QuidelOrtho Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 13, 2024

There are 13 speakers on the call.

Operator

Welcome to the Quidel Orfo 4th Quarter and Full Year 2023 Financial Results Conference Call and Webcast. At this time, all participants are in a listen only mode. Please note that 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.

Speaker 1

Thank you. Good afternoon, everyone, and thanks for joining Ortho's 4th quarter and full year financial results conference call. With me today are Doug Bryant, President and CEO and Joe Buskey, 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 statement.

Speaker 1

The statements we will make during this call that are not strictly 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. Forward looking statements are subject to a number of risks and 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 ks for the fiscal year ended January 1, 2023 and subsequent reports filed with the SEC. Please refer to our SEC filings for a more discussion of forward looking statements and the risks and uncertainties. We cannot assure you that the forward looking statements we make or are implied by our statements will be realized.

Speaker 1

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 statement or any time sensitive information to reflect future events, developments or changed circumstances for any other reason. Also, during today's call, We will discuss certain items that do not conform to U. S. Generally Accepted Accounting Principles or GAAP.

Speaker 1

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 are available on the Investor Relations page of the Quidel Ortho website. Lastly, unless otherwise stated, All year over year growth rates, including 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 Doug Bryant.

Speaker 2

Thank you, Juliet. Good afternoon, everybody, and thank you for joining us today for the 4th Quarter and Full Year 2023 Earnings Call. 2023 was a foundational year for Quidel Ortho. Despite the brevity of the respiratory season in the Q4, we performed well. More importantly, we grew above market in our labs business, gained market share in our industry leading respiratory point of care products and achieved several internal milestones.

Speaker 2

Most notably, our operations team made significant permanent manufacturing upgrades, which increased our production capacity and supply chain resilience. This allowed us to address backlogs and positioned us to meet future market demand. Our global sales team is now in place, actively cross selling, and we like the strength of our position across the globe. Our combo test continued and continues to And we've been able to not only gain market share, but maintain pricing, despite a lower volume season. We received more than 700 regulatory approvals in the U.

Speaker 2

S, Europe, Middle East and Africa and China with an additional 1,000 approvals in the rest of the world. This includes de novo 510s for both SOPHIA-two SARS antigen and the Savanna platform. Additionally, we identified substantial greater synergies while investing in a business and paying down $227,000,000 in term loan debt. All these accomplishments help to bolster our already strong competitive position and long term growth profile. We believe we're well positioned to take additional share in key markets over the longer term.

Speaker 2

Let me turn to the top line numbers, starting with the full year 2023. Our total revenue was $3,000,000,000 a decline of 26% on a supplemental combined basis compared to the prior year. The year over year decline was related to the respiratory, the lower respiratory season in 2023 compared to the prior year, particularly in COVID-nineteen related testing, which was down roughly $1,000,000,000 Although flu was $248,000,000 for the year, Right in the middle of our range of $230,000,000 to $270,000,000 it was down 29% versus the prior year. Excluding respiratory, total revenue grew 5% on a supplemental combined basis for the full year. With that, I will not sugarcoat the fact that our 4th quarter numbers fell short of our expectations as we overestimated the size of the endemic COVID-nineteen and flu season.

Speaker 2

Ultimately, our optimistic outlook turned a solid growth enhancing year into a less appreciated achievement. Despite the relatively weaker respiratory season, We had several bright spots in point of care. 1st, recent third party market data suggest that we gained share for respiratory products in both physician office and acute care segments versus our competitors, all while holding price steady. We remain the industry leader in flu, SARS and RSV rapid diagnostic testing. 2nd, the number of Sofia placements grew to 89,000 instruments, which shows continued runway for instrument demand and positions us nicely for future higher margin revenue growth in the respiratory segment.

Speaker 2

Our 4th quarter results for total revenue came in at $443,000,000 Our respiratory revenue was down 49% compared to the prior year period. In North America, prevalence was steady, but lacked the inflection point in demand that we would typically expect late in Q4. This could be an indication that distributor destocking on COVID-nineteen products will continue into Q1 of 2024. Our distributor partners typically close their fiscal year in March and purposely carry lower inventories. We also believe that the respiratory season or the respiratory testing contraction can be attributed to COVID-nineteen fatigue, perceived reduction in severity of recent strains and very little asymptomatic testing.

Speaker 2

Turning to our business portfolios, our Labs business really led the way this year in terms of growth. For the full year 2023 Labs grew 8% currency in line with our expectations. Excluding respiratory, labs grew 13% in the 4th quarter and 10% for the full year 2023 in constant currency. In our transfusion medicine business, we continue to see great potential and we'll invest further in our immunohematology portfolio to continue advancing our market leading position. On the other hand, we plan to responsibly transition out of the U.

Speaker 2

S. Donor screening portfolio, which is lower growth and has lower margins. While our goal is to wind down this portfolio, We will certainly continue to support our existing customers and honor our contractual commitments. Our molecular business achieved significant milestones with the FDA approval and the U. S.

Speaker 2

Launch of our Savanna multiplex molecular platform and the HSV VZV syndromic panel. This is a critical step in our strategy to bring central lab sensitivity and specificity To everyone from midsized hospitals to remote mobile clinics, the production ramp and marketing rollout are underway. We currently use low volume manual manufacturing lines for production of this panel, but we are working toward deploying our high volume automated solution. So while production in the short term will be dilutive, longer term this automated line is expected to strengthen margins. We anticipate that our automated line will be in production well in advance of the year end respiratory season.

Speaker 2

Within our point of care business, as I said earlier, our commercial team secured approximately 4,800 new Sofia instrument placements globally in 2023, raising our global installed base to about 89,000 SOPHIA analyzers. The commercial launch of SOPHIA-two SARS antigen plus the first rapid antigen test cleared by the FDA with CLIA waiver in the United States market strengthened our position as a top innovator and trusted leader in this evolving space. Additionally, through our triage platform for cardiovascular, we have a revitalized focus on chronic diseases, including heart failure. This work stream will help clinicians detect, monitor and manage the silent pandemic of chronic diseases that tend to be overshadowed by the trending health story of the moment. Shifting now to our 3rd integration phase, transformation.

Speaker 2

We call it QO NEXT and it's geared toward accelerating the execution of value driven initiatives for greater business efficiencies, investments and organizational agility. We know what needs to be done and we understand the levers we need to pull. Specifically, we are shifting our product development, R and D and regulatory efforts to focus on menu expansion As we see ample opportunities to strengthen our competitive advantage in pull through across an expanding customer base, We have been actively evaluating our real estate footprint and anticipate consolidating facilities primarily in the United States. We intend to improve our organizational cost structure by eliminating underperforming non value driven initiatives and initiating a senior level management delayering effort to create leaner teams, improve span of control and speed of execution. We believe this will further reduce our headcount by 5% to 6%.

Speaker 2

Savanna has been a long time coming in the United States and our agenda at this point is clear, menu expansion and customer adoption. We're advancing both with FDA review of our RVP-four panel and others in the queue. Our U. S. Sales team is meeting this week and I can assure you a successful Savanna commercial launch is on their menu as well.

Speaker 2

As noted earlier, we will invest in the higher growth immunohematology side of our transfusion medicine business. These investments are expected to drive higher returns and help balance the seasonal spikes in our current business model. In summary, let me repeat that 2023 was a foundation building year for us. We continue to establish Quidel Ortho as an industry leader capable of serving the breadth of the healthcare continuum from the largest labs and hospital systems to the most remote points of care and in the home. We are a stable diversified growth company targeting about $19,000,000,000 out of a global $48,000,000,000 total addressable market.

Speaker 2

Finally, we are steadfast in accelerating our desired future state and financial goals. With this, I'll let Joe take you through the financials in greater detail. Joe?

Speaker 3

Thanks, Doug, and good afternoon, everyone. I'll begin with a summary of our operating results for the full year and Q4 of 2023 and to facilitate A comparison of the company's operating performance at full year growth rates that I referenced are presented on supplemental for all full year growth rates that I referenced are presented on a supplemental combined basis as if Claudel and Ortho have been combined for the applicable periods. I'm also going to refer to our earnings presentation, which is available on the IR page of our website. Starting with the full year 2023 results on Slide 4, total revenue was $3,000,000,000 a decline of 20 6% year over year. This decline was due to the lower respiratory season in 2023 compared to the prior year with approximately $1,000,000,000 impact from declines in COVID-nineteen related testing.

Speaker 3

Excluding Respiratory revenue, total revenue grew 4% grew 5% for the full year. Turning now to the full year 2023 operating results. Adjusted gross profit margin was 51%, which was down approximately 800 basis points compared to the prior year due to lower respiratory revenues, again due to lower COVID-nineteen testing. Adjusted EBITDA for the full year of 2023 was $723,000,000 and adjusted EBITDA margin was 24%. Adjusted diluted EPS for the full year 2023 was $4.13 a 70% decline from the prior year.

Speaker 3

The year over year change in adjusted Diluted EPS and adjusted EBITDA was a result of the decline in COVID-nineteen revenue compared to the prior year as noted earlier. Our full year effective tax rate was 22.3%. And now I'll provide our 4th quarter results shown on Slide 5. Total revenue was $743,000,000 as reported, which was a decline of 14% year over year due to $77,000,000 of COVID-nineteen headwinds from the prior year. Adjusted gross profit margin was 52.4%, which was down 220 basis points compared to the prior year period due to lower respiratory revenues.

Speaker 3

Adjusted EBITDA was $195,000,000 and adjusted EBITDA margin was 26%. Adjusted diluted EPS was $1.17 a 34% decline from the prior year period and our 4th quarter effective tax rate was 23%. The change the year over year change was primarily driven by product mix with lower respiratory revenues to carry higher margins than our non respiratory business. Our non Respiratory business grew 9% in both reported and constant currency in Q4 compared to the prior year period. Our Labs business led the way with strong revenue growth, which was a great accomplishment by the team after successfully navigating and resolving significant instrument backlog due to supply chain issues in the 1st 3 quarters of the year.

Speaker 3

For the full year 2023, Labs grew 8% in constant currency, in line with our expectations. Excluding respiratory, labs grew 13% in Q4 and 10% for the full year 2023 in constant currency. Given the continued strength and high visibility we have in our lab business, we continue to expect above market growth. Our respiratory results in Q4 were lower than expected as customer ordering patterns followed Seasonal respiratory trends, as Doug mentioned. Compared to our expectations at the end of Q3, the larger part of the respiratory miss in Q4 was due to lower than expected COVID-nineteen and flu markets, both of which came in below 2022.

Speaker 3

Our underlying business trends and sales activity remains strong and we have a market leading position in respiratory. Our combo test continues to gain traction And these trends have enabled us to gain approximately 200 basis points of respiratory market share and maintain pricing despite a lower overall season in 2023. In terms of geographies, Excluding respiratory and in constant currency, 4th quarter North America revenue was flat. Year over year, EMEA grew 23%. China was up 37% of a low prior year comparison due to lockdowns in 2022 and Asia Pacific, which includes Japan and Latin America, grew 10%.

Speaker 3

For the full year 2023, North America revenue was roughly flat year over year, EMEA grew 8%, China grew 21% and Asia Pacific, Japan and Latin America grew 9%. We saw notable strength in reagents, consumables and services growing in the mid single digits, excluding respiratory. Turning to our business lines. As I mentioned, our labs business had a great 4th quarter with approximately 13% revenue growth excluding respiratory, driven by strength in both ClinCAM and immunoassay. This strong performance rounds out a great year for the labs business and is a testament to our commercial strategy to integrate clinical chemistry and amino acid testing.

Speaker 3

In fact, we had growth of 11% in integrated VITRO systems and 14% in automated systems for the full year 2023, which validated our strategy to lead with integrated systems. In our transfusion medicine business, Q4 revenue increased by approximately 2% in constant currency. Excluding the impact of the donor screening business, Immunohematology performed well during the Q4 with high single digit growth and the full year 2023 with growth in line with market rates in the low single digits. We expect to improve efficiency in the TM business by transitioning out of the U. S.

Speaker 3

Donor screening portfolio, which has a lower growth and margin profile than other parts of our business. We plan to invest in our immunohematology business 2024 and we will provide more detail on our plans for this business during our upcoming Investor Day on March 20. 4th quarter point of care revenues declined by 42% year over year due to COVID-nineteen headwinds as discussed earlier. Excluding respiratory revenue, our point of care business grew 6% in Q4 and approximately 2% for the full year in constant currency. Our Triage business grew in the low double digits in many OUS markets in Q4, including EMEA 14% China 15% Latin America 13%, which shows that our early cross selling initiatives are bearing fruit.

Speaker 3

Our molecular revenue decreased by 42% compared to the prior year period due to COVID-nineteen prior year comparisons, excluding respiratory, molecular revenue declined by 10% in Q4 and 13% for the full year 2023 in constant currency. Obviously, we're excited about the U. S. Commercial launch of Savanna and the anticipated growth opportunities ahead. And lastly, we strengthened our balance sheet by paying down $227,000,000 in term loan debt during the year.

Speaker 3

We generated $89,000,000 adjusted free cash flow in the Q4 and $270,000,000 for the full year. And as of December 31, 2023, we had $175,000,000 in cash and marketable securities. And with that, I'd like to turn to our 2024 financial guidance and provide the assumptions that went into our plan and I will take you through this as clearly as I can. Our non respiratory business It is a highly predictable razor razorblade model and the guidance range there is relatively tight. But our respiratory business is not as predictable.

Speaker 3

So our revenue range is wider than in prior years. We've based our respiratory guidance on historical Flu season market size averages going back to 2017. We expect 2024 to be positional year with total revenue in the range of $2,760,000,000 to 3,070,000,000 a decline of 7% to growth of 3% in constant currency. We believe that This is a conservative range that accounts for the high variability in the respiratory market. In addition, there were non recurring items that benefited 2023, but are not expected in 2024, including In Q1 of 2023, a government COVID-nineteen award of $143,000,000 along with the inventory release of $39,000,000 which taken together brought the government order in line with our respiratory margins.

Speaker 3

We made the business decision that without this inventory reserve release would not have participated in the low margin government award. So they must be viewed as part of the same transaction. And second, also in Q1 of 2023, a one time collaboration settlement with a third party of approximately $19,000,000 which impacted both revenue and adjusted EBITDA. Now let me provide details on the components of our 2024 guidance. Of the total revenue range, we expect non Respiratory revenue of between $2,300,000,000 to $2,340,000,000 We expect labs growth to be in the mid to high single digits in 2024.

Speaker 3

Excluding the one time third party collaboration settlement of $19,000,000 in 2023 And transitioning out of the U. S. Donor screening portfolio, we expect non respiratory year over year growth of 4% to 6% in 2024. We expect respiratory revenue of between $460,000,000 $730,000,000 which we believe provides the range necessary to capture the absolute low end as well as provide a reasonable high end given the high variability of the respiratory business. This respiratory guidance assumes a range of 40,000,000 to 60,000,000 flu tests in the U.

Speaker 3

S. Per year. Given the gap between our full year COVID-nineteen expectations versus how the respiratory season played out in Q4, We are resetting our COVID-nineteen range to the low $200,000,000 for 2024. This again excludes any new government contracts and we believe reflects the current endemic environment. Our guidance also assumes minimal contribution of between $30,000,000 to $50,000,000 in respiratory revenues from Savanna RVP-four And we expect that the revenue to be primarily in the Q4 of 2024 given the timing of approvals for the respiratory indication which we expect in Q1.

Speaker 3

We continue to expect Savanna instrument replacements of approximately in 2024, which will pave the way for 2025 Savanna revenue growth. Moving down the P and L, we expect SG and A to be relatively flat and approximate the 2023 year end exit rate on an annualized basis. We expect R and D to be flat at approximately 8% of revenue in $20,000,000 adjusted EBITDA in the range of $565,000,000 to $720,000,000 or 21% to 24% margin. Our Adjusted EBITDA and EBITDA margin as well as adjusted EPS are obviously significantly impacted by bringing down the estimate for endemic COVID-nineteen revenue and widening the range for flu, which impacts the bottom line disproportionately given the high margins on these products. To counterbalance these impacts, as Doug mentioned, we are taking actions to reduce costs by mid year, which is expected to yield approximately $50,000,000 in annualized cost savings.

Speaker 3

We are continuing to execute on QO NEXT, which will have a more significant impact in 2025 than 2024. We expect gradual improvement in Savanna margins as we ramp up sales and move to high volume manufacturing during the second half of twenty twenty four. So we finished 2023 at 24% adjusted EBITDA margin and we are guiding to a midpoint of roughly 22% in 2024. At a high level, this approximates a 200 basis point decrease consisting of 1, lower COVID-nineteen revenue, which would really 3 points of margin 2, the impact of U. S.

Speaker 3

Commercial Savanna launch with initially dilutive margins of approximately 1 point and 3, offset by approximately 2 points of expected improvement in margin due to cost savings and synergy achievement. Interest expense is assumed to be approximately $150,000,000 in 20.24. We've assumed a full year effective tax rate in 2024 of 23% to 24%, adjusted diluted EPS in the range of $2.40 to $3.07 based on 67,600,000 shares outstanding. The areas that give us confidence that we can achieve our high 20s long term EBITDA margin in 2025 include our expectations related to cost savings programs, which includes headcount reductions of 5% to 6%, continued Savanna growth and margin improvements in 2025, planned synergy target achievement and finally benefits from our QoNEXT program in 2025. Based on our current outlook, we believe that our 2024 financial guidance is both realistic and data driven, given the unpredictable nature of the respiratory season and where we are in the process of transforming our company.

Speaker 3

We remain confident that we can achieve our long term revenue targets 6% to 9% top line growth and 27% to 29% EBITDA margins in 2025. We plan to provide greater detail about our specific initiatives during our March 20th Investor Day. So now I'll turn

Speaker 2

the call back to Doug for closing remarks. Thanks, Joe. 2023 was our 1st full year operating as Quidel Ortho. We successfully laid the foundation for building our global company, One poised for advancing the power of diagnostics for a healthier future. Building a high performing organization took a lot of hard work by many of my colleagues.

Speaker 2

I would be remiss not to thank them for their dedication, perseverance and the many long hours it took to achieve such milestones. Looking ahead, I see a bright future for our company, our customers and patient health. We have a growth strategy and an action plan in place. We're accelerating our business efficiency initiatives, cost saving measures and transformational programs. These efforts combined with our R and D menu expansion pipeline, Global pull through across our growing installed base and commercial excellence program will provide Further support to achieve our long term revenue targets of 69 percent top line growth and 27% to 29% EBITDA margins in 2025.

Operator

The first question is from the line of Andrew Brackmann with William Blair. Your line is now open.

Speaker 4

Hi, guys. Good afternoon and thanks for taking the questions. Maybe to start on guidance and thanks for all the color there. It does sound like there's been some sort of change in philosophy to setting this annual range versus sort of your process in the past. So you maybe just talk to that a little bit?

Speaker 4

And as a second part here, Joe, you talked about sort of some areas of conservatism there, but Any part of the guide that you call out as a little bit higher risk or things need to sort of go your way in order to achieve those? Thanks.

Speaker 2

Yes. Thanks for the question, Andrew. I'll start and Joe you jump in. We did see COVID sales in Q3 And then it dropped pretty dramatically. SARS hospitalizations are now down, the severity of disease, Clearly not what it once was.

Speaker 2

And as I mentioned, we don't see any asymptomatic testing whatsoever. So I think it is absolutely prudent for us to take down the COVID number to the lower end of the range and that's probably the most dramatic change in philosophy. I'll let you jump in there, Joe.

Speaker 3

Yes. Thanks, Doug. So just to add on to that point, Andrew, When you think about the margin profile that we had communicated previously of low-50s GP margin and high-20s EBITDA margin, that was really predicated on the endemic COVID revenue being in the high end of the range we had communicated closer to the $400,000,000 And so now having seen what happened in Q4 of 20 We feel it prudent to pull it down to the very low end of that range closer to $200,000,000 and that has about a 300 to 400 basis point impact on the margins just by pulling out that very high margin revenue. And so we are taking actions to counteract but it's going to take a little time to get back to where we want to be. We do expect to get back to where we want to be in 2025.

Speaker 3

So that is the respiratory the big ticket item in the respiratory section. The flu numbers are actually very consistent in '24 with what they were in 2023. The only difference is now you've got the additional respiratory revenue for Savanna that I talked about in the range $30,000,000 to $50,000,000 which we expect mostly will come in Q4. And the other areas RSV and Strep, again, they're very similar to what we did in 2023. So I don't see a lot of risk there.

Speaker 3

And then finally moving to the non respiratory revenue section, We've proven that that's a very predictable part of our business. And you can see that by what we did in 2023 and you can see that we've put a fairly tight range on that in 2024. We feel pretty good about that revenue and where it's going to come out in the 4% to 6% range.

Speaker 4

Okay. Thanks for that. And then Joe, maybe just another one for you on the balance sheet and debt level. Looks like leverage is starting to creep up a little bit. Can you maybe just sort of talk about your comfort with the current leverage ratio?

Speaker 4

Any covenants that we should be taking note of and sort of your plan for debt pay downs

Speaker 3

The leverage ratio, the net debt leverage ratio at the end of 'twenty three was at 3.2, but it's really important to note, And if you I'm sure you've all done this, but if you look at the credit agreement and the way that the leverage ratio is calculated, you'll see that we get the ability to add pro form a adjustments like and like headcount reductions that we've talked about. And so the actual leverage ratio that goes against The covenant is about a half a turn or maybe even a little bit more than half a turn more than what the financial statement straight calculation would give you. So In other words, our credit agreement calculation for leverage at the end of the year is going to be more like 2.6 versus that 3.2 that you calculated. So if you carry that through the end of the year, we should be Right around 3 times levered per the credit agreement versus a covenant of 3.5. So it gets a little tighter, but we feel like we're in okay shape, not really concerned there.

Speaker 2

Okay. Thanks guys.

Operator

Thank you for your question. Next question is from the line of Alex Nowak with Craig Hallum. Your line is now open.

Speaker 5

Okay, great. Good afternoon, everyone. So You provided an endemic respiratory rate for 2023 and you were very confident in it throughout the year and sales still came in below that. So before COVID, the respiratory business for Quidel standalone was roughly $150,000,000 of sales. Now your endemic rate for 2024 as it's set Today is 4.60 to 7.30.

Speaker 5

Now if you get this endemic rate wrong for 2024, there's a lot of downside. I guess the question is why do you think this new number is right?

Speaker 2

Thanks for the question, Alex. We think we have a pretty good understanding of market size And we think the number of tests starting with flu between $40,000,000 $60,000,000 Makes the most sense. We haven't seen something as low as $40,000,000 in a while. And we wouldn't expect at this stage to see something more than 60,000,000 So I think we've pegged the market size correct. The question is, what's your market share?

Speaker 2

Well, our market share actually is has increased in the recent report that we saw this morning, it increased slightly more than that. Well, the other factor is what's happening with your price. Well, our price basically is flat and we've been able to take share in place Sofia analyzers with that same price. We've also seen a shift towards the combo assay, which is super healthy. So, obviously very difficult to predict this market, which is why we're widening the range.

Speaker 5

Now across diagnostics, what other bench top systems have ramped to $30,000,000 to $50,000,000 of sales on a single Less than a year, just that we can use that as a proxy for Savanna at the end of this year?

Speaker 2

What other ones have

Speaker 6

provided you separately?

Speaker 5

Yes. What gives you the confidence in the Yes, the $30,000,000 to $50,000,000 revenue range for Savanna Respiratory.

Speaker 2

Well, okay. What I would say is early on we've seen placements and 100% of our placements have indicated their interest and strong desire to run our respiratory viral panel product. So 100% of the customers that we've closed and shipped thus far with Savanna, 100% of them are highly likely to order that product as we go into the 4th quarter 3rd and 4th quarter. That's significant. And the number of tests on average that they're running Our plan to run is about 3,000 per customer.

Speaker 2

A flu season with respiratory season would be Q4, Q1. So if you take the 1,000 analyzers that we intend to place, times our assumed price times 3,000 tests and you assume that holds true, and then you take and you split it evenly between the two quarters, you get roughly to what we're suggesting we're going to do for Savanna in 2024. So those are our assumptions. You can argue with the assumptions if you like. But those are the facts and those are our assumptions and that's the basis for the number.

Speaker 5

All right. Got it. Appreciate the update. Thanks.

Speaker 2

Sure. Thanks, Alex.

Operator

Thank you for your question. Next question is from the line of Casey Woodring with JPMorgan. Your line is now open.

Speaker 7

Great. Thank you for taking my questions. Just on the 21% to 24% adjusted EBITDA margin for this year, appreciate you quantifying the components driving the year over year difference against 23, but was hoping that you can bridge that 24 number to your comment on getting back to where you want to be in 2025. Are you talking about the LRP range of 27% to 29%? And if so, just what assumptions have changed on the base business that's preventing you from getting there?

Speaker 7

Are you saying today that the step down is all on kind of lower COVID assumptions and the slight Savannah manufacturing headwind in the 1st part of the year?

Speaker 2

We are lowering to be clear, Casey, thanks for the question. We are lowering our guidance on COVID. We think it's prudent, But that has consequence in terms because of mix, it has consequence. We're going to solve for that. And so if you think about what we've just announced in terms of the headcount reduction.

Speaker 2

Again, that gets us about $50,000,000 as Joe said. And then you come back into the number if you want, but effectively, We're assuming that we generate another $100,000,000 in savings in 2025 through our QO NEXT initiatives.

Speaker 3

And then Savanna becomes more accretive with the continued growth in 2025. That's the other factor. And those are the factors, Casey, that get you back to those High-20s margin.

Speaker 2

What's our confidence in the $100,000,000 I would say it's pretty good. We have gone through a diligence phase. We've gone through a business planning phase. We have at this point a plan that totals far greater than 300 And we assume that we should be able when looking at the initiatives, we should be able to ensure that we get at least a third of them fully accomplished. That's what's in the number.

Speaker 7

Got it. That's helpful. And then maybe can you talk about North American non respiratory? It looks like the business slightly declined in 4Q. So curious on how the different business units performed relative to expectations and maybe walk through your expectations by region for the year.

Speaker 7

You're lapping the China comp with the lockdowns from last year. So just any color?

Speaker 3

Yes, I think it's pretty flat, Casey, because if you're talking about non respiratory, Most of that business is going to be the Triage business and the former Beckman business and that was pretty flat year over year in Q4.

Speaker 2

Does that actually address your question, Casey?

Speaker 7

Yes, that's helpful. I'll jump back in the queue. Thanks.

Operator

Thank you for your question. Next question is from the line of Jack Meehan with Nephron Research. Your line is now open.

Speaker 8

Thank you. Good afternoon. First is on the transfusion medicine Business, so you announced some strategic decisions here. Just there were headlines in the fall around considering a sale, Just considering you've decided to exit U. S.

Speaker 8

Donor screening and you're investing in immunohematology, is it safe to assume kind of a sale process is off the table at this point?

Speaker 2

We continue to evaluate all options, Jack, I think it's a great question. I just think when I look at it, you look at the time and effort to do a carve out on On business where we actually are the brand leader, there's a lot of value in that brand strength. When I look at the opportunity to potentially leverage that strength within the medium sized hospital and help with our strategy, which is focused on the integrated platform. I felt like we would just be giving up too much. And I do think that there are measures that we can take to improve the efficiency in the business and I do think that with modest investment, we can continue to grow the menu.

Speaker 2

And so at this time, I don't think it's an asset that we would be willing to give up on so quickly. On the other hand, when you look at the U. S. Donor screening business specifically, these are the larger Factories, if you will. That business is in a market that's flat to declining, not expected to grow.

Speaker 2

It's a very expensive business to maintain. And By not being in that business over time, I think we get about 100 basis point improvement in our growth rate. And I think it helps our margins as well, our profile. So great question, Jack. Our IH business, the immunohematology part of it, I think is a valuable asset that we want to see if we can grow.

Speaker 3

Yes. And Jack, just one other point. In 2023 Sorry, Jack. I didn't mean to talk over you. But I just wanted to add that in 2023, If you were to exclude the donor screening business, our ex respiratory growth actually would have been 200 basis points higher.

Speaker 3

So it had a much bigger impact even in 2023.

Speaker 8

Got it. Makes sense. And then on Savanna, I just want to understand, I guess, like the gating factors to getting RVP For approved, is there any do you feel like you have all the trial activity you need done at this point? That's number 1. And number 2, When do you expect to be CLIA waiver for Savanna?

Speaker 8

Does that come in conjunction with RVP 4? Or do you think that's later in the year?

Speaker 2

I'll go in reverse order. It's an appropriate question. The CLIA waiver is expected by year end. The status of the submission of the 5 10 ks is on track per my previous comments. Recall that I had said that we expect to get clearance before the end of the Q1.

Speaker 2

I think we're still on track for all that.

Speaker 8

Okay. And if I could squeeze in one final one, Joe. What does the guidance assume for growth in the China region for 2024?

Speaker 3

Yes, the China region goes back to what we would define more as a normal high single digit growth. If you go back to before the pandemic with the ortho business, it was high single digit growth region. It gets back to that.

Speaker 8

Okay. Thank you.

Speaker 2

And it's Russ.

Operator

Thank you for your question. Next question is from the line of Connor McNamara with RBC. Your line is now open.

Speaker 9

Hey guys, thanks for taking the questions. Appreciate it. I guess, Just on the first question, in early January, you guys didn't pre announce, which typically you have in early January. And given The size of the EBITDA guidance and miss relative to where folks had come out, was there anything that First off, what was your decision not to pre announce? Is there anything that's come up in the last month that kind of surprised you that you didn't know about in January?

Speaker 2

Thank you, Conor. The total revenue we knew and we knew that we were going to be quite close in understanding that. The miss was about 6% or 7% of what we had projected. So we didn't feel like It was something that we could announce. And further to that, I didn't I knew for sure I wouldn't have all the answers to all the questions that we would have during the 1 on ones at the conference.

Speaker 2

And we certainly didn't know where we stood at that stage in terms of So I could have told you obviously that Any gain or loss relative to the forecast with respiratory has a bigger impact, I knew that, but we really didn't have the specifics as we went into the That's the only reason.

Speaker 9

Got it. Thanks for that Doug. Appreciate that. And then, Joe, you talked about Getting the high 20s EBITDA margins in fiscal 2025, I mean

Speaker 2

is that for the full year

Speaker 9

or should we think about that as things ramp up Through 2024 and then exiting 2025, you'll be there as assuming Savanna gets to A high respiratory number exiting 25 or is that is it realistic to think that that's something that's achievable for all of fiscal 2025?

Speaker 3

Yes. Hey, Conor, we'll talk more about this in detail at the Investor Day. But at this point, I would say, I do think it's for the full year 2025. We execute as

Speaker 2

the plan has been laid out. And as I said, Conor, we're chasing a bigger number than the 100 needed in terms of cost synergy.

Speaker 9

Got it. Okay. And just sorry, last question, just housekeeping. On The decision to transfer out of the get out of the U. S.

Speaker 9

Transfusion business, what's can you quantify all the revenue and EBITDA impact to that? And actually it sounds like you're going to reinvest some money. So maybe it's pretty dilutive to EBITDA, but is there any way to quantify the impact there?

Speaker 3

Yes. The revenue we've said this, the revenue is about 25% of the total TM business And the EBITDA margins are in the low single digits. So by exiting this business, it's going to be accretive, Both top and bottom line. Okay.

Speaker 9

All right. Thanks. Thanks, guys. Appreciate that. Thank you

Operator

for your question. Next question is from the line of Andrew Cooper with Raymond James. Your line is now open.

Speaker 10

Hey guys, thanks for the questions. Maybe first just following up on some of the margin dynamics and this one's going to be a little bit backwards looking. But I guess thinking about respiratory revenues that ultimately came within the range you had provided for the full year, But EBITDA coming some 10% below the low end of the range, was the low end of the respiratory revenue not actually contemplated in that margin range or if so, why not? What were the offsets maybe you expected that you might have found that You didn't just help us think about the disconnect there between the top line and the prior guidance ranges.

Speaker 3

Hey, Andrew, it's Joe. You may recall on the Q3 earnings call that I said that We needed to be at the high end of the flu range to hit our numbers that we were talking about on the bottom line. So $230,000,000 to $270,000,000 was the flu range. Doug's right. We're in the middle.

Speaker 2

We did $248,000,000 right? But we needed to

Speaker 3

be at the high end or even slightly above that range to hit our numbers and we weren't. And in addition to that, there were some estimates on COVID that we came in below as well. And so the combination of those two things led to the miss.

Speaker 10

Okay. And then just on kind of a guide for 2024, appreciate the $40,000,000 to $60,000,000 flu as a volume number, The $200,000,000 of COVID as a dollar number, can you maybe just help us think about sort of apples to apples, whether it's Unit volumes or dollars across that respiratory base? And then maybe also where combo fits in that math as you talk about it today, I know historically it was in flu, but just want to make sure we sort of understand what the starting point assumptions are kind of overall unit volume or dollars?

Speaker 3

Yes, it's a good question. I'm glad you asked because I did want to get through this. So first of all, just a clarification, and this has not changed, but the combo test for us is included in the flu numbers. And we've always included it in flu. It's not in the COVID numbers that we've talked about, the endemic COVID numbers.

Speaker 3

And, you will recall that if you look at the What we just put out the 24 respiratory revenue guidance, 4.60 to 7.30. So if you pull out an estimate for low end of the range for COVID, you pull out an estimate for RSV and strep that's consistent with 2023 and you pull out the $30,000,000 to $50,000,000 of Savanna, you're going to get a flu range that now is about $160,000,000 to $360,000,000 And that compares to the $230,000,000 to $270,000,000 that we gave for 2023. So we have in response to what happened in Q4, we are widening the range on the low and high end, so we don't miss and we've included a realistic high end that is possible. And that's the 40,000,000 to 60,000,000 And if you think about sort of historical where that $40,000,000 to $50,000,000 sits, in Q4 'twenty three, It was a $50,000,000 or $50,000,000 sorry, dollars 50,000,000 test market size market. And that compares to Q4 'twenty two with a 57,000,000 size market.

Speaker 3

And so for 2024, we've landed somewhere between, call it, dollars 46,000,000 to 50,000,000 of test volume to get to when you think about like a midpoint of that range, that's a midpoint. If you go between there, Between the 40 and the 60.

Speaker 10

Okay, great. I will stop there. Appreciate it. It does. Thank you.

Speaker 3

Yes, sure.

Operator

Thank you for your question. Next question is from the line of Patrick Donnelly with Citi. Your line is now open.

Speaker 11

Hey guys, thanks for taking the questions. Joe, maybe another one on the margins, just given what you're talking about there on the respiratory and COVID piece. Given that that's going to be pretty impactful in terms of the cadence of the year, can you just help us think about the right way to kind of map out margins for the year, obviously with the respiratory piece being kind of on the barbell side of 1Q and 4Q. So just want Get our heads around the margin piece as the year progresses here.

Speaker 3

So that range, that wide respiratory range, Patrick, is going to give you an EBITDA range of 21% to 24% As I noted and as I just said to Andrew, I would probably recommend that we focus on the midpoint of that right now as a realistic place to start. It is going to give you gross margins in the range of high 40s. And again, I think I said this earlier that the difference between what we were talking about prior to Q4 of Gross margins in the low 50s and now high 40s is driven by the drop in that COVID revenue of roughly 200,000,000 And the impact of Savanna and the launch and the dilutive impact there, that's about 400 basis points between those two items with about 80% of that being the COVID drop and maybe 20% of that being the Savanna drop or the Savanna dilution, I should say.

Speaker 10

Okay, got you.

Speaker 3

But you're going to see

Speaker 11

that in the quarter, for

Speaker 3

the quarter rollout, you're going to see this. I was going to say for the quarters, you'll see the same normal cadence of Q1 and Q4 will be higher And Q2 and Q3 are really slightly lower.

Speaker 11

Okay, understood. And then just on the LRP, I know you got a few questions. Is that something you guys are going to be reviewing in the next month into

Speaker 2

the Analyst Day? Or you kind of

Speaker 11

feel good about reiterating it today and We'll kind of talk at the Analyst Day in more detail. I just want to make sure we're kind of getting the message correct. On the margins that is, sorry.

Speaker 2

We're definitely going to go through more detail. Yes. And so we're going to attempt to show on March 20, What the initiatives are, what we're working on, what the milestones are so that our investors can know that we're on track with what we say. I would guess in terms of revenue margin, it would be over Probably a 3 year window at this stage.

Operator

Final question is from the line of John Sauerbeer with UBS. Your line is now open.

Speaker 6

Hi. Thanks for taking the question. Just on the Savanna launch, do you still think this has the potential for $250,000,000 of revenues 3 years post launch? Or How should we think about this over the long term?

Speaker 2

I think that's True. I think you probably heard me comment earlier about the 1,000 placements, etcetera. I think we achieved what we set out to do in 2024. We'll have a really nice start to it. And so I don't really see that the 250 will be something that will need to change, the forecast that is.

Speaker 12

Appreciate it. And then just

Speaker 6

a follow-up here on the clarifying thing. Just to Confirm, you're still including the U. S. Donor spinning business. What's the impact in the guidance there?

Speaker 6

And just any color on when that would be actually wound down?

Speaker 3

Yes, it's a good question. It's in the guidance. And I think as Doug said earlier, if you were to pull it out, it's about a point impact, favorable impact on non respiratory revenue. And there will be a favorable impact on EBITDA margin as well. We'll talk more about that on Investor Day.

Speaker 3

We'll give a little more color.

Speaker 12

Thanks for taking the questions.

Operator

Thank you for your question. There are no additional questions waiting at this time. So that will conclude the conference call. Thank you for your participation. You may now disconnect your lines.

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Earnings Conference Call
QuidelOrtho Q4 2023
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