Earnings Call: H2 2018

Mar 5, 2019

Good morning to you all, and thanks for attending our conference call today. Rox McCluskey, our CFO and Denis Moro, our VP of Investor Relations, are with me on the call. This morning, we've announced a strong set of results for 2018, with revenue acceleration, good margin progression, robust EPS growth, strong cash generation and return invested capital above 20%. We are extremely pleased with the consistent performance delivery of the group in 2018 and for the 4th consecutive year, We've delivered an EPS performance above external expectations, while revenue are in line. Today, we'll start with our performance highlights. Then Ross will take you through the detail financial results of the year. I will then provide you an update on strategy and then finally, we'll discuss the outlook for 2019. The group generated revenues of 1,000,000,000, up year on year by 1.2% in actual currency and 4.7% at constant currency, driven by good organic growth of 3.7 percent and by the contribution of recent acquisitions. Operating profit of 1,000,000 was up 3% at actual currency and 6.9% at constant currency. We've delivered a record operating margin of 17.2 percent, up 30 basis points year on year actual rates and 40 basis points at constant currency, Our full year adjusted EPS of 198.3p was up 3.5% at actual currency and 7.7% at constant currency. Or EPS growth was 1.6 times faster than our revenue growth. Based on our new dividend policy, the target's payout ratio of circa 50% of earnings, we've announced a proposed final dividend of 67.2p, taking the full year dividend to 99.1p an increase year on year of 39 percent. Our cash conversion was strong with a free cash flow of 1,000,000 and a cash conversion rate of 100 26%. In 2018, we've seen revenue growth acceleration with 3.7 percent organic revenue growth for the year constant currency and importantly, a run rate improvement of 60 basis points in the second half, as you can see on the slide. We delivered a robust performance of +5.2 percent in our Product division, a solid performance in our Trade division, up 2.2% the performance improvement in our Resource division. As I said, in 2018, we've delivered a record operating margin of 17.2% plus 40 basis point at constant currency as we benefited from operating leverage linked to revenue growth for activity improvement and, of course, from our portfolio mix. I'm really proud of the organizational discipline on margin, having increased our margin from 15.5% to 17.2% over 4 years plus 170 basis points. We believe there is further scope for margin improvement and will remain focused on margin accretive revenue growth. Our cash performance was strong with a cash conversion of 126 percent. We are very disciplined on cash management, and 2018 marked the 4th consecutive year of significant working capital reduction as a percentage of sales now at 3.9% you can see on the slide the constant reduction of working capital intensity over the years. Our net debt to EBITDA ratio was 1.4 at the end of the year. Acquisitions are important to grow in attractive sectors of the industry and we target businesses with strong IP and market leading positions. We are very selective looking at targets that will deliver sustained growth in attractive segments both in terms of growth and margin. In 2018, we acquired 4 companies, the most recent one and the most significant one being Alchemy in August, Alchemy performance is on track, and I'd just like to give you an update on the progress we are making. Alchemy is an industry leader, and expands our TQA value proposition in a high margin capital light assurance sector with SAS platforms focused on the attractive food and multisite retail markets. It has a strong track record and operates a high quality business model, scalable, high margin, strong cash conversion and capital light. In the last few months, I've spent quite time with my colleagues from Austin, Montana and Toronto, and I've been really impressed by the quality of our team and their industry leading expertise in Esaas Technology. Self marketing organization to scale our industry leading platforms in food Manufacturing And Multi Site Retail. The last six months, we've been really pleased with the progress made with existing and new clients. In line with our acquisition strategy, we see tremendous opportunity to win new clients based on size of North American market. I've personally been involved in several new client meetings for Alchemy, and there is no question that the corporation needs for better people assurance is significant and growing. Equally, there are a lot of opportunities to upsell our existing services with existing clients by increasing penetration of existing solutions and offering of course, new innovative services. We expect Alchemy to accelerate the strong growth momentum of our high margin and capital light assurance business. I'll now hand over to Ross, who will take you through our financial results in details. Thank you, Andre, and good morning, everyone. As Andre has described, we have accelerated our revenue growth with robust EPS growth and a strong cash performance. I will now take you through acceleration in 2018 with 3.7 percent organic revenue growth at constant rates and strong progress on margin and free cash flow. With an EPS growth of 7.7 percent being 1.6 times faster than revenue growth, a strong cash conversion of 126%. The negative FX impact on total revenue was 3.50 bps for the year, driven by depreciation of sterling, primarily against the dollar, and renminbi. At constant rates, operating profit was up 6.9% to 1,000,000 and margin was up 40 basis points. Our operating profit was up 3% at actual rates. Net finance costs of 1,000,000 were down 1,000,000 compared to last year, reflecting the good deleveraging prior to the acquisition of Alchemy and also FX movements. Our tax rate was 24.7 percent being up 20 basis points year on year, reflecting the unwind of the 1 off impact of U. S. Tax reforms in 2017, offset by the mix of our global business. So overall, fully diluted EPS grew by 6.7% to 198.3 being up 3.5% at actual rates and up 7.7% at constant rates. We also delivered a strong cash performance for the year with our focus on working capital leading to an increase in free cash flow 1,000,000 margin in 2018 at constant rates increasing to 17.2%. Organic margin improved by 30 bps constant rates driven by margin accretion in products and also by the benefits of the stronger portfolio mix, which contributed 10 basis points. M and A had a positive impact of 10 bps, reflecting the impact of our 20172018 investments in high growth, high margin sectors. Finally, and as expected, FX had a sudden negative impact on the group margin of 10 bps. Now turning to group cash flow and net debt. Free cash flow of 1,000,000 with 9,000,000 higher than prior year at actual rates. We continue to deliver strong improvements in working capital, which was 3.9% of sales at December 2018. We invested GBP 110,000,000 in CapEx and free cash flow conversion was strong 109% of adjusted net income. The acquisitions made in 2018 led to an outflow of 1,000,000 which resulted in an increase in net debt to 1,000,000, equivalent to a 1.4 times net debt to EBITDA ratio. Now turning to our financial guidance for 2019. The expected net finance costs are around 1,000,000 5%. Minority interest will be between 202120 3 and for your models to set up the number of shares for EPS calculation. We're currently expecting full year CapEx to be 1,000,000 to 1,000,000 and for net debt, we expect to close the year between 1,000,000 and GBP 700,000,000. Although noting that this guidance is stated before in the M and A, any material movements in FX and this preview impacts of IFRS 16. I would now like to hand you back to Andre. Thank you, Ross, for a comprehensive review of our 2018 results. We have made continuous progress since 2016, capitalizing on strengths and implementing a 5 by 5 different shared strategy for growth. Today, I would like to give you an update on where we see the quality assurance market what we've accomplished in the last few years and how we plan to drive sustainable growth. The global training landscape has changed structurally over the last 50 years. Today, we operate in a truly global market with international trade, representing 72% of global GDP. In addition to global growth, we see attractive growth at regional and local levels. I meet clients on a regular basis and during my travels, I typically host industry events in a regional capital. A recurring theme of our client's meetings is the exciting growth opportunity in the local and regional trade based on the economic expansion in these regions. We will have seen the trade growth in the Indian Ocean and in Southeast Asia accelerating in the last 2 decades. And there are other interesting opportunities ahead, like the 1 Belt 1 Road, the cross Africa trade routes, the development within the Med and, of course, LatAm. Global Trade Expansion has fundamentally changed the way companies operate today. Corporations are taking advantage of new low cost sourcing operations around the world. They have moved to multitier sourcing with Tier 1, Tier 2 and Tier 3 suppliers. That is distribution activities are becoming global, more complex, multichannel. Consumers are becoming more demanding, seeking greater variety, better quality, and faster response and delivery times. These fundamental change in the way corporations operate globally today have dramatically increased the complexity of the operation and therefore, the quality and safety risks inside their supply chains. This growing complexity is driving increased demand for end to end quality assurance as corporations increase their focus on systemic operational risks. That's why in 2015, we've introduced 80 solutions to help our clients manage greater complexity. Total quality assurance with our ATIC solutions is mission critical for our clients. CIC provides quality and safety control in high risk areas and assurance provides end to end assessment of quality and safety processes. Our differentiated TQA value proposition provides indeed a superior customer service to our clients globally across all of our businesses. We support the existing and emerging quality assurance needs of our customers in each area of their operations, R and D, raw material sourcing, component suppliers, manufacturing, transportation, distribution and channel management and consumer management. We are pleased with the progress we have made implementing our discipline and accretive portfolio strategy. We are moving the center of Intertek towards a high growth and high margin sectors in the industry. We've delivered consistent mid single digit organic growth in our high margin product sector, which represents 60 percent of our revenues and 77 percent of our profit. We've seen an excellent growth in the Captolide, high margin assurance segment, which has doubled in size and now represent 16% of the group revenues. Having discussed the progress we've made with our differentiated TQA value proposition, and the effectiveness of our portfolio strategy, let's look at our financial scorecard in the last few years. In 2015, we've established a disciplined and systemic performance approach focusing both on leading and lag indicators with rigorous processes. That approach has enabled us to deliver consistent progress on revenue, margin, cash and return on invested capital. On the full year, CAGR basis, we've delivered 7.6% revenue growth, 10.4% operating profit growth, 17.4% free cash flow growth, 19.2% to DPS Growth. Our margin is now at 17.2% plus 170 bps compared to 14. We've invested selectively in growth through CapEx and M and A, and our average ROIC has been 22 point 7%. We have created sustainable value creation focusing our operations on what we call internally the X factor to convert revenue growth in higher operating profit, free cash flow and TSR growth. As you can see on the slide, between 2014 2018, our average operating profit growth has been 1.6x faster than revenue growth, while our free cash flow and TSR growth have been faster, respectively, by 2.3x and 2.8x. The world of our clients is getting more and more complex and companies are increasing their focus on risk, which creates ever bigger growth opportunities for Intertek given our unique TQA value proposition that offer systemic end to end ATIC services. We are on a good to great journey, and we firmly believe in continuous improvement to take intertek to greater heights. From our strong base, we see opportunity to deliver stronger performance across all aspects of our business, including our differentiated service offering, with margin accretive innovation, our customer centric approach to sales, our operational excellence, our systemic margin management, and our daily focus on cash management. We are confident that with our ever better operational discipline, Intertek will continue to go from strength to strength. Last year, I shared with you our approach to margin management. This year, I would like to cover innovation and discuss how we plan to seize these attractive growth opportunities ahead, developing new services that help our clients resolve complex issues in their supply chains. The pace of change in our global society is accelerating at the speed of light in multiple direction, and you know that very well. The change that corporations have to deal with are significant. This is the world we live in. Let's just take a couple of examples. The growth in the number of new products is driving increased quality risks as illustrated by the growth in a number of food drinks and medical device recalls. Cyber risk have increased to with more frequent data breach and hacking. So to support the needs of our clients in this increasingly complex world, we focus on innovation. And to do that, we have a 3 tier approach. First, we build on the strengths of our existing ATIC solutions and we call that innovation from the core. Then we develop new products and services in adjacent fast growing and high margin markets And finally, we focus on breakthrough product and services through technology to target new markets. So let me give you a few examples, starting with innovation from the core, strengthening our ATIC services. We have rebranded our Cargo A business Calibrates to actually articulate our service differentiation, leveraging our 130 plus years of leadership in Marine surveillance. Working in collaboration with Axon, Internet experts have created mobile laboratories to fuel test the quality of their fast growing Mexico retail outlets. Following launch of pipe aware, a SaaS platform that allows pipeline asset owners to accept real time data throughout the stage of manufacturing We've extended reach of the solution with Pipware 2 to help customers track and monitor all aspects during construction phase 2. To help our clients better leverage their clients' feedback, we've launched voice of the consumer. This is a service that use big data analytics to quickly identify the quality issues our clients are seeing in their supply chain and develop good product quality improvements. Turning to innovation in high growth and high margin areas. Our working conditions assessments audits are a unique solution to support the clients with their CSR objectives. Our Hardline And Softline Chemical Testing offer safety in rapidly developing regulatory environment. Intertek CareG Tech offers variable road testing services, so important for OEMs. We have strengthened our cybersecurity offering with Acumen, AWS, NTA. And given the growing focus of customers on environmental and social impact, we have developed a comprehensive suite of sustainable services. Technology based innovations are also key to our strategy. Intertek InLIGHT is a SaaS platform offering our clients greater visibility in their entire supply chain. In August, we acquired Alchemy, the leading SaaS solution provider to expand our global assurance offering into people assurance services, and through our unique platforms, including YStell and OnTrak, we help our clients identify, monitor and efficiently close skill gaps among frontline employees, typically a source of quality and safety issues. Interprets is a unique predictive big data analytics platform, enables our clients to really get faster to the market with faster service time. So having discussed where we are on strategy, I'd just like now to focus on the outlook for 2019. In 2019, we expect to deliver good organic revenue growth at constant currency. We expect good organic growth momentum in our Product business, good organic growth in our trade business and solid growth in our resource business. From a profitability standpoint, we expect to deliver moderate margin progression in constant currency, will remain disciplined on cash conversion, but continue to invest in growth and we expect the full year CapEx investment to be circa £130,000,000 to 1,000,000. A quick update on currencies for your models. The average turning rate in the last month applied to the full year results of 2018 be broadly neutral both at the revenue and earnings level. Let's now discuss our division, starting with products, in 2018, Our Product business delivered another year of excellent performance. We delivered 5.2 percent organic revenue growth, driven by broad based revenue growth across business line and geography. Our operating profit was strong at 1,000,000, up 9.4% at constant currency, enabling us to deliver a margin of 22.1 percent, up 60 basis point versus last year. Our Softline business delivered solid organic growth across all markets, And moving forward, we expect solid organic growth in our Softline operations, driven by the increased number of SKUs and brands, supply chain expansion in new market, and increased demand in chemical testing. Our hard line business reported good organic growth across our main markets of China, Hong Kong, India, and Vietnam Moving forward, we expect good organic growth driven by innovation from our customers, leveraging wireless technology, increased demand for chemical testing and our innovative inspection technology. We have delivered robust organic growth in Electrical And Connected World. And moving forward, we also expect robust organic growth would benefit from electrical appliances innovations, providing better efficiency and connectivity and increased demand for IoT assurance services, including cybersecurity. Our business Assurance business delivered strong organic growth. And moving forward, we expect robust organic growth driven by increased focus of corporations and supply chain and increased consumer and government focus on ethical and sustainable supply. Our building construction business delivered robust organic growth. And in 2019, we expect good organic growth, driven by the growing demand for greener and high quality commercial building and sustained investment in large infrastructure projects. In our Transportation Technology business, we delivered double digit organic growth and we expect robust organic growth this year, driven by continued investment of our clients in new models and new fuel efficient engines growth in the hybrid electrical engine segments and increased scrutiny on emissions. We generated robust organic growth in our food business and we expect robust organic growth in 2019, driven by continuous food innovation, increased focus on the safety of supply chains and growth in the food service assurance business. We saw robust organic growth in our chemical and pharma business, and we expect solid organic growth moving forward, driven by the growth of SKUs expansion of the supply chain and management market and increased concerns on product safety and traceability. In 2019, We expect the Product division, which represents 7% to 10% of our earnings to benefit from good organic revenue growth at constant currency. Our trade business delivered an organic revenue growth of 2.2 percent at constant rate. We delivered an operating profit of £83,000,000, slightly down year on year, driven by the portfolio mix. Our Catlet Bread business reported solid organic growth. And moving forward, we expect good organic growth will benefit from global trade flows as well as a development from strong regional trade in Asia, the Indian Ocean, the Med and the Americas. Our Government And Trade Services business delivered robust organic growth. And moving forward, we also expect robust organic growth. Our agri world business Revenue was slightly below last year, and moving forward, we expect solid organic growth, driven by the expansion of our clients into fast growing markets and new customer wins. In 2019, we expect our trade related businesses, which accounts for 17% of our profit to benefit from good organic growth performance at constant currency. Turning now to resource where we saw an improved trading conditions in 2019 and in 2018, sorry, and in the second Our resource rated businesses reported an organic revenue growth of 0.3% at constant currency with a better trading in the second half of twenty eighteen. We've delivered an operating profit of £27,400,000 of disciplined approach to cost control, enabled us to report an operating margin that was stable. The revenue from CapEx inspection was a slight decline year on year, driven by a lower level of investment in exploration activities from our clients and some price pressure in the industry. Moving forward, we expect solid organic growth, driven by the gradual increase investment of oil and gas companies in exploration and production. The demand for OpEx management services remains stable in a competitive environment, and we expect the same trend in 2019. In 2018, We've seen robust organic growth for testing activities in the mineral business, and we expect good organic growth in 2019. Overall, We expect to deliver solid organic revenue growth at constant currency in our Resource division, which contributed 6% above profit in 2018. I would like now to close our presentation with a few comments on the strength of Intertek before we answer any questions you might have. Intertek operates a high quality earnings models: Capital Light, which combined with our entrepreneurial culture, enables us to react quickly to new growth opportunities by following supply chain of our customers in new geographies. Our approach to value creation is based on the compounding effect year after year of margin equity revenue growth, strong cash generation and disciplined investments in growth. The structural growth drivers in the global quality assurance market are attractive. And at the group level, we expect to deliver GDP plus organic revenue growth in the real term, that is margin accretive and strong cash generative. We expect our Product division, which represents 77% of the group's earnings in 2018 to grow ahead of global GDP, We expect our trade division that represents 17 percent of the group's earnings in 2018 to go at a rate broadly similar to GDP through the cycle The gross prospect of our Resource division, which represents 6% of the group's earnings in 2018, are improving with the increased investment of oil and gas exploration and production activity as well as the development of renewable energies. Intertek is going from strength to strength, making consistent progress on strategy and performance, We have scale positions in attractive end markets in more than a hunt countries. We have a strong track record of creating shareholder value, operating a high quality compounder earnings model. Ever growing corporate complexity is a growth accelerator, leveraging our unique total quality assurance value proposition that offers a client superior customer service with our innovative ATIC solutions. However, better operational discipline is making Intertek ever stronger every day. Thank you very much for being on the call today and we'll be answering any questions you might have. The first question is coming through from the line of Tom Sykes of Deutsche Bank, London. Yes, good morning, everybody. A few please. So firstly, just on your free cash flow outlook, Do you actually think you can grow your free cash flow this year if you're going to be increasing your CapEx to the 1,000,001,000,000 And when you look at the working capital development, do you think you can maintain your payables level particularly at this rate? I know receivables were better in H2, but you have pushed out the payables quite a lot. On the products business, I guess you have lots of questions on what looks like slightly weaker growth right at the end of the year. Can you make some comments on that, whether that's tariff related or not? And why growth should pick up in H1? Please? And then if you can make any comments on the margin impact of M And A, expected for full year 2019, please? Okay. I've fully have captured all the questions at, Tom. Look, starting with working capital, I think what you're seeing is the continuous focus on both receivable and payables, as you would have noted over the 1st year, we'll start releasing the working capital. We're focused on receivable and now we are focused on payables. And we believe that the trend that we've delivered are sustainable and structural. We do not guide specifically for free cash flow, but you can obviously run numbers for yourself, the company is highly cash generative even with at free cash flow level, even with $130,000,000 of CapEx. As far as your question on margin, in fact, I'll come to product later on, which is obviously a longer answer. I think we focused our investments on margin accretive targets. That's the way we think about it. And you've seen the impact of acquisitions and our margin in 2018 and in 2017. And look, we are very confident in the acquisition we've made, obviously, you can run your own model regarding Alchemy and Alchemy, we'll take few years to basically be above the group margin, but that's what I would say for now. And we are not guiding specifically on acquisition margins for 2019. But overall, the strategy is margin accretive acquisitions. So let's talk about a product. I mean, the first thing I would say is that, I wouldn't judge the performance of the global business on 2 months. We've announced our results at the end of October, and I would do full year. I think we have a lot of moving parts, as you know, around the world. And when the business is doing well, which is the case of Intertek. We have part of the organization that are doing extremely well, and naturally, they start focusing on the next year. I think The important point, I would say, which I guess is the question behind your question. We saw an organic growth acceleration in H2, 4% to 3.4%. And I'd like to give you 2 data points that I think will help you with the question. First of all, Although we do not disclose quarterly figures, I can say that our Q4 organic growth was slightly better than Q3 and Q3 was obviously better than H1. And the important point that you're raising is I can assure you that there was no change of trends between Q3 and Q4 on our global business lines of soft lines, hard lines, electrical, and in China, which I think is your question. Okay? Okay. I'll leave it there. Thank you. The next question is from the line of Edward Stanley of Morgan Stanley. Please go ahead with your question. Good morning. A couple please. On the electronics division or part of the products division specifically, I'm interested in what conversations you're having with your clients around 5G and the ramp up 5G in the mobile testing space and whether there's something we should expect from, for growth in that regard. Secondly, I've noticed a couple of, large toy companies reporting better than expected growth Lago and a couple of others. Is this a trend that people write off as being x growth too easily? And actually, we might see positive surprises in toys in the coming years, or or or not. Thanks. Look, 5G, in my view, is going to be very exciting for the quality assurance market. Obviously, the level of disclosure on the pace at which the 5G infrastructure will be in place and when the mobile operators will launch their new models is quite cryptic for obvious reasons. Everybody has got an interest there. We believe that the 5G technology will have a potentially bigger impact than we pull things because you will get obviously a much, much better usage experience in terms of quality and speed and certainly capacity, then you get with 4 g, but importantly, the intelligence that we have, it will be superior to wifi. So, I think, it will be a very exciting moment for the industry and everybody is working hard around the world to basically get ready with infrastructure, which is obviously foundation number 1 and 2, the mobile devices, and which means that from a intertek standpoint, the testing will be very, very, very interesting because it's going to be more complex technology and so forth, etcetera, the drill. As far as toys are concerned, I think, I totally agree with you. We should not basically believe that the toy industry is not a exacting industry for the future. I think there are lots of interesting trends, and toys are becoming much more technology orientated, you also see a lot of development in terms of educational toys. Which is really, really important. We see a lot of trends with toys replicating instruments as keyboard, guitars, and drums So there is a lot, a lot of things happening. And the other thing I was going to say, a bit of market, the intelligence the old toys are not getting out of fashion. I was in Italy a few, a few weeks ago, and the old traditional Italian toys are back in fashion. So No, we are very excited to be part of the toy industry. And as you heard, our business is doing very well. The next question comes from the line of Paul Sullivan from Barclays. Good morning, everybody. A couple from me. Firstly, on Paul, are you still there? The next question comes from the line of Yajesh Kumar from HSBC. Just one second. We, sorry, we didn't hear the question from Paul. So we probably should ask Paul to repeat his questions. Paul, are you there? Paul has Paul's line has dropped. All right. Okay. So, hopefully ahead with Rajesh Kumar from HSBC. Of course, of course, yes. On slide number 23, you showed the outsourced market for testing industry, which implies potential for a lot of growth in the future. Can you help us with your thoughts on when and how you see that outsourcing trend to develop? The second would be when you talk about the ATIC market, have your pitch changed in nature in some way when you're going to meet customers that is either you're meeting people at the board level rather than meeting people at procurement level of organizations or you're meeting more people from different departments how has the whole sales process changed because of, putting this ATIC model compared to the past? Or compared to your peers? Thanks for your questions. I mean, look, I'm not sourcing. It's an integral part of our sales activities. So typically, we focus our sales activities on 5 priorities. 1 is customer retention, basically making sure you your farm and develop your existing relationship to its client penetrations, getting more business inside an existing clients, 2 is new customers. Obviously, 4 is a tick and I'll cover that and 5 is outsourcing. Our sourcing discussions are more of a long term nature with clients we don't talk about the outsourcing wins that we get because typically as a company, we don't talk about the activities we do for our clients. But there is no question that we are doing well and its market is continuing to make progress. And when we talk to our clients, we had really, really good discussions. So it's a good business, but it's a long term discussions because when a company outsourced to Intertek it's obviously a structural decisions, and you can imagine it's complex. As far as ATIC is concerned, look, we've been talking to our clients about our ATIC end to end solutions for now several years. We have a well articulated selling process, and we've got selling tools and training in place. And typically, the way we do it Raj is we use our existing relationship within customers organizations to have a broader conversation with our contact but also people at a slightly higher level, which enabled us to cover the broad spectrum of solutions that we have as an opportunity for our clients. And then we go back into the individual department to sell solutions. So indeed, our ATIC selling approach is more of a if you want a senior level selling inside any organization. It doesn't mean it's necessarily C suite. It also is C suite but it could also be ahead of supply, ahead of risk. So it's really important for us and it's part of the way we manage our client relationships. Appreciate the color. Thank you. The next question is from the line of George Gregory of Exane. Please go ahead with your Paul. Good morning. 2, please. Firstly, just on Alchemy, I wondered whether you could tell us what that business delivered in terms of the profit or loss for 2018. I think the prior expectation was a modest loss. I just wondered if you could perhaps confirm where it landed for 2018. And secondly, the within the trade business, the second half margin, saw a decline, albeit that was on a, a much softer comp, bearing in mind the the hurricane impact in the second half of last year. I just wondered whether you could elaborate a bit on the margin performance of trade, please? Thanks. Sure. I think as far as Alchemy is concerned, the business was in line with expectations. You will recall that we gave you the IFRS revenue expectations in the RNS in November, so it was being in line and the profitability was also in line with expectations, as you said, a small loss. In terms of the trade, Look, the margin on the trade is essentially a function of the portfolio mix. As you can imagine, we have large businesses with different operating margin. And what we saw in the second half is in line with what we saw in the 1st half. Essentially a portfolio mix effect. So there is nothing more than that in the numbers, okay? The next question is from the line of Paul Sullivan from Barclays. Please go ahead with your question. Morning, everyone. I did what happened there. Sorry about that. Anyway, just definitely need something here. I'll tell you that. Right, going back to just product, I mean, well, how should we think about the the slight sort of change in guidance because I think last year you're talking about robust growth in 2018. Now you're talking about good growth is that it seems like more of a nuance change than anything more substantial. Is that correct? So thanks for asking the question. I think it's an important point to elaborate. Look, from my perspective, the product division has had an outstanding track record. If you look at the performance in 2015 2016, 2017 2018, we had mid single digit organic growth at constant currency. And as you know, it's the beginning of the year, and we tend to be considered in our guidance So a few things I would say, if you look at the objectives side by side, which I'm sure you will, there is no change of guidance between the 2018 performance at actual rates sorry, at constant currency rates, sorry, and 2019 for our high margin global scale business lines or soft lines, hard line and electrical. So that's the main point. The nuance to use your terminology is basically around the age on certain business lines. So let me give you a bit of color here. BA, which, as you know, has had a stellar performance is going to comp against a year, which saw the change of ISO standards. And therefore, you got a bit of a base effect here. Regulatory on in the chemical and pharma front. As you probably recall, there was a change of regulation with reach in at the end of H1. So we're going to be comping against that. So did I essentially, the nuance you're talking about? Personally, I'm not worried about product, we've had a stellar performance. I mean, look at the margin, I mean, we are really firing on all cylinders here. Great. Thanks for clearing that up. And then just to follow on some housekeeping. Depreciation and amortization, it went down year on year. How quickly does that trend up towards CapEx? And then on restructuring charges, in the absence of material M and A, should we assume that restructuring charges, sort of trend to 0 this year? Is the answers. We don't guide on either or. So we'll take it a step at a time, if you don't mind. But yes, just start it, right. Okay, cool. All right. Thank you very much. Thank you. The next question is from the line of Andy Grobler from Credit Suisse. Please go ahead with your question. Hi, good morning. Just a few quick ones from me, if I may. Can I just go back to product? Just I didn't quite maybe I didn't quite hear properly. I think you said that Q4 organic was better than Q3 and Q3 was better than H1. Did I hear that correctly was 1. 2, just on CapEx, that's, remained much lower than it had been historically. How much of that change in CapEx if we use it as a proportion of sales is kind of internal fundamental change versus versus mix. And then thirdly, again, on Alchemy, and I think you've kind of hinted at the answer to this. With the 1st year in line with expectations, you said you thought it would be a few years before it was up to group margins. Is that expectation still around about year 3 that it gets up to towards group margins? Yes. I mean, let's just, thanks, Andy. Look, let's start with the last question first. Look, we are really excited about Alchemy, as I said, in the first slides. The feedback we're getting from our clients is really tremendous. And there is really a need for frontline employee skills upgrades because unless you have that, you can have all the process you want. You're not going to get the quality output. So we just went to food conference and global food conference in Nice last week. And I mean, our stand was busy as we've never seen it before. I mean, some major corporations that are based here in Europe had never heard of how technology could help food manufacturing, in operations to really cope with. The huge issue, which is basically a high churn, little skilled, low paid workers, not even showing up from time to time to do to this job. And then we had retailers saying, well, my goodness, we have all these millennials working for us. And it's a different type of population to manage and to engage. So So look, the guidance we gave in July last year when we announced the acquisitions remains very, very, very much what we have in mind, and we are very excited. As far as CapEx is concerned, look, our CapEx is essentially made of several elements, as you would imagine, maintenance CapEx, which you need in our labs operation, as you can imagine. We obviously invest quite a bit in technology, to basically either upgrade our operations or develop new solutions including the internal systems. And we do also investments in lab expansions where we open new facilities around the world. And last but not least, innovation. So that's basically what's in the CapEx. And this is how we basically make the decisions, and our guidance remains between 4% to 5% of revenue. As a proxy. I think what I said in the opening comments, in the opening questions on Q4, I said that although we don't give quarterly data because we reported the end of October, I can say that our Q4 organic growth at the group level was, slightly better than Q3 and also said that between Q3 and Q4, there was no change of organic growth trajectory on softlines, hard line, electrical, which are of global scale, consumer goods businesses and China. So that's what I said, Andy. Okay. So we didn't say that Q44 product wasn't, hadn't changed potentially from Q3, but just on those soft hard soft and hard lines in the E and E segment? I thought it was the, that's what the question that I was being asked. Looking forward about China and all these things. So I think, look, I've given you a lot of data points that I typically don't to reassure you that everything is fine. So I think if we leave it to that, Andy, it will be great. Okay. Can I just ask you just one more on the CapEx 1, if I may? If you look back to when you first started versus now with CapEx sales lower, of those the Four blocks you you talked about, which one has has changed the most? From maintenance, expansion, technology and innovation? I think what I would say has changed the most is not the components is the way we basically go about, approving CapEx. It's basically investments like an M and A. So it's the same approach. And as you know, we have a margin accretive portfolio strategy, and we make sure that we target our CapEx investments in a high growth, high margin sectors on sustainable basis that's the major that's the major change. It's the way we allocate CapEx to basically deliver our portfolio strategy. Maintenance, Andy, when it comes to Mentance, 0 defect quality is viable for me. So we do what's required here, right? There is no there is no issue there. Okay, brilliant. Thank you very much. The next question is from the line Alex Meese of JP Morgan. Please go ahead with your question. Good morning. And thanks so much for taking my questions. Just two, please. 1, general, one specific. On the general question, I was just very interested to get a bit more color on Slide 25, that shows the growing trend of product recalls. In various categories. And I wonder if I could just ask you what you think drives that and whether you think it can continue to grow at that pace. And then secondly, the specific question on IFRS 16. Ross, thanks for giving the details on the balance sheet in terms of what the standard means for 2018 numbers. I wonder if you can just help me understand what the, what the impact would be for depreciation and finance costs on the 2018 numbers, please. Oh, let's start the why don't we have Ross started IFRS and I'll do a recall later. Yeah. Sure. So, Alex, obviously, you've seen the note in the account that talked about the increase in the liabilities that we estimated between 10,000,001,701,000,000 which will feed through, hopefully, into the results for next year. In terms of specific line items in the P and L, we're not giving exact guidance across component parts. But as we said in the, announcements at a EPS level, effectively impact is immaterial for the group. Okay. On product recall, if you step back and you look at the world of corporations today, it doesn't matter which company you it applies to every sector. Corporations have had to expand their geographic footprint and are truly global. They had obviously to innovate and increase their SKUs or type of product lines. And all of that has created a lot of complexity. And as you know, corporations have focused for the last 2 or 3 decades on shareholder value creation. And in a lot of cases, they have not spend enough time thinking on the systemic end to end risk management via supply chain, which it'll take time because unless you have a problem, you don't think you have a problem. So the reason why you're seeing an increased number of recalls is because the pace of innovation is not stopping is accelerating as a matter of fact. And there is always this conflict between the commercial agenda, how fast you are going to market versus is my product ready. And this is making it even higher risk for corporations to launch new products. And the other thing I would say, if you take global corporations, They've lost a lot of their local knowledge, and we see it's a lot in our regulatory business, where they don't have the local legal, technical department. And I can tell you, personal example, when I was at Colgate, Product Manager, at Colgate France, we had a head of technical, a head of legal, a head of regulatory. And corporations over the years have moved to European headquarters, sometimes global categories, and they've lost these local knowledge. So you've got a really, interesting situations here where the world of operation is more and more complex. They had to accelerate the pace of innovations. And that lost a lot of internal capability, which explained some of the mistakes we are seeing. And our clients are aware of it. That's why going back to TQA, and we see an increased focus on operational risk management, which is at the heart of what we're trying to offer to our plans. The next question is from the line of David Rux of Bank of America. Please go ahead with your question. Good morning, gentlemen. Two questions from my side. The first one relates to the China business. Can you perhaps remind us of the sort of broad splits in the business between domestic and export markets? And then just as a follow on from that, can you give us the growth progression between these, these two markets over the year? I think let's take that one first and I'll get on to my second one. Well, if you give me the 2, then it's easier, then I can answer them back to back. So what is the other question? Okay, sure. Then the second one relates to CapEx inspection services. You mentioned the slight decline in growth for the year, I was hoping whether you can tell me whether there was a positive growth in the second half of the year compared to the prior year? So look, on the, on the China business, We don't disclose all these data on China, but what I can tell you is that domestic business is around 25% of our total business in China. And of both businesses export and domestic, that's the fastest growing because of the Chinese economy growing and it's growing at double digits. So that's really very exciting moving forward. The export business continues to do well also. As far as CapEx Inspections, I assume you're talking about oil and gas? That's correct. Yes. So look, oil and gas was slightly down for the year in revenues, as we said, which is a function of volume and price as you know, this is an area where price has gone down over the years given the long term nature of the oil price crisis that we saw. And, we believe that the investments that we are seeing from oil and gas companies will enable us to deliver better revenue performance moving forward, and we are talking about solid this year. Okay. Thank you. And was there any sort of slowdown in that decline in the second half? As a matter of fact, you might have seen it, the H2 performance in our Resource business was better than H1. So it was an improvement of trading condition, as I mentioned earlier. Thank you. The next question is from the line of Rory McKenzie of UBS. Please go ahead with your question. Morning. It's Rory here. Within the products outlook, I was surprised that the business assurance is set to slow. I know there are tough comps from the ISO resensification work, but I didn't think that was very significant for you, while of course you will have Alchemy coming into organic growth in HD next year. So I guess I have two questions. Can you give more detail on that slow outlook of business assurance? And then secondly, what are you currently projecting for Alchemy growth? On Alchemy, will not be organic growth next year, right? So year, sorry. So it takes another calendar year for Alchemy to be an organic growth. So why we are basically sorry? When did they close? Sorry. I thought you closed it in August. Yes, but we, we, we wait for the next calendar year to do that. So it would not be organic growth in 2019, okay. As far as business assurance is concerned, we have 2 types of businesses in our business assurance. We have what we call ISO certifications, and we got supply, management or audits. And there is no question that we saw a significant uptick in our ISO certification activities in 2018. Because of the change of standards that were required on September 15 last year, on 900114001. And basically, you've got to take that into consideration. Okay, great. Thank you very much. You're welcome. The next question comes from the line of George Gregory of Exane. Please go ahead with your question. Good morning. Sorry, just one quick follow-up. Going back to the the impact of Alchemy in the second half. The I think you cited that the margin benefited to the tune of 10 basis points in the second half from M and A and disposals, which was similar to the first half, I believe, despite the second half being diluted by the impact of Alchemy. I'm just wondering what the offset to that was in the second half. Wonder whether you could provide any color on that, please. Yes, I mean, look, it's not complicated. I mean, if you look at the acquisition that we've made, in 20 182017. So we've made some really good acquisitions, which are margin accretive, and that's offsetting the dilutive effect Akermes. Nothing more than that. The next question comes from the line of Will Kirkness of Jefferies. Please go ahead with your question. Good morning. Thanks. I just had a final question on the on the 5x5. So just wondered if there are, I guess, it's kind of a way of asking the restructuring items another way. Are there any areas that sort of still persistently underperforming and obviously they have to say which ones they are, but just whether there's anything that might need to be looked at into this year? And then whether there are any gaps that stand out from conversations with your clients where you might need to do an acquisition or to grow something organically? Look, I think there is no question that, although we've made a lot of progress over the years, you always have span of performance in a business of global nature like us with 100 Countries. And 15 plus business lines. So there are some opportunities to basically continue to make some improvement. I mean, there is no question. It's obvious that we expect margins to start rebuilding in our resource sector. Over time, given the fact that if you look at what happened since the peak that we saw in 2013, how margin has been halved. So clearly. It's an area we believe we can do better. And if I look at, of performance, if I look at countries, if I look at business lines, we do have opportunities, of course, of course. And that's what we are doing with our performance management approach. Mind you, as you drive high and higher performance, the best get better. And obviously, the weakest might get further away because the best gets better. So this span of performance reminds a huge priority for us, and that's what we do with our performance management. That they bring the results that we've talked about today. As far as, opportunities with clients to obviously cover some gaps in terms of services, of course, there are opportunities in many areas. You would have seen the investments that we've done in terms of cybersecurity and we can you to invest there. You've talked about sustainability. And it's not only acquisition. It could be organic innovation too, right? So yes, we have plenty of opportunities to go for. Okay. Thanks very much. You're welcome. The next question comes from the line of Rajesh Kumar of HSBC. Please go ahead with your question. Hi. Just one quick follow-up, please. When you look at the comps for second half of next year. Do you think that some of the comps in product lines, which are related to soft clients or grocery might be a bit difficult. Some reports in the market suggest that the U. S. Importers were basically stocking up their inventory early on? I know that's not your business model, but Was there a tailwind which we need to bear in mind while looking at next year estimates? No, I don't think so. I don't think so. So you've not seen any tailwinds as suppliers move from China to Vietnam or more product being shipped out? Yes, I mean, if you see the, I mean, obviously, your question about is, manufacturing decisions, it is a very important decision for a brand to change manufacturing locations. And we've talked about it during the call in November. And we are monitoring, obviously, every single step that any client might want to take. And if you think about it, why would they make such decisions while the discussions are still going on and why also since the decision has been made, the first decision has been made between the U. S. And China, the REM MB has helped to offset most of the increase. So Look, it is an area that will take time for clients to think about, over the years, we have seen clients move supply from one country to the other. And definitely, we are involved in that and it's good for inter tech. But as far as the China question is concerned, no, we've not seen any change, okay? So when you see a change, do you normally get step down in revenue at a higher margin or do you normally keep the revenue at the same level with a similar level of margin? Look, we work with more than 270,000 clients around the world. So your question is very, very generic. The way to think about it, if we work with a client in electrical and we produce in one country and we move to another country, of course, there will be a different price reflecting the costs of doing business in that country, but that will also be reflected in our margin. And therefore, we are we benefit from the change in addition to the assurance activities that we offer to manage the change, because obviously, this change is quite complex. So I'm not worried about chance of manufacturing location because that's something we do all the time with our clients. Understood. Thank you. I will now hand you back to your host to conclude today's conference. Okay. Thank you very much, everyone, for being on the call today. I know it's a busy day. Any questions, please reach out to us. And thanks again. Bye bye. Thank you for