Synlab AG

XETRA:SYAB

Earnings Call Transcript 2021-Q4

[Operator]

Dear ladies and gentlemen, welcome to the SYNLAB Q4 Full Year 2021 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. [Operator Instructions] May I now hand over to Mathieu Floreani, who will lead you through this conference. Please go ahead, sir.

[Mathieu Floreani, executive]

Thank you, and good morning, good afternoon to all, and welcome to our call. So we'll present today our 2021 results together with Sami as usual. But before we start talking about these results, I would like to say a few words about the ongoing war in Ukraine. Of course, this tragic situation there, breaks our heart and SYNLAB is supporting in all ways we can. Even before the invasion, our management teams have worked tireless to ensure immediate support for all Ukrainian SYNLAB employees and their families in case of a potential war. This included options for safe shelter and continued employment across our network, which we have done.

We have no exposure to Russia, but do have a small activity in Belarus. And both in terms of numbers -- activities combined, both countries combined are less than 0.5% of our revenues. Our current efforts also includes help for refugees in neighboring countries like Hungary or Poland and a donation by the group to UNHCR, which will be increased by matching individual donations of our employees. So we continue, of course, to look for the best and most suitable way to support all of our colleagues, their families, and of course, as well, the Ukrainian people in this terrible situation.

Now as we start looking at last year's results, I would like to summarize in numbers what it means to be the European leader in medical diagnostic services. So 600 million tests performed in 2021. This is more than 1.6 million tests per day performed in our 500 labs, which are spanning across our 36-country network. Some of these tests were SARS-CoV-2 PCRs and again, a leading position in Europe with now more than 41 million tests, such tests PCRs done since the start of the pandemic. But the PCR test is, of course, only one out of a total portfolio of more than 5,000 tests. Patients are using our services usually for routine testing, but not only. They are also using us extensively for specialty testing. And specialty, which is typically molecular genetics or anapathology is today more than 20% of our base business, which is a EUR 500 million revenue activity for us roughly.

So now let's dive onto the next page into our actual results presentation, starting with the financial highlights, Page 6. So when we compare with 2020, our revenue is up by 44%. Our adjusted EBITDA has multiplied by 1.8x, our unlevered free cash flow by 2.7x, and our leverage ratio is at 1.35x, which is a record low level at year-end 2021. So this year was a record year on all key metrics and a year after our IPO. I'm very happy to report that we have reached or exceeded all of our IPO targets.

Moving to Page 7 and our traditional operational quadrant. This is our 4U transformation, and it shows very good progress. I start on the top left with organic growth. That's the first pillar of our strategy. So of course, we had challenges created by many COVID different waves. But despite that, we were able to deliver 9.6% underlying organic growth this year, and that is thanks to our initiatives. We opened new BCPs, which is around 40 each quarter. We launched new solutions to better connect with prescribing doctors and also reinforced our overall leadership in specialty testing. Generally speaking, we estimate that initiatives bring 1 percentage points of extra growth to the secular growth of our market. And this year, we also further enjoyed the ramp-up of the SEL contract, one of the largest ever, if not the largest ever hospital outsourcing contracts in Europe.

The second pillar, operational excellence, also very good progress. SALIX delivering the expected EUR 20 million of savings. Our lean, which we call STS roadmap is continuing to sink deeper into the organization. And we also, in this whole pandemic situation were at the same time, able to renew our core lab equipment, which is now 85% completed and puts us as the most modern lab across Europe.

The third pillar, value creation through capital deployment, and we do that through M&A and CapEx. So on M&A, we have -- we had a very strong activity last year with 18 acquisitions completed in 6 countries, and we spent around EUR 250 million enterprise value. So these acquisitions altogether represent EUR 143 million in revenue, which is 5.4% growth in 2021. In parallel, we also accelerated CapEx deployment with plus EUR 50 million invested in our operations compared to what we had last year. And this includes investments for future growth like BCPs or digitization tools for prescribers as an example.

And finally, on the fourth pillar of empowered and engaged employees. There are various initiatives listed here, which ultimately all aim at making SYNLAB a better place to work. One that I take particularly seriously is our SYNLAB Dialogue, which is a group-wide survey, and we use that to measure every year employee engagement.

We received the results for 2021 edition a week ago, and participation was high. And our engagement score is stable year-on-year, which is despite the challenges created by an all-time high COVID-19 activity during the Christmas break or maybe I should say, for a lot of our employees, unfortunately, a lack of Christmas break and the survey process.

So that's an easy transition to Page 8, the usual page on COVID testing volumes, and that illustrates the continuous efforts that have been deployed by our teams throughout the year. And that you'll see very well what I just mentioned was peaking in the very last weeks of 2021 and first months of 2022.

A key highlight is that we would not have been able to cope with the huge surge in demand. You see the peak, without well-trained and numerous staff who we kept with us also when the volumes were lower. And this was a managerial decision, medically driven also, based on the conviction that we are dealing with a virus peaking and receding regularly, which we have not changed our mind about, and we'll discuss that later. So that gives you, indeed, an indication of how we will go about it going forward.

We look at the curves. We try to anticipate now based on 2 years' experience and our virologists opinion. And always balance, say, our operational approach and with what our medical community is telling us. The outcome is EUR 1.6 billion revenue over 12 months with December ending being our strongest month in 2021. And this extra revenue and cash that we earned must be redeployed, and that's illustrated on the next 2 pages about our capital deployment.

So we start with organic deployment on Slide 9, with an accelerated CapEx spend in 2021. So you see the number plus EUR 60 million compared to 2020. We invested in projects such as network expansion, equipment renewal and also IT digitalization. All of this will help deliver better service to a growing number, of course, of prescribers and locations.

So another field where we are accelerating capital deployment is M&A, and that's on Slide 10. We have a selection of recent acquisitions. And basically, just to -- as a reminder, our acquisitions always pursue 3 strategies. They are either a consolidation of existing positions or an access to new markets or an investment in innovation or specialties. So 2021 was marked by 2 midsized acquisitions, which you see here, Gruppo Tronchet, which reinforced our leadership position in Italy, #1 position. And LMP in Mexico, which is a strong platform, LMP, helping us to further expand in a very attractive market.

So as we start 2022, we already finalized 5 acquisitions, 2 of them enhance our specialty testing services and 1 of those is Sistemas Genómicos which is particularly interesting given its strong track record in genetics and bioinformatics. And just for the record, bioinformatics is the software supported analysis of biological data in databases. And these tools, of course, we will now expand and leverage in our entire network and genetics operations.

The next page, Page 11, is about our ESG road map. So in 2021, we laid out the foundation for our ESG journey. We have put in place a proper governance, launched new programs, releasing our first ESG report. Now in 2022, we'll do more on all fronts. But as indicated last year, we always have a specific emphasis on the S part. And for our peoples business, we have 30,000 SYNLAB employees at year-end. Having this positive social impact is the #1 priority. Our SYNLAB Foundation, which we officially launched a few weeks ago, will also play an active role in this respect of S.

And finally, to conclude this section on Page 12, let me just summarize our key achievements for our first year as a listed company: strong organic growth, M&A acceleration, and stronger-than-expected contribution of COVID-19 testing. And I think this shows very clearly our strong execution and transformational capabilities, and that, again, puts us in a very good position for all our future developments.

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

[Sami Badarani, executive]

Thank you, Mathieu. Good afternoon, and good morning for those in Americas. I'm very pleased to walk you through the full year 2021 financial performance of the SYNLAB Group. These are fully audited SYNLAB AG consolidated financials.

And let's start with the revenue on Page 14. The full year 2021 reported revenue stands at EUR 3.765 billion, 44% revenue growth. EUR 3.860 billion revenue on a pro forma basis, adding again the additional revenue as its 2021 acquisition had been consolidated on the 1st January 2021. EUR 143 million annualized revenue from the 18 acquisitions completed in 2021, 5.4% revenue growth. We had nominal FX impact in 2021. And the rest of the growth is organic, EUR 1.94 billion growth. 42% of organic growth with strong execution and contribution from all levels. COVID-19, obviously, but also SEL contract and for new growth initiatives.

Going in more details on Page 15. Again, 42% organic growth for the year. Slowdown of the growth in Q3 and Q4 with COVID testing ramp-up in H2 2020, but still positive growth at 3% in Q4 overall despite the negative growth from COVID-19. The underlying organic growth, excluding COVID-19 impact is strong, 11.1% on the top right of the page here in Q4 and 9.6% for the year. And excluding COVID-19 and the Southeast London contract, the organic growth is at 3.3% for the year, with a slightly lower Q4 at 2.8%, and I will come back to those figures in more details in the upcoming slides.

Now next page, detailing the Q4 organic growth on Page 16. COVID-19 testing, still primary PCR testing, 8.9 million PCR tests in Q4, highest quarterly volume, with an average price around EUR 43 per test compared to EUR 44 per test in Q3 2021, a slight decrease but marginal, and EUR 61 per test in Q4 2020. 2.1 million non-PCR test, mostly antibody testing with a 60% increase versus Q3 2021. The total COVID-19 testing revenue stands at EUR 408 million in Q4 versus EUR 312 million in Q3, an increase of 30% but it's down compared to prior year from lower PCR prices.

Now excluding the COVID-19 testing, the organic growth in Q4 is at 5%. Q4 has been impacted by some attrition from Delta and Omicron variants -- waves in various countries. We have identified 9 million of attrition. We have also seen a reduction of the growth in our underlying business, where the COVID testing was very strong. We have more and more difficulties in isolating the attrition from the rest in the normal business. The underlying organic growth, excluding COVID-19 testing and attrition is strong, 11.1%, above the yearly guidance of 10%.

The underlying growth, which is split into 2 pieces to isolate the impact of the Southeast London contract that has started on April 1 from the rest of the business. So excluding SEL contracts were at 2.8%, as mentioned earlier, slightly lower than in prior quarters, mostly in France and Germany, where COVID testing were very, very strong and the attrition measurement difficult to assess precisely. The key takeaway on this page is strong underlying growth and strong COVID 19 volume, more than compensating COVID PCR price drop.

Now -- looking now at the full year 2021 organic growth on Page 17. We have the same 4 elements to explain the full year organic growth. The underlying growth, excluding SEL, stands at 3.3% above the 3%, EUR 125 million revenue from SEL contract, and excluding the COVID-19 revenue from SEL which is reported in the COVID activity. COVID-19 attrition with a net positive effect of EUR 132 million, and this we don't necessarily talk about it. That means we have been able to recover from the attrition that we had in 2020. COVID-19 testing, EUR 1.57 billion in 2021, excluding the COVID-19 testing from the acquisition. And including the acquisition, it's at around EUR 1.6 billion. In total, 29.7 million PCR tests performed at an average price of EUR 49 per test versus EUR 65 in 2020, 25% price drop. And 5.6 million non-PCR tests, mostly again antibody tests.

Now looking at the growth by segment on next page, Page 18. The split of the underlying growth by segment, excluding SEL, at 3.3%, all segments are growing and Mathieu will provide more color in the business review. The impact of the M&A growth is also indicative. Bolt-on acquisitions in France performed at the beginning of the year. The high focus on the South segment with higher organic growth profile and the start of the SEL contract in April 2021 contributed significant growth to our North and East segment and to the entire group.

Just to reemphasize the strength of the group with its unique characteristic being present in 36 countries, in half of the 36 countries, representing more than 1/3 of the size of the business in revenue, the underlying growth is above 8%.

Moving now to the profit on Page 19. Strong EBITDA performance. The full year reported adjusted EBITDA stands at around EUR 1.21 billion. The EBITDA organic evolution explains the bulk of the growth, EUR 516 million. Excluding COVID-19 impact, we have EUR 13 million price drop, mostly from negative price in France. Inflation is so far contained, negative EUR 19 million and is offset by the impact of our SALIX program, procurement savings from core lab project implementation and productivity savings from initiatives executed across the network. The full year EBITDA margin of the group stands at 32.1%, up 6 points from 2020. Q4 margin is at 30.4%, down compared to Q4 2020, mostly from PCR price drop, EUR 43 versus a EUR 61 per test. Again, 2021 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 flow-through.

Let's move now on Page 20 with the margin expansion drivers. I have explained in prior communication how difficult it was to allocate cost between COVID-19 and non-COVID-19 activities and the impact of attrition. It is still the case. The bridge on this slide is trying to address the legitimate request to understand how the business will perform post COVID-19 acute pandemic phase. The EBITDA bridge is between 2019 and 2021, with the attempt to normalize the performance of the underlying business while isolating specific drivers. Let me walk you through it.

Normalized organic growth has delivered EUR 50 million EBITDA in 2 years. 2019, 2020 and 2021 acquisitions have delivered around EUR 30 million of EBITDA, including EUR 6 million of synergies already achieved. It doesn't yet account the additional synergies still to come. Considering the performance from COVID-19, the business has accelerated investment in 2021 to fuel future growth, mainly in retail expansion and in IT. The 2021 normalized pro forma EBITDA is estimated at around EUR 517 million, EUR 120 million increase from 2019 level, including the expected recurring COVID-19 activity of EUR 150 million, adding EUR 65 million of EBITDA.

On the right, EUR 720 million one-off that include all nonrecurring COVID impact, testing attrition as well as some cost overrun in the base business. Looking at the margin bridge now at the bottom of the page, the normalized 2021 pro forma margin is stable at around 21%. The contribution of each element reflects our business dynamics. Underlying growth at 3.5% in 2020 and 3.3% in 2021, support 1 point of margin improvement, more than offsetting price and inflation. This is the volume leverage. Acquisitions are nondilutive even before full synergies. 2-point impact from investment, negative, and 1 positive point from COVID-19 accretive and recurring activity. Again, 21% normalized pro forma margin in 2021. This margin does not reflect the inflation pressure on energy and fuel that we will experience going forward and the ripple effect on the PEX and METEX inflation that will also probably come. We will certainly manage, but it will be challenging to probably offset the whole impact.

As of now, 32% margin overall in 2021, 11-point improvements in 2 years. It's called on the page, one-offs, but it doesn't mean that it came naturally. It is the result of the unbelievable mobilization of 30,000 employees in 36 countries to fight the pandemic, demonstrating the intangible assets of SYNLAB. It's agility, its ability to adapt very quickly as well as the evidence of our business model. Any incremental volume even on a complex test like COVID PCR flow, has a strong contribution to EBITDA as majority of our cost structure gain is fixed in the short term. That's our business model.

Now moving on Page 21. For 2021, we had a record net profit, the bridge from EBITDA to net profit and from reported to adjusted financials. EBITDA first, we have EUR 30 million of adjustments with 2 items to highlight. EUR 21.3 million of IPO costs. This is a one-off for 2021. This is a portion of the costs related to the IPO, not to be charged to our shareholders as total cost has been apportioned based on the IPO primary and secondary proceeds. And EUR 8.6 million of net acquisition-related costs, including PMI, post-merger integration cost. And as previously reported, it includes around EUR 5 million of revaluation of the options to buy our minority shareholders in Nigeria, the transaction has been completed in Q3 2021.

The adjusted operating profit is at EUR 996 million. It was EUR 504 million for the full year 2020. The strong reduction of the net finance cost mostly from lower borrowings and lower borrowing costs. The tax line is increasing based on increased volume, but the effective tax rate at 25% is lower than the normalized 28% from activation of tax loss carryforward. The net profit reflects also the positive impact from residual sale of A&S business in January 2021.

The full year adjusted net profit stands at EUR 676 million, the adjusted EPS is EUR 3.14 and the proposed dividend to the AGM is EUR 0.33 per share. Cash flow. The strong EBIT on Page 22. The strong EBITDA translate into record cash flow generation, more than EUR 1 billion operating cash flow, more than EUR 0.5 billion increase versus last year with strong contribution from normalizing working capital, partially offset by tax payment increase. Nothing significant to highlight on the other items of the cash flow. CapEx is increasing year-over-year, as Mathieu mentioned. It includes EUR 9.5 million COVID-19 related CapEx. Total to-date COVID-19 CapEx is EUR 33 million. EUR 743 million of unlevered free cash flow, around 60% conversion to the -- of EBITDA.

Page 23, strong balance sheet. The balance sheet of the group expressed again with the capital employed and capital resources view. The change versus December last year is mainly driven by the additions from the 18 acquisitions completed in 2021 and the impact of the SEL contract. The net debt of the group, including EUR 600 million of lease is now at EUR 1.6 billion, rounded number, down EUR 633 million versus December 2020. The group has a strong balance sheet with EUR 450 million cash on hand and EUR 500 million of undrawn RCF. The ROTC (sic) [ROCE] of the group at year-end 2021 is at 20%, a key metric also in comparison to our peers. We have seen a significant increase over the last couple of quarters, and see ourselves ahead of peer group companies. The detailed calculation is in appendix, and it includes goodwill in the way we calculate it.

Page 24, leverage. The adjusted net debt is at EUR 1.067 billion at the end of December '21. The last 12 months pro forma EBITDA stands above the EUR 1.2 billion mark. The leverage ratio debt-to-EBITDA stands at 1.35x, down nearly 2 points compared to year-end 2020. SYNLAB on Page 25 now, SYNLAB future capital allocation reflects the strategy of the group to accelerate the consolidation of this industry through organic growth by gaining market share and through acquisitions. The cash generated from overperformance from COVID-19 testing will be allocated to fulfill these objectives. For 2022, CapEx, including leases is stable at EUR 270 million, with an increase of 2 points in percentage of revenue and M&A will be above the EUR 200 million. It's difficult to give an exact figure but our guidance on the debt-to-EBITDA ratio is below 3x. The proposed dividend of EUR 0.33 per share will represent a cash outflow of around EUR 70 million in 2022. The 2022 dividend will reflect our IPO guidance around 20% of adjusted EPS. We will maintain a sustained dividend policy.

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

[Mathieu Floreani, executive]

Thank you, Sami. So indeed, let's start with Page 27 to cover our main geographies. These are our 4 segments, different colors and strong growth across the board on an organic basis around the 25% mark is the summary. We have 1 outlier which is North and East at over 90% of organic growth, and that's boosted by the SEL contract in the U.K. but growth was still above 30% in that area, excluding SEL. So I would say this -- these are spectacular achievements from all of our teams.

Now on Page 28, starting with France, plus 28% growth in '21 and a strong record AOP margin, and that's driven by volume leverage. 0.7 underlying growth as usual for France, with solid volume growth offsetting a regulatory price decrease which is as per the 3 years agreement with the French health authorities, and that was implemented in Q2 of last year. Q4 decline in revenue is mostly due to PCR test comps, but AOP margin held at a very high level, as you can see. And to be noted, we have a small decrease in retail prices starting February 3 of this year.

Page 29, that's Germany. 25% growth in 2021, strong AOP margin progression driven by volume leverage and by SALIX savings. Plus 1.7% underlying growth with a stronger H1 but an impact also on price decrease in genetics in the final quarter. So Q4 revenue growth remained positive, and that's due to very strong PCR testing activity in the final weeks of the year. Q4 AOP margin contracted and that was, nevertheless, against a strong and record level, I would say, in Q4 of the year prior. And in Germany, SYNLAB remains a key player on variant detection and on school testing.

The next page on the region south. That's a plus 32% growth in 2021 and a strong AOP margin progression, and that's again driven by volume leverage. And that is despite Switzerland and the dilutive impact of new BCPs ramp-ups. 4.9% underlying growth with broadly stable prices. And there, Italy and LatAm are our key growth engines. Q4, we had a moderate revenue growth due to PCR test comps, an AOP reduction due to the drop in COVID-19 testing, which is mainly price, and a BCP ramp-up phase. We also, in that region had a strong M&A activity with 13 deals for a total annualized value of EUR 120 million, that's revenue. And also key for that region is our retail and specialty initiatives. The next page is our North and East region.

So I would say what illustrates here the region is a great capacity to execute on major contracts. We have COVID-19 government testing in North Europe, and the Southeast London contract in the U.K. So as already said, this translate or translated into 95% growth in 2021 and a record AOP progression in terms of the margin percentage, and that's driven by volume leverage, greatly offsetting the lower SEL contract margin. Plus 34% underlying growth and plus 5.8% underlying growth, excluding SEL, with all submarkets recording above group performance. So Q4, we had a strong revenue growth despite lower COVID testing. And that is related to SEL and to 4U initiatives like prescribers in Austria or direct-to-consumer and many others. AOP reduction from peak levels last year, but that is remaining at very high levels.

And we can now move to our last part, which is the outlook, on Page 33. Well, we presented that page in our Q3 results in November '21. And that is showing how we build our business assumptions around the pandemic. So to read the chart, you start with the long-term view at the bottom, and that is with having COVID-19 as pandemic, where the testing generated would be around EUR 150 million on an annual basis. Then you add any short-term use cases, like track and trace, safe at workplace, immunity testing and so on, and that's in the above lighter blue box, and that represents an additional EUR 350 million revenue. And then you have the third box at the top, which materializes the upside that would come from new variants of concern, which potentially escape vaccine. So if we think about where we are today, I would say we are more on the high end of the EUR 150 million to EUR 500 million range, and that is higher than what we expected back in November 2021.

On the next page, 34, we present our revised outlook and -- that's where we expect group revenues to -- in 2022 to be around EUR 3 billion. And that is based on a strong sustained organic and M&A growth with COVID testing expectations increased by 100 million compared to our November outlook that we gave last November. Our 2022 EBITDA margin is expected to remain high at 23% to 25%, and that is unchanged compared with what we indicated in November '21. So keeping our margin range unchanged is our way to capture, number one, the view that we should maintain a certain COVID-19 capacity, also when the prevalence goes down. And of course, if COVID-19 volumes are durably lower, this could slightly impact our margins. Number two, the ramp-up effect of some growth initiatives and investments. Number three, the inflation and costs.

On M&A, we expect to maintain a good pace with, again, more than EUR 200 million of spend in 2022. We have already closed 5 deals year-to-date, and that represents more than EUR 20 million in annualized revenue.

So to conclude today's presentation, a page on our investment case. So some people depict us as a COVID winner. And sometimes, it is viewed as a positive and sometimes as a negative, which creates volatility. Ironically, when our end market is all about resilience and secular growth trends. SYNLAB existed long before COVID-19 and will exist long after. And this is thanks to its strong fundamentals, which I want to reiterate here, which is the potential for consistent double-digit growth, and that's organic and M&A. A margin expansion from our 2019 reference point. Strong cash flow generation with a balance sheet that is today very strong.

And so finally, just a quick update on the next events. 12th of May, we have our Q1 results presentation. And then on the 21st of June, -- we have an Investor Day that will be held in our international -- in one of our international reference laboratories in Barcelona, where we will address selected strategic topics with also site visits. So this concludes our presentation. Thank you, and we now open the floor to your questions.

[Operator]

[Operator Instructions] And the first question comes from Hassan Al-Wakeel at Barclays.

[Hassan Al-Wakeel, analyst]

I have three, please. Firstly, could you talk about the headwind expected from wage and cost inflation in 2022? And where you see the overall rate inflation and how that compares to 2021? And related to this, how much dilution are you embedding from M&A, if at all? And to what extent are you able to mitigate some of these effects with pricing?

Secondly, on margin, more medium term, how does inflation or the current rate of inflation factor into your thinking around next year's margins? And why margins should be meaningfully above 2019 levels, given your comment on Slide 20, around a normalized 21% margin? What flex do you have in the cost base here? And is 23% still a reasonable expectation for 2023? And then finally, if I can squeeze one in, on the underlying performance in France and Germany. How is this shaping up in Q1? And how should we think about full year organic growth here given the underlying decline in Q4?

[Mathieu Floreani, executive]

Hassan, I think, we leave those to Sami.

[Sami Badarani, executive]

Okay. Good questions. On the inflation here on wages and cost inflation in general. On wages, we historically have 2% inflation, which is rounded number to EUR 20 million. And here, we can assume that we can have 1 point more inflation in 2022. So it's around EUR 10 million of additional inflation. On the other costs here, there is obviously the fuel and energy costs that are hiking recently. And here, we can assume that we have around, I would say, it varies. So it's difficult to give a number.

But if -- I will give you a couple of data points so that you can have -- you can then triangulate or estimate what it would be depending on the inflation. The -- our -- I would say, our -- related to fuel and energy, our base cost is around, I would say, EUR 75 million. So it varies, I mean, between EUR 50 million and EUR 100 million as we -- with the detailed information we have.

So the -- so you can assume -- if you assume 20% inflation here, you get a EUR 15 million impact. And that's the range or the amount that we will be looking at for 2022. Now beyond these 2 numbers and not necessarily for 2022, there will be a ripple effect of those inflation and general inflation on the rest of the cost structure, whether it is on CapEx, whether it is on material expense, consumable, at one point things will evolve on one side. And -- but I don't think it will be material for us in 2022. It may happen more in 2023. And then the way we can mitigate these inflation elements.

Obviously, we have a number of -- depending on the -- it vary -- varies depending on the geographies. Some of our activity is -- will not be able to update our prices or we are not driving the prices. It's a regulatory prices. But we have seen it in the past in some of our countries, prices are increased to reflect the increase of inflation to be able to serve our -- the employees. There is a linkage between the price increase of our activity with the inflation of the employees and mostly in the hospitals. So this will remain. And so that means that we have a portion of our activity, which is -- which will be adjusted.

Now if we look at the overall scheme, today, it's very difficult to give an exact number. But I would say that around 40% of our activity prices will not change. At around 45% of our activity, prices may change and it's from the regulator. And on 15% of activity, we'll be able to increase prices. So this is probably -- I mean we've done a quick analysis, and this is the best outcome we have so far.

Now dilution on M&A mitigation factor, I mean, we are reviewing M&A deals on an ongoing basis. We have a good portfolio, but I -- the numbers and the actuals will be -- it will be reflected in our business cases. So we will be more conservative on the -- we will assume the inflation in our business cases.

Now on the margin for the midterm, what we have been able to demonstrate on our Page 20 that -- and this is our business model that irrespective of the starting point, we're able to increase margin with organic and acquisition. And that's the key take here. And then the inflation that we're seeing here is there's probably a one-off, but it's not yet confirmed how sustainable will be the inflation on the long term. So this doesn't -- and I've just demonstrated that we are able to recover some of the pricing on our activity to mitigate a portion of it. So it's too early to conclude that there is a systemic or the long-term impact on our inflation and does it change our business model.

So we're still in a logic where we will continuously improve our margin irrespective of the starting point. So if I take the example because there are other drivers that can impact the margin. If I take the example of the SEL contract, it's dilutive to the group. Is it the right thing to do? So it has -- it will have a -- it has an impact in our bridge to reduce the margin of the group, but it's the right thing to do. But then wherever the SEL contract is, we will improve the margin of SEL and that's what we are looking at.

Now for France, the performance in Q4 is mostly -- is very good. It's very, very strong, but it's coming from Omicron. And there is an impact on the base business. And excluding the base -- I mean -- but this -- we don't see any ripple effect for Q1 and for 2022 of the Q4 performance of France and Germany on the base business.

Very long answers, but Hassan, I think, you have asked very broad questions.

[Operator]

And our next question comes from Veronika Dubajova, Goldman Sachs.

[Veronika Dubajova, analyst]

I have three, please. My first one is just, and apologies, Sami, if I missed this in your prepared remarks, but what is your assumption for the COVID-19 prices in 2022? I saw the price reduction in France, but if you can just give us your expectations for the full year? And then maybe to the extent of any thoughts on the phasing there, that would be very helpful.

My second question, which might be out there for the COVID skeptics, but just looking at the EUR 600 million guidance that you've given for the full year. I'm curious what your expectations are, how much of that you will earn in the first quarter? That might be a helpful way to think about it.

And my third question is just on M&A and what the pipeline looks like at the moment? And in particular, when it comes to more midsized and larger transactions, are you seeing any activity? And do you see probability of another large deal maybe this year? And if I can just add at the end, thank you for the COVID-19 EBITDA margin bridge. It's incredibly helpful for all of us. So I just wanted to thank you for providing that.

[Sami Badarani, executive]

Yes. Okay. So on the COVID-19 prices for 2022, I mean we -- as mentioned here, the COVID-19 in Q4 was at EUR 43 per test, and it has been reducing gradually with a number of countries in which we operate. So we have news from States from time to time, and you had the early January price drop in France. From a planning perspective, we have assumed that the prices in 2021 will be at EUR 45, and it ended up at EUR 49. And today, we are assuming that the prices in 2022 will be around between EUR 33 and EUR 36 per test. And -- but today, we are still higher than that.

[Mathieu Floreani, executive]

And the prices are fairly stable in our key markets at this point. The price drop in France was quite minimal compared to the absolute level, which is still a reasonable one.

[Sami Badarani, executive]

So from a volume or revenue perspective on the EUR 600 million, this is for the COVID, today, we have not given a guidance on COVID, we've given a range. And Mathieu mentioned that we'll be on the top of the range. So it's more -- it's around EUR 500-plus million but we're not giving an exact number on COVID.

[Mathieu Floreani, executive]

As to how much in Q1, it's still a bit difficult to predict, but we have a very strong activity, as you have seen from our COVID say, curve. And then the question is always how does it continue, right? But it will be already quite strong in Q1.

[Sami Badarani, executive]

Yes, in Q1, we should be around EUR 400 million. But it's still depending on March. So we'll see.

[Mathieu Floreani, executive]

And the M&A pipeline, Veronika, well, very, very strong, good perspectives. Transaction activity at this point is, I would say, normal. Possibility of a midsize deal. Yes, our story is about consolidating the market. We have, I think, done any type of acquisitions from EUR 200,000 revenue to EUR 800 million or EUR 700 million when the group was built with the merger of 2 large companies. And in every case, we -- I think we master to create value for our shareholders.

So we are not, say, looking specifically for a midsize or for a small size or whatever. We look at every opportunity that fits our strategy with always a disciplined approach. And if it's a midsize that shows up and that is favorable, of course, we will consider it very seriously or execute it.

[Sami Badarani, executive]

And the last question on the COVID-19 margin, I think you have it on Page 20.

[Veronika Dubajova, analyst]

It wasn't Sami, it wasn't a question. It was my thanks for providing the bridge on Page 20. It's incredibly helpful. So I didn't have a question. I simply wanted to thank you for giving that to us.

[Mathieu Floreani, executive]

You have tortured us so much that we had to try.

[Veronika Dubajova, analyst]

No, it's very helpful. So I wanted to very much acknowledge that because I know I've been asking Mark for it.

[Operator]

And the next question comes from Oliver Reinberg, Kepler Cheuvreux.

[Oliver Reinberg, analyst]

Oliver from Kepler Cheuvreux. Thanks for the color on the personnel cost inflation, but I wanted to take a deeper dive, if possible. I mean personnel cost is obviously 40% of your kind of revenues. The 1% extra inflation you talked about sounds quite small and digestible, I would say. Can you just provide more color, what share of your personnel cost base is actually fixed in nature and not to link to inflation? Is there any share of that?

And can you provide any color what kind of share of your personnel cost is related to union agreements? And where do you have individual agreements? And also when we think about next year, is there a kind of risk obviously that the headwind from personnel cost inflation will accelerate into 2023? That would be question number one.

Question number two, so far, you provided 23% margin guidance for midterm, which was so far 2025. Can you just clarify, is that still holding true? Or is it simply depending on how inflation is going to develop going forward? And then the last question would just be on Switzerland. Can you just provide an update on how the market is operating and whether you have seen any kind of change in competitive behavior since we have seen the change in ownership of Unilabs?

[Sami Badarani, executive]

Yes. Okay. So let me -- I'll take it, Mathieu. On the tax inflation, I gave the example of 1 point inflation for 2022, representing EUR 10 million. We're already in March, so I don't think that we'll have the full year inflation because it didn't really changed so far. But that's fair that we will know more about this in the course of the year, obviously, and understand the implications it can have on 2023 onwards. In terms of breakdown of union agreement, I mean, this is very specific by country. So we are very distributed by country. So we have some union agreement in some countries; in some others, we don't. So I cannot give an overall answer here.

[Mathieu Floreani, executive]

Yes. And I'm not sure, Oliver, that this would be a determinant for us of -- criteria to determine if it's going to be higher or lower inflation on our OpEx. What is fairly sure is that for 2022 at this point, the agreements are mostly, say, done. So we know where we are going. Of course, you never know what can happen if inflation would accelerate further very strongly. But at the end of the day, union or no union, we have to remain competitive in the health care market, and we will have effects if inflation is durable, included on our personnel expenses. The 23%...

[Sami Badarani, executive]

Yes. On the margin side for the midterm -- yes, midterm 2025 we mentioned that the IPO 23%. We are not changing anything here, but it's too early to evaluate exactly the impact that the inflation will have because we need to understand how is it a onetime event or is it for -- in a sustained way.

So until we have clarity on this, it will be difficult to conclude on anything related to the 23%. The 23% remains something achievable in the midterm, but we'll have to assess what midterm is, and before we can conclude. Now for 2023, the margin of 2023 will depend on the COVID level of activity we have at that time. And so this is also something a little bit premature to conclude. So we will develop this more in the course of 2022.

[Mathieu Floreani, executive]

And then your last question on Switzerland. We have been driving the change in behavior, as you know. And I will say that we see a change for sure. And that is not related to the change of ownership, I would say, early on. The 2 other players in the market have joined us in the effort to drive this change. So I would not say there is a link with the change of ownership.

[Operator]

Okay. It looks like we have lost the participant already. Would you like to continue with the next participant?

[Mathieu Floreani, executive]

Sure.

[Operator]

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

[Jan Koch, analyst]

I have also three, please. Starting with the COVID test volumes in recent days. So when I look at the incident rates across Europe, it looks like that daily new cases have started to increase again in most European countries. Have you already witnessed that in your testing numbers? Or is it still too early to tell?

And secondly, with regards to your 2 specialty testing acquisitions, you executed since January. Can you elaborate a bit on the current margin profile of these acquisitions and the future potential you see here? And I imagine that the markets you have to pay are a bit higher than what you paid historically. Any color here would be appreciated.

And then lastly, can you speak a bit about your expectations regarding your free cash flow in 2022? And one clarification, if I may. The EUR 100 million guidance raise you mentioned, is that only driven by higher expected COVID revenue? Or are there any other factors as well?

[Mathieu Floreani, executive]

Okay. Thank you, Jan. So on the COVID, indeed, we have seen as you have probably seen it also in 9 out of 11 European countries it was up, and in 8 of the 9, it was up more than 20%, the incidence rate, and or the number of cases. And we have seen it already from our numbers last week, they were up in the range of 15% compared to 2 weeks ago. So we are, I would say, following -- as we have observed in the past, also very tightly actually this development of the curves.

On the specialty acquisitions, I don't have the margin handy, but they would be slightly -- it depends on which one is probably higher than the group margin, one is a bit lower because the low one because still ramping up on investments and developing very fast. This is the genetics one. This market is, I would say, booming. And hence, you have to always step up your investments to make sure that you serve well the market and the potential.

The multiples, I would say, were not any significantly higher than usual on any of the 2, but that can happen. You're absolutely right on some, say, high growth type of specialty activities. But that's also the, I would say, the interest of being very well known for a very long time in the market having very solid relationship. Because it's not all about differentiating on price, it's also what type of future environment you can offer to the people you acquire and the trust you have built in this capability. And I would say that, that plays a role in many acquisitions.

And then the cash flow question, Sami, do you want to take it?

[Sami Badarani, executive]

Yes, here for 2022, we are -- we have not provided a specific guidance. I mean it's back to the IPO guidance where we will be at 45% to 50% EBITDA conversion.

[Mathieu Floreani, executive]

And the EUR 100 million indeed is that you mentioned on the revenue difference in the guidance is related to Omicron.

[Operator]

And the next question comes from Ms. Oezener, HSBC.

[Sezgi Oezener, analyst]

Just a few questions from my side. First of all, on the breakdown of business-to-business, business-to-consumer business, how has it changed since the start, since the time of your IPO guidance? And can you shed some light on your D2C initiatives, how they are and whether there is any meaningful portion of business coming from that?

Second of all, on your M&A budget in 2022, you have guided that it is going to be above EUR 200 million. But you're also saying that leverage is going to be below 3. So is there a upper limits at which -- an upper limit, a maximum that we should expect in terms of potential M&A spend? And can you also remind us of the limit above which you would disclose the price paid for acquisitions?

[Mathieu Floreani, executive]

Okay. So I can take the first one. Change of the ratio B2B -- D2C that is not changing at this point, of course, because direct-to-consumer is still a fraction of our activity, and I would say, of the market, right? It's below [indiscernible] and so this changes over time -- over a period of time. But what I think is interesting is to be able to capture this very fast-growing segment because in 2, 3, 4, 5 years from now, this will become more and more important, patients being also consumers at times. And our initiatives there are varied. It's a bit say, too early to speak about the main one we have. But I would say, in many countries, we are seeing very good results of having upgraded our web shops and our approach to -- our digital approach to the consumer segments. And we aim to accelerate this in the coming months. And of course, it's a long journey that will be multiyear. On M&A, maybe you want to take that, Sami.

[Sami Badarani, executive]

Yes. We don't disclose prices on M&A on specific deals. We don't put them in our press release and things like that. But we've communicated already on the multiple we've done on the 18 acquisitions and we look at it N+2 and the multiple there EBIT to EBITDA for 2 years down the road is at around 8x. It was slightly higher than the historical or the target we fixed ourselves to be 7x. But we have acquired some growth platform with Tronchet and Mexican. So when we look at N+3, we have a deleveraging also higher. So we're comfortable with that. Now if you want more information on M&A pricing itself, I mean, we have published our annual report and there is always interesting information in the annual report that you can conclude and drive on prices. So I will direct you to our annual report.

[Mathieu Floreani, executive]

And as to the leverage you were asking. I don't think we put a strict say, limit at 3.0 being the leverage. It's what I was mentioning also earlier, it's all about with M&A, you have also to be -- to a degree, opportunistic because some targets available are only available once. And so if they fit very well your strategy and you have good knowledge about them, then it can be the right thing to do to go for it. And even if we would surplus slightly this 3x, that's more an indication of where we want to be max on, say, on a sustainable level.

[Sezgi Oezener, analyst]

Just as a follow-up, since in collection points, the opening was ramped up substantially in 2021 and also looking at the segments, Germany has become smaller since the start of the IPO. Some markets have become larger. So I was wondering if business-to-consumer is taking share from business to business?

[Mathieu Floreani, executive]

Yes, that is indeed -- I'm laughing because it can be -- you're right, it can be business to consumer, but it can also be just the country mix because it happens coincidentally that in the faster-growing countries, usually, it's more B2C type of market. But I would say it's more the market itself than the segment that would drive that additional growth.

Now it's like -- B2C is like retail. You are pretty sure that you select the right place and you have the right, say, experience for your patients, you're pretty sure that you are going to increase your revenue. And in many countries, we have really a very strong skill at selecting this 2 criteria properly. And hence, maybe -- there is still a bit more easiness to grow the business in B2C to a degree. But I think it's -- the majority is driven by the country and the market itself, right?

[Operator]

And the next question comes from James Vane-Tempest, Jefferies.

[James Vane-Tempest, analyst]

Firstly, the revenues were, I think, EUR 156 million. Last year, it is around 4% of group. Just wondering how many of those were Russia or Ukraine? And my next question is just on PEX the 3.3% underlying growth, clearly, the South and Northeast, which is very much driving that with France and Germany around 0.7% to 1.7% in those 2 countries around 40% of your business.

So I guess the question is, how should we think about North and East growth overall if neighboring countries to Ukraine are potentially seeing some disruption? Are you able to give any color how many of those were the 18 out of the 36, which were growing more than 8%? And so how confident are you that the underlying business can grow more than 3% next year, excluding Southeast London?

[Mathieu Floreani, executive]

Okay. So thanks, James, for the question. The first -- the answer on Russia is 0%. We are not present. Ukraine, and if I combine Ukraine and Belarus, it's 0.3% of our revenue. So I would say marginal. The growth indeed -- and this is all the art also of -- to the previous question of country mix to exposing ourselves to high-growth markets. And the neighboring countries to the conflict, we don't see those as slowing down because of the conflict. I would say, to a degree it might turn out the contrary because of the massive refugee influx and these people will also need health care services.

We are a basic service of -- basic not in the sense of -- we are at the base of health care systems, meaning that we are an essential service. And if there is a conflict or not in the next country, this will not change the need for people to get diagnosed and -- through the health care journey. And so we don't see an impact or a negative impact from that.

[James Vane-Tempest, analyst]

So just to, I guess, answer the second part of the question then, do you feel confident in the underlying business ex Southeast London can grow more than 3% next year?

[Mathieu Floreani, executive]

Yes. I think basically, the answer is yes. What we see, nevertheless, and it was quite obvious, I think, in Q4 to a degree, we have seen a bit in the first month. When you have a huge surge of COVID-19 cases, it slows down the hospital elective surgeries or procedures and it slows down just the, say, the number of people willing to go to their routine say, health care procedures. And so to that extent, this is always a bit difficult to predict. But say the underlying fundamentals would not have any reasons not to provide for that. And if you want more details on our revenue breakdown, you have it on Page 129 of our annual report, you have the full breakdown by country.

[Operator]

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

[Mathieu Floreani, executive]

Well, I think actually, to this question, James was just asking, I think the opportunity also to stress the fact that indeed the resilience of our revenue is very strong because people don't go for diagnostics because they have nothing else to do, right? And so you can say with inflationary pressures, maybe some consumers would want to consume less. This is what we hear from some other activities. We are not subject to that, right, because people just -- if anything, after the pandemic, we -- there is some catch-up to be done on regular procedures. And I think that's also to be had in mind when looking at our activity.

We see no more question on the dashboard here. Maybe I'll leave it for 15 more seconds for anyone to jump in.

Okay. Well, it seems that we exhausted all your questions. Thank you very much for your participation. And we reconvene on the 12th of May for our Q1 results. Thank you, and have a good rest of the day. Bye-bye.

[Operator]

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