QuidelOrtho Corp (QDEL) 2022 Q2 法說會逐字稿

Welcome to the QuidelOrtho Second Quarter 2022 Financial Results Conference Call and Webcast. (Operator Instructions) 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. Please proceed.

Thank you, operator. Good afternoon, everyone, and welcome to the QuidelOrtho Second Quarter Financial Results Conference Call. With me today to discuss our financial results are Doug Bryant, QuidelOrtho's Chairman 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. Some of the statements we will make during this call about the company's future expectations, plans and prospects constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and which provides the safe harbor from 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 our current expectations. These risks and uncertainties include, but are not limited to, those factors identified in the joint proxy statement prospectus our quarterly report on Form 10-Q that we plan to file tomorrow and our other filings 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 are implied by our statements will be realized. Furthermore, this conference call contains time-sensitive information that is accurate only as of today. Except as required by law, we undertake no obligation to update any forward-looking statements or 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 for the second quarter of 2021 to the second quarter of 2022. We will be discussing supplemental second quarter 2022 and 2021 revenues and adjusted operating results as if Quidel and Ortho have been combined for the ethical period. We'll 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 3 for a list of non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in the appendix of 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 Chairman and CEO. Doug?

Thank you, Bryan. Good afternoon, everyone. As Quidel and Ortho have combined to become QuidelOrtho. This is our first call as a combined company. Thanks for joining us.

I sincerely appreciate your time and your interest in our company. For those of you that were either shareholders of the Ortho business or are entirely new to our story, I joined QuidelOrtho from the Quidel business where I was President and CEO for more than 13 years. Along with Bryan joining me on this afternoon's call is our Chief Financial Officer, Joe Busky. Both Joe and Bryan joined us from the Ortho Clinical Diagnostics business. I'm happy to have them joining me on this afternoon's call.

Beginning with our results, we delivered strong performance, highlighted by 37.5% supplemental combined revenue growth, 32% and supplemental combined adjusted EBITDA margin and triple-digit supplemental combined adjusted EPS growth as the newly formed team did a terrific job in executing on our strategic priorities. Excluding COVID, supplemental combined revenue grew 9% year-over-year. I'm very pleased with the way both of our organizations have engaged each other and coalesced in such a short amount of time. We had strong execution across the QuidelOrtho businesses as our commercial R&D and operations teams maintained their focus on both near-term and longer-term growth opportunities.

Supplemental combined revenue for the second quarter, including both Quidel and Ortho for the full quarter, reached $898.5 million, supported by double-digit growth in Point-of-Care and Molecular Diagnostics, along with solid high single-digit combined growth for Labs and Transfusion medicine.

As we review our notable achievements in the quarter, I'd like to introduce our 5 strategic priorities, which are: one, integration and corporate culture; two, product innovation; three, global commercial excellence; four, operational excellence; and five, capital deployment.

And I'll start with the integration and our culture. The integration of the 2 organizations is our top priority. As I emphasized on prior calls, we started on the pre-integration work almost immediately following the announcement of the signing of the business combination agreement in late December, enabling us to hit the ground running with the integration immediately after we completed the transaction at the end of May. As we work through the integration, we are focused on maintaining business as usual, keeping our unrelenting focus on our employees and commercial excellence while preserving the best attributes of both cultures as we define our company going forward.

We made substantial progress since the transaction closed on May 27. We achieved over 240 critical integration milestones, identified over 100 integration projects and are executing on over 2 dozen functional and cross-functional work streams. We announced my leadership team as well as other senior executives, developed business unit structures, announced regional leaders and established systems integration road maps. We appointed a strong integration leader who has focused on cultural alignment, combining our operating models and monitoring plans for our specific G&A synergy targets.

To minimize customer disruption and maintain our industry awarded service levels, regional commercial leaders were announced soon after we closed, and we are organizing the joint commercial efforts as quickly as possible, beginning with a U.S. lead-sharing program that is expected to accelerate cross sales. Through this process, we are finding that the 2 organizations balance each other quite well. Quidel has proven to be agile and innovative, allowing it to take advantage of market opportunities to grow rapidly. Ortho, on the other hand, with its long history in the diagnostics market, has established global infrastructure and processes that enable its stable 93% recurring revenue. That balance of agility and stability is critical as we plan to drive market share gains by responding to the needs of the market more quickly and serving our customers better than some of our bigger competitors.

As discussed on prior calls, we expect to realize cost synergies from the transaction of $90 million and cross-selling revenue synergies of over $100 million by the end of year 3, following transaction close. Though we do expect the commercial momentum to continue beyond that time frame. While our integration is still in the early days, the pieces are aligning and the chemistry is even better than expected, which is remarkable given our high expectations. With this progress in mind, our leadership team is even more excited now when we first announced the deal.

Moving on to product innovation. In addition to executing against our integration plans, our team is working to further advance our product pipeline. We will continue to make significant investment in R&D to advance Savanna, our new molecular multiplexing platform while supporting continued expansion of both our Sofia and Vitros test menus. Across the board, we've made good progress on the approximately 100 R&D projects we currently have underway. Long term, we plan to continue to invest in R&D to develop and broaden our portfolio, which we will leverage to accelerate worldwide market penetration.

As Chairman, early on, I made the decision to establish the Science and Technology Board Committee to oversee and advise management on innovation, new product development and strategic R&D goals and objectives, which I think is critical at this point in time. Led by our lead independent Director, Dr. Ken Buechler, the Co-Founder of Biosite and the creative genius behind the development of the Triage product line, the members of this committee have incredible expertise that we will leverage.

Next, while I won't talk about all the projects on this call, I can provide you with a few updates on some of our key growth drivers, starting with our Point-of-Care business unit. We are driving progress on Sofia, which has come a long way in a few short years. Since the pandemic began, we grew the Sofia installed base by approximately 90% to 80,000 instruments. The vast majority of this installed base remains active, and most of the instruments replaced during the pandemic included signed 3-year contracts around COVID, flu, strep and RSV test. This is driving strong growth for all of these assays.

Joe will expand further, but our non-COVID revenue per analyzer is up significantly over the last year. which justifies the many R&D projects underway to further expand our Sofia test menu. Our commercial team is focused on driving menu pull-through on Sofia and supporting incremental per unit revenue growth.

Importantly, our significant leadership position in the flu testing market has translated into significant demand for our ABC combo test that tests for both flu A and flu B as well as COVID-19. We are also excited about our progress towards delivering the first high-sensitivity cardiac troponin solution for the point-of-care market.

Due to the pandemic, the clinical validation has taken longer than originally planned. Our 18 clinical sites are continuing to enroll subjects with the expectation of meeting the FDA's performance criteria later next year. We expect the 510(k) submission will fall shortly after the completion of the clinical validation and we'll utilize the combined cardiac expertise of both Quidel and Ortho. We expect that the review and subsequent clearance will occur in the normal time frame, but there is no guarantee that the effects of the pandemic and EUA filings will have resolved by the time of the submission.

We are selling in Europe and intend to increase the rollout. Once launched in the U.S., we are confident that our current customer base will readily adopt a new assay. More broadly, our integration work has uncovered greater potential cross-selling opportunities for Triage through our global sales team than initially anticipated in our synergy planning.

In our Labs business unit, we launched 7 new assays globally in the quarter. Most notable was the OUS launch of hemoglobin A1c which has seen very strong demand and significant opportunities in our sales funnel. We expect to launch in the U.S. in the second half of this year. Additionally, we have continued to support several studies with our COVID IgG class assay, demonstrating the correlation of our assay to neutralizing antibodies as well as a larger CDC study focused on population antibody levels and breakthrough infections. We believe these studies could better our understanding of our community and may help inform public health recommendations related to COVID vaccination and cautions in the future.

Turning to transfusion medicine. We're seeing strong growth following the completed refreshment of our transfusion medicine portfolio last year. We are pleased to announce that QuidelOrtho reached a major milestone for vision placements by surpassing 5,000 installations globally during the quarter. This milestone is a testament to our technology, service and thought leadership in transfusion medicine. We are dedicated to providing best-in-class technology and solutions in this area.

Lastly, in Molecular Diagnostics, we continue to march forward to secure global regulatory clearances for our Savanna molecular multiplexing platform. Our limited European launch of Savanna with RVP4 continues to go well with some early wins. As manufacturing capacity ramps, we plan a full European launch in Q4, followed by 2023 menu expansions. States side, we completed the Savanna EUA submission with RVP4 in May and continued to make progress towards the 510(k) submission expected this year. We expect that, that submission will be called by 510(k) submissions for 4 additional panels in 2023.

Looking at global commercial excellence, our third strategic priority. We're firing on all cylinders to advance commercial excellence across multiple channels. With a relentless focus on base business execution, we are exceeding our revenue synergy targets at this time. We've kicked off cross-selling of our combined product portfolio through our global commercial teams with a fresh prioritization of OUS opportunities crystallized through our expanded commercial team. Specifically, we have initiated go-to-market programs in both the U.S. and China to reflect the new combined capabilities.

Overall, our commercial integration efforts are accelerating our near-term value creation by identifying quick win opportunities by country and region and ways to make the best use of our end market organizations along with existing distributors. As such, we believe we are on track to deliver on our 2023 revenue synergy target.

Implementation of Ortho's commercial excellence program across our entire QuidelOrtho organization is well underway. We track multiple key performance metrics to enable us to deliver our products, promises and a customer experience that is second to none, and the results we see are compelling. We're driving market penetration of our integrated clinical lab instruments and enabling the pull-through of recurring revenue. In the process, our lab business has gone from low single-digit to mid-single-digit growth. In the quarter, our Vitros integrated analyzer installed base grew by 12% year-over-year, including the double-digit growth in Europe, Middle East and Africa, China and our other OUS regions and high single-digit growth in North America.

Customer-centered service and follow-through are key components of our commercial excellence strategy and have been central to the Quidel and Ortho pull-throughs long before the combination. Our ability to provide quality customer service is critically important and highly valued across our customer base. To this end, I am pleased to announce that last week, we were ranked first for the seventh consecutive time in the Service Track Clinical Laboratory Survey for Integrated Systems, which includes the top ranking in customer service and overall system performance. We were also recognized as #1 in overall service performance for chemistry and immunoassay systems.

Importantly, as part of the ranking, Service Track records a net promoter score for each of the vendors. QuidelOrtho's score was 20 points higher than our next closest competitor, highlighting that this is a first-class service organization which, along with lengthy meantime between service calls of our Vitros analyzers, is a competitive advantage, which portends well for QuidelOrtho's growth in this category.

In terms of the OTC space, we continue to strengthen our positioning through our QuickVue at-home OTC COVID-19 test. During the first 2 years of the pandemic, we scaled our U.S.-based manufacturing capacity exponentially and now have the automated production lines and trained personnel to produce millions of QuickVue at-home tests a month on the low end and ramp weekly output to tens of millions of tests in a matter of months. While we have adjusted our capacity and contingent employees to support softer demand that began in the first quarter, we have maintained capacity as part of our arm-based manufacturing initiative and recently began to ramp up production, giving us the ability to respond to demands of our customers and the U.S. government as caseloads change.

We have the relationships in place with retailers so that if these new variants become more prevalent, we expect to have competitive shelf space. We are currently working with CVS, Walgreens, Amazon and other major retail distributors on ways to expand our availability and are excited that QuickVue recently became available via Amazon Prime. We also sell through over 5,000 independent pharmacies via our partnership with McKesson and are continuing to pursue additional partnerships with institutional and government agencies to advance testing accessibility.

We did complete the $108 million test U.S. government contract in the second quarter discussions with the U.S. government are ongoing, but we are including further government orders in our revenue expectations at this time.

Turning now to operational excellence. This is a bit of a soup-to-nuts category, but I point you to a metric that is both a roll-up and a single data point to watch. We believe we are on track to deliver 1/3 of our targeted $90 million cost synergies in 2023. We are well on our way with competitively bidding insurance and audit fees, technology agreements and indirect sourcing consolidation and eliminating duplicate costs as we bring the businesses together. Our cost synergy target does not include the $45 million in interest expense savings that we have secured. Achieving our cost synergies is critical to our integration planning.

And accordingly, the Board and I decided to hire a Chief Administrative Officer to run the integration and strategically build on our corporate culture. We want to build our brand reputation so that we are an employer of choice, able to attract and retain talented people for all levels with engaging and rewarding careers. Keeping people happy and engaged and productive, these are all areas on which our Chief Administrative Officer is focused.

Strengthening our supply chain is another operational priority to help meet our customer commitments. Given our experienced supply chain team, coupled with our strong balance sheet and cash flow, our capacity to stabilize our supply chain and the inventories could become differentiated capability that we would leverage to compete in the marketplace. If we make it a priority and a must-have, it could potentially make supply chain a competitive advantage. All companies are facing supply chain challenges, but not all will be able to address them equally.

Regardless of location, figuring out how to leverage all our plants and equipment to drive our business forward is a priority. Right now, for a number of products, there is more demand than we have been able to meet and we are working to hire new teams throughout all our factories to step up capacity. For example, we know there is more demand for clinical chemistry consumables, integrated instruments and Savanna than we have been able to produce. And while production has ramped, we are managing our customer contracts and expectations based on our ability to deliver instruments with the availability of semiconductor chips as well as the availability of consumables. Again, building out redundancy across our supply chain is so important as we believe it could turn into a competitive advantage, allowing us to meet elevated demand when our key competitors may not.

Last, but far from least, on our list of strategic priorities is capital deployment. From this standpoint, our strong balance sheet and cash generation give us the flexibility to allocate funds towards several strategic priorities. We look at our capital deployment opportunities in 5 buckets: investing in R&D, manufacturing capacity expansion, debt paydown, share repurchases and strategic M&A.

Investing in our business is critical to our growth, which is why investing in R&D and in our manufacturing capacity are our top capital deployment priorities. We are investing in R&D, both supporting menu expansion across our platforms while also driving development of innovative new instruments and technologies. We are also putting money into building additional manufacturing capacity to meet demand for our broad portfolio, including Savanna and consumables for our Vitros analyzers.

The next item is debt paydown. The combination of Quidel and Ortho was structured such that we have a very attractive debt profile, which we intend to improve over the coming years as we work through our current integration plans. Also under consideration is returning capital to shareholders via a share repurchase program. Strategic M&A is our lowest capital deployment priority, but we will consider the right opportunities as they present themselves. We will continue to be very selective and opportunistic valuing the right organizational fit as our main criteria.

If we execute on all 5 of these strategic priorities, we believe that we will be better positioned to drive innovation, support long-term growth and unlock shareholder value.

In closing, I'd like to thank all the QuidelOrtho team for their incredible work and commitment to bring us to this point. We have many opportunities ahead of us to continue driving improved outcomes for our patients across the globe as we expand our portfolio, extend our reach and make progress in integrating our organization. I look forward to advancing this mission to drive long-term growth for our business.

With that, I'd like to turn the call over to Joe to further discuss our Q2 financial results and 2022 guidance. Joe?

Thanks, Doug, and good afternoon, everyone. I'll begin with a bit more detail on our operating results for the quarter. As mentioned previously, to facilitate a comparison of the company's operating performance from the second quarter of '21 to the second quarter of '22, all figures that I referenced are presented on a supplemental combined basis as if Quidel and Ortho have been combined for the applicable parts and may be referred to as supplemental combined information.

So starting with the breakdown of revenue on Slide 13. In the second quarter, we recorded revenue of $899 million, an increase of 38% in constant currency. Currency translation decreased sales growth by 320 basis points, resulting in 34% total sales growth. Revenue growth was primarily driven by the strong recurring revenue pull-through on our broad instrument portfolio serving the diagnostics continuum as well as QuickVue sales to government and retail customers. In the second quarter of '22, we generated $298 million in COVID-related revenue. So excluding the COVID-related revenue, total revenue increased 9% in constant currency driven by Point-of-Care and Molecular Diagnostics.

Looking at year-to-date, total revenue was up 57% in constant currency to $2.4 billion. Again, excluding COVID-related revenue, total revenue increased 11% in constant currency.

Turning to our Q2 performance by business unit, Point-of-Care revenue grew 181% in the quarter and grew 19%, excluding COVID-related revenues. This is largely driven by the pull-through of our broad respiratory menu. Labs revenue, which includes OrthoClinical labs and noncore revenue as well as Quidel specialized diagnostic solutions grew 3% in the quarter and grew 6%, excluding COVID-related revenues, largely driven by strength in clinic chem and immunoassay revenue.

Transfusion medicine revenue grew 9% driven by strength in donor screening, notably plasma, which is a smaller market but growing at roughly twice the blood market.

Molecular Diagnostics revenue declined 40% in the quarter but grew 45%, excluding COVID-related revenues, largely driven by strength in Lyra, Savanna and Solana product lines.

Now turning to our quarterly performance by geography on a constant currency basis. North America revenue grew 59%. EMEA grew 6%. China grew 25%. And other regions, which include Latin America, Japan and other Asia Pac markets, grew 2%. Excluding COVID-related revenue, North America revenue grew 16%, EMEA grew 8% and China declined 10% and other regions grew 5%.

North America, our largest geography by revenue delivered strong growth driven by Point-of-Care, Labs and Transfusion Medicine. Point-of-Care was particularly strong due to the shipment of the last [35 million] tests to the federal government, pursuant to our 108 million test contract. However, we were still grew mid-teens, excluding COVID-related revenue driven by pull-through of our respiratory revenue on our large Sofia installed base as well as strength in clinic chem consumables and donor screening.

In EMEA, strong growth was driven by Labs. Strength was particularly notable in clinic chem across Western Europe as well as Eastern Europe and Middle East. In China, our team executed exceptionally well despite the numerous macro challenges, including COVID-19 lockdowns that continue longer than expected in the quarter as well as localization and more onerous import application requirements.

Looking ahead, we're continuing to monitor the situation closely for further outbreaks and regional lockdowns. China is a very profitable market for us and is a big investment area for us. As evidence of this, we are in the process of expanding our footprint with both analyzer and assay partnerships with the goal of providing a local manufacturing presence in the near term.

Now looking at our revenue by category. Recurring revenue, which includes reagents, service and other consumables, grew 1% and was up 9%, excluding COVID-related revenue, driven by across-the-board strength and menu pull-through in our instruments. QuickVue revenue grew 756% largely driven by COVID-19. Instrument revenue grew 2%, which is an improvement from the first quarter, but open labs instrument orders due to global supply chain challenges are relatively flat sequentially at approximately 600 instruments.

Now turning to Slide 14. I'd like to comment on our second quarter financial performance versus the prior year, again, on a supplemental combined basis. We delivered a strong quarter of performance below the top line with improvements in gross margin, operating expenses and free cash flow in the quarter.

Gross profit margin for the quarter was 53.6%, which is an 80 basis point increase versus prior year due to volume growth, mix and positive pricing in both Labs and Transfusion Medicine, partially offset by lower margin on COVID-related revenue, including a $25 million QuickVue inventory reserve recognized in the quarter due to the timing of a government order.

Moving down the P&L. R&D expenses increased 2% year-over-year, indicative of our investments in our instrument platforms and menu expansion, including for necessary global regulatory clearances.

Sales, marketing and administrative expenses were flat as operational improvements offset distribution cost increases, including COVID-related expenses. As a percentage of revenue, sales, marketing and administrative expenses decreased 500 basis points year-over-year to approximately 22%.

Adjusted EBITDA grew 75% to $291 million and adjusted EBITDA margin expanded 760 basis points year-over-year to 32.4%, largely driven by the previously mentioned drivers of gross margin and efficient operating spending.

Net interest expense for the period was $29 million, which is a decrease of $4 million as anticipated due to lower interest rates, partially offset by the increases in the average outstanding debt balances related to the combination.

Our provision for income taxes was $63 million compared to $13 million for the prior period. And on a supplemental combined basis, our adjusted earnings per fully diluted share for the second quarter increased 123% year-over-year to $2.12 driven by the increase in our COVID-19 volumes and our solid operating performance as well as lower interest expense. The previously mentioned QuickVue inventory reserve actually reduced adjusted EPS by $0.28.

Turning to cash flow and balance sheet on Slide 15. In the second quarter and on a GAAP basis, we generated operating cash flow of $225 million. After funding $26 million in CapEx and adding back $80 million in acquisition-related costs, we estimate recurring free cash flow to be $279 million.

We ended the quarter with cash, cash equivalents and marketable securities of $446.7 million and total debt of $2.7 billion. We ended the quarter with a 1.1x net debt to EBITDA leverage ratio on a supplemental combined basis. And as COVID revenue declines to an pandemic level of revenue over the coming year, we expect leverage to increase to roughly 2x.

Okay, so now turning to our outlook for the remainder of the year on Slide 16. First, I'd like to provide some broader context on our full year '22 guidance. The point-of-care market is showing signs of strength, which we expect to continue to translate into strong non-COVID-recurring revenue pull-through on our large installed base of Sofia instruments. We expect our Labs and Transfusion Medicine businesses, excluding COVID-related sales combined, to grow mid-single digits. Savanna sales in Europe are expected to drive growth within our molecular diagnostics business. China continues to be an important growth driver for our business, and we expect recurring revenues to grow mid-single digits. However, instruments are expected to be soft due to previously mentioned lockdowns and by local requirements. Inflation and global supply chain disruptions continue to be a challenge. We are seeing greater access to semiconductor chips and expect challenges to further ease as we move through the back of the year and into 2023.

So in light of all these dynamics just mentioned, we are introducing supplemental combined fiscal year '22 guidance as follows. First, revenue, excluding COVID-related sales, is expected to grow 6% to 9% on a constant currency basis to $2.49 billion to $2.57 billion. Next, we expect COVID-related revenue to be $1.29 billion to $1.34 billion in 2022, including $1.15 billion in the first half of the year. And that compares to $1.3 billion recognized in fiscal '21. Total revenue is expected to grow 3% to 6% on a constant currency basis to $3.78 billion to $3.91 billion. Adjusted EBITDA is expected to be $1.38 billion to $1.45 billion, representing a margin of 36.5% to 37%. And finally, adjusted diluted EPS is expected to be $11.80 to $12.75 based on full year diluted weighted average share count of $68 million.

In addition, I'd like to provide assumptions that likely will be helpful for modeling purposes. At current rates, currency translation is expected to decrease full year sales growth by 150 to 200 basis points. We expect flu-related revenue to be $200 million to $260 million in the full year '22, including $121 million in the first half of this year, compared to $72 million in fiscal year '21. And given the seasonality in our business, including our above expectations for flu, the fourth quarter is expected to grow at least 20% over the third quarter.

Note that there are no differences in the number of billing days in '22 compared to '21. Net interest expense is expected to be in the range of $118 million to $123 million, with most of the decrease versus prior year from the fourth quarter run rate to be in the second half of 2012. We are expecting a tax rate for the full year of approximately 25%. And given our $1.2 billion in NOL, we expect an approximately $20 million savings on cash taxes this year and $40 million to $50 million on an annualized basis. In the second half of the year, we expect adjusted free cash flow to be $130 million to $180 million.

And with that, I'll now turn the call back over to Doug to make a few summary comments.

Thanks, Joe. In summary, we had a strong quarter. The integration is going well, and we're even more excited about the growth opportunities ahead. To provide investors with deeper insights into our business and our key growth initiatives, I'm pleased to announce that we plan to host an Investor Day on the afternoon of December 13, 2022 in New York City. I look forward to engaging with you in that forum which will include in-depth management presentations and opportunities for Q&A and informal interaction with the management team. More details about that event will be forthcoming, but please save the date on your calendars.

And with that, operator, we are now ready to open the call for questions.

(Operator Instructions) Our first question is from the line of Brian Weinstein with William Blair.

This is Dustin on the line for Brian. I know you provided us with full year guidance and some color on the fourth quarter, but I'm wondering if you could provide a little bit more detail on the different business segments as we move to the third and the fourth quarter. How should we expect those to move relative to the second quarter, up or down sequentially? Any additional insight there would be helpful.

Yes, I'll just start by saying we're not going to provide a lot of detail here, but I think it's safe to say that for both companies, Q3 is typically a softer quarter. And so we're looking more at sharing with you what we expect for the total for the second half. And I think that's the guidance that Joe provided. And then what else would you add, Joe?

No, I think that covers it.

Got it. Great. I guess, as you provide the guidance for '22, just wondering how you guys are thinking about next year. I know there's certainly a lot of variables with COVID coming out of the business and certainly have a lot of macro headwinds on your hand. But if you could talk about the setup for next year, just where we should be thinking about numbers and where the different businesses can go.

Yes. At this stage, what we see is that we should be able to deliver on the cost synergies that we suggested, and that does not include the $45 million in interest rate -- interest expense, excuse me, reduction annually. On the revenue side, provided that we can manufacture the instruments that we have in the forecast, we feel very comfortable both on the clinical chemistry and immunoassay systems as well as on the Savanna. And what I would point to, I think, generally is to the S-4 and those forecasts and suggest to you that those are solidly intact. What else would you add, Joe?

Yes. I would just add that we'll reiterate what we've said about 2023 and beyond that the top line number ex COVID will be in that high single digit to low double-digit range. And we believe that the COVID revenue once it gets into endemic stage, as you move into next year, we'll be in that $150 million to $200 million range annual COVID revenue.

Which wouldn't necessarily capture the ABC combo revenue correct, right? So that would be additive to the $150 million to $200 million

Correct.

The next question is from the line of Jack Meehan with Nephron Research.

Really appreciate all the color in the deck and the release today. I wanted to start with question for Joe or Doug on the guide here. So the $11.80 to $12.75 EPS, so you did -- I'm sorry, $8.04] in the first quarter, $2.12 in the second quarter. By my math, that's $1.64 to $2.59 in the second half of the year, kind of annualizes the $3.28 to $5.18 . Is that -- am I thinking about it the right way in terms of like starting to build to 2023 and layering on some of the cost synergies maybe growth? Just like any color around starting to think about where 2023 EPS might come out would be helpful.

Yes, go ahead, Joe.

Jack, it's Joe. Yes, I don't want to get too much into 2023 other than what we just said to the previous question. But when you look at the guidance for '22 that we just gave, keep in mind the comments I made about the Q3, Q4 seasonality. Q3 is historically a seasonally low quarter for both sides of the business on Ortho as well as Quidel. And so you'll see the lion's share of that second half EPS falling into Q4 versus Q3. Again, as far as 2023, as you think about the cost base, I do think that you can use the cost base on a supplemental combined basis, the operating expenses that we've given to you in the information we sent out a month or so ago as well as what's in the release today, you can use that as a guide for the second half operating expense and even as a jumping off point as you move into '23 and then full synergy, the impact of the synergies off that base that we're running at right now for operating expense.

Okay. That makes. And then, yes, it does. Second question on Sofia, and I'm sorry if I missed this during the script. Just what were the Sofia sales in the quarter? And I know Doug and Joe, you talked about just confidence in kind of broader utilization long term. If there's color you can provide around just what you're seeing in the field on non-COVID testing on Sofia, any updates would be great.

Yes. Thanks, Jack. It's a really intuitive question, when you back out COVID-19 and look at the Sofia business, what does that look like. And what we see on a comparison year-over-year is a difference of about 25%. So we're up 25% in revenue on a trailing 12 on the Sofia business -- about 25% over the prior year.

And Jack, if you just take that a step further, if I could, Doug, you break it into price and volume. When you look at price stack, the price is up slightly, flat to up slightly, which means that it's primarily all volume. When you're looking at the pull-through COVID, it's almost all volume. So it's a really good sign for us on that trailing 12-month basis.

Just one clarification on the 25%. How much of that is coming from ABC? Are there any other tests that are standing out as you look at the utilization?

We see some pull-through with the other respiratory products, for sure. But you're right in suggesting that the comparator is driven a lot by the flu product, which is both individual and -- yes, because remember last year, Jack, in the quarter, very, very little flu.

Yes. And then last question, just to be clear on the Savanna time line, it sounds like 510(k) approval, is that looking more like 2023 now? Just any comment on sales in the quarter there.

Yes. We're going to introduce the product in Europe on a full launch basis. So obviously, we have EUA for the U.S. We expect to be -- we expect to have the 510k mentioned out by the end of the year, for sure. Is that -- was that your question? Yes. We submitted the EUA for RPP for in May. And then we've been working on a 510(k) set. So we expect to have that in before the end of the year.

Correct. And then it's like a 90-day -- well, historically, it's been like a 90-day review after that, right?

Yes. But remember, the pressure that the FDA is under with a huge workload. And we don't know exactly what all the requirements for 510(k) clearance, maybe at the end of the day, until we get into interactive discussions with the reviewer. So you're right, 90 days is typical. I think the FDA does a pretty darn good job these high priority products. But business guys for sure have a little cushion. But I don't think we're going to be greatly delayed if we delayed, no.

The next question is from the line of Andrew Cooper with Raymond James.

Maybe first on the financials, just thinking about the longer-term targets you laid out when the deal was first announced, the 30% EBITDA margin target. Obviously, some things have changed on the inflation side and just the overall cost side, as well as the FX side. So how do we think about that bogey, if it's changed at all? And then if there's any difference to the time line to get there and anything related to that would be super helpful.

Well, Andrew, your question is certainly timely. We were talking about this just a couple of hours ago. Yes, there are some moving things that we're having to evaluate. So then the question is can we achieve more cost synergies than we thought before. I think what I would say is even if we can't get to greater than 30% EBITDA in 2023, if we cannot, we're still not changing the target or the time frame. We're still going to work to try to get back over 30%. I don't think that, that's an inappropriate goal. But you are right, there's a lot of factors, including how much product can we make when we can, what if any regulatory hurdles get in our way, what's happening on the supply chain side with costs because of inflation. These are all factors that obviously were not known when we initially modeled on it. But we still firmly believe we can get there. Why don't you say that true, Joe?

Yes, I agree. It's certainly not coming off the 30% EBITDA margin. Andrew, when you do the math on the guidance we gave, you'll see that the second half EBITDA margins are below that 30% target there. But that's because, again, the business is seemingly low in Q3, and that's historically been the case for years for both businesses. And then in Q4, you got to remember, you've got a heavier load of instrument revenue that typically comes through in the fourth quarter that will be margin down a bit. So when you look at the second half versus, say, a full year, that's probably going to be our most -- our lowest EBITDA margin quarters. And as you move into '23, not only do you get the cost synergy tailwind that Doug mentioned, but you're also going to get the tailwind of the growth on Savanna as that ramps. When that launch continues and that revenue continues to grow that's going to drive some GP and EBITDA margin tailwinds to march us up closer to that 30% or over that 30%.

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

So I know estimates are sort of all over the place right now with pro forma numbers, but it looks like EPS came in below expectations when accounting for that inventory reserve dynamic. I think that's likely to do the QuickVue margin assumptions. So can you maybe help us think about what the drop-through is there now? Likely, pricing has come down versus where you may have been modeling prior.

So Casey, just to reiterate...

He's suggesting EPS is coming.

Yes. So the QuickVue inventory reserve that we mentioned, the $25 million net of tax, that's $18 million of a hit. So it's a $0.28 impact on the quarter. So obviously, if you remove that, we would have exceeded expectations on a lot of fronts. Now that reserve, depending on what happens with second half COVID revenue could come back. I'm not saying it will, but it could.

We've covered both sides. We said, it doesn't happen, we've got a reserve to take care of the obsolete inventory, right? On the flip side, we also said we're ramping up because we've been externally encouraged to keep manufacturing product, which we will do. So in the event, we're going to be well placed as we move forward. But there is a potential event we don't need that reserve, right?

Correct. Yes.

Got you. And then just on the Clinical Labs business. So just curious on if headwinds in China on the non-COVID piece have subsided here in 3Q and if anything is being contemplated for lockdowns in the back half of the year. And then on that open order comment, the 600 instruments, I'm curious on what labs would have grown if you could have filled those open orders.

Yes. So you're right. We do have a number of open orders. I would say just generally before flipping over to Joe, my impression is that the Chinese team has weathered this pretty nicely, the lockdown and all that. And we also have plans in place to make sure that we can compete with the changes in, whatever, requirements for local manufacturing, et cetera. But have you done the math in your head already? I was just trying to give you enough time on math.

Yes, I can try to hit both questions quickly because then I'll run out of time. we have and the guidance we provided anticipated more caution on future lockdowns in China as well as the by local movement in the country that is potentially impacting the instrument revenues. So all that's factored into the guidance. The other thing we need to keep in mind, Casey, is that the Beckman deal is impacting revenue in our China market, too. So if you look at the Q2 numbers that we've just presented and we show that the China market was down 10% in constant currency in the second quarter. If you were to take out the Beckman impact, it actually be up low single digits. So that has a big impact on that. And again, that's no impact on the margins. It's just a revenue play. So just keep that in mind as well. And when your installed -- to your instrument backlog question, it would have added about 2 points of growth into the numbers had we been able to get all this out.

Our last question is from the line of Alex Nowak with Craig-Hallum.

Okay. Maybe going back to the ABC combo first. This is going to be the first potentially normal respiratory season in a long time. Just how are the Point-of-Care customers approaching it this year? Is the expectation that if they have a Sofia, they're going to be ordering ABC combo? Are you starting to see any purchases ahead of that season yet? And then maybe any status of the ABC OTC product.

Yes, I think we see evidence, Alex, that this is a viable product in that space. We certainly saw outsales of the product, and we are building product now with that expectation. So who knows with flu? But at the end of the day, there's certainly concern at the government level that there's going to be flu in the back half of this year. So that's what we're planning and that's what we're seeing early on in terms of demand. Little bit of a returning to that crazy demand that we saw Q4 of 2021, no. But I do think there's realistic demand for the product.

Okay. Understood. And then for the R&D channel, you mentioned all the systems you've got in the pipeline here. If you had to name a top 1 or top 2 projects, Sofia menu expansion, Savanna menu expansion, cardiovascular, Ortho, just what is the first or second project that are the main priority for the combined business?

There's a lot of priority ones. For example, let's start on the Transfusion Medicines side. We know that to be competitive longer term in that space, we need to provide better solutions. And so we've got a project internally that we've been calling BAM BAM, and that's progressing. That's probably 1/3, I think, of that R&D budget, it isn't on that project alone. Savanna clearly spending what's necessary to make the transfer from R&D into manufacturing at scale is a big lift and a big effort as well. Don't forget also, we've got Project Leapfrog running in the background, too, which our next-generation immunoassay platform. So there's 3 or 4 big hitters, Alex. I'll just stop there because I realize we're getting to the end here.

I'm going to turn it back to Doug Bryant for closing remarks.

Great. Perfect timing. So in conclusion, Q2 was our first quarter report as a combined company. It was certainly fun putting the call together this quarter, for sure. No matter how you slice it, this stands out as a strong quarter across our commercial corporate and cultural metrics. We came in with a road map, and these results underscore our ability to execute on strategic plans. There's a lot of talent in this organization. Achieving our expected cost and synergies, revenue synergies will be a 3-year marathon. It's not a 1- or 2-quarter sprint. But we believe our current pace is exceeding our plans, the necessary pieces that are here and match the fit that we anticipated. And as I had mentioned earlier, the cultural chemistry is even better than I had expected.

I'm encouraged our team is excited. We're moving forward with purpose and confidence, happy in the knowledge that we're making a difference for human health. And equally important, our people. On behalf of our entire management team, I'd like to thank you for your continued support and interest in our new company, QuidelOrtho. We look forward to sharing our journey with all of you. Thanks. And have a great day.

That concludes today's call. Thank you for your participation. You may now disconnect your lines.