Earnings Call: H1 2020

Jul 31, 2020

Hello, and welcome to the Intertek 2020 Half Year Results Call. My name is Jess, and I'll be your coordinator for today's event. I will now hand you over to your host, Andre LaCroix begin today's call. Thank you. Good morning to you all and thanks for joining us on our call. Ross McCluskey and Denis Murrow are both with me. There are essentially 5 key takeaways in our presentation today. 1st, our ability to manage an unprecedented pandemic. We've acted with speed, flexibility and innovation to support our clients, resolve a temporary disruptions in their supply chain. 2nd, our disciplined performance management we've delivered in H1 a resilient revenue, a robust margin and a strong cash flow. Our superior customer service, we've provided uninterrupted customer service to our clients, Our balanced approach, we focus both on defensive and offensive initiatives continuing to innovate and invest in attractive growth segment. And finally, the growth opportunities ahead. The need for risk based currency assurance is greater and clearer today for all stakeholders. Intertek has been championing total quality assurance for more than 5 years and we are strongly positioned for growth moving forward. Let's start with our to the world on January 22 across all countries changing the way we leave and work. For our customers, COVID-nineteen has created challenging and temporary disruptions in their supply chain. The GDP growth we've seen in the last few decades was partially driven by the increase in mobility building a highly connected global economy. Within a few weeks, COVID-nineteen has quickly restricted global mobility, impacting the world economy and the operations of our clients. Right from the start of the pandemic, being agile was paramount to all of us at Intertek. We've adopted fast and adding us to respond decidedly to an unprecedented situation. And we refocused the organization on 5 priorities: employee health and safety customer service, margin management, cash and engagement. Every time, health and safety comes first, our COVID-nineteen health and safety policy is very comprehensive, has been updated on a regular basis on our website, including last week, with our post lockdown health and safety policy. Our second priority is customer service. We are a passionate and customer centric organization, providing our customers with the best possible service 20 fourseven. What we do every day to make sure the supply chain of our clients operate safely in all countries is mission critical. The lockdown measures that create huge operational challenges for our customers since day 1, we have increased the frequency of communication with our clients to make sure we understand their needs quickly and maintaining operations open 20 fourseven was vital for our customers. I'm so proud of our employees that have gone beyond the normal call of duty and here are a few examples of what they've done. Across the world from China, Hong Kong, India, and Philippines, to UK, Turkey and Netherlands, our colleagues have produced hand sanitizers to keep customers and colleagues safe. At the very beginning of the pandemic where mask was in short supply. Our colleagues in Indonesia have provided more than 200,000 face masks to countries that didn't have masks. Our food team in the UK works 7 day a week to collect resistant process samples for clients in a Safeway supporting our customers' tight deadlines. And importantly, we have rapidly brought to market a range of innovation We've ensured supply chain continuity with a remote video inspection and audit solution. On May 1, we launched ProTech, the World First Health Safety and well-being assurance program for people, workplace and public places. In addition to these 2 major global innovations, we've brought to market a lot of new services. Priority testing service for life saving medical equipment like ventilators. We've increased our capacity for end to end testing specifications for PPE equipment We've increased capacity and express services have been put in place for sanitizers and disinfectants. We will of course start supporting the summer industry for vaccine support. And cybersecurity audit has been a huge risk and opportunity for us given the home working conditions within corporations. Our 3rd overriding priority is margin management. Over the years, we have built a very disciplined approach delivering consecutive margin improvement for 5 years in a row. Our strict control on pricing and costs have remained in place. And we have taken a lot of initiatives to protect our margin. 20 annual salary increase. And of course, we've participated in several governance schemes. We believe that our clients are facing temporary disruptions intertake to service our clients fully when their operations are back to normal. Our 4th priority is cash management. Disciplined cash collection remains in place. We've also conducted a CapEx review, reducing our plan expenditures this year by around 1 third We are running a voluntary salary deferral scheme for March through October, and we are benefiting also from several local authority tax payment deferrals where available. Our feed priority is employee engagement with 20 percent of our people working remotely, it has never been more important to stay connected every day. Our world class digital communication platform has made it possible for us to reach out frequently to everyone in the organization. Turning now to our H1 performance. We have delivered a resilient revenue performance, a robust margin and a strong cash generation. That demonstrates the strengths of our business model, the geographic and business line diversity, our disciplined approach to performance management and importantly, our strongly cash generated earnings model. Let's look at the numbers. In the first six months, our group revenue was 1,331,000,000, down 7 point percent at constant currency. Like for like revenue was down 8% at constant currency. Operating profit was 160 point $2,000,000, down 32.2 percent at constant currency. Operating margin was robust at 12.6 percent, down 460 basis points year on year at constant currency. Free cash flow was strong at 1000000, up year on year by 35.7%. Financial net debt was 1,000,000 equivalent to a net debt EBITDA ratio of 1.1. And importantly, we have announced an interim dividend of ARS 32.4 per in line with prior year, reflecting the strength of our cash generations, the strength of our earnings models and the confidence we portfolio with industry leading positions delivered a like for like revenue performance of minus 8.7 percent at constant currency a margin of 16.9 percent, down 470 basis points year on year. Our trade business benefited from the defensive strength of delivered a like for like revenue performance of minus 10.2 percent and a margin of 6.8 percent, down 6 seventy basis points versus last year. Our Resource business delivered a commendable performance with a like for like revenue of minus 2.1% and a margin of 5.3% down 90 basis points at constant currency. Cost base expecting to deliver good organic growth in 2020. We of course have taken a disciplined approach to cost management using our proven disciplined management, performance processes and tool. However, we believe that our clients are facing a temporary disruption in their supply chains. Our cost reduction activities have been very targeted, keeping our ATIC Industry Leading capability intact. To make sure we can support our clients when they fully resume their operations and they start increasing their quality assurance activities. Our cost base in H1 was 6% below our budgeted costs for 2020 2.6% below last year. Cash management remained a high priority for all of us and we've continued to make progress step by step. Our cash generated from operation was 1,000,003,000,000 below last year. Our adjusted free cash flow was 1,000,000, up 35.7 percent. This excellent cash generation was driven by a reduction of 1,000,000 in net CapEx and circa million in working capital. As I said before, we ended up H1 with a strong balance sheet, a financial net debt of 1,000,000 and a net debt to EBITDA ratio of 1.1. Before I hand over to Ross, just want to emphasize the speed at which the global pandemic has unfolded the broad based nature of the lockdown initiatives in every country. The lack of visibility on when the lockdown restrictions will be fully lifted around the world and the complexity faced by our clients to fully with well functioning supply chains. That makes it difficult to give any guidance and quantify the full impact of COVID-nineteen for 2020. Having said that, we expect the second half of the year to be better than the first half. And thank you Andre and good morning everybody. In summary, the group has delivered a resilient revenue performance in H1 with a like for like revenue change of minus 8% at constant rates. Operating costs were well controlled, being down 2.7% constant rates resulting in operating profit of 1,000,000. Operating margin was 12.6 bps at constant currency. The FX impact on revenue was neutral for the half year, despite the volatility of sterling, FX though was slightly negative impacting on profit with a 20 basis points difference between actual and constant rate of operating profit change year on year. Overall, free diluted EPS declined 35.1p to 63.1p being down 35.7% at actual rates and 35.5% constantly. The group recorded a robust margin in the first half with a 170 basis points for in operating margin to 12.6 percent. ForEx delivered a robust operating profit margin of 16.9 percent contributing to just over half of the net movement in group margin in the period. The reduction in trade margin contributed 150 basis points to the year on year change, or resources contributed 10 basis points. Divisional mix had a negative 20 bps contribution given the relative performance in resources, And finally, FX had a modest negative 10 bps impact on the group margin. Our disciplined focus on cash management to continue to period. And this enabled the group to deliver a strong cash result in the 1st 6 months, with adjusted free cash flow 141,900,000 being up 1,000,000 or 35.7 percent despite the year on year reduction in operating profit. Our continued focus on working capital was evident in the first half with a reduction both versus prior year and December 2019. This was driven by strong cash collections in the period as well as our cash preservation activities, including the impact of government facilitated cash tax payment delays. We invested 1,000,000 in net CapEx in the period, being down 1,000,000,000 versus prior year. And as Andre said, we finished the first half with financial net debt of 1,000,000, which is down 21% year on year. That's despite the final dividend payment of 1,000,000 in June, and net debt is up just 1,000,000 versus December 2019. This includes FX, which had a negative impact of 1,000,000 in the first half given the depreciation of sterling versus the dollar since December 2019. The group's liquidity position is well balanced and has been further enhanced by recent actions. As we highlighted at the full year 'nineteen results we've refinanced our RCF facility in January of this year, replacing the existing GBP 800,000,000 facility with a new GBP 850,000,000 RCF. An initial 5 year tenure. And in Q2, we have secured a new fully committed U. S. Private placement split into 2 tranches with the 1,000,000 in 3 years and 1,000,000 in 5 years. And this facility will be drawn down December 2020. We saw excellent demand for this issuance enabling us to secure a very attractive coupon. In terms of maturity, we have 1,000,000 of US115s expiring in December 2020 and just 1,000,000 in 2021. The group is in a strong position from a liquidity perspective, and we had undrawn but committed headroom of 1,000,000 at the end of June, and that is excluding the new US200 million dollars, which I said will be drawn down in December. Turning to financial guidance. We have adjusted our net finance cost outlook for the full year to be 1,000,000 to 1,000,000, reflecting a strong cash performance in the first half and also lower finance costs in H1. We continue to expect our full year effective tax rate to be in the 25.5% to 26% range. We expect minority interest to be 1,000,000 to 1,000,000 and CapEx to 1,000,000 range. We are adjusting our financial net debt guidance to be in the million to million range reflecting the good strong cash generation in the first half. This guidance is, of course, before any acquisitions or changing and prevailing FX rates. More generally on FX, we continue to expect FX to have a broadly neutral impact on the group's full year P and L results. Thank you, Ross, and I'd like now to give you an update on strategy. As I said earlier, what we do is mission critical to our clients to make sure that their supply chains operate fully and safely 20 fourseven. As you know, we offer testing inspection and certification. In a critical area of our client's operations and our assurance solutions provide end to end assessment of the quality and safety process. That's what we call ATIC or total quality assurance. The supply chain of our clients has been disrupted significantly on a temporary basis. It's much easier to close a factory then to restart a production system and the same applies to a restaurant, an airline, a hotel, and any retail operations. Given our end to end 80 capability, we are well positioned to help our clients resume the operations and benefit from the COVID-nineteen recovery. We work with more than 300,000 clients around the world, and we have deep and trusted relationships with them. These relationships are based on our superior customer service and are strong technical expertise in all the sectors we operate in. We truly value these long lasting relationships, and that's why we have stayed fully open and operational during the pandemic. This excellent B2B relationship will play a major role as we help our clients rebuild their operations capacity. Globally across all sectors with our differentiated total quality assurance value proposition, we support the existing and emerging quality assurance needs of customers in each area in the operational of our clients. The lack of end to end systemic QA operating system has been a wake up call for a lot of board and management teams. And that makes our total quality assurance vertical position even more relevant post COVID-nineteen. All the conversations ahead with our clients have demonstrated that they have to address risks moving forward that they didn't address before the pandemic. Everyone as a new appreciation for the health and safety and well-being of employees and customers. COVID-nineteen has identified the need for our clients to rethink and improve the resilience in their supply chain. Supply chain diversification has become much more important, getting better and fast intelligence inside their supply chain is now a huge priority for our clients. And as I said earlier, working remotely has identified serious cybersecurity risk for our corporate clients. We've been focused both on defensive and offensive initiatives during the pandemic, true to our ever better culture We have reinvented ourselves on how to manage the company and importantly, how to service our clients better. ProTech is the welfare and to end health safety and welding assurance program for people, workplace and public spaces, offering audits training inspection certification and certification solutions. The reactions of our clients around the world to protect has been very strong. Protech is very much in line with what the world needs right now. For example, the CEO of Club Med posted a personal welcome back video message on social media Rea sharing his guest about the health and the safety measures, which have been implemented with Intertek Protect solutions. We've introduced Intertek in light 2.0 adding enhanced features to our market leading supply intelligence and compliance solution. We've launched the Alchemy playbook app making it easy for our clients to optimize the scheduling as training. In our trade business, Indu is our unique remote auditing and inspection solution connecting Trans real time with our experts through a live video stream. Our Cadbury business has joined back an innovative platform to create a secure trusted ecosystem powered by blockchain. In our Resource business last week, we've launched Carbon Clear, the world's first assurance program that certifies the upstream carbon intensity per barrel of oil. 2020 will also be remembered as the year when we were forced to rethink how we operate to make the world a safer place. We expect the theme of buildback ever better to guide the actions of governments, companies, institutions shareholders, regulators, consumers in three areas. Management board and shareholders will want to see their companies operate with a safer supply chain. Consumer's governance corporations will want to offer better personal safety and the way the world will operate and will build a lower carbon society. Buildback ever better will make the attractiveness of the 1,000,000,000 total quality assurance market greater. We see strong growth opportunities with existing and new customers. Getting access to the quality assurance work that corporations currently doing house is, of course, an attractive opportunity. The global operations of corporations have become much more complex and corporations are increasing their focus on systemic operational risks that untapped market potential is really exciting. This is all about what companies do not do today and we start doing to improve their operations. The growth outlook for quality assurance in the medium to long term is GDP plus organic revenue growth in real terms. We expect our product division to present 81% of the group earnings to grow ahead of global GDP benefiting from brand SKU expansion, faster innovation cycle, increased demand for smart products and increased focus of corporations and safety, quality end sustainability. We expect our trade division that represents 12% of the group's earnings to grow at a rate broadly similar to GDP through the cycle benefiting from the development of regional and global trade and an increased focus on traceability and sustainability. The growth prospect in our Resource division, which represents 7% of the group's earnings, are linked to the growth drivers in the energy sector. Investment in exploration and production for essential resources like oil and minerals will grow to meet the demand of the growing population. Our resource business will also benefit from the portfolio diversification of our clients as they now focus on renewables and invest in Sustainability And Digital Data Managed We expect our corporate assurance activities which are industry agnostic to get stronger and stronger. Given the increased importance of risk based quality assurance, the increased regulation, the importance of health, safety and well-being, the growth in people assurance, and the investments in supply intelligence, sustainability and cybersecurity. Intertek has been an industry leaders for more than 130 years and we are well positioned to seize these growth opportunities capitalizing on our strengths. Our total quality assurance superior customer service, our powerful portfolio, our high quality component earnings models, our passionate customer cent organization and of course, our disciplined performance management. Moving forward, the group will deliver sustainable value creation for all stakeholders building on a strong track record. I'm not sure you're aware of it. But since its IPO in 2002, Intertek has ranked number 1 in the FTSE 100 in annual dividend growth with a 17% CAGR between 2003 2019. Let's now discuss our divisional performance. In H1, our Product business delivered a resilient revenue performance and a robust margin benefiting from its defensive strengths. Our Product business delivered a revenue performance of $800,000,000, down 8.4% at constant currency and the like for ag revenue of minus 8.7%. Operating profit was 1,000,000, down 28.3% at constant currency and our margin was 16.9 percent down 4 seventy basis points compared to last year. Our Softline business saw double digit decline in light AC revenue due to supply chain disruption in China and India and a temporary closure of non food retailers in Western Europe and North America. This was partially offset by continuous growth in e Commerce and increased demand for PPE testing. Our hard line business saw a double digit negative like for like revenue growth, revenue performance due to the supply chain disruption in China and a temporary closure of non food retailers in Western Europe and North which was partially offset by strong growth in e commerce, growing demand for smart toys and increased demand for testing our TPE equipment. We've delivered a low single digit like for like performance in our electrical and connected world business, as a negative impact of the supply chain disruptions due to lockdown measures around the world has been partially offset by higher ATIC demand in energy efficiency medical device, 5G and cybersecurity. Our business assurance business delivered a high reclosures in several of our market has triggered a delay of the audit later in the year. And this was partially offset by the attractive growth in supply chain assurance The continued focus on ethical supply, the increased need for corporations on sustainability, the strong growth in our people assurance business and the launch of remote audit solution. Our Building And Construction business delivered stable like for like revenue in the first quarter. We benefited North America from the growing demand for more environmental friendly and high quality buildings as well as a strong investment in large infrastructure project. We saw a temporary reduction of building construction activities in Q2 due to lockdown. Our Transportation Technology business delivered a high single digit like for like revenue decline The lower demand for testing in April, May June due to the London activities in Western Europe and North America was partially offset by the continuous investment of our clients in new power trends to lower CO2 and NOx emissions and increase fuel efficiency. Our food business delivered a mid single digit like for like decline, the supply chain disruptions across several markets impacted the demand for testing of new products, and that was partially offset by the sustained demand for food safety testing activities and the increased demand for hygiene and safety audits. We saw double digit like for like negative revenue in our chemical and pharma business. The lockdown measures have reduced the demand for regulatory assurance and chemical testing in our operations in North America and Western Europe, given the importance of COVID-nineteen, the pharma industry has reprioritized their investment and delayed several long term projects. We are, of course, in contact with our clients to support their development activities of a COVID-nineteen vaccine. Our trade business benefited from fancy strengths of our agribusiness. We delivered a revenue of 1,000,000 with a like for like revenue of minus 10.2% at constant currency and operating profit of 1,000,000 and an operating margin of 6.8 percent, down 1000000 basis points compared to last year. Our current bread business delivered a high single digit negative like for like revenue due to the low level of demand for oil and gas. As you know, current bread is the global leader in crude oil and refined product trading markets. Our Government And Trading Services business provides certification services to governance in the Middle East And Africa to facilitate the imports of goods in their markets based on acceptable quality and safety standards. We saw double digit negative like for like revenue decline due to the the disruption of manufacturing in China in February March and the lockdown activities in all countries, impacting cross border trade. Our Agri World business delivered a stable like for like revenue performance. We provide inspection activities globally and we remain open 20 fourseven due during the pandemic to make sure that commendal performance in revenue and margin, we delivered a revenue performance of $235,600,000 with a like for like revenue of minus 2.1 percent at constant currency. An operating profit of $12,600,000, down year on year by 15.4% and a margin of 5.3% down year on year by 90 basis points. We delivered good like for like growth in our CapEx inspection business, benefiting from the increased investment of our clients and exploration and production and from the win of several new contracts. We saw double digit negative like for like revenue in OpEx Maintenance Services as a lockdown initiative impacted the demand for inspection services in the month of March, April, May June. We've delivered robust revenue growth in our mineral business as we saw increased demand for testing inspection activities. In conclusion, Intertek provides mission critical ATIC solutions to make the world ever better, ever safer. The growth opportunities ahead are exciting and we are well placed to seize these. We operate in an attractive EUR 250,000,000,000 Etech market with increased need for quality assurance. We have scale, positions in our verticals and provide a superior customer service to our clients. Our innovative culture and operational disciplines are making Intertek ever better, ever stronger every day. And finally, I'd like to thank my colleagues around the world for all their commitment, passion and energy in the last 6 months. It has been a very different first half of 2020 compared to what we expected. Some of the actions were truly heroic, and I want to recognize one team of Bangladesh team. Our team in DACA had anticipated that hospitals in the country will get overwhelmed. Our team had started to stock oxygen cylinders in our labs to provide support to employees and families in case someone with respiratory distress could not get admitted in an hospital. Oxygen cylinders have been delivered to homes of many colleagues and family members during these times, an incredible generous community activity from our team, true to our value of making the world ever better, ever safer. Thanks for your attention. I will not take any questions you might have. You. And we do have a couple of questions in the queue. So the first question comes from the line of Alexander Mees from JP Morgan. Please go ahead. Thank you. Good morning, Andre and Ross. Thank you for the presentation. Three questions, please. Firstly, I believe the implied, like for like decline was 14% in in May June. I wonder if you're able to comment on the shape that, like, might decline over the period, especially specifically the exit rate for, for June, perhaps normalizing for any difference in trading days. Secondly, Andre, you mentioned that the business had participated in several government schemes. I wonder if you can quantify the support that was received from following and also the working capital benefit from from cash tax deferrals. And finally, more broadly, I wonder, Andre, if you believe that Intertek now had stronger growth opportunities as a result of the risks that have been exposed by COVID-nineteen than perhaps it did this time last year? Thank you. Thanks, Alex. Look, I'm going to start with the last question, which in my view is the most important, which is the future of Intertek. Look, we've been championing quality assurance, as you know, for several years, believing that testing inspection and certification is important, is necessary, but it's not sufficient for corporations to comprehend, mitigate their risks end to end. And what that obviously unfortunate gold pandemic has demonstrated that companies were not ready with the right health and safety protocol for their employees around the world. That companies went already with a diversification of the supply chain in case one country will get problems supply their goods or raw materials. They were not ready with some of the, frankly speaking, crisis protocols, in some of their operations. And they didn't have obviously the information in their supply chain. And then the remote working has demonstrated some major gaps in terms of cybersecurity. So I think, we believe that what we saw a few years ago is more relevant today than it has ever been I think management and boards are realizing that there were a lot of risks in their supply chains that were not identified And we know we've talked about it with many of you over the last few years. Corporations today do more in terms of risks, management that they ever did and both today around the world spend more time on risk. That's true. But I can assure you that they don't spend enough time on the complexity of their supply and it cannot be done in a 1 hour risk register review. This is very, very complex. And I think this huge temporary disruptions of global supply chains operations around the world has identified these risks that we've been talking about and we are ready to seize. And that's why we are extremely well positioned moving forward. And yes, the case for risk based quality assurance is greater today than it was 6 months ago, and that makes me very confident that given all the high work that we've done in terms of repositioning of value propositions 5 years ago with ATIC, making sure that our teams are equipped with the toolbox, the solutions to sell, understand how to pitch these solutions to our clients is a huge process we have today. And there is no conversation that I'm having with our clients that doesn't show that they need more support in terms of end to end risks. And that's why we've launched some of the innovations, and there are more innovations to come. As far as, your specific questions, look, on the fellow schemes, as you know, Intertek is very strong in Asia, very strong in the Americas. Europe is not a very strong operation for us. It's important. But so the benefit of the fellow schemes for us have been obviously, welcome, but they have not been very, very material. The other thing I would say and it's a point I made in the script a couple of times is that we believe it's a temporary supply chain disruption. We operate a highly skilled workforce with PhD, scientists, auditors, engineers. What's really important for us recognizing its temporary supply chain disruptions is that we do not lose this fabulous capability we have to service our clients. So what we have done in terms of cost has been very, very, very soft because what matters first is the health and safety of our people and the customer service of our clients. And yes, we've taken advantage of the follow activities, but it's been very, very reasonable. As far as the government scheme support in terms of cash, yes, that has been slightly more meaningful and about one third of the impact in working capital is in H1 is driven by that. As far as your first question on like for like, as you know, typically we do not give data on either May or June in this period, but I understand it's a very difficult time for all of you to model the company and we're not giving guidance. So we're not making it easier for you. So What I will say is, yes, June was better than May, and it's welcome news. Thank you very much. That's very clear. The next question comes from the line of Suresini Varanasi from Goldman Sachs. Please go ahead. Hi, good morning, Andre. Thank you for taking my questions. Just a few from me, please. You mentioned that June is has been better than May. Was it still down double digits in June or had it improved to high single digit decline? Second question is, if we think about the drop through rate, to EBIT, it was 70% in the first half. And the current consensus implies, you know, something like a 40% drop through to EBIT in the second half of the year. What what gives you a bit of comfort that, you know, the, second half can be better? Is it just the improvement in the decline the most cost savings that can help you improve the drop through to EBIT? Okay. Let me just start with the second question on drop through to put things in context. If you look at the track record of a company over the last 5 years, as you know, we've made consecutive progress year on year on margin till obviously the end of 2019. If you look at H1, 2017, 2018 2019, you will have seen the very strong progress we have done. So one thing that you have to bear in mind when you look at the data for the full year is obviously, we had made stronger progress in H1 than H2 suddenly in 2019. So that's one point that I would say. The other thing too is And this is why it's very complicated for you without having the company's data in details. Is there is obviously a mix effect, by division and by vertical. So our view is that the second half should get better. We are not giving any guidance, as you know, we are overall comfortable with the general consensus out there and we'll take it as a step at a time. And we continue to obviously make progress. And as you know, when you are high margin and you're very disciplined in terms of cost and margin management, every 100 bps of revenue improvement can make a big difference. So that's what I would say, but as you know, we are not giving any guidance hopefully it helps. As far as units concerned, the June organic growth rate was not double digit. The next question comes from the line Edward Stanley from Morgan Stanley. Please go ahead. Good morning. Could you give us, I've got 3 please. Could you give us a feel of why you think the drop through in the second half, might improve from here. What gives you what gives you confidence in that. The second point, conditions in electrical seem to have been the notable deterioration, I'd say, between Q1 and Q2, is that macro led or is there more of a pull forward of of testing volumes in Q1 that's now dropped off in Q2. I'm just curious what's going on there. And the salary deferral scheme sounds like it could be potentially a meaningful impact on margins. Can you give us an idea of what proportion of staff had taken that on and whether that benefits already come through in H1 margins or whether we should expect that more of that benefit to come through in the second half? Yes, thanks. I mean, the salary deferral point is not a cost initiative. It's a cash initiative. We've talked about it in the maturing statement and we had significant uptake. So it's going to be only meaningful for the cash. Look, as far as electrical is concerned, I mean, this is not complicated. As I said, in presentation, it's in H1, you have 4 months of supply chain disruption due to the lockdown activities in U S. And Europe compared to 2 months in the May trading statement. So that's as simple as that. It's just 2 additional months, but the business is in good shape. Look, as far as your question on drop through, I try to answer that question in a previous question. So I'm not sure what else do you want me to say? The next question comes from the line of Rory McKenzie from UBS. Please go ahead. Morning, all is it's it's the Roy here. 2, please. Firstly, Andre, I appreciate your view on this being, you know, a temporary disruption for many of your clients and obviously new opportunities opening through this crisis. But where where have you seen any any evidence yet that some customers are gonna be kind of structurally impacted? Or reduced activities, from this. Obviously, we've seen bankruptcies and reductions in retail or food service industries. Just interested into kind of your your your thoughts there. And also, obviously, I note that your restructuring charge was actually down year over year, in H1, which of course is in line with what you're saying, just wondering any thoughts about what we could expect in H2? Yes. Look, I mean, on the restructuring program, we are in the last year of the 5 year portfolio review we started a few years ago and we are working our way through. We typically do not give guidance on what we're going to do in the second half. As I said, we are very, very careful of keeping our capability intact because it's a temporary disruption. As far as the supply chain of our clients, as far as the structural issues past COVID-nineteen from a negative stand, which is your question. Look, it's a bit early to say, but, clearly, clearly, some sectors in the world economy are more impact than others. So if you look at, of course, the airline industry, which we are not doing a lot of work in is a big question mark, right? Is the capacity that we have today going to be there tomorrow? If you look at the hotel, and travel industry also, question mark. Of course, all of these will change if there is a vaccine very soon and people have got the company start all over again. So look, we're going to have to wait to see some of the, you know, restructuring activities in these sectors. Obviously, you see the news like I do. A lot of corporations are, using this pandemic to basically rebase their cost base, which we are not doing because we believe it's a temporary disruption for all business model. I think the sector that has been impacted pre COVID-nineteen and doing COVID-nineteen is the general retail. And I'm not thinking about food retail. I'm talking about non food retail with the competition of e Commerce and I think here, you're going to see some continuing restructuring activities in terms of clothing nonprofitable stores, which obviously is in the news every single day and rebalance their, management priorities to e commerce, which is obviously a very strong growth opportunity. So I think that's what we we expect in terms of, structural challenge, but we're going to have to take it a step at a time. Okay. Thank you. And then just another question on innovation. Obviously, you've been talking about efforts to digitalize or modernize services with it within testing. And I guess client adoption has always been quite low historically, particularly things like remote inspection. Can you talk about how much maybe some of these areas have grown through the crisis and whether you think that would stick as a trend and what the implications could be for your own profitability or or the range of services you can get into clients? Look, there is no question that digitalization has been happening for several years. There are many initiatives that we've been pursuing, I2Q, which is our remote inspection, in a tool, which is providing digital end to end data to our clients, in resources sector, Packaway, risk aware, which is helping our or clients to digitalize their supply chain in intelligence. The remote audit and inspection solutions, we had developed that before COVID-nineteen for our GTS operations to basically provide an additional service to the class we work with in terms of faster turnaround time when they need it. It's not a cost initiative. It's a customer service initiative. And it is obviously a very enhanced customer service for clients because you get speed and you get different type of expertise. So if I were to basically visualize it for you, you can have a remote inspections happening in the factory of Seoul and then you can have multiple, experts from intertakes around the world helping a client resolve an issue. And that's growing. No question about it. And that's growing with GTS, but that's growing with our, obviously, BA activities. I'm not going to give any numbers because it will be too sensitive from a competitive standpoint. But yes, this is a great initiative and And this technology solution that we have put in place is really good to a point that last week, I was on a top to top call with one of our major clients in the U. S. And you're talking about one of the most successful retailers there. And they said, Andre, this is so impressive would you license your tool to some of our internal users? So we have a really, really good tool and no question. The COVID-nineteen period will change client's perspective on what can we do remotely. I mean, that way just to to give an example of meeting clients, it's easier to meet clients today than it's ever been because of conference calls remotely. Yes. Understood. Thank you very much. And the next question comes from the line of Rajesh Kumar from HSBC. Please go ahead. Good morning. Thanks for taking the question. Just in terms of looking at it, What are the incremental investments you need to do to be prepared for a post pandemic world in terms of take advantage in terms of, you know, the services you would like to offer to your clients over the next 2 to 3 years. That is the first question. The second one is, I'm sorry, I'm going to ask about drop to margin. But when you look at your cost base in the first half and you indicated that you've not cut it aggressively because you think, it is a temporary, disruption. So do you think you've got the capacity to, get back to growth? So the company would you expect similar 70% drop to margin on the upside as well. And, finally, in terms of your receivables, the working capital work has been quite impressive. Then you look at the receivables and you look at your SME exposure across the globe, what proportion of your clients you think, normally, you know, if you turn normally 3 or 4%, because of bankruptcies of your customers, is there a risk that, churn number goes up in the next 12 to 18 months? Thanks for your question. And I think the first question is absolutely right, right. Are you expected to invest and the answer is, of course, yes. I mean, typically, we expect to invest 4% to 5% in CapEx to stimulate organic growth. I think it's a good proxy for your model. We've been at the low end of 4% over the last few years. Obviously, this year is going to be lower, but yes, I mean, we are ready to invest and this is super important. Look, on the drop through margin, as I said at the beginning of the call to the first question on drop through, look, we're not giving any guidance for the second half. If you look at your model and you see the trajectory of the group over the last few years, continues margin improvement year by year that I think should say several things that we know how to drive margin when there is revenue growth that, we have made continuous progress on volume, price, mix management, costs and productivity, which means that when we entered 2021, there was very little slack in terms of taking cost out. And that is an important point when you look at what we did in the first half, that's why we say in the first half, And we believe we have the right capability to operate in this market. We are putting a pause on recruitment because obviously, we don't need additional heads. We've got a solid focus on cost control activities on the pure variable cost, because we want to be there for our clients when they need us. And yes, yes, we do have the capability today to do more than what we've done in the first half because arimatically, mathematically, our volume is down compared to where it was in 2019. We've kept our headcounts at the same level ex attrition. And therefore, we have some productivity improvement, which answers the question differently on what to expect in the second half with revenue progression. And yes, we have decided to temporarily lower Opera activity because we are a highly skilled workforce company with PhD, scientists, engineers. And we don't want to lose these winning capability because our clients, we know, need this. And as far as your question on bad debt, Look, yes, to the question we just had before on some structural issues in the markets, there are some companies in difficulties. We are very disciplined in terms of cost management, receivable management and the work we've done on receivables over the years compounds, and we are very careful. So, we'll continue to be very disciplined and careful in terms of receivable management because as you rightly said, some of the companies out there are not doing well. But one thing I would also add to your very important questions is what we do for our clients is mission critical. And it's like you and I, we might want to save a lot of things in our life. But would we save on our medical coverage policy or insurance policy? Probably not. And that's why our clients know that what we do is super important and they know they need to pay us. Thank you. There are no further questions in the queue. So I'll hand back over to your host for any closing remarks. Thank you very much everyone for being with us today. I know it's a super busy week and super busy day. So, we really appreciate your time. And if you have any questions, we are obviously available as usual and Denis is on standby. Thank you very much, everyone. Thank you for joining today's call. You may now disconnect