SGS S.A.

Good morning and welcome to the SGS Q1 2025 sales update. My name is Ariel Bauer and I'm in charge of communications and investor relations. I'm here with Geraldine Picot, our CEO, and Marta Vlachkova, our CFO. Please note that this call is being recorded and will be available for replay on the SGS website. Throughout today's presentation, all participants will be in listen-only mode. The presentation will be followed by a Q&A session, and you can register for questions at any time by pressing star 1 on your keypad. I would now like to turn the conference over to Géraldine Picot, CEO of SGS.

Thank you, Ariel, and good morning, ladies and gentlemen. Welcome to this conference call about RQ1 sales. So, we had a strong quarter to start the year. In particular, I am very excited about it. We reported the highest quarterly sales ever, close to 1.7 billion Swiss francs, up 6.6%. This achievement is attributable to a strong organic growth of 5.6%, but also to our Bolton acquisition policy, which now significantly contributes to total growth. In a few minutes, I will comment in details on the drivers which have supported the market over the quarter. You will see that digital trust and sustainability have been instrumental here, confirming that we definitely made the right choice when we put them at the heart of our strategy. Looking at the months ahead, we recognize that we have entered into a period of economic uncertainty which is already impacting the forex. Nonetheless, based on what we have seen, we confirm our guidance as communicated in February. And I will comment further at the end of this presentation. Let's look at sustainability. The sustainability services have made a strong contribution to growth with major contracts signed across the four pillars of impact now, climate, circularity, nature and ESG assurance. For example, we see increased demand for sustainability coming from the textile industry. BlueSign, as an example, it's an SGS company, has been pioneering sustainability and textiles since 2000 and was one of the first companies in the world to implement comprehensive phase-out programs targeting forever chemicals, including PFAS. We are proud of our positioning at the forefront of sustainability services, which will continue to be a powerful value driver for SGS in the years to come. Digital trust also contributed significantly to growth in the first quarter, especially through advancements in artificial intelligence and cybersecurity services. We are proud to have issued the world's first AI management certificate for customer airport services to Shanghai Airport in Singapore. This marks a major milestone, demonstrating that artificial intelligence users can and must proactively manage safety, security and ethical risks. Additionally, all European BrightSight labs have successfully obtained the accreditation for cybersecurity certification at the highest assurance level. This achievement reinforces BrightSight position as the best option when it comes to connecting cybersecurity regulations across Europe, North America, and Asia. Finally, in Q1, SGS officially took over the responsibility for global management and independent certification of the digital trust label from the Swiss Digital Initiative. The label has already gained significant traction with adoption by leading organizations, including Swiss Ray and Cisco. We are committed to scaling this Swiss innovation internationally. Let's now look at another key value driver of Strategy 27, mergers and acquisitions. Here you can see on the map that so far in 2025, we have signed the acquisition of eight additional great companies to accelerate growth and profitability in attractive markets, especially in North America and in Europe. As with all of our investments, we apply strong financial discipline with criteria on growth potential, profitability, and of course, payback. So now on this slide, you can see the growth split across all end markets or business lines, and now I will go into the detail of each one of them. Let's start with industries and environment. The solid organic sales growth of 5.1% in the first quarter was led by environment and safety. Environment continued to benefit from double-digit growth in PFAS testing, with particularly strong activity in North America and Asia Pacific. Growth was partly offset by a soft start in routine testing. High single-digit growth in safety services was supported by increased demand for global safety solutions, particularly related to large industrial sites in the Americas and Asia-Pacific. Projects and advisory grew moderately as new wins in Eastern Europe, Middle East, Africa were partly offset by the completion of certain projects in Latin America. Industrial testing benefited from high single-digit organic growth in construction materials, partly offset by the end of some low-margin contracts in non-destructive testing, which we have chosen not to renew. We continue to see growing demand in areas such as greenhouse gas emissions, verification and monitoring, energy transition, including low carbon fuels. SGS continues to be committed and actively engaged in supporting clients in their sustainability journey. Let's now look at natural resources, which delivered resilient organic sales growth of 3.8%. Mid-digit, mid-single-digit organic growth in minerals was fueled by trade services and continued strong demand for critical raw materials and metals for battery testing, where we continue to invest. For instance, you have seen lately we have expanded by 20% the capacity of our battery testing laboratory in Georgia, U.S., to address rising demand for services related to light, electric, vehicles and energy storage. Growth was partly offset by some project delays in North America. Oil and gas and chemicals grew moderately on the back of lower trading volumes related to current economic uncertainties. Agriculture was stable as recovery in agriculture input solutions was offset by softness in trade services due to the poor crop season in Europe. Let's move to connectivity and product. Connectivity and product delivered strong organic sales growth of 6.9% in Q1. Connectivity delivered very strong organic growth with increasing activity in technology security, including functional safety testing, where SGS offers a comprehensive suite of services, particularly for industries where risk reduction and compliance are critical, such as automotive and semiconductors. Recently acquired businesses in North America also delivered a strong performance. High single-digit organic growth in Softline was driven by strong demand for sustainability services fueled by regulatory requirements and voluntary corporate actions in response to rising consumers' expectations. Finally, Hardlines delivered high single-digit organic growth supported by strong demand from automotive and home improvement retailers, and double-digit growth in Eastern Europe, Middle East Africa, Latin America, and Asia-Pacific. Let's now look at health and nutrition, which delivered excellent double-digit growth of 10.4%, driven by all segments. Food continued to grow organically at double digits, supported by emerging contaminants testing, advisory, and compliance. Pharma delivered high single-digit organic growth, driven by drug development and recovery in clinical research. Pharma will continue to be a key area of focus for ESGS. We have over 40 years of experience as a global contract research organization. and have built a strong reputation in delivering integrated services across a wide range of therapeutic products, including biologics, vaccines, small molecules, biosimilars, and advanced therapies. Cosmetics delivered excellent organic growth, supported by all regions, and increased activity arising from growing consumer demand for safety and new regulations. Lastly, let's review business assurance. Certification delivered mid-single-digit organic growth supported by medical devices and digital trust, which grew at double digits. Growth was partly offset by the fact that 2025 is a post-certification year for the core certification business of quality, health, safety, and environment. ESG continued to grow organically at double digits, driven by non-financial reporting assurance and social audits, as well as GHE, or greenhouse gas emissions verification. Consulting remained soft, with several projects on top delayed in North America and in the supply chain management segment. And with that, I will now hand over to Marta, who will present our Q1 sales.

Thank you, Geraldine, and a very good morning to everyone. I'm pleased to report a record start to the year with sales of 1.7 billion Swiss francs, which is an increase by 6.6% compared to the first quarter of 2024. First, the strong organic growth of 5.6% resulted in 88 million Swiss francs of incremental sales, highlighting the resilience of our business. Second, the pace of bolt-on acquisitions accelerated, delivering 1.3% of growth or 21 million of additional sales. And third, During the first quarter, the Swiss franc appreciated only slightly, leading to a small negative translation impact of 0.3% or minus 5 million Swiss francs. Let's now see the sales breakdown by region. In the first quarter, our testing and inspection division expanded organically by 5.8%. while the Business Assurance Division delivered 3.5% organic growth. In testing and inspection, the sales in Europe grew organically by 1.9%. Industrial testing was impacted by completion of low-margin contracts, while natural resources continue to suffer from the poor crop season. This was more than offset by high single-digit growth in pharma and cosmetics. Asia Pacific expanded organically by 6.1%, with high single-digit growth in connectivity and products, and health and nutrition, where food delivered a double-digit growth. North America sales increased by 3.9% organically, impacted by project delays in minerals and soft trading volumes in oil and gas. Eastern Europe, Middle East and Africa grew organically by 10.4%, supported by all business lines. And Latin America expanded by 15.7% with double-digit growth in all business lines. Our business assurance global division delivered 3.5% organic growth. As already mentioned by Geraldine, the strong momentum in ESG, medical device and food certification continued, while consulting remained soft. Let's now move and see more details on the successful script dividend take-up. As announced on the 17th of April, 63.3% of the dividend for the financial year 24 was elected to be paid in the form of new SGS shares, with the remaining 36.7% to be paid in cash. This represents a clear endorsement of Strategy 27 and allows SGS to reward the loyalty of its shareholders while redirecting close to 400 million Swiss francs of cash towards the acceleration of Strategy 27 execution. The delivery of the new shares and the payment of dividend is taking place today. With that, I hand it back to you, Geraldine.

Thank you, Martha. Let's move on to the outlook. Currently, there is uncertainty on tariffs and on Forex. However, we remain focused on executing Strategy 27 in such an economic environment. We will take action to sustain our market leadership and profitability in light of these uncertainties. Our business is Very resilient. We are confident in our ability to deliver the guidance as planned. An organic growth between 5% to 7%, 1% to 2% bolt-on contribution to sales growth, an improvement of the adjusted operating income margin by at least 30 basis points in reported terms, so in Swiss francs, and a strong free cash flow generation. And with this, I will now hand over to Valentina for the Q&A.

We will now begin the question and answer session. You can register for questions at any time by clicking on the Q&A button in the webcast and then pressing star 1 on the virtual keypad. If you are joined by phone, just press star 1. Please limit yourself to a maximum of two questions per person. One moment, please, for the first question. The first question comes from the line of Daniel Pyrki from Zöke Kartonalbank. Please go ahead.

Yeah, good morning, everyone. Two questions from me. First, which was the growth trend in the first quarter? Did you see some development there? And maybe which would be the moving part for the second one? And a second question regarding currency impact on profitability, since we had strong improvement of the Swiss franc in the last few weeks. If you could give us some flavor, what could it mean as it stands now? Thank you very much.

Thank you, Danielle, and good morning. Look, with regard to the currency, you know, it's true that since April, the currency has been quite volatile. And when the Swiss francs appreciate that strongly, it has an adverse impact on our margins. But we feel fully confident to, you know, to offset this negative impact and deliver on our guidance. We... I've taken a lot of initiatives, and we continue. We are fully on track on delivering on our restructuring and cost-saving plan, even a bit in advance, and we'll take additional steps. measures if need be. So we don't see that as an issue as far as our margins are concerned. You know that we report the margins in reported terms, so in Swiss francs, so that includes any adverse impact that we may face on the forex. On the growth trend, I would say that, you know, we have a slow start on industrial and environmental that we see developing better as we go through H2. And also the same for agriculture. You know, agriculture, natural resources has been flat in Q1. And as we go towards H2, we also expect improvement there. So that leaves us fully confident to deliver on our promises for the year.

Thank you very much.

Thank you. Next question. The next question comes from Sylvia Barker from JP Morgan. Please go ahead.

Hi, morning. A couple from me as well, please. Both on connectivity and products. Maybe just on connectivity, you said an acceleration. Could you maybe just talk a bit more about the rate of growth there and how that's developed over the quarter? And then within hard lines, you mentioned automotive specifically having strong demand. What regions and what kinds of clients and products is that related to? Thank you.

Okay. On CNP connectivity, this is effectively a fast-growing segment of our CNP division. And, you know, this is why we have done so many Bolton acquisitions in North America and Last year, it is growing fast, above 7% for the quarter, and last year was the same. So this is something that we continue to see and invest in, whether externally or organically. You had a question on hard lines. On the hard lines, on the automotive clients, products, we do a lot also around cyber when it comes to automotive CNP testing. And this is also, you know, a very strong demand that we see, high single digit. And this is mainly, I would say, with Asia-Pacific as we go. So it's really Asia-Pacific and Internet of Things, cyber, all this. You know, the cars are computer now, so that's all the testing we do around that. So there's a strong demand in Asia. We see a rather slower demand when it comes to Europe on that part of testing.

Okay, thank you.

You're welcome. The next question comes from Annalise Vermeulen from Morgan Stanley. Please go ahead.

Hi, good morning, Geraldine. Good morning, Martha. Two questions as well, please. So firstly, you've talked about continuing to see strong demand for sustainability services. Through the last four-year reporting season, we've seen obviously more companies stepping away from decarbonisation, net zero, ESG targets. So how do I reconcile that with the strong demand that you're seeing? Is it that you're not exposed to those customers in those segments, or do you see any risk to that from the pulling away of those targets? And then secondly, just on consumer and personal care within health and nutrition, you've talked about excellent growth in all regions. I think the picture that we've seen from Some of the players in that space, L'Oreal, et cetera, are talking about weaker U.S. consumer, declining U.S. sentiment. Are you seeing that at all in the U.S. business?

Thank you. Okay. All right. So on the health and nutrition, Martha, do you want to comment a bit on the growth that we see in the U.S.? ? Human testing? Yeah, well, okay. In the health and nutrition, what we see only is that, you know, everything, and that's also valid for sustainability services in a way, is that everything that touches the offering around sustainability, that touch the health, health of people, is responding to very, very strong demand. People, again... are caring about the quality of the water, the drink, the food they eat, the clothes they wear. So these sustainability services that we are providing are effectively responding to this very strong demand that the brands have to answer because their clients are asking for that. So you think about the safety in cosmetics. This is the same thing. There's more and more demand around safety of the cosmetic products. And that is the consumer pressure that, you know, independently from regulations, which are, by the way, not fading away when it comes to health and nutrition, on the contrary, are fueling our, you know, the demand for sustainability. And that is fueling our growth. So Is that all right, Annie?

Maybe on the second question.

Yeah, sorry, go on. Yeah, on the second question regarding the strength of consumer testing in the U.S., given the recent comments from L'Oréal, for example, for soft demand. What we see is we are very much involved in the R&D phase of those products, so it remains strong. So that growth driver coming from the continuous innovation that is required in the consumer product phase remains strong in Q1, and we have so far a strong pipeline.

We have a double-digit growth in North America when it comes to CNP and the connectivity in particular. Perfect.

That's very helpful. Just a follow-up on the first one. So this kind of customers and companies moving away from decarbonisation etc I suppose that's more relevant perhaps for things like your renewables business but it doesn't sound like you're seeing any pullback of demand there either No because you know frankly the regulatory policies most of them are still in place

And you don't see really a lot of companies that want to exit, even if there's less pressure in some areas of the world. So we're still having a strong demand for all our services.

Okay, perfect. Thank you very much.

Next question. The next question comes from Rory McKenzie from UBS. Please go ahead.

Good morning. It's Rory here. Two questions, please. Firstly, for connectivity and products, can you talk about how your clients have been reacting to the tariff announcements and uncertainty so far? I appreciate the Q1 was, of course, all before the 2nd of April announcements in the U.S., but there's been a lot of volatility and supply chain costs are increasing for lots of your customers. So anything you could say about their behavior so far would be very helpful. And then secondly, on business assurance, can you update us on the strategy to restructure or reposition the consulting business and what changes you started to bring in place so far this year? Thank you.

Thank you, Rory. I'll start with the tariff, your first question. So, look, the implementation of trade tariffs will impact the flow of product over the world. You know, it's clear that if you have a very high tariff for trade from China to U.S., that may lead to switches towards countries with lower tariffs, which may become more competitive than to export to the U.S. So that's something that we are following very closely. I think it is really too early to speculate on, you know, how is impact going to happen for our customers? I think that is a bit too early. So the only response is to work with customers, to be close to them, to work on their strategies. And we see a lot of potential as they are exploring move of their supply chain to other countries. Why? Because SGS has the most global network in the world in whatever country they choose, we're there. If they're unsure, we're there. If they change from another Southeast Asian country with more favorable tariffs, we're there. If it's Latin America, we're there. So that is for us also a source of opportunities, actually. So again, my response to your question is we're focused on our customer. We react even faster to any evolution of their needs, and we're In parallel. you know, working also on our costs, but that you know that we do that anyway. So that's about tariffs. On business assurance, yes, there is a fixing of the consulting business ongoing, notably the main point actually of which is the biggest part or the the main part of the business assurance, it's only 10% of business assurance consulting. So just to put things in perspective, I want to remind you that. And there has been delays, which has not helped us, for sure. But these are delays. They're not cancellations. So We are actually expecting to have, you know, a better flow of business when it comes to our consulting business in H2, and we will have, obviously, also less tough comparables as we go on in the year.

Okay, thank you.

You're welcome. Next question. The next question comes from Remo Rosenau from Helvetica Bank. Please go ahead.

Yes, good morning. Thank you. I would like to come back again on the quite clearly confirmed outlook despite tariffs and forex. You mentioned it today and you mentioned it in the press release that you will take action to sustain market leadership and profitability in light of these volatilities and trade tariffs. This sounds like there might be even additional measures necessary above and beyond the ones you have already communicated in connection with strategy 27 and so forth and so on. So what could come on top of that in order to counter all these issues at the moment?

Yes, good morning, Remo. Look, I think it's just clear that when we see what's happened so far since the beginning of the month of April, there are two things, right? There is the trade tariffs. And here, as I said, you know, any disruption that it would create in supply chain of some of our clients, As I said, we will follow, and we are the best place to take advantage of that. And then there is the forex. And the forex... could lead to an adverse impact on our margins. And we will be able to more than offset that as we are going to generate more efficiencies and look closer at our savings plan and accelerate the execution and add some more if necessary.

Okay. And will that also entail some additional extra costs?

No, not as we see today, no. No, no, no. It's just an acceleration of what's being planned and generating more efficiencies.

That's all. Great. Second question, looking at the pace of your M&A strategy, Are the 1% to 2% additional contribution on sales growth via bolt-on acquisitions, might that not be a bit low looking at the price you show?

Well, let's just continue. You see that the relaunch has been quite effective, and we are becoming more and more active to effectively look at what makes sense, what we consolidate, what synergies we can bring, and all bolt-on, all acquisition we do, Raymond, are accretive on our growth, organic growth, and on our profitability. So more and more of that is needed, obviously, and we'll continue on that path. So for the moment, we want to keep the 1% to 2%, but if we can do more, we'll do more.

Okay, great. My last question. The planned move to Duke, what is actually the timing there, and What might the implication be on the tax rate looking forward?

Look, the move is planned for the end of this year to Zouk. And, yeah, we do expect some favorable impact on our tax rate going forward. But it's too early to give you a guidance on that. Be a bit patient.

Okay. Good. Thank you, Geraldine.

You're welcome, Remo.

Next question. The next question comes from Neil Tyler from Redburn Atlantic. Please go ahead.

Thank you. Good morning. Two questions, please. Firstly, back to the topic of M&A, how are you thinking about the sort of broader context of your U.S. growth ambitions and M&A in the context of obviously the less certain policy and economic outlook? And have the recent events changed altered the availability of assets to an extent that you've been able to see so far? That's the first question. Second, on industries and environment, I just wondered whether you got any sort of insight into the project and work backlog that relates to the more traditional energy-related inspection work and how that's developed over the last couple of months, please. Thank you.

Yes, good morning Neil. I will start with M&A, your question on M&A, and then I will continue on your question about the work backlog on industry and environment. To me, in this broader context, as you said, it is still very pertinent, obviously, to invest in North America, and we will do that. There is a strong demand in North America for the end markets that we have elected, which is pharma, cosmetics, connectivity, and we continue to invest organically and by acquisitions in these end markets. You know, that's the first economy in the world, and it will continue, and this is a key market for us. So the strategy 27 from that angle is fully relevant, and we do see a strong demand to continue for our services, obviously, in North America, in the areas I mentioned. Okay, then for industry and environment, look, there is a lot of new energy infrastructure ongoing. So we do see that they're going to be a good backlog of inspection with regards to all the new energy infrastructure that is in preparation and that we see going on in Middle East, in Asia, but also actually in North America. We'll see that.

That's great. Thank you very much.

You're welcome.

Next question. The next question comes from Suazini Varanasi from Golden Stocks. Please go ahead.

Hi, good morning. Thank you for taking my questions. Just a couple from me, please. In Natural Resources, you had indicated that there were some project delays in North America. Was that reflecting the macro uncertainty, and do you still feel that these projects will come back in the second half of the year? Secondly, when you think about margin expansion for this year, I appreciate your full year guidance of at least 30 basis points improvement. But when we have to think about phasing of margin expansion first half and second half, is it fair to assume that the first half will see more margin expansion year over year versus second half? Thank you.

Well, thank you. Look, on your first comment, you know that we had cold weather very recently. very bad weather in North America at the beginning of the year. And that has slowed down notably a lot of the mining projects in Canada and Q1 due to the weather. So that explains, and I think that answers your question with regard to natural resources. On the margins expansion, yes, we have guided 30 BIPs for the year. And I always said everything that we do more will be reinvested so as to, you know, build for the growth also of the years to come. Remember, we are in reported terms. We have the ONMI. company in this sector guiding in reported terms when it comes to our margins. So you will appreciate that 30 business points is a good margin expansion in full Swiss ranks for 2025-2030. And I don't think the, you know, the trend or the phasing is that relevant at the end of the day. So I would keep it on a full year basis. Thank you.

Okay. Okay. Thank you.

Next question. The next question comes from Arnaud Payet from CIC Market Solutions. Please go ahead.

Yes, good morning. Thank you for taking my questions. The first one is regarding M&A, but this time on the disposal side. I would like to know if you have fully completed the review of your different assets, or can we still expect some non-core assets to be disposed? From your previous answer, I understand that consulting is still considered as a core business, but can you confirm? And my second question is regarding Europe and the coming increase in defense budgets. I would like to know if you have some kind of exposure to this sector and maybe through cybersecurity. So can you give us a bit more details about your kind of exposure to the defense sector? Thank you.

Okay, thank you, Arnaud. Thank you very much. So on the non-core assets, there might be some other small divestments along the way that we effectively do in the years to come in order to continue to streamline the group, de-risk the group, and obviously optimize the portfolio. So that is possible, but that will not be significant divestments, I would say. The divestment we have just done, the non-core, that represents about 20 million Swiss rangs of revenue on a full year basis, so it's not significant. Yeah, it's not significant. The consulting, you mentioned, is the consulting core or not core? It depends. You know, consulting is very large. So obviously what we need is to have synergies, cross-selling when we invest in a consulting business. So everything that can't bring that ultimately would be considered its non-core, yes. When it comes to your last questions around Europe, defense budget, look, you know, all defense and supporting industries are a true opportunity. And there is, you know, we're weighing it and there is room to grow. You're right on the cyber. It's already an area where we are delivering some services. But I think there's much more we could potentially do. Yeah.

Next question.

Thank you.

Thank you, Amo. The last question for today's call comes from Arthur Traslov from Citi. Please go ahead.

Good morning, everyone. Thank you very much for taking my questions. The first question was, I just wondered, you obviously talk a bit about contract pruning you've done in industries and environments. I just wondered how much organic growth that cost you and what your organic growth might have been had you not done that. And second question, obviously another company that does food and sort of biopharma type testing reported yesterday much slower growth than what you guys have managed to produce. I guess, you know, and obviously the market, particularly on the pharma side, seems to have been quite depressed. So I just wondered if you could expand on how you've done so well there. And then third question, as of current FX rates, how significant is the margin headwind for the full year? Thank you.

Thank you. Look, I will let Marta answer your first question about the non-destructive testing contract that we have left apart to give you an idea of what it represents in terms of growth. It does impact our organic growth.

Yeah, higher, no, it's higher, sorry, it's around 0.5% of growth. Yeah.

Yeah, absolutely. Maybe before coming to the food and pharma, on margins, yes, as I said, it's not new. We are reporting in Swiss francs, nothing new there. And it has an adverse impact on our margins as the margins are done in other currencies than the Swiss. So we are fully equipped to offset that adverse impact. And let's not speculate on how much it's going to be because Forex is quite volatile, as I said. I think what is important is that we will deliver upon all guidance in reported terms and will improve our margins in Swiss francs. Then you mentioned about food and pharma. I think that the key here is to be close to clients. And we do have a strong level of trust from our clients in this segment. This is valid for Europe. This is valid for North America and globally. And that is our main asset. So, you know, I don't comment on my competitors. I just would say that we've done an excellent job and we'll continue.

Thank you very much.

You're welcome. Thank you, Arthur. That was the last question. So was this... I'm going to conclude that we have delivered, as you know, a very strong Q1 thanks to the continued fast execution of Strategy 27. I am very proud of our strong performance in sustainability and digital trust and of our eight successful Bolton acquisitions, which accelerate both our growth and profitability. We remain focused and we have a customer-focused team on the technical, on the commercial, and with all the passion we have, I am fully convinced that we're going to execute Strategy 27 at full speed and that we have a very exciting future ahead. So thank you for participating and listening.