• Organic Growth: 7.9%, driven by strong performance in food services at 9.3%.
• Revenue: EUR23.8 billion, up 5.1%.
• Underlying Operating Margin: Improved by 40 basis points to 4.7%.
• Underlying Net Income: Increased by 17.6%.
• Net Debt Ratio: Reduced to 1.7 times, below the target range of 1 to 2 times.
• Free Cash Flow: EUR661 million, with a cash conversion of 90%.
• CapEx: 2% of revenue, below the target level of 2.5%.
• Net New Signings: EUR1.6 billion, with a retention rate of 94.2%.
• EBITDA Margin: 6.3%, up 40 basis points.
• Return on Capital Employed (ROCE): Increased to 12.9% from 11.3%.
• Entegra Organic Growth: 17%.
• Food Waste Reduction: 40.7% across sites.
• Digital Investment: Over EUR600 million in tech data and digital.

• Warning! GuruFocus has detected 4 Warning Signs with SDXAY.

Release Date: October 24, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Sodexo (SDXAY) achieved strong financial results in fiscal year 2024, with organic growth of 7.9% and an underlying operating margin improvement of 40 basis points to 4.7%.
• The company successfully reduced its net debt ratio to 1.7 times, well within its target range, thanks to strong cash generation and strategic divestments.
• Sodexo (SDXAY) is expanding its branded food offerings, with Kitchen Works revenues up 45% and Modern Recipe up 30%, aiming for branded offerings to reach 50% of food revenues next year.
• The company is investing in digital tools and AI to enhance asset management and predictive maintenance, which is driving efficiency and supporting large integrated clients.
• Sodexo (SDXAY) achieved a 17% organic growth in its Entegra business, with addressable spend reaching EUR38 billion, indicating strong performance in supply management.

Negative Points

• Retention rates were disappointing at 94.2%, impacted by the loss of a global FM contract and aggressive pricing in Latin America, leading to a 90 basis points hit.
• The fourth quarter saw a slowdown in North America with organic sales growth dropping to around 5%, attributed to lost university contracts and a normalization of previous strong growth.
• Fiscal year 2024 saw restructuring costs increase by EUR20 million due to higher above-site restructuring, with further costs expected in fiscal year 2025.
• Sodexo (SDXAY) faced challenges in the education sector, particularly in the US, due to a cycle of contract renewals influenced by regulatory changes.
• Despite strong financial performance, the company anticipates a more modest growth in the first half of fiscal year 2025, with a stronger second half expected due to timing of contract mobilizations.

Q & A Highlights

Q: In North America, the fourth quarter organic sales growth slowed significantly. Could you quantify the losses and explain the factors causing this slowdown? A: (Sebastien de Tramasure, Group CFO) The slowdown in Q4 was due to a strong base effect from last year, a slowdown in price increases, and some impact from university contracts. However, the impact from education was minor as Q4 is not a big quarter for education. Our disciplined approach focuses on quality retention to protect margins.

Q: With a 90-basis-point hit from FM and E&R contract losses, what is your confidence level in achieving the 95% retention target this year? A: (Sophie Bellon, Chairwoman and CEO) We are confident in achieving the 95% retention target. While large contract losses can impact retention, we have renewed significant contracts with global clients like Microsoft and AstraZeneca, indicating strong retention efforts.

Q: The guidance for a 30 to 40 basis point margin improvement in 2025 seems ambitious. What are the main drivers for this improvement? A: (Sebastien de Tramasure, Group CFO) The improvement will be driven by growth, enhanced productivity at site levels, and overhead cost reductions. We are deploying new tools for workforce management and transforming our service functions to drive efficiencies.

Q: Your fiscal year 2025 guidance assumes significant like-for-like volume growth. What gives you confidence in achieving this? A: (Sophie Bellon, Chairwoman and CEO) We expect positive impacts from the rollback of remote work policies, enhanced office attractiveness, and upselling of upgraded branded offers. Additionally, redesigns of workplaces and GDP-linked growth will contribute to volume growth.

Q: Can you elaborate on the strategy for branded food offers and whether they will eventually cover the entire portfolio? A: (Sophie Bellon, Chairwoman and CEO) Our branded food offers, such as Modern Recipe and Kitchen Works, are growing rapidly. While we aim to increase their share, reaching 100% is uncertain. The focus is on delivering structured, high-quality services tailored to client needs.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.