It is now my pleasure to hand the floor over to your host, Andrew Swift. Sir, the floor is yours.
Ladies and gentlemen, welcome, and thank you for joining Eurofins' nine months 2026 conference call. Please note that this call is being recorded and will later be available for replay on the Eurofins investor relations website. Throughout today's presentation, all participants will be in a listen-only mode. 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 factor section in the most recent 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.
Hello, everybody, and thank you for joining our quarterly call. I guess you have all read our press release, so I will not repeat everything that's in there. There is a short slideshow online. We only discuss organic growth during this quarterly call, so it's a short presentation. You can read the slides, so I will not comment all of them. What we see is that we continue to make progress. The organic growth is what it is. Unfortunately, we have some clinical programs that we thought would start in Q4 of this year that won't start this year. We do have good signatures of different programs, which makes us optimistic for next year that we're going to start seeing some improvements, for example, in our central lab and hopefully in our bioanalysis, which have been hurting us for a few quarters. The growth is what it is.
And of course, one can extrapolate it ad infinitum at a current growth or the derivative of the current growth. But in any case, the main thing about Eurofins is that we are building a very strong company that is lean, and that is making good progress. The building of our hub-and-spoke laboratories network has been continued. We are inaugurating a new large site. We just did it for our biopharma product testing business in the Netherlands. We have moved to a new site in the Netherlands, very modern for environmental testing, that some of you will see the day after tomorrow. And we're confident that we're going to complete that program on our current scope by the end of 2027, the end of this five-year building phase. That on the digital side, which is even more important because our type of business delivers data numbers.
We generate massive amounts of data every day. That is also making good progress with the deployment of our new generation of a suite of IT solutions for our food and environmental testing businesses. We're confident that the deployment will have been completed or quasi-completed by the end of next year as planned. And those things will bring massive benefits in the quality of our service to our clients, in the traceability of everything that happens, in the speed of delivering service. More importantly, this phase of five years will prepare us for the next phase, where we can deploy at scale automation and AI solutions. So as a preview to what's beyond the 2027, that's going to be more the main thing that will happen after that. We will have the footprint.
We won't have to shut down labs, close down, move with massive double cost of facilities while we do the move. Massive, of course, CapEx to build those sites. That will be behind us. And we can then optimize our network, improve further our service to clients. AI can bring a lot in many aspects of our business too, especially in the area of quality control, to make sure everything that we do is performing well, and automation, of course. So that's the building phase, which has been a long one, I do acknowledge, because we've been consolidating a very large numbers of small mom-and-pop labs that were subscale and were all doing a little bit of everything. This phase will be. And of course, this brings benefits. It brings benefits.
That's why even though the growth this year is a little bit below our objective, we will achieve, we believe our profit improvement objectives. And also next year, we are confident that we will achieve the profit growth objective that we have been planning. So overall, things are going well. We are building. The economy is not as great as we would like in Europe, especially France and Germany are struggling with growth. We see it a little bit in our numbers in this quarter for Life, for example. But overall, we have some areas that have been affected for the last few quarters. But we've hit bottom, we believe, in the ancillary activities like Agroscience, genomics, et cetera. And we believe that is a much firmer base to grow going forward. Also, this deployment of LIMS system has been really hurting our labs and costing us growth.
Once this is behind us, our teams can much more focus on growth, winning new clients, rather than fielding complaints because we are behind due to LIMS changes and so on, we have some backlog. All of that make us optimistic for the coming years. What you can see on page four are some breakdown of the growth and the breakdown by activity. Again, I caution everyone on extrapolating a quarter, especially if you look at just one area, because one area can be affected by some large programs disproportionately. But overall, the trend is positive. You see on page eight a bit of color on biopharma.
We still have some areas that are a bit challenged, but we think now in Q4 of this year, we will hit the bottom in some areas and therefore we should have a much easier base to grow from there on from next year. I spent a bit of time on acquisitions on page seven. I think over the long term, our sector will consolidate around category leaders like any other industry. Specialized companies will be able to carry out much more focused investments in the areas that I mentioned, being automation, AI, digitalization, footprint. This is happening. Many leading companies in our sectors, not all, have recognized that and are going away from being conglomerates and being specialized.
We've had a very good transaction with Element, where we were able to have 27 labs that fit very well with our core segments of biopharma and environmental testing to join our network. At the same time, we transferred to UL also a number of our labs that were doing electrical and electronic product testing. This is a number of years, but where we were maybe worldwide number in the 5 to 10 with very little prospect over the next two or three years to become number one globally, and therefore we decided that there could be a better owner. UL is leading in that area, and it makes them stronger, which is good for them. It's good for our teams that are joining UL, and we can redeploy. We started actually with Element to redeploy the resources that we obtained from this transaction into our core business.
The good thing is that we have the digital platform to welcome those new labs, and it's going to be for us a small incremental cost to integrate those labs. They can have access to our clients, we can have access to their clients. So this is a good transaction. This is something we will probably continue to do as the sector consolidates. But we are focusing, of course, on the assets that we think add value and are at the right price. That doesn't mean we will be buying all assets. There are many assets that we think are either overpriced or don't bring really differentiated value, and this is something we can rebuild ourself. This is also an encouraging development. To conclude on page eight, we are confirming our objectives and we are optimistic about the future.
I think the competitive moats we are building around our business from our investments in sites, automation, and scale will continue to provide advantages. Once we are done with the deployment of those new IT solutions, we can be much more aggressive commercially in our markets. More importantly, our clients can see even more the benefits that we can provide from our labs in terms of speed of service, quality of service, transparency of data, ease of use, ease of doing business with us. We think that will also play for an increased organic growth compared to the market growth going forward. Overall, a good quarter. There is a lot of work to do. We still have five quarters until we complete that program at the end of next year.
I am encouraged by the progress I see, and I think all those investments will provide an excellent base for a very focused company to do well for a long time, even if the economy is not maybe as good as we would all hope. I will open the mic for questions now. Laurent is here. He can also answer more specific financial questi`ons. Thank you.
Certainly. Ladies and gentlemen, at this time, we will begin the question-a nd- answer session. Anyone who wishes to ask a question may press star followed by one on their touch-tone phone. If you wish to remove yourself from the question queue, you may press star followed by two. If you are using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. Your first question is coming from Tom Burlton from BNP Paribas. Please go ahead.
Yeah. Hi, Gilles. Hi, Laurent. Thanks for taking my questions. I have three, if that is okay. The first one is just thinking about the bridge in terms of organic growth this year. It looks like if we look at consensus, at least you land around 3.5% for the full year. It depends where Q4 obviously shakes out. We do not know. I appreciate that. You are guiding to mid-single digit organic in 2027. Can you just walk through the key building blocks or drivers of that? I know you referenced some of them in your opening remarks, but to the extent that you are able to call out, I suppose, the most significant when we think about clinical programs restarting, biopharma normalizing, startups, Europe recovery, et cetera.
Just curious if you have the extent of visibility you have in any of those that you call out in particular. Secondly on the clinical programs, I think you alluded in the report to those not restarting this year. We have been waiting for those or that sort of air pocket of the business to come back, I suppose since late 2024. Are you able to give us any more detail around sort of sizing the revenue impact of those? Are they concentrated in a few clients? It sounds like there are a few large projects, but anything more you can give us to underwrite the visibility of those into 2027 would be really helpful. The last one is a more strategic one around this topic of AI and drug discovery, which seems to have sort of caught people's attention in the last few weeks.
As AI, I guess, expands the number of drug candidates, it seems like the bottleneck is increasingly shifting to the wet lab work. When do you think we might begin to see that in your discovery business and elsewhere? Secondly, you have mentioned in the past that discovery business is quite small. If that does end up being a much larger opportunity, how quickly could that business scale, and what would the incremental CapEx requirements be to satisfy the extra demand? Thank you.
Thank you very much, Tom. Very good questions. On the bridge, I said a little bit about that. I think one main aspect is we have been doing, since COVID, a lot of cleaning up. As you saw, we shed also a few loss-making businesses, we closed. We have a bit of cleanup to continue to do. We are really focusing our group on good companies, good sectors, our core sectors where we can generate very good return on capital employed. You can generate very good return on capital employed at different rates of growth. Some businesses do it mostly by efficiency, productivity, et cetera. Others do it from growth. We can achieve both. So we have a mix of businesses.
The clinical business will grow slower than the other businesses, and that is why even if biopharma picks up again as it was to high single digits or double digits, we will have some dilution from this sector. Overall, a lot of the improvement we believe will come from the finalization of the cleanup. That is I think the main factor. Second factor, which I underline, is the finalization of the deployment of our new digital infrastructure. It is costly on the one hand, but it is also very disruptive. When you deploy new solutions, you always encounter a large number of problems, which makes you less productive for a while until you go out of that phase and the new tools give you a lot of advantages, which we think over time will accrue.
This year, we will finalize deployment in a number of scopes, so they should not be affected as much next year. The ancillary activities, as I mentioned, we did some resizing in Agroscience. We did resizing on genomics, and our CDMOs, we also did in Europe where it is more affected with doing some resizing. What is left will benefit from the growth of the market. Also, our CDMO in Canada that some of you will see next week or in two weeks, is going to bring online some new capacity, which will contribute to growth. That is for the general trend, why we are positive about gradually improving organic growth next year. On the clinical, we do not have much biopharma clinical. We have a central lab with order of size of EUR 100 million.
Being small compared to LabCorp Covance, which is more of the order of EUR 8 billion, means a big project for us has a major impact as growth percentage. If you have EUR 100 million central lab and you get a project that is EUR 100 million over five years, that is 20% of your business. We have had a bit of a setback. We had some very advanced contracting regarding some vaccine project that our clients have decided to postpone, so we do not have a start date right now. That would have been very lumpy. It is also around central lab, we have another business which is called bioanalysis, which is of similar nature. If you have large programs, it can be significant as a percent of total revenues. We have signed some new programs, much broader base.
We have a key client, for example, in central lab that we believe will start next year. Vaccine, probably not next year. That would have been a bigger shift. So our target of mid-single digit next year does not account a very significant shift on that. If that happened, that would be a plus, and that would have a more positive impact. But mid-single digit is a range anyway, so we will see when all those things start. But what we have done, we have also moved all those capabilities into modern single sites. So if things pick up, we have significant capacity.
That brings me to your other question. I was talking about clinical, but what I say about clinical applies also to drug discovery, to the area of more earlier phases. We have also done a lot of reorganization of our sites, moving to newer, bigger sites, which have capacity.
So if the market really picked up, if AI brought a lot of candidates that have to be put through the physical testing in labs, or we could increase the capacity of our discovery business by just adding people. We have the footprint, we have the labs. More importantly, the bigger business is biopharma product testing, which the development work will have to be done in labs. AI cannot do the development work and all the method development and testing, et cetera. For that, we have created a lot of capacity for biopharma product testing. I just mentioned our brand-new lab in the Netherlands, for example. We have done that in a few areas in Europe, in Milan also. We have a lot of room for expansion in those sites. If you see, we have a whole floor empty in the Netherlands.
We have a whole wing of a building that we can expand into in Italy. Lancaster in 2028 in Pennsylvania will have another huge wing added that should give us space for growth for a number of years. That also, that program of building the facilities is coming to an end and is going to provide capacity. Of course, we will only hire staff as the actual programs get signed and the contracts get signed. We won't have to move, we won't have to work on a multiplicity of sites except for the local microbiology, which also in biopharma is necessary to have. Now from those acquisitions that we did over the last couple of years, I'm happy to see that we have now a national footprint for biopharma also, for the small part of biopharma work that has to be done locally close to clients.
We now have an almost complete national network of microbiology laboratories for biopharma product testing. This will indeed provide significant capacity should the growth in BPT in the market increase significantly. I think I covered your three questions.
You did, yes. Thank you very much for the color.
Thank you. Your next question's coming from Oswald Digard from Kepler. Your line is live.
Hello. François Digard speaking from Kepler. Thank you to take my question, just a simple one on the FDA warning letter. The FDA recently issued a warning letter to your Oshkosh laboratory in Pennsylvania highlighting serious deficiencies in data integrity and credibility controls. Could you tell us more about that? How is it isolated on the? Have you investigated similar practices existing elsewhere? Have some customers been affected? Could this lead to further regulatory action or commercial consequences? Thank you.
Thank you for the question. This is, of course, very unfortunate. This is a very small laboratory that is more dedicated to consumer product testing and food testing that had, unbeknownst to the leadership of our biopharma product testing activity, a very small activity on pharmaceutical product. Activity is less than EUR 2 million a year. This is of course not good, and we are not happy about it. Our dedicated biopharma product testing teams are now helping that small lab, which was in another business line, to remedy and answer the observation. In the meantime, that lab has been closed to biopharma product testing. The clients have been transferred to dedicated biopharma product testing labs, and this situation is managed.
It is of course regrettable, and I think it underlines what we are doing by being much more specialized, by not letting laboratories do a bit of everything, which is a bit the tradition, unfortunately, in our sector, that in many countries, many markets initially, labs do a number of things and are not specialized by activity. This is what we are doing at Eurofins. This was an exception that was missed. It is very unfortunate. In our materiality, closing that activity at that lab will have negligible impact. Next question.
Thank you.
Thank you. Your next question is coming from Zach Al-Qaryooti from Morgan Stanley. Your line is live.
Good afternoon. I have two questions, please. The first one on the biopharma, how much of the improvement in that end market would you say reflects an underlying recovery in customer spending versus a project timing or comp effect? Are you seeing any broad-based, meaningful improvement in the customer pipelines or more optimism and higher order intake into 2027? The second question, just on how you are thinking around your capital allocation priorities looking ahead.
You have still been quite active on the buybacks, but I appreciate you have also completed some acquisitions like Element. I just wanted to revisit your latest priorities and maybe just as a follow-up to that one on the M&A pipeline, does it feel like there are more of those mid-size acquisitions, the same sort of ballpark as Element coming to the market? Thank you.
Thank you very much. Yes, in biopharma, as I said, one should not extrapolate one quarter. It can indeed, as you say, be due to some contracts, large things being finished. Overall, our teams in biopharma product testing in North America have remained positive and bullish about growth for the last few years. It does not change materially. There was a bit of a boom during COVID, but we have a solid mid-single digit there and hopefully going back towards high single digits. Europe has been a little bit more subdued, but at some times, not all quarters.
That also depends on local situation at certain laboratories. Again, we are reorganizing our Europe biopharma product testing business along bigger sites, more modern sites. It cannot be done super fast because you need to build the sites. It takes a long time, and the qualification of those sites takes a long time.
Transfer of work takes a long time. So we have a slightly less strong position in biopharma product testing in Europe. But that will change over the next few years as a result of the very significant investments that we did. It is a bit less strong, and biopharma is refocusing some of its investments in North America. So I think we retain some growth differential in biopharma between Europe and North America. Allocation, this is all driven by return on capital employed, not by margin, not by growth. Although, of course, we like to grow. It is easier to generate a good return if you grow. We target 16% return on capital employed, and that drives our decision. There are only a certain amount of good quality acquisitions at the right price. We see some competitors paying 20x EBITDA for some assets.
Well, if you pay that much, you better have a very massive organic growth behind that or massive cost savings because you're not going to generate a good return on capital employed if you do that. We are more selective. We can pay high multiples if we have massive synergies, but that's on a case-by-case basis. We will necessarily accelerate. What is clear is that the smart players, the good players in our industry are focusing. This is now understood by the good leaders of companies, that there's no point staying in many activities. Even if you have an activity that's generating cash, if you are not a leader, if you are not able to make the focused investment to have the focused leadership you need, long term, that's not going to be good for you.
We think this wave will accelerate because the market will in the end recognize that focused companies are doing better, have better margin, better growth, et cetera. I think that could play out, maybe not necessarily this year or next year, but over time, I think the direction of journey is clear, and that might bring more M&A. As to the timing of M&A, we don't know. We think a target of EUR 250 million per annum is reasonable, it's doable with a small bolt-on acquisition that are easy to integrate, that we buy at acceptable multiples. Larger deals may happen. Some of the larger players might decide to focus. We will see that, and hopefully it doesn't happen too soon because we're busy at the moment with finishing our program of finalizing our digital network and our lab footprint.
Buybacks, I miss buybacks, but yes, we are fortunate. We can buy as much as we want of a very good company at 8, 9, 10x EBITDA. Frankly, it's a no-brainer, as long as we stay within our leverage to buy Eurofins shares at those multiples when I see the multiples that are paid for small assets sometime of very poor quality. Yes, if we have headroom, we can allocate some money to buybacks.
Very clear. Thank you.
Thank you. Your next question is coming from Allen Wells from Jefferies. Your line is live.
Hey, good afternoon, Gilles. A couple from me, please. Firstly, just mindful of the geopolitical situation, particularly going on in France at the moment. Could you just remind us of what the revenue exposure is for Eurofins in France? I think it is largely diagnostics and a bit of environment and food, but I am just wondering if you are seeing any disruption at all in your business, particularly over the last couple of weeks. Maybe thinking about the blood collection side or maybe just broadly in logistics.
France exposure and France risk would just be the first question. Secondly, just on Europe, obviously, we saw that slight sequential slowdown in Q3. Is it possible that you could separate the impacts of the macroeconomic conditions that you called out from anything on biopharma contract timing, the diagnostics restructuring that you have called out, or even the IT deployment?
Sorry, how does that kind of slight slowdown or slight muted growth in Europe split between those buckets? Thirdly, just on the margins. Obviously, we are not getting details today, but I am mindful of the very solid progress you made in the first half, I think 130 basis points. I think when I look at consensus, most people have got 23.5%, I think, for the full year. So kind of a slowdown in margin expansion to 70-80 basis points. I am just wondering, based on what we see in the Q3 numbers, is there anything we should be thinking about on the margin moving parts that would provide a headwind or a tailwind to margin progression in the second half? Thank you.
Yeah. Thank you very much. So France, I would have to look in our reporting to see the exact revenue percent in the total. Maybe Laurent will look it up and tell me for the nine months what percent that is. The situation in France, and in Europe generally, is not a good one. It is very sad to see what is happening. There is a bit of a dislocation and polarization of politics and society. This leads to very unpleasant situation. We are not seeing that really in our business. What we do is really essential services. People have to be tested if they are sick, and they have to do blood testing or water has to be tested. But the growth in those two major markets, France and Germany, has not been the brightest in Europe, it is true, over the last few quarters.
We see it a bit in our life business. As I say, it is also self-inflicted because disruption for deploying our new IT systems and so on. It is hard to pick the one from the other. We think, if the market is a bit tough, it is tougher for our smaller competitors. If anything happens, it will give also opportunities for further consolidation. That is a positive. I think I forgot your two other questions, so maybe if you would remind me, please.
That is fine. One was just on Europe and the slight sequential slowdown and generally muted growth. Is there any way you could maybe break it between the macroeconomic impact, the biopharma contract timing that you flagged, diagnostics restructuring, and the IT deployment, or any kind of contract losses and regional slowdown?
Oh, yes. Well, no. It is a number of moving pieces which every quarter can move in slightly opposite direction from one quarter to the next. What I can say in terms of dynamism, and you see it in the growth, Asia is doing very well still. North America is doing well with some slightly small differences from quarter to quarter in the different areas. Europe is not doing as well, and we see that in some areas.
Then the other one that I asked was just on the margin. Any comments on the building blocks around the second half margin that maybe would support the slowdown that we see in consensus. Maybe linked to that, does the Element Life Science business have an accretive or dilutive impact on margins in the second half?
Thank you. I think on Element, we communicated the margins are kind of similar to our group margin. Maybe slightly lower, but not massively lower. E&E was also similar to our group margin. So those two transactions will not materially move things. We do not give objectives for quarterly profit growth. We have given objective for the full year, and we stick to those objective for full year. That implies maybe less improvement in profits for the second half. Maybe the base was higher in the second half. We stick by our objectives that our profits will improve this year compared to last year. So will cash flow, and we should have an even bigger step next year to achieve the 24%. But indeed, H1 should demonstrate for people that we are not very far from those 24% operating margin, and we should be getting there next year.
We are also careful because we do buy a lot of companies. Sometimes we do massive restructuring. We still have a number of companies that are losing money because either they are startups or they are being restructured, or when we move them into our core business, they are still not at the 20% margin. So that is why we prefer to have a buffer in our target.
By the way, when we come out of this five-year plan, we will give much more general objectives. I think it has not been to the benefit of our shareholders that we set some very specific numerical targets. I think we are a bit of an outlier in that. So on the advice of our investors, we will be much more general in our targets for going forward, knowing well that we are in a good place. We make good margin, good cash flow.
We have the funds to self-finance our growth, to self-finance acquisitions, to even return cash to shareholders. So it is up to investors to make up their mind in the end. To come back to the weight of France in our revenues, year to date, it is a bit less than 15%. So France, under 15% in year to date. In total. By the way, we are not a French company. We are a Luxembourg company, and Luxembourg has very strong finances. One of the best countries in Europe in terms of public spending, public debt, et cetera.
Thank you.
We have one more question, I believe.
Absolutely. We will take our last question from Paul Piers from Bank of America. Please go ahead.
Hello, gentlemen. Very nice to meet you and ask you my question on behalf of Simona at Bank of America. Just wondering how to read your new 2027 organic growth guidance. Mid-single digit, if we come back to 2024, and we could read 6.5% target on the midterm, we could then assume it will include 2027. Is it fair to read mid-single digit below this 6.5%? If so, can you give us maybe a bit more color on what drove this decision and maybe what changes in your assumptions? Thanks a lot.
I think we just stated the obvious, and our growth has been a bit lower than what we thought would be possible this year. I think there will be gradual improvements, but not necessarily on all fronts at the same time. As I mentioned throughout this call, we still have a number of things we are doing in terms of deploying our IT solutions. We are just stating what we think is the most likely for next year. While we think that once we are done, we can do better than that, and that is a reason why we stick to our midterm objective of slightly higher growth. Mid-single digits for most people is 4% to 6%, I believe. We might be slightly below 6.5% next year. As we can see today, there is a lot of moving parts, and the world is also an uncertain place.
This is an objective.
Very good.
All right. Thank you very much, everybody. I think this concludes the question- and- answer session. Some of you on Friday in the Netherlands and others in Toronto the week after, or a couple weeks after. Thank you for supporting us. Thank you for your questions. Thanks to all analysts for all the work they put in their notes. As I say, we are continuing to build the company. It looks good. We have more and more areas in the world where we are done with our investment program, or we have strong market shares, efficient labs, good IT solutions. For example, biopharma is one. We are almost finished with a full digitalization of everything we do. There are not so many, if any, organization in the world who have done that at that level, and our clients really like that.
We are confident we will be almost done at the end of next year in our other verticals, and that should bring a lot of benefits, especially as with AI, I do not talk too much about it because I prefer to talk about things that we have done than things we are working on. But we are doing a lot of pilots, and as they work well, we should be able to expand their use to a broader range of things. We have also, as you see in our result, our result take into account a lot of spend on those IT programs, on those pilots, on those things that, of course, reduce our profits, but will provide benefits for the future. We do a lot of what other companies would call R&D, that we do not capitalize.
We just spend it, and they will, of course, have benefits going forward. We are optimistic, in spite of the sad state of the society and economy in Europe. We think if the markets get tougher in Europe, in the end, it should play out to our advantage because the weaker and smaller organization or the conglomerates, the diversified companies, will struggle to be as efficient as a focused companies. Thank you very much for attending this call and for your support, and I am looking forward to meeting some of you soon. Thank you. Goodbye.
Thank you. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.