In a recent earnings call, Sodexo (EPA:EXHO) (SW), a leading global food services and facilities management company, reported a strong fiscal year 2024, with significant organic growth and strategic developments poised for future expansion. The company achieved a 7.9% organic growth rate, with food services growing by 9.3% and contributing 66% to total revenues. Notably, the underlying operating margin improved by 40 basis points to 4.7%, and underlying net income from continuing activities rose by 17.6%.
Sodexo's strategic moves included the spin-off of Pluxee and the sale of Bellon SA, leading to a special interim dividend. The company also announced key contracts, such as a partnership with the Titans Nashville Stadium and Fontainebleau Hospital Center. With a strong balance sheet and a focus on enhancing service offerings, Sodexo is positioned for continued growth in the coming fiscal year.
Key Takeaways
- Sodexo achieved strong financial results in FY24 with a 7.9% organic growth and a 17.6% increase in underlying net profit.
- Food services saw a robust 9.3% growth, making up 66% of total revenues.
- The company successfully restructured, focusing on food and facility management across 45 countries.
- Strategic investments in branded offerings and technology are driving revenue increases and client retention.
- Sodexo reported a positive free cash flow of EUR 661 million and reduced total net debt to EUR 2.6 billion.
- The company anticipates organic revenue growth of 5.5% to 6.5% for FY25, with improved profit margins.
Company Outlook
- Sodexo plans to reduce gross debt using excess cash and expects a more normal financial performance around EUR 100 million for FY25.
- Revenue for FY24 reached EUR 23.8 billion, with strong performance across all regions, especially in Food Services.
- The company projects organic revenue growth of 5.5% to 6.5% for FY25, with pricing expected to average around 3%.
Bearish Highlights
- The company faced a drop in client retention to 92% due to the loss of a global FM contract.
- Challenges in the LATAM market resulted in a loss impacting revenue by 0.6%.
- The U.S. education sector experienced a slowdown and a 4.5% decline in Q4 organic growth due to seasonal factors and contract losses.
Bullish Highlights
- Sodexo secured over EUR500 million in revenues with major clients like Microsoft (NASDAQ:MSFT) and AstraZeneca (NASDAQ:AZN).
- New signings exceeded EUR1.6 billion, with a focus on food services.
- The company expects a strong second half of FY24, supported by a 25% increase in their pipeline.
Misses
- Despite overall strong performance, the company reported a negative one-time impact in Q4 related to retention issues in Latin America.
- The education sector is experiencing a slowdown due to a cycle of rebidding following the 2019 Farm Bill.
Q&A Highlights
- The company is open to bolt-on acquisitions within a EUR300 million to EUR500 million range annually.
- Management expressed confidence in achieving a 95% client retention rate and anticipates margin improvements across all regions.
- The next revenue announcement is scheduled for January 7, 2025.
Sodexo's fiscal year 2024 showcased strong financial health and strategic positioning, with the company making transformative changes and reporting robust growth. The company's focus on enhancing its service offerings and investing in technology has paid off, contributing to its positive financial results. While there were some challenges, particularly in the LATAM market and the U.S. education sector, Sodexo's strategic contracts and initiatives indicate a solid foundation for future growth and stability.
InvestingPro Insights
Sodexo's strong fiscal year 2024 performance is further illuminated by key metrics from InvestingPro. The company's market capitalization stands at $12.75 billion, reflecting its significant presence in the Hotels, Restaurants & Leisure industry. Sodexo's revenue for the last twelve months as of Q4 2024 reached $26.3 billion, with a notable revenue growth of 5.13%, aligning with the company's reported organic growth of 7.9%.
The company's financial health is underscored by its profitability, as indicated by an InvestingPro Tip which notes that Sodexo has been profitable over the last twelve months. This is consistent with the reported 17.6% increase in underlying net income from continuing activities. Additionally, the adjusted P/E ratio of 12.6 suggests that the stock may be reasonably valued relative to its earnings.
Sodexo's commitment to shareholder returns is evident in its dividend policy. An InvestingPro Tip highlights that the company has maintained dividend payments for 24 consecutive years, demonstrating long-term financial stability. This is particularly impressive given the challenges faced in recent years, including the pandemic's impact on the hospitality industry. The current dividend yield stands at a substantial 15.63%, which may be attractive to income-focused investors.
The company's strategic moves, including the spin-off of Pluxee and the sale of Bellon SA, are reflected in its financial metrics. The EBITDA growth of 19.32% and the significant dividend growth of 417.03% over the last twelve months as of Q4 2024 indicate the positive impact of these strategic decisions on the company's financial performance.
Investors considering Sodexo may be interested to know that InvestingPro offers 8 additional tips for this stock, providing a more comprehensive analysis for those looking to delve deeper into the company's prospects.
Full transcript - Sodexo SA (SDXOF) Q4 2024:
Virginia Jeanson: Good morning, everyone. Welcome to our Fiscal 2024 Results Call. I'm here with Sophie Bellon and Sebastien De Tramasure. They'll go through the presentation and then take your questions as usual. The slides and the press releases are available on sodexo.com, and you'll be able to access this webcast on our website for the next 12 months. The call is being recorded, but may not be reproduced or transmitted without our consent. Please get back to the IR team if you have any further questions after the call. I remind you that the Q1 fiscal 2024 revenues announcement will be on Tuesday, 7th of January. I now hand you over to Sophie.
Sophie Bellon: Thank you very much, Virginia. Good morning, everyone, and thank you for joining us today. Fiscal year 2024 has been a transformative year marked by two very major and decisive steps to further focus and simplify the Group. As you all know, we spun off Pluxee in February and sold our stake in Bellon SA, distributing a special interim dividend from the proceeds at the end of August. With our simplified structure, reorganized by geography, we are positioned as a pure player in food and targeted FM services in 45 countries. Collectively, we are all mobilized to enhance our operational execution in food and FM services to drive profitable growth for the long term. And before I go into the numbers, although as a rule, we do not comment market rumors, I want to confirm that there are no discussions with Aramark, and I will not comment any further on this subject. Let's now turn to the strong financial delivery in fiscal year 2024 at the top end of the guidance. Organic growth was 7.9%, driven by the strong performance in Food Services at plus 9.3%, which now account for 66% of total revenues. The underlying operating margin improved by 40 basis points to 4.7%, and the underlying net income from continuing activities by 17.6%. We have also delivered on our commitment to reduce the net debt ratio to below two times following the spin-off and a year earlier than we thought. Thanks to strong cash generation during the year, we have lowered financial leverage to 1.7 times, well within our target range of one to two times. We have a strong balance sheet and are ready to do more bolt-on acquisitions where there is a strategic rationale and potential to create value. Now let's turn our attention to the strategic advances we have made this year to strengthen our position in food services and target our growth in facility management. We are transforming our offers and ways of working, particularly with our branded offers as well as innovative off-site production facilities and new distribution options to provide more attractive choices for our consumers, flexibility and better consumer engagement for our clients. The deployment of our branded offers is moving fast with Kitchen Works revenues up 45% and Modern Recipe up 30%. Overall, our branded offerings are on target to reach about 50% of food revenues next year. In addition, we are scaling new models of production and distribution. Our first culinary workshop was launched in Chile seven years ago to meet the specific issues of running food services at very high altitudes. The workshop prepares components for a wide range of dishes for local finalization at the remote camps. We standardized our menu, optimized our purchasing, reduced energy and water consumption, simplified logistics and reduced accidents. With this successful experience, we are now developing the concept in France, where we have a dense client base in the Paris region, and our first workshop started in 2022, and we are targeting 100 client sites by the end of this year served by this workshop. We are also just beginning the development of a similar concept of centralized food production in Hyderabad and Bangalore in India. On the distribution side, our convenience brand InReach in the U.S. is growing fast through acquisition, sales synergies and strong consumer buy-in. Our Noponto convenience brand in Brazil opened 140 micro markets in just six months after a few pilot launches. We are also rolling out our frictionless stores in the U.S. and French stadiums. Finally, in our FM activities, we are also investing in our expertise and digital tools to support our large integrated clients who are seeking to enhance their consumer engagement, attract their employees back to the office, invest in smart buildings with reduced floor space and upgraded holistic services and progress on their sustainable journeys. We are integrating IoT, AI and data analytics to enhance asset management, predictive maintenance and decision-making, which in turn is driving efficiency. This is why in fiscal year 2024, we renewed more than EUR500 million of revenues with four large global clients such as Microsoft and AstraZeneca. And none of this could be done without our focus on our [indiscernible] strategic enablers. We have spent over EUR600 million in tech, data and digital in financial year '24, which is nearly EUR100 million more than a couple of years ago. Our move to cloud initiative is not just a technology upgrade, it's transforming how we operate, accelerating efficiency and mutualizing resources and strengthening our ability to acquire customers. We have also seen a 25% increase in active app users, indicating that our digital transformation efforts are resonating with consumers. Furthermore, we are embedding AI into our core operation, anchoring it as critical component of our business processes to enhance decision-making, automate workflows and drive smarter data-driven strategies. Moving on to commercial excellence, we have established strong processes and tools that enable systematic targeting and prioritization, allowing us to be more strategic in our approach and our targeted sales pipeline has grown by 25%. A key initiative has been to strengthen our Clients for Life program with a new training for account leaders. This initiative is designed to help them take proactive measures on contracts due for renewal over the next three years by tracking them as rigorously as we would a sales pipeline and equipping our team with specialized training. At the same time, we are actively promoting our upgraded offerings and bringing innovation to the table, ensuring that our clients see the added value in staying with us. Finally, on supply chain power, we have made significant progress around the world in reducing our SKUs by 25% in financial year '24, and improving catalog compliance by 400 basis points. Our investments in talent and digital tools is helping us to further optimize our supply chain. Entegra achieved an impressive 17% organic growth, and our addressable spend has now reached EUR38 billion. All of these achievements represent a collective step forward in building a stronger, more agile, and future-ready organization. Let me also share key updates on our people and planet initiatives. Safety remains our top priority with a further improvement in HEC [ph] performance in 2024 at 0.47, the LTIR was down 14.5%, helped by the training of 15,000 managers. We also made real progress in near miss reporting, which will, in turn, help us to continue to reduce the number of accidents, though even one is too many for me. In well-being and development, we reached 60% coverage of our Vita program, and we have increased average employee training by 5.4% with a strong focus this year on sustainable culinary skills. We continue to reduce emissions, achieving a 2.5% year-on-year decrease in Scope 1, 2 and 3 emissions, and 73% of electricity in our own building now comes from renewable sources. Our food waste reduction program is also on track, cutting waste by 40.7% across sites. I'm proud of these achievements. They reflect our total commitment to creating a safer, more inclusive and sustainable future for our employees, consumers, clients, and all our other stakeholders. Now let's turn to the commercial momentum for fiscal 2024. Net new signings reached 1.6% for the year. Retention at 92% was disappointing after a strong performance last year at 95.2%. This year, as you know, was impacted by the loss of a global FM contract for 60 basis points. Adjusted for that, retention would have been close to 95%. On the other hand, we had a record year for new signings, exceeding EUR1.6 billion at above-average margin. I remind you that these indicators are forward-looking, assessing the commercial performance during the year regardless of the actual date of site closure or opening. Now let's take a closer look at this. As shown on the previous slide, our development rate was 7.4%. And when we include new business generated from cross-selling, total new wins hit a record of EUR1.9 billion, up from EUR1.7 billion last year. And importantly, our pipeline at the beginning of this New Year is higher than it has ever been, more targeted and also more advanced than usual, which means that our signings in the first half should be better than they were last year. If you remember, in fiscal year '24, we signed much more in H2 than in H1. In Europe -- no sorry, moving to the right of the slide, you can see that the share of food service within these new sales has increased to 65%, reflecting our strategic focus on food service. Moreover, in North America, the first-time outsourcing trend continues, accounting now for 43% of new sales in '24. On our retention performance, the global FM account had an impact of 0.6%. We also faced specific onetime challenges in energy and resource in Latin America, where we lost two contracts due to aggressive pricing in a changing competitive environment, accounting for another 0.3% of the losses. Without these three contracts, our retention would have been over 95%. On the remaining 4.9% losses, 0.4% were due to site closures and the rest were losses to competitors mainly and some contracts reverting to in-house management, especially in Healthcare Canada, where political decision played a role. I would also like to highlight that education was particularly impacted this year as we were disciplined on pricing in a context where we had a lot of contracts up for renewal, particularly in U.S. schools, reflecting a change in regulation five years ago. I highlight the fact that more generally, net new business margins are accretive, and one of the positives is that we have made very good progress in regions where we previously had lower retention, such as Brazil and France. However, I'm not happy with the overall retention in fiscal year '24. We have made several changes in terms of people and processes to rapidly increase retention back up to 95%. And we still aim for 96% client retention in the midterm, even though as we have seen in fiscal year '24, these targets can be impacted by the loss of one of our large accounts. And while such losses can occur occasionally, they don't undermine the overall solid underlying performance of our retention efforts. That being said, with retention at 95% to 96% and a 7% to 8% development rate, this should allow us to achieve a net new development rate of above plus 3% annually midterm. I would like now to highlight example of some interesting accounts won this quarter. In North America, Sodexo Live has signed a multiyear agreement to be the exclusive hospitality partner for the new 60,000-seat Titans Nashville Stadium opening in 2027. This venue featuring a 12,000 square foot community center expands our NFL portfolio to four stadiums, including iconic locations like the Caesars (NASDAQ:CZR) Superdome in New Orleans and Hard Rock Stadium in Miami. In Europe, we have signed a five year contract with Fontainebleau Hospital Center in France, covering three main sites. This partnership marks a key step in co-creating a customized food service for patients, residents and staff with fresh on-site cooking in line with the EGalim Law. In Rest of the World, we have signed a significant food service partnership with Airbus for 2,000 consumers daily in their sites in India with two branded offers, Warmly Yours and Global Cuisine, for both its local and foreign employees, as well as a gourmet offer supplied from MasterKitchen, our off-site culinary workshop in Bangalore for workplaces where there is no kitchen. I can't finish without mentioning the Olympics. I've already mentioned the key figures in previous presentation. These games presented significant challenges for our Group in terms of logistics and culinary choices. I'm proud of the teams for their amazing resourcefulness, flexibility and innovative spirit, and which will help us improve our offers going forward. We have set a new standard for large-scale events. Let's now turn it over to Sebastien to present the results.
Sebastien De Tramasure: Thank you, Sophie, and good morning, everyone. So I'm very pleased to be here with you today to present a strong set of results for this fiscal year '24. I will present just the continuing operations. The Pluxee contribution for the first five months of fiscal year '24 is detailed in the appendices and in the management report. And to state the obvious, it has not changed since the first half. So now let's start with the P&L. As I said, we delivered strong financial results this year with underlying net profit up 17.6%. Revenue grew by 5.1% or 7% at constant currency. And as Sophie said, organic growth was plus 7.9%. Underlying operating profit reached EUR1.1 billion, up 13.7% and up 16% at constant currency with a margin of 4.7%, up 40 basis points, and this is at the top of our guidance between 30 and 40 basis points. And I will come back to the margin a bit later in the presentation. Operating profit was up 24.1% to over EUR1 billion, helped by the reduction in other operating income and expenses. And again, I will come back to this on the next slide. Net financial expenses totaled EUR63 million, and this is lower than both last year and our expectation. Net borrowing costs were more or less stable and this is partly due to the decision not to refinance the EUR800 million reimbursed during the first half of the year, which were at an average rate of less than 1%. Had we refinanced it, it would have been at a much higher rate. And as a result, our blended cost of net debt at the end of fiscal year '24 was only 10 basis points higher than last year at 1.8%, and this despite higher U.S. dollar floating rates. In other financial expenses, we knew that we no longer had the EUR14 million exceptional costs related to the bond consent process from last year related to the spin-off of Pluxee. But we also had a favorable currency impact and some good news, firstly, on our equity investment, and secondly, we had compensatory interest income linked to a social security claim in Brazil. For fiscal year '25, we expect the financial results to go back to a more normal level of around EUR100 million. The effective tax rate of 25.4% is higher than the 22% we had put into our modeling slide in the recent quarters. As expected, it was positively impacted by the Homecare sale capital gain and some tax asset recognition. However, in Q4, ongoing discussion with the French tax authorities on the past tax audit led to an update of our French tax exposure, partly mitigated by the use of our unrecognized tax asset thanks to the sale of Sofinsod. And the projected tax rate for fiscal year '24 is around 27%. And this does include an estimated impact from the French government's plan for an exceptional corporate tax contribution that would be partly mitigated by the use of deferred tax assets in France. Now back to the Group net profit from continuing activities, we delivered nearly 32% increase. Then adjusted for other operating income and expenses net of tax and for exceptional tax items, the underlying net profit from continuing activities reached EUR775 million, up 17.6%. So now for this fiscal year, other operating income and expense reached minus EUR58 million, and this was positively impacted by the net gain of EUR90 million from scope change, mainly from the sale of the Homecare business during the first half of the year. Then we increased our restructuring cost by EUR20 million due to the higher both site restructuring. We continued the simplification and the streamlining of our organization during the year. And in addition to that, we are moving forward on the transformation of our transversal function at central level and at the regional level towards the global business service model, and this will drive efficiencies in the next few years. And this transformation will accelerate in fiscal year '25. And in total, we expect to spend around EUR130 million in other income and expense in fiscal year '25 including around EUR80 million of restructuring costs. And you will find the modeling slide in the appendix as usual. So now let's move on to our strong cash flow performance. Operating cash flow was EUR1.3 billion for the year. It was up, but not as much as the increase in operating profit due to higher cash tax. However, we have made very good progress on the working capital outflow, which was just over EUR40 million, showing a strong improvement from last year, which had been affected by payroll timing effect -- unfavorable payroll timing effect in the U.S. and changes in regulation impacting European payment delays. CapEx was 2% of revenue. It was below last year's 2.2%. And the CapEx level depends on the type of the signature each year and on the timing of the openings. And we maintain a target level of 2.5% of revenues, and the team knows that we have the capacity to finance the right opportunities, providing that we get the right returns. Looking back to the slide. This brings us to a very positive free cash flow of EUR661 million, nearly EUR290 million better than last year, or a cash conversion relative to net income of 90%. We don't expect to replicate this strong performance next year, because CapEx was slightly below -- lower than normal, and we expect an exceptional tax cash payment this year linked to the discussion with the French tax authorities I mentioned earlier. And on a normalized basis, cash conversion should be between 70% and 80%. Now if we continue down the cash flow, net disposal was a positive EUR986 million due to the sale of Sofinsod for EUR980 million and the sale of the Homecare business. And this was partially offset by several bolt-on acquisitions in the North American convenience sector and by our expansion in China on the food service market. Dividends paid to shareholders were exceptional in fiscal year '24 at EUR1.3 billion because of the special dividend paid in August of EUR980 million, reflecting the return to shareholder of the Sofinsod sale alongside with the usual ordinary dividend from December 2023. So all-in-all, consolidated debt net decreased by EUR318 million, and as a result, as you can see in this slide, total net debt reached EUR2.6 billion. And this net debt reduction, coupled with a year-on-year EBITDA increase of 11.5% has resulted in a net debt-to-EBITDA ratio of 1.7, well below the fiscal year '23 level of 2.2, and firmly back within our target range of one to two times. And this has come earlier than we had initially expected. And there are a few areas I want to comment on the balance sheet. First of all, noncurrent assets have decreased as a result of the sale of Sofinsod. Shareholder equity is lower as a result of the special interim dividend paid in August '24 following the sale of Sofinsod. And I also want to highlight the significant reduction of gross borrowing as we repaid two bonds without reissuing any new debt, as mentioned earlier. Now looking ahead to fiscal year '25, we plan to use our excess cash to continue to reduce gross debt and intend to repay at least part of the EUR700 million bond maturing in April 2025, from cash resources, and this will depend upon the level of M&A. And of course, this will not stop us from being more active in our bolt-on M&A strategy. Now moving on to EBITDA and return on capital. As you can see, the increase in both underlying EBITDA margin and the ROCE, thanks to our improved operational performance and effective capital utilization. As already said, EBITDA was up 11.5% at close to EUR1.5 billion, and the margin at 6.3%, up 40 basis points versus last year. And ROCE is also up strongly at 12.9% compared to 11.3% in fiscal year '23. I also wanted to highlight the shareholder return of the year. I remind you that our shareholders have enjoyed a very strong total shareholder return in fiscal year '24 after already very good performances in fiscal year '23 and fiscal year '22. Of course, a large part of this comes from the exceptional dividend linked to the sale of Sofinsod, which brings our TCR to 29% for fiscal year '24. So now let's turn to the review of operations. I said earlier, fiscal year '24 Group revenue reached EUR23.8 billion, up 5.1%. This figure was impacted on the one hand by the negative currency impact of 1.8%, largely due to significant year-on-year fluctuation in euro, especially at the start of the year of last year, and on the other hand, by the scope change of minus 1%, mainly from the sale of the Homecare business. Organic growth was a robust 7.9%, 7.5% excluding the Rugby World Cup and the Olympics. I will delve into the detailed geographic performance in the next slide. But overall, growth was strong across all regions, driven by Food Services up 9.3%, reaching 66% of total sales. And our FM service also continued to grow, even if more modestly by 5.5%. So now let's look at the impacts of inflation and pricing on our performance. So in Q4, we observed a further easing of food inflation in Europe, but a slight uptick in the Americas. Meanwhile, labor inflation has decreased slightly to around 4.5% globally. And in this volatile context for inflation, I would like to highlight the very, very good performance of our supply management team. They have done a great job in controlling food costs, driving savings and optimizing the supply chain. Pricing trends are now averaging approximately 3.5% in Q4 and 4% for the entire fiscal year, and this is in line with our expectation at the beginning of the year. Inflation trends appear to be less volatile, stabilizing at this level. And so we anticipate that pricing will continue to sustain top line growth by around 3% for the fiscal year '25. Now let's turn to the detail by geography on slide 23, starting with North America. So North America revenue reached EUR11.1 billion, up 8.7% organically, driven by strong volume growth in most segments and pricing of around 3.5%. And this result is despite the slowdown that we observed in Q4. And this was due to the combination of strong project work and convention center activity in last year Q4, and the phasing of net new wins, especially in education. Now let's look at the performance segment by segment. In Business & Administration, organic growth of 11.8% was driven by four factors, new business, pricing effect, continued return to the office, and Entegra's strong performance. Sodexo Live saw robust growth of 23.4% from stadium and event spending and passenger accounts in airport lounges, as well as the mobilization of new contracts and, in particular, American Airlines (NASDAQ:AAL). Education grew 4.2% as a result of price hikes and increased meal counts, and despite some contract reduction and demobilization in Q4. Healthcare & Seniors are plus 5.1%, benefited from price increases, strong net new contribution and retail growth in hospitals, partially offset by some senior site closure. In Europe, revenue reached EUR8.5 billion and organic growth was 7.2%. And this was boosted by the Rugby World Cup in Q1 and the Olympics in Q4, as well as increased food volume and pricing of just below 5%. Second half growth was impacted by the sequential slowdown in pricing and the collateral effect of the Olympics, which for a few months, diverted regular peak season tourism and some corporate activities in and around Paris. In Business & Administration, organic growth was 5.3%, driven by price increases, higher office attendance and new business. Sodexo Live grew by 25.5%, boosted by the Olympics and the Rugby World Cup. Underlying activity was also up at 6.6% with strong performance in French sports venues, slightly offset by the collateral effect of the Olympics in the second half. In education, growth reached 6.9%, boosted by price revision, offset slightly by the exit of low performing contract in France. Healthcare & Senior reached 6.1% organic growth, benefiting from inflation pass-through and new business in Spain and in Belgium. Rest of the World revenue were EUR4.2 billion, up 7.3% organically, driven by double-digit growth in APAC, especially in Australia and in India. For the last five quarters, Rest of the World organic growth has been impacted by an accounting change on the large energy and resources contract. For last year, the full year impact was actually taken retroactively in Q4. And the fourth quarter of this fiscal year '24 was boosted by 8 points due to the base effect from the prior year retroactive impact. Full year organic growth for the year is 7.3%, and this, therefore, is like-for-like. Growth in Business & Administration was 6.9% with a double-digit organic growth in India and Australia, while Latin America saw a deceleration, particularly in the mining sector, due to some contract closure and losses. Sodexo Live revenue doubled due to strong airport lounge activity, but off a very low base. Education, 11.2% strong growth was driven by new business and volume increases, particularly in Brazil, India and a stronger Q4 in China. In Healthcare & Seniors, growth was 3.6%, driven by contract ramp-up in India. On the other hand, China remained weak and there was the impact of the contract exit in Brazil last year as well. And finally, let's look at our margin. Our UOP margin increased by 40 basis points to 4.7%, driven by operational efficiencies and HQ cost reduction. In North America, the 30 basis points increase in profitability was supported by revenue growth, labor efficiency, purchasing optimization, including the good performance of Entegra, while continuing to invest in sales, marketing, supply management and tech to support the growth. In Europe, profitability improved 30 basis points too, through inflation mitigation, SKU reduction and enhanced supplier compliance, combined with the ongoing price revision, especially in Education and in France, where catch-up was still required. In the Rest of the World, UOP margins were up 20 basis points, helped by successful price negotiations and the turnaround of underperforming contracts, somewhat offset by demobilization costs in Latin America. HQ costs were also well controlled, down 11% versus last year. So in summary, we delivered our margin guidance at the top of the range. This performance was driven by three key factors, operating leverage from higher revenue, enhanced site productivity and supply efficiency, and rigorous cost control. And we continue to execute our strategy, and we are well positioned for the future profitable growth. With that, I will now hand over to Sophie to share our guidance for fiscal year '25.
Sophie Bellon: Thank you very much, Sebastien. Looking ahead to fiscal year 2025, we are projecting organic revenue growth in the range of 5.5% to 6.5%, which is, in effect, plus 6% to plus 7%, excluding the base effect from the Olympics, the Rugby World Cup, and the leap year in fiscal year '24. We expect pricing to average around plus 3%, supporting our growth outlook. And in addition, we anticipate like-for-like volume growth driven by increased demand for new or upgraded services and higher attendance in Corporate Services. We also foresee a positive net new contribution of approximately plus 2% with growth expected to be more modest in the first half and picking up in the second half due to the timing of mobilization and demobilization. On the margin front, we anticipate an improvement in the underlying operating profit margin of 30 to 40 basis points at constant currency, and this will be achieved through a disciplined commercial approach and further efficiency gain from the deployment of digital tools, optimization of supply management, rollout of branded offers, and the introduction of new distribution and production models, all underpinned by rigorous cost control and the transformation of our transversal function towards a global business services model. In closing, we are confident in our ability to deliver on these targets. And thank you, and I will now open the floor for the Q&A session.
Operator: [Operator Instructions] The first question is from Jamie Rollo with Morgan Stanley (NYSE:MS). Please go ahead.
Jamie Rollo: Thank you. Good morning, everyone. Three questions, please. First of all, in North America, the fourth quarter organic sales growth slowed quite a lot to around 5%. It was more like, I think, 9%, 10% through the first two quarters, and you talked about some lost university contracts. Could you please quantify those losses? And are there any factors causing that slowdown? Or is it simply just normalization. Secondly, on retention, 90 basis points hit from the FM and E&R contract losses in just a few months, plus maybe something in U.S. It feels like this could be the start of a trend. I'm just wondering what your confidence level is in the 95% retention target this year. And just on the guidance of 30 to 40 basis points, that's clearly quite a good figure for 2025, given the higher base and slowing sales. Is that very much driven by internal acts on cost rather than operating leverage on higher revenues? And also which regions do you see most sort of margin upside in 2025? Thank you.
Sophie Bellon: Okay. Thank you very much, Jamie. I think Sebastien is going to answer your first question.
Sebastien De Tramasure: Yeah, I will take the first question. So thank you, Jamie. So the slowdown in Q4 in North America, around 5%, as you said, it's a different type of impact. First, we mentioned that last year in Q4 fiscal year '23, we had a very strong quarter with some strong activity in project work and convention center as well. So there is a kind of base effect there. There is also the slowdown in price increase between Q1, Q2, Q3 and Q4. This is also impacting Q4. And then there is a question on the impact from university and it's mainly from education, but it has a minor impact here because, as you know, the Q4 is not a big quarter for education. So it has some impact. This is also related to our very disciplined approach in terms of retention. And we really want to focus on quality signing, but we want to focus on quality retention as well to protect our margin. So it has an impact slightly in Q4. But again, main reason was really baseline from Q4 fiscal year '23 and slowdown of inflation.
Sophie Bellon: Okay. Jamie, on your second question on the 90 basis point retention -- impact on retention by FM contract. As you know, we pivot our strategy to refocus on food and be more targeted in FM. And we want to ensure that we work with clients who not only want to drive efficiency, but are also keen to double down on the experience and their employee engagement. So our objective is to retain and grow with such clients by building on our client engagement and bringing value through our services and technology also. I don't want to specifically comment on this loss -- on the FM loss. On the E&R, as I said, it was also due to a very specific competitive environment this year in LATAM. And so it is rare that we lose a very large contract like the one, that has an impact of 0.6%, that are global, complex, and we are often a key strategic partner. And as I said, we have renewed, with the same type of contract, more than EUR500 million this year with four contracts, of which Microsoft and AstraZeneca. So in this highly competitive market, we successfully continue to proactively retain many global clients across sectors like pharma, FMCG, tech, and we want to continue to do so.
Sebastien De Tramasure: And regarding your third question and the further improvement in margin for fiscal year '24 -- '25 between 30 and 40 basis points, here we have different drivers. The first one is growth. I mean, we increased density, we scaled in food procurement. We are able to leverage our overhead as well. So our top line growth helps us to improve margin. Then also, we are working on enhancing the productivity at the site level. This is not new, but it's an ongoing and continuous effort on labor and on food costs. So we are also deploying new tools for workforce planning, for labor scheduling, and this definitely helps the optimization of the middle of the page. And then also, we work on our overhead and transversal function costs. We already mentioned the simplification of our organization. We mentioned the reduction of our HQ cost. And also mentioned the new transformation of our service function, moving to a global business service model, and this will help to drive also efficiency in the coming years.
Jamie Rollo: Thank you. Do you mind just quantifying the U.S. university losses in terms of full year revenue, please? And also, Sophie, so what was your confidence level on 95%? I mean there's no more big contracts you think you could lose in the next 12 months?
Sophie Bellon: Well, we are pretty confident on the 95%. It is our target. We were there last year. And then of course, if another very big contract is lost within that period, as you know, it can affect. But we are pretty confident in our 95% retention rate for this year. And higher education, well, we are not giving the number. We can't give you the specific number. In education, I remind you that there are universities, and they were a big number of universities, but also we have schools, and schools have also been very impacted, because as you remember, in 2019, the Farm Bill law passed and a massive amount of K-12 contract went into rebid during that time, around that time, in 2018 and 2019, to get compliant with the change in the Farm Bill. And now we are five years later. So we are in a cycle of rebidding. And last year, for the school business was a big year. So it's going through a slowdown. It was a big year for renewals and it is because of the impact of that change of law five years ago. And it is slowing down. There's still some in this year, but it is slowing down this year and next year.
Jamie Rollo: Okay, thank you very much. That's very helpful.
Operator: The next question is from Simona Sarli with Bank of America (NYSE:BAC). Please go ahead.
Simona Sarli: Yes, good morning, and thanks for taking my questions. Just a couple of them, please. So your fiscal year 2025 guidance assumes quite some contribution from like-for-like volume growth. So what gives you visibility that you can achieve that? And also how much visibility you have? Second question is on the Q4. Again, you have achieved an organic growth of plus 5% on an underlying basis and are guiding for 6% to 7% in fiscal year '25, which is quite a sizable step-up. So how can you please reconcile that? Thank you.
Sophie Bellon: Okay. So on the like-for-like, I will start giving you some qualitative elements and maybe Sebastien can fill in with -- can give you little -- add some elements to that. So first, we have an ongoing gradual rollback of remote work policies. As you heard, many companies are forcing their employees to get back to work. So we expect a positive impact from that. Clients are looking for ways to make their offices more attractive to their employees to bring them back with better food offers, conscious service, more animation, and sometimes converting desk spaces into meeting rooms and creative space to encourage sharing and group intelligence. So that also is another element that is going to help us in the like-for-like. Our upselling will also come from our upgraded brand offers and complementary convenience in response to the client demand for flexibility, site attractivity, less environmental impact. And it will have an impact on our volume, but also on our prices. We're also counting on some redesign of workplaces with smart building, city center smaller, more flexible. And we always have some GDP-linked growth. That's for the like-for-like.
Sebastien De Tramasure: And just want to add that you have to be very clear that our cross-selling, in our case, cross-sell is in the like-for-like and the volume growth, okay? And as Sophie mentioned, we have a lot of levers to boost also cross-selling during fiscal year '25. So it's the reason why really we are very confident on the volume impact being between 1% and 2% normalized for next year.
Sophie Bellon: Second question…?
Sebastien De Tramasure: Yes. And the second question -- so first also, Q4, as you know, it's not a big quarter for us because of the seasonality of our activity. The exit rate, it's again around 5%. We know that for the year, and if I come back to the guidance, we are expecting around 3% increase from pricing, 2% from net new, and 1.2% from volume, meaning that we would be at 6% to 7%. And it means that what we are expecting is clearly an acceleration of the net new contribution over the year. We are expecting a higher contribution in H2 than in H1. And this also will be based on a very, very strong H2 fiscal year '24 development. And as we said -- Sophie said, we have a very strong pipeline, plus 25% versus last year, and we are expecting a very strong H1 in terms of development that will help organic growth during the second half of the year.
Simona Sarli: Thank you.
Operator: The next question is from Vicki Stern with Barclays (LON:BARC). Please go ahead.
Vicki Stern: Yeah, good morning. And just firstly, I wanted to talk about the medium term, how you're thinking now sort of beyond '25 in terms of medium-term organic growth and margin. So the organic growth, I think, Sophie, you laid out 3% net new would obviously be the target. But in terms of the other levers, particularly volume, do you think you can sustain that 1% to 2% sort of beyond next year? Second one is just on the higher restructuring charges. I didn't quite follow this transversal global business services model. So just a little bit more color on what exactly that is. And should we expect those higher restructuring charges to be a sort of one year thing next year? Or could those continue beyond next year? And then the last one is just back on the balance sheet. You've obviously mentioned there that you're happy to repay some debt through the year, perhaps do some more small bolt-ons. But if you could just talk about the Group's appetite for any larger M&A or if bolt-on is really the desire right now. And to the extent that there's not sort of plenty of opportunities out there, your appetite going forward for any cash returns or additional cash returns to shareholders? Or is really bolt-on M&A the main focus? Thanks.
Sophie Bellon: Thank you, Vicki. So on the midterm organic growth, yes, as you said, we expect a net new of around 3%, and I explained how. And along with that, we have used inflation expectation in our model around 3%. And yes, in the midterm, we want to continue to have a like-for-like between 1% and 2%, thanks to the overall growth, thanks to the GDP growth, the upselling that we just described. So yes, it is what we want to achieve. We want to be very focused on our growth in the short term, but also in the midterm. Maybe on the margin -- on the restructuring part...
Sebastien De Tramasure: Yes, on the transformation. So as I said, Vicki we -- thank you for the question. We are accelerating the transformation of our functional -- transversal function, sorry, to the GBS model. It's really the continuing of our journey, even if we are accelerating that. We have already two key shared service centers, one in Porto and another one in Mumbai with more than 300 employees there. It's towards mainly finance. The objective is really to enlarge the function to other functions in addition to finance, like HR, like purchasing, like health and safety, or other type of general services in those centers. And at the same time, what we want to do is to also transform our back office and functional function with more automatization, digitalization and also the harmonization of our processes. So it's a big transformation. It will take some years to do that, but it will definitely drive efficiencies in the coming years.
Sophie Bellon: On the M&A strategy, as you've seen, we have a strong balance sheet, and we are ready to do more bolt-on acquisition when there is a strategic rationale and when it will create value. We said that we would spend EUR300 million to EUR500 million per year. But it doesn't mean -- first, to strengthen our position in key markets, like in the U.S., some European countries, to expand our new production and distribution model like convenience and vending in North America. And also to continue like we did in the U.S. with the acquisition of Accent and since we did five additional bolt-on acquisitions. Also, we want to strengthen ourselves in GPO, but it doesn't mean that if we have a midsized deal that fits our strategy and that is the right target that is financially creating value that we will not look at it. We have said it's an average of EUR300 million to EUR500 million a year. But if something bigger comes up, we will, of course, look at it.
Vicki Stern: Thank you. And sorry, just to follow back on that first question. Thank you for the color on the medium-term organic growth. The medium-term margin growth, should we still be thinking about 30 to 40 bps beyond next year?
Sebastien De Tramasure: Well, as we said, fiscal year '25 is the last year of the prior three year plan. We are fully focused on delivering and execute our sales plan and executing and delivering the margin for fiscal year '25. Then we'll continue, obviously, to improve margin in the coming years with the growth of the top line and the transformation I mentioned also before. But again, today, the big focus is really to execute fiscal year '25.
Sophie Bellon: Yes. And the mindset there, I think, Vicki, is really to become more efficient and to be able to continue to invest in our growth. I think it is exactly what we have done in the U.S. I remind you that before COVID, in the U.S., our organic growth was at 2%. We almost reached 9% this year. And we have invested a lot in the U.S. So that's why also our margin in the U.S. has not still recovered. The margin it's the only zone where we have not yet recovered for pre-COVID margin. So I think this is really the mindset. And of course, as Sebastien said, we want to continue to improve our margin.
Vicki Stern: That's great. Thanks very much.
Operator: The next question is from Jaafar Mestari with BNP Paribas (OTC:BNPQY). Please go ahead.
Jaafar Mestari: Hi, good morning. I have three, if that's okay. And firstly, just on the free cash flow, at EUR661 million for full year '24. Can you update us, please, on where reverse factoring was at the end of the year? I think in H1, the increase in reverse factoring was a EUR150 million benefit? Is it the same for the full year? Did it increase further? Did you take it down since, please? And then following up on U.S. education, I appreciate you cannot necessarily quantify everything. If I calculate the implied Q4 organic growth by segment, U.S. education is down minus 4.5% in Q4. I think it essentially is plus 5% for next year. Is there anything in terms of calendar effects or any other one-offs to keep in mind in this Q4? Or is it just the site closures, the contract losses, they are pronounced, we can model minus 4% for a couple of quarters. And lastly, more conceptually really most years we're standing here in October, and we're looking at your net new business forward-looking KPIs retention as you define it, minus gross signings as you define them. And most years, the discussion is that's where you can get and how close will you get to that if we start factoring in the ramp-up of the stuff you signed. This year, it's 1.6%. And you're guiding to 2%. You made some points on -- I'm not sure I get them by the way, like the H2 phasing. Yes, some of that stuff was signed late in H2. So it's taking some time. You expect a strong H1. What actions -- I guess my point is what actions are you putting in place to ensure that this year, the ramp up is very fast that you sign more very soon, you ramp up as fast as possible because you're already two months into your fiscal year and the exit rate is 1.6% you want to do.
Sebastien De Tramasure: Okay. So I will take the first question. Thank you, Jaafar. So on the first question, this is really seasonal, talking about the reverse factoring. So it has come back now to last year level, okay? Again, the reverse factoring is very seasonal, and we are back to last year level.
Jaafar Mestari: Super, thank you.
Sophie Bellon: Well, on the second question, I'm not sure I really -- I'm not sure I recognize your number. And because the education in Q4 is always a slow quarter because university, they only start in August. So for two months, they are off, and school also -- and sometimes, they don't even start in the beginning of August. They start in mid-August. Same thing for the school. But it's true that, yes, we have had some losses, and those losses, they have an immediate effect at the beginning of the year. We also had some big wins. I was in the Dallas area, and we have signed a huge school district contract. I'm not sure if I can mention the name or not. So I can't mention the name, okay? So you won't know the name, but I just visited it a month ago. It's huge. We do elementary and primary and schools, and it's a big contract that is going to ramp up. And we also have some project work in school and also in the university. So that maybe can help you do the math with your figures. And in terms, before Sebastien going into the detail in the net new, I remind you that our definition is it's not the in-year indicator. For example, on this big contract, the FM contract that we lost, we are taking the full amount in -- we took the full amount in our retention at the end of fiscal year '24, but we are going to run this contract until January. So it's true that depending on what happened and that's what I said into mobilization and demobilization and especially with big contract whether it's signing, for example, this school district contract that I just told you about in the Dallas area, it's starting on September 1, it has started. It has already started. And for example, this other contract that we have lost and it also has a big impact where it's going to be open until January. So that's how there is a difference between our KPIs, our KPI -- our 12-month KPI and the in-year effect. You want to add something, Sebastien?
Sebastien De Tramasure: Just maybe to add again on the second question. The Q4 it's not really a good proxy for education. It's always very volatile. Again, we don't really recognize your number, I can tell you that school was down, but university was up, okay? And now getting back to the third question. Well, we are very confident, again, I mentioned it, the second half of last year was very, very strong. So we have a very good visibility of the opening during the year and the ramp-up of the mobilization of this contract. Again, we have a very, very good visibility on our pipeline for Q1 and for Q2, and we'll start the year very strong in terms of development. And again, for those contracts, we know exactly what will be the opening date. So this is the reason why we are confident in terms of acceleration of the net new with higher H2 than H1.
Jaafar Mestari: Thank you very much.
Operator: The next question is from Leo Carrington with Citi. Please go ahead.
Leo Carrington: Good morning. Thank you. Three for me as well, please. Firstly, on the margins. This margin progression guidance for FY25, is it to be spread across the three regions relatively equally? Or will the U.S. see some catch-up to break back above 2019 levels? And then within margins, the central cost line, is this the new levels that grows with the business going forward or are further efficiencies possible, do you think, in absolute terms, just given the restructuring in central services investment? Secondly, the food and FM mix in the new development is running at 65%, but with some foods within integrated, can you just break out what proportion of those IFM sales are of food? And then lastly, on the branded food offers, can you just elaborate more on the strategy here? Does this eventually go to 100% essentially? Or are there still outlets or subsectors where you think Sodexo brand itself is the right one? Thank you.
Sebastien De Tramasure: Thank you, Leo. Regarding your first question on the improvement of margin for next year, so we are expecting an improvement in margin across all regions. I would say that we are expecting a higher improvement in Europe because of the starting point and its lower margin. So we know that there is more potential in terms of margin improvement. And then to your second question regarding the central cost and the HQ. On the HQ side, we plan to remain below EUR90 million for fiscal year '25. And again, as I said earlier, I will move on this transformation in terms of transversal functions, but this will impact region and country level. But this will help also to improve the margin in fiscal year '25 and in the next year as well.
Sophie Bellon: The second one on the HQ contribution.
Sebastien De Tramasure: I mentioned it already on HQ.
Sophie Bellon: So on the third one, you said, yes, we have signed 65% of food contracts and also some IFM. It's difficult -- usually IFM is very often in the E&R business, but it's less -- the food contribution is less than a third in those contracts. And I'm not sure I really understood well your last question. Can you repeat it? The second part of the question?
Leo Carrington: Sure. Just in terms of these branded food offers, do you see the Sodexo brand as itself to consumers as still [ph] remaining? Would you intend to take these branded food offers across the whole portfolio? If it's 37% of food revenues now and I think going above 50% next year?
Sophie Bellon: Yes. You said it's Sodexo brand. It's branded offers like a Modern Recipe, Kitchen Work in a manufacturing environment. Good Eating Company, more premium. Fooditude that we have in the U.K. for off-site production, very premium, for clients that don't have a kitchen. So it's a portfolio of brands. And yes, going forward, of course, we want to increase that number. Will it go to 100% eventually, I don't know yet. Why not? But I think the objective is to increase. And as I said, we have increased one brand by 45%, the other one by more than 30%, is to increase, is to structure. There is more SKU rationalization, common menu, common product. And by doing that, our clients can benefit from all the work and all the insights that has been worked by our marketing and commercial team on that brand and deliver the best service for those specific client and those specific consumers. So I think the idea is to improve, and already reaching our 50% target is going to be a good goal. And as we are going to work on our '25, '28 plan, we will see what's the plan for the future.
Leo Carrington: Okay, thank you, Sophie.
Operator: The next question is from Simon Lechipre with Jefferies. Please go ahead.
Simon Lechipre: Yes, good morning. I've got three, please. First of all, in North America, you mentioned the strong growth from Entegra. So I mean could you please give us the organic growth, excluding Entegra, please? Secondly, on the net new wins, could you give us the actual contribution to Q4? And I mean, I'm sorry if you gave it already. And lastly, as a follow-up on the medium-term targets. I mean based on your comments, does that mean that you expect to be at 3% plus net new wins as soon as 2026? Thank you.
Sebastien De Tramasure: Okay. On your first question, again, we gave you the performance of Entegra in North America. Again, very strong performance. We said also in different call that the objective was double the size of Entegra and will be there in fiscal year '25. And then again you can -- it means that the organic growth, excluding Entegra remains good, slightly below the 8.7% we gave you, but very slightly because of the weight of Entegra in total revenue. And on your second question. So the net contribution to Q4 so it was above 2%. We don't -- usually by quarter, we don't give the split between like-for-like volume and net contribution because you may have some phasing impact. You have some porosity between the different buckets. So it's very relevant on a full year basis. It's the reason why we gave you clearly that it was more than 2% for fiscal year '24.
Sophie Bellon: And for the third question, 3% on net new, it's an ambition. So I cannot tell you and we are not going beyond '25, so I cannot tell you. It's an ambition. So I'm not talking specifically about '26.
Simon Lechipre: And a quick follow-up on the Q4 organic growth bridge. So I mean it seems that volumes were actually kind of flat in Q4. So I mean what gives you confidence on kind of low single-digit growth for 2025 from volumes?
Sebastien De Tramasure: Yes. Again, the Q4, it's not necessarily a very good proxy because of the seasonality. And then also, we had a favorable impact in Q4 coming obviously from the Olympic games with EUR66 million. And we mentioned it before, we had the kind of collateral impact from the Olympics in France, impacting our like-for-like and our volume impact. So this explains also the lower impact in terms of volume for Q4.
Simon Lechipre: Okay, thank you.
Operator: The next question is from Neil Tyler with Redburn Atlantic. Please go ahead.
Neil Tyler: Good morning. Thank you. A few left from me, sorry. Margin, first of all, I just like to tackle that outlook question from a different perspective. This year, you've had quite strong pricing catch up also healthy like-for-like volume growth, a big drop in central costs and some strong contribution presumably from the Entegra growth. So can you outline what the negatives were pressuring margin this year because you're expecting next year to be similar with presumably much reduced effects from all of those that are just listed? The second question, just more broadly on the retention. And just could you give us a picture as to how above or below average '25 should be in terms of rebids. Then the point on CapEx being a bit lower in '24. Can you quantify how much that was lower by -- sorry if I missed that. And then the Entegra compliance, I think you said catalog compliance was up 400 basis points. Are you able to share what level it is at on an absolute basis, please? Thank you.
Sebastien De Tramasure: Okay. So if I take -- thank you for your question. If I take your first question on margin outlook, so -- and I mentioned earlier, we have different type of drivers in terms of margin improvement. They remain the same. They can be stronger depending on the year, okay? So clearly, we have been continuing investing in supply and in Entegra. And this will remain a strong driver of the improvement of our margin in fiscal year '25, especially in the U.S. and with the organic growth, it will give us more scale. So more power in terms of purchasing, and this will again help us to improve the margin, okay? I also mentioned the enhanced productivity middle of the page. So this will remain also a key driver for next year. And we'll continue to work on our back office cost, transversal function, as I mentioned as well. And we'll accelerate that. So at the region, country level, this will have a higher impact in fiscal year '25. And then also, it's true that we had some also specific negative onetime impact in Q4. And one of them, and we mentioned it, it's linked to the poor retention in Latin America. We have some severance cost, exit costs linked to that. And we took the hit in Q4 for rest of the world.
Sophie Bellon: So in terms of retention and how our rebid trend levels in 2025, the way we look at it, if we look at two years, three years in advance, we look at the year and we look at the contract ending in '25, contract ending in '26, contract ending in '27. And then from that volume, we try to anticipate and avoid the rebid. So in terms of contract ending, what we can say is that the percentage has been pretty similar in '23, '24, and also '25, but what we do, and as I explained, is try to avoid the rebid by anticipating, and that's how you decrease the risk and you improve your retention.
Sebastien De Tramasure: So then on your third question in the CapEx, where we said it was around 2%. If you look at fiscal year '23, it was around 2.2%, sorry. So it's 20 basis points gap, I would say if you compare to the level of the prior year. And we are expecting to be at 2.5% in fiscal year '25. So it's around 20 bps of revenue if you want to factor what could be the impact of the low CapEx in '24 and the increase of CapEx in '25.
Sophie Bellon: Okay. And in terms of the 400 basis point improvement in compliance and supply management, what was the baseline? We do not give the baseline. But what we can tell you is that we have improved and we can continue to improve. And that's the objective.
Neil Tyler: Okay, that's great. Thank you very much.
Operator: [Operator Instructions] Sodexo team, there are no more questions registered at this time.
Sophie Bellon: Okay. Well, since there are no more questions, thank you very much for being with us this morning. I remind you that the next announcement will be our Q1 fiscal '25 revenue, and it will be on January 7. So thank you again, and have a good day.
Sebastien De Tramasure: Thank you.
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