QuidelOrtho Corp (QDEL) Q4 2022 Earnings Call Transcript

Welcome to the QuidelOrtho Fourth Quarter and Full Year 2022 Financial Results Conference Call and Webcast. At this time, all participant lines are in listen-only mode. For those of you participating on the conference call, there will be an opportunity for your questions at the end of today’s prepared remarks. Please note, this conference call is being recorded. An audio replay of the conference call will be available on the company’s website shortly after this call. I would now like to turn the call over to Bryan Brokmeier, Vice President of Investor Relations. Bryan?

Thank you, Operator. Good afternoon, everyone. And welcome to the QuidelOrtho fourth quarter and full year financial results conference call. With me today to discuss our financial results are Doug Bryant, QuidelOrtho’s President and CEO; and Joe Busky, QuidelOrtho’s Chief Financial Officer. This conference call is being simultaneously webcast on the Investor Relations page of our website and a version of today’s presentation can be downloaded there. Before we begin, I will cover our Safe Harbor statement. The statements we will make during today’s call about the company’s future expectations, plans and prospects include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which provides a Safe Harbor for such statements. Our use of forward-looking statements is subject to a number of risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied in these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors identified under Risk Factors in our quarterly report on Form 10-Q filed with the SEC on August 5, 2022, and subsequent reports filed with the SEC. Please refer to our SEC filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. We cannot assure you that the forward-looking statements we make or are implied by our statements will be realized. Furthermore, such forward-looking statements represent management’s judgment and expectations as of today. Except as required by law, we undertake no obligation to update any forward-looking statements or any time-sensitive information to reflect future events, developments or changed circumstances or for any other reason. Also, during today’s call, to facilitate a comparison of the company’s operating performance from the fourth quarter of 2021 to the fourth quarter of 2022 and from the full year 2021 to the full year 2022, we will be discussing supplemental revenue and other supplemental adjusted operating results as Quidel and Ortho have been combined for the applicable periods. We will refer to this information as our supplemental combined information. This supplemental combined information, as well as certain other items we will discuss do not conform to U.S. Generally Accepted Accounting Principles or GAAP. Please see slide three for a list of non-GAAP measures. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the appendix to the investor presentation and press release issued this afternoon, both of which are available on the Investor Relations page of the QuidelOrtho website. Lastly, unless stated otherwise, all year-over-year revenue growth rates, including revenue growth ranges given on today’s call, are given on a comparable constant currency basis. Now, I’d like to turn the call over to Doug Bryant, QuidelOrtho’s President and CEO. Doug?

Thanks, Bryan. Good afternoon, everyone, and thank you for joining the call today. I am pleased with QuidelOrtho’s financial performance in the fourth quarter and for 2022 overall. I am also happy with the productive initiatives we accomplished during the quarter. These achievements will position us for continued productivity gains in 2023 and for significant revenue and margin growth in the coming years. Today, I will briefly highlight our financial performance and discuss our key growth drivers, which are the programs that will accelerate revenue growth and are essential for restoring EBITDA to over 30% of revenue. For the fourth quarter, revenue was $866.5 million, reflecting a 36% increase compared to the same quarter last year. On a supplemental combined basis, total revenue for the year was $4.1 billion. In the quarter and for the full year, excluding COVID revenue, our revenue grew 19% and 11%, respectively, compared to the previous year, driven by our Point-of-Care and Molecular Diagnostics divisions. The early respiratory season showed above-average rates for influenza and respiratory syncytial virus, though this was somewhat offset by declines in clinical chemistry and immunoassay revenue in China, which faced lockdowns. Joe will elaborate on China later, including our plans for double-digit growth there this year. By business unit, fourth quarter revenue excluding COVID in the Labs unit was down 10% year-over-year. If we adjust for the impact of China and lockdowns, the Labs unit would show mid-single-digit growth. Transfusion Medicine remained flat, while Point-of-Care experienced a 138% increase, and Molecular Diagnostics rose 45% from the previous year. Regionally, all areas showed growth or remained stable except for China, which declined due to lockdowns. Overall, the newly combined organization showed strong performance. It was a solid quarter, and a strong second half of the year is promising for an upward revenue growth trend in the upcoming years. I believe it is crucial for investors and the wider market to recognize that QuidelOrtho is a growth company, and we will continue to operate with that perspective. We are a customer-focused organization running over 100 active R&D and clinical regulatory projects, with the expectation that our product development efforts will be as prolific as in the past. Our primary growth drivers for 2023 are our Sofia, Savanna, and VITROS systems and product lines, with over 85,000 Sofia instruments installed globally. The Sofia franchise is a robust and growing business. A review of our placements in the U.S. provides useful insights for investors regarding the duration of the Sofia platform and our long-term strategy for a more decentralized segment of the IVD market. In the U.S., over 77,000 Sofia instruments are under multi-year contracts, most covering multiple products. Approximately 50% of Sofia instruments are in physician office labs, 23% in hospitals, 17% in urgent care, and 10% in corporate accounts. On average, POL sites operate 2.7 Sofia instruments, hospitals have 7.5, and urgent care centers utilize 3.4. The number of U.S. Sofia customers rose 6% year-over-year to roughly 21,400. POL customers grew by 8%, hospital customers by 2%, and urgent care customers by 9%, while long-term care customers declined 20% due to the conclusion of the Government’s COVID-19 Nursing Home Program. Additionally, the number of customers purchasing our respiratory disease rapid antigen tests, including QuickVue, exceeds 72,000 on a trailing 12-month basis. It is an understatement to say we have a significant presence in the U.S. outpatient sector. Importantly, 82% of the 77,000 Sofia instruments conduct influenza tests, and 70% test for COVID, highlighting our market share gains in respiratory diseases over the last few years. Notably, only 8% of Sofia instruments are dedicated to COVID testing alone. Non-COVID ALK sales per instrument increased 57% year-end on a trailing 12-month basis. The Sofia franchise, with its large installed base, is a valuable asset that we can leverage to the fullest extent, which is why our R&D team is focused on expanding the menu for our Sofia customers. The number of companies seeking Point-of-Care molecular solutions for smaller syndromic panels is rising, validating our efforts to introduce Savanna to decentralized healthcare access points. I am pleased to report that we are nearly ready for an expanded global launch just ahead of the next respiratory season. The supply chain and instrument manufacturing challenges we faced have largely been resolved, and we now have the capacity to begin shipping the analyzers we had anticipated. For cartridge production, we are ramping up manual manufacturing lines, hiring additional staff, and installing high-volume automated lines to produce millions of cartridges required. The first two panels we will launch are our RVP4 and HSV/VZV lesion panels. Beyond that, we expect to initiate clinical trials for RVP11, STI, 2GI panels, bacterial, viral, and parasite panels, as well as pharyngitis and vaginitis. We have concentrated our initial menu focus on these areas to leverage Savanna’s unique features, such as faster turnaround time, test flexibility, and lower total cost ownership. Our largest franchise in terms of revenue, accounting for nearly 50%, is the Labs business unit and our VITROS clinical chemistry and immunoassay systems and slides. With increasing global demand for our integrated chemistry and immunoassay platforms and strong commercial execution, we currently face a backlog of about 650 instruments. While much of this is due to elevated demand, there are also supply chain issues that we are addressing with our suppliers. As we did with Savanna, I am optimistic about collaborating with our suppliers to improve forecast visibility and resolve supply chain challenges in 2023, and I anticipate significant progress as the year unfolds. We expect to decrease the backlog in 2023 by applying the same strategies we used with Savanna to our VITROS platform. Additionally, we are installing two more automated slide manufacturing lines in Rochester to meet rising slide demand. In the fourth quarter, we also formed a joint venture with Shanghai Runda Medical to develop and manufacture VITROS assays in China, which we believe will ultimately lead to quicker time-to-market and a more compelling VITROS assay menu to support our growth strategy in China. We continue to advance our localization initiative for instruments in China as well. Internally, I frequently speak about how excellent execution is a result of doing things well and quickly. Achieving speed requires focus on the two or three things that truly matter and allowing ourselves not to get overly concerned with less critical issues, at least for now. In my view, these three businesses are vital. Success in these programs will yield significant shareholder returns in the coming years. It doesn't imply that Transfusion Medicine or our next-gen donor screening platform isn’t important for the future, because it is. It doesn't diminish the importance of leapfrog and quantitative assays at the Point-of-Care, nor does it suggest that managing our capital wisely isn’t essential, because it is. However, for me, in 2023, my primary focus will be on these three business units. Of course, I am also following our progress with integration very closely and it’s going well. As we transition from our interim state to our future state, over 70% of interim state milestones have been completed to date, a remarkable achievement in such a short amount of time. Following a disciplined and thoughtful approach, our integration team is ahead of expectations in both identifying and realizing cost synergies. Last year, we realized approximately $15 million in cost synergies. We have also identified the full $90 million in cost synergies over the next three years and believe that there could be even more upside. Given where we are today, we are confident that we will exceed our 2023 target of $30 million and commercial cross-training related training through revenue synergies is well underway. In summary, we had a fantastic quarter and a terrific year. We are ahead of schedule on our integration plans and have multiple growth drivers at work. We have a plan in place and everything we need to hit our financial targets going forward. Our path to meaningful growth as we move from 2023 onward is well understood and largely derisked. The headwinds that we were rightly concerned about are not the obstacles we were expecting and may not be as significant as we had originally thought. Objectively, our fourth quarter was truly an outstanding performance and sets us up for a strong 2023 and beyond. With that, I’d like to turn the call over to Joe to further discuss our Q4 financial results and 2023 guidance. Joe?

Thanks, Doug, and good afternoon, everyone. I will begin with a bit more detail on our operating results for the quarter and the full year. As mentioned previously, to facilitate a comparison of the company’s operating performance from the fourth quarter of 2021 to the fourth quarter of 2022 and from the full year 2021 to the full year of 2022, all growth rates that I referenced are presented on a supplemental combined basis, as if Quidel and Ortho have been combined for the applicable periods and may be referred to as supplemental combined information. So let me start by saying that; one, we finished the year strong with a great Q4 that exceeded our expectations; and two, we are today providing 2023 guidance that is in line with our three-year outlook that was provided at the Investor Day in December. I will now provide more detail on both those areas. Starting with the breakdown of Q4 revenue on slide seven. In the fourth quarter, we recorded revenue above the guidance we provided in November. Revenue excluding COVID-related revenue came in at $734 million, which is up 18.6% in constant currency driven by Point-of-Care and Molecular Diagnostics. COVID-related revenue totaled $132 million in the quarter. So in total, we recorded revenue of $867 million, a year-over-year decrease of 23% in constant currency. The currency translation decreased sales growth by about 180 basis points resulting in a total sales decline of 25%. For the full year, however, total revenue was up 10% in constant currency to $4.1 billion. Excluding COVID-related revenue, full year revenue increased 11% in constant currency. Note that as we and others in the diagnostics space have been saying for several quarters now, we believe COVID-19 is transitioning to an endemic state and we now see it as just another respiratory disease, and appropriately, we will begin to bucket COVID-19 revenue with our other respiratory revenue in 2023 and forward. Turning to our Q4 performance by business unit on a constant currency basis and excluding COVID-related revenue, Point-of-Care revenue grew 138% largely driven by pull-through of our broad respiratory menu. These results reinforce our view that our Sofia system has been and will continue to be the beneficiary of tailwinds associated with increased respiratory testing, especially among the 85,000 cumulative instrument placements. Labs revenue declined 10% in the quarter, primarily due to the continued lockdown challenges in China. Transfusion Medicine revenue grew 1% with high single-digit growth in donor screening driven by plasma demand, partially offset by immunohematology due to lower procedure volumes in China. Finally, Molecular Diagnostics revenue grew 45% in the quarter, though this is on a relatively low base. Now looking at our quarterly performance by geography on a constant currency basis and excluding COVID-related revenue, North America revenue grew 38%, EMEA declined 3%, China declined 27%, and other regions, which includes Latin America, Japan, and other Asia Pacific markets grew 7%. North America, our largest geography by revenue delivered strong growth excluding COVID-related revenue driven by Point-of-Care and though it didn’t meaningfully impact the quarter, we recently received two government contracts. One, a one-year $108 million U.S. Government contract for QuickVue at-home COVID-19 tests. The contract provides for an expected value of $54 million and a maximum order value of $108 million. We did ship only a few million tests of this order in Q4 and we expect to shift the remaining tests in the initial 54 million order primarily in Q1. And then more recently we received a second U.S. Government contract for up to 37 million COVID tests for a total of approximately $97 million. We shipped a very small amount in late Q4, but most of this non-guaranteed contract is also expected to ship in Q1. In EMEA, revenue growth, excluding COVID-related revenue slowed as Lab volumes were negatively affected by the timing of tenders. Positively, Point-of-Care grew strong double digits, driven by strength in both Sofia and Triage. In China, which makes up about 10% of our total company revenue, new COVID-19 lockdowns caused a double-digit decline in hospital visits, which had a severe impact on our recurring revenues. Positively, though, late in the fourth quarter and into Q1 we saw increased testing and an acceleration of orders. The end of China’s zero COVID policy is expected to support accelerating demand as we move through 2023. Looking at our Q4 revenue by category. Recurring revenue, which includes reagents, service, and other consumables grew 5% and was up 24% excluding COVID-related revenue. QuickVue revenue was down 72% but up 371%, excluding COVID-related revenue. Instrument revenue grew 9%, driven by strong cash instrument sales in our TM business, including a few nice large wins in North America. Global supply chain challenges continue to limit our ability to deliver instruments in our Labs business. Given Q4 seasonality and instrument demand, Open Labs instrument orders were up modestly from the third quarter. That said, customer demand continues to be strong and we are prioritizing new instrument placements and integrated instruments in order to maximize our recurring revenue pull-through. Now turning to slide eight. I’d like to comment on our fourth quarter financial performance below revenue versus the prior year again on a supplemental combined basis. Although year-over-year growth rates were negatively impacted by the decline in COVID-related revenues, we delivered a strong quarter of performance below the topline. Gross profit margin for the quarter was 54.6%, in line with our expectations and down from the prior year, largely due to the decline in COVID-related revenue as we transition from a pandemic state to an endemic state, as well as FX headwinds, partially offset by favorable base business mix. Adjusted EBITDA also declined year-over-year, again due to the transition from a COVID-19 pandemic state to an endemic state, resulting in adjusted EBITDA of $245.1 million, ahead of our expectations due to the strong revenue. Adjusted EBITDA margin contracted year-over-year to 28.3%, again better than our expectations. Net interest expense for the period was $34.1 million, a decrease of $2 million as anticipated due to lower interest rates, partially offset by the increase in the average outstanding debt balances related to the combination. Our provision for income taxes was $39 million, compared to $92 million for the prior year period. This represents a fourth quarter adjusted tax rate of 25.4%, bringing our full year adjusted tax rate to 22.5%. Our adjusted earnings per fully diluted share for the fourth quarter was $1.76, above our guidance and compared to $5.12 in the fourth quarter of 2021 on a supplemental combined basis. The higher EPS in the fourth quarter of 2021 was driven by the greater COVID-related revenue than in the fourth quarter of this year. For the full year, our adjusted earnings per fully diluted share was $13.80, compared to $13.60 in 2021 on a supplemental combined basis. Turning to cash flow and balance sheet. In the fourth quarter on a GAAP basis, we generated operating cash flow of $169 million and after funding $59 million in CapEx and adding back $25 million in integration and other costs we estimate recurring free cash flow to be $135 million or 55% of our Q4 adjusted EBITDA. In terms of capital deployment, in the fourth quarter, we did not buy back any shares as we focus on bringing down our net leverage through a combination of paying down debt and building cash on the balance sheet. We paid down $52 million of debt in Q4 for a total of $104 million in the second half of 2022. We intend to maintain a flexible and balanced approach to share repurchases and debt paydown going forward, which will include debt paydown of at least the required $206 million in 2023. We ended the quarter with cash, cash equivalents, and marketable securities of $366 million and total debt of $2.6 billion. We ended the quarter with 1.5 times net debt-to-EBITDA on a supplemental combined basis and consistent with what we said at our December Investor Day, as COVID-related revenue declines to an endemic level over the coming year, we plan to maintain prudent levels of leverage and expect leverage to increase up to approximately 2.5 times by the end of 2023 and we believe that we are in a good position to continue to invest in the business. Deleveraging is a top priority for us and we have a goal to be at or below 2 times net leverage by the end of 2024, while maintaining flexibility for strategic smaller M&A opportunities. Okay, now turning to our fiscal year 2023 guidance. First, I’d like to provide some broader context on this outlook. Going forward, although there may be spikes and no one really knows for sure, we assume COVID-19 transitions to an endemic state, similar to other seasonal respiratory viruses and we plan to bucket it with those other respiratory viruses in 2023 and forward. While 2022 included a record-setting respiratory season, including flu and COVID-19, we expect 2023 to return to a more normal respiratory season. We expect to continue to capture and grow our share of the respiratory market underpinned by our large and growing Sofia placements. Outside our respiratory, the Point-of-Care market is healthy and is expected to deliver strong revenue growth in 2023. Our Transfusion Medicine business is expected to be about flat with solid growth within our core IH business and softness in donor screening. Labs instrument supply issues are expected to modestly alleviate as we move through, which along with an anticipated recovery in China, are expected to drive solid growth. It is a little more back half loaded. Savanna sales in Europe are expected to drive strong growth within our Molecular Diagnostics business, which along with the expected ramp in the U.S. volumes after the receipt of regulatory clearance, is expected to drive meaningful revenue in the back half of the year. Given the volume strength we are seeing in stat Labs through to the end of the lockdowns in China, our recent launch of the VITROS-XT3400, and our localization plans, we are expecting strong double-digit growth in China, excluding COVID-related revenue. Finally, inflation and global supply chain disruptions continue to be a challenge. However, we are seeing greater access to semiconductor chips and expect challenges to further ease as we move through the year. So in light of these dynamics, we are introducing the following fiscal year 2023 guidance, which is in line with our three-year model as presented at our Investor Day in December. Total revenue of $2.8 billion to $3.1 billion. Breaking this down further, revenue growth, excluding respiratory sales, is expected to grow 4% to 6% on a constant currency basis to $2.21 billion to $2.25 billion. Respiratory revenue of $610 million to $875 million, which includes COVID revenue of $300 million to $500 million, rapid flu revenue of $230 million to $270 million, and other respiratory revenue of $80 million to $105 million. This includes some benefit of recently awarded government contracts and as compared to 2022 supplemental combined total company respiratory revenue of $1.8 billion. Adjusted EBITDA is expected to be in the range of $800 million to $850 million, representing a margin of 27.4% to 28.6%. Adjusted diluted EPS is expected to be in the range of $5 to $5.60, which includes the increase in the interest rate environment over the last year. In addition, I’d like to provide assumptions that may be helpful for modeling purposes. At current rates, we expect currency translation to be about neutral to full-year sales and adjusted EBITDA. There are no differences in the number of billing days in 2023 compared to 2022. Net interest expense is expected to be in the range of $145 million to $150 million. We are expecting a full year adjusted tax rate of about 23.5%. Consistent with what we said at our Investor Day, we expect recurring free cash flow to be at the lower end of the 50% to 65% of adjusted EBITDA. Finally, full year diluted weighted average share count of 67.2 million. In summary, the fourth quarter results were exceptional as our positioning in the respiratory market drove strong results even as our largest and generally most resilient business, Labs, faced temporary weakness largely due to the China lockdowns. In 2023, we expect a normal respiratory season, which will cause a difficult comp in 2023 and we expect Labs to bounce back and support our business model as our guidance indicates. This 2023 guidance provides for a two-year CAGR for revenue, excluding COVID, in line with a 6% to 9% long-term outlook we provided at the Investor Day. Beyond 2023, we fully expect to continue delivering on our high single-digit long-term growth profile. So, with that, Operator, I think we are now ready to open the call for questions.

The first question comes from Andrew Brackmann of William Blair. Please proceed.

Hey, guys. Good afternoon. Thanks for taking the questions and appreciate the clear comments on the value drivers in the scripts. I thought that was helpful. Maybe if I could just start on the guide here, a lot of moving pieces, I think, Joe, as you called out, a lot of those were already anticipated. But maybe just as we sort of think about those cross wins impacting the business to get to that 4% to 6% base number, can you just maybe talk about how you are thinking about the progression of those variables through the year and then I guess, how does that also impact your thoughts on pacing here? Thanks.

Yeah. Hey, Andrew. Thanks for the question. As in the comments, I do think that, in particular, the Labs growth will be a little more back-end loaded for a couple of reasons. One, the China recovery we expect that we will be a little more back-end loaded. And then also the Labs instrument backorder recovery will certainly be a little more back-end loaded as well. So I think that is going to push a little more of the revenue that growth into the second half of the year, particularly Q4. I would also add that given how the respiratory season played out in 2022, with a very strong flu season in Q4 that sort of ended fairly quickly at the end of Q4. We are not expecting a very heavy respiratory season in Q1, but we are expecting a fairly typical respiratory season in Q4, which again is going to move some more of that revenue into Q4.

Okay. Thanks for that. And then I guess just a similar question on the profitability front, any thoughts on pacing there? And then it looks like the dollars for both EBITDA and adjusted earnings per share were a little bit higher than feared here. So any comments or any thoughts around specific gross margin sort of trends for the year and sort of how we should be thinking about OpEx? Thanks.

Yeah. Consistent with what I have said on previous calls, we still expect in 2023 that seasonality is going to have our Q2 and Q3 quarters to be the least quarters of the year, particularly Q2. And because of that, when you have got those lower revenue quarters with still a level of fixed costs, that’s going to produce lower gross margins and EBITDA margins in Q2 and Q3, and then with slightly stronger revenue quarters in Q1 and Q4, you are going to have stronger GP and EBITDA margins in Q1 and Q4, and so it’s going to get you for the full year as we have been saying, GP margins sort of in that low to mid-50s range.

And if I can just add, Joe, that I think most of our investors know this, historically, Q2 has been our lowest quarter in terms of revenue.

Okay. Thanks, guys.

Thanks.

Thanks, Andrew.

Thanks, guys. I like the back-to-back Andrews here. But just to kind of jump into it, one thing I think investors are certainly going to be teed into is the commentary for 2023 being normal and that $300 million to $500 million of COVID. I think it sounds like it does include those government contracts or at least some contribution from. So can you give us a sense for where you are sort of settling out, of what normal might be for COVID and how that’s going to play out through the course of the year kind of in context of, Joe, what you just said about some of the seasonality in flu and respiratory in general?

Yes, Andrew. Our range remains between $300 million and $500 million, and we can discuss the government contracts, but we are not considering that to be standard or typical.

Yeah. And it is exactly, it’s consistent with what we said at Investor Day, we were saying $200 million to $400 million for endemic state and it’s up $300 million to $500 million, because you have got this level of government contracts that we know we have in hand.

Yeah.

So there’s no change there.

Yeah. That’s what I was trying to say.

There is no change in what we have defined as a normal flu season, which is between $230 million and $270 million. This is the same guidance we provided for 2022. We are returning to what we refer to as a normal flu season, and that is reflected in the 2023 guidance.

Yeah.

Okay. Perfect. That’s helpful.

Do you want to talk about total respiratory as well?

Yeah. Those are the main two pieces and then you have got what I will call just of the respiratory, which would be molecular and RS…

We are back to what we consider a typical flu season, which is reflected in our guidance for 2023, the same as what we provided for 2022.

...strep…

...in the $80 million to $105 million range.

So those are the three pieces.

I appreciate that aspect of the business. Moving on to some of the international business, particularly in Labs, can you provide insight into the impact of the EMEA tender compared to supply chain dynamics and the lockdowns in China? Also, could you give us an idea of how significant each of these factors could be for growth as those challenges ease?

I can start, and then Doug can add any comments. Regarding EMEA, I wouldn't say that the timing of the tenders was significant. The issue with the growth rate in the fourth quarter of 2022 was mainly due to the transition of tender timing from 2021 into 2022. I fully expect EMEA to achieve low single-digit growth, which is consistent with what we experienced in 2022. So, there’s really nothing new here. We still anticipate EMEA to be in the low single-digit growth range in 2023. In China, it was a really difficult quarter, no doubt about that. However, when you consider the decline in outpatient visits in the overall market, our numbers align with that.

The number of patients was down...

...25%, so it pretty much mirrors what happening... And it’s not different than what we see from other companies in that country as well. Correct. Since things have opened up, we are seeing a nice increase in flow through on our boxes, and we are confident in achieving double-digit growth in 2023 for China, as I mentioned.

In fact, it’s been that for a couple of months now.

Okay. I will stop there and hop back in the queue. Thanks.

Okay.

You bet.

Thanks, Andrew.

Hey, guys. Thank you for taking the questions.

Sure.

Joe, maybe one on the EBITDA side. I know you are well aware of the amount of focus people have on this one. So I just want to make sure we understand kind of the 2023 guidance. I mean, is this the right stepping off point going forward, right? I don’t mean to ask about 2024 already. But when you think about that 28% in the middle, you kind of mentioned you have maybe $100 million of COVID on government contracts. I think those tend to be a little lower at least than kind of retail and maybe on the corporate average. But I think there’s this fear that as COVID comes out at 2024 then takes a step down, is this the right kind of stepping off point on EBITDA, maybe just talk about some of those moving pieces as we work our way through the year and kind of look forward?

Hey, Patrick. I believe this is a reasonable starting point. Referring back to our earlier comments on COVID, the annual revenue remains at an endemic level of $200 million to $400 million. Additionally, you're correct that the guidance for 2023 has increased by another $100 million due to government orders, which, as you noted, doesn't contribute significantly to our margins. Therefore, it is indeed a solid foundation. The midpoint of our EBITDA margin guidance is 28%, consistent with what we presented at the Investor Day in December, falling within the 27% to 29% range we provided. We feel confident about this. However, echoing Doug's remarks, we aim to increase the EBITDA margin to 30%. We have a clear strategy to achieve this, which involves driving greater revenue growth and exceeding our synergy targets.

Okay. That’s very helpful. I appreciate that. And then, Doug, maybe on the Savanna timing and assumptions, can you just talk through, I guess, the time line here? I think this quarter is supposed to be around the 510(k) submission. It seems like EUA probably not happening. But can you just talk about where we are the pathway here in the U.S. and then maybe just the assumptions that are layered into the guide here on our way to that $250 million number? I think it’s over three years, that’s just how we are progressing there, and again, the time line in the U.S. would be great?

Thank you for the question, Patrick. I think it helps us clarify our current status. We are still anticipating the RVP for EUA in April, with the 510(k) submission expected shortly thereafter. We are on track for the launch. The instrument build issues have mostly been resolved, and we believe we are already at the capacity needed for a significant launch. Right now, most of our efforts are focused on ramping up cartridge production. We have manual lines in place, and we believe we can meet immediate demand in Europe. We are considering further investments depending on the timeline for the automated line, but we expect to produce millions of cartridges soon. I feel confident about our position. It has been some time, and I am eager to see our performance. At our kickoff meeting in the United States, there was a lot of enthusiasm and effective cross-selling. Currently, the focus is primarily on VITROS chemistry instruments and immunoassay analyzers. I am encouraged by the collaboration and positive attitude within the team. The training is progressing exceptionally well, and I feel we are well-prepared. Our focus is not only on product production but also on commercialization.

Yeah. Understood. It has been a while, but looking forward to seeing it out in the market, Joe and Doug. Thank you, guys.

Thanks, Patrick.

Thank you. The next question comes from Conor McNamara of RBC. Please proceed.

Hey, guys. Thanks for taking the question. I appreciate it.

Hi.

Just getting back to regulatory business, if you...

Hi, Conor. Sorry, Conor. Please go ahead.

Can you guys hear me?

Absolutely. Yeah. Absolutely. Thank you, Conor.

Okay. So just getting back to the respiratory business, if you just think about kind of all of the moving pieces for this year, including the government contract on COVID. Going into next year and not getting into next year’s guidance, but just going forward, how should we think about the total respiratory business size-wise including all of that? And then once you do have Savanna, how does that change the size of that business?

Yeah. Go ahead, Joe.

Yeah. I can start here. And again, breaking it up into the pieces, Conor. I think we would again go back to the COVID $200 million to $400 million and the rapid flu in the $230 million to $270 million. Those are the two base numbers. And then the Savanna number, that number is a little bit of a TBD as you move into 2024, obviously, because it’s going to be based on the slope of the ramp or the launch because some of that Savanna revenue is going to be respiratory, the RVP4 and RVP11. And then you have got that other piece I mentioned the RSP and the strep, we call it, $80 million to $100 million and so those are your pieces as you move forward.

Got it. That makes sense. Doug, you mentioned some excitement around cross-selling. Without Savanna, what areas have you seen success in cross-selling and what are the representatives particularly excited about? Thanks.

Right now, mainly in the U.S., the former Quidel team is integrating with the Ortho team and there are encouraging signs with several opportunities in spending. Outside the U.S., we are somewhat surprised by the positive response to the Triage platform and the potential for our cardiovascular assays. It’s also fair to say that we have seen reasonable success in a limited launch of Savanna in Europe.

Very well. Thanks for taking the question. I appreciate it and congrats on a nice quarter.

Yeah. Thanks, Conor.

Thank you. The next question comes from Eliza Garcia of UBS. Please proceed.

Thank you for fitting me in. I really appreciate it. I understand there are some dynamics in the Lab business, particularly with the 600 open orders you mentioned, which could potentially contribute an additional 2% to the top line if filled. Could you provide some guidance on how to interpret what's included in the outlook or an upside and downside scenario regarding this? How soon could we expect resolution, and are there any capacity constraints to consider?

I think it's fair to say we are gaining better visibility into the supply chain needed to manufacture the instruments. The 2-point improvement in growth was not achieved by completely eliminating the backlog, but rather by reducing it to around $150 million, which is typical for the end of a normal year. To clarify, we are likely seeing an increasing close rate with boxes, which may lead to a larger backlog. However, we are confident that we can produce the additional instruments needed and return to a normal exit rate in 2023, although this won't happen immediately. We are making progress and have some encouraging news for the first quarter, but we are not quite at the levels we need yet. I hope that makes sense. Joe, would you like to add something?

Yeah. So that’s right and as I would just add that, in the guide, we did not, just to be clear, we did not assume that the full backlog goes from $650 million to $150 million. We assumed that it came down modestly. It is going to take until 2024 to drill that all the way down to where we want it to be.

Could you confirm if the figure for flu was $350 million for 2022? Additionally, you have mentioned the TriageTrue opportunity outside the U.S. How should we consider the high sensitive troponin test and any potential updates regarding its launch in the U.S.?

Yeah. First question first I guess. To be clear, I think I heard you say the total flu is $350 million.

In 2022.

Is that what she said?

Yeah.

And then the second piece?

TriageTrue…

Triage.

Are you asking? Perfect. Yeah, we are currently in the process of setting up an automated manufacturing line for the high sensitivity troponin on the Triage. We fully expect that the yields will improve, our costs will be better, and we should be competitive in that market. So I think it’s safe to say that it’s a pretty good opportunity for us there.

Great. Thanks so much guys for taking all my questions.

Thank you.

Thank you. The next question comes from Alex Nowak of Craig-Hallum. Please proceed.

Okay. Great. Good afternoon, everyone. I want to continue on the theme around the flu season and just how to think about it here for 2023. You put the flu number at $230 million, $270 million for 2023, but if you go back to 2019, you did $140 million of flu sales that year. So is this really the new normal with combo testing or is the difference really more about the share gains that you were talking about? And if it’s share gains, what does that mean for the rest of the Sofia business that you could pull alongside that instrument?

Well, it is due to share gain, as we placed a significant number. In the year you referenced, our total installed base in the U.S. was under 40,000, and globally we were at approximately 42,000. Now we have 77,000 instruments in the United States and 21,400 customers, which is up 6% compared to the previous 12-month period. We expect to see pull-through on the product, which is reflected in RSV and strep, as Joe mentioned. I believe this is a reasonable estimate for now. I sense you might think it could be higher, and that's possible, but I think we have positioned ourselves appropriately for the moment.

Okay. Makes total sense. And then I just wanted to get some clarification around the EBITDA to free cash flow conversion, $245 million adjusted EBITDA, I have actual free cash flow being like $76 million. I know there’s some one-time items in there, so your recurring free cash flow number is a bit higher than that. But can you maybe walk through the divergence between EBITDA, free cash flow, recurring free cash flow this quarter and then what to expect in 2023?

The quarter's free cash flow, specifically recurring free cash flow, was $169 million from operating cash, minus $59 million of capital expenditures. After adding back $25 million in one-time or non-recurring items, the total comes to $135 million for the quarter, which represents 55% of our adjusted EBITDA. Looking ahead, we anticipate staying in this range for 2023, likely at the lower end of the 50% to 65% range, so around the 55% mark appears reasonable for this year.

Okay. So expect that for next year?

Yeah. That’s right.

Sure.

Thank you.

Thank you. The next question comes from Jack Meehan of Nephron. Please proceed.

Thanks. Good afternoon. On guidance, I was hoping you could just draw a finer point on first quarter expectations for COVID, flu, and the other respiratory. In the CDC data, we have seen this rapid drop-off in flu activity. I am not sure what you are seeing in Virena, but I just want to make sure we have the right expectations for those three buckets in 1Q.

Yeah. Hey, Jack. How are you? Yeah. Given I think I said earlier, the respiratory season did drop pretty quickly at the end of Q4. So we are expecting a fairly light, I will call it, flu season. COVID is still hanging in there. If you look at the infection rates COVID is still hanging in there, ILI came down flu, but COVID’s hanging in there. And then we have got the government contracts as well. So I think we will have a decent respiratory season in Q1, driven more by COVID than flu and then Q4 is where the rest of that respiratory season is going to go in the guidance.

Let me provide some additional details regarding the Virena data since most of you may not have access to it. When I examine the chart, I notice a significant decrease in positivity rates, although they remain higher than what we typically see at this time of year. To be fair, there was a peak around the second week of December.

Yeah.

And so it’s been coming down pretty nicely. So I think you are right, though, we should have a reasonable first quarter. It just won’t be the normal biggest quarter in the year, I will leave with that.

Got it. Joe and Doug both mentioned that China is down 27% excluding COVID. How much of this decline is attributed to the core Lab business versus Transfusion Medicine or legacy Quidel, and what are your expectations for the region in the first quarter?

Well, just overall patient volumes being down 25% period and I don’t know most Labs, yeah, it’s...

Everything was down. Yeah. Everything was down, but the biggest chunk of it is going to be Labs and Q1 it’s bouncing back. We are seeing nice flow-through on our boxes in Q1.

Would you expect it to still be down year-over-year, though, in the first quarter?

It will be up. It will be up.

Okay. Last one, if you will humor me, just molecular, is there any granularity you can provide around the forecast just for 2023 for that segment?

Well, I mean, again, I think, it’s going to be back-end loaded. The growth will be mostly back-end loaded again due to Savanna and the regulatory clearance in the U.S. I think that’s probably the best color I can give you.

Okay. Thanks, Joe.

You got it.

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

Great. Hi, guys. Thanks for fitting me in. I guess just on pricing, what’s your expectation for respiratory pricing in 2023 versus 2022 and how should we think about that trending across your different products within those three buckets?

Yeah. We are still hanging our price wise. We expect flat price.

Got it. That’s helpful. And then just last one, in terms of the sites with multiple Sofia’s, particularly the hospitals that have five or six on average that you noted in the prepared. What gives you confidence that those multiple instrument sites won’t consolidate? And then can you just elaborate on those multiyear contracts, how much visibility do you have into those flu and those other respiratory revenue numbers?

So a couple of things. Hospitals is 7.5 instruments per hospital, to be clear. In terms of consolidation, I think the most important point that I made was that only 8% of those boxes out there just run COVID. So you could expect, for example, the boxes in the nursing homes would be returns. You can expect that a handful of customers that would maybe run just COVID-only could be an opportunity to consolidate. But at the end of the day, we haven’t seen it yet. So I don’t know how to forecast it moving forward, but I would just say, we are not seeing it yet.

Got it. That’s helpful. Thank you.

Sure. Thank you, Casey. All right. I think that’s all for the questions. I want to thank everybody for your great questions actually, and in closing, thanks to the extraordinary dedication of our folks. We really did have a strong finish in 2022. Once again, the integration is going well, and when I say that, I am not just talking about cost and revenue synergy, I am talking about watching the people get together and across the board, whether it’s in the factories or in meetings, supply chain, or the commercial books. I think everybody is getting along tremendously, people are happy and I am expecting great success from 2023 onward. So, thanks, everybody.

That concludes the conference call. You may now disconnect your lines.