Earnings Transcript for IKTSY - Q2 Fiscal Year 2021

Andre Lacroix: Good morning to you all, and thanks for joining us on the call, following the release of our H1 results, a few moments ago. I have with me Jonathan Timmis, our CFO; and Denis Moreau, our VP of Investor Relations. I'd like to start the call today by recognizing all of our colleagues in all of our countries around the world for a very commendable performance in H1, with strong revenue, earnings, cash and ROIC metrics, as you've seen already. We are on track to deliver a strong 2021 with robust like-for-like revenue growth, year-on-year margin progression and strong free cash flow. Notwithstanding of course, the lockdown restrictions in several of the markets impacting supply chain and mobility in our various operation. There are essentially five key messages for all of us today. First, we are a global industry leader with scale position in a very exciting industry that is expected to grow faster post-COVID-19. We are very customer-centric as Intertek and our superior customer service, gives our Intertek clients really an advantage as they operate around the world. We are investing in global and local innovations as well as acquisitions to see the attractive growth opportunities in high-margin segments. We continue to be laser-focused on operational excellence that drive consistent margin-accretive revenue growth over the year, with strong cash generation and disciplined capital allocation to deliver of course a superior return on invested capital. And as you know, we operate a high-quality earnings model, which has a track record of delivering sustainable value creation for all of our stakeholder. So let's start with our performance highlights. I'm really pleased with our results. We delivered a strong performance in revenue, earning, cash and ROIC. This demonstrates the strength of our business model our geographic and business line diversity, our disciplined approach to performance management, and of course, our strongly cash-generative earnings model. Specifically, in the first six months of the year, group revenue was £1.3176 billion, up 4.8% at constant currency. Like-for-like revenue was up 5.8%. Operating profit was £201.7 million, up 26%. And operating margin of 15.3% was up 260 basis points year-on-year at constant currency. Our highly cash-generative business model delivered a very strong cash conversion of 135%, benefiting from a continuous reduction in working capital. And as I said, our return on invested capital was very strong at 23.4%, up year-on-year by 360 basis point, and we have announced an unchanged interim dividend of 34.2p. So let's now look at our performance at a high level by division. Our Products and Trade divisions combined delivered together, a like-for-like revenue growth of 7.4% and operating profit growth of 26%, and margin accretion of 260 basis points. Our high-quality product portfolio had a really strong performance with like-for-like revenue, up 9.7% and a margin of 20.9%, up 390 basis points year-on-year. Our Trade business delivered a solid like-for-like revenue performance of 1.1% a margin of 7.2%, up 50 basis points year-on-year. And as expected, our Resources business delivered resilient performance with a like-for-like revenue slightly down year-on-year minus 1.6%, and a margin of 4.9%, slightly down year-on-year by 60 basis point. We continue to invest in growth. And recently, we've announced two acquisitions in attractive markets for Intertek. First, we are really excited about the acquisition of SAI Global Assurance. The ATIC industry is expected to grow faster moving forward. Assurance is a capital-light high-growth and high-margin service and is mission-critical for clients, when they try to address their increased risks in their operations. These acquisitions will scale up our global assurance offering with a high-quality business run by a highly respected management team. And the acquisition is expected to deliver attractive financial returns to our shareholders. Specifically, the strategic fit of SAI Global Assurance, with our Intertek portfolio is excellent from a geographic standpoint, as we will strengthen our scale position in attractive growth markets, especially for sustainability. Specifically, post-acquisition, we'll have a stronger market position in Australia, the US, Canada, the UK, and China. The strategic fit of SAI Global Assurance from a service standpoint is also excellent. And we're going to get access to additional services in high-growth sectors like food, agriculture, quick-service restaurant, sustainability and global market access. Last week, we announced the acquisition of GLA to enter the fast-growing food market in Brazil. GLA was established in 1990, and in the food agri and environmental testing business with an excellent track record of organic expansion. As you know, the demand for food and beverage testing solutions has accelerated in recent years. As global supply chains become more complex, the importance of hygiene and safety increases and consumers demand more sustainable and healthier products. The acquisition of GLA expands our food and agri capability, and we're entering the food testing market in Brazil. And you know that, Brazil is one of the largest exporter of agri food products in a world with tremendous growth opportunities moving forward. Cash management remains a high priority for us and we continue to make progress on working capital. If you had asked me, a few years ago, could we take a working capital as low as this, I would have said probably not. But this is the power of the Intertek team in action and operating process. If you look at our percentage of revenue in terms of working capital incredible. Our cash conversion was 135%. Our cash generated from operation was £253 million. And our adjusted free cash flow was £122 million. Our balance sheet is super strong with a financial net debt of £435 million, and a net debt-to-EBITDA ratio of 0.7. I will now hand over to Jonathan, who will take us through our detailed H1 result. Over to you, Jonathan.

Jonathan Timmis: Thank you, Andre, and good morning, everybody. In summary, in the first half of 2021 the group delivered robust revenue growth and double-digit profit and EPS growth. Total revenue growth was 4.8% at constant currency, but down 1% at actual rates, as FX translation negatively impacted our revenue by 580 basis points, driven by depreciation of sterling. Like-for-like revenue grew 5.8% at constant rates. Operating profit at constant rates was 26.2% to £201.7 million, delivering a year-on-year margin improvement of 260 basis points. Overall, fully diluted EPS grew 31% to 78.2p at constant rate. Looking more closely at the operating margin bridge, the group operating margin grew 260 basis points at constant rates. Products delivered a strong operating profit margin of 20.9%, and accounted for 220 basis points of group growth. Trade margin grew 7.2%, and contributed 10 basis points to the year-on-year change, while a decline in operating profit in Resources of 4.9%, had a negative 10 basis points year-on-year effect. Divisional mix had a positive 40 basis points contribution, given the strong growth in Products. Finally, FX had a positive 10 basis points impact on the group margin. Our disciplined focus on cash management continued during the first half of the year. The group delivered adjusted free cash flow of £122.6 million, representing a cash conversion of 135% on an annualized basis. While cash generation was down year-on-year, in the first half of 2020 the group benefited from some government subsidies and cash preservation initiatives to offset the impact of COVID-19. During the first half of this year, we invested £40 million in CapEx up 18% versus prior year. We finished the first half with financial net debt of £435 million which is down 1/3 year-over-year. Now turning to our financial guidance for 2021. Assuming the group's acquisition of SAI Global Assurance closes on the 1st of September 2021 we expect net finance costs for the full year to be in the range of £29 million to £33 million. We continue to expect our full year effective tax rate to be between 26.5% and 27% our minority interest to be between £17 million and £19 million and CapEx investment to be in the range of £110 million to £120 million. Our financial net debt guidance before any material change in FX rates or M&A remains £350 million to £400 million. Including the impact of the SAI Global Assurance acquisition, we expect net debt at the year-end to be between £835 million and £885 million. I'll now hand back to Andre.

Andre Lacroix: Thank you, Jonathan. And let's now discuss our divisional performance. As always and unless stated otherwise all my comments will be at constant currency. Our Products division delivered a strong performance as I said earlier with revenue of £820 million and the like-for-like performance of 9.7%. We delivered an adjusted operating profit of £171 million up year-on-year by 32.5%. Our margin was 20.9% up 390 basis point. If you look at all the individual businesses, we delivered double-digit like-for-like revenue growth in six of our eight businesses. Our Softlines and Hardlines business benefited from the improved trading conditions for retailers in North America and Europe as well as from the continued growth in e-commerce and higher demand for sustainable product. Electrical & Connected World saw increased demand for higher regulatory standard in energy efficiency, strong growth in testing and certification of medical devices, with increased testing requirements for 5G, greater corporate focus on cybersecurity and tremendous growth with protect-related medical device. In Business Assurance, we benefited from a catch-up of our cloud in ISO audit and increase in investment in supply chain resilience. Also we see continued strong demand in our operations for all of our sustainability solutions, ESG audit operational sustainable solutions and of course corporate certification. Growth in our Food business reflected the high level of food safety testing and a stronger demand for hygiene and safety audits in factories hospitals and retail locations. Our Chemical and Pharma business benefited from greater focus on regulatory assurance and clinical testing, as well as from higher R&D investments by the pharma industry. Two of our businesses Building & Construction and Transportation Technology reported revenue decline reflecting the negative impact of the weather event in Texas earlier this year and a low level of testing activities from OEMs in the automotive industry. Looking ahead for 2021, we expect our Products division to deliver robust like-for-like revenue growth. Turning now to Trade which delivered solid performance in H1. Revenue was £278 million up 1.1%. Adjusted operating profit increased by 8.6%. And operating margin was 10.2% up 50 basis points year-on-year. Caleb Brett as expected was down low single digit. We are seeing a gradual recovery of global mobility although we are still below the pre-COVID-19 level. Well of course, our North American business was affected by the weather event in Texas. Our GTS and AgriWorld businesses delivered a robust like-for-like performance. GTS benefits from the growth in trade flow in both Africa and the Middle East. And AgriWorld continued to see increased demand for inspection activity. We are upgrading our expectations for our Trade divisions which represents circa 10% of our earning and we expect to deliver good like-for-like revenue in 2021. Our Resources division benefited from the strength of our business model and helping us to deliver a resilient performance. Our reported revenue was £220 million slightly down year-on-year by 1.6%. Adjusted operating profit was £11 million down 13%. And our margin at 4.9% was down 60 basis point. CapEx Inspection revenue declined low single digit, although we saw an improvement in momentum in the first half compared to the second half of 2020. OpEx Inspection revenues were stable. The impact of lockdown restriction in the first four months of the year, as well as the savings of our clients were offset by a strong catch-up in inspections in the May and June period. We delivered a good revenue performance in our Minerals business reflecting the increased demand for testing and inspection services in all of our Minerals operations. We are upgrading our expectations for our Resource division which represents 5% of our earning and we expect to deliver good like-for-like revenue growth in 2021. I'd like to now move forward and talk about the industry and how we see the exciting growth opportunities, moving forward for all of us. As you know the total value of the global product assurance market is $250 billion. Only $50 billion of this is outsourced. Given the increased complexity in global corporations we expect companies to continue to invest in new quality assurance areas to mitigate emerging risk in the supply chain. These are what we call untapped quality assurance opportunities. And indeed COVID-19 has demonstrated there were major risks in the operations of our clients which were not properly mitigated. And we expect the increased focus on quality assurance essentially in three areas moving forward

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