Good morning to you all, and thanks for attending our conference call today. Ross McKelvie, our CFO, and Denis Moreau, 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 on invested capital above 20%. We are extremely pleased with the consistent performance delivery of the group in 2018. For the fourth consecutive year, we've delivered an EPS performance above external expectations while revenues are in line. We'll start with our performance highlights. Ross will take you through the detailed financial results of the year. I will then provide you an update on strategy. Finally, we'll discuss the outlook for 2019.
The group generated revenues of GBP 2.8 billion, up year-on-year by 1.2% at actual currency and 4.7% at constant currency, driven by good organic growth of 3.7% and by the contribution of recent acquisitions. Operating profit of GBP 482 million was up 3% at actual currency and 6.9% at constant currency. We've delivered a record operating margin of 17.2%, up 30 basis points year-on-year at actual rates and 40 basis points at constant currency. Our full-year adjusted EPS of GBP 1.983 was up 3.5% at actual currency and 7.7% at constant currency. Our EPS growth was 1.6 times faster than our revenue growth. Based on our new dividend policy that targets a payout ratio of circa 50% of earnings, we've announced a proposed final dividend of GBP 0.672, taking the full-year dividend to GBP 0.991, an increase year-on-year of 39%.
Our cash conversion was strong with a free cash flow of GBP 351 million and a cash conversion rate of 126%. In 2018, we've seen revenue growth acceleration with 3.7% organic revenue growth for the year at constant currency, importantly, a run rate improvement of 60 basis points in the second half, as you can see on the slide. We've delivered a robust performance of +5.2% in our product division, a solid performance in our trade division of 2.2%, and a performance improvement in our resource division. As I said, in 2018, we've delivered a record operating margin of 17.2%, +40 basis points at constant currency, as we benefited from operating leverage linked to revenue growth, productivity 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 four years, +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%. We are very disciplined on cash management, 2018 marks the fourth 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. 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 four 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 the high-margin, capital-light assurance sector with SaaS platforms focused on the attractive food and multi-site 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 quality time with my colleagues from Austin, Montana, and Toronto, and I've been really impressed by the quality of our teams and their industry-leading expertise in the SaaS technology.
The integration plans are on track. We have created two separate sales and marketing organizations to scale our industry-leading platforms in food manufacturing and multi-site retail. In 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 the size of the North American market. I've personally been involved in several new client meetings for Alchemy, and there is no question that the corporation need 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 a high margin and capital-light assurance business.
I will now hand over to Ross, who will take you through our financial results in detail.
Thank you, André, and good morning, everyone. As André has described, we have accelerated our revenue growth with robust EPS growth and a strong cash performance. I will now take you through some of the detail underlying our results. In summary, the group has delivered revenue growth acceleration in 2018, with 3.7% organic revenue growth at constant rates and strong progress on margin and free cash flow, with an EPS growth of 7.7% being 1.6 times faster than revenue growth, and a strong cash conversion of 126%. The negative FX impact on total revenue was 350 basis points for the year, driven by the appreciation of sterling, primarily against the dollar and renminbi. At constant rates, operating profit was up 6.9% to GBP 482 million, and margin was up 40 basis points. Our operating profit was up 3% at actual rates.
Net finance costs of GBP 25.3 million were down GBP 3.6 million compared to last year, reflecting the group's deleveraging prior to the acquisition of Alchemy and also FX movements. Our tax rate was 24.7%, up 20 basis points year-on-year, reflecting the unwind of the one-off impact of U.S. tax reforms in 2017, offset by the mix of our global business. Overall, fully diluted EPS grew by 6.7% to GBP 1.983, up 3.5% at actual rates and up 7.7% at constant rates. We also delivered a strong cash performance in the year, with our focus on working capital leading to an increase in free cash flow to GBP 351 million. The group recorded 40 basis points improvements in total operating margin in 2018 at constant rates, increasing to 17.2%.
Organic margin improved by 30 basis points at constant rates, driven by margin accretion in products, and also by the benefits of the stronger portfolio mix, which contributed 10 basis points. M&A had a positive impact of 10 basis points, reflecting the impact of our 2017 and 2018 investments in high growth, high margin sectors. As expected, FX had a certain negative impact on the group margin of 10 basis points. Turning to group cash flow and net debt. Free cash flow of GBP 351 million, with GBP 9 million 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 million on CapEx, and free cash flow conversion was strong at 109% of adjusted net income.
The acquisitions made in 2018 led to an outflow of GBP 388 million, which resulted in an increase in net debt to GBP 778 million, equivalent to a 1.4 times net debt to EBITDA ratio. Turning to our financial guidance for 2019. The expected net finance costs are around GBP 31 million-GBP 33 million. The effective tax rate is expected to be in the range of 24.5%-25.5%. Minority interest will be between GBP 21 and GBP 23. And for your models, I've set out the number of shares for the EPS calculation. We're currently expecting full year CapEx to be GBP 130 million-GBP 140 million, and for net debts, we expect to close the year at between GBP 670 million and GBP 700 million. Although noting that this guidance is stated before any M&A, any material movements in FX, and is pre the impact of IFRS 16.
I would like to hand you back to André.
Thank you, Ross, for the comprehensive review of our 2018 results. We have made continuous progress since 2016, capitalizing on our strengths and implementing our 5x5 differentiated 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 trading 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 their regional capitals.
A recurring theme of our client 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 two decades. There are other interesting opportunities ahead, like the One Belt One 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 multi-tier sourcing with tier 1, tier 2, and tier 3 suppliers. Their distribution activities are becoming global, more complex, multi-channel. Consumers are becoming more demanding, seeking greater variety, better quality, and faster response and delivery times.
These fundamental changes in the way corporations operate globally today have dramatically increased the complexity of their operations, 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 2016, we've introduced ATIC solutions to help our clients manage greater complexity. Total Quality Assurance with our ATIC solutions is mission critical for our clients. ATIC provides quality and safety controls 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&D, raw material sourcing, component supplies, 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 the 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% of our revenues and 77% of our profit. We've seen an excellent growth in the capital-light high margin assurance segment, which has doubled in size and now represents 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 4-year CAGR basis, we've delivered 7.6% revenue growth, 10.4% operating profit growth, 17.4% free cash flow growth, 19.2% DPS growth. Our margin is now at 17.2% plus 170 basis points compared to 2014. We've invested selectively in growth through CapEx and M&A, and our average ROIC has been 22.7%. We have created a 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 and 2018, our average operating profit growth has been 1.6 times faster than revenue growth, while our free cash flow and TSR growth have been faster, respectively, by 2.3 and 2.8 times.
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 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 directions, 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 the number of food, drinks, and medical device recalls. Cyber risks have increased, too, with more frequent data breach and hacking. To support the needs of our clients in this increasingly complex world, we focus on innovation. 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. We develop new products and services in adjacent, fast-growing, and high-margin markets. Finally, we focus on breakthrough products and services through technology to target new markets. Let me give you a few examples. Starting with innovation from the core, strengthening our ATIC services. We have rebranded our cargo business, Caleb Brett, to clearly articulate our service differentiation, leveraging our 130-plus years of leadership in marine surveillance. Working in collaboration with Axon, Intertek experts have created mobile laboratories to field-test the quality of their fast-growing Mexico retail outlets.
Following the launch of Pipe-Aware, a SaaS platform that allows pipeline asset owners to access real-time data throughout the stage of manufacturing, we've extended the reach of the solution with Pipe-Aware 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 uses big data analytics to quickly identify the quality issues our clients are seeing in their supply chain and develop product quality improvements. Turning to innovation in high-growth and high-margin areas. Our working condition assessment audits are a unique solution to support the clients with their CSR objectives. Our hardline and softline chemical testing offers safety in a rapidly developing regulatory environment. Intertek KJ Tech offers valuable road testing services so important for OEMs. We have strengthened our cybersecurity offering with Acumen, EWA, and NTA.
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 client 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. Through our unique platforms, including Wisetail and OnTrack, we help our clients identify, monitor, and efficiently close skill gaps among frontline employees, typically a source of quality and safety issues. Intertek Interpret is a unique, predictive big data analytics platform that enables our clients to really get faster to the market with a faster service time. 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 at constant currency. We'll remain disciplined on cash conversion. We'll continue to invest in growth, and we expect our full year CapEx investment to be circa GBP 130 million to GBP 140 million. A quick update on currencies for your models. The average sterling rate in the last month applied to the full year results of 2018 will be broadly neutral, both at the revenue and earnings level.
Let's now discuss our divisions, starting with products. In 2018, our product business delivered another year of excellent performance. We delivered 5.2% organic revenue growth, driven by broad-based revenue growth across business line and geography.
Our operating profit was strong at GBP 371 million, up 9.4% at constant currency, enabling us to deliver a margin of 22.1% at 60 basis points versus last year. Our softline business delivered solid organic growth across all markets. 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 hardline 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.
Moving forward, we also expect robust organic growth will 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. Moving forward, we expect robust organic growth driven by the increased focus of corporation on supply chain and increased consumer and government focus on ethical and sustainable supply. Our building construction business delivered robust organic growth. In 2019, we expect good organic growth driven by the growing demand for green and high quality commercial building and sustained investment in large infrastructure projects. In our transportation technology business, we have 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. 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. We expect solid organic growth moving forward, driven by the growth of SKUs, expansion of supply chain in emerging markets, and increased concerns on product safety and traceability. In 2019, we expect our product division, which represents 77% of our earnings, to benefit from good organic revenue growth at constant currency. Our trade business delivered an organic revenue growth of 2.2% at constant rate. We delivered an operating profit of GBP 83 million, slightly down year-on-year, driven by the portfolio mix. Our Caleb Brett business reported solid organic growth.
Moving forward, we expect good organic growth as we will benefit from global trade flows as well as the 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. Moving forward, we also expect robust organic growth. Our AgriWorld business revenue was slightly below last year. 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 account 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 in 2018, sorry, and in the second half.
Our resource-related businesses report an organic revenue growth of 0.3% at constant currency with a better trading in the second half of 2018. We have delivered an operating profit of GBP 27.4 million. Our 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 increased investment of oil and gas companies in exploration and production. The demand for OpEx management services remains stable in a competitive environment. We expect the same trend in 2019. In 2018, we have seen robust organic growth for testing activities in the mineral business. 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% of our 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 model. Capital-light, which combined with entrepreneurial culture, enables us to react quickly to new growth opportunities by following the supply chain of our customers in new geographies. Our approach to value creation is based on the compounding effect year after year of margin accretive revenue growth, strong cash generation, and disciplined investment 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 real term that is margin accretive and strongly 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% of the group's earnings in 2018 to grow at a rate broadly similar to GDP through the cycle. The growth 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 activities, 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 100 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 the clients superior customer service with our innovative ATIC solutions. Our ever better operational discipline is making Intertek ever stronger every day. Thank you very much for being on the call today. We'll be answering any questions you might have.
If you would like to ask a question, please press star one on your telephone keypad. You will be advised when to ask your question. The first question is coming through from the line of Tom Sykes of Deutsche Bank, London. Please go ahead with your question.
Morning, everybody. A few, please. 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 GBP 130 million-GBP 140 million? 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? Then if you can make any comments on the margin impact of M&A, expected for full year 2019, please.
Hopefully I've captured all the question, Tom. 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 first year, we start reducing the working capital. We focused on receivables, and now we are focused on payables. 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 a free cash flow level, even with GBP 130 million 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 focus our investments on margin accretive targets.
That's the way we think about it, you've seen the impact of acquisitions on our margin in 2018 and in 2017. We are very confident in the acquisition we've made. Obviously, you can run your own model regarding Alchemy. Alchemy will take a few years to basically be above the group margin. That's what I would say, for now, we are not guiding specifically on acquisition margin for 2019. Overall, the strategy is margin accretive acquisitions. Let's talk about product. The first thing I would say is that, I wouldn't judge the performance of a global business on two 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.
When the business is doing well, which is the case of Intertek, we have parts 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% compared to 3.4%. I'd like to give you two 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.
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 Ed Stanley of Morgan Stanley. Please go ahead with your question.
Yeah, morning. A couple, please. On the electronics division, part of the products division specifically, I'm interested in what conversations you're having with your clients around 5G and the ramp up to 5G in the mobile testing space, and whether there's something we should expect for growth in that regard. Secondly, I've noticed a couple of large toy companies reporting better than expected growth, Lego and a couple of others. Is this a trend that people write off as being ex-growth too easily and actually we might see positive surprises in toys in the coming years, 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 obviously 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 people think, because you will get obviously a much, much better usage experience in terms of quality and speed, and certainly capacity than you get with 4G. Importantly, the intelligence that we have, it will be superior to Wi-Fi. I think it will be a very exciting moment for the industry and everybody's working hard around the world to basically get ready with infrastructure, which is obviously foundation number 1, and 2, the mobile devices.
Which means that from an Intertek standpoint, the testing will be very interesting because it's going to be more complex technology and so forth, et cetera. You know 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 an exciting 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 important. We see a lot of trends with toys replicating instruments, as keyboard, guitars, and drums. There is a lot of things happening. The other thing I was going to say, a bit of market intelligence. The old toys are now getting out of fashion.
I was in Italy a few weeks ago, the old traditional Italian toys are back in fashion. We are very excited to be part of the toy industry, and as you heard, our business is doing very well.
Thank you.
The next question comes from the line of Paul Sullivan from Barclays. Please go ahead with your question.
Good morning, everybody. A couple from me. Firstly, on
Paul, are you still there?
The next question comes from the line of Rajesh Kumar from HSBC.
Just one second. Sorry, we didn't hear the question from Paul, we probably should ask Paul to repeat his questions. Paul, are you there?
Paul's line has dropped.
All right. Okay.
We go ahead with Rajesh Kumar from HSBC.
Of course, yeah.
Thank you.
Hi. Good morning. Thanks for taking the question. 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 pitching this ATIC model compared to the past or compared to your peers?
Thanks for your questions. Look, on outsourcing, it's an integral part of our sales activities. Typically, we focus our sales activities on five priorities. One is customer retention. Basically making sure you farm and develop your existing relationship. Two is client penetrations, getting more business inside an existing clients. Two is new customers. Obviously, four is ATIC, and I'll cover that, and five is outsourcing. Outsourcing 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. There is no question that we are doing well, and its market is continuing to make progress. When we talk to our clients, we have really good discussions.
It's a good business, but it's long-term discussions, because when a company outsources to Intertek, it's obviously a structural decision, 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. Typically, the way we do it, Raj, is basically we use our existing relationship within customers' organizations to have a broader conversation with our contacts, but also, people at a slightly higher level, which enables 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. Indeed, our ATIC selling approach is more of 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 a head of supply, a head of risk. It's really important for us, and it's part of the way we manage our client relationships.
Appreciate the color. Thank you.
Thank you.
The next question is from the line of George Gregory of Exane. Please go ahead with your call.
Good morning. Two 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. Secondly, within the trade business, the second half margin saw a decline, albeit that was on a much softer comp. Bearing in mind 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 bang in line. 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. What we saw in the second half is in line with what we saw in the first half, essentially a portfolio mix effect. There is nothing more than that in the numbers. Okay?
Okay. Thank you.
You're welcome.
The next question is from the line of Paul Sullivan from Barclays. Please go ahead with your question.
Hello, can you hear me? Second time lucky. Morning, everybody.
Welcome back, Paul.
I don't know what happened there. Sorry about that. Anyway, just-
You probably need 5G.
We definitely need something here, I tell you that. Going back to just product, how should we think about the slight sort of change in guidance? I think last year you were talking about robust growth in 2018. Now you're talking about good growth. It seems like more of a nuanced change than anything more substantial. Is that correct?
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. As you know, it's the beginning of the year, and we tend to be considered in our guidance. A few things I would say, if you look at the objective 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 of soft lines, hardline, and electrical. That's the main point. The nuance, to use your terminology, is basically around the edge on certain business lines.
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 get a bit of a base effect here. Regulatory in the chemical and pharma front, as you probably recall, there was a change of regulation with REACH at the end of H1. We're going to be competing against that. These are essentially the nuance you're talking about. Personally, I'm not worried about product. We've had a stellar performance. Look at the margin. We are really firing on all cylinders here.
Great. Thanks for clearing that up. Just to follow on some housekeeping. Depreciation amortization, it went down year-on-year. How quickly does that trend up towards CapEx? On restructuring charges, in the absence of material M&A, should we assume that restructuring charges sort of trend to zero this year?
Paul, they are easy answers. We don't guide on either/or, we'll take it a step at a time, if you don't mind. The year just started, right?
Okay. Cool. All right. Thank you very much.
Thank you.
The next question is from the line of Andy Grubler 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? 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 remains 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 mix? Then thirdly, again, on Alchemy, and I think you've kind of hinted at the answer to this. With the first year in line with expectations, you said you thought it'd be a few years before it was up to group margins. Is that expectation still around about year 3 that it gets up towards group margins, please?
Yeah. Thanks, Andy. Look, let's start with the last question first. Look, we are really excited about Alchemy, as I said in the first slide. The feedback we're getting from our clients is really tremendous. There is really a need for front-line 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. We just went to a global food conference in Nice last week, and our stand was busy as we've never seen it before. Some major corporations that are based here in Europe had never heard of how technology could help food manufacturing operations to really cope with the huge issue, which is basically high churn, low skilled, low paid workers, not even showing up from time to time to do the job.
We had retailers saying, "Wow, my goodness, we have all these millennials working for us." It's a different type of population to manage and to engage. The guidance we gave in July last year when we announced the acquisitions remains 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. We do also investments in lab expansions where we open new facilities around the world. Last but not least, innovation. That's basically what's in the CapEx, and this is how we basically make the decisions.
Our guidance remains between 4%-5% of revenue as a proxy. I think what I said in the opening questions on Q4, I said that although we don't give quarterly data because we report at the end of October, I can say that our Q4 organic growth at the group level was slightly better than Q3. I also said that between Q3 and Q4, there was no change of organic growth trajectory on soft lines, hard line electrical, which are our global scale consumer goods businesses in China. That's what I said, Andy.
Okay. We didn't say that Q4 product hadn't changed potentially from Q3, but just on those soft and hard lines in the E&E segment.
I thought that was the question that I was being asked.
Yeah.
People are worried about China and all these things. I think, look, I've given you a lot of data points that I typically don't to reassure you that everything is fine. I think if we leave it to that, Andy, it would be great.
Okay. Can I just ask you one more on the CapEx one, if I may? If you look back to when you first started versus now with CapEx for sales lower, of the four blocks you talked about, which one has changed the most from maintenance, expansion, technology, and innovation?
I think what I would say has changed the most is not the components. It's the way we basically go about approving CapEx. It's basically an investment like an M&A. It's the same approach. As you know, we have a margin accretive portfolio strategy, and we make sure that we target our CapEx investments in the high growth, high margin sectors on a sustainable basis. That's the major change. It's the way we allocate CapEx to basically deliver our portfolio strategy.
Okay.
Maintenance, Andy, when it comes to maintenance, zero defect quality is Bible for me. We do what's required here, right? There is no issue here.
Okay, brilliant. Thank you very much.
Yeah.
The next question is from the line of Alex Mead of JPMorgan. Please go ahead with your question.
Good morning. Thanks very much for taking my questions. Just two, please, one 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. I wonder if I could just ask you what you think drives that, or whether you think it can continue to grow at that pace. 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 impact would be for depreciation and finance costs on the 2018 numbers, please. Thanks.
I will start. Why don't we have Ross start with IFRS, and I'll do recalls later.
Alex, obviously, you've seen the note in the accounts that talked about the increase in the liabilities that we've estimated between GBP 250 million and GBP 270 million, which will feed through prettyInto the results for next year. In terms of specific line items in the P&L, we're not giving exact guidance across each of the component parts. But as we said in the announcement, at an 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 take, 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. All of that has created a lot of complexity. As you know, corporations have focused for the last two or three decades on shareholder value creation, and in a lot of cases, they've not spent enough time thinking on the systemic end-to-end risk management through a supply chain, which takes time, because unless you have a problem, you don't think you have a problem. The reason why you're seeing an increased number of recalls is because the pace of innovation is not stopping. It's accelerating, as a matter of fact.
There is always this conflict between the commercial agenda, how fast do I go to market versus is my product ready? This is making it even higher risk for corporations to launch new products. The other thing I would say, if you take global corporations, they've lost a lot of their local knowledge, and we see it a lot in our regulatory business, where they don't have the local legal, technical departments. I can tell you a personal example. When I was at Colgate-Palmolive, product manager at Colgate-Palmolive, France, we had a head of technical, a head of legal, a head of regulatory. Corporations over the years have moved to European headquarters, sometimes global categories, and they've lost this local knowledge. You've got a really interesting situation here where the world of corporation is more and more complex.
They have to accelerate the pace of innovations, they've lost a lot of internal capability, which explains some of the mistakes we are seeing, our clients are aware of it. That's why going back to TQA, we see an increased focus on operational risk management, which is at the heart of what we're trying to offer to our clients.
That's really helpful. Thank you.
The next question is from the line of David Ryan 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? Just as a follow-on from that, can you give us the growth progression between these two markets over the year? I think let's take that one first, and I'll get onto my second one.
Well, if you give me the two, then it's easier. I can answer them back to back. What is the other question?
Okay, sure. The second one relates to CapEx inspection services. You mentioned a slight decline in growth for the year. I was hoping whether you can tell me whether there was positive growth in the second half of the year compared to the prior year.
Look, on the China business, we don't disclose all this data on China, but what I can tell you is that our domestic business is around 25% of our total business in China. Of those businesses, export and domestic, that's the fastest-growing because of the Chinese economy growing, and it's growing at double digits. 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.
Yeah. 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. We believe that the investments that we are seeing from oil and gas companies will enable us to deliver better revenue performance moving forward. We are talking about solid this year.
Okay. Thank you. 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.
Morning.
Within the products outlook, I was surprised that the business assurance is set to slow. I know there are tough comps from the ISO recertification work, but I didn't think that was very significant for you, while of course you will have Alchemy coming into organic growth in H2 next year. I guess can I ask two questions: Can you give more detail on that slow outlook business assurance? Secondly, what are you currently projecting for Alchemy growth?
On Alchemy, will not be in our organic growth next year, right? This year, sorry. It takes another calendar year for Alchemy to be in organic growth. What we are basically Sorry?
When did it close? Sorry. I thought you closed it in August.
Yeah, we wait for the next calendar year to do that.
Okay.
It will not be in organic growth in 2019. Okay. As far as Business Assurance is concerned, we have two types of businesses in our Business Assurance. We have what we call ISO certifications, and we got supply management or audits. 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 9001 and 14001. Basically, you've got to take that into consideration.
Okay, great. Thank you very much.
You're welcome.
If you would like to ask a question, please press Star 1 on your telephone keypad. You will be advised when to ask your question. The next question comes from the line of George Gregory of Exane. Please go ahead with your question.
Morning. Sorry, just one quick follow-up.
Sure.
Going back to the impact of Alchemy in the second half. I think you cited that the margin benefited to the tune of 10 basis points in the second half from M&A and disposals, which was similar to the first half, I believe, despite the second half being diluted by the impact of Alchemy. I am just wondering what the offset to that was in the second half. I wonder whether you could provide any color on that, please.
Yeah. Look, it is not complicated. If you look at the acquisition that we have made in 2018 and 2017. So we have made some really good acquisitions, which are margin accretive, and that is offsetting the dilutive effect of Alchemy. It is nothing more than that.
Okay. Thank you.
You're welcome.
The next question comes from the line of Will Kirkness of Jefferies. Please go ahead with your question.
Morning. Thanks.
Morning
question on the 5x5. 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? Obviously, you don't have to say which ones they are, but just whether there's anything that might need to be looked at into this year. 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. Thanks.
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. There are some opportunities to basically continue to make some improvement. 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. Clearly, it's an area where we believe we can do better. If I look at site consistency of performance, if I look at countries, if I look at business lines, we do have opportunities, of course. That's what we are doing with our performance management approach.
Mind you, as you drive higher and higher performance, the best get better. Obviously, the weakest might get further away because the best gets better. This span of performance remains a huge priority for us, that's what we do with our performance management that's delivering 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 will have seen the investments that we've done in terms of cybersecurity, we continue to invest there. You have talked about sustainability. It's not only acquisition, it could be organic innovation too, right? 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 lines 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.
You've not seen any tailwind as suppliers move from China to Vietnam or more products being shipped out?
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. We are monitoring, obviously, every single step that any client might want to take. 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, or the first decision has been made between the U.S. and China? The renminbi has helped to offset most of the increase. 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 Intertek.
As far as the China question is concerned, no, we've not seen any change. Okay?
When you see a change, do you normally get a 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?
We work with more than 270,000 clients around the world. Your question is 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 cost of doing business in that country. That will be also reflected in our margin, and therefore, 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. I'm not worried about change of manufacturing location because that's something we do all the time with our clients.
Understood. Thank you.
Okay.
I will now hand you back to your host to conclude today's conference.
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. Thanks again. Bye-bye.
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