Compass raises FY23 guidance and further share buyback of up to £750m

Compass Group plc (LON:CPG) has announced its half-year results announcement for the six months ended 31 March 2023.

Underlying1 results			Statutory results
	HY 2023	HY 2022	Change	HY 2023	HY 2022	Change
Revenue	£15.8bn	£12.6bn2	24.7%3	£15.7bn	£11.5bn	36.2%
Operating profit	£1,050m	£744m2	41.1%2	£878m	£638m	37.6%
Operating margin	6.6%	5.8%	80bps	5.6%	5.5%	10bps
Earnings per share	42.7p	29.9p2	42.8%2	36.4p	26.7p	36.3%
Operating cash flow	£871m	£557m	56.4%	£944m	£663m	42.4%
Free cash flow	£590m	£360m	63.9%
Interim dividend per share	15.0p	9.4p	59.6%	15.0p	9.4p	59.6%

Half-year highlights

·    Strong organic revenue growth of 25% with excellent net new business of 5.2%

– First-time outsourcing trends continue, accounting for c.45% of new business wins

– Balanced growth across all regions with very strong performance in Europe

– Maintaining strong client retention rate

·    Operating profit over £1bn and operating profit margin of 6.6%, up 80bps

·    Strong cash generation, net debt to EBITDA reduced to 1.1x

·    Further share buyback of up to £750m to be completed this calendar year

Strategic priorities for growth – capturing the outsourcing market opportunities

·    Sustaining the outperformance in North America

·    Building a track record of growth in Europe and Rest of World

·    Exited six tail countries as we continue to reshape our portfolio to focus on growth opportunities in attractive markets

Raising FY 2023 outlook

·    Operating profit growth² towards 30% (from above 20%), delivered through:

– Organic revenue growth of around 18% (from around 15%)

– Operating margin in the range of 6.7% to 6.8% (from above 6.5%)

Change in reporting currency

·    Group to report in US dollars from 1 October 2023 to align with our business exposure and reduce foreign exchange volatility on earnings

Statutory results

·    Statutory revenue increased by 36.2% reflecting trading performance and favourable exchange translation

·    Statutory operating profit, which includes charges from reshaping our portfolio and acquisition-related charges both of which are excluded from underlying operating profit, increased by 37.6%, with statutory operating margin up 10bps

1.   Reconciliation of statutory to underlying results can be found in notes 2 (segmental analysis) and 11 (non-GAAP measures) to the consolidated financial statements.

2.   Measured on a constant-currency basis.

3.   Organic revenue change.

Business review

Dominic Blakemore, Group Chief Executive, said:

“The Group performed strongly in the first half of the year, benefiting from balanced growth across all regions. 
Net new business continued to be excellent, and significantly higher than our historical rate. We are particularly pleased with the step change in our Europe performance which has benefited from growth initiatives as well as favourable outsourcing conditions. 

Despite pockets of macroeconomic weakness, the outsourcing market remains very attractive. We believe that many of the complexities that drive outsourcing, such as increased regulation, changing client and consumer expectations, and inflation, are here to stay. With our strong cash generation, we continue to invest in our business and evolve our operating model, further enhancing our scale and competitive advantage.

Following our strong first-half performance, we now expect operating profit growth towards 30% on a constant-currency basis, to be delivered through organic revenue growth of around 18% and an underlying operating margin in the range of 6.7% to 6.8%. The strength of our balance sheet, along with our confidence in the prospects for the business, give us the platform for further returns to shareholders. In addition to our ordinary dividend, we are announcing a further share buyback of up to £750m in 2023, taking the total programme announced since May 2022 to £1.5bn.

Longer term, we expect the growth opportunities in the market to sustain mid-to-high single-digit organic growth and a path back to our historical margin, leading to profit growth above revenue growth. With our established value creation model intact, we will continue rewarding shareholders with compounding returns over the long term.”

Results presentation today

A recording of the results presentation for investors and analysts will be available on the Company’s website today, Wednesday 10 May 2023, at 7.00am.

There will be a live Q&A session at 9.00am, accessible via the Company’s website, www.compass-group.com, and you will be able to participate by dialing:

UK Toll Number:	+44 (0) 33 0551 0200
UK Toll-Free Number:	0808 109 0700
US Toll Number:	+1 786 697 3501
US Toll-Free Number:	+1 866 580 3963
Participant PIN Code:	Compass

Please connect to the call at least 10 minutes prior to the start time.

2023 financial calendar

Ex-dividend date for 2023 interim dividend	8 June
Record date for 2023 interim dividend	9 June
Last day for DRIP elections	6 July
Q3 Trading Update	25 July
2023 interim dividend date for payment	27 July
Full-year results	20 November

Basis of preparation

Throughout the Half Year Results Announcement, and consistent with prior periods, underlying and other alternative performance measures are used to describe the Group’s performance alongside statutory measures.

The Executive Committee manages and assesses the performance of the Group using various underlying and other Alternative Performance Measures (APMs). These measures are not recognised under International Financial Reporting Standards (IFRS) or other generally accepted accounting principles (GAAP) and may not be directly comparable with APMs used by other companies. Underlying measures reflect ongoing trading and, therefore, facilitate meaningful year-on-year comparison. Management believes that the Group’s underlying and alternative performance measures, together with the results prepared in accordance with IFRS, provide comprehensive analysis of the Group’s results. Certain of these measures are financial Key Performance Indicators (KPIs) which measure progress against our strategy.

The Group’s APMs are defined in note 11 (non-GAAP measures) and reconciled to GAAP measures in notes 2 (segmental analysis) and 11 to the consolidated financial statements.

Group performance

The Group continues to grow strongly, capitalising on the significant structural opportunities in the outsourcing market. Organic revenue growth was 25%¹, with double-digit increases across all sectors and regions. Underlying operating margin increased by 80bps to 6.6%¹ and underlying operating profit increased to £1,050m¹ (2022: £673m).

We are continuing to invest in exciting growth opportunities both through capital expenditure and M&A. Whilst capital expenditure was only 2.3%¹ of underlying revenue in the first half, lower than historical levels due to timing delays in some investments, we expect capital expenditure to be in the range of 3.0% to 3.5% of underlying revenue for the full year. Net M&A expenditure was £210m in the period, which was largely spent on a number of bolt-on acquisitions mainly in the US and UK.

Cash flow performance remains strong, with underlying operating cash flow of £871m¹ (2022: £557m) and underlying free cash flow of £590m¹ (2022: £360m) helping our leverage (net debt to EBITDA) to reduce further to 1.1x¹, including £323m spent on share buybacks during the period.

Revenue

Organic growth of 25%¹ reflects net new business growth above historical levels at over 5%, continuing our post-pandemic recovery, with like-for-like volume growth of approximately 13%, and pricing benefits of around 7%. Net new business growth was broad based, with all the Group’s regions growing in the range of 5% to 6%.

There were double-digit increases in organic revenue across all sectors in the period and performance was particularly strong in Business & Industry, as employees continued to return to the office, and Sports & Leisure, where participation rates improved.

On a statutory basis, revenue was £15,658m (2022: £11,499m), an increase of 36.2%, reflecting the net new business growth, post-pandemic volume recovery and pricing benefits, together with favourable exchange translation.

Profit

Underlying operating profit increased by 41%¹ on a constant-currency basis, to £1,050m¹, and our underlying operating margin was 6.6%¹ (2022: 5.8%). The margin improvement reflects the benefits of operating leverage as volumes returned post-pandemic, with operational efficiencies and pricing actions to manage inflationary pressures, and is despite mobilisation costs associated with higher new business growth.

On a statutory basis, operating profit was £878m (2022: £638m), an increase of 37.6%, mainly reflecting the higher revenue and margin improvements, together with favourable exchange translation.

Statutory profit before tax of £831m (2022: £632m) includes net charges of £153m (2022: £4m) which are excluded from underlying profit before tax. During the half year, we incurred a net charge of £70m in relation to our ongoing strategic portfolio review of non-core activities to allow the Group to focus its resources on our core operations. The net charge comprises the exit from six countries, including Central and Eastern Europe (Czech Republic, Hungary, Slovakia and Romania), and the sale of a business, site closures, and contract renegotiations and terminations in the UK. Acquisition-related charges totalled £61m (2022: £33m) and there was a one-off pension charge of £12m (2022: £nil) following a change in legislation in Turkey eliminating the minimum retirement age requirement for certain employees effective from March 2023. 

1.   Alternative Performance Measure (APM). The Group’s APMs are defined in note 11 (non-GAAP measures) and reconciled to GAAP measures in notes 2 (segmental analysis) and 11 to the consolidated financial statements.

Business review (continued)

Capital allocation

Our capital allocation framework is clear and unchanged. Our priority is to invest in the business to fund growth opportunities, target a strong investment-grade credit rating with a leverage target of around 1x to 1.5x net debt to EBITDA and pay an ordinary dividend, with any surplus capital being returned to shareholders.

Growth investment consists of: (i) capital expenditure to support organic growth in both new business wins and retention of existing contracts; and (ii) bolt-on M&A opportunities that strengthen our capabilities and broaden our exposure. We have a proven track record of strong returns from our investment strategy evidenced by our historical returns on capital employed.

Shareholder returns

Our dividend policy is to pay out around 50% of underlying earnings through an interim and final dividend, with the interim dividend reflecting around one-third of the total annual dividend. The Board has approved an interim dividend of 15.0p per share to be payable in July 2023.

The £250m share buyback programme announced in November 2022 was completed in March 2023. Today, we have announced a further share buyback of up to £750m to be completed this calendar year, which takes the total buyback programme announced since May 2022 to £1.5bn.

Business review (continued)

Regional performance

North America – 67.4% of Group underlying revenue (2022: 65.9%)

	Underlyingresults1		Change1			Statutoryresults		Change
Regional financial summary	2023	2022	Reported rates	Constant currency	Organic	2023	2022	Reported rates
Revenue	£10,652m	£7,657m	39.1%	23.8%	23.2%	£10,643m	£7,650m	39.1%
Operating profit	£832m	£535m	55.5%	38.4%	38.0%	£795m	£509m	56.2%
Operating margin	7.8%	7.0%	80bps			7.5%	6.7%	80bps

1.   Reconciliation of statutory to underlying results can be found in notes 2 (segmental analysis) and 11 (non-GAAP measures) to the consolidated financial statements.

Underlying

Organic revenue grew by 23.2%, with net new business growth of 5.1%.

All sectors performed strongly, with the highest growth in our Business & Industry and Sports & Leisure sectors, which benefited from elevated per capita spend and continued volume recovery from employees returning to the office and higher attendance levels at live events.

Our Education and Healthcare & Senior Living sectors also delivered strong organic revenue growth driven by net new business and like-for-like volume growth.

Margin increased by 80bps to 7.8% driven by operating leverage benefits as volumes increased, and a continued focus on operational efficiencies and pricing actions. Operating profit was £832m, which represents 38.4% growth on a constant-currency basis.

The region invested in several bolt-on acquisitions to strengthen our capabilities and broaden exposure within our existing sectors, including the acquisition of Parks Coffee, a provider of workplace refreshments in the US.

Statutory

Statutory revenue increased by 39.1% to £10,643m reflecting the continued recovery from the pandemic, net new business growth and favourable exchange translation. There is no significant difference between statutory and underlying revenue.

Statutory operating profit was £795m (2022: £509m), with the difference from underlying operating profit being acquisition-related charges of £37m (2022: £26m).

Business review (continued)

Europe – 22.5% of Group underlying revenue (2022: 23.8%)

	Underlyingresults1		Change1			Statutoryresults		Change
Regional financial summary	2023	2022	Reported rates	Constant currency	Organic	2023	2022	Reported rates
Revenue	£3,549m	£2,766m	28.3%	26.8%	28.2%	£3,420m	£2,647m	29.2%
Operating profit	£197m	£125m	57.6%	55.1%	57.3%	£68m	£118m	(42.4)%
Operating margin	5.6%	4.5%	110bps			2.0%	4.5%	(250)bps

1.   Reconciliation of statutory to underlying results can be found in notes 2 (segmental analysis) and 11 (non-GAAP measures) to the consolidated financial statements.

Underlying

Organic revenue grew by 28.2% as our continued investment in people, brands and processes delivered net new business growth of 5.4% and a significant increase in like-for-like volumes due to lapping the impact of the pandemic in the prior period and appropriate levels of pricing. Our Business & Industry sector benefited from employees returning to the office and our Sports & Leisure sector benefited from sites fully re-opening.

Margin increased by 110bps to 5.6% as volumes recovered, and by 10bps on the second half of 2022, despite high mobilisation costs for new business. We continued to work closely with clients to manage heightened levels of inflation, both through operational efficiencies and appropriate pricing. Operating profit increased by 55.1% on a constant-currency basis to £197m.

The region invested in bolt-on acquisitions, most notably to drive additional procurement efficiencies and, as part of the Group’s ongoing strategic portfolio review, sold four businesses in Central and Eastern Europe (Czech Republic, Hungary, Slovakia and Romania) in October 2022 to focus resources and investment on core operations.

Statutory

Statutory revenue increased by 29.2% to £3,420m, with the difference from underlying revenue being the presentation of the share of results of our joint ventures operating in the Middle East.

Statutory operating profit was £68m (2022: £118m), with the difference from underlying operating profit mainly reflecting charges related to the Group’s ongoing strategic portfolio review of £99m (2022: £nil), including site closures and contract renegotiations and terminations in the UK, and a one-off pension charge of £12m (2022: £nil) following a change in legislation in Turkey eliminating the minimum retirement age requirement for certain employees effective from March 2023.

Business review (continued)

Rest of World – 10.1% of Group underlying revenue (2022: 10.3%)

	Underlyingresults1		Change1			Statutoryresults		Change
Regional financial summary	2023	2022	Reported rates	Constant currency	Organic	2023	2022	Reported rates
Revenue	£1,595m	£1,202m	32.7%	28.7%	27.9%	£1,595m	£1,202m	32.7%
Operating profit	£71m	£56m	26.8%	20.3%	20.7%	£65m	£54m	20.4%
Operating margin	4.5%	4.7%	(20)bps			4.1%	4.5%	(40)bps

1.   Reconciliation of statutory to underlying results can be found in notes 2 (segmental analysis) and 11 (non-GAAP measures) to the consolidated financial statements.

Underlying

Growth in organic revenue of 27.9% reflects net new business above historical levels at 5.7%, together with double-digit like-for-like volume growth as we lapped the impact of localised lockdowns and border closures in the prior year, and good levels of pricing.

Organic revenue growth was strong across all sectors, with double-digit growth in our Business & Industry sector across most markets, notably in India as workplaces reopened, and our more defensive Defence, Offshore & Remote sector, especially in Australia and Chile where like-for-like volumes improved.

Operating profit increased by 20.3% on a constant-currency basis to £71m. Operating margin was 4.5%, with the slight reduction on the prior period reflecting the heightened levels of inflation and impact of labour shortages. We continue to work hard with our clients to mitigate these factors going forward.

Statutory

Statutory revenue increased by 32.7% to £1,595m. There is no difference between statutory and underlying revenue.

Statutory operating profit was £65m (2022: £54m), with the difference from underlying operating profit being acquisition-related charges of £6m (2022: £2m).

Business review (continued)

Strategy

Our strategic focus is on food, with targeted support services. The addressable food services market is estimated to be worth at least £250bn. There remains a significant structural growth opportunity from first-time outsourcing, as around half of the market is still self-operated. As the operating environment becomes increasingly challenging due to a combination of inflationary pressures, increased client demands and other additional complexities, we have a clear strategy to capture the acceleration in first-time outsourcing based on our focus, scale and expertise. 

As the largest global player, our scale in procurement and focus on cost efficiencies give us competitive advantages that translate into greater value for clients and consumers. Our sectorised and sub-sectorised approach enables us to provide a tailored offer to meet changing client requirements. We are continuing to invest in our market-leading propositions in digital and ESG which are clear growth enablers in the food services market.

Our strategic focus on People, Performance and Purpose continues to underpin all that we do in our ambition to deliver value to all our stakeholders.

People

Our people are at the heart of who we are and what we do. We are focused on building an open culture in which our people can thrive, feeling safe and valued for who they are and what they bring to Compass.

In North America, our diversity, equity and inclusion (DE&I) vision is built on fostering a culture where all our associates feel seen, heard, valued and welcomed. Our DE&I programme and supplier diversity partnerships are igniting change in the communities we serve. For example, through our supplier diversity strategy, we advocate mentoring Minority and Women-owned Business Enterprises to create sustainable business opportunities for supplier inclusion. By fostering relationships with diverse suppliers, we are nurturing an inclusive business community and providing exciting variety for our clients and consumers.

Last year, Compass UK & Ireland launched ‘Our Social Promise’, a commitment to support one million people from less advantaged and under-represented backgrounds. The business set a target to be representative of society at all levels of the organisation, from a gender, ethnicity and socio-economic perspective, by 2030. As part of this commitment, the median gender pay gap has reduced, from 16.6% to 12.6%, lower than the UK national average, and ethnic median pay was 7.9% higher than the Compass UK & Ireland average reflecting a higher representation of ethnic minority colleagues in higher paid roles.

The launch of the Compass Group Foundation demonstrates our commitment to improve the lives of people through education and innovation by empowering them to play a key role in the future of food for their communities. The Foundation, which is a UK-registered charity, provides grants to non-profit organisations in countries where Compass Group operates such as Spain, India and Turkey which have already been awarded grants. Its priorities are to create inclusive job opportunities, empower local suppliers and to provide urgent support in the case of global emergencies.

Business review (continued)

Purpose

Our Planet Promise is Compass Group’s global commitment to a sustainable future for all. It encompasses the Company’s values as an ethical, sustainable and inclusive business, together with our ambition to positively impact the world. As well as being the right thing to do, this mission is also key to our growth aspirations as sustainability is a critical issue for many of Compass’ clients.

We recognise that our chefs are the best ambassadors to champion our Planet Promise, using food to connect people and communities to one another and the environment. This year, we launched ‘Chefs Creating Change’, our very first Compass Group Global Culinary Forum. The forum is a global conversation focused on sustainability initiatives with the inaugural event focused on food waste reduction. The forum created an opportunity to hear from Compass chefs around the globe as they share their greatest food waste insights.

Our UK & Ireland business has the most ambitious climate goals across the Group, with a climate net zero target date of 2030 validated by the Science Based Targets initiative (SBTi). The business’s first impact report was published this year, highlighting its progress with some standout achievements, most notably a 36% absolute reduction in emissions from animal proteins, which contributed to a 20% absolute reduction in Scope 3 food and drink emissions since 2019 (baseline year). Animal proteins are a key carbon hotspot across the Group and the positive outcome achieved in the UK & Ireland business provides great insights which will allow us to implement similar actions globally in support of our group-wide emissions reduction commitments.

Summary

Our results for the first half of the year were strong across all performance metrics. Organic revenue benefited from volume recovery, pricing and net new growth above our historical average. Operational complexities, persistent inflation, and evolving client and consumer requirements are continuing to drive our growth, with first-time outsourcing contributing c.45% of new business wins. 

The balance of performance across the regions is particularly pleasing and reflects a significant step change in our Europe business which is benefiting from growth initiatives and consistency of best practice. All regions have significant, albeit different, growth potential and we have clear strategic priorities to capture these opportunities.

Despite some pockets of macroeconomic weakness, the food service market is large and very attractive with a long structural runway of potential. Increasing operating complexities and evolving client and consumer requirements are driving exciting growth opportunities which we believe are mostly structural. Our strategic priorities are focused on capitalising on these opportunities and driving accelerated financial performance.

Our strong cash generation and disciplined capital allocation framework underpin our robust balance sheet. Shareholders will benefit from the interim ordinary dividend of 15.0p, together with a further share buyback of up to £750m to be completed this calendar year.

Looking further ahead, we remain excited about the significant global structural growth opportunities, leading to revenue and profit growth above historical rates. With our established value creation model intact, we will continue rewarding shareholders with compounding returns over the long term.