Intertek Group PLC

LSE:ITRK

Earnings Call Transcript 2022-Q4

[Andre Lacroix, CEO and Director]

Good morning to you all, and thanks for joining us on our call. I have with me Jonathan Timmis, our CFO; and Denis Moreau, our VP of Investor Relations. I'd like to start our call today recognizing all of my colleagues at Intertek for having delivered a robust performance in 2022.

2022 marks another year of consistent delivery with revenue and EPS in line with expectations, which demonstrates the high quality of our growth earnings model. There is no question that 2022 was more challenging than expected. The global economy was impacted by the compounding effect of 3 consecutive shocks in the last 3 years: the global pandemic, a major disruption of the world's supply chain and the return of inflation.

There are 5 takeaways in our presentation today. First, we saw a higher demand for ATIC solutions with mid-single digit like-for-like revenue growth at constant rate. Second, our full margin was robust at 16.3% with a strong H2. Third, with even double-digit EPS growth at actual rate, both our cash flow from operations was strong and grew by £26 million. And finally, we delivered an excellent ROIC of 18% with year-on-year progress at constant rate. Let's start with our performance highlights.

We've delivered indeed a robust performance with group revenues up 8% at constant rate and nearly 15% at actual rates. Like-for-like revenue growth of 4.9% at constant rate, operating profit up 4% at constant rate and nearly 10% at actual rates, robust operating margin of 16.3%. EPS growth of 4.6% at constant rate and 10.6% at actual rates progressed on ROIC at constant rate and unchanged full year dividend at 105.8p. Let's now discuss our like-for-like revenue performance.

Globally, we saw an acceleration of our momentum in trade and resources outside of China. Our like-for-like revenue growth was 6.5%. Our Products division delivered a good like-for-like revenue growth of 3.9%, notwithstanding the impact of COVID-19 in Q2 and Q4 in China, the supply chain disruptions in the automotive industry and the slowdown in new product development in Softline and Hardlines in Q4.

Our Trade division delivered a like-for-like revenue growth of 5.6% as we benefited from the increased demand for energy and Agri products. Our Resource division reported like-for-like revenue growth of 7.9%, driven by higher CapEx investments from our energy clients and by the higher demand in Minerals.

Before we discuss margin and cash, a few remarks on our November, December like-for-like performance, which was slightly below our expectations. We knew that the November, December like-for-like revenue growth would be impacted by 1 less working day and the expected slowdown in Softlines and Hardlines, but our performance in the last 2 months of the year was impacted by a high number of COVID cases in China.

Adjusted for the £5 million revenue loss in China due to COVID, our like-for-like revenue growth in November, December was mid-single digit. Indeed, after the relaxation of the COVID-19 restriction, the level of COVID-related sickness in our China business was high in November and December but was back to normal in the first week of January.

You will have noted that we have shown as a reference in November, December like-for-like for 2021, which was demanding in terms of comparable for products and trade. We have delivered a robust margin of 16.3%, which was down as expected year-on-year by 70 basis points at constant rates due to the COVID issue in China in Q2 and Q4, higher-than-expected inflation in many of our markets and the fact that margins benefited from higher than usual government subsidies in 2021.

We are pleased with the strong margin progression we saw in trade and resources. Margin accretive revenue growth is central to the way we did evaluate Intertek in each part of our portfolio. And moving forward, we are targeting margin progression. We pursue a portfolio strategy that focuses on quality growth initiatives based on the right volume price and mix benefits.

Our superiority customer service gives us a strong pricing power. And following the good pricing performance we saw through 2022, we have taken additional pricing that will be beneficial in 2023.

Assurance, which now represents 20% of our revenues, is gross and margin accretive with excellent growth opportunities. We pursue a disciplined capital allocation approach, and our performance management discipline is based on well embedded, continuous improvement processes. As part of this, we are announcing today a cost restructuring program that targets productivity opportunities based on operational streamlining and technology upgrade initiatives to deliver £6 million to £7 million cost reduction in 2023 with an annual saving of £15 million when the program is complete.

We've continued to make progress on cash management in 2022, Our cash from operation of £722 million was up year-on-year by £26 million, which enable us to invest in growth while still operating with very strong balance sheet. We pursue a disciplined approach to investment in growth. Our M&A strategy targets investments in attractive growth and margin sectors to augment our organic growth.

The 3 recent acquisitions we made, SAI, GLA and CA, are performing well and added £153 million of margin accretive revenue in 2022. Our pipeline of potential acquisitions is healthy. Investments in innovation are essential to deliver superior ATIC customer service. Our teams are focused on scaling up our winning innovations while working on a next generation of industry-leading solutions.

We have operationalized these investments successfully over the years, as evidenced by our excellent ROIC. Sustainability is an exciting growth drivers, which we'll discuss later. Internally, we are focused on sustainability excellence in every operation. We are targeting net zero emission by 2050, but sustainability is much more than at 0. We also focus on customer satisfaction, diversity, inclusion, health and safety, compliance and engagement.

I will now hand over to Jonathan to discuss our full year results in detail.

[Jonathan Timmis, CFO and Executive Director]

Thank you, Andre. All the comments I will make will be on the adjusted results. In summary, in 2022, the group delivered a robust financial performance. Total revenue growth was 8.2% at constant currency and 14.6% at actual rates as beneficial movements in FX rates impacted our revenues by 640 basis points driven by the weakening of sterling. Like-for-like revenue grew at 4.9% at constant rates.

Operating profit at constant rates was up 3.8% to £520 million, delivering a margin of 16.3%, down year-on-year by 70 basis points. Diluted earnings per share were 211.1p, growth of 4.6% at constant rates and 10.6% at actual rates.

Turning to cash flow. Adjusted cash flow from operations was £722 million, up £26 million year-on-year. Adjusted free cash flow was £386 million, down year-on-year by £16 million. We invested £117 million in CapEx, £18 million above prior year and finance costs were £10 million higher. We finished 2022 with financial net debt of £738 million, in line with prior year, which represents a financial net debt to adjusted EBITDA ratio of 1.1x.

Now turning to our financial guidance for 2023. We expect net finance costs to be in the range of £40 million to £45 million. We expect our effective tax rate to be between 26.5% and 27.5%, our minority interest to be between £21.5 million to £22.5 million, and CapEx investments to be in the range of £115 million to £125 million. Net debt guidance for M&A is £630 million to £680 million. I will now hand back to Andre.

[Andre Lacroix, CEO and Director]

Thank you, Jonathan, and let's discuss the performance of our business lines, starting with Products. All comments that we make in the section at constant currency.

Our Products division delivered a good performance on [Indiscernible]. Notwithstanding the impact of COVID-19 in Q2 and Q4 in China, the supply chain disruptions in the automotive industry and the slowdown in new product development in Softline and Hardlines in Q4.

Outside of China, our like-for-like revenue growth was 5.5%. Our like-for-like performance was driven by double-digit like-for-like in Business Assurance, mid-single digit like-for-like in Softlines, Building & Construction, low single-digit like-for-like in Hardlines, technical [Indiscernible] and high single-digit negative like-for-like in Transportation Technology.

Operating profit of £427 million was stable year-on-year and as a result of 21.1% decline, 180 bps year-on-year, reflecting the COVID-19 disruption in China and the inflationary pressure in North America, Europe and Australia.

In 2023, we expect our Product division to deliver good like-for-like revenue growth. Our Trade divisions delivered like-for-like revenue growth of 5.6% as we benefit from the increased demand for inspection and testing in energy and Agri products, while the performance of our GTS business reflected the decision to terminate 2 unprofitable contracts.

Outside of China, our last [Indiscernible] operating profit was up 14% to £58 million, resulting in operating margin of 9.1%, 70 basis points higher. We expect our Trade division to deliver good like-for-like revenue growth.

Our Resource division delivered like-for-like revenue growth of 8%, driven by increased CapEx investments by [Indiscernible] oil and gas and renewables as well as high demand in Minerals. Outside of China, our like-for-like revenue growth was [Indiscernible] 61% higher than [Indiscernible] producing in [Indiscernible].

Let's now discuss the growth opportunities we have. We've made a lot of progress [Indiscernible]. Within our 3 divisions, products has been the fastest growing business with a CAGR of 9% and today represents nearly 2/3 of our revenue and 82% of our profit. Within our ATIC solutions, Assurance has been the fastest-growing business at 17% compound, representing 20% of our revenue.

Our portfolio is extremely well positioned for growth and let me explain you why. COVID has been much more than the tragedy for the world. In the post-COVID world, stakeholders' expectations in quality, safety and sustainability are higher, making the case for respace Quality Assurance stronger.

The demand for ATIC solutions will grow faster post COVID. Our industry is highly attractive, of course, with strong structural epic growth drivers that will deliver GDP plus like-for-like revenue in real terms. Based on our customer research, these attractive structural growth drivers will be augmented by an increase in new clients, higher investment in safer supply, higher investments in innovation, the step change in sustainability and high growth in the world of energy.

We are seeing significant growth in a number of companies globally, given the lower barriers to entry for any brand with e-commerce capabilities. The lack of Quality Assurance expertise of these young companies is excellent news for our global market access solutions, and our decentralized customer-first organization has a strong track record of winning new clients.

COVID-19 is proving a catalyst for many corporations to improve the resilience of their supply chains. We are seeing a change of focus within our clients with better data on what is happening in all parts of the supply chain. Tighter risk management with razor-sharp business continuity planning, a more diversified portfolio strategy with Tier 1, Tier 2, Tier 3 suppliers, a more diversified portfolio strategy also regarding factories. And of course, investment in processes, technology, training and independent Assurance.

Our superior Assurance offering means we are well positioned to help our clients reduce the intrinsic risks in their operations. Our clients have also realized that they need to invest more in product and service innovation to meet the changing needs of their customers. A recent survey by Gartner show that 60% of R&D leaders expect to increase the R&D investments in 2023. These investment in innovation has been a higher number of SKUs and a high number of test per SKUs, which will be beneficial for our Products division.

The other major area of investment inside corporations is, of course, sustainability. We are seeing positive momentum with new and emerging regulation that means that companies will have to reinvent the way they manage the sustainability agenda with a great emphasis on independently verified nonfinancial disclosures.

This is excellent news for industry-leading total sustainability Assurance solutions. The growth opportunities in the world of energy are truly exciting. In 2022, we have all witnessed the concerns reflecting energy security, and everyone agrees that global energy production capacity is an issue that needs to be addressed quickly to meet the growing demand for energy. Given the underinvestments in traditional oil and gas exploration production in the last decade and the lack of scale for renewables, investment for production in traditional oil and gas and in renewables will increase. This is excellent news for Caleb Brett and Industry Services businesses.

Moving forward, we'll continue to deliver sustainable growth and value for all of our stakeholders. Our science-based customer excellence USP provides our clients with the ATIC advantage they need to strengthen their business. We operate a high-margin capital-light carbon-light and highly cash-generative earnings model. Intertek's approach to value creation is based on the compounding effect year-after-year of margin-accretive revenue growth, strong cash generation and disciplined investment in growth. That approach has delivered 8% annual TSR since 2012.

Moreover, our earnings model has strong intrinsic defensive characteristics. The ATIC solutions we offer are solutions [Indiscernible]. We enjoy strong and lasting relationship with our clients. Our business model is based on a number of quality, safety and sustainability [Indiscernible] make an existing SKU as well as a number of new brands and SKUs that are being launched in [Indiscernible]. Our Trade business grows in line with GDP type [Indiscernible] is well positioned for growth given the lack of investment in traditional oil and gas in the last few years and the need to scale up renewables.

We are truly excited and need to think about the growth opportunities ahead. Our good to great journey, which has delivered significant value between 2014 and 2022, continues capitalizing on our USP, the Intertek science-based customer excellence TQA advantage.

On May 3 and 4, we will host the Capital Market Day in London, which will give the opportunity to the entire leadership team to present our Intertek 2030 growth strategy. True to our purpose of bringing quality, safety and sustainability to life. Our science-based customer excellence TQA advantage helps our clients to make the world ever better.

Our unique approach is based on 3 components. First, it's about our science-based technical expertise. Our industry leading processors build the world's best intellectual property to deliver superior TQA solutions. Second is our commitment to science-based continuous improvement. We always go back to the data to ensure the solutions we offer to our clients are based on the best possible research, knowledge and insight.

And third is, of course, our science-based innovation. We continuously apply superior data-driven insights when creating new solutions for our clients. Let me give you a few examples to illustrate what I mean.

Our medical device experts support the development of artificial sites to the blind. Intertek calibrate is supporting the development of synthetic fuels for the airline industry. Our IB World business has developed innovative DNA testing tools to assist the [Indiscernible] industry.

Before taking your questions, I'd like to share our 2023 guidance. We're entering 2023 with confidence given the reopening of China, the increased demand for ATIC solutions, the strength of our portfolio, our strong pricing power, our productivity and cost initiatives as well as our cash discipline. We expect the group will deliver mid-single digit like-for-like revenue growth at constant currency, driven by good like-for-like in product and trade and a robust like-for-like in resources.

We are targeting margin progression both in H1 and H2. Our cash discipline will remain in place to deliver strong free cash flow. We'll invest in growth with CapEx between £115 million and £125 million, and we expect our financial net debt to be in the range of £680 million to £680 million.

A quick update on currency for your models. The average sterling rate since the beginning of the year applied to the full year results of 2022 will be broadly neutral at the revenue and earnings level. In summary, we are a purpose-led company offering ATIC solutions that are mission-critical for the world. The growth in our end market is accelerating. We operate a strong portfolio with leading market positions. Our high-performance earnings model has a strong track record. We are a high-quality growth business, creating sustainable value for all. Thank again for your time today. Apologies for the technical hiccup.