Ladies and gentlemen, good morning or good afternoon. Welcome to the SGF's 2017 Full Year Results Conference Call online webcast. I'm Sarah, 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 At this time, it's my pleasure to hand over to Ms.
Kala De Geeser, Chief Financial Officer and Mr. Frank Yang, Chief Executive Officer at SGA SODito in Geneva.
Welcome to the presentation of our 2017 full year results. As usual, I will give you some highlights of our performances Carla will provide you a more detailed financial review. I will come back with your business outlook and some guidance for 2018. In line with our strategy 2020 plan, we have achieved solid growth in form of our focus design transportation, Azure Food And Life, Consumer Retail And Subscription Business Enhancement. Furthermore, we have approve our performances in minerals and all gas and chemicals.
Both our focus regions have performed well on with a very strong condolences in China specifically. As you could go through the highlights of the group, group grew by 5.4% as constant currency, of which 4.2 is organic. Our adjusted operating income margin stands at 15.15.3 percent, sorry, similar to 2016. The profit for the period amounts to 664,000,000 shares, an improvement of 13.3% compared to last year, Cash flow from operation amounts to CHF987 1,000,000 applied decreased compared to last year. Our ROIC improved by 200 basis points to 21.3% compared to 19.3% in 2016.
The Board of Directors proposing a dividend of CHF 75 per share. During 2017, we made a total of 12 acquisitions across 5 business lines, 5 in North America, North America, 4 in Europe, 2 in Saab and 1 in Africa. This is in line with our strategy and will enhance our footprint in key regions and businesses. After our full year closing, we announced a fitted 2 acquisition both in FL. Manca Sciences in the U.
S. Will allow Asia to enhance its footprint in the U. S. Food testing market, the largest in the world, and the critical market for our ASL strategy. At the end of 2017, Interest Group has over 95,000 employees and 2004 on the locations around the globe.
Now I'll hand over to Carla for presentation. She will give you more details with you on the financial performance.
Very good afternoon, ladies and gentlemen, before I share the details of our solid 2017 results that are completely aligned With the outlook that we presented to you during the investor days, there are 3 important points I would like to highlight to each of you. First, we accelerated growth during the second half and continue to deliver market leading organic growth supported by both the diversity in our for you as well as innovation. 2nd, we grew our adjusted operating income by 5.4% despite the fact that industrial Our 4th largest business in terms of revenue continued to operate in challenging market conditions. And finally, we generated a solid cash flow comparable to 2016, despite our continued investments in acquisition and CapEx allowing us to reward our shareholders for their continued loyalty to STS. Let me take you now through the more detailed financial review.
Looking at the overall P and L, the first and the third column reflects the full year performance for 2017 16 at historical rates, while the middle column contains the performance of the financial year 2016 at constant currency. We delivered both good revenue and adjusted operating income growth at 5.4 percent fully in line with the guidance. Our adjusted operating income margin at 15.3 was stable versus a year ago, a 4 clarifying points regarding these margins. First, we delivered a strong performance in the majority of the portfolio. In addition, the dilutive impacts of the underperforming assets, aquitest and Bateman East during the second half.
2 out of the 3 energy related businesses performed strongly. The Minerals business continued on the path of positive growth and significantly accelerated growth during the second half while improving the margins. In addition, the OGC business also experienced accelerated growth in the second half of the year. First, you will remember that the first half year performance was impacted by an exceptional bad debt provision related to a number of GIS contracts. I'm happy to share that we continued our collection efforts and were able to recover a portion in our growth, transformational and efficiency projects in line with our strategic plan.
While these investments driven projects projects negatively impacted our bottom line in 2017. They will allow us to grow the top line and improve the bottom line going forward. Operating income operating income increased by percent to $894,000,000. Our operating income was strong despite the impairment of the industrial goodwill in North America amounting to CHF 30,000,000. This impairment of goodwill is the direct result of challenging market conditions in the oil and gas services with volume reduction and price pressure impacting our results in this specific regions.
Profit for the period amounts to 1,000,000 and increased by 13.1% while the profit attributable to equity holders improved by 14.2%. As a result, the EPS at constant currency increased by 10.756. Our effective tax rate decreased by two percentage points versus last year, and the one off decrease is related to the reduction of the U. S. Corporate income tax.
Let's now take a look at the revenue. Our top line growth at constant currency amounts to 5.4% of which 4.2% is organic. Last year, the majority of our revenue growth was driven through the acquisitions. This year, the majority of our revenue growth is the result of positive organic growth among 7 out of our 9 businesses. The orange part of the chart reflects their organic growth, which is driven by the continued strong performance in the full portfolio with exception of GIS And Industrial.
The great part of the chart reflects the effect of the acquisitions made in 2016 2017 amounting to 1,000,000 or 0.1 percentage points of growth. During 2017, the group acquired 12 companies and continue to focus on small to medium sized companies to expand into new markets and to create more diverse service offerings. 4 of the 12 acquisitions were in ASL III And Industrial III in Consumer Retail Services. From a geographical perspective, 5 acquisitions were made in our focus market North America. The light gray part represents the positive foreign exchange impact and it's the first time since 2012 that we are experiencing a positive ForEx.
Some of the major currencies that we are operating in such as the dollar 90 strengthened versus the Swiss franc throughout the year resulting in this positive impact. This results in a total revenue growth at historical rate of 6 0.1% versus 4.8% last year. One of the key takeaways when we look at the graph, representing the individual, the importance of each of the 9 businesses from a revenue perspective is that the businesses increasing their relative rates are the ones with the higher profitability. Given the size and the double digit revenue growth of Consumer Retail Services, the 3rd biggest business gained 0.7 percentage points in relative weight. This growth is driven by the double digit growth in electrical and electronic benefiting from the strong volumes in its testing services and partly supported by the acquisition of CCS in 2016.
This is clear proof that the group's growth is not solely dependent on the uptake of the energy or commodity related businesses. AFL, our number 2 businesses business generated revenues in excess of 1,000,000,000 representing 16% of revenue and it's also important to note the remarkable increase in the relative weight of the transportation business by 0.5 percentage points. This is resulting from the stellar revenue growth throughout the whole portfolio. To be fully transparent, I would like to inform you that the 2017 results do include a nonrecurring commercial inspection contract in North America that is finalized in the last quarter of 2017. Let me give you some greater insight now in the revenue performance of the individual businesses.
Transportation is 1 of the 2 businesses that realized double digit growth. The organic growth amounts to 11.4% and is driven by strong performance in the statutory inspection testing and field services mainly in Europe and the Americas. Moreover, we invested in a number of new projects in 2016 which have generated which started to generate a return in 2017. CRS, our most profitable business The second business that achieved double digit growth of 10.4% of which 7.6% organically. We achieved a stellar performance in Northeast Asia in addition to solid growth in North Central Europe.
And the major segment, electrical and electronics achieved an impressive growth, including the wireless activities. Softlines, Softlines achieved mid single digit growth through capacity expansion in new sourcing markets, increased market share in footwear testing, higher demand for chemical testing and expansion of our global customer base. The robust performance in soft lines implemented an even stronger growth in the hard lines through expansion of customer supply chain in new markets and strong organic growth in China, India and Vietnam. And finally, we delivered double digit growth in Cosmetics Personal Care And Household, mainly in North America and Asia. Agriculture Foods and Life, the performance there, a growth of 7.7% of which 6.7% was organic and exceeding last year's performance as a result of the double digit growth in food activities, life flap activities and clinical research.
The strong momentum in the foot is supported by recent acquisitions, certification services and digital initiatives which are beginning to ramp up. While trade and logistics performance was fixed throughout the year, we seat and productivity benefited from a recovery in most of the markets. As touched on before, this is the 1st year in which Minerals grew its revenue since 2013. Revenue grew revenue growth accelerated significantly in the second half ending the year with a growth of 5.6% which 5.2% was organic. The energy minerals and the trade services representing more than 50% of the portfolio achieved double digit growth with exceptional performance in Indonesia, South Africa, Colombia and Russia.
The team continued on its successful journey of operating on-site lab activities and the Heochem activities generated a nice sample volume, particularly in Australia and Africa. The metallurgy business recovered during the year particularly in Canada and Australia with higher demand for pilot plant testing. CBE, CBE continues its journey of solid growth achieved single digit growth in the management system certification business driven by the transition to the new 2015 standards as well as medical devices and information security management. Training and performance assessment business experienced double digit growth. Similar to the Minerals business, this is the 1st year in which OGC has experienced positive growth since 2015.
The 2017 growth amounts to 3.2% and all activities with exception of the trade performed very well. Plant and terminal operations achieved double digit growth fueled by contract wins in the U. S. And our upstream business accelerated its growth into the 2nd half and improved profitability, mainly as a result of the successful conversions to production activities. Trade activities remained rich in Europe, Africa and North America, and this was partially offset by growth in Asia and the Middle East.
Environmental health and safety, slow growth of 3% is impacted by 2 key elements that I explained to you in July. First, environmental health and safety benefited from a commercial contract that was completed in 2016 2nd, we took the decision to restructure the acquisition business and exit high revenue low margin contracts. The underlying business is performing very well, driven by continued environmental health and safety regulation enforcement around the world with a new push in developing geographies and the development of innovative packages in terms of hospitality retail a real estate sector. GIS revenue remained at the level of last year as a result of the completion of 2 major contracts, 2 major contracts as well as a delay in turning a new major contract into operation. As the underlying business is very healthy, we believe that the foundations of science of some to realize a nice uptake during 2018.
And last but not least, industrial business, the row revenue remains flat, thanks to 2.6 percent inorganic growth. And inorganic growth relates to the 2016, 2017 acquisitions that were mainly focusing on the diversification of the portfolio which aim to become less dependent on the oil and gas sectors. I'll give an example, the acquisitions we made in the production, material testing and asset monitoring for the manufacturing industry. The reason for the organic decline is twofold. First, the depression in the oil and gas capital expenditure led to a volume decline and pressure on price.
Impacting the energy activities mainly in North America. 2nd, there was reduced public investments in infrastructure and construction markets in South America, impacting both volume and price. Unlike the Americas, the industrial business grew in regions such as Asia and Africa, mainly driven by the healthy lab testing activities as well as growth in power and utility services. I'd like to give you a broad perspective of our revenue trends by region. You can see on the slide, all three regions contributed to the group's growth with the Asia Pacific region being the key drivers.
The Asia Pacific region delivered the highest total and the highest organic growth, significantly exceeding the growth of 1 year ago and it's mainly driven by high single digit growth in Northeast Asia, strengthened by mid single digit growth in China's growth is particularly strong in the Consumer Retail Services Agriculture Food And Life OGC Transportation And Industrial and is driven by the strong growth in the domestic and international markets. In addition, CBE And Environmental Hands And Safety were strong. After 3 years of decline, Australia is recovering very well and this is driven by the uptake in the Minerals business. Acquisitions made in Industrial transportation, agriculture, food, and environmental health and safety helped the Americas region to achieve a mid single digit growth. The organic growth was positive in both separations.
However, North America outperformed the southern part. And this was driven by strong performance in the minerals, the transportation, and agriculture, food and life. The South American performance was a mix of strong performance in Peru, Argentina and Colombia mainly driven by industrial OGC, Minerals and CBE followed by Brazil with low single digit growth and this growth was offset by weaker performance in Chile, mainly as a result of the declining minerals business. Compared to the first half, the growth in the Americas accelerated in the second half. A good organic growth has been achieved in Europe, Africa and the Middle East with growth of 4.2% fuels by a mid single growth in Africa and Western Europe.
The strong performance in Africa is mainly driven by the agriculture food and life minerals and the transportation. European regions performed well mainly in the consumer retail services agriculture food and life. Mineral CPE and transportation and the decrease in the growth rate compared to last year is mainly related to the nonrecurring impact of the completion of the Environmental Health And Safety Contracts and the 2 major GIS contracts in 2016 as well as a decrease in organic growth. Without the impact of those nonrecurring events, the 2017 revenue growth would have been 5.3% with 4.7% organic. Let's now take a look at the evolution of the headcount.
The robust organic revenue growth of the Asia Pacific regions as well as the 2 other super regions contributed to the average headcount increase of 4.4% in 2017. We concluded this year with 95,745 SPEs the 3.8% growth versus the end of 2016. The organic growth mainly relates to the strong performance in EFL Minerals And Consumer Retail Services, while the execution of the restructuring plans resulted in a decrease of 615 FCEs year on year. At the right hand of the slide, you'll see the fluctuation in the average headcount for the 3 super regions and in 2 of the 3 super regions, the increase of the average headcount slower than the revenue growth. Headcount growth in the Americas region clearly outpaced the growth as a result of the continued pressure on our industrial activities, industrial activities as well as double digit decline of the minerals in Chile.
In addition, we staffed a new major industrial contract in Peru that became operational in the 4th quarter and this is and will remain a strong driver of the industrial performance in that country. Let me now take a look at the evolution of the adjusted operating income. Starting with the bridge between 20162017. Adjusted operating income growth amounts to 5.4% and the orange box reflects the impact of the organic growth amounting to 1,000,000 The dark gray box reflects the inorganic growth amounting to 7,000,000 And as you can see, the ForEx impact in the light gray box is neutral for the year. The gap between the positive ForEx impact on the top line and the neutral one on the bottom line is driven by the different relative weight of the currencies in the revenue and the adjusted operating income.
Our adjusted operating income portfolio is communicates a significant improvement of our Minerals business. The increase in importance of our focused businesses, CRS, Transportation, Agricultural Life, and the continued progress of our CB business. CRS remains by far the main contributor of adjusted operating income and increased its relative importance compared to a year ago by 0.4 percentage points, thanks to its strong growth and slight increase in margin. ASL, the 2nd largest contributor increased its relative rate by 0.6 percentage points fueled by the solid growth and increase in margins and combined both CRS and ERC delivered now more than 40% of the adjusted operating income. The strong strong increase in relative rates by transportation is fueled by the double digit growth and the further uptake of the margins.
Hopefully industrial GIS Environmental Health And Safety And OGC decreased their relative rate because of the areas that Let's take a look at the adjusted operating income margins by business compared to comparing 2017 with 2016. As explained before, environmental health and safety adjusted operating margin was impacted by the completion points versus a year ago to 10% as indicated in the middle of the slide. GIS also suffered from a margin perspective. However, the margin decline is significantly comparing the first half with the second half and this is related to the partial recovery of the receivables which were fully provided in the first half. Industrial Industrial is a tech business which suffered from a margin perspective primarily due to volume and price perspective in the in the oil and gas related business in the America.
Reduced inspection in the Middle East intensified competition in supervision and consulting activities in South America, mainly in Brazil. Given our concern with the market conditions, we remain cautious for the development of the industrial business during the coming years. OGC was successful in maintaining the margin as it offset the softer profitability in the trade activities due to volume and price pressure by increasing profitability in the majority of the portfolio, including upstream activity. And I would like to recognize the Minerals team as they continued on their journey of successfully growing the top line while increasing the margins utilization and operational efficiency. And in addition, they continue to add a number of profitable contracts to the portfolio which are laying a good foundation for future growth and further margin improvement.
The most profitable business in our portfolio with a healthy 25.6% margin. The CRS team also continue to run their operation in a very disciplined manner from a cost perspective in the majority of their portfolio They also run that acquired businesses very tightly and recovered the performance in the electrical and electronic activities as reflected in this margin. Update of the margins in agricultural food and life is mainly driven by the life science services including the clinical research. Transportation realized an uptake of 30 basis points as a result of the double digit growth in all activities combined with increased LEAP utilization. And I would like to conclude this slide by recognizing the CDE team and for the second time in a row achieved the best margin improvement and improvement of 140 basis points which is a result of efficiencies partly related to the transfer activities to the transfer of the activities to the shared service center, which contributed to this nice improvement.
Another initiative which is focused on driving margin improvement across all businesses is our procurement initiative. And I'm pleased to announce that 2017 are in line with the targets The split of the savings by nature is also in line with the projections that I gave you during the invested days. CapEx savings amounting to 29% have a positive impact on our CapEx intensity as I will explain also later during the presentation. Let's now take a quick look. As you all know, we continue to have a very solid balance sheet with a net debt of CHF 700,000,000.
Couple of points worth mentioning first, the net debt decreased and the cash increased which is mainly the result of the solid free cash flow combined with the inflow of the 9 years bond of $365,000,000 that we placed in March 2017. The effective interest rate of the current bond portfolio amounts to 1.3% while the average bond maturity is 5.6 years. First, we continue to manage our networking capital in a disciplined manner as evidenced by the fact that our net working capital is stable versus a year ago despite growing revenues by 6.1%. And 4th, the increase in net profit by 14.2 percent combined with a stable net working capital let's say an increase of the return on invested capital by 2 percentage points. 1 of the 4 financial priorities is optimizing our cash flow and of course we remain proud of our ability to continually deliver a very solid cash flow as evidenced again this Operating cash flow reached 1,000,000 as a result of the increased profits and a flat net worth in capital networking capitalized percentage of sales reached a new historical level of 3.9%.
The free cash flow amounts to 706,000,000, which is in line with the expectations. In total, we invested a net amount close to 1,000,000 in CapEx and acquisitions. Finally, the level of CapEx are comparable to last year, while the accretive growth is significantly below last year. The decline in the cash flow from financing activities is related to 2 factors. Firstly, the group was successful in placing a bond of 375,000,000 in 2017.
In which proves the trust of our investors in our ability to deliver on our commitments and in contrast, we repeat a bond amounting to 1000000 in 2016. And secondly, the group experienced a net cash outflow related to the share buyback of 1000000 during 2016. Our net working capital performance is slightly ahead of the expectation and you may recall that you posted the biggest net working capital reduction during the during 2015 2016 put effective measures in place to make it sustainable. Net working capital as a percentage of sales is now below the historic level that we reached in 2016 despite the revenue growth. And as you can see here on the right hand of slight networking capital as percentage of sales is in the target zone where we expect it to be although earlier than expected.
1 of our capital allocation priorities is to invest in is to invest in organic growth through CapEx. And during 2017, we spent 1,000,000 of CapEx, representing 4.7% of sales, which is slightly below last year's The decline in CapEx intensity is partly related to the ongoing pressure in the industrial business and partly related to the attractive pricing and the assets the redeployment program driven by our procurement initiatives. Consequently, the declining CapEx intensity is applicable to the majority of the business portfolio with the exception of GIS And Transportation. We made incremental CapEx investments in these two businesses based on the new contracts that we entered into 2016 2017. Approximately 2 thirds of the CapEx investments are related to growth, while one third relates to maintenance.
And the primary CapEx investments were made in Consumer Retail Services, Agriculture, Food And Life OGC And Transportation together with GIS, please file for the most capital intense businesses in 2017, representing around 70% of our total CapEx investments. Although we decreased the CapEx intensity of industrial, we continue to invest around 10% of our total CapEx in that business. The main CapEx investments took place in Northeast Asia to continue to drive revenue growth of the industrial business in that region. From a geographical perspective, the relative weight of the 3 super regions is comparable to last year. And as you can see from the chart at the right bottom part, our disciplined CapEx management led to a stable CapEx level and gradual uptake towards the level of depreciation and amortization levels.
During our investor days, I presented our aim to maintain a well balanced cash equation between the cash that we generate and the financing of the growth and the cash of course that we returned to the shareholders through the share buyback and dividends. You can see on this slide, The operating cash flow of 1,000,000,000 is fully funding the organic and inorganic growth as well as the share over return. Going forward, We expect to increase the CapEx investments in line with the uptake of the revenue, while the inorganic growth will become more important. I'd like to insist that we remain focused on our inorganic growth targets and we will not shy away from accelerating the inorganic growth when we see the right opportunities. Obviously, we will remain disciplined in terms of price.
Our dividends payments will obviously increase while we don't expect a significant impact from the share buyback program in the coming years. Let us now take at the currency impact. You recognize that flights presenting to you the top 10 currencies in 2017 which are representing approximately 75% of the revenue. And the top 3 currencies that continue to operate in the euro, the dollar and the Chinese renminbi, they continue to represent more than 50% of our revenue. And as mentioned before, for the first time in 4 years, our business results were positively influenced by the strengthening of the majority of the strengthening of the majority of our top currency against the Swiss francs.
Chinese renminbi, Hong Kong, dollar and the British pound were the ones that actually weakened against the Swiss francs. And before I conclude my presentation, I would like to share an overview of the company's performance during the second half of 2017. There are four points to highlight to you. We realized a solid growth of 5.8%, 0.6 percentage points higher than the second half of last year, and 0.9 percentage points higher than the first half of twenty seventeen in which we realized 4.9%. The organic uptick in the second half accelerated and this is mainly due to the nice growth in the minerals OGC CBE Industrial And Environmental Health And Safety Business.
The ForEx impact is significantly more positive to what we experienced in the first half, leading us to a positive revenue growth at historical currency of 7.1% compared to 4.3% in the first half of twenty seventeen. Adjusted operating income increased by 5.7% compared to a year ago and the adjusted operating income margin, obviously, is at the same level. The biggest uptake of margin between the first half and the second half has been realized in our Environmental Health And Safety, CPE And GIS Business. The 14% increase in our operating income relates mainly to the fall through of the incremental adjusted operating income in combination with a decrease of the restructuring and nonrecurring expenses versus 2016. And the increase in net profit after tax by 18.8% broadly related to the combined uptake of the increase of increase in our operating income and the decrease of the effective tax rate that I explained to you before.
Looking at the revenue growth for the second half, There are 2 key message to highlight here. 1st, our organic revenue growth at constant currency accelerated in the second half a strong growth of 4.9% compared to 1.6% the previous year. 2nd, the acquisitive growth weakened in the second half compared to the in the second half compared to last year. Let's take a look at the revenue growth by business During the second half of twenty seventeen five businesses accelerated their growth compared to the first half. These are minerals, OGC And Environmental Health And Safety, which are the most noticeable ones.
4 businesses realized high single digit growth, these were CRS transportation, agricultural food and life and minerals. And this growth was mainly driven by improved organic growth and additionally supported by inorganic. The growth slowdown in transportation is mainly related to the completion of the commercial inspection contracts in North America. Looking at the adjusted operating income by business, I'm happy to share that 8 of our 9 businesses improved their margins in the second half of the year, of which GIS Environmental Health And Safety, CBE and Minerals the most noticeable one. This is the net effect of the benefits resulting from the improvement of the underlying profitability in these businesses.
The restructuring benefits and the measures resulting from the dashboard review as well as the procurement savings and the continuous profit improvement that we focus Transportation is the only business that had lower margins in the second half of twenty seventeen compared to the first half This is mainly due to startup costs, continued investment in the development of new services as well as the completion of the nonrecurring inspection contracts. So coming now towards the end of the presentation, I would like to remind you of some key financial highlights that the worldwide SCS team helped us to deliver throughout the full year 2017. A solid top line growth at constant currency of 5.4% of which four point percent organic. During the second half of twenty seventeen, we accelerated our organic revenue growth from 3.4% in the first half to 4.9% in the second half. An increase in the adjusted operating income at constant currency by 5.4 percent fully in line with the guidance.
We invested 316,000,000 in CapEx and acquisitions to lay the foundations for the future business growth. And we delivered a solid cash flow of $987,000,000. The return on invested capital amounts to 21.3 percent to 200 basis points uptake versus the year to 4. And the board proposed a dividend CAD75 million, an increase of CHF5 million versus last year. In summary, We I believe we delivered solid results and it's clear that these results would have not been possible without the strong engagement and the contribution of our 95,000 plus SCS employees around the world, And I would now like to pass you back to Sankey who will give you further insight into the performance
of the individual businesses. Thank you, Carla. Let me go through the outlook to the 2018, Carla gave you quality information 17. So let me start with agri Food And Life. I expect the good performances of 2017 to continue in 2018.
Agri Food will see a strong growth across the net work and especially in North America with an artificial Vanguard, valve vision and microchem and the expansion of our food and seating facilities in bookings. In life, I expect our laboratories and clinical research activity to perform well, both having grown by double digit and improved margin in 2017. Trade activity will create some uncertainty as soft trading conditions in second half twenty seventeen will continue in the first half of twenty eighteen. Everything in the second half of twenty eighteen will depend on the new crop seasons of 2018. Moving to Minerals.
The immunos overall market conditions are expected to be stable in 2018. Our strategic focus on recyclable trees in generating the expected returns with more project moving to production phase. We have recently secured an on-site lab for smelter facilities in the Middle East, a First Financial Group and this should open the opportunity for us. Total performances should be in line with 2017. On gas and chemicals.
Expect market conditions to be also stable in 2018. Portimilar operations is in the petrochemical field on upstream in the production area are expected to have a good year with the strong pipeline, project pipeline already secured. On the other hand, market conditions for trade activities will remain challenging with uncertain volume and competitive pressure. The women of the portfolio should perform in line with 2017. Potificial mix and efficiency measure including moving back office operations to the shared service center will help to create margin improvement.
Consumer Retail, I expect growth to be in line with 2017 with an expansion of our safety EMCN RSTS with such substances activities. Globally, our activities expected to have stable growth with good momentum in China, but competitive pressure in Korea. Stockton and Harlan expansion will continue with a focus on new sourcing countries such as Indonesia and Vietnam. Together with the focus on the Chinese domestic market related to the Chinese GB standard. These are basically the standard that all the concern could have to pass if they want to be retail in China.
Cosmetic puzzle care and household product is expected to maintain double digit growth in 2018. Solutions EBITDA's enhanced plan. Our growth will still be driven by the transitions to the new AASO 2015 standard with the deadline in Q3 2018. Conversion rate will be the critical parameters in ensuring growth momentum in the traditional ISO certifications. The training market is strong and expect double digit growth in for 2018, the expansion of our SG And A brought to additional countries in Africa and in Asia.
Bank of East transfer and optimization of ODATA utilization will remain a priority to mitigate labor cost increase in key affiliates. Industrial Services, market conditions are not to improve in oil and gas sectors in 2018 and the infrastructure and construction sector in South America will remain challenging The women of the portfolio should see some stability, especially in testing supply chain and other services to the manufacturing and power utility sector. The efficiency ratio put in place together with the protocol diversification should provide a strong improvement on margins throughout 2018. Amarco Health And Safety. Our market position to remain similar to 2017 with increasing Laboratory testing associated to organically polypsine, and all the hazardous substances.
The regulatory environment has become stricter and market demand are increasing accordingly. We expect EHS to grow in the mid single digit and with an improving margin to ramp up better positive for mix efficiencies measurements taken in 2017 on an improvement of result in the U. S. Transformation, the underlying market condition remained strong in 2018. Testing activities in both automotive and aerospace will continue to grow at high single digit with new contract win in Europe and additional new testing capabilities coming online in Asia in 2018.
Furthermore, we expect our continued continued expansion of well industry within the testing and certification activities. As Carl already mentioned, overall growth of transportation in 2018 will be affected by the completion of a major inspection contract in North America in 2017 and also the reduction of volume in 2 technical control completion due to change of conditions. So it will happen in 2018. And finally for government institutional services, GRS is expected to be back to a stronger year in 2018. The scanning contract in Cameroon using our remote image Analytics solution is in full operation and delayed in EWAY's winovo contract in Ivory Coast, Togo, Kenya, have to come online in 2018.
So as a reminder, those renewable contracts are enforcement, are you are forcing the budget commercial monitoring to transparent movement of hazardous goods, HS controlled, that is AV, the echo levy collected for recycling of the consumer electronics, the channel the country of import, allowing governments to implement safe and sound recycling policy. Furthermore, we anticipate another phone year for our chosen net services and the remaining of our portfolio is expected to perform well and our margins to strengthen across the portfolio. On that, let me just for most of our data plan, except for industrial where uncertainty related to the forecast and chemical oil and gas and which all the IMC industrial construction market remains. Okas and chemical and minerals should evolve in a more stable alignment the overall trade related services, including Agree, could see some volatility. On that, our guidance for 2018 are solid organic growth in growth higher adjusted operating income margins above its cash flow.
Finally, just to reconfirm our outlook for our planned 16 20 mid single digit organic growth on average over the period accurating M and A activities with acquired revenue in the range of $1,000,000,000. Address operating income margin at least 18% strong cash conversion operate return on invested capital and the dividend distribution line with improvement in net earnings. Thank you. And on that, Karla and I would be pleased to answer questions. I think we'll start with the question in the room.
Hello, Denis, UBS. 3 questions, please. The first one on the guidance actually Can you clarify what you expect in terms of margin improvement for 2018? Can you give some color on that, please? And especially taking into account as it changes in currencies recently, to expect any impact from that how does that affect your guidance?
Secondly, regarding acquisitions, we've not seen much, actually, last year. So what are the reasons that I've presented you from being more inquisitive last year? Is that the question of pricing? Is that the question of processes and that you made changes to make sure that you meet your $1,000,000,000 target by 2020. And my last question is on the consumer activities for
which we've seen a very nice margin improvement
in the first half. But the deterioration in the second half, can you elaborate on the reasons behind that, please?
So in terms of guidance, margin improvement, yes, definitely we go for what the colonized uptake in this margin. I don't know if the cover is it's clear enough for you, but, that's the feedback in terms of currencies you don't like a major ForEx impact, I would say, on the profitability for 2018.
Yes, sure. I mean, the acquisition, 1st in terms of processes, we in that process, we would change the structure of the company with a new head of MMA. So this is going to happen in the next few few days due to the departure of Jean Luc. In terms of the number of acquisitions, actually we've done 12 acquisitions during the year. That some of them are indeed quite small, but the key focus for M And A is really strategic significance.
So those acquisitions we could shape are really focused on specific area of our operations that we can improve but there was no positive focus on the larger ones in terms of a larger garbage collection or portfolio. For 2017. It doesn't mean that it's not going to happen in 'eighteen. It's just that the opportunity we've seen was more focused on the expansion of our existing portfolio. What they did to put thermal pricing, we're quite disciplined thermal pricing.
So we have some threshold and some guidance that we will use internally ensure that we set certain discipline. So on that one, on some of the assets, they may have played a role, but in terms of the value to the company, which is there was some evaluation that was not worth for us to go for it. Again, the focus is really on the strategic significance in the process in 2018 as I already mentioned, we'll reactivate the MAN activities and then we'll also be looking at the large acquisition as well. The last part was The drop in margin, I wouldn't I would not read too much on that because I think there is a business, there's a portfolio makeup of 4 large segment there and we think those segments is a lot of sub segments. So think it's just a mix of the volume that we had in the second half to do the first half and that is just the mix in there that has influenced the margins.
I would say if I look at the overall portfolio, the growth is healthy, the momentum of the market is strong and I see come on, as I mentioned, just so we are still good, a growth in line with 20172018. Hi, Andy Grobler from Credit Suisse. 3 as well, if I may. You mentioned the US transportation contract a couple of times as a one off contract. Can you quantify how much that added to growth and profitability so what is going to be the headwinds?
From that relatively into 2018. Secondly, within trade, particularly within OGC, and that being been weaker. You had noted a few few reasons in the statement. Is that a market wide issue or is, SGF losing? Any share there?
And then thirdly, kind of on a broader topic, the U. S. Announced today that tariffs were going up at washing machines, so the panels Does that impact you at all? And how do you cope with that goes from being with 2 products to being a much broader issue? Let me answer the last 2.
I'll call back to the first one, which is more sensitive. The trade the trade for oil and gas is our market issues. We're broadly in line with the market. We still have the largest market share. We have not lost market share to, to an extent to our competitions is just the market evolution.
So the trade business is linked to overall and I'm good. So this is not just about the price of all. It's also linked to weather conditions to brand demand. So there's more this movement of goods more these trade activities for us. So in this aspect, it's more trade.
I mean, the market has been weakened. For the last questions that was on the tariff from the U. S, the 2 tariffs I'm correct was on the solar panels some of the washing machines after read this morning. Those two obviously have little impact on us, I would say no impact on us. For timing, it's difficult to read when monitoring institutions, there's a lot of scenarios that will put in place.
There's some one thing I always talk about where we see positive between the U. S. And China where we see lesser impact it was the direct pathway will have more impact for this year. So we're looking at the situations. I would say at this point in time, we're not participating in the major impact for activities yet.
If there's a significant change over the next few months, we'll come back and back start timing. We don't anticipate any major impact. For the first question, I would rather not to give you a number because I have confidentially agree with our customer. I'll give you the number with the, we'll provide the problematic, but It is a significant project that we have to catch up with some of the growth in some of the IVR portfolio for our transportation.
Yes, it's an Ecuador Kepler, Kepler. 3 questions, if I may. One is a follow-up on the guidance for margin. Especially given the 18% 2020 target, do you expect that target to be reaching in a linear basis or more skewed toward the end of the of the period. And in particular, what is difficult for the analyst on the bottom up side is to reconcile.
Some of the cost savings that you anticipate and then allocate it by division. So would you be able to provide their the pace of these cost savings and the impact, which division might be impacted first in 2018? That's the first question. Second one is on the tax rate. You benefited from that lower tax rate.
And you mentioned the U. S. Tax reform, but more of my understanding whether it would be more for the 2018 impact. So what is the guidance for tax rate in 2018 and why did you benefit it from that? So early.
And the last one is on the capital allocation. You raised the the dividend. So when you have to arbitrage between the buyback program and a dividend increase, what did you prefer to go for a dividend increase.
I will start with the first question. In terms of uptake of the margins towards 2020, it is not exactly linear, but it's also not like, I would say, for cost as hockey stick towards the end of 2020. But I would say 'nineteen, 'twenty are obviously more important than 'eighteen, but in 'eighteen, you should already see a significant uptake. So that is now in terms of the uptake as we explained also during the investor days, it a combination from many elements. It's of course the organic uptake, you know, together with the cost efficiency, the process excellence etcetera.
So I mean, different businesses are of course, the impact on the different businesses is slightly different. But what I can say to give you a bit more color is that the impact of the positive impact in 2018 and will be, I would say, the highest in food businesses, the agricultural, Food And Life, OGC Industrial And Environmental Health And Safety. So these are the businesses where you will see or where we expect
to see
the uptake. The question with respect to the tax reform. It is an irony to be clear, it is a nonrecurring impact on 2017. And it is actually the results, I would say, of the impact of the reduction of the corporate tax rate and the impact it has on our deferred assets and deferred liabilities. And so that's why it is also obviously a one off impact.
And why did we go for an increase in terms of dividends? Obviously, we have a 9 uptake in the net profit after tax. We have the cash available. So that's why we took the decision to go for an increase in dividends. Obviously, we have a share buyback program in place, but it's not that significant.
So, yeah, that is the major reason for the increase. Did I forget one of your questions or did I answer that? For 2019, sure. Actually, the underlying sustainable, effective tax rate is 24 all things equal, of course, I mean, assuming that we don't know major changes in one of the tax legislation of of the countries and very operating.
It's Steve with Citi. A couple of questions on 2017 margins, please. There were flat year over year 50% currency there was, I think, a 60 basis point gain from procurement savings, due to the allocation of the 61,000,000 Could you split off roughly the offsetting factors, please? Obviously, you've got the dilution effect to to the acquisitions. You've got the, shared etcetera.
That would be great, please. And then secondly, you mentioned that they in the CBE division. That the shared services were positive to to that division's margin point in 2017. Which divisions to over 2 and negative, please?
I think the first question, if you say the the to split the 60 basis points uptake I would say that health is related to the offset let me just to be clear, please stop. So we see they have the where the effects of the procurement savings spend I would say that half of it is offset by the nonrecurring effects of the contracts that I explained before. So that is one part and the other part went into, I would say, the impact of the transformational and efficient projects that we are working on, a small effect also to the inorganic effect, although that is already substantially. And can you repeat your second question?
Yes, my second question was on the transformation program, you mentioned that the certification business had a benefit in the margin, but overall, of course, you said that there was 30 basis points headwinds So which divisions particularly saw that headwind put?
I I don't have the has been sending CDs Okay. So the other the from coming from the transformation, you mean, that is mainly in the finance, you know, mainly in the finance function And it's also to a smaller extent to the other businesses that are transferring activities into the share center, which is NGC environmental health and safety. And IT, yeah, the functions and the 2 businesses, yeah, sorry.
3 divisions are particularly for that cost? Yes. Okay. Thanks very much. Yes.
Yes, great. It's Paul Sullivan from Barclays. Just wanted to, come back on Andy's question about the drag, some sort of semi contracted contracts. If you don't want to talk about the transport 1 specifically, if there's a number are clearly going to be a drag on 2018. So I don't know whether you can aggregate them all up and sort of talk about this competitive win that you see on organic growth in 2018 to 2017.
From those specific issues. And then in terms of the underlying performance, clearly, you've got Minerals market, which is improving. Sense of commodities, particular oil and gas market that improve. I'm struggling to see why growth wouldn't accelerate. 838 feet off the second half of twenty seventeen overall.
Unless those one offs are close together, they should knock that out. And then finally, in those cyclical areas like minerals, how much excess capacity do you have in your network, so you can, we're allowing you to absorb ongoing revenue growth before you have to start increasing costs. Just want to get a sense of this as a drop through them and whether you can cope with significant revenue growth that expansion prepared before you start having to increase costs for most expiring.
Let me talk from the last one, intaminos, OGs and so on. If you take the minos, an example for the last a few years, we have certainly resized our capacities to meet into the market conditions. So I think we're pretty much there now. There are still capacities on the network. So, this capacity is good for the growth we are looking at for 2018.
We do invest on the regular basis. So we're not actually expecting the market to increase significantly to invest on this particular aspect that we have done the resizing. So for 2017, we started to invest in a bit to keep the momentum running, and we not know which things kind of maintenance CapEx when we put in there. The interesting part is also for Minerals, for example, is on Zalap. We're only investing when this is a project that we win.
So those are more structured in the way that if we have the project, we will put the CapEx in the application secured against the key project. On the commercial lab, they are still capacities. We're just adding a marginal equipment to keep running because there's still room for us to improve the efficiency there. If I go to the second question is the growth for the whole market. I'm actually quite positive about next year's market.
As I mentioned in my outlook, the most of the business line would be in line with that what we've done in this year some of them we just didn't accelerate further. This is just the inter shore services that is still a question mark in terms of growth. And as well as the trade businesses is for time being uncertain in terms of volume. So, the cautious caution is more on those 2 aspects. The rest of the portfolio is quite positive in my view.
On the last the first one, your question about Transportation. We have the number that I would prefer not to give it because it is a significant drag for the consultation business, but the underlying business is good. So we will be able to catch up most of it on the on payroll growth as well. Over the phone.
Yes, we have seven questions from the phone. The first question is from Jean Philippe Versi from Voltobel. Please go ahead.
Good afternoon to everyone. The first one would be on the targets 2020. And at the end of the day, you said that that's to reach the margin target of 8 16%. You should add $400,000,000 to $460,000,000 over 4 years. You had already a last year, a big part in, in the procurement.
So now basically when I calculate growth of around 7% or 8% should add more than EUR 100,000,000 operating profits per annum that would lead to a margin in excess of 20% including acquisitions. So can you give us a little bit of a level of confidence to reach this 18%? And the second one is on the M and A at there were some questions already on the acquisitions. You've seen
Can you can you repeat part of your question because the line was cut for for a couple of seconds.
Basically, the 18% margin targets, you mentioned at the investor day you had to add 450,000,000 of operating profits. And based on my calculation, you should now add every year in the coming 3 years. Kind of an operating profit at a margin in excess of 20% to come to this margin of 18%. And it has never been the case either with acquisitions or with your organic developments. So if you can add some color on how you want to reach that.
And the second one related to M and A, There was already some questions, but I wonder how you want to reach now roughly 270,000,000 sales in the past 12 years, I calculated you add less than EUR 100,000,000 sales on acquisitions. So should we expect like a big acquisition $300,000,000 sales or the other way around, is that really an important target for you to reach? That's what begin sales? And you will not be surprised, Frank, I will ask you because of the dashboards and the clinical research. You already said that it was non strategic now it's a double digit growth at good margin.
What is the plan with that's clinical research activities? Thank you.
So let me start with the clinical research activities. As I mentioned, the question back then was with the dashboard has always been if we cannot fix it and dispose of it. In this kind of case, then as I said, we were looking at always trying to fix the operation that we have. And we put quite a lot of effort with the team here to to look up the new approach. Now the clinical research activities that we'll have in a much more healthy state with the focus on the early phase and the metrics activities.
The 1st phase, we fixed it. It doesn't mean for this part case, for example, in the longer term, we will not take a different decision. At this point in time are such that we have fixed the program more or less. I was going to keep it until we decide to change the opportunities already there's any opportunities. It's important as we also mentioned that, you're the only standard for this disposal issue, strategic dispositions are we're not going to talk about them before our employees or before the management have discussed the thing.
So in here, we for your clinical research, basically that of course has been to go and look at, to fix the program on the way we have changed the strategy and it is now part of the portal. So it's closer to what we do as a company. And I'm ready to keep it until and this is such a time that we change our focus on that as well. On the M and A side, we all as I mentioned, we ended up with 12 smaller acquisition in terms of size in 2017. The the pipeline of work that we've done in M And A is quite extensive.
There are a lot of other opportunities in the pipeline that we're looking at. Some of them are much bigger size. Again, this is something that we are continually looking at. If the opportunity is right, we will be going for for bigger size acquisitions, but what I'm being the ones that we've done are smaller size. I would say M and A is a key focus point in 2018.
Is part of the priorities for the team and I. They'll wait on the work on it and the objective of, is $1,000,000,000 that we set in 2020 is still there. And this question are for us to deliver on some of the acquisition we've been looking at. On the first,
it was the margin of 18% margin target.
Yes. On the margins, you're right. You make the math in the teacher grid, you talk about incremental margin of the group I think we were typically around 18, 19, or so on. But also we have a lot of efficiency project that we have put in place in the last couple of years that should generate the return that an accelerated return on those efficiency programs. Plus, in terms of growth on the market position, I think the 2 combined positions will allow us to start to accelerate in terms of our marginal return as you calculate it there.
I'm still comfortable and confident that the first step of the margin improvement will come in 2018. Hand was going to push with all those measures plus the market evolutions to the heating plus and margin for 2020.
Thanks. And can you update us on the digital strategy and specifically on the e commerce with 3 terriers, we had CAF IV with a major plan in past days. If you can update us on this, please.
I'm sorry for our kafu. The kafu project
Yes. I mean, just like an example, Carrefour went very wide and big with the e commerce strategy, and I just wanted to have an update from your site?
Oh, yeah, sure.
Overall general.
Thanks. We're pushing our e commerce strategy. As I mentioned, during the the industry there in October. Our first strategy for the e commerce site is really about those services that we provide to those online retailers, but offline. Which is our more traditional portfolio of services, inspection testing and so on.
And we're moving more into our authenticity in terms of the Fate product and so on, which is going to help some of those online portals ensure that they're not selling a Fate product on their on the portal. And we're also looking at the newer services that allows them to be those services that allows them to be more online like calibration example that I gave during the Investor Day, although project ongoing, we have an expansion of the the services offered to some of the major portals in China and we have the strategic plan now to push into some of the American and European portal as well. So this is ongoing and we are, we have also recruited and setting up offices in the U. S. Dedicated to to these digital activities.
E Commerce being one element of these digital activities, obviously. So we have set up an office in Seattle for that. We have for technical additional offices, especially in dedicated to these segments.
Thanks a lot.
The next question from the phone is from Tobey Ricks from Morgan Stanley. Please go ahead.
Hi, guys. Could I ask 3 as well? And one of the around what you just said on M And A. So you clearly saying you're looking at some larger deals out there. Is that would we be surprised by any of these bills?
And what I'm trying to say is, are are some of those bills not in the traditional tech space as we we would look
at it?
Secondly, margins in 2018 are being driven by AFLOGC Environment And Industry. And I'm assuming some of that's lab utilization. So should we think about 2018 as being the cyclical recovery in margins and then 2019, 2020, the more fundamental changes coming through. And I was also surprised that Minerals wasn't on that list. Is there a reason why we shouldn't see more up three minerals coming through and higher margins from better lab utilization coming from that?
And then the final one, traditional 3, the consumer margin has improved despite the mix shift. So what we've always sort of seen in the past is that C And E, which is growing faster than the rest of the business, is lower margin. Could you talk about how that's changing and how we can think about maybe higher margins in Consumer going forward?
Okay. Let me start from the reverse order, the consumer margins. In fact, E and E has improved their margin over time with the mix of the in fact the margin is a traditional lower in the year safety activities, but with the wireless activity that has expanded as well as some of the chemical testing linked to D And E sectors, our margin has actually improved in the in the E and E segment. I would say they are not the exact numbers, but they are quite similar to the to somehow enhance the margins. So, slightly still slightly lower, but catching up quite fast.
So, I think the mix of the services are sort of in each one of those sub segments, the product mix within E and E has changed. So the margin, mix has also changed on that and E and E is has been a good contributor to our growth in terms of margins.
And that's got a bit further scale, is it? Do you think that mix shift margin improvement?
I'm sorry. I didn't hear the question. Would that have
a bit further to go that margin improvement?
I think if you look up all the services we offer or wireless field with the increase of IO teachers to take an example, I would say yes, the mix of the product for the mix is going to be to be there. As well as for the more traditional services as well, we are also having a, a double C feature in our portfolio with some more high end consultancy work for the resources substances for the textile product and so on. So in there, we also have a product mix diversification that allows us to maintain or to improve margin in some of the segment as well.
Great, thank
you. On the margins for '18, 'nineteen, Karla mentioned the, you know, I'm currently hedged industrial OGC. Obviously, this doesn't mean that these only 3 businesses, they could recall their margins. The some of you mentioned specific Minerals, they are productivity on the market that we're going to work. We have volume capacity.
So we're going to optimize our margin with these businesses. Doesn't mean when we said it's only those three businesses that Carla mentioned, but the other one, I'm not going to have the margins improve as well. So I would say Carlos just mentioned the pre that we have the more significant margins, but the overall margin evolution is the contribution of all the business lines together.
Okay. And is that is it a reflection of the cyclical impact being more of a 2018 thing and then 29 seen 20 being where we should start seeing all the more of the underlying improvement coming in from the changes you've made to the business.
I think it's mainly due to the underlying improvement because the cycle, I mean, I mean, also we talk about the cycle, I think the the down cycle has been going for quite some years now. We're getting out of there. As I mentioned earlier, the trade activity is still quite bought it out. So we are monitoring that. 2017 has been a good year.
2018 might be something different when monitoring the situation. But the rest of our activities are quite stable. So the on-site lab are a strategy you put in place. We're a larger service provider on-site This is really next to a site that we were captive. So these are more stable.
We're more predictable versus the trade businesses that that we run. So it's also a fact of the strategy we put in place. You come back to your first questions. Was not giving too much details. The acquisition, the space that we're looking at for us is they're all TIC sectors, the inspection certifications, but some of them, I would say that we're looking at, we depart the line closer to the digital where something like the participation in Transpontin-one that we've done a few years back was not accepting the core field of what we do.
Some of the Accutin, one of them that we've done this year, which is more of macro in the GRS sectors, these are more software based, for the trade activities. So, these are also really broader lines from what we will be administration of the big sectors. So there are a few of those that we're looking at as well that could help us to expand into a slightly adjacent field of the TRC sectors, but linked always to our core services. Another question?
The next question is from Tom Sykes, Deutsche Bank. Please go ahead.
Yes, thank you. Good afternoon, everybody. Just on the organic growth, sorry, could you just spell it out maybe a bit more clearly for me that are you expecting that H1 growth in 2018? To be a bit slower than you saw in the second half of this year because of the one off nature of some of the contracts. And then just on the margin, given that you took the provision in GIS in H1 2017, are you expecting any margin gain that you get to be slightly higher in a one perhaps than H2?
And then just on the margin again, the obviously, the EBITDA margin is not up. And so could you maybe just run through any mix implications that may have affected that Or indeed, when we think about the outlook for the depreciation number, do you expect that to fall a bit further as a percentage of sales. And then just on the emerging markets, could you maybe just pick out the geographies rather than business lines that you're feeling most excited about as we go into 2018. Given perhaps prospects for slightly faster growth in EM, please.
Okay. Maybe I'll take the last question up. I'll just in double geographies, the one of the core focus is China. We have grown what is strongly in 20 17, and the China is still a very strong market was in 2018. I think I already mentioned in the past about 50 and what we do in China is our growth rate is already on the domestic market and that they will be offering up an opportunity for us to further grow the domestic area.
There also, these 1 belt 1 road initiative that has been pushed by the Chinese government that is going to impact across Asia. So the Asia Pacific in terms of infrastructure and construction is an interesting market for house development. The focus On the other hand, the focus also for in North America, North America, especially the US where we have a softer presence compared to the market side, we're going to have a strategic focus on that as well. Some of the acquisitions that we made in in agriculture food and life. Part of the strategy to expand our footprint in the sector in the west.
As I mentioned earlier, 3 year condition plus the expansion of our booking facilities would have asked to, should we push way to half into the sector. And we're also looking at all the opportunities, the growth of the PTO operations in the petrochemical industry mainly linked to the U. S. Market as well. So I would say on the nutshell, the U.
S. And Asia will be the focus. We are pocket of all the countries that we're focusing on, but these are really the 2 bulk ones, I would say.
In terms of the organic growth comparing H2 2017 with H1 2018 at you will see the effect there of the non recurring impact that we discussed here mainly in the trans portation. So that is one. You see that also when you already compare, you know, the proof of transportation of the results in H2 versus H1 in 2017, And secondly, there is always a seasonal impact. So I mean, H1 by definition, it's a slower part of the year. So these two elements, you know, really, I would say, justify the assumption that you In terms of the CapEx, I do not know if I clearly got the complete question.
If I look at the CapEx, I always say that this is a to, I would say, 5.5 percent of sales obviously. We will not reach that also in 20 18 given that we are now around 4.7%. But, I assume that we will see an an uptake in percentage of sales of a couple of basis points because that will be needed to fund the growth, I would say that to understand the group that we are forecasting. And especially because some of the more some intensive businesses from home. So yes, that can bring us, I would say, uh-uh, at the level of the depreciation and amortization of or maybe slightly ahead of that.
And then if you can repeat, please your question with respect to CBE,
Yes. No, it was actually the it's the depreciation, sorry, it's a very bad line. I think everybody's on, but it was the depreciation. So your EBITDA is down a little year on the margin, a little bit more than the EBITA. So just what is the outlook for the depreciation to sales?
And should we and what are the mix implications as to why the EBITDA margin may be down?
I think I answered it. We will definitely increase a little bit the CapEx for the first the stage of sales. So that will take a bit of depreciation higher, but it is not mathisa, just to be clear, okay?
Okay. Okay. Thank you.
The next question question is from Rajesh Kumar from HSBC.
Looking at your slides on the ROIC 200 bps improvement. Can you help us understand the comparison between the 2 years, please. When you look at the lower tax rate this year, that combined with asset write downs, 1 off transportation benefit. My estimate is underlying return on invested capital was year on year flat or am I overcounting or double counting something?
You are not. I think it's simply, I would say the improvement is common as you say from the uptake of the net profit after tax and the flat net working capital that that we have versus a year ago. These are the 2 elements. And as you say for going forward, I mean, obviously, the tax benefit will not be there because the sustainable effective tax rate is around 24% and, apart from, you know, we have some small restructuring, I would say that it's mainly related to the further transfer of activities in the shared service center. We don't foresee at this point in town now.
Bigger restructuring or bigger impairments.
Yes. Appreciate that. Just what I'm trying to ask is If you, your tax rate this year has come down and you impaired some assets last year, that surely helped the ratio with net profit increasing because of lower tax and the capital employed in the denominator decreasing because of the write down. When I add them up, I see ROIC improvement smaller than the 200 bps you have shown on the slide as an underlying figure. I'm just trying to understand is that a misunderstanding of the situation, and there are you have readjusted the last year to do that for 200 bps improvement on this year's tax rate and impaired assets.
And the return on invested capital that you referred to on page 22 is not the underlying. It is fewer reports. And yes, you are right. I mean, these are impacted by the elements that you mentioned. By the way, I mean, this impairment of goodwill is 1,000,000.
So it has, you know, it has not a massive
No. The year before was 20. So cumulative there's an impact because of the average, but that's very helpful. Thank you. The second one was the actual results you talked about, write down of some provisions, for the receivables and, you were hoping to collect those receivable.
So did you manage to collect that in second half?
Refers to the $11,000,000 that's provision that we accounted for with respect to some some GIS contracts, we were able to recover, let's say, around half of that amount in the second half. And now the question is when will we recover the other half it will be or in second half of twenty eighteen or it will be the first half of twenty nineteen. Because it's related to a legal case.
Understood. That is very helpful. So that collection has helped the GRES second half margin expansion, because of the provision reversal.
Yes.
Okay, cool. That's very clear. 1, rather more, these are boring questions for you about that. The more interesting one. On price and volume, if we look at the your organic revenue growth for the year, and organic headcount growth, they are pretty much similar to each other, same order of magnitude 4 points something.
Now, when we look at your discussions around certain divisions where you are seeing pricing pressure, is it fair to assume that pricing pressure in industrial or oil and gas exposure is of the order of 10%, fifteen percent? And as a result, other divisions are seeing some price inflation?
First of all, if we look at price and volume overall and we link that to the organic growth, I would say that the major part of the organic growth is related to volume increase. And that is also why you see the reflection in the increase of, of the headcount overall, very, very brutal. It's definitely a right to assume that there is a price pressure in the industrial and OGC, I would say even more in the industrial business. So there you have quite a substantial impact.
And when we are basically looking at the headcount growth, does it include the subcontractors you use for inspection activities in Asia? I mean, what proportion of your activities are subcontractor to third party, or do you do a FTE number?
These are the 4th time equivalents that are on our, payroll. So they don't include subcontractors.
Okay. And the subcontractors are what about 15% of your group or in are they more prevalent in certain divisions and less in others?
It's difficult to say because it's, it really varies, division by division and within the division, geography by geography. And also, you know, we have sometimes contracted for a couple of days. We have some contractors that we use for the long term. I would say a project. So, it would be difficult for me to give you an exact number.
But it is more relevant, let's say, for instance, in the industrial division or even in CDE, then it would be, for instance, in interest of patients or minerals.
Great. And just last one, I promise when you look at the second half comps for the organic growth you had, they were a lot easier compared to the first half of 2017? And then also you pointed out that there was a 1 off transport contract in second half. So you had an easy comp and a one off benefit. So that there was a big step up in the organic growth.
Now you're sort of implying it's still at the same order of magnitude in 2018, a little down in first half and then picks up again. Which means on an underlying basis at the exit rate, you have seen a massive acceleration. Is that a fair assessment of your guidance?
I would not say that we had an easy compare in H2, 1st of all, because the nonrecurring effect that I refer to in GIS, in GIS, first of all, and in the environmental health and safety there were actually in H2 2016. So that's, you know, to make that point, If I make the link to, from H2 2017 to H2, and each one 2018, where do you see the big science? It's actually transportation because that's right what you pointed out there. Because there you have the impact of the, of the nonrecurring, testing, testing contract.
Sorry. I I did not understand the comp issue. Your growth in the second half of 'sixteen was 1.6% organic. First half was 3.4. Surely, you had a easier comp on organic growth in second half.
I was comparing, 1st of all, I would say the second half of twenty seventeen with the second half of twenty sixteen.
Yeah. So second half of twenty sixteen
was easy. It was not
No. No. I I I'm not for a second taking away from what you guys have achieved. It's the incredible 4.8 percent organic growth is very difficult to find these things, but I'm just trying to understand if we extrapolate that, are we setting the expectation, right?
Yes, I think just to be clear, the transportation contract that we mentioned about that stopped in 2017. It is not the H2 contract only. It is the contract that goes across the whole year. So on that particular aspect there, you should not, calculate the whole contract value was on the H2 versus H1. In fact, it is a contract across the whole 2017 and the stop at the end of 2017.
So, on that level, I think it levels out across the two half. And in terms of corporations is a seasonality business between first half and second half, they are There are certain things that comes in the second half of the year versus the first half of the year. So I would say it follows CTV to kind of seasonality that we have in most of the year.
Thank you very much.
The next question is from Suhazy Varanasi from Goldman Sachs. Please go ahead.
Hi, good afternoon. Just a couple for me, please. I'm sorry, it's on organic growth again on the objectives for 2018. Seen good improvement in 2017 with 4.2 percent organic growth. And now you're also starting to see the cyclical recovery in the commodities in OTC and Minerals.
Is there a reason why you should not see organic growth for 2018 above the 4.2% levels that you saw this year as the cyclical recovery continues mean, apart from the 1 off effect in transportation, of course?
Look, we are definitely in a good position. That's not the point, but we also should be aware that the industrial business is, I would say, not completely out of the provostone and we remain very cautious as I stated before. And industrial is an important part of our portfolio.
Okay. So you're worried about further deceleration in basically in 2018 that could be the other offsetting factor?
Yeah, we remain cautious. We're cautious about industrial as well as the trade business that has the volatility from year on year. So all in all, we're quite positive about the total portfolio with the exception of the trade rate activity as fees for activities. As well as the industrial services, they got in the difficult market conditions that we're going to expect to renew in 2018. But on the overall, the rest of the portfolio seems to be a strong and healthy for us.
Okay, thank you. Next one is on the margins, again, on the objectives for 2018. I mean, at the end of the day, I think, given where your targets have 2020, I think you were looking for 70 to 80 basis points of margin improvement for 2018. Is that roughly the range that you're still looking at because I think consensus is at 50 basis points improvement. So it would be great to hear your views on this.
We are looking for an, I would say, visible uptick in 2018 and and I think we will leave it there with respect to the uptake of the margin.
The next question is from Edward Stanley from Redburn. Please go ahead.
Quick ones, please. The China looks excellent across the board except for a small comment you made in the Minerals division. Where it looks like China may be evolving or worsening. I'm wondering if I'm reading that right. And if China is becoming more difficult, does that in any way derail the Minerals recovery?
The second question is, you mentioned at the Investor Day GDPR and data protection. Could be potentially high growth areas. And now that we're coming up to the start of GDPR enforcement in May this year, are you seeing any growth or benefits there? And thirdly, you mentioned that 40% of your clients are being transferred to the new ISO 9001 during 2017, how much more benefit do you think you'll get from that transition in 2018?
Okay. Let me go from the bottom up to 40%. We will see some strong growth momentum for the division business moving to the 'eighteen because of this conversion. But what is clear to us from now is that not 100% of the customer base will be transitioned in 2019. Like all of those processes is always some of our customers will be missing the deadline.
And they will be working on the bridge for them to make sure that they can make this transition between the deadline and some of them we're going to end up in in 2019 as well. But the push for this conversion will keep the momentum in line with what we've done this year possibly need a bit of an acceleration, but in line to a small acceleration for next year, I would say. But we're not looking at 100% of the conversion, I would say. Some of them will be moving to a 2019. If I go from the GDPR, we are pushing for the GDPR project.
Most of the So the background work that we need to do is more or less on time and should be completed. The deadline comes around May, and I'm correct. And we should be seeing as first revenue toward the second half of this year, but the pickup will start slowly up and as our strategy is going to focus on the small to medium sized companies. So we're going to start to build up momentum more towards the second the start of the momentum will start to pick up in the second half and we'll move into the 2019 exercise. On your first question about Minos and China, I would say The MENO business will be more or less stable in China for 2018.
I think the comment that was made is more linked to the energy minerals as well. There was some situation of volume in the coal inspection activities linked to geopolitical situations basically this is kind of behind us and what our portfolio will be catching up with all the activities. So we're looking at the stable year for for China for Munoz in 2018.
The last question is from George Gregory from Exane. Please go ahead.
Hi, two questions, some following up on previous questions. Just on the on the exiting of low margin business, in the coming year, are you able to quantify that in for the group, please? And secondly, on the margin, in 2017, adjusted for the provision the H1 margin saw a strong improvement, whereas the second half saw, no improvement. Just wondering what drove that. I mean, you've called out the contract in EHS, but that was more than offset by the provision release in the second half?
Was there anything else that held the second half back that contributed to an improvement in the first half, please?
Just first to point out on this nonrecurring for GIS If we compare the second half of twenty seventeen with the second half of twenty sixteen, I would say the upside that you have in from the reversal of the budget provision is definitely not offsetting the positive effect we had in 2016. I would say coming from the loss of this of these major contracts, the effects of this the completion of these major contracts was more significant So that is one. And secondly, it's also what I pointed out. It's not only about these two do businesses, but it's also about the transportation contract and the transportation business and the that we described. So it's not it is actually above the 3 businesses there.
Okay.
And secondly, on the, on the low margin business that you referenced, you'd be exiting?
On industrial, I'm not going to give you the total number, but if I give you a subset of the number to give you an indication, for example, for industrial, in 3, 4 countries actually that we focus on trying to optimize our portfolio. We're very low margin business, so we don't want think on those 4 countries, we reduced roughly about $25,000,000 of contract over 2017. This coming. So some of the impact will be felt on 2018. So this is just to give you something on a few countries that we're looking up.
The numbers is, is the total number of the group is different than that number, but I just want to give you a small sample rather prefer not to give you a total number.
Okay. Thanks.
So, I think those are the last questions and thank you very much for attending on the RCU in the first half of twenty eighteen. Thank you.
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