SGS SA (SGSN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome [Technical Difficulty]. [Operator Instructions] And the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Toby Reeks, Senior Vice President of Investor Relations at SGS. Please go ahead, sir.

Thank you, and good afternoon, or morning, depending on where you're located. For those of you who don't know me, I'm Toby Reeks, Head of IR at SGS, and it is my pleasure to welcome you to this call where we will be presenting our strong 2020 performance. And then while it's clear visibility hasn't returned to pre-COVID levels, Frankie will give you a flavor of what to expect in 2021. This will follow the same format that we usually follow. So Frankie and Dominik will run through the presentation, and then we'll have time for Q&A at the end. At that stage, the operator will come back and let you know that you can each ask 2 questions each, or I will let you know you can ask 2 questions each. So please stick to that. And then if we have more time at the end of the call, we can take additional questions then. With that, I would like to hand over to Frankie and Dominik. Please go ahead, guys.

Thank you, Toby. Good afternoon, everyone, and thank you for joining the call of full year result. As usual, I will give a heart of our performances, and the Toby will -- sorry, Dominik will go through the financial in more details. I will come back to you all with an outlook for 2021. Then move to Slide 4. Just a few words about the COVID-related actions, which dominated many of our thought during the year 2020. Ensuring the health and safety of our colleagues is always the highest priority for the management team. And I would have to say that in 2020 was more than any other years that I have faced in SGS. Many of the actions that we have taken in the network has helped to limit the impact of COVID on our colleagues and our operations. During the second half, we have maintained most of actions that we have been doing in the first half. Some of those actions include global travel ban for non-essential visit, a global work-from-home policy wherever is possible, enhanced PPE requirement, additional shift planning, a new process flow to adapt to COVID safety requirement, both in the field and in our laboratories and use remote technology where possible to avoid sending teams on-site like remote inspections, the IoT sensors, for example. Toby mentioned a set of strong results. Just to go to a quick highlight. Total revenue declined by 8.8% at constant currency, while the organic decline was 6.5% with 2 business lines achieving organic growth. Our adjusted operating income stands at CHF 900 million, an 8% decline at constant currency compared to 2019. Our profit for the period stand at CHF 505 million, a decline of 28.5% (sic) [ 28.1% ] compared to prior year. Free cash flow improved to CHF 758 million, an increase of 12.6% compared to prior year. Our ROIC for the year stands at 16.5%, but if you adjust this from the recent acquisition of SYNLAB A&S completed on December 31, the ROIC stands at 20.9%. And the Board of Directors is proposing a dividend of CHF 80 per share, same amount as last year. During the year, we managed to minimize the disturbance of our operations, and we enforce our customer service focus to help our clients deal with the challenge they are facing in their supply chain. I'm very proud to say that our ability and agility in mobilizing our network to support them has been recognized and praised by many of our customers. In terms of service development, related to COVID, we have continued to deploy our next normal solutions. We position ourselves successfully for growth -- strong growth in PPE testing and inspection in China. And we benefited from our increased capacity in our bioanalytical and clinical trial solution for new vaccine. The use of remote inspection that I mentioned earlier and auditing as well, remote auditing, also increased significantly through the year as access to customer site have been restricted. The adoptions of our remote solutions by our client has increased dramatically as well. Aside from remote inspection and remote auditing, we have also seen an increase of remote consulting services within our technical consulting portfolio. Financial discipline is an important aspect during such a volatile period, and Dominik will provide you with more details on the actions we have taken during 2020. But it is important to highlight that we have continued to invest into strategic priorities market through both CapEx and acquisitions. I believe the long-term structural drivers of the TICs industry have not changed. Some sector like life sciences, environment, food security and connectivity may have become even more relevant for society, and it is important that we continue to invest in order to maintain our leadership position. Here also to add that our investment include actions taken in operations to continue our sustainability journey that we have started around 10 years ago. We continue to evolve the culture of our -- sorry, culture of our organization and set higher standard for ourselves, which is also reflected in our leading sustainability and ESG credential in the TIC sector. During 2020, we made 6 acquisitions, with the largest one being SYNLAB A&S that was completed in December last year. This acquisition will reinforce SGS' position as key players in the environmental, food and life sciences sectors in Europe and globally. It will give SGS better access to the more routine while high-volume regulatory of our remote testing market and give us a stronger position in the Nordic country where SGS traditionally has not been that present. The other 5 acquisitions are in consumer goods with Thomas Stephens in the U.S., which further expands our footprint in area of cosmetic testing; in statutory vehicle inspection with CTA Gallet and Groupe Moreau in France would have to consolidate their inspection network. In industrial services, we acquired engineering control in New Zealand and Ryobi Geotechnique in Singapore. These acquisitions will help to enhance our technical competence in the manufacturing and construction sectors, and also help us to diversify our portfolio in those countries. During the year, we also completed one disposal with pest control activity in Belgium and in the Netherlands. Subsequent to our closing, we have also announced 2 additional acquisitions, both in line with our strategic focus in becoming our key players in the AFL area. Analytical and development services in the U.K. will expand our food service point of view by adding pesticide and chemical testing competence to our existing food activity in the U.K. The other one is the laboratory facilities of International Service Laboratory from Novartis in Ireland, which will provide SGS a new competence center and increase our capacity to serve our customers in the fast-growing life sciences industry as they continue to outsource to choosing partners. This is a slide about the last 3 items. On that, I'm handing over to Dominik for more in depth review of the financials.

Thank you, Frankie. Good afternoon, ladies and gentlemen. I will start with the overview of the financial highlights for fiscal year 2020. Frankie already mentioned the operating highlights in his introduction with revenues of CHF 5.6 billion, and adjusted operating income of CHF 900 million and a free cash flow of CHF 758 million. Revenues for the group in constant currency decreased by 8.8%, driven by an organic decline of 6.5% across the majority of the segments, mainly reflecting the impact of the COVID-19 pandemic. The adjusted operating income decreased by 8% in constant currency to CHF 900 million. However, the AOI margin increased by 20 basis points to 16.1% at constant currency. Net profit after minority interest decreased by 27.3% to CHF 480 million in the period under review, which is besides operational performance, also related to a higher gain from disposals realized in the prior year. I will later talk more about those one-off items. Cash flow performance was strong, with cash flow from operating activities up 3.2%, and free cash flow up 12.6%. The decline in net profit was more than offset by strong net working capital management, lower taxes, lease payments and CapEx. Organic revenues declined by 6.5% in 2020. During the second half, we experienced a greater improvement, leading to a situation that we are back to organic growth in December 2020. The contribution from acquisitions is 0.7% they will be limited as the more sizable acquisitions like the A&S division of SYNLAB and Ryobi are only consolidated as of December 31. Disposals had a negative effect of 3%, leading to an overall decline in constant currency of 8.8%. The negative currency impact of 6.3% was due to the strengthening of the Swiss franc against all major currencies. Moving on to the revenue growth by business. Agri, Food and Life posted organic growth of 0.3% in 2020. A decline in food, which was more impacted from lockdown measures in the first half, was more than offset by growth in Agri and Life. Growth in the second half was strong across all segments. Minerals posted a revenue decline of 6.9% in constant currency. The impact of extended lockdown measures, mainly in Europe and the Americas, was partly offset by growth in Asia and Eastern Europe during the second half, leading to material easening of the decline rate in the recent months. Organic decline in Oil, Gas & Chemicals was 7.7% for 2020, which is very similar to the decline rate of H1 of 7%. The business was affected by lower demand and the material oil price drop in the first half. With an organic growth of 1%, consumer and retail showed its resilience during the COVID-19 pandemic. The revenue decline experienced in the first half was more than compensated by good to strong growth experience in all segments in the second half of 2020. CBE declined organically by 12% as the division was impacted by travel restrictions and lockdowns, preventing auditors from visiting customer premises, especially in the first half of 2020. The organic decline rate of 17.8% in the first half eased to 7.3% in the second half, as Management System Certification showed a strong and accelerating recovery throughout the second half, also helped by remote audit solutions, while business enhancement activities are still declining in the second half. Revenue in Industrial declined organically by 13.4%. Transportation and Oil and Gas were the most heavily impacted, while Manufacturing returned to growth in the second half. Environment, Health and Safety declined organically by 9%. A strong start of the year was interrupted by the pandemic, which was especially evident in Health and Safety, given the inability to access construction sites and provide services to hospitality and industrial hygiene clients. The weakness in the first half was partly recuperated later in the year by a pickup in demand in Europe and Asia for lab testing services. Revenues in GIS declined organically by 12.4%. Economic affairs were affected by export weakness. Mobility was heavily impacted by the global lockdown measures and the end of certain contracts. The recovery in H2 in Europe and Latin America has been slowed by the second wave of restrictions. Border Solutions delivered strong growth by continued market penetration for TransitNet. From a regional point of view, organic decline in Europe, Africa and Middle East was 7.9%. The Eastern Europe and Middle East countries achieved low single-digit growth as key markets, such as Russia and UAE, experienced good growth throughout the year, and Turkey recovered strongly in the second half. The double-digit decline experienced in the majority of the key markets in Europe and Africa in the first half gradually improved throughout the second half with several key markets achieving growth towards the end of the reporting period. In the Americas, organic revenues declined by 12%. While trading conditions, especially in the U.S., remain challenging, given the end market exposure, we experienced a good recovery in the second half in several Latin American countries. Asia Pacific was very resilient with limited organic decline of 0.7%. Northeast Asian countries experienced growth throughout the year. Thanks to key markets, such as China, Taiwan and Korea, almost offsetting the decline of the Southeast Asian Pacific countries. Our AOI margin increase of 20 basis points in constant currency was amongst others driven by a very efficient approach when it comes to workforce management. Salary and wages, which account for approximately 50% of revenues, decreased in actual currency by 16.7%. Stripping out the currency impact as well as the restructuring costs in both years, the underlying reduction was 10.2%, declining stronger than the comparable revenue decline in constant currency of 8.8%. The underlying reduction was driven by the active portfolio management, the benefit of the structural cost optimization program implemented in the second half 2019 as well as various measures taken to mitigate the COVID-19 impact. FTEs at the end of 2020 declined by 1% versus prior year. Acquisition-related increase of 2.7%, which is, to a large extent, related to the acquisition of the A&S division of SYNLAB as well as Ryobi both consolidated as of December 31 is more than offset by the structural cost optimization program as well as other measures to adopt to trading conditions in 2020. Average FTEs in 2020 decreased by 5.7%. The magnitude of the change by region needs to be set in perspective with the revenue decline. Overall, we adjusted the head count to trading conditions and benefited from our structural optimization program. However, we have sufficient capacity in place in all regions to convert incremental demand with good incremental margin. The adjusted operating income decreased at constant currency by 8%, which reflects the organic decline of 6.7% as well as the net effect of acquisitions and disposals of 1.3%. Currency had an adverse impact of 7.3%, leading to a reported decline of 15.3% in the period under review. AOI margin remained stable at actual currency, but improved by 20 basis points in constant currency. In addition to the operational performance, the operating income of CHF 795 million was primarily impacted by the following one-off items and goodwill impairment of CHF 37 million. Restructuring costs accounted for CHF 84 million in 2020. Approximately half of this amount is related to the early termination of the single window contract with the government of Ghana and the vehicle inspection contract with the government of Uganda. A claim against the government of Ghana has been raised for the breach of the contract. Gain on business disposals is related to the sale of pest control in 2020 compared to the disposal of PEC in the prior year. 2020 transaction costs mainly related to acquisition of SYNLAB Analytics & Services by 2019 was mainly linked to the disposal of PSC. While the margin decline in the first half of 200 basis points was pretty resilient, given the magnitude of the revenue decline, the very strong performance in H2 of plus 200 basis points is a function of tight cost control, restructuring benefits and lower bad debt expenses, while the revenue decline rate eased. Also throughout the COVID-19 pandemic, we continued to focus on financial discipline, leading to the following achievements during the period under review. To Swiss franc bonds with a combined nominal value of CHF 500 million were issued at attractive conditions. We continue to focus on price discipline. The structural cost optimization program launched in the second half of 2019 delivered annual savings in excess of CHF 90 million. This, coupled with strong cost control and the other restructuring benefits, led to a drop-down ratio of 14.3% in 2020 or an AOI margin increase of 20 basis points in constant currency. Free cash flow increased by 12.6%, driven by tight net working capital management. Moving on to the margins by segment. The strong adjusted operating margin increase in Agri, Food and Life of 160 basis points was primarily driven by a strong margin performance in the Agri and Life activities. Margins in Minerals increased strongly by 80 basis points despite the revenue decline. This increase is due to structural cost optimization program, strong cost control and other restructuring benefits. Margins in Oil Gas & Chemicals declined by 100 basis points, driven by lower volume and lower utilization rates, partly mitigated by cost control and structural cost optimization measures. Our most profitable segment, CIS, with a margin increase of 40 basis points to 25% on a constant currency basis, driven by the strong pickup in demand for PPE. Margins in CBE declined by 60 basis points, driven by the revenue decline, especially in the technical consultancy, training as well as aviation activities, while the strong margin recovery and Management System Certification in the second half and tight cost control, partly mitigated the margin decline. In Industrial, structural cost optimization, the change in the portfolio towards value-creating business and other cost selling activities, they are partly able to compensate the revenue decline leading to a drop-down ratio of 18% for the Industrial business. Margin decline in EHS was more severe than in other business lines, reflecting the lower utilization levels, lower volumes in some higher-margin services, but also the retention of technical capabilities. The margin increase in GIS of 160 basis points was driven by better collection and cost optimization, more than compensating the margin decline in the mobility segment given lower utilization levels. In respect of the 150-plus units in scope under the EVA Performance management review, significant progress has been achieved despite the impact of COVID-19. 17% of the units were in the meantime closed, 40% are value-creating in 2020. 14% improved our results and expect to become soon EVA positive, while the remaining 29% are on a critical focus list partly because of the pandemic, but has a plan to improve materially in '21. Moving on to the balance sheet. The increase in goodwill and intangible assets is primarily due to the consolidation of SYNLAB A&S division as well as Ryobi as of December 31. The reduction in unbilled revenues, work in progress and trade AR is driven by lower revenue levels in general, currency effects but also by a strong focus on collection. Our cash position is CHF 300 million higher than in the prior year despite the outflow for the dividend and share buybacks in the first half, which we are compensated by the issuance of a CHF 500 million bond and a strong free cash flow generation. For the purchase price consideration of the A&S division of SYNLAB at Bridge was considered. Net debt increased from CHF 800 million in prior year to CHF 1.5 billion in the period under review. Cash flow from operating activities increased by 3.2% to CHF 1.2 billion, reflecting the strong inflow from net working capital and lower tax payments, more than offsetting the reduction in profits. Furthermore, free cash flow increased by 12.6%, also benefiting from the slightly lower CapEx and lower operational lease outflows. We paid dividends of CHF 598 million, bought back shares for consideration of CHF 208 million and issued 2 Swiss franc bonds, which led to an inflow of CHF 499 million. The management of net working capital continues to be a very strong feature of SGS. Operational net working capital stands at minus 2.5% of revenues in 2020, reflecting lower trade AR's given lower revenues and increase in advanced payments, a reduction of DSO, supported by strong cash collection and EVA performance management approach. CapEx for 2020 declined slightly less than revenues, leading to a moderate increase in percentage of revenues from 4.4% the prior year to 4.6% in the current period. While we have delayed some nonessential and maintenance CapEx, our level of investment into strategic priorities has been maintained. Almost 1/3 of our CapEx is allocated to CRS and here, especially towards electronic, electronic components in Northeast Asia, which is a high strategic priority. 15% of the CapEx was allocated to AFL, primarily to Life, but also towards the Food segment. The CapEx allocation for OGC and Minerals is, to a large extent, related to client-driven projects. To sum it up, our revenue in 2020 declined by 8.8% in constant currency, of which 6.5% is organically. Multiple actions on the cost management side as well as lower bad debt expenses led to an increase in the adjusted operating income margin of 20 basis points to 16.1% in constant currency. We strongly increased our free cash flow and significantly increased our investment into strategic priorities via acquisitions, and we will propose a stable dividend of CHF 80 to the shareholders in the upcoming AGM. With this, I hand back to Frankie.

Thank you, Dominik. Now let me go through the business review. Same as the first half result. I'm going to give you an indication on how we see each of the business in organic performances in 2021 compared to the relative performance of the total group. So let me start with Agriculture, Food and Life. AFL organic growth should outperform the group average. We expect the trade to continue to grow as demand remains solid. Food structural drivers remain with concern of quality, safety and authenticity supported by testing outsourcing trends. Life will continue to benefit from increasing vaccine work, customer outsourcing and our investment in additional capacity. Mineral organic growth should be broadly in line with the group average. The overall outlook of the Mineral industry is positive with competitive price reporting trade. An expected increase in exploration spend, which will benefit our Jackson laboratories as well. Trade metallurgy volume should increase, but with an offset being coal as power productions continue to transition away from carbon-intensive production. Oil, Gas and Chemical only growth should be below the group average due to expected soft volume of activity in first half of this year, this will continue to impact trade and testing volume. However, we expect a more positive second half with solid volume evolution, increasing our upstream portfolio. CBE organic growth should be above the group average. Depending on the customer accessibility and availability of travel, growth repeat by continuous management system catch up followed following the ease of restructuring and recovery of technical consultancy business, the more discretionary second-party audit and training are likely to remain under pressure. Industrial services. Industrial organic growth should be below the group average. Services to the manufacturing sector were resilient in 2020 and should grow in 2021, particularly in the testing activities. Power and utility will benefit from increased demand in the nuclear security sectors and also catch up activities with delayed shutdown. Oil, Gas and Chemical related activities are expected to remain soft with some limited catch up project. Transportation sectors, both aerospace and automotive, will be under pressure in 2021. EHS -- sorry. So EHS organic growth should be brought in line with the group average. Pressure measures to suppress COVID -- COVID-19 in the first quarter of this year will continue to impact having safety services due to site access and also a lack of tourism activities. However, our Motor Labs business should grow -- should benefit from project delay, particularly in the U.S. Looking to the second half, we expect to have a safety business to recover driven by demand from the real estate, hospitality and tourism sectors. Our Marine business has performed well in 2020 and the growth is expected to accelerate in 2021. GIS organic growth should be brought in line with the group average. Product conformity assessment should continue to recover with increasing volume and new contracts starting this year. Service related to customs should see a positive development in 2021 with the continuing growth of TransitNet and the addition of services related to Brexit. And most of our strategic vehicle inspection centers have reopened, and we expect them to function at full or almost full capacity throughout the year. And to finish on consumer goods. CRS organic growth will be outperforming with a good average. E&E and our Northeast Asian region will continue to be strong growth drivers due to demand and due to our long-term investment to build competence and capacity, particularly in the connectivity-related products such as 5G activity service security sometimes is expected to be under pressure as the Oil industry is not performing well, and we are not expecting to see the same level of PPE testing and inspection as in 2020. Both Personal Care and Household product expected to grow in 2021 with steady double. Let me give a few words about our new strategy 2023. Regarding our new strategy, I would like to remind you that the formal communication will take place in May at our Investors Day and the launch of our sustainability ambition 2030 will also peak in the second quarter. So the purpose today is really to provide an overview of the new structure and the sector we will be focusing on in the future. Despite the current short-term volatility, particularly linked to COVID-19, the structural growth of the TIC sector remains intact, and we see an increasing relevance of -- and opportunities as new regulatory requirement, customer awareness, health concern, cyber threat, social evolution related to environmental issues are driving demand for many of the fixed services and the scope is growing. The new structures that we have set is to align our business focus with the new TIC megatrends and build our competence and expertise and network around them; to recruit business line that has similar delivery model in order to enhance further operational efficiencies; to enhance our digital innovations, technical consulting, sustainability related services and this via our strategic unit; and to create a more agile management group with a leaner structure. The new structure of the group is focused on servicing 4 key industries, the new divisions are named: Connectivity & Product, Health & Nutrition, Industries & Environment, Natural Resources. Then we also now have 2 cross-industry strategic unit with a focus on specific competencies, they are Knowledge and Digital & Innovation. This slide gives you a high-level view of how the existing business line and the sub business unit are evolving and equated into the new divisional structure. This is certainly not comprehensive or the chart would be way too complex, but it should give you an idea of the evolution. For example, the new Knowledge strategic unit is currently composed of the former CD, but new services are being added to these units, such as GST and supply chain management-related services. Likewise, Connectivity & Product would include existing CRS, I will also have a clear focus to connectivity-related services in the automotive and the semiconductor industry. This slide shows the new Operations Council of chart in place starting in 2021. Will compose -- will be composed of 18 members, and these member will compose of 14 different nationalities, representing the cultural diversity of the group. Again, more details on market drivers, go-to-market strategy, all the rationale will be presented in May Investors Day that will take place in Spain. So maybe to conclude on the outlook. It remains difficult to provide a clear outlook for 2021, considering the evolution of the COVID-19 with the new lockdown measures in many countries, the implementations of the vaccine strategy, the evolution of the different new COVID variant. So based on the current situation, my outlook is a solid organic growth. However, normalized for the impact of COVID and improving adjusted operating income, a strong cash conversion, maintaining best-in-class organic ROIC, accelerate investment into our strategic focus area with M&A as a key enabler, at least maintaining or growing the dividend. I believe that 2020 has shown the resilience of SGS group on our ability and agility to adapt to new situations. We have continued our investment for the long-term as we are confident that drivers of the TIC sector remain intact, and our services are becoming more relevant to main industry. And to conclude the presentations, I would like to thank my colleagues of the entire SGS Group and the Operations Council for their dedications and courage during this rather challenging year. As we move into 2021, the health and safety of our colleagues and their family remains our priority. On that, Toby, I'll hand back to you for the Q&A session.

Thank you very much, Frankie and Dominik. And we have a few people stacked up in the Q&A order. So I would like to remind you, please limit it to 2 questions. And of course, then you can come back at the end and ask additional questions if you'd like. First of all, in the queue, we have Andy Grobler from Crédit Suisse.

I've got a lot, but I'll stick to 2 as directed. So Dominik, really given the strength of margins in the second half, and assuming solid organic growth, do you think it's reasonable to expect to get to that 17% margin target this year? And then secondly, you mentioned that December was back into growth. Has that momentum continued into the start of 2021, given the lockdowns have become a bit stricter?

If we start with the margin target, I think it would be to come to 17% plus this year would be, I would argue, a bit demanding because we absolutely convinced and confident that we can show good operational leverage, but we also have to consider a couple of points into this year. First of all, I mentioned that one important driver of the margin increase in 2020 was also lower bad debt expenses given the very strong collection. So to give you some insight, roughly lower bad debt compared to the prior year contributed 40 basis points to the margin development in 2020. I'm not saying it will go back to the level of 2 years ago because I think we are structurally in a better position. However, I would argue the very low bad expenses we had last year was extremely low. So they most likely will be a little bit higher. Then the acquisition of the A&S division of SYNLAB, they have lower profitability than the SGS Group. So there's a little bit of a diluting effect. Obviously, there will be quite some margin pickup in '20 when the full synergies are realized. And also, if you look a bit to the growth pattern in the second half, if you look which business we are growing, there was to -- especially in the second half, there was to a certain extent, let's call it, a good margin mix. Yes. CIS, strongest growth, 7.5%, by far the highest margin with an AFL, especially live trade, very high margin. CBE declining, but Management System Certification, very strong acceleration. So there are, I would say, at a certain moment than other segments, which are maybe more industrial, more cyclical, coming back with growth, they have lower margin. But to answer -- to come back to the point, we are very committed for operational leverage, I would say, 17% for this year would be a bit too demanding.

And the other question was about growth in 2021 on the back of December?

On the back on December. So I mean, we have seen this gradually improving. And I mean, January is not done yet. And we don't have the financial numbers. And January anyway is a month where you cannot read too much into it until activities are starting. As of the first couple of weeks, it's very hard to read something into it. But I would argue when we did the trading update beginning of -- when was it, beginning of November when you talked about the SYNLAB acquisition, we had not in mind to have 1% growth in December because we were also bit concerned with second lockdown measures, but it seems at least in the industry that clients reorganize themselves, that they have their protocol and as long as supply chains not getting disrupted to things moving on with the exception of one or the other business or country.

Thank you. And the next person on the call we have is Paul Sullivan from Barclays. Hi, Paul. Could you limit it to 2, please?

Yes. Sure, Toby. I mean, whilst it's hard to generalize, could you just maybe comment on how you think the competitive landscapes evolved? And would you say that pricing is firmer or softer than it was 12 months ago? And then Dominik, I don't know if you could provide some sort of housekeeping update in terms of below-the-line items like interest tax CapEx? And any thoughts on further restructuring costs and benefits this year?

Paul, it's bit of the difficult questions. I would say, it really depends on segments, our industries. You take the Oil and Gas sectors. The pricing power is more on the customer side. There's no questions. There's soft demand. There's excess capacity. So we are more under pressure than anything else. But at the old extremes on anything linked to Life Sciences as well as some of the consumer good like PPE, 5G and so on, because they are -- whether they are essential services now or the newer activities with a lot of other value, then the pricing power is more on our side and then you have little bit everything in between depending on what you're looking at. So I would say it's not too much different than what we've seen in the past. Certainly, during the lockdown, there was more requests from our customers to help them to survive some of the difficult time. We are more focused on adding value by creating more services to help them to deal with the disturbance of the supply chain more than just giving them outright discount. So I would say we're mitigating some of the pressure, but the market pressure is not different than what we've seen in the past years.

Then to your other question. So basically, if we look to the tax rate, tax rate was 32%, but it was a bit higher than our usual guidance of higher 20s. Higher 20s should be absolutely fine. The reason that it was a bit higher was the fact that part of the restructuring cost was not tax affectable nor the goodwill impairment. So higher 20, I would use for '21 and the years ahead. CapEx, we always said we want to focus more in certain priorities. So we are actually happy that the CapEx in percentage revenue is slightly up last year, that we used the opportunity to invest, especially as I outlined in connectivity-related services in Life and Food. So it was up from 4.4% to 4.6%. We're aiming surely more in the higher 4% area going forward to '21 and the years ahead. Restructuring cost last year, CHF 84 million. Half of it is really related to sizable contract, Uganda, Ghana, as I mentioned in my speech, where you could not -- has a breach of contract where we expect benefits from a claim in the midterm. These things will take time, but they are not direct, let's say, additional benefits, so to say. And the other half, so the CHF 40 million plus, from this half is already kind of in the run rate and the other CHF 20 million is incremental benefit. And going forward, under normal circumstances, I would say, usually, I would use CHF 20 million kind of restructuring costs normalized. For '21, I would consider to make it a bit higher, maybe more to CHF 30 million because while we already did some work in respect of the new organization, there's still some work to be done in the first quarter, which will lead to additional restructuring costs. So I would use roughly CHF 30 million.

Thank you very much, Dominik. And then next on the call, we have Sylvia Barker from JPMorgan. Please go ahead, Sylvia.

I'll stick to the 2 as well. I was just thinking about the vaccine and PPE contribution in 2020. I guess, you have previously commented that the vaccine revenue was in the low -- was expected to be in the low tens of millions. So are we right in thinking that the 2 together or maybe, I don't know, 1.5%, 2% in terms of the contribution to growth last year? And then secondly, thinking about China, could you maybe just tell us kind of roughly what the growth rates have been in China kind of exiting 2020? And obviously, you already started to be hit by lockdown and stoppage of activities last year at this point. So maybe just any thoughts on the ground, what you're seeing now in January as well?

So if we -- if you put -- if I understand this right, how much vaccines and PPE together contributed. So you estimate a bit more than a percent is very good. We're not disclosing growth rates by country. But of course, China had its lockdown in February, recovered very quickly, went back to growth in April and then accelerated throughout the summer month, several months double-digit growth kind of helped by PPE and the recent trends is, let's say, mid-single -- good mid-single-digit growth, which we so far experienced.

Yes. Maybe I can add that you have this year, Chinese New Year in the month of February.

Month of February, yes.

So we can't just say how this evolves. And also China also has some pocket of infections that do disturb from time to time our operations. So all that will need to be managed on the week by week, month-by-month basis to see where we're heading.

Okay. Maybe just a follow-up with Toby about just around the mid-single digits in China. Any comment on export versus import within that?

The domestic is strong.

I mean export versus domestic?

Domestic is stronger.

Thank you. The next person we have on the line is Simon LeChipre from Stifel. Please go ahead, Simon.

Yes. First of all, just on M&A, any comments on how your pipeline looks like right now? That would be very helpful. And secondly, on working capital, how should we think about the dynamic for '21?

So on the M&A, I mean, as Frankie mentioned also in his summary and outlook statement, we are very committed to invest in M&A to -- especially in our strategic priorities. And we have, I would call it, a solid pipeline of opportunities where we're focusing on. But as you know, in this business, sometimes it takes a bit more time. But in general, we are confident that we can announce more deals. On working capital, obviously, when you have revenue decline, it's for the working capital technically also helpful. But to be fair, we also did structural improvements. For example, DSO on a recurring basis went down. So you should expect some outflow in '21, but relatively to prior years in such a situation, it will be somewhat lower.

And then next on the call, we have David Roux from Bank of America. Please go ahead, David.

I've just got one question actually around remote or digital solutions. There's an example mentioned in your release that sort of over 50% of GIS services were conducted remotely in 2020. I'd be interested to understand at a group level, how much are remote or digital services contributing to revenue currently in 2020? And what is the sort of comparison in 2019?

Sorry. I was going to add that it was 50% of eligible GIS inspections. And that means that it didn't require physical inspection. So it's not all GIS inspections. But Frankie, please go ahead.

No, sorry, I was exactly was to say. I mean, what we refer to remote activities where it is inspection, auditing or consulting is really all the segment of our activities where a physical presence could be substituted by the technology to help to review typically for the inspection side is consignment that is more focused on assortment, delivering a packaging more than anything else when it comes to technical review is more complex because you will have to have someone that is looking at the technicality of the product. So the remote inspection is not yet possible. So I would say, when Toby mentioned 50% of eligible services is basically the port of activities that we are looking at is pushing into a remote audit and acceptance by our customers is becoming higher and higher because those conditions existed for a couple of years now already. But before that, our customers was not keen on using them, but with the COVID restrictions, the adoption got up quite significantly. I don't have the numbers for the total eligible, as I said, auditing, inspection and consulting, but I would say the growth is quite significant, from 2020 to 2019 is quite significant. I don't have the number, I'm sorry.

Thank you for your question, David. And next is Ed Stanley from Morgan Stanley. Please go ahead, Ed.

I've got a couple, please. On Slide 21, when you're talking about the EVA management and you showed 29% critical focus. I appreciate that you can't give much of a guidance on margin, but it sounds like you've got a plan for that 29%. So I'm just wondering how much upside potential there is on the margin from dealing with those businesses this coming year. The second question, semiconductors are something you're specifically flagging in your megatrends and given you're the leader in Taiwan and global supply shortages seem to be leaning on Taiwan to fill the gap. Is there anything interesting you're seeing in that space in the supply or demand imbalance? Or is that not really your issue?

Let me start with the critical focus list. So there is obviously upside, but you need to consider this 29% represent less than 2% of group revenues. Even though if they do better, the group impact will be very low given the fact that they are rather small businesses.

For the semiconductor industry, the global trade imbalance is something that is not hitting us that significantly because we're really basically working with the semiconductor manufacturer in Taiwan, in China mainly. So we have more links to their production capacities and what is disturbing them. So I would say it has an incidence, depending on how our customers is impacted. But quite often we are not also linked necessary to the volume itself quite often. So it's more for some of the R&D work and other things. So on that aspect, as long as some of the R&D activities and some of the project activity goes on, we may not have the 1:1 impact in terms of their volumes and the supply chain issues.

Thank you very much. And then next, we have Neil Tyler from Redburn. Please go ahead Neil.

Yes, Toby. My question is on the outlook statement, which the point on return on capital now excludes M&A from your ambitions. And the question really is, does this change reflect materially greater M&A ambitions, higher multiples or both? And then when you're monitoring that target on an ongoing basis, and as these acquisitions are integrated into the business, how long are you able to actually strip those out and monitor the underlying? Do they come back in after 12 months? Or how do you go about that? And that's the questions or 2 parts of the question, please.

I mean, first of all, we're showing the return on invested capital basically for the whole portfolio. And obviously, especially in a case like, for example, the A&S division of SYNLAB, this business will be completely integrated, right? So it's already challenging to give for 12 months the organic growth rate because you start to integrate. It's possible for 12 months, but afterwards it should not be possible because obviously, it would be not integrated. Now when we -- that we -- this time, with statement about the SYNLAB impact is more the fact related to the point that -- well, if you now look to 2020, the only thing what is part of the year-end is the balance sheet of SYNLAB because we acquired the company on the 31st of December. You have the balance sheet in, you have no profit in because no profit are consolidated. And that's the reason why we show here also with -- about it, but we will show the whole thing in combination. Now historically, as we had, of course, also very high ROICs, it was partly also because of not having a lot of M&A, so to say. And obviously, when we had, whatever, 25%, 26% ROIC, if you start to make M&A, just technically, the number will come somewhat down. We're rather looking when we're assessing assets, how much time they give this asset to become EVA positive and then it's the right investment, and continue to focus then with the synergies to get the ROICs accordingly up. But the mix effect will definitely change. If you make more M&A, the implied ROIC is somewhat lower.

And the next, we have Rajesh Kumar from HSBC. Please go ahead, Rajesh.

First one is can you talk us through the working capital improvement you have achieved this year in terms of what is driving that? Is it just the payable side or payables and receivables both? The second is a related one. When we look at last year, if I recall correctly, you have taken a write-down for receivables. Given the improvement in working capital, can you give us the improvement in such write-downs year-over-year?

So if we look to it, the major year-over-year comparison is a lot our side because we -- obviously, we had also revenue decline throughout the year. Yes, towards December, it was grown, but the month before was declining. So it had some impact, let's say, positive impact on the working capital. But secondly, and I think that's the key point that we had very strong cash collection and with this, we had reduced the DSO. So it's really the key driver on this part. I think it has a lot to do also with EVA performance management that people focusing on it. And what we did in terms of centralizing the collection and implementing IT tools to collect better. We also benefited in -- for certain businesses, we had client advances where the client paid upfront for certain services. So these are the kind of main drivers in that respect. When it comes to your second question related to the impact of basically, I would say, bad debt accruals, as I mentioned at the first question when Andy was asking the margin walk, that, of course, had also a very positive impact. As I said, that roughly 40 basis points of the margin for last year was related to lower bad debt expenses. That's not only related to one or the other of these accounts. That's also underlying improvement.

No, understood. So is it improvement in bad debt? Or there are any provision reversals as well, which we need to think about?

No, it must -- maybe run over with it. It was just very low bad debt expenses.

Thank you very much. And next on the call, we have Julien Fouché from Soc Gen. Please go ahead, Julien.

Just one, if I may. Part of the margin improvement has been driven by additional measures taken in 2020 due to the pandemic. Could you give us more color on these additional measures? And more importantly, are there any costs that should be back in 2021?

I mean that's -- I mean there are, of course, a lot of individual measures and what all the units and all the local organization implemented. I mean, if you look, for example, overtime expenses are materially down in a year like last year. If you look usage of flexible workforce went massively down because you use flexible workforce like insurance and when it becomes tough, you let these people go, right? So obviously, in certain jurisdiction, we had subsidies. So there are several things. Then bonus payments, of course, are down. While we had strong financial performance, we're obviously not hitting our internal budget. So these combination had an impact. Travel costs, not surprisingly, materially down. And obviously, as business recovers, some of them will come back for sure.

Thank you very much. And next, we have JP from Vontobel. Please go ahead, JP. Or maybe we go -- could we move to the next question, please? And that's from George Gregory from Exane BNP. George, please go ahead.

First question relates to the restructuring costs in Ghana and Uganda. Dominik, I wondered if you could just elaborate on what exactly those costs represented? And if they had any discernible impact on the GIS margin, please? And secondly, working capital, I appreciate that there are lots of moving pieces which you already articulated. So looking structurally at the way you expect your business mix to evolve, would you expect the working capital position as a percentage of sales to trend in any particular direction over the next few years, please?

So if we look to these 2 contracts. So first of all, the Ghana contract, this is a single window contract, which we had for several years very successfully. And the contract was supposed still to run. But the government basically has taken the decision to take it away from us, which is a breach of the contract with a short notice. But again, it's a breach of a contract and we did all our obligation to full satisfaction. And therefore, we had to close down the whole operation, which, amongst others, means severance costs but also write-down of assets. And we raised the claim against the government of Ghana. It's very strong case, but these things, of course, take a couple of years. That's one contract. The other one is vehicle inspection testing in Uganda, it was a contract from some years ago where we invested significantly in assets based on the agreement with the government. However, the government never enforced the contract. So basically, we had an asset there. We had people there. But we're never able only to a very small extent to provide our service, which is a breach of a contract. In the first years, it was not allowed that we can give notice, even not for breach. Now we can do this. And so basically, we informed -- we stopped the contract and send the letter to the government that they are in breach of it. And this is basically complete asset write down. From -- what's the impact on revenue? The impact on revenue of those contracts, again, Uganda is not really because it was more the asset. Revenues of this contract in 2020 was still around CHF 10 million, but with a loss because of the assets of the underlying depreciation in Uganda, but it was more significant in the prior year. So in the prior year, in 2019, the Ghana contract was still running. We were more in the mid-20s with good profitability. So you don't have to expect now a negative impact on profits because this is already kind of in the results of 2020, right?

And then just follow-up question. Sorry, second question?

Yes, working cap, excuse me, if we -- I think in general, as we historically was always very strong in working capital and the argument was below 2% is a right number. Often, the company was beating this. And I think this is -- this was the right number. Now I think on the structural side, on the AR side, with DSO improving, I'm -- I feel very committed to be below 1% in the midterm.

So next, should we try JP again from Vontebel. JP, if you can hear us, please go ahead.

Can you hear me now? Can you hear me? Hello? Hello? Can you hear me. Hello?

Yes.

Yes.

Very good. The first one -- the first one is on sustainability. I think, Frankie, you were mentioning that it is now included in the CBE or originally in the CBE. If you can share with us how much or how many sales you are now generating with sustainability projects? And how do you see that evolving in future? You were like eager to participate to some of the auditing cost certification of some larger companies, which wants to be like financials to be audited on ESG? And the second one would be on this new organization. Is this just a reshuffling of the organizational structure? Or are you expecting some synergies, both in terms of sales and costs?

Yes. For the sustainability services, for the time being, we are more in the traditional sustainability auditing kind of activities or social audit in general for CBE. So I would say the roughening is rather small. The objective is to start to enhance the portfolio with much more audit programs linked to the ESG field, whether it is financial or it is corporate. So this is more the newer sectors. But I'd like to remind that in SGS Group, a lot of our -- all the services that we're already offering is also linked to part of the sustainability environment, whether it is recycling, [indiscernible] or all those activities. Recycling is a good example, we have contract in the Mineral sectors where we help companies to recycle specific minerals out of batteries and so on. So these are also sustainability services that we're already offering. But they are not really part of the CBE portfolio for the time being because they are quite specialized into a technical aspect. So I would say the group, in general, has a lot of services linked to sustainability. The more specific to CBE that I mentioned will be a development that we'll be doing in 2021, together with the new strategic program. So it's a vast market. We have more or less the background work done. This throws a question of go-to-market and expand our footprints. The second question was...

Your organization whether kind of benefits are you?

The new -- we'll talk more about that in the Investor Day. But by and large, they would be reorganization, refocus on specific segments. I believe that at the industrial level, they are synergy across the customer base. Natural resources is a good example. Likewise, natural resources is also a good example. In the operational aspect, the synergy between some of inspections, fertilizer is a good example. Some of the knowhow from one team could be reused for the order. So there will be both end of the spectrum benefit that they will be optimized and work out during the course of 2021.

Thank you very much. And next, we have Daniel Bürki from ZKB. Daniel, please go ahead.

I would have a question regarding your M&A strategy. How more -- how much more additional debt would you put to your balance sheet with what figures would be -- you would be comfortable with?

We don't have official guidance on net debt to EBITDA, but we always want to have a good investment-grade rating. So with good investment-grade rating, you could easily add the billing and it's pretty good. So at this point of view, there is quite some opportunity there. And it needs to be also put in perspective. It's also not that now every quarter a deal like the A&S division of SYNLAB comes to the market, right? So there will be maybe other deals that are size-wise a bit smaller in terms of enterprise value. But again, we are committed to have a good investment-grade rating. And with this, we have sufficient capacity to do acquisitions if we find the right target for the right price.

And we have Rory McKenzie next from UBS. Rory, please go ahead.

Firstly, just wanted to ask about the customer behavior around maybe deferred inspection services during the restrictions. Just looking at EHS, CBE, maybe the recovery through H2 was a little bit slower than we expected. So can you comment on how much revenue or services have still been deferred and we might see a catch-up? Or whether you think the majority of that lost revenue is indeed now lost? And then secondly, also on the new divisional structure. I appreciate it's a big internal decision. But obviously, for us on the outside, and that does mean we'll lose some external visibility on trends. Just wondered if you expect to report subdivisional trends within that? Or could you explain some of the thinking around those groupings? For example, breaking up GIS, which has been kind of a stand-alone division going back to about 2000s? Yes, interested to see why you thought that was better suited to fit into other places?

Maybe I'll answer the last part of the questions. I mean we will try to provide as much transparency as possible. I mean at the end day, if there's a logic for us to integrate part of GIS that you talk as an example, into some of the activities with -- there are the larger divisions because we can create synergy and it makes sense from both the customers' perspective and on the operational perspective, then we will integrate because it will make sense for the value creation of the company. If they are more independent and we need -- because there's small unit that we needed to put it on the need for specific business lines to help the management, then we will certainly report them separately, but I think it's a fact that we should be transparent about a lot of those sectors. So it is not yet defined. We're still in the process of working on some of the details. But what is clear that we try to keep as much as we can comparison -- comparable for you to be able to look at in term evolutions. But again, we've comment that if we start to integrate because it makes sense and it's more too complex for us to start to split it just for reporting purposes, we'll not do it.

Then regarding EHS, obviously, EHS -- our EHS business has a lot of field activities and dispute activities are still in certain jurisdiction challenging given the COVID situation, given the second lockdown. Thinking about industrial hygiene, is still very challenging. What we're seeing definitely is that the lab testing is picking up, especially Asia and Europe. But this is now not a business where you had a bit of feeling your question was related, is there still work to be done which was not in the first half. So it's not something like a certification where a client wants to make a certification this year. Or if you think about vehicle inspection that people have to inspect the car. So this is not the kind of business. But what we're seeing is the lab testing is improving. Other areas, more field related is still somewhat challenging in EHS.

Thank you very much. And our final question is we have one person who's come back to join the queue. So Paul Sullivan from Barclays you can finish this off, and then we're done. Thank you.

Yes, I'm just trying to catch a trend here. So I mean just a couple of sort of unrelated ESG questions. Just firstly, on China, can you assure us that you don't undertake work either directly or perhaps more importantly, indirectly from companies that operate in the Xinjiang region of China? And how do you avoid conflicts like that more generally? And then secondly, you've done quite a big OC reshuffle, but there is still no female OC members. So I don't know whether you could comment on that, please?

Yes. On the second question, we -- I do understand fully that diversity -- gender diversity on your specific question is an important aspect. And -- but as a group, we also believe that the merit is also something that's critical. But I think one of [indiscernible] because we did have female colleagues on the Ops Council in the past. And our view is that, to some extent, setting requirement for the Ops Council without considering merit may not be doing a favor to our female colleagues to join the Ops Council because nobody wants to be there because there was a number set. So I would say it is something that I'm looking at. It is something that is important for the group. There are the right opportunities with the right person, but with the right process, we will have more diverse Ops Council with certainly more female colleagues on it. We're looking at a different opportunity. We're more looking at trying to get an equal opportunity for male and female senior managements to go into the interview process. And at the end of the day, we go through the merit process when we come to the last hurdle. So this is between more -- the philosophy is not on purpose, that we don't have female. But it is just the evolutions, but the evolution could change in the next couple of years, I would say, to the better.

Next is on Xinjiang whether how we can issue the [indiscernible]?

For the last time I checked, we don't do. I would have to double check again, but we gave clear instructions that that we should avoid any conflict or any sanctions and so on. So I would say I'm not too concerned about this particular point.

Okay. Thank you, Paul. And that brings the Q&A session and the call to an end. So thank you very much for participating, and we all look forward to speaking to you again shortly. Good afternoon.

Thank you very much. Goodbye.

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