Intertek Group Plc Ord

Good day, ladies and gentlemen, and welcome to Intertech 2023 results. 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 raised hand function at the bottom of your Zoom screen. If you have dialled in, please select star nine to raise your hand and then star six to unmute. Instructions will also follow at the time of Q&A. Participants can also submit questions through the webcast page using the ask a question button. I 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 to start the presentation. Thank you.

Good morning and welcome to you all. In 2023, we have delivered a strong performance in revenue, margin, EPS, cash, and RIC. And I would like to start our call today recognizing all of my colleagues around the world of Intertech for the incredible support. Indeed, 2023 marks another year of consistent delivery with earnings slightly ahead of market expectations. Here are the key takeaways for call today. First, we have delivered the highest like-for-like performance in the last 10 years, something that we are tremendously proud of. Profit conversion was strong with a margin improvement of 60 basis points at constant currency. We have delivered the highest ever cash flow operation. We are on track to deliver a medium-term margin target of 17.5% plus. Given our confidence in the significant value growth opportunity ahead, we are increasing our dividend payout to circa 65%. And importantly, we expect to deliver a robust financial performance in 2024. So let's start with our performance highlights. As I just said, we've delivered a strong financial performance in 23. Our group revenue was up 7.1% at constant rate and 4.3% at actual rate. Like for like revenue growth was 6.2% at constant rate. Operating profit was up 11% at constant rate and 6% at actual rate. Operating margin was robust at 16.6%, 60 basis point up on last year. Our EPS growth was double-digit, 11% at a constant rate. We've delivered a very strong ROIC of 20.5%, up 250 bps. We've announced a full-year dividend of 111.7p, a PR near by 5.6%. And our balance sheet remains very strong. Our net debt to EBITDA ratio is 0.8. Our like-for-like revenue growth of 6.2% at a constant rate was the best like-for-like performance in the last 10 years. The demand for ATX solutions is accelerating around the world across all of our business lines, and our like-for-like revenue growth was broad-based, driven by both volume and price. Our like-for-like revenue growth, excluding the consumer product division, was up 8.2%. The recent SAI, GLA, and CA acquisitions we've made to scale up our portfolio and attractive growth and margin sectors are performing very well. The integration of the recent acquisition we made in 2023 with Control Analytical in Brazil and PlayLink in North America are on track. Yesterday, we've announced the acquisition of leading providers of metallurgical testing services in minerals based in North America. The consolidation opportunities in our industry are significant and we'll continue to invest in organic growth. From a geographic standpoint, our revenue growth was also broad-based, with Americas, EMA, and APAC up by 7.6%, 7.1%, and 6.4% at constant currency. And now, I would like to give you an update on the performance of our China business. In China, 75% of our business is linked to the export sector. The Chinese export activities are up 35% compared to 2019, and as we know, down 6% compared to 2022. We grew our like-for-like by 4.6% in 2023, outperforming the overall export sector, and our like-for-like performance was inline and consistent with the 4.9% CAGR we reported in China between 2015 and 2022. We have a very strong business in China. And we remain very confident about the growth opportunities ahead, given the manufacturing excellence that China provides to all Western brands and, of course, the untapped opportunity in the domestic market. We provide our clients with total quality assurance powered by our unique systemic ethical approach to quality, safety and sustainability. Our ATIC offering is well diversified, with assurance, testing, inspection, and certification representing, respectively, 21%, 46%, 25%, and 8% of our total revenue. Between 2015 and 2023, assurance and testing that represent two-thirds of our revenues have grown double digits. Margin of 16.6% was robust and up 60 basis points at concern rates and up 160 basis points if we exclude our consumer product division. How did we deliver such a strong performance? We benefited from fixed cost leverage linked to growth. The faster growth, the more operating leverage. For activity improvements, we never stopped working hard on productivity opportunities. Our restructuring program, which I will talk about in a second, our M&A was accretive in 2023. We had a one-off benefit from a property sales of circa 5 million. These positive margin drivers were partially offset by the negative portfolio mix effect we saw, the cost of inflation, and of course, our investments in capability to accelerate growth. Marginal equity revenue growth is central to the way we deliver value, and this time last year, we announced a cost reduction program to target productivity opportunities based on streamlining some of our operational costs and making some technology upgrades. We've done better than we thought, and our restructuring program has delivered 13 million pounds of savings in 2023, and we are expecting 10 million of savings in 2024. Looking at our performance by division, we've made good progress, improving margin by more than 100 BIPs in three of our five divisions. Cash conversion was excellent. We've delivered the highest ever cash flow operation, £749 million, with a cash conversion of 122%. That enables us to invest in growth, and we invested both in organic CapEx with £117 million and acquisitions with £40 million. Net debt declined by 127 million pounds to 611 million pounds. And as I said earlier, our net debt to EBITDA ratio improved to 0.8. Sustainability is an exciting growth driver, which we'll discuss later. Internally, we are focused on sustainability excellence in every operation. We have a net zero plan and we are targeting net zero by 2050. And we have reduced our CO2 emissions by 11% in 2023 and by 37% since 2019. Sustainability is, of course, much more than achieving net zero. We continue to make progress on customer satisfaction, diversity and inclusion, health and safety, compliance and engagement. I will now hand over to Colm to discuss our full year financial details.

Thank you, Andre. In summary, in 2023, Group delivered strong financial performance. Total revenue growth was 7.1% at constant currency and 4.3% at actual rates. Sterling strengthened compared to major currencies and has impacted our revenues by 280 basis points. Operating profit at constant rates was up 10.9% to 551.1 million. delivering a margin of 16.6% up year on year by 60 basis points at constant currency and 30 basis points at actual rates. Diluted earnings per share were 223 pence, growth of 11% at constant rates and 5.6 at actual rates. The group delivered record adjusted cash from operations of £749 million up year on year by 3.7%. Adjusted free cash flow of 378.4 million was down year on year by 7.9 million as the growth in operating cash flow was offset by higher tax payouts and financing costs. We finished 2023 with financial net debt of 610.6 million pounds down year on year by 127 million and represents a financial net debt to adjusted EBITDA ratio of 0.8 times. Turning to our financial guidance for 24, we expect net finance costs to be in the range of 41 to 43 million, excluding FX. We expect our effective tax rate to be between 25 and 26%, our minority interest to be between 23 and 24 million pounds, and CapEx investment to be in the range of 135 to 145 million pounds. Our financial net debt guidance in excluding any major changes in FX rates or M&A is 510 to 560 million pounds. I will now hand back to Andre.

Thank you, Carl, and I will now take you through our performance by division. All the comments I will make in this section are at concern rates. A consumer products-related business delivered a revenue of $936 million up year-on-year by 1.3%. A 1.3% lack-for-lack performance was driven by low single-digit lack-for-lack in soft lines, stable lack-for-lack in hard lines, mid-second-digit lack-for-lack in electrical and connected world, double-digit negative lack-for-lack in GTS due to the non-renewal of two contracts in 2022. Operating profit was 247 million with a margin of 26.4% down 100 basis points due to the revenue decline in GTS and the low single-digit like-for-like performance in softlines and hardlines. In 2024, we expect our consumer products division to deliver low single-digit to mid-single-digit like-for-like revenue growth. We grew revenue in our corporate assurance-rated business by 9.5% to 477.5 million pounds. Our 9% like-for-like performance was driven by double-digit like-for-like in business assurance and stable like-for-like in assurance. Operating profit of 109 million was up year-on-year by 19%, with a margin of 22.9%, an improvement of 190 bps as we benefit from strong operating leverage and productivity gains. In 2024, we expect our corporate assurance division to deliver high single-digit lack-for-lack revenue growth. Our health and safety related business delivered revenues of £366 million, an increase of 9%. Our 7% lack-for-lack revenue growth performance was driven by mid-single-digit lack-for-lack in high reward and high single-digit lack-for-lack in food, chemical and pharma. Operating profit rose 9% to £43 million, with a stable margin at 13.2% due to the country mix effect in agri-world and investments in capability in chemical and pharma. In 2024, we expect our health and safety division to deliver mid-single-digit, lack-for-lack revenue growth. Our industry and infrastructure-related business report revenues of £860.5 million, an increase of 8%. Our 7.9% lack for lack revenue growth performance was driven by double-digit lack for lack in industry services, high single-digit lack for lack in minerals, mid-single-digit lack for lack in building and constructions. Operating profit of 86 million pounds was up 22% year on year. We delivered a margin of 10%, 110 bps higher than last year as we benefited from both operating leverage and productivity gains. In 2024, we expect our industry and infrastructure related businesses to deliver high single digit, like for like, revenue growth. Revenue in our world of energy related business were 729 million pounds, 12% higher than year. Our like-for-like performance was 9%, driven by high single-digit like-for-like with Kelly Bread, mid-single-digit like-for-like in our TT business, and double-digit like-for-like in our CE business. Operating profit was £66 million, up 57% year-on-year. Our margin rose to 9% of 260 bps year-on-year, reflecting operating leverage, productivity gains, and portfolio mix. In 2024, we expect our World Energy Division to deliver high single-digit, like-for-like revenue growth. At our capital markets event last year, we shared our differentiated InterTech AAA growth strategy to unlock the significant value growth opportunity ahead. Today, I would like to focus on the three main drivers of value creation moving forward. First, the faster growth expected for ATIC solutions. Second, the significant margin accretion potential. And third, our proven high-quality earnings models. The ATIC growth opportunities are very attractive. We know that. Companies have increased their investment in risk-based quality assurance in the last two decades, and importantly, Based on the growing challenge they face in their supply chain and more and more demanding stakeholders, our clients will have to invest more. That's why we expect our like-for-like revenue growth to accelerate and to deliver over time mid-single digit. Our customer research shows that the structural energy growth drivers will be augmented indeed by high investment in service supply, high investments in innovation, a step change in sustainability, high growth in the world of energy, and an increase in the number of new clients. COVID-19 has been a catalyst for many corporations to strengthen the resilience of their supply chain. We are seeing important changes within our clients. There is a high appetite. for more data to understand what's happening in all parts of their supply chain. There is definitely a tighter scrutiny on the business continuity plans. Companies are trying to diversify their tier one, tier two, tier three suppliers, creating opportunities for more audit and inspections. Companies are conducting strategic reviews of their manufacturing footprints to reduce the dependencies on two countries and also to evaluate nearshoring opportunities. And companies are increasing their investment in processes, technology training, and of course, independent assurance. We all know the importance of continuous innovation to accelerate growth. Having made recently significant price increases, many, many brands and all of our clients have realized that they need to invest more in innovation. A recent survey by Capgemini showed that 63% of business leaders plan to increase investments in R&D and innovation. This is good news. These investments in innovation means a higher number of SKUs and, of course, a higher number of tests per SKU. Another major area of investment in the corporate world is of course sustainability. We've discussed at our capital market event how we are supporting our clients with our operational sustainable solutions to reduce the risks inside their value chain and with our ESG assurance solutions to audit their non-financial disclosures. Currently, only the EU and California requiring mandatory third-party assurance for non-financial disclosures, and we expect many countries to follow suit. This is excellent news for ESG assurance solutions. The growth opportunities in the world of energy are exciting for Cadet Brett, Moody, and CA businesses. The energy companies know that energy security is as important as decarbonization, given the growing demand in energy and the fact that renewables represent less than 10% of the global supply. Moving forward, we'll benefit from two major growth drivers in the world of energy. One, the increased investment in traditional oil and gas upstream infrastructure to provide energy security to the world. And two, a scale-up of investments in renewables. $105 trillion have already been pledged, and a further $60 trillion is needed to get to net zero by 2050. We see a significant growth in the number of companies globally, given the low barriers to entry for any brands with e-commerce capability. The lack of quality assurance for these fast-growing young companies is excellent news for global market access solutions. Unfortunately, we continue to witness significant recalls, and these are wake-up calls for all stakeholders. This is a good reminder of the increased complexity and associated risks in the supply chains of all corporations. And our clients fully understand that the only way to operate with high-quality safety and sustainability standards is to increase their investments in risk-based quality assurance. Against this very exciting backdrop of faster growth, we operate high quality portfolio capable of delivering that faster growth. The depth and breadth of our ethics solution position as well to see the increased corporate needs for its best quality assurance. All of our global business lines will benefit from exciting growth opportunities moving forward. At the local level, our country mix is strong, with 56% of our revenues exposed to fast-growing segments, and geographically, we have the right exposure to the right growth opportunities in the global economy. Let's now spend a few minutes on the second main driver of value creation moving forward, the significant margin accretion potential. Between 2014 and 2019, we were the only global tick company to deliver 200 bps plus of margin accretion. Recently, our margin performance was impacted by the disruptions driven by COVID and inflation in 2021 and 2022. Today, we have reported 60 basis points margin improvement, and we are on track to deliver a medium-term margin target of 17.5% plus. When driving margin accretive revenue growth, we focus on five priorities. First, the portfolio effect linked to volume price mix management. Very important. Second, the fixed cost leverage linked to revenue growth. The higher growth, the better leverage. Third, the variable cost productivity improvement. We never stop challenging ourselves on how to be more productive. Fourth, targeted fixed cost reduction. There is always a way to reduce fixed costs. And fifth, the investment that our margin accretive that we are doing innovation, technology, and growth capability. You are very familiar with the enablers we have in place listed on the right side of the slides, including our end-to-end incentive scheme that targets margin equity revenue growth as well as RIC and ESG for everyone inside the company. I will now give you concrete examples on how these five margin drivers are making a difference at Intertech. We have selected six sites on the slide. that basically show how these five drivers have enabled us to drive margin accretive revenue growth in 2023. You can see how the contribution from each driver varies by site, reflecting the local opportunities that our teams are leveraging in their business. I will, of course, not get into the six-site example one by one, but I will give you some insights on the 190 bits margin accretion that we saw at one of our calibrated sites in the Americas. Our local management did a great job executing on the five key margin drivers we just talked about, adding 47 BIPs with price increases, higher volume contributed 32 BIPs increase through leverage, cutting fixed costs boost our margin by 42 BIPs, productivity improvement through over 35 BIPs benefit, and the investment in growth we made added 31 BIPs. We've done the same analysis for six of our global business lines, and let's discuss the impressive performance of our global minerals business. The team improved margin by 150 bps on global basis, benefiting from investments in our labs, driving a gain of 23 bps, a 10 bps gain on fixed cost production, a 17 bps gain from productivity improvement, while driving our mix towards high margin activities, resulting in a gain of 45 bps from portfolio management, and of course, leveraging the tremendous volume growth they saw with a gain of 55 VIPs linked to operating leverage. Our high-quality earnings model is an important driver of value creation. We provide our customers with leading ethics solutions in each of our business lines to give our clients the peace of mind they need to focus on their growth agenda. We deliver sustainable growth and value based on the compounding effect year after year of margin accretive lack-for-lack revenue growth, strong cash generation, and disciplined investment in growth. Notwithstanding the exciting ET growth support we just discussed, our earnings model has strong intrinsic defensive characteristics. The ATIC solution we offer are mission critical for our clients. We operate a highly diversified set of revenue streams, and we enjoy strong and long-lasting relationships with our 400,000-plus clients. Our high-quality earnings model has proven its ability over the years to create growth and value for shareholders. Indeed, between 2014 and 2023, we have grown revenue by 59% and have increased EBITDA by 81%. Our margin has increased by 110 bps and EPS has grown by over two thirds. Our cash flow operation has grown by close to 350 million pounds and ROIC has improved by 400 bps to more than 20%. Before taking any questions, just like to spend a few moments on guidance and dividend. Given the like-for-like acceleration we saw in 2023 and the good momentum we benefited from in Q4, despite one less working day, we are entering 2024 with confidence. We expect the group will deliver mid-single-digit like-for-like revenue growth at constant currency, driven by low single-digit to mid-single-digit in consumer products, high single-digit in corporate assurance and industry infrastructure, mid-single-digit in health and safety and the world of energy. We are targeting further margin progression. Our cash discipline will remain in place to deliver a strong free cash flow. We're investing growth with a capex investment of circa 135 to 145 million pounds. We expect, as Com said, our financial net debt to be in the range of 510 to 560 million pounds before any M&A or Forex movements. A quick update on currency for your model. The average turning rate in the last three months applied to the full year results of 2023 would reduce our full year revenue and operating profit by circa 150 bps. We believe in the value of a creative discipline capital allocation, and during our capital market events, we discussed the approach we have in place. We are very excited about the organic and inorganic investment opportunities. Our investments will continue to be made with the same discipline ROIC driven approach. But today, I would like to announce an important change to our dividend policy moving forward. In recognition of our highly cash generative earnings models, our strong financial position, The board's confidence in the attractive long-term growth prospects of the groups and our ability to fund investments in growth. We are increasing our targeted dividend payout ratio to circa 65% of earnings from 2024. In summary, the value growth opportunities ahead is significant. We are seeing higher demand for Arctic solutions. We have a strong global and local portfolio poised for faster growth. We are on track to deliver a medium-term margin target of 17.5% plus. Our cash generation is excellent to support our investment in growth, and we have a highly skilled and passionate organization to take Intertech to greater heights. Thank you for your attention, and we'll now take any questions you might have.

We will now start the Q&A. If you would like to ask a question, please use the raise hand function at the bottom of your Zoom screen. As a reminder, participants can also submit questions through the webcast page using the ask a question button. Our first question today comes from Rory McKenzie at UBS. Rory, if you could please unmute your line and ask your question. Thank you.

Good morning, Andre. It's Rory here. Just two questions, please. Firstly, it looks like headline organic growth improved slightly for the November-December period. I think that included a pretty reasonable headwind from fewer working days. So the underlying organic growth in consumer products, for example, I think improved to maybe plus 3% to 4%. So how should we interpret that exit rate on the growth? And what have you been seeing about the latest volume trends from clients? And then secondly, on the five margin drivers you highlight, thanks for the examples in the business lines. Could you maybe say what that looks like as a group level for 2023 and what you see into 2024? It feels like you've had good progress on fixed cost reduction and productivity. But again, those weak volumes in consumer means you've still got a sustained negative from portfolio and fixed cost leverage. So is that fair? And where do you think the overall picture lands for this year? Thank you.

Okay, thanks, Rory. Look, indeed, Q4 was very, very good. You know, we had one less working day. And, of course, if you do the underlying analysis, it was, you know, much better than the, you know, 5.6% constant currency like for our growth that we saw in November, December. which gives us, of course, a good acceleration as we get into 2024. We are confident about 2024. I'm not going to basically talk about January and February. It's a bit early in the year and we never do that at this time in the year. We'll update everyone when we do our May trading statement in a few weeks from now. But, you know, The group is in a good position. We are seeing acceleration across all business lines and consumer products, which has been a worry for us last year, is turning the corner. And I'm very, very pleased with the November, December consumer product, like for like revenue growth, which adjusted for one less day indeed is very, very positive. As far as, you know, the drivers of margin at, you know, the group level, what I would say is, you know, on the positive side, you know, the faster growth you get, the better operating leverage you have. It's mathematical, right? Provide that your discipline, of course, in controlling your cost. But fixed cost leverage, you know, was positive for us at the group level. We never stop working on productivity, and if you have time, you can run the ratios on revenue per headcount and profit per headcount, and you will see that not only we are ahead of what we delivered in 2019, which is our peak profitability, but we are industry-leading in terms of productivity metrics. Look, the restructuring program did a bit better than we thought. It's not that we found surprises. Basically, we executed the plan faster. And as you know, this is a multi-year program, and we've continued to invest in this program, and there will be some benefits in 2024. M&A is very important to be doing margin accretive M&A makes a difference. And this is what, you know, we focus on and M&A was accretive to the group. Now, all of this, and I talked about the small property profit of 5 million, which was a one off, but all of these were offset by three things. Right. One, inflation remain important. Let's not forget that in 2023, we're also investing in growth, but we had a negative, you know, portfolio effect given the 100 bps, you know, reduction that we had in our consumer products. So, look, all in all, you know, we are really pleased, you know, 160 bps margin improvement ex-consumer product with that kind of organic growth is, in my view, a very, very good performance. And it shows, you know, the size of the opportunity. You know, if, you know, the group deliver, you know, mid-single-digit lack-for-lack organic growth, there is no reason for not continuing to improve margin.

Thank you. Our next question comes from Carl Rainsford at Berenberg. Carl, if you could please unmute your line and ask your question. Thank you.

Hi, morning, Andre. Morning, Colin. Just three from me, I think, following on from Rory's there, just in the CPS side of things. But my calculations, the Q4 exit rate within soft lines in particular look to be kind of mid single digit, if not slightly higher than that. So to confirm that's the case would be great, please, is the first question. The second, very much appreciate the margin analysis you've done. It's very valuable. But just looking to that 17.5% midterm target, How much of that is based on Caleb Brett in particular? Because this was an area pointed to obviously previously. It looks like you've done a lot of work in the portfolio, but maybe you could sort of give us some color on the volumes you're seeing there versus 2019. And if it's safe to assume there's still operating leverage to come through. And then the last question, just around your STIs, really in the interest line in the P&L. I see there's a big increase in consideration due because of the CEA performance, which is positive. So another 20 million due, I think, there. So perhaps you could talk a little about just how you generally structure deals and if that's something we should expect into the future to be at a slightly elevated level. Thank you.

Okay, thank you. Let's take the simple question first, the last one on CEA. Look, there are instances where, you know, we believe it's important to retain the management and we put an earn out in place. And that's the case here. And CA has exceeded, you know, expectations. You know, you saw the numbers. I wouldn't say that's the only way of doing M&A. It's one way. And we do that, you know, from time to time. As far as consumer product and soft lines and hard lines, maybe you're right. We had a really good exit run rate in soft lines. Let me maybe take the opportunity to to give you a sense of what's happening around the world. We know that, you know, soft lines and hard lines were impacted by retailers being nervous at the end of 2022, given potential slowdown in the global economy and cost of capital. And of course, they had two aggressive forecasts in 2022, and they were worried about inventory. So now that has been a leading indicator for us to understand where the, if you want, retailers are. Now, the good news is that The general retailers in the U.S., which are important for hardline business, now have an inventory level that is really, really decent. So there is no inventory issue there. As far as the fashion retailers in Europe, the progress has been very significant. In the U.S., there has been some progress, but there are some brands doing better than others. When we did our November trading statement, I was talking about the fact that we were finishing you know, the essentially the spring summer collection, which basically, you know, finishes around this period of the year. And I was expecting if you want, you know, a mixed performance, some of the value brands doing better than others. And essentially, that's what has been, you know, driving the acceleration because the confidence has generally improved, not with every single retailer, but with essentially the retailers that got the inventory under control and the right, you know, value, you know, you know, proposition. So, Look, we are turning the corner, as I said, to Huawei, which is really, really, really good news. As you know, we are an important player in the industry, and we expect 24 to be better for our consumer product division, starting, of course, with soft lines and hard lines. As far as our 17.5% medium-term margin target is, Look, there is no question that we have, you know, productivity opportunities everywhere. And despite the fact that Calibrate has made, you know, some really, really good progress, we still have, you know, some opportunities, you know, to do better there. So we are in a very, very good place. And I know that it's difficult to look at the existing divisional split to compare the performance to 2019. But if you look at the old segmentation of disclosures, looking at products, trade and resources, I mean, you will see that at 16.6%, uh products at 21.6 percent was lower than what we achieved in 2019 and and and this is largely due to the slowdown that we saw in soft lines and hard lines and and and you know we have the opportunity here you know to basically capitalize on the accelerated the growth that we expect and and and get uh you know to the level over time trade is still showing a gap versus the peak of 12.7%, which is due to calibrate GTS, not so much to Agri. Calibrate has made some progress, but there is still some operating leverage. And I would say the area that we are all counting on is resources. Resources is now at 9%. Remember, we always talked about getting to 10%, which is much higher than the 6.3%. So if I look at the old divisional split if you want, we have definitely opportunities in product and trade and resource will not stop at 9%. I would also say that our belief that we can go to 17.5% plus over time is just not about the business line, if you want, gaps versus previous peak. It's also the opportunities that we see in productivity, the opportunity we see in terms of span of performance around the world. Because as you know, we look at margin at the site, country, region, global level at the same time.

That's very helpful, André. Thank you.

Thank you. Just a reminder, if you'd like to ask a question, please use the raised hand function at the bottom of your screen. Or alternatively, you can ask a question by submitting a question through the webcast page. Our next question is from Pablo Cuadrado at TEP for Chevro. Pablo, if you could please unmute your line and ask your question. Thank you.

Hi, good morning, everyone. Good morning, Andre. Yes, a couple of questions, please. The first one is on the Chinese performance that we work on, all the insights that you were giving from the presentations, but the question will be more on On that exposure to the export activities, let's say, whether you can tell us if you keep being happy with that exposure or if you think all these onshore activities that we are seeing in some business and in markets, if you think that you may need probably to think about that exposure going forward. Second question will be on the leverage. I recall that when you made the capital market day last year, you were giving this range of 1.3, 1.8. I think that was including IFRS. If we run the numbers and we look at the guidance that you are giving for this year, very likely you are going to be going below that. Clearly, you can still make M&A, but the question will be a little bit more on which are the sources that you think you will prefer to use in order not to go, let's say, below the bottom side of that range, looking on M&A dividends. Clearly, you have increased this year, or even, I remember, we talked about the shareback. And the last question, quickly, on the adjusted EBIT guidance for this year. Clearly, talking about progression on constant currency, last year we saw 60 basic points. I think consensus right now is just assuming 10 basic points, looking to the full year results now that has been released. So probably if you can help us to see what kind of progression 10 basic points, You think it could be too low, something in the middle, when you take 60 basic points you recorded last year should be more adequate, everything of that, that would be helpful.

Okay, thank you. Look, on the margin, Pablo, we have a clear target of 17.5% plus over time. We never give quantitative target when we do the full year guidance. For us, margin progression has, of course, a range. And I know what's in the consensus, and I'm comfortable with that. The year just started, and then we'll continue to focus on margin equity growing growth. But Sorry, we don't give any quantitative margin guidance for the coming year. As far as your question on capital allocation, look, to have a highly cash-generative earnings model is a good problem to have because you've got plenty of options, right? The first use of cash for us is, of course, to support the organic growth. And our target is to invest between 4% to 5%. of our revenue in CAPEX. Given the growth acceleration, you will see us increase our CAPEX investment. That's the guidance that we are obviously giving this year because to basically capture the growth, you need to invest in additional capability as well as, of course, in innovation. We talked about the increased dividend payout, which is our second use of cash. And the third one is, of course, M&A. We have a very, very strong approach to selecting good M&A from a gross and margin standpoint. We know where the quality assets are. we believe that the market is poised for consolidations, and that's our third, if you want, preferred use of the cash, all of that to basically stay within 1.3 to 1.8 net debt EBITDA ratio. So that's, if you want, how we look at using our cash moving forward. As far as China is concerned, I would say a few things, right? And I know that companies are looking at diversifying their supply chain and nearshoring opportunities. As you know, supply chains are quite complex to move when you have a very well-functioning supply chain in a given country. To take some of the production away from one country and move it to the other, to another one, is not risk-free. So essentially, you know, What we are seeing, we are seeing, you know, companies that, you know, are really successful in China and understand how to get, you know, manufacturing excellence in China are staying in China. But equally, when they want to invest in new segments, they will try to diversify away from China for all the reasons that we know. Near-shoring is, of course, an important trend. I would say much more in the energy sector than in the hard-line and soft-line sector. And that's what we're seeing in the United States, for instance, with the Inflation Reduction Act or the infrastructure bill. The point I just want to make is despite all what people have been saying over the years that people are leaving China, it's not true. Essentially, the export value is up 35% compared to 19. This is real. Soft lines up 11%, hard line up 22%, electrical 25%, and the rest is 50%. And when you are an existing retailer, and you've been relying on the manufacturing and customer excellence of China for several years, to change your strategy is not risk-free. And for new brands coming into the market, there is no better capability at the moment end-to-end than China. Let's also... not forget that in addition to hard lines, soft lines and electrical and computers, China continue to invest. And today, China is now becoming a major player in terms of electric vehicles. And you saw the announcement this morning where they're going to continue to invest in high tech industries and of course, you know, AI. So For us to be a market leader in China is a good thing because, you know, we are strong, is one of the key manufacturing center in the world. And that's, you know, how we think about it. And China for us is not running out of growth as you saw, right? 4.6% is a pretty good growth in 2023.

Thank you. Our next question is from James Rose at Barclays. James, if you could please unmute your line and ask your question. Thank you.

Hi, it's Afonso here, not James. Hi, Andrea Cohn. I have three questions, if I may. Number one, on the price volume splits, I've got to ask, can you provide a bit more colour on how pricing contributes to your 6.2 in the full year and In Q4, in particular, you mentioned the 5.6. How much was pricing versus volumes in that number? And also on that topic, what kind of wage inflation are you seeing at the moment and how that evolved over the last year in 2003? So that's the first question. Number two on GTS, I believe we have seen organic declines pretty much in all quarters since FY21. I'm just wondering if you are currently expecting a turnaround here in 2024. And of course, I appreciate you lost two meaningful contracts there at the beginning of the second half of 2022. So can you just perhaps provide a bit more color on the performance, excluding that impact of those two contracts? And finally, I mean, I appreciate you touched on the 17.5 margin target you have in great detail and in the slides as well. And thank you for that. But can you just I was just wondering if you can provide a bit more color on the divisions that you think would benefit the most from the enablers you described in the slides in the medium term. So just looking at the kind of division that has the most upside in your view in the medium to long term in order to achieve that 17.5 target you have in the medium term. Thank you.

OK. Thanks. Look. As far as margin accretive revenue growth, this is central to the way we run the company. Just to give you a sense, right, our incentive schemes, I talked a bit briefly in the call, is basically touching everyone in the company. And everyone in the company that's got a bonus is basically measured on revenue growth and margin progression with a higher weight on margin to make sure you get the margin accretive revenue growth. in addition to return invested capital, which is important, covering investments as well as working capital efficiencies and CO2 reduction. So there is no one inside Intertech, no site, no country, no region, no business lines that doesn't have the opportunity to drive margin equity revenue growth. I mean, when you operate a business model like ours in the etic industry, uh if you manage your you know volume price mix your productivity your fixed cost your investment and and and and and and and you are uh you know delivering good growth you should be able to get some margin accretion. So for me, I wouldn't want to single out any division because I have a lot of my colleagues from around the world at Intertech listening to these calls and inside the company, everybody has the opportunity to do better in terms of margin accretion, of course. You know, this year, you know, we saw a reduction in consumer products linked to the, you know, revenue decline. And of course, here there is potential to, you know, to catch up. But I don't want you to take, you know, one or two, you know, business lines and say this is going to be the driver of margin accretion moving forward. It's going to be broad based. We're going to get every single site, every single country, every business line, every division right in terms of margin-accurative revenue growth every single quarter? Probably not. But we're going to work very hard at it, and then the results will demonstrate that it is possible, because when you have a good revenue management with volume-price mix, you get the benefits I just talked about. And of course, the faster organic growth, the more leverage you get, provided you're disciplined. As far as GTS is concerned, look, I know that the results are what they are. It was a conscious decision to get out of these contracts, right? We are very strict in our customer relations. And when a customer is asking us to do something We believe it's not right to do because we'll not be able to deliver the superior customer service we believe. We just walk away because there is no way that Intertech will commit to a scope in a contract being either standards or price or whatever that is not living up to our values and our standards. Look, GTS will have a better year this year. So I think, you know, the effect of the contract is not off the base. So I'm not too worried about that. And as far as your question on pricing, let me use your question to reaffirm our approach. We work with 400,000 companies around the world. We are B2B. We've got long-lasting relationships with these clients. And we believe that the best way to deal with wage inflation is to pass 50% of the wage increase through pricing and cover the rest through productivity, which means that when you have periods of high inflation, like we saw in 2021 or 22 and 23, it takes a bit of time to catch up. And that's the way we run the company. Our price volume mix management is very carefully structured. And if you look at our revenue growth in 2023, one third was was price and two-thirds was volume. And today, we're seeing it with some of our clients that have basically been very, very, very racy in terms of price increases. And now you're seeing it every day in the news when they announce their results, they're all struggling with volume because they're losing market share. And we believe that our approach is fair with our clients, but also is fair to our shareholders to create sustainable growth and value for all. So that's the approach we'll continue to pursue. Thank you, Andre. Very clear.

The next question is from Jeffrey Michele at OdoBHS. Jeffrey, if you could please unmute your line and ask your question. Thank you. Jeffrey, if you could unmute your line and ask your question, if you're still there.

Is it working? Yeah, we can hear you. Is it working now? Yeah. Another question on capital allocation. So thank you for the explanation on the dividend. Just wanted to know if you had in mind a sort of calendar, you know, before returning additional cash to shareholder or said differently, is there a minimum leverage that if you go under that would trigger also an additional return to shareholders?

Thank you. Yeah, thanks. So the dividend increase to 65% payout ratio is from 2024, which means that we'll pay the final dividend as per the previous policy. And then when we go into the summer and we pay our interim dividend, we'll start with 65%. So it's going to be obviously phased like this. We believe that 1.3 to 1.8 is the right net debt to be the range to operate within. We are happy to be slightly below for a period of time if that's the case. We would be also happy to be slightly above 1.8 if there would be an acquisition that will require us to take some additional leverage. But that's if you want the range that we have in mind. Okay. Thank you.

Thank you.

We have one further question from Sylvia Barker at JP Morgan. Sylvia, if you could please unmute your line and ask your question. Thank you.

Hello.

Hi, good morning.

Hello. Hi, morning. Hi, I'm here. Just one question for you, please. Thank you for the detail. Just wondering, on the consumer business, I appreciate you have thousands of clients, but what we have heard from other businesses is that there has been a lot of kind of re-tendering activity now that the post-COVID kind of period has had some normalization. So could you maybe talk about If we think about your growth in consumer products, can I have you warn new clients? Have you increased or decreased activity with larger or smaller clients? Just any color that you can give us around the client book within consumer products would be interesting. Thank you.

Yeah. Okay. The best in my view, if it's okay, is to focus on the main business lines within consumer products. Otherwise, it's going to be very generic, what I'm going to say. So we talk about GTS, I'll cover soft lines, hard line, electrical. Look, In soft lines and hard lines, you know, we invented the industry with lab tests in 1973. We have a very strong global footprint. As you know, we are not only the quality, but also the market leader in that space. So we have a very high share, right? And, you know, where are the developments in terms of growth with existing clients? Of course, you know, we are seeing quite a lot of investments of our clients in sustainable solutions. And I'm talking about the operational sustainable solutions, talking about soft lines and hard lines that we talked about at the capital market events. because these brands have got, of course, tremendous catch-up to do in terms of sustainability, performance, but also disclosures, right? So that's a big, of course, growth opportunity. There is no question that CSR and the audit of the factories of these brands continue to be an important focus area. And, you know, another, you know, adjacent market to CSR is textile exchange, which we've talked about in the past where companies, retailers have committed to certain disclosures of organic cotton and recycled fibers in their portfolio. So that, if you want really existing clients, what I would say, you know, the most, you know, attractive growth opportunity, recognizing that we've got a very high share. There is very, very few large brands we don't work with. There are some new brands within soft lines, and this is really interesting. I mean, you've seen some of the recent developments in successes of brands exporting digitally from China. And there are lots, lots, lots of interesting concepts being created around the world. And that is very interesting for us because these young companies don't have any global market access, and we can provide them with all the quality assurance they need and, frankly, speed their way to market. As far as Hardline is concerned, the same applies, by the way, for the Hardline, you know, retailers when it comes to, you know, sustainability and auditing of their factories. The interesting bit in Hardline is there is more and more technology in toys, as you know, and some of the equipment that basically we test in Hardline. Think of, you know, medical equipment, for instance. I don't know if you had the opportunity to visit hospitals recently, but, you know, technology is very, very, very impressive. And, you know, there are also some interesting new brands coming up. And let's not forget that our retailers are also doing quite a lot of investment in what I call private labels to basically improve their margin. When it comes to electrical, we are number two in the United States. As you know, we are number one outside of the United States. This is an incredible business for us. By the way, this is one of the few business lines that didn't see any revenue decline in 2020, right? It's been delivering good organic growth every single year. Here, the electrification of the world is the way I would suggest you think about it. there is nothing that we touch today which is not going to get electrified one way or the other in our house, in our cars, in our factories, in our offices. And here, this is not only about the performance from an efficiency standpoint, but also the, you know, sustainability scorecards of these products. And there is a lot, a lot, a lot of, you know, exciting developments, like battery, for instance, the world of batteries is changing because energy storage due to electrification is becoming, you know, really, really important. And I know we all think of batteries for the device that we have, but think of energy storage, think of what's going into cars and think of what it means in terms of grid management, right? Another interesting development within electrical is, of course, medical devices. I was talking about medical device from a technology standpoint. But if you look at the growth of medical devices, it is overwhelming. So, look, you know, we are we are very, very fortunate because in the three main business lines of a consumer product, we are not running out of growth.

Thank you. Our next question is from Sue Hasini at Varanasi at Goldman Sachs. Sue Hasini, if you could please unmute your line and ask your question. Thank you. Hi, can you hear me?

Yeah. Yeah. Good morning. Hi. Can you hear you? Of course. Yeah.

Good morning. Hello. Hello. I just have one question, please. If I think about your revenue outlook for 2024, which is for mid single, which is like for like revenue growth and compare that to where the other testers are, who are basically guiding for mid to high single digit, like for like revenue growth this year. And I look at what you've actually delivered in 2023, where growth has been very strong outside of consumer products and even consumer products was, you know, seeing an improvement in Q4. Should we just read your guidance as just, you know, being cautious given it's the beginning of the year or is there anything that we're missing from demand perspective?

No, I mean, you're right. It's the beginning of the year. Thanks. You're right. It's the beginning of the year and I'm always considered, right, in what I said. The other thing I would say is for us, mid-single digit has a range, right? So giving a range to a range is a bit complicated. So I'm trying to keep it simple.

Thank you.

Thank you. And our final question is from Arthur Truslove at City. Arthur, if you could please unmute your line and ask your question. Thank you.

Thank you very much. Just a couple from me, if I may. So first question was in the consumer products division. Obviously, electricals outperformed from an organic growth perspective. My understanding is that electricals are lower margin than soft lines and hard lines. So can you talk to any mix effect that was negative there? And the second question, in the consumer products division, separately disclosed items went up while DNA fell in the second half. Are you able to explain why both of those two things happened? Thank you.

Sorry, we couldn't hear the second part of your question. Can you repeat it? There is probably a microphone here.

Yeah, of course. So second question, the separately disclosed items within the consumer products division were up year over year in the second half of the year. And at the same time, depreciation amortization fell within consumer products. I just wondered if you could explain both of those two things. Thank you. Yeah.

On the second question, if it's okay, I mean, Denis, we'll come back to you because we want to make sure that we provide you with the precise answer to your question, but well spotted. On electrical, it's true that the margin for electrical is lower than soft lines and hard lines. So that's true that there is a mixed effect here. So absolutely.

Okay.

Thank you. There are no further questions on the webinar. I will now hand it back to Andre Lacroix for closing remarks. Thank you.

Okay. Thank you very much for being on the call with us. I know it's a very, very busy day and busy week for all of you. We appreciate your time. And then any questions, any follow-up discussions, obviously, Denny is available. So thank you very much. Bye-bye.