Sodexo S.A. (SW) Earnings Call Transcript

Good morning. Thank you for standing by, and welcome to Sodexo's Fiscal 2026 Results Conference Call. [Operator Instructions] I advise you that this conference is being recorded today on Friday, October 23, 2026. At this time, I would like to hand the conference over to the Sodexo team. Please go ahead.

Good morning, everyone, and thank you for joining us for our fiscal 2026 earnings call. I'm Juliette Klein, Head of Investor Relations. With me today are Thierry Delaporte, our CEO; and Sebastien De Tramasure, our CFO, who will take you through the presentation. After that, we will open the line for questions. [Operator Instructions] If you have any additional questions after the call, please don't hesitate to reach out to the IR team. With now, I'll hand over to Thierry.

Thank you, Juliette, and good morning, everyone. Thank you for joining us. Before we go through the numbers. So I'd like to step back for a moment on the year we have just completed. Fiscal 2026 was a year of diagnosis and reset. What have we done? Over the past year, I've spent significant time with our teams and clients across our businesses. This has given me a clear view of the issues we need to address, but also of Sodexo's considerable strength, the quality and the commitment of our people, the depth of our client relationships and our expertise and our global reach. These are absolutely powerful assets, but why our performance has not consistently reflected them. And that's the point. So over the year, we worked as a leadership team to turn the diagnosis into shift and growth, a clear action plan, which is now being deployed across the group. In July, at our investor update, we presented that plan to you its first phase covering fiscal '26 and '27 is about rebuilding our foundations and restoring our competitiveness. Concretely, that means 3 things: one, restoring commercial momentum and improving execution discipline; second, simplifying our organization and reducing complexity; and third, investing in critical capabilities in our people and our systems. Three months on, the work is underway across the group. And I will come back shortly to some of the first concrete changes we have made. The transformation will take time. There is no doubt, but our teams are moving with urgency and we are where we expect it to be at this stage. That's what I would say today. Our fiscal '26 results support this. We finished the year well with organic growth ahead of expectations. And today, we confirm our outlook for fiscal '27. Our priorities are very clear, and we are focused on delivering what we committed to. Now let me turn to fiscal '26 in detail. As you can see, revenue was EUR 24 billion with organic growth of plus 2%. This was above our latest guidance, reflecting a stronger-than-expected fourth quarter. The underlying operating margin was 3.4%, here at the upper end of our expected range. We also made progress on our commercial indicators, developments reached 7.7% of revenue and client retention was 94.4%. What I would say is the direction is encouraging, although retention remains below where we want to be, and we need to sustain the improvement over time. We maintain financial discipline through the reset. Free cash flow was EUR 379 million. Leverage ended the year at 2.4x better than the level of around 2.6x anticipated in July at the time of the investor update. Sebastien will come back to these elements in more detail. The proposed dividend of EUR 1.74 per share is in line with our capital allocation policy. Our focus now is to improve, as I said, retention execute our new contract mobilization well and continue to raising executive execution standards across the group. Moving to Shift & Growth. Shift & Growth 2030. It's been 3 months since our investor update, as I said, we're moving forward as planned. And Shift & Growth 2030 is now being translated into concrete actions across the group. We know what we need to do, get closer to our clients be more competitive, faster in our decisions and more consistent in our execution. None of this is conceptually complicated. We know that, but it's demanding, and it requires disciplined execution every day contract by contract and side by side. Now let me give you one example under each priority. On growth. The new account management model that we talked about back in July is in place for our top 200 clients. Each account now has one named owner, accountable for retention, for growth and financial performance. In North America, in the U.S., Education segment, I have absolutely seen that change first end. The new leadership team has restored a level of focus and an intensity around retention that frankly, we have lost over time. They're getting closer to every critical account, mobilizing the right people, well ahead of renewable decisions. They've done systematic franchise review on all critical accounts at an accelerated pace. It's still early, I know that, but we are beginning to see better outcomes on renewals. On simplification now, restructuring actions are underway in every region. In the U.S., each segment has removed between 1 and 3 organizational layers, bringing segment CEOs closer to frontline operations and shortening decision paths. The work continues. This is not, as you can imagine, a onetime initiative. Simplification remains a core discipline and will continue to remove complexity wherever it slows execution or creates distance from our operations. Finally, on performance culture, we have acted on the leadership review. Starting in North America. We have renewed around 2/3 of the leadership team and the level immediately below combining internal promotions on one side, we selected external hires. We have also extended the radio across all levels from operational leaders to the senior leadership team in each segment, giving us a much clearer view of where we have strong talent and where capabilities need to be strengthened. I have been clear with our leaders, performance must be differentiated and decisions on roles, progression and reward must reflect results. Technology supports all 3 priorities in fiscal '26, our focus was on making the right choices before scaling investments. We introduced much stricter go/no-go discipline and concentrated resources on the core systems and data capabilities that matter most to our competitiveness. Deployment will accelerate from fiscal '27, in line with the road map presented in July. What matters now, of course, is to keep the pace and make these changes stick across every business. This is a real transformation of the company, and it requires a lot of work. Now fiscal '27 remains the second year of the rebating phase. We'll continue to strengthen capabilities simplify the organization and raise execution standards. The benefits should build progressively with a more visible acceleration from fiscal '28. The actions I just described are the core of [indiscernible]. We are contemplating them with targeted portfolio moves, each with a clear strategic rationale. For Integra, the objective is to build greater procurement scale and expertise. This is an important engine of competitiveness and profitability for our own operations. as well as a growth platform with third-party clients. CDI and prestige purchasing strengthened that platform in Europe. In Food services, Europe is a region where Sodexo has deep roots but where our positions are uneven. So Menu 2000 is a great example of the type of bolt-on we are looking for. Germany is a priority market, where we want to regain ground and particularly in the Corporate segment. Menu 2000 brings an established position with SMEs as well as a proven operating model built around the central production unit, it's all logistics fleet and strong culinary expertise. Menu 2,000 will retain its independent structure. That's for sure. We will preserve the local expertise and the client proximity behind its success. But with us exoscale selectively what it creates value. This limits complexity and management distraction. We are also actively managing the other side of the portfolio. In July, we sold active global in Asia, the remaining part of our former home care activities which we decided to exit in '23, if you remember, as it was not core to Sodexo. Now let me be clear, m&A is not an objective in itself now. We already have a significant transformation underway. So we want to be careful about adding complexity. Our focus is on bolt-ons that support the organic plan and are manageable for the business. Any further transaction will need to meet that test and deliver the right returns. Now I'll hand over to Sebastien to take you through the financial performance. Over to you, Sebastien.

Thank you, Thierry, and good morning, everyone. So revenue close was close to EUR 24 billion. Organic growth was 2% with a stronger fourth quarter at 2.6%. Looking at the full bridge -- full year bridge, pricing contributed approximately 2.4%, like-for-like volumes around 0.6%, and net new business was around minus 0.3%. And the North American contract reclassification reduced group growth by around 70 basis points over the year. The stronger fourth quarter reflected strong activity at Sodexo Live! in Australia and Latin America and additional client projects in Europe. Some of the downside risks, including our forecast also did not materialize. So it was a better finish to the year, but this is not the starting run rate for fiscal year '27. In the first quarter, we will face the timing of contract exits and openings. Meta is also still ramping up. We'll also continue to carry headwinds of around 100 basis points from the North American contract reclassification, broadly in line with Q4. And this impact will drop out in January. We, therefore, expect growth to start below the full year range of our guidance and build progressively through the year. Turning to margin. Underlying operating profit was EUR 810 million, and the margin was 3.4%, down 130 basis points. The bridge had 3 main components. First, around 50 basis points related to the review of the contracts and assets, these covered areas such bad debt, litigation on [indiscernible] contracts and decisions to rationalize certain assets and facilities. The review was largely completed in the first half when most of the contract related provisions were recognized. The second half impact was more limited with no new broad category of risk identified. Our fiscal '27 outlook does not assume a repeat of the charge, although we'll continue to assess contracts and risk with the same level of rigor. Second, higher operating expenses for commercial capabilities, supply chain and technology, reduced the margin by around 30 basis points. The impact was broadly evenly split across the 3 areas. And as planned, spending increased in the second half as deployments accelerated. On commercial capabilities, we said in July that the investment will represent around EUR 100 million of incremental annual operating costs, one fully deployed. Fiscal included only a partial impact as hiring to [ plex ] progressively during the year. Spending will build further in fiscal '27 as its higher annualized and the remaining rules are filed. Technology programs were also still at an early stage and the EUR 500 million to EUR 600 million planned for technology and data is a cumulative investment through fiscal 2030, and most of it remains to be deployed. Investment will accelerate from fiscal '27, in line with the phasing presented in July. The third and final component around 50 basis points came from operations. This reflects underperformance across parts of the portfolio, it also includes a tougher comparison in the second half as the prior year period benefited from a nonrecurring indirect tax item in rest of the world. and improving operational performance is our major priority as we become more competitive commercially rigorous execution is critical to protect contract economics. Let me briefly close the operating review with the regional performance. In North America, organic growth was minus 1% for the year, with a trend that improved in the second half as the impact of prior contract exits started to fail. Organic growth was broadly flat in the second half, including a headwind of around 220 basis points from the contract reclassification. And for fiscal '27, we expect North America to return to positive organic growth. Europe grew organically by 2.1%, while Rest of the World delivered a particularly strong 9.7% organic growth. On margin, North America recorded the largest decline and reflecting the 3 factors I've just discussed. And in Europe, the decrease mainly reflected charges from the contract and asset review. And in the Rest of the World, the decline was more pronounced in the second half and this largely reflected a tougher comparison, as I just mentioned, together with accelerated transformation investment including the ERP pilot in India. And you will find the detailed Q4 performance and the full breakdown by segment and region in the appendix. So that covers the operating performance. Moving below underlying operating profit. Other operating income and expenses represented a net expense of EUR 290 million, the largest component was EUR 216 million of restructuring costs linked to organizational simplification, workforce transformation and the expansion of [ share services ]. And these costs were partly offset by the disposal gain on Active Global. The restructuring charge was higher than discussed in July, mainly because of the provisions related to the reorganization project announced in France this summer were recognized earlier than initially expected. This changes the timing of recognition, but not the overall size of the program. For fiscal '27, we expect other operating income and expenses to represent a net expense of around EUR 240 million. including approximately EUR 190 million of restructuring costs. And together with EUR 216 million recognized in fiscal '26, this keeps the cumulative restructuring charges in line with the EUR 400 million envelope we announced in July. The cash profile of restructuring cost is more gradual. Cash outflows were around EUR 100 million in fiscal '26. And at this stage, we expect most of the remaining cash impact in fiscal '27 with a residual amount in fiscal '28. Net financial expense increased from EUR 88 million to EUR 137 million. This is mainly due to the full year impact of the U.S. dollar bond issued in May 2025. And for fiscal '27, we expect around EUR 190 million, reflecting the EUR 1.1 billion bond issuance completed in September and fewer favorable one-off financial items compared to fiscal '26. The effective tax rate was 23.4%, below the level of around 26% we had expected. Mainly due to the geographic profit mix, including the active global disposal gain in Singapore. And group net profit was EUR 304 million, and underlying net profit was EUR 508 million. Now turning to cash. Operating cash flow was EUR 1.1 billion, and free cash flow was positive at EUR 379 million. Working capital contributed EUR 75 million, supported by strong collections together with favorable timing and one-off effects. On a more normalized basis, we continue to expect working capital to be broadly neutral. Net capital expenditure was EUR 604 million or 2.5% of revenue reflecting higher investment in contract renewal and new business. And across the cycle, we continue to expect capital expenditure of between 2.5% and 3% of revenue mainly driven by contract-related investment at site, at client sites and to a lesser extent, technology. Net debt ended the year at EUR 2.9 billion and leverage was 2.4x. This was slightly better than the level of around 2.6x discussed in July. Reflecting the stronger EBITDA outcome and better working capital and the disposal of Active Global. And for fiscal '27, we continue to expect leverage of between 2.6 and 2.8x reflecting continued investment in the business and higher restructuring cash outflows before deleveraging from fiscal 2028. Thierry, back to you for the outlook.

Thank you, Sebastien. So for fiscal '27, we continue to expect organic growth of between plus 2% and plus 3% and underlying operating margin broadly in line with achieved in fiscal '26. Fiscal '27, as we said, is the second year of our rebuilding phase. As Sebastien explained very well. We expect growth to start below the full year range and then improve progressively. Our priorities are to improve retention convert the pipeline that is building up and execute the ramp-up of meta, but also our other new contracts. On margin, the new recurrence of the -- the nonrecurrence, sorry, of the review charges and the first benefits from workforce, but also procurement actions will provide support. This is the broadly offset by the further step-up in commercial, in technology and supply chain operating expenses, together with start-up costs on new contracts. This is why we expect the margin to remain broadly stable in fiscal '27. Now regarding our fiscal 2030 ambitions, they remain unchanged. And organic growth above 5%, net new business above 3% and underlying operating margin above 5%. What I'd say to conclude is this is a demanding transformation but the levers are largely within our control, and we have strong assets to build on. So confidence will come from results. Our job now is to continue to execute with discipline and deliver tangible progress quarter-after-quarter. With that, Sebastien and I are now happy to take your questions. Over to you.

[Operator Instructions] The first question is from Leo Carrington, Citi.

Firstly, could I just ask on retention delivered, I think, 94.4% this year. Is this something you can build further on in FY '27 will be initiatives you've mentioned around retention come to fruition already this year? And then secondly, I guess, adjacent comment, but could you elaborate on the comments about your improvements in the Education segment in North America? How is the turnaround going in some of the other historically more challenged areas of the business like North America health care. And together, Education and Health care is FY '27 too early to see an improvement in these segments.

Okay. So I'll take it, Leo. Thank you for those two questions. I'll try to cover them. So first, on the retention, 94.4% if you look back -- 2 comments on retention at 94.4%. On one hand, it's an improvement from the previous year. It's slightly an improvement from the previous year. It's actually -- if you go back 10 years in time it's actually 15 years in time, it's the third best performance. So it's actually from that standpoint in Sodexo, it's a reasonably encouraging result. If you are comparing with our competitors, it's significantly below. So what I mean by that is two things. One, it's an absolute priority or focus for us. And second, it would be foolish to assume that can be easily fixed. It's a structural and deep challenge for us, okay? So that's the starting point. If I look at '26 itself, there has been a pattern, okay? So I would say in some -- first, in some of the countries, the retention has been good. So it's not across the board. We have some who are not doing as well as others. So we know where to focus our attention. One, for example, was you mentioned it, and we mentioned it as well is education in America. We've seen also a pattern in the way we've slowly improved over the year retention. But again, retention is -- I think we're very clear on what we need to do on how we will improve the retention. Now we are being careful, I guess, in the way we are setting objectives for ourselves quarter after quarter because this is a long-term trend that we are looking for here more than anything else. So expectation for '27 ambition, obviously, is to do better. Now we'll see, okay? So far, so good. It's only the beginning of the year. It's a time of mobilization. On the Education itself. So what have we done? The team has done an incredible -- so first of all, most of the leadership of the education team is being renewed over the last 12 months. We have great leaders that have joined they broaden talent with them. We have also promoted talent from within to reinject energy and client attention and focus. It's all about being present with clients every day. It's all about being visiting them. There has been a fabulous, I must say, fabulous mobilization from the leadership and the team in a kind of I do not want to use the world war anymore in this context. But retention mobilization, if you like, very specially in education where it's been about going to clients, accelerating massively the pace of the fresh eyes report. I don't know how much you know it. But typically, what we are doing is we are driving regular in-depth interviews of a lot of the stakeholders and our clients seeking feedback on which we have to act on. So in a lot of the -- in most of the segments in America, this process was largely discontinued over the last years. So we have relaunched it and with fast pace so that we know where to focus our attention and immediately act on the actions. Because what's key Leo for us in retention is: One, get the feedback from the clients, step one; second, understand and turn it into an action for us and then execute, and that is obviously, not something -- so it's not like you need to do it only 3 months before the renewal. It's throughout the life of a contract with our client. So trust me, mobilization everywhere in the world, highly intense in America and in particular, I took the example of Education. But I know that it's the case as well in health care and in corporate across the board.

That's very helpful. Could I just ask a follow-up? I mean extra detail. In terms of the leadership for North America at a high level, how close to appointing a permanent leader or are you now finding it very helpful to extend the current arrangement?

I'm very happy with the way it works today. This is, I repeat, this is a business where each of the leaders today in America manage a business of EUR 2 billion to EUR 4 billion, which is the size of the other regions we manage around the world. So I'm very happy with the way it works. I myself spent 50% of my time in America, supporting them the most I can and certainly driving alignment across the board, but they run their business. And they don't need additional layer. That's the way I feel today. Things may change, and I'll keep you posted on whenever it is the case. But that's how it works today and it's working great.

The next question is from Jamie Rollo of Morgan Stanley.

Yes, two questions. First of all, on the better development of 7.7% and retention 94.4% that obviously implies net new of around 2% at a full annualized run rate. I'm really wondering what you're embedding in the 2027, 2% to 3% organic sales growth guidance on net new and also your pricing and volume assumptions within that? And then secondly, just back on the phasing of organic sales. You've obviously reminded us about the 100 basis points accounting headwind continuing through Q1. And it sounds like net new will be skewed to the second half. Except for those 2 points, do you see a similar profile during the year on OSG? And are you seeing anything at the moment from the protests in France?

So I'll make a couple of points, and Sebastien will provide more details on the sequencing pricing and volume. Okay. So a couple of points, Jamie. One, development and retention. First, keep in mind that if 7.7% debt, there is a significant ramp-up between Q1 and Q4 of '26, okay? And even excluding Meta, we've seen an acceleration of our development in the second half of the year, and that's the encouraging part. It's not only an increase of the pipeline. It's also an increase of the contract signed. The retention, I covered it, so I think I don't need to get back to that. I'll let Sebastien reflect on it. What I would say is on the philosophy of the way we've built our guidance for '27 is that, we continue to push hard on development, and we are expecting retention to improve. But at the same time, we know that I'm being personally in the way we are looking at the projection with Sebastien, we always take a little bit of care with the way we look at retention because, as I said in my previous point, although nothing lead us to believe that, that could go worse, it's something that you need to win every single day. So a little bit of caution here. Just before I let you -- you want to cover the phasing first and then I'll go back to the process in France? You -- go ahead.

So to your question, Jamie, on the guidance for fiscal year '27, what's embedded in the 2% to 3% guidance. So we factor a minimum price increase of 2%. Then in terms of net new, we are expecting a contribution between 0.5% and 1%. And this will be largely driven by Meta. For the like-for-like volume, it's I would say, neutral, neutral to maybe slightly positive. And the remaining impact is the impact of the reclassification of the large contracts. This will impact. If you look at the fiscal 27-year around 30 to 35 basis points for the year, but it will impact 100 basis points for Q1. And then if we look at the trend over the year, we do expect a slow [indiscernible] in Q1 and organic growth are expected -- is expected below the range. and then this will progressively improve over the year with the ramp-up of the impact of the net new.

Then on the -- so thanks, Sebastien. On the protest in France, so first of all, one, obviously, as you can imagine, we are we are paying attention to it. We keep an eye on it. We are headquartered in France. And so the sooner the situation stabilize the better. Now having said that, first, for us, France, it's 12% of our business, okay? So it's not more than that. Second, our business in the high schools and where the protest are when it's not in the street is a, I would say, a modest size of our business. So it's not a significant at group level. What I would say, overall, Jamie, is that, we're not seeing, I would say, material impact. We are a global group. We have presence around the world. We are obviously, looking at everything happening in 1 place and another in the third, and we know that we are in a world where it's not always stable everywhere. But so far, so good. Now of course, indirectly it's never good for an economy. But so far, no visible impact in terms of performance, Jamie.

Can I just come back on the pricing, 2% looks very conservative, given you did 2.4% last year and inflation is going up, not down. And also the net new half to 1%, doesn't that feel a bit light given your sort of KPI suggests more like 2%?

So to your second question or second remark. So clearly, what we said that there is a phasing impact between the impact of the demobilization and the ramp-up of the new contract. And if you look at the retention from fiscal year '26, especially in Education in North America, in Europe, this will release a impacting September, beginning of Q1, while again, mobilization and openings will be more progressive over the year. And on pricing, as you know, our pricing is a blended rate, first of all, between food cost and labor as well. Also, we are managing our internal inflation and our internal inflation in food is better, I would say, it's lower than the external inflation. So -- but on that, even if we do expect some inflationary pressure during the year, more in the second half than in the first half of the year. And because of this combination, again, of procurement mitigation and pricing on that basis, I still confirm our guidance above 2% pricing impact for the year. This remains an appropriate assumption at this stage.

The next question is from Simon LeChipre, Jefferies.

First of all, coming back on Q1...

Simon, we don't hear you too well.

Can you speak louder? We can't hear you well.

Can you hear me better now?

Yes, much better.

Sorry. So two questions and the first one coming back on the Q1 organic growth outlook. So it seems that you expect net new wins to be negative in the quarter. So when do you expect net new in the period to turn positive? And do you expect, what do you expect for volume in Q1? And secondly, in terms of the margin outlook, any phasing to expect between H1 and H2?

so coming back to the forecast for Q1 organic growth -- as I said, we are expecting the ramp-up of menu during the year. Simon, so what we need to keep in mind is that the business mix between Q1 fiscal year '27 compared to Q4, it's very different because the weight of education is much stronger, and we do expect a negative organic growth in Q1 in education at the opposite the weight of Sodexo Live! is lower in Q1 versus very strong performance and strong rate in Q4, and we don't expect Sodexo Live! remain at a double-digit organic growth at the start of the year. So this is clearly also explain why when we look out number we are expecting an organic growth to the start of the year, slightly below the overall range of our guidance for fiscal year '27. And then on your second question is on the margin outlook, phasing between H1 and H2. So clearly here, what we see overall is that it should be -- if you look at the year-over-year, it should be broadly in line in terms of evolution comparison from fiscal year '27 and fiscal year '26, even if H1 margin could be slightly softer than fiscal year 2026. And H2 margin for fiscal year '27 might be slightly stronger because we start really getting the benefit of all the actions, especially the restructuring on the workforce.

Okay. So a very quick follow-up on -- coming back on net new, do you expect net new in the quarter -- in the period to turn positive as of Q2 or only as of Q3?

Honestly, Will not give answer on really the bridge of each driver by quarter. But I think what's very important is we do expect this improvement of the net new impact over the year.

Next question is from Estelle Weingrod, JPMorgan.

Two questions. The first one is on the GPO Entegra. I mean it's a big part of the equation in the turnaround story. You presented the situation at the CMD in July and what needs to be done. My question is how will we be able to assess progress what are the key KPIs to track and will you present them to us. And just another question for you, Thierry. I mean now that you've been here for a year as a year what is one major initiative or change that is facing more friction than you initially anticipated?