DiaSorin S.p.A.

Good afternoon, this is the course call conference operator. Welcome and thank you for joining the second quarter 2024 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 DSRN. Please go ahead, sir.

Thank you, operator. Good morning, good afternoon to everybody. Welcome to the quarter to 2024 results. I'm going to make some introductory comments first at the constant exchange rate, and then I'm going to leave Mr. Pedron, the CFO of the company, to go through the numbers in more detail. So let's start from the top line. It was a strong quarter. The company ex-COVID grew 7%, and there is an acceleration in quarter two compared to quarter one. When it comes to the COVID business, 5 million in the quarter, so far in line with our full year guidance of 30 million. It's sad. is a very strong quarter, and it's a combination of immunoassay that is growing 11% with CLIA, which is the major component of this business, growing 13% in a quarter. And this is due to the fact that the US and Europe, as we will see later, continue to provide strong results. China is not still impacted by VVP. even if in the second quarter we had no growth. Molecular, plus 5%. It would have been, as we did comment before, we lost a contract last year that has been impacting first half. Without the effect of this contract, our molecular franchise would have grown 8%, and there is no impact of Plex yet, but I'm going to comment on Plex later. LTG. In the quarter, minus 7% deceleration, although I think we need to be more analytical about this result. We see growth in consumables. We see growth in royalties, and we continue to see a strong decline in instrumentation as a result of the fact that in the life science sector, our buyers are decreasing. placing systems. So the performance of this business, I remind everybody, is fundamentally reflecting what the major biotech and medical companies that are distributing our products are doing globally. Now let's dive in into the different segments. So let's start from immunodiagnostic. As said, immunodiagnostic XCOVID plus 11%. There is a very strong positive trend on Clea, so on the liaison, also in this quarter, which is the result of the performance of two main geographies, Europe and the U.S. When it comes to the U.S., As we have seen in the last few quarters, the hospital strategy is working well. We keep expanding our presence in the U.S. hospitals, and this is very relevant also for our molecular business, and I will comment on this later. We are well on track to deliver our 2027 plan with 600 hospitals. So far, we are over 300 with in each one, we close 15 new accounts. I remind everybody that the target for 2024 was 100 hospitals and we are on track to deliver also the growth this year. Clearly, this has been possible as I did comment before on the increased commercial footprint. thanks to the Luminex acquisition and to our menu, which is a combination of specialty products that well fit this segment of the market. When it comes to Europe, very strong performance is around plus 12% in the quarter, in spite of some headwind with some legacy products like vitamin D. When it comes to Europe, the performance is supported by the fact that we continue to see growth in testing volumes in all the main European geographies and we see no headwind in front of us when it comes to this volume contribution. If we now move to China, if you remember quarter one, we had a positive result, but they won the market that was because of an easy comparable to Q1 2023 when there was still low testing volume because of COVID. In quarter two, we in China experienced a high single digit decrease that makes The H1 almost fled. We don't see the VBP effect yet, but we continue to see headwinds when it comes to the strong competition due to local suppliers and the fact that there is today, I would call it more persuasion coming from the government to buy more and more Chinese-made products. I remind everybody that China does represent today less than 3% of the overall business, so there is not a significant impact on the company results. However, we continue to stay in China and work into the transformation of the business from a Me Too product catalog, which is what we sell today to a specialty company. business, which is what is going to be coming with the registration of the quantiferium product and the stool product that today are not distributed in China yet. When it comes to other geographies, we are delivering very good results in all the geographies where we are working directly. Australia, notwithstanding we have a very high penetration, is growing almost 15% in the quarter and high single-digit growth in more established markets, Mexico and Brazil, where we have a solid business. The only area where we are suffering is the Middle East and specifically in Iran because we had a We're a strong business, and because of the current situation, we have not been able to ship products in H1 of 2024. So overall, Immune Diagnostics is doing great. When it comes to new products, I wanted to discuss MIMET and LIME. LIME is in line with the plan we received. Remember, we have submitted to the FDA our products. clinical results, and we have received from the agency comments, and we are collecting data for a final resubmission in September, so we are on track to get our product approved by 2025 as per plan. We are also finishing up discussions with a large lab in the U.S. that is going to help us to educate the market because as everybody understands, we need to make sure that we move the market from current testing to the adoption of the T-cell component. MIMED, the Jupiter study, is confirmed to be completed in quarter one of next year, and in quarter three, quarter four, there is going to be an initial set of data that are going to be made public. By MIMED, it continues to be a door opener for us for discussions with hospitals in the U.S., And then we continue the educational campaign to pump up the event of this test. So all of our new diagnostic franchise is doing fantastic in all different geographies, and we are very comfortable with the sustainability of this business mid-long term. Now let's move to molecular diagnostics. As I said, ex-COVID plus 5% in the quarter without the effect of the lost business last year is 8% growth. And again, there is no contribution whatsoever of Plex that we just launched two months ago. The legacy, the assorting molecular business, what we call the targeted business on multiplexing is growing double-digit. The Virgin business is holding pretty well, and I'm going to comment on the customer base of Virgin shortly. We have sunset at the Ares as per plan, and we are transitioning the Ares business to our MDX platform, and it is moving forward as expected. We continue to see growth in the respiratory. Also, high single-digit growth in quarter two. this has nothing to do with the respiratory season that, as you know, will start late in Q3, Q4. But it's more to do with the fact that we do have a presence in this business and we have other infections happening outside the season that are making this business strong. And overall, we have a very good performance both in Europe and in North America. Now, let me make a couple of comments on Plex and this. When it comes to ladies on Plex, we have a very good start with a strong interest for the Plex concept. I remind everybody that, as we discussed previously, the adoption of Plex testing in the A regular customer in the U.S. would grant savings in the range of 30-35% compared to what they are spending today. And certainly in the current environment in the U.S., this is very well appreciated. We have a customer base in the U.S. of over 800 customers that we have access to. These are existing customers. The Asorin customers, 300 are virgin users, and then over 300 are hospitals that we serve with our immuno business and are not buying from the Asorin molecule, and they represent a relevant base to market the new platform. Today is an important day. We are here in Chicago in our manufacturing site, and we are hosting an event for investors and analysts to review the strategy and explain the technology And we are extremely positive about the launch of this platform. We have collected and almost wrapped up a preclinical study in Australia with the new assay, the flu, RSV, and COVID. So the complex assay that we have developed on the platform. We are very happy with the results. We have tested the platform in a clear, waved environment, and we are ready to start clinicals in October, as we have discussed. So when it comes to molecular, very excited, and very excited because we have a strong business. And we have two very nice platforms, very innovative, that are hitting the market now and within the next couple of quarters. Now, let's move to LTG. LTG, I remind everybody, our LTG franchise is a combination of diagnostic partners and life science partners. Diagnostic partners are doing very well. reflecting the fact that the diagnostic market worldwide is experiencing strong growth. In the life science technology, we have partners that today are experiencing, as we all know from public information, single to double-digit decline. The net result is that we see an increase in consumables, we see an increasing royalties, which are the relevant part of this business. And clearly, we see a strong decline in instrument placements. And because the market fundamentally is frozen due to the fact that there is capex restriction in the R&D in university environment. So we continue to monitor the market. We, I believe, some of the partners are highlighting the fact that they expect the life science component to bounce back in the second half. But as far as margin are concerned, clearly the fact that consumable and royalties continue to increase is actually posing for this. So it's positive. for the company. Now I'm going to pass the mic to Mr. Pedro who is going to go through the numbers and then we're going to have a Q&A session.

Good morning, good afternoon everybody. Thank you for joining DSR in H124 earnings call and for the interest you're showing in our company. In the next few minutes, I'm going to walk you through the financial performance of TSR during the first half, and I will then turn the line to the operator for the usual Q&A session. H124 total revenues at €589 million are above last year by 2% of €13 million, despite the expected decrease in COVID sales, down by €21 million. and the different perimeter of consolidation coming from the cut-out of the flow cytometry business in Q1-23. Business XCOVID is growing in H1 at constant exchange rate by 6%, 7% excluding the flow business, therefore in line with a higher range of the full year guidance. H1 COVID sales in the quarter accounted for 14 million euro, vis-a-vis 35 million in 2023. confirming our 2024 outlook, which is calling for nearly 30 million. The FX impact in the quarter is not material at all. Q2 revenues, as covered by the constant exchange rate, grew vis-a-vis 2023 by north of 7% of 20 million euros, thus recording an acceleration toward Q1, which grew 5%. This variance, as we just heard, has been driven by a better performance of both the immune and the molecular franchises, partially offset by the LTG business because of the generalized softness of the life science market, and in particular, touring instrument sales. H1 gross profit at €390 million, or 66% of revenues, is better than last year by €11 million, or 3%. Q2 gross margin ratio at 66% of revenues as well is slightly better than last year, which closed at 65%. All the initiatives aimed at improving operation processes and containing costs, alongside a more structured approach to pricing, which we discussed in the past, allowed us to preserve margins. Despite the inflationary pressure experienced in the last 18 months, now muted, and the manufacturing costs we are incurring into to set up our new plant in Shanghai, which has not started production yet. I believe this to be a remarkable indicator of the success of the relentless efforts we put in place to safeguard our profitability. H124 adjusted operating expenses at €229 million are basically in line with 2023. with a ratio of revenues of 39% vis-a-vis 40% of last year. The fact that operating expenses have not increased despite the investment to support the MIMED Acceleration Program in the U.S. and the physiological yearly labor cost rise is a clear demonstration of our discipline in managing the cost base and the result of the synergies delivered after Luminex acquisition. and marks a clear path to increasing profitability in line with the plan presented during the last capital market day. Adjusted H1 other operating expenses are higher than last year by 4 million euros. This increase is driven by many moving parts. amongst which I'd like to mention a new tax introduced in 2024 by the Italian Governmental Medical Devices Companies, equal to 0.75% of sales made to laboratories covered under the Italian National Health System. The yearly impact of this new levy should be around 1 million euros. Please be aware that this is different and on top of the Italian payback mechanism we have discussed many times in the past and that I will cover in a few minutes because there are some news there. As a result of what just described, the H-124 adjusted EBIT at 153 million euros, 26% of revenues, is higher than last year by 9 million or 6%. whereas the increase in Q2 is 14%, or €10 million. Half-year adjusted interest income at €2 million is in line with last year, and the same is true for the adjusted tax rate, which closed the first six months of the year at 23%. Moving now to the year-to-date adjusted net result, we see €120 million, or 20% of revenues, which is better than 23 by 7 million, or 6%, whereas the increase in Q2 is 12%. Lastly, H124 adjusted EBITDA, just short of 200 million euro, or 34% of revenues, is better than 23 by 8 million, or 4%, whereas the increase in the second quarter accelerated to 10%, with a profitability of 34%, vis-a-vis 32%, of Q2 23. Let me now move to the net financial position. We closed June 24 with a net debt of 781 million euro, basically in line with the end of 2023. The free cash flow generated in H1 has been offset by the payment of dividends to our shareholders, some share buyback to support the equity compensation plan for the certain employees, plus some minor moving parts. Before discussing 2024 guidance and opening the Q&A session, let me update you on the so-called Italian payback, which, as I think you will remember, is a request for companies to pay back part of the regional budget overspending on medical devices covered by the Italian National Health Service. A few days ago, and precisely on July the 22nd, the Italian Constitutional Court ruled in favor of the legitimacy of the law that introduced this mechanism back in 2015. At the same time, though, stating the possibility for each company to settle the amounts due for the period 2015-2018 by paying 48% of the original ask. Nevertheless, the payment is currently suspended and only upon a new request made by the regions that must recalculate what originally due at the light of the ruling imposing the reduction to 48%, the amount should become payable. On top of these, to make things even more complicated, the trial will continue before the administrative regional court in Rome that will judge on the other objection. besides the constitutionality issue raised by the claimants last year. To confuse this saga even further, some operators are considering bringing this case before the European Court of Justice for the alleged violation of EU rules. Now, let's move to what this means for us, for Gasolin. As you might remember, we have built over the last few years in our balance sheet a provision against this risk. Therefore, the latest legal developments are not going to have any impact to our P&L. Whereas in the settlement scenario, we would have a net cash out of about 7 million euros. We are assessing with our legal team and with the association of the Italian diagnostic companies how to move forward, meaning if to settle or keep on litigating, since many things are not clear and determined yet. And as usual, we will provide you with an update as things progress. Let me now finish my remarks moving to the outlook. Considering the strong start of the year, we are increasing the 2024 guidance, aligning with the higher range of what previously reported, both for revenues and profitability. To be more specific, the new outlook is calling a previous year exchange rate for revenues excluded to go between 6% and 7%, with COVID sales at about €30 million. That is not going to change. and an adjusted EBITDA margin at about 33%. With that said, let me please turn the line to the operator to open the Q&A session. Thank you.