Sodexo reports 3.9% increase in revenues for fiscal 2010

Sodexo (NYSE Euronext Paris FR 0000121220- OTC : SDXAY) (PARIS:SW) (OTCBB:SDXAY): At the Board of Directors meeting held on November 8, 2010 and chaired by Pierre Bellon, Sodexo CEO Michel Landel presented the Fiscal 2010 performance.

Fiscal 2010 financial performance

Commenting on the results, Sodexo CEO Michel Landel said:

"Sodexo's performance was solid during the past year, exceeding the objectives set at the beginning of the year, in a still uncertain global economy. This performance demonstrates the relevance of our strategy, our novel positioning, our comprehensive services offer tailored to our different client segments and our unique global network in 80 countries and presence in the strong growth zones such as Asia. These results could not have been achieved without the active commitment of our 380,000 employees. Since Sodexo's creation, our people have been at the heart of our business model and today are a powerful source of competitive advantage in which we continue to invest. The seven point increase in our most recent employee engagement survey, in the midst of the economic crisis, is evidence of our progress. The survey, which is totally anonymous and has been conducted every two years since 2006, also showed that 85% of our employees rate Sodexo as a better employer than its competitors. We are encouraged by this progress and it renews our confidence in our ability to accelerate profitable organic growth in the years ahead."

Revenue grows 3.9%

The 3.9% increase in revenues comprises the following:

• organic growth: +2.5%
• currency impact: +0.2%
• acquisitions and changes in scope of consolidation: +1.2%

In On-site Service Solutions, organic growth was 2.3%, including:

• moderate growth of +1.9% in North America, driven mainly by Education, Health Care and Seniors, offsetting the decrease in Corporate;
• an improvement to +1.7% in Continental Europe, resulting from strong business development in certain countries such as France and the Netherlands;
• a decline (-1.7%) in activity in the United Kingdom and Ireland, particularly in Corporate and Sports and Leisure;
• solid growth of +7.5% in the Rest of the World despite the conclusion of some major Remote Sites contracts; the increase resulted in particular from good growth in Latin America and from Sodexo's strong activity in Asia.

This organic growth also results from:

• +2% organic growth in Corporate, in particular as a result of satisfactory growth in Justice and Defense;
• +2.6% growth in Health Care and Seniors, lower than in the recent past as a result of often slower decision-making by prospective clients.
• A +2.3% increase in Education resulting from rising university enrollments but offset by lower spending by students and their families in the present economic environment.

The bulk of the 7.3% organic growth in Motivation Solutions stemmed from the excellent performance of Sodexo's Latin America teams. Issue volume rose to 12.5 billion euro, compared with 12.1 billion euro in the prior year.

Sodexo's key performance indicators reflect:

• an improvement in the client retention rate which increased to 94.2% from 93.5% in Fiscal 2009, reflecting, in particular, strong performance in North America;
• modest comparable unit growth of 2% across the Group, but close to zero in continental Europe and in the United Kingdom and Ireland;
• a business development rate (i.e., new contract wins) of 8%, compared to 6% in Fiscal 2009.

As part of the redefinition of Sodexo's strategic positioning, its activities were renamed in 2009 as follows:

• "Food and Facilities Management Services" became "On-site Service Solutions"
• "Service Vouchers and Cards" became "Motivation Solutions."

Increase in operating profit

Operating profit rose by +3.4% over the prior year to 771 million euro and by +9.5% at constant exchange rates.

This growth in operating profit resulted primarily from improved profitability in On-site Service Solutions as follows:

• in Continental Europe, reflecting in particular the successful integration of Zehnacker in Germany and improved performance in Sweden;
• in the United Kingdom and Ireland; and
• in the Rest of the World (Latin America, Asia and Remote Sites).

The increase also reflects growth in Motivation Solutions.

Operating profit was down slightly in North America as a result of reduced activity in Concierge Services in the present economic environment and a settlement payment of 15 million euro to resolve a dispute.

The newly introduced Contribution économique territoriale (CET), replacing the Taxe professionnelle or professional tax in France, also contributed 22 million euro to the positive trend in consolidated operating profit.

Exchange rate movements as compared to the previous fiscal year reduced operating profit by 47 million euro (-6.1%) due to currency translation impacts, the most significant of which resulted from the devaluation of the Venezuelan Bolivar Fuerte in January 2010.

The consolidated operating margin was 5.1%, comparable to the prior fiscal year. Excluding currency translation effects, the operating margin would have increased by 0.3 percentage points to 5.4%.

Zehnacker, Facilities Management specialist and a leader in Health Care in Germany.

Increase in net income and earnings per share

Group net income was 409 million euro, an increase of 4.1% compared to Fiscal 2009. Growth is higher than the increase in operating profit, a result of overall lower effective tax rates as the Group benefited from tax loss carryforwards in several countries.

Earnings per share was 2.64 euro, a 3.9% increase at current exchange rates.

Dividend

In view of the solid earnings growth, the strong generation of cash during the year and its strong confidence for the future, Sodexo's Board of Directors will propose an increase in the dividend of 6.3% over Fiscal 2009, to 1.35 euro per share at the January 24, 2011 General Shareholders Meeting. This represents a pay-out ratio of 52% on Group net income and a yield of 2.98% based upon a share price of 45.35 euros (as at August 31, 2010).

A cash generating financial model

Net cash provided by operating activities exceeded 1 billion euro, again demonstrating the quality of Sodexo's financial model, a major asset in the current economic climate. This significant improvement compared to Fiscal 2009 reflects the change in working capital needs. It should be noted that Fiscal 2009 net cash provided by operating activities was lower as a result of the impact of regulatory changes concerning supplier payment terms (in application of the Economic Modernization Law in France, among others). The increase in Fiscal 2010 also stems from the more than 138 million euro increase in vouchers redeemable in the Motivation Solutions activity as a result of solid growth in issue volumes in the last quarter and the success of the Eco Pass offer.

Net cash provided by operating activities enabled:

• net capital expenditures and client investments of 230 million euro (1.5% of revenues);
• acquisitions totaling 22 million euro, which mainly related to the acquisition of a 35% interest in Crèche Attitude in France and the buyout of a handful of minority interests in other Group subsidiaries.

Consequently, as of August 31, 2010, net debt was 656 million euro, compared to 889 million euro at August 31, 2009, representing 24% of Group consolidated equity, compared to 38% at August 31, 2009. Gross debt repayment capacity at August 31, 2010 represented 3.6 years of operating cash flow.

Subsequent events

At the end of January 2009, Sodexo joined the Metrix consortium, named preferred bidder for the British Defence Ministry tender for the design and implementation of the Defence Training Review, a program to meet the British armed forces' training needs for the next 30 years. On October 18, 2010, as part of wider spending cuts, the British Government terminated the procurement of this program in its current form. Since this announcement, Sodexo continues to work with the UK Ministry of Defence at the designated site for this project in Wales and, more broadly, on solutions better adapted to the armed forces' training needs in the medium term. As a result of this announcement, Sodexo recognized an impairment charge of 15 million euro for certain expenses incurred by the Group for which reimbursement is not certain at this stage.

Outlook

At the November 8, 2010 meeting of the Board of Directors, Sodexo CEO Michel Landel presented the outlook for Fiscal 2011.

With revenue growth of 3.9% for Fiscal 2010 and 2.5% organic growth, Michel Landel reminded the Board that, contrary to many major international corporations, Sodexo had continued to grow in the present global economic climate, as a result of:

• its focus on client segments with strong outsourcing potential (Health Care, Seniors, Education, Defense, and Justice);
• its comprehensive service solutions offer;
• its international presence; and
• the motivation and commitment of its teams.

In Fiscal 2010, Sodexo continued the transformation begun last year with the redefinition of its strategic positioning with the dual objectives of differentiation and positioning itself to seize new growth opportunities arising in the coming years. Sodexo is positioned as a strategic partner for its clients, providing them with comprehensive Quality of Daily Life service solutions.

To achieve this transformation, Sodexo has continued to invest in training for its teams and recruiting talent with new expertise.

Fiscal 2011 objectives

Against this still uncertain economic environment, which requires prudence, Sodexo has set the following goals for Fiscal 2011:

• a modest acceleration in organic revenue growth of between 3 and 4%;
• an increase in operating profit of around 10%, at constant exchange rates.

These objectives are based on:

• our growth indicators, in other words, our client retention rate, existing site sales and the development rate,
• continuing dynamism by Sodexo in the countries which will ensure future global growth.

These objectives also take into account the Group's ongoing drive for greater efficiency and productivity, both in the management of its sites and in overhead expenses.

Medium term

Sodexo once again confirms its medium term objectives, which are to achieve annual average revenue growth of 7% and an operating margin of 6%.

With a huge potential market estimated at over 780 billion euro, particularly in the Health Care, Seniors, Education, Justice and Defense segments in which the Group holds leadership positions, Sodexo enjoys major competitive advantages, including:

• a unique mission;
• strong shared values;
• committed teams;
• an integrated service solutions offer combining On-site Services Solutions, Motivation Solutions and Personal and Home Solutions;
• a unique global network, operating in 80 countries that account for over 80% of the world's population and more than 92% of global GDP;
• a financial model that has proven its strength and effectiveness, allowing Sodexo to self-finance its future development;
• and, finally, Sodexo's independence, allowing it to remain focused on a long-term strategy.