Ladies and gentlemen, welcome and thank you for joining Eurofins FY23 call. Please note that this call is being recorded and will later be available for replay on the Eurofins. Throughout today's presentation, all participants will be in a listen-only mode. The presentation will be followed by a Q&A session. If you would like to ask a question, you may press star followed by one to register for questions. For operator assistance, please press the star key followed by 0. 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 report. Please also read the disclaimer on page two of this presentation, subject to which this call and the Q&A session are made. I would now like to turn the conference call over to Dr. Gilles Martin, Eurofins CEO. Please go ahead.
Hello everybody, and thank you for joining our annual results call. We have a presentation, and we can go to slide five. I will give the slide numbers as we go. So what's the story of 2023? Well, it's basically the new year of a time where Eurofins won't be affected by COVID comparable. We still were affected in the first half by significant COVID revenues and margin comparables in the first half of 2022. That was not the case in the second half, so you can still see the company more as it will look in the future. Overall, during the year, it was significant lifting, heavy lifting, to realign some of our business lines to the situation post-COVID, especially our genomics, our IVD business lines, and to a lesser extent our clinical diagnostic business line.
I'd refocused a lot to producing reagents, to doing sequencing, and other work for COVID. We had started realignment in 2022, but in reality, some of it remained to be done. We still had to have restructured, so a lot of reorganization of those business lines has taken place. We've started to refill our biopharma labs. That's why we're doing COVID vaccine development work or clinical trials. Now, they are moving towards oncology clinical trials, even if they are still working with similar clients. There has been a lot of change in 2023, but we're happy to put that behind us. Not only will 2024 not be affected by comparables that contain some COVID revenues, but we have a much cleaner and leaner structure, and our teams are now focusing already since a few quarters on their core business.
We've also started to significantly align revenues and prices with our cost, and we saw that in the second half. We're going to continue to see it in the next year. We have also looked at some of our smaller businesses that might need some work, and we will continue to review that next year. The one area where we need to improve in the next year is our net working capital. Again, there has been too much management focus on other topics over the last couple of years, and we've slipped a little bit at the end of the year. We thought we would catch up more in the fourth quarter on our net working capital, but we have some work to do there.
But overall, as you see for the results of the second half of 2023, things are very encouraging and are moving in the right direction in terms of organic growth, in terms of margin growth, etc. On the next page, we have some comments of the full year, but some summary of the full year results, but we will talk about that in the next slides. On slide seven, you get a breakdown of our various areas of activity. This was an ask by some of the investors. And now that we have comparable data in an auditable manner, as 2024 unfolds, we can give you the evolution of each of those activities, and so you will get also some growth numbers regarding each of those areas of activity. But frankly, the biggest difference is between geographies, as Laurent will explain when he describes the numbers.
On page eigth, so basically what have we been doing during COVID and continued last year is continue to build a network. So on slide eight, you see that impact on our site. Our business is very much driven by scale. Once you get the right scale, you can have very good margin. We saw it during COVID because basically on the COVID test, we had very much scale, high scale for a few tests, and that had a positive impact on margin. This is basically true for all of our activities, but labs are traditionally too diversified, and that's why we built this hub-and-spoke network with a very large central platform. We've continued to make very good progress on that.
Owning our own site is somewhat dilutive on Return on Capital Employed, but as we can estimate it for 2023, it's still already yielding 12% Return on Capital Employed, at least the rent savings that are associated with that. We are not yet at our target of 16%, but as the rents increase with inflation, for a stock of buildings, their cost doesn't increase, and that return can only improve over the years. So we intend to continue to add buildings. We should be done by 2027 because we don't need to convert all buildings to own buildings. It's mostly for our larger sites because we don't want to move labs. It's very expensive to move labs, and therefore we need to have big sites where we can expand on site and not lose all the investment in this whole improvement.
For offices or for a site in certain geographies, we don't need to own the building. So the program we've presented last year for the five years to 2023 to 2027 should do the job of giving us our own network of labs. On page nine, you have some examples of new labs that came online last year and some of the labs that we will add, we plan to add over the next two years. And those labs that will come online over the next two years, they have started to cost us a lot of money already in 2023 because usually you start building in year one, you finish building in year two, and you commission the lab in year three after. So it's an expensive program, but on the long term, we think it will be very favorable.
We see it already in revenues per FTE, revenues per sq m. That's because those labs are more efficient, better built. Also in terms of CO2 emissions, isolation, energy efficiency, newer buildings provide a long-term advantage. On page 10, this is a significant development: startups. We always have an arbitrage between startups and M&A. The interest rates have gone up significantly since 2022, but the multiples for acquisitions, on average, have not come down. Some of the sellers are waiting, hoping the interest rate will go down fast and they can get higher multiples again, but many are still expecting too high multiples. Therefore, in 2023, we haven't bought as many companies as we could have. We're a bit below the target. We had set a target of EUR 250 million added revenues from M&A. We will be below that. We've also been reasonable in multiples.
You see we're only at 1.3 revenue multiple for those acquisitions. But on the other hand, we've added more startups. We have decided to accelerate significantly our startups because they are, of course, short-term, very dilutive in CapEx. We need CapEx for no revenues, very dilutive in margin because they make losses for two or three years, and then in cash flow. But from year three, four, five they can provide a very good return on capital employed, which is much better than acquisitions. Acquisitions, on the other hand, are equivalent to earnings on year one. So both have their advantages and disadvantages, but we've shifted a bit in 2023 towards startups. On page 11, you have a list of some of the acquisitions we did last year, and we can go back to half the amount that we're targeting.
That can change from year to year because it will depend on how the markets for acquisitions evolve, on specific acquisitions, opportunities. It could be that we targeted to add EUR 250 million per annum on average over five years. It's like for organic growth, it's on average over five years our target. It could be that one year we add EUR 400 million, and one year like last year, we add EUR 122 million. Acquisitions are hard to plan. It doesn't have to be linear, and we don't have to do them. We only do them if they provide the right return on capital employed. I will now ask Laurent to comment on the financial numbers, please.
Good afternoon. It's my pleasure to share with you our financial results for the year 2023. On slide 13, you can see that our results were in line with our objectives. We posted revenues of EUR 6.5 billion, which show a slight decrease year-on-year due to the COVID comparables, but a strong organic growth of 7.1%. We posted an adjusted EBITDA of EUR 1,364 million, which gives a 20.9% margin, which was also impacted by the COVID comparables. So overall, we achieved revenues and EBITDA in the upper range of our objectives. On slide 14, you can see the main factors behind the slight decrease of revenues. So first of all, we had a negative FX impact, which weighed for about 1.9%, and we had, of course, a very strong COVID comparable, which created a revenue gap of about EUR 600 million.
We almost compensated for it via a strong organic growth, which was slightly better in H2 than in H1, and we had a very small contribution from M&A, as Gilles just mentioned. On Slide 15, to give you a regional breakdown of our organic growth, you can see that Europe was resilient in all verticals via both volumes and pricing increases, except maybe in clinical France where we had to face some price cuts. North America overall posted a very strong organic growth at 8.7%, which was very strong in all business lines. And in the rest of the world, we had a recovery of our revenues in China and expansion of our business in India, and we also had a very strong demand for PFAS in Japan.
Moving to slide 16, you can see here a breakdown of our EBITDA margin by semester, and we want to point here the strong margin increase we had in the second semester, 120 bps year-on-year, which is basically the first semester without any COVID comparables. This strong increase in margin was due to a strong organic growth, some very good pricing initiatives, and also some productivity efforts. So all this shows a very positive momentum, which is expected to carry on in the year 2024. On page 17, we had a strong cash flow generation in 2023. So our free cash flow to the firm was stable in value despite a lower EBITDA, thanks basically to lower taxes and CapEx. We had a very strong cash conversion at 38%, 300 bps year-on-year, and in the second semester alone of 62% cash conversion.
We also had fewer M&As, which basically made us focus on bolt-on acquisitions. On slide 18, I mean, we already alluded to it. Net working capital was on the high side at 5.1%, a bit far from our best historical performance. This is due to a deterioration by one day of our DSO and also by one day of our DPO. So we are already putting strong measures in place to get back to historical levels, which are more in the range of four and 4.5% of revenues. On page 19, we were able to maintain a very strong credit profile throughout the year. Our leverage is 2.0, stable year-on-year, and we continue to aim for a leverage below 1.5 in the year 2027.
You can see also that we have a very balanced debt maturity profile with no big amount to repay in the coming years, and we have enough cash to pay for all of these because we have EUR 1.2 billion of cash at the start of the year. On page 20, to conclude my presentation, our ROCE was negatively impacted in 2023 by the COVID comparables and also the investment we made to continue to develop our footprint and startups, but we believe we have bottomed out now, and we will basically get back in 2024 thanks to a disciplined capital allocation and also a strong margin growth. Now I will give the mic back to Gilles for the rest of the presentation.
Thank you, Laurent. Yes, so on page 22, we give just a few examples of the areas where we're continuing to lead our industry in innovation. We're not just a laboratory providing routine services. We really invent new tests, and we are often at the forefront of those innovations in our sector, be it in oncology, be it in DNA analysis. We're starting to apply more broadly artificial intelligence. The latest example is for facilitating biopharma product discovery. We have a huge amount of data that we have accumulated over the years through all the work we've done on hundreds and hundreds of molecules, and we can help our clients accelerate their programs. So we're going to get, we think, from AI cost savings, but also more and more differentiation as we can get value from the huge amount of data we own for our clients.
On page 23, I'm proud to report some good improvements on many ESG parameters. We've reduced our carbon intensity by 28% over the last four years. We continued to improve last year by 8%. We're improving our diversity. We get outstanding diversity rating. We increase the representation of women in leadership. Our IT security is improving. We have now systematic measurements of client satisfaction in a standardized way throughout our group, and it's improving year on year. So it's all very encouraging for the development over the next few years. Overall, on page 24, you can see that basically Eurofins is positively contributing to all of the or many of the sustainable development goals of the United Nations. We are not a company that's exposed to ESG risk. We are an ESG facilitator in many ways to help our clients fulfill their ESG objectives.
So what can I say about the outlook? So first, what has happened? We've had the pandemic. The world has changed a lot. We've confronted a number of crises. First, the pandemic, which financially was favorable for us, but also defocused a lot of our teams from their normal work. We shifted a lot of people working in our food testing, biopharma testing, and otherwise, and other areas doing our COVID activities. This has cost us some significant reorganization effort in 2022 and 2023. This is behind us now. But in the meantime, we've also deployed EUR 4.3 billion of the cash we generated to build our network. We now have a fairly unique network. And as you can see on page 27, we come out of the pandemic a much stronger company. Our revenues have increased by 40%, so have our margins. We've increased significantly our cash flow.
Our leverage has come back to an area that gives us a lot of strategic options. We own twice as many square meters of buildings than we used before the pandemic. And so overall, we've not wasted our time during the pandemic. As investors, you're getting now, after the pandemic, a much, much stronger company than what you had before the pandemic. And so in terms of objectives, on page 28, we are confident that we should be able to achieve our objectives for 2027. It represents actually a fairly modest annual improvement in margin, in cash flow, and a modest improvement while we continue to invest very hard at our network.
So not only should we be a bigger company by 2027, a more profitable company by 2027, but more importantly, we should have built very significant competitive advantages with the best lab network in the world, a completely digitalized lab network using automation and AI through the network, having scale advantages in most markets, having finalized the right hub-and-spoke network in all our verticals in the main countries we're active. So we're very optimistic that we will continue to build a very strong company that will benefit from those network effects, from those scale effects for many, many years after that. And while doing it, we'll continue over the next two or three years to gradually improve margins and improve cash flows. And this is summarized again on page 29. I think you can read it at your leisure.
But the main things is 2023 with finalized realignment of the company to a normal post-COVID situation. We did some significant cost savings also and reorganizations in our core business to integrate all the labs we had acquired. We were done in the U.S. after 2022. We've done a lot of that also in 2023 in Europe. We've done a lot of reorganization in our clinical labs, in our genomics labs, in our IVD production sites last year, and all of those are behind us. So we're very optimistic going forward that on this much better and more streamlined infrastructure, we can focus on growth on our core business. And so we're positive and optimistic for the developments this year and the years to come. So we have a couple of extra slides in appendix we can go to on questions.
I think I will now open the microphone to questions.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you were using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. The first question will be from Suhasini Varanasi from Goldman Sachs. Your line is live.
Hi. Good afternoon. Thank you for taking my question. For 2024, given the strong underlying growth performance that you've seen in 2023, can you maybe share some color on the growth prospects by vertical, specifically in the U.S., where growth seems to be coming in slightly higher than group average? I'll take it one by one if that's okay.
Yes, of course. Well, I think we should have good growth in pretty much all our verticals. The growth of biopharma was a bit lower last year because of the, well, the impact on the early phase, which is small for us, but still, of lower biotech funding. But now this is bottoming out, so this should grow. And we also had an impact of the refocusing of our labs to the post-COVID situation and the replacement of all the work we did on vaccines with other work. And now this is also behind us. Do we think we should see an improvement in biopharma? Food testing, environmental testing has been quite dynamic last year in North America, so we don't see why that would change this year. The markets are well oriented.
In clinical, we are, of course, cleaning our clinical activities to focus on the areas that includes Viracor. So Viracor is working for hospitals. So it's not the insurance bill. It's more direct third-party bill for supporting the doctors that work with transplant patients. We have a very strong technological advance in this area. We have unique tests. So we're going to capitalize on this area where we are a market leader. So that's for the U.S., and we're optimistic for that. And in Europe, we think the food testing business has bottomed out. Volumes are still not growing very fast in the food industry, but the food industry will have, if they want to see some growth, to start again to develop new products to address the new wishes of consumers for better product, less transformed product, products with better nutritional profiles.
We think we will benefit from that. Clinical, that's where in Europe we'll have the lowest growth, probably because of price control. Overall, due to the other growth of the other areas, we still are confident with our objective of 6.5% organic growth.
Thank you. There's no incremental price cuts in clinical diagnostics in France, right, for 2024?
Well, there has been an agreement for the next three years, 2024, 2025, 2026, I believe. There are price cuts, but there are volume growths. Overall, the overall spend is projected to be stable or growing slightly. We are gaining share. We're also adding blood collection points to increase our share and our presence in the most dynamic areas. We do believe we can grow our share in that market.
Thank you for the color. The next question is on the Medicare reimbursement for kidney transplant. I think you mentioned on slide 28 that you're going to run some clinical trials. Can you maybe share some color on the costs and the timing of potential benefit on this one, please? Thank you.
Yes. On this one, we've had a bit of a bad luck last year because there was a change of reimbursement, a bit unexpected and unjustified. So we're still working on it, which cost us probably $10 million cash last year in our TGI business and a lot of growth that we should have had that didn't materialize. So what we need to do is to do more clinical trial work to justify our tests. We still do believe that our tests are highly superior. Those trials were run for four years. We should have midpoint results after two years. They cost about $10 million per annum. So that's included in our SDI, of course. But this is, again, if things are confirmed as we think they will be, we're still talking of a market in hundreds of millions of dollars with very high margins.
It is unfortunately delayed again, but we are spending the money because we really do believe in the potential of that market.
Thank you. Last question for me, please. The investment in owned sites, EUR 200 million per annum spent, at what point should it convert to lower principal lease payments on the cash flow statement?
Well, as the sites get finished and as we move in the sites, it's immediately accretive on the cash flow. So it's going to be a gradual impact. But certainly, when we are done with this process and again, now we have some sites that are owned by a related party. We're going to leave them where they are for the moment. The remainder is about 50%. We don't need to convert those 50%. We need to convert, I don't know, 20 or 30% of those or 25% of those 50% to be where we need to be to have all our large countries like China where we don't want to own our sites. And there are, for other reasons, other countries where we simply will not do it. So it's not such a long way.
We think in those four years, we'll pretty much be done with our current footprint, and we'll have a good hub-and-spoke laboratory network everywhere.
Thank you very much. That's all for me.
Thank you. The next question is coming from Himanshu Agarwal from Bank of America. Your line is live.
Hi, Himanshu. Thank you for taking my questions. The first one is on the organic growth. It seems like sequentially organic growth has slowed down in Q4 versus Q3 on working days-adjusted basis despite better pricing. Can you just talk about the volume if we have seen some decline in volume and the trends there? And continuing on that, you mentioned about food testing business in Europe bottoming out. Is it something can you talk about the trend that you're seeing in January? Is that started to show some growth there? That's my first, and then I have two more. Thank you.
Thank you. Yeah, Q4 was slightly below the average, but I don't think it means anything specifically. Food testing in Europe in general and the volume, yes, we can't exactly measure volume and price. We have some indication, but not enough to be able to publish any figure on that. We've made progress last year in measuring it on some samples of our business in the companies where the IT system has been upgraded, where the software has been upgraded to our own software more recently. We hope to make further progress in 2024 to provide overall price and volume growth numbers. And yes, January is too early in January. We don't have any specific data, or I don't remember the data for January. But organic growth in January was strong overall for Europe, if that's your question.
Thank you. Then the second one I have is on SDIs. So it seems like SDIs were slightly higher because of the reorganization and temporary losses, etc. And you're also guiding to more or less flat SDIs in 2024 and maintaining the target of 0.5% by 2027. So how should we think about the phasing in 2025, 2026? Is that going to be a gradual, or is it going to be more back-off loaded? Yeah, if you can comment on that.
Well, I think the reason it's higher is because we've shifted from M&A to startups. So since we saw midyear that basically M&A multiples were not coming down as fast as they should, we think it's always a matter of opinion, obviously, we decided to accelerate the startup program again, which we will continue definitely in 2025 and probably in 2026. After that, on our list of things to do, we should have the hub-and-spoke network that we need to have. Reorganization, we hope those numbers should come down because we have the footprint we need. We don't have so many integrations to do. We don't have so many labs to move. Of course, it might depend on what M&A we do in the meantime, and that is always unknown. But for what we know today, we should see that amount ramp down faster.
Thank you. And just lastly, on the guidance for 2024 revenue, so is it at the midpoint? It implies around 9.5% FY growth. Is it fair to assume organic probably more or less around 6.5% and the remaining from M&A?
Yes. Yes, that's it. We have modeled. We could give no guidance at all. There's always a debate. Should we give less precise guidance or guidance that are more vague? But then the analyst estimates are all over the place. So that's why we went to giving a couple of ranges of what we think is likely. Again, when we set out an organic growth objective of 6.5%, we say that that's what we think on average over a 10-year period we should be able to do. It could be one year is higher, one year is lower, one quarter is higher, one quarter is lower. It's not necessarily linear. And the same applies to acquisition. We think we can acquire for about EUR 250 million revenues per annum at the right multiples and at the right returns.
Last year, it wasn't the case because we had alternatives that we passed on because the multiples were not right. It could be that next year we do EUR 400 million acquisition or the year after. It can, of course, vary a little bit, but that's an objective for the next five years that we think is realistic.
Thank you.
Next year is modeled 6.5% organic growth and EUR 250 million added from M&A at midyear.
Okay. Thank you.
Thank you. The next question is coming from Neil Tyler from Redburn Atlantic. Neil, your line is live.
Yeah, thank you. Good afternoon, Gilles. Hello. I wanted to come back to the food testing business, please. Obviously, very different dynamics within your food and feed testing activities in Europe and the U.S. And from at least the work I've done, it doesn't appear to be reflected in what I see the sort of food manufacturers growing at. There's not quite such a disparity. So could you sort of help me understand, are those businesses sort of targeting different parts of the market? Is that part of the explanation? I understand that inflation is higher in Europe. Or do you think your European business is potentially suffering more from the redeployment of people and capacity that you mentioned in your introductory comments?
Then alongside that, can you give any sort of indication of how far below peak you are in Europe in terms of activity or revenues or volumes? Just broadly would be helpful, please. And then the second question on investments, I just want to understand a bit better what the sort of EUR 100 million or so a year of intangible investments are resulting in and how you measure the return on those, please. Thanks.
Thank you very much. A lot of very good questions. From what we hear from our teams, the food industry and retail especially are suffering much more in Europe since the war in Ukraine. It started really in the second quarter of 2022, and they have reduced significantly their assortments. They've resorted to significant price increase. But throughout last year, their volume growth has been really anemic, and they've had mostly growth related to price increases, which, of course, are not sustainable forever. Consumers are switching to cheaper products. And there's a bit of that in America. I think in America, we're going to be more innovative products, more nutraceutical products. But I think it's mostly the economy that is different for the food and retail in Europe and North America. I'm not sure it's due to redeployment. I mean, the thing is, in America, it's mostly the US.
So we have one country, and we have the right footprint. We did all the reorganization of our network in North America up to 2022. We were done in 2022. We have very big specialized sites for the hubs and a number of spokes. We're heading startups. We don't cover the full U.S. yet. We've got a number of startups to do over the next two or three years to cover 100% of the U.S. addressable market. They are, of course, dilutive. But overall, we're closer to having the right final network and footprint in the U.S. than we have in some European countries. So we had quite a few reorganizations in our food testing business in Europe.
Well, below peak, we are very much below peak because if you look at the profitability between Europe and North America and I don't know if we have it in the slideshow, but we have it in the reports. I mean, people are asking, "How can we go to 24% margin?" But I think we're at 26% in America and 14% in Europe. So just Europe recovering to a more normal situation. Yes. So what do we have? It's not even the adjusted EBITDA margin. It's reported EBITDA margin. We're at 14% in Europe and 26% in North America, 20% rest of the world. So frankly, the problem we have is in Europe is due to the economy. But at some point, you've reorganized to meet the right volume and the right demand in the market, and you can improve your margins again.
And so a lot of that reorganization we have done last year. We have reduced headcount in some areas also to match the current demand. And so we should see the benefits. So it's just improving Europe, bringing it back to what would be not very high, 20%, bring the whole group to wherever we want to be. So there is some upside opportunity and upside surprise opportunity also in our objectives. However, I mean, not everybody would believe that, but we see it also.
Thank you.
You had a question on investment. Yes. What we are doing, we are basically redesigning a whole suite of IT solutions to fully digitalize our businesses. This is something nobody can buy. Of course, people can buy accounting software. We buy accounting software. We buy purchasing software. We buy software to do things that all companies do, but to completely run integrated laboratories, fulfilling all the regulatory requirements that we have to fulfill, working as a global network, a European network, centralizing production in hubs, etc., and having all that work seamlessly. We've developed a fairly unique suite of software, and it has been rolled out in some of our verticals, and we see the benefits. And then how do we benchmark?
Well, if we buy labs and we see what they spend in IT with a collection of disparate IT solutions, and we see what once we have finished developing and the software is rolled out in our labs, we see what it costs, and we see the benefits we have operationally. And that's how we measure the return on those very significant investments. But the world is digitizing. We're coming to a time of AI. If you want to use AI, you have to have standard data formats. You have to have your data organized in a proper way. And I think if somebody in our industry is going to be able to use AI in a big way, that's Eurofins because we've made those investments. We have the data in the right format. We have the data in usable formats.
And we have, I don't know, in the world, 200 laboratories doing microbiology. We can centralize those results in real time to analyze any trends in pathogens, detect automatically new pathogens to the type because now we look at pathogens, the Salmonella is the Salmonella, but really, they're all different, and they all have genetic profile like COVID that you can trace. And those times will come when we will move to genetic testing of pathogens, and we'll have all the data infrastructure to do that and provide very invaluable data to our clients. So we're building this infrastructure. It costs a lot. And we already see some very, very immediate return, but we think the long-term impact and the long-term potential is orders of magnitude better than anything we can see today. So we're still building the house.
It takes a long time, and we're doing it on a global basis. So it costs a lot of money. But any large company, take Amazon, it took them 10 or 20 years to build their network in a much bigger market, obviously. But in our small market, this is what we're doing. Thank you. That's very helpful.
Thank you. And a reminder, ladies and gentlemen, please press star and then one if you wish to ask a question on today's call. The next question is coming from Geoffroy Michalet from Oddo BHF. Your line is live.
Yes. Hi. Thank you for taking my questions. First question is on the working capital. If you could provide us some example of the work that you will do to work on DPOs and DSOs? Another question would be the fact that you mentioned that you would be reviewing some underperforming divisions. Could you also give us some clarity and maybe some figures about that? How big are they? How dilutive are they? And then a last question, still on Food Europe and your guidance, what kind of assumptions on volume are you taking for your full-year guidance since you said that you have, let's say, a positive upside or headroom on your guidance? Thank you.
Thank you. Well, I'll take the last two questions, and I will ask Laurent to answer the net working capital. The things we will review are small things, nothing big in terms of number. It would be small unit making EUR 5 million, EUR 10 million, EUR 20 million in a place where we don't see any path to become market leader, or we don't see any global connections with our clients. So we don't have to do everything everywhere. It's more that philosophy, that thing we are looking at. Our objective is to be market leader in what we do. Sometimes we are patient. It can take 15 years or 20 years or 10 years or five years to become market leader in one month. If we believe it is achievable, we will just wait until we can do the right acquisition or build the right network.
But in some cases, we just see that as unachievable, or we won't become number two or number three, then we will review those few things. But they can be usually dilutive, and they can be losing a lot of money. They can be making EUR 5 million revenues and EUR 5 million losses. So that can be quite impactful on the margin. Food Europe, I don't remember the exact assumption that our leader has done, but I would say maybe 50/50 in volume and in price. And Laurent can answer what is measured and what he's going to do to improve or not only him, but he and his team are going to do to improve our net working capital.
Yeah. Thank you, Gilles. So if you can move to slide 34, we have some figures in appendix to share. As you can see on the slide, I mean, the year 2023 at 5.1% of net working capital was not a good one historically. We have been evolving between 4%-4.5% in the better years. So the gap that we had last year, I mean, versus the best performance, which was the year before, amount to about EUR 60 million. So it's due partly to some litigations we had on one client side and also some comparative on the year before. But what we're going to do going forward is really renegotiate very strictly on payment terms with both the client side in some verticals where we saw that there was a bit of slippage and also on the supplier side.
And we're also going to basically, we launch a workshop already to copy the best practices we have in some countries where we are below these levels of 4% so that we can roll them out everywhere in the world and go back to historical levels where we were rather between 4%-4.5%.
Thank you very much .
Thank you. The next question is coming from Allen Wells from Jefferies. Alan, your line is live.
Hey. Good afternoon, Gilles. A couple from me, please. I'll take them one at a time. I just wanted to stick on the SDI theme because obviously, it's been a bit of a topic for today. The step-up that we saw in one-off costs, obviously, you're stating now that a lot of the reorganization is largely done. So I just wanted to understand, as we think about that number remaining high in FY2024, how we should think about the split between the one-offs, the reorganization costs, and the startups. Would that be similar to what we saw in 2023?
Actually, no. I mean, as we can judge today, we think the proportion of startup costs will be higher as we are really ramping the startup program, and the one-off costs should be less because from what we've seen in our budget anyway, and our leaders have told us, a lot of the reorganization is behind us.
Okay. And just on that as well, I just wanted to check something. The Transplant Genomics issue that you talked about, obviously, with the Medicare billing changes there, was that business profitable in the past, or has it always been included in startup losses?
It has been loss-making, but it was just breaking even in the quarter when this regulation changed. It was actually the revenues were trending up every quarter by 50% at least on quarter-over-quarter, and we're hitting break-even just when they changed the rule. Of course, they changed the rule because this whole sector was costing Medicare a lot more money. So they decided they require more proof of medical benefit to justify those reimbursements on a range of applications. The question is, for what application is there reimbursement? We still get high reimbursement, $2,500 per test, but just it's not yet accepted for routine surveillance to replace biopsies. Markets are very medical. Markets are very conservative. The practice standard of care is to do a biopsy to monitor organ rejection.
Apparently, not the FDA, but the Medicare administrators in question think we need more medical evidence to include that in the standard of care. We're optimistic we will get there. As I answered, it does require some significant investment in clinical trial on our proprietary tests. The good thing is if we get through, we get a reimbursement specifically for our tests for what will become then a fairly broad market.
Just to be clear, the question I was just trying to get to was that when it was at break-even, was that business still reported in below the line, the startup losses, or has that been moved below the line because of this change? That's what I was just trying to understand.
No, no. It was always in startups. It was always in startups. But except last year, instead of for the full year, it should have more or less broken even. It lost EUR 15 million or EUR 20 million. Plus, we had reorganization costs because we had to stop. We had maybe 50 salespeople that were not necessary anymore because the community nephrologist cannot prescribe the test. Only the hospital in hospital setting need to do that.
Yeah. Understand. And then just another slightly accounting question. I noticed in trade receivables, there's a EUR 19.5 million charge or provision for pending litigation relating to COVID. Could you maybe just tell us exactly what that relates to countrywise? And it looks like it's classified as a provision, so I don't think there's any kind of expense; there's not been an expense in ongoing expenses. Can you just kind of confirm that? I just want to understand what's happened there because it looks like it's also been restated in the prior year overall receivables as well, just on that side.
No, it's linked to a dispute we have with one government in Europe linked to COVID invoicing where basically, they ask us to maintain minimum capacities, and they are basically not willing to pay the minimum capacities we maintain. We are in a litigation, an official trial, and according to all lawyers, we have a fair chance to get most of this amount back. So that should go up the coming quarters.
Okay. And then final question, just on the kind of comments you made around kind of the potential for underperforming businesses and portfolio rationalization. Is it possible you can go to kind of help us how to understand or quantify how big that pot is, what the opportunity is to maybe move some of that away from the business, maybe in terms of revenue size or whatever you think is useful there for the underperforming business?
Well, it's small. Let's say it's sub-EUR 100 million in total. It's a number of small things, the total of which is maybe EUR 70 million. But we are the ones who are really looking at specifically. But they can be quite dilutive.
Fine. Okay. And then very final question, just kind of following up on, I think, Neil's question from earlier, just in relation to the food dynamics. Could you kind of comment? It sounds like your comments, actually both on food and pharma, that they're kind of bouncing off the bottom. But I just wanted to just check, is that something you've seen an improvement in January, February already, or are they just numbers you don't have yet in terms of that improvement in food and the pharma dynamics that you talked about earlier in the approved comments?
Well, I haven't seen the February numbers. I've just seen the January numbers. January, overall, was quite good. Okay? It was a strong month also in terms of working days. So we have to see for the full quarter. I think, Stijn, I don't have the exact from memory, the exact breakdown by activity just for January. And anyway, I would never extrapolate one month because you can have one depending on when you bill or you close certain projects. Even on quarterly basis, we can have variation, but even more on a monthly basis.
Okay. Thank you.
Anyway, what we have seen so far is encouraging.
Thank you. The next question is coming from Dominic Edridge from Deutsche Bank. Dominic, your line is live.
Hi there. Just one question left for myself, please. It's just maybe some thoughts from you on the dividend and the balance sheet, and maybe just some comments on why you felt you wanted to rebase the dividend now. And the second question was really just based around the balance sheet and how we should think about that over the next few years. Obviously, you do have some refinancings both in the hybrid and the Eurobond markets to think about. Should we think about sort of are you happy with the current structure of the balance sheet in terms of the splits, and should we think about like-for-like refinancings there as they come due? Thank you very much.
Thank you very much. Yeah. The dividend is very simple. We have a rating, and in the rating, we have certain not obligations, but certain traditions in terms of distribution. And of course, we had much higher profits during COVID. So with that quota of distribution, we could raise the dividend exceptionally. But we went back to a more typical ratio, about a third of our net profit that we pay as dividend. And that is actually, if you compare to 2019, it is a good improvement. It is more than 11% annual improvement to the pre-COVID situation. And we think we can continue doing that. We want to have a conservative balance sheet to stay in the range 1.5-2.5 leverage, which gives us some upside opportunity if there are interesting M&A opportunities, or we can deleverage if there are none.
The structure is fine for us, the current mix of hybrid and bonds. We're not worried at all about refinancing. We have pretty much all our financing at fixed rates. Okay, if rates go down, we'll refinance better than if rates go up. But overall, our interest charge is modest in our total cash flow and profit. So we don't see that as being any kind of issue.
Okay. Thank you very much.
Thank you. The next question is coming from Thomas Burton from BNP Paribas. Thomas, your line is live.
Hi. Thank you. Good afternoon, Gilles. Good afternoon, everyone. Thanks for taking questions. I've just got two: one on margin and one on cash. Sorry if I missed it, but were you able to give any additional color on the margin drivers in the second half, thinking about the points called out on slide 18. I guess some of those components might be harder to quantify, but any steer you're able to give would be helpful. And specifically, how much did the productivity digitalization and automation initiatives add? Because I guess those are probably investments you've made, and I guess you're measuring the payback on those.
And then the second one on cash, just thinking about the year-on-year growth sort of implied in your guidance on free cash flow, are you able to split that out in terms of how much of that is a sort of normalisation of the working capital, I guess, issue that drove the miss in 2023, and how much of it is sort of underlying free cash flow progress year-on-year in 2024? Thank you.
Thank you very much. Yes. Margin drive, so we started to have a bit of impact on price that caught up some on inflation. On 2022, we lost some on price, obviously, and we've started to have some catch-up. We started to have some better network utilization from our hub-and-spoke network. But that's a fairly modest gain overall. We still have had a big chunk in Europe, especially, that were underutilized. And so there's quite a long way to go to further improve this. We don't quantify across-the-board automation and IT impact. I think we'll see much more of that in 2025 or 2026. Right now, we're doing for automation many pilots, but we haven't rolled out hundreds of robots. We are doing many pilots in many places.
If those pilots work out, then instead of two robots, we're going to have 10 or 20 of each kind for each type of testing. We're not there yet. That's really something I don't expect the impact of automation to be really material before 2025, 2026, or 2027. The impact of all our IT software will be much more material as we go in enabling us to consolidate our lab better, to streamline. We won't change the footprint, but there are labs that still do too many tests that could be streamlined more once they are even better interconnected with the Competence Centres. We need to also, there is software for logistics, internal transfer of samples that we need to work on and improve. Quite a number of things.
On the year-on-year growth, I think we have a slide that Laurent can comment on the free cash flow. Yeah. On page 36. So we have put on the slide, I mean, a bridge between 2023 and the way we constructed our free cash flow objective for 2024. And as you can see, basically, I mean, a lot of it is coming from the growth in EBITDA because we have remained prudent on the net working capital change. We kept a safe objective or assumption of 5%. We kept also taxes more or less in line with what we paid this year. And the whole improvement is coming from the fact that the CapEx are staying basically flat year-on-year. The net operating CapEx are only moving by EUR 8 million.
So this model, as you can see on the slide, gives basically a mechanical improvement of EUR 219 million on free cash flow before investment in own sites. And if we maintain, again, investment in own sites of about EUR 200 million, that would give an improvement of EUR 171 million to EUR 645 million of free cash flow to the firm. So this is how we built the model, which is basically a flow-through of the EBITDA increase whereas the taxes and the CapEx more or less stay flat year-on-year. Does that answer your question, Tom?
Yes. That's very good. Thank you.
Thank you. The last question today is coming from James Rose from Barclays. James, your line is live.
Hi there. Thank you. Just got one remaining. It's on sort of legal liabilities. It was triggered by I think it was November last year when Lactalis sort of made an accusation against you. But I understand if you don't want to comment specifically on that. So the question's more it's more broad. Could you remind us of the legal framework which you operate in when you're performing tests? And also from a governance perspective, when you're operating very decentralized structure, what procedures do you have in place to ensure that quality control is up to the standard you'd expect across all of your laboratories?
Yeah. It's a very good and broad question. But we cannot comment on the specific merits of details of the merits of the case regarding Lactalis but we think our exposure is fairly limited. And of course, we think it's more a media defocusing strategy by Lactalis to try to deflect the blame. But they are under very serious criminal investigation and criminal trials. So we'll see what all that involves over the next two years. And it affects our network. Overall, how do we organize things? Well, we have many companies, but we have recommended terms of sales and terms for contracts that limit our liability or limit the liability of each of those companies. And we have a mechanism of authorizing exceptions to that when it's warranted where some companies, in some cases, can accept a bit more liability than what is in our standard terms of sales.
It's how big the clients, how big the contract. There is always a discussion on this. We are employing people. So we can never exclude the risk of human error. So we also have insurance to cover things. If something would happen, we have had people doing criminal acts like any companies. And that is really difficult. We have, of course, a lot of quality assurance programs. All our companies undergo some form of quality assurance registration, either controlled by USDA, by FDA, by accreditation bodies in Europe, by governments with multiple audits, external audits, internal audits. We have also, usually on a national basis but also on a global basis, some quality initiatives, some quality training, some quality audits.
It's impossible to be sure that we'll avoid any risk, but we have a number of practices to mitigate and limit risks and reduce the number of occurrences or detect problems where before they become too serious. I mean, that's our job, basically, to manage risk. There is a lot of procedure all over the place to prevent problems and ensure people follow protocols that are sound.
Great. Thank you.
Thank you. This is all the time that we have for today's question and answer session. We would like to turn the conference back to Dr. Gilles Martin for closing remarks.
Thank you very much. Thanks to all of you for your questions and for joining the call. So to conclude, what can I say? Well, we put the house back in order. COVID is behind us. Now we're back to the normal Eurofins. We can focus on growth and improving margins. We are starting from a much, much stronger point now in 2023 than where we were before COVID in 2019. We've made a long way to improve our IT solutions, our IT programs, our IT landscape, our lab footprint, our processes, our scale. And we're optimistic. We're in good markets. Everything we do is focused on protecting life, protecting health. This is usually where affluent society invests a larger, increasing share of their resources. The cost of healthcare is exploding everywhere. We are in that area. We are contributing also to many ESG priorities, protecting the environment.
And so we're optimistic about our market even though it was a bit softer in Europe. Europe's economy is definitely not out of the woods yet. We've reduced our cost, and we will do it more if necessary to the current market situation. But from that base, we're optimistic to continue to improve things. We will put more money into startups and M&A short term. Maybe this year, later, or next year, there would be better price opportunity on the M&A front. We're open to that. We can be flexible. But we are very optimistic to deliver significant value over the next two or three years as we earn the benefits from all the investments we've done. Thank you very much.
Ladies and gentlemen, the call is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day.