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Edited Transcript of BVI.PA earnings conference call or presentation 25-Jul-19 1:00pm GMT

Half Year 2019 Bureau Veritas SA Earnings Call

Paris Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Bureau Veritas SA earnings conference call or presentation Thursday, July 25, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Didier Michaud-Daniel

Bureau Veritas SA - CEO

* François Chabas

Bureau Veritas SA - Executive VP & Group CFO

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Conference Call Participants

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* Alexander Mees

JP Morgan Chase & Co, Research Division - Head of UK Small and Mid Cap Research

* Aymeric Poulain

Kepler Cheuvreux, Research Division - Head of Support Services Research

* Edward Stanley

Morgan Stanley, Research Division - Equity Analyst

* George Nicholas Gregory

Exane BNP Paribas, Research Division - Research Analyst

* Paul Daniel Alexander Sullivan

Barclays Bank PLC, Research Division - Director & Analyst

* Rory Edward McKenzie

UBS Investment Bank, Research Division - European Support Services Analyst

* Suhasini Varanasi

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Thomas Richard Sykes

Deutsche Bank AG, Research Division - Head of Business Svcs Co. Research & Industry & Leisure & Transport Research

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Presentation

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Operator [1]

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Hello and welcome to the Bureau Veritas H1 2019 results. My name is Molly, and I'll be your coordinator for today's event. (Operator Instructions) Please note that this call is also being recorded. I will now hand you over to your host, Didier Michaud-Daniel, CEO, to begin today's conference.

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [2]

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Thank you. Good morning, good afternoon and good evening to everyone. Thank you for joining Bureau Veritas H1 2019 Results Call and Webcast. François Chabas, our Group CFO, is here with me to present our half year results.

In the first half of the year, we have continued with our solid momentum of growth, portfolio diversification and financial and cash performance improvement. Everything is on track according to plan and we confirm our objectives for the full year. There are a few comments on H1 2019 performances. Group revenue grew by 5.3% year-on-year at constant currency. Organically, we achieved 4%. Our adjusted operating profit is up 6.9% at constant currency. We improved our margin by 25 basis points year-on-year at constant currency and before the application of IFRS 16.

Our adjusted net profit increased by 10.2% at constant currency. Regarding the 2018 dividend, 78.5% of our shareholders opted for payment in shares, a very good take-up rate. It is creating the confidence of our shareholders. Lastly, our free cash flow improved by 54% at constant currency. Together with the benefits of the scrip dividend, this enables us to reduce our adjusted net debt-to-EBITDA ratio from 2.82x last year to 2.25x at the end of June.

Moving to the financial review. François will now take us through the numbers. François, please.

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François Chabas, Bureau Veritas SA - Executive VP & Group CFO [3]

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Thank you, Didier. Good morning, good afternoon to all. Starting with the revenue bridge. We've delivered EUR 2.5 billion in the first semester with an overall growth of 5.9%, which breaks down as follows: First, organic growth reached 4% with similar growth in Q1 and in Q2. This illustrates the resilience of our portfolio today following our diversification effort over the past few years. We have now seen circa 4% organic growth over the past 5 quarters. External growth contributed 1.3% on a net basis. And finally, ForEx had a slightly positive impact of 0.6%, which is mainly attributed to the appreciation of the USD and the Chinese renminbi against the euro, while mitigated by the weaknesses of some emerging countries' currencies.

Turning now to the revenue growth by business in the first semester and the split between organic and external. As you can see, 5 out of our 6 businesses reached a solid base of organic growth of 4.7% on average and they represent 93% of the group revenue. Worth mentioning is the following: Agri-Food & Commodities obviously outperformed the average at plus 7.9% with good growth across the board. At the same time, late cyclical activities are recovering. M&O is up 5.4%. Industry is up 4.8%, and it fully benefits from improving Oil & Gas Capex markets.

Consumer Products grew 2.2% due notably to the phasing of new product launches in Q2. As expected, Certification declined 4%, a reflection of a transitional year post revision of standards.

Turning more specifically to the revenue growth for Q2. We've delivered 4% organic growth as well with Agri-Food & Commodities still the best performers; both industry and Marine & Offshore accelerating the recovery compared to Q1; Consumer Products easing in Q2; and Certification being more negative as a result of more challenging comparables. The comments on the growth between the base business and growth initiative in the first half, we saw an improvement year-on-year on the base business, up 3.4% organically. And in addition, our organic growth initiatives have continued to perform steadily, up 5.1% in H1. Altogether, these growth initiatives now represent 37% of group revenue.

Taking a look at M&A. We continue active portfolio management with the objective of seizing attractive acquisition opportunities and divesting nonstrategic businesses with [bit up our] margins.

In the first half of 2019, we added around EUR 45 million of annualized revenue with 4 acquisitions, notably reinforcing our footprint in the U.S.A and in Asia, in support of Building & Infrastructure and Agri-Food growth initiatives.

In parallel, we completed the disposal of 4 consulting business units providing health, safety and environmental services in North America. These businesses generated roughly USD 30 million in revenue in 2018 and weighted on the overall divisional margin. It would be deconsolidated from our financial statements from the third quarter onwards.

Now a few key points regarding the half year 2019 results. I would comment on the numbers before application of IFRS 16 so as to compare performance versus last year's numbers. We of course disclose the numbers after application of IFRS 16 as well, as you can read on the first column in the table.

Adjusted margin increased by 30 basis points to 15.2%, of which 25 basis points at constant currency. It is fully consistent with our full year guidance.

Adjusted EPS is up 9.6% at constant currency. Free cash flow is up 54% at constant currency. And we'll come back to the details of the cash flow in a minute. And finally, adjusted net debt is down 14% versus last year, benefiting from the strong free cash flow performance in the first semester and the positive impact from the scrip dividend.

Turning to the adjusted operating margin. In H1, it improved to 15.2% before application of IFRS 16, again. It reflects a 20 basis point organic improvement, a 5 basis point positive scope impact and a 5 basis point positive ForEx impact. So all in all, 30 basis points gain versus last year.

3 out of 6 business activities posted stable or improving EBIT margins, adding 50 basis points to the group organic margin. This was driven by a significant improvement in Agri-Food & Commodities and a solid performance in Customer Products. This is -- this improvement is the result of a combination of operating leverage, strict cost management, lean efforts and restructuring payback. Three businesses experienced lower margin due to lower operating leverage, price pressure or change of mix in these activities. This concerns Certification and to some extent, Industry and M&O.

Note that our adjusted operating profit margin after application of IFRS 16 is 15.4%, which means another 20 basis points additional. Operating margins by business would be covered by Didier in the business review.

Looking at the operating profit on Slide 13. It is up 12.1%. Proactive cost management measures resulted in EUR 12.1 million restructuring cost. These were mainly headcount reduction-driven. Actions were taken in Buildings & Infrastructure operations, Commodities-related activities and Industry businesses. This restructuring was lower than last year in the same period of the year.

For 2019, our expectation of restructuring charges remains unchanged at around half the amount of 2018. So in the range of EUR 20 million to EUR 25 million full year. This marks the end of a period of material restructuring, obviously.

Under net financial expenses, we have, first, a slight increase in financial charges mainly due to higher average gross debt following early debt refinancing. Secondly, the depreciation of several emerging country currencies increased the ForEx impact from minus EUR 2 million to minus EUR 4.3 million in the first semester.

Looking now at the tax rate, the adjusted effective tax rate of the group was down 170 basis points at 31.1%. This decrease is mainly explained by the new rules for the tax deduction of interest applicable in France from 2019. For the full year 2019, we expect our adjusted ETR to be at the bottom of the 33% to 34% range that we are guiding for.

Moving now to the cash flow. So there are several elements behind the significant improvement. First, the increase in profit before income tax, mainly driven by higher operating profits and less restructuring items. Second, a very disciplined approach when it comes to CapEx, with net CapEx at EUR 51 million, which represents 2.1% of the revenue. We expect this to be around 3% for the full year 2019.

And lastly, a decrease in interest paid. So all in all, free cash flow increased by 55% year-on-year and organically, by 59%.

A rapid focus on working capital. In the first half of 2019, we continued to deploy our Move For Cash program. We further reduced working capital ratio by 70 basis points versus June last year to 11.7% of the group revenue. As you can read on the charts, since June 2016, our working capital has been reduced by 130 basis points altogether.

Be aware that given the seasonality of our business, as you know, working capital is always higher in H1 than on a full year basis as you can see in the chart. Working capital reduction remains a top priority for the group. And we continue and reinforce our actions moving forward.

Coming now to the overall financial structure of the company. The adjusted net debt stands at EUR 2.1 billion, down 14% compared to June last year and stable compared to December 2018. The strong debt situation at the end of June reflects: one, strong free cash flow generation of EUR 98 million before IFRS 16; a disciplined M&A strategy with EUR 30 million -- EUR 39 million of spend net of divestment; and third, a regular dividend outflow of EUR 69 million given the strong take-up rate for the scrip dividend in H1. So we closed the first half of the year with a leverage ratio of 2.25x, down from 2.82x in June last year and far below our 3.25x bank covenant. This ratio is below end of December 2018 ratio of 2.34x despite our historical seasonality H1, H2. So to conclude, after the strong set of H1 2019 results, margin delivery and cash will remain our top priority for the second semester. And I now hand it back to Didier for the business review.

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [4]

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Thank you, François. Thank you. For the business review, please remember that the numbers I will comment are pre-IFRS 16.

Starting with Marine & Offshore. Revenue increased by 5.4% organically in the first half and by 7.6% in Q2, benefiting from the recovery in new orders, high single-digit growth in construction led by the equipment certification business in North Asia, low single-digit growth for core-in service, with some modest growth of the fleet against continuing price pressure.

Offshore. Offshore was primarily driven by the extension of services and the stabilization of risk assessment studies.

New orders totaled 3.5 million gross tons at the end of June 2019, stable year-on-year, reflecting the group's ability to renew backlog in a market that is down year-to-date.

In fact, the group benefits from its strong positioning on the most dynamic segments, namely; LNG and passenger ships. Our order book stood at 14.1 million gross tons, stable compared to December 2018, with ships including more technological content. Our margin was slightly down impacted by a positive one-off item recorded last year.

2019 outlook, we continue to expect M&O full year organic growth to be positive and full year margin to slightly improve.

Turning to Agri-Food & Commodities. Revenue increased by 7.9% organically in H1, pursuing strong trend observed in the first quarter. By subsegment, Metals & Minerals confirmed strong recovery with organic growth up 10%, both upstream and trade activities performed strongly across most geographies. Gold and base metals continue to be strong performers.

Agri-Food. Agri-Food grew by 9.2% organically coming from both agri and food products. The agribusiness benefited from new contract wins, notably in precision farming. The food business maintained strong trends across all geographies, thanks to the development of several growth initiatives and the contribution from recent acquisitions.

Oil & Petrochemicals was up by 1.4% organically, reflecting high single-digit growth in Europe, thanks to new services, marine fuels, oil condition monitoring, while being broadly stable in North America due to bad weather conditions and persistent price pressure.

Lastly, Government Services performed strongly, benefiting from the ramp-up of VOC and single window contracts. The margin was strongly up by 230 basis points to 13.5%, a combination of operating leverage, mix and restructuring payback.

2019 outlook. We now expect slightly higher organic revenue growth compared to 2018, fueled by solid Metals & Minerals market, robust Agri-Food businesses and improving Government Services. We also expect margin improvement led by restructuring and positive mix.

For Industry now. The business confirmed its recovery, up 4.8% organically with acceleration in Q2 at 5.8%. This results from improving Oil & Gas market conditions and the benefits of our successful OpEx diversification.

Oil & Gas Capex-related activities grew 7.8% in the first half and 11% in Q2, most was led by the U.S., by Latam and Africa. Projects were primarily small- and medium-sized projects focused on gas and onshore activities.

Oil & Gas Opex was up high single digit with strong volume increases in Latam, the Middle East and Europe. We achieved 16.8% organic growth in Power & Utilities Opex with a ramp-up of several contracts in Latin America.

The margin declined 70 basis points organically due to negative mix effect with the high growth in Opex-related services still in a ramp-up phase.

The outlook for 2019. We expect the business to achieve slightly higher organic revenue growth versus 2018. Our strategy of Opex Services diversification will continue to pay off. Oil & Gas Capex markets will continue to improve. We expect a margin improvement led by restructuring benefit and more positive mix.

In B&I now, Building & Infrastructure. Revenue increased by 3.1% organically with slightly stronger organic growth for construction-related activities. Organic growth performance was varied across the different continents. Our operations in China delivered 10% organic growth, where our prospects remain strong from infrastructure project driving the high single-digit growth across the Asia-Pacific region. The weak reais in Brazil, strong growth in Colombia and solid growth in the United States, in particular, for good compliance services and data center commissioning, all contributed to the mid-single digits in the Americas. Europe was stable with limited growth in France, offsetting negative performance in Spain and in the U.K.

France is facing subdued conditions in the Capex-related activities and a weak start to the Europe for OpEx-related works. We expect gradual improvements here. The margin was largely stable organically. For the full year of 2019, we expect the business to achieve slightly lower rate of organic revenue growth compared to 2018, with an acceleration expected in H2. This will be led by solid growth in Asia, U.S. and Latin America and resilience in France. Margins are expected to improve slightly.

Turning to Certification. The business of course continues to record negative organic growth in 2019 as expected, minus 4.1% in H1 and minus 5.9% in Q2. You will remember last year, we benefited from an exceptionally high level of activity due to the September compliance deadline for new QHSE and transportation standards.

This backdrop has matched our highly successful portfolio diversification where revenues from new product development are up 22%. This includes double-digit growth in food certification, sustainability, social audit and for our enterprise risk management offering. Margins declined by 110 basis points to 16.8%, reflecting the impact of negative revenue growth and mix effect.

Outlook for 2019. Certification is expected to deliver a negative organic revenue growth with the impact from the QHSE and transportation transition, which ended in September 2018 and of course, creates challenging comparables for the first 9 months of the year. Solid growth elsewhere, primarily driven by food schemes, sustainability, training and customized audits. Profitability-wise, we are focusing on margin protection.

For Consumer Products, the business delivered a 2.2% organic growth in the first half but slowed to 0.8% in Q2 as anticipated.

Softlines grew in the line with the divisional average. Performance was mixed geographically with a strong momentum in South and Southeast Asia and weaker trading conditions in the U.S. Hardlines grew thanks to Europe at a rate below the divisional average.

The Electricals & Electronics segment grew low single digit. Here, the growth came from mobile testing even if we have noticed a temporary slowdown on new product development, ahead of the 5G launch later this year. Our margin improved by 70 basis points to a strong 24.3%, thanks to efficiency gains.

I would like to say a quick word on the U.S. trade tariffs on China.

As a reminder, only 5% of our Consumer Products business is within the current scope of tariff increases. Consumer Products is a global business with multiple growth engines, and we can easily follow manufacturing relocations and supply chain changes. While our business is stable in Northeast Asia, it is growing elsewhere, including double-digit growth in Southeast Asia.

In 2019, we expect for Consumer Products, a slightly lower organic growth compared to 2018 with a gradual improvement in H2, strong momentum in Southeast Asia, solid growth in Europe, resilience in China and challenging conditions in the U.S. We are focusing on margin protection throughout 2019.

The outlook following the strong first half, we confirm our full year 2019 guidance and expect the good momentum to continue in H2 to deliver solid organic revenue growth, continued adjusted operating margin improvement at constant currency, sustained strong cash flow generation.

This strong set of results provides a perfect illustration of the group's new profile, thanks to the successful transformation undertaken over the past few years. We now have much of the growth profile and cyclical resilience we were looking to achieve. We have significantly improved cash flow generation and deleveraged the balance sheet. In the first half, we have seen the full benefits of diversification. So to conclude, we are extremely pleased with the strong momentum in the first half of 2019. Thank you for listening. François and I are now pleased to answer any question you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Edward Stanley calling from Morgan Stanley.

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Edward Stanley, Morgan Stanley, Research Division - Equity Analyst [2]

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I've got 3 quick ones, please. On Agri-Food, you say slightly higher for the year versus FY '18 for organic growth. If I see this 5% or so for the full year, then that includes 2% in the second half. And yes, you've got some tough comps in Metals and Agri-Food, but that seems quite an extreme slowdown in a division that's doing well. Secondly, in Consumer, you talk about margin protection in the outlook, but the only other place you talk about, that kind of wording, is in the Certification division where growth and margin trends are, obviously, very different in the first half. So can you elaborate on what margin protection really means, specifically, for Consumer? And I hate to labor the point, finally, but on the scrip dividends, I mean, it's clearly a big contributor to better cash and deleveraging. So in an ideal world, would you continue to try to do that until you reach a certain leverage level? Or what's the thinking behind continuing doing that?

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [3]

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So thank you, Edward, for your question, and good afternoon. For the scrip dividend, of course, this is not the decision which has been made today. And as you can imagine, this is going to be included in the future in the board, so I'm not going to talk about next year or today. So we will see what's going to happen next year. We are very happy this year that 78.5% of the dividends were taken in shares, which is really showing the confidence of the market in the future of Bureau Veritas. Regarding the margin protection for the Consumer business, clearly, in the first half, we did very well by improving by 70 basis points the margin. It's coming, when you look at it in the detail, essentially from the mix because as you could see with the slowdown of CPS in Q2, some project are deferred, waiting for the 5G testing implementation. And we know that there is a mix effect, so we did very well in H1. What we want is to keep the margin and deliver we had last year for the full year.

Regarding the Agri-Food & Commodities business, I gave a qualitative guidance. 2018 was 4.5% organic growth. We believe that we will achieve probably the same type of organic growth. When I say the same type, better than last year, in 2019.

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Operator [4]

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The next question comes from the line of Paul Sullivan calling from Barclays.

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Paul Daniel Alexander Sullivan, Barclays Bank PLC, Research Division - Director & Analyst [5]

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Just a follow-up on the margin point. So in Consumer, should we be thinking -- obviously, a risk that the margin could go backwards in the second half. And similarly, in AFL -- I'm sorry, in Agri-Food & Commodities, the margin expansion in the first half, is there any reason why that shouldn't be extrapolated into the second half? And then just from a sort of a bigger picture perspective, overall, is there anything on your horizon that would suggest that for the group, organic growth or margins shouldn't be better in the second half versus the first? Because in theory, looking at some of the mix effect and some of the acceleration that you expect to see in some divisions, it should improve second half on the first half.

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [6]

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Paul, thank you for your question. It's a good try regarding the second half organic growth. Clearly, the guidance is solely the organic growth for the full year. What you could see clearly that we have already achieved 5 times in a row -- 5 quarters in a row, 4% of organic growth, so it could give you an idea of what we will achieve in the second part of the year, which will probably be a good news to achieve our guidance, which is solid organic growth for the year.

Now regarding the margin for Agri-Food. In fact, it's a different distribution between the first semester as we did extremely well in terms of organic growth and the second one. I'm talking about Agri-Food margin. Knowing that, of course, we will benefit for sure and we are benefiting already from the good job that we did in the past, in particular, in restructuring. And I'm talking in this case of the restructuring of the Metals & Minerals lab, knowing that, and you know it, we decided to close some labs in the past. And with more volume in some other, so -- which is helping, of course, us to achieve a better margin. As we know, in this business, most of the improvement in the margin is coming from volume. As the volume is very good in H1, it should be good in the second part of the year. We should see an improvement in term of margin.

Now regarding the Consumer Products division, the impact on the margin is positive in the H1 because we have less -- you know that we are leader in wireless testing -- wireless product testing, and we have less electronics and electrics to be tested in the first part, which has a lower margin. We know already that there will be an acceleration in the second part of the year and with -- the organic growth should resume, meaning that we believe that we could achieve the margin that we earned last year for CPS for the full year.

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Operator [7]

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The next question comes from the line of Alexander Mees calling from JP Morgan.

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Alexander Mees, JP Morgan Chase & Co, Research Division - Head of UK Small and Mid Cap Research [8]

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Just firstly, I wonder, within Marine & Offshore, do you expect the recovery in new construction to continue into 2020, I wonder what your thought is -- firstly is, in that respect. Secondly, with regard to the Consumer Products division, you referred to challenging conditions in the U.S., could you just clarify whether that's entirely a function of the trade tensions with China? Or whether there's something else going on there? And finally, just thinking about your 2020 revenue targets, I wonder if you could quantify how much revenue you would like to acquire by the end of 2020 to make sure you get to that target, please?

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [9]

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Okay. So on your last question, I'm not going to give you more details. What I can tell you is that we have a robust pipeline. As you know, Alexander, we have decided to be extremely disciplined in our acquisitions, which are fully focused on the various markets that we decided to take over in 2015. And mostly into (inaudible) China and the U.S. So we still have some opportunities. My obsession is not this tier. My obsession is to make the right acquisition, which fit perfectly to our model, which will help us to be sure that we deliver in the future more organic growth with a good working capital and with a good margin.

On the Consumer division, in the U.S., in fact, you know it, I'm sure you read the newspaper as I do, you have some companies which are (inaudible). I think about Sears, I think about Toys"R"Us. These companies are big clients for us. So we had large contract with them and it's the reason why, clearly, in Q2, we were at the end of these contracts. What we can see that we decided to focus on some other clients, our backlog now is ready to go again in the second part of the year. On the line, and I'm sure it's too early to talk about 2020, of course. Just what I can tell you is that we have good order intake, and the good news is that these orders are coming mostly from ships which have high content of technology, meaning with probably a good opportunity in terms of revenue recognition this year and probably for 2020. But we'll discuss 2020 next year at the end of February.

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Operator [10]

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The next question comes from the line of Rory McKenzie calling from UBS.

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Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [11]

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Just 2 for me, please. Firstly, can you talk about the sustainability of your growth in Industry? And often, you've signed some good projects, so how long do they run for? And what's the pipeline for further contract wins? And then secondly on the working capital as a percentage of sales and you clearly reduced that and that's great. But I'm aware that the period-end was on a weekend, which presumably made collections more difficult. As you've clearly kind of stepped up your efforts on that front, do you think that we should expect an even bigger year-on-year improvement by the end of H2 as that period-end impact shouldn't be as visible?

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [12]

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Okay. Thank you, Rory. François, maybe you could start by answering the second question, and then we'll take the first one.

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François Chabas, Bureau Veritas SA - Executive VP & Group CFO [13]

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Well, you've spotted well that we've been negatively impacted by the fact that the 2019, 30th of June were weekends. So mathematically, we have indeed a lot of clients paying with payment terms, whatever, 45 days end of month. So this has been indeed moved to first of July. So mathematically, we got the transfer from H1 to H2. That's very clear. Now this being said, do not expect us to deliver another time 50% more free cash flow on the full year basis. I would be very happy to report this in -- at the end of February, but I'm afraid this is not our guidance at the moment. The reason, I think we need to be very humble here. As you know, you know the profile of the cash in the company, H1 remains, I would say, a small part of our full year free cash flow quarter. So we've done very well with relatively low comparables and very strict discipline, especially on CapEx. As you see, we've spent a bit more than 2% of revenue. We are guiding for the year to reach 3% of the revenue on CapEx, which mathematically means 4% of the revenue on CapEx for H2. Didier mentioned investments we want to make to support the growth of CPS and 5G. This is coming in H2, another project by itself. I think we -- obviously, we confirm our guidance on the strong cash flow generation, but do not put yet in your model the plus 50% you are dreaming of.

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [14]

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Okay. François, thank you for this very valuable answer, I think. Okay, let's move in now to Industry. In Industry, your question is a very interesting one because as you could see, in Q2, we accelerated our organic growth, of course, and we know it, we will have tougher comparables in Q4. But even so, I must say that we have a good pipeline. We have a good pipeline and a good backlog of opportunities in Oil & Gas. And we have a good backlog and good opportunities in Power & Utilities. So we should have clearly a good year in Industry and achieve the guidance that I just have given to you.

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Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [15]

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And just on Industry, are they still the smaller types of projects? Or is there anything larger in your pipeline at the moment?

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [16]

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I don't know what you mean by larger. If larger is EUR 10 million, we can see more contracts -- potential contracts at that level. If larger means EUR 60 million, we do not see now this type of contract.

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Operator [17]

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The next question comes from the line of Tom Sykes calling from Deutsche Bank.

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Thomas Richard Sykes, Deutsche Bank AG, Research Division - Head of Business Svcs Co. Research & Industry & Leisure & Transport Research [18]

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So just coming back to that comment on CapEx and then the working capital. So you're saying it's likely you'll spend about EUR 100 million on the CapEx in the second half? Or is that very much at the upper end? And if you look at the combined impact, say, of increased CapEx and better working capital, are you expecting those to sort of let off this year? Or would you expect the combination of those to be a little bit positive for you, please? And then just on Latam growth, it was very strong at 9%. And I was wondering if you could just give a little bit of detail as to what was driving that, sort of business-wise? And then also the inflation element that was in that and whether that growth rate is really sustainable at the 9% at least?

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [19]

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First, I must say that Latam has done a very good job. It's quite a very good organic growth. And talking about inflation, when you're assuming different countries with very different inflation, from Chile to Argentina, we cannot compare. Whatever, at the end of the day, we are close to 10% of organic growth, which is good. And it's coming from 3 major factors: the first one, we are really continuing to enjoy very good and important contracts in Power & Utilities business, which is good news because it's mostly OpEx, meaning that resilient type of business, long-term contracts. The second good news is coming from Agri, and we are doing very well in agriculture. As you know, Brazil is now becoming the first exporter of soya to China. And we are very involved in this type of the business in Brazil. The third factor is Construction, which is resuming in Brazil and Colombia. In Mexico, we made a very good acquisition a little bit more than 1 year. And last but not least, the core business has stabilized now at a low level, but it has stabilized. We could expect even in the future that it will start, but for the moment, it has stabilized. Of course, it's helping us to deliver good organic growth in Latam. And you had a second question on CapEx. François?

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François Chabas, Bureau Veritas SA - Executive VP & Group CFO [20]

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Yes, Tom. So regarding your question between the balance on CapEx and working capital. Your computation is correct, 4% means roughly EUR 100 million in terms of CapEx. Whether we're going to spend all of it or not is to be assessed. But that's the order of magnitude, right? When it comes to would that be exactly 100% balanced by the operating cash flow generated by the company, I mean, the -- as I said, when you look at the amount of free cash which is on H2, it's too early to say. I mean, we are talking here big numbers. So what is for sure is that we'd keep on our focus on free cash and on working capital reduction. There is no doubt about it. And all the management team of Bureau Veritas is clearly committed and focused on those indicators. Frankly speaking, what counts for us is to make sure that we make the right CapEx movement, especially when it comes to CPS, to prepare the growth on 5G. Whether it will be exactly the equivalent of the working cap improvement or a bit below, too early to say. And -- but what is for sure is that we maintain our guidance when it comes to strong cash flow generation for the year.

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [21]

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I must admit maybe to -- even if François gave you very good comment on that, we are really putting a lot of focus on cash. As you could see, that I can tell you that with the move for cash and 2 (inaudible) that we put in place, the pressure is higher. And the good news is that we get the payback.

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Thomas Richard Sykes, Deutsche Bank AG, Research Division - Head of Business Svcs Co. Research & Industry & Leisure & Transport Research [22]

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I was going to ask what behavioral changes can you maybe point to or -- specifically, I suppose, in the B&I business in China, is the change in payment terms there, is that having a tangible benefit yet? Or is that something we hopefully would see in H2?

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François Chabas, Bureau Veritas SA - Executive VP & Group CFO [23]

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Well, I think this -- we are -- well, it's too early to say that the improvements you see here is coming from China, not yet, which is a way to say that there is still some potential for further improvement. But this is -- as I've mentioned now for a couple of times, this is our real focus. And as I mentioned regarding the contractual terms, this is a journey that we have embarked on that will last most probably 12 to 18 months simply because of the current duration of the contracts. So in a nutshell, the figures you see at the end of June are not impacted in any positive manner by China, to make it very simple.

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Operator [24]

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The next question comes from the line of Suhasini Varanasi calling from Goldman Sachs.

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Suhasini Varanasi, Goldman Sachs Group Inc., Research Division - Equity Analyst [25]

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Just a few for me, please. On the Industry division, margins have obviously fallen in first half despite your Capex activities reaching double-digit levels in 2Q. Can you please talk about what happened in -- I mean, why you expect the price mix to improve in second half of the year? And why margin should improve as a result of that? And maybe a comment on pricing in the Oil & Gas projects, that would be helpful. And maybe 2 housekeeping questions. CapEx to sales has been circa 3%, all this in the last 2 years. You're guiding for circa 3% this year as well. So is it fair to assume that it's going to remain at these levels medium term as well? And the last one is on the tax rate. Can you give your guidance on tax rate for this year and the next, because it looks like you had some small changes to your French tax rate according to your first half release?

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [26]

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Okay. I'm going to start with your 2 first questions. So on the Industry, you're right, the margin at the beginning of the year is a little bit lower than last year. Clearly, we have recorded some very good contracts, as I said before, in Latin America. And the most of them are Opex Power & Utilities. There is a ramp-up phase. We need to invest at first, and we need to buy cars, tools and so on. So -- and on top of it, of course, we need sometimes to train the guys who are going to be in charge of delivering the services. And there is a ramp-up phase. And of course, from the beginning of the year, we are very happy because we can enjoy, thanks to this contract, a good organic growth. But progressively, the margin is going to move up along the year to be at a level that was meant, probably, a little -- slightly above last year.

On the pricing on Oil & Gas. We discussed it before. There was some price pressure, a lot of price pressure, varies clearly because of the demand which is becoming higher than the supply today, less than price pressure than before. I'm not talking about Opex, where we can still see some price pressure. But on the Capex side, of course, there are a lot more projects, and we are leader as you know in this Capex activity. Clearly, there is no comparison between now and what was the pressure around 3 years ago.

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Suhasini Varanasi, Goldman Sachs Group Inc., Research Division - Equity Analyst [27]

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So you should be able to see margin improvement coming from the Capex activities at least, right?

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [28]

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Oh, yes. That's for sure. You are right. Now 2 questions for you, François, one on CapEx and tax rate.

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François Chabas, Bureau Veritas SA - Executive VP & Group CFO [29]

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Yes. I will take the housekeeping ones. So first, CapEx, 3%, moving forward, that's what you can plug in your model. Tax rates, we have a situation where we had indeed, say, a good news in H1. The -- what we're guiding for is still within the 33% to 34% range, probably the lower part of the range. The reason being that in H2, we will have to distribute internally, dividends, the usual way we are doing it. And as you know, there are some tax friction, as we say in good French, when you internally distribute dividends, move them up, rather, we'll have more in H2 than we had last year. So by and large, we are a bit more optimistic on the guidance, moving at the lower end of the range, 33% to 34%.

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Suhasini Varanasi, Goldman Sachs Group Inc., Research Division - Equity Analyst [30]

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Got it. Just one follow up, please. In 3Q, I think you have 1 extra working day as well. So you would expect some small benefit from that in 3Q?

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [31]

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When? You mean in Q3?

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Suhasini Varanasi, Goldman Sachs Group Inc., Research Division - Equity Analyst [32]

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Q3, yes.

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [33]

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Ah, yes. Because you said Q2, so I was a little bit [confused] by the question, sorry.

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Suhasini Varanasi, Goldman Sachs Group Inc., Research Division - Equity Analyst [34]

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Sorry.

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [35]

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Missus, we looked at each year. When I look at it -- so I can see it on the -- it seems to be the same number of days. So I'm a little bit surprised by your question. In fact, it's going to be plus 1 in Q3, minus 1 in Q4. So there would be no impact in H2 in fact.

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Suhasini Varanasi, Goldman Sachs Group Inc., Research Division - Equity Analyst [36]

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So in 3Q, you should see some benefits, right? Q3?

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [37]

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Right. When you have one more day, as you know, we usually have some benefit. But again, there is 1 less day in Q4.

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Operator [38]

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The next question comes from the line of Aymeric Poulain calling from Kepler Cheuvreux.

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Aymeric Poulain, Kepler Cheuvreux, Research Division - Head of Support Services Research [39]

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Three questions, please. One is a follow-up on the working capital comments you mentioned on the Chinese payment terms. Just wondering in the new Chinese contract that you're signing right now on the infrastructure side, are you seeing a change of behavior or not? That would be helpful. Secondly, you made a disposal in the first half, I was wondering if there were other parts of the portfolio that could be also disposed of in the coming year? And lastly, on Certification, you mentioned a new product development segment, up 22%. I was wondering what was this new product development you were referring to. And how big this segment represented as a percentage of the total? And how we should interpret this figure going forward?

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [40]

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Okay. Aymeric, thank you. So I'm going to just start by your last question on Certification. So clearly, the 22% up is coming from what I could say new schemes. The good news is, as you may know, in Certification, there are more and more clients which are asking for schemes mostly to protect their brand or to improve sustainability. A good example, for instance, if you have one -- you could have one of our clients (inaudible) on CO2 emission. And of course, you would like now to have -- go over test to certify that this result is consistent with what is nonsense. So -- and we have also social audits, which are customized and new certification program. For instance, we launched a new scheme which is Circular+ to work under circular economy. So the good news for me that all of these new schemes are not purely ISO. And there is a clear acceleration of clients asking us to certify against sustainability, social audit, customized, even food supply chain. So this is good news clearly for the future. Cybersecurity is another example. So this business is going to go in the future, but we have the opportunity to talk about it in the future, no doubt about it. François, you take the 2 first questions.

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François Chabas, Bureau Veritas SA - Executive VP & Group CFO [41]

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Yes. Of course. Your first question on working capital and more specifically, China, so the main moves we've -- we are making currently to cascade down the intensive scheme on cash generation down to the sales teams to ensure that the salespeople get to, let's say, get to feel the pressure as well as, as you rightfully pointed out, the core of the battle is under the contracted terms. So I would say right now, the third of our business is moving towards getting down payments in the contracts. So that's where we are at the moment. It's not yet fully satisfactory. So we continue pushing with -- going further with the team into the direction of reducing working capital requirements.

Second question, another housekeeping question, from what I understand, and when it comes to disposal, we've, as you say, performed one disposal in H1. This is the outcome of a portfolio review that has been conducted, whereby we've identified couple of businesses that are not core for BV and [bit of our] margins. You may see in the coming months or semesters disposal if the market is fit. And we are in no hurry. Things will take the time it needed to get the best value. But we don't expect us to divest the full division, we're talking about targeted geographically located disposal. A little bit of this impact, you'll see in the U.S.

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Operator [42]

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(Operator Instructions) The next question comes from the line of George Gregory calling from Exane.

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George Nicholas Gregory, Exane BNP Paribas, Research Division - Research Analyst [43]

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Three, please. Firstly, I wondered -- sorry, but I'm not sure if I missed this because I was briefly disconnected. Can you provide a rough indication of the margin on the disposed HSE business, which, if I understood correctly from François' comment, is dilutive to the Industry margin? Secondly, looking at the difference between adjusted EBIT and your cash flow from operations, it looks like there's about a EUR 47 million cash outflow in the first half. Just wondering what drove this. And whether we should expect additional cash outflows or movements in the second half? And my final question relates to your average net debt position. You highlighted, I think, François, in your presentation, an increase in average indebtedness, yet, if we compare the average net debt position for the first half of 2018 and the same for 2019 using your disclosed period-end debt levels, it would appear to be lower. Does that mean your average net debt intra-period has gone up, please?

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [44]

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I'm going to start by, George, your first question in order. We said it today that EHS (sic) [HSE] in the U.S. -- those are the ones we decided to divest was not exclusively because of the margin. Even if the margin was below the average margin of the goods but mostly because as we worked on the portfolio and we had the portfolio review really detailed, we decided that this business is not core business for Bureau Veritas anymore. And it's the reason why we decided it's more strategic decision first. Of course, it has an impact on the margin, but it's very small impact because this business was very small. It's marginal, this type of impact. So there was another question from George. François? Two questions, sorry.

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François Chabas, Bureau Veritas SA - Executive VP & Group CFO [45]

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Two questions. So George, for the [EUR 4 million, EUR 5 million] question, not quite sure which line you're referring to for the sake of you getting the right answer and everybody not spending too much time. I suggest you turn the question to Laurent, and we would get -- we get back to you in more detail. When it comes to the net financial charges, what we are actually carrying is the cost that is ending -- now this has ended actually at the end of June. This is the cost of the refinancing of the BV debt. We have refinanced all of 2020 in October. So we are carrying some interest in the first semester. Now all the program have been refinanced and we are back to normal.

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George Nicholas Gregory, Exane BNP Paribas, Research Division - Research Analyst [46]

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Okay. So it was the gross indebtedness rather than the net position that you were referring to?

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François Chabas, Bureau Veritas SA - Executive VP & Group CFO [47]

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Correct. Correct.

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [48]

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That was the last question, Laurent? Okay. Thank you very much to all. And I wish you for those who are going to be holidays -- on holidays, good holidays, not bad.

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Operator [49]

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Thank you for joining today's call. You may now disconnect your lines.