DiaSorin S.p.A.

Good afternoon. This is the Coral School Conference Operator. Welcome and thank you for joining the DioSorin Full Year 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 DioSorin. Please, go ahead, sir.

Thank you, operator. Good morning, good afternoon to everybody. Welcome to the 2023 full year results. As usual, I'm going to make some initial strategic remarks, and then the Chief Financial Officer, Pier Giorgio, is going to take you through the numbers. As a general comment, let me say that 2023 was a very busy year. It was the second year after the acquisition of Luminex and we completed our integration plan with the company. I would like to say that by December of last year, integration is done. The strategic role of Luminex has been defined. The senior leadership team has been set in place. The branding... of Luminex has been defined, and today Luminex is a brand that we are using just for our LTG products, whereas all IVD products, molecular and immuno, goes under Diasorin. From an operation point of view, we have invested heavily in our quality system, and I think it's not worth it that we have closed the warning letter with the FDA and we have completed our investment in manufacturing in the Chicago plant and we are on the way to complete also the California plant where the next manufacturing will happen and as a consequence of a lot of Good work from a lot of people. We achieved, I think, a milestone for the company, which has been the approval of our liaison plex instrument together with the respiratory panel. This is clearly a milestone because we got the instrument approved and therefore from now on it's going to be just assay. We already filed our second panel for the sepsis for the blood and then by Q3 we're going to submit the other two blood panel and we're going to complete with the GI early next year. So it took longer than originally expected. But I think as we discussed during the presentation on the long-term plan, we decided to hold on until the quality of the product and the platform was guaranteed and also the quality system of Luminex was set in place properly. And I would like to say results achieved. When it comes to the immuno, 2023 has been, as we will see later, a very successful year. We had double-digit growth in all the main geographies. Clearly, U.S. has been over-exceeding expectations. Europe has been growing solid growth in the European market, which we have been discussing a few times. It's certainly for the soaring and more mature market, but notwithstanding that, the strategy is working in Europe. Notwithstanding the fact that China has been a drag, we will discuss about it later. In China, I think we achieved three strategic goals. First one, we have local Chinese leadership, senior leadership in place. Second thing, we have initiated, we have started manufacturing of the of the liaison reagents for the Chinese market to follow the China for China strategy and the instrument with our partner Stratec on site. And we're going to have then the instrument cleared for the Chinese market soon. And the third element, which is fairly important, we have been approved under the VBP And therefore, we'll be able to sell in several provinces some of our initial menu. So, notwithstanding the fact that China has been a drag in 2023, we believe that 2024 is going to be the business we expect it to be stabilized and possibly in the second half to start to see growth. So, If now we get to discuss in more specific the numbers and we start from revenues, as usual, I'm going to comment my results in a constant exchange rate. If we look at the total revenues, net of COVID and net of respiratory, the overall business grew 4%, which is in line with the guidelines, notwithstanding, The fact that, as we discussed in the last quarter, we had softness in our LTG business and, as we have discussed, headwind in China. But all of this has been upset by a significantly better performance on the immuno business and the molecular-based business compared to expectations. When it comes to COVID-19, 60 million in 2023, which clearly is a very sharp reduction compared to previous year, minus 75%, I think in line with what everybody sees. We see that the COVID business continues to decline. We expect roughly 30 million in 2024. At that point, and then we're going to stop talking about COVID and start talking about COVID as part of the respiratory panel, which I believe is what is going to happen to this virus. Now, if we look at the three legs, and let's start from immunodiagnostic. You know, as you understand, immunodagnostic is a combination of legacy technologies like ELISA. We have instrumentation revenues inside, and then we have CLIA, which is the lion's share of the revenues. So if we look at the overall immunodagnostic business, ex-COVID, it grew 8%. So very strong growth. If we look at CLIA, Both in the quarter and for the full year, the clear business grew 10%. So double-digit growth in our clear franchise across all the geographies. And this is in spite of, as we discussed, China headwinds. In China, our revenues are primarily clear revenues. Why is this? This is clearly because as far as the U.S., we have a combination of a very successful hospital strategy together with critical mass in the commercial organization that we have reached in the U.S. thanks to the investment and the Luminex acquisition. And when it comes to the European market, with strong, strong growth in volumes in Europe, that certainly pushed If we now look at the immunodiagnostic in the region, to me, U.S. is remarkable because full year is 14% growth for immuno and 14% with CLIA. If we look at quarter four in North America, we had an acceleration when the business has been growing 18%, with a CLIA growth of 16%. So it means that not only in the U.S. the business has been doing well, but the growth has been accelerating toward the end of the year. If we look at Europe, immunodiagnostic full year growth 8%, Q4 growth 8%, so it's fundamentally Q4 is in line with what we have seen for the previous quarters. If we just look at the CLIA components, Overall, it has been growing between 9 and 11 percent, so fully at 11 percent and 9 percent in Q4. Again, when it comes to Europe, most of the growth has been driven by increased volumes of pull-through through our very large install base. Europe X North America. which is a combination of many different markets. As said, negative performance in China, solid growth in other geographies like Brazil, Mexico, Australia, and India, which are countries where we have a direct presence. With overall, the rest of the world has been growing 7%, which is good. As said, this includes also the Chinese drag market. which has been more than compensated by the solid growth everywhere else. And I said before, to me, what was very relevant in immunodiagnostic is the VBP we are in. And at this point, we have access to all the tenders that are covered in all the provinces that are covered by the VBP. Now, if we move to molecular diagnostic, and again, I look at molecular diagnostic, it's a little bit more complicated here because you have three components. You have the COVID, which we exclude. We do have a respiratory that I want to deal separately because, as we discussed a few times, the seasonality has been fairly awkward, so comparison 22 to 23 is complicated, and then the rest of the business. And so one more element, as we discussed, we have lost a contract for cystic fibrosis for one of the major labs, And the effect of this contract has been felt in 2023 and now slightly in Q1 2024. And then at that point, it's going to be completely evened out. So if I now look at the molecular base business, net of respiratory, net of COVID is a net of cystic fibrosis. So the the business is very resilient. It grew 6% with an acceleration in Q4. In Q4, the growth was actually double-digit, 10%. What's behind this? We do have our low-plex offering, which is the traditional Diasorin MDX business, which is growing double-digit. And we do have the Virgin one, Technology holding pretty well. As we have discussed a few times, this business for the Virgin One that we inherited through the acquisition is primarily non-respiratory. And in that, and clearly is primarily U.S.-based, and it is holding up very well. as a consequence of one factor, which is the fact that, as we discussed, we are already using the flex concept on Virgin 1, although the management of the flex credits is more complicated than what we expect on the Virgin 2, and this is providing clearly a a very attractive proposition for a segment of the market. And this is why we are extremely comfortable and confident that once we're going to be providing with Eliazone Flex, the full automation, the hands-on time, which is practically zero because everything is fully loaded into a cartridge, and Flex, we expect this to be a very interesting proposition for customers. If we now look at molecular respiratory, minus 12% versus 2022, but a big dive in Q4, minus 29% as expected because of the seasonality of the flu season in 2023 compared to 2022. Okay, so we're actually, if we look at the budget, we've been doing better than we expected before. in Q4 of 2023. So when it comes to our molecular franchise, if I can summarize it, VIRGIN1 base holding up nicely. Great opportunity for respiratory that today makes a relatively small part of our revenues. A confirmation that the FLEX concept, even if it's a little goofy, if I may say, today on the VG1 platform is an interesting proposition for customers. I've been reading some of the commentaries from the market about the fact that there could be ethical problems about this. And honestly, I don't understand where the comments are coming from. The market does accept the FLEX. is an opportunity, and we don't see any ethical issue with allowing the customer to select which assay they want to run on their patients. If we now move to the LTG, briefly on the LTG, as I said, it has been a difficult 2023 because of the stopping of all the business companies It's relatively stable, declined 4%. But we have seen that the deep talking has been pretty much completed with H2 last year. And we've already seen, starting in 2024, light at the end of the tunnel. So this business is now more stable. We see our partners gaining business, and this is reflected by the royalty rate and royalty increase, the increase of royalties that we see as part of the contracts we have. And therefore, we are more optimistic about 2024. This stocking license event, I think, is behind us, and we are more positive about the future. I'm going to make a few specific comments about three programs, MIMED, LIME, and Quantifera. When it comes to MIMED, the Jupiter study is ongoing. I remind you that the Jupiter study is a study that is intended to guarantee access to the taxpayers. And the study is ongoing. It's conducted by MIMED on time. And we expect the study to be completed sometime by the end of this year, beginning of next year. So we are on track there. We continue to build momentum on MiMed. We have a very strong funnel of hospitals that have been testing the product. And we start to see adoption of the product. As said, I believe we will draw some initial conclusions about this business by the end of 2024. To me, when it comes to the clinical validity of the product, we continue to see that whatever has been claimed by MIMED has always been delivered by all the clinical studies we have conducted. So clinically, the product makes sense. ton of sense and as discussed a few times in the past was very relevant now is the effort of education that where we have decided to invest heavily in the U.S. and we start to reap the benefits of this program. When it comes to Lyme, it is another key program for the authority and is part of the alliance with QIAGEN. A clinical study completed last year, as promised. The filing has been done in December 2023, and we expect this product to be approved in 2024. We are also discussing with partners in the U.S. about the possibility of co-marketing this product because, again, this is going to be another situation where it's going to be key to education, in this case of GPs, and therefore learning from what we had to do with MIMED, I think that we are better prepared now to work online. The third program is the QuantiFERON, reflecting on what QIAGEN has been reporting. Clearly, this is a very successful program. It is a very important product for us, for our hospital strategy, and is working very well together with the rest of the menu we have on our system. And we are working with QIAGEN on the registration of the liaison in China. The product has not been launched in China yet, and so we are going to be working with our partner, QIAGEN, to get the registration in China in 2024 and start commercializing the product as well in this very relevant market. So I'm going to leave now... Thank you, Carlo.

Good morning and good afternoon, everybody. As usual, in the next few minutes, I will walk you through the financial performance of the SOAR in 2023, and I will also make some remarks on the contribution of the fourth quarter. Please let me remind you that consistently with what we did over the last earning course, to better understand the performance of the business, I will mainly refer to adjusted P&L items. Said that, I would like to start with what I believe are the main highlights of the period. 2023 total revenues, the constant exchange rate decreased by 14%, whereas the reduction at constant perimeter of consolidation which means without the contribution of the process of the business, which was carved out in February 2023, has been 12%. This is a combination of the expected falling COVID sales, down by €195 million, partially offset by growth in the ex-COVID business. To be more precise, this growth is a result of a combination of a very good performance, as we heard, of the immunofranchise, which grew 8% in the year and 10% in the quarter, despite, as we said, the weak performance in China, whose immunosafes in 2023 decreased mid-single digits compared to 2022. A slightly negative result of the licensed technology business, which recorded a decrease of 1% in the year and 4% in the quarter, for the known issues of the destocking of consumables implemented by some major partners, and also because of a generalized softness of the life science business, as reported by most of the players in this space. And the negative trend of the molecular franchise, the third leg, down by 8% in the year and 17% in the fourth quarter. 2023 adjusted EBITDA closed at €375 million, or 33% of revenues. Q4, 24 margin at 32% of sales, has been impacted by some extraordinary one-off manufacturing costs. and an unfavorable sales mix. 2023 full year EBITDA reduction compared to 2022, 140 million euro or 27%, is attributable to the drop in COVID sales and therefore to the corresponding worsening of the operating leverage. Lastly, the assorting generated almost a 210 million euro free cash flow in 2023, down €107 million compared to last year. Once again, this variance is driven by the fall in COVID sales. Now, if we move to the P&L lines, as said, 2023 total revenues at €1,148 million decreased 16% compared to 2022. This variance is driven by COVID and the flow cytometry business. During 2023, we recorded some 24 million euro FX headwind, mainly driven by the U.S. depreciation against the euro. Full year adjusted gross profit at 749 million euro decreased by 17% compared to last year, with a ratio over revenues of 65%, broadly in line with 2022, which closed at 66%. The curve out of the flow cytometry business alongside all the initiatives aimed at improving operation processes and containing costs allowed us to preserve margins despite the reduction in revenues, COVID revenues, and the tail of the inflationary pressures. Q4 adjusted gross margin at 65% has been reduced as I said before, negatively impacted by some external one-off manufacturing costs, which we are not expecting in 2024, and by an unfavorable sales mix, mainly lower sales of consumables in the LTG business. 2023 adjusted operating expenses at €466 million decreased by 1% compared to 2022, with a ratio of revenues of 41%, vis-a-vis 35% of last year. The worsening of the operating leverage ratio is entirely owed to the reduction in COVID sales. Moving to Q4 23, adjusted operating expenses decreased compared to last year by 2%, with a ratio of revenues aligned with the full year at 41%. Fully adjusted other operating expenses are better than 2022 by €16 million. The difference with last year is mainly driven by the combined effect of some positive one-off elements booked in 2023 and even much more relevant, I would say, some negative non-recurring expenses booked last year. such as the payback provision booked in Q4, you might remember of, the cost of the Hive Down project, some negative effects, and severance costs. As a result of what just described, year-to-date adjusted EBIT at €283 million, or 25% of revenues, has decreased compared to 2022 by 32%. Adjusted interest income at positive €5 million is better than last year by €8 million, mainly because of the improved yield on our cash investment, whereas the adjusted tax rate at 22% is in line with 2022. Year-to-date adjusted net result at €224 million, 20% of revenues is lower than previous year by €95 million. Let me now move to the net debt position. At the end of 2023, the net debt was negative for €776 million vis-à-vis €907 million at the end of 2022, thus recording an improvement of €130 million of almost 15%. This variance has been mostly driven by the operating cash generated during the year, and by the proceeds of the sales of the Floss Atomic business, partially offset by the payment of just short of €60 million of dividends to our shareholders in May 2023 and €28 million of treasury shares. Lastly, let me move to 2024 guidance, as usual expressed at previous year exchange rate. The guidance confirms what we presented in December 2023 during the Capital Market Day. and it is calling for an increase in revenues ex-COVID of 5% to 7% with COVID sales at €30 million and an adjusted EBITDA margin of 32% to 33%. Please note that we have built in our assumption an average respiratory season. Moreover, please consider that 2024 guidance does not include any possible additional impact from the payback in Italy. consistently with the position taken by the company during fall of 2023, the light of the latest legal development. Regarding this matter, let me please remind you that DS Sorin, as many other diagnostic companies, I would say as most of other diagnostic companies, decided to continue its legal dispute, which might take three to four years before reaching its conclusion. We will keep on monitoring the evolution of this complex and ever-changing situation and update investors as soon as something will change. Now let me please turn the line to the operator to open the Q&A session. Thank you.