DiaSorin S.p.A. (DIA) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the DiaSorin First Half 2020 Results Conference Call. [Operator Instructions] 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. Good afternoon to everybody. Welcome to the DiaSorin quarter 2 call. As usual, I'm going to make some general remarks about the business, and then Mr. Pedron, our CFO, is going to take you through the numbers. I think that, as you have heard from other competitors in the field of diagnostic, when you look at the business these days, you need to -- you really need to look at the business two ways, the current business and the underlying trends and the COVID-19 effect. So let's talk first about the underlying business. The underlying business ex-COVID, the result of the business is primarily driven by volume, associated to the fact that, especially in Q2, which was the peak of pandemic in many European countries and in the U.S., the volume per se, the business volume declined sharply, simply because patients were not available to go to hospitals, to avoid to get infected. And clearly, there is a trend. Overall, for DiaSorin in the quarter, the non-CLIA business declined roughly 30%, again, primarily driven by declining volume. If you look at the different regions, what is noticeable that along the quarter, in quarter 2, we see a stabilization or an improvement in Europe. In several European countries, we see that at the end of the quarter, the volume is roughly down only around 10%, indicating that the situation is better. Whereas in other countries like China, we continue to see our volume that is certainly improving, but not to the level and the extent that we have seen in Europe and somehow in North America. Certainly, North America is a question mark because we all realize they have not had the peak yet. And actually, they are still increasing in terms of prevalence of the disease. So we don't know whether this apparent stabilization that we see will continue or how that -- or how it's going to behave. From -- now if you look at the COVID business, I think that we need to distinguish between COVID molecular and COVID immunoassay. COVID molecular revenues continue to be very strong. It is driven by a strong demand in all geographies, related to the fact that guidelines today do recommend to swab patients, in-patients, for sure, outpatients, to swab employees in certain geographies to guarantee that the manufacturing departments of the companies stay without getting employee infected. So there is a surge in demand of molecular, driven a lot by North America. You know that there is a plan by the government to sharply increase the swab capacity in preparation of the coming fall. Today a report, I think in the U.S., the total number of swab is around 15 million to 20 million per month. And there is an objective by the government to get to 100 million. So a lot of pressure to the labs and to the industry to continue to supply more reagents. As far as DiaSorin is concerned, we, as I think everybody else, has had an opportunity to deploy more systems. We now have over 1,000 MDX placed around in worldwide with a sharp increase compared to last quarter. I remind you that the positioning of our system is not point-of-care because it's a small system that can process 8 centers at a time. So what we see is that there is an increasing demand in small, mid-sized hospitals that cannot wait until the big labs, the turnaround time of the big labs where they send out. They cannot afford technologies, high throughput and the point-of-care systems today available are too small and therefore, the MDX perfectly fit with this mid-sized hospital. And this is certainly true in the U.S. And if you remember what was the company strategy pre-COVID, driven by QuantiFERON and penetrating the hospital market strategically, this, again, is supporting a lot. And because now we can go up to these hospitals and we can provide a solution with the COVID molecular, and we can also provide serology and our LIAISON XL and you saw that placements for LIAISON XL surged in quarter 2. So as far as molecular is concerned, it's a matter of manufacturing capacity and the company, i.e., over the last call, I think I gave an indication in terms of what would be the objective of the company for capacity. And today, we are able to manufacture around 700,000 test per month molecular, and we have a plan to bring that number to 1 million by year-end in anticipation again of big demand with the next flu season, starting from October. So now let's move to serology. Serology is a very interesting story because at the beginning of the pandemic, as soon as products were made available to customers, there was a surge in demand. And if you look at what different companies declared in terms of capacity, manufacturing capacity, it was among the number of product tests that the COVID -- the diagnostic industry was prepared to provide to customers. After an initial consumption of the serology tests and I'm referring to the IgG test, the situation for us is a result of lack of guidelines. There has been a tremendous amount of discussions at the scientific level vis-à-vis what's the value in detecting antibodies. The initial open dream was the fact that antibody detection will provide an indication of immunity. That clearly was not the case, simply because our clinical threshold for immunity has not been defined and will be defined the day that the vaccine industry is going to declare it, once they launch the vaccine. Then there was a usage of this test for epidemiological studies. It is still there, but I think the initial intent of governments to conduct large epidemiological studies eventually faded away because there are different priorities today for governments. I'm referring to the Italian government, for example, which launched a campaign of 150,000 citizens to be tested and from what we understand from public information, they were only able to collect around 80,000. And other governments as well declared massive screening program that eventually did not materialize yet. So today, serology is at the -- the use of serology is more clinical and is related to those countries where there is an ongoing epidemic or there is a lack of swabs. Because somehow, IgG and IgM are used to complement for the fact that there is a chronic lack of swabs. So we see still opportunity for serologies in Brazil, in India, where we see adoption of IgG and IgM. But in the more mature countries, we see that the volumes have eventually declined to numbers, which are far below what were the expectation of the industries initially, as clearly, you picked up following comments from other diagnostic companies, including some large labs in the U.S. So today, what's the future of serology? Well, we believe that the future of serology rests with vaccination and vaccination campaigns. And as it happens with certain vaccines after post-vaccination, there can be a need of determining whether the patient has properly responded to the vaccine. If the case, for example, of some vaccines like the hepatitis B. If that happens, and even if, because it depends what the regulatory bodies eventually will mandate and/or what would the guideline will say post-vaccination, we see a potential -- tremendous potential for serology that probably is going to be a combination of classical test, venous test and a combination of probably some rapid testing that in that case, could fit the market because we don't need an excessive sensitivity, which usually is the problem with these test. But can probably be sufficient to determine whether a certain threshold of antibodies have been generated [ in light of a ] vaccination. So I think that difficult to predict what will happen with serology. We need to wait for guidelines for the vaccine. From a geographical point of view, very clear, clearly, what I said is reflected in the performance of the company. North America has been growing dramatically for the company. In the quarter, [ 72% ]; in the first half, [ 42% ], again, driven by tremendous adoption of swabs and initially of serology, which was actually used by some of the labs in massive volumes. Initially, again, that interest is fading away a little bit. Then with Europe, Europe behaved well for the same reason. In Europe, we have distributed -- we made available to European countries, including Italy, certainly, our home market, our molecular product and our serology product. And that has allowed Europe to grow notwithstanding the fact that we have experience in different countries decline of volume as said of the base business because of the COVID pandemic. We have a black eye in China, as I think everybody else. And this is because, so far, in China, there is no foreign company through with a COVID product. And so you don't enjoy, as a company, the opportunity of COVID in China, where [ as you saw from our ] decline in volume. So China declined sharply for us in Q1. It continues in Q2, although we see a slow improvement in volume, but still negative. And then let's talk about Latin America. Latin America, we all know the situation in Brazil, which for us, is the main geography. In Brazil in Q2, we did suffer by the fact that, well, first, we did not launch our molecular assay in Brazil, and so we don't have their support of molecular. And recently, we got our serology product approved. And therefore, we expect that starting from Q3, we will see adoption of our serological test in Brazil and that will actually revert the result of the region of South America from being sharply negative to being positive in quarter 3 and in quarter 4. As far as futures, I want a couple of comments. The first comment, I believe that we do have an intensive research program for COVID. And as declared, as stated before, we see that there is a need for a saliva-based test, more sensitive than what is currently available to complement the chronic lack of swab. And we have a program in the direction with a partner, with a U.S. partner in order to try to come to the market with products by the coming fall season and flu season. And then and also, we believe that there is a need from a serological point of view of a qualitative test that is actually set up, for again, post-vaccination. And therefore, we are actually working in developing a new serological test for IgG determination, quantitative that standardize, that we plan to make available again by the time the vaccine is launched. So from a product perspective, all our effort on COVID, the COVID program is an IgG, assay, as [indiscernible] for vaccination, and saliva and immunoassay product to try to reach to the best sensitivity, to try to complement swab for the coming season. At this point, just again, one remark. COVID has been an opportunity for the company, not only to establish a brand with the products we have developed, but it has been a great opportunity in North America to establish an installed base. As said before, if you remember, we had strategically, we had a plan to penetrate the hospital market with a mind of certain number of hospitals to be actually reached and closed by end of this year. Well, comes Q2, we already almost doubled the target of the hospital number that we targeted for the full year. So that I see as a tremendous legacy opportunity for DiaSorin because we are penetrating with our products, we call it molecular and immunoassay segment that's strategic for the company. And certainly, we will see then adoption on our systems of the QuantiFERON and all the specialty products that we carry on those systems. So I see a very positive effect of COVID strategically, in terms of positioning, branding and installed base. Now I leave the podium to Mr. Pedron, who is going [ to speak ] to the numbers, and then we're going to start a Q&A session.

Thank you, Carlo, and good afternoon, everybody. In the next few minutes, I'm going to walk you through the financial performance of DiaSorin during the first half of 2020. And I will make some remarks on the contribution of the second quarter as well. As usual, I would like to start with what I believe are the main highlights of the period. We closed half 1 with an increase in revenues at constant exchange rate of 8.7% or EUR 31 million. As a result of the soft first quarter, mainly due to COVID-driven reduction testing volume in China, as we discussed and a very good second quarter, up by 15.4% or EUR 28 million. Q2 gross margin confirmed the good results achieved in Q1 '20, with a ratio of revenues of 69.1%. H1 '20 gross margin ratio at 69.1% as well, is slightly lower than H1 '19, with growth of 69.5%. I will discuss later about the main drivers behind this variance. H1 '20 EBITDA at EUR 154 million, records an increase at constant exchange rate compared to the previous year of 10.1%. H1 EBITDA margin, again, at comparable FX rate, is 40.2% vis-à-vis 39.8% of 2019. Q2 '20 EBITDA at EUR 89 million or 42.9% margin, registers a very good performance, with an increase of 24% or [ EUR 70 million ] compared to Q2 '19. Lastly, we confirm our ability to generate a very healthy free cash flow, EUR 74 million in the first 6 months of the year, which brought the net financial position to positive EUR 190 million. Let me please remind you that in June, we paid EUR 52 million dividends to our shareholders. Let me now go through the main items of the P&L. H1 revenues at EUR 382 million, grew by 9.1% or EUR 32 million compared to last year. The growth at constant exchange rate is 8.7%. The strengthening of the U.S. dollar against the euro is the main reason behind this FX tailwind, which has been partially offset by the devaluation of the Brazilian reals. Considering where the U.S. dollar is trending now compared to 2019, I believe it is fair to say that we might experience in the second half of the year some FX headwind that will likely offset or even more than offset the upside of the first part of the year. H1 gross margin, EUR 264 million, grew by 8.5% compared to last year, closing the first 6 months of 2020 with a ratio of the revenues of 69.1%, a touch below H1 '19, which closed at 69.5%. The slightly decrease in the year-to-date gross margin is the result of the following: a negative product mix coming from lower CLIA sales and higher molecular sales, which enjoy slightly lesser margins. Partially offset by better fixed cost absorption as a consequence of higher manufacturing volumes. Higher distribution and freight costs, mainly driven by the fact that many commercial flights, which under normal conditions would have been used to move our goods have been grounded because of COVID. And so we had to use cargoes, which are usually more expensive. H1 total operating expenses at EUR 131 million or 34.3% of revenues have increased by 2.4% or EUR 3 million compared to last year. OpEx ratio by revenues is 34.3% vis-à-vis 36.6% of 2019. Here, we had 2 effects of opposite side. On one side, we have had a slowdown of activities and the consequent reduction in costs caused by the widespread lockdown measures that interested all the geographies in which we operate. On the other, we have had an increase in costs, mainly driven by the investment we made in the U.S. commercial team, aimed at sustaining our hospital strategy, as we talked over in the past few quarters, and Carlo just mentioned. H1 '20 other operating expenses at EUR 9 million increased compared to 2019 by EUR 4 million. As discussed during Q1 '20 call, most of this variance is driven by a nonforecasted loss we suffered in our South African subsidiary during the shutdown process, for which we have activated our insurance policy -- our group insurance policy. As a result of what I just described, H1 '19 EBIT at EUR 124 million or 32.3% of revenues, has increased compared to 2019 by 12.2% or EUR 13 million. Q2 closed at EUR 74 million or 35.7% of revenues, with an increase of 30% or EUR 70 million compared to last year. The tax rate at 22.5% is substantially consistent with H1 2019. The net result at EUR 95 million or 24.8% of revenues is higher than previous year by EUR 11 million or almost 13%. Lastly, H1 EBITDA at EUR 154 million is better than 2019 by EUR 14 million or 10.3%. The vary asset constant exchange rate is positive by 10.1%. First half EBITDA ratio on our revenues is 40.2% at current exchange rate vis-à-vis 39.8% of last year. Q2 has recorded a very good result, closing at EUR 89 million or almost 43% of revenues. Both H1 and Q2 improvements compared to last year are mainly driven by the higher sales and gross margin, coupled with a very nice operating leverage coming from the reasons that I just talked about. Let me now please move to the net financial position and the free cash flow. We closed the period with a positive net financial position of EUR 190 million after payments in June of EUR 52 million dividends to our shareholders. In the first half of the year, the group generated EUR 74 million free cash flow vis-à-vis EUR 70 million of 2019. The semester has been negatively affected by an increase in working capital, driven by higher sales, and so accounts receivable, higher inventory to sustain COVID tests volume and higher CapEx, driven by the acquisition in Q1 of the TTP license, partially offset by lower tax cash out, mainly coming from a positive payment phasing. Lastly, guidance. So considering the uncertainty and unpredictability of the impact of the coronavirus pandemic in the second half of the year and the risk of further widespread strict lockdown measures, DiaSorin, similarly to what's done in Q1 is not in a position to give an economic guidance for the remainder of the year. Nevertheless, at the light of the good performance achieved in H1 and taking into account the importance of the diagnostic industry in managing the consequences of the COVID pandemic, the management is not expecting a negative impact on the results of the second half of the year. Now let me please turn the line to the operator to open the Q&A session. Thank you.

[Operator Instructions] The first question is from Andrea Balloni of Mediobanca.

My first question is about serology test production capacity utilization. In your last conference call, you guided production capacity expected to increase from 5 million to 10 million per month. We understood that so far, the utilization is much lower compared to the top of range, if you can give us an idea about the capacity utilization in July, just to understand where to set our estimates. My second question is about the molecular test. During the last conference call, if I'm not wrong, you guided for around 10 million to 12 million sales per month without setting the amount of test produced. Now you said that you are producing [ 650,000 units ] per month. And if I have understood correctly, you will like to achieve a level of 1 million per month by the end of the year. If you can give us an idea about the target in terms of sales by the end of the year per month? And my third question is again about serology test, we saw in Italy, a draft law in order to allow students reentering in the school, and one of the point included in this law is the utilization of a serology test for both students and also for teacher and so on. Do you expect this could trigger higher utilization of a serology test, at least in Italy? Or this could represent an example also for other countries in order to increase utilization of serology tests in the school?

Okay. Listen, I will not give volumes in July for serology. My indication is clear, serology, our manufacturing capacity is in the 10 million a month. That capacity today is clearly not used. You can go and check. If you want to have an understanding of volumes, I think you go to LabCorp and Quest reports. And you understand what the current expectation of volume is, which is far below versus what everybody thought. I remind you that there have been statements by certain competitors where the capacity was up to 100 million per month, to 40 million per month to 30 million per month. So the industry released a [ static ] capacity for a demand that eventually did not materialize after an initial surge. I'm saying that the big question mark, is vaccination and the big opportunity is with vaccination today for serology, and we need to see what that will be. As far as school, in the U.S., I don't know about the Italian law, to be honest, we do not have clarity these days about what Italy is doing. And I think you can share the pain with me about that. But all said and done, I look at the U.S., for example, and the start of the year in school is concerned, there have been actual guideline to say that testing will not be required. Okay? So today, there is lots of confusion, I think in the market among experts about serology. And there's a lack of interest. And this confusion is actually pushing for less adoption and lack of interest. And this is the difference between serology and swab because today for swabs, there is a very clear guideline. We start from the WHO and then it's been transposed into the different countries. And this is why there is a clear usage and clear increased volume for swabs and a lot of uncertainty on serology. For molecular, I gave initially an indication of revenues. But then in the last call, I also spoke about manufacturing capacity, which I think is, in this case, is a good correlation between revenue and with the revenue simply because there is more today, demand and capacity for everybody. And so what you can manufacture actually correspond in this case and for the foreseeable future to your revenues. And we have indicated that today, we do have an -- a capacity overall, around 700,000 tests per month, with a plan to increase it to 1 million tests per month by year-end. And I think from that, you can -- and understanding what is the price on the market, and you can make a gross estimation of what DiaSorin revenue per month can be moving forward between now and December.

The next question is from Catherine Tennyson of Bank of America.

I've got two. Just following up on the previous question. In Q2, we had about EUR 89 million of benefit improvement. Could you roughly help us understand how much of that came from molecular versus serology? I appreciate you won't give the July run rate. But if you can just give us any idea on volume to that in Q2, and how we should think about the monthly demand for serology going forward?

Catherine, I cannot. Because I believe that even if some competitors were very analytical about the revenues and some other competitor decided that to keep the numbers to themself. I think that this is what we decided to do. And again, the indication, is follow. I don't think that what happened in Q2 has good proxy for serology into what is going to happen in the future. And therefore, I see no value in really declining serology revenues because it has been a peak that is not going to be repeated until there is something that will make serology as a technology needed, okay? And again, I said, the only way it's going to be that post-vaccination, tighter determination. Molecular, you can do your math. Clearly, you can do your math with information I gave you because you understand what is the current price for our molecular test on the market. And so do the math and understand the potential for molecular, which is certainly vast, I have to say. And it is like that in the U.S. because the government has announced this grandiose plan objective to be able to get to 100 million swab per month. Okay. So it is very relevant for me that as investors and as analysts and you guys understand that serology in Q2 has been a nice opportunity, but eventually, it cannot be repeated, whereas the solid business today stays with molecular product.

The next question is from Maja Pataki of Kepler Cheuvreux.

Carlo, just to follow-up on your statements with regards to serology tests. And in general, a bit more about the outlook for [ COVID-19 ]. I mean, as we as we're passing time, as we're learning about COVID-19, you've mentioned that there could be an opportunity for serology tests in combination with vaccination. Do you believe that based on the data that we have today, COVID-19 will remain a [indiscernible] of the portfolio for a medium to long term rather than what we anticipated all in the beginning that there would be one vaccination, and you might have immunity forever? So do you think that COVID-19 -- the opportunity from COVID-19 is obviously always changing, but do you believe that now there is a potential longer-term opportunity?

Maja, look, to be honest with you, if today, I make a public statement on this, I will be better off to explain a lot because the probability for me to give you the right answer is fundamentally the same. But let me just give you a common sense comment. Let's talk about the vaccination. First, you understand that there are -- there has been a very nice publication recently on Lancet, which has, in fact, described the initial data on 1 vaccine. And I see that today, there is a fundamental discussion, and nobody knows yet whether the vaccine would first efficacy, second, what is the effect of the vaccine. So you're going to be vaccinated or simply it is going to tame the infection and avoid that the severity of the infection once you get it without vaccination. So to make a long story short, I deal what I believe. I believe that there will be a need somehow to test whether the patient has reacted to the vaccine. I see the complexity, though, because if you use a traditional or a serological assay, it means that you need to have millions of people lining up to take blood and to get blood drawn and tested. And that is a complication. I see in that sense that there is an opportunity if the technology can deliver for a [ lateral flow to ] something that makes the testing post-vaccination simpler. Okay? So the question is, what is it going to be the opportunity for serology? And is it going to be more on the lateral flow versus the traditional immunoassay done in a lab and I don't know that yet because it's still recent. As far as the opportunity, I believe -- I think I share the comment that some competitors make vis-à-vis 2021. So if you heard what I believe QIAGEN said or Roche said, everybody sees that 2021, we like it or not, notwithstanding availability of vaccine, we're going to go through the hurdles of COVID, and we will need more testing for COVID. In my opinion, we will need more molecular testing because of the need to isolate people very rapidly. You see what is happening in Europe because of the fact that this swab is becoming common practice in the meeting people of the hospital, for public workers, for police people and so forth. So I see 2021 still COVID. I have no idea whatsoever what is going to be 2022. And to be honest with you, I wish to myself that COVID goes away because quality of life and economy needs a free -- a world free of COVID. As far as we are concerned, I would like to make a comment, what is COVID doing to us? Tremendous branding. Because everybody -- we were the one that -- because of the characteristics of our technology for molecular, we do not extract. So it's the [ right determination ] of the virus, that allowed us not to go through the hurdles of a shortage of reagents for restructuring, which has been one of the problems of other competitors. And since the beginning, we have not back ordered a single customer with COVID. So there is a reputation that we have acquired in the business. On top of that, we clearly had an acceleration as said of the installed base, both of COVID and the non-COVID. So the serology. And today, as far as serology is concerned, if I look at what the company got out of it, we got cash for sure, from serology because it has been a significant opportunity in Q2. But strategically, we got an installed base of systems in hospitals, especially in the U.S., that we continue to do COVID serology at a much smaller volume than what was expected from a very large lapse. But they do COVID, they use the serology and we're taking our system there, they will do QuantiFERON, they will do all the rest. As I said before, we had a target of hospitals to be closed by in 2020. And by June, we already almost doubled the number of hospitals we have enrolled as customers. And this is, I think, as much as a common salesperson can say about COVID.