Eurofins exceeds 2013 objectives

2013 Highlights

• Revenues increased 17.4% to EUR 1,226m on sustained organic growth of over 6.5% for the full year (over 7.5% excluding acquisitions in significant restructuring); and over 7% in Q4.
• Adjusted EBITDA rose 24% to EUR 219m with adjusted EBITDA margin expanding by 100 bp to 17.9%.
• Significant increase in net profit despite higher exceptional costs from ongoing investments to drive future growth.
• 26% increase in Operating Cash Flow to EUR 169m reflecting higher profits and successful management of working capital.
• Strengthened financial position and flexibility following successful financing exercises during the year.
• More than 10 acquisitions with total annualized revenues of ca. EUR 120m completed in 2013.
• Proposed 20% increase in dividends to EUR 1.20 per share.
• 2014 objective of close to EUR 1.4bn in revenues and continued increase in profits (at constant 2013 currency exchange rate

Table 1: Summary of FY 2013 results

*Adjusted for Separately Disclosed Items (SDI) as described in the notes at the end of the press release.

Comment from Dr. Gilles Martin, Group CEO:

"Eurofins' strong performance in 2013 reflects the benefits of our continuous investments into our network, and the progress we are making towards our 2017 objectives. Once again, the Group exceeded its growth objective, achieving over 6.5% organic growth despite economic headwinds in some of our markets.

The strong growth in earnings despite multiple investment programmes that have temporary dilutive impact demonstrate the continued strengthening of the profitability of our mature businesses. The EUR 215m total cash that Eurofins invested in the business in 2013 for acquisitions (EUR 86m), capital expenditures (EUR 99m) start-up losses and restructuring programs (EUR 30m) reflect our commitment in creating efficiencies and securing long-term competitive advantage for the Group.

For 2014, subject to current economic, market and acquisition trends continuing, Eurofins' objective is to generate close to EUR 1.4bn of revenues and to further increase profits to about EUR 250m of adjusted EBITDA (at constant 2013 currency exchange rates). Longer-term, I remain confident that the Group should be able to achieve its objectives of EUR 2bn in revenues and at least 20% adjusted EBITDA margin by 2017."

Business Review

The following figures are extracts from the Consolidated Financial Statements and should be read in conjunction with the Consolidated Financial Statements and the Notes.

Table 2: Full Year 2013 Results Highlights

N.B. H2 2013 results can be found hereafter.

Revenues

Revenues increased by 17.3% in the fourth quarter to EUR 343m, driving full year 2013 revenues up 17.4% to EUR 1,226m. Group organic growth was over 7% in the last quarter and for the full year was over 6.5%, whilst currency translation had a negative impact of 1.9%. Organic growth of companies that are not in significant restructuring stood at over 7.5% in 2013.

Trends remain positive across the Group's businesses, with growth varying across geographies. Eurofins' food testing business remains strong in most of its markets, supported by introduction of regulation (US), increased trade and wealth (emerging markets), increased food testing in response to scandals (Europe), or outsourcing activities. The Group's environment testing results have been impacted by IPL and its reorganization, and a somewhat weaker construction and general economic activity in some parts of Europe. Eurofins' growth in this business was generated by market share gains either through acquisitions or weakened competition, or triggered by market incidents (Mayflower). In pharmaceutical testing, Eurofins' pharma product testing business continues to gain traction with the large pharmaceutical companies due to its unparalleled operational and geographical footprint, whilst Genomics continues to see an upward trend in demand especially for its newest range of services. These activities generated strong growth and continued profitability improvements. The Group's Central Laboratory business is temporarily affected by the move of its US site to its large campus in Lancaster, PA. Discovery Services, where we are currently in the process of combining the two leading global players which the Group acquired recently, need further integration work to achieve the desired performance levels. The strong performance in most of Eurofins' businesses mitigate the negative impact of restructuring of some the businesses that once completed, will provide the Group even greater scale and efficiency.

The US, Eurofins' biggest market making up 22.5% of Group revenues, continued to see strong organic growth. In 2013, including the impact of acquisitions, revenues from the US increased 17.9% to EUR 276.1m, versus EUR 234.2 in 2012. The domestic food testing market remains on a growth path following the introduction of the Food Safety Modernization Act (FSMA) in early 2011, which has prompted the food industry to take a closer look at the safety and quality of all food products across the supply chain. In addition, new segments, especially in the neutraceuticals market, are also pushing the need for more testing either for proper labelling, or to verify the nutritional claims of manufacturers. Similarly, in pharmaceutical testing, the developments in new markets like biologics, in addition to the steady growth in traditional pharma products testing, mitigated the temporary impact of the move of our Central Laboratory business from Washington to the Group's campus in Lancaster, PA. Finally, in environmental testing, the ongoing market consolidation and resulting market share gains for Eurofins, in addition to the increased activities following the Mayflower oil spill in Arkansas in the spring, contributed to the overall good performance in 2013.

France generated 17.9% of the Group's total revenues, at EUR 219.7m, a 7.7% increase versus 2012. The Group's Competence Centre for Authenticity in Nantes continues to benefit from increased volumes on the back of media coverage of widespread fraud in the food supply chain (e.g. presence of pork in halal meat, or mislabelling). In environmental testing, the impact of the temporary weak performance in water testing caused by the heavy restructuring at IPL was mitigated by the strong performance in other parts of the business, namely air and soil testing.

Revenues from Germany, the Group's third largest market generating 17.3% of total revenues, were EUR 211.7m representing growth of 11%, most of which was organic. The sustained strong performance comes on the back of strong growth in all of Eurofins' activities, and the Group's ability to capture a larger share of market volumes due to its scale and market leadership. In addition to continuing market share gains due to its reputation for quality, efficiency, and the breadth of its service offering, Eurofins benefitted from increased volumes following the horsemeat scandal in Europe at the beginning of the year, as the bulk of the analyses was performed at the Group's Competence Centre for Contaminants testing in Hamburg, and for DNA Analysis in Ebersberg. Furthermore, the outsourcing agreement with Danone for its infant nutrition analysis has also served to highlight the capability of the Group, further facilitating market share gains.

In the Nordic region, revenues increased 9.7% to EUR 159.8m, and make up 13.0% of total Group sales. Eurofins continues to reinforce its market leadership in the region by leveraging its scale and footprint, and expanding into new market segments like agro and feed testing. In addition, Eurofins' capabilities at the Group's Competence Centre for Vitamin Analysis in Denmark allows it to capture a large share of the growth in the food testing market that is being driven by increased volumes from Western dairy exporters following the milk scandal in China.

Eurofins' revenues from the Benelux increased 28.3% to EUR 113.4m and made up 9.3% of total Group revenues in 2013. The increased volumes in food and dairy testing, in addition to business ramp-up at the Group's Competence Centre for Carbohydrates set-up in 2012 drove organic growth in the area. Furthermore, the expansion of our footprint following the acquisition of LZV and BLGG contributed a substantial part of the growth in revenues from Benelux in 2013.

The UK & Ireland, which generate 5.2% of Group revenues, grew 17.8% to EUR 63.4m in 2013 driven mainly by steady market share gains as the increased capacity from the new Wolverhampton laboratory allows Eurofins to reach out to more customers. Indeed, Eurofins was able to perform a large part of the analyses for the food industry in the UK during the fallout from the horsemeat scandal. In addition, the outsourcing agreement with Cranswick plc at the beginning of the year has served to highlight Eurofins' capabilities and has allowed the Group to gain further traction with existing and potential customers in the region.

Revenues from Asia Pacific and emerging markets have increased 58.6% to EUR 129.8m in 2013. This means that collectively, they now generate 10.6% of the Group's total revenues, from 7.8% in 2012. Whilst a large part of the growth is on the back of acquisitions to expand its footprint, the Group's businesses in Japan, China and Brazil have all seen very strong growth on volume ramp-up as the markets in these geographies grow and as Eurofins takes market share.

Profitability

Group adjusted EBITDA rose 24.2% to EUR 219.3m with the margin expanding by 100 bp to 17.9% in 2013 as operating leverage and efficiency gains have expanded margins in most of the Group's mature businesses. The uptick in the core profitability is all the more notable given the dilutive impact of having moved certain start-ups and previous acquisitions that had undergone successful restructuring but are still not at Group profitability level into the mature perimeter (as communicated previously), in addition to the fact that some of the recently acquired businesses also have lower margins.

Of the EUR 1,226m total Group revenues, EUR 1,072m was generated by mature companies (i.e. those that are not in significant restructuring or start-up mode), compared to EUR 1,044m and EUR 890m respectively in 2012. Start-ups (including those transferred to the mature perimeter in 2013 and 2014) as a whole reached profitability in 2013. The proportion generated by companies in start-up mode or in significant restructuring was reduced from 14.7% to 12.6% of total Group revenues in 2013. More importantly, this implies that the EBITDA margin of these mature companies was 20.5% in 2013, versus 19.8% in 2012.

The Group's separately disclosed items rose from EUR 15.3m in 2012 to EUR 30.2m at EBITDA level in 2013, i.e. 14% of the EBITDA generated by the Group's mature companies. Temporary operating losses from companies in significant restructuring, chiefly from IPL, have increased from EUR 2.2m in 2012 to EUR 14.5m in 2013. The increase in losses is due mainly to the substantial delays in implementing the restructuring program because of the protracted legal process and the complexity of harmonizing the IT and common sales platforms across the 12 IPL laboratories, and the subsequent impact on operations and volumes.  

In addition, one-off costs from integration and reorganization were EUR 15.7m in 2013 versus EUR 13.1m in 2012, driven mainly by site rationalizations in addition to the on-going restructuring of IPL, the US central lab relocation and the integration of our discovery services business (Cerep and Panlabs). Eurofins is currently engaged in several site rationalization projects that involve consolidating several small sites into fewer but larger industrialized sites, or simply moving some businesses into our large campuses, either to streamline and optimize efficiencies or maximize synergies across our businesses. In Denmark, we are combining 5 small and mid-sized laboratories into a large site in Vejen. In the Benelux region, Eurofins is consolidating several small laboratories into 2 recently-extended sites in Belgium and in The Netherlands. The Group is also in the process of streamlining 3 small laboratories in the south of Germany. Further afield, Eurofins moved its Japanese food and environment testing hub during the year from Tokyo to Yokohama, where costs are lower. In France, large but low-volume departments of several small water-testing laboratories were consolidated into one of the two new large, industrialized sites in Maxéville and Vergèze. In the US, we are moving our southern US food testing hub into a new site with double the capacity at the University of New Orleans campus in Louisiana.

Despite the strong increase in the Group's separately disclosed items (SDI), reported EBITDA still grew 17.3%, in-line with revenue growth, to EUR 189.1m in 2013, with reported EBITDA margin maintained at 15.4%. Going forward, although the Group still has site consolidation and reorganization programmes for the next couple of years, and still has businesses that are in restructuring or start-up mode, management aims for these separately disclosed items (i.e. exceptional charges) to continue to decrease relative to the EBITDA generated by the core profitable businesses of the Group.

The significant increase in non-cash accounting charge related to employee stock options[1] related to the appreciation of Eurofins' share price, and to the accounting treatment of amortization of intangible assets related to acquisitions[2], in addition to the increase in acquisition costs due to increased transactions, have resulted in a negative impact of EUR 4.8m vs 2012.

Interest costs for 2013 increased 19.0% to EUR 23.5m primarily due to higher debt, mitigated by lower interest rates. Income tax expense is broadly flat as the Group recognized some of the tax losses carried forward, resulting in lower effective tax rate of 19.3% for the year (versus 21.8% the previous year).

Adjusted net profit for the year came to EUR 116.8m, a 27.8% increase from the previous year whilst adjusted EPS increased 24.3% to EUR 7.79.  Despite the increase in separately disclosed items in 2013, reported net profit still shows a strong increase of 9.5% to EUR 72.2m. This demonstrates that the strength of profitability of our mature businesses is such that we are able to continue investing in the network and in businesses that are initially dilutive, but should ultimately ensure the sustainability of our growth and leadership.  Basic reported EPS increased 6.5% to EUR 4.81 and EPS attributable to equity holders stood at EUR 3.54 for 2013. The premium paid for the repurchase of the hybrid bond as well as the higher charge due to the temporarily higher outstanding principal before the original hybrid was fully repurchased resulted in negative one-off impact of EUR 0.54 on basic earnings per share attributable to equity holders. However, the lower coupon of the new instrument (7.0% versus 8.08% for the old instrument) results in a positive impact of EUR 0.10 per share. Starting next year, Eurofins' shareholders will fully benefit from the lower coupon on the new hybrid bond.

Cash Flow and Financing

The successful management of net working capital (NWC), in addition to strong top line growth has resulted in 26.2% increase in operating cash flow for the Group, to EUR 169.3m, even with the significantly higher cash taxes paid from the previous year's profits.

Capital expenditures in 2013 stood at EUR 98.7m, a 53.1% increase versus the previous year, as the Group executes its plans for ca. EUR 500m in capital expenditures in the five-year period 2013-2017 to ensure that it has the best and most efficient network comprising of the largest and most modern laboratories in the industry to serve its clients. Eurofins is currently undertaking multiple site builds or expansion projects either to build capacity in high-growth markets or to consolidate a number of small laboratories into fewer, larger and more industrialized sites that should increase profitability going forward through scale and efficiency. In 2013 alone, the Group added 40,000m² of modern laboratory surface to its network, and plans to invest in another 100,000m² in the next couple of years to support and strengthen its leadership in the markets where it operates, and position the business for continued success and market share gains beyond 2017. This significant uptick in capital expenditures in the initial part of this previously communicated growth plan impacted Free Cash Flow, which stood at EUR 46.4m in 2013 versus EUR 49.4m in 2012.

During the year, the Group optimized its funding position by successfully replacing its EUR 150m hybrid bond with a similar instrument for the same amount, but with a lower annual coupon (7.0% versus 8.08% for the old instrument). The Group also entered into new bilateral credit facility agreements for about EUR 350m to replace and extend existing facilities. The majority of the new agreements are for five years with no amortization. Eurofins also successfully raised EUR 300m in its first Eurobond issuance in November 2013.

At the end of December 2013, net debt stood at EUR 387m, an increase of 28.6% compared to the previous year. The increase is due to acquisitions, increased debt from newly-acquired companies, the issuance and buyback costs from the hybrid refinancing exercise and higher dividend payment, partly offset by the Group's free cash flow (EUR 46.4m).

All in all, the Company has lengthened its debt maturity profile with the majority of its debt maturing between 2018 and 2020, and has procured sufficient financing at more attractive terms to be able to respond to compelling opportunities in the medium-term. In addition, continued strengthening of profitability allows Eurofins to maintain a solid balance sheet. In spite of the significant level of capital expenditures and acquisitions in 2013, the Group's leverage ratio stood at 1.76x net debt/adjusted EBITDA compared to 1.70x in 2012, and remains well below its covenant limit of 3.5x.

Dividends

In view of the satisfactory financial performance and prospects of the Company, the Board of Directors proposes to raise the amount of dividends paid out to shareholders by 20% to EUR 1.20 per share.

Business Developments

Acquisitions & Outsourcing

In 2013, Eurofins completed more than 10 acquisitions either to enter new geographies or strengthen its leadership in existing markets. Eurofins entered the Australian testing market with the acquisition of mgt-LabMark in January and promptly reinforced its domestic footprint with the acquisition of Agrisearch later in the year. These acquisitions strengthen the Group's presence in the rapidly-growing Asia-Pacific region. In the same month, we acquired LZV, strengthening our leadership in the food and feed testing in The Netherlands. In February, we reinforced our genomics business with the acquisition of AROS AB in Denmark. The following month, we expanded our Latin American footprint with the acquisition of GCL in Chile, having achieved market leadership of the food testing market in Brazil. Also in March, we completed the acquisition of Cerep, which combined with Panlabs in the US, gives us global leadership in discovery pharmacology. In the summer, Eurofins acquired BLGG, the leading provider of agribusiness testing in The Netherlands, reinforcing our position in the early stages of the food producing industry. Eurofins also completed a host of smaller acquisitions that either provide us with specific technical know-how or increased market share. These acquisitions have combined total annual revenues of ca. EUR 120m, with total purchase price of around EUR 86m.

During the year, Eurofins made further progress in leveraging its best-in-class laboratory network to gain the trust of key clients. In the first half of the year, the Group won an outsourcing agreement with Cranswick plc., a leading food supplier in the UK, whose testing requirements were previously performed by a competitor. At the end of the summer, the Group won a milestone outsourcing agreement with Danone. As part of the agreement, Eurofins took over Danone's laboratory for infant nutrition analysis, Central Laboratories Friedrichsdorf (CLF), in return for an exclusive supplier contract for all infant nutrition analyses for Danone and Milupa, its infant nutrition arm in Germany.

Infrastructure

Eurofins continues to invest massively in its laboratory network to strengthen and expand its market leadership in food, environment and pharmaceutical testing. In 2013, the Group added 40,000m² of state-of-the-art laboratory surface to its network as it adds capacity in high-growth markets, and consolidates some small laboratories into fewer, but larger industrialized sites that should provide greater efficiency and economies of scale.

In 2013, Eurofins started the move of its central laboratory business from Washington DC to its campus in Lancaster, PA following the completion of the 7,250m² extension, bringing the total laboratory surface there to almost 30,000m². The move should not only provide the central lab business a better platform to showcase to large pharmaceutical clients the Group's capabilities in the world's largest single-site independent laboratory, but also result in savings longer term given the lower costs in that part of the country. Part of the extension in Lancaster will also house a new, modern food testing laboratory that will serve as a hub for food microbiology activities in the northeast US. In New Orleans, Eurofins is currently building a large laboratory within the University of New Orleans campus which will be more than twice the size of its current laboratory in the area at over 4,000m². The new site will serve as the Group's food testing hub in the southeast of the country. To serve the rapid growth in food testing, Eurofins is also setting up several satellite facilities to complement its hubs in Des Moines IO, Louisville KY and Minneapolis MN.

Several building projects were also completed at laboratories including in Japan and New Zealand that have not only modernized the sites, but also significantly increased capacity. In Europe, we doubled the size of our site in Vergèze, France, allowing us to maximize efficiency by merging two smaller separate laboratories. The first part of the extension project to increase the size of our campus in Hamburg, where all local Eurofins laboratories should be brought together by 2016, has also been completed. Several projects are currently underway chiefly to expand capacity in existing sites in Romsey UK, Vejen DK, Uppsala SE, Saverne FR, St.Charles MO, among others. Over the next two years, Eurofins has plans for 100,000m² additional capacity of modern laboratory surface to consolidate smaller laboratories into large, industrial facilities with higher automation, greater efficiencies and ultimately higher profitability.

Post-closing events:

In January 2014, Eurofins acquired DDS, a leading provider of early stage discovery services in the US, which strengthens our leading position in the discovery pharmacology market, in turn reinforcing our footprint in the testing market for the entire pharmaceutical product development cycle. The transaction is expected to close at the end of March 2014.

2014 Outlook:

The management of Eurofins remains positive about the outlook for 2014, and it has set objectives for the Group to generate revenues close to EUR 1.4bn and increase its profitability to an adjusted EBITDA of about EUR 250m at constant 2013 currency exchange rates and subject to current economic, market and acquisition trends continuing. The Group also maintains its mid-term objectives of reaching EUR 2bn in revenues and at least 20% adjusted EBITDA margin by 2017.

Table 3: H2 Results Highlights

Table 4: Separately disclosed items

^{1 Adjusted - reflects the ongoing performance of the mature and recurring activities excluding "separately disclosed items".}

^{2  Separately disclosed items - includes one-off costs from integration, reorganisation, discontinued operations and other non-recurring income and costs, temporary losses and other costs related to network expansion, start-ups and new acquisitions undergoing significant restructuring, non-cash accounting charges for stock options, impairment of goodwill, amortisation of acquired intangible assets, negative goodwill and transaction costs related to acquisitions as well as income from reversal of such costs and from unused amounts due for business acquisitions and the related tax effects (Details in Note 2.3 of the Annual Report)}

^{3 EBITDA - Earnings before interest, taxes, depreciation and amortisation, non-cash accounting charges for stock options, impairment of goodwill, amortisation of acquired intangible assets, negative goodwill and transaction costs related to acquisitions as well as income from unused amounts due for business acquisitions.}

^{4 EBITAS - Earnings before interest, taxes, non-cash accounting charges for stock options, impairment of goodwill, amortisation of acquired intangible assets, negative goodwill, and transaction costs related to acquisitions as well as income from unused amounts due for business acquisitions.}

^{5 Net Profit - Net profit attributable to equity holders of the Company (after non-controlling interests but before  payment to hybrid bond holders)}

^{6 EPS - earnings per share before payment of dividends to hybrid bond holders}

^{7 Operating Cash Flow - net cash provided by operating activities after income taxes paid}