SGS SA (SGSN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the half year 2021 results conference call and live webcast. I am Sandra, the Chorus Call operator. [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.

Sorry. Frankie and Dominik, if you can hear me, I apologize. Please just go ahead with the presentation...

Toby, we can hear you now. Please carry on.

Okay. Well, thank you for joining us, everyone. I'll just have a quick recap. Shortly, Frankie and Dominik will present our first half results, which demonstrate a strong performance. [Operator Instructions] And with that, I will hand over to our CEO, Frankie, to start the presentation. Frankie, please go ahead.

Thank you, Toby. Good afternoon, everyone, and welcome to our first half results. I hope that everyone can hear me properly. As usual, I will give you a highlight of our performances, then Dominik will give you more detailed walk-through on our financials. And I will come back to give you a bit of the flavor for the second half of the year with the different business lines. So let me start with the first slide related to COVID situations. Unfortunately, there are still many parts of the world and our network that are affected by the COVID pandemic. We're doing, as usual, our utmost to protect our colleagues and their families. Many of the actions that we have implemented in 2020 remains in place, including: Travel ban for non-essential visit; working-from-home policy wherever possible; use of remote technology for inspectors and auditors; PPE requirement; additional shift adopt to COVID safety requirement; and in addition, we have also implemented facilitations of voluntary vaccination program for our colleagues and affiliate where the government allows us to do so. I would like to take this opportunity to thank the 90,000 colleagues that we have in the network for their dedications in answering the day-to-day running of our operations and also for the disciplines to implementing our COVID measures that has helped to limit the spread of COVID-19 across our network and in the communities where we operate. As indicated during the May Investor's Day, we had a strong start of the year, and this has continued during May and June. Total revenue has increased by 17.9% at constant currency, while the organic growth was 12.4%. Our adjusted operating income stands at CHF 457 million, a 40.6% increase at constant currency compared to 2020. As expected, the acceleration of our activities has led to decrease of free cash flow, mainly due to higher net working capital. Our free cash flow decreased to CHF 93 million compared to CHF 220 million. Our basic earnings per share stands at CHF 36.29, an increase of 59.1% compared to 2020. During the first half, we have continued our investment into strategic priorities with 6 new acquisitions. Let me go through quickly to all of them. ADS, which is the food laboratories we acquired in the U.K., will complement our competencies in the pesticide and chemical testing in the U.K. Together with ADS, SGS Analytics U.K., part of the Synlab A&S acquisition that we made last year, and SGS Ashby, we have now positioned SGS as one of the key service provider for the U.K. food market. We also acquired the facilities of ISL from Novartis in Ireland which will provide SGS with new competence centers and increase our capability to service our customers in the fast-growing life sciences industry as they continue to outsource to chosen partner. BZH in Germany is a leading specialist in hygiene consulting in the health sector. This is a very strong added-value services to our health sector customers and in line with our hygiene service development strategy. Metair is active in the [ German ] asbestos testing in France, particularly in the southeast, and will enhance our competence and market coverage. Autoscope is active in the area of vehicle inspections control in France and enhance our service center network across the country. And the last one, Brightsight, our latest acquisitions. Brightsight is the leading player in the field of cybersecurity and is a key addition to our portfolio in terms of service to the field of connectivity. Cybersecurity issues are increasing and will become a fundamental part of our testing portfolio. With Brightsight joining the SGS Group, we are well positioned to capture this growth opportunity. In terms of strategic evolution of the different initiatives, particularly in system, retail and digital, let me report a few of the progress. First, related to our laboratory information system, what we call the LIMS, our mineral G6 solution is now covering about 45% of our geochem revenue. And more importantly, all the geochem testing data now are centralized into a single database, which will allow us to optimize data analytics to our customers. For WCS, what we call the World Class Services is the spin-off of the world-class manufacturing we're using from Fiat Chrysler automotive. Another 2 labs has passed the first audit since we met in end of May during our Investor's Day. For the laboratories that has adopted WCS initially, we are now seeing a marked improvement of their processes and also the side of tangible savings as we eliminate waste in our operations. Then for Digicomply, the regulatory tools that we have developed over the past 2 years and now is reaching market readiness for the food sectors. Over 100 companies of different sizes are using our solution now, and we expect this number to grow as we continue our sales deployment across the network. At the same time, we continue to develop Digicomply to other segments like cosmetic and in the consumer foods sector. On that, I'm going to hand over for Dominik for a review of the performance related to our financials. Dominik?

Thank you, Frankie. Good afternoon, ladies and gentlemen. I will start with the overview of the financial highlights for the first half '21. Frankie already mentioned the operating highlights in his introduction, with revenues of CHF 3.1 billion, adjusted operating income of CHF 457 million and a free cash flow of CHF 93 million. Revenues for the group in constant currency increased strongly by 17.9%, driven by an organic growth of 12.4% and the contribution from acquisitions. Natural Resources posted mid-single-digit growth, while all the other segments posted strong double-digit growth in the first half '21. Adjusted operating income increased by 40.6%, in constant currency to CHF 457 million, leading to an increased AOI margin of 14.8%, up 240 basis points at constant currency. Net profit after minority interest increased by 59.1% to CHF 272 million in the period under review, which is primarily a function of the operation performance. Cash flow from operating activities as well as free cash flow decreased by 17.2% and 57.7%, respectively, basically reflecting the increase of net working capital in light of the strong growth, higher tax payments, and for the free cash flow, also higher CapEx towards our strategic priorities. Organically, revenues increased by 12.4% in H1 '21. During the first half of '21, we experienced a gradual business improvement, leading to the same organic revenue level as in H1 2019. The contribution from acquisitions of 5.6% reflects primarily the consolidation of the A&S division of Synlab and Ryobi, while the other smaller acquisitions had a minor impact. The impact from currencies is with negative 1.1%, rather small. Moving on to the revenue growth by business. Growth in Connectivity & Products was 13.8% strong. The acquisition of Brightsight contributed 0.5% to it. All SBUs showed a positive recovery and contribution to the overall growth. The strongest growth was achieved in connectivity, also reflecting our continued investments into the strategic priority. Revenues in Health & Nutrition increased by 35.3%, of which 20.9% was organic. All SBUs and all regions achieved double-digit growth. We delivered the strongest growth in health science, benefiting from work related to COVID-19 vaccines as well as a strong rebound of our activities in Northeast Asia and North America. Besides the Health & Nutrition part of the A&S acquisition, several smaller acquisitions contributed to the growth from acquisitions. Revenues in Industries & Environment increased by 21.2%. The environment part of the acquired A&S division contributed strongly to the growth while organic growth was 10%. Field Services and Inspection, Technical Assessment and Advisory as well as Industrial and Public Health & Safety posted organic growth above average, while oil and gas-related services lagging behind. For Natural Resources, strong growth in mineral commodities, laboratory testing and metallurgy was partly offset by weaker demand for OTC commodities given the prolonged effect of the pandemic as well as for agri commodities due to a poor crop season in several European countries. Knowledge grew by 26.2% at constant currency. Management System Certification was the main growth driver, with volumes and revenues exceeding 2019 pre-pandemic levels in all regions. Customized Audits also showed a strong recovery by the recovery in consulting, and training is underway. From a regional point of view, we delivered double-digit organic growth across all regions. The Eastern Europe and Middle Eastern countries achieved double-digit growth across the majority of its end markets and are well ahead of H1 2019 levels. Turkey posted very strong double-digit growth. Most of the key markets in Europe achieved double-digit growth, while some did grow single digit. Key markets in Africa are lagging with mid-single-digit growth. The organic revenue growth of 13.1% in the Americas is a function of double-digit growth in Latin America while growth in North America is almost double digit. Organic growth in Latin America is above first half 2019 levels. Organic growth of 14.1% was achieved in Asia Pacific. While the countries in the Southeast Asia Pacific cluster have just grown double digit, growth in the Northeast Asian countries continue to be materially stronger, being now also strongly above 2019 levels, mainly driven by China, Taiwan and Korea. FTEs at the end of June '21 increased by 6.8% versus prior year. The acquisition-related increase of 3.3% is, to a large extent, related to the acquisitions of the A&S division of Synlab as well as Ryobi, both consolidated as of December 31, 2020. While the nonacquisition-related FTE increase is with 3.5%, materially lower than the organic revenue increase. Average FTEs in the first half 2021 increased by 3.3%, materially lower than the revenue growth of 17.9%, leading to a strong productivity increase resulting from leveraging the benefits of our structural cost optimization program as well as our active portfolio management. This was achieved across all regions as the difference between revenue growth and FTE development is, in all regions, in the 15% ballpark. The adjusted operating income increased at constant currency by 40.6%, which reflects the operational leverage on the achieved revenue growth, while increasing investments into our sales accelerate and business development programs to drive stronger growth as well as into our level of initiatives to drive further productivity increases. Acquisitions added 3.7% to our growth in AOI, fully in line with our expectations. However, it should be noted that the acquired business has a materially stronger seasonality towards H2 compared to the total group. Currency had an adverse impact of 2.1%, leading to a reported increase of 38.5% in the period under review. AOI margin increased strongly by 240 basis points in constant rate or 230 basis points in actual rates to 14.8% in the first half '21. On this slide, I would like to provide an update about the integration of the former A&S division of Synlab, which is, in the meantime, rebranded SGS Analytics. We are well on track to realize cost synergies of approximately CHF 20 million. The related changes in the management team and the integration into our regional and country structure was executed in the first quarter this year. All rebranding and related communication activities have been fully facilitated. The implementation of a common HR system is on the way. The ERP implementation and with this, also the transfer of key finance processes to the financial shared service centers are expected to go live in autumn for Germany and the Nordics and in H1 next year for the Benelux and the U.K. The LIMS implementation for the [ rest of the countries ] will be based on the new-generation LIMS, supporting the digital lab approach. We progressed significantly regarding the implementation of the hub-and-spoke model. The implementation of the footprint consolidation in Health & Nutrition and Industries & Environment is progressing according to plan. At the same time, we are seeing also good potential for revenue synergies. During our Investor Day 7 weeks ago, I talked about the Level Up program and defined our '23 and '25 objectives for various initiatives in the area of finance, IT and operations. Today, I would like to talk about the framework and approach to be used to achieve this objective. For all initiatives, for which IT is a key enabler, which is for the vast majority case, we implement a builders organization in order to be more agile to achieve strong alignment between business, operations and IT and to reduce significantly the time to market. The builders organization is a product to an organization in which the IT function works closely together with the business community to design the products. Through an integration layer, design products will be built by the usage of the best delivery partners in close collaboration with our own in-house expertise. Furthermore, we will implement an OKR framework for each initiative, which helps to set and track the right priorities and accelerates time to implementation and, consequently, the time to market. Overall, the Level Up initiative progressing very well with the Financial Service Center onboarding, including our group ERP, standard solution for Southern Africa, the Nordics and the German activities of the A&S division in autumn, the initiation of the global rollout of the fully standardized, integrated and digitalized third-party certification system for Knowledge and the design of the core for the digital labs model for environment, food and safety -- Food and Life lab testing activities, to mention some of them. Let's turn to the profitability by segment. Our most profitable segment, Connectivity & Products, reported a margin increase of 160 basis points to 23% on a constant currency basis, driven by strong operational leverage in hardlines and a good margin increase in Connectivity despite continued strong investments in that segment. The Health & Nutrition Division strongly increased the adjusted operating income margin by 470 basis points in constant currency. All SBUs achieved material margin increases. Strongest increase was achieved in the health science SBU. AOI margins in the Industries & Environment increased by 310 basis points, driven by all SBUs except for services related to the oil and gas end markets given muted demand. AOI margins in the Natural Resources declined by 150 basis points to 12.6% as margin increases in laboratory testing and metallurgy were more than offset by decreasing margin in trade activities, the latter primarily reflecting the weakening top line in OGC and agri commodities. The strongest margin increase was achieved in the Knowledge segment with plus 930 basis points, reflecting the strong recovery. All segments contributed materially to this achievement. Moving on to the balance sheet. The increase in goodwill and tangible assets is primarily due to the consolidation of a couple of smaller acquisitions as well as Brightsight and currency changes. The increase in unbilled revenue, working progress and trading arm is a result of the strong growth experienced in the first half 2021, while these are stable. The increase in long-term loans and other financial liabilities of CHF 538 million since the end of last year is primarily due to the successful EUR 750 million bond issue in H1, partly compensated by the reclassification of long-term to short-term debt of other bond given the maturity profile. The reduction of the current loans and other financial liabilities of CHF 529 million since the end of last year is primarily coming from the repayment of the CHF 275 million bond matured in May '21 as well as repayment of the bridge facility for the acquisition of the A&S division of Synlab, partly offset by the reclassification of a bond from long to short term, as mentioned before. Net debt increased from CHF 1.5 billion at the end of last year to CHF 2.1 billion, which is mainly driven by dividend payment which occurred in the first half of 2021. Cash flow from operating activities decreased by 17.2% to CHF 342 million, reflecting the increase from the net working capital given the strong revenue growth as well as higher tax payments more than offsetting the strong increase in profits. Furthermore, free cash flow decreased by 57.7% as our investments into our strategic priorities increased according to our plan. We paid dividends of CHF 599 million, issued a EUR 750 million bond, leading to an inflow of CHF 870 million, while we paid a CHF 275 million bond as well as the bridge facility for the acquisition of the A&S division of Synlab. The management of net working capital continues to be a very strong feature of SGS. Operational working capital in percentage of the last 12 months revenue is with minus 0.1%, on a very similar level as for half year 2020 with minus 0.2% despite the strong revenue acceleration experience. The strong working capital management is supported by our EVA performance management approach as well as several of our Level Up initiative. CapEx in the first half 2021 increased strongly by [ 17.9% ] to CHF 150 million, reflecting our accelerated investment focus into our strategic priorities. Consequently, CapEx in percentage of revenues increased to 4.8% versus 4.1% in prior year, in line with our 2023 strategy targeting CapEx in the higher 4% level. Almost 30% of our CapEx is allocated to C&P and here especially towards Connectivity in office Asia, which is of high strategic priority. 70% of the CapEx was allocated to Health & Nutrition with a strong focus on health science. The CapEx allocation for Industries & Environment and Natural Resources is, to a large extent, related to client-driven projects. To sum it up, our revenue in H1 2021 strongly increased by 17.9% in constant currency, of which 12.4% organically. Strong operational leverage was achieved as our adjusted operating income increased by 40.6%, leading to a margin increase of 240 basis points in constant currency. Our free cash flow decreased given the increase in net working capital as a result of the strong revenue growth acceleration as well as the increased investments towards our strategic priorities. And with this, I hand back to you, Frankie.

Thank you, Dominik. So now let me go through the outlook of our 5 divisions. Before that, I would like to highlight here that while we are seeing a strong market development and [indiscernible] across the network, the comparison of the second half versus prior year would be more challenging than it was in the first half, considering the significant disturbance created by COVID-19 in first half 2020 and the subsequent partial recovery of second half of 2020. In line with the guidance 2021 that I have given you in January at the full year result and in May, at the Investor's Day, I'm going to give you a flavor of how we expect the 5 divisions to perform during second half of this year. Note that all the divisional growth outlook comments related to -- relate to the second half organic growth and our innovation to the group average growth. So let me start with Connectivity & Products. Connectivity & Products growth should be broadly in line with the group average. Connectivity should see its momentum carrying on into second half of this year, with strong testing demand for wireless activities such as 5G and IoT and also an improvement of orders related to the automotive sector. Trade facilitations will also see good growth momentum into the second half, with new programs starting in Morocco and in Nigeria and with an expected volume improvement in transit net, particularly related to Brexit. Softline will continue to see solid growth in traditional testing activities, but this will be offset by tough comparisons to prior year due to the sizable volume of PPE tested -- testing we had in the second half of 2020 that will not repeat this year. I move to Health & Nutrition. Health & Nutrition growth should outperform the group average. We're expecting all 4 subsectors of health, food, cosmetic and crop science to grow strongly. Health science will continue to be supported by our vaccine activities, but we're also seeing good growth in other sectors related to drug development and clinical trials. Food will continue its strong recovery, with demand increase in Asia and in North America particularly, while the COVID restriction will continue to impact the tourism and hospitality sector. Now move to Industries & Environment. Industries & Environment growth should be broadly in line with the group average to possibly a bit below. Our Health & Safety services should continue to perform well moving into the second half with possibly some uncertainty related to the tourism and hospitality sectors due to COVID. Likewise, we expect a good second half related to environmental services as the market situation return to normal and while getting to the seasonally stronger second half. International Services should see mixed performances with new projects starting, while we continue to see some delay of some projects due to COVID. The end of certain government contracts, for example, in Ghana, will put pressure on our -- on the growth of our government mandate, but we expect those to be partially compensated by growth in other contracts as economic activities continue to improve. Moving to Natural Resources. Natural Resources growth should be brought in line with group average to possibly a bit above. We expect Minerals Services to continue its momentum into second half as exploration spend in the mining industry continue at derivative levels as a result of strong market drivers and demand for raw materials such as iron, steel and copper. Agricultural Services should see a better second half as current prediction for the new crop season is good for Europe and other regions. We are anticipating higher volumes than in the first half of the year. Oil & Gas chemical volume remain volatile. The higher oil price together with a significant decrease of inventory and an increase of consumption should lead to an increase of production. This should lead to some higher testing inspection volume, but pricing pressure remains due to excess capacity in the TIC sector. And the last one is Knowledge. Knowledge growth should be below the group average. In fact, the underlying market for Knowledge is solid. The slower growth predicted in the second half is mainly due to a tough comparison to last year when we had a good amount of orders delayed from first half of last year to the second half of last year. Also comparing growth between first half and second half of this year 2021, first half also benefited from some catch-up orders coming from the second half of 2020 which have now largely been completed. As said, the underlying market conditions are solid, and we are seeing strong recovery of training and consultant activities and increasing demand for ESG and supplier risk management related services. So on that, let me go to the -- our guidance 2021. In fact, our guidance 2021 remains the same as I gave them to you in January and in May during our Investor's Day. So they are, let me repeat them, solid organic growth, normalizing for the impact of COVID-19; improving the adjusted operating income margins; strong cash conversion; maintaining best-in-class organic return on invested capital; accelerating investment into our strategic focus areas with M&A as a key enabler; at least maintaining or growing the dividend. To the last slide. It's just a reminder of our midterm objective 2020-2023 target. I will not go through them in detail as I presented this slide during our Investor's Day. But what I would like to emphasize here is that, as a company, we are very clear that focus on financial performances is not enough any longer, and we need to be more accountable on the nonfinancial metrics as well. This includes having ESG criteria in the short term and long term incentive of the management which we have introduced this year. As just presented by Dominik we have also continued our investment for the long term, as we're confident that the drivers of the TIC sector are strengthening and our service are becoming more proven in many end markets. So to conclude, before we go to Q&A, I would like to thank again my colleagues of the entire SGS Group and the Ops Council for their dedication and courage during those rather challenging times. On that, Toby, I'm handing back to you for the Q&A session.

Thank you, Frankie. Thank you, Dominik. I'll pass it over to the operator to read out the rules, and then we'll get started with the questions. Thank you.

[Operator Instructions]

Okay. Thank you very much. Paul Sullivan, you're first on the list, so please, Paul, go ahead.

Yes, just two for me. Could you perhaps clarify the June organic exit rate versus '19? And is there any reason to suggest why we shouldn't extrapolate that through the second half? Or indeed, why doesn't growth on that 2-year view accelerate from here? That's the first question. And then secondly, the organic drop-through was clearly very high in the first half. How should we think about the second half margins compared to the 19.3% last year and the biggest divisional deltas that we should be looking at?

Paul, I think the questions are for me. So if we look first to the organic number, so June was definitely up compared to '19. Now on a monthly basis, it's not that relevant in our business, but it was definitely up compared to '19. Overall, in the first half, we were in line with '19, which was the same -- which was the same April year-to-date when we had Investor Day. So it basically imply May was somewhat below '19. June was above '19. Now going forward, I think it's reasonable to believe that there should be a bit of outperformance in the second half of '19 for 2 reasons. In general, having achieved same organic level like first half '19 this year needs to be seen with the knowledge that in the first half this year, still a lot of parts of the economy, in various jurisdictions, we are still not yet back to normal, not yet open, especially at the beginning of the year. So hopefully, the vaccination will help to open them up. Needless to say, there will be, maybe here and there from the Delta version, also some shorter negative impact. But in sum, it should be hopefully slightly net positive. And I think the other thing we need to consider if you think about '19 as a comparison, there was definitely, from a growth point of view throughout '19, a bit of deceleration in the second half, also related to the fact that we shut down some contracts which were well destroying -- which was good for the profitability, but yes, as a bit easier from the second half. So from this point of view, I would say it's reasonable to assume that in the second half should be some growth acceleration compared to '19. If you think about profitability, I think the profitability in the second half last year, and as we outlined this to the full year results, was, of course, very strong for several reasons. As we said at the time, we had a very big recovery from bad debt. Then the PPE business, which kind of kicked in, in May but accelerated strongly in the second half with very high incremental margin was of great help. There was obviously also still some -- also in the second half still some subsidies from governments. And as Frankie, for example, outlined with the Knowledge business, there was some movement of Knowledge activity from H1 to H2. And if you use the same -- or that does so to say, you drive a much higher productivity. So that should be all considered. So therefore, obviously, the margin will be clearly below the second half. To help you a bit or to think how I would look to it is more to look -- if you look back to history and say, okay, seasonally or how the business is structured, H1 margin is always clearly lower than H2. And if you look back, ignore the year 2020 because it was artificial, but if you look 4, 5 years before back and look how the margin evolution was, it was, on average, an increase from the H1 margin to the H2 margin of around 250 basis points. '17 and '18 was slightly -- '16 was in line with this 250, '17, '18 was slightly lower. '19 was higher. And yes, we are confident that it will be higher, yes, maybe more on the '19 increase. But obviously, there will be a drop on a year-over-year comparison in the second half. But for the full year, margin should definitely increase clearly.

Okay. And that's even with the sort of the M&A kicking in more in the second half and then some of the more cyclical businesses like minerals starting to come through and some of the drags in the second half starting to...

Yes. And that's the reason why I'm saying we are confident that we will be clearly higher than the historic trend of the 250 basis points. But obviously, last year it was more than 600, which is, of course, not achievable. But it will be -- it should be clearly above the 250 because the seasonality of the environment business, more environment exposure gives us more seasonally in H2, definitely, yes.

Thanks very much, Paul. The next person we have on the line is Neil Tyler from Redburn. Neil, please go ahead.

Two related questions from me, please. You mentioned the average growth in the Softlines business was held back by PPE. Excluding the PPE, if you're able to do that, would that growth have been more in line or perhaps even above the divisional average? And then secondly, I think probably related to that, in your introductory comments, I think it was Frankie that mentioned the very strong performance in Turkey. And I wondered if you could talk a little bit more around the detailed offset of that sort of regional performance and whether that you think that might have been borrowed from elsewhere, other regions.

I can -- so if you think about the Softlines, I mean, definitely, the Softline business already in H1 is below the growth rate of this consumer Connectivity & Products growth rate in H1 and this is related to PPE. If we strip this out, it would be pretty in line on this one. Now obviously, for the second half, and I think Frankie said this in the outlook statement, the underlying, let's call it, Softlines and non-PPE, we see really good development, but the big PPE impact will happen in the second half, so the second half is the strong comparison. So therefore, Softline, in sum, in the second half will be down, yes, but the reason is that we had very high PPE revenue in the second half last year. And -- do you want to say something?

Yes. I can talk about the Turkey. It's Turkey that you mentioned, Neil? The situation in Turkey is that, indeed, Turkey has for a few years already benefited from the nearshoring, you can call it, or the change of the -- the supply chain from our major partner in China. So Turkey is one of the nearshoring locations of certain sites for the European retailer. So we have been seeing quite a lot of growth into the textile industry for Turkey, particularly what they call the fast fashion. So this is quite time-sensitive and Turkey is pretty good at that as well. But besides that, I would say the general Turkey portfolio, whether it is industrial work and some of the health and -- sorry, some of the nutrition and health help nutrition activities has also improved even in Turkey.

Thank you, Neil. We now have JP from Vontobel.

The first one is on capital allocation. And I don't know if you can share with us how much was invested in the first half beyond the strategic priorities you were mentioning and how much into IT. And maybe to remind us what is the payback when you're investing in such activities, growth activities. And related to capital allocation, I was surprised by the price paid for Brightsight, if you can give some additional info or color on this acquisition, what is probably your competitive landscape, the competitive position and how you expect this company to develop. And the resource one is a second one, would be on the Health & Nutrition. You are talking about PPE in Connectivity division, which had a positive impact related to COVID. And you are mentioning health science as well, driven by COVID-related activities with the vaccines. How much was it a boost to sales as it was more than 10%, I think, above 2019 level?

Should I start? So if you think about -- JP, Dominik speaking. So if you think first about the capital allocation, so clearly, overall, the -- let's say, the increase of CapEx in percentage of revenue compared to prior year is driven by, on the one hand, allocation of more CapEx into areas of high strategic priority for growth, which is a lot. For example, Connectivity, which was 20 -- I mean the whole C&P was 28% of the total CapEx. But the biggest part was going to Connectivity but also health science. In that respect, overall, from the overall CapEx around 15% of it is going towards IT systems. And a lot is related to the new generation systems which we're rolling out. On the acquisition, if you look to the cash outflow in the first half, Brightsight is for sure the biggest part of the outflow, but there are several smaller acquisitions also -- also considered like a health science acquisition in Ireland, like a food business in the U.K. and a couple of other smaller ones. Now for us, Brightsight is strategic, of very high priority. We see a lot of synergy potential with our Asian client base. And based on the price we paid, we believe we get this acquisition in year 3, EVA positive. And therefore, we believe it's the right price.

Yes. Maybe just to add, Jean-Philippe, in terms of competitive landscape, Brightsight is one of the leading cybersecurity company in the chipset industry, which is basically what we always said in terms of cybersecurity as a starting point, you need to make sure that a highway is cybersecurity safe and there are new regulations coming on board on this aspect. And while the European has set the Cybersecurity Act with some additional requirement, you see that this will be extended into all the regions as this is the global play and not just a regional issue. So cybersecurity is part of the revision of our portfolio. We see more and more of our customers asking for integrated solutions which is not just EMC safety, functionality or life cycle that we see. Cybersecurity and [ internal properties ] is part of the portfolio that we need to offer. Brightsight gives us a clear competitive advantage with their network, a strong position in Europe and the network in some Asian countries that we'll be leveraging with Asian customers as well. There was a second question or -- Jean-Philippe, was there a second question or we answered both of your question?

Yes. How much was the impact of the vaccine-related activities in Health Science? Because sales in Health & Nutrition were really clearly above 2019 level. And I just wanted to check how much was the impact of these health science activities.

We had around close to CHF 20 million.

And then the final question we have on the conference call, and I remind everyone, please do join if you'd like to ask a question, is from Daniel Bürki.

Gentlemen, I would have a question regarding streamlining of your portfolio. You mentioned this. You still see areas where you could dispose of some businesses, especially if I look at the margin in Industries & Environment and also Natural Resources.

Daniel. I will ask -- maybe Dominik can add more, but let me start. We do have plan for optimizations. But as you know, we usually do not talk about which area as we like to ensure that our colleagues stays involved, are concerned, do not found out that during our con call during the first half result. So I would simply say that it is a constant review. We understand where the market is evolving, where we have opportunities or where the opportunity in the mid- to long term will disappear. And we are constantly looking at this. And we do have a few topics on the boat that the management is considering.

Maybe just to add as well. I mean first of all, I think SGS did a lot up to -- yes, mid -- end '19, actually, we had quite some disposals happening, amongst others, a very sizable one in the U.S. But then obviously, as the pandemic started, also the M&A market was certainly for us here, we closed. And while the M&A market is opening up, today, it's primarily open for, let's call it, noncyclical business. And as you pointed out, these 2 units, they are slightly more cyclical. And as we said also at the Investor Day, when we look to the part with very low relative market share with low growth, there could be definitely here and there, potential to dispose. It's not the biggest businesses, but there needs to be also a market to make this happen. I think it's a question of time, then we can dispose one or the other of those assets.

Okay. Thank you very much. I'll now go to the webcast, where we've had 1 question from Rajesh Kumar from HSBC. And it's a 2-part question. The first is, are there one-off revenues or cost reductions that might not repeat in the second half this year or that will get comparable [ to last ] year. So we'll start with that one. I think that's you, Dominik.

No. I mean let's say, from a run rate point of view, it's not that we have one-off revenues also on -- if you think about the PPE, the PPE already slowed considerably down into the first half. Maybe will be in the second half, a couple of millions lower than first half, but it's not meaningful. While if you think about the vaccine on the positive side, this is supposed to continue also in the second half. So I would not say that there are certain one-off in one or the other direction. Not on the cost side.

Thank you very much, thank you very much. And then the second part, which is also for you, Dominik, which is what is the bad debt accrual rate and reversals in the first half? So basically, what's our bad debt situation in the first half compared with the first half last year?

There was -- let's say, we had a bad debt accrual in the first half this year, also in the first half last year. But accrual this year was a couple of millions lower, but not much lower.

Okay. Thank you. That's very clear. I'll take -- and there's a couple more which would come in on the webcast and then there's a couple on the call. So I'll keep going on the webcast for now. So this one is from Dominic Edridge from Deutsche Bank. And it's, can you please discuss staff turnover and whether we are seeing greater competition for talent, especially in areas like cybersecurity? And a more general comment is, are there any wage pressures building within the network? So I guess, Frankie, maybe that one for you in cybersecurity. And then Dominik, maybe you could talk about the wage pressure.

Yes. I mean the cybersecurity market is the tight market. So we are specific focusing on the niche, which is the chipset and the hardware side. I would say the pressure to get expertise in this domain has not changed that significantly. So I would say there's no particular mounting pressure. It may come over time because if the market is growing very fast and where the competency is kind of lacking across the network. So we're monitoring that. But we're also seeing a concern in terms of competencies in the health sector as well. The life sciences industry is -- and the pharmaceutic industry is also a sector that we're monitoring on the situation as there's a lot of demand for our competence and expertise. These are those 2 sectors. The rest of the other sectors are, I would say, pretty much as usual, we see some up and downs, but nothing to worry about. But I would just point out those 2 particular sectors as being the more concerning ones for the time being.

From a wage point of view, where we see a bit of wage inflation, I think wage inflation will come. It's a question of time if we look to the overall inflation development. We're not seeing this yet too much in our numbers, but obviously we will increase our prices according to the needs. Here and there, you see this, for example, in certain locations in Canada. Also in the Minerals business, very strong demand. You have some wage inflation. But on the other hand, you have in this area also good power to make price increases. But it's still rather selectively. And obviously, while wage inflation was globally not the biggest theme in the last years, our exposure to more emerging markets was always high and we are used in these markets with wage inflation, how to deal with it.

Okay. Thank you. That's very clear. I've got one from Rajpal, Kulwinder from Alpha Value. What is the level of CapEx we're looking at in the second half? Will it be similar to the first half or higher? And will the split between IT and the rest of the business, which you put up 15%, remain the same?

So the -- it will be on a similar level. Now obviously, the revenues in the second half is also higher, right? So it could be then 10 basis points lower. We have to see, because the CapEx is not too much linked to the revenue development and the IT spending. And when I said the 15% is for total IT, it's not only for the new initiatives. The new initiatives are part of it, obviously. It will be on a similar level, yes.

Okay. Thank you. And then I've got one from Neil Denman from Sarasin & Partners. And I guess this is probably for both of you. What is the most significant difference today compared with when you were planning for 2021 at the end of 2020? So what is the biggest change that you see today when you're planning for 2021 compared to the end of 2020?

So sorry, when we're planning end of 2020, what's the difference what we're seeing in 2021?

Yes, what's the biggest change that you've seen since the beginning of the year, basically, I guess, and we're now in the first half.

Well, let me start. I would say when we were making the planning for 2021, I think we were concerned about the evolution of the COVID pandemic across the network. We probably have assumed that the impact of the disturbance will have been more subdued than it is today because we see that, for example, the Delta variant and all that is coming up. But luckily, I would say, fortunately, we had enough metrics in place to avoid major disturbances in the network. So we had probably, discrepancies to this. The second aspect is while we are developing the portfolio, we knew that the ESG issues was going to be a big topic, but it seems that the market is much more driven that we have anticipated in mid of 2020, we were discussing about the planning for 2021. This would be my 2 take right now.

And maybe to add from my side...

Dominik, do you have anything... yes?

Yes, I think it is -- if you just more look down to the numbers, I would say it's very similar. You could -- we could is the case that we may be a bit better when it comes to the revenue growth than what we thought at the end of last year for the first half, yes, a little bit. But it's not significant, a little bit better. But it's pretty in line with our, let's call it, budget assumptions, how we perform.

Thank you. Very clear. We have another question from [ Bruno Rege ]. Can you please explain what attracted you most to the A&S division of Synlab. What cost synergies are we expecting? And do we expect any material revenue synergies? I know we published all of this quite recently, but, Dominik, run through those factors, please.

I think there are a couple of points. First of all, if we look to the areas of high strategic priorities like Frankie outlined, then not only in the 2020 plan, also before, 92% of the revenues of A&S are exactly in line with these high strategic priorities, whether it's environment, whether it's life science, whether it's food. Secondly, we were quite impressed by the hub-and-spoke model for environment. And we see, because of this hub-and-spoke model, quite some opportunities to further roll this out by integrating this in our network, they're very much progressed. And thirdly, we have seen rather big amount of cost synergies to be achieved very much also in Germany with the network. And this will be the key driver of a CHF 20 million cost synergy which we expect from this -- from this acquisition. I think these are the kind of 3 main points. From a revenue synergies, there are definitely opportunities, quite some opportunities. So for example, if you think about the work which we do for AstraZeneca, having now on top the A&S division of Synlab, they have a laboratory actually here in Switzerland which we can use as additional laboratory for this client. So we're seeing this. But on the other hand, they are also coming in with clients in which SGS had before a smaller market share. So we're definitely seeing quite some opportunities in that respect.

Thank you, Dominik. So we've got one more from Rajesh Kumar on the tax, and then we'll move back to the conference call. We've got 2 or 3 more waiting. So the final one to read out is from Rajesh Kumar from HSBC. And it's a similar comment -- similar question to what we've had before, but it's focusing on emerging markets. So are there emerging market wage inflation pressures building up? And how, as a group, are we thinking about passing through these wage inflation pressures to our customers?

I think in the emerging markets, we had before already, wage inflation, it's not -- they're not a new phenomenon. It's maybe a little bit higher but, I mean, we are used to it. And having a business which is workforce-related than ours, it is something which is part of the daily life of our people and operations to adjust prices accordingly. And this is what we are doing.

Thank you. And now could we move back to the conference call, please, where we have Julien from Societe Generale. Julien, please go ahead.

Thanks, Toby. Just two for me, please. The first one regarding working capital. As expected, we've seen a significant working capital outflow in the first half. What should we expect going to the second half of the year with revenue growth normalizing? And secondly, regarding the price pressure you've had in the first half in the Oil and Gas-related activities in your Natural Resources division, could you give us more color on how do you see these 2 evolving in the second half?

So if you think about the net working capital increase, the cash outflow, so to say, of CHF 200 million, CHF 200 million plus, it was basically, yes, on the same level like first half 2019 but with the difference that we had very strong growth. And this number, there will be, obviously, an increase on outflow for the full year, but it will be significantly lower than the status as of the first half, which is partly also if you look historically how our working capital seasonality works. Now that being said, that we in the first half, even operational working capital slightly negative with 0.1% gives us confidence that the full year is also, in terms of balance sheet position, a negative number. But definitely, there will be an outflow, but significantly lower than the first half.

Yes. On the second question, Julien, is about the pricing on the Oil and Gas. Just to give a bit of color, I think you know that the oil and gas sector is under pressure and a few of our customers are coming back with new tender requirement in terms of pricing discount as well as in terms of new tenders in the market is much more competitive in different regions. I think we are coping with that in the same way that we've been doing in the past few years where the oil and gas market has been under pressure. It's really to focus on customer service and on focusing on our key customers as well as value-added services. So we will focus on not getting into the pure pricing discussions. You see that while we have not significant growth, we have also managed to keep a certain level of market share. In the South Africa sector, we're still the market leader on that as well as that we have managed to particular margins to the best possible extent. Moving into the second half, I think the market landscape would not change drastically. There are excess capacity in the market. There are regional players that wants to get market share. So they will use on those regional contracts, some more aggressive pricing strategy. But the strong position of SGS Group is a lot of those trading volumes are global. So you need to have a global network. So we can leverage our global network to ensure that we still keep our market share on those international orders. While we may be able or maybe have to give some concession into some of the more regional or local contract, but this is part of what we've been seeing in the past few years.

Thank you. And the next is a question from Carolyn Price from Fargo.

My first question is just on restructuring costs, which were only CHF 1 million in the first half. And I'm wondering if we can expect a larger number in the second half? Or if you could give any flavor there for any restructuring projects you have? And then my second question is just on the increase in the minority share of income. Would you say that was mainly attributable to better performance from Maine Point? Or were there other companies with minorities that contributed significantly there?

Thanks, Carolyn. Just to the first question, restructuring was very small with CHF 1 million will be -- will be higher for the full year, most likely number in the teens, but not massively, but will be definitely higher in the -- for the full year. Please bear in mind, besides this, the integration costs for the integration of acquisitions are shown in integration, not in the structure, in the integration line. But there will be a bit more restructuring costs occurring in the second half. Regarding your question on minority, there are several items. First of all, when we had -- last year, we mentioned this, we had this dispute with -- in Ghana, with a contract with finishing, which is basically now a legal case. There was a minority interest as well, so partners from us. And obviously, when we had the write-down of the assets and so on, you have the effect also in the minority. So therefore, the comparison first half last year looks extremely low. The second reason or now to the part, what are the reasons that minority is going up? Maine Point has an impact. But the other big impact is basically that we have, in China, several legal entities with minority interest and they're doing very well. So I think that, I would say, is the main driver.

And our final question is from Karl Green from RBC.

I've got a couple of questions. Firstly, for Frankie. Just a broader question around the carbon border adjustment tax, which is obviously coming into focus in Europe and increasingly in Washington as well. I just wondered, are you having any materially different conversations with clients and industry verticals about how they might look to mitigate that and also then with potential government clients as to how they might look to capture that tax? That's the first question. And then the second one, much more technically for Dominik, just around the depreciation, amortization and impairment charge. That was down 10% year-on-year. So I just wondered if you could indicate what the underlying change was, just stepping out things like the portfolio management and any sort of one-off impairments in either year.

Karl, to your question -- first question, no, actually, [ development ], I think is a pretty new requirement that we are still trying to digest with the team. So I would say no for the time being. We are engaging to the European ETS system. So we're looking at how this will impact with the rest of the network with this new requirement. But for the time being, I have not had particular discussion with my customers. So we're still looking at how this will evolve, I would say.

Regarding the second, regarding your second question, it is down, why? Because last year, we had one-off items of CHF 35 million in the first half. So if you adjust for this, [ that's why it went down ].

Okay. So thank you, everyone, for joining us on the call today. For me, I'd just like to say, have a great summer, everybody. And then I'll hand it over to Frankie for a couple of closing words. And I'm sure I'll speak to you all soon. Thank you.

Thank you, Toby. So first, thank you for joining the first half result. As we mentioned, it was a strong set of results. And while we're seeing still some disturbance into our network and in the different country in terms of COVID, we are also putting all the measures in place to ensure that it would minimize the impact. And we are pretty confident that the TIC market drivers are getting stronger and our outlook for our guidance for the second half of this year and the full year will be where we believe should be on the that. And that's it. Thank you very much.

Thank you very much. Goodbye.

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 lines. Goodbye.