Intertek Group plc

Good day, ladies and gentlemen, and welcome to Intertech November 2024 Trading Update. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. If you wish to ask a question, we ask that you please use the raise hand function at the bottom of your Zoom screen. If you have dialed in, please select star nine to raise your hand and star six to unmute. Instructions will also follow at the time of Q&A. We would like to remind all participants that this call is being recorded. Questions will follow after the presentation. I will now hand over to Andre Lacroix, Chief Executive Officer, to start the presentation.

Good morning to you all, and thanks for joining us on our call. I'm with me, Cam Dizio, CFO and Denny Moreau, VP of Investor Relations. There are five key takeaways in our call today. In the July to October period, we have benefited from a strong demand in consumer products, corporate assurance and health and safety, where we delivered 9.5% like-for-like revenue growth on a combined basis. Trading was in line with our guidance in industry infrastructure as well as At the end of October, we've delivered a strong margin progression and an excellent free cash flow performance. We are on track to deliver a strong performance in 2024, and we are well positioned to deliver another strong performance in 2025. I want to start our call today by answering the most frequently asked questions in our investor meetings. And the first question we get is how strong was the demand for your ethics solution within consumer product in H2? We've seen, indeed, a sequential demand acceleration with like-for-like revenue growth of 9.4% in the last four months compared to 6% in H1. This acceleration was driven by a strong double-digit like-for-like performance in soft lines, benefiting from our clients investing in new product development and sustainability solutions. Momentum in our electrical business remained robust with high single-digit like-for-like growth, while our hotline business grew at mid-single-digit. GTS has benefits for an improvement in reporting mid-single-digit like-for-like revenue growth. As a result, we are upgrading the fully outlook in consumer products to high single-digit like-for-like revenue growth. The other question we get very often is how is your China business performing in H2 and how confident are you about the growth opportunities in China moving forward? Following a 5.6% lack-for-lack revenue growth in H1, we saw an acceleration of momentum in China, which delivered a lack-for-lack revenue growth of 7.4% in the last four months. That acceleration was driven by higher demand for softline, electrical, hardline, and assurance businesses, as our clients increased their investments in new products and in sustainability solutions. The Chinese export economy is very strong, up 5.2% on a year-to-date basis and up 43.5% compared to where it was in 2019. China has a track record of manufacturing excellence and strong customer service, with fast times and highly efficient. That's why China's share of the global export economy has increased consistently in the last 20 years. with 18% global share today compared to 7% in 2000. Importantly, China's consistent investments in new end markets have resulted in strong diversification of export revenue streams, with APAC being the largest export partner, growing at a double-digit rate and now two times bigger than the U.S., which is only 15% of the total China export. That strong global export performance from China over the years has continued recently, and since 2017, Chinese exports have increased at a CAGR of 8.4% per annum overall, 6% for North America, 9% for Europe, 11% for the APAC region, and 11% for the rest of the world. We are confident about the short, medium, and long-term growth opportunities in China, given the manufacturing excellence that China offers to Western brands and, of course, the untapped opportunity in the domestic market. The question we also get is, should we be concerned about potential tariff increase after the election of Donald Trump in the US? And why did it happen last time? Let's take a step back. The tariff imposed in 2018 didn't have any impact on Intertech. Our China revenue has grown at mid-single digit between 2015 and 2023. We delivered mid-single-digit life-for-life revenue growth in the 17-19 period and in the 19-23 period. What matters to our consumer product business is the number of SKUs we test and not the quantities of goods that are produced and exported. As we talked about several times in the past, changing production location is a high risk for any business, and we've seen only a handful of companies leaving China. What we have seen, however, is more and more companies pursuing the China Plus One strategy, which consists in building the supply chain for new businesses in a new country to operate a more diversified footprint. The China Plus One strategy of our clients is an exciting growth opportunity for Intertech because it simply makes our ethnic market bigger. When a client expands its footprint in new countries, it increases the number of SKUs that we have to test and certify. as well as a number of factories and tier one, tier two, tier three suppliers that we have to audit and inspect. We talked about that during our H1 presentation. We've made significant investments in our network to support the channel plus one strategy of our clients, including near-shoring and on-shoring. And we are continuing to expand opportunities globally for our clients, anticipating their need and leveraging our capital light business model. It's very easy for us to open new labs around the world. Importantly, our geographical diversification is strong, with 35% of our revenues in APAC, of which 50% is outside China. The U.S. is a strong market for Intertech, accounting for 31% of our group revenues, and we are well-positioned to benefit from any onshore activities, thanks to our presence across all business lines, building construction, electrical, connected world, Hard lines, soft lines, business assurance, sustainability, cadet breadth, transportation technology, and Moody. Net-net, we are not concerned about increased protectionism. China plus one will make the ATIC market bigger for Intertech. China will not run out of growth. Acceleration in the diversification of supply chain of our clients is a growth opportunity for our ATIC solutions. What really matters for us is the number of SKUs in the global market that need to be tested and certified. And second, the number of factories and tier one, two and three suppliers that we need to audit and inspect. The other question we get is how sustainable is the like for like growth acceleration that you've delivered since 2022? And are you confident to deliver mid single digit like for like revenue growth in 2025? We are very excited about the organic growth prospects for the group. Companies have increased their investments over the years in risk-based quality assurance, given the growing challenge they face in the supply chain, but also given the higher consumer expectation in quality, safety, and sustainability. Our customer research shows that these well-known structural 80 growth drivers are being augmented by the need for companies to operate with safer and more resilient supply chain. Continued investment by corporations in new products and services, a step change in how companies manage sustainability, Increased investments in traditional oil and gas and renewables, and of course, an increased number in terms of new clients. Our clients will continue to invest more in risk-based quality assurance moving forward, and we are well positioned to deliver faster growth, capitalizing on our strong market position. We have seen a sustainable mid-single digit lag for ag revenue growth over the years, 4.9% in 2022, 6.2% in 2023, and 6.3% year-to-date in 2024. We expect to deliver mid-single digit lag for ag revenue growth in 2025. The other question we get is regarding pricing. How will our pricing policy evolve in the next few years, given a lower inflationary environment? In the last three years of higher-than-usual inflation, around one-third of our like-for-like revenue growth was driven by pricing. As discussed, in 2022 and 2023, the increase in our prices have lagged a bit the rise in wages, impacting our margin performance. We plan, therefore, to continue to take price increases to close that gap in the next few years. We are focused on delivering a superior customer service and will continue to strengthen our pricing position through 80 price increases increasing the average number of tests per report through upselling and, of course, scaling up our margin-accretive innovations. Let's now talk about the trading performance in the period by business line. In the last four months, the group has delivered a 6.6% lack-for-lack revenue growth at constant currency, which is in line with our expectations, and a 50 bps higher than H1. We've seen a sequential lack-for-lack revenue growth acceleration in consumer products and corporate assurance. Health and safety revenue growth was in line with H1, Our lack-for-lack revenue performance was in line with guidance in industry and infrastructure in the world of energy, despite severe weather conditions in the U.S. that impacted our building construction, calibrate, and industry services. Our consumer product division delivered a lack-for-lack revenue growth of 9.4%, which was an acceleration of 340 bps compared to H1, driven by a strong acceleration in softline and GTS, while both electrical and outlines delivered a lack-for-lack revenue performance in line with H1. Our corporate assurance division delivers a lack-for-lack revenue growth of 9.9%, an acceleration of 160 bps compared to H1, driven by an increased force to save these solutions inside business assurance and assurances. Our health and safety division delivers a lack-for-lack revenue growth of 9.1% at constant currency, in line with H1, with double-digit lack-for-lack revenue growth in food and agri-world and mid-single-digit growth in chemical and pharma. Industry and infrastructure report a 1.1% lack for lack revenue growth in line with our guidance, slightly lower than H1 due to a baseline effect in industry services and minerals, continuing weak demand in the building construction in the U.S. and the impact of several weather events in the U.S. on building construction and industry services. The world of energy delivered a 6.3% lack for lack revenue growth in line with expectations and slightly lower than H1. Transport technology accelerated significantly to double-digit lack-for-lack revenue growth. Caledbret reported mid-single-digit revenue growth despite a baseline effect and severe weather events in the U.S. And CEA lack-for-lack revenue growth was negative due to a baseline effect. Turning now to the performance at the group level on a year-to-date basis, revenue for the 10 months to the end of October was $2.8 billion, a growth of 6.6% at constant currency and 1.8% at actual rate. Life-for-life revenue growth was broad-based at 6.3% at constant currency, benefiting from both volume and pricing. Acquisitions contributed 13.4 million revenue on a year-to-date basis, and the recent acquisitions of Control Analytico, Paralink, and Basement Labs to scale up our portfolio in attractive growth and margin sectors are performing very well. Margin progression was strong, as we benefited from our divisional mix, pricing initiatives, good operating leverage, disciplined cost controls, and productivity improvement. We delivered an excellent free cash flow performance, enabling us to operate with a strong balance sheet. We continued to invest in organic and inorganic growth opportunities, and our RIC performance was excellent. Let's now discuss our financial guidance for the full year 2024. We continue to expect the group will deliver mid-single-digit like-for-like revenue growth at constant currency. In terms of businesses, we are raising our full-year guidance for consumer products to high single-digit. We are keeping our full-year guidance unchanged at high single-digit for corporate assurance, health and safety in the world of energy, and at low single-digit for industry and infrastructure. Given a strong H1 and an excellent poetry of earnings in July-October period, we are targeting a strong margin progression. Our cash discipline will remain in place to deliver an excellent free cash flow. We'll invest in gross this year of circa 125 to 135 million in capex. And we expect our financial net debt to be in the range of 500 to 550 million pounds before any M&A or forex movement. A quick update on currency for your model. Currencies have remained volatile, as we know, and we are updating our full year forex guidance. The average selling rate since the beginning of the year applied to a full year 23 results would reduce a full year revenue by 450 bps and full year earnings by 600 bps. Net-net We expect to deliver a strong performance in 2024 with mid-single-digit revenue growth at constant currency and a strong performance in margin, EPS, free cash flow, and ROIC. A few words on strategy. All of us at Intertech are super energized about the exciting growth opportunities ahead, and I'm pleased to report that the execution of AAA strategy that we presented last year is on track. Our clients understand the mission-critical nature of risk-based quality assurance to operate with high-quality safety and sustainability standards and make their businesses stronger. We are indeed experiencing a faster growth for ATIC solution. Marginal accretive revenue growth is central to the way we deliver value and we are confident that we'll return to a 17.5% peak margin performance and go beyond. To deliver sustainable growth and value for shareholders, we will stay very focused on our virtuous economics, based on the compelling effect year after year of mid-single-digit like-for-like revenue growth, margin accretion, strong free cash flow, and disciplined investments in high growth and high margin sectors. We truly believe in the value of a creative, disciplined capital allocation, which combines consistent margin equity revenue growth and strong cash generation is the only way to deliver superior ROIC and consistent basis. To do so, we pursue the following priorities in terms of capital allocation. Our first priority is to support organic growth, strengthening capital expenditures and investment in working capital. Our second priority is to deliver sustainable returns for our shareholders through the payment of progressive dividends. We target a payout ratio of 65%. Our third priority is to pursue M&A activities that strengthen our portfolio in attractive growth and margin areas provided we can deliver good returns. Our fourth priority is to maintain an efficient balance sheet with the flexibility to invest in growth. Our leverage target is 1.3 to 1.8 net debt to EBITDA, with, of course, the potential to return excess capital to shareholders subject to our future requirements and prevailing macros. Our good-to-great journey at Inditech continues to unlock this significant value growth opportunity ahead. So let me summarize the highlights of our statement today before taking your questions. The demand for ATX solutions in the last four months was strong, with 9.5% like-for-like revenue growth in the three divisions combined that represent 74% of our earnings, consumer products, corporate assurance, and health and safety. The performance of our two other divisions, industry and infrastructure, and the world of energy, was in line with our guidance. We are converting our 6.6% revenue growth at constant currency on a year-to-date basis into strong margin progression and excellent free cash flow. IN24 will deliver strong performance in line with our targets, and we are well positioned to deliver another strong performance in 2025. Thank you for joining our call today, and we'll now answer your questions.

We will now start the Q&A. If you are dialed into the call and wish to ask a question, please use the raise hand function at the bottom of your Zoom screen. If you have dialed in via phone, please select star nine to raise your hand and star six to unmute. We'll take our first question from Rory McKenzie of UBS. Please go ahead.