Ladies and gentlemen, welcome to the 2023 half-year results conference call and live webcast. I am 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 in writing by the relative 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.
Good afternoon or morning to you, and welcome to SGS first half 2023 results conference call. We hope that you all have had a good start to the year, and we also hope to be able to meet many of you face-to-face over the next weeks and/or some point later this year. In a few moments, I will pass over to Frankie and Dominik, who will run through our presentation, and then we'll move on to Q&A. As per usual, when we have Q&A, please stick to a maximum of two questions, and if we have any 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 read out any questions that we may have submitted through the web.
Finally, we should be finished in about an hour, so we will try and keep it quite tight so you guys can get back to your work. For now, I will hand over to Frankie to start the presentation. Please go ahead, Frankie.
Thank you, Toby. Good morning, good afternoon to everyone. As usual, I will give you a highlight of our performances for H1. Dominik will provide you with a more detailed financial review, and I will cover the business outlook for the second half, our full year guidance, following by Q&A. To start, let me move the slide. To start, I'm pleased to say that with the operational measures we have taken, while strong action on pricing and the benefit of continued investment in key sectors, we have delivered both strong organic growth for H1 and an improvement in our margins. Cover has been strong globally, with double-digit growth in Asia, including China, which benefited from the comparable of the lockdown, which occurred in March and April last year. We also had double-digit growth in the Americas, while Europe growth was strong.
This good result are despite the few challenges faced early in the year, such as persistent high inflations, high energy and transportation costs, and the closure of most of our operations in China in January due to high sickness rate following the lifting of COVID restrictions. To put some numbers around these performances, total revenue increased by 8.5% at constant currency, while organic growth was 8.1%. Adjusted operating income was CHF 462 million, a good event point 3% increase at constant currency compared to 2022. On a constant currency base, our adjusted operating income margins improved to 14.1%, compared to 13.7% in prior year, an increase of 40 basis points. Our ROIC stands at 17.7%, compared to 18.4% same period last year.
It is the last 12-month number, so it was impacted by the second half of last year, and we expect it to improve for the full year 2023. Cash flow from operation increased by 40% to CHF 360 million. Our basic earnings per share is CHF 1.40, which is flat on last year, given the strong impact from Forex. We continue to work toward our strategic target. This slide highlight a few of those achieved so far this year. Dominic will provide you more details on the progress made in our Level Up initiative in a minute. I will just highlight a couple of achievement related to sustainability. Revenue under our internal sustainability solution framework is now at 47.4%.
This is due to the evolution of our portfolio mix in H1. I'm looking at an improvement for full year 2023 as we accelerate our portfolio in health and nutrition and other sustainability-related services. You will recall that last year, we were the first TIC company to be approved for 1.5 degree and net zero target for SBTI, the Science-Based Target initiatives. We have been initiating programs to ensure we meet our SBTI target of reducing absolute scope 1 or 2 GHG emission by 46.2% and scope 3 by 28% by 2030 from a baseline year of 2019. One important program is to improve the energy efficiency of our building across our network.
Far this year, we have increased the number of these energy efficiency project by 40% compared to the number of the whole year of 2022. We're also looking at more stringent energy efficiency criteria on all our CapEx, and we have initiated actions with procurement to tackle our scope three emissions in our supply chain. More result of this action will be reported as we move on during the year and next year. We continue our acquisition strategy with allocation of capital in strategic priorities area. In the first half, we made two acquisitions, and we acquired the remaining minority stakes of Lynxis. In the same period, we made two small disposal to optimize our portfolio. We acquired 60% of Nutrasource, a global contract research organizations in the nutraceutical and pharmaceutical industry based in Canada....
Not a source support our service portfolio expansion in North America and our strategic view of the convergence of health, nutrition, and wellness sectors. We also acquired the testing business and asset from Asmecruz, a cooperative of mussels producer based in Spain, with the objective of expanding our food testing services in Southern Europe and reinforce our position in the seafood industry. As mentioned, we acquired the remaining 40% of Lynxis, our operational consultancy business in Spain. The initial 60% was acquired in 2019, and we have since successfully expanded this activity in Spain and replicated it across several European countries. Next stage of development is the deployment of this service in Asia. During the first half, we disposed of our automotive asset assessment and retail network services operations across 19 countries, as well as our sub-service consultancy business in the Netherlands.
Both activities have been with SGS for many years, but are seen as non-core in the midterm to the group. Their future is therefore better secure with their new owners, and we wish them all the best in their new paths. While the pace of M&A has slowed down this year, it remain an important priority in our capital allocation approach. We expect more activities into 2024. We are also continuing the management of our portfolio through targeted disposals. On that, I'm gonna hand over to Dominik for more detailed review of the financials. Dominik, all yours.
Thank you, Frankie. Good afternoon, ladies and gentlemen. Please, to the next slide. I will start with the overview of the financial highlights for the first half 2023. Frankie already mentioned the operating highlights in his introduction, with revenues of CHF 3.3 billion and adjusted operating income of CHF 462 million, and a free cash flow of CHF 130 million. Revenues for the group in constant currency increased strongly by 8.5%, which is primarily a function of the impact of pricing, more than half of it, and good growth in volumes. Adjusted operating income increased by 11.3% to CHF 462 million in constant currency. Consequently, AOI margin increased by 40 basis points in constant rate to 14.1%.
Net profit after minority interest was with CHF 272 million, broadly stable, as the strong operational performance was primarily offset by FX, given the material strengthening of the Swiss franc against all relevant currencies of SGS. Cash flow from operating activities increased strongly with 40.3% to CHF 369 million, as the net working capital need was lower than in the prior year. Next slide, please. As expected, as you have seen in today's release, the FX headwind is material on both revenues and profit. Our very strong revenue growth in constant rate of 8.5% is, to a large extent, offset by the impact of FX, while the margin increase of 40 basis points in constant shows the underlying operational leverage, in actual currency, the margin at actual rates remains flat.
On this slide, we outline a bit more where the currency headwinds are coming from and their impact. As you can see on the left side, the Swiss franc materially strengthened against all major currencies, leading to a negative currency impact of 7% on prior year H1 revenues. The impact on AOI is with -9.4%, even more material, and consequently, our AOI margin increase of 40 basis points in constant currency is an actual reported rates flat. The higher impact on AOI compared to revenues is driven by the country mix, i.e., currencies of countries in which we achieve materially stronger profitability than the group. For instance, China or Taiwan. FX weakening there had a proportionally stronger impact compared to others. Next slide, please.
Organic revenues increased strongly by 8.1% in H1 2023, of which more than half was generated by continued focus on pricing. Given the strong organic growth in H1 2023 and our view for the second half of the year, we now expect for 2023 an overall organic growth of mid-single digit to high-single digit, versus our previous guidance of mid-single digit growth. As expected, the contribution by acquisitions is with 0.5%, very limited, while disposal had an impact of -0.1%. As outlined before, the negative currency impact was with 7% material, leading to a revenue growth rate in actual rates of 0.9%. Moving on to the revenue growth by business. Next slide, please. Organic growth in connectivity and products was with 6.7% strong.
Activities in China materially picked up after Chinese New Year, and we had easier comps, especially in the second quarter, given the lockdown in Shanghai in the prior year. Excluding China, growth in H1 was with 3.5%, very solid. From an SBU point of view, connectivity, soft lines, and hard lines showed all strong mid to high single-digit growth, while growth in TFS was solid. Revenues in health and nutrition increased by 4.6%, supported by the continued focus on M&A. Organic growth was 2.7%. Food delivered high single-digit organic growth, driven by strong volumes across all regions. In health science, organic revenue decreased slightly, impacted by the lack of funding for new drug development and volumes normalizing to pre-pandemic levels. Excluding COVID-related testing, organic growth was solid, driven by analytical services and clinical research.
Revenue growth in industrial environment was with 7.6% in constant currency, or 7.3% organically strong. Double-digit growth was achieved in industrial and public health and safety, as well as in field services and inspection. Public mandates grew high single digit. Growth in environment testing was very solid, while the other SBUs posted lower single-digit growth. The 10.7% organic growth in natural resources was driven by stronger growth across all SBUs and segments. The strongest growth was achieved in metallurgy and consulting, as well as in the agriculture and minerals commodities. Our best growth was achieved in knowledge, with 14.4%. All SBUs posted double-digit growth. The strongest growth was delivered by customers' audits, benefiting from strong demand for supply chain audits, social audits, and ESG assurances services.
Consulting, amongst others, driven by the strong performance of Maine Pointe, due to strong demand for supply chain optimization and performance improvement services. Next slide, please. From a regional point of view, double-digit growth was achieved by the Americas and Asia Pacific. The Eastern Europe and Middle East countries achieved strong double-digit growth across most of its key end markets. Growth in the African countries was mid-single digit, while growth in the key European countries was, to a large extent, solid to mid-single digit. In the Americas, revenues increased strongly by 11.1% in constant rate, while organic growth was 10.4%. The strong growth was equally driven by North America and several LATAM key countries. The organic growth in Asia was with 10.7% strong.
In most markets, mid-single to high single-digit growth was achieved, while China, Australia, and Japan posted double-digit growth. Next slide, please. FTEs at the end of the first half 2023 increased by 2.2% versus prior year, primarily driven by organic growth, partly offset by the impact of restructuring. Average FTEs in the first half 2023 increased by 2%, clearly lower than the total revenue growth of 8.5%, which is a function of pricing, as well as productivity increases from the various Level Up initiatives. In all regions, revenue growth is clearly exceeding the growth in headcount. Next slide, please. The organic contribution to the adjusted operating income of CHF 462 million was with 10.8% strong.
As outlined before, this was to a large extent offset by the currency impact, so that the reported adjusted operating income was broadly stable in actual currency. Currency had a negative impact of 9.4%. Next slide, please. On this slide, I would like to highlight to you how our digital strategy will drive growth and productivity going forward. First of all, we focus on the following four business priorities: drive material productivity improvement, deliver a different customer experience, capture incremental digital revenues, as well as internal operations and employee experience. The digitalization will be enabled by the deployment of the three selected technologies, namely applications and platforms, AI machine learning, as well as robotics and automatization. Based on this concept, we will execute five digital Flagships. First, Digital Lab program. The rollout of the Digital Lab program is accelerating.
As of the first half 2023, 27% of our lab revenues is migrated to one of our global digital labs platforms, well on track to exceed the objective of 30% for this year. The migration is more advanced in our minerals business, in which we see how our productivity increase is strongly contributing to our margin increase. Second, given the good experience of the digital labs program since its initiation, we recently decided to launch a similar global program for our field activities, representing 45% of group revenues. We initiated a first pilot for digital field services in Latin America, a region with high exposure to field activities, while the technology has been validated in three successful MVPs for field services delivered by our Digital Builders organization.
The deployment of digital labs and digital field services should lead in the first step to productivity increase, and the second step also capture incremental revenue opportunities. Under the Digital Customer Experience program, we fully deployed Salesforce as the global CRM solution and started to scale up our enhanced customer portal and other solutions to increase the client intimacy. This Flagship will be the single point of contact of our customers to digitally interact with SGS. The Next Generation Data and Intelligence program will support the variety of initiatives, all other programs related to data, in order to ensure that we leverage the data coming from our new digital platforms.
Under the Digital Workplace and Shared Service program, we bundle a variety of Level Up initiatives, such as financial shared service centers, centralized billing, world-class services, in which we see the accelerated impact of productivity improvements by recently implemented Workday as the global HR solution, enhancing our employee experience. All five Flagships will be supported by our Digital Builders organization, which will accelerate the time to create a product out of an idea and scale it up within our organization. We launched the Builders organization exactly one year ago. On the following slide, you will find a variety of successful MVPs. MVP stands for Minimum Viable Products and where they stand today. With these initiatives, we are building a strong platform for growth, positioning SGS as a more resilient and productive business. With the benefits realizing from those investments, margins and returns will increase. Next slide, please.
This slide shows some examples on the progress we achieved with our Digital Builders organization, launched 1 year ago. Just to recap, the purpose of the Builders organization is to take an idea and build a minimum viable product with max 3-4 months, depending on the idea. During this 3-4 months, colleagues from the business, colleagues from our group IT organization, and depending on the projects, external partners working together to establish an MVP, including the definition of the business benefits. If the MVP is successful, the solution will be built and will go live in the pilot country or pilot business, with the aim to scale it up to large extents via our 5 digital F lagships. In the meantime, we have 4 MVPs, which we scale up in the relevant businesses globally.
The windPRO solution is going live as we speak. For Simpro, we're currently building the solution. We also use the Digital Builders organization to test new technology in collaboration with our strategic partners. The Builders organization is instrumental to assure the great ideas from our network, our partners, are captured, tested, and implemented in a way that we can scale them quickly. Next slide, please. Here we talk about the margin development by business. The margin decline in Connectivity and Products of 230 basis points is mainly attributable to the positive impact of collections in TFS services in the prior year, partly offset by the recovery of China.
The margin decline of 260 basis points in Health and Nutrition is a function of the conclusion of COVID-related testing in the prior year and a temporary slowdown in new product development in health science. Margins in the food business improved nicely. The AOI margin in Industrial and Environment increased by 170 basis points to 10.2%, benefiting from the savings of the prior year restructuring program, continued integration benefits of acquired companies, and strong pricing. AOI margins and Net Resources increased by 210 basis points to 14.3%. The strong operational leverage is a function of growth, acceleration, also from good pricing in trade and inspection activities, as well as productivity benefits from the digital labs program, which is more advanced in our minerals business.
The adjusted operating income margin increase of 40 basis points in Knowledge is the result of an increase in volume and pricing, partly offset by higher travel costs, given the return to on-site audits. Next slide, please. Operational net working capital stands at 2.5% of revenues in H1 2023. The higher net working capital need is a function of strong growth. That being said, the cash outflow in H1 2023 is materially lower than the prior year and somewhat lower than two years ago, as DSO's improvement was driven by our centralized billing projects and strong focus on cash collection. Next slide, please. Cash flow from operating activities increased by 40.3% to CHF 369 million compared to the prior year, as net working capital need was lower.
We spent net CHF 140 million net CapEx and CHF 8 million for smaller bolt-on acquisitions. Dividend payments, as well as NCI transactions, amounted to CHF 606 million. We paid back a CHF 325 million bond and drew CHF 300 million from our sustainability revolving RCF. All this leads to a cash position of CHF 1.1 billion at the end of the reporting period. Next slide, please. Gross CapEx for H1 2023 decreased by 8% to CHF 143 million. This is an actual rate, and constant rate would be down 1%, and is in percentage of revenues with 4.4%, slightly lower compared to the prior year. Net CapEx stood at 4.3% in 2023.
We continue to invest into our strategic priorities and our digital lab program, but temporarily slowed CapEx allocation somewhat in our health science business, given the more changing market conditions in the short term. Next slide, please. Thank you. To sum it up, our revenues in H1 2023 increased by 8.5% in constant rate, of which 8.1% is organic. Our trust operating income is growing with 11.3%, double digit in constant rate. Our operational cash flow strongly increased by 40.3%. The decrease in return on invested capital is purely a function of the lower profitability in H2 2022 versus H2 2021, as it is calculated on an LTM basis. With this, I hand back to you, Frankie.
Thank you, Dominik. Let me go through the outlook for our five division for the second half of 2023. Let me start with Connectivity and Product. Connectivity and Product, second half organic growth should remain similar to first half. As in first half, our underlying margins will remain robust, but the full year level will continue to be impacted by the strength of the comparable period, which include the benefit from the collection in trade facilitation services. Supply chain de-risking continue in China, with less complex and lower value items, particularly in hard goods and soft lines, moving to other countries such as Vietnam, Turkey, and India. China will remain competitive in most connectivity-related product for the foreseeable future. Our continuous investment in capacity building in other countries outside China, has allowed us to support our customers in this supply chain evolution.
Likewise, our diversification strategy from international trade to the China domestic market has supported our strong growth in China. This despite the current concern of our client regarding inventory level, new SKU development, and in general, a possible softening of the retail sector. Growth in trade facilitation will remain below the division average, due to termination of government contract in Africa and continuous impact on Transinet related to the war in Ukraine. Health and nutrition organic growth in second half should accelerate with improved profitability. This is the result of a better order pipeline and no further residual impact of COVID-related activities. Both food and cosmetic will continue their strong growth path into second half, with good demand coming from most geographies and increased utilization of our newly invested food laboratories in Latin America.
Health science should see the strongest rebound in growth, both in Europe and U.S., benefiting from a solid order pipeline. We expect a marked improvement in margin. We're also continuing to make new investment in our health network in China, as we remain confident of a significant long-term opportunity in this market. Industry and Environment, organic growth should remain strong in second half. Growth momentum will continue in health and safety, with evolving regulatory framework and growing ESG concern. Technical assessment advisory will remain soft as we complete major project, mainly in Latin America. Transition to the startup of new ones. Overall, the market dynamic remain positive. Growth in our field services and inspection will remain strong, with increasing demand for our supply chain activities. This is particularly the case in project related to energy transition and nuclear.
Environmental testing growth will accelerate in second half, supported by an improving pipeline and project win in North America, Europe, and Australia. With the increasing volume, we expect margin to develop positively. Natural Resources organic growth is likely to be slower in the second half compared to the really good growth rate of the first half, but should remain at a strong level. The market fundamentals at the mining industry remain strong, but we do expect exploration funding to reduce compared to the prior year. The demand for steel and critical minerals is supported by the investment in extensive infrastructure and no residential project in many countries, and demand links to energy transition remains. In trade, the rebound agricultural services seen in the first half will continue in the second half, with good crop conditions in key countries such as Canada and in Europe.
The impact from El Niño has been the consideration of the important fish meal season in Peru, as the fish have moved further offshore to avoid the higher temperature. The recent non-renewal of the corridor agreement between Russia and Ukraine has already seen price of grain spiking and some concern on trade flow impact out of Ukraine. The exact impact still need to be assessed in coming months, but could affect our agri activities. Oil, gas, and chemical trade and testing is still volatile, with many uncertain geographical and economic factors. We expect similar growth moving into second half. To finish on Knowledge. Knowledge organic growth will also be slower in the second half compared to the double-digit growth of the first half. Growth will remain strong in the second half as well.
The expected slower growth is mostly related to our leading position in certification in China, which benefited from the softer comparable period in first half with the lockdown of 2022. In prior year, the underlying market conditions for certification remain solid. Especially, we see increasing demand for certification scheme related to medical device, information security, sustainability, and food. We're also seeing a strong increase in demand for customized audit schemes related to social audit, supply chain management, and ESG. Sustainability Assurance Solutions, which is part of our ESG service offering, is an emerging business and is our fastest growing segment in Knowledge. Our consulting activities continue to progress well, and we're looking at another solid semester moving in the second half, backed by the strong pipeline.
Both our operations in the U.S. and Europe are enhancing their value proposition with increasing component of ESG into a training and consultancy services. In terms of low outlook, our guidance for the full year 2023 is mid to high single digit organic growth. This is an increase from our previous guidance of mid-single digit organic growth. Improved adjusted operating income and margin at constant currency, strong cash conversion, leading TIC underlying return on invested capital. As we said earlier, this will be stronger in the second half and stable dividend. The last slide is a reminder of our different objective in terms of people, planet, and performances for the 2021-2023 plan that we were going to conclude end of this year. I'm not going to go through all the details, but you can read it.
Maybe in conclusion, we're pleased with our first half performances at 8.1% organic growth, reflecting our improving growth profile. We showed good underlying margin in the first half, and we expect a stronger performance in the second half. On that, thank you. I think, Toby, we can go through the Q&A.
Thank you, Frankie. If we could start the Q&A with Daniel from ZKB, please.
Yeah, thank you very much. Hello, everyone. I would have two questions. The first on margin. You have 40 basis points better, but could you describe a little bit the moving parts? Because I think you have 80 basis points of savings. It's a restructuring program. You have some support from China and also stronger pricing. What stopped you from a better profitability in the first half? My second question may be on personnel and energy costs, what increased you have seen in the first half, and what do you expect going forward?
Thank you, Daniel. Maybe Dominik, you want to address those two questions?
Sure. Thank you, Frankie. Good morning, Daniel. Good afternoon. Basically, if we look the restructuring things, they are there. They are completely there. The situation is that our like we also reflected at the beginning of the year, that the energy cost increases is quite significant, especially in the first half of this year. This is related to the fact that in the prior year, first half, we are still benefiting from energy contracts, and I talk here primarily about Europe, from energy contracts concluded before the conflict Russia, Ukraine. While now we have the full impact of this higher energy costs. Yeah. The energy costs in the first half are very high.
They will definitely slow down into the second half year. On top, the base effect becomes easier. That's the first point. The second point is also that as we also outlined before, is we definitely have more travel costs. Yeah, we have much more on-site work to do than before, and this is especially relevant since the beginning of the year as China opened up, yeah. Even last year, where we had lockdowns, but they were often location lockdowns. In general, in whole China, obviously, traveling was rather on a lower level given the COVID concerns, and now it's completely back. This has also quite some big impact.
Furthermore, I would say, especially in the first three months of last year, traveling in Europe was not fully back because we had Omicron. These two key components are basically eating then some of the margin increase away, but both of them will have, will be much easier in the second half. On the energy cost, it's also related that sequentially, energy costs will go down. On the travel cost, it's a function that things getting, yeah, basically easier comps or the normal run rate in the second half is a bit easier. On your second point regarding wage inflation, I think this was the point, it's around 5%.
Yeah.
Close to 5%. Obviously, as we said on pricing, more than half of the revenue increase is pricing, so it's actually very close. Our also pricing is in the higher 4% area.
Thank you.
Thank you very much. You covered the energy cost question in the first question, anyway. Thank you for that. The next on to ask a question, please, Annelies from Morgan Stanley, please go ahead. Please limit it to two questions as a reminder, everyone. Thank you.
Hi, thanks. Thanks, Toby. Two questions from me as well, please. Just following up on that pricing point at the end. You said the majority, or sorry, more than half of pricing of the organic in the first half was pricing, so I'm guessing 4.something%. What are you expecting for pricing in the second half? Do you have a target in mind in terms of how to reach the margin progression that you're expecting for the full year relative to where consensus is? Secondly, health and nutrition, you mentioned, I think, a temporary slowdown in new product development and some sort of short-term volume impacts.
How confident are you in the recovery of that, and over what time frame? Perhaps you can comment on how much visibility you have on that returning, either into the second half or going into next year. Thank you.
Hi, Annelies. Let me go through the second question, and Dominik can go through the first one later on. On the other nutritions, on the half sectors, there's also a market situation where I think the funding or the early drug development was a bit soft in the first half of this year. We are seeing already a more stable pipeline in the second half. In our view, the catch-up will start clearly on the second half in term of, as I mentioned in my outlook, that we're looking at a mark improvement in term of growth and margins into a second half of this year. We should be able to develop from then on into 2024 and so on.
The momentum is already happening, and we're seeing a better last month of the first semester, and we should see that continue across the second half of this year. I'm pretty confident in terms of the other pipelines. Some of the project for the first half was delayed to the second half. I'm pretty comfortable that those projects will be executed and will be moving into a more stable market conditions for the second half of this year. Dominik, you want to tackle the first half?
Yep. Yep. Regarding pricing, the statement that more than the half of the revenue growth comes from pricing is not only for organic, it's also for the overall growth rate of 8.5%. Pricing is in the higher 4% area in the first half. I would expect to tick this a little bit more up in the second half, but still, let's say, let's call it close to 5% ending up the year, because a lot of the price increases were implemented also beginning of the year. Throughout the year, you have a bit of an uptick, but it's not that material. I assume we end up in the very high 4% area, close to 5% in terms of pricing for the whole year.
Regarding the margin development and consensus expectation, if I'm not mistaken, consensus and constant rate is looking for the full year, around 70-80 basis points. AOI margin increase in the first half, we have +40. That would imply second half, which is more weighted in terms of profit, a bit more than 100 basis points, which we feel very comfortable for several reasons. First, is related to what I said before, as an answer to Daniel's question on the easier comps for energy cost, plus the fact that also sequentially, energy costs will slow down in the second half. There's also a bit easier comps on travel costs in that regard, and I would say in general, the non-personal cost inflation is somewhat softer.
The second point is obviously there's also a clear expectation from a bit more bad debt recovery into the second half, where we are pretty confident to achieve this. Bad debt didn't have the impact on margin first half, but we are pretty confident for the second half. One could argue we had a bit of easier comps in China in the first half, but I would like to remind, even the second half last year was operationally, for our colleagues in China, not easy because we had constant city lockdowns, so operationally it was quite challenging to move samples. Created a lot of, in the second half of last year, a lot of additional logistic costs and other costs.
The December was a month where after the opening up of the economy, sickness rate in our business, like, I would say in the whole workforce in China, was in the second half of December by around 70%. Therefore, I'm confident that we show also second half in China, good leverage. I also would like to remind, if you recall, second half last year was also a bit softer in Europe. Not only energy costs, also demand side. Overall, we are quite confident that margin will nicely accelerate into the second half and can live with these consensus expectations.
Thank you very much.
Thank you.
Thanks. Thanks, Annelies. Next up, could we have Suhasini, please, from Goldman Sachs?
Hi, good afternoon. Thank you for taking my questions. Just on the connectivity and products, you mentioned that the collections and trade facilitation services impacted the first half margins. Can you please quantify the impact on the margins in first half, and maybe confirm that there is no further impact in second half? Second one is the FX drag on margins, that was there in first half. At current rates, can you please help us understand what you see as the drag for second half, if at all, on margins? Thank you.
Dominik, you want to tackle both questions?
I will do this. Good morning, or good afternoon. Basically, the TFS impact was more in the prior year. We had. If you recall in the first half last year, we mentioned in the half year report, first half last year, our CMP margin was pretty strong, despite the fact that we had this lockdown in Shanghai, which is partly that our colleagues managed the lockdown very well. It was also pretty strong because in the first half last year, we had strong collection, and we mentioned this in the first half report last year.
Obviously, this was last year, the comp of this collection, which was in the CHF higher single digit million in the first half last year, is from a comparison point of view, that's the reason why the comparison margin for this year is rather high. It has not too much to do now with this year or the movement into the second half. From a margin point of view, based on the year-to-date data, we have around 40 basis points track from a, yeah, kind of currency impact, and we see this pretty similar for the second half. Could be 10 basis points more, yeah, very similar, first half, second half.
Thank you.
Thank you very much. Next, Will. Do you wanna go ahead, Will, from Societe Generale, please?
Thanks, Toby. Yeah, I just wanted to talk just a bit about the margin again. The first question is on that. Just, if you could talk about the move in the bad debt provision, so we could just work out what benefit that was last year versus this year. The other one-off impact was, I think in the COVID-related testing, which I actually thought had already washed through. If you could just maybe help us quantify that one. The second question, unrelated, just looking at kind of leverage and thinking about, you know, M&A and things, is there a point at which you look at the divvy? Just be interested in kind of capital allocation thoughts on that one. Thanks.
Dominik, you want to tackle the margin question?
Basically, if you look to the margin, if you recall last year, we said that roughly the impact of bad debt, additional expenses last year was around CHF 20 million. Yeah, last year. In the first half, we were neutral compared to the prior year. While we had in the prior year, a release in, like this TFS thing, and we expect that this amount or the majority of it, we can reverse in the second half of this year, and this, of course, will contribute to the margin increase. Feng, you want to take the next one, or should I take the?
Oh, you can take it.
Yeah.
Go ahead, I mean.
Basically on the vaccine testing, yeah, like we said, for the full year, we still will have a bit of a track, higher single-digit CHF million revenue in the first half from vaccine testing, but this is now for the second half, it's kind of washed out, but second half, prior year still had something in. The last question was regarding.
Okay.
Capital allocation, right?
Yes, on the capital allocations.
Yes.
Even the question is about the dividend. We said we'll keep the dividend stable until we reach, more or less 75% payout ratio. We're going to stick to that, is where we set stable dividend. Obviously, acquisition is a priority into our strategy as well. That the market was a bit soft this year for us, and we'll continue to look at this, and we should be moving to a more active year in 2024.
Thank you. As a reminder, two questions each. Next, we will have Arthur from Citi. Please go ahead, Arthur.
Thanks, Toby. Yeah, first question from me. In the first half of the year, what's been the impact relating to unwell Chinese workers? I imagine this would mostly have been in the first month or two of the year, following the reopening, but I just wonder whether you could give us an idea of that, especially as it relates to connectivity and products. And secondly, I was just wondering, if you could give us an idea of the kind of wage inflation that you've seen in the business, and what you're expecting for the full year. Thank you.
Dominik. You want to.
Yeah, I take that.
Yeah.
Basically, if you look to China, obviously we had a opening up of the economy, and then we had 70% sickness rate, kind of in December. Surely this was also expected. There was a knock-on effect into January because also a lot of clients basically said, "We have high sickness rate in December. The people will be not all healthy on January 1st." Chinese New Year was rather early in the year this year, so basically they decided not to start operations before the Chinese New Year, so to say. We fear from a-
Sorry, Dominik, I think you are cutting out.
Sorry, this is the operator. We lost connection with Mr. Daniel. Just a moment.
Maybe I'll continue to answer the question for the first part of the questions. Indeed, the sickness rate was quite significant in the beginning of the month, for the first 2 weeks, and luckily in term of timing, I would say, we managed to roll over into the Chinese New Year. In a sense, you can assume that the month of Jan was pretty close, pretty flat, pretty subdued in term of margins and in term of revenue, because most of our operation was closed. I don't know whether, Dominik, you're online, you have a number? I don't think we would give the number on what happened in China for the first year, first part of the year.
No, we haven't.
I'm just back.
Oh, sorry, Dominik.
Dominik?
Sorry, my line was disconnected, so I'm now back. Did you answer the question on the January impact of China?
More or less, but we don't quantify the impact of the first month of China of our operations.
No.
In China, so.
Yeah.
We gave the explanations.
Yeah.
Maybe you can go through the second part of the question, which was.
The next question is on wage inflation, the impact so far this year.
Wage inflation.
In the second, expected for the second half.
Wage inflation was, let's say in the higher 4% area, in the first half, and we expect a very similar number, maybe, yeah, close to 5%, in the also for the second half. Yeah, close to 5% will be the number, pretty aligned with the price.
Okay. Thank you very much. That's it for those questions. Next up, we've got Oscar, from JP Morgan. Please go ahead, Oscar.
Thanks, Toby. Hi, everyone. 2 questions. The first one on connectivity and products. Growth ex-China was 3.5%. Can you just give us some color on what you're seeing in June and July around retailers and inventory levels? What's your outlook for growth in the second half? The second question is in the knowledge division, you talk about growth being benefited from reopening in China. How much was that growth ex kind of the Chinese benefit, and how do you expect knowledge to perform in the second half? Those are the 2 questions. Thank you.
Okay. I'll take the first one. Dominik, you can tackle the knowledge one, ex-China. On the first question, for June, May and June, the volume is still stable. In fact, interestingly, the hard goods and the soft line volume was pretty stable for us. The part of the volume that was little bit softer in the last 2 months of the first half was connectivity. Partly in Korea and in Taiwan, some of the volume has dropped a bit. I think it's a question of development cycle, as well as some of the 5G infrastructure development was not at the speed that we're expecting. There is an impact on the amount of a new model development.
Generally speaking, I would say the retail market is kind of worried about little bit of the softness of the, in the second half, with high inventory, plus a discussion on the SKU development, the number of SKU, which is an important factor for us in term of our testing volumes. Nothing that we worry too much about, because in term of diversity vision, our portfolio into some of the domestic market, including China, we see, as I mentioned earlier, a similar kind of growth pattern on some of the development cycle for the connectivity will come back in the second half of the year, which was a bit softer. I have no concern on that.
I think we'll be at a similar level as what we've seen, in the first half of the year, with some moving part between software and hardware than year and year, I would say. Dominik, you want to talk about the?
Yep.
Impact of the uptick on the knowledge one in China?
Yep, yep. Yep. Maybe one additional remark, when the question was said, it was mentioned the growth excluding China of CNP was 2.5. It was 3.5%, yeah. Not 2.5, 3.5%.
Before Frank jumps in. Now, on the knowledge business, China definitely had an impact, but if you would exclude China, we would have grown also double digits. It's now not because of China that only because of China that the growth is very strong. As I said before, a lot of this was also coming from consulting business, where we had a strong demand. The growth rate will slow somewhat into the second half. It's not 14% sustainable, but it will be a strong growth rate in the second half.
. hank you very much.
Thank you.
James Rose from Barclays is next. Please go ahead, James.
Hi. Thanks for taking my question. First one is on pricing. Can you give an idea of where it contributed most across the divisions in the first half? Secondly, looking at industry and environmental margins, it's quite a high drop-through rate, comparable to, you know, other divisions. Can you sort of talk through how you managed to achieve that? Thank you.
Yep. Basically, if we look to pricing, it is, I would say it's less a function of a division. Of course, I can give you the division impact. It's more a function of the end market in terms of country end markets, yeah. Because in this more inflationary environment, especially when wage inflation is kicking in, is often a function of the wages. Therefore, let's say, above average price contribution, we're definitely in businesses like natural resources, like also industrial and environment, because those businesses have more exposure from a country point of view to countries where we have above average wage inflation. Yeah.
On the I&E business, I think that, first of all, to your question, why is this so good? Obviously, a good pricing effect is also helpful there, and we benefited there as well from good pricing. The other things are definitely that if you think about the restructuring program, which we initiated in autumn last year, it was relatively speaking, more geared to Europe and industrial environment. This is definitely one reason. Furthermore, we're seeing also more cost synergies from the integration of our acquired businesses, especially environment business. That's the reason why the kind of incremental margin, relatively speaking, was quite strong in this part of the business.
Can I just add for industrial environment, also the evolution of our portfolio is important as well. We have more work activities in the health and REACH, health and safety sectors, which typically has higher margins than the more traditional construction supervision sectors, as well as in the supply chain, which is, has a lot to do with the energy transitions, wind farm, nuclear, and so on. This is also the mix of the portfolio, the transition we're trying to push through. It's also impact on the way we're looking at margin as well.
Thank you, Frankie. Next, we will have Carl from RBC. Carl, please go ahead.
Yeah, thanks very much. A couple of questions from me. Firstly, just in terms of M&A. Frankie, I think you said, if I recall correctly, that you would expect to do a bit more M&A in 2024. You've obviously come off a very lean period for M&A in the first half. Just an update as to where the M&A pipeline is sitting, what you're seeing on the ground in terms of competition from private, financial buyers, et cetera.
My second question, again, probably directed at you, Frankie, just in terms of the recent management change announcements, just in thinking about the kind of scope of reviews that Geraldine might be doing, when she arrives in December, and how that's likely to dovetail with your strategy planning cycle, which I think you're planning on announcing in May of next year. Just, you know, what's kind of on limits, off limits for her, and then how you're potentially thinking about your own position in the organization on the medium-term view?
Sure. I'll start with the first questions, which was.
M&A.
M&A. Yes. Yes, in fact, you, clearly, our first half performances is rather subdued in term of acquisitions. We're looking at a pipeline is developing. Certainly, the high inflation and high interest rate out there is bringing a position against some of the competition we have, we've seen in the past few years, not necessarily from a strategic, but from some of the financial institutions, private equity, and so on. I think, at one point in time, as the market evolves, some of those assets that was acquired by them will have to come up on the market, as well as some other assets in term of market consolidation.
We are looking at the different avenue in term of health and nutrition, connectivity, environmental and energy transitions. These are some of the assets we're looking at, and I believe that as we see the market improving and evolving, we should be able to see more opportunities and certainly more deals moving into the second half and certainly more so in 2024. Your second question about Geraldine. I would say it's too early for me to comment. We clearly have a plan. Dominik is still with us until end of the year, so the three of us will be working together with the rest women of the ops council to look at the evolution of our strategy.
You're absolutely right to say that, end of 23 is the end of a cycle for us. Our current strategy go from 21 to 23. We're in the middle of the review of this strategy for the next cycles. Certainly, Dominik and Geraldine will work together with the ops council and myself to ensure that we have a coherent strategy moving forward by taking the strength of Dominik and the strength of what Geraldine can bring to the organization. This is in work in progress, and I will come back to you once we have more details on that. On the last part of your questions is about myself. I don't know what to say. I mean, at the end of the day, it is an evolution.
I would simply say that, like any corporations, at one point in time, whatever this point in time means, is, the establishment of the organization for time being, we're looking at the strategy, and we're continuing to evolve on the strategy, and this is the most important priorities.
Thank you very much. Next up, we have Harry from Bernstein, please.
Hi, good afternoon, Frankie. The first question is on the growth performance and the comments about making market share gains in TMP and knowledge, and specifically in soft lines. I wondered if you could just go into a little bit of detail on how you compete for share in those areas and where the successes are coming from? The second question is just on disposals. You mentioned in the presentation that you expect that active portfolio management to accelerate, so two disposals in H1, can we expect a higher number in H2? I guess, more importantly, could you give a little bit more color on potentially how much cash inflow we could see from those disposals in the medium term? Thanks so much.
I'll answer the first part, and, Dominik, you can tackle the second part. Is it okay with you?
Absolutely.
Okay, let me go through the first one. I mean, in term of the market share gain, certainly there are links to a strategic key account. I think it's all more about the customer service, the turnaround times, and the integrated packages, where we can offer a more complete portfolio across different geographies, across different specializations of the product, whether it's chemical testing, whether it's physical properties, and so on. These are really the process that we have worked on with the stronger interaction with our customers over the past several months or couple of years, I would say. We're seeing now the return on this strategy, where we have a much more customer-centric approach to what we're doing, rather than just a testing approach.
This has seen, that has made the differences, and this is where we are gaining quite a lot of new accounts.
Dominik, the active.
Yep.
Portfolio management, please.
Yep. We kind of concluded 2 disposals so far in the first half. There are a couple of more to come in the second half, potentially into Q24. We'll see when they get closed. Those are from a scale per, not, let's say, huge units, and some of them have also subdued profitability or return, so I would not expect too much from an inflow in terms of cash. There will be some inflow, but it will be not that material in general, because those are rather smaller businesses, which we sell now piece by piece.
Thank you. The final person on the call before we move on to questions from submitted on the web, is Rory. Please go ahead, Rory.
Good afternoon. Just the one last from me. It's on knowledge. I understand the outlook is for the division to slow overall a bit, but can you talk about the outlook for the customized audit businesses? Just there are lots of new and recent regulations coming in around things like forced labor bans, deforestation, and things like that. Can you talk about, you know, how much headcount you're adding to that area, how you can grow capacity, and just maybe some sense of what proportion of your customer base is looking at or taking up these customized audit solutions? Thank you.
Sure. I can answer this. In fact, the customer audit portion of our businesses is probably one of the fastest growing now. You're absolutely right, there are quite a lot of schemes links to ESG. I think there will be a convergence of the different schemes in the long term, in terms of standardization on the ISO or other organizations. For the time being, there's quite a lot of activities from our customers in term of needs to understand how to evolve. We do a lot of carbon calculations, we do a lot of ESG gap analysis, we do also a lot of consulting, to some extent, and training on this aspect. I wouldn't be able to tell you how much.
We don't give the exact number of how much is linked to our solution services, but I would say it's the fastest growing by far, and it is also a quite sizable amount of customers is inquiring about that. I would say this will be a key driver for the next few years in terms of the way we look at growth. Beside the traditional certification schemes, this is really the area where we see the most demand today, and we'll probably have an increase of the activities as the standard of the different governments putting more standard or certification scheme on the market, and more requirement as well.
Thank you very much, Frankie. Shall we move over to the web, I will read these questions out and direct them, I guess. The first is from Neil Tyler, I'll ask 2 of your questions, which you've submitted 3, but I think one's already been answered. Within I&E and natural resources, both are delivering organic growth comfortably above the medium-term targets we outlined a couple of years ago. Other than the influence of commodity cycles, has anything changed to alter your medium-term growth perspective for these divisions, Frankie?
You are talking about natural resources?
Natural resources and I&E.
Yes. I think the natural resources, the way we look at the energy transitions is an important factors. In fact, you look at the demand for critical minerals, whether it's lithium, cobalt, copper, and so on, are all key component for this energy transition, and we're seeing more and more demand on this aspect. I would say, we are well positioned in these sectors, and if our outlook for the medium term has changed, it's more on the oil and gas side, more than on mineral side, because we always believe that the mineral sector was a key sector, so we need to be focusing on, but more so now we have additional drivers, this link to the energy transition is very interesting to us.
Likewise, for the agricultural sectors, we always said that it's a seasonality business, and we had a couple of bad seasons, and this year, the seasonality is positive. Again, with the climate change, with all the climate urgency that we're seeing, the seasonality will be even more fluctuating, and we're probably going to see a more volatile market conditions. On that one, we're still committed because we believe that in term of food security, food safety, and so on, this will be a core value proposition for us in the longer term, so we are quite bullish on that. The only one is still on clean technological geopolitical situation and the influence of energy transition is obviously oil, gas, and chemicals.
Again, oil, gas, and chemical is a lot of company in there. While we focused a lot on the burning of the fuel, you also have the petrochemical industry, energy, the gas, the chemical industry, and so on. All that aspect makes that we're still quite interested into our natural resources sectors. More so than I think I already said in the past, just walking away from it does not resolve the problem for the planet. We're more looking at changing the way we look at our services to help our customers to be more sustainable, rather than just walking away from the sector altogether. This is the way we're looking at for the moment.
Thank you. The next one, is for health and nutrition: Over what time period would you expect the health science lab capacity become more fully utilized to improve the divisional margins? If I start with Frankie, and then if Dominik has any additional comments.
It will depend on the different locations. I think we have as excess capacity in some locations. For example, in Glasgow, I think we are wrapping up our volumes to replace some of the COVID testing that we had. China is emerging. We invested quite significantly into China. We're expecting the volumes to pick up in the next couple of years. We're looking at the further development in India as well. There are capacity in there that we need to further enhance and build upon. In Europe, the capacity is well utilized, with some up and down.
For the timing for the first half of this year, will it be slower than we anticipated. We should see the productivity back to a certain normality toward the second half of this year and moving into 2024. It will depend on the different regions.
Thank you very much.
Dominik, you want to add something or?
No, I think you were pretty conclusive. Yeah. Yeah.
Thank you. For Tom Burlton, he's got 3 questions. Tom, I think we've answered your health sciences one already, so I will assume that you can come back to me if you need to have that one answered, but I think it's been covered a couple of times. The first one is in CMP. Can you give some color on price versus volume? CMP looks like the only division where you haven't made reference to price increases or pricing initiatives in the statement. Can we infer that there's been less of a price tailwind there, and organic, we've seen, has been more volume driven or driven by the China recovery? Could you give more details whether there was a bigger cost versus price headwind here that might have affected margins? I think that's for Dominik, I would assume.
Yeah. Dominik?
Yeah. No, definitely. I mean, obviously, also CMP has price increases. I mean, all divisions have price increases, but CMP definitely to a lesser extent. They are definitely the volume is the stronger driver, but this has also to do, like I said before, with the underlying wage inflation and development markets, the end markets for CMP or where we are where the countries who strongly contribute to CMP, their wage inflation is also lower than what we than the average of the group. Definitely CMP is the area very benefiting or where the volume is the more dominant component to the growth.
Thank you. I'll ask Tom's second question. When we're thinking about the margin bridge for the second half, how should we think about the relative contribution from bad debt collections and the payoff from energy measures? What gives you confidence these bad debt collections will come through, and that's for Dominik, please.
On the energy costs, as I outlined, last year, basically, energy costs kind of ramped up from H1 to H2, because H1 last year, we still had, yeah, contracts in place prior to the Russian-Ukraine conflict, while then in the second half, we have seen the increase-.
[crosstalk]o be disconnected automatically in ten-
While we see in the second half last year, then higher energy costs, then this year, this year is just the other way around. That's obviously a contributor in a positive way. Regarding the bad debt, bad debt was in the first half mutual. I mentioned already last year we had a negative of CHF 20 million, so we're expecting definitely a clear positive in the second half of the year.
Regarding the confidence level, obviously, this is only there when the cash is in, but we are pretty confident because there is one particular client situation with a relevant bad debt position, where we have a kind of global commitment to resolve the situation, in the, yeah, I would say rather, in the beginning of the second half. This kind of verbal commitment gives us definitely confidence that we see their positive impact in the second half of the year.
Thank you, Dominik. We've got a quite a detailed margin walk question, from Paul, from Select Equities. I think you've talked about many of these points anyway. Dominik, if you want to give us a few more high-level comments, I'll read it out now. Could you give a more detailed walk on first half adjusted operating profit growth, cost savings, pricing? What are the offsets? How much is travel bonus energy up in the first half, and any other organic cost comments, please?
Basically, we have on the one hand, we have the restructuring savings, and you could say simplified around CHF 25 million. This is more or less eaten away by incremental travel costs and energy costs, roughly. Then, the kind of underlying wage inflation and pricing, as I mentioned before, we are pretty similar. The debt had no impact. Subsequently, you have some productivity increase leading to a 40 basis points margin increase in the first half.
Thank you very much. The final question is from Kourwan, from Alpha Value. Could you clarify for us if there's any pricing or margin advantage across sustainable solutions compared to other offerings? If yes, could you give some details behind it, i.e., leadership position, scale, competencies? Do you think that in the long term, it is reasonable to expect this part of the business will grow faster than the group average? That's for Frankie.
I'm sorry, which part would be sorry?
For sustainability solutions.
Yeah.
Compared to other offerings.
Sorry, all the offerings in the, in our own business?
I assume that is related to the framework, so it'll be the 47% that we have of sustainability solutions, of our internal sustainability solutions framework.
Well, I then I try to answer the question. We mentioned that in, if you look at the development of sustainability market out there, for the time being, a lot of the discussion is all about, currently all about, the auditing schemes across the latest regulatory framework, CSRD, and so on. I always said that these are really a snapshot of what the markets look like, how a company looks like in term of the way they are sustainable against this new directive.
As you move into the maturity of this process, it is clear that the company that has the more technical aspect and more technical skills to help those companies to migrate from their current snapshot of what they are toward what they need to be in the future, because these requirements will become more and more strengthened over time. We are well positioned in term of our portfolio, in term of the auditing, consulting, training, technical aspect of how we manage waste, manage chemical use, manage carbon emissions, so on. This is really the package of the portfolio that we see in term of long term, for us to have the differentiation against some of our peers or some of our, the other industrial players that will play in this particular market.
If I answered the question.
I think so, and of course, there's significant amounts of regulatory change going on at the moment as well.
Absolutely, as well.
That trend. With that, I think we'll draw the call to an end. Thank you very much for your time. As I said, we'll look forward to seeing some of you over the next weeks and then later in the year. Thank you very much.
Thank you.
Thank you.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.