Ladies and gentlemen, welcome to the SGS 2019 Half Year Results Conference Call and Live Webcast. I'm Sherry, the Chorus Call operator. I would like to remind you that all participants will be listening mode and the conference is being recorded. Questions. Questions.
The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Wiggs, Senior Vice President of Investor Relations at SGS auditorium in Geneva. Please go ahead.
Good afternoon, and welcome to SHS first half, 2019 result. I'm Toby Ricks, head of IR, some of you hopefully know me. I have to say a couple of things on health and safety. We're not expecting a drill. If you hear a bell, fire alarm.
There are some signs at the back of the room. If you follow those fire exits out, we've got a muster point just in front of the building. Okay. So With that, I'll hand over to Franky. He'll open up on our results presentation.
Good, ladies and gentlemen. Good afternoon. Again, welcome to the presentation of our 2019 first half results. Before we start, I would like to introduce you to our new group CFO, Dominique Daniel, who has joined us in February. I got it right now.
15th February. So great. So as usual, I will give you a highlight on our first half performances. And Dominique will provide you a more detailed financial review, that I will come back with a business outlook and the second half guidance for and for the full year, sorry. If, if we look at the result, I'm pleased to report that our results are in line with the guidance given in January.
Total revenue grew by 3.9 percent at constant currency, of which 3.5% was organic. Our adjusted operating income stands at 489 5.4% increase compared to H1 2018. Free cash flow from operation amount to 1,000,000,000 compared to the 176 francs that were achieved last year. I'm now ROIC stands at 23.9% for the last 12 months. During the first half, we also hit 3 strategic milestones.
The first one was mentioned during our Investors Day in November last year when I highlighted that following our dashboard review, We were already to dispose of around CHF 350,000,000 of asset and that we will accelerate our acquisition in selected sectors. Both action having the effect of enhancing our capital allocation in line with our long term objectives. I'm pleased to say that we have executed on this 1st pillar with the disposal of Petroleum Services Corporation called Internally PSC and the acquisition of Manpoint, both located in the U. S. HSR's own PSC for the past 15 years and it grew significantly on our leadership and this thanks to the dedication of our PSE colleagues.
But considering the market evolution and our core focus, we decided that PSE will have a better future on the newly on the As for main point, I also highlighted last year the important for the Chesapeake to expand our services across the value chain and main point will bring a wealth of competence in operational consulting to support our time addressing the operational improvement needs. We made some acquisition during the first half and 2 further announcements when made on Tuesday to complement our portfolio. Of the semi acquisition, 4 of them have a minimum of technical or operational consulting consultant expertise, which again is fully in line with the focus of moving more upstream in the value chain. Both Linksys and main point are in the operational consulting space. For Jan is specialized in the consulting and testing engineering and consulting under its name indicates is in the construction sectors but has also an area of consulting in the auto flow.
Subsequent to our media closing, we have also announced a 20% participations in Viacom, BIM building information modeling company in Hong Kong, which will complement our portfolio for the infrastructure and construction sectors in the Greater Bay Area in the South China Sea. We have also announced the acquisition of forensic analytic laboratory based in the U. S. And active in the domain of industrial hygiene. The acquisition will expand our portfolio of services in the growing U.
S. Environmental health and safety market, which growing strongly for us as well. It's not in just light, but the second milestone that we have, achieved is our continuous improvement into investment into new sectors for the long term development of the group. As an example, our restaurant investment very promising cybersecurity sectors with new facilities in Grat, Australia, and Madrid in Spain. On the the plant expansion of these activities in, North America and Asia.
Just real 55s here that we, in Dutch, scope, when of our cyber security, it is not to compete with the software sectors where we're focusing on testing inspection and certification of chip set and product that would need some kind of competency expertise in terms of cybersecurity baseline assessment. This is also a strong commitment to our commitment to the chartered trust on cybersecurity where HS is a founding member. Regarding the 3rd milestone in our press release of this morning, we announced a strategic optimization plan of our network was up of simplifying our structures and rationalizing our overlapping activities. Our matrix organization, our decentralized structure, our key strength for the HS Group, but at the same time, salaryman of complexity and duplication have built over time. Over the past few years, a lot of work has been done and achieved to reach the stage where we can have a closer look at the structure of the network in order to remove waste.
On this public milestone, Dominique will have a slide and will present that in more sales. On that one, I will hand over the presentation to Dominik who will go through the more the financial part of the presentation.
Thank you, Frankie. Good afternoon, ladies and gentlemen. This is my first set of results at SKAT and it's nice to see some familiar faces in the audience, and I suspect familiar voices on the call. So I look forward to spending some time with many of you over the coming weeks and months. I will start with the overview of the financial highlights for the first half of twenty nineteen.
Frank you already mentioned the operating highlights its introduction with revenues of CHF 3,300,000,000 and adjusted operating income margin of 14.6%. Constant currency revenue increased by 3.9%, the majority of our business performed well with the exception of transportation and GIF. Adjusted operating income increased by 5.4% in constant currency, to CHF 489,000,000. At constant currency, adjusted operating income margin increased by 20 basis points to 14.6%. This includes approx 20 basis points from IFRS 16, but this was more than offset by collection delays primarily in our GIS business, which we expect to improve in the second half of twenty nineteen.
Operating income increased by 61% in constant currency largely due to the 264,000,000 system gain of the disposal of the PSC business. This was partly offset by a number of factors including provisions for indirect taxes, remeasurement of the defined obligation of the Swiss pension fund and goodwill impairment of CHF21 million and restructuring costs of CHF16 1,000,000 was CHF 11,000,000 higher than in the prior year. While last year's operating profit was negatively impacted by 1,000,000 in relation of the overstatement of revenues in proceeds. The tax rate increased from 24% in the prior year to 34% in H1 2019. The tax rate of the increase in the tax rate is due to the valuation allowance on DTAs see that in the first half of twenty nineteen.
We expect for fiscal 2019 a tax rate of 31% but going forward, we would expect it to be in the higher 20s. Subsequently the net profit after minority interest increased 38 percent to 1,000,000 in the period under review. We posted a solid organic growth of 3.5%, while acquisitions added 0.5% and disposals had a negative impact of 10 basis points, leading to a constant currency growth of 3.9%. The currency impact was negative by 2.8% as the Swiss franc strengthened against all major currencies with the exception of the U. S.
Dollar. Moving on to the revenue growth by business. We have all had a chance to read the release by now, so we'll just focus on a few of them. Consumer And Retail had a pleasing performance given the geopolitical backdrop it continued to grow strongly with 5.5 percent organic growth in the first half. This is a strong performance given the slow start, which we talked about at the start of this year.
Electrical and electronics showed strongest growth. Soft lines started slowly, but growth improved gradually throughout H1 and is now posting solid growth driven by the new sourcing countries such as Vietnam, Indonesia, Cambodia and Turkey, while China was stable. Industrial also performed very well, growing strongly with organic revenue growth of 6.8%. Within this, oil and gas posted double digit growth. Growth in manufacturing and infrastructure was solid, while power and utilities was broadly stable.
We talked about transportation having a difficult year and it declined organically 4.5%. Weaker demand in field services and some price pressure and increased competition in regulated service more than offset the strong growth in testing. Finally, government and institutions had a challenging first half as revenue declined organically by 4.4%. This was driven by the gap between signing and implementation as well as enforcement of certain client contracts, particularly in the E waste monitoring solution. From a regional point of view, the strongest growth was in the Americas, which was up 5.1% organically.
We grew strongly in South Central America, especially in Peru, Colombia and Brazil. Whereas growth in North America was modest. Asia Pacific also grew well by 4.4%. Growth continued to be driven by strong growth in China, Korea and India, while growth in Australia was solid in Taiwan modest, and Hong Kong Japan as well as Thailand slightly declined. Organic growth in Europe Africa, Middle East was a modest 2%.
Double digit growth in Eastern Europe And Middle East was offset by Africa and Western Europe, which were held back by the weakness in our GIS And Transportation business. The development of the headcount is well controlled. Periods and FTEs increased 1.5% organically year on year, which compares to 3.5 percent organic revenue growth. Acquisitions added 0.3%, while disposals and the optimization of the network combined resulted in a 4.8% reduction. Overall, total headcount fell by 3% at the end of the period, which is, of course, also impacted by the postal of the PAC business in the U.
S. Regionally, productivity improved most in the Americas due to the strike changed implemented in North America as well as South America. South And Central America benefited on top from a higher operational leverage. The adjusted operating income increased in constant currency by 5.4%. This comprises 4.8 percent organic growth and 0.7% added through acquisitions.
Operational leverage was held back by collection delays, largely in CIS, for which we expect a clear improvement in the second half of twenty nineteen. Currency had an adverse impact of 3.7%, leading to an increase in actual currency of 1.7% in the period under review Moving on to the margin development, again, you have seen the numbers so I will focus on a couple of highlights. Margins in Minerals increased strongly by 110 basis points, which is primarily due to good operational leverage in Energy Minerals and an improvement in the trade business. Oil Gas Chemicals showed a nice increase 100 basis points as it benefits from the improvement in the upstream business combined with the cost control measures implemented in the trade related services. CBE increases margin by 10 basis points, while a modest improvement, it's a performance given the lower audited utilization rates due to the 2018 transition period.
While there was a small benefit from the acquisition of Linksys, there was also good cost control and good performance from higher margin services in the performance. Assessment. The largest improvement in margin was an industrial up 2 40 basis points. This is the result of our active contract portfolio management where we are exiting value destroying contracts and successfully reprice some of the existing contracts. There was always a good contribution from restructuring measures taken in the first half.
The margin decline in transportation reflects the impact of the revenue factors covered earlier and some related mix effects. There was a material margin decline in GIS. This is a result of strong collections in H1 2018. Collection delays in the first half twenty nineteen, which led to a significant increase in bad debt charges. Contract and enforcement delays.
As I already mentioned, we expect these factors to improve in the second half. Moving on to the balance sheet. The balance sheet by the end of June compared to the balance sheet by the end of 2018 considers the changes in relation to IFRS 16 lease accounting standard and IFRIC 23, which addresses the interpretation of uncertain over income taxes. Both accounting standards are effective as of January 1, 2019. The increase in property, plant and equipment of CHF 588,000,000 is explained by the recognition of right of use assets, of CHF 686,000,000 on January 1, 2019, following the introduction of IFRS 16, minus the subsequent depreciation.
Out of the lease liability of 714,000,000 as of January 1, 2019, 1,000,000 are considered as current while the remaining amount is considered as long term lease liability. As a result of the introduction of IFRIC 23, a tax provision of CHF 40,000,000 has been recorded against equity. PSC was deconsolidated as at the end of June 2019 and the proceeds of CHF 320,000,000 to be received is reported under other current assets. The increase in goodwill is due to the consolidation of the balance sheet of main points and a couple of other smaller acquisitions. Net debt at the end of the period is 1,000,000,000 or 1,000,000,000, excluding IFRS 16, compared with 1,000,000,000 at year end, reflecting the dividend payment of 1,000,000.
This bank, seasonality, to the need for working capital in the first half and the increase in our M and A activity. The operating cash flow increased from 1,000,000 last year to 1,000,000 this year. However, Given the introduction of IFRS 16, the payment of lease liabilities of CHF 87,000,000 is now reported under financing activity So on a like for like basis, the operating cash flow would have been 1,000,000 versus the 1,000,000 last year. The decrease is a function of a higher increase in working capital. The higher outflow compared to yearend is solely due to timing of payments.
You surely recall the very strong net working capital at the end of last year, which was significantly driven by payments occurring in 2019 instead at the end of 2018. Capital investment in fixed assets were slightly lower than last year, covered in the next slide, while investments in acquisition increased by approximately EUR 100,000,000, mainly related to the main point acquisition consolidated as of June 30th. Dividends of CHF 589,000,000, we are paid in the first half and we paid back the CHF 5. Bond, which was due in the first half for a total cash consideration of CHF 375,000,000. CapEx in the first half twenty nineteen was 3.9% somewhat lower than the historic trend of 4.4%.
However, we believe this is just a timing issue and CapEx will increase in the second half, leading to a CapEx in percentage of revenues more in line with historic trends. Our focus areas in terms of CapEx are related to investments in cyber, strong investments in E and E and Asia as well as investments in 5G. Wireless, lab additions in the food business, additional primarily outsourced labs in the mineral business. The following slide shows the evolution of the operating net working capital as of June 30, in percentage of revenues in the last 12 months. Just a couple of remarks to this one.
First of all, in the last couple of years, SAS did a fantastic job to optimize net working capital. From a seasonal point of view, net working capital is always higher in the first half than at year end. Networking capital in percentage of revenues as of the end of June was further improved by 20 basis points to 2.9%. While we don't expect any further improvement on the liability payment side, we still believe there are some further improvement opportunities on the AR side, especially when it comes to time to bill as well as to the collection process. We announced this morning a structural optimization program, which is needed in order to run our business more efficiently going forward.
The program is focusing on simplifying the business by eliminating duplications and reducing layers within our organization. The cost for this program of this bank $75,000,000 will occur in the second half of twenty nineteen and expected to deliver savings that will exceed the initial investment in 2020. Therefore, the full benefit should be achieved in 2020. As we primarily targeting overhead and indirect costs, the risk to revenue is minimal. If this measures, we will see our business in a leaner and more efficient way going forward.
Before I hand back to Franky, our key points in the first half financial performance are solid, organic revenue growth of 3.5percentor3.9percentinconstantcurrency. Our adjusted operating income increased by 5.4 percent in constant currency, resulting in a margin increase of 20 basis points. Profit for the period was up 34.8 percent to CHF399,000,000, driven by the gain from the divestment of PSC We spent CHF268,000,000 in CapEx and acquisitions, acquisitions and achieved a free cash flow of CHF 216,000,000. With this, I hand back to you, Frank.
Thank you, Dominique. Let me give you a quick review on each of the business lines for the second half of this year. Let me start with agricultural food and life. It is still too early to have a clear prediction on the new crop conditions But the early information indicates some improvement in export condition, and this should be favorable to our trade activities for the second half. Testing and notating activities for food are expected to remain good during the second half with a positive development across the network.
Licenses laboratory testing and clinical research are also expected to achieve good growth in the second half of this year. Overall, and expect similar organic growth as H1, I wish you see a further improvement of margin. If I look at Mino now, growth at Mino will go will come under pressure moving to the second half of this year with the expected softer market conditions for the energy minerals, plant operations, and geochemistry. The startup of new Anselawa trees, a strong metallurgical pipeline and trade portfolio with balanced overall growth, which should be slightly lower than H1. The margin improvement should continue into we have already taken measures to rightsize the business in anticipation of the softer market conditions.
Look at all gas and chemicals. If we exclude the impact of disposals of the to activities in the U. S. And in the Netherlands, the remaining of the OTC portfolio will achieve a moderate growth in H2. We expect strong growth in both upstream activities under all condition monitoring and a stable outlook for the trade and testing activities.
Margin should improve due to the mix of business growth and disposals. Consumer Retail. H1 performance in China was relatively stable despite the trade tension between the U. S. And China.
Volume in Hong Kong has decreased significantly due to the higher exposure to the U. S. Trade, while the rest of the network has performed solidly, particularly in Turkey, Vietnam and India. Assuming no further tariff escalation between the U. S.
And China, we expect consumer goods to achieve similar growth in H2 as in H1 and the full year margin should be similar to the one of last year. Certification business enhancement. The negative growth seen in H1 should moderate in Q3 after comparable from the Azure transition period last year is, and we expect a return to growth from Q4 of this year. The addition of linksys and main points to our performance assessment portfolio bring the strong competence operational consulting and will create new growth opportunities for Citi. The acquisition will also support overall growth and help build on the H1 margin improvement into H2.
In the short, as we mentioned at the end of last year, the focus on reinsurance services in 2019 is to rebuild its portfolio and improve profitability. During H1, we have discontinued several maintenance contracts and closed our pipeline and non digital testing activities in the U. S. This will have a short term growth impact in H2, but we'll also support further margin improvement. Growth in H2 should moderate reflecting the discontinued contract offset by continuous growth of older activities including material testing, supply chain, services in the Manufacturing sector.
The lower growth should be combined with a strong margin improvement. EHS, Orlando Health And Safety. The solid growth across the entire portfolio in H1 is expected to continue in H2. This business should continue to benefit from a continuation of same market drivers from previous years, including increased regulations and increased demand for our marine and industrial hygien services. The margin should improve further in the seasonally stronger H2 as a benefit from efficiency measures taken in H1.
For Transportation, I noted that our full year result 2018, presentations that Transportation will be under pressure in 2019 due to the end of several contracts. As expected, both our regulated services and field services were significant down in each one as already indicated by Dominic. We expect the trend To improve slightly moving into H2 after negative impact from rigor written and field services moderates and growth continued in the La Progyt testing network in popular our new EV battery testing activities in Germany will gain momentum. Overall, H2 growth should be stable compared to H2 of last year and the margin should improve slightly compared to H1. And to conclude with GIS, the government institutional services.
The training condition should improve in H2 supported by the expected volume increase in our scanner activities in Cameron. Our new valuation program in Mozambique and the stricter enforcement of our renewable project in Ghana should also support growth momentum. Also, PCA volume in H1 were impacted by the top rate suspension in our Ghana, Kenya program, sorry, This has been lifted now and we should be seeing the volume back to normal. For the full year, we expect to get back to positive and stable growth compared to last year, the margin will also be closer to the 2018 level as we resolve the budget situation of H1. So, in terms of guidance for the rest of the year, I'm moving towards the end of 2019.
Based on the different business line, outlook address gave and subject to assumptions that no further escalation of the US China trade disputes, I'm expecting our second half organic growth to be similar to H1. In double margins, the second half is traditionally the busiest semester. This together with solid outlook for many of our business lines, which expect a stronger uptake of the adjusted operating income for the 2nd for the end of this year, income margin for the end of this year. On that, our guidance for 2019 remains unchanged and are solid organic revenue growth, higher adjusted adjusted operating income, and rubbish cash flow. To conclude, I would like to thank my colleagues of operations council, who are most of them are present in this room, and the operations group for the achievement of this set of solid results.
Therefore, we're also instrumental for us achieving the 3 milestone I mentioned earlier. Our capital allocation to enhance value investment in new sector for the long term and the optimization of our network. This milestone with position us to ensure and testing inspection and certification industry and create long term value for dentures on previous customers, shareholders and for society. The last slide that you, as you see on the screen, is our outlook 2020. That just to reemphasize on them is delivered mid single digit organic growth.
Actuator M and A, attributable to operating margin of above 17 percent, strong cash conversion, robust return on invested capital, and maintain the dividend or grow it in line with the improvement of adjusted net earnings. On that, we can go for the Q and A session.
Q and A, right. So if we start with the Q and A in the room, so hands up.
2 questions. Can I limit it to two questions as well?
Suhathleen from Goldman Sachs. 2, please. Oil And Gas, the up stream has been quite strong in first half. Has the strength in this division actually surprised you? Has pricing actually come back?
How's the pipeline looking going into second half and twenty twenty. And the second one is, more on accounting 1, IFRS 16. What's the benefit on the margins particularly strong in some divisions or was it spread out across the group divisions? And it's a full year benefit also 20 bps.
So this is, it's approximately 20 bps and there is no big difference around the different business units because it's basically a function of the average duration of your lease portfolio. And there are no significant difference around around the group.
So for the first question for upstream, not just the result was not surprising because we had deep for the past couple of years and we've worked very hard in, securing new contract in the Middle East, in, Asian regions where we're more focused on upstream, but production part of the process. This is with the result of all those efficiency improvement contract securing over the last couple of years. There's now creating the stream of revenue. So we're expecting some kind of, growth that we are looking at. First one into the second half.
Some of those contracts are long term contracts, so we should some momentum into 2020 as well.
Yes, it's Amica Puna from Kepler Cheuvreux. I just wanted to come back on this 75,000,000 cost saving program. And I'm just wondering why you did not raise your margin to 20 target on the back of that given the it should be quite an important uplift. And if not, what is actually eating into your margin and should we conclude that the organic growth is essentially an inflationary pass through and there's no real profit growth or negative potentially pressures on the margin that we should be aware of. And also bearing in mind that there is this margin pressure on the buying.
Why is the group continuing to shrink capital investment and instead of redeploying capital in a more aggressive way?
So if you look to the program, our goal is 17% plus, right? And obviously, it's getting more challenging. So of course, the 1,000,000 is a key enabler to get there, but there's also right? The goal is not 17.00, 17 plus. And this program is very helpful for the 17% plus, but it's meant to be a program for the future, as we think, we achieve efficiency gains, which are helping also beyond 20 2020, but it should not meant to be that we now therefore increase the target up because it's a target 70 plus, and we are confident to get there.
And in terms of capital spend, the objective is not to increase capital. In fact, as Dominic mentioned, just earlier that, the lower numbers in terms of revenue, is just a question of timing. We have a new, investment coming around in the second half of the year. And we should be back more or less to the same level that you see on the yearly basis. So, certainly more disciplined approach toward your field and your areas that we're looking at.
So, it's just that the coach of timing, there's no intention decreased the spend on the capital of this company, not in the CapEx, I would say.
Ed Steele from Citi. Hi. I'm following on from that last question on restructuring. Obviously, been through several years of efficiency savings, procurements, savings, lots of restructuring costs going through the business. So, this is not the 1st program.
Could you give us some specific examples of the things that you are doing that are incremental beyond what's been previously announced and give us an update also on the shared service center benefits, especially coming through at the moment, procurement savings, etcetera. That didn't seem to get featured. And then, second question, maybe you could just talk a little bit around the decision to dispose of, the OGC asset PPCS. Obviously, it's performed very well in the last few years. It's been one of the highlights of that division, really, against, some pressures elsewhere.
And, given, it's got some characteristics of asset light, etcetera, which you may not like. Are there some other assets industrial that you might want to dispose off as well on the same basis, please.
Maybe I'll address the second part of the questions. The process for PSC is really clearly linked to the dashboard that we have put in place, now about 3.5 years ago. Where we're looking at the specific gate in terms of growth and in terms of, margins that we are looking at. You know, the PSC activities are quite unique in the sense that when we bought it 15 years ago, it was the tanker man business and a lot of, transporting of chemical said of a Mississippi River. But if you look at the growth of the last few years, couple of years, it was more focused or linked to the petrochemical industry, where they were supporting the chemical industry into, in terms of expansion of their, their manufacturing basis, which is a totally different businesses that we had the weekend of the process.
While the initial businesses was fitting into our core strategy, the later part of the growth also getting further and further away from the actual core value of the PSC that we got. It doesn't mean that these of the business is not valuable for someone else, but it's not a long term evolution of our strategy. It was not the part of activities we're going to focus and we see more potential in growing this packet of the activities, which is much more lower margins than the ones that we had initially. So this part of the reason why we have decided with our island ahead of OGCs to decide that we need to walk away from these activities and we're still in a good, pattern terms of disposal such activities. But you're absolutely right, it's a good asset, but it's just a different focus on what we are looking at in the longer term.
As for the rest of the portfolio, as I said, the dashboard will carry on, and now see last year, we've done about 3. You can debate and have another 50 that will go around. We are looking at the more asset But the plan is really to ensure that those, asset fit, the strategic logic for us. If it doesn't, then we'll have no issues to make sure the disposal. But at the same time, we also need to look at ARIA where we can grow.
And I think the main point acquisition was a good example where While we're disposing on one part of our portfolio, we are growing something else, this complimentary to what we want to achieve in terms of chain and the enhancement of our portfolio.
So an asset light business model, right? So it's not that we're?
Yes, which is an asset light consulting business.
You want to address it first? So if we look to the restructuring and of course, you're obviously right at the and if you add this over several years up, it's a certain amount, but I think this program is different in two ways. First of all, it's itself, I'm 1,000,000. This is not what we usually spend as restructuring in a half year. And if I look to restructuring programs historically, of course, based on my limited experience in SKS, it's often related much more to the direct cost changing in a certain local market, changing price changes or changes in a certain business, which we are always rightfully actively addressed.
While this one, I would call a small a structural change where we basically look to opportunities to eliminate duplication. And maybe I have 2. Go a little bit back and Frank said he's already in his introduction. If you look to our structure, we have a matrix structure, which is very, very successful where we have 9 business units with strong leadership who, who have a detailed understanding about this business the strategic responsibility. And then on the other hand, we have the operations, the CEOs running the daily business, we're making sure the service is delivered with great quality and run this inefficient and very productive and profitable way.
So it's a good combination because if I see also as a newcomer, it led to better organic growth than the peers the same portfolio basically the last 5 years every year. Now that being said, often incumbent structures over time, duplications building up, duplications between the business and the countries, duplications between the functions and the business. And this is just how things happen and see this also in other companies. So it basically means that we to give examples, in one business unit, we have ITP, but ITP should be in the function of it. So these kinds of duplications we are addressing.
We also think that in certain jurisdictions, we have business unit management for very small businesses where the question is, is the sufficient? Can you really act in the right way on the market if your direct overhead is too high? So this program is basically focusing to eliminate this duplication in the second half of the year. And therefore, what I also said, the impact on sales should be rather limited. A couple of closures are part of it, but it's really minor.
Because it really addresses more the overhead and the indirect cost base. And there should be sustainable cost saving And it should also help if you have duplication, sometimes the decision making takes a bit longer.
Thank you. Do we have any further questions in the room? Please, Paul. Thank you. It's Paul Sullivan from Barclays.
Sorry to come back to the restructuring point, but I'm just interested to know what really changed since November when you set the, when you restraded the targets. And now you need to take a 75,000,000 restructuring charge to achieve the target. I'm not clear what's really changed. And do you or do you see as additive or was the basis of the target effectively flawed when you set it?
No, not all. In fact, in November, when we discussed about the target of 'seventeen, there was also an plan an element of what needs to be done within organizations. While we set the target, we don't explain any details exactly what's going to happen. We were already in the the working process of this plan. So it shows that Dominic has joined us in February, which just accelerated the plan to make sure that we have able to deal with that now.
As to the full plan and we put it in the first half of this year. But the idea of the plan already exists that we know there was efficiency in there that we needed to take some extra measures to ensure that this waste was going to be picked up. You know, if you look at all the different steps we've done over the past few years, besides the shared service center, we also introduced the work broadcast services, which is more focused on the optimization of the processes of laboratories and the field activities itself. So it's an internal longer term evolution of the process to which one is optimized. This additional piece of the optimization is really looking at the duplications of the network to reset the orientation of the network because the matrix organization over time has created a very successful model, but as Dominik just mentioned also created this duplication, this waste across the the network.
So the idea was to have 1 program to work out services to optimize the laboratory's operations and other programs to optimize the network itself in terms of duplication overhead on some of those clustering of function within a smaller country, smaller business line. So this was part of the rationale behind the plan anyway.
Could you, just to be clear, could you give us the exact impact from disposals on the second half margin and on next year?
So if you look on on disposals on second half. So it's basically selling this U. S. Business is approximately 20 basis points because this business itself had not a bad margin, which was lower than the group margin because the margin is a higher single digit. And main point on an annualized basis is rounding to 10 basis points positive.
And from an underlying basis, you would expect the underlying improvement of 20 ex the IFRS changes to accelerate in the second half.
Correct,
yes, because yes.
Thank you.
I think we have one more in the room.
Thank you. William Haggart from Ross Chubbankoe. Two questions, one on tax rates. Could you elaborate a little bit on the detail behind drivers and changes to tax rates from 2019 forward, and that impact on earnings. And the second question is to do with negotiating the contracts with clients, particularly in terms of pricing, whether there are any changes at the moment.
If you look to the tax rate, the tax rate in the first half is 34% higher than the prior year. And this is related to deferred valuation allowance on deferred tax assets in some jurisdictions. It's a noncash item, but it's increasing actually to 34% in the first half. And this will lead to a full year tax rate of 31%. Going forward, the tax rate will be in the higher 20s, which is higher than the tax rate which we had the last couple of years.
And that's a function. On the one hand, obviously, we see in certain jurisdictions Texas are slightly increasing, but it's also a function of IFRIC 23. If week 23 is a new interpretation, about uncertainty around Texas, where you're basically in your own assess ment about the potential, tax case have to assume that any tax authorities have exactly the same knowledge as you. This is an interpretation, which was before not there. And this leads in general to tiny higher tax rates.
And we believe the tax rate going forward 2020 as far as we can say because there, of course, could be always changes in tax rules. And it will lead to a tax rate more in the higher 20s.
The second question was We depend on the business sectors. You look at I would say, if you look at the entire price pressure to Extreme is currently all gas chemicals unit, in terms of, the trade business, We have a lot of new competitors. We mentioned about a few of the mid, 2nd tier players in the past. That has kind of put pressure on the pricing strategy, but we're also seeing a couple of new players from the Eastern the Asian countries is also putting pressure on the margins. It's on the cutting some of those retail price already.
So this is a typical example where Piping pressure is putting an issue on us on which one to optimize the network to defend our margins. And we are not in the game of just dropping our price will think of competing with those parts of the company. So there's a lot of internal optimization we're going through. On the other side of the spec I would say in your businesses like, licenses, food activities where the pricing power is still good and that we still maintain our momentum. Some of some of the consumer goods in terms of chemical testing.
So, we still maintain some of our good pricing momentum. So it's always broad aspect from one spectrum to the other one. So it's difficult to give you an exact answer.
You if we've exhausted the questions in the room, should we move over to the call, please?
The first question from the phone comes from Badia Chirag, HSBC. Please go ahead.
Thank you. Two questions. Do you think the uniformity of price discipline across players and the business lines, which is once historically dependable, is starting to erode again? And secondly, is there too much focus on margins where focus should really be instead on sales and delivering sales growth?
I'm sorry, what did you call the first question?
The price discipline, whether the price discipline in the tech industry, whether it would erode again.
Not really. In fact, you look at that. I think it's against the price discipline is really by market segment. They are changing conditions. They are market a specific market dynamic that forces different prayers to take specific actions, but as the sector is quite diversified, we see a really broad variety of, of pressure.
As I said, on the oil and gas side, it's not more extreme for the time being. While for some of the other licenses older, it is more stable and we have a better pricing power on some of the newer product in, among without having safety, for example, we have a lot of pricing power. You talk about micro pollutant, this is a pitfalls kind of activity, high risk activities, We have a much more stronger passing power than the traditional saltwater kind of testing. So I don't think there's a lack of discipline from the tick sector. I think it's more a question of, maturity of the product cycles, that, that we just have to keep looking at the new regulation and new, items to put on the market.
And, as we do for the consulting, to reinforce our value chain to our customers and trying to bundle the is the protect us better against some of the more mature product, the rewarding thermal pricing.
The the second one was, is there too much focus on margin at the expense of growth?
I don't believe so because we are really clear that the growth drive margin and this one aspect without growth or top line, you can debate on your margins. But so, while we focus on the growth as well, it's just that While we're working on the growth strategy on some of the segment that the transformation of Portofold is part of this growth driving a strategy we'll put in place and then we have to go through this process. We're also trying to focus on our margins because whatever waste we're taking out now is waste that we don't need to take out for the future. So the 2 falls in parallel, sorry, So therefore, it's not a specific reason why we're focusing more on one than the others.
Thank you. Could we move to the next question on the call, please?
Next question from the phone is from Patrick Gerson, Societe Generale. Please go ahead.
Yes, good afternoon. Two questions on my side. First question is on free cash flow. You mentioned effectively that after restatement of payment liabilities, cash flow from accounting activities is 1,000,000. And when I calculate the free cash flow, that is to say I've turned purchase of 6 assets, I found 129 compared to 376 last year in the first half and 210 in first half of twenty seventeen.
So it's a 40% reduction in 2 years. Could you elaborate a bit on that? And the second question is about exceptional items, I. E. The difference between, adjusted operating income and operating income.
We have 1,000,000 in the first half, should we expect something around CHF 70,000,000 in for the full year given the 1,000,000 that you have mentioned for the optimization program or are there other moving parts Thank you.
If we first have a look to the cash flow, I mean, I pointed this out that basically, if you look to the cash flow statement and you look to the payment of lease liabilities, this is obviously a outflow which was historically shown as a rent payment. Now it's in the P and L depreciation that the cash flow is basically down. If we adjust for this, like I said, in my speech, Now what are the reason for this is basically that we had a much more increase in working capital in the first half of this year compared to the first half of last year. So we had 1,000,000 more need of working capital in the first half this year versus 124,000,000 last year. Which is basically explaining much more than the difference in the cash flow.
The reason for this is the following The main reason is basically the timing of payments, because you recall, you have a very strong cash flow operational cash flow and and reported cash flow network, very strong cash flow driven by very strong working capital at the end of last year. Operationally and even more so reported. And this was on the one hand, clearly driven by the fact that and that payments occurred in the first quarter 2019, which are which we are it to Q4 2018. And furthermore, if you look now half year to half year, you need to consider that, at the first half last year, we are the provision or the rise line was booked in terms of Brazil of 1,000,000. It had a negative impact on the earnings, but it helped basically in the first half last year the working capital.
So these two items explaining basically the difference. Regarding the one off items, for the if I understand your question, right? One off items for the half of the year. It's basically when you look on do we have this where we have to we have basically in the first half, we have the gain in other nonrecurring items of 1,000,000 for the time being, what would I expect in this one off items in the second half of the year is basically, the restructuring cost of 70 5,000,000 other items for the time being, we would not expect, obviously, the normal amortization of the existing acquisition and the newly acquired businesses.
On the call, they can submit questions by typing as well if they would like to. Should we move on to the next question on the call, please?
Next question comes from the line of Alexander Mess, JP Morgan. Please go ahead.
Good afternoon. Thanks for taking my call. Questions. 2, please. Firstly, just on transportation.
Obviously, it's been a difficult time for you in transportation. I wonder if remedial action is required in that business? Or is it just a question of working off a few unfavorable contracts? And then, things will get better and if so, when would that be? And secondly, you've obviously been very busy in for the assets that you're looking at and the multiples you're being asked to pay?
Thank you.
For the transportation, the key activities that we're doing currently is to wait to expand our portfolio into our newer field in the testing environment. Asking concerns. So regulatory activities, it's very difficult for us to take, extra steps because these are concessions. It's terminating that we have to wait for the cycle decisions to restart in double pitting. So there's no much we can do besides to optimize our cost base and to ensure that we we can now, we can, we can beat for the next project that comes on, the candidates that comes on the market.
So on the regulated side, difficult to mitigate the risk, On the field activities, on the testing, yes, we are looking actively at new contract expanding our portfolio. The the launch of our electrical batch 3 testing labs in Germany is a good example. We are also setting up on both electronics activity testing in in India, in China. This is with the expand and to obviously file portfolio to accelerate the growth because these sectors are growing at a high single digit So, which is a good activities, which is the most softer regulated businesses that we have to contract on. But as the cycle fresh out, we should come back in a more stable growth in terms of those 2 activities.
The second one was on M and A multiples in the market. Are we seeing any changes? Is there any change in competition for those multiples for those companies?
Actually, we focus a lot of those on those mid size or small size assets. I think the the run of those larger assets in the past couple of years has a soft duty to bid And I would say that in term of multiple we paid is not different than the strategy that we presented last year in term of the bracket we've been paying think in the industry, we showed the EBITDA kind of bracket would be. I would say that you look at the different assets that went back up to now, then not far off from what to which officially pay with some differences. Obviously, some of them are in the segment is slightly higher than the others, but I would say overall we are quite disciplined on our approach. We're not paying more than what we historically redeemed.
Should we move on to the next question on the call, please.
Next question comes from the line of Jean Felty Fontobel. Please go ahead.
Good afternoon, gentlemen, and welcome to Dominic. The first one would be to follow-up on my colleagues. And with this margin, when you exclude restructuring, shared service centers procurement, the dashboard, IFRS 16, it looks that you are on the massive pressure, and do you have like a pricing pressure from a the market. If you can explain that into more details. And the second one, and to add to Kumar, focusing on margin, I think maybe on that standpoint, maybe more focusing on the returns because it looks like the PSC divestments was damn good in terms of of returns, maybe not in terms of margin and the one you acquired with very high margin is not so good in terms of returns.
So maybe strategic rationale behind that? Thanks.
So, I mean, if we if we look to it, so the IFRS 16, yes, it has, of course, a positive impact approximately 20 basis points, right? It's positive, but it's it's also somewhat limited. And and this is how how IFRS 16 works that you base take the rent and separate it into rent payment and then in a financing cost on the EPS level is actually negative in always the next year because the finance charges front loaded, right? But it's limited. Now on the other activities, we're working intensively procurement.
And I also think there are errors which we, which we so far didn't didn't focus on. So I think there are also some more opportunities which we have to tackle. But it's also the case you can make procurement savings but it still means that your remaining cost will inflate, right? So we have to look this in a combined way and not say this is the saving and this has been more the profit because we have inflation for other costs. They are not massive, but they are there.
On shared services, I think it's a good setup. We're moving more and more countries to the shared services to cut to this and to Manila. And there's more work needs to be done in terms of harmonization and optimizing the process because if the If the process are not standardized, you will not achieve the full productivity. And there we are currently focusing on to further optimize and basically standardize first the processes. And if that process is standardized, you get you get also higher efficiency gains.
These are all very important things, and they are not there to stop in 2020. They are really going on beyond it. In terms of returns, honestly, if we look to the acquisition main point, I'm convinced they will achieve, they earn more than clearly earn more in the 1st year than their cost of capital. So if you deploy money, which is the 1st year on more than your cost of capital, and it's a good investment, right?
Maybe I can add on the on the PSC versus main point. I think we, I I don't understand your comment, when you look at an in isolation, the PSC activities, but I also mentioned that you do, we're looking at that 3, 2 or 3 years ahead in a dynamic manner, which when they evaluate the market evolutions, and where this asset is heading to. And I mentioned earlier to the early question that in our view, this asset is a good asset, but it's not heading the right direction in terms of the the focus of their portfolio is part of our core focus. So the strategic significance, the average owner market, what we believe we need to focus on versus what some of those assets because of the market environment and so on goes to has also an cidents on the way we are. But if everything are set, so it's not very much just a static, our historical view is also a projection into future.
It is important to us. So likewise, for main point, it's not just about the asset itself. It's the projection of what they can do for our CP activities. We'll talk about the point of our customers, how we can bundle this connectivity into a more, more value enhancing, a portal phone services There's also a little bit of dynamic process. We're looking at not just purely static or historical factors of those assets as well.
Thank you. I think we've got time for another couple of questions. So if we take the next question on the call, please.
The next question comes from the line of Tom Sykes Deutsche Bank. Please go ahead.
Yes, thank you. Good afternoon, everybody. First of all, just on the Minerals business, could you maybe go through the degree to which you're seeing demand soften? And then the degree to which you can actually still grow the on-site business because you're going to face quite tough comparators on that particularly in the beginning of next year? And what's the scale or pipeline of on-site opportunity to offset any weakness in say, samples demand?
And then just on the evolution of the 1,000,000 at what point did you get to 1,000,000 I. E, is this a response to slightly slower growth? And how much of this is structural and how much of this is just that growth seems to be a bit slower, therefore, you're taking out more cost and maybe more economically sensitive areas, please?
On the on the first question for the MENOS sectors, the slow, the slowing down of the the businesses is many on the the job cam activities, but we're looking at that in terms of the the commercial lab. The on-site activities is still good as we said in the past is the more stable activities because we have multi year contract is exclusive to us. And we're still having a few more new labs coming online in terms of pipeline in the second half of the year. We also have a product of tenders trying to bid for new labs that would come, if we win them, we'll come into the pipeline, in the, the first half of next year. So I would say we're not concerned about the significant decrease.
It's more or less stable to increase. It's still on this activities. The other equation of second half of this year is more the price of the the coal, which is rather soft in Europe for the time being. So we see a slowdown of the trade between Russia and the European countries. But we're also seeing a strong pickup in terms of the trade in the Eastern part of Russia on some of the Australian market because the the Pakistan, the Chinese are actually buying coal because of the rather reasonable price.
So we see the 2 effect offsetting each other but we're still being present by saying that compared to what we've seen in the first half, the growth will slow down in the second half. This decision can change in getting into the second half, the 1st half of next year will change because there are trading conditions that is quite dynamic.
Okay, thank you.
Next one was on at what point did we get to
the 1,000,000 of cost savings? In terms of savings.
Maybe I can start. In terms of evolution, we look at it, we look at it for quite some months and So Denise is an element of what we think could be taken out and what things the market evolution is because it's a dynamic situation where as we're evolving to our plan, we see the area of softness versus others and we see that the internal structure can also take a little bit, a bigger hit into that. But I would say it's a top it's a bottom up process. We come through, for quite some months through the organizations, the network with all our, activities and the chief operator officers across network and ask them if we went to optimize the network and these are the games, the rules of the game, how will you do it and how we can do extract the best value, best optimization possible. So they come up with this plan, and we just basically help to consolidate that into a more structured way.
So they are they are it is a dynamic process and they're certainly over the course of the assessment of this plan. Some area where we started to pushing a bit harder versus all the area when we see growth picking up, where we should keep it softer on that as well. Okay.
Okay. So let's move on to the next question and then that will be it. I think that we've hit an hour and 10 minutes roughly. So final question, please, from the call.
Next question comes from the line of Edward Stanley, Morgan Stanley. Please go ahead.
Yes, sorry. I may have missed it, but I was to find out a little bit more about China. I know we're all a bit bored about it, but given all the, all the industrial warnings that are going on at the moment, you say that China is broadly stable, but there are either emerging problems in Hong Kong or Hong Kong is getting worse. Are you seeing any particularly aggressive swings in any of your divisions or segments going through Hong Kong? And what should we be watching out for that consumer might get worse rather than stay stable in the second half.
We, for China, certainly, we see the impact of the economic, evolutions and the dispute between the U. S. And China. But at the same time, we're also seeing an expansion of the local Chinese market And, also, we are seeing a softness onto the internal trade. We have been very strong internal income of getting to the the local market.
I think a couple of years back when you asked me the question or one of you asked me the question about the percentage of our domestic market. Asset was just short of 50% or close to 50.50. I can say that now we're well in excess of 50%. So a big chunk of what we do on our big chunk, I would say more than 50% of what we do is linked to the domestic So our portfolio has also evolved. And the good news is, the expansion into a domestic market has managed to offset the slowdown the international market plus creating some growth in terms of, the total market, total growth in China.
Hong Kong is a slightly different programmatic in the sense that Hong Kong traditionally is a big trading hub for the retail sectors if you don't do consumer goods, there's less severity of services that you can offer in, in the difference of China, which is much bigger Hong Kong is captive territories. So we have strategy. You look at the expansions, the 20% investment into Viacom is part of our expansion strategy in terms of diversification strategy, sorry, in terms of our industrial portfolio. We, if we recall, we also made a fifty-fifty joint venture with company called South Asia a couple of years ago, which is now active into the third one way of the Hong Kong airport and is quite active into the greater base strategy of the South China Sea there. So we are actually expanding our activities into the industrial sectors in Hong Kong.
The consumer goods sector will follow the natural evolution of the retail sectors. The, as I mentioned earlier, the drop is more significant for them. You will start stabilized because Hong Kong will have, trading, needs in terms of, for the customer good, but it's just for us to take into consideration those dynamics and start to expand the portfolio into something else certifications industrial is the 2 next sectors that we're looking at for Hong Kong. China, we are pretty good because the growth in China is all about nutrition, health, around with the health and safety and some of the in social activities which compensate largely the the intentional decline.
Okay, thank you. I think we'll draw it to them there. If there's people still on the call who'd like to ask questions, I'm more than welcome to email those to me and I'll reply to them very soon as I can. Maybe not this evening, but certainly tomorrow. And thank you very much.
Thank you. Thank you very much, Dominic. Welcome to SGS. And I'd like to invite everyone in this room to come and join us at the Atrium for a cocktail after this meeting. Thank you.
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