Sodexo reported fiscal 2013 first-quarter results that were largely on par with expectations. Revenue grew 7.4% to about EUR 4.95 billion in the quarter. However, favorable foreign exchange represented roughly half of this increase, as organic growth and acquisitions contributed only 2.1% and 1.1%, respectively.
The relatively modest organic growth in the quarter can be partially attributed to difficult prior-year comparisons that include revenue from the Rugby World Cup in the United Kingdom and a sizable U.S. health-care contract subsequently lost in 2012. In light of these preliminary results, management reaffirmed its mediumterm objectives of 7% average annual revenue growth and a 6.3% operating margin by 2015.
Sodexo’s voucher business, renamed benefits and rewards services, achieved organic revenue growth of 6.7%, which is less than we initially expected for this highly scalable business model. Economic conditions continued to affect European voucher issue volume, which increased only 2.8% in the quarter.
Conversely, issue volume in Latin America grew an impressive 18.4%, which reflects strong enthusiasm for such services in this particular market. However, we were not surprised to hear that this lucrative and highly scalable business model has attracted intense competition, as Brazilian commission growth lagged in the wake of increased issue volume.
Given the relative maturity of the food and facility services segment, we believe Sodexo’s ambitious margin target of 6.3% by 2015 depends partially on sustaining high growth rates in its voucher business, which could be difficult to achieve should European weakness continue beyond the next several quarters.
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