SGS SA (SGSN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the SGS First Quarter 2024 Sales Update. My name is Ariel Bauer, and I'm in charge of Investor Relations, Communications and Sustainability. Please note that this call is being recorded and will be available for replay on the SGS website. Throughout today's presentation, all participants will be in a listen-only mode. The presentation will be followed by a Q&A session. You can register for questions at any time by clicking on the Q&A button in the webcast and then pressing Star 1 on the virtual keypad. If you are joining by phone, just press Star 1. I would now like to turn the conference over to Geraldine Picaud, CEO of SGS.

Thank you, Ariel, and good morning, ladies and gentlemen. Thank you for joining this call. I am very happy to have this session with you today to talk about our Q1 update. As you know, we have decided to report now ourselves on a quarterly basis as we feel this is important to give more frequent updates. In terms of sales, organic growth has reached 7.1% at the top of our guidance. Beyond the financial performance, it's been quite an intensive quarter with some key steps achieved in the implementation of the strategy 2027. We have implemented new management incentives. The M&A pipeline is fueled and I'm proud to announce that we signed the acquisition of Arclight wireless recently. This deal, which I will comment in a few minutes is in direct line with our objectives to invest in digital services and to expand our footprint in the U.S. Furthermore, I am confident we will be in a position to announce other acquisitions in the coming months. We have launched the restructuring plan I announced in January, which will, of course, require some time to produce visible effects. The scrip dividend we have proposed at the AGM recorded a good success with 65% tick up. We see this result as a support to our strategy by our shareholders as it allows a cash saving close to CHF 400 million, which will be allocated to investment. Last but not least, the Executive Committee is now appointed and fully efficient. Let's move to Slide 4, where you can see the Executive Committee. So, the appointment of our new ExCo marks the beginning of an exciting new chapter for SGS. The team, as you can see, is composed of 12 members. It includes managers from the group and individuals from other horizons, bringing complementary expertise. Group operations are under the responsibility of 6 leaders fully in charge and accountable for their business. For testing and inspection two executive members are responsible for developing global client contracts. After our ExCo meetings of the first quarter, I am fully convinced that we have the right size and the right profiles to reach the efficiency and agility we need. And I'm taking this opportunity to extend a warm welcome to the 3 very experienced leaders who are joining our group on this occasion. Martelovan as Chief Financial Officer; Martin Husch as Group Legal Counsel; and Rafa Lavazza as Head of Latin America. SGS will be stronger, thanks to their expertise. Let's now move to our first bolt on of the year or client. And let me give you a few words about Arclight wireless. Arclight is one of the leading approved service providers of the main national network carriers in the U.S. It complements our existing portfolio of services in connectivity and further increase our diversification in the wireless testing segment. And I also take this opportunity to warmly welcome our 75 employees. Let's now review the Q1 sales in more details, and I invite you to go to Slide number 7. Our sales reached CHF 1,577 million in Q1, slightly below last year in Swiss francs. This is a result of the strong like-for-like growth of 7.1%, more than offset by the translation effect. This foreign exchange impact is due to the Swiss francs we use as a reporting currency, which has been particularly strong this quarter compared to Europe, for example. So now if we move on to the detailed currency, you can have a better clarity into this currency effect and how it impacts our sales in this trial here that provides the breakdown of the full currency translation impact of minus 8.6%. The main contributors, you can see is China, closely followed by the Europe and Turkish lira. Let's now look at the business drivers. This chart here shows the breakdown of our sales and growth by operations, testing and inspection grew by 7.1% with all regions contributing positively, but at different levels. While Latam and Eastern Europe, Middle East, Africa recorded double-digit organic growth, North America and Asia Pac grew close to 7% and Europe slightly above 3%. Business Insurance performed well at 7.6%, and I will come to it in detail shortly. Industries and environment delivered, as you can see, a high organic sales growth of 8.7%, led by environment, safety and advisory, environmental testing achieved double-digit organic growth, driven by strong momentum in North America and Europe, notably in PFAS. PFAS are not new. Since 2004, SGS has been a pioneer in the detection of these harmful compounds known as forever chemicals in food, water, soil and other materials. We are witnessing today a significant acceleration in activity driven by regulation. In North America, we already doubled the number of our PFAS labs compared to last year, and we expect to double this number again by year-end. Given the very strong growth rates in this activity, the return on this investment is excellent. Technical assessments and advisory also delivered double-digit organic growth, mainly led by new projects in Latin America. Let's move to natural resources. Natural resources benefited from strong and healthy market plans and delivered organic sales growth of 8.6%. High single-digit organic growth in trade and inspection was driven by pricing power and project wins in all commodities. Strong momentum for services supporting the energy transition continues to fuel growth. This is the case, for instance, with new projects in battery metals in North America, which led to solid results in our metallurgy and consulting subsegment. Let's move to Connectivity & Products. It generated solid organic sales growth of 6.8%, driven by soft lines and connectivity. In soft lines, lower inventory levels and new opportunities in sustainability have fueled double-digit organic growth. Connectivity continues to benefit from strong momentum, especially in Asia Pac and North America, thanks to increasing regulations. Our leading expertise in cybersecurity, notably at Bright side also supported growth in connectivity. If we now switch to our Health & Nutrition segment. Here, we continue to grow in constant currency, albeit modestly. Organic sales growth was driven by high single-digit growth in food with very strong performance in Europe and Latin America, supported by regulations and our network expansion. Sales also benefited from double-digit growth in cosmetics and hygiene in Asia Pacific. Let's now move to business assurance. Our Business Assurance delivered organic sales growth of 7.6%, driven by strong sustainability trends. Double-digit organic growth in management system certification was supported by a strong activity in strategic segments, such as medical devices, digital trust and food assurance, notably in North America, Europe and Asia Pac. Quality, health and safety and environment certification also contributed to growth. High single-digit organic growth in sustainability was actually driven by strong performance in North America and in Europe in ESG assurance and social audits. Let's now move to the outlook and to conclude this presentation, I would like to confirm our guidance. We see the rest of the year continuing on the good market trends we have experienced in Q1. We are confident that the actions we have launched will support the commitments we have taken on margin, free cash flow and M&A. And with that, I will now hand over to the operator.

We will now begin the question-and-answer session. [Operator instructions]. We kindly ask participants to limit themselves to 2 questions. The first question is from Sylvia Barker from JP Morgan.

First question, on the wireless business within the consumer sort of within the Connectivity & Products business. So, could you update us on that specific piece, given that was weaker last year, and that was one of the reasons why that margin was a bit lower, specifically on that piece? And then second question, within Business Assurance, it seems that consulting was maybe a little bit weaker and obviously, that can be quite lumpy. Can you just remind us how big that is and what's the margin on consulting versus the rest of the division?

Yes, good morning Sylvia, thanks for your question. So, on the wireless, I think I have to precise a bit here. The traditional wireless market, you're right, is suffering, and that's really related to the 5G devices and there are not many 5G Mobile devices being produced currently, right? So here, we have a bit of a, I would say, challenging time on this very tiny subsegment we have in connectivity. That's fair to say. But our acquisition is not on this part at all. Our strategy on our client acquisition and really targeting a growing market of network testing. And this group, again, is one of the leading approved service providers of the main national network carriers in the U.S. So, it really complements SGS services where we do testing on products, but again, not only on mobile phones, where this is where you see the challenging times, but all wireless-related device SmartSense technology. And actually, all these kinds of products, IoT and so on, these products, they need compatibility with the national carriers in the U.S., and this is where the Arclight comes. So, a very good business. Then you had a question on Business Insurance. Business Assurance, look, fair to say the consulting part, which is not a major part of our business assurance around 20%, to give you a number, but below 20%, actually, the consulting part is having projects that have been pace pushed to next year. And you have a very strong comparable base so basically, that explains the performance. But I can tell you, when it comes to our management system certification, we have a very good growth, double a double-digit growth, and we're doing very well, and I think we're going to do well in the core business of BA throughout the year.

Perfect. And maybe just on the margin on consulting, is that comparable to the rest of the division? Or is that different?

No, it's comparable.

The next question is from Arthur Truslove from Citi.

First question. So obviously, on the collectives and product side, trends have picked up. Are you able to talk about how much of the improvement in softlines and indeed connectivity is using kind of underutilized capacity, if that makes sense? And then second question from me. Obviously, it's early days, but I just wanted to confirm that the restructuring program in terms of stripping out the 100 million of cost, is that still all going to plan? Is anything ahead of schedule? Is there anything behind schedule?

Okay. Thank you and good morning. Look, on the CNP here seeing that was optimizing basically all our available capabilities. That's the first rule we're having. And as everyone in the industry, we've seen product launches resuming on the soft lines. And we do think that the growth is going to continue going forward when it comes to Softline as there is higher demand for sustainability services and consumers. So that's to answer your first question. And remember that we have a big network, and we're using our entire network across the group, obviously, to optimize where the demand is going and capture it. So, on the cost reduction, I would say the plan has started. First phase has mainly consisted in suppressing functions allocated to nonstrategic programs. And now we have ExCo members also focusing on it. So we are in motion, and we are working as the plan, thank you.

The next question is from Annelies Moylan from Morgan Stanley.

Hi good morning Geraldine, 2 questions, please. So firstly, on the additional 400 million of cash from the take able the scrip dividend, I think in your opening remarks, you said allocated to investment now that you know that amount, could you give any more color on where that will be allocated? Is it M&A? Or is it investments in digital or technology or anything else within the business? And I appreciate your guidance is unchanged today, but are there any changes to the components of your guidance as a result of that given when you set the guidance in January, I'm assuming you didn't know what the take-up of the scrip was going to be. That's the first one. Then secondly, just on Business Assurance. You've called out high single digit growth in sustainability and in the U.S. and in Europe. I assume in Europe, that is increased demand for ESG related reporting requirements coming into force. But what is driving that in the U.S.? Are you seeing a step-up in demand for these kind of services from U.S.-based corporates?

Yes. Thank you. So, I'll take yes. So, I will start with your first question around the 400 million cash saving. We're very happy with the take-up. It gives us some firepower to effectively focus on M&A, which is clearly offers priority. And we continue, obviously, to invest where it tends to capture the megatrends I explained during the strategy presentation. But it's obviously going to be M&A, our first priority. On Business Assurance, you're right, we have enjoyed a good growth when it comes to Europe. It's fairly true, and that's driven by the ESG as you mentioned. On when it comes to the North America, the growth has been good as well. It's been mainly driven by training and the medical devices where we see a good growth coming from this industry.

The next question is from Himanshu Agarwal from BOF.

Hi thanks for taking my questions. I just have the first one on the organic growth in Q1, 7.1%, which was better than we expected. And given there are no significant comps impact in the rest of the year, how should we think about the development going forward?

Okay. Well, look, we are going to continue to guide on the same thing that I have guided when I presented the strategy back in end of January. So, 5% to 7% organic growth for the year is our objective, and I don't want to change that guidance at this stage. So, it's a strong start, and we're very happy about it. I don't make any more precise prediction at this stage.

But do you see any incremental headwinds in the rest of the year that should basically be rail this strong start to the year of 7%?

No, globally no now I don't see anything at this stage. No.

Okay. And then secondly, if you could just comment on in the 7%, what is price versus volume?

Yes, you know it's always a bit difficult because you have a volume mix that is very, very important. But I would say that we've passed on a good chunk of the inflation. So basically, I would say 1/3 price and 2/3 volumes back of the envelope.

The next question is from Rory McKenzie from UBS please go ahead.

Good morning, It's Rory here. First question, sorry for focusing on the technical headwinds, but given the effects you laid out on Slide 8, can you give any sense as to what margin headwind that could translate into for the start of this year? Obviously, through last year, a similar FX headwind saw about a 50 to 60 bps impact on margins. So, what does this suggest this year is shaping up to be and then secondly, can you give us more detail on the new incentive programs you've rolled out in the group? I appreciate you've done it quite quickly. But what are the key KPIs for the divisional teams? How has it changed? And does that include any M&A origination targets? Thank you.

Yes. Thank you, Rory and good morning. So, to come to your first question about the margins and the impact of Forex on loan margins, I think, look, we have launched actions, as I said, to protect our margins. And obviously, such actions will not bear fruits immediately. But look, we see obviously no reason for any deterioration at constant currency, obviously. So, we need to execute our strategy, 2027 in order to execute on our guidance. Currencies, to complement a bit on currencies. Currencies, it's true to say, have largely depreciated, and it's you noted it yourself, they have depreciated against the Swiss francs, strong Swiss francs starting H2 last year. But it's fair to say that they remain more or less, and I don't have a crystal ball, let's be clear, but they remain more or less daily since the beginning of the year, which makes us believe that the negative impact could be more limited on a full year basis this year. When it comes to the incentive programs, look, it's very simple, and we intend to disclose everything in the remuneration report when we publish our annual report next year in 2025. The incentive programs that we put the organizational exactly the same KPIs that we have used for guidance. So, their organic growth, there's margins and their cash. So very simple that on the short-term incentive. On the long-term incentive, we have as well the sustainability KPIs and the health and safety ones. So, all numerical, quite simple, clear, transparent external internal.

The next question is from Allen Wells from Jefferies. Please go ahead.

Hi good morning Geraldine, two for me, please. Firstly, just on the environment side in I&E, you called out PFAS as a tailwind there. Could you maybe just give us a little bit of indication of the size of your PFAS exposure either as like a percentage of the division or in absolute revenues? Then maybe just talk a little bit about SGS' market position here. I mean is it a leader, how regional is that? What's the competitive landscape that would be just really interesting? And then secondly, just a follow-up on Rory's question on FX. I completely get the limited full year impact. But in terms of the half year, should we expect a similar 50 bps impact from FX at the half year level? Thank you.

Okay. Thank you very much, Allen, for your question, and good morning to you. So, your first question on environmental testing, which is the PFAS, mostly PFAS sales here for us. It's a wonderful business, basically, it's growing double digits. And there continues to be an increase and a continuous increase in PFAS focus, which is having a very positive effect on our environmental business in the U.S. Our plans are really to expand our PFAS capabilities to continue to gain momentum. And I think there was a press release lately, just also mentioning all our accreditation, the new accreditations because we're really continuing to gain momentum. I think by H1 2024, we'll have 6 of our main, what we call E&S labs accredited for PFAS, which is double compared to last year. So, we're really a leader in U.S. in terms of development. We're really working closer with the main environmental organization, and we have strong investments here. As I mentioned, 6 accredited labs that puts us into a leadership position. So yes, it's a business I really like. It is, when you look at our I&E division presented, still small in terms of portion of sales. But again, this is growing very fast in double digits. I think that was your only question, right, Allen, what was the second?

And the FX on the first.

Sorry. Yes, the FX. Well, look, yes, it's hurting. It's there. Again, the only thing we can do is launch actions and execute as fast as possible. So, it's to limit and protect the margins. But I think it's fair to say that in H1, we're going to have we're going to have an impact that's probably a 0.5 percentage points, I would say, 0.5 to 0.7 percentage points, what I can see as a negative impact on our margins for H1. But again, we're confident that this is going to be fully offset and more by the year-end.

The next question is from Victoria Cheng from Goldman Sachs.

Hi good morning, I'm asking on behalf of Suhasini of Goldman Sachs. We have one more question left. It's on the trading day impact on growth in 1Q. Given some companies saw less trading days in March, we were wondering if you saw a headwind to growth then. If you can give some color on what the impact of that was.

Sure. Thank you, Victoria, and good morning. Look, each quarter, you will have such a topic. And if you make the math on an annual basis, I think it will never be material enough to distort our guidance when it comes to our organic growth annual guidance. So yes, we can have an impact of 1.2% in a given quarter. What does it represent on an annual basis is 4.3%, which is not significant. So, I personally prefer simple and clear communication rather than one focused on arithmetical detail. Even if it is a reality, I don't think that's very relevant. [Operator instructions]

The next question is from James Rose from Barclays. Please go ahead.

Hello and good morning. A question on consumer, please. Are you seeing a recovery in China within that business? And can you update us on the trends in the domestic versus the export market?

Yes. Good morning. Look, we see a good launch of product resuming on the soft lines and on the hard lines. So, we see product launches on brands and retailers, inspections. So again, yes, we do see a high demand continuing a strong growth fuel by the sustainability services in consumer. So, we are confident on the growth going forward. And that is valid for domestic as well as for exports, basically, both. Thank you very much.

There are no more questions at this time.

Well, then thank you very much for participating in our first Q1 sales update and looking forward to meet again and talk to you soon. Have a good weekend. Thank you.

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.