DiaSorin S.p.A.

Good afternoon. This is the Coral School Conference Operator. Welcome and thank you for joining the Diasaurian First Quarter 2021 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 DioSorin. Please go ahead, sir.

Yes, thank you, operator. Good afternoon. Welcome to the quarter one DioSorin conference call. As usual, I'm going to make some general comments about the business, and then I will turn the microphone to Mr. Pedron, the CEO of the company that is going to take you through the numbers. Let me first start to say that, as usual, I'm going to comment numbers at the cost of the exchange rate because, as you know, dollar variation has been significant, and the product effect is fairly significant in Q1. And I will talk about the COVID business and ex-COVID business to give you a view about how we see the market developing. Let me start for once from the ex-COVID business. I believe that the company performed extremely well in quarter one. As you've seen, plus 6% versus quarter one last year. We introduced a couple of adjustments to allow them to understand the real trend. The first one, we took out the effect of some one-offs regarding the vitamin D contract with Quest. that, as you know, was there last year is not any longer in our revenue this year. And then the Siemens effect, meaning that last year, Manusaccio, the Siemens ELISA was stopped as the contract, and therefore, whatever was converted to CLIA was converted, and the remaining ELISA revenues have been dissipating throughout the last few quarters and now are almost nil because of the fact that the product is not there. So if you take out these two effects and you look at how the business performs, The growth is 6%, which is an indication that in several geographies, notwithstanding pandemic, the lab business and the hospital business is returning to a relatively normal course. As far as specialties are concerned, as you know, our revenues are skewed towards specialties. We suffered last year because non-elective surgeries were actually not performing. Now with the clinical patients going back to get tested and to be monitored, then we see, again, the use of specialties going up to where they were. So extremely comfortable with the way that this business is doing, specifically from a geographical point of view, as we have discussed a few times. U.S. is actually the lion's share of the growth, and this is because of the fact that the hospital strategy is paying out. The TB product line, T-cell, together with Cajun is working very well, as you also have seen from the Cajun comment on the work-losses business. And again, that goes together with a series of specialties, primarily gastrointestinal that we have launched in the U.S., and they follow suit together with TB on the same customer base. Europe, same thing, notwithstanding pandemic is clearly stronger here at the time, notwithstanding that in all the main countries, the base businesses are returning to normality, and again, We are gaining from the fact that some of the ATP business that was developed together with Kayagen now with all the install base and all customer gain is providing traction to our traditional ex-COVID business. Now, let's talk about the elephant in the room. Let's talk about COVID. And as you know, as far as COVID is concerned, We look at COVID in three different technologies. And I'm going to comment the three technologies, so molecular, serology, and COVID antigen high-tropical testing. Now, let's talk about molecular. And when we look at molecular, we need to actually comment U.S. and Europe separately. As far as the U.S. is concerned, public data shows that the molecular testing has been significantly decreased, volume-wise, from peak time, which was actually Q4, let me say, around December, January this year. Public data show that daily testing peaked at 1.6 million around December, and now we are closer to a million. and the projection is that by the summer it's going to plateau at 750,000 PCR tests per day. We see in the U.S. the trend of our business to follow pretty much the path, all driven by the fact that there is less request for the time being of testing volume. We don't see any effects of farm pricing also because, as you know, the reimbursement scheme under the emergency situation is still in place allowing customers good reimbursement for all the testing which is performed. Now, if you look at Molecular Europe, we see a completely different trend. We see a little bit of softening but really not so remarkable. And this has to do with two effects. First one certainly has to do with the fact that pandemic is still in place. Strong demand in the major geographies where we play. I remind you that during COVID time when there was shortage of systems and reagents, we elected to give priority in Europe to certain countries, namely Italy, Spain, and partially in France. And therefore, we built and installed these primarily in hospitals in these three countries because of the fact that, again, testing volume in these countries continues to be strong and because of the positioning of our platforms, which have been typically used in emergency room or hospital admission of patients. We don't see today any decline. To the contrary, we see an expansion of the soul base because there is more need of smaller systems and, conversely, less need of high throughput systems in these hospitals because decentralization of testing now is becoming the relevant part of the COVID testing adoption. So in combination of Europe holding and the U.S. declining according to market volume, we have now developed a certain view vis-a-vis the ERM guidance that I'm going to describe later. But you understand from the time being, molecular-wise, this is what we see. Let's comment on serology. Serology for us is what we always said, the part of the business that we believe is going to take longer as a necessity to monitor vaccine response, not necessarily in the general population, but in certain very specific populations. Lots of publications have been Now, I'm now demonstrating that in immunocompromised patients, in dialysis patients, in certain populations, the response to vaccine is different from the normal population. And therefore, we see adoption of testing, of serology testing and monitoring that is, for us, significant. We have, as you know, an extensive install base of Liaison XL. And we see this volume growing rapidly. on a monthly basis, a high single digit. We also have serology used in secondary countries like in Brazil and India where there is still a growing number of cases and lack of solutions, molecular solutions. Therefore, we see in these countries also the adoption of serology still growing. And we continue to be positive about the fact that serology adoption will continue, and especially in those countries like the U.S. where we believe eventually monitoring is going to be added as part of the physical checks, annual physical checks provided by insurance companies. So very positive about that product and very positive about the opportunity of that product. Last but not least, high throughput antigen testing. High throughput antigen testing has been developed by the in light of the fact that we believe that high volume of an extensive molecular testing was going to become an economic issue in several situations. And we thought that a sensitive high throughput antigen test could provide a solution For the time being, we have not seen that shift. We have seen antigen testing clearly being decentralized, as shown by many of our competitors who play in that field. By the same token is public knowledge that we are participating as a primary supplier of LabCorp to the national tender in the U.S. for returning to schools. You know the tender has been postponed already a couple of times, the opening of the tender. We are enrolled in the tender as a supply of laughter, so depending on what laughter is going to be awarded, we are not going to get certain volumes. But clearly, we are all waiting. I think everybody is waiting to understand what the Biden administration is going to do vis-à-vis implemented testing for school reopening. You know, in the US now we are toward the end of the school season, so we're talking about adopting this kind of testing starting from August when school reopens in the US. So now if we look at our guidance for the second half, it's very clear that what we built in is uncertainty vis-a-vis COVID. We are confident about our base business, but when it comes to COVID, we designed two fundamental scenarios. One scenario which corresponds to the high level of the guidance is that we're going to be repeating H2, so the COVID revenues in second half are similar to what we will experience in H1. And that entails two things. That entails that we're going to have some participates, so some revenues coming from the school contracts we'll offer, and a combination of robust respiratory systems, okay, which means that COVID and flu and differential diagnosis will be needed in 2021 wintertime When clearly, you know, symptomatic patients are going to show up, still there are going to be debates about efficacy of vaccine, long-term efficacy of vaccine, and so adoption of molecular testing will be there. That's the best case scenario. Then we have a base case scenario, and the difference between two is roughly 80, 90 million euros, where we're not going to get pretty much contribution, significant contribution from the school reopening program. And together with that, the season, the rest of the season is going to be lighter than what expected because the vaccine will prove to be extremely efficient. And the full need of COVID testing adoption is not going to be as strong as somebody can proceed. I believe you will appreciate the fact that this uncertainty is clearly shown by all diagnostic companies, and so I think we're going to get better visibility when we enter into the second half. One more comment, or two more comments before I turn the microphone to the objective. First one has to do with an announcement we made over the fact that we have initiated a collaboration with Lumos. Lumos is, I remind everybody, an American company that provides what I would call second-generation laminar flow technology. We are in the process of launching two COVID products, COVID serology and COVID antigen testing, in some target European countries mainly focused on the Italian market. And we are testing the pharmacy setting because we believe that, as you know, we have a strategy of decentralized testing with a liaison net for molecular and now the liaison IQ for antibody or antigen testing. And therefore, we are deploying this system through a set of large distributors in Italy. Italy has 19,000 pharmacies, and we want to understand how this system is perceived, what's the story behind COVID testing. You're clearly using the COVID time opportunity to deploy and install this. So for the time being, we have not built financial expectations because we want to see what the contribution will be. But this is a program that to me is very important for the company because it's the first step into a segment that we stated before we want to play strategically at all in the near future. Last comment I want to make is, and I would like everybody to remember, is the fact that we have a series of initiatives with new products coming to a different level of diagnostic vis-a-vis the viral versus bacterial infection, which is largely today dominating space of clinical needs. And last but not least is the China plan. And the China plan to me, which is on time, and I would like to remind everybody that strategically companies today have to develop a China for China strategy because the message sent by the Chinese government over the COVID pandemic is that they clearly want to be independent from European or American technology when it comes to diagnostics and And there's a strong indication that if you want to be a player, you need to be a player perceived as a Chinese true contributor and not necessarily an exporter to China. So keep a note on that. Clearly, this is not going to affect short-term numbers, but mid-term numbers, I believe any company that wants to bet on the fact that growth will continue to come from China has to find a smart strategy to now move their setting into China. And I remind you that the way I define smart for a company like ISO in the fact that we are operating in China through a joint venture with the Chinese government that guarantees us visibility of what's strategic for China these days and moving forward. So with that, I'm going to leave the mic to PG, and then I'm going to take it back for Q&A.

Thank you, Carlos. Good morning and good afternoon, everybody. In the next few minutes, I'm going to walk you through the financial performance of PSO during the first quarter of 2021. As usual, I would like to start with what I believe are the main highlights of the period. We closed the quarter with an increase in revenues, a constant exchange rate of around 60%. Q1 confirms the steady recovery in the ex-COVID business, as just discussed, in spite of the previously viewed loss of the vitamin D business in quest and the termination of the distribution of the Simon Seaman Cellizer products. COVID-19 sales accounted for 102 million euros in the quarter, slightly better than the last quarter of 2020 at the current exchange rate, vis-à-vis 4 million euros in Q1 2020. Q1 gross margin at 69.4% of revenues is a touch better than Q1 2020, which closed at 69.1%. and marks an improvement compared to the last quarter of 2020, which closed at 67.6%. Q1 adjusted EBITDA at €130 million, records an increase of €65 million, or 101% compared to Q1 2020, with a margin of 48.6% on revenues compared to 36.9% of 2020. The growth at constant exchange rate is 110% with a margin of 49%. Q1-21 reported EBITDA is €118 million and the difference with the adjusted EBITDA is due to €12 million one-off costs related to the Luminex acquisition. Lastly, we keep confirming our ability to generate a very healthy free cash flow, 80 million euro and a quarter, with an increase compared to 2.20 of 40 million euro or 100%. The net financial position is positive for 394 million euro with no debt and 430 million euro cash. The difference between the two being driven by the right of use introduced by ISRS-16. Let me now go, please, to the main items, to the main lines of the P&L. Q1 2021 revenues at €267 million grew by 53% or €92 million compared to last year. The growth at constant exchange rate, as we said, is 60%. The weakening of the U.S. dollar against the euro is the main reason behind these FX headwinds. The increase in revenues is the result, as we saw, of the steady recovery of the ex-COVID business and of the COVID contribution. Q1 2021 gross profit at €185 million grew by 54% compared to last year, closing the third quarter with a ratio of revenues of 69.4% compared to 69.1% of the same period of 2020. The margin increase compared to Q120 is a result of a higher operating leverage driven by higher volumes partially offset by different product needs, namely more COVID molecular sales, which enjoys slightly lower margins. I believe it is also worthwhile to underline the gross margin increase compared to Q420. which recorded a similar level of revenues, €271 million versus €267 million of Q1 2021, and a lower marginality, 67.6% versus 69.4% of Q1 2021. This variance is mainly driven by a favorable clear product mix and lower instrument sales, and more importantly, by some efficiencies coming from cost reduction initiatives implemented in the molecular manufacturing processes toward the end of last year, which are now very important. Total operating expenses at 68 million euros or 25.4% of revenues have increased by 3.3% compared to last year. During the quarter, All of our subsidiaries have experienced a general slowdown in some activities, mainly travel, driven by the lockdown measures implemented by the government of most of the geographies in which we do business. To 121 other operating expenses, 14 million euros increased by 9 million euros for 150% compared to last year. This variance is entirely driven by the one-off expenses correlated to Luminex acquisitions, which accounted for about 12 million euros in the quarter. As a result of what just described, Q1 2021 EBIT at 103 million euros of 38.7% of revenues has increased compared to 2020 by 109% of 54 million euros. The tax rate at 23.8% is slightly higher than what we recorded in 2020, 23%. This increase is mainly driven by the fact that some one-off costs driven by room next acquisitions are not tax deductible. Q1 2021 as a result, at 78 million euros, or 29.3% of revenues, is higher than previous year by 40 million euros, or 107%. Lastly, Quarter 1-21 adjusted EBITDA at €130 million, 48.6% of revenues, is higher than 2020 by 101%. The variance at constant exchange rate is positive by 110%, with a ratio of revenues of almost 50%. This result is mainly coming, as we saw, from the good gross margin and the operating leverage delivered by the increasing revenues amplified by a muted increase in operating expenses, which in the quarter accounted for about 25% of total sales vis-à-vis 38% of Q1 2020. As we have discussed, the only difference between adjusted EBITDA and reported EBITDA is the mentioned one-off cost related to the luminous acquisition. Lastly, let me just cover 2021 full-year guidance, already been explained by Carlo. So, as usual, it's three views here, cost and exchange rate. Total revenues to increase between 15% and 25%, out of which the business ex-covid represents an increase of around 15%. and the adjusted EBITDA margin between 44 and 47 cents. In this definition of adjusted EBITDA, we mean without considering the luminex acquisition related one of expenses that we will book from here till the end of the year, on top of the one we booked in Q1. Please, like always, consider that the Australian financials are highly exposed to the U.S. dollar. And even more so now that the United States represents about 40% of the total growth rate. And therefore, as the usual rule of thumb, consider that for every one cent movement of the dollar against the euro, the Australian revenues move by about 3.54 million euros on a year's basis. Now let me please turn the line to the operator to open the Q&A session. Thank you.