Good morning. We're going to get started. I'm Tycho Peterson from the Life Science Team at Jefferies. It's my pleasure to introduce QuidelOrtho. We've got Brian and Joe with us today. Welcome to you both. Got a lot to talk about. You guys have been busy. I think maybe we'll start, not surprisingly, with the SAVANNA announcement. You know, it couldn't have been easy. You've been working on it for a decade. Maybe just talk a little bit about the decision-making process, kind of what went behind that decision, what you saw in the RVP4 trial, and any other factors that played into it.
Yeah, I think it is something that the company's been working on for a long time. And, you know, me coming into the business a year ago and looking at the technology, I really felt like we needed to try to make this work. And there was really nothing in the underlying technology that I thought would be a barrier to our being successful with the respiratory panel. In parallel, we had acquired this option with LEX and were really evaluating the two platforms in parallel. And, you know, fortunately, our clinical trial data kind of came together at the same time, and we were able to do kind of a side-by-side comparison. And, you know, as Jonathan talked about on our call, the RSV component of the SAVANNA product was the most problematic.
I would say it was in kind of a gray zone for approvability, and it just did not meet our standards. It kind of started with that. We really also took a hard look at, OK, the technical risk here associated with bringing large syndromic panels to the market, given the history of the platform, the cost associated with doing that, and the time associated with doing that. Looking at the LEX product, which has very strong clinical data, much closer to broad commercialization, just really doing the calculus on that, it became clear that LEX was going to be our platform moving forward. It was a tough decision. I think we are very excited about the opportunity we have here with LEX, the differentiation I think it brings to the marketplace and the future for that product.
Maybe just a minute on the financial implications. I think previously you'd said it was roughly 200 basis point drag on margin SAVANNA, and that implies about $50 million in costs. I think on the call the other day, you said it's $25 million in run rate savings, $11 million in the back half of this year. Can you maybe help us just square all that away?
Yeah. If we were to shut down SAVANNA development and not replace it with anything, it would have been closer to a full 200 basis point of potential improvement to the guidance. With the LEX replacement, there's definitely going to be some reinvestment that's going to happen. We're also still selling SAVANNA, and we're still selling SAVANNA in EMEA and in the U.S. There's a dilutive impact to that. That impact also pulls down that 200 basis point impact if we had shut down SAVANNA without any replacement.
You touched a little bit on the strengths of the LEX platform. You have got history there having kind of made an investment previously. Maybe just walk through the history of kind of connecting with the company and what you think kind of the long-term roadmap looks like here for LEX.
Yeah, I think the product is clearly differentiated in terms of speed and cost and certainly ease of use. You've got a negative—I'm sorry, positive result in six minutes, negative in 10 minutes. If you look at other competitive platforms and you add in the hands-on time associated with preparing the sample and the cartridges, et cetera, we have a real speed advantage relative to other platforms that are out there. I think at a cost level, we're going to be able to offer, just based on the way this product is designed and will be manufactured, we'll have a real opportunity to provide very competitive pricing. There are other, again, features of this platform. I won't single out any of our competitors here today. I think there are opportunities for us to differentiate really kind of across the space with the platform.
Maybe we could just step back a little bit, Brian, and reflect a little bit on your time in the CEO seat and the journey kind of you've been on, the company's been on, and the path to kind of being a high-margin, durable, mid-single-digit growth business. Talk a little bit about some of the lessons learned from some of the prior challenges, where you see the opportunities ahead. Is there more portfolio restructuring to come?
Yeah. I think we are reshaping the business. There will be more to come for sure as we think about the business in the future. Coming into the business a year ago, what I found was a really highly motivated team. Quite frankly, lacking, I think, focus. We were spread very thin across a broad number of initiatives. I would say especially so in the R&D area where we were working on a lot of different priorities and a lot of things that were not going to have sort of immediate impact on the business. The first thing that we did was we got very focused about, OK, what do we need to do here? We need to get serious about and very focused on our entry/expansion in molecular diagnostics, first SAVANNA, now LEX, pivoting to LEX.
We had kind of let the cost structure get away from us. In my assessment of the cost structure, and along with Joe, we've been in diagnostics for a long time, we don't see any reason why this business shouldn't have a mid-20s adjusted EBITDA profile. We made that a priority along with cash flow improvement, return on invested capital, and getting all of our initiatives first around staffing, but then deeper with procurement, all of our indirect costs, and really getting a focus on getting that pathway toward the mid to high 20s EBITDA target. We got that underway. There are some things that just had to be taken care of with the menu of our existing platforms where we have some competitive areas that we need to strengthen, as well as some life cycle management.
I think bringing just some focus to the organization has really paid off. I'm all about focus. That is a lesson that I think I bring to the business. The other piece of it is talent. We clearly have had some challenges with R&D productivity. I think that's a function as much of a process as it is having great people in the organization. We brought in Jonathan Siegrist , our new CTO, who's had a tremendous impact on the business here in the very short time that he's been on board. We brought in a new CHRO, Lee Bowman , who's been just a super partner with me and the rest of the leadership team in really kind of evaluating and building the talent and the team underneath our leadership team. Yeah, I'm happy with the progress that we've made over this last year.
I think we've had a big impact. It's been a good year, a very productive year. We've got a lot of work in front of us, obviously, and looking forward to what we're going to do with the business here moving forward.
Can you talk about some of the organizational changes? It's easier from the outside to track the products. Maybe just talk a little bit about some of the stuff below the surface from an organizational perspective you're doing.
Yeah. One of the things I think one of the things we did, we were a very functionally oriented business. When the two companies came together, I think the mindset was we're just going to functionalize everything. We had sort of a hybrid business unit structure. We've really organized the business around two business unit leaders, a labs and transfusion medicine leader and our point of care and molecular diagnostics leader. We have regions that are aligned with those leaders and the functions. Our business unit heads are really the kind of what I call the quarterbacks for the organization. In the process of doing this change, we really flattened the organization significantly, took out a couple of layers that has really sped up, I think, decision- making, speed of communication, and our interaction as a team. It's been very productive.
We're making similar changes at deeper levels in the organization. I would say that the one thing we've been very careful about is not impacting our customer-facing people and structure in a way that would impact our relationship with customers. That has been a strength of this business for a long time. We are very sensitive to making sure that we have the right people facing the customer and the right level of service and support at that level as well.
Maybe just shifting to the business, coming off a good quarter, particularly on core lab, up 7%, clinical chem immunoassay doing well. Just talk a little bit about where you're seeing the strength, how you're feeling about hospital purchasing, given all the kind of uncertainties right now.
Yeah. Q1 was strong, really across the board. Labs had a very strong quarter. It was really a function of solid performance across the board. I would say EMEA, LATAM, and our Asia-Pacific area outside of China. China was solid. Our Asia-Pacific area broadly had very strong results kind of across the board. We've made some positive leadership changes in the EMEA and LATAM area that I think have been very positive, getting our business really focused on those segments where we have competitive differentiation, the right to win, and that are very profitable for the business. I think that's paying off. We also saw strong growth in our Triage business across the board. We made some adjustments to the cost of that product, making it more attractive. Our high-sensitive troponin offering outside the United States there is performing very, very strong.
Is there a particular geography for?
We've seen some strong trends on Q1. I think that's just.
For troponin, is there a particular geography? Is that Asia? Where are you seeing that strength?
We're seeing that in EMEA and LATAM in particular.
OK. And then point of care, obviously there's a flu dynamic there. But kind of even ex that, you're putting up decent numbers. Maybe talk about the sustainability of that, how you feel about SOFIA, the combo test and the other.
Yeah. The SOFIA combo test has been a very durable test for us. It continues to perform very well. I think about, is it 50% of our respiratory testing is done on that platform. We saw a pretty strong flu season. Most of that testing was done on the flu combo test. We did see softness in the SARS standalone testing. You would kind of expect that given the dynamic of the season. As we're kind of looking ahead to the respiratory season, we kind of see it playing out like, I guess, an average season, although we're all waiting to see what will happen here, if there will be a summer spike with SARS or not. Keeping a close eye on that.
Yeah. I mean, the 2Q ILI data has kind of tailed off. I mean, how do you feel about kind of the near-term trends overall in that business?
Yeah. So it typically tails off in Q2. It's usually our softest quarter. The earliest indications will be the wastewater data. And we have heard some news about a new SARS variant that's circulating in Asia. We'll start to monitor the southern hemisphere flu season here very carefully. There's a pretty good correlation between what happens there and what happens here. It's a little too early for us to kind of see anything developing at this point.
How do you guys plan around some of the vaccine developments, right? I mean, limiting COVID vaccines going forward. I mean, how do you plan on that for the upcoming season?
Yeah. I don't know that there's a direct correlation between vaccine development and testing. I think when people get ill with something like COVID or flu, docs still want to know what it is so they can treat it appropriately. Although the vaccine piece of it may be a good preventative, it's not necessarily a good predictor of the season and really doesn't have a whole lot of impact on testing.
Maybe just shifting to some of the other topical stuff, tariffs. I think people were pleasantly surprised this quarter that only a small portion of China's shipments were impacted. You were able to maintain the EBITDA target, obviously, with much less than expected tariff headwind. Can you maybe just talk about your comfort in that? Have you received any sort of notice of exemption? How do we get comfortable that it doesn't become an issue down the road?
On the Q1 earnings call, we did talk about a tariff impact of $30 million-$40 million for 2025. There's been some shift in that. I think things have gotten a little bit better since we did that earnings call about a month ago. Largely, we're still in that same range of $30 million-$40 million. We did actually stop shipping into China post-Liberation Day for the month of April to let things settle and give our supply chain team time to figure out what was happening and plan appropriate actions. Since then, in early May, we did start shipping again into China. I believe we'll largely catch up with those shipments in Q2, but probably not fully. There probably still will be some we originally planned for Q2 shipments that'll slip into Q3. We are still shipping into China without any tariffs.
We do think that based on what we hear from our local team in China, who works close with the customs folks there, that the lack of tariff seems to be a pretty durable situation at this point. It does not seem like a high risk for us now. Obviously, we are watching it very closely. The tariff mitigation actions that we have taken to offset that $30 million-$40 million are all happening as we speak. There are surcharges. There are some staffing reductions. There are some other controllable expense reductions that we are taking. All that is happening as planned. I do not see any issue with that.
The other angle we tend to get questions on is just volume-based procurement. Obviously, a lot of the larger diagnostic companies are kind of feeling some of the brunt of that. You guys have so far avoided that. It seems like the dry slide technology will continue to avoid that. How do we get comfort there long term that doesn't become more of a problem?
Yeah. That has been a durable exemption for us here over the long term. I think our near-term view is that that will continue. I think the value proposition that we have with the dry slides, as well as kind of the waterless systems when you consider the entire offering with immunoassay, fits very nicely into the stat lab environment in particular, where they oftentimes do not have a lot of plumbing and they are cramped for space, as well as I think it is supportive of the county hospital initiative that they are driving to push health care closer to patients in China. I think our product offering in particular has some differentiation that that market values. We are hopeful that our exemption will continue. We look forward to supporting that strategy more broadly in the country.
Can you maybe just talk about potential growth accelerators within China? 1 Q was flat. You had good growth in clin chem, triage was a little softer. I think longer term, you've talked mid, high single-digit growth in China. What is the path to kind of get there?
Right now, I think we see the mid to high single. There's a little bit of noise here in the system with tariffs. We are looking at a couple of things. We're going to be localizing some of our immunoassay reagent manufacturing in China. In addition, we're going to be launching a low-volume clinical chemistry analyzer initially for that market, but also other OUS markets toward the end of this year into next year. I think that will provide some considerable growth opportunity for us there. We are looking at other opportunities for us to participate in the point of care setting there. It is a very competitive and cost-conscious setting in China. We've got some hurdles to overcome there.
Yeah, I think in the near term, we're just looking to manage through some of this noise and hopefully continue to deliver the durable growth that we've experienced in that market up to this point.
Where in the portfolio do you see the most local competition?
I would say the most local competition would be, you see it everywhere in labs, really. I mean, we're largely a labs business there. Most of our business is clinical chemistry. We have some immunoassay business. Most of the BBP up to this point initially was focused on liquid chemistry and then, to a certain extent, immunoassay. We have this exemption. I would say the competitive environment there has intensified just as a function of that pricing dynamic in total. We do see that competitive pressure in the labs business there.
Maybe just globally, as we think about the competitive dynamics, I mean, Beckman's got a new instrument. Roche is pushing out a mass spec to address potentially some of this market. How do you think about competitive dynamics among the big players?
Yeah. We continue to have a very compelling portfolio in labs, of course, in the respiratory business. In labs specifically, our sweet spot is that low to mid-volume segment, where we play an important role in IDNs, but many times in this sort of hub-and-spoke model in that space. You do not see a whole lot of competitive pressure. There have been some competitive platforms that have come out here. Our systems are relatively new. They are not old. The life cycle of these platforms is very long, as you know. They are quite competitive in this space. We are not really feeling any sort of pressure there. We are starting, however, to think about, OK, as you do see volume continuing to consolidate into higher levels, how are we going to participate more fully in that? What can we do from a platform standpoint?
We're starting to put those ideas together now.
Are you seeing any change in the interest levels around reagent rental? I mean, that's always been a big part of this market. Are you seeing more customers kind of opt for those types of agreements in the SPAC drop?
Yeah. Tycho, we really have not seen a lot of change in those trends in our business. Typically, what we see globally is about 50% of our customers will pay cash for an instrument, and about 50% will utilize the reagent rental agreement, where we keep the asset on our balance sheet, and they pay us a surcharge as part of the reagent purchases. Those percentages vary by geography. Globally, it has been pretty consistently 50/50 for the past several years. Even with the recent economic issues we are seeing now, we are still not seeing hospitals or customers, in our case, delaying CapEx purchases. I think that is because when you look at the average cost of our instrument versus, say, the average cost of a piece of MRI equipment, it is much, much less.
I think you see the delays more on those larger capital purchases rather than the purchases that our customers are making of our equipment.
Maybe we could just hit on margins. Brian, obviously, talked about the longer-term targets there. You have got your cost-out initiatives, $130 million-$150 million. Maybe just talk a little bit about progress so far. What are the other levers to kind of get to, as you said, mid to high 20s, I would think, over time?
Yeah. It's a good question. I think it's helpful to kind of unpack it a little bit because I know there's a lot of pieces to it that we've talked about on the past several earnings calls. The first piece is the $100 million of cost-downs that we executed about a year ago now. By the time we get to the end of this quarter, Q2, we will have seen all the benefit from that $100 million cost-down. That $100 million was mostly made up of staffing reductions, where we took down our overall company staff by 9%. It was a fairly big cut. I probably should note here that even though we did take out a lot of people from the organization, to Brian's point earlier, we really tried to stay clear of the commercial organization. We didn't mess with the frontline salespeople.
There is really not any impact to our ability to hit those mid-single-digit growth targets that we have talked about on the top line. That is the first piece. The second piece is the $30 million-$50 million of in-year 2025 savings that we are executing on. That is mostly going to be indirect procurement-type actions. There is some headcount in there, but it is for the most part indirect procurement. I would say those projects are on their way to being fully executed between now and the next several months. We do see that we are going to achieve those savings this year in 2025. The third piece is the tariff mitigation, which I mentioned earlier. There is the tariff mitigation piece. This is a decent amount of staffing and some controllable costs. Again, these actions are all being executed right now and over the next several weeks.
We will see the benefits of that offsetting the tariffs that are going to impact us in the second half of this year. The final piece, which we really have not sized yet, is the direct procurement initiatives. These are the initiatives that will lower the cost of our products that we sell to our customers. There are a lot of initiatives in flight. These initiatives take longer than the indirect ones because you are dealing with swapping out suppliers and swapping out subcomponents and materials in our products. In a regulated environment like we are, you want to do that in a very measured, careful way. Those will take longer. We will not see those benefits until you get into probably the second half of 2026 until into first half of 2027.
When we talk about our margin goals and what we're trying to get to, those mid to high 20s, that's why they extend out into mid-2027 because it's these direct procurement initiatives that'll take a little longer. They're in flight, and they're progressing. I feel pretty good that we're going to get there with those initiatives.
How are you navigating those with supply chains moving around, tariffs moving around? There is a lot of moving pieces there.
I would say we have a really talented supply chain team led by our COO. He's just doing a fantastic job. It is a really talented team. There's a lot going on in that group, I would admit. Yeah.
Maybe just touch on free cash flow. You've talked about 50% EBITDA conversion as a target. I think you were 25%, 30% for this year. Maybe just talk about the path to get there.
Yeah. As a company, we were previously at 50% of adjusted EBITDA conversion. I really think that's where we should be as a company. We really should be at 50% or greater adjusted EBITDA conversion to recurring free cash flow. As you said, Tycho, we'll be in the 25%-30% range this year. That's not where we want to be. We do have the goal to get to 50% or above. I think the two main levers that we're pulling to get there are the margin improvement initiatives that we've been talking about now for the last 10 minutes. In addition, in the working capital area, there are some opportunities that we can go after in working capital, primarily in the inventory area.
For those of you running models on our company, you can see that our days of inventory have gone up over the last few years. That was intentional. We had a lot of issues, back orders and the like, coming out of the pandemic. We increased safety stocks. Now I think the pendulum may have swung a little too far. We, as a management team, believe that we can pull that pendulum back a little bit the other way. We can take some inventory out around the world. Between the inventory reductions and the margin improvement, I believe that we can get to that 50% or greater of adjusted EBITDA conversion on free cash flow along the same lines of the timeline for the margins. Call it mid-2027 that we should be able to get there.
We'll make improvement next year, and we'll get to the target in 2027.
Can you also just touch on debt covenant flexibility? You're just 3.4x right now. How much flexibility is there? What's the ceiling around pro forma EBITDA adjustments?
Yeah. I mean, it's no secret that the delay in the SAVANNA launch has really caused our leverage ratio to go higher than we want. We don't want to be above 4 on this leverage ratio. Our goal is to get it to a range of between 2.5 and 3.5. I believe that, and what we've said publicly, we believe that by the end of this year, we should have a leverage ratio between 3.5 and 4. In 2026, we'll make further progress on bringing that leverage ratio down closer to our target range. The credit agreement, as it currently stands, allows us to add back pro forma EBITDA adjustments up to 20% of our total EBITDA. That's the credit agreement threshold. That typically translates to about a 0.6 to 0.9 benefit, if you will.
In other words, if our leverage ratio is 4x on an actual basis, it's going to come down to more like somewhere around 3.3-3.4 likely on a pro forma basis. We feel we're in good shape with our leverage ratio covenants. We are, however, as I said on the earnings call a month ago, going to refinance the debt in the second half of this year. I think the markets are recovering from Liberation Day. The rates, spreads, the yields are starting to get back to a more, what you would say, normal level. I do think that we will have an opportunity to refinance the debt likely sometime in Q3 if the market continues to hold.
Just beyond the paydown, I think you've talked about 2.5x-3.5x leveraged midterm. What are the capital allocation priorities? I mean, how are you thinking about bolt-on M&A, more investments in certain areas?
I'll start. I'm sure we're going to say the same thing. Debt paydowns, as I just said, is the number one capital allocation priority for sure. However, we're going to continue to invest in the business. We're going to continue to spend 7%-8% of revenue in R&D. We're going to continue to look at potential M&A, if you will, in a small form, whether it be license agreements, distribution agreements, smaller bolt-ons. We'll continue to look at that. Right now, the allocation priority is definitely paying down that debt.
Anything you'd add on the M&A stuff?
No, I think Joe has captured it well. I think as we bring the leverage ratio down, that opens up the opportunity for us to then start thinking about some of these longer-term investments in new platforms and maybe larger M&A opportunities. In the short term, it's going to be really focused around debt paydown.
Got it. Maybe just last one. Donor screening, you're nearly complete with that exit. How are you positioning Immunohematology going forward for low single-digit growth?
Yeah. You know, we're the leading provider in the immunohematology space. We like our position there. Longer term, we're going to be looking at how we can improve the competitiveness of those platforms. In the shorter term, really, we're focused on making that a more profitable business for the company and a better contributor to our overall margin performance. That'll be our focus in the short term.
Great. We'll leave it at that. Thanks.
Thank you.
Thank you.
Thank you.