Intertek Group Plc. (OTCPK:IKTSF) 2016 November Trading Statement Conference Call November 22, 2016 3:00 AM ET
Andre Lacroix - Chief Executive Officer
Edward Leigh - Chief Financial Officer
Josh Egan - Investor Relations
Good morning to you all, and thanks for joining us on the call, following the release of our trading statement a few minutes ago. I'm here with Ed, our CFO, and Josh from Investor Relations.
Today, we'd like to give you an update on the Group trading performance for the first 10 months for the year and discuss the outlook for the rest of 2016. We are pleased with our performance. As you've seen we have recorded double-digit revenue growth overall. We're particularly proud of our achievements in the products division. We saw actual revenue growth of 33% with 22% gross at constant currency, and 5.5% organic growth. We are on track to deliver our full-year target, and continue to expect a robust earnings growth performance with strong cash generation in 2016.
Let's now look at the Group performance for the first 10 months. Revenue were £2.098 billion, 9.9% up on last year at constant currency; 17.9% up at actual currency. The six acquisitions that we've made since January 2015 are performing well and contributed circa £200 million of additional revenues.
Organic revenue growth at constant currency was stable year-on-year, products grew by 5.5%, our trade division was up 1%, while resources went down 13%. Looking at the performance of the last four months our revenues were £894 million, 9% up on last year's constant currency and 24% of actual currency. As you've seen organic revenue at constant currency was down by 0.7% in the last four months year-over-year. Product continue to do extremely well and grew at 5.5%, our trade divisions continue to do well and grew by 1% while our resource division declined by 15.5%.
As we've said in August we have not seen trough yet in the resource division and we are not calling the trough yet and as expected trading commissions remains challenging. You'll remember that in the second half of 2015 we saw improvement of organic growth trajectory and therefore DCI in the second half we have started against the higher organic income.
Looking at a two year combined, our average organic growth in last four months was in line with the first six months of the year. Our disciplined approach to cost and margin management, as well as our cash flow version remains firmly in place. All the comments, I will make during the call would be at constant currency and before showing the trends we see in our product trade and resource divisions, I'd just like to cover guidance and currencies.
The group is on track to deliver its 2016 target of robust revenue growth with stable margin we will deliver robust revenue growth performance for the year benefitting from the acquisitions we've made and we expect organic growth to be stable at a group level. Our product related businesses will continue to benefit from robust organic growth our trade related businesses will continue to deliver solid organic growth our resource related businesses will continue to face challenging trading conditions. From the profitability standpoint we remain disciplined on cost and pricing management and continue to expect group operating margin to be stable year-on-year. We remain very focused on cash flow reductions and maintain a disciplined approach to capital allocation. We continue to invest in growth and we expect the full year CapEx investments to this year cap £110 to £120 million.
In line with our portfolio strategy our organic investments in CapEx are targeted to business lines as good growth and margin prospects. Our net debt we continue to expect to close a year with a net debt of £770 million to £820 million before of course any additional M&A activities and based on no further material movement in ForEx.
Turning to currency we all know that currencies are being volatile in last 10 months and I'd like share with you how you look at the impact of translations on our revenue and earnings. For the full year and if the rates stay as is, we'd expect the translation to the positive ForEx impact of circa 800 bps at the revenue and operating profit levels. That compares to an expected full year blip from ForEx on revenues and operating profit of 600 bps when we announced our half year results in August.
I'd like now to give you an update with the performance of each divisions in the first 10 months starting with products. A high margin product like the businesses delivered an excellent performance with revenue growth of 22% and the robust organic growth of 5.5%. In line with our portfolio strategy we have recently made a number of acquisitions to strengthen our product portfolio and these acquisitions are performing well.
Let me remind you that key acquisitions we've made since 2016 in our product sector. In the product in the growing building construction sector in the US the PSI and MT businesses provide access to the rapidly growing commercial and civil construction markets. We have broadened our footprint in the attractive business assurance market in the Nordics through our acquisitions of DIC. We have strengthened our food assurance offering with the acquisition of FIT Italia and recently we have completed the acquisition of EWA-Canada, a leading cyber security assurance business.
Let's now discuss our organic performance in our product sector. Our top line business delivered robust organic growth performance across our market. We continue to benefit from strong demand from our customers for chemical testing and in the food ware sector. We are also leveraging the investment we've made over the years to support the expansion of our customers in new markets. Our hardline and toy business continues to take advantage of our strong global account relationships. We've delivered a robust organic gross performance across the main markets of China, Hong-Kong, India and Vietnam.
Our cost protection technology business delivered double digit organic growth across our main markets in UK, US, Germany and China. We continue to capitalize on our clients' investments in new powertrains and then strive to adopt more stringent emissions and fuel economy standards. Our business assurance business delivered double digit organic growth in our three regions of North America, Europe and Asia. We continue to benefit from the increase focus of corporations on risk management resulting in strong growth in supply chain audits. We've delivered solid organic growth in electrical and wireless driven by higher regulatory standards in energy efficiency. We continue to benefit from the increase 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 strike full growth opportunities in the healthcare markets in both developed and emerging economies.
Our building and construction business delivered a robust organic growth performance in the US driven by the growing demand for greener and higher quality buildings as well as significant wins in large infrastructure projects. Our full year guidance for our project division which represents 72% of our earnings is unchanged. We continue to expect to benefit from robust organic growth and from the contribution of our recent positions.
Our trade related businesses delivered solid organic growth of 1%. Our cargo energy business reported solid organic growth benefiting from the structural growth drivers in the crude oil and refined product global trading market. The demand for GTS services was below last year as the volume of regional trade in the Middle-East and Africa has reduced given the economic challenges and uncertainties in these regions. Our agri business continues to benefit from the expansion of supply chain of our clients in the fast growing markets and delivered robust organic growth performance.
For the full year we continue to expect our trade related businesses which represent 20% of our earnings to deliver solid organic growth performance. Our resource-related businesses have seen an organic revenue decline of 13%. As expected, the trading conditions in this sector remain challenging. The revenue from CapEx inspection services was lower than last year driven by lower volume investment in exploration activities from our clients and from price pressure in the industry. Given these continued challenging trading conditions we continue to be very focused on cost and CapEx team management in our CapEx inspection businesses.
The demand for OpEx maintenance services remains stable overall and we are benefitting from the investments that we have made in the NDT services. We are seeing the stable level of demand for testing activity in the overall business. Our guidance for the resources related businesses which represent 8% of our earnings is an organic revenue decline of share cap 13% to 14% for the full year.
I'd now like to give you an update on strategy. We have started to roll out of side by side differentiated growth strategy a few months ago and we are pleased with the progress we are making. Our strategy is intended to move the center of gravity of the company towards the attractive growth and margin areas in the $260 billion quality assurance market. And the half of our strategy is our total quality assurance value preposition that provides our customers with the superior customer service based on our industry leading assurance testing inspection and certification solutions. I'd just like to talk about the key focus areas in the last six months. We have started measuring customer service in a systematic way throughout the group with the roll out of our NPS measurements and today we do on average 7,000 customer interviews a month that provides incredible insights to all of our operations around the world. We started presenting our total quality assurance offerings to our top 300 global customers and we are pleased with the reception of our ATK approach with our key clients.
We started embedding best in class benchmarking tools and improve processes to drive disciplined performance management throughout the group and obviously to improve productivity. We continue to work on cost and we are working on the 20 business units in the portfolio that as you know are on the review and we continue to allocate our capital in attractive areas of the group where we see a high growth and high margin opportunities that are sustainable. Intertek in our view is well positioned to seize the attractive excellent growth opportunities in the very fragmented industry and we are making progress with the M&A strategy in general we've completed the acquisition of FIT Italia an Italian company providing food testing and assurance services to retail and agriculture sectors of fast growing market in Italy.
In October we've completed the acquisition of EWA-Canada a leading cyber security assurance business providing solutions to a broad range of industries and this month we've announced the creation of a joint venture in Mexico that gives us market leadership in a fast growing environmental market in the water environmental sector.
In conclusion the group is on track to deliver robust earnings growth performance in 2016 with strong cash generation. We are played in a very attractive industry 250 billion global quality assurance market with attractive structural growth prospects and in the medium to long-term we expect the industry to benefit from GDP plus organic growth rate. We are uniquely positioned to see this exciting growth opportunities with our total quality value proposition. We delivered our etic set of solutions through our global network of over 1,000 state of the art facilities in over a 100 countries. Our strategy will continue to move the center of gravity of our portfolio towards the attractive growth and margin opportunities in the industry our disciplined revenue margin portfolio and cash performance management combined with our disciplined capital allocation will continue to deliver sustainable growth and attractive returns for our shareholders.
Thank you very much for your time and would be happy to answer any questions you have.
End of Q&A
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