Ladies and gentlemen, good morning, Eric. Good afternoon. Welcome to the STS 2018 Health Year Results Conference Call And Life Webcast. I'm sorry, the Chorus 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 And A session. We kindly ask you to limit yourself to two questions. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mrs. Carla De Hessler, Chief Finance Officer, and Mr.
Franky Angie, Chief Executive Officer at SGS Auditorium in Geneva. You will now be joined into the conference room. Thank you.
Oh, Ladies and gentlemen, good afternoon, and welcome to the presentation of our 2018 Half Year Results. As usual, I will give you highlight of our first half performances. Carla will provide you a more detailed financial review, and I will come back with a detailed outlook for the second half of our guidance for the full year. I'm pleased to report that our results are in line with our guidance given in January and all our 9 business plan and 8 regions has achieved positive organic growth this year. At group level, total revenue grew by 6.5% at constant currency, of which 5.6% is organic.
Our adjusted operating margin stands at 14.6 percent, a 40 basis point improvement compared to the first half twenty seventeen. The profit for the period amount to CHF 299,000,000, an improvement of 1% compared to prior year and free cash flow from operation amounts to $176,000,000, a decrease of 16.2% compared to last year. 7 acquisitions were made during the first half, which focused on specific business lines and in line with our strategic plan 2020. 4 acquisitions were made in our AFL at Eco Food And Life, are announced to expand our expertise and footprint, popular Van CarSense, allowing us to expand our know how and expertise in the U. S.
Market. This is an important decision because the U. S. Market is one of the largest. It is is the largest food market in the world where we have limited presence and this will help us to penetrate this problem market.
The other three acquisitions are in the field of team care for consumer goods in and our development of cosmetic and personal health care in the field of metrology our space sectors in line with the expansion of the portfolio from the transportation field and in the polymer testing, within the industrial activities where we are 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, Franky. Very good afternoon ladies and gentlemen. As Frank 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 Brazilian affiliate.
Following an internal review of our Brazilian business in late June, we identified evidence of overstatement of revenues in current and prior periods. An internal investigation is currently in progress in Brazil. This overstatement has a cumulative effect of $37,000,000 on the group financial statements as of December 2017, And since the amounts are determined not to be material to past financial statements, a provision of $47,000,000 has been raised to a for the cumulative misstatement and a provision to cover for unforeseen additional costs, which is disclosed as a nonrecurring item recorded in the first half year. If you have any questions related to this topic, I'm happy to answer this during the Q And A session. So in an effort to give you a greater insight into our results for the first half of twenty eighteen.
I'd like to begin by sharing our overall P and L. So the first and the first column reflects the half year performance for 20182017 at historical rates while the middle column contains the performance of the first half twenty seventeen at constant currency. We delivered a strong revenue growth of 6.5 percent and acceleration compared to the 5.8 percent revenue growth during the second half of 2017. We improved the adjusted operating income by 9.2% and the adjusted operating income margin of 14.6% increased by 40 basis points compared to a year ago. 3 clarifying points regarding this uptake of the margin.
1st, 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 initiative programs supporting the 2020 plan. And thirdly, we benefited from the recovery of the bad debt provision the account for in the first half twenty seventeen in GIS and 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. And while these investments 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 CHF411 1,000,000. And this was impacted by the correction of the revenue overstatement in Brazil and the related additional provision. Both together amounting to $47,000,000. The profits for the period amounts to $296,000,000 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 STS Brazil. The earnings per share at constant currency decreased by one point 77, while the adjusted earnings per share increased by 12.2 percent up to CHF 55.
Our top line grows 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 The gray part of the chart reflects the effect of the 15 acquisitions that we made in 2017 2018. Amounting to $27,000,000 or 0.9 percent. In the first half of twenty eighteen, the group acquired 7 companies of each 4 in agriculture, food and life, which is in line with our strategic focus. From a geographical perspective, 2 acquisitions were made in our focus market, North America.
The blue part represents the ForEx which was a positive 2 percentage points contribution due to the strength of the euro and the Chinese renminbi versus the 5th rank. 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 9 businesses delivered organic growth as indicated by the orange bar and 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 1st year in which Minerals grew its revenues since 2013. And this momentum continued in 2018 as revenue accelerated significantly in the first half. Resulting in a year on experience double digit growth. Trade saw robust amount in energy minerals.
The Heochem saw a strong increase in central volumes While the metallurgy business achieved peak performance, particularly in Canada and Australia, it's a higher demand for pilot plant testing. GIS, the 2nd business with a double digit growth, grew its business by 11.1%. A significant improvement versus the breakeven position in the second half of last year. This impressive growth is mainly driven by high double digit growth of Transnet and scanning services and solid growth in single window operations. Similar to the Minerals business, OGC accelerated the growth momentum created in the second half of twenty seventeen resulting in an organic growth of 7.7 percent.
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 single 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 twenty seventeen, we remained very cautious in predicting the further development of the revenue of our industrial business.
In the first half of twenty eighteen, we achieved a growth of 3.8 percent of which 2.9 percent 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 the growth of 6.1 percent of which 4.8 percent 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 directives.
And in addition, we continue to deliver double digit growth in cosmetics personal cash and households. Our growth slowed compared to last year due to low single digit growth in softlines, which experienced a weaker first quarter due to labor shortages following the Chinese New Year. CDE, CDE continued its journey of solid growth resulting in a growth of 7.4% of which 6.2 percent 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 the strong growth of 6.1%, mainly driven by double digit growth in the health and safety services.
And this was complemented by mid single digit growth in fields and monitoring services and 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 sectors. 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 nonrecurring contracts in the U.
S. By delivering double digit growth in testing services across all geographies particularly in China. And last but not least, agriculture, food and life achieved a growth of 4.8% of which 2.7% organic And this is softer than expected due to the agri trait 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 digit growth in life science. 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 America region being the driver. The Asia Pacific region delivers the highest organic growth exceeding the growth of 1 year ago. China's growth outside CRS is particularly strong in agricultural life OGC, CDE, and environmental health and safety, and is driven by the strong growth in domestic and international markets. Australia continued nicely on the recovery part and realized a high mid single digit growth mainly driven by the uptake in the mineral business. Acquisitions made in industrial agriculture Foodter Life And CRS helped the Americas region to achieve a growth of 7.2 percent, of which 5.9% organic.
And the growth was positive in both subregions. South America outperformed North America driven by double digit growth in Minerals And Industrial. And the organic growth in North America is mainly driven by 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 retail life. Our strategic objective is to make this organization more efficient And this slide shows you the first signs of success with average headcount with an average headcount increase of 4.5% year on year which is well below our revenue headcount growth outpaced the revenue growth is the Americas. And this is mainly related to the double digit organic growth in the PTO business in the U. S.
And the strong growth 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 35,000,000 as represented by the green box. The inorganic growth of $5,000,000 included in the Gradebook relates to the 15 acquisitions that were made in the period 2017 2018. And 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 improvement in our GIS, environmental health and safety and minerals businesses.
And I would like to recognize our GIS business for the to performance in improving its profit margin significantly from 11.3 percent 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 Transnet. 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 both in Europe and ongoing operational efficiency in Asia Pacific And Europe. Our minimum 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 lap operational efficiencies.
And in addition, they continue to add a number of profitable contracts to the portfolio. The strong top line in CBE enables an optimized CapEx to use This together with the improved efficiency related to the transfer of related to the transfer of the activities to the shared service center led to a margin improvement of 40 basis points. 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 in supervision and construction. Consumer Retail Services remains by far the biggest contributor of adjusted operating income and the decrease in adjusted operating income margin by 30 basis points relates to specific market conditions in both softlines and poised.
This has been partly compensated by strong productivity gains, in the electrical and electronics as well as a nice uptake of the margins in cosmetic household and personal care. We expect the margin to recover in the second half of twenty eighteen as this is the peak season for our Sierra business. The decrease in the agricultural food and life margin is mainly related to the challenging conditions in trades 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 to the change in the business mix due to double digit growth in plant and terminal operations as well as continued investments in the U. S.
To adjust the business to the changing competitive environment in the trade related activities. And 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 twenty seventeen was positively impacted by no recurring contract in North America. And secondly, 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 improves its margin year on year due to improved utilization of the lab network fueled by a strong global demand. Our balance sheet our balance sheet continues to remain one of our strengths. And a couple of key points, which you will give you a bit of greater insight here is that our net debt of $1,146,000,000 is at a comparable level of June 2017. The decrease in the receivable is partly due to the application of the IFRS 9 retro effectively from January 2018. The adjustment to the carrying value amounts to 77,000,000 and this has been reflected as an adjustment in the opening equity.
Decrease in the long term loans relates to the $375,000,000 bond that will expire in March 2019. The effective rate and the effective interest rate of our current bond portfolio amounts to 1.3% while the average bond maturity is 5 years. After redemption of the bonds that expires in March 2019, the effective interest rate of the portfolio will be below 1%. And last but not least, our networking capital, you know that we continue to manage our networking 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 is despite robust revenue growth.
Looking at our cash flow for the first half of twenty eighteen. We of course remain proud of our ability to continuously deliver solid cash flow as evidenced again this year. And the operating cash flow reached $316,000,000 and the decrease versus last year is actually mainly related to the increase in the taxes paid. The uptake of the networking capital is driven by seasonal patterns and the growth of the business. Free cash flow amounts to $176,000,000, a decrease of $34,000,000 and impacted by the increased investments in CapEx However, CapEx as a percentage of revenue remained at the level of last year.
The casual flow related to acquisitions amounts to $41,000,000 compared to $12,000,000 last year. And the increased investment is a confirmation of our continued interest in acquiring businesses And the increase in cash outflow from financing activities is related to 2 factors: 1st, the dividend increased by $45,000,000 compared to the year before and second, the group placed bonds of $375,000,000 $375,000,000 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 2 thirds of our CapEx investments are related to growth, while one third relates to maintenance. And during the first half of twenty eighteen, this spend $144,000,000 of CapEx, representing 4.4 percent 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.
Ily confirm 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. So before I conclude my presentation, I would like to leave you with some important points that summarize our performance of the first half twenty eighteen. First, we achieved a revenue growth of 6.5 percent of which 5.6 percent organic, 2nd, we grew our adjusted operating income margin by 9.2% while the adjusted operating income margin increased to 14.6%. 1st, our profits at historical rate increased 1 percent to 1,000,000. And 4th, we invested 181,000,000, posting CapEx and acquisition.
Finally, we delivered a solid free cash flow of 176,000,000. So in summary, we delivered solid results in line with expectations and it is very clear that these results would have never been possible without a strong engagement and contribution of our 96,000 plus SCS employees around the world.
Thank you, Carla. So let me go through quickly for the outlook for the second half outlook. Let me start with agriculture full and life. The trade condition should improve in the second half with forecasted better, expect outlook in key geographies, testing volume in the food and life sciences sectors is expected to remain strong in the second half as market fundamental remains positive. The acquisition made in the first half the year, we'll have to expand our footprint and drive further growth.
So on that, I expect a better organic growth in the second half of the year, and we should see some catch up on margin as the agricultural market condition improves. Minus, The good margin momentum should continue in the second half with good volume projections for our commercial labs and for our metallurgical testing. New onset laboratories coming online with further support growth momentum. The overall market trend of the first half is expected to continue subject to stable market global trade macroeconomic 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 twenty seventeen.
Ongas and chemicals, fair market condition expected in the second half. Strong volume already secured for our P2 activities, especially in the U. S. Troid volume is expected to remain stable, but with competitive pressure on price. Further efficiency measures will be taken to limit the impact Positive momentum on option activities up during the Africa Middle East where we secure a new contract that there will be put in place and running in the second half.
On the whole home, with the pickup of upstream in the pickup PTO, in order for us to expect second half margins to be back in line with the second half of twenty seventeen. Customer Retail. 2nd half main travel remains the E and E activities EMC's safety, reception substances testing for electronic product will continue to grow. Wireless testing outlook is positive for China and Taiwan but we still face high competitive pressure in Korea. Although soft line market condition will be stable, second half with in second half with strong growth in countries like Turkey, Bangladesh, Vietnam, but a softer growth in China and India.
Growth in customising and personal care is expected to continue at double digit. As Carla already mentioned, we expect margin to prove 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 December.
After market, we reiterate itself to the post transition of volumes. So we have to monitor that and see what is the development. But on the overall, we should expect, a year of full year growth overall to the first half and we should expect margins to develop positive feedback. I thought it would be uncertain uncertainty about audituritization in November, December. Industrial Services The focus on insurance services will be on continuing to improve continued margin improvement moving into second half.
With more stable market condition and re alignment of our portfolio and capacities, we should see a steady improvement of the market as we progress into the second half of the year. Our winter air and safety. Our market conditions to remain similar to H1 of increased research and driving volume in our laboratories. The expansion of our services in marine, industrial hygiene and hospitality sectors will continue to drive growth in our film activities and also move more volume into our laboratories. We expect both revenue and margins to improve in the second half of the year.
Transportations. As mentioned, Paccala, we did end of the large contract in North America had a negative impact in the growth in H1. And we should see some of this impact moving to H2. The women of the portables should perform well with testing activity expected to maintain a double digit growth in the second half. Also, the lower awaited price increase in Argentina, the color mentioned as well has occurred actually in end of June, and we've developed a volume that we in our Chilean position, we should expect some better momentum and also help to recover some of the margin losses in the first half moving to the second half.
And to finish on the outlook for GIS, senior market condition expecting the second half will grow off trend by 20 net. For the conformity assessment and scanning services. Corvin Gs has been strong, despite the delay in some of the implementation of the renewable E waste project in Africa, and this new project, the internal U. S. Should be coming online on the quarter 4th this year, which supports further the growth of the division here.
So having said that this is aligned by Visa, I find a nickel for the guidance for 2018. And overall, 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 on our global business outlook. However, as it stands today, we have seen little impact to our activities. So on that, our guidance for 2018 remain unchanged and they are solid organic growth, higher adjusted operating margins and workers cash flow, To conclude just a reminder of our 2020 strategic plan, a mid single digit organic growth on average over the period accelerated M and A activities with a crowd in the range of $1,000,000,000 attributable margins of at least 18% strong cash flow conversions, regulatory return on invested capital, solid dividend description in line with improvement of net earnings.
On that, I will, Karen, I will be happy to take your question. My cash will start first in the room here.
Great. Hi. It's Paul Sullivan from Barclays. Just a couple for me. Just in terms of the second half outlook, tracking is to help the clarify issue.
Would you expect growth to be very similar to the first half? Do you see any scope for acceleration? In the second half versus the first half. And secondly, on margins going through the divisional detail, it sounds like margin expansion should be higher. Than the 40 bps underlying dividend at the time.
Is that a correct assumption?
For the growth, we're looking at most similar kind of growth. With some of the businesses with different copper costs against H1 last year. But in terms of overall portfolio, we look at more or less the same kind of growth pattern. For the margins, is, as I mentioned earlier, is the different outlook holder by business 9, but on the overall we're looking at kind of pickup on the second half of the year compared to last year as well.
Okay. That's better. I mean, 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 FX that we've seen for this year, we're going to see an acceleration of this effect. And we're also putting additional measures to make sure that the pickup is what you should be at the end of this year. We should have an acceleration for next year as well.
Yes. It's Mike Plunna 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 percent organic growth you have a procurement savings of about 60 basis points.
And if I'm correct in understanding that the underlying mark if you adjust for the provision of the GIS and the Brazilian restructuring charge that is above the is 40 basis points. That suggests that you get a negative adjusted for procurement saving margin effect, some mix effect, but still it's significantly less that you would expect with an operating leverage tech business. So could you explain a bit the moving part? And 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 out? Because you don't provide a lot of details on that and obviously by division even less.
So very difficult to really appreciate the true operating leverage of the business. And as a follow-up on the cash flow, seems that also there's no depreciation increase. So before working capital before tax payment, there's a quite a significant operating cash margin decline. So again, could you explain why this is the case?
I do understand the complexity in our internal parts 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 percent basis points uptake that you see is really reflecting the underlying profitability improvement. So that's one. And then of course, there are a lot of moving parts, because of course, 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.
But there are also negative effects coming from, 1st of all, the event in Brazil. So there is also a negative effect there above the line. And as you pointed out, we are also continue we continue to invest in our transformational and efficiency programs and on top of it, We also invested incrementally into the digitalization and innovation initiatives in the company. So all these pluses are minus. It leads to the underlying business, the underlying profitability increase of 14 basis points.
Obviously, I cannot give you all, I would say the exact percentages of every part of the puzzle that will make it very complicated. These are the moving parts. Yes, sorry, I forgot the cash flow, sorry, I apologize, I forgot cash flow, cash flow, indeed the operational cash flow decreased versus last year. But as I explained, is mainly related to the increase of the 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. And if you look at the free cash flow, the second element that impacted is really the increased investment of in CapEx, but obviously Obviously, that is also relates 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. I have two questions. One relates to the one relates to the organic growth, which we show at 5.6%. With the resilient problem of $37,000,000, 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.
Yes. And just to answer that question, obviously, I mean, it has also, I would say, the Brazilian event has also an effect on the 2017. So I mean, you cannot just I would say, take it in 2018. We are looking, I would say, in the cumulative effect it is fixed between the prior years. But as a principle, yes, you're right, yes.
But not to the extent that you say because like for like impact will be less.
Yeah. Thank you. Second question is you reported to 708 acquisitions since the start of the year and your objective is to get to something like 1,000,000,000 of revenue until 2020. And today, you are far behind your objective 2020. Are you planning for bigger acquisitions in the near future?
I think the semi key usually made for the 1st half year has not reflect what we've done the background. We've done a lot of processes for all of the acquisitions and for several reasons in terms of financial discipline, in terms of value creation and so on, we have decided to secure those the 7 that we have achieved for the first half. But we'll keep continuing looking at the market where we believe this good value creation for the group in terms of on speaking to a financial discipline. So I would say we'll keep looking at the acquisitions. It's on a high priority list, but not at any cost and any multiple.
So we speak to what our discipline has been for the past couple of years, but we've been more active that there is no issue in here. So there's no question on the room. We can take the
Thank you. The first question is from Tom Frank, Deutsche Bank.
Just on the GIS business, could you maybe just detail a bit more what the improvements in profitability or how you got the improvement in stability, please, excluding the change in provision. And then just on the oil and gas business, you obviously say that there's mix implications for the margin. But could you also confirm whether excluding PTO, the margin was down or not? And just why we would have confidence that the second half margin would be better, please?
Okay. And so first of all, coming back to the question of GIS and the impressive uptake of the margin. So next to I would say the effect of not having the budget, expenses are actually 2 reasons. Our GIS colleagues added some very profitable contracts to the portfolio. That is one element and second element There is also, I would say, a nonrecurring one off effect that is related to the end of a contract in the portfolio.
Okay. Are you allowed to say how large that might be, please? And the nonrecurring effect?
I would say that in public as it's a single correct.
Okay.
And upon for the second questions, I would say the margin has come down to the mix is certainly is, so you can see in finishing that with the P2O business which has lower margins than our trade activities. I would say that for the rest of the portfolio is a mixed bag with some activities to house a lower margin while autonomous house had stable margins. In the second half, the positive impact is 1st upstream businesses has much more contract coming on board. As well as some of the seasonality that we're going to see in a Southeast Asia Pacific into kick in. So we'll have a much more volumes on the upstream side that we had in the first half.
As well as in some of the other sectors like, fuel market on some of the testing activities, we're seeing better volumes moving to 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. So are you saying, 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 will be better, will be captured from some of the downs of the first half of the year.
But that's importantly year on year, not just any seasonality, that'll be year on year up in absolute EBIT.
Yes. Margin.
Next question is on Jean Philippe Bercier. From Pontobel. Please go ahead.
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. And I think when you're talking about industrial, the restructuring is like not in the underlying. So I don't understand really what you're saying. And then we consider the 11,000,000 provision from last year.
I derived something like plus 10 bps at constant currencies. What what am I missing here, please?
Sorry. I apologize. You had one question.
Thank you, Carla. And then the second one on digitalization. You had a full update at the Investors Day last year. Maybe Frank, if you can update us on that program. And if you can confirm the sales of $100,000,000 at 20 5 percent margin.
And maybe the last one on transportation, you're talking about double digit growth in testing services. Which I think is high margin. And we see that the margin in transportation is below the level of H1 16. I understand that we had some positive impact in 2017, but what's the problem versus 2016? Thanks.
Coming back, Jean Filip, 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 twenty seventeen. So that's why I can also confirm that the 40 basis points uptake is really reflecting the underlying profitability improvement.
Okay. Shafielik, for your question on utilizations, yes, we're working on the program. We'll probably give an update at the next, Investors Day. It is clear that we are 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 project that we discussed in our last October has picked up momentum.
And in fact, some of those projects are actually integrating to the bond services that we're offering to the market now. So, you're going to see that some of the services digitization is a stand alone that we can easily track while all the services that we're offering now is quite bundled into the core service offering. If I take one example, Transplant C1 now is not just a single service offering. We need link to bundle service that we're offering. So we will have to speed up little bit the way we tracked that, but should be able to do it on again.
The program is in line. We're just pushing on pushing further on that with internal external optimization and digitalizations. You're
confirming the 3 100,000,000 sales targets and 35% margin? 2020?
The numbers, yes, actually.
And that's on our transportation. Did
you like to say? Yes. 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 nonrecurring of last year. And as I said also before, we faced also the reality that in the first half of twenty eighteen, we were not able to increase our inspection rates in Argentina to really fully cover for the inflation for the inflation effects and these are the 2 offsetting effects.
Thank you.
Next question is
from Chirag Sadia, HSBC. Please go ahead.
Hi, there. Just one question. Given that there were provisions in the first half last year and their provisions in the first half 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 that I don't expect that to be recurring. This was, I would say, 2, 3, and expectedly. And, yeah, 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 referred also to the restructuring and provisions that we had the year before.
But going forward, I would not expect, I would say, a significant provisioning related to the nature or to a similar nature and for, yeah.
So clearly, the president issue is isolated. I mean, now we have, we've implemented strong governance over the past few years and this was detected by our governance structures, that we have taken a one off adjustment in the beginning of first half of this year. We don't expect any kind of these nature happening again in the second half of our subscription. There's no indications. There's still nothing's happening in the network.
So we're treating that as a one off For the rest of the provisioning, we made a small provision of $5,000,000 for restructuring on the first half. I would say, if there's any, we're looking still at the dashboard. If there's any kind of restructuring amount that we're going to put, it will be in this kind of magnitude, but no more than that, I would say.
Next question is from Ed Steele, Citi. Please go ahead.
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, etcetera, please? And then 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.
So are you is your guidance and you expect to see a similar amount, are you 40 basis points year on year increase ex or including that, please?
Want to go from there?
Yes. I mean, for the second half, I would say the expectation is to keep the margin in line actually with the first half. So that's a bit of guidance, I would say, for key
And for the full margin, I will stick to the outlook I just gave, which is a higher adjusting operating margins. So I think you have to make the math with all the details I gave earlier.
Next question is from George Gregory, Exane. Please go ahead.
Question on the GIS margin. So thanks for clarifying color. Just second one, just maybe touching on trade wars, you referenced it as a potential major risk for the tech products industry and your slides. And And I think, frankly, 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, how the business could mitigate any risks that could arise, please?
Thanks.
We, as I said, for the time being, there's probably limited impact from what we've seen. There's a lot of comment on the market about this tariff. Certainly, I think I would say on the Mineral side, if I want to be more precise on the Minerals, the discussion for the tariffs has been have no impact to our businesses. Some of the small impact that we've seen up to now is bit on the consumer goods where a couple of contract has been, reducing size because the scope has changed to fulfill some requirements. I would say.
So the impact is rather limited. We're monitoring the situations, but I believe that because our global footprint, escalation of the tariff is going to happen between specific countries. Some of those volumes will move to somewhere else and in terms of network, we will be able to pick up part of this, this volume also were quite agile in terms of movement of operations. So Some of the mitigation measures I would say is the agility of a network as well as the footprint, will it be able to reshuffle ourselves in terms of the the supply chain change are to power for create disturbances. But for planting again, but not seeing anything.
This is the more hypothetical We have some scenarios in which we anticipate this only happens. We could act on before the time being the adjusted scenarios are not factored yet.
Okay. And I suppose the reason for highlighting, the risk to the tech products industry has been that the tariffs announced thus far as opposed to anything, relating to your particular exposure as a business? Or does it relate to your exposure?
No, you were related to EBITDA. Did you talk about tax specifically? We had a couple of cancellations because of some of the issues linked to technological transfer, I would say, but not directly to a tariff person, I would say.
We have 3 more questions from the phone. The next question is from Ralph Koons, Mirable Securities. Please go ahead.
Good afternoon, ladies and gentlemen. On the Brazilian 1 off, can you actually confirm that this is an isolated event and not just start of something even much bigger once you continue investigating and cleaning up. And then 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.
Yes. Maybe for me to answer further questions is after credit is a one off event. As I mentioned earlier, this Brazil, the governance structure that we have in place is, has identified these issues of overstatement in Brazil. Was taken action on it and we do not expect or foresee any further cases like this. And we have already checked again with the network and we don't expect any other things happening like this.
And I can confirm that we
provisioned rather conservatively. On the Brazilian case.
Yes, it can be
a profitable division going forward. And I must say the nice uptick also in the revenue is not new and we have seen that already in the past.
I think historically GIS has been of the 2 most profitable businesses together with consumer goods over the past 5, 7, 10 years, I guess.
Okay. And this means that it will probably even overtake now consumers going forward.
Can you repeat so?
This means that it will probably even overtake consumer testing and remain the most profitable division going forward.
For the moment, but I'm expecting my, my colleagues from a consumer to make an extra effort as well to catch them up. So I would say for the time being, yes.
Okay, great. Thank you very much.
Next question is from Patrick Johnston, Societe Generale. Please go ahead.
Yes, good afternoon. Can you hear me? Perfect. Yes. A 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 objectives.
Let me clear on that.
Thank you.
Next question is
from Carl Green, Credit Suisse. Please go ahead.
Yes, thank you very much. One of my questions has been answered. So just one residual question, just a clarification on the comments around CBE in the second half. I think you referred to some uncertainties around November December. Could you just clarify what those uncertainties are please.
Also, yes, the uncertainty for CBE is more toward November December because there's a lot of push for for completing the audit thing, the audit transition audit, because at that time it's end of September. So we would expect some delays. So we'll probably going to fall into October, November, December, but typically because there's a quite big rush toward the fact that if you don't complete to the deadline, you have to risk of losing your certifications. So this quarter, a spike of customers pushing for the transition audit. So we're expecting that this spike to go over the, September, October and we're not yet certain how many of our customers will have an idea, but when I have full certainty about how many of our customers will be late and how much of this, this delay will be falling into November December.
But typically after transition, you always have a a slower volumes, which is typical of this kind of market. So the comment made on that was a cautious caution about how fast we could pick up versus what is the what is the room for moving to Novanta's sample and digitization rate about our, in auto details, but for the whole year, we're still expecting a strong full year result for CPE.
We have a follow-up question from George Gregory. Please go ahead.
Hi, yeah, just one if I may. Just on the Brazilian provision, were the, were the full provision to be deemed unnecessary How would you recognize any releases? Would that be booked as a nonrecurring item as well, please?
Yes, I mean, very likely. Yes.
A follow-up on Oil And Gas. It's your biggest division. You have a very low margin. Is it fair to assume that it the PTO is a low capital intensive business. And therefore, you're like cashing a lot or it's really like a cash cow for you.
Is that a fair assumption? And the second one, if my assumptions are right, you are acquiring the 7 acquisitions for 1.7 times sales, 9.5 times EV EBIT. So it's definitely a bit higher than in past years. Is it something that you share as well? So you're paying a bit more for these small acquisitions?
And would you be ready to be, to go above in terms of EBIT for bigger targets?
Maybe I'll go to the you confirm your assumption.
There is absolutely no CapEx involved in the PTO business. So hence, you know, it's a business that's a very attractive return on invested capital.
Yeah. For the acquisition, you know, Philip, what is above or below 10, I think the key point is to get such a strategic fit, value added to the group financial discipline, if this means about a certain multiple that we used to pay as a group, why not?
Thanks.
Thank you very much.
Thank
you.
Hi.
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