QuidelOrtho Corporation (NASDAQ:QDEL) Q4 2022 Earnings Call Transcript

QuidelOrtho Corporation (NASDAQ:QDEL) Q4 2022 Earnings Call Transcript February 15, 2023

Operator: 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?

Bryan Brokmeier: 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 — during this 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 of 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?

Doug Bryant: Thanks, Bryan. Good afternoon, everybody, and thanks for joining the call today. I am pleased with QuidelOrtho’s financial performance in the fourth quarter and for 2022 overall. Equally, I am pleased with the many productive things we got done in the quarter. Our accomplishments that I believe will set us up for continued productivity gains in 2023 and for meaningful revenue and margin growth for years to come. Today, I will highlight our financial performance briefly and I will talk about our key growth drivers, the programs that will create accelerated revenue growth and that will be instrumental in getting EBITDA back to over 30% of revenue. As reported, Fourth quarter revenue of $866.5 million increased by 36% over the prior year quarter.

Supplemental combined revenue for the full year was $4.1 billion. In the quarter and for the full year on a supplemental combined basis, revenue excluding COVID revenue grew 19% and 11%, respectively, versus the prior year periods, driven by strength in our Point-of-Care and Molecular Diagnostics businesses. In an early and pronounced respiratory season was marked by higher than typical influenza and respiratory syncytial virus prevalence rates. This was offset partially by weakness in clinical chemistry and immunoassay revenue in China due to the lockdowns there. Joe will talk more about China later, as well as our path to double-digit growth there for this year. By business unit, fourth quarter ex-COVID revenue in the Labs unit declined 10% versus the prior year.

If you were to normalize the Labs business unit for China and the lockdowns, Labs would be up mid-single digits. Transfusion Medicine was flat at 1% and Point-of-Care increased 138% and Molecular was up 45% from the prior year. From a regional perspective, all the regions were up or flat except China which was down again due to the lockdowns. Overall, the newly combined organization performed well. It was a solid quarter and a good back half of the year, which bodes well for an increasing revenue growth trajectory over the next few years. I think it’s important for investors and the broader market to recognize that I view QuidelOrtho as a growth company and we will continue to manage our business as such. We are a customer-driven company that is executing on over 100 active R&D and clinical and regulatory projects, with an expectation that we will be just as prolific in product development as we have been in the past.

The three key near-term growth drivers that we are acutely focused on in 2023 are our Sofia, Savanna and VITROS systems and product lines, with over 85,000 Sofia instruments installed worldwide. The Sofia franchise is a solid, durable and growing business. A review of our placements in the United States is informative and should be helpful to investors in understanding the longevity of the Sofia platform, as well as our longer term strategy to address an increasingly decentralized segment of the IVD market. In the U.S., over 77,000 Sofia instruments are on multiyear contracts, most of which include urgent care, excuse me, most of which include multiple products. Roughly 50% of Sofia’s are in the POL, 23% are in hospitals, 17% are in urgent care and 10% are in corporate accounts.

On average, POL sites have 2.7 Sofia instruments, hospitals have 7.5 and urgent care sites at 3.4. The number of U.S. Sofia customers is up 6% year-over-year to around 21,400. The number of POL customers is up 8%, hospital customers are up 2% and urgent care customers are up 9%, offset by long-term care customers, which were down 20%, understandably given the end to the Government’s COVID-19 Nursing Home Program. As a quick aside, the total number of customers purchasing our respiratory disease rapid antigen tests, including our QuickVue, is over 72,000 on a year and 12 — a trailing 12-month basis. Saying that we have a meaningful presence in the U.S. outpatient settings is an understatement. Importantly, 82% of 77,000 Sofia instruments run influenza and 70% run COVID, which explains the market share gain we have experienced over the last couple of years in the respiratory disease category.

And interestingly, only 8% of Sofia instruments run COVID only. Non-COVID ALK sales per instrument increased 57% at year-end on a trailing 12-month basis. The Sofia franchise with its huge installed base is clearly a valuable asset, one that can and should be leveraged by us to the greatest extent possible, which is why the R&D team is so focused on developing additional menu for our Sofia customers. The number of companies pursuing Point-of-Care molecular solutions that would potentially address the need for smaller syndromic panels is increasing, which further validates our efforts and strategy to bring Savanna to decentralized access points to healthcare. I am pleased to say that we are nearly there, nearly ready for an expanded global launch ahead of the next respiratory season.

Supply chain and instrument manufacturing issues that were a challenge for us are largely resolved and we now have the capacity to begin to ship the analyzers that we had anticipated all along. For cartridge manufacturer — manufacturing, we are in the process of increasing manual manufacturing lines, hiring additional staff and installing high volume automated lines that will produce millions of cartridges that will be required. The first two panels that we will launch our RVP4 in the HSV/VZV lesion panel. Beyond that, we expect to begin clinical trials for RVP11, STI, 2GI panels, bacterial, viral and the parasite panel, pharyngitis and vaginitis. We have purposely focused our initial menu on these areas to take advantage of Savanna’s unique features, faster turnaround time, test flexibility and lower total cost of ownership.

The largest of our franchises in terms of revenue representing close to 50% of our revenue is the Labs business unit and our VITRO’s clinical chemistry and immunoassay systems and slides, driven by increasing global demand for our integrated chemistry and immunoassay platforms and good commercial execution, we are experiencing a back order of around 650 instruments. While most of this is due to strong demand, there is also a supply chain component which we are addressing with our suppliers. Just as we did with Savanna, I am confident that we will collaborate with our suppliers to improve forecast visibility and to resolve supply chain challenges in 2023 and I expect that we will make significant progress as we move through the year. In other words, we expect to reduce the back order in 2023 by applying the same principles we have employed with Savanna to our VITROS platform.

In addition, we are installing two more automated slide manufacturing lines in Rochester to meet increasing slide demand. Another step we undertook in the fourth quarter was entering into a joint venture with Shanghai Runda Medical to develop and manufacture VITROs assays in China, which longer term we believe will translate into a faster time to market and more compelling menu for VITROS assays in support of our growth strategy in China. We also continue to progress our China instrument localization initiative. Internally, I speak often about excellent execution being a function of things done well at speed. Achieving speed requires focus, picking the two or three things that are going to matter and giving yourself permission not to focus too acutely on things that don’t matter as much, at least not currently.

In other words, first things first. In my mind, these three franchises matter. Our success with these three programs will create the greatest shareholder return in the next couple of years. It doesn’t mean that Transfusion Medicine isn’t important and that our development of a next-gen donor screening platform will be important in the longer term, because it is and it will. It doesn’t mean that leapfrog and quantitative assays at the Point-of-Care are important in the longer term, because they are. And it doesn’t mean that deploying our capital wisely isn’t important, because it is. But for me in 2023, these three businesses matter most and that’s where I am focused. 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 not be 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?

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Joe Busky: 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 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. And 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 moved 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 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. And 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 on slide nine. 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 Investment — 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 on slide 10. 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. And 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 receipt of regulatory clearance are 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.

And then 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, and 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%. And consistent with what we have 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.

And then finally, full year diluted weighted average share count of 67.2 million. So, 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. And 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.

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Q&A Session

Operator: The first question comes from the line of Andrew Brackmann of William Blair. Please proceed.

Andrew Brackmann: 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, I think, 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.

Doug Bryant: 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.

Andrew Brackmann: 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.

Joe Busky: 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 latest 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 a 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.

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

Andrew Brackmann: Okay. Thanks, guys.

Joe Busky: Thanks.

Doug Bryant: Thanks, Andrew.

Operator: Thank you. The next question comes from the line of Andrew Cooper of Raymond James. Please proceed.

Andrew Cooper: 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?

Doug Bryant: Yeah. Hey, Andrew. We did go — the $300 million to $500 million is still our range. So that’s consistent and we can talk about the government contracts. But that’s — we are not treating that as normal and usual.

Joe Busky: 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.

Doug Bryant: Yeah.

Joe Busky: So that’s — there’s no change there.

Doug Bryant: Yeah. That’s what I was trying to say.

Joe Busky: And there’s no change in what we have defined as a normal flu season either the $230 million to $270 million, which is the same guidance we gave for 2022. We are back to that what we are calling a normal flu season. That’s — and that’s inherent in this 2023 guidance.

Doug Bryant: Yeah.

Andrew Cooper: Okay. Perfect. That’s helpful.

Doug Bryant: Do you want to talk about total respiratory as well?

Joe Busky: 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

Doug Bryant:

Joe Busky: strep

Doug Bryant: Yeah.

Joe Busky: in the $80 million to $105 million range.

Doug Bryant: So those are the three pieces.

Joe Busky: Exactly.

Andrew Cooper: Perfect. I had a rare adult footing strip right now. I appreciate that piece of the business. Maybe just next on some of the OUS business, specifically in Labs, can you give us a sense for sizing of — you mentioned the EMEA tender impact versus supply chain kind of dynamics versus the China just lockdowns and give us a sense for as those lift, how big each of those could contribute from a growth perspective?

Joe Busky: Well, I can start and then Doug you can add any color. For EMEA, I wouldn’t — Andrew, I wouldn’t say that the tenders timing was significant. It was really more tender timing in — from 2021 into 2022 Q4 that’s causing the issue with the growth rate in Q4 of 2022. So I fully expect that we are going to get EMEA into the low single-digit growth range, which is where it was in 2022 as well. So there’s really no — nothing new there. We still expect EMEA to be in the low single-digit growth range in 2023. In China, it was a really difficult quarter, no doubt for China. But when you look at the outpatient — the decline in outpatient visits in the overall market, our number, it makes sense.

Doug Bryant: The number of patients was down

Joe Busky: Yeah.

Doug Bryant: 25%, so it pretty much mirrors what happening

Joe Busky: Yeah.

Doug Bryant: And it’s not different than what we see from other companies in that country as well.

Joe Busky: Correct. And we have seen — since things have opened up, we are seeing flow through on our boxes increased nicely and so we do have a lot of confidence in the double-digit growth in 2023 for China, as I mentioned.

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

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

Doug Bryant: Okay.

Joe Busky: You bet.

Doug Bryant: Thanks, Andrew.

Operator: Thank you. The next question comes from Patrick Donnelly of Citi. Please proceed.

Patrick Donnelly: Hey, guys. Thank you for taking the questions.

Doug Bryant: Sure.

Patrick Donnelly: 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?

Joe Busky: Hey, Patrick. Yeah. I think it is a pretty fair jumping all point, because if you go back to the point we just made on COVID, there’s really no change there with that endemic level of annual revenue being it’s $200 million to $400 million. And you are right, it’s up another $100 million in 2023 guide because of those government orders, which again, look, as you said, doesn’t carry a super significant amount of margin. So I do think it’s a good jumping off point. And so the midpoint of our EBITDA margin guide is at 28%, which is what we talked about at the Investor Day in December. It’s right in the middle of that 27% to 29% range that we gave. So we do feel pretty good about that. But going back to Doug’s comments, there is a goal to get it up to 30% the EBITDA margin, no doubt. And we know how to get there, it’s going to get — we are going to get there through greater revenue growth and we are going to get there through overachievement on synergies.

Patrick Donnelly: 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?

Doug Bryant: Yeah. Thanks for that question, Patrick. I think it will help us clarify just we are at. We are still expecting RVP for EUA in April and the 510(k) will be just shortly after that. So we are very much on track for the launch. As I said, the instrument build issues have been largely resolved, we think we are already at the capacity to have a meaningful launch and we are at the point where we are most of the effort right now is around cartridge ramp up. So we have got manual lines that we are — that we have in place. Obviously, we think we can make the immediate demand in Europe. There we are doubling down on the mainline potentially depending on the timing of the automated line, but we expect to have the ability to make millions of cartridges very surely.

So I think we are in good shape. It’s been a while. So I am anxious to see how well we do. And I would say at our kickoff meeting in the United States, and we are hearing a lot of hi-ho and a lot of cross-selling. It’s been effective. Mostly, the other way at this point, because we are talking about VITROS chemistry instruments and immunoassay analyzers. But I am encouraged with the cooperation, the collegiality of the group. I like the attitude. I like the can-do attitude. The training here is going extremely well and so I think we are in good shape. It’s not just about making product, it’s also about commercializing.

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

Doug Bryant: Thanks, Patrick.

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

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

Doug Bryant: Hi.

Conor McNamara: Just getting back to regulatory business, if you…

Doug Bryant: Hi, Conor. Sorry, Conor. Please go ahead.

Conor McNamara: Can you guys hear me — can you guys hear me okay?

Doug Bryant: Absolutely. Yeah. Absolutely. Thank you, Conor.

Conor McNamara: 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?

Doug Bryant: Yeah. Go ahead, Joe.

Joe Busky: 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.

Conor McNamara: Got it. That makes sense. And then just — Doug, you just mentioned some of the cross-selling excitement and without Savanna, what are some of the areas of success that you have seen some of the reps have cross-sell and what are they really excited about? Thanks.

Doug Bryant: Right now mainly in the U.S. at least, mainly the former Quidel people taking the Ortho people into accounts and they have — we have got a number of close is spending that’s encouraging. Ex-U.S., we are a little bit surprised by the enthusiasm for the Triage platform and the opportunity there with our cardiovascular assays. And I think it would be fair to say that we have been reasonably successful in a limited launch in Europe with Savanna, too.

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

Doug Bryant: Yeah. Thanks, Conor.

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

Eliza Garcia: Hey, guys. Thanks so much for squeezing me in here. Really appreciate it. So I appreciate there are kind of some moving parts in the Lab business and the open — the 600 open order that I think you have kind of given it could add incremental 2% to the topline if you were to kind of fill those orders. So I guess if you could maybe provide even like guideposts on how to think about what’s layered into the guidance or just an upside downside case kind of in the resolution of this, how quickly it could be or is there any capacity constraint in how to think about it?

Doug Bryant: Well, I think, it would be fair to say that have increasing visibility to the supply chain necessary to manufacture the instruments and it wasn’t by eliminating the entire back order that we got to the 2-point improvement in growth. It was to get it down to somewhere around $150 million or so

Joe Busky: Which was a normal level

Doug Bryant: which would be normal level if we would exit it typical year at about $150 million. So just to be clear, we are not — we are talking about probably an increasing close rate with boxes, which naturally would create a more back order. But we are pretty confident that we can observe the additional instruments as well and get back to a normal exit rate in 2023. But that’s not going to happen immediately either. We are improving and we have a little bit of encouraging news for the first quarter, but it’s not at the level quite yet that we are needing to be at. I hope that’s clear. Joe, do you want to add something?

Joe Busky: 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 into 2024 to drill that all the way down to where we want it to be.

Eliza Garcia: Okay. Super helpful. And I guess just, A, could you confirm kind of, I think, you had said $350 million for flu, if that was — if that’s how the year shook out to 2022? And then you have been kind of pointing back to the TriageTrue opportunity OUS. How should we think about the high sensitive troponin test and kind of any updates around potentially in the U.S. as well to launch there?

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

Joe Busky: In 2022.

Doug Bryant: In 2022.

Joe Busky: That’s correct.

Doug Bryant: Is that what she said?

Joe Busky: Yeah.

Doug Bryant: She stated that correctly.

Joe Busky: Yeah.

Doug Bryant: And then the second piece?

Joe Busky: TriageTrue

Doug Bryant: Oh! Eliza.

Joe Busky: and troponin.

Doug Bryant: Sorry. Sorry, that — actually I missed that. Yeah. We are at the point where we are working with the FDA to determine next steps with respect to that submission. And once we get through those conversations, we will be prepared to disclose where we are at. But right now, we are still working with the FDA.

Joe Busky: But we are selling in Europe under CE.

Doug Bryant: CE. Yeah. Two questions. Let’s be clear. Eliza, are you asking about Triage? Are you asking about on the VITROS system?

Joe Busky: Triage.

Eliza Garcia: Triage.

Doug Bryant: Are you asking — okay. Perfect. Perfect. Yeah. We are currently. And in fact, we are in the process of setting up an automated manufacturing line for the high sense troponin on the Triage. And we fully expect that the yields will be better, that 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.

Eliza Garcia: Great. Thanks so much guys for taking all my questions.

Joe Busky: Thank you.

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

Alex Nowak: 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?

Doug Bryant: Well, it is due to share gain, because you remember that we placed a significant number. We were in the year that you are talking about, I think, our total installed base in the U.S. was under 40,000. Globally we — I think we were at 42,000. And we are now 77,000 instruments in the United States, 21,400 customers. That’s up 6% over the prior trailing 12-month period. So, yeah, if we have an expectation that we will have pull-through on the product, but that’s that shows up in RSV and strep, as Joe mentioned. So I think it’s a pretty reasonable estimate for the time being. I sense that you are challenging us a little bit and thinking it could be higher, that’s possible. But I think we are — I think we have a peg right for the moment.

Alex Nowak: 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 onetime items in there, so your recurring free cash flow numbers 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?

Joe Busky: Yeah. The quarter free cash flow — recurring free cash flow that was $169 million of operating cash, less $59 million of CapEx and then you lay on add back, if you will, $25 million of one-time or non-recurring and that gets you to $135 million for the quarter, which is 55% of our adjusted EBITDA and looking forward into the guidance, we expect to be in that same range for 2023, call it, the low end of the range of 50% to 65%, so somewhere in that 55% range makes sense for next year — for this year I should say.

Alex Nowak: Okay. So expect that for next year?

Joe Busky: Yeah. That’s right.

Alex Nowak: Okay. Got it. Thank you.

Doug Bryant: Sure.

Joe Busky: Thank you.

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

Jack Meehan: 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.

Joe Busky: 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’s 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.

Doug Bryant: Yeah. Let me just add a little color, because Jack asked about the Virena data and most of the audience doesn’t have access to it. When I look at the chart, I see pretty drastic drop off in positivity rates, but the positivity rates are still higher than they now really would be at this time. So — but to be fair, it did peak, what, the second week in December.

Joe Busky: Yeah.

Doug Bryant: 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

Joe Busky: Right.

Doug Bryant: biggest quarter in the year, I will leave with that.

Jack Meehan: Got it. And then I think Joe and you, Doug, both kind of referenced China to down 27% ex-COVID. Is — how much of this was in the core Lab business versus Transfusion Medicine or legacy Quidel and just what do you expect for the region in the first quarter?

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

Joe Busky: Everything was down.

Doug Bryant: down.

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

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

Joe Busky: It will be up. It will be up.

Jack Meehan: 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?

Joe Busky: 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.

Jack Meehan: Okay. Thanks, Joe.

Joe Busky: You got it.

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

Casey Woodring: 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?

Doug Bryant: Yeah. We are still hanging our price wise. We expect flat price.

Casey Woodring: 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

Doug Bryant: Yeah.

Casey Woodring: 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?

Doug Bryant: 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 the — 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.

Casey Woodring: Got it. That’s helpful. Thank you.

Doug Bryant: Sure. Thank you, Casey. All right.

Operator: Thank you.

Doug Bryant: I think that’s all for the questions. I want to thank everybody for your great questions actually, and in closing, thanks for — 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 a great success from 2023 onward. So, thanks, everybody.

Operator: That conclude — thank you for your participation. That concludes the conference call. You may now disconnect your lines.