We have delivered £55 million of constant currency operating profit
growth in the first half, as follows:
£14m from net new business
£28m from like for like growth
£8m from above unit overhead savings
£5m from acquisitions and disposals
Against the backdrop of deteriorating economic conditions, Compass has had a positive first half. We are encouraged by our continued ability to win high quality new business at levels consistent with last year.
We have demonstrated our ability to flex our cost base and respond to more variable demand. Furthermore, the rigorous application of MAP has enabled us to drive further operating and cost efficiencies of over £50 million, helping to deliver another significant step up in profit and margins.
Looking forward, the trends in revenue seen in the first half of the year are expected to continue into the second half of the year. The acceleration in the rate of cost efficiencies should enable us to deliver further progress in the second half of the year.
Organic revenue growth was 2.6% for the first half and constant currency revenue growth, including acquisitions, was 3.6%. Encouragingly, the level of new business wins in all sectors has remained strong at 8.5%, consistent with last year. As expected, like for like revenue has continued to weaken in parts of the Business & Industry and Sports & Leisure sectors, as clients have reduced discretionary spend on event catering and corporate hospitality and headcounts. However, like for like revenue growth in the Education, Healthcare and Defence, Offshore & Remote sectors has remained strong.
Our ability to flex our largely variable cost base has enabled us to manage our costs in line with the changes in demand. Furthermore, the continued application of the MAP framework has helped us to deliver incremental efficiency gains in each of our major unit costs: food, labour and overhead. We have also continued to deliver savings in above unit costs. Operating margins improved by 60 basis points with all four geographic segments contributing to this strong performance.
A combination of excellent operational management and the MAP framework has enabled us to deliver £55 million of constant currency operating profit growth in the first half as follows:
£14 million from net new business: Encouragingly we have continued to see a good level of new business across all sectors and geographical regions at levels consistent with last year. Supporting the growth in new foodservice business, we are seeing increased demand to provide additional support services to both new and existing clients. We are also making good progress in developing international business, winning new clients and developing our existing client relationships. For example, with both Shell and American Express we have significantly extended our services this year.
Whilst we are seeing some limited business and site closures, mainly in the Business & Industry sector, core retention is stable. We are making good progress in building retention teams and driving consistent processes around the world.
Looking forward to the second half, we have good visibility on our future pipeline and expect similar trends in net new business to those seen in the first half of the year.
£28 million from like for like growth: Across the base estate we have achieved an appropriate level of price increases in the first half of the year given the input cost inflation we are experiencing in food and labour.
In Business & Industry and Sports & Leisure we have seen some pressure on like for like volumes in parts of the business as clients have reduced discretionary spend on event catering and corporate hospitality and headcounts. The considerable flexibility in our unit cost base has, however, enabled us to reduce costs in line with demand and hence contain the impact on profit of lower volume.
Conversely, through the rest of the estate we have continued to see like for like volume growth, which in turn has converted to good profit growth.
Importantly, our efficiency programme has accelerated and once again, through the MAP programme, we have made significant savings in food, labour and overhead.
On MAP 3, cost of food, we are continuing to drive the rationalisation process – the starting point for which is menu planning. Coupled with this, our product and supplier lists are being systematically narrowed which enables us to buy more competitively. In the USA, the ongoing roll out of our ‘Model Market’ approach takes procurement and logistics to the next level, fully automating the process online from order to delivery. This is driving compliance up towards the 100% level and is beginning to deliver significant benefits.
We are making good progress on MAP 4, in unit costs. We are continuing to focus on labour productivity and scheduling and in practice this means less need for expensive agency labour as we better utilise our core labour force. We are making some progress on reducing in unit overheads, but there is plenty of opportunity to do more.
In summary, we have made excellent progress in driving efficiencies in the first half of the year and we expect to see an acceleration in the rate of cost efficiencies, enabling us to deliver further progress in the second half of the year.
£8 million from above unit overhead savings: We continue to make good progress in MAP 5, reducing the above unit overhead whilst growing the business. Increasingly, we are challenging the business both to reduce the overall cost and to redeploy resources from back office to revenue-generating overhead, for example strengthening our sales and retention teams and investing in product innovation.
£5 million from acquisitions and disposals: This relates mainly to the acquisition of the remaining 50% of the shares in GR SA in Brazil completed in March 2008.
Our core strategy is to focus on foodservice, developing support services to complement our food offer, building scale within countries to drive efficiency and utilising our global reach to serve multinational clients. Sectorisation has been a fundamental part of our strategy and we have built big businesses in all of the key sectors. The benefit of our significantly diversified portfolio across 55 countries and multiple sectors and sub sectors has offered good downside protection in a slowing economy.
Our primary focus is organic growth. We continue to benefit from the ongoing trend to outsourcing foodservice. As well as the Business & Industry sector, the under penetrated sectors of Healthcare and Education provide significant scope for growth. Aside from foodservice, clients are increasingly asking for a bundled service including both food and support services. Under the Eurest Services brand, we have organically developed a strong support services offering in most of our major countries. The Compass Service Framework, which is our unique operating model, differentiates us from our competitors and we have already had considerable success in winning new multi-service business.
The strength of our cash flow and balance sheet is enabling us to accelerate our organic revenue growth through selective infill acquisitions. The acquisition of Kimco in the USA strengthens our capability to deliver support services to the Business & Industry sector. In Germany, we are also starting to see acceleration in the trend to bundling food and support services and our acquisition of Plural strengthens our ability to deliver support services across the sectors, in particular Business & Industry and Healthcare. In the UK, we have had considerable success in extending our retail offer within hospitals. The acquisition of a number of McColl’s food and retail outlets has strengthened our retail capability.
We have continued to drive performance in these more challenging times. The key to our success has been not only the flexibility in the cost base to respond to changes in volume, but also the momentum we have in driving additional cost efficiencies. We have excellent cash generation and significant headroom to service our debt and cover our medium-term refinancing needs. Our balance sheet flexibility is enabling us to pursue value-creating opportunities and to continue to reward shareholders.
The MAP framework has helped us deliver the turnaround in performance in the last two and a half years and this, together with the excellent service delivered by our people, gives us confidence that we can continue to make progress.
Richard Cousins
Group Chief Executive
13 May 2009
The MAP programme continues to provide the framework to control costs, drive efficiencies and improve performance across the base estate whilst helping us focus the needs of both clients and consumers, enabling us to win quality new business.
