Compass Group PLC (OTCPK:CMPGF) Q4 2022 Results Conference Call November 21, 2022 4:00 AM ET
Company Participants
Dominic Blakemore – Group Chief Executive Officer
Palmer Brown – Group Chief Financial Officer
Conference Call Participants
Jarrod Castle – UBS London
Jamie Rollo – Morgan Stanley
Vicki Stern – Barclays
Richard Clarke – Bernstein
Jaafar Mestari – BNP Paribas
Neil Tyler – Redburn
Andre Juillard – Deutsche Bank.
Joe Thomas – HSBC
Operator
Good morning, and welcome to Compass Group’s Full Year Results Call. Hosting today’s call will be Dominic Blakemore, Group Chief Executive Officer. This call is being recorded. Following the opening remarks, you will have the opportunity to ask questions. [Operator Instructions]
I will now turn the call over to Dominic Blakemore. Please go ahead.
Dominic Blakemore
Thank you, Serge. Good morning, everyone. As usual, I’m with Palmer, our CFO. We’re delighted by the group’s performance, which surpassed our expectations. We’ve emerged from the pandemic as a stronger and more resilient business and reached the important milestone of revenue exceeding 2019 levels.
Organic revenue growth was 37.5%, benefiting from excellent net new business growth, which accelerated through the year to over 7% in the second half, as well as strong like-for-like volume recovery and good levels of pricing. In Q4, group revenue was 116% of the 2019 level with B&I recovering particularly well at 106%. All sectors continue to trade strongly. And although we’re conscious of the challenging macro environment, we’re not yet seeing any consumer weakness as we continue to demonstrate value against the High Street. Margin improved by 170 basis points to 6.2% despite mobilization costs and inflationary pressures, and we doubled operating profit to GBP1.6 billion.
The outsourcing environment has never been stronger with operational complexities and inflation continuing to drive increased outsourcing. We’re successfully capitalizing on the resulting growth opportunities with our market-leading culinary offer and strong ESG and digital capabilities. So our prospects for accelerated future growth above historical levels are exciting. For 2023, we expect organic revenue of around 15% and operating margin above 6.5%, resulting in profit growth above 20% on a constant currency basis.
Lastly, reflecting our confidence in the business and positive outlook, we’re announcing a further share buyback of GBP250 million in the first half, taking the total program to GBP750 million.
Let’s now move to Q&A.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Jarrod Castle from UBS London. Please go ahead.
Jarrod Castle
Good morning, everyone. I guess just in relation to current guidance and then kind of a little bit looking further out. I mean, your exit rate for margin 6.7% and you’re kind of saying now 6.5%. I guess, in relation to the 6.7%, should we at least expect the margin for 2023, at least the exit rate to be higher than that by the time we get to 4Q?
Secondly, and this is more medium term, Sodexo has been talking about a margin at least 50 points higher than pre-COVID levels by ’25 and organic growth in ’24, ’25, 6% to 8%. And I guess, Compass has historically always done better than Sodexo, so one, relative to that margin guidance, how should we be thinking versus your 7.4%? And relative to the organic growth guidance for ’24, ’25, do you think you can still be the market leader on that front?
And then just lastly, on M&A, you’re obviously giving another GBP250 million back to the market. Should we read anything into that in terms of M&A opportunities that you currently see? Thanks very much.
Dominic Blakemore
Thanks, Jarrod. Why don’t I take first, the medium-term guidance question, and then I’ll ask Palmer to comment on ’23 margin guidance and capital allocation. So I guess the first thing to say on medium-term guidance is it feels a very uncertain world to be making commitments for the medium term. So I think that we are appropriately conservative in that environment.
I think the other thing to say is, it’s quite difficult to make forward predictions on growth given the impact that both pricing and volume recovery are having on the current run rate. I think if you set those aside though and assume that at some point, pricing and volume will return to more like prepandemic levels, I think the real delta in our growth story comes from what’s within our control, which is the net new contract wins.
Again, if you recall, prepandemic, our net new contract win rate was around 3%. You’ll see from the results that we’ve published today, that run rate is more like 6% in the second half and into the first half of ’23. And that’s being achieved by strong retention, 1 to 2 points better than our historic rates, as well as a higher gross new win rate, which is 20% stronger year-on-year.
So I guess the point for us is if we can sustain net new at 2 to 3 points higher, that could and should be additive to that historic growth rate we enjoyed of around 6%. And that would mean our organic growth rate could be mid to high single digit. In terms of margin guidance, at this point, we still see no reason why we can’t get back to prepandemic margin levels. I think the rate and pace of that margin recovery will really be dictated by the very strong levels of net new business. I mean those net new business levels I just quoted are twice as strong as anything we’ve seen before and therefore, come with both mobilization and growth investments, which we think is critical and very positive for the long-term strength of the business.
If we can grow at the rates that we’re describing and restore our margin to prepandemic levels, we’ll be trading with EBIT significantly higher than prepandemic. And I think the other thing in the mix, I’m sure Palmer will reference, is just around inflation. When we look into ’23, at these elevated levels of inflation, there is inevitably a margin lag that hopefully becomes a tailwind as we see margin start to come down and will give us the benefit in the margin recovery journey.
So at this point, we also don’t see prepandemic margins as a floor in the medium term, but we really do need to see how we trade through those two factors. And particularly, as we’ve always said, we will bias for balance strong top line growth across the business, because we think that’s the most important. Palmer, do you want to talk about ’23?
Palmer Brown
In terms of the fiscal ’23 margin progression, you’re right, Q4 exit of ’22 was 6.7%. A bit of seasonality and the like in that. So we view 6.5 — that second half margin of 6.5% really is the foundation that becomes the floor that we see for fiscal ’23.
When we look at fiscal ’23, we expect the first half to be flattish compared to that floor. We’ve got strong mobilization in Education in Q1. Dom referenced the net new business, the mobilization costs that are there. Keep in mind, that accelerated through fiscal ’22 and good momentum into ’23.
When you look at that top line growth, if we use sort of 15% as just a benchmark, we expect a little over a third of that to come from net new business, which, as you know, has a margin drag to it. About a third of it would come from pricing, and there’s a bit of a timing drag, just as Dom referenced, that we should expect to make up later. And then you have like-for-likes making up the rest, which we would expect some progression from.
I mean more importantly, and most importantly, frankly, is the strength of that top line that produces some nice year-on-year profit growth. So we’re looking at over 20% on a constant currency basis. And the progression of the margin and that profit growth in the second half will really depend on some of those factors. If we see inflation taper a bit in the second half, if we see the mobilization costs normalize, if we see some stronger like-for-likes, I think you should expect to see some more margin progression.
And in terms of capital allocation, which M&A is a part of it, we finished fiscal ’22 with leverage of 1.3 times, so squarely in the middle of our target range. We feel very good about the state of the business going into ’23, the strength of the cash flow generation that the business has, but also cognizant of some uncertainties on the horizon. We’re not necessarily seeing it in the business. To be clear, we’re not seeing it in the business at all right now, but I think we’re all cognizant about what might be on the horizon in the second half of the year.
So we think remaining in that mid to low end of the leverage range is prudent. That’s why you see us land on the GBP250 million of buybacks in the first half. We think that will have us at a leverage of 1.3 times at the half year, which gives us a lot of optionality for M&A, for more investment in the business, but potentially for more shareholder returns. We think that’s the prudent place to be. And we’ll keep in mind the context as we go through the first half of the year, and we’ll have some decisions to make at the half year.
Jarrod Castle
Right. Thanks very much.
Operator
Jamie Rollo, Morgan Stanley. Please go ahead.
Jamie Rollo
Thanks. Good morning, everyone. Three questions, again, just on the guidance, really, please. The first on the margin guidance. I appreciate there’s sort of dilution from passing on costs and the contract mobilization. But are you seeing any underlying pressure on margins from things like what just underlying cost inflation or layoffs in the tech sector, et cetera? Or is that sort of flat lining of margin really just the sort of dilution from the pricing and contract wins?
Secondly, you described the 6.5% guidance as a floor. So you sort of know what a ceiling might be if we do get that moderation at the half of the year. You used to talk about sort of towards 7% margins for next year. Is that sort of reasonable sort of bookend?
And then just on the sales guidance, up 15% would give FY ’23 at about 121% of ’19, which is not much improvement from Q4’s 116%. I appreciate your volume recovery is largely done, but should that guidance not be also above 15% rather than 15% like the margin guidance? Thank you.
Dominic Blakemore
Jamie, thank you for those questions. And obviously, I think it’s fair to say, precision is challenging given the amount of uncertainty in the environment at the moment. But I mean, just a couple of thoughts there and then maybe Palmer can give a bit more color. I think it’s important to say, right now, we’re not seeing recessionary pressures impacting the business, either with regard to consumer spend or the layoffs you described in the tech sector. Whilst we’ve seen some announcements being made, I think there were a couple of cancer trends there. I mean, one is we’re still seeing a strong return to office, which you saw in our fourth quarter B&I numbers, which we do expect to continue.
And so potentially, if there are slightly lower headcount, then that may slightly moderate the B&I growth, but we still expect it to be strong. In addition, I think we are seeing a number of other firms in what is still a war for talent and one of the drivers of growth in the business picking up some of those individuals, which means we may see sort of headcount growth in other parts of the portfolio as it were.
With regard to the guidance, look, I think on margin, yes, it’s a floor. We said we’ll be above 6.5%. As you’ve heard Palmer say, the two main factors in that absolutely are managing inflation and the scale of our net new business growth and the relative acceleration. As you’ve seen from today’s presentation, it’s accelerating quarter-on-quarter, and therefore, the level of mobilization is also increasing quarter-on-quarter, which is obviously, again, we repeat super positive, but does mean that we have to be thoughtful on the margin impact in the short term.
Yes, it’s a floor. Where could it land? I mean if we have those factors, as Palmer described, go in our favor in the second half, we could be in the high six’s for the second half, and therefore, you can figure out the full year impact, therefore, would be more positive. And yes, we do anticipate that the trend during the course of the year will help us towards the 7% and beyond as we go forward.
Just on sales, again, 15%, you’re absolutely right, that would imply a slight improvement on Q4. Q4 had some benefit from seasonality within it. And again, we’d like to start the year as we often have done at a point of thoughtful conservatism that gives us the opportunity to do better, but also to weather any potential impact that we may see from changing conditions. Palmer, I don’t know —
Palmer Brown
Nothing to add to that.
Dominic Blakemore
Okay, nothing to add to that. So hopefully, that’s been helpful.
Jamie Rollo
Yeah. Thanks a lot.
Operator
Leo Carrington, Citi. Please go ahead.
Leo Carrington
Many thanks. Good morning. Two questions, please. In the presentation, you mentioned the opportunity from vending and delivered in. That’s something you’ve been speaking about. But given this is effectively a new market for Compass since the start of the pandemic, is it possible to quantify what kind of boost to growth in the midterm can be attributable for this category now that you’ve got more experience in the post-pandemic client needs? Perhaps if you could frame this in terms of your answer to the first question.
And then secondly, in terms of the solid improvements in European retention rates, increasing retention rates have been a feature at your large European competitor. Is it fair to say there’s structurally lower churn in European contracting across the entire market? Or is there a dynamic where clients are choosing to award more contracts to the largest operators rather than locals? Or do you see the majority of this trend simply due to improvements Compass has initiated? Thank you.
Dominic Blakemore
Palmer will take the vending question.
Palmer Brown
Just to be clear, I mean, we’ve had a strong vending business for a long time. Actually, when you look at the origins of Compass in North America and the U.S., it’s actually the vending business that dates back further than anything else. So we’ve had the vending business for a while. It’s evolved over time, especially starting probably seven, eight years ago or so. We’ve been getting more and more into the micro market piece and some of the commissary solutions, the central kitchens and the like. That certainly did accelerate through COVID just as you referenced there. I think it’s just some of the dynamics that have been in play.
And then we’ve been factoring in more of the delivered in solutions, really across a number of sectors, education, B&I being the big ones. I think those are factors that you see within the net new acceleration. There are a number of factors that go into that. I’m not sure we’ve got a really good feel for the quantum of additional growth as we go forward. But when you hear us talk about the expectation that we have to see revenue and profit growth above historical levels in the short and medium term going forward, this would be just one of those components that we would view there.
Dominic Blakemore
Thanks, Palmer. On the European retention point, I’m sure others, like we, are very focused on self-help and therefore, how we can improve through better processes, our own retention levels. I think there’s a few things that we’ve been able to do in Europe through the deployment of tech that have helped us with that. We’re obviously now deploying CRMs for full client insight and data. We have NPS rolled out at two-thirds of our state, which allows us to get consumer feedback in real time. And we’ve also got something called Compass Client Insight, CCI, which is giving us real-time insights into client feedback, which allows us to course-correct immediately rather than waiting for any quarterly reviews that we might have with clients.
We believe that those are helping us to improve the operational quality of our business and in turn helps us improve our retention rate. You’ve seen today in the presentation the strength of that, which we’re very pleased with. Is there less structural churn? I do believe that clients are more minded to work with existing providers and with bigger providers because of the complexity and trust issues that we’ve referenced again today. So I think those do help us. And I think you’re seeing it manifest itself in the results. For us to have improved from what was north to a point of a net new CAGR to 4% in Europe is incredibly pleasing. In part retention, in part better new business, the portfolio and pipeline look strong as we go forward. And we do believe that there is sort of significant elements of self-help, which can continue to sustain and improve those trends.
Palmer Brown
Just to add, I know your question is really focused on the retention part of it. But when you look at the net new business overall, the new business wins, we think that’s primarily a function of self-help initiatives, along the lines that Dominic just referenced. So both components of net new, the new business wins and the retention within Europe are predominantly based on our growth initiatives. And just as you heard Dom referenced to, we think there’s a lot more we can do. And that gives us, I think, faith in the sustainability of those strong growth rates.
Leo Carrington
Okay. Thank you, Palmer. Thank you Dominic.
Operator
Vicki Stern, Barclays. Please go ahead.
Vicki Stern
Hi. God morning. Just firstly on volumes. I know we’ll probably stop talking about volumes on a pre-COVID base after this quarter, but where did you sort of land on that in Q4? I think in Q3, you’ve been 8% below. And what does that reflect now? I think you talked a lot about still some drags in Healthcare, drags in Education even and obviously the B&I. I mean, did you sort of exit Q4 at what you think is the right sort of level? Or on that basis, there could still be some sustained volume improvement, putting aside obviously risks on job losses and things?
And then on signings, I think you normally have a decent line of sight. You’ve sort of referenced that they’re actually dominate on pipeline. If you could just share with us what you’re seeing as we look out over the next six to 12 months? Any reason at all to think that the sort of elevated level of signing pace you’re seeing at the moment should come down at all?
And then just finally on margin, you’ve obviously sort of talked about the drags on the net new side. But teasing that out, if we were to sort of stay at this 6% net new level, all else equal, but we’re lapping that comp, and we’re sort of entering ’24 already with a sort of decent level of mobilization in the base from this year. Can you help us understand a little bit that margin evolution just as it starts to become the norm to be at that level of net new rather than obviously this ramp-up that you’re talking about at the moment, which definitely has quite a big suppressing effect in the short term?
Dominic Blakemore
Do you want to tackle the first couple of those?
Palmer Brown
Yes, sure. On the volume piece, yes, we did see a big step-up in volumes through the year. Certainly, into Q4, we saw a nice acceleration in B&I, in particular, but also Sports & Leisure and Education. You’re right, Vicki, it gets to be quite difficult to nail that. But we think the base like-for-like volumes are somewhere in that 95% to 96% range. I think the question is how much in the pace of that ongoing recovery is there. We actually think that all of the units that we’ll reopen are reopened, and that’s the vast majority. I think there’s still a bit of return to office that’s happening.
Certainly, in B&I, you heard us reference the impact in the tech and some of the other industries there. Within Healthcare, there’s still a bit of retail. Certainly, within Education, some catering and some retail there. So it’s still spread out a little bit, but it’s mostly on the B&I side is where we’re seeing it.
Dominic Blakemore
Thanks, Palmer. On signings, the pipeline at this point looks as good as it did a year ago when we reported record new business levels and 20% up on the previous year. So we would hope that those levels are at least sustainable as we look forward into ’23.
And then with regard to margin, Vicki, I think this probably — if you take maybe 6.5% as a start point compared to the 7.4%, there’s probably a few drivers of that difference. And they’re perhaps not quite equal, but you’ve got the drag of new business, you’ve got the drag of inflation, and then you’ve got the investment that we’ve put into the business. I think as new business and inflation normalize, that gets us above the 7%. I think beyond that, it’s all about the choice of how much investment we choose to put in the business for accelerated growth, and at what point we then get the overhead leverage for that investment and therefore, make progress back to the prepandemic levels.
I think we can’t call exactly when and how that’s going to happen. I think the first thing is we probably need to see the acceleration in new business moderate, but an acceleration in new business is positive, of course, and then start to see inflation coming down a touch. And at the moment, we expect first half ’23 inflation to be at the same level as second half ’22, which was broadly in around gross inflation of 9%; food in the low double digits; labor, mid to high single digits. If those continue, then I think that is what may slow us a fraction on the inflation side. We expect to see that, sort of as that comes down, become a bit of a tailwind, which helps in the equation I’ve just described.
Palmer Brown
Within the net new business, you really got two components of new business that drag our margins. You’ve got mobilization costs that are expensed in period. And as new business is accelerating, those mobilization costs don’t normalize. It’s once it moderates is where you get the normalization. But not only that, the margin progression within a contract increases over time. So even absent the mobilization costs, we see increased margin progression as we get to be more efficient, learn the account much better. A lot of times we don’t really see that materialize until 12, 18, maybe 24 months beyond. It’s very much a case-by-case contract-specific item, but that has a bit longer of a burn this year.
Vicki Stern
That’s pretty helpful. Thank you.
Operator
Richard Clarke, Bernstein. Please go ahead.
Richard Clarke
Hi, good morning. Three questions, if I may. Just starting off with inflation. When inflation was accelerating, you talked about a lag effect that it takes time to sort of readdress the pricing to reflect that inflation. When inflation begins to decelerate, can that actually become a bit of a margin tailwind for you? Can you actually benefit from that because you’re increasing prices by the lag effect from that? Maybe just how does the dynamic work from that in a decelerating environment?
And then the second question just on CapEx. You did a fairly low amount of CapEx this year. You’re guiding to that going back to 3.5% next year. Is there a specific spend in that number? Or is it just that the market is becoming more capital-intensive again year-on-year?
And then thirdly, just following up on Jamie’s question on the tech sector. I mean we hear about lots of cost savings going on at Alphabet, et cetera, removing the free sushi. Are you seeing some of those impacts? And maybe how important are those contracts to Compass at the moment?
Dominic Blakemore
So let me take the first and the third and then Palmer can deal with the CapEx. I think, Richard, you described exactly, in your question how we see the impact of inflation. As it’s increasing and there’s a lag in our pricing, there’s clearly a margin lag. As inflation starts to decelerate and the run rate of pricing overtakes it, we see the benefit. That lag depends on contract types and structure and will be different in different places.
Right now, I think, importantly, we’re seeing sort of inflation at the same levels as it was. We’re not yet seeing that deceleration occurring. Right now, we would expect that inflation to continue at these elevated levels for the first half to the best of our knowledge, and then start to hopefully see that come down in the second half, which is one of the reasons we expect to see the margin progression in half two.
With regard to the tech sector. Again, the tech sector has been fantastic for us. It’s been a great part of our B&I portfolio in North America. It’s around 5% to 10% now across the piece. And our contract types would be varied. Yes, there’s cost plus, but there’s also P&L arrangements within that. Clearly, as cost becomes a critical factor to those clients, we are willing and able to work with them to put the right cost structures in place going forward. And we think that, that is also ultimately neutral to our P&L. What we have to do is obviously have the variability of the model that should we see volumes fall, we can protect those. And obviously, we would be taking some sort of cautious views of what that impact could be in the year ahead.
As you heard me say earlier, we’re also seeing a number of those companies grew their headcount significantly through the pandemic. We’re actually yet to see the higher headcount numbers return to office, albeit they may well then be adjusted down as some of these factors impact. So we still expect to see sort of growth in the tech part of the B&I portfolio as we get the return to office, perhaps not at the levels that were earlier anticipated. So still, I think, a positive overall.
And as I described earlier, we’re seeing lots of indicators that other firms and other sectors are keen to acquire some of that displaced talent, which we may see showing up in positive volumes elsewhere.
Palmer Brown
In terms of the CapEx, the 2.7% this past year was lower than anticipated and lower than what we view our normalized model. Nothing much to really read into that timing as much as anything. We do expect that to return to 3.5%. We don’t really view it as increased capital intensity. I guess, if you want to look at it year-on-year by definition, it is. But we don’t — we view it as more normalization. And in fact, if you look at the overall capital intensity relative to the growth rates, I think you could look at it being quite favorable the way we’re progressing.
In terms of where we’re spending it, it’s still the vast majority on client-facing items. They shifted a little bit more towards digital, ESG, some things of that nature that are frankly becoming more important to clients. But still, the vast majority, 75% or so, on client facing.
Richard Clarke
Excellent. Thank you.
Operator
Jaafar Mestari, BNP Paribas. Please go ahead.
Jaafar Mestari
Hi. Good morning. I’ve got three questions, if that’s all right? Firstly, just on the pipeline, you said, as good as a year ago. Just wanted to clarify if we’re talking like last year GBP8 billion, I think, was the number, GBP5 billion in North America and GBP3 billion in Europe? Or if there’s been any granular change within that?
Secondly, on your revenue guidance, the breakdown you gave, one-third of it from like-for-like volumes. I’m just curious how much of this plus 5% is basically just annualizing where you ended the year versus where you started the year versus how much incremental volume improvement you expect from the September levels?
And lastly, on retention, how would you describe the 2022 and 2023 renewal activity? One of your competitors mentioned that they had a higher-than-usual number of contracts to renew in ’22. They’ll have a smaller than usual number of contracts to renew in ’23, for example. Is there anything like that for you? Or is it just average followed by average?
Dominic Blakemore
I mean let me just quickly take the retention. I think we would say 2023, like ’22, like ’21, has been broadly the same percentage of contracts, which has fallen for renewal. We don’t — the lumpiness of the portfolio generally tends to blend itself out into the average. So we think it’s sort of more of the same, which is positive. On the other two points, Palmer?
Palmer Brown
Yes. Pipeline, I mean, we look at pipeline, both on a gross basis and sort of a weighted probability basis. Personally, I view the way the probability is more indicative, although it does have subjectivity sort of built in. We provide some guidance as to what that should look like. But we’d like to see a pipeline at least 2 times as large as the new business win expectations on a weighted probability basis. And we are seeing that in all of the regions.
I think it’s a combination of a lot of the self-help initiatives that we’ve talked about here as well as some of the outsourcing dynamics that are taking place. When you look at the big step-up in the sources of new business, 45% of our new business wins are from first-time outsourcing. Again, that’s a significant step-up from the historical 30% or so that’s there. So the pipeline continues to be very, very strong. And we have expectations that, that will continue.
In terms of the like-for-like revenue that’s there, we do have some strong growth that comes into fiscal ’23. We think roughly half or so of the like-for-like expectation in ’23 is a roll, and then the remainder, in all honesty, is a bit of a question mark that’s there, and that’s factoring into some of the guidance.
And just to be clear, when we’re looking at that, if you want to use 15% as the benchmark, and you’re looking at net new above a third in pricing there at, the like-for-like we’re looking at is a little bit less. That’s the remaining gap. And it’s the combination of those three that really produce that top line and the margin result as well.
Jaafar Mestari
All right. Thank you for the color. Thanks.
Operator
Neil Tyler, Redburn. Please go ahead.
Neil Tyler
Good morning. Thank you. Just a couple, please, left. Following on from a bit of clarification on a previous question. Does that — the split of net new obviously has an impact on the margin progression. So within that, slightly more than a third of the revenue growth coming from net new, should we sort of broadly assume sort of 96% and 10% as the components and no great difference, therefore, in that effect on margin year-on-year? That’s the first question.
And the second one, just a source of new wins. I wonder whether you could talk a little bit about whether there’s been any sort of sequential change in the source market from which you’ve been winning new business, especially first-time outsourcing over the course of the last 12 or 18 months? Thank you.
Dominic Blakemore
Thanks, Neil. On the net new point, yes, I think you’re broadly right. I think what’s important is though how that looks half-on-half. And again, I think it goes to the point of the sort of accelerating net new that we’ll see in the first half of ’23, which is also an accelerating gross new, which is where the higher levels of mobilization spend comes from. So it’s not just the absolutes, but it’s the mix sort of half-on-half that impacts that.
And then on new business source. I mean, I think as we said, broadly 45% is coming from first-time outsourcing. We’re actually seeing that across all sectors. And I don’t want it to be a bland answer, but we’re seeing first-time outsourcing a new opportunity in B&I just as much as we are in Healthcare and Education and that’s been broadly consistent for a while now. And that’s what’s also exciting because we’re not over-reliant on particular sectors, albeit we still see lots of opportunity in Healthcare and Education.
Neil Tyler
That’s great. Thank you.
Operator
Andre Juillard from Deutsche Bank. Please go ahead.
Andre Juillard
Good morning. Thank you for taking my questions. Part of them has been already answered, but I just wanted to come back on the correlation between the different type of contracts you have, inflation and guidance, just to have a clearer view. Could you just give us a clearer view on where you are in terms of type of contracts and if you came back to the level you were before the crisis?
Second question on the balance sheet. So 1.3 times net debt and EBITDA is a comfortable level if I understand well. You keep some margin of maneuver, but could you give us some more color about M&A, share buyback and dividend that you could consider and the allocation of cash? Thank you.
Palmer Brown
In terms of the contract structures, we are pretty much back to historical levels in terms of the base contract structures. I will say, though, that within the shift from some of the fee contracts back to the P&L contracts, we still have elevated subsidies from clients across the board. So the subsidy level would be a bit higher than what it was historically. And that’s continuing to normalize as headcounts and volumes increase. It’s not a perfect correlation ideally it would be, but that’s happening over time. But in terms of the base contract structures, it’s pretty much how it’s been historically.
And in terms of the balance sheet, certainly, where we are gives us a lot of optionality depending on the landscape. Yes, we’re looking at M&A opportunities. Frankly, we’re looking at M&A opportunities in all regions. We’d like to think that some of them can materialize. We’ve always been disciplined about that in the past. And certainly, that won’t change. We’re investing in the business to take advantage of all the opportunities that we see. And then to the extent that we have any excess, then we’ll return to shareholders.
We’re cognizant that we are in the mid to low end of the range on a forward-looking basis. And we think that’s a good place to be, and we’ll have some decisions to make, but it will really be based on those different variables as the year unfolds.
Andre Juillard
Do you have any envelope in mind for M&A? Or nothing special?
Palmer Brown
I mean nothing special. I don’t think you’ll see anything massive from us. We do view M&A as part of our strategy, and it really comes back to the core question of how does it help us grow. And when we’re looking at M&A opportunities, certainly, we’ve done a good bit of them in North America. We’re starting to look at them increasingly in other places. But it’s all about how does it help us grow and then within our disciplined approach, but we don’t have any set expectations.
Andre Juillard
Okay. And last question, if I may, about dividend. Can you guide anything on a midterm level of payout or something like that?
Palmer Brown
I mean it’s our policy that we’ve stated where 50% of underlying earnings on a payout basis, and we expect that to continue as we go forward.
Andre Juillard
Okay. No change on that side?
Palmer Brown
No change.
Andre Juillard
Thank you.
Operator
Thank you. And we will now take our final question today from Joe Thomas from HSBC. Please go ahead.
Joe Thomas
Good morning both of you. Couple of questions really regarding the risks to the economic outlook. As tech business has evolved over time, and you’ve done different activities and specifically thinking about stuff like vending and delivery, I’m just wondering whether you think that the operational gearing dynamics of the business have changed? If you could give a bit of color around that, that would be helpful, please.
And then I suppose related to that as well. You’ve talked about subsidies that are coming in from clients just now. I just wonder, when we think about like-for-like changes to workforce in the period ahead, whether there’s any difference in contract protections or what contract protections you’ve actually got in place to sort of see you through that period? Thanks.
Dominic Blakemore
Thanks for those questions. They were both — it’s really interesting. I mean, first of all, in terms of risk on economic outlook, I think there’s a couple of things to stress here. Firstly, as we’ve shown in the presentation today, if we compare our portfolio today to the portfolio of 2019, our B&I exposure has reduced from 50% to a third. Why is that? It’s actually been the very strong growth we’ve enjoyed in the other sectors as well as the slower recovery from the pandemic. We also think our DOR sector is more resilient now than it was then because it has more exposure to ongoing production as opposed to lumpy construction projects. So when we add that all up, we think we are more resilient and more defensive than we’ve been before.
In addition, and I know you know this, but it is worth saying, we think that those cost pressures on clients are accelerants of outsourcing. So if you look back to 2009 and beyond, what happened is our revenues held up and didn’t actually turn negative because the acceleration in net new offset the volume declines within B&I. And then actually, over time, we then saw those volumes come back, which benefited the business. And that was particularly marked in North America, where we continue to invest in winning new contracts through the cycle, and that will absolutely be our strategy should we detect widespread recession as we go forward.
In terms of operational gearing, we learned a lot through the pandemic about how to vary our cost base. And therefore, I think we’ve got — we’re much more agile and fleet of foot in terms of how we would protect unit and operating margins through any volume downturn. And I think we’re better placed to do that than we ever have been.
And then to your last point, I think the contracts that we’ve got protect us better now than ever. Now I can’t call out the percentages of that. But we learned through the pandemic that volume protections are critical. Perhaps where the industry got a little bit aggressive in a benign economic environment and when adverse events hadn’t happened, I think we’ve now seen and have the right to protect contracts in a way we hadn’t before. So I think those protections are in the contract should we see material downturns.
So I think we feel, looking out today, to the extent that we have any recessionary impact is shallow or industry-specific or country-specific, we feel pretty good that we can manage through it and that we can see an opportunity beyond that for growth.
Joe Thomas
Okay. Thank you.
Operator
Thank you. With this, I’d like to hand the call back over to Dominic Blakemore for any additional or closing remarks.
Dominic Blakemore
I can simply just say thank you all for joining us today. I’d like to wish you a restful and enjoyable break over Christmas. And we will talk to you again on the first quarter in the New Year. Thank you.
Operator
This concludes today’s conference call. Thank you for your participation. You may now disconnect.
Be the first to comment