Ladies and gentlemen, good morning or good afternoon. Welcome to the SGS 2017 full year results conference call and live webcast. I'm Sarah, the Chorus Call operator. I would like to remind you that all participants will be listening-only mode, and the conference is being recorded. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing star 1 on your telephone. Should you need assistance, please press star 0 to call an operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Ms. Carla De Geyseleer, Chief Financial Officer, and Mr. Frankie Ng, Chief Executive Officer at SGS in Geneva.
Ladies and gentlemen, good afternoon. 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 a business outlook and some guidance for 2018. In line with our strategy toward the 2020 plan, we have achieved solid growth in four of our focus business line, Transportation, Agriculture, Food and Life, Consumer and Retail, and solution business enhancement. Furthermore, we have improved our performances in Minerals and Oil, Gas and Chemicals. Both our focus regions have performed well and with a very strong performances in China specifically. Let me go through the highlight of the group. Group revenue grew by 5.4% at constant currency, of which 4.2% is organic. Our adjusted operating income margin stands at 15.3%, similar to 2016.
The profit for the period amounts to CHF 664 million, an improvement of 13.3% compared to last year. Cash flow from operation amounts to CHF 987 million, a slight decrease compared to last year. Our ROIC improved by 200 basis points to 21.3%, compared to 19.3% in 2016. The board of directors is proposing a dividend of CHF 75 per share. During 2017, we made a total of 12 acquisitions across five business lines, five in North America, four in Europe, two in SEAP and one 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 further two acquisition both in AFL.
Vanguard Sciences in the U.S. will allow SGS to enhance its footprint in the U.S. food testing market, the largest in the world, and a critical market for our AFL strategy. At the end of 2017, the SGS group had over 95,000 employees and 2,400 locations around the globe. Now I'll hand over to Carla, the presentation, and she will give you more details review of the financial performance.
Very good afternoon, ladies and gentlemen. Before I share the details of our solid 2017 results that are completely in line with the outlook that we presented you during the investor days, there are three important points I would like to highlight to each of you. First, we accelerated growth during the second half and continued to deliver market leading organic growth supported by both the diversity in our portfolio as well as innovation. Second, we grew our adjusted operating income by 5.4%, despite the fact that Industrial, our fourth largest business in terms of revenue, continued to operate in challenging market conditions. 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 SGS. Let me take you now through the more detailed financial review.
Looking at the overall P&L, the first and the third column reflects the full year performance for 2017 and 2016 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%, fully in line with the guidance. Our adjusted operating income margin at 15.3% was stable versus a year ago. There are four clarifying points regarding these margins. First, we delivered a strong performance in the majority of the portfolio. In addition, the dilutive impact of the underperforming assets, Agritest and Bateman, eased during the second half. Second, two out of the three energy-related businesses performed strongly. The Minerals business continues on the path of positive growth and significantly accelerated growth during the second half while improving the margin.
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 of the amounts in question. Fourth, finally, I wanted to highlight to you that we continue to invest in our growth, transformational, and efficiency projects in line with our strategic plan. While these investments-driven 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 9.6% to CHF 894 million. Our operating income was strong despite the impairment of the Industrial goodwill in North America amounting to CHF 30 million.
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 region. Profit for the period amounts to CHF 664 million 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 CHF 10.75. Our effective tax rate decreased by two percentage points versus last year. 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 seven out of our nine businesses.
The orange part of the chart reflects the organic growth, which is driven by the continued strong performance in the full portfolio, with exception of GIS and industrial. The gray part of the chart reflects the effect of the acquisitions made in 2016 and 2017, amounting to CHF 72 million or 0.1 percentage points of growth. During 2017, the group acquired 12 companies and continued to focus on small to medium-sized companies to expand into new markets and to create more diverse service offerings. Four of the 12 acquisitions were in AFL, three in industrial, three in Consumer Retail Services. From a geographical perspective, five acquisitions were made in our focus market, North America. The light gray part represents the positive foreign exchange impact, and it is 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 USD and EUR, strengthened versus the CHF throughout the year, resulting in this positive impact. This results in a total revenue growth at historical rate of 6.1% versus 4.8% last year. One of the key takeaways when we look at the graph representing the importance of each of the nine businesses from a revenue perspective is that the businesses increasing their relative weight are the ones with the higher profitability. Given the size and the double-digit revenue growth of Consumer Retail Services, the third biggest business gained 0.7 percentage points in relative weight. This growth is driven by the double-digit growth in Electrical and Electronics, benefiting from the strong volumes in its testing services and partly supported by the acquisition of Compliance Certification Services Inc. 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 business, generated revenue in excess of CHF 1 billion, representing 16% of revenue. It is 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 full and transparent, I would like to inform you that the 2017 results do include a non-recurring commercial inspection contract in North America that we 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 one of the two 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 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. The major segment, Electrical and Electronics, achieved an impressive growth, including the wireless activities. 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 softlines complemented an even stronger growth in the hardlines through expansion of customer supply chain in new markets and strong organic growth in China, India, and Vietnam. Finally, we delivered double-digit growth in cosmetics, personal care, and household, mainly in North America and Asia. Agriculture, Food 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 lab activities, and clinical research. The strong momentum in the food is supported by recent acquisitions, certification services, and digital initiatives, which are beginning to ramp up. While trade and logistics performance was weak throughout the year, the seed and crop activities benefited from a recovery in most of the markets. As touched on before, this is the first year in which Minerals grew its revenue since 2013.
Revenue growth accelerated significantly in the second half, ending the year with a growth of 5.6%, of which 5.2% was organic. The Energy and 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 Geochemistry 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 continued 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 first year in which OGC has experienced positive growth since 2016. 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 second half and improved its profitability, mainly as a result of the successful conversion to production activities. Trade activities remained weak 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 two key elements that I explained to you in July. First, Environmental Health and Safety benefited from a commercial contract that was completed in 2016. Second, we took the decision to restructure the [audio distortion] 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 aimed at the hospitality, retail, and real estate sector. GIS revenue remained at the level of last year as a result of the completion of two 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 are stamped to realize a nice uptick during 2018. Last but not least, Industrial business. The Industrial revenue remained flat, thanks to 2.6% inorganic growth. The inorganic growth relates to the 2016-17 acquisitions that were mainly focusing on the diversification of the portfolio, with the aim to become less dependent on the Oil and Gas sector.
I give an example, the acquisitions we made in the construction, 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. Second, there was reduced public investment 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 driver.
The Asia-Pacific region delivered the highest total and the highest organic growth, significantly exceeding the growth of one year ago. It's mainly driven by high single-digit growth in Northeast Asia, strengthened by mid-single digit growth in SEAP. China's growth is particularly strong in the Consumer and 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 Health and Safety were strong. After three 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 Life, and Environmental Health and Safety helped the Americas region to achieve a mid-single digit growth. The organic growth was positive in both sub-regions. However, North America outperformed the southern part.
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. 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%, fueled 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 and Retail services, Agriculture, Food and Life, minerals, CBE, and Transportation. The decrease in the growth rate compared to last year is mainly related to the non-recurring impact of the completion of the Environmental Health and Safety contract and the two major GIS contracts in 2016, as well as a decreased inorganic growth. Without the impact of those non-recurring 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 two other super regions, contributed to the average headcount increase of 4.4% in 2017. We concluded this year with 95,745 FTEs, a 3.8% growth versus the end of 2016.
The organic growth mainly relates to the strong performance in AFL Minerals and Consumer and Retail services, while the execution of the restructuring plans resulted in a decrease of 615 FTEs year-over-year. At the right-hand of the slide, you see the fluctuation in the average headcount for the three super regions. In two of the three super regions, the increase of the average headcount is lower 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, 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 fourth quarter. 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 2016 and 2017. The adjusted operating income growth amounts to 5.4%. The orange box reflects the impact of the organic growth amounting to CHF 43 million. The dark gray box reflects the inorganic growth amounting to CHF 7 million. 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 here communicates the significant improvement of our Minerals business. The increase in importance of our focus businesses, CRS, Transportation, Agriculture, Food and Life, and the continued progress of our CBE 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. AFL, the second largest contributor, increased its relative weight by 0.6 percentage points, fueled by the solid growth and increase in margins. Combined, both CRS and AFL delivered now more than 40% of the adjusted operating income. The strong increase in relative weight by Transportation is fueled by the double-digit growth and the further uptake of the margins. Obviously, Industrial, GIS, Environmental Health and Safety, and OGC decreased their relative weight because of the areas that I outlined before. Let's take a look at the adjusted operating income margin by business comparing 2017 with 2016.
As explained before, Environmental Health and Safety adjusted operating margin was impacted by the completion of a non-recurring contract in 2016, resulting in a margin decline by 180 basis 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. This is related to the partial recovery of the receivables, which were fully provided in the first half. Industrial. Industrial is the third business which suffered from a margin perspective, primarily due to volume and price perspective in the oil and gas-related business in the Americas. 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 offsets the softer profitability in the trade activities due to volume and price pressure by increasing profitability in the majority of the portfolio, including upstream activities. I would like to recognize the minerals team as they continued on their journey of successfully growing the top line while increasing the margins by 1%. The team continued to work successfully on improved lab utilization and lab operational efficiency. In addition, they continued to add a number of profitable contracts to the portfolio, which are laying a good foundation for future growth and further margin improvement. CRS, the most profitable business in our portfolio with a healthy 25.6% margin.
The CRS team also continued to run their operation in a very disciplined manner from a cost perspective in the majority of their portfolio. They also ran the acquired businesses very tightly and recovered the performance in the electrical and electronics activities as reflected in these margins. Uptake of the margins in Agriculture, 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 lab utilization. I would like to conclude this slide by recognizing the CBE team, who for the second time in a row achieved the best margin improvement, an improvement of 140 basis points, which is a result of the strong growth in the performance assessment and training.
Moreover, improved efficiencies partly related 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. 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 investor 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 at our balance sheet. As you all know, we continue to have a very solid balance sheet with a net debt of CHF 700 million. 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 nine-year bond of CHF 365 million 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. Third, we continue to manage our net working 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%. Fourth, the increase in net profit by 14.2% combined with a stable net working capital led to an increase of the return on invested capital by two percentage points. One of the four financial priorities is optimizing our cash flow.
Of course, we remain proud of our ability to continually deliver a very solid cash flow, as evidenced again this year. Operating cash flow reached CHF 987 million as a result of the increased profit and a flat net working capital. Net working capital as a percentage of sales reached a new historical level of 3.9%. The free cash flow amounts to CHF 706 million, which is in line with the expectation. In total, we invested a net amount close to CHF 316 million in CapEx and acquisitions. Finally, the level of CapEx are comparable to last year, while the acquisitive growth is significantly below last year. The decline in the cash flow from financing activities is related to two factors. Firstly, the group was successful in placing a bond of CHF 375 million in 2017, which proves the trust of our investors in our ability to deliver on our commitments.
In contrast, we repaid a bond amounting to CHF 492 million in 2016. Secondly, the group experienced a net cash outflow related to the share buyback of CHF 160 million during 2016. Our net working capital performance is slightly ahead of the expectation. You may recall that we posted the biggest net working capital reduction during 2015 and 2016, put effective measures in place to make it sustainable. Net working capital as percentage of sales is now below the historic level that we reached in 2016, despite the revenue growth. As you can see here on the right-hand of the slide, net working capital as percentage of sales is in the target zone where we expect it to be, although earlier than expected. One of our capital allocation priorities is to invest in organic growth through CapEx.
During 2017, we spent CHF 302 million of CapEx, representing 4.7% of sales, which is slightly below last year. 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 redeployment program driven by our procurement initiatives. Consequently, the decline in 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 and 2017. Approximately two-thirds of the CapEx investments are related to growth, while one-third relates to maintenance. The primary CapEx investments were made in consumer retail services, Agriculture, Food and Life, OGC, and Transportation. Together with GIS, these five were 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 three super regions is comparable to last year. 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 level. 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 flow that we return to the shareholders through the share buyback and dividends.
You can see on the slide, the operating cash flow of CHF 1 billion is fully funding the organic and inorganic growth as well as the shareholder returns. 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 emphasize that we remain focused on our inorganic growth targets. 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 a look at the currency impact. You recognize the slide presenting to you the top 10 currencies in 2017, which are representing approximately 75% of the revenue.
The top three currencies that we continue to operate in are the EUR, the USD, and the CNY. They continue to represent more than 50% of our revenue. As mentioned before, for the first time in four years, our business results were positively influenced by the strengthening of the majority of our top currency against the Swiss franc. CNY, HKD, and the GBP were the ones that actually weakened against the Swiss franc. 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 2017, in which we realized 4.9%.
The organic uptake in the second half accelerated. This is mainly due to the nice growth in the Minerals, OGC, CBE, Industrial, and the 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 2017. 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, CBE, and GIS business. The 14% increase in our operating income relates mainly to the fall-through
The increase in net profit after tax by 18.8% partly related to the combined uptake of the 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 two key messages to highlight here. First, 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. Second, the acquisitive growth weakened in the second half compared to last year. Let's take a look at the revenue growth by business. During the second half of 2017, 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. Four businesses realized high single-digit growth. These were CRS, Transportation, Agriculture, Food and Life, and Minerals.
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 contract in North America. Looking at the adjusted operating income by business, I'm happy to share that eight of our nine businesses improved their margin in the second half of the year, of which GIS, Environmental, Health and Safety, CBE, and Minerals the most noticeable ones. 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 on. Transportation is the only business that had lower margins in the second half of 2017 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 non-recurring inspection contract. Coming now towards the end of the presentation, I would like to remind you of some key financial highlights that the worldwide SGS team helped us to deliver throughout the full year 2017. A solid top-line growth at constant currency of 5.4%, of which 4.2% organic. During the second half of 2017, 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%, fully in line with the guidance. We invested CHF 360 million in CapEx and acquisitions to lay the foundations for the future business growth. We delivered a solid cash flow of CHF 987 million.
The return on invested capital amounts to 21.3%, a 200 basis points uptake versus the year before. The board proposed a dividend of CHF 75, an increase of CHF 5 versus last year. In summary, 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 SGS employees around the world. I would now like to pass you back to Frankie, who will give you further insight into the performance of the individual businesses.
Thank you, Carla. Let me go through the outlook to 2018. Carla gave you qualitative information 2017. 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 network, and especially in North America with the acquisition of Vanguard, BioVision, and ILC Micro-Chem, and the expansion of our food and seed testing facilities in Brookings. In Life, I expect our laboratories and clinical research activity to perform well, both having grown by double digits on improved margin in 2017. Trade activity will create some uncertainty as sub-trading conditions in the second half of 2017 will continue the first half of 2018. Evolution in the second half of 2018 will depend on the new crop seasons of 2018. Moving to Minerals. The Minerals overall market condition are expected to be stable in 2018.
Our strategic focus on our on-site laboratories is generating the expected returns with more projects moving to production phase. We have recently secured an on-site lab for a smelter facilities in the Middle East, a first for the SGS Group, and this should open new opportunity for us. Overall performances should be in line with 2017. Oil, Gas and Chemicals. I expect market conditions to be also stable in 2018. Port terminal operations is in the petrochemical field and upstream in the production area are expected to have a good year with a strong project pipeline already secure. On the other hand, market conditions for our trade activities will remain challenging with uncertain volume and competitive pressure. The remainder of the portfolio should perform in line with 2017. Portfolio 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 EMC and RoHS restricted substances activities. Globally, our wireless activities are expected to have stable growth with good momentum in China, but competitive pressure in Korea. Supplier and online 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 standards that all the consumer goods have to pass if they want to be retailed in China. Cosmetic, personal care, and household product is expected to maintain double-digit growth in 2018. Certification & Business Enhancement. Our growth will still be driven by the transitions to the new ISO 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. I expect double-digit growth for 2018 with expansion of our SGS Academy brand to additional countries in Africa and in Asia. Back-office transfer and optimization of auditor utilization will remain a priority to mitigate labor cost increase in key affiliates. Industrial Services. Market conditions are not expected to improve in Oil and Gas sectors in 2018, and the infrastructure and construction sector in South America will remain challenging. The remainder of the portfolio should see some stability, especially in testing supply chain and other services to the manufacturing and power and utility sector. The efficiency measure put in place together with the portfolio diversification should provide a strong improvement on margin in 2018. Environmental, Health and Safety. Our market condition to remain similar to 2017 with increasing laboratory testing associated to organic pollutant, dioxin, and other hazardous substances.
The regulatory environment has become stricter and market demand are increasing accordingly. We expect EHS to grow in the mid-single digit with an improving margin driven by the better portfolio mix, efficiency measurements taken in 2017, and an improvement of results in EHS. Transportations. The underlying market condition will remain strong in 2018. Testing activities in both automotive and aerospace will continue to grow at high single digits with new contract wins in Europe and additional new testing capabilities coming online in Asia in 2018. Furthermore, we expect a continued expansion of renewable industry related testing and certification activities. As Carla already mentioned, overall growth of Transportations 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 two technical control concessions due to change of conditions. This will happen in 2018.
Finally, for Government Institutional Services, GIS. GIS is expected to be back to a stronger year in 2018. The scanning contract in Cameroon using our remote image analysis solution is in full operation and delayed in e-waste. Renewable contract in Ivory Coast, Togo, Guinea are to come online in 2018. Just a reminder, those renewable contracts are enforcing the Basel Convention, monitoring the [audio distortion] movement of hazardous goods. HS control, that is the eco levy collected for recycling of the consumer electronics, is channeled to the country of import, allowing governments to implement a safe and sound recycling policy. Furthermore, we anticipate another strong year for our trusted net services and the remainder of our portfolio is expected to perform well, and our margins to strengthen across the portfolio. On that, let me just go through the guidance 2018.
I expect good market conditions for most of our business lines, except for industrial, where uncertainty related to the oil and gas and regional IMC industrial construction market remains. OGC and chemical and minerals should evolve in a more stable environment, but overall trade-related services, including agri, could see some volatility. On that, our guidance for 2018 are solid organic revenue growth, higher adjusted operating income margins, and robust cash flow. Finally, just to reconfirm our look for our plan 2016-2020, mid-single-digit organic growth on average over the period, accelerating M&A activities with acquired revenue in the range of CHF 1 billion, adjusted operating income margins at least 18%, strong cash conversion, robust return on investor capital, and the dividend distribution in line with improvement in net earnings. Thank you. On that, Carla and I would be pleased to answer questions. I think we'll start with questions in the room.
For questions, star and one.
Hello. Denis Moreau, UBS. Three questions, please. 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 the changes in currencies recently, do you expect any impact from that? How does that affect your guidance? Secondly, regarding acquisitions, we've not seen much actually last year. What are the reasons that have prevented you from being more acquisitive last year? Is that a question of pricing? Is that a question of processes and have you made changes to make sure that you meet your CHF 1 billion target by 2020? 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?
Give me one second. In terms of guidance, margin improvements, definitely, we go for what we call a nice upshift in the margin. I don't know if the color is clear enough for you, but that's the feedback in terms of currencies. We don't expect a major ForEx impact, I would say, on the profitability for 2018. This is for you, Philippe.
Yes, sure. On the acquisition. First, in terms of processes, we will change the structure of the company with a new head of M&A. This is going to happen in the next 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. Some of them are indeed quite small, but the key focus for M&A is really strategic significance. Those acquisitions we've achieved are really focused on specific areas of our operations that we can improve. There was no particular focus on the larger ones in terms of a larger diversification of portfolio for 2017. It doesn't mean that it's not going to happen in 2018. It's just that the opportunity we've seen was more focused on the expansion of our existing portfolio. In terms of pricing, we're quite disciplined in terms of pricing.
We have some threshold and some Guidance that we use internally to ensure that we set a certain discipline. On that one, on some of the assets, they may have played a role, in terms of the value to the company, we decided there was some valuation that was not worth for us to go for it. Again, the focus will be on the strategic significance and the process in 2018, as Carla also mentioned, we will accelerate the M&A activities, and we will also be looking at large acquisition as well.
In terms of washing machines and.
The dropping margin, I would not read too much on that because at the end of the day, it's a business. It's a portfolio made up of four large segments there, and within those segments is a lot of sub-segments. I think it shows the mix of the volume that we had in the second half versus the first half, and that is just a 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 as I mentioned just earlier, I see a good growth in line with 2017 for 2018.
Hi, Andy Grobler from Credit Suisse. Three as well, if I may. You mentioned the U.S. Transportation contract a couple of times as a one-off contract. Can you quantify how much that added to growth and profitability? What is going to be the headwind from that relatively into 2018? Secondly, within trade, particularly within OGC, has that been weaker? You had noted a few reasons in the statement. Is that a market-wide issue, or is SGS losing any share there? Thirdly, kind of on a broader topic, the U.S. announced today that tariffs were going up on washing machines and solar panels. Does that impact you at all, and how do you cope as that goes from being two products to being a much broader issue? Thank you.
Let me answer the last two. I'll call back to the first one, which is more sensitive. The trade for oil and gas, yes, is market issues. We are broadly in line with the market. We still have the largest market share. We have not lost market share to an extent to our competitions. It's just the market evolution. The trade business is linked to movement of goods. It's not just about the price of oil, it's also linked to weather conditions, to prime demand. The more there's movement of goods, more there's trade activities for us. In this aspect, it's more trade, I mean, the market pattern than our positions being weakened. For the last questions that was on the tariff from the U.S., the two tariffs, if I'm correct, was on the solar panels and some of the washing machines, I've read this morning.
Those two obviously have little impact on us, or I would say no impact on us. For the time being, it's difficult to read. We're monitoring the situation. There are a lot of scenarios that we're putting in place. There is some, one can always talk about reciprocity between the U.S. and China, where we will see less impact. The direct tariff will have more impact for this year. We're looking at the situations. I would say at this point in time, we're not anticipating any major impact for activities yet. If there's a significant change over the next few months, we'll come back, but for the time being, we don't anticipate any major impact. For the first question, I would rather not to give you a number because I have a confidentiality agreement with our customer.
If I give you the number, it would be rather problematic, but it is a significant project that we have to catch up with some of the growth in some of the area for portfolio for transformation.
Thank you.
Yes. It's Nick Pula, Kepler. Three 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 reached in a linear basis or more skewed toward the end of the period? 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. Would you be able to provide perhaps 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 my understanding was that it would be more of a 2018 impact.
What is the guidance for tax rate in 2018, and why did you benefit from that so early? The last one is on the capital allocation. You raised the dividend. When you have to arbitrage between a buyback program and a dividend increase, why did you prefer to go for a dividend increase?
All right. I will start with the first question. In terms of uptake of the margin towards 2020, it is not exactly linear, but it's also not like a, I would say, forecast that as the hockey stick towards the end of 2020. I would say 2019, 2020 are obviously more important than 2018. In 2018, you should already see a significant uptake. That is it. Now, in terms of the uptake, as we explained also during the investor days, it's a combination from many elements. It's, of course, the organic uptake, together with the cost efficiency, the process excellence, et cetera. Different businesses are, of course, the impact on the different businesses is slightly different.
What I can say to give it a bit more color is that the positive impact in 2018 will be, I would say, the highest in four businesses, the Agriculture, Food and Life, OGC, industrial, and environmental health and safety. These are the businesses where you will see or where we expect to see the uptake. The question with respect to the tax reform, and I repeat to be clear, it is a non-recurring impact on 2017, and it is actually the result, I would say, or the impact of the reduction of the corporate tax rate and the impact it has on our deferred assets and deferred liabilities. That's why it is also obviously a one-off impact. Why did we go for an increase in terms of dividends? Obviously, we have a nice uptake in the net profit after tax. We have the cash available.
That's why we took the decision to go for an increase in dividends. Obviously, we have a share buyback program in place, it's not that significant. Yeah, that is the major reason for the increase. Did I forget one of your questions or did I answer them all? Yes, sure. Actually, the underlying sustainable effective tax rate is 24. All things equal, of course. Assuming that there are no major changes in one of the tax legislations of the countries where we operate in.
Ed Steel, Citi. A couple of questions on 2017 margins, please. They were flat year-on-year, 16.3% constant currency. There was, I think, a 60 basis point gain from procurement savings, the dedication of the CHF 600 million. Could you split off roughly the offsetting factors, please? Obviously, you've got the dilution effect to the acquisitions, you've got the shared service center investments, et cetera. That'd be great, please. Secondly, you mentioned, I think, in the CBE division that the shared service centers were a positive to that division's margin for 2017. Which divisions saw material negativity because of course you had double running costs?
I take the first question. If you say to split the 60 basis points uptake, I would say that half is related to the offset. Let me just, to be clear, restart. Where the effect of the procurement savings went, I would say that half of it is offset by the non-recurring effects of the contracts that I explained before. That is one part, the other part went into, I would say, the impact of the transformational and the efficiency projects that we are working on. A small effect also to the inorganic effect. Can you repeat your second question?
Yeah. My second question was on the transformation program, the shared service center. You mentioned that the certification business had a benefit in the margin.
Yes.
Overall, of course, you said that there was 30 basis points headwind. Which divisions particularly saw that headwind coming?
I don't have the headwind in the CBE.
No.
Yeah. Okay. Sorry.
Sorry.
Coming from the transformation, you mean. That is mainly in the finance function, and it's also to a smaller extent to the other businesses that are transferring activities into the shared service center, which is OGC, Environmental Health and Safety.
IT.
IT, yeah. The functions and these two businesses. Yeah, sorry.
Those three divisions are particularly for that cost?
Yeah.
Yeah. Okay, great. Thank you very much.
Yeah.
Yeah, great. It's Paul Sullivan from Barclays. Just wanted to come back on Andy's question about the drag from some existing contracts. If you want to talk about the transport one specifically, there's a number which are clearly going to be a drag on 2018. I don't know whether you can aggregate them all up and sort of talk about the competitive wins that you see on organic growth in 2018 to 2017 from those specific issues. Then in terms of the underlying performance, clearly you've got a minerals market which is improving in terms of commodities. You've got an oil and gas market that's improving. I'm struggling to see why growth wouldn't accelerate in 2018 on the second half of 2017 overall, unless those one-offs are so significant that they could knock that out.
Then finally, in those cyclical areas like minerals, how much excess capacity do you have in your network? You can, well, allowing you to absorb ongoing revenue growth before you have to start increasing costs. I'm just trying to get a sense of the sort of drop through them and whether you can cope with significant revenue growth expansion from here before you start having to increase costs in those areas.
Let me start from the last one in terms of minerals, OGs, and so on. If you take minerals as an example, for the last few years, we have certainly resized our capacities to meet into the market conditions. I think we're pretty much there now. There are still capacities on the network. This capacity is good for the growth we are looking at for 2018. We do invest on a regular basis, we are not expecting the market to increase significantly to invest. On this particular aspect, we have done the resizing. For 2017, we started to invest a little bit to keep the momentum running, and we are not witnessing the same kind of maintenance CapEx we put in there. The interesting part is also for minerals, for example, is on lab. We're only investing when there is a project that we win.
Those are more structured in the way that if we have the project, we will put the CapEx in there because it is secured against the key project. On the commercial lab, there are still capacities. We are just adding 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. Well, I'm actually quite positive about next year's market. As I mentioned in my outlook, most of the business line would be in line with what we've done in this year. Some of them will certainly accelerate further. This just the intershore services, there 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. The caution is more on those two aspects.
The rest of the portfolio is quite positive in my view. On the first one, your question about Transportation. We have the numbers. I would prefer not to give it because it is a significant drag for the Transportation business, but the underlying business is good, so we will be able to catch up most of it on the stable growth as well. Yeah. Over the phone?
Yes, we have seven questions from the phone. The first question is from Jean-Philippe Bertschy from Vontobel. Please go ahead.
Good afternoon to everyone. The first one would be on the targets 2020 and that Investor Day you said that to reach the margin target of 18%, you should add CHF 400 million-CHF 460 million over 4 years. You had already last year a big part in the procurement. Now basically when I calculate growth of around 7% or 8%, you should add more than CHF 100 million operating profits per annum. That would lead to a margin in excess of 20%, including acquisitions. Can you give us a bit of level of confidence to reach this 18%? The second one is on the M&A. I think there were some questions already on the acquisitions. You still have-
Sorry, can you repeat part of your question because the line was cut for a couple seconds.
Basically, the 18% margin target, you mentioned at the Investor Day you had to add CHF 450 million of operating profits. 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%. It has never been the case either with acquisitions or with your organic developments. If you can add some color on how you want to reach that. The second one related to M&A. There was already some questions, but I wonder how you want to reach now roughly CHF 270 million sales. In the past 12 years, I calculated you had less than CHF 100 million sales on acquisitions. Should we expect like a big acquisition of CHF 300 million sales or the other way around?
Is that really an important target for you to reach that CHF 1 billion sales? You will not be surprised, Frank, I will ask you because of the dashboards and the clinical research. You already said it was non-strategic. Now it's a double-digit growth at good margin. What is the plan with that clinical research activities? Thank you.
Yeah. Let me start with the clinical research activities. As mentioned, the question back then was with the dashboard has always been, if we cannot fix it, then dispose of it. In this current case, 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 look at the new approach. Now the clinical research activities that we have in a much more healthy state with the focus on the early phase and the biometric activities. The phase I, we fixed it. It doesn't mean for this current case, for example, in the longer term, we will not take a different decision.
At this point in time As such that we have fixed the program more or less, we're going to keep it until we decide to change the opportunities and we face new opportunities. It's important, as I also mentioned, that you understand that for those strategic disposal issues, we're not going to talk about them before our employees or before the management has discussed the thing. In here, for your clinical research, basically, the approach has been to go and look up to fix the program, we have changed the strategy, and it is now part of the portfolio, is closer to what we do as a company. We're going to keep it until such a time that we change our focus on that as well.
On the M&A side, as I mentioned, we ended up with 12 smaller acquisitions in terms of size in 2017. The pipeline of work that we've done in M&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 constantly looking at. If the opportunity is right, we will be going for bigger size acquisitions, but for the time being, the ones that we've done are smaller size. I would say M&A is a key focus for in 2018. It's part of the priorities for the team and I.
We're going to work on it, the objective of this CHF 1 billion that we set in 2020 is still there, it's a question of for us to deliver on some of the acquisitions we've been looking at. On the first-
Through the margin of 18% margin target.
Yes. On the margins, you're right. If you make the math, indeed, it should be. You talk about incremental margin of the group. I think we were typically around 18, 19, or so on. Also we have a lot of efficiency projects that we have put in place in the last couple of years that should generate an accurate return of those efficiency programs. Plus, in terms of growth on the market position, I think the two combined positions will allow us to start to accelerate in terms of our marginal return, as you calculated there. I'm still comfortable and confident that the first step of the margin improvement will come in 2018, and we're going to push with all those measures plus the market evolutions to the 18% margin for 2020.
Thanks. Can you update us on the digital strategy and specifically on the e-commerce with retailers? We heard Carrefour with a major plan in past days. If you can update us on this, please.
I'm sorry. About Carrefour? The Carrefour project.
Yes. Carrefour. Just like an example, Carrefour went very wide and big with e-commerce strategy. I just wanted to have an update from your side.
Yeah, sure.
Overall, general. Thank you.
We're pushing our e-commerce strategy. As I mentioned during the Investors Day in October, our first strategy for the e-commerce side 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. We're moving more into authenticity in terms of counter feit products and so on, which is going to help some of those online portals ensure that they're not selling fake products on their portal. We're also looking at the newer services that allow them to be more online, like the e-calibration example that I gave during the Investors Day. All those projects are ongoing.
We have an expansion of the services that we offer to some of the major portals in China. We have the strategic plan now to push into some of the American and European portals as well. This is ongoing, and we have also recruited and setting up offices in the U.S. dedicated to these digital activities. E-commerce being one element of these digital activities, obviously. We have set up an office in Seattle for that. We have set up additional offices specifically dedicated to these segments.
Thanks a lot.
The next question from the phone is from Toby Reeks from Morgan Stanley. Please go ahead.
Hi, guys. Could I ask three as well? How are you doing? One of the questions is around what you just said on M&A. You're clearly saying that you're looking at some larger deals out there. Would we be surprised by any of these deals? What I'm trying to say is, are some of those deals not in the traditional TIC space as we would look at it? Secondly, margins in 2018 are being driven by AFL, OGC, environment, and industry. I'm assuming some of that's lab utilization. Should we think about 2018 as being the cyclical recovery in margins and then 2019, 2020, the more fundamental changes coming through? I was also surprised that minerals wasn't on that list. Is there a reason why we shouldn't see more upstream minerals coming through and higher margins from better lab utilization coming from that?
The final one, traditional three. The consumer margin has improved despite the mix shift. What we've always sort of seen in the past is that C&E, which is growing faster than the rest of the business, is lower margin. Could you talk about how that's changing? How we can think about maybe higher margins in consumer going forward? Thank you.
Okay. Let me start from the reverse order. The consumer margins. In fact, E&E has improved their margin over time. In fact, the margin is traditionally lower in the E&E safety activities, but with the wireless activity that has expanded as well as some of the chemical testing linked to the E&E sectors, our margin actually has improved in the E&E segment. I don't have the exact numbers, but they are quite similar to some of the margin. Slightly still lower, but they're catching up quite fast. I think the mix of the services as well within each of those sub-segments, the product mix within E&E has changed, the margin mix has also changed on that, and E&E has been a good contributor to our growth in terms of margins.
That's got a bit further to go, has it? Do you think that mix shift and 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 at all the services we're offering to the wireless field with the increase of IoT, just to take an example, I would say yes, the product mix is going to be there. As well as for the more traditional services as well. We are also having a diversification of our portfolio with some more high-end consultancy work for the restricted substances for the textile product and so on. In there, we also have a product mix diversification that allows us to maintain or to improve the margin in some of the segments as well.
Great. Thank you.
On the margins for 2018, 2019, Carla mentioned, if I'm correct, EHS, Industrial, OGC.
Yeah.
Obviously, this doesn't mean that these are the only three businesses that will grow their margins. You mentioned specifically minerals, they are volatility on the market, and we could work their volume capacity. We're going to optimize our margin with these businesses. It doesn't mean when we said it's only those three businesses that Carla mentioned, that the other ones are not going to have their margins improve as well. I would say Carla just mentioned the three that we have the most significant margins, but the overall margin evolution is the contribution of all the business lines together.
Okay. Is it a reflection of the cyclical impact being more of a 2018 thing, then 2019, 2020 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. Minerals, we talk about the cycle. I think 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 volatile, so we are monitoring that. 2017 has been a good year. 2018 might be something different. We're monitoring the situation, but the rest of our activities are quite stable. The on-site lab strategy we put in place, we're the largest service provider of on-site lab. This is really next to a site that we're captive. These are more stable, with more predictable versus the trade businesses that we run. It's also a fact of the strategy we put in place.
Great.
To come back to your first questions. Without giving too much details, the acquisition space that we're looking at for us is all the TIC sectors, the testing, inspection, certifications. Some of them, I would say, that we're looking at are really borderline closer to the digital, where something like the participation in Transparency-One that we've done a few years back was not exactly in the core field of what we do. One of them that we've done this year, which is MoleMab, in the GIS sectors. These are more software-based border trade activities. These also really borderline from what we would traditionally see in the TIC sectors. 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 TIC sectors, but linked always to our core services.
Sounds very interesting. Thanks very much, guys.
Another question?
The next question is from Tom Sykes from Deutsche Bank. Please go ahead.
Yeah. Thank you. Afternoon, everybody. Just on the organic growth, sorry, could you just spell it out maybe a bit more clearly for me? Are you expecting the 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? 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 H1, perhaps, than H2? Just on the margin, again, obviously, the EBITDA margin is not up. Could you maybe just run through any mix implications that may have affected that? Indeed, when we think about the outlook for the depreciation number, do you expect that to fall a bit further as a % of sales?
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. In terms of geographies, one of the core focuses is China. We have grown very strongly in 2017. China is still a very strong market for us in 2018. I think I already mentioned in the past, about 50% what we do in China in terms of revenue is already on the domestic market, and that they will be opening up opportunities for us to further grow the domestic area. There also is the One Belt One Road initiative that is being pushed by the Chinese government, that is going to impact across Asia. The Asia Pacific, in terms of infrastructure and construction, is an interesting market for our development. On the other hand, the focus also for in North America. North America, especially the U.S., 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 Agriculture, Food and Life is part of the strategy to expand our footprint into this sector in the Midwest. As I mentioned earlier, three acquisitions plus the expansion of our protein facilities will help us to push very hard into the sector. We're also looking at the other opportunities. The growth of the PTO operations in the petrochemical industry is mainly linked to the U.S. market as well. I would say in a nutshell, the U.S. and Asia will be the key focus. There are pockets of other countries that we're focusing on, but these are really the two big ones, I would say.
Okay. Thank you.
In terms of the organic growth comparing H2 2017 with H1 2018, obviously, you will see the effect there of the non-recurring impact that we discussed here, mainly in the Transportation. That is one. You see that also when you already compare the group of Transportation of the results in H2 versus H1 in 2017. Secondly, there is always the seasonal impact. I mean, H1, by definition, is a slower part of the year. These two elements really, I would say, justify the assumption that you make. 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 it is up to, I would say, 5.5% of sales. Obviously, we will not reach that also in 2018, given that we are now around 4.7%.
I assume that we will see an uptake in percentage of sales of a couple of basis points because that will be needed to fund the growth, I would say, to understand the growth that we are forecasting, and especially because some of the more capital-intensive businesses will come on board. Yes, that will bring us, I would say, at the level of the depreciation and amortization or maybe slightly ahead of that. Then if you can repeat, please, your question with respect to CBE.
No, it was actually the depreciation. Sorry, it's a very bad line, I think everybody's on. It was the depreciation. Your EBITDA is down a little year-on-year, the margin, a little bit more than the EBITA. Just what is the outlook for the depreciation to sales? What are the mix implications as to why the D&A margin may be down? Thanks.
Well, I think I answered it. We will definitely increase a little bit the CapEx as a percentage of sales. That will take a bit of depreciation higher, but it is not massive, just to be clear. Okay?
Okay. Thank you.
Next question.
The next question is from Rajesh Kumar from HSBC. Please go ahead.
Hi, good afternoon, Frankie. Good afternoon, Carla. Just looking at your slides on the ROIC 200 basis points improvement. Can you help us understand the comparison between the two years, please? When you look at the lower tax rate this year, that combined with asset write-downs, one-off Transportation benefit, my estimate is underlying return on invested capital was year-on-year flat. Am I overcounting or double-counting something?
You are not. I think it's simply, I would say the improvement is coming, as you said, from the uptake of the net profit after tax and the flat net working capital that we have versus a year ago. These are the two elements.
Yeah, but-
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%. Apart from, we have some small restructuring, I would say that is mainly related to the further transfer of activities into the shared service center. We don't foresee at this point in time a bigger restructuring or bigger impairment.
Yeah. I appreciate that. Just what I'm trying to ask is, if 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? You have readjusted the last year to do that for 200 bps improvement on this year's tax rate and impaired assets.
The return on invested capital that you refer to on page 22 is not the underlying, it is the pure form.
Okay, fair.
Yes, you are right. These are impacted by the elements that you mentioned. By the way, this impairment of goodwill is CHF 30 million, so it has not a massive impact.
No. The year before was CHF 20, so cumulative there's an impact because of the averaging. That's very helpful. Thank you. The second one was, at the H1 results, you talked about a write-down of some provisions for the receivables, and you were hoping to collect those receivables. Did you manage to collect that in second half?
Refer to the CHF 11 million, that provision that we accounted for in the with respect to some GIS contracts. We were able to recover, let's say, around half of that amount in the second half. Now the question is, when will we recover the other half? It will be or in second half of 2018, or it will be the first half of 2019 because it's related to a legal case.
Understood. That is very helpful. That collection has helped the GIS second half margin expansion, because of the provision reversal?
Yes.
Okay, cool. No, that's very clear. These were boring questions for you about that. The more interesting one, on price and volume, if we look at your organic revenue growth for the year and organic headcount growth, they are pretty much similar to each other. Same order of magnitude, four point something. 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%-15%? 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, that is also why you see the reflection in the increase of the headcount overall, very, very broad terms. It's definitely right to assume that there is price pressure in the industrial and OGC, I would say even more in the industrial business. There you have quite a substantial impact.
When we are basically looking at the headcount growth, does it include the subcontractors you use for inspection activities in Asia? What proportion of your activities are subcontracted to third-party, or do you do a FTE number?
These are the full-time equivalents that are on our payroll. They don't include subcontractors.
Okay. The subcontractors are what? About 15% of your group? Or are they more prevalent in certain divisions and less in others?
Yeah. It's difficult to say because it really varies division by division, and within the division, geography by geography. Also, we have sometimes contractors for a couple of days. We have some contractors that we use for the long-term, I would say, projects. It would be difficult for me to give you an exact number. It is more relevant, let's say for instance, in the industrial division or even in CBE than it would be, for instance, in Transportation or minerals.
Great. Just last one, I promise. When I look at the second half comps for the organic growth you had, they were a lot easier compared to the first half of 2017. Also you pointed out there was a one-off transport contract in second half. You had an easy comp and a one-off benefit. 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, first of all, because the non-recurring effects that I referred to in GIS, first of all, and in the environmental health and safety, they were actually in H2 2016. That's to make that point. If I make the link from H2 2017 to H1 2018, where you see the big variance is actually Transportation because that's right what you pointed out there, because there you have the impact of the non-recurring testing contract.
Sorry, I did not understand the comp issue. Your growth in second half 2016 was 1.6% organic. First half was 3.4%. Surely you had an easier comp on organic growth in second half.
I was comparing, first of all, I would say the second half of 2017 with the second half of 2016.
Yeah. second half of 2016.
Yeah, since it was easy, it was not that easy.
No, I'm not for a second taking away from what you guys have achieved here. The incredible 4.8% organic growth is very difficult to find these days, I'm just trying to understand, if we extrapolate that, are we setting the expectations right?
Yeah, 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. On that particular aspect there, you should not calculate that the whole contract value was only H2 versus H1. In fact, it is a contract that crossed the whole 2017 and that stopped at the end of 2017. On that level, I think it levels out across the two halves. In terms of operations, it's a seasonality business between first half and second half. There are certain things that comes in the second half of the year versus first half of the year. I would say it follows with the kind of seasonality that we have in most of the years.
Thank you very much.
The next question is from Suhasini Varanasi from Goldman Sachs. Please go ahead.
Hi. Good afternoon. Just a couple from me, please. Sorry, on organic growth again and on the objectives for 2018. You've seen good improvement in 2017 with 4.2% organic growth, and now you're also starting to see the cyclical recovery in the commodities in OGC 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? I mean, apart from the one-off effect on Transportation, of course.
Look, we are definitely in a good position. That's not the point. We also should be aware that the industrial business is, I would say, not completely out of the trouble zone, and we remain very cautious, as I stated before, and industrial is an important part of our portfolio.
Okay, you're worried about further deceleration in industrials basically in 2018. That could be the other offsetting factor.
Yeah. We remain cautious.
Okay.
We remain cautious about industrial as well as the trade business that has the volatilities from year-on-year. All in all, we're quite positive about the total portfolio with the exception of the trade-related activity, asset volatilities, as well as the industrial services that are actually in the difficult market condition that we don't expect to renew in 2018. On the whole, the rest of the portfolio seems to be a strong and healthy one.
Okay, thank you. The next one is on the margins, again, on the objectives for 2018. I mean, at the Investor Day, I think given where your targets are for 2020, I think you were looking for 70-80 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'd be great to hear your views on this.
We are looking for an, I would say, visible uptick in 2018, and I think we will leave it there with respect to the uptick on the margins.
Okay. Thank you.
The next question is from Edward Stanley from Redburn. Please go ahead.
Yes. Hi there. Three quick ones, please. 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? 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? Thank you.
Okay. All right. Let me go from the bottom up, the 40%. We will see some strong growth momentum for the certification business moving to 2018 because of this conversion. What is clear to us from now is that not 100% of the customer base will be transitioned in 2018. Like all of those processes, there's always some of our customers who will be missing the deadline, and they will be working on the bridge for them to make sure that they can make this transition. It will be on the deadline, and some of them we're going to end up in 2019 as well. 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.
We're not looking at 100% of the conversion, I would say. Some of them will be moving to 2019. I go from the GDPR, we are pushing for the GDPR project. Most of the background work that we need to do is more or less on time and should be completed. The deadline comes around May, if I'm correct, and we should be seeing our first revenue toward the second half of this year. The pickup will go slowly up and as our strategy is going to focus on the small to medium-sized companies, we're going to start to build up momentum more towards the start of the momentum, we start to pick up in the second half, and we'll move into the 2019 exercise.
On your first question about minerals and China, I would say the mineral 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 fluctuation of volume in the coal inspection activities linked to a geopolitical situation. Basically, this is kind of behind us, and our portfolio will be catching up with all the activities. We are looking at a stable year for China, for minerals in 2018.
Excellent. Thank you.
Next question, please.
The last question is from George Gregory from Exane. Please go ahead.
Hi, two questions, somewhat following up on previous questions. Just on the exiting of low-margin business in the coming year, are you able to quantify that impact for the group, please? 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. 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 but contributed to an improvement in the first half, please? Thanks.
Just first to point out on these non-recurring for GIS, if we compare the second half of 2017 with the second half of 2016, I would say the upside that you have from the reversal of the bad debt provision is definitely not offsetting the positive effect we had in 2016. Coming from the loss of these major contracts, the effect of the completion of these major contracts was more significant. That is one. Secondly is also what I pointed out, it's not only about these two businesses, but it's also about the Transportation business and the effects that we described. It is actually about the three businesses there.
Okay. Secondly, on the low-margin business that you referenced you'd be exiting.
Yeah. 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 three, four countries, actually, that we focus on trying to optimize our portfolio with very low-margin business that we don't want. I think on those four countries, we reduce roughly about CHF 25 million of contract over 2017. This coming. Some of the impact will be felt on 2018. This is just to give you a sampling on a few countries that we're looking at. The total number of the group is different than that number, but just want to give you a small sample. I'd rather prefer not to give you a total number.
Okay, thanks.
I think those are the last questions, and thank you very much for attending, and I'll see you in the first half of 2018. Thank you.
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