DiaSorin S.p.A.

Good afternoon. This is the Carosco Conference Operator. Welcome and thank you for joining the DSR in first half 2020 results conference call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Carlo Rosa, CEO of Diasorin. Please go ahead, sir.

Yes, thank you, operator. Good afternoon to everybody. Welcome to the Diasorin Quarter 2 call. As usual, I'm going to make some general remarks about the business, and then Mr. Pedron, our CFO, is going to take you through the numbers. I think that as you have heard from other competitors in the field of diagnostic, when you look at the business these days, you really need to look at the business to weigh the current business and the underlying trends and the COVID-19 effect. Let's talk first about the underlying business. The underlying business ex-COVID, the result of the business is primarily driven by volume associated to the fact that especially in Q2, which was the peak of pandemic in many European countries and in the US, the volume per se, the business volume declined sharply. simply because patients were not available to go to hospitals to avoid, to get infected. And clearly there is a trend. Overall, for Diasorin, in the quarter, the non-clear business declined roughly 30%. Again, primarily driven by declining volume. If you look at the different regions, what is noticeable that along the quarter, in quarter two, we see a stabilization or an improvement in Europe. In several European countries, we see that at the end of the quarter, the volume is roughly down only around 10%, indicating that the situation is better. Whereas in other countries like China we continue to see volume that is certainly improving but not to the level and the extent that we have seen in Europe and somehow in North America. Certainly North America is a question mark because we all realize they're not at the peak yet and actually they are still increasing in terms of prevalence of the disease. So we don't know whether this pattern of stabilization that we see will continue or how it's going to behave. Now, if we look at the COVID business, I think that we need to distinguish between COVID molecular and COVID immunoassay. COVID molecular revenues continue to be very strong. is driven by strong demand in all geographies related to the fact that guidelines today do recommend to swab patients, inpatients for sure, outpatients, to swab employees in certain geographies to guarantee that the manufacturing The manufacturing departments of the companies stay without getting employee infected. So there is a surge in demand of molecular driven a lot by North America. You know that there is a plan by the government to sharply increase the swap capacity in preparation of the coming fall. Today reports, I think in the U.S., the total number of swabs is around 15 to 20 million per month. And there is an objective by the government to get to 100 million. So lots of pressure to the labs and to the industry to continue to supply more reagents. As far as diastoring is concerned, we, as I think everybody else, has had an opportunity to deploy more systems. We now have over 1,000 MDX placed worldwide with a sharp increase compared to last quarter. I remind you that the positioning of our system is not point of care because it's a small system but can process eight samples at a time. So what we see is that there is an increase in demand in small mid-sized hospitals that cannot wait until the big labs, the turnaround time of the big labs where they send out. They cannot afford technologies, high throughput, and the point-of-care systems that are available are too small. And therefore, the MDX perfectly fit with this mid-size hospital. And this is certainly true in the U.S. And if you remember what was the company's strategy pre-COVID, driven by quantifiering and penetrating the hospital market strategically, this again is supporting a lot. Because now we can go to these hospitals, we can provide a solution with... the COVID molecular and we can also provide serology and our liaison excel and you saw that placements for liaison excel surge in quarter two. So as far as molecular is concerned is a matter of manufacturing capacity and the company I know over the last call I think I gave an indication in terms of what would be the objective of the company for capacity and today We are able to manufacture around 700,000 tests per month molecular and we have a plan to bring that number to a million by year end in anticipation again of big demand with the next flu season starting from October. so now let's move to serology serology is a very interesting story because at the beginning of the pandemic as soon as products were made available to customers there was a surge in demand and if you look at what different companies declared in terms of capacity manufacturing capacity it was among the number of tests that the diagnostic industry was prepared to provide to customers. After an initial consumption of the serology test, I'm referring to the IgG test, the situation froze as a result of lack of guidelines. You know, there has been a tremendous amount of discussions at the scientific level vis-a-vis was the value in detecting antibodies. The initial hope and dream was the fact that antibody detection would provide an indication of immunity. That clearly was not the case simply because our clinical threshold for immunity has not been defined and will be defined the day that the vaccine industry is going to declare it once they launch the vaccine. Then there was a usage of this test for epidemiological studies. It is still there, but I think the initial intent of governments to conduct large epidemiological studies eventually faded away because there are different priorities today for governments. I'm referring to the Italian government, for example, which launched a campaign of 150,000 citizens to be tested, and from what we understand from public information, they were only able to collect around 80,000. And other governments as well declared massive screening programs that eventually did not materialize yet. So today serology, the use of serology is more clinical and is related to those countries where there is an ongoing epidemic or there is a lack of swabs because somehow IgG and IgM are used to complement the fact that there is a chronic lack of swabs. So we see still opportunity for serologies in Brazil, in India, where we see adoption of IgG and IgM. But in the more mature countries, we see that the volumes eventually decline to numbers which are far below what were the expectation of the industries. Initially, as clearly you picked up following comments from other diagnostic companies, including some large labs in the U.S. So today, what's the future of serology? Well, we believe that the future of serology rests with vaccination and vaccination campaigns. And as it happens with certain vaccines, after post-vaccination, there can be a need of determining whether the patient has properly responded to the vaccine. It's the case, for example, of some vaccines like the hepatitis B. If that happens and is an if, because it depends what the regulatory bodies eventually will mandate and or what the guidelines will say post-vaccination, we see a tremendous potential for serology that probably is going to be a combination of classical tests, venous tests, and a combination of probably some rapid testing that in that case could fit the market because they don't need an excessive sensitivity, which usually is the problem with these tests. but can probably be sufficient to determine whether a certain threshold of antibodies has been generated or not after vaccination. So I think that it's difficult to predict what will happen with serology. We need to wait for guidelines for the vaccine. From a geographical point of view, very clearly what I said is reflected in the performance of the company. North America has been growing rapidly. dramatically for the company. In the quarter, 72%. In the first half, 42%. Again, driven by a tremendous adoption of swabs and initially of serology, which was actually used by some of the labs in massive volumes. Initially, again, that interest is fading away a little bit. Then we have Europe. Europe behaves well for the same reason. In Europe, we have distributed, we made available to European countries, including Italy, certainly, our home market, our molecular product and our serology product. And that has allowed Europe to grow, notwithstanding the fact that we have experienced in different countries decline of volume, as said, of the base business because of the COVID pandemic. We have a black eye in China, as I think everybody else. And this is because so far in China, there is no foreign company with a COVID product. And so you don't enjoy as a company the opportunity of COVID in China, whereas you suffer from the decline in volume. So China declined sharply for us in Q1. It continues in Q2, although we see slow improvement in volume, but still negative. And then let's talk about Latin America. Latin America, we all know the situation in Brazil, which for us is the main geography. In Brazil, in Q2, we did suffer by the fact that, well, first, we did not launch our molecular assay in Brazil, and so we don't have the support of molecular assay. And recently we got our serology product approved and therefore we expect that starting from Q3 we will see adoption of our serological test in Brazil and that will actually revert the result of the region of South America from being sharply negative to being positive in quarter three and quarter four. As far as futures, I want a couple of comments. The first comment, I believe that we do have an intensive research program for COVID. And as I stated before, we see that there is a need for a saliva-based test more sensitive than what's currently available. to complement the chronic lack of swab. And we have a program in that direction with a partner, with a U.S. partner in order to try to come to the market with products by the coming fall season and flu season. And also, we believe that there is a need from a serological point of view of a qualitative test that is actually set up for, again, post-vaccination. And therefore, we are actually working in developing a new serological test for IgG determination, quantitative, that standardize that we plan to make available, again, by the time the vaccine is launched. From a product perspective, all our effort on COVID, the COVID program is an IGG, SBA, SA quantitative for vaccination and saliva and nasal swab product to try to reach to the best sensitivity to try to complement swab for the coming season. At this point, just again, one remark. COVID has been an opportunity for the company not only to establish a brand with the products we have developed, but it has been a great opportunity in North America to establish a new store base. As said before, if you remember, we had strategically, we had a plan to penetrate the hospital market with in mind a certain number of hospitals to be actually rich and close by end of this year. Well, comes Q2, we already almost doubled the target of the hospital number that we targeted for the full year. So that I see as a tremendous legacy opportunity for the SORM because we are penetrating with our products with COVID molecular and immuno, a segment that's strategic for the company. And certainly we will see then adoption on our systems of the quantifier and all the specialty products that we carry on those systems. So I see a very positive effect of COVID strategically in terms of positioning, branding, and install base. Now I leave the podium to Mr. Pedro. He's going to talk about the numbers, and then we're going to start a Q&A session.

Thank you, Carlo. Good afternoon, everybody. In the next few minutes, I'm going to walk you through the financial performance of DSR during the first half of 2020. And I will make some remarks on the contribution of the second quarter as well. As usual, I would like to start with what I believe are the main highlights of the period. We closed half one with an increase in revenues at constant exchange rate of 8.7% or 31 million euros. As a result of the soft first quarter, mainly due to COVID-driven reduction testing volume in China, as we discussed, and a very good second quarter, up by 15.4% or 28 million euros. Q2 gross margin confirmed the good result achieved in Q1-20, with a ratio of revenues of 69.1%. H1-20 gross margin ratio, at 69.1% as well, is slightly lower than H1-19, which closed at 69.5%. I will discuss later about the main drivers behind this variance. H120 EBITDA at €154 million records an increase at constant exchange rate compared to the previous year of 10.1%. H1 EBITDA margin, again at comparable FX rate, is 40.2% vis-à-vis 39.8% of 2019. Q2 20 EBITDA. at €89 million or 42.9% margin registers a very good performance with an increase of 24% or €17 million compared to Q2 2019. Lastly, we confirm our ability to generate a very healthy free cash flow €74 million in the first six months of the year which brought the net financial position to positive €190 million. Let me please remind you that in June we paid €52 million dividends to our shareholders. Let me now go through the main items of the P&L. H1 revenues at €382 million grew by 9.1% or €32 million compared to last year. The growth at constant exchange rate is 8.7%. The strengthening of the U.S. dollar against the euro is the main reason behind these FX headwinds, which has been partially offset by the devaluation of the Brazilian reais. Considering where the U.S. dollar is trending now compared to 2019, I believe it is fair to say that we might experience in the second half of the year some FX headwinds that will likely offset or even more than offset the upside of the first part of the year. H1 gross margin at €264 million grew by 8.5% compared to last year, closing the first six months of 2020 with a ratio of revenues of 69.1%, a touch below H1-19, which closed at 69.5%. The slightly decrease in the year-to-date gross margin is the result of the following. a negative product mix coming from lower CLIA sales and higher molecular sales, which enjoy slightly lesser margins, partially offset by better fixed cost absorption as a consequence of higher manufacturing volumes. Higher distribution and freight costs, mainly driven by the fact that many commercial flights, which under normal conditions would have been used to move our goods, have been grounded because of COVID, and so we had to use cargoes which are usually more expensive. H1 total operating expenses at €131 million or 34.3% of revenues have increased by 2.4% of €3 million compared to last year. OPEX ratio of revenues is 34.3% vis-à-vis 36.6% of 2019. Here we have two effects of opposite sign. On one side, we have had a slowdown of activities and the consequent reduction in costs caused by the widespread lockdown measures that interested all the geographies in which we operate. On the other, we have had an increase in costs, mainly driven by the investment we made in the U.S. commercial team aimed at sustaining our hospital strategy. as we talked over in the past few quarters and Carlo just mentioned. Each 120 other operating expenses at €9 million increased compared to 2019 by €4 million. As discussed during Q120 call, most of this variance is driven by a non-forecasted loss we suffered in our South African subsidiary during the shutdown process for which we have activated our insurance policy, our group insurance policy. As a result of what just described, H119 EBIT at €124 million or 32.3% of revenues has increased compared to 2019 by 12.2% or €13 million. Q2 closed at €74 million or 35.7% of revenues with an increase of 30% or €17 million compared to last year. The tax rate at 22.5% is substantially consistent with H1 2019. The net result at 95 million euro or 24.8% of revenues is higher than previous year by 11 million euro or almost 13%. Lastly, H1 EBITDA at 154 million euro is better than 2019 by 14 million euro or 10.3%. The variance at constant exchange rate is positive by 10.1%. First half EBITDA ratio revenues is 40.2% at current exchange rate, vis-à-vis 39.8% of last year. Q2 has recorded a very good result, closing at 89 million euro, or almost 43% of revenues. Both H1 and Q2 improvements compared to last year are mainly driven by the higher sales and gross margin coupled with a very nice operating leverage, coming from the reasons that I've just talked about. Let me now please move to the net financial position in the free cash flow. We closed the period with a positive net financial position of €190 million after payments in June of €52 million dividends to our shareholder. In the first half of the year, the group generated 74 million euros free cash flow, vis-à-vis 70 million euros of 2019. The semester has been negatively affected by an increase in working capital, driven by higher sales and so accounts receivable, higher inventory to sustain COVID test volume, and higher capex, driven by the acquisition in Q1 of the TTP license. partially offset by lower tax cash out, mainly coming from a positive payment phasing. Lastly, guidance. So, considering the uncertainty and unpredictability of the impact of the coronavirus pandemic in the second half of the year and the risk of further widespread strict lockdown measures, The Azorin, similarly to what done in Q1, is not in a position to give an economic guidance for the remainder of the year. Nevertheless, at the light of the good performance achieved in H1 and taking into account the importance of the diagnostic industry in managing the consequences of the COVID pandemic, the management is not expecting a negative impact on the results of the second half of the year. Now let me please turn the line to the operator to open the Q&A session. Thank you.