QuidelOrtho Corp Q1 FY2024 Earnings Call

Welcome to the QuidelOrtho First Quarter 2024 Financial Results Conference Call and Webcast. Please note, this conference call is being recorded. An audio replay of the conference call will be available on the company's website shortly after this call. I would now like to turn the call over to Juliet Cunningham, Vice President of Investor Relations.

Thank you. Good evening, everyone, and thanks for joining the QuidelOrtho's First Quarter Financial Results Conference Call. With me today are Brian Blaser, our newly appointed President and Chief Executive Officer; Mike Iskra, EVP and Chief Commercial Officer; and Joe Busky, Chief Financial Officer; Rob Bujarski, our EVP and Chief Operating Officer, will also join us for the Q&A session that follows our prepared remarks. This conference call is being simultaneously webcast on the Investor Relations page of our website. To aid the discussion, we posted a supplemental presentation on the Investor Relations page that will be referenced throughout the call. This conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not strictly historical, including the company's expectations, plans, future performance, and prospects, are forward-looking statements that are subject to certain risks, uncertainties, assumptions, and other factors. Actual results may vary materially from those expressed or implied in these forward-looking statements. Information about potential factors that could affect our actual results is available in our annual report on Form 10-K for the 2023 fiscal year and subsequent reports filed with the SEC, including the Risk Factors section. Forward-looking statements are made as of today, May 8, 2024, and we assume no obligation to update any forward-looking statements, except as required by law. In addition, today's call includes discussions of certain non-GAAP financial measures. Tables reconciling these non-GAAP measures to their most directly comparable GAAP measures are available in our earnings release and the supplemental presentation, which are on the Investor Relations page of our website at quidelortho.com. Lastly, unless stated otherwise, all year-over-year revenue growth rates, including revenue growth ranges, given on today's call are given on a comparable constant currency basis. And now I'd like to introduce Mike Iskra.

Thank you, Juliet. In a few minutes, I'll introduce our new CEO, Brian Blaser, and then Joe will discuss our quarterly financials in detail. First, I want to review our first quarter business performance and go over the recent actions we're taking to enhance our cost structure and provide greater value to shareholders. Looking at our first quarter 2024 performance, total revenue grew by 6% in constant currency, excluding COVID-19 revenue, with strong growth across regions. We saw particularly good growth in EMEA and China during the first quarter. Our Labs business, which constituted about 50% of our Q1 revenue, performed as expected, showing approximately 4% growth excluding the one-time third-party collaboration settlement from the prior year. Transfusion Medicine made up 23% of Q1 revenue and grew about 4%, driven by immunohematology initiatives across regions in our Ortho Vision Swift and Ortho Vision Max Swift instrument placements. We are continuing our planned efforts to wind down the U.S. business within Transfusion Medicine. Point of Care accounted for 26% of Q1 revenue, and excluding COVID-19 revenue, our Point of Care business grew approximately 38% year-over-year, fueled by strong Sofia sales in the professional market, including our combo, flu, and RSV tests. Finally, Molecular Diagnostics represented 1% of Q1 revenue, with growth of approximately 15% excluding COVID-19 revenue, though this comes from a low revenue base. We are also focused on developing a highly competitive respiratory panel for the U.S. market with the Savanna system, as well as expanding our menu with the STI panel and additional assays over time. We plan to share updates as we reach milestones closer to the full commercial U.S. launch. Since our earnings call in February, the company has gone through significant changes. Although managing change can be challenging, we view this as an opportunity to leverage our strengths and address areas for improvement. Over the past three months, we have implemented cost reduction initiatives aimed at achieving better results in both the near and long term, with a focus on margin restoration that includes headcount reductions expected to yield around $100 million in annual savings. We are also actively exploring new opportunities to enhance business efficiencies and attain greater savings as part of our ongoing improvement culture. Simultaneously, while serving as interim CEO, Rob, Joe, and I made it a priority to maintain business continuity and push forward our margin restoration efforts. I believe our first quarter performance reflects our team's ability to navigate this transitional period while maintaining our business momentum. We are pleased to welcome Brian as our new President and CEO. Brian brings over 25 years of senior leadership experience in the diagnostic industry, including seven years in charge of Abbott's Global Diagnostics business. His proven track record in strengthening operations and driving revenue growth to significantly enhance profitability positions him as the ideal leader to steer QuidelOrtho through its next growth phase. On behalf of our leadership team, I extend our gratitude to our employees at QuidelOrtho for their commitment to serving our customers and executing our 2024 operating plan. We value your dedication and ability to stay focused during these transitional times. We anticipate a seamless transition with Brian now leading us toward a successful future. I'd now like to hand over the call to Brian.

Thanks, Mike. I'm very pleased to join the call today. And first, let me say that it is a true honor to join this exceptional organization. I am thrilled to have the opportunity to work with this leadership team and our talented colleagues across the company. Today, I'd like to share a few of the reasons I was compelled by this opportunity at this pivotal point in the company's history. First, I have always viewed Quidel and Ortho separately as highly innovative companies and formidable competitors. Combined now as QuidelOrtho, this business has one of the broadest product portfolios spanning the continuum of care from Reference Labs to hospitals, clinics, and urgent care to retail and home testing. QuidelOrtho touches every stage of the patient care spectrum, including prevention, diagnosis, patient care, and monitoring. This business has all of the underlying capabilities required to drive exceptional growth and profitability in a large and expanding market. There is work to do, and I'm excited about steering the company so it can achieve its full potential. In the short term, I will be focused on our highest priorities, which are unwavering attention to customer satisfaction, improving profitability and cash flow while reducing our debt level, and positioning ourselves to compete effectively in the highly competitive diagnostics market. I look forward to providing more details about our strategic direction as we move forward. I'm excited about the opportunity to engage with many of you in the coming months and answer your questions when I host our second quarter earnings call in August. Joe, I'll now turn it over to you.

Thanks, Brian. And I would also like to welcome you to QuidelOrtho, and I look forward to the next chapter in our company's growth story. Let's begin with details of our first quarter results on Slide 4 of the earnings presentation. As a reminder, unless stated otherwise, all year-over-year revenue growth rates on today's call are provided on a comparable constant currency basis. Our first quarter 2024 financial results were in line with our expectations and our underlying business trends remain solid. First quarter 2024 revenue was $711 million reported basis compared to $846 million in the prior year period. The year-over-year revenue decrease is primarily COVID-19 related. Therefore, excluding COVID-19 revenue, our total revenue grew by 6% in constant currency, with solid growth across all regions. And if you also exclude the one-time $21 million third-party collaboration settlement from Q1 last year, total revenue grew 10% in constant currency. From a regional perspective, in Q1, again excluding COVID-19 revenue and in constant currency, we achieved revenue growth of 5% in North America, EMEA grew 6%, China growth of 12%, and the rest of the world growth of 6%, which includes Japan, Asia Pacific, and Latin America. First quarter 2024 non-respiratory revenue was flat compared to the prior year period of $574 million. Excluding the one-time third-party collaboration settlement in the prior year period related to our Labs business, non-respiratory revenues grew 4%. First quarter 2024 respiratory revenue was $137 million, which included approximately $50 million in COVID-19. Respiratory revenue decreased 48% year-over-year, primarily due to lower COVID-19 revenue. Excluding the government-only COVID-19 orders, respiratory revenue grew 6%. As Mike mentioned, our first quarter respiratory growth was driven by strong Sofia sales in the professional setting. We leveraged our large global Sofia installed base with 70% of Sofia customers purchasing multiple tests. This includes our combo test, which accounted for greater than 50% of our flu testing revenue in Q1 and is consistent with the past several quarters, demonstrating the durability of this product. Moving down the P&L, non-GAAP total operating expenses were essentially flat compared to the prior year period. Slide 5 shows that Q1 adjusted gross profit margin was 47.5% versus 53.8% in the prior year period. The change was primarily related to lower COVID-19 product sales, which are high-margin contributors as well as one-time items that made for favorable year-over-year comparisons. In summary, gross margin headwinds were comprised of three one-time items: 630 basis points related to the large government COVID-19 orders in Q1 of last year, 140 basis points from the one-time third-party collaboration settlement in Q1 last year, and finally, 230 basis points tied to an inventory reserve related to the respiratory product expiration in Q1 of '24. Those three items were partially offset by underlying base business performance and cost-saving actions within manufacturing and supply chain, which were approximately 400 basis points of benefit to the margin. Adjusted EBITDA was $132 million compared to $245 million in the prior year period. Adjusted EBITDA margin was 19% compared to 29% in the prior year period. Adjusted diluted EPS was $0.44 compared to $1.80 in the prior year period. The year-over-year change in adjusted EBITDA and adjusted diluted EPS was primarily due to the lower COVID-19 revenue from the government work. Our first quarter effective tax rate was 23.5%, which was consistent with the prior year and in line with our full year expectations. In Q1 2024, we recorded a noncash goodwill impairment charge of $1.7 million for the North America reporting unit due to the decrease in the estimated fair value, which was consistent with the decline in the company's market capitalization during the quarter. Turning now to the balance sheet on Slide 6 of the presentation. We finished the quarter with $79 million of cash and $40 million drawn on our revolver. During the quarter, we liquidated investments to avoid additional revolver borrowings. Recurring free cash flow of negative $13 million was driven by working capital needs. We do expect cash flow to improve in the second half of 2024 as margin restoration takes effect along with seasonally higher revenue expected in Q4. We continue to focus on executing our cost savings and margin restoration initiatives, which are designed to deliver improved performance and sustainable long-term growth. We expect the benefits from these initiatives to be realized in the second half of '24 and in the first half of 2025 with minimal impact in Q2 of this year. Taking all this into perspective, we intend to maintain operating flexibility as we implement these initiatives. In light of this, and in an effort to be conservative, we did amend our credit agreement in April to increase the maximum consolidated leverage ratio beginning in Q3 this year through the loan maturity in May of 2027. Importantly, we completed this amendment at a cost of 12.5 basis points of the total loan commitment and the loan pricing is unchanged. During the first quarter of 2024, our consolidated leverage ratio was 3x, including pro forma EBITDA adjustments compared to the 4x maximum specified in the amended credit agreement for the first half of '24. Based on current expectations, we expect our consolidated leverage ratio to be approximately 3.5x by the end of this year, including pro forma EBITDA adjustments compared to the 4.25x maximum specified in the amended credit agreement. Lastly, we want to provide some relevant updates based on our current visibility. Our prior expectation for COVID-19 revenue was approximately $225 million based on our current view, which is subject to change based on COVID-19 developments, we now expect approximately $150 million in COVID-19 revenue for the full year 2024. Second, we also expect that Savanna revenue will be immaterial in 2024 with no expected U.S. respiratory revenue contribution from Savanna in the '24, '25 respiratory season. And as a reminder, the COVID-19 Public Health Emergency in the U.S. ended in May of 2023. However, we continue to see significant quick view COVID-19 test sales in the retail setting in the second quarter '23. Hence, we expect year-over-year COVID-19 revenue comparisons to again be challenging in Q2 of this year. As a result of these changes to the COVID-19 and Savanna revenue, our current expectations are to be at or slightly below the low end of our previously communicated '24 guidance ranges for revenue, adjusted EBITDA, and adjusted EPS. With our new President and CEO coming on board this week, we've decided to suspend guidance to give Brian the opportunity to assess the business and evaluate our plans for the rest of 2024. We do intend to resume providing guidance later in the year when we are able to share our plans.

The first question is from Jack Meehan with Nephron Research.

And Brian, welcome aboard.

Thank you.

I wanted to get your thoughts maybe to start on two topics. First, as you were taking the CEO role at QuidelOrtho, you talked about the work you did on Savanna and what your view is on just the level of confidence in the competitive platform market there? That's number one. Number two is, your view on what the right margin profile is kind of once you go through this transition period like aspirationally, where do you want to get this business to?

Let me share my initial thoughts on why I took this role and my early impressions of the business. I've been here just three days, and while the information I had access to during my due diligence was somewhat limited, I have a long history in this industry. I'm still in the early stages of understanding the business details, but I am well-acquainted with the market landscape and the business models relevant to this situation. I've had the chance to collaborate with talented teams to drive significant changes, expand into new markets, develop products, launch complex new systems, and optimize manufacturing, supply chains, and commercial models. From my assessment of the business prior to starting and now after a few days, I see potential here. I believe there are clear opportunities to enhance the organization’s performance in all the areas I mentioned, where I have experience. Many of these opportunities have already been recognized by the interim CEO, and initiatives are underway. I foresee additional opportunities, particularly in product development, productivity, and commercial excellence. The leadership team also recognizes these opportunities, and I am eager to work with them to improve our performance. I see this as a significant opportunity. Regarding your second question about aspirations, I don’t want to get ahead of myself, but achieving operating margins in the high 20s seems reasonable for a business like this. We will strive to reach that and more if possible.

Great. And then I wanted to ask about guidance. I appreciate the color, Joe, around kind of where you're shaking out relative to the prior guide. Can you just give us a timeline when you expect to reinitiate guidance? Do you think with 2Q? Or could it come before then?

Well, Jack, first of all, we want to be as transparent as possible. So we did provide those updates on our expectations for COVID revenue in Savanna because we know that they've been open questions for investors. And we did suspend the guidance to give Brian a chance to assess the business a little further and evaluate our plans for 2024. We will resume guidance at some point in 2024. I think it's too early to say specifically what that date is, though.

Yes, this is Brian. I want to add that there was an Investor Day that was postponed due to recent events. I'm eager to engage with investors as soon as we can. While we haven't set a definite date for the Investor Day, we are considering holding it before the end of the year. I'm looking forward to interacting with everyone.

Next question is from the line of Andrew Brackmann with William Blair.

This is Maggie Buy on for Andrew today. Joe, I appreciate the color you provided us on COVID and Savanna based on what you're seeing thus far. But with the full respiratory season under your belt at this point, can you talk about what you view as realistic endemic revenue levels from here?

And Maggie, before I answer, you're specifically asking about COVID revenue, correct?

Yes, just COVID and respiratory revenue.

Yes. Got it. Okay. So let me just hit on the COVID first. We did take the full year COVID revenue down to $150 million, and you guys have probably heard me say this before. The truth is no one really accurately predict the COVID market size and the timing. But we do use customer, industry, and peer data, as well as we've accessed proprietary research to triangulate data points and come up with the projection that we spoke about. We don't believe it's zero, to be clear. We don't think that's the right number. We did $50 million of COVID revenue in Q1 as we said in the scripted remarks. We continue to see COVID sales in Q2 on that, although at lower levels. We do expect COVID revenues in the second half to be higher given the typical respiratory season in the third and the fourth quarters. We will carefully continue to monitor all leading indicators, and obviously, we'll adjust expectations as things evolve and the year progresses. As far as respiratory revenue outside of COVID and the reminder following last year, we did put in place a new methodology for forecasting the flu revenue. That methodology is based on market share and market size, number of tests, and mix of products, specifically mix of combo versus flu-only tests. I would have to say that the Q1 numbers turned out pretty much as expected based on that new methodology. As you think about the balance of the year for us, we do expect a typical flu season of roughly 50 million tests. Remember, we've said that we think that the range of volume for size of market is 40 million to 60 million tests. We think we're going to land somewhere in the middle; that's where we've pegged it. We haven't seen any changes in distributor inventory levels or any other leading indicators that would materially impact our forecast. So maybe I'll stop there and see if that answers your question.

Yes, that's great. And then maybe just another one on gross margins. I can appreciate the couple of moving pieces we saw in Q1, but just how should we be thinking about those on a quarterly basis as we go throughout the rest of the year?

Yes, this is similar to what we've experienced in previous years. There will be some seasonal fluctuations within the quarter. Q2 will be our weakest quarter for gross margin since the revenue is usually the lowest of the year during this time. There are fixed costs that affect the gross margin and contribute to this decline. Q2 will be the lowest, but we anticipate that margins will improve in Q3 and Q4 due to the seasonal increase in respiratory revenues and the labs seasonality we usually see in Q4. We expect margins to recover in the second half of the year.

Next question is from one of Andrew Cooper with Raymond James.

Brian, good to have your first earnings call underway. Maybe just first, thinking about margins and the trajectory for the year, can you give us a sense for maybe just where we are in terms of the cost savings that are in motion and in-flight already versus maybe what's identified to get to the $100 million target and not quite started, and what maybe you need to go out and find in the base as it sits today?

Yes, I assume I'll take that question, Andrew. You'll recall that on the last earnings call, we did talk about a headcount reduction in the range of 5% to 6% in headcount and a $100 million annualized savings target. I'm happy to say that we've completed the majority of those headcount reductions, and we're continuing to look at ways to improve the organization. We expect to complete the majority of these headcount reductions, which will amount to around 500 positions, by mid-year this year. Again, we expect to see about $50 million of that benefit in the second half of this year, primarily in SG&A, and the other $50 million of the benefit will be in the first half of 2025. It's probably also important to note that these headcount reductions were a little more focused on higher-level individuals within the organization. So even though the position reductions are 5% to 6% in headcount, it's closer to 10% to 12% of our total compensation and benefits because we did focus on taking out higher-level management positions. We are not done; we're going to continue to look for ways to make this company more efficient.

Okay. Helpful. And maybe just one more on the gross margin since we just talked about it a bit as well. But just to be clear, when you talk about Q2 being the lowest, I assume that's on a sort of an adjusted basis, absent the inventory write-down that you called out for the quarter, is that a fair way to think about it, at least from a typical trajectory perspective? Or just how should we think about that piece, which obviously we're hoping won't repeat?

Yes, that's true, Andrew. As I said in the prepared remarks, the Q1 margin was impacted by about 200 basis points due to an inventory reserve since we overcalled Q4 '23. You still would see Q2 be seasonally low. We don't expect significant inventory reserve write-offs in Q2.

Okay. And then if I can sneak one more in, maybe just for Brian. I think Jack tried to ask it, but maybe it got lost in the shuffle. Just what's your views on a product like Savanna in the competitive molecular marketplace, how do you think about the actual ability to go out and compete with that kind of mid-plex product? And what's attractive about that platform, particularly as you think about the path forward?

I think it's an attractive competitive product, quite frankly. Our challenge is the menu. My focus is getting the menu of tests on that platform as quickly as we can to ensure we have a competitive offering.

Next question is from the line of Conor McNamara with RBC.

Welcome to San Diego, Brian. Joe, could you share how involved you were in forecasting respiratory and flu sales when you provided Q4 guidance? I know you mentioned some of the assumptions that informed your projections. How does your involvement compare now to then? It seems like you made significant adjustments to some of those assumptions. I'm interested in understanding your prior involvement versus your current perspective.

I don't want to rehash too much through Q4, other than to say that, as we've said in the past, we overcalled COVID and flu revenue in Q4 of 2023, unfortunately. As I said on that previous response, we did put in place a new methodology for forecasting flu, and we feel pretty good about it. Again, using the three variables I mentioned – market size, market share, and mix of products, we will continue to use that methodology and refine that methodology.

Conor, it's Mike. Look, I think on both fronts, if we take the traditional respiratory season, as Joe said, we have a new methodology coming into this year, and we feel very good. The market demand and how big the flu season is, is to be determined really outside of our control. But what's in our control is what are we doing to drive market share gains, are we driving the right mix of product, leveraging our combo test, which we decided differentiating to get the right mix, and are we able to compete with pricing. We have a solid method for forecasting, and I think we have very specific KPIs for how we operationalize that. As for COVID, we spent a good deal of time trying to triangulate on the right number, and the question was asked earlier; our outlook on COVID-19 starts from here. There's still more information to come, but we feel that we've done a wide range of analysis covering material from our peer group, the industry, and market, along with other experts, and I think the number shared today, the $150 million, is well thought out.

Great. And just a follow-up on Savanna. You removed the respiratory revenue. Is there a consideration that if you receive approval for the respiratory panel, you would prefer to wait until you have multiple panels before launching in the market? It seems like that’s what your comments were suggesting. Or is there a possibility that you might still launch it in 2024 with just the respiratory panel?

Yes, Conor. Good question. So look, I think we are all absolutely clear on two things. One, the guidance we gave is around financial expectations for Savanna. Let's not confuse that with the operational expectations. We have a very aggressive plan to move as quickly as we can, not just on respiratory but as mentioned, STI, and as Brian mentioned, the rest of the Savanna menu, which is critical. We will be careful not to set our expectations too early, but we do not want to confuse that with an unrelenting effort to get products approved and out in the market as soon as possible.

The next question is from the line of Patrick Donnelly with Citi.

Joe, maybe just on the leverage side and some of the covenant restructures you guys did. I think you bumped the number all the way up to 4.25, but the guidance here, I think it's for 3.5. So how do you think about just the trajectory on the leverage piece as we work our way through the year? Is that just the EBITDA moving around? How do you think about the leverage progression and the debt load there?

Patrick, I want to make sure, and I know I said this on every earnings call in the last several quarters, just to ensure everyone is clear that there is the financial statement leverage ratio that comes straight from the face of the financials and then there is the credit agreement leverage ratio that allows pro forma EBITDA savings to be included in the calculation. When you run that credit agreement calculation for Q1, it allows the pro forma EBITDA adjustments. We're at 3x versus the credit agreement covenant of 4x at Q1. Based on the seasonality of the business and what I said before, Q2 will be seasonally low for us. I expect that the leverage ratio will likely creep up a little bit, and then it will start to come down slightly in Q3 and Q4. I expect, from a credit agreement calculated ratio including the pro forma EBITDA adjustments, it will be around 3.5x at year-end, again versus a leverage covenant of 4.25. I feel like we've got plenty of cushion there. We will be focused on margin restoration and bringing that leverage ratio down as quickly as possible.

Okay. That's helpful. And then maybe on the core business in China. You obviously saw some decent growth there. Can you just talk about the trends you're seeing in that business? Obviously, there have been a lot of questions about the potential impact of some of the various legislations over there. Maybe just kind of pull the curtain back a little bit on what you're seeing and then expectations as we work our way through the year in that region would be helpful?

Patrick, thank you for the question. Yes, China, we're very pleased with the results here in Q1, and credit to our team there. I appreciate all that they're doing. I think as we shared, China is a focus market for us; it's changing quickly, maturing quickly, with lots of different drivers there. In the end, our team is executing well across the portfolio. We are seeing increases in Point of Care placements, and the general part of the business is performing well. As you may recall, we have somewhat of a unique position in China where we're prominent in stat labs. This has not excluded us from things like BBP, but some major BBP efforts have not been in our warehouse. In fact, we participated throughout and have won in all rounds of BBP. While we've done well so far, we'll continue to keep an eye on that as well as some other challenges in China. I feel fortunate that we have a team on the ground that's very tuned in to those things. A positive aspect of our efforts and investments in China around localization and instrument manufacturing, as well as some R&D projects, are all starting to take shape. These are things that will help us as we go forward.

The next question is from the line of Casey Woodring with JPMorgan.

Welcome, Brian. So first, can you guys touch on customer conversations around Sofia ahead of next respiratory season? You placed a number of Sofia's under 2- to 3-year contracts during COVID. So those are likely in renewal negotiations now, I would imagine. So maybe just walk us through how you and your customers are both approaching that renewal process, especially with the headcount turnover in SG&A that you called out. And then as a follow-up to that, can you just talk about any expectation for a 510(k) submission for the Sofia combo test?

I'll take the first part, and then you can talk about the 510(k) submission. Casey, the first part of your question is around our base and what we are doing. Over a year ago, we put in a concerted effort to get back in front of our customers and reevaluate where they are on the contract status to be proactive in extending agreements. One of the data points Joe shared in the prepared remarks is that around 70% of customers are ordering more than one test. This shows the efforts of getting back in front of customers and not only maintaining the business we had but demonstrating what other tests they could put on that platform, which helps make this a bit more sticky. It creates more value for the customer, making us harder to displace. So I think we're in good shape. Going back a couple of years, there were several placements that were maybe COVID only, and as COVID waned, they went away. I believe we're seeing a more stabilized base now and one that we are trying to leverage for additional tests.

Casey, on the second part of your question, we anticipate being in trials during the '24, '25 season on the combo test. The next question is from the line of Patrick Donnelly with Citi.

Joe, maybe just on the leverage side and some of the covenant restructures you guys did. I think you bumped the number all the way up to 4.25, but the guidance here, I think it's for 3.5. So how do you think about just the trajectory on the leverage piece as we work our way through the year? Is that just the EBITDA moving around? Or just how do you think about the leverage progression and the debt load there?

Patrick, so again, I want to make sure and I know I said this on every earning call in the last several quarters, just to make sure everyone is clear that there's the financial statement leverage ratio that comes straight from the face of the financials and then there's the credit agreement leverage ratio that allows pro forma EBITDA savings to be included in the calculation. When you run that credit agreement calculation for Q1, it allows the pro forma EBITDA adjustments, we're at 3x versus the credit agreement covenant of 4x at Q1. Based on the seasonality of the business, I do expect that the leverage ratio will likely creep up a little bit and then it will start to come down slightly in Q3 and Q4. From a credit agreement calculated ratio including the pro forma EBITDA adjustments, I expect it to be around 3.5x by year-end, again, versus a leverage covenant of 4.25. I feel like we've got plenty of cushion there. We will be focused on margin restoration and bringing that leverage ratio down as quickly as possible.

That's helpful. And then maybe on the core business in China. You obviously saw some decent growth there. Can you just talk about the trends you're seeing in that business, obviously, there's been a lot of questions about the potential impact of some of the various legislations over there. Maybe just kind of pull the curve back a little bit on what you're seeing and then expectations as we work our way through the year in that region would be helpful?

Patrick, thank you for the question. Yes, China, we're pleased with the results in Q1, and I credit our team there for all that they're doing. I think as we shared, China is a focus market for us; it's changing quickly and maturing in different ways. That being said, our team is executing well across the portfolio. We are seeing increases in Point of Care placements, and the overall business is performing well. We have a unique position in China where we're prominent in stat labs. This has not excluded us from things like BBP, but several major BBP efforts really have not been in our warehouse. In fact, we participated throughout and have succeeded in all rounds of BBP. While we've performed well thus far, we will keep an eye on that as well as other challenges in China. I'm thankful that we have a team on the ground that is very attuned to these matters. Also noteworthy is that our efforts and investments in China around localization, instrument manufacturing, and some R&D projects are taking shape, which we believe will help us in the future.

The next question is from the line of Casey Woodring with JPMorgan.

Welcome, Brian. So first, can you guys touch on customer conversations around Sofia ahead of next respiratory season? You placed a number of Sofia's under 2- to 3-year contracts during COVID. So those are likely in renewal negotiations now, I would imagine. So maybe just walk us through how you and your customers are both approaching that renewal process, especially now with the headcount turnover in SG&A that you called out. And then as a follow-up to that, can you just talk about any expectation for a 510(k) submission for the Sofia combo test?

I'll take the first part, and then you can talk about the 510(k) submission. Casey, the first part of your question is around our base and what we are doing. Over a year ago, we put in a concerted effort to get back in front of our customers and reevaluate where they are on the contract status to be proactive in extending agreements. One of the data points Joe shared in the prepared remarks is that around 70% of customers are ordering more than one test. This shows the efforts of getting back in front of customers and not only maintaining the business we had but demonstrating what other tests they could put on that platform, which helps make this a bit more sticky. It creates more value for the customer, making us harder to displace. So I think we're in good shape. Going back a couple of years, there were several placements that were maybe COVID only, and as COVID waned, they went away. I believe we're seeing a more stabilized base now and one that we are trying to leverage for additional tests.

Yes, on the second part of your question, we anticipate being in trials during the '24, '25 season on the combo test.

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.