Welcome to the QuidelOrtho Fourth Quarter and Full Year 2024 Financial Results Conference Call and Webcast. At this time, all participant lines are in a listen-only mode. [Operator Instructions] I would now like to turn the call over to Juliet Cunningham, Vice President of Investor Relations.

Thank you. Good afternoon, everyone. Thanks for joining the QuidelOrtho's fourth quarter and full year 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 aid in the discussion, we posted a supplemental presentation on the IR page that will be referenced throughout this 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, financial guidance, future performance, and prospects, are forward-looking statements that are subject to certain risks and uncertainties, 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 on 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, February 12, 2025, and we assume no obligation to update any forward looking statement except as required by law. In addition, today's call includes discussion 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'd like to turn the call over to our CEO, Brian Blaser.

Thanks, Juliette. Good afternoon, everyone, and thank you for joining us on the call today. We finished the year with solid top-line results that were in line with our 2024 financial guidance, and I'm encouraged by the progress that we're making in improving our cost structure and focusing the business to elevate profitable growth. Today, I'll discuss our 2024 operational highlights and key priorities for 2025, and then Joe will provide greater detail, as we share our 2025 full year guidance. As I mentioned in previous calls, I've been driving an operating model designed to empower our leadership team to focus on growth and profitability. As part of this strategy, I made key changes to the leadership team to ensure we have the right mix of talent and expertise to move our vision forward. Having the right leadership in place is essential for driving innovation, improving operational efficiency, and positioning the company for success. Our efforts to prioritize high impact opportunities are showing early signs of progress, as reflected in our second half 2024 results. Turning to the fourth quarter of 2024, we saw ongoing contribution from our labs, Immunohematology and Point of Care businesses. Total reported revenue in Q4 was $708 million which decreased by 4% year-over-year due to the expected declines in COVID and flu testing revenues. Importantly, over 90% of our Q4 sales were recurring, driven by reagents, consumables and service. And I'd mention that, all growth rates I'm about to give are in constant currency. Our Labs business, which is roughly 50% of our total company revenues, achieved growth of 4% on a reported and constant currency basis excluding COVID and non-core revenue. This performance underscores its durable and predictable business model with strong brand recognition, long-term contracts, and a loyal customer base. Within transfusion medicine,…

Okay. Thanks, Brian, and hello, everyone. I'll begin with the details of our fourth quarter and full year 2024 results on Slides 3 and 4 of the earnings presentation, which is currently available on our IR website. Again, unless stated otherwise, all year-over-year revenue growth rates on today's call are provided on comparable currency basis. During the fourth quarter and full year 2024, our business performed in line with our expectations, and we expect continued momentum going into 2025. I'll start with some high level commentary on our full year 2024 performance and then drill down into fourth quarter results. We'll also provide our estimated full year 2025 financial guidance, and then of course we'll open up the call for some questions. Total reported revenue for the full year 2024 was $2.8 billion, including $2.3 billion in non-respiratory revenue. Labs growth was 4% excluding COVID and non-core revenue, which includes contract manufacturing. And our respiratory revenue was $504 million which grew 4% excluding COVID compared to the prior year. Full year 2024 COVID revenue was $185 million, including $17 million in government contracts. Foreign currency exchange negatively impacted full year 2024 results by 60 basis points. Adjusted EBITDA was $543 million and 19.5% adjusted EBITDA margin, and adjusted diluted earnings per share was $1.85. Moving now to fourth quarter 2024 results. Total reported revenue was $708 million, which decreased by 4% compared to the prior year period due to lower year-over-year COVID and flu revenues as discussed in our third quarter earnings call. Foreign currency exchange negatively impacted fourth quarter results by 30 basis points. From a regional perspective, our fourth quarter 2024 constant currency revenue performance was led by our other region, which again is comprised of Japan, Asia Pacific and Latin America and grew 13%. China grew 11%,…

[Operator Instructions] The first question comes from Jack Meehan with Nephron Research.

Thank you. Good afternoon. First question was on the guidance. The forecast for free cash flow conversion at 25% to 30% of adjusted EBITDA. It wasn't that long ago that, you were looking at something closer to 50% of adjusted EBITDA conversion. I know that was a different time, different revenue base. But I was wondering, if you could just talk about, where you think that can go over time and what a more normalized level might look like?

It's Joe. Thanks for the question. Yeah, the cash flow is certainly not where we wanted to be. We ended 2024 at 20% recurring free cash flow as a percentage of EBITDA. And again, as you just stated, for 2025 we expect it to be between 25% to 30%. So it's an improvement over 2024, but ultimately our goal is to be at least 50% conversion of adjusted EBITDA to free cash flow conversion. And I believe that getting to that target will be over the same timeline as our margin improvement goals, so I would say over the next couple of years.

Okay. And then, I was hoping you could also just talk about the China region. So given some of the market uncertainty, the fourth quarter actually looks like it was pretty good for you guys in the region. This mid to high single-digit target you have for 2025, can you just give us an update on your view on pricing and exposure to any VBT programs that are taking place?

Yes. Hi, Jack. This is Brian. China continues to be an attractive market for us, but it is a complex market as you know. In the near term, we think that the risk of additional VBP pressure has largely passed us by at least for 2025. But we have seen some smaller impacts to cardiac reimbursement there that are yes, mainly reimbursement versus broad VBP actions. I don't expect any more significant actions on either VBP or reimbursement, but I would say that the competitive intensity there just given what has happened has increased. And as a result of that, we're kind of tempering our view from kind of -single-digit to mid-single-digit moving forward given that the nature of the environmental dynamic there.

Okay. That makes sense. If I could squeeze in one more just a clarification. I think there was a new disclosure in the slides for the cardiac revenue. I just wanted to clarify, does that include both Triage and BNP and kind of the decline you had in the quarter was entirely on the Triage side, I assume?

Yes, that's right. Yeah, we referenced that growth or decline in the prepared remarks, Jack, so we had to put a slide in the PowerPoint deck that goes with the earnings call. And yes, when we talk about the cardiac, it's the combined Triage revenue as well as the BNP revenue and really all of the full year variances is in the Triage business. That BNP business is flat, $75 billion every year.

The next question comes from Patrick Donnelly with Citi.

Hey, guys. Thanks for taking my questions. Joe, maybe one for you on the cost side. It sounds like maybe some of the cost savings are coming a little earlier than expected this year as well. Can you just talk about the levers you guys are pulling to preserve and drive EBITDA higher the key ones as we work our way through this year and then obviously the ones that remain out there to drive EBITDA back to where you guys want it on the margin side?

Yeah. So, hey, Patrick, so yeah, the overall EBITDA margins are going up 250 basis points from '24 to '25. And at a high level, I would say that the pieces are -- it's the roughly $50 million of the first $100 million that we actioned last year mid to 2024, which will benefit the first half of 2025. And I would say that, that $50 million is going to be split pretty evenly between, OpEx and GP. And the second tranche that I would mention is the $30 million to $50 million of incremental savings for the '25 that we mentioned on this call today, which we've defined as mostly procurement related. And most of those savings will occur within the OpEx line, because a large majority of those savings as procurement savings are going to be indirect procurement savings. And the direct procurement savings that will benefit GP will take a little bit longer to realize and we'll probably start to see more of those move into 2026. So those are the two main good guys benefiting margins. And then, of course, you have a headwind of normal merit increase for employees and 1% to 2% inflation on materials that are offset. And those are the really the big main pieces, as you think about how we go from '24 to '25 and then 250 basis point improvement on EBITDA margins.

Okay. That's helpful. And then, maybe just the range on respiratory. Can you talk about, the different drivers there? Are we in the endemic? Is this the right number to think about going forward? And then, inside of that, just Savanna, it sounds like respiratory trials for now, not much this year, the contribution there as we work our way forward?

Yes. I can take that. Maybe I'd take the COVID revenue piece first. We do believe that when you look at the COVID revenue for us, it is going down in '24 '25. But the really all of that drop from '24 to '25 in the COVID revenue is the government contract that won't repeat that we saw in '24. And then the other piece is retail revenue, which is a really small piece of our business. It's less than 0.5% of our total company revenue. And quite honestly, it's just not really a big focus of ours right now. The professional COVID revenue is relatively flat in our guidance, '24 '25, and we believe that's really at what I would describe as an endemic level. As far as the rest of the respiratory, revenue, it's growing in the guidance. It's growing roughly low single-digits for '24, '25, when you think about flu, RSV and strep.

The following question comes from Bill Bonello with Craig-Hallum.

Hi, thanks guys. I just want to follow-up a little bit on the first question that Patrick asked, maybe slightly differently. The margin expansion target is now a lot better than what you had said not long ago. And it would seem like you had anticipated additional cost savings, you've been talking about that and procurement, as an opportunity. So I'm just curious, two things, sort of what's going better, what has you more encouraged, than when you originally talked about maybe 150 to 200 basis points? And then secondly does it change your thinking about the total opportunity at all?

Hey, Bill, this is Brian. I think in terms of what's gone better, we can point to a lot of the accomplishments the organization has made this last year. First and foremost, the staffing reductions that we made, which were substantially were 9% of our workforce and probably monetized out closer to 12% to 13% of cost reduction there. But we very quickly jumped on the procurement piece of that. And I think as we have gotten significant traction there, that's enabling us to now talk about this additional $30 million to $50 million of incremental savings. So, I still see -- I wouldn't want to get too far out of our skis there. I still see our pathway here to the 25% EBITDA range and higher over the sort of 25% to 30% range over the next two to three years. So that's our target. We keep trying to push that as hard as we can.

Okay. That's helpful. And you talked about the procurement being more on the indirect cost side this year. Is there any color you can give on that at all? Like what types of things are you able to achieve there?

Yes. It's a lot of costs. It really cuts across the entire P&L. It's everything from supply chain and logistics costs, packaging to travel and entertainment costs. It really just cuts across the whole P&L. It's a lot of our service cost in IT and quality etcetera and even some R&D expenditures. So it really is a broad-based approach that we've taken to the indirect side. And the reason we're those are just a little bit more actionable in the short term than the direct procurement, which are generally product related costs that require us to change in some cases the design or make regulatory submissions. And so they just take a little longer for us to implement.

Yes. Okay. That's helpful. And then if I can just one last one. On the -- thanks for the color on the year-over-year decline in the adjusted gross margin. Can you just remind us the reason for the sequential decline?

From Q3 to Q4 in 2024 you're talking about, Bill?

Yes.

It's going to be mix. Yes, product mix. It's product mix.

Okay. But don't you have more respiratory in Q4 and isn't that higher margin? What ---

No, it's actually less, yeah, which is what we had talked about on the Q3 call.

Okay. Okay. Well, I'll ask on our follow-up call, so I don't look any more stupid. Thank you.

The next question comes from Lu Li with UBS.

Great. Thank you. So two questions. So first one on the margin. I just wanted to get your updated thoughts on the tariff. Is your assumption right now including like any negative impact from the tariff or and then maybe just like any mitigation that you can talk about?

Yes. The tariff subject seems to be ever changing here, over the last couple of weeks and we're monitoring it very carefully. We were happy to see that Mexico and Canada are moving, I think, toward a resolution to what was proposed by the administration. And as you probably know, our industry continues to lobby for an exemption there, because the bulk of medical devices and diagnostic products are manufactured in the United States. We do have some exposure there, as we've got some instruments that are sourced from Mexico. But given the changing nature and morphing of the subject right now, it's really just too early for us to provide any real view of potential impact at this point. So we're just going to monitor it very closely and once we understand what the real impact is, we'll be able to provide additional guidance on that.

Got it. So, I wanted to circle back on one of your comment on the China part. So, you said risk of additional VBP pressure largely passed for 2025, and you don't really expect any like significant action. Just can you just provide a little bit more detail in terms of like what have you seen on the ground and why you believe that most of the impact should be gone in 2025?

Yes. Most of the VBP actions up to this point have been focused on liquid, clinical chemistry products, and immunoassay products. Our dry slide technology has been exempt from those actions up to this point. And unlike most of our other competitors there, our mix of clinical chemistry versus immunoassay is kind of reversed. We have less immunoassay exposure in the China market. We have very little immunoassay placement in the China market and most of our volume there is clinical chemistry. So based on the timing of how these actions roll out, we believe, at this point they're really -- we don't expect any sort of meaningful VBP impact, for that would affect our products in 2025.

Okay, got it. If I can squeeze one more, I just wanted to think about more the long-term margin expansion opportunity. So we're talking about like 250 basis points in 2025. Is that the right way to think about in terms of like 2026 as well, given that, you do have more procurement opportunities that you just mentioned and then you also have the divestiture of the donor business? Just wanted to think about how you it sounds like a little bit longer-term 2026?

Yes. Hi, Lu. It's Joe. We've been, I think, pretty consistent here since Brian joined the company back last May in that we are targeting adjusted EBITDA margins greater than 25% and that it would be a two to three year journey from when he started with the company. And the reason that it takes that long, because it may be surprising to some of us, like, why would it take so long is, because we can do the headcount actions fairly quickly, which we did. We can get to indirect procurement savings, which we will get to this year. It's the direct procurement savings that take a little bit longer because sometimes you're looking at bringing in recertifying new suppliers or actually swapping in and out new materials on existing products and trying to avoid new 510(k) filings with the FDA. So it does take a little time. So I think we're making good progress from '24 to '25. We will make even more progress as we move into 2026 as we continue with the indirect procurement savings as well as start to see more of the direct procurement savings come through on the gross margin line. And then the final thing I would say is that we are going to get a bit of a tailwind as we fully exit from the donor screening business, the U.S. Donor screening business in 2026. We've sized that at roughly 50 to 100 basis points. And then the final thing I mentioned is, the Savanna launch. That will provide some tailwinds to margins as well as we start to move from dilutive impacts of the project to more accretive impacts of a molecular product margin. So all those things combined will get you to, again, that greater than 25% adjusted EBITDA margin. So we'll make progress this year. We'll make more progress next year. And I would think by the time we get to the end of '26, first half of '27, we should be where we need to be with margins.

[Operator Instructions] The next question comes from Andrew Cooper with Raymond James.

Everybody, thanks for the question. A lot already asked, but maybe just one, just to make sure on the $30 million to $50 million of savings this year, that's an in year number and I think you said second half weighted. So is it right to think about as we move into 2026, there is some flow through there on top of like you called out the incremental direct procurement work and so forth. So we should have again kind of another above fully normalized margin expansion year in '26. Is that the right way to think about it?

Yeah. Hi, Andrew. Yes, the $30 million to $50 million that we talked about is incremental. We'll be in year. That's the -- this year impact. And you're right, it'll be mostly second half impact. And it'll be mostly, as I said earlier, it'll be mostly in the OpEx area as a lot of that is focused on indirect insurance. And then for sure, we have many direct procurement projects and initiatives in flight, which will start to benefit more in 2026. And obviously, if we move through 2025, we'll talk a little more about what those impacts might look like in 2026.

Okay, helpful. And then I'm going to sneak two together here. But maybe just on Savanna and the timing, I think you said you started the trial last month. That puts you a full kind of 10 months from when you first withdrew the submission last year. It's a little bit later than we would have thought given the typical respiratory season of what we've seen of late would have kicked off a little earlier. Luckily, there is kind of a big February surge, it appears. But just how do we think about the timing there and potentially being ready for this next flu season if all goes right? I know you don't have anything baked in, but just kind of would love the thoughts there on what that could look like if it does. And then secondly, just very quickly, can you give us a little bit of color for the donor screening revenues assumed in the guide?

Yeah, sure. So on Savanna and the start of the trial, we did start it in January. As you recall, the flu season was ramping up a little later in December this year than we had expected. We tried to time the start of the trial with the increase toward the peak so that we would get the kinds of samples that we need to have a successful trial. The season will go on here for another couple of months. We'll be collecting our samples, running our data, and then we would expect we'd go into a period where we analyze the data and make a submission with the idea of moving through a process for an approval that would put us into the market later this year. So we're really -- there's really no change in the timing of our expectation for Savanna, and there's not much more that we can really say about it until we're well through our trial and into the regulatory process.

And then into the Donor Screening question you had, really no change from what we said on the Q3 earnings call that we expect that the Donor Screening business this year will be $40 million to $50 million in the U.S. Donor Screening will be $40 million to $50 million and that's down quite a bit from 2024 where we finished at roughly $115 million. So it's quite a drag, but we'll get through most of the wind down this year. I think there'll be very little residual revenue that will fall into 2026. We should get through most of it this year.

The next question comes from Tycho Peterson with Jefferies.

Yes. Hi. This is Jack on for Tycho. Thanks for taking our question. I guess first thinking about the longer-term margin target, how should we think about the tradeoff between building your longer-term growth engine, funding innovation beyond Savanna and sort of rightsizing the cost structure? What gives you confidence in the ability to get back to consistent mid-single-digits growth, while also driving this new operating model?

Yes. Thank you for the question. What I would say is, there's a direct correlation between the work that we're doing in margin expansion and our ability to invest in the future of the business, with new product development, both in terms of assays content on our platforms and new systems. So we view them -- I view them as connected. And my initial focus was really around getting the organization focused on the things we had to do from a cost improvement standpoint, getting Savanna on the tracks, and then we had a number of other important menu expansion and lifecycle management projects. We're very quickly here, I think, with the traction that we're getting in our procurement initiatives, turning the corner there to looking at what we can do now to further drive the robustness of our product portfolio. We're still in the early stages there, but we're in the process of defining innovation roadmaps for each of our businesses, that involve assays and new systems. And so, we'll share more about that in future calls as we develop our plans. I'd also -- in terms of the underlying business model here, I would just point to the fact that, this is a very solid, stable, mid-single-digits growth business that's really supported by the underlying business dynamics of long customer relationships, a positive win loss ratio, high renewal rates. And those dynamics really support kind of this underlying growth and really anything we do with systems and new assays are things that we can layer on top of that.

Got into mid-single digits and labs for the year, are there any swing factors in play that could drive that to either lower or mid-single digit or higher end for instance China?

Yeah. Well, China is a dynamic market. Things change there quickly. I would say right now, I don't see anything again on the VBP front or the reimbursement front that would have a major impact there. And again, I kind of point to the stable recurring revenue dynamic of our business model that wouldn't point to any major swings in our labs business.

Yeah, I think I would only add that, as a tailwind, menu is always going to drive incremental growth. So as we continue to reprioritize the R&D group on menu expansion, I'd like to think that there would be potential upside going forward. I wouldn't say this year, because what we put out as a guide we're comfortable with. But moving forward, as you expand the menu, especially on the IA side that would drive additional growth.

The next question comes from Casey Woodring with JPMorgan.

Great. Thank you for taking my questions. I guess my first one, can you give us a sense on what to expect for 1Q across your different business lines and specifically on respiratory and flu in 1Q? What do you have baked in here there? ILI has been picking up as you noted. So curious if respiratory in 1Q could come in above where it was in 3Q, since inventories are lower or if some of that was just pull forward in the fall? And then, I guess, if respiratory is expected to come in stronger here in 1Q, how are you thinking about the rest of the year, just given the unknowns around the ‘25, ’26 respiratory season? Yeah, just maybe walk us through 1Q versus the rest of the year in respiratory?

Yeah. Hi, Casey. This is Brian. We're seeing the same thing that you're seeing, which is the ILI really spiking up here and also the positivity rate is also almost double what it was last year. And I think it's higher or as high as the ‘17,’18 flu season, which was a pretty robust season for us. We got off to a late start, but now we've seen this peak and the question is how quickly the peak will come down. I think just given how high it is, there's a good likelihood that the tail from the coming down from the peak will stretch out a little bit further. And I think that's supported to a certain extent by what we saw in the Southern Hemisphere this last summer. So we're watching it. And you just don't know what the duration of this season is going to be. So we assumed for our full year guidance an average flu season with a test size of 50 million to 55 million tests in 2025, which is kind of the average for us for the last three years. And that's what we've got baked into our full year guide.

The following comes from Andrew Brackmann with William Blair.

Hey, guys. Good afternoon. Thanks for taking the questions. A lot has been asked of Brian, maybe one for you, big picture. I think you've been in the seat now months or so. So I think you've had some time to do sort of a full review of the business. Any sort of change in how you're sort of thinking about this collection of assets on the whole, this being the right mix or any sort of changes in how you might be thinking about acquisitions, divestitures, cuts, things like that? Thanks.

Thanks, Andrew. Our focus really is on improving the operational performance of the business. I like every one of these businesses. I think they fit together well, again, giving us the capability to work across the entire patient care value stream and be in both centralized and decentralized testing. I think each of the businesses plays a different role in our portfolio. But largely speaking, our focus is on making each of them more profitable and each of them grow more. So in the short-term, I don't have anything really to say on business development opportunities. We're really just focused on improving the operation of the business at this point.

The final question comes from Conor McNamara with RBC Capital Markets.

Hello. This is Jose Ricardo for Conor. I just wanted to go back to the tariff conversation. Thank you for asking one of the next question. I know things have changed quickly since you spoke and the administration has different approaches to tariffs, depending upon the country. And you talked about some of the instruments that are sourced with parts from Mexico. Have you also looked into the exposure on the secondary level suppliers that provide you with procurement of process materials that you also incorporate into your manufactured instruments?

Yes. That's all factored into the analysis that Brian referenced earlier. It is all factored in there. Yes. And again, we don't see a lot of exposure for China or Canada. If there's any one country, where more exposure, it will be Mexico, including all those layers that you mentioned.

Thank you. There are currently no other questions in queue at this time. This concludes today's conference call. Thank you for your participation. You may now disconnect your line.