Ladies and gentlemen, thank you for standing by, and welcome to the Intertek 2023 Half Year Results Conference Call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If you should require assistance during the call, please press star then zero. As a reminder, today's conference is being recorded, and I would now like to turn the conference over to your host, Mr. André Lacroix. Please go ahead, sir.
Good morning to you all, thanks for joining us on our call. I have with me Colm Deasy, our CFO, and Denis Moreau, our VP of Investor Relations. I would like to start our call today recognizing all of my colleagues at Intertek, for having delivered a robust financial performance with revenue growth, acceleration, margin progression, and a higher ROIC. Some of you got to meet my senior team at the capital market event in May, when we presented our AAA growth strategy, and I would like to give them a special thanks. There are a few takeaways in our presentation today. Our AAA growth strategy is in place to capitalize on the faster AT growth opportunities ahead. Our like-for-like revenue growth momentum is accelerating, and we have delivered our highest like-for-like revenue growth in the last 10 years.
We have made very good progress on margin as we benefited from our pricing and productivity initiatives. Our ROIC is much higher than last year. We've delivered a strong free cash flow, and last but not least, we are extremely pleased to announce this morning a double-digit increase in the interim dividend. Let's start with our performance highlights. We have indeed delivered a robust financial performance in the H1 . Group revenues up 8.3% at constant rate and 9.9% at actual rate. Like-for-like, revenue growth of 7.1% at constant rate. Operating profit was up 13.3% at constant rate, and 12.9% at actual rate. We saw a robust operating margin of 15%, up 70 basis points at constant rate year-on-year.
EPS growth was 10.6% at constant rate and 10.1% at actual rate. ROIC of 19.3% was up 120 basis points at constant rate, and 260 basis points at actual rate. Our cash generated from operation was super strong, GBP 270.5 million, up 13.6%. Our free cash flow was robust at circa GBP 80 million. We are investing in growth, as you can see, our CapEx and M&A investments are up year-on-year. As I've just said, our interim dividend of 37.7 P is up 10.1% year-on-year. Last but not least, we continue to operate with a very strong balance sheet, with a net debt to EBITDA ratio of 1.1.
Let's now discuss our like-for-like revenue growth, which, as I just said, at 7.1% at constant rate, was the best performance in the last 10 years. We are indeed seeing an increased demand for AT solutions. Like-for-like revenue growth was driven by both progress on both volume and price. Given the change we've made in terms of disclosures on the slide here, we are showing a like-for-like performance using the previous and the new disclosures. Looking at the results through the previous disclosures, our product and trade divisions delivered mid-single digit like-for-like, while our resource business delivered double digit like-for-like. Looking at the like-for-like revenue growth performance based on the new segmentations, we delivered double digit like-for-like in Corporate Assurance as well as in industry and infrastructure. We saw a high single digit like-for-like in the world of energy.
Health and safety recorded a mid-single digit like-for-like, consumer product delivered as expected, a low single digit like-for-like. Our China business rebound strongly after Chinese New Year, following the relaxation of the COVID restrictions in January, we've delivered a like-for-like revenue growth of 7.3% at constant rate. Outside of China, our like-for-like revenue growth was 7%. Our geographical portfolio is strong, we have the right exposure to the right growth opportunities in the global economy. Our revenue growth was broad-based, as you can see on the slide from a geographic standpoint, with Americas, EMEA and APAC growing respectively at constant currency by 7.8%, 7.6%, and 9.4%. We are really proud of the margin we delivered at 15%, up year-on-year by 70 basis points at constant rate and 40 basis points at actual rate.
As you know, margin equity revenue growth is central to the way we deliver value. We have a superior AT customer service, which we discussed in May. That gives us a strong pricing power and high retention rates. We allocate capital targeting the attractive growth and margin segments. We are laser focused on that. Our performance management discipline is, of course, well embedded in the organization with the data advantage we have side by side. We announced a cost reduction program in March that targets productivity opportunities based on operational streamlining and technology upgrade initiatives. The execution of the cost reduction program is on track. We saw 10 basis points of margin improvement in H1 due to that. In H1, we've also identified additional restructuring opportunities, which should deliver annualized savings of GBP 4 million and circa a GBP 1 million benefit in 2023.
When you bring the two programs together, 2022 and 2023, our cost reduction program should deliver an annual savings of GBP 19 million with an expected GBP 7 million-GBP 8 million savings on annual basis, oh, sorry, in 2023, of which GBP 1.7 million has been delivered in H1. Looking at our margin performance through the PTR disclosures, our margin increase of 70 basis points was driven by margin progress in Products and Resources, while Trade was down. The margin performance based on the new divisional disclosure, show that we've made good progress year-on-year in 3 of our 5 divisions. I will give you more details later on the call.
The recent SAI, JLA, and CEA acquisitions that we've made to scale up our portfolio in attractive growth and margin sectors, are performing well, in line with our expectations. Later in the presentation, you will see how these 3 acquisitions have contributed to our growth performance in H1. The integration of the recently announced acquisition we made in Brazil, Controle Analítico, is on track. I will now hand over to Colm to discuss our H1 results in details.
Thank you, André. In summary, in H1 2023, the group has delivered a robust financial performance. Total revenue growth was 8.3% at constant currency, and 9.9% at actual rates, as beneficial movements in FX rates impacted our revenues by 160 basis points. Operating profit at constant rates was up 13.3% to GBP 245.5 million, delivering a margin of 15%, up year-on-year by 70 basis points. Diluted earnings per share were 95.2%, growth at, of 10.6 at constant rates and 10.1% at actual rates. The group delivered adjusted cash from operations of GBP 270.5 million, up year-on-year by 13.6%.
Adjusted free cash flow of GBP 79.6 million was down year-on-year by GBP 16.2 million, as growth in operating cash flows was offset by higher CapEx investments and higher net, net financing costs. We finished H1 2023 with financial net debt of GBP 791.3 million, which is down year-on-year and represents financial debt to adjusted EBITDA ratio of 1.1. Turning to financial guidance for 2023. We expect net finance costs to be in the range of GBP 40 million-GBP 42 million. We expect our effective tax rate to be in the range of 25.5%-26.5%. Our minority interest to be between GBP 22 million and GBP 23 million, and CapEx investment to be in the range of GBP 115 million-GBP 125 million.
I will now hand back to André.
Thank you, Colm. I'll now summarize our performance by division, but clearly, there is much more detail in the RNS, and all comments I will make in this section will be at constant currency. Our consumer product delivered a revenue, which was in line with our expectation of circa GBP 468 million, up year-on-year by 1.1%. Our low single digit like-for-like performance was driven by low single digit like-for-like in softlines and hardlines, mid-single digit like-for-like in electrical and connected world, and double digit like-for-like in GTS, which was due, as you know, to the non-renewal of two contracts last year.
Operating profit was circa GBP 117 million, with a margin of 25%, which was down year-on-year by 140 BPS, due of course, to the revenue decline within GTS and the low single digit like-for-like performance in softlines and hardline. In 2023, we expect the consumer product division to deliver low single digit, like-for-like revenue growth. Our Corporate Assurance delivered a stellar performance, with a revenue of GBP 232 million, up year-on-year by 12.5%. Our double digit like-for-like revenue growth performance was driven by double digit like-for-like in Business Assurance, and mid-single digit like-for-like in Assurance. We are really pleased with the operating profit of GBP 48.2 million, up year-on-year by 31.7%, resulting in a margin of 20.8%, 300 BPS up year-on-year.
Indeed, we benefited from both strong operating leverage and productivity gains, including, of course, the benefit of the cost synergy post the SAI acquisitions. In 2023, we expect our Corporate Assurance division to deliver high single digit like-for-like revenue growth. Our health and safety business delivered a revenue of circa GBP 157 million, up year-on-year by 7.9%. Our mid-single digit like-for-like revenue growth performance was driven by mid-single digit like-for-like in AgriWorld, high single digit like-for-like in food, and mid-single digit like-for-like in Chemical and Pharma. We delivered an operating profit of GBP 16.5 million, with a margin of 10.5%, which was down year-on-year by 70 basis points, essentially due to the country mix effect within AgriWorld, and the investment in capability we are seeing in Chemical and Pharma, and we expect, you know, accelerated growth there.
In 2023, we expect our health and safety division to deliver mid-single digit like-for-like revenue growth. Our industry infrastructure business delivered a revenue of GBP 427 million, up year-on-year by 10.5%. Our double digit like-for-like revenue growth performance was driven by double digit like-for-like in industry services, double digit like-for-like in minerals, and mid-single digit like-for-like in building construction. We are really pleased with the operating profit of GBP 37.3 million, up year-on-year by 36.1%, which gave us a margin of 8.7%, up 160 basis points year-on-year. We benefited indeed, from operating leverage and productivity gains. In 2023, we expect our industry and infrastructure division to deliver high single digit like-for-like revenue growth.
Our World of Energy business delivered a revenue of GBP 366.6 million, up 13.5%. Another stellar performance in that division. Our high single digit like-for-like revenue growth performance was driven by high single digit like-for-like for Caleb Brett, and mid, mid-single digit like-for-like for TT Business. Our CEA business delivered an excellent H1, benefiting from an increased investment in solar panels worldwide. We delivered an operating profit of 26.6%, and we're extremely pleased with the 87.3% year-on-year growth, resulting in a margin of 7.5%, up 300 BPS year-on-year. In that division, we benefit from operating leverage, productivity gains, and of course, portfolio mix, given the high margin nature of our CA business. In 2023, we expect our World of Energy division to deliver high single digit, like-for-like, revenue growth.
At our capital market event in May, we presented our Intertek AAA growth strategy to unlock the significant value growth opportunities ahead. All of us at Intertek are laser focused on taking the company to greater heights, putting our AAA growth strategy in action. We made strong progress, as you know, between 2014 and 2022, delivering value for all stakeholders, and our good to great journey continues, capitalizing on our competitive advantage of science-based customer excellence, ethics advantage. Our clients understand the mission critical of risk-based quality assurance to operate with higher quality, safety, and sustainability standards, and make their brands and businesses stronger. We are experiencing faster growth for ethics solutions, and we expect that to continue. Our AAA growth strategy is simply about being the best for every single stakeholder, every day.
To do that, we are focused on the following goals: We want to be the most trusted TQA partner with every single customer. We want to be the employers of choice with every single employee. We want to deliver sustainable excellence everywhere in our communities, and importantly, we want to deliver sustainable growth and values for our shareholders. To deliver these goals, we have developed with our teams three simple, highly focused, and compelling strategic priorities and strategic enablers to simply get better. We are already very strong, but of course address the areas where we can improve through to our ever better culture. The critical drivers of our faster growth moving forward is, of course, our high quality portfolio. The depth and breadth of our ATIC solutions position us really well to seize the increased corporate needs for risk-based quality assurance.
All of our global business science will benefit from exciting growth opportunities. We discussed that in details in May. At the local level, our country business mix is strong, with 55% of our revenue exposed to the fast-growing segment. Geographically, as I said earlier, we have the right exposure to the right growth opportunities in the global economy. In summary, our high quality portfolio is poised for faster growth. Medium to long term, we are targeting mid-single digit, like-for-like, revenue growth at constant currency, with low to mid-single digit in consumer products, high single digit to double digit in Corporate Assurance, mid to high single digit in health and safety, mid to high single digit in industry and infrastructure, and low to mid-single digit in the world of energy.
As I said earlier, margin accretive revenue growth is central to the way we deliver value. Our target is over time, to return to a 17.5% peak margin that we achieved in 2019, and go beyond from there. Our confidence is simply based on 3 reasons. We have the proven tools and processes in place. We've demonstrated that in H1. We, of course, operate with a span of performance, which shows the opportunities we have, and we have a very disciplined, accretive portfolio strategy. To continue to deliver sustainable growth and value for our shareholders, we'll stay focused on our Intertek Virtuous Economics. Our Intertek Virtuous Economics are based on the compounding effect year after year of mid-single-digit, like-for-like, revenue growth, margin accretion, strong free cash flow, and disciplined investments in high growth and high margin sectors.
Importantly, we believe in the value of accretive disciplined capital allocation. Here are our capital allocation priorities. Our first priority is always support organic growth through capital expenditures and investment in working capital. The second priority is to deliver sustainable returns for our shareholders, through the payment of a progressive dividend, and we are targeting a payout ratio of circa 50%. The third priority is to pursue M&A activities that will strengthen our portfolio and attractive growth in margin areas, provided of course, we can deliver good returns. Our fourth priority is to maintain an efficient balance sheet with the flexibility to invest in growth. Our leverage target is 1.3-1.8 net debt to EBITDA, with the potential to return excess cash, cash to shareholders, subject to our future requirements or prevailing macros.
We expect to deliver a robust financial performance in 2023. Let's now discuss our guidance for the year. We expect the group to deliver mid-single digit, like-for-like, revenue growth at constant currency, based on low single digit, like-for-like, in consumer products, mid-single digit, like-for-like, in health and safety, and high single digit, like-for-like, in Corporate Assurance, industry and infrastructure, and in the world of energy. We are targeting, of course, margin progression year-on-year. Our cash discipline will remain in place to deliver strong free cash flow. We plan to invest circa GBP 115 million-GBP 125 million in CapEx. Our financial net will be in the range of GBP 630 million-GBP 680 million. A quick update on currencies for your model. Sterling, as you know, has continued to strengthen Q2. We are therefore updating our Forex guidance.
The average sterling rates in the last three months applied to the full year results of 2022, would reduce our revenue by 250 BPS and our earnings by 400 BPS. In conclusion, the value growth opportunity ahead is significant. These are exciting times for all of us at Intertek. We are entering the next phase of our good to great journey with a high quality growth portfolio. Our portfolio provides our customers with leading ethics solutions in each of our global business lines. Intertek has the track record of consistent growth and value delivery based on the compounding effect of margin accretive like-for-like revenue growth, strong cash generation, and disciplined investment in organic and inorganic growth. In addition to the exciting growth opportunities ahead, our portfolio has strong intrinsic defensive characteristics. The ethical solutions we offer are mission-critical for our clients.
Our clients need to operate safely in the global market. We operate a highly diversified set of revenue streams. We enjoy strong and lasting relationships with our clients. Thank you for your time this morning. We'll take any questions you might have.
Ladies and gentlemen, if you wish to ask a question, please press one then zero on your telephone keypad. You may withdraw your question at any time by repeating the one then zero command. If you're using a speakerphone, please pick up your handset before pressing the numbers. Once again, if you do have a question, please press one then zero at this time. One moment, please, for our first question. Our first question comes from the line of Annelies Vermeulen from Morgan Stanley. Please go ahead.
Hi. Good morning, André, thank you for the presentation.
Morning.
Good morning. I have a couple of questions. First of all, you said you identified additional opportunities for restructuring in the H1 . Could you comment a little bit on what those are, which divisions, and what you're seeing, and whether you're you know, you expect to identify more as we move through the H2 of the year? Secondly, I wanted to ask about consumer products, and the potential for the margin recovery, you know, given the dip in the margin year-over-year. Is this a case of waiting for some of your restructuring and cost-cutting initiatives to reap benefits? Or do we just need to see operational leverage from volumes improving?
Over what sort of timeframe do you think that that margin in consumer products c ould recover to historical levels? Thank you.
Thanks, for your, for your question. Look, let's just start with our restructuring program. As we explained, a few months ago, we had not looked at our fixed costs for quite a long time at Intertek. Our previous, you know, restructuring programs was back in 2015 and 2016. You know, when you do a review of your fixed cost, you cannot look at every single part of the portfolio in one go. We've done quite a bit of work in, in 2022, and that's what we announced in, in March. This is an iterative process that's gonna continue for, for a few years. We are taking our time to look at possible portfolio that will benefit from these initiatives. You remember, there are essentially, you know, 3 type of initiatives, right?
Can we streamline the non-productive, you know, side of the organizations by basically, you know, consolidating operations and, and, and reducing the number of non-productive headcounts? Can we consolidate certain sites that will benefit from, you know, additional scale if we bring these, you know, together? Three, you know, do we have opportunities from a technologies standpoint to upgrade or, you know, operating systems essentially, and make us more productive? What we did in, in the H1 , I would say, is more of the same. You know, we've identified three additional sites. And, you know, we've identified quite a few, non-productive headcounts, in, in the organization. There was not much in technology in the H1 .
I would say it, it's a continuous, you know, implementation of these programs, and we believe that it's gonna take us, if you want a while to complete this review, because you want to do it step by step, and every decision you make is really, really important, and you want to have the right decision, in your process. It's part of our margin accretive, you know, revenue growth strategy that we talked about, you know, during the year. As far as consumer product is concerned, maybe let me use your question to, to explain, you know, what, you know, we are seeing in this segment, right?
I think the team has done a good job in the H1 in soft lines and hard lines, considering the fact that, you know, retailers in North America and the US continue to be careful with inventory and management. I mean, you see the stats like I do. You know, we are not in the situations where the inventory is much lower than it used to be. The demand is basically okay, you know, we're gonna have to wait for the inventories to normalize, to see an acceleration of demand in soft lines and hard lines. When it comes to our business in terms of soft line and hard lines, I'll come to your point on margin. You know, we are the market leader.
We, we operate, you know, with the highest, you know, quality. As I always said, you know, when there is a slowdown in the market, you need to protect your IP, you need to protect your customer service capability. Don't expect us to do any restructuring from an operational standpoint, you know, soft lines and hard lines, because, you know, we operate with a high margin. We are market leader. Yes, the revenue growth at the moment is a bit below the inflation rate in these businesses, but it is temporary. You know, we know that our customers are investing in sustainabilities. We know that once the inventory are normalized, we'll see some, you know, innovations, you know, investments from our clients.
The second business that is in our consumer products is our electrical and connected business, which is and we don't talk much about, about the business, because we talk a lot about other divisions when we meet, but this is, you know, a legacy business. This is the Thomas Edison heritage. As you all know, we didn't see a reduction in revenue during COVID. This business has been consistently delivering, you know, margin equity, revenue growth, year after year. Every month is a new record. Here , I'm not gonna think of, you know, cost restructuring here. Here, we are thinking of investing in growth to make sure that we can seize the ESG opportunities, where we've got obviously synergies with our TT business.
Of course, you know, about the exciting medical device in the market. Of course, we talked about functional safety, the Capex market. Here, we are investing in growth because the business is really poised for faster growth. GTS is really the biggest challenge we have in this new division. It used to be in trade, and of course, now it's in consumer product because it is consumer product related. I'm not concerned about GTS because, you know, it's a really well-run business. We've got, you know, huge disciplines, but, you know, we have to go through the negative operating leverage effect of having lost, you know, two contracts. To your questions, what's gonna happen to the margin in this division?
Look, it will be progression through operating leverage and the implied productivity, benefits we're gonna get from there. You know, we're not planning any, any, any restructuring.
Thank you very much.
Our next question comes from the line of Rory McKenzie with UBS. Please go ahead.
Good morning. Two questions, please.
Morning.
Firstly, on the guidance, despite the strong growth at 7% in H1, you've obviously kept your cost guidance unchanged, the mid-single digit growth for this year, that could imply a slowdown anywhere to +2% to +6% organic in H2. I wanted just to ask about that kind of outlook. Is it just the comparators you want us to be aware of, or are there any specific parts of the business you think are sequentially declining? Secondly, following up on, on consumer products, can you say how long the double digit negative drag in GTS is due to last? I can't remember when the contract ending kind of comps out. More broadly, what's your view of the customer base and this destocking cycle?
It sounds like from your guidance, you don't expect it to get any better for you, for all the rest of this year and for the winter season, and it's more about the 2024 news cycle, perhaps.
The last question, Rory, was about softline and hardlines, right?
Yes.
Yes. Okay. Look, I, I think you're absolutely right to ask the question on guidance. Why aren't we changing our guidance, given the best like-for-like revenue growth we've given in the last, you know, 10 years of 7%? Look, when we give guidance, as you know, I always give guidance within a range, and mid-single digit doesn't mean 5%. If you read carefully my script, you will see how I've used mid-single digit for certain like-for-like revenue growth. There is a range, and I'm not worried about, you know, like-for-like, you know, revenue growth, but as you know, we're always very considered and disciplined in terms of guiding.
In terms of the base last year, look, if you look at the group, we had the same organic growth in H1 versus H2. Having said that, if you look at, and I'll come to consumer product in a second, in softline and hardlines, if you look at the fastest growing business that we are seeing in the H1 , there will be a bit of a base effect, because Corporate Assurance did extremely well last year, the same for industry and infrastructure and Caleb Brett. Yes, there is a bit of a base effect, but I don't want you to worry too much about it. Look, in terms of softlines and hardlines, and I'll come to GTS in a second.
My sense is, you know, I don't call a change of trend in any market until I see it. I'm gonna be, you know, very honest with, with all of you guys. At the moment, I'm not seeing, you know, a reduction of innovation activities from our clients. I'm talking sequentially, you know, Q2 versus Q1, but I'm not seeing any uptick yet in the demand in hardline and softlines around the world. Having said all of that, certain brands are doing better than others. You know, like I do that with inflation, you know, being where it is, consumers are starting to look at price points.
The retailers that are focused on SKUs at a lower price points will benefit from, you know, the fact that certain brands are priced too high. For us, this is a message I'm giving to my team that says: Look, yes, I understand the inventory globally are where they are, as I just said to Annelies, but certain brands will do better than others. For instance, you know, to give you some color, if I were to tell you that, you know, we saw incredible growth in India and Bangladesh in the last few months. Why? Because the brands producing there are the brands that are really focused on lower price points.
I think that's gonna be, you know, the situation for a little while, and we know that inflation is peaked and things will move, you know, step by step, you know, back to normal. It's gonna take some time. To say it, you know, in simple terms, I'm not forecasting any change of trends in softline and hardline for the H2 . If it globally, if it happens, it's gonna be a positive news, but our focus is to make sure that we support the needs of our clients, that are seeing good growth, and we keep providing superior customer service to our clients that are resolving our, our inventory challenge. There are a few, I mean, it's public information
On GTS, look, it's gonna take us till next year to start, you know, growing again. It's not a huge business. We have won a significant contract in Mozambique, which will help in 2024. Is the H2 gonna be double G negative? I hope not, and I don't think so, but I think we're gonna have to wait till 2024 to be back in growth. That would be my view at this stage. Hope that helps.
That's all helpful. Thank you, André.
Our next question comes from the line of Oscar Val Mas with JP Morgan. Please go ahead.
Yes. Good morning, André and Colm. Three questions from my side. The first one, going back on, I guess, the guidance for the full year. Very strong H1 margin, only 10 basis points from restructuring. I was wondering if you could give us some color on your thoughts for the H2 around the moving parts. Could we expect a similar amount of constant currency margin improvement in the H2 ? That's the first question. The second question is on building and construction in, I guess, in the US, growing mid-single digit. Is it fair to say that some of the benefits from the IRA haven't really kicked through yet? Could you give us some color when you expect growth to improve or to accelerate in B&C?
The final question is just a smaller one on kind of the free cash flow was impacted by higher, maybe one-off cash interest and tax. Could you give us some guidance for the full year around that number? Thank you.
Okay. Thanks, Oscar. Look, your question on margin is important. Let me just use this opportunity to, you know, reassure everyone that margin accretive revenue growth from a P&L management is a way of working everywhere inside Intertek, right? We always try to make sure that we get the right volume and price, you know, mix in our revenue line. We are very focused on productivity, you know, metrics in existing, you know, businesses. Obviously, I've talked about the restructuring that we talked about.
No matter what we say about the performance, we can always be better, and, and, and the span of performance is the best evidence that, you know, we are not at our maximum everywhere, and, and you heard it, you know, from, from Ross at the capital market event. As far as H2 is concerned, look, it is our view that, you know, inflation is peaking, and therefore the drag effect of inflationary pressure on costs, on our margin should become less so. I'm not saying we're moving out of a, you know, a sustained inflation environment, but there is a positive trend here. That's good.
We are not, you know, running out of growth because we expect, you know, as, as we said, you know, the performance in like, for like, I just talked about in the previous, previous questions. We'll have a greater benefit in the H2 from the restructuring. I said, you know, in the call, we benefit from around slightly GBP 1.3 million-1.5 million in H1, but we expect more in the full year so that 's important. On the flip side to it, is that, you know, we had a very strong H2 last year in terms of margin. As you know, we were at, you know, 17.9%. We, you know, we have to be mindful of the base.
All in all, we expect to, to continue to make progress on margin in the H2 to deliver the targets that we have for the full year. I'm gonna refrain, as you know, from giving you any targets or guidance in terms of the quantum of progress we are making, but I can tell you that everybody at Intertek, you know, truly believe in the central, you know, value of margin equity revenue growth to deliver value for our shareholders, right? It's important. As far as B&C is, is concerned, we are pleased with the development.
That's true that the incentives that the government has put in place to attract additional infrastructure investments, and certainly moving into the greener, you know, side of the economy, are gonna accelerate growth in the United States. It's true that we've not seen the full effect of that because, as you know, you know, in the building and construction, you know, business, you know, people need first to make the investment decisions, need to go through the planning to get the authorizations to build a power plant or a solar, you know, power infrastructure, whatever they want to build or a new, you know, refinery, or carbon capture, and we are in phase II.
I would hope that B&C will continue to perform very, very well. As far as, as the free cash flow is concerned, well, the important point for me is operating cash flow, right? This is the cash conversions, how the team are basically, you know, converting the strong profit growth in cash, and this is doing very well. It's true that, you know, in our free cash flow, we had a few negatives, and you know, we believe that we'll have a strong year in terms of free cash flow. You know, we are confident to that. We're not gonna give an H2 free cash flow, you know, performance. We're giving a guidance for the full year net debt, and, and I'm not worried about, about free cash flow.
Great. Thanks a lot, André.
Thank you.
Our next question comes from the line of Neil Tyler with Redburn. Please go ahead.
Good morning. Thank you.
Morning.
Two questions, please. Good morning. Firstly, the Assurance activities, you said previously that you, you tend to have quite a good line of sight on the sort of project pipeline, the demand there. So I wonder if you could sort of share your perspective on that and the growth opportunities and any challenges that might, you know, might be in the offing in terms of staffing that business to meet that pipeline? That's the first question. Secondly, back to hard lines, soft lines, I'm afraid. I wanted to ask about so the you mentioned the regional disparities in demand or variances in demand. Does that regional mix impact margins in either direction?
One of your competitors noted quite recently that price pressure and slower volumes in China has meant that their hard lines and soft lines activities elsewhere generated higher margins than those in China these days. I wonder if you're prepared to share any thoughts on that. Thank you.
Yeah. Thanks. Look, I'll start with the second one. Look, we are the global leader in terms of soft lines and hard lines, as we talked about at the capital market event, when we talked about supply chain moving here from here, there is no margin accretion or dilution really effect on global basis when volume moves around, because, you know, we have very very strong margin in China, which is the envy of many companies, including our competitors. We have very strong margin in Vietnam, in Bangladesh, in India. I'm not that concerned, but I respect obviously what our competitors see in their own portfolio, but it doesn't apply to us.
Okay.
Look, I'm really, really proud of what the team is doing on, on Assurance. I mean, just to remind everyone, you know, we, had double digits, you know, like for like, you know, last year, you know, we've had another double digit performance, you know, this semester. This is obviously with SAI now being part of our, you know, base in terms of like for like. Where are we seeing the growth opportunities? Well, the simple answer is that companies have increased their focus on risk. There, there is no question about it, and it's as much as, you know, the functionality, if you want, of a supply chain, right? End-to-end. Of course, you know, they need to get access to better data points.
We know the pressure they are under in terms of sustainability and traceability. No, it's, it is, you know, doing very well. You know, the pipeline or, or the backlog, as we call it inside the company, is strong. Is it a challenge to recruit people? It's no different than it was a year ago or two years ago. I mean, when you run a business like Intertek, you've got to basically work on being the best, you know, company in terms of attracting talents, recruiting them, giving them the, the opportunity to grow and excel and develop inside Intertek.
This is part of the business, because to deliver double-digit like-for-like growth in 2022 in terms of Assurance and to do it again in the first semester, you need to focus both on sales and talent, and our team wouldn't have delivered 2022 without having worked on recruiting the right people. Look, it's part of the way we do business. Is it more difficult than it used to be? No. Is it easy to recruit talents? Never. It's what we're here to do, because if our clients need our help, we need to develop and prepare the right colleagues. I mean, look, as you know, we did a major play strategically on ATIC back in 2016.
You know, we are being proven right, that, this is the most exciting part of the industry, if you ask me.
Great. Just if I could ask a follow-up, just more broadly on sort of talent acquisition, you know, within your plans, obviously growth is, you know, is very, you know, very impressive in the first 6 months. How do you see the headcounts broadly on average, you know , compared to last year over the, over the 2023 period?
Yes. It's a, it's a really important question. As you know, we disclose our headcounts on a yearly basis. In terms of, which I think the question behind your question is: What is your staffing policy? We, we have two and I assume that your question is assure- is total Intertek, not just Assurance, right?
It is. Yeah, yeah, yeah.
Yeah. So, so you have to, to think about headcounts, productive headcounts, either in a lab-based business or in a field-based business, right? In a lab-based business, you know, where, you know, we, we have quite a lot of equipment and, and, and, and lots of, you know, you know, tools and, and automation, we have productivity opportunities in every single site. I'm not saying that our sites are not profitable, but when you look at the metrics, individually, we see opportunity. We also spend a lot of time reinventing our processes to become more efficient. You know, here we've got a clear, process on how we approve additional headcounts for, an existing lab.
It's simply based on where we believe the productivity thresholds are, i.e., above which you need to recruit, and then we do so. It's always with the same approach, which is ever better, right? There is always a way to get better at productivity management. It's not like, to make it simple for you, if your volume increased by 10% in the lab A, you're gonna increase your productive staff by 10%. It's not the way it works. That's on the lab-based business. As far as the field-based business is concerned, it's different, because essentially, if you look at an audit workforce, right? It's no different than the Big Four.
A good workforce needs to be at 85%, 87% utilizations, because you've got to travel, the admin work, et cetera, and so forth. Then when we plan for our insurance or inspector, you know, head count investments, this is the model we pursue. As I said, at the capital market event, you have less if you want a fixed cost leverage in insurance than in lab-based business. Equally, as we all know, it is a high margin business and very, you know, predictable.
That's very helpful. Thank you.
Our next question comes from the line of Arthur Truslove with Citi. Please go ahead.
Hi, André, thank you so much for taking my questions. First question was.
Sorry.
Oh, hello. Can you hear me?
Yeah, I can hear you, Arthur. Good morning. Welcome.
Perfect. Thank you. First question was just on what sort of level of pricing and wage growth have you actually seen? Are you able to give us an idea of sort of how that compares with what you might have expected at the full year? Second question, I may have misunderstood your previous comments, in your previous guidance, you said that you expected adjusted EBIT margins to increase in both the first and second halves. Obviously, the guidance wording has slightly changed. Just to be clear, are you expecting the EBIT margin to increase in absolute terms in the H2 or not? The third question was just on the minerals business.
I guess, you know, clearly very strong in H1, but I think one of your competitors said that maybe things slowing a little bit as we move through the year. I'm just wondering what you were seeing. Thank you.
Okay. Thanks, Arthur. Look, on, on the margin, well spotted. I mean, the reason why I didn't say H1 and H2, because we've delivered margin accretion in H1, and if we want to deliver the guidance that we are giving, we have to deliver margin accretion in, in H2. The answer is yes, of course, we are not changing our guidance on that. On price and wages, so as I said earlier, the good news is that inflation is seems to have peaked. I'm not obviously predicting the global economy, but based on my indicators, it seems to be the case. You saw the, the results of the oil and gas companies, this week, and, and of course, the reduction in energy price will trickle down in, in, in the economy.
We know that a lot of companies, including our clients, of course, have increased their prices significantly, during the last 2 years, and now they are seeing the negative effect of that and losing market share to, to price levels and having, you know, volume problem is public. I mean, you've seen all the FMCG in London or, or Switzerland talking about it. Of course, you know, the policymakers are, are very, very, very focused on that. The wage growth, is in line with what we had in our budget. We are, I think, bang in line with what we expected. There is no surprise there. I think that moving forward, the pressure will be incrementally less on wage inflation.
As far as price is concerned, you know, we take a, a balanced approach. It's not one or the other. I think, when you are a high quality operator like Intertek, where you've got the best customer service, which we demonstrated at the capital market events, you command a premium price. Our starting position is very good. Equally, you know, we want to get rewarded for the work we do. We are passing, as you know, you know, 50% of the wage cost to our clients. In the H1 , the balance was, you know, consistent with what we saw earlier, 1/3, 2/3.
So I'm pleased with that because, you know, saying just focus on volume and not price, it's a very dangerous strategy because, you know, people in the organization says, Okay, yes, boss, it's just volume, right? I'm just gonna focus on volume and forget about price. This is the wrong message to, to give. To say, you just focus on price and not volume is also the wrong message. You know, we believe in both price and volume, and what I said internally is what I said externally. This is what the numbers are showing. Look, on, on minerals, I'm aware, of course, of some of the concerns that are in certain disclosures of certain companies involved in the sector.
Look, as you know, minerals for us is, is a really good business, but not a massive business, right? We tend to, you know, to be, you know, to be focused on, you know, certain end markets. We are really strong in Australia. We are very strong in Indonesia, in the Philippines. We are very strong in Africa, especially in Ghana. Our team is, is focused, has been focused for many, many years on diversifications, i.e., you know, the base minerals that everybody knows, but we are very focused on greener minerals, for the reasons that we all know, and we discussed at capital market events. We are, of course, investing in technology....
If I were to, you know, just look at the numbers, there is no question that we had an incredible 2022 with, you know, double-digit revenue growth in 2022, and of course, we had double digit again, you know, this, this time around. Do I expect minerals to grow at double digits forever? No. Is this business running out of growth? No. What's really important for me is for the team to recognize, as we talk about the capital market events, that portfolio management is very important. It's about selecting the high growth, high margin sectors and, and, and the team is doing a really really good job.
If you happen one day to be, to be in Australia, I, I would invite you to visit our operations in Perth, so that you could see firsthand how we're using our portfolio activities and technology to not only deliver, you know, a great revenue growth, but also margin, margin accretion. I hope that answers your questions.
Just to follow up, just to be clear, your comments on margin were actual rates, not constant currency rates, right? In the first question, I've understood that right, haven't I?
You never miss a beat, right? Okay, what's the next question?
Our next question comes from the line of Harry Martin with Bernstein. Please go ahead.
Hi. Good morning, André. Morning, everyone.
Morning.
The first question I have is on the China business. Obviously, the growth today is really reflecting the snapback from the lockdowns, but we will hear about wider worries about macro weakness to come in China. I wonder if you could just comment on what you're seeing there, and how resilient the Intertek portfolio is to any sort of domestic downturn. The second question on CapEx, you talked about the increase in CapEx in H1, but even at the top end of the full year CapEx guide, it still looks flat to down year-on-year in H2, and quite away from the 5% ambition.
I wondered if you could talk about the levels of spending that aren't being done this year that might take you up to 5%, and where we could see that CapEx come in, in the coming years. Then the final question, just a longer term question on industry pricing power. You know, as you said, it's an industry historically, that's had a lot of organic growth from volume growth. I wonder if in the last year or so, you've learned anything about pricing power and price elasticity for your services, and if there might be any change to the way that, you know, Intertek uses price longer term. Thank you very much.
Okay. Thanks. I mean, three important questions. What are we seeing in China? I've talked about the like-for-like revenue growth, and you heard what we say in the January, April period, you will have seen that the momentum in May and June was really, really commendable. Look, the reality is that we have a portfolio, as John explained, during the capital market events, that targets both the export economy and the domestic economy. What I can say is that in the H1, we saw faster growth and higher demand for the domestic markets than the export market.
Both segments grew, despite what, what we hear, that, you know, there is an issue in terms of the domestic economy, with consumer confidence being low, we didn't see that in our numbers. Now, we are not the proxy for the, for the Chinese economy, but this is important to know. We, we saw growth in both segments, which is, which is good, as we know, we've got opportunities in both segments and of course, greater opportunities in the domestic, in domestic market. Within our portfolio in, in, in China, we've got, you know, soft lines and hard lines. We've got electrical and connectivity. We've got, you know, Business Assurance, we've got C&P. I've talked about, you know, hard line, soft lines, which was, you know, very, very positive for us in China in, in the H1 .
Of course, we benefited from the rebound given the COVID, you know, situation, you know, last year. If you take soft line and hard lines out, benefiting from a strong rebound, because we are very strong in, in Shanghai, in hard line, soft lines, our electrical business continues to, to motor ahead, our Assurance business continue to motor ahead, our C&P business continue to motor ahead. The same for Caleb Brett, the same for, you know, for all businesses that, that, that, that we have. If you look at some of the macro stats, if you look at the production data that I have, is you know, there is still, there is still growth in China. Am I listening to some of the concerns that people have? Of course, I always do.
I look at all type of data. Am I concerned? No. We have a very good team and China is well positioned as we talk about at the capital market event. I, I hear the concern, but I'm not seeing any of this. I mean, point on CapEx is spot on. Look, we've always said, you know, 4% to 5%. You know, it's, when we give guidance like this, this is a range and we will be very happy at 5, 5.5 or 6, if it makes sense, but we are also happy at 4%. You know, you don't want to push the team to spend on CapEx just because we said 5%.
I think what we do is, you know, we look at every single opportunity individually with the right approach in terms of NPV, IRR, and ROIC. We've increased our investment in the H1 , and I'm pleased to see that our events, we're investing in some of the fastest growing regions, so good increase of investments in APAC as a whole, in Africa, in the Middle East, which are good growth market, and also in Europe, which for us is doing very, very well. You know, we you saw our numbers. I mean, our European business is very, very strong given where, what our competitors have, have, have said.
As far as the H2 , we're gonna continue to invest, we talked about the segments we are interested in. If we don't do 5%, that's okay, because 4-5 is the range, and the key is to invest in the right growth opportunities that are gonna deliver, you know, sustainable growth and volume and pricing, and of course, margin. As far as the pricing power of the industry, look, from our perspective, we've always believed in being a premium price operator, because we believe that we are the quality leader in the industry. I've demonstrated that at the capital market event.
We've always started with a higher price point, and that's why we've always had, you know, the, you know, a very strong margin in the industry, because we wouldn't have the margin we had without the strong price point. Have we learned new lessons in the last years in terms of price elasticity? Of course. I mean, we never stop. We never stop learning. Would I say that, you know, in a highly customer-centric organization, our people are always careful to increase price? Of course, because, you know, we have long-lasting relationship with, with, with our customers. And, and, you know, we want to make sure that this last
When we pass on wage inflation, we've always had, you know, the view of putting 50% to our customers and the rest to our productivity, because we believe in, in real partnership. Have our team been surprised on the elasticity and certain solutions? Absolutely. Absolutely. You ask me which one, and I'm not gonna tell you because it's commercially sensitive.
Thanks very much.
Our next question comes from the line of Suhasini Varanasi from Goldman Sachs. Please go ahead.
Hi, good morning. Thank you for taking my question. Just a point for me, please. Good morning. M&A, I just wanted to understand, given your pipeline, are you seeing, for larger transactions, any signs of valuation multiples compressing at all? Second one is on leverage. Appreciate it's not the full year results, but I suppose it's in anticipation of the full year results next year. Your leverage is 1.1, target is 1.3-1.8. If M&A does not materialize, would you be considering additional share buybacks, other capital return opportunities? Thank you.
Thanks. From an M&A standpoint, I would say, it's a good question, that, that the pipeline is getting currently more interesting. I think, as you know, a lot of companies were concerned about some of the debt capacity in the market last year. Of course, we're getting out of COVID, and when all this is happening, you know, it's not the best time to put your business into the market. Yes, I think, you know, we've of course, announced Controle Analítico a few weeks ago. The pipeline is getting more and more interesting. That, that would be my, my statement.
I'm not gonna say that we're gonna announce anything next week, but I'm just saying this is what I'm seeing, because this is what, what your question is all about. Are the multiples changing in the industry? I wouldn't say so, because it's a high quality industry. There, there are not too many industry like ours, where, you know, see acceleration of revenue growth, market opportunities, strong return on invested capital, and you know, the owners of quality business know that, you know, they've got a quality investment proposition here. I wouldn't bank on that if, if I were you.
What matters is for us, is that, of course, the multiple are important, but what's important is the quality of the IP we bring in, the scalability, and how we can drive, you know, synergies. As far as leverage, you're absolutely right. I mean, we are below the 1.3, 1.8. We've always said in one-on-one conversations, in meetings, and we kind of put it in the capital allocation disclosures, that we'll, of course, always be open to returning cash to shareholders in one way or the other if we believe we don't have the right usage for cash, and if we believe the macros are the right macros moving forward.
I will also say that there are big lessons, you know, around the world where, you know, certain countries and companies have operate with inefficient balance sheet for a long long time. There are also, you know, lessons for companies having done, you know, a lot of buybacks to incite EPS in the short term and have not invested in the business. Our priority will always to put cash to work and deliver the type of ROIC we deliver for clients. If you run the numbers on Intertek, you know, share price, yes, you can get EPS accretion, but is it really value creation? I think it's a very difficult debate. Look at the numbers from an ROIC standpoint.
Hopefully you understand the approach we are taking on that. We are, of course, open, but our priority is to put cash to work because this is how we can create, you know, the ROIC we like to create, which is, you know, what we demonstrated this, this semester.
That's very clear. Thank you very much.
Our next question comes from the line of Karl Green with RBC. Please go ahead.
Yeah, thanks very much. My, my questions have pretty much all been answered. Just one small technical question for Colm. Probably nothing, but I, I just noticed the net finance cost guidance in the slide deck on slide 13, talked about it being pre-FX. Is there any kind of big unhedged FX movement we should be aware of, that's gonna impact the net finance cost line versus the specific numbers you've given?
Yeah. Look, thank you. Look, the net finance cost guidance is just that. We don't build in FX. It's simply uncertain. I would say the primary part of our net finance cost is interest. As we move through the year, those fixed interest costs on our PPs is pretty well known. Of course translated, will move with our expectations on the dollar. No, I think the simple answer is, we don't forecast unhedged FX going forward, and we have fairly good clarity on what our interest costs will be for the H2 .
Great. Thanks.
Our next question comes from the line of James Rose. Please go ahead. Well, I'm sorry, James Rose with Barclays. Please go ahead.
Yeah. Hi, morning. I've got three on Corporate Assurance, please.
Morning.
Hi. Firstly, within Business Assurance, the double-digit growth, could you give us a sort of range of the growth of the different business units within that, please? Alchemy comes to mind, for example. Secondly, on Assurance doing mid-single digits, could you say why, why that business isn't doing double-digit growth as well? Lastly, on SAI Global, could you just give us an update on progress there, and when it does come into organic scope, is it likely to be accretive or dilutive to the division?
Okay. Look, it's our Business Assurance as you heard from Colm Deasy at the, you know, capital market event, is obviously broad-based. We've got ISO, non-ISO. We've got, you know, sustainability assurance, we've got our SaaS, you know, solution. You know, I'm gonna be very careful with what I said. You know, the growth is broad-based. I don't want to give too much information to our competitors. You know, the business is doing, you know, very very well, broad-based, and it's not only across the segment I just, you know, talked about, but it's also across geographies.
We are really well placed, wouldn't be able to deliver the, the type of growth we are delivering if it was not, you know, you know, broad-based. We continue to be, you know, really excited about the growth opportunity in People Assurance, which you know, is so important for companies to reuse their operational, you know, span of, of performance in, in the front line, you know, of, of their operations. I think the SAI acquisition, which we made now quite a while ago, our focus has been integration in terms of, you know, bringing the two, you know, teams together. Making sure that we go to market with one set of solutions.
Making sure that, of course, you know, we bring the Intertek processes into the SAI businesses. As you remember, there was a lot of complementarity in terms of geographic portfolio, SAI adding some scale in Asia Pacific, you know, largely in Australia, but also in China and in some smaller Asian markets, and of course, in the food, you know, retail segments and sustainability. As I said earlier in the call, we're really, really pleased with like-for-like performance of SAI, but also with the fact that, you know, the benefits of the acquisitions and bringing these two business together on a global basis from a cost standpoint is happening.
We've taken quite a lot of costs out, and I'd expect the non-productive costs out, and you've seen it in the margin. Now it's, it's doing very well.
Thank you.
Okay.
We have a last question from the line of Simon LeChipre with Stifel. Please go ahead.
Yes, good morning. Just one from me coming back on, on margin. Basically, looking to the past, you were benefiting from very nice margin momentum, and I mean, ultimately reaching 17.5% at the peak in 2019. Now, you are telling us you are looking at your fixed costs, implementing restructuring to, to basically help you, help you to bring margin back to the peak. Has something changed in the business? Is it related to the industry facing some, some issues? Is it maybe the, the new inflationary backdrop? I mean, we can see your peers are also struggling to, to really make margin progressing. Just wondering what could be the negative factors playing out across the industry if any? Thank you.
Look, first of all, you know, for, for, for us, you know, going back to our, our peak margin of 17.5% is a goal that, you know, we are committed to, and it's gonna take a few years, you know, you know, to get there. There, there is no question that what has changed between, you know, 2019 and, and, and now is 2, 2 things, right? One is, the portfolios of companies... is not exactly the same because market changed, and when you have a, a disruption of the nature we saw with COVID on, on global scale, you got lots of moving parts.
I think everybody has got to, you know, to deal with that, and every portfolio is, is different, and I'm not gonna talk about my competitors. Also, we all have been obviously surprised by the pace at which inflation has obviously materialized. We talked quite about it in 2022, but, you know, we know that it started in certain countries in the H2 of 2021. The reality is that, you know, everybody in the corporate world in 2020, 2021, and, you know, to a rather extent in the H1 of 22, was busy with lots, lots, lot of other activities.
I think there is a catch up that the companies and the industry will do in terms of inflation, because it's a secret for no one. You know, the growth that we've seen in cost through inflation has been obviously in lots of places, higher than the growth we've seen in revenues, and there is a catch up to do here.
Yeah. Thank you.
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Okay. Well, thank you very much for your time today on the call. I know it's a busy schedule for everyone. If you have any questions, feel free to call Denny, and we'll be happy to help. Thank you very much, and have a good day.
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