9 May 2011

Eurofins reports strong performance in its seasonally weaker first quarter, with 10% revenue growth driving wide profit expansion. ebitda rose 66% due partly to the strong pick-up in revenues, and partly to the benefits of the investment and reorganization programmes completed at the end of 2010. The strong margin expansion reflects the Group’s ability to leverage operating momentum, and bodes well for the remainder of 2011.

Q1 2011 Results Highlights

§ Revenues grew 10% year-on-year to EUR 164.3m. Organic growth during the quarter was above the 5% annual objective. Lancaster will be consolidated starting Q2 2011.

§ EBITDA rose 66% to EUR 17.3m, the highest Q1 EBITDA level ever achieved by the Group, and implies 354bp EBITDA margin expansion to 10.5%, well above the margin level of Q1 2007, prior to the economic recession and the Group reorganization programme.

§ EBITAS increased 8-fold in Q1 2011 to EUR 6.6m versus EUR 0.8m in Q1 2010.

§ The Group generated net profit of EUR 1.7m in Q1 2011, marking a return to a profitable Q1 since the start of the intensive investment programme in 2006.

§ Net debt as of March 31, 2011 stood at EUR 130.4m, representing net debt/equity of 0.5x and net debt/clean EBITDA of 1.1x, a significant improvement from the 0.9x and 2.0x net debt/equity and net debt/clean EBITDA levels at the end of March 2010, and implies substantial headroom to accommodate payment for Lancaster Laboratories, acquired shortly after the close of the Q1 reporting period.

Comments from the CEO, Dr. Gilles Martin:

“These results show that we are off to a good start. Despite a seasonally quiet period, we managed to drive revenues in line with our Group target. We are starting to see the benefits of the investment and reorganization programmes in the results, with revenues growing without margin pressure. These results reinforce our confidence of achieving our objective of generating EUR 1bn in sales and 21% EBITDA margin by 2013.”

Revenues

Eurofins achieved revenues of EUR 164.3m in Q1 2011, representing growth of over 10%, more than half of which was generated organically. Across Eurofins’ markets, the pace of top line recovery was fastest in countries where economic recovery is strongest.

Within the Group, the food testing business continued to grow, with volumes from normal manufacturing and retail activities of customers, and from new customers switching from competitors. The recovery in environmental testing business continues steadily, with water testing remaining stable, whilst soil and air testing continue to recover as the global economy and industrial activities stabilize. Although pre-clinical and clinical testing for the pharmaceutical industry remain soft, trends indicate continued stabilization. In contrast, pharmaceutical product testing continues to grow.  

Profitability

The Group is starting to see the first benefits of the investment and reorganization programmes completed at the end of 2010. EBITDA rose 66% in Q1 2011 to EUR 17.3m, the highest ever Q1 EBITDA achieved by the Group, and implies a 354bp margin expansion to 10.5%. This marks a return to margin levels before the start of the global economic recession.

In line with guidance, there are no more significant non-recurring costs following the completion of the reorganization programme. Adjusting for the one-off costs included in Q1 2010, “clean EBITDA” still marks a 35% year-on-year increase in Q1 2011. The improvement comes on the back of a slower cost inflation of 7%, compared to the 10% revenue appreciation during the quarter. The Group continues to rein-in costs despite the on-going investments in start-ups and IT systems development. Personnel expenses rose 8% to EUR 86.3m, while the cost of purchased materials grew 5% to EUR 62.2m, versus EUR 79.6m and EUR 59.0m respectively in Q1 2010. As a proportion of revenues, both cost items remain on a declining trend, with personnel expenses constituting 52.5% of sales, down from 53.4% in the same period last year, while the cost of purchased materials have also declined as a proportion of sales from 39.5% in Q1 2010 to 37.8% in Q1 2011. These should continue to decline for the remainder of the year as revenues increase according to previously observed seasonality. Given that depreciation costs have remained fairly constant as a proportion of revenues, the higher revenues and stronger margins have boosted EBITAS 8-fold from EUR 0.8m in Q1 2010 to EUR 6.6m in Q1 2011. Adding back the one-off costs booked in Q1 2010, clean EBITAS still show a 96% increase. Therefore, the Group achieved a net profit of EUR 1.7m in Q1 2011, versus a loss of EUR 2.5m in the same period last year.

Balance Sheet

Total assets stood at EUR 858.2m as of March 31, 2011, a 33% increase compared to the same period in the previous year. However, assets excluding cash rose only 6% during the period. In preparation for payment for the Lancaster acquisition, cash and cash equivalents at the end of the period was EUR 229.7m, versus EUR 52.7m in Q1 2010, due largely to the proceeds from the Hybrid bond extension in February 2011 and the OBSAAR bonds in June 2010, in addition to improving profitability. Therefore, net debt was further reduced to EUR 130.4m at the end of March 2011, representing net debt/equity of 0.5x and net debt/clean EBITDA of 1.1x, a significant improvement from the 0.9x and 2.0x net debt/equity and net debt/clean EBITDA levels at the end of March 2010.

Net working capital (NWC) had increased to 5.9% of revenues as of March 31, 2011, versus 4.4% at the end of December 2010 and 4.8% at the end of March 2010. This is mainly due to short-term compression in operating cash flows due to growth activities and timing of payments. Management is confident of managing NWC back to below 5% of revenues, according to annual target.

Cash flows

Capital expenditures in Q1 2011 came to EUR 8.8m (EUR 8.2m in Q1 2010), representing a reduction to 5.3% of revenues, versus 5.5% of revenues in Q1 2010. However, the lower capital expenditures and higher operating income (EUR 2.5m in Q1 2011, versus a loss of EUR 2.2m in Q1 2010) were offset by the negative effect of the increase in net working capital as discussed above. In light of this, net cash from operating activities declined to EUR 6.8m, and Group Free Cash Outflow**** was EUR 4.4m in Q1 2011. Management reiterates, however, that within the year, NWC should be fully normalized, and together with further improvements in operating results, should strengthen Free Cash Flows for the remainder of the year.

Outlook

• Given that Q1 is traditionally the period with the lowest level of activity, profitability and cash flows should, as usual, increase during the rest of the year
• Debt levels will rise following payment for Lancaster in April, but debt ratios will remain comfortably within covenant limits
• The strong Q1 2011 results reinforce management’s commitment to its 2013 objectives of
  • Generating EUR 1bn sales 
  • Reaching 21% EBITDA and 15% EBITAS margins
  • Managing capex/sales level below 6%

*              EBITAS – Earnings Before Interest, Tax, Amortization of Intangible Assets related to acquisitions and impairment of goodwill and non-cash accounting charge for stock options

**            clean - a proforma presentation excluding one-off costs from reorganization and discontinued operations, but including losses related to network expansion (17start-ups)

***            EBITDA – Earnings before interest, tax, depreciation and amortization

****          Free Cash (out)Flow – net cash flow provided by operating activities, less cash used in investing activities (but excluding acquisition payments) and interest and hybrid interest paid