Sodexo: operating profit guidance maintained despite mixed revenue performance in Q3 2017

Finance
Jul. 06, 2017

Sodexo, world leader in Quality of Life Services, today reported its non-audited revenues for the first nine months of Fiscal 2017, which ended on May 31, 2017.

Revenue organic growth¹ was up +0.5% and +1.3% excluding Rugby World Cup:
- On-site Services organic growth turned positive at +0.3% as the weight of the base effect of the Rugby World Cup reduces. Excluding this event, the growth was +1.1%.
  This reflects a lower than expected Q3 performance, at +1.3%, with▪ Lower than anticipated activity in Health Care and Universities in North America,
  - Lower than anticipated activity in Health Care and Universities in North America,
  - Corporate Services remained strong in North America and Asia and Latin America but was still weak in Europe,
  - Energy & Resources and Government & Agencies returned to positive growth,
  - More generally, robust growth in Latin America, Brazil and Asia.
- Benefits & Rewards Services organic growth of +6.1%, reflecting
  - Strong growth in Europe, and in Incentive & Recognition
  - An improving underlying trend in Latin America in Q3 masked by the effect of the Venezuelan bolivar devaluation.
Fiscal 2017 guidance:
- Revenue organic growth of +1.5% to +2%
- Growth in operating profit confirmed at between 8% and 9% (excluding currency effect and exceptional expenses linked to the Adaptation and Simplification program).
Medium-term objectives confirmed.

"TheQ3revenueperformancewasinlinewithQ2butdisappointing,particularlyinHealthCareandUniversitiesinNorthAmericaandBusiness&AdministrationsinEurope."

Michel LandelSodexo CEO

"On the other hand in other areas, the recovery is coming through. Energy & Resources has turned positive in Q3. France is improving and Asia and Latin America, and in particular Brazil, continue to be strong.

We are confident in the acceleration of revenue growth in Q4, given the recent contract start-ups and a significant calendar effect in North America.

As a result, whereas revenue growth will be softer than expected this year, we maintain our objective of growth in operating profit of between +8% to +9% for this fiscal year, excluding currencies and before exceptional expenses."

Highlights of the period

9M Fiscal 2017 Revenues amounted to 16 billion euro, up +1.7% on the previous year period. Currencies contributed +0.8% and net acquisitions +0.4%. So, organic growth was +0.5%, or +1.3% excluding effect of the Rugby World Cup (RWC) in the comparable base.
Organic growth for the On-site Services activity was +0.3%, or +1.1% excluding the RWC impact:
- Business & Administrations organic growth of -0.5%, or +1.1% excluding the RWC, accelerated quarter on quarter. This reflects a return to positive growth in Energy & Resources of +4.3% in Q3, an improving trend in France, due to an easier comparable base in the tourist activities and Government & Agencies. In Corporate Services, activity was solid with high single digit growth in North America and the developing economies more than offsetting weakness in Europe.
- The strong trend in Health Care & Seniors in the first half was offset somewhat by organic growth turning negative in Q3 in North America resulting in an organic growth at +1.9% for the period. This was due to lower comparable unit sales linked to scope and services changes in a few large contracts and the impact of phasing difference in new business. Development in Asia and Brazil remained strong. In Europe, bidding opportunities remain highly competitive in Hospitals; however Seniors development has been better in Q3.
- Education organic growth was positive at +0.2%. Schools activity is benefiting from strong retention and development in all regions. The Universities activity is more challenging, particularly in North America where growth was suffering from the lack of prior year signatures. In Q3, same site sales growth reflected a positive calendar shift from Q2, lower than expected student spend and the accelerated exit of a large contract in Q2.
First 9M Fiscal 2017 organic revenue growth in the Benefits & Rewards Services was +6.1%. Growth in Europe, Asia and the USA remained strong through to the end of the period at +9.8%, reflecting solid growth in both the number of beneficiaries and face values, and good momentum in the Incentive and Recognition activity. In Latin America, organic growth was +2.1% for the period. The apparent slowdown in Q3 reflects the impact of the Venezuelan devaluation at the end of May, masking signs of stabilization in Brazil and continued strong growth in Mexico and Chile.

Outlook

Revenue growth in Q3 was disappointing due to lower than expected activity in Health Care and Universities in North America and continued weakness in Corporate services in Europe. However, Energy & Resources has turned positive, the trend in France is improving and developing economies are growing well.

The expected acceleration in Q4 is also still on track with:

A return to growth in France,
Further acceleration in Energy & Resources,
The calendar effect in North America,
Contribution of contract startups in May and June 2017.

As a result, while revenue growth may be softer than previously anticipated, between +1.5% and +2%, operating profit growth before currencies and exceptional items should still be between +8% to +9%.

Long-term trends remain positive with further significant opportunity in outsourcing and contract consolidation, growth in developing economies, strong potential of the new segment organization and increased contribution from acquisitions. The Group confirms its mid-term objectives of:

Average annual revenue growth, excluding currency effect, of between +4% and +7%;
Average annual growth in operating profit, excluding currency effect, of between +8% and +10%.

¹ Organic growth is defined as growth at constant exchange rates (converting 9M Fiscal 2017 figures at Fiscal 2016 rates) and consolidation scope, except for Benefits & Rewards in Venezuelan Bolivar. All Fiscal 2017 and Fiscal 2016 figures in VEF have been converted at the exchange rate of USD 1 = VEF 2010 vs. VEF 645 for FY 2016.

Read the full press release (PDF)
Download the presentation (PDF)

Conference call

Sodexo will hold a conference call (in English) today at 9:00 a.m. (Paris time), to comment on its revenues for the first nine months of fiscal 2017. Those who wish to connect from UK may dial + 44(0)20 3427 1905 or from France +33(0)1 76 77 22 30 following by the pass code 34 49 694. The presentation can be followed via live webcast on the Group website, www.sodexo.com.

The press release, presentation and webcast will be available on the Group website www.sodexo.com in both the "Latest News" section and the "Finance - Financial Results" section.

Sodexo: operating profit guidance maintained despite mixed revenue performance in Q3 2017

Highlights of the period

Outlook

Conference call

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Highlights of the period

Outlook

Conference call