Earnings Call: Q4 2019

Mar 4, 2020

Welcome to the Eurofins Scientific full year 2019 results. For the first half of this call, all participants will be in listen-only mode, so there is no need to mute your own individual lines. Afterwards, there will be a question and answer session. I am going to hand the floor to our first speaker, Dr. Gilles Martin, Eurofins CEO. Please begin. Hello, everybody, and thank you for joining our annual result call. There is a slideshow on our website, and I invite you to check the disclaimer on page 2. That is caveat to what I am saying. I will do a very short introduction, then Laurent Lebras will talk a bit about the financial aspects for this year. Then we will focus most of the call for questions. 2019, what are the highlights? It is on slide 4 of the presentation. Of course, unfortunately, we were hit on June 2nd by a massive cyber attack by criminals, which has caused a lot of disruptions to our systems and some of our laboratories, after checking and cleaning their servers, could only restart after 2 weeks. That has caused us a significant cost, and for the rest of the year, a lot of the focus for our management. Nonetheless, we are happy to see that this is behind us. We have had a strong organic growth in Q4. Although we have lost some clients due to bad service, this has been compensated. So we are satisfied that we have been able to mitigate the impact of the cyber attack. We have significant reimbursements pending from our insurers for the cyber attack, which we have not booked in our accounts, because we are conservative in how we do our accounting. We do hope to be largely compensated for the cost. Although we have tried to account for the financial impacts that were measurable and claimable under our insurance policies, which we will never be reimbursed for is the defocus of our management time, and the fact we have not been focused on growth for a while where we were fixing the situation and restoring our analysis time. Second unpleasant development this year was a strong reduction of reimbursements for preventive tests that hit our Boston Heart cardiovascular testing laboratory, in the fourth quarter of 2018 and continued throughout the year. We have had to completely restructure the company. The good thing is we also settled all claims with our shareholders and allegations about the, let us say, borderline sales practices. So this company now can be refocused on growth, and we believe it has hit the bottom point. Anyway, it is so small now that going forward, its performance will not affect the group performance materially. So those were the two things that really unfortunately had an impact on our financial performance in 2019. We have attempted to give you figures which we call comparable to correct for those aspects and also for the first application of IFRS 16. When we look at those adjusted numbers, we see that we would have exceeded or achieved our objectives on all accounts, which is satisfactory. Clearly on the top line, in spite of almost EUR 70 million missing revenues, we are well above the EUR 4.5 billion that we had set as a target. Our organic growth development has been very good. We will add a slide to the slideshow later that gives you that in more details. This is very satisfactory if you look at it quarter by quarter. We had a slightly weak Q4 in 2018, especially because of Boston Heart Diagnostics. We have given you the gross figures corrected for Boston Heart Diagnostics. We have also an impact of EUR 4 million or EUR 5 million last year from one-off lower reimbursement in France, but that has not a material effect on the numbers. Overall, very good trend for organic growth. What we also are happy to see is that all those acquisitions that we have been doing in 2017 and 2018, we see their margin improving in 2019. We see a continued improvement of the margin of our mature business that we had acquired until the end of 2016, our development till the end of 2016. Of course, our overall margins are not progressing massively because we have a dilution from the margin of the companies we acquired in 2017, 2018 and 2019. But overall, the trend on margin is very positive. As we had promised, in spite of this cyber attack, we have reduced our leverage in 2019, and we intend to continue to reduce leverage going forward. We have invested a lot of money in our network. Over the last three years, we invested more than EUR 900 million in building our network of laboratories with this hub and spoke model, very big, very efficient central laboratories, and then satellites to do the time-critical assays. This is nearing completion. By the end of this year, we will be pretty much done with that. Also we should be pretty much done with the development and the start deployment of the new IT solutions that we have developed to manage our network of laboratories and the massive amount of data we generate. We believe we are going to start to see significant benefits of those investments in capacity, efficiency, robotization, automation, et cetera, over the years to come, and we should see an acceleration of our margin improvement in 2021, we believe. What we have also done is as we started to do in 2018, we have significantly improved our disclosures regarding ESG. We have talked more about what our various board committees have been doing, provided more benchmark. We added hurdles for the financial performance of our company, for stock options of our executives to be exercised, et cetera. We disclosed the many things we are doing that are positive for the environment. We will add at least one non-executive director to our board. We are listening to our shareholders and trying year after year to improve on those important matters. One very satisfactory development is that the investment we did in the esoteric and genomic chemical testing sector are starting to bear fruit. We started in 2014 by buying Viracor, a very well-known virology laboratory in Kansas City in the U.S., which is also the leader in testing for transplant patients. We now have launched two new tests that help doctors detect rejection and even one that detects silent rejection. It's the only test in the world that can do that and has a potential of replacing a biopsy. We got reimbursement for this test in November, December of last year. Since December, we've had very high growth, month-to-month, 30% growth. Still very small numbers, but we believe that by 2021, again, the added revenues could be quite material. It takes time for hospitals to include the test in their programs, how they monitor their patients, and to interconnect the electronic patient files with our system to place order for tests automatically, et cetera. It's not something that will happen overnight, but it's looking very good. One of the first investments we had done was the area of non-invasive prenatal testing. There we have developed a whole range of tests from the most advanced test covering pretty much all genetic diseases that can be tested in this context, to the normal test that all the laboratories offers, and also up to a very cost-effective test for the most likely trisomy 21, that we can offer for about $50 or EUR 50 when the routine test for the three trisomies are usually sold around EUR 300 or dollars. We have a whole range of tests. This has gone very well. Last year, we had a 50% increase of sample number in Europe. We are the leader in that market in Europe where we started. We start to see good results on that aspect. We have to talk a little bit about, unfortunately, the coronavirus crisis. Our activities in China are about 1% of our revenues. If we add South Korea and Italy, we are at about 3%. Our laboratories in China, of course, were extremely slow in the month of February, but they're starting to pick up. What they did in the meantime, some clients were starting to be worried about coronavirus in effluents or food. They developed a test to help those manufacturers check this aspect. Of course, through our network, we can make those tests available worldwide. Our clinical laboratories have been developing and validating testing for the SARS-CoV-2 coronavirus in human specimens. Initially, the public health authorities were reluctant to have independent laboratories carry out this testing, but this has changed over last weekend. Again, today, the WHO advised government to increase significantly the amount of testing, and our clinical laboratories around the world are getting ready for that in setting up those tests and developing them and sharing between each other their own internally developed tests. What we're also doing is we have a subsidiary that is developing tests that we sell to other clinical laboratories, that we sell to governments, that we sell to industry, and we are also developing a range of tests to do that. We are adding this test to our syndromic panels. Eurofins Diatherix is, since many years, offering a very broad syndromic respiratory panel that tests for a large range of potential respiratory illnesses, from the flu to bacteria-caused illnesses to about 32 pathogens. We're adding a CoV to that to help find out if somebody has a cough or fever, what it could be. This is a contribution we will try to bring to the very difficult work of the public health authorities, as we are required to do that in some countries. In some countries, it might stay only performed by public hospitals. In others, we will contribute if we can. We also are developing kits for testing in situ, if that would be required in the industry. That's for that aspect. Otherwise, we are getting our laboratories ready. We have developed a disaster recovery plan and other aspects and contingency plans in case of supplies disruptions or in case of quarantines of some of our staff, like any company. We're fortunate to be serving industries that generally prove resilient in a downturn. We believe the outlook is still positive for the industries we are serving and for the type of services we provide them. We're of course, monitoring the situation daily. What we've also done for the group is, over the last two years, we've strengthened significantly our leadership team, and we added professionals. Some were executive vice presidents at other similar companies like ALS or Intertek. Others were managing large companies in the food industry, et cetera. Not only have we tripled in size in the last few years, but we've also significantly strengthened our leadership team. Overall, since the outlook is good, we have been able to set new objectives for not only 2020, but also 2021. Not only for margin improvement, but also cash flow development. Laurent can comment on that a little bit more. Our focus remains beyond running our business, growing and improving our margin to deleverage, to go back to our historic range, 1.5 to 2.5 debt to EBITDA. We believe that by the end of 2021, all things being equal, we should be able to get there. That's it for my short introduction, and Laurent will say a few words about our financial performance. Thank you, Gilles. So indeed, we are happy to report on solid results for 2019 despite the cyber attack. First, I want to comment on I mean, we had revenues reaching EUR 4,563 million, 21% versus last year. And accelerating in terms of organic growth quarter after quarter as we reach on the last quarter, 5.6% organic growth corrected for public working days. And if we even exclude the impact and the drag we got from Boston Heart, we reached 6.5% organic growth in the last quarter. We didn't improve only the revenues, we also improved our EBITDA. As a comparable, it's hard to read because we have IFRS 16. We have produced a bridge that you can find in our corporate presentation on page 65, where we basically exclude for IFRS 16 impact, and we also correct for the cyber attack impact. In that vision, we would have generated basically EUR 883 million EBITDA in excess of our objectives, which is a 10 basis point improvement year on year. And which is not only translated at the level of the group, but also each scope in the mature business. As you can see, our business acquired before 2017 increases profitability by 40 basis points year on year. And the acquisitions of 2017 and 2018, though they are still dilutive, they increase on a pro forma basis, our profitability by 80 basis points year on year. In terms of cash flow, we had also a good translation. Our operating cash flow was up 24%, our free cash flow to the firm was up 41%. If you correct for IFRS 16, this is still an improvement of 24% year on year, despite the cyber attack. We are in the middle of a consolidation effort, so we have indeed some higher SDIs this year amounting to EUR 98 million. Basically, half and half between a one-time cost linked to reorganization and restructuring, and some losses on startup and acquisitions in the restructuring. Overall, we maintain a good financial discipline. We were within our EUR 600 million envelope of spend on acquisition and CapEx, with EUR 171 million on acquisition for 26 deals and EUR 321 million on our CapEx spend. And we were able, thanks to this, to basically lower our leverage to 3.08, which is a 0.6 decrease versus last year. Overall, we are confident about our objectives for 2020 and 2021, which I will just summarize here. For 2020, including IFRS 16 impact, we confirm our objectives of EUR 5 billion of revenues, EUR 1.1 billion of adjusted EBITDA, and EUR 500 million of free cash flow to the firm. For 2021, EUR 5,415 million of revenues, EUR 1.250 billion adjusted EBITDA, and EUR 600 million of free cash flow, for which you can find a bridge in our corporate presentation, I think on page 72. I will pause here and take your questions. Thank you. If you wish to ask a question, please dial 01 on your telephone keypads now to enter the queue. Once your name is announced, you can ask your question. If you find your question is answered before it is your turn to speak, you can dial 02 to cancel. So once again, that is 01 to ask a question or 02 if you need to cancel. Our first question comes from the line of Edward Stanley at Morgan Stanley. Please go ahead. Your line is open. Afternoon, guys, and thank you for taking my questions. I have just got a few clarifications, please. Can you confirm that the guidance of EUR 700 million maximum spend of CapEx and M&A is EUR 700 million maximum in 2020 and EUR 700 million maximum in 2021? It is not that that EUR 700 million is spread between both years. Is that right? Yeah, that is right. Okay. EUR 700 million, which is unchanged because it is pre-IFRS 16, it is EUR 600 million. Okay. Excellent. Your previous EUR 1 billion of EBITDA guidance was pre-IFRS 16, and that's now been updated. Can you confirm also that the EUR 350 million of free cash guidance for 2019 was also pre-IFRS 16? Yep. It's a rounding. We're rounding the objectives, so it's basically unchanged. We haven't changed our objectives for 2020, and we just added objectives for 2021. Okay, but I'm just trying to understand if the EUR 500 million of free cash flow to the firm includes EUR 98 million of IFRS 16 CapEx and EUR 32 million of IFRS 16 interest, then pre-IFRS 16, so year-on-year comparison, you're actually at EUR 370 million expectation for 2020 versus EUR 350 million in full year 2019. Is that right? No, that's not correct. The impact of IFRS 16 on the free cash flow to the firm is only of €32 million, as you can find in the bridge we made in the back of the presentation. Okay. Following up on working capital because of the malware attack, can you confirm whether you expect to get a net working capital inflow this year? Well, you mean the reimbursement from insurance? Not necessarily. I just mean a net working capital inflow in aggregate this year. Is that expected in 2020? We expect to reduce our net working capital needs, which were at 5.3% in 2019, towards the objective of 4.5%, which is our historical objective. Then indeed, we will expect to have a slight inflow in a comparative mode from the cash flow statement. Okay. Finally from me, can you confirm the scope impact on sales in 2019, please? What do you mean exactly by the scope impact? The impact to net growth that has come from revenues in year. That has come from M&A, sorry, rather than organic and FX. Yeah. That was, I think, a bit more than EUR 100 million of consolidated revenues. We will give you the exact figure. It is in the notes to the financial statements. We have a pro forma for 2018 in the 2018 accounts, and a pro forma for 2019 in the 2019 accounts. You can look exactly at the pro forma. We will look it up while we speak. Okay. It won't be much in 2020, because we haven't done a lot of acquisition in 2019. 93 million EUR revenue consolidated in 2019, and would be 135 on a pro forma basis. Okay. Thank you. Thank you. Our next question comes from the line of Suhasini Varanasi of Goldman Sachs. Please go ahead, your line is open. Thank you. Hi, good morning. Good afternoon. A few from me, please. In your slide 22, in the bridge between free cash flow to the firm of 2019 to 2020, there is a cyber insurance payment net of tax that you expect. What is the exact number, please, that you expect in 2020? The number we put on that slide is around EUR 50 million net of tax, for that bridge in 2020. Page 72. You are referring to the cash flow bridge on page 72? Yes, exactly. That's the one. That's it. Coming back to the question, the difference between free cash flow with IFRS 16 and without is very small. As Laurent said, it's about EUR 30 million. We haven't counted any cash flow correction for 2019 for the reimbursement, which we do expect. We have claimed actually more than the EUR 75 million that we have disclosed. But of course, this will not be paid immediately, and we are conservative, so we haven't booked anything for that. But you do expect the payment to come through in 2020, right? That's why you put it in your guidance for 2020, the free cash flow to the firm. That's correct. Okay. Understood. Absolutely. Understand. One on the guidance for 2020, please. I know you said it's an approximation, but I wanted to make sure I got the numbers right. The EUR 1 billion of EBITDA for 2020, pre-IFRS 16, has become EUR 1.1. Now, the EBITDA got a benefit of EUR 130 million in 2019 because of IFRS 16. What's the assumption that you're using for EBITDA benefit for 2020, please? Because it feels like it's been rounded down, but maybe the number should be EUR 1.13, EUR 1.14, maybe. Just to make sure that- Well, we don't know. Yeah. We consider it rounding because we do not know what the impact of IFRS 16 will be on the 2020 number, because it depends on the remaining duration of leases. Our leases are going to become shorter, the one that exists. It will depend what leases we renew, for what duration. Right. What we acquire. When we say order of magnitude, EUR 100 million is what we are targeting. As you say, maybe it is going to be EUR 120, maybe it is going to be EUR 140. But we will know when we finish the year. Understand. Thank you. Therefore, if I go into 2021 targets, obviously the implied margin is like 22.9%. Just wanted to clarify, you are expecting an underlying margin improvement between 2020 and 2021 through, let us say, organic growth and higher productivity at the labs. Is that fair? Yeah. What we are planning, we are planning about 50 basis point improvement in 2020. All things equal, without IFRS 16, all things equal, we are planning about 50 basis point improvement in 2020, because we are still investing heavily in our network and putting things right. And we are planning about 100 basis points improvement from 2020 to 2021, because we should start to benefit more then from all the investments we have done so far to build our network. Understood. It's again, rounded. Maybe it's 110 or whatever, but it's just to give you the order of magnitude. Maybe it's 55 or 45, but that's just to give the round numbers. Got it. Thank you very much. The last one from me, please. You mentioned in your report that beyond 2020, you'll be focused on expanding in Asia and LATAM. How big do you think these markets are in the context of the markets in Western Europe and the U.S.? I suppose where I'm going with this is, will you be returning to a more M&A-led growth strategy to build the scale in these end markets, or will it be organic? In which case, if it's going to be organic, you indicated in your report that your CapEx to sales is falling below 6% ex-IFRS 16 by 2021. Will that go back up from 2022? No, it's not required. We're talking of a 10-year timeframe. Okay. We're not talking of becoming big in Asia in one year. Okay. The market. Okay, you have, of course, countries in Asia like Japan, which are highly developed. Actually, we're talking of LATAM and Asia-Pacific. Australia and New Zealand are very developed. We can do a bit of M&A in some of the developed markets. But in more, say, countries like China, there is very little M&A to do. This development will be slow, and it will be more organic. But the CapEx for a startup is not huge, and spending a lab is about EUR 3 million CapEx. In Europe and North America, we should be well below the 6% CapEx. Because if you look at our CapEx last year, we had EUR 100 million for buildings. That means new labs. Okay. That's massive, and those labs, they will be there for the next 20 or 30 years. We will not repeat that every year. So we should have a significant drop on that aspect. Also, at some point, our IT solutions will be there, so that should also fall off. We're going to replacement equipment and capacity equipment. But as you see with our return on capital employed without goodwill, the return on CapEx is very high, so we don't need too much. Yeah, maybe it will take us 10 years then to bring the rest of the world to a similar size to what we have in Europe and North America. It's not going to be fast because those markets are not there yet. They have to open up. Understand. Thank you. Just one clarification on the CapEx guidance, please, because if I take, let's say, the EUR 300 million of ex-IFRS 16 CapEx for 2021 on the EUR 5.45 billion of revenues, you're roughly at around 5.5% of CapEx to sales. Is that the level you are comfortable with beyond 2021 as well, or do you see that falling towards 5% beyond 2021? Our maintenance CapEx is 2% or 3%. We can probably grow at least 5% with 4% or 5%. We haven't done any budgets beyond 2020 for CapEx. Okay. 2020 still will be significant because we're adding quite a lot of buildings still. But that's the type of range we're talking about. Understand. Thank you very much. Thank you. Our next question comes from the line of Tom Wilson at Berenberg. Please go ahead. Your line is open. Hi. Good afternoon, Gilles, Laurent. It's Tom Wilson here. Thanks for taking my questions. I just wanted to take a step back if we could, perhaps, just on the cyclicality of your business. I think economists, global stock markets, and bond yields are all telling us we're probably heading closer to a recession in many countries, and potentially globally. Can you give us an update today just in terms of how the portfolio has changed and where we stand today in terms of what proportion of your business is really non-cyclical or otherwise sort of recurring type revenue? Related to that, which parts of your business would be most sensitive if we do go into an economic downturn, please? Thank you, Tom. Of course, it's very hard to predict the future, especially with this type of potential crisis, which is also a healthcare crisis and not only economic, or could be. Hopefully, it won't be. In the past, I started this company 32 years ago, and I've been through a number of downturns, the last one in 2008. In the worst year, which was, for us, 2009, we still had positive organic growth. We had, I think, +2% or +3% positive organic growth. Historically, we've been fairly resilient. If we look at what happened last time around, we were very resilient in our pharma and food testing business. We didn't have clinical testing at the time, but pharma and food were pretty resilient. Where we saw a bit of softness was in some of our environmental testing business, where we did air monitoring and testing of industrial installation, which actually we got out of in the meantime. We sold pretty much all our activities. We just sold that activity in the U.S. in the beginning of this year. Potentially, if complete factories are shut down, of course, they won't be testing for their effluence. That's a relatively small part of our business. I wouldn't think the clinical testing would be so cyclical. Actually, we're starting in Germany, for example, the testing was open to private laboratories from the beginning, and we're starting to test a lot for this coronavirus, unfortunately. I think this will probably happen in other countries. Might be a bit less of testing for certain things that are mild, like allergies, if people are very worried about very acute infections. Overall, it's very hard to predict the future. Of course, if there are cataclysmic economic blockage and whatever quarantines and things like that all over the world, it's impossible to predict what could happen and affect any company. I think compared to many other sectors, we are in very resilient and recurring sector, as we can judge today. Okay. Thank you. That's helpful. Just another one in terms of changing tack slightly on TruGraf. That seems to be quite interesting, quite a big addressable market. The EUR 2 billion you mentioned in your presentation that competitors have alluded to sounds like quite a big number. I think it could include some rather optimistic assumptions. What's your working assumptions of what that could generate in terms of revenue in 2021? You said quite material. Is that perhaps in the order of EUR 100 million, EUR 200 million or so of revenue? What's your best guess of what kind of margin that might look like over time relative to the group or clinical diagnostics within the group today? Yeah, thank you. Well, I think the EUR 2 billion come from either CareDx, an analyst that cover CareDx or Natera, an analyst that cover them. I don't know that we would agree with that. It seems, as you say, to be quite optimistic. You never know. I think by that time, probably there would be a lower reimbursement. The numbers you mentioned, EUR 100 million to EUR 200 million for 2021, are in the range of our planning. Now, whether this will happen remains to be seen. It's really a question of adoption. The test we have is meant for monitoring, for monitoring of patients who have no symptoms instead of doing biopsies. So normally, it would make sense that it is put in routine monitoring program at frequency of twice a year or three or four times a year, and it could be quite substantial. This will depend how many hospitals, how many transplant programs adopt it, or fast adopt it. We believe our test is vastly superior. Actually, it is the only test that can detect silent rejection. It has very strong medical benefits to help patients keep their graft. We will start several clinical studies to add more applications. We are working on launching those tests for other organs. So there's very promising potential. It's potential, so we first need to see the ramp that we achieve in how we get out of 2020, will be a very good indication of what happens in 2021 for that. Okay. That's helpful. I just have one final question, just around the balance sheet. Previously, you've talked about your aspiration to move towards achieving an IG credit rating. Could you just update us in terms of where we are with that ambition, in terms of timeframe and what is required of you in order to ensure that you do indeed achieve an IG rating? Thank you. Yeah. We will start working on that. We will start engaging this year with rating agencies and working on shadow ratings and private ratings to get them familiar also with our industry. They have to really know our industry and the characteristics of our industry, because that's a big part of the rating. It's not only the company, it's also the sector. We will be active this year, and then what time we actually do it will depend on how fast we deleverage and our dialogue with them to come out with the best rating possible. This is something we will be engaging, because of course it will open a much broader investment horizon. Even if we were not actually investment grade, just being rated would vastly expand the horizon of investors who could invest in our company. This is something we work on actively, actually right now after we publish our results. Okay, that's helpful. Just one very last one for me, if I could, and apologies if I missed this in your opening remarks. I think it's just a clarification on the impact from the cyber losses at the EBITDA level. That seems to be a bit larger now at the EUR 75 million versus your initial estimate at the H1 stage. What's the reason for the difference there? Were there some additional costs that you didn't foresee? No, there seem two factors. One of them is that we account for slightly more revenue loss also that what we announced last, and the biggest part of the increase on the loss on EBITDA level is linked to additional IT recovery expenses, which are covered by the insurance policy for 12 months. We are not totally at the end of it, even though we don't expect significant amounts to come in addition to the claim now. Okay. Thank you very much. That is very helpful. Yeah. In the second half, we have had significant IT recovery costs. That also explains why the SDI are so high in the second half. Okay. Thank you. That is clear. Thank you. Thank you. Our next question comes from the line of Nico Terborg of Meindertsz Bank. Please go ahead. Your line is open. It looks like the line is not open or something. Apologies. We seem to have lost Nico's line. We will move to the next question, which is from the line of Mohit Harati of AlphaValue. Please go ahead. Your line is open. Hi. Good afternoon. Thank you for taking my question. My question is basically, first question is basically regarding the, again, operating EBITDA guidance for 2020. If I do rough calculation, it comes out that when you guided for the EBITDA number for FY 2019 and 2020, you basically expected a margin improvement of roughly 110 basis points. I am assuming, or I am taking the numbers of EUR 1 billion of FY 2020 EBITDA and EUR 850 million of FY 2019 EBITDA. But with the new guidance, when you expect around EUR 1.1 billion of FY 2020 EBITDA, and I adjust the previous base also for IFRS, the net improvement comes out to be roughly only 20 basis points versus 120 basis points earlier. Can you throw some more light on that? I don't think we can trace it this way. Compared to the actual EBITDA and so on, which we are planning, I think is about 50 basis point improvement between 2020. We have to do it on pro forma basis. The acquisitions we did in 2019 are dilutive in terms of margins. For example, TruGraf is losing money, so it should do all things on a comparable basis. I think we're planning about 50 basis point improvement in 2020 and about 100 basis point improvement in 2021. We commented again, the 1.1, we have a rounding on the IFRS impact of about EUR 100 million. It might be a bit more or a bit less. We'll see. Probably slightly above. Okay. Can I assume that the slightly lower improvement between 120 basis point and 50 basis point can be attributable to the recently acquired dilutive acquisitions? Or there is some impact of startup laboratories also in this regard? It's kind of a mix. We don't know what we're going to buy in the future, and we don't know when we made whatever objective we made two years ago. We didn't know what we would buy. We'll see. But our target for this year is EUR 1.1 billion of EBITDA and EUR 5 billion of revenues. Again, the EUR 5 billion of revenues, they include EUR 100 million from acquisition that we have not done yet. That would be EUR 200 million of acquisition consolidated at mid-year. We don't know if we're going to buy anything. We don't know the margin of what we're going to buy, if it's going to be accretive. There are some hypothesis in an objective like this, that there have to be hypothesis, because we don't know what we're going to buy, when we're going to buy it, what the margin will be. But it is our best guess if we want to help analysts try to understand what we're thinking and what we think is likely. This is our objective. It's not a guidance. It's an objective, by the way. Okay. Fair enough. If you allow me, my next question would be about, can you just give us break up, as in what percentage of top line comes from pharma or food or environmental business? Just trying to understand the kind of resilience, what percent of your top line is resilient. I think our top line is broadly resilient to things we have seen historically. To market movements we have seen historically, I think we are overall pretty resilient. In terms of percentage, I think pharma is probably something like EUR 1.3 billion or between EUR 1.2 billion, EUR 1.5 billion. Food is about EUR 1 billion. Environment is below that, and is maybe EUR 800 million or something like that. Clinical is also about EUR 1 billion or close. We have other activities like material science, cosmetic testing, that do the rest, some product testing that do the rest. Okay, sure. Thank you for that. Just one last question regarding the tax rate. Should we assume this around 28% tax rate or a normalized tax rate going forward? Thank you. It is a good question. It is high in 2019, and it is high for a variety of reasons. But one of the reasons is that a lot of our startups are losing money, but they are not in a tax unity with companies that are making money. So our tax rate is higher than what it should be based on a normal average tax rate. So going forward, maybe not immediately in 2020, but as all our companies become profitable, all things being equal in tax rates, we believe our tax rate should be lower. Okay. Thank you for your answers. Thank you. Thank you. Our next question comes from the line of Carl Bontholm of M&G Investments. Please go ahead. Your line is open. Hello? Hi. I guess it's just Carl Bontholm of M&G. Can you hear me? We can hear you. Yes, we can hear. Can we. Can you. Hello? Yes, we can hear you. Okay. Fantastic. Thank you. I have a couple of questions. The first one is on your clinical diagnostic business. I was wondering if you can give us an update on, I don't know if you call it like a strategic review, but if you can give us an update on that. Thank you very much. We went in clinical diagnostic before. Okay. I am just going to mute the participant's line while you are answering. Thank you. So we went in clinical diagnostics for the genomic testing and molecular and genetic testing. We saw it as a place where we could innovate and invent new tests, like we do in food testing or in environmental testing and testing for the pharma industry. We have a few activities in clinical testing in France, in Spain, in Germany, where we do routine testing, where we also buy tests from suppliers and run them. And those routine testing are subject to a reimbursement pressure, therefore they are not growing as fast. They are good activities, very stable, very recurring, and with strong cash flow, but they are not growing. So there is of course a debate whether we should have them, because last year, if we correct for Boston Heart, our organic growth and the year before also, was about 6%. It would have been higher if we did not have the, say, French and Spanish and German routine clinical testing, which were not growing or very little. It does not mean they are bad businesses. We have had approached, we have looked at it. It is something we could divest if we had to, but it is not something we must divest, and especially at the moment. Those labs are very important for public health activity, and we are happy to contribute to what the public health authorities need in terms of lab testing. I think testing is one of the best way to detect diseases early and avoid people getting sick. Okay. Thank you for that. In terms of the other question, I would ask you if you can repeat your net leverage guidance target. I think it was for 2021, you mentioned 1.5 or 2 times. So you are planning to get into that range by the end of 2021? Did I take that correctly? Yes. Our objective is to go back to about 2.5 by the end of 2021 based on the plans and hypothesis we disclosed on M&A, on margin improvement, on organic growth. If those things work out as we have communicated them in our objectives, we believe our net leverage could go back to 2.5. Beyond that, in 2022, et cetera, we want to continue to bring it down towards the midpoint of 1.5-2.5, which has been our historic range forever. I think a bit of debt or leverage is good for our return on equity. I think most of our shareholders agree with that. So we do not want to go to zero debt, but we had a peak last year, and it is coming down now because of the many opportunities for very interesting acquisitions we had in 2017 and 2018. But it is not a place we want to stay at, and each year we want to see some de-leverage as we started to see last year. Okay. In that 2.5 times net leverage target by that time, are you assuming the same amount of hybrids at EUR 1 billion, or that part of the capital structure might increase to achieve that target? No, we are assuming an unchanged structure. We are assuming that that EUR 1 billion of hybrid in the mix, which actually, that EUR 1 billion of hybrid, compared to our EBITDA as a percent of our EBITDA, will become less over time. All those things are also subject to review. If we generate a lot of cash flow, maybe we should do away with the hybrid financing or step by step do away with it, because it is not something that credit agencies, rating agencies take into account fully or at all. Over time, if we look 2021, 2022, we of course will review whether we need hybrid at all. At the moment, we have them, and they have a maturity. We cannot pay them back before a certain date. We will permanently monitor based on market conditions what makes sense for managing our balance sheet. Of course, we want to be conservative in our financing. We do not want to take too much risk. We will like to have long-term financing. We think the hybrid in terms of risk management has been, so far, a very good instrument because it is extremely low risk as an investment. As we become a mature, stable company that generates very large cash flow, maybe that instrument won't be as needed as before. Thanks. Can I squeeze one last one on your cash flow? In addition to the SDI that you have clearly identified, if I look at your cash flow, there is also a significant component of other cash items on top of that, another around EUR 90 million. If I put everything together, SDIs plus other operating cash items, it is quite a sizable number, around EUR 180 million. Can you clarify the additional EUR 90 million of other cash item? What is it made of? Sorry, which line are you referring to exactly in the cash flow? Basically, this is just a residual line. When I take your cash flow from operations and I strip out EBITDA, taxes, working capital, I am left with an additional EUR 90 million that I call other operating cash items that I cannot attribute to any other line. It is just basically a plug line. If I take your EBITDA, including your SDIs and yeah, that is We do not have this number. I am sorry, we cannot follow exactly. Okay. Well, maybe I will follow up this offline. The other non-cash effect is only EUR 4 million in our cash flow statement. Okay. But you know Okay. Well it's not an element that's directly visible in our accounts. I think it's maybe better that you take it offline with our CFO. But yes, the gist of it, you are correct. We are spending a lot of money doing a lot of things, either in putting our network fit for better by reorganizing a lot on the right footprint, by startups, and by CapEx. A lot of that is finite in time and to a large extent, discretionary. So there's a lot of upside to our cash flow, we believe, once we say, "Okay, that's it. We have the footprint we need. We don't need to move activities from A to B." We also have some earnouts that we might not pay. So we have quite a few things that could be of interest. But we'll see how things evolve. Okay. I'll follow this up. Thank you very much. Thank you. Our next question comes from the line of Stephen Golden of Deutsche Bank. Please go ahead. Your line is open. Hi, yeah. Thanks for taking my question. Could you just give us a little bit more, I know we touched on it earlier on, but a little bit more color on how the cyberattack cost was determined? Because obviously, at the Q3 update, we were assuming that the cost on the EBITDA level would be in the low 50s, and that's now gone up to 85 or 75 net. Obviously, this makes quite an impact at the margin level. Another sort of 20 is ballpark 50 basis points for the full-year margin or a percentage point in the second half. I just want to get a feel for how accurate you think that estimate is, and the sort of the phasing of the cost that came through and sort of surprised you in the second half. My second question, just on the clinical diagnostics point. You were saying that for European Clinical Diagnostics, that the routine business has been challenging. But obviously, you did, in your print, apparently, mid to high single digits in European Clinical Diagnostics. I was just sort of wondering, I know you talked about non-invasive prenatal testing, but my understanding is that the specialty business is quite small within European Clinical. Maybe if you could just give a bit of a color on how you achieve that kind of number, given obviously a slightly challenging underlying market backdrop. Thanks a lot. Thank you. Let me answer the cyberattack estimates. This is in line with the claims that we are making to the insurance companies, and basically they cover for two type of costs. The profit loss due to what we call business interruption, which is a 6-month calculation. Basically, this period ended the 2nd of December, after 6 months from the attack. This is why there was a slightly additional impact on the top line from the EUR 62 million we estimated earlier on to EUR 69 million. The second component is what they call IT recovery expenses, for which there is a policy of 12 months of coverage. This part is still ongoing, and it will be ongoing until the 2nd of June this year. That being said, we believe that what we disclosed in the press release this morning, which is an EUR 85 million gross impact on the EBITDA level, is more or less close to the full amount that we will make to the insurance companies because the IT recovery expenses, which will be coverable under the policy, are not going to be that many until the next 2nd of June. Does that answer your question? Yeah. Thanks. Yeah. We have at least EUR 20 million of IT recovery expenses in the second half that we couldn't predict precisely at the end of the first half. Anyway, they should be covered by insurance, so it's a bit immaterial. On the clinical diagnostics, our esoteric specialty clinical testing in Europe is not so small. It's more like EUR 200 million of revenues that we have in that activity. The NIPT is starting to be quite big. As we disclosed, our test numbers went from 100,000 in 2018 to 150,000 in 2019. We had massive growth on some segments of our clinical diagnostics. The routine, in France, for example, the government has a 3-year program. It's a negotiation with the Union of the Clinical Pathologists. Usually, they allow a spend growth of quarter a percent. They're talking for the next three years of half a percent growth per year. The growth is constrained. How we can generate growth is through developing new tests that have a lot of medical benefits for patients and that can be reimbursed on top of the fixed amount for routine tests. That's what we think we should specialize in because we're a company, at the end, of innovators. Does that answer your question? Yeah. Thank you very much. Thank you. We have a follow-up from Suhasni Varanesi of Goldman Sachs. Please go ahead. Your line is open. Hi. Thank you for taking my question. Just one follow-up, please. I think recently, in the last one month or so, there were some price cuts announced in French clinical diagnostic businesses. I just want to make sure if you had seen any implications or it was outside your scope of work. I think they are still talking between the Union of the Clinical Pathologists and the National Insurance. I think they are close to agreeing for the next three years to have a volume increase of about half a percent per year, each year, maybe a bit more in the last year, which would be 2022. It hasn't been signed yet, so I think anything could change. Of course, that means the nominal reimbursement goes down. It goes down every year. We would love to get more efficient. Overall, they improve their margins every year anyway. That's what people are thinking will happen for the next three years, for the French business. I understand. The net impact on revenues will be flat, roughly. For the routine business outside of new innovative tests, I think you are talking a flattish, plus or minus half a percent. Okay, but that's without the market share gain. We can do a bit better either if we open new labs or we gain market share through winning some new hospital clients, et cetera. It's an overall reimbursement by the government, which is constrained. Understand. Thank you very much. Thank you. We have another follow-up. This is from Edward Stanley at Morgan Stanley. Please go ahead. Your line is open. Sorry. Yeah, one more quick one. I am following up from Tom's question earlier on TruGraf. Your working assumption roughly is that EUR 100 million-EUR 200 million of sales is possible in 2021. Your uplift you are guiding to is around EUR 400 million, and EUR 200 million of which comes from M&A. Are you saying that if TruGraf goes well, then EUR 200 million of the uplift year-on-year comes from M&A and another EUR 200 million from TruGraf, and the underlying business does not grow? Is that TruGraf incremental to the guidance that you have given for 2021? Edward Stanley from Morgan Stanley. If you could just repeat your question just for the benefit of the speakers, please. Yeah. Can you hear me? Yes, I can. Sorry, let's hope it's worthwhile. The guidance for 2021, I'm just following up from Tom Bolton's point earlier. There's a EUR 450 million increase year-on-year in revenues. You said that you expect TruGraf to be EUR 100 million to EUR 200 million, and you've also guided to roughly EUR 200 million of revenues from M&A consolidated at mid-year. With M&A and TruGraf, that accounts for all of the uplift in revenues, or is TruGraf separate to that guidance? Yeah, we've been conservative. We haven't planned much for TruGraf for 2021, or it's part of the mix, because we want to see how the adoption is. The good thing about this test is once it's part of the monitoring program for patients, it will become or should become very recurring, but we first have to see how the adoption develops in 2019. Sorry, in 2020. The run rate in the fourth quarter of 2020 will be a very good indication of what will happen with this test and the other tests that we'll be launching this year. We will review that and maybe our 2020 objectives, our 2021 objectives, once we know this development. Maybe we're a bit conservative, but let's see. We first have to deliver 2020, get a good adoption, and if during the year of 2020 or at the back end, we have good news, that will be good. Okay. Because I've got through, why not just ask quickly on Boston Heart, the comp effect, I was pretty sure was dropping away almost fully at the end of Q4 and wouldn't impact at all in Q1, but it doesn't sound like that's the case. It sounds like it's still going to take a bit of time before that stops becoming a drag. Yeah. The big drop started in the middle of 2018. In Q4, we've had a very strong effect in Q4 of this year. The company is not very material going forward. We're talking something like EUR 30 million. We might have a small impact in Q1 of next year, but pretty minimal on the consolidated basis, maybe 0.1%. But at some point we hope to see some pickup, so we'll see. That's why we disclose it separately. I don't believe BHD will be material to our revenues, or any change at BHD level, we don't think this will be material to our revenue evolution in 2020. Okay, thank you. Thank you. We have one further question in the queue so far. That's from the line of Andy Grobler of Credit Suisse. Please go ahead. Your line is open. Hi, good afternoon. Just a couple of quick ones from me. You mentioned earlier about business development having slightly been put on the back burner through the middle of 2019, but you had pretty good growth momentum into the end of the year. Where are you with that? Do you think you are back fully on track in terms of growing the business and BD in general? Then secondly, there was a question earlier around tax. Could you possibly be a bit more precise about where you think tax is going to settle for 2020 and 2021 in terms of rates, please? Thank you very much, Andy. You are right. It is a good comment. We try to identify the revenues that we lost for sure in the year of 2019, and that has been disclosed. But what we cannot quantify is what we would have otherwise won if we had been focused on really running the business. It is a contrasted picture because some of our companies were not affected at all by the cyberattack, and they continued to win business, et cetera. Others were. We are also doing significant change in our IT systems to become more resilient, to harden them. That also cost a lot of management attention. So indeed, our 2019 second half was still affected, and we estimate it has cost us probably six months of impact of growth to some of our businesses. So we have some upside. We think through 2020 we will recover, but we could have had a better growth than better organic growth Q4 were it not for this cyberattack. We think, for example, in our genetic testing business, where the turnaround time of testing is 12 hours, 24 hours, 36 hours, we lost a lot of clients because they did not get any service for two weeks. In other parts of our labs, our analysis time got longer because we had a huge backlog that was created in June and July. Of course, clients did not send us more samples because we were not able to report on results. All those things compounded to hurt our growth in Q3 and Q4 of last year. Little by little, we are putting that behind us and hopefully, our teams will be able to refocus on their clients and convince them, those that are giving us less work, that they should give us back more work as they used to. Is there a bit of a hangover from that in term? I'm not sure how long the lead times are for the sales process. Do you think you're fully back up and running as of now, or will it take a bit longer to get there? No, not fully. I think that's why we said we think that should be behind us by the end of 2020. Okay. Hopefully by June, it will be one year, people will start to forget, and they will look at the last quarter operational performance. Once our operational performance is everywhere fully normalized for long enough, for six months to a year, we think it's going to be forgotten, and we should recover most clients. Our teams don't have to go and visit clients to apologize anymore, but they can visit clients to talk about new products, new services. Again, some of our labs have continued to work without any interference. It's just those labs that were affected. Okay. Thank you. To your question on tax, for 2020, we do not really know exactly. It will depend exactly where our profits are. If you want to be conservative, you probably can work with the same percentage. Beyond that, probably our normal rate should be 25%, isn't it? Yeah. Today, if you look at our theoretical tax rate in 2019, it was about 25%, and we booked around 28% because we did not optimize all the losses and the tax entities due to the heavier acquisitions we did recently. So we are going to try to merge these two tax rates all the time. The theoretical tax rate, which is around 25%, and what we actually book and pay in the year. But that takes a bit of time because it is not something that you do overnight. Okay. Thank you. We have had one further question come through. That is to follow up from the line of LMG Investments. Please go ahead. Your line is open. Yes. This is Sokazedi from LMG. I just want to follow up on my earlier question on the other operating cash items. I just want to apologize for the confusion and just check it's basically the same amount as the SDI, so there's really nothing to clarify. I just want to apologize for the confusion. Okay. Thank you very much. Thank you very much. Thank you. As there are no further questions at this time, I'll hand back to our speakers for the closing comments. Well, thank you everybody for joining our call. We apologize for the technical glitch in the middle of the call. That's embarrassing. We will try to make sure it does not happen next time. Thanks for all of you, our shareholders, for supporting us and supporting our investments for the long term. We have put a lot of investment into this company, to build an incredible network of labs, to build a very nice pipeline of new tests. And we know it takes a long time. It takes a long time to generate very high cash flow. It is really hard to have your cake and eat it, too. Many companies that do as much research and development and investment for the future generate massive losses. We managed to do that, to make all the spend in R&D and building a very powerful group in our markets while still making money and even increasing our margin. But of course, it could be much better, and our good labs are doing much better. We are going to be working hard throughout this year and the next couple of years to increase cash flows and mitigate any risk that are thrown at us by the market and this global health risk. And we will try to help the public health authorities in mitigating the impact of this terrible disease. Thank you very much, everybody, and have a good day.