SDXAY Sodexo (PK)

Emerging markets will remain the growth engine for the catering industry, attracting investment and providing acquisition opportunities to offset the impact of ailing economies across Northern and Continental Europe, Compass Group PLC (CPG.LN) Chief Executive Richard Cousins told Dow Jones Newswires Wednesday.

Cousins said in an interview that since taking the helm of the Surrey, U.K.-based FTSE 100 business five years ago, he has brought focus to an "out of control" company by shrinking its geographical footprint, selling off underperforming assets and paring costs.

He said the company, which is the world's largest caterer by revenue ahead of French rival Sodexo (SW.FR), will "put more and more of our capital and focus into the emerging economies," which last month posted a 7.9% rise in third-quarter sales.

He expects double-digit organic revenue growth from growth markets such as Asia, Africa and Latin America, as well as further acquisition opportunities.

The group, which supplies around 4 billion meals a year to offices, schools, hospitals, armed forces and leisure centers in 50 countries, made five bolt-on acquisitions in India in the last 18 months, and has previously bought out joint venture agreements in both Brazil and Turkey. "We are beginning to see these [markets] as really significant growth engines," said Cousins.

"We have just bought a little business in Hong Kong. We are growing very strongly in the Middle East, China is very exciting and Russia is going well," he added.

Cousins is also upbeat on the U.S., which accounts for more than 40% of group operations. "The economy is not great, but it is better than the U.K. and Europe. The outsourcing trends are positive. We are pretty bullish."

However, corporate catering and hospitality have suffered as companies and government services cut costs amid austerity measures and a slow economic recovery, leading to falling sales in the U.K. and Ireland and only a modest rise in Europe in the third quarter.

"Our working assumption is that, in the U.K. and Europe, it's going to be tough [in the second half]. You can imagine that with some of the big banks, BT Group PLC (BT.A.LN), the Post Office -- they are taking people out all the time and we do notice that," Cousins said.

He also noted the challenge posed by input inflation which hits the company's margins despite an attempt to partially offset the higher raw materials costs through menu planning and pricing.

"What we are seeing globally today is food inflation between 2% and 4%, so 3% on average. If beef goes up by 10% and pork goes up by 4% it's fairly obvious what you do with planning your menus," said Cousins.

"We have to mitigate it as much as we possibly can. That probably takes the 3% headline down to 2% and then we have to pass the rest on through pricing."

The CEO also said paring logistic and distribution costs is a necessity. "We spend well over a billion (US) dollars a year globally on pure transportation from manufacturers to distributors."

Compass last month posted a rise in third-quarter sales and said its full-year expectations remained unchanged, despite a GBP20 million hit to second-half profit due to supply chain disruption in Japan following the March tsunami.

"We don't think Japan will be back to normal for some months," Cousins warned.

By Simon Zekaria, Dow Jones Newswires; +44 207 842-9410; simon.zekaria@dowjones.com

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