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

Good day, ladies and gentlemen, and welcome to Intertek November 2025 Trading Update. [Operator Instructions] I would like to remind all participants that this call is being recorded, questions will follow after the presentation. I will now hand over to Andre Lacroix, Chief Executive Officer, to start the presentation. Thank you.

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. There are essentially 5 key takeaways from our call today regarding our July-October trading statement. First, we have benefited from a robust growth in our 2 highest margin division, Consumer Products and Corporate Assurance in the July-October period, where we've delivered a 5.8% like-for-like revenue growth on a combined basis despite a very demanding base last year. Second, we saw trading momentum improve in Industry & Infrastructure with a strong acceleration in Minerals and a good pickup in Building and Construction. Third, important message on Transportation Technology, the restructuring in the automotive sector in Q3 results in double-digit negative like-for-like revenue growth in Transportation Technology. The group like-for-like performance in July, October ex Transportation Technology was in line with the run rate we had in the first half. Of course, we continue to invest in growth with the 3 acquisitions that we've made in 2025 in high-growth and high-margin sectors. And we have launched several industry-leading innovations like SupplyTek and AI². Final message for today, given our strong margin and excellent cash performance, we are on track to meet the earnings expectations for 2025. These are the key takeaways for our call today. So let me just start our call today by answering the 3 most frequently asked questions in our investor meetings. And the first question we get is, what are your growth expectations in Consumer Products? We are extremely pleased with the performance of our Consumer Products division, which has delivered a 6.9% like-for-like revenue growth in the first 10 months of the year after an excellent year in 2024, where we saw 8% revenue growth. The global consumer continues to expect more choices of high quality, triggering more innovation with existing brands and, of course, the emergence of new brands. We are very confident about the growth outlook of our Consumer Products division, and we do not expect that megatrend to change. What I'd like to do now is give you a few examples of what our passionate and innovative colleagues do every day in our Consumer Products division. Within our softline teams, our global sales organization has won several new contracts with existing and new clients. Our online colleagues continue to expand the portfolio and recently created a breakthrough by opening a [indiscernible] center of excellence in Hong Kong. Our electrical colleagues are continuing to invest in fast-growing space like energy storage, EMC, HVAC. They are at the cutting edge of total quality assurance for AI-based products and services. And our GTS colleagues have won numerous new contracts in the Middle East and Africa. The second question we get is what are the building blocks that you have in place to deliver your 18.5% plus margin target? As you know, margin accretive revenue growth is central to the way we manage performance at Intertek. We have a strong track record of consistent margin progression and expect to reach 18.5% margin in the next few years with plenty of further opportunities beyond. We drive margin accretive revenue growth based on 5 distinct priorities. First, the portfolio effect at the site level linked to volume, price and mix management; second, fixed cost leverage linked to revenue growth. The faster revenue growth, the better leverage you have. Third, variable cost productivity improvement. We never stop reinventing ourselves to find new productivity opportunities. Fourth, targeted fixed cost reduction. We continue remove -- continuously remove unnecessary costs in the business. And fifth, of course, margin accretive investments when we do innovation, technology and M&A. We do this based on a best-in-class capability that we've built step-by-step over the years. We are indeed managing performance on a daily, weekly, monthly basis with digital operating systems that gives us real-time visibility. We have a strong pricing discipline and take price increase regularly leveraging our superior customer service. Our tight benchmarking tool gives our operation a precise constitutive analysis of where the opportunities are. We pursue a disciplined growth and margin accretive capital allocation policy. And importantly, 70% of our annual incentive scheme is based on margin-accretive revenue growth. The third question we get is what are your growth investment priorities? We operate in a very exciting industry, and we are laser-focused on the investments that we can make to seize the attractive growth opportunities ahead. And our #1 priority is, of course, to invest in our local operations. We've invested more than GBP 1 billion in CapEx in the last decade, close to circa 30% of cumulative adjusted free cash flow, and we operate a state-of-the-art lab network around the world. Last month, we opened our footwear Center of Excellence lab in Bentonville, Arkansas, the home of Walmart, and have witnessed firsthand how these investments has already created immediate growth opportunities. Our second priority is to reinvent ourselves by offering our clients new solutions to address the needs that are not met in the industry today. We believe in the importance of technology to augment the strength of ATIC solutions. And let me give you a few examples of what we do in tech. Our People Assurance business provides a comprehensive suite of audit and training solutions with SaaS delivery platform reaching close to 5 million frontline workers today. Within our softline and online businesses, we have strengthened our customer value proposition with the digitization of our testing solution with high care and inspection services with 2Q. Recently, we've partnered with Trace For Good to offer a digital platform for our clients that need to manage their data to get the digital passports ready. A few months ago, we've launched AI² to help our clients identify and manage the risks intrinsic to what they do with the app when they try to augment the value of their products or services. Our third priority is to invest in M&A to expand our IT portfolio. Our acquisition strategy targets companies that have a strong track record in high-growth and high-margin sectors. We made 6 acquisitions between 2020 and 2024, and these 6 investments have delivered in aggregate a margin of 25.1% in 2024. This year, we've acquired 3 excellent companies, Tesis in Brazil and Envirolab in Australia and Suplilab in Costa Rica. We are seeing a good pipeline of M&A opportunities, and we remain selective to identify the right M&A opportunities. Before I turn to our trading performance, I just want to let you know that in our investor website, you can now access 3 new type of information, an interactive financial modeling tool, the answers to the frequently asked questions and a dedicated You''ll be Amazed web page where you can discover what we do every day for our clients. So let's now turn to trading in the last 4 months. The group has delivered a robust trading performance with a 4.1% like-for-like revenue growth at constant currency. We have seen a robust like-for-like revenue growth in Consumer Products and Corporate Assurance against demanding prior year comparator. Like-for-like revenue growth in Health and Safety was in line with expectations. We saw a trading momentum improvement in industry and infrastructure, while in the world of energy, we saw a stable performance. Our Consumer Product division delivered like-for-like revenue growth of 5.4% at constant currency driven by double-digit like-for-like revenue growth in GTS, a high single-digit like-for-like revenue growth in Softline and a mid-single-digit like-for-like revenue growth in Hardlines and Electrical. The 2024 base was very demanding for Consumer Products. Over 2 years, we've delivered a 15.1% like-for-like revenue growth at constant currency. Our Corporate Assurance division delivered a like-for-like revenue growth of 6.6% at constant currency, driven by high single-digit like-for-like revenue growth in Business Assurance and a stable like-for-like revenue in Assuris. The 2024 base was also very demanding for Corporate Assurance. In the past 2 years, we've delivered a 16.9% like-for-like revenue growth at constant currency. Our Health and Safety division reported like-for-like revenue growth of 0.8% at constant currency. Double-digit like-for-like revenue growth in Food and a low single-digit like-for-like in AgriWorld was partially offset by negative mid-single-digit like-for-like revenue performance in Chemical & Pharma due to a strong comparator and some temporary project delays. On a 2-year basis, we delivered a 9.1% like-for-like revenue growth at constant currency in Health and Safety. Industry & Infrastructure reported 6% like-for-like revenue growth at constant currency, which was a 300 bps acceleration compared to what we saw in H1, driven by an improved momentum in Minerals, where we delivered double-digit like-for-like revenue growth and improved building construction performance with a low single-digit like-for-like revenue performance, while Industry Services continued to deliver mid-single-digit like-for-like revenue performance. The World of Energy delivered a stable like-for-like revenue growth at constant currency, driven by double-digit like-for-like revenue growth in CEA and a low single-digit like-for-like revenue growth within Caleb Brett while Transportation Technologies saw a double-digit negative like-for-like revenue performance due to a baseline effect and the temporary reduction of investments for some of our clients as they focus on reducing their cost base in what is a more challenging market for them. Turning now to the performance at the group level on a year-to-date basis. Our revenue for the 10 months to the end of October was GBP 2.850 billion, a growth of 4.6% at constant currency and 1.2% at actual rate. Our like-for-like revenue growth of 4.3% at constant currency benefited both from volume and pricing. Our recent acquisitions are performing well and contributed GBP 9 million revenue on a year-to-date basis. Margin progression was strong as we benefited from our divisional mix, pricing initiatives, good operating leverage, disciplined cost controls and productivity improvements. We delivered an excellent free cash flow performance and ROIC was also excellent. We have completed GBP 328 million of our GBP 350 million share buyback program that we announced in March. And we are basically now going to discuss our guidance for 2025. We continue to expect that the group will deliver mid-single-digit like-for-like revenue growth at constant currency, high single-digit like-for-like performance in Consumer Products and Corporate Assurance, mid-single-digit like-for-like performance in Industry & Infrastructure, low single-digit like-for-like performance in Health and Safety and a stable like-for-like performance in the World of Energy. Given our strong margin performance in H1 and the strong quality of earnings in the July-October period, we are targeting strong margin progression. Our cash discipline will remain in place to deliver an excellent free cash flow. We'll invest in growth with circa GBP 135 million, GBP 145 million of CapEx. We now expect the financial net debt to be in the range of GBP 925 million to GBP 975 million, reflecting the 2 additional acquisitions made in the second half. Our interim currency guidance remains unchanged. Net-net, we are on track to meet the earnings expectations for the full year. We are seeing high demand for ATIC solutions and the value growth opportunity ahead is significant. We are laser-focused on converting revenue growth into stronger profit growth, targeting our 18.5% plus operating margin targets. Our strong cash generation will enable us to invest in growth while providing our shareholders, of course, with strong returns. We are confident in the sustainability of the strong performance that we have seen in the last few years, and we look forward to another strong performance in 2026. Our confidence is based on the continuing increased demand for ATIC solutions and our expectations for a more supportive macroeconomic backdrop. So let me summarize the highlights of our trading statements today before taking your questions. In the last 4 months, we've delivered quality growth with our 2 highest margin divisions, Consumer Products and Corporate Assurance, delivering a robust like-for-like performance. We are converting revenue growth into strong profit and excellent free cash flow, and we are on track to deliver a strong performance in 2025, and we are well positioned to deliver another strong performance in 2026. So thank you for joining us on our call today. We'll answer any questions you might have.

[Operator Instructions] The first question is from Rory McKenzie at UBS.

It's Rory here. First question I wanted to ask about was on Consumer Products, where it's still delivering good organic growth but obviously, softlines and electricals have slowed a bit since H1. Is that just a higher comparison base you've hit so far in H2? Or are you seeing any hesitancy from brands at all given the uncertainty in some of the consumer markets? I think you commented that you are very confident in the growth outlook for Consumer Products. Just wanted to understand if that means we're at a fair run rate or whether you expect any changes in that one going forward? And then secondly, in Transport Technologies, can you just give a bit more detail on your exposure here? Have you seen a slowdown across the auto space in U.S., Europe or China? Where is your biggest business there? And just maybe a bit more on where exactly you're involved in their projects?

Thanks, Rory. Look, I wouldn't call the like-for-like performance in July, October in Softlines and Electrical and hardlines or Customer Product slowdown. I just want to remind everyone that last year, in July, October, we did 9.5% like-for-like revenue growth in Consumer Products with an exceptionally strong performance in Softlines and Electrical. So look, it's compounding. The demand continues to increase. We are winning quite a lot of new businesses with existing and new clients. The team is doing a great job in terms of customer service innovation and of course, assurance solutions. So look, this is a very, very, very good place to be in. And we're not worried about demand within consumer products in the next few years. Everything is basically in line with our expectations. As far as Transportation Technology, it's a relatively small business for Intertek. We are only present in 3 regions, the U.S., Europe and China. We are seeing essentially a significant level of restructuring activities and everything is public. You can see it, obviously, on the web. All major OEMs in Europe and in the U.S. have basically announced significant cost cutting in Q3 to deal with a few things. One is they are facing intense competition in one of their important market called China from the local OEMs. And of course, the cost of doing business in the U.S. is increased with the new tariff situation. So they're trying to basically rebase their cost structure to make sure they continue to deliver the right cash flow that they need to invest in growth. We do not worry about the long-term prospect in Transportation Technology because we all know this is an industry where innovation in technology is paramount, and they will obviously start investing again after this temporary reduction in new project funding. Where we are invested in, we're essentially investing in greener fuels, hybrid electrical technology in both Europe and the U.S. and in China. So we are really front and center in the engine development being combustion engine for greener fuels or hybrid or electrical powertrains.

The next question is from Suhasini Varanasi from Goldman Sachs.

Just a couple of questions from me, please. I think this is the first time in a while that you've talked about the next year's outlook with the 3Q results. Just wanted to understand the rationale behind this. I know you mentioned a supportive macro backdrop but are you calling out a change in consumer or customer sentiment given that most of the tariff deals have been reached? Just want to understand that, please. And secondly, in Industry & Infrastructure, can you maybe provide some color on the recovery that you've seen in Building & Construction and Minerals and your expectations for 2026?

Yes. Thank you. This is something that we also did last year. We announced our trading statement for July, October and start talking about 2025. So this is not new. As you know, we basically presented our strategy a few years ago, which has a very clear outlook in terms of mid-single-digit like-for-like revenue growth through the cycle with a target of 18.5% plus margin and strong cash and disciplined capital allocation. So our narrative, if I were to say so, in our Trading segment is in line with what we did last year and in line with the capital market event. We see a much better environment in terms of growth across all divisions for the next few years, and there is nothing more than that. Of course, the point that we are making on the statement about a slightly better supportive macro backdrop, there is no question that there have been some uncertainties in certain industry driven by some of the tariff increases where companies have been obviously being a bit more careful with investment. We've not seen much of that in the Consumer Product division but there is no question that with the tariff situation being what it is at the moment, i.e., clearer and certainly very, very, very precise now for each of the operators, I think that should remove some of this uncertainty away. That's basically what we are basically saying. As far as Building & Construction, look, we expected an acceleration of demand in building construction in the United States. This is where we operate, as you know, when there is an election year, there is always a bit of a pause before and after the election year. What we are seeing is with the lower interest rate environment, an increased confidence in future spendings. We are obviously benefiting from the activities in data centers to power the AI transformation in society, which is a business that we are well positioned to benefit from because we have essentially a building construction operation that can basically get involved in the design phase, the building phase but also when we do the commissioning. And also from an operational standpoint, our electrical business is highly involved with the certification of the equipment that goes into the data center. So there is no question that, that continues to be a driver for us. The other important driver is, of course, the investments that are happening in the United States in terms of large projects and infrastructure. As you know, the previous administration passed 2 important bill, the infrastructure bill and also the Inflation Reduction Act. There is close to $1 billion of investments that have been approved that are basically being obviously invested at the moment. And largely, we're benefiting from that. And finally, the move towards greener buildings continues to be very beneficiary for us. So look, we expect Building & Construction to continue to do well.

The next question is from Allen Wells at Jefferies.

Just a couple for me. I just -- could you provide a little bit more kind of regional color on the business? You've alluded to some of the benefits coming through in North America. Maybe you can expand on that a little bit beyond the B&I side, what else you're seeing in North America? And then maybe a comment on China and exactly how the business in China is doing there? And then maybe following on from Suhasini's question on the Industry and Infra business and the growth pickup there. What does the pipeline look like on the CapEx side of that business as we think about 2026 as well?

Thank you. Look, we will give the data on a regional basis when we announce a full year basis -- full year results, sorry. But essentially, in North America, the key trends are B&C improving its run rate because essentially our B&C business is largely North America. So you got the data. And then we are seeing a better second half within Caleb Brett as expected. Your question about the pipeline in infrastructure. Look, it's looking good for next year. So we are positive. And China continued to motor ahead. I mean we had another mid-single-digit like-for-like revenue performance. So we are not seeing any slowdown whatsoever. The team is doing a great job there.

The next question is from James Rowland Clark at Barclays.

My first is just on Minerals. It's obviously had a pickup in performance in double-digit growth in the last 4 months. Can you talk about the drivers behind that and how sustainable you think that is going into next year? And then secondly, on M&A, a couple of deals announced in the second half that's raised your net debt target. Could you also just talk a little bit about the multiple on those deals, the rationale and the sort of dilution or accretion to EPS?