Eurofins Scientific SE (ERF) Earnings Call Transcript

Good day, everyone, and welcome to the Eurofins Scientific Third Quarter Conference Call. [Operator Instructions] It is now my pleasure to hand the floor over to your host, Andrew Swift. Sir, the floor is yours.

Ladies and gentlemen, welcome, and thank you for joining Eurofins 9 Months 2026 Conference Call. Please note that this call is being recorded and will later be available for replay on the Eurofins Investor Relations website. During this call, Eurofins' management may make forward-looking statements, including, but not limited to, statements with respect to outlook and the related assumptions. Management will also discuss alternative performance measures such as organic growth and EBITDA, which are defined in the footnotes of our press releases. Actual results may differ materially from objectives discussed. Risks and uncertainties that may affect Eurofins' future results include, but are not limited to, those described in the Risk Factors section in the most recent Eurofins' annual and half-year reports. Please also read the disclaimer on Page 2 of this presentation, subject to which this call and Q&A session are made. I would now like to turn the conference over to Dr. Gilles Martin, Eurofins CEO. Please go ahead.

Hello, everybody, and thank you for joining our quarterly call. I guess you have all read our press release, so I will not repeat everything that's in there. There is a short slide show online. We only disclose organic growth during this quarterly call. So it's a short presentation. You can read the slide, so I will not comment all of them. What we see is that we continue to make progress. The organic growth is what it is. Unfortunately, we have some programs, clinical programs that we thought would start in Q4 of this year that won't start this year. We do have good signature of different programs, which makes us optimistic for next year that we're going to start seeing some improvement, for example, in our central lab and hopefully in our bioanalysis, which have been hurting us for a few quarters. The growth is what it is. And, of course, one can extrapolate it ad infinitum at the current growth or the derivative of the current growth, but in any case, the main thing about Eurofins is that we are building a very strong company that is making good progress. The building of our hub-and-spoke laboratories network has been continued. We are inaugurating new large sites. We just did it for our BioPharma Product Testing business in the Netherlands. We have moved to a new site in the Netherlands, very modern for environmental testing that some of you will see the day after tomorrow. And we are confident that we are going to complete that program on our current scope by the end of 2027, at the end of this 5-year building phase. On the digital side, which is even more important because our type of business delivers data numbers, we generate massive amounts of data every day. That is also making good progress with the deployment of our new generation of suite of IT solutions for our food and environmental testing businesses. We are confident that the deployment will have been completed or quasi completed by the end of next year as planned. And those things will bring massive benefits in the quality of our service to our clients, in the traceability of everything that happens in the speed of delivering service. More importantly, this phase of 5 years, we will prepare us for the next phase where we can deploy at scale, automation and AI solutions. So if you -- as a preview towards beyond 2027, that's going to be more the main thing that will happen below -- after that. We will have the footprint. We won't have to shut down labs, close or move with massive double cost of facilities, while we do the move massive, of course, CapEx to build those sites, that will be behind us. And we can then optimize our network, improve further our service to clients. AI can bring a lot in many aspects of our business to -- especially in the area of quality control to make sure everything that we do there is performing well and automation, of course. So that's the building phase, which has been a long one. I do acknowledge because we've been consolidating a very, very large number of small mom-and-pop labs that were subscale, and were all doing a little bit of everything. This phase will be. And of course, this brings benefits. It brings benefits. That's why even though the growth this year is a little bit below our objective, we will achieve, we believe, our profit improvement objectives. And also next year, we are confident that we will achieve the profit growth objective that we have been planning. So overall, things are going well. We are building. The economy is not as great as we would like in Europe, especially France and Germany are struggling with growth. We see it a little bit in our numbers in this quarter for Life, for example. But overall, we have some areas that have been affected over the last few quarters, but we've hit bottom, we believe, in the ancillary activities like Agroscience, Genomics, et cetera, and we believe that is a much firmer base to grow going forward. Also, this deployment of LIMS system has been really hurting our labs and costing us growth. And once this is behind us, our teams get much more focused on growth, winning new clients rather than fielding complaints because we are behind because due to LIMS changes and so on, we have some backlog. So all of that makes us optimistic for the following -- for the coming years. What we -- you can see on Page 4, some breakdown of the growth and breakdown by activity, again, I caution everyone on extrapolating a quarter, especially if you look at just one area, because one area can be affected by some large programs disproportionately. But overall, the trend is positive. You see on Page 8, it's a bit of color on BioPharma. We still have some areas that are a bit challenged. But we think now in Q4 of this year, we will hit the bottom in some areas. And therefore, we should have a much easier base to grow from there from next year. I'll spend a bit of time on acquisitions in 20 -- on Page 7. I think over the long term, our sector will consolidate around category leaders like any other industry. And specialized companies will be able to carry out much more focused investments in the areas that I mentioned being automation, AI, digitalization footprint. And this is happening. And many leading companies in our sectors, not all, have recognized that and are going away from being conglomerates and being specialized. We've had a very good transaction with Element, we were able to have 27 labs that fit very well with our core segments of BioPharma and environmental testing to join our network. At the same time, we transferred to UL also a number of our labs that we're doing electrical and electronic product testing. This is a number of years. But where we were maybe worldwide number in the 5 to 10, with very little prospects over the next 2 or 3 years to become #1 globally. And therefore, we decided that there could be a better owner. UL is leading in that area, and it makes them stronger, which is good for them. It's good for our teams that are joining UL, and we can redeploy, we started actually with Element to redeploy the resources that we obtained from this transaction into our core business. The good thing is that we have the digital platform to welcome those new labs and it's going to be for us an incremental -- small incremental cost to integrate those labs. They can have access to our clients who can have access to their clients. So this is a good transaction. And this is something we will probably continue to do as the sector consolidates. But we are focusing, of course, on the assets that we think add value and are at the right price. And that doesn't mean we will be buying all assets. There are many assets that we think are either overpriced or don't bring really differentiated value, and this is something we can rebuild ourselves. So this is also an encouraging development. And to conclude on Page 8, we are confirming our objectives and we are optimistic about the future. I think the competitive moat we are building around our business from our investments in site, automation and scale will continue to provide advantages. Once we are done with the deployment of those new IT solutions, we can be much more aggressive commercially in our markets, and, more importantly, our clients can see even more the benefits that we can provide from our labs in terms of speed of service, quality of service, transparency of data, ease of use, ease of doing business with us. And we think that will also play for increased organic growth compared to the market growth going forward. So overall, a good quarter. There's a lot of work to do. We still have 5 quarters until we complete that program at the end of next year. But I am encouraged by the progress I see and I think all those investments will provide an excellent base for a very focused company to do well for a long time even if the economy is not maybe as good as we would all hope. So I will open the mic for questions now. Laurent is here. He can also answer more specific financial questions. Thank you.

[Operator Instructions] Your first question is coming from Tom Burlton from BNP Paribas.

I've got three, if that's okay. So the first one is just thinking about the bridge in terms of organic growth this year. It looks like if we look at consensus at least you land around 3.5% for the full year. It depends where Q4 obviously shakes out. We don't know. I appreciate that. And then you're guiding to mid-single-digit organic in 2027. Can you just walk through the key kind of building blocks or drivers of that? I know you referenced some of them in your opening remarks. But to the extent that you're able to sort of call out, I suppose, the most significant, when we think about, kind of, clinical programs restarting BioPharma, normalizing startups, Europe recovery, et cetera. I'm just curious if you have kind of or the extent of visibility you have in any of those that you call out in particular. Then secondly, can be on the clinical programs. I think you alluded in the report to those not restarting this year. We've been waiting for those -- that sort of air pocket of the business to come back, I suppose, since late 2024. Are you able to give us any more detail around sort of sizing the revenue impact of those? Are they concentrated in a few clients? It sounds like there are a few large projects. But anything more you can give us to kind of underwrite the visibility of those into 2027 would be really helpful. And then the last one is a sort of more strategic one, around this topic of AI and drug discovery, which seems to have sort of caught people's attention in the last few weeks. And as AI sort of, I guess, expands the number of drug candidates, it seems like the bottleneck is increasingly shifting to, kind of, the wet lab work. When do you think we might begin to see that in your Discovery business and elsewhere? And secondly, you mentioned in the past that Discovery business is quite small. If that does end up being a much larger opportunity, how quickly could that business scale? And what would sort of the incremental CapEx requirements be to satisfy the extra demand?

Very much, Tom. Very good questions. Well, on the bridge, I said a little bit about that. I think one main aspect is we've been doing since COVID, a lot of cleaning up. As you saw, we shed also a few loss-making businesses. We closed. We have a bit of cleanup to continue to do. And we are really focusing our group on good companies, good sectors, our core sectors, sectors where we can generate very good return on capital employed. You can generate very good return on capital employed, at different rates of growth, some businesses do it mostly by efficiency, productivity, et cetera. Others do it from growth, we can achieve both. So we have a mix of businesses. The clinical business will grow slower than the other businesses. And that's why we -- even if BioPharma picks up again as it was to high single digits or double digits will have some dilution from this sector. But overall, a lot of the improvement, we believe, will come from the finalization of the cleanup. That's, I think the main factor. Second factor, which I underline is the finalization of the deployment of our new digital infrastructure. It is costly on the one hand, but it's also very disruptive. And when you deploy new solutions, you always encounter a large number of problems, which makes you less productive for a while until you go out of that phase and the new tools give you a lot of advantages, which we think over time will accrue. This year, we'll finalize deployment in a number of scopes, so they should not be affected as much next year. And the ancillary activities, as I mentioned, we did some resizing in Agroscience, we did resizing on Genomics and our CDMOs, we also did in Europe where it is more affected with doing some resizing then what's left will benefit from the growth of the market. Also our CDMO in Canada that some of you will see next week or in 2 weeks is going to come -- bring online some new capacity, which will contribute to growth. That's for the general trend, where we are positive about gradually improving organic growth next year. On the clinical, well, clinic, we don't have much, including BioPharma clinical. We have a central lab with a order of size of EUR 100 million, being small compared to LabCorp Covance, which is more of the order of EUR 1 billion means a big project for us has a major impact on a growth percentage. If you have EUR 100 million central lab and you get a project that is EUR 100 million over 5 years, that's 20% of your business. We've had a bit of a setback. We had some very advanced contracting regarding some vaccine projects that our clients have decided to postpone, so we don't have a start date right now. That would have been very lumpy. It is also around central lab, we have another business, it's called bioanalysis, which is of similar nature. If you have large programs that can be significant as a percent of total revenues. And -- so we have signed some new programs, much broader base with key clients, for example, in central lab that we believe will start next year. Vaccine probably not next year, that would have been a bigger shift. So our target of mid-single digit next year doesn't account a very significant shift on that. If that happens, that would be a plus, and that would have a more positive impact. But mid-single digit is the range anyway. So we'll see where -- when all those things start. But what we've done, we've also moved all those capabilities into modern single sites. So if things pick up, we have significant capacity. And that brings me to your other question. It's not only -- I was talking about clinical, but what I say about clinical applies also to drug discovery, to the area of more earlier phases. We have also done a lot of reorganization of our sites, moving to newer, bigger sites, which have capacity. So if the market really picked up, if AI brought a lot of candidates that have to be put through the physical testing in labs are -- we could increase the capacity of our discovery business by just adding people. We have the footprint. We have the labs. And more importantly, the bigger business is BioPharma Product Testing, which the development work will have to be done in labs. AI cannot do the development work. You know, the method development and testing, et cetera. And for that, we have created a lot of capacity for our BioPharma Product Testing. I just mentioned our brand new lab in the Netherlands, for example. We've done that in a few areas in Europe, in Milan also. We have a lot of room for expansion in those sites. If you'll see we have a whole floor empty in the Netherlands. We have a whole wing of a building that we can expand into in Italy. And Lancaster in 2028 in Pennsylvania, we'll have another huge wing added that should give us space for growth for a number of years. So that also, that program of building the facilities is coming to an end and it's going to provide capacity. Of course, we will only hire staff as the actual programs get signed and the contracts get signed. But we won't have to move. We won't have to work on a multiplicity of sites, except for the local microbiology, which also in BioPharma is necessary to have now from those acquisitions that we did over the last couple of years. I'm happy to see that we have now a national footprint for BioPharma also for the small part of BioPharma work that has to be done locally close to clients. We now have an almost complete national network of microbiology laboratories for BioPharma Product Testing, and so this will indeed provide significant capacity should the growth in BPT in the market increased significantly. I think I covered your three questions.

Your next question is coming from Francois Digard from Kepler.

Francois Digard here speaking from Kepler. Just a simple one on the FDA warning letter. The FDA recently issued a warning letter to your Horsham laboratory in Pennsylvania, highlighting serious deficiencies in data integrity and quality controls. Could you tell us more about that? How is it isolated? And have you investigated similar practices existing elsewhere? And have some customers been affected? And could this lead to further regulatory action or commercial consequences?

Thank you for the question. This is, of course, very unfortunate. This is a very small laboratory that is more dedicated to consumer product testing and food testing that unbeknown to the leadership of our BioPharma Product Testing activity is very small activity on pharmaceutical product activity, is less than EUR 2 million a year. And this is, of course, not good, and we're not happy about it. And our teams are dedicated BioPharma Product Testing teams are now helping that small lab, which was in another business line to remedy and answer the observation and -- but in the meantime, that lab has been closed to BioPharma Product Testing. The clients have been transferred to dedicated BioPharma Product Testing labs, and this situation is managed. It's of course, regrettable, and I think it underlines what we are doing by being much more specialized by not letting laboratories do a bit of everything, which is a bit the tradition, unfortunately, in our sector, that in many countries, many market initially, labs do a number of things and are not specialized by activity. And this is what we're doing at Eurofins. This was an exception that was missed. It's very unfortunate. But in all materiality, closing that activity at that lab will have a negligible impact. Next question?

Your next question is coming from Zach Al-Qaryooti from Morgan Stanley.

I have two questions, please. The first one on the BioPharma, how much of the improvement in that end market would you say reflects, kind of, an underlying recovery in customer spending versus kind of project timing or comp effect? Are you seeing any broad-based meaningful improvement in the customer pipelines or more optimism and higher order intake into 2027? And then the second question, just on how you're thinking around your capital allocation priorities looking ahead. So you've still been quite active on the buybacks, but I appreciate you've also completed some acquisitions like Element. So I just wanted to revisit your latest priorities? And maybe just as a follow-up to that one, on the M&A pipeline. Does it feel like there are more of those midsized acquisitions, the same sort of ballpark as Element coming to the market?

Thank you very much. Yes, in BioPharma, as I said, one should not extrapolate 1 quarter. It can indeed, as you say, be due to some contracts, large things being finished. Overall, our teams in BioPharma Product Testing in North America have remained positive and bullish about the growth for the last few years. It does not change materially. There was a bit of a boom during COVID, but we have a solid mid-single digit there and hopefully going back towards high single digits. Europe has been a little bit more subdued, but at sometimes, not all quarters. That also depends on local situation at certain laboratories. Again, we are reorganizing our Europe BioPharma Product Testing business along bigger sites, more modern sites. Cannot be done super fast because you need to build the sites, it takes a long time and the qualification of those sites takes a long time. Transfer of work takes a long time. So we have a slightly less strong position in BioPharma Product Testing in Europe, but that will change over the next few years as a result of the very significant investments that we did. A bit less strong and BioPharma is refocusing some of its investments in North America. So I think we'll retain some growth differential in BioPharma between Europe and North America. Allocation, this is all driven by return on capital employed, not by margin, not by growth. Although, of course, we like to grow, it's easier to generate a good return if you grow. We target a 16% return on capital employed, and that drives our decision. There are only a certain amount of good quality acquisitions at the right price. We see some competitors paying 20x EBITDA for some assets. Well, if you pay that much, you better have a very massive organic growth behind that or massive cost savings because you are not going to generate a good return on capital employed if you do that. We are more selective. We can pay high multiples if we have massive synergies, but that's on a case-by-case basis. So we will not necessarily accelerate. What is clear is that the smart players, the good players in our industry are focusing. This is now understood by the good leaders of companies that there's no point staying in many activities. Even if you have an activity that's generating cash, if you are not a leader, if you are not able to make the focused investment to have the focused leadership you need long term, that's not going to be good for you. And we think this wave will accelerate because the market will, in the end, recognize that focused companies are doing better, have better margin, better growth, et cetera. So I think that could play out, maybe not necessarily this year or next year, but over time, I think it's -- the direction of the journey is clear. And that might bring more M&A. As to the M&A, we don't know. We think a target of EUR 250 million per annum is reasonable. It's doable with a small bolt-on acquisitions that are easy to integrate, that we buy at acceptable multiples. And larger deals may happen. Some of the larger players might decide to focus, we will see that. And hopefully, it doesn't happen too soon because we're busy at the moment. We're finishing our program of finalizing our digital network and our lab footprint. And buybacks, I missed buybacks. But yes, we have -- we are fortunate we can buy as much as we want of a very good company at 8, 9, 10x EBITDA. And so, frankly, it's a no-brainer as long as we stay within our leverage to buy Eurofins shares at those multiples when I see the multiples that are paid for small assets sometime of very poor quality. And so yes, if we have headroom, we can allocate some money to buybacks.

Your next question is coming from Allen Wells from Jefferies.