QuidelOrtho Corporation (QDEL) Earnings Call Transcript & Summary

Thanks, everyone, for joining us this morning. I'm Vijay Kumar, the life science device analyst here at Evercore. Pleasure to have with us QuidelOrtho with us this morning. We have CFO, Joe Busky; and from Investor Relations, we have Juliet Cunningham. Joe, thanks for the time this morning.

Thanks, Vijay.

So maybe the story is -- obviously, it's had a transformation, point of care with a central lab model. When I just look at those end markets, right, those end markets sort of grow mid-singles. When you exclude COVID, like how would you characterize Quidel's performance versus those end markets? What's done better? What's perhaps underperformed?

Yes. I think the business is having a really good year this year. We see the Labs business, which is about half of our revenue base will grow mid-single-digit this year. If you go back to last year 2023, which was the first full year after the business combination, Labs had a really good year and actually grew 10%. So the Labs business again, which is half of the business continues to perform well. And really, that's -- I think that's a testament to us continuing the strategy of customer segmentation, focusing on the small and midsized labs and hospitals as well as the customer excellence strategy of leading with integrated analyzers, which will drive more higher-margin immunoassay revenue. The Transfusion Medicine business, which is sort of the other big component of nonrespiratory business, there's 2 pieces within that. The immunohematology business is, again, for the last 2 years, has been solidly a low single-digit growth business, right where we want it to be. It's a #1 globally market leader. Customers love our products. They're very loyal customers, typically blood bankers who love our products. And so that business is in a really good shape. The other part of the transfusion medicine business, which is donor screening, that's a business that we're currently winding down, specifically the U.S. donor screening business. And really, that was part of a portfolio optimization process review that we decided because it's a smaller market, it's a lower growth business, it's a lower-margin business, and it's a business that would require investment to continue to compete. We decided it's better off for our shareholders just to wind that business down. And we'll get top line growth improvement, we'll get bottom line EBITDA margin expansion as that business winds down into 2026. The Triage business is the nonrespiratory piece of point of care. Again, that's a business that's been growing mid- to high single digit for us. It's a good business. It's one of the areas that's seeing good penetration for cross-selling as we put that product in the hands of the Ortho -- legacy Ortho commercial team around the world. So we continue to see good traction there. And then respiratory, I think we're -- it seems like we're getting through most of the big drops in revenue on the COVID side. It does feel like we're entering into a truly endemic stage for the COVID revenue, and that's really good. The $150 million for the full year estimate for this year that we put out earlier this year seems to be a pretty good number. And so maybe I'll stop there and see if you have any follow-up questions.

Great. And when you say respiratory, there's obviously the non-COVID piece as well. Has there been some shift from stand-alone flu kind of testing into 4-in-1? Has it had an impact on the business?

Yes, it has. And that shift really happened during the pandemic and has continued post pandemic. We call that the combo test where the test will test for flu A, flu B as well as SARS. And we characterize that revenue as part of our flu revenue. We have seen that very consistently for the last 2 or 3 years that, that percentage or the mix of combo test to total flu testing is greater than 50%. So it's proved to be a very durable product for us. It continues to sell well, and the price has been pretty stable as well.

Great. And maybe one sort of related question to the flu season, Joe. I think latest CDC had ILI pickup. Has it had an impact on your business? Or how would you characterize that?

It's interesting, Vijay. This respiratory season, it seems to be getting back to what we would define as a more typical pattern that we saw pre-pandemic. And that is we would see that the distributors would load up at the end of Q3, which we did see. And then you would start to see ILI creep up and spike after Thanksgiving and more into December. I think during the pandemic and more a follow-on post pandemic, we started to see ILI spike a little earlier. And now it seems we're getting back to more of a pre-pandemic cycle where that spike would happen more in December, which is where we are now. So we see the same thing you're seeing. We see ILI starting to creep up. We have a really good data point in that the Southern Hemisphere had an above-average respiratory season. It's not a perfect R-squared, but it's a good data point to have, nonetheless. So we think that the guidance that we put out on the Q3 call, which has our respiratory revenue at the midpoint of the guidance, down 30% year-over-year from Q4 last year and down 20% sequentially from Q3 this year, we think it's a pretty good place to be for the guidance that we have out there.

Fantastic. And Joe, you did bring up cross-selling. I think that was one of the strategic underpinnings for the deal. Maybe talk a little bit more on cross-selling and where have you done well? And perhaps what have been some of the learnings?

Yes. If I could, just to maybe take a step back for a second, the thesis of the combination of the 2 companies really has held up well. It was on the Ortho side, looking for a point-of-care and molecular business to put into the bags of the Ortho commercial team around the world, roughly 3,000 people strong. And then for the Quidel side, it was really to have that global sales force to expand outside the U.S. and to have a more stable line of business like labs and immunohematology. That thesis still holds well, and there was no product overlap between these 2 companies. So there was really no product rationalization that needed to happen. So as far as the cross-selling, it's mostly on the side of Quidel products in the bag of Ortho salespeople and outside the U.S. And so we're seeing that. We're seeing good traction, like I said before, with the Triage product and with also the Sofia product, mainly in, I would say, in geographies such as China, some countries within Asia Pac and some countries within Latin America is where we're seeing a lot of that traction.

Got you. And maybe one sort of housekeeping question, if you will, Joe. I was looking at your most recent presentation. I know it makes sense to back out COVID and U.S. donor business given you're winding down. But why do you guys back out instrumentation to -- when you calc the organic?

Yes. Here's why. If you go back to 2023, QuidelOrtho, like a lot of companies in our space had supply chain hiccups and product backlogs, particularly instrument backlogs. And at the height, we had about a 600-unit instrument backlog because of supply chain issues coming out of the pandemic. And we were drilling down that roughly 600-unit instrument backlog during 2023. And so a lot of that incremental instrument placement instrument revenue happened in Q1 and Q2 of '23. And so when you're looking at this year versus last year, it did create a bit of a headwind on the comps. And so for the first half of the year, we thought it would be helpful for the Street and for our shareholders to see the numbers without the instrument revenue. So you could see the true underlying increase in the business on a recurring revenue basis. As we move into the second half of this year, those headwinds really kind of go away, and we'll probably talk a little less about that because it's more -- it's not as bad of a comp year-over-year.

Got you. So for next year, it should just be donor business and COVID?

Yes, it's -- exactly. We are winding down donor screening. So we'll likely, for sure, back that out. And even with COVID, I don't expect there to be super significant drops there. So it's a little less of an impact there as well.

Got you. And then maybe if you look at the third quarter performance, talk to us, as you've reviewed the quarter, what went right? What was above versus perhaps maybe in line to below?

Yes. Q3 was a really good quarter for us. We were happy with where we ended up both versus our internal expectations and versus what the Street expected. I would say that the nonrespiratory business, as you would think, as it's a very stable, predictable business, came in line with what we thought and what the Street thought. As far as the respiratory business, there was a bit of an overachievement there, I think. And what we've done is, as part of the guidance, we took that overachievement in Q3 and just really labeled as timing and pulled it out of our Q4 numbers to derisk Q4 and set up what we think is a pretty reasonable guide for Q4, again, with that 30% drop year-over-year in respiratory revenue and 20% drop sequentially from Q3 respiratory revenue. As far as OpEx, I think we saw a good performance on OpEx as well. We did take out about $100 million annualized of cost midway through this year. And we're seeing the benefits of that as you look at the OpEx dropping year-over-year.

Got you. And that sort of segues into the fiscal '25 setup. I think you made some helpful comments on the 3Q call on fiscal '25. For me, just looking at it from an external perspective, like last year, there was a surprise relative to Street models as they went into fiscal '24. So from that standpoint, I think giving those fiscal '25 comments was helpful. When you look at Street numbers, revenue, EPS, has the Street heard your message? And do you feel like they're -- it's in the right place?

Yes, it's a good question. So there's a lot of moving pieces within the business. And we did think that despite not wanting to give full granular 2025 guidance, we thought that we would provide what we're calling breadcrumbs to some extent, to give people some views into what we think '25 will look like so models can be set. We thought it would be helpful. And it seems that most folks we're talking to agree that it was pretty helpful to provide that information. And as you look at what we provided, just to recap it quickly, we do expect the Labs to continue to grow mid-single digit. We do continue to -- immunohematology to continue to grow low single digit. We purposely didn't say much about respiratory revenue because we really need to see how Q4 shapes up before we can comment on 2025 respiratory revenues. We didn't say much there. We also highlighted the fact that we'll get that second $50 million of the $100 million annualized of cost benefits in the first half of '25 and that we expect 100 to 200 basis points of adjusted EBITDA margin improvement off of the full year adjusted EBITDA exit rate of roughly 19.5%, which is the midpoint of our guidance. So where the Street is now feels like it's a pretty good place. I think we're pretty comfortable with where things ended up in the models.

Got you. And maybe one more sort of pipeline-related question, Joe, if you will. I know back in the day, both on Quidel and on Ortho Clinical side, you guys had some longer-term pipeline projects, right? Maybe just give us an update on where we are in some of these projects.

Yes, specifically in the R&D area, are you talking about projects? Yes, sure. So Brian Blaser is our new CEO. He started a little over 6 months ago. Brian is a really, really good addition to the team. We're super happy to have him. His experience speaks for itself, what he did at Abbott, running the Abbott diagnostics division. And he's really bringing some good ideas to how we run the business. And one of his themes is to prioritize and focus. And in the R&D area, it's no different there. And so what he's been having us focus on there, including his -- or our new Head of Technology, Jonathan Siegrist, who again, is another great addition to the team having come from Cepheid, is to focus on the areas of Savanna, menu expansion, and then just increasing R&D productivity as a whole. I would say that those right now are the very near-term priorities that we've laid out for Jonathan Siegrist and his R&D team.

And maybe some of this is -- because I'm not close to the story, Joe, the Savanna menu expansion, it feels like it's been pushed out. Maybe talk about what happened and what changes under Jonathan?

Yes. I think -- I mean, Savanna has definitely been a long and winding road for us. I do feel like it's in a pretty good place now with Jonathan Siegrist in place and leading the helm on our technology side. We're purposely not saying as much as we did previously under the former CEO because I think that somewhat got us in trouble to some extent with a little too much commitment on dates. So what we have said that -- is that the respiratory panel, which is the, I guess, the primary focus at this point, to get that approved in the U.S. is to start clinical trials as this respiratory season heats up here in December and January. And I would say the next panel with the next focus would be the STI panel for us, and that will also enter clinical trial sometime in 2025. So we do expect that in 2025, at some point, I would say, in the latter part of the year, we should have approval for these panels. We don't think that the revenue will be significant in '25. It's more of a -- I think, more of a '26 thing when the revenue starts to scale up, but we do expect to have those panels approved. I should probably also note that in the U.S., we already have the box approved by the FDA, and we already have an HSV, VZV panel approved in the U.S., which is essentially a herpes shingles virus panel. And so we are selling the box. We are placing the box. And we also have a limited launch that's been occurring in Europe as well. We have the box, and we have the respiratory panel under CE approval. So we're placing boxes, we're winning deals in Europe as we speak, using these competitive advantages that we've been talking about in terms of ease of use, turnaround time and cost. We're winning deals already in Europe. So we have a lot of confidence that once we do get the respiratory panel approved in the U.S. that we will be successful in the launch.

Got you. So it sounds like from an R&D standpoint, it has been largely derisked. And it's just a question of running a clinical trial. Would that be a fair statement?

Yes, there's still a lot of work to be done, but we do feel like that things are in a pretty good place right now, moving along.

Got you. And you did mention the respiratory panel. Like the panel is -- have you given any details on how many organisms or targets you would be looking at, what the level of multiplexing would be?

In the respiratory panel, it's a 4-panel test.

Got you.

Yes.

And maybe one last one on -- have you disclosed on what is the current installed base or perhaps what should be a pull-through per system longer term for Savanna?

We haven't talked too much about that, Vijay. Yes. I think we'll save some of that information for a later date as we get further along in the process. I think we can talk a little more about that. I think it would be probably a little premature. But I will say that, again, in Europe, where we have this limited launch ongoing, we are placing boxes, we're winning deals. And although it's a low base, we do expect that the revenue this year will double from what we did last year, which is a good sign.

Fantastic. And then one on the macro side, post elections, maybe talk about your exposure or potential impact from tariffs.

Yes. This is a popular question. I think a lot of us are getting -- a lot of CFOs are getting -- I think if you look at the 3 countries that are probably most likely to get hit, it's Mexico, it's Canada and it's China. I don't think we have significant exposure to worry about in Canada or really in China. We don't import a lot of components or products from those countries. Mexico would be the country that we probably have the more significant impact if there were tariff increases, and that's because we do manufacture some instruments for the Labs business in Mexico. But we do have options in place to mitigate. And depending on how severe these tariffs are and what the impact would be, we could start pulling some levers next year to mitigate.

Got you. And in the event we do have -- we'll see if there's a lot of details. We don't know. But could these products be sort of, I guess, come under exemptions because they serve health care markets? Is that a possibility?

There is a possibility, yes. I think -- and I think those are a big part of all the details that need to be worked through before we get too far down the road of quantifying what these impacts would be. There absolutely could be exemptions like that.

Got you. And would you say the margin expansion targets, they're still intact even if we did have a tariff impact from imports from Mexico?

Yes, yes. We have several cost-down initiatives in flight in the procurement area, in the indirect area as well as the direct area. And yes, even with some tariff increases potentially, we would expect that we would still achieve those benefits. Yes.

Fantastic. The other thing that stood out, which has been unique for you guys is China. Year-to-date, I think China has done mid-singles. For me, I just look at from a life science perspective, where China has been pretty challenged. What has been different for you guys? Why has China done so well?

Well, China is an important market for us. It's about 10% of our revenue. It's also a very complex place to do business, as I think everyone is aware of. We monitor activities there very closely. We have a fantastic team on the ground there, a fantastic leader of that team there. We'll continue to monitor what's going on in China very closely going forward. But I would say, as you think about all of the impacts, the bigger impacts going on there, as far as the anticorruption activities, that's definitely impacted some of our instrument placements and the timing of instrument placements. There's been some delays. We do think that, that is going to abate in 2025. As far as the value-based procurement initiatives that are ongoing there, we haven't had really significant impacts there, and we don't expect significant impacts there for this year or even next year. And the reason for that is, one, that we don't have as large of an immunoassay base of revenue there as some of our larger competitors do. And immunoassay panels have been more of a focus in that value-based procurement initiative. And the second thing is that the dry slide technology that we use has not really been a focus of the value-based procurement initiatives either. So we feel pretty confident that we're in good shape this year and next year. We can't say a whole lot beyond that. We'll continue to watch it and monitor. And then I guess the third piece I would mention would be reimbursement issues. And we mentioned this on the Q3 earnings call a few weeks ago. We do expect that there will be an impact to our cardiac business there because of reimbursement changes in some of the provinces in which we operate. But at this point, it looks like it's going to be fairly minimal, maybe 1% or 2% of our China revenue that could be impacted by these reimbursement changes.

Got you. And given the mid-single trend, is that a sustainable number for you guys, Joe?

I think it is. I think Q3 had a tough comp, so it wasn't a great growth rate in Q3. But Q4, we expect to have a better growth. And for the full year, we've been consistently saying we think that the business will be a high single-digit grower. For next year, we've said that we expect it to be a mid-single-digit to high single-digit growth business. So we do think that it's a good business for us, and the top line has been really good there.

Got you. Got you. That's helpful. Since you brought up about dry slide, I know one of the pipeline projects was dry slide, I think, on the immunoassay side. Have you given an update on where we are on that project?

Yes. That was a project that was started by Ortho, legacy Ortho prior to the combination. And honestly, that project was more focused on the donor screening business. And since we've decided to wind down that donor screening business, that project was put off.

Got you. That's helpful. And then maybe switching on to Labs, that's really -- it's been a bright spot, mid-singles off of, I think, double-digit comps last year. What -- are there particular areas within Labs, which has driven the SaaS strength, right? Is this Ortho placing more systems? Or is this coming from consumables/share gains? How would you want to characterize it?

Yes. I think the Labs success really hinges on, like I said earlier, the customer segmentation and the customer excellence strategy of leading with integrated analyzers. Our mix of immunoassay revenue to total is really inverted from the overall market, and only about 30% of our global installed base on the Labs side is integrated analyzers. So there's a lot of room left to run on that strategy of leading with integrated analyzers and driving more immunoassay revenue. The strategy is employed around the world. It is a global strategy. I would say that as far as volumes and growth, we do see higher volume growth in areas such as Asia Pac, some countries within Latin America, Eastern Europe. You see slightly lower volume growth in the more developed countries, if you will, in Western Europe and in the U.S. But we do see some higher growth rates in some of those other countries that get you to that blended mid-single-digit growth rate around the world.

Got you. And how would you characterize the pricing environment within Labs?

Yes. It's interesting. I've been in this space for a long time in my career, and it's been pretty consistent where you see about 100 to 150 basis points of price erosion annually. And it's just a super competitive market. You've got 5- to 7-year contracts. And so every year, you're seeing roughly, whatever, 15% of the contracts come up for renewal, very competitive. And so us as well as the other DX players see this price erosion. So when we're talking about mid-single-digit growth, the volume is higher by that amount to offset that price erosion of roughly 100 to 150 basis points, which we've seen for decades in this space, and we expect that to continue going forward as well.

Got you. And from a margin standpoint, what are the levers you have to offset the pricing headwind?

Yes. I think the primary -- well, let me say this, there's 2 things. One is we have put back into our contracts starting this year, the inflation adjustment language that would allow us to pass on higher-than-normal inflation going forward as we write deals that new language is going into the contracts. That language -- those provisions have been negotiated out over the last few decades as inflation was very low. We put it back in now. So we feel that we're protecting ourselves if inflation were to rear its head again going forward. And then second, I would say that the direct procurement initiatives that we have in flight are really meant to get at the costs that crept into the business during the period '21, '22, '23, where as an economy, we saw a lot of heavy inflation hit not just our business, but all businesses. And we were much more focused on integrating these 2 companies and harmonizing these 2 companies and making sure we didn't drop any balls on revenue or supply chain. And honestly, it's now time to take those costs out of the business. And so that's where we've got the direct procurement initiatives in flight that will get at that. Now these direct procurement initiatives will take time. This involves things like bringing in new suppliers and swapping out components within our products. It takes time. So I wouldn't expect there to be a significant amount of impact in '25, but I would expect there to be more impact in 2026 from those initiatives.

Got you. And since you brought up the mix angle on immunoassay versus clinical chemistry, I think one of the bright spots has been automated analyzers, right, which can do both. That's grown double digits. I think in the past, you used to give the installed base, what percentage of your total installed base is automated. What is that number right now? And what visibility does that provide you for a higher proportion of revenues coming from immunoassays going forward?

Yes, that's right. I would say that as you think about our Labs business, the 2 most important metrics that we typically talk about on every earnings call is the growth in integrated installed base and the growth in automation. And both of those figures are typically anywhere from high single digit to mid-teen double-digit growth. The automated base is still a low -- probably low single digit of the total. But again, it is growing nicely. And as I mentioned before, the integrated base is about 30% of the overall base. So for sure, those are 2 areas of growth that as long as we're still seeing good growth rates in those areas, we're still going to continue to see that mid-single-digit growth in the Labs business.

And that 30%, Joe, when you look at the -- should that go up by a point or 2 every year? Or how should we think?

Yes, I think that's fair. When I joined the company nearly 5 years ago, that number was around 25% of the integrated base to the total. And so yes, I think that's a good estimate, Vijay.

And how does that translate to you on the consumable side, right, once you place these integrated systems, now you're tacking on immunoassays. Is that incremental?

Yes, for sure. If there's a conversion from a stand-alone box to an integrated analyzer, there is a significant increase in the volume from that customer and the revenue. And again, the immunoassay revenue comes at much higher margin, so there's a little bit of a margin tailwind there. So yes, for sure, that strategy does provide a lot of tailwind into the mid-single-digit growth that we're hitting.

Got you. Then maybe one on the competitive standpoint. How would you characterize the competitive positioning? I think some of your peers are talking about higher single growth. They're looking at neurodegenerative diseases as a growth area. Maybe talk about your pipeline initiatives and competitive positioning.

Well, I think for us and for any player within the Dx space, keeping your menu up to date on the immunoassay side is critical to success. And that's why I mentioned before that one of our R&D group's main priorities is menu expansion. And so we -- when this business was carved out from J&J back in 2015, there was a menu problem. And Carlyle, to their benefit in the first few years of their ownership, really spent a lot of money developing the menu and getting back to where it should be by the time you got into the 2018, 2019 time frame. We are completely committed to keeping the menu up to where it needs to be. And so all these sort of cutting-edge immunoassay products that you need to compete and get on tenders for sure that it's within our R&D group's priorities to get there and get these menus out there for -- get these assays out there for our customers.

Got you. And then maybe one last one on Labs. When I look at the year-to-date trends, it feels like it's low singles. I have a feeling it's the instruments, which needs to be backed out. Is that right? And -- yes...

Yes, it's the instrument as well as if you go back to Q1 of '23, there was a onetime collaboration settlement for about $18 million that went to the Labs business in Q1 '23, so you have to back out that piece, too. When you back out that piece, you get squarely in the mid-single-digit range.

Got you. And all we have to do to maintain fiscal '25 is current trends in...

Exactly. That's right.

Fantastic. And then on the Transfusion side, this immunohematology, low singles rate. When you look at fiscal '25, is that what the market is growing at, low singles and you expect to grow in line with market? Or are you gaining share in that market?

Yes. The immunohematology business, again, we have a #1 global market share is growing low singles, and that is at market. Yes. Yes, it's exactly at market.

Got you. And then the other part of the equation here, the U.S. donor screening business, what is the -- on a reported basis, I guess, the revenue headwind for next year? Is it like $50 million, $60 million?

Yes, it will be between $115 million and $120 million of revenue this year, and that's down about 15% from last year. And then as you move into '25, we've said that we think that, that business will be about $40 million to $50 million in 2025. And then in '26, it will be minimal. And as we exit customer contracts, it will be -- there will be some revenue in '26, but I expect it to be minimal.

Got you. What's the margin uplift you get, Joe, from exiting this business?

Yes. The margins on that business are low to mid-single-digit adjusted EBITDA margins. So we would expect that we'll get roughly a 50 to 100 basis point EBITDA margin uplift when fully out of that business in 2026.

Got you. And then on the point of care, this is one where it's done double digits ex respiratory, right? So talk about some of the menu, like what's driven some of these -- the strength? Also feels like numbers moved around, like third quarter was down, some timing element. What drives that variability?

Yes. With the point-of-care business, if you look at it on a nonrespiratory basis, the main driver of growth there is going to be that Triage product that's been seeing some good traction across selling around the world with the legacy Ortho team. When you look at it with respiratory, obviously, there's going to be some volatility with the respiratory numbers sort of bouncing around a little bit. I think it's best to look at that respiratory revenue over a longer period and you sort of -- when you look at it that way, I would expect it to be more of a mid-single-digit growth business. And that's really just based on overall market increases and market share gains for us and continued installations of Sofia to that platform around the world.

Got you. And sorry, at the point of care ex COVID, did you say -- is that mid-singles or respiratory is mid-singles?

Yes. I think -- yes, I should have said ex COVID. I think that's the right way to look at it. Correct.

Got you. And in what innings would you say we're in this cross-selling? Are we still early innings, mid-innings?

Yes, I would say it's early to mid. I think there's still areas around the world that we can do better. Yes, I would say early to mid-innings on that. Yes.

Got you. And I know, Savanna, you said you'll refrain from giving comments, but maybe talk about Brian's sort of -- his philosophy and what has changed under Brian when you speak about things like R&D productivity? What is he doing that's different?

I think it's a focus. I think previously, there was a little more of a shotgun approach of let's have a lot of oars in the water and a lot of shots on goal. And I think Brian's view is a little different of, let's focus on the main things that we see as priorities for the business. And I do think it's having an impact. And it's not just in R&D. I would say it's across the entire business that Brian is instilling this culture. And I do think it's beneficial for us where we are right now. We need to focus on what's ahead of us and what are the near-term priorities that are going to move the needle for margin as well as revenue.

Under Brian, has any of the comp metrics changed for sales in some of the leadership organization?

No. I mean, we did talk about flattening the organization on the Q3 call, and we took out a couple of pretty senior positions recently. And we've talked -- but there's been no changes to comp plans. I think as you think about the commercial area for us, we're obviously being very careful not to rock the boat there too much. We certainly don't want to create any sort of revenue hiccups or any customer hiccups. And so we don't expect any changes with comp plans at this point...

Got you. And then I know you said Savanna revenues, to double. Was that a fiscal '24 comment or fiscal '25 comment?

That was relative to the EMEA limited launch comparing '24 to '23.

Got you. And is that sort of sustainable, like another doubling up in fiscal '25?

Well, I think we'll provide more color when we give '25 guidance in February. I think we want to get a little further along on the respiratory season, a little further along on the Savanna progress, and then we'll provide more comments in February.

Got you. And maybe if I take a step back, Joe, what is the longer-term thesis, right? Like if we just remove the transitionary with the donor screening coming down or perhaps launching the menu in Savanna, right, in an idealized state, what should be the top line? What should be like normal margin cadence and EPS growth for this company?

I think it's pretty simple. On the top line, it's a mid-single-digit growth business. I think with success with Savanna, we could potentially move up into the high single-digit range for top line growth. But again, more to come on that as we get further along on the progress of U.S. regulatory approvals. On the bottom line, I think it's consistently what we've been saying. We think this business, as like most other businesses in our space and the experience that Brian and I have had at other companies that we've worked at in this space, there's no reason we can't be in the mid- to high 20s for adjusted EBITDA margin for this business.

Got you. And sorry, the EPS growth algorithm, should that be in the double digits or teens?

Yes, I think that makes sense. Yes. Yes.

Got you. And maybe one on free cash flow. What should be like a normalized free cash conversion for this business?

Yes, for sure. We're not where we want to be right now with cash flow conversion. The first half of this year was not a great cash flow period for us. It's much better in the second half. We will generate recurring free cash flow in the second half, and we'll generate recurring free cash flow -- we expect to generate recurring free cash flow for the full year as well. But I would say, as far as targets, we should be at least 50% conversion from adjusted EBITDA and on a net income basis, over 100% conversion for recurring free cash flow. And I think the journey to get there will be similar to the journey on the margins. I'd say it's going to take a couple of years. I don't think we'll get all the way there in '25, but I would expect us to get closer to that in 2026, those targets.

Got you. And I think one of the things you called out was incentive comp reset as being a margin headwind for next year. Is that sort of a 1-year impact just because of some of these numbers have moved around and then it shouldn't be an ongoing impact here in fiscal '27?

Yes. Just to be clear, to make sure we're clear on this, that comment I made on the Q3 call about the bonus or the incentive comp was really meant to be a comment when you compare Q4 this year to Q4 of '23. Because last year, we missed our targets in Q4, and so there was not a bonus accrual. And then we do expect at this point that we'll hit our targets this year. And so there will be. And so there is a differential on that OpEx line that you'll see Q4 this year versus Q4 last year. There's no issue with Q3 sequentially or no issue going into '25.

Okay. That's helpful. And then maybe at the last minute here, any closing comments from you, Joe? Things that I should have asked? Anything you want to highlight?

The only other thing I would say, Vijay, because I think it's on a lot of people's minds, and we talked about cash flow, but just to extend that a little further on the leverage ratio. Right now, Q3, our leverage ratio was a tick over 4. On a pro forma basis, it was 3.3 when you include the pro forma add-backs allowed under the credit agreement. We do expect to make improvement on that as you move through '25. We do expect that, that leverage ratio will have a 3 handle in '25. Ultimately, our goal is to really get that down into more of a 2.5 to 3.5x range. And again, I would expect we'll get there over the next couple of years as we move through the margin enhancement initiatives as well.

Fantastic. With that, I think I'm out of questions. Joe, thank you so much for the time this morning.

Thanks, Vijay. It's great to be here. Good seeing you again.