Intertek Group plc ($ITRK)

Good day, ladies and gentlemen, and welcome to Intertek's Strategic Review and 2026 Q1 Trading Update. [Operator Instructions] I would like to remind all participants that this call is being recorded. I will now hand over to Andre Lacroix, hief Executive Officer, to start the presentation.

Good morning to you all, and thanks for joining us on our call. I would like to welcome Laura Christie, our new CFO, on our call today. And of course, Dennis Moro, our VP of Investor Relations, is also on the call with us. There are 3 main takeaways in our calls today. First, we are announcing the start of the strategic review to determine whether we can accelerate growth and drive further shareholder value by creating 2 specialist scale global ATIC businesses, Intertek Testing & Assurance and Intertek Energy & Infrastructure. The second key point on today's agenda, we had a strong start to the year with a robust like-for-like revenue growth at 5.4% constant currency in the first quarter. And the third important message, we are confirming our full year guidance. We are on track to deliver a strong 2026 with mid-single-digit like-for-like revenue growth at constant currency, continuous margin progression, strong earnings growth and a strong free cash flow. I'd like to start by saying that we are truly energized by the launch of our strategic review to unleash the full potential of Intertek and deliver greater value for all. I am very proud of our passionate and talented colleagues who are building a stronger Intertek every day in every single business with the disciplined execution behind our AAA growth strategy. We've launched our AAA strategy about 3 years ago. Since then, we've delivered annual revenue growth of 6% at constant currency, 240 bps margin accretion, an average EPS growth of 12% per annum and of course, all of that with industry-leading margins and returns. Intertek has always been a pioneer in the industry and true to our ever better high-performance culture, we truly believe in the power of reinventing ourselves to accelerate growth and unleash our potential. We believe that the group has now reached a scale and breadth that would benefit from greater simplification and strategic focus to take our industry-leading global business lines to greater heights. That's why we have initiated a strategic review to evaluate whether the separation of Intertek Testing & Assurance and Intertek Energy & Infrastructure, either by the way of a sale or a demerger could accelerate growth and create greater value for shareholders. In a stronger growth environment that we are experiencing across our markets, we believe that 2 specialist scale global ATIC businesses could be better positioned to unlock our full potential. Intertek Testing & Assurance and Intertek Energy Infrastructure are high-quality businesses with scale and are renowned for their science-based ATIC customer excellence and have heard the trust of our clients through the delivery of superior customer service for many years. Both businesses have compelling opportunities for further growth and value creation. They are offering premium market-leading ATIC solutions to their clients through their global network, and we believe could grow faster with a more focused portfolio strategy, sharper capital allocation and faster in-market execution. In the tech testing and assurance and Intertech Energy & Infrastructure have different customers operate in different markets with different financial characteristics and offer distinct value propositions. The decentralized and coordinated operating structure that we have in place at Intertek means that these 2 businesses have built the talents, the processes, have the assets and technology capability they need to thrive in today's and tomorrow's market. During the strategic review, which will be concluded and implemented by mid-2027, we will remain very focused on the disciplined execution of our AAA strategy, delivering on our corporate goals of mid-single-digit like-for-like revenue growth at constant currency continuous margin progression, strong cash generation, disciplined capital allocation and an excellent ROIC. Let me turn briefly to trading in the last 3 months. As usual, all the comments we'll make are at constant currency. We have benefited from a strong demand for ALT solution across all divisions and geographies and helping us to deliver a robust 5.4% like-for-like revenue at the group level. Our Consumer Products division delivered like-for-like revenue growth of 6.5%, delivered with mid-single-digit like-for-like revenue growth in South lines, high single-digit like-for-like growth in hard lines and electrical, while GTS delivered a mid-single-digit negative like-for-like performance as it was impacted by trading distractions in the Middle East. Our Corporate Assurance division delivered like-for-like provision growth of 10.8%, driven by double-digit like-for-like growth in Business Assurance, where we saw a low single-digit negative like-for-like performance within assures due to a baseline effect linked to a few large contracts at lapsed at the end of June last year. Our Health and Safety division delivered like-for-like revenue growth of 5.9% and driven by double-digit like-for-like revenue growth, mid-single digit in food, mid-single-digit like-for-like revenue growth in CMP and roll delivered a stable like-for-like performance. Our Industry Infrastructure division delivered like-for-like revenue growth of 5.5%, with low single-digit like-for-like revenue growth in Industry Services, double-digit like-for-like revenue growth in our Minerals business and a low single-digit like-for-like revenue performance in building and construction. Our World very division delivered a stable like-for-like revenue performance with low single-digit like-for-like revenue growth in Calibre and C, while our Transportation Technology business reported negative double-digit like-for-like 1 performance due to the reduction by some clients and R&D investments as they continue to focus on cost reduction in the challenging automotive environment. As always, there is much more details in the RNS. Overall, we had a strong start to 2026, and let's now discuss the performance at the group level for Q1. Our revenue for Q1 grew 6.7% to GBP 838 million. Our like-for-like revenue growth, as I said, was 5.4%, driven by both volume and pricing. The 4 acquisitions we made in 2025 to scale up our portfolio in attractive growth in margin sectors with tests in Brazil and Varela in Australia, Capri lab in Costa Rica and PTL in the U.S. are all performing very well. We saw continued margin progression as we benefit from division mix, operating leverage, cost control and productivity improvements. We delivered a strong free cash flow and continue to operate with a strong balance sheet. We continue to invest in organic and inorganic growth opportunities. We've recently announced the acquisition of Aerial PV in Europe to expand our market-leading position in solar energy and the acquisition of Quest in Colombia to expand our electrical business in an attractive Latin American market. Turning now to the outlook for 2026. We are confirming our full year guidance. We expect to deliver mid-single-digit like-for-like revenue growth at constant currency with high single-digit like-for-like in corporate assurance, mid-single-digit like-for-like in consumer product, industry infrastructures and low single-digit like-for-like enhancement safety and the world of energy. We are targeting further margin progression, which combined expected revenue growth will deliver strong earnings growth. Our cash discipline will remain in place to deliver strong free cash flow. We invest in growth with a CapEx of circa GBP 150 million to GBP 160 million will, of course, continue to deliver an excellent ROIC. A quick update on currency for your model the average selling rate in the last 3 months applied to the full year results of 2025 will be broadly neutral at the revenue and operating profit level. In addition, going forward, I'm pleased to announce that we'll be providing quarterly trading updates for the 3 months ending March and September. In conclusion, we have seen a significant performance acceleration with the strong delivery of our AAA strategy. And looking ahead, we are super excited about the significant value growth opportunity. To deliver quality growth and value for our shareholders will capitalize on our high-quality cash compound earnings model, benefiting year after year from the compounding effect of mid-single-digit like-for-like revenue growth continuous margin accretion, strong free cash flow and disciplined investments in high-growth and high-margin sectors. Our enduring competitive advantage underpin our confidence to deliver quality growth moving forward. We operate a high-quality portfolio with leading scale positions in attractive industries that are all poised for global growth. We are the premium leader in quality assurance with superior at customer service which is the trust of all of our clients over the years. Our high-quality cash component earnings model is underpinned by disciplined performance management, both on financial and nonfinancial metrics. Our science-based organization is a high-performance organization. We attract and we develop and retain the best talent in the industry. And last but not least, we operate with a culture of doing business the right way with strong controls, compliance and very strong governance. The strategic review we're announcing today will determine if the separation of Intertek testing and assurance and intersect energy infrastructure into 2 specialist scale global at leaders, will augment this enduring competitive advantage with 3 major benefits. First, the focus specialist portfolio approach for each business, resulting in greater strategic focus. Second, a sharper capital allocation to see the immediate and long-term growth opportunities targeting faster market share gains; and third, a simpler business to manage resulting in faster in-market execution, increased productivities and high returns. We are all energized about the start of our strategic review to unleash our full potential and see the significant value growth opportunities ahead. Having said that, we all remain laser focused on delivering quality growth in Q2, Q3, Q4 to make sure that we have a strong 2026. And of course, we continue to deliver a strong performance in 2017 and beyond. Thank you for joining our call today. We'll take now any questions you might have.

[Operator Instructions] Our first question comes from Rory McKenzie with UBS.

Andre, it's Rory here. And my first question, I just want to ask about, I guess, why now? I think all the divisions have always been run relatively independently and the historical view in the testing sector was that there's a benefit to them being a large central brand to leverage. So can you explain more about why you think that this kind of more focused specialist approach for each unit could accelerate organic growth and what that would really change? And then secondly, in terms of any carve-out, can you just talk through more about how Intertek is structured today? The divisions have existing different management and finance teams, what costs might you need to build up? So each unit and stand-alone? And just how do you expect to go through the process of kind of legal entity separation to different countries?

All right. Thanks, Rory. Look, this is a strategic inflection that we've been thinking about for quite a long time. This is not a short-term thinking. We came to the conclusion that the generalist portfolio model, that is the one we've been using for decades to build global scale in each of our global business lines, local scale in each of our markets, developing the depth and breadth of ATIC solutions has been doing extremely well for us but might be reaching its potential. And there is merit in greater strategic focus there is merit in sharper capital allocations, and there is merit in faster in-market execution. And what we are proposing is to evaluate the merits of these strategic assumptions. Of course, we have not made decisions. We'll obviously work on that. But it is our working assumptions that the specialist portfolio model will drive greater focus, sharper capital allocations and faster end market executions and accelerate growth. That's -- and why we're doing it now. because we've concluded that the generalist portfolio strategic approach is reaching its full potential. This is not a new ID. This is something we've been thinking about for quite a long time. And of course, today, we are just announcing the start of the strategic review that I just explained. How are the businesses being managed today. We have, as we've talked about in the past, an operating model that is decentralized and coordinated. What does the centralized mean? It means that a high office here in London, we operate with a very little overhead unit. We have about 50 to 60 people here in London. All of our resources. That's why we are the best in depth of customer service have always been in the market. And essentially, all of our global verticals have got their own operational teams and functional teams. So to the question about the synergies in terms of supporting costs, look, it's still early in the process. But given the fact that we've operated with a very decentralized and coordinated approach where the resources are in the market and the process are aligned with a very, very state-of-the-art technology. We believe that these will be limited in terms of dissynergies, but that's the work that we have to do with [indiscernible].

Yes. I understand that. It's still early. Just to clarify, I guess in most countries, would Intertek only currently have 1 legal entity? And will that be against some work through within different [indiscernible].

No, look, in terms of legal entities, we have plenty of legal entities. So we're going to go through all of these. No worries.

Our next question comes from [indiscernible] Varanasi with Goldman Sachs.

Hope you can hear me.

Yes.

Two questions from me, please. Number one, clearly, a pretty strong to the year, which is very reassuring to see. Just wanted to check if there was a bit of a catch-up effect November, December last year, which is obviously a bit slower than expected. And have you seen any changes to the operating environment since the Middle East conflict started? Any changes to oil and gas trade volumes or any increases to oil and gas CapEx trends, for example? And the second 1 is on the strategic review. Can you help us understand maybe what would make you consider a sale versus a demerger, vice versa? And you be considering also a change in listing maybe to the U.S. That's it.

Yes. Thanks. I mean on the second question, right, all the ideas you mentioned are options available to us. It's very early on. We're going to be evaluating every single option with a very simple goal to maximize, obviously, the value we can create through the separations for our shareholders. and not only the value and including, of course, the 70, if we decide to do so. So look, plenty of options to consider, as you rightly said, but it's too early to say, but we are considering all potential options. We are very, very open, and we have not determined if we do that, how we're going to do it. As far as the performance in Q1, look, it was a very strong start, indeed. I wouldn't say that we had some catch-up from orders that were not fulfilled in Q4 because, as you know, our customers cannot wait. I mean when we deliver basically a testing report or an assurance report, it's got to be done with a short turnaround time. So it's really a representation of the organic performance of the group. The question that you have asked on the Middle East is an important one. Let me just give you a bit of background, what's happening in the Middle East and what does it mean for oil and gas. Maybe if I were to contextualize what is the Middle East business for Intertek? It's about 6% of the group revenue. We have multiple business lines, but the 3 biggest business lines we have in the Middle East are Calibre, industry services and GTS. The Middle East business was slightly down in the month of March, low single digit but was up double digit in Q1. This is a strongly performing business for Intertek. There is no question that within these 3 large business lines calibrate Industry Services and GTS, the 2 businesses that were mostly impacted are Calene, which was double-digit negative in March in the Middle East and GTS, which was, as I said, doing my remark impact by trading. What does it mean in terms of the overall oil and gas trends around the world, which is your other questions? We all know that the Middle East is about 20% of the daily supply and consumption of oil and gas around the world. And clearly, the production and the export out of the Middle East has obviously reduced significantly in margins still public information. Now it takes time for cargo to go from Dubai to Singapore or to Australia. So there is a bit of a lag in what it means for supply chains of our clients and the receiving end. We expect obviously Asia to be the most impacted region if they continue as they are today. Having said that, we are seeing very, very strong acceleration of production and export in the Americas where Intertek is very, very strong, as you know. So that's the situation. Obviously, we are following that very, very carefully our teams have remained operational despite the war and the safety considerations that have been taken very seriously by all of our colleagues locally in the Middle East. We are ready to start, obviously, providing testing and inspection to our plants when the export of the trade war as start to increase again. But at the moment, it's quite a slow business environment. But having said all of that, the Middle East is only 6% of Intertek group revenue. And within Care globally, which is, I think, the important business line to have in mind, it's also 6%, right? So we can manage.

Our next question comes from Annelies Vermeulen with Morgan Stanley.

I have 2 questions, please. Two questions, please. So firstly, on the strategic review, could you elaborate a little bit more on why you think diversification is not the right strategy? Or rather, you've talked about you're seeing the generalist model reaching its full potential. What indicators would you point to that, that is the case? Like what are you seeing in the business that makes you think actually we can't unlock the full value while remaining as 1 business? What are the barriers to do that? And then secondly, again, if you think about your M&A strategy as you want to grow this review, do you would you expect to allocate capital to acquisitions across sort of both of these buckets of businesses? Or do you think you'll focus more on the consumer side?

Thanks, Annelies. I mean, look, on the second question, it's business as usual, right? We have not made our mind. We are initiating a strategic review if -- to see if it makes sense. But as far as running the business for value and growth, we're not going to change anything. I think your question is where do you see the benefits? I think if you go back into the history of Intertek, and I'm not going to go too far in time just when we obviously listed the company here in London at the beginning of the century. The businesses had an operating model that was essentially made of verticals, i.e., global century driven organizations to develop the industry through global accounts. I'm just making it simple for us to understand. And that worked tremendously for us to basically develop the market. There was a very big inflection when the organization decided that to augment the growth for global accounts, we also had to focus at the local level and trying to basically win local customers. That's when the organization that we have today, which is essentially a metric between global verticals and regions was created to make sure that we scale up not only with global accounts but with local accounts. We have now reached a real strong position in each of our markets. We have scale global verticals, local verticals. And there is no question that when you run a region, if you are in the regions with 15 business lines, there is complexity attached to making decisions that are the right decisions in terms of people, capital allocations, investments, M&A for these 15 businesses. And we believe that to take the business to the next phase of growth, we would benefit from, number one, more strategic focus in terms of portfolio. What does it mean? It means that the management that is running that country or that regions will be focused on fewer industries being closer to their customers, certainly having sharper insights in terms of innovations. And when it comes to people development and execution, it will simplify their agenda. The second area is capital allocation. When you operate in a group like Intertek, you have a certain envelope of capital allocation, which we've talked about is 4% to 5% every year. But there is arbitrage. And there is the fact competition between high-growth low-margin business, high-growth, high-margin business. And you can imagine that in 2 separate units, you will operate with a capital allocation that is focused on your end markets. And these 2 businesses that we talked about, Intertek, testing and assurance and in tech energy infrastructure operate in different end markets. In the tech testing and assurance is obviously focused on global leading brands, FMCGs, retailers or Intertek energy and infrastructure is focused on the global world of energy, trade and gas, renewables and of course, the infrastructure investments through the work that we are seeing with our minerals and BNC. So there will be a sheer benefit from sharper capital allocations. And then the last point in terms of decision-making, the focus that you're going to create at the portfolio level, the complexity that you're going to remove will accelerate decision-making. And the factor accelerate in market execution. So we have not decided we're going to do that. We want to evaluate if this strategic working assumption I just talked about, the specialist portfolio model, capital allocation policy that is dedicated for each business and faster in market executions will accelerate growth and create more value for our shareholders. That's the work we're going to do right now. But we believe that it might be the time to take the next inflection in the way we run a group to move from the generalist portfolio model to a special model with 2 global ATIC business of scale.

Perfect. Very clear. Just as a follow-up, I mean you've obviously said several times, it's different end markets, different customers. So I -- can we assume there's not a lot of customer overlap between these 2 segments? And therefore, you don't see any risk of revenue dissynergies from breaking up the business?

Yes, you said right.

Our next question comes from James Rowland Clark with Barclays.

Can you hear me?

Of course.

Three questions, please. On the strategic review. I'd just be interested to know if in the recent history, you've been approached by buyers for any of your verticals within World of Energy and industry and infrastructure and whether those interested parties tended to be trade buyers or private equity? My second question is on health and safety. That's a division you're planning to keep. It's underperformed the group, it's growing low sort of single digits this year and you've done a sort of restructuring in that division. Is there any reason why that isn't considered within your strategic review as potential for sale of demerger. And then finally, Assurance improved a lot in Q1 versus the end of the year. And I think you've mentioned this in the answer to Sunesis question, but is there any catch-up there? Can you just help us with what the underlying growth really is in Assurance at the moment?

Yes. All right. So let's just start with the last question. No, there is no catch up in Assurance in to your colleague I mean we have a key priority with every single of a customer. It's called turnaround time, right? If you basically test tissue gene, you got to lever your report within a few days. And it's the same with Assurance. I mean our clients don't wait very long. So no, I think there is no catch-up. The growth that we got in a basically because we had built the backlog of demand for Q1 and the rest of 2026. As far as health and safety, look, health and safety yes, had a bit of a slow '25, but I just want to put things into context. I mean, we did 7% revenue growth in '23, 7.9% revenue growth in '24. And we did 5.9% revenue growth in Q1. So this is a strongly performing business. Yes. we had a bit of a slowdown in one of our business line last year for the reason we talked about it, but it's a fantastic business. And going back to the question that analyst was asking about customers. I mean, the big difference between industry -- so energy infrastructure and testing and assurance work for global leading brands. being retail or consumer brands. And this is a business that is definitely part of our testing national division moving forward, and it's been performing very well, recognizing that we had a bit of a slowdown in 2025. But as you know, if you cannot keep growing full speed ahead every single year. As far as your first question on strategic review, no, we've never received any formal offer or approach for one of our world of energy business. So that's [indiscernible].

our next question comes from Victoria Chang with JPMorgan. [Technical Difficulty] Thank you for your patience, everybody, Victoria, if you would like to repeat your question.

Can you hear me?

Yes, of course, sorry for that, Victoria. Apologies.

Yes, of course. So my question was if you can confirm that you expect to keep all business lines within Industry & Infrastructure and world of energy, in the Inspec new energy and infector are there certain business lines that you could expect to move into the rest of the business? For example, CEA, which I understand could be a bit more insurance-based? My second question is also on assurance activities. What percentage or what -- how big is the insurance activity business within industry infrastructure and model energy? And do you expect that to stay there? Or does it make more sense to move any kind of assurance activities into the business?

Yes. Thanks. I mean, really 2 very good questions. CEA, which is our solar assurance business, we'll move into the electrical business because this is the way it's run. It's obviously solar panels and energy storage and battery and it's managed today by our global electrical business. So that will basically move from the world of energy into consumer products. The rest doesn't change. Your question on Assurance is really a good one. We have developed our ATIC value proposition over the years. And when we offer Assurance, we have 2 type of Assurance solutions. We have the Assurance solutions that are industry-specific and which are basically managed by the business lines, let's just say, BNC or Moody or Caleb Brett. And you've got the industry agnostic assurance solutions that are part of corporate assurance. So that's the distinction that we make, all right? So nothing will change in terms of the ATIC solutions that Caleb Brett or BN C or Moody provider and sells their clients today. All right?

I see. Okay. And is it possible if you could disclose what level of industry-specific assurance activities you have within Intertek Energy and infrastructure?

Yes. Look, we disclosed the EPIC revenues on a global basis every year. And if you want to get a sense of the weight, if you want, in terms of revenue of the nonindustry agnostic assurance solution, the best way is to take the revenue that you at a group level minus the corporate insurance and you will get the answer.

Okay. I understand. Sorry, just one more follow-up. The government and trade services been consumer products. Do you think it makes sense to continue sitting there? Or do you think it's more natural synergy -- okay.

Of course, we are working with global brands, right?

Our next question comes from Virginia Montorsi with Bank of America.

Just a quick one. Could you remind us what was the M&A contribution in health and safety in Q1? And what contributed mostly to it?

Yes, essentially, we bought a business called Embarlab, which is an Australian-based environmental testing assurance business, and it was the main driver of the difference between organic and total revenue.

Our next question comes from Geoffroy Michalet with ODDO BHF.

Yes. Two questions for me. First one on the TT business. we is still affected. Do you have any change in the tonality of your clients about when they speak about, let's say, coming back on the market within this division? And then the second question is on the Middle East disruption. Can you describe us some positive side effect that you are seeing? You talked a bit about oil and gas in the U.S.? Is it something that we witnessed already in Q1? Or is it more something that you anticipate for Q2 and going forward?

Yes. It's great questions. Look, TT remains very challenging for our clients. Look, we expect that our clients are going to resume investments in R&D. Based on the discussion we have, they're not obviously reducing their innovation investments over time. But at the moment, there are still on the short-term cost and cash management. So it remains very tough, and we'll take it a step at a time. We'll see how the second half unfolds. As far as the positive effect upside of the Middle East in Q1. Yes, I mean, clearly, we had a very strong performance for Caleb Brett in the Americas, I suppose, North America and Lat Am. Why? Because, of course, Europe is importing more from the U.S. and LatAm. And we sense of benefit from it. No question. All right.

[Operator Instructions] Our next question comes from Joe Brent with Panmure Liberum.

Can you hear me?

Of course, yes.

Two sort of related questions really. Firstly, you've hopefully given a divisional split of revenue for the potential demerger. Could you give us some indication of what the profits of those 2 businesses could look like? And secondly, I appreciate it's early in the process, but just thinking about potential extra costs from having 2 businesses versus 1. Is it fair to say that you'd expect the extra cost to be less than 1% of total sales?

All right. So in terms of the margin of the 2 businesses, when you look at our full year disclosures, essentially, you have the contribution margin by division after all overhead allocations at the group level. And as I said earlier in the call, we do not have a lot of overheads in the center. We operate a decentralized market focus business model. So if you do crudely the margin calculations based on these disclosures, you will get a sense of the margin of both in detect testing and assurance and Intertek energy and infrastructure. Of course, Laura and I are going to need to do some work on overhead allocation and absorption which obviously will change this margin profile a bit, but it's not going to be something that we believe is going to be materially different, but there will be some, obviously, change of economics based on overhead absorption depending on the formula that we use and where we put the overhead. As far as how much incremental costs are going to be added to the Tesla. This is something that we're going to do allegiantly during the strategic review. Of course, if you do a demerger and you list 2 businesses. i.e., we have to list another business findation to Intertek today. They will have a certain level of cost if obviously, you do a sell, it's a different level of cost. So this is going to be part of the of the work we're going to do. And I'm not going to say much more than that for now.

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

Well, thank you very much for being on the call today. I know it was on short notice, we appreciate you making the time for Intertek. And then Denis will be available if you have any more questions. Thank you very much.

Thank you for your participation in today's call. You may now disconnect.