SGS SA (SGSN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the SGS 2019 Full Year Results Conference Call and Live Webcast. I am Alice, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Tobias Reeks, Senior Vice President of Investor Relations at SGS Auditorium in Geneva. You will now be joined into the conference room.

[Audio Gap] and welcome, again, to the presentation of our full year 2019 results. As usual, I will start with the highlights of our full year performances, then I will hand it over to Dominik to give you a more detailed walk-through of the financial results, and then I'll come back to give an outlook and guidance for 2020. Let me start on that slide. Total revenue grow -- grew by 1.2% at constant currency, while the organic growth was 2.6%. Our adjusted operating income stands at [ CHF 1.063 billion ], 4.6% increase compared to 2018. Profit for the period stands at CHF 702 million, an increase of 1.7% compared to last year. And the free cash flow from operation amounts to CHF 870 million compared to CHF 796 million in 2018. Our ROIC has improved to 25.5% for the last 12 months. And the Board of Directors is proposing a dividend of CHF 80 per share, an increase of -- from CHF 78 in 2018. This slide shows little bit the KPIs that we have established in terms of growth stability for further the long-term value creation of our portfolio for shareholders. We expect to be able to maintain or improve this performance going forward. But just to give you an indication on what we've done over the last few years. During 2019, we remain disciplined or focused on our capital allocation, [trying to keep ] in line with our long-term objectives. So during the year, we made 11 acquisitions in 6 business lines in order to strengthen our portfolio. The largest of those acquisitions is Maine Pointe, in the U.S., and together with the Leansis, which was the first acquisition we made in 2016, enhanced our capability and our strength in the operational consulting area, and add additional value to our customers, not just the CD customers but across the board of our customer base. Four acquisitions were made in EHS. Floriaan's increased our expertise in the fire consulting. Our global laboratory network has been strengthened with the addition of PT WLN in Indonesia and Forensic Analytical Laboratories in the U.S.; and DMW Environmental Safety to support our growth in the Health and Safety sector. And this is why it is based in the U.K. I'll talk about that. And after the full year closure, we also announced an additional acquisition in the area of consumer retail services in the U.S., is Thomas J. Stephensons -- Stephens, sorry, is a company which is specialized in clinical research in the safety and efficacy of cosmetic and personal health care products. So combined with HRL, that is an acquisition made a couple of years ago, this will enhance our capabilities and competence on the service offering in the U.S. market. So these are quite good additions to our expansion to the U.S. market. During the 2019 exercise, we also made 4 disposals. So we mentioned earlier to DCI Petroleum Services Corporation, which is a larger one. We've also made the disposal towards end of last year with the vehicle inspection in the U.S. as well. And we've also disposed of our PTO activities in the Netherlands. But the ones that we have not highlighted too much, there was a small legacy licenses activity that we had in the -- in Italy that we disposed off during the first half of the year, but there's also rather small unit and we have not flagged this one. If you make -- you take the 4 disposals together, we are more or less around the CHF 250 million of revenue, and this is in line from the numbers I have highlighted during the 2018 Investor Day in terms of disposal strategy. But beside the acquisition and disposal, the SGS Group is continuing to invest in new sectors to position ourself with the long-term evolutions. A couple of examples just to highlight. Our southern laboratories strategy, we mentioned that already in the half year, this is a strong development and the progress in terms of expansion in the Europe and in the U.S. is according to our plan. Our second development in terms of new business is our semiconductor industry. We have the new strategy in terms of [ semiconductor industry ], especially in [ China ]. Some of you that has been with us during the Investor Day of 2019 last year, in fact they have saw some of the activities that we are performing there. And we're trying to expand this kind of similar activities in the Chinese market, which is a quite fast-growing segment. Those 2 months [indiscernible] of connectivity in [indiscernible]. So all that is great in terms of development for the long-term strategy in assets growth. On that, I'm going to hand over to Dominik to go through the financial review, and I'll come back with an outlook for each of the business [ models ].

Thank you, Frankie. Good afternoon, ladies and gentlemen. I will start with the overview of the financial highlights for 2019. Frankie already mentioned the operating highlights in his introduction with revenues of CHF 6.6 billion, and adjusted operating income of EUR 1.063 billion. Revenues for the Group in constant currency increased by 1.2% driven by the organic growth in the majority of our segments of 2.6%, partly offset by the net effect of acquisitions and disposals. The adjusted operating income increased by 4.6% in constant currency to EUR 1.063 billion, leading to a margin increase of 50 basis points to 16.1% in 2019. The strong increase in operating income of 18% in constant currency is a result of the CHF 259 million gain of the disposal of PSC, net of transaction costs in the U.S., partly compensated by provisions for indirect taxes considered in the first half of 2019; a goodwill impairment of CHF 21 million considered in the first half of 2019; the structuring costs of CHF 89 million while the vast majority is related to structural cost optimization program executed in the second half of 2019; and impairment of fixed and intangible assets of CHF 24 million considered in the second half of 2019. While the operating profit in 2018 than the year before was negatively impacted by CHF 47 million in relation to the overstatement of revenues in Brazil. The effective tax rate increased from 24% in the prior year to 31% in 2019. The increase in the tax rate is due to valuation allowance on DTAs as disclosed in the first half of 2019. Subsequently, net profit after minority interest increased by 2.6% to CHF 660 million in fiscal year 2019. We posted a moderate organic growth of 2.6% while acquisitions added 1.1%, and the disposals had a negative impact of 2.5%, leading to constant currency growth rate of 1.2%. The negative currency impact of 2.8% was due to the strengthening of the Swiss franc against all major currencies with the exception of the U.S. dollar. Moving on to the revenue growth by business. Agri, Food and Life achieved solid organic growth of 3.8%. Growth in trade and logistics was good. Food, solid, and Life delivered moderate growth. Our growth in Minerals decelerated as expected throughout the year, leading to a solid organic revenue growth rate of 3.7%. The growth was primarily driven by the trade in geochem business while Metallurgy and Plant Operations declined as a result of delayed projects in a softer market. Organic growth in Oil, Gas and Chemicals was 2.9%. Rate was broadly stable despite a more competitive environment and pricing pressure in several jurisdictions. Upstream achieved strong double-digit growth, and some growth was also achieved in oil conditioning monitoring while the Non-Inspection Related Testing services was stable. Consumer and Retail continues to grow strongly, delivering an organic growth of 5.4%. The strongest growth driver was the Electrical and Electronics business, growth in Softlines was solid, benefiting from new customers and strong performance of new [ sourcing ] countries, including Vietnam, Turkey, Indonesia and Cambodia while China remained stable. Hardline achieved strong growth, benefiting from increased volume of activities with e-retailers and other e-platforms. CBE delivered double-digit growth of 13.2% driven by acquisitions. The organic growth of 1.5% in fiscal year 2019 reflects the fact that we returned to good growth in the later part of the year after the plantation period. After a strong first half in Industrial, organic revenues in the second half 2019 declined by 2%, leading to moderate organic growth of 2.3% in our Industrial business. The slowdown in the second half reflects the reduction of exposure to value driving businesses, leading subsequently to a very strong margin and profit increase. Good organic growth of 4.6% was achieved in Environment, Health and Safety driven by strong growth in Fuel and Monitoring services as well as Health and Safety services while growth in the Laboratory Services was solid. Organic revenue and transportation declined by 3.7% driven by weaker demand in food services, mainly related to the supply chain certification as suppliers completed their certification to the new standard. Regulated services were impacted by reduced volumes on some programs, the completion of a contract and increased competition in Spain. Revenues in GIS declined organically by 4.8%, reflecting unexpected change in government policies on import duties in Ghana as well as lengthy implementation and enforcement of recently signed government contracts, particularly in the eWaste monitoring solution, Renovo. From a regional point of view, organic growth in Europe, Africa and Middle East was modest with 1.6%. Eastern Europe and Middle East delivered strong high single-digit growth. Growth in North Central Europe was solid, while growth in Africa was held back by the weakness in our GIS and Transportation business. Americas posted organic revenue growth of 2.3% driven by strong growth in South Central America and here, in particular, in Peru, Colombia and Brazil, while growth in North America was broadly stable. The good organic growth in Asia Pacific of 4.4% continued to be driven by strong growth in China, Korea and Vietnam, while growth in Australia was solid and it was moderate in Taiwan and Japan. Hong Kong and Thailand declined slightly. The development of the head count is well controlled and contributes strongly to a higher productivity level. At the end of December 2019 versus December 2018, FTEs decreased 4.8% driven by organic additions of 1.4% and the impact from acquisitions of 0.5%, more than offset by the reduction related to the cost optimization program of 2.3%. The disposals had an impact of minus 4.4%. From a regional point of view, all regions improved their productivity. The highest productivity increase was achieved in the Americas segment, which is a function of the structural cost optimization program achieved, but also the impact of the disposal of PSC. The adjusted operating income increased at constant currency by 4.6%, which reflects the organic increase of 4.8% as the impact of acquisitions and disposals almost offset each other. Currency had an adverse impact of 3.4%, leading to an increase of 1.2% in actual rate in the period under review. The adjusted operating margin Agri, Food and Life declined by 20 basis points to 16% on a constant currency basis, impacted by less favorable geographic mix for agri, food and continued investments to increase capacity and capabilities in the laboratory network. Margins in Minerals increased strongly by 19 basis points to 17% on a constant currency basis, driven for efficiency benefits and the disciplined pricing structure. Oil, Gas and Chemicals improved margins also very strongly by 180 basis points in constant currency. The increase is a function of the implemented cost control measures, strong improvement in the upstream business and a significant shift in business mix following the disposal of PTO business in the U.S. and the Netherlands. Our most profitable segment, CIS, showed a margin decline of 10 basis points to 25.7% on a constant currency basis. Good margin increases in Electronic and Electronics were offset by strategic investments in new technology and in cybersecurity. Despite a difficult post-ISO transition market conditions, the adjusted operating income margin in CBEs increased by 40 basis points to 20.4% on a constant currency basis driven by efficiency gains and the diversification into technical consultancy. The significant margin increase of 300 basis points to 12% in constant currency in the Industrial business is a result of active portfolio management and structural cost optimization across regions and various management layers. Adjusted operating income margin, EHS, increased by 150 basis points to 12.4% on a constant currency basis driven by the operation leverage as well as the benefits resulting on the restructuring of our U.S. operations. The margin decline in Transportation business is due to the loss of higher-margin contracts in the regulated and the certification segment. The significant margin decline in the GIS business is primarily related to substantial collection delays, mainly in Haiti and Ghana. Moving on to the balance sheet. The balance sheet till December 2019 compared to the balance sheet till end of '18 considers the change in relation to IFRS 16 lease accounting standard and IFRIC 23, which addresses the interpretation of uncertainty over income taxes. Both accounting standards are effective as of January 1, 2019. The increase in PP&E of CHF 568 million is explained by the recognition of the right-of-use assets, which amounted to CHF 611 million as of December 31, given the introduction of IFRS 16. Out of the lease liabilities of [ CHF 644 million ] at the end of December 2019 and [indiscernible] while the remaining amount is considered as long-term lease liability. Subsequent to [indiscernible] [ IFRIC 23 ] CHF 40 million was recognized into our tax liabilities as adjustments in the [indiscernible] equity. The increase in goodwill is primarily due to the consolidation of the balance sheet of Maine Pointe. Unbilled revenues, work in progress as well as trade receivables were reduced compared to the prior year, supporting the strong development of net working capital. The net debt position for fiscal year 2019 stands at EUR 1.4 billion, considering IFRS 16 was CHF 764 million, excluding IFRS 16 compared to CHF 772 million in the prior year. Operating cash flow increased from CHF 1.074 billion last year to CHF 1.149 billion this year. However, given the introduction of IFRS 16, the payment of lease liabilities and its interest of CHF 195 million is now shown in the financing activities. The outflow for working capital was this CHF 3 million [ minor], while we had in the prior year an inflow of CHF 95 million. Taxes paid increased from CHF 265 million in the prior year to CHF 306 million. Net investment in fixed assets, we have CHF 700 -- excuse me, we have CHF 279 million on a similar level as last year. Cash consideration for acquisitions increased to CHF 169 million while we had, at the same time, a strong inflow from disposals of CHF 333 million. We paid dividends of CHF 589 million in the first half 2019, and paid back the Swiss franc bond, which was due in the first half '19 for a consideration of CHF 375 million. The management of net working capital continues to be a very strong feature of SGS. After strongly improving the operational net working capital in the prior year to 0.6% of revenues, we continue to further improve the net working capital as a percentage of revenues to 0.3%, which is primarily related by strong management of unbilled revenues, work in progress as well as the trade received position. CapEx for 2019 was at 4.4% on a similar level like last year. For 2020, we expect an acceleration towards the higher 12% area, supporting our growth initiatives. While our margin expansion in the first half 2019 was just 20 basis points, held back by bad debt provisions, we achieved in the second half 2019 a strong margin uplift of 90 basis points, despite a deceleration of organic revenue growth. The improvement in the second half of 2019 is primarily related to the structural cost optimization program and the disposal of the PSC business, while the positive impact of IFRS 16 was offset by bad debt provision, for which we expect collection to improve in the year 2020. We are pleased to confirm that the cost optimization program aiming at simplifying the business by eliminating duplications and reducing layers within our organization was fully executed at the end. The incurred cost for the program stands at CHF 73 million, pretty in line with the estimate provided of CHF 75 million. We expect annualized recurring savings of above CHF 90 million, out of which CHF 15 million are already achieved in the second half of 2019. The full benefit of the program will be realized in the course of the first quarter. The implemented EVA recovery plans started to contribute positively to our recent performance, benefiting from considered closures but also underlying improvements within the businesses in scope. In respect of active portfolio management, we recently strengthened our portfolio with the recent acquisition of Stephens in the U.S. in the -- especially in the Cosmetics segment. The disposal of the preowned vehicle inspection operations in the U.S. will strengthen our return profile, especially in the U.S. And finally, we expect a solid cash inflow from the disposal of the noncore activity related to Pest Control in the first quarter 2020. In summary, our financial performance for 2019 looks as follows: We achieved an organic growth of 2.6%; our adjusted operating income increased by 4.6% in constant currency, resulting in a margin increase of 50 basis points to 16.1%; the profit for the period increased by 1.7% to CHF 702 million; and the board is proposing a dividend of CHF 80 per share. Before I hand back to Frankie, I would like to take the opportunity to thank all our colleagues around the world for their commitment, their dedication and their hard work to achieve the set of results, which we present today. Thank you.

Thank you, Dominik. So let me walk you through each of the business lines in terms of outlook for 2020. So let me start with Agriculture, Food and Life. It's always difficult to predict crop and trading conditions for the agricultural sectors, but for the moment from what we've seen, we're looking at a similar market condition as in 2019. Testing and auditing activities for food are expected to remain good moving into 2020. Licenses should recover from some short-term contract delays and accelerate back to normal growth level in 2020. So on the overall, for AFL, I'm looking at the maturation of growth in 2020. Minerals. The Minerals sector was under pressure moving to second half of 2019, and I'm expecting the situation to be similar moving into 2020. Exploration is expected to be relatively subdued in 2020, but our geochem on-site laboratories strategy should provide good stability and predictable volume and the same is expected from our trade service portfolio. So overall, for Minerals, I'm looking at a slightly lower growth in 2020 than 2019, considering the overall market situation. For Oil, Gas and Chemicals, OGC overall market condition remains soft. However, the trade activities remain stable in H2. Conditions should be similar moving into 2020. Upstream activity should provide some good upside momentum with new contracts expected in Africa and Middle East. Overall, for OGC, I'm expecting an underlying growth level similar to 2019 for -- excluding PSC. So a good core indicator is second half of 2019 for you to consider. Consumer and Retail. Well, again, assuming that the tension between the U.S. and China stays at the current level, I'm expecting the performance of CLS in 2020 to be similar to 2019. The potential mix may change slightly with faster growth in Cosmetic and Personal Care and 5G testing and mixed growth in the more traditional Softline and hardline sectors. CBE, Certification and Business Enhancement. Possibly the effect of the ISO 2015 transition should be fully behind us moving into 2020. The pipeline for operational consulting activity is very strong. So overall, I'm expecting a strong growth for CBE in 2020. Industrial. Dominik just mentioned now, the focus of Industrial in 2019 was to rebuild its portfolio and a focus on improving profitability. Looking at the strong margin performances in H2, I think we have achieved this goal. So the level of margin is sustainable and will increase further. Considering our strategic decision to discontinue several maintenance contracts in South America, the closure of our pipeline on Non-Destructive activities in the U.S. and also the traditional discontinuation of several low profit contracts in Europe during the second half of 2019, I'm expecting the growth of Industrial to be negatively impacted until Q3 2020. Environmental Health and Safety. EHS had an overall strong year in 2019, and market conditions are not expected to change significantly in 2020. Together with the additional competence acquired through the full acquisition of 2019, I'm expecting a strong 2020 for EHS, similar to the level that we have seen in 2019. GIS, Governments and Institutions Services. As Dominik mentioned as well, in these sections, we have faced some long delay in implementation of several projects, especially related to renewable, the eWaste programs in Africa. The result of H2 was certainly disappointing. Moving to 2020, we have better visibility on start-up of several smaller new contracts, but remain cautious with the implementation of some of the larger ones that did not happen in 2019. But I'm rather cautious for the first half of the year, improving in the second half. But overall, I'm looking at a soft full year growth for GIS. For provisions. The regulator of fuel services is still under pressure -- I'm sorry, on the transition period and ending of contract in the U.S. and more competitive landscape in Europe with changes or [Audio Gap] market conditions. This should be a drive for the growth in 2020, which should improve throughout the year. The testing activity should see some good growth with additional testing capacity in Germany and India coming on stream. Overall, I'm looking at the growth -- to flat growth and improvement compared to last year. Just some additional remarks about Transportation. As part of our strategic business review, I have decided to break down our Transportation business unit into 4 strategic segments and integrate them with all the business lines. The large regulated business will go on the GIS while the testing on field activities will be integrated with Industrial. Consumer will absorb some of the testing activities related to chemistry and onboard electronics. [Audio Gap] while CBE will absorb the strategical activities. The purpose of this change is really to optimize our market approach. For instance, for our regulatory services, our customers being the government, it is natural that we focus one of our business unit, GIS, to deal with this ground base, and try to optimize our synergy across the different government departments. There is also a geographic cost synergy between those 2 businesses. For the remainder of the transportation activities such as our automotive testing and rail, this will be driven by our Industrial Services. As we evolve in our strategy, it is clear to me that the conversions between the broader material testing in Industrial are the [indiscernible] would converge together under this logic for optimizing the operations daily for those activities. Further, labs at the operation level have been merged, and we will develop the Transportation unit on the gas industrials to do the sales process. With these changes, we will [ now be separating] [indiscernible] on the transportation, starting the first half of [2020.] Before I go into the outlook, the guidance for 2019. So just in terms of margins. So in terms of margin for all the business lines, considering the optimization plans, the efficiency schemes that were put in place like the world-class services, our customer dashboard review and an optimization of portfolio, I'm expecting all the business lines to improve their margin in 2020, and I will remain very confident regarding our 17% adjusted operating income margin for the end of 2020 exercise. So in terms of guidance, based on what I just mentioned for business line, I'm looking at solid organic growth, higher adjusted operating income and a robust cash flow for 2020. To conclude, I would like also to thank my colleagues at the Operations Council, most of them are here, and the [OPA ] SGS Group for achieving this set of solid results. Also, I would like to thank for -- thank all of them for their commitment to upheld our group feasibility culture. SGS has been a pioneer in driving sustainability practices in the TIC sector. And our increase in the FTSE [ Focus ] indices, our [ cabinet whole ] status, and our leading position in the Dow Jones Sustainability Index are a reflection of our dedication to make a difference in this area of sustainability. We believe that our strong financial results and our clear commitment to sustainability and the EHP position SGS as the leader in the testing, inspection, certification industry and are helping to create long-term value for SGS employees, customers, shareholders and society in general. And to conclude my presentation, just to remind you on the outlook 2020 in term of plan, which is the last year of our 2016-2020 plan. So solid organic growth, mid-single-digit organic growth, in fact, accelerated M&A, AOI margin at least 17%. Strong cash flow conversions returned strong robust return on invested capital, solid dividend distribution, at least maintaining in line with improvement in adjusted net earnings. Again, while we're really focused in delivering those 2020 plans, but we're also looking at our next strategic growth in term of evolutions, and we are looking forward to present these plans with you later on this year. On that…

I think now, we'll move on to Q&A. We'll start in the room, and then we'll go to the conference call. And then if there are any questions on the webcast, I'll just check that out. We will read those out, too. Who would like to go first in the room?

[Operator Instructions]

Just firstly, can you give us a sense of the exit rate in terms of organic growth? If you can break down the second half between the quarters. And what does that imply for first half performance, organic perspective? And then secondly, on margin, it looks like M&A contributed about 40 bps of margin expansion in the second half of the year. Should we roll that into the first half? And then with cost savings delivering 110 bps, are there any offsetting investments that we should be taking into account when trying to work out the margin for this year?

Yes. So basically, we're not commenting on exit rates. It's more for [indiscernible] comments like staffing companies, but in general, as you know, and during the second half of the year the growth rate slows, it slowed a bit down. I mean this was one of the reasons why we why we guided the growth a bit lower towards the Investor Day, and then it picked up. And this is it again, right? Obviously, if you think about, let's say the 1.7%, which we have in the second half of the year, it's a clear deceleration from the 3.5%. And a lot of these things, they're also done on -- throughout the slide in the Industrial business. So we -- you definitely have to see this reaccelerating throughout next year because second half will be the easier comp in that respect. Yes, so growth rate should accelerate, but much more towards the second half of the year and also, if you take Frankie's comments about Industrial where we expect definitely the first half delivery having a decline. And also for GIS, I'm coming from the more, yes, minus 4.8% back to growth will take some time. There's definitely more in that direction. If you look to the margin increase, if you look to the -- in the second half, we had 90 basis points improvement. And if you take this 90 basis points, you can say the CHF 50 million is around 50 basis points. Obviously, from a run rate point of view, we are not persisting fully there, but this will happen in Q1. So you have uplift of CHF 75 million, at least, which is roughly 110 basis points, and they should be pretty deeper spread because the program is implemented. So basically, as of January, we should have the whole benefit and I would say for a margin increase should be pretty strong in the first half. From the 90 basis points, yes, around 50 is structural, 30 basis points is still, let's say, the benefit coming just on the mix of selling PSC. So this mix is still happening in the first half. So from this point of view there, it should be a strong margin uplift in the first half.

And the offset?

The customization has really come down to the bottom line. Obviously, we'll be doing here and there investments, but it's not something where we now have to say we have to accelerate a lot. Where we have other cost measures, underlying productivity, SGS always improved productivity every year and obviously, part of this productivity will be also invested. And we're also looking for more CapEx this year than last year. But it should not, by any means, put at risk 70% plus margin target.

It's Alex Mees here from JPMorgan. Firstly, in consumer, you've called out 5G as being an area of positivity for you. I wonder if you can just give some color as to how that accelerates through 2020, if indeed, it does accelerate? Secondly, on GIS, I wonder if you can comment on the materiality of the issues in Haiti and Ghana and whether the business has to change its business practices at all to respond to issues like this in the future. And thirdly, apologies if I missed it, but I wonder if you provided a reconciliation of the segmental performance in 2019 with transportation pushed into the other sectors?

Let me just answer the first question about 5G. You know what, this is the -- '19 and '20 are the transition years for the different technology. You hear a lot about 5G on a market, especially on the mobile phone sectors. And I think this is where the transition is happening. So the 4G technology will still remain technology. So you can see an increase of -- I would not call them prototype, but I think we can't offer this period. It's more a mainstream product coming in the next 18 months which has been tested today. That we'll be hitting the market in the next 18 months, and we're starting to see an emergence of that. But I think the 5G increase will become for the use into the broader industrial environmental regions and consumer goods only. And this is going to come in the next, I would say, 2-years-plus. This is going to be implemented across the broader spectrum. For the time being, I would say, is we're at the early stage. When you look at in terms of the investment we invested to a certain extent in 2019, and we'll see having an additional investment in the network for 5G capabilities in 2020.

On the GIS performance. If you look to the margin decline last year of a bit more than 10%. You can attribute roughly 70% of this margin decline of, can call it, natural profit to a change in bad debt provisions, right? So increasing the debt provision. The biggest part is for Haiti and Ghana. A couple of other contracts as well, but the biggest part of it is Haiti and Ghana. And for Haiti we have put an allowance on the complete receivers, we put the receiver to civil, we have this both, let's say, government discussions, good discussions, we are confident we receive money, but it will take -- it will most likely take a bit of time. On the contract, in general, if you look to a lot of our contracts, they are much more -- more and more supplier-funded, they are not government-funded. If you look, for example, the government contract, it's very clear that we get our fee based on the flow and not rely that we get paid from the government. But Haiti, especially, is a legacy contract where this change was so far -- we are not able to achieve this change. But in general, the model I would say, was already quite changed in that perspective on also new contracts that they are much more funded by, let's call it, participant suppliers than by government. But the 2 big ones that is reasonably different is Haiti and chasing it. Regarding Transportation, you want to know roughly the split or...

When the pro forma numbers will be available effectively for -- unless that will be in due course. I think it's -- you answered that question.

And if you want to know roughly, revenue split. I can give it a bit.

Sure, that will help their models, but [ I'll try to look ] for the numbers.

Yes. We -- let's say, we have now to put this in the right structure and you get it well ahead of H1 number.

Who would like to go next? Why don't we start at the front? At the moment it comes easier actually. Reminder, 2 questions and, Tom, hold it close to your mouth, please.

So just on -- you mentioned that CapEx may increase. And I didn't quite decipher all that you said about the leases and what was going into the PPE, but it does look like organically you were flat to slightly down again in terms of the movement in PPE, which is like the third, fourth year or so in a row. Part of that is the CapEx optimization, you're only really growing by inflation, it looks like maybe there's a bit of volume, but how can you give us some confidence that you can actually commit capital and grow as you're committing that capital and not just on M&A, please? And then on the minerals business, could you maybe just go through the potential ups and downs in that outlook for you for minerals? Because it does seem like the production outlook is a little bit less certain than it was. And maybe your business mix has obviously changed a bit in that division and say, how comfortable can we feel that you'll -- as you said, expect to see margins go up in each division, but the margin would go up or you get EBIT improvement in minerals, please?

First, to the CapEx. So if I look to it, we definitely have a lot of focus on several key topics like 5G, like semiconductor business but also areas of upstream, where we had strong growth, where we definitely spent more CapEx. And looking to the pipeline and looking what we discussed in operational counties, it should definitely kick in into this year, maybe 2019, we were -- I think it was coming a bit earlier. And sometimes, this project takes some time until we get all the components. But it's very clear that the CapEx will accelerate. And this is primarily related to -- to a large extent, investments in E&E within CIS, given the growth opportunities we are seeing. We have a good pipeline of on-site lab renewals. They sometimes depends, of course, whether we get the award from the client but we are very successful in this area. So there, we see some pickup in our upstream business in Oil, Gas and Chemicals has shown very strong performance throughout last year with double-digit growth, and there's a good pipeline of customers. So we do think CapEx in percentage of revenue will pick up this year. Higher 4% area.

4.5% to...

So last year, we had 4.4%. [ In October ], it's higher 4%, so maybe 50 basis points.

Final question. Yes.

Second question is from Tom. There's a lot of moving parts in the mineral sectors. So it's difficult for me to give you a summary. We say, you look at this, for example, the copper explorations, Investment has increased, while the gold investment has decreased because of the price fluctuations. So what is important for us is our strategy for the on-site laboratories is establishing factors with 2 of the new labs coming on board, which has came on board towards end of 2019, which add additional volumes for 2020. And we have 2 additionals, is supposed to come on board, we signed, it's going to come on board in 2020. While we are going to able to see an impact on our more commercial geochem lab, which is getting volume from all over the place. So if the overall volume decreases, we may have less volumes, but the bulk of what we do is also linked to our on-site strategy. So this will keep a good level of visibility on that kind of [ pulling ] progression, more west of those projects, more with after [ gross ] creations. Likewise, for the trade activities from what we see so far in terms of the flow and income of contract, we're quite comfortable that it's going to be pretty okay income of growth. So all in all, with the soft explorations into a more commercial lab because it is a more stable portfolio in the on-site laboratories as well as the trading unit, we'll see that we're probably going to be a little bit short of DCS growth but not that far.

Thank you. Should we go to Rory and then over -- and while Rory is getting ready to ask the question. Can I remind the people on the webcast, if they would like to ask a question, they need to submit it by typing it in. Thank you.

Yes. It's very close. Now you've done one round of EVA recovering meetings so far. Just interested to hear what you've learnt about the 8% of your business that you said it was EVA-negative. What have you stand out? Will those be assisting more restructuring? Any change in future disposal plans? Or when will you update us on that? And then secondly, do you think with the shifting supply chains in Asia will further accelerate growth in the frontier markets like Vietnam, you mentioned this year and whether you're thinking about redeploying capacity away from China in your own business to support the growth in those markets?

Let's start with the question regarding EVA. So we have to scale recovery plan, like I outlined at the Investor Day. And basically, the -- we consider several closures, they are -- they would be -- they are too small or too hard to sell, so to say, right? So -- and we closed several of them to the kind of whole units, which are on that EVA recovery plan, they do in the -- on the last 12-month basis, less revenue than they did some months ago, but the negative EVA improved a lot, right? So we have -- the negative EVA of this portfolio is actually since we started is reduced by 1/3, which was so far, primarily a function of either cost savings. Obviously, it happened more or less also at the same time, like the structural cost appreciation program. So some of these things they are kind of driven by the customization program and benefiting on the EVA side. I also think if you look to unbilled revenue, and it's definitely more attitude to get the things built. You see this in the balance sheet, it's improving. And especially in the last couple of months. So I do think it has some impact also on working capital.

Looking at your second question in terms of capital deployment. China has been a strong driver for us in 2019, and we expect that to carry on in 2020. Interestingly is that the domestic market is developing very fast. Certain indications as I mentioned, is about 55% of what we do in China is already linked to domestic market. And this is why we would increase further -- some of the international supply chain migrate to the other countries. So I don't expect to have to redeploy the capacity what we have in China. We're going to -- we use that to give the local domestic market and the China government has committed and we see the changes, they are opening up additional categories for the product sectors to play [indiscernible] entities. In terms of capital for the rest of Asia, we're just going to spend more in Vietnam, in Indonesia where we see a lot of opportunities, not necessarily all in consumer goods. China [indiscernible]. So we see a lot of opportunities. Vietnam is being one of the large opportunities. The growth is high double-digit and we don't see that just going down.

Ed?

Which one?

Ed 2 will come after.

It's Edward Stanley from Morgan Stanley. On Slide 15, I'm interested on your CHF 15 million realized cost savings. When you talk about 2,260 heads taken out of the business. How much of that CHF 15 million is their heads versus how much is coming down from lab closures, for example?

For the savings, 85% is related to head count for the whole program. You have then -- you see in the walk, 2,200 people because obviously, some people who stand who are at the company until the end -- at the end of last year, they're still employed. So there will be additional more than 500 leading, so the total head count reduction will be in some roughly 2,800. And 85% of the sales are partner cost related, the other 15% are other closure costs, lower rent, no depreciation.

And the second question follows on from Rory's, I guess, on domestic versus export to China. Can you give us any figures on how fast each of those are growing, and APAC is quite a large proportion of the overall group growth rate last year. And to what extent you may or may not be planning for disruption in China, given what's going on there?

We don't want to give exact growth numbers for [anything] International. The only thing I can say is that considering the public issues, the headwinds there were for the North American market, the domestic market has been growing faster than the international market, and this is why you're also seeing the fact that this percentage of domestic versus international is accelerating. But again, not necessarily all related to consumer goods, the domestic markets are also about raw materials, Health and Safety, Industrial, food products. So this is also a diversification of our strategy in China, which is a good addition to the 2 focused consumer good activity that we had in the past. If you look at the current situation, I guess, you are talking about coronavirus. We're monitoring the situation. It's too early for me to give you an impact assessment. Obviously, the first week of all the movement is happening in China was in the middle of the Chinese New Year holidays. So double impact for that particular week was rather minimal because all the operation was anyways off on vacations. Certainly, the latest announcement by the governments to extend under the current year -- to extend the holidays from the initial days to the third of February on some of those provinces and the cities, extending that to the 9th of February will have an impact on us in the February results. So we're still monitoring. I guess we do have to wait for more news. If the situation stands as it is today, our setting back would be mainly on our February results. Because we have one less week of activities. But as the situation develops, I will come back to you if there's further impact. And we're looking at this in a very serious way to make sure that we minimize the impact.

And finally, Ed.

Ed Steele from Citi. Two questions, please. First of all, what -- roughly, what percentage of divisional revenue did the various contracts that have the bad debt in 2019 comprised of 2019 revenue, please?

Very small. Because we have -- if you look to it the debt provision, in some cases, like, it is 100% providers, right? So it's -- in terms of revenues, they are not that big, right? We talk...

It's several years' worth of revenue that you've guided for?

No. No. No. The outstanding, we have a clear agreement with them. So you provide as you go. But let's say, if the government is not paying, you provide the full revenue, which is outstanding, right? It's not a massive amount, right?

Okay. And I just want to understand a little bit more about your thinking, if I may putting the vehicle inspection contracts into GIS. Is that right? Yes. Could you talk to your thought process around that? Because that seems like a lot of challenges for 1 division. I mean [ Rog ] is not here. So -- maybe he's busy sorting some of those out. But just talk a little bit to help me?

I think he's on his way to Haiti or something. Now Europe, we are more focused on the tendering process because all the process of the cells and tendering is with the government structure. So this is where we were focusing on because once the delivery -- once the contract is accepted and delivery is done, the delivery is typically handled by the fleet themselves. So the involvement of the business structure is to much lesser extent with it. At this point on, once the contract or the concession has been assigned, is where the operational activities that kicks in. So the business managers do not focus on the total [indiscernible]. I'll give an example, for example, a lot of what -- some of the activities that we do in the trade could be [indiscernible], and we see sometimes twice at some ministry for different reasons. But the idea was really to all -- combine all that into one single portfolio management with the different ministries at the country level, and the execution will be handled by the country. So it's not going to be major. [ Roger ] would not be going around trying to understand how each one of those [ patient ] is going to work.

We've got one more in the room. [ Caroline ]?

I'm wondering just technically on the other nonrecurring items that totaled CHF 165 million. You enumerated the PSC gains? I mean -- I'm wondering, first of all, the tax provision on the gain of CHF 33 million, is that netted? Or is that included in the tax expense?

The gain of the PSC disposal is shown in the tax expense.

Okay. So I'm just trying to reconcile like coming from the CHF 259 million gain, then you had the less the CHF 24 million impairment of fixed and intangible assets, less the CHF 10 million defined benefit.

Yes.

Then how do you then get down to CHF 165 million? Because I think you did all your provisioning excluding -- like, for your bad debts, that's not in these other nonrecurring items...

I mean it's the following situation. You have the CHF 259 million to start this, then the CHF 33 million provision for taxes is not related to PSC. This tax provision for indirect tax is considered in the first half of this year. So they are not related to PSC. There are taxes on PSC as shown in the income tax line. These are basically provisions which are indirect tax, right, which are basically in the EBIT. And then you have the impairment of CHF 24 million for fixed and intangible assets, you have around CHF 10 million for the Swiss pension obligation and then there are other items which we not, yes, line-by-line disclose here, that you come to the CHF 165 million remaining income.

We can go through it in more detail, if you'd like. So right, let's move out of the room and on to the webcast, please? Okay. Well, why don't we go to the question that was on the well on the webcast, as I said, very quickly, that is asking about GIS and Ghana, and given the payment issues we've had there. Does it affect any other cash flow in Ghana, specifically? Very simply, it doesn't. Okay, nice and easy. Are we ready to go to the webcast -- conference call, sorry. Yes, sorry. Go ahead.

The first question coming from the conference call comes from George Gregory from Exane BNP Paribas.

I have 3 questions, please. Firstly, just looking at the profit contribution from acquisitions, specifically in the second half, it looked a bit lower than I would have expected, given the first-time contribution of Maine Pointe. Was there anything offsetting that? Perhaps first-time integration costs, please? Secondly, in AFL, I think from your comments suggests that both Food and Life decelerated in the second half, wondering if there was anything in particular behind that? And finally, Dominik, I think you mentioned that 70%, 7-0, of the margin decline in GIS can be ascribed to the collection delays, the provisions. Could you just clarify that, just check that my calculation of what was a 40 basis point headwind this year is correct, please?

Maybe should I take the first and last one?

Yes. Yes, exactly. Go ahead.

So if we first look to the acquisition impact, Maine Pointe is a bit below our expectation for the second half of the year. We have, let's say, very good project book for 2020, but it's fair to say it was slightly lower in the second half of last year, assuming obviously, the -- our partner is 40%, but also very busy with the team, instead of focusing completely on this business. So there's a bit of a timing issue, I would say. So it's a bit lower. But in general, we are convinced we'll go in the right direction, hit the numbers, which we expect for 2020. So it's definitely some impact on top, maybe some -- a bit of a cost of integration as well. But it's true, it's a bit below expectation. If we -- what I said regarding GIS, we have bad debt provisions in -- you take the results and you basically look, okay, the results or the performance of the business, the revenue decrease, how much of the current decline of 40% is related to bad debt provision and what's the underlying reduction. And if you look to this, basically 70%, 7-0, out of the earnings decline is explained by higher bad debt provisions compared to the prior year. I hope this clarifies. And maybe one word, obviously, you need to consider here that why we have the normal aging for this project. We have taken on top of the decision to completely put allowance on the Haiti. We see that given the fact that we have not recorded any, let's say, collection throughout last year.

If I go -- George, if I go to the question on the Food and Life, I would say there's nothing major there. If you look at life licenses, we had some -- I would say, some short-term issues in terms of manpower retentions in one of the affiliates because they are evolving into a pharmaceutical hub. So sometimes we do lose some of our customers to -- some of our operators to our customer base. That particular case is, we have lost a little bit more than we were expecting, but these are not unusual situations and we have managed to catch up to the situation pretty fast, so we should expect this to be back on track for 2020. On the food, I would say, it's up and down. So some of the softer markets, like in Germany, where I think the current market situation with a bit of tighter market conditions makes that our customers are looking at typically tight in terms of volumes and so on, but nothing major. I would say, again, the situation will come back on track, I do not see that as major issues for the Food and Life activities in 2020.

Thank you very much. I don't think there is another question on the conference call. But can I check there is? No? Okay. Well, also, I'd like to say that don't think by staying in at home and dialing in, you get 3 questions. That's not part of the deal. Anyway, I'd like to invite you all -- we would like to invite you all upstairs to a -- for a cocktail. And thank you very much.

Thank you.

Thank you very much.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your line. Goodbye.