Thanks, everyone, for joining us this morning. I'm Vijay Kumar, the Life Science Device Analyst here at Evercore. Pleasure to have QuidelOrtho with us this morning. We have CFO Joe Busky. From Investor Relations, we have Juliet Cunningham. Joe, thanks for the time this morning.
Thanks, Vijay.
So, maybe, you know, in the stories, obviously, it's had a transformation, you know, Point of Care with a central lab model. You know, when I just look at those end markets, right, those end markets sort of grow mid-singles. You know, when you exclude COVID, like, how do you characterize Quidel's performance versus those end markets? What's done better? You know, what's, you know, perhaps underperformed?
Yeah, I think the business is having a really good year this year. We see the Labs business, which is about half of our revenue base, will grow mid-single digit this year. You know, if you go back to last year, 2023, which was the first full year after the business combination, Labs had a really good year and actually grew 10%. So the Labs business, again, which is half of the business, continues to perform well. And really, I think that's a testament to us continuing the strategy of the customer segmentation and focusing on the small and mid-size labs and hospitals, as well as the customer excellence strategy of leading with integrated analyzers, which will drive more higher margin immunoassay revenue. The Transfusion Medicine business, which is, you know, sort of the other big component of non-respiratory business, there's two pieces within that.
The Immunohematology business is, again, for the last two years, been solidly a low single-digit growth business, you know, right where we want it to be. It's a number one globally market leader. Customers love our products. They're very loyal customers, typically blood bankers who love our products, and so that business is in really good shape. The other part of the Transfusion Medicine business, which is Donor Screening, that's a business that we're currently winding down, specifically the U.S. Donor Screening business. And really, that was part of a portfolio optimization process review that we decided because it's a smaller market, it's a lower growth business, it's a lower margin business, and it's a business that would require investment to continue to compete. We decided it's better off for our shareholders just to wind that business down, and we'll get top-line growth improvement.
We'll get bottom-line EBITDA margin expansion as that business winds down into 2026. The Triage business is, you know, the non-respiratory piece of Point of Care. Again, that's a business that's been growing mid- to high-single-digit for us. It's a good business. It's one of the areas that's seeing good penetration for cross-selling as we put that product in the hands of the Ortho legacy Ortho commercial team around the world. So, you know, we continue to see good traction, good traction there. And then, you know, respiratory, I think it seems like we're getting through most of the big drops in revenue on the COVID side. It does feel like we're entering into a truly endemic stage for the COVID revenue. And that's really good.
The $150 million for the full year estimate for this year that we put out earlier this year seems to be a pretty good number. And so maybe I'll stop there and see if you have any follow-up questions.
Great. And, you know, when you say respiratory, there's obviously the non-COVID piece as well. Has there been some, you know, shift from standalone flu kind of testing into four-in-one? Has it had an impact on the business?
Yeah, it has. And that shift really happened, you know, during the pandemic and has continued post-pandemic. We call that the combo test, where the test will test for flu A, flu B, as well as SARS. And we characterize that revenue as part of our flu revenue. We have seen that very consistently for the last two or three years that that percentage or the mix of combo tests to total flu testing is greater than 50%. So it's proved to be a very durable product for us. It continues to sell well. And the price has been pretty stable as well.
Great. And maybe one sort of related question to the flu season, Joe. I think latest CDC had ILI pickup. Has it had an impact on your business, or how do you characterize that?
It's interesting, Vijay, this respiratory season, it seems to be getting back to what we would define as a more typical pattern that we saw pre-pandemic, and that is, you know, we would see that the distributors would load up at the end of Q3, which we did see, and then you would start to see ILI creep up and spike after Thanksgiving and more into December. I think during the pandemic and more a follow-on post-pandemic, we started to see ILI spike a little earlier, and now it seems we're getting back to more of a pre-pandemic cycle where that spike would happen more in December, which is where we are now, so we see the same thing you're seeing. We see ILI starting to creep up. We have a really good data point in that the Southern Hemisphere had an above-average respiratory season.
You know, it's not a perfect R-squared, but it's a good data point to have nonetheless. So, you know, we think that the guidance that we put out on the Q3 call, which has our respiratory revenue at the midpoint of the guidance down 30% year- over- year from Q4 last year and down 20% sequentially from Q3 this year, we think it's a pretty good place to be for the guidance that we have out there.
Fantastic. And Joe, you did bring up cross-selling. I think that was one of the strategic underpinnings for the deal, right? Maybe talk a little bit more on cross-selling and where have you done well and perhaps, you know, what have been some of the learnings?
Yeah, you know, if I could just maybe take a step back for a second, you know, the thesis of the combination of the two companies really has held up well. You know, it was on the Ortho side looking for a Point of Care, a Molecular business to put into the bags of the Ortho commercial team around the world, you know, roughly 3,000 people strong. And then for the Quidel side, it was really to have that global sales force to expand outside the U.S. and to have a more stable line of business like Labs and Immunohematology. That thesis still holds well. And there was no product overlap between these two companies. So there was really, you know, no product rationalization that needed to happen.
So as far as the cross-selling, it's mostly on the side of Quidel products in the bag of Ortho salespeople and outside the U.S. And so we're seeing that. We're seeing good traction, like I said before, with the Triage product and with also the Sofia product, mainly in, I would say, in geographies such as China, some countries within Asia-Pac, and some countries within Latin America is where we're seeing a lot of that traction.
Gotcha. And maybe one sort of housekeeping question, if you would. I was looking at your most recent presentation. I know it makes sense to back out COVID and U.S. donor business given your winding down. Why do you guys back out instrumentation too, you know, when you're healthy organic?
Yeah, here's why. If you go back to 2023, QuidelOrtho like a lot of companies in our space had supply chain hiccups and product backlogs, particularly instrument backlogs. And at the height, we had about a 600-unit instrument backlog because of supply chain issues coming out of the pandemic. And we were drilling down that roughly 600-unit instrument backlog during 2023. And so a lot of that incremental instrument placement, instrument revenue happened in Q1 and Q2 of 2023. And so when you're looking at this year versus last year, it did create a bit of a headwind on the comps. And so for the first half of the year, we thought it would be helpful for the Street and for our shareholders to see the numbers without the instrument revenue so you could see the true underlying increase in the business on a recurring revenue basis.
As we move into the second half of this year, those headwinds really kind of go away, and we'll probably talk a little less about that because it's not as bad of a comp year over year.
Gotcha. So for next year, it should just be donor business and COVID.
Yeah, it's exactly. You know, we are winding down Donor Screening, so we'll likely for sure back that out. And even with COVID, I don't expect there to be super significant drops there. So, you know, it's a little less of an impact there as well.
Gotcha. And then maybe, you know, if you look at the third quarter performance, you know, talk to us as you review the quarter, you know, what went right, what was about versus perhaps maybe in line to below.
Yeah, Q3 was a really good quarter for us. We were happy with where we ended up both versus our internal expectations and versus what the Street expected. I would say that the non-respiratory business, as you would think, because it's a very stable, predictable business, came in line with what we thought and what the Street thought. And as far as the respiratory business, there was a bit of an overachievement there, I think. And what we've done is, as part of the guidance, we took that overachievement in Q3 and just really labeled as timing and pulled it out of our Q4 numbers to de-risk Q4 and set up what we think is a pretty reasonable guide for Q4, again, with that 30% drop year- over- year in respiratory revenue and 20% drop sequentially from Q3 respiratory revenue.
As far as OpEx, I think we saw good performance on OpEx as well. You know, we did take out about $100 million annualized of cost midway through this year, and we're seeing the benefits of that as you look at the OpEx dropping year- over- year.
Gotcha. And that sort of segues into the fiscal 2025, you know, setup. I think you made some helpful comments on your call on fiscal 2025. You know, for me, you know, just looking at it from an external perspective, like last year, there was a surprise for relative to Street models as they went into fiscal 2024. So from that standpoint, I think giving those fiscal 2025 comments was helpful. When you look at Street numbers, you know, revenue EPS, has the Street heard your message and do you feel like it's in the right place?
Yeah, it's a good question. So there's a lot of moving pieces within the business. And we did think that despite not wanting to give full granular 2025 guidance, we thought that we would provide what we're calling breadcrumbs to some extent to give people some views into what we think 2025 will look like so models can be set. We thought it would be helpful. And it seems that the most folks we're talking to agree that it was pretty helpful to provide that information. And, you know, as you look at what we provided, just to recap it quickly, you know, we do expect the Labs continue to grow mid-single digit. We do continue to Immunohematology to continue to grow low single digit.
We purposely didn't say much about respiratory revenue because we really need to see how Q4 shapes up before we can comment on 2025 respiratory revenue. So we didn't say much there. We also highlighted the fact that we'll get that second $50 million of the $100 million annualized of cost benefits in the first half of 2025 and that we expect 100-200 basis points of adjusted EBITDA margin improvement off of the full-year adjusted EBITDA exit rate of, you know, roughly 19.5%, which is the midpoint of our guidance. So, you know, where the Street is now, you know, feels like it's a pretty good place. I think we're pretty comfortable with where things ended up in the models.
Gotcha. And maybe one more sort of pipeline-related question, Joe, if you will. You know, I know back in the day, both on Quidel and on Ortho Clinical side, you guys had some longer-term pipeline projects, right? Maybe just give us an update on where we are on some of these projects.
Yeah, specifically in the R&D area, you're talking about projects?
Yes.
Yeah, sure. So, you know, Brian Blaser is our new CEO. He started a little over six months ago. Brian is a really, really good addition to the team. We're super happy to have him. His experience speaks for itself. What he did at Abbott, running the Abbott Diagnostics division. And he's really bringing in some good ideas to how we run the business. And one of his themes is to prioritize and focus. And, you know, in the R&D area is no different there. And so what he's been having us focus on there, including his or our new Head of Technology, Jonathan Siegrist, who again is another great addition to the team having come from Cepheid, is to focus on, you know, the areas of Savanna, menu expansion, and then just increasing R&D productivity as a whole.
I would say that those right now are the very near-term priorities that we've laid out for Jonathan Siegrist and his R&D team.
Maybe some of this is because I'm not close to the story, Joe. The Savanna menu expansion feels like it's been pushed out. Maybe talk about what happened and what changes under Jonathan.
Yeah, I think, I mean, Savanna has definitely been a long and winding road for us. I do feel like it's in a pretty good place now with Jonathan Siegrist in place and leading the helm on our technology side. You know, we're purposely not saying as much as we did previously under the former CEO because I think that, you know, somewhat got us in trouble to some extent with a little too much commitment on dates. So what we have said that is that the respiratory panel, which is the, I guess, the primary focus at this point to get that approved in the U.S., is to start clinical trials as this respiratory season heats up here in December and January. And I would say the next panel with the next focus would be the STI panel for us. And that'll also enter clinical trials sometime in 2025.
We do expect that in 2025, at some point, I would say in the latter part of the year, you know, we should have approval for these panels. We don't think that the revenue will be significant in 2025. It's more of a, I think, more of a 2026 thing when the revenue starts to scale up. But we do expect to have those panels approved. I should probably also note that in the U.S., we already have the box approved by the FDA. We already have an HSV VZV panel approved in the U.S., which is essentially herpes shingles virus panel. So we are selling the box. We are placing the box. We also have a limited launch that's been occurring in Europe as well. We have the box and we have the respiratory panel under CE approval. So we're placing boxes.
We're winning deals in Europe as we speak using these competitive advantages that we've been talking about in terms of ease of use, turnaround time, and cost. We're winning deals already in Europe. So we have a lot of confidence that once we do get the respiratory panel approved in the U.S., that we will be successful in the launch.
Gotcha. So it sounds like from an R&D standpoint, it has been largely de-risked. And it's just a question of running a clinical trial. Would that be a fair statement?
Yeah, there's still a lot of work to be done. But we do feel like that things are in a pretty good place right now moving along.
Gotcha. And you know, you did mention the respiratory panel. Like the panel is, have you given any details on how many organisms or targets you would be looking at, what the level of multiplexing would be?
In the respiratory panel, it's a four-panel test.
Gotcha.
Yeah.
And maybe one last one on, have you disclosed on what is the current installed base or perhaps what should be a pull-through per system longer term for Savanna?
We haven't talked too much about that, Vijay. Yeah, I think we'll save some of that information for a later date as we get further along in the process. I think we can talk a little more about that. I think it would be probably a little premature. But I will say that again in Europe, where we have this limited launch ongoing, we are placing boxes. We're winning deals. And, you know, although it's a low base, we do expect that the revenue this year will double from what we did last year, which is a good sign.
Fantastic, and then, you know, one on the macro side, you know, post-elections, maybe talk about your exposure or potential impact from tariffs.
Yeah, this is a popular question. I think a lot of us are getting, a lot of CFOs are getting. I think if you look at the three countries that are probably most likely to get hit, it's Mexico, it's Canada, and it's China. I don't think we have significant exposure to worry about in Canada or really in China. We don't import a lot of components or products from those countries. Mexico would be the country that we'd probably have the more significant impact if there were tariff increases. And that's because we do manufacture some instruments for the Labs business in Mexico. But we do have options in place to mitigate. And depending on how severe these tariffs are and what the impact would be, you know, we could start pulling some levers next year to mitigate.
Gotcha. And in the U.S., you know, we do have. We'll see if there's a lot of details. We don't know. But could these products be sort of, I guess, come under exemptions because, you know, they serve healthcare markets? Is there a possibility?
There is a possibility, yeah. And I think those are a big part of all the details that need to be worked through before we get too far down the road of quantifying what these impacts would be. There absolutely could be exemptions like that.
Gotcha. And would you say the margin expansion targets, they're still intact even if we did have a tariff impact, you know, from imports from Mexico?
Yes. Yeah. We have several cost-down initiatives in flight in the procurement area, in the indirect area as well as the direct area, and yeah, even with some tariff increases potentially that we would expect that we would still achieve those benefits. Yes.
Fantastic. You know, the other thing that stood out, which has been unique for you guys is China. You know, year to date, I think China has done mid-singles. Now, for me, I just look at it from a life science perspective where, you know, China has been pretty challenged. What has been different for you guys? Why has China done so well?
China is an important market for us. It's about 10% of our revenue. It's also a very complex place to do business, as I think everyone is aware of. We monitor activities there very closely. We have a fantastic team on the ground there, a fantastic leader of that team there. We'll continue to monitor what's going on in China very closely going forward. But I would say as you think about all of the impacts, the bigger impacts going on there, you know, as far as the anti-corruption activities, you know, that's definitely impacted some of our instrument placements and the timing of instrument placements. There's been some delays. We do think that that is going to abate in 2025. As far as the value-based procurement initiatives that are ongoing there, we haven't had really significant impacts there.
We don't expect significant impacts there for this year or even next year. The reason for that is, one, that we don't have as large of an immunoassay base of revenue there as some of our larger competitors do. Immunoassay panels have been more of a focus in that value-based procurement initiative. The second thing is that the dry slide technology that we use has not really been a focus of the value-based procurement initiatives either. We feel pretty confident that we're in good shape this year and next year. We can't say a whole lot beyond that. We'll continue to watch it and monitor. I guess the third piece I would mention would be reimbursement issues. We mentioned this on the Q3 earnings call a few weeks ago.
You know, we do expect that there will be an impact to our cardiac business there because of reimbursement changes in some of the provinces in which we operate. But at this point, it looks like it's going to be fairly minimal, you know, maybe 1% or 2% of our China revenue that could be impacted by these reimbursement changes.
Gotcha, and you know, given the mid-singles trend, is that a sustainable number for you guys, Joe?
I think it is. I think, you know, Q3 had a tough comp, so it wasn't a great growth rate in Q3, but Q4, we expect to have a better growth. For the full year, we've been consistently saying we think that the business will be a high single-digit grower. For next year, we've said that we expect it to be a mid-single digit to high single-digit growth business, so we do think that it's a good business for us. The top line's been really good there.
Gotcha. Gotcha. That's helpful. And since you brought up dry slide, I know one of the pipeline projects was dry slide, I think, on the immunoassay side. Have you given an update on where we are on that project?
Yeah, that was a project that was started by Ortho legacy Ortho prior to the combination. And honestly, that project was more focused on the Donor Screening business. And since we've decided to wind down that Donor Screening business, that project was put off.
Gotcha. That's helpful. And then maybe switching on to Labs, you know, that's really, you know, it's been a bright spot, you know, mid-singles off of, I think, double-digit comps last year. Are there particular areas within Labs which have driven this trend, right? Is this Ortho Clinical, you know, placing more systems, or is this coming from consumables, i.e., share gains? How would you want to characterize it?
Yeah, I think the Labs success really hinges on, like I said earlier, the customer segmentation and the customer excellence strategy of leading with integrated analyzers. You know, our mix of immunoassay revenue to total is really inverted from the overall market. And only about 30% of our global installed base on the lab side is integrated analyzers. So there's a lot of room left to run on that strategy of leading with integrated analyzers and driving more immunoassay revenue. You know, the strategy is employed around the world. It is a global strategy. I would say that as far as volumes and growth, we do see higher volume growth in areas such as Asia-Pac, you know, some countries within Latin America, Eastern Europe. You know, you see slightly lower volume growth in the more developed countries, if you will, in Western Europe and in the U.S.
But, you know, we do see some higher growth rates in some of those other countries that get you to that blended mid-single digit growth rate around the world.
Gotcha, and how would you characterize the pricing environment within Labs?
Yeah, you know, it's interesting. I've been in this space for a long time in my career, and it's been pretty consistent where you see about 100-150 basis points of price erosion annually, and it's just a super competitive market. You know, you've got five- to seven-year contracts, and so every year, you're seeing, you know, roughly whatever, 15% of the contracts come up for renewal. Very competitive, and so, you know, us as well as the other DX players see this price erosion, so when we're talking about mid-single-digit growth, the volume is higher by that amount to offset that price erosion of roughly 100-150 basis points, which we've seen for decades in this space, and we expect that to continue going forward as well.
Gotcha. And, you know, from a margin standpoint, you know, what are the levers you have to offset the pricing headwind?
Yeah, I think the primary, well, let me say this. There's two things. One is we have put back into our contracts starting this year the inflation adjustment language that would allow us to pass on a higher than normal inflation going forward. You know, as we write deals, that new language is going into the contracts. You know, that language, those provisions have been negotiated out over the last few decades as inflation was very low. We put it back in now. So we feel that we're protecting ourselves if inflation were to rear its head again going forward.
And then, second, I would say that the direct procurement initiatives that we have in flight are really meant to get at the costs that crept into the business, you know, during the period 2021, 2022, 2023, where, you know, as an economy, we saw a lot of heavy inflation hit not just our business, but all businesses. And we were much more focused on integrating these two companies and harmonizing these two companies and making sure we didn't drop any balls on revenue or supply chain. And, you know, honestly, it's now time to take those costs out of the business. And so that's where we've got the direct procurement initiatives in flight that will get at that. Now, these direct procurement initiatives will take time. You know, this involves things like bringing in new suppliers and swapping out components within our products. It takes time.
So I wouldn't expect there to be a significant amount of impact in 2025, but I would expect there to be more impact in 2026 from those initiatives.
Gotcha. And, you know, since you brought up the mix angle on immunoassay versus clinical chemistry, I think one of the bright spots has been automated analyzers, right, which can do both. That's grown double digits. I think in the past, you used to give the installed base, what percentage of your total installed base is automated. What is that number right now? And, you know, what visibility does that provide you for a higher proportion of revenues coming from immunoassays going forward?
Yeah, that's right. I would say that as you think about our Labs business, the two most important metrics that we typically talk about on every earnings call are the growth in integrated install base and the growth in automation, and, you know, both of those figures are typically anywhere from, you know, high single digit to mid-teen double digit growth. The automated base is still a low, probably, you know, low single digit of the total, but again, it is growing nicely, and as I mentioned before, the integrated base is about 30% of the overall base, so for sure, those are two areas of growth that, you know, as long as we're still seeing good growth rates in those areas, we're still going to continue to see that mid-single digit growth in the Labs business.
That 30%, Joe, when you look at the, should that go up by a point or two every year, or how should we think?
Yeah, I think that's fair. When I joined the company nearly five years ago, that number was around 25% of the integrated base to the total. And so, yeah, I think that's a good estimate, BJ.
And how does it translate on the consumable side, right? Once you place these, you know, integrated systems, now you're tacking on immunoassays. Is that incremental?
Yeah, for sure. If there's a conversion from a standalone box to an integrated analyzer, there is a significant increase in the volume from that customer and the revenue. And again, the immunoassay revenue comes at much higher margins. So there's a little bit of a margin tailwind there. So yeah, for sure, that strategy does provide a lot of tailwind into the mid-single digit growth that we're hitting.
Gotcha. Then maybe one on the competitive standpoint, how would you characterize the competitive positioning? I think some of your peers are talking about higher single growth. They're looking at neurodegenerative diseases as a growth area. Maybe talk about your pipeline initiatives and competitive positioning.
I think for us and for any player within the DX space, keeping your menu up to date on the immunoassay side is critical to success. And that's why I mentioned before that one of our R&D group's main priorities is menu expansion. And so we, you know, when this business was carved out from J&J, you know, back in 2015, there was a menu problem. And Carlyle, to their benefit in the first few years of their ownership, really spent a lot of money developing the menu and getting it back to where it should be by the time you got into the 2018, 2019 timeframe. We are completely committed to keeping the menu up to where it needs to be.
And so all these sort of cutting-edge immunoassay products that you need to compete and get on tenders, for sure, that it's within our R&D group priorities to get there and get these menus out there for, you know, get these assays out there for our customers.
Gotcha. And then maybe one last one on Labs. When I look at the year-to-date trends, it feels like it's low singles. I have a feeling it's the instruments which needs to be backed out. Is that right?
Yeah. It's the instrument as well as if you go back to Q1 of 2023, there was a one-time collaboration settlement for about $18 million that went to the Labs business in Q1 of 2023. So you have to back out that piece too. When you back out that piece, you get, you know, squarely in the mid-single digit range.
Gotcha. And all we have to do to maintain fiscal 2025 is current trends in.
Exactly. That's right.
Fantastic. And then, you know, on the Transfusion side, you know, this Immunohematology, low singles rate, when you look at fiscal 2025, is that what the market's growing at, low singles? And you expect to grow in line with market, or are you gaining share in that market?
Yeah, the Immunohematology business, where again, we have a number one global market share, is growing low singles, and that is at market. Yeah. Yeah, it's exactly at market.
Gotcha. And then the other part of the equation here, the U.S. Donor Screening business, what is that? On a reported basis, I guess the revenue headwind for next year, is that like $50 million-$60 million?
Yeah, it'll be between $115 million and $120 million of revenue this year, and that's down about 15% from last year, and then as you move into 2025, we've said that we think that that business will be about $40 million to $50 million in 2025, and then in 2026, it'll be minimal. You know, as we exit customer contracts, there'll be some revenue in 2026, but I expect it to be minimal.
Gotcha. What's the margin uplift you get, Joe, from exiting this business?
Yeah, the margins on that business are low to mid-single digit adjusted EBITDA margins. So we would expect that we'll get roughly a 50-100 basis points EBITDA margin uplift when fully out of that business in 2026.
Gotcha. And then on the Point of Care, you know, this is one where it's done double digits, ex-respiratory, right? So talk about some of the menu, like what's driven some of these, you know, the strength. Also feels like numbers smooth around, like third quarter was down, some timing element. What drives that variability?
Yeah, with the Point of Care business, if you look at it on a non-respiratory basis, you know, the main driver of growth there is going to be that Triage product that's been seeing some good traction cross-selling around the world with the legacy Ortho team. When you look at it with respiratory, obviously there's going to be some volatility with the respiratory numbers sort of bouncing around a little bit. I think it's best to look at that respiratory revenue over a longer period. And, you know, when you sort of, when you look at it that way, I would expect it to be more of a mid-single digit growth business. And that's really just based on overall market increases and market share gains for us and, you know, continued installations of Sofia to that platform around the world.
Gotcha. And sorry, at the point of care, ex-COVID, did you say is that mid-singles or respiratory is mid-singles?
Yeah, I think, yeah, I should have said ex-COVID. I think that's the right way to look at it, correct?
Gotcha. And in what innings would you say we're in this cross-selling, you know, are we still early innings, mid innings?
Yeah, I would say it's early to mid. I think there's still areas around the world that we can do better. Yeah, I would say early to mid innings from that, yeah.
Gotcha. And I know Savannah, you said you'll refrain from giving comments, but maybe talk with Brian's sort of his philosophy and what has changed under Brian, you know, when you speak about things like R&D productivity. What is he doing that's different?
I think it's a focus. I think, you know, previously there was a little more of a shotgun approach of, you know, let's have a lot of oars in the water and a lot of shots on goal. And I think, you know, Brian's view is a little different of, let's focus on the main things that we see as priorities for the business. And I do think it's having an impact. And it's not just in R&D. I would say it's across the entire business that Brian is instilling this culture. And I do think it's beneficial for us where we are right now. We need to focus on what's ahead of us and what are the near-term priorities that are going to move the needle for margin as well as revenue.
Under Brian, has any of the comp metrics changed for sales and some of the leadership organization?
No. I mean, we did talk about flattening the organization on the Q3 call, and we took out a couple of pretty senior positions recently. And we've talked, you know, so, but there's been no changes to comp plans. You know, I think as you think about the commercial area for us, we're obviously being very careful not to rock the boat there too much. We certainly don't want to create any sort of revenue hiccups or any customer hiccups. And so, you know, we don't expect any changes with comp plans at this point.
Gotcha. And then I know you said Savanna revenues to double. Was that a fiscal 2024 comment or a fiscal 2025 comment?
That was relative to the EMEA limited launch comparing 2024 to 2023. Yeah.
Gotcha. And is that sort of sustainable, like another doubling up in fiscal 2025?
I think we'll provide more color when we give 2025 guidance in February. I think we want to get a little further along on the respiratory season, a little further along on the Savanna progress, and then we'll provide more comments in February.
Gotcha. And maybe if I take a step back, Joe, what is the longer-term thesis, right? Like if we just remove the transitory, you know, with the Donor Screening coming down or perhaps launching the menu on Savanna, right? In an idealized state, what should be the top line? What should be like normal margin cadence and EPS growth for this company?
I think it's pretty simple. On the top line, it's a mid-single digit growth business. I think with success with Savanna, we could potentially move up into the high single digit range for top line growth. But again, more to come on that as we get further along on the progress of U.S. regulatory approvals. On the bottom line, I think it's consistently what we've been saying. We think this business, as like most other businesses in our space and, you know, experience that Brian and I have had at other companies that we've worked at in this space, you know, there's no reason we can't be in mid- to high-20s% for adjusted EBITDA margin for this business.
Gotcha. And sorry, the EPS growth algorithm, should that be in the double digits or teens?
Yeah, I think that makes sense. Yeah, yeah.
Gotcha. And maybe one on free cash flow, what should be like a normalized free cash conversion for this business?
Yeah, for sure. We're not where we want to be right now with cash flow conversion. You know, the first half of this year was not a great cash flow period for us. It's much better in the second half. We will generate recurring free cash flow in the second half, and we'll generate recurring free cash flow. We expect to generate recurring free cash flow for the full year as well. But I would say as far as targets, we should be at least 50% conversion from adjusted EBITDA and on a net income basis over 100% conversion for recurring free cash flow. And I think the journey to get there will be similar to the journey on the margins. I'd say it's going to take a couple of years.
I don't think we'll get all the way there in 2025, but I would expect us to get closer to that in 2026, those targets.
Gotcha. And you know, I think one of the things you called out was incentive compensation as being a margin headwind for next year. Is that sort of a one-year impact just because some of these numbers have moved around? And then it shouldn't be an ongoing impact here in fiscal 2026?
Yeah, just to be clear and to make sure we're clear on this, that comment I made on the Q3 call about the bonus or the incentive comp was really meant to be a comment when you compare Q4 this year to Q4 of 2023.
I see.
Because last year we missed our targets in Q4, and so there was not a bonus accrual. And then we do expect at this point that we'll hit our targets this year, and so there will be. And so there is a differential in that OpEx line that you'll see Q4 this year versus Q4 last year. There's no issue with Q3 sequentially or no issue going into 2025.
Okay, that's helpful. And then maybe at the last minute here, any closing comments from you, Joe? Things that I should have asked? Anything you want to highlight?
You know, the only other thing I would say, Vijay, because I think it's on a lot of people's minds, and we talked about cash flow, but just to extend it a little further on the leverage ratio, you know, right now at Q3, our leverage ratio was a tick over four. On a pro forma basis, it was 3.3 when you include the pro forma add-backs allowed under the credit agreement. We do expect to make improvement on that as you move through 2025. We do expect that that leverage ratio will have a three handle in 2025. You know, ultimately our goal is to really get that down into more of a two and a half to three and a half times range. And again, I would expect we'll get there over the next couple of years as we move through the margin enhancement initiatives as well.
Fantastic. With that, I think I'm out of questions. Joe, thank you so much for the time this morning.