Eurofins Scientific SE ($ERF)

Good day, ladies and gentlemen. Welcome, and thank you for joining Eurofins First Quarter 2026 Trading Update Conference Call. Please note that this call is being recorded and will later be available for replay on 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 is defined in the footnotes of our press release. 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 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 over to Dr. Gilles Martin, Eurofins' Chief Executive Officer. Please go ahead.

Hello, everybody, and welcome to our quarterly call. So in the first quarter, we only -- in the third quarter, we only published limited comment that I will make today. In Q1 was a continuation of last year. We've had a softer revenue growth with a big impact on weather, those who live in North America, in the Midwest or the East Coast and even in the South, will remember that January and February were particularly arise with storms unprecedented weather in Northern Europe, we had similar situation. I read somewhere that Finland had the worst winter in 40 years this year. You can all do your research about that. How does that impact us when we don't -- when there is snow and storm and we don't get samples coming into our labs, we can test when an environment when people cannot go and sample outside because it's too cold, everything is frozen, we don't test. People don't go to the doctor to get tested. They don't go to the hospital to get their procedure. That has an impact. And every winter, of course, we have an impact. It's a matter of magnitude and normally we catch up during the year. It just happens that this year was here. I had a question of how do we quantify that? Well, Q1 at 62.5 days. If you have to shut down 3 days, not even a full week, you're losing 5% of your revenues for the month, if people can't come to work or you don't get samples. So that's relatively easy to see that the impact can be significant. And of course, we get the question, can we catch up? Normally, we catch up just happens that this year, the catch-up might take probably longer than just 1 quarter because we had a very strong however, also March had 1 more day, but even with that effect, March was back to our mid-single-digit target. However, it was not enough to compensate for the -- what happened in the earlier part of the quarter. We do think that much of that will come back at some point during the year, maybe not fully. But overall, we are sticking with our objective of mid-single-digit organic growth for the full year. Overall, our business is doing well. We have a slide show, if you want, I'm on Page 3, but I will not read everything from the slide show, you're welcome to go back and read it yourself or ask further questions in the call later. Overall, our business is doing well. We -- our biopharma product testing is doing well. We continue to build our hub and spoke network, the completion of which is making further progress. We will be done by the end of 2027, as we believe. And we start to see the impact of that because even with fairly soft growth in Q1, losing some volume due to weather, for example, we still continue to improve significantly our profitability. So we are very confident on our objectives to achieve the profitability and cash flow growth that we have set for the next -- for this year and next year. The biopharma, the core biopharma product testing, as I said, is doing well, is mid-single digit. The -- we still have a softness in the ancillary biopharma, discovery is also still a little bit soft, the very early phase of biopharma. Genomics for AnzixAgroScience, unfortunately, are dragging the growth we will get bottom on those activities. We've done a lot of rationalization. We also continue to rationalize the contracts that we acquired from SimLab in Spain. They had a lot of loss-making contracts that we are exiting. We are exiting some of the distributorship we had in clinical diagnostics in Italy, which all show an impact on the growth. How long will that go? Well, probably in lab, we should be done this year with the cleanup and probably also Italy. We've exited completely one activity in the Netherlands in clinical diagnostics because we didn't see potential upside. So we are really making the company very efficient, highly digital, and we're quite positive for the outlook. On Page 4, we give a breakdown. Of course, we have an FX impact. It's very difficult to predict what the further FX impact will be going forward. As some of you know, please tell me. the currencies will evolve. On Page 5, we give a bit more color on the various components of the growth in the different activities, life biopharma and diagnostic Exo pharma includes ancillary activities like Agroscience, Genomics, forensics, which are really diluting the growth of our core business. Our CDMO is also quite lumpy. We actually got an award as one of the best -- or the best mid-scale CDMO recently yesterday or the day before. So we have a good product, but it's fairly lumpy when you're small, you get a big contract. And that has an impact. But overall, we like that activity, which -- the profitability of which, especially on our large Compass in Toronto is doing very well. On Page 6, we talk about acquisitions, we will continue our acquisition plan. We do think we can achieve the EUR 250 million additional revenue EUR 26 million. a smaller bolt-on acquisition at acceptable multiples. On Page 7, maybe I can give a bit more color on the divestment of our electrical and electronic testing business. We had talked about the possibility of such things happening. We like consumer product testing. This is definitely not an exit of consumer product testing. We believe consumer product testing has a strong impact on health. If you take cosmetics, those are things that we put on our skin and definitely impact our health. They fit very well in testing for life. If you get things from fewer shoes and daily chemicals, this has also an impact. You might have seen recently the Texas state suing Lululemon for PFAS contained in closing indeed, clothing may contain chemicals, so the level of health impact is there potentially. So we do like consumer products. We think they fit very well, but electrical and electronic was a little bit different. It's more like type certification of products. It's not checking every single batch or every single product. We fought the fit with our testing for life objectives was not perfect. Also, we were relatively small in that area. We are in many countries. And it was pretty obvious that it is a better fit with the buyer, UL, which already has a global network in this activity, we would have had to develop all the digital backbone specific to that activity. We all know it's essential for long-term efficiency and leadership, and that was a bit too small to do the spend that we thought was required to make that platform and the best in its activity in digital. As you can see the terms of that, I think it's a good highlight of what we have in the portfolio of Eurofins. It wasn't by far our strongest business. It was a business where actually we hadn't started the digital journey. I think the acquirer has the right digital tool and so they can deploy that. So for them, it's very good. For us, it would have cost a lot of capital to put the digital backbone in place, the hub and spoke and so on. We didn't have the scale to build proper urban spoke, we had good accreditation. It is a nice global platform in that area. But it's definitely, if I compare it to the rest of Eurofins, not a crown jewel by far. And it shows in terms of valuation, what is contained in Eurofins businesses? I think the remaining businesses are definitely for us, from our perspective, more potential. On the Page 8, we are just repeating our objectives. So although the Q1 was a bit soft, we think we will achieve our goals for this year. We have already achieved significant continued profitability growth. On the M&A, we are on track. And our digitalization programs and building the hub and spoke network, we are on track. So that's it for my short introduction, but we can go to Q&A, and I can answer some specific questions.

[Operator Instructions] Our first question today will be coming from Rami Grenu with Morgan Stanley. .

I've got 2 on my side. So the first 1 would be on the biopharma division performance, which seems to have slightly weakened sequentially versus Q4. So I just want to try to understand which subsegments within that division have seen the most organic growth pull back versus what you had in Q4? And if there is any explanation for the slight weakness there? And as part of that question, are you still confident potential recovery in the second half of the year? I know I am discussing some of the contracts within Central Lab, for example, and I think you're making some more positive comments on the pipeline as well and the contract wins. So that would be the first question on biopharma. And then the second one, on the divestments. Are there any other parts of the business you think could be potential candidates? And specifically on the divestments you've made, what would be the preferred use of the cash proceeds that you've received for the sale.

No, I don't think biopharma has weakened. We have a number of ancillary activity pharma they have not performed as they will and they should. And that's the main factor. We also had some weather impact on biopharma. It's not like any business in North America was fully immune to the situation. As I mentioned, our CDMO and especially in Europe, the through with a lot of contracts finishing with significant clients. So that had an impact. Our bioanalysis business is still soft. So those new contracts in Central Lab and so on haven't started. So we still have a negative development there. I think that's the main thing. But the trend is really as we anticipated. We do expect recovery. As usual, the timing of recovery is always difficult to determine, especially for the clinic clinical areas where you have large contracts, which are fairly lumpy, and you never know exactly when they will start. But our clients, one of our largest clients recently reconfirmed, they really want to go ahead. Timing of that, we will see. On divestment. We have nothing specific on the agenda. We are doing a bit of, as I mentioned, of portfolio cleanup on smaller things, can be contract or smaller activities. We exited clinical diagnostic in Brazil, for example, that was last year. So we have a few smaller things that are ongoing anyway to really clean up our network. We have some in dorms, obviously, on a number of areas. We don't need to do any additional divestments. We could potentially at some point. We do active portfolio management, and we have to be the best owner of all assets. And we also look at some other M&A assets that could be interesting. So it's not that we want to shrink overall. We want to grow, but in areas where we are global market leaders, and we see some upside. So there's nothing imminent on the horizon. And of course, everything is possible. Some things are possible. On the use of proceeds, you asked, well, we disclosed it in the press release, the general business. First of all, it will reduce our overall leverage. And then depending on opportunities on M&A, we might use some of it for that. If not, we might use it for share buyback, but that depends, of course, on our share price. So we have a number of options to allocate capital, and we are driven by return. So we allocate capital where we think it provides return significantly above our hurdle rate, and that's how we will manage. But short term, it's mostly debt reduction.

Okay. And if I just may ask a follow-up on that. Just taking a step back and given the recent Intertek announcement, interested in hearing what you think around some of the parts valuation consideration on the business and whether you would be open to the idea of the broader strategic review on how to potentially crystallize any potential value, if there is value into a sum of the part consideration.

Value is always there for the long-term owner. What the market says today doesn't define the value of the assets that someone wants to run that asset long term. So no, there is nothing on the agenda like this. However, on the sum of the parts have made no secret from the fact that I believe that our share prices at the moment currently massively undervalued compared to the sum of the part and this small divestment for 2.5% of Eurofins it shows clearly, if you take, for example, net sales revenues, the massive gap exists. And as I say, I don't think that part was any more profitable, and more faster growing for the last -- for the recent past or had any more general attributes that made it more worthwhile than any other assets that we own. But the market is always right at the moment, at any moment in the long term, I think the value has come out.

[Operator Instructions] Our next question is coming from Neil Tyler with Rothschild & Company Redburn.

Two questions, please. Firstly, around your investment program, and you talked about investing in the digital backbone, which has been taking place for a little while now. Can you talk about how perhaps those investments may have had to have changed over the last couple of years and in the -- against the background of AI and large language model development and how that's allowed you to either accelerate or perhaps have had to increase investments and how you thought about the sort of integrated digital infrastructure across the business? That's the first question. . And the second one, much more specifically, you mentioned some reimbursement issues in the diagnostics business in North America, having held back revenue growth in this period. Can you talk about what that was and what the sort of incremental risk of the same thing repeating is again? Because it was my perception at least that the majority of the North American Diagnostics business was less exposed to those sorts of issues, which have obviously been a feature in Europe.

Thank you very much. Our digitalization program hasn't changed much with AI. We have deployed coding tools, obviously, AI coding tools, the impact on the speed of development so far is fairly modest, unfortunately. And of course, we're reading about many others. And while in the future, a lot of people hope that development will come much faster with AI, this impact is relatively slow. Does it speed up our development by 10%, 15% now? Maybe that's about -- or the quality of code is improving, obviously. All the coders have to learn to use those tools. And now we go to agentic AI. And what happens. There was an interesting article in Bloomberg yesterday about actually what happens inside Google for their own coding needs. You're talking there are a number of coding tools that accelerate and facilitate coding. Some are for a few quarters better than others. But you end up having only a small part of your developers who are able to use them to the full capability of the tool. It's a learning. So it's an adaptation. So maybe on the long term, the speed acceleration of development that will be provided by that will be more significant. But in the end, what matters you have to define what you want to do. And in any case, that is the most difficult thing because you have to define exactly what processes you want to standardize around and that is real engineering. I'm not sure AI does it really for you at the moment. So I do think it will certainly help us to get our program delivered on time and as times go, we can improve our capabilities and our tools. But it's not -- AI is not a game changer, unfortunately, at the moment. Maybe it will be, but not quite yet. Reimbursement. We have 2 specific things on reimbursement in the U.S. We have, first, the end of the reimbursement of our True graph test, which happened last year, but is still impacting 2 or 3 quarters this year. And then we have a small activity we haven't talked a lot about. It's about EUR 100 million, but it is called donor products testing, where we test organs or we test cells that will be used -- that will be implanted, transplanted and the requirement for testing is not only reimbursement. It's mostly the policy of how often and what tests have to be done for organ transplant, and that has changed recently and that is starting to affect from Q1 of this year. So those are the 2 things I was -- we were referring to.

That's very helpful. Can I perhaps just ask a follow-up related to the first question around your comment around margins that you're expecting significant progress. The -- obviously, the investments you've made have been one of the supports to margins and most evident in the U.S. And does that comment that you made around margin confidence apply both to the U.S. and to Europe as well for this year?

Yes. Yes. Well, margin -- margins will improve just by construction because there are many things we've spent a lot of money on reorganization and so on that are coming to an end or have ended. Once we have the right size footprint, we don't have to have the shutdown, also the impact on the top line of shutdowns when you shut down side and consolidate, you always lose a bit of revenue. So that's not good for the top line. But of course, once you have finished the consolidation and the new IT systems are better done and everything, you gain efficiency. So you need fewer people. So -- and in Europe, we have a huge catch up because there was much more duplication. There is still much more duplication in our network in Europe and North America and diversity and diversity of IT systems, because each country had deployed an older versions of our system, which was configured differently in its country. So the cost of maintaining that is much higher. If I look our IT cost in Europe, there are 5 -- just IT solutions. There are 5% of revenues in Europe versus 3% in the U.S. It's already there, you've got a difference, and that should normalize once we have standardized everything. That gives some idea of the impact and why irrespective of revenues growth, it's not only volume drop-through, we believe we will improve profitability.

Our next question is coming from Delphine Le Louet with Bernstein. .

Just to be back on the follow-up on this margin story or the way you look at the margin and specifically into minding the gap in between the U.S. and the European margin. How should we think about the size of the gap in the next 5 years? This is the first one. The second one is really back to us to what is happening exactly on the margin into Q1 when you say we have total and mechanical gains due to the hub and spoke, but can you be more specific and possibly separate what you see coming out from the mix effect and what you see, let's say, more broadly coming from the COGS. And finally, the question deal with the CDMO Canadian business that you bought and effectively, you had at the time of the buying some contract for a certain duration. So can we size actually what is the CDMO precisely in terms of revenue? And because we have the catch-up into the biomanufacturing happening right now or you're not more in a way active or being more successful in bringing new contracts to the table to make this facility running at full capacity?

Thank you. Yes, the size of the gap between the U.S. and Europe is big in profitability. I don't think we'll ever fully catch up. Although there were activities and areas in Europe where we have higher margin than in North America in the same business. So it's not impossible. It just needs the proper focusing on the sites and also finalization of all those very disruptive new digitalization programs. So I think the gap is -- can we have the gap, I don't know. We haven't made any -- any objective beyond 2027. So I can't be specific about that. . And again, in Q1, I cannot tell you more than what's in the press release. Otherwise, we'll have to do a new press release, I'm sorry, but we'll -- we are confident that we'll improve margins in a way to achieve our objectives for this year and next year, and that has gone well in that direction in the first quarter of this year.

Okay. But when you say -- significantly. So how should we think about that? Should we think as a sort of a doubling of what you see into the organic growth? Or what's the rent I presume you can give us a flavor.

I'm not sure I understand your question, but I cannot give you a number because otherwise, we'll have to issue a press release. I cannot give much more thing and saying that we are completely confident in achieving our margin progression for this year and next year and the evolution in Q1 fully underlines that and makes us also even more confident about it. That's all I can say, I'm afraid. Otherwise, we think about some time publishing full financial report also for Q1 that would have some benefits because indeed discussing just the top line growth is not much information for you guys to do your planning, we're not there yet. We haven't decided to do that. Maybe we should at some point. It is a valid question, Delphine, and I understand just what we can give with short of publishing a full P&L is frustrating. And yes, whether it's COGS or the top line and COGS improvement of COGS is linked to our purchasing effects. I mean, the way we define it is mostly external cost. And if you include labor, lab labor, of course, that comes from productivity and we have gains there. And also, we have a program to use our overheads better and that's going to be a multiyear program. So we think we can go beyond what we plan in terms of margin -- but we first need to deliver that before we talk about what is possible after that. To your second question on CDMO, that's globally about a EUR 100 million business. In Canada, we bought a small business, but we mostly expanded it. We've built a big site now and every time we expand, it takes 2 years to fill -- not to fill, but to qualify, to build the room to build the equipment, to qualify the equipment so that it can be filled. So it's very lumpy. But we will do an Investors Day, I think, this year in Toronto. So you can see the facility and we can talk more about that. Our CDMO was affected in Europe this quarter because we do more biologics in Europe, in Canada also with not only and they had some contracts that just ended. There was 1 client that had a clinical trial that didn't go well. So that stopped. And -- so overall, the CDMO in Europe is doing a lot of early stage and has been more affected by the funding issues of biotech. And of course, we get the impact a few quarters after the clients run out of money because the projects continue, they don't end abruptly. So that's what I can say with CDMO. Our positioning in Europe is good. It's mostly biologic. So when that picks up, we should be able to get good new contracts.

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

Just 3 for me, please. Just to clarify, it's a weaker start to the year, but you've maintained your guide for mid-single-digit organic growth for year. Can you maybe clarify how trends were in March and maybe early April? Did it return to more than 5% levels? Second question, we've obviously seen some news flow on AI partnerships by big pharma players and there's some concern in the market that it could lead to more in-sourcing of pharma R&D. Can you discuss the risks to Eurofins if this trend were to happen? The last one is on contract exits, specifically in clinicals and lab. How much impact 1Q growth, please?

I think you were cut off. But I think the first question regarded the exit rate for growth. I alluded to that earlier, saying we had a quite strong March. And even correcting for the extra working day were mid-single digits. That's one point. Partnerships. That's more for discovery. We don't do a lot of discovery. We have an AI company also that works with clients to use a lot of data points we have for Discovery to help them. Actually, if there is more discovery, there will be more work flowing through our labs because you cannot replace what we do with AI for the biopharma product testing, this is mandatory. This is testing with machine, and that is part of the -- what is it called, the filing registration, how the product will be tested as part of the registration of the product. . So I don't really see what AI will impact for the type of business that we do, which requires brick-and-mortar and labs and touching the sample, if there are more products developed the biopharma will not in-source a biopharma product testing because they bring more molecules in the clinic. They will still need -- they decided to outsource it long ago, and that I don't see why that would change before because of AI. On SYNLAB, I think SynLab, over a number of months, quarters, we plan to shed EUR 20 million or EUR 25 million of revenues. That was what we announced when we bought it. That has started, of course, immediately when we bought it. First quarter, what the impact is a concept but it's significant. We're talking this year, probably still EUR 10 million that will be shaved off the activity of that business. Now of course, we also increased prices. We do effect because we don't lose all the contracts. Sometimes we manage to conclude them at a higher price that provides the right profitability. So it's a complex multiple pieces moving.

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

Thank you very much. Well, thank you very much to all of you for your questions. As I mentioned, it's a bit frustrating to just talk about revenues, especially when we've had a soft quarter with a big impact on weather. I think the outlook has not changed. We're confident that we should be doing mid-single-digit growth this year, improve our margins, continue to build strong competitive advantage, have a more efficient more digital, more differentiated business, which our clients love. And also, we are fortunate to be in a resilient industry. We do things that are not directly tied to energy. Of course, inflation can be a few percent. I had a question, how much is energy? I mean maybe energy is 3% or 4% of our cost between transportation and heating and so on. But it's not an enormous impact. It is an impact. But not super enormous in good or bad times, food has to be safe and tested the air, the water we drink, the air we breathe, the water we drink has to be safe. and there is more biopharmaceutical research. The development in these areas are super exciting and more products will be developed and we provide some of the pigs and troves to get product registrar. So we're feeling good about all our activities. We think they are resilient even in very predictable times. And we are getting close to having built a very efficient and very profitable lab network with very high market shares and strong differentiation. So thank you for your support. And we'll talk more in 3 months with profitability numbers that I hope you will all like. Thank you very much.

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