Compass Group Annual Review 2006

Chief Executive’s statement

Our objective is to maximise shareholder value through delivering profitable and sustainable growth in our chosen markets.

First impressions

In my first three months I visited 15 of our largest countries and received presentations on a further 30 key markets. It is clear to me that our customer service is excellent and that our people are committed and passionate about what they do. We have strong client relationships and market leading positions in our core markets. We also have a global footprint that should enable us to leverage our scale and expertise to develop growth for the future.

Hence my conclusion is that fundamentally this is a good business with a sound strategy. However, the model has been a little overstretched and in some parts of the world governance and control have been lacking. We therefore need to create a more intensive performance culture. This implies the need to support customers locally but asking our managers across the world to operate within simple global frameworks. We seek intelligent top-line growth and a more disciplined approach to reducing our global cost base.

Very simply we need to build on our strengths and correct our weaknesses. We have to create a management and performance culture that has at its core the delivery of profitable growth to maximise shareholder value. Aligning the business around this single unifying objective is the priority for me and my management team.

Business strategy

To be successful we must deliver the highest quality and performance, whilst relentlessly driving to be the lowest cost, most efficient provider. Our focus going forward will be on the creation of real shareholder value delivered in a disciplined and sustainable way.

At the moment we trade in too many countries where future growth prospects do not offer adequate returns. Over the next 12 months we will reduce the number of countries we operate in to 60-65.

Our core business will remain contract foodservice. We are focused on it and excited by the opportunity. The market is some £150 billion in size and, with outsourced penetration still at around 50%, our market grows at about 5% a year.

There is clearly a growing trend amongst some clients to source catering and other support services, such as cleaning, from a single provider. This market, including catering, has a value of around £700 billion, and with circa 35% outsourced, growing at around 10% a year. Support services already account for around 10% of our revenue and we are ideally placed to leverage our existing client relationships to offer them integrated food and support services. We will only do this, though, where it makes sense and enhances value for shareholders.

Offering clients an integrated foodservice and vending solution has been a key competitive advantage in North America. Our European vending business, Selecta, though highly profitable, only has 9% of its revenues with our contract foodservice clients. We have decided that this business is not a core part of our operations and will be sold. We will continue to offer European clients an appropriate vending solution when they require it.

The sale of Selecta following other disposals (such as SSP, Moto and Au Bon Pain) and the gradual withdrawal from a number of small countries will mark the end of a phase for Compass. From this new, tighter core Compass will be able to grow in a sustainable way. Capital expenditure, which three years ago exceeded £300 million a year will, for the next two-three years, be held at circa 2% of revenue a year.

Profit drivers

Our objective over the next two-three years will be to drive disciplined profitable growth with the focus more on organic growth and much less on acquisitions. Within that philosophy we will drive performance by concentrating upon five simple profit drivers:

Client sales and marketing: winning new business is, and will continue to be, a clear strength for Compass. However, as we improve discipline and focus on unit margins, organic growth rates may, for a period, slow a little before increasing back to trend rates. We will work closely with clients to deliver like-for-like revenue growth seeking to balance the needs of value for money, efficiency and a fair reward for a job well done. In the medium-long term, we will work harder to demonstrate to potential clients the benefits of outsourcing.

Consumer sales and marketing: we will seek a more innovative approach to our consumers improving the quality of our offer, restaurant designs and point of sale displays. Like-for- like volume growth will be an important key performance indicator and where we face inflationary cost pressures we will seek reasonable price increases.

Food cost: we spend over £3.5 billion a year on food. Our objective must be to procure the optimal quality and range of food to meet the needs of our customers at the lowest cost. This means having an efficient supply chain that leverages our scale whilst being much more disciplined about rationalising our supplier and product base. Driving in-unit compliance with approved purchasing lists through a much more systematic approach to menu planning and portion control will be critical.

Unit costs: we spend nearly £6 billion a year on unit costs. We will work closely with clients and employees to improve labour scheduling and efficiency and to reduce unit overheads.

Above unit overheads: we lose too much of our unit profit to overheads. We need a simpler model with fewer layers of management and less bureaucracy. This year we have achieved our target of £50 million of overhead savings and are seeking a similar reduction once again in 2007. Thereafter, the drive for overhead efficiency will continue.

Focus on management and performance (‘MAP’)

I have dismantled the divisional structure so that we have greater visibility of the underlying performance of local businesses. New monthly reporting processes and regular business reviews with country management teams will ensure that all of us are constantly focused on the same things. As part of this process the five profit drivers outlined previously are being orchestrated into a global performance framework called ‘MAP’. Local managing directors are empowered to run their business within clearly defined corporate governance rules and MAP.

The actions that have already been taken to improve financial discipline and governance are focusing management on value creation. There are three simple questions that managers at all levels in the business are beginning to use in their decision making. Does it fit with our strategy? What are the risks and rewards? Does it create value for shareholders?

Through creating a performance-driven culture we are increasing the focus and intensity with which we manage the business to deliver value for shareholders.

Conclusion

2006 has been a transitional year for Compass against which we can benchmark our performance.

By stepping up the intensity with which we manage the performance of the business, and with a disciplined focus on the key profit drivers, we are well placed to create and deliver sustainable shareholder value.

Richard Cousins
Group Chief Executive
29 November 2006