

The on-site team joined forces with our benefit and rewards teams and capitalized on our deep understanding of the needs of both our clients and our consumers. And we were chosen by Pierre Fabre to provide meal pass and [indiscernible] subsidies for employing people at home and to provide these to 2500 employees.

Work is also on the way with our client to propose consumer services as well. So as you can see, our teams are working together to improve our offer and better meet our client expectations.

The work on enhancing operational efficiency is also progressing. The STEP team is currently building the tools to simplify access to the STEP dashboard.

Six countries are now engaged in forming at least 20 standard operational KPIs. And here with the figures that we show on the slide, we show you how corporate services in North America and France compensated for wage increases with productivity increasing faster than the hourly cost.

As part of our program to nurture our talent, and in preparation for STEP full deployment, we have launched the Unleash program to reinforce the basic principles by reasserting the manager role at the center of everything we do. The program was launched in March and more than 500 modules have already been completed in the UK and North America.

Full rollout of this program in all the different languages will be made. And finally, in terms of anchoring corporate responsibility, during the quarter, we built momentum in our quest to bring healthy and sustainable diets to a wider audience, especially in key segments, like college and universities in the UK and Ireland, and in North America.

And we do this by partnering with innovative and disruptive brands. In UK and Ireland, we opened our first Crussh outlet at City University of London.

Crussh is London's original fresh juice, smoothie and a healthy fast food retailer. Our partnership with Crussh will see 35 franchises, opening across sites in universities, hospitals, major events and corporate workplaces.

In North America, with 20% of college students following some form of special diet, ranging from semi-vegetarian to vegan, this is a key priority for the segment. Building on our recently deployed 200 plant based menu recipes, we have announced during this quarter two partnerships to accelerate and grow our offer on college and university campuses in the US.

One with Veggie Grill, the leading US plant based premium fast casual concept and one with SaladWorks, the reading salad centric franchise in the US. Our goal is to continue to grow and expand our offer by partnering with innovative, like minded brands when it comes to advocating and promoting health, nutrition and sustainability, and use our unique position and ability to scale to bring these offers to wider audience in key locations.

On slide 30, we felt important to provide you with an update on healthcare in North America. When I talk here about healthcare, let me highlight the fact that this is just the hospital part of the business.

This business is progressing on its turnaround plan, which I remind you was based on driving the growth agenda, anchored on renewed commercial, operational and functional excellence. We have revamped the healthcare North America executive leadership team now with 14 executives selected for their respective operations, commercial and functional expertise in the healthcare industry.

This is critical, as healthcare providers in the US expect to work with partners who understand their industry. And all combined, the executive leadership team has a unique depth and breadth of healthcare industry experience.

The team is reestablishing operational excellence, investing in subject matter expertise to support operators at client side with consistent deployment and execution of core Sodexo programs in the US, which is critical to guarantee repeatability, reliability and predictability of the outcomes, healthcare providers expect from us. Commercial excellence is also being rebooted.

With the new US sales leadership, we've on boarded the commercial skills and expertise required. We’re also investing in subject matter expertise, specifically, key account and GPO relationship management to develop stronger partnerships and increase value for members and technical sales support across all service lines we provide beyond nutrition, to advanced clients in their outsourcing decision journey.

We clearly see improvements in contract wins and retention. Phoenix Children's and the City Hospital at White Rock are proofs of this.

We’ve won a five year agreement to provide multiple support services at City Hospital at White Rock in Texas. The services include patient dining, retail dining and vending as part of the food and nutrition program as well as cleaning services for the hospital campus.

We've also recently extended our partnership with Phoenix Children's Hospital in Arizona, which we have had since 2001. Sodexo will provide clinical nutrition Services, patient food services, retail food services, clinical technology management Services, and environmental services.

We are also providing our new actual request food offer, which ensures that similar to a hotel room service, patients can request freshly prepared meals when desired. How does it work?

First, all nurses work with our food and nutrition department to define each patient's appropriate diet. Then, the patient can order from his or her customized menu.

Patient can order what they want, when they want, during our hours of operation, as long as it is within their personal dietary restrictions. Individual meals are then prepared fresh and delivered to the patient within 45 minutes of the time the patient places an order.

So it's a great offer for our clients and consumers. The team is also delivering results in the first half.

Organic growth reached 2.1%, labor productivity was up 48 basis points, which generated significant underlying operating margin improvements. All the growth KPIs are improving too.

Business development is up 30 basis points, comparables unit sales up 230 basis points and client retention up 240 basis points. On this however, I want to be quite clear, there are some good signs but we remain very cautious because we know that we still have a lot of retention challenges to come and so we may not be able to maintain this performance in the second half.

Let's move now to slide 33 and the fiscal ‘19 objectives. We saw a good start of the year.

In terms of growth, slightly better than expected, some of this growth is not yet generating the margin that it should do, particularly because of the US Marine contracts that Marc mentioned earlier, and to a lesser extent, the Yveline department schools contract, but I can assure you that we are actively working on our margins. Now, looking at the second half, first, we remain prudent on North America.

It is improving quarter by quarter, but there are still a lot of execution issues to resolve in both healthcare and seniors and in education. So we still have retention risks going forward.

This is unlikely to impact H2 significantly, but it makes us cautious. In education in North America, we also had a very strong Q4 last year, which makes our comparable base high.

We still have a lot of more work to do in terms of the management teams and reasserting the discipline in the organization. Secondly, we also have lost or exited or not renewed some contracts that will impact H2 organic growth, particularly in corporate services and sports and leisure.

This will not necessarily be bad for margins going forward. Because in many cases, these accounts were not as profitable as they should be.

Thirdly, the regions of Africa, Asia, Australia, Latin America and the Middle East is continuing to grow, but the comparable base is becoming higher and higher and energy and resources [indiscernible] as I said earlier, even though the pipeline of opportunities is improving. So, while I am confident that organic revenue growth should be in the upper end of the range between 2% and 3%, do not expect more.

The action plans are being executed with a clear focus on growth and also on margin protection. As a result, we maintain our objectives to achieve an underlying operating margin for the year in the range of 5.5% to 5.7%, excluding the currency impact, but more likely at the lower end of the range.

Our strategic agenda is aimed at delivering market leading growth. The first step is to return to this performance or to achieve an organic revenue growth of more than 3% from fiscal year 2020.

And margin improvement will come with the right levels of growth, the objective being a return to an underlying operating margin over 6% sustainably. Thank you again for being with us.

And I now open the call for your questions. So, operator, can you please open the Q&A session?

Operator?

Good morning. I will have three questions please.

First of all, in terms of your margin performance, you mentioned your intention to accelerate growth, while protecting margin, but looking to the performance in on-site, so this is in H1. So indeed, you have been able to accelerate organic growth, but margin was down.

And I know this is due to -- partly due to timing effect, but just was interested to know, if you think you will be able to recognize this loss in H2 or it will take longer than that. Second question, in terms of the improvement in North America in terms of organic growth, just would like to understand in which extent it has been helped by the pass-through of inflation compared to any underlying improvements.

And my last question, you mentioned the senior retention has been weak in North America. So I would like to know if it rose or in line with what you expected when you highlighted this risk back in January.

And also, if you have any KPIs to share on this segment as you did for healthcare.

Thank you for your question. Yes.

When we spoke earlier about the investment in growth, it’s also mean that investments in retention and signing new contracts and so on and, obviously, I mean, building up a higher growth. I mean, there are moments where you have to invest.

And this is, for instance, what's happening with the US Marine Corps. We clearly wanted to retain it and we made the effort necessary to retain it.

It has an impact in the margin short term. The US Marine Corps had a very good margin for many of its previous tenure, and -- but there is a reinvestment to be made.

We made those reinvestments in, for instance, the school in Marseille by winning a larger contract than the one we had before. But obviously, at the beginning, you have to make an effort for renewal.

So, and we have to put the CapEx and you have to put the resources. So, what we are saying is that we -- to grow, we have to make those investments and we are making it, building up, the margins will build up, some will build up faster than others.

But this is why we are maintaining the guidance for the year. I mean, the margin will improve, but we have to make those investments, if we want to grow sustainably and retention is very, very important, as we explained before and retention requires investment.

On your second question, on the USA and whether inflation is playing a role in the growth, yes, it does. It does play a role in the growth.

When we analyze the CUGR, the same-sites store in the US, we had two negative impacts. One is the reduction in price of the US Marine Corps.

And one was that big project in E&R in Q1 last year, but we have a very significant positive impact, which is the inflation pass-through and we are passing inflation and I can confirm, we are passing inflation in the US. So it helps.

The development -- the new sales in the US are still a little weak, and we are working on it, but better than last year. What we really want to focus in the US is retention.

And it takes me to your last questions on seniors. What we wanted to illustrate with the page that Denis presented on healthcare in NorAm is that when we apply our mind to fixing a business, it works.

It takes time, but it works. And so in seniors, the retention -- we lost a significant contract at the beginning of the fiscal year in seniors.

We haven't lost much since then, because the team is now really focused on, week by week, on maintaining the retention at a good level. But maybe one day, we'll give you more details on seniors.

Right now, we just wanted you to give an example of what we can do and healthcare NorAm was a good way to explain it.

We have a new leader leading the senior sub-segment and he focuses a lot of effort of course in North America. And we're confident that we'll hold strong on retention moving forward.

Three questions again, please. First, on the organic sales guidance, you say it will nearly be at 3% this year, so a year early compared to your target, how do you feel about that target for next year?

Any chance of that rising to maybe 4% at some point? And also, could you please quantify those contract exits for the second half of the year.

Secondly, on the margin guidance, you said lower end, but that still implies, at least, 20 basis points of growth in the second half. Is there any risk to that number?

Particularly, as you mentioned, those big contract wins or renewals diluting the margin. And finally, could you please give us an update on the Dining Alliance contract transfer and any sort of impacts on margins for this year or next?

Thank you.

Hello, Jamie. Thank you.

First, we’re satisfied with our first half, as you can see in terms of organic growth. We said that next year will be -- likely to be above 3%.

We don't give any guidance for next year, as of today. We'll give it in time when we present the full year fiscal year ‘19 results.

However, as you can see, we see a good momentum on our growth, we focus on profitable growth, which leads me to the second part of your first question, which is on contract exits. We are doing portfolio management, but to a very reasonable extent, of course, we focus a lot for the contracts that do not perform at the level of margin that we expect.

We do the hard work, to bring them back to the level of profitability that we expect. In some cases, we might exit some, and -- but it's not -- it's on a case by case basis.

So here and there, we could have those decision made. But there is nothing massive.

We've lost some contracts that we knew we would have lost also from Centerplate, we knew that from, at the moment we made the acquisition, so nothing new here. But as organic growth from Centerplate starts from the second half, it has an impact, but this was anticipated.

So there is nothing major, but it's -- we focus our teams very much on profitability and profitable growth, growth is back. We have a lot of now focus on our -- the right level of profitability for our contracts.

Regarding margins, Marc?

Yeah, obviously, I mean, we have to do better in the second half than we did last year to be within the range. We have a plan.

I think the team has been mobilized on executing a GP plan, which is well articulated and well focused, there are no more -- every individual in the organization has no more than three priorities on GP. There are a number of things which needs to happen.

We obviously, as we mentioned, we opened the Yveline contract, we opened the US Marine Corps, we opened a number of contracts, not all of them are performing at the right level. So now, we've got to get them to a higher level in Q3 and Q4.

And we have, I will say, a very strong control on SG&A. And so all of this together helps us making a plan to deliver those margin improvements in H2 versus last year.

Yeah. So this is where we are.

Yeah, regarding Dining Alliance, I must say that this comes, it's a progressive transfer of the portfolio. I can say that this is moving quite smoothly, and we don't anticipate any major impact on margins.

Two questions for me please. The first one on Europe, could you please give us a little bit of details of performance in your key European countries, I’m thinking about France especially, on the on-site activity, how is performance in France?

And if we -- the second question -- if we remain on France, when you approach the sell-off season, what is the risk of the yellow jacket impact on leisure demand during this season and how do you take that into account in your guidance?

So we talked, the main countries, so, of course, France is the second largest country of the group. Let’s say that we have a pretty encouraging growth in France.

It's now several quarters that we've enjoyed progressive growth or that it's pretty good. Definitely, the social climate in France is still tense.

And even though the impact of the yellowjackets is not very significant in the first half, we’re worried of the impact that it can have on the summer season, still difficult to evaluate. We know that typically hotel booking is a bit lower than last year, that’s what we see.

So, we expect definitely an impact, but it's difficult really to quantify as of today, but on the mid-, long term, things will come down. The crisis seems a little bit behind us.

For the rest, I think we see still some good momentum in the other segments and regarding another -- regarding the UK, which is also an important country, we still feel growth picking up, despite the uncertainty of the Brexit.

Harry Martin here, the first question is on cost inflation. In Q1, you said you mitigated the cost inflation and US education specifically by those improvements in work productivity, but now it sounds like this is being more passed on to clients.

Have there been any changes in the months since? And can you just say how much if anything has been a drag on the margins there.

Secondly, it's a little bit surprising to hear you talk about contract churn in education in the first half of this year, given that the selling season hasn't started yet, so could you give a little bit more color on what's happening there? And then finally, we've seen some recent contract losses in the US going back in health, college and the University of Tennessee.

So is this a trend that you've been recognizing and what do you think is leading to this shift back? Thank you.

Yeah. On cost inflation, especially in the US, I mean, we are passing inflation.

As I said, we are passing it in healthcare very well. We are passing it in universities and in schools.

The more difficulty – the difficulty we had in margin in universities and schools, it's not so much in university because in schools, if there was a lot of a churn in new contract, but in universities for instance, we had productivity gain in Q1 and we didn't sustain those productivity gains in Q2. So we've got to go back and work harder on this because we had difficulties to maintain those productivity gains over a long period of time.

But we are passing inflation. Today, the hourly labor inflation we see is about 3.4%, 3.5%.

The food inflation is reasonable, but there is some time a little disconnect between how much you pass to a client and what you suffer as inflation, but overall, the businesses is passing inflation pretty well. And productivity, it may be unstable, but we are working on it.

And regarding the churn in schools, the churn was, not this year, was last year. It’s true that we had also some renewal, not necessarily churn, but some renewals.

And as Marc was saying earlier, when you renew, sometimes, you adjust your pricing and of course you get the profitability back, most of the month. But, so there's a -- nothing major to highlight on H1.

Regarding your last question, we see here and there some clients returning, shifting back to in house, but this is absolutely marginal. This is not a fully trained, at least we don't see that all.

On the contrary, we have several interesting contacts, particularly in universities that today self-operate and are interested in outsourcing. So we still believe that there is a lot of opportunities of turning self-up universities into clients, particularly linked to the complexity of managing food at large scale where a lot of these new trends coming up and bringing complexity in our business, which is good for us with the added value that we can bring to our clients, so don't see it as a trend.

I have three questions. Just firstly on the investment program, can you just comment a bit how happy you are with the nature of the investments you've been making?

Obviously, you're a little deeper into the business now, are there any areas you think will now require incremental investments, anything else to comment that. Second one is around just the CapEx outlook?

Obviously, you’ve outlined already the guidance to hopefully get up to 2.5%. We've seen the step up already in H1, but are you still feeling 2.5% is the right level.

And I suppose how quickly do you think you'll get to that level? And then just finally on the acquisitions pipeline for the full year, that's that looking like?

And just more broadly, how you're thinking about use of cash going forward? Thanks.

Well, so far, we’re pretty happy with the investment that we made, particularly, there's the investment that we've made in the business and particularly in sports and leisure, some investments in university as well. So, they are supporting our development.

So, particularly in sports and leisure, we’re happy about this, that's what we wanted. Because we know that this CapEx is bringing the margins as we move forward.

So that's good. The other investments that we make in developing the business, we talked about marketing, sales, still, we have more to do there, digital, data, all this is promising for the future.

I believe that the investments in people also that we've made, the changes that we've made is bringing results, we see it in healthcare in North America, you see that all indicators are now back to green, not full green, but encouraging green. And so yeah, we continue to do so.

We still have a lot to do. Digital and data, we’ll update you as we move on, is bringing good things.

We have some interesting pilots on the predictability of our business, predictability of what's happening on the site. And so that's good, not late yet at scale, but interesting.

Regarding CapEx, Marc?

Yeah, we said that we will invest more in education and sports and leisure. We were under scaled in sports and leisure.

Now with the Centerplate acquisition, we have a broader scope and so we invest more in sports and leisure and we want to do that. In education, as we said, we are investing in retentions.

We are investing in development. The CapEx we spend this year was more linked to the development of last year obviously than the development of this year, because the development of this year is going forward, so depending on the selling season, and if we have a good selling season in universities and schools, we will have more CapEx next year.

But yes, we are happy. We also recognize that we have internal CapEx to do in ISMT.

And as I said earlier, we are making investments step by step, but we are making good progress on our IT CapEx. So, today, we are at 1.9%.

So we're very close to 2%. Yeah, the 2.5%, we maintain the guidance we gave at the Capital Markets Day.

Yeah.

And regarding the last question on acquisitions, we have an interesting pipeline. It's always difficult to know if we will conclude on some of the acquisitions.

As we said, acquisitions are bolt-on, not disruptive to all the efforts that we have to do to get our business back on track. We concentrate a lot on our operations, the efficiency, on our margins, top line.

So all this, we're very happy with the acquisitions that we've made so far. We don't expect any massive ones, which we could have a few coming up, but I wouldn't call any -- I wouldn't anticipate anything massive for the second half.

And in terms of cash allocation, Marc?

There is no reason why at this stage, which will change the cash allocation. We've had a very steady guidance on this today, I mean, there is no elements allowing us to say that it will change.

Three if I may as well. Two on balance sheet, one just on P&L, just on the balance sheet.

Firstly, does it make sense to still hold the bal on stake, given the amount of value there. And then secondly, just your thinking on net debt.

I think you've got the one to two times range, at 1.3 times, are we going to get towards 2? And then thirdly, on restructuring charges, I mean, how long do you think these are going to continue?

Should we expect further charges in 2020 or 2021? Thanks.

On the balance sheet stake, there is no plan today. Sodexo generates enough cash to finance its investments and if we are not very leveraged, so, there is no immediate need in cash.

So, right now, the answer is not in the foreseeable future, but I cannot further comment on that. In terms of the net debt ratio, 1 to 2 range, yeah, it depends on the M&A, because the -- right now, we have a little bit more CapEx, but the free cash flow is still steady as we showed you in November.

I mean, our cash conversion is about 100%. We do not intend to change a dividend policy at that stage.

So, today, we are generating cash. Now, what's going to happen with the 1 to 2 range, as we said, there is IFRS16 also coming into the picture and we will give you more information later on in the year.

But getting to 2, I mean I think, we are stepping up gently, so it will take us maybe a couple of years, a few years to get to 2, but it will really depend on M&A and the quality of M&A we can do and the quantity of it. So, very M&A related.

The restructuring charge going forward, so, I explained at the Capital Market Day that before we were doing big plans, but it was getting diluted after a while, so we prefer now to be more logical and do it at the right time. So we do less, but more regularly.

This first six months with the 90 million, last year we did 42, so I will say for maybe a year or two, I mean, you will be modeling at around 14 million, I think will be the right number. Be careful that in our other income and expense, there is this line, there is the M&A line and there is also the amortization of client investment and trademarks and so forth.

So you really need to have the three to get the comprehensive numbers. But I will say on the restructuring, rough number of 14 million a year looks right to me for a couple of years, not forever, for a couple of years, I think once we will be through, it will come down.

This is [indiscernible] speaking from Bank of America Merrill Lynch. Three questions please.

The first one is regarding your school contract in the Yveline, so you’ve said education’s organic revenue growth was up 10% in the first half, I just would like to understand how much was linked to the school contracts in the Yveline? Secondly, would you mind to give us your thoughts on benefits and rewards business?

And what is the outlook for this business in the second half of the year, especially with much more positive effects, especially in Q4 this year? And thirdly, would you mind to comment on food delivery?

And do you see any impact on your business from the food delivery? Thank you.

Thank you for your questions. So regarding the first one, school contract, definitely, first, we’re proud to have won that.

It’s very innovative one. It represents a significant part of that growth, but I must say that as I was saying earlier, regarding the UK, education in the UK is also developing well, so I would say a significant part coming from the school contracts in Yveline, but also of a good base -- good development in the UK.

Regarding benefits and rewards, I must say that the fundamentals are good in all the big regions and big countries where we operate. We said that Brazil is really back on track, so we’re positive.

France is doing well. Central Europe is doing well, so the big geographies, Turkey, all those big geographies, India after some quarters of difficulty due to the migration, India is back on track.

So we have really very -- some very good fundamentals. So we have a higher comparable base.

Definitely, but I'm confident in what we will do in H2. I think, there, we have some strong muscle there and yeah, confident on the year.

Regarding the food delivery impact, I wouldn't call it massive. It's a trend, as we have embarked into that trend.

As you know, in the acquisition of FoodCheri with what we've, eat club in the year, the participation that we took in eat club in the US, we also very actively delivering, starting pilots of local food delivery with some partners. We also are associating more and more, what we do in benefits and rewards with on-site to deliver additional services that help on that food delivery concept.

And we believe it's promising. So we're active.

It has an impact, but I wouldn't call it massive at this moment, but we have to watch out because -- and keep our offers ready up to speed with consumer expectations. So, all the things that we do also in click and collect, everything that facilitates for our consumers, the immediate delivery of their food and the choice is very high in our agenda.

I believe we should take the last question now.

I will probably rephrase Vicki’s questions. Obviously, you had strong organic growth that you reported.

But looking at your cash generation, you provided the slideshow in the first half free cash flow generation over the past few years, but some of those in 2017 were also affected by negative one-offs like working capital and high exceptionals. So it looks like you're retaining more contracts, which is a great success.

But there was a structural reset of cash returns down, as now even retaining the contracts requires more CapEx. So my question is, can you give a bit more color on what are your expectations, as you renew the contracts, putting in more money, in terms of their returns, versus where the business was, let's say, last year and the returns profile, that would be very helpful.

And my second question is on your brand positioning, do you feel like the brand offering is in the right place for you now across your operations?

On the cash generation, not surprisingly, there is more CapEx to go in education and in sports and leisure. As I said, we were very small in sports and leisure and mostly in France.

Now, we have a big presence in the US. We have concession and convention centers and yes, we have to put more CapEx in.

I don't think the Centerplate team is, they were telling us there is more CapEx than in the past, maybe a little bit more, but not significantly more. In education, I mean, in education, when you are playing in large schools and large colleges or contracts, you have to put some CapEx in universities too.

Yeah, I mean, I won't say it's massively more than before. In the corporate services, we have some CapEx, but not reasonable.

For instance, in government and agencies, when you renew the US Marine Corps, I mean, we don't have a huge amount of CapEx, the investments we make is more in the offer and the pricing and the productivity we will deliver. We recognize that we have more CapEx to do in IT and digital tools and so forth.

And yes, this will be consuming CapEx and we are aware of it. And I mentioned this at the Capital Market Day.

I mean, this is probably the third pillar of growth of CapEx in the future after education, sports and leisure, will be everything we have to do to become more digital insight, Sodexo and invest in it tools. I'm still maintaining that the guidance of 2.5% is reasonable.

Right now, we're at 1.9. We'll see where this will be at the end of the year and I think it will be more meaningful with a full year of CapEx and with the semester.

What we just wanted to illustrate here is the direction is going towards that. Cash generation, as you've seen, our free cash flow generation and our cash conversion has been strong.

And we expect the 100% cash conversion for this year too. It’s probably too early to say whether rates will have an impact on cash generation, but I don't see it in the immediate future.

And regarding brand positioning, we still have some work to do. We've said in previous calls that we are moving away from the absolute, single brand positioning.

We've kept some of the brands of the company, we acquired recently the companies, a great brand and of course we keep it and we will expand it. Centerplate, we get the brand [indiscernible].

So we have some very strong brands that have been joining the group. We might leverage some other ones.

We definitely have more work to do there. We also have offers that are branded, particularly in North America, local activism has helped us win a very interesting tech contract on the West Coast.

Modern recipe has helped us also won some contracts especially on the East Coast at that time. So, we have -- but we have to be stronger on that, be more explicit and so we are currently reviewing and actively repositioning our brand.

So more to come on that, it's progressive, of course. But it's an avenue that we are deeply exploring.

Thank you, Daria. Thank you very much for having been with us.

Maybe a few words of conclusion, just to tell you that, of course, we are reasonably happy with the growth that he had on the first half. We still have a lot of focus on North America, of course in healthcare, which is promising in the future.

Education is of course still an area of attention. We are actively working on portfolio management.

All hands on deck, I can assure you, discipline is being rolled across the whole organization. And profitable growth is the motto at the moment.

Talent is a constant effort across the group. And, we are positive on the outlook of the second half, cautious about areas where we have to work, but we maintain our guidance and look forward to exchanging with you as we move on, particularly in Q3 of course.

So, thank you very much to all of you. Have a great day and talk to you later.

Thank you.