Intertek Group Plc Ord

Good day, ladies and gentlemen, and welcome to Intertech H1 Results 2024. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. If you wish to ask a question, we ask that you please use the raise hand function at the bottom of your Zoom screen. If you have dialed in, please select star nine to raise your hand and star six to unmute. Instructions will also follow at the time of Q&A. 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.

Good morning to you all and thanks for joining us on our call. Hi, with me, Com Dizzy, our CFO and Daniel Moreau, our VP of Investor Relations. I would like to start our call today recognizing all of my colleagues at Intertech for having delivered a strong performance in the first half of the year with double-digit growth in operating profit, EPS, and free cash flow. Here are the key takeaways from our call today. We've delivered a broad-based like-for-like revenue growth of 6.1% at constant currency. We saw a very strong margin performance with a year-on-year improvement of 110 bps at constant currency. That resulted in double-digit EPS growth of 17.5% at constant currency. Cash conversion was excellent at 118%, and we saw a free cash flow increase of 14%. We continued to make progress on ROIC, which was up 210 basis points at constant currency to 20%. In line with our new dividend policy payout ratio of 65%, our interim dividend was up by 43%. We expect a strong performance in the second half of 2024. And importantly, the implementation of our AAA differentiated strategy for growth is on track. So let's start with our performance highlights. As I said, we delivered a strong financial performance. Group revenues were up 6.6% at constant rate and 1.8% at actual rate. Lack-for-lack revenue growth was up 6.1% at constant currencies. Operating profit was up 14% at constant rate and 8% at actual rate. We delivered a 15.9% operating margin, up 110 basis points at constant rate and 90 basis points at actual rate. EPS growth was super strong, as I said, 17.5% at constant rate and 10% at actual rate. The 20.4% ROIC performance was excellent, 220 basis points ahead of last year at constant rate and 110 basis points up on actual rates. Free cash flow of £91 million was up 14%. Our interim dividend of 53.9p is up 43% and our balance sheets remain very strong with a net debt to EBITDA ratio of 1. Let's now discuss our like-for-like revenue growth at constant rate, which was 6.1%. As I said, it was broad-based, consumer products up 6%, corporate assurance up 8.3%, health and safety up 8.5%, industry infrastructure up 2.2%, and world of energy up by 8.3%. Our like-for-like revenue growth was driven by both volume and price. We have seen an acceleration of our underlying lack-for-lack growth in the May-June period. Adjusting for two fewer days in that period, our lack-for-lack growth was close to 9% in May and June and 7.7% for the first half. It's great to see that the demand for oetic solutions is accelerating with a two-year lack-for-lack revenue growth of 13.2%. The GLA, CA, PairLink and BaseMed Labs acquisitions we've made to scale up our portfolio in high-growth and high-margin sectors are performing very well. The consolidation opportunities in our industry remain significant and we will continue to invest in inorganic growth. Margin-accretive revenue growth, as you know, is central to the way we deliver value, and our disciplined performance management has resulted in a margin progression of 110 basis points at a constant rate to 15.9%. We benefited from mixed pricing, fixed cost leverage linked to growth, productivity improvement, and our restructuring program, while continuing to invest in our ATIC capability for growth. Looking at our performance by division, we've made good progress, improving margin by more than 100 bps in three of our five divisions. Last year, we announced a multi-year cost reduction program to target productivity opportunities based on operational streamlining and technology upgrade initiatives. The implementation of this program is on track, and after having delivered a cost reduction of £13 million in 2023, we expect a full-year benefit from this program of £11 million in 2024, £5 million in H1 and £6 million in H2. As you can see on the slide, the compounding effect of our margin initiative has enabled us to deliver a two-year margin progress of 180 BIPs. I will now hand over to Con to discuss our results in more details.

Thank you, Andre. In the first half of 24, the group delivered a strong financial performance. Total revenue growth was 6.6% at constant currency and 1.8% at actual rates, as sterling strengthened compared to major currencies that impacted our revenue growth by 480 basis points. Operating profit at constant rates was up 14%. 0.2% to 265.1 million, delivering a margin of 15.9% up year-on-year by 110 basis points at constant currency and 90 basis points at actual rates. Diluted earnings per share were 104.9p, a growth of 17.5% at constant rates and 10.2% at actual rates. Our cash conversion was strong and we delivered adjusted free cash flow of 90.6 million up year on year by 14%. We finished the first half of 24 with financial debt of 708.2 million, which is down year on year and represents a net debt to adjusted EBITDA ratio of just one times. Turning to our financial guidance for 24, we expect net finance costs to be in the range of 41 to 43 million. We expect our effective tax rate to be between 25% and 26%, our minority interest to be between 23 and 24 million, and CapEx investment to be in the range of 135 to 145 million. Our financial net debt guidance, excluding change in FX and MA, is 510 to 560 million. I'll hand back to Andre now.

Thank you, Colm. Let's now talk about the performance by division. All the comments I will make are at constant rates. We are super pleased with the performance of our consumer products-rated business. We've delivered a revenue of £468 million, up 6% year-on-year. Our mid-single-digit, like-for-like performance was driven by high single-digit, like-for-like in soft lines, mid-single-digit, like-for-like in hard lines, high single-digit, like-for-like in electricals, Lack for Lack for GTS was slightly below last year, as expected. Operating profit increased by 12% to £123 million, and our margin of 26.2% was up by 140 bps. We continue to expect the consumer product division to deliver mid-single-digit Lack for Lack revenue growth in 2024. We are also extremely pleased with the performance of our corporate assurance business. A revenue of £242.1 million, up 9.4% year-on-year. Our high single-digit lack-for-lack performance was driven by high single-digit lack-for-lack in business assurance and mid-single-digit lack-for-lack in assurance. Operating profit of £52 million was up year-on-year by 14%, and we've delivered a margin of 21.6%, an improvement year-on-year of 90 bps. Our full year 24 expectations for corporate assurance divisions are unchanged at a high single-digit like-for-like revenue growth. Our health and safety business continues to outperform and delivered a revenue of 167 million per year by 11%. Our high single-digit like-for-like revenue growth performance was driven by high single-digit like-for-like in agri-world and chemical and pharma and double-digit like-for-like in food. Operating profit rose by 27% to 20 million. We delivered a margin of 12.2% up year-on-year by 160 basis points. Our health and safety division is expected to deliver a high single-digit lack-for-lack in 2024. Our industry and infrastructure business reported a revenue of 420.5 million, an increase of 2.8%. Our low single-digit lack-for-lack revenue growth was driven by mid-single-digit lack-for-lack in industry services, mid-single-digit lack-for-lack in minerals, and stable lack-for-lack in building and construction. Operating profit of 37 million was at 4%, with a margin of 8.8%, 10 basis points ahead of last year. In 2024, we expect our industry infrastructure-related business to deliver low single-digit lack-for-lack revenue growth, given the slowdown in large infrastructure construction projects in the U.S. Revenue in our world of energy-related business, we're at £372 million, up 8% year-on-year, or high single-digit lack-for-lack revenue growth, was driven by high single-digit like-for-like within calibrate, low single-digit like-for-like in our TT business and double-digit like-for-like in our CA business. Operating profit was 33 million pounds, up 31% year-on-year, and our margin improved by 150 basis points. In 2024, we continue to expect a world of energy division to deliver high single-digit like-for-like revenue growth. At our capital market events last year, we shared with you our AAA differentiated strategy for growth to unlock the significant value growth opportunity ahead. In March, I gave you an update on why we expect faster life-for-life revenue growth for ATX solutions, how we will deliver a 17.5% plus medium-term margin targets, and how our high-quality earnings models will deliver sustainable value creation. Today, we'd like to give you an update on three important investment areas to execute our AAA growth strategy. The supply chains of our clients are never static, and we'll discuss how we're investing in our global AT capability to seize the exciting growth opportunities ahead. Sustainability is the movement of our time, and we'll explain how we've built an industry-leading approach to address the complex sustainability needs of our clients. The digitization of our ATIC value proposition is really important, and we'll talk about how we are using technology to build a technology-based customer service advantage. Supply chains never stand still, and we've seen several structural changes in the operations of our clients in the last few decades. Our mantra at Intertech is to always anticipate where our clients are taking their supply chains, using our 6,000 interviews that we do a month with every customer, to invest in our global AT capability. Our global footprint and importantly, our capital-light business model makes us very agile, giving us the opportunity to move fast if we need to build additional AT capability for our clients in existing or new markets. Over the years, we've invested in many markets to expand our global footprint. This is how we've built a strong presence in Vietnam, India, Bangladesh, Cambodia, Egypt, Turkey, Greece, Morocco, Guatemala, Brazil, Colombia, and of course Mexico. There have been a lot of discussions about brands exiting their manufacturing footprint in China. We've only seen a handful of brands doing so as changing production location is a high-risk decision for any business. Importantly, China has a track record of manufacturing excellence with good customer service, a strong capacity in terms of logistics, and they continue to invest for the long term in new sectors as energy storage, solar panels, and EVs. That's why the Chinese export economy in 2023 was 37% larger than in 2018, and in H1, the export economy was 46% higher than 2019. We operate a strong business in China that has demonstrated its ability to deliver mid-single-digit lack-for-lack revenue growth over the years, including in the first half of 2024. What we have seen is companies pursuing a China plus one strategy. What is it all about? It's essentially building supply chain for new businesses in a new country to operate a more diversified footprint. That has resulted in additional manufacturing investments in countries like Vietnam, Cambodia, India and Bangladesh, while China has continued to invest in new sectors. We also have seen investment in nearshoring to reduce the time to market and CO2 emissions, and the main beneficiaries have been countries like Egypt, Turkey, Portugal, Morocco, Guatemala and Mexico. Finally, we are seeing onshore investments in the renewable sectors with manufacturing investments in energy storage, solar and wind. These are strategic sectors for the energy security of the European and North American markets. Over the last three years, we've invested 330 million capex to support the needs of our clients in APAC, EMEA and the Americas. And this year, we plan to invest another 135 to 145 million pounds. I would like now to give you a sense of the investment that we've made to expand our global ETIC footprint. Let's start with APAC. We operate an excellent ETIC portfolio in APAC. This is 35% of our revenue. And here is a list of the investment that we've made to broaden our ETIC footprint. Of course, I will not comment on all of these, but here are a few comments based on my recent market visits. We operate a mineral center of excellence in Perth, Australia, and I'm really impressed each time I visit the operations by the work our team is doing to drive faster growth, importantly in high-margin segments. I go to India very, very frequently. It's a fantastic market and plenty of growth moving forward. Our business assurance business in India is truly best in class, and the investments we've made are driving exceptional returns there. I had the opportunity a few months ago to visit our new toys lab in Hanoi, and I saw firsthand the excellent growth opportunities we have there. Let's move to EMEA. EMEA represents 26% of our revenues, and these are the investments that we've made recently. Just a few comments from my side. We've opened a battery center of excellence in Italy last year, and I'm really proud. This is a really leading-edge lab, one of the best in the world that can handle all the needs of our clients in energy storage. Very recently, we were in Turkey and we had organized a sustainability event for all of our SoftLine customers. And I was really impressed to see how SoftLine customers were embracing the investment we've made in leading operational capability solutions like Detox. Here in the UK, we are at the forefront of the EV industry development. We are a center of excellence in Milton Keynes, and the good news is that we are winning significant new contracts step by step. Let's move to the biggest region for Intertech, the Americas. This is 39% of the group revenues, and of course, we have invested significantly to take advantage of the exciting growth opportunity in that region. Biofuel is a huge area of investment. We talked about it during our capital market event, and I'm pleased that we now have a leading capability in sustainable aviation fuel in the region. The growth we are seeing with the AgriWorld operation in LATAM is super exciting, and I'm really pleased that we've decided to expand there step by step over the last few years. Going back to EV in North America, we recently opened an EV center of excellence because the opportunity for growth there is significant. Let's now discuss the second strategic deep dive for our call today, sustainability. And let's, you know, talk about how we are supporting the needs of our clients with our sustainability solutions. We know that sustainability is the movement of our time. Corporations are increasing their focus in this area. Of course, these investments are driven by an increase in number of regulations, but it's also driven by more and more demanding consumers for the brands they buy or service they purchase. Our clients are facing some real challenges to take an end-to-end strategic approach to sustainability. And to help them, we have developed industry-leading end-to-end total sustainability assurance solutions, which basically try to help them mitigate their operational, corporate, and reputational risk within sustainability. We always advise our clients to start the sustainability journey at the heart of their value chain. That's why we offer industry-leading operational solutions sustainable solutions that cover, among others, R&D development, tier 1, 2, 3, supply, sustainability, performance, energy, waste, water, chemical, air quality, safety management, of course, carbon footprint assessment for scope 1, 2, and 3, and eco-scoring of their products. In simple terms, our operational sustainable solutions focus on the high-risk areas inside the value chains of our clients. In addition, We also advise our clients to complement these investments in operational sustainable solutions with the right sustainable policies underpinned by the right corporate process, which we can audit with our corporate sustainability certification program. Last but not least, the reputational risks for companies are significant, and we've seen world-class companies being fined by regulators for having made unsubstantiated claims about their products. That's why we help our clients with our ESG assurance solutions, which offer an independent audit of their non-financial disclosures. Importantly, every industry is different and every industry has its own sustainability risk. That's why when we go to market and meet our clients, we always go with industry-specific ethics solutions that cover the needs of our clients in quality, safety and sustainability. Let me give you a few concrete examples of how it works in several industries. You've seen that in the past, this is a visual representation of our ethics solution here, in that case for company producing T-shirts, and what I've done to make it clearer for you what we offer in terms of operational sustainable solutions, we've basically highlighted in blue the operational solutions that target sustainability risk in the supply chain of our clients. Now, Let's move to another example. This is what we do in the case of a light bulb producer, very important given our strong presence in the electrical sector. You can see here how this approach works in the food sector. In that case, it's a honey manufacturer. And here, this is an example in the oil and gas industry looking at what I just talked about, sustainable aviation fuel, which is really important for the future. Let's now talk about our third strategic deep dive today, and I want to talk about our tech-based AT solution. You would recall that during our capital market events, we discussed the importance of innovation and M&A to strengthen our customer service, targeting high growth and high margin space. Today, I'd like to give you an update on where we are in the digitalization of our ATIC value proposition. We believe in the importance of technology to augment the strengths of our ATIC solutions with a superior digitized customer service. We've made a lot of progress in that space and equally, there is much more to go for. The benefits of a tech-based ATIC solutions are significant, That provides a superior customer service, making our commercial relationship more sticky. Our customers have access to better insight with superior data and can make better decisions in terms of risk-based quality assurance. And importantly for us, tech-based solutions provide significant productivity benefits as you can benefit from operating leverage from the SaaS investment that you've made. I'd like now to share how we've built a tech-based AT advantage in three segments. Let's start with people assurance, where we help our clients identify and mitigate the skill gaps they have at the operation level, at the frontline of their manufacturing or distribution centers. We provide a comprehensive suite of audit training engagement solutions in a SaaS platform targeted at frontline workers, as I said, with Alchemy, Whitestell, and PlayerLink. This adjacent ethics space of people assurance when we made the acquisition of Alchemy six years ago. And that has opened excellent new growth opportunities in the sector that is high marketing. Let's now talk about a few examples of digital service delivery. Within our soft line and high line business, we've strengthened our customer value proposition with the digitization of our inspection solution with i2Q a few years ago and recently our testing solution with iCare. Very recently, we partnered with ESG Playbook to offer a digital platform for clients to collect and manage carbon data. The responsibility of companies with their own supply chain and extended supply chain is significant, but very complex to manage. That's why our clients need tech-enabled supply chain traceability tools. We've launched a few years ago InLight, which helps companies manage their tier one, two, and three suppliers in a very granular fashion to better identify and mitigate the risks in their extended supply chain. We operate SourceClear, an industry-leading platform for chain of custody traceability in the textile industry. And recently, we've partnered with Trade for Good to provide product-level traceability and product passports for clients in consumer products. We are pleased with the progress we've made to digitize our ATIC value proposition and will continue to invest in technology to strengthen our technology-based ATIC advantage. Before taking any questions, let's cover our guidance for 2024. Given the strong performance we've delivered in H1, we're entering H2 with confidence and expect to deliver a strong performance in 2024. We expect the group will deliver mid-single-digit, like-for-like revenue growth at constant currency. We expect mid-single-digit in consumer product, high-single-digit in corporate assurance, health and safety, world of energy, low-single-digit in industry infrastructure. We are targeting year-on-year margin progression, our cash discipline, We'll remain in place to deliver a strong free cash flow. We invest in growth. This capex of circa 135 to 145 million. We expect our financial net debt to be in the range of 510 to 560 million pounds before any M&A or Forex movement. A quick update on currencies for your model. The average selling 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 300 bps and 400 bps, respectively. We believe, as you know, in the value of a creative, disciplined capital allocation, and during our capital market events, we discussed the approach we have in place, which you can see on the slide. We are very excited about the organic and inorganic investment opportunities, and our investments will continue to be made with the same discipline ROIC-driven approach. In summary, our highly engaged customer-centric organization is laser-focused to take Intertech to greater heights, putting our AAA strategy in action. To deliver sustainable growth and value for shareholders, we'll capitalize on a high-quality cash compound earnings model, benefiting year after year from the compounding effect of mid-single-git lack for equity growth, margin accretion, strong free cash flow, and disciplined investment in high-growth and high-margin sectors. The value growth opportunity ahead is significant. Thank you for your time today, and we'll now take any questions you might have.

We will now start the Q&A. If you're dialed into the call and wish to ask a question, please use the raise hand function at the bottom of your Zoom screen. If you've dialed in, please select star nine to raise your hand and star six to unmute. We'll take our first question from Suhasini Varanasi at Goldman Sachs. Please unmute your line and ask your question.

Hi, hope you can hear me.

Yeah, yeah. Oh, good. Good morning.

Good morning. Good morning, Andre. I have two questions, please. One, given the actions in the US this year, can you maybe share some feedback from clients? Are they talking about any SKU volume reduction in light of the risks around increase in protectionist policies? The second question is on the trading day adjusted organic growth, which was high single digits in May and June. And going into third quarter, you actually have benefit from two extra trading days. Is there any reason why we shouldn't expect double digit growth for the next quarter? Thank you.

OK, so as you know, we don't give quantitative guidance per quarter. We're trying to give you a full year view. But you're right. Momentum is strong. And, you know, we are getting into H2 with confidence. And as you know, we take it a step at a time and we'll report in October. But the team, you know, is very, very positive about the second half, given the broad-based momentum that we have in the business. And rightly said, you know, there is a good opportunity to continue to do very well. But I'm not going to give you any precise guidance, as you know. On your first question, Look, I'm not going to get into politics, of course. What I can say is that our clients in the consumer product space, and for us it's essentially soft lines, hard lines, and electrical, are in a very good place. Starting with electrical, this is not a business we talk a lot about, but this is a business that has continued to really deliver really, really commendable performance. We'll recall that we didn't see any change in terms of life-for-life trajectory in 2020 because it's focused on the mission-critical nature of the electrification of society. And again, you saw the performance. And here, we have a very broad-based footprint Of course, we are really strong in North America, but we are very strong here in Europe, very strong in Asia. And I'm not worried about that. When it comes to soft lines and hard lines, look, that industry has been through a few difficult years in the second half of 2022 and 2023. I think they've done a lot of work in terms of, you know, their cost base and working capital management. The rebound we saw in consumer product has been, you know, based on a renewed confidence in the investment that they need to make in USKU. So we are not seeing anything that would be a worry or concern regarding the outlook of our consumer product performance in the second half. The other thing I would say, because I know what's driving your question, if you go back to what happened when we saw a tariff increase under President Trump back then. Essentially, if you look at the export value of China in the United States, it's way higher than it was pre-Trump. And there was very little effect. China has continued to do very well. I talked about the export markets being significantly ahead of 19 in 23 in the first half. So if the past is a proxy for the future, the previous tariff increase that the previous administration put in place didn't work. Now, I'm not going to say much more than that, but I think it's an important data point for everyone. And why is that? It's because essentially, The industry is consumer-driven, right? Consumers want the brand that appeals to their needs. And this is what's driving, obviously, consumption. And tariff is not a driver of consumption. Tariff is a driver of fiscal policy and potentially of inflation. So, look, that's what I will say, okay?

Thank you very much. Our next question is from Rory McKenzie at UBS. Please unmute your line and ask your question.

Good morning. It's Rory here. Two questions, please. Firstly, can you tell us Can you tell us what the revenue growth was in APAC overall in H1? I think you said China was still growing at mid-single digits. So can you talk about the performance in other countries? I guess I'm asking because there was just the really interesting detail on slide 25, showing your capacity investments in the region. So I wanted to understand how they're adding to growth already and how perhaps even margins are evolving in these faster growing countries within APAC. And then secondly, on margins, can you help us understand the really strong improvement in H1? You obviously called out the direct cost saving benefits, but what else stands out in that 110 bps increase year over year? Can you attribute much of that to operating leverage or margin investments ramping up? And how should we think about that evolving in H2? Thank you.

Thanks, Roy. Look, As you said, we are really pleased with the mid-singularity performance in China. in um apac the countries that you would know very well that are you know strong manufacturing centers for the world where we are seeing some really really strong performance and accelerations are essentially japan uh where we are really strong in electrical uh you know and also business assurance and and and you know the importance of the chinese economy We are seeing some very, very, very strong growth in Korea, a fabulous, fabulous economy in multiple sectors. There is no question that in the first half, Vietnam has been a star performer. Our team has done a great job. And I'm not going to talk about market share, but it's very, very likely that they outperformed everyone. Really, really strong performance. And then, you know, the other markets I would call is India and Bangladesh. I mean, all India business. I talk about India from a business sharing standpoint, but... The progress that the team has been making in every single category is outperforming the rest of the industry in soft lines, in hard lines, in electrical, in sustainability, in food, in, of course, business assurance. Agri and calibrate is incredible. And last but not least, we never talk about this market, and I go there on a regular basis, is Bangladesh. I mean, the presence we have in Bangladesh, like in India, where the market leader is just incredible, and the growth there is really strong. So you're right, APAC is broad-based, and I try to help you here with some of the key markets. The other question on margin. We talked at the capital market event last year, how we are managing, you know, margin. And I think, you know, the reason why, you know, the margin is so strong is because we are basically staying very focused on our strategy, right? Number one, we believe in the power of margin accretive revenue growth. As I said, you know, in the past, I would rather grow 1% less in terms of like for like with margin accretion than growing faster than life for us and not getting any margin of acquisition. Why is that? Because when you are the premium player, we have the highest customer service ratings, as you know, demonstrated that last year. When you have a premium price positioning, you've got to stay focused on margin equity for growth from a volume price and mix. So the first, if you want, you know, driver of performance is volume price mix. We took pricing and price was about one third. of our revenue increase, but mix management is really, really important, i.e., you've got 100 engineers in a lab, let's just say, in Cortland, upstate New York, where you apply the 100 engineers' hours, available hours, will make a big difference if you target high growth, low growth, high margin, low margin, and what you want is You want, of course, to pay the fixed cost, but you want to really make a difference in high growth, high margin. So that's this really portfolio approach that we have at the global level, that we have by business line, and that we have at the local level. Now, the second thing is performance management. We have an incredible focus on data. As you know, we've built a fabulous data platform over the years where we can look at any productivity metric for any site in any period. And the team is really data savvy. And we benchmark our business all the time to make sure that we don't focus on one metric, but we understand for all the margin drivers, what can we do? Volume, price, mix. Fixed costs, variable costs, and of course, investment in the future. And our business model is so strong that we can invest in the future and do what we are doing. Now, and lastly, you know, what's obviously helping is the restructuring program that we have in place that is targeting the non-customer facing operational headcounts, i.e. we are streamlining where we can, you know, with technology, if possible, you know, the back office, et cetera, and so forth, or some of the shared service center to get a lower overhead. And that's, you know, really, really important. I would say that, you know, we expect, you know, margin to continue to progress. You know that we have a 17.5% plus margin target. And you ask at the capital market event, it's going to be 2029. And I said, you know, I hope not. And, you know, now we are getting very close to the target. And then, you know, when we get to 17.5%, we'll not stop there. I mean, this business has got the opportunity to go to 17.5% plus margin. because of our product mix, because of our performance management, but also because of our track record. So look, I'm very proud of what the team has done. And that's what I would say on your second question.

That's very helpful. Thank you, Andre.

Our next question is from Arthur Truslov at Citi. Please unmute your line and ask your question.

Brilliant. Thank you very much indeed. I guess first question. Good morning, Andre. Well done. Good results. First question for me was on the operational leverage opportunity looking forward. So it obviously sounds like you've benefited from that in both your consumer products and indeed world of energy divisions, amongst other things. I guess, how are you expecting that to progress as we move forward into the second half? Do you think that operational leverage opportunity is as good in H2O? as in H1, or slightly less, or indeed slightly more. Second question. It looks like, having a quick look through your full release, that depreciation and amortization was around 10 million lower than in the prior year. I just wondered how that happened. And I guess it seems to be broad-based across the divisions. I just wondered why that was the case. And then third question, just on the second half margin. So I guess you've got 30 bps of... the 30 bits of comp headwind from the gain on disposal in the prior year, a bit of FX. And so, you know, do you think you can do comparably at constant currency in the second half on margin or indeed, you know, other headwinds that we should think about? Thank you. Yeah.

So I think... On the second question, it's not that complicated. An attorney can help you if you want. But essentially, as you know, we had a bit of low capex during the COVID years. And that's the explanation. There is nothing more than that. Look, the first and the third question is the same, right? Is how do we think about margin for the second half? No. There are multiple moving parts that I just explained to Ori. One thing I didn't say to Ori, which I should have said, one thing that we should not forget when it comes to Intertech in terms of operating leverage, because testing and certifications, and you know the numbers, are delivered in labs. Of course, as we talked about at Capital Market Events, the lab-based activities are provide with a better operating leverage than inspection, for instance, right? And that's, you know, something that obviously is very, very important for us. Now, is there any reason why the operating leverage should be lower in the second half than the first half? Strictly, no. The only thing I would say is that, you know, we've delivered a very strong performance in the second half in terms of margin last year. So the base is slightly more demanding. I get your point on the gain on disposals and could we target, are we targeting constant currency margin improvement in the second half? And of course, we are obviously wanting to continue to make progress because remember, we believe that this business can go back to 17.5% and go beyond that. So nothing is going to change. But, you know, we had a half year. There is a lot of work still to be done. We have a strong demanding base and we believe that our guidance is fair. And we will update that when we announce in November the next four months.

Great. Thank you very much.

Our next question is from Sylvia Barker at JP Morgan. Please unmute your line and ask your question.

Thank you. Hi, morning, everyone. A couple of questions for me, please. First one, on the organic growth adjusted for days, just to be clear, so you're obviously talking about two fewer days in the second period. That implies 9% growth in that second period. And you seem to suggest that that momentum has carried on into the start of the second half. Can we just double check that? And obviously those working days would have had a greater impact, as you always say. on testing and certification type activities. So maybe just a little bit of colour around, you know, just around the divisional differences there that we might expect. And then secondly, just on the CAPEX, so a lot of investments on those slides. And I suppose just squaring that with the 3% to sales of CAPEX, Do a lot of the investments now go to the leases line? Or can you help us otherwise? Because it does seem that you're adding a lot of capabilities and facilities, but the capex to sales is actually not particularly high. So maybe if you can just help us out a little bit to understand that. Thank you.

Yeah. Let's take your second question first. Look, we have a very strong... you know advantage is that you know we operate world-class uh facilities right so we don't have if you want a huge catch-up in terms of capex to keep our facilities you know up to uh up to the standards right so we really we are really in in investing you know in in in growth and of course you know it and of course you know maintenance because you want you want you want to do that the lion's share of our investment is in organic growth right you know through through capex So that's the way to think about it. But I want to answer your question slightly differently. Yes, we are very disciplined in terms of CapEx. investment. We care about return on invested capital for our shareholders. That's why, you know, we have an industry-leading ROIC and we continue to make progress because that's our job, right, to make sure that you allocate capital, you know, wise and you try performance. So, yeah, I mean, we are getting some good results on the investments we are making. And, you know, as we just said, you know, when Arthur asked the questions about depreciation, we had a few years where There was a bit of slowdown in investments because of COVID years. We're busy with other things. But, you know, we have invested and I tried to demonstrate, you know, today where we invested and we're not stopping there. But one thing, you know, I want everyone to be clear is we are really disciplined because we want to run this company for mid-single-digit, like-for-like investment. high margin, strong cash, disciplined investments to deliver, you know, a strong ROC and the component effect of these various drivers is what drives, you know, sustainable value creation. We're not one single metric company. As far as, you know, your organic growth, you know, question, I mean, look, Two months doesn't make a year, right? We are very pleased about the January-April period. We are very pleased about the underlying growth in May and June. They adjusted, as you said. We're entering, as I said in the first questions, H2 with confidence. But don't take a two-month trend as a full-year extrapolation for your model. I wouldn't advise you to do so. Remember, we have a base to compare ourselves against. But I can tell you that the team is super energized about having a very strong H2. And we'll update you and your colleagues in November.

Thank you. And just on that, I guess one and a half percent or so, let's say one, one and a half percent of drag in the first half on that organic from days. Did that have no impact on the profitability then? Because obviously the margin is up so much. Did you have any negative impact from that in profitability?

Well, I mean, the answer to your question, the margin could have been better if we didn't have that impact.

OK. All right. Well, thanks very much.

You're welcome. As a reminder, if you wish to ask a question, please use the raise hand function at the bottom of your Zoom screen. Our next question is from Alfonso Osorio at Barclays. Please unmute your line and ask your question.

Hello. Good morning. Thank you for taking my question. Most of my questions have been answered so far. But yeah, just one last one for me, Andre. On GTS, I think I asked you this before. I appreciate the level the client has stabilized versus what you saw in 2022 and 2023. But it's still a draft group into your consumer division. So can you share your thoughts as to why this division has faced some difficulties over the last 24 to 26 months? And what can you do to improve this performance?

There is a lot of do we can do to improve performance in every aspect of our business. So we are, as you know, always focused on finding new ways of driving better results. So there are plenty of things we can do. I don't want to be flippant. I just want to be precise on GTS. Look, GTS, I would say, is stabilizing versus what we did in the last few years. The reason why it's slightly below last year is not because there is a contract effect. It's essentially because, as you've seen in a few releases this week, there's been some consumer's reactions to high price categories and high price brands. And there is a bit of a mixed effect within these countries where, you know, we are certifying the export from, you know, whatever country to the Middle East and Africa. That's the only, you know, factor here. But, you know, volume is very, very, very good. But, you know, there is a bit of a, you know, consumer, you know, slow down in the high price categories given the inflation that we've seen. And I'm talking about Middle East and Africa only, right?

That's it. That's helpful. Can we see some growth in the second half or is it still broadly the same as the first half from here?

We will see the basis getting obviously easier, of course. So we will see. I wouldn't be surprised to to see the growth starting to improve in Q4, but we will see it, take it step by step.

Thank you very much, Andre. Appreciate it. You're welcome.

Our next question is from Annelies Vermeulen at Morgan Stanley. Please unmute your line by pressing star six and ask your question.

Hi, good morning, Andre. Can you hear me?

Yeah, good morning. How are you?

Oh, hi. Hi, good morning. Hi, good. How are you? So thank you. A couple of questions as well. So firstly, just on capital allocation, I think you've made one acquisition in the first half. Could you talk a little bit about the pipeline? Can we expect to see more deals in the second half? And similarly, your net debt at one times, I think, below your target range. How are you thinking about capital allocation more broadly? Is there a potential to return excess cash in the coming months? Then secondly, building and construction. We've heard some mixed commentary at the peer group with some suggesting that that may have troughed based on your lowered guidance for INI. Clearly, I think you still expect some weakness in the second half there. So when do you think that that business will trough for you? I know you've mentioned slowdown in large infrastructure projects in the US. So is it a case of getting past the US election? And then thirdly, just on China, So, you know, you've talked about China, mid-single-digit growth, and clearly your consumer business is rebounding nicely. However, some of the indicators on growth for China still look a little bit mixed. So could you talk about what you're seeing on the ground in China and perhaps some comments on export versus domestic, if there are any differences to call out? Thank you.

Okay, thanks. So I'm trying to answer your four questions. On M&A, there is no question that the M&A market has been a bit soft in the last few years. You're right, we've only done one in the first half. We are seeing a bit more activity. I wouldn't say a lot more, but we are seeing a bit more. The pipeline is getting incrementally stronger. As you know, I cannot predict M&A closures. I mean, there are so many moving parts here. But the pipeline, I would say, is getting incrementally better than it was six months, 12 months ago, which I think is good news. And as you know, the more the interests go down, the more the market will accelerate. So I think that market should get step by step much better for us. We'll always... remain very disciplined. As you know, we focus on acquisitions that are strong in terms of growth, but also margin. Look, on cash, you're absolutely right. Our balance sheet is super strong. We've always guided for a leverage target of 1.3 to 1.8 net debt to EBITDA. We are below that uh that that zone um we've always said that we are happy to be below and above uh this range for the right reasons um you know you would recall um from the capital market event and and uh you know i put the slides uh after the guidance slide that you know um we are not obviously you know um against you know return returning excess capital if this is the right thing to do we have not made that kind of decision but we're not against that and then we'll have to take it a step at a time and this is our policy our view in terms of real value creation is that investment in the right inorganic opportunities drive much better return than buyback. And you can run numbers yourself. You've done it, I'm sure. It's very easy to drive EPS accretion with buyback. But the business case on return invested capital is different. So that's where we are. It's no different from where we were a few months ago. um bnc you know really really important question we've always seen uh pre and post the election a slowdown uh in the construction activities in north america i would say you know this time it's a bigger slowdown than than we've seen in the past for essentially you know two reasons one is um there is, of course, an impact of higher interest rate on these large construction projects. And that's a fact that we all understand. And then, of course, the question we had at the beginning, would a Trump administration come back? What would they do with the Infrastructure Act, the Inflation Reduction Act, which you know has basically released tremendous incentives? So there is a bit of wait and see, but it's a bit more pronounced than we've seen in the past because the fear that some of these incentives will be watered down or taken away. Personally, I don't think so because it's going to be very difficult, but also the interest. As far as China is concerned, look, the rebound of our Chinese business in consumer products has been very strong in soft line and hard lines, as you've said. um our electrical business continued to do you know very well there so there is no no no no no worry you know whatsoever uh we are of course involved in assurance we are of course involved in food and chemical and pharma products no i mean the the the manufacturing data uh out of china is positive the service data is also you know positive when you get the pmi so I'm not concerned about the outlook in China. And as I said, you know, the export market is up, you know, significantly, you know, versus, you know, 2019 and, you know, make progress. So, no, we are, you know, very comfortable about the outlook in China.

Okay.

Thank you very much.

You're welcome.

Our next question is from Neil Tyler at Redburn Atlantic. Please unmute your line and ask your question.

Yeah, good morning. Thank you. A couple left, please. I think I suppose a similar question to Annalisa's on the CapEx and OpEx activities, which look like the momentum there has slowed a little. I understand they're lapping particularly tough comparatives. But do you see enough in the end market backdrop to support sort of growth through next year? And how far forward do you sort of realistically anticipate um have line of sight over for those businesses that's the first question and then secondly uh andre thanks for the the deep dive on the sustainability opportunities um i appreciate those uh expanding quickly but similarly as we've discussed previously the competitive landscape is also developing quite quickly so can you help us perhaps understand some of the key elements of the intertech pitch if you like um how these differentiate you against non non-tech competitors in the space. Thank you.

Of course. So I assume that your first question is on industry services, right? CapEx and OPEX.

Yes, yes, yes. Yeah, sorry.

Yeah. Yeah. So really important to talk about it. Thanks for asking the questions. So we have within industry services, two businesses, right? We have what we call Moody, which is essentially, you know, CapEx. We are the market leader in terms of engineering-based inspections in, you know, large, you know, energy projects being, you know, traditional oil and gas and obviously renewables. And as you rightly said, you know, we had a really strong last performance in 2023, and we've got a strong base. The reason why our industry services numbers are down is because we are very, very careful with obviously some of our you know, contracts renewal. And, you know, we decided not to renew a few large contracts in our OPEX business, which is the smallest of the two businesses inside industry assurance, which essentially means that our OPEX business was done, you know, double digit in the first half because we decided not to renew this contract. We're not going to go for low price and very low margin. Importantly, the Moody business has grown double digit and strong double digit and continue to gain market share. We got tremendous growth in some of the projects around the world. Middle East, of course, India, Asia, North America. And here, as we talked about in the past, given the underinvestment that we've seen in the energy sector pre-COVID, and given the energy security that the world is facing due to geopolitics that we all understand so well, the world has to invest. in traditional end gas and renewables to drive energy security in the short term and energy transition in the long term. So I'm very, very, very, very bullish there. We are the market leader. We are investing in new spaces. So this is a very, very good business. Look, your point about sustainability and the pitch versus, if I understand it correctly, the big four, right? That's what your question is. Yeah, and even more broadly than that, I suppose. Yeah. So essentially, who is doing what in the sustainability space around the world at the moment, right? So you've got the big four who basically are seeing the opportunity on the back of CSRD for the audit of non-financial disclosures, okay? And then you've got a few, you know, companies around the world, niche consulting companies getting involved in sustainability assurance, et cetera, and so forth, right? So what is the pitch of Intertech, right? There is nothing that the big four do that we cannot do in terms of audit of non-financial disclosures, right? We can do that. We have the same capability. But the advantage we have versus the big four, all of these firms and these small consulting firms is that we are really strong from a technical standpoint in helping companies address the drivers of sustainability improvement. Because to basically, you know, do what CSRD is asking companies to do in Europe is very, very good because you have to audit your non-financial disclosures. But as you know, the moment you produce numbers, people are going to ask the question, how are you improving your numbers? And the advantage that Intertech has is that we are very strong in the operational sustainable solutions, which I tried to explain today, because this is an area where we invested for many, many, many years. This is, of course, where we are, you know, really, really, really, you know, you know, edgy in terms of technical understanding and innovations. And the advantage we have when we said to our clients, look, working for Intertech, we can do what the big four can do, but we're going to do much more for you because we can help you. essentially on the high-risk sustainability areas of your value chain, which are very different by industry. And by the way, when it comes to the consulting and advisory, we have an incredible business called Assuris, where we have all the capability in terms of helping clients do their scope one, two, and three, looking at the various methodology in terms of scope three, which, as you know, is a bit of a mess at the moment, but it will have to be fixed. And, you know, and making sure that our clients are really, really focused on the regulatory drivers from a corporate standpoint, but also from a product standpoint, because that's where the world is going, right? They are the corporate disclosures, but also the product, you know, regulation. It is very important. So what is the USP? We offer an end-to-end total sustainability assurance, and we are much better than our competitors.

Great. Thank you very much. That's helpful. Thank you.

Our next question is from Himanshu Agrawal at Bank of America. Please unmute your line and ask your question.

Hi, good morning. Thank you for taking my question. I hope you can hear me. Of course, yeah, go for it. Okay, great. Yeah, no, I just wanted to come back to the organic growth performance in the first half, which we already discussed. But I understand there was a two days impact and it it has impacted the testing and certification business. But when I look at the organic growth numbers in the May-June, it looks like the slowdown was a bit more broad-based. So even world of energy slowed down quite a bit from Q1 and then industry and infrastructure, which we have already discussed. So if you can just talk about the drivers of this broad-based slowdown and And if you're so confident on the improvement in the second half, so how should we think about, because you had this exit run rate of around 9%, so it should extrapolate that kind of growth rate into the second half. So that is the first one. And also on organic growth, if you can help us with the split of price versus volume in each one.

Yeah, so look, on price versus volume, as I say, it was, you know, one-third, two-third, right? One-third price and, you know, two-third volume. Look, we are an AT company and testing and certification is just, it's not only in consumer product, right? We are a lab-based, you know, business in consumer product, of course, in health and safety, right? in industry and infrastructure, we've got labs, and in the world of energy, right? So there is, you know, I wouldn't want you to think that Intertech is lab-based in consumer product and inspection and the rest, because that's not true, right? So the discussion we had applied throughout, and I wouldn't basically, you know, worry about, you know, the unadjusted like for like revenue growth in may and june for the reason that we talked about right okay okay yeah thank you you're welcome there are no further questions on the webinar i will now hand over to management for closing remarks Well, thank you very much for your time this morning. I know it's a busy day for everyone. Of course, Denny is available for any additional questions that you have for the rest of the day or next week. Thank you very much and have a nice weekend.