Welcome to the 2022 half year results conference call and live webcast. I'm Alice, the conference call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Webcast viewers may submit their questions or comments in writing by the relevant field. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Toby Reeks, Senior Vice President, Investor Relations, Corporate Communications, and Sustainability. Please go ahead, sir.
Thank you very much. Good morning, good afternoon to you, and welcome to SGS first half 2022 results conference call. We all hope that you've had a good start to the year and that we're going to be able to meet many of you at our Investor Days later on this year in November. In a few moments, I will pass over to Frankie and Dominik, who will run through our presentation, and then we will move to the Q&A. When we have Q&A, as per usual, please stick to a maximum of two questions, and if we have time at the end, we can answer further questions if they haven't already been asked. Once we have taken questions from the call, I will then read out any questions that are sent to us on the web.
Finally, we do hope to finish in 50 minutes or so. Without further ado, I will hand over to Frankie to start the presentation.
Thank you, Toby. As usual, I will give you a highlight of our performances for the first half. Dominik will provide you in more details the financial review. I will cover the business outlook for the second half of this year, as well as the full year, 2022 guidance, and then we follow, as Toby mentioned, by Q&A. Let me start with the financial performances. I have to say, despite the difficult market conditions faced during the first half, including the war in Ukraine, the current global economic context, the China lockdown, and the absenteeism by COVID, I'm pleased to report a strong set of results highlighting the resilience of our global network. These results are driven by the strong underlying performances in our strategic focus area and our commitment to investing in the long term.
You can see total revenue increased by 6.8% at constant currency, while organic growth was 5.8%. Our adjusted operating income stand at CHF 458 million, a 1.6% increase at constant currency compared to 2021. The first half margin was heavily impacted by COVID-related restrictions in China. Excluding China, adjusted operating income growth was double digit. Our ROIC stands at 18.4% compared to 17.8% same period last year. Our basic earnings per share of CHF 36.78 is a 1.4% increase compared to 2021. Regarding the COVID situation, in terms of health impacts to our colleagues, I'm glad to say that the new variants are much milder, and we have had very few severe cases within our global network.
However, the impact of COVID on our operations is still important. The 2.5 months of lockdown in China was the primary one, but also we continue to have high-level absenteeism across the network due to COVID-related sickness, which is having a clear impact on our operational management. The situation was quite severe in January and February, much better in March till May, and we have seen again an increase in June in part of the network. Additional preventive measures has been put in place to mitigate risks and support our colleagues. I'd like to take the opportunity here to thank my 96,000 colleagues in the network for their dedications in ensuring the day-to-day running of our operations and supporting our customers and the communities where we operate.
As outlined in our strategy, which we presented to you in May 2021, we are on the journey to become a more sustainable and more data-driven company. We have made good progress and are in line with our strategic planning. As you can see, the revenue under our Sustainability Solutions Framework increased from 45% to 47% in 2021. We have also migrated 9% of revenue to our next generation digital platform services and solution, confirming our target of 20% by 2023. Dominik de Daniel will provide you more details on the progress made in our Level Up initiative in a minute. I will highlight a couple of the achievement during the first half. All our Knowledge division business have now migrated to our new CertIQ application platform.
These applications set the foundation for an end-to-end digital journey for our customers in terms of interaction with SGS. The development of our cybersecurity laboratory network is continuing with the expected opening of three new facilities by the end of this year. The market realities and the current demand are in line with our expectations, and we will further reinforce our leading positions with this development. Our objective of migrating our services to a new digital ecosystem continues with good progress made in our Digital Lab initiative, digitizing the customer journey and new digital service offering. The more mature new digital service being Digicomply, with which you are all familiar, and Truum, our upcoming solution for the e-commerce sector, which we will tell you more about in due time.
Acquisition continued to be an important part of how we allocate capital to support our strategic priority areas. We made three acquisitions during the first half. Gas Analysis Services based in the UK will enhance our expertise across the gas instrumentation measurement and calibration industry value chain, particularly in the sector of pharmaceuticals, semiconductor, food, and beverages. Ecotecnos, based in Chile, is specialized in monitoring the impact of industrial activities on the aquatic and marine ecosystem. These services are in line with our focus on developing new sustainability-related solutions to protect the biodiversity, the environment, and the local communities. AIEX, based in France, is a technical inspection and welding specialist in the nuclear sector. It provides critical services to ensure the safety of nuclear plants and support our long-term vision related to energy transition. We have also acquired the remaining minority stake of two companies during H1.
30% of AMS, Advanced Metrology Solutions based in Spain. The initial investment into AMS was made in 2018, and this will, of course, our position in the 3D metrology and dimensional measurement inspection in the aviation industry. 49% of SGS Digicomply. If you recall, Digicomply is a JV created by SGS that specializes in regulatory monitoring in the food sector using latest digital technologies. The solution is now in full production and have been adopted by many of the leading food manufacturers. We're now developing the solution for other sectors such as cosmetics and non-food. Finally, after the first half closing, we have announced two subsequent acquisitions. proderm in Germany significantly reinforced our leading global position in the cosmetics and personal care testing, adding innovative capabilities and strong scientific expertise.
Silver State Analytical Laboratories, based in the U.S., is a specialist in the environmental testing of water and soil. Their expertise will further complement our network of laboratories in North America. All these acquisitions support key sustainability development goals and comes under our Sustainability Solutions Framework. They are supporting our midterm ambitions of reaching 50% of group revenue by 2023. On that, I'm gonna hand over to Dominik for a detailed review of our financials.
Thank you, Frankie. Good afternoon, ladies and gentlemen. I will start with the overview of the financial highlights for the first half 2022. Frankie already mentioned the operating highlights in his introduction with revenues of CHF 3.3 billion and adjusted operating income of CHF 458 million and a free cash flow of CHF 11 million. Revenues for the group in constant currency increased strongly by 6.8%. The adjusted operating income increased by 1.6% to CHF 458 million in constant currency, leading to an AOI margin decrease of 70 basis points to 14.1%. This reduction is solely related to China, where our business was impacted by the lockdown between mid-March and end of May. Excluding China, the adjusted operating income is growing double-digit in constant currency.
Net profit after minority interest increased by 1.5% to CHF 276 million in the period under review, while adjusted EPS was up 3.9% to CHF 40.37. Cash flow from operating activities declined by 23.1% to CHF 263 million due to higher net working capital requirement to support the strong revenue growth. Organic revenues increased by 5.8% in H1 2022, out of which approx 2.5% is a function of price increases to pass on the majority of the absolute cost inflation. The contribution from acquisitions is limited to 1% and reflects several smaller but strategically very important additions to our network.
The currency impact was with 1.6% negative, leading to revenue growth in actual rates of 5.2%, 4.1%, clearly lower than the total growth of 6.8%. The magnitude of the change by region needs to be set in perspective with the revenue increase. Overall, we showed a good increase of productivity. Only in Asia-Pacific, the differential between revenue growth and FTE growth is limited given the conscious decision to not actively reduce headcount during the lockdown in China to secure the full recovery potential, which was already evident and started in the month of June. The adjusted operating income increased at constant currency by 1.6%, which reflects an organic growth of 1.2%, as well as a small contribution from acquisitions of 0.4%.
Currency had a negative impact of 1.4%, leading to approximately stable AOI in the period under review. The very modest increase in adjusted operating income at constant rates is primarily driven by the lockdown in China. Excluding China, our adjusted operating income would grow double-digit. Consequently, the AOI margin decreased by 70 basis points to 14.1%. On this slide, I would like to provide you an update on our Level Up initiatives. The following objectives and milestones were achieved in the first half 2022. Project Prometheus was kicked off. The purpose of the program is to outsource IT infrastructure, application maintenance, and application development to reduce the time to market for new solutions and to reduce costs. This program will build a strong basis to roll out our new solutions globally in an accelerated manner.
We established the Digital Builders Organization to design and develop new technology-based products, initially focusing on higher productivity. We introduced Salesforce as the new global CRM. We implemented CertIQ as the global Knowledge platform. For the second half of the year, we'll focus among others on the following objectives. 20% of lab revenues will be covered by the Digital Lab concept. We continue to invest in the global Digital Lab core model for Environment, Food and Industrial. We will add additional 15 countries to our Finance Shared Service Center setup, covering approximately 60% of group revenues with the regional financial shared service center setup at the end of the year. The successful WCS program will cover 3 additional labs. We are fully on track to achieve our 2023 Level Up objectives.
We'll continue to increase the scope in terms of group revenues coverage and additional functionalities to the different digital lab platforms, as well as to CertIQ. Acceleration of productivity gains will be realized. Moving on to the margin by division. Our Connectivity & Products business is mostly geared to China. Despite a negative margin impact from the lockdown in China, we were able to increase the AOI margin by 30 basis points, which is a result of cash collection, recovery of bad debt and trade facilitation services, and improved profitability in cybersecurity and strong performance from key affiliates such as Turkey, India and Bangladesh.
The AOI margin in Health & Nutrition decreased to 12.4% from 15.5% the prior year, affected by the end of COVID vaccine-related testing, the impact of the lockdown in China second quarter, as well as the continued investment into our global lab network. AOI margin in Industries & Environment decreased by 100 basis points to 8.6% due to COVID restrictions in China, collection delays from certain government contracts, as well as the mix effects as we are winning a couple of sizable value-generating contracts in Latin America with very low invested capital. AOI margins in Natural Resources increased by 20 basis points to 12.8%. Good margin increases in laboratory testing and mineral commodities were partly compensated by lower profitability levels in oil and gas trade, as well as agri commodities.
The margin decline of 60 basis points to 90.1% in Knowledge is primarily a function of changes in the geographical and service mix. Operating net working capital stands at 1.8% of revenue, reflecting the strong growth. DSO levels remain strong and sustainable. Net working capital was negative in H1 2020 and H1 2021. However, this year's number of 1.8% is still materially better than what we have seen in the years 2019 and before. Furthermore, despite the continued strong growth, we believe we will finish with a negative working capital at the end of 2022. Cash flow from operating activities decreased by 23.1% to CHF 263 million due to higher working capital needs, given the growth of the corporation.
We spent net CHF 153 million in investing activities, which considers also CHF 11 million for a couple of smaller bolt-on acquisitions. Dividend payments as well as the NCI transactions amounted to CHF 611 million. We bought back own shares for an amount of CHF 51 million Swiss francs. We paid back a CHF 250 million Swiss francs bond and increased short-term borrowings by CHF 592 million. All this leads to a cash position of CHF 1.1 billion at the end of June 2022. Gross CapEx for H1 2022 increased by 4% to CHF 156 million and is in percentage of revenues with 4.8% on the same level as in the prior year. To sum it up, our revenues in H1 2022 increased by 6.8%, of which 5.8% organic.
While the lockdown in China impacted our growth and especially our profitability in the first half 2022, we experienced a strong growth recovery in China in the month of June. Our adjusted operating income increased by 1.6%, held back by the lockdown in China. Excluding China, the AOI growth was double digits. Our return on invested capital increased by 60 basis points to 18.4%. With this, I hand back to you, Frankie.
Thank you, Dominik. Let me now go through the outlook for our five divisions for the second half of 2022. Note that all the divisional growth outlook comments here relate to the second half organic growth in relation to the overall group average. Let me start with Connectivity & Products. The Connectivity & Products organic growth should be well above group average. Connectivity should see its growth momentum carrying on into the second half with acceleration of our cybersecurity services demand. Software will continue its growth pattern with solid pipeline in many countries, including China, Turkey, Bangladesh and Vietnam. Growth in hardlines will be stable with some improvement expected in the toys and general product testing volume, offset by continuous supply chain disruption in the other hard goods sectors.
Growth in trade facilitations will remain stable due to termination of government contract in Africa and impact on TransitNet related to the situation in Ukraine. Health & Nutrition organic growth should also be well above the group average. Health science will accelerate growth in the second half as new project comes online, replacing the COVID vaccine volume. Those contracts are signed but have different start dates during the second half. Talent acquisitions remain an issue that needs to be carefully managed, especially in certain key regions such as North America. Solid growth to continue in the second half in food with positive market outlook and new SGS facilities adding capacity, particularly in Latin America. Cosmetic and hygiene growth should accelerate as well in second half, as some of the project delay on operational resources issues seen in the first half has been addressed. Moving to Industries & Environment.
Industries & Environment organic growth should be below group average. Growth momentum will continue in both health and safety and technical assessment services in line with the momentum seen in first half with a strong project pipeline in most geographies. Supply chain services and activities related to oil and gas sectors will see limited growth in the second half due to supply chain disruptions and the completion of some oil and gas OpEx projects. Government mandate growth will remain flat with contract termination in some countries and limited growth in our vehicle statutory inspection activities. Environmental testing growth should accelerate in the second half, supported by better market conditions, less weather-related disturbance, and a catch-up on delayed projects such as Legionella testing program in Europe. Natural Resources organic growth should be broadly in line with the group average.
Mineral-related services, particularly testing activities, will continue the growth momentum in second half with new on-site project coming into operations. While there are concerns related to possible economic slowdown, the current demand for oil, steel, copper, cobalt, and coal remains strong. Agricultural services will remain under pressure. While we expect a slightly better crop prediction in Europe and North America, however, this will be upset by trade disturbances in Ukraine and Russia. Oil and gas trade and testing should continue to benefit from steady volume increase, so we expect growth in the second half to be similar to the first half level. Knowledge organic growth should be also broadly in line with the group average. The underlying market condition for certification remains solid, with increasing requirements for schemes such as medical devices, information security, and in the food sector.
Growth in the second half will continue to be held back by the challenging comparables to H1 2021, which was a recertification year and generated higher volume than usual. New drivers for ESG regulations will further support market growth in the medium term, and SGS is well positioned to capture this growth with our comprehensive suite of ESG-related services. The very strong growth of our consulting activities will continue in the second half. Demand for technical operational support, which provides improved efficiency and cost control, is increasing against some challenging market conditions for our customers. In terms of outlook for the remainder of the year, the full year 2022.
Mid-single digit organic growth, improved adjusted operating income with margin at a similar level to prior year, strong cash conversions, maintain best-in-class organic return on invested capital, accelerating investment into our strategic focus area with M&A as the key differentiator. At least maintaining the dividend and utilize our new share buyback program on an opportunistic basis as part of our flexible capital allocation strategy. This is just a reminder of our 2020-2023 mid-term target in which I mentioned earlier we're still on track to achieve what we presented to you in May 2021. In conclusion, I would like to mention that we will continue to support all our colleagues across the network affected by the Ukraine war, and particularly those who have remained in Ukraine.
We'll continue to monitor the situation and take actions to ensure their health and safety and wellbeing. Also, I would like to express my personal gratitude to all my colleagues who have volunteered in supporting our different actions, and particularly my colleagues in the neighboring countries of Poland, Slovakia, Hungary, Moldova, and Romania, who have provided logistics support to assist our Ukrainian colleagues and their families. On that, I'm handing it back to Toby for the Q&A session. Thank you.
Hi there. Yes, welcome to the Q&A part of the call. Remember, if you do wish to send a message, you'll be able to do that via email, so you can do this over the call. We'll take our first questions, and please remember it's two questions each from Paul Sullivan. Paul, please go ahead.
Yeah, thanks, Toby. Afternoon, everyone. Just, yeah, the usual couple from me. The outlook statements by division read quite well, but your full-year mid-single-digit guidance implies a second-half slowdown if you strip out the China lockdowns. Can you give us a sense of what you're building into your thinking and expectations in terms of pricing, the broader economy and the balance between recovery and further lockdowns in China? Secondly, can you walk us through the bridge back to flat margins for the full year? Specifically, how much of it feels like CHF 40 million-CHF 50 million China shortfall in the first half can come back in the second half. Thank you.
I'll take this. I mean, first of all, I mean, mid-single digit is a range, right? And obviously there's also opportunity to be at the upper end of this range. And I think we also have to see this guidance in light of the overall uncertainty which we have in the economy. We are optimistic and, but generally we think the outlook statement mid-single digit is the right number, but don't want to rule out that it's more at the upper end for sure. Now from a pricing point of view, pricing impact was from the 5.8% organic, 2.5% was pricing. There are still a bit more coming in, but this could be the trending.
From the economic outlook, I mean, things can change. We know it's an overall challenging market condition, and this is also in light of what we have to see, the outlook. Regarding China, whether there are lockdowns happening or not and how long they are, that's very difficult for us to judge. Yeah. We wanted to outline here more what was the impact of China in that regard for the first half. Regarding the second point, if we think about China, in the month in which we didn't have the impact of lockdown, we had actually really good growth. Yeah. High single digits, even double digits, for example, June.
I think June has to be seen also in the light that the lockdown just finished. There was for sure also some extra work in the month, but at least it shows that the supply chain is functioning. This is how we also manage our cost base to stay basically there to assume kind of what we expected also at the beginning of the year, mid- to high-single-digit growth. Obviously it will be not possible to recover the full impact of not generated potential profits in the first half from the lockdown, but some of it we could cover. Based on this, we feel comfortable to have a similar margin like in the prior year for the whole year.
Very clear. Thank you. Shall we move on to the next caller, please? Sushi, do you wanna go ahead?
As a reminder, for questions, star and one, and for webcast viewers, they may submit questions, on the relevant field and webcast. Ms. Varanasi, your line is now open.
Thank you. Hi. Good afternoon. Thank you for taking my questions. Two for me, please. Is it possible to quantify the revenue impact from the China lockdowns? Was it in the order of 1.5% or so? And which divisions saw the most impact? This can probably help us model it out if, God forbid, we have something else coming up in second half. Second, we've seen a fall in margins in Health & Nutrition and Knowledge. Health & Nutrition is from the COVID contract step-down plus something else. Knowledge is because of the mix. How should we think about the normalized margins for these two divisions on an annualized basis, please? For Health & Nutrition is in on the order of 14%-15%, maybe Knowledge, maybe 19.5%-20.5%.
Would love to get your thoughts there. Thank you.
I mean, first of all, if you look to China, the revenue impact was only 0.5% down in the first half because basically the good growth we had January, February, and June was more or less not completely, but almost offsetting the revenue reduction in China in March, April, and May. As I mentioned before, we planned the organization for a different growth profile. Therefore, of course, we had more costs. If you think about the margin development in Knowledge, it's really about the service mix.
Are we getting very strong demand in consulting work where their margins are a little bit lower than in the more traditional business? It's also fair to say that we compare especially last year with a very tough comp, yeah? Because we had last year the year where we have additional this three-year cycle where we have additional audits. We could definitely do every three years a higher productivity. I think what is partly needs to be also partly considered is the fact that last year a lot of audits still happened very much remotely, which is from a cost to serve model, of course more efficient than having this on-site. Now we start to have much more on-site audits again.
It's already in the run rate, and this is partly also driven by the regulators. From this point of view, last year's margin was, I would say, also exceptionally strong. On the Health & Nutrition part, it is definitely fair to say that we are very strong on vaccine-related testing last year. Surely we have given to those clients a priority, and we are not able to serve other demand which potentially being there. Subsequently this business was also respectively well-priced as a priority, has a value and help the pricing. It will take. We are very confident to replace the volume.
I mean, if we look today, excluding vaccine-related testing, we're growing double digit, but and it will accelerate. Of course it takes some time until this project starts, and we need even more volume because now we have, let's say, good prices, but not exceptionally high prices. The margin gap will be definitely still there. You could say maybe last year's margin, more from a short-term point of view, had a bit of excess potential, so it will take some time to narrow the gap in that respect.
Got it. Thank you very much.
Thank you very much. Shall we move to the next caller? Anvesh, please go ahead.
Yeah, good afternoon. I got two questions. First, you sort of flagged the negative impact in I&E from collections, and then at the same time in connectivity, there was some sort of benefit from the collections. Can you just help us quantify that, and are those one-offs, do you expect them to repeat in the second half? The second is really around the free cash and working capital. Clearly, sort of it has picked up as the revenue growth has picked up, but is 1.8%, do you think, is sort of sustainable level beyond FY 2022 as well? Or we should expect sort of an increase in that as we go along.
I mean, if you look to the net bad debt development, I mean, for the whole company, it's neutral, right? Basically there is not higher or lower net bad debt expenses this year versus prior year. There are shifts within the units. They are definitely still in the single-digit CHF millions. It's fair to say that the more meaningful positive impact was the collection and trade facilitation services, so C&P. This was not completely offset by more bad debt expense in I&E, but I&E was the biggest one with more bad debt expense.
There were a couple of other things in other regions, but it's still in a mid-single digit level. For the working capital, obviously, there's strong growth. I think if we look to the trends in working capital, it is DSO are strong. Actually, they are one day down, so that's good to see. It's not because of increasing DSOs, it's just growth and activity. Surely here and there are more areas on the payable side, which are sometimes it's just the timing of certain payments versus when the activity happened. Overall, we believe we will continue to have strong working capital in the future.
As I mentioned also in my remarks, for the end of the year, I believe working capital and percentage of revenues at the end of the year will be still negative. Not to the same level like the last two years, but still negative. I mean, of course, with more growth, there is more need, but you need also to consider that our Level Up initiatives in terms of centralizing billing and adding more to centralized billing will further help to make structural improvement to partly offset the need in terms of good growth.
Thank you very much, Dominik. As a reminder, you can submit questions via the live feedback, I guess. Next please, could we have Silvia? If you have your two questions if you want.
Yes. Hi, good afternoon, everyone. For me, just could I just go back? Just to make sure that I understand the China impact. China itself grew by 0.5%,
Negative. Decline.
-0.5%, and it would have been, I don't know, 8x. I guess the negative impact in the half is kind of CHF 40-45 million, and then whatever drop through you've got on top. I guess that's the right way to think about that. Just to check on Russia and the Ukraine. You've previously said that that's about 2% of overall group sales. It doesn't seem that you've exited, you've just reduced kind of business activity or at least business development. Can we just confirm if that 2% is still unchanged overall within the H1 numbers?
Maybe I'll, Silvia, I'll answer the second part of the questions, then Dominik can confirm the first part. Yeah, you're right. In terms of activity in Russia, we have, as we mentioned in our press release, we're still active in Russia. We have stopped all of our business development activities. We have stopped all new investments. We are basically working on existing contract, and the revenue has decreased, so it's below 2% now of the group.
I think that covers that actually, doesn't it? Next please, could we have Neil from Redburn? Please go ahead, Neil.
Product contribution products. The
The margin impact of improved collections. Could you just help me understand which of the two years, this year or last, or two periods is the abnormal? I mean, presumably you've improved collections and you hope to keep them there, but that's the first question. Secondly, with regard to the outlook and the focus on M&A, I understand there's been a couple of deals post June thirtieth. You have, you're not spending a great deal on M&A at the moment, so can you talk a little bit about what the pipeline looks like, please? Thank you.
If we look for the whole group, there is in the last two and a half years as a group nothing abnormal, so to say. There was a bit more bad debt expense in the year 2019, but the full year 2021 is comparable, and the first half this year is also comparable. Obviously there could always be some movements between divisions like we have it now in the first half this year. On the M&A side, I mean, we reflect at the beginning of the year that we don't expect very sizable transactions because, you know, the kind of more sizables in our industry, they are all well known.
We know what will most likely come when to the market, which is of interest. We didn't foresee in general that sizable things which we are looking for will come in the market. That, of course, could sometimes change, but so far that's basically the case. We see, of course, continuously interesting opportunities which are smaller, partly very small, which are small, but which are of high strategic interest. We will continue to go after them if they make strategic sense and basically meeting our EVA criteria, but for this year will be not a significant amount of M&A spending. Next year it's too early to say how availability of targets, pricing, and so on develops.
Thank you. Very clear.
Okay. Understood. Thank you.
Thank you, Neil. Next to go is Rory from UBS. Rory, please go ahead.
Good afternoon all. It's Rory here. Firstly, just on Natural Resources, your commentary suggested that's going to slow in H2. Is that just a strong growth in minerals hitting tough comparators? Or can you be a bit clearer where else the slowdown we should worry about? Secondly, looking at customized audits, it's clearly been a pretty busy period for changing reporting requirements or at least plans to do so in Europe. Can you just explain today how big customized audits are in Knowledge relative to the traditional certifications, and what percentage of your customer base currently is taking up some kind of ESG related audit service today? Thank you.
Maybe I'll start with the second part. For in terms of the new reporting requirements, which will be effective next year, and in fact, it's not all the companies. To be clear, it is about 50,000 plus companies, if I'm correct. The schedule is over three years and not over one single year. You're not gonna see all those companies. Second is, most likely it's more the larger companies going to go on the first batch and then the SMEs and so on will go. We have seen quite a lot of increase in demand for these kind of activities. We are offering services to our customers.
In fact, it's a mix between some kind of consultancy to help them to navigate the new requirements, especially in the SME populations where they have less, maybe less expertise in dealing with this kind of requirement. The larger company has usually their own internal structure. We're dealing with that in terms of services. Ultimately, in the medium term, we'll start to look at the validation, the revision certification of those audits or those requirements. It's an evolution of the market, so we're seeing more demand for us to help them to do. Obviously, we can't do consulting and certifications in one point in time.
The market, for the time being in our views, more on the consultancy part of the processes and in the medium term. Again, our target population for the time being is the SMEs. The larger customers have their own structures, but the ones they will start to request for certification, we'll be stepping in as well to see whether we can offer those services to them. I don't have exact numbers in terms of how much we certified, because what we do for our customers in terms of ESG certification for the time being is voluntary. The requirement is not coming to a mandatory stage yet. It's more, as you say, customized voluntary certifications that I don't have the numbers. The first question was
From Metro's Natural Resources, the guidance for a slowdown in the second half, does this relate to minerals or tough comparables?
I think if we looked at in general, we are very optimistic and upbeat when it comes to minerals testing, also minerals commodity. Obviously, there was also a bit of a pickup already in the second half last year, so the tough comps get a bit tougher. I think it's fair to say that obviously some of this business, like especially agriculture, is impacted from certain trade restrictions. While restrictions they happened rather early, it takes some time until they're really in the system. We expect
Maybe from this point of view, you have a bit more difficulties, but it's not. I would not call it a slowdown. I mean, the growth rate is maybe a tiny bit lower.
Thank you. The next on the call is Arthur from Citi. Arthur, please go ahead.
Thanks, Toby. I think you mentioned that the oil and gas trade activity is a little bit less profitable than perhaps it had been before. I personally just wonder whether that was linked to the issues in Russia and Ukraine, and if not, then sort of what was the issue? Question two, just on the energy CapEx side, both in terms of renewables and indeed oil and gas. Just wondering sort of how you're seeing the second half of the year in terms of that. Thank you very much.
Sorry, Arthur. I did not really understand.
The first question was related to whether the lower margins oil and gas trade is more a function of price pressure or more a function of Russia.
Oh, yeah.
No, whether it was to do with volumes in Russia and Ukraine or something like that. I just, yeah, trying to get a feel for what the reason was, if that makes sense.
Yeah. I think the, as I mentioned earlier, the Russia impact is limited to SGS Group, is less than, as mentioned earlier, now it's less than 2% of the group. But the pressure on the oil and gas margin is still remaining the price pressure, and there are excess capacities. The trade is getting better. We're seeing growth, but the competition is quite high. When we talk about pricing strategy and so on, there are sectors in which pricing is more difficult than others. And the oil and gas sector is one of those sectors where pricing is little more challenging, and this is reflecting in the margin.
I would say the Russian current sanction restrictions are not the bigger part of the margin evolutions. The second question was? I'm sorry, I did not hear that one.
Sorry. Arthur, could you repeat the second question?
Yeah. It was just around how you look at the outlook for revenues relating to energy CapEx. That's both oil and gas and also renewable energy.
Okay. The outlook for energy CapEx oil and gas. I mean, we do very little oil and gas CapEx now.
Also renewables, too.
There's certainly an evolution in terms of the CapEx spend into the infrastructure. We're still hearing a lot of discussion with our customers about putting more CapEx into refineries or so on because the oil price is high. We're hearing a lot of discussions, planning, but for the time being, it does not hit directly our activities yet. On the other hand, we're seeing much more demand in terms of renewables, whether it is wind farms in South Africa. We've secured a few contracts there.
If you can put nuclear as renewable energy, depending on how you see it, we're also seeing a more increased demand into the technical expertise for the nuclear sector as well.
Thank you very much.
Thank you, Arthur. The next to go is Kate from Bank of America. Please go ahead, Kate.
Hi. Thanks for taking my question. Just as we think about the second half of the year, could you remind us how much exposure you have to Germany and the industrial sector in particular, just given, you know, the potential risks to gas supply? Then of that exposure, any details that you can give around how much is kind of more volume-driven versus more recurring or regulatory based would be great. Thank you.
Okay. Why don't we talk a little bit about the volume related business and any cyclical parts of our European business in general? I guess that's probably the question. Especially focusing on Germany.
I don't have the exact number for the oil and gas specific related activities for Germany, Victor.
I think it's more that if Germany, correct me if I'm wrong, Kate, but if Germany is impacted, the economy is impacted by higher gas prices or gas shortage, it would impact the industry, which might not be able to function. How would that impact our business?
Oh, yeah. In terms of
Yeah. Exactly. Oh, sorry, go ahead.
Sorry, Kate. Yeah. Yes. In fact, we do, like every other laboratories, have contingency plans. Obviously, it depend on the extent of the severity of the impact Germany, if all the energy sources been cut or not. We do have contingency plan across the group and, typically, in our business continuity plan, we also look at a severe event and some of the activities will be migrating to our neighboring countries like Belgium, Netherlands and France and so on. Because we do have across the network similarity in term of the capacities that we have. These are under study. In fact, it's part of our business continuity planning studies. If the severity goes to the extent that we have to.
We cannot function in Germany and we have to migrate all those volume out. France, Italy, Netherlands and Belgium, the countries, will be migrating some of those volume. The exact impact of how much this means to our businesses is difficult to quantify because I don't know yet. I can't tell you how much of the economy will collapse in Germany for the time being. We have contingency plan.
I guess the other part of the question referred to how cyclical is our business in Germany? How regulatory driven is it?
Everything depends on the sectors again. You look at all the environmental activities that extremely regulated. On the infrastructure activities, you're looking at the stuff to do with control and so on, is all regulated. The food activities is regulated in the sense that you need to meet certain criteria. Quite a lot of the activities is regulated across the different spectrum of our customers. Some of them has a specific requirement, but they go in line against regulation based on the background as well.
Thank you very much. The other thing is that we are starting to see some refineries opening up in Germany again and coal power stations, which obviously counters that cyclical element. The final caller on the line is Paul from Credit Suisse. Paul, please go ahead.
A question on supply chain disruptions. In the outlook section, you mentioned that you expect Hardlines stores and auto to improve in second half. Are you seeing any easing in terms of supply chain issues in those areas?
Yes and no. It depend on the product. I mean, if you look at the automotive sectors, we see a little bit of the easing of the supply chain, but not too much. On the automotive sectors, we are very cautious about that. On the toys, on the general products, things seems to be more stable these days. We see an increase in terms of volumes, and we're still seeing some of the difficulties in the different kind of hard goods products. The logistics with the containers and so on is still problematic, but we see different increases of different volumes. The automotive sector is probably the one that's more challenging.
Thank you very much. That brings the questions on the call to an end, but there are some questions online, so I will attempt to group them because these were submitted. Some were submitted prior to the Q&A session, so some of them are probably outdated. A lot of them cover China and quantifying that impact. I think we've covered that enough already. If you do have any additional questions, please just send them to me. Dominik, we've got a few on quantifying the impact on pricing and in particular, our ability to continue increasing our prices given the inflationary environment.
I mean, if we look to it, I think in general we increased prices 2.5% in the first half. With this, we offset the vast majority of absolute cost inflation, whether it's wages or non-personnel cost inflation. It's a very strong focus of us because we see high inflationary levels and from this point of view, the operations very focused on it. So I guess this 2.5% will further increase throughout the year. There is, of course, a strong need also at least in the short to mid-term to work on it, and we are very committed.
I also think it is important also to see that overall, I would say that the tech industry is very rational or more rational than maybe other business service sectors in that respect.
Absolutely. Another one for you, Dominik, as well. We've got some comments asking for some guidance around full year net debt levels, and free cash flow conversion. I guess, you know, obviously the dividend was paid in the first half, and we-
Yeah.
We've sort of got clear guidance around CapEx, so maybe talk about the other factors.
Yeah. I mean, if you look to it, I mean, we have a pretty clear dividend policy where we say CHF 80. We will only increase this absolute dividend if we are down to a payout ratio in 75%-80%, which will be this year not the case. Obviously, the payout ratio will drop with the looking to our outlook statement in that respect. We have, from a working capital point of view, we had some need in that respect.
As I mentioned before, assuming a slightly negative working capital as a percentage of the balance sheet at the end of the year and a bit more CapEx, we still should be able to have a kind of similar free cash flow. From this point of view, the net debt will go a little bit up because we announced the share buyback, which is basically on top. It's not that, it's not overall that material in that regard.
Thank you very much. Maybe one for Frankie. If there were more lockdowns that came in China, what measures can we take to mitigate those effects?
Yeah. I think again we need to differentiate the city which was locked down. If you look at the lockdown that happens in the first half was Shenzhen and Shanghai. Shenzhen for about 10+ days and Shanghai for two and a half months. These are the two largest operational site of the SGS Group in China, and certainly Shanghai is one of the largest in the group. The full lockdown of those two sites certainly has a major impact. Especially the length of the Shanghai lockdown did not allow us the abilities to move samples to the rest of the network within China. As I said, we have contingency plan, but the lockdown was much longer than we anticipated.
On top of that, our own customers were in lockdown, so we couldn't even send our own inspectors and auditors to their site. There was quite a considerable impact. If we look at the future in terms of lockdown, we do see some spot lockdowns in China still ongoing, but we have much more flexibilities around because the network is quite large and we have duplicated a little bit, moving around to reassess a little bit the footprint so that we can move sample volumes and they do it more across the network in a more even way.
Obviously, if there's another lockdown of a month or two in Shanghai, considering the size that we have in Shanghai would be something that will have an impact. If it is one of the smaller sites that we have, Tianjin or Beijing, the impact would be much smaller because we'll be able to take the volume and move it to another laboratories.
Thank you very much. I haven't given names to the questions because they've all been grouped so far. Karl Green from RBC has got a couple of questions around the magnitude of the recovery of bad debts in Connectivity & Products and the end of some PCA contracts. I'm not sure if we actually disclosed those details, but could you talk a little bit about how that will impact the C&P business as we go through the rest of the year?
Yep. Basically on the C&P side, the kind of contract losses, they are not that meaningful because obviously the key driver for the acceleration of growth, like Frankie Ng said in the outlook statement, is really the recovery of China, where the C&P is really benefiting from it, given the big impact of China for the C&P business. In terms of collection of bad debt in C&P, there was great effort, so it was a positive thing in the first half. As I said in the question before, it's CHF single-digit million.
There was also in the second half last year they did quite a good collection on this in that part. In the C&P part, there's no other big outstanding there. Basically all bad debt was completely recovered.
Thank you very much. We've got two more. The first one's from Daniel Hobden. He would like to ask, given 96,000 employees, and personnel costs, sorry, I should say, about 50% of revenues, how are we managing the impact from that?
Yes, in terms of wage inflation. Obviously, we calculate all that into our. Two aspects. First is in terms of pricing strategy, we do factor into our pricing strategies the biggest cost base that we have in the group, which is people. This is factored into the pricing that Dominik's been talking about. Second aspect is also a question of continuing to implement those efficiency measures that we put in place. Part of the cost inflation, whether it's wages or others, is compensated by the price increase. The other part is also continuous evolution of our optimization in terms of productivity gain and so on across the operations that makes a difference. We are.
For the time being, we manage to balance the two.
Thank you very much. For the final question, which again is a sort of mix of a few people asking. In terms of the investment plans in the second half, where are our key focus areas?
You want to go, Dominik? The key focus area, as I said, again, number one is Health & Nutrition. We will continue to expand our network of strategic area of focus. Our Health & Nutrition has a few new projects in the discussion in terms of planning, so that we will continue to invest. Connectivity & Products, I mentioned the three cyber labs that will be established across the network with the support of Brightsight. We also have a few more CapEx investments into the wireless activities. These are the traditional. The Knowledge businesses will continue to expand, but very little CapEx and more people related.
We also have a few on-site labs that are coming on board with Minos, which is in support of our evolution in terms of the market evolutions. These are, I would say off the top of my head, the larger CapEx we're looking at.
Thank you very much. Thank you to everyone for joining us on the call. As I said before, we do hope to meet, to be able to meet many of you face-to-face at our investor days later this year. With that, I will end the call. Thank you very much.
Thank you.