DiaSorin S.p.A.

Good afternoon. This is the Coruscant Conference Operator. Welcome and thank you for joining the Diasorin First Quarter 2022 Results Conference Call. After the presentation, there will be an opportunity to ask questions. At this time, I would like to turn the conference over to Mr. Carlo Rosa, CEO of Diasorin. Please go ahead, sir.

Thank you, operator, and ladies and gentlemen, good morning, good afternoon. And I will make some few comments. As usual, a constant exchange rate, and then the CFO, Mr. Pedron, is going to take you through the numbers. Okay, so first, as you know, we have been slightly changing our reporting system after the acquisition of Luminex. So now we have the business, which is divided in three buckets. We have the immuno side, and the immuno side, we have all the technologies that start from CLIA, the ELISA technologies. And we have the molecular bucket, and then we have the license technology bucket. So let me start to talk about the immuno. Immuno, we look at the ex-COVID part of the business, so clear ex-COVID, and then we look at the COVID part. So let me clear first the COVID. COVID, if you remember on immuno, it was the antibody test after vaccination to monitor the antibody titers. And then we had a high throughput antigen test to be used in hospital settings when they wanted to have cheaper technology, cheaper than molecular to test personnel. Well, this side of the business is declining sharply. And this is fundamentally because there has been no adoption of the serology test or less than what it should be done. And this is certainly linked to two things. One, the perception that COVID is pretty much going away. The second is the fact that governments have been fighting the adoption of serology as a way to control immune response against the vaccine because the problem there was to convince the population to get vaccinated rather than the sophistication of the follow-up. So we still have a business that is a good business for us, but it's 50% below what it was one year ago, mainly driven by the serology component. Now, if we look at now CLIA X-COVID, and when we look at CLIA now, the all-day assortment business, we have the CLIA X vitamin D component, which is growing strongly, 13% in the quarter, and we have vitamin D, which is declining a little bit, minus 5%, but is much more stable than before. On the ClearXD performance, if we look at the geographies, we have the U.S. growing 30%, we have Europe growing 9%, and we have China, which is flat-ish, just growing 3%, and I'm going to comment on China later in the presentation. Now, if we now switch to molecular, we have the COVID bucket and we have the ex-COVID bucket. I understand that when it comes to molecular, numbers are clearly affected by the change in the perimeter that happened after the Luminex acquisition. So I will try to digest the numbers for you. When it comes now to the COVID component, Okay, which is molecular COVID. We see 15% decline on average compared to the peak of last year. And this is certainly to do with the fact that with the Omicron, with Omicron, we had a very high January and then a sharp decline. So the peak of testing, as you have seen reported by different operators in this field. This peak now is much sharper than what was in 2021. When it comes to the ex-COVID, We have overall a single-digit growth, and we can XCOVID is a combination of the old, of the MDX technology coming from the , and clearly you have all the multiplexing different technologies coming from Luminex. Overall, this bucket is a single-digit growth with certainly there is a negative growth in the respiratory as a consequence, clearly, of COVID. And then we have growth in non-respiratory. So primarily, we're talking the gastro panel for the VIRGIN1, the blood culture panel for the VIRGIN1, and then the MDX assays, which, if you remember, were primarily On the non-respiratory side was for transplantation, and we had a very nice ASR business that has been used by labs to develop their own LDT. So overall, this bucket of ex-COVID is a single-digit growth component. Now, if we move to what we call licensed technologies, okay, licensed technologies has to do with the business that Luminex developed when the company was started. Overall, it's around annually is a $200 million franchise, and this business, if you remember, it's... An interesting business where we have partnerships with some of the main players in the life science business that are actually using our instrumentation and our technology to build their own products, primarily in the space of life science research, clinical research, but also specifically there is one player, very important player, which dominates the transplantation market, and that player is using our technology. Overall, this bucket, which in terms of profitability is accretive vis-à-vis our overall business, that bucket is growing 14%. Okay, and that is a consequence of the fact that a good quantity of money has been poured into life science research as a combination of pharma investment, but especially as a combination of grants coming from the governments both in U.S. and in Europe that after pandemic decided to foster the sector, really increasing the number of public spending in this sector. So we are benefiting from that trend. Last but not least, the flow cytometry, which is a relatively small business for us. It's less than $50 million annually. It's flat. And it's a combination of that business actually is split in two. We have some very high complex flow cytometer plus imaging system, and that piece of the business is actually growing. And then we have a more mature set of technologies, a small piece of equipment that have sold to smaller labs. is in the very specific case in quarter one, we had problems with delivering some of the system because of the supply chain and unavailability of certain electronic components, which is interesting because so far is the only area in the company where we have experienced supply issues with this component. One remark when it comes to the LTG growth, if you remember that last year we launched the IntelliFlex, which is the new platform that was developed by Luminex for this sector, and the adoption of this platform by partners is far greater than expected. so we had a solid q1 and we have a strong funnel for quarter two and quarter two so which makes us optimistic about the performance of this business moving forward now if i make some if i may make some comments when it comes to different geographies and i want to start with the us as you know Today, the U.S. is the primary market for the company. It does represent 50% of our overall revenues. And if I look at the strategy in the U.S., we started as Diasorium in 2019, really investing in a capillary cell force or a bigger cell force to try to increase our presence in the hospital market. And we now are, we went through COVID and certainly COVID did somehow help in the hospital penetration at the time when serology, there was a hype of serology in Q2 next year, last year, but by the same token also it slowed down the installation of some of the systems simply because hospitals were very busy and so in certain cases they could not literally see our technicians in the lab. But overall, as a combination of POS and NEC, we made our plan. And the idea was to create additional 150 hospitals in the new hospital in the U.S., which we are perfectly in line to achieve by year end. It's very clear when it comes to our product portfolio today as a combination of what is available with the liaison access, the quantifieron, and now the very exciting MIMED opportunity, which is clearly a hospital test. It is very clear that what we are reflecting is on further investment in our ability to reach this segment of the market, which for us is extremely promising as a combination of certainly better pricing and better and much, much interest in tests like, again, the MIMET and the upcoming on the liaison test, quantifier on test for Lyme with high clinical value, right? So my, today, What is really paying off is the fact that the company continues certainly to develop its commercial presence, but we are expanding very rapidly into the hospital segment, and the growth you see in the U.S. is driven by a combination of success in commercial lab, but also, again, a set expansion in this segment. This is very important because the next generation platforms that are coming on the molecular side, which is the liaison NESS and the liaison PLEX, have been designed for that segment. So it all fits perfectly. So you have a funnel of product for that segment, and you have expansion of the customer base and expansion of infrastructure to serve that segment. When it comes to Europe, which today is 33% of revenues, we have solid high single-digit growth. We have discussed a few times that for us, Europe clearly is a mature market. We continue to fuel that market with products that we continue to bring to that market. QuantiFerron was the last one. And NEMED now has been launched in Europe. clearly is not contributing yet to revenues because we are in a phase where we have clinical evaluations which are happening in the major hospitals. The initial response from the hospital and the clinicians is very positive and we are actually running some regional clinical studies because as you know every country in Europe fortunately or unfortunately needs their own opinion leader to bless the algorithm and the product. So there is a continuous effort in 2022 in Europe that is going to be mainly focused in generating this clinical data and promote, again, the adoption of this product in the hospital segment. Now last but not least is China. China is complicated. China today represents around 5% of revenues. And so I would say that very gladly we have diluted the Chinese risk. China short term, we see it as a burden and not as an opportunity, as a consequence of declining prices, as an effect of these very large tenders, provincial tenders that now are in place. and our driving price down, on average, 30%. The second effect, clearly, is the fact that there is a priority, official or unofficial priority, call it as you like, to the local manufacturer versus imported products. So we believe that, as said already in the previous quarter, we continue with the strategy we have. We continue with the setup of the manufacturing site. where clearly we have been hampered by the COVID, with the shutdown of COVID in the last months or so. We are in Shanghai, and in Shanghai, as you know, everything has been locked down, so we cannot move forward with what we were foreseeing needed for the manufacturing site. But, you know, we believe that this situation is temporary, and we will set up, we'll continue the setup of the manufacturing site, The overall investment in China is over 30 million euros that we have forecasted to get there. And because we believe that a 1.4 billion people market has to be served. And so the short-term view is negative. I believe that mid-long-term view has to be positive, especially for a company like DioSorin, which is thriving off some of the specialty products. Last but not least, I would like to make a comment on the announcement about the fact that we finally found a president for the Luminex business, so Angelo Arago, that is an American executive from Chicago. 30 plus year experience in med tech space where he has been working in imaging and first and then ophthalmology and later and has a very specific experience on the issue of the decentralization and the point of care in the point of care setting and that to us was key because Angelo You know, moving forward, we'll continue to serve the hospital market, but that's traditional in our sense, because we've been there with our products for a long time. But by the same token, we need to tackle the decentralization mode and get our products to the POL and to the pharmacies. And so, Angelo, Angelo's experience is very much welcome to help us out to set up the strategy for the launch of the news on this. Okay. So, PG, please go ahead with numbers, and then we're going to move to the Q&A session.

Thank you, Carlo. Good morning and good afternoon, everybody. In the next few minutes, I'm going to walk you through the financial performance of DSR during the first quarter of 2022. Consistently with what was done last quarter, and in order to better understand the performance of the business, I will refer to adjusted P&L items. Therefore, sterilizing the impact of the following Luminex deal-related elements. So, the one-off acquisition and integration costs, the effect of the purchase price allocation that we have covered last quarter, the cost of financing, and lastly, the fiscal impact of all of these components. In the press release available on our website, we are providing a line-by-line bridge between adjusted and IFRS items. So that is usual, I'd like to start with what I believe are the main highlights of the quarter. So Q1 2022 total revenues at constant exchange rate grew by 28%. The immunodiagnostic franchise, ex-COVID, grew by 7%, driven by a 13% increase in the CLIA-X vitamin D franchise, which, as Carlos just said, has been partially offset by the expected slightly negative performance of vitamin D, ELISA, and instruments business, according to the new reporting structure. So the molecular business ex-COVID growth is mainly driven by the inclusion of the luminex in the perimeter of consolidation on top of all of those elements that carlo covered whereas the licensed technology franchise variance year over year is obviously all due to the different perimeter of consolidation but carlo covered the performance of the business so i believe we should be fine there kobe 19 sales did better in the quarter than originally expected when we set the 2022 guidance mainly because of the impact of the Omicron variant, and those sales decreased at constant exchange rate compared to 2021 by 10% of €10 million. Q1 adjusted EBITDA records an increase at constant exchange rate of 10% compared to last year, with a margin of 42% of revenues. The margin has been positively affected by the COVID sales of the quarter and by a positive one-off of about 2 million euros that we booked in the other operating expenses. Lastly, we keep confirming our ability to generate a very healthy free cash flow, 116 million euros in the quarter, with an increase compared to Q1 2021 of 36 million euros, or 46%. The net financial position is negative for €860 million, with a ratio over 2021 adjusted EBITDA of 1.5. Let me now please go through the main items of the P&L. Total revenues at €358 million grew by 34% at current exchange rate, or 91 million euro compared to last year. Luminex products revenues in the quarter amount to 97 million euro. COVID revenues amount to 97 million euro as well, vis-a-vis 102 million euro of Q1 2021. The quarter has seen some 16 million euro FX tailwind, mainly driven by the USD appreciation. Considering 2021 USD-EUR exchange rate and the current trend, I think it is fair to expect that this positive tailwind will continue for the remainder of 2022. Q1 2022 adjusted gross profit at €237 million grew by 28% compared to last year. closing the first quarter with a ratio of revenues of 66% vis-a-vis 69% of the same period of last year and in line with the Q4-21. The difference with Q1-21 is mainly driven by the inclusion of luminescence in the scope of consolidation. This variance is in line with our expectations and modeling and is reflected in 2022 outlook. Adjusted operating expenses at €109 million grew by 61% compared to the same period of 2021, with a ratio of revenues of 31% vis-à-vis 25% of last year. This increase is in line with our expectations, is once again mainly driven by the different perimeter of consolidation. We are expecting synergies to reach the level discussed during the investor day back in December as the integration process will move forward. Adjusted other operating expenses are better than last year by 1 million euro. As said, this difference is due to a favorable one-off of about a couple of million euro that we booked during the quarter. As a result of what I just described, the adjusted EBIT at €126 million, or 35% of revenues, has increased compared to 2021 by 10% or €11 million. The adjusted interest income and expenses at €2 million is substantially in line with last year. Adjusted tax rate at 23% is in line with 2021 as well. And the net result at 96 million euro, or 27% of revenues, is higher than previous year by 9 million euro, or 11%. Lastly, adjusted EBITDA at 150 million euro, or 42% of revenues, is higher than 2021 by 16% of 20 million euro. The variance at constant exchange rate is positive by 10%, with a ratio of revenues of 42%. The difference with Q1-21, which closed at 49%, is slightly better than our expectation and almost entirely driven by the change in perimeter of consolidation. Lastly, let me move to 2022 full-year guidance. As usual, as previous year, constant exchange rate. Because of the peak of COVID sales during the quarter, mainly driven by the Omicron variant of the virus, the outlook of the year has been increased. Specifically, the updated guidance is calling for total revenues substantially in line with 2021, between minus 2% and plus 1%, to be precise, and revenues ex-COVID to grow by about 24%. And COVID sales between €150 million and €180 million. Adjusted EBITDA margin between 35% and 37%. So before concluding, please remember that our financials are highly exposed to U.S. dollar, as we said, and even more so now that North America represents about 50% of the total group sales. Therefore, as a rule of thumb, consider that for every one cent movement of the dollar against the euro, our revenues move by about six, seven million euro on an yearly basis. Now let me please turn the line to the operator to open the Q&A session. Thank you.