Earnings Transcript for IKTSY - Q3 Fiscal Year 2024

Operator: Good day, ladies and gentlemen, and welcome to Intertek November 2024 Trading Update. [Operator Instructions]. We would like to remind all participants that this call is being recorded. Questions will follow after the presentation. I will now hand over to Andre Lacroix, Chief Executive Officer, to start the presentation.

Andre Lacroix: Good morning to you all, and thanks for joining us on our call. I'm with Colm Deasy, our CFO; and Denis Moreau, our VP of Investor Relations. There are five key takeaways in our call today. In the July to October period, we have benefited from a strong demand in consumer products, corporate assurance and health and safety, where we delivered 9.5% like-for-like revenue growth on a combined basis. Trading was in line with our guidance and industry infrastructure as well as [indiscernible]. At the end of October, we have delivered a strong margin progression and an excellent free cash flow performance. We are on track to deliver strong performance in 2024, and we are well-positioned to deliver another strong performance in 2025. I want to start our call today by answering the most frequently asked questions in our investor meetings. And the first question we get is how strong was the demand for your ATIC solution within consumer product in H2? We've seen indeed a sequential demand acceleration with like-for-like revenue growth of 9.4% in the last 4 months compared to 6% in H1. This acceleration was driven by a strong double-digit like-for-like performance in soft lines benefiting from our clients investing in new product development and the sustainability solutions. Momentum in our Electrical business remained robust with high single-digit like-for-like revenue growth while Hardline business grew at mid-single digit. GTS has benefited from improved momentum, reporting mid-single-digit like-for-like revenue growth. As a result, we are upgrading the full year outlook in consumer products to high single-digit like-for-like revenue growth. The other question we get very often is how is your China business performing in H2? And how confident are you about the growth opportunities in China moving forward? Following a 5.6% like-for-like revenue growth in H1, we saw an acceleration of our momentum in China, which delivered a like-for-like revenue growth of 7.4% in the last 4 months. That acceleration was driven by higher demand for Softline, Electrical, Hardline and Assurance businesses as our account increase their investments in new product and in sustainability solutions. The Chinese export economy is very strong, up 5.2% on a year-to-date basis and up 43.5% compared to where it was in 2019. China has a track record of manufacturing excellence and strong customer service with just 1 time and highly efficient [indiscernible]. That's why China's share of the global export economy has increased consistently in the last 20 years with 18% global share today compared to 7% in 2000. Importantly, China consistent investments in new end markets as a result of strong diversification of export revenue streams with APAC being the largest export partner, growing at a double-digit rate and now 2 times bigger than the U.S., which is only 15% of the total Chinese export. That strong global export performance from China over the years has continued recently. And since 2017, Chinese exports have increased at a CAGR of 8.4% per annum overall, 6% for North America, 9% for Europe, 11% for the APAC region and 11% for the rest of the world. We are confident about the short-, medium- and long-term growth opportunities in China given the manufacturing excellence that China offers to Western brands and of course, the untapped opportunity in the domestic market. The question we also get [indiscernible] is should we be concerned about potential tariff increase after the election of Donald Trump in the U.S.? And why it happened last time. Let's take a step back. The tariff imposed in 2018 didn't have any impact on Intertek. Our China revenue has grown at mid-single digit between 2015 and 2023. We did have a mid-single-digit like-for-like revenue growth in the '17, '19 period and in a '19, '23 period. What matters to our consumer product business is the number of SKUs and not the quantities of goods are produced and exported. As we talked about several times in the past, changing production location is a high-risk decision for any business, and we've seen only a handful of companies living in China. What we have seen, however, is more and more companies pursuing a China Plus One strategy, which consists in building the supply chain for new businesses in a new country to operate a more diversified footprint. The China Plus One strategy of our clients is an exciting growth opportunity for Intertek because we simply make our ATIC market bigger. When a client expands its footprint in new countries, it increased the number of SKUs that we have to test and certify as well as a number of factories in Tier 1, Tier 2, Tier 3 suppliers that we have to audit and inspect. We talked about that during our H1 presentation, we've made significant investments in our network to support the China Plus One strategy of our clients, including near-shoring and on-shoring, and we are continuing to expand opportunities globally for our clients, anticipating their needs and leveraging our capital-light business model. It's very easy for us to open new labs around the world. Importantly, our geographical diversification is strong with 35% of our revenues in APAC, of which 50% is outside of China. The U.S. is a strong market for Intertek, accounting for 31% of our group revenues, and we are well positioned to benefit from any ensuring thanks to our presence across all business lines, building construction, electrical, connected world, hardlines, softlines, business assurance, sustainability, Caleb Brett, transportation technology and Moody. Net-net, we are not concerned about increased protectionism. China Plus One will make the ATIC market bigger for Intertek. China will not run out of growth at acceleration in a diversification of the supply chain of our clients is a growth opportunity for our ATIC solutions. What really matters for us is the number of SKUs in the global market that need to be tested and certified. And second, the number of factories and Tier 1, Tier 2 and Tier 3 suppliers that we need to audit and inspect. The other question we get is how sustainable is the like-for-like growth acceleration that you've delivered since 2022? And are you confident to deliver mid-single-digit like-for-like revenue growth in 2025. We are very excited about the organic growth prospects for the group. Companies have increased their investments over the years in risk-based quality assurance, given the growing challenge they face in the supply chain, but also given the higher consumer expectation in quality, safety and sustainability. Our customer research shows that these well-known structural at growth drivers are being augmented by the need for companies to operate with safer and more resilient supply chain, continued investment by corporations in new products and services, a step change in how companies manage sustainability, increase investments in traditional oil and gas and renewables and of course, an increased number in terms of new clients. Our clients will divest more on risk-based quality assurance moving forward, and we are well positioned to deliver faster growth utilizing on our strong market position. We have seen a sustaining digit like-for-like revenue growth over the years, 4.19% in '22, 6.2% in '23 and 6.3% year-to-date in '24. We expect to deliver mid-single-digit like-for-like revenue growth in '25. The other question we get is regarding pricing. How will our pricing policy evolve few years given a lower inflationary environment? In the last three years, higher than usual inflation, around one third of like-for-like revenue growth was driven by pricing. As discussed, in 2022 and 2023, the increase in our prices have lagged a bit the rise in wage impacting our margin performance. We plan, therefore, to continue to take price increase to close next few years. We are focused on delivering a superior customer service, and we'll continue to strengthen our pricing position through ATIC price increases, increase in the average number of tests per report through upselling and of course, scaling up our margin-accretive innovations. Let's now talk about the trading performance in the period by business line. In the last four months, the group has delivered a 6.6% like-for-like revenue growth at constant currency in line with our expectations and a 50% higher than H1. We've seen a sequential like-for-like revenue growth acceleration in Consumer Products and Corporate Assurance and safety revenue growth was in line with H1. Our like-for-like revenue performance was in line with guidance in Industry & Infrastructure and World of Energy despite severe weather conditions in the U.S. that impacts of building construction, calibrate and industry services. Our Consumer Products division delivered a like-for-like revenue growth of 9.4%, which was an acceleration of 340 bps compared to H1, driven by a strong acceleration in Softline and GTS while both Electrical and Hardlines delivered the like-for-like of view performance in line with H1. Our Corporate Assurance edition delivered a like-for-like revenue growth of 9.9%, an acceleration of 160 bps compared to H1 driven by increase for sustainability Business Assurance and Assurance. Our Health and Safety division delivered a like-for-like revenue growth of 9.1% in constant currency in line with H1 with double-digit like-for-like revenue growth in Food and Energy World and mid-single-digit growth in chemical and pharma. Industry & Infrastructure reported a 1.1% like-for-like revenue growth in line with our guidance, slightly lower than H1 due to a baseline effect in Industry Services & Minerals continuing brand-building construction in the U.S. and the impact of several weather events in the U.S. and big in construction and industry services. The World of Energy delivered a 6.3% like-for-like revenue growth in line with expectations and slightly lower than H1. Transport Technology accelerated significantly to double-digit like-for-like revenue growth, Caleb Brett reported mid-single-digit revenue growth despite baseline effect and severe weather events in the U.S. and CEA like-for-like cement growth was negative due to a baseline effect. Turning now to the performance at the group level on a year-to-date basis. Revenue for the 10 months to the end of October was GBP2.8 billion, a growth of 6.6% at constant currency and 1.8% at actual rate. Like-for-like revenue growth was broad-based at 6.3% at constant currency, benefiting from both volume and pricing. Acquisitions contributed GBP13.4 million revenue on a year-to-date basis and the recent acquisitions of complementary to our ATIC trailing and base met labs to scale up our portfolio in attractive growth and margin sectors are performing very well. Margin progression was strong as we benefited from our divisional mix, pricing initiatives good operating leverage, disciplined cost controls and productivity improvement. We delivered an excellent free cash flow performance, enabling us to operate with a strong balance sheet. We continue to invest in organic and inorganic growth opportunities in our ROIC performance was excellent. Let's now discuss our financial guidance for the full year 2024. Continue to expect the group will deliver mid-single-digit like-for-like revenue growth at constant currency in terms of businesses. We are raising our full year guidance for consumer products to high single digit. We are keeping our full-year guidance unchanged at high single digits for corporate assurance, health and safety and the world of energy and a low single-digit for industry and infrastructure. Given a strong H1 and an excellent quality of earnings in July, October period, we are targeting a strong margin progression. Our cash discipline will remain in place to deliver an excellent free cash flow will invest in growth this year of circa GBP125 million to GBP135 million in CapEx. And we expect our financial net debt to be in the range of GBP500 million to GBP550 million before any M&A of Forex movement. A quick update on currency for your model, currencies have remained volatile as we know, and we are updating our full FX guidance. The average selling rate since the beginning of the year, applied to full-year '23 results would reduce our full-year revenue by 450 bps and full-year earnings by 600 bps. Net-net, we expect to see a strong performance in '24 with mid-single-digit revenue growth at constant currency and a strong performance in margin, EPS, free cash flow and ROIC. A few words on strategy. All of us at Intertek, super energized about the exciting growth opportunities ahead, and I'm pleased to report that the execution of AAA strategy that we presented last year is on track. Our can't understand the mission core nature of risk-based quality assurance to operate with high quality, safety and sustainability stands and make their businesses stronger. We are indeed experiencing a faster growth for ATIC solution margin-accretive revenue growth is central to the way we deliver value, and we are confident that we'll return to a 17.5% peak margin performance and go beyond. To deliver sustainable growth and value for our shareholders, we will stay very focused on our virtuous economics based on the compounding effect year-after-year of mid-single-digit like-for-like revenue growth, margin accretion and strong free cash flow and disciplined investments in high-growth and high-margin sectors. We truly believe in the value of accretive disciplined capital allocation, which combined with consistent margin equity revenue growth and strong cash generation is the only way to deliver superior ROIC on a consistent basis. To do so, we pursue the following priorities in terms of capital allocation. Our first priority is to support organic growth, strengthening capital expenditures and investment in working capital. Our second priority is to deliver sustainable returns for our shareholders through the payment of progressive dividends. We target a payout ratio of 65%. Our third priority is to pursue M&A activities that strengthen our portfolio in attractive growth and margin areas provided we can deliver good returns. Our fourth priority is to maintain an efficient balance sheet with the flexibility to invest in growth. Our large target is 1.3 to 1.8 net debt-to-EBITDA with, of course, the potential to return excess capital to shareholders subject to our future requirements and reverting macro. Our good to great at Intertek continues to unlock the significant value growth opportunity ahead. So, let me summarize the highlights of our statement today before taking your questions. The demand for ATIC solutions in the last 4 months were strong with 9.5% like-for-like revenue growth in the three divisions combined that represent 74% of our earnings, Consumer Products, Corporate Assurance and health and safety. The performance of our two other divisions, Industry & Infrastructure and awarded Energy was in line with our guidance. We are converting our 6.6% revenue growth at constant currency on year-to-date basis into strong margin progression and excellent free cash flow. In '24, we'll deliver strong performance in line with our targets and we are well-positioned to deliver another strong performance in 2025. Thank you for joining our call today, and we'll now answer your questions.

Operator: [Operator Instructions]. We'll take our first question from Rory McKenzie of UBS. Please go ahead.

Rory McKenzie: It's Rory here from UBS. Two questions, please, about consumer products. Firstly, on the acceleration to double-digit growth in Softlines, just wondering what the sustainability of those growth rates, it's good to see client activities picking up strongly this year after a weaker period. But can you comment on where volumes are now within those labs and how much further do you think they can recover? And perhaps comment on the spread of clients and whether there are some that are still at relatively low levels? And then secondly, I wanted to ask about Consumer Products in North America. Am I right that it's about 1/4 of the division? And can you comment on the growth rates that you're seeing there? Just given history of ETL that you talked about back at your Capital Markets Day, I guess that's all quite weighted to electrical which, of course, is a focused growth area for the economy? And can you talk about your expansion plans within North America? Thank you.

Andre Lacroix: Thanks, Rory. We are pleased with the strong double-digit performance of soft lines. Of course, let's not forget we have also a favorable baseline effect. Last year, we know that retailers were just not investing as much in new products as they have done. So essentially, the acceleration we are seeing is, of course, more SKUs, more testing more number of test certificate. And this is really good news for us. There is confidence in the global economy, both in the U.S. and here in U.K., Europe and retailers, investing in new products to improve their performance. And you're right to say that this performance among retailers is not consistent. There are still some brands lagging their competitors. But one thing we know is that innovation is super important. And if a brand doesn't innovate, they're not going to be able to gain market share. So, I can tell you that in the discussions we have with our class, they're all focusing on what they can do to basically gain market share through better offering, which is innovation and of course, value. So, while the double-digit revenue growth is not consistent with every single client, I can tell you that our clients are working on innovations and new product development. The other thing that is very, very important is that our clients are investing in operational sustainably solutions. We've talked about sustainability this call very, very often. We have two types of solutions, the corporate sustainability solutions, essentially doing an audit of the nonfinancial metrics and, of course, helping our clients with their CO2 plans and validation and audit. But the core of our sustainability solutions has always been in the operation’s sustainable solutions, what we do for our clients to improve there, obviously, waste performance are reducing waste. Why do we do with our clients in terms of chemical management, I've talked about seen several times, what do we do with our clients in terms of helping them verify the content of recycled fiber or eventually green cotton. And of course, moving forward, the clients are starting to invest in what we call digital passport where they want to be able to tell their consumers that this is where their products are coming from hence, traceability, right? So, this is driving the growth in soft lines, increasing new products and increased investments in sustainability. The other thing what I would say it's broad-based. As you know, we are very strong in Softlines globally. But we are seeing strong growth everywhere. And it shows that the industry is in a good shape from our perspective, and we don't see any reason to believe that the industry is not going to have a good year next year. As far as consumer products in North America, essentially, we have an industry-agnostic business called business assurance and is in terms of assurance, which targets all type of corporations, including consumer product company. They want to work on their CSR performance but also the sustain performance. But as far as testing and certifications, you're right to say that our largest business is Electrical, which is a fantastic business and doing extremely well. Our growth in electrical in North America is double-digit. So, we are really doing extremely well there. And this is all driven by the electrification of society, which means there is more demand for efficient electrical appliances. There is a lot of investment in HVAC, which is about air quality and air conditioning. You know what's happening with the Inflation Reduction Act in the U.S. and the investment that we are seeing in semiconductor plants, but also in battery and energy storage. This is a business that is also thriving in a space called medical devices where we are very, very strong. And as you know, this is a fabulous growth market. In addition to electrical, we do have a hardline and Softline business, which essentially focuses on the R&D needs of our clients locally. And this is a good business because you are at the source of product developments. And in terms of partnership, it means you've got to trust with your clients. So, it's a good business that we have.

Operator: We'll take our next question from Annelies Vermeulen of Morgan Stanley. Please go ahead.

Annelies Vermeulen: Hello. Can you hear me?

Andre Lacroix: Yes.

Annelies Vermeulen: Good morning. I have two questions, please. So firstly, just on the margins, it sounds like you're relatively constructive on more growth outlook for next year and also in the near term on consumer. So, with regards to your margin expectations for next year, particularly with regards to progressing towards your 17.5% target. Do you think that this could be reached in 2025, assuming no significant growth from FX? And then secondly, I just wanted to ask about China. Thank you for the detail on export and share and so on. In your business, specifically in China for memory, around 75% export and 25% domestic. Of that 75% export, could you tell me what percentage is exports to the U.S. versus Europe or to other Asian countries? Thank you.

Andre Lacroix: Thanks, Annelies. Look, we are tremendously pleased with the progress we're making on margins as you know, margin equity revenue growth with strong cash as investments is how we deliver value at tech. We, of course, tell you in March how we finished the year. And after that, we'll talk about guidance for next year. But you're spot on, we are very close to our big margin. As far as China is concerned, look, with all due respect, I think the question you're asking, if I may, is not the right question. And I want to explain why, right? Of testing and certification that we do in China and consumer product has got nothing to do with the amount of products being produced and export. It's all based on the number of SKUs that we test, that's really what matters. And that's why despite the 20% tariff increase that the Trim administration put in place in is cycle, we had no impact on our Chinese business because we've continued to test more SKUs and increase the number of tests per SKUs, which has been basically driving the mid-single-digit like-for-like revenue growth. But to be more specific, to put a number on the percentage of testing linked to the U.S. is not the right question because when we test the product, it doesn't matter if it's softlines and hardlines or electrical, we test products that are basically produced in China and exported around the world as some of these products will be tested, of course, for the U.S. but the same product will be tested at the same time, LatAm for Canada for Europe. And when we do a test or certificate, we do that for all these destinations, that's what we call the beauty of our global market access. So even if doesn't get exported to the U.S. We still test this SKU. That's why putting a number is the wrong way to think about it. What you really need to really understand is that number of SKUs, number of tests we do is really where our volume is coming from. And when we do test or certify that SKU, is just not for one destination. It's for multiple destinations. And if the retailer decided not to produce that SKU in China, and I said several times and I said again today, the very few brands are doing so in terms of remaining the production away from China because this high-quality destination in terms of production. We'll still do the SKU testing and certification.

Annelies Vermeulen: Okay. Understood. Thank you.

Operator: We will take our next question from Suhasini Varanasi of Goldman Sachs. Please go ahead.

Suhasini Varanasi: Hi, good morning. Thanks for taking my questions.

Andre Lacroix: Good morning.

Suhasini Varanasi: Good morning. Just a couple from me, please. The acceleration that you saw in Consumer Products, did you get a sense from your customers about any pull forward of demand ahead of the Republicans taking office next year? And second one on the margin guidance. If you're talking about on margin expansion, you delivered in the first half, 90 basis points of expansion on a reported basis. And given the acceleration that we saw in consumer and the margins in that division, do you think that you can deliver a similar margin expansion in the second half of this year as well? Thank you.

Andre Lacroix: Thanks. Look, on the consumer product, there is no pool of demand because of the outcome of elections. This is not the way the industry works when we test and certify SKU for softlines or hardlines or electrical. These are essentially decisions that were made a year or 1.5 years ago, by the brands because it takes time to get the supply chain ready for new SKUs. So even if they wanted to do so, they wouldn't basically launch additional new products because there is a change in the White House and tariff might increase. That's absolutely not happening at all. As far as the margin performance is concerned, you're right. I talked about the strong margin performance in H1. And of course, we expect a strong margin performance given the favorable quality of earnings that I just talked about with the acceleration in our three highest margin divisions at represents 74% of our earnings. So yes, you should expect strong margin in H2.

Suhasini Varanasi: Thank you, very much.

Operator: We'll take our next question from Carl Raynsford of Berenberg. Please go ahead.

Carl Raynsford: Can you hear me?

Andre Lacroix: Of course, yes. Good morning.

Carl Raynsford: Just -- I've just got one left, Andre. Just on the oil and gas OpEx and CapEx services. Would you be able to call out any particular regions which are perhaps anomalies performing particularly well or maybe slowing down a bit, it would be very useful? Thank you.

Andre Lacroix: Thanks. Look, as you know, we are largely involved in the CapEx side of the world of energy with our Moody division. We are growing at double digit. And I have to say that if you look at the quality of the earnings of our clients, the energy companies, they have had some very, very strong years, given the sustained high price of oil. And they know that they need to invest in greener energy, either greater fuels, but also in renewables. And you see the level of CapEx investment is also double digit. And our double-digit Moody performance is really broad-based. We are seeing very strong investments in U.K. and Europe. Of course, Middle East is investing in new type of energy. We know that very well. Asia, given growth there is doing very well. LatAm is in good place. And in North America, we are starting to see, of course, the benefit from the Inflation Reduction Act, where significant amount of investments have been put towards a greener U.S. So, it's really broad-based. I wouldn't want to single out any region because all of my colleagues around the world are doing a good job. And the good news, it's sustainable because we know, I mean, that much more needs to be done in terms of investments in both traditional oil and gas to increase supply and energy security and renewables. So, we are in a good place there.

Carl Raynsford: Okay. Thank you.

Operator: We will take our next question from Allen Wells of Jefferies.

Allen Wells: Andre, a couple of questions from me, please. Firstly, just on the language around margins for the full year, that increased to strong improvement. Could you maybe just talk a little bit about the building blocks behind that? And specifically, just how much of this is supported by the mix improvement with the consumer stronger versus other areas? And then second question, just -- I noticed that the CapEx guidance has been trimmed slightly GBP10 million or so. I guess, given the stronger or strong growth outlook that we've got here, what's the rationale for some slightly reduced investment this year. Is that phasing? Or is there a specific project or an idea behind that? Thank you.

Andre Lacroix: Yes. Thank you. Of course, on question number two, it's purely phasing. I mean some of these CapEx projects take time and there is a bit of delays here and there. On the margin, look, we had a very strong performance in H1. And you remember what I talked about pricing, operating leverage, cost control and productivity improvement. The better news in H2 compared to what I said in H1 is, of course, the divisional mix oil to earnings, which frankly speaking is needed because we had a very, very strong margin performance in H2. And as you know, Forex has got a bit adverse to us. So, we need a strong margin in H2 to deliver our full-year goals, and that's what's happening. So, it's more of the same on all the other levers. And you will remember that at the full year presentation, I gave some business case on how we're looking at margin improvement side by side. The obviously, acceleration is the divisional mix, of course.

Allen Wells: And then maybe one quick follow-up. Just we've heard from one of your competitors recently. And actually, if you go back to the Capital Markets Day of any of your peers earlier in the year as well around, I guess, increased focus on North America. Wonder if you could just talk about how you see the competitive landscape in your key markets in North America and how well you see Intertek is positioned? And to what extent you can protect your position and/or expand any leadership there? Thank you.

Andre Lacroix: Yes, that's a fair question. So, I think we will take this question business line by business line, right? As I said, in the opening remarks, U.S. is one of our strongholds, right? We've always been basically strong there. It's about one third of our revenue. It's really well diversified. We are in a world of energy and in consumer product and industry agnostic space like assurance and business assurance. We are very strong in each of our markets, and we are either number 1 or number 2, right? So, if we were to say -- to take a few examples, for instance, electrical, we have obviously a competitor called UL, but we are a very, very strong number 2 there. And that's been a stronghold of Intertek, and it's doing extremely well. If you look at Caleb Brett, we are the second player in the market, the first player is another company which is not listed that you might have heard of call, Aspec, but we are really, really strong there. Moody, which is in the CapEx inspection business for the world of energy is a clear leader in North America, we've been established for so many years in that market. It's the [indiscernible] system. So, we have scale. We've got tremendous teams. We've got, obviously, the depth and breadth of solution. And clearly, any investments in North America from our clients, we are ready. And let's not forget, B&C where we are one of the top three operator in the country. So, we do have scale quality portfolio and tremendous teams to take the business forward. And of course, we welcome any onshoring opportunities there because we can scale up, right? So, we are very strong.

Allen Wells: Thank you.

Operator: We will take our next question from Arthur Truslove of Citi. Please go ahead.

Arthur Truslove: Could you hear me okay?

Andre Lacroix: Of course. Hi, good morning, Arthur.

Arthur Truslove: Good morning. Thank you for taking my question. So, two for me, if I may. So, the first one was industry and infrastructure. So clearly, you've been doing a bit of contract pruning within the OpEx element there. Could you just give us an idea of what the organic growth in that division would have been in the four months had you not pruned those contacts. And at the same time, could you just sort of say were those contracts actually loss-making? Or are they just not as profitable as you would have liked them to be? Second question, is on working days. So, my understanding is there are two additional working days in the four months, which I guess you could argue is a couple of percent on the number of working days. if you sort of do the math, that would suggest that organic growth on underlying basis was obviously nearer sort of 5%. But I suspect I must have missed something there because, clearly, you don't seem to be guiding to a deceleration in November and December in any meaningful way. I just wondered if you could comment on how you see the underlying trend and the working days within that? Thank you.

Andre Lacroix: Yes. Look, when you have a four-month period or six months period, we don't look at working days because the workload of our clients get basically plan accordingly. It's become an issue when you have a shorter period like we may in June. So, I wouldn't worry too much about that. The performance we delivered in July or October is a performance that we believe is sustainable for the rest of the year. So, we are in a good position from our perspective. As far as the OpEx question. Look, as you know, we are not strategically focused on OpEx. We focus on CapEx, which is a higher added value business with better margins OpEx for us has been adjacency to help our clients if they ask us because we want to provide a superior customer service. And we decided to basically disengage from certain contracts that were going to be even less attractive in terms of financial terms, they were not going to be profitable moving forward. And that's why we exited these. And if you take this out, we would have had potentially mid-single digit in our OpEx business. But OpEx for us is not really core. It's adjacency that we have just to help our clients if they need to, but we're not strategically focused on that. We believe it's low tech, it's low margin, and it's not something that we believe is worth investing our science-based expertise.

Arthur Truslove: So just to understand, it sounds like if you had not got rid of those contracts, you might have been talking mid-single-digit organic growth for the division as a whole. Is that about, right?

Andre Lacroix: I mean the Moody is the largest part of the division, right? It's double digits. So, it will have been much more than that because the mix effect is fair with Moody, right.

Operator: We'll take our next question from Tom Belton of BNP Paribas. Please go ahead.

Tom Burlton: Thanks. Good morning, everyone. I just wanted to ask a question if I can on the capital allocation policy, please. The statement references obviously the guidance or the sort of longer-term target of leverage of 1.3 times to 1.8 times. Based on the net debt guidance you've issued today and if I look at kind of where EBITDA is likely to shake out for the year, it looks like you're going to be well below that sort of near 1 time or even below. So, leaving you with 0.5 turn or more of headroom. Can you just give us an update on how you're thinking about that kind of flexibility? I mean particularly with where the shares are trading now, Intertek's have the biggest history of share buybacks, but there is the comment about potential to return excess capital to shareholders. I know you're not going to commit to anything today, but just give us a framework for how you're thinking about that, please?

Andre Lacroix: Yes. Thanks, and of course, that point has not escaped us or you or anybody else in the financial markets. Look, we are very strong in terms of free cash flow generation. And when you got strong revenue and operating profit growth, it does compound your strength. So that is, of course, a fact. I've explained in my opening remarks how we think about accretive capital allocation. Our priority is always to invest in organic and finding the right M&A opportunities. But we want to be selected because we want to bring acquisitions that are truly augmenting the value of what we offer to our clients, i.e., is a new type of in an exciting growth market provided we can deliver good margin, good returns, and we can execute. And of course, we have increased our payout ratio in terms of 65%. Having said that, I take the point that our balance sheet will be very strong at the end of 2024. We never had as Intertek to make the decision to return cash to our shareholders. But as I said, consistently several times on this call again this morning, we're not opposed to it. And this is something that the Board has to decide. And I would suggest that we'll let these discussions to the Board.

Operator: [Operator Instructions]. We will take our next question from James Rose of Barclays.

James Rosenthal: Can you hear me okay?

Andre Lacroix: Of course, yes. Good morning.

James Rosenthal: Good morning. Thanks. I've got two questions on insurance, please, if I may. The first is on your training business there, Alchemy and recently purchased Playerlink. How are training services doing within the mix of assurance? And then secondly, on cybersecurity, your peers have recently brought sort of this business more into focus, I'd say, I'd been talking it up. Could you give us some details on your business here, perhaps your particular strengths positioning and the relative importance of that business within insurance growth for you in the medium term?

Andre Lacroix: Yes, of course. I think on Alchemy and Playerlink, it's about people assurance. It is essentially doing an audit of the gap between expected skills and behaviors and delivered skills and behaviors in manufacturing environment, but also in multisite environment. And once you've done this, you basically do some training to close the gap and improve, of course, the executional excellence or operational excellence in these businesses. Look, this is a great business. It's SaaS space, high margin, and it's doing extremely well because companies know that one of the key issues in terms of consistency of performance is the lack of operational consistency. And lastly, it's not driven because they don't have the process or equipment, it's because people are just not basically operating with the right skills. So, it's a good business, growing very well for us. As far as cyber is concerned, we are essentially operating a business-connected world that we have built over the years. It's a good business. Essentially, we do two types of activities in terms of cybersecurity. We do an audit of the enterprise securities of our clients, and we have a company called NTA that is based here, but also EWA in Canada that does that. And the other thing, too, is we will do, of course, some testing in terms of cybersecurity, defense in the networks of our clients and also look at how well the devices are protected. So, this is a business that we've built over the years largely focused in North America and here in Europe. But we're expanding and we've seen increased demand in Asia Pacific and because we have the IP. So, it's very easy to expand within our electrical division. And indeed, the growth is positive there.

James Rosenthal: Thank you, very much.

Operator: We will take our next question from Sylvia Barker of JPMorgan. Please go ahead.

Sylvia Barker: Hi, good morning, everyone.

Andre Lacroix: Good morning.

Sylvia Barker: Three for me, please. First, on consumer again. Could you maybe just remind us where we are on the relative profitability of softlines, hardlines, and, I guess, electricals more broadly. Second one, on Transportation Technologies, very strong growth in this period. Could you maybe just comment where are your clients based? Are these specific projects, other European companies or maybe some of the growth is coming from Asia? And then finally, just a boring one on pricing. But where is pricing running today, where you do have, I guess, a price negotiation, could you comment around the run rate of pricing when you're sitting down with customers at the moment? Thank you.

Andre Lacroix: Sure. I mean, on consumer, of course, softlines and hardlines remain within consumer, the two highest-margin divisions. And are doing very well, as we just talked about. Electrical is an amazing business for us. And I think we talked about in the past, right? Electrical didn't have any revenue decline in 2020. So, I'm not saying that electrical is getting close, but electrical is making some really good progress in terms of margin. It's a very, very significant contributor to the group. As far as IT is concerned, I mean growth is essentially coming from two type of R&D activities that our clients are pursuing. One is they have to make the fuel greener and operate, obviously, greener lubricants and there are some new standards in terms of greener fuels I could say it is. This is the existing, if you want, powertrains, but the other important development is what our clients are doing in hybrid and electrical, and we know that the automotive industry has had a few good years recently, and they've got more financial capacity to invest in greener fuels and hybrid electrical powertrains. That's essentially what we're seeing and we are seeing it in the U.K. business here and in North America and also in Asia. As far as pricing is concerned, the way we look at pricing is number one, we are very focused on customer service. And as you know, I've shared it at the capital market event last year, Intertek is positioned as the quality leader in terms of customer service. And that means that we have a very strong price position in the market. And we are very disciplined on price because we believe that when you are the quality leaders, you've got to be disciplined on price to keep obviously driving margin equity revenue growth. How we basically increase prices is there are some contracts indeed, they've got inflection is close to increase price on a regular basis, but we'll review our products to our clients on a regular basis for the other contracts. But this is not the only way to take pricing, right, increasing the number of test base SKUs, where I mentioned in the opening remarks in terms of upselling adds, obviously, to your price point? And lastly, when you innovate trying to innovate in segments that are growth accretive, but margin accretive is also helping because you target a higher price point. So that's basically how we manage price. And as I said on the call, we will continue to pursue our price strategy, as I just described.

Sylvia Barker: But could I just ask also about the -- just simply the split of pricing and volume this period?

Andre Lacroix: Sure. Yes. Sorry, I didn't realize actually. Yes. It was in line with the past, about one third, two third.

Operator: There are no further questions on the webinar. I will now hand over to management for closing remarks.

Andre Lacroix: Well, thank you very much for being on the call today. We appreciate your time and your interest in need to take and Denis of course available if you have any follow-up questions. Thank you very much.

Operator: Thank you for joining today's call. We are no longer live. Have a nice day.