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Edited Transcript of SGSN.S earnings conference call or presentation 18-Jul-19 12:00pm GMT

Half Year 2019 SGS SA Earnings Call

Geneva Jul 23, 2019 (Thomson StreetEvents) -- Edited Transcript of SGS SA earnings conference call or presentation Thursday, July 18, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dominik de Daniel

SGS SA - CFO

* Frankie Ng

SGS SA - CEO

* Tobias William Reeks

SGS SA - SVP of IR

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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

* Ed Steele

Citigroup Inc, Research Division - Director

* Edward Stanley

Morgan Stanley, Research Division - Equity Analyst

* Jean-Philippe Bertschy

Bank Vontobel AG, Research Division - Head of Consumers Team

* Patrick Jousseaume

Societe Generale Cross Asset Research - Head of Mid and Small caps Europe Research

* Paul Daniel Alexander Sullivan

Barclays Bank PLC, Research Division - Director & Analyst

* Rajesh Kumar

HSBC, Research Division - 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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Ladies and gentlemen, welcome to the SGS 2019 Half Year Results Conference Call and Live Webcast. I'm Cheryl, the Chorus Call operator. (Operator Instructions) The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Toby Reeks, Senior Vice President of Investor Relations at SGS Auditorium in Geneva. Please go ahead.

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Tobias William Reeks, SGS SA - SVP of IR [2]

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Good afternoon, and welcome to SGS first half 2019 results. I'm Toby Reeks, I'm Head of IR. Some of you hopefully know me.

I have to say a couple of things on health and safety. We're not expecting a drill. If you hear a bell, a fire alarm, there are some signs at the back of the room. If you follow those fire exits out, we've got a master point just in front of the building, okay?

So with that, I'll hand over to Frankie, who'll open up on our results presentation.

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Frankie Ng, SGS SA - CEO [3]

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Well, thank you. So good -- or ladies and gentlemen, good afternoon. Again, welcome to the presentation of our 2019 first half result. Before we start, I would like to introduce you to our new Group CFO, Dominik de Daniel, who has joined us in February.

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Dominik de Daniel, SGS SA - CFO [4]

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Right.

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Frankie Ng, SGS SA - CEO [5]

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I got it right, yes?

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Tobias William Reeks, SGS SA - SVP of IR [6]

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Yes.

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Frankie Ng, SGS SA - CEO [7]

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15th of February. So great.

So as usual, I will give you a highlight on our first half performances, and Dominik will provide you a more detailed financial review. And I will come back with our business outlook and the second half guidance for -- and for the full year as well, sorry.

If we look at the result, I'm pleased to report that our result are in line with the guidance given in January. Total revenue grew by 3.9% at constant currency, of which 3.5% was organic. Our adjusted operating income stands at CHF 489 million, a 5.4% increase compared to H1 2018. Free cash flow from operation amount to CHF 216 million compared to the CHF 176 million that we achieved last year. And our ROIC stands at 23.9% for the last 12 months.

During the first half, we also hit 3 strategic milestones. The first one was mentioned during our Investors Day in November last year, when I highlighted that following our dashboard review, we were ready to dispose of around CHF 350 million of assets and that we will accelerate our acquisition in selected sectors, both action having the effect of enhancing our capital allocation in line with our long-term objectives. I'm pleased to say that we have executed on this first pillar with the disposal of Petroleum Services Corporation, called internally PSC, and the acquisition of Maine Pointe, both located in the U.S. SGS owned PSC for the past 15 years, and it grew significantly under our leadership, and this thanks to the dedication of our PSC colleagues. But considering the market evolution and our core focus, we decided that PSC will have a better future under newly ownership. As for Maine Pointe, I also highlighted last year the importance for the SGS Group to expand our services across the value chain, and Maine Pointe will bring a wealth of competence in operational consulting to support trying addressing the operational improvement needs.

We made some acquisition during the first half and 2 further announcements were made on Tuesday to complement our portfolio. Of the several acquisitions, 4 of them have a minimum of technical or operational consulting expertise, which again is fully in line with the focus of moving more upstream in the value chain. Both LeanSis and Maine Pointe are in the operational consulting space. Floriaan specialize in the area of fire but also have an aspect of technical consulting. And Testing, Engineering and Consulting, under its name indicates, is in the construction sector but has also minerals consulting in the -- in its portfolio.

Subsequent to our midyear closing, we have also announced a 20% participations in Vircon, a BIM, Building Information Modeling, company in Hong Kong, which will complement our portfolio for the Infrastructure and Construction sectors in the Greater Bay Area in the South China Sea.

We have also announced the acquisition of Forensic Analytical Laboratories based in the U.S. an -- active in the domain of industrial hygiene. That division will expand our portfolio of services in the growing U.S. environmental, health and safety market, which is growing strongly for us as well.

It's not in the slide, but the second milestone that we have achieved is the continuous improvement into -- investment into new sectors for the long-term development of the group. As an example, our recent investment in the really promising cyber safety, security sectors with new facilities in Graz, Austria and Madrid in Spain and the planned expansion of these activities in North America and Asia. Just to re-emphasize here that we -- I'll just go point when you talk about cybersecurity, it is not to compete with the software sectors. Where we're focusing? On testing, inspection, certification of chipset and product that would need some kind of competence and expertise in term of cybersecurity baseline assessment. This is also a special complement to our commitment to the Charter of Trust on cybersecurity where SGS is a founding member.

Regarding the third milestone in our press release of this morning, we announced the strategic optimization plan of our network with the objective of simplifying our structures and rationalizing our overlapping activities. Our matrix organization, our decentralized structure are key strengths for the SGS Group. But at the same time, some element of complexity and duplication have built over time. Over the past few years, a lot of work has been done and achieved to reach the stage where we're going to have a closer look at the structure of the network in order to remove waste. On this particular milestone, Dominik will have a slide and will present that in more details.

On that one, I will hand over the presentation to Dominik, who will go through the more -- the financial part of the presentation.

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Dominik de Daniel, SGS SA - CFO [8]

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Thank you, Frankie. Good afternoon, ladies and gentlemen. This is my first set of results at SGS, and it's nice to see some familiar faces in the audience and, I suspect, familiar voice on the call. So I look forward to spending some time with many of you over the coming weeks and months.

I will start with the overview of the financial highlights for the first half of 2019. Frankie already mentioned the operating highlights in his introduction, the revenues of CHF 3.3 billion and adjusted operating income margin of 14.6%.

Constant currency revenue increased by 3.9%. The majority of our business performed well with the exception of Transportation and GIS.

Adjusted operating income increased by 5.4% in constant currency to CHF 489 million. At constant currency, adjusted operating income margin increased by 20 basis points to 14.6%. This includes approx 20 basis points from IFRS 16, but this was more than offset by collection delays primarily in our GIS business, which we expect to improve in the second half of 2019.

Operating income increased by 61% in constant currency largely due to the CHF 264 million gain of the disposal of the PSC business. This was partly offset by a number of factors, including provisions for indirect taxes, remeasurement of the defined obligation of the Swiss pension fund and goodwill impairment of CHF 21 million and restructuring costs of CHF 60 million, which was CHF 11 million higher than in the prior year. But last year's operating profit was negatively impacted by CHF 47 million in relation of the overstatement of revenues in Brazil.

The tax rate increased from 24% in the prior year to 34% in H1 2019. The tax rate or the increase in tax rate is due to the valuation allowance on DTAs considered in the first half of 2019. We expect for fiscal 2019 a tax rate of 31%. But going forward, we would expect it to be in the higher 20s.

Subsequently, the net profit of the minority interest increased 38% to CHF 377 million in the period under review.

We posted a solid organic growth of 3.5% while acquisitions added 0.5% and disposals had a negative impact of 10 basis points, leading to a constant currency growth of 3.9%. The currency impact was negative by 2.8% as the Swiss franc strengthened against all major currencies with the exception of the U.S. dollar.

Moving on to the revenue growth by business. We have all had the chance to read the release by now, so we'll just focus on a few of them.

Consumer and Retail had a pleasing performance given the geopolitical backdrop. It continues to grow strongly with 5.5% organic growth in the first half. This is a strong performance given the slow start which we talked about at the start of this year.

Electrical and Electronics saw its strongest growth. Softlines started slowly, but growth improved gradually throughout H1 and is now posting solid growth driven by the new sourcing countries such as Vietnam, Indonesia, Cambodia and Turkey while China was stable.

Industrial also performed very well, growing strongly with organic revenue growth of 6.8%. Within this, Oil and Gas posted double-digit growth. Growth in Manufacturing and infrastructure were solid, while Power and Utilities was broadly stable.

We talked about Transportation having a difficult year, and it declined organically 4.5%. Weaker demand in field services and some price pressure and increased competition in regulated service more than offset the strong growth in testing.

Finally, Governments and Institutions had a challenging first half as revenue declined organically by 4.4%. This was driven by the gap between signing and implementation as well as the enforcement of certain client contracts, particular in the eWaste monitoring solution, Renovo.

From a regional point of view, the strongest growth was in the Americas, which was up 5.1% organically. We grew strongly in South/Central America, especially in Peru, Colombia and Brazil, whereas growth in North America was modest.

Asia Pacific also grew well by 4.4%. Growth continues to be driven by strong growth in China, Korea and India, while growth in Australia was solid; in Taiwan, modest; and Hong Kong, Japan as well as Thailand slightly declined.

Organic growth in Europe, Africa, Middle East was a modest 2%. Double-digit growth in Eastern Europe and Middle East was offset by Africa and Western Europe, which were held back by the weakness in our GIS and Transportation business.

The development of the headcount was well controlled. Period-end FTEs increased 1.5% organically year-on-year, which compares to 3.5% organic revenue growth. Acquisitions added 0.3% while disposals and the optimization of the network combined resulted in a 4.8% reduction. Overall, total headcount fell by 3% at the end of the period, which was, of course, also impacted by the disposal of the PSC business in the U.S.

Regionally, productivity improved most in the Americas due to the structure change implemented in North America as well as South America.

South and Central America benefited on top from a higher operation leverage.

The adjusted operating income increased in constant currency by 5.4%. This comprises 4.8% organic growth and 0.7% added through acquisitions.

Operation leverage was held back by collection delays, largely in GIS, for which we expect a clear improvement in the second half of 2019.

Currency had an adverse impact of 3.7%, leading to an increase in extra currency of 1.7% in the period under review.

Moving on to the margin development. Again, you have seen the numbers, so I will focus on a couple of highlights.

Margins in Minerals increased strongly by 110 basis points, which is primarily due to good operation leverage in Energy Minerals and an improvement in the Trade business.

Oil, Gas & Chemicals showed a nice increase of 100 basis points as it benefits from the improvement in the Upstream business combined with the cost control measures implemented in the Trade-related services.

CBE increased its margin by 10 basis points. While a modest improvement, it's a strong performance given the lower auditor utilization rates due to the 2018 transition period. While there was a small benefit from the acquisition of LeanSis, there was also good cost control and good performance from higher-margin services in the Performance Assessment.

The largest improvement in margin was in Industrial, up 240 basis points. This is the result of our active contract portfolio management, where we are exiting value-destroying contracts and successfully repriced some of the existing contracts. There was also good contribution from restructuring measures taken in the first half.

The margin decline in Transportation reflects the impact of the revenue factors covered earlier and some related mix effects.

There was a material margin decline in GIS. This is the result of strong collections in H1 2018; collection delays in the first half 2019, which led to a significant increase in bad debt charges; contract and enforcement delays. As already mentioned, we expect these factors to improve in the second half.

Moving on to the balance sheet. The balance sheet at the end of June compared to the balance sheet at the end of 2018 considers the changes in relation to IFRS 16 lease accounting standard and IFRIC 23, which addresses the interpretation of uncertainty over income taxes. Both accounting standards are effective as of January 1, 2019.

The increase in property plant and equipment of CHF 588 million is explained by the recognition of right-of-use assets of CHF 686 million on January 1, 2019, following the introduction of IFRS 16 minus the subsequent depreciation.

Out of the lease liability of CHF 740 million as of January 1, 2019, CHF 161 million are considered as current while the remaining amount is considered as long-term lease liability. As a result of the introduction of IFRIC 23, a tax provision of CHF 40 million has been recorded against equity.

PSC was deconsolidated as at the end of June 2019, and the proceeds of CHF 320 million to be received is reported under other current assets.

The increase in goodwill is due to the consolidation of the balance sheet of Maine Pointe and a couple of other smaller acquisitions.

Net debt at the end of the period is CHF 2.1 billion or CHF 1.4 billion excluding IFRS 16 compared with CHF 0.7 billion at year-end, reflecting the dividend payment of CHF 589 million, seasonality for the need for working capital in the first half and the increase in our M&A activity.

The operating cash flow increased from CHF 316 million last year to CHF 341 million this year. However, given the introduction of IFRS 16, the payment of lease liabilities of CHF 87 million is now reported under financing activities. So on a like-for-like basis, the operating cash flow would have been CHF 252 million versus the CHF 316 million last year. The decrease is a function of a higher increase in working capital. The higher outflow compared to year-end is solely due to timing of payments. You'll surely recall the very strong net working capital at the end of last year, which was significantly driven by payments occurring in 2019 instead at the end of 2018.

Capital investment in fixed assets are slightly lower than last year, covered in the next slide, while investments in acquisition increased by approximately CHF 100 million, mainly related to the Maine Pointe acquisition consolidated as of June 30.

Dividends of CHF 589 million were paid in the first half, and we paid back the Swiss franc bond, which was due in the first half, for a total cash consideration of CHF 375 million.

CapEx in the first half 2019 was at 3.9%, somewhat lower than the historic trend of 4.4%. However, we believe this is just a timing issue and CapEx will increase in the second half, leading to a CapEx in percentage of revenues more in line with historic trends. Our focus areas in terms of CapEx are related to investments in cyber; strong investments in E&E Asia as well as investments in 5G Wireless; lab additions in the food business; additions, primarily outsourced labs, in the Minerals business.

The following slide shows the evolution of the operating net working capital as of June 30 in percentage of revenues in the last 12 months. Just a couple of remarks to this one.

First of all, in the last couple of years, SGS did a fantastic job to optimize net working capital. From a seasonal point of view, net working capital is always higher in the first half than at year-end.

Net working capital in percentage of revenues as of the end of June was further improved by 20 basis points to 2.9%. While we don't expect any further improvement on the liability payment side, we still believe there are some further improvement opportunities on the AR side, especially when it comes to time to bill as well as to the collection process.

We announced this morning the structural optimization program, which is needed in order to run our business more efficiently going forward. The program is focusing on simplifying the business by eliminating duplications and reducing layers within our organization. The cost for this program of CHF 75 million will occur in the second half of 2019 and is expected to deliver savings that will exceed the initial investment in 2020. Therefore, the full benefit should be achieved in 2020. As we're primarily targeting overheads and indirect costs, the risk to revenue is minimal. With this measure, we will steer our business in a leaner and more efficient way going forward.

Before I hand back to Frankie, our key points in the first half financial performance are: solid organic revenue growth of 3.5% or 3.9% in constant currency; our adjusted operating income increased by 5.4% in constant currency, resulting in a margin increase of 20 basis points; profit for the period was up 34.8% to CHF 399 million driven by the gain from the divestment of PSC; we spent CHF 268 million in CapEx and acquisitions; and achieved a free cash flow of CHF 216 million.

With this, I hand back to you, Frankie.

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Frankie Ng, SGS SA - CEO [9]

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Thank you, Dominik. Let me give you a quick overview on each of the business lines for the second half of this year.

Let me start with Agriculture, Food and Life. It is still too early to have a clear prediction on the new crop conditions, but the early information indicates some improvement in export condition, and this should be favorable to our trade activities for the second half. Testing and auditing activities for food are expected to remain good during the second half with a positive development across the network. Licensees' [opportune] testing and clinical research are also expected to achieve good growth in the second half of this year. Overall, I expect similar organic growth at H1, and we should see a good improvement of margin.

If I look at Minerals now. Growth of Minerals will go -- will come under pressure moving to second half of this year with the expected softer market conditions for the Energy Minerals, plant operations and geochemistry. The start-up of new onsite laboratories, a strong metallurgical pipeline and Trade portfolio would balance overall growth, which should be slightly lower than H1. The margin improvement should continue into H2 as we have already taken measures to rightsize the business in anticipation of the softer market conditions.

Look at Oil, Gas and Chemicals. If we exclude any impact of disposal of the PTO (sic) [PSC] activities in the U.S. and in The Netherlands, the remaining of the OGC portfolio will achieve a moderate growth in H2. We expect strong growth in both Upstream activities under Oil Condition Monitoring and a stable outlook for the Trade and testing activities. Margins should improve due to the mix of business growth and disposals.

Consumer and Retail. H1 performance in China was relatively stable despite the trade tension between the U.S. and China. Volume in Hong Kong had decreased significantly due to the higher exposure to the U.S. trade, while the rest of the network has performed solidly, particularly in Turkey, Vietnam and India. Assuming no further tariff escalation between the U.S. and China, we expect consumer goods to achieve similar growth in H2 as in H1, and the full year margins should be similar to the one of last year.

Certification and Business Enhancement. The negative growth in H1 should moderate in Q3 as the comparable from the ISO transition period last year ease, and we expect to return to growth from Q4 of this year. The addition of LeanSis and Maine Pointe to our Performance Assessment portfolio bring a strong competence to operational consulting and we create new growth opportunities for CBE. The acquisition will also support overall growth and help build on the H1 margin improvement into H2.

Industrial. As we mentioned at the end of last year, the focus on Industrial Services in 2019 is to rebuild its portfolio and improve profitability. During H1, we have discontinued several maintenance contracts and closed our pipeline and non-destructive testing activities in the U.S. These will have a short-term revenue impact in H2 but will also support further margin improvement. Growth in H2 should moderate, reflecting the discontinued contracts offset by continuous growth of other activities, including material testing, supply chain services in the manufacturing sector.

The lower growth should be combined with the strong margin improvement.

EHS, Environmental Health and Safety. The solid growth across -- on top of the portfolio in H1 is expected to continue in H2. This business should continue to benefit from a continuation of same market drivers from previous years, including increased regulations and increased demand for marine and industrial hygiene services. The margin should improve further in the seasonally stronger H2 as we benefit from efficiency measures taken in H1.

Transportation. I noted at our full year result 2018 presentations that Transportation would be under pressure in 2019 due to the end of several contracts. As expected, both our regulated services and field services were significantly down in H1, as already indicated by Dominik. We expect the trend to improve slightly moving into H2 as the negative impact from regulated and field services moderate and growth continue in the laboratory testing network. In particular, our new EV battery testing activities in Germany will gain momentum. Overall, H2 growth should be stable compared to H2 of last year and the margin should improve slightly compared to H1.

And to conclude with GIS, the Governments and Institutions Services. The trading conditions should improve in H2 supported by the expected volume increase in our Scanner activities in Cameroon. Our new valuation program in Mozambique and the stricter enforcement of our Renovo project in Ghana should also support good momentum. Also, PCA volume in H1 were impacted by the temporary suspension in our Ghana -- our Kenya program, sorry. This has been lifted now and we should be seeing the volume back to normal. For the full year, we expect to get back to positive and stable growth compared to last year. The margin will also be closer to the 2018 level as we resolve the bad debt situation of H1.

So in term of guidance for the rest of the year and moving toward the end of 2019. Based on the different business line outlook I just gave and subject to assumptions that no further escalation of the U.S.-China trade disputes, I'm expecting our second half organic growth to be similar to H1.

In term of margins, the second half is traditionally the busier semester. This, together with solid outlook for many of our business line, we should expect a stronger uptick of the adjusted operating income for the second -- for the end of this year -- income margin for the end of this year.

On that, our guidance for 2019 remains unchanged and are solid revenue organic growth, higher adjusted operating income and robust cash flow.

To conclude, I would like to thank my colleagues of the Operations Council, who are -- most of them are present in this room, and the operations group for the achievement of this set of solid result. Their effort were also instrumental for us achieving the 3 milestone I mentioned earlier: our capital allocation to enhance value, investment in new sector for the long term and the optimization of our network. These milestone would position us to ensure SGS' leading position in testing, inspection and certification industry and create long-term value for the SGS employees, customers, shareholders and for society.

The last slide, as you see on the screen, is our outlook 2020, but just to re-emphasize on them is deliver mid-single-digit organic growth, accelerate our M&A, adjusted operating margin of above 17%, strong cash conversion, robust return on invested capital and maintain the dividend or grow it in line with the improvement of adjusted net earnings.

On that, we can go for the Q&A session.

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Tobias William Reeks, SGS SA - SVP of IR [10]

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Q&A. Right. So if we start with the Q&A in the room. So hands up.

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Questions and Answers

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Tobias William Reeks, SGS SA - SVP of IR [1]

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So ladies first. (Operator Instructions)

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Suhasini Varanasi, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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Suhasini from Goldman Sachs. Two, please. Oil and Gas, the Upstream has been quite strong in first half. Has the strength in this division actually surprised you? Has pricing actually come back? How is the pipeline looking going into second half and 2020?

And the second one is more an accounting one, IFRS 16. Was the benefit on the margins particularly strong in some divisions? Or was it spread out across the group divisions? And is the full year benefit also 20 bps?

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Frankie Ng, SGS SA - CEO [3]

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Yes. Why don't you take that question?

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Dominik de Daniel, SGS SA - CFO [4]

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I'll take the IFRS 16 first. So this is -- it's approximately 20 bps, and it's -- there is no big difference around the different business units because it's basically a function of the average duration of your lease portfolio, and there are no significant difference around the group.

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Frankie Ng, SGS SA - CEO [5]

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So for the first question, for Upstream. Not as -- we thought it was not surprising because we had the team for the past couple of years, and we worked really hard in securing new contracts in the Middle East and in Asian regions where we're more focused on Upstream production part of the process. But this is the result of all those efficiency improvement, contracts securing of the last couple of years that is now creating the stream of revenue. So I expect this as a kind of growth that we are looking at first one into second half. And some of those contract are long-term contracts, so we should see some momentum into 2020 as well.

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Tobias William Reeks, SGS SA - SVP of IR [6]

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Thank you. Should we start on that side of the room? Aymeric?

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Aymeric Poulain, Kepler Cheuvreux, Research Division - Head of Support Services Research [7]

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It's Aymeric Poulain from Kepler Cheuvreux. I just wanted to come back on this CHF 75 million cost saving program. And I'm just wondering why you did not raise your margin 2020 target on the back of that given the fact that it should be quite an important uplift. And if not, what is actually eating into your margin? And should we conclude that the organic growth is essentially an inflationary pass-through and there's no real profit growth or even negative potentially pressures on the margin that we should be aware of? And also, bearing in mind that there is this operational margin pressure underlying, why is the group continuing to shrink capital investment and -- instead of redeploying capital in a more aggressive way?

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Frankie Ng, SGS SA - CEO [8]

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Do you want to take on the...

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Dominik de Daniel, SGS SA - CFO [9]

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So if we look to the program, our goal is 17%-plus, right? And obviously, it's getting more challenging. So of course, the CHF 75 million is a key enabler to get there, but there's always a plus, right? The goal is not 17.0%, it's 17%-plus. And this program is very helpful for the 17%-plus, but it's meant to be a program also for the future as we think we achieve efficiency gains that just are helping also beyond '20 -- 2020. But it's -- it should not meant to be that we now, therefore, increase the target up because that's the target, 17%-plus, and we are confident to get there.

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Frankie Ng, SGS SA - CEO [10]

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And in term of capital spend, the objective is not to squeeze capital. In fact, as Dominik mentioned just earlier, that the lower numbers in term of revenue is just a question of timing. We'll have a new investment coming around in the second half of the year, and we should be back more or less to the same level that you see on a yearly basis. And so certainly, more disciplined approach toward the new fields and new areas that we're looking at. So it's just a question of timing. There is no intention to squeeze the spend on the capital of this company. Not in the CapEx, I would say.

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Tobias William Reeks, SGS SA - SVP of IR [11]

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Thanks. We move on to Ed.

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Ed Steele, Citigroup Inc, Research Division - Director [12]

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Ed Steele from Citi. Following on from that last question on restructuring. Obviously, SGS has been through several years of efficiency savings, procurement savings, lots of restructuring costs going through the business. So this is not the first program. Could you give us some specific examples of the things that you are doing that are incremental beyond what's been previously announced? And give us an update also on the shared service and the benefits especially coming through at the moment, procurement savings, et cetera, that didn't seem to get featured?

And then a second question. Maybe you could just talk a little bit around the decision to dispose of the OGC asset, PSC. So it's performed very well in the last few years. It's been one of the highlights of that division really, as against some pressures elsewhere. And given it's got some characteristics of asset-light, et cetera, which you may not like, are there some other assets in, say, Industrial that you might want to dispose of as well on the same basis, please?

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Frankie Ng, SGS SA - CEO [13]

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Maybe I'll address the second part of the questions. The process for PSC is really clearly linked to the dashboard that we have put in place now about 3.5 years ago where we're looking at a specific gate in term of growth and in term of margins that we are looking at.

The PSC activities are quite unique in the sense that when we bought it 15 years ago, it was the tankerman business and a lot of transporting of chemicals all over the Mississippi River. When you look at the growth of the last few years, couple of years, it was more focused or linked to the petrochemical industry, where it was supporting the petrochemical industry in term of expense of their manufacturing basis, which is a totally different businesses that we had at the beginning of the process. While the initial businesses was fitting into our core strategy, the later part of the growth was getting further and further away from the actual core value of the PSC that we got. It doesn't mean that this part of the business is not valuable for someone else. But in our long-term evolution of our strategy, it was not the part of activities we wanted to focus on, and we see more potential in growing this part of the activities which is much more lower margins than the one that we had initially. So this was part of the reason why we left this with Alim, the Head of the OGC, to decide that we need to walk away from this activity, and we're still in a good pattern in terms of disposal of such activities. But you're absolutely right, it's a good asset, but it's just a different focus than what we are looking at in the longer term.

As for the rest of the portfolio, as I said, the dashboard will carry on, are now CHF 350 million last year. We're down about 3. You can debate. And me, I have another CHF 50 million that will go around. We are looking at more assets, but the plan is really to ensure that those assets fit the strategic logic for us. If it doesn't, then we have no issues to make further disposal. But at the same time, we also need to look at area where we can grow, and I think the Maine Pointe acquisition was a good example where, while we're disposing one part of our portfolio, we're acquiring something else that's complementary to what we want to achieve in term of value chain and the enhancement of our portfolio.

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Ed Steele, Citigroup Inc, Research Division - Director [14]

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So an asset-light business is probably right -- so it's not the way?

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Frankie Ng, SGS SA - CEO [15]

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Yes, which is an asset-light consulting business, so. If you want to address the first.

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Dominik de Daniel, SGS SA - CFO [16]

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Yes. So if we look to the restructuring -- and of course, you're absolutely right there. Every year, a kind of restructuring. And if you add this over several years up, it's a certain amount. But I think this program is different in 2 ways. First of all, it says CHF 75 million. This is not what we usually spend as restructuring in a half year. And if I look to restructuring programs historically, of course, based on my limited experience in SGS, it's often related much more to the direct costs changing in a certain local market, changing -- price changes or changes in a certain business which we always rightfully actively addressed, while this one, I would call, is more a structural change where we basically look to opportunities to eliminate duplication. And maybe I have to go a little bit back. And Frankie said it's already in his introduction.

If you look to our structure, we have a massive structure which is very successful, where we have 9 business units with strong leadership who have a detailed understanding about this business and the strategic responsibility. And then, on the other hand, we have the operations, the CEOs running the daily business who are making sure that the service is delivered with great quality and run this in an efficient and very productive and profitable way. So it's a good combination because as I see, although as a newcomer, it led to better organic growth than the peers with the same portfolio basically the last 5 years every year.

Now that being said, often, in company structures over time, duplication is building up, yes? Duplications between the business and the countries, duplications between the functions and the business. And this is just how things happen, and I see this also in other companies. So it basically means that the -- to give an example, in one business unit, we have ITP, but ITP should be in the function of IT. So these kind of duplications, we are tracking. We also think that in certain jurisdictions, we have business units managed by very small businesses where the question is, is this sufficient? Can you really act in the right way on the market if your direct overhead is too high? So this program is basically focusing to eliminate this duplication in the second half of the year. And therefore, what I also said, the impact of -- on sales should be rather limited. There are -- a couple of closures are part of it, but it's really minor because it really addresses more the overhead and the indirect cost base. And there should be sustainable cost savings, and it should also help -- if you have duplications, sometimes the decision-making takes a bit longer

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Tobias William Reeks, SGS SA - SVP of IR [17]

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Thank you. Do we have any further questions in the room? Please, Paul.

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Paul Daniel Alexander Sullivan, Barclays Bank PLC, Research Division - Director & Analyst [18]

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It's Paul Sullivan from Barclays. Sorry to come back to the restructuring plan, but I'm just interested to know what really changed since November when you set the -- when you reset the targets. And now you need to take a CHF 75 million restructuring charge to achieve the targets. I'm not clear what's really changed. And do you -- or do you see it as additive? Or was the basis of the target effectively flawed when you set it?

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Frankie Ng, SGS SA - CEO [19]

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Not at all. In fact, in November when we discussed about the target of 17%, there was also a plan, an element of what needs to be done with no innovation. While we set a target, we don't explain in details exactly what's going to happen, and we were already in the working process of this plan. So it's just that Dominik has joined us in February which just accelerated the plan to make sure that we are able to deal with that now as to the full plan and we'd put it in this first half of this year. But the idea of the plan already existed. We know there was inefficiency in there, so we needed to take some extra measures to ensure that this waste was going to be [picked] enough.

When you look at all the different steps that we've done over the past few years, besides the shared service center, we also introduced the world-class services, which is more focused on the optimization of the processes or laboratories and the field activity itself. So it's an internal longer-term evolution of the process that -- which we want to optimize. This additional piece of the optimization is really looking at the duplications of the network, to reset the orientation of the network because the matrix organization over time has created a very successful model but, as Dominik just mentioned, also created this duplication, this waste across the network. So the idea was to have one program of world-class services to optimize the laboratories, the operations and other programs to optimize the network itself in term of duplication, overheads, some of those clustering of function within a smaller country, smaller business line. So this was part of the rationale behind the plan anyway.

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Paul Daniel Alexander Sullivan, Barclays Bank PLC, Research Division - Director & Analyst [20]

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Could you -- just to be clear, could you give us the exact impact from disposals on the second half margin and on next year?

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Dominik de Daniel, SGS SA - CFO [21]

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So if we look on disposals on second half, so it's basically selling this U.S. business is approximately 20 basis points because this business has had not a bad margin. It was lower than the group margin because the margin of the business is higher single digit. And Maine Pointe on an annualized basis is rounding to 10 basis points positive.

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Paul Daniel Alexander Sullivan, Barclays Bank PLC, Research Division - Director & Analyst [22]

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And from an underlying basis, you would expect the underlying improvement to 20 ex the IFRS changes to accelerate in the second half?

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Dominik de Daniel, SGS SA - CFO [23]

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Correct, yes, because the -- yes.

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Tobias William Reeks, SGS SA - SVP of IR [24]

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Thank you. I think we have one more in the room.

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Unidentified Analyst, [25]

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William [Hayard] from [Ross Southern] & Co. Two questions, one on tax rates. Could you elaborate a little bit on the detail behind drivers and changes to tax rates in 2019 forward and their impact on earnings?

And the second question has to do with negotiations of contracts with clients, particularly in terms of pricing, whether there are any changes at the moment.

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Dominik de Daniel, SGS SA - CFO [26]

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If we look to the tax rate, the tax rate in the first half is 34%, 10% higher than the prior year. And this is related to deferred valuation allowance on deferred tax assets in some jurisdictions. It's a noncash item, but it's increasing actually to 34% in the first half. And this will lead to a full year tax rate of 31%.

Going forward, the tax rate will be in the higher 20s, which is higher than the tax rate which, yes, we had the last couple of years. And that's a function, on the one hand, obviously we see in certain jurisdictions taxes are slightly increasing. But it's also a function of IFRIC 23. IFRIC 23 is a new interpretation about uncertainty around taxes. You basically, in your own assessment about a potential tax case, have to assume that any tax [authorities] have exactly the same knowledge as you. And this is an interpretation which was a form of (inaudible), and this leads in general to tiny -- higher tax rates. And we believe the tax rate going forward 2020 as far as we can say because there, of course, could be all these changes in tax rules. It will lead to a tax rate more in the higher 20s.

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Frankie Ng, SGS SA - CEO [27]

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I think the second question was on -- it will depend on the business sectors. You look at -- I would say if you look at in term of price pressure, the extreme is currently the Oil, Gas and Chemicals unit in term of the Trade business. We have called out a few new competitors. We mentioned about a few of the mid-tier or second-tier players in the past that have kind of put pressure on the pricing strategy. But we've also seen a couple of new players from the eastern -- the Asian countries that is also putting pressure on the margin, who's undercutting some of those mid-tier players already. So this is a typical example where pricing pressure is putting a niche on us, and we're trying to optimize the network to defend our margins. And we're not in the game of just dropping our price for the sake of competing with those popular companies. So there's a lot of internal optimization we're going through. On the other side of the spectrum, I would say, is businesses like licenses and food activities where the pricing power is still good and we still maintain our momentum. There are some also -- or some of the [consumer liquid] in term of chemical testing and so on, we still maintain some of our good pricing momentum. So it's a really broad aspect from one spectrum to the other one. So it's difficult to give you an exact answer.

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Tobias William Reeks, SGS SA - SVP of IR [28]

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You -- if we've exhausted the questions in the room, shall we move over to the call, please?

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Operator [29]

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The first question from the phone comes from Roger Chua (sic) [Rajesh Kumar] HSBC.

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Rajesh Kumar, HSBC, Research Division - Analyst [30]

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Two questions. Do you think the uniformity of price discipline across players and the business lines, which was once historically dependable, is starting to erode again?

And secondly, is there too much focus on margins where focus should really be instead on sales and delivering sales growth?

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Frankie Ng, SGS SA - CEO [31]

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I'm sorry, what -- did you get the first question?

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Dominik de Daniel, SGS SA - CFO [32]

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Price discipline, whether the price discipline in the TIC industry, whether it would erode again, so.

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Frankie Ng, SGS SA - CEO [33]

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Not really. In fact, when you look at that, I think it's against -- the price discipline is really by market segment. There are changing conditions. There are market-specific -- market dynamic that forces different players to take specific actions. But as the sector is quite diversified, we see a really broad variety of pressure. As I said on the Oil and Gas side, it's more extreme for the time being. While for some of the other licenses, other, it is more stable and we have a better pricing power. On some of the newer product, in Environmental Health and Safety, for example, we have a lot of pricing power. When you look -- talk about micro-pollutant, these PFOS kind of activity, high-risk activities, we have a much more stronger pricing power than the traditional saltwater kind of testing. So it's -- I don't think it's a lack of discipline from the TIC sector. I think it's more a question of maturity of their product cycles, that we just have to keep looking at the new regulation and new items to put on the market and, as we do for the consulting, so we offer our value chain to our customers and try to bundle the services to protect us better against some of the more mature product they're able in terms of pricing.

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Tobias William Reeks, SGS SA - SVP of IR [34]

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The second one was, is there too much focus on margin at the expense of growth?

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Frankie Ng, SGS SA - CEO [35]

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I don't believe so because we are really clear that growth drive margins. And on this one aspect, with our growth on the top line, here you can debate on your margins, but -- so, well, we focus on the growth as well. It's just that while we're working on the growth strategy on some of the segment, that the transformation of the portfolio is part of this growth driving strategy we're putting in place, and we have to go for this process. We're also trying to focus on our margins because whatever waste we're taking out now is waste that we don't need to take away for the future. So there are 2 [forces that can pan] out. So therefore, there's not a specific reason why we're focusing more on one than the other.

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Operator [36]

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Next question from the phone is from Patrick Jousseaume, Societe Generale.

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Patrick Jousseaume, Societe Generale Cross Asset Research - Head of Mid and Small caps Europe Research [37]

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Yes. Two question on my side. First question is on free cash flow. You mentioned effectively that after restatement of your liabilities, that cash flow from operating activities is EUR 254 million (sic) [CHF 254 million]. And when I calculate the free cash flow, that is to say after you made purchase of fixed assets, I found CHR 129 million compared to CHR 176 million last year, in the first half, and CHR 210 million in first half of 2017. So it's a 40% reduction in 2 years. Could you elaborate a bit on that?

And the second question is about exceptional items, i.e., the difference between adjusted operating income and operating income. We have CHF 147 million in the first half. Should we expect something around CHF 70 million in -- for the full year given the EUR 75 million -- CHF 75 million that you have mentioned for the optimization program? Or are there also moving parts?

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Dominik de Daniel, SGS SA - CFO [38]

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If we first have a look to the cash flow, I mean, this -- I pointed this out that basically, if you look to the cash flow statement then you look to the payment of lease liabilities, there's obviously an outflow which was historically shown as a rent payment. Now it's in the P&L, depreciation. So the cash flow is basically down if we adjust for this, like I said in my speech. Now what are -- the reason for this is basically that we had much more increase in working capital in the first half of this year compared to the first half of last year. So we had CHF 205 million more need of working capital in the first half this year versus CHF 124 million last year, which is basically explaining much more then the difference in the cash flow. The reason for this is the following: The main reason is basically the timing of payments, yes, because you'll recall you -- there's very strong cash flow, operational cash flow and reported cash flow net of -- a very strong cash flow driven by very strong working capital at the end of last year operationally and even more so reported. And this was, on the one hand, clearly driven by the fact that payments occurred in the first quarter '19 which were related to Q4 2018. And so the more if you look now half year to half year, you need to consider that at the first half last year where the provision or the [write-down] was booked in terms of Brazil of CHF 47 million, it had a negative impact on the earnings, but it helped basically in the first half last year on the working capital. So these 2 items explaining basically the difference.

Regarding the one-off items for the -- if I understand your question right, one-off items for the second half of the year, it's basically when you look on -- where do we have this? Where we have the -- we had -- basically in the first half, we have the gain in other nonrecurring items of CHF 201 million. For the time being, what would I expect in this one-off items in the second half of the year? It's basically the restructuring cost of CHF 75 million. Other items, for the time being, we would not expect. Obviously, the normal amortization of the existing acquisition and the newly acquired businesses.

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Tobias William Reeks, SGS SA - SVP of IR [39]

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Thank you very much. (Operator Instructions)

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Operator [40]

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Next question comes from the line of Alexander Mees, JPMorgan.

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Alexander Mees, JP Morgan Chase & Co, Research Division - Head of UK Small and Mid Cap Research [41]

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Two, please. Firstly, just in Transportation. Obviously, it's been a difficult time for you in Transportation. I wonder if remedial action is required in that business. Or is it just a question of working out a few unfavorable contracts and then things will get better? And if so, when will that be?

And secondly, you've obviously been very busy in M&A. I just wonder if you see any changes at the moment in the competition for the assets that you're looking at and the multiples you're being asked to pay.

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Frankie Ng, SGS SA - CEO [42]

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For the Transportation, the key activities that we're doing currently is to -- really to expand our portfolio into a newer field in the testing environment. Our key concern, the regulated activities. It's very difficult for us to take extra steps because these are concessions terminating. Then we have to wait for the cycles of these concessions to restart in term of bidding. So there's not much we can do besides to optimize our cost base and to ensure that we can now -- we compete for the next project that comes on -- the project that comes on the market. So on the regulatory side, difficult to mitigate the risk. On the field activities on the testing, yes, we are looking actively at new contracts, expanding our portfolio. The launch of our electrical battery testing labs in Germany is a good example. We're also setting up on both electronics activity and testing in our -- in India, in China. This is a way to expand the overseas part of portfolio to accelerate the growth because these sectors are growing at a high single digit. So which are the good activities versus the most softer regulatory businesses where those contracts going, but as the cycle [flesh] out, we should come back in a more stable growth in term of those 2 activities.

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Tobias William Reeks, SGS SA - SVP of IR [43]

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The second one was on M&A multiples in the market. Are we seeing any changes? Is there any change in competition for those multiples -- For those companies?

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Frankie Ng, SGS SA - CEO [44]

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Actually, we focus a lot on those midsized to small-sized assets. I think the run of those larger assets in the past couple of years has subdued it a little bit. And I would say that in term of multiple we've paid, it's not different than the strategy that we presented last year in term of the brackets we've been paying. I think yesterday, we showed a little bit the kind of brackets we're paying. I would say that when you look at the different assets that we have acquired up to now, they're not far off from what we traditionally pay with some differences. Obviously, some of them are in a segment that's slightly higher than the others. But I would say on overall, we are quite disciplined on our approach on not paying more than what we -- it's the way we think.

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Operator [45]

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Next question comes from the line of Jean-Philippe Bertschy, Vontobel.

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Jean-Philippe Bertschy, Bank Vontobel AG, Research Division - Head of Consumers Team [46]

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Welcome to Dominik. The first one would to be to follow up on my colleagues. And with this margin, when you exclude restructuring, shared service centers, procurements, the dashboard, IFRS 16, it looks that you are under massive pressure and that you have like a pricing pressure from the markets. If you can explain that into more details.

And the second one, and to add to Kumar focusing on margin, I think maybe on that standpoint, maybe more focusing on the returns because it looks like the PSC divestment was then good in terms of returns, maybe that much in terms of margin, and the one you acquired with very high margin is not so good in terms of return. So maybe the strategic rationale behind that.

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Frankie Ng, SGS SA - CEO [47]

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All right, first one?

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Dominik de Daniel, SGS SA - CFO [48]

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So I mean if we look to the IFRS 16, yes, it has, of course, a positive impact, approximately 20 basis points, right? It's positive, but it's also somewhat limited. And this is how IFRS 16 works, that you basically take the rent and separate it into rent payment in the financing costs. On an EPS level, it's actually negative in -- always the next year because the finance charge is front-loaded, right? But it's limited.

Now on the other activities, we're working intensively in procurement. And I also think there are areas where we so far didn't focus on. So I think there are also some more opportunities which we have to tackle. But it's also the case you can make procurement savings, but it still means that your remaining cost will inflate, right? So we have to look at this in a combined way and not say this is the saving and this is then more the profit because we had inflation for other costs. They are not massive, but they are there.

On shared services, I think it's a good setup. We're moving more and more countries to the shared services, to [Canaries] and to Manila. And there's still some -- more work needs to be done in terms of harmonization and optimizing the process because if the process are not standardized, you will not achieve the full productivity. And there, we are currently focusing on to further optimize and basically standardize first the processes. And if the processes are standardized, you get also higher efficiency gains. These are all very important things. And they are not there to stop in 2020, they are really going on beyond it.

In terms of returns, honestly I -- if we look to the acquisition, Maine Pointe, I'm convinced they will achieve -- they earn more than -- clearly earn more in the first year than their cost of capital. So if you deploy money basically the first year, what's then your cost of capital? And it's a good investment, right?

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Frankie Ng, SGS SA - CEO [49]

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Yes. Maybe I can add on the PSC versus Maine Pointe. I think we -- I don't understand your comment when you look at in isolation the PSC activities. But I also mentioned that you -- we're looking at that 2 or 3 years ahead in a dynamic manner, which -- where you evaluate the market evolutions and where this asset is heading to. And I mentioned earlier to the earlier question that in our view, this asset is a good asset, but it's not having the right direction in term of the focus of their portfolio. This is part of our core focus. So the strategic significance, the evolution on the market, what we believe we need to focus on versus what some of those asset, because of the market environment and so on, goes to has also an incidence in the way we are evaluating assets. So it's not really much just a static historical view, it's also our projection into the future. It is important to us. So likewise for Maine Pointe, it's not just about the asset itself, it's the projection of, I think, what they can do for our [CP] activities. When we talk about the pain point of our customers, how we can bundle these kind of activity into a more value-enhancing portfolio of services. It's also a little bit of dynamic process. We're looking at not just purely static or historical factors of those asset as well.

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Tobias William Reeks, SGS SA - SVP of IR [50]

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Thank you.

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Operator [51]

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

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Thomas Richard Sykes, Deutsche Bank AG, Research Division - Head of Business Svcs Co. Research & Industry & Leisure & Transport Research [52]

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Yes. So first of all, just on the Minerals business. Could you maybe go through the degree to which you're seeing demand soften and then the degree to which you can actually still grow the on-site business because you're going to face quite tough comparators on that, particularly in the beginning of next year? And what's the scale of pipeline of the on-site opportunity to offset any weakness in, say, samples demand?

And then just on the evolution of the CHF 75 million. At what point did you get to CHF 75 million? I.e., is this a response to slightly slower growth? And how much of this is structural? And how much of this is just that growth seems to be a bit slower, therefore you're taking out more cost in maybe more economically sensitive areas, please?

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Frankie Ng, SGS SA - CEO [53]

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On the first questions for the Minerals sector, the slow -- the slowing down of the businesses is mainly on the geochem activities. But we're looking at that in term of the commercial labs. Their on-site activity is still good. As we said in the past, it's the more stable activities because we have multiyear contract that's exclusive to us. And we're still having a few more new labs coming online in term of pipeline in the second half of the year. We also have quite a lot of tenders, trying to bid for new labs that would come. If we win them, would come into the pipeline in the first half of next year. So I would say we're not concerned about the significant decrease. It's more the stable to increase still on this kind of activities.

The other equation of second half of this year is more the price of the coal, which is rather soft in Europe for a time being. So we see a slowdown of the trade between Russia and the European countries. But we're also seeing a strong pickup in term of the trade in the Eastern part of Russia and some of the China market because the Pakistan, the Chinese are actually buying coal because of the rather reasonable price. So we see the 2 effect offsetting each other, but we're still being prudent by saying that compared to what we've seen in the first half, the growth will slow down in the second half. This decision can change getting in the -- into -- getting into the second half. The first half of next year will change because there are trading conditions that is quite dynamic.

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Tobias William Reeks, SGS SA - SVP of IR [54]

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The second one was on at what point did we get to the CHF 75 million of cost savings.

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Dominik de Daniel, SGS SA - CFO [55]

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In terms of savings?

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Tobias William Reeks, SGS SA - SVP of IR [56]

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Yes. How did we get to that number, I guess.

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Frankie Ng, SGS SA - CEO [57]

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Maybe I can start. Now in term of evolution, we looked at it for quite some month. And certainly, it's an element of what we think could be taken out and what we think the market evolution is because of dynamic situations where as we evolve into our plan, we see area of softness with these others. And we see that in term of structural, we can also take a little bit -- negotiating to that. But I would say it's a top -- it's a bottom-up process we come through for twice a month with the organizations, the network with all our executive VPs and the chief operating officers across network and ask them, if we were to optimize the network and these are their games -- the rules of the game, how will you do it and how we can do -- extract the best value, best optimization possible. So they've come up with this plan. Now we just basically have to consolidate that into a more structural way. So they are -- it is a dynamic process, and there are certainly, over the course of the assessment of this plan, some area where we started to push a little bit harder versus other area where we see growth picking up where we're a little bit soft on that as well. I think that's enough for that.

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Tobias William Reeks, SGS SA - SVP of IR [58]

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Okay. I think that we've hit an hour and 10 minutes roughly.

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Operator [59]

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Next question comes from the line of Edward Stanley, Morgan Stanley.

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Edward Stanley, Morgan Stanley, Research Division - Equity Analyst [60]

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Yes. Sorry, I may have missed it, but I was keen to find out a little bit more about China. I know we're a little bit bored about it. But given all the industrial warnings that are going on at the moment, you said that China is broadly stable but there are either emerging problems in Hong Kong or Hong Kong is getting worse. Are you seeing any particularly aggressive swings in any of your divisions or segments going through Hong Kong? And what should we be watching out for this consumer might get worse rather than stay stable in the second half?

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Frankie Ng, SGS SA - CEO [61]

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We -- for China, certainly we see the impact of electronic evolutions and the dispute between the U.S. and China. But at the same time, we're also seeing an expansion of the local Chinese market. And also, we are seeing a softness on -- to the international trade. We have been really strong in term of getting to the local market.

I think a couple of years back when you asked me the question -- or one of you asked me the question about the percentage of our domestic market, I said it was just short of 50% or close to 50-50. I can say that now we're well in excess of 50%. So a big chunk of what we do are now a big chunk. I would say more than 50% of what we do is linked to the domestic market. So our portfolio has also evolved. And the good news is the expansion into domestic market has managed to offset the slowdown of the international market for us, creating some growth in term of the total growth in China.

Hong Kong is a slightly different programmatic in a sense that Hong Kong traditionally is the big trading hub for the retail sector. If we don't do consumer goods, there's less severity of services that you can offer. And the difference over China, which is much bigger, Hong Kong is rather captive territory. So we have strategy. You look at our expansions. The 20% investment into Vircon is part of our expansion strategy in terms of diversification strategy -- sorry, in terms of our Industrial portfolio. We -- you will recall we also made a 50-50 joint venture with a company called Lab (Asia) a couple of years ago, which is now active into the third runway of the Hong Kong airport and is quite active into the Greater Bay strategy of the South China Sea there. So we are actually expanding our activities into the industrial sectors in Hong Kong. The consumer goods sector will follow the natural evolution of the retail sectors. The -- as I mentioned earlier, the drop is more significant for them. You will stabilize because Hong Kong will have trading needs in term of -- for the consumer good. But it's just for us to take into consideration those dynamics and start to expand the portfolio into something else. Certifications, Industrial is the 2 next sectors that we look at for Hong Kong. China, we are pretty good because the growth in China is all about nutrition, health, Environmental Health and Safety and some of the international activities which compensate largely the international decline.

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Tobias William Reeks, SGS SA - SVP of IR [62]

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Okay. Thank you. I think we'll draw it to an end. There's people still on the call who would like to ask questions. You're welcome to email those to me, and I'll reply to them very -- as soon as I can. Maybe not this evening but certainly tomorrow. And thank you very much, Frankie. Thank you very much, Dominik. Welcome to SGS. And I'd like to invite everyone in this room to come and join us at the [H] Room for a cocktail after this meeting. Thank you.

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Frankie Ng, SGS SA - CEO [63]

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Thank you.

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Dominik de Daniel, SGS SA - CFO [64]

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Thank you.

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Operator [65]

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Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.