Intertek Group plc

Good morning to you all, and thanks for joining us on the call following the release of our H1 results a few moments ago. I'm with Ross McCluskey, our CFO; and Denis Moreau from our Investor Relations team.

This morning, we've announced a strong set of results with broad-based revenue growth and margin accretion, strong cash generation and continuous progress on dividends. We're extremely pleased with the consistent performance delivery of the group year-after-year, and we are on track to deliver our full year 2019 targets.

As you know, I spent quite a bit of my time visiting our operations, traveling around the world and of course, meeting with our clients. In addition to the strong financial performance of the group, I'm really energized by the progress our teams are making, offering our differentiated Total Quality Assurance Value Propositions to our clients.

Our customers are more focused today than they've ever been on mitigating the increased operational risks in their operations. There is no question that our risk-based quality assurance approach is addressing their needs to improve the quality, safety and sustainability of their operations.

Today, I will start with the performance highlights in the first half of '19. Ross will then take you through the detailed financial results.

I'll discuss the progress we are making with our plans. And finally, we'll talk about the outlook for 2019 by division.

Before we start, I'd just like to give an update on the approach Intertek is taking in relation to the changes in accounting standards. For reporting and consistency purposes, the numbers we'll discuss in our presentation today are based on IAS 17.

The IFRS 16 figures are detailing our press release this morning. We'll continue to guide on the IAS 17 until the end of '19.

When we start 2020, we will have a full year numbers under both standards. And it's only then we'll start guiding on the IFRS 16.

Let's start with our H1 performance highlights. In the first half, we continued to make progress on revenue, margin and cash.

The group generation revenues of £ 1.443 billion, up year-on-year by 4.9% at constant currency and 7% at actual currency. Our revenue performance at constant currency was driven by good organic growth of 3%, in line with expectations and by the contribution of recent acquisitions.

The group delivered operating profit of £243.6 million, up 6.8% at constant currency and 7.9% at actual currency. We have delivered an operating margin of 16.9%, up 30 bps at constant currency and 10 bps at actual rates.

Our EPS for H1 was 97.8p, up 6% at constant currency and 7.2% at actual currency. We continue to make significant progress on cash with a 12% increase year-on-year in operating cash flow underpinned by our disciplined approach to working capital, which was down year-on-year by 12%.

In line with the dividend policy that targets a payout ratio of circa 50%, we've announced the interim dividend of 34.2p, up 7.2% compared to last year. We are pleased with the consistent performance delivery of the group, underpinned by a strong earnings model and our disciplined performance approach on a daily basis.

In the first half, in the last 5 years, we have grown our revenue on CAGR by 7% per year, operating profit by 10%, operating cash flow by 9% and our dividend by 16%. Last but not least, we have improved the margin of the group, which is now 200 bps higher than it was 5 years ago.

We have reported broad-based organic growth in line with accretion. Each of our division's made progress on both organic revenue growth and margin.

Our Products-related businesses delivered a robust operating performance with a revenue growth of 4.9% at constant currency driven by good organic revenue of 2.1% and by the benefit of acquisitions made recently. Products operating profit increased by 6% at constant currency and the margins was up by 20 bps.

We benefited from an acceleration of gross momentum in our Trade-related businesses as we delivered revenue increase of 5.8% at constant currency driven by robust organic growth of 5.1% and the benefit of acquisitions. Operating profit in Trade was up 6.8% at constant currency and the margin improved by 10 basis points.

We saw improved revenue momentum in our Resource-related businesses delivering a good organic revenue growth of 3.5% in constant currency. Operating profit was up 16.9% at constant currency and the margin expanded by 70 bps.

Our M&A strategy is focused on the acquisitions of leading and innovative solutions that we can scale through the Internet network. The acquisitions that we've made since January '18 in attractive growth and margin sectors, as you know, we are very selective where we invest, are performing well and have added 1.9% to our revenue in the first half.

I'm particularly pleased with the progress Alchemy is making, offering our leading People Assurance services to our clients in North America. As always, we continue to actively pursue special opportunities and attractive growth and margin areas with value-enhancing acquisitions.

Margin is an important priority to the group. We have delivered an operating margin improvement of 30 bps at constant currency, benefiting from an operating leverage linked to gross productivity gain and from a margin-accretive portfolio strategy.

We are pleased with the continuous progress we are making on margin. It's 5 consecutive years of margin accretion in H1 at constant currency, as you can see on the slide.

Our daily focus on cash management is also a very important priority for the group. We continue to reduce working capital.

We delivered an operating cash flow increase of 12% and the strong cash conversion of 126%. I'll now hand over to Ross who will take you through the financial results in detail.

Thank you, André, and good morning, everyone. I will now take you through our results and in detail.

In summary, in the first half, we delivered robust revenue profit and EPS growth at constant currency. Margin improved year-on-year at both actual and constant currency, and our cash flow performance was strong.

The half year '19 results were first reported under the new lease accounting standards of IFRS 16, as you know. And for comparability purposes we've also presented our results in an IAS 17 basis.

In the comments that I will make on the year-on-year developments, we'll be on a consistent IAS 17 basis. Total revenue growth was 4.9% at constant currency and 7% at actual rates as FX translation increased our revenues by 210 bps driven by the depreciation of sterling.

Organic revenue growth at constant currency was up 3% and operating profit at constant rates was up 6.8% to £ 243.6 million. And margin was up 30 basis points.

The FX effect for the half year results in operating profit of 7.9% in actual rates. So overall, fully diluted EPS grew to 97.8p, being up 7.2% at actual rates and 6.0% at constant rates.

I'll now take you through the high-level margin performance by division. The group recorded a 10 basis points improvement in operating margin in the first half at actual rates, increasing to 16.9% in an IAS 17 basis.

Margin improved by 30 basis points at constant rates driven by margin accretion in each of the divisions. This was partly offset by FX, which had a negative 20 bps 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 £ 229 million, up 12% year-on-year with working capital down 12% year-on-year and further reducing as a percentage of revenue. We invested £ 45.7 million in CapEx in line with 2018 to expand our market coverage and develop innovative ATIC solutions.

Free cash flow in the period was £ 104.6 million. Net debt stood at £ 826 million on an IAS 17 basis and £ 108.2 million on an IFRS 16 basis.

Now turning to our financial guidance for FY '19. And as André said, for comparability purposes, our guidance remains on IAS 17 basis.

We expect the net finance cost will be around £ 31 million to £ 33 million. The effective tax rate is still expected to be in the 24.5% to 25.5% range, and minority interests will be circa £ 21 million to £ 23 million.

We're expecting full year CapEx to be £ 130 million to £ 140 million, and we continue to expect the net debt to close the year of between £ 670 million and £ 700 million. And of course, this net debt guidance is stated on an IAS 17 basis before any further M&A and before any future achievable movements in FX.

I will now like to hand you back to André.

Thanks, Ross. In the last 8 to 10 minutes, we've covered our financial performance.

What I would like to do now is to give you an update on the progress we are making with our clients. As you know, at Intertek, we put customers first.

We work with more 300,000 corporations around the world, and we enjoy deep and trusted relationships with each of them. These long-lasting relationships are based on a superior customer service.

We provide independent quality assurance services that are mission-critical for our clients. We have a strong technical expertise in all sectors we operate in, and when combined with our passionate and entrepreneurial culture, that enables us to support the growth agenda of our clients in an ever-changing and more complex operating environment.

At Intertek, we truly value the long-lasting relationship with our clients, and each of us is deeply committed to the delivery of our Total Quality Assurance customer promise. We see their attractive growth opportunities in the quality assurance market.

The market is worth circa $250 billion, yet only 20% of this market is outsourced. We see, of course, strong growth opportunities with existing and new customers.

We saw -- we also saw attractive growth opportunities to get access to quality assurance work that corporations currently do in-house, i.e., outsourcing. But the opportunities goes beyond outsourcing and existing clients, it's all about the untapped potential in our exciting industry.

The global operations of corporations around the world are increasingly more complex, which drives more demand for end-to-end quality assurance services as corporations increase their focus on systemic operational risks. This untapped potential is really exciting as it all about what companies do not do today in terms of quality assurance and are starting today -- to do today or tomorrow to improve the quality, safety and sustainability of their operations.

We are seizing this exciting growth opportunities that have differentiated Total Quality Assurance Value Proposition globally. Across all of our businesses, we support the existing and emerging quality assurance needs of our customers in each area of their operations: R&D; raw materials sourcing; component suppliers; manufacturing; transportation; distribution and channel management; and of course, consumer management.

Total customer first approach innovation is truly important to have our clients mitigate the increased quality and safety and stability risks in their operations. I'd like to share some of the innovations that we've launched recently.

As you know, we do NPS as a feedback with our clients, and we do about 7,000 monthly surveys. That gives you tremendous customer insights when it comes to innovation.

Let's start with some of the most recent innovations in our Products division. We've developed a Virtual Audit solution through which our TQA Experts are able to audit remotely.

This allows us to deliver our audit faster and with a wider audience of subject matter experts. STEM Toys are increasingly being marketed to young children.

These are toys that have in-build Science, Technology, Engineering and Mathematics functionality. There is an increased demand from schools using toys for learning that are both generally [STEMs] in our space.

We have developed unique STEM Toy Mark to verify that our customers' toys meet stringent quality and safety standards. Let's now discuss a few innovations in our Trade-related businesses.

Turnaround time is a key factor for all trading customers. It's critical for our clients.

These are for operations doing the assembles to test them in a fast, efficient and flexible way. Our Caleb Brett business has developed a very unique service proposition called Oceanlab Quality Testing Laboratories, and we started with our clients installing these labs on their ships.

Another innovation to reduce turnaround time for our clients in our AgriWorld business. We have recently launched a rapid protein analysis, leveraging leading technology for soya exports.

A few innovation examples in our Resource sector are offshore drilling, exploration, and production customers face the challenge of maintaining, aging our increasingly complex new equipment in a deep and more stringent regulatory environment. We've developed DeepView 3D, a new inspection methodology that combines 3D laser scanning and precise metrology data with advanced Non-Destructive Testing.

It gives an accurate representation of current conditions and mechanical integrity of critical assets. This allows our customers to take a smarter approach to maintenance reducing expensive operational downtime.

The important safety innovations for oil and gas clients. As you know, helicopter journey can present risks when staff work on offshore rigs.

Our experts have developed a Helicopter Underwater Escape Simulation program, which essentially a training program. Let's now discuss the outlook for the group in 2019.

We are on track to deliver our full year 2019 targets. We expect to deliver good organic revenue growth at constant currency with good organic revenue growth in each of our 3 divisions: Product, Trade and Resources.

From a profitability standpoint, we expect to deliver moderate margin progression. We'll continue to invest in growth with full year CapEx being circa £ 130 million to £ 140 million.

A quick update on currency for your models. Based on the actual figures on the first 6 months of the year and the last 3 months average rates for the remainder of the year, the average selling rate applied to the full year results of 2018 would provide 150 bps uplift at the revenue level and 100 bps at the operating profit level.

Let's now discuss all divisions, starting with Products. All the numbers I will discuss in this section are at constant rate.

In the first half, our Products business delivered consistent margin accretive revenue growth. We've delivered 4.9% revenue growth driven by a good organic revenue growth of 2.1% and by the benefit of acquisitions made recently.

We delivered a robust operating profit of £ 185 million, up 6%, enabling us to deliver a margin of 21.3%, 20 bps ahead of last year driven by the benefit of operating leverage, cost discipline and our pricing power. Softlines business delivered solid organic revenue growth benefiting from supply chain expansion of our clients in new market, rapid expansion in the footwear sector and the increased demand for chemical testing.

I'm pleased with the commercial progress we are making with our Softlines client, our full year guidance of solid organic growth for Softlines remain unchanged. Our Hardlines business reported solid organic revenue growth driven by innovations from our customers leveraging wireless technology, increased demand for chemical testing and our innovative inspection technology, i2Q.

We are making good progress on business development activities with our clients, and our full year guidance of good organic revenue growth for Hardlines remain unchanged. We delivered robust organic revenue growth in the Electrical & Connected World as we continue to benefit from electrical appliances innovation that provides better efficiency and connectivity and of course, increased demand for IoT including cybersecurity assurance services.

Our full year guidance of robust organic growth for Electrical & Connected World remain unchanged. Our Business Assurance delivered good organic revenue growth.

We are comping versus a high base last year, as you know, when we benefited from the increased ISO audit demand for our clients to meet the Q3 '18 deadline for standards upgrade. Our full year guidance of robust organic growth for Business Assurance remain unchanged.

We are seeing a strong demand for non-ISO assurance solutions as we benefit from increased focus of corporations on risk management and obviously supply chain processes, increased consumer and government focus on ethical and sustainable supply. In our Building & Construction business, we are also comping against a high base in '18 and have delivered a solid organic revenue growth as expected.

You'll recall that the inspection activities of last project in United States in 2017 were soft following the presidential election. And that in '18, we benefited from the fast ramp-up of several new projects that were delayed in '17.

We are seeing good traction with our business development activities. Our full year guidance of good organic growth for B&C remain unchanged.

In our Transportation Technology business, we delivered robust organic revenue growth driven by continued investment of our clients in new models and new fuel-efficient engines and increased scrutiny on emissions. Our full year guidance of robust organic growth for Transportation business in '19 remained also unchanged.

We generated good organic revenue growth in our Food business driven by continuous food innovation and increased focus on the safety of supply chain. We expect our Food business to deliver good organic growth in '19.

We saw unexpected organic revenue below last year in our Chemicals & Pharma business in the first half as we benefited last year from robust growth ahead of the June first week deadlines, which created obviously a very strong business for us. We are maintaining our full year guidance of solid organic growth for C&P business.

Our pipeline of activities is strong for the second half. Overall, for the full year, we expect the Products-related business to deliver good organic revenue growth.

Our Trade business benefits from acceleration in revenue momentum and delivered a robust performance with a revenue growth of 5.8% and organic growth of 5.1%. We delivered an operating profit of £ 44 million, up year-on-year by 6.8% and operating margin of 13.3%, up year-on-year by 10 basis point.

Our Caleb Brett business reported good revenue performance. We continue to benefit from the global and regional trade and structural growth drivers in all regions, and our full year guidance of good organic revenue growth for Caleb Brett is on track.

Our Government & Trade Services business delivered double-digit organic revenue growth driven by volume growth from existing contracts as well as strong new contracts around the world. We continue to expect the GTS business to deliver strong organic growth for the full year.

Our AgriWorld business, we reported good organic revenue growth, and we expect the strengths to continue for the full year. And for the full year, we expect our Trade-related businesses to deliver good organic revenue growth.

Our revenue momentum has improved in our Resources-related businesses, and we've delivered a good organic growth of 3.5%. We delivered a strong operating profit of £ 14.5 million, up by 16.9% year-on-year with a margin of 6%, up 70 basis points year-on-year at constant rates.

Our CapEx Inspection business reported good organic revenue growth as we start to benefit from the increased investment of our clients in exploration productions around the world, and we expect our CapEx Inspection business to deliver good organic growth in '19. The demand for OpEx Maintenance Services remained stable in a competitive environment, and we expect that trend to continue for the remainder of the year.

We continue to see an improved level of demand for testing activities in the Minerals business as we delivered robust organic growth performance in the first half. And our full year guidance with good organic growth for Minerals in '19 remains unchanged.

For the full year, we expect our Resources businesses to deliver a good organic revenue growth performance. Before we take any questions you might have, a few concluding remarks from my side.

We operate a high-quality earnings model of Intertek. And our approach to value creation for mid to long term is based on global GDP plus organic growth in real terms, plus margin accretion, plus strong cash conversion and plus disciplined capital allocation in organic investments, targeting the attractive growth and margin sectors in our industry.

Compounding effect of Virtuous Economics earnings model year-after-year will continue to deliver shareholder value creation. Our future growth outlook is global GDP plus, organic growth in real terms.

We expect our Products division that represents 76% of the group's earnings to grow ahead of global GDP, benefiting from brand and SKU expansion, regulatory development as well as increased focus of corporations and safety, quality and sustainability. We expect our Trade division that represents 18% of the group earnings to grow at a rate broadly similar to GDP through the cycle of Trade business.

We'll benefit from the development of regional and global trading as well as from increased focus on traceability. The growth prospects of our Resource division, which represents 6% of group earnings are indeed the global growth drivers in the energy sector.

Investments in exploration and production of essential resources like oil and minerals will grow to meet the demand of the growing population around the world. We also expect structural growth in the renewable sector from an energy standpoint.

Intertek is going from strength to strength with scale positions in attractive end market in 100-plus countries. We offer our clients a superior customer service with our unique Total Quality Assurance Value Proposition.

We operate high-quality component earnings models. And our ever better operational discipline is even making us ever stronger every single day.