Synlab AG

XETRA:SYAB

Earnings Call Transcript 2022-Q1

[Operator]

Dear ladies and gentlemen, welcome to the SYNLAB Q1 2022 Financial Results Call. At our customer's request, this conference will be recorded.

[Operator Instructions]

Today's call will be hosted by Mathieu Floreani, CEO of SYNLAB; and Sami Badarani, CFO of SYNLAB. After the presentation, there will be an opportunity to ask questions. May I now hand you over to Mathieu Floreani, who will lead you through this conference. Please go ahead, sir.

[Mathieu Floreani, executive]

Thank you. So good morning, good afternoon to all, and welcome to our call. So we will present today our Q1 2022 results. I'm together with Sami. I'm very pleased to report today another quarter of growth and another increase in our 2022 guidance.

So let's start with our Q1 financials, the highlights on Page 5. Our revenue is up by 13%, adjusted EBITDA by 10%. And this is against the challenging comparison base we had in Q1 2021. And just as a reminder, at that time, we had reported 96% growth in Q1 '21 against the prior year.

And in this year's Q1, we have a strong impact of Omicron wave. Our unlevered free cash flow is strong at EUR 155 million but below last year. And that's due to temporary COVID-19 impact on working capital.

And so net-net, our financial position is very strong and the leverage is down again at 1.2x.

Moving to Page 6 in our operational quadrant. Summary here is good execution again on all 4 pillars. I'll start with organic growth, the first pillar of our strategy. We progressed there on many fronts: number one, new BCPs, keeping up with the pace of last year with about 40 BCPs opened in the quarter.

Number two, specialty tests. We have been reinforcing our leadership through new partnerships like OncoDNA, for example, in Germany, and continuous M&A.

Number three, the SEL contract, where we are successfully delivering on one of the largest ever hospital outsourcing contracts in Europe. Now focusing on the underlying growth, which excludes any COVID-19 testing, we saw some softness in the month of January and February.

And that is correlated with Omicron wave. COVID-19 reached levels that we have never seen before in terms of infections, and that has impacted the lives of many of us, including people operating in the labs.

We stopped measuring attrition end of 2021 and -- but there was definitely also an attrition impact in Q1 2022. And that is evidenced by the strong rebound we saw in organic growth in March when the wave was receding.

We have also good progress on our second pillar of operational excellence with SALIX delivering another EUR 5 million of savings. Our lean and STS program is now rolled out in 5 new countries. And the renewal of our core lab equipment is more than 90% completed.

Third pillar is M&A. 8 acquisitions completed in 6 countries for EUR 63 million EV. That represents around EUR 32 million in revenue. And there, we are also progressing continuously and well on our integration of 2021 acquisitions. And finally, on the fourth pillar of employee engagement, well, it's not really a Q1 highlight as such, but we have published our second ESG report in April, and that defines our high-impact areas and tangible targets for each of those.

And you can also read that our ESG team has gathered many short stories and will show the efforts that are made across the network to make SYNLAB a more sustainable company.

Now moving to Page 7. That's our usual update on COVID-19 testing. Our summary is tremendous efforts again by our teams to meet the demand, especially in the first weeks of the year. You can also see that testing levels gradually are decreasing since then and are now back to levels that we have seen about 20 months ago, which is very good news for our society, of course, and also for our teams, which can now go back to more normal working conditions.

On the right of the chart, we also showed a decrease in PCR testing prices, and that is a trend that we have observed for a while, of course, but that we have also accompanied with many initiatives. And if I just name one, I would name the lollipop test initiative in Germany. The average price per test is lower by almost 1/3 compared to 1 year ago. I can now hand over to Sami for the financial section of the presentation.

[Sami Badarani, executive]

Thank you, Mathieu. Good afternoon, everyone. I'm very pleased to walk you through the Q1 2022 financial performance of the SYNLAB Group. These are non-audited SYNLAB AG consolidated financials.

Let's start with the revenue on Page 9, where we have another quarter of revenue expansion. The Q1 2022 reported revenue stands at EUR 1.061 billion, 13% revenue growth. We have roughly the same revenue on a pro forma basis. Again, pro forma basis means adding the additional revenue as if the 2022 acquisition had been consolidated on the first of January 2022. And 2 out of the 5 acquisitions completed in Q1 were completed very early in the year, and the remaining 3 are very small bolt-ons. So overall, EUR 7 million revenue from the 5 acquisitions completed in Q1.

We have a positive effect in the quarter with weakening of the euro versus Swiss franc and GBP currencies. The -- and then the rest, EUR 74 million of organic growth, 7.6% organic growth with strong volume growth more than offsetting 17% revenue drop from PCR price decline year-over-year that Mathieu mentioned.

Let's understand more the strong organic growth on Page 10. The COVID-19 testing, still primarily PCR testing. 10.2 million PCR tests in Q1, highest quarterly volume with an average price around EUR 41 per test compared to EUR 43 per test in Q4 and EUR 58 per test in Q1 '21, down EUR 17 million, EUR 170 million rounded number revenue loss. 1.5 million non-PCR test only, mostly antibody testing.

The total COVID-19 testing revenue stands at EUR 450 million versus EUR 434 million last year in Q1, still up EUR 16 million despite the price drop that I mentioned. Excluding the COVID-19 testing, the organic growth is at 10.8%. The underlying growth is split into 2 pieces, to isolate the impact of the Southeast London contract that has started on April 1, 2021, from the rest of the business.

The underlying growth, excluding SEL, is at 2.1%, slightly lower than in prior quarters. We have stopped obviously reporting the attrition as its measurement was difficult to assess precisely. Mathieu will provide more color in the business review of the growth by segments.

But January and February was -- were soft, with the growth in January very soft, impacted by the Omicron wave. And we experienced a strong rebound in March with 4% loss growth.

Moving now to EBITDA. The Q1 on Page 11. The Q1 2022 reported adjusted EBITDA stands at EUR 357 million. This is the highest level achieved in a quarter for SYNLAB. EUR 22 million EBITDA growth, of which EUR 2 million from FX, EUR 3 million from 2022 acquisition and EUR 17 million from organic. Excluding COVID-19, we had around EUR 5 million price drop, mostly from negative price in France. We have EUR 9 million inflation in 1 quarter. It was EUR 19 million for the full year 2021.

So the -- somehow, we are doubling the rate of inflation versus the running rate we had last year. And it's mostly coming so far from OpEx. SALIX program, again, procurement savings from core lab project and product savings from initiatives executed across the network.

EUR 5 million in Q1, we're in a good shape to deliver the EUR 20 million for the full year 2022. The full year EBITDA margin -- no, the Q1 EBITDA margin stands at 33.6%, down 0.9 points versus from 2021 with a drop of 9 points from the PCR price alone, meaning that excluding PCR price drop, the margin is up around 8 points year-over-year.

Again, the Q1 performance helps us demonstrate that the key profitability driver in our industry is volume leverage. As our cost structure is mostly fixed in the short term, any incremental revenue drop to the bottom line with a high volume flow through.

Page 12, net profit expansion. The bridge from EBITDA to net profit and from reported to adjusted financials. EBITDA first, we have a nominal adjustment now of EUR 0.5 million, and it's all acquisition-related costs, including PMI cost. The adjusted operating profit is at EUR 300 million. It's up EUR 20 million from Q1 '21.

The net finance results are positive, rounded EUR 5 million, thanks to financial instruments revaluation and FX gain. Interest expense are also down at EUR 14 million only, representing 1.9% average interest rate on our financial debt. Tax line is increasing based on increased volume with an effective tax rate roughly stable at 25%. The Q1 adjusted net profit stands at EUR 227 million, up EUR 38 million year-over-year, plus 20%.

Let's move to cash flow after the P&L, page 13. The strong EBITDA translates into strong cash flow generation despite the impact of Omicron wave on working capital. Mostly receivable, DSO is at 69 days, up 7 points compared to year-end.

One quick message here is we have EUR 35 million of COVID-19 receivable from one large contract that has been collected early May. So -- okay. So sorry for the short break here. We had an electricity shortage in the room, and so we are now online on the mobile. So I stopped the presentation on Page 13, cash flow.

And I just wanted to highlight again here is that we have a strong cash flow for the quarter, EUR 155 million of unlevered free cash flow, around 44% of conversion rate to EBITDA.

There is nothing significant to highlight below the operating cash flow, except the CapEx is increasing EUR 16 million year-over-year as planned, including EUR 9 million of leases.

Moving on Page 14, strong balance sheet. The balance sheet of the group expressed with the capital employed and capital resource review. The change versus December is mainly driven by the addition from the 5 acquisitions as well as the impact of Omicron again on the net working capital.

The net debt of the group, including rounded EUR 600 million of lease, is now at EUR 1.5 billion, down EUR 113 million versus December. And the group has a strong cash -- strong balance sheet here with EUR 540 million cash on hand and around EUR 500 million of undrawn RCF.

The rounded -- more than EUR 1 billion available cash for M&A. The ROTCE is at 19% at the end of Q1 2022.

Page 14 -- 15, sorry, further reduction in debt and leverage. The adjusted net debt is rounded at EUR 1.56 million at the -- EUR 1.56 billion at the end of March. The LTM pro forma EBITDA is at EUR 1.264 billion, up EUR 27 million. And the leverage ratio debt-to-EBITDA stands at 1.3, down nearly 12 basis points compared to year-end '21.

And this concludes now the financial section of the presentation, and I will hand it back to Mathieu for the business review.

[Mathieu Floreani, executive]

Thank you, Sami. So -- yes, let's cover our main geographies, starting on Page 17 with France. So 7% decrease in revenue, 23% decrease in AOP compared to Q1 last year, and that is mostly due to a reduction in the COVID-19 contribution, which was price driven.

Minus 1.1% on the underlying revenue evolution, and that is hiding actually a very robust volume growth of 4.1%, which is offset by a sharp price decrease. And the 2 components here are that the normal price decrease as per the 3-year agreement, which is 2.5% since January 2022.

And on top of that, an unfavorable comparison base in Q1 only for this year as the 2021 price decrease started later in April. So it's a slow start into the year, but a very good reason not to be worried about for the full year performance.

Page 18, Germany, plus 32% increase in revenue and 75% increase in AOP with a new high for margins there. 3.9% underlying growth, and that is again a strong volume growth at 4.5% against the soft comparison base last year and with very limited price pressure.

Page 19, our South region. So they are 13% increase in revenue and slight reduction in AOP. The quarter in South was marked by reduction in the COVID-19 contribution and strong contribution from M&A.

So we have a minus 1% underlying revenue evolution with 2.3% volume growth, stable prices, and that is more than offset by headwinds in Italy. Two components here also. Half of the underperformance is coming from a high comparison base and half from a change in the reimbursement schedule of the Campania region, region of Naples.

This phasing impact should revert in the rest of the year. This has happened before already. So we have a strong network expansion also in the South with 25% new BCPs in Q1 2022 and 6 acquisitions closed since the beginning of the year.

Page 20, our North and East region. So there, we have 18% growth in revenues, 3% growth in AOP with lower COVID-19 contribution, but very strong organic development. The underlying growth is 9.1%, excluding SEL. And that is with a volume that is up 7.6% and prices that are also up by 1.5%.

And that is -- the price effect here is the result of price indexation in both Eastern Europe and in the U.K. We also have a further network expansion with about 10 new BCPs that we opened.

Now on to Ukraine. So our operations in Ukraine closed temporary when Kyiv was threatened because that's where we are located. But we have reopened since on the request of our Ukrainian colleagues.

And also to be noted that since the start of the war, we saw increased activity in neighboring countries, and that is driven by the influx of refugees, which once again is a testimony of how critical of an infrastructure we are in health care systems.

Now let's move to the concluding section of the presentation today, the outlook on Page 22. So our COVID-19 business scenario as presented since November 2021, same slide.

So we have done EUR 450 million of COVID-19 testing in Q1 alone. So we are now in the upside scenario for 2022, higher than the EUR 5 million described -- the -- sorry, the EUR 500 million described at the upper end of the range from November 2021 when we communicated.

And consequently, on the next page, Page 23, we present the revised outlook. So we now expect group revenue in the year 2022 to be around EUR 3.1 billion, and that is based on sustained strong organic and M&A growth.

Our adjusted EBITDA margin is expected to be within a 24% to 25% range. This is the high end of the 23%, 25% range that we communicated back in November 2021. So we narrow it upwards to reflect the expected increase in revenue, but it also factors in, number one, the view that we should maintain a certain COVID-19 capacity also when the prevalence goes down, which then can have a dilutive impact on the margins in the short term.

Number two, the ramp-up cost effect from growth initiatives investments and that is notably in direct-to-consumer. And number three, inflation on cost.

On the bottom part of the page, our key priorities for 2022 in terms of capital allocation, which are CapEx, M&A, while paying out the 20% of adjusted EPS in dividend. So this concludes our presentation for today. Thank you for listening, and we'll now open the floor for questions. But I'm just looking here in the room. If we -- we are going to switch on to our usual device, which is probably higher quality for the sound. So we might have, while you think about your questions, a few seconds off-line.

[Operator]

[Operator Instructions]

So the first question comes from Oliver Reinberg from Kepler Cheuvreux.

[Oliver Reinberg, analyst]

I wanted to talk about inflation pricing. When we start with wage inflation, I think in the last call, you talked about that in March, you haven't seen much so far. So can you just provide an update where you stand? And also, when we think about wage inflation, probably more for next year, at what point in time do you expect to have better visibility? And can you talk to how the kind of process really works in the kind of biggest countries, Germany and France? Is it simply you setting the price or is there any kind of external party being involved?

Secondly, on pricing, I think you provided some color on the last call that around 15% of sales is where you can pass on pricing. While with 40%, it's rather fixed, while 44% is subject to the regulator.

So can you just talk to, is there any kind of action you're taking to push the regulator for potentially more better recognition of inflation trends? Or is it too early? Or is there kind of pushback in terms of that you have been over-earning in the past? So any color on that side?

And with regard to the sales that are fixed in terms of price, can you just clarify what exactly what kind of business is that? And I would assume probably that the hospital tenders are part of it. So what is the average duration of the contracts when they come for negotiation, which allows you to also pass on prices there?

[Mathieu Floreani, executive]

All right. Thank you, Oliver. A long list of questions. So Sami, do you want to kick it off on the inflation?

[Sami Badarani, executive]

Okay. So inflation, inflation first. Yes. I mean, so again, we have assumed in our guidance here around EUR 25 million additional inflation versus what we had in our budget, which was slightly higher than the, I would say, the EUR 19 million that I showed today in comparison to the EUR 9 million in Q1.

So let's assume EUR 23 million inflation in -- for the year plus EUR 25 million, so we're assuming EUR 48 million inflation for the year.

This was assuming 3% now inflation on PEX. As mentioned, there was nothing very significant in Q1 as an incremental inflation on PEX. But a portion of it is within the EUR 9 million.

The -- here, we will see how things develop during the year, right, in terms of the pace -- usually, we have a yearly exercise for the personnel expense increases. We may have to adjust this on -- during the year. We will see how it develops.

And -- but we believe still that the biggest portion of the inflation on PEX will come for the next year. The -- now the process, it varies by country, as you mentioned it, France and Germany. But it remains within the same area where usually, there are yearly agreements. It can be done on -- with local unions or on a branch level.

And so it's very specific country to country. There will be also in Germany, the wage minimum increase in -- starting Q4 or somehow in Q4. And this will probably have an impact or a ripple impact on the rest of the salaries and mostly on the lower salaries.

But all this, what I'm describing here is already somehow captured into the overall number of EUR 25 million incremental inflation getting to EUR 48 million for 2022.

Now for 2023, it's probably a little bit premature to provide a guidance or direction here. Historically, we were at 2%. This one, we are targeting to 3%. So we'll see later in the year what would be the range for next year.

[Mathieu Floreani, executive]

And currently, we have no negotiation started on other clients.

[Sami Badarani, executive]

Yes.

[Mathieu Floreani, executive]

We'll push it further into the year, if anything.

[Sami Badarani, executive]

So this was for the inflation. On the pricing side, the breakdown again, 50%, where we can action prices. And obviously, we have these ongoing reviews and reviews with the countries with the direction that they have been given to increase prices where possible based on the current environment, and this is ongoing.

We are seeing this in -- already in April and some increases in prices. But this is an ongoing -- it cannot come overnight. Obviously, it's a continuous effort within the 36 countries.

[Mathieu Floreani, executive]

And then on the question on how we influence the regulator or I think how we push the regulators, you were mentioning, to increase prices, this is at various stages, depending on the country.

Some have understood and have already increased prices, as we have shown. What you have to remember also is that the regulators are not only regulating us, they're regulating health care. And in health care, they usually have a lot of public hospitals.

So we'll see what will happen, but it's a bit difficult to, on one side, increase the salaries of public hospitals and not do anything on the rest of the health care sector. So we have good, I say, hopes that at some point, there will be a, say, a positive impact. But it's too early to call.

And then you asked the part of the business at fixed price. So that's the regulated one. And then we have also some hospital contracts you were mentioning. Duration of this contract, it's very variable.

But let's say, it can be from 1 to 5 years depending on the nature of the contract. And that -- so that means that we renew, let's say, on average 30% approximately of the contract annually. But that is a bit the same topic, right, because at some point, if inflation would be durable, the health care systems will need to increase their DRGs.

And if that happens, then our hospital customers will also have a different, say, invoicing conditions, which will give us an opportunity to discussions.

[Oliver Reinberg, analyst]

That's perfect. Very helpful. And just on energy, the EUR 15 million upgrade in terms of cost base, is that still a reasonable assumption?

[Sami Badarani, executive]

Yes. No change to this assumption so far based on the trend we're seeing.

[Operator]

And the next question comes from [ Mr. Sinha ], HSBC.

[Unknown Analyst]

Congratulations on the results. I have 2, please. First of all, on the Southeast London project, based on my calculations, I think you are coming up to much higher revenue figures from the initially guided [ EUR 150 million ] per annum from that project. And also, is the margin still slightly dilutive?

My second question is we've noticed that you've completed 90% of your -- of the update of your core equipment. Does that -- could that indicate that we should calculate lower CapEx for this going forward? I guess, that will also depend on the future opening of blood collection points.

And the third question is I appreciate you've stopped reporting attrition numbers, which are hard to measure. But which areas of testing and which countries are the ones that where you're experienced and how you'll come back to business now that COVID testing is going down?

[Sami Badarani, executive]

Can you just repeat? I think that the last -- the #3, that was not super acoustically clear.

[Unknown Analyst]

Sure. So you don't report attrition numbers, but in terms of the comeback of the testing, which areas are the ones where you're seeing the most revival, let's say?

[Sami Badarani, executive]

You mean geographically or nature of tests?

[Unknown Analyst]

Nature of tests and geographic as well. I think both are interesting.

[Mathieu Floreani, executive]

Okay. Okay. So on SEL revenues, do you want to take that?

[Sami Badarani, executive]

Yes. SEL revenue, you rightly pointed out the growth of SEL. SEL is delivering above the expectation in terms of revenue. And we mentioned it that we have this -- we have earned a number of additional activity, while the trust was contracting with additional hospitals.

So this has given these incremental activities that we are seeing here on a running basis quarter-after-quarter. Now in terms of profitability, it's still a dilutive contract, and it will remain dilutive for the duration of the contract vis-a-vis the margin of the group.

And the quarterly profitability, it needs to be looked at over time where we stand. So today, it's still in the -- I would say, in the tens percent, around 10% margin.

And -- but it will evolve positively once the transformation of the operation would have been achieved in a couple of years. So that's the way to look at it. So it would be difficult to navigate quarter after quarter on this. It's more a business plan to execute and the improvement will come over time.

[Mathieu Floreani, executive]

At this point, we had a strong COVID testing with SEL because it's within Pillar 2, testing for hospitals. And that has been a very good one for our margin since the beginning of the contract.

[Sami Badarani, executive]

Yes. But this is in addition to the numbers we show because the COVID is reported in the COVID column.

[Mathieu Floreani, executive]

You want to take the question on the group? On the...

[Sami Badarani, executive]

Yes, on the CapEx. Yes, the CapEx is a good news on the program execution on core lab. This is great. So this is per our expectation. And for the year, I've already mentioned that we are targeting around 9% to the revenue of CapEx.

This -- and then for the future, there will be a reduction of this percentage of CapEx in percentage of revenue. This includes the lease in this level of CapEx in percentage of revenue. But there will be a shift. I mean we still have a number of initiatives.

BCP will increase obviously. It will necessitate some CapEx but also the completion of our IT road map, whether on cybersecurity, whether on the lease conversion, whether on the SAP project or on the D2C initiative also will require some of the CapEx that we need to have. But overall, CapEx should not -- should be contained going forward.

[Mathieu Floreani, executive]

Yes. On your question about which geographies and the nature of tests come back faster. Well, on the geographies, it's still bouncing a bit around, right? We still see that it's not, say, on a cruising normal level all the time. But we have seen strong volumes across the board, right? If you take out the pricing effect, you see in every region that it has been strong. So I would not say huge differences between one country and the other.

And in terms of nature of tests, of course, routine is the biggest component of our activity. And that makes it difficult to see the effect of specialties. And the bet, if you look at it in more details, is that the specialties will be a high contributor in the coming months because we see more serious pathologies as a result of not enough early detection in the past 2 years, which require the specialty test. And although we are the biggest in Europe on specialty test also, we -- you don't necessarily see them showing significantly into the different pattern of growth in the total number, right, if that can make sense.

[Unknown Analyst]

And is it -- just to follow up, so the SEL revenues in the first quarter, I calculated roughly at around EUR 80 million. That does include some COVID revenues or not?

[Sami Badarani, executive]

The EUR 47 million that you see on Page 10 of the presentation exclude the COVID-19. And the COVID-19 is included in the 74 -- in the EUR 450 million. We have not communicated the split of SEL in total.

[Operator]

And the next question comes from Craig Mcdowell with JPMorgan.

[Craig Mcdowell, analyst]

The first one, just on the value of assets that you're acquiring, looking at the EV to annualized revenues, I know it's not a perfect measure, but it's all we have from the outside. It seems that the target multiples have stepped up this quarter versus the prior year from around 1.7x to 2.0x this quarter. Is this a level we should expect to continue? Or was there something unique in Q1? I'll ask a follow-up after.

[Sami Badarani, executive]

Yes. This cannot be looked only on 5 acquisitions. There is a range. It appears to be a little bit higher here. It's fair, but it depends on the type of -- yes, the 8 acquisitions. Sorry, not the 5, year-to-date. It depends on the type of acquisitions and the profitability of that acquisition at the time of the acquisition. So it's not -- 1.72x is within this range.

[Mathieu Floreani, executive]

And in terms of EBITDA multiple, it's fairly stable, slightly up but fairly stable. And so the answer to your question is yes, that will probably be more or less the range to continue with.

[Sami Badarani, executive]

The key criteria is the multiple of EBITDA at N+2 for synergies. And this is the one that fluctuates -- don't fluctuate a lot around a certain time.

[Craig Mcdowell, analyst]

Understood. And then just on -- you mentioned a lot on inflation within your fixed cost base. But just in the variable cost per test, just to be sure that there's no kind of inflators there either in terms of the reagent or testing chips or anything else. Is that something we should be concerned about?

[Sami Badarani, executive]

This is partially captured in the EUR 15 million. There will be a portion of the material expense that will be exposed to some inflation. But it's still relatively limited because a big portion of our material expense is based on contracts, multiyear contracts, and those ones are fixed. So...

[Craig Mcdowell, analyst]

Excellent. And just the final one, maybe a bit bigger picture. But maybe you could speak to what the inflation backdrop is doing in terms of the competitive environment? Or do you expect maybe smaller independent lab competitors to react? Where do you think there's opportunity to win business or either organically or potentially take them out if sort of they face financial distress?

[Mathieu Floreani, executive]

I don't think it will have a material impact. I think it could more have an impact on the regulator to a degree, right, because they don't want to kill all the smaller ones, which might struggle more because they are not protected with long-term contracts like we are on material expenses, as Sami was mentioning or others. So I would rather see it there than in willingness to, say, sell or being differently aggressive. It might reduce a bit their capabilities to invest into their growth, but I don't think it's going to be anything significant.

[Operator]

And the next question comes from [ Alex Thomas, TKO ].

[Unknown Analyst]

My first question is, last quarter, you showed an EBITDA excluding COVID of EUR 517 million. Do you have an update for this quarter? Or should we still consider that the EBITDA margin is around 21%?

[Mathieu Floreani, executive]

Yes. The EUR 517 million and the normalized EBITDA margin at 21%, we presented it for the full year. It's a complex exercise, and so we will not repeat it on a quarterly basis. We'll do it again for next -- we'll see whether we can do it half year, but I doubt we'll -- otherwise, it will be done for the full year 2022. The -- now the trend -- I mean, there is -- there are a number of factors that influence this 21%. It's the level of investment for future growth that we have as well as the inflation.

These, I would say, are the 2 key factors that have probably changed or can change versus what we have presented earlier this year. So I mentioned already in March that the inflation -- the incremental inflation was not factored in this number. So there is a high probability that the 21% with a higher inflation as well, I mean now, will reduce.

[Unknown Analyst]

Do you have a guidance on that number?

[Mathieu Floreani, executive]

No, no. But we have guided the EUR 25 million in additional inflation.

[Unknown Analyst]

Okay. And my second question is more specific.

[Mathieu Floreani, executive]

But I mentioned those 2 factors. At the same time, you need to look at another factor. [ Alex ], we're back on. Sorry, we had another Deutsche -- I mean, an issue with our telecommunication system here, but now we're back on.

To complete my answers in relation to the evolution of the 21%, there are different factors that can favor or non-favor the increase or decrease of this margin. The inflation will decrease the margin, no doubt. The pace of the transformation can go up or down, depending on which -- how much we invest in discretionary on our side.

And the third item is the long-term COVID volume, which we put at EUR 150 million but could be different. And I assume that it's -- probably, we are being conservative here, so there could be some upside. So the outcome of it is difficult to factor. My assessment today is that there will be a slight pressure on the inflation on this number.

[Unknown Analyst]

Okay. Understood. And my second question is more specific on energy and transport. When I look at the energy and transport cost, it looks like slightly higher than, notably, peers in France. Is there any obvious reason why this is the case? And notably on your transportation cost, is it higher in Germany than in France or not?

[Mathieu Floreani, executive]

Yes. No. What is fair in what you are describing is we do see the same -- we do see a geographic variance on the inflation on OpEx, and we see more inflation in the South region than in France, while [ transfer ] have reported a relatively minor impact on transportation cost increases.

[Sami Badarani, executive]

But the base is different also, right? I assume you have that in mind that in France, the business model is that the patients come to the blood collection point, and then we have a limited number of lines connecting to our labs. Whereas in Germany, we pick up the samples at each doctor and there's thousands of them, of course, so the infrastructure is a bit different.

[Unknown Analyst]

Okay. And if you were to compare France and Germany in terms of transportation cost, what will be the difference as a percentage of sales? Is it like double or how much?

[Mathieu Floreani, executive]

This is a very detailed question we need to come back to. I don't have the information for you.

[Operator]

And the next question comes from Hugo Solvet, BNP Paribas Exane.

[Hugo Solvet, analyst]

I have a couple. First, on the 4% underlying organic growth rate that you had in March and conscious about the comp base, which will be a bit higher towards the remainder of the year, what should we think about in terms of underlying growth rates for Q2, Q3, Q4 and maybe against the 3% or above 3% that you highlighted in your long-term guidance?

Second, on attrition, which you did not provide a number, but in Q1 this year, just wondering whether it was due to prioritization of COVID samples or also to absenteeism at testing sites because of COVID?

And last on my end, a housekeeping one. Your long-term guidance assumes 28% tax rate. If I'm not mistaken, given the tax rate was 22% last year, slightly north of 23% in Q1, what should we assume going forward?

[Mathieu Floreani, executive]

Yes. In relation to the organic growth for the remainder of the year, we have -- we are very, I would say, confident in our ability to deliver the 3% plus that we have guided for in our IPO guidance. And continuously, we -- obviously, this is supported by the opening of the BCP.

I mean when you open [ 4 ] BCPs per quarter, 2 or 3 quarters in a row, it adds only, I mean, roughly 0.5 point of growth for the group on a yearly basis. So that would be good, so 3% plus. Last year, we delivered 3.3%. And so this should be similar.

[Sami Badarani, executive]

On the attrition, what caused it, I think we were fairly, say, agile to not have what you mentioned that we would have too much absenteeism and suffer not to be able to serve our needs.

We would rather see it on the other side that some hospitals in the first 2 months were not operating at full capacity, and people were also sick at home and not necessarily going for their normal doctors' consultations or procedures. That would be the effect we have seen. And then on tax rate?

[Mathieu Floreani, executive]

Yes. The tax rate, 24% last year, 25% in Q1. We're keeping our guiding 28%. This is very -- we have a mix of countries and then the COVID-19 has -- we have strong COVID-19 in some specific countries. So we -- and there have been some impact on the adjustment for the tax carryforward losses. And so I -- today, I will keep the 28% as a placeholder for planning purposes.

[Hugo Solvet, analyst]

And just a quick follow-up on my end. Can you maybe shed some light on the D2C initiatives, which you mentioned alongside the 2022 guidance? Any initiatives here? How fast is it growing? Which countries are you rolling these initiatives in?

[Mathieu Floreani, executive]

Yes, it's a bit early to give too many details. But we have picked 2 pilot countries to, say, be in an accelerated mode and then are supporting also countries that were already having D2C activity, and they are usually growing between 15% and 20% year-over-year. But we'll give more color in the coming months. We have an Investor Day on the 21st of June.

Yes. And [ Alex ], I don't know if you're still online. But we have looked at the numbers you asked for, I mean, the transportation percentage of revenue for France is 1.6% of revenue. And for Germany, it's 4% of revenue.

[Operator]

And the next question comes from Jan Koch, Deutsche Bank.

[Jan Koch, analyst]

I also have 3 please. Starting with your new guidance. So how much of the EUR 100 million guidance based on revenue is actually driven by higher expected COVID revenue and how much by other factors? And is it fair to assume that your new guidance implies COVID revenue of roughly EUR 640 million?

And then secondly, I was a bit surprised by your strong underlying performance in Germany. It would be great if you could provide some color on the monthly performance of your German base business. just to get a feeling of the COVID impact in January and the current run rate.

And then lastly, on your last earnings call, you shared with us that you generated about EUR 500 million revenue in specialty testing. Can you speak a bit about the growth and the margin profile of this business, especially compared to your routine testing business?

[Mathieu Floreani, executive]

Okay. Can you start, Sami?

[Sami Badarani, executive]

Yes. COVID revenue, around EUR 600 million-plus. This is what is in our guidance today of EUR 3.1 billion. And so we were slightly above the EUR 400 million when we made the EUR 2.9 billion. It's a very rounded number. The numbers, the increase up to EUR 3.1 billion is 2 factors. It's the incremental COVID on one side and it's our confidence in our underlying business. There is always pluses and minuses that we need to factor. And so this is the reasons why we are showing around EUR 3.1 billion.

And then Germany, yes, we have shown a 4.1% growth in volume in Q1, 4.5% growth in Q1, 3.9 -- here, you need to understand that there has been -- there is no more attrition in the reporting system. And the last year, there were some attrition recorded, and there has been some, I would say, difficulties in reporting the attrition also last year.

So the evolution here on the growth could be also explained by some base comps in Germany. But what we see is a strong volume. So that's, at the end, is a key driver. And we see that we have a higher growth than the market. When we look at -- so we're gaining market share when we look at the various metrics that are published by the different institutes here in Germany. But it was not specifically to be precise on Q1 because the numbers are published a few quarters back. But we have had, I think, now 4 to 6 quarters of market share gains.

And then your question on the specialty test, the EUR 500 million. What is common to all countries is that this is a segment that grows faster than the others. And given the, let's say, the lack of early diagnostics during the pandemic, this should even accelerate a bit further. So this test would grow 5% to 15% to give a wider bracket because it really depends on the specialty and then a bit also on the country.

And the margin profile there, they are usually a bit less automated test than routine. So they're also more expensive. So I would say that the margin would be in percentages, on a rough bet, probably a bit lower than routine on average but very variable by country. But for sure, in terms of absolute euros per test, significantly higher. Did that answer your question?

[Jan Koch, analyst]

Yes. Thank you.

[Operator]

And the next question comes from [ Gabriel Delay, Net Success ].

[Unknown Analyst]

Can you hear me?

[Sami Badarani, executive]

Yes.

[Unknown Analyst]

This is [ Cherul Hawaii ] from Natixis. Just 2 questions on my side. So the first one is on gross margin. So what I see in Q1 is that we got increased about 1.5%. I'm just wondering, how should we think about it because the PCR testing volumes were a record high? So that would -- I would assume that as they have usually low margin, so we should see gross margin deteriorating a little bit, but it was the opposite in Q1. So that if you could comment on that, please?

And the second one is on M&A. So you didn't change your guidance. It's still EUR 200 million that you target, more than EUR 200 million. But then just looking at your cash balance, leverage level, and then what is going on in the industry, so 2021 and this year, some of your peers have been consolidating very aggressively. So should we see some sort of, let's say, well, higher target or revised guidance on that soon?

[Sami Badarani, executive]

So on the gross margin, so here, our gross margin, the -- this is a -- yes, it's a good cash year. It's 13% revenue growth, 15.9% gross profit margin. It's something that we have seen. It's a continuation of the automation of PCR and the reduction of material expense that we have seen there. So despite the price drop that we have, we have a strong margin on PCR in margin.

And then we have also an improvement in our material expense on the rest of the portfolio in the first quarter around 2 points also there. So these combined explain the improvements here on the margin. So when we say we renew the equipment, it travels together with improved, say, conditions.

[Unknown Analyst]

Yes. Sorry, just a follow-up on that. So would it be fair to say once the business normalizes or the credit revenue normalizes, should we expect higher gross margin than it was in 2019, '18?

[Sami Badarani, executive]

The gross margin of COVID was lower than the gross margin of the rest of the business. It's a fair point. There was more consumables for COVID testing and the material expense was historically higher. We have reduced it, but it was still, I would say, slightly higher than the rest of the group.

[Mathieu Floreani, executive]

And on your question on M&A. So the -- we remain very disciplined. But at the same time, you're right to point that we have cash power to move on, say, maybe medium or larger-sized targets. So we have a very strong pipeline. I think when you look at also the diversification of our geographies where we originated from, it gives good confidence that we can, say, do more.

But as I said in earlier calls, we don't want to work on a target here. It's very important to keep the discipline of the alignment between strategy and what you're ready to pay for and what you say the quality of the target you will find. So we are not worried that we can do more, but we just want to see it a bit, the year, progressing.

[Operator]

And the next question comes from Craig Mcdowell, JPMorgan.

[Craig Mcdowell, analyst]

It was just a question on the guidance and what's implied for the final 3 quarters of 2022. And sort of backing it out, given the very strong Q1, the implied EBITDA margin for the last 3 quarters is sub-20%. I think around 18% to 20% by my math. And just wondering what do we attribute that to? Is that the continuing carry of the sort of the COVID labor costs that you want to be ready for? Or is this the run rate that we should expect in the base business?

[Mathieu Floreani, executive]

Yes. Yes, I mean, obviously, we have done the math. So at 24%, it gets you a 19% margin. And at 25%, a 20.5% margin. So it varies between 19% and 25%. For the remainder of the 3 quarters, 20.5%. So all this, again, is driven by the factors that we have provided for the range of the overall guidance for the margin, which is the level of COVID can vary. As we mentioned, we will receive round numbers. The level of investments can change also. So those are the 2 key factors that can influence the mix of activity and the level of investment we do.

[Operator]

And we haven't received further questions at this point. I will hand back to the speakers.

[Mathieu Floreani, executive]

Yes. We can still wait for a few seconds to see if anyone has or struggling to log the question.

[Operator]

And we have received one more question. The next question comes from Grace Lee, Jefferies.

[Grace Lee, analyst]

Could I ask 2 questions? First, on the margin impact. I think you mentioned premature about '23 margin guidance. But we're just curious to hear your thoughts on kind of the -- at least the phasing of those impacts to your margin for Q2 to Q4. Is it -- we're just curious to hear that.

And the second part is about your strategy to keep the COVID capacity. How quickly, for example, in terms of time, can you change from the sort COVID testing mode to sort of [ none ] your underlying business? And what is that sort of in terms of margin impact that we should be sort of factoring in our Q2 to Q4 sort of going forward?

[Mathieu Floreani, executive]

So for the margin, the 23% for '23 is not -- it has never been our guidance. I mean, the 23% is a midterm guidance provided at the IPO. And on this one, I mean, it was on the basis of the 20.8% in '19. And this one, the 23%, also still assumed a certain level of COVID in it on the long term, and this will be delivered over time.

And today, despite the inflation, we still believe that this can be delivered. The timing of it could be slightly longer to get there, but that's our current view on it. The reasons for that is, again, once you deliver organic growth at a certain level, you offset price and inflation.

You may have more inflation, which will reset a little bit the base. But then with a new starting base, you can gain market margin over time based on our business equation, which is volume leverage.

[Sami Badarani, executive]

And then your question on COVID-19 capacity, it's not so much how fast we can do it, right, because adapting our resources is -- can be quite fast. And remember that we have a lot of -- in our COVID-19 resources, a lot of temporary fixed-term contracts in place. So this goes with fast adaptations.

But the question for us is more on how much do we keep at a base level and how much, say, very trained people do we keep in that mix. And that is what can have an impact on the margin. But also, if you look at the current levels, right, where everyone has declared COVID has finished, we are still in the range of 50,000 a day. And if you run the math, you will see that if you would consider that as a stable post-COVID number, you would see that we are probably a bit conservative with our EUR 150 million that we consider will remain for the longer term. So we're definitely prepared for that level and perhaps a bit more because we anticipate that we might have another variant within the fall where we need to be -- we'll need to be able to react fast.

[Operator]

And it looks like we haven't received further questions. I will hand back to the speakers then.

[Mathieu Floreani, executive]

All right. Thank you. So we are monitoring the screen in case someone wants to jump in before we are completely finished. So thanks for your listening and the active questions. For next time, so our next, as I mentioned already, say, meeting is an Investor Day, the 21st of June. And that will take place in Barcelona, so please register if you're interested.

And then we will present the full first half of the year at the 11th of August of this year, 11th of August. And with that, I wish you a good continued rest of the day. Thank you.

[Sami Badarani, executive]

Bye-bye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This conference has been concluded. You may disconnect.