Sodexo S.A. (OTCPK:SDXOF) Q2 2024 Results Conference Call April 19, 2024 3:45 PM ET
Company Participants
Virginia Jeanson – Investor Relations
Sophie Bellon – Chief Executive Officer
Marc Rolland – Chief Financial Officer
Conference Call Participants
Jamie Rollo – Morgan Stanley
Vicki Stern – Barclays
Jaafar Mestari – BNP Paribas
Julien Richer – Kepler
Johanna Jourdain – ODDO
Estelle Weingrod – JPMorgan
Leo Carrington – Citi
Virginia Jeanson
Good morning, everyone. Welcome to our first half fiscal 2024 results call.
On the call today, we have Sophie Bellon, Chairwoman and CEO; and Marc Rolland, CFO. As usual, we’ll start with a presentation and then open up the call for your questions. If you haven’t already downloaded, then the slides and press releases are available on sodexo.com, and you’ll be able to access this call on our website for the next 12 months.
The call is being recorded, but may not be reproduced or transmitted without our consent. Don’t hesitate to get back to the IR team if you have any further questions after the call. Please note that the Q3 revenues will be on the 2nd of July. And I now turn the call over to Sophie.
Sophie Bellon
Thanks, Virginia. Good morning, everyone, and thanks for being with us today. I know that for many of you, it is a busy morning with both Pluxee and Sodexo. We shall go back to a more normal date for Sodexo’s H1 announcement next year.
So this has been a busy first half for us at Sodexo. And I’m really proud of the fact that the spin-off and listing of Pluxee was effective on February 1. It has been hard work for the teams, but we have managed to pull it off in record time with no interruption to the underlying businesses and a successful stock market trajectory so far.
Sodexo has now become a pure player in food and facility management, and we’re excited by the profitable growth opportunities that exist in a market over €600 billion. In the meantime, we’ve had a solid H1 performance on track for our guidance, and we have made steady progress on net new wins with record retention. We have also executed at pace on our strategy development. With a strong increase in branded food volumes, Modern Recipe is now deployed in 12 countries, 400 sites and organic sales growth is 22% year-on-year.
We’re also progressing on client adoption of low carbon meals, and I shall show you a client testimony in a couple of minutes. And finally, we have disposed of the Homecare activities, freeing up cash and allowing us to refocus our energy on transforming our core Food business.
Organic growth revenue for the first half was 8.5%, accelerating in Q2 to 8.9%, helped by the leap year boosting volume across the board, but especially in Education and Sodexo Live! Combining a large number of events, much more travelers in the airport lounges and strong new business. The strength of the growth in Food services at plus 10.7% is across all zones. And FM organic growth has remained solid to a 4.5% or 5.4% excluding the accounting change and very similar in all regions.
The underlying operating margin was up 40 basis points at 5.1%, a good sign for our fiscal year ‘24 guidance, even though the inflation sweet spot benefit is short-lived. The last 12-months client retention hit a new record at 95.5%, up 30 basis points relative to year-end 2023. And as a result, the last 12-months net new is up 20 basis points.
Before I start on the detail, I wanted to highlight that we have changed the KPI to last 12-months numbers, and you will find the 6-months numbers in the appendix if you want to check them. As I already said in the previous slide, client retention is on a good trend at 95.5%. Last 12-months development on the other end is below the range of 7% to 8%, and this is due to phasing. We are confident that we will be in the range for the year, and we are totally focused on our targeting and also on signing better margin than before.
Despite this phasing issue, we are making steady progress in net new signings, which are at 2.4% on last 12-months basis. To illustrate this commercial dynamic, let me highlight a few contracts which are symbolic for us. Sodexo Live! Had just won a significant multiyear contract for 23 American Airlines lounges in North America. It includes key location of Charlotte, Miami, Philadelphia and New York, where circa 500 Sodexo Magic employees will provide complimentary snack, premium food and beverage to guests each day. This contract is effective since January with progressive operational transition since then. Over the past few years, we have developed a solid expertise in airline lounges and a strong airline client portfolio.
We have strengthened our European partnership with Clariane by retaining the procurement and advisory food service in France and Spain and with a new contract in Belgium, where Clariane is outsourcing for the first time. The contract covers 550 sites in total. We are proud of the trusting relationship built over the years and the successful collaboration between our companies to enhance food offers to consumers and provide technical assistance to our clients.
In this contract, we shall be creating a culinary identity in each country, training staff to deploy hospitality-level standards and providing digital solutions to enhance services. We shall also be providing Clariane with help in reaching its CSR objectives by deploying WasteWatch, measuring the new carbon footprint, promoting low-carbon recipes, implementing initiatives around responsible and inclusive procurement, and developing a health and safety culture.
We have also renewed and extended our now integrated food and FM services contract with The Heineken Company in Brazil. We are their single food supplier in Brazil with the Sabor Brazil brand implemented for all of their administrative, factory and distribution centers. By integrating a large suite of services, we will standardize their site operation and optimize cost across their properties and support them in achieving their CSR targets. For instance, the eco-efficient performance of the [Cocina Inteligente], the Smart Kitchen, will reduce organic waste by 30%, oil used by 60% and electricity by 32%.
On Slide 8, you can see how we have accompanied the New York City hospitals in their move towards low-carbon meals. We have been working with them for the last 15 years. In 2019, they started with Meatless Mondays. And then in 2022, plant-based dishes were provided as the primary and default dishes to all patients.
Last month, I was in New York to celebrate the 1.2 million plant-based meals served for our client. And look at what MacKenzie – Kate MacKenzie from the New York City office said, “We are proud of New York Health + Hospitals for taking on the challenge of creatively developing delicious and culturally relevant plant-forward dishes. Their uptake is proof of their popularity.”
So we have been – we have even published a recipe book to extend good practices outside the hospital. And with a 90% patient satisfaction for food service, a 90% patient acceptance and a 36% carbon reduction year-on-year, this contract has become a showcase for New York City and also for Sodexo.
I would also like to say that our actions on the ground are also recognized by some very prestigious organizations. For the first time, we are one of the World’s Most Ethical Companies as per Ethisphere. There are no other food service companies out of the 125 recognized companies. And we have also reintegrated the CDP Climate A List, again, the only one in our sector.
I’m sincerely very proud of this recognition because we work hard to improve our practices on a permanent basis. It is part of our DNA. And though the discussions I have with our clients and – through, sorry, the discussions I have with our clients, I know that they are taking these subjects more and more seriously and are choosing their suppliers for their value and their capacity to help them achieve their CSR targets.
I now pass you on to Marc for the details of our first half numbers. Marc?
Marc Rolland
Thank you, Sophie, and good morning, everyone. Before I start, don’t forget to look at the appendices. You have the detail of the alternative performance measure definition along with the modeling slide.
Let’s now have a look at the P&L performance for first half fiscal ’24 without Pluxee. You will find the Pluxee contribution in the appendices and the management’s report. We had given you all the major details in our Q1 announcement. For those of you who still follow Pluxee, I’m sure you have a full grasp of their…
[Technical Difficulty]
So in H1, as Sophie has shown, we’ve made solid progress. Revenues were up 4.5% or 7.8% at constant currencies. The underlying operating profit was at 12.3% and nearly 17% at constant currencies, resulting in a margin of 5.1%, up 40 bps. Thanks to the gain on the sale of the Homecare activities, as of October ’23, other operating income and expenses were positive at €30 million. I’ll come back to this on the next slide.
Net financial expenses were €46 million, up €3 million. Gross interest on the bonds was more or less stable. Higher dollar floating rates were offset by the reimbursement of 2 bonds. And just as a reminder, the first one was in November ’23 for €300 million, and it was due in 2025, but this was the only bond that refused the spin-off-related consent process. The second for €500 million was at maturity in January ’24. I remind you that these 2 bonds were at very low interest rates.
The first half fiscal ’24 effective tax rate was very low at 16.6% due to the capital gain on the sale of the Homecare activity compared to 26.2% last year. As a result of all these items, group net income from continuing activities increased by 46.3% to €496 million. Adjusted for other operating income and expense after tax, the H1 underlying net profit from continuing activities amounted to €427 million, up 15.4% or plus 21% at constant currency.
As I have just said, other operating income and expenses were a net positive of €30 million, including €83 million of net gains from disposal. This was offset slightly by some limited restructuring cost of €15 million. And as usual, the amortization of purchased intangible assets were €17 million. This plus €30 million compares to minus €36 million last year. Pleased note that we are expecting about €40 million of negative OIE for the full year, including the last of the spin-off cost and a bit more above site restructuring.
Before I turn to the cash flow, I wanted to highlight a few changes that we have made to some of our metrics to bring them more in line with those used by our peers and which we hope will simplify your reading of our accounts. You have already seen with Sophie that we have moved to a last 12-months retention and development. This will help the understanding of the KPI trends. You have also probably seen that by geographic zone, we have split our Sports & Leisure from B&A. I hope this extra disclosure will also help you to better understand the revenue dynamics.
And now a more technical change. Under IFRS 15, the amortization of client investments is deducted from the revenue. Therefore, it has always impacted negatively the operating cash flow despite being a known cash item and was then corrected through a reduction of CapEx to balance of free cash flow.
From H1 onwards, we treat this as a noncash item within the operating cash flow, which therefore goes up. As a result, our operating cash flow and our underlying EBITDA are up. The next CapEx is just — is adjusted up to — we now have alignment of our net CapEx and our CapEx guidance, and we believe we are now aligned with our 2 main competitors.
So with all of that in this table, the first column shows you the previous definition; in the second column, you will find the amortization adjustments; and then in the third column, the new definition, which gives us a CapEx to sales of 2% versus 1.4% previously, an underlying EBITDA margin of 6.7% versus 6.1% and a net debt-to-underlying EBITDA of 2.3x versus 2.6. And just to be sure, the new net CapEx includes normal CapEx with new client investment net of asset disposal.
In the last 2 columns, we’ve also added the IFRS 16 adjustment. This is for information only. We still do not believe that this adjustment reflects the first situation for the group. This will improve the EBITDA margin to 7.5%, but also increase the net debt-to-EBITDA to 2.5x.
Now let’s take a look at the cash flow. This is the free cash flow excluding Pluxee. Operating cash flow was €739 million. The limited improvement, despite the increase in operating profit, was linked to the unfavorable variation of income tax paid following significant positive one-offs last year. The seasonal outflow in working capital was reduced by more than €100 million to €513 million during first half fiscal ’24.
Net capital expenditure was stable at €246 million, corresponding to 2% of revenue. The CapEx-to-sales ratio is expected to be higher in the second half due to the timing of investments. We are maintaining our expectation for a net CapEx to sales of 2.5% in fiscal ’25. As a result, first half fiscal ’24 free cash outflow was minus €102 million and better than last year.
Acquisition net of disposal were positive at €100 million, thanks to the disposal of the Homecare business and despite several small acquisitions in North America in convenience. On the other hand, the dividend was increased by €100 million compared to the previous year. As a result of this, consolidated net debt increased by only €434 million during the first half to reach €3.4 billion at February 29, as we shall see on the next slide.
Now on the balance sheet. Here, you can see that the assets and liabilities held for sale are gone. We are now a pure player. Our balance sheet is lower. The intercompany loans have disappeared, and we have not replaced the bonds that we reimbursed. As a result, gross borrowings are now down to €4.8 billion from €5.6 billion at year-end and in February last year.
Given the higher level of interest rates, going forward, we intend to manage our balance sheet more frugally in terms of gross debt and cash balances. Net debt is up against last August as it always is, but down substantially since February last year. So gearing is down to 75.9% from almost 100% last year. The net debt-to-EBITDA ratio was contained to 2.3x, only 0.1x more than a year — at year-end, also helped by the improvement in underlying EBITDA.
Let’s now turn to the review of operations. On Slide 17, you’ll find the breakdown of organic growth. First half fiscal ’24 revenues were €12.1 billion, up 4.5%. Currency impact was minus 3.3% linked to the significant year-on-year movement of the euro last year in Q1, which led to a very substantial minus 5% in Q1. Since then, the comparison is less negative. If rates remain where they are now, we expect the annual impact to be around minus 2%.
The scope effect reduced revenues by 0.7%. This is due to the disposal of the Homecare business from October. Depending upon the level of acquisition closed in the second half, we will probably be running at about minus 1% for the full year. As a result, organic growth was a solid 8.5%. I shall come back to the detailed geographic performance in the next slide.
North America achieved double-digit growth. Europe was up 8%, helped a bit by the Rugby World Cup. And the Rest of the World was up 5.7% or plus 8.4% excluding the accounting change, which will be reversed anyway in Q4. Food services continued to perform well, up 10.7%. FM services activity continued to grow but more modestly, up 4.5%.
We are definitely in a more favorable operating environment from an inflationary point of view. Food inflation continues to average out at low to middle single digits with a continued downward trend in Europe. Labor inflation remains stable at around 5%. Pricing was close to 4.5% for the first half. It is decreasing in line with the softening of food inflation.
We now expect pricing to be close to 4% for the year, at the top end of our previous expectation of 3% to 4%. And while this level of inflation is much more comfortable, the supply management teams are monitoring trends very carefully because in certain countries where the fall have been mostly significant, we are seeing inflation moving back up.
Now let’s turn to the details by geography. North America revenues reached €5.8 billion, up 10% organically, driven by new business, some volume growth and pricing of just under plus 4%. Organic growth in Business & Administrations, now incorporating Corporate Services, Government and Energy & Resources, but excluding Sodexo Live!, reached 13.2%, driven by the contribution of new business, strong growth in food from the continuing return to office, project works and strong retail sales growth. Entegra revenue growth was also accretive.
The organic growth of Sodexo Live! was plus 23.3%, driven by robust activity in all venues and, in particular, strong per capita spend in sports stadiums. Airport lounge also benefited from increased passenger count, added scope on existing contracts and mobilization of new business. In Education, organic revenue growth was plus 7%, benefiting from price and volume increases with meal count, retail sales, catering events all up strongly.
Healthcare & Seniors, restated organic growth was 6.3% with good performance in hospitals through a combination of price increases, volume, retail growth and favorable net new business, somewhat offset by senior site closure at the end of the prior fiscal year.
In Europe, revenue reached €4.2 billion and organic growth was 8%. It was boosted by the Rugby World Cup by 0.8% as well as increased food volumes and pricing of around 5%. Business & Administrations, excluding Sports & Leisure, organic growth was 6.3%, helped by both price increases and higher office attendance, coupled with new business in Government in the United Kingdom.
Organic growth in Sodexo Live! was very strong at 25.4%, boosted by the Rugby World Cup in Q1. It was still 12.5% excluding the Rugby. This was driven by improved attendance and pricing, particularly in the U.K. in stadiums, strong performance in our restaurants in the Eiffel Tower and other cultural destinations, as well as recovery in the airport lounges, which were only just starting to pick up in early fiscal ’23 post-pandemic.
Education was up 7.3% organically, reflecting price revision, particularly in France, and a favorable working days impact. Healthcare & Seniors organic growth was 7.8%, driven by new business in Spain and inflation pass-through in the United Kingdom as well as favorable volume and price revision in Seniors in France.
Rest of the World revenues were €2.1 billion in H1, up 5.7% organically. As a reminder, this was impacted negatively by the change in revenue recognition of project works in Energy & Resources. We have already discussed this in the last 2 quarters. We took the full impact in Q4 last year. So this year, you have the negative impact each quarter for the first 3 quarters, which will then be reversed in Q4. So it is much better to look at the underlying trend, which was plus 8.4%, including a pricing impact of around 4.5%.
The organic growth of Business & Administrations with the Sports & Leisure activity stripped out was 5.1% or 8.3% excluding the accounting change. We are benefiting from very strong growth in food in India, driven by both new and existing business, and in Australia from a pricing catch-up and new opening in mining.
Brazil and Latin America are still growing high single digit, although with a slight deceleration in the second quarter due to a lower pricing impact and slower demand. This performance was slightly offset by a much more modest improvement in China, impacted by clients restructuring and site closures last year, and in the Middle East due to contracts lost last year.
Sodexo Live! revenue tripled off a very low base. This is principally in airport lounges business, and the performance is linked to the COVID restriction in airlines only being lifted from January ’23 as well as the opening of new lounges in Hong Kong.
Education is only 2% of Rest of the World sales. It was up 10.5%, fueled by strong growth in China coming off a low base last year due to school closures and sustained growth in Brazil and India, boosted by both new business and existing site growth.
Healthcare & Seniors organic growth was 1.4% organically with regular strong growth in India, a significant pickup in growth in Latin America, offset by slow growth in China and the impact of the exit of low-performing contracts in Brazil during the second quarter last year.
There was a solid increase in the UOP in each zone and a 10% reduction in HQ cost. The margin improvement is 30 bps in each zone, even though rounding helped in North America and for the group as a whole, which was really only up 35 bps at current rates, right in the middle of the 30 to 40 bps range expected for the full year. H1 did benefit from the inflation sweet spot with pricing catching up and inflation coming off. However, mitigation measures are also being reversed in many client sites.
Of course, structuring — ongoing actions are also contributing with on-site productivity and, in particular, in supply management, higher retention and better margins in signing, strict above-site cost management and not just at the HQ level and that, at the same time, we are continuing to invest in sales, marketing, IT and data to support our future growth.
Thanks for listening. As you all know, this is my last presentation. Sébastien and I have been working very closely together over the last 4 months. I assure you that you will be in good hands. And now, Sophie, back to you.
Sophie Bellon
Thank you very much, Marc. And also thank you for your more than 8 years as our CFO. Just to be clear, Marc is not — we are not letting Marc go. His new role will start on May 1 as General Secretary for the group. He will remain a member of the senior leadership team. He will have responsibility for the group audit for legal and for the transformation of our global business services, and he will continue to provide strategic advice to the group and to me personally.
So let’s finish with the outlook. As you have seen, the first half has been solid with top end of the range pricing and extra leap year day, while activity levels should remain buoyant helped by the Olympics and the net new contribution to revenue of just over 2%. The post-COVID volume recovery has now finished, and the comparative base is much higher.
Pricing will probably remain close to 4% for the year as a whole. And as a result, for fiscal year 2024, we expect organic revenue growth to be at the top of the 6% to 8% range. And the UOP margin improvement is confirmed at between 30 and 40 basis points at constant rates.
Operator, could you please launch the Q&A session?
Question-and-Answer Session
Operator
[Operator Instructions] The first question is from Jamie Rollo with Morgan Stanley.
Jamie Rollo
Three questions, please. First, you didn’t quantify the leap day. Is it fair for us to assume it’s about a 1% benefit to the second quarter organic sales?
Secondly, you said the development was below target due to phasing. Could you please explain that a little bit more? Because your definition seems to be the value of signings won in the period, not when this contract actually contribute to the P&L. So what makes it phasing rather than simply fewer wins? And also, does it mean that the P&L impact will be weaker in the second half as weaker signings now affect sort of future revenues?
And then finally, in terms of the sales guidance upgrade, obviously, pricing is a bit of that, but could you quantify what you’re now expecting for volume and also net new contract sales? And then any early thoughts on the 6% to 8% target for next year?
Marc Rolland
Yes. So the leap day, we estimate that the leap day impact in Q2 is about €50 million, which represents 0.8% of growth for Q2 and 0.4% of growth for H1.
Sophie Bellon
So Jamie, on your second question about the phasing, so the phasing issue, I mean you’re right, we take into account in the percentage the volume of contracts that we have signed. And the signing of those — but we only take the number into account — even if we have an approval from a client, we only take the number of sales, the volume of sales into account when the signing has been effective. And some of the signing, we had some long negotiation and has been a little delayed. So that’s why we are not taking them into account.
And as you know, we’re also very focused on signing quality contracts to improve our margin and avoid retention issues in a few years. But we are very confident to reach the range in financial year ’24 because the pipeline is good. And I don’t think it should affect the H2 on those signings because usually, they start a few months later.
Marc Rolland
On the sales guidance for full year ’24, so the net new, we are expecting in H2 is 2.5%. And the like-for-like is a little lower because we, first, we have a very strong base from last year. Last year, we had a fantastic year in Sodexo Live!, for instance, in France. But also, even though we are going to have the geo which will contribute, we believe that there will be disruption in the level of services for us in the Paris region. And we’re not completely sure as to what it will mean in terms of volume during the months of July and August. So we believe the like-for-like will be slower in H2 than it was in H1.
And when I look at next year, fiscal year ’25 and our guidance of 6% to 8%, so the math for me are the net new should be above 2.5%. Pricing, we now believe pricing will be around 3%. And then the like-for-like will be between 1% and 2%. And there will be a little headwind coming from the one-off, the Olympic games and Rugby World Cup and so forth. But because there will be the Paralympics Games in September, we believe the headwind should be about 0.3%.
Jamie Rollo
That’s really helpful. Can I just follow up on 2 quick things? What were the volumes, the like-for-like volumes in the first half? And then also, Sophie, on the phasing of development, that sounds like a negotiation delay. There’s nothing affecting the timing of when those contracts actually start and benefit the P&L. Is that right?
Marc Rolland
Yes, the like-for-like volume in H1, I calculate it at 1.4%. And in terms of contracts, for instance, we have a big contract in mind, and Sophie must have the same thing in mind, we have the LOI, but we don’t have the contract, and we have the starting date. The starting date is in the future. So once we sign the contract proper, we will declare it as a sale, but it won’t change or delay the starting date.
And so sometimes it delays the starting date, but on big contracts, usually doesn’t delay the starting date because the starting date is in the future and comfortably in the future. It’s not necessarily opening next week or the week after next.
Jamie Rollo
Great. And good luck in the new role, Marc.
Marc Rolland
Thank you. Thank you, Jamie.
Operator
The next question is from Vicki Stern with Barclays.
Vicki Stern
And yes, I wanted to add my congratulations for the future, Marc. Just firstly, on the margin, you’re — obviously, you came in at the top end of the range for the first half. You’re not changing the full year margin guidance from the 30 to 40 basis points. You gave some color there, obviously, as to the sort of tailwind on inflation in the first half. But just a bit more color, please, on how you’re thinking about margin growth in the second half. And then, again, the medium-term outlook, can you continue with the 30 to 40 basis points range going into next year and beyond?
The second question is on retention. Obviously, yet another quite impressive jump in retention to 95.5%. Based on what you’re seeing so far in the outlook, how confident are you in sustaining that kind of level? And indeed, when do you think you might reach the 96% target you put out there?
And then the last one is on the like-for-like price growth. Again, that’s coming through better than expected, both for the first half and in your guidance for the full year. You also touched on actual cost inflation sort of increasing again in some markets. Just to understand framing the like-for-like price growth, is that coming through higher because of that delta on inflation or it’s more commercial discussions, just to understand what’s going on, on the like-for-like price, please?
Marc Rolland
On margin, Vicki, we — in H1, as we said and commented by the IR team, we have — we were in the sweet spot of inflation. We believe it started at the back end of last year, and we were in the middle of it in H1. So I think we had some tailwind.
As I alluded to, now we have to moderate our mitigation actions because the mitigation actions were justified because we were suffering from inflation. So now we have to bring the level of services back to normal, so to speak. And I don’t believe we will have such a sweet spot impact in H2 for the rest of the year. We still have action on supply chain retention. The fact that we retain contract is good for margin. I think we’ve been good in SG&A on the first half.
Now on the less positive side, when you start new contracts and we start more and more new contracts, we have the ramp-up phasing. We are disciplined in margin, but starting a new contract, this remains. Starting a new contract, it costs you a bit at the beginning. And we have investments we mentioned in the past, but we are investing in sales, marketing, IT, data. We have a few technology projects, and they will be weighing on a little bit on the margin in H2. So that’s why, for us, the 30 to 40 bps guidance remains the best option to guide for in terms of margin.
Now on retention, I’ll let Sophie comment.
Sophie Bellon
Yes. So thank you, Vicki, for your question. So on retention, I think the recent crisis have helped us also strengthen our relationship with our clients. We have supported them and navigate through challenges and selling protocols.
So I think it’s also — that’s driven the improvement, but it’s also many other things that we’ve done at the same time. First, an increased focus on the topic, accuracy, discipline, accountability. And I remind you that every single leader has an incentive on organic growth, but also specifically on retention and also some consequence management when things are not happening right.
We’re also, I think, improving in the use of our processes, our tools. We are also leveraging — as Marc said, we are investing in new offers, in convenience, in innovation, and that’s helping the retention. We still — that there is still — we think that there is still room for improvement. I remind you that not everyone is at 95% yet. So yes, we’re targeting the 96%, the sooner the better.
As you can see, we have had, quarter after quarter or semester after semester, we have had a good improvement. So I’m quite confident on the fact that we are going to continue to improve. And I can tell you, I put a lot of pressure on the team on the topic.
Marc Rolland
And on your last question, so as I said, we were guiding for 3% to 4% of pricing. This year, we are now more at 4%, and we were 2% to 3% for next year. And I think now we are more at 3% for next year. Part of it is due to the fact that we’ve seen the inflation going down, for instance, in the U.S. and Brazil. But it’s stabilizing, and it’s not going down actually anymore. It’s actually sometimes going up a little bit. So I don’t think we are totally out of the inflation mode now. It’s true that in Europe, it has come down a lot, but it’s still remaining relatively high in the U.K. compared to the rest of Europe.
So there is a bit of inflation still there. And obviously, client negotiations, we have — we constantly have client negotiation, and some of them are still there. But I would say it’s more the trend of inflation than client negotiations, which are keeping the inflation slightly higher than what we were expecting 6 months ago.
Vicki Stern
And sorry, can I just follow up back on that margin question? That was very clear, Marc, for the second half. But the medium-term view there, the ability to sustain the 30 to 40 bps going forward?
Marc Rolland
Well, we believe we have a strong action plan in terms of margin improvement. I mentioned supply chain. I think we are making big progress in retention, and it helps. We are – we keep on reducing our SG&A and streamlining our SG&A. So we have a few programs to reduce SG&A at various levels, especially above sites. And then there will remain investments. But I think the way of the investments will be significant in H2, a little bit less maybe next year. So 30 to 40 bps is a good guidance for next year.
Operator
The next question is from Jaafar Mestari with BNP Paribas.
Jaafar Mestari
I have two, if that’s okay. Just on retention, it’s improved, but obviously, you still lost a few things. HCA, the biggest hospital chain in the U.S., I assume, is the biggest or one of your biggest health care clients, and you’ve actually lost a handful of hospitals with them, which they strangely chose to take back in-house. Just curious what the story is there, and what’s the status of the remaining HCA hospitals? Are they also going to be reviewed and you may lose some more? Or should we assume what’s happened is you’ve renewed all of the ones you didn’t lose?
And then on vending, you’ve now done 4, I think, small acquisitions in U.S. vending. Where does that get you in terms of pro forma revenue in this segment and in terms of geographical coverage? Once you’ve ramped up there, are you going to be a small player or a medium-sized player in that segment, please?
Sophie Bellon
So just on retention, yes, we have some big systems and HCA is one of them, and we’ve lost a few sites, but I’m not going to comment. We’re not a threat for the whole contract. And yes, in hospitals, but it has always been the case. Some clients want to go back in-house. It has been a specificity of that market.
And of course, we have to show them the value that they have when using a supplier like us. And when they do that, usually they take our innovation. And then once the work is done, they go back in-house. And then a few years later, they might also decide to set contracts again. So — but it’s something that we are looking with a lot of attention.
Marc Rolland
And on convenience, we don’t call it vending because it’s a bit more than vending. On convenience, we said, I think it was at the Capital Market Day in November ’22, that our target was to reach €500 million of volume by ’25, and I think we are on track. We’ve been doing buildup. We’ve been buying assets almost city by city, improving our presence geographically or concentrating our volume on the number of routes.
It’s an accretive business. Margins are higher than the rest of the business. It’s growing also organically at a good pace. So I think we are on track with our plan, and we will continue because this is — when we will reach €500 million, we will not be at the peak. We need to catch up and continue catching up.
Jaafar Mestari
And just to clarify, I think that €500 million number was everything new food models. Have you done more work? And should we assume now convenience is the biggest chunk of that and other things like delivery, et cetera, smaller?
Marc Rolland
I think the target we have internally is €500 million for convenience in ‘25, including M&A, yes, in the U.S.
Operator
The next question is from Julien Richer of Kepler.
Julien Richer
Two ones also for me, please. First, if you could give us a view on first-time outsourcing, if the first-time outsourcing path has evolved recently in some region maybe or some division? And any update on the GPO in the U.S., the way it has evolved and the contribution of the GPO that you have today?
Sophie Bellon
Okay. Thank you, Julien. I will take your first question. So in North America, the first-time outsourcing remains very, very strong. And North America is the biggest market for us, but also as a whole. And so — and today, in North America, in our signing in H1, we are at 40% of first-time outsourcing. A lot of — still a lot of opportunities in the market in self-op, in health care, in seniors, in education.
We’re also seeing some signs of first-time outsourcing trend developing in Europe in senior homes, in hospitals. For example, the contract Clariane that I just discussed earlier, it’s reinforcing the partnership. And — but also — so it was a renewal of part of the contract, but also extended with Belgium. And with Belgium, it was the first-time outsourcing. So yes, the trend is strong, and we’re still targeting very much the first-time outsourcing market in all the geographies.
Marc Rolland
In terms of GPO, so what you need to know is that – let’s talk maybe mostly of the U.S. to start with, but it’s accretive to the U.S. numbers in terms of growth, in terms of margin. So it’s a very healthy business. It’s growing. In the U.S., we find it difficult to do M&A because there are not that many targets to acquire. So – but this is purely organic growth, but we have a strong sales team and they are developing the business.
In Europe, we are profitable. In Europe, we can do M&A. So we are active on the M&A front in Europe to consolidate country by country our presence. Now we are in multi-countries. It’s also growing organically double digit and it’s profitable, as I said. So we believe a lot in this business. And we will continue to grow it and to do M&A in GPO even though it’s in Europe because we don’t find targets in the U.S.
Operator
The next question is from Johanna Jourdain of ODDO.
Johanna Jourdain
Two questions from my side. So the first one, you are guiding on the tax rate at 22% for ’24. So could you please help us modeling on the evolution of this tax rate in the medium term?
And my second question is on the costs that were re-invoiced to Pluxee to the tune of €11 million in H1. So I calculate they have been adding about 10 basis points in EBIT margin in H1. Is it part of the reason for you to maintain the EBIT margin guidance as those re-invoiced costs won’t repeat in H2?
Marc Rolland
So the tax rate at 22% for the year is completely linked to the fact that we were at 16.6%, and we had the benefit of a very low tax on the disposal of Homecare, and we start recognizing also deferred tax assets on the French perimeter, which now starts being slightly positive. When you look at midterm, we believe that 25% to 26% as an ETR is a good proxy for your model.
When you’re referring to Pluxee, those were intercompany costs that we were invoicing before. So I think there is not big difference between the before and after. It’s just that before, we were allocating it and now we are invoicing it, but I don’t see why it has an impact on margin. So it doesn’t play a role in our margin guidance.
Operator
The next question is from Estelle Weingrod with JPMorgan.
Estelle Weingrod
Just 2 questions on my side. On new development, I mean, still a little bit behind, though likely explained by phasing as you rightly explained. Can you just provide more color on any recent initiatives you’re working on to improve the momentum there?
And just a second question, may I also ask if corporates are reducing food subsidies now that employees are back in the office, please?
Sophie Bellon
So on new development, we are doing a lot of initiatives. We are working on the incentive plan also for our sales team. We have done an assessment of the team. We have changed a number of people in the U.S. and also in the team. We are going to centralize the sales team in the U.S. with a leader, and the sales will report directly to him. And so we can activate some of the best practice that we have had in, for example, in health care and accelerate that implementation and reinforce the expertise of our team.
And we are also doing growth review with each country and with each segment in the country to improve on our targeting and on the segment and also the subsegment and the specific clients that we want to target. So there has been a lot that has been done to sustain our growth. What I can tell you is that in terms of volume, the development has been increasing and year after year and semester after semester. And we are confident that we will reach – be within our target of 7% to 8% for the year.
The second question — your second question around reducing food spend now that people are back in the office. First, not everybody is back in the office. And so I think it’s a real challenge for organizations. Some have been more directive, not giving a choice. But I think we really see after the COVID period that our services, whether it’s food or future of work and what the experience at work, that companies really want to continue to attract the best talents by leveraging the workplace.
And so we don’t see more requirements or different requirements from our clients. I think they really leverage now our services to attract the people back to the office. And I have an example like a headquarter of a big international company in Paris, and they offer brunch on Friday so that people come back, and it works. So I don’t see the trend.
Operator
The next question is from Leo Carrington with Citi.
Leo Carrington
If I could just ask to follow up firstly on the North America growth. Is it fair to say that the pricing would have been lower than in other regions and so a much stronger contribution from net development and like-for-like? And any numbers around that would be helpful.
And then secondly and lastly, just on the headquarter costs which are progressing nicely, do you see further savings or perhaps investments? And would we expect a similar level for 2025 net of any Pluxee changes?
Marc Rolland
So in NorAm, the pricing was 4%. And as you — you’re right, it was lower than the group average because inflation came down faster and sooner than in the rest of the region, which means that, yes, the net new revenue is above the group average of 2.5%. And there was good like-for-like volume. For instance, we’ve had a very strong like-for-like volume in Sodexo Live! But as I said also in my speech, we could see also food volume going up, retail volume going up. So there was a lot of volume impact in the U.S.
HQ cost, so we obviously — I mean, we said we will reduce HQ cost over time because we lost, so to speak, Pluxee. So we had to reduce the SG&A at HQ level. The H1 level is very good. There were some one-offs. H2 is not going to be as good as H1, it’s going to be higher. But we still have a target to reduce year-on-year. And in ’25, one of our targets is to reduce H2 cost. So expect a higher H2 than H1, but expect the trend to squeeze SG&A at HQ level in fiscal year ’25.
Operator
Sodexo team, there are no more questions registered at this time. I’ll turn the conference back to you for any closing remarks.
Sophie Bellon
Well, thank you very much for listening, and thank you very much for your questions, and goodbye. Talk to you soon.
Marc Rolland
Thank you. Bye-bye.
