Intertek Group plc (ITRK) Earnings Call Transcript

Hello, and welcome to the Intertek May 2023 Trading Update Conference Call. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to Andre Lacroix, CEO, to begin today's conference. Please go ahead.

Good morning to you all, and thanks for joining us on our call. I have with me, Colm Deasy, our CFO; and Denis Moreau, our VP of Investor Relations. There are 3 takeaways from our call today. First, our strong portfolio is delivering faster like-for-like revenue growth, benefiting from increased demand for our ATIC solutions. Second, our China business rebounded strongly after Chinese New Year, following the relaxation of the COVID restrictions in January, and third, we are making good progress on revenue, margin and cash. We are confirming our '23 guidance of mid-single-digit like-for-like revenue growth at constant currency with margin accretion in H1 and H2 and strong cash. Let's discuss the performance by business line. Our products businesses benefited from a continuing increase in customer demand, and we reported revenue of GBP 658 million, up 9.2% at actual rate and 5.5% at constant currency. We delivered a like-for-like revenue growth of 5.5%, with double-digit like-for-like revenue growth in Business Assurance, mid-single-digit like-for-like revenue growth in Food and Building & Construction, low single-digit like-for-like revenue growth in the other business lines. Our Trade division benefited from increased demand for energy and Agri products, enabling us to report a revenue of GBP 212.5 million, up 8.9% at actual rate and 5.2% at constant currency. Our like-for-like revenue growth of 5.2% was driven by high single-digit like-for-like revenue growth in Caleb Brett, low single-digit like-for-like revenue growth in AgriWorld and double-digit like-for-like negative revenue in GTS. Our Resources division is benefiting from increased CapEx investments as our energy clients are building additional production capacity. Moreover, the demand for testing in Minerals remains very strong. We delivered revenue of GBP 189 million up 23.3% at actual rate and 18.9% at constant currency. Our like-for-like revenue growth was 12.5% in the Resources division with double-digit like-for-like revenue growth in all business lines. I would like now to discuss our performance in China. The reopening of the economy in January was welcomed by all of our clients, both in the export and domestic markets and post Chinese New Year, we saw a rebound in manufacturing and trading activities that provided real benefit to our local operations. This is reflected in the performance of our China business. In January, February, revenue was broadly flat and it accelerated in March, April period to double-digit like-for-like revenue growth, which was broad-based as all business lines benefited from the reopening of the economy. Overall, in the first 4 months of the year, our China business delivered like-for-like revenue growth of 7.5% at constant currency. This is a good start to the year for our China business, which will be a significant contributor to the group performance in 2023 given the baseline effect caused by the COVID disruptions in Q2 and Q4 last year. Turning now to the performance at the group level for the first months of the year. We delivered a revenue growth of 7.6% at constant currency and 11.4% at actual rate. Like-for-like revenue growth was broad-based which was also the highest like-for-like revenue growth since we started reporting our performance in product, trade and resources in 2016. Like-for-like revenue growth of 6.5% benefited from both increased volume and pricing. As previously discussed, we took pricing in the second half of 2022 in the regions where inflation was higher than expected, and we have taken further global price increases, as you would expect in Q1 in our global businesses. The SAI, JLA and CEA acquisitions that we've made recently to scale up our portfolio in attractive growth and margin sectors are performing well, in line with our expectations. As you would have noted, we've announced last month the acquisition of Controle Analítico, a leading provider of environmental analysis with a focus on water testing based in Brazil. We continue to make progress on productivity, targeting operational improvement in our variable costs and maintaining strong controls on fixed cost which combined with the benefits of operating leverage has delivered good margin performance in the first 4 months of the year. The cost restructuring program we announced in March is on track. As a reminder, it targets productivity opportunities based on operational streamlining and technology upgrade initiatives to deliver GBP 6 million to GBP 7 million cost reduction in 2023 with an annual saving of GBP 15 million when the program is complete. Our day-to-day cash performance discipline has delivered a strong free cash flow. Of course, we continue to invest in OpEx capability, innovation and capacity expansion to see the exciting growth opportunities ahead. And let's now discuss the guidance for the full year in 2023. We continue to expect that the group will deliver mid-single-digit like-for-like revenue growth at constant currency driven by mid-single-digit like-for-like revenue growth in product and trade, while we expect high single-digit like-for-like revenue growth in our Resources businesses. We are targeting margin progression in both H1 and H2. Our cash performance will be strong. We'll invest in growth with CapEx of circa GBP 115 million to GBP 125 million. We expect our financial net debt to be in the range of GBP 630 million to GBP 680 million. A quick update on currencies for your model, sterling, as you know, have strengthened in the last few months, and we are updating our ForEx guidance for the year. The last 4 months average sterling rate at the end of April applied to the full year results would reduce our revenue by 50 basis points and our earnings by 150 basis points. We are improving our segmental disclosures to better reflect the growth drivers in our business and starting from the H1 results in 2023, we'll report revenue, operating profit and margin in 5 divisions, Consumer Products, Corporate Assurance, Health and Safety, Industry and Infrastructure and World of Energy. As you know, a few weeks ago, we hosted our Capital Markets event, which gave our leadership team the opportunity to present our 2030 AAA growth strategy to unlock the significant value growth opportunity ahead. Our clients are increasing their focus on risk-based quality assurance to operate with higher standards on quality, safety and sustainability in each part of their value chain, which is triggering a higher demand for ATIC solutions. We have made a lot of progress in our portfolio, which is poised for a faster growth, both at the global and the local level. We are laser focused on margin-accretive revenue growth, and we have the plans in place to take our margin back to a peak of 17.5% over time and go beyond from there. We've made great progress over the years on cash generation, and we expect higher cash generation to support investment in growth and deliver strong returns. We now have a more agile operating structure, which combined with our high-performance capability will unlock significant value. In summary, we had a good start to the year, benefiting from faster like-for-like revenue growth as well as continued progress on cost and cash. We are on track to deliver our full year target for 2023. And our Intertek 30 AAA growth strategy is in place to deliver the significant value growth opportunity ahead. Thank you for your time, and we'll take now any questions you might have.

[Operator Instructions] And our first question today comes from Harry Martin of Bernstein.

I'll ask 3 questions, please. The first one is on the Resources business and how that looks for the rest of the year, 12.5% like-for-like growth is quite the acceleration from Q4 even on a harder comp. So is there anything one-off in there? And the guidance really implies a slowdown, but any color you can give on how that develops through the year would be useful. Secondly, on China, double-digit for March and April is quite a broad range for us. So I wondered if you could give any more color on where that business is now versus normal or versus 2019? And was April better than March on that basis? And then the final question on the margin guidance expecting expansion in H1 and for the full year. I'm interested to know what would have to happen from where we are today for you not to be able to expand margin in H1 or for the full year here? Any color you have on the flex for that guidance would be interesting.

Sorry, Harry, I'm not sure I understood the last question. What do you mean?

I'm just interested, I guess, particularly for the first half, where most of the way through that, is there any flex what would have to happen to the world and to your various business lines for the margin target not to be hit?

Okay. So look, on your question on the like-for-like performance of Resources, of course, it's pure like-for-like. There is no one-off. We have, as you know, 3 businesses, of course, 2 bigger than the other one, but we are seeing a very, very strong demand across the board. As you know, our energy clients have underinvested for many years in terms of expanding their production assets and distribution assets. It is a surprise to no one that now the demand in terms of oil is back to the level it was pre-COVID-19 and we, of course, have very tight capacity globally. And everybody knows that renewables are great and very important for the future, but it represents less than 10% of the world energy supply and to meet the growing demand for energy companies you have to invest both in traditional oil and gas and renewables. That's what's happening, and we are benefiting from that. As you know, we are the global leader in engineering-based inspections with our Moody business that covers all aspects of the production ecosystems in the energy sector including renewables and of course, solar with the recent acquisition that we've made, which is not, of course, in a like-for-like. The other point that is important is that Minerals continues to see some very, very strong demand. As you know, the investment infrastructures are building around the world. And in addition, we've talked quite a bit about that at the Capital Market event, the importance of lithium and cobalt regarding the energy demand -- sorry, the battery demand. And then it's a smaller business, but it all compounds. Of course, with this tight production capacity, the existing production assets need to sweat harder, if I could say it like this, so of course, oil and gas companies are investing in maintenance and it's benefiting our OpEx business. Look, we had, as you know, a very strong second half and therefore, I would suggest that we keep that in mind while looking at the full year, double digit is obviously fantastic but we had a much stronger second half than first half in Resources, and there is a bit of a baseline effect in our outlook for the year. As far as China is concerned, look, really, really pleased with a strong rebound that we've seen in March, April. I gave you January, February and March, April because they are 2 distinct periods, the first 2 periods -- the first 2 months of the Chinese New Year period, which was broadly flat, and it took quite a bit of time for companies to start all over again, but both March and April, we are very, very strong. I'm not going to give you much more than what I've given in terms of numbers, but I can say that we had a double-digit growth on all of our business lines. And a few -- question is, is the level of revenue compared to 2021 higher and lower. The rate of growth in January, April for 2023 is higher than the rate of decline in January, April 2022. So here, you have it doing very well. And you would remember that we have disclosed the performance at the Capital Market events on the performance of China pre-COVID-19 and after COVID-19. So the business is in a really, really good place. I think that's it. In terms of margin, look, we are very focused on margin-accretive revenue growth. We've made good progress in the first 4 months. There is still some work to be done. The annualizations of our restructuring program will take time. It takes time to implement pricing. So look, we are targeting progress in H1 and H2, and we'll report H1 in a very short period of time.

And our next question comes from Annelies Vermeulen of Morgan Stanley.

Three questions, please. So firstly on to -- the first 2 are on China. So given the rebound in growth in the performance, I'm certainly surprised that, that hasn't translated into a better margin guide for this year given the operational leverage in that division. Is it a case of it's too early to make that call? Or is there anything else going on in terms of why we're not seeing more of a margin drop-through from that China recovery? And secondly, I suppose it's a related question. You said that all the business lines benefited from the recovery in China. But again, I'm curious as to which divisions and subsegments in particular, have driven the growth recovery and perhaps where you're still seeing some weakness, if any? And then just lastly, you helpfully gave the growth in Jan and Feb, March, April for China. Do you -- can you give any color on the growth progression at the group level and particularly for the Products division. I'm most interested in how that trended, particularly in April, that would be helpful.

Okay. Look, I think we are reporting revenues this time around, I think it's too early to take a view on the potential upside to our margin guidance based on the strong channel recovery. I would also say that full year guidance, we had expected a strong China recovery, and this is something that we all need to keep in mind. As far as the business lines, it is really broad-based. And it was very, very pleasing to see the same pattern that you see at the global level, right? Assurance was a very strong performer in China, as you would expect. And then, of course, the Resources business is also doing very, very well, same trend on Trade. And the only thing I would say to give you a bit more color, the Softlines' performance was really good in the first 4 months of the year, which for us is really, really important. So we look forward to the start of the new season to really confirm and capitalize on these very, very strong trends. I mean, look, we gave as much color as we can in terms of disclosures, I wouldn't say much more than what I've said on the group business line performance. I mean, there was some significant difference between January and February and March, April, I would, of course, tell you, but we are in a good place of role, certainly very, very pleased to be broad-based.

And up next, we have Simona Sarli of Bank of America.

Yes. So the first one is a follow-up on China. If you could please remind us what is the split between domestic and exports and also of this strong growth momentum, if you could please comment again in -- on domestic, if that was driven mostly by that. Also, you have mentioned that prices are -- the price increases are accelerating. So if you could please comment on how much they are contributing to growth? And if there is also any substantial difference across the different segments?

Yes. Thanks. Look, the split, as you would recall from the Capital Market event, it's about 75% to 25%. I think both domestic and export market did extremely well in the first 4 months. If I had to give you some more nuances, domestic was slightly better, but it's really on the margin, right? It was excellent on both segments. And pricing remains, of course, very important for us, and it was about 1/3 of the revenue performance in January, April, and it was broad-based.

And up next, we're moving on to Will Kirkness of Societe Generale.

Three questions, please. Firstly, just wondered if there's any working day impact to call out particularly from a revenue perspective. Secondly, within products, just looking at Business Assurance. Now you've given us a bit more information. I guess we can kind of have a bit of a guess at the growth rate. So it looks like it might have been in terms of double digit, maybe more like 15%. I just wondered if you can comment at all if that's accurate? And then how much is kind of cross-selling and self-delivered and how much is sort of market growth for Business Assurance? And then lastly, just on Caleb Brett. I think maybe for a few years, pricing had been difficult there. I just wondered if you could talk about the volume and pricing dynamics now.

Okay, yes, thanks. Look, for us, pricing for Caleb Brett has never been difficult. So I don't know where this is coming from. We've always been able to take prices where we wanted to. We are a global market leader. We've got a tremendous reputation in quality and fantastic contracts. So pricing has never been an issue for us. So -- and we continue to see some good pricing performance there. I think in terms of working days, there is no real difference here. So I wouldn't worry too much about that. And I mean your point of Assurance, it's correct. I mean it's been a stellar performance when you look at the numbers. And it's broad-based geographically. We talked a lot about Assurance in the capital market events. You would recall the presentation from Calin where we talked about ISO, non-ISO technology risk-based quality assurance with our Inlight platform, people assurance and, of course, sustainability. And what you're seeing is the compounding effect of all the investments that we made in each of these segments. We are, of course, the ATIC leader in the industry and our clients understand that when it comes to risk-based quality assurance, Intertek is the partner of choice. So I think this is a fantastic performance from the team, I would say, again. And we are very pleased.

And our next question comes from Oscar Val of JPMorgan.

Yes, two questions. The first one, I think, just going back on consumer products. Over the last 6 months and at the Capital Markets Day, we've talked a lot about destocking in the U.S. retailers. Could you give us an update on what you're seeing on the ground in terms of demand for the next few months? Are we seeing some sort of green shoots? Or is the market still difficult on the consumer product side across all 3 divisions? And then -- all 3 end markets. And then the second question is, I guess, in the trade, you've talked a bit about Caleb Brett, but could you give us a sense of, are we back to normal in terms of demand or should we still see some recovery in terms of volumes around mobility or air travel?

Yes. Thanks, Oscar. I mean, on Softlines and Hardlines, right? The first thing I would say is if you look at the performance we had in the first 4 months of the year last year and you remember the beginning of 2022 was on the back of a huge surge of consumer demand for products in 2021, companies were rebuilding their supply chain, and it was really, really strong momentum everywhere. And we had, as you would recall, mid-single-digit Softlines performance and low single-digit Hardlines performance. With that in mind, I think the performance in the first 4 months of the year for both Softlines and Hardlines is, I would say, a commendable performance. And I've talked about China, which is a major contributor and it has been doing very well in the January, April period. But to your question about what's happening within the retail environment in North America and Europe, so to remind everyone what we saw and we called it in the October trading statement, we saw, of course, retailers being careful with their inventory as they were getting into H2. Why? Because they had stocked and developed a lot of new products to meet the demand I was talking about. And of course, with a discussion on interest rate and inflation, they were concerned about consumer-led recession in North America or here in Europe, which, as we know, has not happened. So hence, the careful approach to new products for the winter and the spring collection. And that's basically the slowdown in new product development that we saw in the fourth quarter of 2022 and to a certain extent in the first 4 months of the year. Now the reality, as you know, is that retailers have done a lot better than they thought. We are sensing confidence is back. And certainly, the pivot for us will be when we start producing the fall and winter collections, which will be from the second half. So look, I would say the mood music, if I were to use that metaphor, is better within the retailers than it was 6 months ago. Having said that, there are always a span of performance. Some brands are doing better than others. You would have seen Walmart announcement last week, which obviously demonstrates the power of retailers, which got a good value positioning in the market. As far as -- so hence, we are optimistic for the second half on consumer products. As far as Caleb Brett is concerned, look, if you look at the global supply and demand in terms of pure barrels of oils, in the fourth quarter, it was around 101, right? with supply matching demand very, very, very well. So that's -- speaking to the point I was making earlier, there is not a lot of capacity in the systems. Having said that, when you look at the data, the mobility, as I was trying to explain at the Capital Market Day, the mobility on the ground is back to where it was in '19 and slightly higher in the air, it's not situations. As you know, airlines have got several challenges. Number one, they've lost a lot of pilots and crew. I mean, they have divested quite a lot of airplanes. So -- and I think it's going to take some time for the airline capacity to go back to the pre-COVID-19. Interestingly, lot of airlines boost their cargo capacity to address the supply chain issues. So the cargo capacity from an airline standpoint is higher than it was pre-COVID-19. It's the commercial capacity that is lower. I don't know if you travel much, but try to book some flights and you will see the choices is much less than it used to be, and certainly, the prices are crazy. So that way it is, which means that from a pure volume standpoint, there is still more opportunities for us as far as Caleb Brett is concerned and as we talked about at the Capital Market events, we are very excited about, of course, the move towards sustainable fuels, which means higher testing protocol for us.

And we are now moving on to a question from Arthur Truslove from Citibank.

Three from me, if I may. First question, just on the margin headwinds arising from foreign exchange. I was just wondering whether you could explain just how that comes about, really. Second question, obviously, one reason for sort of margin changes last year was obviously very strong demand for labor and that being a margin pressure. Are the labor markets loosening now in terms of what you're seeing? And is it still becoming -- is it becoming incrementally easier to hold on to workers? And then third question, just on the transport tech side. I think at the Capital Markets Day, you were quite bullish on that within the Products division, but I think I might say it only grew low single digit. Are you expecting that to accelerate through the year? And sort of can you confirm that if it does, that that's an operational leverage opportunity as well?