DiaSorin S.p.A.

Good afternoon. This is the Chorus Call Conference Operator. Welcome and thank you for joining the Diasorin First Half 2023 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.

Thank you, operator. Good morning, good afternoon, and welcome to the Diasorin H1 conference call. As usual, I'm going to go through some comments about the business, and then I will allow the CFO, Mr. Pedron, to go through the numbers. As usual, I'm going to comment all the numbers at constant exchange rate. So we had a very good quarter. The quarter, we had an acceleration of revenues compared to quarter one. In fact, the quarter closed at plus 5% versus Q1 at plus 3%. This is clearly excluding COVID. And I am going to now... Briefly comments, the three legs, so the way we look at the business, immunodiagnostic, molecular, and the LTG. Let's start from the immunodiagnostic. The immunodiagnostic franchise, ex-COVID, closed in H1 at plus 7%, with a very strong quarter two, with growth over 8%. there has been a very strong performance of our CLIA franchise that net of vitamin D in the first half has grown over 13%. So if we look at the different geographies starting from Europe, Europe quarter two was plus 6%. X vitamin D CLIA was plus 11%. And fundamentally in Europe, what we continue to see is An increase in volume, most likely due to rebounding of testing after COVID. We saw this positive effect in Q1, and we continue to see this effect in Q2 in all the different European geographies. When it comes to North America, very strong results in H1, 13% up. If we exclude vitamin D, it's 19% up. In the quarter two specifically, 15% over last year. And if we exclude vitamin D, it's plus 22%. As you all know, in North America, the program has been mainly focused on the hospital segment. In 2022, we heavily invested in doubling our cell force. We completed the hiring end of last year, so effective Q1, we now have a very complete self-force that is serving the market segment of the hospitals. We have an ambition to close in the next three years over 250 hospitals, doubling our hospital presence in the U.S., and as we have discussed many times, We are very successful as a combination of the two systems we have, the Liaison XL and recently the Liaison XS and the products. Mainly, I would like to mention clearly the Quantiferon together with our Stool franchise. These products together are actually driving interest of customers that typically in this segment have been sending out products. And with the viability of these products and the systems we provide, they can in-source and making clearly this testing profit center for the hospital. So it's working very well. When we look outside of Europe and North America and the rest of the world, I believe that the good news is that China, that has been a real drag in quarter one, did actually stabilize in quarter two. For the first time, we have seen modest growth in CLIA. And this is certainly very positive. I think that we continue to be very cautious about near-term growth. Opportunities in China because of the current very rapidly shifting policy toward China-made product that we continue to become more and more popular in our customer base, although It is certainly true that we have invested significantly in turning our commercial sales force with new leadership and changing our distribution network in China. And I think we start to see the first positive effects. The other element, which I believe is very important, is that now that we are close to opening our manufacturing site, it is very clear to the customers the direction that the assortment is taken in China is to become China-based. And this, I believe, is certainly helping the business. Again, I'm very cautious about the future because, as we did comment a few times, China is an unpredictable country. in the short term. So let's see how it goes, but certainly good news. In all the other geographies where we are direct, Brazil, Mexico, and Australia, we are enjoying strong growth in the immuno assay franchise, clearly related mainly to our traditional infectious disease product line. The other thing that I think is very relevant to discuss is the fact that for the first time, in the post-COVID era, we've been launching new products. And specifically in quarter two, we launched two new products on the Liaison XL and XL, the new Legionella test and the Pro-Adreno Medulin, a very interesting product that has been developed together with Thermo Fisher, with a license coming from Thermo Fisher. And so I think finally, After the COVID, the two very difficult years of COVID has consumed our R&D resources in 2021. Now, starting from 2022, we restarted our development, and now you see us with new products that are hitting the market, taking us back to where we were prior to the COVID pandemic time. So this is, I think, great. The other thing I would like to mention is that specifically related to the U.S., we really start to see the effect of the critical mass that we were able to build as a consequence of the Luminex acquisition. As I think we have discussed strategically, the Asurion wants to improve the footprint in the U.S., and sees itself as a U.S. company when it comes to the future. And it's very clear that the Luminex acquisition gave us the brand, the visibility, the footprint, and the resources which are now very useful in launching all the new products that they will bring into the market. intangible or tangible value from the acquisition critical mass clearly is paying out. Last but not least, when it comes to MIMET, as we have discussed, I think, in the last conference call, we decided to increase our spending in marketing and providing commercial coverage for the launch of the product. We have hired The dedicated clinical reps that are needed to go and solicit demand with the clinicians. The dedicated Miebes Health Force now is staffed, has been trained and started from quarter three. We started to hit the market together with other tools like the digital campaign in order to create demand for this very interesting product. Now, if we move to molecular diagnostic, ex-COVID, the franchise in the first half is relatively flat. It's a combination of low growth in respiratory. We have a very good performance in the syndromic panel with varangine 1, which is partially offset by the flu-only test that we carry on the MDX. I remind you that This is an effect of the last flu season that was extremely strong in quarter one and therefore relatively weak. Sorry, relatively strong in quarter four and so relatively weak in quarter one. In the non-respiratory, we have a decline of roughly 5%, but this is primarily due to the fact that, as we have discussed, we lost a contract with a very large lab. For CF, and now in the second quarter, we start to feel almost a full loss of the revenues related to this product. X, cystic fibrosis, the growth is low single digit. So considering the fact that our molecular business today, when it comes to the syndromic, still relies on technologies which are very solid, but certainly... They are showing sign of time, to put it that way. And this business is extremely resilient. And certainly, we are waiting for the Plex now to invert from a stable business and go back to growth. When it comes to the Plex, we have completed the clinical studies for the respiratory panel. And we expect filing in Q4 and approval by next year respiratory season. When it comes to the liaisonless, same thing. Clinical studies started in Australia because now, as you know, it's the flu season. We'll continue in the U.S. And we expect filing. in the U.S. of the ABC, so the flu and COVID product at the end of the coming respiratory season. Now, last but not least is our licensed technology business. And I think we all need to remind ourselves the fact that quarter one was very weak. And we did comment last time that Q1 was weak because we had a significant backorder still of instruments due to the supply chain issues that we still encounter until the end of last year. Well, Q2 is completely different. As you have seen, we have double-digit growth at 10%. This is primarily due to the fact that we were able to close our gap, and now we have availability of spare parts. We were able to make systems, and we shipped all the instruments that were in back order. I believe that, as you have seen from other competitors, when it comes to the life science business, We see initial signs of slowdown. Therefore, I just want to caution that the double-digit growth in quarter two should not be intended to be what we believe this business can continue to perform in Q3 and Q4. And we really need to understand, I remind everybody, this is a B2B business. So we actually sell a relatively small portion of these revenues come from direct sales to customers, most of the revenues in this business come from B2B with some of the largest life science companies in the U.S. We are waiting to see the way that they're going to be forecasting Q3, Q4, then to provide an expectation to what we believe is going to be year-end and beginning of next year. So just be cautious. Don't take the plus 10% of Q2 or Q2 as a true A couple of comments. Very good news. We actually received from the FDA the closing of the warning letter. This was a significant effort by the company and a couple of years of solid work by our quality assurance team and regulatory brought us to, again, brought the FDA to close the warning letter. So we are going back to the regular business. We made significant investments in the quality system of Luminex to resemble the DSR in quality system. And therefore, we are confident that moving forward, we are going to be able to work in an FDA environment also at Luminex according to the most recent standards. Last but not least, when it comes to the synergy and integration plan, glad to report that we are on time and we expect by 2023 a running rate between 50 and 55 million euros in cost synergies as provided in our long-term plan. At this point, I'm going to turn the Microsoft to Mr. Pedron, and then I'll take questions after. Please go ahead.

Thank you, Carlo. Good morning. Good afternoon, everybody. In the next few minutes, I'm going to walk you through the financial performance of the SORIN during the first half of 2023. And I will make some remarks on the contribution of the second quarter. Let me please remind you all that consistently with what we did over the last earning course, 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. As we did over the last few quarters, I would like to start with what I believe are the main highlights of the period. H123 total revenues at constant exchange rate decreased by 16%, whereas the reduction at constant perimeter of consolidation, which means without the contribution of the flow cytometry business that we carved out in February 2023, has been 14%. This result, which is in line with the full year guidance, is a combination of the expected fall in COVID sales, the carve-out of the flow business, partially offset by a growth in the ex-COVID business of around 4%. And to be more precise, ex-COVID revenues at constant exchange rate and perimeter of consolidation without the contribution of the molecular respiratory business grew by 4.2%. It's a contribution of very good performance of the immunofranchise, plus 7% in Q2, which saw an acceleration compared to what we achieved in Q1, moving from the 6% of the first quarter to 8% of the second. A recovery of the LTG business, which closed Q2 23 with an increase of 10%, therefore ending the half year with a growth of 2% compared to 2022. And lastly, a slightly negative performance of the molecular franchise net of the respiratory business, driven by the budgeted loss of the cystic fibrosis business that Carlo just mentioned. Lastly, the molecular business, respiratory business, recorded in the first six months of the year a performance substantial in line with 2022. plus 2%, to be precise, as a combination of an increase in the very genuine respiratory panel, which offset a decrease in the flu and fluvid only molecular testing for the reasons that Carlo just commented. H123 adjusted EBITDA at €190 million, or 33% of revenues, is substantially in line with the full year guidance. The decrease compared to last year 79 million euros, 29%, is mostly driven to the drop in COVID sales and therefore to the corresponding worsening of operating leverage. Lastly, we generated 104 million euros free cash flow in the first six months of 2023, down 34 million euros compared to last year. This variance, once again, is mainly driven by the falling COVID sales, whereas the non-recurring phasing events, which I talked about during Q1-23 earning calls, have mostly been offset by the expected strong performance of Q2-23, which closed with a free cash flow generation of €76 million. Before moving to the P&L, let me provide you an update on the so-called payback system for medical devices in Italy. As you might remember from the previous calls, 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 medical devices spending This scheme requires companies to pay back any sum exceeding the budget allocated by the central government to the Italian regions. Specifically, the law obliges vendors to return 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 to 2018, the payback could be potentially extended in the future to the subsequent years. What has happened? So practically all the operators, including the Assorin, have filed legal appeals to the competent courts to challenge the decree covering the years 2015-2018. In particular, the Administrative Regional Court in Rome has been charged with more than 1,800 recourses to suspend and annul the payback regulations. The payment due date originally set for January 2023, after being postponed a few times, was set for the end of July, and based on the most recent news, might be postponed even further till the end of October. Moving from this very complex situation, rich of legal controversies, the government recently issued a law introducing the faculty for each company to settle disputes relating to the period 2015-2018 by paying 48% of the total amounts requested by the region and by renouncing any pending legal litigation. We are assessing the possibility to adhere to this settlement, but no final decision has been taken yet. Please note that before September 2022 reactivation of the payback mechanism, DSRN had already built in its balance sheet a provision based on information available back then. and it's a relative risk assessment. And therefore, the potential settlement that we just discussed about would be covered with the provision booked in the past and would not have any impact to the P&L of this year. Now, pending more clarity on the legal front, for the years following 2019 and the amount already booked for in our balance sheet in the past, we have not changed our provision for the period 2019-2022. And we have not accrued anything for 2023. We will keep on monitoring the evolution of this very complex and daily changing situation and update you during the next quarter course. Moving now to the P&L, H123 total revenues at €576 million, as we said, decreased by 16% or €109 million compared to last year. This variance completely due to lower COVID sales, which in the first half are down by €115 million or 77% compared to last year, and the disposal of the flow cytometry business. I think it is worth noticing that the second quarter recorded some 6 million euro FX headwind, mainly driven by the US dollar depreciation compared to the euro. Considering the current exchange rates and what we had in H2 2022, I believe it is fair to expect this negative FX impact to continue in the second part of the year. First half adjusted gross profit at 379 million euro decreased by 16% compared to last year, with a ratio of revenues of 66%, in line with the same period of 2022. The carve-out of the flow cytometry business alongside all the initiatives aimed at improving operations processes and containing costs, some of which part of our broader cost synergy plan, allowed us to preserve margins despite the reduction in COVID revenues and the tail of the inflationary pressure we talked about in 2022. I believe this to be a remarkable indicator of the relentless efforts we put in place to safeguard profitability, which has been confirmed by Q2-23, which closed with a gross margin ratio over revenues of 65%. H1-23 adjusted operating expenses at €230 million grew by 2% compared to last year, with a ratio of revenues of 40% vis-à-vis 33% of 2022. The worsening of the operating leverage ratio is entirely due to the reduction in COVID sales. Moving to Q2-23, adjusted OPEX decreased compared to last year by 1% or €1 million, with a ratio of revenues of 40%, vis-a-vis 36% of last year. This OPEX reduction is the result of all the initiatives we implemented to control cost, the impact of the cost synergy plan that also Carlo just mentioned, and the disposal, obviously, of the flow cytometry business. Adjusted outdoor operating expenses at negative €4 million are substantially in line in absolute value with 2022. As a result of what we just described, H123 adjusted EBIT at €144 million, or 25% of revenues, has decreased compared to 2022 by 35%. Adjusted interest income at positive €2 million is better than last year by €6 million, mainly because of improved yield on our cash investment. whereas the adjusted tax rate at 23% is in line with 2022. Year-to-date adjusted net result at €113 million, or 20% of revenues, is lower than previous year by 33%. Let me now move to the net debt position. At the end of June, the net debt was negative for €861 million, vis-à-vis negative €907 million at the end of 2022. This improvement has been mostly driven by the operating cash generated in the first six months of the year, partially offset by the payment of just short of €60 million dividend to our shareholders in May 2023, and 23 million euro of treasury shares by BEC. Lastly, we confirm 2023 guidance as usual expressed at previous year exchange rate. Let me finally please remind you that we have built in our assumption an average respiratory season. And the 2023 guidance, as I just said, does not include any possible impact from the payback mechanism in Italy, since the whole situation is in flux. And the most recent news, which I personally deem positive and pointing in the right direction, has made it even more difficult to make any reliable prediction on what is going to happen next. Now let me please turn the line to the operator to open the Q&A session. Thank you.