QuidelOrtho Corporation (QDEL) Earnings Call Transcript & Summary

Good morning, everyone. Thanks for joining us on Day 3 of the Raymond James Institutional Investor Conference. I'm Andrew Cooper. I cover diagnostics here for Raymond James. Happy to be joined by the QuidelOrtho team this morning. We're going to do a presentation. And if there's a little bit of time, we'll do some Q&A and then head down to Amarante One for the breakout session. So with that, I'll pass it to Brian Blaser, CEO, and thanks, Brian.

Thank you, Andrew. So good morning, everyone. Very pleased to be here with you this morning. So I'd like to start out first by describing our business. Sure I got my tech working here. I'll talk you through our market opportunities, how we're positioned to grow and capture share in each of our business units. Then I'll cover the initiatives that we're deploying and how we see this business evolving over the next few years. Then I'm going to turn it over to Joe, who will take you through our recent financial performance as well as our guidance for 2025. But before we get started, I'd point out that we will be making forward-looking statements during this presentation. We will refer to non-GAAP financial measures. So please refer to the description of these financial measures and statements in the presentation, including factors that could cause materially different outcomes. So just starting with a little history. Quidel and Ortho Clinical Diagnostics combined in May 2022 to create QuidelOrtho. Today, we are focused around four major business areas that serve market segments of roughly $20 billion, labs, transfusion medicine, point of care and molecular diagnostics. Our global product portfolio includes more than 330 products. And for the full year 2024, we reported revenue of approximately $2.8 billion. 2024 was an important year for QuidelOrtho, where we made several changes that will position us for near- and longer-term growth. We are a global company of roughly 6,600 employees, and we have 3 commercial regions that cover over 130 countries. North America is, by far, our largest market with just under 60% of our revenue; EMEA and Latin America at about 20%; and Japan, Asia Pacific and China are 22% and of this, China represents roughly 11% of our total company revenue. And our commercial team includes nearly 3,000 customer-facing sales and service professionals who serve over 65,000 customers, and our global regions are fully aligned with our business units to leverage the scale of our global commercial team, capitalizing on growth opportunities and providing the best possible customer experience. So since I joined the company in 2024, a key priority for me was strengthening our leadership team and aligning our organization for speed and effectiveness. So last fall, we announced a change in the organization model that enables a flatter more efficient organization that's focused on our key customer segments and regions. And we've acquired key talent and assembled a team of highly experienced industry leaders to deliver an excellent customer experience improve our performance and prioritize profitable growth. So our CFO Joe Busky has a strong background in diagnostics at Dade Behring and Ortho Clinical Diagnostics and Joe's focus is on improving our financial performance, consolidating our ERP systems, increasing cash flow generation and reducing our debt leverage. Jonathan Siegrist recently joined us as EVP of R&D and our CTO with a proven 15-year track record in molecular diagnostics and biomedical engineering. We're looking to Jonathan's extensive expertise in assay development and molecular diagnostics to be a catalyst to improving the capability and productivity of our R&D team. Lee Bowman brings over 25 years of experience in developing talent and high-performing teams and is a key partner for me and the leadership team as we create a winning organization with a continuous improvement culture that people want to be a part of. And Michelle Hodges is our Chief Legal Officer. Michelle has got extensive experience from her prior roles in private practice and has been really a key asset for the business and overseeing the legal compliance and governance matters for the company. And finally, Phil McLellan, I recently promoted to Chief Operations Officer, where he has responsibility for all aspects of customer fulfillment, including manufacturing, supply chain, logistics and quality. And Phil is really a champion of our continuous improvement culture and just crucial to driving our quality and operational efficiency goals. So we have a very broad product portfolio of instrumentation that spans the entire continuum of care, from hospital reference labs to point-of-care testing. Our overarching mission is to improve customer and patient outcomes in each care setting at every step of patient's health care journey and our product portfolio is uniquely suited for both centralized and decentralized testing. We serve customers and their patients from prevention to diagnosis and in treatment to monitoring and I think the unique thing here is that very few companies in our space have the breadth to do this, and this is particularly exciting of what it represents in terms of opportunity for growth and impact. So I think all of you know that the in vitro diagnostics market is a large market, approximately $50 billion in size, growing in the mid-single-digit range. Of this, we serve market segments of approximately $20 billion, spanning the full continuum of care. And so I'd like to take a minute to go into some detail about each of our business units. So our labs business has a very large global installed base with highly loyal customers, typically long 5- to 7-year contracts and an average tenure in terms of relationship with us of more than 12 years. We have a highly reliable vitro platforms that enable small and medium-sized hospitals and hospital networks to cost-effectively run more than 175 unique tests. Among the competitive strengths for this platform are dry chemistry offering, which requires no special lab plumbing, low -- very low total cost of ownership with higher first pass yields and excellent customer service as well. Our commercial emphasis here has been placing integrated analyzers that can do both routine chemistry and immunoassay testing and only about 30% of our installed base is integrated. So we have a long runway for growth in this particular area. This is a stable, consistent mid-single-digit growth business that represents about 50% of our revenue or $1.4 billion in 2024. Our transfusion medicine business consists of immunohematology and donor screening. We have got the #1 global brand in immuno hematology with an extensive installed base of about 7,400 systems worldwide that run about 350 unique tests both in hospitals and blood banks worldwide. We have announced that we're winding down our U.S. donor screening business, which we expect to be largely complete by the end of 2025. Excluding donor screening, the immunohematology business generated $523 million in revenue in 2024, and we expect this business to grow in the low single digits in the near and medium term. There are some opportunities for us to increase this growth rate over time with investment in our platforms. We are the leader in respiratory testing in the U.S. with our Sofia 2 platform in the professional setting. We have cumulative placements of 97,000 instruments. Sofia 2 is a portable benchtop analyzer designed to deliver rapid, accurate results to physicians' offices, labs and clinics for a range of infectious diseases and chronic health conditions. In addition, we have QuickVue, which is a line of rapid test for professional and home use. And we continue to get good traction with our Sofia flu and COVID combo test. Over the past 2 years, this test has consistently represented over 50% of our total flu revenue. And our Triage MeterPro platform offers an extensive cardiac menu that's primarily used in emergency departments for patients presenting with cardiac symptoms. Point of care contributed $694 million in revenue in 2024 and is expected to grow in the mid-single digits overall. We are developing an emerging molecular diagnostics business to target the fastest-growing market segment in the IVD industry. Our benchtop molecular systems provide easy-to-use affordable solutions with highly accurate and fast results. our next-generation Savanna platform provides multiplex real-time PCR testing within a very easy sample to result operation. Savanna instrument is designed to provide an alternative to mainframe molecular systems for use in emergency departments and in ICUs, while also it will provide capacity overflow solutions for core laboratories. Savanna is approved in Europe and in the U.S., and in the U.S. we have the HSV panel approved, and we have now entered clinical trials with our respiratory panel. Molecular Diagnostics was $24 million in revenue in 2024, and we see molecular as our largest nearest term opportunity for incremental growth over the next few years. So now that I've covered a little bit about who we are and how we're positioned. I'd like to shift to the bigger picture opportunity here that we have to improve our operational and financial performance. One of the things that I've come to appreciate about the company, I think, is becoming more well understood is that the underlying strength and durability of this business that's driven by our instrument and reagent pull-through business model. Our business benefits from an extensive base of installed instruments that are deployed globally, both in centralized and decentralized testing settings. The segments that we operate in are large and growing, and we have a very strong brand with a super loyal customer base with long-term contracts and even longer-term customer relationships. And our solutions provide important benefits in terms of reliability, accuracy, speed, total cost of ownerships, ownership that our customers appreciate and value. And these benefits provide us with a strong underlying recurring revenue stream characterized by durable mid-single-digit growth and approximately 90% of our revenue comes from consumables. So we have customer renewal rates on existing business in the 90% range and also a positive win ratio on new business. So in recent years, the profitability of the business has been challenged with some supply chain issues, some inflationary pressure that's crept into the business as well as integration of the combined business. And so we've taken very aggressive action to address this. Since I came on board, we've refocused the company on a narrow set of high-impact priorities to improve the profitability, deliver on short-term innovation opportunities and prioritize profitable growth. We're also realigning our incentive systems to drive improvement in economic profit and return on invested capital and just laser-focused on optimizing the relationships with our customers so that we can deliver an exceptional experience and foster a continuous improvement culture across our business. So as we move the business forward, we have 3 central priorities for the business, delivering an exceptional customer experience prioritizing execution on a small number of high-impact programs and then driving profitable, sustainable growth. And I'll go through each of these in a little bit more detail. So first, we have a great brand, which is built on highly reliable systems and an exceptional level of customer service. And historically, this has been a real key differentiator for us in the business. But quite frankly, during the pandemic, this took a bit of a hit as we experienced some very challenging supply chain and quality issues. So one of my first steps was to redouble our efforts here, and we've taken steps to align the entire organization around operating at the highest levels of quality, improving our supply and quality management capabilities and creating a culture of continuous improvement across the organization. Second, we are centering our team around a very narrow set of innovation and cost structure improvement initiatives that will have the highest impact in the -- for the business in the short term. And this includes the launch of our Savanna platform, improving R&D productivity and the competitiveness of our assay menus on key platforms as well as delivering on cost reduction initiatives that will return our margins to benchmark levels. And last, we are prioritizing profitable growth by aligning our energy and resources to the fastest-growing and most attractive segments where we have competitive differentiation. And in addition to driving growth and improving EBITDA margins, we are really also extremely focused on improving ROIC and aligning our internal incentive programs accordingly. So our efforts are paying off here. We've identified over $100 million of cost savings in 2024 with an additional $30 million to $50 million expected in 2025. We are aggressively pursuing opportunities across really every corner of this business. A lot of the savings in 2024 was focused on staffing reductions, but we are now looking at deeper improvements, particularly in direct and indirect procurement across every category, supply chain, management quality, IT, really every aspect of the P&L. And we expect these initiatives to enable us to operate more effectively and deliver incremental margin contribution in 2025 and beyond. So before I hand things over to Joe, I'd just like to highlight on some of the areas where I think we made some significant progress in 2024. First, we had, I think, a solid finish to 2024 with financial performance that was right in line with our expectations and our full year 2024 guidance. We also brought on new talent, as I mentioned, Jonathan and Lee as CTO and CHRO as well. We've aligned the global organization around a business unit-led operating model that is focused on customer satisfaction and business efficiency. We've added 2 members to our Board of Directors, both of whom bring significant industry and importantly, leadership experience to our team. And so all in all, I would consider 2024 to be an important year that set a solid foundation for success in 2025 and beyond. So with that, I will turn things over to Joe.

All right. Thanks, Brian. Good morning, everyone. As Brian mentioned, I'll take you through some detail on the 2024 financial performance, and then I'll give you a summary of our 2025 financial expectations. So first slide, we completed our Q4 2024 earnings call about 3 weeks ago -- actually, it was 3 weeks ago now on February 12. We had a solid Q4 to close out our fiscal 2024. We had $708 million of revenue in the quarter, which is actually down 4% year-over-year, but it's down for 2 reasons. One, because of our planned U.S. donor screening business wind down, which was down 40% in the quarter. And second of all, and we had predicted this on the Q3 call, in November, the respiratory revenue was down nearly 20% due to the later start of the respiratory season this year versus the prior year. But our key businesses performed well in Q4 with the core labs business up mid-single digits. Our immunohematology business was up low single digit. Our Triage business was flat, but there was some timing within the quarter. And our Savanna business in the Europe, Middle East and Africa region was actually up nearly $1 million, which is small, I know, but it's nice to see the growth in that business have limited rollout. So other key financial metrics here on the slide to us are adjusted EBITDA where we had $150 million of adjusted EBITDA or 21% of revenue and adjusted EPS, which is a metric that actually eliminates the onetime items and is a more accurate picture of our true operating performance of $0.63. Now again, these numbers are down versus the prior year but only because of the 2 items I just mentioned a minute ago, that's the U.S. donor screening wind down and the U.S. respiratory revenue being down nearly 20% year-over-year. I think the key takeaway here for the quarter is that our underlying operating performance is, in fact, improving. Okay. So same format of a slide. However, this is the full year. And the headline here is that we did have a solid year in 2024 with $2.8 billion of revenue, $543 million of adjusted EBITDA and a $1.86 or $1.85, my apologies of adjusted EPS, again, are within that revenue line, our core labs business grew mid-single digit, immunohematology grew low single digit and respiratory ex-COVID grew mid-single digit, all right in line with where we had expected those businesses to be for the full year. We met all of our commitments and this is especially rewarding given all the organizational transitional impact that we had in 2024. So before I move off our year-to-date '24 performance, I do want to address a disclosure in our 2024 10-K that was filed last week on Feb 27 as well as a related 8-K that we just filed yesterday at the close of business. In Item 9B of the 10-K, we disclosed an adjustment to our balance sheet that resulted from our annual audit. This audit was completed after we reported our earnings on February 12. And while we typically will file our quarter and annual filings with the SEC on the day of or the next day following an earnings call. We weren't able to do that after our Q4 earnings call. And unfortunately, we had an adjustment to certain foreign deferred tax assets on our balance sheet that were made subsequent to the earnings call and the press release. So this adjustment represents a conservative view on certain deferred tax assets. I want to be clear, it doesn't affect cash. It doesn't affect revenue. It doesn't affect adjusted EBITDA, adjusted net income or adjusted diluted EPS. And the assets can still be realized. We just conservatively put a valuation allowance on those assets. This late tax adjustment is an example of a larger service issue we have experienced. And therefore, we have made the decision to move to a new big 4 auditor as disclosed in that 8-K filing that I referenced it was made yesterday. To be clear, as stated in the 8-K, there are no disagreements with our previous auditor, and we were just not satisfied with the service levels provided and therefore, we decided to make a change. In our 10-K filing, we also disclosed 2 material weaknesses in our internal controls as of year-end '24. One was related to this deferred tax issue that I just mentioned. The other related to a legacy third-party system that is used only for internal purposes, there were no misstatements, no restatements related to these disclosed material weaknesses and we firmly believe we will be able to remediate both of these issues fairly quickly since they are pretty narrow in scope. Okay. Next slide is on balance sheet. For 2024, we finished the year strong in terms of recurring free cash flow generation after a tough first half of '24, we actually converted 59% of our second half adjusted EBITDA to recurring free cash flow of just under $190 million. We expect to increase our fiscal year 2025 conversion of adjusted EBITDA from the 20% we did the full year of '24 to 25% to 30% in 2025. And we also expect that our recurring free cash flow will get to our target of 50% or greater of adjusted EBITDA in 2026. We also expect to bring our net leverage ratio down from the 4.4x at the end of '24 to a range of 3.5 to 4x by the end of this year, 2025 and our target for debt leverage remains at 2.5 to 3x. Okay. Next page is on 2025 guidance, and I just wanted to share this slide with you. It's a slide we presented on the earnings call that does summarize our 2025 financial guidance. We are expecting revenue between $2.6 billion and $2.81 billion. At the midpoint, this overall top line growth is pretty flat. But within this, it's important to note that the Labs is expected again to grow. The Labs business is expected to grow mid-single digit. Immunohematology is expected to grow low single digit and respiratory revenue ex-COVID, low single-digit growth and finally, our Triage business, we expect to grow in the mid- to high single digits. This guidance also reflects an approximate $55 million impact of an FX headwind and is also reflecting our planned continued U.S. donor screening wind down of about 2 points of growth. And also, there's a COVID decline of about another 2 points of headwind. So excluding these 2 impacts, we are growing solid mid-single digit on the topline. So at the midpoint of our guidance on EBITDA -- adjusted EBITDA of just under $600 million. That's growth of 10% versus the EBITDA we did in 2024. This reflects the good work we are doing on cost initiatives and the strong EBITDA growth relative to topline growth, displays the nice drop through as evidenced by EBITDA margin improving 250 basis points from 2024. And then finally, the midpoint of adjusted EPS of $2.32. Over there on the far right of the slide, is up $0.47 or 25% versus where we finished for adjusted EPS in 2024. And while on this page, I think it's appropriate to mention and highlight the fact that the tariffs that were just recently enacted by the Trump administration that may then be rescinded, I don't know where they are right now. I'll talk about that later. But I do want to reiterate that there is no expected significant impact Canada or the China tariffs to our business. For Mexican tariffs, we do manufacture some instruments in Mexico. So we do estimate there would be impact there. But we reiterate that we have mitigated down the impact of that expected impact to not significant amount that is included in this guidance that I'm showing you. And as far as retaliatory tariff impacts, we believe there's just too much uncertainty on these for us to really comment. But rest assured, we are working closely with industry lobbying groups and taking actions to mitigate any potential impacts there may be in this area. Okay. So margin expansion, this is a slide that we actually did not show on the Q4 earnings call, but we talked about it in the remarks -- prepared remarks as well as in the Q&A. And we thought it would be helpful for everyone to actually see picture of what we said on the call. Brian and I have been pretty clear for the last 6 to 8 months on our target of getting to the mid- to high 20s for adjusted EBITDA margin by the end of 2026, the first half of 2027. We made a lot of progress in '24 with the large $100 million annualized cost reduction in the mid-'24. It was mostly staffing reductions. In '25 and '26, we are now more focused on procurement savings in both the indirect and the direct spend areas. These efforts are mainly focused on pulling out the higher-than-normal inflation that crept into the business during the years 2021 to 2023. We're more focused on indirect benefit savings in 2025, and we'll see more of the direct benefit -- coming out of the direct benefits hitting the business in 2026. We expect $30 million to $50 million of these procurement benefits in 2025, and then we expect additional cost reductions in '26 to grow our EBITDA margin another 100 to 200 basis points in 2026. We will keep our shareholder base informed of the progress here as best we can in each of the upcoming quarterly earnings calls. Capital allocation. This slide is really largely capital allocation priorities, I should say. This slide is largely unchanged since the combination of the 2 companies in mid-2022. We will first invest in the business and focus on areas such as menu expansion, the loss -- or the launch of U.S. Savanna Respiratory and enhancing our company's overall productivity, especially in the R&D area. And then second, as a priority, we will focus on return on invested capital, cash generation and deleveraging the balance sheet as our top priorities. And then finally, on my last slide, this is just a summary of the investment thesis that Brian mentioned earlier. But in summary, we believe we showed nice operating improvement with our performance in 2024. And we think our 2025 guidance also reflects solid operational improvement and moving us towards our targeted goals. So we do look forward to updating all of you on our progress in the coming quarters. So with that, thanks, everyone. We'll talk soon.