Synlab AG

XETRA:SYAB

Earnings Call Transcript 2022-Q4

[Operator]

Dear ladies and gentlemen, welcome to the SYNLAB Conference Call. At our customers' request, this conference call will be recorded. Today's call will be hosted by Mathieu Floreani, CEO of SYNLAB; and Sami Badarani, CFO of SYNLAB. [Operator Instructions] May I first hand you over to Anna Niedl, who will begin this conference. Please go ahead.

[Anna Niedl, executive]

Good afternoon, and good morning to the U.S. My name is Anna Niedl, I'm the Head of Investor Relations at SYNLAB. I would like to welcome everybody to today's conference call during which we will discuss on the financial results of 2022. As always, you will find today's presentation on our website available for download together with the new report that we issued earlier today. .

I would now like to draw your attention to Slide 2 of our presentation, as always, during this presentation, we will present and discuss certain forward-looking statements. And having read this, I would now like to hand over to Mathieu, the stage is yours.

[Mathieu Floreani, executive]

Thank you, Anna. So good morning, good afternoon, ladies and gentlemen, and welcome to our call. As usual, I will begin with the highlights of the financial year 2022. Sami will then provide a deep dive into the financials before I conclude with key aspects of our business review and outlook. And after our presentation, we'll be opening the floor to your questions, as usual.

So before we start, let me briefly touch on the news you may have seen at the beginning of this week. On Monday, we announced that SYNLAB has received legally nonbinding expression of interest by its major shareholders, Cinven, to acquire up to 100% of the company's shares. We are examining this expression of interest and our options for action in the best interest of SYNLAB and its shareholders, and we will, of course, inform the market on the progress in accordance with the legal requirements. So please note that there is no more information at this point that we could share with you today, in this regard.

Now let's jump right in on Slide 4, just a recap and summary. In 2022, we have once again proven our market leadership for medical diagnostic services in Europe. We continue to hold leading positions in our key markets and to strengthen also our leadership in specialty testing. And over the past 12 months, just as a reference, SYNLAB has performed more than 600 million tests across our broad network of countries, which means this is about more than 1.6 million tests every day.

Now on Slide 5. This is a recap also. We serve a diversified setup of channels across our markets from B2B and B2C to direct-to-consumer. And this provides an expertise, which we then replicate and adapt to local customer needs across our different geographies, which also makes SYNLAB their partner of choice for routine and specialty diagnostics in this market.

Now let's move on to our highlights of 2022 on Slide 7. So we closed 2022 with robust results in a challenging macro environment. If you exclude the exceptionally strong last 2 years, which were mainly a result of our COVID-19-related business, we were still able to constantly grow our underlying business. A key driver in 2022 was our strong underlying organic growth of 6.2%, which is well above our yearly goal of more than 3%. Using 2019, the last pre-pandemic year, as a comparison, our total revenue CAGR, excluding the COVID testing, reached approximately 9%, and this shows our underlying growth strategy is paying off, which leads me to Page 8.

In 2022, we successfully continued to execute this strategy with the 4 operational quadrant for you. So just picking a few points. In Q4 last year, we grew strongly our base business with 6.4% organic. We continued our retail and direct-to-consumer initiatives and further strengthened also our positions in specialty testing. A core component in operational excellence is our efficiency program, SALIX, which outperformed our expectations in '22 with EUR 25 million in savings. What else, as we continue to position ourselves for the future, we gradually reduced COVID-19 testing capacities and workforce while further developing our activities in the Southeast London region under the Synnovis brand.

So moving to the next quadrant. We completed 23 acquisitions in 9 countries, entering Chile as a new market to further strengthen our position in Latin America. And also as part of our constant portfolio review, we sold our U.K. veterinary business in a highly accretive deal. And the last quadrant, we aim to make SYNLAB a better place to work, and I'm happy to be recognized as a top employer in Estonia, in Denmark, and some regions in France, along with a record number of 372 scientific publications showcasing our industry-leading talent and medical leadership. And I will cover ESG in one of the following slides.

So now on to next slide, Slide 9. If we look at our COVID-19 testing activity, we're at the forefront to meet the urgent needs of the European and other healthcare systems. To date, we have performed more than 59 million COVID-19 PCR tests across 35 countries. And this included, of course, a requirement for significant capital investments and ramp-up of clinical staff. Those resources were deliberately upheld to respond in case of new waves, and it paid off when our teams had to deal, for example, with the record-breaking daily PCR testing volume in January 2022, as an example, during Omicron.

Now as the pandemic reached a more endemic stage, PCR test turned into a regular prescribed test, and this results in less volumes. And against this backdrop, we are progressing well in a structured ramp down of our COVID testing capacities. In order to, again, align the company's capacity and cost base with more normalized test demand.

On Page 10. We are now refocusing our efforts on our core business and on gradually bringing back our productivity to and beyond pre-pandemic levels. The SALIX program is an integral part of this objective, and it generated savings of EUR 25 million in 2022, and we expect to double that amount in 2023. In 2022, we have successfully completed Project BLUE, which now offers new standardized state-of-the-art diagnostic equipments for all our colleagues across the 36 countries. We also continue to optimize our procurement to drive further efficiencies. We started to adapt our COVID-19 headcount ramping it down. We furthermore continue to leverage our lean management program called, STS, and the opportunities that digitalization has to offer us, for example, with laboratory information system, LIS.

Nevertheless, I would say, next to numerous single initiatives, we have identified more than 10 global levers to ramp down -- to ramp up, sorry, our productivity across our regions. We'll continue to optimize our supply chain, standardize processes and further drive our digitization efforts, which will have a significant impact on our savings.

Page 11. So while we continue to focus on efficiency. We have also reinvested a portion of the incremental cash generated through COVID-19 testing and just a few examples. So we increased our investments in '22 to EUR 317 million, and that represents about 10% of our revenue. The focus areas were operations, commercial and IT, and we have driven multiyear projects such as the SEL outsourcing contract, the Project BLUE I already mentioned and also further IT infrastructure improvements. So with these state-of-the-art technologies, we are investing in the future of SYNLAB. And looking ahead, we expect investments coming back to pre-pandemic levels as a percentage of revenue.

So now Page 12 or Slide 12. So on this slide, you see some highlights we had in 2022 along our ESG journey. At the 2022 Capital Markets Day, we stressed that the S would be a special priority for SYNLAB. Therefore, just please allow me to focus on SYNLAB Care. We launched a leadership development program and continued to focus on excellence in diagnostics through medical trainings, also fellowship offerings and a program to connect international scientific colleagues across the SYNLAB network. In 2023, we will focus on progressing on our ESG journey taking the next steps in SYNLAB Green, Citizenship and care, our 3 pillars. And you can find a detailed description of all our efforts in each of these 3 compartments in our ESG report, which we have released today together with our annual report.

I now hand over to Sami to kick off the financial section of the presentation.

[Sami Badarani, executive]

Thank you, Mathieu. Good afternoon, everyone. I'm very pleased to walk you through the full year '22 financial performance of the SYNLAB Group, and let's start with the Q4 revenue on Page 14. The Q4 revenue, reported revenue, stands at EUR 701 million. The pro forma revenue includes, as usual, the additional revenue as '21 and '22 acquisitions have been consolidated on the first of January of each year. The bridge now, EUR 349 million of revenue reduction from COVID-19 testing in Q4.

The Q4 COVID-19 organic revenue stands at EUR 70 million. EUR 37 million of underlying organic growth. 6.4% organic growth, excluding COVID. Price is up 1.4%, reflecting the positive effect of price indexation in most countries of north and east and south segments, with an acceleration in the last 6 months. Volume is up 5%, benefiting from a low base in Q4 '21 impacted by the Omicron wave. We have a stable FX impact in Q4 and EUR 20 million revenue from the '23 acquisition completed in fiscal year 2022. The key takeaway here, we have a strong underlying growth in Q4, price and volume.

Let's now move to the full year revenue. Page 15. We have the same 4 elements to explain the revenue development. COVID-19 testing EUR 790 million organic revenue in full year '22. The underlying organic growth, excluding SEL in Q1 stand at 4.1%, above the 4%. We have a [ favorable ] FX with EUR 21 million contribution, and we have EUR 83 million of pro forma revenue from the '23 acquisition completed in 2022, 2.2% growth. Overall, full year '22 reported revenue stands at EUR 3.251 billion, above our latest guidance of around EUR 3.2 billion.

Moving to AEBITDA performance on Page 16. The full year '22 reported adjusted EBITDA stands at EUR 753 million compared to EUR 1.21 billion in full year '21. The AEBITDA organic evolution explained the bulk of the variance. Close to EUR 0.5 billion organic AEBITDA drop. Around EUR 226 million price drop from COVID-19. We have EUR 13 million positive price from the underlying business. Around EUR 60 million inflation, 3.1% inflation overall on the base business, 6% inflation on OpEx, energy and fuel, limited incremental inflation on PEX, 2.7% so far. And we have limited inflation on MATEX, 1.8%. Our reagent costs are, for the most part, fixed with multiyear contracts.

And overall stabilization of inflation in Q4, we had EUR 18 million in Q3 and EUR 19 million in Q4. Q4 inflation is at 3.6%. The rest of the business covers volume drop, with a flow-through of 47%, mostly COVID testing being the main driver. SALIX performance, as mentioned by Mathieu, EUR 25 million, very strong. And SALIX again, is our initiative-driven program to improve our productivity. The reduction of COVID capacity is well underway. We started the year 2022 with around 3,000 full-time employee dedicated to COVID-19 activity. We were at 720 FTE at the end of 2022, and around 360, half of it already, at the end of February 2022. Our target is to bring back the productivity level of the business at the same level in pre-COVID-19.

The year-to-date -- the full year, I mean, AEBITDA margin full year of the group stands at 23.2%, lower than the guided 24%, 25%. Q4 is impacted by one-offs that I will describe now on next slide. Here, new bridge, our internal estimate in the first column here for Q4 and full year was respectively, 18.3% and 24.4% AEBITDA margin, at the midpoint of our 24%, 25% guidance for the year. Excluding the EUR 40 million one-off recorded in Q4, our performance is right on our estimate and guidance. And 2 key items to explain the EUR 40 million one-off. First, COVID-19 one-off accounts for half of it. Receivable provision, inventory provision, tax costs with delayed ramp-down and special bonuses.

And the second half is legal provision one-off. We consider now that all our known legal risks are adequately provisioned. The pre-one-off Q4 margin is at 18.5%, with still EUR 70 million COVID revenue in Q4. Adjusting COVID-19 revenue to, let's say, the EUR 50 million full year run rate that we are expecting in '23, with a margin at around 50%, probably it will be slightly lower. The Q4 run rate margin is between 15.5% and 16%, slightly below the 16% to 18% margin guidance for 2023. But let's provide more color on how we will achieve this 2023 margin guidance of 16% to 18% on the next page. You have here the bridge on Page 18, the bridge from 2019 to 2023. This is a 4-year bridge and 2019 being before the start of the pandemic.

Focusing on the first 2 lines highlighted in blue that reflects the fundamentals of the business explained a drop of 2.5 points of margin over the 4 years. Inflation net of price first. '22 and '23 are 2 years of higher-than-usual inflation. In '23 alone, we will have EUR 13 million more inflation net of price than in a normal year. We have previously highlighted the lag time for price increase. And in a sizable portion of our portfolio, price increase has accelerated in the second half of '22 and will probably continue in 2023. Overall, around 5 points of margin over 4 years, 125 points on average per year.

Even though higher inflation and delayed price increase has an impact on our margin in '22 and '23, our business model is not at risk on the long term. This is not in the interest of the respective regulators in each country. Second key driver productivity, productivity being volume leverage and cost out, 2.5 points over 4 years, and this is the area, which is relatively low, despite the strong volume expected in '23 as well as the doubling of SALIX as mentioned by Mathieu.

We are still recovering from COVID-19 pandemic, while still investing in our D2C platform for the future. Our response to COVID-19 has impacted our underlying performance, refocusing the organization on its fundamentals, now that COVID-19 activity is much lower, is our top priority. 2023 should be the low point from which the business will improve gradually and continuously its margin. The net of those 2 lines highlighted in blue should be positive on a yearly basis.

Now coming back to the full year '22 results. The bridge on next Page 19, the bridge from EBITDA to net profit and from reported to adjusted financials. EBITDA first, we have a nominal adjustment of EUR 7 million acquisition-related costs. The adjusted operating profit is at EUR 508 million. It excludes EUR 213 million of goodwill impairment in Germany, EUR 173 million was recognized in Q2 2022, an additional EUR 40 million in Q4 from increased WACC. As I previously mentioned and reported, we have no headroom in Germany and any incremental in WACC triggers additional impairments. So nothing really new.

The net finance cost is lower than last year, thanks to the gains from financial instruments revaluation. Income tax is overall decreasing but normalized adjusted effective tax rate is up this year at 26% and closer to the normalized tax rate regularly communicated at around 28%. The full year '22 net profit includes EUR 70 million of profits from the disposal of the U.K. veterinary testing business. And the full year '22 adjusted net profit stands at EUR 342 million. Adjusted EPS is at EUR 1.54 per share and the proposed dividend to the AGM is EUR 0.33 per share with a payout slightly above the 20% of adjusted net profit. The dividend is stable year-over-year, and the goodwill impairment and the profits from the U.K. veterinary testing business do not impact the adjusted net profit nor the dividend calculation.

Cash flow, Page 20. The AEBITDA translates into strong cash flow from flow generation for the year. Receivable, DSO is at 55 days, down 8 days compared to year-end '21. The normalization of the working capital is progressing post Omicron peak wave, even though not yet completed. EUR 233 million of tax payment in '22, EUR 72 million increase versus full year '21. Timing of tax payment has an impact on our quarterly cash generation. Net CapEx, including leases, is increasing EUR 50 million, as mentioned earlier by Mathieu. IT, retail expansion in the southeast London contract and recent acquisitions are the biggest contributors. Inflation impact also has the leases increased. EUR 312 million of unlevered free cash flow, 41% conversion of AEBITDA.

Page 21. The balance sheet of the group, I mean, the main changes year-over-year reflects the consolidation of the '23 acquisitions completed in '22, the goodwill impairment in Germany that I mentioned and the normalization in progress of the working capital, nothing else to highlight here, otherwise. The group has a strong balance sheet with EUR 542 million cash on hand and EUR 500 million of undrawn RCF, EUR 100 million of TLB5 debt was reimbursed in February 2023. The return on capital employed stands at 11.5% at the end of '22.

Net debt, Page 22. We have a slight reduction in net debt. The adjusted net debt is rounded at EUR 1.6 billion at the end of December. It reduces by EUR 26 million. We have probably to highlight here the EUR 140 million of spend for acquisitions, partially offset by the EUR 80 million of net proceeds from the disposal of the U.K. vet business. The covenant AEBITDA stands at EUR 795 million. The leverage ratio stands at 2.07x, up 70 basis points compared to last year.

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 let's cover our main geographies, and we start with our activity in France. So in France, we reached a full year revenue of EUR 674 million and AOP of EUR 116 million, which is a margin of 17.2%, AOP margin. The full year 2022 decline in revenue and AOP margins was, of course, mainly driven by the reduction of COVID testing, both for volume and prices. Our underlying growth in France has been impacted by price decreases as per the 3-year agreement that we have with the authorities and by strikes in the diagnostics sector. After the current agreement, we expect a negative price impact of 3.7% in 2023, and it is planned to renegotiate a new 3-year agreement before the end of September this year with the regulator.

On Slide 25, Germany. So our revenue in Germany for 2022 was EUR 700 million with EUR 11 million additional annual revenue through the 3 acquisitions we performed. AOP and AOP margin came in at EUR 135 million and 19.2%. And we saw in Germany, 1.1% underlying growth with a strong development, especially in Q4 at 5.1%.

On Slide 26, we have South. So in our South segment, revenue for 2022 reached EUR 960 million, with EUR 67 million added through 18 bolt-on acquisitions in 7 countries. The overall decrease in revenue is due to reduced COVID testing and the price reduction in Switzerland. AOP for '22 was EUR 97 million, resulting in a margin of 10.1%. We delivered a good 1.7% underlying growth in 2022 with strong underlying growth in Q4, where we managed 5.1%, and this was particularly driven by robust volumes and positive price developments. And as Sami mentioned earlier, our provision booking in Q4 impacted the Q4 performance.

And finally, North and East on Slide 27. So North and East reported revenues of EUR 913 million. AOP came in at EUR 160 million, with margin of -- AOP margin of 17.5%. And in this segment, we saw a particularly strong 21.8% base business growth in 2022, driven by significant increases in testing volumes at 18% and prices at 3.5%.

Now let me conclude the presentation of today with the outlook for 2023 and beyond, and we go to Slide 29. So based on our strong core business of routine and specialty testing, we are very well positioned for the future. And for 2023, we expect group revenues of around EUR 2.7 billion. This assumption is driven by continued underlying organic growth of approximately 4%, with accelerated prices within -- price increases within the base business. Our 2023 adjusted EBITDA margin is expected to be in a range of 16% to 18%, and this incorporates factors like the overall reduction of COVID-19 testing volume and prices. Inflation risks while also considering our goal to double the savings from the SALIX program in 2023 compared to 2022. For M&A, we will spend up to EUR 100 million in 2023, which is a temporary reduction compared to previous years to fully focus on bringing productivity back to pre-pandemic levels.

In 2024 and 2025, we expect the adjusted EBITDA margin to gradually increase by at least 0.5 percentage points per year. Over the long term, we continue to aim at an adjusted EBITDA margin of 23%. And this will be supported by our year-on-year organic growth of more than 3%, accretive bolt-on acquisitions, a projected annual productivity increase of 2% and also active portfolio management.

And finally, on Slide 30. So based on the key levers mentioned in the previous slide, we are appearing here and in the [ course also ] of the presentation, we are confident to gradually strengthen our margin and fulfill our long-term ambitions. So to conclude, we are very confident in our capabilities and our business model to continue a robust and sustainable development of SYNLAB in the future.

I hand over to Anna.

[Anna Niedl, executive]

Thank you, Mathieu and Sami. So this concludes our presentation, and thank you all for your attention. We will now hand back and open the line for your questions. .

[Operator]

[Operator Instructions] Our first question comes from Jan Koch from Deutsche Bank.

[Jan Koch, analyst]

I have 2, if I may. The first one is on your 2024, 2025 margin outlook. What are your assumptions for future price cuts in France? And then my second question is, on the inflationary impact on reagent costs, I understand that you haven't witnessed a significant increase in costs so far given that you generally have long-term reagent contracts. Of the contracts you have recently renewed, what kind of price increases do you have to burn here?

[Sami Badarani, executive]

So on '24, '25, obviously, we have looked at the trajectory of price and the inflation, and we have an assumption of accelerated pricing in most of the portfolio at least in '24, and this bridge between price and inflation has to reduce. Now specifically for France, the current agreement is not yet negotiated or discussed with the authorities. It will be happened during the year. So we've made an assumption and the assumption is consistent with our historical view of how prices evolve in the country and usually evolves in relation to the volume also.

[Mathieu Floreani, executive]

And for the second one, the evolution of our reagent costs. Historically, what we have seen is that the increase of our size has always enabled us to optimize the condition of each of the renewals, and we have a factor to remain consistent. You also have to take into account that the mix enriches regularly also with more complex tests coming in, which generates improvement of gross margin.

[Jan Koch, analyst]

Great. Very helpful. And one follow-up, if I may. Could you provide an update on the investigation in Portugal? On the last call, you mentioned that you're currently conducting a review and might have more information now in March.

[Mathieu Floreani, executive]

Sure. So we conducted the review and we have turned in our response to the authorities in March, and our response was to dismiss the allegations. I can't tell you more, of course, because we are in the process.

[Operator]

Your next question comes from Oliver Reinberg from Kepler Cheuvreux.

[Oliver Reinberg, analyst]

The first one would be on Cinven. I fully appreciate that you can't say much here. I was just wondering can you share any kind of color on the time horizon here. Is there any kind of legal limit which -- in which you have to provide your response to this approach? And also, is there any kind of time line that has to be followed after your answer here?

Secondly, on personnel cost inflation, the 2.7% you mentioned for Q4, can you just confirm that this is on a like-for-like basis? And can you share with us what kind of like-for-like personnel cost inflation you have embedded in the assumption for 2023, but also in the next 2 years. And then last question just on this kind of legal provision. Is that related to the investigation in Portugal?

[Mathieu Floreani, executive]

I can answer the first one and leave the second one to Sami. So on Cinven question, the legal limit in the process, we have a fiduciary obligation, Sami and myself, to conduct the process within the legal requirements. And as we said, to act in the best interest of Cinven and its shareholders, and that doesn't call for a legal time limit to my knowledge.

[Sami Badarani, executive]

Yes. For the second question, the inflation on personnel expense is 2.7% in 2022. Yes, it stays on the base business, and the assumption for 2023 is around 4%. And we have taken, I would say, an assumption based on our historical rate with -- considering also the environment for 2024 onward.

[Oliver Reinberg, analyst]

Does that mean that you're assuming less than the 4% for 2024, correct?

[Sami Badarani, executive]

Yes, I think '24 will be a peak year. But it doesn't mean that we came back also to -- only the historical level for future years.

[Oliver Reinberg, analyst]

Sorry, '24 is the peak year or '23.

[Sami Badarani, executive]

'23, sorry is the peak year and '24 onward, we have taken an assumption, which is between the peak year and the historical level, which was much lower. On the legal provision that you mentioned here, we do not disclose the split of this EUR 20 million. But again, all our risks are adequately provisioned in our view.

[Operator]

The next question comes from Blanka Porkolab from Barclays.

[Blanka Porkolab, analyst]

Blanka Porkolab from Barclays. I have a few please. On the nonbinding Cinven, what have shareholders initial reaction you see? That would be my first question. My second question is, how is Q1 trending relative to your full year '23 guidance? And how should we think about phasing our performance over the course of the year?

[Mathieu Floreani, executive]

Yes. I'm not sure I understood properly your first question, but the shareholder reaction that you can see in the stock price maybe, and I can't comment any further, of course.

[Sami Badarani, executive]

Yes. And in relation to your Q1 trending activity, we are seeing continued on 1 side, reduction of COVID, obviously. I mean -- you've seen it on the graph on test per day year-on-year, we have around I would say, EUR 20 million of revenue in the first 2 months on COVID. And on the underlying business, we have a strong growth. But again, we should not forget that last year we had the peak of Omicron wave, so -- but we are well recovering, so far, in Q1.

[Blanka Porkolab, analyst]

Great. And just a quick follow-up. The 4% underlying organic growth that you expect this year, how should we think about the contribution from price and volume?

[Sami Badarani, executive]

We should see a strong growth in price again, similar to last year. I mean obviously, we have a price impact in France, which is significant, which is, at the same time, lower than what we expected in our budget because with the final agreement that happened early January, the price drop in France is lower than what we initially thought at the end of December. So we should see around, I would say, 3.7%, 3.8% drop in France. And then the overall business will -- because of this significant impact in France, will be higher than this year in '22, in '23 and around -- more than 1%, I would say. Yes. And the volume, we have strong volume, obviously, with a strong start of the year and the recovery now. The underlying business is recovering from the COVID period.

[Operator]

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

[Hugo Solvet, analyst]

Can you just maybe talk to the leverage ratio you target for 2023, please? On the long-term targets, I think you mentioned before in the previous call, 2027. Now you're beyond 5 years. So should we consider the 23% adjusted EBITDA margin now more as aspirational? Or can you give us some indication on which year you expect to achieve that? And lastly, on the reimbursement negotiation trend, what's the tone of the negotiation? Can you give more detail on what expectations you have for -- in the model for pricing trends for 2024 to 2026?

[Sami Badarani, executive]

Okay. So first, the leverage ratio for 2023, we are at 2.07% at the end of 2022. And this is still with a very high, I would say, COVID contribution with an AEBITDA of EUR 795 million. Now we've communicated the guidance for 2023 with a EUR 2.7 billion revenue and 16% to 18% margin. So you can easily compute what would be the AEBITDA for 2023, which will increase the leverage ratio. We will probably be above the 3x debt-to-EBITDA in 2023.

Now for the second question in relation to the long-term ambition, and it's our ambition, it's not aspiration, it's slightly more. It's probably less than a guidance. It's fair, but it's our ambition because it reflects our confidence in our business model. And then as Mathieu explained earlier, we have beyond '24 and '25, where we have mentioned above 0.5% margin improvement. We say that at least, for the future, there is a potential -- there is an acceleration to come, and it will come through the portfolio management and the incremental productivity that we can drive in this business.

[Mathieu Floreani, executive]

And for the -- go ahead.

[Hugo Solvet, analyst]

Just a quick follow-up on that. Should we expect then [indiscernible] basis point improvement from -- in 2025, 2026, something like that, to reach that 20%, 23%? Or should we take more 50 basis points or slightly above the run rate. .

[Sami Badarani, executive]

This is your call. I can only mention that we are working towards this ambition and our objective is to accelerate the margin of the business. Now how exactly it's modeled, it's open.

[Mathieu Floreani, executive]

Yes -- so as per the tone of the French discussions. It's a very simple answer. There are no discussions at this point because they're supposed to restart a bit later, at least to my knowledge. And so -- what we expect is that the regulator will have a structured and long-term approach to the industry as it has for the last 3 agreements. So we have been within a framework of an agreement in the last 9 years, this year being an exception. So we expect that this will resume in the same spirit, knowing also that there are very different lab sizes in France, and of course, the regulator has also to take that into account.

[Operator]

The next question comes from the line of Sezgi Oezener from HSBC.

[Sezgi Oezener, analyst]

Hope you can hear me well. So I would -- first of all, you worked as part of Cinven -- sorry, during the time when company was not public and also during the time after that, when it was public. So in terms of the potential for restructuring or changes in the portfolio, what kind of changes do you -- alternatives do you see that would defer if the company were to become again nonpublic in the future?

And my second question relates to the vet sale and another vet purchase in Germany. In terms of the sales figures, they seem to be similar sizes even though the proceeds from the divestment of the U.K. veterinary seems to be a lot higher than the one in Germany. So can you give us some highlights on the outlook and the impact from this vet business? Was the profitability much higher in the business in the U.K.? And should we expect some steady remaining margin impact from that?

[Mathieu Floreani, executive]

Okay. Thank you, Sezgi. So your first question, there is no impact that we can see. We manage the company in an absolute business continuity manner, and there is, in my view, nothing that would be deferred one way or the other. And as to the vet, I think the answer is more simple, it's just a difference of multiple that we paid for the acquisition compared to the multiple we got for the sale, a very significant difference. So there is no impact, as you have imagined on revenue, AEBITDA or profitability that would be -- that would have any significance.

[Sezgi Oezener, analyst]

All right. It just drew my attention because in terms of the revenues, the 2 businesses seems very similar. And it seemed out to me that in 2 countries, the margins would be very different. Well, of course, it could be. .

[Mathieu Floreani, executive]

No, it's not different. The margin is not different. It's only the fact that we had a very nice sales in the U.K.

[Operator]

The next question comes from David Adlington from JPMorgan.

[David Adlington, analyst]

So the first one, I might just push you a little bit just in terms of the likely timing on your decision around the Cinven offer. Is it in the next few weeks? Or would it be -- it is also possibly longer than that? Any sort of narrowing down that would be very useful, I think? Secondly, just on the SEL tender, obviously, dilutive to margins last year, I think, by about 80 basis points. I just wondered what you expect the trends within that particular tender to be from here. Do you expect those to improve?

And then finally, just in terms of the, obviously, the margin compression that you're seeing, I just wondered if you're detecting any stress amongst your smaller competitors. And if you are seeing that stress, how do you expect that to play out? Do you expect people to exit the industry from here?

[Mathieu Floreani, executive]

Thanks, David. So I won't comment on the first point. And just to correct what you're saying, it's not an offer. It's an expression of interest for an offer, which, of course, is a bit different. Then, on SEL?

[Sami Badarani, executive]

Yes, the SEL, the margin is diluted by -- and it was known in advance. And this whole project of SEL is a major transformation. We are spending a lot of CapEx this year, building a new lab, and there will be a concentration of all the labs, the various labs existing in the various hospitals, is to -- and to have a state-of-the-art lab concentrated in one location. This, obviously, you can imagine, generates savings and generates productivity. And so the intent is obviously to improve the margin of this business over time, and obviously, part of the deal -- a portion of this margin will be shared with the NHS or the trust, but still, it will still be an improvement for us. So it's probably not in 2024 or '25. But again, it's a 15-plus contract duration.

[Mathieu Floreani, executive]

And this agreement is also a very strong scientific platform for what we call reference tests or specialty tests across the U.K. and even broader and developing that activity is also relative to the margin of the contract. And now on your last question on margin compression, people would exit the industry. I have not seen one single case of this. The industry is a very resilient industry. There is some temporary pressure, of course, with inflation, but mostly regulators take this into account. And I think it might favor more say, M&A maybe at some point, but not to the point of people just wanting to exit. I think it's more on the positive side that people would look for more scale and concentrate.

[David Adlington, analyst]

Yes, I think that was the point I was trying to get to is, are you seeing [ greater ] interest of people selling out, I suppose?

[Mathieu Floreani, executive]

No, I think you have probably, in our view, a lot of labs, smaller labs in Europe that are also facing a generational change in the coming years, right? It's no different than the population of doctors across Europe. And so I think maybe this will indeed -- with the appetite for some players to consolidate, generate some more consolidation in the industry. Let's not forget that the industry is just less than 10% concentrated across Europe at this point. And so this is a long-term trend that has not stopped up to now for many, many years.

[Operator]

The next question comes from Demi Ogunwusi from Barings Bank.

[Demi Ogunwusi, analyst]

I just had a question on the French market. I was wondering if you could maybe speak to some of the developments you're seeing within that market in terms of volume and then also on the diagnostics strike action that you just mentioned? Have you seen any progress in terms of the default? Or would you expect strikes to kind of -- would occur through the year?

[Mathieu Floreani, executive]

We -- you got it because -- I struggle acoustically.

[Sami Badarani, executive]

No, no. The recent development on the French market in relation to the strikes and the impact on volume, yes, it's indeed we had in Q4 a couple of days of strikes, 3 days, I think, and it has impacted the revenue for around EUR 2.5 million and slightly the AEBITDA but nothing material. And similarly, in early January, we have a couple of days again, and it has -- it will impact also the revenue by a couple of million euro but nothing significant. But it's over now because there has been an agreement in early January between the NHS and the industry. And the outcome of it was -- and the agreement on the price drop for 2023 is a favorable outcome again, where prices will be lower than what it was expected initially.

[Mathieu Floreani, executive]

The price cut will be lower.

[Sami Badarani, executive]

The price cut -- yes, the price cut will be lower.

[Demi Ogunwusi, analyst]

Okay. So I guess just as a bit of a follow-up. Looking ahead at the rest of FY '23, how do you expect volumes to progress within France compared to FY '22?

[Sami Badarani, executive]

Yes. In France, we usually see strong volume development with the aging of the population, the increase of the population, the increase of number of tests. We usually see more than 3% volume increase on a yearly basis. That was usually offset by prices and the market overall was growing around 5.7% per year. But the underlying driver for structural growth are there. And the local NHS is also pushing for more ongoing test, prevention test and screening in a more general way going forward. So we are confident in this market growing in terms of volume.

[Operator]

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

[Grace Lee, analyst]

Can I ask 3, please? First, on the FY '23 margin guidance, can you help us understand, you mentioned tax, but on OpEx side, what are you assuming in terms of the cost inflation there? And then also as a part of that margin guidance, are you assuming any one-off cost impact of COVID continued into '23 with like capacity ramp down that needs to continue to happen in '23?

And my second question is on the investment required for [indiscernible] considering that there's still margin dilutive impact near time, and this is much more for future opportunities. Is that something that you guys are thinking about in terms of reducing that activity down a little bit for near-term-wise? And my final question is Germany M&A activity. We are hearing its sort of coming back now again. So curious how you're seeing that market as well?

[Sami Badarani, executive]

Yes. For the inflation in terms -- for 2023, I mentioned it already previously. I mean we're seeing around continuous inflation overall for the business at around the same pace in 2020 -- second half of 2022, which is around EUR 20 million per month. I mentioned the 4% on tax, and we still expect 5% -- around 5% on OpEx also inflation.

[Mathieu Floreani, executive]

Per quarter.

[Sami Badarani, executive]

Sorry, EUR 20 million per quarter, I am sorry if I did a mistake here. Thank you, Mathieu. Now in relation to the one-off on the COVID rundown, I mentioned earlier the FTE run down, which is the main cost at the end. We are accelerating this ramp down. We still have a 360 at the end of February, FTE. Obviously, this is still too high in relation to the current volumes that we're having and then there is a trade-off between accelerating the restructuring versus waiting for the end of the contract, while some of those people can still be used in the growing underlying business. So there is a lot of trade-offs that are made locally. But obviously, any opportunity to accelerate the reduction is being managed.

[Mathieu Floreani, executive]

But we should not have any significant one-offs connected to this reduction.

[Sami Badarani, executive]

Not now. No major restructuring.

[Mathieu Floreani, executive]

On B2C, there is capital consumption indeed. I mean your point is correct that it's dilutive to our margin, but we see this as a truly an opportunity and we have a unique position with our diversified geographic footprint across Europe and beyond. So we really believe that we should not say tamper with this and look also -- say to create the levers of further organic growth acceleration in the future. So we will stick to our plan to a large degree. We obviously always try to optimize a bit things. But generally, we stick to the plan.

And then on German M&A. We have not seen anything specific. Maybe if we really want to answer the details, maybe there is a bit more anatomic pathology companies to be -- that come to the market. And that is most probably also related to what I was mentioning earlier. They are more [ intuitive personnel ] type of companies depending on pathologists and these people for many of them are nearing or have passed the year of retirement, the age of retirement, sorry. And that may be accelerated a little bit. But other than that, for classical lab, nothing to report.

[Operator]

[Operator Instructions]

We have another question, which comes from the line of Angelo Manca.

[Unknown Analyst]

Have you appointed advisers to evaluate the expression of interest from Cinven?

[Mathieu Floreani, executive]

Yes. Yes, we have.

[Operator]

[Operator Instructions]

The next question comes from the line of David Spire.

[Unknown Analyst]

You previously reduced your COVID testing revenue guidance from EUR 250 million to EUR 50 million which you reiterated as part of this recent update. Can you just talk through that, in particular, with the EUR 20 million of revenue that you mentioned have been achieved in the first 2 months of this year?

[Sami Badarani, executive]

Yes. Here, there is -- we are expecting a drop and a continuous drop of the volume as well as a drop in the prices. There has been announcement price drop, has already happened in France early February. And in Germany, the price will continue to drop. And as of 1st of April, the prices will be around EUR 20 per test. So the contribution of COVID-19 would be lower and lower going forward.

[Mathieu Floreani, executive]

But having said that, it's fairly reasonable to expect that, let's say, end of April, we will be at least at the half year mark of the number. And this is a cyclical -- it's a respiratory affectation, right? So it's also very logical to expect that in autumn and winter, so by the latter part of the year, there will be, again, some needs in -- as we have for other such tests and usually, right, there is seasonality. So that's the color.

[Operator]

Next, we have a question from [indiscernible] from Partners Group.

[Unknown Analyst]

Hello. Can you hear me?

[Mathieu Floreani, executive]

Yes, we can.

[Unknown Analyst]

Okay. Perfect. Maybe I missed it, but would you be able to share with us the COVID-19 EBITDA for FY '22?

[Sami Badarani, executive]

The point is, again, we -- in the last 2 -- since the beginning of the pandemic, we have been struggling in isolating the full performances, the full contribution of the COVID because it's very difficult to allocate cost between the 2 -- COVID-19 business and the rest of the business. When we look at the contribution of the business of any test in general, we talk about flow through around between 40% and 50%. And so we could arguably make the assessment that it should be similar, and that's what we have been experiencing.

[Mathieu Floreani, executive]

But also very different, depending on countries, reimbursement schemes, type of services, et cetera, et cetera. So it's...

[Sami Badarani, executive]

But that has been roughly -- I mean you can see it also in the incremental revenue, and we've done in the last 2 years and the current guidance of 16% to 18% with this incremental inflation.

[Unknown Analyst]

Okay. And then on Slide 41, where you have covenant adjustments of EUR 31.9 million to the EBITDA. What exactly are these adjustments?

[Sami Badarani, executive]

These are related to our documentation, the bank documentation that we have in hand. And so they include the synergies and acquisitions. They include LTI, long-term incentive plan costs, they include the legal provision as well as investment with no revenue, for example, the D2C platform. All of that is included in those adjustments. And it's per our banking covenants also.

[Unknown Analyst]

Yes. Okay. And then just lastly, you mentioned that the tariff cut in France for 2023 will be 3.7%. Some of your peers have communicated higher percentages, something close to the 5%. Just wanted to understand how that 3-point -- why there is a difference between what you're expecting and what your peers are seeing? .

[Sami Badarani, executive]

Yes. And we have previously communicated 5%. So -- but there has been an evolution in early January, where there has been a reallocation of the price drop that was expected of the market, and it was -- it's EUR 250 million for the overall market in France. And the allocation of this EUR 250 million has been made, EUR 180 million on the base business and EUR 70 million on the COVID business. And that's why the initial reduction, which was assumed to be all on the base business for EUR 250 million overall for the French market has been now reduced and so it's a reduction from 5.1% to 3.8%.

[Operator]

[Operator Instructions] There appears to be no further questions at this time.

[Mathieu Floreani, executive]

Let's leave maybe 1 minute for people who struggle with the unmute or the process.

[Operator]

[Operator Instructions]

[Mathieu Floreani, executive]

All right. It seems that we have exhausted questions. Back to you, Anna.

[Anna Niedl, executive]

Okay. Thank you very much, Mathieu and Sami, again, also for the Q&A session. And with this, I would actually like to close the call, and we will speak again during our next webcast event, which will be with the Q1 results on 10 May in 2023, so 10 May 2023. Thank you, and goodbye, everyone.

[Mathieu Floreani, executive]

Thank you. Goodbye.

[Operator]

Thank you very much. That does conclude our conference for today. Thank you all for your participation. You may now disconnect.