Compass Group Regulatory News (CPG)

Annual Results Announcement

Legal Entity Identifier (LEI) No. 2138008M6MH9OZ6U2T68

Full year results announcement for the year ended 30 September 2020

1. Reconciliation of statutory to underlying results can be found on pages 49 to 50.

2. Prior year comparatives have been restated as required by IFRS 5 'Non-current assets held for sale and discontinued operations' to account for joint ventures and associates using the equity method retrospectively when they cease to be classified as held for sale. Additional information is included in note 11.

3. Measured on a constant currency basis.

4. Organic revenue growth.

5. The Group has adopted IFRS 16 'Leases' with effect from 1 October 2019 without restating prior year comparatives. As a result, the Group results for the year ended 30 September 2020 are not directly comparable with those reported in the prior year under IAS 17 'Leases'. To provide meaningful comparatives, the results for the year ended 30 September 2020 have therefore also been presented on a proforma IAS 17 basis, see notes 2 and 13 for additional information.

Compass is well positioned for the future as it addresses the challenges of COVID-19

Dominic Blakemore, Group Chief Executive, said:

"2020 was a challenging year for Compass. I am extremely proud of how the organisation responded to the pandemic. I have been humbled by the commitment of our people in the face of unprecedented adversity and want to thank them for their continued dedication and hard work.

We began the year on track to deliver our strongest performance ever, and over the course of a fortnight in March, we saw the containment measures to stop the spread of COVID-19 close half of the business. We rapidly enhanced our health and safety protocols, mitigated our costs, increased our liquidity and strengthened our balance sheet. Through the summer, our performance began to improve slowly as we helped clients in Education and Business & Industry return to schools and offices safely.

Importantly, in the fourth quarter we returned the business to profitability and are now cash neutral. This was achieved mainly through contract renegotiations to reflect the difficult trading environment, continued discipline in terms of costs and some improvement in volumes. We are executing at pace and expect the underlying operating margin in the first quarter of 2021 will be around 2.5%.

Although the prospects of a vaccine are encouraging, the resumption of lockdowns in some of our major markets shows that we have to continue to take proactive actions to control the controllable and ensure the business can thrive despite the ongoing pandemic. We are innovating and evolving our operating model to be more flexible and to provide our clients and consumers with an exciting offer that is delivered safely and provides great value. This combined with our existing scale, ability to flex costs and focus on operational execution, will allow us to return to a Group underlying margin above 7% before we return to pre-COVID volumes.

The scope for growth from first time outsourcing and share gains is significant. In addition, we have a strong pipeline of new business in Healthcare & Seniors, Education and Defence, Offshore & Remote that will diversify and broaden our revenue base. We are investing in the business organically and inorganically to support our long term growth prospects, enhance our competitive advantages, and further consolidate our position as the industry leader in food services.

We are improving the quality of the business and will emerge from the pandemic stronger than we've ever been. We recognise the importance of the dividend to our shareholders and the Board looks forward to reinstating it when considered appropriate. Finally, we remain as excited as ever about the significant structural growth opportunities globally, the potential for further revenue and profit growth, and returns to shareholders over time."

Chief Executive's Statement

Although COVID-19 severely impacted the business from late Q2, new business wins remained robust, and retention was high

• Organic revenue down 18.8% year on year as COVID-19 related restrictions reduced volumes in Business & Industry, Education and Sports & Leisure in all three regions

• In North America, new business wins of 6.9% and strong 96.4% retention, despite significant disruption due to the pandemic

• In Europe, good results in Healthcare & Seniors offset by the significant impact of COVID-19 on Sports & Leisure and Business & Industry

• Greater exposure to Defence, Offshore & Remote in Rest of World mitigated the impact of the pandemic on Business & Industry throughout the region

• Underlying operating margin of 2.9% or 3.5% (excluding contract related non-current asset impairment and onerous contract charges) with a return to profitability in Q4

• Expect Q1 2021 margin to be around 2.5% and committed to rebuilding the Group underlying margin to above 7% before we return to pre COVID-19 volumes

COVID-19 response

• Prioritised the safety of colleagues and customers and enhanced operating protocols throughout the crisis

• Moved rapidly to support clients in Healthcare & Seniors and Education on the frontline of the pandemic

• Adapted our cost base and renegotiated contracts to reflect the new trading environment

Strong and resilient balance sheet

• £2 billion equity raise to reduce leverage - liquidity increased to around £5 billion

• Free cash flow of £213 million and net debt to EBITDA ratio of 2.1x

Strategy - positioning for the future

• Managing the business through the lens of People, Performance, Purpose in the interests of all stakeholders

• Adapting our operations to improve the offer, increase flexibility and manage costs

• Significant structural growth opportunity in terms of first time outsourcing and share gains

• Investing in digital, organic and inorganic growth opportunities to support future growth

Statutory results

• Statutory revenue decreased by 19.8% due to the impact of COVID-19 on volumes. Operating profit decreased by 81.9% as a result of the impact of COVID-19, the resizing programme to adjust our cost base, contract related non-current asset impairment and onerous contract charges, as well as the negative impact of foreign exchange.

Chief Executive's Statement (continued)

Results presentation today

A recording of the results presentation for investors and analysts will be available on the Company's website today, Tuesday 24 November 2020, at 7.00 a.m.. There will be a question and answer session at 9:00 a.m., accessible via the Company's website, www.compass-group.com, and you will be able to participate by dialing:

Please connect to the call at least 10-15 minutes prior to the start time.

Financial calendar

Enquiries

Chief Executive's Statement (continued)

Basis of preparation

Throughout this preliminary results announcement, and consistent with prior years, underlying and other alternative performance measures are used to describe the Group's performance. These are not recognised under International Financial Reporting Standards (IFRS) or other generally accepted accounting principles (GAAP). The Executive Committee of the Group manages and assesses the performance of the business on these measures and believes they are more representative of ongoing trading, facilitate meaningful year on year comparisons, and hence provide more useful information to shareholders. Underlying and other alternative performance measures are defined in the glossary of terms on pages 53 and 54. A summary of the adjustments from statutory results to underlying results is shown in note 12 on pages 49 and 50 and further detailed in the consolidated income statement (page 30), reconciliation of free cash flow (page 36), note 3 segmental reporting (page 42) and note 13 organic revenue and organic profit (page 51).

FY 2020 overview

The COVID-19 pandemic has had a profound impact on Compass. We can only exist with the commitment of our colleagues around the world, many of whom have been on the front line of the battle against the pandemic. I am extremely proud of how the organisation has responded, and I'm humbled by the commitment and dedication our people are showing, day in day out.

I want to extend my deepest sympathies to the families of those colleagues that have lost their lives to COVID-19. We continue to be committed to doing all we can to support them.

2020 was a year of two halves. We began the year on track to deliver our strongest performance ever when, in March, over the course of a fortnight we saw the containment measures to control the spread of COVID-19 close half of the business. The health and safety of our employees and consumers has been, and remains, our absolute priority. As the pandemic unfolded, sites that remained open were operating with enhanced health and safety protocols and Personal Protective Equipment (PPE). As restrictions were lifted and clients returned to schools and offices, we have helped them reopen and ensure they bring consumers back safely. Nevertheless, throughout the year, in the face of unprecedented volatility, we have continued to manage the business through the lens of People, Performance and Purpose to ensure that we continue to protect the interests of all our stakeholders.

Performance

Our 2020 results reflect the dramatic impact COVID-19 has had on our business. Our revenue in FY2020 declined by 18.8% on an organic basis as a result of the pandemic.

Organic revenue

After an excellent first five months, the business received a shock when all our Sports & Leisure business and most of our Education and Business & Industry sectors were closed in March. In June, July and August we saw a gradual reopening of parts of the business. By September, all sectors except Sports & Leisure were partially or fully open representing about 65% of the business. At that time, we also began to see the reintroduction of local lockdowns as many markets started to experience a second wave of infections.

New business (MAP 1) was up 5.7% reflecting the strong momentum pre-pandemic. After a slowdown in the third quarter, in the fourth quarter we saw an increase in new wins in Healthcare & Seniors and Education in North America. This reflects a 'flight to trust' as clients sought food service providers with best in class health and safety protocols, robust supply chains and strong balance sheets.

Retention was 95.1% as clients maintained their trusted food service provider during the pandemic. Like for like revenue declined by 19.6% due to the impact of site closures as well as lower populations on site due to social distancing requirements. On a statutory basis, revenue decreased by 19.8%, including the negative impact of foreign currency translation.

Chief Executive's Statement (continued)

Costs

We have taken a series of measures to reduce our food (MAP 3) costs, in unit labour and in unit overheads (MAP 4) and our above-unit (MAP 5) costs to offset the impact of lower volumes. In markets where little or no government support was available, we acted quickly to adjust our cost base and are already seeing the savings come through.

In markets where government support was available, we used it to limit job losses. This year we received £437 million of government support. However, whenever government support has ended, we have evaluated our staffing needs and taken the necessary steps to ensure that we avoid carrying excess costs.

Although resizing will be an ongoing task, actions taken thus far will avoid annual in unit labour (MAP 4) costs of around £280 million and annual savings of above unit (MAP 5) costs of £70 million, both of which will be essential for us to rebuild our margins back to above 7%.

Resizing action in the year totalled £122 million. In addition, the cost action programme announced in November 2019 has incurred £75 million of costs in the year and is delivering the savings initially anticipated. Together, these initiatives will allow us to rebuild our margins in 2021 and beyond. The costs associated with both programmes have been excluded from the Group's underlying results.

Operating profit and operating margin

Although margins were up 20 bps (10 bps excluding the impact of IFRS 16) for the five months to March, the significant volume impact of the lockdowns resulted in a negative third quarter margin. Significant cost actions and contract renegotiations to reflect the changes in the trading environment, combined with a slight improvement in volumes, allowed us to return to profitability in the fourth quarter (before any contract related non-current asset impairment and onerous contract charges).

In light of the disruption to the business, we have reviewed our contract portfolio and impaired £88 million of contract related non-current assets and recognised £31 million of onerous contract losses - together these represent around 3% of our £4 billion contract related non-current assets (contract fulfilment assets and contract costs, right of use assets, property, plant and equipment and intangible assets).

Underlying operating profit decreased by 69.7% to £561 million on a constant currency basis (or by 71.2% to £533 million excluding the impact of IFRS 16). Our underlying operating profit margin was 2.9% or 3.5% after excluding contract related non-current asset impairment and onerous contract charges (2.8% or 3.4% excluding the impact of IFRS 16) with a return to profitability in the fourth quarter.

Strategy

The food services market remains very attractive. We estimate it is around £220 billion, with about two thirds currently operated by small regional players or operated in house. This means there is a significant structural growth opportunity from first time outsourcing as well as share gains. We are particularly attracted to the more defensive sectors of Healthcare & Seniors, Education and Defence, Offshore & Remote where there are meaningful first time outsourcing opportunities.

We have reviewed our strategy and remain confident about our focus on food, and our pragmatic approach to providing support services in the markets where we have the right capabilities. As the industry leader, we have the greatest scale, which gives us an advantage in terms of food procurement and our ability to leverage our overheads. In addition, we go to market with a sector and sub sector approach that allows us to get close to our clients and create a bespoke food service solution that truly meets their needs.

In response to the pandemic, we are innovating and evolving our operating model. By innovating and adapting our offer and operations to the 'new normal', this will allow us to reduce costs and increase our flexibility, so that we can provide our clients and consumers an exciting offer that is delivered safely and provides great value. The three main areas of strategic focus are:

• digital: consumer facing use of apps and kiosks to pre-order, pre-pay, click and collect as well as back of house apps for labour management and food procurement

• labour: increase labour flexibility, leverage our scale and pool our workforce across sectors to better accommodate volume volatility on site

• central production units: hubs for development, training and production to rationalise labour costs and reduce food waste

These three areas of focus combined with our existing scale and competitive strengths, will allow us to return to industry leading levels of performance.

Chief Executive's Statement (continued)

Regional performances

North America - 63.1% Group revenue (2019: 62.4%)

1. The Group has adopted IFRS 16 'Leases' with effect from 1 October 2019 without restating prior year comparatives. As a result, the Group results for the year ended 30 September 2020 are not directly comparable with those reported in the prior year under IAS 17 'Leases'. To provide meaningful comparatives, the results for the year ended 30 September 2020 have therefore also been presented on a proforma IAS 17 basis, see notes 2 and 13 for additional information.

Organic revenues in our North American business declined by 18.5%, reflecting the volume impact of COVID-19 in the second half of the year, which saw revenues decline by over 40%. Encouragingly, new business for the full year was 6.9%, with significant levels of growth from first time outsourcing and wins from smaller regional players. Retention rates were high at 96.4%.

Our Sports & Leisure business - mainly stadia and entertainment venues - remained closed throughout the second half of the year. Our Education sector was significantly impacted by the lockdown in March. As the new academic year began in August and September we saw a mixed approach to reopening, especially within our Higher Education sub sector where many clients are offering a hybrid curriculum with online as well as live classes. Our Business & Industry portfolio is more weighted towards 'Business' and serving office based consumers where the return to work has been slow. Our Healthcare & Seniors business grew by 4.5%, driven by double digit new business wins. Most Defence, Offshore & Remote locations have remained open during the year, however, changes to working patterns have driven modest volume declines.

We have taken significant actions to mitigate the impact of volume declines on our operating margin. We have renegotiated contracts, furloughed employees and rightsized both in unit (MAP 4) and above unit (MAP 5) costs. Underlying operating profit of £606 million, including £64 million of contract related non-current asset impairment and onerous contract charges, decreased by 52.8% on a constant currency basis. The full year underlying operating margin was 4.8% (4.6% excluding the impact of IFRS 16), or 5.3% before the impact of contract related non-current asset impairment and onerous contract charges. The Q4 underlying margin, before the impact of contract related non-current asset impairment and onerous contract charges, was around 3%. With uncertainty around volume recovery, the cost base remains under constant review to ensure margin improvement in 2021.

Chief Executive's Statement (continued)

Europe - 25.0% Group revenue (20191,2: 25.4%)

1. The Group has adopted IFRS 16 'Leases' with effect from 1 October 2019 without restating prior year comparatives. As a result, the Group results for the year ended 30 September 2020 are not directly comparable with those reported in the prior year under IAS 17 'Leases'. To provide meaningful comparatives, the results for the year ended 30 September 2020 have therefore also been presented on a proforma IAS 17 basis, see notes 2 and 13 for additional information.

2. Prior year comparatives have reclassified Turkey and Middle East from our Rest of World region into our Europe region.

Organic revenue declined by 24% for the full year. Revenues declined by 44% in the second half given that 71% of Europe's revenues are in Business & Industry (51%), Education (12%) and Sports & Leisure (8%), the three sectors that have been most impacted by the pandemic. Through the summer we saw a recovery in Business & Industry as consumers returned to the office, especially in continental Europe. In Education, the beginning of the academic year in September has been positive especially in the K-12 sub sector. Reopening of our clients in Higher Education has been more mixed. Our Sports & Leisure business, which is largely in the UK, remains closed.

Although new business wins were 2.8% and have been subdued especially in the UK, France and Germany, we saw a higher proportion of new business from small and regional players. Retention has been broadly in line with previous years at 92.6%.

Across Europe, government schemes are supporting employees during the pandemic. As these schemes end, we are having to take resizing actions to adjust our cost base to reflect the current trading environment.

The integration of Fazer, acquired in February, has proceeded at a slightly slower pace than anticipated due to the pandemic. Nevertheless, Fazer returned to profitability in September and is on track to deliver the expected synergies.  

As a result of the significant volume decline, the underlying operating loss was £29 million. This includes £48 million of contract related non-current asset impairment and onerous contract charges. The underlying operating margin was 0.4% before the contract related non-current asset impairment and onerous contract charges, and negative 0.6% (negative 0.7% excluding the impact of IFRS 16) including these impairments and charges. Encouragingly, since the initial impact of lockdowns in March, the underlying operating margin improved from negative 13% in Q3 to negative 4% in Q4. We have taken the necessary actions to rebuild our margin in the UK to offset the impact of lower reopening rates in Business & Industry and the sustained closure of our Sports & Leisure business with the benefits expected to come through in 2021.

Chief Executive's Statement (continued)

Rest of World - 11.9% Group revenue (20191,2: 12.2%)

1. The Group has adopted IFRS 16 'Leases' with effect from 1 October 2019 without restating prior year comparatives. As a result, the Group results for the year ended 30 September 2020 are not directly comparable with those reported in the prior year under IAS 17 'Leases'. To provide meaningful comparatives, the results for the year ended 30 September 2020 have therefore also been presented on a proforma IAS 17 basis, see notes 2 and 13 for additional information.

2. Prior year comparatives have reclassified Turkey and Middle East from our Rest of World region into our Europe region.

Organic revenue declined by 7.9% as the volume impact of the pandemic offset modest growth in Australia and in some countries with Offshore and Remote businesses. The region was not as impacted by the pandemic given that 54% of its revenues are in the Defence, Offshore & Remote and Healthcare & Senior sectors.

New business wins in the year were 5.8%, with strong growth rates in Brazil, Chile and India. Retention for the year was 93.4%, however, we saw a significant improvement in the second half with retention at around 95%.

We took swift actions to adjust our cost base to the new trading environment, especially in Latin America.

Underlying operating profit was £94 million, including £7 million in contract related non-current asset impairment and onerous contract charges. The impact of disposals, mainly the Highway business in Japan, accounted for around £30 million of the underlying operating profit decline. The full year underlying operating margin was 3.9% (3.7% excluding the impact of IFRS 16), or 4.2% before the impact of contract related non-current asset impairment and onerous contract charges. The underlying operating margin in the fourth quarter before the impact of contract related non-current asset impairment and onerous contract charges was 2.8%.

Chief Executive's Statement (continued)

Earnings per share and the dividend

Underlying earnings per share was 18.6 pence, down 77.8% (19.1 pence down 77.2% excluding the impact of IFRS 16) on a constant currency basis due to the impact of the pandemic. Although we recognise the importance of the dividend to our shareholders, we need to balance this with the impact that COVID-19 has had on our business. As a result, as previously reported on 23 April, the Board has decided not to pay a final dividend in respect of the financial year ended 30 September 2020. The Board will keep future dividends under review and will restart payments when it is considered appropriate to do so.

On a statutory basis, operating profit for the year decreased by 81.9% to £294 million due to our lower underlying operating profit, resizing costs, the cost action programme and £24 million negative impact of foreign currency translation, partially offset by a £28 million benefit from the adoption of IFRS 16. Statutory earnings per share was 8.0p, down 88.8%.

Cash

Underlying free cash flow was £213 million. This is significantly lower than last year mainly due to the impact of COVID-19 on profits. Gross capital expenditure for the year was £749 million, 3.7% of revenues. This was spent primarily on contractually committed investment including £70 million on new wins and retention in North America in the fourth quarter. Working capital was a £143 million outflow. This is slightly higher than in previous years as sales and payroll tax deferrals and excellent collections were offset by the impact of having most of our cash business in Sports & Leisure, and Business & Industry closed. Net M&A totalled £450 million. The largest acquisition was Fazer Food Services in the Nordics for £363 million net of cash acquired, offset by £29 million of disposals net of exit costs, with the largest disposal being our highways service business in Japan.

Balance sheet

At 30 September 2020 net debt was £3,006 million, including an additional £939 million due to the implementation of IFRS 16 'Leases'. Net debt to EBITDA was 2.1x (excluding the impact of IFRS 16, net debt to EBITDA would have been 0.4x lower). During the year, we took a series of steps to increase the resilience of our balance sheet. We increased the Group's liquidity from £2,381 million to £4,787 million through a £1,972 million equity raise and £800 million of additional committed and undrawn credit facilities.

We obtained waivers of the leverage covenant test in our US Private Placement agreements for the September 2020 and March 2021 test dates. The interest cover covenant test was also waived for September 2020 and reset at more than or equal to 3x on a six months proforma basis for March 2021.

These measures have increased our resilience and will allow us to weather the crisis, whilst continuing to invest in the business to support our long term growth prospects and enhance our competitive advantages so we can continue to create long term value for all our stakeholders.

In March, we qualified for and drew down £600 million from the Bank of England's Covid Corporate Financing Facility (CCFF). This was repaid in June with proceeds from the equity raise. The £600 million limit remains available whilst the CCFF remains in place.

We are targeting strong investment grade credit ratings and net debt to EBITDA in the range of 1x -1.5x. Beyond this, our priorities for cash are: (i) invest capital expenditure to support organic growth, (ii) bolt-on M&A opportunities that improve our sector exposure or strengthen our capabilities. At the appropriate time, we will resume the dividend and other returns to shareholders.

People

People are the foundation of our business. The global impact of COVID-19 has tested the strength, resilience and adaptability of our teams more than ever. Our overriding focus has been the safety and wellbeing of our colleagues during these difficult times.

There have been a range of initiatives developed locally to support our People through the crisis. Markets as varied as the UK, Canada, India and Argentina are providing colleagues with support and assistance programmes to help them cope with uncertainty, fear and anxiety.

The pandemic has impacted some of our sectors more than others. We have tried to protect as many jobs as possible. Employees working in units that have been closed have, where possible, been redeployed to other sites where critical work is still required such as Healthcare & Seniors, Education and Defence. Where redeployment has not been possible, support has been provided locally through mechanisms such as employee assistance programmes and hardship funds.

Chief Executive's Statement (continued)

We are committed to hiring, developing and retaining our diverse talent to ensure we have a truly engaged, high performing and fulfilled workforce so we can drive our business forward. This year, we have signed the Race at Work Charter, which has been designed to foster a commitment to improving outcomes for ethnic minority employees in the workplace. Although we continue to progress the levels of representation of women in our senior ranks, there is more we need to do to fully reflect the rich diversity of the communities in which we operate.

Purpose

Our purpose is mainly a social purpose: to keep our people and our consumers safe and healthy, provide healthy food and nutrition, while making the world a better place by protecting the environment and supporting local communities.

We have introduced new protocols to help protect our people and consumers from COVID-19. Working in partnership with our clients, we have transformed thousands of sites around the world to be COVID-19 secure, facilitating social distancing and introducing enhanced hygiene measures. We continue to take measures to protect our employees. Our global Lost Time Incident Frequency Rate has dropped by 42% since 2016.

While the pandemic has resulted in some delays in climate change action in some of our markets, we remain committed to reducing our CO2 footprint and getting ready to set Science Based Targets to play our part in limiting global warming to below 1.5 ○C.

During the pandemic our teams around the world have mobilised resources at scale and with pace to allow us to support governments and Healthcare clients. We have also prepared and delivered food to critical and essential workers, the elderly, vulnerable and those in financial distress, often working in partnership with grassroots support organisations.

As we look ahead, we will focus our efforts further on three priorities: food waste, environmental impact - including climate change - and responsible and resilient sourcing.

Summary and outlook

The Group has responded admirably to unprecedented circumstances. We supported the front line without compromising on the health and safety of our people, clients and consumers. We acted quickly to mitigate costs, increase our liquidity and strengthen our balance sheet. We have renegotiated contracts to reflect the difficult trading environment while continuing to remain disciplined in terms of costs. These actions, combined with some improvement in volumes, allowed us to return to profitability in the fourth quarter and we are now cash neutral. We continue to execute at pace and expect the underlying operating margin in the first quarter of 2021 to be around 2.5%.

We are taking proactive actions to adapt our operations and control the controllable to ensure the business can thrive despite the pandemic and is well placed for the recovery. We are innovating and evolving our operating model to be more flexible and to provide our clients and consumers with an exciting offer that is delivered safely and provides great value. This, combined with our existing scale, ability to flex costs and focus on operational execution, will allow us to return to a Group underlying margin of above 7% before we return to pre-COVID volumes.

Although much has changed, the Compass model of value creation remains the same. We leverage our scale and focus on best in class operational execution to drive organic revenue growth and margins. This is combined with a disciplined approach to capital allocation that rewards shareholders while supporting reinvestment in the business.

Whilst this crisis has placed significant pressure on the Group in the short term, we are very confident in our medium and long term growth prospects. We remain excited about the significant structural growth opportunities globally, the potential for further revenue and profit growth, and returns to shareholders over time.

Dominic Blakemore

Group Chief Executive Officer

24 November 2020

Business Review

Compass is well positioned for the future as it addresses the challenges of COVID-19.

1. The Group has adopted IFRS 16 'Leases' with effect from 1 October 2019 without restating prior year comparatives. As a result, the Group results for the year ended 30 September 2020 are not directly comparable with those reported in the prior year under IAS 17 'Leases'. To provide meaningful comparatives, the results for the year ended 30 September 2020 have therefore also been presented on a proforma IAS 17 basis, see notes 2 and 13 for additional information.

2. Prior year comparatives have been restated as required by IFRS 5 'Non-current assets held for sale and discontinued operations' to account for joint ventures and associates using the equity method retrospectively when they cease to be classified as held for sale. Additional information is included in note 11.

Definitions of underlying measures of performance can be found in the glossary on pages 53 and 54.

Business Review (continued)

Segmental performance

Statutory and underlying results

1. Definitions of underlying measures of performance can be found in the glossary on pages 53 and 54.

2. Reconciliation between the different growth rates is provided in note 13.

3. Prior year comparatives have reclassified Turkey and Middle East from our Rest of World region into our Europe region.

4. The Group has adopted IFRS 16 'Leases' with effect from 1 October 2019 without restating prior year comparatives. As a result, the Group results for the year ended 30 September 2020 are not directly comparable with those reported in the prior year under IAS 17 'Leases'. To provide meaningful comparatives, the results for the year ended 30 September 2020 have therefore also been presented on a proforma IAS 17 basis, see notes 2 and 13 for additional information.

5. Prior year comparatives have been restated as required by IFRS 5 'Non-current assets held for sale and discontinued operations' to account for joint ventures and associates using the equity method retrospectively when they cease to be classified as held for sale. Additional information is included in note 11.

Further details of the adjustments can be found in the consolidated income statement, note 3 segmental reporting and note 12 statutory and underlying results.

Business Review (continued)

Adoption of new accounting standards

The Group has applied the new accounting standard IFRS 16 'Leases' using the modified retrospective transition approach, therefore the comparative information has not been restated and continues to be reported under IAS 17 'Leases' and IFRIC 4 'Determining whether an arrangement contains a lease'.

Statutory results

Revenue

On a statutory basis, revenue was £19,940 million (2019: £24,878 million), a decline of 19.8% due to the negative impact of COVID-19.

Operating profit

Operating profit was £294 million (20191: £1,626 million), a decrease of 81.9%, mainly reflecting the negative impact of COVID-19, including a £119 million one off non-cash charge in relation to contract related non-current asset impairment and onerous contract charges. The reduction in operating profit was also driven by the costs associated with the programmes aimed at right sizing the business, partially offset by the savings related to these programmes and a modest benefit from the implementation of IFRS 16.

Statutory operating profit includes non-underlying items of £267 million (20191: £256 million), including a £75 million charge in relation to the continuation of the cost action programme announced in November 2019 (2019: £190 million), COVID-19 resizing costs of £122 million (2019: £nil) and acquisition related costs of £70 million (2019: £54 million). A full list of non-underlying items is included in note 12.

Net gain on sale and closure of businesses

As a result of the strategic review of the business, the Group has continued to sell or exit its operations in a number of countries, sectors or businesses in order to simplify its portfolio. Activity in the period has included the sale of 50% of the Japanese Highways business. The Group has recognised a net gain of £115 million on the sale and closure of businesses (2019: £50 million gain), offset by £56 million of exit costs and asset write downs relating to committed or completed business exits (2019: £57 million).

The Group's consolidated balance sheet includes assets of £13 million (20191: £135 million) and liabilities of £7 million (2019: £30 million) in respect of businesses held for sale. This decrease is driven by the Group's decision to pause the disposal of the remaining US laundries and some businesses in Rest of World due to the market volatility caused by COVID-19. As a result, management no longer considers these disposals are highly probable and likely to be completed within 12 months and therefore these businesses are no longer classified as held for sale.

Finance costs

Net finance costs increased to £143 million (2019: £125 million), mainly due to the adoption of IFRS 16 which resulted in an additional £36 million of net interest payable, partially offset by lower interest rates compared to the prior year and a reduction in net debt following the equity raise.

Tax charge

Profit before tax was £210 million (20191: £1,494 million), giving rise to an income tax expense of £75 million (2019: £351 million), equivalent to an effective tax rate of 35.7% (20191: 23.5%). The increase in rate primarily reflects the mix of profits by country taxed at different rates and the higher effective tax rate on sale and closure of businesses.

Earnings per share

Basic earnings per share were 8.0 pence (20191: 71.6 pence), a decrease of 88.8%, mainly as a result of the negative impact of COVID-19 and an increase in the number of ordinary shares in issue following the placing of shares in May 2020.

1. Prior year comparatives have been restated as required by IFRS 5 'Non-current assets held for sale and discontinued operations' to account for joint ventures and associates using the equity method retrospectively when they cease to be classified as held for sale. Additional information is included in note 11.

Business Review (continued)

Underlying results

We track our performance against underlying and other alternative performance measures, which we believe better reflect our strategic priorities of growth, efficiency and shareholder returns.

A summary of adjustments from statutory results to underlying results is shown in note 12 on pages 49 and 50 and further detailed in the consolidated income statement (page 30), reconciliation of free cash flow (page 36), note 3 segmental reporting (page 42) and note 13 organic revenue and organic profit (page 51).

Revenue

On an organic basis, revenue decreased by 18.8%, reflecting the negative impact of COVID-19. The steps taken to contain the spread of the virus impacted our sectors in different ways. Revenues in Healthcare & Seniors and Defence, Offshore & Remote were good. Our Education and Business & Industry sectors were mostly closed in April and May, and started to cautiously reopen in June, while Sports & Leisure remained fully closed. In the last quarter of the year, the Group's organic revenue performance improved as clients in Education and Business & Industry began to return to schools and offices in our main markets. By September, all sectors except Sports & Leisure were partially or fully open, representing about 65% of the business. Retention was robust at 95.1% and we have started to see attractive new first time outsourcing opportunities. New business wins were 5.7% and like for like revenue decline was 19.6%.

Operating profit

Underlying operating profit was £561 million (2019: £1,882 million), a decrease of 70.2%, reflecting the impact from COVID-19 and the resulting lower volumes. Operating profit for the year has been negatively impacted by a non-cash charge of £119 million comprising contract related non-current asset impairment (£88 million) and onerous contract charges (£31 million) for contracts impacted by COVID-19 and that are now considered to be structurally loss making.

If we restate 2019's profit at the 2020 average exchange rates, it would decrease by £30 million to £1,852 million. On a constant currency basis, underlying operating profit has therefore decreased by £1,291 million, or 69.7%.

The impact of IFRS 16 for the twelve months of 2020 was to increase underlying operating profit by £28 million.

Operating margin

The operating profit margin was 2.9% (2.8% excluding the impact of IFRS 16), reflecting the impact of COVID-19 (2019: 7.4%). As our business started to reopen and after strong mitigating actions to compensate for lower volumes and relentless focus on cost efficiencies, the business returned to profitability in the fourth quarter.

Finance costs

The underlying net finance cost increased to £134 million (2019: £110 million), mainly due to the adoption of IFRS 16 which resulted in an additional £36 million of net interest payable, partially offset by lower interest rates compared to the prior year and a reduction in net debt following the equity raise.

Tax charge

On an underlying basis, the tax charge was £116 million (2019: £413 million), equivalent to an effective tax rate of 27.2% (2019: 23.3%). The increase in rate primarily reflects the mix of profits by country taxed at different rates. The tax environment continues to be uncertain, with more challenging tax authority audits and enquiries globally. 

Earnings per share

On a constant currency basis, the underlying basic earnings per share fell by 77.8% to 18.6 pence (2019: 83.8 pence). The decrease is mainly driven by the negative impact of COVID-19 and an increase in the number of ordinary shares in issue following the placing of shares in May 2020.

Business Review (continued)

Shareholder returns

Dividends

As a result of the impact of the COVID-19 pandemic, in April 2020, the Board decided not to recommend an interim or final dividend. The Board understands the importance of the dividend to our shareholders and will keep future dividends under review and will restart payments when it is appropriate to do so.

In determining the level of dividend in any year, the Board considers a number of factors, which include but are not limited to:

• the level of available distributable reserves in the Parent Company

• future cash commitments and investment requirements to sustain the long term growth prospects of the business

• potential strategic opportunities

• the level of dividend cover

Further surpluses, after considering the matters set out above, may be distributed to shareholders over time by way of special dividend payments, share repurchases or a combination of both.

Compass Group PLC, the Parent Company of the Group, is a non-trading investment holding company which derives its distributable reserves from dividends paid by subsidiary companies. The level of distributable reserves in the Parent Company is reviewed annually and the Group aims to maintain distributable reserves that provide adequate cover for dividend payments. The distributable reserves of the Parent Company include the balance on the profit and loss account reserve, which at 30 September 2020 increased to £2,935 million (2019: £1,252 million) mainly due to the placing of new equity on 21 May 2020.

The ability of the Board to maintain its future dividend policy will be influenced by a number of the principal risks identified on pages 21 to 29 that could adversely impact the performance of the Group, although we believe we have the ability to mitigate those risks as outlined on pages 25 to 29.

The Group continues to have substantial available liquidity and it is our ambition to resume dividend payments. While the current uncertainty caused by the COVID-19 situation makes it difficult to accurately forecast the timing and extent of profit recovery, we continue to see good long term opportunities for the business.

Placing of shares

The Group raised net proceeds of £1,972 million through a placing of new ordinary shares on 21 May 2020. The placing comprised 195,667,352 new ordinary shares at a price of £10.25 per share, representing a discount of 3.3% to the middle market price at the time at which the placing price was agreed. The total number of new shares issued represented approximately 12.3% of Compass' existing issued ordinary share capital prior to the capital raise. The proceeds from the placing have strengthened the Group's balance sheet and liquidity position, reducing leverage to deal with the challenging environment and ensure Compass remains resilient in the event of further negative developments in the pandemic. These measures will enable Compass to continue to invest in the business to support long term growth, ensuring it is well positioned for the eventual recovery.

Share buyback programme

The Group did not buy any shares during the period under the share buyback programme (2019: £nil). The directors' authority to purchase the Company's shares in the market was renewed by the shareholders at the Company's Annual General Meeting held on 6 February 2020.

Share price

The market price of the Group's ordinary shares at 30 September 2020 was £11.69 per share (2019: £20.93 per share).

Business Review (continued)

Free cash flow

Free cash flow totalled £105 million (2019: £1,218 million). During the year, we made cash payments of £108 million in relation to the programmes aimed at right sizing the business (2019: £29 million). Adjusting for this, underlying free cash flow was £213 million, an 82.9% decrease as a result of the impact of COVID-19 on profitability and cash generation. Underlying free cash flow conversion was 38% (2019: 66%).

Gross capital expenditure of £749 million (2019: £853 million) is equivalent to 3.7% (2019: 3.4%) of underlying revenue.

The working capital outflow, excluding provisions and pensions, was £143 million (2019: £59 million inflow) and includes a £234 million benefit from COVID-19 indirect and payroll tax payment deferral schemes available in different countries.

The outflow related to post employment benefit obligations net of service costs was £9 million (2019: £15 million).

The net interest outflow was £137 million (2019: £107 million), of which £36 million relates to interest on lease obligations.

The net tax paid was £228 million (2019: £328 million), equivalent to an underlying cash tax rate of 53% (2019: 19%). The percentage increase is due to changes in the UK's corporation tax instalment regime and tax payments made based on higher profits arising before the COVID-19 outbreak, partially offset by corporate income tax payments deferred as a result of COVID-19.

Acquisitions

The total cash spent on acquisitions in the year, net of cash acquired, was £479 million (2019: £478 million), comprising £480 million of bolt-on acquisitions and investments in associates and £24 million of contingent consideration relating to prior years' acquisitions, offset by £25 million of cash acquired net of transaction costs.

The main acquisition during the year was the purchase of 100% of the issued share capital of Fazer Food Services for an initial consideration of £363 million (€414 million) net of cash acquired. The remaining contingent consideration is payable within seven years and is dependent on the operation of an earn-out. The net present value of the contingent consideration was £56 million (€66 million) at the date of acquisition. Fazer Food Services is a leading food service business in the Nordic region with operations in Finland, Sweden, Norway and Denmark across several sectors including Business & Industry, Education, Healthcare & Seniors and Defence.

Disposals

The Group has continued to simplify its portfolio and has sold 50% of its interest in the Japanese Highways business during the year. The Group received £29 million (2019: £101 million) in respect of disposal proceeds net of exit costs.

At 30 September 2020, the Group has net assets and liabilities totalling £6 million classified as held for sale in relation to certain businesses as these disposals are highly probable and expected to be completed within 12 months.

Financial position

Liquidity

The Group finances its operations through cash generated by the business and borrowings from a number of sources including the bank, the public and the private placement markets. The Group has developed long term relationships with a number of financial counterparties with the balance sheet strength and credit quality to provide credit facilities as required. The Group seeks to avoid a concentration of debt maturities in any one period to spread its refinancing risk. The maturity profile of the Group's principal borrowings at 30 September 2020 shows that the average period to maturity is 4.6 years (2019: 5.4 years).

We have taken steps to strengthen the Group's financial position. In March 2020, the Group qualified for and drew down £600 million from the Bank of England's Covid Corporate Financing Facility (CCFF) which was repaid in June. In April, we put in place an additional Revolving Credit Facility1 (RCF) of £800 million and as at 30 September 2020 had total undrawn committed credit facilities of £2,800 million. The £600 million CCFF limit remains available whilst the CCFF is open.

We have obtained a waiver of the leverage covenant test in our US Private Placement agreements for the September 2020 and March 2021 test dates. The interest cover covenant test has also been waived for September 2020 and reset at more than or equal to 3x on a six months proforma basis for March 2021. Finally, Standard & Poor reaffirmed our long term (A) and short term (A-1) credit ratings on 24 March (the outlook was changed to Negative) and Moody's A3/P-2 long and short term credit ratings and Stable Outlook remain unchanged.

1. Contains no financial covenants.

Business Review (continued)

In May 2020, the Group completed a £1,972 million equity raise to strengthen the balance sheet and liquidity position, reducing leverage to deal with the challenging environment and ensure Compass remains resilient in the event of further negative developments in the pandemic. These measures will enable Compass to continue to invest in the business to support long term growth, ensuring it is well positioned for the eventual recovery.

Proceeds from the equity raised were used to repay: £600 million of CCFF, £350 million of drawn credit facilities and £214 million maturing Commercial Paper.

As of 30 September 2020, the Group had access to £4,787 million in total liquidity, including £2,800 million in undrawn committed bank facilities (2019: £2,000 million), £600 million available in CCFF and £1,387 million in cash net of overdrafts. Our solid financial position will allow us to weather the crisis whilst continuing to invest in the business to strengthen our competitive advantages and support our long term growth prospects.

Net debt

The ratio of net debt to market capitalisation of £20,871 million at 30 September 2020 was 14.4% (2019: 9.8%).

Net debt decreased to £3,006 million (2019: £3,272 million) despite £995 million of net debt added on the adoption of IFRS 16, offset by £1,972 million from the equity raise. The ratio of net debt to EBITDA was 2.1x. Our leverage policy is to maintain strong investment grade credit ratings and to target net debt to EBITDA in the range of 1x to 1.5x.

The Group generated £213 million of underlying free cash flow (2019: £1,247 million), including investing £706 million in net capital expenditure, and spent £450 million on acquisitions net of disposal proceeds. £427 million was paid in respect of the final dividend for the 2019 financial year. The remaining £47 million increase in net debt related predominantly to cash spent in relation to the cost action programme and resizing costs (£108 million) partially offset by other non-cash movements and currency translation (£61 million).

Return on capital employed

Return on capital employed was 4.7% (2019: 19.5%) based on net underlying operating profit after tax at the underlying effective tax rate of 27.2% (2019: 23.3%). This decrease mainly reflects the impact of COVID-19 and a 30 bps decrease due to the implementation of IFRS 16. The average capital employed was £8,683 million (2019: £7,380 million).

Post employment benefit obligations

The Group has continued to review and monitor its pension obligations throughout the period, working closely with the trustees and actuaries of all schemes around the Group to ensure appropriate assumptions are used and adequate provision and contributions are made.

The Compass Group Pension Plan (UK) surplus of £441 million (2019: £448 million) and the deficit in the rest of the Group's defined benefit pension schemes of £251 million (2019: £259 million) have remained relatively unchanged year on year.

The total pensions charge for defined contribution schemes in the year was £118 million (2019: £126 million) and £21 million (2019: £33 million) for defined benefit schemes.

Financial management

The Group manages its liquidity, foreign currency exposure and interest rate in accordance with the policies set out below.

The Group's financial instruments comprise cash, borrowings, receivables and payables that are used to finance the Group's operations. The Group also uses derivatives, principally interest rate swaps, forward currency contracts and cross currency swaps, to manage interest rate and currency risks arising from the Group's operations. The Group does not trade in financial instruments. The Group's treasury policies are designed to mitigate the impact of fluctuations in interest rates and exchange rates and to manage the Group's financial risks. The Board approves any changes to the policies.

Foreign currency risk

The Group's policy is to balance its principal projected cash flows by currency to actual or effective borrowings in the same currency. As currency cash flows are generated, they are used to service and repay debt in the same currency. Where necessary, to implement this policy, forward currency contracts and cross currency swaps are taken out which, when applied to the actual currency borrowings, convert these to the required currency.

Business Review (continued)

The borrowings in each currency can give rise to foreign exchange differences on translation into sterling. Where the borrowings are either less than, or equal to, the net investment in overseas operations, these exchange rate movements are treated as movements on reserves and recorded in the consolidated statement of comprehensive income rather than in the consolidated income statement.

Non-sterling earnings streams are translated at the average rate of exchange for the year. Fluctuations in exchange rates have given, and will continue to give, rise to translation differences. The Group is only partially protected from the impact of such differences through the matching of cash flows to currency borrowings.

Interest rate risk

As set out above, the Group has effective borrowings in a number of currencies and its policy is to ensure that, in the short term, it is not materially exposed to fluctuations in interest rates in its principal currencies. The Group implements this policy either by borrowing fixed rate debt or by using interest rate swaps so that the interest rates on

at least 80% of the Group's projected debt are fixed for one year. For the second and third year, interest rates are fixed within ranges of 30%-70% and 0%-40% respectively.

Group tax policy

As a Group, we are committed to creating long term shareholder value through the responsible, sustainable and efficient delivery of our key business objectives. This will enable us to grow the business and make significant investments in the Group and its operations.

We therefore adopt an approach to tax that supports this strategy and also balances the various interests of our stakeholders including shareholders, governments, employees and the communities in which we operate. Our aim is to pursue a principled and sustainable tax strategy that has strong commercial merit and is aligned with our business strategy. We believe this will enhance shareholder value whilst protecting Compass' reputation.

In doing so, we act in compliance with the relevant local and international laws and disclosure requirements, and we conduct an open and transparent relationship with the relevant tax authorities that fully complies with the Group's Code of Business Conduct and Code of Ethics.

After many years of operations, the Group has numerous legacy subsidiaries across the world. Whilst some of these entities are incorporated in low tax territories, Compass does not seek to avoid tax through the use of tax havens. Details of the Group's related undertakings are listed in note 36 of the Annual Report.

In an increasingly complex international corporate tax environment, a degree of tax risk and uncertainty is, however, inevitable. Tax risk can arise from differences in interpretation of regulations, but most significantly where governments apply diverging standards in assessing intragroup cross border transactions. This is the situation for many multinational organisations. We manage and control these risks in a proactive manner and, in doing so, exercise our judgement and seek appropriate advice from relevant professional firms. Tax risks are assessed as part of the Group's formal governance process and are reviewed by the Board and the Audit Committee on a regular basis.

Risks and uncertainties

The Board takes a proactive approach to risk management with the aim of protecting its employees and customers and safeguarding the interests of the Group, its shareholders, employees, clients, consumers and other stakeholders.

The principal risks and uncertainties that face the business and the activities the Group undertakes to mitigate these are set out on pages 21 to 29.

Related party transactions

Details of transactions with related parties are set out in note 31 of the consolidated financial statements in the 2020 Annual Report. These transactions have not had, and are not expected to have, a material effect on the financial performance or position of the Group.

Business Review (continued)

Going concern

The uncertainty as to the future impact on the financial performance and cash flows of the Group as a result of the recent COVID-19 outbreak has been considered as part of the Group's adoption of the going concern basis in its financial statements. The factors considered by the directors in assessing the ability of the Group to continue as a going concern are included in note 1.

The Group has access to considerable financial resources together with longer term contracts with a number of customers and suppliers across different geographic areas and industries. As a consequence, the directors believe that the Group is well placed to manage its business risks successfully during this period of uncertainty.

Based on the assessment discussed in note 1, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the 12 months from the date of approval of the financial statements. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

Viability statement

In accordance with provision 31 of the UK Corporate Governance Code 2018, the directors have assessed the viability of the Group, taking into account the Group's current position, the latest three year strategic plan, and the potential impact of the principal risks documented on pages 21 to 29. Based on this assessment, the directors confirm that they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period to 30 September 2023.

Group's strategic planning process

The Board considers annually and on a rolling basis a three year, bottom up strategic plan. Current year business performance is reforecast during the year and a more detailed budget is prepared for the following year. The most recent financial plan was approved by the Board in September 2020 and subsequently updated in November 2020 in the light of the recent resumption of lockdowns in some of our major markets. The directors acknowledge the heightened uncertainty of the Group's strategic plans in the current environment and as a result have considered a range of different scenarios. The plan is reviewed and approved by the Board, with involvement throughout from the Group CEO, Group CFO and the management team. Part of the Board's role is to consider the appropriateness of key assumptions, considering the external environment, business strategy and model including the impact of COVID-19.

Period of assessment

The directors have determined that a three year period to 30 September 2023 is an appropriate period over which to provide its viability statement. Having considered whether the assessment period of three years should be extended in light of COVID-19, it is the directors' view that three years is an appropriate period given this is the period reviewed by the Board in its strategic planning process and is also aligned to the Group's typical contract length (three to five years). The directors believe that this presents the Board and readers of the Annual Report with a reasonable degree of confidence over this longer term outlook.

Viability assessment and COVID-19 

In making this assessment, the Board carried out a robust evaluation of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. The output of the strategic plan is used to perform a central debt and headroom profile analysis, which includes a review of sensitivity to 'business as usual' risks and severe but plausible events. It also considers the ability of the Group to raise finance and deploy capital. The results consider the availability and likely effectiveness of the mitigating actions that could be taken to avoid or reduce the impact or occurrence of the identified underlying risks.

While the review has considered all the principal risks identified by the Group, there was a focus on how the COVID-19 pandemic risk could impact the Group's future financial performance and cash flows under different scenarios. As a result, COVID-19 severe yet plausible downside sensitivities have been applied to the three year plan approved by the Board. These were based on the potential financial impact of the Group's principal risks and uncertainties and the specific risks associated with the COVID-19 pandemic.

The COVID-19 downside sensitivities have been assumed to occur over the same three year period in order to assess the Group's ability to withstand multiple challenges.

In the three year plan approved by the Board, consistent with current trading patterns, the business that is closed is assumed to continue reopening in a phased manner and gradually recover. Given the three year plan is most sensitive to changes in the duration and severity of the impact of the pandemic, a prudent approach has been taken to stress test this three year plan with downside scenarios as explained below:

Business Review (continued)

· 'additional global wave' scenario: assumption that a further global wave of infections and government enforced restrictions occurs in financial year 2021 and lasts for a full quarter, with trading patterns and subsequent recovery mirroring that experienced during the first global wave. This scenario mirrors the experience of the first global wave experienced in all major markets at the same time

· 'prolonged downturn' scenario: assumes that, after an additional global wave scenario, the number of sites open, occupation levels and volumes do not recover above 75% for the rest of the three year period

The impact of the COVID-19 downside scenarios has been reviewed against the Group's projected liquidity headroom, credit ratings and financial covenants over the three year viability period. Should these scenarios occur, the Group continues to retain sufficient committed headroom on liquidity with mitigating actions it can deploy.

Mitigating actions were identified as the COVID-19 pandemic emerged as part of the contingency planning that the Group has been undertaking, which considered both feasibility and timeframe to execute. Mitigating actions available include, but are not limited to, reducing planned capital spend, resizing the cost base of the Group, reducing or pausing M&A activity, securing additional committed funding and reducing or pausing shareholder returns. During the current financial year, all such actions have been deployed as part of the Group's response to COVID-19, along with the £1,972 million equity raise.

As the pandemic emerged, in order to strengthen the Group's financial position in March 2020, the Group put in place an additional RCF of £800 million and obtained a £600 million limit under the CCFF. As at 30 September 2020 the Group had total undrawn committed credit facilities of £2,800 million, an unutilised £600 million CCFF limit, and £1,387 million cash net of overdrafts.

In May 2020, the Group completed a £1,972 million equity raise to strengthen the balance sheet and reduce leverage to deal with the challenging environment and ensure the Group remains resilient in the event of further negative developments in the pandemic.

In the event that any of the downside scenarios modelled materialise and financial covenants on the Group's US Private Placement (USPP) debt come under pressure, various alternatives exist to manage this risk including repaying the loan notes from available liquidity in advance of their maturity, negotiating further covenant waivers or refinancing the debt. The Group was successful in obtaining a waiver of the leverage covenant test in the USPP agreements for the September 2020 and March 2021 test dates. The interest cover covenant was also waived for September 2020 and reset for March 2021.

Standard & Poor reaffirmed the Group's long term (A) and short term (A-1) credit ratings on 24 March (the outlook was changed to Negative) and Moody's A3/P-2 long and short term credit ratings and Stable Outlook remain unchanged.

The combination of strong investment grade credit ratings and a well established presence in the debt capital markets provide the directors with confidence that the Group could raise additional debt finance if required.

The geographical and sector diversification of the Group's operations helps minimise the risk of serious business interruption or catastrophic damage to our reputation. Furthermore, the Group's business model is structured so that the Group is not reliant on one particular group of clients or sector. The Group's largest client constitutes only 2.7% of Group revenue and the Group's top 10 clients account for less than 11% of Group revenue.

The Audit Committee reviews the output of the viability assessment in advance of final evaluation by the Board. Having reviewed the current performance, forecasts, debt servicing requirements, total facilities and risks, the Board has a reasonable expectation that the Group has adequate resources to continue in operation, meet its liabilities as they fall due and retain sufficient available cash across all three years of the assessment period.

The Board therefore has a reasonable expectation that the Group will remain viable over the three year period of assessment.

Karen Witts

Group Chief Financial Officer 

24 November 2020

Risk Management

Identifying and managing risk

The Board continues to take a proactive approach to risk management, with the aim of protecting the Group's employees and consumers and safeguarding the interests of the Company and its shareholders in what is a constantly changing environment.

Risk management is an essential element of business governance and, as set out in the Corporate Governance section, the Group has risk management processes in place, supported by policies and procedures to ensure that risks are properly identified, evaluated and managed at the appropriate level within the business.

The identification of risks and opportunities, the development of action plans to manage the risks and maximise the opportunities, and the continual monitoring of progress against agreed key performance indicators (KPIs) are integral parts of the business process and core activities throughout the Group.

In compliance with provision 28 of the UK Corporate Governance Code 2018, the Board has carried out a robust assessment of the Company's emerging and principal risks. The paragraphs below set out the Board's approach to assessing risk, the principal risks of the Company and the procedures in place to identify emerging risks.

Risk governance framework

The Group runs a formal risk management process, as part of which the Group's principal risks (highlighted on pages 25 to 29) are assessed and prioritised, with the Board having overall responsibility for risk management.

Risks are reviewed by country and regional leadership teams on an ongoing basis and are assessed to identify and document corresponding mitigating actions. Risk updates form an integral part of periodic management reviews and are also reviewed by other members of the Group's senior leadership, the Group's Risk Committee and the Regional/ Group Governance Committees. Additional reviews are performed by Group Internal Audit. This bottom up and top down approach provides awareness and agreement on key risks facing the Group.

A critical component of the risk review process is the dynamic identification of developing and emerging risks at a country, regional and global level. The findings of the risk reviews, including the principal risks and any developing trends, are reported to and considered by the Board twice a year.

Risk appetite

The Board interprets appetite for risk as the level of risk that the Company is willing to take in order to meet its strategic goals. The Board communicates its approach to and appetite for risk to the business through the strategy planning process and the internal risk governance and control frameworks. Through this process there is a robust approach to risk assessment and mitigation, whilst maintaining sufficient flexibility to continue to promote the entrepreneurial spirit which supports the Company's strategic priorities, including positioning the business for growth. Risk appetite, principal operational risks and risk assurance are discussed in further detail in the Audit Committee Report on pages 92 to 103 of the 2020 Annual Report.

Emerging risks

The Board has established processes for identifying emerging risks, and horizon scanning for risks that may arise over the medium to long term. Emerging and potential changes to the Group's risk profile are identified through the Group's risk governance frameworks and processes, and through direct feedback from management including changing operating conditions, market and consumer trends.

In respect of emerging risk, the Board is cognisant of structural changes in many of our markets, particularly in business and industry, where working practices are changing, which include an increase in working from home. This trend has been greatly accelerated by the COVID-19 pandemic, and working habits and trends may not fully revert to their pre-COVID-19 position. In addition, office and other work sites may become smaller and more numerous. Furthermore, competition from online food vendors offering delivery services is an increasing trend, which may compete with our established premises in Business & Industry, Healthcare & Seniors and Education.

To mitigate the risk to the business of changes in consumer habits, we are adapting our service offering and evolving our strategy to meet the needs of our clients and consumers while continuing to create long term value. We are focused on innovation and have invested in technology, our supply chain and our ability to scale solutions that take advantage of emerging trends in the food service sector and ensure we continue to delight our existing and future clients and consumers.

Risk Management (continued)

We perceive climate change as an emerging risk and foresee that it may have an impact on the Group's operations, food sourcing and our supply chain in some of our markets. In turn, this could affect the availability of some food products, and potentially may lead to food cost inflation. To mitigate this risk, we will focus on evaluating our exposure to climate change, and will seek to identify potential future issues early so that our sourcing and operations can be adjusted, and our menus adapted appropriately. Climate change is important to us as a business and to our clients, and we will continue to work with our clients to propose, execute and measure solutions to support their efforts and ours in reducing greenhouse gas emissions.

Our principal risks

On pages 25 to 29 we set out the principal risks and uncertainties facing the business at the date of this announcement and any changes to the status of these risks since 2019. These have been subject to robust assessment and review.

They do not comprise all of the risks that the Group may face and are not listed in any order of priority. Additional risks and uncertainties not presently known to management, or which are considered to be remote or are deemed to be less material at the date of this announcement, may also have an adverse effect on the Group.

COVID-19 pandemic risk

Throughout the COVID-19 pandemic, our priority has remained the health and safety of our employees and consumers and we continue to manage the business to protect the interests of all our stakeholders, including our shareholders, our people, clients, consumers and the communities in which we operate.

The Group's operations have been significantly disrupted as a result of the rapid development and global impact of the pandemic. During the pandemic, much of our business has been closed, and sites that are open are operating with enhanced health and safety protocols and Personal Protective Equipment (PPE) requirements. The performance of our Business & Industry, Education and Sports & Leisure sectors has been particularly affected by containment and social distancing measures. Excluding Sports & Leisure we have seen improvement, but we anticipate that changes to the market and consumer trends may require us to adapt some of our service offerings.

We moved quickly to mitigate the disruption and our ability to adapt helped us to adjust our operations to the changed environment, implementing a wide range of actions to mitigate a risk to the business which continues to evolve.

Employees

To try to protect as many jobs as possible and to facilitate mobilisation of the business at the appropriate time, steps have been taken to retain the skills and experience of our colleagues. Employees working in units that remain closed have, where possible, been redeployed to other sites where critical work is required e.g. in Healthcare and Education, and where this has not been possible, by the use of furlough according to local government support schemes and labour regulations. Our regions provide a variety of support mechanisms through employee assistance programmes and many have established funds and other mechanisms to support employees who face financial difficulties as a result of these actions.

In line with local government and public health guidance, provisions are in place throughout our operations to safeguard the health and safety of employees globally, including travel restrictions, remote working and ensuring our operations are COVID-19 secure, to help prevent the spread of the virus. Where we are able to operate on site, we have stepped up our health and safety protocols to ensure our employees, clients and consumers remain safe. Additional measures to combat the spread of the virus will continue to operate in line with local government and public health guidance.

Locally, there has been an increased focus on providing mental health awareness, stress management and resilience toolkits, whilst individual support has been provided through employee assistance programmes and our local People teams. We have also implemented a small number of employee retention arrangements for critical employees.

Profitability and liquidity

We have implemented action plans to mitigate a significant proportion of our cost base in order to preserve the profitability and liquidity of the Group and we continue to review our cost base for additional savings. All non-business critical capital expenditure and M&A activity has been significantly reduced or paused.

We reduced our cost base by taking a wide range of actions including: (i) limiting the use of variable forms of in unit labour (MAP 4) such as overtime, redeploying or furloughing much of the fixed element of our in unit labour; (ii) reducing in unit overheads (MAP 4) such as rent, rates and concession fees and (iii) reducing salary, hours or furloughing above-unit overhead (MAP 5) employees.

Risk Management (continued)

The Board decided not to recommend an interim or a final dividend for the year ended 30 September 2020 to preserve capital to ensure that the medium to long term interests of the Company are protected for the benefit of investors and other stakeholders.

The Group proactively managed its working capital, applying for government support packages such as temporary wage subsidy schemes and tax payment deadline extensions where possible.

In addition, a number of steps were taken to strengthen the Group's liquidity and increase the resilience of our balance sheet:

• in March, the Group obtained a £600 million limit under the Bank of England's Covid Corporate Financing Facility (CCFF). This was drawn down in March and repaid in June

• in April, we put in place an additional Revolving Credit Facility (RCF) of £800 million and, as at the date of this announcement, we have total undrawn committed credit facilities of £2,800 million

• in May, we obtained waivers of the leverage covenant test in our US Private Placement agreements for the September 2020 and March 2021 test dates. The interest cover covenant test has also been waived for September 2020 and reset at more than or equal to 3x on a six months proforma basis for March 2021

• as announced on 19 May 2020, the Company raised £1,972 million by way of an equity placing, subscription and retail offer

The Company has further strengthened its position by undertaking the following actions:

• extending the maturity date on the Group's £2,000 million RCF (£1,860 million expires in 2025 and £140 million expires in 2024)

• increasing the Company's Commercial Paper programme from $2,000 million to $4,000 million and its Euro Medium Term Note programme from £4,000 million to £6,000 million.

Together, these measures will ensure that we remain resilient in the event of further negative developments in the pandemic. The Board will continue to monitor the situation and to adjust the Company's capital and liquidity strategy as appropriate to deal with the situation as it evolves.

Governance and operational effectiveness

Robust incident management and business continuity plans were quickly implemented throughout our business to safeguard governance processes and operational effectiveness. Regional and country management and Group Executive Committee and Board meetings have been, and continue to be, conducted remotely (where necessary) on a more regular basis, to ensure that the Group is able to respond to any immediate or emerging concerns and to closely monitor the effectiveness of strategic measures. Special measures that were put in place as a short term response to counter the initial severity of the COVID-19 outbreak, including remote working, are still in operation where necessary and are working effectively.

Before lockdown, we performed business continuity tests to ensure that our technology infrastructure could support the shift to mass working from home. We have accelerated the adoption of digital diagnostics and monitoring to reduce the possibility of an attack on our technology estate and we continue to closely monitor our infrastructure and any reliance we have on third parties to ensure continuity of business critical systems and processes.

Our people have been instrumental in the smooth transition to remote working. With support from our IT colleagues, we have quickly adapted to using videoconferencing and other forms of digital technology and, in the process, have demonstrated that we are able to work efficiently away from the office.

As a result of these special measures, business usage of and reliance on the internet has risen, leading to a significant increase in the number of sophisticated malware and phishing attacks across all organisations. To mitigate the risk of these types of attacks, we have increased our awareness campaigns to help our employees be better equipped to identify these attacks. We are using the lessons learned from those exercises to target areas for improvement in our awareness campaigns.

Planning for the unknown

The speed with which countries and their governments have responded to the threat of COVID-19 and the severity of the containment measures imposed arise from the complexity of the factors involved, which include devolved decision making at country and local government level, cultural issues and financial considerations. This has meant the rate at which communities and businesses are able to return to a level of normality is different not only at country, but also at local level. Because of this, it is difficult to predict when we will return to a pre-COVID normality. Experience has demonstrated that the full threat of the virus is not yet completely understood and that further outbreaks are leading to the re-introduction of the stricter measures that were in force in many of our markets in April and May. As a precautionary measure, to test our resilience and safeguard our resource, we are modelling on this basis and will continue to plan and evolve our strategy accordingly.

Risk Management (continued)

Due to the unpredictable nature of the virus and the complexity of factors involved, we believe that the COVID-19 pandemic represents a principal risk to the Group. We have taken the lessons learned from our business response and have incorporated them into our risk management processes and procedures to mitigate the impact of this risk as far as possible in the event of further outbreaks of COVID-19, or another pandemic. With respect to managing the COVID-19 risk, we will continue to monitor recurrence of the virus, and will retain the ability to adapt our service offering, employ relevant health and safety precautions and deploy resources as necessary. Our prudent financial controls and robust modelling scenarios will assist us in accounting for this risk.

Brexit

The impact of the UK's decision to exit the European Union (Brexit) remains high on our agenda. The Board continues to view the potential impact of Brexit as an integral part of our principal risks rather than as a standalone risk.

The UK has left the EU and remains in a period of transition until 31 December 2020. The UK Government has made a number of announcements that could impact food and beverage costs from 1 January 2021 including customs checks, tariffs and new immigration policies. We perceive the main risks as a potentially reduced range of fresh produce, increased costs and tariffs, and price increases in locally sourced produce in line with increased demand. In our risk mitigation planning we have sought to ensure that our key suppliers have the correct customs documentation in place for 1 January 2021, and have planned for increased stock holding and possible menu changes in case of delays in supply through UK ports. We retain our ability to adapt our menu planning and sourcing to mitigate the risk of supply chain issues arising from the impact of Brexit. The Board will continue to monitor the potential impact and the Company will take necessary mitigating actions as appropriate.

Other principal risks

The Group faces a number of operational risks on an ongoing basis such as litigation and financial (including liquidity and credit) risk and some wider risks, for example, environmental and reputational. Other than the impact of the COVID-19 pandemic, the principal risks affecting the Group during the year were consistent with those reported in the 2019 Annual Report and in the 2020 half year results announcement. All risks disclosed in previous years can be found in the annual reports available on our website www.compass-group.com. We recognise that these risks remain important to the business and they are kept under regular review. However, we have focused the disclosures on pages 25 to 29 on those risks that are currently considered to be more significant to the Group.

Principal Risks

Principal Risks (continued)

Principal Risks (continued)

Principal Risks (continued)

Principal Risks (continued)

Compass Group PLC

Consolidated Financial Statements

Compass Group PLC

Consolidated Financial Statements (continued)

Compass Group PLC

Consolidated Financial Statements (continued)

1. Own shares held by the Group represent 147,058 ordinary shares in Compass Group PLC (2019: 187,455 ordinary shares) and are held by the Compass Group PLC All Share Schemes Trust (ASST). These shares are listed on a recognised stock exchange and their market value at 30 September 2020 was £1.7 million (2019: £3.9 million). The nominal value held at 30 September 2020 was £16,250 (2019: £20,714).

2. Prior year comparatives have not been restated for IFRS 16 'Leases'. Additional information about the impact of IFRS 16 is included in note 2.

3. Prior year comparatives have been restated as required by IFRS 5 'Non-current assets held for sale and discontinued operations' to account for joint ventures and associates using the equity method retrospectively when they cease to be classified as held for sale. Additional information is included in note 11.

4. In May 2020, the Company issued 195,667,352 new ordinary shares of 111/20 pence each, comprising the 'Placing shares', the 'Subscription shares' and the 'Retail offer shares'. No share premium was recorded in relation to the Placing shares and the premium over the nominal value of these shares was credited to merger reserve and subsequently recognised in retained earnings as the Company was able to rely on Section 612 of the Companies Act 2006.

5. Includes loss of £621 million (2019: loss of £668 million) in relation to the balance remaining in the foreign currency translation reserve from net investment hedging relationships for which hedge accounting continues to apply.

Compass Group PLC

Consolidated Financial Statements (continued)

1. Prior year comparatives have not been restated for IFRS 16 'Leases'. Additional information about the impact of IFRS 16 is included in note 2.

2. Prior year comparatives have been restated as required by IFRS 5 'Non-current assets held for sale and discontinued operations' to account for joint ventures and associates using the equity method retrospectively when they cease to be classified as held for sale. Additional information is included in note 11.

3. Includes loss of £668 million (2018: £529 million) in relation to the balance remaining in the foreign currency translation reserve from net investment hedging relationships for which hedge accounting continues to apply.

Compass Group PLC

Consolidated Financial Statements (continued)