Ladies and gentlemen, good morning or good afternoon. Welcome to the SGS 2018 half-year results conference call and live webcast. I'm Cherry, the current call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing star and one on your telephone. We kindly ask you to limit yourselves to two questions. Should you need assistance, please press star and zero to call an operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mrs. Carla De Geyseleer, Chief Financial Officer, and Mr. Frankie Ng, Chief Executive Officer at the SGS Auditorium in Geneva. You will now be joined into the conference room. Thank you.
Ladies and gentlemen, good afternoon, and welcome to the presentation of our 2018 half-year results. As usual, I will give you a highlight of our first half performances. Carla will provide you a more detailed financial review, and I will come back with a business outlook for the second half and guidance for the full year. I'm pleased to report that our results are in line with our guidance given in January on all our nine business lines and eight regions have achieved positive organic growth this year. At group level, total revenue grew at 6.5% at constant currency, of which 5.6% is organic. Our adjusted operating income margin stands at 14.6%, a 40 basis point improvement compared to the first half 2017. The profit for the period amount to 296 million CHF, an improvement of 1% compared to prior year.
The free cash flow from operation amounts to 176 million CHF, a decrease of 16.2% compared to last year. Seven acquisitions were made during the first half. We focused on specific business lines and in line with our strategic plan 2020. Four acquisitions were made in AFL, Agriculture, Food, and Life, allowing us to expand our expertise and footprint. Vanguard Scientific allowing us to expand our knowhow and expertise in the U.S. market. These are important additions because the U.S. market is one of the largest It is actually the largest food market in the world, where we have a limited presence, and this will help us to penetrate this popular market. The other three acquisitions are in the field of skincare for consumer goods, in line with our development of cosmetics and personal healthcare.
In the field of metrology for our space sectors, in line with the expansion of the portfolio from the transportation field. In the polymer testing within the industrial activities where we're focusing on the expansion of expertise in the U.S. as well as in the testing field. On that, now I'm passing over the presentation to Carla, who's going to give you a more detailed review of our results for the first half.
Thank you, Frankie. Very good afternoon, ladies and gentlemen. As Frankie mentioned it already, it's a real pleasure to confirm that our results are fully in line with the guidance that we gave earlier this year. One important development that impacted our results relates to a recent investigation in our SGS Brazil affiliate. Following an internal review of our SGS Brazil business in late June, we identified evidence of overstatement of revenues in current and prior periods. An internal investigation is currently in progress in SGS Brazil. This overstatement had a cumulative effect of CHF 37 million on the group financial statements as of December 2017.
Since the amounts are determined not to be material to past financial statements, a provision of CHF 47 million has been raised to account for the cumulative misstatement and a provision to cover for unforeseen additional costs, which is disclosed as a non-recurring item recorded in the first half year. If you have any questions related to this topic, I'm happy to answer these during the Q&A session. In an effort to give you greater insights into our results for the first half of 2018, I'd like to begin by sharing the overall P&L. The first and the third column reflects the half-year performance for 2018 and 2017 at historical rates, while the middle column contains the performance of the first half 2017 at constant currency. We delivered a strong revenue growth of 6.5%, an acceleration compared to the 5.8% revenue growth during the second half of 2017.
We improved the adjusted operating income by 9.2%. The adjusted operating income margin of 14.6% increased by 40 basis points compared to a year ago. Three clarifying points regarding this uptake of the margin. First, the market recovery in minerals and the efficiency gains in GIS, CBE, and Environmental, Health and Safety positively impacted our margins. Secondly, we delivered a margin uptake resulting from the initiatives program supporting the 2020 plan. Thirdly, we benefited from the recovery of the bad debt provision we accounted for in the first half 2017 in GIS, which was, of course, related to a number of GIS contracts. Please note that we continue to invest in our growth transformational and efficiency projects in line with our strategic plan.
While these investment-driven projects negatively impacted our bottom line in 2018, they will allow us to grow the top line and improve the bottom line in the future. Operating income decreased by 2.6% to CHF 411 million. This was impacted by the correction of the revenue overstatement in SGS Brazil and the related additional provision, both together amounting to CHF 47 million. The profit for the period amounts to CHF 296 million and decreased by 2.3%, while the profit attributable to equity holders decreased by 3.9% as a result of the exceptional provision taken for SGS Brazil. The earnings per share at constant currency decreased by CHF 1.77, while the adjusted earnings per share increased by 12.2% up to CHF 45. Our top-line growth at constant currency amounts to 6.5%, of which 5.6% is organic and 0.9% is inorganic.
The green part of the chart reflects the organic growth, which is driven by the continued strong performance in the full portfolio. The gray part of the chart reflects the effect of the 15 acquisitions that we made in 2017 and 2018, amounting to CHF 27 million, or 0.9%. In the first half of 2018, the group acquired seven companies, of which four in Agriculture, Food, and Life, which is in line with our strategic focus. From a geographical perspective, two acquisitions were made in our focus market, North America. The blue part represents the Forex, which was a positive two percentage points contribution due to the strength of the euro and the Chinese renminbi versus the Swiss franc, which together represent more than 40% of our revenue. There are several important points here to highlight as I take you here through the revenue performance by individual business.
First, each of the nine businesses delivered organic growth, as indicated by the orange bar. Second, the black part indicates the acquisitive growth. The most significant acquisitive growth has been achieved in GIS, Agriculture, Food, and Life, and CRS business. These businesses are part of our key focus areas for inorganic growth. 2017 was the first year in which Minerals grew its revenue since 2013, and this momentum continued in 2018 as revenue accelerated significantly in the first half, resulting in a year-on-year organic growth of 13.8%. Most activities in the Mineral portfolio experienced double-digit growth. Trade saw robust demand in energy minerals. The Geochem saw a strong increase in sample volumes while the metallurgy business achieved a peak performance, particularly in Canada and Australia, with a higher demand for pilot plant testing.
GIS, the second business with a double-digit growth, grew its business by 11.1%, a significant improvement versus the break-even position in the second half of last year. This impressive growth is mainly driven by high double-digit growth of TransitNet and scanning services and a solid growth in single window operations. Similar to the Minerals business, OGC accelerated the growth momentum created in the second half of 2017, resulting in an organic growth of 7.7%. This growth is mainly driven by the double-digit growth in plants and terminal operations, fueled by contract wins in the U.S. as well as volume increase of existing contracts. Our upstream business achieved a single-digit growth into the first half. Trade activities realized low double-digit growth and were particularly strong in China and improved growth in Eastern Europe and the Americas.
You will remember that on the back of organic decline in the second half of 2017, we remained very cautious in predicting the further development of the revenue of our Industrial business. In the first half of 2018, we achieved a growth of 3.8%, of which 2.9% organic. These results were driven by both double-digit growth in oil and gas activities in South and Central America and supervision and construction activities resulting from a continued development of the material and construction lab testing activity in Asia, South America, and Africa. CRS, our most profitable business, realized a growth of 6.1%, of which 4.8% organic. Major segments, Electrical and Electronics, achieved robust growth at the back of electrical safety and EMC. The last benefiting from the new Radio Equipment Directive. In addition, we continue to deliver double-digit growth in Cosmetics, Personal Care, and Household.
Our growth slowed compared to last year due to low single-digit growth in soft lines, which experienced a weaker first quarter due to labor shortages following the Chinese New Year. CBE. CBE continued its journey of solid growth, resulting in a growth of 7.4%, of which 6.2% organic. It achieved double-digit growth in the management system certification business, driven by the transition to the new 2015 standards, as well as medical device and information security management. Environmental, Health and Safety realized a strong growth of 6.1%, mainly driven by double-digit growth in the health and safety services. This was complemented by mid-single digit growth in field and monitoring services. A key contributor to the Environmental, Health and Safety growth is regulation enforcement around the world, accentuated by a new push in developing geographies.
Another new revenue driver includes innovative packages aimed at the hospitality, retail, and real estate sector. Transportation, a growth of 1.1%, of which 0.8% organic, fully in line with our expectations. Our colleagues in transportation were successful in offsetting the 2017 impact of the non-recurring contracts in the U.S. by delivering double-digit growth in testing services across all geographies, particularly in China. Last but not least, Agriculture, Food, and Life achieved a growth of 4.8%, of which 2.7% organic. This is softer than expected due to the agri trade business, which is the result of the high stocks, low volatility in prices, and reduced testing in Canada high-quality crops. This was compensated by double-digit growth in food activities and high single-digit growth in Life Sciences. Let's take a look at the regions.
All three regions contributed positively to the group's revenue growth with the Asia Pacific region and the Americas region being the driver. The Asia Pacific region delivered the highest organic growth, exceeding the growth of one year ago. China's growth outside CRS is particularly strong in Agriculture, Food, and Life, OGC, CBE, and Environmental, Health and Safety, driven by the strong growth in domestic and international markets. Australia continued nicely on the recovery path and realized a high mid-single digit growth, mainly driven by the uptake in the Minerals business. Acquisitions made in Industrial, Agriculture, Food, and Life, and CRS helped the Americas region to achieve a growth of 7.2%, of which 5.9% organic. The growth was positive in both subregions. South America outperformed North America, driven by a double-digit growth in Minerals and Industrial.
The organic growth in North America is mainly driven by a double-digit growth in Agriculture, Food, and Life, OGC, and Environmental, Health and Safety. The total inorganic growth relates to the North America region, which remains a focus area for future acquisitions. Europe, Africa, Middle East achieved a good growth of 4.8%, which is slightly ahead of last year. The growth is mainly fueled by double-digit growth in Africa and the Eastern Europe, Middle East region. Strong performance in Africa is mainly driven by Minerals and GIS, while the strong performance in Eastern Europe and the Middle East is related to Minerals, OGC, and Agriculture, Food, and Life.
Our strategic objective is to make this organization more efficient. This slide shows you the first signs of success with an average headcount increase of 4.5% year-on-year, which is well below our revenue increase of 6.5% for the same period. The only region where our headcount growth outpaced the revenue growth is the Americas. This is mainly related to the double-digit organic growth in the PTO business in the U.S. and the strong growth of our industrial business in South America. Looking now at the development of the adjusted operating income. This slide shows you that our adjusted operating income increased by 12.4% year-on-year, which has been driven primarily by the organic growth amounting to CHF 35 million, as represented by the green box.
The inorganic growth of CHF 5 million included in the gray box relates to the 15 acquisitions that were made in the period 2017 and 2018. The blue box reflects the currency exchange impact, strengthening the growth with an additional 3.2%. Year-on-year, we achieved an uptake of 40 basis points in the AOI margin, driven by margin improvements in our GIS, Environmental, Health and Safety, and Minerals businesses. I would like to recognize our GIS business for their top performance in improving its profit margin significantly from 11.3% to 29.4%. The uptake of the adjusted operating income margin is far beyond the partial recovery of the receivables, which were fully provided in the first half of 2017 and relate to the economies of scale across several services and the deployment of remote inspection activities as well as strong profitable growth in TransitNet.
Environmental, Health and Safety margin improvement by 210 basis points resulted from improved performance in the U.S., as well as increased volume in health and safety work in Europe and ongoing operational efficiency in Asia Pacific and Europe. Our minerals colleagues were successful in accelerating the top-line growth while increasing the margins by 150 basis points. The team continued to work successfully on improved lab utilization and lab operational efficiencies. In addition, they continued to add a number of profitable contracts to the portfolio. The strong top line in CBE enabled an optimized capacity use. This, together with the improved efficiency related to the transfer of the activities to the shared service centers, led to a margin improvement of 40 basis points. Despite the negative impact of the Brazilian event, Industrial increased its profitability by 20 basis points.
The underlying profitability improved mainly as a result of prior restructurings, better market outlook, and an increased focus on profitable contracts in supervision and construction. Consumer Retail Services remains by far the biggest contributor of adjusted operating income. The decrease in adjusted operating income margin by 30 basis points relates to specific market conditions in both softlines and toys. This has been partly compensated by strong productivity gains in the Electrical and Electronics, as well as a nice uptake of the margins in Cosmetics, Household and Personal Care. We expect the margin to recover in the second half of 2018, as this is the peak season for our CRS business.
The decrease in the Agriculture, Food and Life margin is mainly related to the challenging conditions in trade and is due to the high stocks and the low volatility both in Europe and Canada, resulting in less optimal use of our capacity. Margins of Life Science, including clinical research, increased while the margins in the Food division slightly weakened, mainly due to the end of the commercial partnership in Inner Mongolia. Pressure on the OGC margin is mainly related to the change in the business mix due to double-digit growth in plant and terminal operations, as well as continued investment in the U.S. to adjust the business to the changing competitive environment in the trade-related activities. Last but not least, the decrease in Transportation margin is the result of a variety of elements.
First, the testing and the field services margin in the first half of 2017 was positively impacted by non-recurring contracts in North America. Secondly, a rate freeze in Argentina has not allowed us to compensate for cost inflation in the country. Thirdly, we experienced a slow start in the Uganda Road Safety Inspection program, which impacted the profitability of our statutory services. Importantly, however, the testing services improved its margin year-on-year due to improved utilization of the lab network, fueled by a strong global demand. Our balance sheet continues to remain one of our strengths. A couple of key points which will give you a bit of greater insight here is that our net debt of CHF 1,146 million is at a comparable level of June 2017. The decrease in the receivables is partly due to the application of the IFRS 9 retrospectively from January 2018.
The adjustment to the carrying value amounts to CHF 77 million, this has been reflected as an adjustment in the opening equity. Decrease in the long-term loans relates to the CHF 375 million bond that will expire in March 2019. The effective interest rate of our current bond portfolio amounts to 1.3%, while the average bond maturity is five years. After redemption of the bond that expires in March 2019, the effective interest rate of the portfolio will be below 1%. Last but not least, our net working capital. You know that we continue to manage our net working capital in a disciplined manner, as evidenced by the fact that our net working capital as a percentage of annualized sales, 3.9% is stable versus a year-ago, and this despite a robust revenue growth. Looking at our cash flow for the first half of 2018.
We of course remain proud of our ability to continuously deliver a solid cash flow as evidenced again this year. The operating cash flow reached CHF 316 million, the decrease versus last year is actually mainly related to the increase in the taxes paid. The uptake of the net working capital is driven by seasonal patterns and the growth of the business. Free cash flow amounts to CHF 176 million, a decrease of CHF 34 million, impacted by the increased investment in CapEx. However, CapEx as a percentage of revenue remained at the level of last year. The cash outflow related to acquisitions amounts to CHF 41 million compared to CHF 12 million last year, the increased investment is a confirmation of our continued interest in acquiring businesses that provide value to the group and to our shareholders.
The increase in cash outflow from financing activities is related to two factors. First, the dividend increased by CHF 45 million compared to the year before, and second, the group placed a bond of CHF 375 million in March 2017. We continued to invest in capital in a controlled manner during the first half of 2018 in order to fuel our long-term organic growth. Close to two-thirds of our CapEx investments are related to growth, while one-third relates to maintenance. During the first half of 2018, we spent CHF 144 million of CapEx, representing 4.4% of revenue. This is at a level comparable with last year, and the stable CapEx intensity is partly related to the attractive pricing and asset redeployment program driven by our procurement initiatives.
I reconfirm that the future CapEx intensity is expected to be within the range 5%-5.5%, and for 2018, I do not expect our capital intensity to increase above the lower end of the range. Before I conclude my presentation, I would like to leave you with some important points that summarize our performance of the first half 2018. First, we achieved a revenue growth of 6.5%, of which 5.6% organic. Second, we grew our adjusted operating income by 9.2%, while the adjusted operating income margin increased to 14.6%. Third, our profit at historical rate increased 1% to CHF 296 million. Fourth, we invested CHF 181 million, both in CapEx and acquisition. Finally, we delivered a solid free cash flow of CHF 176 million.
In summary, we delivered solid results in line with expectations, and it is very clear that these results would have never been possible without the strong engagement and contribution of our 96,000+ SGS employees around the world.
Thank you, Carla. Let me go through quickly for the second half outlook. Let me start with Agriculture, Food, and Life. The trade conditions should improve in the second half. We forecasted better export outlook in key geographies. Testing volume in the Food and L ife Sciences sectors is expected to remain strong in the second half as market fundamental remains positive. The acquisition made in the first half of the year will help to expand our footprint and drive further growth. On that, I expect a better organic growth in the second half of the year, and we should see some catch-up on margins as the agricultural market condition improves. Minerals. The good margin momentum should continue in the second half, with good volume projections for our commercial labs and for our metallurgical testing. New on-site laboratories coming online will further support growth momentum.
The overall market trend of the first half is expected to continue, subject to stable market and global trade macroeconomy environment. Note that I expect organic growth to slow down in the second half, mainly due to high comparables that we have in the second half of 2017. Oil, Gas, and Chemicals. Same market condition expected in the second half. Strong volume already secured for our PTO activities, especially in the U.S. Trade volume is expected to remain stable but with competitive pressure on price. Further efficiency measure will be taken to limit the impact. Positive momentum on upstream activities, particularly in the Africa and Middle East, where we secure new contract that will be put in place and running in the second half.
On the whole, with the pickup of upstream and the pickup of PTO and in other parts of the portfolio, expect the second half margins to be back in line with the second half of 2017. Consumer Retail. Second half, main driver will remain the E&E activities. EMC, safety, restricted substances testing for electronic products will continue to grow. Wireless testing outlook is positive for China and Taiwan, but we still face high competitive pressure in Korea. Overall softlines market condition will be stable in the second half, with strong growth in countries like Turkey, Bangladesh, Vietnam, but a softer growth in China and India. Growth in Cosmetics and personal care is expected to continue at double digits. As Carla already mentioned, we expect margin to improve in the second half compared to the first half as we hit the peak season. Certification Business Enhancement.
The transition to a new standard, ISO 2015 standard, will continue to drive the market in Q3, after that time is in September. There's some uncertainty regarding growth moving to November and December as the market will readjust itself to the post-transition volumes. We have to monitor that and see what is the development. On the whole, we should expect a full-year growth comparable to the first half, and we should expect margins to develop positively, although there will be some uncertainty about order utilization in November and December. Industrial Services. The focus on Industrial Services will be on continued margin improvement moving to second half. With more stable market condition and realignment of our portfolio and capacities, we should see a steady improvement of the margin as we progress into the second half of the year. Environmental, Health and Safety.
While market conditions to remain similar to H1, with increased regulation driving volume in our laboratories. The expansion of our services in marine, industrial hygiene, and hospitality sectors will continue to drive growth in our field activities and also move more volume into our laboratories. We expect both revenue and margins to improve in the second half of the year. Transportation. As mentioned by Carla already, the end of the large contract in North America had a negative impact on the growth in H1, and we should see some of this impact move into H2. The remainder of the portfolio should perform well, with testing activity expected to maintain a double-digit growth in the second half. Also, the long-awaited price increase in Argentina that Carla mentioned as well has occurred actually in the end of June.
With the better volume that we expect in our Chilean concession, we should expect some better growth momentum and also help to recover some of the margin losses in the first half moving to the second half. To finish on the outlook for GIS, similar market condition expected in the second half with growth driven by TransitNet, product conformity assessment, and scanning services. Growth in GIS has been strong despite the delay in some of the implementation of the renewable E-waste project in Africa, and this new project in E-waste should be coming online on the quarter four of this year, which support further the growth of the other division here. Having said that, this design by business line, let me go through the guidance for 2018. On the whole, I expect stable market condition for most of our business lines with some macroeconomic uncertainties.
If there's a further escalation of the tariff conflict between the U.S., China, and other countries, it will likely have a negative impact on global GDP and on our global business outlook. However, as it stands today, we have seen little impact to our activities. On that, our guidance for 2018 remains unchanged, and they are solid organic revenue growth, higher adjusted operating income margins, and robust cash flow. To conclude, just a reminder of our 2020 strategic plan. Mid-single digit organic growth on average over the period, accelerated M&A activities with acquiring in the range of 1 billion, adjusted operating margins of at least 18%, strong cash flow conversions, robust return on invested capital, and solid dividend distribution in line with improvement of net earnings. On that, Carla and I will be happy to take your questions. I guess we start first in the room here.
Questions, line one.
Great. Hi, it's Paul Sullivan from Barclays. Just a couple from me. Just in terms of the second half outlook, perhaps, Frankie, you could just help clarify a little bit. Would you expect growth to be very similar to the first half? Do you see any scope for accelerations in the second half versus the first half? Secondly, on margins, going through the divisional detail, it sounds like margin expansion should be higher than the 40 basis points underlying delivered in the first half. Would that be a correct assumption?
Yeah. For the growth, we're looking at similar kind of growth with some of the businesses with different comparables against H1 last year. In terms of overall portfolio, we look at more or less the same kind of growth pattern. As I mentioned earlier, it's a different outlook for the by business line, but on the whole, we're looking at the kind of pick up in the second half of the year compared to last year as well.
And just-
Speak into the microphone.
Okay. That's better. In terms of the margin trajectory, it looks like it's still inefficient, or it looks like it's not substantial enough to get you towards your 2020 objectives. When do you think we'll start to see that step change come through that would put you on track?
I think all the measures that we have put in place, part of the effect is already seen for this year, we're going to see an acceleration of this effect. We're also putting additional measures to make sure that the pickup is what it should be at the end of this year, and we shall have an acceleration for next year as well.
Yes. It's Aymeric Brunner at Kepler. It's a follow-up on this margin trajectory. Could you explain the lack of operating leverage that you showed in the first half? Because we have 5.6% organic growth, you have a procurement savings of about 60 basis points, and if I'm correct in the understanding that the underlying margin, if you adjust for the provisions of GIS and the Brazilian restructuring charge that is above the line, is 40 basis points. That suggests that you get a negative adjusted for procurement saving margin effect, some mixed effect, but still it's significantly less that you would expect with an operating leverage for a TIC business. Could you explain a bit the moving part? As you also have investments that you are doing, especially as part of your digitalization efforts, could you explain also how that phasing is going?
You don't provide a lot of details on that and obviously by division even less so it's very difficult to really appreciate the true operating leverage of the business. As a follow-up on the cash flow, it seems that also there's no depreciation increase. Before working capital, before tax payment, there is quite a significant operating cash margin decline. Again, could you explain why this is the case?
Yeah. I do understand the complexity when you're not part of the company to try to understand because there are a lot of moving parts with respect to the margin. Let me start first with confirming that the 40 basis points uptake that you see is really reflecting the underlying profitability improvement. That's one. Then, of course, there are a lot of moving parts because the underlying profitability improvement includes the procurement and yes, there is a positive effect coming from less bad debt compared to half a year ago. There are also negative effects coming from, first of all, the event in Brazil. There is also a negative effect there above the line.
As you pointed out, we continue to invest in our transformational and efficiency programs, on top of it, we also invested incrementally into the digitalization and innovation initiatives in the company. All these pluses and minus leads to the underlying profitability increase of 40 basis points. Obviously, I cannot give you all, I would say, the exact percentages of every part of the puzzle because that will make it very complicated. These are the moving parts. I apologize, I forgot the cash flow. Indeed, the operational cash flow decreased versus last year. As I explained, it's mainly related to the increase of the taxes paid.
That is actually a phasing, a timing issue because the effective tax rate is at 24%, where we also expect it to be for the remainder of the year and which is in line with last year. If you look at the free cash flow, the second element that impacted is really the increased investment in CapEx. Obviously, that is also related to the growth of our business because CapEx as a percentage of revenue is at the same level of last year, and we are really confident that we can manage that in a disciplined way also going forward.
Yes. Thank you. Two questions. One relates to the organic growth, which you show at 5.6%. With the Brazilian problem of CHF 37 million, I believe, is it correct to assume that if you would adjust the revenue in 2017, in fact you would be not at 5.6%, but more likely at 6% over the year? That's the first question.
Yeah. Just to answer that question. Obviously, I would say the Brazilian event had also an effect on the 2017. You cannot just, I would say, take it in 2018. We are looking, I would say, in the cumulative effect, how it is phased between the prior years. As a principle, yeah, you are right. Not to the extent that you say, because like for like, the impact will be less. Yeah.
Thank you. Second question is, you operated to 7 or 8 acquisitions since the start of the year. Your objective is to get to something like CHF 1 billion of revenue until 2020. Today you are far behind your objective for 2020. Are you planning for bigger acquisitions in the near future?
I think the 7 acquisitions we made for the H1 does not reflect what we've done on the background. We've done a lot of processes for a lot of acquisitions and for several reasons in terms of financial discipline, in terms of value creation and so on. We have decided to secure those probably 7 that we have achieved for the H1. We will keep continuing looking at the market where we believe there's a good value creation for the group in terms of sticking to our financial discipline. I would say we'll keep looking at acquisitions is on a high priority list, but not at any cost and any multiple. We stick to what our discipline has been for the past couple of years, but we've been more active than the result is showing here.
Anyone in the room? Should we go to the telephone?
There's no question in the room. We can take the question over the phone.
Thank you. Ladies and gentlemen, at the moment, we have four questions from the phone. The first question is from Tom Sykes, Deutsche Bank. Please go ahead.
Good afternoon, everybody. Just on the GIS business, could you maybe just detail a bit more what the improvement in profitability or how you got the improvement in profitability, please, excluding the change in provision. Just on the oil and gas business, you obviously say that there's mixed implications for the margin. Could you also confirm whether excluding PTO the margin was down or not? Just why we would have confidence that the second half margin would be better, please.
First of all, coming back to the question of GIS and the impressive uptake of the margin. Next to, I would say the effect of not having the bad debt expense, there are actually two reasons. Our GIS colleagues added some very profitable contracts to the portfolio. That is one element. Second element, there is also, I would say, a non-recurring, one-off effect that is related to the end of a contract in the portfolio.
Are you allowed to say how large that might be, please? The non-recurring effect.
No, it's difficult to say that in public as it's a single contract.
Okay.
For the second questions, I would say the margin has come down. The mix certainly is influencing that with the PTO business, which has lower margins than our trade activities. I would say that for the rest of the portfolio, it's a mix bag where some activities can have a lower margin, while others have stable margins. In the second half, the positive impact is first upstream businesses has much more contract coming on board, as well as some of the seasonality that we're going to see now in the Southeast Asia Pacific into kicking. We'll have much more volumes on the upstream side that we have in the first half. As well as in some of the other sectors, like fuel marking on some of the testing activities, we're seeing better volumes moving to the second half as well.
This is what is a positive momentum in the outlook of the margins.
Okay. Thank you. Your oil and gas business was obviously down in absolute EBIT year-on-year. Are you confident that you will actually be up in absolute EBIT year-on-year, even taking into account your mix, please?
No. In fact, I was saying that the second half would be better. We'll be catching for some of the downs of the first half of the year.
That's importantly year-on-year, not just any seasonality. That'll be year-on-year up in absolute EBIT.
Yes. Margin.
Yeah. Okay, perfect. Thank you very much.
Next question is from Jean-Philippe Bertschy from Vontobel. Please go ahead.
Bonjour, Carla and Frankie. Sorry to insist on the margin, because the line was not so good, but I think you said that we have some one-off positive in GIS. I think when you're talking about industrial, the restructuring is not in the underlying. I don't understand really what you're saying. Then we consider the CHF 11 million provision from last year. I derive something like plus 10 basis points at constant currencies. What am I missing here, please?
You are missing. Sorry, I apologize. You had one question, Jean-Philippe.
Thank you, Carla. Maybe the second one on digital transformation. You had a full update at the Investors Day last year. Maybe, Frankie, if you can update us on that program, and if you can confirm the sales of CHF 300 million at 25% margin. Maybe the last one on transportation. You're talking about double-digit growth in testing services, which I think is high margin. We see that the margin in transportation is below the level of H1 2016. I understand that we had some positive impact in 2017, but what's the problem versus 2016? Thanks.
Coming back, Jean-Philippe, to your first question, I think what I was missing in your explanation is the incremental investment in the transformational and efficiency programs and in the digitalization and the innovation. We clearly invested significantly more than the first half of 2017. That's why I can also confirm that the 40 basis points uptake is really reflecting the underlying profitability improvement.
Okay. Jean-Philippe, for your question on digitalizations. Yes, we're working on the program. We'll probably give an update at the next Investors Day. It is clear that we're putting the effort into this program, that we have made additional progress in some of those. I'm not going to go through one by one, but some of the projects that we discussed in last October has picked up momentum. In fact, some of those projects are actually integrated into the bundle services that we're offering to the market now. You're going to see that some of the services, digitalization is a standalone that we can easily track, while other services that we're offering now is quite bundled into the core service that we're offering. If I take one example, Transparency-One now is not just a single service offering, it's really linked to a bundle service we're offering.
We will have to speed up little bit the way we track that, but should be able to do it. Again, the program is in line, and we're just pushing forward on that with internal, external optimization in term of digitalizations.
As for me, Jean-Philippe, you're confirming the targets, yeah?
I'm sorry?
You're confirming the CHF 300 million sales targets and 35% margin 2020?
The numbers, yes, absolutely.
Thanks. The last one on transportation.
Should I take it?
Yes.
Yeah. In transportation, indeed, the testing services, they improved in profitability year-on-year. However, that was not, I would say, sufficient to offset the effect of the non-recurring of last year. As I said also before, we faced also the reality that in the first half of 2018, we were not able to increase our inspection rates in Argentina to really fully cover for the inflation effect. These are the two offsetting effects.
Thank you.
Next question is from Chirag Vadhia, HSBC. Please go ahead.
Hi there. Just one question. Given that there were provisions in the first half of last year and there are provisions in the first half of this year, how should we think about provisions in general going forward? Thanks.
Let me say that the provisioning for our Brazilian event, I can say that I don't expect that to be recurring. This was, I would say, totally unexpectedly, and clearly the result of the work we have done internally in terms of improving our governance and internal controls. It's true, I think that you refer also to the restructuring provisions that we had the year before. Going forward, I would not expect, I would say, significant provisioning related to the nature or to a similar nature.
Clearly the Brazilian issue is isolated. Now we've implemented strong governance over the past few years, this was detected by our governance structures, that we have taken a one-off adjustment in the beginning of first half of this year, that we don't expect any kind of this kind of nature happening again in the second half or subsequently. There's no indication that similar thing is happening in the network. We're really treating that as a one-off. For the rest of the provisioning, we made a small provision of CHF 5 million for restructuring on the first half. I would say, we're looking still at the dashboard. If there's any kind of restructuring amount that we're going to put, it would be in this kind of magnitude, but no more than that, I would say.
Thank you.
Next question is from Edward Steel, Citi. Please go ahead.
Good afternoon, Carla. Thank you, everyone. I have two questions, please. First of all, on GIS, obviously the business mix has changed quite a lot in the last few years. What do you perceive as being the normalized margin range for that business now, excluding all the one-offs like the provision movements, et cetera, please? Secondly, just coming back please to the second half margin guidance. Obviously there's a tough comp effect in the second half from last year's provision release in GIS. Is your guidance that you expect to see a similar amount, i.e. 40 basis points year-on-year increase, ex or including that, please? Have I misunderstood? Thank you.
You want to go first?
Yeah. For the second half, I would say the expectation is to keep the margin in line actually with the first half. That's a better guidance, I would say, for GIS.
For the full margin, I will stick to the outlook I just gave, which is higher adjusted operating margins. I think you have to make the math with all the details I gave earlier.
Understood. Okay, got it. Thank you.
Next question is from George Gregory, Exane. Please go ahead.
Afternoon, everyone. Ed just asked a question on the GIS margin, so thanks for clarifying, Carla. Just second one, just maybe touching on the trade wars. You referenced it as a potential major risk for the tech products industry in your slides. I think, Frankie, you mentioned it in your concluding remarks. Just wondered if there was anything you could add in terms of color or areas you see most at risk and how the business could mitigate any risks that could arise, please. Thanks.
As I said, for the time being, there's rather limited impact from what we've seen. There's a lot of comment on the market about these tariffs. Certainly, I would say on the mineral side, if I want to be more precise, on the minerals, the discussion for the tariffs has had no impact to our businesses. Some of the small impact that we've seen up to now is a bit on the consumer goods, where a couple of contract has been reduced in size because the scope has changed to fulfill some requirements, I would say. The impact is rather limited. We're monitoring the situations, but I believe that because our global footprint, whatever escalation of the tariff is going to happen between specific countries, some of those volumes will move to somewhere else.
In terms of network, we will be able to pick up part of this volume. Also, we are quite agile in terms of movement of operations. Some of the mitigation measures I would say is the agility of our network as well as the footprint. We will be able to reshuffle ourselves in terms of the supply chain change as the tariff create disturbances. For the time being, again, we have not seen anything. This is more hypothetical. We have some scenarios in which we anticipate if something happens, we could act on, but for the time being, they are just scenarios and not fact yet.
Okay. I suppose the reason for highlighting the risk to the tech products industry has been the tariffs announced thus far, as opposed to anything relating to your particular exposure as a business? Or rather, does it relate to your exposure?
No. It relates a bit. If you talk about tech specifically, we had a couple of contract cancellations because of some of the issues linked to technological transfer, I would say, but not directly to a tariff per se, I would say.
Thank you.
Yeah.
We have three more questions on the phone. The next question is from Rolf Kunz, Mirabaud Securities. Please go ahead.
Good afternoon, ladies and gentlemen. On the Brazilian one-off, can you actually confirm that this is an isolated event and not just the start of something even much bigger once you continue investigating and cleaning up? Secondly, on GIS again, sorry for that. Do I understand it correctly that GIS will become and probably also remain the most profitable division in full year 2018, and that this should also be the case going forward? Thank you.
Yeah. Maybe for me to answer the third question. It's absolutely clear this is a one-off event. As I mentioned earlier, this president of the governance structure, the way in place has identified these issues of overstating in Brazil. We have taken action on it, and we do not expect or foresee any further cases like this. We have already checked again with the network, and we don't expect any other things happening like this.
I can confirm that we provisioned rather conservatively.
On the Brazilian case.
On the Brazilian case. Yes, definitely.
The second question?
Second.
Yeah. I think it can be the most profitable division going forward.
Yes. It will be a profitable division going forward. I must say the nice uptick also in the revenue is not new. We have seen that already in the past.
I think historically, GIS has been one of the two most profitable businesses together with consumer goods over the past five, seven, 10 years, I guess.
Yeah.
Okay. This means that it will probably even overtake now consumers going forward?
Can you repeat, Rolf?
This means that it will probably even overtake consumer testing and remain the most profitable division going forward.
Perfect.
For the moment, I'm expecting my colleagues from consumer to make an extra effort as well to catch them up. I would say for the time being, yes.
Okay, great. Thank you very much.
Next question is from Patrick Jousseaume, Société Générale. Please go ahead.
Yes, good afternoon. Can you hear me?
Perfect.
Yeah. Okay. Simple question regarding the guidance. In the press release in January 2018, you mentioned in your guidance 2018 is expected to be a significant step towards the accomplishment of the 2020 plan. You have removed this sentence from the guidance. Could you explain why, please?
Yes. I would say it does not change our objective to move towards 18% margin for 2020. Whether we put this comment last year or we took it out, it has not changed our commitment to the 2020 objective. Let's be clear on that.
Thank you.
There was no particular.
No particular.
Next question is from Carl Green, Credit Suisse. Please go ahead.
Thank you very much. One of my questions has been answered. Just one residual question, just a clarification on the comment around CBE in the second half. I think you referred to some uncertainties around November and December. Could you just clarify what those uncertainties are, please?
You know.
Yes, the uncertainty for CBE is more toward November, December, because there's a lot of push for completing the audit transition, because the deadline is end of September. We would expect some delays. We're probably going to fall into October, November, December. Typically, because there's a quite big rush towards the fact that if you don't complete to the deadline, you have the risk of losing your certification. This cause a spike of customers pushing for the transition audit. We're expecting the spike to go over September, October, and we're not yet certain how many of our customers. We have an idea, but we're not of full certainty about how many of our customers will be late, how much of this delay would be falling to November and December.
Typically, after transition, you always have slower volumes, which is typical of this kind of market. The comment made on that was a caution about how fast we could pick up versus what is the residual volume moving to November and December, and hesitation rate about our auditors. For the whole year, we're still expecting a strong full-year result for CBE.
Okay. Thank you very much. That's clear.
We have a follow-up question from George Gregory. Please go ahead.
Yeah, just one, if I may. Just on the Brazilian provision. Were the full provision to be deemed unnecessary, how would you recognize any releases? Would that be booked as a non-recurring item as well, please?
Yes. Very likely, yes.
Thanks.
The last question is a follow-up from Jean-Philippe. Please go ahead.
A follow-up on oil and gas. It's your biggest division. You have a very low margin. Is it fair to assume that the PTO is a low capital-intensive business, and therefore you're cashing a lot, or it's really like a cash cow for you? Is that a fair assumption? The second one, if my assumptions are right, you are acquiring the seven acquisitions for 1.7 times sales, 9.5 times EBIT. It's definitely a bit higher than in past years. Is it something that you share as well? You're paying a bit more for these small acquisitions, and would you be ready to go above 10 times EBIT for bigger targets?
Maybe I'll go to this. You go for the first part and I'll go second.
I can confirm your assumption. There is absolutely no CapEx involved in the PTO business. Hence, it's a business with a very attractive return on invested capital.
Yeah. For the acquisition, Jean-Philippe, what is above or below 10, I think the key point is to get strategic fit, value added to the group, financial discipline. If this means above a certain multiple that we used to pay as a group, why not?