SGS S.A.

[Technical Difficulty] presentation, there will be time [Technical difficulty] Thank you, Dominik, if you could hear, I apologize.

Toby, we can hear you now. Please go on.

Okay. Well, thank you for joining everyone.

I’ll just have a quick recap. Shortly, Frankie and Dominik will present our first half results, which demonstrate the strong performance.

After the presentation, there will be time for Q&A, and when there is, please keep your questions to a maximum of two. And with that, I will handover to our CEO, Frankie to start presentation.

Frankie, please go ahead.

Thank you, Toby. Good afternoon, everyone, and welcome to our first half results.

I hope everyone can hear me properly. As usual, I will give you a highlight of our performances, and Dominik will give you a more detailed walk through our financials, and I will come back to give you a bit of a flavor for the second half of year with the different business lines.

So, let me start with the first slide related to COVID situations. Unfortunately, there are still many parts of the world on our network that are affected by the COVID pandemic, but we’re doing, as usual, our utmost to protect our colleagues and their families.

Many of the actions that we’ve implemented in 2020 remain in place, including travel ban for non-essential visits, working-from-home policy wherever possible, use of remote technology for inspectors and auditors, PPE requirement, additional shift to adapt to COVID safety requirements. And in addition, we have also implemented facilitations of voluntary vaccination program for our colleagues in the period where the government allows us to do so.

I would like to take this opportunity to thank the 90,000 colleagues that we have in the network for their dedications in unchanged day-to-day running of operations, and also for the disciplines to implementing our COVID measures that has helped to limit the spread of COVID-19 across our network and in the communities where we operate. As indicated during the May Investors Day, we had a strong start of the year, and it has continued during May and June.

Total revenue has increased by 17.9% at constant currency, while the organic growth was 12.4%. Our adjusted operating income stands at CHF 457 million or 40.6% increase at constant currency compared to 2020.

As expected, the acceleration of our activity has led to a decrease of free cash flow, mainly due to higher net working capital. Our free cash flow decreased to CHF 93 million compared to CHF 220 million prior year.

Our basic earnings per share stands at CHF 36.29, an increase of 59.1% compared to 2020. During the first half, we have continued our investment into strategic priorities with six new acquisitions.

Let me go through quickly through all of them. ADS, which is a food laboratory we acquired in UK, will complement our competencies in the pesticide and chemical testing in the UK.

Together with ADS, SGS Analytics UK, part of the SYNLAB A&S acquisition that we made last year, and SGS HE, [ph] we have now positioned SGS as one of the key service provider for the UK food market. We also acquired the facilities of ISL from Novartis in Ireland, which will provide SGS new competences and increase our capabilities to service our customers in the first growing life sciences industry as they continue outsource to chosen partner.

BZH in Germany is a leading specialist in hygiene consulting in the health sector. This is a very strong advisory service to our health sector customers and in line with our hygiene services women’s strategy.

Metair is active in the asbestos testing in France, popularity in the southeast and will enhance our competitors and market coverage. Autoscope scope is active in the area of vehicle inspections control in France and enhance our service center network across the country.

And the last one Brightsight, our latest acquisition. Brightsight is a leading player in the field of cybersecurity and is a key addition to our portfolio in terms of service to the field of connectivity.

Cybersecurity issues are increasing and will become a fundamental part of our testing portfolio. With Brightsight joining the SGS, we are well positioned to capture this growth opportunity.

In terms of strategic evolution of the different initiatives, particularly in sustainability and digital, let me report a few of the progress. First related to our Laboratory Information System, what we call the LIMS, our new G6 solution is now covering about 45% of our GeoChem revenue.

And more importantly, all the GeoChem testing data now are centralized into a single database, which will allow us to optimize data analytics to our customers. For WCS, what we call the WCS, World Class Services is the spin of the world class manufacturing we’re using from automotive [ph], and other two labs have passed their first audit since we met in end of May, during our Investors Day.

For the laboratories that have adopted WCS initially, we are now seeing a marked improvement of their processes and also the start of tangible savings as we element waste in our operations. Then for Digicomply, the regulatory tools that we have developed over the past two years and now is reaching market readiness for the food sector.

Over 100 companies of different size are using our solution now, and we expect this number to grow as we continue our scale deployment across the network. At the same time, we continue to develop Digicomply to other segments, like cosmetics and in the customer food sector.

On that, I’m going to hand over to Dominik for review of the performances related to our financials. Dominik?

Thank you, Frankie. Good afternoon, ladies and gentlemen.

I will start with the overview of the financial highlights for the first half ‘21. Frankie already mentioned the operating highlights in his introduction, the revenues of CHF 3.1 billion, adjusted operating income of CHF 457 million, and free cash flow of CHF 93 million.

Revenues for the Group in constant currency increased strongly by 17.9%, driven by an organic growth of 12.4% and the contribution from acquisitions. Natural Resources posted mid-single-digit growth while all the other segments posted strong double-digit growth in the first half ‘21.

Adjusted operating income increased by 40.6% in constant currency to CHF 457 million, leading to an increased AOI margin of 14.8%, up 240 basis points at constant currency.Net profit after minority interest increased by 59.1% to CHF 272 million in the period under review, which is primarily a function of the operational performance. Cash flow from operating activities, as well as free cash flow decreased by 17.2% and 57.7%, respectively, basically reflecting the increase of net working capital in light of the strong growth, higher tax payments and for the free cash flow also higher CapEx towards our strategic priorities.

Organically, revenues increased by 12.4% H1 ‘21. During the first half of ‘21, we experienced a gradual business improvement, leading to the same organic revenue level as in H1 2019.

The contribution from acquisitions of 5.6% reflects primarily the consolidation of the A&S division of SYNLAB and Ryobi, while the other smaller acquisitions had a minor impact. The impact from currencies is this negative 1.1%, rather small.

Moving on to the revenue growth by business. Growth in Connectivity & Products was 13.8% strong.

The acquisition of Brightsight contributed 0.5% to it. All SBUs showed a positive recovery and contribution to the org growth.

The strongest growth was achieved in connectivity, also reflecting our continued investment into this strategic priority. Revenues in Health & Nutrition increased by 35.3%, of which 20.9% was organic.

All SBUs and all regions achieved double-digit growth. We delivered the strongest growth in Health Science, benefiting from work related to COVID-19 vaccines, as well as a strong rebound of our activities in Northeast Asia and North America.

Besides the Health & Nutrition part of the A&S acquisition, several smaller acquisitions contributed to the growth from acquisitions. Revenues in Industries & Environment increased by 21.2%.

The environment part of the acquired A&S division contributed strongly to the growth, while organic growth of 10%. Field Services & Inspection, Technical Assessment and Advisory as well as Industrial and Public Health & Safety posted organic growth above average, while oil and gas related services are lagging behind.

For Natural Resources, strong growth in Minerals Commodities, Laboratory Testing, and Metallurgy, was partly offset by weaker demand for OGC Commodities, given the prolonged effect of the pandemic, as well as for AGRI Commodities due to a poor crop season in several European countries. Knowledge grew by 26.2% at constant currency.

Management System Certification was the main growth driver with volumes and revenues exceeding 2019 pre-pandemic levels in all regions. Customized Audits also showed a strong recovery by the recovery in Consulting and Training is underway.

From a regional point of view, we delivered double-digit organic growth across all regions. The Eastern Europe and Middle East countries achieved double-digit growth across the majority of end markets and are well ahead of H1 2019 levels.

Turkey had very-strong double-digit growth. Most of the key markets in Europe achieved double-digit growth while some, they grew single-digit.

Key markets in Africa are lacking this mid-single-digit. The organic revenue growth of 13.1% in the Americas is a function of double-digit growth in Latin America, while growth in North America is almost double-digit.

Organic growth in Latin America is above first half 2019 levels. Organic growth of 14.1% was achieved in Asia Pacific.

While the countries in the Southeast Asia Pacific cluster have just grown double-digit, growth in the Northeast Asian countries continued to be materially stronger, being now also strongly above 2019 levels, mainly driven by China, Taiwan and Korea. FTEs at the end of June ‘21 increased by 6.8% versus prior year.

The acquisition-related increase of 3.3% is to a large extent related to the acquisitions of the A&S division SYNLAB as well as Ryobi, both consolidated as of December 31, 2020, while the non-acquisition-related FTE increase 3.5% materially lower than the organic revenue increase. Average FTEs in the first half of 2021 increased by 3.3%, materially lower than the revenue growth of 17.9%, leading to a strong productivity increase, resulting from leveraging the benefits of our structure customization program as well as our active portfolio management.

This was achieved across all regions as the difference between revenue growth and FTE development is in all regions in the 15% ballpark. Adjusted operating income increased at constant currency by 40.6%, which reflects the operational leverage on the achieved revenue growth while increasing investments into obviously accelerate and business development programs to drive stronger growth, as well as into our Level Up initiatives to try drive further productivity increases.

Acquisitions added 3.7% to our growth in AOI, fully in line with our expectations. However, it should be noted that the acquired business has materially stronger seasonality towards H2 compared to the total group.

Currency had an adverse impact of 2.1%, leading to reported increase of 38.5% in the period under review. AOI margin increased strongly by 240 basis points in constant rate or 230 basis points in actual rates to 14.8% in the first half ‘21.

On this slide I would like to provide an update about the integration of the former A&S division of SYNLAB, which is in meantime rebranded SGS Analytics. We are well on track to realize cost synergies of approximately CHF 20 million.

The related change in management team and the integration into our regional and country structure was executed in the first quarter this year. All rebranding and related communication activities have been fully facilitated.

The implementation of a common HR system is underway. The ERP implementation and with this also the transfer of key finance processes to the financials and service centers are expected to collide in autumn for Germany and the Nordics and in H1 next year for the Benelux and the UK.

The LIMS implementation for the various countries will be based on the new generation LIMS supporting the digital lab approach. We progress significantly regarding the implementation of the Hub and Spoke model.

The implementation of the footprint consolidation Health & Nutrition and Industries & Environment is progressing according to plan. At the same time, we are seeing also good potential for revenue synergies.

During our Investors Day seven weeks ago, I talked about the Level Up program and defined our ‘23 and ‘25 objectives for growth initiatives in the area of finance, IT and operations. Today, I would like to talk about the framework and approach we used to achieve these objectives.

For all initiatives for which IT is key enabler, which is for the vast majority case, we implement a builders organization in order to be more agile to achieve strong alignment between business, operations and IT and to reduce significantly the time to market. The buildup organization is a product to an organization in which the IT functions are closely together with the business community to design the products.

Through an integration layer, design product will be built by the usage of the best delivery partner in close collaboration with our own in-house expertise. Furthermore, we will implement an OKR framework for each initiative, which helps assess and track the right priorities and accelerate time to implementation and consequently the time to market.

Overall, the Level Up initiative is progressing very well. With the financial service center onboarding, including our group ERP, standard solution for Southern Africa, the Nordics and the German activities of the A&S division in autumn, the initiation of the global rollout of the fully standardized integrated and digitalized third-party certification system for Knowledge, and the design of the CORE for the digital labs model for Environment, food and safety -- Food and Life lab testing activities to mention some of them.

Let’s turn to the profitability by segment. Our most profitable segment Connectivity & Products reported a margin increase of 160 basis points to 23%, on a constant currency basis, driven by strong operational leverage in Nordics and a good margin increase in connectivity, despite continued strong investments in that segment.

The Health & Nutrition division strongly increased the adjusted operating income margin by 470 basis points in constant currency. All SKUs achieved material margin increases.

Strongest increase was achieved in the Health Science SBU. AOI margins in the Industries & Environment increased by 310 basis points, driven by all SBUs except for services related to the oil and gas end markets, given muted demand.

AOI margins in the Natural Resources declined by 150 basis points to 12.6% as margin increases in Laboratory Testing and Metallurgy were more than offset by decreasing margin and trade activities, the latter primarily reflecting the weakening topline in OGC and AGRI Commodities. The strongest margin increase was achieved in the Knowledge segment with plus 930 basis points, reflecting the strong recovery.

All segments contributed materially to this achievement. Moving on to the balance sheet.

The increase in goodwill and tangible assets is primarily due to the consolidation of a couple of smaller acquisitions as well as price hikes and currency changes. The increase unbilled revenues, work in progress and trade AR is because of the strong growth experienced in the first half 2021 while these all are stable.

The increase in long-term loans and other financial liabilities of CHM 538 million since the end of last year is primarily to the successful EUR 750 million Eurobond issue in H1, partly compensated by the re-classification of long-term to short-term debt of other bond given the maturity profile. The reduction of the current loans and other financial liabilities of 529 million since the end of last year is primarily coming from the repayment of the CHF 275 million bond matured in May 2021, as well as the repayment of the bridge facility for the acquisition of the A&S division of SYNLAB, partly offset by the reclassification of a bond from long to short-term, as mentioned before.

Net debt increased from CHF 1.5 billion at the end of last year to CHF 2.1 billion, which is mainly driven by dividend payment which occurred in the first half of 2021. Cash flow from operating activities, decreased by 17.2% to CHF 332 million, (sic) [CHF 332 million] reflecting the increase from the net working capital, given the strong revenue as well as higher tax payments, more than offsetting the strong increase in profit.

Furthermore, free cash flow decreased by 57.7% as our investment into our strategic priorities increased according to our plan. We paid dividends of CHF 599 million issued as a €750 million Eurobond, leading to an inflow of CHF 817 million while we paid a CHF 275 million bond as well as a bridge facility for the acquisition of the A&S division of SYNLAB.

The management of net working capital continues to be a very strong feature of SGS. Operational net working capital in terms of the last 12 month revenue is just minus 0.1%, on a very similar level as for half year 2020, with minus 0.2%, despite the strong revenue acceleration experienced.

Strong working capital management is supported by our EVA performance management approach, as well as several of our Level Up initiatives. CapEx in the first half 2021 increased strongly by 30.9% to CHF 150 million, reflecting our accelerated investment focus into our strategic priorities.

Consequently, CapEx in percentage of revenues increased to 4.8% versus 4.1% per year in line with our 2023 strategy, targeting CapEx in the higher 4% level. Almost 30% of our CapEx is allocated to C&P in here especially towards connectivity in Northeast Asia, which is of high strategic priority.

17% of the CapEx was allocated to Health & Nutrition with the strong focus on Health Science. The CapEx allocation for Industries & Environment and Natural Resources is to a large extent related to client driven projects.

To sum it up, our revenue in H1 2021 strongly increased by 17.9% in constant currency or 12.4% organically. Strong operational leverage was achieved as our adjusted operating income increased by 40.6%, leading to a margin increase of 240 basis points in constant currency.

Our free cash flow decreased, given the increased net working capital, a result of the strong revenue growth acceleration as well as the increased investments towards our strategic priorities. And with this, I hand back to you, Frankie.

Thank you, Dominik. Now, let me go through the outlook of our five divisions.

Before that, I would like to highlight here that while we are seeing a strong market development and recovery across the network, the comparison of the second half versus prior year would be more challenging than it was in the first half, considering the significant disturbance created by COVID-19 in first half 2020 and so subsequent partial recovery in second half of 2020. In line with the guidance 2021 that I have given you in January at the full year and in May at the Investors Day, I’m going to give you a flavor of how we expect the five divisions to perform during second half of this year.

Note that all the divisional growth outlook comments relate to the second half organic growth and are in relation to the Group average growth. So, let me start with Connectivity & Products.

Connectivity & Products growth should be brought in line with the Group average. Connectivity should see its momentum coming on into the second half of this year with strong testing demand for wireless activities such as 5G and IoT, and also an improvement of orders related to the automotive sector.

Trade facilitations would also see good growth momentum into the second half with new program starting in Morocco and in Nigeria, and with an expected volume improvement in TransitNet, particularly related to Brexit. Softlines will continue to see solid growth in traditional testing activities, but it will be offset by tough comparisons to prior year due to the sizeable volume of PPE testing we had in the second half of 2020, that will not repeat this year.

I’ll move to our Health & Nutrition. Health & Nutrition growth should outperform the Group average.

We’re expecting all four sub-sectors of health, food, cosmetic, and crop science to grow strongly. Health Science will continue to distribute vaccine activities, but we’re also seeing good growth in other sectors related to drug development and clinical trials.

Food will continue its strong recovery and with increase in Asia and in North America particularly, while the COVID restrictions will continue to impact the tourism and hospitality sector. Now, move to Industries & Environment.

Industries & Environment growth should be both in line with the Group average to positively or bit better. Our Health & Safety services should continue to perform well moving into the second half with possibly some uncertainty related to the tourism and hospitality sectors due to COVVID.

Likewise, we expect a good second half related to environmental services as the market situation return to normal while getting into the seasonally stronger second half. International Services should see a mixed performances with new projects starting, while we continue to see some delay of some projects due to COVID.

The end of certain government contracts, for example, in Ghana, would put pressure on the growth of our government mandates, but we expect those to be positively compensated by growth in other contracts as government activities continue to improve. Moving to Natural Resources.

Natural Resources growth should be brought in line with group average to possibly a bit above. We expect mineral services to continue its momentum into the second half as exploration spend in the mining industry continue at the elevated levels as a result of strong market drivers and demand for raw materials, such as iron, steel and copper.

Agricultural services should see a better second half as current prediction for the new crop season is good for Europe and other regions. We’re obviously getting higher volumes than in the first half of the year.

Oil, Gas and Chemical volume remains volatile. The higher oil price together with a significant decrease in inventory and an increase of consumptions will lead to an increase of production.

This should lead to some higher testing and inspection volume but pricing pressure remains due to excess capacity in the TIC sector. On the last one is Knowledge.

Knowledge growth should be below the Group average. In fact, the underlying market for Knowledge is solid.

The solid growth predicted in the second half is mainly due to a tough comparison to last year when we had a good amount of orders delayed from first half of last year to the second half of last year. Also comparing growth between first half and second half of this year, 2021, first half also benefited from some catch up orders coming from the second half of 2020, which have now largely been completed.

I said, the underlying market conditions are solid, and we’re seeing strong recovery of training and consulting activities, and increasing demand for ESG and supplier risk management related services. So on that, let me go to our guidance 2021.

In fact, our guidance 2021 remains the same as I gave them to you in January and in May during our Investors Day. So, they are, let me repeat them: solid organic growth normalizing for the impact of COVID-19, improving the adjusted operating income margins, strong cash conversion, maintaining best-in-class organic return on invested capital, accelerating investment into our strategic focus area with M&A as a key enabler, at least maintaining or growing the dividend.

To the last slide, it’s just the reminder of our mid-term objectives 2020-2023 targets. I will not go through them in details as I presented these slides during our Investors Day.

But what I would like to emphasize here is that as a company, we’re very clear that focus on financial performances is not enough any longer, and we need to be more accountable on the non-financial metrics as well. It includes having ESG criteria in the short-term and long-term incentive of the management, which we have introduced this year.

As just alluded by Dominik, we have also continued our investment for the long-term, as we’re confident that the drivers of the TIC sector are strengthening, and our services are becoming more relevant in many end markets. So to conclude, before we go to Q&A, I would like to thank again my colleagues of the entire SGS Group on the Ops Council for their dedication and courage during those rather challenging times.

On that, Toby, I’m handing back to you for the Q&A session.

Thank you, Frankie. Thank you, Dominik.

I’ll pass it over to the operator to read out the rules. And then, we’ll get started with the questions.

Thank you.

Okay. Thank you very much.

Paul Sullivan, you’re first on the list. So, please go ahead.

Yes, just two from me. Could you perhaps clarify the June organic exit rate versus ‘19?

And is there any reason to suggest why we shouldn’t extrapolate that through the second half, or indeed, why doesn’t growth on that two year view accelerate from here? That’s the first question.

And then secondly, the organic drop through was clearly very high in the first half, how should we think about the second half margins compared to the 19.3% last year and the biggest divisional deltas that we should be looking at? Thank you.

Paul, I think it’s for me. So, if we look first at the organic number, so June was definitely up compared to ‘19.

Now a monthly basis is not relevant in our business, but it was definitely up compared to ‘19. Overall, in the first half, we were in line with ‘19, which was the same, which was the same April year-to-date, when we had the Investors Day.

So, it’s basically implied, May was somewhat below ‘19, June was above ‘19. Now, going forward, I think it’s reasonable to believe that there should be a bit of outperformance in the second half of ‘19 for two reasons.

In general, having achieved same organic level like first half ‘19 this year needs to be seen with the knowledge that in the first half this year still a lot of parts of the economy and jurisdictions, there is still not yet back to normal and not yet open, especially at the beginning of the year. So, hopefully, the vaccination will help to open them up.

Needless to say, there will be maybe here and there some of the delta rush and also some shorter negative impacts, but in some it should be hopefully slightly net positive. And I think the other thing we need to consider talking about ‘19 as a comparison, and there was definitely from a growth point of view throughout ‘19 a bit of deceleration in the second half, also related to the fact that we shut down some contracts which were very flowing, which was good for the profitability.

But yes, it’s a bit easier from the second half. So from this point of view, I would say, it’s reasonable to assume that in the second half should be some growth acceleration compared to ‘19.

If you think about profitability, I think the profitability in the second half last year and as we outlined this to the full year results, was of course very strong for several reasons. As we said at the time, we had very big recovery from bad debt, then the PPE business which kind of kicked in May but accelerated strongly in the second half with very high incremental margin was of great help.

There was obviously also still some -- also in the second half still some subsidies from governments. And as Frankie for example outlined, this Knowledge base, there was some movement of Knowledge activity from H1 to H2.

And if you use the same audit, that’s all to say you try for much higher productivity. So, this should be all considered.

So therefore, obviously, the margin will be clearly below the second half. To help you a bit or to think how I would look to it, it’s more to look -- if you look back to history and say, okay, seasonally or how the business is structured, H1 margin is always clearly lower than H2.

And if you look back, ignoring year 2020, because it was artificial, but if you look four, five years before back and look how the margin evolution was, it was on average an increase from the H1 margin to the H2 margin of around 250 basis points, ‘17 and ‘18 was slightly was -- ‘16 was in line with this 250, ‘17 and ‘18 slightly lower ‘19 was higher. And, yes, we are confident that it will be higher, maybe more on the ‘19 increase.

But obviously, there will be a drop on a year-over-year comparison in the second half. But for the full year, margin should increase, clearly.

Okay. And that’s even with the use of the M&A, it’s kicking in more in the second half and then some of the more cyclical businesses, like minerals starting to come through and some of the drags in the second half…

That’s the reason why I’m saying, we are confident that we will be clearly higher than the historic trend of the 250 basis points. But obviously, last year, it was more than 600, which is of course not achievable.

But it should be clearly above the 250 because the seasonality of the environment business, more environmental exposure gives us more business in H2, definitely, yes.

The next person we have on line is Neil Tyler from Redburn. Neil, please go ahead.

Two related questions from me, please. You mentioned the average group in the Softlines business was held back by PPE.

Excluding the PPE, if you are able to do that, would that growth have been more inline or perhaps even above the divisional average? And then secondly, I think probably related to that, and in your introductory comments, I think it was Frankie that mentioned the very strong performance in Turkey.

And, I wonder if you could talk a little bit more around the detail of that sort of regional performance and whether you think that might have been borrowed from elsewhere, other regions? Thank you.

So, I can. So, if you think about the Softlines, I mean, definitely the Softlines business already in H1 is below the growth rate of this consumer Connectivity & Products growth rate in H1, and this is related to PEE, which is out, it would be pretty in line on this one.

Now, obviously for the second half and I think Frankie said this in the outlook statement, the underlying, let’s call it, Softliness, the non-PPE is really good development. But the big PPE impact that happened in the second half is the strong comparison.

So, therefore Softlines in some, in the second half will be down. But, the reason is that we had very high PPE revenue in the second half last year.

Yes. I can talk about the Turkey.

Turkey is that you mentioned Neil. The situation in Turkey is that, indeed Turkey has for few years already benefited from the near-shoring, you can call it the change of the supply chain from Asia, China.

So, Turkey’s one of the near-shoring locations of certain sites for the European retailer. So, we have been seeing quite a lot of growth into the textile industry for Turkey.

For what they call the first fashion, so this is quite positive and Turkey is pretty good at that as well. But because, I would say, the general Turkey portfolio with industrial work and some of the health and -- sorry, some of the nutrition and -- Health & Nutrition activities, that has also improved in Turkey.

Thank you very much.

Thanks, Toby. Good afternoon, gentlemen.

The first one is on the capital allocation. And I wondered you can share with us how much was invested in the first half under strategic priorities you were mentioning and how much into IT?

And maybe to remind us what is a payback when you’re investing in such activities, growth activities? And related to capital allocation, I was surprised by the price paid for Brightsight.

If you can give some additional info or color on this acquisition, what is your probably your competitive landscape, your competitive position and how you expect this company to develop? And the very short one as second one would be on the Health & Nutrition.

You are talking about PPE in Connectivity division, which had positive impact related to COVID, and you are mentioning Health Science as well driven by COVID-related activities with the vaccines. How much was it a boost to sales, as it was more than 10% I think above 2019 level?

Thanks.

Should I start? So, if you think about -- JP, Dominik speaking.

So, if you think first about the capital allocation, so clearly overall, let’s say the increase of CapEx and percentage of revenue compared to prior year is driven by, on the one hand, allocation, more CapEx into areas of high strategic priority for growth, which is a lot for connectivity, which is which was 20 -- I mean, the whole C&P was 28% of the total CapEx, but the biggest part was going to connectivity, but also Health Science in that respect. Overall from the overall CapEx around 15% of it is going towards IT systems and a lot is related to the new generation systems which we which we are rolling out.

On the acquisition, if you look to the cash outflow in the first half, Brightsight is for sure the biggest part of the outflow but there were several smaller acquisitions also considered like Health Science acquisition in Ireland, like food business in the UK, and a couple of other smaller ones. Now, for us, Brightsight is strategic of very high priority.

We see a lot of synergy potential with our Asian client base. And based on the price we paid, we believe we get this acquisition in year three is a positive and therefore we believe it’s the right price.

Maybe just to add, Jean-Philippe, in terms of competitive landscape, Brightsight, which is one of the leading subsidiary company in the chipset industry, which is basically what we always said in terms of cybersecurity is a starting point, you need to make sure that how cybersecurity is safe and there are new regulations coming on both on these aspects. And while the European have set the cybersecurity act with some additional requirements, you see that these will be extending to other regions as this is the global player, and not just a regional issue.

So, cybersecurity is part of the division of portfolio, we see more and more of our customers asking for integrated solutions, which is not just EMC safety, functionality or life cycle that we see. Cybersecurity and interoperability is part of the portfolio that we need to offer.

Brightsight gave us the clear competitive advantage with their network, strong position in Europe, and the network in some Asian countries that we would be leveraging with our Asian customers as well. There was a second question, or -- Jean-Philippe, there was a second question or we answered both of your questions?

Yes. How much was the impact of the vaccine-related activities in Health Science?

Because sales in Health & Nutrition were really clearly above 2019, I just wanted to check how much was the impact of this Health Science activity?

We had around close to CHF 20 million.

Thank you. And then, the final question we have on the conference call, and I remind everyone, please to join if you’d like to ask a question, is from Daniel Burki.

So, Daniel, please go ahead.

Good afternoon, gentlemen. I would ask a question regarding streamlining of your portfolio, you just mentioned this.

Do you still see areas where you could dispose of some businesses, especially if I look at the margin in Industries & Environment and also Natural Resources?

Good morning. Good afternoon, Daniel.

I would ask -- maybe Dominik can add more, but let me start. We do have plans for optimizations, but as you know, we usually do not talk about which area.

So, we like to ensure that our colleagues stay involved, are concerned, I do not want out that during con call within the first half result. So, I would simply say that it is a constant review.

We understand where the market is evolving, where we have opportunities or where the opportunities to meet long-term would disappear. And we are constantly looking at these, and we do have a few topics on the table that management is considering.

Maybe just to add as well, I mean first of all, I think, and SGS did a lot as to -- and ‘19 actually, there were quite some disposals happening amongst others, very sizeable one in the U.S. But then obviously, as the pandemic started, the M&A market was suddenly paused and closed.

While the M&A market is opening up, today, it’s primarily open for let’s call it non-cyclical business. And as you pointed out, this to units, they’re slightly more cyclical, and as we said at the Investor Day, when we look to the part with very low relative market share with low growth, that could be definitely here and there potentially to dispose, it’s not the biggest businesses, but there needs to be also a market to make this happen.

I think it’s a question of time. And we can dispose one or the other of those.

Thank you.

Okay. Thank you very much.

I’ll now go to the webcast where we had one question from Rajesh Kumar from HSBC. And it’s a two-part question.

The first is, are there one-off revenues or cost reductions that might not repeat in the second half this year or [Technical Difficulty]. So, let’s start with that one.

I think that’s for you, Dominik.

I mean, let’s say from a run rate point of view, it’s not that we have one-off revenues. If you think about the PPE, the PPE already slowed considerably down into the first half, maybe there’d be in the second half a couple of millions, but it’s not meaningful.

While, if you think about the vaccine, on the positive side, this is supposed to continue also in the second half. So, I would not say that there are certain one-offs in one or the other direction, no on the cost side.

Thank you very much. And then, the second part, which is also for you, Dominik, which is what is the bad debt accrual rate and reversals in the first half?

So, basically, what’s our bad debt situation in the first half compared to the first half last year?

There was a -- let’s say, we had a bad debt accrual in the first half this year, also in the first half last year but the accrual this year was a couple of millions lower but not much lower.

Okay. Thank you.

That’s very clear. I’ll take -- there’s a couple more, which have come in on the webcast and then there’s a couple on the call.

So, I’ll keep going on the webcast for now. So, this one is from Dominic Eldridge from Deutsche Bank.

And it’s, can you please discuss staff turnover and whether we are seeing greater competition for talent, especially in areas like cybersecurity? And a more general comment is, are there any wage pressures building within the network?

So I guess, Frankie, maybe that one for you in cybersecurity and then Dominik, maybe if you can talk about the wage pressure.

Yes. I mean, so cybersecurity market is a tight market.

So, we are specifically focused on some of the niche, which is the chipset under the hardware side. I would say, the pressure to get expertise in this domain has not changed that significantly.

So, I would say, it is not particular mounting pressure. It may come over time, because this market is growing really fast and where the competencies is kind of lacking across the network.

So, we’re monitoring that, but also seeing a concern in terms of competencies in the health sectors as well. Life Sciences industry is and the pharmaceutical industry is also a sector, so monitoring on the situation, a lot of domain for competence and expertise.

These are those two sectors. The rest of the other sectors are, I would say, pretty much as usual.

We see some up and downs, but nothing to worry about. But I would just point out those two public sectors as being the more concerning one for the time being.

From a wage point of view, where we see a bit of wage inflation, I think wage inflation, it’s a question of time. If you look to the overall inflation development, we’re not seeing this yet too much in our numbers, but obviously, we will increase our prices according to the needs.

Here and there you see this, for example, in certain locations in Canada, also on the minerals business very strong demand, you have some wage inflation. But on the other hand, you have in this area also good power to make price increases, but it’s still rather selectively.

And obviously, while wage inflation was globally not the biggest theme the last year, our exposure to more emerging markets was always high, and we are used in these markets with wage inflation how to deal with it.

Okay. Thank you.

That’s very clear. And I’ve got one from Rajpal Kulwinder from AlphaValue.

What is the level of CapEx we’re looking at in the second half? Will it be similar to the first half or higher?

And will the split between IT and the rest of the business, which he put up 15%, remain the same?

So, it will be on a similar level. Now, obviously, the revenue in the second half is also higher, right?

So, it could be then 10 basis points lower. We have to see because the CapEx is not too much linked to the revenue development, and the IT spending.

And when I said the 15%, it’s for total IT, it’s not only for the new initiatives. The new initiatives are part of it, obviously.

It will be on a similar level. Yes.

And I’ve got one from Neil Denman from Sarasin & Partners. And I guess this is probably for both of you.

What is the most significant difference today compared with when you were planning for 2021 at the end of 2020? So, what is the biggest change that you see today when you’re planning for 2021 compared to the end of 2020?

So, sorry, when we’re planning end of 2020, what’s the difference…

Yes, what’s the biggest change that you’ve seen since the beginning of the year basically, I guess? We’re now in the first, so.

Well, let me start. I would say, when we were making the planning for 2021, I think, we were concerned about the evolution of the COVID pandemic across the network.

We already have assumed that the impact or the disturbance would have been more subdued it is today, because we see that for example that delta variant of that is coming up. But luckily, I would say fortunately, we had enough measures in place to avoid major disturbance in the network.

So, we had priority for this purpose into this. The second aspect is, while we were developing the portfolio, we knew that the ESG issue was a big topic, but it seems that the market is much more driven that I would have anticipated in mid of 2020, where we were discussing about the planning for 2021.

It would be my two take right now.

I think it is -- if you just now look down to the numbers, I would say, it’s very similar. You could -- or we could, what is the case that there may be a bit better when it comes to revenue growth than what thought at the end of last year for the first half, a little bit.

But, it’s not significant, a little bit there. But it’s pretty in line with our, let’s call it, budget assumptions, how we perform.

We have another question from Bruno [ph]. And can you please explain what attracted you most to the A&S division of SYNLAB?

What cost synergies are we expecting? And do expect any material revenue synergies?

I know we published all this quite recently, but Dominik, run through those factors, please.

I think, there are a couple of points. First of all, if we look to the areas of high strategic priorities, like for India, outlined and not only the 2023 plan, also before, 92% of the revenues of A&S exactly in line with this high strategic priorities, whether it’s environment which has Life Science, whether it’s food.

Secondly, we were quite impressed by the Hub and Spoke model for environment. And we see because of this Hub and Spoke model quite some opportunities to further roll this out by integrating within our network very, very much, very much progress.

And thirdly, we have seen rather big amount of cost synergies to be achieved, very much also in Germany with the network. And this will be the key driver of a 20 million cost synergy, which we expect from this acquisition.

I think these are the kinds of three main points. From a revenue synergies, there are definitely opportunities, quite some opportunities.

So, for example, if you think about the work which we do for AstraZeneca, having now on top, the A&S division of SYNLAB, they have they have a laboratory actually here in Switzerland, which we can use as additional laboratory for this client. So, we’re seeing this.

But, on the other hand, they are also coming in with client in which SGS had before a smaller market share. So, we’re definitely seeing quite some opportunities in that respect.

Thank you, Dominik. So, we’ve got one more from Rajesh Kumar on the text, and then we’ll move back to the conference call.

I’ve got two or three more waiting. So, the final one to read out is from Rajesh Kumar from HSBC, and it’s a similar comment, similar questions, like what we’ve had before, but it’s focusing on emerging markets.

So, are there emerging market wage inflation pressures building up, and how as a group are we thinking about passing through these wage inflation pressures to our customers?

I think in the emerging markets, we have already wage inflation, it’s there, not a new phenomenon. It’s maybe a little bit higher, but I mean, we are used to it and having a business, which is -- for us related.

It is something, which is part of the daily life of our people and operations to adjust prices accordingly, and this is what we are doing.

And now, could we move back to the conference call, please, where we have Julien from Société Générale. Julien, please go ahead.

Thanks, Toby. Good afternoon.

Just two for me please. First one is regarding working capital.

As expected, we’ve seen a significant working capital outgrow in the first half. What should we expect going to the second half of the year with working cost normalizing?

And secondly, regarding the price pressure, you had in the first half in the oil & gas related activities in your Natural Resources division? Could you give us more color on how do you see it evolving in the second half?

Thank you.

So, if we think about the net working capital, increase of the cash outflow, so to say of CHF 200 millions, CHF 200 million plus, it was basically yet on the same level, like 2019, but the difference that we had very strong growth. And this number that really obviously an increase on outflow for the first year, but it will be significantly lower than the stages as of the first half, which is partly also if you look at directly how our working capital seasonality works.

Now, that being said that we’re in the first half, even operations working capital slightly negative 0.1% gives us confidence that the full year is also in terms of balance sheet position a negative number. But definitely, there will be an outflow, but significantly lower than the first half.

Yes. On the second question, Julien is about pricing on oil & gas, just to give you a bit of color.

I think you know that oil & gas sector is under pressure and few of our customers coming back with new tender requirement in terms of pricing discount as well as in terms of new tenders in the market is much more competitive in different regions. I think, we are coping with that in the same ways that we’ve been doing in the past few years where the oil & gas market has been on under pressure is really to focus on the customer service and on focusing on our key customers as well as value added services.

So, we’re focused on not getting to the pure pricing discussions. You can see that while we have not significant growth, we have also managed to keep certain level of market share.

In this part of the sector, we’re still the market leader on that, as well as that we have managed to protect our margins to the best possible extent. Moving to the second half, I think the market landscape would not change drastically.

There are excesses capacities, there are regional players that want to get market share. So, they will use on those regional contracts some more aggressive pricing strategies.

But the strong position of SGS Group is a lot of those trading volumes are global. So, you need to have a global network.

So, we can leverage our global network to ensure that we still keep our market share on those international orders, while we may be able to -- or maybe we’ll have to give some concession into some of the more regional, local contract. But this is part of what we’ve been seeing in the past few years.

Yes. Hello.

Thank you. And my first question is just on restructuring costs, which were only CHF 1 million in the first half.

And I’m wondering if we can expect a larger number in the second half, or if you can give any flavor there for any restructuring projects you have? And then, my second question is just on the increase in the minority share of income.

Would you say that was mainly attributable to better performance from main points or were there other companies with minorities that contributed significantly there? Thank you.

To the first question, restricting was very small with CHF 1 million, will be higher for the full year, most likely number in the teens but not massively, but will be definitely higher in the -- for the full year. Please bear in mind, besides this, the integration costs or the integration of acquisitions are shown in integration restricting and integration line, but there will be a bit more restructuring cost occurring in the second half.

Regarding your question on minority, there are several items. First of all, there are -- when we had -- last year we mentioned this, we had this dispute in Ghana that the contract was finishing, which is basically now a legal case.

There was a minority interest as well, so partners from us. And obviously when we had the write down of the assets and so on, you have the effect also in the minority.

So, therefore the comparison first half last year looks extremely low. The second reason or now to the -- what are the reasons that minority is going up?

Main point is, it has an impact. But the other big impact is basically that we have in China several legal entities with minority interest, and they are doing very well.

So, I think this I would say is the main driver.

I’ve got a couple of questions. Firstly, for Frankie.

Just a broader question around the carbon border adjustment tax, which is obviously coming into focus in Europe and increasingly in Washington as well. I just wondered, are you having any materially different conversations with clients and industry verticals about how they might look to mitigate that and also then with potential government clients as to how they might look to capture that tax?

That’s the first question. Then the second one, much more technically is to Dominik, just around the depreciation, amortization and impairment charge that was down 10% year-on-year.

I just wondered what an underlying change was, just setting out things like the portfolio management and any sort of impairments in [indiscernible]? Thanks very much.

I can’t. To your question, first question, no.

Actually we’ve opened -- I think, it’s a pretty new requirement that we’re still trying to digest with the team. So, I would say no for the time being.

We are engaged into the European ETF system. So, we’re looking at how these will impact with the rest, what could is this new requirement.

But for the time being, I have not had particular discussion with my customers. So, we’re still looking at how this would evolve.

Regarding your second question, it is down. Why?

Because last year we had one-off items of CHF 35 million, in the first half.

Okay. So, thank you everyone for joining us on the call today.

And for me, I’d just like to say, have a great summer everybody. And then, I’ll hand it out to Frankie for a couple of closing words.

And I’m sure I’ll speak to you all soon. Thank you.

Okay. Thank you, Toby.

So, first, thank you for joining the first half result. As we mentioned, it was a strong set of result.

And while we’re seeing some -- still some disturbance into our network and in the different countries in terms of COVID, we are also putting all the measures in place to ensure that we will minimize this impact. And we’re pretty confident that the big market drivers are getting stronger and our outlook for guidance for the second half of this year on the first full year would be where we believe should be.

And that’s it. Thank you very much.