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Eurofins Scientific SE
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Welcome to the Eurofins Scientific Full Year 2019 Results. [Operator Instructions] I'll now hand the floor to our first speaker, Dr. Gilles Martin, Eurofins' CEO. Please begin.
Hello, everybody, and thank you for joining our annual result call. There is a slide show on our website, and I invite you to check the disclaimer on Page 2. That's where -- I think to what I'm saying. So I'm going to do a very short introduction, then Laurent Lebras will talk a bit about the financial aspects for this year, and then we'll focus most of the call for questions.So in 2019, what are the highlights? It's on Slide 4 of the presentation. Of course, unfortunately, we were hit on June 2 by a massive cyberattack by criminals which has caused a lot of disruptions to our systems, and some of our laboratories after checking and cleaning their servers could only restart after 2 weeks. That has caused us a significant cost, and for the rest of the year, a lot of the focus for our management. But nonetheless, we're happy to see that this is behind us, and we've had a strong organic growth in Q4. And although we have lost some clients due to bad service, and it has been compensated.So we are satisfied that we've been able to mitigate the impact of the cyberattack. We have a significant reimbursement spending from our insurers for the cyberattack, which we have not booked in our accounts because we are conservative in how we do our accounting. But we do hope to be largely compensated for the cost, although we have tried to account for the financial impacts that were measurable and claimable under our insurance policy, which will never be reimbursed for, is the focus of our management time and the fact we've not been focused on growth for a while where we were fixing the situation and restoring our analysis time.Second and present development this year was a strong reduction of reimbursement for preventive test that hit our Boston Heart cardiovascular testing laboratory in the fourth quarter of 2018 and continued throughout the year. We've had to completely restructure the company. The good thing is we also settled all claims with our shareholders and allegations about the, let's say, borderline sales practices. So this company now can be refocused on growth, and we believe it has hit the bottom point. And anyway, it is so small now that going forward, its performance won't affect the good performance materially. So those were the 2 things that really, unfortunately, have had an impact on our financial performance in 2019.We've attempted to give you figures, which we call comfortable, to correct for those aspects and also for the first application of IFRS 16. When we look at the -- at those adjusted numbers, we see that we would have exceeded or achieved our objectives on our accounts, which is satisfactory, clearly, on the top line. In spite of almost EUR 70 million missing revenues, we are well above the EUR 4.5 billion that we had set as a target. Our organic growth development has been very good. We will add a slide show later that gives you that in more details. This is a very satisfactory. If you look at it quarter-by-quarter, we had a slightly weak Q4 in 2018, especially because of Boston Heart Diagnostics. So we've given you the gross figures corrected for Boston Heart Diagnostics.We have also an impact of EUR 4 million or EUR 5 million last year from one-off lower investments in France, but that has not a material effect on the numbers. So overall, a very good trend for organic growth. What we also are happy to see is that all those acquisitions that we have been doing in 2017 and '18, we see their margin improving in 2019. We see a continued improvement of the margin of our mature business that we had acquired until the end of 2016 are developed until the end of 2016. So of course, our overall margins are not progressing massively because we have a dilution from the margin of the companies we acquired in 2017, '18 and '19. But overall, the trend on margin is very positive.As we had promised, in spite of this cyberattack, we have reduced our leverage in 2019, and we intend to continue to reduce leverage going forward. We have invested a lot of money in our network. Over the last 3 years, we invested more than EUR 900 million in building our network of laboratories with this hub-and-spoke model, a very big, a very efficient central laboratories, and then satellites to do the time-critical assays. This is nearing completion. By the end of this year, we'll be pretty much done with that. And also we should be pretty much done with the development and start deployment of the new IT solutions that we have developed to manage our network of laboratories and the massive amount of data we generate. So we believe we're going to start to see significant benefits of those investments in capacity, efficiency, robotization, automation, et cetera, over the years to come, and we should see an acceleration of our margin improvement in 2021, we believe.The -- what we've also done is, as we started to do in 2018, we have significantly improved our disclosures regarding ESG. We've talked more about what our various board committees have been doing, provided more benchmark. We added the hurdles for the financial performance of our company for stock options of our executives to be exercised, et cetera, et cetera. We disclosed the many things we are doing that are positive for the environment, and we will add at least one nonexecutive director to our Board. So we are listening to our shareholders and trying year after year to improve on those important matters.One very satisfactory development is that the investment we did in the esoteric and genomic clinical testing sector are starting to bear fruit. We started in 2014 by buying Viracor, a very well-known biology laboratory in Kansas City in the U.S., which is also the leader in testing for transplant patients. We now have launched 2 new tests that help doctors detect rejection and even one that detect silent rejection. It's the only test in the world that can do that. And there's a potential of replacing a biopsy. We got reimbursement for this test. In November, December of last year, and since December, we had a very high growth, month-to-month 30% growth. Still very small numbers, but we believe that by 2021, again, the added revenues could be quite material. It takes time for hospitals to include the test in their programs, how they monitor their patients and the -- to interconnect the electronic patient files with our system to place orders for tests automatically, et cetera. So it's not something that will happen overnight. But it is looking very good. And one of the first investments we had done was the area of noninvasive premature testing. There, we have developed a whole range of tests, from the most advanced tests covering pretty much all genetic diseases that can be tested in this context to the normal test that other laboratories offers, and also up to a very cost-effective test for the most likely trisomy, trisomy 21, that we can offer for about $50 or EUR 50, when the routine test for the 3 trisomies are usually sold around EUR 300 or dollars. So we have a whole range of tests. This has grown very well last year. We had a 50% increase of sample number. In Europe, we are the leader in that market in Europe, where we started. So we start to see good results on that aspect. We have to talk a little bit about, unfortunately, the coronavirus crisis. Our activities in China are about 1% of our revenues. If we add South Korea and Italy, we are at about 3%. Our laboratories in China, of course, were extremely slow in the month of February, but they are starting to pick up. What they did in the meantime, some clients were starting to be worried about coronavirus in affluence of food. They developed the tests to help those manufacturers check this aspect.Of course, through our network, we can make those tests available worldwide. Our clinical laboratories have been developing and validating tests for -- testing for the SARS 2 coronavirus in human specimens. Initially, the public health authorities were reluctant to have independent laboratories carry out this testing. But this has changed over the last weekend. Again, today, the WHO advised governments to carry out -- to increase significantly the amount of testing. And our clinical laboratories around the world are getting ready for that in setting up those tests and developing and sharing between each other their own internally developed test.What we're also doing is we have a subsidiary that is developing tests that we sell to other clinical laboratories, that we sell to governments, that we sell to industry. And we are also developing a range of tests to do that. We are adding this test to our syndromic panels. Eurofins Diatherix is, since many years, offering a very broad syndromic respiratory panel that tests for a large range of potential respiratory illnesses from the flu to bacterially caused illnesses to about 32 pathogens. We're adding CoV to that to help find out if somebody has a cough or fever, what it could be. So this is a contribution we will try to bring to the very difficult work of the public health authorities as we are required to do that in some countries. In some countries, it might stay -- only performed by public hospitals. In others, we will contribute if we can.And we also are developing kits for testing in situ if that will be required in the industry. So that's for that aspect. Otherwise, we are getting our laboratories ready and we have developed disaster recovery plan and other aspects and contingency plans in case of supplies disruptions or in case of current lines of some of our stuff, like any company.We are fortunate to be in -- serving industries that generally prove resilience in the downturn. So we have -- we believe the outlook is still positive for the industries we are serving, and for the type of services we provide them. And we're, of course, monitoring the situation daily.What we've also done for the group is, over the last 2 years, we've strengthened significantly our leadership team and we added professionals, some are executive vice presidents of other similar companies like ALS or Intertek. Others were managing large companies in the food industry, et cetera. So not only have we tripled in size in the last few years, but we've also significantly strengthened our leadership team.So overall, we have been able -- since the outlook is good, we have been able to set new objectives for not only 2020 but also 2021, not only for margin improvement, but also cash flow development. Laurent can -- Laurent Lebras can comment that a little bit more. And our focus remains beyond running our business, growing and improving our margin to deleverage, to go back to our historic range, 1.5 to 2.5x debt-to-EBITDA. And we believe that by the end of 2021, all things being equal, we should be able to get there. So that's it for my short introduction, Laurent will say a few words about our financial performance.
Thank you, Gilles. So indeed, we are happy to report on solid results for 2019 despite the cyberattack. First, I want to comment on [indiscernible] and we had revenues reaching EUR 4.563 billion, 21% up versus last year. And accelerating in terms of organic growth quarter after quarter as we reached on the last quarter, 5.6% organic growth corrected for calendar working days. And if we even exclude the impact of the drive we got from Boston Heart, we reached a 6.5% organic growth in the last quarter.We didn't improve only these revenues, we also improved our EBITDA. So as a comparable, it's hard to read because we have IFRS 16. We have produced a bridge that you can find in our corporate presentation on Page 65, where we basically exclude for IFRS 16 impact, and we also correct for the cyberattack impact. And in that vision, I mean we have generated or we would have generated basically EUR 883 million EBITDA in excess of our objectives, which is a 10 basis points improvement year-on-year, and which is not only translated at the level of the group, but also its scope in the mature business. As you can see, our business acquired before 2017 increases profitability by 40 basis points year-on-year. And the acquisitions of '17 and '18, though they are still dilutive, they increase, on a pro forma basis, they are -- profitability by 80 basis points year-on-year.In terms of cash flow, we are also a good translation. I mean our operating cash flow was up 24%. Our free cash flow to the firm was up 41%. If you correct for IFRS 16, this is still an improvement of 24% year-on-year despite the cyberattack. We are in the middle of a consolidation effort. So we have indeed some higher SDIs this year amounting to EUR 98 million. Basically, our finance between a one-time cost linked to reorganization and restructuring and some losses on start-up and acquisition in restructuring. Overall, we maintained a good financial discipline. I mean we were within our EUR 600 million envelope of spend on acquisition and CapEx with EUR 171 million on acquisition for 26 deals and EUR 321 million on our CapEx spend. And we were able, thanks to this, to basically lower our leverage to 3.08x, which is a 0.6x decrease versus last year. So overall, we are confident about our objectives for 2020 and 2021, which I will just summarize here. As for 2020, including IFRS 16 impact, I mean we confirm our objectives of EUR 5 billion of revenues, EUR 1.1 billion of adjusted EBITDA and EUR 500 million of free cash flow to the firm. And for 2021, EUR 5.450 million (sic) [ EUR 5.450 billion ] of revenues, EUR 1.250 billion adjusted EBITDA and EUR 600 million of free cash flow, for which you can find a bridge in our corporate presentation, I think, on Page 72. I will pause here and take your questions.
[Operator Instructions] And our first question comes from the line of Edward Stanley at Morgan Stanley.
I've just got a few clarifications, please. Can you confirm that the guidance of EUR 700 million maximum spend of CapEx and M&A is EUR 700 million maximum in 2020 and a EUR 700 million maximum in 2021? It's not that that EUR 700 million is spread between both years, is that right?
Yes, that's right. EUR 700 million each which is unchanged because it is pre-IFRS 16 at EUR 600 million.
Okay. Excellent. And your previous EUR 1 billion of EBITDA guidance was pre-IFRS 16, and that's now been updated. Can you confirm also that these EUR 350 million of free cash guidance for 2019 was also pre-IFRS 16?
Yes. And you know it's rounding, we're rounding the objective. So it's basically unchanged. We haven't changed our objectives for 2020. And we just added objectives for 2021.
Okay. But I'm just trying to understand if the EUR 500 million of free cash flow to the firm includes EUR 98 million of IFRS 16 CapEx and EUR 32 million of IFRS 16 interest, then pre-IFRS 16 sort of year-on-year comparison, you're actually at EUR 370 million expectation for 2020 versus EUR 350 million in full year '19. Is that right?
No. That's not correct. The impact of IFRS 16 to free cash flow to the firm is only of EUR 32 million, as you can find in the bridge we made in the back of the presentation.
Okay. And following up on working capital because of the sort of malware attack. Can you confirm whether you expect to get a net working capital inflow this year?
Well, you mean, the reimbursement from insurance?
Not necessarily. I just mean a net working capital inflow in aggregate this year, is that expected in 2020?
So we expect to reduce our net working capital needs, which were at 5.3% in 2019 towards the objective of 4.5%, which is always the record objective. So then, indeed, we will expect to have a slight inflow in a comparative mode from the cash flow statement.
Okay. And finally for me, can you confirm the scope impact on sales in 2019, please?
What do you mean exactly by the scope impact?
The impact from -- to net growth that has come from revenues in year -- that has come from M&A -- sorry, rather than organic and FX?
Yes. That was, I think, a bit more than EUR 100 million of consolidated revenues. We will give you the exact figure, it's in the notes to the -- our financial statements.
We have a pro forma for 2018 in the 2018 accounts, and the pro forma for 2019 in the 2019 accounts. So you can look exactly at the pro forma. We will look it up while we speak. It won't be much in 2020 because we haven't done a lot of acquisitions in 2019.
EUR 93 million revenue consolidated in 2019 and would be EUR 135 million on a pro forma basis.
Our next question comes from the line of Suhasini Varanasi of Goldman Sachs.
A few from me, please. In your Slide 22, you -- in the bridge between free cash flow to the form of 2019 to '20, there's a cyberinsurance payment net of tax that you expect. What's the exact number, please, that you expect in 2020?
So the number we put on that slide is around EUR 50 million net of tax for that bridge in 2020. Page 72, are you -- you're referring to the cash flow bridge on Page 72?
Yes, exactly. That's the one.
So coming back to the question, the difference between free cash flow with IFRS 16 and result is very small. As Laurent said, it's about EUR 30 million. So the -- and in -- we haven't counted any cash flow correction for '19 for the reimbursement, but we do expect -- we have claimed actually more than the EUR 75 million that we have disclosed. But of course, this will not be paid immediately, and we are conservative. So we haven't booked anything for that.
But you do expect some -- the payment to come through in 2020, right? That's why you put it in your guidance for 2020, the free cash flow it's on?
That's correct.
Absolutely.
Understand. One on guidance for 2020, please. I know you said it's an approximation, but I wanted to make sure I got the numbers right. The EUR 1 billion of EBITDA for 2020, pre-IFRS 16, has become EUR 1.1 billion. Now the EBITDA got a benefit of EUR 130 million in 2019 because of IFRS 16. What's the assumption that you're using for EBITDA benefit for 2020, please? Because it seems like it's been rounded down, but maybe the number should be EUR 1.13 billion, EUR 1.14 billion, maybe? Just to make sure...
Well, you know we don't know -- we consider it rounding because we don't know what the impact of IFRS 16 will be on the 2020 number because it depends on the remaining duration of leases. So our leases are going to become shorter. The one that exists, it will depend what leases will renew, for what duration, what we acquire. So it's really -- so when we say order of magnitude, a EUR 100 million is what we are targeting. As you say, maybe it's going to be EUR 120 million, maybe it's going to be EUR 140 million, but we will know when we finish the year.
Understand. And therefore, if I go into 2021 targets, obviously, the implied margin is like 22.9%. I just wanted to clarify, you are expecting underlying margin improvement between '20 and '21 through, let's say, organic growth and higher productivity at the labs. Is that fair?
Yes. So what we are planning, we're planning about 50 basis point improvement in '20 -- I mean all things equal without IFRS 16. All things equal, we are planning about 50 basis point improvement in 2020 because we're still investing heavily in our network and putting things right. And we're planning about 100 basis points improvement from 2020 to 2021 because we should start to benefit more than from the -- all the investments we've done so far to build our network. It's again rounded. Maybe it's EUR 110 million or whatever, but it's just to give you order of magnitude. And maybe it's EUR 55 million or EUR 45 million but that's just to give the round numbers.
Got it. And the last one for me, please. You mentioned in your report that beyond 2020, you'll be focused on expanding in Asia and Lat Am. How big do you think these markets are in the context of their markets in Western Europe and the U.S.? I suppose where I'm going with this is, will you be returning to a more M&A led growth strategy to build a scale in these end markets? Or will it be organic? In which case, if it's going to be organic, you've indicated in your report that your CapEx to sales is falling below 6%, ex-IFRS 16 by 2021. Does that go back up from 2022?
No. It's not required. We're talking of a 10-year time frame. We're not talking about becoming big in Asia in 1 year. The market is -- okay, you have, of course, countries in Asia like Japan, which are highly developed, and we could actually be talking of Lat Am and Asia Pacific. So Australia and New Zealand are very developed. We can do a bit of M&A in some of the developed markets, but in more, let's say, countries like China, there is very little M&A to do. So this development will be slow, and it will be more organic. And -- but the CapEx for start-up is not huge since spending in lab is about EUR 3 million CapEx. So -- and in Europe and North America, we'll be well -- we should be well below the 6% CapEx. If you should look at our CapEx last year, we had EUR 100 million for buildings, that means new labs. And that's massive. And those labs they will be there for the next 20 or 30 years, we will not repeat that every year. So we should have a significant drop on that aspect, which were at some point, our IT solutions will be there. So that should also fall off. And we're going to replacement equipment and capacity equipment. But as you see, with our return on capital employed with our goodwill, the return on CapEx is very high. So we don't need so much. And yes, maybe it will take us 10 years and to bring the rest of the world to the same or to a similar size to what we have in Europe and North America, it's not going to be fast because those markets are not there yet. They have to open up.
Understand. Just one clarification on the CapEx guidance, please. Because if I take, let's say, the EUR 300 million of ex-IFRS 16 CapEx for 2021, on EUR 5.45 billion of revenue, you're roughly at around 5.5% of CapEx to sales. So is that the level you are comfortable with beyond 2021 as well? Or do you see that falling towards 5% beyond 2021?
Our maintenance CapEx is 2% or 3%. We can probably grow at least 5% with 4%, 5%. So it's -- we haven't done any budgets beyond 2020 for CapEx. 2020 still will be significant because we're adding quite a lot of buildings still. But just the range and that's the type of range we're talking about.
Our next question comes from the line of Tom Wilson (sic) [ Burlton ] at Berenberg.
It's Tom Burlton here. I just wanted to take a step back, if we could, perhaps just on the cyclicality of your business. I think economists, global stock market and bond yields are all telling us we're probably heading closer to a recession in many countries and potentially globally. Could you give us an update today just in terms of how the portfolio has changed and where we stand today in terms of what proportion of your business is really noncyclical or otherwise sort of recurring type revenue? And related to that, which parts of your business would be most sensitive if we do go into an economic downturn, please?
Thank you, Tom. Yes, of course, it's very hard to predict the future, especially with this type of potential crisis, which is also a health care crisis, and not only economic, or could be. Hopefully, it won't be. In the past, I mean the worst has been -- I started this company 32 years ago and I've been through a number of downturns, the last one in 2008. In the worst year, which was, for us, 2009, we still had positive organic growth. We had, I think, plus 2% or 3% positive organic growth. So historically, we've been fairly resilient. And if I look -- if we look at what happened last time around, we were very resilient in our pharma and food testing business. We didn't have clinical testing at the time, but pharma and food were pretty resilient. Where we saw a bit of softness was in some of our environmental testing business, where we did air monitoring, testing of industrial installation, which actually we got out of. In the meantime, we sold pretty much 4 activities. We just sold that activity in the U.S. in the beginning of this year, but potentially, some -- if complete factories are shut down, of course, they won't be testing for their assurance. Now that's a relatively small part of our business. And I wouldn't think the clinical testing will be so cyclical. We -- actually, we're starting in the country -- in Germany, for example, the testing was open to private laboratories from the beginning. And we're starting to test a lot for this coronavirus, unfortunately. And I think this will probably happen in other countries, might be a bit less of testing for certain things that are mild like allergies, if people are very worried about very acute infections. But -- so overall, it's very hard to predict the future. And of course, if there are cataclysmic economic blockage and whatever quarantines, and things like that all over the world, it's impossible to predict what could happen and affect any company. But I think compared to many other sectors, we are in a very resilient and recurring sector, as we can judge today.
Okay. That's helpful. And then just another one in terms of changing tax slightly on TruGraf, that seems to be quite interesting and quite a big addressable market. The EUR 2 billion you mentioned in your presentation that competitors alluded to sounds like quite a big number, and I think could include some rather optimistic assumptions. But what's your working assumptions of what that could generate in terms of revenue in 2021? You said quite material, is that perhaps in the order of EUR 100 million, EUR 200 million or so of revenue? And what's your best guess of what kind of margin that might look like, over time, relative to the group or clinical diagnostics within the group today?
Yes. Thank you. Well, I think the EUR 2 billion come from either CareDx, and analysts that cover CareDx, or Natera and analysts that cover them. I don't know that we would agree with that. It seems, as you say, to be quite optimistic, but you never know. And I think by that time, probably, there would be a lower reimbursement. But in the numbers you mentioned, EUR 100 million to EUR 200 million for 2021, are in the range of our planning. Now whether this would happen is -- remains to be seen. It's really a question of adoption. And the test we have is meant for monitoring, for monitoring of patients who have no symptoms instead of doing [indiscernible] where normally, it would make sense that it is put in routine monitoring program at frequency of twice a year or 4 -- 3 or 4 times a year. And it could be quite substantial, but this will depend how many hospitals, how many transplant programs adopted -- are fastly adopted. We believe our test is largely superior. Actually, it is the only test that can detect silent rejection, and it has a very strong medical benefits to help patients keep their graft. And we're starting -- we will start several clinical studies to add more applications. We are working on launching those tests for other organs, and so there's a very promising potential, but numerous potential. So we first need to see the ramp that we achieve, and how we get out of 2020 will be a very good indication of what happens in 2021 for that.
Okay. That's helpful. I just had one final question, just around the balance sheet. I mean previously, you've talked about your aspirations to move towards achieving an IG credit rating. Could you just update us in terms of where we are with that ambition, in terms of the time frame and what is required of you in order to ensure that you do indeed achieving an IG rating?
Yes. I mean we will start working on that. We will start engaging this year with rating agencies and working on charter ratings and private ratings to get them familiar also of our industry. They have to really know our industry and the characteristics of our industry because that's a big part of the rating. It's not only the company, it's also the sector. So we are -- we will be acting this -- active this year. And then what time we actually do it will depend on how fast we deleverage and our dialogue with them to come up with the best rating possible. But this is something we will be engaging because, of course, it will open a much broader investment horizon. Even if we were not actually investment grade, we would be just being rated, which would vastly expand our -- the horizon of investors who could invest in our company. So this is something we work on actively, actually, right now, after we publish our results.
Okay. That's helpful. Just one very last one for me, if I could, and apologies if I missed this in your opening remarks. I think just a clarification on the impact from the cyber losses at the EBITDA level, that seems to be a bit larger now at the EUR 75 million versus your initial estimate at the H1 stage. What's the reason for the difference there? Were there some additional costs that you didn't foresee?
No. There's 2 factors, I mean one of them is that we account for slightly more revenue loss also than what we announced last. And the biggest part of the increase on the loss on EBITDA level is linked to additional IT recovery expenses, which are covered by the insurance policy for 12 months. So we are not totally at the end of it, even though we don't expect significant amounts to come in addition to the plan now.
Yes. So in the second half, we've had significant IT recovery cost. And that's also explain why the SDI are so high in the second half.
And our next question comes from the line of Nicolas Tabor of MainFirst Bank.
So it looks like the line is not open or something.
We'll move to the next question, which is from the line of Mohit Rathi of AlphaValue.
My question is basically -- first question is basically regarding the, again, operating EBITDA guidance for 2020. If I do a rough calculation, it comes out that when you guided for the EBITDA numbers for FY '19 and '20, you basically expected a margin improvement of roughly 110 basis points. I'm assuming or I'm taking the numbers of EUR 1.1 billion of FY '20 EBITDA and EUR 850 million of FY '19 EBITDA. But with the new guidance, when you extract around EUR 1.1 billion of FY '20 EBITDA, and I adjust the previous base also for IFRS, the net improvement comes out to be roughly only 20 basis points versus 120 basis points earlier. So can you throw some more light on that?
I don't think we can trace it this way. What we are -- compared to the actual EBITDA and so on, which we are planning, I think, is about 50 basis points improvement between '20 because we have to do it on a pro forma basis. The acquisitions we did in 2019 are dilutive in terms of margins. For example, also TruGraf is losing money. So it should do all things then on a comparable basis, I think we're planning about 50 basis point improvement in 2020 and about 100 basis point improvement in 2021. And we did -- we commented again the 1.1 -- we have the rounding on the IFRS impact of about EUR 100 million. It might be a bit more, a bit less, we'll see, probably slightly above.
Okay. So can I assume that the slightly lower improvement, 120 basis points and 50 basis points, can be attributable to the recently acquired dilutive acquisitions? Or there is some impact of startup laboratories also in this regard?
No. It's kind of a mix. We don't know what we're going to buy in the future, and we don't know when we made, whatever objective we made 2 years ago, we didn't know what we would buy. So we'll see. But our target for this year is EUR 1.1 billion of EBITDA and EUR 5 billion of revenues. And again, the EUR 5 billion of revenues, they include EUR 100 million from acquisition that we have not done yet. So that would be EUR 200 million of acquisitions consolidated at midyear. A, we don't know if we're going to buy anything. We don't know the margin of what we're going to buy, if it's going to be accretive. So there are some hypothesis in an objective like this that have to be hypothesis because we don't know what we're going to buy, when we're going to buy, what the margin will be. But it is our best guess. If we want to help analysts try to think -- to understand what we're thinking and what we think is likely, this is our objective. It's not a guidance. It's an objective, by the way.
Okay. Okay. Fair enough. If you allow, my next question would be about -- can you just give us a breakup as in what percentage of top line comes from pharma or food or environmental business? Just trying to understand the kind of resilience, what percent of your top line is resilient?
I think our top line is broadly resilient to things we have seen historically. So to market movements, we've seen historically, I think were overall pretty resilient. In terms of percentage, I think pharma is probably something like EUR 1.3 billion or from EUR 1.2 billion, EUR 1.5 billion. Food is about EUR 1 billion. Environment is below that and is maybe EUR 800 million or something like that. And clinical is also about EUR 1 billion or close. And we have other activities like material science, cosmetic testing that do the rest, some product testing that do the rest.
Okay. Sure. Just one last question regarding the tax rate. Should we assume this around 28% tax rate a normalized tax rate going forward?
Thank you. It's a good question. It's high in 2019. And it's high for a very few of reasons, but one of the reason is that a lot of our startups are losing money, but they are not tax -- in a tax unity with companies that are making money. So our tax rate is higher than what it should be based on a normal average tax rate. So going forward, maybe not immediately in 2020, but as all our companies become profitable, all things being equal in tax rates, we deliver -- our tax rate should be lower.
Our next question comes from the line of [ Carl Bonthron ] of M&G Investments.
I guess, this is Saul -- because of the M&G -- can you hear me?
We can hear you.
Yes, we can hear you.
Okay. Okay, fantastic. I have a couple of questions. The first one is on your Clinical Diagnostic business. I was wondering if you can give us an update on -- I don't know if you call it, like, a strategic review. But yes, if you can give us an update on that?
Thank you very much. We went in Clinical Diagnostics. [Technical Difficulty].
Okay. I'm just going to mute the participant's line while you're answering.
Thank you. Yes, so we went in Clinical Diagnostics for the genomic testing and molecular and genetic testing. We saw it as a place where we could innovate and invent new tests, like we do in food testing or in environmental testing and testing for the pharma industry. We had a few activities in clinical testing in France and Spain and Germany, where we do routine testing, where we also buy tests from suppliers and run them. And those routine testing are subject to a reimbursement pressure, and therefore, they are not growing as fast.There are good activities, very stable, very recurring. And with strong cash flow, but they're not growing. So there is, of course, a debate whether we should have them because last year, if we correct the Boston Heart, our organic growth and the year before also whereas about 6%. And it would have been higher if we didn't have the, let's say, French and Spanish and German routine clinical testing, which were not growing or very little. It doesn't mean they're bad businesses. In that approach, we've looked at it. It's something we could divest if we had to, but it's not something we must divest. And especially at the moment, there is -- it is -- those labs are very important for public health activity, and we're happy to contribute to the -- what the public health authorities need in terms of lab testing. I think it's -- and testing is one of the best way to avoid -- to detect diseases early and avoid people getting sick.
Okay. Okay. And in terms of the other question, I would ask you to, if you can repeat your net leverage guidance target. I think it was for 2021, you mentioned 1.5 or 2x. So you're planning to get into that range by the end of 2021, and did I get that correctly?
Yes. So our objective is to go back to about 2.5x by the end of 2021 based on the plans and hypothesis we disclosed on M&A, on margin improvement and organic growth. If those things work out as we've communicated them in our objectives, we believe our net leverage could go back to 2.5x. And beyond that, in 2022, et cetera, we want to continue to bring it down towards the midpoint of 1.5x, 2.5x, which has been our historic range forever. I think a bit of debt or leverage is good for our return on equity. I think most of our shareholders agree with that. So we don't want to go to 0 debt, but we had a peak where -- last year, and it's coming down now because of the many opportunities for very interesting acquisitions we had in 2017 and 2018. It is not a place we want to stay out. And each year, we want to see some deleverage as we started to see this year -- last year.
Okay. And in that 2.5x net leverage target by that time, are you assuming the same amount of hybrids at EUR 1 billion? Or that part of the capital structure might increase to achieve that target?
No, no. We are assuming an unchanged structure. So we are assuming that EUR 1 billion of hybrid in the mix, which actually that EUR 1 billion of hybrid, that compared to our EBITDA, as a percent of our EBITDA, will become less over time. And all those things are also subject to review. If we generate a lot of cash flow, maybe we should do away with the hybrid financing or step-by-step do away with it because it's not something that credit agencies -- rating agencies take very -- take into account fully or at all. And so over time, if we look 2021, 2022, we, of course, will review whether we need hybrid at all. But at the moment, we have them and they have a maturity. We can't pay them back before a certain date. So -- and we will permanently monitor, based on market conditions, what makes sense for managing our balance sheet. We're, of course -- we want to be conservative in our financing. We don't want to take too much risk. We will like to have long-term financing. We think the hybrid in terms of risk management has been, so far, a very good instrument because it's extremely low risk as an investment. But as we become a mature, stable company that generates a very large cash flow, maybe that instrument won't be as needed as before.
Can I squeeze one last one on your cash flow? So in addition to the SDI that you have clearly identified, I look at your cash flow, there's also a significant component of other cash items on top of that. And then another -- around 90 -- EUR 90 million. So if I put everything together, SDIs plus other operating cash items, it's quite a sizable number, around EUR 180 million. Can you clarify the additional EUR 90 million of other cash items? What is it made of?
Sorry, which line are you referring to exactly in the cash flow?
So basically, this is just a receivable line. When I take your cash flow from operations and I strip out EBITDA, taxes, working capital, I'm left with an additional EUR 90 million that I call other operating cash items that I cannot attribute any other lines. So it's just basically a bland line. So if I take your EBITDA, including your SDIs, and that's...
We don't have this number. So I'm sorry, we cannot follow exactly.
Okay. Well, maybe I'll follow-up this offline.
The other noncash effect is only EUR 4 million in our cash flow statement, so...
Okay. But you know it's not an element that's directly visible in our accounts. I think it's maybe better that we take it -- that you take it offline with our CFO. But yes, I mean the gist of it, you are correct. We are spending a lot of money, doing a lot of things either in putting our network fit for macro environment [indiscernible] we have by start-ups and by CapEx. And a lot of that is in finite in time, and to a large extent, discretionary. So there's a lot of upside to our cash flow. We believe once we say, okay, that's it, we have the footprint we need. We don't need to move activities from A to B.And we also -- we have some earn-outs that we might not pay. So we have quite a few things that could be of interest, but we'll see how things evolve.
And our next question comes from the line of Steven Goulden of Deutsche Bank.
Could you just give us a little bit more -- I know you touched on it earlier on, but a little bit more color on how the cyberattack cost was determined? Because obviously, the Q3 update, we were assuming that the cost on the EBITDA level would be in the kind of low 50s, and that's now gone up to EUR 85 million or EUR 75 million net. And obviously, this makes quite an impact at the margin level, another sort of EUR 20 million is ballpark 50 bps for the full year margin or percentage point in the second half. So I just want to get a feel for how accurate you think that estimate is and just the sort of the phasing of the costs that came through and that sort of surprised you in the second half. And then on the second -- my second question, just on the clinical diagnostics point. So you were saying that the European clinical diagnostics that the routine business has been challenging. But obviously, you did in your print apparently mid- to high single digits in European clinical diagnostics. So I was just sort of wondering what -- I know you talked about noninvasive prenatal testing, but my understanding is that the specialty business is quite small within European clinical. So maybe if you could just give a bit of color on how you achieved that kind of number given, obviously, a slightly challenging underlying market backdrop?
Yes. So let me answer the cyberattack estimates. So this is in line with the plans that we are making to the insurance companies. And basically, they cover for two the type of costs. The profit loss due to, what we call business interruption, which is a 6-month calculation. So basically, this period ended the 2nd of December after 6 months from the attack. And this is why there was a slightly additional impact on the top line from the EUR 62 million we estimated earlier on to EUR 69 million. And the second component is what they call IT recovery expenses for which there is a policy of 12 months of coverage. So this part is still ongoing, and it will be ongoing until the 2nd of June this year. That being said, we believe that what we disclosed in the press release this morning, which is an EUR 85 million gross impact on the EBITDA level, is more or less close to the full amount that we will make to the insurance companies because the IT recovery expenses, which will be coverable under the policy, are not going to be that many until the next 2nd of June. Does this answered your question?
Yes.
Yes. So we have at least EUR 20 million of IT recovery expenses in the second half that we couldn't predict precisely at the end of the first half. And anyway, they should be covered by insurance. It's a bit immaterial. On the clinical diagnostics, actually, our esoteric specialty clinical testing in Europe is not so small. It's more like EUR 200 million of revenues that we have in that activity. And the NIPT is starting to be quite big. And it's -- we've had -- as we disclosed, our test numbers went from 100,000 in 2018 to 150,000 in 2019. We had massive growth in some segments of our clinical diagnostics. The routine, in France, for example, the government has a 3-year program. It's a negotiation with the union of the pathologists. And usually, the low spend growth of 0.25%. They're talking for the next 3 years of 0.5% growth per year.So this is -- the growth is constrained. How we can generate growth is through developing new tests that has a lot of medical benefits for patients and that can be reimbursed on top of the fixed demand for routine test. And that's what we think we should specialize in because we're a company that's [indiscernible] of innovators. So does that answer your question?
Yes.
And we have a follow-up from Suhasini Varanasi of Goldman Sachs.
Just one follow up, please. I think recently, in the last one month or so there were some price cuts announced in French clinical diagnostics businesses. I just wanted to make sure if you have seen any implications or it was outside your scope of work?
I think they are still booking between the union of the clinical pathologist and the national insurance. And I think they're close to agreeing on -- for the next 3 years to have a volume increase of about 0.5% per year, each year. Maybe a bit more in the last year, which would be 2022. It hasn't been signed yet. So I think anything could change. And of course, that means that the nominal reimbursement goes down. It goes down every year. We'd love to get more efficient. And so overall, they improved their margins every year anyway. So that's what people are thinking will happen for the next 3 years for the French business.
Understand. So the net impact on revenues will be flat, roughly speaking?
Yes. For the routine business outside of new innovative tests, I think you're talking flattish, plus/minus 0.5%. Okay, but that's without market share gain. So you can do -- we can do a bit better if all labs -- either if we open new labs or we gain market share through winning some new hospital clients, et cetera. So it's an overall reimbursement by the government, which is constrained.
And we have another follow up. This is from Edward Stanley at Morgan Stanley.
Sorry. Yes, I have one more quick one. Following up from Tom's question earlier on TruGraf, so your working assumption roughly is the EUR 100 million to EUR 200 million of sales as possible in 2021, but your uplift you're guiding to is around EUR 400 million and EUR 200 million of which comes from M&A. So are you saying that if TruGraf goes well, then EUR 200 million of the uplift year-on-year comes from M&A and another EUR 200 million from TruGraf, and the underlying business doesn't grow? Or is that TruGraf incremental to the guidance that you've given for 2021?
Okay. We're currently getting no sound from the speaker line. Can I just confirm you're still connected? [Technical Difficulty]Okay. Apologies, ladies and gentlemen. It seems we may be having the technical issue with the speaker line. The line is still connected, but there seems to be no sound coming from. Bear with me just one moment.Okay. Apologies for the technical issues, ladies and gentlemen. We'll restart the Q&A now. So Edward Stanley from Morgan Stanley, if you could just repeat your question just for the benefit of speakers, please?
Yes, can you hear me?
Yes, I can.
So I'm going to -- let's hope it's what I thought. The guidance for 2021, just following up from Tom Burlton's point earlier, it does a EUR 450 million-odd increase year-on-year in revenues. But you said that you expect TruGraf to be EUR 100 million to EUR 200 million, and you've also guided to roughly EUR 200 million of revenues from M&A consolidated at midyear. So with M&A and TruGraf, that accounts for all of the uplift in revenues or is TruGraf separate to that guidance?
Yes, we've been conservative. We haven't planned much for TruGraf for 2021 because it's always part of the mix. Because we want to see how the adoption is. And the good thing about this test is once it's part of the monitoring program for patients, it will become or should become very recurring, which we first test to see how the adoption develops in 2019. So the run rate in the fourth quarter of -- sorry, in 2020. So the run rate in the fourth quarter of 2020 will be a very good indication of what will happen with this test and the other tests that we'll be launching this year. And so we will review that and maybe our 2020 objectives -- 2021 objectives, once we know this development. So maybe we're a bit conservative, but let's see. Now we first have to deliver 2020, get a good adoption. And if during the year of 2020 or at the back end, we have good news, that will be good.
Okay. And because I've got through you, why not just ask quickly on Boston Heart. The comp effect, I was pretty sure it was dropping away almost fully at the end of Q4 and wouldn't impact at all in Q1, but it doesn't sound like that's the case. It sounds like it's still going to take a bit of time before that stops becoming a drag.
Yes. The big drop started in the middle of 2018 in Q4. We've had a very strong effect in Q4 of this year, and the company is not very material going forward. And we're talking something like EUR 30 million. We might have a small impact in Q1 of next year, but pretty minimal on a consolidated basis, maybe 0.1%, but it's also -- at some point, we hope to see some pickup, so we'll see. But I don't think -- and that's why we disclosed it separately. I don't believe BHD will be material to our revenues in or the change of any change at BHD level, we don't think this will be material to our revenue evolution in 2020.
And we have one further question in the queue so far, that's from the line of Andy Grobler of Crédit Suisse.
Just a couple of quick ones from me. You mentioned earlier about business development having slightly been put on the backbone through the middle of 2019, but you had pretty good growth momentum into the end of the year. Kind of where are you with that? Do you think you're back fully on track in terms of growing the business and BD in general? And then secondly, there was a question earlier around tax. Could you possibly be a bit more precise about where you think tax is going to settle for 2020 and 2021 in terms of rates, please?
Thank you very much, Andy. Yes, you're right. It's a good comment. We try to identify the revenues that we lost for sure in the year of 2019, and that has been disclosed. But what we cannot quantify is what we would have otherwise won if we had been focused on really running the business. And it's a contrasted picture because some of our companies were not affected at all by the cyberattack, and they continued to do to win business, et cetera, others were. And also are doing significant change in our IT systems to become more resilient to audit them. And that also cost a lot of management attention. So indeed, our 2019 second half was still affected. And we estimate, it has cost us probably 6 months of impact of growth to some of our businesses. So we have some upside. We think through 2020, we will recover and -- but we could have had a better growth than better organic growth in Q4 were if not for this cyberattack. So -- and we think any -- for example, in our genetic testing business, where the turnaround time of testing is like 12 hours, 24 hours, 36 hours. We lost a lot of clients because they didn't get any service for 2 weeks. In other parts of our labs, our analysis time got longer because we had a huge backlog that was created in July -- June and July. And of course, we -- clients didn't send us more samples because we were not able to report on results. And so all those things are compounded to hurt our growth in Q3 and Q4 of last year. And little by little, we're putting that behind us. And hopefully, our teams will be able to refocus on their clients and convince them, those that are giving us less work, that they should give us back -- more work as they used to.
And is there a bit of a hangover from that in terms -- I'm not sure how long the lead times are for the sales process? Do you think you're fully back up and running and -- as of now? Or will it take a bit longer to get there?
No, not fully. I think that's why we said we think that should be behind us by the end of 2020. And hopefully, by June, it will be 1 year, people will start to forget and they will look at the most -- last quarter operational performance. And once our operational performance has everywhere fully normalized for long enough, for 6 months to a year, we think it's going to be forgotten and we should recover most clients. And our teams don't have to go and visit clients to apologize anymore, but they can visit clients to talk about new products and services. And again, I mean some of our labs have continued to work without any interference and it's just those labs that were affected.And to your question on tax. For 2020, we don't really know exactly, it will depend exactly where our profits are. If you want to be conservative, you probably can work with the same percentage. Beyond that, we -- probably, our normal rate should be 25% and 50%. Yes, I mean and today if you look at our theoretical tax rate in 2019, it was about 25%, and we paid -- I mean we booked around 28% because we didn't optimize all the low season, the tax activity due to the heavier acquisitions we did recently. So we're going to try to merge these two tax rates all the time. The theoretical tax rate, which is around 25% and with that we actually booked and paid here. But that takes a bit of time because it's not something that you do overnight.
And we've had one further question come through, that's a follow up from the line of M&G Investments.
Yes, this is Saul Casadio from M&G. I just wanted to follow up on the -- my earlier questions -- question on the other operating cash items. I just want to apologize for the confusion and we just checked, it's basically the same amount as the SDI. So there's really nothing to clarify. So we just want to apologize for the confusion.
Okay. Thank you very much.
Thank you very much.
And as there are no further questions at this time, I'll hand back to our speakers for the closing comments.
Well, thank you, everybody, for joining our call. We apologize for the technical glitch in the middle of the call, that's embarrassing. We'll try to make sure it doesn't happen next time. Thanks for all of you, our shareholders, for supporting us and supporting our investments for the long term. And we've put a lot of investment into this company to build an incredible network of labs to build a very nice pipeline of new tests. And we know it takes a long time, it takes a long time to generate very high cash flow. And it's really hard to have your cake and eat it too. And in many companies that do as much research and development and investment for their future, generate massive losses, so we managed to do that, to make all this spend in R&D and building a very powerful group in our markets while still making money and even increasing our margin. But of course, it could be much better and our -- a good life that will be much better. So we're going to be working hard throughout this year and the next couple of years to increase cash flows and mitigate any risk that we are -- that are [indiscernible] the market and this global health risk, and we'll try to help the public health authorities in mitigating the impact of this terrible disease. Thank you very much, everybody, and have a good day.