Welcome to the QuidelOrtho Third 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 Juliet Cunningham, Vice President of Investor Relations. Please go ahead.

Thank you and welcome to the QuidelOrtho third 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 on 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 that are not strictly historical including the 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 for the fiscal year ended January 1st, 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 are 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 any other reason. Also, during today's call, we will discuss certain items that do not conform to US Generally Accepted Accounting Principles or GAAP. Please see Slide 3 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. With that, I'd like to turn the call over to Doug Bryant.

Thank you, Juliet. Good afternoon everybody and thank you for joining us today for our third quarter earnings call. Let me first take a moment to welcome Juliet to our QuidelOrtho team as we continue to execute on our strategy to increase shareholder value, Juliet's expertise in the medical technology sector and her 25 years of experiencing -- her experience at managing investment community relations for publicly-traded companies makes her an ideal choice to lead our Investor Relations function. We're committed to transparently communicating our progress to the street and excited to have her on our team. And for those of you that have known me a long time, you recognize that I don't sound normal. Let me just say that having suffered through this, over the weekend, we are definitely in a respiratory season and it didn't start in my house. And I know that recently, the CDC published that ILI is now over 2.5%. So, technically, I guess we are in a respiratory season or at least at the beginning of it. I'll press forward though and hope I can be, heard and understood, well. Turning now to our third quarter financial performance and as noted in our preannouncement, we delivered ahead of our guidance and Street expectations. We're forging a path to durable growth and there are many proof points on our progress in these results, including our ability to meet the earlier than expected respiratory season demand and the continued strength of our core businesses across all geographies. I'm pleased to report through quarter revenue of $744 million with adjusted EBITDA of $169.2 million and adjusted EBITDA margin of 23%, which was up sequentially from Q2. During the third quarter, we generated $53 million in adjusted free cash flow, which is another testament to the strength…

Thanks Doug and good afternoon, everyone. Our topline performance in the third quarter was positively impacted by strong earlier than expected demand for our respiratory products in our key markets. So, let's begin with details on our third quarter revenue on Slide 7 of the earnings presentation. To assist with prior year comparisons, we added for quarterly non-respiratory and respiratory record charge for 2022 and the first three quarters of 2023 on Slide 18 of that deck. Non-respiratory revenue was up 2% in constant currency to $559 million in the third quarter, driven by continued strength in our Labs business, which grew 3%. We are focused more on full year non-respiratory and Labs growth rates and quarterly results, which smoothes out quarterly variability tied to instrument placements. We have good visibility in this part of our business and are confident of high-single-digit Labs growth in Q4, which will translate to non-respiratory revenue growth with our communicated full year guidance range. And note that there is some timing of instrument revenue between Q3 and Q4 that explains the varying growth rates for Labs business. But importantly, we are back to normalized instrument backlog levels in Q4. We have a strong order book and are actively winning contracts and we believe our Labs business is well-positioned to provide durable growth in both the near and longer term. Respiratory revenue came in strong at $185 million, which reflects earlier-than-expected demand for COVID-19, flu, strep, and RSV tests. In addition to normal pre-respiratory season distributor stocking orders, we saw greater demand and sell-through in Q3. Compared to prior year period, respiratory revenue was down 21%, primarily due to the anticipated decline in COVID-19 revenue. Now, looking at our quarterly performance by geography on a constant currency basis and excluding respiratory revenue, we saw a…

Thanks, Joe. I'd like to leave you with one key takeaway, and that's, you know, we are the same successful respiratory company that we were prior to the global pandemic and the acquisition of orthoclinical diagnostics. The key difference is that the overall respiratory market, including COVID-19 now in its current endemic state, is significantly larger than it was pre-pandemic. And quite an ortho position in the overall diagnostics market, including respiratory, is much stronger as a combined company than either company was on a standalone basis. Contrary to some recent opinions, we believe, as evidenced by our results, the market, the diagnostics market, is positioned for continued durable growth for many years to come. And with that, I'll ask the operator to open the line for questions.

Thank you. We will now begin the Q&A session. [Operator Instructions] Our first question is from Andrew Brackman with William Blair. Your line is now open.

Yes. Hi, this is Dustin on the line for Andrew. Thanks for taking our questions. As we look forward to 2024, just wondering if you can touch on some of the billing blocks for margins. Understanding it's a bit early here, but a lot of investors are asking about the moving parts. So, any color there would be greatly appreciated.

Yeah. I'll let Joe go through some more detail. But clearly, the fact that we've stabilized the Labs business is very helpful to growth. we expect it to continue to do well in respiratory. And of course, we'll be launching Savannah. So I would look as an investor to those 3 milestones. Joe, what would you add? .

Yes. I was just going to add that we still expect the growth in the margins we'll be aligned with how we communicate about a year ago at Investor Day. So there's really no change there. And as Doug said, we have a lot of competent labs business. And as I said in the prepared remarks, visibility into that non-respiratory as you think about sort of the more variable and sort of more of the building blocks that we still have to work through between now and early next year when we provide 2024 guidance. It's the timing of the respiratory season Q4, Q1, it's the launch of Savannah. It's the endemic COVID levels where that finally ends up at the end of this year. It's the synergy achievement then of course, there's inflation in FX to think about also. So those are all the big moving pieces.

Understood. Thanks for the insight there. Another question on Savanna. Good update on the approval time line there. Just maybe if you could talk about your confidence in the rapid menu expansion and then placement install expectations? And then maybe to ask it another way, what are kind of the KPIs that you're going to be looking at to determine if Savanna is a successful launch? Thank you.

We're in good shape from a menu development perspective, and the clinical trials will drive our success. So we will do several clinical trials throughout 2024 with an expectation that once the instrument has already been cleared that the packages should be somewhat straightforward on each of the panels that we'll do. So we've said before that we will attempt to be in market with at least 4 or 5 different panels before the end of 2024. And that would be our major objective. We have instruments in inventory. We've recently completed the software update. We are fully manufacturing cartridges. And so I don't see any other constraint other than U.S. FDA clearance and obviously, we will work with the regions to launch the Savannah product internationally as well. But obviously, we have pretty high expectations for here in the US.

Okay. Great. Thanks for taking our questions.

Thanks, Dustin.

Next question is from Patrick Donnelly with Citi. Your line is now open.

Hey, guys. Thanks for taking the question. Maybe the first one is for Joe. I've got a few questions, how are you I got a few questions just on the 4Q ramp. The revenue, I think, sequentially is about flat. I think EBITDA is about double 3Q. So can you just talk about what the moving parts are there? Obviously, the respiratory piece is I assume a big piece. But can you just talk about that ramp and the confidence level in the EBITDA margin, EBITDA dollar ramp there in 4Q?

Yes, Hey, Patrick. So first of all, again, we -- as I said on the call, probably a couple of times, we've got good visibility into the non-respiratory business, and we expect a pretty solid Q4 for the Labs business. Of course, the growth, as you think sequentially, it's going to be driven predominantly out of the respiratory business. And so if you think about where we are in Q3 with $185 million of respiratory revenue in Q3. The remaining guide, again, is to get us to what we've been calling this normal or typical flu season. And so to get to the high end of the range that for respiratory revenue that I talked about in the prepared remarks. You're looking to increase roughly $50 million from Q3 to Q4. And given what we know about the respiratory season that doesn't sound super insurmountable.\ And by the way, if that happens, we would be down about $115 million or 33% from the prior year Q4 respiratory revenue So clearly, we're not planning for a record respiratory season like last year. We're planning towards this normal or typical season.

Yeah. And maybe, Joe, I could add just a little bit more color. Typically, what has happened over the last years, and I've been watching this now for 14 years. particularly driven by U.S., the distributors will order product in Q3. Historically, it's actually been close to when kids go back to school. So they've ordered and you can see right now in our own inventories at distribution, which we have very good visibility to. You see fairly high inventory levels. And what would normally happen is as we see a respiratory season clearly high, surplus emerge, the tests are going to come out of that inventory. And depending on how quickly that inventory bleeds down, we'll determine the distributors, the major distributors will order before the end of Q4. Sometimes, we've been holding our breath to the last week of the year, sometimes, but typically, it happens in the last 3 weeks. So that's what happens pretty much every year. Obviously, COVID change that dynamic a little bit, but that's typically what happens. And right now, looking at what the ILI rates are, and the fact that I'm hearing that a lot of physicians are actually ordering the combo products, I think it's reasonable to expect that we have a bleed off that mimics what we've seen in prior years. And so we won't see a lot of ordering for example, in October, we didn't. But we will be expecting that distribution inventory levels sort of get down below a certain point, they're able to trigger them to order. And the speed with which they got there sometimes affects how much they order as well.

Okay. That's helpful. And just, Joe, on the margin/EBITDA dollar ramp, is that almost all tied to respiratory, that's a pretty big step-up as well. I just want to make sure we're thinking about the margin profile correctly, 3Q to 4Q.

Yes. Yes. It's driven by two things, Patrick. It is the respiratory revenue step up, which, as you know, the respiratory products carry the highest standard gross margins of all of our products as well as just continued expense management synergy achievement. Those 2 things are going to drive the increase in gross and EBITDA margin.

Okay. Understood. Thank you. And then maybe just on the non-respiratory piece. The Lab business, Doug, can you maybe just talk about the trends you saw in the quarter, the visibility here going forward in terms of the growth, just trying to balance expectations into 4Q and as we work our way into 2024. Just what you're seeing there and expectations would be helpful. .

Well, just generally, as I say, the orders are up. So really, what drives the growth rate after that is the speed with which we get the installs done and the customer -- test of record. But we do expect a tick up in Q4 on the Labs business. And frankly, this is maybe a little bit too much detail, but every Friday, I see exactly what we closed. And I have seen a ramp up in terms of the order rates. So that's my visibility to it.

Okay. That's helpful. Appreciate guy.

Thank you, Patrick. Our next question is from Alex Nowak with Craig-Hallum.

Yeah. As I mentioned, we That actually just staying on that last topic there, the Labs business ramp in Q4. Is there any geography in particular that's driving the outsized growth? Is it China perhaps? Obviously, a lot of focus there. Just what's the thoughts.

Yes. As I mentioned, we will be up around 25% in China alone. And for the year, I think we're high teens in terms of growth 2023. So China clearly is back on track. It is a growth driver for us. And of course, the other major driver is the U.S., what happens in the US. because of the size is particularly important. So what we're seeing and expecting to see is driven by China and by the US.

Okay. Got it. That's all my side.

Yeah. Go ahead, Pura, I was just going to add that most of the regions are going to be up sequentially, Q3 and Q4. But the year-over-year growth, as Doug said, there's a lot of it has to do with China and the lockdowns we saw last year, obviously, lifted.

Okay. Got it. Thank you. And then so on Savannah, what has been the feedback so far at the FDA? And I'm sure they've had questions around the submission. And I've honestly forgotten, is this going to be a 510(k) or an EUA that we should get the approval at the end of this year?

Thanks for the question, Alex. We're super confident that we'll have approval for the box. And it will be approved 510(k). We'll pursue CLIA waiver at our earliest opportunity. But it's not going to be in EUA.

And that's 500 for the RVP 4 as well, just to confirm.

That's correct. So RVP 4 would be cleared, HSV obviously is under active review as well.

Okay, perfect. And then just an update on the high-volume cartridge manufacturing line. Thank you.

I don't have a further update. We're still targeting everything on track for midyear next year.

Excellent. Good to hear. Thank you.

Thanks, Josh.

Our next question is from Jack Meehan with Nephron Research. Your line is now open.

Thank you. Good afternoon. First, I hope you feel better soon. I wanted to follow up on some of the fourth quarter guidance questions. Maybe just looking at the margin profile in the fourth quarter. I think the guide implies something like a 40% EBITDA margin. If I just look at the history of the company, it's somewhat unprecedented outside of the COVID period. So I think I heard SG&A within more like 2Q. Are there other factors you can call out?

I'm super happy that you asked that question, Jack, because no, we're not going to do 40% EBITDA in the fourth quarter.

Yes, Jack, there must be a disconnect somewhere because it should be more like mid-30s. It would not be -- and that's pretty much -- I think last Q4, we were at 32%, 33%. So it shouldn't be size 40.

Okay. I'll play with the model. But even getting to a mid-30s EBITDA margin, still pretty healthy kind of relative to the pro forma that if you put together the two companies, historically, just talk about going from 23% in the third quarter to that level, what drives the step up?

As I said before, is the increase in respiratory revenue, which carries high margins and then expense management. I said in the prepared remarks that the -- we expect the SG&A in Q4 to come down to closer to where it was at Q2 levels. So we're expecting a drop expense.

Yes. And maybe this would be a good time to comment on this. We've talked before with everybody on the phone about the idea that we started with Harmonization. We went to integration we had two shots on goal with cost synergies, projects that we called Synergy 1.0 and 2.0. And some of those things are finally showing up in the fourth quarter. So that's a factor. But Jack, after only 18 months as a combined company. We know what needs to be done. We understand the levers we need to pull, and we're in the process of identifying the initiatives that we will need in order to execute moving forward. At the end of the day, we can run this business better, and we expect to run this business better, which will result in EPS growth over time. And I think you're seeing the beginning of it in the fourth quarter, and I would expect us to be able to report to you our expectations for the efficiencies that we will gain moving forward. But I can't emphasize this enough. We know what needs to be done.

Okay. And then I appreciate all the comments on the China VBP. I was just curious if you could clarify, do you plan to participate in this program at all? And do you think in future test categories? How important is it for you to maybe get exempt from the program?

Yes. So there's two sides to this, you've had other VBPs that have included clinical chemistry, and some of those excluded our products because their drive life chemistry. And one, a couple of years ago, I don't have all the details in front of me, but we chose to participate. We did reduce price we actually increased volume pretty dramatically. I think my colleagues in the diagnostic industry look at it the same, while it is a threat to price, sometimes it gives you greater access to the volume that's out there that we might not ordinarily have had access so easily. So in that case, two years ago, Ortho actually was the winner and did pick up the volume. So we will try to participate in this tender, but it really is only hormones, infectious disease tests and HCG, which are pretty low volumes for us. If we do choose to participate, we will more than likely reduce our pricing as was done in 2021 about that same level, pretty Draconian, but it could be valuable to us in order to retain our volume. That's the case. You heard me in my prepared remarks say that that's 0.72% impact if we were to reduce pricing at that level. But that would be the worst case scenario, actually, because you have to remember that we're going through distribution and distribution will pick up part of that price. So yes, we are going to participate if we can. Of course, we would. That would be the impact if -- and if we didn't pick up any volume, but simply retained what we had.

Okay, got it. And just last question, the account -- maybe for Joe, the accounts receivable stepped up, I think, $85 million sequentially. What drove that?

The higher respiratory revenue in the quarter. And by the way, we -- our global DSO Jack, is 33 days, and it's -- I believe it's 20 or less from the U.S. So all that respiratory revenue overachievement was in the U.S. So we've already collected all that cash. So, yes, that's what drove up, and we've got a very, very solid DSO. Yes.

Thank you.

Yes, thank you. Thanks, Jack.

Our next question is from Andrew Cooper with Raymond James. Your line is now open.

Hey, guys, thanks for the questions. Maybe just sticking with the Labs business a little bit. Can you give us a little bit more color just on sort of what the typical seasonality is here and how we should be thinking about one, what that meant for 3Q, but also when we think about that 4Q, I look at it and see a relatively easy comp. We have the backlog of instruments back to normal, which should be a tailwind here. So is there a scenario where this could be faster than the high single digits you pointed to in 4Q? And if not, maybe what might be limiting that relative to some of the tailwinds that we think about in the space.

And Andrew, you're specifically talking about the labs business?

Correct.

Or non-respiratory, right?

Yes, it is.

Yes, I mean, I do think there, again, we've got great visibility into this business.

So let's just start with the timing part of the question. So coming out of Q3, which is typically the lower in terms of instrument orders. Q4 not only is higher decisions made before May before year-end. But often, if they're sale instruments, we would see them higher in the fourth quarter. So I'll start with that. I mean that's what's driving some of it. And then the question that Andrew, I think, is really trying to get at is there potential upside there? And I would say, yes, but we have to deliver. We have to execute. And we have to get -- we got to get installs. We got to make sure that we've got everything covered on the supply chain side, and everything has to go pretty darn well to be a lot better than what we're forecasting how do you feel about that?

I'll leave it aside, but I'll comment further on the…

What they're witnessing it's just the optimism of the CEO and the conservatism of the CFO.

But I will comment further on the seasonality of the last instrument revenue, and I think it's probably a good point to hammer on. If you look at the five-year average of that legacy Ortho business, Q1 and Q3 are typically the lowest instrument revenue quarters, and the five-year average is about 22% to 24% of the instrument revenue in those quarters. And then Q2 and Q4 are the highest revenue quarters for lab instruments at 26% to 28% percent of the annual instrument revenue. So we will see an uptick sequentially from Q3 to Q4 on lab instrument revenue. Yes, that I can say with a lot of confidence.

Okay. Helpful. And then you mentioned capital deployment and not necessarily doing any buybacks as of yet. As we continue to see the stock price sort of come down, rates remain kind of steady. How do we think about that decision-making process and where that threshold is to get a little bit more aggressive on the buyback as opposed to prioritizing debt paydown as you have so far?

Well, we've said before in terms of capital allocation that we look both at debt repayment as well as share repurchase. And when we do the math right now, obviously, the math would tell you that it's probably better to be buying shares than paying out debt, but it's not dramatically so. So, but we'll continue to be opportunistic for sure.

Okay, I will stop there then. Thanks for the question.

Thanks, Andrew.

Our next question is from John Sourbeer with UBS. Your line is now open.

Hi. Thanks for taking the questions. I was wondering if there's any additional color divide on the Savannah backlog and then maybe more broadly on molecular diagnostics. Just any updates on the shift you're seeing there from centralized labs to decentralized solutions, and then how should we think about Savannah offsetting this in 2024?

You are right that the play there for Savannah is to meet the need of bringing molecular testing closer to the patients. And so we would see that as an unmet need that has existed for some time and has been addressed in part by other companies. We happen to think our solution, given its speed and the ease of use and the comments that we're getting from potential customers. We think that we will be successful. But I will say that if we weren't successful, somebody else in the space would be molecular testing needs to be closer to the patient. That need has been in there for a while. We're simply trying to do it and address it in a better way. But if we didn't get it done, if you're looking for what the trend is, the trend is going to be that it's going to be decentralized for sure. And I didn't understand, John, your question on the backlog of Savannah. We do have inventory. We do have inventory that we built in anticipation of a launch early 2024. Frankly speaking, we would love to have shipped a lot more boxes in but we're not cleared yet. But again, I'm confident that we will be, and we'll be ready to launch.

Got it. Appreciate that. And then maybe just a follow-up on the VITROS platform. And I just want to make sure I understand here, but have you seen any extension or change in the actual sales cycle there throughout the year?

No, I'd say not. No. I think seen any significant macro changes in terms of capital availability or decisions delayed. So it's been a fairly steady for a couple of years now.

Globally, we still average broadly 50-50 between cash yields and pre-age arrivals. That hasn't changed.

Right. And but the speed with which orders are coming – I don't see the customer behaving differently in terms of making decisions differently. And we do seem to be winning a few more than we normally would at this stage. But I don't see anything macro, John, that would impact clinical chemistry and/or immunoassay sales.

Got it. Thanks for taking the question.

Thank you, John.

There are no further questions at this time. So I'll pass the call back to the management team for any closing remarks.

I'll just say, on behalf of the team, thanks for your interest. Thanks for joining the call. We'll talk soon.

That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.