Eurofins Scientific SE (ERF) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome, and thank you for joining Eurofins 9-month 2025 Trading Update. 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 most recent 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.

Hello, everybody, and thank you for joining our quarterly call. We have posted a small presentation for those who are interested. I will refer to some of those slides. I will start on Slide 3. So I'm happy to report on a good quarter, which is in line with our plans. We've made good progress on all our initiatives. As you know, we are in the middle of our 5 years plan to build a world-class network of laboratories in our core markets. We continue to build laboratories to finalize our hub-and-spoke network. This is continuing to make good progress. We will be, over the next few quarters, finalizing a number of labs, for example, in CDMO, in our large campus in Toronto in Canada, in Leiden in the Netherlands for BPT. We're expanding our Lancaster campus. So we see a strong outlook overall for the next few years because BioPharma, some parts of BioPharma have been a bit soft following the COVID peak, but we are bullish about their future expansion. We are getting ready for that. The other big areas where we are investing is our digitalization programs where we aim at standardizing all the digital solutions for [Technical Difficulty] and we are also making good progress on that. We plan to complete this by 2027, which should make us much more efficient, leaner, faster and differentiate further the level of service we can offer to our clients compared to what our competition is doing. So this is also making good progress. Of course, when it will be finalized, we will have also a reduction of costs in addition to the benefits we will get operationally from those systems. Throughout the course of this year, things are developing as planned. We have a solid margin progress as planned. And overall, we are looking forward to delivering on our objectives for this year when we report in the beginning of 2026. So overall, things are in line and we can give a bit more color during questions, if you want. The different segments are growing in line with the previous quarters. We have a very significant base effect that is going to flip in Q4 of this year, as we announced because we had a number of activities that we have in our ancillary BioPharma activities, especially the clinical areas, our central lab or bioanalysis, where very significant studies ended in Q3 of last year. So we have that in the base until this quarter and next quarter, this should fade away. We also have a similar effect in pricing reduction in the French routine clinical business that will also fade in Q4. So we're looking forward to a strong Q4. The rest of our business is developing well. We continue to acquire businesses. In actuality, we are a bit above our objectives for this year. We will continue over the next few years to add about EUR 250 million revenues each year from acquisition. We continue our start-up programs. We have opened a number of start-ups and the blood collection points where blood collection points is because we find the cost of that is more attractive than buying existing businesses. We are, of course, reviewing constantly our portfolio of businesses and may make some decisions on some limited divestments of noncore assets. This is something we are working on and evaluating. On Page 7, we have a summary of the -- of how we see the outlook. So we simply confirm the objectives we set at the beginning of this year. Of course, we've had a little bit of dilution from SYNLAB, but there also the restructuring is going as planned. We will remove significant cost in the last quarter of this year and the beginning of next year. We, of course, incurred some costs for that and it creates some dilution but this dilution will fade in 2026 and 2027, and we believe we will create a lot of value with this acquisition and to the company we already had in Spain in clinical diagnostics. So I'm happy to report that this is developing as planned. We have a small FX effect. Of course, nobody can predict the effects and it could go the other way at some point. Nobody really knows. But since it seems that the U.S. dollar to euro exchange rate is stabilizing somehow at the current level, we gave an indication of what the impact on the full year result of Eurofins would be. And as you can see, it is not much. And the type of margin improvement we can do in our operational business is many times this impact. So we are confident that this will not affect our objectives for 2027 and our objectives for this year. So overall, things are progressing as planned. It's a lot of work. And we are making our business even more competitive, even more effective, and we're very bullish for what we will achieve over the next 2 years and beyond as we enter a phase where we are much more cash flow generative. We own our buildings. We will have also less cash to spend for those buildings because we know them. So we are very bullish with the cash we will generate. And we continue to take opportunity of basically undervaluation, what we believe is undervaluation of our shares to buy back within the range of our leverage commitment, which we intend to keep between 1.5 and 2.5. Since we generate a lot of cash, and we think we'll generate a lot more cash. We have quite a bit of headroom for that in addition to potential asset divestments if we see opportunities for things that are not necessarily 100% fit for what we do. So this is an overview of the progress of the business, and Laurent and I will be happy to answer questions if you have some.

[Operator Instructions] Our first question today is coming from Suhasini Varanasi with Goldman Sachs.

Two for me, please. Can you maybe share a little more color on the declines that you saw in Discovery Genomics and ancillary revenues in Q3. In first half, it was running at minus 4% and minus 10%, respectively. Just wanted to understand whether the declines have been similar in the third quarter to date? Or has it improved? And do you have any idea when this will stabilize, I suppose? That's the first part of the question. The second question is on the BioPharma business. I think you mentioned that some large studies were in the base in Q3, which will flip and go away from the base in Q4. Is it possible to give some color on the magnitude of the benefit in the competitors? Is it like 0.5%, 1% benefit in the comps?

Thank you very much for your question. The Genomics, unfortunately, is continuing on the same trend, also Agroscience, Discovery is more stabilizing. We don't see an explosion, but more stabilization. I think we will also hit bottom in Genomics and Agroscience. So we don't foresee a continued decline of that order of magnitude in Q4 and especially going into next year. More importantly, we can adjust the cost base to that new level of revenues and also the product mix in Agroscience, for example, there is still stronger demand in some areas like biologics or replacements of chemicals with bioorganic compounds. So we refocused some of our teams on the markets that are more growing in this area. So we're optimistic that this will stabilize, probably not looking at significant growth for next year, but probably a stabilization. So that will also be a positive because it won't be dilutive on our growth. On Discovery, there are some positive outlooks. But like others, we don't see it very much. So we're more looking to a stabilization in Discovery, so they're very early phase. And restart of significant growth in the next quarter. On BioPharma, our BPT is doing well, it's growing mid-single digits. But the -- where we were hit is we had very large studies in the central lab and the clinical phases that we do in bioanalysis and that -- those programs ended in Q3 of 2024. They have not restarted yet, but basically, we won't have the base effect next quarter. As to the impact, it is tens of millions of euros. I don't know if it's EUR 10 million, EUR 20 million, EUR 30 million. This is something we and also, if it's per year or per quarter, but it is significant. So we will see it. I don't know if Laurent has a number. No, we don't have it here, but we will -- it's a good point. We'll try to publish that with Q4 or give some indication with Q4 on that. But it is significant. And of course, there is the other side is we have signed contracts and we think there will be a restart of those contracts. As usual, for clinical research, it's difficult to know exactly when our clients will restart when they will start recruiting at a significant level. But we do hope in the course of next year to also see a rebound of growth. We have capacity. We have an efficient central lab. We're an efficient bioanalytical lab, that can support a central lab, and we have clients that have selected us and would like to start studies with us. When exactly those studies will start is a question, but they really plan to do it and they are preparing for it.

Our next question is coming from James Rowland Clark with Barclays.

Just following up on the easing comps in the fourth quarter beyond the BioPharma business. I think you also have easing comps in clinical diagnostics and also in consumer. So I wondered if you could help quantify what those 2 could look like as well? And then just on FX, I just wanted to check, would there be any margin dilution from 1.5% headwind on revenue, i.e., is the EBITDA impact larger than that 1.5%? Or is it similar? And then my final question is on Life, which has accelerated in the last 2 quarters really good performance in food, in particular. Is that now running at what you think is a sustainable rate of growth? Or is the environment business being flattered by easy comps and so actually moderates down a tiny bit in the future?

Thank you very much. Yes, the clinical business is about, I think, EUR 300 million, and the hit was 8% on an annual basis. So you can more or less calculate per quarter, it's EUR 75 million and EUR 5 million or EUR 6 million or EUR 7 million impact on the French clinical business. What was the other -- the second one you mentioned, excuse me?

Consumer.

Consumer, this is a mix of many different things. We have the -- we had a lot of orders in our the microscopy and microscopy and material science business because of prestocking prior to prior to memories and other things and instrument going to China because we also test instrument in the summer industry and that was a big boost to 2024, and that is easing a little bit. So we do hope to see better numbers on that in Q4 and the resumption of growth next year. So that was the second one. That's -- we lump it in consumer, but that's mostly on this activity. The rest of consumer is going well, actually, surprisingly, considering the economic situation. So we don't see that changing very much. Of course, we also have a heavier weight in Asia in that area, and Asia is doing well. The economies in Asia are doing much better than in Europe. So that is good. And life, yes, life is essentially a mid- to high single-digit growth business. We've seen that for a long time. What you have to realize also is an environment we have a seasonal impact. And depending on weather effects, you can have one quarter in Q1, especially, which is a lower quarter. If it snows a lot, if there is everything is frozen or if there is a hurricane or if something happens, that can affect one quarter in environment more than the other areas like food. Food is more affected by scandals or contamination events and things like that. Although we are so big now that anything happening in one continent wouldn't so materially affect the whole. And so environment -- the growth in environment can vary from quarter-to-quarter without being probaly meaningful on an annual basis.

And sorry, just on FX. Is it safe to assume a 1.5% headwind on EBITDA as well as revenue?

Yes. Well, we have a slightly higher margin in the U.S. That's why we comment and if you can do the math yourself if you take 2024 and you take the split of margin in the U.S., in North America versus Europe. There is a small dilutive margin effect from -- if we have -- if the Dollar is lower versus the Euro, we've quantified it on a full year impact. So that's probably the same order of magnitude on the quarterly impact that we will see on the margin. But this is more than offset by the things we do operationally to, of course, continue to optimize our margins, and this program is going well. For a strong change in dollar value, the impact of margin, as we calculated, was 0.2% on a full year basis. So we're not talking of huge impact on margins, it's mostly translational. And over time, our margins in Europe should catch up in North America as we finalize all our IT standardization program and also the hub-and-spoke model, where we cut duplication across countries in Europe. So it shouldn't be that forever, we have lower -- significantly lower margins in Europe than America. Over time, we've had times where Europe and higher margins in North America. And so we will see how that evolves over the next 2 or 3 years.

Our next question is coming from Virginia Montorsi with Bank of America.

I just had 2 quick ones. One is, could you elaborate a little bit more on how you're thinking about buybacks into end of the year and next year? And then just on the FX impact, at total level, if I think about the 1.6% headwind that you're talking about due to the dollar, would it be fair to assume just a little bit more at group level when I consider all of the currency impact? Or should we think about that differently?

Yes, buybacks, we -- it is the best investment we can do at the moment when I compare to M&A, the quality of M&A in the market. What we pay for M&A, companies we don't always know. And more importantly, what others pay for M&A, which usually we pass on because we think it's quite high in our sector, transactions go for 15x and more 12x depending on the sector. And so when we can buy Europe at 8x or 9x or depending on what your look at, we think it's a bargain. Now of course, we have a leverage range we want to respect and so we will respect that, but that still leaves a lot of headroom as our EBITDA is growing and it's growing every year. And on top of that, we generate a lot of cash and our investment in buildings, this will also, at some point, is out because at some point, we will have the hub-and-spoke network, we're very far along. So that will generate more cash. Additionally, if things stay completely abnormal as they are now, we could sell a significant asset and use that cash to buy back even more share or to reduce leverage. So we have a number of options, which means we can continue to do buyback opportunistically. And maybe going forward, more massively if things continue, maybe not short term, for the rest of this year anyway. And -- as to FX, well, it's the same thing. It's all mostly translational. We have a slightly higher -- slightly -- so on your 1.6% was for the dollar, as we pointed out on the top line the dollar represents about 70% of the FX effect, but the FX effects on other currencies since the margin is similar to our average group margin, in the rest of the world or in the other areas covered by the other currencies that wouldn't necessarily impact the margin. So that's an indication we can give on that level.

Our next question is coming from Arthur Truslove with Citi.

A couple if I may. So the first one, just on the organic growth guidance. Obviously, mid-single digit you're talking to. My guess would be that, that means at least plus 4%. And could you confirm whether that relates to organic growth adjusted for working days or not adjusted? So I guess, at 9 months, that's whether it's 3.3% or 4%, that would be the reference point. Second question, I don't think it was in the release, but -- are you able to say how much revenue you've acquired so far this year in terms of deals that you've done? And also how much you've paid for it. And I guess, just on capital allocation as well, you mentioned in response to a prior question that you could potentially sell a major asset. In what circumstances do you think you would actually do that?

Yes, the organic guidance is adjusted for working days, but it doesn't mean we can't exceed it. So we will see, as I mentioned, the comps should help us in Q4 significantly, and our business is doing well. We see some acceleration in some areas. So we will see what Q4 brings. More importantly is whether our growth is 7%, 6%, 5%, 4%, we will improve margins and we will improve profits over proportionately. And more and more, as we advance through our digitalization and the network expansion program. And we've shown that, that with less growth than our secular growth targets, we can improve margin significantly. We showed that last year, we showed that in the first half of this year, and we will show it again in the second half of this year, we believe. So that's on that. Also on organic growth, if you look at 1 quarter, I've heard people saying, "Oh, yes, but the BioPharma organic growth in Q3 is slightly lower. We're talking a very small numbers. BioPharma is EUR 500 million and in Q3, of last year in 2024, there was 1 building of our CDMO in Canada that started working that added EUR 4 million to our revenues, and that is 0.8% of the BioPharma and of course, that is now included in the comps because it started in Q3 of last year of 2024. So one should not draw things over conclude on things that are very small -- there are very small numbers we're talking about. So we are -- we don't see any change of trend, maybe there was a single event that confuse -- can confuse some people. But overall, we'll see the evolution in BioPharma, as we described with the BPT doing very well, the CDMO doing very well, and the ancillary activities staying soft and having base effect for the clinical with studies that ended in Q3 of last year. So overall, we are very confident with our objectives for the rest of the year and on the organic growth level and even more on the margin level. Acquired revenues. I don't think we have published that, so we will look for it, but it's nothing extraordinary in Q3. We published a number of small acquisitions or we did a number of small acquisitions.

In H1, it was EUR 210 million on a full year basis. So it's going to be EUR 10 million, EUR 20 million more for Q3.

For the revenues.

Yes for the revenues on a full year basis.

So we didn't do any large deal in Q3. So we do mostly small bolt-ons because we focus on finalizing our hub-and-spoke network. And capital allocation, this will be if we ever sell assets, it will be either -- it will be mostly opportunistic. If we see an asset that potentially is not 100% fit with our plans and where maybe we will not become #1 in the world in that area, we might consider exiting that asset if we get a really good price for it. I think that would be it. And then we're arbitrage with the buying of our shares. I don't know how long this undervaluation, in our opinion, will continue. We think it is quite massive. But of course, the market is always right. And so we have -- we will opportunistically arbitrate if we need to. And of course, those things are done confidentially, so there will be no warning. If we do a deal, we'll announce it when it's signed.

[Operator Instructions] Our next question is coming from Allen Wells with Jefferies.

A couple for me. Just a clarification question off the back of Suhasini's question from the start. I just really want to understand the sequential change in pharma growth. It looks obviously like the sequentially pharma overall growth was weaker in Q3 versus Q2 by at least 110 basis points. And it also looks like the comp was easier as well as you say this some trialing that starts to drop out in Q3. But in your commentary at the start, you talked about Genomics, Agroscience was weak, but kind of at the bottom Ancillary was kind of stable, maybe getting a little bit better. Discovery was stable. So I'm just trying to understand what's actually got worse in Q3 versus Q2 to drive that sequential weakness? That's my first question. And then secondly, just maybe which could also answer some of it as well is regionally, I just wanted to understand what was going on in North America, again, sequentially, it's been a good region for you, but sequentially, it looks weaker by kind of 40 basis points in Q3 versus Q2 against an easier comp it's 100 basis points of decline in North America. Are there particular moving parts in particular pharma or is it food that's driving that North America slowdown as well? So just pharma and North America for me, please.

Your first question was cut off. So I'm not sure I understand what you said. I don't see 110 basis points going down anywhere. So I don't really understand your numbers. Do you mind rephrasing?

Yes, sorry. So if I just look at the Q2 growth, at least to my headline numbers, working what reported was 1.5-ish%, 1.4%, 1.5% in Q2. Pharma looks like 0.4% in Q3. So that looks like 100, 110 basis points of decline sequentially. And maybe that number is wrong, but it looks like pharma got sequentially weaker in Q2 versus Q3. Yet the commentary around Genomics, Agroscience, Discovery all feels like it's weak but stable, but something must have got worse in Q3 versus Q2, unless I'm misunderstanding the numbers here.

Yes. No, I was commenting on that earlier. We have, for example, one in Q3 of 2024 we had one unit of our new CDMO building in Canada that started, and that added 0.8% to the pharma in Q4 of 2024. And of course, that's a base effect for this quarter because this unit is growing, but it's not growing in the same order of magnitude, so doubling in size or whatever. So those are the kind of effects you can have from one quarter to the next, which don't mean anything. And so that's basically this question. On the other aspects, I'm not sure, I think I answered already about the different components that we think the Agroscience and part of the Agroscience actually. Agroscience and Genomics are still down and still down meaningfully, but we think they will bottom up in the relatively near future, and we are adjusting the cost to the level where they are. While Discovery is soft, but we see the outlook more positive and looking for stabilization, but it's not significantly down. I think that's a comment I gave. And as to the clinical part of BioPharma, we had very large studies that ended at the end of Q3 of 2024. And therefore, was still a significant amount of revenues in Q3 of 2024, which are not there in Q3 of 2025. But when we go in Q4 of 2025, the comps will, of course, not include those revenues because those studies ended in Q3 of 2024. I think that's what I said earlier.

Okay. And then just on North America, the change sequentially, what's driving the slightly slower North America growth?

I don't think there is any meaningful explanation other than the one I gave. Our BioPharma is bigger in North America. The CDMO is a North America effect that happened in Q3 that was a big plus in Q3 2024. I don't think there is anything meaningful in North America in one way or another that they could extrapolate any way in any particular way. Frankly, I think, of course, you -- there is not a lot of data in a quarterly release and maybe it gets overanalyzed and over extrapolated over 2,000 quarters a trend of one quarter. That is, of course, possible. But our view from inside is everything is evolving as planned and we think we will achieve or exceed our objectives for this year, and we're bullish about the evolution for next year and the achievement of our 2027 objectives.

This is all the time we have for today's question-and-answer session. So we would like to turn the call back over to Dr. Gilles Martin for any closing remarks.

Right. Thank you, everybody, for your questions. Of course, we are available offline for more questions. Laurent or myself at investor conferences, we'll be holding one investors meeting in Hamburg later this week on Friday and we will also be holding an investor meeting in Lancaster. That will give you the opportunity to meet our leaders who lead our different business lines and ask more questions, they are definitely more competent to give you views about how they see the future in details in their business lines. But overall, we have done a lot internally to improve our business, improve our efficiency. We are continuing to do that, and that makes us very bullish about how well we will do in a sector that's very resilient. That's not too affected by the economic cycles. We build very -- for our market with our extraordinary efficiencies, and that should help us in the end stages of the consolidation of this market. And we think our competitive advantage in the market can only improve, will improve and will be more and more appreciated by clients, which will lead to market share gains that are also an important part of the growth that we see going forward. So that concludes this call. Looking forward to meeting some of you in person on Friday and in November in America. Thank you very much.

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.