Eurofins Delivers Solid FY 2018 Results with Revenues of EUR 3,781M (+27% yoy) and Adjusted EBITDA of EUR 720M (19.0% of Revenues), in Line with Its Recently Upgraded Objectives
Eurofins Scientific (Paris:ERF):
- Organic growth10 was 4.5% in FY 2018, over 6% excluding Clinical Diagnostics which was affected by sharp one-off price reductions in Q4 in France and tests coverage and reimbursement cuts, particularly at Boston Heart Diagnostics in the U.S. bringing annual revenues to EUR 3,781m in spite of -2.9% negative FX effect vs. 2017 average rates.
- 2018 was another strong year of M&A activity for the Group, with ca. 50 acquisitions closed during the year, representing annual revenues of ca. EUR 720m in FY 2018, for a total investment of about EUR 1.2bn.
- Adjusted1 EBITDA3 of EUR 720m in FY 2018, in line with the Group’s objectives (EUR 700m), resulting in a margin of 19.0% (+30bp vs. FY 2017 in spite of negative FX effects also on EBITDA). Reported EBITDA of EUR 651m, a +27% increase vs. the previous year, in line with total revenue growth and representing 17.2% margin.
- The mature scope11 of the Group, now representing 93% of total Group revenues (EUR 3,505m) up from 91% in 2017, posted an adjusted EBITDA margin of 20.5%, stable yoy, despite the margin dilution caused by 2017 and 2018 acquisitions (2017 acquisitions at 19.5%, +160bp yoy, and 2018 acquisitions at 16.5% adjusted EBITDA margin for the part consolidated in 2018 accounts), thanks to productivity gains and better utilisation of the laboratory infrastructure.
- Third start-up laboratory programme completed in FY 2018 with 15 new openings during the year, bringing the total number of start-ups opened since the beginning of the third programme in 2014 to 102 and to 145 since the year 2000. Start-ups launched during the third programme remain dilutive to Group’s margin.
- Basic adjusted earnings per share (EPS) increased 15% to EUR 20.11 in FY 2018 in spite of higher tax rate and finance costs for M&A and not yet benefitting from integrating recent acquisitions.
- Strong operating cash flow8 generation up 34% to EUR 544m in FY2018, with net working capital below 5% of revenues. Free cash flow to the firm9 slightly decreased from EUR 192m in 2017 to EUR 183m in 2018, impacted by significant investments in laboratories and systems in order to build a leading global testing platform (capex of EUR 361m in 2018), the ramping up of costs in the Group’s third start-up programme and the necessary reorganisations linked to the many acquisitions made in 2017 and 2018 (SDIs2 of EUR 68m at EBITDA level in 2018, 9.5% of adjusted EBITDA).
- Net debt to adjusted pro-forma EBITDA leverage stood at 3.38x as at 31st December 2018, below the Group’s self-imposed limit of 3.5x. Over the coming years, as its five years infrastructure development programme should be completed by the end of 2020, Eurofins intends to deleverage as a result of improved cash flow generation from a reduction in capex, profitability improvement and lower M&A activity and revert back to its historical average leverage level.
- Proposal to distribute a dividend of EUR 2.88 per share, a 20% increase vs. 2017 corresponding to 29% of basic reported EPS7 attributable to equity holders.
- In FY 2018, the Group made significant improvements to its corporate governance and is expanding its annual report and disclosures on audit coverage, Board Committees’ work, organic growth calculation and segment information. The Group’s Board of Directors also mandated an independent third party audit on the authorization process of related parties transactions by its existing Governance Committee made up of independent directors only who approve these transactions, and created a Nomination & Remuneration Committee, whose work has been supported by an independent third party benchmark report on Board and CEO compensation.
- Outlook: following two years of intense M&A activity and heavy investments into its leading global platform (mostly in state-of-the-art laboratories, start-ups and proprietary IT solutions), the Group will now increasingly focus on operational performance optimisation, which it expects should also improve its margins and cash flow generation. On the M&A side, after an exceptional level of ca. EUR 700m in revenues added in each of 2017 and 2018, Eurofins intends to be very selective and focus on deleveraging. As such for now, it intends to keep M&A investments under EUR 300m per annum on average in 2019 and 2020 and may not even reach that level in the absence of compelling assets.
- At 2018 average exchange rates, Eurofins management has set the following objectives14 for the year 2019: EUR 4.5bn revenues, including 5% from organic growth
and EUR 100m consolidated from acquisitions, EUR 850m adjusted EBITDA, and EUR 350m Free Cash Flow to the Firm9. These objectives reflect the beginning of a stronger focus on margins and
cash flow generation and are accompanied by significantly reduced cash outflow resulting from self imposed limits of EUR 300m each for capex spend and M&A spend in 2019 and 2020. Eurofins will
be completing its five years infrastructure global development programme in 2019 and 2020 and thus capex in laboratories and IT solutions, which remain relatively high until 2020, should reduce
thereafter. The opening of new start-up laboratories should be minimal in 2019 and 2020.
For 2020, Eurofins’ objectives are to achieve EUR 5bn of revenues and EUR 1bn Adjusted EBITDA (at 2018 average exchange rates and on a pro-forma basis), translating into an Adjusted EBITDA margin objective of 20% for 2020 as the benefit of its laboratory network modernisation and streamlining and of IT investments should start to kick in. This is based on the assumption of Eurofins achieving its 5% organic growth objective and acquiring laboratories generating ca. EUR 200m revenues per annum in each of 2019 and 2020 (consolidated at mid-year). 2020 revenues and profit objectives will be fine-tuned when presenting 2019 results as current focus is on deleveraging rather than on M&A.
We expect Clinical Diagnostics to fare better in 2019 than in 2018. In Europe, we expect strong developments in the non-invasive pre-natal tests market where Eurofins has the broadest service offering as well as a more benign reimbursement environment in France with market expected to return to modest growth. In the U.S., significant measures to restructure Boston Heart Diagnostics which has now unfortunately become smaller and less significant with respect to the Group’s overall size and develop sales toward prevention oriented markets are being taken. Eurofins’ clinical diagnostics laboratories also have several promising tests in their pipeline, which may receive reimbursement in 2019 or 2020 in some geographies. Trends remain very positive across the rest of the Group’s activities. Eurofins expects continued strong organic growth outside of Clinical Diagnostics.
Beyond 2020, Eurofins will focus on making optimal use of its existing best-in-class network of laboratories - to be completed by then - which should have a positive impact on margins and cash flow generation and potentially on organic growth as new tests receive adoption. With regards to liquidity and leverage, based on achieving the objectives mentioned above, Eurofins is already financed to repay its Hybrid instrument callable in January 2020 (EUR 300m) and does not plan to issue equity in the short term. Beyond 2020, Eurofins should expand mostly via organic growth and modest M&A activities until its leverage ratio15 is back to its historic secular level.
Comments from the CEO, Dr. Gilles Martin:
“2018 was a pivotal year for Eurofins as the Group made very significant progress towards the objectives of its five year 2015-2020 plan to build a unique global network of state-of-the-art laboratories, market leadership positions, scale and scientific excellence to offer even better, faster, more cost effective and more differentiated services to its clients and as a result significantly improve its competitive advantage, profitability and cash flow generation to benefit its long-term oriented shareholders for years to come. From a financial perspective, the exceptional M&A activity of the last two years and subsequent integration efforts as well as the heavy investments into building an unmatched state-of-the-art laboratory platform (laboratory buildings, start-ups and IT) with significant scale advantages are still weighing on the margins and cash flow generation. In 2019 and 2020, the focus for the Group will be less on M&A, as most strategic acquisitions have been completed, and much more on finalising those internal investments and making progress towards operational excellence, and thus on beginning to improve profitability, cash flow and return on investment. Based on the noncyclical nature of the markets it serves, the very high recurrence of its revenues, the discretionary nature of the largest part of its investments and the market value of its various independent businesses, Eurofins’ leadership is very comfortable with its current balance sheet structure but over the next few years it will nonetheless aim at deleveraging back to the historical level it has consistently operated at until 2017.”