Eurofins Scientific SE

PAR:ERF

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, welcome, and thank you for joining today's Eurofins' Q1 2022 Trading Update. Please note that this call is being recorded. [Operator Instructions]

During this call, Eurofins' management will 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, which is defined in the footnotes of our press releases.

Actual results may differ materially from objectives discussed. Risks and uncertainties that may affect Eurofins' future trading results include, but are not limited to, those described in the Risk Factors section of the Eurofins' annual report.

Please also read the disclaimer on Page 2 of this presentation subject to which this call and Q&A session are being made.

I'd like to now turn over the conference call to Dr. Gilles Matan, the CEO. Please go ahead.

[Gilles Martin, executive]

Hello, everybody, and thanks for joining our quarterly call. Well, again, we've had a strong first quarter, continues on the good trend that we have had last year. We've had actually more revenues from COVID than expected in Q1 because of the Omicron wave. Of course, it had an impact on a lot of companies, unfortunately, [indiscernible] and a lot did impact our business. They were lockdowns in Shenzhen and Shanghai that impacted our labs, which was mostly -- people not showing up to work because they were sick or there's some members of their families were sick so they were contact persons. This has now subsided, unfortunately, not in China. But overall, our businesses are strong.

We've had a number of very interesting wins. Eurofins has seen increasingly as a very reliable global partner for large programs, for the pharma industry. Even for government, we are pleased to participate in the U.K., Our Future Health, one of the largest genotyping programs that ever was undertaken, and we gave very interesting insight on the impact of genomics on our health and the expression.

We're involved on a number of other programs of different scale with pharma companies. We are really blessed to work in a field where science is bringing so many potential innovation that will have a major positive impact for the health of all.

Environmental testing is quite strong. There are more and more compounds that impact our environment and subsequently, our health and the health of animals, fish, et cetera, that needs to be managed. Otherwise, we'll have another disaster in addition to, the climate disaster.

We're facing -- the world might face more food risks. And when food risk come, well, there is, of course, there are associated -- [ potential ] risk that require more testing because of potential adulteration to substitute high-quality product with low-quality product. There will be probably a refocus -- an increased focus on agriculture. Eurofins is an important tester for agriculture.

And the different countries around the world have definitely not all optimized the output they can have from their soil or from the use of their fertilizers. And by proper analytical programs use of [indiscernible] fertilizers, which are undergoing a significant shortage, for example, in Brazil at the moment, due to the crisis -- due to the war in Ukraine and its impact.

Well, that the use of fertilizers can be reduced and optimized by proper testing. Our Agroscience business might benefit from the shift to different crops to adapt to climate change. So there are many, many areas where Eurofins companies can contribute positively to health and feeding the planet and ensuring our environments remain livable and healthy.

So -- and that being said, we continue to invest significantly to build the company, to build the company organically and to build the company through acquisitions. We have carried out 16 acquisitions in the first quarter. We're in line with our annual objective. So that's -- and we're being very selective because the valuations haven't quite come off for private transactions from the peaks. So we are being prudent and we make all efforts to achieve our objective, return on capital employed of 12%. So overall, it's just only -- I'm only reporting about 3 months, but a very good development over those 3 months.

The outlook, of course, the world is becoming more challenged. There are more uncertainties, but the outlook for Eurofins companies overall is positive as we can see it. We are active in areas where there is demand. Whether the economy goes well or doesn't go well, we need to be protected from risk. And research and innovation in all the areas we're active being in crop, in food, in biopharma, other things that create value that for the future will be needed to cope with the challenges that the world will be facing.

So overall, we are well positioned, and we continue to invest significantly in that market to build our long-term position and generate sustainable returns.

So that's my introduction for this call, and I'm going to be happy to take questions, our CFO can take some.

[Operator]

[Operator Instructions] We'll take our first question from Patrick Wood with Bank of America.

[Patrick Andrew Wood, analyst]

Perfect. I'll keep it to 2 quick ones, please. I guess, the first one is, there's been obviously a lot of headlines on the biotech funding environment. I'm just curious what you guys are hearing from your customers, whether it's on the clinical trial side or the biopharma product testing business? Just any kind of commentary you've got around there would be very interested to hear on that.

And then the second one is on pricing. I think you guys have been putting some price through like, let's face it, basically, everybody has. Did we see much of an effect on that in the first quarter? Or is that something that's coming in Q2 or later? Or indeed, am I wrong?

[Gilles Martin, executive]

Yes, we still see very strong demand from our biotech clients who have been well funded over the last few years. And for biopharma, there are sweet spots of investments in new medical approaches. I don't want to use a jargon here, but all the things around biopharma, and we don't see any change of mood.

We are capacity constrained there with every hour that we have available, every workday that we have available, we use it to produce things for clients, and we have backlog and we can't take a lot of orders. So that doesn't change.

On to pricing, yes, it's hard to measure. We don't have a global pricing indicator. We do too many things, and we have too many new tests and things that are not so easy to compare. Sometimes we sell workdays, sometimes we sell programs, sometimes we sell tests.

Once a year in our food and environmental testing businesses, which are more sample based, we get an indication or a measurement of price impact and volume impact, but we don't do it every quarter. It's a fairly significant effort. But I would think, yes, there is some price impact, obviously, in Q1. And like we have in normal years, probably a bit higher this year. It's hard to say.

[Operator]

Our next question comes from Andy Grobler with Credit Suisse.

[Andrew Grobler, analyst]

Just a couple from me as well, if I may. Firstly, just on the divisions, which areas were growing above and which below that 6.5% through the first quarter?

And then secondly, you've raised your guidance for COVID-related revenues for the year. But with about implicitly EUR 340-or-so million of revenues in Q1 and guidance only for EUR 400 million for the full year. Does that still look a little low in terms of guidance at this stage?

[Gilles Martin, executive]

Thank you, Andy. I think we've had a good growth across most areas, it's not even a global, we are organized by region. And so the different areas of activity can behave differently. Our environmental testing business was still challenged in January and February for weather issues and a lot of COVID issues at our clients, at our own staff. March was much better, but probably overall for the quarter that would be below, while environmental testing in Europe was very strong. Food testing was very strong in America, a bit less strong in Europe.

Biopharma was strong in most geographies. We've had issues in China with the lockdowns in Shenzhen and now in Shanghai, which are very harsh. So it's a bit of everything, but I would say if I had to do global totals, which we do rarely maybe once a year to have a look, probably biopharma was the fastest-growing area globally for Eurofins.

And for COVID, we're not at EUR 340 million, we're above EUR 300 million. There are some, what is it called scope effect with M&A and some currency effects, too. But I prefer to be conservative. I don't want to disappoint investors and we try to set objectives that are achievable. Of course, things can always unexpectedly go terribly wrong, but based on what we know we try to set objectives that we think are achievable.

Obviously, we [ committed ] our objective with the indication that there could be prolonged COVID testing for a number of reasons, a, because doctors would want to know, even though governments don't mandate as much COVID testing as they used to. There's no -- not much COVID required now for travel in Europe, at least. But doctors, when people get sick, would want to know, it's really hard to know exactly what volume this will represent, and that could actually be a permanent volume because every winter, there will be waves. And of course, we are introducing multi pathogens test that will enable doctors to know if people have COVID or have the flu or what else they have. That's for the known things. And for the unknown things, of course, this virus has mutated a number of times, and nobody knows what the new variants will do.

The prevailing majority opinion, and again, it's not -- no certainty that's a majority opinion is that the viruses get less and less little as they evolve, and we all hope that to be the case for COVID. But of course, nobody can exclude a much more lethal version of the virus that could also be contagious, and that will require, again, some public health measures and a lot more testing.

So nobody knows. But therefore, we have set as a target, the lowest scenario where COVID would be contained and they would probably be would be no more testing beyond this quarter. I hope that's full conservative, really it could.

[Operator]

Our next question comes from James Rose with Barclays.

[James Rosenthal, analyst]

I've got 2, please. First is on the inflation cost side. And if freight rates are going up when you're moving samples around energy costs are higher and probably there's more inflation in labor markets than usual, how are you dealing with that? And what mitigating actions can you take?

And then secondly, on the new investments which you announced at the full year. Presumably, a lot of that means new start-up labs. So should we think of this as the next program, your [ program 4 ]? And if so, could you help us with some of the economics of those, i.e., what -- sort of how many start-up labs per annum are you targeting? What size could that roughly be the maturity curve of those labs that would be helpful.

[Gilles Martin, executive]

Yes, inflation. Inflation is hitting everywhere -- is hitting everyone. And we have several ways to approach it. Of course, we are getting better at purchasing. We've deployed a global purchasing system that now enables us to cover maybe 90% of our companies. So we have better leverage when we know our global quantities and can work to standardize also on better negotiated or semi in-sourced OEM product that we make ourselves or get some companies to make for us in Asia. So those are those measures that are starting to bear fruit.

On the labor side, we have to live with whatever the market dictates. And in the end, we have to pass on the cost. Of course, we make productivity gains every year by being bigger, by our programs to consolidate labs, to make our labs the most cost effective in the market.

But once we know our labs are the most cost effective in the market, then if we see our cost raising, we have to raise our price and our competitors will do the same anyway. It is sad, but that's how a world of inflation starts. So far, we've seen a varied impact. The impact has been stronger and earlier in North America, maybe a bit in Germany. And France was, for example, in Southern Europe, less affected. It might change going forward. And so we will react in the different markets at the right time because we don't -- as a market leader, we don't want to be seen of taking advantage of our size to push higher prices. But if any given country, any given market is affected, we will react.

And in terms of start-up, yes, we have accelerated and maybe, I mean, we haven't communicated on that specifically in terms of quantum. We will do it with half year. It could be that we doubled the number of start-ups we start per year, something of that order of magnitude. Overall, we're not talking of huge numbers relative to the overall size of Eurofins. We're not going to multiplied by 10. But compared to maybe 20 start-ups per year that we did before, we might try it, if we can, now it matters how fast we can really open them. But if we could do 40, that might be -- might enable us to achieve faster our footprint objectives, especially in Asia, where we want to expand significantly and where there are significant opportunities.

[Operator]

And our next question comes from Arthur Truslove with Citi.

[Arthur Truslove, analyst]

Arthur Truslove from Citi. Just a follow up on China. I didn't quite understand what you said at the beginning. Did you say that the issues there were starting to ease in terms of activity there or are they still as severe as they were? That's the first question.

And then the second question was just around COVID again, and your thoughts on that. Would you consider flu testing to be to correct parallel for COVID testing going forward? Or do you think there's likely to be more sort of COVID testing relative to flu testing on a longer-term view?

[Gilles Martin, executive]

Maybe what I was referring to regarding China is we have labs in South China. We have labs in Shenzhen and labs in Shanghai and elsewhere, but those are 2 big areas. Our labs in Shenzhen were affected by lockdown earlier in the quarter. And the labs in Shanghai in the latter part of the quarter, and they are still affected actually at the moment.

And yes, it's very hard to predict again, what will happen in China. China is not a huge part of our business. It's unfortunately an area where we more see the future than our current size, but that still impact, unfortunately. And for the people there in Shanghai, for our teams, it is absolutely dreadful, the conditions they have to endure. Maybe it's for the greater good, but for the individual is concerned, it's very difficult.

On the flu testing, yes, I think the times are changing a bit. Flu testing wasn't done very significantly, but also the tools weren't there necessarily, and it's also a matter of cost. Now with all the investments that were done not only by Eurofins, but by the diagnostic kits makers, by the labs in equipment, it's becoming much easier to do a PCR test to not only detect the flu, but detect the flu and COVID.

And I think there will be interest in at least some countries in a significantly higher level of COVID and flu testing than was the case before just for flu after this pandemic. Now each country -- and each reimbursement system will have to decide what they reimburse. And I don't think that is really clear, and this is going to be a changing and a moving target. That's going to also be affected by the potential pricing for those tests in the relevant markets.

So I'm afraid I can't really tell, and that's why we're being conservative in our objectives because we work when we set an objective from -- yes -- something that is -- where we already know, we think it is likely to happen. And in this case, there's too much unknown to set any number, so we set a very low number.

[Operator]

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

[Allen Wells, analyst]

Allen here, just a couple of quick ones for me. The impact that you commented on from things like staff absentee, the Asia restrictions in Q1. Is there any way you can kind of roughly quantify that? I'm just thinking about how this potentially eases into Q2? That's my first question.

Second question, I'm sorry if I missed this earlier, but did you comment on the exit rates on COVID testing. So of that 3 -- north of EUR 300 million, you talked about what the kind of exit run rate was out of the quarter.

And then the final question for me, just on the expansion ambitions you've talked about. Could you maybe comment on the availability of equipment with things like supply chain challenges in mind and price inflation. Is there any sort of headwind to those expansion plans because you can't get the kit there? Or just any comments would just be quite interesting.

[Gilles Martin, executive]

Thank you very much, Allen. Well, our staff absenteeism was pretty serious. We've had weeks or number of weeks with 20%, 30% staff absenteeism in some areas. So yes, we've had a bit of headwind with working days, significantly less than 1 day actually in Q1, but we haven't tallied up all the days missed by our staff, but we believe it's significantly more than that.

So that could be indeed, I don't know, how you call it in financial terms, but a catch back or something in the second quarter by a clawback, but we're going to have to see.

Now in the second quarter, we are affected with lockdown in China in Shanghai. We don't know how this all will pan out in China for the rest of the country. So there's still a question mark on that aspect. Otherwise, and it goes back to your other question on the COVID run rate, it's -- the changes are pretty abrupt in government decisions regarding basically no need for testing.

I think in the U.K., for example, the government has decided no testing and people can even go to work if they're positive. So -- but other countries are taking a much more prudent approach or I wouldn't use the word prudent, but let's say, a more an approach that's a bit more restrictive for letting people go and work and then that means they have to be tested if people have to know if they should go to work or not go to work. And hospital and several areas are testing people as a matter of course, anyway, when they come in.

So the exit run rate was still high. And I mean, we have had a decrease. January was higher. Then February and March were lower, but April is falling significantly due to those measures. So it's more like a week-by-week change, which is steep. And -- but it doesn't reach, as I speak now, it doesn't reach 0 by any stretch of imagination. It's just difficult to extrapolate anything because it is the mix of a number of local decisions by so many countries where we are present, that are very difficult to guess. So we don't even try to guess them.

And on expansion and CapEx, yes, we have to plan with more delays. The things we would get in 2 weeks, sometime we have to wait 2 or 3 months to get. Sometimes it's not so much scientific testing kit. Although there are areas, for example, during COVID, there were a lot of shortages, but they weren't necessarily due to the supply chain issues also to demand.

I think also building are delayed or building -- some of our building projects are delayed some time because of scarcity of raw materials. It's -- the world is just becoming more uncertain. And that's why the question on the start-ups, we have plans, but we're going to have to see by which time we can start building.

It's a process to ask for quotes to get, and to get the design done, and to get companies to bid for it. Some we might even decide to delay a little bit until the costs are abating a bit. So we have so many countries where we can invest and we can decide to focus on areas which are less affected by those shortages. And so we have a number of options. But I do think we will do significantly more start-ups in this year, and we will keep them than in the previous couple of years.

[Operator]

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

[Suhasini Varanasi, analyst]

Just a couple, please. Is it possible to quantify the impact of the China lockdowns in the first quarter? And given it's continuing into Q2, that will help us anticipate what the Q2 impact can be as well? And the second one is -- what's the tailwind from the trading days, please, in the first quarter?

[Gilles Martin, executive]

China lockdown, well, it's really hard to say. It's a number of millions, obviously, but our China total is of the order of 100 million. So it's not all that huge. And it was never fully affected. We were usually able to shift between South China and North China, the samples. But obviously, the overall capacity is reduced. So that's going to be an impact. But on the total numbers, 100 million out of 6 billion is also not so much. And I don't think we would lose half of it. I think, I mean, for a period, but it's, in China can take pretty radical decisions sometimes. So it's difficult to guess again.

And Q1, the impact of days was minimal and it's less than 1 day, the impact on a global basis. It's -- we just mentioned it for the sake of transparency. But the numbers problem is very hard to tally up on a global basis, how many missed workdays we've had due to COVID and those lockdowns, our impression is that is significantly superior to any working day -- calendar working day impact.

But anyway, it's -- I don't think it really matters. The trend is very good on overall, and we are positive about our annual objective for organic growth. And maybe some of you were setting much higher targets. We're going to have to see. We never encourage anybody to deviate too much upwards or downwards from our objectives, but time will tell what happens.

There is, of course, if a lot of inflation, that's also something we said with our annual results is that we don't want to gouge our customers. But obviously, if we see that during the year, the inflation is really taking hold on a permanent basis, we're going to have to do something on price, which will have an impact.

[Operator]

And we have no further questions at this time.

[Gilles Martin, executive]

Well, thank you, everybody, and thanks for supporting us. I'm really blessed to lead a company, which has so much to offer for helping everybody to live better and healthier. We are facing a very large number of opportunities of areas where we can deploy capital with very good rates of return because this is based on innovation, on new markets, on helping our customers develop drugs or categories of classes of drugs that never existed before.

It's really blue ocean opportunities in many areas for our customers and for us, but that's where we're investing towards. And we're going to deploy very significant capital in biopharma over the next 2 or 3 years and the needs of that industry for producing all the components that they need for testing it are going to be enormous.

There are very promising results for many clinical studies on many areas, which would mean more research we've undertaken and there will be work on more drugs. We see the need with -- the world is facing energy crisis. The world is facing food crisis. Those means more testing will be required, as I mentioned, and there will be also a lot more innovation on the type of foods we eat, on the seeds we use, where they are planted, which type of fertilizers we use, which type of non-pesticide, so biopesticides, we use on them. There are a number of challenges that the world is facing, where Eurofins companies are contributing and can contribute even more going forward.

And I thank you for your support, for your support with the capital you grant us to deploy in those sectors because I think they really have a positive impact. Well, thank you very much, everybody, and I'm looking forward to meeting you in person. As I see that now we have -- we are starting to have, again, investors conferences in person, a couple in London and in Paris at time. So looking forward to meeting you again in person. Have a very good day.

[Operator]

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