Release Date: July 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- SGS AG (SGSOF, Financial) reported strong organic growth of 8% in H1 2024.
- The company successfully mitigated the negative impact of foreign exchange on its margin rate.
- SGS AG (SGSOF) achieved significant improvement in free cash flow, up by 35% compared to the prior year.
- The restructuring plan is well on track, with initial savings already documented.
- The company was ranked as the sixth most sustainable company in the world by Time Magazine.
Negative Points
- Health science market conditions remain challenging, impacting the health and nutrition segment.
- The negative foreign exchange translation effect of 5.8% impacted sales, driven by the depreciation of the Chinese yuan and the euro against the Swiss franc.
- The company incurred CHF34 million in restructuring costs in H1 2024.
- The crop science business transaction did not close due to unmet conditions, leading to its retention within SGS AG (SGSOF).
- Despite strong organic growth, the adjusted operating income margin remained stable at 14.1%, indicating limited margin expansion.
Q & A Highlights
Q: Can you help us understand the price component of organic revenue growth? Could you give us a split between volumes, mix, and price?
A: We see roughly a 50-50 split between price and volume in our 8% organic growth. (Martha Vlatchkova, CFO)
Q: Could you elaborate on the strong increase in the margin in industry and environment? What is stopping natural resources from improving profitability despite nice top-line growth?
A: The product mix favored the increase in margin in industry and environment. In natural resources, the margin has not declined when looked at constant currency, and we expect strong momentum to continue. (Geraldine Picaud, CEO)
Q: How should we think about the quarterly run rate of cost savings? Will it accelerate into Q3 and Q4?
A: We recorded CHF9 million in Q2 and you can project similar savings for Q3 and Q4. The rest will come in 2025, with the full run rate of CHF100 million expected by the end of 2025. (Geraldine Picaud, CEO)
Q: What surprised positively on both organic growth and margin in the first half? How should we think about the second half?
A: Strong momentum in industry and environment, and natural resources. We stick to our guidance of mid to high single-digit organic growth, considering macro-political uncertainties. (Martha Vlatchkova, CFO)
Q: Could you talk about significant growth in Asia for sustainability reporting assurance and expectations for Business Assurance in the second half?
A: We had a high comparable in Q2 last year, especially in consulting. Management system certification is performing well and will continue to be fueled by ESG requirements. We are confident Business Assurance will perform well in 2025. (Geraldine Picaud, CEO)
Q: What was the group headcount at the end of H1 and how has it changed since December?
A: The headcount is stable compared to December, with a marginal impact from the restructuring plan and acquisitions. (Geraldine Picaud, CEO)
Q: Can you provide more detail on the country saving plans initiated in H1? Does it include plans to rationalize or change the site network?
A: Yes, we have plans to tackle indirect costs at the country level, improve productivity, and optimize footprint where it makes sense. This is ongoing. (Geraldine Picaud, CEO)
Q: When do you expect the health and nutrition segment, particularly biopharma, to start improving?
A: We see signals of improvement towards the end of the year with an increasing pipeline. Wireless is also expected to improve in the second half with new lab developments and acquisitions. (Geraldine Picaud, CEO)
Q: If FX rates remain where they are today, what would that mean as a margin tailwind or headwind in the second half?
A: If exchange rates remain as of June 30, we will incur a slower ForEx impact in H2. (Martha Vlatchkova, CFO)
Q: Was the restructuring benefit of 30 basis points in H1 weighted to any particular division?
A: The restructuring benefits impacted all business lines and did not involve any sales teams. (Geraldine Picaud, CEO)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
