DiaSorin S.p.A.

Good afternoon, this is the Chorus Call Conference Operator. Welcome and thank you for joining the Diasoring Full Year 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 Diasoring. Please go ahead, sir.

Yes, thank you, operator. Ladies and gentlemen, good afternoon. Welcome to the year-end 2022 results call. As usual, I'm going to make some remarks about the business, and then I will leave the microphone to the CFO, to go through the actual numbers and guidance for next year. So, let's start to discuss 2022. As usual, I'm making comments at constant exchange rate to understand how the business did progress in the last year. As you know, we have, we're now used to represent the business looking at three different legs of the company, the immuno franchise, which is a roughly 700 million euro business, the molecular business, and the LTG business. The immuno franchise last year grew 3% with different results depending on the different geographies. We have North America that grew double digits, over 10%, as a result of the hospital strategy that I think we have discussed over the last calls. The initial strategy was initiated in the end of 2019, and the idea was to add resources to support deployment of systems in the hospital setting in the U.S. We achieved by the end of 2022 the target we had, which was to add 150 new hospitals And the program has been so successful that we decided to continue to invest in this segment. We hired 20 more reps in Q4 last year, and we gave ourselves the target to now add to the customer that we have in that segment over 250 hospitals in the next three years, as discussed many times. This strategy is fundamentally centered around certain specialty products that we have today available in the U.S. and we are adding in the next three years as part of the immuno-SA manual development effort. Clearly, we are talking about products like MIMED, like the Lyme disease, like new products we have in mind for gastroenterics. We are talking about high-reward specialty products, very differentiating, that clearly will generate revenues at high margin, but at the same time do require an investment in terms of resources to be allocated for the promotion and education, especially the education of some of the end users of these products, which are not the labs, but are the clinicians. When it comes to Europe, Europe grew 4% last year, which is in line with what we historically achieve in this geography. Remember, this is a blend of Europe and Italy, where we are clearly overly penetrated in the main regions, as discussed many times. Europe for us is a geography where we expect steady growth. where we have an installed base in hospitals of over 2,000 systems that do benefit by an add-on strategy. Clearly, the difficulty of Europe is that when it comes to the introduction of new products, a new product meaning those products where you need to educate the clinicians, you need an effort that goes country by country and not necessarily directed to a single country, a larger geography like the U.S. So we need to be extremely efficient choosy when it comes to the markets that are worth investing in because the effort quite often is not commensurate to the market opportunity. Anyway, Europe continues to be for the assorting of flagship territory, and we believe that 3%, 4% per year is fundamentally what we need to continue to guarantee and we will continue to achieve with our immune franchise. Now, let's go outside the rest of the world. The rest of the world actually declined 4%. And that's actually a combination of two different groups of countries. Countries that are doing very well for us, where we today, we work directly, and namely is Brazil, which grew high single digit. It's India that grew double digit, and Mexico double digit growth. And Australia, high single digit because we are highly penetrated. And a different group of countries where the business did suffer, last year, primarily in China, where our business declined 14% year-on-year as a consequence of declining volumes, the COVID situation, and the kickstart of some of the programs that are driving prices of certain products down by 30% compared to previous years. We also suffer in other secondary geographies like Iran and clearly Russia where we had business. Certainly in Iran was not marginal. That because of what happened in the last few months clearly got to a stop in the second part of the year. Overall, although the Immuno franchise I think is solid in terms of growth, in terms of success in those geographies where the company has invested, and in terms of prospective growth funded by the new products that we have discussed and we are bringing to the different markets. Now let's go to molecular. Molecular is a little bit more complicated because there is a change of perimeter that took place in 2021 with the acquisition of Luminex. So if I can make a general comment on molecular, which is for us over $200 million or euros of business, the business is stable. Notwithstanding the fact that, as we know, in the multiplexing side, we are offering products which are getting old and will be replaced by the liaison plex that I'm going to comment after this. The business is stable and certainly with an acceleration in Q4. where the business grew actually 18%, but that has been driven by the very strong respiratory flu season. That, as I think you've seen for all the companies that have been working in this space, was extremely strong in Q4, but by the same token, the flu peak was pretty much done and over with by December. So in Q1 of 2023, we expect a slow start in respiratory. Anyway, as I said, the business is a combination of the DSO in single-plex business, which continues fundamentally its path of single-digit growth, very profitable, and the Luminex business, which is fundamentally multiplexing, which again is stable depending on the respiratory, as we discussed. And then we have some legacy Luminex business like the Ares, which is lingering. And as we've been discussing, we are evaluating options moving forward to consolidating some of these platforms into existing the Asorium platforms. Let's move to LTG. The LTG, again, difficult to give information year-on-year comparison, again, because of change of perimeter in 2021. However, we've always stated that the LTG is a business that is very profitable and where we expect a growth of 7%, 8% per year by a single digit. We had a slowdown of the business in Q4 on the instrument side, I think, as we have discussed. because of supply chain issues with parts and electronic components. So if we dissect the LTG, we had 70% growth on the royalty side and on the bid business following the trajectory of our partners that continue to sell their products in the research market. And we had a In the second half, we had a decline on instruments, and not because we were missing orders, but because we were missing parts. I believe that comes H1 in 2023, this situation should be addressed and resolved, and we should then see our LTG overall franchise continuing to grow at historical rates. Now, let me move to the 2023, and we decided in order to make the numbers comprehensible, to discuss the numbers or the projection on ex-COVID, and I'm going to make a comment on COVID, and ex-respiratory. Because when it comes to respiratory, clearly there is a strong seasonal impact. And we made an assumption on respiratory, but truly we need to understand to see what will happen in quarter four than to understand the business impact, positive or negative, versus what we forecast. So if you look at the business, ex-COVID, ex-respiratory, we expect a growth of 4% to 6%, where we see the immunoassay franchise to continue to grow mid-single-digit. with a strong impact from North America, again, Europe, in the low single-digit numbers. And we expect China, starting from H2, to recover, so not to be a drag compared to last year. And also, you know, the effect of Russia and where we have sold in 2021 and not sold in 2022 is going to be washed away in 2023 in terms of comparison. And so we also expect the rest of the world business overall to contribute to the growth of the business. When it comes to the LTG, as said, we believe that the supply chain issue should be addressed by the end of H1, and therefore we expect high single-digit growth in line with past expectations. Let me also add a comment here. As part of our attempt to recover from the increase of cost due to inflationary pressure, we have, starting from beginning of 2023, we have increased prices of instruments and components to our partners following the pricing policy the partners applied to their end-user customers. And so we expect that there is going to be a low single-digit positive impact starting from Q2 and Q3 to the revenues that we get in LTG, selling, again, instruments and components to partners. So we believe that fundamentally the LTG will continue its trajectory and a margin – contribution improvement compared to 2022 due to the fact that we'll be able now to overcome certain cost increase. We had especially on spare parts and instruments. When it comes to molecular, we expect the business to continue to be stable, notwithstanding the fact that, as we will discuss, we're not going to see a contribution from Plex and Ness in 2023. Although there is an element of this business that we need to remark, and that has to do with the fact that Luminex already, prior to the acquisition, had lost a significant contract with one of the major reference labs in the U.S. where Luminex was supplying products. test for cystic fibrosis. It was a significant business, a $12 million business, that after the acquisition, we were able to continue to supply. Because of the, let me say, existing relationship between DSO and this very last lab, although the lab has provided to us a final notification, they are switching to homemade different technology. And therefore, starting from the second quarter of 2023, we are going to take a net loss of $10 million in this segment. And this is going to be important. And we're going to be moving forward in the next quarters. We will continue to point this out because it clearly dilutes growth in molecular activity. And it is because of the size is, again, it's important that you understand that this component is a one-off component that is actually going away in 2023. Now, let's talk about COVID. I believe that in 2022, We got 220 some million dollars, euros of COVID revenues. We already saw starting from Q4 last in 2022 that there has been a sharp decline in this business pretty much across all geographies. And I would say it is more relevant in Europe than in the U.S., Although starting from quarter one of this year, we saw a dramatic decrease of this business. And therefore, we expect that, I think, as for everybody else in this segment that operate in COVID diagnostic, we expect that our COVID revenues will be down 80%. compared to what they were in 2022. And so we believe it's going to be around 60 million of COVID revenues in 2023. Now, let me make a couple of comments on the two strategic programs. One is MIMET, and the other one is the Liaison Plex and NESS. So let me start with MIMET. As I think everybody has seen, MIMET decided to give another license to another partner. We got... questions about this. It's very clear that for us it was not a surprise at all because it was embedded in the contractual agreement that we have with MIMET. We believe that because of the fact that we have the product and the product has been already approved in the U.S., we have a couple of years of advantage compared to the partner, although I have to say that MIMET I see the fact that there is another player or more players in this business. I see it as positive and not negative for a very simple reason. The opportunity is vast, but the opportunity also comes with the fact that clinical marketing is to be activated in order to promote among the ID specialists the adoption of this algorithm. the fact that the clinical guidelines do include this algorithm, and Mimed is a very, very small company, and they clearly decided to spend their economic resources in promoting the test with payers, but they don't have the footprint in the U.S. to go and promote the clinical content to physicians. Diasorin made an investment, and we are making more investments in adding reps in this area because we see that today the success of this product will come from the adoption and not from a clinical value. It's just a matter of explaining to people that this product exists. But we are limited, limited in size. We are a great company, but certainly we don't have the footprint that by ourselves we can cover the U.S. And the addition of a good player like Beckman, you know that we do have a relationship with Beckman in many different fields. We believe that having Beckman also taking the token and commitment to promote will certainly help the growth of adoption of this product. So I don't see this as a competitive threat. I see this as actually an advantage to make sure that this assay is adopted in the U.S. Now, let me make a final comment on the liaison plaques and the liaison nest. And I'll go one by one when it comes to the liaison plaques. We are, as we speak, conducting the clinical study in the U.S. during the respiratory season that will be concluded around May when the season is completely over. As you know, companies in respiratory are required actually to go through the full season because of the fact that certain strains only appear toward the end of the season. And then we'll submit and at that point we'll expect, we are expecting to have the product approved by the beginning of next year. Results so far are very good, and the product is, the system per se, is performing as expected. And so now we are working on the second set of products that will follow suit, which is the blood panel, the three assays from the blood panel. When it comes to the liaison nest, The initial product is, as you know, COVID flu A and flu B. We had a delay on this product for a completely different reason, and this has to do with supply chain issues with us and the partner that is actually being awarded with a contract to manufacture the system. We are, as we speak, working with the partner to make available the first 100 units. that will be necessary to start the clinical study. We are thinking that the clinical study on respiratory will start in Australia first in order to anticipate the season and then end up in the U.S. and the Western world when the flu is going to cross over and come to us. So, again, we expect to submit this de la zona COVID flu by the beginning of next year and have it approved in 2024. At this point, I'm going to leave the microphone to Mr. Pedron who is going to take the numbers and then we're going to take questions.

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 in 2022. And I will also make some remarks on the contribution of the fourth quarter. Again, 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 Luminex deal-related elements. In the press release available on our website, we are providing a line-by-line bridge between adjusted and IFRS item. Please also remind that we completed Luminex acquisition in July 21, so starting from Q3 2022, the perimeter of consolidation is comparable. For that, I would like to start with what I believe are the main highlights of the period. 2022 total revenues at constant exchange rate grew by 2.4% vis-à-vis 2021, as a combination of a decrease in COVID sales by 40%, more than offset by an increase in the ex-COVID business by 21%. This performance is in line with 2022 guidance. The immunodagnostic franchise ex-COVID at comparable effects grew in the year by 3.3%, driven by an increase in CLIA sales by 5%, partially offset by a negative performance in the Chinese market, as we just heard. The molecular business ex-COVID growth was mostly driven by the different perimeter of consolidation and by a very good performance in H2O. plus 13% at constant exchange rate, fueled by a strong respiratory season. The licensed technology franchise growth year over year is due to the different perimeter of consolidation, whereas H2 soft performance minus 2% comparable effects rate is mainly due to COVID-driven supply chain issues on electronic components, which affected our instrument sales. Q422 total revenues at constant exchange rate decreased by 14% as a result of the anticipated decrease in COVID sales, 61% of €62 million, partially offset by an increase of the ex-COVID franchise by 4%. Before moving to the EBITDA, we need to spend a couple of minutes on the so-called payback system for medical devices. This measure, originally introduced in 2015 by the Italian government and never implemented since then, has been eventually reactivated in September 2022. With the goal of rationalizing public healthcare spending, this scheme requires companies to pay back any sum exceeding the budget allocated to the Italian regions by the government. Specifically, the law obliges returning to the regions about 50% of the turnover exceeding the medical devices cap, fixed for the period 2015-2018. Please note that even if the September 2022 law decree covers only four years, as said 2015-2018, the payback could be potentially extended to subsequent periods. More than 1,000 companies in Italy, including Viasorin, have filed legal appeals to administrative regional authorities to challenge the decree. The payment due date, originally set for January 2023, has recently been postponed by the government to the end of April. The Administrative Regional Court in Rome has scheduled a hearing on June 2023 that will reveal its intention with respect to all the pending lawsuits. In the case the Administrative Court rejects the claim, the SORIN, and very likely most of the 1,000 companies that already filed a recourse, will appeal the decision in front of the State Council, which is the Administrative Court of Appeal. Before September 22 reactivation of the payback mechanism, the SOARIN had already built in its balance sheet a provision based on the information available back then and its relative risk assessment. Because of the news introduced by the September 22 law decree, the provision has been increased during Q4 by about 4 or 5 million euro. In case of a negative outcome in both the Administrative Court and the Administrative Court of Appeal, starting from 2023 onward, the payback will have to be accounted for as a reduction in revenues. So, having clarified the meaning of this payback mechanism in Italy, let me please move back to the financials. 2022 adjusted the bid up. at €514 million, or 38% of revenues, is in line with the full-year guidance, in spite of the payback provision we just mentioned, which was not originally factored into our projection. The decrease compared to last year, €29 million, or 5%, is the result of the combination of diluted gross profit, mostly driven by different product mix, and the lower operating leverage, driven by the inclusion of luminex in the perimeter of consolidation and lower COVID sales. Q4 adjusted EBITDA margin at 35% of sales, or €123 million, recalls a decrease toward Q4 21 of €39 million, or 24%. This variance is mostly driven by lower COVID sales, €60 million in the quarter, to be precise. and by the payback provision that we just discussed. Lastly, we keep confirming our ability to generate a very healthy free cash flow, €316 million in 2022, with an increase compared to 2021 of 5%. Moving now to the P&L, 2022 total reported revenues at €1.3 billion, grew by 10% or €123 million compared to last year. Luminex products revenue in the period amount to €386 million vis-à-vis €185 million in 2021, in line with our budget, as a result of lower instrument sales for the licensed technology franchise, which have been offset by higher molecular sales. 2022 adjusted gross profit at €904 million grew by 9% compared to last year, with a ratio of revenues of 66% compared to 67% of 2021. The full year contribution of Luminex on the different product mix are mostly driving this very light dilution. Q4-22 gross profit iteration is in line with Q4-21 at 66%. I believe it is important to underline that in spite of the inflationary pressure we discussed about in previous quarters, we have been able to put in place cost containment measures and initiatives that have allowed us to safeguard margins. Full-year adjusted operating expenses at €472 million drew by 32% compared to 2021, with a ratio of revenues of 35% vis-à-vis 29% of last year. This increase, in line with our expectation, is mainly driven by the different perimeter of consolidation and higher COVID sales book in 2021 that generated back then a very material operating leverage. A negative FX effect, higher travel costs and higher inflation mainly drive Q4 2022 adjusted operating expenses increase toward previous year of 12 million euro or 11%. It is important to underline that the increase at comparable exchange rate is just short of 4%. Year-to-date adjusted other operating expenses increased toward 2021, as said, is mostly driven by the payback provision. As a result of what we just discussed, 2022 adjusted EBIT at 417 million euro, or 31% of revenues, has decreased compared to 2021 by 10%. Interest expenses at 3 million euro are lower than last year by almost 40%, mainly because of better yield on our cash investment, whereas the adjusted tax rate at 23% is basically in line with 2021. Year to date, So, full year adjusted net result at €319 million or 23% of revenues is lower than previous year by €38 million or 11%. Let me now move to the free cash flow and the net debt position. During 2022, the SOIN generated €316 million free cash flow, as we said, vis-à-vis €301 million in 2021. At the end of 2022, the net debt was negative for €907 million, vis-à-vis negative €986 million at the end of 2021. This improvement has been driven by a strong generation of operating cash, which has been partially offset by the following items. Share-by-back for about €160 million, €57 million dividends to our shareholders, and about €40 million of negative translation effects effect. mainly due to the U.S. denominated term loan that we put in place to finance the Luminex acquisition. Lastly, let me move to 2023 guidance, as usual, expressed at previous year exchange rate. Total revenues minus 14%. Total revenues at constant perimeter of consolidation, which means without the flow cytometry business, which was sold at the end of February, minus 11 percent of which COVID at about 60 million euro molecular respiratory business minus 20 percent and the base business ex-COVID and molecular respiratory plus four plus six percent adjusted EBITDA margin at around 34 percent please note that we have built in our assumption and average respiratory season beside we believe that 2023 base business growth will be skewed towards the second part of the year, since we deem, like many other peers, that China will recover from H2. Moreover, please consider that 2023 guidance does not include any possible impact on the payback mechanism in Italy, since we have no visibility, neither on its potential implementation nor on its materiality. We deem that in the worst-case scenario, we could have a negative effect of €6 million to both our top line and the bid. Before concluding, please remember that the assuring financials are highly exposed to the US dollar, and even more so now than sales denominated in USD represents about 50% of our total group sales. Therefore, as a rule of thumb, Please consider that for every one cent movement of the dollar against the euro, the assuring revenues move by about 6 million euro on an yearly basis. Now let me please turn the line to the operator to open the Q&A session. Thank you.