SGS SA (SGSN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the 2023 Half Year Results Conference Call and Live Webcast. I am Alice, the Chorus Call operator. [Operator Instructions] At this time, it's my pleasure to hand over to Toby Reeks, Senior Vice President, Investor Relations, Corporate Communications and Sustainability. Please go ahead, sir.

Good afternoon or morning to you, and welcome to SGS First Half 2023 Results Conference Call. We hope that you all had a good start to the year, and we also hope to be able to meet many of you face-to-face over the next weeks and or some point later this year. In a few moments, I will pass over to Frankie and Dominik, who will run through our presentation, and then we'll move on to Q&A. And as per usual, when we have Q&A, please stick to a maximum of 2 questions, and if we have any time at the end, we can answer further questions if they haven't already been asked. Once we have taken questions from the call, I will read out any questions that we may have submitted through the web. Finally, we should be finished in about an hour. So we will try and keep it quite tight, so you guys can get back to your work. And for now, I will hand over to Frankie to start the presentation. Please go ahead, Frankie.

Thank you, Toby. Good morning, good afternoon to everyone. So as usual, I will give you a highlight of our performances for H1. Dominik will provide you with a more detailed financial review, and I will cover the business outlook for the second half, our full year guidance, followed by Q&A. So to start, I'm pleased to say that with the operational measures we have taken, while strong action on pricing and the benefit of continued investment in key sectors, we have delivered both strong organic growth for H1 and an improvement in our margins. Growth has been strong globally, with double-digit growth in Asia, including China, which benefited from the comparable of the lockdown, which occurred in March and April last year. We also had double-digit growth in the Americas, while Europe growth was strong. These good results are despite a few challenges faced early in the year, such as persistent high inflation, high energy and transportation costs and the closure of most of our operations in China in January due to high sickness rate following the lifting of COVID restrictions. To put some numbers around these performances, total revenue increased by 8.5% at constant currency, while organic growth was 8.1%. Adjusted operating income was CHF 462 million a good 11.3% increase at constant currency compared to 2022. On a constant currency basis, our adjusted operating income margins improved to 14.1% compared to 13.7% in prior year, an increase of 40 bps. Our ROIC stands at 17.7% compared to 18.4% same period last year. It is the last 12-month number, so it was impacted by the second half of last year, and we expect it to improve for the full year '23. Cash flow from operations increased by 40% to CHF 360 million. And our basic earnings per share is CHF 1.40, which is flat on last year, given the strong impact from ForEx. We continue to work towards our strategic targets. This slide highlights a few of those achieved so far this year. Dominik will provide you more details on the progress made in our Level Up initiative in a minute. I will just highlight a couple of achievements related to sustainability. Revenue under our internal system resourcing framework is now at 47.4%. This is due to the evolution of our portfolio mix in H1, and I'm looking at an improvement for full year '23 as we accelerate our portfolio in Health & Nutrition and other sustainability related services. You will recall that last year, we were the first TIC company to be approved for 1.5 degrees and net zero target for SBTi, the Science Based Target initiatives. We have been reinforcing initiating programs to ensure we meet our SBTi target of reducing up to for scope 1 and 2 GHG emission by 46.2% and Scope 3 by 28% by 2030 from a baseline year of 2019. One important program is to improve the initial efficiency of our building across our network. So far this year, we have increased the number of these energy efficiency project by 40% compared to the number of the whole year of 2022. We're also looking at more stringent energy efficiency criteria on all our CapEx, and we have initiated actions with procurement to tackle our Scope 3 emissions in our supply chain. More results of this actually will be reported as we move on through the year and next year. We continue our acquisition strategy with allocation of capital in strategic priorities area. In the first half, we made 2 acquisitions, and we acquired the remaining minority stakes of Leansis. In the same period, we made 2 small disposals to optimize our portfolio. So we acquired 60% of Nutrasource, a global contract research organization in the nutraceutical and pharmaceutical industry based in Canada. Nutrasource supports our service portfolio expansion in North America and our strategic view of the convergence of health, nutrition and wellness sectors. We also acquired the testing business and asset from Asmecruz, a cooperative of mussels producers based in Spain, with the objective of expanding our food testing services in Southern Europe and reinforce our position in the seafood industry. As mentioned, we acquired the remaining 40% of Leansis, our operational consultancy business in Spain. The initial 60% was acquired in 2019, and we have since successfully expanded this activity in Spain and replicated it across several European countries. Next stage of development is the deployment of this service in Asia. During the first half, we disposed of our automotive asset assessment and retail network services operations across 19 countries as well as our subservice consultancy business in the Netherlands. Both activities have been with SGS for many years, but are seen as noncore in the midterm to the group. Their future is therefore better secured with their new owners, and we wish them all the best in their new paths. While the pace of M&A has slowed down this year, it remains an important priority in our capital allocation approach. We expect more activities into 2024. We're also continuing the management of our portfolio through targeted disposals. On that, I'm going to hand over to Dominik for more detailed review of the financials. Dominik, all yours.

Thank you, Frankie. Good afternoon, ladies and gentlemen. I will start with the overview of the financial highlights for the first half '23. Frankie already mentioned operating highlights in his introduction with revenues of CHF 3.3 billion and adjusted operating income of CHF 462 million and a free cash flow of CHF 130 million. Revenues for the group in constant currency increased strongly by 8.5%, which is primarily a function of the impact of pricing, more than half of it, and good growth in volumes. Adjusted operating income increased by 11.3% to CHF 462 million in constant currency. Consequently, AOI margin increased by 40 basis points in constant rate to 14.1%. Net profit after minority interest was CHF 272 million, broadly stable as the strong operational performance was primarily offset by FX, given the material strengthening of the Swiss franc against all relevant currencies of SGS. Cash flow from operating activities increased strongly with 40.3% to CHF 369 million as the net working capital need was lower than in the prior year. Next slide, please. As expected and as you have seen in today's release, the FX headwind is material on both revenues and profit. Our very strong revenue growth in constant rate of 8.5% is to a large extent offset by the impact of FX. And while the margin increase of 40 basis points in consolidated shows the underlying operational leverage and actual currency, the margin at actual rates remains flat. On this slide, we outline a bit more where the currency headwinds are coming from and the impact. As you can see on the left side, the Swiss franc materially strengthened against all major currencies, leading to a negative currency impact of 7% on prior year H1 revenues. The impact on AOI is at minus 9.4%, even more material, and consequently, our AOI margin increase 40 basis points in constant currency is an actual reported rates flat. The higher impact on AOI compared to revenues is driven by the country mix, i.e., currencies of countries in which we achieve materially stronger profitability than the group. For instance, China or Taiwan. FX weakening there had a proportionally stronger impact compared to others. Next slide, please. Organic revenues increased strongly by 8.1% in H1 '23, of which more than half was generated by continued focus on pricing. Given the strong organic growth in H1 '23, and our view for the second half of the year, we now expect for '23, an overall organic growth of mid-single digit to high single digit versus our previous guidance of mid-single-digit growth. As expected, the contribution by acquisitions is with 0.5% very limited, while disposal had an impact of minus 0.1%. As outlined before, the negative currency impact was 7% material, leading to a revenue growth rate in actual rates of 0.9%. Moving on to the revenue growth by business. Next slide, please. Organic growth in Connectivity & Products was with 6.7% strong. Activities in China materially picked up after Chinese New Year and we had easier comps, especially in the second quarter, given the lockdown in Shanghai in the prior year. Excluding China, growth in H1 was 3.5%, very solid. From an SBU point of view, connectivity, soft lines and hard lines showed all strong mid- to high single-digit growth, while growth in TFS was solid. Revenues in Health & Nutrition increased by 4.6%, supported by the continued focus on M&A. Organic growth was 2.7%. Food delivered high single-digit organic growth driven by strong volumes across all regions. In Health Science, organic revenue decreased slightly, impacted by the lack of funding for new drug development and volumes normalizing to prepandemic levels. Excluding COVID-related testing, organic growth was solid, driven by analytical services and clinical research. Revenue growth in industrial environment was 7.6% and in constant currency or 7.3% organically strong. Double-digit growth was achieved in industrial public health and safety as well as in field services and inspection. Public mandates grew high single digits. Growth in environment testing was very solid, while the other SBUs posted lower single-digit growth. The 10.7% organic growth in Natural Resources was driven by stronger growth across all SBUs and segments. The strongest growth was achieved in metallurgy and consulting as well as in the agriculture and minerals commodities. Our best growth was achieved in knowledge with 14.4%. All SBUs posted double-digit growth. The strongest growth was delivered by customers' audits, benefiting from strong demand for supply chain audits, social audits and ESG assurance services as well as consulting, amongst others, driven by the strong performance of main point due to strong demand for supply chain optimization and performance improvement services. Next slide, please. From a regional point of view, double-digit growth was achieved by the Americas and Asia Pacific. The Eastern Europe and Middle East countries achieved strong double-digit growth across most of its key end markets. Growth in the African countries was mid-single digit, while growth in the key European countries was, to a large extent, solid to mid-single digit. In the Americas, revenues increased strongly by 11.1% and in constant rate, while organic growth was 10.4%. The strong growth was equally driven by North America and several LatAm key countries. The organic growth in Asia was with 10.7% strong. In most markets, mid-single to high single-digit growth was achieved by China, Australia and Japan posted double-digit growth. Next slide, please. FTEs at the end of the first half '23 increased by 2.2% versus prior year, primarily driven by organic growth, partly offset by the impact of restructuring. Average FTEs in the first half 23 increased by 2%, clearly lower than the total revenue growth of 8.5%, which is a function of pricing as well as productivity increases from the various level of initiatives. In all regions, revenue growth is clearly exceeding the growth in headcount. Next slide, please. The organic contribution to the adjusted operating income of CHF 462 million was with 10.8% strong. As outlined before, this was to a large extent offset by the currency impact, so that the adjusted -- so that the reported adjusted operating income was broadly stable in actual currency. Currency had a negative impact of 9.4%. Next slide, please. On this slide, I would like to highlight to you how our digital strategy will drive growth and productivity going forward. First of all, we focus on the following 4 business priorities. Drive material productivity improvement, deliver a different customer experience, capture incremental digital revenues as well as internal operations and employee experience. The digitalization will be enabled by the deployment of the 3 selected technologies, namely applications and platforms, AI machine learning as well as robotics and automation. Based on this concept, we will execute 5 digital flagships. First, digital lab program. The rollout of the digital lab program is accelerating. As of the first half '23, 27% of our lab revenues is migrated to 1 of our global digital lab platforms, well on track to exceed objective of 30% for this year. The migration is more advanced in our minerals business in which we see how our productivity increase is strongly contributing to our margin increase. Second, given the good experience of the digital lab program since its initiation, we recently decided to launch a similar global program for our field activities, representing 45% of group revenues. We initiated the first pilot for digital field services in Latin America, a region with high exposure to field activities, while the technology has been validated and free successful MVPs for field services delivered by our digital builders organization. The deployment of digital lab and digital field services should lead in the first step to productivity increase and the second step also capture incremental revenue opportunities. Under the digital customer experience program, we fully deployed Salesforce as the global CRM solution and started to scale up our enhanced customer portal and other solutions to increase the client intimacy. This flagship will be the single point of contact of our customers to digitally interact with SGS. Bank generation data and intelligence program will support the variety of initiatives, all other programs related to data in order to ensure that we leverage the data coming from our new digital platforms. Under digital workplace and shared service program, we bundle a variety of level up initiatives such as financial shared service centers, centralized building, world-class services, in which we see the accelerated impact of productivity improvements while recently implemented Workday as a global HR solution enhancing our employee experience. All 5 flagships will be supported by our digital builders organization, which will accelerate the time to create a product out of an idea and scale it up within our organization. We launched the builders organization exactly 1 year ago. And on the following slide, you will find a variety of successful MVPs. MVP stands for minimum viable products and where they stand today. With these initiatives, we are building a strong platform for growth, positioning SGS as a more resilient and productive business with the benefits realizing from those investments, margins and returns will increase. Next slide, please. This slide shows some examples on the progress we achieved with our digital builders organization launched 1 year ago. Just to recap. The purpose of the builders organization is to take an idea and build a minimum value product with next 3 to 4 months depending on the idea. During these 3 to 4 months colleagues from the business, colleagues from our group IT organization and depending on the projects, external partners working together to establish an MVP, including the definition of the business benefits. If the MVP is successful, the solution will be built and will go live in the pilot country or pilot business with the aim to scale it up to a large extent via our 5 digital flagships. In the meantime, we have 4 MVPs, which we scale up in the relevant businesses globally. The Windgo solution is going live as we speak and for Simiprom, we're currently building the solution. We also used the digital builders organization to test new technology in collaboration with our strategic partners. The builders organization is instrumental to assure the great ideas from our network, our partners are captured, tested and implemented in a way that we can scale them quickly. Next slide, please. Here, we talk about the margin development by business. The margin decline in connectivity and products of 230 basis points is mainly attributable to the positive impact of collections in TFS services in the prior year, partly offset by the recovery of China. The margin decline of 260 basis points in Health & Nutrition is a function of the conclusion of COVID-related testing in the prior year and a temporary slowdown in new product development in Health Science. Margins in the food business improved nicely. AOI margin in industrial environment increased by 170 basis points to 10.2%, and benefiting from the savings of the prior year restructuring program, continued integration benefits of acquired companies and strong pricing. AOI margins in Natural Resources increased by 210 basis points to 14.3%. The strong operational leverage is a function of growth, acceleration, also from good pricing in trade and inspection activities as well as productivity benefits from the digital lab program which is more advanced in our minerals business. Adjusted operating income margin increase of 40 basis points in knowledge is the result of an increase in volume and pricing, partly offset by higher travel costs given the return to on-site audits. Next slide, please. Operational net working capital stands at 2.5% of revenues in H1 '23. The higher net working capital need is a function of strong growth. That being said, the cash outflow in H1 '23 is materially lower than the prior year and somewhat lower than 2 years ago, as DSO's improvement was driven by our centralized spending projects and strong focus on cash collection. Next slide, please. Cash flow from operating activities increased by 40.3% to CHF 369 million compared to the prior year as net working capital needs was lower. We spent net CHF 140 million net CapEx and CHF 8 million for smaller bolt-on acquisitions. Dividend payments as well as NCI transactions amounted to CHF 606 million. We paid back CHF 325 million Swiss Bank bond and CHF 300 million from our sustainability revolving RCF. All this leads to a cash position of CHF 1.1 billion at the end of the reported period. Next slide, please. Gross CapEx for H1 '23 decreased by 8% to CHF 143 million. So this is in actual rate. In constant rate, it would be down 1%, and is in percentage of revenues with 4.4%, slightly lower compared to the prior year. Net CapEx stood at 4.3% in '23. We continue to invest into our strategic priorities and our digital lab program, but temporarily slowed CapEx allocation somewhat in our Health Science business given the more challenging market conditions in the short term. Next slide, please. To sum it up, our revenues in H1 '23 increased by 8.5% in constant rate, of which 8.1% is organic. Our adjusted operating income is growing with 11.3%, double digit in constant rate. Our operational cash flow strongly increased by 40.3%. For this reason, return on invested capital is purely a function of the lower profitability in H2 '22 versus H2 '21, as it is calculated on an LTM basis. With this, I hand back to you, Frankie.

Thank you, Dominik. So let me go through the outlook for our 5 divisions for the second half of 2023. Let me start with Connectivity & Products. So Connectivity & Products second half organic growth should remain similar to first half. As in first half, our underlying margins will remain robust, but the full year level will continue to be impacted by the strength of the comparable period, which included a benefit from the collection in trade facilitation services. Supply chain derisking continued in China with less complex and lower value items, particularly in hard goods and soft lines moving to other countries such as Vietnam, Turkey and India. China will remain competitive in most connectivity related products for the foreseeable future. Our continuous investment in capacity building in other countries outside China has allowed us to support our customers in the supply chain evolution. Likewise, our diversification strategy from international trade to the China domestic market has supported our strong growth in China, this despite the current concern of our client regarding inventory level, new SKU development and in general, a possible softening of the retail sector. Growth in trade facilitation will remain below the divisional average due to termination of government contract in Africa and continuous impact on transit levels related to the war in Ukraine. Carbon Nutrition organic growth in second half should accelerate with improved profitability. This is the result of a better order pipeline and no further residual impact of COVID-related activities. Both food and cosmetic will continue their strong growth path into second half with good demand coming from most geographies and increased utilization of our newly invested food laboratories in Latin America. Health Science should see the strongest rebound in growth, both in Europe and U.S., benefiting from a solid order pipeline, and we expect a marked improvement in margin. We're also continuing to make new investment in our health network in China as we remain confident of a significant long-term opportunity in this market. In this environment, organic growth should remain strong in the second half. Growth momentum will continue in Health & Safety with evolving regulatory framework and growing ESG concerns. Technical Assessment Advisory will remain soft as we complete major projects mainly in Latin America and transition to the start up of new ones. Overall, the market dynamic remained positive. Growth in our field services and inspection will remain strong with increasing demand for our supply chain activities. This is partly the case in projects related to energy transition and nuclear. Environmental Testing growth will accelerate in the second half, supported by an improving pipeline and project win in North America, Europe and Australia. With the increasing volume, we expect margin to develop positively. Nate Resources organic growth is likely to be slower in the second half compared to the really good growth rate of the first half but should remain at a strong level. The market fundamentals at the mining industry remain strong, but we do expect exploration funding to reduce compared to the prior year. The demand for steel and critical minerals is supported by the investment in extensive infrastructure and no residential project in many countries and domain links to energy transition remains. In trade, to rebound agricultural services seen in the first half will continue in the second half with good crop conditions in key countries such as Canada and in Europe. However, the impact from El Nino has been the consolidation of the important fishmeal season in Peru as the fish have moved further offshore to avoid the higher temperature. In addition, the recent nonrenewal of the Corridor agreement between Russia and Ukraine has already seen price of grain spiking and some concern on trade flow impact out of Ukraine. The exact impact still needs to be assessed in coming months that will affect our agri activities. All gas and chemical trade and testing is still volatile with many uncertain geographical and economic factors. However, we expect similar growth moving into second half. And to finish on Knowledge. Knowledge organic growth will also be slower in the second half compared to the double-digit growth of the first half. However, growth will remain strong in the second half as well. The expected slower growth is mostly related to our leading position in certification in China, which benefited from the softer comparable period in first half with the lockdown of 2022. As in prior year, the underlying market conditions for certification remains solid, especially we see increasing demand for certification scheme related to medical device, information security, [indiscernible] and food. We're also seeing a strong increase in demand for customized audit schemes related to social audit, supply chain management and ESG. Sustainability Assurance solutions, which is part of our ESG service offering is an emerging business and is our fastest-growing segment in Knowledge. Our consulting activities continue to progress well and we're looking at another solid semester moving into second half backed by the strong pipeline. Both our operations in the U.S. and Europe are enhancing their value proposition with increasing component of ESG into their training and consultancy services. So in terms of outlook, our guidance for the full year '23 is mid- to high single-digit organic growth. This is an increase from a previous guidance of mid-single digit organic growth, improved adjusted operating income and margin at constant currency, strong cash conversion, leading tick underlying return on investor capital. As we said earlier, this will be stronger in the second half, and stable dividend. The last slide is a reminder of our different objectives in terms of People, Planet, and Performances for the '21-'23 (sic) [ '20-'23] plan that we were going to conclude end of this year. So I'm not going to go through all the details, but you can read it. Maybe in conclusion, we are pleased with our first half performance at 8.1% organic growth, reflecting our improving growth profile. We showed good underlying margin in the first half, and we expect a stronger performance in the second half. On that, thank you. And I think, Toby, we can go through the Q&A.

Thank you, Frankie. If we could start the Q&A with Daniel from ZKB, please.

Yes. Thank you very much. Hello, everyone. I would have 2 questions. The first on margin. You have 40 bps better. But could you describe a little bit the moving parts? Because I think you have 80 bps of savings. It's a restructuring program. You have some support from China and also stronger pricing. So what stopped you from a better profitability in the first half? And my second question may be on personnel and energy costs, what increase you have seen in the first half and what do you expect going forward?

Thank you, Daniel. Maybe, Dominik, you want to address those 2 questions?

Sure. Thank you, Frankie. Good morning, Daniel, good afternoon. So basically, if we look at the restructuring things, they are completely there. The situation is that our -- like we also flagged at the beginning of the year, the energy cost increase is quite significant, especially in the first half of this year. And this is related to the fact that in the prior year, first half, we are still benefiting from energy contracts, and I talk primarily about Europe from energy contracts concluded before the conflict, Russia, Ukraine. While now we have the full impact of this higher energy costs, yes? So the energy costs in the first half are very high they will definitely slow down into the second half year. And on top, the base effect becomes easier. That's the first point. The second point is also that as we also outlined before, is we definitely have more travel costs, yes, we have much more on-site work to do than before. And this is especially relevant since the beginning of the year as China opened up, even last year where we had lockdown, but they were often location lockdowns in general in whole China obviously, traveling was rather on a lower level, given the COVID concerns and now it's completely back. And this has also quite some big impact. And furthermore, I would say, especially in the first 3 months of last year, traveling in Europe was not fully back because we had Omicron. So these 2 key components are basically eating then some of the margin increase away. But both of them will be much easier in the second half. On the energy cost, it's also related that sequentially energy costs will go down. And on the travel cost, it's a function that things getting basically easier comps or the normal run rate in the second half is a bit easier. Then on your second point regarding wage inflation, I think this was the point. It's around 5%, close to 5%. And obviously, as we said, on pricing, more than half of the revenue increase is pricing. So it's actually very close to also pricing is in the higher 4% area.

And you covered the energy cost question in the first question anyway. So thank you for that. The next ask a question, please, Annelies from Morgan Stanley. Please limit it to 2 questions as a reminder, everyone. Thank you.

Thanks, Toby. Yes, 2 questions from me as well, please. So just following up on that pricing point at the end. So you said the majority -- sorry, more than half of pricing of the organic in first half was pricing, so I'm guessing 4-point-something percent. What are you expecting for pricing in the second half? And do you have a target in mind in terms of how to reach the margin progression that you're expecting for the full year and relative to where consensus is? And then secondly, Health & Nutrition, you mentioned, I think, a temporary slowdown in new product development and the sort of short-term volume impact. How confident are you in the recovery of that, and over what time frame? Perhaps you can comment on how much visibility you have on that returning either into the second half or going into next year?

Annelies, let me go through the second question and Dominik can go through the first one later on. So on the Health & Nutrition sectors, it's also a market situation where I think the funding of the early drug development was a bit soft in the first half of this year. We are seeing already a more stable pipeline in the second half. So in our view, the capture will start clearly on the second half in terms of, as I mentioned in my outlook, that we're looking at a marked improvement in terms of growth and margins into the second half of this year. We should be able to develop from then on into 2025 and so on. So the momentum is already happening, and we're seeing a better last month after the first semester, and we should see that continue across the second half of this year. So I'm pretty confident in terms of the order pipeline. Some of the project for the first half was delayed to the second half. So I'm pretty comfortable that those projects will be executed and will be moving into a more stable market conditions for the second half of this year. Dominik, you want to tackle the first half.

Yes. So regarding pricing. So the statement that more than half of the revenue growth comes from pricing is not only for organic. It's also for the overall growth rate of 8.5%. So pricing is in the higher 4% area in the first half. I would expect to tick this a little bit more up in the second half, but still, let's say, let's call it, close to 5%, ending up the year because a lot of the price increases were implemented also beginning of the year. And then throughout the year, you have a bit of an uptick, but it's not that material. So I assume we end up in the very high 4% area, close to 5% in terms of pricing for the whole year. Regarding the margin development and consensus expectation, if I'm not mistaken, consensus in constant rate is looking for the full year around 70, 80 basis points AOI margin increase. In the first half, we have plus 40 bps, that would imply second half, which is more weighted in terms of profit, a bit more than 100 basis points, which we feel very, very comfortable for several reasons. First is related to what I said before, as I answered to Daniel's question on the easier comps for energy cost plus the fact that also sequentially, energy costs will slow down in the second half. There's also a bit easier comps on travel costs in that regard. And I would say, in general, the nonpersonnel cost inflation is somewhat softer. And then the second point is, obviously, there's also a clear expectation from a bit more bad debt recovery into the second half, where we are pretty confident to achieve this, but that didn't have an impact on margin first half, but we are pretty confident for the second half. Now one could argue we had a bit of easier comps in China in the first half, but I would like to remind even the second half last year was operationally for our colleagues in China, not easy because we had constant city lockdown. So operationally, it was quite challenging to move samples. So created a lot of -- in the second half last year, a lot of additional logistic costs and other costs, and the December was a month where after the opening up of the economy, sickness rate in our business, like, I would say, in the whole workforce in China was in the second half of December by around 70%. So therefore, I'm confident that we show, yes, also in the second half in China, good leverage. And I also would like to remind, if you recall, second half last year was as a bit softer in Europe, not only energy cost, also demand side. So overall, we are quite confident that margin will nicely accelerate into the second half and can live with this consensus expectations.

Thanks, Annelies. Next up, could we have Suhasini, please, from Goldman Sachs?

Just on the Connectivity & Products. You mentioned that the collections and trade facilitation services impacted the first half margins. Can you please quantify the impact on the margins in first half? And maybe confirm that there is no further impact on second half? And second one is the FX drag on margins that was there in the first half. At current rates, can you please help us understand what you see as the drug for second half, if at all, on margins?

Dominik, you want to tackle both questions?

Yes, I will do this. So basically, the TFS impact was more in the prior year. And we had -- if you recall, in the first half last year, we mentioned in the half year report, first half last year, our C&P margin was pretty strong despite the fact that we had this lockdown in Shanghai, which is partly that our colleagues managed the lockdown very well, but it was also pretty strong because in the first half last year, we had strong collection, and we mentioned this in the first half report last year. Now obviously, this was last year, so the comp of this collection, which was in the higher single-digit million in the first half last year is from a comparison point of view. That's the reason why the comparison margin for this year is rather high. So has not too much to do now with this year or the movement into the second half. Now from a margin point of view, based on the year-to-date data, we have around 40 basis points track from a kind of currency impact, and we see this pretty similar for the second half. It could be 10 basis points more, but yes, very similar first half, second half.

Next, Will, do you want to go ahead, Will from SocGen, please.

I just wanted to talk just a bit about the margin again. So the first question is on that. Just if you could talk about the move in the bad debt provision. So if you could just work out what benefit that was last year versus this year? And then the other one-off impact was I think in the COVID related testing, which I actually thought had already washed through. So if you could just maybe help us quantify that one. And the second question, unrelated, just looking at kind of leverage and thinking about M&A and things. Is there a point at which you look at the divi. Just be interested in kind of capital allocation thoughts on that one.

Dominik, you want to tackle the margin question?

Yes, yes. So basically, if you look to the margin, if you recall last year, we said that roughly the impact of bad debt, additional expenses last year was around CHF 20 million last year. So in the first half, we were neutral compared to the prior year while we had in the prior year release in like this TFS thing, and we expect that this amount or the majority of it, we can reverse in the second half of this year. And this, of course, will contribute to the margin increase. Then, Frankie, you want to take the next one? Or should I take the...

You can take it. Go ahead.

So basically, on the vaccine testing, like we said, for the full year, we still will have a bit of a track higher single-digit million revenue in the first half from vaccine testing, but this is now for the second half, it's kind of washed out. But second half prior year still had something in. And the last question was related to capital allocation, right?

Yes. On the capital allocation, your question is about the dividend. We said we'll keep the dividend stable until we reach more or less 75% payout ratio. So we're going to stick to that is why we set stable dividend. And obviously, acquisition is a priority into our strategy as well that the market was a bit soft this year for us, and we'll continue to look at this, and we should be moving to a more active year in 2024.

Thank you. As a reminder, two questions each. And next, we will have Arthur from Citi.

First question for me. In the first half of the year, what's been the impact relating to unwell Chinese workers. I imagine this would mostly have been in the first month or 2 of the year following the reopening. But I just wonder whether you could give us an idea of that, especially as it relates to connectivity and products. And secondly, I was just wondering if you could give us an idea of the kind of wage inflation that you've seen in the business and what you're expecting for the full year?

Dominik, you want to...

Yes. So basically, if you look to China, obviously, we had opening up of the economy, and then we had 70% sickness rate kind of in December. And surely, this was also expected, there was a knock-on effect into January because also a lot of clients basically said, we have high sickness rate in December that people will be not all healthy on January 1, plus Chinese New Year was rather early in the year this year. So basically, they decided not to start operations before the Chinese New Year, so to say. [Technical Difficulty]

Sorry, Dominik, I think you are cutting out. .

Sorry, this is the operator. We lost connection with Mr. de Daniel. Just a moment.

So maybe I'll continue to answer the question for the first part of the question. So indeed, the sickness rate was quite significant in the beginning of the month for the first 2 weeks, and luckily, in terms of timing, I would say, we managed to roll over into the Chinese New Year. So in a sense, you can assume that the month of Jan was pretty close, pretty flat, pretty subdued in terms of margins and in terms of revenue because most of our operation was closed. I don't know whether Dominik you're online. You have a number. I don't think we will give a number on what happened in China for the first part of the year.

No, we haven't. Sorry, my line was disconnected. So I'm now back. Did you answer the question on the January impact of China...

More or less, but we don't quantify the impact of the first month of our operations in China. So but we gave the explanations. Maybe you can go through the second part of the question, which was...

The next question is on wage inflation, the impact so far this year and in the second -- expected for the second half.

Yes, so wage inflation was, let's say, in the higher 4% area in the first half, and we expect a very similar number, maybe close to 5% also for the second half. So yes, close to 5% will be the number pretty aligned with the pricing.

Okay. Thank you very much. That's it for those questions. Next up, we've got Oscar from JPMorgan.

Two questions. The first one on Connectivity & Products. Growth ex-China was 3.5%. Can you just give us some color on what you're seeing in June and July around retailers and inventory levels? What's your outlook for growth in the second half? And then the second question is in the Knowledge division. You talked about growth being benefited from reopening in China. How much was that growth ex kind of the Chinese benefit? And how do you expect knowledge to perform in the second half? Those are the 2 questions.

Okay. I'll take the first one. Dominik, you can tackle the Knowledge one ex-China. So on the first question, for May and June, the volume is still stable. In fact, interestingly, the hard goods and the soft line volume was pretty stable for us. The part of the volume that was a little bit softer in the last 2 months of the first half was Connectivity partly in Korea, and in Taiwan, some of the room as drop a bit. I think it's a question of development cycle as well as some of the 5G infrastructure development was not at a speed that we're expecting. So there is an impact on the amount of a new model development. But generally speaking, I would say the retail market is kind of worried about a little bit of the softness in the second half with higher inventory plus a discussion on the SKU development, number of SKU, which is an important factor for us in terms of our testing volumes. But nothing that we worry too much about because in terms of diversification of our portfolio into some of the domestic market, including China. We see, as I mentioned earlier, a similar kind of growth pattern and some of the development cycle for the connectivity will come back in the second half of the year, which was a bit softer. But I have no concern on that. I think we'll be at a similar level as what we've seen in the first half of the year with some moving part between soft and hard goods and I&E I would say. Dominik, you want to talk about the impact of the uptake on the Knowledge one in China?

Yes, yes. And maybe one additional remark. When the question was said, it was mentioned, the growth excluding China of C&P was 2.5%. It was 3.5%, yes, so not 2.5%, 3.5%. So before Frankie answered. Now on the Knowledge business, China definitely had an impact. But if you would exclude China, we would have grown also double digits. So it's not because of China that only because of China, that the growth is very strong. And as I said before, a lot of this was also coming from consulting business where we had strong demand the growth rate will slow somewhat into the second half, it's not 14% sustainable, but it will be a strong growth rate in the second half.

James Rose from Barclays is next.

First one is on pricing. Can you give an idea of where it contributed most across the divisions in the first half? And then secondly, looking at industry and environmental margins, it's quite a high drop your rates comparable to other divisions. Can you sort of talk through how you manage to receive that?

So basically, if we look to pricing, I would say it's less a function of a division. Of course, I can give you the divisional impact. It's more a function of the end market in terms of country end markets? Because in this more inflationary environment, especially when wage inflation is kicking in is often a function of the wages. And therefore, let's say, above-average price contribution, we're definitely in businesses like natural resources, like also industrial and environment because those businesses have more exposure from a country point of view to countries where we have above-average wage inflation. On the I&E business, I think that, first of all, to your question, why is this a good -- obviously, a good pricing effect is also helpful there, and we benefited there as well from good pricing. But the other things are definitely that if you think about the restructuring program, which we initiated in autumn last year, it was relatively speaking, more geared to Europe and industrial environment. So this is definitely 1 reason. And furthermore, we're seeing also more cost synergies from the integration of our acquired businesses, especially in environment business. So that's the reason why the kind of incremental margin relatively speaking, is quite strong in this part of the business?