Intertek Group plc (ITRK) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Intertek H1 Results 2024. [Operator Instructions] I would like to remind all participants that this call is being recorded. [Operator Instructions] I will now hand over to Andre Lacroix to start the presentation.

Good morning to you all, and thanks for joining us on our call. I have with me Colm Deasy, our CFO; and Denis Moreau, our VP of Investor Relations. I would like to start our call today recognizing all of my colleagues at Intertek for having delivered a strong performance in the first half of the year with double-digit growth in operating profit, EPS and free cash flow. Here are the key takeaways from our call today. We've delivered a broad-based like-for-like revenue growth of 6.1% at constant currency. We saw a very strong margin performance with a year-on-year improvement of 110 bps at constant currency. That resulted in double-digit EPS growth of 17.5% at constant currency. Cash conversion was excellent at 118%, and we saw a free cash flow increase of 14%. We continued to make progress on ROIC, which was up 210 basis points (sic) [ 220 basis points ] at constant currency to 20 bps -- to 20%, sorry. In line with our new dividend policy payout ratio of 65%, our interim dividend was up by 43%. We expect a strong performance in the second half of 2024. And importantly, the implementation of our AAA differentiated strategy for growth is on track. So let's start with our performance highlights. As I said, we delivered a strong financial performance. Group revenues were up 6.6% at constant rate and 1.8% actual rate. Like-for-like revenue growth was up 6.1% at constant currencies. Operating profit was up 14% at constant rate and 8% at actual rate. We delivered a 15.9% operating margin, up 110 basis points at constant rate and 90 basis points at actual rate. EPS was super strong, as I said, 17.5% at constant rate and 10% in actual rate. The 20.4% ROIC performance was excellent, 220 basis points ahead of last year at constant rate and 110 basis points up on actual rate. Free cash flow of GBP 91 million was up 14%. Our interim dividend of 53.9p is up 43%. And our balance sheet remained very strong with a net debt-to-EBITDA ratio of 1. Let's now discuss our like-for-like revenue growth at constant rate, which was 6.1%. As I said, it was broad based. Consumer Products, up 6%; Corporate Assurance, up 8.3%; Health and Safety, up 8.5%; Industry & Infrastructure, up 2.2%; and World of Energy, up by 8.3%. Our like-for-like revenue growth was driven by both volume and price. We have seen an acceleration of our underlying like-for-like growth in the May-June period. Adjusting for 2 fewer days in that period, our like-for-like growth was close to 9% in May and June and 7.7% for the first half. It's great to see that the demand for our ATIC solutions is accelerating with a 2-year like-for-like revenue growth of 13.2%. The JLA, CEA, PlayerLync and Base Met Labs acquisitions we've made to scale up our portfolio in high-growth and high-margin sectors are performing very well. The consolidation opportunities in our industry remain significant and we'll continue to invest in organic growth. Margin-accretive revenue growth, as you know, is central to the way we deliver value and our disciplined performance management has resulted in a margin progression of 110 basis point at constant rate to 15.9%. We benefited from mix, pricing, fixed cost leverage linked to growth, productivity improvement and our restructuring program while continuing to invest in our ATIC capability for growth. Looking at our performance by division, we've made good progress improving margin by more than 100 bps in three of our 5 divisions. Last year, we announced a multiyear cost reduction program to target productivity opportunities based on operational streamlining and technology upgrade initiatives. The implementation of this program is on track, and after having delivered a cost reduction of GBP 13 million in 2023, we expect the full year benefit from this program of GBP 11 million in 2024, GBP 5 million in H1 and GBP 6 million in H2. As you can see on the slide, the compounding effect of our margin initiatives has enabled us to deliver a 2-year margin progress of 180 bps. I will now hand over to Colm to discuss our results in more detail.

Thank you, Andre. In the first half of '24, the group delivered a strong financial performance. Total revenue growth was 6.6% at constant currency and 1.8% at actual rates as sterling strengthened compared to major currencies that impacted our revenue growth by 480 basis points. Operating profit at constant rates was up 14.2% to GBP 265.1 million, delivering a margin of 15.9%, up year-on-year by 110 basis points at constant currency and 90 basis points at actual rates. Diluted earnings per share were 104.9p, a growth of 17.5% at constant rates and 10.2% at actual rates. Our cash conversion was strong, and we delivered adjusted free cash flow of GBP 90.6 million, up year-on-year by 14%. We finished the first half of '24 with a financial net debt of GBP 708.2 million, which is down year-on-year and represents a net debt-to-adjusted EBITDA ratio of just 1x. Turning to our financial guidance for '24. We expect net finance costs to be in the range of GBP 41 million to GBP 43 million. We expect our effective tax rate to be between 25% and 26%, our minority interest to be between GBP 23 million and GBP 24 million and CapEx investment to be in the range of GBP 135 million to GBP 145 million. Our financial net debt guidance, excluding change in FX and M&A, is GBP 510 million to GBP 560 million. I'll hand back to Andre now.

Thank you, Colm. Let's now talk about the performance by division. All the comments I will make are at constant rates. We are super pleased with the performance of our Consumer Products-related business. We delivered GBP 468 million, up 6% year-on-year. Our mid-single digit like-for-like performance was driven by high single digit like-for-like in Softlines, mid-single digit like-for-like in Hardlines, high single digit like-for-like in Electrical. Like-for-like for GTS was slightly below last year, as expected. Operating profit increased by 12% to GBP 123 million. And our margin of 26.2% was up by 140 bps. We continue to expect the Consumer Product division to deliver mid-single digit like-for-like revenue growth in 2024. We are also extremely pleased with the performance of our Corporate Assurance business. A revenue of GBP 242.1 million, up 9.4% year-on-year. Our high single digit like-for-like performance was driven by high single digit like-for-like in Business Assurance and mid-single-digit like-for-like in Assuris. Operating profit of GBP 52 million was up year-on-year by 14%. And we've delivered the margin of 21.6%, an improvement year-on-year of 90 bps. Our full year '24 expectations for our Corporate Assurance divisions are unchanged at a high single digit like-for-like revenue growth. Our Health and Safety business continues to outperform and delivered a revenue of GBP 167 million, up year-on-year by 11%. Our high single digit like-for-like revenue growth performance was driven by high single digit like-for-like in AgriWorld and Chemicals & Pharma and double-digit like-for-like in Food. Operating profit rose by 27% to GBP 20 million. We delivered a margin of 12.2%, up year-on-year by 160 basis points. Our Health and Safety division is expected to deliver a high single digit like-for-like in 2024. Our Industry & Infrastructure business reported revenue of GBP 420.5 million, an increase of 2.8%. Our low single digit like-for-like revenue growth was driven by mid-single digit like-for-like in Industry Services, mid-single digit like-for-like in Minerals and stable like-for-like in Building & Construction. Operating profit of GBP 37 million was up 4% with a margin of 8.8%, 10 basis points ahead of last year. In 2024, we expect our Industry & Infrastructure-related business to deliver low single digit like-for-like revenue growth given the slowdown in large infrastructure construction projects in the U.S. Revenue in our World of Energy-related business were at GBP 372 million, up 8% year-on-year. Our high single digit like-for-like revenue growth was driven by high single digit like-for-like within Caleb Brett, low single digit like-for-like in our TT business and double digit like-for-like in our CEA business. Operating profit was GBP 33 million, up 31% year-on-year. And our margin improved by 150 basis points. In 2024, we continue to expect our World of Energy division to deliver high single digit like-for-like revenue growth. In our Capital Market event last year, we shared with you our AAA differentiated strategy for growth to unlock the significant value growth opportunity ahead. In March, I give you an update on why we expect faster like-for-like revenue growth for our ATIC solutions, how we will deliver our 17.5%-plus medium-term margin target and how our high-quality earnings model will deliver sustainable value creation. Today, we would like to give you an update on 3 important investment areas to execute our AAA growth strategy. The supply chains of our clients are never static, and we'll discuss how we're investing in our global ATIC capability to seize the exciting growth opportunities ahead. Sustainability is the movement of our time, and we'll explain how we have built an industry-leading approach to address the complex sustainability needs of our clients. The digitization of our ATIC value proposition is really important, and we'll talk about how we are using technology to build a technology-based customer service advantage. Supply chains never stands still and we've seen several structural challenges in the operations of our clients in the last few decades. Our mantra at Intertek is to always anticipate where our clients are taking their supply chain using our 6,000 interviews that we do a month with every customer to invest in our global ATIC capability. Our global footprint, and importantly, our capital-light business model makes us very agile, giving us the opportunity to move fast if we need to build additional ATIC capability for our clients in existing or new markets. 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 of course, Mexico. There have been a lot of discussions about brands exiting their manufacturing footprint in China. We've only seen a handful of brands doing so as changing production location is a high-risk decision for any business. Importantly, China has a track record of manufacturing excellence with good customer service, a strong capacity in terms of logistics. And they continue to invest for the long term in new sectors as energy storage, solar panels and EVs. That's why the Chinese export economy in 2023 was 37% larger than in 2018. And in H1, the export economy was 46% higher than 2019. We operate a strong business in China that has demonstrated its ability to deliver mid-single digit like-for-like revenue growth over the years, including in the first half of 2024. What we have seen is companies pursuing a China Plus One strategy. What is it all about? It's essentially building supply chain for new businesses in a new country to operate a more diversified footprint. That has resulted in additional manufacturing investments in countries like Vietnam, Cambodia, India and Bangladesh while China is continuing to invest in new sectors. We also have seen investment in near-shoring to reduce the time to market and CO2 emissions and the main beneficiaries have been countries like Egypt, Turkey, Portugal, Morocco, Guatemala and Mexico. Finally, we are seeing onshore investments in the renewable sectors with manufacturing investments in energy storage, solar and wind lead our strategic sectors for the energy security of the European and North American markets. Over the last 3 years, we invested GBP 330 million in CapEx to support the needs of our clients in APAC, EMEA and the Americas. And this year, we plan to invest another GBP 135 million to GBP 145 million. I would like now to give you a sense of the investment that we have made to expand our global ATIC footprint. Let's start with APAC. We operate an excellent ATIC portfolio in APAC. This is 35% of our revenue. And here is a list of the investments that we have made to broaden our ATIC footprint. Of course, I will not comment on all of these, but here are a few comments based on my recent market visits. We operate in Minerals center of excellence in Perth, Australia and I'm really impressed each time I visit the operations by the work our team is doing to drive faster growth importantly in higher-margin segments. I go to India very, very frequently. It's a fantastic market and plenty of growth moving forward. Our Business Assurance business in India is truly best-in-class. And the investments we've made are driving exceptional returns there. I had the opportunity a few months ago to visit our new toys lab in Hanoi and I saw firsthand the excellent growth opportunities we have there. Let's move to EMEA. EMEA represents 26% of our revenues and these are the investments that we have made recently. Just a few comments from my side. We've opened a battery center of excellence in Italy last year, and I'm really proud. This is a really leading-edge lab, one of the best in the world that can handle all the needs of our clients in energy storage. Very recently, we were in Turkey and we had organized a sustainability event for all of our Softlines customers. And I was really impressed to see how our Softlines customers were embracing the investment we have made in leading operational capability solutions like detox. Here in the U.K., we are at the forefront of the EV industry development with our center of excellence in Milton Keynes, and the good news is that we are winning significant new contract step by step. Let's move to the biggest region for Intertek, the Americas. This is 39% of the group revenues. And of course, we have invested significantly to take advantage of the exciting growth opportunity in that region. Biofuel is a huge area of investment, we talked about it during our Capital Market event, and I'm pleased that we now have a leading capability in sustainable aviation fuel in the region. The growth we are seeing with our AgriWorld operation in LatAm is super exciting, and I'm really pleased that we've decided to expand there step-by-step over the last few years. Going back to EV in North America, we recently opened an EV center of excellence because the opportunity for growth there is significant. Let's now discuss the second strategic deep-dive for our call today, sustainability. And let's talk about how we are supporting the needs of our clients with our sustainability solutions. We know that sustainability is the movement of our time. Corporations are increasing their focus in this area. Of course, these investments are driven by an increase in number of regulations, but it's also driven by more and more demanding consumers for the brands they buy or service they purchase. Our clients are facing some real challenges to take an end-to-end strategic approach for sustainability. And to help them, we have developed industry-leading end-to-end Total Sustainability Assurance solutions, which basically try to help them mitigate their operational, corporate and reputational risk within sustainability. We always advise our clients to start their sustainability journey at the heart of their value chain. That's why we offer industry-leading operational sustainable solutions that cover, among others, R&D development; Tier 1, 2, 3 supplier sustainability performance; energy, waste, water, chemical, air quality, safety management; of course, carbon footprint assessment for Scope 1, 2 and 3; and Eco-scoring of their products. In simple terms, our operational sustainable solutions focus on the high-risk areas inside the value chains of our clients. In addition, we also advise our clients to complement these investments in operational sustainable solutions with the right sustainable policies underpinned by the right corporate process, which we can audit with our Corporate Sustainability Certification program. Last but not least, the reputational risk for companies are significant and we've seen world-class companies being fined by regulators for having made unsubstantiated claims about their products. That's why we help our clients with our ESG assurance solutions, which offer an independent audit of their nonfinancial disclosures. Importantly, every industry is different and every industry has its own sustainability risk. That's why when we go to market and meet our clients, we always go with industry-specific ATIC solutions that cover the needs of our clients in quality, safety and sustainability. Let me give you a few concrete examples of how it works in several industries. Now you've seen that in the past, this is a visual representation of our ATIC solution here, in that case, for a company printing T-shirts. And what we have done to make it clearer for you what we offer in terms of operations sustainable solutions, we've basically highlighted in blue the operational solutions that target sustainability risk in the supply chain of our client. Now let's move to another example. This is what we do in the case of a light bulb producer, really important, given our strong presence in the electrical sector. You can see here how this approach work in the food sector, in that case, it's a honey manufacturer. And here, this is an example in the oil and gas industry looking on, what I just talked about, sustainable aviation fuel, which is really important for the future. Let's now talk about our third strategic deep dive today. And I want to talk about our Tek-based ATIC solution. You would recall that during our Capital Market event, we discussed the importance of innovation and M&A to strengthen our customer service, targeting high-growth and high-margin space. Today, I'd like to give you an update on where we are in the digitization of our ATIC value proposition. We believe an importance of technology to augment the strength of our ATIC solutions with a superior digitized customer service. We've made a lot of progress in that space and equally there is much more to go for. The benefits of a Tek-based ATIC solutions are significant. That provides a superior customer service, making our commercial relationship more sticky. Our customers have access to better insight with superior data and can make better decision in terms of risk-based quality assurance. And importantly for us, Tek-based solutions provide significant productivity benefits as you can benefit from operating leverage from these such investment that you've made. I'd like now to share how we've built a Tek-based ATIC advantage in 3 segments. Let's start with People Assurance, where we help our clients identify and mitigate the skill gaps they have at the operational level at the front line of their manufacturing or distribution centers. We provide a comprehensive suite of audit, training, engagement solutions in a SaaS platform targeted at front-line workers, as I said, with Alchemy, Wisetail and PlayerLync. We've entered this adjacent ATIC space of People Assurance when we made the acquisition of Alchemy 6 years ago and that has opened excellent new growth opportunities in a sector that is high margin. Let's now talk about a few examples of digital service delivery. Within our Softlines and Hardlines business, we've strengthened our customer value proposition with the digitization of our inspection solution with i2Q a few years ago, and recently, our testing solution with iCare. Very recently, we've partnered with ESG Playbook to offer a digital platform for clients to collect and manage carbon data. The responsibility of companies with their own supply chain and their extended supply chain is significant, but very complex to manage. That's why our clients need Tek-enabled supply chain traceability tools. We've launched a few years ago Inlight, which helps companies manage their Tier 1, 2 and 3 suppliers in a very granular fashion to better identify and mitigate the risks in their extended supply chain. We operate SourceClear, an industry-leading platform for a chain of custody traceability in the textile industries. And recently, we've partnered with Trade for Good to provide product level traceability and product passports for clients in Consumer Products. We are pleased with the progress we've made to digitize our ATIC value proposition, and we'll continue to invest in technology to strengthen our technology-based ATIC advantage. Before taking any questions, let's cover our guidance for 2024. Given the strong performance we delivered in H1, we're entering H2 with confidence and expect to deliver a strong performance in 2024. We expect the group will deliver mid-single digit like-for-like revenue growth at constant currency. We expect mid-single digit in Consumer Product; high single digit in Corporate Assurance, Health and Safety, World of Energy; low single digit in Industry & Infrastructure. We are targeting year-on-year 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. 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 sterling rate in the last 3 months applied to the full year results of 2023 would reduce our full year revenue and operating profit by circa 300 bps and 400 bps, respectively. We believe, as you know, in the value of accretive disciplined capital allocation, and during our Capital Market event, we discussed the approach we have in place, which you can see on the slide. We are very excited about the organic and inorganic investment opportunities, and our investments will continue to be made with the same disciplined ROIC-driven approach. In summary, our highly engaged customer-centric organization is laser-focused to take Intertek to greater heights, putting our AAA strategy in action. To deliver sustainable growth and value for our shareholders, we'll capitalize on a high-quality cash compounder earnings model, benefiting year-after-year from the compounding effect of mid-single digit like-for-like revenue growth, margin accretion, strong free cash flow and disciplined investment in high-growth and high-margin sectors. The value growth opportunity ahead is significant. Thank you for your time today, and we'll now take any questions you might have.

[Operator Instructions] We'll take our first question from Suhasini Varanasi at Goldman Sachs.

Hope you can hear me?

Yes, yes. All good.

I have two questions, please. One, given the actions in the U.S. this year, can you maybe share some feedback from clients? Are they talking about any SKU volume reduction in light of the risks around increase in protectionist policies? The second question is on the trading day-adjusted organic growth, which was high single digits in May and June. And going into third quarter, you actually have benefit from 2 extra trading days. Is there any reason why we shouldn't expect double-digit growth for the next quarter?

Okay. So as you know, we don't give quantitative guidance per quarter. We're trying to give you a full year view. But you're right, momentum is strong and we are getting into H2 with confidence. And as you know, we take it a step at a time and we'll report in October, but the team is very, very positive about the second half given the broad-based momentum that we have in the business. And rightly said, there is a good opportunity to continue to do very well. But I'm not going to give you any precise guidance, as you know. On your first question, look, I'm not going to get into politics, of course. What I can say is that our clients in the Consumer Product space, and for us, it's essentially Softlines, Hardlines and Electrical, are in a very good place, right? Starting with Electrical. This is not a business we talk a lot about, but this is a business that has continued to really deliver really, really commendable performance. You will recall that we didn't see any change in terms of like-for-like trajectory in 2020 because it's focused on the mission-critical nature of the electrification of society, and again, you saw the performance. And here, we have a very broad-based footprint. Of course, we are really strong in North America, but we are very strong here in Europe, very strong in Asia and I'm not worried about that. When it comes to Softlines and Hardlines, look, that industry has been through a few difficult years in the second half of 2022 and 2023. I think they've done a lot of work in terms of their cost base and working capital management. The rebound we saw in Consumer Product has been based on renewed confidence in the investment that they need to make in new SKUs. So we are not seeing anything that would be a worry or concern regarding the outlook of our Consumer Product performance in the second half. The other thing I would say because I know what's driving your question, right, if you go back to what happened when we saw a tariff increase on the President Trump back then, essentially if you look at the export value of China in the United States, it's way higher than it was pre-Trump and there was very little effect. So China has continued to do very well. I talked about the export markets being significantly ahead of '19 in '23 in the first half. So if the past is a proxy for the future, the previous tariff increase that the previous administration put in place didn't work. Now I'm not going to say much more than that, but I think it's an important data point for everyone. And why is that? It's because essentially the industry is consumer-driven, right? Consumers want the brand that appeal to their needs. And this is what's driving, obviously, consumption. And tariff is not a driver of consumption. Tariff is a driver of fiscal policy and potentially of inflation. So look, that's what I will say. Okay?

Our next question is from Rory McKenzie at UBS.

It's Rory here. Two questions, please. Firstly, can you tell us what the revenue growth was in APAC overall in H1? I think you said China was still growing at mid-single digits. So can you talk about the performance in other countries? I guess, I'm asking because there was just the really interesting detail on Slide 25 showing your capacity investments in the region, so wanted to understand how they're adding to growth already and how perhaps even margins are evolving in these faster-growing countries within APAC. And then secondly, on margins, can you help us understand the really strong improvement in H1? You obviously called out the direct cost-saving benefits. But what else stands out in that 110 bps increase year-over-year? Can you attribute much of that to operating leverage or margin investments ramping up? And how should we think about that evolving in H2?

Thanks, Rory. Look, as you said, we are very pleased with the mid-single-digit performance in China. In APAC, the countries that you would know very well that are strong manufacturing centers for the world where we are seeing some really, really strong performance and accelerations are essentially in Japan, where we are really strong in Electrical and also Business Assurance. And you know the importance of the Chinese economy. We are seeing some very, very, very strong growth in Korea, a fabulous, fabulous economy in multiple sectors. There is no question that in the first half, Vietnam has been a star performer. Our team has done a great job. And I'm not going to talk about market share, but it's very, very likely that they outperformed everyone. Really, really strong performance. And then the other markets I would call is India and Bangladesh. I mean, our India business, I talked about India from a Business Assurance standpoint. But the progress that the team has been making in every single category and outperforming the rest of the industry in Softlines, in Hardlines, in Electrical, in Sustainability, in Food, of course, Business Insurance, Agri and Caleb Brett is incredible. And last but not least, we never talk about this market and I go there on a regular basis is Bangladesh. I mean, the presence we have in Bangladesh where, like in India, we are the market leader, is just incredible and the growth there is really, really strong. So you're right, APAC is broad based and I tried to help you here with some of the key markets. The other question on margin. Look, we talked at the Capital Market event last year how we are managing margin. And I think the reason why the margin is so strong is because we are basically staying very focused on our strategy, right? Number one, we believe in the power of margin equity revenue growth. And as I said in the past, I would rather grow 1% less in terms of like-for-like with margin accretion than growing faster in like-for-like and not getting any margin accretion. Why is that? Because when you are the premium player -- we have the highest customer service ratings, as you know, demonstrated that last year. When you have a premium price positioning, you've got to stay focused on margin equity revenue growth from volume, price and mix. So the first, if you want, driver of our performance is volume, price, mix. We took pricing, and price was about 1/3 of our revenue increase. But mix management is really, really important, i.e., you've got 100 engineers in the lab, let's just say in Cortland, Upstate New York. Where you apply the 100 engineers' hours, available hours, will make a big difference if you target high growth, low growth, high margin, low margin. And what you want is you want, of course, to pay the fixed cost, but you want to really make a difference in high growth, high margin. So that's this really portfolio approach that we have at the global level, that we have by business line and that we have at the local level. Now the second thing is performance management. We have an incredible focus on data. As you know, we've built a fabulous data platform over the years where we can look at any productivity metric for any site in any period. And the team is really data savvy and we benchmark our business all the time to make sure that we don't focus on one metric, but we understand for all the margin drivers what can we do, volume, price, mix, fixed cost, variable cost, and of course, investment in the future. And our business model is so strong that we can invest in the future and do what we are doing. Now -- and lastly, what's obviously helping is the restructuring program that we have in place that is targeting the noncustomer-facing operational head count, i.e., we are streamlining where we can with technology, if possible, the back office, et cetera, and so forth, of some of the shared service center to get a lower overhead and that's really, really important. I would say that we expect margin to continue to progress. You know that we have a 17.5%-plus margin target. And you asked at the Capital Market event is it going to be 2029, and I said I hope not. And now we are getting very close to the target. And then when we get to 17.5%, we'll not stop there. I mean, this business has got the opportunity to go to 17.5%-plus because of our product mix, because of our performance management but also because of our track record. So look, I'm very proud of what the team has done, and that's what I would say on your second question.

Our next question is from Arthur Truslove at Citi.

I guess, first question -- well done on good results. First question for me was on the operational leverage opportunity looking forward. So it obviously sounds like you've benefited from that in both your Consumer Product, and indeed, World of Energy divisions amongst other things. I guess, how are you expecting that to progress as we move forward into the second half? Do you think that operational leverage opportunity is as good in H2 as in H1 or slightly less, or indeed, slightly more? Second question, it looks like, having a quick look through your full release, that depreciation and amortization was around GBP 10 million lower than in the prior year. I just wondered how that happened? And I guess, it seems to be broad-based across the divisions so just wondered why that was the case. And then third question, just on the second half margin. So I guess, you've got 30 bps of comp headwind from the gain on disposal in the prior year, a bit of FX. And so do you think you can do comparably at constant currency in the second half on margin? Or indeed, are there other headwinds that we should think about?

Yes. So I think, on the second question, it's not that complicated, and Tony, can help you if you want. But essentially, as you know, we had a bit of lower CapEx during the COVID years and that's the explanation. There is nothing more than that. Look, the first and the third question is the same, right, is how do we think about margin for the second half. Now there are multiple moving parts that I just explained to Rory. One thing I didn't say to Rory, which I should have said, one thing that we should not forget when it comes to Intertek in terms of operating leverage because testing and certifications, and you know the numbers, are delivered in labs. Of course, as we talked about at the Capital Market event, the lab-based activities provide with a better operating leverage than inspection, for instance, right? And that's something that obviously is very, very important for us. Now is there any reason why the operating leverage should be lower in the second half than the first half? Strictly, no. The only thing I would say is that we've delivered a very strong performance in the second half in terms of margin last year, so the base is slightly more demanding. I get your point on the gain on disposals and could we target -- are we targeting constant currency margin improvement in the second half? And of course, we are obviously wanting to continue to make progress because remember, we believe that this business can go back to 17.5% and go beyond that. So nothing is going to change. But we had the half year, there is a lot of work still to be done. We have a strong demanding base. And we believe that our guidance is fair, and we will update that when we announce in November, the next 4 months.

Our next question is from Sylvia Barker at JPMorgan.

A couple of questions for me, please. First one, on the organic growth, adjusted for days, just to be clear, sir, you're obviously talking about fewer days in the second period. That implies 9% growth in that second period and you seem to suggest that, that momentum has carried on into the start of the second half. Can we just double-check that? And obviously, those working days would have had a greater impact, as you always say, on testing and certification-type activity. So maybe just a little bit of color around -- just around the divisional differences there that we might expect. And then secondly, just on the CapEx. So a lot of investments on those slides. And I suppose just squaring that with the 3% of sales -- of CapEx, do a lot of the investments now go through the leases line? Or can you help us otherwise because it does seem that you're adding a lot of capabilities and facilities, but the CapEx to sales is actually not particularly high. So maybe if you can just help us out a little bit to understand that.

Yes. Let's take your second question first. Look, we have a very strong advantage, is that we operate world-class facilities, right? So we don't have, if you want, a huge catch-up in terms of CapEx to keep our facilities up to the standards, right? So we are really investing in growth, and of course, IT, and of course, maintenance because you want to do that. The lion's share of our investment is in organic growth, right, through CapEx. So that's the way to think about it. But I want to answer your question slightly differently. Yes, we are very disciplined in terms of CapEx investment. We care about return on invested capital for our shareholders. That's why we have an industry-leading ROIC and we continue to make progress because that's our job, right, to make sure that you allocate capital in a wise -- and you drive performance. So yes, I mean, we are getting some good results on the investments we are making. And as we just said, when I was asked the questions about depreciation, we had a few years where there was a bit of slowdown in investments because of COVID years, we're busy with other things. But we have invested and I tried to demonstrate today where we invested and we are not stopping there. But one thing I want everyone to be clear is we are really disciplined because we want to run this company for mid-single digit like-for-like, high-margin, strong cash, disciplined investments to deliver a strong ROIC and the compounding effect of these various drivers is what drives sustainable value creation. We're not a one -- single metric company. As far as your organic growth question, I mean, look, 2 months doesn't make a year, right? We are really pleased about the January-April period. We are very pleased about the underlying growth in May and June, they adjusted, as you said. We're entering, as I said in the first question, H2 with confidence, but don't take a 2-month trend as a full year extrapolation for your model. I wouldn't advise you to do so. Remember we have a base to compare ourselves against. But I can tell you that the team is super energized about having a very strong H2, and we'll update you and your colleagues in November.

And just on that, I guess, 1.5% or so, let's say, 1%, 1.5% of drag in the first half on the organic from days. Did that have no impact on the profitability then because obviously the margin is up so much. Did you have any negative impact from that in profitability?

Well, I mean, the answer to your question, the margin could have been better if we didn't have that impact.

[Operator Instructions] Our next question is from Afonso Osorio at Barclays.

Most of my questions have been answered. But yes, just one last one for me, Andre. On GTS, I mean, I think I asked you this before. I appreciate the level the client has stabilized versus what you saw in 2022 and '23, but you still have a drag group into your Consumer division. So can you share your thoughts as to why this division has faced some difficulties over the last 24 [ to ] 6 months? And what can you do to improve this performance?

There is a lot of what we can do to improve performance in every aspect of our business. So we are, as you know, always focused on finding new ways of driving better results. So there are plenty of things we can do. I don't want to be flippant, I just want to be precise on GTS. Look, GTS, I would say, is stabilizing versus what we did in the last few years. The reason why it's slightly below last year is not because there is a contract effect, it's essentially because, as you've seen in a few release this week, there's been some consumers' reactions to high-priced categories and high-priced brands and there is a bit of a mix effect within these countries where we are certifying the export from whatever country to the Middle East and Africa. That's the only factor here. But volume is very, very, very good. But there is a bit of a consumer slowdown in the high-priced categories, given the inflation that we've seen. And I'm talking about Middle East and Africa only, right? That's it.

Can we -- that's helpful. But can we assume some growth in the second half? Or is it just still broadly the same as in the first half from here?

That, we will -- look, we will see the base is getting obviously easier, of course. So we will see. I wouldn't be surprised to see the growth starting to improve in Q4, but we will see, take it step by step.

Our next question is from Annelies Vermeulen at Morgan Stanley.

Can you hear me?

Yes.

So a couple of questions as well. So firstly, just on capital allocation, I think you've made one acquisition in the first half. Could you talk a little bit about the pipeline? Can we expect to see more deals in the second half? And similarly, your net debt at 1x, I think, below your target range. How are you thinking about capital allocation more broadly? Is there a potential to return excess cash in the coming months? Then secondly, Building & Construction, we've heard some mixed commentary at the peer group with some suggesting that they may have troughed. Based on your lowered guidance for I&I, clearly, I think you still expect some weakness in the second half there. So when do you think that, that business will trough for you? I know you've mentioned slowdown in large infrastructure projects in the U.S. So is it a case of getting past the U.S. election? And then thirdly, just on China. So you talked about China mid-single-digit growth, and clearly, your Consumer business is rebounding nicely. However, some of the indicators on growth for China still look a little bit mixed. So could you talk about what you're seeing on the ground in China and perhaps some comments on export versus domestic, if there are any differences to call out?

Okay. Thanks. So I'll try to answer your four questions. On M&A, there is no question that the M&A market has been a bit soft in the last few years. You're right, we've only done one in the first half. We are seeing a bit more activity. I wouldn't say a lot more, but we are seeing a bit more. The pipeline is getting incrementally stronger. As you know, I cannot predict M&A closures. I mean, we have so many moving parts here. But the pipeline, I would say, is getting incrementally better than it was 6 months, 12 months ago, which I think is good news. And as you know, the more the interest go down, the more the market will accelerate. So I think that market should get step-by-step much better for us. We'll always remain very disciplined. As you know, we focus on acquisitions that are strong in terms of growth, but also margin. Look, on cash, you're absolutely right. Our balance sheet is super strong. We've always guided for a leverage target of 1.3 to 1.8 net debt-to-EBITDA. We are below that zone. We've always said that we are happy to be below and above this range for the right reasons. You would recall from the Capital Market event and I put the slides after the guidance slide that we are not obviously against returning excess capital if this is the right thing to do. We have not made that kind of decision, but we're not against that. And then we'll have to take it a step at a time, and this is our policy. Our view in terms of real value creation is that investment in the right inorganic opportunities drive much better return than buyback. And you can run the numbers yourself, you've done it, I'm sure. It's very easy to drive EPS accretion with buyback. But the business case on return on invested capital is different. So that's where we are. It's no different from where we were a few months ago. B&C, a really, really important question. We've always seen pre and post the election a slowdown in the construction activities in North America. I would say this time, it's a bigger slowdown than we've seen in the past for essentially two reasons. One is there is, of course, an impact of higher interest rate on these large construction projects and that's a fact that we all understand. And then, of course, the question we had at the beginning, would a Trump administration come back? What would they do with the Infrastructure Act, Inflation Reduction Act, which you know has basically released tremendous incentives. So there is a bit of wait and see, but it's a bit more pronounced than we've seen in the past because the fear that some of these incentives will be watered down or taken away. Personally, I don't think so because it's going to be very difficult, but also the interest. As far as China is concerned, look, the rebound of our Chinese business in Consumer Products has been very strong in Softlines and Hardlines, as you've said. Our Electrical business continued to do very well there, so there is no worry whatsoever. We are, of course, involved in Assurance. We are, of course, involve in Food, in Chemical & Pharma products. No, I mean the manufacturing data out of China is positive. The service data is also positive when you get the PMI. So I'm not concerned about the outlook in China. And as I said, the export market is up significantly versus 2019 and make progress. So no, we are very comfortable about the outlook in China.

Our next question is from Neil Tyler at Redburn Atlantic.

A couple left, please. I think -- I suppose a similar question to Annelies' on the CapEx and OpEx activities, which look like the momentum there has slowed a little. I understand they're lapping particularly tough comparatives. But do you see enough in the end market backdrop to support sort of growth through next year? And how far forward do you sort of realistically have line of sight over for those businesses? That's the first question. And then secondly, Andre, thanks for the deep dive on the Sustainability opportunities. I appreciate those are expanding quickly, but similarly, as we've discussed previously, the competitive landscape is also developing quite quickly. So can you help us perhaps understand some of the key elements of the Intertek pitch, if you like, how these differentiate you against non-Tek competitors in the space?

Of course. So I assume that your first question is on Industry Services, right, CapEx and OpEx?

Yes, yes, yes. it is. Yes, yes. Sorry, yes.

Yes. So really important to talk about it. Thanks for asking the questions. So we have within Industry Services two businesses, right? We have one called Moody, which is essentially CapEx. We are the market leader in terms of engineering-based inspections in large energy projects being traditional oil and gas and obviously renewables. And as you rightly said, we had a really strong last performance in 2023 and we've got a strong base. The reason why our Industry Services numbers are down is because we are very, very careful with, obviously, some of our contracts renewal and we decided not to renew a few large contracts in our OpEx business, which is the smallest of the two businesses inside Industry & Assurance, which essentially means that our OpEx business was down double digit in the first half because we have decided not to renew this contract. We are not going to go for low price and very low margin. Importantly, the Moody business has grown double digit and strong double digit and continue to gain market share. We got tremendous growth in some of the projects around the world, Middle East, of course, India, Asia, North America. And here, as we talked about in the past, given the underinvestment that we've seen in the energy sector pre-COVID and given the energy security that the world is facing due to geopolitics that we all understand so well, the world has to invest in traditional oil and gas and renewables to drive energy security in the short term and energy transition in the long term. So I'm very, very, very, very bullish there. We are the market leader. We are investing in new spaces. So this is a very, very good business. Look, your point about sustainability and the pitch versus, if I understand it correctly, the Big Four, right? That's what your question is?

Yes, and even more broadly than that, I suppose.

Yes. So essentially, who is doing what in the sustainability space around the world at the moment, right? So you've got the Big Four who basically are seeing the opportunity on the back of CSRD for the audit of nonfinancial disclosures, okay? And then you've got a few companies around the world, niche consulting companies, getting involved in sustainability, assurance, et cetera and so forth, right? . So what is the pitch of Intertek, right? There is nothing that the Big Four do that we cannot do in terms of audit of nonfinancial disclosures, right? We can do that. We have the same capability. But the advantage we have versus the Big Four, all of these firms and these small consulting firm, is that we are really strong from a technical standpoint in helping companies address the drivers of sustainability improvement. Because to basically do what CSRD is asking companies to do in Europe is very, very good because you have to audit your nonfinancial disclosures. But as you know, the moment you produce numbers, people are going to ask the question, how are you improving your numbers? And the advantage that Intertek has is that we are very strong in the operational sustainable solutions, which I tried to explain today because this is an area where we invested for many, many, many years. This is, of course, where we are really, really, really edgy in terms of technical understanding and innovations. And the advantage we have when we said to our clients, look, working for Intertek, we can do what the Big Four can do, but we're going to do much more for you because we can help you essentially on the high-risk sustainability areas of your value chain, which are very different by industry. And by the way, when it comes to the consulting and advisory, we have an incredible business called Assuris, where we have all the capability in terms of helping clients do their Scope 1, 2 and 3, looking at the various methodology in terms of Scope 3, which, as you know, is a bit of a mess at the moment, but they will have to be fixed. And making sure that our clients are really, really focused on the regulatory drivers from a corporate standpoint, but also from a product standpoint because that's where the world is going, right? There are the corporate disclosures, but also the product regulation that is very important. So what is the USP? We offer an end-to-end Total Sustainability Assurance, and we are much better than our competitors.

Our next question is from Himanshu Agarwal at Bank of America.

I hope you can hear me.

Of course, yes. Go for it.

Okay. Great. Yes. No, I just wanted to come back to the organic growth performance in the first half, which we already discussed. But -- like I understand there was a 2 days impact and it has impacted the testing and certification business. But when I look at the organic growth numbers in the May-June, it looks like the slowdown was a bit more broad based. So even World of Energy slowed down quite a bit from Q1 and then Industry & Infrastructure, which we have already discussed. So if you can just talk about the drivers of this broad-based slowdown? And you're so confident on the improvement in the second half, so how should we think about -- because you had this exit run rate of around 9%, so it should be -- extrapolate that kind of growth rate into the second half, which -- yes. So that is the first one. And also on organic growth, if you can help us with the split of price versus volume in H1?

Yes. So look, on price versus volume, as I said, it was 1/3, 2/3, right? 1/3 price and 2/3 volume. Look, we are an ATIC company and testing and certification is just -- it's not only in Consumer Product, right? We are a lab-based business in Consumer Product, of course, in Health and Safety. In Industry & Infrastructure, we've got labs and in the World of Energy, right? So there is -- I wouldn't want you to think that Intertek is lab-based in Consumer Product and inspection and the rest because that's not true, right? So the discussion we had apply throughout. And I wouldn't basically worry about the unadjusted like-for-like revenue growth in May and June for the reason that we talked about, right?

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

Well, thank you very much for your time this morning. I know it's a busy day for everyone. Of course, Denis is available for any additional questions that you have for the rest of the day or next week. Thank you very much, and have a nice weekend.