Sodexo announces solid H1 fiscal 2023 results and plan to spin-off Benefits & Rewards Services

At the board of directors meeting on April 4, 2023, chaired by Sophie Bellon, the board closed the consolidated accounts for the first half fiscal 2023 ending February 28, 2023.

Highlights:

Revenue growth +17.8%, organic growth +13.4%
Underlying operating profit +30.9%, H1 margin at 5.8%, up +60 bps
Underlying earnings per share amounted to 3.25 euros, up +40%

Group fiscal 2023 organic growth guidance upgraded

Organic growth now expected to be close to +11%
Underlying operating profit margin confirmed to be close to 5.5% at constant rates

Plan to spin-off and list Benefits & Rewards Services during 2024

Resulting in two leading pure players Sodexo On-site Services (OSS) and Benefits & Rewards Services (BRS) with highly cash generative business models.
Placing both businesses in a stronger position to execute their respective strategies and realize their full potential in fast growing markets.

Sophie Bellon, Sodexo chairwoman and CEO, said in the announcement: “The performance in the first half is solid. In On-site Services, despite inflation, the post-Covid ramp-up in volumes, mitigation actions and pricing have helped us to improve our margins. Food inflation has remained high and is likely to remain so in the second half. In Benefits & Rewards Services, growth and profitability have been better than expected.

To reflect the positive business momentum in the first half, we upgraded the Group organic growth guidance for Fiscal 2023 close to +11% while confirming our UOP guidance, expected to be close to 5.5% at constant rates.

With the completion of the On-site Services reorganization into geographies, the Sodexo Leadership Team is totally focused on the execution of our strategic plan.

The next major step for the Group is the proposed separation of OSS and BRS, that is driven by a strong strategic rationale. More focused, supported by a dedicated and empowered governance as well as an adequate capital structure, each entity would be in an even stronger position to pursue its own strategy, achieve its goals and realize its full potential.

We confirm our mid-term financial objectives and are more than ever determined to meet them. I am confident in the capacity of the leadership teams of both entities to deliver the expected results.

Finally, I would like to take a moment to warmly thank our teams for the strong progress that we have made this first half.”

First-half fiscal 2023 results up strongly

First half fiscal 2023 consolidated revenues were at 12.1 billion euros, up +17.8% year-on-year including a net contribution from acquisitions and disposals of -1.3% and a positive currency impact of +5.7%. Excluding these elements, organic revenue growth was +13.4%.

On-site Services organic revenue growth was +12.9% for the period, benefiting from the ongoing post-Covid ramp-up particularly in Corporate Services, Sports & Leisure and Universities, as well as above 5% pricing effect. Net new development started to come through in the second quarter, contributing +0.5% to the growth in the first half. Food services recovered strongly up +20% organically. FM services were up +6% excluding the impact of the end of the Testing Centers contract in the UK. Food services represented 65% of total On-site Services revenues during the period, increasing from 59% in fiscal 2022.

First half fiscal 2023 net new development was positive:

Client retention was 97.8% with no unanticipated contract losses.
New sales development was 3.6%, reaching a record more than 0.8 billion euros including cross-selling.

First half fiscal 2023 Benefits & Rewards Services revenue organic growth was +24.2%. Operating revenues were up +16.1% organically due to portfolio growth, positive net new development and an increase in face values. Financial revenues more than doubled due to the increase in interest rates in all geographies.

Underlying operating profit was 704 million euros, up +30.9%, and +22.5% excluding currency effects. The underlying operating margin was up +60 bps at 5.8%.

Operating profit was up strongly at 662 million euros compared to 537 million euros in the previous year.

Group net income was up +30.6% to 440 million euros. Underlying net profit adjusted for other operating income and expenses net of tax amounted to 475 million euros, compared to 339 million euros in the previous year, up +40.1%.

Corporate responsibility achievements have been recognized:

Sodexo ranked 12th in the annual ranking published by Equileap, world leader in data and information on gender equality. Sodexo is equal 1st on the French podium.
Sodexo received a special mention for “Workforce action” category at the WDI Workforce Transparency Awards.
For the second consecutive year, Sodexo is on the CDP Supplier Engagement Leaderboard. The Group is among the top 8% companies taking action to measure and reduce environmental risks within its supply chain.
Sodexo ranks in the top 10% companies in the "Restaurants & Leisure Facilities" sector for the excellence of its performance in terms of sustainable development in the S&P Global Sustainability Yearbook.

Plan to create two leading pure players in growth markets by splitting Sodexo On-site Services and Benefits & Rewards Services

The Sodexo board of directors has unanimously approved the project to separate the two business units of Sodexo by spinning-off and listing BRS through the distribution of BRS shares to Sodexo shareholders.

Bellon SA supports the plan and intends to continue playing a long-term controlling shareholder role in both businesses.

The contemplated transaction is expected to take place during 2024 following the completion of several customary steps, including consultation of the employee representative bodies, and remains subject to market conditions.

The Group confirms, and is more committed than ever to deliver, its mid-term guidance via the two separate entities.

Detailed transaction terms will be presented at a later stage and submitted to the approval of Sodexo’s shareholders at an extraordinary shareholders’ meeting. Sodexo’s bondholders and other lenders will be consulted on the proposed transaction in due course.

By separating the two businesses, Sodexo intends to accelerate value creation for all its stakeholders:

As two pure players dedicated to their respective markets and clients, one in Food and Facilities Management services and the other in employee benefits and engagement, each would be strategically more focused.
Empowered and dedicated governance would drive enhanced business and financial performance.
Conducting each business independently would help create a focused workforce and optimize employer attractiveness and people retention through dedicated compensation mechanisms.
Both companies would be established with the adequate capital structures providing them with the full financial flexibility to execute their growth strategies, including specific M&A. At separation, OSS and BRS would have capital structures consistent with a strong Investment Grade rating.
Already operating vastly as an independent company, the spin-off and listing of BRS is not expected to generate any material adverse effects and would result in one-off costs customary for a transaction of this nature.
The two differentiated investment profiles, with their respective business drivers, KPIs and stock market benchmarks would ensure that they attract the best suited investors.

Outlook

First half fiscal 2023 was better than expected. As a result, fiscal 2023 guidance for the Group and Benefits & Rewards Services has been revised up slightly.

Group fiscal 2023 guidance upgraded on organic growth:

Fiscal 2023 organic revenue growth now expected close to +11%, driven by higher-than-expected growth in H1 and price increases to remain above 5% in H2.
Fiscal 2023 underlying operating profit margin confirmed to be close to 5.5%, at constant rates.

Benefits & Rewards Services fiscal 2023 guidance upgraded on both organic growth and underlying operating profit margin:

Fiscal 2023 organic revenue growth expected close to +20%.
Fiscal 2023 underlying operating profit margin expected close to 32%, at constant rates.

Group and Benefits & Rewards Services fiscal 2024 and 2025 guidance reiterated:

Group: +6 to +8% organic revenue growth and an underlying operating profit margin above 6% at constant rates in FY2025.
Benefits & Rewards Services: low double-digit organic revenue growth and an underlying operating profit well above 30% at constant rates in FY2025.