DiaSorin S.p.A.

Good afternoon. This is the Chorus Call Conference Operator. Welcome and thank you for joining the Diasorin First Half 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 Diasorin. Please go ahead, sir.

Yes, thank you, Officer. Ladies and gentlemen, good morning, good afternoon. Welcome to the Diasorin call. We're going to be discussing the H1 results, and as usual, I will make comments on the at constant exchange rate so that we can take care of the exchange factor. First of all, this is the first conference call where we have expanded the Diasorium family. It is the Diasorium Luminex family today. I was in Austin last week. I believe we acquired a great company full of opportunities and technologies. with a lot of talented people. And during this call, I'm going to make some specific comments about the Luminex business. So let's start from DioSorin. When it comes to the H1 result, as you've seen, we reported in line with guidance. What is very interesting to notice is that compared to our expectation, we have the base business, which is doing slightly better than what we expected, and I'll explain why. And we have the COVID business that is doing slightly worse than we expected, mainly related to the antigen testing volume. that is lower than what we expected. But again, I'm going to give a little bit of details later on. Now, let's focus first on the base business. And, you know, for us now, the base business is fundamentally the CLIA business, now that the Siemens-Eliza contract was actually terminated, and so our revenues with ELIZA are becoming very small. If we now look at the CLIA business, And we look at CLIA without COVID and without vitamin D. And if we compare to 2020, clearly there is a phenomenal growth, 40% growth versus last year. But if you want to measure really how things are going, we should use 2019 as a reference. because we did not have clearly the COVID effect. And the great news is that our CLIA business, and again, ex-COVID, ex-vitamin D, is now growing 16%. And this is the result of the fact that I said many of the programs that we had, like the Quaniferon, like the GI, so the specialty program is really performing well in all geographies. And I'll just give you one example of a successful geography, which is the U.S., that, as you know, today is becoming the number one geography for the group. If I look at CLIA X COVID and X vitamin D, and I compare it to 2019, our business is growing 22%. And this is phenomenal. If I include vitamin D, The 22% goes to 12% because, as you know, we have lost the vitamin D business at Quest that we had in 2019, and we don't have it today. It was a very significant business. So notwithstanding that, our overall CLIA franchise in the U.S. is growing double digits, and we have a lot of installations that happened over the last few months. mainly driven again by the quantiferum and the gastroenteric strategy. Let me also remind you that in the U.S. we made an investment in 2019, roughly $5 million of OPEX in hiring reps, hiring marketing people, and hiring service people to support our hospital strategy. Our target was to close in the following three years no more than 150 hospitals, and I think we are now, notwithstanding COVID, at 100 hospitals already closed. So we're going to clearly by the end of next year, we're going to blow that number. So it's going very well, the hospital setting. This is very interesting because we're going to come in later, Luminex, The Luminex diagnostic business was primarily directed toward the hospital market, so we find ourselves now in a very interesting position where we have a hospital program with CLIA that will benefit also from the hospital customer list that Luminex brought to us. If you look at the Excel placements in H1 300 systems, which is not worthy considering that typically a good contributor to Excel placement was China. China is a difficult geography these days to access. And also there is a slowdown of placements in China because of the COVID situation. So we actually made better placements. than previous year in exchange placement worldwide, notwithstanding the slowdown in China, which means, again, as I said, our business in U.S. and Europe is really doing very well. Now let's talk about COVID. And as you know, COVID for us, I put in this big family of products, molecular, which makes the majority of revenues, and serology products, that are split between antigen testing and antibody testing. Now, in H1, COVID was roughly 180 million years. In Q1, we had a little over 100 million. In Q2, there has been a slowdown due to, on the site that we'll talk about, volumes. And in Q2, we have close to 80 million euros. So if we look at the molecular component, Q1 to Q2, we saw an overall decline of the COVID franchise of roughly 30%. Now if we look at the reason for this, for molecular, is as everybody else is reporting, in the U.S. there has been significant decrease in volume, which is roughly overall 60%. We are doing better than that because of the positioning of the system. It was never intended to be a high throughput system. And as you know, our volumes are moving away and getting more decentralized from the core lab. And so, yes, we lose volume, but not to the extent that other competitors have reported. It is not worthy also to say that so far we didn't see any significant price pressure, also because the reimbursement system in the U.S. has not been affected so far. In H2, so the guidance that you have seen, includes an overall COVID business, molecular plus serology, in the range of 140 to 150 million, which would put us in the middle range of the guidance. So still, compared to each one, we expect a 20% decrease. As you can imagine, still very complicated to make a real assessment of of what the COVID effect is going to be, especially in light of the recent news with the Delta variant. But as good as it gets, this is what we've included in the guidance, and we're going to give an update clearly in quarter three, where I think we're going to have better visibility on how the season is going to look like. Now, I will briefly comment about Luminex. I'm not going to go too much into detail, but I would like to touch base on some very important points. First point is our guidance, so what we expect Luminex to contribute in the second half. And we expect Luminex to contribute around $210 million to our top line program. of which around $30 million are COVID-related products. I remind you that because of a certain number of things, the COVID business that Luminex was able to develop in last year was relatively limited due to the fact that because of their technology, it was complicated for them to scale up manufacturing. This is why The COVID effect now is much less than what you could see on the dinosauring site. As far as business performance, we have the LTG business, which is clearly booming, is a very profitable business for the company. And if we look at the growth compared to 2019, so take 2019 as a reference, normal year is double-digit. Clearly, if you compare it to 2020, it's very high, over 20%. But again, difficult to compare things to 2020 because it was a very awkward year for, I think, all of us. When it comes to the molecular business, as said, we need to split the business in two. We have the Aries business, which is the single-plex business. That business is where they had an impact of COVID relatively limited in 2020. So the loss that can happen in, and it is, sorry, a relatively stable situation. as far as quarter one and quarter two is roughly around $10 million. And we expect, you know, that business to decline slightly in the second half, even if, again, we have no idea at all what is going to happen because of the COVID effect. That business is primarily a U.S. business. So it does not have the relief, let me say, of the European component. So it's primarily dependent on U.S. volumes. Then you have the multiplexing business. Overall, the multiplexing business has been doing okay. This has to do with the fact that there is a respiratory component to it, which clearly fired up. at the beginning and now as well, is dependent a lot on COVID plus the flu season, which nobody knows what is going to happen to flu in the second half. But more than anything, I think we should talk about the future, and the future is the Virgin 2 system. Let me remind everybody, what is Virgin 2? Virgin 2 is a fully... integrated sample-to-answer system that has been designed by Luminex to compete with the rest of the companies in this growing space. It does have a very interesting feature, which is differentiating vis-à-vis the other companies, and that's a flex system that would allow customers to tailor-make and design their own panels, The launch of the Virgin 2 has been impaired by two events. The first one is that the company, prior to Diasorin, elected to go through the agency, the FDA, with a panel for gastroenterology, and clearly that panel was, the review process was completely frozen by the agency because, as you know, in 2020 and still now, priorities respiratory. The company then submitted an EUA for respiratory right at the time when the FDA changed their policy, and now they want a fight and cake. So we are running the clinical study for the respiratory panel. And we expect that the clinical study will be completed at the end of the season because the respiratory clinical study clearly is depending on the season. You cannot clearly do it during the summer. And we plan to file with the FDA the respiratory and hopefully they're going to start reviewing also gastroenterology panel by Q1 next year. with full launch of the platform by second quarter next year with an initial panel of respiratory and gastroenterology. Following that, very close to it, so still within next year, there are going to be the submission of the blood culture, positive and negative. So the full panel is going to be coming soon. We're very excited about this platform. We really believe that it does make a difference vis-à-vis the ability of customers to make affordable multiplexing compared to what they have on the market today. We are working at the scale-up of manufacturing, and we are going to be ready next year for the full worldwide launch of this platform. Now let me talk about the integration plan. I'm going to give just some flavor, and then full disclosure is going to be done at the investor day that, as you know, has been scheduled for the month of December. As far as integration is concerned, we have certainly some primary objectives here. First one is to refocus the company on what we consider bets that cannot be missed. And as an example, we are talking about the Virgin 2. The IntelliFlex, which is the platform that has been just made available to the partners the company works with recently. for the LPG and has been the first platform that this company has been launching in the last 10 years. So there is a lot of excitement about the system that would go and possibly replace thousands of systems that have been installed by the company and the partners in the field over the last 10 years. Last but not least is the image stream and the flow cytometry new generation systems which are coming to the market. So this company had a mission before. It was a Luminex mission, and now we are making it a Diasore and Luminex mission, refocusing all the resources in these very strategic projects. By the same token, we are looking at the footprint of the company and the possibility of synergies and improvements of operations since we also have operations in the U.S. There is a full team of people that is reviewing footprint and preparing a plan that, again, we are going to be able to discuss when we talk about the expectations for the next three years. By the same token, you know, to complete strategically our product portfolio, we have two very important projects that now are hitting the end phase of product development for Diasorin, the liaison nest, which is the small platform for the decentralized market PCR sample to result in 15 minutes. And then we have the Liaison MDX Plus, which is replacing the Liaison MDX and will substitute actually the Liaison MDX starting from 2022. So my point is, now that we really bought technology in a good business, as far as molecular diagnostics is concerned, we have many arrows in our quiver. We have four platforms that will hit the market in the next year or so. And as far as LTG, we just launched the next generation platform. So I would say that we have many, many good things that are coming forward for the combination of diasoring and luminex. At this point, I'm going to leave the microphone to the CFO of the company, Mr. Pedron, who is going to drive you through the numbers.

Thank you, Carlo, and good morning, good afternoon, everybody. In the next few minutes, as usual, I'm going to walk you through the financial performance of DSR during the first half of 2021. And I will also make some remarks on the contribution of the second quarter. As usual, I'd like to start with the main highlights of the period. So we closed first up 2021 with an increase in revenues at constant exchange rate of 40%. COVID sales are up by almost 100% compared to last year, whereas ex-COVID business is up by 21%. Please note that the revenues growth is in line, as Carla just said, with the H121 guidance we provided to the market when we discussed fiscal year 2020 results back in March. I believe it is also worthwhile mentioning that the ex-COVID sales in the first half are back at the same level as where they were pre-COVID in 2021 and even higher, as Carol said again, if we take out, if we sterilize the loss of vitamin D business in quest. Q2 2021 gross margin confirms the very good results achieved in the previous quarter, therefore closing half one at almost 69%, just a touch below 2020, which closed at 69.1%. H1 adjusted EBITDA at €144 million records an increase of €91 million, or almost 60% compared to 2020, with a margin of 47.4% on revenues compared to 40% of 2020. The growth at constant exchange rate is 64% with a margin of 47%. Again, therefore, slightly better than H1 guidance. provided when we discussed FY 2020, which was 45% EBITDA margin, a constant exchange rate. Lastly, we keep confirming our ability to generate a very healthy free cash flow, €126 million in the first half, with an increase compared to last year of €52 million, or 70%. The net financial position is positive for €436 million, with almost 9%. million euro cash. Please let me remind you that in Q2 in April, we issued an equity link bond for 500 million euro due in 2028 to finance the Luminex acquisition, to partially finance the Luminex acquisition. Let me now go through the main items of the P&L. So H1 revenues at 550 million euro grew at current exchange rate by 35% compared to last year. The first two quarters of 2021, we have experienced some 18 million euro FX headwind, mainly caused by the strengthening of the euro against the US dollar. I believe that if we consider where the US dollar is trending now compared to 2020, it is fair to say that in the second part of this year, this negative effect should be less material. even including luminex sales that, as we know, are mostly generated in the U.S. During the first half of the year, we booked 177 million euro of COVID sales, about 75% of which driven by our molecular test, against 95 million euro of 2020, which were, back then, almost evenly split between immuno and molecular tests. I believe it's worthwhile mentioning, as we did last quarter, that the business ex-COVID was up by 21% constant versus 2020, but also if we look at H119, it was up by 6% once we sterilized the effect of the vitamin D business inquest and de-seminarizer, as I believe we discussed in the previous quarter. H1 gross margin at €355 million grew by 35% compared to last year, closing the first six months of 2021 with a ratio of revenues of 68.9%. The margin on revenues has not increased compared to last year, in spite of the higher revenues, and mainly for the following reasons. We have a negative effect from product mix coming from higher molecular sales and lower clear sales, We've had an higher incidence of royalties driven by the increase in our latent tuberculosis sales. And all of this has been partially offset, or I would say almost completely offset, by the lower incidence of fixed costs driven by the higher sales volume and some efficiencies coming from the manufacturing processes of our molecular products. H1, 21 total operating expenses at €136 million of 26.4% of revenues have increased by less than 4% of €5 million compared to last year. The increase in revenues, mainly driven by the COVID effect, is behind the operating leverage of the period. That has seen a decrease of the OPEX ratio of revenues from 34% of 2020 to 26% of 2021. First half other operating expenses at €17 million increased by €8 million compared to last year. This variance is entirely driven by the one-off expenses related to the Luminex acquisition, which accounted for about €13 million. As a result of what just described, H121 EBIT at €202 million of 39% of revenues has increased compared to last year by 63%. The tax rate at 23.5% is slightly higher than what we recorded in 2020, which closed at 22.5%. This increase is mainly driven by the fact that some one-off costs driven by the Luminex acquisition are not tax deductible in the U.S. The net result at €150 million, or almost 30% of revenues, is higher than previous year by €55 million. Lastly, H1 2021 adjusted EBITDA at €144 million, 47% of revenues, is higher than 2020 by 59% or €91 million. The variance at constant exchange rate is positive by 64%, with a ratio of revenues of 47%. Let me remind you that the difference between the reported EBITDA and the adjusted EBITDA is only due to the mentioned one-off costs related to the Luminex transaction that we discussed about. Let me now please move to the free cash flow. In the first half of the year, the group generated €126 million free cash flow vis-à-vis €74 million in 2020, therefore booking an increase of almost 70% of €52 million. I believe it is worth mentioning that in this semester, we've had a much higher tax cash out compared to 2020. 66 million euros in 2021 vis-à-vis 5 million euros in 2020. This difference has been driven mainly by two elements. A different phasing accounting for about 30 million euros, and €35 million driven by the higher profit that the group generated compared to previous years. Lastly, let me now move to the 2020 full-year guidance, as usual, at previous year content exchange rate, which, let me remind you, was for the $1.14 compared to the euro. In order to make the number comparable with 2020, we will also provide a breakdown of the revenue guidance between DSR and Luminex business. So the total combined revenues will increase between 35% and 40%. Therefore, we expect total 2021 revenues at around 1.2 billion euros. We expect a total combined adjusted EBITDA margin at 42%. Therefore, again, 510 million euro at constant exchange rate. Besides, please note that the Australian revenue is a constant exchange rate and constant perimeter of consolidation should increase between 15% and 20%, out of which the overall Australian business, excluding COVID-19, will represent an increase of around 15%. Please, let me remind you once again that the group is very much exposed to the U.S. dollar fluctuation, even more so now that we have acquired the Luminex business. So, as a rule of thumb, remember that for every one cent movement of the dollar against the euro or the Australian revenues, should move by about 6 million euro on a yearly basis. Now let me please turn the line to the operator to open the Q&A session. Thank you.