Business Breakdowns
· Asif Jeevanjee
[00:00:00] S1: That's a really great point. And one of the things I think Compass is slightly advantaged on is the way their model works versus say, a restaurant. A restaurant is a spot business, but Compass is a contractual business. Compass is able to menu plan, let's say, for the week ahead, and then all of their chefs at the site level will order from Foodbuy. The inventory turns are quite high. Inventory represents less than 2% of sales. It's not going to be sitting within the business very long. It's mainly perishable. There might be some food that sits in the fridge for a while, but it's going to be used according to the menu that's already been planned out. And because you have a mainly captive customer base, you sort of know what your covers are going to be, if you like the equivalent in the restaurant business. So it's a very different business from that point of view. But I think inventory isn't really a huge part of the story. From a working capital point of view, though, what's interesting and again difference with the restaurant industry is that working capital is negative for Compass, so effectively they're able to pay suppliers later than they're collecting from the clients and consumers. And that's really a very attractive feature of the business, particularly as it seems to continue to grow and grow.
· Matt Reustle
[00:00:00] S0: Every business lover loves a good negative working capital story. I think that sends off the trigger in the brain, so that's a favorite. On the other cost buckets, thinking about labor, I saw some staggering statistic in terms of the employee base. Can you map out what that entails in terms of labor? And is the right understanding that they have a workforce that is essentially contracted out to the corporation or whoever the end customer is in order to work the cafeteria or whatever site it might be?
· Asif Jeevanjee
[00:00:00] S1: No, so actually the employees on site are Compass employees. If Compass takes over a contract from an in-house operation, they will usually take over most of the employees as well. As you said, it is a staggeringly big business from a point of view of how many people they employ. It's nearly 600,000, which makes it one of the largest private sector employers in the world outside of retail. And managing that labor force is challenging, but also I think one of the skill sets Compass has. They have a few advantages here versus I think their peers and also other restaurants. One is they've invested a lot in technology, in what they call labor scheduling technology. What the employees can do is input into an app the hours that they'd like to work, the shifts they'd like to work, which days they'd like to work. So there's a lot more flexibility for employees, versus let's say a restaurant. And then they can use the algorithm to match up where demand and supply for labor is. So you might have one particular cafeteria in a location that based on demand would be overstaffed and another that is understaffed and they can actually move people across locations. But the other thing is that flexibility is a huge advantage in terms of recruitment. If you think about a typical high-end restaurant, it's a very high stress environment. The hours tend to be pretty antisocial. When your biggest day part is lunch, for a typical cafeteria, I think that makes for much more sociable working hours. And one of the ways that this actually plays out is in the gender balance of the Compass employee base, which is much more balanced than the restaurant sector. So they have a slight edge, I think, in managing labor, which is their biggest cost by far. And I think they generally have pretty good labor relations.
· Matt Reustle, Asif Jeevanjee
[00:00:00] S0: These people in their labor force act as extensions of other companies. So it's important to get that right and hire high quality. So interesting to hear those dynamics and how they play a role. When you think about the volatility of the financials and particularly the income statement, I think you referenced COVID, a 40% decline. That probably isn't the right historical period to use as a model. But if you go back over previous recessionary periods or previous moments of macro sensitivity, how has the business performed both from a top line perspective and then from margins and the operating leverage that sits in the system? [00:00:00] S1: Compass is a cyclical business. The main element of cyclicality comes from the volume in the actual canteen. And that's going to be a function, for example, within B&I, of employment levels. If you look back at the biggest shock to employment we've had in, let's say the last 20 years, it was during the financial crisis. And there you did see volume decline a little bit, but you didn't see organic growth go below zero during that period, because what happened is Compass won a lot of new business as well. I think there's a sort of natural edge there, because in stressed macro environments, I think there's an even bigger propensity for self-operated or in-house operations to actually look to outsource, because their own cost structure will become problematic with a drop in volume. Complexity is rising. So this is actually something I'm a bit nervous about in the future, but I think the offset will be net new business growth.
· Asif Jeevanjee, Matt Reustle
[00:00:00] S1: Compass is a cyclical business. The main element of cyclicality comes from the volume in the actual canteen. And that's going to be a function, for example, within B&I, of employment levels. If you look back at the biggest shock to employment we've had in, let's say the last 20 years, it was during the financial crisis. And there you did see volume decline a little bit, but you didn't see organic growth go below zero during that period, because what happened is Compass won a lot of new business as well. I think there's a sort of natural edge there, because in stressed macro environments, I think there's an even bigger propensity for self-operated or in-house operations to actually look to outsource, because their own cost structure will become problematic with a drop in volume. Complexity is rising. So this is actually something I'm a bit nervous about in the future, but I think the offset will be net new business growth. [00:00:00] S0: In terms of the lingering effects of COVID where we went from five days in office to zero days in office to return to office and still seeing that be figured out from a lot of corporations and I think we see five days a week, we see some four, we see some three. There is definitely a return to office as the standard, but what that looks like is kind of up for debate still, it seems like. How has their own business recovered from that understanding? They've won a lot of net new, which is a good thing. But is that legacy business still impaired in a material way from the lingering impact of COVID?
· Asif Jeevanjee
[00:00:00] S1: There's no question that pandemic era working practices were really rough for the contract catering industry. If the standard working week was five days in the office before the pandemic and that goes down to four days, that's 20% off your revenue gone straight away. If it goes down to two or three days in the office, that's brutal. The pandemic taught us all that work from home is possible and it could be that attendance levels in offices never quite return to pre-pandemic levels. But the good news is there has been this steady recovery in return to office. But all that being said, I think it's a common misconception about Compass that they really only do office catering. And I think that's partly because for many investors, their own office cafeteria is the primary frame of reference when they're visualizing what Compass does. But actually the exposure to the office is much less than one would imagine. And understanding this actually created quite a major buying opportunity in the stock during the pandemic. If you look at B&I, it's about 38% of revenues. So this is their biggest sector. And yes, that is very important, but it's not the be all and end all. Of that, 60% is in business, so that's where the offices sit. The other 40%, the I in B&I is things like industrial plants and manufacturing facilities where the reality is work from home is not really possible. And in fact, that part of the business was not really impacted during the pandemic. So in reality, the office part of what Compass does is in the low twenties percent of the group. And then if you go through the other sectors, well, healthcare actually grew during the pandemic and that's the second most important sector. Sports and leisure was very, very impacted. It was hit hard because, almost overnight, sports fixtures and concerts were just canceled. But the minute there was reopening, people were really eager to get back to those events. And that business recovered very, very fast. And similarly in higher education, it's pretty difficult to keep fee-paying students away from campus. So that business also recovered very quickly.