Eurofins Scientific SE (ERF) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome, and thank you for joining Eurofins Half Year 2023 Results Call. Please note that this call is being recorded and will later be available for replay on the Eurofins Investor Relations website. [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 Eurofins annual and half-year reports. Please also read the disclaimer on Page 2 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.

Thank you, Bernard. Hello, everybody, and thank you for joining our half year call. So I'm pleased to report on a good evolution in the second quarter of this year with acceleration of our growth. We are starting to see some impact of our pricing measures. It takes, of course, some time to push through all the inflation we had last year, and we're still having this year, but we see a good trend on that. This is the first half of the year, also the last period where we suffer from significant COVID comparable. And that is in our COVID business, which basically is now almost inexistent and [Audio Gap] to 0. And -- but also in our core business because we did significant demand on vaccine work on our BioPharma sector, which, of course has ended, and we still had quite a bit of that, especially in Europe in the first half of 2022. So we have a slide show we can go through. I will go to Page 5 now. As you can see, our growth momentum in our core business is good. It is stronger in North America. As we all know, unfortunately, since the war in Ukraine, Europe is affected and especially the countries closer to the war, the eastern part of Western Europe, Germany are more affected than others by the inflation that followed and the supply chain disruption. So we still see some softness in some markets in Europe, which we don't see in America. The good thing also about our results is that we achieved good organic growth in spite of the impact of cost containment measures by the French offshore security, which impacts reimbursement in clinical diagnostics. So that our total growth achieved this level in spite of those effects are good. Obviously, we are prudent regarding the outlook in Europe. We do think things should normalize, but nobody knows. So we have started a number of cost initiatives in several businesses to -- just to be ready in case growth doesn't pick up in the second half in Europe as we think it should or early next year. So whatever the development will be, we will be prepared to do that. Overall, the companies -- or the companies of our group are doing well. We are earning good margins, close to 20% EBITDA. So we continue our program of investments. We continue to focus on acquisitions where the sellers have accepted the new environment in terms of interest rates and therefore, valuation. So we are prudent in valuations. We think there might be better opportunities. We haven't changed our objective to add EUR 250 million each year from acquisition on average for the 5 years starting 2023 might be less linear. We think there might be better opportunities in a while. This year, it maybe a bit less than EUR 250 million. That's why we said most likely, maybe we'll have EUR 200 million revenues this year. We're very disciplined on acquisition price and the fit of those targets. We continue to build out our laboratory network. We've expanded the percentage of sites that we own to 31%. So it's -- of course, each quarter a modest improvement. And also there, we are prudent. We know that building costs may have peaked. So there are certain things we can delay a little bit in terms of building certain laboratories to when the cost of building might have softened even further. We continue to do start-ups. We think the return on capital employed on start-ups is usually very good. We have returns between 40% and 50%, often exceeding 50% in year 3 or 4. So we continued to open a lot of start-ups, which in some markets are necessary because there's nothing of quality to buy or in other markets, it is a better alternative to acquisitions due to the cost of acquisitions. On Page 6, we've disclosed some more information about revenues by activity. We are of the opinion, and we are structured by geography. We have one leader for each activity in its continent. That's what we think is the best way to organize our business. We do understand that investors would like to see [ our results ] presented differently, which is difficult, because then we need to have a different structure of organization to make that meaningful. But nonetheless, we will try to work towards that in how we, in the future, structure our groups. So we've decided [Audio Gap] information at this stage on revenues. But of course, as time passes, we will see the revenue evolution. You will get that in each of those areas. And as -- and if we can adapt our structures and the results are meaningful, we should be able to provide also data and profitability and its evolution. But this is not something we can do this year. But this is something we intend to continue at least providing revenues and describe -- and some color around the development in those areas, which we already gave in the past, by the way. So I will now pass the microphone to Laurent Lebras, our CFO, who will discuss the financial results of the first half.

Thank you, Gilles. Good afternoon, everyone. It's my pleasure to walk you through our first semester 2023 results. As you can see on Slide 8, our revenues year-on-year were down by 5.9% due to the strong decline in COVID activities. On the other hand, our core business organic growth was very strong at 7%. Our adjusted EBITDA was down because of the COVID activities decrease, but stood at 19.9%, broadly in-line with our full year objective. On Slide #9, you can see that our organic growth accelerated in Q2 to 7.5%, while the impact from foreign currencies and M&A were quite minimal in the first semester of the year. So the main driver behind our H1 revenues evolution was a sharp decrease of COVID revenues, which created an unfavorable comparative of over EUR 450 million that we were able to bridge the organic growth of our core business, by about half of this gap. On Slide 10, you can see a breakdown of our organic growth by segments and by region, which Gilles alluded to already. So Europe overall was a bit more softer in terms of organic growth, despite a very strong environment testing growth, while food and discovery were a bit more challenging. North America recorded a very strong organic growth on most vertical, very close to double digit overall. And the rest of the world was a bit more contrasted. On Slide 11, looking at our cash flow in the first half of the year, the net cash from operations stood at EUR 333 million, a 33% decline year-on-year due to the COVID activities decrease mostly. We had controlled but sustained CapEx spend at EUR 259 million, resulting in free cash flow of EUR 74 million or EUR 125 million before investment in owned sites. We were involved to increase our net cash position, which stood at the level of EUR 682 million, a stable level versus the previous year. On Slide 12, this is another view of our capital allocation for the first semester, so you can see that we generated cash before CapEx after debt service and rentals of about EUR 227 million. If you account for about 2% maintenance CapEx, they still left EUR 163 million that we decided to allocate heavily in long-term investment for growth. So basically, M&A and CapEx, where we spent EUR 273 million, resulting in a consumption of cash of EUR 110 million before any refinancing activity. On Slide 13, you can see a breakdown of our CapEx spend, which was very similar to the one of last year with 20% spend in investment in owned site, 19% in IT, 41% in machinery and equipment and 20% on leasehold improvements. On Slide 14, you can see that our net working capital intensity increased to 6.8% of revenues, this is mostly in relation to an exceptional comparative in the first half of last year, which was linked to advanced customer receipts related to COVID activities. Overall, our DSOs improved by 1 day at 60 days and our DPOs slightly decreased to [Audio Gap] . And to conclude on Slide 15, you can see that we were able to finish this first semester with a very stable leverage at 1.9 turns, well within our range of 1.5 to 2.5 turns. We decreased our net debt by EUR 250 million following the issuance of a hybrid bond in January and the repayment of a leftover hybrid bond in April. We had no major refinancing needs until July next year, and we end up the first semester with a very strong cash position and access to large credit facilities. Thank you for your attention. I now give back the microphone to Gilles for the operational and strategic update.

So we'll go to Page 17. So while we get out of the COVID period, of course, our teams have more time to refocus on their core business. And our core business is innovation to develop new services and new products. And the technological breakthroughs that happened over the last 5 to 10 years are really helping to create new possibilities. We -- anecdotally, we are listing 2 on this slide, for example, the early gender test that now can be done without taking blood, without having to go to a doctor of phlebotomy center to have blood taken, also in the tests that are adjuncts to new cancer therapies or that are early predictors that enable early action while the treatment will be easier. So we're investing a lot in developing new tests in those areas related to health care and generally. We already mentioned what we're doing, for example, to detect PFOS in -- not only in the environment, but potentially also in food, because it might be there and unfortunately, also in people that might be affected, especially if they live very close to sites that were polluted. So we continue to invest very significantly in innovation. On Page 18, we comment on a couple of things. We're starting to see the benefits of having built this large urban spoke network, because in the large hubs, we have a very large number of samples. With that, we analyze even for rare and complex test that are fairly labor-intensive, both in the sample preparation and in the interpretation. And on both ends of those tests, now we start to have the scale to develop automated solutions. You see a couple of robots here that we've developed with partners and where we own the IP for sample preparation to reduce the amount of manual labor, so we have a number of pilot initiatives where we are developing those type of systems across our group. And when we see those pilots working, we usually have 2 or 3 in parallel for each application, then we intend to deploy standardized robotics for the laboratories around the world to do the same thing. And we do the same thing at the back end that the interpretation and or it's more artificial intelligence to interpret the data and reduce the amount of scientist time that is required. So we're really transforming which is to be a mom-and-pop business into a real industry. We have big hubs for complex analysis, but also on Page 19, you will see there are some tests, including microbiology that need to be done close to our clients. And for that, we're developing new mobilities. We have developed standardized, containerized laboratories that we can deploy even on our customer side, if required. So we have also the spokes of the hub, not only the regional laboratories but even very local small laboratories at customer site, where we use the reagents and the testing kits that we developed in our specialized units that provide some product, a limited range of products for both clinical diagnostics and food and environmental diagnostics. So we are doing a lot to be more efficient. We are still in the phases where all those development cost money, and they haven't been deployed everywhere, but we are really optimistic on the impact that will have long term on the quality of our service, because machines don't make mistakes. They repeat the same thing in a very consistent way. And on the cost of doing our service, the speed of providing our service and overall, the quality of our service and differentiation we are getting. So we are really working hard to continue to be the leader in innovation, in terms of the breadth and depth of our service but also its efficiency and its quality. We continue, as you see on Page 20, to expand our laboratories network of modern laboratories around the world. We -- on Page 21, you see the evolution of our start-ups. So they continue to have a good return on capital employed. They continue to add to our organic growth. And at this stage, while the price of acquisitions has not yet come down to levels that we think are commensurate with the current and the prospective interest rates. We favor more start-ups at the moment than maybe we did a few years ago. But this can also be adapted depending on the outlook in the years to come. On Page 22, you get a bit of an overview of the acquisitions we've done. It's mostly small bolt-on acquisitions that have a strong focus in the areas where we see good long-term growth. If I move to Page 24, we'll talk a bit about our objectives, where we debated whether we should adjust or not our objectives because basically, the only adjustment we did was based on things that cannot be predicted. We have made objectives based on the average FX rates of 2022. We decided, since FX rates are shifted in H1 to adjust it, frankly, we don't know what FX rates will be in H2, but at least it gives you a legibility and you're welcome to do your own adjustment based on the whatever FX rate you think. It's not a change. It's not because our business is not performing as we planned. It is just because of the exchange rate that happened. And as to M&A, it's fairly difficult to predict what will happen, what we will close, because the timing of signing and closing is never really certain. We could still add EUR 250 million pro forma revenues. We don't know, but we thought it's prudent to flag that maybe we'll only add EUR 200 million this year. It's -- but that has not -- it's not saying our business is not performing as planned. It's absolutely performing as planned [Audio Gap]. We have a strong outlook for continued growth and improvement in the second half, but the FX has changed significantly in H1 versus last year. So we thought we should flag that for those who haven't noticed. On the second half, we have -- we're positive about the second half. We have seasonality in our business. Historically, we've always had a stronger second half, both in revenues and especially in margin, especially in Q4. So we're confident of our unchanged objectives for this year. The only thing we can't control and can't know is what the FX will be, and that's why we mentioned that. So if I go to Page 25, we've had -- what we think is a good growth momentum in the first half of the year. The -- all the difficult comparables are just going away, the second half of the year will have much less difficult comparables because we had very little COVID testing. We had a little bit, but we have very little COVID testing in the second half of 2022. And we also had much less remaining vaccine work in our BioPharma business in the second half. So we're positive for the second half of this year. And we're also positive that in 2024 and the year thereafter, we will start to benefit more and more from all those investments we've made in CapEx, automation, modern laboratories, rationalizing our network of labs in a fit-for-purpose urban spoke network. We have the right footprint in many, many countries now, and it's just about us to continue to absorb the last impact of inflation, pass on the costs that need to be passed on and improve the productivity in all our areas. So our outlook for 2027, we haven't changed. We're positive that all the initiatives that we have started will yield the desired effects, and we're looking forward to a strong second half of the year. Thank you very much. So now we'll go to question and answers. And I think the operator will lead that.

Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions]. We'll go first to Pablo Cuadrado with Kepler.

Three quick questions from my side. The first one is on the pricing. Gilles, I think you mentioned at the beginning of your speech that you were more confident that pricing was starting to fit across the portfolio. I was wondering whether you can share with us either with the pricing component of the organic growth during Q2, maybe. Second question is on the free cash flow target before real estate CapEx, and I wanted to understand which are the delta areas that they need to change in order to meet the target for H2 because clearly, in H1, it wasn't very large figure and for H2 in order to meet the target free cash flow probably need to multiply by 4. So just to understand if this is a question of working capital change, tax payments or something like that? And the third question will be on -- and let me just congratulate you on the new segmentation information by business. I think many people are just going to welcome that. But I was wondering whether if you can help us to understand from the 4 new business lines versus the base of the 7% organic growth during H1, which areas were growing above or below that reference? I think that will be helpful for us.

Thank you very much. Yes, pricing is very complex for us to measure pricing. On our sample-based business, we start to have a decent view because we have often a price catalog for all the work we do with BioPharma and elsewhere, which is project work. It's very, very difficult to measure pricing. We have started an initiative across the group to get that. I think we might get somewhere in 2024 on that component. The pricing component in Q2 is higher, obviously, and we get a lot of anecdotal evidence across the group. I cannot give you a number because it would have to be audited and tested. It's simply more than it was in the first half -- in the first quarter. It doesn't cover the food inflation we had last year yet. But this is something we are, of course, working on depending on when contracts and so on. So we still have some pricing power to deploy in the second half of the year, and we'll do that, but we do that in agreement and consensus with our clients. On the free cash flow, the main component is, of course, net working capital. We have -- if we forget what we always do, the net working capital back to the impact 0 in the full year because revenue should be comparable to last year. That's a EUR 300 million swing in net working capital alone between H1 and H2. We pay most of the tax in H1. So we'll have much less tax in H2. And the CapEx is more or less flat from half to half. And of course, we should have a higher EBITDA in the second half. We are -- our business is seasonal, so with higher EBITDA, then you come up to the number that we set as an objective for the year. If you want some more specific, Laurent, can take a follow-on question on that. And we remain -- we are organized by continent. And we remain convinced this is a better driver, explanation of any differences. The world is not fully decoupling, but there is some level of economic decoupling because of war in Ukraine has had a much more negative impact on Europe. So that's where we see that we have less growth and more need to adopt our cost structure to the lower growth in some areas which we are doing, and we'll be doing more -- even more actively in the second half, whereas North America is still doing very well. So that's the main difference if you want to analyze anything. If we were to add results to cross-continent in the different activities, I mean the only thing that could stick out is probably overall clinical diagnostics would be the lower growth, because it's impacted in Europe by the pricing in the routine business. That's -- we've had a setback in the U.S. in reimbursement for TGI, and we are doing more clinical trials to achieve better indications for reimbursement after a change of policy by MolDX. But that's really the main difference. Otherwise, Food and Life is doing well in, and food is a bit softer in Europe as we indicated, because the big food companies have -- are challenged on volume. The -- but it's doing very well in America. So overall, everything more or less evens out on an average or everything is fairly similar. We -- BioPharma is doing well. Food and Life is doing well. So it's -- and maybe consumer is in between. Consumer and technology products because we -- our business doing -- material science testing is also doing well. So it's -- that would give you the indication. But then the numbers on a global basis by activity don't mean very much. But this -- since this is what you want, we will be trying to work to change the structure of our group. So maybe we replace the geographic indication by activity indication. I personally don't think it's a plus. It's more meaningful. But if this is what you want, we'll try to work towards that.

We'll go next to Thomas Burlton with BNP Paribas.

A few questions, if I could. The first one on the food testing business, and I appreciate the additional disclosure around revenues by activity. I just wondered if you could give any more color around -- appreciate, you haven't yet given profit or margin by activity. But if you can help us understand maybe the incremental margins on the food testing business, just so we can think about as and when those volumes return and maybe just any more color you can give us on your expected timing of that. But as those volumes return, kind of how should we expect that to impact the margin and what the margin delta could be as those volumes come back. And then just a couple on the cash flow, if I can. On your CapEx for the investment in owned sites that was around EUR 50 million in the first half. That looks to be well below the sort of assumed run rate of EUR 200 million per year. So I just wondered why that was? And is it just a timing thing? Should we be expecting EUR 150 million in H2 or is it more likely you might undershoot the EUR 200 million this year? And then finally, just another one on the clarification on the cash flow and the cash flow guidance and that second half guidance for cash tax. Just any more detail as to why that should be so low in the second half and [ it's even may ], you haven't tended to have such a big delta when we compare H2 versus H1. Just any more color on the kind of expected cash tax number for the year?

Thank you very much. Yes. Well, food, we have -- it's contrast between Europe and North America. We have stronger growth in North America than in Europe. And that impacts also the margin. We've had also higher margins in North America. So it is true, and we saw it by COVID that when we have high volume of one activity or high volume growth, it improved -- it has a very positive impact on margin. So we do see that and as we will trim our business in the countries where we see continued soft demand for food testing or softer demand. And of course, the rebound will have a much bigger impact then because we will have by then automated more and have an even better cost structure by finalizing the hub and spoke model in the countries concerned. On cash flow, Yes, we are also timing a little bit our investment program. We would like by 2027 to have a much significant percentage of our labs, especially our large labs or campus labs that we own, but we have a bit of leeway of exactly when we do that, and we're a bit opportunistic. There are uncertainties as to valuations on the real estate market. So we're not rushing into things when we think the outlook might be better for either buying or building sites. And also the timing of those investments depend on planning permission, depend on speed of building and commissioning but so the whole year indeed could be lower than the EUR 200 million that we have indicated as a target on average for the next 5 years, including this year. On the net -- the cash flow and cash tax, I will ask Laurent to answer this question.

Tom, yes, indeed. So on the tax, I mean, we usually pay a bit higher tax in the first half, especially when you had higher profits on the year before because you pay your taxes following the closing of the exercise for many countries. So this is why in our assumptions when we look at the full year tax, we believe that the tax rate and the tax paid in the second half will be lower than it was in the first half.

We'll take our next question from Neil Tyler with Redburn.

A couple of questions, please. Firstly, the BioPharma services, you've called out on a couple of comments in the statement, that the discovery work has slowed as early stage investments have impacted that. In the past, has that business -- that discovery business provides us sort of precursor to later-stage work -- late-stage clinical development work that you support. And if so, should we anticipate more challenging growth conditions elsewhere in BioPharma in the coming years? Or are you able to combat that? That's the first question. I'll come on to the second one.

Thank you. No, we've had that question many times. And our leaders in BioPharma, we have been for decades in that business, are adamant that this is not the case. Late stage is something that's closer to revenues and the Pharma industry is well funded, and it will certainly not slow down investment in things that will give them products that will get registered. The very early stage, of course, is more of a bet will a molecule make it through a Phase I or will it make it through Phase lI, that's much more risky. And that's where the funding is much more volatile. And the bulk of our business in BioPharma is Big Pharma anyway, and it's for projects that are often already in the clinical phases. So we don't see softness there. And actually, quite the contrary, biologics are providing a huge opportunity for the Pharma industry to develop very powerful medicines that will impact the chronic diseases like cancer and in other areas, rare disease, et cetera. So there will be big breakthroughs in pharmaceutical product development. And we are the main partner of a very important part of those product development in BioPharma product testing business. Discovery, yes, is a bit softer. There was a big boom in the last 3 or 4 years. And of course, we are trimming the cost where it has to be trimmed to adjust to the current demand. But we don't see that impacting. For something like that to happen. It is, in fact, the later stage, there should be no new product coming out and the cycles are so long and there's so much in the pipeline that this would take probably 5 or 10 years of 0 spend in discovery to have nothing in the pipeline. And then, of course, Pharma would compensate by increasing investment there and funding of start-ups.

Okay. That's helpful. And then the second question, back to the topic of, I suppose, infrastructure investments and the lab build-out. Reading through your comments suggest that particularly in food and environmental testing, the new capacity investment is a, I suppose, obviously, a critical component of volume growth. And you talked in your earlier comments about the sort of module build-out as well. So should we view volume growth as going hand-in-hand with CapEx? And if that's the case, does that sort of limit some of the operating leverage that traditionally has been evident in the business?

No, I'm not sure I understand your question because we have very high return on capital employed on organic CapEx. So we have 50%. So the CapEx on organic growth in Food and Environment is fairly limited. We've had a lot of CapEx in buildings because we repositioned the whole business. We reconstructed it on a different footprint along this hub and spoke model, as opposed to a lot of labs that we bought that were doing a bit of everything. And we're doing everything regionally, which we think is not the best model to maximize the cost effectiveness and the quality of the service. But once we have a new footprint, we don't need to invest so much in buildings. They are there, and we have lots of space for improvement and then the increase is more like linear. Is just on the small local microbiology lab? Yes, you are right. Then we -- if we want to go into a new region, we need a new lab that we either buy or build. But the drop-through is very good in Food and Environmental testing on a given lab perimeter.

Okay. Okay. And just -- Gilles, just wanted to come back to the working capital comment again, just my own clarification, if you don't mind. So the free cash flow guidance assumes that the full year working capital to sales ratio remains constant and therefore, that the first half increase in that ratio sort of reversed during the second half. Is that the correct interpretation?

That's correct, yes.

That was Laurent speaking. Yes. We think we don't see why we wouldn't control net working capital as not as well as the previous years. So we don't see why at the end of the year, we would come at a different number than the year before.

We'll go next to James Rose with Barclays.

I've got 3, please. First, on start-up losses of EUR 38.6 million, could you say how much of that is transplant genomics and then perhaps give us an outlook for that business given the reimbursement changes. And second is on on-site investments, EUR 200 million over -- sorry, EUR 200 million a year over 5 years. Could you sort of help us model what that EUR 1 billion of spend would mean depreciation and cash spend on lease liabilities into the future? And then thirdly, on your automation investments, do you have any outcomes of early-stage deployments or pilots that you can talk to in terms of turnaround time improvements or margin improvements?

Thank you. So on TGI, I think we have about EUR 7 million loss in H1. And the change in reimbursement was extremely abrupt and we came with no warning. So it took us about 60 days to adjust the cost to that and the decision is how much clinical trials will do to establish new, how to say that, new reimbursement conditions for surveillance because that's the main area where our test is superior, is accepted for surveillance. We want to establish full equivalents to replace surveillance biopsies. This will be presumably a 24-month period, during which the volumes will not be growing as we previously anticipated. So we'll, of course, adjust the ongoing cost to the level of revenues that we expect will see why we carry out those clinical trials. So the flourishing of TGI, I think, is postponed by 24 -- something like 24 months as we can judge today. We still are convinced we have a fairly superior test and the medical community, the nephrology community. Especially, the leading key opinion leaders are of the opinion that our test is better, and we are working actually even before the clinical trials will be through to obtain better reimbursement and differentiated reimbursement from the unacceptability of the testing for medical cause as compared to cell-free DNA. We also have a cell-free DNA test in our portfolio, but we believe that the test or TruGraf test provide superior value for patients. And patients and doctors are really frustrated that they can't be reimbursed right now. So we will work on that over the next few years, but the impact on the top-line of TGI for the next 24 months will be negligible, unfortunately. And we'll incur some ongoing losses to finance the clinical trials. Maybe the losses are of the order of anywhere between EUR 5 million or EUR 10 million per annum. On owned sites, this is how did we come to the calculation. Well, it's really more back of the envelope calculation. If we want to go to anywhere something like 50% of our site owned, that -- and then you put some assumption of the cost per square foot or the cost per square meter of a new lab, it gives you a total spend over 5 years to get to a certain percentage of lab owned. On the lease cost, again, the impact on depreciation site has depreciated, I don't know, over 15 years or 20 years, so that can help you. I think we're conservative. So we have short depreciation, but land is not depreciated. The leasehold improvement we depreciate over 10 years while we use them for 30 or 50 years. But still, we are conservative in how we show things in our accounts. And the lease liabilities, we had some modeling in one slide that we can get back to, I don't have it in front of me right now, for the stock that we've done already and the return on that is something like 11% compared to the value in the balance sheet. So that helps you model the impact of future lease savings assuming all things stay equal in terms of cost per square meter, et cetera. But this is something we'll do gradually. And it's also a matter of negotiation. We have sites where we are tenants, where actually we like the sites. And we could stay if we buy the site. We don't have to move to a new site. But that is a matter of negotiation with the landlords and depending on the interest rate, those negotiations might take longer or not to come to something satisfactory. So there is -- we're a bit opportunistic on that too, in terms of doing it, not doing it, moving, staying, buying, continuing to run. Sometimes the fact -- the mere fact that we could move leads the landlord to drop the line so much that we decide to stay as a tenant, if we like the site. So it's something that's a bit difficult to plan, especially if we want to plan it on a year-by-year basis. On automation, well, I don't know if I have the answer as you presented, what we do is that we have paybacks. So the paybacks of our automation projects as a midpoint around 3 years on the investments we spent on automation. And the investments now are much higher because we have all the development costs, all the engineering development, the software development for the first 1 or 2 robots for 1 applications. When we start to buy 10 or 20 robots for the same thing or 30 robots nearing spend and the cost of additional robots will come down and the returns will be faster. But we can do a deep dive maybe at the end of the year when we have a few more cases where they have been running for sufficiently long to see -- to give you more flavor of that and what it could mean.

We'll take our next question from Allen Wells with Jefferies.

A couple from me, please. Firstly, I just wanted to go back to the food testing side and particularly the divergent performance between North America and Europe. Could you maybe just talk a little bit about what you're seeing here, because some of the headwinds that you called out, price inflation, consumer behavior, et cetera, I think that still should be impacting some of the U.S. testing activities, maybe not significantly in Europe, but any kind of clarity on really what's going on underlying food would be really useful. That's my first question.

Yes. Thank you. I think in Europe, it's a continuation of what we've seen now for 3 or 4 quarters of the consumers being affected. The consumer is changing their spending patterns and the industries that serve those consumers and the food industry is a big one and a big client of us adjusting their practices, reducing the range of products that they are selling. That means fewer references, that means the bigger batches, fewer testing, checking on their spend, optimizing their testing regimes to some extent. So that's, I think, one of the bigger impacts. What do we have as in Europe, we have the reimbursement impact on clinical that is hitting us in Europe, that we don't have in North America because North America, we sell a lot to hospitals and in the clinical business and specialties testing. In Europe, we had a bit more BioPharma vaccine work in the first half of 2022 than in North America, respectively, probably. So that might explain. And the cost inflation has been higher in parts of Europe, and it remains higher in Germany or in Eastern Europe than it has been so much in North America. North America, we have been fighting with labor cost inflation for longer on the qualified staff than it started in Europe. It started probably North America already in 2021 or earlier then -- and that's a phenomenon that is a bit more recent in Europe. Where in America, we see a bit of moderation on that level at the moment, I think.

Okay. And then just quickly, just on the sequential growth improvement from 2Q. Obviously, we also had a 2-ish percent easier comp and expected stronger pricing tailwinds. I'm guessing that the Diagnostics business in Europe was one of the key drags 2Q versus 1Q, we saw it was incrementally more challenging. Is there any way you can tell us what maybe the underlying organic would have been without that drag in Diagnostics? Or is that not possible?

I think it is possible, but we will need to go back and calculate it. It is not so material, but we have about EUR 500 million of diagnostics in routine that would have been affected by a 3% -- something like a 3% or 4% cut. So that's not a huge amount, but it is an amount. So but we have to calculate it offline, if you want to have the exact calculation, especially for one quarter.

Okay. And then just very quickly on that diagnostics piece, I think there's been some noise out of the French lab industry association. It started to be a bit more vocal about the need for clarity and move back to triennial pricing in the French kind of lab market. There's obviously some increasing concerns around further budget and pricing declines as we move into those negotiations towards the end of the year. What's kind of expectations here from the European side? Do you think that the trend review will be in terms of the price cuts will be more moderate as we move forward? Or are you planning for further reasonably sizable kind of 3% decline again this year?

I think long term, things will lead to a consolidation of that market, like other markets, and the productivity gains that are associated to that compensate the price reduction and you have volume increase of 3% or 4% too. The volumes have also been soft in the second quarter, I believe, in France because there were instructions to doctors to reduce prescriptions that can oversee -- also only go so far because people get sick and testing needs to be done. So it is the environment for clinical diagnostics worldwide. It has been like this forever and laboratory -- there is also a huge potential for outsourcing of government labs or hospital labs that are very badly run, that can -- sorry to say it like this, but where there is massive, massive opportunities to save for the government. And some countries are really moving ahead on that. So it is the name of the game in clinical diagnostics. The industry is consolidating, is modernizing and part of that is passed on to the payers through cost savings.

And what's your strategy, just to follow on from that, what's your strategy in terms of that consolidation in France? Because obviously, you built that position through acquisition. Is there a plan to continue to consolidate that market further and you'd be involved in that? Or do you think that the bigger players in that market will take -- continue to take share?

We will see what are the right opportunities at any given time. We optimize the network that we have. We had blood sampling points where we need it. We think acquisition prices are too high. So we're not making substantial acquisition there at this time. It could be there will be opportunities later or we can do alliance or mergers with others of our business in that area. There are many ways we can play this evolution from our existing position. The thing is we run this business for return on capital employed. Those investments have provided a very good return so far. Of course, COVID has helped but we have a very good return on the investments we've made and we look at the future in the same way. We're doing investments that we think provide a good return on capital employed. It could be that they are dilutive in overall growth for Eurofins, I acknowledge that. But in the end, our investors pay us to have a return on their capital. And I think our investment in that sphere, so far have proven very positive in terms of return, and we'll continue to drive decisions based on the expected returns we think we will get. And of course, if there is an outlook of growth is less, then the values will be less or -- and that has been the case always and will remain the case. And I think it is still a sector where we can generate good returns, even though in the routine area, the growth may be more subdued [indiscernible] the numbers more by activity, you can judge all the sum of parts better.

We'll take our next question from Arthur Truslove with Citi.

A couple for me, if I may. First question, in terms of the Discovery business within BioPharma, obviously, it sounds like it slowed down a bit. Have you got any sort of early indication as to when that situation might improve and obviously, your food business in Europe, likewise, has been under a bit of pressure for a little while. Interested to know when you think that might turn around and become more positive and then finally, I just wonder if you could give us an idea, I know difficult across the group, but just how significant wage inflation has been in the first half. If you give us a number for how much that's been, that would be most helpful.

Thank you very much. For Discovery, I don't know, frankly, when things will start looking more positive. We are, of course, trimming the cost to adjust for the current demand, and that's fine. For food, we've done a lot of that already. We had a strong month of June and a much better June in Europe. It's 1 month. So it's really hard to say if this is a trend. But at some point, any readjustment of testing, it's the bottom because testing is required for food to be safe. So -- and people in volume, in the end, they might have switched to a cheaper product or more bigger batches of the same thing. But in the end, everybody -- we all need to eat. So this -- the rationalization of testing can only go so far. So -- but the timing of that is very -- is a bit hard to read. So what we're doing, we're, of course, adjusting our cost structure to whatever are the short-term expectations. And wage inflation, we don't track that on a consolidated basis. Anecdotally in Europe, maybe we've given across Europe, 4%, 5% raises, I would guess, and similar amounts in North America with vast differences from country to country.

We'll take our next question from Louise Boyer with Stifel.

I have a couple, if I may. The first one regards your capital allocation. You have shown us on Slide 21. Your usual graph of data revenues per program. Would you be able to give us a bit more color on the margin and what is the contribution of like the past 4 programs if we exclude number 5, to your margins. The second one, in terms of capital allocation. Sorry, go ahead, and I'll continue later.

Well, the last 2 programs are loss-making and highly dilutive still. And the first 3 are close to our group margin, slightly below our group margin, as I can recall.

Okay. And also on your capital allocation, you -- every time during those calls we're having, you highlight on innovation, whether it's Peekaboo today or the 2 graphs last time and so on. How much of your sales are realized on tests that you have created? How relevant is that on your business?

Yes. We don't track that on a consolidated basis. We invent and develop a lot of tests every year and even in areas where we're not the only one in the world doing a certain test. And there is a new range of new test any year. We have -- in our -- in the programs we are piloting to track price evolution. We are also tracking mix evolution. So the impact of new test and the impact of tests that are being discontinued. So maybe next year, we'll have a better view on a consolidated basis of new tests. In the areas where we look at often the new tests are anywhere between 2% and 10% of the revenues in a given year, that gives some indication. But it's very anecdotal, and I don't have the numbers for the whole group. So I don't know if it is the case. And in BioPharma, for example, this is really not applicable because everything is new because we have a new program for all of our clients. They develop new pharmaceuticals. So every time we have to develop new testing modalities for those new pharmaceuticals. So the question is very difficult to generalize for a whole group.

Okay. Two last questions, if I may. The first one on your portfolio -- product portfolio. You mentioned during last call that some divestment plan could be looked at on your noncore activities. Which activities -- what percentage of your current business do you consider as more core right now? What are we talking about in terms of size?

It's a matter we have now -- we described the 4 activities -- 4 main activities. They are -- we put food, by the way, in passing, and we put food and environment together, because the frontier is very blurred. We use the same labs for food and environment in many cases, water in some areas is with food and other areas, it's with environment. So our drinking water at least -- so those 2 activities, we think they fit together. That's also our most historic activity. BioPharma is more new, but it's just as core as food and environment testing. The other activities are -- also clinical is starting to be significant and in material science, we're the world leader. All those activities are separate. But you have companies -- I think we are actually more focused than many other companies you look at, which have 10 or 20 -- or 10 or 15 verticals. Should we keep 4 verticals forever? That's a question. Some of you would prefer if we didn't have clinical diagnostics in our scope because organic growth would be better. Whether from a capital return, it's a good thing to do? I don't know. What we've done, we've done some trimming. We sold our digital testing business because, frankly, it didn't fit. There was no way we would become a world leader in cybersecurity testing, and the other things were fairly niche. In this first half year, we have disposed of some animal testing activities that were part of an acquisition we did long ago. So we do a bit of cleaning out of smaller activities at the moment. And yes, we have a portfolio of a range of things that could leave their lives independently or could stay all part of Eurofins.

Okay. And last one for me is about the price negotiation. We know that you are like over H1 looking at the price of 2025. Could you give us a bit of color on your discussion with your clients on price negotiations for next year?

Well, our price negotiation will continue and will be a continued factor. We need to catch up all the price that we didn't charge in 2022, and we've done a lot of that, but there's still inflation in '23 that we'll need to pass on. And so this is a permanent discussion for any contract that ends. Of course, we take into account the -- all the inflation that we've seen since 2019 in the repricing of those activities and the costs that are incurred to do it. We also have developed some fairly advanced models to know our cost, which few of our competitors actually are doing, so we can adjust much more the pricing towards the actual cost of doing the business. And some clients get very significant repricing. And we say, look, we prefer not to do business for you if you don't accept 30% price increase. That's the exception, of course, fortunately, but it's a very broad landscape of pricing depending on what we do for which clients. And we...

Average price negotiation right now?

There's no average price for negotiation. We have thousands and thousands of clients all over the world and each situation is different.

We'll take our next question from Dominic Edridge with Deutsche Bank.

Just the first one is just on the level of SDIs we should be thinking about second half of this year. I know you've got quite a lot of start-ups in place. So I think you did EUR 39 million of losses that you -- temporary losses in the first half. Is that sort of what we should be thinking about in the second half as well? Or would it be significantly up or down from there? Secondly, just to clarify on the BioPharma product testing side of things. Can you just maybe discuss the pipeline there? Is really any difference there compared with where you were maybe last year, just the pricing on the COVID vaccine work that you did and otherwise, everything as much as what it was? And then my last question is just on the Genomics business. Obviously, a number of those business units did very well out and during the COVID time by going into COVID testing, obviously, profits have come down significantly. Can you just give me an idea of how quickly you feel those businesses could get back to sort of peak profitability again? And what are the sort of the key drivers in that business?

Thank you very much. SDIs are a mix of reorganization costs, network expansion cost and start-ups. I think the losses and startups are likely to increase, while the reorganization costs are likely to decrease to stay more or less within the targets that we are setting. It's also quite hard to predict, especially over a 5-year period. But we've done a lot in the first half of reorganization towards our hub and spoke model, and that could be a bit less in the second half. The BioPharma product testing, yes, indeed, I think the changes are in volume have been mainly the replacement of the COVID vaccine work, which has occurred faster in North America than in Europe with other type of routine product development. I mean Genomics is true. Genomics will take us a bit longer to -- especially in Europe, which was very focused on COVID testing. So it will take us probably another 2 or 3 quarters to get Genomics back to an acceptable level of profitability and that is not an area -- that is an area of focus for us. It's not a huge business. It's, I don't know, EUR 30 million in Europe, but -- or EUR 40 million. And we have some programs that we've signed that take a bit of time to start that should give a boost on, for example, population testing. We've won some very significant programs to do genotyping of all populations or large segments of the population, which -- and also on animal and genotyping of complete groups of animals, Bovine for example, which are very promising. And I think those things will expand significantly in the future, also plant genotyping. Many of those things might become mainstream. And we're just at the beginning of earlier pilot programs by some countries. So they are promising things where we are really developing capabilities in terms of testing, automation, IT, data handling. It's a huge amount of data where we are developing the tools to be active in. It's a very promising midterm area, but it takes a bit of time for some of the programs to start at the moment.

There are no additional questions in queue. I'd like to turn the call back over to our speakers for any additional or closing remarks.

Thank you very much, and thank you very much for everyone for joining our call. We think we've had good momentum in the first half. And quarter-on-quarter, the evolution is good. We're doing a lot of homework to clean out everything from COVID and shape our company for growth in the areas that where we see potential. We're continuing to build a strong company. We think the outlook for the second half is good and for the years to come. And little by little, we'll see in our operations, in our efficiency, in our productivity and in our profit, we should see the benefits of all the investments we do in IT. We do very massive investment in digitalization, much more than any other company we know about, even smaller competitors proportionally. And all of that, we strongly believe will make us stand out more and more as the premium and best provider in our markets. And that should have, over time, the impacts we are looking for in terms of margins and cash flow. So thanks for your support, and I'm looking forward to meeting some of you in person over the next few days. Have a very good day. Bye-bye.

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