Intertek Group plc (ITRKL.XC) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Intertek H1 2025 Results. [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, Chief Executive Officer, to start the presentation.

Good morning, and thanks for joining us on our call today. Colm, Denis and I are delighted to be with you and discuss our H1 '25 results. Intertek has demonstrated once again its high performance through the passion, innovation and the drive of its people. And I wouldn't want to start our call today without recognizing all of my colleagues for having delivered a strong set of results in customer service, revenue growth, margin accretion, earnings growth, cash generation and ROIC progression. Here are the key takeaways of our call today. H1 '25 marks the ninth consecutive 6-month period of mid-single-digit like-for-like revenue growth and the fifth consecutive 6-month period of double-digit EPS growth at constant currency. Our profit conversion was strong with operating margin up year-on-year by 80 bps. Our cash conversion was 118%, and we've delivered a strong operating cash flow. Our ROIC was excellent at 22.5%, up year-on-year by 170 bps. We are increasing our interim dividend in line with our EPS growth at actual rates. Moving forward, the value growth opportunity is significant. We expect a strong financial performance in 2025, and we remain confident in our medium-term targets of mid-single-digit like-for-like revenue growth, margin of 18.5% plus and strong cash generation. We'll continue to operate with our accretive disciplined capital allocation policy, investing in organic growth, rewarding our shareholders with our progressive dividend policy, pursuing high-quality M&A opportunities and returning surplus cash to shareholders. So let's start our presentation today with our performance highlights. We have delivered indeed a strong financial performance in the first half of 2025. Our like-for-like revenue growth was 4.5% at constant rate. Operating profit was up 9.7% at constant rate and 4.2% at actual rate. We've delivered a 16.5% operating margin, up 80 basis points at constant rate. EPS growth was 12.6% at constant rate and 6.3% at actual rate. CapEx investments were up 11%. ROIC of 22.5% was up 170 bps at constant rate. The interim dividend of 57.3p is up year-on-year by 6.3%, and our balance sheet remains strong with a net debt-to-EBITDA ratio of 1x. Let's now discuss our like-for-like revenue growth performance. The global demand for ATIC solution was robust and our like-for-like revenue growth of 4.5% at constant rate was driven by both volume and price. We'll discuss later in the call the performance by division and by business line, but we are pleased to see the consistent delivery of mid-single-digit like-for-like revenue growth, resulting in a 3-year like-for-like revenue growth of over 13%. We are benefiting from attractive structural growth drivers. Our clients are increasing their investment in quality assurance to improve their competitiveness. We are seeing higher regulatory standards for quality, safety and sustainability. We are seeing an increase in testing and certification activities in our Consumer Products and Health and Safety divisions as consumers want more choices and higher quality choices. Companies are increasing their focus on risk management, making our Assurance business the fastest-growing division. The increased investments in oil and gas exploration and production as well as the electrification of society are creating structural growth opportunities in our Industry Infrastructure and World of Energy divisions. Last but not least, our superior customer service drives extremely high customer retention rates and excellent client relationships, driving revenues that are largely recurring and giving us good visibility on new growth opportunities. The consolidation opportunities in our industry are significant, and we're excited about the M&A opportunities. We've made 7 acquisitions in the last 5 years to strengthen our ATIC value proposition in high-growth and high-margin sectors. These acquisitions are performing very well and the integration of TESIS, our recent acquisition [indiscernible]. Moving forward, we will capitalize on our strong M&A track record of selecting and executing transactions that are delivering strong returns. We are also very pleased with our margin performance of 16.5%, up 80 basis points at constant currency. Margin accretive revenue growth is central to the way we deliver value. We have increased H1 margin in each of the last 3 years, and I want to spend a few moments to discuss the building blocks underpinning our year 240 bps margin progression. We have benefited from our portfolio mix and strong pricing power. We have delivered consistent mid-single-digit like-for-like revenue growth, driving good operating leverage. We have reduced our fixed costs. A few years ago, we announced a cost reduction program to target productivity opportunities based on operational streamlining and technology upgrade initiatives. Our restructuring program has delivered GBP 13 million of savings in '23, GBP 11 million in 2024 and GBP 2 million in the first half of 2025. We expect a further benefit of GBP 3 million in the second half. We truly believe in continuous improvement, and we never stop reinventing ourselves to increase our productivity based on process reengineering and technology investments. And our CapEx and M&A investments were made in high-growth and high-margin sectors and have delivered through the period margin accretive revenue growth. These positive margin drivers were partially offset by the investments we have made in people, process and technology to execute our AAA growth strategy. I will now hand over to Colm to discuss our H1 results in details.

Thank you, Andre. In H1 '25, the group delivered a strong financial performance. Total revenue growth was 4.5% at constant currency and 0.2% at actual rates as sterling strengthened compared to the major currencies that impacted our revenue growth by 430 bps. Operating profit at constant rate was up 9.7% to GBP 276.3 million, delivering a margin of 16.5%, up year-on-year by 80 basis points at constant currency and 60 basis points at actual rates. Diluted earnings per share were 111.5p, growth of 12.6% at constant rates and 6.3% at actual rates. Our cash conversion was strong. We delivered an adjusted cash flow from operations of GBP 265.8 million, and we finished H1 '25 with net debt of GBP 800.6 million, including the GBP 187 million spent on share buyback to the end of June, and this represents financial net debt to adjusted EBITDA ratio of 1x. Now turning to our guidance for '25. We expect net finance costs to be in the range of GBP 51 million to GBP 52 million. We expect our effective tax rate to be between 25% and 26% and our minority interest to be between GBP 22 million and GBP 23 million. CapEx investment will be in the range of GBP 135 million to GBP 145 million. Our financial net debt guidance, excluding future change in FX rates or M&A, will be GBP 820 million to GBP 870 million. I will now hand back to Andre.

Thank you, Colm. And let's discuss our performance by division. All the comments I will make will be at constant currency. Our Consumer Products division delivered a revenue of GBP 482 million, up year-on-year by 7.5%. Our high single-digit like-for-like revenue growth was driven by double-digit like-for-like in Softline, mid-single-digit like-for-like in Hardlines, high single-digit like-for-like in Electrical and double-digit like-for-like in GTS. Operating profit was GBP 135.6 million, up 15.8% year-on-year and a margin of 28.2% was up year-on-year by 210 basis points. In 2025, we now expect the Consumer Products division to deliver high single-digit like-for-like revenue growth. We grew revenue in our Corporate Assurance division by 8.2% to GBP 251 million. Our like-for-like revenue growth was driven by high single-digit like-for-like in Business Assurance, low single-digit like-for-like in Assuris. Operating profit was GBP 55.6 million, up year-on-year by 11.2% and our margin of 22.1% was up year-on-year by 60 basis points. In 2025, we continue to expect our Corporate Assurance division to deliver high single-digit like-for-like revenue growth. Health and Safety delivered a revenue of GBP 164 million or low single-digit like-for-like revenue growth of 3.2% was driven by double-digit like-for-like in Food, mid-single-digit like-for-like in AgriWorld, which was partly offset by negative low single-digit like-for-like in C&P due to a baseline effect. Profitability was impacted by mix, and we've delivered a margin of 11.8%, down 10 basis points year-on-year. In 2025, we now expect our Health and Safety division to deliver low single-digit like-for-like revenue growth. Revenue in Industry & Infrastructure increased 3.7% to GBP 417 million. Our low single-digit like-for-like revenue growth reflects mid-single-digit like-for-like in Industry Services, mid-single-digit like-for-like in Minerals and stable like-for-like revenue in Building & Construction. Operating profit of GBP 36 million was up 4.6% year-on-year with a margin of 8.7%, up year-on-year by 10 basis points. In 2025, we now expect our Industry and Infrastructure-related business to deliver low single-digit like-for-like revenue growth. Revenue in our World of Energy division were GBP 359 million. Our stable like-for-like revenue performance was driven by stable like-for-like revenue in our Caleb Brett business, low single-digit like-for-like revenue growth in our TT business which was offset by mid-single-digit like-for-like revenue in our CEA business due to a baseline effect. Profitability was impacted by mix and our margin of 8.2% was 60 basis points lower than last year. In 2025, we continue to expect our World of Energy division to deliver low single-digit like-for-like revenue growth. A few years ago, we introduced our AAA differentiated strategy for growth to unlock the significant value growth opportunity ahead. And today, I would like to give you an update on the progress we are making on the ground. Our AAA strategy is about being the best for every stakeholders with laser focus on our medium-term goals of mid-single-digit like-for-like revenue growth, 18.5% plus margin and strong cash generation. In the last 2 years, I've shared with you several deep dives called AAA strategy in action, which you can see on the slide. And today, I would like to cover 3 important areas: the attractive growth model of consumer products, the exciting global growth strategy of Electrical and the outstanding business poised for fast growth we have built in India. Let's start with Consumer Products, our largest and most profitable division, where structural growth drivers are both unique and exciting. Our revenue growth model is essentially based on the number of SKUs or product type we test, the number of tests we do per SKU and the price we charge for this test. We operate in a world where consumers want more choices, which means companies need to innovate constantly to gain market share. The global SKU expansion that we have seen in the last few decades has resulted in more SKUs for Intertek to test. Consumers also want higher quality choices, which means companies need to upgrade the performance of their products in quality, safety and sustainability. This means more tests per SKU for Intertek. And the higher performance standards we need to test against means that we benefit from a higher price per report. Over the years, we have increased our scale leadership position in softlines, hardline and electrical, and we've delivered consistent revenue and margin progression. Moving forward, we are confident we'll continue to benefit from these 3 strong growth drivers. Now I would like to give you a few examples on how customer expectations for higher quality in softlines, hardlines and electrical have resulted in a higher number of tests per report and a higher price per report. On this slide, you can see the progression of number of tests per report for 4 type of softlines products, T-shirts, running shoe, denim jeans and a hat. Here, we are showing 4 product examples in the Hardlines business, a toy, a stroller, a sofa and a chair. And finally, the same data for 4 different product types in the electrical business, a large battery for energy storage, electrical fans, lighting certifications and cooking equipment. Let's now focus on the exciting growth opportunity for our electrical business, which represents half of our Consumer Products division. Our global electrical footprint is excellent. And over the years, we have built large-scale operations, delivering our ATIC service across 11 industries in 23 countries. Our track record has been excellent. Revenue growth CAGR was 7% between 2015 and 2024 as the electrification of society increased its growth momentum and as we benefit from continuous regulatory upgrades. Our electrical business is truly mission-critical to society. In 2020, a year of massive global supply chain disruption due to COVID, our like-for-like revenue grew by 2% on a global basis. We are very excited about the growth opportunities ahead, and we are confident that we'll continue to benefit from electrification of society and regulatory upgrades. We pursue a very disciplined organic and inorganic investment strategy within electrical, targeting, as you would expect, high growth and high-margin space. Over the years, we have pioneered the industry with our cyber assurance solutions. And a few weeks ago, we've launched AI2, the first global AI assurance program. In addition, we have expanded our footprint to increase our capacity in HVACs, renewables and grid management. Let's now turn to India, where we have built a well-diversified scale business with market leadership positions in most of the business lines we operate in. We operate in state-of-the-art operations, and we have a good national coverage of 18 sites, positioning us well for the exciting growth opportunities ahead. Our business was founded in 1993 and has delivered an excellent performance over the past 10 years with a revenue growth CAGR of 9.5%. We have leveraged our scale, of course, and benefited from our disciplined performance management, enabling us to deliver a high margin, strong cash and excellent ROIC performance on a sustainable basis. India is one of the fastest-growing economy in the world with very strong fundamentals underpinning the future. Given our track record and growth potential, we expect India to deliver high performance for many years to come. We see opportunities to increase our ATIC revenue with existing customers as brand increase the number of products that manufacture in India and upgrade the quality, safety and sustainability performance of these products. What is equally exciting in India is a number of companies being created every day to seize the domestic market opportunities as well as a number of international companies setting up operations in India. We have a highly talented organization in India, and we continue to invest in growth. We've opened the center of excellence in Gurgaon for our softline operation, which is the flagship of the industry. We've launched recently our global market access program, Supply Tech to help factories improve their global market access, and we are leading in the space of sustainability assurance and biodegradability. Let's now discuss our guidance for the full year. Given the strong performance we've delivered in H1, we are entering H2 with confidence and expect to deliver a strong performance in 2025. We expect the group will deliver mid-single-digit like-for-like revenue growth at constant currency, driven by high single-digit like-for-like growth in Consumer Products and Corporate Assurance, low single-digit like-for-like growth in Health and Safety, Industry and Infrastructure and the world of energy. We are targeting year-on-year margin progression. Our cash discipline will remain in place to deliver strong free cash flow, and we will invest in growth with our CapEx investment being circa GBP 135 million to GBP 145. We expect our financial net debt to be in the range of GBP 820 million to GBP 870 million. A quick update on currencies for your model. Currencies have been very volatile and the average sterling rate in the last 3 months applied to the full year results of 2024 would reduce our full year revenue and operating profit by circa 350 bps and 500 bps, respectively. We believe in the value of accretive disciplined capital allocation. Our first priority is to support organic growth, and we target CapEx investments of circa 4% to 5% of revenues to expand our footprint geographically, develop industry-winning innovations that are largely technology-based, maintain our state-of-the-art global network and invest in technology to digitize and streamline our processes. Our second priority is to reward our shareholders with a progressive dividend policy, and we target a 65% payout ratio. We are very excited about the inorganic investment opportunities, and our M&A investments will continue to be made with the same disciplined ROIC-driven approach. Our leverage target is 1.3 to 1.8 net debt to EBITDA. Given the increasing strength of our high-quality cash compound earnings model, we've announced in March a GBP 350 million share buyback program to return the surplus cash we do not need to run the company for growth. And at the end of June, we have bought 4 million shares for a value of GBP 187 million. In summary, the value growth opportunity ahead is significant. Our highly engaged customer-centric organization is laser-focused to take Intertek to greater heights. To deliver sustainable growth and value for our shareholders, we'll 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, margin accretion, strong free cash flow and disciplined investments in high-growth and high-margin sectors. Before I take your questions, let me summarize the economic drivers of our high-quality cash compounder earnings model. We operate in a highly attractive industry where we've delivered mid-single-digit like-for-like revenue growth for the last 3 years, and we have good visibility on the structural growth drivers moving forward to deliver mid-single-digit like-for-like revenue growth. Margin accretive revenue growth is central to the way we manage performance, and we are confident that we'll deliver our medium-term margin targets of 18.5% plus, focusing on our proven margin accretion building blocks. We have step changed the cash generation of the group and now operate a highly cash-generative earnings model. We'll continue to operate with our accretive disciplined capital allocation policy and reward our shareholders with our progressive dividend policy. We'll continue to invest in high-growth and high-margin sector with superior execution to deliver an excellent ROIC. In summary, Intertek has created significant value in the last 10 years, and we are well positioned to create significant value moving forward. To do so, we'll capitalize on our 5 strengths: our high-quality global growth portfolio, our science-based customer excellence ATIC advantage, our disciplined performance management, our high-performance organization and of course, doing business the right way, operating culture. Thank you for being on our call today, and we'll now take any questions you might have.

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

Two questions, please. Firstly, on Consumer Products. Thanks for that deep dive into the growth model. It was really interesting. How does the current environment affect your growth? For example, are you seeing some clients reduce ranges because of consumer challenges? Are there other clients who maybe are speeding up launches before tariffs come in fully? And also, have you seen much acceleration yet in supply chain consulting and those kind of services? And then secondly, I appreciate cash conversion was still strong, but cash flow was a bit below last year. I know there's seasonality, but could you give us any more detail on the working capital outflow in H1 and maybe especially comment on what's within the GBP 30 million change in provisions?

Why don't we start with the GBP 30 million provision question. So it's a very, very simple answer. So Colm, [indiscernible]?

Rory. So simply, -- we have moved -- as we finalize the '24 EBITDA on a recent acquisition, we've moved from a contingent liability into payables. So the number is still on the balance sheet. It's just moved between lines. On cash flow, look, cash from operations broadly flat. On free cash flow, there's a couple of movements in there around higher CapEx, higher cash tax paid on the back of bigger profits last year. And of course, the weakening of the dollar will have led to some cash outflow on the hedge program. But broadly, I mean, the conversion is very strong, and we don't have any concerns on the outlook for net debt for the year.

Thanks, Colm. Look, on Consumer Products our clients right, are taking the time, Rory, to understand what the tariff change could imply for their economics. That's basically what we are seeing throughout the world. Nobody is rushing or panicking. As you know, our volume of testing and certification is linked to a number of SKUs we test and a number of test per SKUs. And to set up a yearly production program for any brand, this is a planning that takes a long time. And brands didn't have the time nor the desire to basically advance new product launches, right? So we've not seen any demand being pulled forward from a testing and certification standpoint. It just doesn't work like this in softlines, in hardlines, in electrical and in GTS, right? Companies set up their supply chain for the next 12 months based on their new product strategy. They need to get the Tier 1, the Tier 2, the Tier 3 supplies organized and to get the CapEx approved and implemented in the factories. So there is a huge inertia in supply chain planning, as you can imagine, that's super complex. And companies cannot just say, look, we're going to just launch this new product 3 months before because of the tariff. It doesn't work like this. The -- I think important point for us is that when we basically do a product test or product certification, it doesn't matter if it's electrical, if it's hardline and softlines. Companies have built scale manufacturing operations around the world that produce not for one geographic destination. And of course, some of the brands importing into the United States might feel some increased cost in the short term. But where they produce that SKU, they produce for multiple destinations. That's why they're taking the time to understand what the true economics are going to be and what are the options. What's really, really interesting is that we are seeing a significant interest for our SupplyTek Assurance program because companies want to take the time to understand what the options available to their product lines are. Because if you are, let's just say, producing batteries in China or in Korea and you might want to change your production location for tariff consideration. I just explained, it's complicated to set up the supply chain to run it, to change it, is not easy. They're going to need to look at the entire ecosystem, right? Do they have the raw materials, the components, the logistics infrastructure. So this is super complex. And of course, customers have been very, very positive about the fact that we've reached out to them to say, look, we can help you understand the potential new routes that you could eventually invest in. For us, right, what is going to mean if new routes are being established, it's going to create new opportunities because we'll have more factories to audit and inspect and more products to test and certify. So that's the state of play, and we are not seeing anyone overreacting, which is what I would have expected.

We'll take our next question from Suhasini Varanasi of Goldman Sachs.

Just a couple from me, please. Can you discuss what's changed versus your previous expectations in health and safety, industry infrastructure that caused the downgrade to full year expectations on revenues? And the second one, on M&A, there has been a larger deal done in the space in the U.S. Just want to get a sense of whether you took a look at that transaction and decided not to pursue it? And how is the pipeline looking today?

Yes. So look, on M&A, the pipeline is increasingly more active. That's the good news. This is what we've talked about in the last few years, and we continue to look at opportunities that make sense for Intertek. Of course, we saw the prospectus on this transaction you're referring to, but I would never have considered that for Intertek. It doesn't make sense for us. As far as the slight change of outlook for health and safety and industry infrastructure. Look, this is really a small change around the edge, I would say. We basically are recognizing the H1 performance. And we've seen a few project delays with some of our large pharma customers in CMP that will not happen in the second half. And also with Moody's, that's why we are basically adjusting the guidance accordingly. But nothing to worry about. The are just project delays, not cancellation.

We will take our next question from Karl Green of RBC.

Just following up on the provision movements, Colm. If I heard you correctly, you said that, that was largely due to a reclassification from contingent consideration payable to a hard payable. But I just wanted to be clear in terms of the cash flow adjustment that's come from that. Did you say it was still payable, so the cash is yet to go out or the cash has gone out. So I'm just trying to reconcile what's happening in terms of the change in provisions of GBP 31 million in the cash flow statement, please.

Karl, yes, so -- there's 32 million from contingent consideration once we finalize the EBITDA on the acquisition, and it's now in payables. Of course, it won't be in the cash flow because it's separately disclosed. But happy to kind of go through the more detail with you after the call, if you'd like.

Question floating around this morning is it's a big cash movement in the provisions in the cash flow. So people just trying to understand, is that just kind of timing issues? Or has there been provision releases to the P&L?

Yes. Karl, I'm not sure if there's some crosswires here. The provision movement wouldn't be in the cash flow. The movement of cash flow is driven by 3 key factors. It's the higher CapEx, higher tax -- cash tax paid and the outflow on the hedge program. I'm not sure why we're linking the 2 together.

Yes. And then on your question, Karl, about P&L, I can assure you that has no impact on the P&L. If you take this reclass, the provision is up year-on-year. So no impact on EPS, no impact on cash flow.

We'll take our next question from Neil Tyler of Redburn Atlantic.

Just returning -- going back to Consumer Products and the themes that you described, and thanks also for me for the detail in the slides. Can you talk a little bit about how that might be changing the competitive landscape more broadly? I'm not just thinking obviously of the larger listed players, but more broadly, how that complexity is altering that perhaps in the major regions? And then secondly, you talked about in your comments about pricing power. Now there are you referring again to mix, i.e., more higher-priced tests being performed similar to the comment you made on the previous call? Or are you talking about sort of, I guess, sort of price over cost per item?