Earnings Transcript for ERF.PA - Q4 Fiscal Year 2024

Operator: Ladies and gentlemen, welcome, and thank you for joining Eurofins’ FY 2024 Results Presentation. Please note that this call is being recorded and will later be available for replay on the Eurofins Investor Relations website. Throughout today's presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions] 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 of 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 the Q&A session are made. I would now like to turn the conference over to Dr. Gille Martin, Eurofins CEO. Please go ahead.

Gilles Martin: Hello, everybody. Thank you for joining our call regarding our preliminary end year result for 2024. We've decided to move things forward as our company grows, is more mature, and our financial processes further strengthen, and that gives you an overview of our performance for last year. I think we've had a very good year last year, and I'm happy to report strong results. The last few years were impacted by lots of extraordinary events, the COVID pandemic, which had initially negative impact and positive impact for us, and then a very strong impact of the war in Ukraine on supply chains and inflation. Inflation may not be fully over now, but its impact is much less, and we've been able to make price increases, again, part of our normal operating model. So the impact of inflation is now not significant on our results. So if I go, and we have a slide show, if I go on page 5, we've decided to put things in perspective and not only discuss the improvements this year in 2024 compared to 2023, we'll also compare our result to the pre-pandemic 2019. And I'd like to discuss here what we have achieved in the last five years if we somehow not focus on the three years with ups and downs due to COVID. Well, first of all, we've had significant growth of our revenues, on average 9% per annum. And as you can see, our EBITDA, or whether it's adjusted or reported, increased faster than our revenues growth, or EPS increased twice as fast each year on average as our EPS growth since 2019. And on the cash flow side, we've had even more impressive results. And the impressive thing about that is that we are still in the middle of a building phase. A lot of the investments we have made in the last five years have not yet provided beneficial impact. There are costs. It takes a long time to build a building, to validate it for biopharma, to validate it for CDMO or even for food or environmental testing. We have lots of CapEx that is being fully underutilized or not utilized at all now that still is weighing on our cash flow and our returns. But that will definitely provide positive benefits. The same thing for large investments in digitalization that we have made over the last five years and that are only in part providing positive impact. So that's why we feel the last five years have been a very good run for Eurofins. And they are basically the result of ‘24 show the resumption of a historic growth trend, not only for our top line, but also even more strongly for bottom line and cash flow, although we can still do much better than that as this five years investment phase finalizes by 2027. On page 6, we discuss a bit more what we're doing for this investment phase. So we discussed it in greater details elsewhere, but we are building a hub and spoke network with very large central laboratories to do analysis in very large volumes and benefits from economies of scale. And then we have local spoke labs close to customers to do the things that need to be done very close to customers because transportation times might modify the result, like microbiology, for example, or water testing, short, old turnaround time samples. And when you buy companies, they don't always fit that model. So there is usually a significant transformation of the asset required. So they fit this model, which provide much higher leverage and profitability. However, as we can see on this slide 6, even though we plan a budget of EUR 400 million per annum for that, we are making progress and we start benefiting from past investments. So the as percent of revenues, the CapEx for that program is starting to trend down. What we also can observe for the first time this year is also that CapEx and depreciation start to invert. So basically, this is also good for our cash flow because we start to have to invest less than the depreciation where we're benefiting in our cash flow. IT is a very important CapEx area because for our sector, there are no real full IT solutions one can buy. Laboratories historically have a large number of different IT solutions that have different life cycles, have to be bridged, connected, et cetera, and depend on a number of vendors. We are developing for each of our business line or own IT solutions to cover the whole range of needs and they provide a lot of advantages in quality, performance, TAT and overall cost. This is probably has been over the last 10 years our largest investment and it's also in some business lines starting to bear fruit and our IT costs we see are then reduced and our businesses are much more efficient and reliable. So this is making progress, startups will continue to make startups although over the last couple of years of this five-year plan there will be fewer startups because we want to see the benefits of those and we want our investors to see it too. On page 7, we have presented our results in a way that maybe we should have done before but that illustrates basically what we are doing. We have two scopes, we have the mature scopes, the businesses that have been in our group for a long time or we have more or less finished the setup of the hub and spoke network, the alignment of our businesses to our operating model and then we have the non-mature businesses which are either startups, businesses we started Greenfield or we are basically completely refocusing on a different market and the acquisitions that we've bought and that don't fit this model and that are being reorganized. And you can see the result of both scopes or investment on the startup but non-mature you can see it cost us on top of the CapEx about EUR 70 million of losses in EBITDA that are strictly allocated and attributable to that scope and we have the mature scope. And if you look at the performance of the mature scope it is pretty big in the meantime. It represents EUR 6.5 billion revenues. We've adjusted EBITDA margin of 23.7% which is very close to a 24% target margin for 2027 and that alone should illustrate where we are confident to get there for whole group and even the SDI on the component is very close to the 0.5% that we set as a target for 2027. So and that mature scope if you valued that mature scope alone with any kind of metrics that can be used for comparable and one can easily see why we feel that buying our share at the moment is a very significant opportunity for using the cash of the company. And of course, we believe strongly in our startups that they will generate strong profits once they mature over the next two or three years and that's why we are making those investments. So that's a new presentation of our result that you also can find in the detailed notes. On page 8, we discuss our investments because of course people can say Eurofins invest a lot and we do that because we believe in the extraordinary potential of our market and our strong market position to generate on a secular basis for a very long time very high returns a very good margin and very high cash flow. So over the last five years we've generated the revenues that have been growing and that now represent almost EUR 7 billion and they generated quite a lot of cash. As you see the cash generation has significantly improved over the years, it has been about 20% of our revenues which is quite significant. Overall, our operations are very profitable but we have opted to invest of those euro billion that we could have just kept and if we didn't want to grow and of course especially those investments done in the last couple of years, they are not yet providing the benefits, the returns that they should provide because it takes time as I said earlier for a building to be commissioned to be qualified to be audited by clients and authorities et cetera and the same applies for IT solutions. So very significant investments that we have been doing and also, we invested in buying companies quite significant amounts. We've also since our large campuses we're going to need forever. And we don't want to be held at ransom by landlords because we make so much investment in those buildings to make them basically into laboratories. We believe owing our laboratories is a very good investment for the long term, and we'll come back to that. But on top of that, during this period we've distributed, we've returned to shareholders more than EUR 1 billion, which is beginning, it's very modest compared to what we think we ca do, but it still already significant amounts. And on page 9, we've looked at the returns, and again, we're not at a point where we can show peak returns because we, as I mentioned, we're not seeing yet by design the full benefits of all the investment we have done that are, of course, in the calculation of returns included. Only part of them provide full returns yet. But still, since 2019, you can see how our return has improved, they have significantly improved between 2023 and 2024. And overall, as you can see on our capital, our net debt has actually been almost constant over the period, and our financial leverage since our margins have increased a lot, and our total profit and our size has increased a lot, our leverage has gone down significantly. And the other interesting thing is for some time people said, yes, but Eurofins share count is increasing. Actually, considering what we've done to buy back our shares, we've already bought back 70% of the share that we issued at the beginning of COVID, as there was uncertainty and potential need for cash. So our share count actually has been only very modestly. So that means we've pretty much the same capital. We are now generating much better results, and we think this trend can only continue and amplify. And the interesting thing about that is, as we've seen, some of our markets have been a bit more challenged in the course of this year, and especially in the second half, and in the second half of 2024, and also in fourth quarter, although our growth was less than our long-term average target, which we still believe, we still were able in H2 to significantly increase our margins. So we now have a size that we can adjust, if growth is a bit less then we adjust cost, and we still improve our profits, and we have a long runway to continue to do that. And on page 10, we've looked at historically other transactions in the sector, just to put things into perspective of how we decide and explain how and why we decide to deploy capital the way we do. And now we have much more free capital to deploy, because, as I mentioned, the building of our network is nearing completion. So those are transactions of sizes between EUR 100 million and maybe EUR 500 million of smaller tick businesses, and you can see the multiples, and the multiples haven't changed much between the historic period, 2019 pre-COVID, and now, a bit less now, about 15x EBITDA. We've deployed about EUR 630 million of capital this year to either buy companies or buy our own shares, and you can see that the companies we bought last year, we bought them at an EBITDA multiple of 10, and that's the first year. They haven't started being improved by all the measures we are doing to integrate them, and we bought our own shares last year for EUR 290 million at only an EBITDA multiple of 8.7. And so if we had done that to buy assets like others did in the market, which we think are less well-invested assets and assets with much less potential than Eurofins as a whole, we would have spent almost EUR 500 million more. So that shows you opportunity. It is very rare that we can buy something for 50 that actually should be worth 100, and we have taken opportunity of that when we buy our own shares, and if things don't change significantly on our valuation, we will continue, and now we have much more cash flow to do that, and even last year, we could do it while we reduced our leverage. There will be no doubt some discussion about how is biopharma doing and what is the outlook on biopharma, and so we wanted to give on page 11 a bit more granularity on the evolution. Because indeed, in the full year and also in Q4, biopharma growth overall is the activity that we describe as biopharma, which contains also other ancillary activities that are related to biopharma, can be also GLP, et cetera, but are not strictly biopharma. So we have a number of verticals in biopharma. And the core vertical, which is biopharma product testing, is doing actually quite well. So it's still growing at mid-single digit. And we see that continuing and actually improving. For a long time, it was growing at double digits. We don't see why that would not come back. However, we have a small group of companies that were presented last year about EUR 400 million. That actually decreased 10% last year. There is a number of reasons for that. Agrosciences services or crop sciences was probably the hardest hit. This is an area where we do research for the launch of new agrochemicals, for registration of agrochemicals, registration of new seeds or biostimulants. And that industry has been struggling a bit. They've suffered challenges in registration of new agrochemicals. And they are now in a phase where they are reducing their spending. So what we've done there, we've adjusted our cost. This will not go to zero. We don't expect things to worsen. But they might not pick up immediately. So we've adjusted our cost so that, in spite of that, we can continue to increase our profits. We had some challenges in our due to project ends in our CDMO in France and Italy and India. And there is another thing we discussed already. We have an activity that is central laboratories running tests for the usually Phase 3 clinical trials and related by analysis testing, which depend on studies. And studies can be very large. They can represent tens of millions of euros, but they're a bit lumpy. So when a study starts, until a new study starts. And that's exactly what we are on a couple of very large studies, what we have been experiencing recently. So overall, we had a 10% contraction of revenues on what is a fairly small part of biopharma in total and of the group. And so if we didn't have this impact, our organic growth last year for the whole group would have been 5.8% and for the biopharma area, 4.1%, which is not bad and very close to our long-term objectives. So that was an impact. We think it is temporary. There's no absolute certainty of when things will exactly pick up, but we see things on the long-term, going back to the trends we've seen for a very long time. We had also softer, but not negative, but flat growth in Discovery, which are the very early phase of biopharma product development and in Genomics. And we see those things also returning to historic growth rates. Biotech funding is starting to pick up. So we think it's hard to say exactly which quarter this will trend up, but our leaders are positive that they see very good outlooks ahead of them. So that's for the things that impacted, especially the second half in terms of organic growth and particularly in Q4. What we are, although it's of course a negative blip for a very small part of the group, we think this is temporary and will pick up. And that's why we've maintained our objective for 6.5% organic growth on average over long periods. So that's it for my introduction. Laurent will now discuss a bit more detail the financial results.

Laurent Lebras : Good afternoon. I'm happy to present our 2024 financial results, which show a very solid improvement versus last year in line or above our latest objectives. If we turn to page 13, you can see that we delivered a very solid set of results on all fronts. Our revenues were able to grow by 6.7% year-on-year. We have increased our EBITDA margin by 180 bps year-on-year. We have reached an adjusted EBITDA level of 22.3%. We have reduced our SDI. And if you look at how it's translated, our net profits have increased by 32% versus last year and our earnings per share by 41% versus last year. Moving to slide 14 on our revenue bridge, you can see that we had a very limited slightly negative FX impact. Our organic growth amounted to 4.7%. Stronger in H1 at 5.6% than in H2 at 3.9%. And we had contribution from M&A in the magnitude of EUR 132 million. Going into more details on page 15 into the analysis of organic growth by activity, you can see that our live segment of activity, which regroups food and environment testing, was very dynamic. They posted an organic growth of 7.4%. They were very strong in all geographies. As Gilles mentioned it, you can see that pharma was subdued at 0.9% organic growth, but a very contrasted picture because BPT was mid-single-digit organic growth, which is a bulk of the segment, whereas we suffered from the trends in ancillary segments, such as Agrosciences or early stage pharma activities. On the other hand, the clinical growth was in line with our expectation, and that despite tariff cuts that happened in France, which is a large market for us in September, and the consumer and products line of activities was in line also with our expectations for organic growth. Turning to page 16, looking at the profitability improvement by region, so you can see the most significant factor was a very good progress for margins in Europe. They grew by 280 bps, and they are catching up with the rest of the group. And the growth was especially significant in the dark region. And this was all achieved through price increases, volume growth, and contained cost. At the same time, you can see that in the North American region, we were still able to progress our margins by 100 bps year-on-year, despite the very high level of margins already, thanks to the contribution from the food and environment activities. And in the rest of the world, we were so able to increase our margins by 200 bps, and we continue to be accretive to the group in Asia, in Pacific, and the Middle East. Turning to slide 17, maybe the most significant achievement for the year is a very strong progress of our Free Cash Flow to the Firm. It grew by 69% year-on-year, thanks of course to our very good margin improvement, but also to a strong improvement of networking capital and a very disciplined CapEx spend. This resulted in a very strong cash conversion of 56%. And that enabled us basically to self-finance all needs, I mean here, CapEx, M&A, interest, dividends before any share buyback. Going to slide 18, coming back to the networking capital improvement, you can see that it decreased from 5.1% to 3.8%. Thanks to stable inventories and the DPOs, but also reduced DSOs, which improved by five days year-on-year, following the internal actions that we launched earlier last year. Now moving to the CapEx analysis on slide 19. So as Gilles mentioned, we were able to reduce our CapEx spend by 80 bps to 7.5% of our revenues. We are halfway through the infrastructure program that we are building, and we have allocated our CapEx fund by 30% to build our own sites, and 34% to lab equipment, 20% to IT and 16% [inaudible]. And to conclude on page 20, you can see that our financial leverage improved slightly by almost 0.1x, to reach 1.9x, despite all the significant share buybacks we did, thanks to a very strong cash generation in ‘24. And overall, we still maintain a very balanced debt maturity profile with ample and untapped liquidity access. Thank you for listening, and I now turn the mic back to Gilles.

Gilles Martin: I'm on page 21. I talk a bit about the strategic initiatives that we have to complete our Five Years of Infrastructure program. On page 22, we are presenting the progress of building our hub and spoke laboratories network. As I mentioned earlier, we want to have very large laboratories to centralize all the complex tests and the network of local labs. We don't necessarily want to own the local labs because the investments in there can be much less. But those large central laboratories, they have tens of millions of investment rooms, et cetera, the AGAC, and all of that almost doubles the value of the building. We've been often in situations where if we rent one of those large sites, we can have a contract for five years or 10 years. At the end of that period, the landlord knows that it's extremely costly for us to move and they can actually hold us to ransom and jack up the rent. We've just had a case in the UK where the landlord wanted to extract a 50% rent increase and also force us to lock in that for 10 years because moving was extremely expensive and we had invested a lot in that site. Of course, we don't want those things to happen. That's why we prefer, we think it's wise, for Eurofins to own its very large laboratories. We will use them forever so we can accept a slightly lower return than other investments in M&A or organic investments. We can see that's what we've done. So between 2018, where we had about 240,000 square meters of labs that we owned, now we've almost traveled that to 630,000 square meters. And by doing that, we can already more or less estimate the savings of rent that we are making because we have comparable of rents that we pay for other buildings in the same country. We are almost saving EUR 100 million in rent. The yield on that is already above 10%. Certainly, it's not the 12% we want or the 30% we want on organic investments, but it is acceptable. We are continuing that program. On page 23, you see some of the examples of labs that we have added this year or came online. On the next slide, on the page, still page 23, you see other examples of labs that we will open. The exact amount is always a bit difficult to calculate because it depends when those labs come into service, when they are completed. We already spend money on labs that are basically being built each year but that are not open in that year. We give an idea for ‘25, ‘26 of how much we think we should add. The good thing is this is not infinite. We don't need to own all our sites. Between the sites that are owned by related parties and Eurofins, we are almost at 50% of our sites. The related party is a friendly landlord, so there's no risk of anything happening there. So we don't need so much to basically own all the sites that we consider strategic. There are countries where we can't really own sites like China, for example. We are confident that by 2027, we'll be done by this large capital deployment. That capital deployment, again, is discretionary. If we were owned by private equity, they would do the opposite. They would do a sale this back of those 630,000 square meter of lab, which would yield a EUR 1 billion or EUR 2 billion of cash, and they would go and lease it back and sell the business four years later after having shown great financial performance. We don't do that because we think long term. Of course, in those buildings, when we do that, we can make them better, environmentally friendly, with lower energy requirements, et cetera, and better revenues per square meter because we optimize. But it's a significant discretionary allocation of the cash we are generating. On page 24, we discuss a bit our investment in startups. It's another thing that's very dilutive because a startup requires capital. I don't know how much we invested last year just in CapEx for startup, but suddenly over EUR 50 million. That also induces losses because we have building, people expenses, and it's not full immediately. It's not profitable immediately. That takes two or three years. That's very dilutive, very dilutive of the overall result. That's why we show this non-natural perimeter so investors can appreciate what it is. Sometimes people say our numbers are complex. I think they are rather providing more transparency on what we do and how we are organized and the different areas where we deploy capitals and we invest. And if we just showed our reported results, but our reported results are already quite good with EBITDA margin in excess of 20%. So that's for the startup. And we believe this is something we should continue to do. Although also there, at some point we're going to run out of areas where we should do startups. So we might not do that forever in that magnitude. On page 25, we summarized some acquisitions that we did together. We gave statistics. So those that represent about EUR 225 million pro forma revenues in 2024. And we paid 1.5x revenues about 10x EBITDA. And of course we're going to work on them to make them even more profitable and fit them in our hub and spoke network. And we think we can continue more or less at that level. It might be a little bit higher next year because we've signed the acquisition of Synlab in Spain. It's a company that's not profitable. So we're going to have some dilution there, but we paid a very low price for it. And together with our own Spanish business, we think it's going to be a strong business in Spain, probably the leader in its market and that will over time provide good profitability and an excellent return. And on top of that, this year we'll do many other smaller bolt-on acquisitions. So the outlook for acquisitions for ‘25 is good over the five years. I'm sure we'll do our average of EUR 250 million extra revenues per annum, although last year we did less. And the main thing again on that, as I discussed earlier, is a return. We could buy a lot more. We could pay much more for businesses. The average for large businesses is 15 or more in our scope and 15 times EBITDA, but we try to do, we go for acquisitions, not for size, but we go for returns. So we don't focus strictly on the current margin. We focus on the margin those businesses can have three years later and the return we can have on those acquisitions. Another things we do and all our businesses do is invest in innovation. And I'm proud to say that we are often the first to develop new tests, new capabilities that contribute to helping our clients solve difficult problems. And we are often the first in the market to be able to offer those solutions. So to summarize, on page 28, I've summarized our objective. You can see them and read them in our press release. So we'll not go through all of them, but basically, we're convinced that we are in very good markets, in very good markets that enjoy secular growth. The things we are doing to invest in our business to be the most efficient, the most digital, provide the fastest turnaround time, we think will allow us over the long term growth in our segments, in our core areas of activity that is superior than the market, that is of course much superior to the GDP. We've seen pharma being soft already in 2012, 2011. Right now, not the whole of biopharma is soft, mostly pre the first phases, the early phases and biotech, but our view is that this will normalize or the revenues hit we've had in Agrosciences are certainly not permanent. We had a lot of clinical testing. We won big contracts, but I think we can win it again. So that's why we are confident to set, and also the inflation, that includes some inflation. We were at our objective for secular growth at zero inflation was 5%. Of course, we don't know what inflation will be on average on our scope, but there will be a bit of inflation, so probably 6.5% we think as an average for a long period, it's something we can shoot for. A margin of 24% in 2027 seems highly achievable for us. As I showed, we already almost achieved that in our mature scope. And we definitely aim that our under development scope, startup scope will be much smaller by 2027. Mature scope should be able to exceed 24%. A lot of it is not even linked to the market or anything. We just have a huge spend, huge investments, for example, in digitalization that we know will get on the control will reduce. We just rebuilt or are finishing this year the rebuilding of all our internal IT network in much more resilient smaller scopes fitting to our local businesses. The cost of that will be reducing definitely from 2026. We are investing usually in our IT solutions, but many of them get completed and the cost will go down. So there is that element that makes us confident. And also, we'll get the benefit of using all those buildings that are partly empty that we have, better utilization, all the measures we are taking to benchmark our labs, become more efficient, produce our own reagents, et cetera. We'll provide benefits. So that's why we are confirming that objective. And of course, we see as our fixed CapEx, as some elements of our spending cash are fixed or will go down, the CapEx spend and cash flow to the firm and return on capital employed can only increase. And giving, we thought about the way we give objectives, giving fixed numbers doesn't make a real sense because they depend anyway on a lot of factors that we cannot influence, especially exchange rates, for example, or inflation. And so we think those way of formulating our objectives is actually more helpful for investors. And that's what we're doing for 2025. We've set a mid-single-digit objective for organic growth. It's a bit lower than our long-term average organic growth target because we don't know exactly when the early phases in biopharma will start growing again as the rest of biopharma, Agrosciences need to bottom up. Some studies have to restart, but we're confident on that. And we think we can continue to improve profitability also this year. So on the, just to conclude on page 29, so we have achieved a lot. We think we've had a really good year and a year that really demonstrate that we're not here just to have a big size. We're here to generate cash, profit, returns. And of course, the numbers for ‘24 are still very modest compared to what we think we can achieve at the end of our investment cycle. But they show a very good trend and they show our intentions and what we want to do. And really what we are working for our investors is that by 2027, we think we will deliver an extraordinarily successful company with high growth, high margin, high returns, and high cash flows with very, very strong market positions, very defendable market positions in three or four very exciting life science markets, which should enjoy a lot of growth, a lot of organic growth for many, many years. So it's building, it's not like we're not focusing on next quarter or the next two quarters or our focus is to build something that has a very defendable market position that is loved by clients that provides unique services. And also because we have large market shares in our chosen markets, we are not, we are very focused. We don't have so many verticals and we can make the right investments, right heavy investments in digitalization in each of our verticals. And we will continue to do that. But in 2024, you could already see the first result. And as I said, even in the second half of 2024, where the organic growth was not as strong as we think it should be and will be, we could still improve our margins and cash flows. And that's what we, whatever the growth is exactly, whether it's five or six and a half is something we intend to continue doing. That's it for a long introduction, but we can take some questions now.

Operator: [Operator Instructions] The first question will be asked by Annelies Vermeulen from Morgan Stanley.

Annelies Vermeulen: Hi, good afternoon. I have two questions, please. So I just wanted to come back on the medium-term growth guidance, 6.5%. You haven't hit that this year, even on an ex-biopharma basis. And clearly, perhaps don't expect to hit that this year, given there's still relatively limited visibility across some of your end markets. So I'd be curious as to what gives you the confidence that this is still the right level of growth to consider for this business, particularly if you think about the mix of mature versus startup labs evolving over time, whether you can still hit that growth rate. And then secondly, just on the related party real estate, any update to that process? I think you talked at the end of last year about running a valuation process and potentially doing a shareholder vote in the first half. Has anything changed in that regard? Thank you.

Gilles Martin: Thank you. Well we look at this 6.5% as an average long term and we've had years at 8%, 9%, 10% organic growth. And so we think there's no reason why biopharma should stay at the level where it is. Normally, biopharma is almost a double digit business and it could well be that it returns to that. But even short of that, our businesses are becoming better and better. So their ability to win share is increasing and we think that will only be strengthened and continue over the years. So we have some inflation that we didn't have a few years ago when we're already growing 6%, 7%, 8%. So, of course, nobody can predict the future. But our best guess is that on average with some years that will be higher, some years that might be lower, we can achieve this organic growth. Related parties, yes, we are working on it. We've started to commission some comparable. Now, of course, we have a specific situation now is that the best investment for Eurofins now is to buy back its own shares. And whatever the capitalization rate that we take for real estate and it can vary. It's a matter of region, opinion, location, whether you take 6%, 5%, 8%, 9% capitalization rate. You still end up with multiples that are significantly above 10%. And when we can buy our own share at 8.5% and that was on last year's EBITDA, not even on this year's EBITDA, it's hard for us to recommend doing anything like that to investors. The return, because those buildings are not going to go away, they're going to stay available. So we might do a few if we need to invest on the site, expand the site that could create the impression of conflict of interest. We might prioritize some of the larger buildings where our campuses where we need to, that we need to expand. But it's very hard for us considering the situation which could change. It could change fast. We don't know the markets are fickle. And it's a lot of matter of sentiment sometime more than it's not like private markets. Private markets, we know the value of transactions. So it's but public markets can be changing as we see at the moment as a management of the company. We feel that the best investment if we have extra cash flow in addition to our organic investment is to buy back our own shares for significant quantum.

Operator: The next question will be from Suhasini Varanasi from Goldman Sachs.

Suhasini Varanasi: Hi, thank you for taking my questions. Two from me, please. Growth slowed a little bit more in 4Q versus 3Q. Can you maybe discuss how you see growth developing in 1Q this year? Will there be a further step down versus 4Q, or should we expect a stabilization at these levels? And then maybe it starts improving in the second half of the year as we lap easier competitive. And maybe related to that, given the lower growth levels in the first half potentially, as you annualize some of those declines. Do you think you can deliver margin expansion at all in first half, or is it more stable levels that we should be thinking about first half, and maybe expansion weighted to second half of the year? Thank you.

Gilles Martin: Thank you very much for the question. There are many moving parts. And what we know, there are some impacts that we know already. For example, we had the drop of reimbursement in clinicals in France in September. So that's going to affect, in terms of base, the next three quarters, Q1 to Q3. The biopharma, we know some studies will restart, but we don't know exactly when they will restart. We think Agrosciences as will bottom out. But whether it bottoms out in Q2 or in Q3, there are many moving parts. And that's why we are often not to give more precise things. And there are many programs that we do internally, anyway. So I'm afraid I can't really be more specific because each of our businesses have their own dynamics and other things that all have some, it's basically estimates by our leaders. So we didn't do the effort of weighing all of that in order to give the market a quarter by quarter outlook. We think overall, in the year, we can improve. We can improve, of course, on top line, and we can improve the margins and we can generate more cash. Also, because there are many programs that are totally independent of revenues that should improve the profitability. And we do think that some of those things will take time. And that's why we said, probably, we'll see more of the effect in H2.

Operator: The next question will be from Pablo Cuadrado from Kepler.

Pablo Cuadrado: Yes, hi, good afternoon, everyone. Just two quick questions on my side. The first one will be on the consumer and technology products. I saw that probably there was a little bit of turnaround during Q4 where organic growth was only 2% at the end of nine months was close to 8%, so I was wondering whether there was any kind of strange things during the quarter or if there is any kind because I was surprised about the slowdown going through the end of last year just to have a little bit more details on that. And the second question will be on the comments that you make deals on the share count and clearly buying back shares at this price being very profitable. Can you confirm the idea is that from the shares that you bought back last year will be to cancel them or if with the current share back that is ongoing the idea will be to use those shares to cancel them or what's the idea?

Gilles Martin: Thank you very much. Yes, in consumer, we've had a couple of things. We shut down two companies, small companies in the UK and in Germany. And that has had an impact. They were doing local and one of them doing factory air emission testing at very low margins. So that has an impact on revenues. And as I understand, they've had a slightly softer market in the EMC testing in the UK and in wireless, especially one site in China. They're also working a lot on local market. The local Chinese market is very competitive. That's what I got as a feedback. And also, we do a lot of material science testing. And we did a very strong first half because there was a lot of stocking related to AI and so on and semi equipment that we did testing that was completed before the end of the year. So November, December, we're softer on that. I think that's the explanation. And yes, we don't see what we could do. On the second question, what we could do with those shares, we use a little bit every year. And we have used a bit this year for people who exercise stock options or RSU plans. But of course, we are buying much, much more than the need for that. So yes, we probably will cancel those shares at some point. I don't think our shares being at least at the moment highly undervalued in our opinion, even if we were to do M&A, we wouldn't want to pay with shares. So that's, I don't see any other outcome than that.

Operator: The next question will be from James Rowland Clark from Barclays.

James Clark: Hi, thanks very much. My first question is just on your free cash flow in 2024. So you saw a big working capital boost and lower CapEx than you guided. And in 2025, you're talking about an improvement in free cash flow to the firm. Can you just talk about your conviction in delivering that given you won't have the same working capital boost and you're actually guiding to CapEx EUR 600 million? And then secondly, you talked about a margin progression to 2027 as more back-end loaded or back-weighted. I just wondered what's changed from your original thinking here because my impression was it's meant to be a little bit more front-end loaded. So are you putting extra expansion into digitalization or is it because you've got some more margin dilutive M&A? And then my third question is the rest of world, and you may have just asked this and apologies if you have, but the rest of world's slowed down to I think 5.7% organic in Q4 from 10% in Q3. So any extra color you can provide around the deceleration there, is it to the comp and anything else you can provide. Thank you.

Gilles Martin: Yes, thank you. Yes, we've had a working capital boost and I wouldn't shoot for much lower working capital as per side of revenue. Of course, our teams will work hard and we'll always try to improve on that. I don't think it's in the bank that we improve on 3.8%. So I wouldn't expect the same benefit next year. The larger benefit would be that we should increase our margin on higher revenues. So that's one thing. Also, SDI we think should reduce if they will stay meaningful, but they should reduce a bit. And we'll see, of course, by how much we increase the free cash flow will depend on how much CapEx we end up spending. If you look at the free cash flow after the discretionary allocation to buy buildings, this will depend on how fast we buy buildings, how much potentially we buy back from relative parties. So there are some moving parts in there, but the main thing we'll explain, we'll disclose it. And we see CapEx slightly different than the market. Maybe the market sees it as wasted money, spent money. We see it a bit more as generating future profits. So the more we decide to end up doing CapEx, that means the more profits we think we will do. There are areas where we actually do a budget each year and our leaders come to us and say, oh, I have those opportunities to grow and to generate very strong returns on that immediately and we authorize more CapEx. So that's why we flag to the market the quantum and order of magnitude. It's what we end up spending. It depends also on how the market develops, how fast we grow, and things like that. So the less we grow, the less we spend a little bit on the growth CapEx. And the thing on the back way to 2027, actually, we already achieve more if you linearize from ‘23. We are quite ahead of the margin improvement that would have been linear to 2027 because I think we had to do something like 60 or 70 bps per year and we've done a double this year, last year. So we are ahead. And why do we say it could be back-end loaded? Because we have spent that we will do on digitalization those couple of years. And we see that spend really significantly reducing mostly in 2027. So that's totally with no control. Then, of course, there is the utilization that will grow and when exactly it grows, we'll see in the cycle. But we are ahead through the result of last year in this progression. Also, acquisitions might dilute. They might fold the one we do in Spain. If it gets closed, depending on when it gets closed, would be the reorganization scope because we have a lot of duplication with our existing business in Spain and a lot of improvements can be made over the first couple of years. But other smaller acquisitions, of course, we rarely buy companies that have 24% EBITDA. So mostly what we buy is a bit dilutive. And the rest of the world, I think the impact on the rest of the world organic growth was due to a large extent to the things we disclosed in the ancillary biopharma activities. In India, especially in Q4, with programs in CDMO and in other activity, very early stage activities in biopharma where we concluded studies earlier. But we see the India business picking up or there were delays in finalizing studies that we couldn't book the revenues this year and we will book it when we complete the studies next year. So there is a big chunk in that biopharma in India, especially in the rest of the world. And what I just mentioned already in the CPT for the wireless in China.

Operator: The next question will be from Himanshu Agarwal from Bank of America.

Himanshu Agarwal: Yes, hi. thank you for taking my questions. First one is on the free cash flow, the midterm objective. I see that you no longer mentioned free cash flow approaching EU EUR 1.5 billion, but instead guiding for a cash conversion of above 50%, which I think you achieved 56% this year, and you are talking about further improvement in probably CapEx et cetera. So shouldn't we expect more? Or if I look at the 50% itself, then to me, it sounds like a downgrade to the free cash flow guidance. So that's the first one. Second one, we don't have the full disclosure yet, but I try to back-solve the share-based, the amount that is in share-based payment and acquisition-related expenses, the amortization. And to me, it looks like that number has increased quite substantially in ‘24 at around EUR 170 million, versus it used to be around EUR 135 million, EUR 140 million historically. So can you please confirm that? And the last question I have is around the working days impact. Can you quantify the impact in Q4 and also any potential impact you expect in Q1 or Q2 next year?

Gilles Martin: Thank you. Yes, as you know, we, as I mentioned, we don't think it's beneficial to give absolute numbers considering they contain some elements that are absolutely unpredictable. FX, we have 40% of our revenues in dollars are linked to US dollars and we report in euro and that can be very big swings, of course nobody knows. Inflation, the relative position of interest rate on both sides of the Atlantic and things like that can impact. So giving absolute numbers, we think doesn't make any sense. Also, considering the current level of our valuation, we don't see any benefit in giving you three digits, free cash flow conversion targets and we think if investors don't think 50% free cash flow to their firm is good enough, they should not buy our shares and we think it's a reasonable target. We might do better but we don't see the point in setting higher objectives at this stage. Of course, this will depend there is leverage obviously. If the EBITDA grows and our CapEx stays constant or goes down, this will improve. A moment of discretionary, depending on where you look at the free cash flow to the firm, if it's after buying our own buildings, we could say if we have a lot of cash in 2026 or 2027 and our share price has recovered, we could say, okay, then we buy back all the buildings from the related parties and we close that for forever. So there is an element of things we just cannot predict. But we think if you have a company that is making EBITDA and 50% free cash flow to the firm, just calculate the cash flow in your model and you will see that the company is highly undervalued today anyway.

Laurent Lebras: Yes, on the next question on the share-based payment charge and acquisition related, I mean, of course, our financials are not yet fully audited, but the number should not materially change from the EUR 140 million we had last year, it should be pretty much in line for 2024.

Himanshu Agarwal: Okay, and on the working day impact.

Gilles Martin: The working days impact, it was about one working day in the Q4, and next quarter, I don't know, minus 1.1 in percent.

Himanshu Agarwal: Okay, so working days are going to be a drag in Q1. What it says, they were a tailwind in Q4, if I got it.

Gilles Martin: Yes.

Operator: The next question will be from Allen Wells from Jefferies.

Allen Wells: Hey, good afternoon, gentlemen. Three from me, please. Firstly, could I just maybe just start with the pharma business, and particularly the areas that you call out as going flat or down minus 10%? Could you maybe just provide some commentary around exit rates on those businesses in December? And maybe what sort of levels of growth you'd expect those couple of areas, or those few areas to do that's assumed in that 2025 guidance, please.

Gilles Martin: Well, it's going to be a comparison with, what is it called, comparable quarter by quarter, and we don't have, it's very hard to say in Agrosciences because it is a studies-based business, and the studies take months or quarters to several quarters to complete. Depending on the season, we plant, and then we harvest, and we build according to the program. So it's very hard to model by quarter. Over the full year, our business leaders in agro science think this has bottom, this will bottom up in ‘25. What this does exactly quarter by quarter, I haven't had conversations that makes me confident we can't really model it.

Allen Wells: Okay, thank you, so still similar levels of growth may be the right place to be thinking about for much of ‘25. Second question.

Gilles Martin: No. That's not what I said. I said we think it could bottom up in ‘25, not that it will continue to go down 10%. We think going down 10% is quite extreme.

Allen Wells: Okay, and then just thinking about, kind of following up on Himanshu’s question around free cash flow and maybe less around the absolute number. If I saw the absolute moving parts, but if I look at the 50% free cash flow conversion, make some assumptions around revenues and a reported EBITDA number, it looks like that roughly implies a EUR 1 billion free cash flow to the firm number for 2027. And just in terms of order of magnitude, that's about 50% lower than, 40% lower than the EUR 1.5 billion. So it's a reasonable downgrade overall. What I am, rather than the absolute number, I'm just interested in how you think about the key variables behind this, what's changed from when you set those targets to now that make you less confident in being able to hit a higher free cash flow number.

Gilles Martin: I think if you want me to be totally frank, we have changed nothing. We think it's your job to model whatever you want to model. What we say is we think we shouldn't do any worse than that. Whether we do 60%, 70%, 80% will depend, or 50% will depend on a lot of factors. We don't see any benefit in giving any other numbers than that because whether it's a downgrade or not a downgrade, it would be a very good result in 2027.

Allen Wells: Okay, that's fair. And then finally, just on the CapEx numbers again, obviously CapEx fell, that was a driver of improving free cash flow. I just wanted to get your sense of that confidence on that current level of CapEx at 5.2% of sales. If you were to accelerate growth as you plan to back towards the mid, back to the 6.5% kind of ambition, and mindful of your comments where you talk about CapEx being indicative of the outlook for growth. Should we not expect that CapEx number to start to increase again as you get more confident on the growth outlook? I'm just trying to work out how that tallies with driving improved free cash flow over the next three years.

Gilles Martin: Well we've done a lot of CapEx. There is a lot of elements. In that CapEx, you have EUR 100 million of IT CapEx, which at some point will reduce because we will be done. We have a lot of those developments of software. So we know some of it will go down. And we already have a lot of growth CapEx in what we spent last year. But we think you should be on the safe side. Put in your model the worst assumption you want. Like put the EUR 600 million, look at the cash flow. And on that basis, you can decide if it's a good investment or not a good value should be. And if we do better, we'll do better. It's, I think there are a number of reasons why we should. But it hasn't proven that given strict absolute numbers is a good way to set objectives. And we're just not going to do it anymore.

Allen Wells: Okay, that's fair. So am I right in thinking that at around the 5% CapEx to sales number, just over 5%, you're comfortable that you can meet a 6.5% growth ambition with CapEx around the levels that we're seeing now?

Gilles Martin: Yes, of course, but the variables would be more what we do to, what we invest to buy our own buildings or things like that, that is very hard to predict. Also, when you do M&A, do they have buildings that we buy or that we don't buy? What will be any dilution we get from M&A when they enter our mature scope? They might enter our mature scope at 10% or they might enter it at 20%, depending on when we are done with integrating them.

Operator: We will take our last question today from Arthur Truslove from Citi.

Arthur Truslove: Thank you very much, everybody. A few from me, if I can. The first one I had was you've obviously done really well on the working capital, reducing that working capital intensity. Are you able to just run through exactly what drove that and whether you think you can do more of that going forward? Second question, you said a couple of times that you feel at the moment your own shares are the best investment the company can make. Obviously, your midterm guide has talked to try to buy EUR 250 million of revenue per year. How does the interaction between your view on your own shares and potential 2025 M&A work? Then I guess the final one is obviously you've done unbelievably well on margins in the year considering that the higher than group average biopharma business was a bit soggy and the organic growth generally being lower than usual. Can you just run through a little bit more about sort of how you actually have done that in terms of what measures you've taken to deliver those excellent margins? Thank you.

Gilles Martin: Laurent, do you want to comment on the networking capital?

Laurent Lebras: Yes, so the result of the improvement in networking capital was a result of all the actions we launched mostly on the receivable side. So basically, we engaged actions with each leader to review payment terms whenever possible, but also to accelerate and build revenues and to collect over dues. So this has resulted in an improvement of five days in the DSOs. We had a similar effort on the payable side and which resulted in an improvement of one day. So this is a long-term action. There was a strong push this year. So indeed, it's hard to replicate such an effort every year, but we will continue to engage there because we believe that we could continue to do better in the long term.

Gilles Martin: Yes, then in terms of M&A, each acquisition is something we look at on a case-by-case basis, and it's driven by return on your three. So we look at a company, we look at historic growth and profitability, leadership team, potential synergies of our businesses, and so on, and we decide where we think that business could be if part of Eurofins three years later. And that determines what we're prepared to pay for it. It has shown that we usually don't like to pay for bad assets, and we let other people buy them, especially when the multiples they pay are, in our opinion, extremely high. So we are prudent in our M&A strategy, and we intend to continue to be prudent. But it's impossible to predict what will come our way, what assets will be available, and what will be the opportunities. We look on a broad range. We are present in more than 60 countries and in four verticals. Four verticals are much less than other IT companies, but still, it's significant, and it gives a lot of options. And as we saw last year, we already did a lot, and I think this year we'll do even a bit more in M&A, and we intend to buy them at acceptable multiples. And then we don't know what our shares will do. Actually, there is one multiple we could have added in that table. Two years ago, we sold our digital business, and I think we also sold it at 14x or 16x or more EBITDA. So we have assets within Eurofins. If I go through your thinking one step further, if we wanted to, if we were maybe more short-term financially driven, we have assets in Eurofins that might not be quoted, that we could sell for a very high multiple and buy back even more shares. And maybe some of you would advise us to do that. You are trading shares day-to-day, so we can do those arbitrage. We're not in the business of arbitraging. We think over the long term, the market does it anyway. We just have to be patient. And what we did to improve margins; it's a lot of things. Our margins, I would say, in my view, are overall pretty bad because we have a lot of homework. We are doing many things. We have invested to buy many companies and integrating companies, consolidating sites, all of that is highly disruptive. We have a lot of startups that take time to run to profitability. We've taken some risks. So we have a lot of things that we can improve and that are improving. All those programs to deploy new IT systems are highly disruptive. First of all, they don't work well. We are less productive when we start deploying systems. They don't work well together. Every new deployment of systems goes for the first year, a negative impact on operations. So as all those things start to work and more and more, we are done with deploying those systems in a broader part of our group, more and more we see the benefits instead of seeing the cost of the disruption. So it is a really very systematic, slow process of improving our own businesses, of getting our hub and spoke labs to be in the right shape and to have the right IT systems everywhere. So the benefits we had last year were a result of all those investments and a little bit of the stop of things not doing well because in 2024 we had a very large number of businesses that underperformed like probably any company and little by little we are fixing that. We are fixing that. We are putting the right leadership. We finalize the site footprint and then they start working and they start to generate a lot of profits. We shut down a couple of sites last year and of course we can show the exceptionals but the disruption that that causes is captured in our mature business even though the right of cost of the leasehold improvement can be exceptional. So each year we make a bit of progress and we click a bit of progress that carries on into the next year. That's another reason why we're very optimistic for the midterm outlook for the group as a whole. But it's, I'm a bit impatient. All of that takes more time than I would wish but it does make progress and it creates an incredibly strong business when I compare it to our competition. And we can do that because we are more focused and also because we are less let's say disturbed by any short term lack of appreciation by the market. We just do what is right for the long term and we do it consistently, persistently and little by little we get the benefits.

Operator: Thank you. This does conclude the question and answer session for today. I will now hand the call back to Dr. Gilles Martin for closing remarks.

Gilles Martin: Well, thank you very much for joining our call. And of course, we'll have meetings with many of you in the next couple of weeks, and we're happy to take more questions. We are continuing to invest, but we are getting close now to being done with this investment phase and delivering an extremely successful company, extremely well invested, fully digital, that will make investors happy for a very long time, we think. So thanks a lot for your support and looking forward to talking to some of you in person soon. Goodbye.

Operator: Ladies and gentlemen, the call is now concluded. And you may disconnect your telephone. Thank you for joining. And have a pleasant day.