Welcome to the Intertek November 2018 trading update call. My name is Jess, and I'll be your coordinator for today's event. For the duration of the call, you will be on listen only. However, you will have the opportunity to ask questions, and this can be done by pressing star one to register your question at any time. If at any point you require assistance, please press star zero on your telephone keypad, and you will be connected to an operator. I will now hand over to your host, André Lacroix, to begin today's call. Thank you.
Good morning to you all, and thanks for joining us on the call. I have with me Ross McCluskey, our CFO, and Denis Moreau from our investor relations team. This morning, we'll give you an update on the group trading performance for the first 10 months of the year and discuss the outlook for the rest of the year. There are essentially three main messages for our call today. First, I'm pleased to say that Intertek is going from strength to strength. We are making consistent progress day by day on strategy and performance. We are seeing a high demand from our customers for our global ATIC solutions in the product trade and resources sector. I'm pleased that we have seen broad-based organic revenue growth acceleration in the last four months with organic revenue growth of 4.5% at constant rate.
That gives us a good trading momentum as we exit 2018 and enter 2019. The second message is that we are on track to deliver our 2018 target of good organic revenue growth with moderate margin progression at constant currency and strong cash conversion. The third main message is that we've completed the acquisition of Alchemy in August. The integration is progressing well. We've started presenting Alchemy's unique people assurance solutions to our clients, and we are really excited about the attractive growth prospects ahead with our people assurance services. Let's start with our 10 months trading highlights. In the last four months, the group revenues were GBP 968 million, an increase of 6.1% at constant currency and 3.8% at actual currency. Organic revenue at constant currency was at 4.5% year on year.
Our product divisions grew by 6.1%, our trade divisions grew by 2.8%, and our resources division delivered revenue growth of 1.2%. On a year-to-date basis in the January to October period, the group revenues were GBP 2.3 billion plus 4.8% at constant currencies and plus 4.5% at actual currency. Our revenue performance at constant currency was driven by good organic growth of 3.8% and by the contribution of recently made acquisitions. Our product division delivered a robust performance, growing organically at 5.9%. Our trade division was up with a 1.5% growth year on year, and our resource division was stable overall. Our disciplined approach to cost and cash management remains firmly in place. I'd like now move to guidance.
In 2018, we expect to deliver good organic revenue growth at constant currency driven by robust organic growth in our product-related businesses, solid organic growth in our trade-related businesses, and stable organic revenue performance in our resources-related businesses. From a profitability standpoint, we expect to deliver a moderate margin progression at constant currency, leveraging our portfolio strength, our pricing power, and our systemic approach to performance management. We continue to expect to deliver strong cash conversion. We are investing in growth and expect our full-year CapEx investment to be circa GBP 140 million. On net debt, after the acquisition of Alchemy, we continue to expect to close the year with a net debt of GBP 800 million-GBP 850 million before any additional M&A activities and based on no further material movement in Forex. I just like to cover now Forex.
Based on the first 10 months of the year and the spot rate for the remainder of the year, the average selling rate applied to the full year results of 2017 would provide a reduction of 350 basis points at the revenue level and 400 basis points at the operating profit level. Let's now discuss the performance of each of our divisions. All the comments I will make will be at constant currency, and I will start with product. Following an organic growth of 5.7% in H1, our product business slightly improved its robust growth momentum with 6.1% organic growth in the period July to October. On a year-to-date basis, our product-related businesses delivered an excellent 5.9% organic revenue growth performance, driven by broad-based revenue growth across business lines and geographies.
Our softline business delivered solid organic revenue growth, benefiting from the supply chain expansion of our clients in new markets, the rapid expansion in the footwear sector, and the increased demand for chemical testing. Our hardline business reported good organic revenue growth, driven by increased demand for chemical testing and innovative inspection technology. We delivered robust organic revenue growth in our electrical and network assurance business, benefiting from electrical appliances innovating to provide better efficiency and connectivity to their consumers, increased demand for IoT assurance services, including cybersecurity. Our business assurance business delivered strong organic revenue growth driven by ISO standards upgrades, the increased focus of corporations on supply chain and risk management, and increased consumer and government focus on ethical and sustainable supply.
Our Building & Construction business delivered robust organic revenue growth, and that was driven by the continuing increased demand for more sustainable and high-quality commercial buildings and increased investments in large infrastructure projects. In our transportation technology business, we delivered double-digit revenue growth as we are seeing continued investment from our clients in new models and new fuel-efficient engines. Of course, we are seeing an increased scrutiny on emissions. We generated robust organic revenue growth in our food business, driven by continuous food innovation, increased focus on the safety of supply chain. We saw robust organic revenue growth in our chemical and pharma business, and we've seen increased number of SKUs and also increased concern of corporations on product safety and traceability. For the full year, we expect our product-related businesses to deliver robust organic revenue growth. Let's now discuss trade.
Following an organic growth rate of 0.7% in H1, we saw an organic growth of 2.8% in the period July to October in our trade-related businesses, driven by strong momentum in Caleb Brett and GTS. On a year-to-date basis, our trade businesses reported solid organic revenue growth of 1.5%. Our Caleb Brett business reported on a year-to-date basis a solid revenue performance and will continue to benefit from the global and regional trade structural growth drivers. Our government and trade service business delivered robust organic revenue growth on a year-to-date basis, driven by volume growth coming from existing and new contracts. Our agri business reported on a year-to-date basis, a revenue performance below last year, as we saw low export activity due to a baseline effect in some of our markets that benefited from strong trading activities in 2017. For the full year, we expect our trade-related businesses to deliver solid organic revenue growth.
Let's now discuss resources following a minus 0.7% organic revenue growth decline in H1. We saw an improved trading performance in the July-October period with 1.2% organic growth, with stable revenue in CapEx inspection services and a stronger momentum in minerals. Our resource-related businesses have delivered stable revenue on a year-to-date basis. On a year-to-date basis, the revenue from CapEx inspections was down year on year, while the level of CapEx inspection activity was stable, we continue to see some pricing pressure in the market. OpEx maintenance services continue to benefit from stable volume in a price-competitive environment. We delivered robust organic revenue growth in the minerals business, reflecting an increased level of demand for testing activities. For the full year, we expect our resource business to deliver the stable organic revenue performance. I would like now to give you an update on M&A.
Our M&A strategy, as you know, is focused on the acquisition of leading innovative solutions that are scalable across Intertek. In 2018, we've made several acquisitions in attractive growth and margin sector. Since the publication of our H1 results, we have completed the acquisition of Alchemy. Alchemy is a leading SaaS provider that expands our high margin and capital-light assurance offering with people assurance services. Alchemy focuses on the frontline staff of industries where high turnover make traditional classroom training very costly and inefficient. The demand is growing for solution that identify, monitor, and close skills gaps among frontline employees. Alchemy has scalable solution that can be rolled out across many different industries and geographies, and we are very excited about the growth prospects ahead. As discussed at the time of the announcement and in accordance with IFRS, we revalue the Alchemy deferred revenue balance at the point of purchase.
This will result in an acquisition accounting adjustment when we report the 2018 and 2019 IFRS revenue, and we expect Alchemy's IFRS contribution to the group revenue to be circa GBP 11 million in 2018. Just to remind everyone, this is purely an accounting adjustment and has no impact on cash flow generation. Over the past few weeks, I've spent time working with the Alchemy teams in Bozeman, Montana, and Toronto, and I've been very impressed by the quality of the operations and the excellent relationship we have with our clients. Like I do, I spent quality time in the last four months discussing our ATIC opportunities with our clients. I got the opportunity to talk to our clients about the three distinctive Alchemy platforms, and they were very impressed by our industry-leading approach to people assurance.
In conclusion, the group is on track to deliver its 2018 targets of good organic revenue growth with moderate margin progression at constant currency and strong cash conversion. Intertek is going from strength to strength. We are pleased with the continued progress we are making step by step and every day on both strategy and performance. We are uniquely positioned to seize the exciting growth opportunities ahead with our total quality assurance value proposition that provides our customers with a superior end-to-end customer service. Thank you very much for your time, we'll be happy to answer any question you might have.
If you would like to ask a question, please press star one on your telephone keypad. If you change your mind or want to withdraw your question, please press star two. Please ensure your line remains unmuted locally and you will be prompted when to ask your question. The first question comes from the line of Paul Sullivan from Barclays. Please go ahead.
Good morning. Good morning, everybody.
Morning.
Just a couple from me. Firstly, on resources, André, are you ready to sort of call the bottom on the oil and gas cycle? In your outlook, are you sort of focusing on more of a return to growth as we head into 2019? Just on trade, I mean, it looks like trade has stepped up a little bit. Perhaps you could have even have shifted it from solid to good. Could you perhaps just run through the changes you're seeing there on the ground, especially in light of what we're hearing about price competition in the U.S. Thank you.
Thanks, Paul. Look, I think both questions are related to essentially the oil and gas industry. Let me just make a few introductory comments. I think the oil and gas industry, from our perspective, is in a better place. You obviously will have seen that there is continued increase in demand for oil and gas, with getting closer to 100 million barrels a day. We obviously have seen destocking of some of the excess stock that was happening at the end of 2016. There is now a better stocking level in the industry, and importantly, we are seeing a better match between the daily production, if you want, and the daily demand. All of that, if you want, is making the industry obviously in a much better position than it was.
You will have seen that all the public oil and gas companies that have reported their numbers are seeing increased revenue growth, better profitability. A lot of them are now having double-digit margin. There is no question that there is light at the end of the tunnel. That's the way I would say it. Specifically, in your first question, what am I seeing in the CapEx inspection business, which is basically the core of our resource business, the rest being obviously minerals and a little bit of OpEx. We've seen, obviously, a stable revenue in our CapEx inspection business in the last four months, which is sequentially better than what we've seen. There is still pricing pressure, but the volume obviously has started to improve, and that's really good news.
There is no question that given the lack of investment in exploration and production, investment over the last few years, we are seeing an increased interest in future CapEx investments from our clients, which makes us believe that, yes, it looks like we are seeing the bottom, and we should see growth ahead. We are very well-positioned, as you know, with Moody. This is a high-quality business. We've got strong market presence, excellent relationship with our clients, and obviously there is a lot of interesting activities happening on the CapEx at the moment. As far as trade is concerned, you will remember that when we talked about the first half, really the area for us that was a bit behind in terms of performance was the U.S. Not because of price competition, but because the U.S. was going through a strong destocking.
This is the point I made at the beginning of the statement. In the second half, obviously, the destocking activities has normalized, and we are seeing an improved momentum in our Caleb Brett business in the U.S. The rest of Caleb Brett is doing very well, and we still believe that solid is the right objective to qualify the outlook for the year.
Great. Thank you very much. Can I just put one quick follow-up? Can you just perhaps clear up the trading day impact on organic in the second half? Should we view the first nine months or the nine months year to date organic as a better reflection of organic trends through this year? Thank you.
Yeah. On year to date basis, there is no difference of trading days. The organic growth that we have reported for the first 10 months of the year, 3.8%, is really not impacted by trading days.
Okay. Thank you very much.
The next question comes from the line of Tom Sykes from Deutsche Bank. Please go ahead.
Morning, everybody. I wondered if you could just make some comments on your expectations for the impact of tariffs, and indeed whether you'd actually experienced any, obviously in China from the U.S., and whether you'd experienced any early pull-through of activity which may or may not be boosting current activity levels in products, please. Maybe just in ForEx, can you just clarify? That seems to be a reversal from the movement in revenues versus the movement in margin from the half year, and maybe could you just clarify why that is, please?
Yeah, sure. Happy to do so, Tom. Let me just start with the second one. It's a brief answer. It's basically really some sensitivity on ForEx on the edges for us. It's essentially rapidly strengthening the last few months of the pound against some European currencies and obviously the renminbi. As far as tariff is concerned, look, we are, as you know, in very close contact with our clients to really understand how they look at the situations. What I'm going to try to give you is the perspective of our clients and how we work with them, because I think that's the best way to think about what does it mean for Intertek clients.
The first thing I would say is that we all know that, our product business, the volume of activities is not linked to the number of items being exported from one country to the other. It's basically linked to the number of SKUs that we test and also the average test per SKU. Right? I think we've talked about it in the past. It's very important to remember that. The second thing I would say is the measures that have been announced so far, and I'm talking about obviously what's being implemented, is relatively small in the scheme of things. It's 0.5% of the global GDP, we know that the renminbi devaluation has more than offset that. What is really the main discussion we are having with our clients? Basically, we've been working with, obviously, 270,000 clients for many, many years around the world.
When a company makes a supply chain decision, it's a strategic decision. When they decide to produce a given SKU in a country, this is not for the short term. This is for the long term. What we are saying is that obviously companies are taking the time to assess what does it all mean. Before they change their supply strategy, which is very costly, by the way, and very complex. They are looking at a lot of levers they have, like obviously increasing the price, renegotiating the trade margins, trying to obviously make some productivity initiatives, improve their margins, and reduce, obviously, the prices with their suppliers. So far, we have not seen any development that makes us worry about the fact there is a change of production locations for our clients from China to somewhere else.
This is today, and we are continuing to monitor the situation. Over the years, we've seen companies moving their supply chain from China to Vietnam to India to Bangladesh. We do that all the time, working with our clients, following their supply chain. Frankly speaking, we see opportunities because two things, we are global, so we work with them in a new country where they produce, and also we provide them with assurance solutions to help them manage the transition. In a nutshell, we are basically very close to what's happening in supply chain of our clients. There is nothing today that tells us there is a departure from China due to tariff increase. Would there be, frankly speaking, the Intertek business model is well-equipped to deal with that. That's why we do every single day.
We always follow the supply chain of our clients. That's how we look at it, Tom.
Thank you very much for that answer. Just to follow up, in terms of locations of production, and I appreciate it takes some time for your clients to move. Is there anything specific about part of your testing base in China that you think would be particularly difficult to move or replicate in another country? I mean, the cost structure might be a little bit different, but in terms of the actual capabilities that you have.
If you look at our main product businesses in China, which is electrical appliances, softline, hardline, transportation technology, business and assurance. These are basically global solutions that have consistency of service around the world. We have seen, over the years, production moving from one location to the other. The advantage of our business model is that we can provide independent global consistency of services. I'm not too worried about that, Tom. That's a good question.
Okay. Thank you. I'll leave it there.
You're welcome. Thank you.
The next question comes from the line of Rory McKenzie from UBS. Please go ahead.
Morning, all. Two follow-ups from me, actually. Stripping out the working days that were a headwind in H1 and a tailwind in July to October, we say that products have slowed to plus 5.0% growth in that July to October from 6.6% at the start of the year. Firstly, do you think those numbers are fair? Is that the right adjustment? Secondly, in the statement, you discussed the year-to-date trading per sub-segments. Would you describe any of the growth performances differently if just looking at the last four months? Those two on products, please.
Yeah. Look, we are very pleased with our product performance. On a year-to-date basis, 5.9% at constant currency is, in my view, an excellent performance. This is obviously another strong year. The performance in the July to October period has been consistent. I think we are in a good place.
Okay, cool. Sorry if I missed it in the answer to Tom's question just now, but did you give an actual proportion of your products business in China that works on items that are exposed to the current tariffs?
No, we're not giving that type of disclosure because it's, frankly speaking, we work with 270,000 customers around the world. Each of them does hundreds of SKUs with us. To give you an idea of how many SKUs could be potentially changing production locations is not an exercise we are comfortable doing out of respect for you guys. We got to be professional, and we're going to call it if we see it. At the moment, we don't see it.
Okay. Fair enough. Then actually just one more, if I may. On Alchemy, now it's integrated, what's the current thinking about the pace of expansion to your existing client base and grow their 1,100 customers?
Look, I think the integration is doing very well. The level of subject matter expertise in the three different platforms is second to none. We are basically now starting to present the solutions to our clients. I've done, as I said, several meetings myself. You should have seen the eyes of our clients. They are all facing the same issue in multi-site being either retail or being production operations, this is very difficult to get the consistency of operational delivery. Companies that worked on processes and equipment that now understand they need to work on skill and behaviors. Frankly speaking, what the platforms do are just second to none. As you probably know, I used to run Burger King internationally, and head-to-head, the Alchemy platform, it would've been a different type of role.
This is just amazing what they can provide to the brand owners, from not only audit of skills in the restaurants, but also turnover management, importantly, engagement and performance management in real time. This is really, really impressive. There is nothing like that in the world of assurance. We are really excited.
Great. Okay. That sounds good. Thank you.
The next question comes from the line of Andrew Grobler from Credit Suisse. Please go ahead.
Hi. Good morning. Just a couple from me, if I may.
Great.
Sorry to go back to this topic because it's not the most important thing after some good performance. Just on the day adjustments, are we right, just so we get this right, that it was about a 2% headwind in May and June, and it's about a 1% tailwind for the last four months, just so we can clarify that number. Then secondly, within business assurance and certification, as that business continues to grow, can you break out or give us some help about thinking through the ISO certification, which presumably was quite a big support for growth in that business through this year? Kind of what level of tailwind has it been, and what kind of headwind will we see within that portion of the operation over the next 12 months, please? Thank you.
Okay. Look, Andy, you know the company extremely well. Your math as good as mine. Let me just be super clear. The year-to-date organic growth for the group is 3.8%. July, October was 4.5%. Year-to-date April was 4%. May, June was 2, 3%. H1 was 3.4%. There was a number of day factor impacting on May, June performance. On year-to-date basis, we are at a set number of days, which means indeed that in July, October, there was one day more. I would be very careful of not trying to do too much calculations because some of the business lines are more dependent than others on number of days. You're right, that on year-to-date basis, there is no difference in terms.
Yeah
of number of days.
Okay.
3.8% is without any change in number of days at constant currency, which is in line with what we had expected. As far as business assurance is concerned, look, as you know, what we do in our assurance business is going beyond the ISO certifications. Of course, we are acting in the ISO market, and of course, we've seen an impact, positive impact, over the last 9 months of the quality standards upgrade that you've talked about. We do much more than that, and what's really important for us is this diversified approach, which provides ISO and non-ISO, and we've talked a lot about it. Assurance is our fastest growing service, and we, frankly speaking, are not worried about assurance moving forward, notwithstanding the upgrade of the ISO standards that had a positive impact in the first 9 months.
Longer term, this will all wash through, and as you say, assurance is growing very quickly. Just in the shorter term, so we can think about that division through next year, is there any kind of range of positive versus negative that we can think of for 2018, 2019, just within BA?
Look, I think for BA, we've maintained our guidance of strong for the year. We're not guiding for 2019 at this moment of time. We'll do it when we announce our results. Business assurance is a growth business, and what we're seeing in terms of innovations, new clients, client attraction, is very positive. I wouldn't worry about assurance, Andy, if I were you.
Okay, great. Thank you very much.
You're welcome.
The next question comes from the line of George Gregory from Exane. Please go ahead.
Good morning. Two for me also, please. Firstly, just on trade, helpful color on the trading day impact. If we just were to kind of normalize for trading days and the impact of hurricanes in the comparative period, would you say that the performance kind of through the year has been broadly constant? I suppose if we were to adjust for those two impacts, would look at least to have been broadly stable. Secondly, just following up on China. Perhaps without getting into the intricacies of the tariffs enacted to date, I wondered whether you could at least disclose your exposure to Chinese consumer goods exported to the U.S., please. Thanks.
Okay. Thanks. On the latter, we do not disclose this number. As you know, we've got a very clear policy of what gets disclosed, this is what we do. I'm sorry, I cannot give you more color on that. As far as the acceleration that we've seen in July, October, I think, if you look at the trade business, which indeed was impacted by the storm last year, has not really any issue with trading days because we operate 24/7. We've seen an acceleration. I think we are seeing an acceleration, we are pleased with where we are. Thank you.
Okay.
The next question comes from the line of Edward Steele from Citi. Please go ahead.
Thanks very much. Morning, all. Just one question from me. Great to see the Caleb Brett brand back. Obviously, it's got great heritage. Is there anything else that this brings into the equation potentially about Caleb Brett? Could it be more than just a renaming? Are there some strategic options that you're considering? Obviously, there's a lot of competitive pressures in that industry at the moment. Thank you.
Thanks for asking the question. Caleb Brett is basically a very important product brand that we have. One of the things we are doing from a branding standpoint, now that we have rebranded the company as Intertek: Total Quality. Assured., we are very keen to make sure that there is a clear differentiation at the product level. You will have seen that we've launched several innovations with specific program, like Inlight in the Business Assurance. We basically have kept the PSI brand name to operate Building & Construction business in the U.S. because this is a strong brand name. We are using the ETL, Edison Testing Laboratories, brand in our electrical business. We felt that it was very important for clients to know that Intertek in a cargo business was Caleb Brett, the company that created the industry, who got industry-leading positions.
It's purely a differentiation strategy from a product and service standpoint to basically improve our market share. Nothing more than that, Ed.
Brilliant. Thanks very much, André.
The next question comes from the line of Eric Poulain from Kepler Cheuvreux. Please go ahead.
Yes, good morning. To follow up for me on the comps question, especially on the product side, I think you answered the business assurance ISO comp issue. Another standout is the transportation business double-digit growth. Would you expect that to continue in the year ahead, or are there some specific contracts that are boosting this unit? That's one. Second, on the resource, minerals have been obviously strong this year, and again, would you expect that to continue, or is there here perhaps a bit of a plateau in terms of the extrapolation of that division? Thank you.
Okay. Thanks. Look, as I said in the previous question, we do not guide at the moment for 2019. Let me talk about the momentum that we're seeing, both in our product, transportation business, and resources. Look, transportation technology is a very good business for us, and you know that the automotive industry has to reinvent itself from a combustion engine standpoint. The amount of innovation that's going in, obviously, reducing the consumption and the emissions of diesel and obviously fuel engines. Importantly, the investment that our clients are making in terms of hybrid electrical vehicles are very significant. This is really good for us. We have subject matter expertise in that area. We cover these services globally, and that's the type of growth we are seeing. In addition to that, OEMs have to test cars on the road.
Let's not forget the autonomous vehicle driving opportunity, where we play a major role in the U.S. with all manufacturers. Look, while I'm not going to give you a precise guidance for transportation technology in 2019, we are not worried about transportation. It's going from strength to strength, and we continue to invest, obviously, to see this growth. As far as minerals is concerned, minerals for us is a relatively small business. What we are seeing at the moment, we are seeing some very good performance in our three core markets, which is Australia, Indonesia, and China. There is nothing telling us that we should worry about the momentum. We are seeing continuous increased demand. It started last year, so it's basically very consistent and we are very pleased with performance.
Thank you.
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If we don't have any question, I'd like to thank everyone for being on the call this morning. I know it's a busy day. As usual, we're here if you have any additional questions, and thanks for your time today.
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