Intertek Group PLC (OTCPK:IKTSF) Q4 2019 Earnings Conference Call March 3, 2020 3:00 AM ET
Ross McCluskey - CFO
André Lacroix - CEO
Conference Call Participants
Sirasimi Varanasi - Goldman Sachs
Paul Sullivan - Barclays
Edward Stanley - Morgan Stanley
Tom Sykes - Deutsche Bank
Rory McKenzie - UBS
David Root - Bank of America
Ed Steele - Citi
Hello and thank you for staying connected. We apologize for the delay and welcome you to the Intertek 2019 Full Year Results Conference Call. My name is Rosie and I'll be your coordinator for today's event. Please note that we are recording this conference and for the duration, your lines will be on listen-only however, you will have the opportunity to ask questions at the end. [Operator Instructions] I will now hand you over to André Lacroix to begin today's conference. Thank you.
Good morning to you all and thanks for joining our conference call. Apologies again for the slight delay this morning. Your patience is highly appreciated and I know it's a busy day for all of you. Ross McCluskey our CFO; and Denis Moreau our VP of Investor Relations are with me on the call. This morning, as you saw at 7:00 o'clock, we announced a very strong set of results for 2019 with revenue acceleration progression in terms of multicultural currency, robust EPS growth, strong cash generation and a higher return on invested capital. 2019 marks the fifth consecutive year for Intertek of an EPS delivery ahead or in line with external expectations. We are extremely pleased with the consistent performance of the group in the last five years, delivering value for all of our stakeholders, inspired our purpose or bringing quality, safety and sustainability to life.
Today, I'll start with a performance highlights then Ross will take you through the financial details and results. I'll provide an update on strategy and then we'll discuss the outlook for 2020. Before we start, I just want to give you an update on the approach we are taking in relation to the changes in accounting standards. For reporting consistency purposes the numbers we'll discuss in our presentation today are based on the IS17 standards. Given that we now have the 2019 full year numbers I realize this morning available on both standards moving forward, we will be guiding on the IFRS 16.
So let me start with our performance highlights in 2019. In 2019, we've continued to make progress on revenue, EPS, cash and dividends. The group generated revenues of £3 billion up year-on-year by 6.6% actual currency and 4.8% at constant currency driven by good organic growth of 3.3% and by the contribution of recent acquisitions. Operating profit was £513 million at 6.5% of actual currency and 5.2% at constant currency. We've delivered an operating margin of 17.2% stable at actual rates and up 10 basis points at constant currency. Our full year adjusted EPS of 211.7p was up 6.8% actual currency and 5.2% at constant currency.
In line with our dividend policy the targets the payout ratio of circa 50% of earnings, we've announced a proposed final dividend of 71.6p, taking the full year dividend to 105.8p an increase year-on-year of 6.8%. Our cash commercial was strong with a free cash flow of £318 million up 8% year-on-year. We are pleased with the consistent performance delivery of the group underpinned by strong earnings model and our disciplined performance approach. In the last five years, on CAGR basis, we have grown our revenue by 7.4%, operating profit by 9.6%, our free cash flow by 15.5% and our dividend by 16.6%. During that period, our margin improved by 170 basis points.
In 2019, we benefit from a broad base organic revenue growth of 3.3% at constant currency with a run rate improvement of 60 basis points in the second half. We've delivered an organic growth performance of 2.3% in our product divisions, 4.1% in our trade division and 5.7% in our resource division. 2019 marks the fifth consecutive year of managing progression at constant rate. We've delivered last year a margin improvement of 10 basis points at constant currency. We believe there is scope for further margin improvement and we'll remain very focused on margin accretive revenue growth. Our cash performance was strong with cash conversion of 127%. Our financial net debt to EBITDA ratio was 1x.
I will now hand over to Ross who will take you through our financial results in detail.
Thank you, Andre. And good morning everyone. As Andre has described, we have accelerated our revenue growth with robust EPS growth and a strong cash performance. I will now take you through some of the details underlying our results. In summary, the group has delivered good revenue growth in 2019 with 3.3% organic revenue growth at constant currencies, further progress of more margin and the EPS growth of 5.2%. Free cash flow generation remained strong with the cash conversion of 127%. The positive ethics impact on total revenue was 180 basis points for the year driven by the depreciation of the sterling. Our constant rates operating profit was up 5.2% to £513.3 million. Our margin was up by 10 basis points.
Our operating profit was up 6.5% at actual rates. The overall fully diluted EPS was £13.4 to £211.7 being up 6.8% at actual rates and 5.2% at constant rates. Another at the high level margin performance by division. As Andre said the group recorded an operating margin in 2019 of 17.2% stable year-on-year at actual rates and up by 10 basis points at constant currency. Organic margin was stable at constant rates with 10 basis points improvement driven by resources margin offset by 10 basis points moving from our trade business. Acquisitions contributed 10 basis points of margin improvements with FX for the negative 10 basis points impact on the group margin.
Now turning to group cash flow and net debt. Our disciplined focus on cash management continued throughout the period. Cash flow from operations was £662 million up 8.1% year-on-year with working capital down 8% year-on-year reducing to 3.4% of revenue. We invested £116.8 million in CapEx in line with 2018 to expand our market coverage and develop innovative ATIC solutions. Adjusted free cash flow in the period was £395.3 million. And the acquisition that we made in 2017, led to an outflow of £16.9 million. Financial net debt stood at £629.4 million and including the IFRS 16 lease liability, total net debt was £875.4 million.
Now turning to our financial guidance for 2020 on an IFRS 16 basis, the expected net finance costs will be in the range of £35 million to £38 million. The effective tax rate is expected to be in the 25.5% to 26% range, a minority interest between £21 million and £23 million. Via models I've setup the number of shares for the EPS calculation and we're currently expecting through your CapEx to be in the range £130 million to £140 million. For financial net debt, we expect to close the year at £520 million to £550 million. Although noting this guidance has stated before any M&A, any material movements in FX and of course the impact of coronavirus.
I would now like to hand you back to Andre.
Thank you, Ross, for a comprehensive review of our 2019 results. So today I would like to give you an update on where we are on a good to great journey. You will remember that five years ago, this is what we said we will do when we presented a five by five differentiated strategy for growth. In the last five years, we've made continuous progress on strategy and performance and I would like to start with a short video they will show you how we operationalize our strategy inside the group.
The operationalization of our strategy as you know has delivered strong results over the years. Between 2014 and 2019 our revenue has grown by 43%, operating margin has increased from 15.5% to 17.2%, our adjusted EPS has grown by 60%, our cash generation has more than doubled, now at £380 million, our retail investors capital has progressed from 16.3% to 22.8% and we've improved our employee productivity. And I would like to take this opportunity to recognize and thank all of my colleagues around the world who are delivering sustainable value through their own much expertise and customer-centric approach every single day.
As you've seen in our video, we've made disciplined investment in attractive growth and margin sectors. We've invested £560 million in CapEx over the last five years to better serve our clients with additional market coverage, capacity extension, and importantly, innovative solutions. We've also invested in M&A selectively £710 million through the period making acquisitions in attractive sectors connected world sustainability, people assurance, food and hospitality. We've invested both, organically and inorganically in breakthrough innovative SaaS platforms like Alchemy and Inlight that provide a tremendous level of service to our customers.
So a few words on Alchemy; 2019 was the first full year of Alchemy at Intertek and we are really, really pleased to welcome Alchemy inside the group. We have inherited this passionate organization working with leading edge technology in the food sector, both factories and multi-sites. And I'm pleased to report that we are on-target from a financial standpoint and we are really pleased with the progress that we're making on commercial activities, frankly, reflecting the strong demand for Alchemy SaaS platforms. Our five-year guidance that was published last year remained unchanged, and that includes an EBIT margin of over 25% in year five.
Moving forward, we'll continue to execute a 5x5 differentiated strategy for growth that you know so well. Our mid to long-term strategic goals remain unchanged, focusing on our employees and superior customer service to deliver margin accretive revenue growth. Strong escalation remains a core priority and we'll continue to pursue a disciplined capital allocation strategy. The growth opportunities in the quality assurance market, the way we define it are very attractive. The total quality assurance market is worth $250 billion, yet only 20% of this market is currently outsourced. The global operations of corporations are more and more complex, and that drive more demand for end-to-end quality assurance services as companies increase their focus on systemic, operational and corporate risk. These untapped market potential is really exciting as this is all about what companies do not do today, and we'll start doing to improve the quality, safety and sustainability of their operations.
Based on the attractive structural growth drivers in the global quality assurance market, we expect the group to deliver GDP plus organic revenue growth in real terms. We expect our product divisions which represent 78% of the group's earnings to grow ahead of global [ph] GDP. We expect our trading division that represents 16% of the group earnings to grow at a rate broadly similar to GDP through the cycle. The growth prospects in our virtual divisions which represents 6% of our earnings are improving with increased investments in oil and gas exploration and production activities, as well as in renewable energies.
We are extremely well positioned to see these exact exciting growth opportunities ahead, capitalizing on our core strengths. Our strengths under one [ph] is our total quality assurance superior customer service, our cycle strength is our powerful portfolio, our high quality component earnings models is a real core strength of Intertek, we have a passionate customer-centric organization and disciplined performance management. Innovating in attractive growth and margin sectors is an integral part of our strategy helping our clients resolve the increased complexity they face in their global operations to deliver their product and services with a highest quality, safety and sustainability standards. We'll continue to identify margin accretive innovations leveraging our industry leading expertise.
Intertek operates with a high quality component earnings models, our capitalized business models combined with our customer-centric organizations enables us to react quickly to new growth opportunities by following the supply chain of our customers in new geographies. Our approach to value creation is based on the compounding effect year after year over margin equity revenue growth, strong cash generation and disciplined investment in growth.
We believe in the value of disciplined capital allocation. Our first priority is to support organic growth through capital expenditures and investments in working capital by offering new services and developing your client relationship. Typically, we target circa 5% of revenue in CapEx. Our second priority is to deliver sustainable returns for shoulders through the payment of progressive dividends. In recognition of our highly cash generating business models, our strong financial position, they are both confident in the attractive long-term growth prospects for the group and it's ability to fund continued growth investments, our targeted dividend payout ratio is circa 50%. And our third priority is of course, to pursue M&A activities in attractive growth and margin sectors to offer superior customer service to our clients and deliver good returns.
One of our core strengths at Intertek is our performance management discipline. As we talked about over the years, our performance approach is based on leading and lagging indicators for every single team in the world of Intertek from every single site output in the organization. The insights we get from our MPS surveys, more than 7,000 interviews a month a tremendous, they enable us to drive the superior customer service with a continuous improvement operational approach. Our incentive systems for our colleagues is aligned with the interests of our shareholders targeting revenue, profit margin, cash and return on invested capital. Importantly, we believe in the growth of our people and we give all of our people the opportunity to learn and grow using a leading global learning platform 10X Way!
Sustainability is central to a 5x5 differential strategy for growth. We believe that doing business the right way with a systemic approach is the only way to deliver our corporate goals and create sustainable value creation for all stakeholders. To do that, we follow precise processes and standard operating procedures in 10 areas of our sustainability approach. It starts with quality and safety, risk management, enterprise security, compliance, environment, people and culture, communities, governance, financial and disclosures.
Now that we've reviewed where we are from a strategic standpoint, I'd just like to spend some time now on the outlook for 2020. And that starts with an update on the coronavirus. We've made regular updates to our website since February 3, and let me recap where we are. We operate more than 80 sites in China with the following business lines, electrical, soft lines, hard lines, food, business insurance, supply management, transportation technology, Caleb Brett [ph], agriculture, minerals, and industry services. We have almost 12,000 employees in mainland China and Hong Kong, and in Wuhan, which is obviously the area where the -- who their province is locked down. We only have one side of branch offices with 30 employees working for TT, who would be in supply management.
The actions we have taken in China include health alerts and guidance to our colleagues, including a detailed coronavirus control and prevention manual. In accordance with his manual, we've put in place hygiene and other protection measures in the workplace and at customer locations for field-based colleagues, including the use of face masks and the use of hand sanitizers and gloves. When conducting field-based audits and inspections for factory vendors or customer sites, we are asking our partners to first confirm that they have no suspected case of coronavirus and that they have taken the precautionary measures before we deploy our people.
We've put a compete restriction on international travel from and to China and Hong Kong. We will also issue the prevention guide to other people globally, in line with the World Health Organization guidance, to minimize the risk of infection. As you know, this is a developing situation, and will provide you with regular updates moving forward.
Let's now discuss the outlook for 2020. As I said earlier, with Intertek's five years of consecutive progress on revenue, EPS, and cash, exiting 2019 was improved all the gross momentum. We are well positioned to continue to deliver sustained value creation for all stakeholders. Prior to the outbreak of the coronavirus, we were targeting the group to deliver continuous progress in 2020, with broad base good organic growth across the group at constant currency, based on good organic growth in profit trade, robust growth in resources, moderate margin progression at the group level, and of course, strong cash collection.
We are not immune to the impact of the coronavirus, and our 2020 performance will be affected by the temporary disruption to the supply chain of workers in China and any impact it might have on global trade activities. It is too early to quantify the impact of the coronavirus, and we'll provide an update at a later stage during the year, once we have more visibility on the full resumption of the supply chain of our accounts. We'll remain, of course, very disciplined on cash conversion. We'll continue to invest in growth, and we expect a full-year CapEx investment to be circa £130 million to £140 million. A quick update on currencies for your model. The average selling rate in the last few months apply to the full-year results of 2019, would reduce our revenue and earnings by circa 250 bps.
Let's now discuss our divisions, and given difficulty in qualifying the impact of coronavirus, we are not providing business plan guidance for 2020 at this time. In 2019, our product business delivered a robust performance with continuous margin equity revenue growth. Our revenue growth at constant rate was 4.6%, and organic revenue growth 2.3%, driven by broad-based revenue growth across business lines and geographies. We delivered robust operating profit of £398.6 million, up 5.7% at constant currency, enabling us to deliver a margin of 22.2%, up 20 basis points compared to last year, as we benefited from positive operating leverage and disciplined cost management.
Our soft line business reported an organic growth performance slightly below last year. We benefit from the investment we made, the supporting expansion of our customers into new market, seeding the exciting growth opportunities the footwear sectors, and continue to leverage the strong demand from our customers for chemical testing. However, as discussed in November, the lack of visibility around the outcome of negotiation and tariffs has resulted in a delay in the launch of new products in the second half. Our hardline and product businesses continue to take advantage of our strong global account relationships, the expansion of a customer supply chain into new markets, and our innovative approach to factory inspection. We've delivered solid organic revenue growth performance across our main markets of Greater China, India, and Vietnam. We've delivered good organic revenue growth in our electrical and Connected World business, driven by higher regulatory standards in energy efficiencies, and by the increased demand for wireless devices and cyber security.
Our business assurance business delivered good organic revenue growth, as we continued to benefit from the increased focus of cooperation on risk management, resulting in strong growth in supply chain audit, and increased consumer governance focus on ethical and sustainable supply. Driven by the growing demand for more environmentally friendly and high-quality buildings and infrastructure in the U.S. market, our building and construction business reported good organic revenue growth. Our transportation technology business delivered robust organic revenue, benefiting from our clients' investment in new powertrain to lower emissions and increased fuel efficiencies. We continue to benefit from the increased focus of cooperation and food safety, and delivered good organic revenue growth in our food business.
We delivered an organic revenue performance slightly below last year in our chemical and pharma business, due to the deadline effect, driven by the 2019 registration deadline. In the mid to long-term, our product division will continue to benefit from exciting structural growth drivers, including product variety, brand and supply chain expansion, product innovation and regulation, the growing demand for quality and sustainability from developed and emerging markets, the acceleration of e-commerce as a new sales channel, and the increased corporate focus on risk.
Let's now move to trade. Our trade-related businesses benefit from acceleration of its revenue momentum, with 4.5% growth and 4.1% organic revenue growth at constant rates, driven by broad-based revenue growth across business lines and geographies. We've delivered a stable operating profit of £83.5 million, enabling us to deliver an operating margin of 12.3%, down 60 basis points versus last year, driven by portfolio mix effective within GTS and challenging training conditions we incurred in Britain, North America, and Northern Europe.
Our Caleb Brett business reported good organic revenue growth, reflecting the structural growth drivers in the crude oil and refined product global chain markets. Our governments and trade services business delivered double-digit organic revenue growth, driven by growth from existing contracts and new contracts. Our AgriWorld business delivered good organic revenue growth, driven by a broad-based growth performance across our global inspection businesses. In the medium to long-term, our trade division will continue to benefit from regional and global trade flow, as well as increased customer focus on quality, quality control, and supply chain risk management.
Let's now discuss results. We benefit from an improved revenue momentum, with margin accretion in our resource-rated businesses. We have reported a robust organic revenue growth [indiscernible] by 5.7% of constant rate, and we've delivered an operating profit of £31.2 million, which was up year-on-year by 16% enabling us deliver a margin of 6.1%, up year-on-year by 50 basis points. We've delivered robust organic revenue growth in our CapEx inspection business, which benefited from the increased investment of our customers in exploration and production activities, as well as the win of new clients in several geographies.
The demand for OpEx management services remains stable, with benefits from robust organic revenue growth in our mineral business, driven by stronger demand for testing and inspections across most geographies. In the medium to long term, our resource division will continue to benefit from investment in exploration and production of oil, investment in renewable energies and minerals to meet the demand of the growing populations around the world.
In summary, we are pleased with the progress we've made both on strategy and performance in the last five years, and this is a real tribute to the quality of organization. The opportunities for growth ahead are exciting, and we are well positioned to seize these with our superior total quality assurance customer service. We'll remain very focused on delivering sustainable value for all stakeholders, executing our five-by-five strategy with operating discipline.
Thank you for your attention this morning, and we'll answer any question you might have.
Thank you, sir. [Operator Instructions] Our first question comes from the line of Sirasimi Varanasi from Goldman Sachs. Please go ahead.
Hi, good morning. Thank you for taking my questions. I understand you cannot quantify the impact on the coronavirus, but can you give some color on how February has been in terms of, let's say, trading activity in China and Hong Kong, or in terms of, let's say, how many employees have actually come back to work by the end of February? That'll be helpful. Thank you. And regarding the virus impact, can you talk about what kind of leverage you have on the cost base to mitigate any impact of margins? Are you thinking about taking any cost saving measures? Thank you.
Okay, thank you very much for your question. I guess we're going to have quite a few questions on the coronavirus. So, maybe let me just give you a bit of color on how we are handling the situation. As you can imagine, we are very close to our Chinese colleagues, and I personally chair a daily session to track the progress of all activities in Greater China, given the fact that China and Hong Kong represent 19% of our group revenues based on the 2018 annual reports data. As I said in the call, of course, we are not immune to the impact that these temporary supply chain disruptions is creating in the world of all kinds, because this is basically the main point here. And as I said, trying to be helpful as much as we can. It is not possible to quantify precisely the impact. And I will give you a few data points. As you know, the Chinese New Year holiday was postponed. The return was postponed, I should say, to February 10. And we basically resumed operations from February 10 onwards in mainland China.
Hong Kong operates as a different calendar, and we resumed operation on January 29, as expected. Unfortunately, we had one case of one of our employees inside operations being identified having the virus, and we decided for the health and safety of everyone inside operations in Hong Kong to basically close the operation for 14 days, to give everybody the time to go through the required quarantine period. We reopened in Hong Kong on the 25th of February, and Hong Kong is now like Mainland China, fully operational. Our tower operations has resumed operation on January 30, as expected.
What's really important for all of us to consider on how to think about the next steps is twofold. One is it's a function of how many employees do we have inside of our operations back to raise your work. This is issued on our own capacity, if you want, and I will give you some data points on that. But this also applies to our clients. And maybe another important factor for clients is what is the availability they have in their supply chain of all the components and parts from their tier one, tier two, tier three suppliers. And if you visualize our operations in China, as I said, we have close to 12,000 colleagues. We operate in more than 80 sites. Just to give you a sense, we work for close 130,000, 140,000 clients in Greater China. So, it's not only a question of how much capacity does Intertek have, and I'll come back to this point, but it's how much of the capacity our clients can basically resume because for them, it's a function of two dimensions. How many of the employees are back to work, and do they have the parts from the tier one, tier two, tier three suppliers? That's why it's very difficult to quantify how long it's going to take and what it means.
Having said that, I can assure you that everybody in China is focused on being back at work, trying to resume as much as possible their operations. But it will take time, and I will keep you informed throughout the next few months where we got more visibility. So what does it mean for Intertek? We've seen a gradual progress of capacity buildup in operations, and we will also see the global progress of the supply chain resumptions from all of our clients. But just to give you a sense, we restarted operations on February 10. And in the first week after the Chinese New Year, we basically had about 20% to 30% of our employees back to work. And you will recall that after the Chinese New Year, for lots of provinces, if anyone had traveled outside of the province, they had to go in quarantine for two weeks. That was basically mandatory. That was what created the delay in the capacity build up.
In the week of February 17, we saw some further progress, and we had about 35% to 45% of our capacity back. And last week, which was the week of February 24, we had about 55% to 65%. So, that gives you an idea of how much capacity we have rebuilt step by step. What I want to really stress here, this is the Intertek capacity, i.e., how much can we produce for our clients. It's not an indication of our revenues because, as I explained before, our clients also needs to rebuild their supply chain, and it's complex. It's taking time, and nobody can really quantify that. What we are doing for our clients is very important. Making sure that we have the utmost hygiene and safety standards inside operations, and when we go and visit our clients. We are obviously available 24/7 to help them resume their work when they need to start testing for their export activities. And we basically cannot really quantify and determine when all of our suppliers or customers are going to be back to 100% capacity.
Now, one thing that I would like to stress is we are a B2B business. We are not a B2C business. So, what matters for us is the resumption of the supply chains of our clients. And you know that so well. If you are in a B2C business and you're in the restaurant business, if you don't go out for dinner because you're worried about certain things, you're not going to have two dinners the next night. But in our business, we have an older book, and it is usual in our industry to make sure that we add extra sheets to serve our clients and meet the demand in the other book we have. So, there will be some catch up down the road in China. Obviously, I cannot say more than that.
So, the last question you asked in terms of what type of consulting could we pursue if we want to reduce the impact of the lost revenue. Our view is that we had a very good year last year in China. We had targeted our China businesses to continue to grow at a very healthy rate. And all our costs, fixed and variable ideas to deliver that growth. It's not possible to save cost doing what's going to be a temporary reduction of the supply chain because we want to be there when our clients need us to resume the production of testing activities for them. So, thanks for asking that question. I used the opportunity to give you a broader perspective on where we are. And I'll take any additional questions from anyone.
Can I just ask one follow-up, please? You mentioned that at the end of February, you've got 45% to 65% capacity back at your businesses in China. Would it be fair to say that within your customer base, the ramp up has not been very strong, and therefore, you have not been able to use your existing employee capacities to service all your clients? That basically the customers are still ramping up until your employees are [indiscernible], some of them are sitting idle? Is that fair to say?
Look, I know exactly where you're trying to go. Today is not a trading statement about 2020. I'm trying to give you the parameters to think through how to look at your model. As I said, this is Intertek's capacity, and I'm not making any statement on our revenue in January, February. We'll do that in due time when we announce our results for the first four months in May. So, I'm not trying to be difficult. I just want to be precise. This is our own capacity numbers, which I think gives you a sense of where we are. I would also ask you to think through that know that different level of business resumptions in the supply chains of our clients in China. There is a bit of data out there. We have to be all very careful with the data being published. But it's going to take some time, and we have to be patient, and I think the best way is to wait for the numbers to be to be released.
The next question comes from the line of Paul Sullivan from Barclays. Please go ahead.
Good morning, everybody, and thanks for the color, Andre. And just following up on that…
Good morning. Can you hear me?
Okay, great. Outside of China, are you seeing any impacts in other parts of Southeast Asia at this stage?
I think that's a great question, Paul, and thanks for asking it. As you can imagine, there are less import and export activities in China, and that is, of course, having an impact on some of the global trade activities. You will have heard that some of the factories in Europe or in the U.S. are not getting the supply of components they need to produce, and that's basically a reflection of that because it's more difficult to get in and get out of port in China. So yes, I expect some impact on global trade. Very difficult to quantify, Paul, but we are monitoring it very, very carefully because it's part of the global supply chain points I mentioned earlier.
And just following on from that, and if we can -- wishful thinking maybe to put COBIT aside for one second, the impact from the trade war that became a little bit more evident in the second half, how were you seeing that wash through? And then finally, were you -- on the changing tax slightly on the balance sheet, the cash flow's good, looking under levered now. Were you tempted to think about a cash return this year? But has the uncertainty put sort of ticks out into the long grass?
I think the news at the end of the year, since they confirmed early January on the tariffs discussions between the U.S. and China have been very welcomed by the entire business community. And what is really its downfall, it has reduced the level of uncertainties in terms of future issues. Unfortunately, with the Chinese New Year holiday in January and what happened in February, we've not been able to see any benefit from that, as you can imagine. But certainly, this is positive news in terms of reducing the uncertainties moving forward for all of our clients. As far as our balance sheet and the strength of our balances, look, we believe in disciplined capital allocations. We have tremendous opportunities, organic, inorganic.
As you probably have seen, we made a small acquisition at the end of December. We continued to look at acquisition opportunities around the world in a very disciplined fashion. We've been at one time net debt to EBITDA in the past, and we are happy to be there if this is what we need to find the right acquisitions. We've never made any commitments to any return to shareholders in terms of cash because we never had to do that in the past. But as you can imagine, this is a decision for our board. And we want to do the right thing for the business for long-term. So the good news is, we are extremely strong financially, we've got a tremendous balance sheets, we've got a lot of opportunities, we are very disciplined; and we will make the right call.
Thank you very much.
The next question comes from the line of Edward Stanley from Morgan Stanley. Please go ahead.
Morning. Thanks for taking my questions. Following up on Paul's question on the impact from the trade war, can you give us a feeling for the products that have been delayed in the second half? Is that a small number of products from a small number of customers? Or is that a sort of larger number of customers spread across your total customer base? Just trying to get a feeling for how quickly it might bounce back, whether it's isolated or broad spread. The second point, I'm just wondering whether you're seeing any incremental pressure on price or increased competition in either hard lines or soft lines in the second half of the year because the operational gearing in products was not as great as I might have had in my model. And then on the third point, during the year, you said you lost some food share or market share in the in the food business. Do you have a long-term plan for how you get that market share back in food and where you expect that division to grow over the medium to long term?
Okay, thanks, Ed. Look, I think going back to your first questions, in terms of the delay of the launch of new products that we saw on the back of these discussions on tariffs, basically it's not complicated to understand, is if you are a brand or if you are a factory in China and you know that the tariffs are going to increase across lots of categories and you know that potentially there will be some solution to these negotiations, why would you invest in tooling and equipment to start producing new equipment in new products? So, what we saw is across several customers, these decisions to be delaying investments, nothing more than that.
As far as the situations in soft line and hard lines, look, we operate in a global market. We have, as you know, competitors. There is always price competition out there. We do not use price to deliver revenue growth. We believe that good revenue is based on volume and strong pricing power. And the operating leverage, a point you've mentioned, is just a function of the portfolio of multiple business lines. And it's true that in our soft line business, we saw slow revenue in '19. And when you have a business that is a high-quality business, and you value your customer service, you have to accept to get some negative appointment [ph] right from time to time because you want to protect the quality of your customer service. As far as -- but I wouldn't say that the pricing environment has changed significantly. It's been more or less the same for many years. And you know which companies use price more than others, and good luck for them. As far as the food point, yes, you're right. I mentioned that during the year, as I said, at the time, it was really local issues in a few sites. As a matter of fact, I was there a few weeks ago, and some of the customers that went for the lower price and decided to come back to us because they got a better customer service.
So, sometimes it takes a few months to stick to your guns and say you know what? We are the superior operator here. If our competition wants to lower their price and our clients wants to try it, they can do that. And this is the best compliment we can get, when our clients say you know what? We're back.
The next question comes from the line of Tom Sykes from Deutsche Bank. Please go ahead.
Thanks very much. Morning, everybody.
Morning. Just going back to, sorry, COBIT again, are you able to say which sort of supply chains have been most affected, the sort of soft lines or electronics at all? And perhaps, is there any way you can kind of give us a typical walkthrough of each one in terms of the seasonality and kind of what months are really important if April comes back and is quite strong? Is that disproportionate for you in the first half in industries that may be in a disproportionately large for you, please? Then just on the cash flow, I think the payables pushed out a bit, obviously brought working capital down again. But do you still see some improvement in that working capital? And where might that come from, please? And then finally, just on the tax rate, what's the reason for the tax rates increase, please? Because you're in a number of large geographies which are not that level of tax, please.
Thanks, Tom. So, let's just start with your question on the profile resumption across industries and the seasonality in China. Look, on the first relation, Tom, as you can imagine, this is something that we're looking at in detail with our colleagues And just to give you -- because I want you to get the full picture, there is a difference in terms of resumptions between the testing that we do in our own labs and the inspections and audit activities that we do in our factories or factories of all kinds, as you can imagine, because going out to a factory, there is an additional complexity. Is the factory ready for us to get there? So, I just wanted to mention that because I didn't do that up front. And it's important, obviously. Inspection and audit is not the majority of our activities in China, but it's important to understand that.
And you're absolutely right. There is a difference in terms of the profile of supply chain resumptions between [indiscernible]. I wouldn't say necessarily between industries, Tom, because every client has got their own supply chain and where they source their components. And this is something that we are monitoring. Very complex though because it's also a function of how many stock companies operate with. So, this is going to be the difficulties because supply chains are super intertwined, super connected, and we have to do it a step at a time. The differences we're seeing, Tom, is by clients, not necessarily by industry. And I saw a question in terms of seasonality. Not all of our businesses have got seasonality in China. But it's fair to say that soft lines, the peak seasons, tend to be slightly in the year. So, that's a fair point. I will let Ross handle the tax rate and working capital questions.
Sure. Thanks, Andre. Tom, thanks for your questions. I mean, on working capital, as you saw in 2019, we continued to make good progress, reducing working capital intensity down to 3.4% of sales, down from 3.9% in 2018. And that's been driven both by improvements in the receivable side and the payable side. So, our DSOs and DPOs have both moved in the right direction for that period of time. And as we talked about before, we continue to see the opportunity over the medium term, and to make this better by driving down the spine of performance across the global operations. And in terms of tax, as you saw, the guidance was 25.5% to 26% versus the 24.5% we delivered in 2019. And the driver of that really is around simply the mix of operations across the globe and the changing tax regimes that are out there, and also how the group is using its tax attributes over a period of time. So, it's no more than that.
Okay, thank you. And just in terms of behaviors of people around the virus, is there any -- or what effects of switching, of sourcing, sending -- I don't know, sending products to different labs at all? Or is there any counterbalance? I know you mentioned to Paul that you would expect world trade to be affected. But is there any counter balancing that you're actually seeing some unexpected increases everywhere, or is it all bad, and then we're waiting for resumption?
If you put yourself in the shoes of our clients in China, their main focus is to go back to business and go back to where they were to be after Chinese New Year because they had to worry about where are their employees, are they going to be able to come back, are some of them going to be in quarantine. And then obviously, the next implication is how much do they have in the audit book that they need to produce? Where are their clients really becoming impatient? And how do they deal with it? And obviously, as I talked about, components, supply chains, stock management is important. Look, if any of our clients wants to think about alternative locations because they have a faster way to get to market by moving the production from China to Bangladesh or Vietnam or India, of course, we are there, that's what we are trying to do, to make sure that we have all clients 24/7 in their supply chain activities. It's fair to say, Tom, that until today, the focus has been very much on trying to go back to normality in China. The discussions on warehouse to produce, we're obviously already in the pipeline, as you remember last year. So, these continue. But it's been quite an unprecedented time for everyone in China, and they just want to go back to business, and back to America, and that's where they want to go.
Okay, and sorry, just one final short question. If you have a resumption in activity and it's quite strong, is there anything you're being told by the authorities, which would prevent you from pricing, say, the overnight shift appropriately or in line with your historical rate cards, if you needed to bring on that activity quickly?
Look, it's a great point. If you look at the Hong Kong, basically, situations where we had to shut down operations for two weeks, as I said earlier, and as you know, in operations, in terms of turnaround time, we offer an express service. And what we have done is basically -- we basically offer this expert service as preferential terms to help our clients. So, the way I'm thinking about it, is helping our clients. In the very difficult times like this, the partnership demonstrated in these really, really tough moment is going to go a long way. And yes, we want to drive margin and revenue growth. We all want to do that. But what really matters most at the moment is helping our clients to resume their operations, and we will do whatever is required.
Okay, thank you very much indeed.
The next question comes from the line of Rory McKenzie from UBS. Please go ahead.
I wanted to ask a couple of questions about the business assurance division within products. Can you clarify where the growth did accelerate into year-end as you hit easy comps? And also, how much were you hoping for it to accelerate in 2020 on a pre [indiscernible] basis?
Sorry, the connection is not too good. Can you repeat your question, please?
Sure. Is that better?
Yes, that's better. Thank you.
I wanted to clarify whether growth did accelerate into your end. I think you had easier comps. And how much were you hoping for it to accelerate in 2020 on a pre-COBIT '19 basis? You started last year hoping for robust growth, and end up with good. And you also invest in a lot there, both organically and with Alchemy coming in.
No, you're right. We had a baseline effect in '19 for our business assurance, given the ISO standard change at the end of '18. And yes, for sure, we saw some good progress, as expected, in the second half. And prior to coronavirus, we were targeting the group to continue its progress on business assurance. And as you rightly said, we now have Alchemy also part of assurance business. So, we continue to be very excited about the prospects in our assurance business. So, it's all good.
Can you share any numbers with us about the interest or the headcount growth and the sustainability assurance services that you launched through last year? And again, anything to talk about particular areas of the market you're seeing more maybe interested in some clients, sectors like soft lines or anything like that? What was picked up the most?
No, it's a great question. And as you can imagine, we've been quite active meeting with our clients over the last few months. I do regular customer meetings myself. And what's really, really interesting is that the interest has been really broad based, as you would expect, but with particular interest in the in the energy sector, which is very encouraging, given some of the pressure our clients are under in terms of environmental data and sharing the system with AT strategy. So, we've seen quite a lot of interest there. Of course, in the soft line industry, lots of interest there, given all what we've been hearing in terms of their global supply chain management. And as I mentioned, in one of our calls, we've also been seeing some quite interest from the financial sectors, and that's quite interesting. Obviously, green financing is a big thing, and our model applies there. So, what's been really, really, really impressive is the way our clients have said, finally, we have a framework, we have the set of standards, we understand where sustainability starts and finished. And it's really global. I had the opportunity beginning of January to launch TSA in Delhi. And the amount of interest we got from everyone across all sectors was very, very significant. And I'm going to the Middle East in the next few weeks and the interest is very strong there and, of course, and U.S.
You know, it's been a really good reaction. We are very pleased. And if you recall from our presentation, it's not only the certification, which is our new approach to sustainability. It's also the operational solutions that companies use to go very, very deep in monitoring the emissions. They're looking at the social standards, et cetera, and so forth. It's been very positive. And frankly speaking it's not part of our -- discussion with our clients, and there is no one presentation where our clients don't want to hear about our views on sustainability.
Very interesting. And just now with tracking. If, say, you do win a contract, for say apparel supply chain certification, does that go into soft loans or into this assurance division?
That's a good question. If it's a certification, which is about an audit and certification of the corporate processes, that will be done by our business assurance teams. And in terms of the operational sustainable solutions, we have solutions that are industry agnostic done by business assurance, and some that are business life specific and done by our soft line teams. Because we do, as you probably recall, sell assurance testing inspection certifications in each of our business lines.
Great, thank you very much.
The next question comes from the line of David Root from Bank of America. Please go ahead.
Morning, guys. Just a couple from me. In terms of Intertek's investments into lab expansions over the year, could you perhaps elaborate on how these investments were allocated by region? And then just sticking with capital allocation, on M&A, you mentioned the various inorganic opportunities of those realities. I don't think we've seen a sort of sizable transaction since Alchemy. I'm just wondering, what is holding Intertek back in this case? Is this just a function of high asset prices and you guys being prudent on that? And then lastly, on China, can you perhaps give us a breakdown of your China business by main segments, so, i.e. products, resources and trade. Thanks very much.
Again, thanks. Look, I'll go in reverse order. On China, as you know we do not disclose by geography, but it is fair to say that the product is a very strong part of our business in China as you can imagine given the strength we have in this market. In terms of M&A look, this is a very important question. For us, M&A has got to be selective to augment the financial trajectory of the group moving forward, to basically provide additional services and it's got to make sense from all aspects. So we are very disciplined. It's not only about is the business attractive but is the business going to continue to perform on a sustainable basis from a revenue and margin standpoint. It's also about do we believe that we can add value to this business and do we have commercial IP innovation synergies. Is obviously, of course, about the financials. If we don't tick all the boxes, we just don't do it because we don't need it. We have a very strong business where the growth opportunities from an organic standpoint, are very, very attractive and we want to be and remain selective. That's true that we've not done any large production since alchemy but this is fine. We have lots of opportunities but we are always looking at all transactions out there. We say no more often than we say yes. That's what discipline is all about. The opportunities remain there. I wouldn't take anything from what I said that we're not focused on it. We're very focused on it. We want to seize the right one at the right time. As far as lab expansion, good question. As you can imagine we have invested to either increase our capacity or technology, technical capability in certain sectors. So we've invested a lot in electrical labs around the world in terms of energy efficiencies, for instance. We've obviously made investments that in terms of connected world cybersecurity in the U.S. and also in Asia. We tend to expand where the supply chain of our currency goes. So as you can imagine, over the years, we've expanded to print in Vietnam. We've expanded our footprint in Bangladesh. We have expanded our footprint in India. We've seen some good opportunities in Africa and also in the U.S. We have seen some really interesting segment. So it is opportunity based, and this is where we want to take on customer service, to either create capacity where clouds are going with our supply chain, or improve the level of customer service. So this is how we think about it.
Thank you. That's very helpful.
[Operator Instructions] And our next question comes from the line of Ed Steele from Citi. Please go ahead.
Good morning all. It's Ed Steele from Citi. A couple of questions on trade please. Obviously, you had a growth in government and trade services double-digit year. Probably that was the new contract component. Could you remind us of how that flows into next year 2020, please? That's the first question. And secondly, on calibrate. Obviously, you cite competitive pressures as your competitors have done for a couple of years. I think your approach has been to stick to price discipline in the past and maybe sacrifice a bit of share. But you talked about good organic growth in 2019 but negative margins. So have you changed your approach? Are you now may be considering a better price to keep share?
Thanks, Ed. Look on GTS you're right. The double-digit growth has been on the back of new contracts. These new contracts have been almost from month one in 2019. So I would expect too much from these in 2020. Having said that, our team is always active to get New Year contract. So the year just started so I wouldn't be too worried about GTS. On calibrate, you're right. We are very disciplined in terms of price and what's happening is relatively simple if I may say. Let me just explain it in simple terms for you. Obviously, in the second half we had the baseline effect because the second half of 2018 was very strong. We saw a slowdown in the market in the second half in North America and in Europe. For us when they read this talking in the supply chain of our currency we've got it right. This is a slow down for us because obviously they sell refined products that we've already tested from stock and the same in terms of crude. Now, what's happening in these situations is this is a competitive market so our competitors will lower their price to basically gain some market share. While we are commercial and we want to make sure that we stay competitive in the market, our preference is to not lower our prices because if you start where do you stop. The negative margin impact in the second half has been a function of slower growth in an environment where you have to recognize your inflation, your cost and that's what it is. But it's not a change of pricing discipline. That's a good question. Thanks for asking.
Very clear. Thank you, Andre.
We have no further questions in the queue so I'll now hand the conference back to Andre for any concluding remarks.
Well, thank you very much to all of you for joining on the call. Again, thanks for your patience this morning. We had a technical issue with our webcast operating platform that was resolved by our providers relatively quickly. So really appreciate your patience and if you have any questions, obviously, we are available, and Denis is obviously on standby for you at any time. Thank you very much. Have a good day.
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