Synlab AG

XETRA:SYAB

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, welcome to the SYNLAB Q3 9 Months 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 today's conference. Please go ahead.

[Mathieu Floreani, executive]

Thank you. Good morning, good afternoon to all, and welcome to our call. So we will present today our Q3 and 9 months 2022 results, as usual, together with Sami. I'm very pleased to report today another strong quarter in a very challenged macro environment. And this again demonstrates the resilience and critical nature of our activity.

So we can start with our financial highlights on Page 5. And starting with the first 9 months in Q3. So we continue to see strong growth of our base business with 4.1% in Q3, also resilient COVID testing of EUR 105 million in the summer period, inflation impacting our margin and strong cash generation. So overall, a strong Q3. We're also happy to confirm our 2022 guidance of EUR 3.2 billion revenue with 24% to 25% of AEBITDA margin. And finally, even though it is still very early in a volatile environment, we are providing our 2023 guidance with around EUR 3 billion revenue at 18% to 20% AEBITDA margin.

Moving to Page 6 and our operational quadrant. The summer here has, again, continued good execution across our 4 pillars and starting with the first one on organic growth. So the organic growth is stable at around 4%, and that's similar to Q2 with a confirmed positive price development in both South and North and East regions. We continue to progress our retail initiatives with 21 new BCPs opened in Q3 and also a renewed digital offer in Estonia, for example.

On our second pillar of operational excellence, we progressed well also with SALIX delivering EUR 18 million of savings year-to-date, and continued work also on our infrastructure like what we do in pathology or in -- on our IT systems. And finally, important also, the workforce reductions continue in order to adapt to the needs.

M&A, our third pillar. So there are 19 acquisitions completed year-to-date balanced in 8 countries for around EUR 139 million EV, representing EUR 79 million revenue. And to be noted, here we entered Chile with the first acquisition and also sold our U.K. vet activity.

And finally, on the fourth pillar of employee engagement. We got awarded as top employer in Estonia. We continue also our journey of training and completed our double materiality assessment on the ESG front. So strong execution on our For You transformation program.

Moving to Page 7. I want to illustrate here our dynamic portfolio management. We indeed sold our U.K. veterinary business with a very high value creation. The business is about GBP 13 million in revenue in a U.K. market where our vet clients are fast consolidating into substantially large platforms. We continue to operate and strengthen our continental vet activity, which is about EUR 30 million in revenue.

And moving to Page 8. Our usual update on COVID-19 testing. And the key message here is a sustained level of activity in Q3 with testing having now moved into the routine prescription of general practitioners and hospitals. So we remain comfortably above our long-term business case here.

And now I hand over to Sami for the financial section of today's presentation.

[Sami Badarani, executive]

Thank you, Mathieu. Good afternoon, everyone. I'm very pleased to walk you through the Q3 and the 9 months 2022 financial performance of the SYNLAB Group. These are the nonaudited SYNLAB AG financials.

Let's start with the revenue on Page 10. The Q3 of '22 reported revenue stands at EUR 698 million. It's a negative 18% revenue variance year-over-year and the pro forma revenue, as usual, includes the additional revenue as '21 and '22 acquisitions had been consolidated on the 1st January of each year. We have EUR 214 million of revenue reduction from COVID-19 testing, EUR 7 million from price and EUR 207 million from volume.

Q3 2022 COVID-19 organic revenue stands at EUR 105 million. 2.3 million PCR tests performed with a price of EUR 42 per test. Prices have been stable quarter-to-quarter, but price will continue to reduce gradually. EUR 23 million of underlying organic growth, 4.1% of organic growth. Q3 '22 price is up 1%, reflecting the positive effect of price indexations in several countries from the Northeast and South segments. The Q2 volume is up 3.1%. Volume growth is improving from Q2 2022, but still lower than usual, reflecting some continued softness in hospital business, some residual impact of the Omicron wave on non-COVID testing activities. Mathieu will provide more color in the business review of the growth by segment, and it's the most visible step in Germany, where we had still high volume of COVID-19.

We have a positive FX impact in Q3 with the strength of the Swiss franc and the Mexican peso, more than offsetting the weakening of a few other emerging currencies. Overall, EUR 10 million revenue from the 14 acquisition completed in the 9 months 2022.

Page 11, the 9 months revenue page, the same 4 elements to explain the revenue development. COVID-19 testing EUR 720 million of organic revenue in 9 months 2022. We still have EUR 5 million in acquisitions, so EUR 725 million in total. 16.1 million PCR tests performed at an average price of EUR 42 per test. The underlying organic growth, excluding the Southeast London contract, which started in Q1 last year -- in Q2 last year, stands at 3.5%, 6.3% with the SEL contract. Favorable FX gain, EUR 22 million contribution. The 2022 acquisition, EUR 33 million of pro forma revenue from 9 months 2022, 1.1% growth. Overall, the 9 months reported revenue stands at around EUR 2.5 billion, an 8% reduction versus the 9 months of 2021.

Page 12, the EBITDA performance. The September year-to-date '22 reported adjusted EBITDA stands at EUR 663 million versus EUR 907 million in 9 months '21. The EBITDA -- adjusted EBITDA organic evolution explained the bulk of the variance. EUR 283 million organic EBITDA drop. EUR 213 million comes from price drop from COVID-19, EUR 6 million positive from underlying business. We have EUR 41 million inflation on a year-to-date basis, 2.9% negative overall percent on the base business. Strong inflation on OpEx around 5%, mostly energy and fuel and fuel are double-digit impact. Limited incremental inflation on PEX at 2.7% so far, and we have limited inflation on MATEX 1.7%. Mostly consumables and external labor as our reagent costs are, for the most part fixed with multiyear contracts. Overall, we have an acceleration of inflation. It was reported at EUR 9 million in Q1, EUR 14 million in Q2 and EUR 18 million in Q3. Q3 inflation is at 3.8%, again on the base business.

The rest of the business is at negative EUR 35 million. It includes, obviously, the negative FX impact of the COVID-19 volume drop and the cost of maintaining sufficient COVID-19 capacity partially offset by the positive impact of the organic growth and the SALIX benefit of EUR 18 million. The reduction of COVID capacity is well underway. And to illustrate the progress, we started the year with around 3,000 FTE dedicated to COVID-19 activities. And at the end of September, the FTE dedicated to COVID is just below 1,000. Our target is to bring back the level of productivity of the business at the same level than pre-COVID.

The year-to-date EBITDA margin of the group stands at 26%, 2.5 points lower than in H1. The Q3 '22 AEBITDA margin stands at 19.3%, and it's in line with our implied H2 '22 guidance of 18% to 20%. Again, our overall year guidance is 24%, 25%, and we are very confident to achieve this guidance. And when we compute with our H1 performance, the H2 implied guidance, it was 18% to 20%. And at 19.3%, we are above the midpoint of this guidance.

Let's move now on Page 13, robust earnings. The bridge from EBITDA to net profit and from reported to adjusted financials. EBITDA first, nominal adjustment of EUR 7 million, acquisition-related costs, including PMI costs. The adjusted operating profit is at EUR 487 million. It's down EUR 274 million from 9 months '21, again, COVID-19 price and volume reduction. The adjusted operating profit excludes the EUR 173 million of goodwill impairment in Germany recognized in the Q2 quarter. The net finance result is lower than the EUR 21 million interest expense, thanks to the gains from financial instruments revaluation. Tax line is overall decreasing compared to 9 months '21, but adjusted effective tax rate is up at 27%. It reflects a prudent approach on how to activate prior tax losses in our German tax unit.

The 9 months 2022 net profit includes EUR 71 million of profit from the disposal of the U.K. veterinary testing business. The 9 months '22 adjusted net profit stands at EUR 332 million, down EUR 182 million year-over-year. Adjusted EPS is at EUR 1.5 per share. It would translate already to EUR 0.30 per share of dividend, assuming the guidance of 20% adjusted net profit. The goodwill impairment and the profit from the U.K. veterinary testing business do not impact the adjusted net debt nor the dividend calculation.

Moving now to Page 14. Strong cash flow in Q3. The EBITDA translates into strong cash flow generation. Receivables, DSO is at 54 days, down 8 days compared to year-end. The normalization of the working capital is progressing post Omicron peak, even though it's not yet completed. EUR 151 million tax payment in 9 months '22. It's a big number. Net CapEx is increasing, EUR 54 million year-over-year as planned, including leases. Again, retail expansion and IT are the biggest contributors. It's also impacted by inflation related lease increases. EUR 339 million of unlevered free cash flow, 51% conversion of EBITDA.

Next page, strong balance sheet. Again, our balance sheet of the group expressed with a capital employed and capital resource view. The change versus December is mainly driven by the addition from the 14 acquisitions completed in the first 9 months. The goodwill impairment in Germany recognized in Q2 and the normalization in progress of the working capital with the reduction of COVID activity. The net debt of the group, including EUR 530 million of lease -- EUR 630 million of leases is now at EUR 1.4 billion, down EUR 214 million versus December '21, of which, EUR 84 million from the net proceeds of the disposal of the U.K. vet business. The group has a strong balance sheet with EUR 660 million cash on hand and EUR 500 million of undrawn RCF. The return on capital employed stands at 15.6% at the end of September.

Next page, reduction in net debt and stable leverage. The adjusted net debt is at EUR 1,454 million at the end of September. Adjusted net debt reduction reflects the strong unlevered free cash flow. The EUR 90 million spent in acquisition, offset by the EUR 84 million net proceeds from the disposal of the U.K. vet business. The dividends paid to SYNLAB AG shareholders and EUR 15 million share buyback to cover for management incentive plan and employee purchase plan. The last 12 months pro forma AEBITDA stands at EUR 971 million. The leverage ratio debt-to-EBITDA stands at 1.5x, up 15 basis points compared to year-end '21 and stable compared to H1 2022.

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

[Mathieu Floreani, executive]

Thank you, Sami. So we indeed have a comfortably strong financial situation. Now let's come indeed to our main geographies. Page 18, starting with France. So 22% decrease in Q3 revenue, 9 percentage points decrease in AOP, and this is mostly due to a reduction in COVID-19 contribution, both on volume and price. Underlying flat revenue in Q3 made up a reasonable volume growth of 2.3%, offset by a sharp price decrease. And here, we still have 2 components year-to-date. The normal price decrease as per the 3-year agreement, which was 2.5% starting in January 2022. And an unfavorable comparison base in Q1 of this year as the 2021 price decrease started later in April.

To be noted also a further expected COVID PCR price decrease, which will impact Q3 and some inflation weighing about 2 percentage points in the margin. The discussions for the new price framework are not final yet with a tabled 5.5% from the regulator. And here, of course, regional scale is a strong driver of profitability and M&A is a potential lever.

Page 19, Germany. So 4% revenue increase in Q3, plus 7.5 percentage points increase in AOP. So very strong margins despite some inflationary pressure. We have a flat underlying revenue year-to-date with minus 5% in Q3, driven by an unusually weak volume. And here, we have to say the German market has still not normalized. COVID-19 prevalence and testing are strong, and this hampers hospital and regular GP activity, in a context where our client base is very stable. Inflation is still fairly low, below 2 percentage points impact and agreements have been reached on salaries for 2023, combining one-off payments and an increase.

Page 20, South region. So minus 14% revenue evolution in Q3, and a more marked reduction in AOP due to the sharp drop in COVID PCR testing volume and some inflation. 5.6% underlying revenue growth in Q3. It's driven by robust volumes across the board and a sound positive price also. Switzerland recorded a weaker volume, being also hit by the August 1 price decline of 10%. And here, as a reminder, we estimate the impact to be around EUR 8.4 million on an annualized basis. Inflation is a bit higher in this segment, South, reducing AOP by 3.1 percentage points in addition to the COVID cost of ramp down. Network expansion continues also here with 12 BCPs opened in Q3 and 3 bolt-on acquisitions closed also in Q3.

Page 21, North and East region, minus 30% in Q3 revenue and a marked reduction in AOP, driven by the sharp drop in COVID contribution and the COVID cost of ramping down. The SEL contract margin dilution and inflationary pressure, which impacted the margin by 3.5 percentage points. The inflation is offset to a degree with a continued strong positive price effect of 4.5% in Q3 and price indexation being mostly in the U.K. Very strong volume growth across most countries, resulting in 12.6% underlying growth in Q3. We continue also here the network expansion with 9 BCPs open.

So in conclusion to this, our first 9 months in Q3 confirm our 3% plus underlying growth target despite the still disruptive effect of COVID in some countries as we saw in Germany. Overall, volumes have been growing in line with expectations with now also a positive price effect and the combination of the 2 proves once again the very resilient nature of our activity.

Now let's move to the concluding section of today's presentation, which is the outlook on Page 23, we confirm the outlook for 2022. So just to repeat, we confirm this guidance revised in August of group revenue to be around EUR 3.2 billion with an adjusted AEBITDA margin expected within the 24%, 25% range. Priorities for investments for '22 unchanged, prioritizing future growth with CapEx and M&A, while paying out 20% of adjusted EPS in dividend. We have a bit of a technical issue here to move the slides. I hope you can see them.

And on Page 24, we provide an outlook for 2023. So given the many uncertainties in the macro environment, providing this outlook for 2023 at this stage, is, of course, very challenging. We target for 2023 a revenue of about EUR 3 billion -- so EUR 3 billion revenue and an AEBITDA margin ranging from 18% to 20%, while our M&A spend is expected stable at around EUR 200 million.

This relies on assumptions of 4% underlying revenue growth, about EUR 250 million COVID-19 testing revenue and an increased SALIX cost-saving program in a context where the evolution of inflation is still very uncertain. So in summary, once again, the company is performing well, delivering on the commitments and strongly positioned for the future.

This concludes our presentation for today. So thank you for listening, and we now open the floor for questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Blanka Porkolab from Barclays.

[Blanka Porkolab, analyst]

It's Blanka Porkolab from Barclays. I have 2, please. Could you walk us through the bridge from your margin guide in 2023 of 18% to 20% to 23% over the medium term? What are the key puts and takes and what is the time frame in achieving this? Is it 2025? Or is it pushed out further?

And then my second question is, do you still expect EUR 800 million worth of COVID testing revenues for this year, that implies a sequential deceleration in Q4? And what gives you confidence on the EUR 250 million in 2023?

[Sami Badarani, executive]

Okay. So I will try to respond to those 2 good questions. The first one on the long-term margin. I mean, this has been reconfirmed at our Capital Market Day in June, and where we have presented different scenarios of inflation impact on the short term where our margin will reduce from our normalized margin of 21%. And at that time, we have reconfirmed that despite the short-term drop of -- in N+1 and N+2, we would be able to recover the 23% on the long term based on the 2 assumptions. First, we are able to unlock some productivity in the group, which are not easy to unlock on the very short term. And second, that on the midterm, the pricing will be aligned with any inflation on the basis that we have a lag between those 2 today, but this will be catch up in the future.

So there is no change in our model, which remains a major -- whatever the starting point is in normal inflationary environment, not as we as the one we are experiencing now. We have a volume leverage as we have any incremental volume, and we have a stronger volume today. If there is one thing that has changed since the Capital Market Day is a 3% plus volume or organic growth that now we have rounded to 4%. So this is a positive development here. The -- so that's the point on the margin for the long term. And long term, it has been clarified at the Capital Market Day is 2027.

The -- for the second question in relation to the COVID activity. Yes, EUR 800 million is the current view for 2022. It implies around EUR 25 million per month. And this is the latest rate we have been going through in starting September. So we're comfortable with this so far. For next year, we've made an assumption of EUR 250 million, which is fully aligned with our IPO case, the one we had back in 2021, where we said that in 2023, we'll be around EUR 230 million of COVID revenue, which is a sequential drop of the activity. And this EUR 250 million represents 15% of the peak activity we had in 2021. And the only probably change we had versus the IPO case is that the prices have been a little bit higher or maintained at a higher level than the assumption we've made at that time.

[Mathieu Floreani, executive]

And I would say beyond the numbers, what is important also is that the assumptions we had made at that time that the mass testing would probably win, but you would have the practice of the test trickling down into the normal routine health care activity at this point is fully confirmed. So there is no reason to change what Sami mentioned, right, we're comfortable.

[Operator]

Our next question comes from the line of Oliver Reinberg from Kepler Cheuvreux.

[Oliver Reinberg, analyst]

And I'd also like to come back to this midterm guidance. Thanks for confirming it for 2027. I'm just trying to think about the phasing here. I mean if I look at your guidance for 2023 and if I would rebase it to EUR 150 million COVID sales, I think the midpoint of the margin guidance for next year will be rather 18% than 19%. That basically means there's 500 basis points margin improvement over 4 years. So can you just talk about the kind of timing? Do you expect this to be kind of straight line? Or will this be very back-end loaded? First question.

The second just on funds. Can you provide some kind of color in terms of the timing for this proposed 5.5% of price cut? When will this be finally decided on? And if it will stay at 5.5%, what ability do you have to offset this? And what would be a reasonable AOP margin assumption for funds for next year?

And the third question, please, just for modeling purposes. Based on your guidance, Sami, can you just provide some kind of color what is the reasonable assumption for DNA ex-PPA for interest expenses, including leases, tax rate and CapEx, please?

[Sami Badarani, executive]

Starting from the first question. The -- again, the recovery or the achievement of the long-term guidance of 23% that was communicated at the Capital Markets Day. At that time, when we communicated, we were talking about normalized margin going from 21% to 23% at one point. Here, we're talking -- your starting point is 18%, 19% and with the assumptions that you have made that if we reduce by -- to the long-term COVID activity, we lose an additional 1 point of margin is fair, but it's not necessarily the normalized margin. In our current margin for next year range, we still have a number of items which are not into the normalized activity. We still have ramped down cost, and we still need to, I think, address the lack of productivity or the -- bringing back the businesses with productivity pre-pandemic.

So this has an impact on our margin next year still. And then we're still investing heavily into these 2 items, the D2C activities development as well as the transformation of SEL, which have an impact on our margin. So it's very difficult to necessarily assume that this is all normalized activity.

Now again, the model is volume leverage. So if our volume goes up and we are able also to update to align our prices with our inflation, there should be no -- this is a model where we will be able to improve our margin.

Now for France, I mean, as Mathieu mentioned, the -- every day we -- the negotiation is ongoing. So it's very difficult to -- we've made an assessment where we have taken the conservative view of the 5.5% negative impact for us in 2023. We don't know yet when it will start. Is it January 1, is it April 1, it's a one-off or it will be on all the activity, we -- it's still unknown. So I mean, we have taken a conservative assumption here with the 5.5%. And obviously, it's a relatively new information. It has increased versus the prior communication we had with you.

So I mean the team in France is working their case and for 2022, and we don't have it yet. We are in the middle of the budget review. So I will not be able to explain the impact on their AOP margin yet, how much they will be able to recover and what is the volume assumption also that we'll have next year.

Now on the CapEx and lease impact, we usually -- we are at around in last year and this year around the 9% cash impact. So the D&A should increase in percentage of revenue year-over-year and towards these percentages, that's the current high-level assumption that I can give you.

[Oliver Reinberg, analyst]

Super adjustment tax rate and net financial results for next year?

[Sami Badarani, executive]

On tax and net finance cost. So on tax, we have the -- we have no change to our usual parameter that our normalized tax rate is around 28%. We were at 27% year-to-date, but this is the prudent assumption. And on the net finance cost, our net finance interest -- the interest cost for us is at 1.9% at the end of Q3, and there is no significant change. Just to note that a big portion of -- half of our debt is hedged in terms of fixed versus variable.

[Operator]

The next question comes from the line of [ Carol Tali ] from [ Natixis ].

[Unknown Analyst]

Just I would like to go back against the France and the ongoing discussions, as you said. Just I think I also read that actually the budget for 2023 has been already voted or kind of implemented by the government. And so just to confirm that it's really still ongoing or it has been already finalized?

[Mathieu Floreani, executive]

Yes, technically, you're right. It has been voted by the Senate Monday during the night at this assumption of 5.5% one-off, which is a departure from the past and more positive. The fact that it's one-off. But there are also some ongoing actions that the industry is taking and what we have seen in this, say, process is that it has been, let's say, less linear than usual and with ups and downs and stops and resuming. So that's why we are a bit cautious to say the negotiation or the discussions might not be fully over.

[Unknown Analyst]

Just referring back to the 2019 when was the last vocation of the P&L agreement. Back then, that the industry participants were also up despite for the result and the one of the, let's say, actions that they took was some sort of strikes. Yes. So -- and just trying to assess you, in-house, for example, do you see a potential strike as significant to your 2022 guidance?

[Mathieu Floreani, executive]

Yes, it's -- so first, it's one of the considered action. And the answer is no.

[Sami Badarani, executive]

We're still within the 3-year agreement today. So in any case, whatever negative impact it has on the volume activity for this year, will be catch up as a true-up for the 3-year contract because then the prices will have to be adjusted.

[Unknown Analyst]

Okay. And just one more question on other countries. So for 2023, do you see some -- certain countries where we might see potentially some significant tariff revisions?

[Mathieu Floreani, executive]

At this point, I mean, we have to be -- it's forward looking here. We have to be cautious, right? But what -- we don't have any knowledge of discussions of anything being discussed that would be significant. You can always have one region in Italy doing this or that, but that is not what I understand your question is right. Anything significant, we have no information about at this point. And we don't expect this to happen.

[Unknown Analyst]

And just the promise, the last one. It's on wage for 2023? How might you see the wage inflation next year?

[Sami Badarani, executive]

So this is still being worked. There is no final number here as we are reviewing the budget. But I mentioned earlier for Q3 year-to-date that we had only 2.7% inflation and -- but probably the inflation on PEX will be higher next year. And the range is more in between, I would say, 3 and 4 max that would be the range overall for the group.

[Operator]

Our next question comes from the line of Grace Lee from Jefferies.

[Grace Lee, analyst]

Could I ask 2 questions, one on margin and the other one on pricing. So one on the margin side. Can I just go back to your sort of CMD illustration example? I think that was really helpful to understand sort of moving dynamics. Can you help us to bridge that 18% to 20% '23 margin? How that inflation assumptions that you sort of laid out at CMD? How much of that has changed? And where do you see further pressure in terms of those inflation further increasing in your assumption? .

And I think, I guess, the second part of that question, if I could add. You are still including sort of material EUR 250 million COVID revenue in your '23 revenue guidance. So is it fair to assume excluding that on an underlying basis, margin range will be lower than 18% to 20%? I'll follow up a second question.

[Sami Badarani, executive]

Yes. inflation, I mentioned Q3 is a bit higher. So we have around 3.8% inflation in Q3. And inflation next year will be in this range around 4% overall for the group. And so if you compare it to the assumption used in the CMD scenarios were slightly higher, but this is already baked in the 18% to 20%. So that's the answer for the point.

And the EUR 250 million is the total number of COVID that we are planning for next year. In our long-term view, we will keep EUR 150 million of COVID. That means that the difference is EUR 100 million that will have an impact on the margins, and we estimated at around 1 point.

[Grace Lee, analyst]

Okay. Great. I guess in terms of sort of the -- just to follow up, the inflationary pressures in terms of buckets of where you highlighted, is it fair to assume what should you see in the Q3, that will be broadly where you see the most pressure?

[Sami Badarani, executive]

The pressure we evolved. I mean -- and on the long term, the inflation, probably I will use your questions to react to it to link the different topics here. The inflation today has been on energy and fuel and limited on PEX. We have limited on MATEX. For next year, we probably have more PEX inflation. But what would be the inflation by year-end next year on the fuel, nobody knows what will be the fuel price. And -- but there is probably the assumption that those prices on the long term will stabilize. So at one point, we'll have a reverse impact of the fuel in 1 year, which will help us to improve our margin.

Now the inflation has increased gradually in Q1, Q2, Q3. And if I mentioned, that will be around 4% next year that, it will still increase a little bit in the subsequent quarters.

[Grace Lee, analyst]

Okay. On pricing, we are hearing also pricing negotiation has been challenging on the Germany side as well. Can you share sort of your insight than what you see in that market and what's included in your growth assumptions?

[Mathieu Floreani, executive]

You probably referred to pricing negotiations in the hospital area because to my understanding, there is nothing ongoing of any significance, I mean, different from the normal on our industry.

[Grace Lee, analyst]

Okay. But you are exposed to hospital sector a lot in Germany. So could you comment on that?

[Mathieu Floreani, executive]

No. Actually to clarify, they are negotiating and I think, have already received something like 5% increase. But this is -- it's not my specialty. So I cannot be, say, 100% precise. But this is fairly rather good news for us that they are able to increase their prices to the final patients, right? So that's rather positive for us than anything else.

[Operator]

Our next question comes from the line of Hugo Solvet from BNP Paribas.

[Hugo Solvet, analyst]

I have two, one is follow-up on the negotiations with the French regulator from various press articles suggest that the French regulator is also looking at 44:38 [indiscernible] in 2024, 2026 period. Can you comment on that and what impact of that, if any, is included in your long-term margin assumptions?

And second, following the impairment that you passed on the goodwill for the German business in Q2 and further increase in interest rates, have you recently run other impairment tests on other regions? Or given that if I'm not misunderstanding this was triggered by -- or done by your auditor when are the next test plan for?

[Mathieu Floreani, executive]

So on France, yes, I mean, as I said, it has really not been a linear discussion. At this point, we are in an annual type of situation, not a multiyear plan. So there have been discussions of having decreases as one-offs for the future, which, again, is positive for us because it doesn't mean reducing the envelope but leaving the growth in it. So it's really -- it's way too early to call. And I suspect that also it will depend on inflationary pressures that will be measured in the year '23. If they would confirm that for '23 it's just a 1-year agreement or a 1-year measure, during the year, they would also have to look at what's happening in inflation. So I think it's too early to call at this point.

[Sami Badarani, executive]

Yes. For the impairment, this is part of the normal closing cycle of the year. We are working through the budget also a multiyear plan. And so we'll have our models updated with the latest WACC early January. So we will fine-tune the view on the impairment at that time. So it's more a 3-year discussion.

Now as mentioned in Q2, having done an impairment in Germany means that means that there is no more headroom in our German activity. And if there is a deterioration of the WACC, there will be mechanically, as mentioned, our reporting in Q2, an adjustment again in that full year. But this, again, will be pure mechanic and accounting, and there is no -- again, reading to be made on this on the strategy, on the acquisition of the bolt-on and on our model. So it's pure accounting, and it's as already mentioned, excluded from the adjusted number.

[Hugo Solvet, analyst]

Okay. And one follow-up, if I may, on the declining volumes in Mexico. You did not comment on that. I guess I missed it. Can you give some more color, please?

[Sami Badarani, executive]

Can you repeat the question because what is Mexico at this point?

[Hugo Solvet, analyst]

You mentioned in the presentation declining volumes in Mexico. I was just wondering what's been the driver for that?

[Mathieu Floreani, executive]

Yes. We stepped out of -- in Mexico of one hospital contract. You remember we just took over the business. So we also apply the same discipline in terms of some profitability hurdles and so on. So that's the reason.

[Operator]

Our next question comes from the line of Jan Koch from Deutsche Bank.

[Jan Koch, analyst]

I would also like to start with your EBITDA margin and pick your brain on the potential inflationary impact on your margin in 2024. At your Capital Markets Day, you mentioned that you expect the margin drop to happen next year. But you also mentioned that if the inflation remains elevated, your margin could be further hit in outer years. And if we were to see an inflation in the high single digits next year and no meaningful reimbursement rate increases, would you be able to show any margin expansion in 2024? I understand that it's quite early to speak about specific numbers, but any comments would be appreciated.

And then secondly, I was a bit surprised by the strong margin in Germany. Can you speak a bit about the COVID activity you have in Germany? And how much of this is backed by contracts? And should we expect a sharp decline here next year?

And then finally, on your vet business, you sold in the U.K. Can you tell us the margin profile of this business? The implied transaction might look highly attractive. Could you achieve similar multiples in other regions? And if so, would you be willing to sell your remaining that business?

[Sami Badarani, executive]

Okay. So inflation for '24 is, I think -- I mean, we're already compared to the average companies reporting in '23. So I will pass on this question and wait a little bit longer because it's too early to say what will be the inflation in 2024. It doesn't change the business model. The only thing. On the -- so this is my job for today.

On the second question.

[Mathieu Floreani, executive]

The strong margin in Germany. So we don't have COVID-19 contracts in Germany. It has completely trickled down into the normal health care activity for the very vast majority. So no risk, say, like of contract loss for next year. And at this point, it's very, very resilient volumes. And vet...

[Sami Badarani, executive]

No. Vet -- I mean, yes, you're right. You have noted the very nice accretive transactions that we have done in the U.K. And so far, we're still investing in vet in other countries. As Mathieu mentioned, we have done a recent acquisition in Germany. But we will continue working and we will manage the portfolio. That means we'll create value where we can and develop those businesses where we can at the same time.

[Mathieu Floreani, executive]

And that remain open. This is really the dynamic portfolio management, right? We remain open to look at where we are, where, say, the dynamics of the markets are and then assess where we have maybe lack of scale or where we can either consolidate with bolt-ons or to the contrary rather exit and sell. So it's difficult to predict for the continental part in the future, but we will remain a very, say, dynamic in how we look at it.

[Operator]

[Operator Instructions] And our next question comes from the line of Sezgi Oezener from HSBC.

[Sezgi Oezener, analyst]

One question I had on total M&A spend with EUR 90 million growth and after actually your divestment, you seem to be almost at nil for 2022 versus your budget up to EUR 200 million. Does this point to some conservative or general back off targets in the market?

And my second question will be on France. I'm actually surprised to see in your last call, you had actually voiced your hopes perhaps of a positive renegotiation of the pricing level and the amount that came is considerably below that. Does this -- is this going to apply all across the board? Or do you think you would be able to balance part of this out with out of money -- out-of-pocket services to retail customers?

[Mathieu Floreani, executive]

Thank you, Sezgi, for your question -- on questions. On the M&A, it's absolutely not a lack of targets. We are always selective. And at this point, the deal flow is absolutely not a question, not a problem. It's what as usual, right? We need to have, say, a good strategic fit, reasonable financial conditions and capability to integrate in good conditions. So as we have always said, right, M&A for us is always a multiyear view, right? You rather should look at EUR 1 billion over 5 years, then exactly EUR 200 million each year. At this point, there is no -- nothing we observed that would give us any worries about the capabilities of doing this.

And then on the France, capability with out-of-pocket, probably not. It's quite limited market there. So it might change a bit in the future. But also, of course, price is one component, but you also have to look at volume, right? And the government in the same token has asked, say, the whole health care practitioners to also put much more efforts on early detection and prevention, which means a push on our volume. So we'll see how this whole, say, components pan out at the end. But that would be the view here.

[Sezgi Oezener, analyst]

So the next time this could be reviewed would be in 2 years or would be further down the line? As we always talked about structure of the sector with smaller players having less stamina against price decreases, how do you expect the situation to evolve in the long run?

[Sami Badarani, executive]

Yes, this -- I mean, as I mentioned earlier, it's too early to call, right? At this point, we are on a one-off price decrease, which means that the year after, to be specific, right? One-off means that you take a savings in the year '23 and then the base -- the starting base of the year after is the same price you had end of '22 when you looked at it, right? So it's not in steps down.

So it's too early to say what will happen in the outer years. But you're absolutely right that whatever is happening has an impact on still a substantial part of smaller players. So there will be an impact on the policy should they want to push it further, and it's probably not very sustainable. Because at the same time, the same government has communicated very strongly on improving health care as a result of the, say, realization during the pandemic.

[Operator]

Our next question comes from the line of Oliver Reinberg from Kepler Cheuvreux.

[Oliver Reinberg, analyst]

Three in fact, if I may. Firstly, on the profitability of source in Northeast region. I mean this came sharply down basically to mid-single-digit percentage rates now. Can you just talk to what extent is that a concern? I understand that there's COVID sales decline, ramp down costs and OPEX inflation, but is that a kind of reason for concern? That's question number one.

Secondly, the margin guidance for next year is quite wide, in particular, considering that you gave a specific COVID number. So can you just mention what are the kind of 3 key variables that would lead you to move towards the lower and upper end, I guess, personnel cost inflation in France are 2 items, but if you can just talk about the top 3 items and probably also providing ranking?

And then third question, if I may, just in pricing. In your assumption for next year, you talked about a kind of positive pricing environment or more positive going forward. Can you just provide any kind of example where you've seen favorable pricing indications already? I bear in mind that obviously, only 15% of your business is subject on pricing where you can influence it yourself.

[Sami Badarani, executive]

Okay. Profitability, South and North and East, fair point, I mean, Q3 is low. It's impacted by a number of one-offs. I mean it's a long release, so I don't know whether we need to go there. So these are not the normalized margin, I would say, for those 2 segments. And so there is nothing here alarming for us in terms of point.

Now on the 18% to 20% margin for 2023, the range, I mean, obviously, it's similar to this year in second half. So first, it's -- and the second point is what drives the range. I mean we have highlighted a number of points here. Still the level of uncertainty we have on the inflation.

The second point is our ability to execute our plan to bring back the productivity level of the business pre-pandemic level. So this takes -- then there is still -- on the upward one, it's probably some -- if we can do more than the COVID levels that we have. So if we're slightly better than the EUR 250 million. And then the timing of the closing of the M&A, obviously, this is something that we don't master, but -- and the mix of M&A that you have.

[Mathieu Floreani, executive]

And one element you mentioned that I would add leading to the next question, which is the pricing environment. And we have seen, as you noted, positive price. If you exclude just for Q3 as an example, right, France and Switzerland, you come to something in the range of 2% across the board. If you look at our emerging market cluster, I'm not talking about all emerging markets, right, but a cluster, which is made of some Eastern European countries and Africa, we have more than 10% price increase in that quarter.

In the U.K., we have more than 5%. So you see it's not just one country where it's happening. It's fairly -- and now if I play the game, if you even exclude all what I said, right, France and Switzerland, the negatives. You exclude the positives of U.K. and emerging market, you are still at 1% positive in Q3. So that shows that it's fairly spread across the board. I hope this answered your question.

[Operator]

[Operator Instructions]

[Mathieu Floreani, executive]

Okay. So it looks like we have exhausted the questions on time, it's 4:00 here in Munich. So thank you very much for your participation in listening. And the next time we communicate is March 16 of 2023, and we also will have a new investor contact starting December 1, Investor Relations who is [ Anna Needham ]. With that, wishing you a very good rest of the day. Goodbye.

[Operator]

This now concludes our conference. Thank you all for attending. You may now disconnect.