Welcome to the QuidelOrtho Second Quarter 2023 Financial Results Conference Call and Webcast. At this time, all participant lines are in a listen-only mode. For those of you participating on the conference call, there will be an opportunity for your questions at the end of today's prepared remarks. Please note, this conference call is being recorded. An audio replay of the conference call will be available on the Company's website shortly after this call. I would now like to turn the call over to Bryan Brokmeier, Vice President of Investor Relations. Bryan?

Thank you, operator. Good afternoon, everyone, and welcome to the QuidelOrtho second quarter financial results conference call. With me today to discuss our financial results are Doug Bryant, QuidelOrtho's President and CEO; and Joe Busky, QuidelOrtho's Chief Financial Officer. This conference call is being simultaneously webcast to the Investor Relations page of our website and a version of today's presentation can be downloaded there. Before we begin, I will cover our Safe Harbor statements. The statements we will make during this call about Company's expectations, plans, future performance and prospects are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which provides a Safe Harbor for such statements. Forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied in these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors identified under Risk Factors in our annual report on Form 10-K filed with the SEC on February 23, 2023, and subsequent reports filed with the SEC. Please refer to our SEC filings for more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. We cannot assure you that the forward-looking statements we make or implied by our statements will be realized. Furthermore, such forward-looking statements represent management's judgment and expectations as of today. Except as required by law, we undertake no obligation to update any forward-looking statements or any time-sensitive information to reflect future events, developments or changed circumstances or for any other reason. Also, during today's call, to facilitate a comparison of the Company's operating performance from the second quarter of 2022 before the QuidelOrtho combination for the second quarter of 2023, we will be discussing supplemental revenue and other supplemental adjusted operating results as if Quidel and Ortho have been combined for the applicable periods. We will refer to this information as our supplemental combined information. Certain supplemental combined information, as well as certain other items we will discuss, do not conform to U.S. Generally Accepted Accounting Principles or GAAP. Please see slide three for a list of non-GAAP measures. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the appendix to the investor presentation and press release issued this afternoon, both of which are available on the Investor Relations page of the QuidelOrtho website. Lastly, unless stated otherwise, all year-over-year revenue growth rates, including revenue growth ranges given on today's call, are given on a comparable constant currency basis. Now, I'd like to turn the call over to Doug Bryant, QuidelOrtho's President and CEO. Doug?

Thanks, Bryan, and welcome, everybody, and thanks for joining our call. We just marked an incredibly exciting first year of harmonization and integration across the Global Quidel organization. Our colleagues had performed admirably, and we as a united team have successfully achieved major milestones in a very short time frame. We delivered solid financial results in the second quarter with revenue of $665 million and non-respiratory revenue was up 4% on a supplemental combined basis. Demand for diagnostics across the healthcare continuum remained strong and our Labs business delivered high-single-digit growth. Our team was steadfast in executing our key growth drivers this quarter. Our Labs business backlog approached and normalized the levels that we saw utilization increase. Sofia non COVID-19 pull-through continue to increase, and we completed both the Savanna EUA and 510(k) FDA submissions as planned, including 510(k) for the instrument in both RVP4 and HSV VZV lesion panels. Drilling down into the results from our four business units. First, our Labs business delivered 9% growth in non-respiratory revenue, with growth across all major geographic regions. The notable global strength in clinical chemistry was driven by expected utilization levels for instrument and the strong integrated instrument placements over the last few years, which also drove solid growth in immunoassay and is clearly helpful to gross margin. Instrument demand remained healthy across all regions. [Focus] (ph) execution by our operations team enabled us to produce nearly 10% more instruments, than our record breaking first quarter and reduced our instruments backlog in our Labs business by approximately 40%. These efforts enabled us to ship more instruments than previously anticipated in the quarter. As a result, our integrated installed base grew 13% and automation increased 20% continuing the positive trend that we’ve seen since implementing our Commercial Excellence program and launching our…

Okay. Thanks, Doug, and good afternoon everyone. Before I discuss our financial results for the second quarter, I want to remind you that to facilitate a year-over-year comparison of the Company's operating performance, all growth rates that I referenced are presented on a supplemental combined basis as if Quidel and Ortho has been combined for the applicable periods, and may be referred to as supplemental combined information. Staring with the breakdown of revenue on slide seven, with demand environment continues to be strong and we delivered another strong quarter on the top line. Non-respiratory revenue grew 4% in constant currency, to $576 million in the second quarter, driven by continued strength in our Labs business unit, as well as increasing strength in our Triage product line and a bounce back of immunohematology. Excluding our Donor Screening business, which was a headwind in the quarter, as Doug mentioned, non-respiratory revenue would have been up 7% in constant currency. Respiratory revenue totaled $89 million in the quarter, including $56 million in COVID related revenue. Respiratory revenue was softer than expected due to a sharper than expected decline in COVID related revenue, following the end of the public health emergency in May, partially offset by resilient flu revenue. In total, revenue was down 26% to $665 million, reflecting the strong COVID related revenue in the second quarter of 2022. The strength of our COVID related revenue a year ago highlights what we and others in the diagnostic space have been same for several quarters. We believe COVID-19 is transitioning to an endemic state and is continuing to circulate like any other respiratory disease, appropriately we now bucket COVID-19 revenue with our other respiratory revenue. Turning to our quarterly performance by geography, on a constant currency basis and excluding respiratory revenue, North America revenues…

Thanks, Joe. In conclusion, the second quarter demonstrated the strength of our combined organization, a solid financial results driven by our Labs business unit and Triage. We raised non-respiratory revenue guidance to the high-end of our prior guide, while lowering our respiratory guidance to the low-end of our prior guide. We have now identified cost synergies of $130 million that we expect to realize over three years, as we are making steady progress across the organization improving the efficiency of the business, paying down debt, generating cash and being good stewards of shareholder capital, relaying the necessary groundwork for our transformation to an organization that's positioned for long-term top line and bottom line growth. Now let's open the line for Q&A.

We will now begin the Q&A session. [Operator Instructions] The first question comes from the line of Patrick Donnelly with Citi. Please proceed.

Hi there. You got Jason on for Patrick. Maybe first on the China performance in the quarter growing 26% ex-COVID. How did things trend in the country throughout the quarter? Did you see any changes in demand as the quarter went on, and is double-digit ex-COVID growth is still? How are you thinking about the guide there for the year?

Well, what we saw was stabilization of the business there, and we had a bit of a surge in the first quarter. I think what you're seeing in Q2 is more of a return to normalcy, and what would you add, Joe, in terms of the actual numbers.

Yes. No change in expectations there for the full-year. We're still expecting high-single-digits, total revenue growth and high-teens, full-year revenue growth, excluding SARS.

Got it. Okay. That's helpful. And then maybe just on the Savanna manufacturing, how has that been ramping? How should we be thinking about production capacity relative to initial demand, as well as the automated production line coming online next year?

That's a great question. We're actually at the phase now where we're stocking instruments. And supportive, but we anticipate to be a reasonably good launch, assuming that we're in market for this upcoming respiratory season. So again, we're already at the stage from an instrument, position that we feel like we can address the coming launch. And on the cartridge side, as I mentioned, we're just finished standing up our second low volume manufacturing line for the cartridge for both clinical trials and launches, and that's going well too. So, I think we're in really, really good shape from an ops supply chain and launch perspective.

Got it. Thank you.

Thank you. The next question comes from the line of Andrew Cooper with Raymond James. Please proceed.

Hi, everyone. Thanks for the questions. Maybe first, I just want to talk a little bit adjusted EBITDA here in the guide. The margins moving a little bit lower, I think the conversations we’ve had about COVID and respiratory prior was that it was had really worked closer to the consolidated average. You talked about, some expense offset as well. But we do see that margin going lower. So just help me kind of think through some of the moving parts there and maybe why we aren't seeing more of those synergies and more of those cost offset helping, helping drop down, limit the drop down a little bit more.

Yeah. Hi, Andrew, it's Joe. Yes, so there are two big changes to the guide on the revenue side. We are taking the non-respiratory revenue guide up to the upper-end of the range and that's really driven by the strong results we're seeing on the Labs business and the continued success we're seeing unwinding that instrument backlog. But in the quarter and then early in this Q3, and like a lot of other diagnostic companies that have already reported, we are seeing some softness on the COVID revenue side. And so, those -- the areas where we're seeing that softness on COVID are particularly on the Molecular side where that testing is moving to antigen, and on the retail side where it seems that the asymptomatic testing is it's just not happening as much as it was last year and earlier this year. So, we did bring down the revenue guide there. So, there is definitely a margin impact to those two things that I just mentioned, as we drill down the Labs backlog faster than we had expected earlier in the year. It's a good thing because we're producing more instruments and we're getting more instruments out to our customers and that's going to drive more recurring revenue in the future. But in the short-term, it is going to drive margins down, as we drive more instrument revenue, which had -- it just has lower margins, significantly lower margins than the recurring reagent revenue. And then on the COVID revenue, most of the commentary we made about the margins approximating the overall total Company margin were related to the government contract that we fulfilled in Q1 and early in Q2. But as you look at the COVID margins for retail and professional, there are still pretty strong margins relative to the rest of product mix. And so by pulling down that COVID revenue in the second half, it is going to have an impact. And if you work through the math, and I'm sure we all do this after the call. If you work through the math and look, through the midpoints of the revenue drop, on the guidance and then the EBITDA and EPS drop, you will see that we did actually offset some of the margin impact with cost reductions to soften that EBITDA and EPS impact on the bottom line.

Okay. Great. That's helpful. And then maybe just one more, when we got a lot on the -- in the quarter just around the Triage business and some of the moving parts here in the U.S., specifically, with the recall, obviously sounds like a really strong quarter there overall. So maybe just help us size some of those impacts for folks, how we should think about it for this quarter and into the future. And then, some of the key factors may be helping drive that growth with the cross selling in the international markets?

Yes. I'll start with the recall part of the question. And just point out that we're talking about a very small number of this across a small number of [youths] (ph) that were affected. And so the financial impact is what happened was de-minimis, more than offset by the growth that we're seeing, particularly ex-U.S. of the Triage business.

Yes. And by the way Andrew, Triage did have a nice quarter up in, up high-single-digit in the quarter. And so, up nicely sequentially from Q1. So, we are starting to see those nice cross selling opportunities, particularly outside the U.S. which is driving that growth and it's going to drive a nice full-year growth in the Triage business.

Okay. I'll stop there. Thank you.

Thank you. The next question comes from the line of Alex Nowak with Craig-Hallum Capital Group. Please proceed.

Okay. Great. Good afternoon, everyone. I know you're adjusting the respiratory guidance here today, but we are entering the second half, so I got to ask the question anyway. Just how are you thinking about the flu season? There's a big Australian flu season that they're going through right now. We're also hearing news, but another COVID variant potentially floating around. We're seeing positivity spiking. So, what are you hearing out there in the channel? And then just remind us how much COVID and flu inventories ultimately is still sitting out there?

On flu, this is the same answer. This time of the year that I've been giving, I think, for the last 14 years, and that is, we see correlation between Southern Hemisphere and Northern Hemisphere. And I think when I last saw that, we had looked at the last 20 or 25 years or something. And that are squared between the two is pretty high, but it's not causing it's not necessarily causing effect. So, I do think that we're hearing from the government some concern about what's going to happen in the upcoming respiratory season. But what I would normally say, Alex, is I never know when it's going to start and when it's going to stop. So do I believe that we'll see an influenza season this year that is more traditional in terms of size, I think so. I just can't predict how much of that's going to occur in the fourth quarter and how much of that would remain for the first quarter. Our sales have been, reasonable because for most of the inventory that would have been shipped to distribution, that's the product that gets shipped into the professional segment. And so I'm not thinking that we are sitting with a lot of inventory out there right at the moment.

Yeah, I'm looking at it. Distributors inventory is down quite a bit from prior year, and it's also down from Q1. So we're looking at pretty low levels of distributor inventory of SARS in the U.S.

Right. And then when we see their out sales report, we know that they shipped. Yeahand we suspect that what will happen as is atypical, is that during the respiratory season, that same set of distributors will reorder before we get too far into the fourth quarter. Sometimes it occurs earlier, as early as late third quarter but we're not modeling that at the moment. So that is true for both COVID and for flu.

Okay. Very helpful. And then maybe going back over to Savanna, can you remind us how the initial launch of Savanna in Europe went? Were you seeing those competitive conversions happen like you outlined at the Analyst Day, the share gains take place, and how has that changed the initial U.S. game plan once we get the approval?

Well, I think it's a bit of foreshadowing wing on what we might expect, the competitors that we saw based on European feedback might be vulnerable. we're indeed those same 2 competitors. And we've done there quite well. The issues that are reported in Europe we see as being applicable here in the United States too. So particularly with respect to the respiratory launch, I think we're in a really good shape here in the U.S. and for HSVs. that's a product. It's not a huge market, but we already do quite well in it.

Alright. Appreciate the update. Thanks.

The next question comes from the line of Jack Meehan with Nephron Research. Please proceed.

Thank you. Good afternoon. Joe, so the new EBITDA forecast for the for the year, the EBITDA forecast 800 million to 830 million. Can you talk about the pacing in the back half. I'm getting 4Q needs to be over 300 million or so. Is that the magnitude, the step up you're looking for. And just what drives that?

I don't know that -- it's that steep Jack, hang on one second. Let me just pull up the file.

The qualitative. It is a pretty big step up in the first quarter.

It is a big step because sequentially, we've been saying Q2 is our lightest revenue quarter and that is going to be true. Q3 will step up sequentially. Q3 will step up sequentially and then Q4 will step up quite a bit with the respiratory season. And cardiovascular, frankly, in the fourth quarter, it steps up a little bit normally too. So fourth quarter typically is our second biggest quarter, across the combined business.

But remember also, Jack, in addition, you've got, we're going to have a decent amount of cost synergies starting to hit the P&L. So, your OpEx number will be coming down quite a bit. If you're comparing to Q4 last year, you're going to have quite a bit of a nice step down in OpEx year-over-year.

Okay. And then another one on Savanna. So, it's good to see the submissions are in. When do you pencil in now an approval for 510k? And can you just tell us what the second half guide for respiratory includes for Savanna sales?

I'll let Joe answer the second part of the question. The first part of the question is, traditionally once we make submissions to the FDA, and they are under active review. We don't comment any further. So, I think the first part of your question was, asking me to forecast when we probably would get approval. And I won't do that. Obviously, we have ongoing dialogue. We have a number of things as part of the process, not one of which we can discuss. while the products are under active review.

Yeah. And on the magnitude, Jack, there's no change from what we said the last quarter or maybe two quarters that the Savanna revenue that's in the guide is less than 1% of total revenue. it's, it's just not a big number.

Okay. And just to be clear, just given we're still waiting for the UA and 510, are the sales baked in for Savanna in the back half just all from, Europe?

It's a bit of mix. Obviously, the larger is the European and ex-U.S. sales. but we do expect, still sales in the fourth quarter in the United States.

Okay. Excellent. Thank you.

Thank you. The next question comes from the line of Casey Woodring with JPMorgan. Please proceed.

Hi. Thanks for taking my question. So maybe just picking up piggybacking off of Jack's question. Looks like the implied back half EBITDA margin is something around 29% to 30%. Can you just walk us through the puts and takes there on what would get you to the low end and the high end of the range that you gave today? And know it's tough to run rate the 2nd half margins given the annual strong fourth quarter, but maybe can you just talk about what the right jump off point would look like for 2024 margins?

Yes, I can answer the last question first. Casey, on the, and I assume you're talking about, well, only 'll speak to gross margins. As I said on the call, we are going to trend to the low end of the of the previously communicated range of low to mid-50s because of those reasons I mentioned earlier of the drill down the of the laps backlog, creating more instrument revenue, and then less COVID revenue than we originally thought. So we'll be at the low end. I still think that the relevant long term range for us is that low to mid-50s. And it's -- I hate to give this answer, but it's a little too early to talk 2024 because there's so many moving variables for 2024. So I'll just reiterate that we still believe that the appropriate gross margin range for us is that low to mid 50s. And is, you know, what's going to move us within that range is going to be the pace of cost synergy achievement as well as the slope of the Savanna revenue ramp and how fast that goes up because as we've said many times, and we've talked about with you, you know, the early launch of Savanna in the U.S. it's going to be a headwind to margins. And until we get we really get that high volume line up and running, at some point in 2024, that's when the margins will start to get accretive. And then as far as your first question, I think it's a similar answer on where we end up in the range of the EBITDA that we provided today, it's going to hinge on, how much more of the lab's backlog we can drill down and drive more labs growth. What exactly does the respiratory season look like and where does it land in the range? And then how fast we can achieve cost synergies, this year versus first half next year.

Got it. That's helpful. And then maybe just one follow-up. So it looks like the Labs business beat the street by more than 30 million here in 2Q. But just looking at the non-respiratory guide for the year, it looks like it's only going up to 5 million can you maybe just talk about some trends in the non-respiratory business and in Labs for the back half of the year? Thank you.

Yes. I think the two big variables here, no surprise. We've talked about both these things already is China the continued recovery there throughout the year. And then instrument back order drill down and how fast happens. And that creates a little bit of variability. I wouldn't Casey that we're probably being a little bit prudent with the guide on the non-respiratory,-non respiratory, because you're right, the midpoint 105 million.

And Casey, the other variable worth considering is the speed with which our field service engineers install the instruments and the speed with which the customer actually validates and gets the, instrument and assays to what they call test of record. That's the variable. And, so when you look at these installations at this point moving forward, the biggest gain from a revenue and margin perspective is obviously going to incur in 2024. So that’s kind of the variable that we're looking at. And I think we have been prudent. We certainly haven't ever called it.

Got it. That’s helpful. Thanks, guys.

Thank you.

Thank you. There are no additional questions at this time. I will now hand it back to Doug for closing remarks.

Thank you. I want to thank everybody for your great questions. In fact, I would just add that they were the right questions. And on behalf of our entire management team, I want to thank you for your continued support and interest in QuidelOrtho. This is a journey for sure, and we look forward to sharing our journey with you.

That concludes today's conference call. Thank you. You may now disconnect your line.