Hello, and welcome to the Bureau Veritas H1 2019 results. My name is Molly, and I'll be your coordinator for today's event. For the duration of the call, your lines will be on listen only. However, there will be an opportunity to ask questions later in the call. If you require assistance at any time, please press star zero on your telephone keypad and you will be connected to an operator. Please note that this call is also being recorded. I will now hand you over to your host, Didier Michaud-Daniel, CEO, to begin today's conference. Thank you.
Thank you. Good morning, good afternoon, and good evening to everyone. Thank you for joining Bureau Veritas H1 2019 results call and webcast. François Chabas, our group CFO, is here with me to present our half year results. In the first half of the year, we have continued with our solid momentum of growth, portfolio diversification, and financial and cash performance improvement. Everything is on track according to plan, and we confirm our objectives for the full year. A few comments on H1 2019 performances. Group revenue grew by 5.3% year-on-year at constant currency. Organically, we achieved 4%. Our adjusted operating profit is up 6.9% at constant currency. We improved our margin by 25 basis points year-on-year at constant currency and before the application of IFRS 16. Our adjusted net profit increased by 10.2% at constant currency.
Regarding the 2018 dividend, 78.5% of our shareholders opted for a payment in shares. A very good take-up rate, illustrating the confidence of our shareholders. Lastly, our free cash flow improved by 54% at constant currency. Together with the benefits of the scrip dividend, this enables us to reduce our adjusted net debt to EBITDA ratio from 2.82 times last year to 2.25 times at the end of June. Moving to the financial review, François will now take us through the numbers. François, please.
Thank you, Didier. Good morning, good afternoon to all. Starting with the revenue bridge. We've delivered EUR 2.5 billion in the first semester with an overall growth of 5.9%, which break down as follows. First, organic growth reached 4%, with similar growth in Q1 and in Q2. This illustrates the resilience of our portfolio today following the diversification efforts over the past few years. We have now seen circa 4% organic growth over the past five quarters. External growth contributed 1.3% on a method basis, and finally, ForEx had a slightly positive impact of 0.6%, which is mainly attributed to the appreciation of the USD and the Chinese Renminbi against the EUR, while mitigated by the weaknesses of some emerging countries' currencies. Turning now to the revenue growth by business in the first semester and the split between organic and external.
As you can see, five out of six businesses reach a solid pace of organic growth of 4.7% on average, and that represents 93% of the group revenue. Worth mentioning is the following. Agri-Food & Commodities obviously outperformed the average at plus 7.9%, with good growth across the board. At the same time, late cyclical activities are recovering. M&O is up 5.4%, Industry is up 4.8%, as it fully benefits from improving oil and gas CapEx markets. Consumer Products grew 2.2%, due notably to the phasing of new product launches in Q2. As expected, Certification declined 4%, a reflection of a transitional year post revision of standards. Turning more specifically to the revenue growth for Q2, we've delivered 4% organic growth as well, with Agri-Food & Commodities still the best performers.
Both Industry and Marine & Offshore accelerating their recovery compared to Q1, Consumer Products easing in Q2, and Certification being more negative as a result of more challenging comparables. To comment on the growth between the base business and growth initiative in the first half, we saw an improvement year-on-year on the base business, up 3.4% organically. In addition, our organic growth initiatives have continued to perform steadily, up 5.1% in H1. Altogether, this growth initiative now represents 37% of group revenue. Taking a look at M&A, we continue our active portfolio management with the objective of sizing attractive acquisition opportunities and divesting non-strategic businesses with below par margins. In the first half of 2019, we added around EUR 45 million of annualized revenue with four acquisitions, notably reinforcing our footprint in the U.S.A. and in Asia that support our Building Infrastructure and Agri-Food growth initiatives.
In parallel, we completed the disposal of our consulting business unit providing health, safety, and environmental services in North America. This business generated roughly $30 million in revenue in 2018 and weighted on the overall divisional margin. It will be deconsolid from our financial statement from the third quarter onwards. Now a few key points regarding the half year 2019 results. I will comment on the numbers before application of IFRS 16, so as to compare performance versus last year's numbers. We, of course, disclose the numbers after application of IFRS 16 as well, as you can read on the first column in the table. Adjusted margin increased by 30 basis points to 15.2%, of which 25 basis points at constant currency. It is fully consistent with our full year guidance. Adjusted EPS is up 9.6% at constant currency. Free cash flow is up 54% at constant currency.
I will come back to the details of the cash flow in a minute. Finally, adjusted net debt is down 14% versus last year, benefiting from the strong free cash flow performance in the first semester and the positive impacts from the scrip dividend. Turning to the adjusted operating margin. In H1, it improved to 15.2% before application of IFRS 16 again. It reflects the 20 basis points organic improvement, five basis points positive scope impact, and five basis points positive ForEx impact. All in all, 30 basis points gain versus last year. Three out of six business activities posted stable or improving areas margins, adding 50 basis points to the group organic margin. This was driven by a significant improvement in Agri-Food & Commodities and a solid performance in Consumer Products.
This improvement is the result of a combination of operating leverage, strict cost management, Lean efforts, and restructuring payback. Three businesses experienced lower margin due to lower operating leverage, price pressure, or change of mix in these activities. This concerns Certification and to some extent, Industry and M&O. Note that our adjusted operating profit margin after application of IFRS 16 is 15.4, which means another 20 basis point additional. Operating margin by business will be covered by Didier in the business review. Looking at the operating profit on slide 13, it is up 12.1% with proactive cost management measures resulting in EUR 12.1 million restructuring costs. These were mainly headcount reduction driven. Action were taken in Buildings & Infrastructure operation, commodities-related activities, and Industry businesses. This restructuring was lower than last year in the same period of the year.
For 2019, our expectation of restructuring charges remains unchanged at around half the amount of 2018, so in the range of EUR 20 million-EUR 25 million full year. This marks the end of a period of material restructuring, obviously. Under net financial expenses, we have first, a slight increase in financial charges, mainly due to higher average book debt following early debt refinancing. The depreciation of several emerging country currencies increases the ForEx impact from minus EUR 2 million to minus EUR 4.3 million in the first semester. Looking now at the tax rates, the adjusted effective tax rate of the group was down 170 basis points at 31.1%. This decrease is mainly explained by the new rules for the tax deduction of interest applicable in France from 2019.
For the full year 2019, we expect our adjusted ETR to be at the bottom of the 33%-34% range that we are guiding for. Moving now to the cash flow. There are several elements behind the significant improvement. First, the increase in profit before income tax, mainly driven by higher operating profits and less restructuring items. Second, a very disciplined approach when it comes to CapEx, with net CapEx at EUR 51 million, which represents 2.1% of the revenue. We expect this to be around 3% for the full year 2019. Lastly, a decrease in interest paid. Only non-free cash flow increased by 55% year-on-year, and organically by 59%. A rapid focus on working capital. In the first half of 2019, we continued to deploy our Move For Cash program.
We further reduced working capital ratio by 70 basis points versus June last year, to 11.7% of the group revenue. As you can read on the chart, since June 2016, our working capital has been reduced by 130 basis points altogether. Be aware that given the seasonality of our business, as you know, working capital is always higher in H1 than on a full year basis, as you can see on the chart. Working capital reduction remains a top priority for the group. We will continue and reinforce our actions moving forward. Coming now to the overall financial structure of the company. The adjusted net debt stand at EUR 2.1 billion, down 14% compared to June last year, and stable compared to December 2018. This strong debt position at the end of June reflects, one, a strong free cash flow generation of EUR 98 million before IFRS 16.
The disciplined M&A strategy with EUR 39 million of spend net of divestment. Third, a reduced dividend outflow of EUR 69 million, given the strong take-up rate for the scrip dividend in H1. We closed the first half of the year with a leverage ratio of 2.25 times, down from 2.82 times in June last year, and far below our 3.25 times bank covenant. This ratio is below end of December 2018 ratio of 2.34 times, despite our historical seasonality, H1 is two. To conclude, after the strong set of H1 2019 results, margin delivery and cash will remain our top priority for the second semester. I now hand it back to Didier for the business review.
Thank you, François. Thank you. For the business review, please remember that the numbers I will comment are pre-IFRS 16. Starting with Marine & Offshore. Revenue increased by 5.4% organically in the first half, and by 7.6% in Q2, benefiting from the recovery in new orders. High single-digit growth in construction, led by the equipment Certification business in North Asia. Low single-digit growth for current service, with another growth of the fleet against continuing price pressure. Offshore. Offshore was primarily driven by the expansion of services and the stabilization of risk assessment studies. New orders totaled 3.5 million gross tons at the end of June 2019, stable year-on-year, reflecting the Group's ability to win its backlog in a market that is down year-to-date. The Group benefits from its strong positioning on the most dynamic segments, namely LNG and passenger ships.
Our order book stood at 14.1 million gross tons, stable compared to December 2018, with ships including a more technological content. Our margin was slightly down, impacted by a positive one-off item recorded last year. 2019 outlook, we continue to expect annual full-year organic growth to be positive and full-year margin to slightly improve. Turning to Agri-Food & Commodities. Revenue increased by 7.4% organically in H1, pursuing the strong trend observed in the first quarter. By sub-segment, metals and minerals confirm a strong recovery, with organic growth up 10%. Both upstream and trade activities performed strongly across most geographies. Gold and base metals continue to be strong performers. Agri-Food. Agri-Food grew by 9.2% organically, coming from both Agri and food products. The Agri business benefited from new contract wins, notably in precision farming.
The food business maintained strong trends across all geographies, thanks to the development of several growth initiatives and the contribution from recent acquisitions. Oil and petrochemicals was up by 1.4% organically, reflecting high single-digit growth in Europe, thanks to new services, marine fuels, oil condition monitoring, while being broadly stable in North America due to bad weather conditions and persistent price pressure. Lastly, government services performed strongly, benefiting from the ramp-up of VOC and single window contracts. The margin was strongly up by 230 basis points to 13.5%, a combination of operating leverage, mix, and restructuring payback. 2019 outlook. We now expect slightly higher organic revenue growth compared to 2018, fueled by solid metals and minerals markets, robust agrifood businesses, and improving government services. We also expect margin improvement led by restructuring and positive mix. For Industry now.
The business confirmed its recovery at 4.8% organically, with acceleration in Q2 at 5.8%. This results from improving oil and gas market conditions and the benefits of our successful OpEx diversification. Oil and gas CapEx-related activities grew 7.8% in the first half and 11% in Q2. Growth was led by the U.S., by LATAM, and Africa. Projects were primarily small and medium-sized projects focused on gas and onshore activities. Oil and gas OpEx was up high single digit with strong volumes increases in LATAM, the Middle East and Europe. We achieved 16.8% organic growth in power and utilities OpEx, with a ramp-up of several contracts in Latin America. The margin declined 70 basis points organically due to negative mix effects with the high growth in OpEx-related services still in a ramp-up phase. The outlook for 2019. We expect the business to achieve slightly higher organic revenue growth versus 2018.
Our strategy of OpEx services diversification will continue to pay off. Oil and gas CapEx markets will continue to improve. We expect a margin improvement led by restructuring benefit and more positive mix. In B&I now, Buildings & Infrastructure. Revenue increased by 3.1% organically, with slightly stronger organic growth for construction-related activity. Organic growth performance was varied across the different continents. Our operations in China delivered 10% organic growth, where prospects remain strong from infrastructure projects, driving the high single-digit growth across the Asia Pacific region. The recovery in Brazil, strong growth in Colombia, and solid growth in the U.S., in particular for code compliance services and data center commissioning, all contributed to the mid-single digit in the Americas. Europe was stable, with limited growth in France offsetting negative performance in Spain and in the U.K.
France is facing subdued conditions in the CapEx-related activities and a weak start to the year for OpEx-weighted works. We expect gradual improvements here. The margin was largely stable organically. For the full year of 2019, we expect the business to achieve slightly lower rate of organic revenue growth compared to 2018, with an acceleration expected in H2. This will be led by solid growth in Asia, U.S., and Latin America, and resilience in France. Margins are expected to improve slightly. Turning to Certification. The business, of course, continues to record negative organic growth in 2019 as expected, -4.1% in H1 and -5.9% in Q2. You will remember last year, we benefited from an exceptionally high level of activity due to the September compliance deadline for new QHSE and transportation standards. This backdrop has masked our highly successful portfolio diversification, where revenues from new product development are up 22%.
This includes double-digit growth in food certification, sustainability, social audits, and for our enterprise risk management offering. Margins declined by 110 basis points to 16.8%, reflecting the impact of negative revenue growth and mix effect. Outlook for 2019. Certification is expected to deliver a negative organic revenue growth with the impact from the QHSE and transportation transition, which ended in September 2018 and of course, creates challenging comparables for the first nine months of the year. Solid growth elsewhere, primarily driven by food schemes, sustainability, training, and customized audits. Profitability-wise, we are focusing on margin protection. For Consumer Products, the business delivered a 2.2% organic growth in the first half, but slowed to 0.8% in Q2 as anticipated. Soft lines grew in line with the divisional average. Performance was mixed geographically, with a strong momentum in South and Southeast Asia and weaker trading conditions in the U.S.
Hard lines grew thanks to Europe at a rate below the divisional average. The electrical and electronic segment grew low single digit. Here, the growth came from mobile testing, even if we have noticed a temporary slowdown on new product development ahead of the 5G launch later this year. Our margin improved by 70 basis points to a strong 24.3%, thanks to efficiency gains. I would like to say a quick word on the U.S. trade tariffs on China. As a reminder, only 5% of our Consumer Products business is within the current scope of tariff increases. Consumer Products is a global business with multiple growth engines, and we can easily follow manufacturing relocation and supply chain changes. While our business is stable in Northeast Asia, it is growing elsewhere, including double-digit growth in Southeast Asia.
In 2019, we expect for Consumer Products a slightly lower organic growth compared to 2018, with a gradual improvement in H2, strong momentum in Southeast Asia, solid growth in Europe, resilience in China, and changing conditions in the U.S. We are focusing on margin protection throughout 2019. The outlook. Following the strong first half, we confirm our full year 2019 guidance and expect the good momentum to continue in H2 to deliver solid organic revenue growth, continued adjusted operating margin improvement at constant currency, sustained strong cash flow generation. This strong set of results provides a perfect illustration of the group's new profile, thanks to the successful transformation undertaken over the past three years. We now have much of the growth profile and cyclical resilience we were looking to achieve. We have significantly improved cash flow generation and leveraged the balance sheet.
In the first half, we have seen the full benefits of diversification. To conclude, we are extremely pleased with the strong momentum in the first half of 2019. Thank you for listening. François and I are now pleased to answer any questions you may have.
If you would like to ask a question, please press star one on your telephone keypad and ensure that your telephone line is unmuted locally. You will be advised when to ask your question. The first question comes from the line of Edward Stanley calling from Morgan Stanley. Please go ahead.
Afternoon. Thank you for taking the questions. I've got three quick ones, please. On Agri-Food, you say slightly higher for the year versus FY 2018 for organic growth. If I assume it's 5% or so for the full year, then that implies 2% in the second half, and yes, you've got some tough comps in metals and Agri-Food, but that seems quite an extreme slowdown in a division that's doing well. Secondly, in Consumer, you talk about margin protection in the outlook. The only other place you talk about that kind of wording is in the Certification division, where growth and margin trends are obviously very different in the first half. Can you elaborate on what margin protection really means specifically for Consumer?
I hate to labor the point finally, but, on the scrip dividends, it's clearly a big contributor to better cash and deleveraging. In an ideal world, would you continue to try to do that until you reach a certain leverage level? Or what's the thinking behind continuing doing that?
Thank you, Edward, for your question, and good afternoon. For the scrip dividend, of course, this is not a decision which has been made today. As you can imagine, this decision is there in the future in the board. I'm not going to talk about next year today, we will see what's going to happen next year. We are very happy this year that 78.5% of the dividends were taken in shares, which is really showing the confidence of the market in the future of Bureau Veritas. Regarding the margin protection of the Consumer Products, clearly in the first half, we did very well by improving by 70 basis points the margin. It's coming, when you look at it in the detail, essentially from the mix.
As you could see with the slowdown of CPS in Q2, some project are deferred, waiting for the 5G testing implementation. We know that there is a mix effect, so we did very well in each one. What we want is to keep the margin at the level we had last year for the full year. Regarding the Agri-Food & Commodities business, I gave a qualitative guidance. 2018 was at 4.5% organic growth. We believe that we will achieve probably the same type of organic growth, when I say the same type, better than last year in 2019.
The next question comes from the line of Paul Sullivan calling from Barclays. Please go ahead.
Good afternoon, everybody. Just to follow up on that, on the margin point. In Consumer, should we be thinking, or is there a risk that the margin could go backwards in the second half? Similarly in AF&C, sorry, in Agri-Food & Commodities. The margin expansion in the first half, is there any reason why that shouldn't be extrapolated into the second half? Just to more sort of a bigger picture perspective, overall, is there anything on your horizon that would suggest that for the group, organic growth or margins shouldn't be better in the second half versus the first? In theory, looking at some of the mix effects and some of the acceleration that you expect to see in some divisions, it should improve second half on first half. Thank you.
Paul, thank you for your question. It's a good try regarding the second half organic growth. Clearly, the guidance is solid organic growth for the full year. What you could see clearly is that we have already achieved five times in a row, five quarters in a row, 4% of organic growth. It could give you an idea of what we will achieve in the second part of the year, which will probably be a good news to achieve our guidance, which is solid organic growth for the year. Now, regarding the margin for Agri-Food. In fact, it's a different distribution between the first semester, as we did extremely well in terms of organic growth and the second one. I'm talking about Agri-Food margin.
Knowing that, of course, we will benefit for sure, and we are benefiting already from the good job that we did in the past, in particular in restructuring. I'm talking in this case of the restructuring of the metals and the minerals lab, knowing that, you know it, we decided to close some labs in the past, and we have more volume in some areas, which is helping us, of course, to achieve a better margin. As we know in this business, most of the improvement in the margin is coming from volume. As the volume is very good in H1, it should be good in the second part of the year. We should see an improvement in terms of margin.
Regarding the Consumer Products division, the impact on the margin is positive on the H1 because we have less, you know that we are a leader in wireless product testing, and we have less electronics and electrics to be tested in the first part, which has a lower margin. We know already that there will be an acceleration in the second part of the year, and the organic growth should resume, meaning that we believe that we could achieve the margin that we enjoyed last year for CPS for the full year.
Okay. That's clear. Thank you.
Thank you, Paul.
The next question comes from the line of Alexander Bea, calling from JP Morgan. Please go ahead.
Good afternoon, gentlemen, thanks for taking my questions. Firstly, I wonder, within Marine & Offshore, do you expect the recovery in new construction to continue into 2020? I wonder what your forward visibility is in that respect. Secondly, with regard to the Consumer Products, you referred to challenging conditions in the U.S. Could you clarify whether that's entirely a function of the trade tensions with China or whether there's something else going on there? Finally, thinking about your 2020 revenue targets, I wonder if you could quantify how much revenue you would like to acquire by the end of 2020 to make sure you get to that target, please. Thank you.
Okay. On your last question, I'm not going to give you more details. What I can tell you is that we have a robust pipeline. As you know, Alexander, we decided to be extremely disciplined in our acquisitions, which are fully focused on the various markets that we decided to tackle in 2015, and mostly into the U.S., China, and the U.K. We still have some opportunities, but my obsession is not the target. My obsession is to make the right acquisition, which fits perfectly to our model, which will help us to be sure that we deliver in the future more organic growth with a good working capital and with a good margin. On the Consumer Products division, in the U.S., in fact, you know it, I'm sure you read the newspaper as I do. You have some companies which are Chapter 11.
I think about Sears, I think about Toys "R" Us. These companies are big clients for us. We had last contract with them, and it's the reason why clearly in Q2, we were at the end of this contract. What we can see is that we decided to focus on some other clients. Our backlog now is ready to go again in the second half of the year. On the Marine & Offshore, it's too early to talk about 2020, of course. Just what I can tell you is that we have good order intake. The good news is that these orders are coming mostly from ships which have a high content of technology, meaning with probably a good opportunity in term of revenue recognition this year and probably for 2020, but we'll discuss 2020 next year at the end of February.
Excellent. Thank you, and good luck for the second half.
Thank you, Alexander.
The next question comes from the line of Rory McKenzie calling from UBS. Please go ahead.
Afternoon, guys. Just two from me, please. Firstly, can you talk about the sustainability of your growth in Industry? Obviously, you've signed some good projects, how long do they run out for? What's the pipeline for further contract wins? Secondly, on the working capital as a % of sales, clearly you reduced that's great. I'm aware that the period end was on a weekend, which presumably made collections more difficult. As you've clearly kind of stepped up your efforts on that front, do you think that we should expect an even bigger year-on-year improvement by the end of H2 as that period end impact shouldn't be as visible? Thank you.
Okay. Thank you, Rory. François, maybe you could start by answering the second question, and I will take the first one.
Good afternoon, Rory. Well, I think you've spotted well that we've been negatively impacted by the fact that the 29th and 30th of June were weekends. Mathematically, we have indeed a lot of clients paying with payment terms, whatever, 45 days end of month. This has been indeed moved to 1st of July. Mathematically, we got a transfer from H1 to H2. That's very clear. This being said, do not expect us to deliver another time 50% more free cash flow on a full year basis. I would be very happy to report this at the end of February, but I'm afraid this is not our guidance at the moment. The reason, I think we need to be very humble here. As you know, you know the profile of the cash in the company.
H1 remains, I would say, a small part of our full year free cash flow quarter. We've done very well with relatively low comparables and very strict discipline, especially on CapEx. As you see, we spend a bit more than 2% of revenue. We are guiding for the year to read 3% of the revenue on CapEx, which mathematically means 4% of the revenue on CapEx for H2. Didier mentioned investments we want to make to support the growth of CPS in 5G. This is coming in H2, another project like this. I think, obviously, we confirm our guidance on strong cash flow generation, but do not put yet in your model the plus 50% you are dreaming of.
Okay, François, thank you for this very valuable answer, I think. Okay. Let's move in now to Industry. In Industry, your question is a very interesting one because as you could see in Q2, we accelerated our organic growth. Of course, and we know it, we will have tougher comparables in Q4. Even so, I must say that we have a good pipeline. We have a good pipeline and a good backlog of opportunities in oil and gas, and we have a good backlog and good opportunities in power and utilities. We should have clearly a good year in Industry and achieve the guidance that I just have given to you.
Just on Industry, are they still the smaller types of projects, or is there anything larger in your pipeline at the moment?
I don't know what you mean by larger. If larger is EUR 10 million, we can see more potential contracts at that level. If larger means EUR 60, we do not see any now of this type of contract.
That's clear. Thank you both very much.
My pleasure.
The next question comes from the line of Tom Sykes, calling from Deutsche Bank. Please go ahead.
Yes. Good afternoon, everybody. Just coming back to that comment on CapEx and then the working capital. You're saying it's likely you'll spend about EUR 100 million on CapEx in the second half, or is that very much at the upper end? If you look at the combined impact, say, of increased CapEx and better working capital, are you expecting those to sort of net off this year, or do you expect the combination of those to be a little bit positive for you, please? Just on LATAM growth, it was very strong at 9%, and I was wondering if you could just give a little bit of detail as to what was driving that sort of business-wise, and then also the inflation element that was in that and whether that growth rate is really sustainable at the 9%, please.
First, I must say that LATAM has done a very good job. It's quite a very good organic growth. Talking about inflation, when you have so many different countries with very different inflation, from Chile to Argentina, we cannot compare. Whatever, at the end of the day, we are close to 10% of organic growth, which is good. It's coming from three major factors. The first one, we are really continuing to enjoy very good and important contracts in power and utilities business, which is good news because it's mostly OpEx, meaning that resilient type of business, long-term contracts. The second good news is coming from agri, and we are doing very well in agriculture. As you know, Brazil is now becoming the first exporter of soya to China, and we are very involved in this type of the business in Brazil.
The third factor is construction, which is resuming in Brazil, in Colombia, and in Mexico, we made a regular acquisition a little bit more than one year. Last but not least, the core business has stabilized now, at a low level, but it has stabilized. We could expect even in the future that it will start, but for the moment it has stabilized. Of course, it's helping us to deliver a good organic growth in LATAM. You had a second question on CapEx, François?
Yes, Tom. Regarding your question between the balance on CapEx and working capital, your computation is correct. 4% means roughly EUR 100, in terms of CapEx. Whether we're going to spend all of it or not, it's still to be assessed, but that's the order of magnitude. You're right. When it comes to will that be exactly 100% balanced by the operating cash flow generated by the company? As I said, when you look at the amount of free cash received on H2, it's too early to say. We are talking here big numbers. What is for sure is that we keep on or focus on free cash and on working capital reduction. There is no doubt about it, and all the management team of Bureau Veritas is clearly committed and focused on those indicators.
Frankly speaking, what counts for us is to make sure that we make the right CapEx movement, especially when it comes to CPS, to prepare the growth on 5G. Whether it will be exactly the equivalent of the working cap improvement or a bit below, too early to say. What is for sure is that we maintain our guidance when it comes to a strong cash flow generation for the year.
Okay. Thank you.
I must add maybe to, even if François gave you a very good comment, Tom, but we are really putting a lot of focus on cash. As you could see, that I can tell you that with the Move For Cash, and it's true, a process that we put in place, the pressure is high, and the good news is that we get the payback.
Well, I was going to ask, what behavioral changes can you maybe point to or, specifically I suppose in the B&I business in China, is change in payment terms there, is that having a tangible benefit yet, or is that something we hopefully would see in H2?
Well, it's too early to say that the improvement you see here is coming from China. Not yet. Which is a way to say that there is still some potential for further improvement. As I've mentioned now for a couple of times, this is our real focus. As I mentioned, regarding the contractual terms, this is a journey that we have embarked on that will last most probably 12-18 months.
Simply because of the current duration of the contract. In a nutshell, the figures you see at the end of June are not impacted in any positive manner by China, to make it very simple.
Okay. Thank you very much, indeed.
Thank you.
The next question comes from the line of Suhasini Varanasi, calling from Goldman Sachs. Please go ahead.
Hi, good afternoon. Just a few from me, please. On the Industry, margins have obviously fallen in the first half despite your CapEx activities reaching double-digit levels in 2Q. Can you please talk about why you expect the price mix to improve in the second half of the year, and why margins should improve as a result of that? Maybe a comment on pricing in the oil and gas projects. That would be helpful. Thank you. Maybe two housekeeping questions. CapEx to sales has been circa 3% or less in the last two years. You're guiding for circa 3% this year as well. Is it fair to assume that it's going to remain at these levels medium-term as well? The last one is on the tax rate. Can you give your guidance on tax rate for this year and the next?
It looks like you had some small changes to your French tax rate, according to your first half release.
Okay. I'm going to start with your two first questions. On the Industry, you're right. On the margin at the beginning of the year is a little bit lower than last year. Clearly, we have recorded some very good contracts, as I said before, in Latin America, and most of them are OpEx power and utilities. There is a ramp-up phase. We need to invest at first, and we need to buy cars, tools, and so on. On top of it, of course, we need some time to train the guys who are going to be in charge of delivering the services. There is a ramp-up phase, and of course, from the beginning of the year, we are very happy because we can enjoy, thanks to this contract, a good organic growth.
Progressively, the margin is going to move up along the year to be at the level that we estimate, probably slightly above last year. On the pricing on oil and gas, we discussed it before. There was some price pressure, a lot of price pressure. There is clearly, because of the demand, which is becoming higher than the supply today, less price pressure than before. I'm not talking about OpEx where we can still see some price pressure. On the CapEx side, of course, there are a lot more projects, and we are a leader, as you know, in this CapEx activity. Clearly, there is no comparison between now and what was the pressure around three years ago.
You should be able to see margin improvement coming from the CapEx activities at least, right?
Oh, yes. For sure.
Yes, okay.
You're right. Now, two questions for you, François, one on CapEx and tax rate. I will take the housekeeping ones.
Okay.
First, CapEx, 3% moving forward. That's what you can put in your model.
Okay.
Tax rates, we have a situation where we already did, let's say, good news in H1. What we are guiding for is still within the 33%-34% range, perhaps at the lower part of the range. The reason being that in H2, we will have to distribute internally dividends, the usual way we're doing it. As you know, there are some tax friction, as we say in good French, when you internally distribute dividends, move them up the ladder. We'll have more in H2 than we have last year. By and large, we are a bit more optimistic on the guidance moving at the lower end of the range, 33%-34%.
Got it. Just one follow-up, please. In Q3, I think you have one extra working day as well. You would expect some small benefit from that in Q3?
When are you meaning? In Q3?
Q3, yes.
In Q3.
Oh, yeah, because you said Q2, so I was a little bit-
Sorry
disturbed by the question. Sorry. Sorry.
We looked at it. When I look, so I can see it seems to be the same number of days, so I'm a little bit surprised by your question. In fact, it's going to be plus one in Q3, minus one in Q4. There will be no impact in H2, in fact.
In Q3, you should see some benefit, right? Q3.
When you have one more day, as you know, we usually have some benefit. Again, there is one less day in Q4.
In Q4. Yeah, got it. Thank you very much.
My pleasure.
The next question comes from the line of Aymeric Poulain, calling from Kepler Cheuvreux. Please go ahead.
Yes. Thank you. Good afternoon. Three questions, please. One is a follow-up on the working capital comments you mentioned on the Chinese payment terms. Just wondering, in the new Chinese contract that you are signing right now on the infrastructure side, are you seeing a change of behavior or not? That would be helpful. Secondly, you made a disposal in the first half. I was wondering if there were other parts of the portfolio that could be also disposed of in the coming year. And lastly, on Certification, you mentioned a new product development segment up 22%. I was wondering what was this new product development you're referring to and how big this segment represented as a percentage of the total, and how we should interpret this figure going forward. Thank you.
Okay, Aymeric, thank you. I'm going to start by your last question on certification. Clearly the 22% up is coming from what I could say, new schemes. The good news is, as you may know, in Certification, there are more and more clients which are asking for schemes, mostly to protect their brand or to improve sustainability. A good example, for instance, you could have one of our clients who is committing on CO2 emission, and of course, you would like now to have Bureau Veritas to certify that his result is consistent with what he's announcing. There are also social audits which are customized and new certification programs. For instance, we launched a new scheme, which is Circular+ to work on the circular economy.
The good news for me is that all of these new schemes are not purely idle and there is a clear acceleration of clients asking us to certify against sustainability, social audits, customized, even food supply chain. This is good news clearly for the future. Cyber security is another example. This business is going to grow in the future, but we have the opportunity to talk about it in the future. No doubt about it. François, you take the two first question?
Yes, of course. Aymeric, your first question on working capital and more specifically China. The main moves we're making currently to cascade down the incentive scheme on cash generation down to the sales teams to ensure that the salespeople get to feel the pressure as well as you rightfully pointed out, the core of the battle is on the contractual terms. I would say right now a third of our business is moving towards getting down payments in the contracts. That's where we are at the moment. It's not yet fully satisfactory, so we continue pushing with going further with the team into the direction of reducing working capital requirements. Second question, another housekeeping question.
From what I understand, when it comes to disposal, as you say, perform one disposal in H1, this is the outcome of a portfolio review that has been conducted, whereby we've identified a couple of businesses that are not core for BV and eat up our margins. You may see in the coming months or semesters, disposal if the market is fit, and we are in no hurry. Things will take the time it needed to get the best value. Don't expect us to divest a division. We're talking about targeted, geographically located disposal, a little bit the same like you've seen in the U.S.
Okay. Thank you.
Thank you, Aymeric.
Before we take the next question, please be reminded, if you have a question, please press star one on your telephone keypad. The next question comes from the line of George Gregory, calling from Exane. Please go ahead.
Good afternoon, gents. Three, please. I wonder Sorry, perhaps I'm not sure if I missed this because I briefly disconnected. Could you provide a rough indication of the margin on the disposed HSE business, which, if I understood correctly from François's comments, is diluted to the Industry margin? Looking at the difference between adjusted EBIT and your cash flow from operations, it looks like there's about a EUR 47 million cash outflow in the first half. Just wondering what drove this and whether we should expect additional cash outflows or movements in the second half.
Yes.
My final question relates to your average net debt position. You highlighted, I think, François, in one of your presentations, an increase in average indebtedness. If we compare the average net debt position for the first half of 2018 and the same for 2019, using your disclosed period and debt levels, it would appear to be lower. Does that mean your average net debt intra-period has gone up, please? Thanks.
I'm going to start by your first question, George. We decided to divest EHS in the U.S. Mostly because as we worked on the portfolio and we had a portfolio review really detailed, we decided that this business is not core business for Bureau Veritas anymore. It's the reason why we decided it's more a strategic decision first. Of course, it has an impact on the margin, but it's a very small impact because this business was very small. It's marginal, this type of impact. There was another question from George, François. Two questions, sorry.
Two questions. George, for the EUR 4.5 million question, not quite sure which line you're referring to. For the sake of you getting the right answer and everybody not taking too much time, I suggest you channel the question to Laurent, and we will get back to you in more details. When it comes to the net financial charges, what we are actually carrying is the cost that is ending, and this has ended actually at the end of June. This is the cost of the pre-financing of the BV debt. You know we have refinanced all of 2020, in October, so we are carrying some interest in the first semester. All the program has been refinanced, and we are back to normal.
Okay. It was the gross indebtedness rather than the net position-
Correct
that you were referring to.
Correct. Yeah.
Okay. No problem. Great. I'll email Laurent on that last one. Thanks. Thank you, François.
Okay, George. Thank you. That was the last question, Laurent? Okay. Thank you very much to all, and I wish you, for those who are going to be on holiday, you know it is good holidays. Bye-bye.
Thank you for joining today's call. You may now disconnect your line.