Intertek Group Plc Ord

And ladies and gentlemen, thank you for standing by, and welcome to the Intertech 2023 Half-Year Results Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If you should require assistance during the call, please press star, then zero. As a reminder, today's conference is being recorded, and I would now like to turn the conference over to your host, Mr. Andre LeCroy. Please go ahead, sir.

Good morning to you all, and thanks for joining us on our call. I have with me Colm Deasy, our CFO and Daniel Moreau, VP of Investor Relations. I would like to start our call today recognizing all of my colleagues at Intertech for having delivered a robust financial performance with revenue growth acceleration, margin progression, and a higher ROIC. Some of you got to meet my senior team at the Capital Market event in May when we presented our AAA growth strategy, and I would like to give them a special thanks. There are a few takeaways in our presentation today. Our AAA growth strategy is in place to capitalize on the faster AT growth opportunities ahead. Our like-for-like revenue growth momentum is accelerating, and we have delivered our highest like-for-like revenue growth in the last 10 years. We have made very good progress on margin as we benefited from our pricing and productivity initiatives. Our RIC is much higher than last year, We've delivered a strong free cash flow. And last but not least, we are extremely pleased to announce this morning a double-digit increase in the interim dividend. So let's start with our performance highlights. We have indeed delivered a robust financial performance in the first half. Group revenues up 8.3% at constant rate and 9.9% at actual rate. Like-for-like revenue growth of 7.1% at constant rate. Operating profit was up 13.3% at constant rate and 12.9% at actual rates. We saw robust operating margin of 15% up 70 basis points at constant rate year on year. EPS growth was 10.6% at constant rate and 10.1% at actual rates. RIC of 19.3% was up 120 basis points at constant rate and 260 basis points at actual rates. Our cash generated from operation was super strong, 270.5 million, up 13.6%. Our free cash flow was robust at circa 80 million. We are investing in growth. And as you can see, our CapEx and M&A investments are up year on year. And as I just said, our interim dividend of 37.7% is up 10.1% year on year. And last but not least, we continue to operate with a very strong balance sheet with a net debt to EBITDA ratio of 1.1. Let's now discuss our like-for-like revenue growth, which, as I just said, at 7.1% at constant rate was the best performance in the last 10 years. We are indeed seeing an increased demand for ATX solutions and like-for-like revenue growth was driven by both progress on both volume and price. Given the change we've made in terms of disclosures on the slide here, we are showing a like-for-like performance using the previous and the new disclosures. So looking at the results through the previous disclosures, our product and trade divisions delivered mid-single-digit like-for-like, while our resource business delivered double-digit like-for-like. Looking at the like-for-like revenue growth performance based on the new segmentations, we delivered double-digit like-for-like in corporate assurance as well as in industry and infrastructure, We saw a high single-digit like-for-like in the world of energy, health and safety record a mid-single-digit like-for-like, and consumer product delivered, as expected, a low single-digit like-for-like. Our China business rebounded strongly after Chinese New Year, following the relaxation of the COVID restrictions in January, and we've delivered a like-for-like revenue growth of 7.3% at constant rate. Outside of China, our like-for-like revenue growth was 7%. Our geographical portfolio is strong, and we have the right exposure to the right growth opportunities in the global economy. Our revenue growth was broad-based, as you can see on the slide from a geographic standpoint, with Americas, EMEA, and APAC growing respectively at constant currency by 7.8%, 7.6%, and 9.4%. We are really proud of the margin we delivered at 15%. up year-on-year by 70 basis points at constant rate and 40 basis points at actual rate. As you know, marginal equity revenue growth is central to the way we deliver value. We have a superior ethnic customer service, which we discussed in May, and that gives us a strong pricing power and high retention rates. We allocate capital targeting the attractive growth and margin segments. We are laser focused on that. And our performance management discipline is, of course, well embedded in the organization with the data advantage we have side by side. We announced the cost reduction program in March that targets productivity opportunities based on operational streamlining and technology upgrade initiatives. The execution of the cost reduction program is on track, and we saw 10 basis points of margin improvement in H1 due to that. In H1, we've also identified additional restructuring opportunities which would deliver an annualized savings of $4 million and circa 1 million benefit in 2023. So when you bring the two programs together, 2022 and 2023, our cost reduction program should deliver an annual savings of 19 million pounds with an expected 7 to 8 million pound savings on annual basis, and of which, sorry, in 2023, of which 1.7 million has been delivered in H1. Looking at our margin performance through the PTR disclosures, our margin increase of 70 basis points was driven by margin progress in products and resources while trade was down. The margin performance based on the new divisional disclosures show that we've made good progress year on year in three of our five divisions, and I will give you more details later on the call. The recent SAI, GLA, and CA acquisitions that we've made to scale up our portfolio in attractive growth and margin sectors are performing well in line with our expectations. Later in the presentation, you will see how these three acquisitions have contributed to our growth performance in H1. The integration of the recently announced acquisition we made in Brazil, Control Analytico, is on track. I will now hand over to Con to discuss our H1 results in detail.

Thank you, André. In summary, in H123, the group has delivered a robust financial performance. Total revenue growth was 8.3% at constant currency and 9.9% at actual rates, as beneficial movements in FX rates impacted our revenues by 160 basis points. Operating profit at constant rates was up 13.3%, to 245.5 million, delivering a margin of 15%, up year-on-year by 70 basis points. Diluted earnings per share were 95.2%, growth of 10.6% at constant rates and 10.1% at actual rates. The group delivered adjusted cash from operations of 270.5 million of year-on-year by 13.6%, and adjusted free cash flow of 79.6 million was down year-on-year by 16.2 million, as growth in operating cash flows was offset by higher capex investments and higher net financing costs. We finished H123 with financial net debt of 791.3 million, which is down year on year and represents financial debt to adjusted EBITDA ratio of 1.1. Now turning to financial guidance for 23, we expect net finance costs to be in the range of 40 to 42 million pounds, We expect our effective tax rate to be in the range of 25.5 to 26.5%. Our minority interest to be between 22 and 23 million pounds and capex investment to be in the range of 115 to 125 million pounds. I will now hand back to Andre.

Thank you, Colm. I'll now summarize our performance by division, but clearly there is much more detail in the R&S, and all comments I will make in this section will be at constant currency. Our consumer product delivered a revenue which was in line with our expectation of circa £468 million, up year-on-year by 1.1%. Our low single-digit like-for-like performance was driven by low single-digit like-for-like in soft lines and hard lines, mid-single-digit like-for-like in electrical and connected world, and double-digit like-for-like in GTS, which was due, as you know, to the non-renewal of two contracts last year. Operating profit was circa £117 million, with a margin of 25%, which was down year-on-year by 140 bps. due, of course, to the revenue decline within GTS and the low single-digit lack-for-lack performance in softlines and hardlines. In 2023, we expect the consumer product division to deliver low single-digit lack-for-lack revenue growth. Our corporate assurance delivered a stellar performance with a revenue of £232 million a per year by 12.5%. Our double-digit lack-for-lack revenue growth performance was driven by double-digit lack-for-lack in business assurance and mid-single-digit life-for-life initiatives. We are really pleased with our operating profit of £48.2 million up year-on-year by 31.7%, resulting in a margin of 20.8%, 300 bps up year-on-year. Indeed, we benefited from both strong operating leverage and productivity gains, including, of course, the benefit of the cost synergy post the SAI acquisitions. In 2023, we expect our corporate assurance division to deliver high single-digit lack-for-lack revenue growth. Our health and safety business delivered a revenue of circa 157 million pounds up year-on-year by 7.9%. Our mid-single-digit lack-for-lack revenue growth performance was driven by mid-single-digit lack-for-lack in agri-world, high single-digit lack-for-lack in food, and mid-single-digit lack-for-lack in chemical and pharma. We delivered an operating profit of $16.5 million with a margin of 10.5%, which was down year-on-year by 70 bps, essentially due to the country mix effect within AgriWorld and the investments in capability we are seeing in chemical and pharma and expect accelerated growth there. In 2023, we expect our health and safety division to deliver mid-single-digit, lack-for-lack revenue growth. Our industry and infrastructure business delivered a revenue of £427 million up year-on-year by 10.5%. Our double-digit like-for-like revenue growth performance was driven by double-digit like-for-like in industry services, double-digit like-for-like in minerals, and mid-single-digit like-for-like in building construction. We are really pleased with the operating profit of £37.3 million up year-on-year by 36.1%. which gave us a margin of 8.7% up 160 pips year-on-year. We benefited indeed from operating leverage and productivity gains. In 2023, we expect our industry infrastructure division to deliver high single-digit like-for-like revenue growth. Our world of energy business delivered a revenue of £356.6 million, up 13.5%, another stellar performance in that division. Our high single-digit like-for-like revenue growth performance was driven by high single-digit like-for-like for calibrate and mid-single-digit like-for-like for TTA business. Our CEA business delivered an excellent H1, benefiting from an increased investment in solar panels worldwide. We delivered an operating profit of 26.6% and we're extremely pleased with the 87.3% year-on-year growth, resulting in a margin of 7.5% up 300 bps year-on-year, In that division, we benefit from operating leverage, productivity gains, and, of course, portfolio mix, given the high-margin nature of our CA business. In 2023, we expect our World of Energy division to deliver high single-digit, like-for-like revenue growth. At our capital market event in May, we presented our Intertech AAA growth strategy to unlock the significant value growth opportunities ahead. All of us at Intertech are laser-focused on taking the company to greater heights, putting our AAA growth strategy in action. We've made strong progress, as you know, between 2014 and 2022, delivering value for all stakeholders, and our good-to-great journey continues, capitalizing on our competitive advantage of science-based, customer-excellence, ethic advantage. Our clients understand the mission critical of risk-based quality assurance, to operate with higher quality safety and sustainability standards and make their brands and businesses stronger. We are experiencing faster growth for ATIC solutions and we expect that to continue. Our AAA growth strategy is simply about being the best for every single stakeholder every day. To do that, we are focused on the following goals. We want to be the most trusted TQA partner with every single customer. We want to be the employees of choice with every single employee. We want to deliver sustainable excellence everywhere in our communities. And importantly, we want to deliver sustainable growth and values for our shareholders. To deliver these goals, we have developed with our teams three simple, highly focused and compelling strategic priorities and strategic enablers to simply get better. We are already very strong, but of course, address the areas where we can improve true to our ever better culture. The critical drivers of our faster growth moving forward is, of course, our high quality portfolio. The depth and breadth of our ethics solutions position us really well to seize the increased corporate needs for risk-based quality assurance. All of our global business lines will benefit from exciting growth opportunities. We discussed that in detail in May. At the local level, our country business mix is strong with 55% of our revenue exposed to the fast-growing segment. Geographically, as I said earlier, we have the right exposure to the right growth opportunities in the global economy. In summary, our high-quality portfolio is poised for faster growth. Medium to long-term, we are targeting mid-single-digit like-for-like revenue growth at constant currency, with low to mid-single-digit in consumer products, high single-digit to double-digit in corporate assurance, mid to high single-digit in health and safety, mid to high single digit industry infrastructure and low to mid single digit in the world of energy. As I said earlier, margin accretive revenue growth is central to the way we deliver value. And our target is over time to return to a 17.5% peak margin that we achieved in 2019 and go beyond from there. Our confidence is simply based on three reasons. We had the proven tools and processes in place. We've demonstrated that in H1. We, of course, operate with a span of performance, which shows the opportunities we have, and we have a very disciplined, creative portfolio strategy. To continue to deliver sustainable growth and value for our shareholders, we'll stay focused on our Intertech Virtuous Economics. Our Intertech Virtuous Economics are based on the compounding 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. Importantly, we believe in the value of accretive, disciplined capital allocation. Here are our capital allocation priorities. Our first priority is always to support organic growth through capital expenditures and investment in working capital. The second priority is to deliver sustainable returns for shareholders through the payment of a progressive dividend, and we are targeting a payout ratio of circa 50%. The third priority is to pursue M&A activities that will strengthen our portfolio and attractive growth in margin areas, provided, of course, we can deliver good returns. And 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 the potential to return excess cash to shareholders subject to our future requirements or prevailing macros. We expect to deliver robust financial performance in 2023, and let's now discuss our guidance for the year. We expect the group to deliver mid-single-digit like-for-like revenue growth at constant currency, based on low single-digit like-for-like in consumer products, mid-single-digit like-for-like in health and safety, and high single-digit like-for-like in corporate assurance, industry and infrastructure, and in the world of energy. We are targeting, of course, margin progression year on year. Our cash discipline will remain in place to deliver a strong free cash flow. We plan to invest circa 115 to 125 million in capex, and our financial net will be in the range of 630 to 680 million pounds. A quick update on currencies for your model. Sterling, as you know, has continued to strengthen Q2, and we are therefore updating our forex guidance. The average selling rates in the last three months applied to the full year results of 2022 would reduce our revenue by 250 bps and our earnings by 400 bps. In conclusion, the value growth opportunity ahead is significant. These are exciting times for all of us at Intertech. We are entering the next phase of our good-to-great journey with a high-quality growth portfolio. Our portfolio provides our customers with leading ethics solutions in each of our global business lines. Intertech has the track record of consistent growth and value delivery based on a compounding effect of mountain accretive lack-for-lack revenue growth, strong cash generation, and disciplined investment in organic and inorganic growth. In addition to the exciting growth opportunities ahead, our portfolio has strong intrinsic defensive characteristics. The ethics solutions we offer are mission critical for our clients. Our clients need to operate safely in the global market We operate a highly diversified set of revenue streams, and we enjoy a strong and lasting relationship with our clients. Thank you for your time this morning, and we'll take any questions you might have.

And ladies and gentlemen, if you wish to ask a question, please press 1 then 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1 then 0 command. If using a speakerphone, please pick up your handset before pressing the numbers. And once again, if you do have a question, please press 1 then 0 at this time. And one moment, please, for our first question. And our first question comes from the line of Annalise Vermeulen from Morgan Stanley. Please go ahead.

Hi. Good morning, Andre. Thank you for the presentation. Good morning. Good morning. I have a couple of questions. So, first of all, you said you identified additional opportunities for restructuring in the first half. Could you comment a little bit on what those are, which divisions and what you're seeing, and whether you expect to identify more as you move through the second half of the year? And then secondly, I wanted to ask about consumer products and the potential for the margin recovery, given the dip in the margin year over year. Is this a case of waiting for some of your restructuring and cost-cutting initiatives to reap benefits, or do we just need to see operational leverage from volumes improving? and over what sort of timeframes do you think that that margin in consumer products could recover to historical levels? Thank you.

Thanks for your question. Look, let's just start with our restructuring program. As we explained a few months ago, we have not looked at our fixed costs for quite a long time at Intertech. Our previous restructuring programs was back in 2015 and 2016. And when you do a review of your fixed cost, you cannot look at every single part of the portfolio in one go. So we've done quite a bit of work in 2022, and that's what we announced in March. But this is an iterative process that's going to continue for a few years. We are taking our time to look at possible portfolios that would benefit from these initiatives. And you remember there are essentially three types of initiatives, right? Can we streamline the non-productive side of the organizations by basically consolidating operations and reducing the number of non-productive headcounts? Can we consolidate certain sites that will benefit from additional scale if we bring this together? And three, do we have opportunities from a technology standpoint to upgrade our operating systems essentially and make us more productive? So what we did in the first half, I would say, is more of the same. We've identified three additional sites and we've identified quite a few non-productive headcounts in the organization. There was not much in technology in the first half. I would say it's a continuous process. implementation of these programs. And we believe that it's going to take us, if you want, a while to complete this review because you want to do it step by step. And every decision you make is really, really important. And you want to have the right decision process. But it's part of our margin accretive revenue growth strategy that we talked about during the year. As far as consumer product is concerned, maybe let me use your question to to explain what we are seeing in this segment. I think the team has done a good job in the first half in soft lines and hard lines. considering the fact that retailers in North America and the U.S. continue to be careful with inventory management. I mean, you see the stats like I do. We are not in the situations where the inventory is much lower than it used to be. the demand is basically okay, and we're going to have to wait for the inventories to normalize to see an acceleration of demand in soft lines and hard lines. When it comes to our business in terms of soft line and hard lines, I'll come to you upon a margin. We are the market leader. We operate with the highest quality, and as I always said, when there is a slowdown in the market, you need to protect your IP. You need to protect your customer service capabilities. So, Don't expect us to do any restructuring from an operational standpoint, soft lines and hard lines, because we operate with a high margin. We are market leader. And yes, yes, the revenue growth at the moment is a bit below the inflation rate in these businesses, but it is temporary. We know that our customers are investing in sustainability, and we know that Once the inventory are normalized, we'll see some, you know, innovations, you know, investments from our clients. The second business that is in our consumer products is our electrical and connected business, which is, and we don't talk much about the business because we talk a lot about other divisions when we meet. But this is, you know, a legacy business. This is the Thomas Edison Heritage business. As you all know, we didn't see a reduction in revenue during COVID. So this business has been consistently delivering, you know, margin equity revenue growth year after year. Every month is a new record. So here, I'm not going to think of, you know, cost restructuring here. Here we are thinking of investing in growth to make sure that we can seize the ENC opportunities where we've got obviously synergies with our TT business. And of course, you know about the exciting medical device market. Of course, we talked about functional safety, the capital market. So here we are investing in growth because the business is really poised for faster growth. GTS is really the biggest challenge we have in this new division. It used to be in trade, and of course now it's in consumer product because it is consumer product related. I'm not concerned about GTS because it's a really well-run business. We've got huge disciplines, but we have to go through the negative operating leverage effect of having lost two contracts. To your questions, what's going to happen to the margin in this division, look, it will be progression through operating leverage and the implied productivity benefits we're going to get from there. But, you know, we're not planning any restructuring.

Thank you very much.

And our next question comes from the line of Rory McKenzie with UBS. Please go ahead.

Good morning. Two questions, please. Firstly, on the guidance, despite the strong growth at 7% in H1, you've also kept your qualitative guidance unchanged for mid-single-digit growth for this year. That could imply a slowdown anywhere to plus 6% organic in H2. So I wanted just to ask about that kind of outlook. Is it just the comparators you want us to be aware of, or are there any specific parts of the business that you think are maybe sequentially declining? And then secondly, following up on consumer products, can you say how long the double-digit negative drag in GTS is due to last? I can't remember when the contract ending kind of comps out. And then more broadly, what's your view of the customer base and the stocking cycle? It sounds like from your guidance, you don't expect it to get any better for you for all the rest of this year and for the winter season. and it's more about the 2024 news cycle, perhaps.

The last question, Rory, was about software and hotlines, right? Yes. Yeah, okay. Look, I think you're absolutely right to ask the question on guidance. Why aren't we changing our guidance, given the best lack-for-lack revenue growth we've given in the last 10 years of 7.1%? Look, when we give guidance, as you know, I always give guidance within the range. And mid-single-digit doesn't mean 5%. And if you read carefully my script, you will see how I've used mid-single-digit for certain lack-for-lack revenue growth. So there is a range, and I'm not worried about lack-for-lack revenue growth, but as you know, we're always very considerate and disciplined in terms of guiding. In terms of the base last year, Look, if you look at the group, we had the same organic growth in H1 versus H2. Having said that, if you look at, and I'll come to consumer product in a second, in soft run and hard lines, if you look at the fastest growing business that we are seeing in the first half, there will be a bit of a base effect because corporate assurance did extremely well last year, the same for industry and infrastructure, and calibrate. So yes, there is a bit of a base effect, but I don't want you to worry too much about it. Look, in terms of top lines and hard lines, and I'll come to GTS in a second, look, my sense is I don't call a change of trend in any market until I see it. So I'm going to be very honest with all of you guys. At the moment, I'm not seeing a reduction of innovation activities from our clients. I'm talking sequentially, Q2 versus Q1, but I'm not seeing any uptick yet in the demand in hard lines and soft lines around the world. Now, having said all of that, certain brands are doing better than others. And, you know, like I do, that with inflation, you know, being where it is, consumers are starting to look at price points. And the retailers that are focused on SKUs at a lower price point will benefit from, you know, the fact that certain brands are priced too high. So for us, This is the message I'm giving to my team that says, look, yes, I understand the inventory globally are where they are, as I just said to Annalise, but certain brands will do better than others. So, for instance, to give you some color, if I were to tell you that we saw incredible growth in India and Bangladesh in the last few months. Why? Because the brands producing there are the brands that are really focused on lower price points. And I think that's going to be the situation for a while. And we know that inflation is peaked and things will move step by step back to normal. But it's going to take some time. So to say it in simple terms, I'm not forecasting any change of trends in software and hardware for the second half. If it happens globally, if it happens, it's going to be positive news. But our focus is to make sure that we support the needs of our clients that are seeing good growth. And we keep providing superior customer service to our clients that are resolving our inventory challenge. And there are a few. I mean, it's public information. On GTS, look, it's going to take us until next year to start growing again. It's not a huge business. We have won a significant contract in Mozambique, which will help in 2020 of 2024. Is the second half going to be double G negative? I hope not. And I don't think so. But I think we're going to have to wait till 2024 to be back in growth. That would be my view at this stage. Hope it helps. That's all helpful. Thank you, André.

And our next question comes from the line of Oscar Valmas with JP Morgan. Please go ahead.

Yes. Good morning, Andre and Colm. Three questions from my side. The first one, going back on, I guess, the guidance for the full year, a very strong H1 margin, only 10 basis points for restructuring. I was wondering if you could give us some color on your thoughts for the second half around the moving parts. Could we expect a similar amount of constant currency margin improvement in the second half? That's the first question. The second question is on building and construction in, I guess, in the U.S., growing mid-single digit. Is it fair to say that some of the benefits from the IRA haven't really kicked through yet? And could you give us some color when you expect growth to improve or to accelerate? in B and C. And then the final question is just a smaller one on kind of the free cash flow was impacted by higher, maybe one-off cash interest and tax. Could you give us some guidance for the full year around that number? Thank you.

Okay. Thanks, Asghar. Look, your question on the margin is important. I mean, let me just use this opportunity to, you know, reassure everyone that margin accretive revenue growth from a P&L management is a way of working everywhere inside Intertech. We always try to make sure that we get the right volume and price mix in our revenue line. We are very focused on productivity metrics in existing businesses. Obviously, you've talked about the restructuring that we talked about. No matter what we say about the performance, we can always be better, and the span of performance is the best evidence that we are not at our maximum everywhere, and you heard it from Ross at the capital market event. As far as H2 is concerned, look, it is obvious that inflation is peaking, and therefore, the drag effect of inflationary pressure on costs on a margin should become less so. I'm not saying we're moving out of a sustained inflation environment, but there is a positive trend here. So that's good. We are not running out of growth, because we expect, as we said, the performance in lack for lack that just talked about in the previous questions. We'll have a greater benefit in the second half from the restructuring. I said, you know, in the core, we've benefited from around slightly 1.3, 1.5 million in H1, but we expect more in the full year. So that's important. On the flip side to it is that, you know, we had a very strong second half last year in terms of margin. As you know, we were at 17.9%. And, you know, we have to be mindful of the base. But all in all, we expect to continue to make progress on margin in the second half to deliver the targets that we have for the full year. I'm going to refrain, as you know, from giving you any targets or guidance in terms of the quantum of progress we're making. But I can tell you that everybody at Intertech truly believe in the central value of margin equity revenue growth to deliver value for our shareholders. It's important. As far as BNC is concerned, we are pleased with the development. That's true that the incentives that the government has put in place to attract additional infrastructure investments and certainly moving into the greener side of the economy are going to accelerate growth in the United States. And it's true that we've not seen the full effect of that because, as you know, in the building and construction business, people need first to make the investment decisions, need to go through the planning to get the authorizations to build the power plant or the solar panel infrastructure, whatever they want to build, or a new you know, refinery or carbon capture, and we are in phase two. So I would hope that BNC will continue to perform very, very well. As far as the free cash flow is concerned, well, the important point for me is operating cash flow, right? This is the cash conversions, how the team are basically, you know, converting the strong profit growth in cash, and this is doing very well. It's true that, you know, in our free cash flow, we had a few negatives. And, you know, we believe that we'll have a strong year in terms of free cash flow. So, you know, we are confident that we're not going to give an H2 free cash flow, you know, performance. We're giving a guidance for the full year net debt. And I'm not worried about free cash flow. Great. Thanks a lot, Montre. Thank you.

And our next question comes from the line of Neil Tyler with Redburn. Please go ahead.

Good morning. Thank you. Good morning. Two questions, please. Good morning. Firstly, the assurance activities. You said previously that you tend to have quite a good line of sight on the project pipeline, the demand there. So I wonder if you could share your perspectives on that and the growth opportunities. And any challenges that might be in the offering in terms of staffing that business to meet that pipeline? That's the first question. And secondly, back to hard lines, soft lines, I'm afraid, but I wanted to ask about, you mentioned the regional disparities in demand or variances in demand. Does that regional mix impact margins in either direction? Because one of your competitors noted quite recently that price pressure and slower volumes in China had meant that their hard lines and soft lines activities elsewhere generated higher margins than those in China these days. And so I wonder if you're prepared to share any thoughts on that. Thank you.

Yeah. Thanks. Look, I'll start with the second one. We are the global leader in terms of soft lines and hard lines. and as we talked about at the capital market events when we talked about supply chain moving here from here um there is no margin accretion or dilution really effect on global basis when volume moves around because you know we have very very strong margin in in china which is the energy of many companies including our competitors and we have very strong margin in vietnam in bangladesh in india so I'm not that concerned, but I respect obviously what our competitors see in their own portfolio, but it doesn't apply to us. Look, I'm really, really proud of what the team is doing on Assurance. I mean, just to remind everyone, you know, we had double digit, you know, last year, we've had another double digit performance this semester. This is obviously with SAI not being part of our base in terms of like-for-like. Where are we seeing the growth opportunities? Well, the simple answer is that companies have increased their focus on risk. There is no question about it. And it's as much as the functionality, if you want, of their supply chain, right, end-to-end. But of course, they need to get access to better data points We know the pressure they are under in terms of sustainability and traceability. It is doing very well. The pipeline or the backlog, as we call it inside the company, is strong. Is it a challenge to recruit people? It's no different than it was a year ago or two years ago. When you run a business like Intertech, you've got to basically work on being the best company in terms of attracting talents, recruiting them, giving them the opportunity to grow and excel and develop inside Intertech. And this is part of the business, because to deliver double-digit Lack for Agribusiness in 2022 in terms of assurance and to do it again in the first semester, you need to focus both on sales and talent. And our team wouldn't have delivered 2022 without having worked on recruiting the right people. So look, it's part of the way we do business. Is it more difficult than it used to be? No. Is it easy to recruit talents? Never. But it's what we're here to do because if our clients need our help, we need to develop and prepare the right colleagues. So now it's, I mean, look, as you know, we did a major play strategically on ATIC back in 16 and, you know, we are being proven right that this is the most exciting part of the industry, if you ask me.

Great. And just if I could ask a follow-up, just more broadly on talent acquisition, how within your plans, obviously growth is very impressive in the first six months. How do you see headcount broadly on average compared to last year over the 2023 period?

Yes, so it's a really, really important question. As you know, we disclose our headcounts on a yearly basis. And in terms of, which I think the question behind your question is, what is your staffing policy? So we have two, and I assume that your question is total intertech, not just assurance, right?

It is, yeah, yeah, yeah.

Yeah, so you have to think about headcounts, proactive headcounts, either in the lab-based business or in the field-based business. So in the lab-based business, where we have quite a lot of equipment and lots of tools and automation, We have productivity opportunities in every single site. I'm not saying that our sites are not profitable, but when you look at the metrics individually, we see opportunities. We also spend a lot of time reinventing our processes to become more efficient. So here we've got a clear process on how we approve additional headcounts. for an existing lab. It's simply based on where we believe the productivity thresholds are, i.e. above which you need to recruit, and then we do so. But it's always with the same approach, which is ever better, right? There is always a way to get better at productivity management. So it's not like, to make it simple for you, if your volume increased by 10% in the lab A, you're going to increase your productive staff by 10%. It's not the way it works. That's on the lab-based business. As far as the field-based business is concerned, it's different because essentially, if you look at an audit workforce, it's no different than the big four. A good workforce needs to be at 85%, 87% utilizations because you've got to travel, the admin work, et cetera, and so forth. And then when we plan for our insurance or inspector, you know, headcount investments, this is the model we pursue. So, as I said, at the capital market events, you have less, if you want to, fixed cost leverage in insurance than in lab-based business. But equally, as we all know, it is a high margin business and very, very, very, you know, predictable. That's very helpful. Thank you.

And our next question comes from the line of Arthur Truslove with Citi. Please go ahead. Hi, Andre.

Thank you so much for taking my questions. So the first question was, oh, I don't know, can you hear me? Yeah, I can hear you, Arthur. Good morning. Welcome. Perfect. Thank you. First question was just on what sort of level of pricing and wage growth have you actually seen? And are you able to give us an idea of how that compares with what you might have expected at the full year. Second question, I may have misunderstood your previous comments, but in your previous guidance, you said that you expected adjusted EBIT margins to increase in both the first and second halves. And obviously the guidance wording has slightly changed. Just to be clear, are you expecting the EBIT margin to increase in absolute terms in the second half or not? And then the third question was just on the minerals business um i guess you know clearly very strong in h1 but i think one of your competitors said that maybe things slowing a little bit as we move through the year i'm just wondering what you were saying thank you okay thanks arthur look on the margin uh well spotted i mean the reason why i didn't say h1 and h2 because with david margin acquisition in h1 and

if we want to deliver the guidance that we are giving, we have to deliver marginal accretion in H2. So the answer is yes, of course, we are not changing our guidance on that. On price and wages. So as I said earlier, the good news is that inflation seems to have peaked. I'm not obviously predicting the global economy, but based on my indicators, it seems to be the case. You saw the the results of the oil and gas companies this week. And of course, the reduction in energy price will trickle down in the economy. We know that a lot of companies, including our clients, of course, have increased their prices significantly during the last two years. And now they are seeing the negative effect of that and losing market share to private labels. and having, you know, volume problem is public. I mean, you've seen all the FMCG in London or Switzerland talking about it. So, and of course, you know, the policymakers are very, very, very focused on that. So the wage growth is in line with what we had in our budget. So we are, I think, bang in line with what we expected. So there is no No surprise there. And I think that moving forward, the pressure will be incrementally less on wage inflation. As far as price is concerned, we take a balanced approach. It's not one or the other. I think when you are a high-quality operator like Intertech, where you've got the best customer service, which we demonstrated at the capital market events, you command a premium price. So our starting position is very good. But equally, we want to get rewarded for the work we do. And we are passing, as you know, 50% of the wage cost to our clients. And in the first half, the balance was consistent with what we saw earlier, one-third, two-third. So I'm pleased with that because saying you just focus on volume and not price, it's a very dangerous situation. strategy because you know uh people in the organization says okay yes boss it's just volume right i'm just going to focus on volume and forget about price this is the wrong message to to give to say you just focus on price and that volume is also the wrong message so you know uh we believe uh in in in both price and and volume and what i said internally is what i said externally so and this is what the numbers are are showing look on minerals um I'm aware, of course, of some of the concerns that are in certain disclosures of certain companies involved in the sector. Look, as you know, minerals for us is a really good business, but not a massive business, right? We tend to, you know, to be focused on, you know, certain end markets. So we are really strong in Australia. We are very strong in Indonesia, in the Philippines. We are very strong in Africa, especially in Ghana. Our team has been focused for many, many years on diversifications i.e you know the base minerals that everybody knows but we are very focused on greener minerals um for the reasons that we all know and we discuss at capital market events we are of course investing in in technology if i were to you know just look at the numbers there is no question that we had an incredible 2022 with you know double digit revenue growth in 2022. And of course, we had double digit again this time around. So do I expect minerals to grow at double digit forever? No. Is this business running out of growth? No. What's really important for me is for the team to recognize, as we talked about at Capital Markets events, that portfolio management is very important. It's about selecting the high growth, high margin sectors. And the team is doing a really, really good job. And if you happen one day to be in Australia, I would invite you to visit our operations in Perth so that you could see firsthand how we're using our portfolio activities and technology to not only deliver a great revenue growth, but also margin accretion. So I hope that answers your questions.

Just to follow up, just to be clear, your comments on margin were actual rates, not constant currency rates, right, in the first question. I've understood that right, haven't I? Yes.

You never miss a bit, right?

Okay, what's the next question? And our next question comes from the line of Harry Martin with Bernstein. Please go ahead.

Hi, good morning, Andre. Morning, everyone. Morning. First question I have is on the China business. Obviously, the growth today is really reflecting the snapback from the lockdowns, but we will hear about wider worries about macro weakness to come in China. So I wonder if you could just comment on what you're seeing there and how resilient the Intertech portfolio is to any sort of domestic downturn. The second question on CapEx, you talked about the increase in CapEx in H1, but even at the top end of the full year CapEx guide, it still looks flat to down year on year in H2 and quite away from the 5% ambition. So I wondered if you could talk about the levels of spending that aren't being done this year that might take you up to 5% and where we could see that CapEx come in the coming years. And then the final question, just a longer term question on industry pricing power. As you said, it's an industry historically that's had a lot of organic growth from volume growth. I wondered if in the last year or so you've learned anything about pricing power and price elasticity for your services and if there might be any change to the way that Intertech uses price longer term. Thank you very much.

Thank you. Thanks. Three important questions. So what are we seeing in China? I've talked about the like-for-like revenue growth, and you heard what we say in the January-April period, so you will have seen that the momentum in May and June was really, really commendable. Look, the reality is that we have a portfolio, as John explained, uh during the capital market events that targets both the export economy and the domestic economy what i can say um is that in the first half we saw faster growth and higher demand for the domestic markets than the export market both segments grew but despite what what we hear that you know there is an issue in terms of the domestic economy With consumer confidence being low, we didn't see that in our numbers. Now, we are not the proxy for the Chinese economy, but this is important to know. We saw growth in both segments, which is good. And as we know, we've got opportunities in both segments and, of course, greater opportunities in the domestic market. Within our portfolio in China, we've got soft lines and hard lines. We've got electrical and connectivity. We've got business assurance. We've got CNP. And I've talked about hard-line and soft-lines, which was very, very positive for us in China in the first half, of course. We benefited from the rebound given the COVID situation last year. If you take soft-line and hard-lines out, benefiting from a strong rebound, because we are very strong in Shanghai in hard-line and soft-lines, our electrical business continues to motor ahead, our insurance business continues to motor ahead. or CNP business, continue to motor ahead, the same for calibrate, the same for all businesses that we have. If you look at some of the macro stats, if you look at the production data that I have, there is still growth in China. Am I listening to some of the concerns that people have? Of course, I always do. I look at all type of data. Am I concerned? No. We have a really good team, and China is well positioned, as we talk about, at a capital market event. But I hear the concern, but I'm not seeing any of this. I mean, people on CapEx is spot on. Look, we've always said, you know, 4% to 5%. You know, it's... When we give guidance like this, this is a range and we would be very happy at 5, 5.5 or 6 if it makes sense. But we are also happy at 4%. You know, you don't want to push the team to spend on CapEx just because we said 5%. I think what we do is we look at every single opportunity individually with the right approach in terms of NPDR and ROIC. We've increased our investment in the first half, and I'm pleased to see that our events, we're investing in some of the fastest growing regions, so we had a good increase of investments in APAC as a whole, in Africa and the Middle East, which are good world markets, and also in Europe, which for us is doing very, very well. You saw our numbers. I mean, our European business is very, very strong, given what our competitors have said. um as far as the second half we're going to continue to invest and we talked about the segments we are interested in so um but if we don't do five percent that's okay uh because four to five is a range and the key is to invest in the right growth opportunities they're going to deliver you know sustainable growth and volume and pricing and as far and of course margin as far as the pricing power of the industry Look, from our perspective, we've always believed in being a premium price operator because we believe that we are the quality leader in the industry. I've demonstrated that at the capital market event. So we've always started with a high price point. And that's why we've always had a very strong margin in the industry because we wouldn't have the margin we had without a strong price point. Have we learned anything? New lessons in the last years in terms of price elasticity, of course. I mean, we never stop. We never stop learning. um would i say that you know in a highly customer-centric organization uh are people always careful to increase price of course because you know uh we have long-lasting relationship with with our customers uh and and you know we want to make sure that these last and and when we pass on uh wage inflation we've always had you know this view of putting 50 to our customers and the rest through our productivity because we believe in real partnership Have our team been surprised on the elasticity in certain solutions? Absolutely. Absolutely. And you're going to ask me which one, and I'm not going to tell you because it's commercially sensitive.

Thanks very much.

And our next question comes from the line of Suhasini Varansi from Goldman Sachs. Please go ahead.

Hi, good morning. Thank you for taking my question. Good morning. M&A, I just want to understand, given your pipeline, are you seeing for larger transactions any signs of valuation multiples compressing at all? And then second one is on leverage. I appreciate it's not the full year results, but I suppose it's in anticipation of the full year results next year. Your leverage is 1.1. Target is 1.3 to 1.8. If M&A does not materialize, would you be considering additional share buybacks, other capital return opportunities? Thank you.

Thanks. From an M&A standpoint, I would say it's a good question that the pipeline is getting currently more interesting. I think, as you know, a lot of companies were concerned about some of the debt capacity in the market last year. Of course, we're getting out of COVID. And when all of this is happening, it's not the best time to to put your business into the market so yes i think um you know we've we've of course announced controlling analytical a few weeks ago um the pipeline is is getting more and more interesting um that that would be my my statement i'm not gonna say that we're gonna announce anything next week but i'm just saying this is what i'm seeing because this is what what your question is is is all about are the multiples uh changing in the industry i wouldn't say so because it's a it's a high-quality industry. There are not too many industries like ours where, you know, the acceleration of revenue growth, market opportunities, strong return on invested capital, and, you know, the owners of quality business know that, you know, they've got a quality investment proposition here. And I wouldn't bank on that if I were you. What matters for us is that, of course, the multiple are important, but what's important is the quality of the IP we bring in, the scalability and how we can drive synergies. As far as leverage, you're absolutely right. I mean, we are below the 1.3, 1.8. We've always said in one-on-one conversations, in meetings, and we kind of put it in the capital allocation disclosures that would, of course, always be open to returning cash to shareholders in one way or the other if, we believe we don't have the right usage for cash and if we believe the macros are the right macros moving forward. I will also say that there are big lessons around the world where certain countries and companies operate with inefficient balance sheet for a long, long, long, long, long time. But there are also lessons for companies having done a lot of buyback to insight EPS in the short term and have not invested in the business. So our priority will always to put cash to work and deliver the type of RAC we deliver for clients. And if you run the numbers on Intertech share price, Yes, you can get EPS accretion, but is it really value creation? I think it's a difficult debate. Look at the numbers from our ROIC standpoint. So hopefully you understand the approach we are taking on that. We are, of course, open, but our priority is to put cash to work because this is how we can create the ROIC we like to create, which is what we demonstrate this semester.

That's very clear. Thank you very much.

And our next question goes to the line of Carl Green with RBC. Please go ahead.

Yeah, thanks very much. My questions have pretty much all been answered. Just one small technical question for Colm. Probably nothing, but I just noticed the net finance cost guidance in the slide deck on slide 13 talked about it being pre-FX. Is there any kind of big unhedged FX movement we should be aware of that's going to impact the net finance cost line versus the specific numbers you've given?

Yeah, look, thank you. The net finance cost guidance is just that we don't build in FX. It's simply uncertain. I would say the primary part of our net finance cost is interest. And as we move through the year, those fixed interest costs on our PPs is pretty well known. Of course, translated, we'll move with our expectations on the dollar, but no. I think the simple answer is we don't forecast unhedged effects going forward, and we have fairly good clarity on what our interest costs will be for the second half. David, thanks.

And our next question comes from the line of James Rose. Please go ahead. Oh, I'm sorry, James Rose with Barclays.

Please go ahead. Morning. I've got three on corporate insurance, please. Morning. Firstly, within Business Assurance, the double-digit growth, could you give us a range of the growth of the different business units within that, please? Alchemy comes to mind, for example. Secondly, on Assurance doing mid-single digit, could you say why that business isn't doing double-digit growth as well? And then lastly, on SAI Global, could you give us an update on progress there and when it does come into organic scope? Is it likely to be accretive or dilutive to the divisions?

Okay. So our business assurance, as you heard from Kaleen at the capital market event, is obviously broad-based. We've got ISO, non-ISO. We've got sustainability assurance. We've got our SaaS solution. And I'm going to be very careful with what I said. But the... The growth is broad-based. I don't want to give too much information to our competitors. So the business is doing very, very well, broad-based. And it's not only across the segment I just talked about, but it's also across geographies. So we are really well-placed and wouldn't be able to deliver the type of growth we are delivering if it was not broad-based. And we continue to be really, really excited about the growth opportunity in people assurance, which is so important for companies to reuse their operational span of performance in the frontline of their operations. I think the SAI acquisition, which we made quite a while ago, Our focus has been integration in terms of bringing the two teams together, making sure that we go to market with one set of solutions, making sure that, of course, we bring the inter-tech processes into the SAI businesses. As you remember, there was a lot of complementarity in terms of geographic portfolio, SAI adding some scale in Asia Pacific, in Australia, but also in China and in some small Asian markets, and of course, in the food retail segments and sustainability. And as I said earlier in the call, we're really, really pleased with the performance of SAI, but also with the fact that the benefits of the acquisitions bringing these two businesses together on a global basis from a cost standpoint is happening. We've taken quite a lot of cost out and I'd expect a non-productive cost out and you've seen it in the margin. So now it's doing very well. Thank you. Okay.

And we have a last question from the line of Simon Le Chirp with Stifel. Please go ahead.

yes um good morning just one for me coming back on on margin uh basically looking to the past you were benefiting from very nice margin momentum and i mean ultimately reaching uh 17.5 percent at the peak in sun 19. now you are telling us you are looking at your fixed cost implementing restructuring to to basically help you to bring margin back to the peak and as something changes the business is it related to the industry facing some some issues is it when is the new inflationary backdrop I mean, we can see your peers are also struggling to really make margin progressing. So just wondering what could be the negative factors playing out across the industry, if any?

Thank you. Okay. First of all, you know, for us, you know, going back to our peak margin of 17.5% is a goal that, you know, we are committed to, and it's going to take a few years, you know, to get there. There is no question that what has changed between 2019 and now is two things. One is the portfolios of companies is not exactly the same because market change. And when you have a disruption of the nature we saw with COVID on global markets, scale, you've got lots of moving parts. So I think everybody has got to deal with that. And every portfolio is different. And I'm not going to talk about my competitors. But also, we all have been obviously surprised by the pace at which inflation has obviously materialized. And we talked quite about it in 2022. But you know, We know that it started in certain countries in the second half of 2021. And the reality is that, you know, everybody in the corporate world in 2020, 2021, and, you know, to a rather extent in the first half of 22 was busy with lots and lots of other activities. And I think there is a catch up that the companies and the industry will do in terms of inflation, because it's a secret for no one. The growth that we've seen in cost through inflation has been obviously in lots of places higher than the growth we've seen in revenues, and there is a catch-up to do here. Thank you.

And if there are any additional questions at this time, please press 1 followed by the 0 on your touchtone phone. And at this time, it has appeared there are no further questions from the phone lines. Please continue.

Okay, well, thank you very much for your time today on the call. I know it's a busy schedule for everyone. If you have any questions, feel free to call Denis and we'll be happy to help. Thank you very much and have a good day.

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference Services. You may now disconnect.