Sodexo: Fiscal 2015, a year of progress

• A solid financial performance and improved profitability
  • Total Revenue growth of 10%, including organic growth of 2.5%;
  • Operating profit up 21.7%
    • +11.9%, excluding currency effects and FY 2014 exceptional charges, exceeding the 10% growth objective set in early FY 2015, with an operating margin up 40 basis points;
  • Growth in Group net income of 42.9% and 32.4% excluding currency effects;
  • Net cash provided by operating activities of more than €1 billion.
     
• Proposed dividend of €2.20 per share (up 22.2%) and a €300 million share repurchase program for cancellation purposes.
   
• For Fiscal 2016, Sodexo's objective is revenue growth of around 3% and an increase in operating profit of around 8% (excluding currency effects and before exceptional items).

      
Issy-les-Moulineaux, November 19, 2015 - Sodexo (NYSE Euronext Paris FR 0000121220-OTC: SDXAY). At the Board of Directors meeting held on November 17, 2015 and chaired by Pierre Bellon, Sodexo's Chief Executive Officer Michel Landel presented the Group's performance for the fiscal year ended August 31, 2015.

Fiscal 2015 financial performance:

Revenues

Consolidated revenue for Fiscal 2015 amounted to 19.8 billion euro, an increase of 10% including organic growth of 2.5%. Favorable changes in exchange rates had a positive impact not only on revenues but also on all other income statement items.

On-Site Services Activity

Organic growth for the On-site Services activity was 2.2%. In a global economy that saw moderate growth, with some developing economies particularly in Latin America experiencing a loss of momentum, this growth rate primarily reflected heightened demand for Sodexo's integrated Quality of Life Services offers in all geographic regions. These offers include a significant facilities management component, which lessened the effect of lower foodservices volumes resulting from headcount reductions and other cost-saving measures undertaken by clients, particularly in Europe.

Organic growth by client segment was as follows:

In the Corporate Services segment organic growth amounted to 3.9%, representing the result of several different trends:

• Strong demand for integrated Quality of Life Services offers in all regions, led by the United Kingdom and North America;
• The ramp-up of new contracts in the Justice segment in the United Kingdom; 
• 5.1% growth in the Remote Sites segment, which benefited - in particular, in the first half of Fiscal 2015 - from the many contracts signed at the end of the prior year, particularly in Australia. 

Health Care and Seniors revenues grew by a modest 1.2%, reflecting the budget constraints on public sector enterprises and the withdrawal from part of the HCR ManorCare contract in the United States at the end of Fiscal 2014. Sodexo nonetheless successfully leveraged its expertise in this segment, and continued to enjoy strong growth in Latin America, especially Brazil, as well as in China.

Education segment revenues were down 0.7% based on a comparable consolidation scope and at constant currency exchange rates. The decline was partly due to the Group's decision to withdraw from a contract with Detroit Public Schools in North America, in light of the city's financial difficulties, and reflected the more selective approach to new business in Europe. In contrast, Education revenues in the Rest of the World grew over the year, lifted by Sodexo's global expertise in this client segment.

Benefits and Rewards Services

Organic growth for the Benefits and Rewards Services activity was 9.5%, reflecting further double-digit growth in Latin America - despite a slowdown in Brazil in the second half of the year - and a healthy increase in revenues in Asia.

Key performance indicators

The On-site Services activity's key growth indicators were as follows:

• 93.1% client retention rate, little changed from Fiscal 2014. The retention rate remained very high in the United Kingdom and Ireland but declined slightly in other geographic regions.
• 2.2% growth for existing sites, compared to 2.5% for the prior year. Foodservices volumes continued to decline in Europe, and slower economic growth and inflation in certain developing economies also weighed on growth;
• 7.5% development rate (new contract wins) compared to 7.1% in Fiscal 2014, reflecting contract wins for integrated service offers, particularly in the United Kingdom. New contracts won during the fiscal year represented 1.3 billion euro in annual revenues.

      
Operating profit

Reported operating profit amounted to 1,143 million euro, an increase of 21.7% at current currencies.

Note that Fiscal 2014 reported operating profit was stated net of 27 million euro in exceptional costs related to the program to improve operational efficiency and reduce costs.

Based on Fiscal 2014 operating profit before these exceptional costs, year-on-year growth was 11.9% excluding currency effects, while operating margin was 5.8% compared to 5.4% in Fiscal 2014. This performance was better than the objective of 10% announced by the Group in November 2014.

All of On-site Services' geographic regions contributed to the high overall rate of growth, with operating profit increases of:

• 39.4% in North America (18.7% at constant currencies) ;
• 42.4% in the United Kingdom and Ireland (28.8% at constant currencies) ;
• 15% in the Rest of the World (Latin America, Middle East, Asia, Africa, Australia and Remote Sites) (7.1% at constant currencies) ;
•  3.0% in Continental Europe (3.9% at constant currencies).

In Benefits and Rewards Services, higher issue volumes and tight control over costs drove a 15.3% increase in operating profit excluding currency effects and 6.3% at current exchange rates.

This performance also reflected the full year benefits of the program to improve operational efficiency and reduce costs, which generated annual savings of 170 million euro compared to the Fiscal 2013 baseline. This program, which was launched in September 2012 and completed in February 2014, focused on reducing both on-site operating expenses and overheads.

Group net income

The solid increase in operating profit, the reduction in net finance expense and the effective tax rate combined to drive a 42.9% increase in Group net income (32.4% excluding currency effects), to 700 million euro.

Earnings per share totaled 4.60 euro compared to 3.23 euro in Fiscal 2014, representing an increase of 42.4% (32.2% excluding currency effects) in line with the growth in Group net income.

Net cash flows: a solid cash-generating financial model

Net cash provided by operating activities amounted to 1,017 million euro, representing some 200 million euro or 23% more than in Fiscal 2014.

This good performance was mainly due to the sharp 203 million euro rise in operating profit from fully consolidated companies, part of which was attributable to the favorable currency effect. 

The change in working capital, which had a more limited positive effect than in the prior year, reflected two opposing developments, with an increase in trade receivables in North America and Latin America that was partly offset by significant client advances related to the Rugby World cup in the United Kingdom.

Gearing

As of August 31, 2015, the Group had total borrowings of 3,047 million euro. The main borrowings are two euro-denominated bond issues for a total of 1,100 million euro and three U.S. private placements for a total of 2,060 million U.S. dollars.

The operating cash position (which includes Benefits and Rewards Services cash investments and restricted cash) totaled 2,708 million euro, including 1,476 million euro relating to the Benefits and Rewards Services activity.

As of August 31, 2015, net debt was 339 million euro, representing 9% of shareholders' equity, compared to 12% as of August 31, 2014 and the average interest rate on borrowings was 3.8% as of August 31, 2015.

Dividend proposal / Share repurchase program

Based on this strong performance:

• At the Annual Shareholders' Meeting to be held on January 26, 2016, the Board of Directors will recommend paying a dividend of 2.20 euro per share^[3] for Fiscal 2015, an increase of 22.2% over the prior year.  The proposed dividend represents a payout ratio of nearly 50% of Group net income.
• Confident in the future while maintaining the financial flexibility needed to invest in future development, the Board has also decided to implement a 300-million euro (approximately 2.4% of the share capital) share repurchase and cancellation program in Fiscal 2016. This transaction is expected to be accretive to earnings per share starting in 2016.

Board of Directors

At the Annual Shareholders Meeting to be held on January 26, 2016, the Board of Directors will recommend the appointment of a new director, Mr Emmanuel Babeau, Deputy Chief Executive Officer of Schneider Electric, in charge of Finance and Legal Affairs.

Economic, Social and Environmental Responsibility
Sodexo was named "global leader for its industry" by the Dow Jones Sustainability Indices (DJSI) for the 11th consecutive year and the number one consumer services company for the second year in a row. DJSI is the longest-running global sustainability benchmark worldwide and the key reference point in sustainability investing for investors and companies alike. The annual DJSI review is based on a thorough analysis of corporate economic, environmental and social performance, assessing issues such as corporate governance, risk management, climate strategy, environmental policy/management systems, supply chain standards and labor practices.

Among the initiatives launched during the year, Sodexo announced an ambitious objective to reduce carbon emissions 34% by 2020 compared to 2011 across all internal operations and the entire supply chain. The methodology was developed jointly with the World Wildlife Fund (WWF).

Outlook

At the November 17, 2015 meeting of the Board of Directors, Michel Landel, Chief Executive Officer, reminded the Board of the relevance of the Group's long-term strategy, built on its unique integrated Quality of Life Services offer, its global network and its uncontested leadership position in developing countries.

During the meeting, Michel Landel also discussed the profound changes the world is currently undergoing, sources of opportunity for long-term growth for the Group. Sodexo's future success will depend on its ability to convert these changes into opportunities to create value as an even more agile, innovative and flexible partner.

The trends remain favorable for Fiscal 2016, but in a highly volatile global economy: with low forecasted GDP growth in the short-term in developing economies, in particular in Brazil; oil, gas and mining sectors strongly affected by the decline in commodity prices; uncertainty surrounding currency trends; and a halting recovery in Europe.

Faced with these short-term challenges, the Chief Executive Officer confirms that his Executive Committee is reinforcing the measures needed to adapt. In Fiscal 2016, the Group will continue to pursue its efforts for simplification and standardization, notably through the following efforts:

• reinforced adaptation of operating costs on site
• simplification of the organization, and
• greater pooling of Group expertise on an international scale in both operations and support functions.

The measures taken will progressively generate annual savings of around 200 million euro, between now and Fiscal 2018, when the full benefit will be realized. The implementation of certain of these initiatives will result in exceptional costs over the next 18 months, which are estimated at 200 million euro.

For these reasons, the Group has set the following objectives for Fiscal 2016:

• organic revenue growth of around 3%;
• growth in operating profit excluding currency effects and before exceptional items of around 8%.

In the medium-term, the Group's growth will be supported by several major trends:

• Outsourcing of services by clients in both the private and public sectors continues to represent outstanding growth potential in all markets and geographic regions.
• "Seniorization" of populations globally: By 2025, the population over 65 will have doubled to 800 million people worldwide;
• Robotics: New technologies can contribute to automating the Group's processes and services, but the human factor remains essential to consumers' quality of life, throughout the world;
• Digital: the Group will take advantage of digital technologies which today are revolutionizing the world and transforming relations between Sodexo and its consumers.

In this context, the Group has committed to a reorganization whose progressive deployment started September 1, 2015. Sodexo will evolve from a company organized by country to an organization by client segment. This will allow the Group to continue to deepen its knowledge of consumer expectations in the area of quality of life specific to each segment, and to standardize and pool its expertise thanks to the implementation of operational platforms. This new organization will create enhanced value for Sodexo's clients and consumers, and will thus allow the Group to progressively accelerate growth.

The Board of Directors, confident in the future, confirms the medium-term objectives of:

• average annual revenue growth, excluding currency effects, of between 4% and 7%;
• average annual growth in operating profit, excluding currency effects, of between 8% and 10%;
• an average annual cash conversion ratio^[4] of around 100%.

Lastly, the Board reiterated Sodexo's core strengths:

• significant potential market;
• unique range of Quality of Life services particularly well aligned with evolving client demand;
• global network spanning 80 countries;
• unchallenged leadership in developing countries;
• robust financial model;
• independence; and
• strong culture and engaged teams.

      
In conclusion, the Board added, "We would like to take this opportunity to thank our clients for their loyalty, our shareholders for their confidence, and the Group's 420,000 employees for their efforts in Fiscal 2015 and for their daily commitment to improving the Quality of Life of our consumers and the performance of our clients."

Analyst briefing

Sodexo will hold a briefing today at 9:00 a.m. (Paris time) at the Capital 8 Conference Center (32, rue de Monceau, 75008 Paris) to discuss the Fiscal 2015 results.

The briefing may also be viewed via webcast on www.sodexo.com or via conference call at + 44 (0) 20 3427 1903 followed by the code 35 72 594 (in French) or 34 91 103 (in English).

The press release, presentation and webcast will be available on the Group's website www.sodexo.com, under the tab "Latest news" as well as in the section "Finance - Financial results." A recording of the conference call will be available at + 44 (0) 20 3427 0598 followed by the code 34 91 103, until November 25, 2015.

Financial communications schedule

About Sodexo

Founded in 1966 by Pierre Bellon, Sodexo is the global leader in services that improve Quality of Life, an essential factor in individual and organizational performance. Operating in 80 countries, Sodexo serves 75 million consumers each day through its unique combination of On-site Services, Benefits and Rewards Services and Personal and Home Services. Through its more than 100 services, Sodexo provides clients an integrated offering developed over nearly 50 years of experience: from foodservices, reception, maintenance and cleaning, to facilities and equipment management; from Meal Pass, Gift Pass and Mobility Pass benefits for employees to in-home assistance and concierge services. Sodexo's success and performance are founded on its independence, its sustainable business model and its ability to continuously develop and engage its 420,000 employees throughout the world.

Forward-looking statements

This press release contains statements that may be considered as forward-looking statements and as such may not relate strictly to historical or current facts. These statements represent management's views as of the date they are made and Sodexo assumes no obligation to update them. The reader is cautioned not to place undue reliance on these forward-looking statements.

Contacts

APPENDIX 1
Comments by activity and geography

Revenues by activity

Operating profit by activity^[5]

1. On-Site Services

Revenues

Revenues by segment:

1.1 North America

Revenues

On-site Services revenue in North America totaled 8 billion euro, up 18% over Fiscal 2014. Organic growth for the year was 1.5%.

Organic growth in the Corporate Services segment was 5.4%, reflecting high business volumes in facilities management services for clients such as, Citigroup and Alcatel-Lucent, along with robust growth in On-site Services in the Defense segment. Sodexo won a large number of contracts during the year, notably with the House of Representatives, Chevron and Zurich.

In the Health Care and Seniors segment, revenue increased by just 1.1%, due to the adverse impact during most of the year of Sodexo's withdrawal in the prior year from part of the HCR ManorCare contract, and of the sale of certain laundry activities. However, new contracts won with clients such as Vidant Health and Tenet Health System, and faster growth at existing sites confirmed the market's potential and led to a return to growth in the latter part of the year. Other contract wins included LHP Hospital Group (Texas), Erlanger Health System (Tennessee), Avalon Woodland Park Rehab and Care Center (Utah) and UMass Memorial Medical Center (3 sites in Massachusetts).

In Education, the 0.6% decline in revenue reflected mixed trends, with an increase in sales of full board meal plans to universities partially offset by the voluntary withdrawal from a contract with Detroit Public Schools at the end of the prior fiscal year, due to the city's financial difficulties and the risk of non-payment. In the schools segment, growth in existing site revenues reflected changes in students' eating habits in response to the latest changes in the Healthy and Hunger Free Kids Act (HHFKA). Following disappointing sales performances and contract wins in Fiscal 2015, a series of measures to improve the sales teams' efficiency was decided at the end of the year. Recent contract wins included Dakota State University, San Francisco State University and State University of New York at Stony Brook.

Operating profit

Operating profit totaled 499 million euro, an increase of 39.4% (+18.7% excluding currency effects) compared to Fiscal 2014.

Numerous productivity improvement measures paid off in Fiscal 2015 thanks to the systematic deployment of standardized on-site contract management methods, particularly in the Education segment, leading to improved management of the effects of inflation. Off-site administrative cost efficiencies also contributed to this good performance.  In all, these two factors accounted for 40% of the increase in Fiscal 2015 operating profit, with the other 60% attributable to the low basis of comparison in Fiscal 2014 when operating profit was temporarily affected by problems in deploying the HCR ManorCare contract and by the provisions set aside for doubtful receivables and risks on certain contracts.

Boosted by all of these factors, operating margin in North America rose to 6.3% from 5.3% in Fiscal 2014.

1.2 Continental Europe

Revenues

In Continental Europe, revenues totaled nearly 5.7 billion euro.

Organic growth in the Corporate Services segment was 2.9%. However, this performance reflected mixed situations:

• foodservices volumes declined, notably in France, Italy, the Netherlands and Finland, and revenues were also adversely affected by Sodexo's withdrawal from certain contracts as part of the program to improve operational efficiency and reduce costs;
• these effects were offset by sustained demand for Quality of Life services, particularly services that required deployment of a variety of technical skills. The ramp-up of multi-site contracts signed in Fiscal 2014, among them Carlsberg and Johnson & Johnson, also acted as a growth driver.

New contracts signed during the year included Institut Pasteur and GE Power Conversion in France, and the National Police Service in the Netherlands.

The 3.4% contraction in Health Care and Seniors revenues was mainly due to lower client retention rates, especially in France, and limited business development in recent quarters. These markets continue to offer considerable medium-term growth potential despite the current economic and political environment. The transition to an organization by global client segment currently in progress should enable the Group to leverage its expertise and deep understanding of its clients and consumers, in order to steadily improve the effectiveness of its sales initiatives.

New contracts signed during the year included Ospedale San Matteo Pavia in Italy and Forcilles Hospital in France.

In Education, the 2.3% decline in revenue was mainly attributable to Sodexo's decision in Fiscal 2014 not to renew certain major contracts, as a result of budget cuts for schools in several countries. Sodexo nonetheless enjoyed a modest return to growth in the fourth quarter and expects a modest improvement in the next twelve months.

New contracts signed during the year included Conseil Général des Yvelines and Ecole Supérieure d'Art et de Design in France and Tampere University of Technology (TTY) in Finland.

Operating profit

At 238 million euro, operating profit was up by 3% (3.9% excluding currency effects) over Fiscal 2014. Operating margin was up 10 basis points compared with the previous year, at 4.2%. The effects of client cost-saving drives and non-recurring contract mobilization costs recorded in the first half were more than offset in the second half, as expected, by the benefits of the program to improve operational efficiency launched in September 2012.

1.3 Rest of the World
(Latin America, Middle East, Asia, Africa, Australia and Remote Sites)

Revenues

Revenues in the Rest of the World region totaled 3.5 billion euro in Fiscal 2015, an increase of 5.3% over Fiscal 2014. Organic revenue growth was 1.7%.

The Remote Sites segment, which accounted for 45% of the region's total revenues in Fiscal 2015, reported organic revenue growth of 2.2%, driven by significant contract wins in Fiscal 2014, including Woodside Energy and BHP Billiton subsidiary GemCo for Groote Eylandt, Mineral Resources/Jerriwah Village in Australia, Petrex in Peru and Compania Minera Nevada in Chile. Revenue growth in the second half of the year was nonetheless adversely affected by mine closures, particularly in Latin America.

Excluding Remote Sites, organic growth in the Rest of the World region was 1.4%.

Organic revenue growth in the Corporate Services segment was 0.6%, reflecting both the developments in the Remote Sites segment described above and the consequences of the severe economic slowdown in Brazil, as well as the difficult fiscal and social environment in Chile. Growth nonetheless remained satisfactory in Asia, with near-double digit increases particularly in India and Southeast Asia. Many contracts were signed in emerging markets, including JBS, Valeo, FMC Technologies and Braskem in Brazil, Vodafone and Adobe in India, and deployment of the Unilever contract in Asia began during the year.

In Health Care and Seniors, organic growth of 20.2% was attributable to contract wins in Latin America, especially in Brazil, and strong growth in Asia. Driven by Sodexo's expertise in Health Care and Seniors services, this steady sustained growth confirms the of the Group's global approach by client segment.  During the year, Sodexo won a number of contracts including for the Mater Dei Belo Horizonte hospital in Brazil, and Rumah Sakit Pondok Indah Hospital in Indonesia.

In Education, the 4% organic growth in revenue was primarily attributable to operations in Latin America, India and China. New contracts signed during the year included Nord Anglia International School in Hong Kong and Sri Utama Schools in Malaysia.

Operating profit

Operating profit in the Rest of the World region increased by 15% (7.1% excluding currency effects) to 161 million euro. Operating margin was 4.6% compared to 4.2% in the prior year, maintaining the pattern of growth established over the last two fiscal years. The further improvement was the result of major productivity gains achieved in most of the countries in the region, and also reflected the impact of additional one-off projects in the offshore sector.

1.4 United Kingdom and Ireland

Revenues

Revenues in the United Kingdom and Ireland totaled 1.8 billion euro, an increase of 23.5% over Fiscal 2014 including organic growth of 12.8%.

Corporate Services revenue growth accelerated sharply to 13.9%. This performance was attributable to the provision of services, including one-off projects with a large facilities management component, for clients such as GSK, Rexam, Carlsberg and Zurich. It also reflects the initial months' revenue from a contract awarded to Sodexo in six regions under the UK government's Transforming Rehabilitation program to help prepare prison inmates for a successful return to mainstream society.

Another highlight of Fiscal 2015 was the contract signed with Diageo to provide an array of integrated Quality of Life services at 68 sites in the United Kingdom and Ireland.

In Health Care and Seniors, organic growth accelerated to 12.7% thanks to the ramp-up of several contracts and the extension of services provided to several hospitals such as the five in London operated by Imperial College Healthcare.

In Education, the 4.1% growth in revenues for the year was principally due to the contract with the prestigious University College London won in Fiscal 2014.

Operating profit

Operating profit increased to 94 million euro, up 42.4% or +28.8% excluding currency effects. The increase was partly attributable to the leverage provided by revenue growth but it also reflected improved margins on several major integrated services contracts that were still in the start-up phase in Fiscal 2014. Operating margin increased from 4.5% in Fiscal 2014 to 5.1%.

2. Benefits and Rewards Services

Issue volume

Revenues

In the Benefits and Rewards Services activity, the growth dynamic remained satisfactory in emerging markets (Latin America and Asia), despite the gradual but nonetheless significant economic slowdown observed in Latin America. This trend was illustrated by the 9.5% organic revenue growth for Fiscal 2015.

Digital-based issue volume accounted for 65% of total issue volume for the year, reflecting the strong innovation culture that prevails at Sodexo and underpins the service offer for clients.

In Latin America, organic growth continued at a satisfactory rate of 11.1% for issue volume and +14.4% for revenues, led mainly by solid advances in Brazil and Venezuela. This performance was supported by higher face values on vouchers and cards and rising interest rates in Brazil. Sodexo continued to deepen its market penetration, thanks to its relevant service offers, and continued development of its expense management activities. Contract wins included Hospital Santa Paula and CEFOR Segurança Privada in Brazil, and Municipio de Xochitepec Morelos in Mexico.

In Europe and Asia, organic growth accelerated to 4.3% for issue volume and +3.8% for revenues. These gains reflected the success of Sodexo's Quality of Life offers, double-digit growth in Turkey, India and China, and more encouraging growth rates in the rest of Europe. Contract wins included Hindustan Zinc Limited and Willis Processing in India, Régie Nationale des Tabacs et Alumettes in Tunisia, Kiloutou in France and Vitaldent in Spain.

Operating profit

Operating profit amounted to 285 million euro, up 6.3% compared to the prior year (+15.3% excluding currency effects). The increase reflected higher issue volumes and tight operating cost management with a particular focus on voucher and card processing costs. The Group continued to invest in research, innovation and development of Quality of Life services during the year, while also launching operations in four new countries (Portugal, panama, Singapore and Taiwan) at the end of the fiscal year.

Operating margin was 34.5% or 35.7% at constant currencies, notably excluding the effect of changes in the exchange rates used to translate operating profit generated in Venezuela^[6]. At constant currencies operating margin was stable compared to Fiscal 2014.

APPENDIX 2
Financial statements for Fiscal 2015

Consolidated income statement

Consolidated balance sheet

Consolidated statement of cash flow