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Edited Transcript of ITRK.L earnings conference call or presentation 1-Aug-19 7:00am GMT

Half Year 2019 Intertek Group PLC Earnings Call

London Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Intertek Group PLC earnings conference call or presentation Thursday, August 1, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* André Pierre Joseph Lacroix

Intertek Group plc - CEO & Director

* Ross McCluskey

Intertek Group plc - Group CFO & Executive Director

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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

* David Roux

BofA Merrill Lynch, Research Division - Associate

* Edward Stanley

Morgan Stanley, Research Division - Equity Analyst

* George Nicholas Gregory

Exane BNP Paribas, Research Division - Research Analyst

* Rajesh Kumar

HSBC, Research Division - Analyst

* Rory Edward McKenzie

UBS Investment Bank, Research Division - European Support Services 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 Intertek 2019 Half Year Results Call. My name is Rosie, and I'll be your coordinator for today's conference. (Operator Instructions)

I will now hand you over to André Lacroix, CEO of Intertek, to begin today's conference. Thank you.

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André Pierre Joseph Lacroix, Intertek Group plc - CEO & Director [2]

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Good morning to you all, and thanks for joining us on the call following the release of our H1 results a few moments ago. I'm with Ross McCluskey, our CFO; and Denis Moreau from our Investor Relations team.

This morning, we've announced a strong set of results with broad-based revenue growth and margin accretion, strong cash generation and continuous progress on dividends. We're extremely pleased with the consistent performance delivery of the group year-after-year, and we are on track to deliver our full year 2019 targets.

As you know, I spent quite a bit of my time visiting our operations, traveling around the world and of course, meeting with our clients. In addition to the strong financial performance of the group, I'm really energized by the progress our teams are making, offering our differentiated Total Quality Assurance Value Propositions to our clients. Our customers are more focused today than they've ever been on mitigating the increased operational risks in their operations. There is no question that our risk-based quality assurance approach is addressing their needs to improve the quality, safety and sustainability of their operations.

Today, I will start with the performance highlights in the first half of '19. Ross will then take you through the detailed financial results. I'll discuss the progress we are making with our plans. And finally, we'll talk about the outlook for 2019 by division.

Before we start, I'd just like to give an update on the approach Intertek is taking in relation to the changes in accounting standards. For reporting and consistency purposes, the numbers we'll discuss in our presentation today are based on IAS 17. The IFRS 16 figures are detailing our press release this morning. We'll continue to guide on the IAS 17 until the end of '19. When we start 2020, we will have a full year numbers under both standards. And it's only then we'll start guiding on the IFRS 16.

Let's start with our H1 performance highlights. In the first half, we continued to make progress on revenue, margin and cash. The group generation revenues of GBP 1.443 billion, up year-on-year by 4.9% at constant currency and 7% at actual currency. Our revenue performance at constant currency was driven by good organic growth of 3%, in line with expectations and by the contribution of recent acquisitions.

The group delivered operating profit of GBP 243.6 million, up 6.8% at constant currency and 7.9% at actual currency. We have delivered an operating margin of 16.9%, up 30 bps at constant currency and 10 bps at actual rates. Our EPS for H1 was 97.8p, up 6% at constant currency and 7.2% at actual currency.

We continue to make significant progress on cash with a 12% increase year-on-year in operating cash flow underpinned by our disciplined approach to working capital, which was down year-on-year by 12%.

In line with the dividend policy that targets a payout ratio of circa 50%, we've announced the interim dividend of 34.2p, up 7.2% compared to last year.

We are pleased with the consistent performance delivery of the group, underpinned by a strong earnings model and our disciplined performance approach on a daily basis.

In the first half, in the last 5 years, we have grown our revenue on CAGR by 7% per year, operating profit by 10%, operating cash flow by 9% and our dividend by 16%. Last but not least, we have improved the margin of the group, which is now 200 bps higher than it was 5 years ago.

We have reported broad-based organic growth in line with accretion. Each of our division's made progress on both organic revenue growth and margin. Our Products-related businesses delivered a robust operating performance with a revenue growth of 4.9% at constant currency driven by good organic revenue of 2.1% and by the benefit of acquisitions made recently. Products operating profit increased by 6% at constant currency and the margins was up by 20 bps.

We benefited from an acceleration of gross momentum in our Trade-related businesses as we delivered revenue increase of 5.8% at constant currency driven by robust organic growth of 5.1% and the benefit of acquisitions. Operating profit in Trade was up 6.8% at constant currency and the margin improved by 10 basis points.

We saw improved revenue momentum in our Resource-related businesses delivering a good organic revenue growth of 3.5% in constant currency. Operating profit was up 16.9% at constant currency and the margin expanded by 70 bps.

Our M&A strategy is focused on the acquisitions of leading and innovative solutions that we can scale through the Internet network. The acquisitions that we've made since January '18 in attractive growth and margin sectors, as you know, we are very selective where we invest, are performing well and have added 1.9% to our revenue in the first half. I'm particularly pleased with the progress Alchemy is making, offering our leading People Assurance services to our clients in North America. As always, we continue to actively pursue special opportunities and attractive growth and margin areas with value-enhancing acquisitions.

Margin is an important priority to the group. We have delivered an operating margin improvement of 30 bps at constant currency, benefiting from an operating leverage linked to gross productivity gain and from a margin-accretive portfolio strategy. We are pleased with the continuous progress we are making on margin. It's 5 consecutive years of margin accretion in H1 at constant currency, as you can see on the slide.

Our daily focus on cash management is also a very important priority for the group. We continue to reduce working capital. We delivered an operating cash flow increase of 12% and the strong cash conversion of 126%.

I'll now hand over to Ross who will take you through the financial results in detail.

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Ross McCluskey, Intertek Group plc - Group CFO & Executive Director [3]

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Thank you, André, and good morning, everyone. I will now take you through our results and in detail. In summary, in the first half, we delivered robust revenue profit and EPS growth at constant currency. Margin improved year-on-year at both actual and constant currency, and our cash flow performance was strong. The half year '19 results were first reported under the new lease accounting standards of IFRS 16, as you know. And for comparability purposes we've also presented our results in an IAS 17 basis. In the comments that I will make on the year-on-year developments, we'll be on a consistent IAS 17 basis.

Total revenue growth was 4.9% at constant currency and 7% at actual rates as FX translation increased our revenues by 210 bps driven by the depreciation of sterling. Organic revenue growth at constant currency was up 3% and operating profit at constant rates was up 6.8% to GBP 243.6 million. And margin was up 30 basis points. The FX effect for the half year results in operating profit of 7.9% in actual rates. So overall, fully diluted EPS grew to 97.8p, being up 7.2% at actual rates and 6.0% at constant rates.

I'll now take you through the high-level margin performance by division. The group recorded a 10 basis points improvement in operating margin in the first half at actual rates, increasing to 16.9% in an IAS 17 basis. Margin improved by 30 basis points at constant rates driven by margin accretion in each of the divisions. This was partly offset by FX, which had a negative 20 bps impact on the group margin.

Now turning to group cash flow and net debt. Our disciplined focus on cash management continued throughout the period. Cash flow from operations was GBP 229 million, up 12% year-on-year with working capital down 12% year-on-year and further reducing as a percentage of revenue. We invested GBP 45.7 million in CapEx in line with 2018 to expand our market coverage and develop innovative ATIC solutions. Free cash flow in the period was GBP 104.6 million. Net debt stood at GBP 826 million on an IAS 17 basis and GBP 108.2 million on an IFRS 16 basis.

Now turning to our financial guidance for FY '19. And as André said, for comparability purposes, our guidance remains on IAS 17 basis. We expect the net finance cost will be around GBP 31 million to GBP 33 million. The effective tax rate is still expected to be in the 24.5% to 25.5% range, and minority interests will be circa GBP 21 million to GBP 23 million. We're expecting full year CapEx to be GBP 130 million to GBP 140 million, and we continue to expect the net debt to close the year of between GBP 670 million and GBP 700 million. And of course, this net debt guidance is stated on an IAS 17 basis before any further M&A and before any future achievable movements in FX.

I will now like to hand you back to André.

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André Pierre Joseph Lacroix, Intertek Group plc - CEO & Director [4]

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Thanks, Ross. In the last 8 to 10 minutes, we've covered our financial performance. What I would like to do now is to give you an update on the progress we are making with our clients. As you know, at Intertek, we put customers first. We work with more 300,000 corporations around the world, and we enjoy deep and trusted relationships with each of them. These long-lasting relationships are based on a superior customer service. We provide independent quality assurance services that are mission-critical for our clients. We have a strong technical expertise in all sectors we operate in, and when combined with our passionate and entrepreneurial culture, that enables us to support the growth agenda of our clients in an ever-changing and more complex operating environment. At Intertek, we truly value the long-lasting relationship with our clients, and each of us is deeply committed to the delivery of our Total Quality Assurance customer promise.

We see their attractive growth opportunities in the quality assurance market. The market is worth circa $250 billion, yet only 20% of this market is outsourced. We see, of course, strong growth opportunities with existing and new customers. We saw -- we also saw attractive growth opportunities to get access to quality assurance work that corporations currently do in-house, i.e., outsourcing. But the opportunities goes beyond outsourcing and existing clients, it's all about the untapped potential in our exciting industry. The global operations of corporations around the world are increasingly more complex, which drives more demand for end-to-end quality assurance services as corporations increase their focus on systemic operational risks.

This untapped potential is really exciting as it all about what companies do not do today in terms of quality assurance and are starting today -- to do today or tomorrow to improve the quality, safety and sustainability of their operations.

We are seizing this exciting growth opportunities that have differentiated Total Quality Assurance Value Proposition globally. Across all of our businesses, we support the existing and emerging quality assurance needs of our customers in each area of their operations: R&D; raw materials sourcing; component suppliers; manufacturing; transportation; distribution and channel management; and of course, consumer management.

Total customer first approach innovation is truly important to have our clients mitigate the increased quality and safety and stability risks in their operations.

I'd like to share some of the innovations that we've launched recently. As you know, we do NPS as a feedback with our clients, and we do about 7,000 monthly surveys. That gives you tremendous customer insights when it comes to innovation. Let's start with some of the most recent innovations in our Products division. We've developed a Virtual Audit solution through which our TQA Experts are able to audit remotely. This allows us to deliver our audit faster and with a wider audience of subject matter experts.

STEM Toys are increasingly being marketed to young children. These are toys that have in-build Science, Technology, Engineering and Mathematics functionality. There is an increased demand from schools using toys for learning that are both generally [STEMs] in our space. We have developed unique STEM Toy Mark to verify that our customers' toys meet stringent quality and safety standards.

Let's now discuss a few innovations in our Trade-related businesses. Turnaround time is a key factor for all trading customers. It's critical for our clients. These are for operations doing the assembles to test them in a fast, efficient and flexible way.

Our Caleb Brett business has developed a very unique service proposition called Oceanlab Quality Testing Laboratories, and we started with our clients installing these labs on their ships. Another innovation to reduce turnaround time for our clients in our AgriWorld business. We have recently launched a rapid protein analysis, leveraging leading technology for soya exports.

A few innovation examples in our Resource sector are offshore drilling, exploration, and production customers face the challenge of maintaining, aging our increasingly complex new equipment in a deep and more stringent regulatory environment. We've developed DeepView 3D, a new inspection methodology that combines 3D laser scanning and precise metrology data with advanced Non-Destructive Testing. It gives an accurate representation of current conditions and mechanical integrity of critical assets. This allows our customers to take a smarter approach to maintenance reducing expensive operational downtime.

The important safety innovations for oil and gas clients. As you know, helicopter journey can present risks when staff work on offshore rigs. Our experts have developed a Helicopter Underwater Escape Simulation program, which essentially a training program.

Let's now discuss the outlook for the group in 2019. We are on track to deliver our full year 2019 targets. We expect to deliver good organic revenue growth at constant currency with good organic revenue growth in each of our 3 divisions: Product, Trade and Resources.

From a profitability standpoint, we expect to deliver moderate margin progression. We'll continue to invest in growth with full year CapEx being circa GBP 130 million to GBP 140 million.

A quick update on currency for your models. Based on the actual figures on the first 6 months of the year and the last 3 months average rates for the remainder of the year, the average selling rate applied to the full year results of 2018 would provide 150 bps uplift at the revenue level and 100 bps at the operating profit level.

Let's now discuss all divisions, starting with Products. All the numbers I will discuss in this section are at constant rate. In the first half, our Products business delivered consistent margin accretive revenue growth. We've delivered 4.9% revenue growth driven by a good organic revenue growth of 2.1% and by the benefit of acquisitions made recently. We delivered a robust operating profit of GBP 185 million, up 6%, enabling us to deliver a margin of 21.3%, 20 bps ahead of last year driven by the benefit of operating leverage, cost discipline and our pricing power.

Softlines business delivered solid organic revenue growth benefiting from supply chain expansion of our clients in new market, rapid expansion in the footwear sector and the increased demand for chemical testing. I'm pleased with the commercial progress we are making with our Softlines client, our full year guidance of solid organic growth for Softlines remain unchanged.

Our Hardlines business reported solid organic revenue growth driven by innovations from our customers leveraging wireless technology, increased demand for chemical testing and our innovative inspection technology, i2Q.

We are making good progress on business development activities with our clients, and our full year guidance of good organic revenue growth for Hardlines remain unchanged.

We delivered robust organic revenue growth in the Electrical & Connected World as we continue to benefit from electrical appliances innovation that provides better efficiency and connectivity and of course, increased demand for IoT including cybersecurity assurance services. Our full year guidance of robust organic growth for Electrical & Connected World remain unchanged.

Our Business Assurance delivered good organic revenue growth. We are comping versus a high base last year, as you know, when we benefited from the increased ISO audit demand for our clients to meet the Q3 '18 deadline for standards upgrade. Our full year guidance of robust organic growth for Business Assurance remain unchanged. We are seeing a strong demand for non-ISO assurance solutions as we benefit from increased focus of corporations on risk management and obviously supply chain processes, increased consumer and government focus on ethical and sustainable supply.

In our Building & Construction business, we are also comping against a high base in '18 and have delivered a solid organic revenue growth as expected. You'll recall that the inspection activities of last project in United States in 2017 were soft following the presidential election. And that in '18, we benefited from the fast ramp-up of several new projects that were delayed in '17. We are seeing good traction with our business development activities. Our full year guidance of good organic growth for B&C remain unchanged.

In our Transportation Technology business, we delivered robust organic revenue growth driven by continued investment of our clients in new models and new fuel-efficient engines and increased scrutiny on emissions. Our full year guidance of robust organic growth for Transportation business in '19 remained also unchanged.

We generated good organic revenue growth in our Food business driven by continuous food innovation and increased focus on the safety of supply chain. We expect our Food business to deliver good organic growth in '19.

We saw unexpected organic revenue below last year in our Chemicals & Pharma business in the first half as we benefited last year from robust growth ahead of the June first week deadlines, which created obviously a very strong business for us. We are maintaining our full year guidance of solid organic growth for C&P business. Our pipeline of activities is strong for the second half.

Overall, for the full year, we expect the Products-related business to deliver good organic revenue growth.

Our Trade business benefits from acceleration in revenue momentum and delivered a robust performance with a revenue growth of 5.8% and organic growth of 5.1%. We delivered an operating profit of GBP 44 million, up year-on-year by 6.8% and operating margin of 13.3%, up year-on-year by 10 basis point.

Our Caleb Brett business reported good revenue performance. We continue to benefit from the global and regional trade and structural growth drivers in all regions, and our full year guidance of good organic revenue growth for Caleb Brett is on track.

Our Government & Trade Services business delivered double-digit organic revenue growth driven by volume growth from existing contracts as well as strong new contracts around the world. We continue to expect the GTS business to deliver strong organic growth for the full year.

Our AgriWorld business, we reported good organic revenue growth, and we expect the strengths to continue for the full year.

And for the full year, we expect our Trade-related businesses to deliver good organic revenue growth.

Our revenue momentum has improved in our Resources-related businesses, and we've delivered a good organic growth of 3.5%. We delivered a strong operating profit of GBP 14.5 million, up by 16.9% year-on-year with a margin of 6%, up 70 basis points year-on-year at constant rates.

Our CapEx Inspection business reported good organic revenue growth as we start to benefit from the increased investment of our clients in exploration productions around the world, and we expect our CapEx Inspection business to deliver good organic growth in '19.

The demand for OpEx Maintenance Services remained stable in a competitive environment, and we expect that trend to continue for the remainder of the year.

We continue to see an improved level of demand for testing activities in the Minerals business as we delivered robust organic growth performance in the first half. And our full year guidance with good organic growth for Minerals in '19 remains unchanged. For the full year, we expect our Resources businesses to deliver a good organic revenue growth performance.

Before we take any questions you might have, a few concluding remarks from my side. We operate a high-quality earnings model of Intertek. And our approach to value creation for mid to long term is based on global GDP+ organic growth in real terms, plus margin accretion, plus strong cash conversion and plus disciplined capital allocation in organic investments, targeting the attractive growth and margin sectors in our industry.

Compounding effect of Virtuous Economics earnings model year-after-year will continue to deliver shareholder value creation.

Our future growth outlook is global GDP+, organic growth in real terms. We expect our Products division that represents 76% of the group's earnings to grow ahead of global GDP, benefiting from brand and SKU expansion, regulatory development as well as increased focus of corporations and safety, quality and sustainability.

We expect our Trade division that represents 18% of the group earnings to grow at a rate broadly similar to GDP through the cycle of Trade business. We'll benefit from the development of regional and global trading as well as from increased focus on traceability.

The growth prospects of our Resource division, which represents 6% of group earnings are indeed the global growth drivers in the energy sector. Investments in exploration and production of essential resources like oil and minerals will grow to meet the demand of the growing population around the world. We also expect structural growth in the renewable sector from an energy standpoint.

Intertek is going from strength to strength with scale positions in attractive end market in 100-plus countries. We offer our clients a superior customer service with our unique Total Quality Assurance Value Proposition. We operate high-quality component earnings models. And our ever better operational discipline is even making us ever stronger every single day.

Thank you for your time, and we'll answer now any questions that you might 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 from Morgan Stanley.

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

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Two, please. In the Products division, when we think about the 20 basis points at constant currency margin expansion, can you give us a bit more detail about where that underlying organic margin improvement is coming from given there are clearly some weaker segments within the mix year-on-year on Products?

And secondly, it feels like you're now comfortably pass the trough in Resources. So where do you think you can get the underlying margin in that division back up to relative to the previous peak margin in Resources?

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André Pierre Joseph Lacroix, Intertek Group plc - CEO & Director [3]

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Thanks for your question. Look, I think we are tremendously proud of where the Products business is. If you look at what we've done over the last 5 years, and I would say even beyond that, we've got different disclosure format. I mean this is the machine core of the group, and we have obviously the highest margin targets division. As you know, we do not disclose individual numbers by business lines for essentially commercial reasons because we are competing against some of the business in the industry, as you know. But I can tell you that the organic growth in the Products division is broad-based. There was only one division that was new last year, which is C&P. And from a margin standpoint, we're also making progress in most of the divisions.

And as you know, my approach to organic revenue growth is all about good organic revenue growth, right? We focus our operations on volume, price/mix, and we say no to plans that just want price reduction because we believe that we are a superior quality operator in the industry with our customer service approach, we are the market leader in most of the business lines, our Products business or Trade or Resources in the way we operate in our portfolio, and having a strong pricing power is very important. So when you think of operating leverage, don't only think about revenue growth. Think about pricing power, mix, innovation and then how we get to obviously the margin that you book.

Look, I'm tremendously pleased, indeed, to see some height in the Resource sector. We have been expecting that moment, and it is now here for us to seize. There is no question that this business has been in a lot of pressure for many years. It's one of the longest crisis in terms of price, and the oil and gas companies have been under a lot of pressure as you know. The good news is our clients have rebuilt their balance sheet. They have realized that they need to invest in exploration productions. And look, if you look at peak to trough, I mean from 2013 to 2018 on full year basis, our Resource division lost about 27% to 28% revenue and 60% profit. Our margin in the peak was around 10.5%. So we have a lot of room for improvement here. We're going to take it a step at a time. But I really believe that with all the work that we have done in terms of volume, pricing, quality of earnings, productivity through the downturn, we should be able to show some steady progress in terms of margin. But these opportunities is absolutely significant as we just bought it.

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Operator [4]

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The next question comes from the line of Alexander Mees from JPMorgan.

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Alexander Mees, JP Morgan Chase & Co, Research Division - Head of UK Small and Mid Cap Research [5]

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A couple, please. Just firstly within the Products division, I noticed that the outlook for Food, I think it was previously described as robust, is now good. I just wondered if there's been any change in the market dynamics and if you can give any color there.

And secondly, on the working capital improvement. I just wondered if you could explain what measures you've actually taken to improve working capital. Should we consider this improvement sustainable, and can you go further?

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André Pierre Joseph Lacroix, Intertek Group plc - CEO & Director [6]

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Thanks, Alex. Look, on Food, as you know, Food for us is a relatively small business around the world. It's essentially a regional business in several market. And we've seen in a couple of markets, one of our competitors, and I'm not going to say who it is, starting to really drop prices because they are taking some challenges, and we decided to move away from this contract because as I just said to Ed, we believe in the volume, price/mix and pricing power. So I'm not worried about it. It's just commercial, I would say, in the management of these markets where one competitor is aggressive than usual. Working capital, we still have a lot of opportunities, and I think Ross will answer your question directly.

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Ross McCluskey, Intertek Group plc - Group CFO & Executive Director [7]

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Yes. Alex, I mean the -- on working capital, we basically brought the same disciplined approach to margin discipline that we have into working capital. We continue to make progress both on the receivable side and the payable side. And in terms of further opportunity, absolutely. We still see a standard performance across the group. And as we said at the year-end for 2018, we continue to see opportunities to take this down more.

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Operator [8]

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

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Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [9]

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Two for me, please. Firstly, hate to focus on the really short term, but the implied organic growth seemed to slow in May, June compared to the first 4 months, especially in Products. Can you just help us estimate how much of that was maybe due to the fewer working days year over year? And then secondly, on the kind of margins in Products side. Can you talk about Alchemy, a year on when you first bought it? What are your thoughts about the margin investment you want to make in growth there? If it will be dilutive after this year, overall and the thoughts, in the year after and the year after that. It will be very helpful.

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André Pierre Joseph Lacroix, Intertek Group plc - CEO & Director [10]

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Yes. Look, I think the point about May, June and essentially a working day, as a matter of fact, if you do the math and you normalize the entire organic growth in Products in May and June with additional working days. You'll see that you are slightly ahead of your run rate in January to April. So there is nothing new to explain the baseline effect in our May trading statement in greater details and this is (inaudible) a working day and I'm not concerned about it. Look, Alchemy, thanks for asking. It's going to be very soon, to talk about the anniversary of our acquisition. This is something that is really going to make a huge difference to our clients around the world. There is no question that corporations have invest a lot in testing, inspection, certifications, which is all definition of the industry, and we believe that the industry is moving to ATIC where you have to add assurance because testing, inspection, certifications is just a feeble quality control in today to get quality assurance, end to end this is necessary and not sufficient, and you need to add assurance. And assurance has always been for us and audit our offering procedures and management system and that was always of the view that one day we'll go into to skills and behaviors. And if you think about the people in a given industry, it doesn't matter if it has few restaurants or hotels or factories, no offsetting streamline processes, sharpen your investments in terms of equipment, done all the work on formulations and quality control.

People Assurance is really an excellent year for corporations. And I'm saying it because we have been presenting our People Assurance solutions to our clients and I've done lots of clients meetings myself in North America but also around the world and when I explain what we can do for them either for factory owners or for multisite owners, their eyes are just wide open, wow, we didn't know that technology could enable that to do that. So this is very energizing, so we have been making a lot of progress on the commercial agenda. Today, we are essentially focused on setting up in North America with clients that are based in North America, but also have operations around the world. And we're going to be very careful about what we disclose because obviously, there is some competitive sensitivity. I think we are taking steps ahead of many companies in the world of quality assurance with our approach with Alchemy. But I can tell you that if you look at all the SaaS models when you scale it up, the margin is just fantastic. So from our perspective, we are on track both commercially and on track in terms of margins. As far as investments and development, look, innovation is part of the group strategy and we continue to invest in innovations. And of course, there are innovation opportunities in Alchemy. I hosted a full day of innovation workshop with our teams in Austin, which is just a fabulous team and the opportunity is very significant. So we'll share some of these as we go, but I'm so pleased we have Alchemy now part of the Intertek family.

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Operator [11]

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The next question comes from the line of George Gregory from Exane.

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George Nicholas Gregory, Exane BNP Paribas, Research Division - Research Analyst [12]

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I have 3 questions, please. Firstly, just in terms of the Hardlines performance. I wondered if you could elaborate on the solid growth in the first half and the expected improvement to good for the full year, please? Secondly, I noted you've accelerated it looks you've accelerated some of your restructuring activities with the SDIs up a bit. I just wondered if you could give us some more color as to where that work is taking place? And then finally, just on guidance. Your tax rate guidance is unchanged despite you being, I think, at 24.5% the first half. I just wondered if there's any particular reason to expect that to increase in the second half? And similarly, on the interest guidance, the first half run rate looks a bit higher than the full year expectation. Does this currency have any upward impact on net interest or are there any offsetting factors on an IAS 17 basis, please?

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André Pierre Joseph Lacroix, Intertek Group plc - CEO & Director [13]

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Thanks, George, I'll do the first 2 and Ross will do the last 2 questions on the tax and net finance cost. Look, Hardlines is pretty straightforward. As you recall, the bankruptcy of Toys"R"Us rematerialized at the end of the first half last year. And basically, it's simply a baseline effect as I explained in the May trading statement. And as you know, Toys"R"Us is an important player in the global toy industry, or was, I should say, an important player in the industry. As far as SDI, look, you might recall, when we announced our strategy in 2016, we said that we would take our time to do deep forensics on certain part of our portfolio because we want to take the time to make the right decisions. Taking a restructuring charge is really the last resort. There are many thing that you can do to improve performance of certain business lines. And we're going at our own pace and I wouldn't see the year on year increase in the first half. As a signal of acceleration, it's just the way the math and the review has played out and we are being very, very selective. And where is it happening? I mean it's happening in businesses around the world. We typically don't go into too many details because it would be too detailed. But we are very, very selective, and it is really only the last resort. Where we believe that we have explored all options we decide, okay, we need to take some cost out here because that's the only way to improve the performance of this business. Now, I'll hand over to Ross for tax and net finance cost.

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Ross McCluskey, Intertek Group plc - Group CFO & Executive Director [14]

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George, for tax, I mean as you saw, the range is 24.5% to 25.5%. And as you know, when we do the half year results, we have to use our estimates for the full year. Tax rate for the group, which is 24.5%, so within the range. And clearly, as we go into the second half, the final number will be a function of the overall mix of the business and the geographies that contribute and hence, we can continue to guide to a range of 24.5% to 25.5%. On interest, again, the range, we've reiterated from the pre results at this point of March, GBP 31 million to GBP 33 million. And that guidance, it maintained on the basis of no further material movements in FX and given obviously the U.S. dollar-denominated debt, that we've got. And is very much based upon the view of the group's cash generation over the course of the second half.

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Operator [15]

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The next question comes from the line of Rajesh Kumar from HSBC.

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Rajesh Kumar, HSBC, Research Division - Analyst [16]

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Just following up on the working capital comments earlier. What are your medium-term aspirations for working capital? What level you think Intertek can achieve in the 18 to 24 months' time? And second question is looking at the overall tariff debate, I appreciate it's quite difficult to quantify what the impact could be. But how are your discussions with suppliers, customers shaping up in terms of preparation for various scenarios of outcome? Have you seen any adverse effect or benefit from the inventory buildup we are seeing in the U.S. in response to the tariff? And finally, on the pricing dynamics with your customers, can you give us some color on what sort of pricing discussion you're seeing in the Products and the Resource segment, please?

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André Pierre Joseph Lacroix, Intertek Group plc - CEO & Director [17]

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Thanks. Look, on working capital, as you know, we do not give any quantitative targets at Intertek for medium to long term. Our view is that there is more fuel in the tank or there is more juice in the lemon and the answer is, ever better. And we're going to continue to make some improvement and every bits for me make a huge difference because it's about the consistency of performance there, where we saw we made tremendous progress. But there is more progress we made as Ross said in terms of span of performance. As global trade trend is speaking, the situation has not changed since our recent May trading statement. You know that the discussions are going on between the U.S. and China. A few important points. I think we have not seen any impact of the trade discussions on the sustainable performance of our business in China across all business lines and we are really pleased with our Chinese performance. I just came back from a trip, I was 2 weeks in Asia, trying to talk to clients and to talk to our colleagues. And what's happening because nothing has changed, there is no need for companies to make any decision. And as I explained in our previous discussion, it is a very complex decision for a given brand to move factory from China to another country. Obviously, they've done it in the past, and we followed the activities and preallocating supply. But it's costly and not risk free because they've got to rethink all production standards, trading in the factories, they've got to rethink their Tier 1, Tier 2, Tier 3 supply base, they've got to rethink logistics.

So as you can imagine, this is not a light decision to take. What I can say is that obviously companies are evaluating their options as you would expect them to do. So that is really the main point. And no change in our business momentum in our Chinese business and companies are looking at what could happen and what could be the best solutions for them. The only thing I would say is that we should not underestimate the high quality of manufacturing in China. China is just not low-cost manufacturing hub or house for the world. It's much more than that, right? There's a lot of investments in leading technology and the quality of processes and discipline of the workforce, all of that contributes to the output of what companies get out of China.

So look, I think we are monitoring it, I'm very close to it, I've got, as I said in the previous call, the task force that basically is staying close to the our clients because frankly speaking, throwing the supply chain of our clients. Where do they want to go in the world is something that we do every single day at Intertek. And we've got clients who want to move from a to b, we'll be very happy to help and I just want to make sure we provide that customer service. In terms of pricing, look, as I said earlier, we are a premium operator. We believe in superior customer service. We invest in innovation that adds value. We track our customer service. And I wouldn't say that there is any change of dynamic in terms of pricing in the market. We've got clients that want to negotiate as you always have. That has always been part of the day to day commercial activities. But there's nothing that's telling me pricing trends are changing one way or the other. So we continue to focus on our own pricing power strategy and that's the way we run the business.

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Operator [18]

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The next question comes from the line of Tom Sykes 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 [19]

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Firstly, just on a rather boring question on the depreciation because I think your EBITDA number or margin on a pre-IFRS 16 basis is up by quite a bit more than the 10 basis points. So therefore, and I think that might be the first time in quite a few years. Is there anything particular about increased depreciation levels for this year that we should think about depressing the EBITDA a little? You suggest the underlying profitability is perhaps a little stronger? And then just on the CapEx guidance, the degree to which you should we really expect it coming into the GBP 130 million, GBP 140 million. And what areas of the CapEx actually are going into, or is that a very conservative estimate? And then finally, on the Chems & Pharma and Building & Construction parts of Products, is that been any is there a basis point drag on the margin that you'd picked out from Chems & Pharma that might reverse in H2? And what's the forward like on the Building & Construction business given that you have tougher comps up until Q4, I think?

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André Pierre Joseph Lacroix, Intertek Group plc - CEO & Director [20]

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I'll take 2, 3, 4 and then Ross will do 1. Look, in terms of CapEx, I mean typically we tend to spend less in H1 than H2. That's, sort of, the nature of CapEx approval inside any global company. You'll approve your CapEx to begin the year, and it takes a bit of time. Where we invest and the guidance is, I would say, not too conservative. We might not spend it all, but we want to be fair and when we give you some numbers, we fully model. I think where we are investing, it's very simple. It's maintenance CapEx, as you would imagine. We invest obviously in IT to continue to develop our IT functionality. We invest in lab expenses in terms of capacity, lab equipments. And also one of the big area of focus is innovation. So we try to bring new equipments and we talk about these for quite a while or we try to basically invest in development of new solutions. So this is basically what we do.

I think the allocation is the same that we In terms of discipline, it's the same, a project we take through M&A. We only invest in areas where we believe that we will get bright returns. Look, as far as our C&P is concerned, as I said, we don't talk about margins by business line inside the 3 divisions. And look, this is, again, for us, it's a relatively regional business. We're not a global player in C&P. I think what happened is essentially the June 1st deadline from which last year, which obviously had a great revenue momentum. And of course, when you are negative in terms of gross, it has an impact on your operating leverage. I'll leave it to that. And as far as B&C, that's true that we had a good momentum last year. But equally, the large investment projects, we're really concentrating Q1, Q2 and Q3. So the comps should be slightly easier in Q4. I will hand over to Ross on the...

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Ross McCluskey, Intertek Group plc - Group CFO & Executive Director [21]

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Sure. And Tom, I mean as you say, if you look at the cash flow, you can see the combination depreciation, amortization was GBP 51 million in the first half of this year and that simply reflects the CapEx spend of the last few years because we've been spending broadly between GBP 100 million and GBP 130 million in the last 3 years. It's simply a timing impact of that.

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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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Okay. So that times 2 in H2, as the underlying depreciation number is or sorry, replicated, again, in H2, is it about fair then?

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Ross McCluskey, Intertek Group plc - Group CFO & Executive Director [23]

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Yes.

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Operator [24]

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We have no further questions coming through. So I'll now hand the call back to André for any concluding remarks. Apologies, we have, actually, just had another question. Are you happy to take that?

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André Pierre Joseph Lacroix, Intertek Group plc - CEO & Director [25]

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Of course.

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Operator [26]

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So this question comes from the line of David Roux from Bank of America.

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David Roux, BofA Merrill Lynch, Research Division - Associate [27]

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Just 3 questions from my side. I think firstly, going back to your comments around more competitive price behavior in Food. I was just wondering whether you've seen more aggressive price behavior from your competitors in any of your other segments? My second question relates to the sort of hypothetical shift in manufacturing basis. I'd be interested to know if your labs in Southeast Asia are running at full utilization, or if there was a shift of the manufacturing base to Southeast Asia, would you need to roll out further capacity in labs? And then lastly, just going back to restructuring of the business. I just wanted to know whether you've seen a net increase or decrease in employee head count since year end 2018?

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André Pierre Joseph Lacroix, Intertek Group plc - CEO & Director [28]

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Yes. So on the price. As I said, the price comment I made is really targeted to 2 markets inside our Food business as I said to the previous question from our colleague from HSBC. We're not seeing any change in terms of price activities blowing from our major competitors. Look, as far as the capacity utilization point, it's a good question, of course, and it's not an easy one to answer precisely because every situation is different. But broadly speaking, for us, there is quite a lot of headroom in terms of capacity utilization because it's a function of the number of shifts that you run. You can run 1, 1.5, 1.2, 1.3. And typically, we don't have operations running at 3 shifts a day.

Capacity is also a function of storage and obviously logistics because you get samples in. So when we look at our capacity, we take these 2 factors into consideration. So to give you an example. We were one of the first movers into Vietnam years ago and last year, we basically expanded our lab in Vietnam because of these 2 considerations. So look, we have capacity in our labs. And if we need to increase it, we will do that. It's not that complicated because, at the end of the day, our IPs, all our processes combined with our people and equipment, and you can move that relatively easily, which we do all the time. Of course, in terms of head count, we will report it, end of full year but we continue obviously to invest in growth. I mean we're a growing business. So we are a people business. So it continues to progress, of course.

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Operator [29]

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We have no further questions, sir. I'll hand back to you André now. Thank you.

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André Pierre Joseph Lacroix, Intertek Group plc - CEO & Director [30]

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It's a busy morning for everyone today, so thanks very much for being on the Intertek call this morning. Obviously, Denis is going to be available for any questions you might have after this call. And have a good day.

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Operator [31]

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