Intertek Group PLC

LSE:ITRK

Earnings Call Transcript 2020-Q2

[Operator]

Hello, and welcome to the Intertek 2020 Half Year Results Call. My name is Jess, and I'll be your coordinator for today's event. [Operator Instructions].

I will now hand you over to your host, André Lacroix, to begin today's call. Thank you.

[André Lacroix, CEO & Director]

Good morning to you all, and thanks for joining us on our call. Ross McCluskey and Denis Moreau are both with me. There are essentially 5 key takeaways in our presentation today. First, our agility to manage an unprecedented pandemic. We've acted with speed, flexibility and innovation to support our clients resolve temporary disruptions in their supply chain.

Second, our disciplined performance management. We've delivered in H1 a resilient revenue, a robust margin and a strong cash flow. Our superior customer service. We have provided uninterrupted customer service to our clients. On balanced approach, we focused both on defensive and offensive initiatives, continuing to innovate and invest in attractive growth segments.

And finally, the growth opportunities ahead. The need for risk-based quality assurance is greater and clearer today for all stakeholders. Intertek has been championing Total Quality Assurance for more than 5 years, and we are strongly positioned for growth moving forward. Let's start with our performance highlights. As we all know, COVID-19 became a truly visible risk to the world on January 22 when the lockdown in Wuhan was put in place. Since then, we've seen a rapid progression of the virus across all countries, changing the way we live and work. For our customers, COVID-19 has created challenging and temporary disruptions in their supply chain.

The GDP growth we have seen in the last few decades was partially driven by the increase in mobility, building a highly connected global economy. Within a few weeks, COVID-19 has quickly restricted global mobility, impacting the world economy and the operations of our clients. Right from the start of the pandemic, being agile was paramount to all of us at Intertek. We've adapted fast, enabling us to respond decisively to an unprecedented situation.

And we've refocused the organization on 5 priorities: employee health and safety, customer service, margin management, cash and engagement. Every time, health and safety comes first. Our COVID-19 health and safety policy is very comprehensive, has been updated on a regular basis on our website, including last week, with our post lockdown health and safety policy. Our second priority is customer service. We are a passionate and customer-centric organization, providing our customers with the best possible service 24/7. What we do every day to make sure the supply chain of our clients operate safely in all countries is mission-critical. The lockdown measures have created huge operational challenges for our customers. Since day 1, we have increased the frequency of communication with our clients to make sure we understand their needs quickly, and maintaining our operations open 24/7 was vital for our customers.

I'm so proud of our employees. They've gone beyond the normal call of duty. And here are a few examples of what they've done. Across the world, from China, Hong Kong, India and Philippines to U.K., Turkey and Netherlands, our colleagues have produced hand sanitizers to keep customers and colleagues safe. At the very beginning of the pandemic where mask was in short supply, our colleagues in Indonesia have provided more than 200,000 face masks to countries that didn't have masks. Our food team in the U.K. worked 7-day week to collect, register and process samples for clients in a safe way, supporting our customers' tight deadlines.

And importantly, we have rapidly brought to market a range of innovation. We've ensured supply chain continuity with a remote video inspection and audit solution. On May 1, we launched Protek, the world's first health, safety and well-being assurance program for people, workplace and public places. In addition to these 2 major global innovations, we've brought to market a lot of new services. Priority testing service for lifesaving medical equipment like ventilators. We've increased our capacity for end-to-end testing and certifications for PPE equipment. We've increased capacity, and express services have been put in place for sanitizers and disinfectants. We will, of course, start supporting the pharma industry for vaccine support. And cybersecurity audit has been a huge risk and an opportunity for us given the homeworking conditions within corporations.

Our third overriding priority is margin management. Over the years, we have built a very disciplined approach, delivering consecutive margin improvement for 5 years in a row. Our strict controls on pricing and costs have remained in place. And we have taken a lot of initiatives to protect our margin. This includes a pause on all recruitment, a delay of 6 months to the 2020 annual salary increase, and of course, we've participated in several governance schemes. We believe that our clients are facing temporary disruptions in their operation. All the margin initiatives we've taken are keeping the ability for Intertek to service our clients fully when their operations are back to normal.

Our fourth priority is cash management. Disciplined cash collection remains in place. We've also conducted a CapEx review, reducing our planned expenditures this year by around 1/3. We are running a voluntary salary deferral schemes from March to October. And we are benefiting also from several local authority tax payment deferrals where available. Our fifth priority is employee engagement. With 20% of our people working remotely, it has never been more important to stay connected every day. Our world-class digital communication platform has made it possible for us to reach out frequently to everyone in the organization.

Turning now to our H1 performance. We have delivered a resilient revenue performance, a robust margin and a strong cash generation. That demonstrate the strength of our business model, the geographic and business line diversity, our disciplined approach to performance management, and importantly, our strongly cash-generative earnings model. Let's look at the numbers. In the first 6 months, our group revenue was £1.331 billion, down 7.8% at constant currency. Like-for-like revenue was down 8% at constant currency. Operating profit was £168.2 million, down 32.2% at constant currency. Operating margin was robust at 12.6%, down 460 basis points year-on-year at constant currency.

Free cash flow was strong at £141.9 million, up year-on-year by 35.7%. Financial net debt was £650 million, equivalent to a net debt/EBITDA ratio of 1.1. And importantly, we have announced an interim dividend of 32.4p, in line with prior year, reflecting the strength of our cash generation, the strength of our earnings models and the confidence we have in the future growth opportunities for the group. Let's discuss now performance by division. Our high-quality Products portfolio with industry-leading positions delivered a like-for-like revenue performance of minus 8.7% at constant currency; a margin of 16.9%, down 470 basis points year-on-year.

Our Trade business benefited from the defensive strength of agri business and delivered a like-for-like revenue performance of minus 10.2% and a margin of 6.8%, down 670 basis points versus last year. Our Resource business delivered a commendable performance with a like-for-like revenue of minus 2.1% and a margin of 5.3%, down 90 basis point at constant currency. As you know, we entered 2020 with a strong trading momentum and we had budgeted our cost base, expecting to deliver good organic growth in 2020. We, of course, have taken a disciplined approach to cost management, using our proven disciplined management performance processes and tool.

However, we believe that our clients are facing a temporary disruption in their supply chains. Our cost reduction activities have been very targeted, keeping our ATIC industry-leading capability intact to make sure we can support our clients when they fully resume their operations and they start increasing their quality assurance activities. Our cost base in H1 was 6% below our budgeted costs for 2020 and 2.6% below last year. Cash management remained a high priority for all of us, and we've continued to make progress step by step. Cash generated from operation was £261 million, £3 million below last year. Our adjusted free cash flow was £142 million, up 35.7%. This excellent cash generation was driven by a reduction of £14.5 million in net CapEx and circa £88 million in working capital.

As I said before, we ended up -- H1 with a strong balance sheet, a financial net debt of £650 million and a net debt-to-EBITDA ratio of 1.1. Before I hand over to Ross, I just want to emphasize the speed at which the global pandemic has unfolded, the broad-based nature of the lockdown initiatives in every country, the lack of visibility on when the lockdown restrictions will be fully lifted around the world and the complexity faced by our clients to resume their operations fully with well-functioning supply chains. That makes it difficult to give any guidance and quantify the full impact of COVID-19 for 2020. Having said that, we expect the second half of the year to be better than the first half.

[Ross McCluskey, Group CFO & Executive Director]

Thank you, André, and good morning, everybody. In summary, the group has delivered a resilient revenue performance in H1 with a like-for-like revenue change of minus 8% at constant rates. Operating costs were well controlled, being down 2.7% at constant rates, resulting in operating profit of £168.2 million. Operating margin was 12.6%, being down 460 bps at constant currency.

The FX impact on revenue was neutral for the half year despite the volatility of sterling. FX still was slightly negative, impacting on profit with a 20 basis points difference between actual and constant rate operating profit change year-on-year. Overall, free diluted EPS declined 35.1p to 63.1p, being down 35.7% at actual rates and 35.5% at constant rate.

The group recorded a robust margin in the first half with a 470 basis point reduction in operating margin to 12.6%. Products delivered a robust operating profit margin of 16.9%, contributing to just over half of the net movement in group margin in the period. The reduction in Trade margin contributed 150 basis points to the year-on-year change while Resources contributed 10 basis points. Divisional mix had a negative 20 bps contribution given the relative performance in Resources. And finally, FX had a modest negative 10 bps impact on the group margin. Our disciplined focus on cash management continued throughout the period, and this enabled the group to deliver a strong cash result in the first 6 months with adjusted free cash flow of £141.9 million, being up £37.3 million or 35.7% despite the year-on-year reduction in operating profit.

Our continued focus on working capital was evident in the first half with a reduction both versus prior year and December 2019. And this was driven by strong cash collections in the period as well as our cash preservation activities, including the impact of government-facilitated cash tax payment delays. We invested £31.2 million in net CapEx in the period, being down £14.5 million versus prior year.

And as André said, we finished the first half with financial net debt of £650.1 million, which is down 21% year-on-year. Despite the final dividend payment of £150 million in June, our net debt is up just £21 million versus December '19. This includes FX, which had a negative impact of £19 million in the first half, given the depreciation of sterling versus the dollar since December 2019. The group's liquidity position is well balanced and has been further enhanced by recent actions. As we highlighted at the full year '19 results, we've refinanced our RCF facility in January of this year, replacing the existing $800 million facility with a new $850 million RCF with an initial 5-year tenor. And in Q2, we have secured a new fully committed $200 million U.S. private placement split into 2 tranches with $120 million expiring in 3 years and $80 million in 5 years. And this facility will be drawn down in December 2020. We saw excellent demand for this issuance, enabling us to secure a very attractive coupon.

In terms of maturity, we have $150 million of USPP expiring in December 2020 and just $15 million in 2021. So the group is in a strong position from a liquidity perspective, and we had undrawn the committed headroom of £324 million at the end of June, and that is excluding the new $200 million USPP, which I said will be drawn down in December. Turning to financial guidance. We have adjusted our net finance cost outlook for the full year to be £35 million to £38 million, reflecting a strong cash performance in the first half and also lower finance costs in H1. We continue to expect our full year effective tax rate to be in the 25.5% to 26% range. We expect minority interest to be £19 million to £21 million and CapEx to be in the £90 million to £100 million range.

We are adjusting our financial net debt guidance to be in the £625 million to £675 million range, reflecting the group's strong cash generation in the first half. This guidance is, of course, before any acquisitions or change in prevailing FX rates. More generally, on FX, we continue to expect FX to have a broadly neutral impact on the group's full year P&L results.

[André Lacroix, CEO & Director]

Thank you, Ross. And I'd like now to give you an update on strategy. As I said earlier, what we do is mission-critical to our clients to make sure that their supply chains operate fully and safely 24/7. As you know, we offer testing, inspection and certification in the critical areas of our clients' operations, and our assurance solutions provide end-to-end assessment of their quality and safety process. That's what we call ATIC or Total Quality Assurance.

The supply chain of our clients has been disrupted significantly on a temporary basis. It's much easier to close a factory than to restart a production system and the same applies to a restaurant, an airline, a hotel and any retail operations. Given our end-to-end ATIC capability, we are well positioned to help our clients resume their operations and benefit from the COVID-19 recovery. We work with more than 300,000 clients around the world, and we have deep and trusted relationships with them. These relationships are based on our superior customer service and our strong technical expertise in all the sectors we operate in. We truly value these long-lasting relationships, and that's why we have stayed fully open and operational during the pandemic. This excellent B2B relationship will play a major role as we help our clients rebuild their operations capacity.

Globally across all sectors, with our differentiated Total Quality Assurance Value Proposition, we support the existing and emerging quality assurance needs of our customers in each area of their operations. And there is no question that the COVID-19 pandemic has magnified some of the structural risks in the operations of our clients. The lack of end-to-end systemic QA operating system has been a wake-up call for a lot of boards and management teams, and that makes our Total Quality Assurance Value Proposition even more relevant post COVID-19. All the conversations I had with our clients have demonstrated that they have to address risks moving forward that they didn't address before the pandemic. Everyone has a new appreciation for the health and safety and well-being of employees and customers. COVID-19 has identified the need for our clients to rethink and improve the resilience in their supply chain. Supply chain diversification has become much more important. Getting better and faster intelligence inside their supply chain is now a huge priority for our clients. And as I said earlier, working remotely has identified serious cybersecurity risk for our corporate clients.

We've been focused both on defensive and offensive initiatives during the pandemic. True to our ever-better culture, we have reinvented ourselves on how to manage the company, and importantly, how to service our clients better. Protek is the world's first end-to-end health, safety and well-being assurance program for people, workplace and public spaces offering audit, training, inspection, verification and certification solutions. The reactions of our clients around the world to Protek has been very strong. Protek is very much in line with what the world needs right now. For example, the CEO of Club Med posted a personal welcome back video message on social media reassuring his guests about the health and safety measures, which have been implemented with Intertek Protek solutions.

We've introduced Intertek Inlight 2.0, adding enhanced features to our market-leading supply intelligence and compliance solution. We've launched the Alchemy Playbook app, making it easy for our clients to optimize their scheduling after training. In our Trade business, Inview is our unique remote auditing and inspection solution, connecting clients real-time with our experts through a live video stream.

Our Caleb Brett business has joined VAKT, an innovative platform to create a secure trusted ecosystems powered by blockchain. In our Resource business, last week, we've launched CarbonClear, the world's first assurance program that certifies the upstream carbon intensity per barrel of oil.

2020 will also be remembered as the year when we were forced to rethink how we operate to make the world a safer place. We expect the theme of Build Back Ever Better to guide the actions of governments, companies, institutions, shareholders, regulators, consumers in 3 areas. Management Board and shareholders will want to see their companies operate with a safer supply chain. Consumers, governments, corporations will want to offer better personal safety. And the way the world will operate and invest will build a lower carbon society.

Build Back Ever Better will make the attractiveness of the £250 billion total quality assurance market greater. We see strong growth opportunities with existing and new customers. Getting access to the quality assurance work corporations currently do in-house is, of course, an attractive opportunity. The global operations of corporations have become much more complex, and corporations are increasing their focus on systemic operational risks. That untapped market potential is really exciting. This is all about what companies do not do today and will start doing to improve their operations.

The growth outlook for quality assurance in the medium to long term is GDP+ organic revenue growth in real terms. We expect our Product division that represents 81% of the group earnings to grow ahead of global GDP, benefiting from brand and SKU expansion; faster innovation cycle; increased demand for smart products; and increased focus of corporations on safety, quality and sustainability. We expect our Trade division that represents 12% of the group's earnings to grow at a rate broadly similar to GDP through the cycle, benefiting from the development of regional and global trade and an increased focus on traceability and sustainability.

The growth prospects in our Resource division, which represents 7% of the group's earnings, are linked to the growth drivers in the energy sector. Investment in exploration and production for essential resources like oil and minerals will grow to meet the demand of the growing population. Our Resource business will also benefit from the portfolio diversification of our clients as they now focus on renewables and invest in sustainability and digital data management. We expect our Corporate Assurance activities, which are industry-agnostic, to get stronger and stronger given the increased importance of risk-based quality assurance; the increased regulation; the importance of health, safety and well-being; the growth in people assurance; and the investment in supply intelligence, sustainability and cybersecurity.

Intertek has been an industry leader for more than 130 years and we are well positioned to seize these growth opportunities, capitalizing on our strengths: our Total Quality Assurance superior customer service, our powerful portfolio, our high-quality compounder earnings models, our passionate customer-centric organization, and of course, our disciplined performance management. Moving forward, the group will deliver sustainable value creation for all stakeholders, building on a strong track record. I'm not sure you're aware of it, but since its IPO in 2002, Intertek has ranked #1 in the FTSE 100 in annual dividend growth with a 17% CAGR between 2003 and 2019.

Let's now discuss our divisional performance. In H1, our Product business delivered a resilient revenue performance and a robust margin, benefiting from its defensive strengths. Our Product business delivered a revenue performance of £800 million, down 8.4% at constant currency, and a like-for-like revenue of minus 8.7%. Operating profit was £135.5 million, down 28.3% at constant currency. And our margin was 16.9%, down 470 basis points compared to last year. Our Softlines business saw a double-digit decline in like for AC revenue due to supply chain disruption in China and India and the temporary closures of nonfood retailers in Western Europe and North America. This was partially offset by continuous growth in e-commerce and increased demand for PPE testing.

Our Hardlines business saw a double-digit negative like-for-like revenue growth -- revenue performance due to the supply chain disruption in China and the temporary closure of nonfood retailers in Western Europe and North America, which was partially offset by strong growth in e-commerce, growing demand for smart toys and increased demand for testing of PPE equipment. We've delivered a low single-digit like-for-like performance in our Electrical & Connected World business as the negative impact of the supply chain disruptions due to lockdown measures around the world has been partially offset by higher ATIC demand in energy efficiency, medical device, 5G and cybersecurity.

Our Business Assurance business delivered a high single-digit negative like-for-like. Temporary factory closures in several of our markets has triggered a delay of the audit later in the year, and this was partially offset by the attractive growth in Supply Chain Assurance, the continuous focus on ethical supply, the increased needs of corporations on sustainability, the strong growth in our People Assurance business and the launch of remote audit solution. Our Building & Construction business delivered stable like-for-like revenue. In the first quarter, we benefited in North America from the growing demand for more environmental-friendly and high-quality buildings as well as a strong investment in large infrastructure project. We saw a temporary reduction of building construction activities in Q2 due to lockdown.

Our Transportation Technology business delivered a high single-digit like-for-like revenue decline. The lower demand for testing in April, May and June due to the lockdown activities in Western Europe and North America was partially offset by the continuous investment of our clients in new powertrains to lower CO2 and NOx emissions and increased fuel efficiency. Our Food business delivered a mid-single-digit like-for-like decline. The supply chain disruptions across several markets impacted the demand for testing of new products and that was partially offset by the sustained demand for food safety testing activities and the increased demand for hygiene and safety audits.

We saw double-digit like-for-like negative revenue in our Chemical & Pharma business. The lockdown measures have reduced the demand for regulatory assurance and chemical testing in our operations in North America and Western Europe. Given the importance of COVID-19, the pharma industry has reprioritized their investments and delayed several long-term projects. We are, of course, in contact with our clients to support their development activities of a COVID-19 vaccine. Our Trade business benefited from the defensive strength of our agri business. We delivered a revenue of £294.7 million with a like-for-like revenue of minus 10.2% at constant currency, and operating profit of £20.1 million and an operating margin of 6.8%, down 670 basis points compared to last year.

Our Caleb Brett business delivered a high single-digit negative like-for-like revenue due to the lower level of demand for oil and gas. As you know, Caleb Brett is the global leader in crude oil and refined product trading markets. Our Government & Trading Services business provides certification services to governments in the Middle East and Africa to facilitate the imports of good in their markets based on acceptable quality and safety standards. We saw a double-digit negative like-for-like revenue decline due to the disruption of manufacturing in China in February and March and the lockdown activities in all countries impacting cross-border trade.

Our AgriWorld business delivered a stable like-for-like revenue performance. We provide inspection activities globally, and we remained open 24/7 during the pandemic to make sure that the global food supply chain of our clients is operating safely and fully. Our Resource business delivered a commendable performance in revenue and margin. We delivered a revenue performance of £235.6 million with a like-for-like revenue of minus 2.1% at constant currency, an operating profit of £12.6 million, down year-on-year by 15.4% and a margin of 5.3%, down year-on-year by 90 basis points.

We delivered good like-for-like growth in our CapEx Inspection business, benefiting from the increased investment of our clients in exploration and production and from the win of several new contracts. We saw double-digit negative like-for-like revenue in OpEx Maintenance Services as the lockdown initiatives impacted the demand for inspection services in the months of March, April, May and June.

We've delivered robust revenue growth in our Minerals business as we saw increased demand for testing, inspection activities. In conclusion, Intertek provides mission-critical ATIC solutions to make the world ever better, ever safer. The growth opportunities ahead are exciting, and we are well placed to seize these. We operate in an attractive £250 billion ATIC market with increased needs for quality assurance. We have scale positions in our verticals and provide a superior customer service to our clients. Our innovative culture and operational disciplines are making Intertek ever better, ever stronger every day.

And finally, I would like to thank my colleagues around the world for all their commitment, passion and energy in the last 6 months. It has been a very different first half of 2020 compared to what we expected. Some of their actions were truly heroic. And I want to recognize one team, our Bangladesh team. Our team in Dhaka had anticipated that hospitals in the country will get overwhelmed. Our team had started to stock oxygen cylinders in our labs to provide support to employees and families in case someone with respiratory distress could not get admitted in a hospital. Oxygen cylinders have been delivered to homes of many colleagues and family members during these times, an incredible generous community activity from our team, true to our value of making the world ever better, ever safer.

Thanks for your attention. I will now take any question you might have.

[Operator]

[Operator Instructions]. So the first question comes from the line of Alexander Mees from JPMorgan.

[Alexander Mees, JPMorgan Chase & Co.]

Three questions, please. Firstly, I believe the implied like-for-like decline was 14% in May and June. I wonder if you're able to comment on the shape of that like-for-like decline over the period. I suppose, specifically, the exit rate for June perhaps normalizing [indiscernible] difference in trading days.

Secondly, André, you mentioned that the business has participated in several government schemes. I wonder if you could quantify the support that was received from furloughing and also the working capital benefit from cash tax deferrals.

And finally, more broadly, I wonder, André, if you believe that Intertek now has stronger growth opportunities as a result of the risks that have been exposed by COVID-19 than perhaps it did this time last year.

[André Lacroix, CEO & Director]

Thanks, Alex. Look, I'm going to start with the last question, which, in my view, is the most important, which is the future of Intertek. Look, we've been championing quality assurance, as you know, for several years believing that testing, inspection, certification is important, is necessary, but it's not sufficient for corporations to comprehend, mitigate their risks end-to-end. And what that, obviously, unfortunate goal of pandemic has demonstrated that companies were not ready with the right health and safety protocol for their employees around the world, that companies were not ready with diversification of the supply chain in case one country will get problems to supply their goods or raw materials. They were not ready with some of the, frankly speaking, crisis protocols in some of their operations. And they didn't have, obviously, the information in their supply chain. And then the remote working has demonstrated some major gaps in terms of cybersecurity.

So I think we believe that what we saw a few years ago is more relevant today than it has ever been. I think managements and boards are realizing that there were a lot of risks in their supply chains that were not identified, and we've talked about it many of you over the last few years. Corporations today do more in terms of risk management that they ever did. And boards today around the world spend more time on risk. That's true. But I can assure you that they don't spend enough time on the complexity of their supply operations. And it cannot be done in a 1-hour risk reduction review. This is very, very complex. And I think these huge temporary disruptions of global supply chains operations around the world has identified these risks that we've been talking about and we are ready to seize, and that's why we are extremely well positioned moving forward.

And yes, the case for risk-based quality assurance is greater today than it was 6 months ago and that makes me very confident that given all the hard work that we've done in terms of repositioning our value proposition 5 years ago with ATIC, making sure that our teams are equipped with the toolbox, the solutions to sell, understand how to pitch these solutions to our clients, is a huge plus that we have today. And there is no conversation that I'm having with our clients that doesn't show that they need more support in terms of end-to-end risks. And that's why we've launched some of the innovations, and there are more innovations to come.

As far as your specific questions. Look, on the furlough schemes, as you know, Intertek is very strong in Asia, very strong in the Americas. Europe is not a very strong operation for us. It's important, but -- so the benefit of the furlough schemes for us have been obviously welcome, but they have not been very, very material.

The other thing I would say and it's a point I made in the script a couple of times is that we believe it's a temporary supply chain disruption. We operate a highly skilled workforce with PhDs, scientists, auditors, engineers. What's really important for us, recognizing it's a temporary supply chain disruption, is that we do not lose this fabulous capability we have to service our clients.

So what we have done in terms of cost has been very, very, very soft because what matters first is the health and safety of our people and the customer service of our clients. And yes, we've taken advantage of the furlough activities, but it's been very, very reasonable.

As far as the government scheme support in terms of cash, yes, that has been slightly more meaningful and about 1/3 of the impact in working capital is -- in H1 is driven by that.

As far as your first question on like-for-like, as you know, typically, we do not give data on either May or June in this period. But I understand it's a very difficult time for all you to model the company and we're not giving any guidance, so we're not making it easier for you. So what I will say is, yes, June was better than May and that's welcome news.

[Operator]

The next question comes from the line of Suhasini Varanasi from Goldman Sachs.

[Suhasini Varanasi, Goldman Sachs Group]

Just a few from me, please. You mentioned that June is -- had been better than May. Was it still down double digits in June or had it improved to high single-digit decline? Second question is if we think about the drop-through rate to EBIT, it was 70% in the first half. And the current consensus implies something like a 40% drop-through to EBIT in the second half of the year. What gives you a bit of comfort that the second half can be better? Is it just the improvement in the declines? Are there more cost savings that can help you improve the drop-through to EBIT?

[André Lacroix, CEO & Director]

Okay. Let me just start with the second question on drop-through to put things in context. If you look at the track record of the company over the last 5 years, as you know, we've made consecutive progress year-on-year on margin till obviously the end of 2019. If you look at H1 '17, '18 and '19, you will have seen the very strong progress we have done. So one thing that you have to bear in mind when you look at the data for the full year is, obviously, we had made stronger progress in H1 than H2 certainly in '19. So that's one point that I would say. The other thing, too, is -- and this is why it's very complicated for you without having the company's data in details, is there is obviously a mix effect by division and by vertical.

So our view is that the second half should be better. We are not giving any guidance, as you know. We are overall comfortable with the general consensus out there, and we'll take it a step at a time. And we continue to, obviously, make progress. And as you know, when you are a high margin and you're very disciplined in terms of cost and margin management, every 100 bps of revenue improvement can make a big difference. So that's what I would say. But as you know, we are not giving any guidance. Hopefully, it helps. As far as June is concerned, the June organic growth rate was not double digit.

[Operator]

The next question comes from the line of Edward Stanley from Morgan Stanley.

[Edward Stanley, Morgan Stanley]

Could you give us -- I've got 3, please. Could you give us a feel of why you think the drop-through in the second half might improve from here? What gives you confidence in that? The second point, conditions in Electrical seemed to have been the notable deterioration, I'd say, between Q1 and Q2. Is that macro-led or is there more of pull forward of testing volumes in Q1 that's now dropped off in Q2? I'm just curious what's going on there.

And the salary deferral scheme sounds like it could be potentially a meaningful impact on margins. Can you give us an idea of what proportion of staff have taken that on and whether that benefit has already come through in H1 margins or whether we should expect that -- more of that benefit to come through in the second half?

[André Lacroix, CEO & Director]

Yes. Thanks. I mean the salary deferral point is not a cost initiative. It's a cash initiative. We've talked about it in the May trading statement, and we had a significant uptake. So it's going to be only meaningful for the cash. Look, as far as Electrical is concerned, I mean this is not complicated. As I said in the presentation, it's -- in H1, you had 4 months of supply chain disruption due to the lockdown activities in the U.S. and Europe compared to 2 months in the May trading statement. So that's as simple as that. It's just 2 additional months. But the business is in good shape. Look, as far as your question on drop-through, I tried to answer that question in the previous question, so I'm not sure what else you want me to say.

[Operator]

The next question comes from the line of Rory McKenzie from UBS.

[Rory McKenzie, UBS]

It's Roy here. Two, please. Firstly, André, appreciate your view on this being a temporary disruption for many of your clients and obviously new opportunities opening through this crisis. But where -- or have you seen any evidence yet that some customers are going to be kind of structurally impacted or reduced activities from this? Obviously, we've seen bankruptcies and reductions in retail or foodservice industries. I was just interested in kind of your thoughts there.

And also, obviously, I note that your restructuring charge was actually down year-over-year in H1, which, of course, is in line with what you're saying. Just wondering any thoughts about what we could expect in H2.

[André Lacroix, CEO & Director]

Yes. Look, I mean on the restructuring program, we are in the last year of the 5-year portfolio review we started a few years ago and we are working our way through. We typically do not give guidance on what we're going to do in the second half. As I said, we are very, very careful of keeping our capability intact because it's a temporary disruption as far as the supply chain of our clients.

As far as the structural issues post COVID-19 from a negative stand, which is your question, look, it's a bit early to say, but clearly, clearly, some sectors in the world economy are more impacted than others. So if you look at, of course, the airline industry, which we are not doing a lot of work in, is a big question mark, right? Is the capacity that we have today going to be there tomorrow? If you look at the hotel and travel industry, also a question mark. Of course, all of these will change if there is a vaccine very soon and people have got the confidence to start all over again.

So look, we're going to have to wait to see some of the restructuring activities in these sectors. Obviously, you see the news like I do. A lot of corporations are using this pandemic to basically rebase their cost base, which we are not doing because we believe it's a temporary disruption for all business model.

I think the sector that has been impacted pre COVID-19 and during COVID-19 is the general retail, and I'm not talking about food retail. I'm talking about the non-food retail with the competition of e-commerce, and I think here, you're going to see some continuing restructuring activities in terms of closing nonprofitable stores, which obviously is in the news every single day, and rebalance their management priorities to e-commerce, which is obviously a very strong growth opportunity.

So I think that's what we expect in terms of structural challenge, but we're going to have to take it a step at a time.

[Rory McKenzie, UBS]

Okay. And then just another question on innovation. Obviously, you've been talking about efforts to digitalize or modernize services within testing. And I guess client adoption has always been quite low historically, particularly things like remote inspection. Can you talk about how much maybe some of these areas have grown through the crisis and whether you think that would stick as a trend? And what the implications could be for your own profitability or the range of services you can get into clients?

[André Lacroix, CEO & Director]

Look, there is no question that digitalization has been happening for several years. There are many initiatives that we've been pursuing, i2Q, which is our or remote inspection tool, which is providing digital end-to-end data to our clients. In Resources sector, PipeAware, RiskAware, which is helping our clients to digitalize their supply chain intelligence.

The remote audit and inspection solutions, we had developed that before COVID-19 for our GTS operations to basically provide an additional service to the clients we work with in terms of faster turnaround time when they need it. It's not a cost initiative, it's a customer service initiative. And it is obviously very enhanced customer service for our clients because you get speed and you get different type of expertise. So if I were to basically visualize it for you, you can have remote inspections happening in a factory of Seoul and then you can have multiple experts from Intertek around the world helping a client resolve an issue. And that's growing, no question about it. And that's growing with GTS, that's growing with our, obviously, BA activities. I'm not going to give any numbers because it will be too sensitive from a competitive standpoint. But yes, this is a great initiative. And this technology solution that we have put in place is really good to a point that, last week, I was on the top-to-top call with one of our major clients in the U.S., talking about one of the most successful retailers there. And they said, André, this is so impressive. Would you license your tool to some of our internal users? So we have a really, really good tool.

And -- no question. The COVID-19 period will change client's perspective on what can we do remotely. I mean, just to give an example of meeting clients. It's easier to meet clients today than it's ever been because of conference calls remotely.

[Operator]

[Operator Instructions]. And the next question comes from the line of Rajesh Kumar from HSBC.

[Rajesh Kumar, HSBC]

Just in terms of looking ahead, what are the incremental investments you need to do to be prepared for a postpandemic world in terms of capabilities, in terms of the services you would like to offer to your clients over the next 2 to 3 years? That was the first question.

The second one is -- I'm sorry, I'm going to ask about the drop-through margin. But when you look at your cost base in the first half and you indicated that you've not cut it aggressively because you think it is a temporary disruption, do you think you've got the capacity to get back to growth? So in a recovery, would you expect a similar 70% drop-through margin on the upside as well?

And finally, in terms of your receivables, the working capital work has been quite impressive. When you look at the receivables risk and you look at your SME exposure across the globe, what proportion of your clients you think -- normally -- if your churn is normally 3% or 4% because of bankruptcies of your customer, is there a risk that churn number goes up in the next 12 to 18 months?

[André Lacroix, CEO & Director]

Thanks for your question. And I think that the first question is absolutely right, right? Are you expected to invest? And the answer is, of course, yes. I mean, typically, we expect to invest 4% to 5% in CapEx to stimulate organic growth. I think it's a good proxy for your model. We've been at the low end of 4% over the last few years. Obviously, this year is going to be lower. But yes, I mean we are ready to invest. And this is super important.

Look, on the drop-through margin, as I said at the beginning of the call to the first question on drop-through, look, we're not giving any guidance for the second half. If you look at your model and you see the trajectory of the group over the last few years, continuous margin improvement year by year, that I think should say several things: that we know how to drive margin when there is revenue growth; that we have made continuous progress on volume, price, mix, management costs and productivity, which means that when we enter 2021, there was very little slack in terms of taking cost out. And that is an important point when you look at what we did in the first half. That's why we say in the first half. And we believe we have the right capability to operate in this market. We are putting a pause on recruitment because, obviously, we don't need additional heads. We are solely focused on cost control activities on the pure variable cost because we want to be there for our clients when they need us.

And yes, yes, we do have the capability today to do more than what we've done in the first half because, arithmetically and mathematically, our volume is down compared to where it was in '19. We've kept our head count at the same level ex attrition. And therefore, we have some productivity improvement, which answers the question differently on what to expect in the second half with revenue progression.

And yes, we have decided to temporarily lower our productivity because we are a highly skilled workforce in company, with PhDs, scientists, engineers and we don't want to lose this winning capability because our clients we know need this.

And as far as your question on bad debt. Look, yes, to the question we just had before on some of the structural issues in the markets, there are some companies in difficulties. We are very disciplined in terms of cost management, receivable management. And the work we've done on receivables over the years compounds, and we are very careful. So we will continue to be very disciplined and careful in terms of receivable management because, as you rightly said, some of the companies out there are not doing well.

But one thing I would also add to your very important question is what we do for our clients is mission-critical. And it's like you and I, we might want to sell a lot of things in our life. But would we save on our medical coverage policy or insurance policy? Probably not. And that's why our clients know that what we do is super important and they know they need to pay us. Thank you.

[Operator]

There are no further questions in the queue. So I'll hand back over to your host for any closing remarks.

[André Lacroix, CEO & Director]

Thank you very much, everyone, for being with us today. I know it's a super busy week and super busy day, so we really appreciate your time. And if you have any questions, we are obviously available, as usual, and Denis is on standby. Thank you very much, everyone.

[Operator]

Thank you for joining today's call. You may now disconnect your lines.