Intertek's (IKTSF) CEO Andre Lacroix on Q2 2016 Results - Earnings Call Transcript

| About: Intertek Group (IKTSF)

Intertek Group plc (OTCPK:IKTSF) Q2 2016 Earnings Conference Call August 1, 2016 4:00 AM ET


Andre Lacroix – Chief Executive Officer

Edward Leigh – Chief Financial Officer


Toby Reeks – Morgan Stanley

Will Kirkness – Jefferies

Josh Puddle – Berenberg

Robert Plant – JPMorgan

Ben McSkelly – Shore Capital

Tom Sykes – Deutsche Bank

George Gregory – Exane BNP Paribas

Paul Sullivan – Barclays

Edward Stanley – Redburn

Rajesh Kumar – HSBC

Suhasini – Goldman Sachs

Andre Lacroix

Good morning everyone and thanks for being on time. If we start on time we are very likely to finish on time, so it's really appreciated. Welcome to our H1 Results Presentation. I assume we are all set from a webcast standpoint? Yes. Good. We are really pleased with our performance in the first half and the good news that you've seen from this morning's statement, we are on track to deliver our full year targets.

I would say that the results that we delivered in the first half are a further demonstration that Intertek operate a high margin, strongly cash generative earnings model with a track record of sustainable growth in terms of earnings, cash, revenue and obviously shareholder value creation. We have delivered indeed a double-digit revenue and earning growth with improved margin, strong cash conversion and a 14% increase in the interim dividend. Moving forward, in our view is the organic and inorganic growth opportunities in $250 billion quality assurance market are truly exciting and we're very, very well positioned to seize these.

Let me just go through the highlights of the first six months. As you've seen this morning we've generated a revenue of £1.2 billion recording a double-digit growth of 13.6% of actual currency and 10.6% at constant currency. The organic growth rate of the Group was 3.1% actual rate and 0.5% constant currency. The robust organic growth that we've delivered in the Products Division of 5.6% of constant currency and the solid organic growth in Trade of 1.1% also at constant currency were partially offset by challenging conditions as we know in the Resource sector. It was down 11% at constant currency. I'm talking about organic growth here for Resources.

The five acquisitions we made since January 2015 are on track, performing well and contributed £113 million of revenue in the first half. The Group operating profit of £186 million was up 13.1% at actual currency. At constant currency, operating profit was up 11.3%. That drove an overall margin improvement as you've seen of 10 basis point at constant currency. Our cash flow and cash conversation remains strong, we've delivered an adjusted EPS of 74.5p up 14.1% at actual currency and 11.4% at constant currency. In line with our progressive dividend policy we've announced this morning an interim dividend of 19.4p, up 14.1% year-on-year.

As we've said in March where we presented our 5x5 strategy, one of the key purpose of our strategy is to move the center of gravity of the Company towards a high growth, high margin opportunities in the industry. In the first half of 2016 our combined product and trade segment generated 79% of the Group revenues and 92% of the Group's operating profit. We've delivered an excellent performance in our product sector, operating profit growth was 22% at actual rate driven by robust organic growth and the benefit of the acquisition that we have made.

In addition to our focus on revenue and portfolio management, disciplined cost and margin are important priorities for us as a management. I'm pleased to report that we continue to make progress in this area with an overall organic margin performance improvement of 60 basis point after a very good performance in the first half of last year.

In the first six months this year we've continued to benefit from the cost restructuring activities we implemented over the last two years. And as you can see on the slide we have removed 1300 positions in the Group and we continue also to focus on a disciplined performance management approach on cost, pricing and mix, leveraging the tool that we've put in place a year ago.

Moving forward we remain very focused on cost and margin management and today we've announced another restructuring program of £15 million that will remove 400 positions and that will yield an annual benefit of £7 million.

I will now hand over to Ed who will take you through our financial results in greater details.

Edward Leigh

Thank you Andre and good morning everyone. So in summary we delivered double-digit revenue profit and EPS growth with margin accretion at constant currency. We delivered organic revenue growth of 0.5% at constant currency, continuing the trends seen in the first four months of the year and in line with our full year guidance for solid organic growth.

Acquisitions added 10.1% of revenue in the period driven by the five acquisitions made since the start of 2015. The depreciation of sterling seen during the period particularly in recent weeks against the Group's baskets of currencies led to FX contributing 3% to revenue growth in the period. Operating profit was up double-digit at £186 million, being up 11.3% at constant rates with margin up 10 basis points. The positive FX impact in the first half resulted in operating profit up 13.1% at actual rates.

I will now take you through the high-level performance by division. The products division delivered robust organic revenue growth with margin at constant currency being impacted by the six-month contribution of PSI. The trade division delivered organic growth with margin stable at constant currency. In the resource division as expected we continued to experience challenging additions throughout the first half of 2016 with an organic revenue of – a revenue decline of 11% and margin down 50 bps at constant currency.

Turning to operating margin. The Group recorded a 60 basis point improvement in operating – organic operating margin in the first half of the year. Our products division contributed 30 basis points as the benefits of our rigorous and disciplined approach to performance management continued to have an impact and we benefited from operating leverage. Our resources division had a 10 bps impact on Group margin as trading conditions remain challenging. We also generated an additional 40 bps from divisional mix as we continued to move our portfolio towards attractive margin opportunities in the sector.

You can see that during the period acquisitions have the expected dilutive effect of 50 bps as we consolidated the half-year results of PSI's. earnings. Finally, we had a 20 bps profit impact on margin taking us to the reported 15.4%.

Now turning to the Group's cash. So at actual currency adjusted cash was £156 million. On a constant currency basis and excluding PSI working capital was down 5% year-on-year at the end of June, driven by a continued focus on cash management across the business. We continue to invest in growth with CapEx and M&A expenditure of circa £50 million. During the first-half we paid out cash cost of £9 million in relation to our restructuring activities, including prior year programs and the integration of PSI.

Moving to tax. Our effective rate was 25.3% and in line with our full year guidance. At the end of June net debt stood at £887 million, which included a £90 million translation impact from FX since the start of the year. Now moving to our financial guidance for the full year 2016. The expected net finance cost will be broadly unchanged at £30 million with higher interest costs on U.S. dollar debt being offset by FX gains on non-sterling receivables.

Minority interests have increased due to FX translation and will be between £15 million and £16 million. We are currently expecting full year CapEx of between £110 million and £120 million. For net debt we now expect to close the year between £770 million and £820 million due to FX translation on dollar debt as well as the impact of the announced restructuring costs.

Our net debt for the year will be in the 1.6 to 1.7 times range. This guidance is stated before any M&A completions and any further material movements in FX. Our guidance for the effective tax rate is unchanged at 25% to 26%. With that I'd like to hand you back to Andre.

Andre Lacroix

Thank you Ed for this very comprehensive presentation of our H1 result. In the second half of the presentation this morning I'd just like to spend a bit of time on the way we see the growth opportunities moving forward, how we plan to seize these and obviously I will talk about the outlook for the second half and the plans we have in place.

We've talked about it before but let me just spend a bit of time on that. I think the quality assurance market is worth $250 billion on a global basis and this is truly exciting for us and we believe there are four type of growth opportunities. First the structural growth drivers that we know so well in a TIC but also in assurance sector. We see growth opportunities with our existing customers by increasing the account penetration i.e. selling more of what we already sell today. In addition to that driving cross selling activities with our unique ATIC offering.

Another strong growth area for us is obviously new customers, we can win new contracts or we can convince these companies that do in-house testing to outsource. We believe that outsourcing is about $200 billion of the market opportunity that I talked about earlier. The fourth opportunity of course is M&A and you know our industry is very fragmented.

We believe we are well positioned to seize these growth opportunities and we've identified five medium to long-term corporate goals for the Company to take in, to take to new heights. The first goal is we want our employees to be fully engaged and working in a safe environment. Secondly, we want to deliver a super customer service. Our third target, and this morning results is an example, is to deliver margin accretive growth in terms of revenue being positive year-on-year. Fourth, we aim to deliver strong cash conversion from operation, and fifth we'll pursue an accretive disciplined capital allocation policy for both our M&A and CapEx activities.

To achieve these goals, we have developed a differentiated growth strategy that we call 5x5 and that we have shared with you in March. Our 5x5 framework is Group agnostic and applies to all of our business lines and our countries. At the heart of our 5x5 strategy is our differentiated ATIC value proposition and this is based on the research we've done in 2015, the trends we've looked through the Group over the years and the customer interviews we've done.

The main conclusion from all this work is that the industry in our view over time is going to move from TIC to ATIC. Why is that? The operations of our customers have become so complex that when looking at quality assurance they need to think beyond simply testing inspection and certifications. Our customers are increasingly focused on risk management to fully comprehend the systemic risk in their global businesses with the support of assurance solutions.

Said differently, to operate safely with total peace of mind our customers expect a total quality assurance service, to look at both the quality and safety of physical components, products and assets as well as the reliability of their operating processes and management systems. We are therefore evolving our value proposition to meet the existing and emerging needs our customers of total quality assurance proposition with A plus TIC solutions, provides indeed a systemic approach to support the quality assurance efforts of our customers in each of their operations.

Our 5x5 strategy was launched internally at the end of February. As you know implementing a new strategy in a large organization like Intertek takes time and we are obviously on a step-by-step journey with a clear road map and precise milestones. We've made good progress on each of our five strategic priorities.

In the last three months the key focus areas have been on starting to measure customer service with the roll out of NPS, Net Promoter Score. [Indiscernible] is organizing and starting the ATIC sales presentations to our global customers, continuing to identify cost saving as we talked about this morning, reviewing the most attractive areas to invest in both CapEx and M&A, continuing our brand work to develop a differentiated positioning and starting the process of reviewing the 20 business units in the portfolio where we have question marks.

We also have made progress on each of our five enablers. In the last three months the priorities have been on communicating the 5x5 strategy throughout the organization, embedding our performance management tools and starting to build a baseline for non financial metrics, mapping out the architecture of our future technology strategy, importantly implementing a Group wide bonus system to drive margin accretive revenue growth with strong cash conversion and good capital discipline.

In my view, to deliver shoulder returns on a consistent basis the right formula is sustainable earning growth with accretive discipline allocation of capital. Our approach to capital allocation is very disciplined indeed. The first priority when it comes to capital allocation is investment to support organic growth though capital expenditure and working capital, by delivering new services, opening new locations, developing existing and new client relationships in areas with good growth and good margin opportunities.

In the medium to long-term we plan to invest circa 5% of our revenues in CapEx. The second priority is to deliver sustainable returns for our shareholders through the payment of a progressive dividend policy. Our dividend payout ratio as you know is around 40% of earnings.

The third priority for capital allocation is M&A activities to strengthen our portfolio in the most attractive growth areas provided obviously we can deliver good returns. This means focusing on those existing business lines or countries with good growth and margin prospects where we have leading market positions or where we see new exciting growth areas being geographic or service. Lastly, the fourth priority is to maintain an efficient balance sheet that gives us a flexibility to invest in growth with a net debt to EBITDA gearing ratio of 1.5 to 2 times.

Let me just talk about the outlook for the Group in terms of growth moving forward. In the medium to long-term we believe that the industry will benefit from global GDP plus organic growth rate in real terms. The growth prospects in the products space are driven by the need for corporations to build their brands, consistently innovate, raise their quality standards, meet regulatory standards and of course focus on risk management.

In addition, the e-commerce channel is making global access to the consumer easier for small businesses and as a result the proliferation of brands or SKUs is a – positive structural growth drivers for the product business.

Our product business represents 56% of our revenues and 72% of our profit and will continue to grow ahead of global GDP growth. The trade business will continue to benefit from the expected growth in global trade and from the development of regional trade in Asia, the Indian Ocean, the Med and the Americas. We expect our trade business which represents 23% of our revenues and 20% of our profit to continue to grow at a rate broadly similar to GDP through the cycle.

The resource business, which represents 21% of our revenues and 8% of our profit, is as we know more cyclical and from time to time we have to cycle through periods of low resource prices. During this period our customers will use the CapEx expenditure in order to protect their cash flow.

Investments and exploration production for essential resources like oil, gas and minerals will grow in the medium to long-term to meet the demand of the growing population around the world.

A few words on the implication of Brexit for us. We had prepared of course for a Brexit scenario. We do not believe that Brexit will impact the future growth opportunities of the Company. The UK represents 8% of our revenues in 2015 and as you would expect, there will be a ForEx translation impact for 92% of our revenues.

Moving to guidance, the Group is on track to deliver its 2016 full year targets, specifically we continue to expect to deliver an overall robust cost [indiscernible] performance with solid organic growth for the year. We expect our product related business to benefit from robust organic growth, our trade related business should continue to deliver solid organic growth. Our resource related business will continue to face challenging trading conditions. We will benefit of course from the five acquisitions that we have made last year. From a profitability standpoint we will remain disciplined on cost and pricing management and we continue to expect the Group margin to be broadly stable year-on-year.

We will remain focused on cash conversation and we will maintain our disciplined capital allocation policy. We continue to invest in growth and we expect our full year CapEx investment to be circa £110 million to £120 million. As we know, currencies have been very volatile since the announcement of the referendum results. I'd like to share with you how we look at the impact of translations on our earnings based on the recent volatility.

For the full year and if the rate stays as is we would expect the translation to have a positive ForEx impact of circa 600 bps at the revenue level and at the operating profit level for the full year. From a net debt standpoint, we expect to close the year with a net debt of £770 million to £820 million, obviously this guidance is of course before any M&A and based no further ForEx volatility.

I'd just like now to go through the divisions and give you an update for each of our three major divisions, starting with product. Our product related business delivered an excellent revenue performance with double-digit growth rate. We benefited from robust organic revenue growth performance and we delivered organic margin accretion. In addition, the benefits from the four acquisitions in the last 12 months was really visible in our numbers.

Our softlines business delivered the robust organic growth performance across all of our markets. We continue to benefit from strong demand from our customers for chemical testing. We are also leveraging the investment that we've made over the years to support the extension of our customers in new market and we are seizing interesting growth opportunities in the footwear sector. Our hardline business continues to take advantage of our strong global account relationships, the expansion of our customers into new markets and our innovative solutions.

We believe that in hardlines a robust organic growth across all of our main markets and you know these markets are China, Hong Kong, India and Vietnam.

Our transportation technology delivered a double-digit organic growth across our main markets, being the U.S., UK, Germany and China. We continue to capitalize on our client's investments in new product train as they strive to adopt more stringent emissions and obviously look for fuel efficiencies.

Our business assurance business delivered double-digit organic growth in our three regions of North America, Europe and Asia. We continued to benefit from the increased focus of corporations and risk management, resulting in strong growth in our supply chain audits.

We've delivered solid organic growth in electrical and wireless, driven by higher regulatory standards in energy efficiency and by the increased demand for wireless devices. We continue to benefit from the increased focus of corporations and food safety and delivered good organic growth in our food business.

We saw solid organic growth in our chemical and pharma business as we continue to leverage the structural growth opportunities in healthcare markets around the world. Our building and construction business delivered a robust organic growth performance, driven by the growing demand for greener and high quality buildings and the growing infrastructure investments in the U.S. market.

We continue to invest in innovative solutions to drive organic growth performance and I'd just like to talk about three innovations that really impressed me in the last six months. Our building and construction business has implemented an innovative remote vibration monitoring system for clients in New York City, using specialist sensory equipment vibration levels caused by construction activities are recorded and documented throughout the day.

Our electrical and wireless business has recently developed new services to help manufacturers of medical, electrical equipment ensure that their products are environmentally conscious. 80% of the hospitals around the world are expected to incorporate sustainability goals in their purchasing decisions, accordingly to a Harris Poll made a few years ago.

In China the food assurance service businesses has launched a differentiated food tracability program of total ATIC solution that covers the producers entire supply chain with a final product bearing our Intertek trademark. For the full year we expect our product division to benefit from robust organic growth and from the contribution of the acquisition made recently.

Next to our trade related businesses where we delivered solid organic growth with stable margin overall. Our cargo business reported solid organic growth performance, benefiting from the structural growth drivers in the crude oil and refined products global trading markets. As expected, we are seeing a normalization of the supply situation following the build up of high level inventory in 2015.

The demand for GTS services continue to weaken, following the slow down we've seen in the second half of 2015 and was below last year. The volume of regional trade in the Middle East and Africa has reduced given the economic challenges and uncertainties in this region.

Agriculture business continues to benefit from the expansion of supply chain of our clients in the fast growing markets and delivered a robust organic growth performance.

Our team continue to innovate to improve the quality of service we provide to our customers. Let me just talk about two innovations in the trade sector. Our agriculture service business has recently developed iPort, a powerful new cloud based tool to manage trade certification. Customers now are able to monitor contracts, test results and workload in real time and that's significantly improved our customer experience.

In June our GTS business has demonstrated real entrepreneurship and opened a dedicated customer-service center in Vietnam, strengthening our global network of conformity assessment programs. As you know, Vietnam is a fast-growing country, at the moment. Net-net, for the full year, we expect our trade-related business to deliver solid organic-growth performance.

Turning now to resources. Our resources-related business saw, as expected, an organic revenue decline of circa 11% with a slight reduction in margin. The revenue from CapEx inspection services was lower than last year, driven by volume of investments that have reduced by our clients and obviously due to price competition.

Given the challenging trading conditions, we continue to be very focused on cost and capacity management in our CapEx inspection businesses. And I think the team did a good job of mitigating the effect of negative operating leverage with a slight margin erosion. The demand for OpEx maintenance services remained stable overall. And we are benefiting from the investment we have made over the years in NDT services.

Continuing the trend, we've seen in the second half of 2015, we are seeing a stable level of activities for minerals around the world. We continue to invest in innovative solutions in our resource sector to improve our customer relationship and the quality of our services. And I'd just like to talk about one recent innovation. Our industry-services business delivered global inspection programs for clients across multiple geographies and asset types, where really success demands a close coordination between our team, the client, and the suppliers of the equipment.

Our CapEx customers have benefited from Evolution. This is a proprietary, global, job-coordination system developed by Intertek for many years, bringing a greater level of central control and visibility for these complex tasks. In the first half of the year we've been able to extend this service to our NDT customers, which means we provide now a better service to our OpEx related customers.

We do not believe that we have reached the trough in the resource division and we expect trading conditions to remain challenging for the second half. Our guidance for the resource-related business is an organic revenue decline between 10% and 12% for the full year.

Before concluding, a few words on where we are with PSI. The integration plans are on track and we are benefiting from a good revenue momentum. We have executed the cost synergy for year one and the operating margin is up year-on-year. The pipeline of activities for H2 looks good with significant wins in large projects and there are a few examples on the slides.

In conclusion, we have delivered double-digit revenue and earning growth, driven by an excellent performance in our products-related businesses, cash conversion remains strong, and we continue to be very disciplined with capital allocation, targeting businesses with good margin and growth prospects. We are well positioned to seize the attractive growth prospects ahead, leveraging our high quality and strongly generative earnings model, and our strong balance sheet.

Edward and I will be pleased to answer any question you might have. So, we've got the first question from Toby here.

Question-and-Answer Session

Q - Toby Reeks

Morning, guys. Toby Reeks from Morgan Stanley. I've got a few if I can? The first is on what you said around FX and the full-year impact of 600 basis points revenue and EBIT. Does that mean that the FX impact you had in the first half evens out?

And then, secondly, you talked about reviewing the most attractive areas to invest in CapEx and M&A as part of the strategic development. Could you give us an idea of what those areas are and also a comment on the M&A outlook?

And then, finally, one on restructuring. Do we get a full payback? And what should we expect in the full – for the full year? Thank you.

Andre Lacroix

So, I will answer the number-two question on portfolio and then I'll let Ed talk about ForEx and cost, if it's okay, yes?

Edward Leigh

Of course.

Andre Lacroix

Look, I think as far as the portfolio is concerned, we articulated, I would say precisely, the priorities for the Group when we presented the strategy. And there is a slide in the strategy pack where we said, look, we want to first strengthen our global core business and, yes, basically our global business lines where we have strong market leadership, good pricing power, certainly scale and good capability.

And the other one – and the other priority, is to invest in the good growth, good margin opportunities in the other business lines where we might be subscale or where we see some huge growth opportunities going forward. And the third priority is to fix the underperforming businesses that we have around the world.

So, we are very much focused on this three-tier portfolio strategy. As far as the day-to-day performance management is concerned the priorities are very clear. Ed and I have got clear dashboards on what is in one, what is in two, what is in three. So, that's from a day-to-day performance-management standpoint.

The way we allocate CapEx follows the same principle. So, we will basically prioritize number one and number two, because these are where we see the growth opportunities for the Group. As far as M&A it's exactly the same approach.

So, this three-tier portfolio strategy, strengthening the global core business where we have good franchise around the world remains our number-one priority; investing in the high-growth, high-margin opportunities where we are subscale or where we see growth opportunities are too, and fixing the underperforming business is our number-three opportunities.

That is how we invest our time and CapEx as far as the business and M&A. As far as the business in this review that we talked about, let me just refresh everybody's memory. When we've done the portfolio review we basically came to the conclusion that in the top 30 countries around the world in all of our business lines and this is about 300 business units, there are only 20 business units where we have question marks.

And these question marks are because we are not happy with the performance or we are subscale or the margin is not great. Or we might have some management issues. But 20 businesses in a scheme of 300 is not a lot. And, frankly speaking, these 20 businesses are not very significant to the Group on a global basis.

We've started a process, but it's a diligent process, because every business unit is a separate story. And we are basically going to go step-by-step.

The restructuring activities that we've announced today are not linked to these 20 business unit, are linked to ongoing cost and productivity initiative that we see to support our margin-accretive, revenue-growth goal, yes?

So, I'll let Ed talk about ForEx and also the payback of this restructuring.

Edward Leigh

So, on the FX impact side, there's a few pieces here. First, as you had the 20 bps impact in the first half at margin level, and we've also then guided for the full-year margin to be broadly stable year-on-year with washing everything together, having that impact.

And then Andre talked about the 600 bps impact for revenue and profit for the year as a whole. So, whilst we're not guiding individually for FX margin for the full year, I think within in that overall shape given that – the breadth of portfolio, we've got the 100 countries, the sectors, all the business lines, then we take a view that the wash of that through will be for a flat position overall for total margin and within that the 600 in revenue and profit. So, there's a lot of volatility that we're seeing and we'll continue to run through.

On the restructuring side, yes, the £50 million we've put down today and talked about today, we've got about £7 million savings associated with that, so about a two-year payback. And we expect some of that to start coming through in the second half.

Andre Lacroix

Okay? So – yes?

Will Kirkness

Morning. Thanks. It's Will Kirkness from Jefferies. Could you talk a bit about PSI just in terms of the organic-growth profile? And if you're still happy with the, I think, 300 basis-point of improvement for that business?

And then, secondly, just a bit on the CapEx that went in, in the first half, which main business areas that went into.

Andre Lacroix

Sorry, I didn't hear the second half of your question.

Will Kirkness

The second part?

Andre Lacroix

Yes. Repeat the question.

Will Kirkness

On the CapEx, so the first half, where the main investments were in the first half of this year.

Andre Lacroix

Okay, you mean the CapEx investments, yes? Basically the CapEx – to start with there, the CapEx investment in the first half are very much in line with what we talked about priority one and two. So, we are investing in our global business lines to strengthen their either footprint, if we need to expand our lab coverage, so I've talked about new market growth in softline and hardline, so that has basically been supported by investment.

Market like Vietnam, for instance, continue to be a high priority for us. India continues to be a high priority. We continue also to invest in our cargo AA business, which is obviously an important business for us, where we have a very strong market share globally. There is no question that our business assurance business, which is growing double-digit, requires some support and investment. It's not in terms of labs or equipment, but it's more in terms of IT and making sure that the back office can support the growth. So, I mean, our CapEx discipline is aligned to our portfolio strategy that we talked about.

As far as PSI is concerned, look, I think we are very pleased. Obviously, this is the first six months. The revenue momentum is good and has been really, really, consistent throughout the first six months. The integration I would say culturally has happened very, very well. I think our team has done a lot of communication to make sure that we explain who is Intertek, what we're trying to do.

And, as you know, in the U.S. we had a small business in terms of construction business. So, in a way, PSI is becoming, if you want, our biggest construction business and our old business is going into PSI. I think the team has been very quick from day one in terms of cost initiatives. So, we have removed all the non-essential positions that we wanted to remove. So, we are basically on track, and the margin is up year-on-year.

And what I would say is, it's mentioned in the presentation, what's really good is there are a lot of investments in the U.S. in terms of large infrastructure projects, roads, airports, railway, and we are benefiting from that. And we've won quite a few projects. All in all, this is working very well for us. Okay?

Josh Puddle

Yes. Hi. Josh Puddle from Berenberg. Two questions, please. Firstly, can you comment on the organic-growth trend you're seeing in the cargo AA business? And are you anticipating any slowdown here in the second half, given the normalization you've seen in the supply of oil?

And then, secondly, I just want some comments on why you think you haven't reached the trough in your resources business. Are you experiencing month-on-month declines there?

Andre Lacroix

Look, I think the – on the cargo AA business we basically are very mindful of the fact that last year – and you know it's really other indicators – the level of crude and refined product stocking around the world has been very significant. And if you look at the performance we delivered in trade last year where we had a 5% or 5.4% organic growth for the full year, which was broadly even the first and the second half, is a reflection of that. We benefit from this.

So, this year with 1% trade organic growth we basically are continuing to grow, because our cargo AA had another record revenue performance in the first half. But, frankly speaking, I look at a two-year organic growth rate because, frankly speaking, there was a lot of stocking last year. And we expect this trend to carry on through the year.

I mean, the stocking started, as you know last year, not in the second half but very early on in 2015. So, I look at it on two-year basis, but overall I'm pleased it's a record revenue in cargo AA. You've seen the margin stable so we are very well controlled on cost. And on two-year basis the trade division is doing a good job in my view.

As far as the CapEx investment is concerned, i.e. the activities of our customers, why am I saying we've not seen the trough? It's because, frankly, there is always a lag between what's happening to the oil price and what's happening to the CapEx investments of our customers.

And, as you know, when we went into 2015 we thought that at the end of Q1 the oil price was starting to stabilize at around $60 or $65. Now, what happened in 2015, is that the oil price went further down. And we are basically only a year away from that and it's going to take time. And typically there is a year lag between the moment where the oil price started to stabilize and when our customers start to invest in CapEx.

So, we believe it's going to remain very challenging and we are obviously guiding on that basis, okay? Okay. Sorry. Rob?

Robert Plant

Thanks. I'm Robert Plant from JPMorgan. At the time of PSI I think you mentioned potential to get the margin up by 300 basis points. Given what you've seen in the first six months, do you think that's still achievable or could that be higher? Thanks.

Andre Lacroix

Well look we – we are very focused on both revenue growth and margin enhancement. I would say we are on track. I think 300 bps over three years is going to take PSI to, broadly speaking, the Group margin level. I think that's the goal we have and that's what we are working against. Okay?

Ben McSkelly

Hi. Ben McSkelly, Shore Capital. I want to ask on new restructuring. If you look at – over five years, the average restructuring charge is something high teens in the millions sense. So, looking past this full year –

Edward Leigh

Structural spend, okay.

Ben McSkelly

Can we expect these charges to go away or are these truly, you said, ongoing before? So, I'm just wondering in terms of these restructuring charges, how long are we going to see this pattern emerge in terms of what we should be forecasting and what we should be looking for?

Andre Lacroix

Yes. Look, I mean, in terms of restructuring charge it's a pure technical accounting definition that basically is looked at by Ed and the auditors. And if it's truly a one-off, i.e. we are basically touching, if you want, the fabric of how we do the business in that part of the Company, it goes into exceptional. If it's ongoing it goes into underlying.

So, from a treatment standpoint this is the way it goes. As far as we are concerned, we believe that looking at productivity improvement is a priority. It's a clear strategic goal that we've given to our self. As you know, we want to go for margin-accretive, organic-revenue growth.

On the slides we have talked about what we have done this year and last two years. We are talking about some of the other areas. We have more work to do, as I talked about. We are starting the review of these 20 business units. And we will know what the outcome is going to be.

But from a pure treatment this is, I would say, a technical point. And, frankly speaking, this is done independently with the auditors, so there is no worry there. Okay. So, Tom?

Tom Sykes

Morning. Tom Sykes from Deutsche Bank. Just on your dividend, your dividend's up by the reported earnings rather than organic earnings. Obviously we're going to get quite a big FX benefit in the second half and you talk about the progressive dividend policy.

So, can you just walk through what some of the thinking is there? And is that something to expect, obviously a Board decision, but to expect for the full year? And what messaging are you trying to give about the sustainability of that, obviously if FX were to move potentially, in a different direction?

And then on the working capital, there was obviously quite a big movement in the payables there. And could you perhaps just pick out what the acquisition and what the FX effects were and how big the working-capital movements are in PSI please?

Andre Lacroix

Okay, great. I'll do the divi bit and Ed will do the working capital. Look, I think our – obviously the earnings that we capture at the end of the year are in actual rates. And there is no question that our dividend policy, which is a progressive dividend approach with a payout ratio of around 30% – sorry, 40%, it's around 37% at the moment, is based on the actual profit after tax we deliver.

Obviously this is the interim dividend. And what we have done with the Board is reflecting the growth at actual rate, but it is by no way a proxy for the growth we expect in the second half. It's basically the way we look at it, interim, and then we'll do a full year.

Edward Leigh

Yes. Hi. So, yes, on the working-capital side, as I mentioned on the presentation, we're down 5% year-on-year on working capital constant rate, excluding PSI. So, that drive in working-capital improvement continues.

On the payables side or the balance sheet, yes, we have the – quite a large FX impact, as you say, increasing there. PSI is included. There's another – the other factor there is the impact of the – as the industry services business comes down we reduce the subcontractors in the base. The subcontractors do come through in the payables because they're our supplier, essentially. So, as those wind down as we reduce industry services business, that does impact the payables line as well.

Tom Sykes

Sorry. Are you expecting a continuation of your organic working-capital performance in the second half? Or does it get a bit better because, obviously, if you're still having the commodity – the impacts on industry and impacts on potentially other parts of commodities business that might be working capital positive for you?

Edward Leigh

Yes, we're still driving working capital hard, so we would expect to continue to see improvements organically. Yes.

Tom Sykes

Okay. Thanks.

Andre Lacroix

I mean, there is no question that from our standpoint in terms of day-to-day performance-management priorities, revenue, portfolio costs, margin and cash, these are the key financial metrics we look at, so yes.

George Gregory

Morning. It's George Gregory from Exane BNP Paribas. Two if I may. Firstly, just within cargo AA, I wondered whether you had seen or were expected to see any drag from the upstream analytical testing activities within that sub-segment?

Secondly, in terms of the second half margin dynamics, I think you saw 50 basis points of drag from M&A. Should we assume a similar drag for the second half? That was all, thanks.

Andre Lacroix

Thank you. I'll do question one and Ed will do question two. As far as the upstream analytical assessment, it's not in cargo AA at Intertek. It's basically in the resources sector.

There is no question that this is a difficult sector at the moment. Okay.

Edward Leigh

So on the margin side, we do have the 50 bps you say in the first half. Whilst we're guiding for full year margin being broadly stable, I think the first half had a slightly heavy effect on dilution for a couple of reasons. One is PSI business is slightly more weighted into the second half, and therefore we'll have better revenue and better margin as a result in the second half, so a less dilutive effect there.

But also last year had PSI for five weeks in the base, so as we start to lap that in the second half, we won't have quite the same level of dilution in the second half from acquisition.

George Gregory

Maybe following up on that, Ed, you said the full year margin would be total margin stable. FX based on the 600 basis points is stable for the year. Perhaps I'm splitting hairs here, but if the second half margin dilution from M&A is less than the first half, does that therefore mean that your organic performance in the second half won't be as strong as the 60 basis points seen in the first half? And if so, why?

Edward Leigh

There's a lot of moving parts in the margin in the full year, and we'll see. Clearly we had the 60 bps organic margin in the first half. It was a very strong result and we're very pleased with it, so we'll be endeavoring to achieve a good organic margin accretion in the second half, as well. So lots of moving parts, so hence we're guiding to a single margin percent number for the full year.

Andre Lacroix

Okay, so we've got a question here in the front. We'll go back in a second.

Paul Sullivan

Yes, morning. It's Paul Sullivan from Barclays. Just a bigger-picture question for me.

In terms of protectionism or free trade movements, have you had any further thoughts on TPP and if that does materialize how that could impact your business? Actually, on the flipside of that, the ratcheting up of protectionist rhetoric coming out of the U.S. elections, does that concern you at all if we were to see a change of policy coming out of the U.S. next year?

Andre Lacroix

Look, I think the – for us, anything that promotes trade is good. So I think the TPP for us is good news, and certainly the activities we are putting in Vietnam are basically expecting some of the positive effects of that. As far as protectionism, I think we'll have to – in the speech today of the politicians, I think we have to basically deal with that when it happens.

My view is that it doesn't matter which global economy in the world, they need their corporates to do well. And corporates need basically to take advantage of the global demand. So we will have to take it a step at a time, and I cannot basically foresee what it really means, because these people have not been elected yet. So we are focused on doing what we do best, which is basically helping our customers manage their quality assurance proposition.

I would also remind everyone that certifications, which is basically key activities to support global trade, is a very small part of our revenues, as you know. It's less than 10%.

Edward Stanley

Morning. Edward Stanley from Redburn. In the product slide on 25, you mentioned China in food traceability, but in the H2 outlook, you don't talk about China. I'm just wondering in terms of softline and hardline what you're seeing, what growth trends you're seeing coming out of China?

Andre Lacroix

Yes, we have so many parts in the groups, it's difficult to talk about every single part in a short presentation. I just came back from China. I spent time, we had a week out there. We're having a very good time in China. I don't know if people remember that, but Intertek was the first foreign testing company to get into China in 1989. We've got an incredible portfolio.

Our softline business is very well anchored. We've got facilities in Shanghai in the South. No, I think we had a very, very good set of results in China, so I'm not worried about China at all.

Rajesh Kumar

Rajesh Kumar from HSBC. Could you give us some color on what changes to staff incentives you've done? In one of the slides, you indicated that you made some tweaks there.

The second one, what sort of cost inflation should result in your view and what sort of growth you need to offset that?

Andre Lacroix

I think as far as the incentives are concerned, what we have done is not complicated but is consistent. So what do I mean by that? It's basically we have made sure that every single business around the world has got the same kind of metrics. It's very simple. It's revenue and obviously based on revenue growth targets, it's profit based on profit growth targets.

The weight of profit is higher than revenue to get the margin accretion. And then everybody has got a return on invested capital target to make sure that we get the cash conversion and the disciplined capital allocation.

This scheme is now in place everywhere so that we are all aligned on the same targets. One of the things that I would say that is important on the revenue front, as you know, cross-selling and intercompany businesses is very important, and we basically have incentivized our people on total revenue, which is you see in terms of disclosure the external revenue, because at the Group level they net out at zero. But we have quite a bit of internal revenue.

So that's basically what it is. The mechanics of it are disclosed in the annual report, and basically what counts for Ed and I in terms of policy applies to everyone, so there is total alignment and it's now in place.

As far as the issue of cost inflation and price, look, I think obviously there are different levels of inflations around the world. As we know, we are not in a high-inflation environment here in Europe or in the U.S.

In a higher inflationary environment, what we're trying to do is we try to basically pass some of it to our customers and offset part of it with productivity. So we do not pass 100% of the inflationary prices to our customers. As you know, it's a competitive market, so you need to stay competitive. We have one question in the front.

Suhasini Varanasi

Good morning, Suhasini from Goldman Sachs. One question from me, please. On your strategy slide, you have mentioned increasing existing account penetration and driving ATIC cross selling. Can you talk about the progress you've made year to date and whether you have started seeing the benefits to growth yet? Thank you.

Andre Lacroix

Look, I think the – obviously driving account penetration with existing customers is the daily task of every single sales manager around the world. So the growth you are seeing in terms of organic growth in product and trade is a reflection of that, because there's been the ongoing priority.

As far as cross-selling is concerned, with our ATIC offering, as I talked about in March, we are starting with the top global customers. We believe that these top 300 customers are the ones where we should start with, because they are our biggest customers. They've got the most complex supply chain on a global basis, and we believe that they should get the first communication with us on why we believe that A plus T plus I plus C will provide them with a better customer service.

Everyone in the senior management team is doing customer visits, including myself. As recently as Friday, I was here meeting – I cannot tell you who it is, but one of the major global corporations in the UK. The reaction is very much the same. He says, wow, I didn't realize you could do all of this for us. That's basically the main insight from each of the discussions – thanks for taking the time to explain what you can do for us on a global basis. I didn't know that Intertek has such a wide portfolio.

If you go back in history, that's not surprising because the way the industry, not only us, has been built not in the last two years but in the last 20 or 30 years, it's been built through vertical sales and marketing. So this is the way we used to be organized as a company. Electrical and wireless was simply focusing on electric and wireless clients, and so was cargo AA. So was Moody and so was lab test in Hong Kong.

When you have had years of customer conversations on the fact that we are your best partners in softlines and hardlines, in testing, inspection, certification, no surprise that the customers don't realize that you can do much more for them. In a way, it is very an important communication in the program to tell our customers we can do much for them now.

And the meeting on Friday was a good proxy of what happens. They wanted first to start with their priorities in their supply chain. Guess what? They might not have used a certain terminology that I use here, but they were saying exactly the same thing – we cannot carry on with just testing and inspection certifications. We need to worry about all the other bits in the supply chain. Can you give us visibility?

They basically went on with our agenda, and then we present ours and say, look, there are things we can do beyond what we do today.

A typical meeting is okay; we have a great relationship today. These are the services we provide. What else can we do in terms of doing more or being better at driving performance for you in what we do today?

Typically, at the end of every single meeting, there are one or two or three leads that basically says, okay, why don't we think of this? Can we talk about this, et cetera and so forth? So think of it as a B2B, if you want, business development with existing customers to reinforce the relationship we have today and build on future opportunities.

But that takes time. So I wouldn't say that our first-half results there is any benefit from the ATIC selling we are doing, because we just started. But it's very positive and we have – we have a very clear process inside the Company, because as you can imagine, we want the same message with every single global customer touch point in any customer's organization.

No, it's positive, and we are just now rolling out. Any other questions? Do we have any questions on the telephone?

Andre Lacroix

Okay, well thank you very much for being on time this morning. It's 10 o'clock, so I'll obviously add Josh and I are available if you need us, if you have more questions, but thank you very much for your time.

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