SGS S.A.

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00:45 Thank you. Good morning or afternoon to you wherever you may be.

Welcome to our full-year results for 2021 and the conference call. We hope that you've all had a good start for the year and we also hope to be meeting many of you later face-to-face at some point later this year, which we haven't had the chance to do so much over the past 12 to 18 months.

01:11 In a few moment, I'll pass over to Frankie and Dominik, who will run through our presentation and then we will move on to Q&A. When we start the Q&A, please do stick to a maximum of two questions.

And if we have time, at the end of the call, we can answer further questions if they haven't already been addressed. Once we've taken questions from the call, I will read out any questions that we may have that have been submitted by the web.

Finally, as usual, we hope to finish in 50 minutes or so. 01:41 And with that, I will hand over to Frankie to start the presentation.

Please, Frankie, go ahead.

01:47 Thank you, Toby. Good afternoon, everyone.

And again, welcome to our full-year result for 2021. So, as usual, I will give a highlight of our performances for the year.

Dominik will then step in to give a more detailed financial review and then I'll cover the business outlook for 2022 and will follow by a session of Q&A. 02:12 Well, I was hoping that this slide would have disappeared for now, but unfortunately, let me start again with an update on our COVID situation.

Maybe first I would like to take this opportunity to thank my 96,000 colleagues across the SGS network. Their dedication in minimizing disruptions to our operations by serving our customers with the same high-level standard of professionalism and by taking the time to ensure each other's well-being despite the challenging environment, which we have all faced during the last 2 years is a quite source of pride to me and the company.

02:48 Looking back at 2021, we saw difficult Q1 with lockdowns and frequent disruptions across the network. In Q2 and Q3, generally speaking, the situation improved with most operation returning to some kind of normality.

Then towards the very end of Q4, we have seen an increase of operational disruptions related to absenteeism due to COVID once again. We're monitoring the situation moving into Q1 this year and for the moment, we have not seen an increase of disruption compared to year-end, but the situation is very volatile.

This is impacting both our customers and our own operations. 03:27 Within these context, many of the measures implemented since 2020 are still in place, including a work-from-home policy wherever is possible, using remote technologies with our customers, ensuring there is enough PPEs to all our colleagues for adapting work practices to COVID safety requirements and minimizing non-essential travel.

SGS is also encouraging and facilitating all our colleagues to get vaccinated. 03:58 In continuation of the first half, we've finished 2021 with a strong operational performance with total revenue increasing by 14.2% at constant currency, while the organic growth was 8.9%.

Adjusted operating income now stands at CHF1.55 billion, a 16.8% increase at constant currency compared to 2020. 04:23 Our profit for the period was CHF655 million, an increase of 29.7% compared to prior year.

As expected, the increased working capital requirements to support the growth of our activities led to a decrease of free cash flow compared to 2020, but this is after healthy level of CHF635 million compared to CHF758 million in 2020. And the Board of Director is proposing a dividend of CHF80 per share at the AGM, same as last year.

05:03 In terms of strategy, we have made good progress in all our strategy initiative during 2021. We enforce our commitment to be a more sustainable company and to be more accountable, we have launched our Sustainability Ambition 2030 and we are finalizing the migrations of our Science Based Targets towards 1.5 degree path.

We've also included ESG criteria in the short and long-term incentive schemes of senior management and other more sustainability criteria in our capital allocation decisions. 05:38 Our strong growth in Connectivity & Product, Health & Nutrition and Knowledge is in line with our strategic focus.

We also made good progress in the transformation of Industries and Natural Resources, where we have built new competences, particularly in energy transitions and ESG related services. Those new solutions will be part of our future growth drivers.

Dominik will give you some more details on our Level Up initiative later in this section. 06:12 On digital, we've established a framework, the team and the objective, which will deliver our goal of 20% revenue through digital services.

This slide here gives a framework to monitor our progress to this goal, which we will develop over time. 06:29 There are three categories of revenue that are included in these targets.

Category one and two are existing services that we will migrate and enhance with new digital tools. This will add value to our customers, create stickiness, off-setting opportunities, and efficiency for both us and our customers.

06:49 We also formed the basis for development of new data driven solutions. Example of those category one and two are our small warehouse solutions, which has now been deployed in 12 countries and is being adopted by more and more of our customers.

All our digital lab solutions, remote inspections being implemented across the network. 07:12 Category three refers to new and fully digital solution generating incremental revenue for the Group.

Example of category three are, our digit comparable regulatory solutions, which some of you are already familiar with and is fully automated with AI-driven application now being used by most of our top 10 food customer across the network. 07:37 We're now working on expanding the scope into all the categories.

Tru is another digital product being launched in 2022. This solution helps our customers to ensure consistency, accuracy, and compliance of online data quality of their product on e-commerce portals.

08:02 During the year, we continue our portfolio evolution by investing in our strategic priorities across the different areas through 10 acquisitions. In the second half, we have Quay Pharmaceuticals and Groupe IDEA TESTS to our Health & Nutrition portfolio.

Quay Pharmaceutical is based in the UK, a formation [indiscernible] more focus on formation research and development. The additional Quay Pharma's competence has enabled SGS to extend the portfolio along with a healthy supply chain moving further upstream in the drug development process.

08:40 Groupe IDEA TESTS is based in France and is specialized in the clinical, microbiological, and in vitro testing of cosmetic products. This is in line with our strategy to strengthen footprint in European cosmetic and hygiene product with France being one of the key markets.

We also welcome the addition of Sulphur Experts in our natural resources division. Sulphur Experts is based in Canada and is a process engineering and testing provider, specialized in sulphur recovery industry, helping to improve performances and lower the impact on the environment.

09:17 Finally, we have acquired the remaining 49% of The Lab (Asia) based in Hong Kong. 09:24 SGS now owns 100% of this company that is active in the infrastructure and construction sector in the South China Greater Bay area.

An area comprising of Hong Kong, Macao, and the Guangdong province with many new infrastructure projects such as the Hong Kong Airport Third Runway. 09:44 This followed a good level of M&A activities in the first half, when we acquired Analytical and Development Services based in the UK and active in the food sector.

The laboratories activities of International Service Laboratory from Novartis in Ireland, active in the pharmaceutical industry; Autoscope in France to densify our technical control network. Majority Stake in BZH in Germany to expand our footprint in the complex hygiene consulting activities in the Health Sector.

Metair in France, complementing our network asbestos expertise in the Southeast region. And Brightsight, the leading players in the field of cybersecurity and a key addition to our portfolio services in the field of connectivity.

10:35 As mentioned, during our Capital Market Day, cybersecurity issues are increasing and are becoming a fundamental component of our total service portfolio. 10:45 On that, I'm going to hand over the presentations to Dominik to go through some of the financial details.

10:58 Thank you, Frankie. Good afternoon, ladies and gentlemen.

I will start with the overview of the financial highlights for fiscal year '21. Frankie already mentioned the operating highlights in his introduction with revenues of CHF6.4 billion and adjusted operating income of CHF1.55 billion and a free cash flow of CHF635 million.

11:21 Revenues for the Group in constant currency increased strongly by 14.2%, driven by an organic growth of 8.9% and the growth contribution of acquisitions of 5.3%. Adjusted operating income increased by 16.8% to CHF1.55 billion in constant currency, leading to an increase in AOI margin of 40 basis points to 16.5%.

11:49 Net profit after minority interest increased by 27.7% to CHF613 million in the period under review, while adjusted EPS was up by 18.6% to CHF89.46 million. Cash flow from operating activities was almost stable, while the reduction of the free cash flow of 16% reflects the increase in CapEx.

12:17 Organic revenues increased by 8.9% in fiscal year '21. Compared to 2019, we experience organically a steady improvement throughout the year, leading to a 2% growth versus 2019.

The contribution from acquisitions of 5.3% flex to a large extent, the acquisition of the A&S division of SYNLAB and to a smaller extent, the acquisition of Ryobi as well as Brightsight. All the other acquisitions had a very minor impact.

The currency impact is 0.1%, not relevant. 12:56 Moving on to the revenue growth by business.

Growth in Connectivity & Products was 8.8% strong. The acquisition of Brightsight contributed 1.1% to it.

With the exception of soft lines, given prior year's strong demand for PPE, all SBUs posted strong growth during '21. The strongest growth was achieved in connectivity also reflecting our continued investment into the strategic priority.

All SBUs are above 2019 levels. However, the main contributor to the C&P growth of 6% versus 2019 is connectivity.

13:41 Revenues in Health & Nutrition increased by 30% approx, equally split between organic growth and acquisitions. We experienced a strongest growth in Health Science benefiting from work related to COVID-19 vaccines, as well as a strong rebound of activities in Northeast Asia and Northern America.

14:04 All SBUs performing strongly above 2019 levels. Revenues in Industries & Environment increased by 18%.

The environment part of the acquired A&S division, as well as Ryobi contributed strongly to the growth, while organic growth was 7.5%. Field Services and Inspection, Industrial and Public Health and Safety, as well as Technical Assessment and Advisory posted organic growth above-average, while oil and gas related services lagging behind.

14:40 The 6% organic growth for Natural Resources is a function of strong growth in Minerals Commodities, Laboratory Testing, and Metallurgy, partly offset by low growth in OTC commodities, as well as a revenue decline in agricultural products due to the poor crop season in several European countries and North America. 15:05 Knowledge achieved an organic growth of 14.7%.

In all SBUs and regions double-digit growth was achieved. With the exception of our consulting and Academy SBUs, all SBUs trading also strongly above the 2019 level.

15:27 From a regional point of view, we delivered double-digit growth in all regions partly driven by acquisitions. The Eastern Europe and Middle East countries achieved double-digit growth across the majority of its end markets and are strongly ahead of 2019 levels.

Turkey posted very strong double-digit growth. 15:49 The growth in Europe is more mixed.

We achieved double-digit growth in countries with strong health and nutrition and market exposure, such as the UK or Belgium, while other key European countries such as Germany, France and the Netherlands growing mid-single digit. 16:08 Overall, Europe is still somewhat below the 2019 level.

However, we experienced in key markets such as Germany and Netherlands also growth versus 2019 towards the end of the reporting period. 16:25 In the Americas, revenues increased by 13.5%.

In North America, we achieved almost double-digit growth, but we aren't yet back to 2019 levels organically. Latin America delivered strong double-digit growth, also nicely exceeding the 2019 levels.

16:49 After having been very resilient in the prior year with almost stable revenues in 2020 growth in Asia-Pacific for '21 was organically up 8.2%. When comparing with 2019, the 7% growth is solely a function of Northeast Asian countries such as China, Taiwan, and Korea, while Southeast Asian Pacific countries are still below 2019 levels.

That being said, several key markets in Southeast Asia-Pacific growing versus 2019 towards the end of the reporting period. 17:30 FTEs at the end of '21 increased by almost 5% versus prior year, primarily driven by organic additions following the pandemic recovery.

Average FTEs in '21 increased to 4.7%, materially lower than the total and organic growth. The magnitude of the change by region needs to be set in perspective with the revenue increase.

Overall, we showed a good increase of productivity across all regions, as we had despite the material reduction headcount the prior year, sufficient capacity in place to support the growth. 18:12 Adjusted operating income increased at constant currency by 16.8%, which reflects organic growth of 13.3%, as well as the net effect of acquisitions and disposals of 3.5%.

Currency had a small positive impact of 0.4%, leading to a reported growth of 17.2% in the period under review. AOI margin increased by 40 basis points to 16.5%, the best AOI margin achieved in the last eight years.

18:48 On this slide, I would like to provide an update about the integration of the former A&S division of SYNLAB, which is now called SGS Analytics. We are well on track to realize cost synergies of approximately CHF20 million.

The related change in the management team and integration into our regional and country structure was executed in the first quarter '21. 19:10 All rebranding and related communication activities have been executed in the first half of '21.

The implementation of a common HR system is almost finalized. All Tru processes related to treasury, procurement, corporate real estate, tax, net working capital management, and internal controls are implemented and activities are fully integrated into the SGS structure.

19:38 The ERP implementation and we have did also the transfer of key finance processes to our financially shared service centers in Katowice went live in October for Germany and the Nordics and will be executed in the first half of '22 for the Benelux and the UK. The LIMS implementation for the various countries will be based on the new generation LIMS supported by our digital lab concept and is progressing very well.

The implementation of the Hub-and-Spoke model is fully executed and we are onboarding additional SGS countries to the environmental hubs as we speak. 20:19 The implementation of the footprint consolidation Health & Nutrition and Industrial & Environment is progressing according to our plan.

At the same time, revenue synergies materializing according to our expectations. 20:36 During the last year's Investor Days, I talked about the Level Up program and defined our '23 and '25 objectives for the various initiatives in the area of finance, IT, and operations.

You see on this slide the accomplishments for '21 and objectives for '22. Instead of going through all the individual items, I would like to highlight a couple of them.

We globally rolled out our new standardized fully integrated and digitalized third party certification system for our knowledge business. We designed the core for the digital lab model and started to rollout this new generation digital lab concept.

We're currently covering 10% of our lab revenues. 21:20 In relation to about ‘22 objectives, I would like to highlight that we will establish a financial shared service center in Mexico covering the Americas.

We will onboard additional 16 countries to our financial service center concepts and accelerate the go-live of our centralized billing initiatives covering 14 additional countries during '22. 21:43 From an operational and IT point of view, an accelerated rollout of the digital labs is of highest priority.

Overall, we are well on track to achieve our '23 Level Up objectives. For fiscal year '21, AOI margin increased by 40 basis points to 60.5%, which is the best AOI margin in the last eight years.

The 40 basis points increase is a function of a strong margin increase in H1, while the margin in H2 '21 decreased as expected and as outlined in last year's full-year result release. 22:22 As we all know, the prior year H1, H2 margin split is very much distorted by the impact of COVID.

Therefore, it is more meaningful to compare our development versus the 2019 level. Compared to 2019, we achieved in the first half a margin increase of 30 basis points, by revenues compared to 2019, we are flat.

22:49 For the second half, the margin increased was 70 basis points, also relate to the fact that growth picked up given a 3% growth in H2, '21 versus H2, 2019, leading to a 50 basis points increase in AOI margin versus 2019, for the full year. 23:15 Coming to the profitability by segment.

Our most profitable segment Connectivity & Products reported a stable margin of 24.5%. The margin in soft lines decreased, given last just very high incremental margins as a result of the additional PPE business.

This was completely offset by margin increases across all other SBUs despite accelerated investments into our Connectivity segment. 23:46 Strong adjusted operating margin increase in Health & Nutrition of 170 basis points is mainly a function of a material increase in profitability in the Health Science SBU.

AOI margin in Industries & Environment increased by 120 basis points to 11.3%, driven by all SBUs except for services related to the oil and gas end markets. 24:13 AOI margins in natural resources declined by 160 basis points to 14.3% as margin increases in Laboratory Testing and Metallurgy were more than offset by decreasing margins in trade activities in the LatAm, latter primarily reflecting the weakening topline in Agri-Commodities and some price pressure in OTC commodities.

24:41 Strongest margin increase of 220 basis points was achieved in the Knowledge segment reflecting the strong growth, but also the fact that the lower cost to serve model for remote audits are still applied. All SBUs contributed to a higher margin increase.

25:03 We continue to align our capital allocation towards our strategic priorities. The reduction in this year's free cash flow is a function of accelerated organic investments towards our strategic priorities.

We also align our CapEx to our sustainability ambitions. 25:23 We acquired nine new companies for total consideration of CHF214 million.

We launched at the beginning of the year, our first Eurobond with a nominal value of EUR750 million successfully. We signed a CHF1 billion Sustainable linked RCF in '21.

And we proposed a stable dividend of CHF80. 25:53 The management of net working capital continues to be a very strong feature of SGS.

Operational net working capital stands at minus 2.4% of revenues in '21, almost on a similar strong level as in 2020. We were basically able to finish two years in a row with a negative operational working capital despite the strong recovery.

26:14 This is very much driven by our focus on EVA, as well as the implementation of various initiatives such as the centralized cash collection from financial shared service centers or the centralized bidding project leading to a new records in DSOs. Cash flow from operating activities was CHF1.169 billion, almost on prior levels.

26:39 We spent net CHF331 million for CapEx, equaling 5.1%, a step up compared to prior years. The dividend payment as well as NCI transactions amounted to CHF652 million.

We had inflows from Asian covered bonds i.e., first Eurobond issued by SGS, we paid back short-term borrowing of CHF555 million, leading to a cash position of CHF1.48 billion at the end of the reporting period. 27:09 Gross CapEx for '21 increased strongly by 30% to CHF336 million or 5.2% of revenues gross, 5.1% net.

The CapEx increases to a smaller extent a function of catch-up investments not executed during '20, but to a large extent a function of more capital allocation towards our strategic priorities, namely Connectivity & Products and Health & Nutrition, leading to stronger growth. Approx 30% of the CapEx is allocated to C&P and especially towards the connectivity in Northeast Asia, which is of utmost priority.

CapEx allocation of 18% in Health & Nutrition goes primarily to Health Science and then to the nutrition segment. While the CapEx allocation to Natural Resources is to a large extent, based on client projects.

28:01 To sum it up, our revenue in '21 increased by 14.2%, of which 8.9% is organic. We are trading organically 2% above 2019 levels.

Our adjusted operating margin increased by 40 basis points to 16.5%. Our operational cash flow was almost stable, while we accelerated our organic investments towards our strategic priorities to foster growth.

We are proposing a stable dividend of CHF80 to the shareholders in the upcoming AGM. 28:33 And with this, I hand back to you, Frankie.

28:37 Thank you, Dominik. Now let me go through the outlook of our 5 divisions.

So, as usual, I will give the visual growth outlook comment related to our expectations for full-year 2022, organic growth and are relative to total group organic growth. 29:01 So, Connectivity & Products should grow above to Group average.

Momentum in Connectivity remains strong and should progress well in 2022. The already strong demand for cybersecurity, wireless, and semiconductor-related services should increase as automotive sector recovers.

The investment we have made in '21 will support this growth. Hardlines and trade facilitation should show good growth.

Hardlines should show steady growth from our traditional retail clients, while momentum should improve in the automotive sector. 29:37 In trade facilitation services, we expect a strong growth from TransitNet and eCustoms solutions to continue, while PCA services should be stable.

We expect moderate growth in Softlines in line with the overall markets. However, for HS specifically, we now have the same negative impact from the reduction of PPE volumes that we had in '21.

30:05 So, Health and Nutrition growth should outperform the Group average. Market fundamentals and global demand for core TEC services remain strong across all Nutrition, Health and Wellness verticals.

Health Sciences, particularly Biopharma will remain a key driver - a key role driver supported by our recent organic investment in China, UK, France, Germany, and [further] (ph) acquisitions. Vaccine testing volume will depend on the evolution of the pandemic during this year, but we already have a solid order book for the first half.

30:44 Good testing demand will continue to be sustained by concern of a quality, safety, and authenticity and supported by ongoing outsourcing trend. The ramp up of our recent investment in Americas and the increased regulation will remain strong drivers for the top-line growth.

Integration of recent acquisition and many efficiency initiatives are set to improve operational excellence as well. Finally, for cosmetic and hygiene, we expect a strong performance following good momentum in '21.

31:24 Natural Resources, growth should be brought in line with the Group average. Strong momentum in the mining industry is expected to continue in '22 with exploration budget forecasted to increase in the range of 5% to 9%.

This will support growth in our geo-chem and Metallurgy Consultancy businesses unit, where we have expanded our footprint over the past few years. 31:49 In other growth sectors, also global output for men adulthood product is expected to be slightly higher in first half '22, with further improvement in the second half.

We will see a negative impact on our trade activities in the first quarter due to the anticipated Canadian export reduction related to the drought of last summer. 32:11 In the oil, gas, and chemical sectors, global oil demand is expected to recover to above 2019 level.

This will give some support to our trade and testing businesses. However, pricing continue to remain competitive due to excess capacity on the market.

32:32 Sorry, I think I missed one slide on the Industries & Environment, let me come back to that. So Industries & Environment growth should be below the Group average.

We expect a strong development of health and safety to continue into 2022 with the further recovery of different industrial sectors and new services being deployed. A good example of those new services is our ISN solutions, which monitors air quality in school, warehouses, and all the building by using sensors.

33:06 A volatile year '21 for environmental testing with a better market conditions and customer site access in the second half of the year. These improvements should continue into second -- into 2022 and we are expecting a solid development in this strategically important sector.

The deployment of the Hub-and-Spoke model of SGS Analytics formally A&S SYNLAB will support this growth acceleration. 33:31 Then both Technical Assessment Advisory and Field Services & Inspection should continue to perform well in line with '21, particularly in LatAm and Asia supported by a strong project pipeline.

As for public mandates, growth will be impacted by discontinuation of a vehicle compliance concession spend and a change in scope our few government contract in Africa. 33:59 So I've done Natural Resources, let me go down to Knowledge now.

So, finally for Knowledge, growth should broadly in line to better than the Group average. The underlying market for Knowledge Services remain strong.

We do expect a lower growth in Certification due to the additional work performed in '21 related to the recertification cycle, and the tail end of COVID catch-up effect that was still impacting first half '21. 34:27 However, industrial specific standards such as information security, a medical device certification should deliver strong growth.

Demand for customized audit across all international sectors will remain strong in areas of ESG services and supply chain risk management solutions. Technical Consulting Services are expected to continue to rebound after a challenging 2020 and some of '21.

Demand will increase, especially in the field of process and supply chain optimizations. The '20 market will continue to recovery, but we're still not expected to reach the pre-pandemic level.

35:13 So, in terms of outlook 2022 for the Group, while we're seeing ongoing disruptions, we are confident that moving into the year, we will see further normalization of our business environment. Our outlook assumes no incremental pandemic-related disruptions occurring beyond what we are experiencing today.

35:32 Given these, we expect mid-single-digit organic growth, improving the adjusted operating income benefiting from operational leverage, strong cash conversion, maintaining the best-in-class organic return on invested capital, accelerating investment into our strategic focus 35:32 as a key differentiator, and at least maintaining the dividend. 35:58 This last slide is a reminder of our 2020-2023 mid-term target.

Our balanced approach to planet, performances, and people is again reflecting our belief that only focusing on financial performances is not enough anymore. 36:15 As already mentioned, ww have other ESG criteria to the short and long-term incentive plan of management, we have introduced new ESG criteria for CapEx approval across the network.

And as Dominik already mentioned, we have linked some of our financial borrowings to our ESG performances to further enhance our culture of sustainability at SGS. And I'm proud to say that each one of my 96,000 colleagues are committed to our purpose of enabling a better, safer, and more interconnected world.

36:47 On that, I'm handing back to Toby for the Q&A session. Thank you.

36:57 Okay. Thanks very much, Frankie and Dominik.

We will now move over to the Q&A section. And please remember to limit it to two questions per person.

And please, if you are thinking of joining and asking a question, please, please jump on that call now. So, we will start with Paul Sullivan from Barclays.

Please go ahead, Paul.

37:20 Thanks, Toby. Afternoon, everyone.

Firstly just on margins. I mean, obviously, there's lots of moving parts as we go through this year, given comps and things.

But given the uptick in FTEs and underlying wage inflation, can you provide a little bit more color on your thoughts for the margin bridge for this year? 37:38 And then following on from that, on pricing more generally.

I mean shouldn't the inflationary backdrop or given the inflationary backdrop, shouldn't that point to more than mid-single-digit growth -- organic growth for this year, particularly as it sounds like the exit rate was pretty good. So, what's holding you back in that respect?

38:02 Good afternoon, Paul. So, first if you look to the margin development, I think it's important to see first for '21.

If you look to it and I think it's important, the second half was really good. It was of course down compared to the prior year as we outlined already one year ago that the year before was really for various reason extremely strong.

But if you look from H1 to H2, we actually had an uptick in '21 of 330 basis points sequentially. 38:36 And if I look to this historically, I have to say, between '15 and '18, it was between 220 basis points to 250 basis points.

Then in '19, it was 300 basis points and actually for '21, 330 basis points. So, I think we are margin-wise really on the well-track and it also shows that we raise our prices, because obviously inflation is kicking in.

38:59 Now, if you think about this year, we're not guiding, as you know, the margin specifically, but we are very committed to show operational leverage. There obviously is also a supporting element from the fact that the integration of A&S is progressing.

So there will be also some additional benefits on the cost side and we are very keen to basically increase the prices. We worked intensively on it to pass on the majority of wage inflation.

39:33 To your second question, now mid-single-digit is also a range. But in general, I agree that in a more inflationary environment it's also a stimulus for revenue growth, but for the time being, we believe mid-single-digit is the right guidance for this year.

39:55 That's great. And just following up, I mean when you listen to BV at their Investor Days at the end of last year.

They seem to suggest that decent organic growth and margin expansion were some more incompatible. That is clearly not your view, just to be clear?

40:09 No, I mean, I cannot comment on competitors. I can only comment on us and we are very committed that we can increase our margins as we say in our outlook statement.

We're looking for operational leverage. And if we -- while we not have any more a fixed margin target, we are very clear in our plan '22, '23 to look for high single-digit growth, including acquisitions and implying mid-single-digit organic growth, but we're also saying that earnings growth has to be 10% plus and that implies very clearly a commitment that we drive operational leverage and we believe we can do this.

We have several levers to pull amongst others, it’s also the reason why we are spending time to talk about the different initiatives, to talk about Level Up, to talk about world class services, because we believe these things will drive productivity in a way that shareholders in terms of operational leverage will also benefit.

41:16 That's very clear. Thank you.

41:19 Thank you. Could we move on to the next person on the call.

Simona from Bank of America. Please go ahead.

41:28 Yes. Good afternoon, gentlemen, and thank you for taking my question.

One specifically, if you could please give an indication of the organic growth tailwind on Group organic growth in H2, and overall for 2021 from COVID-19 vaccine work in Health and Nutrition? And similarly also the contribution from PPE and Connectivity & Products?

41:55 And then, just a very quick follow-up on the question that has been asked previously from Paul on wage inflation. This is more related to the fact if you're seeing any material talent scarcity and how difficult it is at the moment for you to recruit personnel?

Thank you.

42:22 I'll answer the second question about the talent scarcity. It is different depending on which sector we're talking about.

It is clearly that it is a challenge in sector like Health Sciences and Connectivity, where we see clearly that we're not just competing against our peers in the TIC sector, we are also competing for talent with some of our end customers. So this is something that we're monitoring.

42:54 We have implemented different measures. So, in term of getting earlier recruitment at University, Technical Institute to help us to have a strong pipeline of talent that we can develop over times, that is little more stable, I would say.

And as well as looking at partnership with different organizations, so that we can cross utilize some of the resources and talent. 43:21 But it is part of the challenges we've been facing over the last few years in these kinds of growth areas and we're seeing some of the challenges on the wage pressure, but nothing that we cannot manage for time being, because we also have good added value to our end customers, where we can pass over some of the wage pressure on the end-customers, because it's not those sectors that has the biggest price pressure, I would say.

But talent scarcity is one of the key topics for us to look at in 2022.

43:55 Coming to the second question. So if we think about the second half of 2021 versus the second half of 2020, we had 5.8% growth.

And if you look to this 2 components which you outlined, one is a tailwind, the other one is a headwind, right? Because the PPE business was extremely strong in the second half of 2020 and now it's back to the level where it was before COVID.

44:28 Then on the other hand, obviously, there was a further vaccine work acceleration. So if you set these off there is still in some, there is still a tiny bit of headwind so to say, because the PPE reduction is bigger than the vaccine increase for the second half, but it's not that much impacting -- it's not that meaningful.

The only different is obviously [Multiple Speakers]

45:02 Sorry. If you want to carry on Dominik, please do --

45:04 I just want to say that the PPE is now on a nominal level, so there is no further risk coming so to say, while – yeah, vaccine work, we have to see going forward, but obviously at least for the short term, there is no risk.

45:24 Thank you very much. [Operator Instructions] And now we will continue with Daniel from ZKB.

Daniel, please go ahead.

45:39 Yes. Thank you very much.

I want to question on the synergies and of A&S. So you expect the full $20 million already in '22.

And I understand there was a slightly negative impact in '21. So can we speak of a swing factor of about 30 basis points by A&S alone?

46:02 So the full synergy potential will be achieved in -- fully realized in the year after, but there is a big step-up into '22, because we achieved now this year -- last year '21, we achieved around CHF5 million and there is a big step-up towards the '20, but it's not fully '20 yet, because some of the synergies will be not the full year, they are so to say, yeah, but obviously it will have a positive impact on the profitability for sure. 46:42 Now the -- for '21, not surprisingly if you buy assets with a lower profitability than our own assets, especially in the first year where the synergies are not all there yet.

It had a small dilutive impact. So, it's true that acquisition in some and as the biggest part, dilutive impact on margins around 20 basis points, but this will obviously recovered by achieving the cost according to plan, but it's everything according to plan.

47:16 Thank you very much.

47:19 Thank you. Next on the line, we have Sylvia from JP Morgan.

Sylvia, please go ahead.

47:28 Thanks, Toby. Hi.

Good afternoon, everyone. Firstly, could I ask on CapEx?

I guess it is interesting that you're investing potentially ahead of peers. So, could you maybe talk about where you see that CapEx going forward, both, I guess, the areas, where -- you mentioned the areas where you're investing, but is that mainly going to be lab based?

Or is there anything else to think about? And then maybe numerically on the back of that CapEx to sales and depreciation to sales, where could we see that?

47:57 And then secondly, just a quick check-in. Provisions for bad debt clearly went down a lot in the second half of '20, you were expecting maybe 40 bps drag in the second half of '21, that's not crystallized.

Could we expect any normalization in '22 or is this the new level that you're comfortable with? Thank you.

48:24 If we start with the bad debt development, 2020 was a really good year, but '21 as well. And it seems this is the kind of normalized level.

We had – we finished very strong in 2020, we had also a good year in '21. So, there were no, let's say, meaningful changes in that respect.

It's also the case that over the years, we may be have a little bit less, still some, but less exposures to very large government contracts, where sometimes collection is a bit difficult. 48:59 You may recall, years ago when we had the GIS unit margin were often fluctuating because they were large contracts which we’re very depending on the payment behavior of governments.

This is still in the portfolio, but maybe to a little bit lower extent than historically. So, the volatility in that respect should be somewhat lower.

49:22 On the -- Sylvia, on the CapEx side, obviously the focus for the CapEx development will be in line with our strategic priorities, same as this year. So, I would say, look into future Connectivity, Health, Nutrition, Renewable energy, all the factors.

Some of them are lab based, for example, renewable energy is more fuel based, wind OpEx or windfarm OpEx and so on are more fuel based, but a large part of it will be linked to our laboratory activities, where we have good leverage -- operational leverage as well. 50:00 In term of evolutions, we had 5.1% this year.

I think we always gave the bracket of 4% and 5% and we should be in this range in the medium term. Dominik, if you want to add something.

50:14 Yeah. And also depreciation, I mean if we look, I would say in the years -- the three years up to '21, basically the three years before, so '18, '19, and '20.

We are more on average, I mean, we are between 4.4% and 4.6%. Now, obviously, in the last year, we were slightly above 5%, we indicated towards 5%, now we are slightly higher, but not very meaningful.

I think to assume around 5% is a good number now. In last year number, the 5.2% gross or 5.1% net was also a little bit of CapEx, which simply shifted from the first COVID year to last year, but kind off 5% I think is a number going forward.

51:04 And as Frankie outlined, it's very much a strategic priorities, but it's also investment into systems, so the digital lab system, where we have clear targets that in '23 more than 30% of our lab revenues will be done with the new generation digital lab concept and in '25 more than 70% that need some CapEx, so there is also some CapEx allocation in that respect and it's the reason why we are more in -- close to 5% or 5% area and depreciation will of course then adjust accordingly.

51:47 Thank you so much.

51:48 Thank you, Sylvia. And Andy is next.

Andy from Credit Suisse, please go ahead.

51:55 Hi, good afternoon everybody. First one, could I go back to the original question and ask a little more around pricing and wage inflation.

Kind of what levels of wage inflation were you seeing last year? And how much of that was offset just by pricing and how much had to be done through efficiency and so forth?

And what are your expectations for 2022 and beyond? 52:20 And then secondly just on M&A, there has been some very large deals in the -- in the sub-sector or in the sector in recent days, what is the environment like for getting the deals across the line and for pricing?

Thank you.

52:37 If you think about -- if you think about last year, the real impact of wage inflation hadn't had yet -- it was a little bit higher, but it was not much higher last year, because in the majority of our end markets it's kind of that we have kind of agreements with the local management, with the employee representation and usually these things getting then implemented after end of Q1, beginning of Q2, this is the kind of normal cycle. 53:15 That being said, there are certain end markets where we are some more liquid, we are somewhat fluent like the US, like Australia.

And yes, we had also there some more wage inflation, I think it was -- but it was also partly driven. There was a bit of a structural change.

For example, in Australia, not the possibility to really import people, or in Canada given the kind of government support to people during COVID, there was maybe not the highest willingness to go back to the job market, which had some inflation. 53:50 Now the good thing is, in businesses where we have strong positions like in our minerals business and so on, we are able to pass this on completely because clients also understand.

So, I would not say now that now wage inflation would have -- we were not able to pass on the pricing, because otherwise it would also explainable that we had from H1 to H2, where you see -- where you start to see, for example, on consumables some price inflation, a cost inflation so to say that we had from H1 to H2 actually. 54:27 And margin increase, if you take out last -- the year before, because it was COVID, which was the best margin increase back to 2015, I didn't check the years before.

So, now more important, I think this is where we will see this wage inflation topic is really into this year. Now, it is -- of course, it really depends country by country and end market to end market, it will definitely happen, but I think we as an organization, we worked early enough last year to prepare this, to price this, to have proper discussions with clients.

And I think we are confident that in the majority of the cases we can pass this on, but there will be a part of it, where part of the productivity is needed. But I think in general, the bigger part is passed on.

M&A?

55:19 The other question on M&A. Well, you know what, I think the market already in 2021 was quite dynamic for M&A.

So, yes there was loss, understand a last till the beginning of this year. I don't think it's going to change too much our view on M&A.

We have our focus in terms of strategy, we have discipline in terms of the way we're looking at our strategy, significant of the asset, in terms of the EVA, in term of value creations. So we're just going to continue to focus on what we believe the right asset to join SGS Group, if the price tag is creating the right synergy at the right time in terms of EVA and so on, we'll go after it.

If not, we'll just pass and move to the next target. So, we are quite active in this domain.

We're trying to discuss with a lot of different party and it is part of our strategy for 2022.

56:20 And then, could I just ask. Thank you for that.

Can I just ask one follow-up on -- in terms of kind of wage inflation and pricing. I kind of got the message, just wondered what your thoughts are in terms of how much wage inflation you expect to see this year?

And how much you saw last year? You sort of talk around it but didn't quantify.

56:38 Yeah. I mean, let's say the wage inflation last year was not a lot, it was whatever, close to 2%.

It was not really a lot. Because, as I said, it was more by [NSX] (ph) market.

Now for this year, I don't think it makes too much sense to give a number, because every end market is very different and we look market to market to those things, but -- and things are a little bit fluid as well currently, right? So, it is more important that we -- I think we are ahead, because we try to increase prices and in that respect we should cover this appropriately.

57:23 Okay. Thank you very much.

57:26 Thank you, Andy. Next, we have Jewel from HSBC.

Please go ahead, Jewel. Okay.

Maybe Jewel wasn't actually on the line. Apologies if you were and you dropped off.

Okay. So, we'll move on to the next caller, which is Rory from UBS.

Rory, please go ahead.

57:51 Good afternoon. It's Rory here.

Firstly within Knowledge, the organic revenue versus 2019, it was a little lower in H2 than H1. So was that because the traditional certification of volume normalized and does that mean tough comps to start 2022?

And secondly, do you still run and evaluate your EVA reviews? I'm just wondering how much of Group revenue is in SBUs that are still EVA negative, compared to the 8% you found in 2019?

And are there any SBUs that are still going to performance improvement plan or that could be considered for further disposals? Thank you.

58:32 So, if you compare -- on the Knowledge side, the comparison versus '19, there's definitely not -- it's not Management System Certification, because it was only in 2020, where you have this big shift now that we have that -- that you see kind of for the full year lower growth versus '19 and the first half is more related to other situation and that's related to the fact that we did an acquisition in July 2019, main point for our consulting business. And this was in the first half this year, not yet in the comp, because it was organic, it's only the second half in the comparison organically, because we acquired it in 2019.

59:25 Now this business not surprisingly, this consulting work had a very tough year in 2020. It recovered quite strongly in '21, but we are not yet back on the level of '19, like I said in my remarks, the consulting business and the academy, so the training business, they are not yet back on the '19 level, but the kind of legacy Management System Certification, customer audits and so on, they are well above our '19 levels and actually accelerated versus '19 from H1 to H2.

60:07 The second question was related –

60:09 EVA negative.

Excuse me. Sorry [Multiple Speakers] So this continues to be a strong focus area, obviously.

Now one thing I have to say, when we presented this we had a different business structure, where we had -- where we had 9 different business units. Now, with the change to five, things moved a bit left and right, but we have a strong focus on it.

We have this EVA reviews, so for example, next month we have the full EVA review of the ones [Technical Difficulty] but some of them are kind of delayed, given the fact that, especially if you think about certain oil and gas end markets, where we're still somewhat below our 2020, 2019, but they are progressing and the picture is a little bit better than what I showed at the Investor Days in the main meeting when I indicated to you what is value destroying in this corner left down, but we are continuing to focus and we can give an update, maybe to the half-year numbers more in detail.

61:18 Thank you.

61:21 Thank you, Rory. Next please is Arthur from Citigroup.

Please go ahead, Arthur.

61:29 Thanks, Toby. So yes, Arthur from Citigroup.

So within the Industry & Environment business, you mentioned that the outlook look pretty strong in field services and Technical Advisory, does this reflect the acceleration from both renewables was clearly worst part in 2021 and also oil and gas, is that also improving? 61:50 And then the second question I had was on the resources side.

So, you mentioned that the oil and gas trading business struggled a little bit from sort a pricing perspective. Is it right to assume that the sort of volume trend improved in the second half of 2021?

And how did that impact the pricing trend? Thank you.

62:16 I'll go for the first part of the questions. So, what we call the fuel services and the other part is basically -- one part is linked to the construction supervision in our sectors, so infrastructure and constructions.

This sector is very dynamic in Asia and in South America, where we have strong position, where less price like in Singapore, in Hong Kong. I mentioned about the South China Greater Bay Area and Saudi and LatAm, where it feels Technical Assessment and Advisories were linked to this evolution, so a strong double-digit growth and some return in this activities.

So, we see a strong pipeline on that. 63:05 On the Fuel Services & Inspection, you're right.

These are migration of some of our existing services to what we know well, but it is wind farm, wind energy, or to some extent like country like in France, [indiscernible] is also part of the regulations and the oil and gas sectors is still stable, I would say, it is not going backward, it is stable, but it is not where some of the bigger growth is coming from.

63:33 Now regarding the commodity trading business. So, if we look to it, oil and gas commodities and natural resources, we are down for sure in the first half, because certain products like jet fuel and so on, they were not really back yet.

We definitely see an improvement. In the second half, it's growing.

So in sum, we are a tiny bit growing, not a lot, but a tiny bit growing, but obviously, the trend into this year is therefore clearly better. 64:02 The remarkable pricing is related to -- it is a product-competitive environment.

In this end market there are still quite some capacity in the market. So, the pricing environment is not easy.

We don't think it will become much easier in the short term, but volumes definitely are increasing.

64:28 Thanks very much.

64:30 Thank you, Arthur. And the next one on the call is Neil from Redburn.

Neil, please go ahead.

64:39 Hi. Good afternoon.

Thank you. Thanks, Toby.

A couple of questions please. Firstly, I'd like to go back to the subject of CapEx and the growth projects that you referred to.

Can you give us an indication of when I'm thinking particularly in Connectivity & Products, these projects will begin to reflect in the growth rate itself, how long they take to complete? And any comments you'd like to make about the incremental return on capital at those sorts of labs -- connectivity labs might generate?

65:16 And then secondly, back to the environmental division. The comment you make around the sort of flat organic progress in some of those activities, do you think that was principally the result of external factors and the lack of something, collection availability or do you think there might have been some evidence of negative revenue synergy, either because of the disruption or otherwise around the A&S deal?

Thank you.

65:57 So if we, take this question. First of all, on the connectivity side, we are seeing this already today.

I mean if you look to our connectivity business, it is 16% above 2019. Yeah.

And this is also partly as we allocate more capital to it and we continue to allocate capital to it. If you allocate capital, it takes a couple of months, but then this thing is kind of ramping up and we get very quickly good utilization, the returns are materially higher than the returns, which we has as a Group average, so it has high returns, it grows rather quickly.

And I would say it's not only last year, we also invested during 2020 into it and this is now already realizing in terms of growth and we continue to invest in this part. 66:59 On the environment testing, I think there is -- first of all, by this interesting environment testing, if we talk about organic growth, we talk it is flat.

That's correct. In acquisition as well, instead is growing.

So our environment testing in A&S, they actually had seen growth in the COVID years or the year before we bought them or at the end we bought them and they have seen a solid growth also in '21. 67:29 Now, but what is true, and what is definitely a market-related item is, on one hand, we had rather tough winter at the beginning of last year, so there was definitely some delay and we had expectation that demand for soil testing is picking stronger up during summer, which happened -- which didn't happen.

I think this is a market-related item that construction projects are not started or partly also delayed. 68:04 And again, and if you look to our business, where we didn't see really also improvement is North America and North America has now nothing to do with our E&S acquisition as it is focused on Europe.

We don't believe there's anything to do with the acquisition, we believe it's more market situation.

68:22 Neil, may be I'd like to add one more comment on the Connectivity. It's not a factor that we have a very strong network of connectivity lab worldwide, because a lot of those CapEx that we are putting in this incremental CapEx they are just adding on the capacity on the development of our network.

They are not new lab that we're building. If we're building a totally new lab somewhere indeed, by the times you build a capacity, by the time you get the acquisition, it takes time.

But we're not at this stage anymore have our networks complete. It's just incremental CapEx we used our excess [indiscernible].

Also often we use the same manpower that just expand the capacity, so we're in a different level of maturity.

69:07 Understand. That's very helpful.

Thank you.

69:10 Thank you, Neil. The next on the line, we got two more on the line, and we do have some questions on the web, which I'll read out in due course.

So first on the call or next on the call I should say is Annelies from Morgan Stanley. Annelies, please go ahead.

69:26 Hi. Thanks, Toby.

I just have one question remaining. I was hoping you could give some more color on the situation on the ground in Asia, as you're seeing it at the moment.

During the presentation, you called out that Northeast Asia saw a very good recovery through the year, but Southeast Asia or certain parts of it are still below 2019 levels, but parts have started to improve towards the end of the year. 69:50 So to the extent you have visibility, I'm just wondering how you see that developing in the early months of this year?

And if you able to quantify how much of a drag was that on growth when there was localized lockdowns and so on? And any detail you can give around that would be very helpful.

Thank you.

70:14 I'll try to answer a little but part of the question on SEAP versus Northeast Asia. You look at the competencies of the countries in SEAP and you look at the evolution of the pandemic over the past 12-plus months, it is clear that country like Indonesia, Philippines, Malaysia, Singapore was -- had much stronger -- stricter lockdown than some of the other economy that we've seen in Northeast Asia.

So not just the fact that you cannot travel between countries, there were also a lot of factors, some of the lockdown within the country and some of economic activities was much more severe, including India that had quite a significant raise so cases at the beginning of the year. 71:07 But as we move with the evolution of the pandemic, we've seen that country like Bangladesh, India was much stronger and coming back online in the second half of the year, where the market was reopening, while we're seeing again Malaysia is good example, it is not fully back on track as an economy and we are still dealing with some of the legacy issues.

Indonesia is getting better. Thailand is just getting out of the sectors, where tourism is an important aspect and we're not back to there.

Australia is opening up. New Zealand is still in lockdown, but New Zealand has an issue of workers, a lot of the technical people comes from outside to work in New Zealand.

So, for the time being, we're dealing with a situation where the country is closed, there are work to be done, but they're falling shortage on manpower, because they use a lot of people coming from outsider countries. 72:02 So as things open up, we see the market conditions becoming more and more normal, which was going be less obvious, I would say, in Northeast Asia, where I think, Korea, China, Taiwan, Hong Kong was operating, maybe the traveling between the country was not great, but as the economy was operating at a satisfactory level.

The only one that was tail -- the headwind for us in our Northeast Asia was Vietnam, because of the serious infection rate that they had in the fourth quarter of last year, we basically had to shut down some of the facilities for couple of months, but again end of the year, December, when the economy went back on line, we're back to the whole trajectory that we have. 72:47 So, I would say, as I mentioned earlier, moving into 2022, I'm expecting Northeast Asia to be performing in line with what we've seen at the end of the year and probably SEAP having more upside and downside, assuming that there is no new way for lockdown coming around, that is going to disrupt the processes.

73:10 Thank you very much.

73:12 Thank you, Annelies. And then saving the best for last, we have Karl.

Karl from RBC, no pressure, please go ahead.

73:21 Thanks, Toby [Multiple Speakers]

73:23 This is the last on the call, I should say. We've got a couple more to readout, but please go head, Karl.

73:27 Thanks very much. Just a couple of residual ones from me.

I mean, just in terms of the impact of the step-up in CapEx over the last couple of years. What are you expecting in terms of the depreciation and non-acquisition intangible amortization charge this year.

Just in terms of step of that, the cash flow modeling? And also just following from that, is it fair to say that the rapid utilization you get from that asset deployment means that actually you are unlikely to see any material divisional margin drag from that step up in depreciation and that's sort of first one.

73:59 The second one, completely unrelated, Agri I think took the shine off the very good performance in Minerals and Natural Resources in the year just gone. The talk -- the big step up in fertilizer and nutrient cost is going to lead to planters applying much less fertilizer, which is raising the specter of very low crop yields in H1 next year.

Is that something you've already factored into your dynamics and your outlook for the Natural Resources please?

74:31 [indiscernible]

74:33 You want to deal with the first one, I’ll do the second.

74:34 So basically if you look -- if you looked at the whole depreciation, amortization. If you -- So if you take everything, it charges around CHF500 million, but this considers also the amortization of the right of use and lease, it considers the amortization of intangibles and so on.

So let's say that depreciation related to, let's call it, traditional CapEx was last year CHF275 million. 75:04 Now if you think about this and say okay, the last couple of -- the years before we had now more 5%, it was 5.2% this time, we had around 4.5%, if we're now adding a year with 5% or more year with 5% over the next couple of years, if you assume average usage of CapEx is 5 years, you can easily calculate how the depreciation is step by step moving up.

It's not jumping up, because obviously it takes time until the 5 years average, for example, if you buy equipment, what is depreciated over five years will happen. So depreciation will grow of course a bit more than the years before, but it's step by step, because you have in the current run rate of depreciation still other years of prior investments.

But over time it will increase by roughly this 0.5% of revenues over time.

76:08 Okay. Karl, maybe for your second questions, I'm not going to try to diverse your question, because I don't have a direct answer.

Let me put it this way, in our assessment of the agricultural sectors for the -- for 2022, we factored, Tim and I factor all non-conditions in terms of where we stand in terms of potential growth and market conditions and so on. I don't have the specific comments on nutrient and fertilizer use and so on.

76:42 If you don't mind, I will ask Toby to come back to you if this was part of higher or lower element of the things we make. But I'm pretty sure it's part of the assessment we made, because the team up with due diligence to have all particular aspect, but I just won't say something specific on that one without knowing to exact information.

77:05 Thanks very much.

77:06 I will check in with Derek and I'll get back to you Karl. And so that's it for the call.

And we have got some questions. We've got 3 questions remaining.

I've moved a couple, because they are already answered and I think one, we can combine. 77:21 So the question from Julien from Societe Generale and from Kulwinder from AlphaValue are basically asking about the sustainability of margins in Health and Nutrition and Knowledge.

And so that's one, do we think these levels can be sustained going forward? And the second one is, what's -- a similar question is or related question maybe is, is the H&N margin sustainable given the vaccine work?

And what do we expect for vaccine work going forward, which I guess we've already answered. Good.

78:02 And I guess that's for Dominik .

78:04 Yeah. So, I mean if you look to it, obviously, there was now a good margin increase also related to the vaccine work.

And for sure we had also very, very good pricing. But I also [Ends Abruptly]