SDXOF - Sodexo S.A. (SDXOF) Q4 2023 Earnings Call Transcript
2023-10-27 03:08:14 ET
Sodexo S.A. (SDXOF)
Q4 2023 Earnings Conference Call
October 26, 2023 03:00 ET
Company Participants
Virginia Jeanson - Investor Relations
Sophie Bellon - Chief Executive Officer
Marc Rolland - Chief Financial Officer
Conference Call Participants
Harry Martin - Bernstein
Jarrod Castle - UBS
Jamie Rollo - Morgan Stanley
Julien Richer - Kepler
Leo Carrington - with Citi
Neil Tyler - Redburn Atlantic
Vicki Stern - Barclays
Estelle Weingrod - JPMorgan
Andre Juillard - Deutsche Bank
Presentation
Operator
Good morning and thank you for standing by and welcome to the Sodexo Fiscal 2023 Results and Strategy Update Conference Call. [Operator Instructions] At this time, I would like now to hand the conference over to the Sodexo team. Please go ahead.
Virginia Jeanson
Thank you. Good morning, everyone. Welcome to our fiscal 2023 results and strategy update. I’m here with Sophie and Marc. They will go through the presentation and then take your questions. The slides and press releases are available on our site, sodexo.com, and you’ll be able to access this call on our website for the next 12 months. Please get back to the IR team if you have any further questions after the call.
I now hand you over to Sophie.
Sophie Bellon
Good morning, and thanks for being with us today for our fiscal 2023 results announcement and strategy updates. As I am sure you have already all seen, we are announcing the details of the Pluxee spin-off. Given the listing is expected early 2024, Pluxee has been accounted for as discontinued operation.
In this presentation, as usual, I will introduce the numbers and the key strategic moves. Marc will then go into the financials, firstly, the group numbers and then the Sodexo and Pluxee standalone numbers. I shall come back to conclude and then, of course, both of us will take your questions. So let’s start.
First message. We outperformed guidance. Group organic revenue growth was 11.6%. The group underlying operating profit margin was 5.6%, more than 10 basis points higher than we were aiming for. Pluxee organic growth accelerated quarter-after-quarter, resulting in an annual organic growth of 26.9% and an underlying operating margin at 33.1%, again, significantly above expectation.
Second message. As a result of this solid operational performance, group net profit increased by 14% and the underlying net profit by 30% to give an underlying earnings per share of €6.21. As you all know, our dividend policy is to pay out 50% on our underlying net profit. So the Board is proposing a dividend of €3.10 this year, up 29% on last year and over the historic dividend high of €2.90 in 2019.
Third message. I’m proud of the strategic progress that we’ve made in a short period. We have implemented significant change to restore Sodexo’s agility and growth capabilities. We have made strong choices. Over the last 2 years, we have put an important focus on executing our strategy in North America. Our retention is now comfortably over 95% in NorAm, and we have seen a solid development at over 8% in 2023, including cross-sells fueled by more targeted and more profitable operations. This is a combination of determination, focus, better incentives and more key talent. We will continue to improve in North America.
We have also made our organization more simple and effective. The transfer of the end-to-end P&L management to countries to bring decision-making closer to the ground is a success. All regions are aligned on our 15 global KPIs to monitor progress on our strategic pillars. We see concrete example of the added efficiency that our geography-based organization provides. For example, the focus on consolidating and standardizing processes and technologies in transversal function in our 4 shared service centers has led to economies of scale, improved efficiency, lower operational costs and is driving competitiveness. In the U.S., the segment HR teams have collaborated to recruit more efficiently and optimize staff utilization between segments. As a result, we no longer have an issue on staff shortages.
I also reduced the Sodexo leadership team to 11 members. One thing I’m very proud of is the progress we have made on our gender balance targets at leadership level. Women represent 42% of group senior leaders, which is our top 1,600 leaders, and we have more women in our operational teams with, for instance, new female CEOs in China, Canada, Brazil and for Sodexo live in the U.S. and in the UK.
Another highlight is our record client retention. This is the KPI for sustainable profitable growth. In financial year ‘23, we broke the record again with a 95.2% retention globally. Now we need to move to the bar to 96%. How did we do this? We have been more proactive with our clients. We have also rigorously implemented our retention tools and processes across the business, resulting in better reporting. We are much more disciplined in tracking and monitoring the KPIs that influence retention, and we will keep challenging ourselves to continue to increase.
We are also accelerating on our food services transformation. We are scaling our advanced food models and leveraging enhanced digital experience. Today, they account for 3.9% of total sales. And we are also being more selective on our FM growth by focusing on value-adding adjacent services that are accretive to our business. This year, we are back to a 64-36 mix for food and FM, helped by the strong post-COVID recovery in food services and the end of the testing centers contract in the UK. And by the way, FM is continuing to grow up 3% organically in fiscal year 2023. I’ll come back to this in a minute.
We define a holistic approach on people and the planet to reach our goal to be a market maker in sustainability. And I’m going to come back on this because it is important to be clear about what we mean by being a market maker. We also made a very important strategic portfolio decision. Back in April, we announced our decision to spin-off and list Pluxee. This spin-off project is a historic and very positive turning point in the life of our group, which will lead to the creation of two leading pure players in fast growing markets.
Let’s go into this. We are now ready to go ahead with a full Pluxee spin-off. The spin-off will be proposed at a dedicated AGM early 2024 and will be followed subject to Euronext admission decision and market condition 2 days later by the listing. Existing voting rights will be maintained through the registration of Pluxee in the Netherlands. All shareholders will be able to opt-in for their double voting rights by registering their shares in the Netherlands. Tax residency will remain in France. From a tax point of view, the spin-off will be tax-free for Sodexo and its shareholders, at least in France and the U.S.A. Pluxee will host its Capital Market Day early 2024. Their guidance will be provided at this event, but I want to reassure you that organic revenue growth and margin improvement should remain favorable in fiscal year 2024.
The governance is currently being finalized. You have seen the announcement of the new Chairman, Didier Michaud-Daniel. He will be Executive Chairman to support Aurélien Sonet through the transition from subsidiary to quoted pure player. The Board will be made up of 4 Bellon family members and 5 independent board members. There will be an animation contract between Bellon SA and Pluxee, similar to that of Sodexo including the rebuilding of the Executive Chairman and the CFO.
Now that we have reviewed progress made over the past few years, I’d like to focus on our strategic plan for the new Sodexo post spin-off. Our strategy has not changed. It is now organized around two strategic pillars that I will develop in further detail in a moment, focus on food and be more selective in FM, being a market maker in sustainability supported by three key enablers, accelerating our investment in tech and data, reinforcing our supply chain competitiveness and commercial excellence to fuel our growth trajectories.
Let’s start with focus on food. This is our historical growth market. It is at around €240 billion, in which we have a leading position and where we know that consumers are looking for more flexibility, more personalization, more sustainable offers, healthier dishes, better taste and more digital to help us to do all that. We believe that we can grow the business faster by leveraging our expertise to adapt our traditional food model and complement our existing infrastructure with advanced food model. We are scaling our investment in all geographies and environment to upgrade our offer through new production facilities, new distribution organization, a lot more sustainability in the menus with premium brands, and I’ll come back to this later and more digital.
Now for FM, there is a much more fragmented market, but it is a massive market of €380 billion. We have recognized expertise and integration capabilities. But the maturity and client buying habits still varies significantly from one geography and one segment to another. This is why our aim is to grow selectively in FM for clients who value our services on identified playground where we contribute to the enhancement of the end-user experience and where we can bring sustainability, innovation to our clients.
For example, in North America, we took several radical decisions in schools and campus where size, concentration and margin of the contracts were inadequate. Since the successive crisis of COVID staff shortages and then inflation, many very large clients have appreciated the value of our services and have renewed their contract with better pricing. Therefore, we shall continue to grow this business on chosen markets with an adequate pace and scale.
Within food, we have a growing portfolio of premium brands. This premium brands are a rich source of growth. Each one is designed to address specific sub-segments whether the client has large or small spaces, a hybrid workforce and how they want to use food as an engagement leader for their teams. For clients with on-site kitchen, we have Modern Recipe. It is flexible healthy and plant-based. This is for large corporate university or health care clients that need all-day options. Modern Recipe is starting to scale. We have this brand in 11 countries at almost 400 sites. We introduced Modern Recipe in France a year ago and have already added 65 new sites and targeting 200 by 2025.
The Good Eating Company is a niche and sustainable brand that gives on-site dining a taste of the good life. We are targeting high-tech financial and professional services. We started it in the UK and have expanded it to the U.S. with a total of 126 sites. We plan to grow the numbers of sites time 1.5 by 2025.
For clients without kitchen and smaller spaces, we have Fooditude. Meals delivered fresh, creative and ingredient-focused. The targeting is very specific for this brand. Fooditude is positioned to work only with clients who want to fully subsidize meal for their employees. We see that as a key trend for tech, media, banking and other visionary clients who want to attract employees and drive engagement. Fooditude is in the UK, and we have just added a second central kitchen in London that will double production capabilities. Next year, we will expand it to the U.S.
To complement our premium brands, we have a strong portfolio that includes Kitchen Works Company. Kitchen Works is accessible, high-quality convenience food designed to drive our market share. It is a food court experience targeting manufacturing clients who are looking to attract a new generation of workers and inspire healthier eating. Today, we are signaling Kitchen Works in 8 countries with more than 2,000 sites. In Brazil, where food makes up 20 – sorry, sorry, 73% of our revenue and 92% of sites use the Kitchen Work brand express locally as Sabor Brasil, driving strong profitability and consumer recognition.
In August and September, the Netherlands converted 95 sites to Kitchen Works. It gives clients consistency of delivery, consumers get great experience, and we standardize the menus and recipes and the way we purchase. By financial 2025, we will expand to 6 more countries. We had some excellent wins and retention this year in all areas and regions. Let’s take a few examples. In Europe, the AXA contract will be an example of advanced food model where we will offer multiple meal solutions, including Toqla, FoodChéri and Modern Recipe.
I would like to highlight the renewal and extension of the Colgate Palmolive global contract with 12 new sites in North America. We will be providing IFM services to 43 sites across 25 countries, including manufacturing plants, research center and their new global headquarters for the yield Pet Food division. We will continue to bring technology innovation like dynamic cleaning and support CSR improvement in energy, waste, water, food and DNI as identified by our site engagement sustainability assessment tool. We are also piloting a Modern Recipe solution in the New York office. In Europe, Sodexo Live! has been the official hospitality provider at Ascot Racecourse since 1998 and we’ll continue to do so for another 10 years. We shall be creating the Ascot Hospitality Academy and rendering the menu more planet-friendly and biodiverse.
This year, I wanted to call out the massive return of live events after the COVID crisis. Sodexo Live! has had a great year. We’ve brought visitors and fans back with record attendance in Stadia and the Parisian boats and in airport lounges and increased average spend per capita. We have also seen been winning new clients, 10% of new development, of which 75% is in North America, and the retention rate this year was also very strong at 97%.
As everyone knows, internally and externally, I think I am incredibly focused on retention, and the efforts are paying off. We achieved our best client retention ever at 95.2%. This is a combination of many different measures that we have been putting in place for the last few years. But I would say that the inclusion of a retention condition in the bonus, the absolute insistence on the use of the reporting tool by all, the consistent following up on all contract losses, the message has become more firmly entrenched down through the organization. And as I have been saying to the team, profitable growth starts with retention.
For business development, it was also good at 7% within the 7% to 8% target range. The annual development, including cross-sell, improved to €1.7 billion compared to €1.5 billion last year and with increased profitability. As a result, net new signing remained firmly positive at 2.2%. The commercial momentum is improving. This year, we had an increase in new signature of 10%. Within this new development, there has been an increasing share of food service at 61% of the total versus only 55% last year, and FM activity has reduced demonstration of our more selective approach. We have also seen strong demand for more first-time outsourcing in North America and particularly in the health care sector, now representing 50% of our total signature in the zone.
Retention is my obsession. And this year, the really good news is that it has increased, but it has become more uniformly good everywhere with more than 60% of the countries representing 75% of revenues, generating a retention rate of more than 95%. And we can still continue our progress.
The second leg of our strategy is to be a market maker in sustainability. We are a pioneer. We do make more ambitious commitment on both the planet and people. And we deploy these commitments globally and at scale, not just in small pockets of the business.
In fiscal year ‘23, we have continued to deliver our global carbon emission reduction – no, we have continued to – our global carbon emission reduction has been validated by SBTi. Yes, this is a global ambition, so much beyond the U.K. where it has become obligatory.
We have established with the WWF, a low carbon standard, which has also been approved by SBTi. This year, Scope 1, 2 and 3 emissions are down 5.4% in the year, and we’re also making progress on waste reduction. We are not yet at 50% weight reduction on the site in which we have introduced WasteWatch. However, the number of sites has increased significantly. The program is now covering 57% of total food raw material cost, up from 46% last year. The aim is to get to 80%. So we still have some way to go to achieve our 2025 objectives, and we are tackling with this is bigger. We are also paving the way in biodiversity with strong global commitment for physical certification, whether it be in palm oil or paper or fish and seafoods.
For our people, our action to enhance our focus on our people have also been delivered at scale. This year, we launched an industry-leading common employee benefit standard for our 429,000 people worldwide. It is expected to be implemented in 60% of the countries by the end of 2024.
A sure sign that we’re getting some things very right, our engagement rate reached a record of 82.5% and on a record response rate. This is 4.5 points better than in the last survey in fiscal year 2021. Safety also improved with our LTIR down 15.4%. Gender balance is very important, and we have reached between 40% and 60% of women among senior executives. It is a constant point of attention to keep it there.
I could not end without mentioning the iconic Olympic contract which will boost revenue in fiscal year 2024 by €60 million and a further €30 million in fiscal year 2025. This is also a journey for sustainability. Our teams have put together a program to source responsibly, locally and seasonally. Recipes will be more than 60% plant-based, and we shall be working hard to avoid food waste and plastic packaging, and we shall be optimizing existing infrastructure and equipment where possible.
From a people point of view, we need to recruit 60,000 people, of which 15% will come from underprivileged environment. Very importantly, the training that we shall put in place to welcome these employees will be officialized by a certificate. This is an exceptional effort, and we are very excited. The teams are ready to go and break new records.
On that hand, I now hand you over to Marc for the financial of the year.
Marc Rolland
Thank you, Sophie, and good morning, everyone. It’s great to be here with you this morning. Important point, the accounts have been produced under IFRS 5 with Pluxee accounted for as a discontinued business as this is now the way it should be presented. But today, we’ve also added a few more slides to show you how the pre-spin of group, as we knew it in the past, has performed.
First, let’s take the numbers at the group level, including Pluxee, as you were expecting it on Slide 22. The revenues grew strongly during the year reaching €23.7 billion, up 12.3% as published and as Sophie pointed out in our first slide, plus 11.6% organically. The underlying operating profit was €1.3 billion, up 26.1% with a margin of 5.6%, up 60 bps and 10 bps above our guidance. This progress was a combination of, among other things, passing through inflation and compensating any lives with mitigation efficiencies, leveraging volume growth and a strong performance all year round from Pluxee. Other operating income and expense were negative at minus €159 million; I’ll come back to this on the next slide.
Financial expenses were €114 million versus €87 million last year. This is due principally to the one-off cost of the bond consent process to prepare for the spin-off. The tax charge was flat at €261 million, reflecting an effective tax rate of 24.8%, well below last year and one of the better ETR ever. As a result, in fiscal 2023, we generated a net profit of €794 million, up 14.2%, and an underlying net profit of €908 million, up 29.9%. The underlying EPS was €6.21, and this is the basis for the calculation of the 50% payout ratio of the dividend policy.
Other operating expenses amounted to €159 million compared to €5 million in the previous year. This year’s number is due mostly to one-off, spin-off costs, as well as the restructuring costs related to the change in organization. And I remind you that the prior year benefited from €50 million of net gains related to the sale of the Childcare business and a very positive settlement on our under litigation for €34 million.
Group free cash flow was good at €812 million and despite a significant increase in CapEx. Net CapEx reached €463 million, up 36%. I’ll come back to CapEx later.
Group net debt, including the Pluxee cash flow – of Pluxee cash, sorry, of €3.1 billion fell to €1.1 billion. And the net debt ratio of 0.7 turns, well below the 1 to 2 target range. The lower debt ratio was also helped by a very solid increase in the underlying EBITDA at €1.6 billion or a 6.8% margin. Pluxee was also strong at 20.6%, back up over the 2019 levels.
Now let’s focus on Sodexo, which is excluding Pluxee, the new stand-alone company. On Slide 28, you can see quarterly underlying revenue growth. Organic growth was impacted in the first 3 quarters by the end of the testing centers contract in the UK. In Q4, we had an adjustment linked to a change in revenue recognition of project works on the large E&R contract in the Rest of the World. We now account for those jobs on a net basis, reflecting a more efficient way of operating the account. This 2.3% impact in Q4 is a full year effect of the change. So there will be an impact in Q1, Q2 and Q3 of fiscal 2024 of about 0.5 points. Taking out these elements, the underlying organic growth at over 10% represents a solid exit growth rate.
Pricing has been consistently above 5% each quarter. In the last month, the softening of food cost inflation is confirmed. We have seen a significant drop in North America and Brazil with pricing starting to outpace food cost inflation. It is softening in Europe too, but was still double digit in Q4. Overall, year-on-year food cost inflation before mitigation actions was just below 10% for the full year with Q4 being just below 5%. Labor inflation was about 5% to 6%. Mitigation measures will continue to ensure that we protect our margins going forward. We are expecting a further 3% to 4% price increases in fiscal ‘24.
Now let’s look geographically at revenues. We had a good year in North America with revenues up 13.9%, including the post-COVID recovery in H1, an acceleration in the net development in H2 and 5% of pricing. Business & Administrations was up 23.4%, boosted by the return to the office and new contracts in Corporate Services. And as Sophie has already mentioned, very sturdy growth in Sodexo Live! Of a smaller base, convenience solutions and Entegra also contributed to the momentum with strong organic growth. In Healthcare & Seniors, revenue were up 8.8% organically, driven by cross-selling retail recovery and some major mobilization. The 9.1% organic growth in Education was driven by universities, up 13.4% and with strong attendance levels, price increases and strong recovery in retail sales and event catering. Schools were impacted by the reduction of government waiver eligibility for students.
Europe was up 7.5% or 10.6%, excluding the impact of the end of the testing centers. Thanks to record tourism level and ongoing return to work in Corporate Services, Q4 growth was 9% after Q3 at 6.9%, excluding the testing center, affected by strikes and bank holidays. In Business & Administrations, organic growth for the year was 12.2%. Healthcare & Seniors were down 2.4%, impacted by the end of the testing centers. The rest of the business was up 9.1%, with the contribution of new openings and solid occupancies in seniors, particularly in France. In Education, organic growth was 4.4%. The French strikes in the third quarter were offset by a positive impact of working days in the fourth quarter. Pricing was lower than in most segments, particularly in France due to inadequate price indices.
Rest of the World, organic growth was 11.5% or 14.6% without the revenue recognition adjustment. The change was implemented during the fourth quarter with retroactive impact for the full year. Business & Administrations organic growth was up 14.9%, excluding this effect, driven by strong project works, successful price negotiations in Energy & Resources, new openings in Latin America and strong performance in India and Southeast Asia, in particular in the tech sector. Healthcare & Seniors revenue was up 6.2% organically with good development in India and China. The strong recovery in Education continued, up 35.1% as all schools re-opened in China and growth in India remained very strong.
On the bottom line, you see the UOP margin was up 30 bps to 4.3%, only 10 bps below the 2019 level. This improvement was driven by volume leverage, especially in North America combined with rigorous inflation management. Supply chain economics also improved, thanks to the robust development of Entegra.
HQ costs, we are down significantly in million euro and in percentage as we move from global segment to geographic governance with better allocation of resources closer to the field, more disciplined and simplified processes. The 20 bps decline in margin in Europe was the result of the transitory inflation headwinds, where price adjustments are still lacking food cost inflation in public contracts in France, Italy and Belgium, mostly in school, and in addition to the high flow-through of the testing centers contract, which was closed at the back end of fiscal 2022.
In this slide, you can see that the stand-alone Sodexo P&L will look like, €20.6 billion of revenue; €976 million of UOP, a margin that you’ve just seen of 4.3%, which includes €97 million of group central costs. I’ve already talked about the OIE. Financial expense were €101 million. The major reason for the increase in financial expenses is due to €14 million cost of the bond consent process. The average interest rate as at August 31, 2023, was 1.7%, only 10 bps above where it was a year ago due to the dollar variable rate borrowings. A tax charge of 24.6%, one of the lowest rates we’ve ever had. We expect in the future to be able to maintain this between 26% and 27% going forward. So net profit of the continuing activities was €516 million and underlying net profit was €659 million or €4.51 per share. Then you had the net profit of Pluxee, which gives you the same total number in the previous P&L €794 million and €908 million.
In this cash flow, you can see that the stand-alone Sodexo operating cash flow change in working capital and net CapEx. Free cash flow was positive at €374 million. As you will note, the net CapEx increase is significant at plus €86 million. The big €646 million positive inflow in others is linked to the push down of €0.6 billion of debt to Pluxee.
In this slide, you can see the Sodexo balance sheet with Pluxee assets and liabilities held for sale. The €1.2 billion of assets shown in the red box will be settled for cash on the spinoff date and now treated as cash in our ratios. Sodexo net debt after push down and settlement of the €1.2 billion on closing is now at €2.9 billion at the end of 2023, resulting in a net debt-to-EBITDA ratio at 2.4 turns.
Our CapEx will remain focused on supporting sustainable growth. This year, our growth CapEx reached €520 million or 2.3% of revenue, close to the 2025 target of 2.5%. As you can see, 87% of this CapEx were client-facing versus 75% last year, due in particular to the Ardent contract in North America. IT and data investments will increase in the coming years.
As a summary, in the first set of slides, the group had leverage of 0.7 turns. Because of the spinoff, Sodexo leverage increased to 2.4 turns, and our ambition is to get this ratio close to 2 within 12 to 18 months of the spinoff and for the mid-term backbone into the 1% to 2% range. The sale of the MKR business and the positive results of the bond consent process will contribute. We shall also maintain a balanced capital allocation strategy with a dividend payout of 50% and selective and disciplined M&A. Our objective is to maintain an investment-grade rating of BBB+.
Now let’s turn to the third set of numbers for Pluxee. In Slide 40, you can see the strong finish to the year with Q4 operating revenue growth at 22.4%, boosted by face value increases and net new development. Financial revenue growth was also very strong at 143%, which further increases in interest rates in the Eurozone, Central Europe and Turkey and despite the leveling of rates in Brazil.
In this slide, you can see the same breakdown for the year. Operating revenues were up 18%. Financial revenues were at 145.6%. Here, you can see the very strong growth in employee benefits, up 28.5% for the year. On issue volume, up 14.1%. Service diversification was up 19.8%, thanks to the two major public sector contracts in Austria and Romania.
The performance was good everywhere with Europe, Asia and the U.S.A., up 24.7%, and Latin America, up 31%. Activity was buoyant in all major European markets helped by rising interest rates. In Latin America, new business, face value increases and the change in regulation in Brazil contributed. Also, the Selic has started to come off from its eyes. Higher rates were also a tailwind for the year. Despite sustained investment intake in digital, UOP and EBITDA margins are up 480 and 460 bps at constant currency, respectively, boosted by volume leverage and the significant flow-through from higher interest rates.
I highlight that this Pluxee margins are before any central cost allocation. For instance, in fiscal ‘23, the group allocated and invoiced €25 million of group HQ costs to Pluxee. This cost invoiced right above the profit before tax are not visible yet, but will become visible in the Pluxee stand-alone income statement to be published in the prospectus early 2024. From fiscal 2024 onward, Pluxee will also have its own additional stand-alone costs, which are currently estimated at circa €45 million per year.
I hope that you’ve been able to follow all these changes. I thank you for your attention, and now I hand you back to Sophie for the outlook.
Sophie Bellon
Thank you, Marc. And now let’s turn to the outlook. So as you have seen, the numbers are solid, and we’re turning the corner to be a pure player focused on food and being more selective in FM. From an operational point of view, we have a clear set of strategic priorities by zone. You should recognize this from the Capital Market Day last year. And please go and listen to our zone leaders videos on our site as well as one from Nathalie Bellon-Szabo in Sodexo Live!.
And I remind you that in North America, the aim is to enhance growth to increase market share. In Europe, we are focusing on profitability and cash flow while maintaining market share. And in Rest of the World, the focus is on growth and profitability in a strong growing market.
For Sodexo Live!, they are focused on growing too to become a global leader in the live events hospitality experience in a focused manner in France, UK and North America with a priority on convention and conference centers, stadia and arenas, cultural destination, airport lounges and major events and by driving cross-selling through new capabilities in venue sales and hospitality ticketing for sporting events.
For the next 2 years, we are seeking to sustain 6% to 8% organic growth supported by an underlying exit growth rate in Q3 and Q4 of more than 10%. Continued inflation being passed through expected to average out at 3% to 4% pricing for fiscal year ‘24, a contribution from net new business, which should be above 2% amplified by cross-selling and volume growth of 1% to 2%.
On that organic growth, we should be increasing the UOP margin, including HQ costs by 30 to 40 basis points per annum at constant rates. This is coming from further operational efficiency and cost savings, inflation being passed through into pricing, Entegra, high-growth and high-margin business model, offset slightly by continued investment in commercial and operational excellence.
I thank you for your attention and now ask the operator to open up for the Q&A session.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] The first question is from Harry Martin with Bernstein. Please go ahead.
Harry Martin
Hi, good morning. A question on the revenue KPIs and then a couple of margins, if I may, please. So you talked about the best-ever retention, new development as a percentage step back a little bit this year but was up to close to record levels as well. So is the 2% to 2.5% net new contribution as good as people could put into their models going forward? Or do you see further upside as you talk about 96% retention and the potential for various wins to carry on increasing as well? So that’s the first question. And then on the margins, in H2, we saw margins step back year-on-year in North America and Europe. It’s tough for us to know exactly where the 2019 equivalent is, given the change in the geographic reporting as well. So can you give us a little bit of color on how to get comfortable with the improvement guided for next year given that step back in the second half this year? And then the final one, just in the Rest of World, with the accounting change to go from gross net revenues and that contract also boost percentage margins. And so could I just ask what the on-site margin was in Rest of World, excluding that accounting change. Thank you very much.
Sophie Bellon
Okay. Thank you very much. I will take the first question on retention. So just as a reminder, we have been net new positive since last year. And as I said in my speech and as I talked to you a couple of years ago when I first started as a CEO, I’ve been putting a very strong focus on retention. And I can say that 95.2% is really the best record that I’ve seen in Sodexo since I’ve been there, and it’s quite a number of years now. So we are very, very happy with this number. We can – we think that we can continue to progress. And that’s why I said that now the objective is to reach, at some point, 96%. And concerning our development rate, we are between – we are within the range of 7% and 8%. And we also want to continue to progress. The pipeline is solid, about the same at the beginning of last year. As I said, we are within the range of 7% to 8%. We are confident because the first time outsourcing opportunities, especially in North America but also in Europe, are increasing. And yes, if we continue, and that’s the objective, to progress both on retention and development and cross-sell, the net new should also continue to increase. And that’s the objective.
Marc Rolland
And on margins, in Europe, the main drive on margins in Europe is, as I said in my speech, the testing centers which stopped. I think it was in Q3 last year. We’re having a very good flow-through in margins. So this now is not there. So the margin you see is without that. And we’ve had a difficult year in the school business because the pricing was not happening at the right time. So we had a difficult time in the school business in Europe, mainly in France, Italy, Belgium. But now the pricing is coming through at the beginning of this new fiscal year. So I think this will be restored into H1.
Now with regard to the U.S., indeed, the margin in H2 this year is lower than the margin last year. It’s mainly because we passed some onerous contract provision. As you know, we had COVID and we had inflation. And at the end of the year, we had a few contracts where the margin was not fully recovered. So we booked those onerous contract provision, and it affected temporarily the margins in H2 of NorAm. On the Rest of the World, the change – the impact of the change in margin is a few bps. We’re not talking big numbers because we reduced by €110 million to revenue and the margin became the revenue. So it’s not significant.
Harry Martin
Okay, thank you.
Operator
The next question is from Jarrod Castle with UBS. Please go ahead.
Jarrod Castle
Thank you. And good morning, Marc, Sophie. You called out China as an area of some slowdown. Are you seeing any other kind of industry segments or any other countries where you’re seeing a slowdown? I guess Manor is in the news at the moment, so I’d be interested in any thoughts there. And then FM organic growth, can you just give an update where it was in 4Q ‘23? And within the 6% to 8% onsite growth, any kind of range potentially that you could give for how you see FM growth in 2024? And then just lastly, obviously, Pluxee getting very close to the demerger. Any update on thoughts around the share cross-holding between Sodexo and the Bellon Foundation in terms of how you’re seeing that at the moment? Thanks.
Sophie Bellon
Okay. So I will take the question on slowdown. So the slowdown on China, I mean there has been some COVID effects last year and also the activity has not completely caught up. But really in China, it’s the only country where we are seeing this slowdown. We have no other country across the different region, Rest of the World or Europe, where we see a slowdown like that. So it’s really mainly focused on China. And as so far said, first, I want to say that it’s a very different operation than the spin-off it has nothing to do, and it is always a topic that we are looking into. But at this moment, there is no news on this topic.
Marc Rolland
And on the FM organic growth in Q4, it’s obviously much lower than the growth in food, and we – I don’t have the number in front of me, but I think it’s 3% to 4% in Q4 for FM.
Sophie Bellon
And it’s also the effect. It’s because we are really accelerating on food. And we want to be more targeting, more specific in FM, so that’s why this number is lower.
Jarrod Castle
Can we think about 3% to 4% again then maybe in 2024? Or should we be thinking lower even?
Marc Rolland
It’s too early to say. But yes, the guidance is 6% to 8% overall. The focus is on food. So the FM growth will be a little slower than the food growth, so probably, yes.
Jarrod Castle
Okay, thanks very much.
Operator
The next question is from Jamie Rollo with Morgan Stanley. Please go ahead.
Jamie Rollo
Thanks. Good morning, everyone. First question is just why you’re not giving guidance on Pluxee at this time. Is that simply you want to hold your firepower for the CMD or is there anything else we need to think about? And perhaps related to that, secondly, if you could please comment on the French antitrust authority recommendations on the vouchers market? And any sort of possible read across for what might be happening in other markets? And then finally, for Marc, just on the revenue recognition in the E&R segment. Could you explain just a little bit more exactly what’s going on there and what has caused that accounting change? Thank you.
Sophie Bellon
So on the guidance on Pluxee, the fiscal year 2024 and mid-term guidance will be provided at the Pluxee Capital Market Day early 2024. In the meantime, we can say that the new business remains solid. In Brazil, the change in regulation will continue to be a tailwind and will start to benefit from the Santander deal. We are confident that face value inflation and European interest rate will also continue to be tailwinds, and we are confident for Pluxee going forward. But really, we think that the guidance should come from the Pluxee management team. So that’s why we will have to wait a little more.
On the French antitrust recommendation, well, we have – we are – there has been – the antitrust authority was requested by the Ministry of Finance to give an opinion on the opportunity to cap the issuer merchant commission. Based on their opinion, the introduction of the – this potential price cap doesn’t constitute the most appropriate response that could lead to uncertain effects. So additionally, the antitrust authority really recommend that the government makes the dematerialization of meal benefits compulsory and establish appropriate – the right regulation – appropriate regulation of the meal benefit market, in particular, through the approval and accreditation of issuers and exhaustive advertising of approved companies.
I think all these recommendations are very aligned with the position Pluxee has been sustaining for a while. The issuers are now invited by the government to make proposal, to make the new benefit regulation evolve. So such evolution will rely on a lot of full digitalization. And as Sodexo and Pluxee now, we have always been in favor of the digitalization of the meal benefit because it does create a lot of value for all stakeholders, including the restaurant owners. That’s why we have been actively migrating our portfolio of clients over the past 5 years. And in France, more than 70% of our volume in meals are digitized. And we hope that the full digitalization is going to happen fast, the faster the better.
Marc Rolland
And on your last question, what has caused the accounting change? We had a deep review of the contract with the client because we were renegotiating a large number of terms. And that this occasion, the contract was refined and we were in the – we had the opportunity to transfer those projects from gross to net.
Jamie Rollo
So what does that mean in practice, please? You just...
Marc Rolland
I’ll give you an example. For example, we do a project for our clients. And basically, the only thing we do – we don’t choose the supplier. We don’t choose the services. We don’t negotiate the price. The only thing we do is supervise, and those guys come on time, do the stuff and report. And when we do very, very simple basic supervision, there is no reason for us to account for it. When we are involved in the project itself, when we do things, when we take risk, when we have KPIs at stake, then we account for it in growth. But when we do relatively little, we can put it to net.
Jamie Rollo
Thank you.
Operator
The next question is from Julien Richer with Kepler. Please go ahead.
Julien Richer
Yes. Good morning. Three quick ones for me, please. The first one, could you please quantify the contribution of the Olympics next year? The second one, you mentioned and you discussed about European public contracts and the fact that it is now normalizing. Could you please also help us to have a view on this normalization impact on your margin in 2024, so the positive contribution you expect? And last one on facility management, maybe a little bit more, if possible, granularity on the operating profitability, operating margin, for example, of the facility management division, please? Thank you.
Marc Rolland
Can you repeat your question on normalizing because I’m not sure I captured it?
Julien Richer
So the second one on the European public contracts. So you said that you have been able to better negotiate prices recently. What do you expect in terms of margin impact in 2024 from those negotiations?
Marc Rolland
Well, the Olympics, as I think Sophie said it in her speech, we are expecting in 2024, €60 million of revenue and there will be some revenues in 2025 because of the cutoff of the Paralympics into September. That’s it. On the European public contracts in education, yes, we are expecting – we estimate that last year, we suffered 10 to 15 bps of margin related to that. So that should normalize and should get back up. So that will cancel itself, and so it will help the margin in 2024. And on FM granularity of operating profitability, we don’t comment the UOP profit of FM. But the focus on food and being selective in FM means that we are choosing in the FM services, the one who creates most value. And those FM contracts tend to be at a decent margin, very good margin, actually. So they are helping our margin overall. But we don’t give more detail than that.
Julien Richer
But as a follow-up, does it mean that for the latest contract on the facility management activity, you have something that is not dilutive in terms of margin for the Sodexo activity – Sodexo level?
Marc Rolland
I will say that, yes.
Operator
The next question is from Leo Carrington from with Citi. Please go ahead.
Leo Carrington
Good morning. If I ask three, please. Firstly, to follow-up on your guidance for margin progression for 2024, can you help break out the drivers for us? Particularly, I’m interested if you could attribute the progression between operating leverage from your growth and element of pricing catch-up versus costs and lastly, internal cost savings, which you did reference. And secondly, on the retention rate, are you able to give some color on how that progression up to 96% progresses over 2024? And if I was to just think about 2024 net development versus 2023, can you give some more color on the contribution from retention and gross development? And then lastly, the focus on cross-sell in OSS feels more in focus than ever. In terms of your focus on food and selectivity on FM, can you just give an example of – or a couple of examples of where the opportunities in cross-sell are in terms of some practical examples? Thank you.
Sophie Bellon
Okay. So, I will start with the retention. So first, I didn’t say that we were going to be at 96% in 2024. I said that the objective is to get there, but I didn’t give a date. And – but definitely, the objective is to continue to progress. How are we going to continue to progress, for example, there are some activities like, first, I mentioned a number of topics, how operationally we are better using our tools, how we are measuring, we are anticipating, we are tracking when contracts are expiring. We are proactively asking our teams to renegotiate contracts in event, especially in business like campus services in the U.S., where we have long contracts. We invest a lot. And so if we have a 5-year contract after 2 years, we go back to the client and we propose. After 2 years or 3 years, we go back, we propose a new offer, additional services and then we extend the contract for another 5 years. So, that’s the kind of action, and that will help us. It’s something that can happen in campus. It can also happen in Sodexo Live! where we invest a lot in our contracts. And that’s the kind of action, but it can happen also in other segments. That’s the kind of action that we want to focus more. It’s also – retention, we have tools. But for me, it’s a philosophy. And the more – and the philosophy is that you don’t lose a contract that you don’t want to lose. And so – and more and more, that philosophy is going to be part of the group, and the expectation is going to be there more we are going to progress. That’s why I am pretty confident that we still have leverage on retention. And as I have said in the beginning, retention is the basis, is the first pillar for sustainable and profitable growth.
Marc Rolland
And in terms of margins and the drivers, the first driver is we are at the moment where we can pass higher inflation than the one we incur. So, I think at the beginning of the year, there will be some margin improvement coming from – we are coming from the fact that we are now in the right moment of the inflation phenomenon to pass the increase on margins. We also have operational efficiencies and cost savings. So, I think the bulk will come from inflation and operational efficiency. We have also Entegra convenience, which are uplifting the margins, especially in the U.S. But at the same time, we will be, on the other hand, there will be some weight coming from the openings and the openings will wear a little. And we continue to invest in commercial excellence in supply chain, in Entegra in convenience, so it’s a mix. But the bulk of the improvement will come from operational efficiency, leverage and inflation.
Sophie Bellon
So, for the – and for the third question, the selectivity in FM, it’s like – we still – we never said that we want to not to be active in FM. We want to be more selective. We want to go where there is value for our customers. For example, in the healthcare business, we want to focus on HTM, which is a technical maintenance of the white rooms and operation of technical maintenance of materials within the hospital. We also have a number of global strategic accounts. They are very important clients for us. And as I have said, we retain Colgate-Palmolive in 12 countries where we were already operating. But now we are extending to more countries with more services and more revenues. So, it’s more a question of better targeting. And it’s also something that we are doing in food to accelerate the food. We are also targeting better. But in FM, we really want to have accretive business and also business that brings – increase the value experience of our consumers on a site, and that’s what we are doing.
Leo Carrington
Thank you. And just if I might have a follow-up on the first question on net development, would it be reasonable to expect some small progression in gross development rate for 2024 as well?
Marc Rolland
Well, the fact is, as you can see, the net new business last year in ‘22 was 2%. This year, it’s 2.2%. By improving our retention rate and staying within the range of 7% to 8%, mathematically, yes, it will improve. But it’s not going to be a leapfrog it’s going to improve steadily.
Leo Carrington
Thank you, Marc. Thanks Sophie.
Sophie Bellon
Thank you.
Operator
The next question is from Neil Tyler with Redburn Atlantic. Please go ahead.
Neil Tyler
Yes. Thank you. Good morning and thank you for the very detailed presentation. Firstly, one quick point of clarification on the pricing catch-up in the EU education. Marc, the 10 basis points to 15 basis points, is that at a group level, that impact, or was that on the EU margin? I just wanted a clarification before I move on to my other questions, please.
Marc Rolland
It’s on the EU margin, yes, Europe.
Neil Tyler
Okay. Thank you. And then – so you mentioned – I mean going back to this topic of selectivity in FM, are there any sort of meaningful contracts within the current base? You mentioned sort of active contract actions where perhaps terms are unsatisfactory, I think in your prepared remarks. Is there anything in the current base that you are not happy with as being actively sort of renegotiated? And is that material, please?
Sophie Bellon
Well, no, there is nothing. When I say selective, it means the commercial team is not going after…
Marc Rolland
New opportunities.
Sophie Bellon
New opportunities with services that are very different, especially in some countries from what we do today. So, there is nothing very material in our current portfolio, but I think we need to be more disciplined and more selective, especially with the new business.
Neil Tyler
Understand. Thank you. And then just coming back to the margin outlook, typically, the acceleration in net new creates some sort of margin drag as a larger contribution of growth comes from early-stage contracts. To, what extent are you sort of factoring that in – if you are able to sort of frame how much margin is being held back by that factor in your ‘24 guidance, please?
Marc Rolland
So, I think this is what I would try to explain when I was commenting the components of the margin that we have quite a bit in operational efficiency and inflation, and there is a little bit of drag in terms of openings. But again, the openings went from 2% to 2.2% in signing. We are already at 2% in opening in H2 fiscal year ‘23. We will be above 2% in ‘24. So, it’s not just like – it’s not an explosion of impact. It’s a gradual – I think this is why also earlier we said, we want to do things gradually. We want to sell more gradually at good margin. We want to mostly improve retention because this is the most accretive. So, the net new will improve. But right now, we said we want to stay in the 7% to 8% range of new development. What we want is the retention to go to 96%. That’s why we have already part of that impact in our ‘23 number. We may have a little more in ‘24, but we also have also positive levers. In the future, yes, it will increase, but the net new component should come more in our view from retention than from new openings.
Neil Tyler
Wonderful. Thank you. And then just one.
Marc Rolland
It’s all the way to find the right balance between opening and retention.
Neil Tyler
Got it. Yes, that’s very clear. Thank you. And then just one small follow-up on, I just – I struggled slightly to follow the dynamics in the sort of breaking up of the central overheads between the two pieces of the business. So, if you just sort of, for the avoidance of doubt, give us an indication of where you think that number will be for the core business for FY ‘24, please?
Marc Rolland
So, we have a P&L for Pluxee in appendix. You can have a look at the P&L in appendix. In this P&L for Pluxee, there is no HQ cost. It’s purely the direct Pluxee cost. It’s under IFRS 5. It’s calculated by difference. So, this is the way it should be. So, what we are saying in the presentation is that in ‘23, we as a group, between business units, between HQ and business units, we allocate and invoice what we call management fee or HQ cost to make it simple. In ‘23, we invoiced €25 million to Pluxee as a business unit. In ‘24, those €25 million, let’s assume they will not be invoiced anymore, but they will be replaced by standalone costs that Pluxee needs to build, and they are building it just now. They need to be standalone in IT. They need to be standalone in legal. They need to have a consolidation team and so forth. So, you see what I mean. Those costs right now are estimated at €45 million. So, those €45 million will replace the €25 million. It’s not in addition. The €25 million will go. The group will deal with that. And the €45 million are the costs that Pluxee needs to be standing on its two feet on its own. And when we will send you the prospects is 2024, you will then see the €45 million in the P&L. While in the one we have in the appendix, the €45 million and €25 million are not there.
Neil Tyler
I understand. And then the €97 million, is that netted against the €25 million, or is that…
Marc Rolland
The €97 million we have on the Sodexo P&L is the totality of HQ costs before any invoicing. So, it means that on the Sodexo standalone ex-Pluxee, whatever you call it, the €97 million are with us. The €97 million is already a reduced number. It used to be more in the past, and it will continue to reduce. With Sophie, we are committed to keep on reducing it so that we become more streamlined. What you need to know also, the reduction in HQ costs is also linked to the regionalization. We didn’t start because of the spinoff. We also started because we moved to a regional model, and we decided that some of the costs, which were held centrally, had to be transferred to the regions and the zone, and they had to be accountable for it. So, we have less centrally as part of that.
Neil Tyler
That’s very helpful. Thank you very much.
Operator
The next question is from Vicki Stern with Barclays. Please go ahead.
Vicki Stern
Good morning. And just coming back again on the guidance for Pluxee, I appreciate you are going to give full numbers next year, but you gave some helpful commentary there on the top line drivers. Just wanted to circle back on the margin, and I am doing this before the central cost point you just discussed. And obviously that margin has been very much helped by interest income being so good this year, but I know you have been investing some of that benefit on the other side. So, sort of general direction of travel for the margins for Pluxee as we look into next year and beyond when interest rates perhaps stop being such a tailwind. Second question is just on the use of cash. Obviously, that business will have a lot of cash. I know you have talked about sort of a few step plan long-term plan being diversification, but any sort of initial comments on M&A strategy for that business and when that might become relevant. And then just finally, a follow-up to Jamie’s question really, I think one of the proposals that came out last week was about the separation of issuance and acceptance of meal vouchers in France. Just specifically on that measure, curious in the long-term if you think that could be problematic for you in any way. And I think you also asked on the competition, any other inquiries underway in any other countries? Curious to know if there is anything else going on there.
Sophie Bellon
First, on the guide – thank you, Vicki for your questions. But on the guidance for Pluxee, I mean we are not giving any guidance. As I have said, the management is going to the Capital Market Day early in 2024. And soon after, we will have the spinoff. So, until then we are not giving any guidance.
Marc Rolland
And on the M&A strategy, as you can see, I mean Pluxee has – will have a significant firepower. They will have a net cash position to start with. But I am not commenting the M&A strategy for Pluxee. I think it will also be presented to you at the Capital Market Day. On the separation of issuance and acceptance of meal vouchers, what I understand is that there was some conversation where the card, the service could be used almost anywhere. And I think this is a very complex matter. I don’t think it’s a very detailed proposal at that stage. And the difficulty I understand, but I am not sure I grasp everything on that, so we will need to have more information. Is that – if what we call fungibility was implemented, it will mean that a meal service, meal vouchers, meal cards will be almost used as cash. And if it was used as cash, then why should it have some social exemptions or whatever. So, I think it’s very early stage on this. It’s complex. And there are currently a clarification meeting with the government to understand what they have in mind, but I don’t think this is a well-developed sort at that stage.
Vicki Stern
Thank you. And just the last one was about whether there is any other sort of competition inquiries going on in any other geographies that we should be aware of right now?
Marc Rolland
There is nothing significant that I remember, so I will recheck that.
Vicki Stern
Okay. Thanks very much.
Operator
The next question is from Estelle Weingrod with JPMorgan. Please go ahead.
Estelle Weingrod
Hi. Good morning everyone. There is only one left from me. Could you just provide more color on the net new in-year contribution for full year and Q4 as it was actually slightly negative last year for the full year, if I remember correctly, while the reported net new was then 2%? Yes, just a bit of color on this, please.
Marc Rolland
Yes, I was expecting the question. Yes, the net new openings and the net new in revenue and the way it’s reflected is at 2% in H2, and I think as we have said it will be. And so it’s in line with what we had observed in H1, and the ramp-up, we were expecting, so a net new of 2% in H2. And if I project myself in ‘24, now that we have had 2 years in a row of net new business at above 2%, 2% then 2.2%, the net new openings in revenue will consolidate at 2% plus. So, we will see the 2% contributing to the guidance in revenue.
Estelle Weingrod
Okay. Thank you.
Operator
The next question is from Andre Juillard with Deutsche Bank. Please go ahead.
Andre Juillard
Good morning and congratulations for the solid results. Most of my questions were already answered, but I just wanted to have a follow-up on inflation. Considering that the inflation on food is slowing down, don’t you think that the renegotiation could become tougher in the next few months with your clients? So, I would appreciate a feedback on that. Second question on CapEx, where we have been seeing that CapEx were improving progressively, you are targeting mid-term 2.5%. Is it a top-ish level for you, or could we consider that the growth on that side is going to continue? Thank you.
Marc Rolland
Inflation on food slowing on and that for us, the fact that the food cost inflation is slowing down is a blessing. We can see already in the U.S., we are well below 5% in food cost inflation, and we see immediately the benefits happening in our margin. And as you know, the indexes we are using are not prospective indexes, they are retractive indexes. So, when we pass inflation, for instance, in October, we pass inflation, which has been calculated from October ‘22 to October ‘23. So, the inflation is contributing, while actually the food cost inflation is lower. So right now, we are in this moment where the – we are increasing revenue more than the food cost is increasing. Where it’s not yet totally true is in Europe because in UK, France and Continental Europe, the food cost is still double digit. It’s been slowing down, but it’s still at a high level. So right now, in Europe, we are still. But will it become tougher with clients, yes it will become tougher with clients, not necessarily on the pricing, but on the mitigation action. At some point, the clients will tell us you were mitigating a lot, now you need to mitigate a little less. And for instance, increase the level of services or increase the level of their hours of openings, so the mitigation will need to stay firm as long as we can on the mitigation. But I am expecting pressure on the mitigation at some point. We are actually spending more CapEx. And as you can see, it’s very client focused. So, this is good CapEx. It helps retention. It helps development. We were at 2.3% gross CapEx to revenue. We said 2.5%. We will be happy to revisit the CapEx above 2.5% if it helps us consolidate the retention above 96%, that’s for sure. But right now, we want to keep on progressing and do good CapEx so that we can improve retention and we can improve winnings and net new business. But yes, if there is opportunity to go above 2.5%, we will go above 2.5%.
Andre Juillard
Okay. Thank you.
Operator
Ladies and gentlemen, there are no more questions registered at this time. I will turn the conference back to the Sodexo team for the closing remarks.
Sophie Bellon
Well, since there is no more questions, I want to thank you all for being with us this morning. So, our next step is the Shareholder Meeting on December 15 and our Q1 revenues on January 5. Thank you all. Have a good day.
Operator
Ladies and gentlemen, thank you for joining. The conference is now over and you may disconnect your telephones.
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Sodexo S.A. (SDXOF) Q4 2023 Earnings Call Transcript