Good afternoon, everyone. Thank you for joining us for FES First Half results, which are in quite unusual circumstances. I'm sitting in London, Franky and Dominic are in Geneva without any of us being able to see any of your smiling faces. I'll come back for Q and A and we hope to be wrapped up in just just over now. That's the presentation, including Q And A.
And let me pass you on to Franky who will start the presentation. Franky, please.
Thank you, Toby. Yes. Indeed, it's a bit unusual to have just a meeting on ice sitting, in the both room here in Geneva. So, Good afternoon to everyone. So as usual, I will give you a highlight of our first half performances, then Dominique will give you a more details, financial review, and I come back with the business outlook.
Okay. And if it does slide, if you Okay. But before I go through the financial highlights, I would like to take this opportunity to thank my colleagues of the entire HS Group and the operations council for their dedication and courage during this unprecedented and difficult period. We have worked all together to ensure continuity of the businesses as well as support to our customers. And at the same time, we have managed to ensure they have the safety of all our colleagues in the network, which remains our 1st priority.
So let me give you a few example of actions that we have taken during the first half of this year ensure they have the safety of the the network network and land colleagues. So our travel ban was put in place in mid February and we also installed a group of work from home policy starting in March. Those policies have since been relaxed in some regions as the pandemic has evolved. But we will continue to prioritize the safety of our colleagues. And in most of the offices working from office is still a and options to our colleagues can stay home if they wish to.
For our laboratory and field colleagues, we have enhanced our hygiene and social distancing procedures and also implement the additional leadership to reduce the total number of people in the office in the facilities, right, to at any times to make sure that we we keep the lowest level of in across infection possible. 1 of the challenges we have faced during the first half is sourcing of, PPEs, personal protective equipment, especially during March April where the global world was, the world was looking at the 20 source of those products. It was a difficult period for us. But I'm glad to say that we managed to ensure that everyone of our colleagues was properly equipped and protected. And these thanks to our global procurement as well as the operational integrity teams.
They've done a fantastic job and shared that we have a constant supply of those personal protective equipment. Another of the challenge that we faced during the first half were the lockdown measures by the different authorities. Wherever our activities were designated as essential services, operations managed to continue, but often at the reduced productivity rates. Other operations like statutory inspection and start to grave vehicle inspections were totally stop during the duration of the lockdown. Ma'am, please do say that nevertheless the network managed to remain within them with our broad geographies coverage and good balance across the eight business lines.
That goal for the result, the highlight would be total revenue decline of 14.9 percent at constant currency while the organic decline was 10.4%. Our adjusted operating income stand at 330,000,000, a 26.8% decline compared to H1 2019. Free cash flow improved to CHF 310,000,000 an increase of 43.5 percent compared to last year, and our ROACE for the last 12 months stands at 18.7%. During the first half, we made 2 acquisitions, 1 in the US for Consumer Retail, which is Stephens. Stevens is an acquisitions in the field of cosmetics where we're expanding our network in the US, which is in line with the previous occasion, we made their already called HRL.
So this will complement our footprint in the US market. The old acquisition we made is in France on the GIS Mobility, CTA galet is basically to enhance the density of our our statutory inspection network in France to ensure that we have the best coverage possible for these activities in, in France. We also made one disposal is our pest control activities in Belgium and Netherlands, which was labeled as non core for the SS Group. During this pandemic, we also we also been looking at different services and support that we can provide to society and our customers in dealing with the crisis. So if, if you look at this slide, let me let me give a couple of examples.
We have announced last week that our live facility in Glasgow will be involved in the valve safety testing of AstraZeneca vaccine. Another one is we have already increased our PPE personal protective equipment testing capabilities across the network to service the sharp increase in demand. In fact, together with all the tech council members in China, we have implemented a free PP inspection program when shipping are ordered by government NGLs and nonprofit associations. In terms of survey delivery, the remote inspection tools that we implemented since 2018 has been has seen an increased acceptance by the market and the number of inspection performed remotely has more than doubled in Q2 of this year compared to last year. So these are a couple of examples where we have done so far for for our customers during this COVID period.
And those services will carry on in the second half of the year and certainly into 2021. On that, I will pass the floor to Dominique will give you a more detailed financial review.
Thank you, Frankie. Good afternoon, ladies and gentlemen. I will start with the overview of the financial highlights for the first half twenty twenty. Frankly already mentioned operating highlights in his introduction with revenues of 1,000,000,000, adjusted operating income of 1,000,000 and a free cash flow of 1,000,000. Revenues for the group in constant currency decreased by 14.9% driven by an organic decline of 10.4 percent across all segments, reflecting the impact of the COVID-nineteen pandemic and the net effect of acquisitions and disposals.
The adjusted operating income decreased by 26.8% in constant currency, to 1,000,000, leading to a margin decline of 200 basis points in constant currency to 12.5% in the first half. In addition to the operational performance, the operating income of 1,000,000 was primarily impacted by the following items with 1 off character, restructuring costs of 35,000,000, goodwill impairment of 35,000,000. Partly offset by the gain by the net gain of dispose of PEC, partly compensated at the time by other one of items. The effective tax rate increased from 34% in the prior year to 35% in the period under review impacted by an increase in non deductible items related to goodwill impairment and a portion of the restructuring costs. Adjusted for those items, the underlying tax rate was 29%.
Subsequently, net profit after minority interest decreased by 54.6 percent to 171,000,000 in the period under review. Cash flow, cash flow performance was strong with cash flow from operating activities up 21.1%, and free cash flow grow up 43.5 percent. The decline in net profit was more than offset by strong net run capital management, lower tax payments as well as lower CapEx. As a result of the impact of the COVID-nineteen in pandemic, organic revenue declined by 10.4%. Acquisitions added 1.1% and disposals had a negative impact of 5.6%, leading to a constant currency decline of 14.9%.
The negative currency impact of 5.8 percent was due to the strengthening of the Swiss franc against all major currencies. Moving on to the revenue growth by business, agri, food and life declined by 6.5% in constant currency. Revenue decline in food and life, we are partly compensated by solid growth and trade. Minerals posted a revenue decline of 8.7 percent in constant currency. While trade activities showed a similar decline than the deletion, metology was weaker and the decline in Geochem was very limited given the continued growth in on-site laboratory.
Organic decline in Oil Gas And Chemicals was 7%. Trade as well as the majority of the activities posted a similar decline rate as the whole division, while upstream was more negatively impacted. With a revenue decline of 4.1%, consumer and retail showed its resilience during the COVID-nineteen pandemic. While for H1 2020, revenue declined for soft line, hard line, and E and E was broadly mid single digit, Softline and E and E turned recently back to growth. The recovery in Softline is driven by PPE, while for E and E, they experienced strong growth in the areas of product safety tests.
CPE declined organically by 17.8% as the division was impacted by travel restrictions and lockdown lockdowns preventing auditors from visiting customer premises. Management certification declined less than the divisional average, helped by the implementation of remote audit solutions. Other CB activities declined stronger than the average of the division. In technical consultancy, several large projects were stopped or postponed as customer dealt with the effects of the COVID-nineteen pandemic. Revenues in industrial business declined organically by 18.2%.
1 third of the decline is related to last year's decision to focus on value creating businesses. While twothree of the decline is related to the pandemic. Infrastructure, as well as power utilities were ahead of the division average, while oil and gas manufacturing and transportation, we are in line or below. Environment Health And Safety declined organically by 11.5%. A strong start of the year was interrupted by the pandemic, which was especially evident in health and safety, given the inability to access sites and constructions, Hospitality And Industrial Hygiene.
Revenues in GIS declined by 17.4% in constant currency. Mobility was heavily impacted by the global lockdown measures, while other activities performed better than the division. From a regional point of view, organic decline in Europe, Africa, Middle East was 11.9%. The Eastern Europe And Middle East Countries delivered low single digit decline as key markets such as Russia and WEE continued to grow. The majority of the key markets in Europe post a double digit decline but the decline in Germany was single digit.
Revenue decline in the Americas was 11.8% on organic basis. U. S. A. And Canada posted high single digit decline by the performance in several key markets in Latin America where more severely impacted by the COVID-nineteen pandemic.
Asia Pacific was with a decline of 7.2% more resilient, Northeast Asia Countries returned back to group in the 2nd quarter, driven by a strong recovery in China, growth throughout H1 in Taiwan and very strong growth in Vietnam. By revenues in several Southeast Asian Companies declined double digit. Our resilient performance was amongst others driven by the very efficient approach when a comes to workforce management. Salary and wages who account for 52 percent of revenues decreased in actual currency by 20.5%. Tripping out the currency impact as well as the restructuring cost in both years, the underlying reduction was 14.2% almost matching the revenue decline in constant currency of 14.9 percent.
The underlying reduction was driven by the active portfolio management, the benefits of the structure cost optimization program implemented in the second half of last year, as well as various measures taken to mitigate
the impact
FTEs at the end of H1 2020 declined by 7% versus the prior year. This is primarily a function of the structural cost optimization program implemented in the 2nd half of last year. Measures taken to adopt to the trading conditions as well as the net impact of acquisitions and disposals. Average FTEs per true in 2020 reduced by 7.2%. The magnitude of the change by region needs to be set in perspective with the revenue decline.
The strong decline in Americas is also related to the disposal PSC in the prior year. Overall, we adjusted the FTEs to trading conditions, but have in all regions sufficient capacity in place to convert incremental demand with good incremental margins. The adjusted operating income decreased at constant currency by 26.8 percent, which reflects the organic decline of 23.5 percent, as well as the effect of disposals of 3.3%. Currency had an adverse impact, adverse impact of 5.7% leading to a reported decline of 32.5 percent in the period under review Also throughout the COVID-nineteen pandemic, we continue to focus on financial discipline, leading to the following achievements during the period under review. 2 Swiss franc bonds with a combined nominal value of CHF 500 Swiss franc for attractive conditions were issued.
Continued strong focus on price discipline. The structural cost optimization program launched in the second half last year delivered annualized savings of more than 90,000,000 Wiss franc. This is coupled with strong cost control and general led to a drop down ratio of 26% in the first half twenty twenty. Strong free cash flow up 43.5 percent to 310,000,000 system driven by tight networkingcapitalmanagementandlowertaxpayments. Adjusted operating margin decline in agri Food And Life was with 100 basis points limited.
Margins in trade increased while margins in Life were stable despite varying decline and margins in decline given lower utilization rates in laboratories and activities. Limited margin decline as well of 100 basis points for minerals. Margin trade was resilient while a good margin increase in CHEO CHEM was partly offset by a decline in the metallurgy business. Margins in Oil Gas And Chemicals were with minus 40 basis points, very resilient, benefiting from the structural cost measures taken in the prior year and this year. Our most profitable segment CIS showed a margin decline of 210 basis points to 21.8% on a constant currency basis, reflecting slightly lower lab utilization rates, temporary closures of some locations but also continued strategic investments in new technology and cyber security.
The margin decline in CBE was driven by a material revenue decline, especially in the technical consultancy training as well as the aviation activities. Margin decline in management system certification was less severe than the whole division. In industrial, structural cost optimization, the change in the portfolio towards value creating business and other cost saving activities they are partly able to compensate their revenue decline leading to a good drop down ratio of 24% for the industrial business. Margin decline in EHS was more severe than in other business lines, reflecting the lower utilization levels, temporaries stopped activities but also the retention of technical capabilities to support the rebound of the business in the second half, given the launch of COVID-nineteen related services. The margin decline in GIS of 230 basis points is essentially due to the mobility segment given the lockdown of inspection stations in various countries.
Margins in the legacy GRS business increased strongly. In respect of the 150 plus units in scope, under the EVA performance management review, significant progress has been achieved despite the impact of COVID-nineteen. 10% of the units we are in the meantime closed. 40% are very well on track to be EV accretive in 2020. 25% are on the way to improve the position and for the remaining 25% which are not on track, partly because of the pandemic additional actions were defined and being implemented.
Moving on to the balance sheet. The reduction in unbilled revenues, work in progress and trade AR is driven on one hand by lower revenue levels in general, but also by our strong focus on collection. Cash is almost on the same level as at year end 2019 despite the outlook for the dividend and share buybacks in the first half. Which were compensated by the issuance of 500,000,000 Swiss franc bonds and the strong free cash flow management. The increase of 1,000,000 of net debt to 1,000,000,000 compared to year end 2019 was very limited given the payment of Cash flow from operating activities increased from 1,000,000 in the prior year to 1,000,000 in the current period, reflecting the strong management of net working capital and lower tax payments.
Furthermore, free cash flow increased by 43.5 percent, also benefiting from the slightly lower CapEx. We paid dividends of 600,000,000 bought back shares for consideration of 189,000,000 in issues to Swiss franc bonds, which led to an inflow of 499,000,000. The management of net working capital continues to be a very strong feature of SGS. Operationnetworkingcapital stands at minus 0.2 percent of revenues at half year twenty twenty reflecting lower trading hours given lower revenues and increase in advance payments applied in several jurisdictions for certain services and client segments as well as the strong focus on collection. CapEx for H1 2020 declined slightly less than revenues leading to a moderate increase in percentage of revenues from 3.9% the prior year to 4.1% in the current period.
While we have delayed some non essential and maintenance CapEx projects, our level of investment into strategic priorities has been maintained. Summit up from my side, our revenue in H1 2020 declined by 14.9% in constant currency, of which 10.4% is organically. Multiple actions on the cost management side limited the decrease in adjusted overhead income of 26.8 percent or 200 basis points in constant currency. We achieved a strong free cash flow of 1,000,000 a very solid return on invested capital of 18.7 percent, especially considering the economic circumstances in the first half of twenty twenty. And with this, I hand back to you, Frankie.
Thank you, Dominique. It's very hard to give any meaningful outlook per business for the full year considering the current circumstances. However, I thought it would be useful to give you an indication of how the different businesses should perform relative to the total good full year 2020 organic growth. So let me start with, AFL. FL should outperform the group organic rate, our trade business should continue the growth trends in line with H1 a volume should return to our food and life sciences laboratories.
Food audit and supervision, which was badly hit during H1 due to lockdown measures, should we commence. Clinical research activity should improve at the end of the year as new studies start and biometric should continue strong performances. For Minos, Minos should be brought in line with group organic level. In second half, we expect some improvement in growth as some Latin American countries remains in lockdown and causes under pressure in the US. Metrology should continue to recover and sample volume should improve in both our commercial labs, commercial joe cam lab, sorry, and plant operation services.
Comcast chemicals should be brought in line with group organic level. Option is being impacted by the low oil price, which is truck driven production cut and project delay. The rest of the business is volume based, so it is under pressure now which should improve toward end of the second half and into 2021. For CB, CB should be below the group organic level of year. The management system business model remain intact and activities should resume gradually in the second half.
However, the current crisis are certainly put some of our SMEs customers on the pressure, and we need to fill it. We need more time to access half this part of the the market will change moving to the second half of DCN into 2021. Technical consultancy should also gradually resume activities while training budgets, women are reached for the year. For all management system, technical consultancy and training, we have already introduced accelerated the adoption of remote execution tools to support our customers. International Services should be below the group organic level.
The Institutional inspection business is one of the sector hardest hit by the lockdown related to COVID-nineteen. Whereas as Dominic already mentioned, a third of the growth needed clients year on year is due to HS exceeding some low margin contract, and we should still see some of the negative effect in the second half of this year. Startory work should recover in power utilities, manufacturing infrastructure, highway, the oil and gas end market will likely remain under pressure. GIS. GIS should perform below group organic level, but the gap will be much smaller than in the first half of the year.
2nd half should show some improvement as our product portfolio assessment will recover. The reopening of our vehicle inspection network in Europe has shown good momentum. We expect a similar pattern as the network will open in auto region throughout the second half. We also expect stable activity in our border solution in the second half is include our trade, our transit net services, which has performed well during the first half. EHS EHS would perform broadly in line with the group organic level.
Statutory activity in the US and Europe should restart to weekend momentum in the second half, incurring some catch up of orders from the first half. Regionally, Southeast Asia should show good growth in our China and tower laboratories, audit and marine activities. The business will the business will also benefit from the new COVID 19 greater services release end of the first half. I think there's a link to the press release that we issued this morning so you can have a look at the exact kind of services, the welfare, and the kind of contract we're on. Then to conclude consumer and retail, shipping ahead of the full year group organic level.
We continue to benefit from a growing exposure to a China domestic market. And our E engine and chemical testing operation has been rather resilient during the first half. Softline should remain the business on the pressure while the strong demand for PP testing should support growth to a certain extent. So if you're going to allow a look, here, I would like to mention here that, the outlook that again, I have given you in the first half of the year, picking up this year in January, about the full year would not be achieved, suddenly due to unprecedented circumstances we're facing here. But considering the current COVID 19 situations, the validity of the market and also the uncertainty regarding action of different government related to the lockdowns and other measures remains difficult for me to give you any meaningful group guidance for the full year 2020 at this stage.
However, assistance today, We are looking at the second half that should be materially better than the first half as the momentum in Q2 was positive in countries that came out of lockdown earlier. The long term the long term drivers of the tick sectors remain strong, and in fact, many of the services will come even more relevant post crisis as many of our customers adapt to new business environment. On that, I just wanted to conclude as a reminder that we've had postponed our investors this 2020 event due to the uncertainty regarding travel restrictions and all that having safety concerns, even will not take place in May 27, 28, 2021 in Spain while looking forward to hosting you all. On that, I'm handing back to you the, Toby for the Q and A session.
Okay. Thank you. As you heard it guys, that's two questions, please. If we keep it to that, and the first person to ask question please, Alex. Hi, Toby.
Can you hear me, gentlemen?
Yes. Great.
Very great. Okay. Yeah, so firstly, I wonder, if you can comment on what proportion of revenue that you lost in one is likely to have been lost permanently, and how much you expect to recover in in H2 to catching up. And secondly, I wonder, Dominic, do you think the, the very low ratio of net working capital to sales can be sustained into the future and into H2 specifically. Thank you.
Hi. You want me to try the first questions? You know, it's difficult to say, but, I would say if you take, 3 part of our businesses, what we are called the statutory activities, the voluntary activities on the the transactional ones, certainly the transactional activities which would not be recovering because there are specific season related like in consumer goods. If you are looking at about the Easter season, then the Easter season is gone. If you're looking at about the back to school season, then there's, there's opportunity for us to catch up on that one, but each of the season are different.
For the statutory work, most of the businesses will come back because they, mandated. So we see already, for example, the vehicle inspection are coming back. In fact, the demand is quite high because our customers is trying to catch up for the work that I have not done so far. The middle part, which we call the voluntary is like, as a 9000 ODT, some of those food auditing. They are needed, but the the timeline at which this would coming back is on certain.
We could be in the second half of this year. We'll be beginning of next year. This one would be uncertain. What I want to give the proportion of the 3, I would, I would avoid that, but you see the 3 kind of category, I would say.
So then to the second question, so obviously, the very we have always acquired a strong working capital. It is very strong for the first half is partially also related, obviously, that we that we have clear less revenue. You have less less AR. So so it really depends how how how the second half will will develop and especially last month of the second half, will determine to a certain extent how much working capital we need. Of course, there will be a little bit of a need.
I don't think it will be very material. Another part is obviously a key feature of the first half that we get quite some increase in advance payments, which was also specific situation because from a from a from a client with point of view, it was appropriate time to, to us, certain clients of a certain services, some advanced payments. We will see how this evolved in the second half. Definitely there will be a bit of need in the working capital in the second half, but I I I think it's it's it will be still very good I I think in general, cash flow, we we'll be also rather good, because, because tax payments will be materially lower this year than than in the prior year.
That's great. Thank you very much. Thank you. And if we could move on to Paul? Yeah.
Hi. Hi, Tobey. Can you hear me?
Yes. We can.
Great. Just just to follow-up on that, I mean, in terms of the speed of recovery, where do you think we'll see the biggest or where do you think you'll see the biggest delta? In the second half on a divisional basis from an organic growth perspective. And then just on some of the COVID related revenue opportunities, we've seen various press releases over the last few weeks. I mean, how big in aggregate do you think that sort of opportunity is?
And is it temporary? Permanent and can it really move the needle on a on a group basis? Thank you.
Maybe I'll I'll answer the second public question first. In terms of different new services that we have, proposed. I would say you look at the performances of our software activities where we have, the PP included. I think the the rather strong, performance we have in softwares is partly linked to the possible volume of a PP that we're testing, in a in Asia, specifically China for the time being. We're expanding the capacity in Europe and the US as well.
So I would say this is quite material. It does move the needle, needle for our consumer good, software and sectors. That is something that we see carrying on because the volume actually has picked up since, the second quarter of the year. We see quite strong momentum moving to a just, it's a second quarter. So moving into the second half, and I don't see that discipline because the need for those PP are still quite high.
And there's a lot of concern about possible new waves in a specific location. So the domain is, is there. For some of the vaccines, some things, I mean, we are now working with 1 of the the first vaccines that has been developed by the Oxford University together with AstraZeneca. We're doing just the European batches So there will be additional batches in, Asia and the US. There will be all the vaccines that we also are 20 tender So the the market will keep developing and there will be additional opportunity on the some of the batches, the the the numbers are quite interesting.
For for us. We don't disclose the the amount because not, it's confidential, but, they are not a small, a smaller amount in terms of contract to agreement. So I would say they will be also interesting. And then the new the new next normal services that we have in term of, for the hospitality sectors and so on. These are new.
We're still looking at, the evolutions but I think the demand is extremely high. We have a lot of demand from the hotel industry, from the waste, in, sectors shopping more and so on. I would say this would be able accumulated with an interesting evolutions to compensate for some of the softness of the other sectors, I would say.
Then to the to the other question, if if you look to the delta, so if you compare, let's say, what we achieved in H1, what we think the relative performance of the division will be in H2, just in terms of, yeah, change rates. We believe actually the ones who who were more the weakest spots have a bit more potential, not because the starting point is weak, more for some underlying reasons. If you look to GIS where we now showed a mobility segment, which was a major part of the transportation unit last year. Obviously, since we had, lockdown in the vehicle inspection testing in a lot of key markets. We had material less revenues in the first half and this and this inspections open up now.
Clients have to test their car. They maybe can do it 1 or 2 months later, but not 1 year later. So so there's obviously some, I would say, demand or supply of demand switching into the second half. Then then within CBE, part of the certification business, is postponed and, and as soon travel restrictions are are relaxed or clients allowing allowing the, let's say, the, the visits, there should be some movement in, in, in that respect, as as Frank mentioned, within EHS, we have quite some some new services. We are winning a lot of clients which most likely will also impact more 21, but there should be also some some upside from, from COVID related services.
The industrial business, I would not say there's now underlying already strong growth trend, but obviously, as you know, the EVA approach to stop certain contracts started throughout, last year. So it comes from a base effect, it becomes a bit a bit easier, I mean, in H1, we have seen the full effect. There's still some effect from this, but it will be it will be less in the second half.
Okay. Thank you very much. And next, we have Ed Stanley from Morgan Stanley. Ed, go ahead.
Yeah. Thank you. I'll go 1 for Dominic and 1 for, thank you, please. If we think about the $90,000,000 in cost saving, that you'd you'd land and annualize you're ahead of that. If if we try and tell you that with slide 14, it looks like the structural cost optimization program that bar is about, I don't know, 40 or 45,000,000.
Does that does that mean that in the second half of the year, you expect to do underlying another 40 or 45 to to make up for the total amount that you'd originally guided for in November, or have you already pulled forward some of that incremental cost savings I'm just trying to understand that bridge a little bit better. And then the second question, I guess, to Frank, is, you've, you've talked about in the past the tech industry going back to mid single digit organic growth levels, and that's sort of what you talked about in November. Lots changed since then, but do you still think that's possible, given what's happened and when do you envisage that that may become the reality?
I'll take the first question. Ed, so you have very good eyes, so your numbers make sense there as well. That's actually the impact of the first half. So the second half will, of course, will, of course, also happen. So we have then annualized the run rate is somewhat above 90,000,000 from a year over year compare comparison just consider that, remember, when we announced, when we announced the program, we announced the full year, we said we had already recognized, towards the end of last year, 15,000,000 just from a year over year comparison.
On the other hand, we also had a bit of more restructuring costs in the first half. You see this also on slide 15 with the impact of disposal restructuring. This primarily restructuring disposal. We are not that much as was only pest control and, and, and, transportation business in the US. So there will be, there'll be also new savings kicking in, given the fact that that we have this restructuring cost, now towards the first half, of this year, which is not yet fully in the run rate, right, because these things were implemented basically in in Q2.
Okay. I had, for your second questions, I still believe that single digit is possible and, and this is, still a target of us to to do it and to to to improve on that. In fact, the market, in the short term has been impacted by, but COVID is no question about that. This year will be a challenging year, which you'll see it already from the numbers. But, you move forward into the future.
A lot of the services that we're offering, are becoming more and more relevant to our customers, whether you talk about the migration or transformation or the supply chain, they would need most of the our support to help them to to move to new, sourcing locations or whether some of the automotive sectors that you see have declined for the time being, they're also evolving to, more electronics, more EVs, and so on. We're seeing a lot of demand on these sectors. I would really need to you need to look at this internship and industries and the evolving industry, there will be cycles within each of the business sectors, but those cycles need to be compensated by additional new new services within those specific industry. Even in more cyclical businesses like, Minerals and all gas chemical, we see quite strong pocket of demand for specific, services like a recycling and sustainability services in the mining sectors nowadays. So I would say it's really about how the tech sectors can adapt to the demand of those, those industries and I believe the 5% of mid single digit, I would say is absolutely possible.
In our timeline, it's difficult to say because, The economic situation is quite uncertain. I would say, we'll need to, to have a clear view on the second half of this year moving to the 2021 to have, probably better visibility on where and when we can achieve back to this missing single digit.
Thank you. Next, it's David Rui from Bank of America. Hi, guys. Thanks very much for for the insights. From my side, thank you.
Perhaps could you share what the organic growth rate was in, in June. That's my first question. And then my second question is just on GIS. With the Ghanaian contract now terminated in May, does this now mean that there are no further concerns around collections within within that business? And perhaps leading on from that, do you expect a potential pickup in bad debt provision going into the second half?
Maybe too many can answer the first questions.
So I mean, the we said in the press press release that we said in the press release that that basically lowest level was April since then it improved. Now normally, don't give exit rate, but I also understand the circumstances. So it was more high single digit in 2. When decline? Yeah.
Organic. High single digit decline in 2, yeah, organic. On on on the bad, on the bad debt, I think in in general, of course, there's you have certain clients, there's a bit of risk and we see also that DSO increasing increasing a little bit, not not materially, actually bad debt expenses compared to prior in the first half were somewhat better, but to be fair, we had also, last year, if you recall in the first half, a bit higher, bad debt expenses. So we covered part of this in that respect. But in general, I I think we we focus a lot on this, so so we don't think it's it's it's the major concern for the second half by debt expenses.
Thank you very much. Great. Thank you. And next, we've got JP from Bonterbelle. Do you want to go ahead, JP?
Thanks, Toby. Good afternoon. Jean Felty from Ponderville. The first one would be on your EVA review. Now you're still talking about, I think, 25% the critique and focus.
If you can share with us how much does it, represent in terms of sales and what are the the options for those businesses? And, one for for Frankie. I think, you know, Frankie, my trusted question on clinical research, I think you made another impairment, in H1. If you can share with us what was the improvement in 11 4 and if if this business is still a strategic going forward.
If we start with the EVA review, so basically the 25% who are not on track rather the smaller ones, to be fair, where we missed the critical size, where we basically expected also let's say, the delivery more more on revenue growth, because if if they are small, it's it's a question of this one, to be fair, to to to this kind of subunits. Obviously, the pandemic was for them not helpful. We saw we are assessing a case by case, in what respect we give them a bit more time. Some of them some of them will be closed. Some of them will be will be integrated in other businesses.
And and and, here and there's also some some changes in management.
Yeah. On the second part of your questions, as I mentioned earlier, already, we don't comment on the disposals of any unit before it happens. What I can say is life sciences is critical to the address group is core of our long term evolutions. So, but within the life sciences portfolio, there are certainly area that we want to focus more than others. We will, we'll make our reviews on a regular basis.
We'll decide in due time whether each one of those specific services that we're profiting within the business unit of licenses would be relevant anymore to our long term strategy or not. And this will include as well the clinical research activities that we have. For the goodwill impairment, maybe Dominique, you can.
So the the, so the impairment is is is is related to a, clinical activity, which we which was closed, but not related to the, to the activities which we're doing, which we're doing in Belgium. Which is the more important, the size of the month.
Yeah. The larger size. Yeah.
Okay. Thank you very much. Next, Rory Mackenzie. From UBS. Go ahead, please, Rory.
Hi, all. Yeah. It's Rory here. Firstly, about innovation. Can you talk about how we're set of customers and regulators have been to some of the new ways of of working within TIC.
I think in the past, the uptake of new digital services such as remote inspections has been fairly low. So any time that's changing in a post COVID world, and then secondly, can you talk about the performance in China and in particular, the the growth rates or range of growth rates for the domestic Chinese market. And the reminder as part of the business there. Thank you.
Yes. Maybe I go for the first half of the questions. You're absolutely right, Roy. In fact, it's less about regulators. It's more about our customers.
A lot of the tools that we are we're putting in place these days is really to facilitate are steering the services to our customers and facilitate their their traveling requirement and so on. In the past, a lot of our our customers in terms of a market adapt adoption of these services was not very high because they don't really see a value on the likes to stick a bit to the more traditional ways, but it is clear that since the the the COVID 19 crisis, a lot of our customers sees the benefit and sees the natural evolution of the services. We do, as I mentioned, remote inspection that we're doing has, more than doubled in terms of, numbers, in the second quarter of, of this year, the customers felt to understand how this works and, what is the initial value, especially in the new world where traveling is becoming more complicated, especially across border traveling, a lot of those, face to face meeting are are complex. So the customer's adoption of those new tools that we're putting based actually quite high. And we I do believe that you would carry on into the future.
There's no questions that, they will be pushing more and more of those. There's not a solution of our services. On the other part of the questions, Can you remind me the
Recovery in China? How strong and how much domestic demand?
Oh, yes. You know what? The the the I I'm not sure whether Dominic can decide whether he want to give a number on the on the China growth, but I can say that, the international business was the The international trade part of the China activities was the softer one, and we have certainly moved further into the the domestic, market in China. I think beginning of the year, we mentioned 55% domestic, and we are let's say we're above that now. So, the evolution of the market is strong.
We have a lot of, new activities, what is in EHS, food, Consumer good as well. I mean, the Chinese market for consumer good has become, interesting as well. We're sorting all the activities related to industrial services and so on. There are some, some evolution of the the portfolio. You look at, the core businesses because of the inter tension in Asia where the Chinese decide not to buy a call from other other countries.
We see some more local demand for local inspection of calls. So it's an evolution of the the services migration as well as some of the those activities from the international aspect to local aspect.
I mean, if I mentioned in my remarks, no, the Northeast Asian countries are back to growth in the whole second quarter. And this was driven by China, despite the fact that Taiwan, I mean, the people who work with us at the at the Investor Relations, you have seen this is a big operation has seen growth for the first half, but China's basically all the months in the second quarter growing and and month by month slightly increasing their growth rate so that we have now, yeah, in the meantime, a really solid singled it to Crawford in China in in the last couple of months. Now, obviously, there's also quite some demand for PPE who who drove this as well.
Got it. Thank you.
Thank you. And next, Rajesh Kumar from HSBC. Go ahead, Rajesh.
Hi. Good afternoon. A couple, if I may. How what commentary have you heard from your customers in terms of how they're thinking about reviving their supply chains, especially given what is happening, with the disrupt in terms of international travel in terms of procuring goods, from China. So we could get some color there, that would be very helpful.
The second one is for Dominic. If we look at the, you know, margin declines in quite a lot of businesses that percent of completion, revenue recognition is higher. It it it is higher, obviously, there's an economic factor there. But in terms of revenue recognition or recognition of bad debt, how easy or difficult it was in the first half, given all the disruption in terms of the testing. And when you were doing that, did you choose to or on the more cautious side, with potential to you know, adjusted at the full year level.
Okay. Let me let me start with the first, first part of the questions. I guess, in fact, the transformational supply chain is, is quite interesting. Certainly, it depends on the the industry and the the business, the the the sectors, not all of them are are identical. If I take the the the the more link to China 1 is to consumer goods.
It is certainly an evolution. So we see a more and more of our customers migrating out of China for the basic textile product as well as some of the the hard goods product. But, having said that, China has such a capacity into our productions and not it's almost impossible for everything to be moved moved out of China in those categories in a in a near term. So you take quite some time. Typically the locations that, that our customers is targeting is in non Asia, Vietnam is a hotspot, I would say.
Bangladesh India to some extent, but then you'll have the the more the concept of near shoring, which is going back to Turkey. The European market is quite focus on Turkey while the US is more and more trying to focus a bit more on on Mexico and, and Santa America as the evolution of the textile, a good product. Interestingly, for the more higher technology call, product, unique product is, the migration is much slower. China is still a dominant player. I think in terms of, know how, in terms of, design, manufacturing, China is still, quite leading in that.
And do we see less movement there? It doesn't mean that there's not a none, but there is, but, it's much less obvious than, 10 fold for the for the, for the other categories. I would say, look at the different level, foot foot sectors, more and more, we talk about the consumer local. So do you wanna have, small fluctuation of that? But I think this kind of, trend is not, significant enough for the time being's food to distribute the the the supply chain of, food product from, from China yet.
You have the industrial sectors as well that, to see some migration of the some of the heavy industries to, to other locations, but, would say these are the I'm more minor ones, automotive sectors, a little bit of, moving back to, to, to Europe, but I would say, to a much less extent that we see in the consumer quick migrations.
To your second question. So basically, I think the first of all, we are pleased with, the drop down ratio for the first half of twenty six percent. And I think there are 3 components. First of all, obviously, one one key point that that we achieved is whilst a structural cost optimization program from last year. This was implemented before COVID.
So it was basically it was basically done, have nothing to do with COVID, but obviously the savings are now there. The second point it's really about to try to use all levers to stay flexible and and try to adjust the cost base based based on the based on the based on the needs, whether it will be over time, whether it is, flexible workspace workforce, excuse me, to be to be used and and and manage this. And I think the organization did this extremely well because we have to consider that that the drop happened quite significantly in certain jurisdictions And and the challenge, I would say, is more about sometimes, regulatory environment, right, because they are they are still jurisdictions, but you cannot do it because of, of, of temporary regulation. But by the end of the day, that's the same for the competition right, that that's just how it is. And management has has to deal with this.
And the 3rd point is then really, and this is what what what we and and the whole team at OC intensively did is really to assess a business by business. Are there are there maybe some concerns that that the pickup will come not that quickly or that it will not googge that quickly to a new normal. Right? If you think about, the aviation industry, it will take a long time until the aviation is weak. We'll come back and maybe they have less needs.
So obviously there needs to be a further push and structure structural optimization. And this is what we did and applied this or are still in the process because in some cases, it it's still ongoing discussion, but the majority, as I mentioned, was recognized in the restructuring costs for the second half. So I think it's it's just management responsibility, but we always did this in a way that we take out cost what is what is what is needed, what is necessary, but should not interrupt us if the demand is coming back that we cannot supply. So I think, frankly, myself and the team, if you're comfortable, as soon as demand is coming back, we are able to provide the service in very good quality and ensure the right returns out of it.
Thank you
very much. Next, George Gregory from Exane. George, go ahead, please.
Thanks, Terry. Afternoon. Thanks for afternoon, Dominic. Just following up on that previous question, on the on the drop through. The the organic drop through in the in the first half, I think, was was around 30% or in the in the low forties if we if we adjust the 45,000,000, structural savings.
Are there are there any reasons why we we should expect that to be, the 2nd half, excluding the the the structural savings, the the the incremental savings. And how I know I know it's obviously difficult, but then we, you don't know what the pace of recovery might look like, but how should we think about the the drop through next year, as hopefully, revenue starts to recover? Thanks.
I think in general, I mean, also even for the second half of pence also a lot how the revenue is developing. If you have 1% more or less revenue growth, it impacts the dark fruit, but in underlying, there are no general reasons to think differently about it. Obviously, you need to consider that, the annualized 90,000,000 savings, towards the second half at the later stage of the second half, you come to a, to a base effect because, this program last year started to build the first 50,000,000. But as I mentioned in the other question before, we also have a new savings kicking in from from from the measures we have taken now. So in general, I I think it's a fair assumption that you just said.
Now when it comes when it comes to next year and and and, you know, we we still have uncertainty and don't give a outlook for this year. So I think it's it's not appropriate to give a complete outlook for next year, but in general, I would I would say that, that, if the recovery at a certain moment comes, we will have relatively to the history rather strong drop for ratios. Let let's answer this in this way. And
next we've got Andy Grobler from Credit Suisse. Anika. Go ahead, please.
Hi. Good afternoon. Just just a couple, if I may. Sticking on the theme of costs within the the first half to what extent were the savings related to to furlough schemes and how much of that is going to drop out into the second half. And then secondly, within Consumer, the E and E division was was strong.
Do you think you're taking share within that, within that end market? And and if so, what is driving that change?
So the first question was regarding, follows: the basic government subsidies, what is, is this correct, Andy?
Yes, a government subject.
Okay. So basically, we recognize in the 1st of 1,000,000. It will be somewhat less in the second half, but them, it it will be still, it will not materially less because often the systems are basically implemented by governments until until the end of the year. Yeah. So, but in some areas, we we have people there, they will come back to block and then there is no need anymore for using it, but but I I do believe there is still a relevant impact in the second half.
And if it's less then it's actually also a good sign because that means that our people have more work and and we can build more.
On the on the E and E product evolutions, we've been now we've been quite strong indeed. There's a different services where we're we're we're we're we're we've been pretty good, and we're gaining volumes, whether it is safety, whether it is, chemical testing on, on some of the electrical electrical product. But I would say, the, the, the crisis, is also hitting some of our smaller competitors. Because of the the abilities to deal with the the lockdowns. So I would say I don't know who is taking market share from.
I would simply say that we know, which customers is giving us more volumes, but I would assume that some of those volume would be coming from smaller competitors that cannot, deal with the the lockdown, current lockdown situations. The some of the markets are is also growing. They are their pocket of the the global market in the g and g side, it is it's still growing. Which will also be retreating from that growth.
Okay. Thank you.
Thank you. Next, we have Julia from Societe Generale.
Hi, Toby. Thank you. Most of my questions were already answered. Just two questions. The first one on the Industrial division do you expect the division to remain, under pressure of a 2021 due due to the situation on the oil and gas market?
And the second one is, could you give us an update on your 5 g activities? Do do you see slowing trends due to the the
I'm sorry. The second question was, on the, what activity did
you see?
A 5 for you.
5 for that. Yes. Approach as for that. I'll check the 5 g. In fact, not really.
In fact, if you look at our 5 g laps in, China as well as in, in current Taiwan, the the activities Taiwan's been, very strong. The Korean activities is, it's been delayed. Because of our customer's, lounge date. So, obviously, when you have, a soft consumer market, some of the 5 g activities linked to our mobile phones, so on, they have tendency of trying to a time to beat the launch of their new models and so on. So we see a delay on that, but, the The orders are not canceled.
In fact, we're seeing some of those, going back into a lot of countries. China is quite steady as well. And then you look at the evolution of what we call the connectivity where the 5 g is more than just mobile phones. We see this kind of 5 g technology in a more and more of the automotive sectors and some of the other other industrial sectors. In fact, we are seeing quite strong momentum for the 5 g sectors.
And when Dominic spoke about, investment into, in the future and to call strategic development in terms of CapEx for this year. 5 g is one of the the the sectors that we have invested. We believe that the market will pick up
I mean, as I mentioned before, the one third of the decline within industrial is also related to the fact that we, that we focus on value creating business. So this will this will, of course, over time, in terms of decline rate into second half, but then also into the following year. Phase, phase out. Obviously, we we we have a certain exposure to oil and gas. How this is developing next year?
It really depends on on what's happening in the in the in the in the oil market or oil and gas market, but obviously strategically, we we we we we focus also on other segments or we'll focus more within industrial and other segments, who are maybe in the long term, less under pressure than oil and gas. Or have more opportunities put it this way. Thank
you. Right. Okay. We've got one more question on the call, and then there's a couple, which had been submitted by the webcast, which I'll read out. So so Tom Burton, do you know, from Berenberg when you asked the the final couple of
Yes, thanks, Toby. Good afternoon guys. Just two for me. Just on the new COVID related to the revenue streams and opportunities. I'm just curious given it seems that it didn't seem to make a huge revenue impact in the first half.
I'm wondering whether there were any sort of whether there's any front loading of costs maybe on any of those contracts or those new wins. And I'm just wondering, whether there might be any to margin impact to get a few front loaded costs and maybe taking the revenues, or starting to book revenues then in the second half. And then the second one is just to follow-up on one of the earlier questions regarding new modes of of working in the tech sector, if if there's a sort of increasing uptake on on remote inspection or so forth, whether you back to any sort of, noticeable impact on either sort of pricing productivity or margin that we might see coming through sort of over the medium term? Thank you very much.
Let me stress that with the first question. So it's not that, a lot, you know, a lot of these contracts were recently signed and they will because also for clients, it has taken some time what what they need and want to do, but, but very strong pipeline. We signed a lot of contracts. I think we have also an internet link where you can see all these new services And when we are allowed by our client to talk about it, we of course also mentioned this there, there are not really a lot of, let's say, front costs, but what is fair to say given the fact that we have seen this opportunity, we we we also stick to a certain level of capacity, because we we anticipate painting, delivery in that respect and we want to deliver this in a very, in a very good way. So it's more anticipation of the disservice generated revenue, but not contract related, pre costs to be considered?
If I go to our second questions, interestingly, for the time being, we I I I don't see any, price pressure or cost pressure with those, new solutions. In fact, we see that, our customers sees that as, and add add value as well because, we spoke about earlier about, evolution of the supply chain, because of the new new normal, I would say where a lot of customers do not necessarily want to travel. In fact, we ended up in the situations where we become kind of, their QAQC imencies in the ground more than before. I was starting to do, those activities beyond the traditional inspection activities we're having. We're actually doing some of the Q secure, QC work as well.
Which usually is done by the whole procurement, so we are expanding these services. And they're quite happy about that because both ways, the customers could do some of those remote activities by themselves, or we can do those remote activities on their behalf. So the 2 add to add value into their supply chain. And, in the medium term, I don't see any particular pressure on the price on the on the cost. In fact, we'd bundle that survey that solution into our our total services, and it's something that, allows us to be more efficient as well.
Okay. Thank you very much. That's the end of the conference call questions, there are a couple, on the webcast, which I will read out. So the first is Could you comment on the commitment to the dividend given that we've been running a 90% plus payout ratio since full year 2015?
We we I mean, we have a clear dividend policy and and line with earnings growth, but at least stable in general. And, I mean, if you look to the strength of the balance sheet, if you look to the free cash flow, which we generated, we are not concerned about this.
And the final question is how much revenue did the Ghana contract contribute in 2019? Was it close to divisional average margins? And what is the expectation regarding the recovery of the Ghana contract bad debt provision?
So if we look to Ghana, the Ghana contract, the Ghana contract was stopped to the towards the first half this year, and it contributed this year. I mean, it was this pretty stable business around 12,000,000 So, last year around 24, so you basically miss from a year over year comparison in the second half to 12,000,000. The profitability of this kind of contract usually are somewhat somewhat higher, than, than the than the than the group average. And, from, from a bad debt point of view, we recovered, we recovered some bad debt, but not not all outstandings, but I clearly want to point out that, that in terms of service delivery and quality, this was everything perfect. The government walked away out of existing conflicts.
So it's basically breach by the government, where we're currently assessing the opportunity for a claim.
Okay. Thank you very much. Well, that brings us to the end of the call and the end of the webcast. Thank you very much for everyone joining. Also for those who ask questions, we look forward to speaking to you and seeing you at some point in the not too distant future.
Have a good afternoon. Bye bye.
Thank you.
Thank you.