Welcome to the QuidelOrtho Third Quarter 2024 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.

Thank you. Good evening, everyone, and thanks for joining the QuidelOrtho third quarter 2024 financial results conference call. With me today are Brian Blaser, President and Chief Executive Officer; and Joe Busky, Chief Financial Officer. This conference call is being simultaneously webcast on the Investor Relations page of our website. To aiding the discussion, we posted a supplemental presentation on the Investor Relations page that will be referenced throughout the call. This conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not strictly historical, including the company's expectations, plans, future performance, and prospects, are forward-looking statements that are subject to certain risks, uncertainty, assumptions, and other factors. Actual results may vary materially from those expressed or implied in these forward-looking statements. Information about potential factors that could affect our actual results is available in our annual report on Form 10-K for the 2023 fiscal year and subsequent reports filed with the SEC, including the Risk Factors section. Forward-looking statements are made as of today, November 07, 2024, and we assume no obligation to update any forward-looking statement except as required by law. In addition, today's call includes discussions of certain non-GAAP financial measures. Tables reconciling these non-GAAP measures to their most directly comparable GAAP measures are available in our earnings release and the supplemental presentation, which are on the Investor Relations page of our website at quidelortho.com. Lastly, unless stated otherwise, all year-over-year revenue growth rates given on today's call, are given on a comparable constant currency basis. And now I would like to turn the call over to our CEO, Brian Blaser.

Thanks, Juliet. Good afternoon everyone. I'm pleased to be here with you today and share our third quarter 2024 results. We reported third quarter revenue of $727 million, adjusted EBITDA of $171 million and adjusted diluted EPS of $0.85. Our results demonstrate solid progress in executing our business improvement initiatives, including our previously communicated $100 million in annualized cost savings that we expect to realize through the first half of 2025. After my remarks, Joe will cover our detailed quarterly financials as well as provide our full year 2024 financial guidance, which we reinstated today. I would also like to highlight the key focus areas where we see the greatest opportunity for improvement in profitability and growth. During my first six months here at QuidelOrtho, we undertook an extensive review of every part of the business. I continue to be excited by the opportunity to serve our customers across the entire healthcare continuum and meet patients' needs in every care setting and at every step of the journey from prevention to diagnosis, treatment and monitoring. To meet those needs and to do so profitably, we need the right people, the right products, rigorous discipline and a strong cultural mindset that places customers and quality first. With that objective in mind, we strengthened our leadership team with the recent addition of two highly experienced industry leaders, Jonathan Siegrist as Chief Technology Officer and Lee Bowman as Chief Human Resources Officer. Jonathan has a proven 15-year track record in molecular diagnostics, microfluidic platforms and biomedical engineering. He most recently was the CTO and Head of Assay Research and Development at Cepheid. Lee brings over 25 years of experience leading teams through transformative initiatives in workforce engagement and leadership development at Edwards Lifesciences, Levi Strauss & Co., and Target. Lee's expertise in developing…

Okay, thanks Brian. Let’s begin with the details of our third quarter and year to date 2024 results on slides 3 and 4 of the earnings presentation which is posted on our IR website. I will also provide our reinstated full year 2024 financial guidance and then we will open up the call for questions. Unless stated otherwise, all year-over-year revenue growth rates on today’s call are provided on a comparable constant currency basis. During the third quarter and the first nine months of 2024 our business performed well and we continue to see healthy customer demand and momentum. Total reported revenue in the third quarter of 2024 was $727 million which declined by approximate due to higher COVID-19 and flu revenue in the prior year period. While foreign currency exchange did not have a material impact on overall third quarter results, we had a negative 100 basis point FX impact in our Labs business, which has a global footprint. Third quarter 2024 recurring revenue, which we define as revenues from sales of our assays, reagents, consumables and services and excludes instrument revenue, was $598 million as reported with no significant change in constant currency. This figure excludes COVID-19 and U.S. Donor Screening revenue. Recurring revenue growth was 1% in Q3. Underlying Labs recurring revenue growth was 6% but was offset by a decline in cardiac revenue mainly due to expected order timing between Q3 and Q4 in China. Total reported year-to-date revenue was $2.1 billion and total year-to-date recurring revenue was $1.74 billion or 5% growth compared to the prior year period. Again this excludes COVID-19 and U.S. Donor Screening revenue. From a regional perspective our third quarter 2024 total revenue performance was led by EMEA growth of 12% and 8% growth in our other region which is comprised…

Absolutely. We will now begin the Q&A session. [Operator Instructions] The first comes from Andrew Brackmann with William Blair. You may proceed.

Hi guys. Good afternoon. Thanks for taking the question. Maybe I can pick up where you left off there, Joe, related to 2025 and the adjusted EBITDA margin target that you sort of laid out there, I think it was 100 to 200 basis points compared to the 2024 exit rate. So by my math, I think that means call it, somewhere in the low-20s for adjusted EBITDA margin for next year. Can you maybe just sort of talk about high level, the building blocks that get you there? How does that $100 million in annualized cost savings roll in throughout the year and any other thing, cost saving initiatives that we should be penciling in here. Thanks.

Sure. So – and by the way, thanks, Andrew. So, yes, here's how I put together the more significant building blocks of that 100 to 200 basis points of margin improvement off the exit rate of this year's margin. First, we'll have the roughly $50 million of cost savings that relate to the first $100 million actions that we've already executed that'll come in the first half of the year. And then, there are additional cost savings initiatives that Brian hinted at in his prepared remarks that we haven't really framed out yet. But these are all in progress. And these are going to be in really all the areas that Brian laid out. I think, procurement IT really across all the areas. And I would say that, this org structure, the flattening of the org structure is probably a good example of what that will be and what types of things that will be in that second tranche of cost savings that's over and above the $100 million that we've already executed on. The third thing is, there are some bad guys that I need to call out. And this is not, shouldn't be surprising, there's going to be a roughly 3% merit increase for our employees which will have a negative impact – which will have to build in. And then of course there's going to be what I call, normal inflation within the business of roughly 1% to 2%. That will be a downside in the margin calculation. And then the last thing I'll mention, which was in the script, but just to reiterate it, where – or I should say when the 2024, 2025 respiratory season starts and ends, which we don’t really know at this point, will likely or could, I should say could have an impact on where the margins eventually land for this year and next year.

Great. Thanks. And then if I could ask just on the labs business, it sounds like you had some nice placements there in the quarter. You’re also seeing some nice sort of recurring revenue growth in that business as well. Can you maybe just sort of remind us your visibility into the underlying demand for the consumables for that business and how should we be thinking about that for the balance of Q4 but also in the 2025? Thanks, guys.

Yes, I would say, Andrew, for the non-respiratory business, particularly the labs business and the immunohematology business, there’s really good visibility because as you know, most of these contracts we have with our customers are five to seven year contracts and there’s very predictable ordering patterns that we have with these customers. And so the non-respiratory side of the business, specifically labs, which is your question, is very predictable. So we have good visibility into Q4 and even into next year, I would say. There’s always the variability caused by timing that may slip between one quarter to the next, but generally got pretty good visibility there.

Thank you. The next question comes from Jack Meehan with Nephron Research. You may proceed.

Thank you. Good afternoon. I wanted to ask a little bit more on the respiratory season. Just checking my math. The guide, $160 million, $170 million of I guess COVID, I think that implies $20 million to $30 million in the fourth quarter. I guess just would love to hear like what – how you went about thinking about what might have been pull forward versus actual demand? It’s been like unusual respiratory season given the summer spike, but just is that – I guess just any comments on that would be great.

Yes. Hey Jack, this is Joe. Thanks for the question. So if you look at the guide that we just put out, it is true that the variability or the range that we put out is predominantly in the respiratory space. As I just said to the previous question, the non-respiratory side of the business is fairly predictable. So there’s not a lot of range in the guide for non-respiratory, it’s really all in the respiratory space. The flu season began early last year and we really haven’t seen it pick up to that level yet. The ILI, which everyone knows is a public metric that we can all look at, is just beginning to start to tickle. Last time I looked at it was like 2% or 3%. And you’re right, the midpoint of our guide has respiratory down about 30% year-over–year. So based on the data we’re seeing from the Southern Hemisphere, there is a chance that volumes overall may be higher than the average flu season. But we are being somewhat prudent on the timing to account for the risk that the revenues could land in Q1 2025 versus Q4 this year. So, going back to Q3 last year, we had a strong Q3 with both flu and COVID and last year we expected that trend to continue into Q4 of last year, but it didn’t. And so as a result, we overcalled respiratory and we missed the quarter last year Q4. So we just really don’t intend to do that again. So we’ve – in the guide this year we have, as I said, we’ve planned that the COVID numbers will come down to about the range that you just quoted. I think that’s a fair number. And that flu would come down slightly as well versus prior year.

Okay, got it. And then wanted to follow-up on your China comments. Is it possible to frame up on the cardiac side just the potential magnitude of sales that could be exposed there? I’m not sure if that’s related to the Yanxi Province VBP, but just any color would be great. Thanks.

Yes. There are proposed decreases for certain cardiac marker, specifically is BNP reimbursement changes in various provinces. And again, this is different than VBP. Just want to make sure that's clear. We're still assessing the potential impact, Jack, but at this point we believe it'll be 1% or less of 2025 China revenue. China revenue.

Got it. Excellent. Thank you.

Thank you. The next question comes from Bill Bonello with Craig-Hallum. You may proceed.

Hey guys, thanks a lot. So two questions, one financial, one not. First of all, thanks for providing the assumptions underlying the guidance. It's really helpful and very much appreciate the prudence I am helping. Hoping you might be able to help me connect the dots a little bit between those assumptions and what sort of the implicit Q4 EBITDA outlook. It seems like if I'm doing my math right at the midpoint, it looks like EBITDA would be down maybe 250 basis points or so. That's down about $23 million on $27 million decline in revenue. I'm just sort of trying to understand, okay, which of the assumptions sort of, accounts for that and maybe, whether or not there was anything, any unusual benefit this quarter, it sounds like maybe there's some uptick in sales and marketing costs next quarter and maybe it's that simple. But…

Yes. Hey, Bill, this is Joe. Good question. And so let's break it down this way for the year [ph] Q4. And again, assuming the midpoint of the guide, as we just went through on the previous question about the respiratory season. We are assuming a roughly 30% drop in respiratory revenue year-over-year, Q4-to-Q4. And so that GP or adjusted EBITDA impact, the dropping down from that decline in respiratory revenue will be the majority of what you're referring to as the EBITDA drop year-over-year. But the other big piece, there's two other pieces, I would say. one, we will have some incremental cost savings in Q4, which is a good guy. But then there's another bad guy offsetting that is the bonus accrual that I mentioned in the prepared remarks. So we did not have a bonus accrual in the previous year, Q4 because we missed our performance targets. This year we are tracking towards those performance targets and we do have a bonus accrual. And so that dynamic is causing a roughly $25 million to $30 million increase in SG&A year-over-year in Q4. That's a big part of the story.

Okay, that's super helpful and I'm glad you have a bonus accrual this year. And then just not financial, but can you talk to us a little bit more about the organizational changes that you're making and what you announced, maybe the rationale for the changes? And then just also, you know, how we might think about the risk of disruption and what you're doing to mitigate that risk?

Sure. Bill, this is Brian. Thanks for the question. And you know, really, the decision to eliminate our Chief Commercial Officer and COO roles was all about flattening our organization, improving our speed, efficiency, and getting closer to our customers. Mike and Rob did a great job for the business, had a really significant impact on our team, especially as we went through the CEO transition earlier in the year. At the customer level, this really has no impact. All of these changes are kind of at the top of our organization. We've got very strong business unit, regional commercial and functional leaders in place who are now going to report to me. So I'm excited about this organization and what it means in terms of our ability to operate more effectively and bring more value to our customers.

And just in terms of the commercial organization. I mean is it – is there a change sort of in the way the sales force is organized and are you anticipating any other kinds of change in the salesforce structure or will it be relatively transparent to the sales team?

Yes, this will be, Bill, relatively transparent to the sales team at the customer interface level. We've consolidated our regional structure. So at the – again at the top of the organization from five regions to three and we've consolidated our business units from four to two. And in doing that have affected a lot of the top of our business. But really again our customer facing impact here is non-existent. There really isn't any change at all.

Okay. Thank you very much.

Thank you. The next question comes from [indiscernible] with UBS. You may proceed.

Great. Thank you so much for taking my questions. Why don't you go back to the China part? I think you mentioned the cardiac reimbursement pressure is not VBP related. Do you think that the other categories could be impacted as well or it just really just the cardiac biomarkers?

Yes, I believe based on what we're hearing now and the research we've done, we believe that it is cardiac only. However, as I said in the remarks, China is a complex environment and we'll continue to monitor and watch it closely. But right now we believe it's going to be limited to cardiac.

Our business there – we're heavily weighted in clinical chemistry and utilize a dry slide technology which so far the VBP actions have not been focused on. They've been more focused on immunoassay testing and wet chemistry testing in the region.

Got it. And then do you have any update on the Savanna platform and then also the menu kind of approval timeline, any color will be great.

Yes. So on Savanna, we continue to be on track with our RPV 4X [ph] panel to enter clinical trials during the start of this year's respiratory season. With the objective being that we'll have approval for that assay in the later part of 2025. We're not expecting any sort of significant revenue impact from that panel in 2025. Most of the ramp up will be in 2026 and 2027.

Got it. Thank you.

Thank you. [Operator Instructions] The following comes from Patrick Donnelly with Citi. You may proceed.

Hey guys. Thank you for taking the questions. Brian and I'm sure Joe, you can jump in as well. Just on the EBITDA side when you guys think about the path to that mid to high 20s that you talked about. It sounds like next year, nice 200 bps [ph] expansion. What are the key levers beyond this next 100 million leg? When you look at the organization, where do you see opportunities? Where do you see those additional levers to continue debt margin slowly towards the mid to high 20s?

Yes. So – as Joe mentioned earlier, we're really looking at a number of cost and business process improvement initiatives kind of across the P&L, whether it's in direct costs for our products, which includes everything from instrument components to plastics, biologics, chemicals to a lot of the indirect costs, travel and entertainment, distribution, freight, logistics, seeing what more we can do to be more efficient in R&D, et cetera. So there's a lot of work that we're doing on the just sort of the basic blocking and tackling cost side of the P&L. In addition, we're doing more with our commercial organization to focus our teams on the most attractive, most profitable and fastest growing segments where we have competitive differentiation and a right to win. And by doing that we not only improve our competitive win rate, but we also improve our profitability in doing that. So those are really our key areas of focus across the business. And as we get further into the implementation of some of these programs we will be providing additional visibility to those as we move forward.

Okay, that's helpful. And then another one on China, I've obviously talked about some of the variables, cardiac, EVP, I guess when you think about just that setup for 2025, what are you layering in for China? And then maybe just longer term how you think about that geography on the growth side would be helpful? Thank you guys.

Yes, hey Patrick, it's Joe. So yes, I mean we take the same opinion. I think most in our space do that. It's definitely a complex environment and we're watching very closely all of these moving pieces that you mentioned as well as the anti-corruption policies. But we still believe that given all that's going on, we still believe this year is going to be high single digit growth in China and for next year, I would probably frame it as somewhere between mid single-digit to high single-digit and more to come on that as we frame out our 2025 operating plan and then we'll talk more about it as we – as we report on 2024 results in February. But we still, as I said before, we still see that there's more opportunity than risks and we business there is pretty solid.

Sounds good. Thanks, Joe.

Sure.

Thank you. The next question comes from Andrew Cooper with Raymond James. Your line is open.

Hey everybody. Thanks for the question. A lot's already been asked and you covered a lot in the prepared remarks. So maybe just one quick one for me. You talked about plans for increasing the cross selling efforts on the legacy Quidel side. I mean, we can go back to 2018 and the triage deal and trying to do that internationally with Sofia and QuickVue. How do you operationalize that? Like I said, it's been a long time where we haven't really seen that play out. So maybe just give us a sense for how you refocus the sales force on that? How you incentivize it and what you think it can contribute in terms of growth either in 2025 or over the longer term?

Yes. My observation on that, thank you for the question, Andrew, is that, I think we've made some progress there, but we're in relatively early innings with cross selling. I think we probably do more there with our triage product line than anything else. And so we are looking at how we can more effectively approach the market with that strategy. Again focusing more, utilizing our direct commercial force as opposed to reliance on distributors, which largely our Sofia businesses is heavily dependent on. So the opportunity there is to maybe shift more from that channel to the direct channel. And we're trying to understand how we can do that and incent our teams to effectively compete that way.

Okay, I'll stop there and let others ask. Thanks.

Thank you. [Operator Instructions] The following comes from Conor McNamara with RBC Capital Markets. You may proceed.

Good evening. This is Jose Ricardo Moreno for Conor. Thank you for taking the question. Just wanted to ask what were some of the insights you have about current opportunities within the funnel that coincide with the 28 billion China stimulus for equipment as it starts rolling into 2025.

Is this as relates to China stimulus?

Yes, as it relates to China.

Yes. I mean, we see potential headwinds in terms of the value-based pricing initiatives and the anti-corruption policies that are being implemented. The stimulus could be a potential tailwind, but I think it's still a little early for us to understand how that's really going to play out in our market. And so we're still just in the early stages of monitoring that and the impact on our business.

Thank you. And then just one more on the immuno business. A lot of those contracts are five to seven years, in particular those instruments replaced during COVID in 2020. Where do you see the dynamics of the equipment replacement cycle happening starting now going into 2025?

Generally speaking, whether it's our labs business or our point of care business, we do have longer contract cycles, we have very high retention rates on our existing placements and we have a positive win loss ratio on new business. So, I think the over overall dynamic there really supports the stability of our underlying business model and that sort of mid-single-digit growth rate, especially for our labs business.

Thank you so much. Good job in the quarter.

Thank you.

Thank you. The final question comes from Casey Woodring with JPMorgan. You may proceed.

Great. Thank you for taking my questions. Maybe to piggyback on Patrick's question a little bit earlier, you know that second tranche of cost savings you mentioned on top of that 100 million run rate in savings here in that first tranche, would you realize those in 2025 and would those help bridge kind of the gap in 2026 and 2027 between the low 20s EBITDA margin in 2025 and that kind of mid-to-high 20s margin in the outer years on target you maintained or would you see, would you need to see more kind of cost savings and execution to reach that?

Hey Casey, it's Joe. Yes, I think this second tranche that was mentioned in Brian's prepared remarks would have an impact into 2025 and 2026. It's not all 2025. And again we'll, we'll try to provide more visibility into sizing that up on the next quarterly call as, we get through it. And I think just keep in mind that we are going to be moving to what I would call a continuous improvement culture of, looking for cost savings and efficiency. So that there certainly will be more to come. The other area I'd call out as a tailwind, if you will, for the margin improvement is going to be the exit of the donor screening business. That's a dilutive business as you know. And as we exit that at the end of next year, that's going to provide a tailwind to the margins as well.

Okay, got it. So that the low 20s and 2025 assumes the cost savings that you haven't identified yet. Is that kind of a particular?

Well, I would say it a different way. I would say that we haven't fully communicated to you yet into the street, but we have the majority of it fleshed out. And again, a good example is the flattening of the organization that Brian mentioned today.

Okay, got it. Helpful. And maybe just one last one. Quickly, your respiratory framework. Can you just give us an updated picture on what the competitive landscape looks like there? And you noted that we should expect similar market share to 2023. Can you just remind us kind of where you saw that last year and what it looks like now? I know that there's a number of players in that space that have been talking about, solid growth in their own respiratory panels. So just kind of curious on the updated picture to share. Thank you.

Sure. Yes. So we are the leader in the respiratory space, and I think the other large players are going to be avid, and then there's some smaller players. And, we've got a decent track record of the last couple years post-pandemic of taking market share. And as I said in the guidance that we provided, we've assumed similar market share to last year. But obviously internally, we are working very hard to increase our market share and beat that target. So more to come again as we finalize this respiratory season. When we talk to you guys in February, we can report on what that looks like.

Thank you. There are currently no other questions in queue. Thank you for attending today's call. This concludes today's call. Hope you have a great rest of your day.