Earnings call: Eurofins reports growth and strategic focus post-COVID

Eurofins Scientific (ERF.PA) has reported a solid financial performance with revenues reaching EUR 6.5 billion and a 7.1% organic growth for FY 2023. In the earnings call, CEO Gilles Martin and CFO Laurent Lebras outlined the company's strategic realignment post-COVID, improvements in net working capital, and strong cash flow generation. The adjusted EBITDA stood at EUR 1.364 billion, with a margin of 20.9%

Eurofins aims to lower leverage to below 1.5 by 2027 and continues to innovate in fields such as oncology and DNA analysis, while also focusing on ESG goals like carbon intensity reduction and diversity. Challenges include a change in Medicare reimbursement impacting the TGI business, but the company is optimistic about its market potential and future growth.

Key Takeaways

• Eurofins reported revenues of EUR 6.5 billion with a 7.1% organic growth.
• Adjusted EBITDA reached EUR 1.364 billion, a margin of 20.9%.
• The company aims to lower leverage below 1.5 by 2027.
• Innovation and ESG goals remain a priority, with a focus on oncology, DNA analysis, carbon intensity reduction, and diversity.
• Challenges included a change in Medicare reimbursement affecting the TGI business.
• Eurofins is conducting clinical trials to adjust their tests, with results expected in two years.
• The company is optimistic about its market potential and future growth.

Company Outlook

• Eurofins expects growth across all verticals, especially in the US.
• The company is investing in owned sites, which will impact cash flow as they are completed.
• Eurofins is optimistic about developing competitive advantages and future growth.

Bearish Highlights

• COVID-19 had a significant impact on the business, especially in the first half of 2022.
• A change in Medicare reimbursement resulted in a €10 million cash hit and slowed TGI business growth.
• Net working capital is slightly higher than desired, but measures are being implemented to correct this.
• Underperforming divisions are under review, and divestment may occur for those not leading the market or lacking global reach.

Bullish Highlights

• Strong EBITDA margin increase in the second semester of 2023, driven by organic growth, pricing initiatives, and productivity efforts.
• Stable free cash flow with a strong cash conversion rate, despite lower EBITDA.
• Continued focus on innovation, including the use of artificial intelligence.
• Contribution to ESG objectives, with an emphasis on carbon intensity reduction and diversity improvement.

Misses

• The company faced a dispute with a European government regarding COVID invoicing but is confident about the recovery of the amount.
• Eurofins had to rebase the dividend due to rating obligations and traditions.

Q&A Highlights

• The company has reorganized to meet market demands and improve margins, including headcount reduction.
• Investment in IT solutions to digitize businesses and provide valuable data to clients.
• The company is managing liability and risks with recommended terms for sales and contracts, backed by insurance and quality assurance programs.
• Eurofins remains open to M&A opportunities, with a favorable balance sheet structure.
• The CEO expressed confidence in the future growth and investment opportunities in the market.

InvestingPro Insights

Eurofins Scientific's recent financial performance indicates a company navigating post-pandemic market conditions with a focus on strategic growth and financial stability. According to InvestingPro data, Eurofins boasts a market capitalization of $11.32 billion, reflecting the market's valuation of the company. Despite experiencing a revenue decline of 5.06% over the last twelve months as of Q2 2023, Eurofins maintains a solid gross profit margin of 20.53%, which is in line with the adjusted EBITDA margin reported in the company's earnings.

The P/E ratio stands at 26.77, which may suggest a premium compared to industry peers, especially considering the company’s PEG ratio of -0.74 in the same period, indicating potential concerns over future growth relative to earnings. This is further supported by one of the InvestingPro Tips, which notes a valuation implying a poor free cash flow yield. However, it is important to recognize that analysts predict the company will be profitable this year, a sentiment backed by the company's profitability over the last twelve months.

Another InvestingPro Tip points out that Eurofins operates with a moderate level of debt, which aligns with the company's objective to lower leverage below 1.5 by 2027. This strategic financial management may provide the company with the flexibility to pursue its innovation and ESG goals, as well as to remain resilient against market challenges such as changes in Medicare reimbursement.

For readers interested in a deeper dive into the financial metrics and strategic analysis of Eurofins Scientific, InvestingPro offers additional insights and tips. To enhance your investment research, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, which includes access to a total of 5 InvestingPro Tips for Eurofins Scientific. Visit the InvestingPro platform for more detailed information and expert analysis.

Full transcript - None (ERFSF) Q4 2023:

Operator: Ladies and gentlemen, welcome and thank you for joining Eurofins' FY 2023 Conference Call. Please note that this call is being recorded and will later be available for replay on the Eurofins Investor Relations website. Throughout today's presentation, all participants will be in a listen-only mode. The presentation will be followed by a Q&A session. [Operator Instructions] During this call, Eurofins' management may make forward-looking statements, including, but not limited to, statements with respect to outlook and the related assumptions. Management will also discuss alternative performance measures such as organic growth and EBITDA, which are defined in the footnotes of our press releases. Actual results may differ materially from objectives discussed. Risks and uncertainties that may affect Eurofins future results include, but are not limited to, those described in the Risk Factors section of the most recent Eurofins annual report. Please also read the disclaimer on Page 2 of this presentation, subject to which this call and the Q&A session are made. I would now like to turn the conference call over to Dr. Gilles Martin, Eurofin's CEO. Please go ahead.

Gilles G. Martin: Hello, everybody, and thank you for joining our annual results call. We have a presentation, and we can go to Slide 5. I will give the slide numbers as we go. So, what's the story of 2023? Well, it's basically the New Year of a time where Eurofins won't be affected by COVID comparable. We still were affected in the first half by significant COVID revenues and margin comparables in the first half of 2022. That was not the case in the second half. So, you can still see the company more as it will look in the future. Overall, during the year, it was significant lifting, heavy lifting to realign some of our business lines to the situation post-COVID, especially our Genomics, or IVD business lines and to a lesser extent our Clinical Diagnostic business line had refocused a lot to producing reagents, to doing sequencing and other work for COVID. We had started realignment in 2022, but in reality some of it remained to be done. We still had to have restructured. So, a lot of reorganization of those business lines have taken place. We've started to refill our BioPharma labs that we're doing, COVID vaccine development work or clinical trials. Now, let’s now moving towards oncology clinical trials, even we are still working on with similar clients. So, there has been a lot of change in 2023, but we're happy to put that behind us. So, not only will 2024 not be affected by comparables that contain some COVID revenues, but we have a much cleaner and leaner structure and our teams are now focusing already since a few quarter on their Core business. We've also started to significantly align revenues and prices with our cost and we saw that in the second half. We're going to continue to see it in the next year. We have also looked at some of our smaller businesses that might need some work, and we are we will be continuing to review that next year. The one area where we need to improve in the next year is our net working capital. Again, there has been too much management focus on other topics over the last couple of years and we slipped a little bit at the end of the year. We thought we would catch up more in the fourth quarter on our net working capital, but we have some work to do there. But overall, as you see for the result of the second half of 2023, things are very encouraging and are moving in the right direction in terms of organic growth, in terms of margin growth, etcetera. On the next page, we have some comments on the full-year, but some summary of the full-year results, but we will talk about that in the next slides. On the Slide 7, you get a breakdown of our various areas of activity. This wasn't asked by some of the investors. And now that we have comparable data in an auditable manner, as 2024 unfolds, we can give you the evolution of each of those activities. And so, you will get also some growth numbers regarding each of those areas of activity. But frankly, the biggest difference is between geographies, as Laurent, will explain when he describes the numbers. On Page 8. So, basically, what we've been doing during COVID and continued last year is continue to build the network. So, on Slide 8, you see that impact on our sites. Our business is very much driven by scale. Once you get the right scale, you can have very good margin. We saw it during COVID, because basically on the COVID test, we had very much scale, high-scale for a few tests and that had a positive impact on margin. This is basically true for all of our activities, but labs are traditionally too diversified and that's why we build this hub and spoke network with a very large central platform. We've continued to make very good progress on that. Owning our own site is somewhat dilutive on return on capital employed. But as we can estimate it for 2023, it's still already yielding 12% return on capital employed, at least the rent savings that are associated to that. We are not yet at our target of 16%. But as the rents increase with inflation for a stock of buildings, their cost doesn't increase and that return can only improve over the years. So, we intend to continue to add buildings. We should be done by 2027, because we don't need to convert whole buildings to owned buildings. It's mostly for our larger sites, because we don't want to move labs. It's very expensive to move labs and therefore, we need to have big sites where we can expand on-site and not lose all the investment in this whole improvement. For offices, for site and service, [technical difficulty] we don't need to own the building. So the program we've presented last year for the five years to ‘23 to ‘27 should do the job of giving us our own network of labs. On Page 9, you have some examples of new labs that came online last year and some of the labs that we plan to add over the next two years. And those labs that will come online over the next two years, they have started to cost us a lot of money already in 2023, because usually you start building in year one, you finish building in year two and you commission the lab in year three. After [technical difficulty] it's an expensive program, but on the long-term, we think it will be very favorable. We see it already in revenues per FTE, revenues per square meter. That's because those labs are more efficient, better built. Also in terms of CO2 emissions, isolation, energy efficiency, newer building provide a long-term advantage. On Page 10, this is a significant development in start-ups. We always have an arbitrage between start-ups and M&A. The interest rates have gone up significantly since 2022, but the multiples paid for acquisitions on average have not come down. Some of the sellers are waiting, hoping the interest rate will go down fast and they can get higher multiples again, but many are still expecting to high-multiples. Therefore, in 2023, we haven't bought as many companies as we could have. We're a bit below the target. We had set a target of EUR 250 million added revenues from M&A. We will be below that. We also had been reasonable in multiple. As you see, we're only at 1.3 revenue multiple for those acquisitions. But on the other hand, we've added more start-ups. We have decided to accelerate significantly our start-ups because they are of course short-term very dilutive in CapEx. We need CapEx for no revenues, very dilutive in margin, because they make losses for two or three years and then in cash flow. But from year three, four, five, they can provide a very good return on capital employed, which is much better than acquisitions. Acquisitions on the other hand are accretive to earnings on year one. So, both have their advantage and disadvantages, but we've shifted a bit in 2023 towards start-ups. On Page 11, you have a list of some of the acquisitions we did last year and we can go back to half the amount that we're targeting. And for, but that can change from year-to-year, because it will depend on how the markets for acquisitions evolve, on specific acquisitions, opportunities. It could be that we targeted to add EUR 250 million per annum on average over five years. It's like for organic growth, it’s on average over five years our target. It could be that one year we had [EUR 400 million] (ph) and one year like last year we had EUR 122 million. Acquisitions are hard to plan. It doesn't have to be linear. And we don't have to do that. We only do them if they provide the right return on capital employed. I will now ask Laurent, to comment on the financial numbers, please.

Laurent Lebras: Thank you, Gilles. Good afternoon. It's my pleasure to share with you our financial results for the year 2023. On Slide 13, you can see that our results were in-line with our objectives. We posted revenues of EUR 6.5 billion which showed a slight decrease year-on-year due to the COVID comparables, but a strong organic growth of 7.1%. We posted an adjusted EBITDA of EUR 1.364 billion, which gives a 20.9% margin, which was also impacted by the COVID comparables. So overall, we achieved revenues and EBITDA in the upper range of our objectives. On Slide 14, you can see the main factors behind the slight decrease of revenues. So first of all, we had a negative FX impact, which weighted for about 1.9% and we had, of course, a very strong COVID comparable, which created a revenue gap of about EUR 600 million. We almost compensated for it, we have a strong organic growth, which was slightly better in H2 than in H1 and we had a very small contribution from M&A as Gilles just mentioned. On Slide 15, to give you a regional breakdown of our organic growth, you can see that Europe was resilient in all verticals via both volumes and pricing increases, except maybe in Clinical fronts where we had face some price cuts. North America overall posted a very strong organic growth at 8.7%, which was very strong in all business lines. And in the rest of the world, we had a recovery of our revenues in China and expansion of our business in India and we also had a very strong demand for PFAS in Japan. Moving to Slide 16, you can see here a breakdown of our EBITDA margin by semester. And we want to point here the strong margin increase we had in the second semester 120 bps year-on-year, which is basically the first semester without any COVID comparables. This strong increase in margin was due to a strong organic growth, some very good pricing initiatives and also some productivity efforts. So, all this shows a very positive momentum, which is expected to carry on in the year of 2024. On Page 17, we had a strong cash flow generation in 2023. So, our free cash flow to the firm was stable in value despite a lower EBITDA, since basically to lower taxes and CapEx. We had a very strong cash conversion at 38%, 300 bps year-on- year and in the second semester alone of 62% cash conversion. We also had fewer M&As, which basically made us focus on bolt-on acquisitions. On Slide 18, I mean, we also we already alluded to it. Net working capital was on the high side at 5.1%, a bit far from our best historical performance. This is due to a deterioration by one day of our DSO and also by one day of our DPOs. So, we are already putting strong measures in place to get back to historical levels, which are more in the range of 4% and 4.5% of revenues. On Page 19, we were able to maintain a very strong credit profile throughout the year. Our leverage stood at 2.0 stable year-on-year and we continue to aim for a leverage below 1.5 in the year 2027. You can see also that we have a very balanced debt maturity profile with no big amount to repay in the coming years and we have enough cash to pay for all of these, because we have EUR 1.2 billion of cash at the start of the year. On Page 20, and to conclude my presentation on the slide. Our ROCE was negatively impacted in 2023 by the COVID comparables and also the investment we made to continue to develop our footprint and start-ups, but we believe we have bottomed out now and we will basically get back in ‘24, thanks to a disciplined capital allocation and also a strong margin growth. So, now I will give the mic back to Gilles, for the rest of the presentation.

Gilles G. Martin: Thank you, Laurent. Yes, so on Page 22, we give just a few examples of the areas where we're continuing to lead our industry in innovation. We're not just a laboratory providing routine services. We really invent new tests and we are often at the forefront of those innovation in our sector, be it in oncology, be it DNA analysis. We're starting to apply more broadly artificial intelligence. The latest example is for facilitating BioPharma product discovery. We have huge amount of data that we have accumulated over the years through all the work we've done on hundreds and hundreds of molecules, as we can help our clients accelerate their programs. So, we're going to get, we think, from AI cost savings, but also more and more differentiation as we can better value from our the huge amount of data we own for our clients. On Page 23, I'm proud to report some good improvements on many ESG parameters. We've reduced our carbon intensity by 28% over the last four years. We continued to improve last year by 8%. We're improving our diversity. We get outstanding diversity rating. We increased the representation of women in leadership. Our IT security is improving. We have now systematic measurements of client satisfaction in a standardized way throughout our Group and it's improving year-on-year. So, it's all very encouraging for the developments over the next few years. And overall on Page 24, you can see that basically Eurofins is positively contributing to all of the, or many of the Sustainable Development Goals of the United Nations. We are not a company that exposed to ESG risk. We are an ESG facilitator in many ways to help our clients fulfill their ESG objectives. So, what can I say about the outlook? So first, what has happened? We've had the pandemic. The world has changed a lot. We've confronted a number of crises. First, the pandemic, which financially was favorable for us, but also defocused a lot of our teams from their normal work, we shifted a lot of people working in our food testing, BioPharma testing and otherwise and other areas testing our COVID activities. This has cost us some significant reorganization effort in ‘22 and ‘23. This is behind us now. But in the meantime, we've also deployed EUR 4.3 billion of the cash we generated to build our network. We now have a fairly unique network. And as you can see on Page 27, we come out of the pandemic a much stronger company. Our revenues have increased by 40%, so have our margins. We've increased significantly our cash flow. Our leverage has come back to an area that gives us a lot of strategic options. We own twice as many square meter of buildings than we used before the pandemic. And so overall, we've not wasted our time during the pandemic. You're as investors, you're getting now after the pandemic a much, much stronger company than what you had before the pandemic. And so in terms of objective on Page 28, we are confident that we should be able to achieve our objectives for 2027. It represents actually a fairly modest annual improvement in margin, in cash flow and a modest improvement, while we continue to invest [in our network] (ph). So, not only should we be a bigger company by ‘27, a more profitable company by ‘27, but more importantly, we should have built very significant competitive advantages with the best lab network in the world, a completely digitalized lab network using automation and AI through the network, having scale advantages in most markets, having finalized the right hub and spoke network in all our verticals in the main countries who are active. So we're very optimistic that we will continue to build a very strong company that will benefit from those network effects, from those scale effects for many, many years after that. And while doing it, we'll continue over the next two or three years to gradually improve margins and improve cash flows. And this is summarized again on Page 29. I think you can read it at your leisure. But so the main thing is ‘23 with finalized realignment of the company to a normal post-COVID situation. We did some significant cost savings also and reorganizations in our Core business to integrate all the labs we had acquired. We were done in the U.S. after 2022. We've done a lot of that also in 2023 in Europe. We've done a lot of reorganization in our Clinical labs, in our Genomics labs, in our IVD production sites last year. And all of those are behind us. So, we're very optimistic going forward that on this much better and more streamlined infrastructure, we can focus on growth on our Core business. And so, we're positive and optimistic for the developments this year and the years to come. So, we have a couple of extra slides in appendix we can go to on questions. And, I think I will now open the microphone to questions.

Operator: Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] And the first question will be from Suhasini Varanasi from Goldman Sachs (NYSE:GS). Your line is live.

Suhasini Varanasi: Hi, good afternoon. Thank you for taking my question. For 2024, given the strong underlying growth performance that you've seen in 2023, can you maybe share some color on your growth prospects by vertical, specifically in the U.S. where growth seems to be coming in slightly higher than Group average? I'll take it one-by-one, if that's okay.

Gilles G. Martin: Yes, of course. Well, I think we should have good growth in pretty much all our verticals. The growth of BioPharma was a bit lower last year, because of the, while the impact on the early phase, which is small for us, but still of lower biotech funding, but now this is bottoming out, so this should grow. And we also had an impact of the refocusing of our labs to the post-COVID situation, and the replacement of all the work we did on vaccines with other work. And, now this is also behind us. So, we think we should see an improvement in BioPharma. Food Testing, environmental testing has been quite dynamic last year in North America, so we don't see why that would change this year. The markets are well orientated. In Clinical, we are of course cleaning our clinical activities to focus on the areas that include vaccines, sorry, that includes Viracor. So, Viracor is working for hospitals. So, it's not insurance bill, it's more direct third-party bill for supporting the doctors that work with transplant patients. We have a very strong technological advance in this area. We have unique tests. So, we're going to capitalize on this area where we are a market leader. So, that's for the U.S. And we're optimistic for that. And in Europe, we think the Food Testing business has bottomed out. Volumes are still not growing very fast in the food industry, but the food industry will have, if they want to see some growth, to start again to develop new products, to address the new wishes of consumers for more better product, less transformed product, products with better nutritional profiles. So, we think we will benefit from that. Clinical, that's where in Europe we'll have the lowest growth probably because of price control. But overall, we due to the other growth of the other areas, we still are confident with our objective of 6.5% organic growth.

Suhasini Varanasi: Thank you. And there's no incremental price cuts in Clinical Diagnostics in France, right, for 2024?

Gilles G. Martin: Well, there has been an agreement for the next three years ‘24, ‘25, ‘26, I believe. There are price cuts, but there are volume growth. So, the overall spend is projected to be stable or growing slightly and we are gaining share. We're also adding blood collection points to increase our share and our presence in the most dynamic areas. So, we do believe we can grow our share in that market.

Suhasini Varanasi: Thank you for the color. The next question is on the Medicare reimbursement for kidney transplant. I think you mentioned on Slide 28, that you're going to run some clinical trials. Can you maybe share some color on the costs and the timing of potential benefit on this one, please? Thank you.

Gilles G. Martin: Yes. On this one, we've had a bit of a bad luck last year because there was a change of reimbursement, a bit unexpected and unjustified. So, we're still working on it, which cost us probably EUR 10 million cash last year in our TGI business and a lot of growth that we should have had that didn't materialize. So, what we need to do is to do more clinical trial work to adjust for test. We still do believe that our tests are highly superior. Those trials will run for four years. We should have midpoint result after two years. They cost about EUR 10 million per annum, so that's included in our SDI, of course. And, but this is again, if things are confirmed as we think they will be, we're still talking of a market in hundreds of millions of dollars with very high margins. It is unfortunately delayed again, but we are spending the money because we really do believe in the potential of that market.

Suhasini Varanasi: Thank you. Last question for me please. The investment in owned sites EUR 200 million per annum spend at what point should it convert to lower principal lease payments on the cash flow statement?

Gilles G. Martin: Well, as the sites get finished and as the site, as we move in the sites, it's immediately accretive on the cash flow. So, it's going to be a gradual impact. But certainly, when we are done with this process and again, now we have some sites that are owned by a related party. We want to leave them where they are for the moment. The remainder is about 50%. We don't need to convert those 50%. We need to convert, I don't know, 20% or 30% of those or 25% of those 50% to be where we need to be to have all our large countries like China where we don't want to own our sites. And there are for other reasons other countries where we simply will not do it. So, it's not such a long way. We think in those four years, we’ll pretty much be done with our current footprint, and we'll have a good hub and spoke laboratory network everywhere.

Suhasini Varanasi: Thank you very much. That’s all for me.

Operator: Thank you. The next question is coming from Himanshu Agarwal from Bank of America (NYSE:BAC). Your line is live.

Himanshu Agarwal: Hi, Himanshu. Thank you for taking my questions. The first one is on the organic growth. It seems like sequentially organic growth has slowed down in Q4 versus Q3 on working days adjusted basis despite better pricing. Can you just talk about the volume if we have seen some decline in volume and the trends there? And continuing on that, you mentioned about Food Testing business in Europe bottoming out. Is it something, can you talk about the trend that you're seeing in January? Is that started to show some growth there? That's my first and then I'll have two more. Thank you.

Gilles G. Martin: Thank you. Yes, Q4 was slightly below the average, but I don't think, we don't think it means anything specifically. Food Testing in Europe and the volume, yes, we can't exactly measure volume and price. We have some indication, but not enough to be able to publish any figure on that. We've made progress last year in measuring it on some samples of our business in the companies where the IT system has been upgraded, where the software has been upgraded to our own software more recently. We hope to make further progress in 2024 to provide the overall price and volume growth numbers. And, yes, January is too early, in January, we don't have any specific data or I don't remember the data for January to, but organic growth in January was strong overall for Eurofins, if that's your question.

Himanshu Agarwal: Thank you. And then second one I have is on SDIs. So, it seems like SDIs were slightly higher because of the reorganization and temporary losses etcetera. And you're also guiding to more or less flat SDIs in ‘24 and maintaining the target of 0.5% by 2027. So, how should we think about the phasing in ‘25, ‘26? Is that going to be a gradual or is it going to be more back half loaded? Yes, if you can comment on that.

Gilles G. Martin: Well, I think the reason it's higher is because we've shifted from M&A to start-ups. So, since we saw mid-year that basically M&A multiples were not coming down as fast as they should we think. So, it was a matter of opinion, obviously. We decided to accelerate the start-up program again, which will continue definitely in ‘25 and probably in ‘26. After that, on our list of things to do, we should have the hub and spoke network that we need to have. Reorganization, we hope those numbers should come down, because our, we have the footprint we need. We don't have so many integrations to do. We don't have so many labs to move. Of course, it might depend on what M&A we do in the meantime and that is always unknown. But for what we know today, we should see that amount ramp down faster.

Himanshu Agarwal: Thank you. And just lastly on the guidance for 2024 revenue. So, is it like at the midpoint, it implies around 9.5% Y-o-Y growth. Is it fair to assume like organic probably more or less around 6.5% and the remaining from M&A?

Gilles G. Martin: Yes. That's it. We have modeled, we could give no guidance at all. And there's always a debate, should we give less precise guidance or guidance that are more vague, but then the analyst estimates are all over the place. So, that's why we went to giving couple of ranges of what we think is likely. Again, when we set out an organic growth objective of 6.5%, we say that that's what we think on average over a 10 year period, we should be able to do. It could be one year is higher, one year is lower, one quarter is higher, one quarter is lower. It's not necessarily linear. And the same applies to acquisition. We think we can acquire for about EUR 250 million revenues per annum at the right multiples and at the right returns. And last year, it wasn't the case, because we thought we had alternatives that we passed on, because the multiples were not right. It could be that next year we do EUR 400 million acquisition, so it's or the year after. So it can, of course, vary a little bit, but that's an objective for the next five years that we think is realistic.

Himanshu Agarwal: Thank you.

Gilles G. Martin: So, it's modeled, next year is modeled 6.5% organic growth and EUR 250 million added from M&A at mid-year.

Himanshu Agarwal: Okay. Thank you.

Operator: Thank you. The next question is coming from Neil Tyler from Redburn Atlantic. Neil, your line is live.

Neil Tyler: Thank you. Good afternoon, Gilles and Laurent. I wanted to come back to the Food Testing business, please. Obviously, very different dynamics within your Food Testing activities in Europe and the U.S. And that from at least the work I've done doesn't appear to be reflected in the in what I see the sort of food manufacturers growing at, there's not quite such a disparity. So, could you sort of help me understand, are those businesses sort of targeting different parts of the market? Is that part of the explanation? I understand that inflation is higher in Europe and or do you think your European business is potentially suffering more from the redeployment of people and capacity that you mentioned in your introductory comments? And then alongside that, can you give any sort of indication of how far below peak you are in Europe in terms of activity or revenues or volumes just broadly would be helpful, please? And then the second question on investments. I just want to understand a bit better what the sort of EUR 100 million or so a year of intangible investments are resulting in and how you measure the return on those, please? Thanks.

Gilles G. Martin: Thank you very much. A lot of very good questions. From what we hear from our teams, the food industry and retail especially are suffering much more in Europe since the war in Ukraine. It started really in the second quarter of ‘22 and they have reduced significantly their assortments. They've resorted to significant price increase, but throughout last year their volume growth has been really anemic and they've had mostly pricing growth related to price increase, which of course are not sustainable forever. Consumers are switching to cheaper product. And there's a bit of that in America. I think there's, in America many more innovative products, more on nutraceutical products. But I think it's mostly the economy that is different for the food and retail in Europe and North America. I'm not sure it's due to redeployment. I mean, the thing is in America, it's mostly the U.S, so we have one country and we have the right footprint. We did all the reorganization of our network in North America up to 2022. We're done in 2022. We have very big specialized sites for the hubs and a number of spokes. We're heading start-ups. We don't cover the full U.S. yet, but number of start-ups to do over the next two or three years to cover 100% of the U.S. addressable market. They are, of course, dilutive. But overall, we're closer to having the right final network and footprint in the U.S. than we have in some European countries. So, we had quite a few reorganizations in our Food Testing business in Europe. Well, below peak, we are very much below peak, because if you look at the profitability between Europe and North America and I don't know if we have it in the slideshow, but we have it in the report. If we see people are asking how can we go to 24% margin, but I think we're 26% in America and 14% in Europe. So, just Europe recovering to a more normal situation. Yes, so what do we have? Even, it's not even the adjusted EBITDA margin, as reported, reported EBITDA margin were at 14% in Europe and 26% in North America and 20% Rest of the World. So frankly, the problem we have is in Europe is due to the economy. And but at some point, you've reorganized to meet the right volume and the right demand in the market and you can improve your margins again. And so a lot of that reorganization we have done last year. We have reduced the count in some areas also to match the current demand and so we should see the benefits. So, it's just improving Europe, bringing back to what would be not very high 20%, bring the whole Group to wherever we want to be. So, there is some upside opportunity and upside surprise opportunity also in our objectives. However, I mean, not everybody would believe that, but we see it also.

Neil Tyler: Thank you.

Gilles G. Martin: Well, the question on the investment. Yes, what we are doing --

Neil Tyler: Yes.

Gilles G. Martin: We are basically redesigning a whole suite of IT solution to fully digitalize our businesses. This is something nobody can buy. Of course, people can buy accounting software. We buy accounting software. We buy purchasing software. We buy software to do things that all companies do, but to completely run integrated laboratories, fulfilling all the regulatory requirements that we are that we have to fulfill, working as a global network, a European network, centralizing production in hubs, etcetera, and having all that work seamlessly, we've developed a fairly unique suite of software. And it has been rolled out in some of our verticals, and we see the benefits. And, then how do we benchmark? Well, if we buy labs and we see what they spend in IT, we have a collection of disparate IT solutions and we see what once we have finished developing and the software is rolled out in our labs, we see what it cost and we see the benefits we have operationally and that's how we measure the return on those very significant investments. But the world is digitalizing. We're coming to a time of AI. If you want to use AI, you have to have standard data formats. You have to have your data organized in a proper way. And I think if somebody in our industry is going to be able to use AI in a big way, that's your offense because we've made those investments. We have the data in the right format. We have the data in usable format. And we have, I don't know, in the world 200 laboratories doing microbiology. We can centralize those results in real-time to analyze any trends in pathogens, detect automatically new pathogens to the type because now we look at pathogen, the salmonella, is salmonella, but really they're all different and they all have genetic profile like COVID that you can trace and those time will come when we'll move to genetic testing of pathogens. And we'll have all the data infrastructure to do that and provide very invaluable data to our clients. So, we're building the infrastructure. It costs a lot. And we already see some very immediate return, but we think the long-term impact and the long-term potential is orders of magnitude better than anything we can see today. So, we're still building the house. It takes a long time and we're doing it on a global basis. So, it costs a lot of money. But any large company, take Amazon (NASDAQ:AMZN), it took them 10 or 20 years to build their network in a much bigger market, obviously, but in our small market, this is what we're doing.

Neil Tyler: Thank you. That's very helpful.

Operator: Thank you. [Operator Instructions] The next question is coming from Geoffroy Michalet from ODDO BHF. Your line is live.

Geoffroy Michalet: Yes. Hi, thank you for taking my questions. First question is on the working capital. If you could provide us some example of the work that you will do to work on DPOs and DSOs? Another question would be the fact that you mentioned that you be reviewing some underperforming divisions. Could you also give us some clarity and maybe some figures about that? How big are they? How dilutive are they? And then last question, still on Food Europe annual guidance, what kind of assumptions on volume are you taking for your full-year guidance since you said that you have, let's say, positive upside or headroom on your guidance? Thank you.

Gilles G. Martin: Thank you. Well, I'll take the last two questions and I will ask Laurent to answer the net working capital. The things we will review are small things. Nothing big in terms of number. It would be small unit making EUR 5 million, EUR 10 million, EUR 20 million in a place where we don't see any path to become market leader or we don't see any global connection with our clients. So, we don't have to do everything everywhere. It's more that philosophy that thing we are looking at. Our objective is to be market leader in what we do and sometimes we are patient. It can take 15 years or 20 years or 10 years or five years to become market leader [Technical difficulty]. If we believe it is achievable, we will just wait until we can do the right acquisition or build the right network. But in some cases, we just see that as unachievable or we won't become Number 2 or Number 3 then we will review those few things. But they can be usually dilutive, and they can be losing a lot of money. They can be making EUR 5 million revenues and EUR 5 million losses. So, that can be quite impactful on the margin. Food Europe, I don't remember the exact assumption that our leader has done, but I would say maybe 50-50 in volume and in price. And, Laurent can answer what he's measuring and what he's going to do to improve or not only him, but he and his team are going to do to improve our net working capital.

Laurent Lebras: Yes. Thank you, Gilles. So, if you can move to Slide 34. We have some figures in appendix to share. As you can see on the slide, I mean, the year 2023 at 5.1% of net working capital was not a good one historically. We have been evolving between 4% and 4.5% in the better years. So, the gap that we had last year, I mean versus the best performance, which was a year before, amounts to about EUR 60 million, so it's due to partly to some litigations we had on one client side and also some comparative on the year before. But what we are going to do going forward is really renegotiate very strictly on payment terms with both the client side in some verticals where we saw that there was a bit of slippage and also on the supplier side. And we're also going to basically, we launched a workshop already to copy the best practices we have in some countries where we are below these levels of 4%, so that we can roll them out everywhere in the world and go back to historical levels where we were rather between 4% and 4.5%.

Geoffroy Michalet: Thank you very much.

Operator: Thank you. The next question is coming from Allen Wells from Jefferies. Allen, your line is live.

Allen Wells: Hey, good afternoon, Gilles. A couple from me, please. I'll take them one at a time. I just wanted to stick on the SDI theme because, obviously, it's been a bit of a topic for today. The step up that we saw in one-off costs, obviously, you're stating now that a lot of the reorganization is largely done. So, I just wanted to understand as we think about that number remaining high in FY ‘24, how we should think about the split between the one-offs, reorganization costs and the start-ups. Will that be similar to what we saw in 2023?

Gilles G. Martin: Actually, no. I mean, as we can judge today, we think the proportion of start-up costs will be higher as we are already ramping the start-up program and the one-off cost should be less because from what we've seen in our budget anyway and our leaders have told us, a lot of the reorganization is behind us.

Allen Wells: Okay. And just on that as well, I just wanted to check something. The transplant genomics issue that you talked about, obviously, with the Medicare billing changes there, was that business profitable in the past? Or has it always been included in start-up losses?

Gilles G. Martin: It has been loss making, but it was just breaking even in the quarter when this regulation changed. It was actually, the revenues were trending up every quarter by 50% at least on quarter-on-quarter and we're hitting breakeven just when they changed the rule. Of course, they changed the rule because this whole sector was costing Medicare a lot more money, so they decided they require more proof of medical benefit to justify those reimbursement on a range of application. The question is, for what application is there reimbursement? We still get high reimbursement $2,500 per test, but just it's not yet accepted for routine surveillance to replace biopsies. Markets are very medical, markets are very conservative. The practice standard-of-care is to do a biopsy to monitor organ rejection. And apparently, not the FDA, but the Medicare administrators in question think we need more medical evidence to have this to include that in the standard-of-care. And we're optimistic we will get there. But as I answered, it does require some significant investment in clinical trial on our proprietary test. The good thing is, if we get through, we get a reimbursement specifically for our test for what will become then a fairly broad market.

Allen Wells: But just to be clear, the question I was just trying to get to is that, when it was breakeven, was that business still reported in below the line, the start-up losses? Or has that been moved below the line because of this change? That's what I was just trying to understand.

Gilles G. Martin: No, no. It was always in start-ups. It was always in start-ups. But except last year instead of for the full-year, it should have more or less broken even. It lost EUR 15 million or EUR 20 million plus we had reorganization costs, because we had to stop. We had maybe 50 salespeople that were not necessary anymore, because the community nephrologists cannot prescribe the test. Only the hospital setting need to do that.

Allen Wells: Yes, understand. And then, just another slightly accounting question. I noticed in trade receivables there's a EUR 19.5 million charge or provision for pending litigation related to COVID. Could you maybe just tell us exactly what that relates to country wise? And it looks like it's classified as a provision, so I don't think there's any kind of expense, there'll be any expense in ongoing expenses. Can you just kind of confirm that? I just want to understand what's happened there because it looks like it's also been restated in the prior year overview receivables as well, just on that side?

Gilles G. Martin: No. It's linked to a dispute we have with one government in Europe linked to COVID invoicing, where basically they ask us to maintain minimum capacities and they are basically not willing to pay the minimum capacity we maintain. We are in a litigation and official trial. And according to our lawyers, we have a fair chance to get most of this amount back. So, that should go up the coming quarters.

Allen Wells: Okay. And then final question, just on the kind of comments you made around the potential for underperforming businesses and portfolio rationalization. Is it possible you can kind of help us out to understand or quantify how big that pot is, what the opportunity is to maybe move some of that away from the business maybe in terms of revenue size or whatever you think is useful there for the underperforming business?

Gilles G. Martin: Well, it's all let's say, it's a sub EUR 100 million in total. It's a number of small things, the total of which is maybe EUR 70 million that we are the ones we're really looking at specifically. But they can be quite dilutive.

Allen Wells: Fine. Okay. And then very final question, just kind of following up on, I think, Neil's question from earlier, just in relation to the food dynamics. Could you kind of comment it sounds like your comments, actually both on food and pharma, that they're kind of bouncing off the bottom. But I just wanted to just check, is that something you've seen an improvement in January, February already? Or are they just numbers you don't have yet in terms of that improvement in food and the pharma dynamics you talked about earlier in the proof of comments?

Gilles G. Martin: I haven't seen the February numbers. I've just seen the January numbers. January overall was quite good. Okay? It was a strong month also in terms of working days, so we have to see for the full quarter. I think, I don't have the exact of memory, the exact breakdown by activity just for January. And anyway, I would never extrapolate one month, because you can have one depending on when you build or you close certain project. Even on quarterly basis, we can have variation but even more on a monthly basis.

Allen Wells: Okay. Thank you.

Gilles G. Martin: But anyway, what we have seen so far is encouraging.

Operator: Thank you. The next question is coming from Dominic Edridge from Deutsche Bank (ETR:DBKGn). Dominic, your line is live.

Dominic Edridge: Hi, there. Just one question left for myself, please. Just maybe some thoughts from you on the dividend and the balance sheet and maybe just some comments on why you felt you wanted to rebase the dividend now? And the second question was really just based around the balance sheet and how we should think about that over the next few years. Obviously, you do have some refinancings both in the hybrid and the euro bond markets to think about. Should we think about sort of are you happy with the current structure of the balance sheet in terms of the split? And should we think about like-for-like refinancings there as they come due? Thank you very much.

Gilles G. Martin: Yes, the dividend is very simple. We have a rating. And in the rating we have certain not obligations, but certain traditions in terms of distribution. And of course, we had much higher profits during COVID. So, with that quota of distribution, we could raise a dividend exceptionally. But we went back to a more typical ratio about a third of our net profit that we can that we pay as dividend. And that is actually, if you compare to 2019, it is a good improvement. It is more than 11% annual improvement to the pre-COVID situation. And we think we can continue doing that. We want to have a conservative balance sheet to stay in the range 1.5 to 2.5 leverage, which gives us some upside opportunity. There are interesting M&A opportunity or we can deleverage if there are none. And the structure is fine for us, the current mix of hybrid and bonds. We're not worried at all about refinancing. We have all our, pretty much all our financing at fixed rates. And okay, if rates go down, we'll refinance better than if rates go up. But overall, our interest charge is modest in our total cash flow and profit. So, we don't see that as being any kind of issue.

Dominic Edridge: Okay. Good. Thank you very much.

Operator: The next question is coming from Thomas Burlton from BNP Paribas (OTC:BNPQY). Thomas, your line is live.

Thomas Burlton: Hi, thank you. Good afternoon, Gilles. Good afternoon, Laurent. Thanks for taking the questions. I've just got two, one on margin and one on cash. Sorry if I missed it, but you're able to give any additional color on the margin drivers in the second half, thinking about the points called out on Slide 18? I guess some of those components might be harder to quantify, but any scale you're able to give would be helpful. And specifically, how much did the productivity, digitalization and automation initiatives add? Because I guess those are probably investments you've made and I guess you're measuring the payback on those. And then the second one on cash, just thinking about the year-on-year growth sort of implied in your guidance on free cash flow. Are you able to split that out in terms of how much of that is a sort of normalization of the working capital, I guess, issue that drove the miss in ‘23? And how much of it is sort of underlying free cash flow progress year-on-year in ‘24? Thank you.

Gilles G. Martin: Thank you very much. Yes, margin drive, so we started to have a bit of impact on price that caught up some on inflation. On ‘22, we lost some on price obviously and we've started to have some catch up. We started to have some better network utilization from our hub and spoke network. But that's a fairly modest gain overall. We still have had big chunk in Europe, especially that were not, that were underutilized. And so there's quite a long way to go to further improve this. We don't quantify across the board automation and IT impact. I think we'll see much more of that in ‘25 or ‘26 when right now we’re doing for automation many pilots, but we haven’t rolled out hundreds of robots. We are doing many pilots in many places. And if those pilots work out, then instead of two robots, we're going to have 10 or 20 of each kind for each type of testing, but we're not there yet. So, that's really something I don't expect the impact of automation to be really material before ‘25, ‘26 or ‘27. The impact of all our IT software will be much more material as we go and enabling us to consolidate our lab better to streamline. We won't change the footprint, but there are labs that still too many tests, it could be streamlined more once they are even better interconnected with the competent centers. We need to also, there is software for logistics, internal transfer of samples that we need to work on and improve, so quite a number of things. And on the year-on-year growth, I think we have a slide that Laurent had comment on the free cash flow.

Laurent Lebras: Yes, on Page 36.

Gilles G. Martin: So, we have put on the slide, I mean, a bridge between ‘23 and the way we constructed our free cash flow objective for ‘24. And as you can see basically, I mean, a lot of it is coming from the growth in EBITDA, because we have remained prudent on the net working capital change. We kept a safe objective or assumption of 5%. We kept also taxes more or less in-line with what we paid this year. And the whole improvement is coming from the fact that the CapEx are becoming staying basically flat year-on-year. So, net operating CapEx are only moving by EUR 8 million. So this model, as you can see on the slide, gives basically a mechanical improvement of EUR 219 million on free cash flow before investment in owned sites. And if we maintain again investment in owned site of about EUR 200 million that would give an improvement of EUR 171 million to EUR 645 million of free cash flow to the firm. So, this is how we built the model, which is basically a flow through of the EBITDA increase, whereas the taxes and CapEx more or less stay flat year-on-year. Does that answer your question, Tom?

Thomas Burlton: Yes, that's very good. Thank you.

Operator: Thank you. And the last question today is coming from James Rose from Barclays (LON:BARC). James, your line is live.

James Rose: Hi there. Thank you. Just got one remaining. And it's on sort of legal liabilities and it was triggered by I think it was November last year when Lactalis sort of made an accusation against you. But I understand if you don't want to comment specifically on that. So, the question is more it's more broad. Could you remind us of the legal framework, which you operate in when you're performing tests? And also from a governance perspective, when you're operating very decentralized structure, what procedures do you have in place to ensure the quality control is up to the standard you'd expect across all of your laboratories?

Gilles G. Martin: It's a very good and broad question. But we cannot comment on the specific merits of details of the merits of the case regarding Lactalis, but we think our exposure is fairly limited. And of course, it's we think it's more media defocusing strategy by Lactalis to try to deflect the blame, but they are under very serious criminal investigation and the criminal trial. So we'll see what how that unfolds over the next two years and it affects network. Overall, how do we organize things? Well, we have many companies, but we have recommended terms of sales and terms for contracts that should be that limit our liability or limit the liability of each of those companies. And we have a mechanism of authorizing exceptions to that when it's warranted, where we some companies in some cases can take a bit more accept a bit more liability than what is in our standard terms of sales. It's how big are the clients, how big are the contract, there is always a discussion on this. We are employing people, and so there is, we can never exclude the risk of human error. So, we also have insurance to cover things. If something would happen, we have had people doing criminal acts like any companies and that is really difficult. We have, of course, a lot of quality assurance programs or our companies undergo some form of quality assurance registration either controlled by USDA, by FDA, by accreditation bodies in Europe, by governments with multiple audits, external audits, internal audits. We have also on usually on a national basis, but also on a global basis, some quality initiatives, some quality trainings, some quality audits. It's impossible to be sure that we'll avoid any risk, but we have a number of practices to mitigate and limit risks and reduce the number of occurrences or detect problems where before they become too serious. I mean, that's our job basically to manage risk, and there's a lot of procedure all over the place to prevent problems and ensure people follow protocols that are sound.

James Rose: Great. Thank you.

Operator: Thank you. This is all the time that we have for today's question-and-answer session. We would like to turn the conference back to Dr. Gilles Martin, for closing remarks.

Gilles G. Martin: Thank you very much. Thanks to all of you for your questions and for joining the call. So to conclude, what can I say? Well, we put the house back in order, COVID is behind us. Now, we're back to the normal Eurofins. We can focus on growth and improving margins. We are starting from a much, much stronger point now in 2023 than in where we were before COVID in 2019. We've made a long way to improve our IT solutions, our IT programs, our IT landscape, our lab footprint, our processes, our scale. And we're optimistic. We're in good markets. We are everything we do is focused on protecting life, protecting health. This is usually where affluent society invest a larger increasing share of their resources. The cost of health care is exploding everywhere. We are in that area. We are contributing to also to many ESG priorities, protecting the environment. And so, we're optimistic about our market, even though it was a bit softer in Europe and Europe's economy is definitely not out of the woods yet. We've reduced our cost and we will do it more if necessary to the current market situation. But from that base, we were optimistic to continue to improve things. We will put more money into start-ups and M&A short-term. Maybe this year later or next year, there would be more, better price opportunity on the M&A front. We're open to that, we can be flexible, but we are very optimistic to deliver significant value over the next two or three years as we earn the benefits from all the investments we've done. Thank you very much.

Operator: Ladies and gentlemen, the call is now concluded, and you may disconnect your telephone. Thank you for joining and have a pleasant day.

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