Turismo
Robust Sodexo First Half Fiscal 2020 Results
Issy-les-Moulineaux, April 9, 2020 - Sodexo (NYSE Euronext Paris FR 0000121220-OTC: SDXAY). At the Board of Directors meeting held on April 8, 2020 and chaired by Sophie Bellon, the Board closed the Consolidated accounts for the First Half Fiscal 2020 ended February 29, 2020.
Financial performance for First Half Fiscal 2020,
(First time application of IFRS16 )
Highlights of the period
Outlook
The COVID-19 pandemic started to be a concern in the second half of January for our business in China, leading to a rapid deterioration worldwide in February, moving from region to region and generating more and more government precautionary measures to limit the spread of the virus.
Sodexo is coordinating globally, regionally and locally to manage its business continuity and pandemic plans to support and protect its employees and consumers across all of its geographies. The health and safety of Sodexo employees and consumers is our utmost priority. Sodexo has reinforced the existing rules for food safety, personal hygiene and infection control.
As the situation is an evolving one, Sodexo teams are adhering to guidelines of health advisories and local authorities and will continue to closely monitor the situation.
As of today, On-Site services are expected to be impacted as follows:
As for Benefits & Rewards Services , we believe there could be some decline due to technical unemployment measures and some disruption in both issuance and reimbursement flows in some geographies due to delays or diversion of traffic from one type of merchant to another.
As of April 9, 2020, for the Group, our top-line model show a reduction of revenues in the second half of between 2.4 and 2.8 billion euro compared to last year.
Sodexo is also mobilized to ensure business continuity and results through a set of rigorous actions focused on:
At this stage, after these strong mitigating measures taken on site and strict implementation of SG&A reductions, we estimate the Underlying operating profit flow-through to be circa 25% of revenue shortfall.
We remain confident on our strong market and financial position, and the mid-term positive perspectives and potential of Sodexo.
The press release and presentation will be available on the Group website www.sodexo.com in both the "Latest News" section and the "Finance - Financial Results" section.
Fiscal 2020 financial calendar
These dates are purely indicative and are subject to change without notice.
Regular updates are available in the calendar on our website www.sodexo.com
About Sodexo
Founded in Marseille 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 67 countries, Sodexo serves 100 million consumers each day through its unique combination of On-site Services, Benefits & Rewards Services and Personal and Home Services. Sodexo provides clients an integrated offering developed over more than 50 years of experience: from foodservices, reception, maintenance and cleaning, to facilities and equipment management; from services and programs fostering employees' engagement to solutions that simplify and optimize their mobility and expenses management, to in-home assistance, child care centers 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 470,000 employees throughout the world.
Sodexo is included in the CAC 40, FTSE 4 Good and DJSI indices.
Contacts
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FISCAL 2020 FIRST HALF ACTIVITY REPORT
(September 1, 2019 to February 29, 2020)
Revenues
First Half Fiscal 2020 consolidated revenues totaled 11.7 billion euro, up +5.9% year-on-year. Currency effects during the period were +1.6%, due to the strength of the dollar compensating the decline in the Brazilian Real in the Benefits & Rewards Services. The contribution from acquisitions net of disposal of subsidiaries was +1.1% with the ongoing impact of acquisitions completed in the previous fiscal year. Organic revenue growth was +3.2%, boosted by the Rugby World Cup in the first quarter, Onsite Services growth excluding Rugby World Cup of +2.3% and +2.5% in Q1 and Q2 respectively and a 4% growth from Benefits & Rewards.
For further detail on currencies, please see page 17 of this document.
Brexit:
Sodexo has been present in the United Kingdom since 1988 and has around 35,000 employees there today. The Group's business should not be materially impacted by the United Kingdom leaving the European Union. The Group is a local player, working with local suppliers and employees, and very often for Government authorities and Government Services. Action plans have been put in place to limit the impact of a hard Brexit on food prices and availability. We have noticed a slowdown in new business opportunities. However, same site sales growth remains solid.
On-site Services
On-site Services organic revenue growth of +3.2% reflects encouraging Key Performance Indicators:
On-site Services Revenues by region
North America is down -0.4%, turning positive in the second quarter at +0.2%, after a first quarter down by -0.9%. Outside North America, On-site revenue growth was +6.3%, with a strong performance in Africa Asia, Australia, Latin America and the Middle East +10.8% and Europe up +4.5%, or +2.4% excluding the Rugby World Cup.
Business & Administrations
First Half Fiscal 2020 Business & Administrations revenues totaled 6.2 billion euro , with organic growth of +5.7%.
First Half revenues in North America were up +1.8%. The second quarter strength more than compensated for the first quarter weakness. On the one hand, growth was solid in Corporate Services and Government & Agencies, helped by the continued improvement in the US Marine Corps contract. This compensated for the decline in Sports & Leisure due to the ongoing effects of the exit of some less profitable contracts. Energy & Resources benefited from a contract startup in the second quarter, after a series of construction contract completions.
In Europe, sales were up +5.3% organically, boosted by the Rugby World Cup in Japan, consolidated by the Group's specialist entity in the UK, in the first quarter. Excluding the Rugby World Cup, organic growth remained steady at +2.3%. While growth in Corporate Services was more modest than in recent quarters, Government & Agencies and Energy & Resources were up strongly.
In Africa, Asia, Australia, Latin America, Middle East organic revenue growth was +10.7% reflecting strong growth in same site sales and new business in Corporate Services and in Energy & Resources, particularly in mining. The effect of Covid-19 in China was absorbed by the very strong growth up to the end of December.
Healthcare & Seniors
Healthcare & Seniors revenues were 2.5 billion euro , down -2.0% organically.
In North America, organic growth was -4.6% deteriorating each quarter due to the impact of the loss of several hospital contracts from the fourth quarter Fiscal 2019 and one large contract exit in the first quarter Fiscal 2020. Development has also been slow due to a more selective approach in the new business pipeline. As a result, the contracts signed are more robust. Seniors organic growth has remained solid.
In Europe, organic growth was +0.5% . The lack of new business opportunities in the segment and the resulting negative net new business in most countries has hampered growth. On the other hand, sales growth in existing sites was strong, particularly in northern Europe. During the period, Sodexo also signed a contract with Elsan consolidating all its food services and cleaning in its 78 private hospitals in France.
In Africa, Asia, Australia, Latin America, Middle East organic revenue growth has remained strong, at +15.4% . This reflects new contract startups in Brazil and Asia, and strong existing site sales growth across the regions.
Education
Revenues in Education were 2.5 billion euro, up +2.4%.
North America was up +1.4%. While net new business signed in Fiscal 2019 was neutral, inflation, an extra University day, and some volume growth in Schools boosted same site sales. However, this was partially offset by weaker University meal plan volumes in the Fall semester.
In Europe , organic growth was +5.9%. In France, the ongoing impact of the Yvelines Schools contract start-up in January 2019 annualized during the second quarter, which was also impacted by strikes. The rest of the region showed solid growth in the UK and Italy, where strong new business offset 2 less working days due to holidays and the first 3 days of the Covid-19 school closures.
In Africa, Asia, Australia, Latin America, and the Middle East , organic growth was +3.6%. After strong double-digit growth in the first quarter, activity was severely impacted by the protests in Hong Kong and then the closing down of all schools in greater China.
Benefits & Rewards Services
Benefits & Rewards Services revenue amounted to 443 million euro, up +4.0% organically.
Revenues
Employee benefits were up +3.2% compared to total issue volume of 6.9 billion euro, up +5.2%. Services diversification was up +7.2% with strong double-digit growth in Mobility & Expense and in Corporate Health and Wellness products offsetting a weak start of the year in Incentive and Recognition due to ongoing portfolio rationalization.
In Europe, USA and Asia, organic growth in revenues remains strong at +9.5% . This performance is due to a particularly strong double-digit performance in the traditional benefits business in Asia and in many European markets. Strong development continued in Rydoo, the end-to-end travel and expense management solution and the Corporate Health and Wellness offers.
Organic revenue growth in Latin America sales declined -3.1%. The Brazilian market was affected by falling interest rates, a more competitive environment, and flat issue volumes. The momentum in the rest of the region remained strong.
In First Half Fiscal 2020, Operating revenues were up +5.4% . Financial revenues were down -11.3% due principally to the significant fall in interest rates in Brazil since August 2019.
Underlying operating profit
First Half Fiscal 2020 Underlying operating profit amounted to 685 million euro, up +5.9%, or +4.3% excluding the currency effect. As a result, the Underlying operating margin was 5.9%, stable against last year both at current and constant exchange rate. The positive effect of the first-time implementation of IFRS 16 on Underlying Operating profit was 2 million euro.
Underlying Operating profit by activity
The First Half Underlying operating profit margin in Onsite Services, excluding the currency effect , was down -10bps. It was impacted by the higher cost of health benefits in the USA for about -14bps. Segment performance is as follows:
In Benefits & Rewards Services , excluding currencies, the Underlying operating profit and margin were up respectively +9.8% and +160 bps. This margin improvement was due to a much more efficient operating environment after substantial digital transformation of the back-offices over the last few years and very tight control of costs in Brazil, in line with the weak top line. Nevertheless, the year-on-year weakness of the Real impacted negatively the Benefits & Rewards published margin by -50 bps.
Group net profit
Other operating income and expenses were 66 million euro, more or less stable relative to the previous year period. As a result of our initiative Fit for the Future, restructuring costs in the First Half amounted to 33 million euro against 19 million euro in the previous year. However, this increase was compensated by lower amortization and depreciation of client relationships and trademarks which fell to 20 million euro against 43 million euro in First Half Fiscal 2019, linked to higher than normal brand impairment last year.
As a result, the Operating Profit was 619 million euro up +7.2%.
Net financial expenses increased by 13 million euro year on year essentially due to first implementation of IFRS16 for 11 million euro. As a result of the increase in the use of commercial paper at short-term euro borrowing rates, the blended cost of debt was 2.2% as of February 29, 2020, compared to 2.6% as at August 31, 2019 and 2.3% at the end of First Half Fiscal 2019.
The effective tax rate was 29.3%.
Profit attributed to non-controlling interests was 17 million euro against 11 million euro in the previous year. As a result, Group net profit was 378 million euro, up +3.8% or +1.8% excluding the positive currency impact. EPS was €2.59, up +3.7%.
Underlying net profit (adjusted for Other operating income and expenses at a normalized tax rate) amounted to 424 million euro, up +2.8% or +1.0% excluding the currency effect. Underlying EPS was €2.91, up +2.6%.
Consolidated financial position
Cash flows
* Excluding change in financial assets related to the Benefits and Rewards Services activity (+€104m in H1 Fiscal 2020 and +€55m in H1 Fiscal 2019).
Total change in working capital as reported in consolidated accounts: in H1 Fiscal 2020:
€(543)m = €(647)m+ €104m and in H1 Fiscal 2019: €(373)m = €(428)m + €55m
As of Fiscal 2020, the Group is implementing IFRS 16. The Group does not believe the new accounting treatment introduced by IFRS 16 modifies the operating nature of its lease transactions. Accordingly, to ensure the Group's performance measures continue to best reflect its operating performance, the Group consider repayments of lease liabilities as operating items impacting the Free cash flow. Therefore, the Free cash flow formula has been adjusted post IFRS 16 implementation to include the lease payments presented as repayments of lease liability in Net cash provided / (used in) financing activities in accordance with IFRS 16.
Stripping out the IFRS16 elements, Operating cash flow totaled 672 million euro, up +3.7% on the previous year. The traditional negative Working capital variation in the First Half of 647 million euro is principally due to the difference in activity levels between August 31 and February 29. However, this seasonal variation was exacerbated by the combination of the implementation of the prompt payment code in the UK, a very favorable cut-off in Benefits & Rewards last year end and the Rugby World Cup cash outflows.
As expected, net capital expenditure increased to 268 million euro for the period, representing 2.3% of revenues, versus 205 million euro in First Half Fiscal 2019, or 1.9% of revenues.
As a result, Free cash outflow was 243 million euro.
Net acquisitions and disposals of subsidiaries fell to a very low level at 13 million euro after the higher levels of the previous years. Share buy-backs linked to the covering of performance share attributions were more significant in this First Half. Other outflows were principally related to negative currency impacts, in particular linked to the weakness of the Brazilian Real.
As a result, consolidated net debt rose by 860 million euro from Fiscal 2019 year-end, to 2,074 million euro as at February 29, 2020.
Acquisitions for the period
During the First Half Fiscal 2020, the Group completed several minor acquisitions, for a total acquisition price of 13 million euro net.
Total revenues generated by acquisitions during the period contributed 1.1% to growth in the First Half Fiscal 2020, principally due to acquisitions completed in the previous year. Given the current freeze on M&A activity, the contribution from acquisitions in the next two quarters will be negligible.
Condensed consolidated statement of financial position
at February 29, 2020
As of Fiscal 2020, the Group is implementing IFRS 16. As a result, in the balance sheet, the Group now recognizes a right of use of leased assets in its assets and a corresponding lease debt representing the net present value of future rental payments of the lease, in its liabilities. As a result, a 1,495 million euro right-of-use asset was recognized on September 1, 2019, for an amount equal to the lease liability. This is depreciated over the lease term. As of the closing date of February 29, 2020, this right of use amounted to 1,397 million euro.
Stripping out IFRS 16, as of February 29, 2020, net debt was 2,074 million euro, representing a gearing of 50%, compared to 45% as of February 28, 2019, and a net debt ratio of 1.3 , well within the Group's target range of 1 to 2.
If IFRS 16 lease obligations were included as part of the financial debt of the Group, gearing would be 84% and the net debt ratio would be 2.0.
Despite the traditionally higher level of debt at the end of the First Half of the year, the Group's financial position remains strong. At the end of the period, the Group had unused lines of credit totaling 1.8 billion euro.
The operating cash position totaled 2,623 million euro as of February 29, 2020, including bank overdrafts for 51 million euro. The Benefits & Rewards Services position was 2,246 million euro, including 563 million euro of restricted cash and 426 million euro of financial assets of more than three months.
Subsequent events
Revenue short-fall in H2 top-line model vs last year, as of April 9, 2020, estimated at between 2.4 and 2.8 billion euro
Flow-through hypothesis vs last year, as of April 9, 2020, estimated at circa 25%
of revenue shortfall
Related party transactions
Main risks and uncertainties
The main risks and uncertainties are not materially different from those described in the Risk Management section of the Fiscal 2019 Universal Registration Document filed with the Autorité des marchés financiers (AMF) on November 21, 2019. However, given the current COVID-19 crisis, we believe that this crisis does add further risk to the Group due to the uncertainty surrounding the duration and the effects of the COVID-19 pandemic in each of the countries in which we operate.
After consultation with its legal advisors, the Group considers that it has strong arguments that may lead to the annulment or alteration of the French Competition Authority decision. As a result, no provision has been made for this litigation as at February 29, 2020.
Currency effect
Sodexo operates in 67 countries. The percentage of total revenues and Underlying operating profit denominated in the main currencies are as follows:
The currency effect is determined by applying the previous year's average exchange rates to the current year figures except in hyper-inflationary economies where all figures are converted at the latest closing rate for both periods when the impact is significant.
As a result, for the calculation of organic growth of Benefits & Rewards in Argentina Peso figures for H1 FY 2020 and H1 FY 2019 have been converted at the exchange rate of 1€ = 68.248 ARS vs 44.045 ARS for FY 2019.
IFRS 16 “Leases”
New accounting standard applied in First Half Fiscal 2020
Main impact on First Half Fiscal 2020
Further information can be found in the consolidated accounts, notes 6.2.2 and 6.4.11.
Impact on First Half Fiscal 2020
Consolidated financial statements
Impact on First Half Fiscal 2020
Alternative Performance Measures
The Group does not believe the new accounting treatment introduced by IFRS 16 modifies the operating nature of its lease transactions.
Accordingly, to ensure the Group's performance measures continue to best reflect its operating performance, the Group consider repayments of lease liabilities as operating items impacting the Free cash flow . Therefore, the Free cash flow presented for First Half Fiscal 2020 is prepared on a consistent basis compared to the First Half Fiscal 2019 Free cash flow.
Consistently, the lease liabilities are not included in Net debt (treated as operating items). However, additional information is provided hereafter to help comparison with similar indicators used by other groups.
The table below provides information on what our AMP would have been in H1 FY20, should we have considered lease transactions as a financing item instead of an operating item:
Inter-segment restatements
Since the beginning of Fiscal 2020, in some European and Asian countries, contracts have been reallocated from Healthcare & Seniors and Education to Business & Administrations.
Given the low materiality of these changes, pro forma figures for Fiscal 2019 are not required. The effects are detailed below. Fiscal 2020 organic growth and variations in UOP margin will be adjusted to take into account such changes.
Below are the adjustments for these restatements for each quarter of Fiscal 2019.
Glossary
First Half client Retention rate
The First Half Client Retention rate corresponds to the total amount of revenue in the First Half generated from business with existing clients in the prior fiscal year compared with total revenues for that year. The client retention rate declines progressively month by month as business is lost during the year.
First Half Development rate
The First Half Development rate is the annualized estimated revenue for new contracts signed during the First Half divided by prior year annual revenues. The development rate increases progressively month by month, as business is won during the year.
Comparable site growth rate
The First Half comparable site growth rate is the increase in revenues from sites that have contributed to consolidated revenue in both prior and current year first halves. It also includes the growth generated by the major sporting events.
Alternative Performance Measure definitions
Blended cost of debt
The blended cost of debt is calculated at period end and is the weighted blended financing rate on borrowings (including derivative financial instruments and commercial papers) and cash pooling balances at period end.
Financial Ratios Definitions
Financial Ratio Reconciliation
Free cash flow
Please refer to the section entitled Consolidated financial position.
Growth excluding currency effect
The currency effect is determined by applying the previous year's average exchange rates to the current year figures except in hyper-inflationary economies where all figures are converted at the latest closing rate for both periods when the impact is significant.
As a result, for the calculation of organic growth of Benefits & Rewards in Argentina Peso figures for First Half Fiscal 2020 and First Half Fiscal 2019 have been converted at the exchange rate of
1€ = 68.248 ARS vs 44.045 ARS for First Half Fiscal 2019
Issue volume
Issue volume corresponds to the total face value of service vouchers, cards and digitally delivered services issued by the Group's Benefits and Rewards Services, for beneficiaries on behalf of clients.
Net debt
Net debt is defined as Group borrowing at the balance sheet date, less operating cash. This does not include lease obligations as defined by IFRS16.
Organic growth
Organic growth corresponds to the increase in revenue for a given period (the “current period”) compared to the revenue reported for the same period of the prior fiscal year, calculated using the exchange rate for the prior fiscal year; and excluding the impact of business acquisitions (or gain of control) and divestments, as follows:
Underlying Net profit
Underlying Net profit presents a net income excluding significant unusual and/or infrequent elements. Therefore, it corresponds to the Net Income Group share excluding Other Income and Expense and significant non-recurring elements in both Net Financial Expense and Income Tax Expense where relevant.
Underlying Net profit per share
Underlying Net profit per share presents the Underlying net profit divided by the average number of shares.
Underlying operating profit margin
The Underlying operating profit margin corresponds to Underlying operating profit divided by revenues
Underlying operating profit margin at constant rates
The Underlying operating profit margin at constant rates corresponds to Underlying operating profit divided by revenues, calculated by converting H1 2020 figures at FY 2019 rates, except for countries with hyperinflationary economies.
2
1 CONSOLIDATED INCOME STATEMENT
CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Assets
Shareholders' equity and liabilities
CONSOLIDATED CASH FLOW STATEMENT
Including 129 million euro corresponding to the depreciation of the right-of-use assets recognized in the First Half of Fiscal 2020 pursuant to IFRS 16.
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
See note 6.2.2.
Including the effects of hyperinflation.
Including the effects of hyperinflation, recognition of commitments to repurchase non-controlling interests.
The following notes are an integral part of the condensed interim consolidated financial statements.
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Sodexo is a société anonyme (a form of limited liability company) domiciled in France, with its headquarters located in Issy-les-Moulineaux.
Sodexo's condensed interim consolidated financial statements for the six-month period from September 1, 2019 to February 29, 2020 were reviewed by the Board of Directors on April 8, 2020.
Significant events
On October 9, 2015, Octoplus filed a complaint with the French Competition Authority ('Autorité de la concurrence') concerning several French meal voucher issuers, including Sodexo Pass France. Following the hearing of the parties concerned in April and July 2016, the Competition Authority decided on October 6, 2016 to pursue investigation on the merits, without requesting protective measures.
On February 27, 2019, the prosecution services sent their final investigation report to Sodexo Pass France. In its response filled on April 29, 2019, the Group contested both grievances (information sharing and foreclosure of the meal voucher market through the Centrale de Règlement des Titres). On December 17, 2019, the Competition Authority issued an adverse decision against meal voucher issuers, and fined Sodexo Pass France, jointly and severally with Sodexo S.A., 126 million euro. Sodexo Pass France and Sodexo S.A. received notification of this decision on February 6, 2020.
Sodexo firmly contests this decision which manifests an inaccurate appreciation of the alleged practices and of the market dynamics and therefore has appealed this decision to the Paris Court of Appeal. After consultation with its legal advisors, the Group considers that it has strong arguments that may lead to the annulment or alteration of the French Competition Authority decision. As a result, no provision has been made for this litigation as at February 29, 2020.
Basis of preparation of the financial statements
6.2.1. General principles
The condensed interim consolidated financial statements for the six months ended February 29, 2020 have been prepared in accordance with IAS 34 "Interim Financial Reporting", as published by the IASB and endorsed by the European Union. They do not include all of the disclosures required for complete annual financial statements and should be read in conjunction with the consolidated financial statements of the Sodexo Group for the fiscal year ended August 31, 2019.
The accounting policies applied by the Group in the condensed interim consolidated financial statements for the six months ended February 29, 2020 are the same as those used in the annual consolidated financial statements for the fiscal year ended August 31, 2019, with the exception of the specific requirements of IAS 34 (see note 6.2.3) and except for the first-time application of IFRS 16 and IFRIC 23 as described in note 6.2.2.
The Group has not applied any IFRSs that had not yet been approved by the European Union as of February 29, 2020.
The Group has not elected to early adopt any standards or interpretations whose application is not mandatory in Fiscal 2020.
Amounts in tables have been prepared in thousands of euro and are expressed and rounded to the nearest million (unless otherwise indicated).
6.2.2. New standards and interpretations applied
First-time application of IFRS 16 “Leases”
IFRS 16, applicable to the Group as from the fiscal year opening on September 1, 2019, sets out the principles for recognizing leases. These principles replace those laid down in IAS 17 “Leases” and in the interpretations SIC 15 “Operating Leases – Incentives”, SIC 27 “Evaluating the Substance of Transactions Involving the Legal Form of a Lease” and IFRIC 4 “Determining whether an Arrangement contains a Lease”.
IFRS 16 introduces for lessees a single model for the recognition of leases, involving the recognition of all leases on the balance sheet (removal of the distinction between finance leases and operating leases), except where exemptions are applicable (short-term leases and leases of low value asset).
Accordingly, as a lessee, the Group recognizes in the balance sheet:
The presentation of lease transactions in the consolidated income statement is also modified, the lease expense being replaced by:
Finally, in the consolidated cash flow statement, cash outflows relating to interest and variable lease payments impact operating activities flows, while repayments of the lease liability impact financing activities flows. The investing activities flows are not modified.
The Group applied IFRS 16 from September 1, 2019 using the simplified retrospective approach, without restating the comparative periods. As a result, the Group recognized as of September 1, 2019 a lease liability, corresponding to the present value of the future fixed lease payments over the residual lease term, and a right-of-use asset, for an amount equaling the lease liability adjusted for prepaid or accrued lease payments previously recognized. Hence, comparative information for the First Half of Fiscal 2019 is presented as previously, in application of IAS 17 and the related interpretations. Among the practical expedients authorized by the standard for the transition, the Group chose to apply the practical expedient allowing to use its assessment of whether leases are onerous by applying IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” made immediately before the date of first-time application as an alternative to testing right-of-use assets for impairment at September 1, 2019.
The discount rates used at the transition date correspond to incremental borrowing rates as at September 1, 2019, calculated over the initial term of each lease. The weighted average incremental borrowing rate as of September 1, 2019 amounts to 1.6%.
The Group decided not to apply the deferred tax exemption from initial recognition provided in IAS 12 (paragraphs 15 and 24). A deferred tax is recognized on the net temporary difference arising from recording the lease liability and the right-of-use asset.
The reconciliation of operating lease off-balance sheet commitments presented according to IAS 17 as of August 31, 2019 and lease liabilities recognized according to IFRS 16 as of September 1, 2019 is summarized as follow:
Off-balance sheet commitments have been determined considering the non-cancellable term of operating leases (future minimum lease payments),
whereas according to IFRS 16, the determination of the duration takes into account extension options that the Group is reasonably certain to exercise.
The residual difference mainly relates to:
- commitments relating to short-term leases and leases of low value assets, covered by the exemption option provided for by IFRS 16
and applied by the Group (see Accounting principles described in note 6.4.11), and
- measurement differences of lease payments, as a result of the exclusion of the service component.
The accounting principles and information required on lease liabilities and right-of-use assets relating to lease contracts as of February 29, 2020 are detailed in note 6.4.11.
First-time application of IFRIC 23 “Uncertainty over income tax treatments”
The interpretation IFRIC 23, which is applicable to the Group as from the fiscal year opening on September 1, 2019, clarifies how to apply the recognition and measurement requirements in IAS 12 “Income Taxes” when there is uncertainty over the acceptability of a particular tax treatment under tax law.
The Group reviewed its income tax treatments in order to determine the impact of this interpretation on its consolidated financial statements. In that respect, the Group recognized an additional income tax liability amounting to 90 million euro and a depreciation of the deferred tax assets for 6 million euro. In accordance with the transitional provisions of the interpretation, the Group recognized the cumulative effect of first application as a reduction of consolidated equity at September 1, 2019, without restating the comparative periods.
Furthermore, the Group reclassified in Income tax payable its existing liabilities for uncertain tax treatment, which were included in Provisions until August 31, 2019 for 6 million euro.
Impact on the opening consolidated statement of financial position
As described above, the restatements required by IFRS 16 and IFRIC 23 as of the transition date have been recognized in the opening consolidated statement of financial position as of September 1, 2019. 2018-2019 comparative information has not been restated.
The following table presents the impact of the first-time application recognized as of September 1, 2019:
6.2.3. Specific interim reporting requirements
Income tax expense
Income tax expense (current and deferred) in the condensed interim consolidated financial statements is computed by applying an estimated average annual tax rate for the current fiscal year to each tax reporting entity's pre-tax profit for the First Half of the year as adjusted, where applicable, for the tax effect of any specific events that may have occurred during the period. The resulting deferred tax charge or benefit is recognized in deferred tax assets or deferred tax liabilities in the consolidated statement of financial position.
Post-employment and other long-term employee benefits
The expense for post-employment and other long-term employee benefits is computed as one half of the annual charge estimated as of August 31, 2019. The actuarial projections are updated to take into account any material changes to assumptions or one-off impacts (discount rates, applicable legislation…) during the six-month period.
There were no material plan amendments in the First Half of Fiscal 2020.
6.2.4. Use of estimates
The preparation of the condensed interim consolidated financial statements requires the management of Sodexo and its subsidiaries to make estimates and assumptions that may affect the amounts reported for assets, liabilities and contingent liabilities as of the date of preparation of the financial statements, and of revenues and expenses for the period.
These estimates and judgments are updated continuously based on past experience and on various other factors considered reasonable in view of the situation prevailing as of February 29, 2020 and are the basis for the assessments of the carrying amount of assets and liabilities.
Actual results may differ substantially from these estimates if assumptions or circumstances change.
Significant items subject to such estimates and assumptions are the same as those described in the consolidated financial statements for the year ended August 31, 2019 (provisions – including uncertain tax treatments – and litigations, financial assets measured at fair value, post-employment defined benefit plan assets and liabilities, goodwill and other intangible assets, impairment of current and non-current assets, deferred taxes, and share‑based payments), plus right-of-use assets and lease liabilities recognized in accordance with IFRS 16 (main estimates and assumptions described in note 6.4.11).
6.2.6. Changes in principal currency exchange rates
The following table presents changes in exchange rates for the main currencies used to convert the financial statements of subsidiaries compared with the first half of the prior fiscal year.
Segment information
The segment information presented below has been prepared based on internal management data as monitored by the Group Executive Committee, which is Sodexo's chief operating decision maker. The Group's two business segments correspond to On-site Services and Benefits & Rewards Services.
On-site Services revenue and underlying operating profit are broken down by global client segment. These global client segments meet the definition of operating segments under IFRS 8.
Consequently, Sodexo's operating segments and groups of operating segments are as follows:
The operating segments that have been aggregated carry out similar operations – both in terms of type of services rendered and the processes and methods used to deliver the services – and have similar economic characteristics (notably in terms of the margins they generate).
Segment assets and liabilities are not presented as they are not included in the chief operating decision maker's measurement of segment performance.
Since the beginning of Fiscal 2020, in some European and Asian countries, contracts have been reallocated from Healthcare & Seniors and Education segments to Business & Administrations segment. Figures for Fiscal 2019 have not been restated given the low materiality of these changes.
6.3.1 By business segment
Including Group's share of profit of companies consolidated by the equity method that directly contribute to the Group's business and excluding other operating income and expenses.
Including Group's share of profit of companies consolidated by the equity method that directly contribute to the Group's business and excluding other operating income and expenses.
6.3.2 By significant country
The Group's operations are spread across 67 countries, including two that each represent over 10% of consolidated revenues: France (the Group's home country) and the United States. Revenues in these countries are as follows:
Notes to the interim consolidated financial statements
6.4.1. Operating expenses by nature
Including the depreciation of right-of-use assets relating to lease contracts recognized from September 1 , 2019 in accordance with IFRS 16 (129 million euro in First Half of Fiscal 2020).
Primarily payroll taxes, but also including costs associated with defined benefit plans, defined contribution plans and free share plans.
Other operating expenses mainly include professional fees, other purchases used for operations, sub-contracting costs and travel expenses, as well as lease expenses relating to short-term lease contracts and lease contracts of low value assets, and variable lease payments (not included in the measurement of the lease liabilities). For First Half of Fiscal 2019, other operating expenses included the lease expense relating to operating lease contracts (169 million euro). The decrease resulting from the application of IFRS 16 from September 1 , 2019 is offset by the increase of operating expenses arising from the activity growth during the first half of the year.
6.4.2. Other operating income and expenses
6.4.3. Financial income and expense
6.4.4. Income tax expense
The 28.8% effective tax rate for the First Half of Fiscal 2019 increased to 29.3% in the First Half of Fiscal 2020.
6.4.5. Earnings per share
The table below presents the calculation of basic and diluted earnings per share:
All Group's free share plans had a dilutive impact in the First Half of both Fiscal 2020 and Fiscal 2019. The last stock option plan shares were delivered in the First Half of Fiscal 2019, therefore stock option plans had no dilutive impact on the reported periods.
6.4.6. Consolidated statement of changes in shareholders' equity
As of February 29, 2020, the Group held 1,821,266 Sodexo shares with a carrying amount of 182 million euro, including (i) 1,712,266 shares (172 million euro) purchased to cover the Group's obligations for free share plans for Group employees, and (ii) 109,000 shares (10 million euro) held under the liquidity contract. As of August 31, 2019, the Group held 1,448,566 Sodexo shares with a carrying amount of 145 million euro to cover its obligations under free share plans for Group employees.
During the First Half of Fiscal 2020, Sodexo shares with a carrying amount of 0,3 million euro were delivered to employees under free share plans. During the First Half of Fiscal 2019, Sodexo shares with a carrying amount of 3 million euro were delivered to employees upon exercise of stock options.
Total dividends paid out in the First Half of Fiscal 2020, adjusted for treasury shares, amounted to 425 million euro, representing a dividend of 2.90 euro per share and, where applicable, a dividend premium of 0.29 euro per share.
6.4.7. Business combinations
Changes in goodwill were as follows in the First Half of Fiscal 2020:
During the First Half of Fiscal 2020, goodwill totaling 72 million euro was recognized, mainly on the acquisition of Prima Assistance and Active Global Health Sciences Education Group in Homecare, and CSM in Corporate Services.
Reclassifications during the First Half of Fiscal 2020 relate to the reallocation of contracts since the beginning of Fiscal 2020, in some European and Asian countries (from Healthcare & Seniors and Education segments to Business & Administrations segment).
The table below shows the impact of newly consolidated entities. It includes the values of the assets acquired and liabilities assumed, as provisionally estimated at February 29, 2020, and the adjustments resulting from the final purchase price allocation of prior acquisitions.
Excluding the consideration transferred booked in Fiscal 2019 for companies firstly consolidated in Fiscal 2020, for 31 million euro.
Companies consolidated during the First Half of Fiscal 2020, that were integrated from the date of acquisition, contributed by 58 million euro to the consolidated revenue and by 1 million euro to the consolidated underlying operating profit of the period.
Intangible assets mainly include customer relationships and trademarks. The amortization period for customer relationships is determined based on the estimated attrition rate, with a maximum length of 20 years set by management. Goodwill primarily reflects the expertise and know-how of the acquired businesses' employees and the expected synergies between these companies and Sodexo.
6.4.8. Cash and cash equivalents
Including 10 million euro allocated to the liquidity contract signed with an investment services provider, which complies with the Code of Conduct drawn up by the French financial markets association (Association française des marchés financiers – AMAFI) and approved by the French securities regulator (Autorité des Marchés Financiers – AMF), to improve the liquidity of Sodexo shares and the regularity of the quotations.
The Group's international cash pool has negative cash positions in U.S. dollars for the equivalent of 521 million euro, in Sterling Pounds for the equivalent of 89 million euro and in other currencies for the equivalent of 33 million euro, partly offset by a positive cash position in euro of 644 million euro.
Total marketable securities comprised:
6.4.9. Borrowings
Including the proceeds of (i) three U.S. private placements (207 million U.S. dollars, 400 million U.S. dollars and 950 million U.S. dollars respectively as of February 29, 2020) and (ii) commercial paper issues (,725 million euro as of February 29, 2020). The U.S. private placements are subject to financial covenants that the Group complied with as of February 29, 2020, August 31, 2019 and February 28, 2019.
Including 13 million euro as of February 29, 2020 corresponding to liabilities recognized relating to commitments to repurchase the non-controlling interests in certain subsidiaries (23 million euro as of August 31, 2019).
Changes in borrowings during the First Half of Fiscal 2020 were as follows:
Including commercial papers.
As of February 29, 2020, the fair values of bond issues and bank borrowings were 2,679 million euro and 2,241 million euro respectively
(2,553 million euro and 1,636 million euro respectively as of August 31, 2019).
As of February 29, 2020, approximately 42% of the Group's borrowings were denominated in U.S. dollars, after considering the effect of derivative financial instruments and the cash pooling system. Approximately 85% of the Group's borrowings were at fixed interest rates (97% as of August 31, 2019) and the blended cost of debt at that date was 2.2% (2.6% as of August 31, 2019).
July 2011 multi-currency confirmed credit facility
As of February 29, 2020, the Group has a multi-currency confirmed credit facility for 589 million euro plus 785 million U.S. dollars, initially expiring in July 2024 with an option to extend for a further two years.
No amount has been drawn down on this facility as of either August 31, 2019 or February 29, 2020.
Bilateral confirmed credit facility
On December 18, 2019, the Group renewed two 150-million euro bilateral confirmed credit facility, both are due to expire in December 2023.
On February 13, 2020, the Group renewed a third 150-million euro bilateral confirmed credit facility expiring in February 2024.
No amounts had been drawn down on any of these facilities either as of August 31, 2019 or February 29, 2020.
Commercial paper issues
As of February 29, 2020, borrowings under the Sodexo SA and Sodexo Finance commercial paper programs totaled 725 million euro compared to 140 million euro as of August 31, 2019 and explains the increase of 817 million euro of private placements.
6.4.10. Financial assets
Fair Value Level 3: Measurement of Bellon SA Securities
The Group holds, through its wholly owned subsidiary Sofinsod, a 19.61% stake in Bellon SA, a company that controls Sodexo SA with 42.22% of its shares and 56.70% of its voting rights exercisable as of February 29, 2020. This shareholding does not give the Group considerable influence over Bellon SA, as voting rights attached to Bellon SA shares cannot be exercised by Sofinsod, in accordance with the provisions of Article L. 233-31 of Code de Commerce.
In accordance with IFRS 9, this investment is measured at its fair value, determined in accordance with IFRS 13. The valuation of the fair value of the investment depends, among other things, on the revalued net asset value (NAV) of Bellon SA which has limited debt and holds no assets other than shares of Sodexo SA. These shares are valued at their closing share price for the calculation of the NAV of Bellon SA. Furthermore, the valuation method used by management (Level 3 of the hierarchy defined by IFRS 13) incorporates the illiquidity implied by the characteristics of the holding's ownership structure (discount to net asset value of Bellon SA estimated at 40% as of February 29, 2020 and August 31, 2019).
As of February 29, 2020, the fair value of the investment is assessed at 611 million euros (708 million euro as of August 31, 2019), and its change since the opening of the half-year has been recorded in other non-recyclable items of comprehensive income.
6.4.11. Leases
The leases contracted by the Group as a lessee mainly relate to the following categories of assets:
Lease liabilities
As of February 29, 2020, the lease liabilities amount to 1,404 million euro, including 1,168 million euro in non-current lease liabilities and 237 million euro in current lease liabilities. The change in lease liabilities during the First Half of Fiscal 2020 breaks down as follows:
Right-of-use assets relating to leases
Right-of-use assets break down as follows, by type of underlying asset:
6.4.12. Related party information
Non-consolidated companies
Transactions with non-consolidated companies are similar in nature to those described in note 4.25, "Related parties" to the consolidated financial statements for the fiscal year ended August 31, 2019.
Principal shareholder
As of February 29, 2020, Bellon SA held 42.22% of the capital of Sodexo and 56.70% of the exercisable voting rights.
During the First Half of Fiscal 2020, Sodexo paid fees of 1.5 million euro (1.7 million euro for the First Half of Fiscal 2019) under the assistance and advisory services contract with Bellon SA.
Bellon SA received dividends of 181 million euro on its Sodexo SA shares in February 2020.
6.4.13. Other disclosures
Free share grants
On September 6, 2019, the Board of Directors decided to grant up to 10,000 shares to certain Group employees. The shares granted under this plan will only vest if the beneficiaries are still working for the Group on the vesting date and are subject to a performance condition.
Members of the Board of Directors and the Executive Committee, Chief Executive Officer
There were no significant changes from the fiscal year ended August 31, 2019 in relation to the nature of compensation, advances and commitments for pensions or similar benefits granted to members of Sodexo's Board of Directors or Executive Committee, or to the Chief Executive Officer.
Disputes and litigation
Sodexo Pass do Brasil is firmly disputing this reassessment, which the Brazilian tax authorities originally envisaged during a previous tax audit covering fiscal years 2008 and 2009 but then abandoned. The Company considers that the goodwill amortization was valid, both in terms of its underlying reasons and the way it has been recorded. Therefore, the Company considers that there is a strong probability of winning the dispute with the tax authorities, and this has been confirmed by its tax advisors. Consequently, no provision was recorded for this dispute in the consolidated statement of financial position as of August 31, 2017.
This dispute was presented on August 14, 2018 for a judgment of the competent administrative court. The court ruled in favor of Sodexo Pass do Brasil as it considered that the goodwill and corresponding amortization were legitimately recognized on the acquisition of VR. The judgment therefore confirms that Sodexo Pass do Brasil acquired a full business structure when it purchased VR.
This judgment can be reversed on appeal. The Group believes, however, that the risk of change in this judgement is low.
In addition, the tax savings generated by this tax depreciation were offset in the consolidated accounts of the Group by a deferred tax expense of the same amount for each of the financial periods concerned, in accordance with the IFRS rules. The balance of the related deferred tax liability amounts to 64 million euro as of February 29, 2020 (69 million euro as of August 31, 2019).
This decision represents an important step in the process of resolving this dispute. However, the Hungarian state having applied for annulment of this decision on May 27, 2019, the Group has considered it was too early to record an income based on the decision of ICSID.
Group subsidiaries are also subject to tax audits that may result in reassessments. The main proceedings are described above. In each case, the risk is assessed by management and its advisors, and any estimated charge which could potentially result from such audits are recorded as provisions or tax liabilities.
To the best of the Company's knowledge, there have been no other governmental, judicial or arbitral proceedings (including any such proceedings which are pending or threatened of which Sodexo is aware) which may have, or have had in the past 12 months, material effects on Sodexo and/or the Group's financial position or profitability.
Sodexo is also involved in litigation arising from its ordinary activities. The Group does not believe that liabilities relating to such litigation will in aggregate be material to its activities or to its consolidated financial position.
6.4.14. Subsequent events
The COVID-19 health crisis experienced from January 2020 has worsened over the last weeks, impacting the activities in all regions in which the Group is operating. From January 2020, the Group has implemented a set of actions in order to ensure business continuity and protect its employees and consumers, in compliance with its Group Health and Security policy and in application of the directives and guidelines of health organizations and local authorities.
To limit the spread of COVID-19, officially designated as pandemic by World Health Organization on March 11, 2020, different measures have been gradually implemented in many countries in which the Group operates, requiring sites closures and cancellation or postponements of events.
Even if the impact on the First Half of Fiscal 2020 performance is limited, the Group is closely monitoring the situation and is mobilized to ensure business continuity and results through a set of rigorous actions:
Considering the variety of situations the Group is facing (decline in traffic, full or partial closure of sites, and variability between sites, countries and regions) and the difficulty in assessing the duration of the health crisis is a challenge, it is not possible at this stage to precisely evaluate the impact on the Group's financial results in the second half of the year.
However, the Group confirms its confidence in its resilience and considers that the current situation does not jeopardize the positive mid-term perspectives and potential of Sodexo.
In addition, with cash flows covering investments, acquisitions and the dividend, the Group's financial situation remains strong. Moreover, as mentioned in note 6.4.9, the Group has access to confirmed credit facilities that can be drawn down at any time according to its needs (the confirmed credit facilities are undrawn as of February 29, 2020).
3
Statutory Auditors' review report
on the interim financial information
For the six months ended February 29, 2020
SODEXO
255 Quai de la Bataille de Stalingrad
92866 Issy-les-Moulineaux Cedex 9
France
To the Shareholders,
In compliance with the assignment entrusted to us by your Shareholders' Meeting and in accordance with the requirements of article L. 451-1-2 III of the French Monetary and Financial Code ( Code monétaire et financier ), we hereby report to you on:
These condensed interim consolidated financial statements are the responsibility of the Board of Directors and were reviewed by the Board of Directors on April 8, 2020 based on the information available at that date and in the evolving context of the Covid-19 pandemic . Our role is to express a conclusion on these financial statements based on our review.
I – Conclusion on the financial statements
We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed interim consolidated financial statements have not been prepared, in all material respects, in accordance with IAS 34 – "Interim Financial Reporting", as adopted by the European Union.
Without qualifying our conclusion, we draw your attention to the note 6.2.2 “ New standards and interpretations applied ” to the condensed half-year consolidated financial statements which describe the adoption as of September 1, 2019 of the standard IFRS 16 “ Leases ” and the interpretation IFRIC 23 “ Uncertainty over income tax treatments ”.
II - Specific verification
We have also verified the information given in the interim management report on the condensed interim consolidated financial statements prepared under the responsibility of the Board of Directors on April 8, 2020 and subject to our review. We have no matters to report as to its fair presentation and its consistency with the condensed interim consolidated financial statements.
Neuilly-sur-Seine and Paris La Défense, April 8, 2020
The Statutory Auditors
4
GROUP CHIEF EXECUTIVE OFFICER
RESPONSIBILITY FOR THE HALF YEAR FINANCIAL REPORT
Issy-les-Moulineaux, April 9, 2020
I hereby affirm that to the best of my knowledge the condensed financial statements presented for the half-year just ended have been prepared in accordance with the applicable accounting standards and provide a fair view of the assets, financial position, and profits of Sodexo, and of all the companies included within the consolidation scope, and that the half year activity review included in the attached report presents a true view of the significant events which took place during the first six months of the full year period and of their impact on the half year financial statements; the principle transactions between related parties; and describes the main risks and uncertainties for the remaining six months of the year.
Denis Machuel
Chief Executive Officer
255 Quai de la Bataille de Stalingrad – 92866 Issy-les-Moulineaux Cedex 9 - France
Tel.: +33 (0)1 30 85 75 00
Sodexo SA with a capital of 589,819,548 € - 301 940 219 R.C.S. Nanterre
www.sodexo.com
Please see section IFRS16 in the Activity Report
New definition, see APM definitions
See hypotheses on page 15
New definition, see APM definitions
Until August 31,2019, only finance leases were recognized on the balance sheet; operating leases were presented off-balance sheet
Hence, all lease payments are reflected in the Free cash flow, independently of their fixed or variable nature
Attachment
Attachment
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