Trading Update

Nov 27, 2018

Earnings release

Oh, and 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 and you will be connected to an operator. I will now hand over to your host, Andre LaCroix to be in 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 Benny Morrow, from our Investor Relations team. This morning, we'll give you an update on the group trading performance for the 1st 10 months of the year and discuss the outlook for the rest of the year. There are essentially three main message for our call today. First, I'm pleased to say that Intertek is going from strength to strengths, we are making consistent progress day by day on strategy and performance. We are seeing a high demand from our customers for 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 4 months with organic revenue growth of 4.5 percent 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. And the 3rd main message is that We've completed the acquisition of Alchemy in August. The integration is progressing well, which 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. So let's start with our 10 months trading highlights. In the last 4 months, the group revenues were £968,000,000, an increase of 6.1% at constant currency, and 3.8% at actual currency. Organic revenue at constant currency was up 4.5% year on year, Our Product division grew by 6.1%, our trade divisions grew by 2.8% and our Resources division delivered revenue growth of 1.2%. On year to date basis, in a January to October period, the group revenues were £2,350,000,000, plus 4.8% at constant currencies and plus 0.5 percent at actual currency. Our revenue performance at customer currency was driven by good organic growth of 3.8 percent 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 remained optimally in place. I'd like now to 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 strengths, 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 1,000,000. On net debt, after the acquisition of Artemium, we continue to expect to close the year with a net debt of 800 to 8 £150,000,000 before any additional M and A activities and based on no further material movement in ForEx. Just like to cover now Forex based on the 1st 10 months of the year and the spot rate for the remainder of the year, the average selling rate applied to the year results of 2017 would provide a reduction of 350 bps at the revenue level and 400 bps at the operating profit level. Let's now discuss the performance of each of our division. All the comments I will make will be at constant currency, and I will start with product. Following an organic growth of 5.7 percent in H1 or product business through IP 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 repeat expansion in the foodwear sector and the increased demand for chemical testing. Our hard line 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 of grades, the increased focus of cooperation on supply chain and risk management, and increased consumer and government focus on ethical and sustainable supply. Our Building And Construction business delivered robust organic revenue growth that was driven by the continued 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 And of course, we are seeing an increased scrutiny on emissions. We generated robust organic revenue growth in our food business, driven by continuous full innovation increased focus on the safety of supply chains. We saw robust organic revenue growth in our chemical and pharma business, I will see an increased number of SKUs and also increased concern of corporations on product safety and traceability. For the full year, we expect our product light businesses to deliver robust organic revenue growth. Let's now discuss trade. For an organic growth rate of 0.7 percent 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 Catad Bread and GTS. On a year to date basis, our trade businesses reported fully dogmatic revenue growth of 1.5 percent. Our cat bed business reported on a year to date basis as solid revenue performance and we 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 Agree business reported on a year to date basis a revenue performance below last year as we saw lower expected activities 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 percent organic revenue growth decline in H1. We saw an improved trend performance in the July October period was 1.2 percent organic growth with stable revenue in CapEx inspection services and a stronger momentum in Minerals. Our resource related businesses delivered stable revenue on year to date basis. On 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 mineral business, reflecting an increase 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 And A. Our M and S 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 trading very costly and inefficient. The demand is growing for solution that identify, monitor, and close skills gaps among frontline employees. RKMEA's 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 timing announcement and in accordance with IFRS, we'll revalue the Alchemy deferred revenue balance at the point of purchase. This will result in an acquisition accounting adjustments when we report the 2019 IFRS revenue, and we expect Alkemi's IFRS contribution to the group revenue to be circa 11,000,000 in 2018. Just to remind everyone, this is fuel unit accounting adjustment and has no impact on cash flow generation. Over the past few weeks, I spent time working with the Alchemy teams and in Montana and Toronto, and I've been very impressed by the quality of the operations and the excellence relationship we have with our clients. Like I do, I've spent quite a time in the last 4 months discussing our AT opportunities with our clients. I've got the opportunity to talk to our clients about the 3 distinctive academic 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're uniquely positioned to see 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. Please. And the first question comes from the line of Paul Sullivan from Barclays. Please go ahead. Good morning, good morning, everybody. Just a couple for me. Firstly, on resources, Andre, are you ready to sort of call the bottom on the on the oil and gas cycle? And in your outlook, are you sort of focusing on more of a return to growth as we head into 20 'nineteen. And, 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, but could you perhaps just run through the changes 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. Okay. Thanks, Paul. Look, I think I mean, both questions are related to, essentially the oil and gas industry. So let me just, you know, make a few introductory comments. I think the oil and gas industry from our perspective is in the better place. You obviously will have seen that there is continuous increase in demand for oil and gas with getting closer to 100,000,000 barrels a day. We obviously had seen a destocking of some of the excess stock that was happening at the end of 2016. There is now a better, you know, starting a volume industry And importantly, we are seeing a better match between the daily production if you want and the daily demand. So all of that, if you want is making the industry obviously in a much better position than it was. You would have seen that all the public oil and gas companies that have reported the numbers are seeing increased revenue growth, better profitability. A lot of them are now having double digit margin. So there is no question that there is light at the end of the tunnel. That's the way I would say it. So 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, you know, revenue, you know, CapEx inspection business in the last 4 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 investments 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 present, 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 because the U. S. Was going through a strong destocking. This is the point I made at the beginning of the statement. Now in the second half, obviously, the destocking activities has normalized and we are seeing an improved momentum in our cattle bread business in the U. S. The rest of cattle bread 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? In terms of can you just perhaps clear up the trading day impact on organic in the second half? And should we view the 1st 9 months or the 9 month year over year to date organic as a better reflection of organic trends through this year? Thank you. Yes, there is a on year to date basis, there is no difference of trading days. So the organic growth that we have reported for the 1st 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. Wondered if you could just make some comments on your expectations for the impact of tariffs. And indeed, whether you'd actually experienced any and, obviously, in China, from the US and whether you'd experienced any early pull through of activity, which may or may not be boosting current activity levels in in products, please. And maybe just in FX. Can you just clarify? So that seems to be a reversal from the the movement in revenues versus the movement in Rajee from the half year. And maybe could you just clarify why that is, please? Yes, sure. Happy to do so. Tom, let me just start with the second one. It's Sabrina. The answer is basically really you know, some sensitivity on ForEx on the edges for us. It's essentially a rapid strengthening last few months of the pound against some European currencies and obviously the, renminbi. As far as you know, 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. And 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 inter tech clients. The first thing I would say is that we don't know that, but 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 as 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 and we know that the renminbi devaluation has more than offset that. But what is really the main discussion we are having with our clients? Basically, we've been working with, obviously, our 270,000 France for many, many years around the world. And when a company makes a supply chain decision, it's a strategic decision. When I decide to produce a given SKU in a country, this is not for the short term. This is for the long term. So What we are seeing is that, obviously, companies are taking the time to assess, what does it all mean? And, you know, before they they they changed their supplies if you, which is very costly, by the way, and and very complex. I mean, they are looking at, you know, lots of, levers they have, like, you know, obviously increasing the price. Renegotiating the trend margins, trying to obviously make some productivity initiatives improve their margins and reduce obviously the price of their supplies. So, so far, we have not seen any, developments that makes us worry about the there is a change of production locations for our client from China to somewhere else. Now This is today and we're continuing to monitor the situation. But over the years, we've seen companies moving their supply chain from China to Vietnam, to India, to to Bangladesh. And we do that all the time, you know, working with our clients, growing their supply chain. And frankly speaking, we see opportunities because two things we are global. So we will work with them in a new country that they produce and also we'll provide them, you know, with assurance solutions to help them manage the transition. So in a nutshell, right? We are basically very, very, very close to what's happening as a flash in our clients. There is nothing today. That tells us there is a departure from China due to, tariffs increase. Would they be frankly speaking, the Intertek business model is well equipped to deal with that. That's why we do every single pay. And we always follow this attraction of our clients. So that's how we look at it, Tom, Okay. Thank you very much for that answer. Just to follow-up in terms of locations of production, and I know, I appreciate it takes some time for your clients to to move. But 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, I've said that the cost structure might be a little bit different for a little bit. In terms of the actual capabilities that you have, If you look at our main product businesses in China, which is electrical appliances, supplies, hard lines, transportation, technology, business assurance. These are basically global solutions that have consistency of service, around the world. And we have seen over the years, you know, production moving from one location to the other the advantage about business model is that we can provide an independent global consistency of services. So 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 Laurie Mackenzie from UBS. Please go ahead. Good morning. 2 kind of follow ups for me actually. Stripping out the working days that were a headwind in H1, and the tailwinds, in July to October. And we say the products have slowed to kind of plus 5.0% growth in that July to October. From 6.6% at the start of the year. So firstly, do you think those numbers are off air? Is that the right adjustment? And then secondly, in the statement, you discussed the year to date trading per subsegments. But would you describe any of the growth performances differently if just looking at the last 4 months, And so those 2 own products, please? Yes. Look, we are very pleased with our product performance on year to date basis. 5.9% at constant currency in my view, an excellent performance. And this is obviously another strong year and the performance in the July to October period has been consistent. So I think we are in a good place. Okay, okay. Cool. And I'm sorry, 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 and to give you an idea of how many SKUs could be potentially charging production locations is not an exercise. We are comfortable doing out of respect for you guys. We've got to be a professional and we're going to call it if we see it, but at the moment, we don't see it. Okay, okay, fair enough. And then actually just one more, if I may, on Alchemy, and now it's integrated what's the current thinking about the pace of expansion to your existing client base and grow their 1100 customers? Look, I think the integration is doing very well. The level of subject matter expertise in the 3 different platforms is set up to known. We are basically now starting to present the solutions to our clients. I've done, as I said, several meetings myself. And you should have seen the eyes of our clients. They are all facing the same issue in multi site being at a retail or being production operations. This is very difficult to get the consistency of operational delivery. Companies that work on processes and equipments then I understand they need to work on skill and behaviors. And frankly speaking, what the platforms do are just second to none. As you probably know, I used to run Burger King internationally and head ahead, the Alchemy platform it would have been a different type of role. I mean, this is just amazing what they can provide to the brand owners, from not only audit of skills in the restaurants, but also, you know, turn over management that importantly, engagement and performance management in real time. This is really, really impressive. I mean, there is nothing like that in the world of Assurant. So we are really excited. Great. That sounds good. Thank you. The next question comes from the line of Andy Grobler from Credit Suisse. Please go ahead. Hi, good morning. Just a couple from me, if I may. Sorry to go back to this topic because it's not the most important thing after some good performance, but just on the day the adjustments, are are we right? So just so we get this right, that it was about a 2% headwind in May June, and, it's about a 1% tailwind for the last 4 months just so we can clarify that number. And 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 this year, you know, kind of what level of tailwind has it been and what kind of headwind will we see within that, that portion of the operation over the next 12 months, please? Look, Andy, you know, the company extremely well, you know, your math as good as mine, let me just be super clear. The year to date organic growth for the group is 3.8%. Drug 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 our 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 lines are more dependent than others, a number of days, but you're right. But on the year to date basis, there is no difference in terms of number of days. Okay. And 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 insurance business is going beyond the ISO certifications. Of course, we are acting in the eyes or market. And of course, we've seen an impact, positive impacts over the last 9 months of the quality standards upgrade that you've talked about. But 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, I'm not worried about assurance moving forward. Notwithstanding the upgrade of the ISO standards that had a positive impact in the 1st 9 months. And longer term, this will all or wash through and as you say, assurance is growing very quickly. But just in the, in the shorter term, so we can think about that have 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. But business assurance is a growth business. And what we're seeing in terms of innovations, new clients, clients and attractions is very positive. So I wouldn't worry about assurance, Andy, if I were you. The next question comes from the line of George Gregory from Exane. 2 for me also, please. Firstly, just, on trade, it's helpful color on the trading day impact. If we just with the, kind of normalized 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 the, for those 2 impacts, would look at least, to have been broadly stable. And secondly, just on, following up on China, That's without getting into the intricacies of the tariffs enacted to date. I wondered whether you could at least disclose your exposure Chinese consumer goods exported to China, to the U. S, please? Okay. Thanks. On the latter, we don't disclose, this number. As you know, we've got a very clear policy of what gets disclosed and, and, you know, this is what we do. So 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, you know, issue with trading days because we operate rate for 7. We've seen an acceleration. So I think we are seeing an acceleration. So we are pleased with where we are. Thank you. The next question comes from the line of Edward Fields from Citi. Please go ahead. Thanks very much and good morning all. Just one question for me. Great to see the kind of brand back. Obviously, it's got great heritage. Is there anything else that this kind of brings into the equation potentially about Calibrates, 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. I think, thanks for asking the question. I mean, cated vet is basically, a very important product brand that we have. And one of the things we are doing from a branding standpoint now that we have rebranded the company as interjectable quality assured, we are very keen to make sure that there is a clear differentiation at the product level. So, you will have seen that we've launched several innovations with specific program like Inlight and, in the business assurance, we basically have kept the PSI, you know, brand name to operate in our BNC business in the U. S, because this is a strong brand name. We are using the ETL Edison testing laboratory brand in our electrical business. And we felt that it was very important for clients to know that Intertek in a cargo business was kind of breath, the company that's created the industry, we've got industry leading positions. And it purely a differentiation strategy from a product and service standpoint to basically improve our market share. Nothing more than that. The next question comes from the line of Eric Puling from Kepler. Please go ahead. Yes, good morning. 2 follow-up for me on the comps question, especially on the product side. I think you answered the business assurance, I saw a comp issue, but, another standout is a transportation business, double digit growth. Would you expect that to continue in the year ahead or are there some specific contracts that are in this unit. That's one. And then 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 20 seen, but 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. So the amount of innovation that's going in obviously reducing the consumption and the emissions of diesel and obviously fuel engine. But importantly, the investment that our clients are making in terms of hybrid electrical vehicles are very significant. And this is really good for us. We have a separate 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 this is a new testing opportunity for us. And let's not forget the autonomous vehicle driving opportunity where we play a measure role in the U. S. With all manufacturers. So look, while I'm not going to give you a precise guidance for transportation technology in 2019, Look, we are not worried about transportation. It's going from strength to strength. And we continue to invest and we see to see these growth. As far as minerals is concerned, minerals for us is a relatively small business. And what we are seeing at the moment, we are seeing some very, very good performance, 3 core markets, which is Australia, Indonesia and China, there is nothing telling us that we should worry about the momentum. No, we are seeing continuous increased demand. It started last year. So it's is very consistent and we're very pleased with the performance. There are currently no further questions from the Okay. 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, but as usual, we are here if you have any additional questions. And thanks for your time today. Thank you for joining today's call. You may now disconnect