DiaSorin S.p.A.

Good afternoon. This is the Coruscant Conference Operator. Welcome and thank you for joining the Diasar in third quarter 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.

Yes, thank you, operator. Ladies and gentlemen, good afternoon, and welcome to the 483 conference call result. As usual, I'm going to shed some colors on... the quarter results in terms of the top line and the main fundamentals of the business, and then our chief financial officer is going to take you through the numbers. So let's start from the top line. I remind everybody I'm going to comment on a constant exchange rate. As you know, otherwise, you know, all the numbers are heavily affected by the Evaluation of the dollars. So at constant exchange rate, the business in the quarter performed at minus 14% versus last year. That is according to expectations. And the reason for the decline is attributable to the COVID, as you have seen from the numbers. Compared to last year, in the quarter, we are $15 million down, and we are roughly $90 million year-to-date. If we look at the business ex-COVID, the business grew 2% in quarter three. And it's a combination of several events. Although there are a couple of things that I would like to highlight. We had two clear headwinds when it comes to the quarter results. The first one has to do with the fact that in two geographies, and mainly China and the Middle East, we had a performance which was heavily affected by the current situation. So China continues to be a drag. And as far as we are concerned, the main effect today is with lockdowns. So we see that... In the provinces where we sell, we continue to see a strong effect on volumes. And then in the Middle East, because of the current situation in Iran, we had to postpone some of the shipments. By the same token, we continue to see the effect of Russia. We were exporting until last year, and the export has been reduced to some very small amount. If we take away these effects, then immunodiagnostic in the quarter would grow 6%, year-to-date 7%, so this would be in line with companies' expectations. Now, if we look at the business in immunodiagnostic and we look at North America, North America, as you know today, does represent the majority of our business. Immunodiagnostic is growing very strong, 10% in quarter three, 12% year-to-date. And if for one second we take away the vitamin D franchise that, as you know, has been declining historically for the soaring, the rest of the clear XD business in the U.S. grew 18% in quarter three and 25% year to date. What's the reason behind that success of immunodagnostic in North America, as we discussed many times, is the hospital strategy, where there is a segment where diasorin was traditionally under-penetrated, and because of the effort that we put in at the beginning of the pandemic to in putting together a distribution footprint in terms of more rats and more territories, and this clearly continues to pale. Today, we have, until understanding the effort, today, if we look at the available resources, market in terms of number of hospitals that we serve compared to the total market, we are below 20%. So we still have a very long runway in front of us in terms of opportunity to grow in North America. When it comes to Europe, Europe grew in neurodiagnostic 4% in quarter three and 5% year to date. So as you know, notwithstanding the current situation, economic situation in Europe. So the business is a stable business. We continue to grow. If you look at just the growth of the market in Europe, we estimate today the market grows at 1%, 1.5%. So we continue to grow the market. The strategy is always the same. It's specialties and the margin contribution certainly is extremely positive. Now, if we look at the rest of the world, is quarter three is 7% below last year. And this is exactly where we have the two headwinds that we were talking before, so export, Middle East, and China. With the exception of these two geographies, if I take everything else, including countries where the company made an investment in infrastructure and infrastructure I'm referring to India, for example, or Mexico or Brazil where we have our local team. Just as a reference, India in the quarter grew roughly 20% and in the other geographies we are growing high single digit or low double digit. So I think specifically the problem we have seen in this quarter has to do with the two geographies and the events we've been talking about. Now let's go to molecular diagnostics, 7% growth in quarter three. That is a good performance for the reassuring molecular assays. Again, we are talking about growth X COVID and growth has been driven by COVID flu. Plus it has been driven by the fact that when it comes to the very gene and the multiplexing business, we have that business. notwithstanding it's based on technologies which had been launched over 10 years ago is holding up, waiting again for the launch of the liaison Plex, which is going to be the new driver for growth in the segment. When it comes to what we call licensed technology, here is where in the quarter for the first time the business actually declined significantly 4% in the quarter, but there is a reason about it, which is there is a reason for this decline, which has to do with the supply chain. On the instruments that we manufacture, as you know, the business that we call licensed technology is a combination of consumable revenues, royalties that we get from partner distribution and instrument sales. As far as this business, traditionally the growth is high single digit, low double digit. And if I look at the royalty component, which is an indicator of what the partners are doing with our consumable and the consumable growth, the growth is very strong. Unfortunately, when it comes to the instrument component of this business, because of the current supply chain issues and unavailability of certain parts, In quarter three, we built less instruments than we have orders for, and we are estimating that the gap today is between five and eight million euros in terms of systems that we should be delivering, but as we speak, they are held in the quarter waiting for some of the parts to be completed. So this explains why, for the first time, licensed technology is not a growth component for the business. But again, it has nothing to do with the fundamental of the business. Again, it has to do with the supply chain issue. But this also explains why margins are very strong in this quarter. notwithstanding the fact that we are missing some of the revenues. And this is to do with the margin differential between consumable and royalties and instruments. As you can imagine, on instruments, the gross margin is relatively modest, whereas on consumable and certainly royalties, the margin contribution is very high. So the fact that that component of the business goes well explains why the overall margins of the company are I would say very nice in the quarter. Now let's talk about COVID. COVID continues to decline. It's roughly 90 million below last year. Of the 90 million, above 50 million, exactly 53 million is in quarter three. The decline versus last year, it is expected, as you can imagine, because we don't sell the antigen test, the rapid test, which is a market that today is declining, but not as much as molecular or certain serology. Although the decline we see is better than what we expected. So the business is still holding in certain key strategic geographies, and this is why we're actually performing better than our expectations. We still don't see in these numbers any effect on differential diagnosis, where we expect to see pickup in volume in Q4 and Q1, but the jury's out, as we've discussed many times. So we're going to be able to comment on that, I would say, when we're in the mid of the influenza season, which is around the December time frame. A couple of things that I would like to discuss have to do with margins. As you've seen, margins in the quarter are strong and actually better than what we expected. And what is very important to note is that despite the headwind due to the inflectionary effects that everybody, I believe, is experiencing, is facing these days. I think in the last quarter we quantified the effect of inflation around 15 million annualized. We revised this effect slightly to 17 million and mainly due to the effect of the cost of electricity in the European plants. It's still marginal, vis-à-vis what you see in other industries, and certainly manageable from a DSR perspective. By the same token, what's working good for us is the synergies that we are extracting from the consolidation of Luminex within the SORIN. As we have discussed already previously, the program is in line with the expectation, and I would say slightly better than we scheduled. The other element, which is very important these days for us, is that all the time and money and education spent in the last few years in terms of education improving the manufacturing cycles in our manufacturing sites, especially when it comes to the immunoassay now clearly coming to fruition. So notwithstanding our situation where there is price pressure, we continue to be able to hold our margins because of the efficiencies that we we've been driving through manufacturing. And that, let me say, makes me quite comfortable even in these difficult times. It's a combination of increasing costs and decreasing prices. A couple of notes when it comes to two key programs. The first one, MIMET, as you have seen, there has been a recommendation published vis-à-vis MIMET. The U.S. CMS reimbursement, the proposed reimbursement is around $250, which is extremely high for an immunoassay. And I believe that what is extraordinary about the proposed reimbursement is that this has nothing to do with the technology per se, but it has to do with the benefit of the algorithm. vis-à-vis the way patients are actually accepted and treated when they come to the emergency room. So that's very positive, and I believe MIMED as a company did a fantastic job in educating the regulators on the value of the assay. So that certainly will support and facilitate the marketing of the product in the U.S., The second element which makes me very proud, in a sense, is the fact that BARDA just announced that they have decided to fund substantially the development of the Elias of Mess. And the contribution of BARDA is $31 million, which... What is very interesting is that these funds are not coming from the COVID fund. As you know, the emergency COVID funds pretty much are over. This is coming from the strategic funding, which means that this reflects the recognition of BARDA, the liaison platform with its characteristics of being easy to use, fast PCR response, and can be disseminated in the territories So the capillary system is a key and strategic technology for the U.S. government, and that, as you well know, is not simple for a non-U.S. company. So that, I think, is a very interesting and encouraging side vis-à-vis the acceptance of this technology. So now I'm going to leave the podium to the speaker. Thank you, Carlos.

Good morning and good afternoon, everybody. In the next few minutes, I'm going to walk you through, as usual, the financial performance of PSO during the first nine months of 2022. And I will make some remarks on the contribution of the third quarter. Let me please remind you that consistently with what we did over the last course, we In order to better understand the performance of the business, I will refer to adjusted P&L items, therefore sterilizing the impact of the Luminex deal-related elements. In the press release available on our website, we are providing a line-by-line bridge between adjusted and IFRS items. Please also remind that we completed the Luminex acquisition in July 2021, so starting from this quarter, we have the same perimeter of consolidation. So that, as usual, I'd like to start with what I believe are the main highlights of the period. 2022 year-to-date total revenues at constant exchange rate grew by 10% or €82 million vis-à-vis 2021. as we saw as a combination of a decrease in COVID sales by 32%, more than offset by an increase in the ex-COVID business by 171 million euros. The neurodiagnostic franchise ex-COVID, at comparable effects, grew by 4%, driven by an increase in the CLIA-XD business just short of 10%, in spite of the weak result in the Chinese market that Carlo just discussed about and the headwind we faced in the export business. Partially upset by the negative performance of vitamin D and the increase in 4% of the immuno business and the ELISA franchises. The molecular business ex-COVID growth is mainly driven by the different perimeter of consolidation and by a very good performance of DSRI molecular reagents. The licensed technology franchise variance year over year is mainly due to a different perimeter of consolidation in the first half of the year, partially upset by the slowdown in the third quarter that Carlo just commented. Q3 total revenues at constant exchange rate decreased by 14% of €47 million as a result of the anticipated decrease in COVID sales, partially offset by an increase of the ex-COVID business by 2% of €5 million. We should be able to recover most of the gap in the licensed technology business that Carlo has discussed and the new expert business by the end of the year. These elements... the one that we just saw, explain the soft increase in the immuno business and the decrease of the licensed technology franchise, whereas we saw the molecular franchise increase by 7%. Year-to-date adjusted EBITDA at €391 million records an increase of €8 million or 2% compared to 2021, with a margin of 39% in revenues compared to 45% of 2021. The expected decrease in marginality is the result of the combination of a diluted gross profit, mainly driven by different product mix and the lower operating leverage, driven by the inclusion of Luminex in the perimeter of consolidation and the very high COVID sales of 2021. Both these elements are in line with the assumptions we made at the time of the Luminex acquisition and are embedded in the outlook shared during the Capital Market Day and the updated guidance we've just released today. Q3 2022 adjusted EBITDA margin at 37%, or €122 million, records a decrease towards Q3 2021 of €17 million, or 12%. The variance is mainly driven by lower COVID sales, 47 million euros in the quarter, to be precise, and as a consequence, a lower operating margin. We keep confirming our ability to generate a very healthy free cash flow. 150 million euros yesterday to an increase compared to last year of 28 million euros, or 13%. As you might remember, when we released Q1-22 results back in May, we announced that the ESR and 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. As of the end of September, within that program, the Australian bought back about 1.3 million shares for an equivalent amount of about €160 million. On a different note, and before moving to the main items of the P&L, I'd like to provide an update on the impact on the inflationary pressure on the Australian total cost base. We saw that number was 15 million euros back when we closed the half year. And at the light of the recent increases in energy costs, that number has been increased to 17 million euros. Now, moving to the P&L items. September year-to-date total revenues at 1,012 million euros grew by 18% or 153 million euros compared to last year. Luminex products revenues in the period amount to €277 million, vis-à-vis €91 million in 2021. COVID revenues amount to €201 million, vis-à-vis €276 million, therefore recording a decrease of €74 million. The first nine months of the year have seen some 71 million euro FX tailwind, mainly driven by the USD appreciation. Considering Q421 USD-euro 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. and we will end up with a positive FXF sector, full 22 over 21, just short of €100 million on the top line. September year-to-date adjusted gross profit at €672 million grew by 16% compared to last year, closing the first nine months with a ratio of a revenue of 66% compared to 68% of the same period of 2021. The full year contribution of Luminex and the different product mix are the main drivers of these variants. Q3 22 adjusted gross margin at 68% is better than last year by 2 percentage points. The overage, in spite of lower quarterly revenues, is driven by a different product and geographic mix and some one-off positive elements that we had in the quarter. I believe, though, it is important to underline that in spite of the inflationary pressure we discussed about, we have been able to put in place cost containment measures and initiatives that have allowed us to preserve our margins. September year-to-date adjusted operating expenses at €345 million grew by 42% compared to the same period of 2021, with a ratio of revenues of 34% vis-à-vis 28% of last year. This increase, once again in line with our expectation, is mainly driven by the different perimeter of consolidation and the much higher COVID sales in 2021 that generated back then a very material operating leverage. A negative FX effect and higher travel costs mainly drive Q3 2022 adjusted operating expenses increase towards last year. of €13 million or 12%. I believe it is important to underline that net of the FX effect and these additional travel expenses, we would have actually added the case in OPEX in spite of the inflationary pressure we just discussed about. Year-to-date other operating expenses are substantially in line with last year, and as a result of what I just described, September year-to-date adjusted EBIT at €319 million has decreased compared to 2021 by 3% of €11 million. September adjusted interest expenses at €4 million are lower than last year by 30% of €2 million, mainly because of better yield on our cash investments. whereas the adjusted tax rate at 23% is in line with 2021. The adjusted net result at €244 million, or 24% of revenues, is lower than the previous year by €4 million. Lastly, the year-to-date adjusted EBITDA at €391 million, or 39% of revenues, is higher than last year by 2% or €8 million. The variance at constant exchange rate is negative by 5%, with a ratio of revenues of 39%. Let me now move to the free cash flow and the net debt position. In the first nine months of 2022, as just said, Gessorin generated €252 million free cash flow, so €28 million better than last year. At the end of September 2022, the net debt of Gessorin was negative for €1,000. €12 million, vis-à-vis negative €986 million at the end of 2021. The difference is the result of very strong cash generation, which has been more than offset by the following items. The share buyback program for €160 million, €90 million of negative translation FX effect, and €56 million dividend to shareholders. Lastly, let's now move to the updated 2022 full-year guidance, as usual, at previous year constant exchange rate. The guidance has been increased as follows. Total revenue to grow between 2% and 3%, with the next COVID business growth at about 22%, and COVID sales at around €225 million. And the adjusted EBITDA margin between 38% and 39%. The increase in the guidance for the top line is mainly driven to better COVID sales, whereas the weak performance of the Chinese market is the core driver of the revision of the ex-COVID sales. Now let me please turn the line to the operator to open the Q&A session. Thank you.