Welcome to Compass Group's Third Quarter Trading Update Call. Hosting today's call will be Dominic Blakemore, Group Chief Executive Officer. My name is Suzanne, and I will be your coordinator for today's event. Please note this call is being recorded, and for the duration of the call, your lines will be on listen only. However, you'll have the opportunity to ask questions. This can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point, please press star zero and you will be connected to an operator. I will now hand over to your host, Dominic Blakemore, to begin today's conference. Thank you. Thank you, and good morning, everyone. As usual, I'm here with Palmer, our CFO. We're delighted with our third quarter performance. Growth further accelerated in the quarter to 43% from 38% in the first half. This was due to positive contributions from all drivers of growth. Most critically, net new business accelerated to 9% or 7% on a like basis with 2019 compared to an historical 3%. Pricing stepped up and volumes continued to recover strongly. Pleasingly, all sectors and regions are now above 2019 levels, including B&I which was 97% in the quarter and above 100% on a run rate basis. As we expected, new business and a change in mix in B&I is now offsetting any hybrid office risk. In addition, we continue to see a very strong new business pipeline, and it's clear that the complex market conditions and high levels of inflation are contributing to this. Margins improved by 40 basis points in the quarter to 6.2%, and we're confirming our full year guidance of margin above 6%. We now expect Q4 margin to moderate slightly to around 6.7%-6.8% as we mobilize double-digit new business. Taking advantage of the growth opportunities, their number one priority, and while investment and mobilization costs may slow our margin recovery in the short term, it's driving more profits to the bottom line and is better for the long-term health of the business. Let's move now to Q&A. First question comes from the line of Jamie Rollo from Morgan Stanley. Please go ahead. Morning, everyone. Three questions really on margins, please. First of all, just in terms of that moderating margin momentum, perhaps Dominic or Palmer, if you could break it down between the impact of sort of mobilization costs on the net new wins versus the underlying sort of cost inflation. Secondly, if you could quantify that cost inflation please, in the main buckets and talk perhaps specifically about the supply chain on the food side and what it means for GPO purchasing. Finally, I think you said 6.7%-6.8% in Q4. What's the implication for fiscal 2023 margins then? And when do you think you might get back to 2019 margins? Thanks. Morning and thanks, Jamie. Let me just take margin in overview and then maybe hand over to Palmer for some detailed color on your three points. I think first of all, if we take a step back, we just gotta remember the journey we've been on from 4.5% in 2021 to now over 6% in 2022. We've made significant progress in the recovery, and we'll again make significant progress in 2023 on a full year basis. We see no structural impediments to restoring 2019 margin either from COVID or inflation. In the short term, the recovery may slow from the impact of the exceptional growth that we're seeing and reporting today, and also if inflation is sustained at these higher levels for longer. Again, important to remember, both market conditions and inflation are creating the great growth opportunities that we talked about and will bias to growth in the short term. I think Palmer Brown on the detail on the three points. Sure. In terms of impacts on the margin between the new business and inflation, it's some and some. When you look at it, certainly the inflation is helping to contribute to the new business just as Dominic mentioned. Inflation at these high levels does have a drag, which we need time to offset between mitigation and pricing. There is a drag effect to that and as you know, the drag effects are in new business both from mobilization, which is expensed when incurred, as well as lower margins that progress over the life cycle of a contract. As growth is increasing, you will have this bit of margin drag that's there. In terms of the rates, labor inflation has remained fairly consistent at 6%-7% between Q2 and Q3. Food inflation has accelerated. It's now about 10% overall. That's really blended across the entirety of our portfolio. Some pockets, the U.S., the U.K., Europe would be a bit more. LATAM would be in there as well, a bit more than perhaps APAC and some others. You know, as it impacts on our business and specifically, Jamie, you referenced the GPO aspect of it. Similar to our new business wins within Core Compass, it actually helps us on the third party business side of things as well. Certainly these same challenges that are prevalent for, you know, our clients who are potential clients who are self-operated are the same for other potential clients on the GPO side. However, I'll say that there's still supply chain disruption that is happening. Within the U.S., for instance, substitution rates are still in the 7%-8% range. That's never been more than 2% historically. That is impacting really the value proposition that we're able to immediately deliver right now, not only to ourselves but the third parties. It's helping us to get product, certainly our size and our scale and our growth, but we're not fully optimized, you know, at the moment. Then looking into 2023, Dominic referenced it a second ago. The reality is with growth rates this high and inflation this high, it's gonna be difficult to progress the margin much from where we're exiting the year. That's not to say that it won't progress over time, and certainly if either of those two moderates a bit, you should expect to see more margin progression from us. The reality is that it'll be slow as long as those two elements are as high as they are. Again, they have a direct correlation with each other. We think you know the best indicator of the health of the business is profit, and that's what you're seeing some nice strength of across the board. Thanks. Just to push you a little bit. If we try and maybe quantify the mobilization versus the cost inflation or at least sort of compare the two in terms of quantum, is it much more the inflation side of it than the mobilization side of it. I'm guessing. But if you could help us a bit more on that, please? Yeah. It's not something we wanna necessarily get into quantifying specifically. In all fairness, it's quite difficult to do, because of the interrelationship between the two. But it's certainly some and some. Inflation at these levels is certainly weighing a bit. Thank you very much. Before moving to the next question, as a reminder, if you'd like to ask a question on today's call, please press star one on your telephone keypad. To withdraw your question, please press star two. The next question comes from the line of Harry Martin from Bernstein. Please go ahead. Hi. Good morning, everyone. I'll ask three questions as well, if that's okay. The first one really is what was the main driver of the improvement in new business wins, getting that so much better than, you know, the guidance that you gave it at Q2? Where were the real surprises for you? The second one is really on the momentum and price inflation and how that's contributing to the revenue uplift. You know, where are we today compared to the 5% in H1? You know, where do you expect that to be in Q4? Can we sort of extrapolate that in at least into H1 next year regardless of what the macro does? The final question. You know, on my math, I think if you give credit for around sort of 5.5% net new as a percentage of 2019, add in 6% pricing, you can reach the 35% organic growth guidance with volume versus 2019 still down sort of 15%, which is kind of what you suggested you were running at at H1. You know, is that the way that you're thinking about internally, still a lot of volume recovery potentially to come back next year? Or, whereabouts do you think we are on that volume recovery? Thank you. Thanks, Harry. Let me take the first question and ask Palmer to take the question on price and the quarter four run rates. I think in terms of the new business wins, I mean, look, we saw record levels of new business wins that we reported at the full year, last year, and at the half year. We've perhaps seen those mobilize more quickly and with higher initial volumes than we anticipated, which I think is a theme also of the volume recovery. Palmer will come on to talk, you know, where we are today with volumes versus 2019 compared to the half year. I think that, you know, higher volume contribution from the initial mobilization phase has been positive. The new business wins are across the piece. They're across all sectors. They're also strong in B&I, which has helped us with the recovery in volume of B&I, and they're strong across the regions as well. It's a very positive outlook. Yeah, I mean, we're now running a couple of points stronger than we were at the half. With just a bit more within that. If you're getting into the net new aspect of it, Harry, the retention piece is a big driver as well. It's not only in the new business side, but the retention, which in fairness is probably a bigger contributor, if you're looking at it on a net new. That has been improving, pretty much across the board. We've seen a step change of that over the last 12-18 months within Europe, which we're excited about, and we think there's further opportunity both on the new business and on the retention side. You know, in terms of pricing, we're a little bit above the 5% pricing level that we discussed at the half year. Frankly, it needs to be at that level, and then some dealing with inflation at the rates we are. Keep in mind too, though, it's not just a pricing strategy, if you will. We've got to mitigate. It actually starts with mitigation. If we're not mitigating for our clients, even on the cost-plus contracts, if we're not mitigating for our clients, we're not doing our job, and they're gonna ask us, where's the value proposition? It's a combination between the two. In fairness, it with inflation at these levels, it's a bit of operational leverage that's being used as well. They're all contributing to how we're dealing with inflation, you know, at the moment. When you look at the revenue guidance going forward, first of all, at Q3, we're about at 109% of 2019 revenues overall. As you heard from Dominic at the beginning, we're now above 100% in all regions and on a run rate basis in all sectors. B&I was 97% in the quarter and now above 100% as you look ahead. When you do the math, just like you've done, Harry, you know, to get to the 35%, on the dot, it actually equates to 109% of 2019 revenue as well. What we have in the quarter is a step change both in B&I, which we think can be recurring, but certainly in the Sports & Leisure, and we've got the benefit of some scheduling, some timing aspects, which are one-offs that will not be repeated in the quarter. We've got that element just there. It's hard to say what the recovery will be. We saw a big acceleration of that base volume recovery occur in Q3. At the half year we were right. We thought you were right. We thought we had about 15% of base volumes yet to recover. We think that number is somewhere around 8% now, so a nice pickup there in Q3, which really accelerated and brought forward some of that recovery we expected to occur into 2023, is actually happening a bit earlier than expected. That's the way we sort of see the revenue taking place for the rest of the year. Thanks. Just to clarify on that, would you expect Q4 to be a little bit better than 109% or quite similar? That's what we're showing right now is our forecast and our guidance. I think the wild card is just as you mentioned on the base volume recovery to see what that does. Great. Thank you very much. The next question comes from the line of Vicki Stern from Barclays. Please go ahead. Yeah, morning. Just firstly on the signings and retention piece. I think at the first half stage you were running at an exit rate based on signings and retention then of around 6%. Now the retention just got a chunk better. And you've mentioned there, Dominic, that the pipeline looks very good. So just really your views now on the sustainability of that higher run rate on both signings and on retention, as we sort of try to frame the right view on the future net new business growth for the company. Secondly, just on competition, what are you seeing around you? And I'm particularly interested in the smaller operators. Any incremental signs of share gains, disruption amongst those operators? And would that sort of trigger any potential desire to do more M&A? I think last time you spoke you were a little bit more cautious on sort of overloading the teams with a lot more M&A in coming months. Then just finally on CapEx, are you seeing the same sort of trend there on the CapEx side that even though you're seeing this faster net new, you're not actually seeing that come along with a higher than 3.5% CapEx sales ratio? Thanks. Thanks, Vicky, and good morning. Again, I'll take the first question and pass the next two over to Palmer on competition and CapEx. Really just on, you know, our outlook on net new, if you recall, you know, we kinda said, you know, as a consequence of COVID, now as a consequence of inflation, you know, we are seeing a significant first-time outsourcing opportunity. The share of first-time outsourcing in the pie of new signings is increasing significantly. We're very focused on how we sustain that. You know, we also obviously talk to some of the more technical challenges now, which is accelerating first-time outsourcing. You know, they persist and increase around data, allergens, and so forth. We do feel that the marketplace is exciting. It does feel that at these levels of inflation, smaller players have less levers to pull than we do, and therefore it's also creating opportunity for share. It is an attractive marketplace. I think we have to remind ourselves that the levels of net new we're reporting now are close to 7%, you know, are twice as big as some than our historical run rates. It's a very significant acceleration that we're seeing. Again, when we came into this, we thought, you know, if we could improve the structural net new growth rate of the business by one to two points from that 3%-4% to 5%, then, you know, all things being equal and normalized pricing, that could look like a 6%-8% growth rate. I think right now, clearly we're outperforming that. You know, our ambition and our strategy is to do everything we can to sustain it. The acceleration we talked about of one to two points on a sustainable basis would be a very attractive step change for our business model. Of course, that's being achieved with record retention. You know, that's also been judicious use of CapEx and I think very good relationships through COVID and beyond. We need to ensure that we are sustaining that as well because that's the first lever to pull in an improved net new performance. I mean, look, we're absolutely delighted with where we are. We should never underestimate the scale of our performance against relative history. I think a little bit of that was starting before COVID. A lot of it is also down to self-help in terms of the quality and discipline around sales and retention processes and execution, particularly outside North America. We're optimistic about what we can achieve, but, you know, we would also be cautious about sustaining it at these levels for the medium term. On the competition front as it's weaving into new business wins and then potential M&A, Dominic mentioned it there a second ago. We're seeing a slight uptick in the share gains from competition. It's in fairness is it's not near the uptick that we're seeing from first time outsourcing. That's been the biggest driver within the new business side of things. We're seeing a slight uptick from the share gains from the smaller players. That's not to say that it's not impacting the smaller players. The way we look at things is challenges and complexities in the market we think ultimately play to our favor. As we discuss internally, if the operating environment is challenging for us, it's gonna be every bit as challenging and then some for others and frankly brutal for the self-ops. Everyone is feeling it. They'll probably feel it perhaps a bit more as we look ahead. But it's playing out to some degree in the shared gains and probably more so, you know, within their current operations. On the M&A side of things, you're right, Vicky, it's something that we want to do. We've always been disciplined, but we think we need to be especially disciplined in this environment. Our operators, you know, have full loads on their plate now. We don't wanna distract them. It needs to be a fairly compelling proposition for us to take M&A. That said, we did do some small end deals in the quarter. We did about GBP 65 million or so of new deals in the quarter. Most of those were within the U.S., but we're looking at M&A opportunities in every region right now. It does need to be, you know, a pretty compelling proposition. We would need to look at, you know, what their book of business looks like, their sector split, their contract structures, really what it brings us, how does it help us grow going forward. We think of M&A as certainly core to our overall strategy, but we do need to be disciplined, especially in this environment. Then Vicky, your last question on CapEx. We're still seeing the same algorithm of the 3.5% of revenues right now. That's not to say that we wouldn't potentially invest more to, you know, continue these high levels of growth, but that's not what we're experiencing at the moment. We're still seeing a continuation of our same algorithm and expect that to be somewhere around the 3.5% for the year. Thank you. Sorry, just one follow-up back on the retention. I think your retention rate, the exit rate is sort of well above 96%. I think Compass, we used to talk about 96% as a sort of sensible ceiling for where retention could get to. Yeah, how sustainable is retention at these high levels from here? Thanks. Yeah, Vicky. I mean, we've looked in North America. We've sustained retention above 96% for some time and continue to improve. This business is all about marginal gains. I think as we start to get to new thresholds, we'll set ourselves new targets. You know, the biggest single shift in retention right now is our European and U.K. businesses. If we can sustain retention at those levels, then, you know, there's every reason why we can expect to sustain retention at these higher levels, and continue to push on from there. We'll be all about the marginal gains as we go forward from here. Great. Thanks very much. Next question comes from the line of Jaafar Mestari from BNP Paribas. Please go ahead. Hi. Morning, everyone. I've got a couple, if that's okay. Firstly, on medium term guidance, you've updated for the 2022 guidance and started giving some direction on 2023. You obviously have working assumptions for higher inflation. Jaafar, sorry to interrupt you. We're struggling a little bit to hear you clearly. Oh, I'm sorry. If that's better, I'll continue. Otherwise, I'll just pass. Is that better? If you try again. Yeah, I was just wondering whether you could update your more medium term indications to take into account what is now known in terms of higher inflation and better new business. You were talking about full year 2024 revenue that could be 120% or 125% of 2019. That was a while ago with more inflation, more new business, if you run an updated scenario there. Separately on U.S. education specifically, you made some comments on generic competition and retention trends. That's the market that seems interesting. I think we're nearing the end of the renewal season there. Just curious how it played out for you. Are you coming out with good traction on your own university contract? Have you been able to win some from competitors? In the longer-term university first-time outsourcing, have you seen some of the big sites come through outsourcing this year? Thank you, Jaafar. Thank you. I think we've followed those questions. If I take the sort of the medium-term guidance point, and then Parm will talk to U.S. healthcare. Just on the medium term, I think the first thing to say is, it's clearly very difficult for us to look into current circumstances and form a view as to what medium-term growth trends could look like. I mean, clearly pricing in particular will play into that very significantly, as will the net new performance. As we look at 2023, you know, what we do know is that there is a momentum that we've got in the second half of 2022, which will run into 2023. We still expect to see very healthy levels of growth next year as we have the annualization of the volume recovery, the strong pricing and the strong net new trends that we are experiencing today. What does that mean broadly? I think we could be at that full year 2024 ambition in full year 2023. As we look beyond that, I think we need to understand what the inflation and pricing environment looks like. But as I said earlier, the sort of structural base case for us would be a one to two point improvement in net new and then continuing to be successful with pricing. If inflation moderates some, I'm sure it will be above the historical levels that we experienced for quite some time, yet for a while. So i n aggregate, that would suggest, when volumes are stabilized, I think medium-term growth rates that are ahead of what we enjoyed pre-COVID. In terms of U.S. education, it's certainly a business that we're, you know, continue to be excited about. We think it's done quite well, certainly over the last year when you look at the base recovery, the new business wins, the strong retention. That's continuing. You're right that the selling season, the traditional selling season, were coming to an end. Although we'll say that we're seeing a bit more expansion of the selling season, because of the various pressures that are there. It's still very much pronounced within the spring, but that's expanded out to beyond that just a bit. We're seeing, you know, gains on both the first-time outsourcing and share gains as well. Really when you break it down, the K through 12, the public higher ed, the private higher ed, the independent schools and the support services aspects of it, they're all performing nicely. They're doing a bit differently in that some of them have different contract structures. You look at, you know, the higher ed piece and the support services tends to have more fixed-price components within that. K through 12 would be an element of that as well. Within the education business, retail and catering is still depressed a bit from historical levels. We think it's still about 25% down on the volumes, the base volumes versus historical levels. You're right. All of those pressures that you know we're dealing with there, everyone else is facing and the self-ops are as well. It's certainly helping to drive you know sources of revenue. We're excited about that as we look forward. There's still a massive structural growth opportunity in that you know in that environment. With the macroeconomic pressures that you know everyone is increasingly keeping an eye on, you know, education performs very well in downturns. It actually tends to grow a bit during downturns. It has an insulation effect there as well. Thank you. Thank you very much for the color. Next question comes from Leo Carrington from Citi. Please go ahead. Good morning. Can I ask a couple of follow-ups on net new business, please? Firstly, in terms of helping our modeling really of the ramp up of net new business, the net new business KPI. Am I correct in saying that mechanism behind your disclosure here means that it would be fair to assume that the current levels of net new business in absolute terms, say, continues for at least the next three quarters as these as the current contracts go through their first year? Then secondly, in terms of the volumes that you're seeing on mobilization, are your new contracts tending to be near 100% of the expected total volumes? Or should we allow for a little extra tailwind in their second year as footfall and volumes recover to, t o what might be a normal level? Thank you. Palmer. With respect to the net new as we look ahead, that 6.97% in the quarter certainly it's higher than we actually expected. Look, we knew the forward-looking indicators were strong. When we looked at the new business wins and the forward-looking retention, we knew those numbers were strong coming in. To actually see the growth that strong within the quarter surprised us a bit. I think it speaks to the strength of the opening and the ramp up that's occurred there. You know, as we look ahead, you know, we expect to still see that number be strong. We think the 6.9% is pretty exceptional and probably should be treated as exceptional. When you look at it, the 5.2% is a year to date figure, and that's probably something that's closer to what we would expect going forward. Also, keep in mind the lapping effect, the comps that come into play as we go forward. We had a big step up in Q4 last year, 77% of 2019 revenues in Q3 of last year, up to 88% in Q4. Certainly all those factor in and contribute. Then in terms of the ramping up of the volume on new business, you're right, there's a gradual ramp up. We've been the beneficiary of that over the course of this year, certainly when you've had mobilizations occur last year but not fully optimized. That's getting back to at least closer to what we expected. There'll be a bit more to come. You're right that it usually doesn't fully optimize until into the second year, and especially if you have the larger deals. Think of a large healthcare system, a large senior living system, something like that, where there's a ramp up that occurs over three, six, potentially more months. Obviously, you'll get a rolling effect of that. Okay. Thank you, Palmer. As a final reminder, if you'd like to ask a question, please press star one. The next question comes from the line of Neil Tyler from Redburn. Please go ahead. Yeah, good morning. Thank you. A couple left, please. Sticking with the topic of margins, actually, you've been clear that the inflation effect this year at least isn't just a mechanical percentage, but obviously there will be a sort of profit drag. Would you anticipate being able to recover that absolute profit delta over the course of FY 2023? You know, assuming, of course, that the cost inflation itself normalizes. Longer term, the sort of 6% growth algorithm that you framed, does that still allow at that level of net new that's incorporated within that, does that still allow operating leverage to deliver perhaps, you know, 10, 20, 30 basis points of margin improvement? At 6%, do you effectively sort of run at sort of static margins as those components combine? More specifically, going to the topic of new wins and in B&I, I'm just quite interested, if you wouldn't mind, describing a little bit the unit margin comparison of the new business wins there, because it strikes me that there's probably a difference in the cost structure in quite a lot of the new business that you're winning as you expand that market yourselves. Thank you. Thank you, Neil. I'll just take the sort of growth versus margin point and then ask Palmer to deal with the sort of profit drag and the unit margin on new business. On that first point, look, I think when we were in pre-COVID, old world, old money, we had a growth range of 4%-6%, and we always said at the high end of that we'd expect less or little margin progression, and then as we enjoy that higher level of growth. I think it's quite difficult right now for us to be precise. There are a lot of moving parts in the margin equation. We've obviously got the operational leverage recovery as volumes come back. We've got the impact of cost inflation, the timing of pricing, and when pricing recovers the lag. We've got these exceptional levels of net new growth. All of those are going on simultaneously. In that context, we've made significant progress year-over-year and expect to make significant progress again. The path back to pre-COVID margin will, you know, take a wee while, but we expect all of those levers to be positive. If we would continue to grow, you know, let's say we talk about net new business at 5%, and that means the, you know, pricing being the same as pre-COVID, we're growing at 8%. We would expect that to put some pressure on the margin journey until that growth moderates. I think there's a lot going on right now. I think, you know, the right thing to take away is we're very excited about the growth potential of the business. We think we can now grow at above historic levels. Pricing will also contribute to that. We do believe that we'll recover pre-COVID margin. I think those are the two takeaways. The balance of how those play out over time, you know, we'll have to go on that journey with you as we plan and forecast within the business. In terms of margins, and the inflationary pressures being a profit drag, we actually probably look at it a little differently. If you look at margins from the headwind perspective, I certainly see what you're saying. We see it as a drag on the margins, but it's contributing to the top line growth, which ultimately we think has a net benefit to profit. We think the best way to judge performance in these kind of environments when inflation can be a tailwind and a headwind is actually the improvement in the growth in profit. That's the best way we look at it. In terms of the recovery aspect, which is, I think the essence of what you're asking there. Dominic referenced it. We, you know, we fully anticipate continued progression on the margin. We're not gonna put a timetable on it. We're going to go for the growth opportunity that's there. We'll get the operational leverage as it comes through, you know, all things being equal. In terms of the B&I new business, from just a margin contribution, a unit margin contribution, we don't expect there to be a significant change out of the gate. Yeah, we're seeing a bit more free food offers, a bit more commissary delivered in, a bit more micro market and pantry type of offers there. Some of those are scale gains. If you think of the, you know, the central kitchens, to the extent we can utilize our current infrastructure, whether they're units out of other units or centralized kitchens, and utilize more scale, we should get a bit more margin drop through, you know, over time. We're not necessarily seeing any real margin impacts within B&I right now. Frankly, we expect to see pretty consistent and healthy margins in B&I as we go forward. That's very helpful. Thank you. Thank you both. The next question comes from the line of Estelle Weingrod from JP Morgan. Please go ahead. Hi, good morning. Just one question from my side. Just coming back to your organic growth momentum into next year. I understand there are a lot of moving parts, of course, in the current environment, but is there a scenario whereby we can be in mid-teen growth territory? I mean, I think we need to. We'll come back to you at the end of the year. I mean, right now, as you've seen, you know, the growth in quarter four is going to be in the 20% plus range. We're going to enter next year with that momentum. We've got very strong net new. The pricing momentum will continue. So look, I think the prospects for growth in the first half are very strong. The second half is a little more unclear. We'll need to see how we continue to trend on net new, though, as you've heard us say today, we feel positive about both retention and the growth pipeline of new business opportunities. I think we also need to see where pricing shakes out and where inflation shakes out as we start to lap the annual impacts. Although again, we do expect it to continue to trend high. I think all the ingredients are there for positive growth next year. I think putting a range on it right now is tough. We exit this year with very strong momentum. Okay. Thank you very much. This now concludes our question and answer session. I will now hand back to Dominic Blakemore for final remarks. Just to say thank you all for joining us today. We'd like to wish you a restful and enjoyable summer holidays and look forward to speaking to you later in the year. Thank you again.