SGS SA (SGSN) Earnings Call Transcript & Summary

Good morning, and welcome to the SGS Third Quarter 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. Welcome to this conference call about our Q3 sales. As usual, I will drive you through the highlights of the quarter, and then I will hand over to Marta for more detailed information about the sales. So let's start. Our Q3 sales are very close to CHF 2 billion, a global increase of nearly 15% compared to Q3 2025. We are very happy with this record number, which demonstrates that SGS is in the right position to capture the growth opportunities. This excellent total growth results from a strong organic growth of 5.7%, combined with the scope effect of 6.9%, mainly attributable to ATS, further helped by a positive foreign exchange amounting to 2% over the quarter. The first 2 drivers we have identified in our Strategy 27, Digital Trust and Sustainability have confirmed their role of growth engines. You will see that we have achieved a major step with the acquisition of Prescient. This deal gives us access, in particular, to the high-growth market in the U.S. of the SOC 2 certification, which guarantees the security of the company's IT system. Other bolt-on acquisitions also significantly contributed to the growth. We have signed 4 more deals since last time we met in July for our H1 results. Finally, we are well on track with our guidance, and I'm happy to confirm our initial outlook for the full year. Now some recent updates about Digital Trust and Impact Now. Starting with Digital Trust, I already mentioned the acquisition of Prescient Security, which reinforces significantly our position on the cybersecurity market for companies. And I will give you more insight on Prescient in a minute. The acquisition of NetSentries is also an achievement in the same area. NetSentries provides security assessment and cyber risk management services. And now talking about our organic business, Brightsight, that you know well, is about to become a notified body under the European Union Cyber Resilience Act. This regulation dictates manufacturers to demonstrate the compliance of their connected products across the life cycle with mandatory cybersecurity requirements. We are also very proud to have issued the first internationally recognized cybersecurity certification of a medical software, a laser ophthalmoscope. Coming now for sustainability now, we also registered a lot of successes actually. More specifically, for instance, we have captured opportunities coming from new regulations implemented in Europe. We achieved accreditation for the CBAM and already signed contracts. New regulation about packaging and waste has become applicable in August, creating a sustained multiyear pipeline for growth. Finally, we have secured our first clients and a growing demand arising from the regulation around deforestation and the sustainable biomass program. So now let me share some insights on Prescient Security. Prescient Security is a leading provider of cybersecurity and digital compliance services in North America. This acquisition is an important step in expanding our Digital Trust offering for enterprises and strengthening our position in this attractive and fast-growing market. Prescient Security is accredited to deliver SOC 2 attestation services, which are becoming a business requirement for technology companies and their customers in demonstrating robust controls around security, reliability of their systems and protection of customer data. Together with our other acquisitions, SGS has the most complete portfolio of Digital Trust certifications among the TIC companies and reinforces our ability to offer clients a comprehensive portfolio of cybersecurity, assurance and compliance services. I look forward to discussing this exciting development during our Capital Markets event in November. Over the past 3 months, we have concluded 4 additional acquisitions. I already commented on Prescient Security and NetSentries. In Chile, as you can see, we've invested in Konatec, which supports mining companies, thanks to unique rheology measurement solutions. In Spain, DOEL is a specialist in testing and inspection for electricity transmission, so fast-growing business. I would like to warmly welcome the experts and the employees of these companies to the SGS family. Let me now share some key highlights from our business lines, and let's start with Industries & Environment. You can see here our Industries & Environment business line delivered solid organic growth with 3.6% and sales amounting to CHF 697 million. Environment recorded strong growth, thanks to increased demand for environmental compliance testing such as PFAS water quality assessment and emissions monitoring across North America, Asia Pacific and Europe. Inspection, Supervision & Safety grew at a high single-digit rate with new solar energy projects and infrastructure Inspection projects in airports and urban housing developments in India. In the third quarter, we also signed new contracts in the data center sector across multiple regions and continue to see strong growth in renewable energy projects in Latin America. Industrial Testing was softer, reflecting the disruption in the Middle East and a demanding comparison basis. Lastly, acquisitions continue to deliver strong performance, including ATS. Natural Resources now delivered a strong organic growth of 6.2%, with sales amounting CHF 448 million, an increase of 10% versus 2025. In Minerals, we accelerated growth, supported by all regions with new geochemistry on-site projects. The demand was high for gold, copper and iron ore all over the world. In addition, Minerals trade services performed very well, driven by new projects in North America related to industrial minerals and rare earth commodities. Growth was also supported by Inspection projects for gold and critical minerals in Asia Pacific. Agriculture was stable despite seasonal challenges in Europe. And Oil, Gas & Chemicals remained resilient. Double-digit organic growth in both, actually, North America and Lat Am offset trade route disruptions caused by the Middle East situation. Connectivity & Products delivered an excellent organic growth of 9.2% with sales of CHF 385 million in the quarter. Connectivity grew at a high single-digit rate, led by wireless testing growth for new mobile and Wi-Fi products. Strong growth was recorded in emerging markets such as Brazil and [indiscernible] services, for instance, cybersecurity services and automotive technical evaluation for autonomous driving systems. Softlines delivered double-digit growth, driven by strong demand for compliance testing across textiles, footwear, accessories, including notably the PFAS solutions and durability testing. Hardlines also delivered double-digit growth with renewed momentum in toys and strong demand for food contact material testing. The new European Union regulation is creating additional demand as clients prepare products and packaging to be compliant with the new waste reduction and recyclability requirements. And the Trade Facilitation services remained soft, affected by disruption to trade flows linked to the Middle East situation. Health & Nutrition delivered strong organic growth of 6.2% with sales amounting to CHF 239 million. Food achieved again double-digit growth, driven by continued very strong demand for food contaminant testing and advisory services. Growth was supported by increasing consumer awareness around food safety and the adoption of the food labeling requirements across Asia Pacific. Pharma recorded moderate growth in the third quarter with a double-digit increase in biosafety, while project delays in European clinical research remains a constraint. Cosmetics & Personal Care posted solid results supported in all regions by improved demand for derma cosmetics testing and scientific data-backed consumer claims. Business Assurance now delivered 4.2% organic growth with sales amounting to CHF 213 million. Certification recorded moderate growth impacted by audit delays due to some extreme weather conditions in East Asia. Sustainability grew high single digits, supported by new client wins and a growing demand for sustainability regulatory advisory services. Digital Trust assurance achieved double-digit organic growth, and we secured strategic customer wins, including landmark AI and health care data security certifications for multinational technology corporations. The training revenues were soft during the period due to a delay in the release of the new ISO standards. With that, I will now hand over to Marta for the sales review.

Thank you, Geraldine, and good morning to everyone. In the third quarter, we achieved record sales of close to CHF 2 billion, up by near 15% compared to last year. When we compare in constant currency, the sales grew by 12.6%, of which 5.7% from the strong organic growth and 6.9% from M&A, which included ATS. On the ForEx side, our reporting currency, the Swiss franc, although still very strong, depreciated in average by 2% compared to the currencies in which we operate. And now should we report our Q3 growth in euro or U.S. dollar, we would have seen broadly similar growth rates. So the 14.6% sales growth in Q3 in Swiss francs is equivalent to 14.7% in euros and to 12.9% in U.S. dollars. Let's now turn to the sales breakdown by region. In Testing & Inspection, the growth momentum in Asia Pacific continued with 9.3% organic growth. Health & Nutrition expanded double digit, while Connectivity & Products and Natural Resources grew by a high single digit. Europe expanded by 2.4% organically, driven by Food, Environment, Minerals and Connectivity & Products. This was partially offset by soft volumes in Pharma, Agri and Oil & Gas. North America grew by 5.4% in Q3 with strong performance in Connectivity & Products, Food, Environment and Natural Resources. Eastern Europe, Middle East and Africa expanded by 5.1% organically. Although the situation in the Middle East remains highly volatile, we saw an improvement from the low point in Q2, notably in Connectivity & Products and Food. In addition, geochemistry benefited from high demand for gold, copper and iron ore across the region. Latin America expanded by 7% organically with continued double-digit growth in geochemistry and new projects in Inspection & Supervision. And finally, as commented earlier by Geraldine, Business Assurance delivered 4.2% organic growth, led by Digital Trust and sustainability, partially offset by moderate growth in certification. Looking now at the 9 months, I'm proud to report that we delivered 10% sales growth to reach CHF 5.7 billion. In constant currency, the sales increased by 13.1%, of which 5.6%, thanks to the strong organic growth and 7.5% from M&A, including ATS. On ForEx, despite the recent depreciation of the Swiss franc, the overall impact for the 9 months remains negative 3.1%, bringing the growth in Swiss francs to 10%. And with that, I hand over back to you, Geraldine.

Thank you, Marta. Again, this quarter, we're well on track with the guidance. The success of our acquisition policy and ATS allow us to achieve the top end of our initial outlook on scope effect. So you see here, we are now guiding for a growth from acquisition around 7%. We fully confirm all the other items of the guidance, and I'm very excited to see you in Berlin in less than 1 month to discuss about what we expect for the coming years. Thank you. And we will now open the call for questions, please, Ariel.

[Operator Instructions] Our first question comes from Rory McKenzie from UBS.

I wanted to ask a question about the Digital Trust services. Clearly, you're investing heavily into this area and the news right now is really dominated by cybersecurity risks and threats. Can you just explain where you sit in this sector? What capabilities are you putting together? And how do you see kind of client demand evolving? And yes, how has that been trending through this year?

Well, thank you, Rory, for the question. Look, clearly, when you look at the TIC industry, the fast-growing sector of the TIC industry is undoubtedly the digital trust services. Whether you consider it from an industrial aspect or from an enterprise aspect, which is what Prescient is serving or from a Digital Trust for products, connected products, this is a very, very fast-growing portion of the TIC industry. It is a clear new growth opportunity that we set when we presented as early as when we presented Strategy 27 back in January '24, and we're going to continue to invest in this fast-growing segment. All the organization are deploying AI systems, autonomous vehicle, connected medical device, industrial Internet of Things platform, smart infrastructure, traditional product testing. All this, it's no longer sufficient. We need to have on top the check of the AI model safety, cybersecurity resilience, functional safety, software integrity, all this is key topics that we want to continue to serve and invest into. So it's a very fast-growing, strong double-digit growth, and we are undoubtedly the leader of the industry when it comes to cover all the needs of our clients when it comes to digital trust. We'll come to that in the CME, and I will explain that even further.

And then just the second question, just to clarify something Marta said about ForEx. I think you said -- well, the last time you saw a tailwind was literally 9 years ago. So we haven't had to model a positive impact for a long time. In H2 at the current Swiss franc rate, would that be a positive impact for margins on the translation and the mix?

Yes, Rory. I confirm that you saw we have a positive ForEx in Q3. Should the rates remain at the current levels, we should expect similar for Q4. And this would mean that indeed, we have no more this ForEx headwind in the margins. But looking at the second half, I remind that in the first half, it was still there. So for the full year, you should expect rather neutral impact.

The next question comes from Annelies Vermeulen from Morgan Stanley.

So my first question is just on Business Assurance, which has been improving nicely through 2026 as you had guided for. I know you talked about the weather impact in Asia. So can we assume that the majority of the slightly slower Q3 was that weather impact? And therefore, would you expect that to catch up in Q4 and return back to more of a normal growth rate?

Yes. Annelies, look, we had 2 impacts. We have effectively all the typhoons and all the flooding that happened in East Asia, which you have to have outages on site, so they could not go on site. So that it's always an impact on Business Assurance in Asia. We had also quite a sluggish Europe macro economy also. That's impacting core certifications and industrial sectors, automotive and even if we're not -- I mean, our business in France is really marginal, but that was also impacted. So look, I'm really expecting a full normalization of all this and back to mid- to high single-digit growth at least for 2027. Q4, we should be a bit better, but I'm really betting on '27 for BA.

Perfect. Very clear. And then secondly, I just wanted to ask about data centers. You mentioned that you signed some contracts in I&E. So how much did that contribute to growth in that division? And can you comment a little bit on the pipeline there? Do you expect that to continue to become a larger part of I&E?

Yes. Annelies, data centers is not only impacting I&E. It is impacting I&E favorably. It is, I would say, a tailwind. But it's also impacting BA. It's also impacting Connectivity & Products, the supply -- everything we have across our verticals are impacted favorably by the data centers because we have an offering that's quite complete. From the very beginning, the initial risk assessment, the environmental due diligence that you have to do, the supply chain management, the construction supervision, the control of health and safety, that's all I&E. And by the way, we have a lot that's done also by ATS in North America and all the hyperscalers, they really value our expertise for these services through all the testing programs for key equipment and safety, the EMC, the reliability, the connectivity, the energy management, for the servers, the energy storage, the data integrity, that's Connectivity & Products. So you have the building and you have all the devices you put inside the data centers, the servers, the connected equipment, and that's C&P. So when all is operational, we continue also to support the clients with certification around the governance, the business continuity and the cybersecurity. And here, you have Business Assurance. And the tailwind of '27 for Business Assurance is really around the digital trust, and that's also the rationale for Prescient Security. So yes, we are doing a lot for data centers, and that will continue to be one of the growth drivers that we benefit from as we go towards 2027.

The next question comes from Will Kirkness from Bernstein.

My first question probably follows on from that. So you had a very impressive performance in C&P. I just wondered how sustainable that level of growth was, whether there are any contract wins in there or if that's all existing customer strength?

Yes, sure, Will. Look, as explained during the call, we're really about the sustainability related like PFAS and the new regulation driven -- the new regulation that drove the growth like the PPWR, the packaging, packaging material waste regulation. That's really what drove the organic growth that you've seen. In North America, there's a growing number of states that are implementing PFAS-related requirements for apparel and consumer products, and that creates a strong demand. So is it going to fade away? No, I don't think so. I think it's going to remain and it's going to remain super strong. The outlook for Q4 is super high, super strong. And we probably took some market share as well.

Okay. Clear. And then if I could just follow up on your -- you made a comment on ATS in your prepared remarks. I just wondered if you could talk about how that's -- any details you could give on that, how it's growing, margins, what you've done on cost or whether you've managed to get any revenue synergies yet?