DiaSorin S.p.A.

Good afternoon. This is the call school conference operator. Welcome and thank you for joining the DSR in 9 months 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 the S4IN. Please go ahead, sir.

Thank you, operator, and good morning or good afternoon to all the participants, to the third quarter 2021 results. As usual, I will make a few comments about the business, more qualitative, and then Mr. Pedron will The CFO of the company is going to take all of us through the numbers. Now, this is the first quarter where we also have Luminex included in our numbers. So in order for everybody really to understand how the business is trailing, I'm going to make my comment without Luminex at the beginning, and then I'm going to give some remarks on the Luminex performance. So if we look at... did business at constant exchange rate and without Luminex. In quarter three, the growth was 10% versus Q3 of 2020. If we look at the different technology, CLIA X vitamin D had an outstanding performance, plus 30%, and we're going to see that this is the result of a successful placement in all the different geographies, primarily U.S. and Europe. And the programs that today are driving the success of our CLIA business are the specialty and the stool program together with the TB deployment and the program that we're running together with QIAGENT to convert and grow the TB franchise around the world. Vitamin D is down 8.7% and this is clearly related to the quest loss that happened in 2020 at the end of 2019 and now is in full effect starting from this quarter. As far as molecular is concerned, the business overall grew 5.5% versus last year. Clearly, the vast majority of the business is COVID-related, and I'm going to make some comments about the COVID later on. Now, if we deep dive into the geographies, and we start from Europe, Europe grew actually 20% year over year, quarter over quarter, sorry. CLIA is including vitamin D, so all in is up 18%. COVID molecular is up 30% versus... quarter three in 2020, and this is due to the fact that, as I think many other operators in this industry have already commented about, the European COVID business has been more flat and so less affected from volume increase or decrease over the last few quarters. We do have an installed base of MDX systems, which today sits primarily in Italy, in Spain, in France. And this is due to the fact that when we had to launch the system during the COVID pandemic, we clearly gave to these geographies preference over other geographies due to the limitation in number of systems that we could manufacture. Today, that installed base in Europe primarily into hospitals and it is used to triage patients. It is used on symptomatic and therefore today we are not at risk of losing some of the volume that typically was related to screening of a symptomatic that was happening in the high-throughput platforms in the core labs. When it comes to U.S. and Canada, the business overall is flat, but I think we need to read between the lines in terms of how technologies are performing. CLIA is up 36% versus quarter three last year. Again, deployment of the hospital strategy with the TB product and the stool again and all the specialties that are really leading the charge is allowing us to penetrate this segment If you remember, at the end of 2019, we had invested $5 million in creating a dedicated cell phone for this segment, and I think that today we are reaping the benefit of the fact that we do have a manual product that fits very well the space. The TB is certainly a product that is interesting in that space. Today, there is lots of send-out in that space that, due to the viability of the azomex, now hospitals can bring in-house and save money versus the send-out opportunity. So, overall, the CLIA strategy is working very well in the U.S. It is becoming our primary geography around the world. When it comes to the molecular business in the U.S., it's flat-ish. It's actually decreasing, I believe, 1% versus Q3 last year. And this is due to the fact that there has been a softening of volumes, clearly, from the peak that the industry enjoyed in Q1 of 2021. I think what is not worthy is that when it comes to the instrument sales, we are €7 million down versus last year, and this is explainable by the fact that all the emergency funding that was available in 2020 to buy instruments, and now it really dried down. And so today we are converting. Clearly, we are not selling systems any longer. We are placing systems under the reagent rental business model, which is what, as you know, we've always been doing before the COVID pandemic and the emergency funds became available. So overall, the business is flat, but the CLIA is clearly very successful in the US. Now, if we move to China, year to date is plus 28%, quarter three is plus 5%. So we see that in China, There is a recovery compared to the debacle of 2020, although I believe that there are a couple of things that are not working in the geography. First thing is that there is volatility testing volumes, and this has to do with the fact that in order to fight the pandemic, there are continuous lockdowns in different provinces and cities. And every time there is a lockdown, certainly the routine testing is suffering. The second effect that is not worthy is that we start to see, as everybody else, price effect due to the fact that these provincial tenders are entering into effect. There has been a report which has been issued a couple of days ago by one of the primary research firms in the U.S. that was actually published. Saying something interesting about these tenders, Diasorin has been one of the companies that has been on the winning side, so we won a certain number of provincial tenders, although it is very clear that the pricing structure for some of the routine assays, like the thyroid and oncology products that today are really suffering the competition from local manufacturers, the price structure certainly is very different from what we used to enjoy when we were going to each hospital offering our products. So I believe that as far as China is concerned and as other manufacturers have expressed in the last few days, I believe that the future for China is quite uncertain and quite difficult really to predict what is going to happen in the next few quarters in this geography. So I believe that from an overall geographical perspective, though, today the U.S. does represent 50% of the diasorian business, and strategically, if you remember when we were commenting about the Luminex acquisition, one of the reasons why we bought Luminex is because we strongly believe that the market today guarantees growth, good pricing, and a reward for innovation in the U.S. And Diasorium is very well positioned to enjoy this opportunity, again, through the Luminex acquisition. Now, I'm going to talk about COVID a little bit, the elephant in the room. So today, COVID, including Luminex, and again, sorry for changing the perimeter, but I think this is important. COVID for Diasorium does represent today 30% of the overall business, Year to date, the business has been growing nicely, around 55%, 57%. When it comes to the last quarter, it's plus 5%, certainly with different dynamics between the U.S. and Canada and Europe, which I've been discussing before. It is quite difficult to predict, in my opinion, what is going to happen to COVID, as I think, again, other operators have been commenting in their quarterly results. But today, again, when it comes to Europe, we see a steady demand. And when it comes to the U.S., we certainly see a decrease in testing volume compared to peak of around 30%. But the demand is, at this point, relatively flat in the last two to three months. So we now need to really wait and see what is going to happen during the upcoming flu season or respiratory season. Today, I always provided you with also volume, testing volume in terms of manufacturing. Today is a combination of diasorin and Luminex. We are shipping roughly 1 million tests a month of COVID products. Then I'm going to make a comment about Luminex. As you know, we have incorporated now Luminex for the full quarter and roughly 90 million euros of revenues in the quarter. The acquisition has been completed in July. Since then, we have started to work with the Luminex management on the integration. We have... recently announced the new organization where we do have now a management team that is a combination of Diasori and Luminex managers that will have the responsibility to lead the company forward. We are completing the integration plan that will be presented to the board of directors in December, and it is going to be disclosed as part of the December 17 investor day. when in broad terms we're going to talk about what we intend to do Luminix and then we intend to leverage all the assets that actually Luminix has brought to Diasorin. I make one more comment about the Verigine 2 platform that, as you know, is one of the key platforms or key technologies that we acquired through this acquisition. We intend, we are planning to have a soft launch of the Virgin 2 in 2022, ex-US, so in Europe, and then we're going to have all the submissions in the US where we expect to launch the platform in 2023. The platform is going to be renamed, so the Virgin 2 name is going to be soon abandoned and is going to be substituted by the new name, which is Liaison Plex, And this is because this platform does complete the product portfolio of Diasorin that I remind you is going to be made of the MBX+, which will be the platform that can offer small plexes, the liaison plex, which will be the one that will allow us to develop high-complex panels and the Aliazone Nest that will be the one that we are going to use for decentralization of molecular testing, alongside the ARIES platform, which is the legacy from Luminex, the legacy platform from Luminex that today has been successfully launched in Europe, primarily in the U.S. with an installed base of roughly 70 systems today placed in some European countries. One thing that is worth noting is the fact that when we look at the customer base in the U.S., what is very interesting is that Luminex is primarily offering its products, I'm talking about the IVD products, to the hospital market. There are over 700 hospitals that the company is selling to in the U.S., And Diasorin has roughly 250 hospitals that we are serving and supporting. And the interesting part is that only 70 hospitals in the U.S. are overlapping. And so we believe that there is a very interesting opportunity for cross-selling products in this hospital base. You know that Diasorin made of the hospital segment one of its primary targets to develop the U.S. market. The reason why there is no overlap between the two companies is because Diosorin did develop its store base using the adiason XL. Adiason XL certainly requires certain testing volumes in immunoassay and the hospitals that typically were running this volume were large institutions in the U.S., whereas as far as Luminex is concerned, they've been serving this market really starting from a mid-low throughput system, which is the Verigine platform, the Verigine One platform, and the Ares. And therefore, they traditionally have developed their business in the mid-size segment areas. in the U.S. And this provides a phenomenal opportunity, in my opinion, to the liaison access. As you know, we are waiting for the approval of the TB assay on the access. We already have all the other products, the stool products and the PCP already ready to go. And as soon as TB is going to be migrated there, and we expect to hear something from the FDA by year-end, Then we are ready. We have an available market of over almost 700 institutions that we can go and sell the excess to. So I'm very excited about this cross-selling opportunity that the Luminous Acquisition has provided to us. Now, I think now I'm going to turn the microphone to... to Pier Giorgio, and he's going to take you through the financials, and then we're going to open up the session, the Q&A session. Thank you.

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 PSO in the first nine months of 2021. And I would also make some remarks on the contribution of the third quarter and on the impact of the Luminex business. whose acquisition has been completed on July the 14th. Again, please note that we are consolidating a full quarter of Luminex into the Assyrian financials. So, said that, I'd like to start with what I believe are the main highlights of this period. On July the 14th, we closed the Luminex transaction for a total equity value of $1.8 billion, and starting from Q3 2021, Luminex financials are consolidated into the Assyrian ones. Please let me remind you that the acquisition has been financed by a mix of a bank term loan for 1 billion USD, 5-year tenure, and a zero-interest convertible bond for 500 million euro, with 2028 maturity. Revenues, as reported, so at current exchange rate and with the contribution of about 91 million euro of the Luminex business, grew by 41% year-to-date and 51% in the quarter. The growth at constant exchange rate and scope of consolidation in the nine months is 29% and 10% in the quarter. These numbers, as we will see, are in line with the high range of the guidance we provided in July. Q3 2021 gross margin at 65% is below last year, which closed at 68% because of the expected dilution of the Luminex business. The year-to-date margin at 68% is substantially in line with 2020. Likewise, Luminex consolidation is at a dilutive effect on Q3 adjusted EBITDA margin, which closed the quarter at 41% vis-à-vis 46% of 2020. Once again, this is in line with our expectations and the guidance we provided back in July. Lastly, we keep confirming our ability to generate a very healthy free cash flow €224 million in the first nine months of the year, with an increase compared to 2020 of €71 million, 46%. The net financial position is negative for €1.05 billion, with a €330 million cash position, positive cash position. Let's now go through the main items of the P&L. So, September year-to-date revenues at €850 million, 9 million euros grew by 41% or 249 million euros compared to 2020. Three drivers behind this variance. Sales ex-COVID and Luminex grew by 65 million euros or 15%, 17% at constant exchange rate. Then we have the contribution of COVID sales, which grew by 93 million or 56%. The growth at constant exchange rate is 60%. Luminex which is a difference in scope of consolidation which accounted for 91 million euro. September year to date gross margin at 580 million euro drew by 38% compared to last year, closing the first nine months of 2021 with a ratio of revenue substantially in line with 2020. As said at the beginning of my remarks, the difference with the previous year is mainly driven by the inclusion of the Luminex business in the scope of consolidation. This is even more clear when we consider the gross margin ratio of the quarter, which closed at 65% compared to 68% of 2020. Let me please remind you that this variance, again, is in line with our expectation and the guidance provided. September operating expenses at €243 million grew by 24% compared to 2020, with a ratio of revenues of 28% vis-à-vis 32% of the previous year. The increase in the OPEX ratio of the third quarter from 28% of last year to 31% of 2021 is due to the very same reason highlighted for the gross margin, the consolidation of Luminex into DSRI numbers. Once again, let me remind you that this is in line with what we forecasted, and we are expecting this ratio to diminish as the integration process will move forward. and we will deliver the synergies discussed during the call we had when we announced the Luminex deal. Year-to-date, our operating expenses at €23 million increased by €12 million compared to last year. This variance is almost entirely driven by the one-off expenses related to the acquisition, which accounted for about €16 million. As a result of what just said, September EBIT at €314 million, 37% of revenues, has increased compared to 2020 by 47%, or €101 million. Interest expenses at €14 million are almost completely driven by the bank, term loan, and the convertible bond to support the Luminex acquisition. Let me please remind you that this number includes about 3.5 million euro of non-monetary interest driven by the convertible bond. This is just due by how the IFRS is dictating the way to account for interest on convertible bond. Even though, let me remind you that the convertible bond was issued with zero monetary interest rate. The tax rate at 24% is substantially in line with 2020, which closed at 23%. And this brings us to the net result, year-to-date net result, at €229 million or 27% of revenues, which is higher than previous year by €67 million or 41%. Lastly, 2021 adjusted EBITDA at €383 million or 45% of revenues is higher than 2020 by almost 50% or €125 million. The variance at constant exchange rate is positive by 51% with a ratio over revenues of 45%. The adjusted bid duration, the quarter, is 41% and is lower than 2020, which closed at 46% because of what we said before, the dilutive effect of the consolidation of the Luminex business. And as I said before, for the OPEX, let me remind you that this is in line with our expectations. I want to make this very clear. and it's coming from the lower operating leverage in the Luminex business. Let me now please move to the free cash flow. As usual, in the first nine months of the year, the group generated €224 million of free cash flow, vis-à-vis €153 million of 2020, with an increase of 46% or €71 million. As discussed back in July, I believe it is worth underlining that In 2021, we have had a much higher tax cash out compared to 2020, €78 million vis-à-vis €23 million. The difference has been driven mainly by two elements, a different phasing accounting for about €15 million and about €35 million driven by the higher profit compared to the previous year. Lastly, let me please move to the 2021 phase. as usual, at previous constant exchange rate. So, in light of the performance of the third quarter and what we expect for the remainder of the year, the guidance for 2021 has been increased compared to July. In order to make the numbers comparable with 2020, we will also provide, as we did in July, a breakdown of the revenues between DSR and Illuminex Business. So the new guidance is calling for a total combined revenues increase at around 40% and a total combined adjusted EBITDA margin at around 43%. Besides, the assorted revenues are forecasted to increase at constant perimeter of consolidation and exchange rate by around 18%. For concluding, please remember that the Australian financials are exposed to the U.S. dollar, as we always remind everybody, and even more so now that the United States represents about 50% of the total group sales. Therefore, as a rule of thumb for your modeling, consider that for every one cent movement of the dollar against the euro, the Australian revenues move by about 6 million euros on a yearly basis. Now let me please turn the line to the operator to open the Q&A session. Thank you.