Eurofins Scientific SE (ERF) Earnings Call Transcript & Summary

Good day ladies and gentlemen, and welcome to the Eurofins H1 2026 Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Mr. Andrew Swift. Sir, the floor is yours.

Thank you for joining the Eurofins H1 2026 Conference Call. Please note that this call is being recorded and will later be available for replay on the Eurofins Investor Relations website. [Operator Instructions] During this call, Eurofins management may make forward-looking statements, including, but not limited to, statements with respect to outlook and the related assumptions. Management will also discuss alternative performance measures such as organic growth and EBITDA, which are defined in the footnotes of our press releases. Actual results may differ materially from objectives discussed. Risks and uncertainties that may affect Eurofins future results include, but are not limited to, those described in the Risk Factors section of the 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 half year results call. We have a small presentation. I guess some of you could download it. So we've had a strong H1 2026 with very strong improvement of results, 29% EPS growth. That's a continuation of the progress we've seen on margins and profit in the last year. If we go to the summary that we have on Page 4 -- on Page 5, we can highlight some numbers. The growth is still not at our midterm objectives, but it has been improving between Q2 and Q1. In our life sector, especially in environment, we've seen the growth accelerating to -- as we recovered some of the weather effect that we saw in Q1. We had not flagged a particular catch-up in biopharma in the second quarter. We think the later part of the year, especially Q4 will be -- we should see much more effect from the positive comparable and potentially some restart or start of some important programs in our clinical business and also the end of some of the constructions of some areas in agroscience, for example, where we have rationalized also the capacity. So no big surprise on the top line. On the margin, on the other hand, we are above our objectives. We are above what we were expecting in what is traditionally the lower margin part of the year. We have achieved the 23.7% on the adjusted margin -- EBITDA margin, which is quite good, and it shows what our business can deliver. Overall, we continue to reduce our separately disclosed item. And as we finish the integration of all the companies we acquired, we are moving forward in the building of the hub-and-spoke model, and we start to see the benefits. We're not there yet. We still have enormous expenses in IT, enormous disruptions to our business in deploying our new IT solutions in our food and environmental testing businesses in Europe. But all of that is progressing. So we are positive that by the end of '27, we will complete those programs, and we'll have a very efficient completely digital network with the latest technologies and start to deploy some AI tools for being even faster and more efficient in some areas. Those programs are going well, and we start to see the [indiscernible] faster than we thought. So that's on the -- and we also -- most of our investments are done. So we have to invest a little bit less. The other thing [indiscernible] continue to focus our business. We've already discussed that we agreed to divest our electrical and electronic testing business. It's a good business that we built over the last 15 years, but it's not necessarily core to our testing for life business. UL will be a better owner. So we were able to divest it. We were able -- we announced that on Monday to acquire a business of similar size in North America, which is an area that is actually growing better than Europe, focused on the core of our business, mainly biopharma product testing, but also environmental and some food testing. So this is an example of 2 transactions that are in line with the goal to focus. Of course, the more we focus on one area of activity, the more efficient we are, the better we can deploy our IT solutions. We hadn't started developing a whole suite of IT solutions for the electrical and electronic testing business, which is slightly different than our other businesses. But in that business we acquire, we have all the tools that we can deploy almost from day 1 and make it more efficient. So that's an example of how we intend to continue to allocate capital going forward. On Page 6, you see some of the reasons for the margin improvement. And -- but if I summarize it, as I just said, it's basically we are starting to see the benefits of all the efforts we did. And we're also at the end of some of the costs for duplicate sites and et cetera, the exceptional costs are also going down because we -- we are still doing some new sites, moving to a new site in the Netherlands. We're moving to a new environmental testing site, where we will be moving also pharma testing site to bring together 4 different sites. So all of that is, of course, costing still a lot of money, but a lot of that -- those programs are behind us, and we see the benefit. On Page 7, you see the various evolutions. And on organic growth. So our Life business is still slightly below where it should be, but it's doing well overall, close to the mid-single digits, close to 5%. Biopharma is a bit soft. Even biopharma product testing in Europe has been softer than in previous periods. We've had a couple of large contracts that ended. We are working on replacing them and some parts will be replaced, but it had an impact, especially in Q2. Diagnostic business was doing well in Europe. In North America, we still have the impact of some regulatory changes. One affected our transplant business. We've already covered that several times, but we still have the base effect in the first half of 2025 in the change of reimbursement of the transplant rejection test that we have. And we also have a change of the mix of tests required for donor product testing, which impacts our growth. We've had negative growth in diagnostics in North America, which affect the overall growth. But here again, soon as the time passes, the comparable will ease and that should improve. And consumer has been doing well. We have a bigger exposure to Asia in consumer than to Europe and North America. And Asia is doing well. And also, we have our material testing business. We have some nice developments with AI and semiconductors, and that business is progressing very positively. On Page 8, we give a bit more color on the components of our biopharma sector and where you -- as you can see, we still have, unfortunately, some areas which are -- which have negative growth. Discovery is still slightly negative. That's the early phase of biopharma. We see some green shoots. We -- the funding of biotech is improving. We have requests for quotes, but we haven't seen a big impact on the actual numbers yet, although that should materialize at some point. Agroscience and genomics are still challenged on the top line. We are rationalizing sites. We are rationalizing capacity. And we also do believe that this will hit bottom over the next few quarters. So the opportunity there is the impact of those areas that are negative is getting smaller and smaller every quarter. And at some point, we get to the core that will not decrease anymore. And of course, that leads to rationalization in the market. There are fewer and fewer players in Agroscience and a lot of companies are closing or rationalizing also. So that's the outlook on biopharma. [indiscernible] continued to do very well, double digit in North America and in Europe for the reason the soft [indiscernible]. Laurent will now give you some more details and more color on the financial numbers.

Thank you, Gilles. Good afternoon. It's my pleasure to walk you through our half year results. On Slide 10, despite the moderate revenue growth, we delivered a strong improvement of margins and earnings per share. Our reported EBITDA recorded a 190 bps improvement year-on-year, reaching 23.3%, including a 50 bps exceptional gain from legal settlements. Our adjusted EBITDA increased by 130 bps year-on-year, reaching 23.7% with reduced SDI, which are now weighting only 0.4% of revenues. So overall, we saw a very strong increase of our earnings per share at plus 29% year-on-year, reaching the level of EUR 1.55. On Slide 11, as you can see, our moderate revenue growth was a result of mostly two factors, an organic growth of 2.7%, but also a very strong FX headwind of 2.9%. The M&A contribution in H1 was very limited. On Slide 12, if we look at the breakdown of our H1 results by region, we see a very strong growth of revenues in the Rest of the World, plus 9% organically and plus 5% in reported figures. And we see a very good improvement of margins across all regions with Europe recording a plus 210 bps improvement, North America, a plus 230 bps improvement. If we exclude the onetime gain from settlement, it's still a 90 bps improvement and a plus 130 bps improvement in the Rest of the World. On Slide 13, if we look at another breakdown of our H1 results between mature and nonmature scopes, we see a mature business, which is reaching 25.3% margin, well ahead of our group objectives. And we see also a nonmature headwind decreasing year after year with SDI at only 0.4% of revenues. On Slide 14, in line with this strong margin improvement, we also had a very strong cash flow improvement. We saw our free cash flow to the firm increased by 46% year-on-year and reaching EUR 403 million. We also had a record cash conversion of 47%, which resulted in a very stable leverage versus December of 2.2. All this enabled us to increase our share buybacks by another EUR 200 million in the first half. On Slide 15, if we zoom at the levers behind the strong improvement of cash generation, of course, it's due to the improved margin, plus 500 bps in the last 3 years, but also to reduce CapEx, 240 bps less in the last 3 years and a much decreased net working capital intensity, which increased by 190 bps in the last 3 years. All in all, it's notable to see that we were able to multiply by 5 of free cash flow to the firm in the last 3 years. Now I will give back the mic to Gilles.

So a bit more color on this focus on our core business. On Slide 17, we talked again about the divestment of electrical and electronic product testing. So this was a transaction that was also generated, as you can see from the numbers at a much, much higher multiple than the overall multiple at which Eurofins shares are trading, almost double. And this business is not -- doesn't have a higher margin, and it's not growing faster than the rest of Eurofins. It's just a small indication of the value that is within Eurofins and that actually can be realized by those transactions or at least shown. And it generates some cash. And with this cash, we can reinvest in our core business, which we did, and you have some details on Page 18. We have the agreement to acquire Element Material Technologies Life Science Testing Services. Element is a business that was formed by private equity, by a number of acquisitions over the years. It was sold to Temasek. And like many, many big players, when markets become more advanced and the companies like Eurofins that are very specialized become more competitive, it becomes harder for conglomerates that are serving a large number of verticals to be very good in all verticals and to invest in the digitalization, in the robotics, in the AI tools that are bespoke for each type of activity. And so it does really make sense for Element to dispose of an activity where they will never have had a global or local leadership in North America. Like UL is a better owner for the electrical and product testing that Eurofins used to own, Eurofins is a much better owner for the life science testing that belongs to Element. So it's win-win deals for both parties in both cases. Over time, we think we can create significant value of that business. We have a very clear integration plans. We know what tools we can develop. We can deploy our IT solutions for BPT, are world-class. And this business is growing well for us in North America, where those businesses are present. We have a large food testing, a large environmental testing business in North America. So we can easily add the few labs that Element has in those areas, and they can fall under our leadership team and our IT solutions. So those are -- this is a very good fit acquisition for us. And I think you will see over the next few years that the most successful TIC businesses will be the very focused TIC businesses as it's difficult to be the best in all areas. That applies to TIC like it applies to any other industry. On the side of those large acquisitions, we continue with our M&A, which -- where we have a target to add about EUR 250 million revenues per year from a number of bolt-on acquisitions, and we continue to do that in the first half of this year, with several transactions, including some that will close -- that we are working on and that will close over the next few months. On Page 20, we give a couple of examples of the new sites that we have been building. Building new sites to create hubs and to consolidate the smaller labs that we acquired over the years is not something that is done overnight. The lab in the Netherlands is a project we started 3 years ago. We needed to buy land to obtain planning permission to get it built, and now we're getting it qualified. [indiscernible] after 1 year, all our businesses that are in the Netherlands into that building. We need to qualify the businesses after the moves. So all those moves are very costly, disruptive. They dilute our margins. And of course, they dilute our return on capital employed while we do them. But once we are done, once they are done, they provide significant scale advantages for a decade or more or actually much more because on those sites, we have extra land. So if we need to grow, we don't need to move the sites. We don't need to add destroyed buildings. We can just add a wing to the buildings we have built. So -- we still have a few to do. The last one will be an extension of our Lancaster campus in North America that will complete in 2028. But with that, we will be by the end of next year, with that exception, pretty much complete to integrate all our network into the right footprint with very large hubs with scale effects, automation, robotics, et cetera, and bespokes to do the time-critical assays closer to our customers, but only when it's required. On technology, we don't talk very much about that because it's more in the trade journals that we talk about it for the clients that are interested in each area, but our labs continue to invest a lot in R&D, developing new solutions that are in the testing world, usually quite advanced compared to the rest of the industry. So we can talk a few -- we presented a few on Page 21. And we are proud to have some of the most innovative labs in our sector. So if we look at how we see the future, we are not changing our outlook. It is obvious that to hit the mid-single-digit organic growth for this year, we need to have a significant pickup in H2. We believe we will have a pickup in H2. How big the pickup will be, we will see. But we still think mid-single digit is achievable, whether we will achieve it or not will depend on a number of factors, but we have decided to keep that objective. Our margins, we think the margins, we keep our objectives. Basically, we haven't changed anything. Our margins will improve this year. And we also confirm our objectives for next year. It's -- if you look at the numbers for the first half of this year, it probably makes very credible our objectives for next year. And we confirm also our objective for next year. And we do think the softness in biopharma is temporary. It is shown in our numbers as bigger than it is for the core of our biopharma, which is BPT. So clearly, at some point, all those ancillary activities in biopharma will stabilize, will start growing or we will shrink them to a point where they don't matter. So we maintain our objective to grow a bit above mid-single digits on the secular level. And another factor is once we are done with restructuring our network around our hub-and-spoke network, deploying our IT solutions, deploying AI and robotics, our operational performance will also significantly improve. At the moment, we lose clients because we are changing limbs because when you change IT systems, your performance decreases, you have issues. And at some point, this is done. And then the other -- the opposite happens, we will be much faster, much better, much more reliable in our delivery times than pretty much anyone in the market, which should also provide the opportunity for gaining significant share. Also will be much more efficient. So we are really looking forward in all of our markets to being done with those programs, and we are right in the middle of it in Europe at the moment in food and environmental testing. So it is a drag. But the progress is good, and we are confident that we'll come out of 2027 with the best network possible in terms of footprint and in terms of IT solutions, service delivery, speed and quality of interaction with clients. So we're optimistic for the midterm growth once we are done with that. In the meantime, we continue to improve our margins. We continue to generate more cash flow. Our CapEx is kept within the objectives that we have set for our CapEx of EUR 400 million per year. That can go down when we are done with this program of building the hub-and-spoke network and the digital investment program. So beyond 2027, we might be able to do less than that. We will also be done with spending to own our own sites. And so beyond 2027, we see the cash flow that we generate to continue to increase, and we can use it to either grow organically or to return to shareholders. And even now when we are not done with building our network, we return a lot of money to our shareholders through dividends and through share buybacks. And as we continue to improve our margins and cash flow, we can increase those returns to shareholders and continue to take advantage of a very depressed share price to create long-term value for those shareholders who believe in the long term of Eurofins. So overall, we repeat our objective, we confirm our objectives. And if I move to the conclusion slide on Page 24. I think we've had a very good first half. Things are moving as we expect, actually better than we expect. Our network is coming together very well. We still have a number of loss-making units that either are start-ups and that are working -- that are growing to profitability or are in the middle of a reorganization. The SYNLAB network in Spain, the integration is going well, but it's still very dilutive to our profits. So we still need a couple of years to get to our target profitability there. We've ended a lot of loss-making contracts there that also impacts our organic growth, of course, when we do that. But then we focus on business that is profitable long term and clients that are prepared to pay to their providers make an acceptable profit. So we are, as I said, optimistic that the organic growth will pick up going forward. The difficult to say, but we will go back to what we were used to be mid or high mid-single digits. We will continue to deploy capital carefully to focus on our core business. And overall, we are convinced we will finalize our program, our 5-years program by the end of next year, achieving our financial objectives, and that will give us a very good platform for growth of top line and profits. So that is from my -- for our introduction, and we can now take questions. Thank you.

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

A couple for me, please. I think at the 1Q results, you had indicated that growth was coming back to normal by the end of the quarter. And therefore, the expectation was for 2Q to deliver reasonable mid-single-digit growth. Just trying to understand what changed, please? And specifically in biopharma, when you talked about the contracts that ended, was it a competitive loss? Or was that something else? Second one on CapEx actually. It feels a little bit light, especially on the real estate spend in 1H. Is that a timing issue? Or should we expect maybe slightly less spend on real estate for the rest of the year?

Thank you, Sasi. Well, what we're talking about, if I remember well, was mostly the environment and the businesses that were affected by weather that were coming back, and they are back at mid-single digits. Biopharma, we have different components in biopharma. So the genomics and the agroscience, the outlook then was not good and it's still not good. We don't expect a pickup in those areas, a significant pickup in the short term. Then we have Discovery. Discovery is close to 0, slightly negative in the first half. Here, again, we believe it will pick up, but there's no -- we haven't -- we hadn't flagged and we still can't flag a significant pickup or timing of a pickup. On DPT, the U.S. continued mid-single digits. Europe was flat in the first half of the year. It depends on the countries. We have countries growing very well, double digit actually. And we have countries that are a bit more challenged, France and Germany, among others. And there is the impact of some large contracts that it's not that we lost it to a competitor, but sometimes pharma has certain programs, they develop a new product or they build a new site that they need to validate. So it makes it a little bit lumpy. And so usually, we win more contracts and it's not shown. But maybe in an environment that's a bit less dynamic for biopharma, it shows more when one of those contracts end. And CapEx, yes, especially real estate CapEx is not linear. It's a bit bulky. It depends when we complete the building. So we're still guiding for more or less EUR 200 million on our own site. Maybe some will shift to 2028 because I don't think we can complete Lancaster by the end of 2027. And the overall other CapEx, which includes growth and maintenance CapEx, maintenance CapEx is 2% or 3% and the rest is growth CapEx, we spend as we need it. So indeed some of our businesses that are more challenged on growth, they spend less. Then -- and so that may be why we're a bit below. But other businesses that are growing fast are in the normal spend of CapEx that we have planned. Of course, we're frugal. We don't spend when we don't need to spend.

Our next question is coming from Francois Digard with Kepler Cheuvreux.

Coming back on biopharma. So is it fair to understand from your comments that improvement will come mainly from easier comps. But I had in mind that you were also expecting new contracts to come. Are these contracts already signed? And are we talking about smaller number of contracts or a broad number of smaller contracts? And I have a second question, if I may. Do you today consider Eurofins to be a conglomerate or already sufficiently focused?

DPT, well, we have biopharma, we have many things. We have a business, which is a small clinical business, where we have large contracts compared to the size of that business. That affects our central lab, bioanalysis and also our CDMO to some extent. where it can -- a contract can make a difference. In DPT, it's much less so, but we do have EUR 5 million or EUR 10 million a year contracts with some clients that are linked to certain projects. But DPT is mostly a lot of small contracts compared to the size of the business. They might be big in absolute terms. And the clinical contract -- clinical business like central lab would be larger contracts compared to the size of that business. And we have some that are signed, but we don't -- we're not exactly sure when they will start being implemented, pick up when the patient recruitment will show some significant momentum. So we cannot give precise timing. We do think we'll see an impact in the back end of this year of those contracts starting. And of course, as you mentioned, we'll have the comps. How do I define focused? I would say focused is if you are 3 or 4x bigger than your next competitor and you are the market leader, you benefit from the scale. You benefit from being focused, and you can have 1 or 2 verticals. The question is, in each vertical, how much bigger are you? Are you the market leader in each vertical and potentially in each market, in each geography? And if you're a market leader, how much -- how many times bigger than the next one are you? And that gives you scale and that gives you a benefit of your focus. So that's how I would look at focus. And when I look at other companies that are more conglomerate, they have -- they sprinkle their market shares. They have a bit of this in one country, a bit of that in another country, but they are not leaders in many places, if any. And to build the efficiency, the scale, the digital -- the dedicated digital tools that will make -- and that makes people winners. If you look -- I mean, on the traded companies, it's difficult to see because you don't get the detailed numbers of each of the vertical. You have some focused companies. And if you look at UL, for example, which is much more focused on core products and this type of certification activity, they do have significantly higher margin, trade at higher multiples, just to give one example. Most of the other examples, you only see when you look at private companies that are sold in private transactions. So the numbers are not public. But in my experience from what I've seen in the last few years, in the last actually decades, focus is a high benefit.

And do you think that today, Eurofins is already focused enough?

Well, 70% of our business in those activities. The other 30%, we can be #1 in a geography. And then the question is in those businesses like clinical diagnostics, we are #1 in Spain, for example, we're #1 in Ireland. Is it necessary to be #1 worldwide in that sector? That would be the question. And I think we like what we have. And we have businesses, for example, in consumer product testing. If I take our material science business, we are #1 in the world in that niche. It is a niche. It is a global niche. We are #1 in the world, and we have a great business. We have a fantastic business working for some of the most advanced companies in the world, where they need very specific advanced microscopy testing that we're among the very few companies in the world that we can offer. We put it, we classify it as consumer product testing, but it is an extremely focused and extremely successful business that is global market leader and actually 2 or 3x bigger than the next one.

Our next question is coming from Allen Wells with Jefferies.

A couple from me, please. Firstly, I just wanted to follow up on Suhasini's question earlier, but with a focus maybe on visibility. I don't think any of us thought that pharma was necessarily going to get significantly better in Q2. I think most people probably didn't expect it to get sequentially worse. Could you maybe just comment a little bit about the increase or decrease in visibility that you maybe have across the business with a particular focus on pharma. And I guess that I would have expected that you would have known that some of those contracts were ending in Q2 and that there may be nothing lined up to replace them. So just trying to understand that. And then linked to that, is there any comment you can make on kind of June, July exit rates for the business as a whole? That's my first couple of questions. And then secondly, just on biopharma. Growth obviously weakened if I then add in the prior year comp that eased as well. That's almost a 500 basis point underlying deterioration between Q1 and Q2. And if I go through the building blocks, I mean, yes, ancillary is obviously weaker, but it does feel like a lot of that is in the product testing side. The text commentary in the release first seeing talked about Europe being stable and the U.S. staying solid. So how do I reconcile between the tech and the numbers? And maybe you can quantify some of the building blocks within the product testing business. How much was the contract exits of that almost 500 basis points underlying versus whatever else was in there that was moving against you, just so we can understand the moving parts?

Yes. Thanks, Allen, for your question. visibility, we don't -- we're not in the business of making, I would say, rolling forecast or things like that. So we don't -- we only look at the results at the end of the quarter. And frankly, there are so many contracts we can win or we can't lose that can start or clients can send sample wherever they want. It would be actually very hard to do that. Also, we think the impact is immaterial on the long-term prospects and the long-term value of the company because we know what we're doing, we know what we're doing and you see it on the profitability and whether we are 1% or 2% above in the quarter doesn't change anything on the midterm outlook in our opinion. So we could put a lot of effort in their fine planning and all of those things, which would be extremely difficult to do. I don't know if we could actually do it, but we don't do it. I'm not sure I follow the 500 basis points that you mentioned, but is 500 basis points between what and what for what period, what activity?

So yes, I mean, maybe this is, again, focused on quarterly movements more than anything else, but I was just looking at growth was minus 1.1% in Q2 from plus 1.1%. But then the prior year comp. Sorry, got almost 200 easier as well in biopharma, sorry.

What? Biopharma, the whole of biopharma -- of biopharma. Yes. So you say there is 220 basis point difference in the total of biopharma.