Good afternoon. This is the call's conference operator. Welcome to our DiaSorin Q3 2018 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, you may signal an operator by pressing seven, zero on their telephone. At this time, I would like to turn the conference over to Mr. Carlo Rosa, CEO of DiaSorin. Please proceed, sir.
Thank you, operator. Ladies and gentlemen, good afternoon, and welcome to our nine-month, Q3 conference call. I will start, as usual, commenting revenues. I will make my initial remarks at constant exchange rate since, as you know, currency fluctuation had a relevant impact on our business in the first nine months of 2018. Moreover, let me remind you that the performance, which has been registered this year, includes the positive contribution from the fact that we had nine months of revenues coming from the Siemens ELISA business, which was acquired in September 2017. At the group level, our revenue grew by 9.1% in the first nine months as a result of the solid sales performance of our CLIA test, method vitamin D, and the ELISA business, which has been acquired by Siemens.
This positive trend of the CLIA ex-D was partially mitigated by some negative trends that I think we have already discussed in previous calls. One is the vitamin D volume decline, mainly in the U.S. market, as a consequence of the change in reimbursement policies by some of the insurers. A slowdown in revenues of the newer ELISA business in certain geographies, mainly in distribution and in Brazil. This is associated to two events, delay of certain large tenders in one side, and as far as Brazil is concerned, the fact that some of the distributors are supplying public tenders in Brazil had issues of credit collection. As a consequence, we have frozen some of these distributors, waiting for them to address the problem with the government. We have actually stopped shipping some of these ELISA to these distributors. Let's talk about vitamin D.
As far as vitamin D is concerned, as I already commented in the last financial conference call in August, starting from Q2 this year, we have seen a change in pace, mainly due to a recent policy change with one insurance company in the U.S. market. Let me remind you that when we experience on the market a change in the reimbursement policy, we also usually see a reduction of prescription from physician, which is then translated in lower volumes in a period of 12-18 months. Australia has experienced something similar two years ago. This is certainly related to the fact that doctors are recommended not to test or to limit testing of vitamin D compared to what they used to do when these measures were not in place. We have no visibility at this point on this trend.
We are starting to acquire some visibility, certainly in the last month or so. As we have discussed previously, what we see currently in the U.S. market is that we expect that the vitamin D volume may decline up to 18%-20% over the next 12-18 months, but it's a matter of just waiting and seeing what's the reaction in the market. Let's talk about the other geographies, let's talk about Europe. We came to Europe with a solid growth, 14% in the first nine months. Europe proved once again to be a strong contributor to our group revenues, and this is certainly linked to the vast installed base, the availability of all the products in the region.
As far as the fact that we have initiated the sales of QuantiFERON, certainly not in Q3, but we initiated the commercialization of the product and we expect to see a benefit starting from Q4. Specifically, Italy grew by 9%, France grew by 16%, it means that in some very key geographies, the business is certainly moving fast. Germany grew 23%. Certainly, this is related mainly to the fact that a lot of Siemens additional business was added in the geography. We have inherited through Siemens roughly 800 accounts throughout Europe, of which 60% were in German-speaking countries. We are working on the conversion of these accounts from ELISA to the LIAISON. We have three years to accomplish conversion. Roughly 10% of the accounts have been already converted, and we have 15% of the accounts in the pipeline.
We expect roughly 50% conversion by the end of 2019. I would say the ELISA business is flat, the Siemens business we inherited net of conversion. Let's talk about North America. Certainly, as we discussed before, this geography is where we are experiencing the vitamin D issue, and I'm not going to talk about this any longer. By the same token, we had a continuous growth of CLIA ex-D with a growing install base in the hospital and midsize labs of LIAISON XL. The net-net of the decline of vitamin D, but the increase of revenues of CLIA ex-D pretty much flattens out this geography. The growth of the ex-D is able to counterbalance the decline of D, but overall, the U.S. is flat.
In the U.S., the good news is that we were able to find an agreement with Meridian, we got the approval by the FDA of the H. pylori product, as a consequence of that, we have launched recently this assay in the U.S. in conjunction with Meridian to go and rapidly convert all the existing customer base of Meridian from aging ELISA to the LIAISON version of the product. As far as Asia Pacific is concerned, this region grew 16% in the first nine months. Certainly, the driver in China is CLIA ex-D in China, which is growing strongly. We are talking about 16% growth of CLIA overall, because also vitamin D is growing strongly in China. This trend is consistent what we have announced in the last conference call.
Please consider, as we had discussed before, that by the same token, changing business model where we don't sell instrument to distributors any longer, but we try to place in region of interest and to drive placement into the Class II market, we have decrease in instrument revenues. It's not a mistake for DiaSorin. Clearly bears much lower profitability. This is a must for us because it's the only way to control actually the shift of focus of distributors in China from Class III to Class II. Overall business, the underlying business, again, CLIA does benefit from it, as I said, growth of 16%. Let's talk about the 2018 guidance. We confirm revenue growth at 9% at constant exchange rate and EBITDA growth at 12%.
We would like to underline a couple of aspects of the business which have to do with the fact that in quarter four, there are two events that may shift revenues from one quarter to the other. First one is Iran, it has to do with the fact that, for us, Iran is a very relevant geography. Recently, actually yesterday, a series of measures have been published by the U.S. government. We need to understand how to continue to supply this market and through which bank system we can continue to operate. Since, as you know, a lot of international banks actually stopped operating in Iran. The second one is a very large tender, some of which entails chunk of instrumentation, some of which have been shipped in Q3.
There is a large installment that has to happen, and we forecast to have it made in Q4. Clearly, since it is a lot of instrumentation, we need to understand when that can be fully completed in quarter four. Before giving the microphone to Mr. Pedron, I would like to conclude my comment with a couple of remarks. First one has to do with new products. We have launched so far four CLIA tests, we have one additional test in the pipeline, which we believe is going to launch in Q4, then six new molecular products. So far so good in terms of continuing the effort of delivering new products to the market. Talking about business development, we, as you know, have provided lots of color to different projects.
The one that I would like to stress is QIAGEN and the collaboration about the We have successfully launched it in Europe. That actually happened at the end of September. We are very engaged in the initial conversion of customers, together with QIAGEN, from ELISA to the LIAISON version. I know Peer Schatz did provide color and comments during his Q3 conference call, I actually invite you to go and check what he said. Things are going well, and I think the two companies are now working together to enlarge the scope of the collaboration and add more content to this line, which we deem as strategic. We also deem strategic to enlarge menu availability on the LIAISON system with QuantiFERON application, and it has been made public that the next in line for us is a Lyme disease product.
We're currently running pre-clinical testing to verify claims and applicability. Fundamentally, the two companies are aligned in terms of dedicating R&D money and effort to bring forward a new application on the LIAISON system. I would actually give the microphone to Mr. Pedron, who is going to take you through the numbers, and then we're going to take questions.
Thank you, Carlo. Good afternoon, everybody. In the next few minutes, I am going to walk you through the financial performance of DiaSorin during the first nine months of 2018. I would also make some remarks on the contribution of Q3 . With that, as usual, I would like to start with what I believe are the main highlights of the period. The strengthening of the EUR against all the currencies in which we operate has generated some notable FX headwind on revenues during these first nine months of the year, almost EUR 15 million. Even if, as expected, the impact has been negligible in quarter three compared to half one. This variance has been mainly driven by two currencies, the U.S. dollar, which depreciated by 7%, and the Brazilian real, -22% year-to-date.
Considering the U.S. trend in 2017 and where we are now, I think it is fair to say that also in Q4, like in Q3, we should not expect a material FX headwind. Moving to the second point, we closed September 2018 with an increase in revenues at constant exchange rate of 9.1% or almost EUR 43 million, whereas the growth in the quarter has been 9.5%. September year-to-date EBITDA at EUR 187.1 million, recording increase at constant exchange rate compared to last year of 7.5%. The margin at comparable exchange rate of 38.3% versus 38.9% of 2017. Quarter three EBITDA at EUR 58.9 million, increased by 6.8% at constant exchange rate vis-à-vis last year.
Please note that September 2018 EBITDA margin, net of expenses we booked for the legal disputes in the U.S. with Meridian, now settled, and net of the tail of the Irish site divestiture cost, would have been in line with what we recorded last year. Lastly, we closed September with a strong free cash flow, about EUR 101 million, and a very healthy positive net financial position, just short of EUR 130 million. The net financial position has been affected by the payment of the ordinary dividend for EUR 47 million in May, and by a share buyback program for about EUR 65 million. Please remind that the net financial position does not include EUR 98 million of debt to shareholders for the extraordinary dividends, which will be paid out in December 2018. Let's now go through the main items of the P&L.
September year-to-date revenues at EUR 494 million, grew by 5.4% or about EUR 25 million compared to last year. The growth at constant exchange rate is 9.1% or EUR 42.6 million. Carlo has already covered the business drivers behind this variance. Gross profit at EUR 336 million, grew by 5.1% compared to last year, closing the first nine months of 2018 with a ratio over revenues of 68%, which is basically in line with 2017, in spite of the negative effect of the Siemens ELISA sales and of the price pressure on Vitamin D. This performance, which is slightly better than what we originally expected, is mainly driven by higher manufacturing efficiencies and better geographical and product mix.
Q3 2018 gross margin at 67.1% of revenues is substantially in line with last year. The reduction compared to the previous quarters, which we also experienced in quarter three of the last couple years, is mainly driven by the product mix and by the seasonality of our business, which usually sees lower activities in some geographies, especially in Europe, during the summer months. Total operating expenses at EUR 179.8 million, or 36.4% of revenues, have increased by 5.7% compared to the first nine months of last year. Please remember that about EUR 11 million of September year-to-date OPEX have been driven by the depreciation of the intangible assets coming from the Siemens, ELISA, and Focus business acquisitions. Net of these elements, the year-to-date OPEX increase at constant exchange rate versus last year would have been 8.5%, and the ratio on revenues would have been 34.1%, against 34.3% for 2017.
September year-to-date, the operating expense is at EUR 6.9 million, increased by EUR 2.1 million compared to last year. As just said, the period has been affected by some expenses related to the legal disputes in the U.S. with Meridian, and the detail of the Irish site divestiture costs. As a result of what just described, September year-to-date EBIT at EUR 149.3 million, or 30.2% of revenues, has increased compared to 2017 by 3.1%, or EUR 4.5 million. The growth at constant exchange rate is positive for just short of 8.5%. The tax rate at 22.2% is almost 10 percentage points better than September year-to-date 2017, which closed at 32%, and is in line with what anticipated and discussed during 2017 year-end call.
This variance is mainly driven by the positive impact of the Italian patent box and the U.S. tax reform, which we already discussed about in the previous calls.
Year-to-date group result at EUR 160.8 million, or 23.6% of revenues, is higher than previous year by EUR 21.1 million or 22%. This increase is the result of what said so far and of lower net financial expenses, mainly driven by a reduction in interest and FX losses compared to last year, and by the evaluation of the participation in our Indian subsidiary following the takeover of its full control from the local partners. We also discussed about this element during last quarter call. Lastly, September year-to-date EBITDA at EUR 187.1 million is better than last year by EUR 5 million or 2.7%. The variance at constant exchange rate is positive by 7.5%. The EBITDA ratio on revenues is 37.9% at current exchange rate and 38.3% at constant exchange rate, thus confirming the strong profitability recorded in the last quarters.
Q 3 EBITDA margin at 36.2% of sales has been affected mainly by two elements. The impact of the one-off cost just described and some seasonality in sales, mainly Europe, and some product mix. Please remind that Q4 2017 was materially affected by the Irish site divestiture costs. The growth of Q4 2018 over Q4 2017 is going to be more material than what we have recorded year-to-date. 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 128.8 million and about EUR 141 million in cash. The net financial position has been affected by two main elements, the payment of the ordinary dividend for EUR 47 million in May, and the shares buyback program for EUR 65 million.
As said, the net financial position does not include EUR 98 million debt towards shareholders for the extraordinary dividends, which we will be paying out shortly in December. In the period, the group generated EUR 101 million free cash flow, vis-à-vis EUR 97 million in 2017. Lastly, in view of the group's operating performance, the management confirms 2018 guidance for both revenues and EBITDA, with growth at constant exchange rate of around 9% for revenues and 12% for EBITDA. As just mentioned by Carlo, please note that this guidance might be negatively affected by the delay in 2019 of some tenders originally foreseen for Q4 2018, which should take place in geographies which are served by our distributors network. Now let me please turn the line to the operator to open the Q&A session. Thank you.
Excuse me. This is the Telco Conference operator. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Romain Zana of Exane BNP Paribas. Please go ahead.
Yes, good evening. The first question, I'm sorry if I missed that during the call, is just a clarification of the organic growth component for the group in Q3. The second question is regarding contribution TB, and I was wondering if you would comment, let's say, on at least a range of the incremental growth that it could bring to your revenue growth in 2019. Just also clarification regarding the comment you made regarding some potential postponements of revenues in Q4, I'm referring to Iran, for example. Does it mean that you could actually miss the current year guidance, or this could be added to next year, or it won't be material enough that it will jeopardize the current guidance? Thank you.
Okay. I will comment on the second and the third question, then Pedron will cover the first. On the effect on TB and contribution 2019, you need to wait for the 2019 guidance and the plan that we the new three-year plan, which we plan to discuss in the first half, and we're certainly going to give more color to what we expect from TB. As far as the comment on Q4, look, we have a significant business in Iran. What we are trying to understand, at least because, actually, the U.S. just came out yesterday with a list of banks which have been blacklisted. We need to understand how, financially, we can continue our business in Iran.
So far, we expect that, looking at the list of banks, we will be able to continue with some of the current banks, and then we'll be able to make complete shipments in Q4. I'm just warning that, in case we need to move to different banks, it may take time, and that means that our regular business and our regular shipments in Q4 will be moved to Q1. That has nothing to do, certainly, with losing business, but has to do with the fact that there is a significant portion of sales, significant for the quarter, will be moved from one quarter to the other. The other one has to do with a very large blood bank tender that entails sale of a large quantity of systems, some of which already happened in Q3, but some is scheduled to happen in Q4.
Again, we are waiting for instruction, and we need to understand whether this is going to happen in Q4 or it's going to happen in Q1. We are saying these are events that should not impact our revenues, but there is a shift of these extraordinary components that may be shifted from Q4 to Q1. As far as organic growth?
Yeah. Hello. Organic growth, both in Q3 and year to date, was around 4%-4.5%. I believe I didn't mention it in my call, that's why you didn't pick it up.
Okay. Thank you. Just a short follow-up on Iran. What is the sales exposure of the group to this country?
No. It's sensitive information. We don't share this information.
Okay. Thank you.
The next question is from Michael Ruzic of Berenberg. Please go ahead.
Yeah. Hi, guys. Thanks for taking my question. Just a quick one from me. I was wondering how many of the Siemens accounts you have currently converted from ELISA to CLIA, I guess, percentage-wise? As well, just on the large system order, to better understand if that slips to Q1. Just in terms of percentage of revenues, can you quantify that or be a bit more clear? Thanks.
Let's talk about the conversion. I think I provided some data. I said that we converted today 10% of the customer base. We have in the funnel 50% conversion by year-end. Year-end meaning 2019. Okay, we expect to convert up to 50% by end of 2019, which it means that we will have one and a half year to convert the remaining accounts. Certainly, the weight in terms of revenues is not 50/50 because we are converting, in phase one, larger accounts. You're going to have the revenues is going to outweigh in terms of the number of accounts converted. I think the question was. Can you repeat the second question?
Yeah. I was just wondering if you could quantify, the system order for Q4, how important that was, for the revenues, perhaps percentage-wise, if that were to slip to Q1.
Unfortunately, cannot do it because this is part of a transaction which involves Siemens, is part of the Siemens business that we inherited, cannot share.
Okay. Thanks a lot.
The next question comes from Maja Pataki with Kepler Cheuvreux. Please go ahead.
Yes. Good afternoon. I have a couple of follow-up questions, and I'm sorry if I'm asking you probably the same questions again, Carlo. The potential postponement into Q1, is it related to Iran and what would be the second reason? I wasn't quite sure whether everything's down to Iran or there's another reason. My second question would be around your molecular performance, which came in below what I was expecting and with the discourse that at the first half results, a bit of a seasonality in molecular. I was wondering if you could give us an update and how we should think about it maybe going into Q4.
The last question would be really relating, since you're giving us an indication that there could be a shipment or like a postponement of some revenues moving into Q1, would you confirm, nevertheless, the 2019 guidance and then with this time to add Q1 on top of that, would that be the right way to look at it? Thank you.
Okay. The first, I said that there are two events, very different. First one is to do with Iran, and again, and we covered that. Second one is to do with a very large tender in blood bank in Asia. This is part of the Siemens business we inherited. We cannot quantify, it's a significant business. It's done through partnership, and therefore, we cannot provide more details. The question on the table is whether shipments will happen in Q4 or will happen in Q1. That's the
Okay. Thank you.
Okay. We're just moving from one quarter-
Okay
to the other quarter. As far as that clearly, if this is shifted to Q1, is additional business, to what we foresee for 2019.
We have now, the world has been slightly crazy. You talk about issues also in Brazil due to debt collection and, stopping for a moment with the orders. We're seeing Iran, this large order, in Asia. Do you still feel that the 2019, that your guidance that you provided three years ago for 2019, that are you still comfortable with that?
Look, Maja, the 2019 guidance, I think if we do it at planned exchange rates, okay, which is already a complication, entails a growth next year of 10%. What are the factors, the add-on factors and, what are the risks? The add-on factor is certainly understanding that, we have a base business today net of new initiatives, and a new initiative would be launch of Stool in the U.S. and with the Meridian, conversion of the Meridian business to launch the QuantiFERON and launch some of the nuclear products. We have an intrinsic growth rate of the business, which sits around 5%. To that, you need to add the component, the organic growth provided by, again, PB, and the Stool. The question, in my opinion, for 2019, is more to do with, where vitamin D in the U.S. is going to go.
Because today I'm making a projection which is based on data that we are seeing today, and I'm also making projection on what we have seen in other geographies. I'm guesstimating that within a certain period of time, vitamin D volume may go down between 18% and 20%. Okay? Then, I think as we have discussed already, from previous experience, I expect that volume will bounce back. I always refer to what happened in Australia, very similar situation. Measures were put in, reimbursement was cut, which is very exactly the same as in the U.S., and then eventually bounced back, the volume bounced back in the following two years. There is a hit that you take, when it goes down. The effect of this in 2019, in my opinion, is still to be seen and evaluated, and this is why we are careful.
From what we see today, I believe that the 2019 guidance that we have given, provided that, again, we have good outcome from PB, which is starting very well. The viability and this transaction with Meridian, which pretty much is opening up the U.S. market to H. pylori. Working with Meridian conversion, it's kind of a positive feeling about 2019 and the guidance.
Great. On molecular?
I'm sorry. Yes. Question number two was about molecular. You see, the problem with molecular is that, as you know, as I discussed a few times, we bought a molecular business which has two components. One is ASR, famous ASR. The other one are the kits. We don't break it down, but as far as the kits are concerned, there is a growth which is significant. It's 20% growth worldwide of this product line. You have the ASR, where ASR, you really are at the mercy of the end user, which, guess what? The very large end users are the very large labs in the U.S., where they use it for LDT. There you see dynamics, which are difficult, honestly, to predict, because LDT means that they develop their own test, so difficult to understand and predict efficiency.
How much of your reagents are actually turned into assays that they report and therefore consumption. Historically, when we bought this business, the ASR in the U.S. was growing double digits. Okay. What we have seen this year is that this ASR component is not growing. Actually, specifically, with one account is declining. The net-net effect is that we are diluting the growth of what is the strategic business, which is the kit business. It's still less than 10% of our overall business, so it does not have a great impact, plus or minus, on the growth. It's very positive on the kit side. There is this ASR component, which is difficult, honestly, to predict. Great cash cow, not necessarily so strategic, but it's diluting sometimes the good results of the kit.
Thank you very much. Carlo, at the second quarter call, you were kind of expecting that the ASR business would, at some point in time, see an acceleration in this year. Just as you pointed out, the lumpiness and the big customers. Do you still believe that at some point is that we're going to see a turn effect, or do you think this is something that is going to remain sluggish?
My expectation in 2019 is that this is not going to be a drag. The reason being that there is a large contract that was awarded to us. We have the validation. Again, some of the big labs. This should cover some of the negative impact that we're seeing from reduction of use by other accounts. In my projection, ASR should not be a drag, should probably continue to grow slow in low single digits. I see it as a cash cow, and this would allow clearly the kit performance to be more visible. Keep in mind that we have the influenza syndrome as everybody else, we are carefully watching what is going to happen with the influenza this year. It was a light season in the Pacific, I think we're all waiting to see how the influenza will do in this winter.
It does impact, I think, the business of a lot of companies that actually play into the molecular space, bioMérieux.
Okay. Thank you very much for that.
A reminder, if you wish to register for a question, please press star and one on your telephone. The next question is a follow-up from Michael Ruzic of Berenberg. Please go ahead.
Yeah. Hi, just a quick follow-up from me. I think the market has been kind of spooked by these potential delays in Q4. I think it would be really helpful, maybe not splitting them out, but just together, if you could quantify, in terms of a headwind, if both were to go in the negative case and slip to Q1, do you think it would be a 1% headwind to sales? Does that feel about right, or would it be more or less? Thanks.
More or less one percentage point.
Okay, thanks a lot. Very helpful.
Welcome.
If for the questions, please press star and one on your telephone. Mr. Rosa, there are no more questions registered at this time.
Thank you, operator.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.