Eurofins Scientific Sa

Ladies and gentlemen, welcome and thank you for joining Eurofins Q1 2024 Trading Updates. 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 question and answer session. If you would like to ask a question, you may press star followed by one on your touchtone telephone to register for questions. For operator assistance, please press the star key followed by zero. During this call, Eurofin's 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 Eurofin's future results include, but are not limited to, those described in the risk factor section of the most recent Eurofins annual report. Please also read the disclaimer on page two of this presentation, subject to which this call and Q&A session are made. I would now like to turn the conference over to Dr. Gilles Martin, Eurofins CEO. Please go ahead.

Hello, everybody, and thank you for joining our quarterly call. Well, we've had a very good start in the year 2024. Things are working according to our plans. We are continuing to invest significantly to build out our network and build out very large hub laboratories. And we continue to open many spoke laboratories, local labs for microbiology or for blood sampling in some areas in our clinical business. As you can see, the startups, we invest a lot in startups, but they start to have a meaningful impact in our total growth. So this is encouraging. This is something we will be continuing. And we flagged the amounts that we're investing there over the next few years. So this is an important part of our growth. We have resumed our inorganic growth. We've acquired a few more companies this quarter than we did before. Acquisitions are lumpy. All our objectives are five years objective. Whether you look at what we think could be the average organic growth over five years, or the volume of M&A each year. This is, of course, something that is not exactly plannable. We only do M&A if they provide, we think, a very good return, and we have a hurdle rate that we have set at 16% pre-tax for any of our investments, organic or inorganic, so we pass on many acquisitions, and we only do those that fit. We acquired the larger acquisition last year or this quarter, was a company that fits well with our transplant testing business. We are the leader in providing testing for transplant hospitals. Ascend in California is also a leader in that, especially on the dialysis segment, so pre-transplant or post-transplant. So we are expanding our franchise. In clinical diagnostics, for those of you who haven't followed in detail what we do, we don't want to be all things for all people. We don't want to be a generalist where we can avoid to be. So we don't want to be a lab corporate request. We are focusing on areas where through innovation, we can create new tests and those tests can provide superior growth and the superior profitability. So in America, we are refocusing to be almost a pure player focused on transplant testing. And in Europe, we have some countries where in order to have market access like France or Spain or Germany, or the Netherlands, we need to have a broader range of testing, including a lot of routine testing. But this is not a strategy worldwide. In clinical, we look at it country by country. We also will not be in all countries. We've been active in that market since 2014, which gave us a fairly good overview of the situation in clinical diagnostics around the world. And we know now in which countries we want to be, to do what, and what type of return we can expect. So we are very selective in clinical diagnostics. We are at the same time refocusing in some countries and expanding in some others and some markets. So that's for the clinical diagnostics. Some of you noted we had a setback last year. We flagged it in Q1 at the conference call. And if you read our offshore report, you will find more details. We have developed a new test, which initially got a very positive response by Medicare, a combination test expression. and cell-free DNA testing combined. Unfortunately, effective in March last year, there was a change of reimbursement policy, which meant that test cannot be sold. So we had to shut down the whole activity, lay off about 50 salespeople or something of that order of magnitude that were focused on that activity. And we need to invest for two or three years or two to four years in the new clinical trials to validate the benefits of those tests or actually an improved test we are working on. and see if we can create the half a billion dollar market that we are looking at initially. So this is, we flagged that last year, unfortunately delayed, but otherwise we have all the components now to serve completely the needs of transplant hospitals with a range of virology testing, organ testing, donor testing prior to transplants, including for for egg and cell therapy and all those potential grafts, not only kidneys or heart. So we are definitely the market leader in America. And we believe we're investing 10 million, at least 10 million losses in that activity for the clinical trials. But we believe that long term, it can be a very nice growing market and a nice franchise for us. So that's for this activity. Overall, our business is doing well. We've had good growth in many areas. As usual, North America and the rest of the world have had higher organic growth than Europe. Europe is still somewhat subdued. We see some green sprouts and green things coming up, but it's not as marked as we would like. We hope that the next few quarters will show a catch-up in Europe. We have improvement also in profitability that can be even further increased once Europe fully pick up. So you can read on the press release the different level of growth. On page five, you can see of the slideshow breakdown of the revenues. So we've basically ended the COVID period. COVID revenues are over. Of course, we will do when we do multi-panel for flu and so on, when it's required, we'll test a bit of COVID, but that's really marginal. So we've had to compensate that, and now we've almost fully compensated that. This year, twenty twenty four will be a year where our total revenues should exceed the revenues we had in the peak of the year of twenty twenty one. So that's basically this year in twenty twenty four. We are really putting behind us the times the comparable of twenty three are, of course, mostly free of COVID. And therefore, you should be able to see the revenues and profitability improvements independently of that. So we've really grown to a much larger company than we were pre-COVID. And so what I was saying for acquisitions over five years, we think we can add about $250 million per annum of revenues on a pro forma basis because it won't be consolidated January 1st every year. So that means over five years, including 2023, 1.25 billion euros. And we might do a little bit more this year. We did a bit less last year, but that gives you an average of what we think is possible while achieving the, basically doing that with our own cash flow and reducing our leverage by 2027 further. So that gives you a bit of the breakdown of our growth on page five. And on page six, well, I just want to reiterate that we are comfortable with our objectives. We think the year is starting very well from that perspective. And we think we, if things continue like this, we should be able to achieve our objectives for this year. And also the objectives we've set for 2027, which include indeed significant margin expansion and cash flow expansion. But I have also to underline, Over the last two or three years, we have done some fairly heavy lifting in building our network, and we start to see the benefit of that, of reorganizing, realizing along a very efficient hub-and-spoke network. We are still doing very heavy lifting to rejuvenate our IT infrastructure in more resilient, more independent networks, higher level of security. That should be completed next year. A large part of it will be done this year, actually. We have invested massively in developing new solutions in some verticals that are deployed. We will now from this year in our food and environmental testing business line in Europe, start deploying on on full countries, the two or three full countries, the new suite of solutions, which will enable us to. to remove a lot of big patchwork of legacy solution, which over a two or three year timeframe should reduce our IT costs significantly, improve our efficiency, reduce our testing time, and more importantly, give us the clean data pools that are required to run some new applications based on artificial intelligence to remove more and more of the scientist time that is needed to look at results and interpret results before they are sent to our customers. Automations, we're doing a number of pilots of automation to reduce manpower. It will become harder and harder to hire analysts and technicians. And we are studying, and that's a lot of capex and a lot of cost and disruptions, but we have many pilot studies to define what is the right automation for all of the use cases we have in our various verticals. And of course, we benefit from having many labs doing the same thing all over the world. with different approaches. We're doing a lot of effort to benchmark them, to find the best processes, to optimize them, and then to automate what can be automated. So while we run the business, while we grow, while we improve our profitability, we are really doing a lot of heavy lifting for the long term to strengthen the competitive advantage of our group, of our different verticals, in the verticals where we see very strong potential growth on a secular basis for the next five to ten years. So that's a summary of this quarter, and we'll be happy, Laurent and I, to take questions.

Thank you, ladies and gentlemen. At this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you were using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press Star followed by one at this time. And please hold while we poll for questions. The first question today is coming from Suhasini Varanasi from Goldman Sachs. Suhasini, your line is live.