Eurofins Scientific SE (ERF) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining Eurofins' Full Year 2021 Results Call. Please note, this call is being recorded. [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 the 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 Eurofins annual report. Please also read the disclaimer on Page 2 of this presentation, subject to which this call and Q&A session are made. I'd now like to turn the conference over to Dr. Gilles Martin, Eurofins' Founder and CEO. Please go ahead.

Thanks, Guy. Hello, everybody, and thank you for joining our quarterly and annual results call. We will go to Page 4, I believe. Well, I am pleased to report -- Page 5, sorry, to report on an excellent year in 2021, where Eurofins exceeded its objectives on all aspects and made a lot of progress on its operational program to build a leading global company in the exciting field of Testing for Life. During this year, operationally, not only did we achieve increasing revenues, not only did we contribute to helping many governments fight the COVID pandemic, but we also continued our pivot and made good steps towards our pivot towards positioning Eurofins as a leading BioPharma company, a company serving the broader life science sectors with BioPharma services, IVD products, Genomic Services, Agroscience services. This now is of a significant size, close to 1/3 of Eurofins food and environmental testing or historic areas of activities together compared to BioPharma. So this first part, I was mentioning, our life science activities now represent about 85% of food and environmental testing combined, a significant pivot. We've also made very significant investments in Asia. And our objective for this decade is to rebalance Asia compared to Europe and North America. Long term, there is no reason why Asia wouldn't represent 1/3 of Eurofins business, Europe being a 1/3 and North America, 1/3. We've made very good step operationally over the last 2 years in -- towards those objectives. Next slide, please. So a very good development in our core business. As you have seen in the fourth quarter, we were up 12.6% compared to 2019. So a very good rebound. Although, let's say, not all of Eurofins activities were unaffected by COVID. We still have had lockdowns and a lot of disruptions in Q4 in several areas and still a little bit in environmental testing in the U.S. and some of the food service, support services in Europe, et cetera. So a very strong year for our core business. Outlook is very good. We continue to innovate, develop many different tests, both for supporting the public health authority in fighting COVID and in -- throughout our core business. The future for Eurofins, as we can judge today, is very bright. There's a lot of demand in our markets. Our markets are very resilient, and we've seen it through the great recession and through the COVID pandemic, our businesses are very resilient in terms of crisis. But they also have a lot of opportunities that are due to the developments in biotechnology, in analyzing the human genome, in new tools to read biomarkers at the same time. So we see a lot of opportunities. And we feel that we will take advantage of those opportunities. We will be massively expanding our BioPharma footprint over the next 3 years. We already add on an investment program to expand our BioPharma laboratories over the last 5 years. And -- but unfortunately, it looks like they could be full within 2 or 3 years. So we have to now start planning additional capabilities. And as you know, building and qualifying BioPharma laboratories, our CDMO side, takes time. So we're -- we've decided to invest quite significantly in this area, to open quite a few startups, especially in Asia. So a lot of things going on. We made good progress on our digitalization programs, in the food environment and BioPharma. So we decided to start similar programs in our new areas of Clinical Diagnostics, Genomics and Clinical Genomics, also Product Testing. So overall, we are very positive and bullish about the future of our markets and we are investing behind that. Next slide, please. Eurofins has always done a lot to protect our planet and to contribute to safer lives and better lives for everybody, supporting our clients, meeting their ESG objectives, but we might not have been very good about describing what we did and talking about it. So we have started, last year, to engage with the rating agencies, with the ESG rating agencies. And as you can see on Page 7, we've received the increase and upgrade by pretty much all agencies, and it's just the beginning. Our ESG report this year, I hope you will find, is much better than the one we had last year. We have launched many programs that should deliver a meaningful upgrade in those rating over the next few years. And more importantly, to enable Eurofins to be a carbon-neutral company. I will now ask Laurent Lebras, our Finance Director, to report on the financial results for last year.

Thank you, Gilles, and hello, everyone. I'm very happy to present you with a very strong set of financial results for Eurofins in 2021, ahead of our latest objectives, thanks to a very strong growth in our core business and the continued COVID activity. Moving to Slide 9. I will highlight a few metrics. As you can see, we posted record revenues of EUR 6.7 billion, an increase of 24% year-on-year, which translated into a very strong EBITDA progress. Our adjusted EBITDA stood at EUR 1.9 billion, a record level also in progression of 35% year-on-year, implying an EBITDA adjusted margin of 28.3%, which is a very significant increase of 230 bps over the previous year. All this translated into a record earnings per share at EUR 3.91 in progress of 44% year-on-year, also adjusted EPS of EUR 5.29 in progression of 46% year-on-year. Moving to Slide 10 for a closer look at our revenue bridge. As you can see on the slide, we didn't enjoy the positive currency impact, we had actually a negative FX impact of about EUR 50 million. And you can see that the very strong revenue growth that we posted in 2021 was mostly linked to 2 factors of similar importance. First, a very strong organic growth of our core business at plus 12%, which brought almost EUR 600 million of additional revenues in 2021, and also an increased COVID activity, which brought additional revenues of EUR 600 million in 2021. As you can see also, the contribution from M&A was rather limited at a bit less than EUR 100 million in 2021. Moving to Slide 11 for a detailed look at our cash flow breakdown. We had a record net operating cash flow of EUR 1.5 billion, which enabled us to fully finance our acquisitions, our increase CapEx spend for capturing more mid-term growth. We also engaged in a very significant refinancing exercise, which successfully led us to redeem about EUR 1.1 billion of bonds, which were bearing an interest rate of almost 3% and refinance them with a 10-year bond, with an interest rate of below 1%. Overall, we were able to self-finance our CapEx, our M&A, our debt service, our dividends. And we also chose to decrease our gross debt by about EUR 400 million with our own cash reserves. Moving to Slide 12, for a focus on net working capital. As you can see on the slide, our net working capital remained stable at 4.5% of revenues. We had a very good inventory management. We had a slightly higher trade accounts receivables, which were linked to the COVID activity in the last quarter of the year, but which were fully offset by higher trade accounts payables and other payables, which globally enabled us to have 0 net working capital valuation in the cash flow statement last year. Moving to Slide 13. I'm going to walk you through our CapEx plans. So as you can see on the slide, I mean, we had an acceleration of our investment in CapEx in 2021, which reached almost EUR 500 million that we can break down into 2 groups. First, what we call the operational investments, which represented about 77% of the spend and which relates basically to IT, lab equipment or investments in leased sites. And then the investment in owned sites, which relates basically to the purchase of land or buildings and the further investment in these sites, which is basically an answer to capture the strong market demand that Gilles mentioned a bit earlier, and which is also acted by the company in a discretionary logic, like we do for M&As, while creating tangible value. You can also see on the slide that we remain very cautious on the COVID CapEx, which has been depreciated or written off for 88% at the end of the year. Moving to Slide 14 to take a closer look at our leverage and debt maturity profile. So as I mentioned it a little bit earlier, we were able to reduce our gross debt by EUR 400 million. We had a net debt at the end of the year, which was stable at EUR 2.2 billion, and we were able to decrease our leverage by 0.4 turns, reaching a level of 1.2 turns only, which is well below our comfort zone of 1.5 to 2.5 turns. We also did a debt refinancing exercise, which successfully enabled us to extend our maturity to 10 years and enjoy lower interest rates going forward. These interest rates will be [Technical Difficulty]. So overall, we conclude the year of 2021 with a very solid balance sheet with ample headroom if needed. And to conclude this presentation on financial results on Slide 15. After a period of very strong M&A activity in 2016 to 2019, you can see that we reached record ROCE level of 22% in '21 or even 68% if we exclude the goodwill. And that makes us very confident to maintain our hurdle rate at 12% for both internal and external investments. Now I'm giving back the mic to Gilles for an update on operational activities, strategy and future objectives.

All right. So we'll move to the next slide, please. So Eurofins is all about innovation. It was founded based on innovation. And one of the reasons that we grew so fast is that we were investing, overtime, in developing new tests, developing new modalities to offer those tests like recently going into direct-to-consumer, investing in automation, investing in IT and artificial intelligence and we continue along those lines in 2021. On next Page 18, you will see a number of examples of innovations, which I will not dwell on now, but we can come back during questions. Similarly, we continued to innovate throughout 2021 to help governments find solutions to fight COVID-19. We're one of the largest sequencing providers to identify the variants. We launched a test to detect Omicron on the same day that it was declared a variant of concern by the WHO. So we've been very fast and very proactive in this area. So as I mentioned earlier, our strategy continues to become a leader also in Asia to strengthen our leadership in BioPharma services and invest in the high-growth areas of life science that we've been already started to be active in. And we continue to do M&A to add technologies or add presence in activities where we were less present before, like, for example, consumer diagnostics with the DNA Diagnostics Center we acquired this year. On Page 21, you'll see some examples of the large investments we are doing in expanding our campuses. It's in laboratory testing, scale matters. So having large campuses, large hubs, where we concentrate for each continent large number of tests of each kind is a good way to increase margins, to be efficient. And we've been doing that for a number of years, and we're continuing to do that. We have a focus now on Asia for the next 10 years, but still in Europe and North America, there's still a lot we can do. We have, as I mentioned, big plans to expand our BioPharma footprint or CDMO footprint. And we have some major campuses in North America and in Europe that we'll be expanding over the next 3 years so that we have capacity available 2 or 3 years down the road when our current facilities start to be full. On Page 22, you see the overview of our M&A. So definitely, we have not come back to the level of 2017 and 2018, where we added about 15% additional revenues from M&A each year, but we did exceed last year the target we had for M&A. M&A will add about EUR 250 million revenues on the M&A that we closed last year compared to a target of EUR 150 million. We also think that going forward, adding EUR 250 million from M&A compared to the EUR 200 million we're targeting before is absolutely achievable, while staying conservative on valuation. In order to do those 38 deals last year, we passed on hundreds, which were, we thought overpriced or not appropriate. So we are still very prudent and very selective in the companies that we buy. Nonetheless, overall, our cost was about 2x revenues, which is less than a lot of other multiples I've seen from other buyers. Now the question is, of course, we buy companies, but are we creating value with those companies that we buy. So now we are at the end of the 36-months period following the acquisitions that we did in 2017 and 2018. I will focus here on 4 -- on the 4 largest acquisitions we did in that period. The most expensive one, I think, over EUR 600 million was Covance Food Solutions. And when we bought Covance Food Solutions, we already had a network of food testing laboratories in North America. And we added 9 more laboratories from Covance Food Solutions. A large number of those were redundant or subscale. And we had to move out of the very complex campus of Covance LabCorp in Madison. In the meantime, we built a new very large site in Madison that we'll be happy to show you at an Investors Day, I hope this fall. And we also consolidated all the other sites in the U.S. into our site, except the sensory sites, which were small, and we didn't have sensory before. So this integration is physically complete. As we can see on the next page, the results of these integrations were very good. We were able to have a significant organic growth over the period, over 7%, on a compound annual basis. The margins have increased significantly over the period, as you can see, and if we look at the return on capital employed, we are over 16% for that area. We did a couple of additional acquisitions in the meantime. So a very good success of this integration. The next large group of companies that we bought is TestAmerica, a network of over 24 environment -- over 20 environmental testing labs. That had to be combined with Eurofins environmental testing network in North America. Same thing we did that. We moved or renovated 7 labs. We had -- we did some bolt-on acquisitions. We upgraded the leadership. And again, as you can see, although this business is still affected or was still affected in 2020 and 2021 by COVID, by lockdowns and restrictions of sampling and so on, we did finalize and achieve this integration. And we've achieved over 13% return on capital employed. Also, we did some additional bolt-on acquisitions over the last couple of years, which are not fully integrated yet and are still a bit dilutive. Next target was EAG. EAG was also a major investment, also more than $600 million. And some said we paid a significant price. And here again, as you can see, we achieved, not only significant growth, but also significant margin improvements, and we achieved the return on capital employed target that we have set for ourselves. And here, again, we've done, more recently, some additional bolt-on acquisitions. Last one was DiscoverX in San Diego and in California, generally, a company specialized in discovery pharmacology to complement our discovery business, our BioPharma discovery business. Also a very good progression, even higher growth, 12% compound annual growth for that business and return on capital employed achieved with 22%. We've got the summary on Page 29. So I think if we look back, of course, we could do that on every single of our acquisitions. Some of them are difficult to trace because they are immediately integrated, the sites sometimes are closed down and they are merged in our business. We do that. We look at it. We look at it as a bulk, but we wanted to show you this analysis on the 4 largest acquisitions that we did in 2017 and 2018 to enable you to see the impact of those acquisitions on our financial numbers. Another important investment we did is in developing capabilities to support health care practitioners in keeping patients who have received an organ transplant alive and keeping their graft alive. We had developed the TruGraf rejection test, which is the only test in the world, which can rule out silent subclinical rejection. We were competing with CareDx and Natera, which are much -- had a much simpler test to detect acute rejection. We launched, in the meantime, a test called TRAC, which is working in a similar way. And now what we are doing, we are combining both tests to launch OmniGraf, which is, by far, the best test to help doctors support their patients, which are undergoing a graft. We are putting this OmniGraf in additional clinical trials to validate the benefit over time, not only in the couple of years following a graft, but for pretty much the life of the patient for regular monitoring multiple times per year. So we are convinced we will get good data to expand the use cases, where the medical benefit of this very good test is proven. As you can see, this is starting to pick up. TruGraf has increased more than 300% last year compared to 2020. And as you can see on Page 31, this growth is really picking up. Of course, we are investing massively in medical liaison officer, in personnel to explain the capabilities of those tests to doctors to establish the interfaces, the electronic interfaces with the nephrologist offices so they can order smoothly as part of their patient management protocols. We will continue to invest next year. Of course, we are doing that much more cost effectively than CareDx or Natera seemed to have done in the past. And we think now the catch-up will be very interesting over the next couple of years. We are quite optimistic about the development of this test. We have, by far, the better test, and now we are setting up structures to access the market nationwide of a similar order of magnitude than our competitors. So we are very positive about the potential development of our test. And I think it was Natera or CareDx, who were talking of a market of $2 billion. We are definitely not there and have quite some way to go. Other example of development is testing for pair and Polyfluorinated Alkyl Substances or PFOS. This is a topic that started to appear and be mentioned in environment. We developed test already almost 20 years ago in Europe. Then we developed those tests in the U.S. and Australia. We learned how to industrial those tests -- industrialize those tests, make them very fast, very efficient. We transferred that know-how to our food testing business over the last few years. And more recently, we even transferred it to our clinical diagnostics business to direct-to-consumer because unfortunately, we don't only find those pollutants in the environment or later in our plate, but also it stays in our body, and it is almost not destructible. So we pretty much keep it all our lives. And it is now recognized as an issue for a lot of people who unfortunately lived near certain factories. So we are offering ways to -- for people, for consumers to self-monitor themselves for those compounds, and we are working on a range of other modalities. ESG. As I mentioned, we are investing to document what we do. We're also investing to scale up the CO2 reduction programs. We are asking each of our leaders of our companies to develop programs to reduce their emissions. Our goal is to be carbon-neutral by 2025, and we are convinced that we are on the right way to do that. Our EDE initiative, equality for excellence. This is making good progress. We're increasing female leadership in our group, and we have been recognized for several of those actions worldwide. In the government area, we have now 5 non-executive directors, independent non-executive directors. We have parity, male, female parity in our Board. We have created several committees. And I hope you will appreciate the improvement of our ESG report. And again, we're happy to take a suggestion on how to meet your expectations even better in this area, which we're definitely making significant progress in ESG. So to conclude on Page 35, we wanted to go back on organic growth. There always have been discussions about organic growth. And actually, we -- what we found was very positive. We've had for a long time an organic growth target, a secular long-run organic growth target of 5% per annum. And what we found is that actually, over the last 11 years, our average organic growth was more 6.5%, actually 30% higher than our objective. And before the Q&A maybe we should review what we plan for the future. There's definitely upside above that. Maybe we've been a bit too conservative for too long. So we decided to raise our organic growth objectives for the next 10 years to 6.5% per annum. Of course, if inflation explodes or stay super high, we will increase our prices and things will be higher, but we're working from the assumption that inflation will normalize in the -- at least in the second half of the year and return to the 2% or 3% level, which is what everybody hopes. We shall see. But anyway, on Page 36, we've made objectives on that basis. There is a typo in the slide. The only objectives we worked on and modeled are objectives, including M&A, some are IR-added free cash flow before investment in owned site in the -- without M&A objectives that we just give for information, but we didn't do any planning. So that will be removed. So what we wanted to also mention on Page 37, is how we -- because we've had questions on that, how do we think we would spend our cash. Obviously, post the pandemic, Eurofins has reduced its leverage very significantly, is starting to generate very significant cash flows, not only very good margins, but also good cash flows. So the way we've made the planning, and you can see on the page before, of our objectives -- of course, it assumes that we meet those objectives, we would, on average, generate close to EUR 1 billion each year of free cash flow. So about EUR 900 million of free cash flow to the firm, and we're giving you a bit of a breakdown on how we think it could be spent. And what's interesting is that you see that we can -- we are now in a position to self-finance our M&A, pay a significant dividend, purchase more of our own laboratories, and do that while not increasing our leverage and maintaining a very reasonable level of indebtment. So to conclude, very strong performance in 2021. The outlook, as we can judge today, is excellent for the next few years. We will be investing because we think going forward, we can do even better than that. It takes a bit of time, of course, for those investments to come online. If we start planning today a new BioPharma site and a new -- or a new CDMO site, of course, we won't generate revenue with that building or that site before 2024 or 2025. But we are very confident that we should do that. And that's why we've planned our CapEx the way it is. We'll continue to do moderate M&A, about EUR 250 million additional revenues per year. So that altogether, we are in a range where we probably confidently could grow our total revenues by 10% per annum by a mix of organic and acquisition, while self-financing everything and keeping our leverages very low and distributing a dividend. So Eurofins still has a lot of potential to grow to expand its network, but is also becoming a more mature company that can serve its shareholders a decent return, while continuing to grow and expand significantly. So that is for our overview today, a bit of a long one, I'm afraid, but it's a full year that passed. And then I'll be happy to -- Laurent and I will be happy to take some questions.

[Operator Instructions] And we will now take our first question from Rajesh Kumar from HSBC.

Just thinking through the 6.5% incremental, basically, your structural growth guidance has increased from 5% to 6.5%. What do you think would be the incremental return on capital and payback period required for that capital to deploy to drive faster growth in the near term? So basically, what sort of return on incremental capital would you expect to generate, while you invest for that additional growth? The second question is obviously, a lot of services you provide are of a technical in nature and one would imagine that passing through cost inflation and pricing should be very tricky for you -- your business. That 6.5% organic growth, does that factor in some inflation benefits on pricing as well? Or would that be an additional upside? And the last question would be, what is your -- in terms of the end markets, where do you think you need to augment your existing capacity with M&A the most for the next 5- to 10-year strategic journey.

Thank you very much. Increasing our organic growth objective from 5% to 6.5% is not a factor of the future CapEx we will do. It is more the result of the CapEx we did over the last 10 years to build the network that we have. The additional CapEx that we plan to do over the next 2 or 3 years, we should see the main benefits more 2 or 3 years down the road with potentially even higher organic growth and better margins from automation. On inflation, it includes same -- similar level of inflation that we had before. It doesn't include, of course, exclusive inflations. Yes, we -- as I might have commented before, in some areas, we are passing significant cost increase to our clients. Where obviously, there are some more labor shortages in North America. And BioPharma, there are definitely some tensions on labor costs that we are passing on to our clients. This is very hard to plan. If the Fed and the BCE are still pondering what they think inflation would be, obviously, Eurofins is not in a position to plan inflation any better than them. So we are -- we will be adjusting as time goes. But yes, if there is inflation on top of that, we will increase more revenues. In terms of end market M&A, all our end markets we like. We are putting a focus on Asia, but there is not necessarily so much M&A to be done in Asia. And again, in BioPharma, there is not necessarily so much M&A to be done either. I mean not proportionately more than in our other businesses. So I think M&A might be spread fairly evenly across our business line. And on organic investments, we are definitely making a focus on BioPharma in Asia.

And our next question comes from Neil Tyler from Redburn.

A couple for me, just returning to your revised guidance and the lifting of that. Can you just sort of clarify to what extent does the raised long-term growth guidance reflect a change in approach to framing guidance as opposed to improved end market prospects? That's the first question. And secondly, the purchase -- the increased CapEx to purchase your own sites, is the expectation that ultimately, the return generated on these sites will end up being higher than those -- than that generated on rented sites. And over what time frame, i.e., if some of the CapEx ultimately going to replace future OpEx? Or are these sites sort of all incremental to what's in place already? And then finally, Gilles, your introductory comments suggested -- were pointed to the ongoing negative impacts that you had experienced during 2021 in environmental testing and in some food testing activities, I think, as well. Are you able to quantify at all sort of what those might have been? And by when you assume those impacts unwind?

Thank you very much. Our guidance is basically because we see our markets are better orientated now than they've ever been. So we see more growth in our markets today than we saw 5 years ago. Our mix also because we have improved our competitive position. Also because some of our investment in Clinical Diagnostics, for example, for TGI and TruGraf are starting to pay off. It still does include, in principle, a margin of error like we had before. Of course, forecasting the future is the most difficult exercise, as we see how volatile the world is today, but we have basically a better outlook on growth today than we had 5 or 10 years ago. CapEx repurchase our own side. Yes, what we've observed is, and you probably all know that, the cost of building has increased massively over the last 5 years. So we are very pleased to own our own buildings because where we don't, we see a very significant potential rental cost increases over the next 5 to 10 years. Now of course, again, we don't know what inflation will do and maybe that will reverse. But at the moment, with the shortage of raw materials and basically simply more demand than availability for many types of buildings and especially for laboratory buildings, we are very pleased to own our sites. And of course, a good thing when we own our sites is that at some point, they are paid for. And indeed, it increases return because their cost doesn't increase. It's a fixed cost. We need to maintain them, of course, but we also need to maintain rental property. And the other benefit is usually we build campuses. So we buy extra land. So that when the building is full, we can build an extra wing and then an extra wing and another extra wing and we don't have to move. So we don't lose all the investments we put in the first wing because we have to move to a new site and we cannot be held at ransom by the landlord. So that's a bit the rationale. And it's really hard to quantify what the COVID headwinds were last year. They were not the same in every quarter and in every geography, but they were something. So -- but I wouldn't be able to give you a number. But it's not like -- it's not EUR 1 million. It's more than that much more than that.

We will now take our next question from James Rose from Barclays.

I've got 2, please. First of all, in the BioPharma markets, could you be a bit more specific on which areas you particularly want to add capacity, where are you really trying to build a strong position in that market? And then secondly, when more PCR machines become available as COVID testing declines? Could you talk a bit more about how they could be repurposed elsewhere in business? And are you seeing any concerns about oversupply or sort of competitive pressures on pricing if there are more of those machines just generally in the marketplace?

Yes. Thank you very much. In BioPharma, our focus will be very much in ATMPs and biologics, both in testing. So testing and biosimilars. We're expanding our capabilities, and that's a number of modalities. We are also building our CDMO in those areas. For example, we are a large producer of oligonucleotide and this is getting into, not only more IVD products, but it's getting into therapeutic oligos in a number of usage. We're investing to build factories there, antibodies or the modalities. So that's -- of course, we continue to invest for small molecules, and we have a lot of small molecule capabilities. But the bulk of our investment, probably at least 70% to 80% are planned on the biologics and ATMPs. And as to PCR machine, yes, that's the question. The world is full of PCR machines. The clinical business is regulated. So the prices for clinical testing are regulated. The real question is whether actually, new tests will come to market. Eurofins and many other players have now developed panels. So that when somebody is sick, one doesn't only test for the flu or doesn't only test for COVID, but can test in one run for a number of pathogens. And the price for doing that will for -- and what would be good for patients and doctors, if the health care systems and the insurances would start to pay for those panels on a routine use basis because it would really help doctors immediately prescribe the right antibiotic, if there is resistance or basically prescribe nothing instead of prescribing antibiotics, if it's a virus. And of course, in sepsis, it's of critical interest and there are already some panels and they are being used. But for the routine management of respiratory or gastrointestinal diseases, all those PCR machines could find good use. Whether this will happen, we'll have to see. It's very difficult to change the reimbursement policies. But definitely, the cost of a PCR has now gone down so much that it is a viable option to test everybody who gets sick.

We'll now take our next question from Andy Grobler from Credit Suisse.

Just a couple from me, if I may. Going back to your long-term target and the increase to 6.5%, I just wanted to balance out the 2 comments because the 6.5% is in line with the last 10 years or so. But you're also saying that the outlook for your market is better than it was historically. So why isn't -- was there a temptation to push that target up a little bit further? And then secondly, and apologies for a shorter-term question, just in terms of revenues from your COVID activities through the end of last year and into this year. Kind of what is the run rate as you go through January and into February? Just trying to work out at what stage that falls pretty much to 0.

Thank you very much, Andy. Well, I guess by now, many of you have noticed that we try to be conservative. We think our duty to investors is to set objectives that we think are achievable. And it's always difficult to predict the future, but I think on balance over the last 10, 15 or 20 years, we have a very good track record of hitting our objectives. And maybe our objective sometimes include a bit of a margin of safety and sometimes we exceed, actually most of the time we exceed. And if I look at the organic growth, we exceeded by 30% over the last 10 years, our objective. It doesn't mean that some years we didn't come just at the 5% objective. So -- but we are more interested in long-term investors, investors who want to stay with us for 5 or 10 years. And we're trying to give them an indication of what we think is achievable. But yes, there is some elements, some level of caution to set 6.5%. But we think it's a bit our duty. And I think the same apply to your second question on COVID. We're a bit conservative in planning EUR 300 million of COVID testing. If I look at what LabCorp, Quest are doing or Sonic or SYNLAB, they're all planning continued COVID testing through 2023 at different levels. Here again, we prefer to err on the side of caution, we might be at about EUR 100 million per month run rate now. Maybe we think of 3 months of COVID and nothing after that. It would be very extreme if COVID fell to 0 so quickly. But it's, on the other hand, impossible to plan. It's impossible to plan if there will be a new variant, it's impossible to plan what will happen next fall and next winter. So we'd rather tell our investors, look, plan for 0. If you're happy with the performance that we think we can achieve with 0, then that might be safe to buy our share. If -- rather than speculate on what COVID will be in the second half of this year. That's a better approach for the long-term target growth. There's no guarantee we will hit it or there's no guarantee we will exceed it. But we think it is, from what we can tell today, it is definitely achievable.

The next question comes from Geoffroy Michalet from ODDO BHF.

Two questions for me. First one is on the market of the direct-to-consumer. Could you elaborate a bit on how you see that market, the growth, the kind of tests you will target and the size may be in the U.S. and Europe? The second question has to do with Clinical Diagnostics. Do you have, let's say, new ambitions apart from the one on COVID on the routine Clinical Diagnostic or maybe on the specialty Clinical Diagnostic?

Thank you very much. The direct-to-consumer testing market is rather small. You see DNA Diagnostics in the U.S., we bought, was about a $50 million business. It was a leader in that market in size. There are other companies like Everlywell and others that are launching. Amazon is launching. LabCorp and Quest, both have DTC business. I think I read somewhere that either the CEO of Quest or LabCorp was thinking they could make it a [ 200 million ] business from maybe [ 50 million ] or [ 70 million ] now. And that includes a lot of COVID. And by the number I mentioned was without COVID. It's going to be interesting to see how fast this market develops. We are launching ranges of tests for wellness, for vitamins, for sexually-transmitted diseases, for PFOS, for contaminants, for aging, for sport nutrition, supporting sports. So we're not really doing the very acute care test on a direct-to-consumer basis. They are usually needed in hospitals and care settings. We're offering a range of genetic tests also to consumers, to test for predispositions where it is allowed. So it's going to be an interesting evolution for the next 2 or 3 years to see how fast the pickup will happen. It's true that people in many countries like the U.K. or the U.S. are used to ordering a COVID test online. If they are used to ordering a COVID test online, they could -- if they are coughing, they could have a box at home and send it back if -- after they spit in it to see why they are coughing. This would make sense, and we'll be launching tests like that or if people don't want to go to the doctor to get tested for STDs then they could do it from the comfort of their home. Those are things that really make sense, and we're going to see how fast the pickup will be. It's probably -- we'll start more in the U.S. than in Europe, as usual. Also in Asia, there's potential in some countries or Southern Europe, Italy, Spain, maybe might be more open than the highly regulated countries like Germany or France. And to your second question, our ambition remains really specialty diagnostics. Most of the investments we made in Japan and in Vietnam, this year, for example, were on clinical genetics NIPT, oncology. We want to be in Clinical Diagnostics, where we can create new tests, where we can innovate, when we can create value by offering proprietary tests that are better than what is routinely available. We think that's where the growth will be. We think that's where the margin will be. And we don't want to just consolidate the routine Clinical Diagnostics like others may be doing.

Allen Wells, Jefferies.

Three for me, please. The first one, just a bit of a follow-up on the kind of COVID-level question. But when you are obviously seeing or planning for a significant ramp down, you talked obviously about the impacts of ramp down costs, stranded costs or assets. Is there any way you can potentially quantify or give us an indication of how much that's impacting the business from a margin perspective or from a cost perspective in 2022, please? That's the first question. And then secondly, just a clarification question on the EUR 100 million investment to acquire labs and land. Is this purchasing buildings on new sites? Or is this going to be purchasing existing labs from current owners? And if it's the latter, how much of that will be kind of the independent owners versus the related parties. And then the final question, just on the financial, and apologies if I missed this. I think there's a call on the hybrids end of the second half of this year and into 2023. Have you got any thoughts or comments around how you plan to refi these? Is it going to be traditional debt or would you stick with a hybrid structure in there as well?

Thank you very much. Yes, we do have some rundown costs when we have to close sampling station. We're actually in the middle of it in the U.K. right now because the U.K. government has pretty much stopped all testing. It is expensive. There will be other countries where the rundown will be much less expensive, if it's mostly central labs. We have a lot of time personnel, which, at some point, their contracts run out. And that's why we have planned for COVID testing in 2022, a margin equivalent to the rest of our group margin. It's definitely a mix. Of course, if we run at full capacity, we have higher margins. But closing down our U.K. network is actually generating losses this year. So of course, we have a global mix of all those things. But the impact is included in the margin we are planning. So there will be some pluses and we think overall, a little bit of COVID testing we'll do this year, will be profitable. Investing in labs. Well, it's going to be a mix of everything. It's new labs we're building on land. It is existing buildings that we are buying from third parties and that we are converting to laboratories. When we can, it is buildings that we are currently leasing that we buy from the owner, not from related parties. From related parties, they are there and they are available. So there's no rush for Eurofins to acquire them. What I have said is that once Eurofins has enough cash flow, I will put it to the vote of our shareholders. We'll get valuation done by independent building appraisers, and we'll offer that to Eurofins, and we will let our shareholders vote on it. I will not vote on it and I'll the follow the vote of the rest of the shareholders. That's the intention. I don't think we will do it this year. I don't think there's a big emergency to do it. But if our main shareholders decide that they would like us to do it faster, of course, we have a dialogue with them, large institutional funds. And we could consider it now. It's -- I'm not sure it will change very much because they are available if Eurofins need them and Eurofins enjoys already that protection by the fact that I'm prepared to do it. But it's not on the agenda, at least for this year. And hybrid, yes, that's our treasurer to decide that. It will depend on the conditions on the market when we are able to call that hybrid. We will see. I'm very curious to see what the conditions will be then.

We'll now move to our next question from Dominic Edridge from Deutsche Bank.

Just 1 left for me. It's just regarding employees and employee retention. I know that obviously, you've already mentioned that there's been quite a lot of activity and quite a lot of challenges in the labor market, particularly in North America. Could you just maybe discuss, a, what your own churn rates are looking like? And also anything that you're doing to try and improve the situation in terms of -- I know that you're already offering $1,000 bonuses to sign on, some things like that. Is there much more you can do? And I suppose as the last point on that, is it having any negative impact on how fast you can expand the business or any sort of operational impact of sort of the short space of labor?

Thank you. Yes, I think labor is a challenge for pretty much everybody for every company in Europe and North America, probably even more so in North America. The churn numbers vary vastly by business, country, et cetera, anywhere between 10% and 30% is numbers that I've heard. And it's impacting everything. It's impacting efficiency. It's impacting cost. It's impacting operational. That was compounded last year with -- and in the beginning of this year with a lot of people being off sick with COVID, with Omicron. It's very hard to run a business at the moment. Nonetheless, in spite of all that, we've had a very strong fourth quarter of last year. And the first quarter of this year is starting very well. Businesses have to cope with adversity. They are -- and of course, we are taking a number of measures to hire more people, to retain our employees, to promote them, to train them, to give them opportunities. Our entrepreneurial model, with a lot of independent companies, is a good factor in this because a lot of people can be promoted. It can be a management track if they want to. But I think it's going to be a challenge for Europe and North America for a while. Maybe it's going to take a year for everybody who didn't change job during the pandemic to change job. And then, okay, they will be happy for the next 2 or 3 years.

I'm sorry, just a follow-up. Is it -- would you say it's having much of an impact in terms of what you can do at the moment in terms of limiting what you can do, in terms of maybe expansions or growing the business organically? Or have you still got enough room, do you feel, to do that even with the number of workers you have currently?

Yes. Of course, we would have grown faster last year and the year before, and we would grow faster than we planned this year if we had unlimited supply of labor. That is clear. We took that into account in our plans and objectives.

We will now move to our next question from Nicolas Tabor from Stifel.

First one, I would just come back on the acquisition of the laboratories. I just wanted to understand, you seem to say that the EUR 100 million will be allocated to both acquiring new labs and for existing labs. So how much is in the 6.5% CapEx-to-sales ratio guidance and how much is in the EUR 100 million for the new labs and start of labs investment? And then second question would be on the M&A spending. I think that the EV sales ratio was a bit higher this year based on what you reported on a pro forma basis. Should we expect this trend to continue over the next years? And how do you see this M&A cost inflation overall at constant acquired revenue? And then finally, can you give us an idea of the current gross margin you see in the COVID testing market, considering the recent price cuts and so on. What's your gross margin level, excluding all the, let's say, the back office and employment costs that can be shared with all the businesses?

Thank you very much. Well, the way we have modeled things is in the 6.5% or some whole percent. We have the investments in building that we do not own. So let's say, building in Shanghai, for example, last year that we rented in Shanghai, we don't own it. We still spend significant amount to build labs inside. And that is part of CapEx. And one on the other hand, we own a building and where we build a new building for a lab, this would be part of this EUR 100 million envelope. But it could be EUR 50 million, it could be EUR 150 million. It really depends on how fast the progress -- the project comes and especially with the existing landlord, we can negotiate with them, but if they don't want to sell, they don't want to sell. So that means we have to move and build a new building. The benefit of building a new building is we can build a green building. So I think the bulk of it will be more building new buildings. So they are also more environmentally friendly.

And how much of the EUR 100 million that you -- sorry I just wanted to follow up on that one. On the EUR 100 million you expect to target to spend the whole of that block every year if there is no pressure on your cash flow. That's what we have to understand?

Yes. EUR 100 million per year is what we think is an order of magnitude. But as I said, it could be EUR 50 million, it could be EUR 150 million. On M&A, last year, we were about at 2x revenues. I think it's a good deal. If I look what SGS paid for what was it, the SYNLAB lab is at 2.7% revenues and 18x EBITDA. I think we're fairly frugal and prudent on that spend. If you look at what we disclosed for the first 2 months of this year, I think we're at 1.5x revenues for what we bought so far. It's very difficult to predict what we will pay for M&A going forward because it depends on what we buy, their margin, where they are, so many different factors, but at least that gives you 2 numbers. And I think we're maybe -- I don't know where we were in 2020, 1.6 maybe. And for COVID, gross margin, it's all over the place. It depends on the country. It depends if we have to do the sampling or we just get the samples in our labs. It's very, very different. Its country reimbursement value is different. I wouldn't be able to answer on the gross margin. I think it's not that because we manufacture on own reagents. But anyway, the real problem on COVID is not the lab testing, is the whole sampling and getting the kits to the consumers and getting the kits back to the lab. And in some countries, you have to have a nurse or a doctor do the sampling. In the U.K., people are allowed to sample themselves also in many other countries, but not in every country. So it's -- really it's very hard to do any average because the numbers are so vastly different from country to country.

We will now take our next question from Arthur Truslove from Citi.

So just a couple for me on margins. So first one, when I think about the margins within the mature scope and indeed within the core business, Are you able to give an idea of what that looked like in 2021? And if you can't disclose that, it would be helpful to just confirm that it was above the 22% that you delivered in 2019 on that basis. The second question, just around the COVID testing, again. Obviously, you've sort of talked previously about how the revenue per COVID test ultimately has fallen a little bit, and that's been less positive for margins. Is it reasonable to assume that margins from COVID testing in the second half of the year were lower than they were in the first half? Or is that -- would that not be the right assumption?

Thank you very much. It's very hard to define the margin of core and COVID. Revenues is easy, COVID is COVID and something else is something else, but we do it in the same lab, the same personnel to a large extent. So it's really a question of how do you allocate overhead, how do you consider it the COVID as marginal extra revenues, where -- which we did still build some specific units for COVID. So we don't attempt to track the margin in a way that we could disclose and that could withstand audit. On orders of magnitude, yes, our core business, as we mentioned, we did right that, I believe, had increased margin. So -- and we wouldn't have come out and set objectives. I think that's something like 24% EBITDA margin for our core business going forward, which is quite a nice margin. I think it's industry-leading margin of the tech industry. And if we were not confident, we are now reasonably close to it already. So that's for the core business margin. And yes, it was lower in H2 with the COVID margin. It's -- nobody made any secret. There were significant reimbursement cuts in many countries. Of course, we also have institutional customers that buy in bulk. So they negotiate prices and they have negotiated better prices over time. So we're getting much less now than we were getting at the beginning of the crisis on a significant part of our turnover. The other thing is, as I mentioned, is in some countries, we're organized assembling ourselves. So we have to manage when we set up, together with partners, 1,000 sampling stations, that is a lot of extra cost. And in some countries, we even made a loss on our network of sampling station in the second half of last year because they were only utilized at the very back end of the year. But -- and that's why we are planning also including random costs that COVID margin now will be more or less at the level than our overall group margin. Of course, it's very hard to predict because we don't know how much COVID will do, and we don't know what utilization will have where. But over time, if COVID continues, and that's something we haven't planned for, but it's quite a possibility that COVID testing will continue through 2022 and 2023. And it will continue mostly probably for people who are sick. So it will go through a normal hospital business, or a normal clinical business, and it will probably have the same margin than our normal clinical business. So that's -- I mean, it's very hard to guess and forecast, but that's the best guess we can make.

We'll now take our last question from Rajesh Kumar from HSBC.

Just a quick follow-up on lab CapEx that you're planning. Could you -- have you already been in discussion with the current or future landlords of these last year procuring? And if so, how do you ensure that the valuation you're paying on these labs are not inflated by the demand you're sort of stoking by your stated objective of expansion?

We always have the make or buy option. So whenever we buy a building, whether it's a building, we already occupy and that's rare. It's fair that we can buy building we currently occupy to be frank. I think last year was maybe 1 building in that category. But we look at other buildings on the market in the area that we're interested in because usually, we have a benefit of moving. If you're going to spend money for a building, we -- our first choice is to build a new one because it can be environmentally-friendly. It can be more of a green building. And then we have land for expansion, which is rare in our existing premises that we were renting. But so we have third-party valuation also. We know what the market is, and we try to get a good deal. All right. Well, I guess we are getting through this long list of questions. Thanks a lot for staying with us for so long. Sorry that we run over a little bit. Well, as I said, we -- I think we've had an outstanding year in 2021, exceeding our targets in all areas and making a significant contribution to society. The outlook for the next 2 or 3 years seems very positive for us. If we are investing more, it's not so much for those next 2 or 3 years. It's that beyond those 2 or 3 years, we think we could potentially have even more growth and more potential for our business. Digitalization is very powerful. It should help us to serve our clients better. It should increase the gap of our competitors, and it should enable us to launch new services with Big data, with this huge amount of Genomics data that we are collecting every day that certainly will have an impact for treating diseases for oncology, et cetera. So it all looks very promising and very exciting, and I thank you very much for your support. And I hope that soon now we will be meeting in-person again. Thank you very much.

Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.