Intertek Group Plc Ord

Good morning to you all and a warm welcome from London in front of me. I'm just watching the beautiful sunrise. It's a great way to start our trading update today, which is full of good news, as you would have read in our statement this morning. Thanks for making the time. Colm, our CFO in Denny, our head of investor relations, are with me here in the room. Essentially, if you step back from the statement that we just issued a few minutes ago, there are five key points and messages that we are trying to communicate today. First and importantly, the demand for ATIC solutions is robust. I'm not worried about demand. And in the first 10 months of the year, we have delivered the highest like for like revenue goals in the last 10 years, something that the organization is tremendously proud of. The second thing is, you know, we are confirming our targets. We are on track to deliver our full year targets, which you know very well. It's mid single digit, like for like revenue growth at constant currency with margin progression and a strong free cash flow, essentially, given where we are on the day to day basis. And as we talk today, we have 10 months of actual. So we are confident in our full year outlook. Importantly, our margin progression is healthy. We are benefiting from three important drivers. Our pricing initiatives are obviously kicking in after the price increase we took over the last few years. The faster we grow, the better operating leverage we have. So we've got a really good operating leverage. And as you know, we are very disciplined on cost. Importantly, in this higher interest environment, cash is super king and we are delivering a strong cash performance, which combined with our strong balance sheets enables us to invest in growth and accelerate performance. That's the firepower we have moving forward. And last but not least, we are laser focused inside the company to execute the AAA strategy we presented to all of you a few months ago to unlock the significant value growth opportunities ahead. While I'm pleased about the 2023 performance, I'm super excited about 2024 and beyond. I'd like to start our call today answering some of the most frequent questions that Donny and I get in our meetings, because I thought it would give you some color on how we think about the big things when it comes to Intertech. The first question we get is, do you see any sign that the inflationary pressure is easing, and how is your pricing approach working? Well, it's good news. The inflationary pressure has peaked in Q2 in North America and Europe. And indeed, we are seeing a gradual reduction of the cost increase in our P&L. We continue, of course, to implement our pricing policy. And you know that well, we are absorbing 50% of the wage increase through productivity, and we are passing 50% through the price increases. In the July to October period, two-thirds of our revenue growth was driven by volume and one-third by pricing. The second important question we get is, how is your China business doing? Following a life-for-life revenue growth of 7.1% in H1, our China business delivered the lowest single-digit life-for-life revenue growth in the last four months. And this slight slowdown in revenue momentum in life-for-life revenue growth is driven essentially by two factors. First, we have a baseline effect. You would remember that past the serious lockdown that we faced in Q2 last year, we benefited from a rebound of activities in the summer, particularly in the consumer product division. And second, I'll come back to it later, retailers in North America and Europe are concerned about demand and are not investing as they have invested in the past in new product developments to control cost and reduce inventory. Now, if you step back from these short-term trends, let's recap what the data is telling us, i.e. where is the Chinese export business really compared to 2019? And as you would remember, the Chinese economy didn't see a big impact from COVID in 2020 and benefited from a significant increase in consumer product demand in 2021 and the first half of 2022. While the data shows indeed that the Chinese export is down 11% year-on-year in Q3, the Chinese export is up 32% compared to 2019. China has increased its share of global export since 2019. Now, we are very passionate about China. We have a very strong business, and our consumer business is very resilient. And we did outperform the overall export sector in the July-October period because, despite the number I just quoted, we delivered a low single-digit lack-for-lack revenue growth. Moving forward, we remain super confident about the growth opportunities in China. As I explained at the capsule market event, China has got one big USP in the world of manufacturing. It's manufacturing excellence and 24-7 high-quality service. This is something that they offer to all Western brands existing and new. And this is a big growth opportunities moving forward. And of course, let's not forget the untapped opportunities in the domestic market. So the third question that we get most of the time is, when do you expect the destocking of retailers to end? Now, what is the data telling us? The level of inventory remains higher than normal within the North American and European fashion retailers indeed, while the general retailers are back on track. And I meet our customers on a regular basis, as you know. And at the moment, most of the retailers that I meet are concerned about a slowdown of demand in discretionary category. That's where the concern is. We will continue to monitor the situation a quarter at a time. We are now starting in our business the testing for the spring season, which, honestly speaking, we expect to be a mix. What do we see and what do we expect? Essentially, The brands have got a good value proposition that, you know, price that people are ready to pay for the quality they get. These brands will continue to benefit from higher demand and will continue to invest in new product development. We are seeing it today and we expect it to continue. The premium brands that have some value issues in the market will have to keep their investment in new products under review for a little while. But how long could they do that? Well, that's the next point I want to address. What does it mean moving forward? If you look at the last few years, several brands took significant price increases in 21, 22, and 23. And sometimes this price increase were ahead of the inflationary cost in their inflation basket. And these brands now are seeing some issues in terms of volume performance. Now, We know that once a big company has increased prices, it's very difficult to reduce prices because you cannot change your economics by reducing prices. What you need to do is you need to increase the value proposition in your business to regain market share. And this is why we believe, and certainly I believe, that these brands will have to invest in innovation to increase the value proposition, which obviously will be very beneficiary for a consumer testing business. So, net-net, while we recognize the slowdown in new product development by retailers, I really believe that this is temporary. The fourth question that I typically get with Denny is, given the fact that your like-for-like revenue growth pre-COVID, like your peers, was around 3%, what makes you confident that you will deliver mid-single-digit like-for-like revenue growth moving forward? Well, there are three reasons for a high level of confidence in mid-single-digit like-for-like revenue growth moving forward. First, Our industry always had and has some very strong structural growth drivers that are now going away, and let's not forget intrinsic defensive characteristics. Our solutions are mission critical for corporations to operate safely, and regulatory requirements will continue to increase step by step. Second important reason, in a world where real-time information is available to all consumers on social media, Stakeholder expectations in quality, safety, and sustainability are getting higher every day. We just need to look what's happening in the news and also for media. And we've done some research over the last few years, and we believe that the attractive structural growth drivers that we all know very well in our industry will be augmented by five accelerators. You should expect increased investments in safer supply from companies because companies have learned during COVID that they have to make their business more resilient. The supply chain breakdowns cost a lot of money to everyone. Second, the increase in investment innovations that I just talked about will happen and will make their business stronger. We all know that sustainability is the movement of our time, and there will be increased investments in sustainability assurance, including, of course, ESG reporting. What's happening in the world of energy is significant. I'll come back to that later. The increased investments in renewables to get to net zero are the only solutions to get there. And last but not least, consumers today want more choice. It doesn't matter if they are here in the UK or in North America or Asia or Africa or Australia. And we're seeing an increase of new brands, which means new clients for Intertech. The third important reason for our confidence in mid-single-digit-like productivity growth moving forward is our portfolio. We've explained at the capsule market event, our portfolio is poised for faster growth at the global and local level. Pre-COVID, we had some global business lines facing headwinds. All of our business lines are going to benefit from structural growth drivers. And then we've done a lot of work at the local level in our portfolio. And you'll recall what I said during the capital market event, 55% of our local business is exposed to faster growths. The fifth question, before we talk about the trading data, is how is the M&A market today? And are you seeing more or less opportunities? Well, the reality is the M&A market has been more active in the last 12 to 18 months, but it's not to the level we saw pre-COVID. We've made, as you know, a few Bolton acquisitions, and we remain and will always be very selective when it comes to M&A. Our view is that we'll have to wait for lower costs of borrowing before we see a higher level of M&A activities. But based on the trend we're seeing, that will happen over time. So now that we've covered what we believe are the five most topical themes that are in the market at the moment, let's talk about our trading performance. In the last four months, the group has delivered 5.2% like-for-like revenue growth at constant currency, and this was in line with our guidance and expectations. Our consumer product division, they have a like for like revenue growth of 1%. We saw a very, very commendable performance in electrical and connected world with high single digit like for like revenue growth. There is real, real, real momentum there. This is all about the electrification of the society. And I'm really, really proud about what's happening globally with our electrical business. However, that was single-digit negative like-for-like performance in soft lines and hard lines for the reason I just talked about, i.e., some of our clients are reducing investment in new products, and we continue to see double-digit like-for-like negative performance in GTS. As you know, we exited contracts, which we announced last year, and it takes time to basically get these off the base. Moving to corporate assurance, we're really pleased with the performance. The like-for-like revenue growth was 6.6% at current currency, high single-digit like-for-like revenue growth in business assurance, and negative Mid-single-digit performance within Assuris. Assuris, as you know, is a very small business in the scheme of things. It's very conservative, and we had some exceptional strong projects last year, and we are cycling against a very strong comparative, but I'm not worried about the intrinsic demand for Assuris. Our health and safety division delivered like-for-like revenue growth of 6.5%, and that was driven by mid-single-digit like-for-like performance in food, chemical, and pharma, and agri-world. Really, really, really strong performance across the board. Our industry infrastructure division delivered like-for-like revenue growth of 5.7% constant currency. We saw double-digit like-for-like performance in minerals and industry. And BNC delivered a low single-digit like-for-like performance. Some of you might recall we had a really strong summer last year in North America with BNC. So there is a bit of a baseline effect here. Our World Energy Division delivered like-for-like revenue growth of 8.7% at constant currency. We saw double-digit like-for-like performance within Calibret and CEA and low single-digit like-for-like performance within our TT business. So now, if we look at the performance at the group level on a year-to-date basis, revenue for the 10 months is about £2.8 billion, 7.3% up year-on-year at constant and 5.1% up at actual rate. Life-for-life revenue growth for the first 10 months is broad-based at 6.3%. And as I said earlier, we're benefiting from both volume and pricing acquisitions that have contributed to 26 million of additional revenue on a year-to-date basis. I have to say that the SAI, GLA, and CA acquisitions we made in 2021 and 2022 to scale up our portfolio in the attractive growth and margin sectors are performing very well. And the integration of the recent acquisition we made, Controllers Analytical and PlayerLink, are also on track. In terms of year-to-date margin, our margin progression is in line with our expectations. As I said earlier, we're benefiting from our pricing initiatives, good operating levels linked to faster growth, and disciplined cost control. We've delivered a strong free cash flow, enabling us to operate with a very strong balance sheet. We continue to invest in organic and inorganic opportunities. Let's discuss now our guidance for the full year, which, as you know, is unchanged, so I'm going to go relatively quickly through that. We continue to expect to deliver mid-single-digit like-for-like revenue growth at the group level at constant currency, low single-digit like-for-like in consumer products, high single-digit like-for-like in corporate assurance, industry and infrastructure and water and energy, and mid-single-digit in health and safety. continue to expect to deliver margin progression and a strong free cash flow. Our net finance card guidance is unchanged in the range of 40 to 42 million. Our guidance in terms of tax is slightly better than previously guided between 25 and 26%. Our minority interest guidance is unchanged between 22 and 23 million. Our capex guidance is also unchanged in the range of 115 to 125 million. Currency, however, and I want to make a few points here, have remained very volatile, as you know. And we are updating our currency guidance. The average selling rate since the beginning of the year applied to the full year results of 2022 would reduce our revenue by 300 bps and our earnings by 500 bps. And lastly, our financial net debt guidance excluding future change in Forex and M&A is also unchanged between 630 and 680 million pounds. Before we address your questions, I would just like to make a few remarks on strategy, if you allow me to. Our good-to-great journey continues, and all of us at Inditech are super energized about the significant value growth opportunity beyond 2023. If you have time, go through social media and you will sense and feel the energy in all parts of our business. with our You'll Be Amazed campaign, which is basically dramatizing our competitive advantage to our clients, existing and future clients, to basically accelerate growth. We are laser-focused internally in terms of execution, and everything is in place to execute the strategy we talked about in London a few months ago. The important point is that our clients understand the need to increase their investment in risk-based quality assurance, because they have to operate with high quality, high safety, and high sustainability standards. This is the only way they will make their business stronger, gain market share, and deliver value. That's why we're experiencing a faster growth for IT solutions, and we expect that to continue. Geographically, as we talked about, the business is extremely well diversified from an earnings standpoint, and we have the right exposure to the right growth opportunities in the global economy. When it comes to our targets in the medium to long term, let me remind our targets. We are targeting mid-single digit like for agribusiness growth at constant currency with the following guidance by division. Low to mid-single digit in consumer product, high single to double digit in corporate assurance, mid to high single digit in health and safety, mid to high single digit in industry infrastructure, and low to mid-single digit in the world of energy. Let's talk about margin. Margin accretive revenue growth is central to the way we deliver value. You've seen it in the pre-COVID-19 period. We've increased our margins significantly, and you've seen it in our recent announcement where we are outperforming the industry. I'm talking about H1. Our target is that over time, we will return to our peak margin of 17.5% and then go beyond from there. we can see the path and we'll get there step by step that's what the intertech leadership team is committed to and it's what we're working on starting with 23 making progress on margin to continue to deliver sustainable growth and value for shareholders we'll be very focused on what we call our virtuous economics. And the virtuous economics is simply the compelling effect year after year of mid-single-digit lack-for-lack revenue growth, margin accretion, strong free cash flow, and importantly, disciplined capital investments in the high growth and high margin sector to accelerate growth in the right margin segments. Last but not least, Let's talk about capital allocation. We believe in the value of accretive, disciplined capital allocations. If we invest capital, it's got to make a difference in terms of return investment over time. So we pursue the following priorities. First, we support organic growth through capital expenditure and investment in working capital, as you would expect. Second, we deliver sustainable returns for our shareholders with the payment of progressive dividends, and we target, as you know, a payout ratio of circa 50%. Third, we pursue M&A activities that strengthen our portfolio in attractive growth and margin areas, provided, of course, we can deliver good return investment. And fourth, we try to maintain an efficient balance sheet with the flexibility to invest in growth, targeting 1.3 to 1.8 net debt to EBITDA range. So let me summarize the highlights of our training statements today before we take your questions. First, the demand for IT solutions is robust, and we are delivering the best like-for-like revenue growth in the last 10 years. We are converting our robust revenue growth into healthy margin progression and strong cash performance. We are on track to deliver our 2023 targets, and we are laser focused to implement our strategy, which we presented to you a few months ago, to unlock the significant value growth opportunity ahead.