DiaSorin S.p.A.

Good afternoon. This is the Coruscant Conference Operator. Welcome and thank you for joining the Diasorin First Half 2022 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.

Thank you, operator. Ladies and gentlemen, good morning and welcome to the H1 conference call. I'm going to make the initial remarks on the top line by geography and by technology, and then I'm going to make a few comments on some of the major events that happened in the quarter, and then I'm going to leave to our CFO the commentary on the numbers. So starting from the technology, I will discuss immuno, I will discuss molecular, I will talk about licensed technology, and last but not least, I will talk about COVID. When it comes to immuno, which I remind everybody, it includes our CLIA reagents as well as our residual ELISA business. The franchise in H1 did plus 5%, which is in line with our expectations. If we look at CLIA, so we exclude the ELISA franchise that, as you know, is a cash count for us and is declining significantly, CLIA alone grew 7%. If now I exclude from CLIA the vitamin D franchise, which also, you know, it's a very profitable franchise, but not growing any longer, if not slightly declining. Now, if I look at CLIA standalone, the growth is XD, growing double digit. And this is fundamentally telling you that when it comes to the immuno-SA group, franchise for DioSorin, it continues to perform strongly following the usual strategy that we discussed many times, which is the positioning of DioSorin as a specialist and on the specialty products that we have been launching in the last few years, and we continue to launch moving forward. Now, if you look at the performance by geography, what is remarkable is is that North America today, which, as you know, represents 50% of our overall revenues, is by far the number one market for the group. In North America, the growth of CLIA is around 30% if we exclude the vitamin D. That is remarkable. and it is driven by the hospital strategy. I remind everybody that starting from 2019, the company put together a strategy, a combination of diversification of revenues from the original footprint we had, which was centered around the commercial labs and trying to penetrate the hospital market. COVID hit. And during COVID time, on one side, we got some help at the beginning because there was a lot of interest in serology by the hospital market at the beginning in 2021. Then COVID became more of a problem because of the availability of hospitals to accept new technologies in the USA because they were very busy with COVID. But all said and done, notwithstanding all of this, we are on the verge of delivering our 3S plan, which was calling for the creation of 150 new hospitals in the U.S., which was achieved. And this was achieved mainly driven by a combination of menu. Certainly, our gas and terology panel and the quantifier have been driving this strategy. In this achievement, we still don't see fully the contribution of the Luminex acquisition, and this is because we spent... time at the end of the second half of 2021 and beginning of 2022 in rationalizing our commercial sales force. As we discussed in the past, the Luminex business, which is a molecular business, was primarily centered in the hospital market. And we expect moving forward that our penetration in that market will accelerate thanks to the fact that we're going to be able to cross-sell across the different customer groups in the hospital market. And so at the end of the story, what is very important for us is that in our number one market, which pays, as I've commented many times, for innovation, it is recognizing the specialists that we are. We continue growth, and I believe that we have a long, long runway in front of the company. So North America, all good and exceeding expectations. When it comes to Europe, Europe, as you know, for us, does represent 30% of revenues. If we look at Korea, we have more than 2,000 systems already installed. We have a good penetration in the markets. So Europe for us is more steady single-digit growth, which we continue to see. In the first half, we are actually high single-digit growth for CLIA, again driven by fundamentally the same strategy, menu-driven. We initiated also the launch of the XS. Even if I remind everybody that the XS system was designed primarily for the Chinese in the U.S. market, notwithstanding. So we have now over 100 excess placed, and now we start to see traction in the U.S. market, where we got approval on the excess of the – sorry, getting approval very shortly of QuantiFeron, also on the excess, and also we expect MIMED to be validated by the fall on the – on the same platform. When it comes to Europe, again, solid growth. Europe for us is a geography very well penetrated that continues to contribute to the growth of the company. Let's move now to Asia. When it comes to Asia, we continue to see problems in China or China lagging behind. The major problem with China is to do with the fact that we have an installed base of over 800 systems in China, which are primarily placed in large urban centers. And every time – so Shanghai is a good example. We have a good chunk of business in Shanghai – And every time there's a lockdown, and the lockdown typically, it happens in the urban centers, we really suffer from the lockdown. And this is what we continue to experience. So China continues to, revenues of clean air continue to decline. The primary driver, again, is volume related. So as soon as China is stabilizing when it comes to the COVID policy and lockdowns, We believe that the business will stabilize, but still in quarter two, unfortunately, China is declining. I remind everybody, though, that today China overall represents around 3% of total revenues. So this effect has been completely de-risked from a group perspective. Now let's move to molecular. When we look at the molecular franchise, let's first discuss molecular ex-COVID, otherwise it gets very confusing. And let's start from the Virgin One business, which is the multiplexing business. It is a very resilient business, and we have experienced double-digit growth. which is driven by the fact that there is a stable business when it comes to the blood culture, and there has been a positive effect, clearly, on respiratory because of the COVID situation. So, overall, we have around 700 VIRGIN users. Certainly, some of the accounts are migrating, but by the same token, this is overly compensated by the fact that we continue to see a positive effect on volume. So the franchise itself is growing nicely. When we look at what we call molecular reagents singleplex, which primarily has to do with technology, all the diasorin MDX technology, the growth is substantial. On the reagent side, we are up almost 25%. And this is a combination of two things. First, recovery of testing volume, which certainly during COVID we were affected because we are selling here high profitable but highly specialized products. So now we are back fundamentally to all the elective surgeries and everything else that is using our products on one side. But by the same token, we see that there is a continuous, there's an acceleration, in my opinion, in the adoption of molecular technologies. I think I did comment previously, the fact that one of the benefits of COVID is that there has been a dissemination of molecular platforms, even in smaller institutions that are, We're not using molecular before. And today, this is the incremental volume that we see on our install base. So there is a very nice growth of that business, which is also a very profitable business. Where we are suffering in molecular, which is, I think, what is happening to everybody in the industry, is on the instrument revenue. This is due to the fact that during the COVID time, customers, because of the emergency funding, were buying instruments, and so we had high revenues in 2020 and 2021. On the instrument side, we typically did not carry high margins, but they were posted as revenues. When it comes now to post-COVID in 2022, we go back to reagent rental. And so on one side, we see placement of systems, but we don't get the revenues because we go back to the reagent rental model. So overall, the molecular franchise as COVID is growing very nicely for DSRN. Now, let's look at the third leg, which is the license technology. I remind everybody that this is a combination of two different product lines, and we have flow cytometry, which represents around 20%, 25% of the total business. And then we have the licensed technology business, which has to do with the partnership that Luminex and now Diasorin has with all the primary players in the biopharmaceutical and bioanalytical business. The business overall, I remind you, that is on an annual basis for 2022, around $210 million, and we are training to hit that target because our partners are really growing nicely, I believe, driven by the fact that there is a flow of funding in the biotechnology, biopharmaceutical that is providing It is increasing volume consumption of these reagents. And this is notwithstanding the fact that in this business where 25% of the business has to do with instrument sales to the partners, we are certainly experiencing some issue in terms of shortage of parts. Notwithstanding the fact that there is a shortage, And so we are limited in our ability to supply certain instruments. Because of the mix and the ability to carefully plan the shipment of the different systems, we are able to make that anyway the top line, which is a strong effort in today's reality of the supply chain and especially of electronic components that, as you know, is pretty much a plague for the business. I see now we have one year of Luminex under our belt and we've been re-establishing some of the strategic relationship with the partners. I honestly am very optimistic about the opportunity to expand the business in the future with the partners through collaboration in developing content and or platforms. Now that we understand the business better than clearly before, I believe that it is a very important leg for diasporing. It's extremely profitable, and I think it's very well positioned strategically. Now let's talk about COVID. You have seen that we have decided to increase our guidance to 200 million euros of COVID revenues annually. for 2022. I believe that what is not, although I think that every player in the industry is recognizing the fact that there is still uncertainty about COVID, but there is more certainty to the use of COVID and the use of molecular technology versus the antigen testing. And it is very clear today that molecular testing, which is considered more expensive, it is utilized for certain applications. For example, hospital admission typically is done on a molecular test follow-up. A patient is done on a molecular test and so forth. However, I think what we have noticed is that there is a very resilient business, especially for the business that we have today with our platform, and I think it has been highlighted also by other companies that play in that segment of the small equipment. This equipment and this testing in small, mid-sized hospitals, which is where today our install base is, is resilient. And we continue to see on a monthly basis now we are experiencing a volume that stays constant. What is very important to understand is that COVID today, which used to be a seasonal disease, you've seen by the current trends, is becoming non-seasonal. So it's a respiratory disease, not seasonal. And I honestly believe that there is an opportunity for future growth of this business that is not indicated in our guidelines. which has to do with differential diagnosis. And if we look at what is happening today in Australia, where we have the current respiratory influenza season, we see two things. We see a very strong influenza season, indicating that also in the Western Hemisphere we are going to have the same effect coming the fall. But most important what we see is the co-infection, which is now expected. It's called fluorona and fundamentally indicates the fact that when patients are going to show up in the winter with respiratory infection symptoms, not only is it important to differentiate diagnosis, but also it's important to understand if there is a co-infection because it does guide the treatment differently. So it's going to be very interesting to understand what kind of protocols hospitals will adopt for differential diagnosis. As said, our projection today is not really indicating or is not including this potential, and I believe we're going to be able to quantify this potential better at the end of quarter three. So when it comes to COVID, in summary, resilient business, we have 1,500 systems today that continue to run COVID. We lost some business, but relatively small, in very large accounts where initially they were using the box because they needed multiple suppliers because of volume. But now with more of a high-throughput system, clearly we lost that business, which is did correspond to 15%, 20% of our customer base, but now the remaining customer base is, again, extremely resilient, okay? And my view is that at least for 2023, we are going to have COVID testing and the use of COVID, which is different from what I think the whole industry has projected. Just one year ago, we were looking at how long COVID is going to stay with us. Now, let me move away from revenues, and let me comment more on some of the facts that happened in the quarter. First, and I believe it's very important for us, is that we got finally approval in the U.S. of the NEMED test. It is very relevant because as discussed many times, MIMED is a test that is clearly performed in the hospital segment. The hospital strategy is the key strategy for the U.S., so this essay in the U.S. is key to the future strategy. NEMED is working in the U.S. in the promotion with the medical doctors and is also working on obtaining the reimbursement. And so this approval, which came unexpectedly in a sense because we already didn't know how long the FDA would take, but it took a relatively short time, six months, now is putting us in a very good position to gain approval from incremental revenues from the product. The second comment I would like to make is to do with integration and Luminex. The integration is proceeding as expected, and synergies are in line with the goal that we have outlined during our investor meeting, the five-year plan meeting, which I remind everybody was to achieve $55 million in savings by end of 2023. So running right in 2024, we are in line with the goal. And so I feel very comfortable about the savings that we promised as a result of this acquisition. And let me also remind you that savings does not necessarily represent, does not necessarily mean cost savings. but it means also a better way to do business because one of the problems that we found in Luminex sometimes is that it was very convoluted in a way it was managing the business. So streamlining some of the processes really improved the productivity and therefore allowing us to serve a growing business with a lower cost base. The Third element that I would like to discuss has to do with the fact that inflation, and I know that our CFO, Pier Giorgio, is going to get more into the numbers, but let me just give you a couple of remarks. Inflation so far for diasporan has been manageable. I would say we have calculated that on an annual basis it will represent an increase of the cost base of roughly 15 million euros, which certainly is an increase compared to previous years, but if you look at the cost base of diastole is less than certainly other industries or other competitors. Primary driver for the inflation, for the soaring, is the logistic cost, which does represent almost a third of this one. And then the second element, which is important for us, is with the cost of labor inflation, especially in the U.S. market, where we know there has been shortage of people and it clearly demands higher salaries. Okay? So overall, yes, there is an inflationary effect on our numbers. We already have almost half of the $15 million in our H1, but it's certainly manageable and for the time being is not an area of concern. Last but not least, we finally have management in place in Luminex. Our president joined the company. Now it's been three months with the company. Angelo is with us financially. And he's taking the helm of the company. And I'm very happy about this because I believe that Luminex has a ton of opportunities in the future in terms of technology it carries, in terms of products, in terms of opportunity to improve profitability. And the key was to have senior leadership in place. Now we have it. And welcome, Angelo. And... I'm very comfortable with the fact that we're going to be delivering growth of this business in the next few years. Now, I'm going to leave the rest of the financial comments to Giorgio and then start our 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 half of 2022. and I will make some remarks on the contribution of the second quarter. Let me please remind you that consistently with what we did over the last course, 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 still, so to say, related elements. You want to offer acquisition and integration costs, the purchase price allocation, the cost of financing, and lastly, the tax impact of all of these components. The press release is available on our website. We are providing a line-by-line bridge between adjusted and IFRS items. So that, as usual, I would like to start with what I believe are the main highlights of the period. H-122 total revenues at constant exchange rate grew by 25% or €129 million vis-à-vis 2021. The immunodagnostic franchise ex-COVID grew by 5%, driven by a low-dense increase in clear ex-vitamin D, partially offset by the expected slightly negative performance of vitamin D and ELISA. The molecular business ex-COVID growth is mainly driven by the different perimeter of consolidation and by the very good performance of DSR in molecular reagents. The licensed technology franchise variants year over year is all due to Luminex's contribution. Moving to the second quarter, the total revenue growth at constant exchange rate is 22%, and the business drivers behind these variants are very much the same discussed for H1N1. To be noted that Q2-22 growth ex-COVID is broadly in line with the result achieved in Q1-22. Now moving to COVID, sales did better than expected and recorded a decrease in the first half of the year of 21%, and in the second quarter of 35%, both variances at constant exchange rates. This is a result of a material decline of immuno-COVID sales, though in line with our expectations, and a better performance or a lower decline, if you wish, than anticipated of the molecular business, for all the reasons that Carlo just talked about. H1-adjusted EBITDA at €169 million records an increase of €25 million, 10% compared to 2021. with a margin of 39% on revenues compared to 47% of 2021. The expected decrease in marginality is the result of the combination of a diluted gross profit, mainly driven by a different product mix, and a lower operating leverage, mainly driven by Luminex contribution and lower COVID sales. Both these elements are in line with the assumptions we made at the time of Luminex acquisition and are embedded in the outlook shared during the recent capital market day and the updated guidance we have released today. We keep confirming our ability to generate a very healthy free cash flow, almost 140 million euros, Year-to-date, with an increase compared to 2021 of €13 million of 10%. As you might remember, when we released Q1 2022 results back in May, we announced that the Australian Board of Directors resolved to launch a share-by-back program for a total maximum of 1.5 million Treasury shares to support the potential settlement of the outstanding convertible bond and the management equity plan. Within that program, as of the end of June, the assuring bought back about 530,000 shares for an equivalent amount of 62 million euros. On a different note, and before moving to the main items of the P&L, I would like to provide some comments on the impact of the inflationary pressure on the assuring total cost base. If you remember during Q1-22 call with the market, we said this impact would be around 7-8 million euros on top of what already embedded in our 2022 budget projection. Now, everybody understands that this is a moving target and there is a certain degree of approximation. Nevertheless, we reviewed our assessment and, as just confirmed by Carlo, We confirm our estimated about 15 million euro impact in 2022 full year compared to 2021, of which 7, 8 million on top of our budget projection, as we said in Q1 2022. Therefore, 2022 inflation-driven increase compared to last year is less than 2% of the total cost base, or about 1% of the top line. This increase is mainly driven by energy costs, transportation, distribution, utilities, labor, mostly in the U.S., and some components of our reagents and instruments sourced from third parties. We have put in place several initiatives to contain this inflationary pressure, and therefore the overall impact on our margin will be muted, as confirmed by our review guidance. Now, moving to the P&L. H-122 total revenues at €685 million grew by 33% or €170 million compared to last year. Luminex products revenues in the period amounted to €185 million, in line with our initial assumptions. COVID revenues amount to €150 million vis-à-vis €177 million of 2021, therefore recording a decrease of €28 million, or 16%. In the first six months of the year, we have seen some €41 million FX tailwind, mainly driven by the USD appreciation. Considering H2 2021 USD-EUR exchange rate and the current FX trend, I think it is fair to expect that a similar positive tailwind will continue for the remainder of the year. H1 22 adjusted gross profit at €451 million grew by 27% compared to last year. closing the first six months with a ratio of revenues of 66% compared to 69% the same period of 2021 and in line with Q1-22. The contribution of Luminex and the reduction in COVID sales are the main drivers of these variants, which is in line once again with our expectations and modeling, and these are reflected in 2022 outlook. Adjusted operating expenses at €126 million grew by 66% compared to the same period of 2021, with a ratio of revenues of 33% vis-à-vis 26% of H121. This increase, once again in line with our expectations, is mainly driven by the different perimeter of consolidation and the higher COVID sales booked in 2021. that generated, back then, a very material operating leverage. Let me remind you that before Luminex acquisition and COVID, the Australian PORPX ratio was running at around 37-38%. We are expecting synergies to reach the level discussed yesterday as the integration process will move forward. H-122 adjusted other operating expenses are substantially in line with 2021. As a result of all of these elements, H-122 adjusted EBIT at €221 million, or 32% of revenues, has increased compared to last year by 3%. H-122 adjusted interest income expenses at €4 million are higher than last year by 60%, mainly because of commissions paid on the share buyback program and Luminex IFRS 16 impact. whereas the adjusted tax rate at 23% is in line with 2021. Adjusted net result at €169 million or 25% of revenues is higher than previous year by €6 million or 4%, whereas Q2 is below last year by €3 million or 4%. Lastly, H222 adjusted EBITDA at €169 million or 39% of revenues is is higher than last year by 10% or €25 million. The variance at constant exchange rate is positive by 4% with a ratio of revenues of 39%. Q2 adjusted EBITDA at €120 million or 37% of revenues is better than the same period of last year by €5 million or 4%. Let me now move to the free cash flow and the net debt position. In the first six months of 2021, Adiasorin generated just short of €114 million of free cash flow, which means €13 million better than last year, or 10%. I believe it is worth to underline that Q2 has been negatively affected by the build-up of some safety stock and some anticipated payments to Italian vendors that that we did to manage the eyes down of the Italian operating activities to our wholly owned new direct subsidiaries of Yesor in SBA, as communicated with several press releases over the last few months. Both these elements are temporary and will be absorbed in the second part of the year. At the end of June 2022, the net debt of the Australian was negative for €1,003 million, vis-à-vis a negative €986 million at the end of 2021. The difference has been driven by a strong generation of operating cash, as we said, which has been more than offset by the following items. Share buyback for about €65 million. About 63 million euro of negative translation effects mainly due to the USD denominated term loan to finance Luminex acquisition and about 56 million euro of dividends to our shareholders. Lastly, let me move to 2022 full year guidance. As usual, at previous year constant exchange rate because of the higher COVID sales during the first six months of the year mainly driven by all those elements that we just talked about, the outlook for the year has been increased. Specifically, the updated guidance is calling for total revenues to growth by about 2%, with the next COVID business growth confirmed at about 24% and COVID sales at around €200 million, adjusted EBITDA margin at about 38%. Before concluding, Please, as always, remember that the soaring financials are highly exposed to U.S. dollar, and even more so now that sales denominated in USDA represent more than 50% of the total group ones. Therefore, as a rule of thumb, consider that for every one cent movement of the dollar against the euro, the soaring revenues 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.