Eurofins Scientific SE

PAR:ERF

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, welcome, and thank you for joining Eurofins Q3 2022 Management Update. 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 [indiscernible] after 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 Eurofins' annual and half year report. 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.

[Gilles Martin, executive]

Hello, everybody, and thank you for joining our quarterly call. Well, we are quite pleased with the development of our companies in Q3, especially considering the general environment affected by inflation, supply chain issues, the war in Ukraine and many other bottlenecks and headwinds. So overall, our businesses did quite well, and it looks like our overall revenues have continued to grow in spite of the ending of most of the COVID testing that was associated to travel and to government requirements for testing.

So the development of the quarter is quite good. Of course, we have a variety of countries and geographies. One important thing to note is that due to our investments over the last few years and the evolution of currencies, now Eurofins since -- in Q3 is making more than half of its revenues outside Europe. So although our names start with euro and we are European-based or headquartered company, a group of companies, the majority of our business is now carried out outside of Europe. And I think this trend probably will continue as we ramp our investments in Asia and also in North America.

We are continuing to invest very significantly. We see large opportunities in our markets. We are -- as we already mentioned, we have significantly ramped up the opening of startup laboratories with a very strong focus on Asia. We see large opportunities in many Asian markets, China, but also many others as the level of testing in those countries will gradually raise to similar levels that we have observed in Europe and North America. So our sector seems to be very well orientated, and we see large growth opportunities. So overall, we are focused on continuing to invest.

We are also in line with our M&A investments this year. And as you might have seen, we've made a significant divestment that was announced over the last few weeks. Eurofins would like to be focused on Testing for Life. And our core focus, of course, is testing, but is testing things that have a direct impact on our health, things that we eat every day, drink every day or for pharmaceutical [ less ] often or products that are in touch with our body, like cosmetics or to some extent, footwear and textile, those are things that definitely can have an impact on our health based on their composition, the chemicals, the content, et cetera. So this is a focus we are doing.

As you will see when we release our annual result, that has proven the investments in digital testing that was often part of larger acquisition or sometimes has proven a good investment for Eurofins, and we generated a good return there. So we intend to redeploy these amounts into investments in our own business.

We have a strong acquisition pipeline, but the valuation for acquisitions has not significantly come down yet. So we will invest probably more organically into expanding our network, expanding our labs, expanding our IT solutions, then using that -- reemploying that amount for acquisitions.

We have also noticed that [ our valuation ] does not reflect the values of companies on the private market. We are overall trading at lower valuations than a transaction we see in the private market for companies that benefit for much less investments and upside. So we've also activated the option of acquiring our shares, and we intend to use it should the share value reach certain levels, we consider undervalued. And then we can reuse those shares for later for other uses like our stock option plans or potentially acquisitions in the right moment. So those are some of the significant news of the quarter.

As you have seen, organic growth in the third quarter in spite of a softer quarter for food testing in Europe due to the impact of the war in Ukraine mainly and inflation and the resulting inflation [indiscernible] reached our objective of 6.5% organic growth. In terms of calendar days, this is a very small correction. You're talking of 0.5%. It will be a larger impact in Q3 where we have actually less working days this year than last year. And on a year-to-date basis, it's fairly negligible. But for the whole year, there will be a small negative impact on working days that I can already flag for those who are [ seem ] to put a lot of emphasis of this thing. So that's for the organic growth.

Also, in terms of pricing, we are not seeing yet a lot of pricing effect flow through, not so much more than on usual years. We have annual contracts, and they are usually negotiated at the end of the previous year for the following year, and we also operate based on this price for a large part [ of those ] are changed on 1st of January. Of course, there will be bigger impact next year as everybody seems to acknowledge that inflation is, unfortunately, higher than expected and there to stay.

If I move to Page 4 of the presentation. We've highlighted some of the significant progress we made on some fronts. We pride ourselves on being one of the most innovative testing supplier in the world. We invest in many areas to develop new tests, new tests that will generate growth for many years and also good margins, and we are getting increasing recognition for doing that in different areas. It can be in clinical testing, genetic-based clinical testing where we enjoy some very strong leading positions, but also in our traditional areas of testing for contaminants. For example, we were among the first to develop very fast and sensitive methods for detecting a range of PFAS contaminants in the environment. And now together [ with our ] clinical labs through cross fertilization, we are also applying those tests on human specimens under the clinical regulations, and we are starting to win significant contracts on those areas in different geographies, just to cite a few examples.

Our TruGraf test on kidney transplant recipient is growing very significantly. We enjoy very good quarter-on-quarter growth. And now we also have launched a test for liver, which -- where we enjoy a first-mover advantage, and we hope we can contribute to protecting the lives and prolonging the life of graft of many patients.

On Page 6, we list some of the solutions. We have launched as part of our Eurofin Sustainability Solutions offering. We have a range of areas where we can help our clients with our services, improve the sustainability of their product and reduce their impact on the environment. We are going to be investing and more importantly, make those services more easily accessible and more known to more clients. This is also an area where we see some significant potential growth.

On Page 7, we say a few words about our outlook. Well, basically, if you can blame us for something, it's for being lazy. We see so many moving parts in the world, in the economy, starting from geopolitics, starting from exchange rates, inflation, whether COVID will continue at significant levels or not, whether it will be integrated in routine, pulmonary disease, respiratory disease [ screens ], et cetera. We could have updated our forecast for the rest of this year or for next year. Indeed, FX is a bit higher, but we don't see the point, with it to the point changing things when FX are changing on a daily basis, and that we're not really in the business of really focusing on 1 quarter. Things are going to be what they're going to be. We're going to do our best with the FX that we have. And if FX, indeed, stay the way they are now with a very weak euro, that would definitely have an impact on our overall revenues and profitability because we tend to have higher profitability in North America and the rest of the world than in Europe.

But this being said, we are not in the business of predicting the future, and we don't think it would make most change to, at this stage to speculate on what all those parameters should be next year. Some of them could have a negative impact on our costs. Others, like what price increase we managed to put through, et cetera, and potentially remaining some COVID testing and the FX could have a positive impact. So, so many factors, we don't think it was the right time to update anything.

But overall, we are positive about the outlook, positive about the midterm, short-term and long-term outlook for our industry. There will be more consolidation. If things get tougher in some areas, smaller laboratories, less well-invested players, more indebted players will suffer, which will also accelerate the consolidation and over the long term, further increase the scale effect of the larger players like Eurofins, are enjoying.

So overall, as we did over the last 35 years since we founded Eurofins, we think we will take advantage of opportunities. Crisis bring opportunities, and we are positive about the outlook for the company.

So that's it for this introduction. And Laurent and I [indiscernible] will be happy to take questions now.

[Operator]

[Operator Instructions] And we will take our first question from Neil Tyler with Redburn.

[Neil Tyler, analyst]

Three, if I can, please? Firstly, more broadly on Diagnostics. I mean, the innovations that you highlight in the statement and a couple of your referrals in the prepared remarks around TruGraf and PFAS testing point to a lot of activity in that area. So I wonder if you could help provide some framework around European diagnostics to remind us of the relevant scale of that business. And then how you view the growth prospects here compared to perhaps the historic growth rate pre-2020, any figures you'd like to share would be great?

Second question, I wanted to ask about the refilling of the pipeline of work in BioPharma that was postponed both by your customers and out of necessity by yourselves as you switched resources towards tackling the pandemic. So where would you say you had reached in terms of refilling that gap?

And then finally, more broadly, what if any measures are being put in place to prepare for a tougher economic environment? And where about would those measures -- within the portfolio of businesses, where about would those measures be most likely to occur and I suppose those conditions to impact the business, please?

[Gilles Martin, executive]

Thank you very much. In Clinical Diagnostics, from the onset in 2014 when we made our first acquisition in the sector. Our focus has been on genetic genomics and more generally esoteric advanced testing areas where through our innovation, we can offer new possibilities for doctors and patients to, for example, detect disease early, while they still can be cured or have a significant impact on the quality of care and the survival of patients and their life -- the quality of life, too.

This has been our basically the driving force and the guidelines for our investments. We've acquired over the years, a lot of specialized laboratories, and we further invested in those specialized esoteric laboratories. But in some countries, we also need to be in markets where we also need to offer a full range of tests to be accepted by the insurances as basically laboratories that they will refund the testing of.

And that means mostly in Europe, we are also offering a range of routine tests in our laboratories. I'd say in Europe, maybe half of our revenues would be routine or maybe a bit more than half, while in North America, the vast majority is advanced testing, esoteric testing. So that gives a bit of a flavor of what we want to do and what we are today. And the trends are typically that in routine testing, laboratories by reagents from suppliers like Roche or Abbot or others, and they don't really invent new tests and they become more and more efficient by having bigger laboratories, more efficiency, saving costs [ when ] the insurances and government take advantage of that to reduce their reimbursement every year. This has been going on for decades and probably will continue.

And in innovative test, we have the opportunity to get reimbursed also for the value of the R&D we put in that sector. So the growth is higher and the margins can also be potentially significantly better. This is a mix, and this is why we are focusing on the areas where we can really create new markets on [ blue ocean ] markets where through our innovation and new test, we can create significant value for patients and doctors and significant growth for Eurofins.

So that's how this giving specific growth rates, and we can talk about that when we publish a result for this year, and we'll have a budget for next year, it is a mix. We have, as I mentioned earlier, [ TVI ], which is growing very fast year-on-year and even quarter-on-quarter and other areas, which there is strong pricing pressure for government. And the mix of that depends on the relative way to all the components. I don't know exactly what it will be for this year, [ stripped off ] COVID, but definitely, this is something we can dig in to when we look at the results for 2022.

Refining of pipeline in DPT, this is starting to happen. Of course, we had significant vaccine work, both in the clinical trials part and because that was helped, of course, with our presence in Clinical Diagnostics and our licenses, our licensed laboratories for that. There are not so many clinical trials for COVID anymore. And the work we are doing on vaccine release is, of course, becoming less this year. So we are in the process of refilling. We have not fully refilled or replaced that work, but we have already made some progress towards that. But of course, those new studies that take a bit of time to start as usual in BioPharma.

To your question, what are we doing if we think there will be tougher economic climates? Well, we are in a sector that is needed even in difficult times. It's rare, we've gone through a number of crises or I've gone through a number of crises in my tenure as CEO of Eurofins. And even in the worst of times, we've not seen revenues coming down. We've seen slower growth. And here, the slower growth can be harder to manage if costs also increase at the same time.

But the measures we are taking is -- well, first, planning price increases and implementing price increases to compensate for the increase of our costs. And where -- in the areas where we think it can be a little bit softer, we have, of course, opportunities to accelerate the work we are doing to build very large platforms, competent centers and high-throughput laboratories and focus in the small satellite, only the test that has to be done very fast in a time-critical way. So we have quite some room to go, for example, in Europe and we have plans that we are accelerating in that matter to be even purer in our hub and spoke model and hence, more efficient and able to be profitable, to increase our profitability even with slower growth if that were to be the case for a year or 2. Those are the things we will be doing.

We employ people. So of course, we don't like to let go with people, but there is some turnover. And so of course, we have the option of not replacing all the people that leave. Of course, if there is a big economic crisis, turnover can slow down a lot, but also we'll have a lot of people then, which have been recently hired.

And also, if the economic crisis were to be very significant, we would probably start hiring people on temporary contracts more than we generally do. But this is not really something that's immediate. At the moment, our outlook is rather positive. We see significant demand for our services, and we are more in the mode of investing to take advantage of the opportunities in our markets.

I guess we can take the next question.

[Operator]

[Operator Instructions] Otherwise, we will take the next question from Suhasini Varanasi with Goldman Sachs.

[Suhasini Varanasi, analyst]

Just 2 for me, please. To clarify, when you're negotiating the price increases for next year, are you trying to just offset the costs? Are you trying to maintain the margins, please, on the services that you're providing?

And then the second one is on the objectives for '23 and '24. I appreciate that you will give color next year. But I mean thinking about this ongoing permanent COVID testing revenues, is it that you're going to look at Q3, Q4 as like the run rate, quarterly run rate and annualize that? Or do you have -- basically have contracts in place where you expect a certain level of volumes that can continuously recur in '23 and '24?

[Gilles Martin, executive]

Thank you very much. Yes, on price increases, of course, we try to get as much as is reasonable, acceptable for our clients. We are often the market leader, so we don't want to be seen as taking advantage of our position as a market leader. And we, of course, balance long-term relationship with clients with short-term potential gains. We intend to be there and serving them 10 years from now also. So at least, we should offset our cost, maybe get a bit more. And sometimes, it will work, sometimes we'll get a bit more. Sometimes it won't work. We know on a company-by-company basis at the end of the year is basically what [ is ] achieved. We also have some level of contracts that are multiyear that can be indexed or not indexed. It's all a mix of effects, and not 100% of the contracts will be effective in 1st of January. So some of them have already increased. We already will see some effect in Q4. So that's the general direction.

And [ to ] permanent COVID testing, it won't necessarily be contracts. It will be more -- first of all, how is COVID behaving? And this is really a total unknown. How will the virus evolve? How lethal will it be? How much will it spread? It looks like in the Western world -- the Western developed world, a large percent of the population already enjoys strong immunity, not only through the antibodies they have, but their T cell-mediated immunity and other immunity and therefore, fortunately, fewer people end up in the hospital.

But when people end up in the hospital, they need to be tested. So another question is also what level of surveillance testing will be done. At the moment, it looks fairly minimal. I would like to see how the winter evolves and whether some countries reintroduce some certain measures of broader testing or not. So there are some of those unknown.

Or that's the hypothesis we have been working from now, and it's the hypothesis that is included in our objectives for '23 or '24. We say, okay, the COVID is gone, and we don't consider there will be meaningful testing next year. And that is a question we can't answer yet. We're going to have to see how the winter evolves and the biggest unknown how the virus evolves. We tend to be optimistic that COVID will be behind us next year but there is no certainty that this would be the case.

[Operator]

And we take the next question from James Rose with Barclays.

[James Rosenthal, analyst]

I've got 2, please. The first is on the components of the outlook and the guidance you've given. Could you just talk through those in a bit more detail for us, so the war in Ukraine, supply chain disruptions, the COVID testing, inflation? Just appreciate a bit more color on how you see that impacting the business and the potential scale of those in 2023?

And then secondly, thinking about pricing coming through more in FY '23, more than it has done in FY '22, could we assume that the business is capable of delivering an organic growth rate higher than its medium-term trend in FY '23?

[Gilles Martin, executive]

Thank you very much. Yes, actually, it's a good question because I think there might have been some misunderstanding on the wording of our rationale for not changing our objective. It's not that we're worried about the future. I think for some of those things, actually, it's quite the opposite. So I'll take it in order.

So we said by then the potential impact of the war in Ukraine, supply chain disruptions, ongoing permanent COVID testing, inflation and foreign exchange rate will hopefully be clearer. So in this order, the impact of the war in Ukraine, of course, that's the biggest unknown. I mean none of us hopes that there would be an escalation of the war in Ukraine, but there could also be an end of the war in Ukraine. There could be, the war in Ukraine becoming -- getting at a lower level and having less impact and people being more used to it.

As related to the war in Ukraine is the energy supply in Europe and the cost of energy in Europe, this is something we don't really know. We are all adjusting for basically a difficult situation. whether the situation will be as difficult as the worst fears. Nobody knows. But of course, this cost -- energy cost has an impact on some of our clients in the food industry of growers who use greenhouses and [indiscernible] their greenhouses, some production is being limited. Of course, export to Russia, they will have to find their way to other markets, et cetera, et cetera. So the war in Ukraine could have no positive impact, but we're more or less prepared for that already or things -- some of the clouds could clear out, actually.

The same applies for supply chain disruptions. China has had this year of COVID. Policy has had a big impact on shipments from China. And of course, lack of supply chain has a ripple effect to all industries, including our clients, even the pharma industry has found itself sometimes without certain chemicals to start studies. We have [ studies ] with big pharma that are delayed in starting because they don't get certain intermediates. So all of that, we hope that like all of us that hopefully, the outlook for this for next year will be less lockdowns in China and less disruption to supply chain, and that could have a positive impact.

COVID testing, the same thing. We have planned zero COVID testing for next year. Actually, it could be that we do have some permanent COVID testing, and that's what we're going to try to see this year is absent any government measures to impose prevention testing, what is a normal medical level of testing because when people get sick for any disease, often they get tested even only to make the diagnosis, if they -- and okay, not necessarily for the flu in Europe, although that could become more than norm than there is a test for the flu and COVID, so doctors know. There is also another aspect, which we don't understand very well yet is the impact of long COVID. We are starting to develop tests to detect long COVID. How much of those tests will be used? How much they will be monitoring and treatment of long COVID patients is also a certain unknown that could add to our market.

Inflation, next point. While inflation, of course, we will try to adjust our pricing to inflation and make sure we don't lose in revenues if our costs increase by that factor, so to use the same factor. If we work next year of an inflation expectation of 3% across our business, it's quite different than if we work with an inflation expectation of 7%. And on top of that, we will have volume growth.

So to go back to your second question, yes, of course, we have to, in the end, find out what we think will be our net price increase next year and what we think will be our net volume increase next year. We can't exactly measure it precisely on all our labs for some activities, which are project-based, it's very difficult to have to compare pricing from period-to-period because the work is different each time, but we're trying to get some proxies for that. So indeed, if we assume the world will have 3% inflation next year, it's quite different than if we assume the world will have 7% inflation next year.

And foreign exchange is the same. Obviously, if the euro stays below $1, that will have a strong positive impact on our reported revenues as opposed to the hypothesis we had made when we made those objectives at the beginning of 2022. So all of those factors, they won't all be negative. They could actually -- the majority of them could have a positive impact on our results. So that gives a bit of color maybe on -- it's hard to quantify any of those things. I mean I gave some range for inflation, but foreign exchange is also significant. If we say we have 40% of our revenues in U.S. dollars, it's 5% of exchange rate, does a lot to our revenues -- 5% change in FX does a lot to revenues, et cetera. So I guess I answered both questions with that.

[Operator]

And we take our next question from Anvesh Agrawal with Morgan Stanley.

[Anvesh Agrawal, analyst]

I got 3 questions as well. First, if I can ask on food testing, which seems to have remained weak. Is it just Russia, Ukraine, which is impacting that business? Or the overall testing with the SKU growth also coming under pressure? So if you can provide a bit more color on the trends in Q3, let's say, versus Q2, that would be very useful.

Second, it was -- I mean you commented around Asia at the beginning of the presentation, and I think there was an article last week in Financial Times, essentially arguing that you would end up making more acquisitions in Asian markets. So if you can provide a bit more color on what you're looking to buy there and what are the growth areas that will be really useful?

And then finally, I know it's a revenue call, but given the price increases, it looks like are a thing for next year, how is the -- how are the margins trending in the second half so far? Are you able to offset the cost pressures or we are looking for a bit of a negative impact at least in the second half of this year?

[Gilles Martin, executive]

Thank you. Well, food testing, we are basically suffering only in Europe. In North America, things are going as usual. We are continuing to grow nicely. In Europe, our clients are affected. They're affected by supply chain issues. They are affected by market issues. Those that were selling in Russia or Ukraine, of course -- or Belarus are affected. They can't sell anymore. The -- is affected by inflation and the impact of inflation of consumers. Consumers are trading down. Consumers in some markets in Lithuania, in the Baltics, in Poland, the inflation is even above 10%. So this is really hitting consumers hard, and they are simply buying less in some areas. So that's the situation.

Of course, this is not something that can go on forever because people can trade down a little bit, but they need to eat. So at some point, the markets that are the most affected will hit bottom. So we are not worried going forward, going into 2023. We might have a lower base in 2022. And Q3 was a bit like Q2. It's not like there's a big change on that level, I believe.

In Asia, well, we think Asia will follow a similar trend to what we saw in Eastern Europe. When the country started to develop, they ramped up significantly the level of food testing, then came environmental testing a bit later. It needs a wealthier nation to afford environmental testing. And lastly, those countries try to develop the BioPharma industry. So this is usually the area that comes last as a country develops.

Like Clinical Diagnostics is present from the beginning, the grows as the wealth of the nation grows. And we believe many countries in Asia are in a very good development path and will offer very good opportunities. So we are investing a bit in that order in those countries. And some countries are exporters, so they are exporters for those commodities that they export, for example, tea, the testing will be -- or honey or other things, the testing will be -- will start even if their national or local market is very weak.

And price increase. Yes, we think next year, we should be able to cover most of the inflation with -- of more maybe something of the order of inflation with price increase. unless, of course, we start from an hypothesis of, say, on average, 4% or 5%, and it turns out to be 15%. That's always trickier. Although we are now introducing more frequent -- the possibility of more frequent price increases than once a year.

We suffer a little bit this year from that effect because, of course, we had some fixed price contracts for 2022 that we cannot change during the year. But now, of course, we are warned, and we are making sure that our contracting for next year will allow for significant variability of inflation and upwards variability of inflation that we can adjust more dynamically to inflation.

[Operator]

And we take our next question from Del Louet with Societe Generale.

[Delphine Le Louet, analyst]

3 questions on my side. I was wondering, do you want to highlight anything positive or negative that happened in Q3 regarding specific business activity? So is there any particular stuff you want to convey to us and for us to better understand the flexibility in between the business?

Other question deals with the energy pricing and the politics you have on this one and just to get a better understanding of a possible impact going forward '23.

And lastly -- and sorry, because I know you've been talking a lot about inflation and, of course, pricing. But instead of going into that direction, I was wondering if you can tell us more when you look at your activity, where do you have the most flexibility in terms of pricing policy?

[Gilles Martin, executive]

Thank you. Well, I think what I'd like to highlight is that we are quite bullish about our markets going forward. We remain very positive. And we see any potential softness we see in food in Europe as a transient and temporary aspect. So we think it might even provide more opportunities to consolidate the market, make our labs more efficient and be an even stronger leader of our industry.

The other thing we invest is Asia. We continue to open labs. We continue to transfer technologies from our other labs. The other thing we also do is we invest massively in IT, in our IT infrastructure to become more resilient to cyber attacks and to also stand out as different providers in this area as the risk of cyber attack will certainly increase over the years. And we invest in digitalization. And the millions and millions and dozens of millions we've invested there, they will bring positive impact on our productivity or efficiency on the quality of service perceived by our clients or on the stickiness of our relationship with clients. So we continue to make -- we have made a lot of investments to stand out and be much better than competition on this, but we will continue to make that.

The other thing is innovation. We invest to develop new tests, and we see traction on those new tests that we develop. And that is also creating new markets that make this Clinical Diagnostic sector less commoditized and more -- and highlights even more the benefits for patients. We're not alone there. There are many companies investing in that area, but we are starting to learn how to do it well and get significant traction.

Energy pricing -- yes, that energy. In that sense, we haven't had a standardized group policy. Those are very local markets. And we believe the leaders of all local companies are better placed to evaluate what their course of action should be, whether the government support measures will apply to them or won't apply to them, what type of energy they are using. Of course, we are sponsoring investments in -- as part of our ESG program, we're sponsoring significant investment in renewables for our different labs. And where we can, we install solar panel. We make -- take measures to reduce electricity consumption or replace normal lamps by [ LEDs ], et cetera, et cetera, recycle the energy and the heat of our labs.

So we are making those investments. But we leave it up to the local leaders to decide what type of relationship they need to have with their energy providers. We are [ not ] also entering a long-term contracts. On energy, we've never really done that. We are not a huge -- we need energy for labs, but we're not like a heavy industry that may want to hedge it for a very long time.

And inflation, where can we adjust the most? Well, in most of our business-to-business market, we always have the option to raise our prices and then clients have to decide if they find a better deal somewhere else or not or if they want to change if they don't like it, except in some areas of Clinical Diagnostics, where the prices are set by either national security or the prices are set by insurance companies on a much more, let's say, rigid basis or national insurance like Medicare in North America.

So I guess that's the area where we have the lowest flexibility to adjust pricing. Of course, we have a lot of private pay, patient pay, but not -- that's not the majority of our revenues. But the bulk of our business is B2B. So we have the possibility to enter a negotiation with all our clients on a regular basis. It used to be annually. We are working to reduce those cycles to be more.

And also our clients might want that because we can tell them, look, if you want to have a fixed price for the year, the increase will be 15%. And they say, well, that's not much. Then we say, okay, well, we can agree on a lower level, but then we need the readjustment [ clause ] in case inflation increases a certain threshold. So that's what I can say on that.

[Delphine Le Louet, analyst]

Okay. Just a quick follow-up on this one and meaning on the clinical diag. How big does that represent to your business? Or what sort of a -- it's a large bracket you can give us? And probably also a follow-up on Europe situation. Is it the performance in terms of revenue, European revenue? Is it just linked to food business and so a massive deceleration into the food business? Or is there any other specific issue we have to keep in mind for Europe specifically?

[Gilles Martin, executive]

The Clinical Diagnostics is of the order of EUR 1 billion revenues, annual revenues, but not all of that is based on insurance or, let's say, state insurance or Medicare reimbursement. In the U.S., it's a much smaller fraction. We have a lot of B2B relationship in Clinical Diagnostics and where we serve directly hospitals in the U.S.

In Italy, for example, we have the majority not everything is patient pay, almost no insurance. So we have a mix in there. The routine part in Europe is about half, half of the total to give you some markers. And in terms of the impact on growth in Q3, the biggest impact was food, which was softer with testing, we had other areas that did quite well in Europe, like environmental testing, which is more linked to infrastructure and buildings did well.

Clinical is always lower growth. We have more routine clinical testing in Europe than we have in North America. So it was lower growth in North America. And the other areas, those are the main areas. BioPharma did well in Q3 in Europe and North America.

[Operator]

We take our next question from Arthur Truslove with Citi.

[Arthur Truslove, analyst]

It's Arthur Truslove from Citi. So 3 for me, if I may? So just sort of wondering in the here and now, roughly speaking, what are you seeing in terms of labor cost increases across your business as a whole? And I know pricing has been discussed a little bit, but sort of do you think you'll be able to deliver price increases in excess of the labor cost run rate?

Second question, just around your sort of EBITDA margin guidance of 24% and obviously, you've got a target for '23 and '24 that level as well. I just wondered if you could sort of paint the kind of scenario in which you might not be able to hit that target over '23 and '24?

And then finally, in terms of BioPharma, what are you seeing in terms of the market dynamics? Does the funding pipeline remain good? Or indeed, is it deteriorating? And if it is deteriorating, then if you could just remind us of how that affects you?

[Gilles Martin, executive]

Thank you. Well, when we say we want to offset our cost increase by price increase that, of course, applies to labor cost because that's -- the majority of our costs will be labor. And in some areas like energy, we were caught a bit off guard because we had set our prices for 2022 based on expected inflation. And obviously, energy inflation was well at a level this year that nobody expected. That is less of an impact for labor because the negotiations -- labor salary negotiations are often once a year, and they are then for -- they take in to -- take place in the first quarter in many areas. And so we're going to get the hit on the labor cost, at least in Europe in a more significant way next year based on the general negotiations of salaries that occur in the different countries.

In the U.S., it's a bit more dynamic. There's more adjustment, faster adjustment, people change up faster. So it's a bit smoother than maybe we'll see in Europe. So our goal indeed is to offset also labor price increase -- with labor cost increase with price increase. At the moment, we have no reason to doubt our objectives in terms of EBITDA. Of course, they assume that we are successful in what we intend to do in the different measures we are implementing to our -- the measures we are implementing in terms of productivity gains and the consolidation of sites with competent centers, which we continue to do. That's how we see that.

But what could go wrong? Anything could go wrong. If there is no more energy in Europe, and there's no more electricity, basically labs cannot run without electricity. So there are things that could happen. Cyber attacks. We're getting much better protected against cyber attacks. And we think, if any, it would have much lower impact than it had last time, that's if everything works as we think it should.

What else could happen? We could have our clients -- I mean, if they are -- if governments start to severely restrict energy access to industry, that could have a very large impact on the whole economy, and then if factories don't work. But I assume people will still be provided with drugs and with food. So we'll continue to have to test those products.

But we went through a few crises, and we manage our way through those crises. Now that it should -- there could be things that affect our objective. It's only an objective, it can be a road making. It can be -- the biggest factor that has been difficult for us so far has been shortage of labor, frankly, over the last -- it hasn't been recession or anything. The biggest hurdle towards our objectives is more that we can't find the people to basically do all the things we want to do.

And BioPharma funding, we see no effect. The only impact on BioPharma, if we are where in a few areas where we are not where we want to be, is either a local leader, who doesn't do a good job and doesn't watch his quality well or doesn't run his labs properly or it's -- we can't find enough employees, train them fast enough to be able to carry out the work that our clients want us to do.

And I've never been worried on the funding of biotech. I think we've seen a collapse of valuations of biotech, but it doesn't mean the biotech can't be funded. Maybe it will be funded at lower valuations, but it's not that they can't get funding at all. Maybe they have to -- they are waiting until they have no other choice to then drop their valuation expectations.

But when the question will be either going bankrupt or accepting a lower valuation to continue their studies, they will accept a lower valuation. And they will get the money. And for the labs doing the work, the work will be done. If there is hope that the molecule will obtain registration, and it will be a profitable product, the funding will come. It has always [indiscernible] no issue with that. Whether -- at which valuation it will come is, of course, a different question. BioPharma also is there and is very well funded.

[Operator]

[Operator Instructions] And we take our next question from Allen Wells with Jefferies.

[Allen Wells, analyst]

I just had a follow up on Arthur's question just around some of the margin dynamics. I may be a bit more focused on the near term, if that's okay? Obviously, you talked a little bit around some of the challenges you've had with some of the fixed price contracts and not being able to increase or not be able to increase part of the contract price until 1st of January next year. How should we think about the margin dynamics in the second half versus the first half? Were there some of those [ inflatory ] pressures end up being stronger as you look at 3Q and 4Q? I'm thinking of referencing obviously the 24.3% that you posted in the first half, and we also saw a step down, obviously, in the COVID activity. That's my first question.

And then the second question was just on the Diagnostics business, we obviously saw some noise around diagnostic tariffs in France. I think you guys and the industry put out kind of a -- some pushbacks around some of the potential budget cuts that were being discussed. I think you were in the region of EUR 200 million. Could you provide a bit of an update on what's going on in terms of the price negotiations in French diagnostics as well, if that's okay?

[Gilles Martin, executive]

Thank you. Yes, of course, this year is a difficult year to navigate. And with all the different impacts on our business, it's -- we have some definitely cost increase on energy that we have to somehow compensate through productivity gains elsewhere and savings elsewhere or price increase where we get some limited price increase or energy surcharge that some of our businesses are now introducing energy surcharges or logistic surcharges. So it's a daily battle. And we do hope that we'll hit our EBITDA objective and our overall basically profit objectives, but we are working hard on it, and it is not easy everywhere. We have geographies. On the other hand, where things are easier, it's the North American market is good, and we have several companies that are above their objectives. Some of the -- our European companies will be below their objectives. And we will see where the whole thing ends up at the end of the year as to our overall profitability. But we are, at this stage, as we see it, we think we can achieve our objectives of -- our EBITDA objectives also. And that's why we didn't change them.

On Diagnostics, yes, they are like every year or in every country, there are discussions from the health care authorities of the funding providers for the health care system about drop in prices. It's a bit of arm twisting, it's not only a one-dimensional thing. In France, you have to see that there are extra cost that laboratories have to carry compared to other countries due to restrictions in the number of -- in the geography that each lab can serve, we can only serve a geography, a very small geography of 50 or 100 kilometers around the lab. The -- each sampling point needs to have 1 full-time doctor to be there. Although it's not the doctor who is taking the blood for patients, but that's unheard of. There is no requirements anywhere to have a doctor in each lobotomy center, that's a requirement in France.

And there are a lot of administrative hurdles in France that also add a lot to the labs cost. So of course, the negotiation is about what could be an acceptable price reduction in the French market to save money for the state but also in exchange, while maintaining the continuity of care also because they don't want us to close labs in areas of the country where we don't make money then if they reduce that. So -- and also what compromise the state could do on all those administrative burdens that maybe are increasing the cost unreasonably. So that's a multifaceted negotiation. And of course, we will know only when the negotiation ends what the net result will be.

[Allen Wells, analyst]

Can you just remind me on timing when we should expect some sort of resolution? I know that kind of -- it's kind of a standardized timing typically happens every year, right, and the negotiations end and there's a price increase put through.

[Gilles Martin, executive]

Yes, exactly. It's -- usually, it's a 3-year agreement between the state and the union of laboratories of independent laboratories and hospital laboratories. Whether they'll stick to the schedule, hopefully, we'll know by the end of the year. They want to have this effective in February, I believe. So the latest by February, we'll know that what's the impact of that.

And just for reference, I think that business in France is in the order of -- well, we have 2 parts. We have the routine part, which is about EUR 250 million and the esoteric part, which is about EUR 200 million. Esoteric tests are not necessarily priced or treated exactly the same way than routine test, and that gives you order of magnitude of impact of what could happen.

[Operator]

[Operator Instructions]

[Gilles Martin, executive]

All right. I guess we don't have more questions.

[Operator]

Yes.

[Gilles Martin, executive]

So yes, on this question, I saw a lot of question on this diagnostics in France. But on a total of close to EUR 7 billion revenue, this is a relatively small bit of our business and if we talk of price reduction or price, that's not a massive impact on the overall picture.

Anyway, just to conclude, thanks for joining. We -- while the world becomes more and more uncertain, and it's very hard to make predictions about anything, we are still quite positive about the outlook for our business short term and long term. We think the need for the type of services we offer for testing will be there and we'll be there in an increasing fashion, recession or no recession, the innovations that are made and able to cover more and more risks in a very cost-effective way compared to other alternatives and testing, who we believe testing and Testing for Life in the areas that we have chosen has a bright outlook. And it is a sector that, in my experience over the last 3 decades, has always fared better than many other sectors in difficult times.

And we also came out of those difficult times even stronger as compared to the rest of our industry. And this is what we intend to do. I'm not saying it will be easy, I'm not saying it will be smooth every time, but the investors, we think choose Eurofins are investors who look at a 2 or 3-year horizon, and we have always created a lot of value over this horizon, and we think there is no reason why it should be different this time around. And that's why we continue to invest significant amounts in those areas.

I'm looking forward to meeting some of you in-person at last at our Investor Days. We have an Investor Day in London coming up later this month, and we have 1 in Madison at our largest food testing laboratory in North America coming up in early November. You can get all the details from [indiscernible] if you haven't gotten them yet, and I'm looking forward to meeting you there in-person and answering more questions.

Thank you very much for joining. Have a very good afternoon or day if you are in North America. Goodbye.

[Operator]

Ladies and gentlemen, the call has now concluded, and you may disconnect your telephone.