Jobs at risk as Compass heads south

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Compass Groupunveiled the spectre of swingeing job cuts yesterday as the embattled caterer seeks to cut its £1bn overheads bill and get its faltering global business back on track.

Compass Groupunveiled the spectre of swingeing job cuts yesterday as the embattled caterer seeks to cut its £1bn overheads bill and get its faltering global business back on track.

Shares in the group fell after it scotched hopes that it was limbering up to sell assets and hand cash back to investors. A surprise rise in Compass's pension liabilities under new accounting rules also hit its stock, which plunged 6 per cent to 222.75p.

The company, which has issued two profits warnings in the past eight months, is reviewing all aspects of its business after interim pre-tax profits fell 15 per cent to £124m. As a first step, it intends to slash its operating costs by £50m over the next 18 months and improve its return on capital and free cash flow.

Mike Bailey, the chief executive, admitted he was unhappy with the group's performance. "I'm still as positive on Compass today as I've always been. The model is far from broken," he said.

Although Compass has sold a controlling stake in its New York delicatessen chain, Au Bon Pain, for $90m (£49m), Mr Bailey said this was not the start of a wider disposal programme. "I haven't got a laundry list of businesses that I'm preparing to sell," he said. Neither are share buy-backs "on the agenda", he added.

Asked whether he felt his position was under threat, he said: "That is not something I get into. I am here to run the business and that is what I am doing. If someone is unhappy, no doubt the board will tell me."

Robert Morton, at Investec Securities, said: "There's no question that his goodwill with the market has worn very thin but if he is delivering he will remain there."

Compass has been beset by woes involving distribution and its school meals division in the UK, and its contracts to feed military divisions in the Middle East.

Operating profits in the UK fell 27 per cent to £89m in the six months to 31 March, while the country's operating margin decreased to 6.2 per cent from 9.2 per cent. Underlying sales from its UK education arm, Scholarest, fell 2 per cent. Scholarest, which was in the firing line thanks to Jamie Oliver's campaign to improve school meals, lost two contracts with local education authorities during that period. Compass said yesterday cost inflation in the UK and new, lower-margin business would hit its margins for the full year.

The company is upping its annual pension fund contributions of £42m by about one-third to help reduce its liabilities, which have risen by up to £170m under the new accounting rules. It set itself new targets of generating £1bn of free cash flow from 2006 to 2008, and improving its return on capital employed rate by 100 basis points during the same period. The group is on track to hit this year's free cash flow target of £350m to £370m and is still expecting underlying sales to increase by 6 per cent.

Mr Bailey declined to comment on how many jobs he would axe from its 400,000 global workforce. He said the £50m cost savings would cost £50m to achieve but would then fall straight through to the bottom line.

The group has begun a search for a new chairman after placating investors with the announcement that Sir Francis Mackay will step down at next year's annual meeting.

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