Welcome to the Quinelle Ortho first quarter 2025 financial results conference call and webcast. At this time, all participant lines are in listen mode only. For those of you participating in the conference call, there will be an opportunity for questions at the end of the prepared remarks. Please note this conference call is being recorded. An audio replay for 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 afternoon everyone and

thanks for joining the quite out ortho first quarter 2025 financial results conference call joining me today are brian blazer president and chief executive officer and joe busky chief financial officer this conference call is being simultaneously webcast on the investor relations page of our website. To aid in the presentation, we also posted supplemental information on the investor relations page that will be referenced throughout this call. This conference call and supplemental information contain forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995. Statements that are not strictly historical, including the company's expectations, plans, financial guidance, future performance, and prospects are forward-looking statements that are subject to certain risks, uncertainties, assumptions, and other factors. This includes the expected impact of tariffs and macroeconomic conditions. Actual results may vary materially from those expressed or applied 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 2024 fiscal year and subsequent reports filed with the SEC including the risk factors section. Forward-looking statements are made as of today, May 7, 2025, and we assume no obligation to update any forward-looking statement except as required by law. In addition, today's call includes discussion of certain non-GAAP financial measures. Tables reconciling these non-GAAP measures to their most directly comparable GAAP measures are available in our earnings release and the supplemental information, which are on the Investor Relations page of our website at quitealortho.com. Lastly, unless stated otherwise, all year-over-year revenue growth rates given on today's fall are on a constant currency basis. Now I'd like to turn the call over to our CEO, Brian Blazer.

Thanks, Juliet, and good afternoon, everyone. As I reflect on my first anniversary since joining the company, I first want to thank all our employees and our leadership team for their unwavering support as we implemented difficult but necessary changes to our business over the last year. Together, we refocused the organization on a narrow set of priorities and set in motion key initiatives to improve our performance and our cost structure. Our business faced unique challenges and increasingly dynamic environment. The organization came together around our common mission with our customers at the center of everything we do. The team's efforts played a critical role in the strong results we delivered in Q1, reinforcing my confidence in our strategy and operational discipline. Let me start by taking a closer look at our first quarter results, followed by my thoughts on the evolving tariff situation. During Q1, we delivered solid mid-single-digit revenue growth of 6%, excluding COVID and donor screening. This performance was primarily driven by our labs business, as well as stable growth in immunohematology and a strong flu season. We also recognized cost savings from our previously announced initiatives that drove a 450 basis point year-over-year improvement in adjusted EBITDA margin and a 68% increase in adjusted diluted earnings per share compared to the prior year period from a business unit perspective our labs business which was 54 of total company revenue in q1 achieved revenue growth of seven percent with strength in both clinical chemistry and immunoassay testing our immunohematology business continued its global leadership position and consistent trajectory with four percent growth during the quarter Our point-of-care business represented 25% of our Q1 revenue and grew 8%, excluding COVID. Q1 COVID testing was down compared to the prior year period, but flu sales were strong, resulting in 18% year-over-year growth. This performance was led by our COVID flu combo tests, which has continued to deliver durable revenue. And our molecular diagnostics business grew 11 percent, excluding COVID, albeit off a smaller revenue base. We are currently in the last stages of the clinical trial for our Savannah respiratory panel and are completing verification and validation testing. Once our trial data has been fully successfully finalized, we expect to make our submission to the FDA this summer. Our Q1 performance is further proof that the initiatives we launched in 2024 are having a positive impact on the performance of the business. As we look forward to the balance of 2025, we continue to be focused on our narrow set of strategic initiatives, including increasing the content and utility of our platforms, expanding margins, and commercial and operational execution. Our commercial teams are more focused than ever before on driving profitable growth by targeting the most attractive customers of market segments where we can drive value with our unique solutions. And we are on track to realize the remainder of the $100 million in annualized cost savings we defined in 2024, with $50 million in cost savings expected in the first half of 2025. And while much of our work last year was focused on staffing reductions, we have expanded our efforts to improve cash flow generation with initiatives targeting direct and indirect procurement inventory utilization capital expense management and optimization of our cash conversion cycle we expect these initiatives to yield an incremental 30 to 50 million in cost savings in 2025. i'd now like to turn to the evolving developments at the macro level including the expected impact on our business and the actions we're taking to address these challenges Obviously, this is a very dynamic situation, so my comments reflect our assessment based on current information. Our business is based on a recurring revenue model, with more than 90% of our sales coming from consumables, and a small percentage coming from instrument placements. The majority of our manufacturing is based in the United States, and over the past three years we have have invested nearly a billion dollars in u.s based manufacturing and r d over half our employees are based in the u.s and over the next several years we expect to continue to invest and expand our capabilities to support the growth of our business both domestically and globally we also have company and third-party manufacturing located in the uk china europe in mexico these locations further our strategy of being close to our important customers as well as reinforcing our business continuity objectives with our global operating footprint we estimate the potential tariff headwinds prior to mitigations is roughly 30 to 40 million dollars of impact in 2025. but since the discussion of tariffs began in 2024 we have been diligently working on plans to mitigate potential impacts. These plans include changing the origin of source materials, repositioning inventory, shifting our supply chain to alternate suppliers, as well as implementing select pricing actions and additional reductions to our controllable costs. Collectively, we believe the incremental actions we are taking are sufficient to fully offset the tariff impacts as they stand today and while the environment can always change we are maintaining our full year 2025 financial guidance based on our current business outlook we remain focused on our key priorities and achieving our previously communicated cost savings initiatives over and above any tariff related offsets so to wrap up we are pleased with the strength of our first quarter results and the progress we have made in our key priorities over the last 12 months we remain focused on supporting our customers and believe we are well positioned to continue to drive consistent growth while also expanding our profitability and value for shareholders in 2025 and beyond so thank you for your time and continued support and with that i'll now turn the call over to joe to take you through our first quarter financials in more detail joe okay thanks brian and hello everyone

i'll start by walking through our first quarter results which are detailed on slide three of the supplemental information available on the investor relations page of our website and unless otherwise noted all year-over-year revenue growth figures discussed today are presented on a constant currency basis as brian noted our first quarter performance was in line with our expectations and we anticipate continued momentum through the rest of 2020 2025 particularly with our labs business where we see strong recurring revenue with long contracts and a loyal customer base Let me begin by taking you through our first quarter performance, followed by a discussion of our full year 2025 financial guidance, which remains unchanged. After that, we'll open up the call for questions. Total reporting revenue for the first quarter of 2025 was $693 million compared to $711 million in the prior year period. The year-over-year decrease in total revenue was primarily due to lower COVID revenue and lower donor screening revenue related to the planned wind-down of that business. Excluding COVID and donor screening revenue, we achieved mid-single-digit revenue growth of 6%. This performance was primarily driven by strength in our lab's business, as well as consistent growth in immunohematology and the strong flu season. Foreign currency translation had an unfavorable impact of 150 basis points. From a regional perspective, our Q1 revenue performance was led by our other region, which is comprised of Japan, Asia-Pac, and Latin America, with 12% growth, driven by strong 17% growth in labs revenue. And looking at our other regions, North America declined by 6% compared to the prior year period due to the year-over-year decrease in COVID revenue and the ongoing wind-down of our donor screening business. But absent these headwinds, North America grew by 5%. Europe, Middle East, and Africa grew 9%, driven by strong contribution from labs and immunohematology. Finally, China revenue was flat compared to the prior year period, primarily related to order timing and a decrease in triage revenue related to lower reimbursement rates for certain cardiac markers. Labs revenue in China grew 2% with strong contribution from clin chemistry testing. We continue to expect mid to high single digit growth in China for the full year, assuming no change in the current tariff situation. Business in the first quarter of 25, revenue grew 2%. Now, within that non-respiratory category, our lab's business grew 7%, driven by good performance in both clean chemistry and immunoassay testing. We had strong recurring revenue growth, which was partially offset by an approximately $8 million decline in instrument revenue due to order timing. Non-core revenue was flat year over year, with an increase in collaboration revenue offset by a timing of contract manufacturing revenue. In transfusion medicine, immunohematology revenue continued its consistent growth of 4% with particular strength in Europe, Middle East, and Africa. Toner screening revenue declined by 62% due to the continued wind down of that business as expected. And then lastly, our triad business performed nice. Turning now to our respiratory business, revenue of $120 million grew 11% excluding COVID. We saw strong flu sales in Q1 with year-over-year growth of 18%. COVID revenue was $23 million during the quarter, which was a 53% year-over-year decline. Moving down the P&L, Q125 adjusted gross profit margin was 50.1% versus 47.5% in the prior year period. The year-over-year increase was primarily driven by product mix with higher margin contribution from flu and COVID flu combo test. Non-GAAP operating expenses of $233 million, including SG&A and R&D, decreased by net $18 million compared to the prior year period, which resulted primarily from our ongoing cost savings actions. The primary areas of savings included staffing reductions, decreased travel, and lower outside services expense. Adjusted EBITDA was $160 million compared to $132 million in the prior year period. Adjusted EBITDA margin was 23%, a 450 basis point improvement, which again reflects the cost savings actions we have taken. EPS was $0.74 compared to $0.44 in the prior year period, which is a 68% year-over-year improvement. Turning now to the balance sheet on slide 5, we finished the quarter with $127 million in cash and $250 million in borrowings on our $800 million revolving credit facility. Reminder, our capital allocation priority continues to be debt paydown. For 25, adjusted free cash flow was $47 million, which represents 29% of our adjusted EBITDA and 94% of adjusted net income in the quarter. This is in line with our previously communicated targets. Our net debt to adjusted EBITDA ratio decreased sequentially from 4.4 times at year 924 to 4.2 times. our consolidated leverage ratio including pro forma ebitda adjustments was 3.4 times as permitted and defined under our credit agreement now turning to slide six based on our current business outlook we are maintaining our full year 2025 financial guidance as follows we expect gross tariff impacts of 30 to 40 million to be neutral to our overall financial results based on the expected mitigation plans that Brian discussed earlier. We continue to expect full year 2025 total reported revenue of between $2.6 billion and $2.81 billion. Note that the U.S. dollar has weakened since year-end 2024, creating an opportunity for FX tailwinds of approximately $26 million. However, we are leaving total reported revenue guidance unchanged at this time due to current currency volatility. We continue to expect COVID revenue of between $110 million to $140 million. This assumes that we see a summer slag of COVID activity as we've seen in the past two years. Of course, we will monitor this closely and we'll look to mitigate any impact with further cost reductions if the seasonal cases don't materialize as expected. We expect adjusted EBITDA between $575 and $615 million, which equates to 22% adjusted EBITDA margin. which is a 250 basis point improvement over full year 24. And we expect adjusted diluted EPS of between $2.07 and $2.57. Other key points related to our assumptions for full year 25 guidance include, we assume a typical quarterly seasonality with Q2 revenue being our lowest quarter, Q4 being our highest quarter for revenue and margins. And further, we expect Q2 performance in China to be lower compared to the prior year period due to our decision to delay some shipments early in this quarter as the tariff situation evolved. Since then, regular shipments to China have resumed, and we do not expect any impact on our full year 2025 guidance. Again, this is timing only between Q2 and second half 2025. 25. We assume cost savings of approximately 50 million in the first half of 25 is part of our previously implemented 100 million of annualized cost savings initiatives. We continue to expect incremental cost savings in 25 between 30 to 50 million primarily related to procurement efforts. And again, this is in addition to any tariff related offsets. We assume positive adjusted free cash flow for the full year 25 to be approximately 25 to 30% of adjusted EBITDA conversion, and approximately 100% of adjusted net income. Cash flow in the second half of 25, which is in line with the seasonally higher revenue and the realization of our cost savings. Can we continue to target free cash flow conversion of 50% of adjusted EBITDA on the same timeline as our margin improvements? We also continue to expect our net debt leverage ratio to between three and a half and four times by year end. And since our credit facility matures in May of 2027, we plan to refinance the debt sometime in the second half of 2025 or early 26. Timing of this refinancing, of course, depends upon market conditions. Our continued operational improvements played a meaningful role in our performance this quarter. or actively navigating a fluid macro environment and believe our current business outlook is in lockstep with our 2025 full-year financial guidance. Looking ahead, we remain focused on execution, commercial excellence, and cost savings initiatives to deliver profitable growth. And despite recent macro challenges and the impact of tariffs, we continue to see a clear pathway to our justity but odd margin goal in the mid to high 20% range over the next couple of years. With that, I'll ask the operator to please open up the line for questions.

If you'd like to ask a question, it is star 1 on your telephone keypad. If for any reason you'd like to remove that question, it is star followed by 2. Again, to ask a question, it is star 1. Our first question is from Connor McNamara with RBC. Your line is now open.

Hey, guys. Thanks for taking the question, and congrats on a solid quarter. Just wanted to dig into the tariff impact a little bit more. Can you, you know, you've got a lot of businesses on reagent rental contracts, so to the extent that you're able to pass through pricing, how much of the tariffs can you offset with that if they are to get worse?

Hey, Connor, thanks for the question. Yeah, you know, we are looking at selected pricing actions where we can take them. But, you know, these are competitive markets and we have to be concerned about the impact there. I would say the business has had some experience in doing this during the pandemic when the business went through some, you know, the high inflation time period, and we were able to pass some of that through. So I think we'll be doing it on a selective basis as we can.

Great. Thanks for that. and then um again appreciate the color on on plans for mitigating some of the tariff uh impacts but longer term where it will this is this likely to impact any of your longer term um manufacturing

build out plans uh by region uh at this point i i don't expect uh any change in our overall manufacturing footprint obviously it's a fluid situation so we we need to understand how things develop um you know we have as we said major manufacturing centers in the united states uh uk uh china and some um uh third-party manufacturing in mexico those sources and and that global footprint has served us well uh you know as we tried to get closer to our customers and also manage some of our supply continuity risk so we'll um we'll continue to utilize that network and, as we always do, make modifications as we see the dynamics change here.

Our next question is from Patrick Donnelly with Citi. Your line is now open.

Hey, guys. Thank you for taking the questions. Joe, maybe another one just on the tariff side, again, encouraging to see the offsets here. Can you just talk about the exposures, obviously, the China to US or US to China piece, I should say, was a big concern coming in. How are you thinking about you know just quantifying that and again you know how the offsets the confidence level that you guys can can get there um again i think maintaining the guidelines was a good

outcome here hey patrick uh thanks for the question yeah um you know as we said in the remarks most of our products are actually manufactured in the u.s and so our largest tariff impacts are immunoassay products that are manufactured in the uk and shipped to the u.s We also ship products to China, but we're only seeing that a small portion of these are being subject to tariffs. And then finally, I would say we have some impact of some subcomponent materials that are purchased around the world that are being surcharged as we come in. So that is what makes up the gross $30 to $40 million tariff impact that we just mentioned. that, again, is fully mitigated through, you know, identifying incremental controllable costs that we can take down as well as passing on where it's appropriate some of these tariffs to our customers and moving, realigning inventories and changing suppliers. So, you know, through all those actions that we feel really comfortable with and confident in, because we've identified them all and we've implemented them all, that we feel we can fully mitigate the tariff impacts and leave our financial guidance as is.

That's helpful. And then maybe just on Savannah, you know, just an update there, I guess the commitment, the ongoing commitment to that program, how are you thinking about that piece? You know, if there are additional pushouts, you guys walk away from it, what's the right way to think about just the commitment level and the confidence in some of those timelines and what should we be keeping an eye on that piece? Thank you, guys.

Yeah, thanks, Patrick. Rick, what I can say at this point is really we are just so focused on getting our RVP4X submission into the FDA that I really don't want to speculate on outcomes beyond that. Molecular continues to be one of the fastest growing segments in diagnostics. We want to participate in that and benefit from that. We're just laser focused on getting the job done here. And, you know, we'll update you accordingly as we make our progress.

Our next question is from Andrew Breckman with William Blair.

Your line is now open. Thanks for taking the questions. Joe, I think in the assumptions you said that China is still expecting to grow mid to high single digits for the year. What sort of underpins your confidence in that growth rate? And is there anything that you can share with respect to maybe what you've seen in the region in April which supports that thing?

Yeah. Hey, Andrew. again thanks for the question you know we even though we're seeing some softness in the triage sales due to the reimbursement rates on certain cardiac markers we are seeing good growth in labs and immunohematology and as you know those businesses have good visibility to going forward so you know that's really what gives us the confidence that that our china team can hit that mid to high single digit growth target for the full year. And again, you know, as we've said many times, the BBB is not really having an impact on us as it is with others in our space. And so, you know, that's not really a concern for us right now. So it's just really the visibility to that non-respiratory business that we have in China that gives us the confidence that we can

still hit those numbers. I appreciate that. And then maybe just a clarification to your answer to Patrick's question. I think you said only a small percentage of products being shipped to China are subject to tariffs right now. Are those exemptions that are specifically called out or any color on why you're not seeing those be subject to tariffs? Thank you. Yeah, really,

all we can say at this point is that with all of the shipments that have gone into the country over the last couple of weeks since the tariffs went into effect, we're really just seeing a small number of those uh being subjected to the tariffs in in practicality okay i got it thank

you our next question is from jack mehan with nephron research your line is now open thank you

good afternoon i wanted to start by asking about the respiratory sales in the quarter so you hit our forecast but got there in a way wasn't exactly expecting less covid more flu combo So, Brian, I was curious, do you think we're seeing some sort of permanent shift here toward Combo slash Sophia? And maybe for Joe, like, what are the implications for the guide? Like, if COVID came down, like, do you think you can make up for it kind of on the other respiratory piece?

Yeah, well, hi, Jack. Thanks for the question. You know, we did see COVID down year over year, you know, and flu is up. You know, I think we're still expecting that 110 to 140 million range that we provided in the guidance, which includes the summer spike that's happened for the last couple of years. So we'll be monitoring that very carefully to see, you know, what happens here. But, you know, I would say on the on the COVID flu question, that test has just been very durable now for the last couple of years. And we've just seen, you know, very stable performance from it.

Yeah. And Jack, I would just add to what Brian said, even though we did see COVID come down in the quarter year over year, you know, we did expect COVID to be less this year. You know, we took it down from 185 down to a midpoint of 125, and most of that decline was due to the lack of a government order fulfillment this year versus last year, and then a decline in retail. But, you know, so we expected a decline, and we still think that our range is a reasonable place to be for the full year. But as I said in the prepared remarks, we'll obviously keep a close eye on it as we move through the year.

Got it. Okay. And I did want to follow up on Patrick's question related to Savannah. It sounds like the trial might be wrapping up. I was curious if you've seen any of the data. Was it a success? And if it's too early for that, I was also curious with how the engagement's been with the FDA around submission. There's been some discussion around kind of turnover in the approval office. I was curious if you've seen any of that and just thoughts on if that could delay the

approval at all. Yeah, no, we're just, Jack, in the last stages of our process here before submission, you know, doing some of our studies around reproducibility, shelf life, etc. We need to get those completed. We really haven't seen any sort of negative impact in terms of our interactions with with fda uh we are hearing things in the industry that um pre-submission uh meetings are are taking a while while are being delayed but nothing that that is affecting the submission process itself that's obviously something we're going to you know have our finger on very carefully here as as we go through the process but um you know that's really what i can share at this point about where we're at in the process appreciate all the feedback thank you

The next question is from Lou Lee with UBS. Your line is now open.

Thank you for taking my questions. So on the mitigation effort, are we going to see some timing impact here? Like maybe some of the mitigation impact are not going to show up in Q2 and then more in the second half. I was just wondering how the margin progression on this one.

Yeah, hey, Lou, it's Joe. Yeah, I don't think there's going to be a lot of timing impact because I think we've got the mitigation actions pretty well paired up with the impacts of the tariffs, the gross impact of the tariffs. So I don't think there's any real timing impact there to speak of, maybe a little bit, but nothing significant. I do think that the only real timing impact is going to be in Q2, because we did slow down shipments to China early this quarter as we waited for the tariff situation to evolve. And we're doing our best to catch up on those shipments, but I don't think we're going to fully catch up. And I think, so I do think there'll be, you know, we'll see some softness in China, revenue in Q2 that will make up as timing in Q3 and Q4. I think that's really the only timing impact that we'll see from the tariffs.

Okay, got it. And then I assume that the 30 to 40 growth impact is mostly 2025 numbers. So I wonder if anything will linger into 26, and then are you maintaining your 23% to 24% EBITDA margin that you presented a few months ago?

Yeah, Lou, good question. Yeah, the numbers that we talked about, the 30 to 40 million, that is a 2025 impact number. So, you know, obviously the annualized impact would be a little larger than that. But the tariff impacts, the mitigation impacts, I should say, that we talked to will fully offset the annualized impacts as well. And so there's no change to our margin targets and where we expect to be for 2026. No change.

Thank you.

Our next question is from Casey Woodring with J.P. Morgan. Your line is now open.

Great. Thank you for taking my questions. I'll just stick to one. Can you just elaborate on the shipments into China and only a small percentage of those subject to tariffs right now? Why is that exactly? And what's your visibility into that continuing? And is there any kind of risk that a larger percentage would eventually get hit with tariffs here? Just kind of curious on that piece. Thank you.

Hi, Casey. Thank you for the question. Again, I can really only say that our experience here over the last several weeks in what has been a very fluid situation is that we aren't experiencing the tariffs on the bulk of our products going in. It's just a small subset where we're seeing that. And we'll look to understand if that changes, but it looks like that's going to be the case

for a while. There's no indication that it's not the case at this point, that it's not

it's going to be permanent our next question is from andrew cooper with raymond james

your line is now open thanks for the question um maybe first just if i think back to a couple years ago visiting the rochester ended some ia manufacturing capacity if i remember right with covet grants there can you just give us a sense what are you able to to manufacture in the u.s for immunoassay versus relying on that whales facility to support this country's utilization

there? Yeah, we do have some immunoassay manufacturing capacity in our Rochester facility, but the bulk of it is in the UK at this point. And then maybe just to touch on China again

as well. You called out the 2% growth and called out clinical chemistry, especially. I know IA has historically been smaller for you in China, but any change in win rates there across, you know, clinical chemistry versus IA? And then maybe can you give us a sense for the penetration of integrated instruments in China versus globally? Well, Andrew, we can start with the penetration

of integrated instruments that, you know, our business there is primarily clinical chemistry. So, you know, most of what we have there are standalone ClinChem boxes. And so we've got plenty of runway to expand our immunoassay presence there. And, you know, in terms of the results that we saw in the quarter, you know, our growth rate there was primarily impacted uh by triage um you know we did see lower clinical chemistry growth but i would say that some of that is kind of shift across the quarters and and i wouldn't read too much into that okay a lot's

been covered i'll stop there i appreciate it our next question is from tideshow peterson with

jeffrey's airline is now open hey uh thanks wondering if you can maybe just talk a little bit more on um you know some of the strengths you're seeing on on core lab and any noticeable change you know among your hospital customers given some of the funding uncertainty said

yeah you know uh taika uh thank you appreciate the question um you know we we really saw across the board um you know strong performance uh in labs uh you know seven percent overall growth uh and then you look across you know north america emia our latam uh area all all reporting you know pretty strong growth there in the lab segment. You know, we can continue to have a very strong value proposition in the lower volume setting where customers value, you know, our technology value proposition with the dry slides, as well as our immunoassay capabilities. So, you know, strong growth in Q1, no real significant competitive headwinds at this point. and we continue to, you know, really just drive our value proposition there to continue to drive

growth. And maybe a follow-up on that, you know, on the competitive front, you know, others have tried mass spec and not had much success. Roche is obviously, you know, going to try to go at this, I think, with 50 analytes at first, but they've talked about scaling up to thousands. Maybe, can you just touch on how you view mass spec, you know, as a competitive technology going forward?

yeah you know i i saw the the launch of of their new product um it's really focused on a testing segment that uh is not mainstream and not you know in our um sort of you know central area of of you know competition so it's not something that we're overly concerned about it seems to have a specialty utilization. I do know they have aspirations for it, but I think it's going to take some time for them, you know, to provide an alternative there that really competes with kind of mainstream core laboratory technology at this point. Okay, thank you. We have no more questions

waiting at this time, so I'll pass the call back over to Brian Blazer. Well, thank you, operator,

and thanks everyone for your interest in the company. We're very pleased with our first quarter results. We are going to keep focused on our key priorities and we look forward to updating you on our progress in the coming quarters. So thank you very much.