QuidelOrtho Corporation (NASDAQ:QDEL) Q4 2023 Earnings Call Transcript February 13, 2024
QuidelOrtho Corporation misses on earnings expectations. Reported EPS is $1.17 EPS, expectations were $2.02. QuidelOrtho Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the QuidelOrtho Fourth Quarter and Full Year 2023 Financial Results Conference Call and Webcast. At this time, all participants are in a 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 that this conference call is being recorded. An audio replay of the conference call will be available on the company’s website shortly after this call. I would now like to turn the call over to Juliet Cunningham, Vice President of Investor Relations.
Juliet Cunningham: Thank you. Good afternoon, everyone, and thanks for joining QuidelOrtho (ph) fourth quarter and full year financial results conference call. With me today are Doug Bryant, President and CEO; and Joe Busky, 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 this call that are not strictly historical, including the company’s expectations, plans, future performance and prospects are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to a number of risks and 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 Annual Report on Form 10-K for the fiscal year ended January 1, 2023, 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. 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 statement or any time-sensitive information to reflect future events, developments, or changed circumstances for any other reason.
Also, during today’s call, we will discuss certain items that 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 their most directly comparable GAAP measures are included in the appendix to the investor presentation and press release issued this afternoon. Both are available on the Investor Relations page of the QuidelOrtho website. Lastly, unless otherwise stated, all year-over-year growth rates including revenue growth rates given on today’s call are given on a comparable constant currency basis. And now, I’d like to turn the call over to Doug Bryant.
Douglas Bryant: Thank you, Juliet. Good afternoon, everybody, and thank you for joining us today for the fourth quarter and full year 2023 earnings call. 2023 was a foundational year for QuidelOrtho. Despite the brevity of the respiratory season in the fourth quarter, we performed well. More importantly, we grew above market in our Labs business, gained market share in our industry leading respiratory point-of-care products, and achieved several internal milestones. Most notably, our operations team made significant permanent manufacturing upgrades, which increased our production capacity and supply chain resilience. This allowed us to address backlogs and positioned us to meet future market demand. Our global sales team is now in place, actively cross selling and we like the strength of our competitive position across the globe.
Our combo test continued and continues to [Technical Difficulty] and we’ve been able to not only gain market share but maintain pricing despite a lower volume season. We received more than 700 regulatory approvals in the U.S., Europe, Middle East and Africa, and China, with an addition of 1,000 approvals in the rest of the world. This includes De Novo 510(k)s for both Sofia 2 SARS antigen and the Savannah platform. Additionally, we identified substantial greater synergies, while investing in the business and paying down $227 million in term loan debt. All these accomplishments help to bolster our already strong competitive position and long-term growth profile. We believe we’re well positioned to take additional share in key markets over the longer term.
Let me turn to the top line numbers. Starting with the full year 2023, our total revenue was $3 billion, a decline of 26% on a supplemental combined basis compared to the prior year. The year-over-year decline was related to the respiratory — the lower respiratory season in 2023 compared to the prior year, particularly in COVID-19 related testing, which was down roughly $1 billion. Although, flu was $248 million for the year, right in the middle of our range of $230 million to $270 million, it was down 29% versus the prior year. Excluding respiratory, total revenue grew 5% on a supplemental combined basis for the full year. With that, I will not sugarcoat the fact that our fourth quarter numbers fell short of our expectations as we overestimated the size of the endemic COVID-19 and flu season.
Ultimately, our optimistic outlook turned a solid growth enhancing year into a less appreciated achievement. Despite the relatively weaker respiratory season, we had several bright spots in point of care. First, recent third-party market data suggests that we gained share for respiratory products in both physician office and acute care segments versus our competitors, all while holding price steady. We remain the industry leader in flu, SARS, and RSV rapid diagnostic testing. Second, the number of Sofia placements grew to 89,000 instruments, which shows continued runway for instrument demand and positions us nicely for future higher margin revenue growth in the respiratory segment. Our fourth quarter results for total revenue came in at $743 million.
Our respiratory revenue was down 49% compared to the prior year period. In North America, prevalence was steady, but lacked the inflection point in demand that we would typically expect late in the fourth quarter. This could be an indication that distributor destocking on COVID-19 products will continue into Q1 of 2024. Our distributor partners typically close their fiscal year in March and purposefully carry lower inventories. We also believe that the respiratory season or the respiratory testing contraction can be attributed to COVID-19 fatigue, perceived reduction in severity of recent strains and very little asymptomatic testing. Turning to our business portfolios. Our Labs business really led the way this year in terms of growth. For the full year 2023, Labs grew 8% in constant currency, in-line with our expectations.
Excluding respiratory, Labs grew 13% in the fourth quarter and 10% for the full year 2023 in constant currency. In our Transfusion Medicine business, we continue to see great potential and will invest further in our immunohematology portfolio to continue advancing our market leading position. On the other hand, we plan to responsibly transition out of the U.S. donor screening portfolio, which is lower growth and has lower margins. While our goal is to wind down this portfolio, we will certainly continue to support our existing customers and honor our contractual commitments. Our Molecular business achieved significant milestones with the FDA approval and the U.S. launch of our Savanna Multiplex molecular platform and the HSV syndromic panel.
This is a critical step in our strategy to bring central lab sensitivity and specificity to everyone from mid-sized hospitals to remote mobile clinics. The production ramp and marketing rollout are underway. We currently use low volume manual manufacturing lines for production of this panel, but we are working toward deploying our high volume automated solution. So, while production in the short term will be dilutive, longer term, this automated line is expected to strengthen margins. We anticipate that our automated line will be in production well in advance of the year end respiratory season. Within our Point-of-Care business, as I said earlier, our commercial team secured approximately 4,800 new Sofia instrument placements globally in 2023, raising our global installed base to about 89,000 Sofia analyzers.
The commercial launch of Sofia 2 SARS antigen plus, the first rapid antigen test cleared by the FDA, with CLIA waiver in the United States market, strengthened our position as a top innovator and trusted leader in this evolving space. Additionally, through our triage platform for cardiovascular, we have a revitalized focus on chronic diseases, including heart failure. This work stream will help clinicians detect, monitor, and manage the silent pandemic of chronic diseases that tend to be overshadowed by the trending health story of the moment. Shifting now to our third — integration phase, transformation, we call it QO NEXT (ph), and it’s geared toward accelerating the execution of value driven initiatives for greater business efficiencies, investments, and organizational agility.
We know what needs to be done and we understand the levers we need to pull. Specifically, we are shifting our product development, R&D and regulatory efforts to focus on menu expansion, as we see ample opportunities to strengthen our competitive advantage and pull-through across an expanding customer base. We have been actively evaluating our real estate footprint and anticipate consolidating facilities, primarily in the United States. We intend to improve our organizational cost structure by eliminating underperforming non-value driven initiatives and initiating a senior level management delayering effort to create leaner teams, improved span of control, and speed of execution. We believe this will further reduce our headcount by 5% to 6%.
Savanna has been a long time coming in the United States and our agenda at this point is clear, menu expansion and customer adoption. We’re advancing both with FDA review of our RVP4 panel and others in the queue. Our U.S. sales team is meeting this week and I can assure you a successful Savanna commercial launch is on their menu as well. As noted earlier, we will invest in the higher growth immunohematology side of our Transfusion Medicine business. These investments are expected to drive higher returns and help balance the seasonal spikes in our current business model. In summary, let me repeat that 2023 was a foundation building year for us. We continue to establish QuidelOrtho as an industry leader, capable of serving the breadth of the healthcare continuum from the largest labs and hospital systems to the most remote points-of-care and in the home.
We are a stable diversified growth company, targeting about $19 billion out of a global $48 billion total addressable market. Finally, we are steadfast in accelerating our desired future state and financial goals. With this, I’ll let Joe take you through the financials in greater detail. Joe?
Joseph Busky: Thanks, Doug, and good afternoon, everyone. I’ll begin with a summary of our operating results for the full year and fourth quarter of 2023, and to facilitate a comparison of the company’s operating performance at full year growth rates that I reference are presented on supplemental or all full year growth rates that I reference are presented on a supplemental combined basis as if QuidelOrtho have been combined for the applicable periods. I’m also going to refer to our earnings presentation, which is available on the IR page of our website. Starting with the full year 2023 results on Slide 4, total revenue was $3 billion, a decline of 26% year-over-year. This decline was due to the lower respiratory season in ’23 compared to the prior year, with approximately $1 billion impact from declines in COVID-19-related testing.
Excluding respiratory revenue, total revenue grew 4% — grew 5% for the full year. Turning now to the full year 2023 operating results, adjusted gross profit margin was 51%, which was down approximately 800 basis points compared to the prior year due to lower respiratory revenues, again due to lower COVID-19 testing. Adjusted EBITDA for the full year of 2023 was $723 million and adjusted EBITDA margin was 24%. Adjusted diluted EPS for the full year 2023 was $4.13, a 70% decline from the prior year. The year-over-year change in adjusted diluted EPS and adjusted EBITDA was the result of the decline in COVID-19 revenue compared to the prior year as noted earlier. And our full-year effective tax rate was 22.3%. And now I’ll provide our fourth quarter results shown on Slide 5.
Total revenue was $743 million as reported, which was a decline of 14% year-over-year due to 77 million of COVID-19 headwinds from the prior year. Adjusted gross profit margin was 52.4%, which was down 220 basis points compared to the prior year period due to lower respiratory revenues. Adjusted EBITDA was $195 million and adjusted EBITDA margin was 26%. Adjusted diluted EPS was a $1.17, a 34% decline from the prior year period and our fourth quarter effective tax rate was 23%. The change — the year-over-year change was primarily driven by product mix with lower respiratory revenues that carry higher margins than our non-respiratory business. Our non-respiratory business grew 9% in both reported and constant currency in Q4, compared to the prior year period.
Our labs business led the way with strong revenue growth, which was a great accomplishment by the team after successfully navigating and resolving significant instrument backlog due to supply chain issues in the first three quarters of the year. For the full year 2023, labs grew 8% in constant currency, in line with our expectations. Excluding respiratory, labs grew 13% in Q4 and 10% for the full year 2023 in constant currency. Given the continued strength and high visibility we have in our Lab business, we continue to expect above-market growth. Our respiratory results in Q4 were lower than expected as customer ordering patterns followed seasonal respiratory trends as Doug mentioned. Compared to our expectations at the end of Q3, the larger part of the respiratory miss in Q4 was due to lower than expected COVID-19 and flu markets, both of which came in below 2022.
Our underlying business trends and sales activity remain strong and we have a market-leading position in respiratory. Our combo test continues to gain traction and these trends have enabled us to gain approximately 200 basis points of respiratory market share and maintain pricing despite a lower overall season in 2023. In terms of geographies, excluding respiratory and in constant currency, fourth quarter North America revenue was flat year-over-year, EMEA grew 23%, China was up 37% off a low prior year comparison due to lockdowns in 2022, and Asia-Pacific, which includes Japan and Latin America, grew 10%. For the full year 2023, North America revenue was roughly flat year-over-year, EMEA grew 8%, China grew 21%, and Asia Pacific, Japan and Latin America grew 9%.
We saw notable strength in reagents, consumables, and services growing in the mid-single-digits excluding respiratory. Turning to our business lines, as I mentioned, our Labs business had a great fourth quarter with approximately 13% revenue growth excluding respiratory, driven by strength in both clinchem and immunoassay. This strong performance rounds out a great year for the Labs business and is a testament to our commercial strategy to integrate clinical chemistry and immunoassay testing. In fact, we had growth of 11% in integrated vitro systems and 14% in automated systems for the full year 2023, which validated our strategy to lead with integrated systems. In our Transfusion Medicine business, Q4 revenue increased by approximately 2% in constant currency.
Excluding the impact of the donor screening business, immunohematology performed well during the fourth quarter with high-single-digit growth and the full year 2023 with growth in line with market rates in the low-single-digits. We expect to improve efficiency in the TM business by transitioning out of the U.S. donor screening portfolio, which has a lower growth and margin profile than other parts of our business. We plan to invest in our Immunohematology business in 2024 and we will provide more detail on our plans for this business during our upcoming Investor Day on March 20. Fourth quarter point of care revenues declined by 42% year-over-year due to COVID-19 headwinds as discussed earlier. Excluding respiratory revenue, our point of care business grew 6% in Q4 and approximately 2% for the full year in constant currency.
Our Triage business grew in the low double digits in many OUS markets in Q4, including EMEA 14%, China 15%, Latin America 13%, which shows that our early cross-selling initiatives are bearing fruit. Our molecular revenue decreased by 42% compared to the prior year period due to COVID-19 prior year comparisons. Excluding respiratory, molecular revenue declined by 10% in Q4 and 13% for the full year 2023 in constant currency. Obviously, we are excited about the US commercial launch of Savannah and the anticipated growth opportunities ahead. And lastly, we strengthened our balance sheet by paying down $227 million in term loan debt during the year. We generated $89 million in adjusted free cash flow in the fourth quarter and $270 million for the full year.
And as of December 31, 2023, we had $175 million in cash and marketable securities. Now with that, I’d like to turn to our 2024 financial guidance and provide the assumptions that went into our plan and I will take you through this as clearly as I can. Our non-respiratory business is a highly predictable razor/razor blade model and the guidance range there is relatively tight, but our respiratory business is not as predictable. So our respiratory revenue range is wider than in prior years. We’ve based our respiratory guidance. On historical flu season, market size averages going back to 2017. We expect 2024 to be [Technical Difficulty] transitional year with total revenue in the range of $2.76 billion to $3.07 billion, a decline of 7% to growth of 3% in constant currency.
We believe that this is a conservative range that accounts for the high variability in the respiratory market. In addition, there were non-recurring items that benefited 2023, but are not expected in 2024, including in Q1 of ’23, a government COVID-19 award of 143 million, along with the inventory release of 39 million, which taken together brought the government order in line with our respiratory margins. We made the business decision that without this inventory reserve release, would not have participated in the low-margin government award, so they must be viewed as part of the same transaction. And second, also in Q1 of ’23, a one-time collaboration settlement with a third-party of approximately $19 million, which impacted both revenue and adjusted EBITDA.
Now let me provide details on the components of our 2024 guidance. Of the total revenue range, we expect non-respiratory revenue of between $2.3 billion to $2.34 billion. We expect labs growth to be in the mid-to-high single digits in 2024, excluding the one-time third-party collaboration settlement of $19 million in 2023 and transitioning out of the U.S. Donor Screening portfolio, we expect non-respiratory year-over-year growth of 4% to 6% in 2024. We expect respiratory revenue of between $460 million and $730 million, which we believe provides the range necessary to capture the absolute low end as well as provide a reasonable high end given the high variability of the Respiratory business. This Respiratory guidance assumes a range of 40 million to 60 million flu tests in the U.S. per year.
Given the gap between our full year COVID-19 expectations versus how the respiratory season played out in Q4, we are resetting our COVID-19 range to the low $200 million for 2024. This again excludes any new government contracts and we believe more accurately reflects the current endemic environment. Our guidance also assumes a minimal contribution of between $30 million to $50 million in respiratory revenues from Savannah RVP4 and we expect that the revenue to be primarily in the fourth quarter of 2024, given the timing of approvals for the respiratory indication, which we expect in Q1. We continue to expect Savannah instrument placements of approximately 1,000 in 2024, which will pave the way for 2025 Savannah revenue growth. Moving down the P&L, we expect SG&A to be relatively flat and approximate the 2023 year end exit rate on an annualized basis.
We expect R&D to be flat at approximately 8% of revenue in 2024. Adjusted EBITDA in the range of $565 million to $720 million, or 21% to 24% margin. Our adjusted EBITDA and EBITDA margin, as well as adjusted EPS are obviously significantly impacted by bringing down the estimate for endemic COVID-19 revenue and widening the range for flu, which impacts the bottom line disproportionately given the high margins on these products. To counterbalance these impacts, as Doug mentioned, we are taking actions to reduce cost by mid-year is expected to yield approximately $50 million in annualized cost savings. We are continuing to execute on QO NEXT, which will have a more significant impact in 2025 than 2024. We expect gradual improvement in Savannah margins as we ramp up sales and move to high-volume manufacturing during the second half of 2024.
So we finished 2023 at 24% adjusted EBITDA margin and we are guiding to a midpoint of roughly 22% in 2024. At a high level, this approximates a 200 basis point decrease consisting of: one, lower COVID-19 revenue, which would be approximately 3 points of margin; two, the impact of US commercial Savannah launch with initially dilutive margins of approximately 1 point; and three, offset by approximately 2 points of expected improvement in margin due to cost savings and synergy achievement. Interest expense is assumed to be approximately $150 million in 2024. We’ve assumed a full-year effective tax rate in 2024 of 23% to 24%. Adjusted diluted EPS in the range of $2.40 to $3.07 based on 67.6 million shares outstanding. The areas that give us confidence that we can achieve our high 20s long-term EBITDA margin in 2025 include our expectations related to cost savings programs, which includes headcount reductions of 5% to 6%, continued Savannah growth and margin improvements in 2025, planned synergy target achievement and finally, benefits from our QO NEXT program in 2025.
Based on our current outlook, we believe that our 2024 financial guidance is both realistic and data-driven. Given the unpredictable nature of the respiratory season and where we are in the process of transforming our company, we remain confident that we can achieve our long-term revenue targets of 6% to 9% top-line growth and 27% to 29% EBITDA margins in 2025. We plan to provide greater detail about our specific initiatives during our March 20th Investor Day. So now I’ll turn the call back to Doug for closing remarks.
Douglas Bryant: Thanks, Joe. 2023 was our first full year operating as QuidelOrtho. We successfully laid the foundation for building our global company, one poised for advancing the power of diagnostics for a healthier future. Building a high-performing organization took a lot of hard work by many of my colleagues. I would be remiss not to thank them for their dedication, perseverance, and the many long hours it took to achieve such important milestones. Looking ahead, I see a bright future for our company, our customers and patient health. We have a growth strategy and an action plan in place. We’re accelerating our business efficiency initiatives, cost saving measures, and transformational programs. These efforts, combined with our R&D menu expansion pipeline, global pull-through across our growing installed base, and commercial excellence program, will provide further support to achieve our long-term revenue targets of 6% to 9% top-line growth and 27% to 29% EBITDA margins in 2025.
[Technical Difficulty]
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