Earnings Transcript for IKTSY - Q4 Fiscal Year 2021

Andre Lacroix: Good morning to you all and thanks for joining us on our call following the release of our 2021 results. I have with me Jonathan Timmis, our CFO; and Denis Moreau, our VP of Investor Relations. I'd like to start our call today recognizing all of my colleagues around the world at Intertek for having delivered a superb performance in 2021. Indeed, 2021 marked the seventh consecutive year of group earnings being in line or above expectations. And our consistent performance delivery demonstrates the strength of our differentiated ATIC value proposition, the science-based customer excellence of our organization, our unique performance management approach and, of course, the quality of our earnings model, they bring sustainable growth in value for all stakeholders. In our call today, there are essentially three takeaways. First, we've made strong progress in the second half, delivering broad-based like-for-like revenue growth with profitability ahead of 2019. Second, we expect the industry to grow faster post COVID-19 and we are very well-positioned to benefit from our current increased investments in risk-based quality assurance. Thirdly, we enter 2022 with confidence targeting robust like-for-like revenue growth at constant rates, with margin progression and strong cash generation. So let's start with our performance highlights. In 2021, we've delivered a strong performance at constant rates in revenue, earnings and ROIC. Group revenue was GBP2,786.3 million -- sorry, up 6.5% year-on-year. Like-for-like revenue was up 5.6%. Operating profit was GBP473.9 million, up 15.4%. Operating margin was 17%, up 130 basis points year-on-year. ROIC was strong at 18.2% and our organic ROIC was excellent at 24.4%, up 350 basis points year-on-year. We've announced a full year dividend of 105.8p in line with our dividend in 2019 and 2020. As I said earlier, in H2, we benefited from a strong momentum and delivered a broad-based like-for-like revenue growth within each of our three divisions, delivering mid-single-digit like-for-like revenue growth at constant rates. Let's now look at our performance compared to 2019. Our strong performance in H2 enabled us to deliver a full year margin of 17%, only 50 basis points below our industry-leading operating margin of 17.5% delivered in 2019. In the second half, our group like-for-like revenue was in line with 2019, while our profit and margin were above 2019. In our Products division, we delivered a like-for-like revenue operating profit and margin ahead of 2019 for the full year of 2021. We've continued to make great progress on cash management. We've reduced our negative working capital further with a cash conversion of 132%. Cash generated from operation was GBP696 million and adjusted free cash flow was strong at GBP402 million. We've closed the year with a robust balance sheet. Our net debt to adjusted EBITDA ratio was 1.1x higher than last year as we continue to invest in growth through the acquisitions of SAI and GLA. Let me take a few minutes to reflect on these two strategic acquisitions. SAI Global Assurance is a very exciting move for Intertek. We are scaling up our leading assurance business at a time where the ATIC industry is expected to grow faster post-COVID-19. As you all know, assurance is a capital-light, high-growth and high-margin service which is mission critical to addressing the increased corporate focus on risk. The strategic fit of the SAI Global Assurance portfolio with Intertek is excellent, both from an excellent geographic complementary standpoint and service standpoint. Geographically, it strengthened our scale position in Australia, the U.S., Canada, U.K. and China. And in terms of service, it expands our audit offering in the high-growth sectors of food, agriculture, quick service restaurants, sustainability and global market access. The integration of SAI is progressing well and we are on track to deliver the expected revenue and cost synergies in the next few years. GLA expands our existing food and agri capabilities in LatAm. G&A was established in 1990 and is a food agri and environmental testing business with a strong track record of organic expansion. GLA enables us to enter the food testing market in Brazil, one of the largest exporter of agri food products in the world. I will now hand over to Jonathan to take you through the financials.

Jonathan Timmis: Thank you, Andre. In summary, in 2021, the group delivered strong revenue growth and double-digit profit and EPS growth. Total revenue growth was 6.5% at constant currency and 1.6% at actual rates as FX translation negatively impacted our revenues by 490 basis points, driven by depreciation of sterling. Like-for-like revenue grew 5.6% at constant rates. Operating profit at constant rates was up 15.4% to GBP473.9 million, delivering a year-on-year margin improvement of 130 basis points. Diluted earnings per share were 190.8p, a growth of 16.8% at constant rates and 11.6% at actual rates. I'll now take you through the high-level operating margin performance by division. Looking more closely at the operating margin bridge. Products delivered a strong operating profit margin of 22.8% and accounted for 90 basis points of group growth. Trade operating margin grew to 9% and contributed 20 basis points to the year-on-year change, while a decline in operating margin in resources to 5% had a negative minus 20 basis points year-on-year effect. Divisional mix had a positive 20 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 year. The group delivered adjusted free cash flow of GBP401.8 million, representing a cash conversion of 132%. Working capital improved further in 2021 but not as much in absolute terms as 2020, leading to cash generation slightly down year-on-year. In 2021, we invested GBP96 million in CapEx, up 25% versus prior year. We finished 2021 with financial net debt of GBP733 million which is up year-on-year due to acquisition of SAI, representing a financial net debt to adjusted EBITDA ratio of 1.1x. Now turning to our financial guidance for 2022. I -- we expect net finance costs to be in the range of GBP35 million to GBP39 million. We expect our effective tax rate to be between 26.5% to 27%, our minority interest to be between GBP20 million to GBP22 million and CapEx investment to be in the range of GBP135 million to GBP145 million. Our financial net debt guidance, before any material change in FX rates or M&A, is GBP640 million to GBP690 million. I'll now hand back to Andre.

Andre Lacroix: Thank you, Jonathan and let's now discuss the performance of our business lines, starting with products. As always and unless stated otherwise, all my comments will be at constant rates. In 2021, our product business delivered a strong performance in like-for-like revenue, operating profit and margin, combined with all three measures ahead of 2019. In H2, our performance was excellent. Other revenue, profit and margin were respectively up by 14%, 34% and 350 basis points compared to H1. Picking out some of the highlights. Both our Softline and Hardline businesses reported double-digit like-for-like revenue growth for the full year. We benefit from growth in e-commerce and a higher demand for testing of PPEs, home furniture and toys as well as from the easing of lockdown restrictions. Our Electrical & Connected World business delivered a high single-digit like-for-like revenue growth, benefiting from an increased focus on energy efficiency regulatory standards, more testing of medical devices and 5G equipment. Our Business Assurance, Food and Chemical & Pharma businesses delivered double-digit like-for-like revenue growth in 2021. Business Assurance experienced a rebound in ISO audit while our Food business benefited from a recovery in the global supply chains of our clients. Thanks to a stronger second half, our Building & Construction business delivered stable like-for-like revenue in 2021. Our Transportation Technology business also bounced back in the second half as OEM investments in new, more efficient and environmentally friendly powertrains picked up in the second half, enabling us to deliver low single-digit negative like-for-like revenue. In 2022, we expect our Product division to deliver robust like-for-like revenue growth. In 2021, our Trade business delivered a good performance in like-for-like revenue, operating profit and margin. We saw an acceleration of our like-for-like revenue growth in the second half, enabling us to increase revenue, operating profit and margin by respectively, 7%, 57% and 340 bps versus the first half. Caleb Brett recovered as global [indiscernible] picked up with improved momentum in the second half, resulting in low single-digit like-for-like revenue for the year. Our Government & Trade Services business showed a slowdown in the second half -- in the second half a little bit, due to supply chain disruptions in some of our markets, resulting in low single-digit like-for-like revenue growth for the year. Benefiting from growing demand for food inspections, the AgriWorld business delivered double-digit like-for-like revenue growth in both the first and the second half of the year. In 2022, we expect our Trade divisions to deliver robust like-for-like revenue growth. For the full year, our Resources division delivered a solid like-for-like revenue performance with a margin performance below 2020. I -- in the second half, we saw like-for-like revenue growth acceleration in each of our three businesses compared to H1 revenue was up 7%, operating profit was up 11% and margin was up 10 basis points. Our CapEx Inspection Services business delivered stable like-for-like revenue growth in H2 as our oil and gas clients started ramping up their investment. OpEx Maintenance services picked up in the second half and delivered mid-single-digit like-for-like revenue growth. Increased demand for testing and inspection activities saw our Minerals business delivered double-digit like-for-like revenue growth in the second half. In 2022, we expect our Resource business to deliver good like-for-like revenue growth. Let's now discuss the growth outlook for the group moving forward. COVID-19 has been much more than a tragedy for the world. In our view, COVID-19 will be remembered as the greatest dislocation of the global supply chain since the '70s, creating significant challenges across the world. Our clients have realized that they will need to increase their investments in quality assurance to operate with high quality, safety and sustainability standards. Indeed, COVID-19 has made the case for total quality assurance stronger. At Intertek, we are supporting our 400,000 customers every day as they try to synchronize their sourcing, production and logistics activities. The supply chain disruptions within the ecosystem of our clients are highly complex. And although everybody is working hard, it will take time before the global supply chain is back to normal. There is a major learning for our clients from this significant global supply chain dislocation. They have been operating with substantial intrinsic risks in their supply chains without the right data, process and independent assurance. That's why 80% of companies will increase their investments in quality assurance to strengthen their operations. Based on the extensive discussions we've been having with our clients, these investments will be in three areas

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