SGS SA ($SGSN)

Good morning, and welcome to the SGS Q1 2026 Sales Update. I'm here with Geraldine Picaud, our CEO; and Marta Vlatchkova, our CFO. Please note that this call is being recorded and will be available for replay on the SGS website. [Operator Instructions]. 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 attending this call. As usual, I will comment on the business and share our latest news before handing over to Marta for more details on the numbers. Sales reached CHF 1.75 billion, a record for SGS. We achieved this with strong organic growth of 5.3%, combined with growth from acquisition of 7.3%. We experienced a huge negative foreign exchange effect amounting to 8.7%. The situation in the Middle East affected our operations in the region, but the impact on our sales has remained very limited as it represents less than 3% of our total revenues. On the positive side, over the quarter, we had several successes on the business that I will comment in the coming minutes. You will see that we are very happy with the leadership we have further reinforced in digital trust and also in our AI offering. About ATS, Applied Technical Services, the integration is well underway, and we are where we expect it to be. Another success is the scrip dividend, which recorded a final take-up exceeding 60%. To conclude, we are fully on track, which allows us to confirm our outlook. Let's now go into our digital trust. The first area we are especially proud of is really our leadership in digital trust. As you know, digital trust services has been from the start at the heart of our Strategy 27. We were already in a leading position, but we have further reinforced this over the quarter. First, we have added additional capabilities in connectivity by opening a new state-of-the-art lab in the U.K. We have also completed the acquisition of Granite River Laboratories, GRL, which brings us complementary expertise in high-speed connectivity. GRL employs 200 experts working in laboratories in the U.S., in Europe and in Asia. Secondly, in AI certification, we also have achieved some successes by delivering certifications in new geographies and to key clients. And finally, with several bolt-ons, we have enlarged our global offering by adding to our business portfolio new expertise such as payment card security or cyber Thore and SC. We expect to deploy these new capabilities across the entire SGS network. To continue with the business update, let me now give you some examples of how we use AI to serve our clients. Of course, we also use AI in our labs to improve efficiency and processes. But the point here in this sales Q1 update is to focus on sales and to give you a strong sense on how we can improve our customer satisfaction with AI. Chemical intelligence in China is a great example. It allows us to reduce by 80% the traditional spectra analysis processing time. It's already live in Shanghai, and it's being currently rolled out across China. Another example on the certification side is NearMet AI, which significantly accelerates the audit reviews by prescreening the documentation, flagging potential gaps and therefore, allowing experts to focus on critical issues. But not only are we improving the customer experience, we also are in a position to propose new services. FoodNexus is an AI-powered platform. It enables food companies to monitor regulatory changes, identify emerging safety risk and generate adequate evidence across their supplier networks. In a different sector, externalytics is a centralized tool, which allows mining companies to manage their assets and in particular, predictive maintenance. We could give plenty of other examples of this type across the group, and we see a huge potential for the future. Let's go to ATS, and that give me a short update on where we are. You remember that we closed the acquisition in early January. The integration is fully on track. We want to increase the value built over the years by ATS. We have implemented a governance by STS while keeping ATS structure unchanged. This way, we have full cooperations to find cross-selling opportunities and implement synergies with no risk of destroying the brand, the technical expertise and the Made in America culture of ATS. We are extremely happy with this acquisition. Let's move on to our bolt-on. In Q1, we continued with our active bolt-on program. In our full year results presentation, I already commented on 5 of them. Since the end of February, we have completed the acquisition of digital trust deals, especially Granite River Labs that I already presented, but we also bought Alzerad, a cybersecurity company in Hungary. Trident is an ATS acquisition in the U.S. nuclear sector. And finally, OGA is a French company, which provides predictive analysis in connection with floodings. Please let me warmly welcome these new experts who are now part of the SGS family. Let me now share some key highlights from our business lines, and let's start with industries and environment. Industries & Environment delivered a strong quarter, with excellent -- an excellent growth driven by Inspection and Safety and a meaningful contribution from ATS. Double-digit organic growth in inspection and Supervision with a strong performance in Safety were supported by new wins and strong execution in Latin America and Asia Pacific. Industrial Testing delivered solid results led by new projects and a strong calibration activity, particularly in Europe and in Asia Pacific. In Environment, growth was solid overall, driven by Industrial Hygiene and field monitoring in North America. Scope contribution was mainly driven by ATS following the closing in January. As you remember, inspection calibration and part of the testing businesses of ATS are consolidated within Industries and Environment. Let's move to Natural Resources, which delivered a solid quarter with 4.2% organic growth led by Minerals and resilient performance across the rest of the portfolio. So strong growth in Minerals was driven by the Americas, Asia Pacific and Southern Africa. Geochemistry and metallurgical testing recorded an excellent performance supported by gold and rare earth metals. In this area, we continue to pioneer and scale advanced geochemistry solutions such as coal block and photonisate to help mining clients meet operational and sustainability goals. Oil, gas and chemicals also posted solid organic growth despite business disruptions coming from the Middle East in March. And agriculture grew moderately with solid organic growth in North America. Now let's move on to Connectivity & Products, which delivered another strong quarter with 6.3% organic growth. High single-digit organic growth in connectivity was led by wireless testing and cybersecurity. Softlines also delivered high single-digit organic growth, benefiting from a surge in demand for PFAS testing in Asia Pacific, mainly driven by new European regulations. Here, we have developed highly advanced solutions to help brands move away from PFAS. By choosing PFAS-free alternatives, brands can ensure compliance across complex supply chains while strengthening competitiveness, and this is fully aligned with our impact now for sustainability offering. Obines posted strong organic growth, supported by new contract wins. Trade facilitation services was slightly impacted by geopolitics and contract mix. Organic growth now in Health & Nutrition was driven by Food, which delivered high single-digit organic growth for the quarter. The strong performance was driven by food safety services across all geographies, and we saw continued strong momentum in health, food and sports nutrition, particularly in Asia Pacific. Food safety remains a core area of focus for SGS. And with our globally recognized expertise, we remain committed to supporting the industry with science-based reliable testing solutions. Pharma showed improving performance in North America, offset by the phasing of projects in clinical testing in Europe. Cosmetics and Personal Care was impacted by delays in the start of clients' projects. Let's move to Business Assurance, which delivered a strong quarter with 7.4% organic growth led by sustainability and digital trust. Double-digit organic growth in sustainability was driven by greenhouse gas emissions verification and supply chain services. Digital trust assurance also delivered double-digit organic growth, supported by strong demand for information security, cybersecurity and AI assurance. And this reflects the strong commitment to scaling our leading capabilities in this area, leveraging additional expertise brought by acquisitions such as Certix. Certification posted solid organic growth led by medical devices, a critical sector where we continue to invest. Scope contribution was mainly driven by the consolidation of the foreign SIC business of ATS, and it was partially offset by the planned disposal of our consulting business in the U.S. With that, I will now hand over to Marta to review our Q1 2026 sales.

Thank you, Geraldine, and a very good morning to everyone. Looking now at our record first quarter sales of CHF 1.75 billion. We were very pleased with a 12.6% growth in constant currency, of which 5.3% from the strong organic growth and 7.3% from M&A, which included the consolidation of ATS since the beginning of the year. On the ForEx side, our reporting currency, the Swiss franc remained very strong, resulting in a negative translation impact of minus 8.7%, which reduced the growth in Swiss francs to plus 3.9%. Let me now briefly put our Q1 growth in Swiss francs into context by comparing it with the euro and the U.S. dollar. 12 months ago, in early April 2025, with President Trump Liberation day tariff announcement, there was a sharp and rapid appreciation of the Swiss franc against all major currencies. Since then, the fund has remained structurally strong, particularly against the U.S. dollar, but also versus the euro. This is why the plus 3.9% growth in Swiss franc is equivalent to plus 7.1% growth in euro or to plus 19.3% in U.S. dollar. As you can see here, the organic growth continues to be supported by all regions and this despite the Middle East situation. In Testing and Inspection, Asia Pacific expanded by 8.9% organically in Q1 with double-digit growth in Natural Resources, notably by continued strong performance in Australia as well as double-digit growth in both pharma and food. In addition, growth in Connectivity & Products accelerated. Europe grew organically by 2.4%, led by Industries & Environment with new industrial testing projects, partly offset by phasing of clinical testing activities in pharma. Volumes in Natural Resources improved, while Connectivity & Products remained soft. North America grew by 1.4% organically with strong performance in Minerals, solid Environmental and Connectivity & Products, which were offset by phasing of projects in cosmetics and nutraceutical supplement testing. Eastern Europe, Middle East and Africa delivered 2% organic growth, impacted by the current situation in the Middle East. Latin America grew by 8.5% organically, supported by new project wins in Chile and Peru. And finally, as commented earlier by Geraldine, Business Assurance delivered 7.4% organic growth, driven by double-digit growth in sustainability and digital trust assurance services. As announced on the 21st of April, 61.35% of the dividend for the financial year 2025 was elected to be paid in the form of new SGS shares with the remaining 38.65% to be paid in cash. This represents a continued clear endorsement of Strategy 27 and allows SGS to reward the loyalty of its shareholders while redirecting close to CHF 400 million of cash towards the continued execution of Strategy '27. The delivery of the new shares and the payment of dividend will take place on the 24th of April tomorrow. With that, I hand it back to Geraldine.

Thank you, Marta. With that, I am pleased to confirm our 2026 outlook, and I will now open the floor for questions.

[Operator Instructions] The first question comes from Arthur Truslove from Citi.

Arthur from Citi. So one for me. So obviously, one of your competitors has announced a strategic review. I'm just wondering, I mean, do you think there's a potential sum of the parts angle for SGS? And would you consider doing a similar kind of review? And I suppose, if not, are you able to talk about the synergies between, for instance, your product testing business and your commodity testing or asset inspection businesses?

Thank you, Arthur. Thank you for your question. Look, there's no sum of the part per se study as we -- in SGS for the simple reason that this occurs when you want to realize or monetize value, which is not the case for us. We're here to grow, and we're here to keep the business thriving. So that's the first point. I would say the second point is that there's no value creation for me or loss of value to have a portfolio that is diverse and having a geographical balance on your presence. When people say that separating business lines allow a greater expertise, I don't agree with that. I think that you can do food and you can do pharma and you can do industry and environment, and you've got experts in the 3 end markets, right? And that coexists and that actually adds resilience, which is what SGS is all about. And you see that quarter after quarter. And also, of course, you can have some cross-selling in some areas where you're complementary in order to offer all services.

The next question comes from Will Kirkness from Bernstein.

I know it's sort of early days on ATS, but I wonder if you could talk about that, how it's performing in terms of your original expectations, just thinking about next year and really when it falls into organic growth. And then I just wanted to follow up on the comments on the script, whether you're happy with that sort of level of take-up. It seems like it's in the range of expectations. But I guess the script is sort of part of Strategy '27. So maybe we expect another one this year. But just wondered how we should think about it longer term within your capital allocation framework?

Yes. Thank you very much. Look, we effectively hope and so far, so good, we'll have an ATS that will be accretive to our organic growth next year. The second remark about the scrip, I think it's much early to talk about what we are going to do next year. You know we have a capital market event in end of this year, and let's do that in due course, if you allow me, Will.

The next question comes from Annelies Vermeulen from Morgan Stanley.

Two questions, please. So just firstly, coming back, Geraldine, to your comments around AI implementation. I wondered what it meant for pricing. Are you typically able to use AI to bolster pricing by offering faster, more detailed, more accurate research reports? Or are you seeing instances of customers seeking lower pricing perhaps because more of the service is automated, for example? So what's your strategy around that? And then secondly, following up, I guess, on Will's question. Could you comment on leverage? I appreciate this is a sales update, but since December, we've had the closing of ATS, we've had the script take-up. So could you comment on where you expect leverage to land at the, say, the half year? And with that in mind, would you say you have potentially appetite for larger acquisitions? Or do you expect to stick to bolt-ons this year? Sorry, that might have been...

No, no problem. Look, I will let Marta answer on the leverage projection maybe for year-end rather than the half year. I think it would make more sense. And then I will take the larger acquisition space and MI implementation. Marta, do you want to start?

Yes. Annelies, on leverage, as I already commented for the full year results with the acquisition of ATS, indeed, we have a peak of around 2.2x on EBITDA, which will gradually reduce in the next 18 to 24 months.

Okay. So look, this would allow us to continue, obviously, our bolt-on acquisitions. You've seen that we've been quite successful. And we obviously want to continue on this. It's clear that our approach to date has been to acquire really expertise or geographic regions that really -- where we had gaps, and that allows us to better serve our global clients around the world to better balance our geographic portfolio so that we can really capitalize on high-growth market while limiting risk. Look, the -- we think we have space to do bigger acquisitions. And I would say that -- and continue our bolt-on that has been successful for the reason I just mentioned. On AI, it's most and foremost, new offers that we're doing. So we are really doing new offers, and that is a growth driver that is becoming more and more prominent, and I wanted to really give you concrete examples already in Q1. I think all the customer service enhancing is also helping to reinforce the stickiness with the customer. And we don't experiment as we speak, any pressure on our prices or on pricing at all.

The next question comes from Rory McKenzie from UBS.

I just want to ask about the U.S. consulting business. Can you just clarify whether you found a buyer for that or you're in a sale process at the moment? And can you also talk about how big it still is after the past few years and what the recent trends have been? And just following up on the question on AI. AI sounds a very sensible way to speed up documentation and free up expert time. But I would have thought that would be applicable to much more of the group than just Business Assurance. Is this just a start and you think this tool will go into all divisions? Or actually is the AI strategy about having different tools or solutions for the different divisions? Just interested about your kind of internal deployment.

Okay. Okay. Yes. Of course, AI is -- here, we showcased some examples with Business Assurance, but when it comes to identifying the bacteria in a food lab, we have AI. We have AI with our pharma. We have agents deployed on all pharmaceutical labs. We have many examples we could have showcased as I explained. So this is full speed across the organization. And we will have a lot to showcase when outside of business assurance when we will meet the capital market event. So it's really in full deployment. And as I said, it's new offers. It's new offers. So we're building the pricing on these new offers. And obviously, the margin to the point of Andy, is maintained on the rest. So we actually have plus when it comes to AI in terms of sales and margins. If I go to your first question on main point, Look, we came to a stage where the sale of the business become quite advanced. And we could state that at this stage, we were going to separate ourselves from this business on a certain manner. I think I told you, business that are very cyclical, where we don't have any synergies with group businesses are candidates for sale. We also tried to improve the business. In the end, we found a solution to exit. So we adopted and we opted for that solution. So that's why it should happen very shortly as we speak on the definitive disposal of the business.

And apologies, I think back in 2018, Main Point was doing about USD 70 million of revenues. Can you comment on what the size of it is today?

It's a cyclical business. I don't comment on that. It goes up and down all the time. It depends on the project you have in a year -- in a given year. You can't have a constant trend. That's not the operating model.

The next question comes from Victoria Chang from JPMorgan.

My first question is also on the U.S. consulting business. Please may I confirm that the organic growth of 7.4% you posted in Certification excludes the consulting business and that would be included in scope? And are you able to give some color on how the U.S. consulting business performed in 1Q? Did the weakness continue? And what effect it would have had on organic growth in the division? My second question is on your March growth rate, please. Given the Middle East conflict, how are you thinking about growth in 2Q and through the rest of the year?

Yes, I will start on the March growth rate, and I will give the floor to Martin to explain to you the accounting treatment related to the Main Point Consulting U.S. business that we are exiting from. So March, we see a very good growth. So we are confident as we speak, if things stay as is, that we will effectively deliver on our guidance and on our promises. So no -- yes, as I said, Middle East is impacted in March, but Middle East is less than 3% of sales overall as a group. So we have easily offset this impact with the rest of our activities and geographies. So Marta, do you want to comment the pure accounting treatment.

Yes. Main point, it's actually reported as discontinued operations. This is why it is not inorganic growth. It's part of the scope offsetting partially the positive scoping from the forensic business of ATS. What I can say is should we have had no intention -- firm intention to sell and should we have that be part of the organic growth, it is not material for the group as impact.

The next question comes from Allen Wells from Jefferies.

Just one quick follow-up from me, please. Obviously, you talked a little bit about the resilience in the business in Q1 and the Middle East had a little bit of impact in March. But as we think about the shape of growth through the year, could you talk a little bit about -- specifically about kind of the exit rates in some of those areas that were impacted how to think about the impact should things continue in April? And then maybe just more generally, I'd love to get a feeling for -- or get some color on some of the broader conversations you're having with customers that are clearly looking at this geopolitical uncertainty and potential risk around some of their businesses. Are they the types of discussions you're having in terms of planning, in terms of potential impact? And how comfortable are they with the scenario that they're in at the moment? Just thinking about how this shapes through the year?

Yes. Thank you. Look, again, it's -- Allen, it really depends on with which customer you're talking to. So you're talking of a biosimilar manufacturer in the U.S. is all very positive because of the reindustrialization and the promise of having for us more QA/QC testing. You're talking with another one in another place or in the Middle East is not the same sound. Everybody is acknowledging there is global uncertainty and there is political geopolitics playing here. But it's -- there's a lot of diversity of reactions depending on the business and on the geography. And fortunately, we are everywhere. So when I look at the exit growth rate of Q1, I mean, we're good. And I'm confident that at least April is going to be a very good growth. And as we continue to -- through the year, there's nothing which tells me as of today that we shouldn't deliver. I'm very confident on the delivery.

Next question comes from Neil Tyler from Redburn & Co.

Just a follow-up on capital allocation, really, please, Geraldine, Marta. You've almost fulfilled your ambition to double sales in the U.S. Can you sort of help us with your perspective on sort of priorities really in terms of regions or divisions where you'd like to expand inorganically? What sort of tops list? Obviously, I don't want to give very specific I didn't expect you to. But how you sort of frame the portfolio at the moment in terms of -- if we're sitting here in 2 or 3 years' time, where you're more likely to have allocated more inorganic expansion capital compared to today, please?

Sure. Look, we keep our portfolio as is, Neil, for the reason I've just explained since the beginning of this call. And our approach to date has really been to acquire expertise or geographies where we have gaps. But look, I mean, I think this question is really a question for our capital market event at the year-end. So be a little bit patient, and we'll answer that in detail.

Okay. Fine. In that case, a follow-up, I'm just going to keep sort of picking all this consulting question. In your revenue bridge, there's CHF 12 million of revenue in the discontinued and disposed line. Is there anything other than consulting in that number?

Marta?

Yes. As you have seen already the impact from last year, we had a few divestments in the Middle East. So the EUR 12 million includes them plus Main Point.

The next question comes from Suhasini Varanasi from Goldman Sachs.

Just a couple for me, please. One is on North America, where I think the organic growth was around 1.5% below group average. Just want to understand the key moving parts here. Was it mainly Health & Nutrition that was -- that drove the weakness? And -- given your strategy to grow this region, how do you see growth prospects and which divisions will drive it medium term? The second one, just a small admin, please. Where do you see FX at current spot rates for the rest of the year?

Well, maybe Marta is going to answer your question on ForEx and how she sees it at least for H1, right, or for Q2? Marta?

Yes, indeed, we have a very strong negative impact in Q1. But as I was mentioning, it is in comparison to the period before the tariff announcement last year and appreciation of the Swiss franc. Should the rate -- exchange rates remain as they are now, we -- this effect will obviously slow down and reverse. So for H1, that would mean around 4%, 4.5% negative ForEx...

Yes. And on your point about organic growth in North America, it's a mixed bag, Fzinie. So we have a very strong actually performance from our Minerals and the Softlines division in the U.S. and this has been offset by cosmetics and some clinical testing in cosmetics where projects has not started yet, and we expect that to come sometime in the year. We see a slow start in pharma. But as I explained, I'm quite confident that pharma will catch up and get to a much higher growth as we develop through the year, and we are very well positioned to capture QA/QC in most of our labs, the Fairfield lab and so on from biosimilars that are keeping increasing as we speak. And as you know, the focus on industrialization is coming into effect in the U.S.

The next question comes from James Rowland Clark from Barclays.

Just one on Consulting. For a while now, you've been looking to turn this business around. I just wonder what levers you implemented to try to turn it around and how that wasn't successful? And is it because you had an offer come in into you that you sort of ended that turnaround process or simply had you completed a turnaround and it was unsuccessful and then you to sell it? And then finally, on consulting, can you disclose, is it above the group margin or below the group margin? Just anything on profitability?

No, on the margin, it's completely neutral. I would say that the turnaround was going to take a lot of time because it's an activity, again, that by nature, is very, very much cyclical and on which we never found some synergy. So having a possibility to dispose it was some opportunity that we wanted to seize, and that's what we've done.

The next question comes from Virginia Montorsi from BAM.

I just have a quick follow-up to the consulting business question that James just asked. In the press release, you described the consulting disposal as planned, but I think this is the first time we're actually publicly discussing it with you. I think at full year results, we were discussing more the turnaround of the Business Assurance segment in general. So can you help us just understand the choice of wording on the plan? Was this still the plan at full year? Or has anything changed? And how should we think about this?

Well, I think it's simple. The process was -- the imminent process did go step by step. In February, end of February, the process was clearly not advanced enough. It was an assumption. Now it's a process that is certain and IFRS tells you then in this case to put it in discontinued operations. This is what we have done. But it was always an option for me to dispose this business. It's something that I've always thought of either managing to find synergies. But as I just explained, it was too cyclical business to find any synergies, what we've tried. We also tried a lot to turn it around. And in the end, it's a business that will go better as its own, functioning on its own, and that's what we are doing. So this is going to happen effectively in the next coming weeks, yes.

Can I just ask a follow-up to this? Can you disclose what would have been the organic growth of Business Assurance if you had kept U.S. consulting in it?

I think there was already a question before that, as they said, it is not material on organic growth for the group.

The last question is a follow-up from Arthur Truslove from Citi.

Sorry, my questions have been answered.

Glad you're happy, Arthur. Fantastic. Okay. So let me now conclude this call. I would say that in conclusion, we do what we say and which is exactly what our brand promise stands for SGS when you need to be sure. So many thanks. We look forward to speaking with you again at our half year results in July. Thank you.

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