Compass Group Regulatory News (CPG)

Interim year results announcement for the six months ended 31 March 2016

Strong performance delivering growth and returns to shareholders

1 Full details of the underlying column can be found on page 40.

2 Measured on a constant currency basis, with the exception of free cash flow and interim dividend.

3 Organic revenue growth.

Excellent organic revenue growth of 5.8%

· Another strong six months in North America with organic sales up 8.3%

· Good growth in Europe with organic revenue up 3.7%

· Rest of World grew 5% excluding Offshore & Remote

Underlying margin flat before restructuring costs

· The Management and Performance (MAP) programme continues to drive operating efficiencies

· Restructuring plan announced in July 2015 on track to deliver the expected savings

Growth, performance and returns to shareholders: a proven and sustainable model

· Free cash flow of £396 million, up 23% on H1 2015

· Proposed interim dividend up 8.2%, in line with constant currency EPS growth

· Remain committed to ongoing returns to shareholders with £72 million of share buybacks in H1 2016

· Expectations for 2016 are positive and unchanged

Chief Executive's Statement 

Richard Cousins, Group Chief Executive, said:

"Compass has had another strong six months. North America continues to deliver excellent growth. Our business in Europe is growing nicely as we are rewarded for our investment in previous years to accelerate growth in the region. In Rest of World, reasonable growth in Business & Industry, Healthcare & Seniors, Education and Sports & Leisure was partly offset by ongoing weakness in Australia, Brazil and our Offshore & Remote sector.

We continue to drive operating efficiencies around the business, which is being reinvested in the growth opportunities we see. The savings from the restructuring are starting to come through, and are offsetting the weakness in Offshore & Remote and some emerging markets. Therefore, margins pre-restructuring were flat.

Our expectations for FY 2016 are positive and unchanged. Our pipeline of new contracts is encouraging and our focus on organic growth, efficiencies and cash gives us confidence in achieving another year of delivery.

In the longer term, we remain excited about the significant structural growth opportunities globally and the potential for further revenue growth, margin improvement, as well as continued returns to shareholders through dividends and ongoing share buybacks."

Enquiries

Chief Executive's Statement (continued)

Group overview

Revenue for the Group increased by 5.8% on an organic basis. Underlying revenue at reported rates increased by 6.7%.

New business wins accelerated to 9%, driven by a strong performance in MAP 1 (client sales and marketing) across the Group. Our retention rate remained at 94.5% reflecting our ongoing focus and investment. This includes extending our global contract with JLL to provide a range of food services to HSBC until 2021.

We aim to increase consumer participation and spend through MAP 2 (consumer sales and marketing) initiatives. This combined with a more benign macroeconomic environment in many of our markets resulted in like for like revenue growth of 2.3%, reflecting modest price increases and some volume improvements in parts of North America and Europe. In Rest of World we have seen like for like weakness in some emerging markets and in our Offshore & Remote business.

On 29 July 2015, we announced that in addition to our ongoing restructuring activities, we are proactively reducing the cost base in our Offshore & Remote business globally and in some emerging markets. This incremental restructuring cost of around £50 million will be included in operating profit. In 2015, we incurred a £26 million charge, most of which was for labour cost reductions, with £9 million non-cash. A further £11 million, with £1 million non-cash, has been incurred in the first half of 2016. The remaining £10-15 million is expected to be incurred in the second half.

Excluding the impact of the restructuring, organic operating profit increased by 5.8% with the underlying operating margin remaining flat. We continue to drive efficiencies across the business using our Management and Performance framework, MAP. We have maintained our focus on MAP 3 (cost of food) with initiatives such as menu planning and supplier rationalisation, as well as continually optimising MAP 4 (labour and in unit costs) and MAP 5 (above unit costs). These efficiencies are helping us to invest to support the exciting growth opportunities we see around the world and offset the volume declines and business closures in some emerging markets and in our Offshore & Remote business. After restructuring costs, underlying operating profit increased by 4.8% on a constant currency basis.

Returns to shareholders continue to be an integral part of our business model. Along with an interim dividend of 10.6 pence per share, an increase of 8.2%, the Group bought back £72 million worth of shares in the period. Going forward we will continue to maintain strong investment grade credit ratings, returning any surplus cash to shareholders to target net debt/ EBITDA of around 1.5x.

Chief Executive's Statement (continued)

Regional performances

North America - 56.0% Group revenue (2015: 51.8%)

North America has delivered another excellent performance with organic revenue growth of 8.3%. This was driven by solid new business wins and continuing excellent retention rates. Like for like volume improvement has been seen across most of the business, with the exception of the Offshore & Remote sector where volume pressure and price weakness continue.

Underlying operating profit of £461 million increased by 9.6% on an organic basis. We have absorbed increased mobilisation costs to support high levels of organic growth, the impact of lower like for like volumes in the Offshore & Remote sector and above average wage pressures. We continue to drive ongoing efficiency initiatives across MAPs 3 and 4, some pricing increases and leverage the overhead base, resulting in modest underlying operating margin expansion.

Good levels of net new business and some positive like for like volumes delivered strong organic growth in the Business & Industry sector. We retained our existing business and added further locations with each of Intel Corporation and Capital One.

Double digit new business drove the Healthcare & Seniors sector's organic revenue growth with new contract wins including Hartford HealthCare, for both food and support services, and Ochsner Health System.

Increased levels of participation have been seen in the Education sector along with new business wins, including Muncie Community Schools, for both food and support services, and Florida Gulf Coast University.

In our Sports & Leisure business we have again delivered excellent organic revenue growth with strong retention and increased attendance at sporting events. Contract wins include the New Las Vegas Arena and retail operations at Oracle Arena, home of the Golden State Warriors.

The relatively small Offshore & Remote business continues to be impacted by pressure from low commodity prices. Organic revenue declines of 22% are a result of business closures and lower volumes on site. However, new contracts continue to be won including an additional camp for Canada Natural Resources Limited awarded along with a contract extension. 

Chief Executive's Statement (continued)

Europe - 28.2% Group revenue (2015: 29.7%)

The progress in Europe seen in the second half of 2015 continued in the first half of the year with organic revenue growth of 3.7%. The performance is driven by improving rates of new business and slightly positive like for like revenue.

The encouraging new business performance reflects accelerating levels in the UK, BeNeLux and Southern Europe. New contract wins include Conseil de l'Europe in France, Brighterkind in the UK and Türkiye İş Bankası A.Ş. Turkey. Contract extensions include National Grid in the UK as well as P&G Wella in Germany and Club de Campo in Spain.

Our exposure to the oil and gas market in the North Sea continues to moderate like for like volumes, and we continue to face a tough economy in France. However, momentum remains positive in Germany and the UK.

Driving operational efficiencies remains a key focus allowing us to reinvest to support the higher levels of growth. Underlying operating profit grew organically by 3.1% to £201 million, before EM & OR restructuring costs, and the underlying operating margin was flat at 7.4%.

Chief Executive's Statement (continued)

Rest of World - 15.8% Group revenue (2015: 18.5%)

For Rest of World, organic revenue growth was 1.7%. Excluding the Offshore & Remote sector, growth was 5% as pricing and new business was partly offset by volume declines in some emerging markets. In Australia, our largest Offshore & Remote business, as expected, revenues declined by 6%. Underlying operating profit, before EM & OR restructuring costs, reduced organically by 5.8% to £97 million. The underlying operating margin was down 40 basis points, in line with expectations, at 6.4%. Excluding Australia, the savings from the restructuring programme, along with pricing and ongoing efficiencies, offset the impact of weak volumes in the Offshore & Remote sector and some emerging markets. In Australia, pricing pressures and site closures are reducing the profitability of our business.

The 6% organic revenue decline in Australia has been driven by pricing pressures, site closures and lower volumes in the Offshore & Remote business. With more construction contracts moving into their production phases during the second half of the year, we expect the pace of organic decline to accelerate through the second half of 2016 and into 2017. However, other sectors continue to perform well and we have won new business with the Melbourne Museum and Apple as well as a food and support services contract with the Canberra University Hospital. Outside of Australia, our other oil and gas related businesses have seen organic revenue declines of 10%. This is expected to continue through the second half of the year.

In Brazil, double digit new business, including contract wins with Vale and Fibria Celulose has been offset by the negative impact on like for like volumes from challenging macroeconomic conditions. Across the rest of Latin America, we continue to see double digit organic growth with contract wins including Banco Estado in Chile and Cerrejón Port in Colombia.

Japan continued to win and retain contracts including the Bank of Japan, Canon HQ, QVC Marine Field, home to the Chiba Lotte Marines baseball team, and various locations for the National College of Technology. Double digit growth in India was driven by wins in the Business & Industry and Healthcare & Seniors sectors, including new food service contracts with Ericsson and Fortis Hospital. However, while still strong, our organic growth in China reflects a less buoyant Chinese economy. We continue to win new contracts including Google in Shanghai.

Solid growth in the Middle East reflects good levels of new business including contracts with the Petroleum Institute, Al Aqaria and WesternGeco.

Chief Executive's Statement (continued)

Strategy

Focus on food

Food is our focus and our core competence. The food service market is estimated to be more than £200 billion; with only around 50% of the market currently outsourced, it represents a significant opportunity. We believe the benefits of outsourcing become increasingly apparent as economic conditions and regulatory changes put increasing pressure on organisations' budgets. As one of the largest providers in all of our sectors, we are well placed to benefit from these trends.

Our approach to support and multi services is low risk and incremental, with strategies developed on a country by country basis. Our largest sector in this market is Defence, Offshore & Remote, where the model is almost universally multi service. In addition, we have an excellent support services business in North America and some operations in other parts of the world. This is a complex segment and there are significant differences in client buying behaviour across countries, sectors and sub-sectors.

Geographic spread

We have a truly international business, with operations in around 50 countries.

North America (56% of Group revenue) is likely to remain the principal growth engine for the Group. We have a market leading business, which delivers high levels of growth by combining the cost advantage of our scale with a segmented client facing sector approach. The outsourcing culture is vibrant and the addressable market is significant.

The fundamentals of our businesses in Europe (28% of Group revenue) are good and we see many opportunities to drive growth in revenue and margin. Our investment in MAP 1 sales and retention has accelerated our organic revenue growth and we continue to see opportunities to deliver efficiencies and make our operations more competitive.

Rest of World (16% of Group revenue) offers excellent long term growth potential. Our largest markets are Australia, Japan and Brazil, and India and China have strong long term growth potential. Lower commodity prices and a weak macroeconomic backdrop have impacted our Offshore & Remote business and some of our emerging markets. We are in the process of restructuring our business where necessary to adapt to the changing market environment, and remain excited about the attractive long term growth prospects of the region.

Sectorised approach

We segment the market and create sectors and sub-sectors to develop customised dining solutions that meet the requirements of a growing range of clients and consumers. Our portfolio of B2B brands enables us to differentiate these propositions and maximise our market coverage, while benefiting from the cost advantages of scale in food procurement and back office costs.

Chief Executive's Statement (continued)

Scale

As we continue to grow, our scale enables us to achieve our goal of being the lowest cost, most efficient provider of food and support services. Scale is a benefit in terms of food procurement, labour management and back office costs. It underpins our competitiveness and enables us to deliver sustainable growth over time.

MAP culture

We speak one common 'MAP' language. All our employees use a simple framework to drive performance across the business. This framework helps us focus on a common set of business drivers, whether it is winning new business in the right sector on the right terms (MAP 1), increasing our consumer participation and spend (MAP 2), reducing our food costs (MAP 3), our labour costs (MAP 4) or our overhead (MAP 5).

Uses of cash and balance sheet priorities

The Group's cash flow generation remains excellent and it will continue to be a key part of the business model. Our priorities for how we use our cash remain unchanged. We will continue to: (i) invest in the business to support organic growth where we see opportunities with good returns; (ii) pursue M&A opportunities, our preference is for small to medium sized infill acquisitions, where we look for returns greater than our cost of capital by the end of year two; (iii) grow the dividend in line with earnings per share; and (iv) maintain strong investment grade credit ratings returning any surplus cash to shareholders to target net debt / EBITDA of around 1.5x.

Reporting dates for 2016

The Group's reporting dates for the remainder of the year will be:

28 July 2016 Q3 trading update

22 November 2016 Full year results

Summary and outlook

Compass has had another strong six months. North America continues to deliver excellent growth. Our business in Europe is growing nicely as we are rewarded for our investment in previous years to accelerate growth in the region. In Rest of World, reasonable growth in Business & Industry, Healthcare & Seniors, Education and Sports & Leisure was partly offset by ongoing weakness in Australia, Brazil and our Offshore & Remote sector.

We continue to drive operating efficiencies around the business, which is being reinvested in the growth opportunities we see. The savings from the restructuring are starting to come through, and are offsetting the weakness in Offshore & Remote and some emerging markets. Therefore, margins pre-restructuring were flat.

Our expectations for FY 2016 are positive and unchanged. Our pipeline of new contracts is encouraging and our focus on organic growth, efficiencies and cash gives us confidence in achieving another year of delivery.

In the longer term, we remain excited about the significant structural growth opportunities globally and the potential for further revenue growth, margin improvement, as well as continued returns to shareholders through dividends and ongoing share buybacks.

Richard Cousins

Group Chief Executive

11 May 2016

Business Review

Financial summary

Business Review (continued)

Segmental performance

Business Review (continued)

Revenue

Revenue for the Group increased by 5.8% on an organic basis. New business wins accelerated to 9% driven by a strong performance across the Group and our retention rate remained at 94.5%. Like for like revenue grew by 2.3% reflecting modest price increases and some volume improvements in part of North America and Europe. Underlying revenue at reported rates increased by 6.7%.

Operating profit

Underlying operating profit after restructuring was £724 million (2015: £688 million), an increase of 5.2%. If we restate 2015's profit at the 2016 average exchange rates, it would increase by £3 million to £691 million. On a constant currency basis, underlying operating profit has therefore increased by £33 million, or 4.8%.

EM & OR restructuring

The Group has incurred an £11 million charge in the period as a result of reducing the cost base in our Offshore & Remote business globally and in some emerging markets. The cost relates to headcount reductions (£10 million) and onerous contract provisions (£1 million). Excluding these restructuring costs, underlying operating profit would have been £735 million, an increase of £44 million or 6.4% on a constant currency basis. A further £10-15 million charge is expected in the second half of the year.

Operating margin

We have absorbed increased mobilisation costs to support high levels of organic growth in North America and Europe, the impact of lower like for like volumes in the Offshore & Remote sector and some emerging markets and above average wage pressures. We continue to drive ongoing efficiency initiatives, modest price increases and leverage the overhead base. This has resulted in the underlying operating margin before EM & OR restructuring costs remaining flat at 7.5%. After these restructuring costs, the underlying operating margin declined by 10 basis points.

Finance costs

The underlying net finance cost reduced to £47 million (2015: £51 million) as a result of lower pension interest costs given the increased surplus on the UK scheme. We therefore now expect an underlying net finance cost of around £100 million. This equates to an effective interest rate of around 3.5% on gross debt.

Income tax expense

Income tax expense from continuing operations was £162 million (2015: £155 million).

On an underlying basis, the tax charge was £166 million (2015: £159 million), equivalent to an effective tax rate of 24.5% (2015 FY: 24.5%). We expect the tax rate to be around the same level for the full year. There are significant changes expected in tax legislation in the future, principally the OECD Base Erosion & Profit Share project. When these proposals are finalised we will report on any impact they will have on the Group.

Basic earnings per share

On a constant currency basis, the underlying basic earnings per share were 30.8 pence (2015: 28.5 pence), an increase of 8.1%.

Business Review (continued)

Dividends

In line with our policy, an interim dividend of 10.6 pence per share, an increase of 8.2%, will be paid on 25 July 2016 to shareholders on the register on 24 June 2016.

Free cash flow

Free cash flow from operations totalled £391 million (2015: £302 million). In the first half of 2016, we made cash payments of £5 million relating to the 2012 and 2013 European exceptional programme. Adjusting for this, free cash flow on an underlying basis would have been £396 million (2015: £323 million), an increase of £73 million or 23%. Free cash flow conversion was 55% (2015: 47%).

Underlying gross capital expenditure of £264 million (2015: £234 million), including assets purchased under finance leases of £1 million (2015: £2 million), is equivalent to 2.7% of underlying revenues (2015: 2.6% of underlying revenues). In the second half of the year we will be investing in a camp in our CAMEA region as part of a long term contract extension with an existing client. We therefore expect capex in the full year to be around 3% of underlying revenues.

The working capital outflow of £83 million (2015: £106 million) reflects the seasonality of the business. Looking forward, annual trade working capital movements are expected to average out at a small outflow. In 2016 we will also have a negative impact of around £70 million due to the timing of our payroll run in September in the USA and UK. This will reverse in 2018.

The £21 million outflow (2015: £23 million) in respect of post-employment benefit obligations reflects the regular payments agreed with trustees to reduce deficits on defined benefit pension schemes, and is expected to continue at around a £50 million per annum outflow.

The net interest outflow was £39 million (2015: £45 million).

The underlying cash tax rate was 17% (2015: 20%). For the full year we expect the cash tax rate to be in the low 20 percent range, reflecting the fact that proportionately more tax payments are made in the second half.

Acquisition payments

The total cash spent on acquisitions in the first half was £144 million (2015: £58 million), including the acquisition of CulinArt in the USA, a Business & Industry and Education business which in their last fiscal year ending 30 June 2015 had revenues of around £160 million. The total cash spend comprises £119 million on infill acquisition, £24 million of deferred consideration relating to previous year acquisitions and £1 million on acquisition transaction costs.

Post-employment benefit obligations

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

The Group's pension surplus at 31 March 2016, calculated in accordance with IAS 19, for all Group defined benefit schemes was £8 million (30 September 2015: £9 million deficit).

Business Review (continued)

Financial position

During the first six months of the year, net debt increased to £2,917 million (30 September 2015: £2,603 million). The Group generated £396 million of underlying free cash flow, including investing £264 million in gross capital expenditure, and spent £144 million on acquisitions. £322 million was paid in respect of the final dividend for 2015 and £72 million returned to shareholders through share buybacks.

The remaining £172 million movement in net debt related predominantly to £161 million currency translation.

Related party transactions

Transactions with related parties have not had, and are not expected to have, a material effect on the financial performance or position of the Group.

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 and its shareholders.

A summary of the principal risks and uncertainties that face the business is set out on page 14.

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in this Business Review, as is the financial position of the Group, its cash flows, liquidity position, and borrowing facilities. In addition, note 19 of the Consolidated Financial Statements of our 2015 Annual Report includes the Group's objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and hedging activities and its exposures to credit risk and liquidity risk.

The Group has 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 despite the current uncertain economic outlook.

After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

Johnny Thomson

Group Finance Director

11 May 2016

Focus on Risk

Identifying and managing risk

The Board continues to take a proactive approach to recognising and mitigating risk with the aim of protecting its employees and consumers and safeguarding the interests of the Company and its shareholders in the constantly changing environment in which it operates.

Details of the principal risks facing the Group are included on pages 31-33 of the 2015 Annual Report. These remain unchanged and are expected to continue to be relevant for the remaining six months of this financial year. A summary of the principal risks and uncertainties is set out below:

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 addition, the geographic, sector and contract diversification of the Group helps to minimise the impact of individual risks on its consolidated results.

Compass Group PLC

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Directors' responsibilities

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Independent review report to Compass Group PLC

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