QuidelOrtho Corporation (QDEL) Earnings Call Transcript & Summary

Hi, everyone. Good afternoon. Thanks for joining us on the second day of the Growth Stock Conference. For those of you who don't know me, my name is Andrew Brackmann, and I cover diagnostics for the firm. Before we get started here, just a couple of quick pieces of housekeeping item. The breakout for this will be in Burnham A on the second floor and for a full list of research disclosures, please see williamblair.com. With that, we're pleased to have the team from QuidelOrtho joining us. We have the new CEO, Brian Blaser, right here; the CFO, Joe Busky, who will be doing the presentation and from IR, the VP of IR, Juliet Cunningham, joining us as well. So with that, Brian, Joe, Julie, thanks for joining us.

Thank you. All right. Good afternoon, everyone. I'm happy to be here to present to you. I am Joe Busky. I'm the Chief Financial Officer at QuidelOrtho, I came over from the Ortho Clinical Diagnostics side of the business as the CFO and became CFO of the combined company upon closing of the deal in May of '22. And I've been with the company, 4 plus years at this point. And again, Brian Blaser is here with us. I think today is actually his 1 month anniversary with the company. So congratulations on that achievement. And Juliet is also with us, our Head of IR. And again, I will be leading the presentation, but both of these 2 will be in the breakout session with us in the next half hour. So this slide here is just a legal reminder. If I didn't show this, our General Counsel would be upset. So before I get into the main slides, we will be making some forward-looking comments and reference not referencing some non-GAAP financial measures, articulate when you can take notice of the non-GAAP reconciliations in the back of the deck that will -- I assume we'll post this deck online at some point. So the first real slide here. For those of you who might be new to the story, maybe just a few high-level pieces of information. Our company QuidelOrtho was born 2 years ago, almost to the day here, as I speak, when Quidel and Ortho Clinical Diagnostics, 2 companies, both with many decades of success combined. We've completed the integration of these 2 companies, but we have not forgotten the DNA of quality and customer service that was required to fuel each of the company's success over the decades. We are a global, pure-play diagnostics company that serves a very large market, which we'll get into in a couple of slides. We have a large commercial team of about 3,000 individuals around the world. We have a broad portfolio of products, many with leading market positions. Again, we'll get into more of that in the next coming slides. And finally, on this slide, the company did $3 billion of revenue in 2023. And just a reminder that scale really does matter in the diagnostics space. I won't spend a ton of time on this slide, but I did want to highlight our executive leadership team, starting with Brian. Brian, our new CEO, has extensive experience in the diagnostics space. Over 25 years, in fact, and he spent 15 years at Abbott and running Abbott's Diagnostics division for the last 7 of those 15 years. Believe it or not, Brian also works for Ortho, while owned by J&J, so he very much knows quite a bit about our products, our competition in the overall industry very well. And as for the rest of the team, we have lots of experience in diagnostics in a nice way, I would say people would say we're a seasoned team. Next slide. So as opposed to starting off the presentation with a high-level strategy slide or a long-term financial commitment slide, given where Brian Blazer is and his tenure with the company, we thought it would be more appropriate to highlight what our near-term priorities are. And these are largely the same that we communicated on our last earnings call a month ago. And before I talk about anything on the slide, it's not listed here, but as table stakes, we're going to focus on our customer and meeting their needs. That's obvious. We're going to focus on that. That's always going to be a priority. But beyond that, first and foremost, we know that we need to restore investor confidence. Brian and the entire very experienced exec leadership team that I just showed you on that previous slide, are focused on this and understand what needs to be done here. Margin restoration is next. We begin with the $100 million annualized headcount reduction just executed, of which $50 million will impact in the second half of this year. And the next $50 million will impact in the first half of 2025. Now we won't stop at this, however. Now that the integration of the combined companies is behind us, among other things, we are focused on pulling pandemic-related inflation out of the business and instilling a continuous improvement culture and continuing to find ways to be more efficient and bring our margins back to where they were pre combination. And quite honestly, where the margins belong. Now we won't forget about the top line either as a near-term focus. We will continue to take advantage of an existing robust global commercial team and grow our outside U.S. markets. We will continue to focus on growing our underpenetrated immunoassay business. We will accelerate menu expansion to take advantage of a large installed base around the world. And we will complete the menu of our Savanna product, which we believe still has significant competitive advantages in the markets in which we compete. This slide is one that we started showing at the time of the business combination to explain one of the key attributes of the 2 companies coming together. So what are the obvious benefits of the combination of the 2 companies is that we now serve a very large $48 billion market, that covers the entire continuum of health care from home testing, all the way to large reference lab testing. In other words, with the focus on our customer we have the products that cover all areas of the patient care journey. Now the benefits of this are that, one, we use our large global commercial team to drive growth by cross-selling all products into all geographies. And second, and probably more important, we are well positioned to capitalize on the themes accelerated by the pandemic, whereby we all see that testing is moving closer to the patient. It's kind of interesting for me to go back to the time right before the business combination. At Ortho, we were publicly talking about finding more growth in a syndromic molecular product and a point-of-care business to pair with our stable labs and transfusion medicine businesses. Now Quidel on the other hand, needed a more stable business to pair with their market-leading respiratory point-of-care business. The combination solve both sides' search. And it's important to note that there is no product overlap from this combination. There was no product rationalization that needed to be done, like on most larger scale combinations like this one. And the overlap of the 4 business units that you see on this slide is intentional as we believe that there is good cross-selling opportunities across all geographies. So more on each of the business units now as we move through the next set of slides here. I want to first show you a summary of our 4 business units on this one slide. And all the -- just to note that all the financial information here is just Q1 2024. So first, in the upper left corner, labs, as we call it, is our largest and most stable business unit. It is half of our revenue, and it is a true razor/razor-blade model with typically 5- to 7-year contracts. It is stable in a predictable business. Point of care moving to the right is -- represents about 1/4 of our business. and is a focus of ours as again, we continue to see care moving closer to the patient. Lower right is our transfusion medicine business. This is also about 1/4 of our overall business and is a steady low-digit growth business. We are winding down a lower-profit U.S. donor screening business, but we do have the #1 market position globally in immunohematology. And finally, on the bottom left there, molecular is currently our smallest contributor of revenue now, but we do see it ultimately having the highest growth rates as we fill out the menu of Savannah. So I'm going to take you through each of the business units and provide a little more granularity, and we'll start with the labs business, which again represents half of our business. Labs is comprised of 2 segments: there's the clean chemistry or routine chemistry. Think of this as the routine chemistry, the test you go in, when you do an annual physical glucose, cholesterol, it's those kind of tests, that's a routine chemistry test. The market there is growing low single digits. The second segment within labs is immunoassays. Immunoassays are more of the specialty assays or specialty tests that will be performed. That market is larger and growing high single digits. So about 5 years ago, at Ortho, you may have heard me talking about this during the IPO of Ortho a few years ago, but about 5 years ago with Ortho, we learned that we had the best success with our selling efforts when we focus on what we call our sweet spot of low and midsize hospitals. Now also about 5 years ago, we initiated the play, and we continue to run this play of leading with placements of integrated analyzers, which drives more immunoassay revenue. Think of the integrated analyzers that run both chemistry and immunoassay. We have analyzers that run just chemistry. We have analyzers that just run immunoassay. I'm talking about the integrated analyzers that run both routine chemistry and immunoassays. Now the total TAM of the labs market is $29 billion. But [ IM ] market is very large at $19 billion. And our mix of immunoassay revenue is about 1/3 of our revenue where the market is inverted versus us, and is about 2/3. So that creates an opportunity as we place these integrated analyzers, the driving of this higher-margin amino assay revenue growth has provided us with above-market growth, and we'll continue to do so. As you can see on the top of the slide that only about 30% of our installed base is made up of integrated analyzers. To be clear, that's the roughly 4.6% versus the 14.6% at the top right of the slide. So that integrated analyzed replacement will drive significant growth in that immunoassay segment. And as far as the Clean labs or the routine testing side of the business, we're going to continue to drive growth through outside U.S. expansion and penetrating new markets. And again, this business is a stable and predictable business for us and we'll continue to drive at least mid-single-digit growth going forward as it has the last several years. Next is transfusion medicine. And as I said before, we are winding down our U.S. donor screening business over 2024 and 2025. But we are #1 globally in immunohematology. Immunohematology is a steady low single-digit growth business for the market and for us. There are opportunities for more growth in such areas as regional specificities on our red blood cell products, and upgrades to our current systems such as the optics reader and the vision software upgrades. It's also important to note that with the wind down of the U.S. donor screening business, it will positively impact our overall revenue growth rate and adjusted EBITDA margin. Point of Care segment is the next focus. Again, we believe that focus in this segment is important to take advantage of evolving trends and care moving closer to the patient. We have a very large, installed base of Sofias and Triage instruments and plan to continue to take advantage of our global commercial team and cross-sell into new geographies. As you can see on the middle pie chart that we are very underpenetrated outside the U.S. on this business. So that is clearly an opportunity for us. Menu expansion will be important for this business unit. We are investing currently to maintain our position in respiratory and grow our position in toxicology. Our commercial scale and our significant platform will allow for this. And finally, again, currently our smallest business unit in terms of revenue is our molecular business unit. This space has a $9 billion TAM and is growing at high single digits. So hence, you can see the reason for our interest and focus here. We do have a solid business already in our Lyra and Solana products. But our Savanna product, a product that is delayed, but for which we still see good competitive advantages in areas of: one, turnaround time, to ease of use and three, cost. I also think it's important to note that we do have CE Mark and have done a limited launch in Europe in 2023. And we did get 510(k) FDA approval for the instrument and HSV/VZV panel in the U.S. in December of 2023. So we are currently placing boxes in the U.S. This product, the Savanna product is in the hands of our U.S. commercial team. Now the HSV/VZV panel, which is essentially the Herpes panel and the Shingles panel, we know it's not a high runner. It's not a high runner for revenue, but still, it's a good thing to have the box and have that first panel out there. We are working internally very hard and fast to further fill out the menu in the U.S. There will be, however, no external promises of dates, and we have pulled all the U.S. revenue out of our '24 guide, and we'll inform the [ Street ] of progress as it occurs. So the previously mentioned competitive advantages and the macro trends of the rise in popularity of syndromic testing, and the increased need for flexibility across the continuum of patient care that we serve is what gives us continued confidence in the Savanna product. And now a couple of financial slides. You can't expect me to do a presentation and not have at least a couple of financial slides. So I promise I'll keep it to a minimum. So with Brian coming into the company, we gave updates on Savanna and COVID revenue on our Q1 call, and then we suspended guidance until Brian gets up to more speed on the business. So this slide really is just a summary of our Q1 results. It was a good quarter that was above our expectations in many respects. The headline total revenue of 711 did show a decline versus prior year Q1 '23. But if you exclude the onetime U.S. government COVID order from last year, our revenue grew 6% on a constant currency basis. And I guess for me, even more importantly, that growth was across all regions. All regions had growth. And even further, if you to exclude the $21 million onetime collaboration settlement revenue from Q1 '23, our COVID, [ ex-COVID ] revenue grew 10%. And again, I hate having all these exclusions from previous periods to show a growth rate. But here, I think it's kind of important. If you exclude that government COVID order and you exclude that onetime collaboration settlement, our revenue grew 10% [ ex-COVID. ] That's a pretty good quarter. Our adjusted EBITDA was $132 million or 19% of revenue. And don't get me wrong. That's not where we want our margins to be. But we did have an inventory reserve booked in Q1 that had about a 200 basis point headwind impact. And I would say that's a hangover from overcalling the Q4 '23 respiratory revenue. Improving margins, though we did execute on $100 million annualized headcount reductions that were completed in Q2, and we have our sights on other margin restoration activities. So as stated on the Q1 earnings call, we expect margin and cash flow to improve in the second half of '24 versus the first half of '24 due to these margin restoration actions. Looking at the balance sheet and cash flow for Q1. Q1 cash flow was better than our expectations, but we know that recurring free cash flow of negative 13% is not where we want to be. So it's probably appropriate to give a little more color on the quarter. The Q1 CapEx was higher due to some carryover from '23, and we do expect the spend levels to go down over the next 3 quarters. And again, we do expect second half '24 cash to be much improved versus first half '24 due to the previously mentioned margin restoration activities, as well as higher seasonal revenue that we typically see. Now on the balance sheet, we ended Q1 at a 3.8x leverage from the face of the financials, but with pro forma adjustments allowed under our credit agreement, we are at 3x levered versus a covenant of 4x, plenty of cushion. And we expect to be at approximately 3.5x with pro forma adjustments by the end of the year versus the covenant of 4.25x. Looking at the next slide on our capital allocation priorities. Other than a strengthened focus on reducing debt and driving recurring free cash flow, obviously because of the previous slide I just showed you, these priorities are largely unchanged from what we've discussed for the last 2 years. Number one, we're going to focus on investing back into the business and manufacturing capacity, supply chain resiliency, menu expansion of products and existing BUs, just making the overall company more efficient through business enablement tools, such as a combined ERP and other customer support tools. This organic view of growth as well as continuing to prudently evaluate inorganic options will drive long-term value of the company. And to close, I want to reiterate our near-term priorities. These items were a primary focus under the office of the CEO prior to Brian's arrival, and they remain as a focus, as Brian enters his second month with us. And hopefully, you can see that these near-term priorities show that as an executive team, we know what needs to be done here. So at this point, I'm going to end the presentation, and we can transition to the second floor.

Yes, we'll be going to the breakout in Burnham.