Ladies and gentlemen, Welcome and thank you for joining Eurofins' Half-Year 2023 Results Call. Please note that this call is being recorded and will later be available for replay on the Eurofins Investor Relations website. Throughout today's presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. If you would like to ask a question, you may press star, followed by one on your touchtone telephone to register for questions. For operator assistance, please press the star key followed by zero. During this call, Eurofins' management may make forward-looking statements, including, but not limited to, statements with respect to outlook and the related assumptions. Management will also discuss alternative performance measures such as organic growth and EBITDA, which are defined in the footnotes of our press releases. Actual results may differ materially from objectives discussed.
Risks and uncertainties that may affect Eurofins' future results include, but are not limited to, those described in the Risk Factors section of the Eurofins Annual and Half-Year Reports. Please also read the disclaimer on page two of this presentation, subject to which this call and Q&A session are made. I would now like to turn the conference over to Dr. Gilles Martin, Eurofins' CEO. Please go ahead.
Thank you, Bernard. Hello, everybody, and thank you for joining our half-year call. I'm pleased to report on a good evolution in the second quarter of this year with acceleration of our growth. We are starting to see some impact of our pricing measures. It takes, of course, some time to push through all the inflation we've had last year and we're still having this year, but we see a good trend on that. This is the first half of the year, also the last period, where we suffer from significant COVID comparable, and that is in our COVID business, which basically is now almost inexistent and in to zero.
Also in our core business, because we did significant amount on vaccine work on our biopharma sector, which, of course, has ended, and we still had quite a bit of that, especially in Europe, in the first half of 2022. We have a slideshow we can go through. I will go to page 5 now. As you can see, our growth momentum in our core business is good. It is stronger in North America. As we all know, unfortunately, since the war in Ukraine, Europe is affected and especially the countries closer to the war. The eastern part of Western Europe, Germany, are more affected than others by the inflation that followed and the supply chain disruption.
We still see some softness in some markets in Europe, which we don't see in America. The good thing also about our results is that we achieve good organic growth in spite of the impact of cost containment measures by the French Social Security, which impacts reimbursement in clinical diagnostics. That our total growth achieved this level in spite of those effects are good. Obviously, we are prudent regarding the outlook in Europe. We do think things should normalize, but nobody knows. We have started a number of cost initiatives in several businesses just to be ready in case growth doesn't pick up in the second half in Europe, as we think it should, or early next year.
Whatever the development will be, we will be prepared to do that. Overall, the companies or the companies of our group are doing well. We are earning good margins, close to 20% EBITDA, so we continue our programs, our investments. We continue focus on acquisitions where the sellers have accepted the new environment in terms of interest rates and therefore valuations. We are prudent in valuations. We think there might be better opportunities. We haven't changed our objective to add EUR 250 million each year from acquisition on average for the five years, starting 2023. Might be less linear. We think there might be better opportunities in a while. This year, it may be a bit less than EUR 250 million.
That's why we said, most likely, maybe we'll have EUR 200 million revenues this year. We're very disciplined on acquisition price and the fit of those targets. We continue to build out a laboratory network. We've expanded the percentage of sites that we own to 31%. It's, of course, each quarter, a modest improvement. Also there we are prudent. We know that building costs may have peaked, so there are certain things we can delay a little bit in terms of building certain laboratories, to when the cost of building might have softened even further. We continue to do startups. We think the return on capital employed on startups is usually very good. We have returns between 40% and 50%, often exceeding 50% in year three or four.
We continue to open a lot of startups, which in some markets are necessary because there's nothing of quality to buy or in other markets is a better alternative to acquisitions due to the cost of acquisitions. On page 6, we've disclosed some more information about revenues by activity. We are of the opinion, and we are structured by geography. We have one leader for each activity in each continent. That's what we think is the best way to organize our business. We do understand that investors would like to see our results presented differently, which is difficult, because then we need to have a different structure of organization to make that meaningful.
Nonetheless, we will try to work towards that in how we in the future structure our groups. We've decided information at this stage on revenues, but of course, as time passes, we will see the revenue evolution. You will get that in each of those areas. As and if we can adapt our structures and the results are meaningful, we should be able to provide also data on profitability and its evolution. This is not something we can do this year, but this is something we intend to continue, at least, providing revenues and describe and some color around the development in those areas, which we already gave in the past, by the way.
I will now pass the microphone to Laurent Leb ras, CFO, who will discuss the financial results of the first half.
Thank you, Gilles. Good afternoon, everyone. It's my pleasure to walk you through our first semester of 2023 results. As you can see on slide 8, our revenues year-on-year were down by 5.9% due to the strong decline in COVID activities. On the other hand, our core business organic growth was very strong at 7%. Our adjusted EBITDA was down because of the COVID activities decrease, stood at 19.9%, broadly in line with our full year objective. On slide number 9, you can see that our organic growth accelerated in Q2 to 7.5%, while the impact from foreign currencies and M&A were quite minimal in the first semester of the year.
The main driver behind our H1 revenues evolution was a sharp decrease of COVID revenues, which created an unfavorable comparative of over EUR 450 million, that we were able to bridge via organic growth of our core business by about half of this gap. On slide 10, you can see a breakdown of our organic growth by segment and by region, which Gilles alluded to already. Europe overall was a bit more softer in terms of organic growth, despite a very strong environment testing growth, while food and discovery were a bit more challenging. North America recorded a very strong organic growth on most vertical, very close to double-digit overall, and the rest of the world was a bit more contrasted.
On slide 11, looking at our cash flow in the first half of the year, the net cash from operations stood at EUR 333 million, a 33% decline year-on-year due to the COVID activities decrease mostly. We had controlled but sustained CapEx spend at EUR 259 million, resulting in free cash flow of EUR 74 million, or EUR 125 million before investment in own sites. We were able to increase our net cash position, which stood at the level of EUR 682 million, a stable level versus the previous year. On slide 12, this is another view of our capital allocation for the first semester. You can see that we generated cash before CapEx and M&A, after debt service and rentals of about EUR 227 million.
If you account for about 2% maintenance CapEx, this still left EUR 163 million that we decided to allocate heavily in a long-term investment for growth. Basically, M&A and CapEx, where we spent EUR 273 million, resulting in a consumption of cash of EUR 110 million before any refinancing activity. On slide 13, you can see a breakdown of our CapEx spend, which was very similar to the one of last year, with 20% spent in investment in own sites, 19% in IT, 41% in machinery and equipment, and 20% on leasehold improvements. On slide 14, you can see that our networking capital intensity increased to 6.8% of revenues.
This is mostly in relation to an exceptional comparative in the first half of last year, which was linked to advanced customer receipts related to COVID activities. Overall, our DSOs improved by one day at 60 days, and our DPOs slightly decreased and to conclude on slide 15, you can see that we were able to finish this first semester with a very stable leverage at 1.9x, well within our range of 1.5x-2.5x. We decreased our net debt by EUR 250 million, following the issuance of a hybrid bond in January and the repayment of a leftover hybrid bond in April. We have no major refinancing needs until July next year, we end up the first semester with a very strong cash position and access to large credit facilities. Thank you for your attention.
I now give back the microphone to Gilles for the operational and strategic update.
We'll go to page 17. While we get out of the COVID period, of course, our teams have more time to refocus on their core business. Our core business is innovation, to develop new services and new products. The technological breakthroughs that happened over the last 5 to 10 years are really helping to create new possibilities. Anecdotally, we are listing two on this slide. For example, the early gender test that now can be done without taking blood, without having to go to a doctor or phlebotomy center to have blood taken.
Also in the test that are adjuncts to new cancer therapies or that are early predictors that enable early action while while the treatment will be easier. We're investing a lot in developing new tests in those areas related to healthcare and generally. We already mentioned what we're doing, for example, to detect PFAS in not only in the environment, but potentially also in food, because it might be there, and unfortunately, also in people that might be affected, especially if they live three close to sites that were polluted. We continue to invest very significantly in innovation. On page 18, we comment on a couple of things.
We're starting to see the benefits of having built this large hub-and-spoke network, because in the large hubs, we have a very large number of samples that we analyze even for rare and complex tests that are fairly labor-intensive, both in the sample preparation and in the interpretation. On both ends of those tests, now we start to have the scale to develop automated solutions. You see a couple of robots here that we've developed with partners and where we own the IP for sample preparation to reduce the amount of manual labor. We have a number of pilot initiatives where we are developing those type of systems across our group, and when we see those pilots working, we usually have 2 or 3 in parallel for each application.
We intend to deploy standardized robotics for the laboratories around the world who do the same thing. We do the same thing at the back end, at the interpretation end, where it's more artificial intelligence, to interpret the data and reduce the amount of scientist time that is required. We're really transforming what used to be a mom-and-pop business into a real industry. We have big hubs for complex analysis, but also on page 19, you will see there are some tests, including microbiology, that need to be done close to our clients, and for that, we're developing new modalities. We have developed standardized, containerized laboratories that we can deploy even on our customer sites, if required.
We have also the spokes of the hub, not only the regional laboratories, but even very local, small laboratories at customer site, where we use the reagents and the testing kits that we developed in our, in our specialized units that provide some product, a limited range of products for both clinical diagnostics and food and environmental diagnostics. We are doing a lot to be more efficient. We are still in the phases where all those development costs money, and they haven't been deployed everywhere, but we are, we are really optimistic on the impact they will have long term on the quality of our service, because machines don't make mistakes.
They repeat the same thing in a very consistent way, on the cost of doing our service, the speed of providing our service, overall, the quality of our service and differentiation we are getting. We are really working hard to continue to be the leader in innovation in terms of the breadth and depth of our service, but also its efficiency and its quality. We continue, as you see on page 20, to expand our laboratories network of modern laboratories around the world. We on page 21, you see the evolution of our startups. They continue to have a good return on capital employed. They continue to add to our organic growth.
At this stage, while the price of acquisitions has not yet come down to levels that we think are commensurate with the current and the prospective interest rates, we favor more startups at the moment than maybe we did a few years ago. This can also be adapted, depending on the outlook in the years to come. On page 22, you get a bit of an overview of the acquisitions we've done. It's mostly small, bolt-on acquisitions that have a strong focus in the areas where we see good long-term growth. If I move to page 24, we talk a bit about our objectives. We debated whether we should adjust or not our objectives, because basically, the only adjustment we did was based on things that cannot be predicted.
We had made objective based on the average FX rate of 2022. We decided, since the FX rate adjusted in H1 to adjust it, frankly, we don't know what FX rate will be in H2, but at least it gives you a legibility, and you're welcome to do your own adjustment based on the whatever FX rate you think. It's not a change. It's not because our business is not performing as we planned. It's just because of the exchange rate that happened. As to M&A, it's fairly difficult to predict what will happen, what we will close, because the timing of signing and closing is never really certain. We could still add EUR 250 million pro forma revenues, we don't know, but we thought it's prudent to flag that maybe we'll only add EUR 200 million this year.
It's, that is not, it's not saying our business is not performing as planned. It's absolutely performing as planned. We have a strong outlook for continued growth and improvement in the second half, the FX has changed significantly in H1 versus last year, we thought we should flag that for those who wouldn't notice. On the second half, we are positive about the second half. We have seasonality in our business. Historically, we've always had a stronger second half, both in revenues and especially in margin, especially in Q4. We're confident of our unchanged objectives for this year. The only thing we can't control and can't know is what the FX will be, and that's why we mentioned that.
If I go to page 25, we've had what we think is a good growth momentum in the first half of the year. The all the difficult comparables are just going away. The second half of the year, we'll have much less difficult comparables because we had very little COVID testing. We had a little bit, but we had very little COVID testing in the second half of 2022, and we also had much less remaining vaccine work in our biopharma business in the second half. We're positive for the second half of this year, and we're also positive that in 2024 and the year thereafter, we'll start to benefit more and more from all those investments we've made in CapEx, automation, modern laboratories, rationalizing our network of labs in a fit-for-purpose hub-and-spoke network.
We have the right footprint in many countries now, and it's just about us to continue to absorb the last impact of inflation, pass on the costs that need to be passed on, and improve the productivity in all our areas. Our outlook for 2027 haven't changed. We're positive that all the initiatives that we have started will yield the desired effects, and we're looking forward to a strong second half of the year. Thank you very much. Now we'll go to Q&A , and I think the operator will lead that.
Thank you. Ladies and gentlemen, at this time, we will begin the Q&A 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 queue, you may press star followed by two. If you're using a 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. We'll go first to Pablo Cuadrado with Kepler.
Yes, good morning, everyone. Well, good afternoon, sorry. Three quick questions on my side. The first one is on the pricing. Gilles, I think you mentioned at the beginning of your speech that you were more confident that pricing was starting to fit across the portfolio. I was wondering whether you can share with us a little bit the pricing component of the organic growth during Q2, maybe. Second question is on the free cash flow target before real estate CapEx. I wanted to understand which are the delta areas that they need to change in order to meet the target for H2, because clearly in H1, it wasn't a, you know, very large figure.
For H2, in order to meet the target, free cash flow probably needs to multiply by four. Just to understand if this is a question of working capital, a change, tax payments or something like that. Let me just congratulate you on the new segmentation information by business. I think many people is going to welcome that. I was wondering whether if you can help us to understand from the four new business lines, versus the base of the 7% organic growth during H1, which areas were growing above or below that reference? I think that will be helpful for us. Thank you.
Thank you very much. Yes, pricing is very complex for us to measure pricing. On our sample-based business, we start to have a decent view because we have often a price catalog. For all the work we do in Biopharma and elsewhere, which is project work, it's very difficult to measure pricing. We have started an initiative across the group to get that. I think we might get somewhere in 2024 on that component. The pricing component in Q2 is higher, obviously, and we get a lot of anecdotal evidence across the group. I cannot give you a number because it would have to be audited and tested.
It's simply more than it was in the first quarter, and it doesn't cover the full inflation we had last year yet, but this is something we are, of course, working on, depending on when contracts end and so on. We still have some pricing power to deploy in the second half of the year, and we'll do that, but we'll do that in agreement and consensus with our clients. On the free cash flow, you know, the main component is, of course, net working capital. If we get the net working capital back to the impact zero in a full year, because revenues should be comparable to last year.
That's a EUR 300 million swing in net working capital alone, between H1 and H2. We pay most of the tax in H1, so we'll have much less tax in H2, and the CapEx is more or less flat from quarter, from half to half. We should have a higher EBITDA in the second half. Our business is seasonal, so with higher EBITDA, you come up to the number that we set as an objective for the year. If you want some more specific, Laurent can take a follow-on question on that.
You know, we are organized by continent, and we remain convinced this is a better driver explanation of any differences.
The world is not fully decoupling, but there is some level of economic decoupling, because the war in Ukraine, has had a much more negative impact on Europe. That's where we see that we have less growth and more need to adapt our cost structure to the to slower growth in some areas, which we are doing, and we'll be doing more, even more actively in the second half. Whereas North America is still doing very well. That's the main, I think, the main difference, if you want to analyze anything.
If we were to add results across continents in the different activities, I mean, the only thing that could stick out is probably overall clinical diagnostics would be the lower growth because it's impacted in Europe by the pricing in the routine business. We've had a setback in the U.S. in reimbursement for TGI, and we are doing more clinical trials to achieve better indications for reimbursement after a change of policy by MolDx. That's really the main difference. Otherwise, Food and Life is doing well. Food is a bit softer in Europe, as we indicated, because the big food companies have are challenged on volume. It's doing very well in America.
Overall, everything more or less evens out on an average, or everything is fairly similar. We, Biopharma is doing well, Food and Life is doing well, so it's. Maybe Consumer is in between, Consumer and Technology product, because we, our business doing material science testing is also doing well. It's, that would give you the indication, but then the numbers on a global basis by activity don't mean very much. This, since this is what you want, we will be trying to work to change the structure of our group. Maybe we replace the geographic indication by activity indication. I personally don't think it's a plus, it's more meaningful, but if this is what you want, we'll try to work towards that.
All right. Thank you very much.
We'll go next to Thomas Broughton with BNP Paribas.
Yes, thank you. Good afternoon, Gilles, Laurent, thanks very much for the color. I just have a few questions, if I could. The first one on, the food testing business, and appreciate the additional disclosure around revenues by activity. I just wondered if you could give any more color around, appreciate you haven't yet given profit or margin by activity, but if you can help us understand maybe the incremental margins on the food testing business, just so we can think about, as and when those volumes return, and maybe just any more color you can give us on your expected timing of that. As those volumes return, kind of how should we expect that to impact the margin and what the margin delta could be as those volumes come back?
Just a couple on the cash flow, if I can. On your CapEx for the investment in own sites, it was around EUR 50 million in the first half. That looks to be well below the sort of assumed run rate of EUR 200 million per year. I just wondered why that was, and is it just a timing thing? Should we be expecting, you know, EUR 150 million in H2, or is it more likely, you know, you might undershoot the EUR 200 million this year? Finally, just another one on, just a clarification on the cash flow and the cash flow guidance, and that second half guidance for cash tax. Any more detail as to why that should be so low in the second half?
I think seasonally, you haven't had tended to have such a big delta when we compare H2 versus H1. Just any more color on the kind of expected cash tax number for the year? Thank you.
Thank you very much. Yes, well, you know, food, we have, it contrasted between Europe and North America. We have stronger growth in North America than in Europe, and that impacts also the margin. We've had also higher margins in North America. It is true, and we saw it by COVID, that when we have high volume of one activity or high volume growth, it has a very positive impact on margin. We do see that. As we will trim our business in the countries where we see continued soft demand for food testing or softer demand.
Of course, the rebound will have a much bigger impact then, because we will have by then automated more and have an even better cost structure by finalizing the hub and spoke model in the countries concerned. On cash flow, yes, we are also timing a little bit our investment program. We would like by 2027 to have a much significant percentage of our labs, especially our large labs or campus labs that we own. We have a bit of leeway of exactly when we do that, and we're a bit opportunistic. There are uncertainties as to valuations on the real estate market, so we're not rushing into things when we think the outlook might be better for either buying or building sites.
Also the timing of those investments depend on planning permission, they depend on speed of building and commissioning. The whole year indeed could be lower than the EUR 200 million that we have indicated as a target on average for the next five years, including this year. On the cash flow and cash tax, I will ask Laurent to answer this question.
Yes. Hi, Tom. Yes, indeed, on the tax, I mean, we usually pay a bit higher tax in the first half, especially when you had higher profits on the year before, because you pay your taxes following the closing of the exercise for many countries. This is why, in our assumptions, when we look at the full year tax, we believe that the tax rate and the tax paid in the second half will be lower than it was in the first half.
Okay. Thank you very much.
Thank you. We'll take our next question.
Yes
From Tyler with Redburn.
Thank you. Good afternoon, Gilles. A couple of questions, please. Firstly, the biopharma services, you've called out on a couple of comments in the statement that the discovery work had slowed as early stage investment had impacted that. In the past, has that business, that discovery business, provided a sort of precursor to later stage work, later stage clinical development work that you support? If so, you know, you know, should we anticipate more challenging growth conditions elsewhere in biopharma in the coming years? You know, are you able to combat that? Is that? That's the first question. I'll come on to the second one.
Yeah, thank you. No, we've had that question many times, and our leaders in biopharma, we have been for decades in that business, are adamant that this is not the case. Late stage is something that's closer to revenues, and the pharma industry is well-funded, and they will certainly not slow down investment in things that will give them product that will get registered. The very early stage, of course, is more of a bet. Will the molecule make it through a phase 1, or will it make it through a phase 2? That's much more risky, and that's where the funding is much more volatile. The bulk of our business in biopharma is big pharma anyway, and it's for projects that are often already in the clinical phases.
We don't see softness there, and actually, quite the contrary, biologics are providing a huge opportunity for the pharma industry to develop very powerful medicines that will impact chronic diseases like cancer and in other areas, rare disease, et cetera. There will be big breakthroughs in pharmaceutical product development. And we are the main partner of a very important part of those product development, you know, biopharma product testing business. Discovery, yes, is a bit softer. There was a big boom in the last three or four years. Of course, we are trimming the cost where it has to be trimmed to adjust to the current demand.
We don't see that impacting you know, for something like that to happen, that it impact the later stage, there should be no new product coming out. The cycles are so long and there's so much in the pipeline, that this would take probably five or 10 years of zero spend in discovery to have nothing in the pipeline. Of course, pharma would compensate by increasing investment there and funding of startups.
Okay, thank you. That's helpful. Then the second question, back to the topic of, I suppose, infrastructure investment and the lab build-out. You know, reading through your comments suggests that particularly in food and environmental testing, you know, the new capacity investment is a, you know, I suppose obviously, a critical component of volume growth. You talked in your earlier comments about the sort of modular lab build-out as well. Should we, you know, should we view volume growth as going hand in hand with CapEx? If that's the case, does that sort of limit some of the operating leverage that traditionally has been evident in the business?
No, I'm not sure I understand your question because, you know, we have a very high return on capital employed on organic CapEx. We have 50%. The CapEx on organic growth in food and environment is fairly limited. We've had a lot of CapEx in buildings because we repositioned the whole business. We reconstructed it on a different footprint along this hub and spoke model, as opposed to a lot of labs that we bought that were doing a bit of everything. Were doing everything regionally, which we think is not the best model to maximize the cost effectiveness and the quality of the service. Once we have a new footprint, we don't need to invest so much in buildings.
They are there, we have lots of space for improvement, and then the increase is more like linear. It's just on the small local microbiology labs, yes, you are right. We, if we want to go into a new region, we need a new lab that we either buy or build. The drop through is very good in food and environmental testing on a given lab perimeter.
Okay, thank you. Just, Charles, just want to come back to the working capital comment again, just for my own clarification, if you don't mind. The free cash flow guidance assumes that the full year working capital to sales ratio remains constant, and therefore, that the first half increase in that ratio sort of, you know, reverses during the second half. Is that the correct interpretation?
That's correct, yeah.
Yeah, that was Laurent speaking.
Thank you.
Yes.
Yeah. Thank you.
We don't see why we wouldn't control net working capital as, not as well as the previous years. We don't see why at the end of the year, we'd come at a different number than the year before.
Excellent. Thank you very much.
Thank you.
Thank you. We'll go next to James Rose with Barclays.
Hi there. Thank you. I've got three, please. First, on startup losses of the EUR 38.6 million, could you say how much of that is transplant genomics? Perhaps give us an outlook for that business, given the reimbursement changes. Second is on own site investments, EUR 200 million over... Sorry, EUR 200 million a year, over five years. Could you sort of help us model what that EUR 1 billion of spend would mean for depreciation and cash spend on lease liabilities, into the future? Thirdly, on your automation investments, do you have any outcomes of early-stage deployments or pilots that you can talk to in terms of turnaround time improvements or margin improvements?
Thank you. On TGI, I think we have about EUR 7 million loss in H1, and the change in reimbursement was extremely abrupt and we came with no warning. It took us about 60 days to adjust the cost to that. The decision is how much clinical trials we'll do to establish new reimbursement conditions for surveillance, because that's the main area where our test is superior, is accepted for surveillance. We want to establish full equivalence to replace surveillance biopsies. This will be presumably a 24 months period, during which the volumes will not be growing as we previously anticipated.
We'll of course, adjust the ongoing cost to the level of revenues that we expect we'll see while we carry out those clinical trials. The flourishing of TGI, I think, is postponed by 24, something like 24 months, as we can judge today. We still are convinced we have a fairly superior test, and the medical community, the nephrology community, especially the leading key opinion leaders, are of the opinion that our test is better. We are working actually, even before the clinical trials will be through to obtain a better reimbursement and differentiated reimbursement from the unacceptability of the testing for medical cause as compared to a cell-free DNA.
We also have a cell-free DNA test in our portfolio, but we believe that the test, OmniGraf test, provides superior value for patients. Patients and the doctors are really frustrated that they can't be reimbursed right now. We will work on that over the next few years, but the impact on the top line of TGI for the next 24 months will be negligible, unfortunately. We'll incur some ongoing losses to finance the clinical trials. Maybe the losses are of the order of anywhere between EUR 5 million or EUR 10 million per annum.
On own sites, yes, this is how did we come to the calculation? Well, it's really more of back-of-the-envelope calculation.
If we want to go to anywhere, something like 50% of our site owned, you'd put some assumption of the cost per square foot or the cost per square meter of a new lab, it gives you a total spend over 5 years to get to a certain percentage of lab owned. On the lease cost, again, the impact on depreciation, the site is depreciated, I don't know, over 15 years or 20 years, so that can help you. I think we're conservative, so we have short depreciation, but land is not depreciated. The leasehold improvement will depreciate over 10 years, while we use them for 30 or 50 years.
Still, we are conservative in how we show things in our accounts. The lease liabilities, we had some modeling in 1 slide that we can get back to, I don't have it in front of me right now, for the stock that we've done already. The return on that is something like 11% compared to the value in the balance sheet. That helps you model the impact of future leases savings, assuming all things stay equal in terms of cost per square meter, et cetera. This is something we'll do gradually, and it's also a matter of negotiation. You know, we have sites where we are tenants, where actually we like the sites, and we could stay if we buy the site.
We don't have to move to a new site, but that is a matter of negotiation with the landlords, and depending on the interest rate, those negotiations might take longer or not, to come to something satisfactory. We're a bit opportunistic on that too, in terms of doing it, not doing it, moving, staying, buying, continuing to rent. Sometime, the mere fact that we could move, leads the landlord to drop the rent so much that we decide to stay as a tenant, if we like the site. It's something that's a bit difficult to plan, especially if we want to plan it on a year-by-year basis. On automation, well, I don't know if I have the answer as you, as you presented.
What we do is we have paybacks. The paybacks of our automation project, as a midpoint, around three years on the investment we spend on automation. The investments now are much higher because we have all the development costs, all the engineering development, the software development, for the first one or two robots for one applications. When we start to buy 10 or 20 robots for the same thing, or 30 robots, engineering spend and the cost of additional robots will come down, and the returns will be faster. We can do a deep dive, maybe at the end of the year, when we have a few more cases where they have been running for sufficiently long, to see to give you more flavor of that and what it could mean.
That's great. Thank you very much.
We'll take our next question from Allen Wells with Jefferies.
Hey, good afternoon, Gilles. Good afternoon, Laurent. A couple from me, please. First, I just wanted to go back to the food testing side, and particularly the diverging performance between North America and Europe. Could you maybe just talk a little bit about what you're seeing here? Because some of, I think, the headwinds that you called out, price inflation, consumer behavior, et cetera. I mean, I think that still should be impacting some of the U.S. testing activities. Maybe not as significantly in Europe, but any kind of clarity on really what's going on underlying food would be really useful. Thanks. That's my first question.
Yes, thank you. I think in Europe, it's a continuation of what we've seen now for three or four quarters of the consumers being affected, the consumers changing their spending patterns. The industries that serve those consumers, the food industry is a big one and a big client of ours, adjusting their practices, reducing the range of products that they are selling, that means fewer references, it means bigger batches, fewer testing, checking on their spend, optimizing their testing regimes to some extent. That's I think one of the bigger impacts. What do we have else in Europe?
We have the reimbursement impact on clinical that is hitting us in Europe, that we don't have in North America, because North America, we sell a lot to hospitals and in clinical business and specialty testing. In Europe, we had a bit more biopharma vaccine work in the first half of 2022 than in North America, respectively, probably. That, that might explain. The cost inflation has been higher in parts of Europe, and it remains higher in Germany or in Eastern Europe than it has been so much in North America. North America, we have been fighting with labor cost inflations for longer on the qualified staff, than it started in Europe.
It started probably in North America already in 2021 or earlier than. That's a phenomenon that is a bit more recent in Europe. Where in America, we see a bit of moderation on that level at the moment, I think.
Okay, thank you. Then just quickly, just on the sequential growth improvement from 2Q. Obviously, we also had a 2-ish% easier comp and expected stronger pricing tailwinds. I'm guessing that the diagnostics business in Europe was one of the key drags, 2Q versus 1Q, which was obviously incrementally more challenging. Is there any way you can tell us what maybe the underlying organic would have been without that drag in diagnostics, or is that not possible?
I think it is possible, but we would need to go back and calculate it. It is not so material, but we have about EUR 500 million of diagnostics in routine that would have been affected by a 3%, something like a 3% or 4% cut. That's not a huge amount, but it is an amount. We have to calculate it offline if you want to have the exact calculation, especially for one quarter.
Okay, thank you. Just very quickly, on that diagnostics piece, I think there's been some noise out of the French Lab Industry Association, that have started to be a bit more vocal about the need for clarity and a move back to triannual pricing in the French kind of lab market. There's obviously some increasing concerns around further budget and pricing declines as we move into those negotiations towards the end of the year. What's kind of expectations here from the European side? Do you think that the triannual review will be, you know, in terms of the price cuts, will be more moderate as we move forward? Or are you planning for further reasonably sizable, kind of 3% declines again this year?
You know, I think long term, things will lead to a consolidation of that market, like other markets, and the productivity gains that are associated to that compensate the price reduction. You have volume increase of 3% or 4%, too. The volumes have also been soft in the 2nd quarter, I believe, in France, because there were instructions to doctors to reduce prescriptions. That can also only go so far because, you know, people get sick and testing needs to be done. It is the environment for clinical diagnostics worldwide.
It has been like this forever, and the laboratory. There is also huge potential for outsourcing of government labs or hospital labs that are very badly run, that can lead, sorry to say it like this, but where there is massive opportunities to save for the government. Some countries are already moving ahead on that. It's, it is, it is the name of the game in clinical diagnostics. The industry is consolidating, is modernizing, and a part of that is passed on to the payers through cost savings.
What's your strategy, just to follow on from that, what's your strategy in terms of that consolidation in France? Because obviously, you built that position through acquisition. Is there a plan to continue to consolidate that market further and you be involved in that? Or do you think that the bigger players in that market will continue to take share?
You know, we will see. We will see what are the right opportunities at any given time. We optimize the network that we have. We add the blood sampling points where we need it. We think acquisition price are too high, we're not making substantial acquisition there at this time. It could be there will be opportunities later, or we can do alliance or mergers with others of our business in that area. There are many ways we can play this evolution from our existing position. The thing is, you know, we run this business for return on capital employed. Those investment have provided a very good return so far.
Of course, COVID has helped, we have a very good return on the investment we've made, and we look at the future in the same way. We're doing investment that we think provide a good return on capital employed. It could be that they are dilutive in overall growth for Eurofins, I acknowledge that, but in the end, our investors pay us to have a return on their capital. I think our investment in that sphere so far have proven very, very positive in terms of return, and will continue to drive decisions based on the expected returns we think we will get. Of course, if there is an outlook of growth is less, then the values will be less, or. That's that has been the case always and will remain the case.
I think it is still a sector where we can generate good returns, even though in the routine area, the growth may be more subdued.
Thank you very much.
To provide the numbers more by activity, you can judge all the sum of parts better.
Great. Thank you, Gilles.
Thank you. We'll take our next question from Arthur Truslove with Citi.
Thank you very much. A couple from me, if I may. First question, in terms of the discovery business within biopharma, obviously, you know, it sounds like it's slowed down a bit. Have you got any sort of early indication as to when that situation might improve? Obviously, your food business in Europe, likewise, has been under a bit of pressure for a little while. Interested to know, you know, when you think that might, you know, turn around and become more positive. Finally, I just wonder if you could give us an idea, I know it's difficult across the group, but just how significant wage inflation has been in the first half. If you give us a number for how much that's been, that would be most helpful. Thank you.
Thank you very much. For discovery, I don't know, frankly, when things will start looking more positive. We are, of course, trimming the cost to adjust for the current demand, and that's fine. For food, we've done a lot of that already. We had a strong month of June and a much better June in Europe. You know, it's one month, so it's really hard to say if this is a trend. But at some point, any readjustment of testing, it's the bottom because testing is required for food to be safe. And people in volume, in the end, We might have switched to a cheaper product or more bigger batches of the same thing. In the end, everybody, we all need to eat.
This, the rationalization of testing can only go so far. The timing of that is a bit hard to read. What we're doing, we're, of course, adjusting our cost and structure to whatever are the short-term expectations. Wage inflation, we don't track that on a consolidated basis. Anecdotally, in Europe, maybe we've given across Europe, 4% or 5% raises, I would guess, and similar amounts in North America. With vast differences from country to country.
Great. Thank you.
Thank you. We'll take our next question from Louise Boyer with Stifel.
Good afternoon. Thank you for taking my questions. I have a couple, if I may. The first one regards your capital allocation. You have shown us on slide 21, your usual graphs of data revenues per program. Would you be able to give us a bit more color on the margin, and what is their contribution of, like, the past four programs, if we exclude number five, to your margins? The second one in terms.
Thank you.
Of capital allocation, Oh, sorry, go ahead, and I'll continue later.
Well, you know, the last two programs are loss-making and highly dilutive still, and the first three are close to our group margin, slightly below our group margin, as I can recall.
Okay, thank you for that. Also on your capital allocation, you every time during those calls we're having, you're highlighting innovation, whether it's Peek-a-Boo today or the Tru Graf last time and so on. How much of your sales are realized on tests that you have created? How relevant is that on your business?
Yeah, we don't track that on a consolidated basis. We invent and develop a lot of tests every year, and even in areas where we're not the only one in the world doing a certain test. There is a new range of new tests any year. We have in the programs we are piloting to track price evolution, we are also tracking mix evolution, so the impact of new tests and the impact of tests that are being discontinued. Maybe next year we'll have a better view on a consolidated basis of new tests. In the areas where we look at, often the new tests are anywhere between 2 and 10% of the revenues in a given year.
That's, that gives some indication, but it's very anecdotal, and I don't have the numbers for the whole group, so I don't know if it's the case. You know, in biopharma, for example, this is really not applicable because everything is new, because we have a new program for all of our clients. They develop new pharmaceuticals. Every time we have to develop a new testing, modalities for those new pharmaceuticals. The question is very difficult to generalize for our whole group.
Okay. Thank you for that. Two last questions, if I may. The first one on your portfolio, product portfolio. You mentioned during last call that some divestment plan could be looked at on your non-core activities. Which activities, what % of your current business do you consider as really core right now? What are we talking about in terms of size?
You know, it's a matter... We have, now, we described the four activities, four main activities. They are, we put food, by the way, in passing, we put food and environment together because the frontier is very blurred. We use the same labs for food and environment in many cases. Water in some areas is with food, other areas it's with environment, or drinking water, at least. Those two, those two activities, we think they fit together. That's also our most historic activity. Biopharma is more new, it's just as core as food and environment testing. The other activities are also clinical, we're starting to be significant. In material science, we're the world leader.
All those activities are separate, you know, you have companies I think we are actually more focused than many other companies you look at, which have 10 or 20 or 10 or 15 verticals. Should we keep 4 verticals forever? That's a question. You know, some of you would prefer if we didn't have clinical diagnostics in our scope because organic growth would be better. Whether from a capital return, it's a good thing to do, I don't know. What we've done, we've done some trimming. We sold our digital testing business because frankly, it didn't fit. There was no way we would become a world leader in cybersecurity testing, and the other things were fairly niche.
In this first half year, we have disposed of some animal testing activities that were part of an acquisition we did long ago. We do a bit of cleaning out of smaller activities at the moment. Yes, we have a portfolio of a range of things that could live their lives independently or could stay all part of Eurofins.
Okay, thank you. Last, last one for me is about the price negotiation. We know that, you are like over H1, looking at the price of 2025. Could you give us a bit of color on your discussion with your clients on price negotiation for next year?
Well, our price negotiation will continue, and will be a continued factor. We need to catch up all the price that we didn't charge in 2022, and we've done a lot of that, but there is still inflation in 2023 that we'll need to pass on. This, this is a permanent discussion. For any contract that ends, of course, we take into account the all the inflation that we've seen since 2019 in the repricing of those activities and the costs that are incurred to do it. You know, we also have developed some fairly advanced models to know our costs, which few of our competitors actually are doing.
We can adjust much more the pricing towards the actual cost of doing the business, and some clients get very significant repricing. We say, "Look, you know, we'd prefer not to do business for you if you don't accept 30% price increase." That's the exception, of course, fortunately, but it's a very broad landscape of pricing, depending on what we do for which clients. We're bringing a lot of transparency-
Average price negotiation right now?
There's no average price for negotiation. You know, we have thousands and thousands of clients all over the world. Each situation is different.
Okay. Thank you for that.
Thank you. We'll take our next question from Dominic Edridge with Deutsche Bank.
Hello, thanks for taking the questions. Just the first one is just on the level of SDIs we should be thinking about for the second half of this year. I know you've got quite a lot of startups in place. I think you did EUR 39 million of losses in temporary losses in the first half. Is that sort of what we should be thinking about in the second half as well, or will it be significantly up or down from there? Secondly, just to clarify on the biopharma product testing side of things, can you just maybe discuss the pipeline there. Is really the only difference there, compared with where you were maybe last year, just the pricing on the COVID vaccine work that you did, and otherwise, everything is much as what it was?
My last question is just on the genomics business. Obviously, a number of those business units did very well out of during the COVID time by going into COVID testing. Obviously, profits have come down significantly. Can you just give me an idea of how quickly you feel those businesses could get back to sort of peak profitability again, and what are the sort of the key drivers in that, in that business? Thanks so much.
Yeah. Thank you very much. SDIs are a mix of reorganization costs, network expansion costs, and startups. I think the losses in startups are likely to increase, while the reorganization costs are likely to decrease, to stay more or less within the targets that we are setting. It's also quite hard to predict, especially over a five-year period. But we've done a lot in the first half of reorganization, towards our hub-and-spoke model, and that could be a bit less in the second half. The biopharma product testing, yes, indeed. I think the changes are, in volume, have been mainly the replacement of the COVID vaccine work, which has occurred faster in North America than in Europe, with other type of routine product development. And in genomics, it's true.
Genomics will take us a bit longer to get, especially in Europe, which was very focused on COVID testing, so it will take us probably another two or three quarters to get genomics back to an acceptable level of profitability. That is not an area... That is an area of focus for us. It's not a huge business. It's, I don't know, EUR 13 million in Europe, but it, or EUR 40 million. We have some programs that we've signed that take a bit of time to start, that should give a boost on, for example, population testing.
We've won some very significant programs to do on genotyping of whole populations or large segments of the population, and also on animal genotyping of complete groups of animals, bovine, for example, which are very promising. I think those things will expand significantly in the future. Also plant genotyping. Many of those things might become mainstream, and we're just at the beginning of earlier pilot programs by some countries. There are promising things where we are really developing capabilities in terms of testing, automation, IT, data handling. It's a huge amount of data where we are developing the tools to be active in.
It's a very promising midterm area, but it takes a bit of time for some of the programs to start at the moment.
Okay. Thank you very much.
Thank you. There are no additional questions in queue. I'd like to turn the call back over to our speakers for any additional or closing remarks.
Thank you very much.
Thank you very much for everyone for joining our call. We think we've had good momentum in the first half, and quarter on quarter, the evolution is good. We're doing a lot of homework to clean out everything from COVID and shape our company for growth in the areas where we see potential. We're continuing to build a strong company. We think the outlook for the second half is good, and for the years to come. Little by little, we'll see in our operations, in our efficiency, in our productivity, and in our profits, we should see the benefits of all the investments we do in IT.
We do very massive investment in digitalization, much more than any other company we know about, even smaller competitors, proportionally. All of that, we strongly believe will make us stand out more and more as the premium and best provider in our markets. That should have, over time, the impact we are looking for in terms of margins and cash flow. Thanks for your support, and I'm looking forward to meeting some of you in person over the next few days. Have a very good day. Bye-bye.
Thank you. Ladies and gentlemen, the call is now concluded, and you may disconnect your telephone. Thank you for joining and have a pleasant day.