Eurofins Scientific SE (ERF) Earnings Call Transcript & Summary

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

Hello, everybody, and thank you for joining our annual results call. We have a presentation, and we can go to Slide 5. I will give the slide numbers as we go. So what's the story of 2023? Well, it's basically the new year of over time where Eurofins won't be affected by COVID comparable. We still were affected in the first half by significant COVID revenues and margin comparables in the first half of 2022, that was not the case in the second half. So you can still see the company more as it will look in the future. Overall, during the year, it was significant lifting, heavy lifting to realign some of our business lines to the situation post-COVID, especially our Genomics, our IVD business lines, and, to a lesser extent, our Clinical Diagnostic business line had refocused a lot to producing reagents to doing sequencing and other work for COVID. We had started a realignment in 2022, but in reality, some of it remains to be done. We still had to have restructured. So a lot of reorganization of those business lines have taken place. We've started to refill our BioPharma labs, that were doing COVID vaccine development work or clinical trials. Now they are moving towards oncology clinical trials, even they are still working on with similar clients. So there's been a lot of change in 2023, but we're happy to put that behind us. So not only will 2024 and not be affected by comparables that contain some COVID revenues, but we have a much cleaner and leaner structure. And our teams are now focusing already since a few quarters on their core business. We've also started to significantly align revenues and prices with our cost. And we saw that in the second half. We're going to continue to see it in the next year. We have also looked at some of our smaller businesses that might need some work, and we are -- we will be continuing to review that next year. The one area where we need to improve in the next year is our net working capital. Again, there have been too much management focus on other topics over the last couple of years. And we've slipped a little bit at the end of the year. We thought we would catch up more in the fourth quarter on our net working capital, but we have some work to do there. But overall, as you see for the results of the second half of 2023, things are very encouraging and are moving in the right direction, in terms of organic growth, in terms of margin growth, et cetera. On the next page, we have some comments on the full year, but some summary of the full year results, but we will talk about that in the next slide. On Slide 7, you get a breakdown of our various areas of activity. This wasn't asked by some of the investors. And now that we have comparable data in an auditable manner, as 2024 and unfolds, we can give you the evolution of each of those activities. And so you will get also some growth numbers regarding each of those areas of activity. But frankly, the biggest difference is between geographies. As Laurent will explain when we -- when he describes the numbers. On Page 8. So basically, what have we been doing during COVID and continued last year is continue to build the network. So on Slide 8, you see that impact on our site. Our business is very much driven by scale. Once you get the right scale, you can have a very good margin. We saw it during COVID because basically, of the COVID test, we had very much scale, high scale for a few tests. And that had a positive impact on margin. This is basically true for all of our activities, but labs are traditionally too diversified, and that's why we built this hub & spoke network, with a very large central platform. We've continued to make very good progress on that. Owning our own site is somewhat dilutive on return on capital employed. But as we can estimate it for 2023, it's still already yielding 12% return on capital employed, at least the rent savings that are associated to that. We are not yet at our target of 16%. But as the rents increase with inflation, for our stock of buildings, their cost doesn't increase and that return can only improve over the years. So we intend to continue to add buildings. We should be done by 2027 because we don't need to convert all buildings to own buildings. It's mostly for our larger sites because we don't want to move labs. It's very expensive to move labs. And therefore, we need to have big sites, where we can expand on site and not lose all the investments in leasehold improvements. For offices of our site in serving [Technical Difficulty] need to own the building. So the program we've presented last year for the 5 years to '23 to '27, should do the job of giving us our own network of labs. On Page 9, you have some examples of new labs that came online last year and some of the labs that we will add -- we plan to add over the next 2 years. And those labs that will come online over the next 2 years they have started to cost us a lot of money already in '23 because usually, you start building in year 1, you finish building in year 2 and you commission the lab in year 3 after [Technical Difficulty]. So it's an expensive program, but on the long term, we think it will be very favorable. We see it already in revenues per FTE, revenues per square meter. That's because those labs are more efficient, better build. Also in terms of CO2 emissions, isolation, energy efficiency, newer building provide a long-term advantage. On Page 10, this is a significant development in startups. We always have an arbitrage between startups and M&A. The interest rates have gone up significantly since 2022. But the multiples for acquisitions on average have not come down. Some of the sellers are waiting, hoping the interest rate will go down fast, and they can get higher multiples again. But many are still expecting to high multiples. Therefore, in 2023, we haven't bought as many companies, as we could have. We're a bit below the target. We had set a target of EUR 250 million added revenues from M&A. We will be below that. We've also had been reasonable in multiples. You see we're only at 1.3% revenue multiple for those acquisitions. But on the other hand, we've added more startups. We have decided to accelerate significantly our startups because they are, of course, short term, very dilutive in CapEx. We need CapEx for no revenues, very dilutive in margin because they make losses for 2 or 3 years and then in cash flow. But from year 3, 4, 5, they can provide a very good return on capital employed, which is much better than acquisitions. Acquisitions, on the other hand, are accretive to earnings in year 1. So both have their advantage and disadvantages, but we've shifted a bit in '23, towards startups. On Page 11, you have a list of some of the acquisitions we did, last year. And we can go back to [Technical Difficulty] the amount that we're targeting and for -- but that can change from year to year because it will depend on how the markets for acquisitions evolve on specific acquisitions, opportunities, it could be that we targeted to add EUR 250 million per annum on average over 5 years. It's like for organic growth. It's on average over 5 years of target. It could be that 1 year, we had EUR 400 million in 1 year, like last year, we had EUR 122 million. Acquisitions are hard to plan. It doesn't have to be linear. And we don't have to do them. We only do them if they provide the right return on capital employed. I will now ask Laurent to comment on the financial numbers, please.

Good afternoon. It's my pleasure to share with you our financial results for the year of 2023. On Slide 13, you can see that our results were in line with our objectives. We posted revenues of EUR 6.5 billion, which show a slight decrease year-on-year due to the COVID comparables, but a strong organic growth of 7.1%. We posted an adjusted EBITDA of EUR 1.364 billion, which gives a 20.9% margin, which was also impacted by the COVID comparables. So overall, we achieved revenues and EBITDA in the upper range of our objectives. On Slide 14, you can see the main factors behind the slight decrease of revenues. So first of all, we had a negative FX impact, which weighted for about 1.9%. And we had, of course, a very strong COVID comparable, which created a revenue gap of about EUR 600 million. We almost compensated for it, via a strong organic growth which was slightly better in H2 than in H1. And we had a very small contribution from M&A, as Gilles just mentioned. On Slide 15, to give you a regional breakdown of our organic growth, you can see that Europe was resilient in all verticals. We have both volumes and pricing increases, except maybe in Clinical France, where we had to face some price cuts. North America overall posted a very strong organic growth at 8.7%, which was very strong in all business lines. And in the rest of the world, we had a recovery of our revenues in China and expansion of our business in India, and we also had a very strong demand for PFOS in Japan. Moving to Slide 16. You can see here a breakdown of our EBITDA margin by semester. And we want to point here the strong margin increase we had in the second semester, 120 bps year-on-year, which is basically the first semester without any COVID comparables. This strong increase in margin was due to a strong organic growth, some very good pricing initiatives and also some productivity efforts. So all this shows a very positive momentum, which is expected to carry on, in the year of 2024. On Page 17, we had a strong cash flow generation in '23. So our free cash flow to the firm was stable in value, despite a lower EBITDA, thanks basically to lower taxes and CapEX. We had a very strong cash conversion at 38%, 300 bps year-on-year and in the second semester, alone of 62% cash conversion. We also had fewer M&As, which basically made us focus on bolt-on acquisitions. On Slide 18, I mean, we also -- we already alluded to it. Net working capital was on the high side at 5.1%. A bit far from our best historical performance. This is due to a deterioration by one day of our DSO and also by one day of our DPOs. So we are already putting strong measures in place to get back to historical levels, which are more in the range of 4% and 4.5% of revenues. On Page 19, we were able to maintain a very strong credit profile throughout the year. Our leverage stood at 2.0, stable year-on-year, and we continue to aim for a leverage below 1.5 in the year of 2027. You can see also that we have a very balanced debt to maturity profile with no big amount to repay in the coming years, and we have enough cash to pay for all of this because we have EUR 1.2 billion of cash at the start of the year. On Page 20, and to conclude my presentation on the [Technical Difficulty] ROCE was negatively impacted in '23, by the COVID comparables and also the investment we made to continue to develop our footprint and startups. But we believe we have bottomed out now and we will basically get back in '24, thanks to a disciplined capital allocation and also a strong margin growth. So now I will give the mic back to Gilles for the rest of the presentation.

Thank you, Laurent. Yes. So on Page 22, we give just a few examples of the areas, where we're continuing to lead our industry in innovation. We're not just a laboratory providing routine services. We really invent new tests. And we are often at the forefront of those innovation in our sector. Be it in Oncology, be it in DNA analysis, we're starting to apply more broadly artificial intelligence. The latest example is for facilitating BioPharma product discovery. We have a huge amount of data that we have accumulated over the years, through all the work we've done on hundreds and hundreds of molecules that we can help our clients accelerate their programs. So we're going to get, we think, from AI cost savings, but also more and more differentiation, as we can [ bet ] value from our -- the huge amount of data we own for our clients. On Page 23, I'm proud to report some good improvements on many ESG parameters. We've reduced our carbon intensity by 28%, over the last 4 years. We continued to improve last year by 8% or improving our diversity. We get outstanding diversity rating. We increased the representation of women in leadership, our IT security is improving. We have no systematic measurement of client satisfaction in the standardized way throughout our group, and it's improving year-on-year. So it's all very encouraging for the developments over the next few years. And overall, on Page 24, you can see that basically, Eurofins is positively contributing to all of the -- or many of the sustainable development goals of the United Nations. We are not a company that's exposed to ESG risk. We are a ESG facilitator, in many ways to help our clients fulfill their ESG objectives. So what can I say about the outlook? So first, what has happened. We've had the pandemic. The world has changed a lot. We've confronted a number of crisis, first, the pandemic, which financially was favorable for us, but also we focused a lot of our teams from their normal work. We shifted a lot of people working in our food testing, BioPharma testing and otherwise and other areas [ where we're ] testing our COVID activities. This has cost us some significant reorganization effort in '22 and '23. This is behind us now. But in the meantime, we've also deployed EUR 4.3 billion, of the cash we generated to build our network. We now have a fairly unique network. And as you can see on Page 27, we come out of the pandemic, a much stronger company. Our revenues have increased by 40%, so have our margins. we've increased significantly our cash flow. Our leverage has come back to an area that gives us a lot of strategic options. We own twice as many square meter of buildings than we used before the pandemic. And so overall, we've not wasted our time during the pandemic. Your -- as investors, you're getting now after the pandemic, a much, much stronger company, than what you had before the pandemic. And so in terms of objective on Page 28, we are confident that we should be able to achieve our objectives for '27. It represents actually a fairly modest annual improvement, in margin, in cash flow and a modest improvement while we continue to invest [Technical Difficulty] network. So not only should we be a bigger company by '27, a more profitable company by '27 but more importantly, we should have built very significant competitive advantages with the best lab network in the world, a completely digitalized lab network using automation and AI through the network having scale advantages in most markets, having finalized the right hub & spoke network in all our verticals, in the main countries we were active. So we're very optimistic that we will continue to build a very strong company that will benefit from those network effects, from those scale effects for many, many years after that. And while doing it, will continue over the next 2 or 3 years to gradually improve margins and improve cash flows. And this is summarized again on Page 29. I think you can read it at your leisure. So the main thing is '23. We've finalized the realignment of the company to a normal post-COVID situation. We did some significant cost savings also and reorganizations in our core business to integrate all the labs we had acquired, we were done in the U.S. after 2022. We've done a lot of that also in 2023 in Europe. We've done a lot of reorganization in our Clinical labs, in our Genomics labs, in our IVD and production sites last year. And all of those are behind us. So we're very optimistic going forward that on this much better and more streamlined infrastructure, we can focus on growth on our core business. And so we're positive and optimistic for the developments this year and the years to come. So we have a couple of extra slides in Appendix, we can go to questions. And I think, I will now open the microphone to questions.

[Operator Instructions] And the first question will be from Suhasini Varanasi from Goldman Sachs.

For 2024, given the strong underlying growth performance that you've seen in '23, can you maybe share some color on your growth prospects by vertical, specifically in the U.S., where growth seems to be coming in slightly higher than group average. I'll take it one by one, if that's okay.

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

And there's no incremental price cuts in Clinical Diagnostics in France, right, for '24?

Well, there's been an agreement for the next 3 years, '24, '25, '26, I believe. There are price cuts, but there are volume growth. So overall, the overall spend is projected to be stable or growing slightly. And we are gaining share. We are also adding blood collection points to increase our share and our presence in the most dynamic areas. So we do believe we can grow our share in that market.

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

Yes. On this one, we've had a bit of a bad luck last year because there was a change of reimbursement, a bit unexpected and unjustified. So we're still working on it, which cost us probably EUR 10 million cash last year in our TGI business and a lot of growth that we should have had, that didn't materialize. So what we need to do is to do more Clinical Trial work to justify [ our ] test, we still do believe that our tests are highly superior. Those trials will run for 4 years, we should have a midpoint result after 2 years. They cost about EUR 10 million per annum. So that's included in our SDI, of course. And -- but this is again, if things are confirmed as we think they will be, we're still talking of a market in hundreds of millions of dollars with very high -- very high margins. It is unfortunately delayed again. But we are spending the money because we really do believe in the potential of that market.

Last question for me, please. The investment in owned sites EUR 200 million per annum spent. At what point should it convert to lower principal lease payments on the cash flow statement?

Well, as the sites get finished and as a side -- as we move in the sites, it's immediately accretive on the cash flow. So it's going to be a gradual impact. But certainly, when we are done with this process and again, now, we have some sites that are owned by a related party. We want to leave them where they are for the moment. The remainder is about 50%. We don't need to convert those 50%. We need to convert, I don't know, 20% or 30% of those or 25% of those 50%, to be where we need to be, to have all our large countries like China where we don't want to own our sites and there are, for other reasons, other countries where we simply will not do it. So it's not such a long way. We think in those 4 years, we'll pretty be -- pretty much be done with our current footprint, and we'll have a good hub & spoke laboratory network everywhere.

The next question is coming from Himanshu Agarwal from Bank of America.

The first one is on the organic growth. It seems like sequentially, organic growth has slowed down in Q4 versus Q3 on working days adjusted basis despite better pricing. Can you just talk about the volume, if we have seen some decline in volume and the trends there? And continuing on that, you mentioned about Food Testing business in Europe bottoming out. Is it something -- can you talk about the trend that you're seeing in January? Has that started to show some growth, there? That's my first, and then I have 2 more.

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

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

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

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

Yes, as I have said, we have modeled -- we could give no guidance at all. There's always a debate should we give less precise guidance or guidance that are more vague, but then the analyst estimates are all over the place. So we -- that's why we went to giving a couple of ranges of what we think is likely. Again, when we set out an organic growth objective of 6.5%, we say that, that's what we think on average over a 10-year period, we should be able to do. It could be 1 year is higher, 1 year is lower and 1 quarter is higher, 1 quarter is lower. It's not necessarily linear. And the same applies to acquisition. We think we can acquire for about EUR 250 million revenues per annum at the right multiples and at the right returns. Last year, it wasn't the case because we thought we have alternatives that we passed on because the multiples were not right. It could be that next year, we do EUR 400 million acquisition. So it's -- or the year after. So it can, of course, vary a little bit, but that's an objective for the next 5 years, that we think is realistic. So its modeled -- next year is modeled 6.5% organic growth and EUR 250 million added from M&A at midyear.

The next question is coming from Neil Tyler from Redburn Atlantic.

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

A lot of very good questions. The -- from what we hear from our teams, the Food industry and Retail, especially are suffering much more in Europe, since the war in Ukraine. It started really in the second quarter of '22, and they have reduced significantly their assortments. They've resorted to a significant price increase. But throughout last year, their volume growth has been really anemic and they've had mostly pricing growth related to price increase, which, of course, are not sustainable forever. Consumers are switching to cheaper product. I think there's a bit of that in America. I think there's -- in America, [Technical Difficulty] more innovative products, more nutraceutical products. But I think it's mostly the economy that is different for the Food and Retail in Europe and North America. I'm not sure it's due to redeployment. I mean the thing is in America, it's mostly the U.S. So we have one country and we have the right footprint. We did all the reorganization of our network in North America, up to 2022. We're done in 2022. We have very big specialized sites for the hubs and a number of spokes. We're heading startups. We don't cover the full U.S. yet. [Technical Difficulty] number of startups to do over the next 2 or 3 years to cover 100% of the U.S. addressable market. They are, of course, dilutive. But overall, we're closer to having the right final network and footprint in the U.S. than we have in some European countries. So we had quite a few reorganizations in our Food Testing business in Europe. Well, below peak -- we are very much below peak because if you look at the profitability between Europe and North America, and I don't know if we have it in the slide show, but we have it in the report. If -- see -- people are asking, how can we go to 24% margin. But I think we're 26% in America and 14% in Europe. So just Europe recovering to a more normal situation. Yes, so what do we have? The -- even -- it's not even the adjusted EBITDA margin, it's reported EBITDA margin. We're at 14% in Europe and 26% in North America, and 20% rest of the world. So frankly, the problem we have is in Europe, is due to the economy. And -- but at some point, you've reorganized to meet the right volume and the right demand in the market, and you can improve your margins again. And so a lot of that reorganization we have done last year, we have reduced head count in some areas also to match the current demand, and so we should see the benefits. So it's just improving Europe, bringing it back to what would be not very high, 20% bring the whole group to where ever we want to be. So there is some upside opportunity and upside surprise opportunity also in our objectives. However, I mean, not everybody would believe that, but we see it also. You got a question on the investment, yes. What we are doing, we are basically redesigning a whole suite of IT solution to fully digitalize our businesses. This is something nobody can buy. Of course, people can buy accounting software, we buy accounting software, we buy purchasing software. We buy software to do things that all companies do, but to completely run integrated laboratories, fulfilling all the regulatory requirements that we are -- that we have to fulfill, working as a global network, a European network, centralizing production in hubs et cetera, and having all that work seamlessly. We've developed a fairly unique suite of software, and it has been rolled out in some of our verticals, and we see the benefits. And then how do we benchmark? Well, we buy labs and we see what they spend in IT, we have a collection of disparate IT solutions. And we see what -- once we have finished developing and the software is rolled out in our labs, we see what it costs. And we see the benefits we have operationally and that's how we measure the return on those very significant investments. Which you know the world is digitalizing. We're coming to a time of AI. If you want to use AI, you have to have standard data formats. You have to have your data organized in a proper way. And I think if somebody in our industry is going to be able to use AI in a big way, that's Eurofins, because we've made those investments. We have the data in the right format. We have the data in usable format. And we have -- I don't know, in the world, 200 laboratories doing microbiology, we can centralize those results in real time to analyze any trends in pathogens, detect automatically new pathogens, to the type because now we look at pathogen, the salmonella is a salmonella, but really, they're all different, and they all have genetic profile like COVID that you can trace. And those time will come when we will move to genetic testing of pathogens. And we'll have all the data infrastructure to do that and provide very invaluable data to our clients. So we're building the infrastructure. It costs a lot. And we already see some very very immediate return, but we see -- we think the long-term impact and the long-term potential is orders of magnitude better than anything we can see today. So we're still building the house. It takes a long time, and we're doing it on a global basis. So it costs a lot of money. But any large company, take Amazon, it took them 10 or 20 years to build their network, in a much bigger market, obviously. But in our small market, this is what we're doing.

[Operator Instructions] The next question is coming from Geoffroy Michalet from OdoBHF.

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

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

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

The next question is coming from Allen Wells from Jefferies.

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

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

And just on that I just wanted to check something. The transplant Genomics issue that you talked about, obviously, with the Medicare billing changes there. Was that business profitable in the past? Or has it always been included in start-up losses?

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

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

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

Yes. Understand. And then just another slightly accounting questions. I noticed in trade receivables, there's a EUR 19.5 million charge or provision for pending litigation related to COVID. Could you maybe just tell us is what that related to country-wise? And it looks like it's classified as a provision. So I don't think there's any kind of expense -- being expense in ongoing expenses. Can you just kind of confirm that? I just want to understand what's happened there? Because it looks like it's also been restated in the prior year over your receivables as well, just on that side.

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

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

Well, it's small, let's say, it's a sub-EUR 100 million in total. It's a number of small things, the total of which is maybe EUR 70 million, the ones who are really looking at specifically. But they can be quite dilutive.

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

I haven't seen the February numbers. I have just seen the January numbers. January overall was quite good, okay. It was a strong month also in terms of working days. So we have to see the full quarter. I think trend, I don't have the exact of memory, the exact breakdown by activity just for January. And anyway, I would never extrapolate 1 month because you can have one depending on when you build or you close certain projects. Even on a quarterly basis, we can have variation but even more on a monthly basis. But anyway, what we have seen so far is encouraging.

The next question is coming from Dominic Edridge from Deutsche Bank.

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

Yes, the dividend is very simple. We have a rating. And in the rating, we have certain not obligations, but certain traditions in terms of distribution. And of course, we had much higher profits during COVID. So with that quarter of distribution, we could raise the dividend exceptionally, but we went back to a more typical ratio about 1/3 of our -- 1/3 of our net profit that we can -- that we pay as dividend. And that is actually -- if you compare it to 2019, it is a good improvement. It is a more than 11% annual improvement to the pre-COVID situation. And we think we can continue doing that. We want to have a conservative balance sheet, to stay in the range of 1.5x to 2.5x leverage, which gives us some upside opportunity. There are interesting M&A opportunity or we can deleverage, if they are non. And the structure is fine for us, the current mix of hybrid and bonds. We're not worried at all about refinancing. We have all our -- pretty much all our financing at fixed rates. And okay, if rates go down, we'll refinance better then if rates go up. But overall, our interest charges is modest in our total cash flow and profit. So we don't see that as being any kind of issue.

The next question is coming from Thomas Burlton from BNP Paribas.

I've just got 2. One on margin and one on cash. Sorry if I missed it. But are you able to give any additional color on the margin drivers in the second half? Thinking about the point called out on Slide 18. I guess some of those components might be harder to quantify, but any stay you're able to give would be helpful. And specifically, how much is the productivity, digitalization and automation initiative is at? Because I guess those were the probably investments you've made and I guess you're measuring the payback on those? And then the second one on cash. Just thinking about the year-on-year growth sort of implied in your guidance on free cash flow. Are you able to split that out in terms of how much of that is a sort of normalization of the working capital, I guess, the issue that [ drove the ] miss in '23? And how much of it is sort of underlying free cash flow progress year-on-year in '24?

Yes, margin drive, so we started to have a bit of impact on price that caught up some of the inflation. On '22, we lost some on price, obviously, and we've started to have some catch-up. We started to have some better network utilization from our hub & spoke network. But that's a fairly modest gain overall. We still have had a big chunk in Europe, especially that were not -- that were underutilized. And so there's quite a long way to go to further improve this. We don't quantify across-the-board automation and IT impact. I think we'll see much more of that in '25 or '26, when -- right now, we're doing for automation, many pilots, which we haven't rolled out hundreds of robots. We are doing many pilots in many places. And if those pilots work out, then instead of 2 robots, we're going to have 10 or 20 of each kind, for each type of testing, but we're not there yet. So that's really something -- I don't expect the impact of automation to be really material before '25, '26, or '27. The impact of all our IT software will be much more material as we go in enabling us to consolidate or have better to streamline. We won't change the footprint, but there are labs that still need too many tests, could be streamlined more. Once they are even better interconnected with the competent centers. We need to also -- there is software for logistics, but internal transfer of samples that we need to work on and improve. So quite a number of things. And on the year-on-year growth, I think we have a slide that Laurent can comment on the free cash flow.

Yes. One Page 36. So we have put on the slide, I mean, a bridge between '23 and the way we constructed our free cash flow objective for '24. And as you can see, basically, I mean, a lot of it is coming from the growth in EBITDA because we have remained prudent on the net working capital change. We kept a safer objective or assumption of 5%. We kept also taxes more or less in line with what we paid this year. And the all improvement is coming from the fact that the CapEx are becoming -- staying basically flat year-on-year. The net operating CapEx are only moving by EUR 8 million. So this model, as you can see on this slide, gives basically a mechanical improvement of EUR 290 million on free cash flow before investment in own sites. And if we maintain, again, investment in own site of about EUR 200 million, that would give an improvement of EUR 171 million to EUR 645 million of free cash flow to the firm. So this is how we build the model, which is basically a flow-through of the EBITDA increase, whereas the taxes and the CapEx more or less stay flat year-on-year.

Does that answer your question, Tom?

Yes, it's very good.

And the last question today is coming from James Rose from Barclays.

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

It's a very good and broad question. But we cannot comment on the specific merits or details of the merit of the case, regarding Lactalis, but we think our exposure is fairly limited. And of course, we think it's more a media defocusing strategy by Lactalis to try to deflect the blame but they are under very serious criminal investigation and the criminal trial. So we'll see what -- how that involved over the next 2 years, and it affects [Technical Difficulty] work. Overall, how do we organize things? Well, we have many companies, but we have recommended terms of sales and terms for contracts that should be that limit our liability or limit the liability of each of those companies. And we have a mechanism of authorizing exceptions to that when it's warranted. Where we -- some companies, in some cases, can take a bit more -- accept a bit more liability, than what is in our standard terms of sales. It's -- how bigger the clients, how bigger the contract, there is always a discussion on this. We are employing people. So there's -- we can never exclude the risk of human error. So we also have insurance to cover things. If something would happen, we have had people doing criminal acts like any companies. And that is really difficult. We have, of course, a lot of quality assurance programs. All our companies undergo some form of quality assurance, registration, either controlled by USDA, by FDA, by accreditation bodies in Europe, by governments with multiple audits, external audits, internal audits. We have also -- usually on a national basis but also on a global basis, some quality initiatives, some quality training, some quality audits. It's impossible to be sure that we'll avoid any risk, but we have a number of practices to mitigate and limit risks and reduce the number of occurrences or detect problems, where before they become too serious. It's -- I mean that's our job basically to manage risk, and there is a lot of procedure all over the place to prevent problems and ensure people follow protocols that are sound.

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

Thank you very much. Thanks to all of you for your questions and for joining the call. So to conclude, what can I say? Well, we put the house back in order, where COVID is behind us. Now we're back to the normal Eurofins, we can focus on growth and improving margins. We are starting from a much, much stronger point, now in 2023, than where we were before COVID in 2019. We've made a long way to improve our IT solutions, our IT programs, our IT landscape, our lab footprint, our processes of scale. And we're optimistic. We're in good markets. We are -- everything we do is focused on protecting life, protecting health. This is usually where affluent society invest a larger increasing share of their resources. The cost of health care is exploding everywhere. And we are in that area. We are contributing to -- also to many ESG priorities, protecting the environment. And so we're optimistic about our market. Even though it was a bit softer in Europe, and Europe is -- Europe's economy is definitely not out of the woods yet. We have reduced our cost and we will do it more if necessary, to the current market situation, but from that base, we're optimistic to continue to improve things. We will put more money into startups and M&A short term. Maybe this year, later or next year, there would be more better price opportunity on the M&A front. We're open to that, we can be flexible. But we are very optimistic to deliver significant value over the next 2 or 3 years as we earn the benefits from all the investments we've done. Thank you very much.

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