Intertek Group plc (ITRK) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Intertek May 2024 Trading Update. [Operator Instructions]. I 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 to start the presentation.

Good morning to you all, and thanks for joining our call today. I'm here with Colm, our CFO; and Denis our VP of Investor Relations. And there are essentially 5 takeaways from our call today. First, trading in the first 4 months of the year were slightly stronger than expected with 7% like-for-like revenue growth at constant currency. We've delivered a robust margin performance by -- driven by pricing, operating leverage, cost control and productivity improvements. Our disciplined cash conversion drove strong free cash flow. We are reconfirming our full year guidance at constant currency. And the execution of our AAA differentiated growth strategy is on track. I would like to start our call today by answering the most frequently asked questions we've had in meetings since we announced our full year results a few weeks ago. The first question we get is, why do you have the confidence to deliver mid-single-digit like-for-like revenue growth on a sustainable basis? We all know the ATIC structural growth opportunities are very attractive. Companies have increased their investments in risk-based quality assurance in the last 2 decades. And importantly, based on the growing challenge they face in their supply chain and more and more demanding stakeholders, our clients will invest more moving forward. Indeed, our customer research shows that the structural ATIC growth drivers will be augmented by the need for companies to operate with safer and more resilient supply chain, continued investments by corporation and new products and services, especially for these companies that have increased prices very, very strongly in the last few years and are seeing volume decline, a step change in how companies manage the sustainability. You know that the regulatory framework is evolving every single day. We expect increased investments in traditional oil and gas infrastructure and of course, renewables. And lastly, we expect an increase in the number of new clients, both in developing and emerging economies. It's never been easier to start a new business in our world today. Against this backdrop, we operate a high-quality portfolio, extremely well positioned to deliver faster growth. And that's why we expect to deliver mid-single-digit like-for-like revenue growth on a sustainable basis at constant currency. The second question we get is, what are building blocks to go to a 17.5% plus margin over time? For us, margin-accretive revenue growth is central to the way we manage performance at Intertek. You will remember that between 2014 and 2019, we were the only global listed companies that delivered 200 bps plus of margin accretion. In '21 and '22, our margin performance was, of course, impacted by COVID and the higher-than-expected inflation. In 2023, you would recall, we reported a 60 basis points margin improvement at constant currency we have made further progress on margin in the first 4 months of the year, and we are on track to deliver our medium-term target of 17.5% plus margin. You will recall that during our full year results presentation a few weeks ago, I gave specific examples about how we manage margin in every single business. When driving margin-accretive revenue growth, we focus our teams on 5 simple yet powerful value drivers: First, the portfolio effect. This is how we manage volume, price and mix; second, the fixed cost leverage linked to revenue growth, and of course, the faster revenue growth, the better operating leverage. The variable cost productivity improvement, which is very important as you grow, you want to get more productive. Targeted fixed cost reduction, we never stop looking at costs that are unnecessary that can be taken out. And importantly, margin-accretive investments in innovation, technology and growth capability. To execute these priorities, we have proven enablers in the organization that have been tested for so many years, and some of you know these very well. First, we run the company based on a daily, weekly, monthly performance management cadence. We do best-in-class benchmarking analysis every single months. We are very disciplined on price, capitalizing on our superior customer service. Our capital allocation policy is targeting investments in high-growth and high-margin segments. And our management incentive has been designed to reward margin-accretive revenue growth. We are confident we'll achieve our medium target margin of 17.5% plus over time. For 3 simple reasons. We have the proven tool and processes. We operate a wide span of performance, and we have a very disciplined accretive portfolio strategy. The third question we are getting is, what is the performance in the first 4 months of the year within your consumer activities? And what do you expect for the full year? You've seen the numbers this morning. Our Consumer Products business delivered 6.2% like-for-like revenue growth in the first 4 months, which was slightly ahead of expectations. What happened? Following a difficult 2023 fashion and general retailers entered 2024 with low levels of inventory and started to invest in the development of new SKUs given the positive outlook for consumer demands in both discretionary and nondiscretionary categories. That's why we saw a high single-digit like-for-like revenue growth in Softlines, the mid-single-digit like-for-like revenue growth in the Hardlines and both the like-for-like revenue growth in Softlines and Hardlines, we have broad-based from a geographic standpoint, which is really good news for us. Demand is strong in every single country where we operate Hardlines and Softline. The other important point is that the electrification of society, and we talked about it at length during the capital markets event a year ago continues to strongly support the growth of our electrical business, which has delivered a high single-digit like-for-like revenue growth. I would remember everyone on the call that our electrical business had a steady growth year after year and didn't decline in 2020. Finally, GTS was in line with expectations. So we are revising our '24 guidance for Customer Products division and we are now expecting mid-single-digit like-for-like revenue growth within our consumer product. The fourth question we get is, how well are you positioned in the context of changes in global supply chain of your clients? Supply chain never stands still in the world today, and we have seen structural change in the operations of our clients in the last few decades on a regular basis. Our mantra at Intertek is simple. We always anticipate where our clients will take the supply chain using the 6,000 interviews we do with our customers every month. Our global footprint and our capital-light business model make us very agile, giving us the ability to move fast if we need to build additional ATIC capability for our clients in existing or new markets. And over the years, we have invested in many markets to expand our global footprint. This is how we've built a strong presence in Vietnam, India, Bangladesh, Cambodia, Egypt, Turkey, Greece, Morocco, Guatemala, Brazil, Colombia and Mexico. There have been a lot of discussions about brands exiting their manufacturing footprint in China. I can tell you that we only have seen a handful of brands doing so. Changing production location is a high-risk decision for any business. However, what we've seen is that companies are pursuing a China Plus One strategy. They are building the supply chain for new businesses in new countries to operate a more diversified footprint. That has resulted in additional investments in countries like Vietnam, Cambodia, India and Bangladesh for Hardlines and Softlines. While the manufacturing activities have continued to grow in China, benefiting from growth in existing categories, new brands deciding to produce in China as well as expanding in new sectors. You've seen the expansion of the Chinese export industry in the solar panels and of course, EV industry. We all know that China has a track record of manufacturing excellence and good customer service. That's why the export economy in 2023 was 37% larger than in 2019, and that's why our Chinese business has continued to deliver mid-single-digit like-for-like revenue growth. We also have seen investments in nearshoring to reduce the time to market and CO2 emissions. And the main beneficiaries are Egypt, Turkey Portugal, Morocco, Guatemala and Mexico. And finally, we are seeing onshoring investments in the renewable sectors with manufacturing investments in energy storage, solar and wind and these are strategic sectors for the energy security of the European and North American markets. And there is no question that the Inflation Reduction Act is triggering a significant step-up in green energy investments in the U.S. The fifth question we are getting is, how are the competitive dynamics inside the industry and what are the Intertek differentiating factors? An important point to make upfront is that our competitive set is very broad. The Tier 1 group of companies in our industry made of publicly listed companies and a Tier 2 group made of midsized businesses being not-for-profit or owned by private equity sponsors together represents less than 25% of the global industry. Intertek offers its clients a differentiated value proposition based on very distinct attributes. And let me go through these one by one. First, we have a very decentralized and empowered organization, which makes us truly customer-centric, and that's why we deliver the best customer service in the industry. We operate a high-quality portfolio with well-capitalized scale businesses. You've seen during our capital market event, the quality of our labs around the world. We are the only player in the industry offering our clients end-to-end risk-based quality assurance with our ATIC solutions. We've built over the years a comprehensive suite of leading and lagging indicators for every business, and that gives us a strong data advantage. And lastly, but importantly, we believe in the power of continuous improvement, our high-performance culture, combined with our data advantage means that we never stop challenging ourselves on how we improve our processes and solutions to provide better value. Let's now discuss our trading highlights and all the comments I will make are at constant currency. In the last 4 months, the group has delivered 7% like-for-like revenue growth, slightly ahead of expectation. Our Consumer Products division delivered like-for-like revenue growth of 6.2%, as we just discussed, driven by high single-digit like-for-like performance in Softline and Electrical while Hardlines delivered mid-single-digit like-for-like revenue growth, GTS was slightly below last year. Our Corporate Assurance division delivered like-for-like revenue growth of 7.6% driven by high single-digit like-for-like performance in Business Assurance and mid-single-digit performance within Assurance. Our Health & Safety division delivered a like-for-like revenue growth of 9.9% driven by double-digit like-for-like performance in Food and AgriWorld, while C&P delivered a high single-digit like-for-like performance. Our Industry & Infrastructure division delivered like-for-like revenue growth of 4.2% driven by mid-single-digit like-for-like performance in our Industry Services, the Mineral business and low single-digit like-for-like growth in Building & Construction. Our World of Energy division delivered a like-for-like revenue growth of 9.4% driven by double-digit like-for-like increase in Caleb Brett and CEA and mid-single-digit like-for-like growth in TT. Turning now to the performance at the group on a year-to-date basis. Revenue for the 4 months to the end of April grew 7.5% at constant currency and 2% at actual rates to GBP 1.081 billion. Like-for-like revenue growth of 7% at constant currency was broad-based benefiting from both volume and pricing. Acquisitions contributed GBP 5.6 million revenue on a year-to-date basis. The Controle Analitico, PlayerLync and Base Met Labs acquisition we made in 2023 and '24 to scale up our portfolio in attractive growth and margin sectors are performing very well. Margin progression was robust. We benefited from our pricing initiatives, good operating leverage, disciplined cost controls and productivity improvements. We've delivered a strong free cash flow and continue to operate with a robust balance sheet. We continue to invest in organic and inorganic growth opportunities. Let's now discuss our guidance for the full year of 2024. We continue to expect the group will deliver mid-single-digit like-for-like revenue growth at constant currency. Given the strong start to the year, we have raised our guidance in Consumer Products to mid-single digit and to high single digit for Health & Safety as well as the World of Energy. Our expectations remain to high single digit growth in Corporate Assurance. We are revising our outlook for Industry Infrastructure to mid-single digit. We are, of course, targeting margin progression, our cash discipline will remain in place to deliver strong free cash flow. We'll invest in growth, with CapEx of circa GBP 135 million to GBP 145 million, and we expect our financial net debt to be in the range of GBP 510 million to GBP 560 million before any M&A or ForEx movements. A quick update on currencies for your model. The average selling rate in the last 3 months applied to the full year results of 2023 would reduce our full year revenues and operating profit, respectively by circa 200 bps and 300 bps. What does it mean? Net-net, we are on track to deliver our full year guidance at constant currency and the market expectations for 2024, notwithstanding the ForEx volatility we are seeing in the market. A year ago, at our capital market event, we presented our Intertek AAA differentiated growth strategy to unlock the significant value growth opportunities ahead. All of us at Intertek are laser focused on taking our company to greater heights. And I'm pleased to report that the execution of our AAA growth strategy is on track. We've made strong progress between 2014 and 2023, delivering value for all stakeholders and our good-to-great journey continues capitalizing on science-based customer excellence ATIC advantage. Our clients understand the mission-critical nature of risk-based quality assurance to operate with higher quality, safety and sustainability standards and make their business stronger. We are experiencing faster growth for our ATIC solutions, and we expect that to continue. To continue to deliver sustainable growth in value for our shareholders we'll 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, strong free cash flow and, of course, disciplined investments in high-growth, high-margin sectors. Importantly, we believe in the value of accretive disciplined capital allocation, we pursue the following priorities. Our first priority is to support organic growth through capital expenditures and investment in working capital. The second priority is to deliver sustainable returns for our shareholders through the payment of progressive dividends, and we target a payout ratio of circa 65%. The third priority is to pursue M&A activities that strengthen our portfolio and attractive growth and margin areas provided, of course, we can deliver good returns. And our fourth priority is to maintain an efficient balance sheet with the flexibility to invest in growth. Our leverage target is 1.3x to 1.8x net debt to EBITDA, with the potential to return excess capital to shareholders, subject, of course, to our future requirements and prevailing macros. So let me summarize the highlights of our trading statements before taking your questions. Trading in the first 4 months was slightly stronger than expected, with 7% like-for-like revenue growth at constant currency benefiting from a broad-based performance. Our pricing initiatives, strong cost controls and productivity improvements drove a robust margin performance while our disciplined cash conversions delivered a strong free cash flow. We are on track to deliver our full year guidance at constant currency and the market expectations for 2024, notwithstanding the ForEx volatility in many markets in the last few months. Again, thank you for joining our call today, and we'll now answer any questions you might have.

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

It's Rory here from UBS. Two questions, please. Firstly, on consumer [indiscernible] on consumer goods, as you were describing the strong performance in Softlines and Hardlines, you spoke about retailers wanting to restock after last year. Can you talk about if this marks a return to steady growth trends for you or could this year be volatile as you go through periods of catch-up and restocking from clients and then see slower periods later on? And I appreciate you did just increase divisional guidance of course, mid-single digits still leaves a range that could be lower than where you were tracking today? And then secondly, good growth again in World of Energy. Can you talk about what underpins that in terms of price or volume or new service mix? And again, as you look at the year, does that growth rate look sustainable given that I know there's a little bit of a catch-up in some areas from some of that mobility trends.

Yes. I mean, look, I'm not worried about consumer products. What happened in the last few years was clearly understood by everyone and made sense. I'll just remind everyone that post-COVID there was a surge in consumer demand for new products and Softlines and Hardlines and Electrical benefited from that. I think retailers were too bullish with their forecasting in 2022 because they had not really quantified the big one-off that was a rebound post COVID on consumer consumption. And they got their supply chain forecast wrong, which basically made them, obviously, very careful in '23 with inventory management. And of course, they were worried about weakening consumer demand based on the higher-than-expected inflation. Now that was the reason for the slowdown in the new product development within consumer product in Hardline and Softline, less so in Electrical, which obviously benefits from the greener energy trends. And we know that the consumption in the world is in a good shape, that inflection is going down, and that confidence is good. And the confidence in the global economy that we are all sensing is the confidence that we are sensing within our customers. And I think we're going to have a really good momentum over the years. I've given -- of course, some long-term guidance for Consumer Products. You remember at the capital markets event, and that's the guidance that I would want you to think, not for '24, but for the long term. But as you know, this is a very strong part of our portfolio. We have created the Softlines and Hardline testing industry with lab test in 1973. We've got leadership positions. And we have got tremendous technical expertise and we've got scale and fabulous productivity, and we are never stopping in terms of innovation. When it comes to Electrical, look, we don't talk much about Electrical. And maybe we should. I mean this is one of the major vertical of Intertek. Remember, this is the business we bought from -- in the U.S. many years ago, it was called the Edison Testing Laboratory. We are the #1 outside of the U.S., inside the U.S. We are #2 just behind UL. But our performance is, frankly speaking, world-class. We've never seen any issue in terms of organic growth. And the performance that we've delivered with high single digit is very, very commendable. And I can tell you that here, we're not seeing any slowdown because what is driving electric testing is essentially, of course, innovation, new products, new brands but greener. If energy is really needed with appliances and electrical products that are more efficient, right? And of course, this sector is benefiting from energy storage investments being industrial or consumer products with batteries and you know all of that. So look, I'm not worried about consumer goods. The recovery in the first 4 months were stronger than we expect, which is good, and we are very, very positive about the year, and everybody knows that this is an important recovery because this is where we have the highest margin in the group. As far as the World of Energy performance, look, let's just start with the smallest of the 3 business, CEA, which is essentially the business we bought a few years ago to be the global leader in terms of independent Assurance when it comes to solar energy. Now solar energy is the fastest-growing renewable source of energy, we all know that. It's an unregulated space. And a lot of companies are asking them the questions which solar panel should I buy? How should I make it part of my energy mix management. And CEA provides both independent quality inspections in the manufacturing footprint, i.e., in the factories producing solar panels, but also they work with the clients in terms of managing the quality assurance of, the infrastructure they've built. And frankly speaking, you can see that there is growth there and they continue to do a fantastic job. Transportation technology has been obviously challenged for multiple reasons that we talked about in the past. These issues are now behind us. I think the supply chain of the OEMs is in much better shape, and they need to invest in greener internal combustion engines and of course, electrical vehicles and hybrid and [Audio Gap]

Our next question is from Neil Tyler at Redburn Atlantic.

My first question really on the -- first question on the Assurance activities really. I appreciate that outside of your Corporate Assurance division, there are other mentions -- frequent mentions of Assurance work you're doing. I wonder if you could sort of share your thoughts on the -- in aggregate, the momentum within those to give a sort of picture, sort of top-down picture of how those are progressing versus the last year or 2? And then do you have a view of the proportion of those revenues in aggregate that you would view as sort of repeat annual business? That's the first question. And then the second one, sorry to call this out, but in government and trade, one of the few areas where sales have declined. I noticed that they've been sort of declining for the last couple of years. So can you share your sort of medium-term perspective on sort of what the strategy is there and how you see that developing over the next few years?

Yes. Thanks, Neil. I mean, don't be sorry to ask a question about GTS. I mean we are here to talk about all parts of our business. Look, GTS is an inspection based business that works with government, it's called Government Trading Services. And that's true that the performance has been soft over the last few years because we exited contracts that we didn't want to renew. Why is GTS slightly below last year this year, is essentially not a volume issue. It's a program mix point. We don't have the same price points on every single contracts. And this is what's happening. The volume is good and we're going to continue to make progress. So I'm not worried, and I don't want you to worry about GTS. I mean your question about Assurance is central to what we do with our clients, right? ATIC is all about risk-based quality assurance where we provide end-to-end risk assessment with an assurance, which is an audit of operating procedures, management systems, skills and behaviors to make sure that our clients have got an end-to-end visibility on risks within their entire value chain. And that complements, of course, the quality control work that we do with testing inspection certifications in a high-risk area. I mean this is the genesis of what we offer to our clients. As I said on the call earlier today, we are the only company to basically talk about risk-based quality assurance through ATIC and this gives us, of course, an incredible advantage when we talk to clients on -- at the C-suite level. Now you're right, there are 2 types of Assurance solutions inside the group. They are the business client-agnostic solution, which is essentially Business Assurance and Assurance, and you've got the business client specific solutions. And we report our ATIC revenue now every single year. So we'll do so at the end of 2024. There is no question that if you look at the data and Denis can send you the graph that Assurance has been one of the fastest-growing solutions for Intertek because companies need to increase focus on risk management. And if anything, COVID has pinpointed the fact that company didn't have enough focus on the resilience of the value chain end-to-end, et cetera and so forth. So look, I'm not going to give you a number for the Assurance Services for the first 4 months because we're going to disclose it at the end of the year, but this is continuing to perform very well. And this is obviously at the heart of our competitive advantage, and we are really, really focused on that. And we know all the drivers.

Just to follow up there. Within that sort of broader Assurance piece, do you have a perspective? Or are you able to see how much of it is repeat business in both business agnostic, [indiscernible] agnostic and industry specific.

Yes. I mean a couple of things about your question. Sorry, I should have addressed that, my apologies. Number one, we have very sticky customer relationships at Intertek, right? I've talked about it in the past. So customer retention rate is very, very, very high. And it's very rare when we lose a clients and usually it's because we don't agree on the price, as you know, we are primarily focused on pricing power. [indiscernible] because typically, when you do an Assurance program, it's a multiyear program, right? So Assurance and I should have said that because [indiscernible] basically planned for your capability development. So it's -- I wouldn't say -- it's a very good business, okay.

Our next question is from Arthur Truslove at Citi.

A couple from me, please. So first question, please. On the Consumer Products business, obviously, a good start to the year. How are you expecting organic growth there to progress as the year goes on? Or are you expecting it to strengthen in May and June and then also July to October or not? And second question is on the margin. I guess, simply put today, Consumer Products has been stronger than expected, which is obviously lab-based, World of Energy likewise. And therefore, we expect that to be very positive for operational leverage and therefore, margin. But my understanding is you're talking margin, down a little bit. So I just wondered whether I understood correctly or not? And then third question just on the free cash flow. I guess, how confident are you of very strong free cash flow conversion this year perhaps relative to last year?

So let's take these questions in reverse order, free cash flow confidence, super strong. Don't worry about that. Margin, we're not taking the margin down. What we are saying is that ForEx is going to be, of course, more negative than we thought and more negative at the operating profit than revenue, 200 bps but from a constant currency standpoint, which is the way we look at margin performance, we're not downgraded, if anything, what we said this morning is we believe that market expectations at actual rate, which is the consensus. We are comfortable with that. And if you do the math and you include the more adverse ForEx compared to our previous guidance. Essentially, what we are talking about today is a mini upgrade at constant currency. So don't worry about margin. As far as Consumer Products is concerned, look, we've increased the guidance to mid-single digit, mid-single digit is a range. And it's true that 6.2% is a bit at the upper end of this range. We don't give forecast for the next 2 months or H1 or H2 we give for the full year. But where I sit today, I think we're going to have a good year. So if I were you, I wouldn't worry about Consumer Products.

Our next question is from Suhasini Varanasi at Goldman Sachs.

Just a few from me, please. So just one more on Consumer Products, please. Sorry to go back to that, but it's probably the most interesting division at this point, given the inflection you've seen on growth this year. But that's the one division where margins are well below 2019 levels. So I just wanted to check, given the upgrade to guidance and the strong start to the year, how long do you think it will take for you to get back to 2019 levels? Is it just 1 year or will it take 2 to 3 years? That's the first question. The second question is on the Building & Construction..

I'm going to answer this one with a smile, nice try. You know that I'm not going to give you any day. So enjoy, do you have a more interesting questions for me because don't ask me questions where I'm not going to give you answers.

Okay. Okay. The next one...