Yahoo Finance QuidelOrtho Corporation (NASDAQ:QDEL) Q1 2024 Earnings Call Transcript
QuidelOrtho Corporation (NASDAQ:QDEL) Q1 2024 Earnings Call Transcript May 8, 2024
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 First Quarter 2024 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 questions at the end of today’s prepared remarks. Please note this conference call is being recorded. A 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 evening, everyone, and thanks for joining QuidelOrtho first quarter financial results conference call. With me today are Brian Blaser, our newly appointed President and Chief Executive Officer; Mike Iskra, EVP and Chief Commercial Officer; and Joe Busky, Chief Financial Officer. Rob Bujarski, our EVP and Chief Operating Officer, will also join us for the Q&A session that follows our prepared remarks. This conference call is being simultaneously webcast on the Investor Relations page of our website. To aiding the discussion, we posted a supplemental presentation on the Investor Relations page that will be referenced throughout the call. This conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Statements that are not strictly historical, including the company’s expectations, plans, future performance, and prospects, are forward-looking statements that are subject to certain risks, uncertainties, assumptions, and other factors. Actual results may vary materially from those expressed or implied in these forward-looking statements. Information about potential factors that could affect our actual results is available in our annual report on Form 10-K for the 2023 fiscal year and subsequent reports filed with the SEC, including the Risk Factors section. Forward-looking statements are made as of today, May 8, 2024, and we assume no obligation to update any forward-looking statement except as required by law. In addition, today’s call includes discussions of certain non-GAAP financial measures.
Tables reconciling these non-GAAP measures to their most directly comparable GAAP measures are available in our earnings release and the supplemental presentation, which are on the Investor Relations page of our website at quidelortho.com. 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. And now I’d like to introduce Mike Iskra.
Mike Iskra: Thank you, Juliet. In a few minutes, I’ll introduce our new CEO, Brian Blaser, and then Joe will go through our quarterly financials in detail. First, I’d like to review our first quarter business performance and discuss the recent actions we’re taking, which are designed to improve our cost structure and deliver increased shareholder value. Beginning with our first quarter 2024 performance excluding COVID-19 revenue, total revenue grew by 6% in constant currency with solid growth across regions. Excluding COVID-19 revenue, we saw particularly good growth in EMEA, in China during the first quarter. Our Labs business, which was about 50% of our Q1 revenue, performed as expected with approximately 4% growth excluding the one-time third-party collaboration settlement in the prior year period.
Transfusion Medicine was 23% of Q1 revenue and grew by approximately 4%, driven by immunohematology reagent group across regions in the ORTHO VISION Swift and ORTHO VISION Max Swift instrument placements. Within Transfusion Medicine, our efforts to wind down the U.S. donor screening business continue as planned. Point-of-Care represented 26% of Q1 revenue. Excluding COVID-19 revenue, our Point-of-Care business grew approximately 38% year-over-year. Growth was driven by strong Sofia sales in the – market including our combo test, flu, strep and RSV tests. And lastly Molecular Diagnostics was 1% of Q1 revenue. Excluding COVID-19 revenue, Molecular grew approximately 15%, albeit from a low revenue base. On Savanna, we continue to work on producing a highly competitive respiratory panel for the U.S. market as well as menu expansion with the FTI panel and additional assays over time.
We plan to provide updates as we achieve milestones and get closer to our target for full commercial U.S. launch. Since our earnings call in February, the company has undergone a tremendous amount of change. While managing change can be challenging, we see this as an opportunity to build on our strengths and address the areas we need to improve. Over the past three months, we have implemented cost reduction initiatives designed to deliver better results in both the near- and long-term. Our focus areas include margin restoration, which includes headcount reductions expected to deliver approximately $100 million in annualized savings. Beyond those initiatives, we are actively looking for new opportunities to improve business efficiencies and realize greater savings as part of our continuous improvement culture.
At the same time, while acting in our prior role as Interim Officers CEO, Rob, Joe and I prioritize maintaining business continuity and accelerating our margin restoration initiatives. To that end, I believe our first quarter performance speaks to our team’s ability to navigate a transitional period, while keeping our business momentum intact and forging ahead with purpose. We welcome Brian as our new President and CEO. Brian brings over 25 years of senior leadership experience in the diagnostic industry, including seven years of full responsibility for Abbott’s global diagnostic business. His track record of streaming operations and driving revenue growth to dramatically improve profitability, makes him an ideal leader to guide QuidelOrtho through its next phase of growth.
On behalf of our Global Leadership Team, I would like to thank our employees of QuidelOrtho for continuing to serve our customers and deliver on our 2024 operating plan. We appreciate your dedication and ability to remain focused during transitional times. We look forward to a smooth transition with Brian now at the helm to pave the way for a successful future. Now I’d like to turn the call over to Brian. Thanks Mike.
Brian Blaser: Thanks, Mike. I am very pleased to join the call today. And first let me say that it is a true honor to join this exceptional organization. I am thrilled to have the opportunity to work with this leadership team and our talented colleagues across the company. And today I’d like to share a few of the reasons I was compelled by this opportunity at this pivotal point in the company’s history. First, I have always viewed Quidel and Ortho separately as highly innovative companies and formidable competitors. Combined now as QuidelOrtho, this business has one of the broadest product portfolios spanning the continuum of care from reference labs, to hospitals, clinics and urgent care, to retail and home testing. QuidelOrtho touches every stage of the patient care spectrum, including prevention, diagnosis, patient care and monitoring.
This business has all of the underlying capabilities required to drive exceptional growth and profitability in a large and expanding market. There is work to do and I am excited about steering the company so it can achieve its full potential. In the short term, I will be focused on our highest priorities, which are unwavering attention to customer satisfaction and patient care, improving profitability and cash flow, while reducing our debt level, and positioning ourselves to compete effectively in the highly competitive diagnostics market. I look forward to providing more details about our strategic direction as we move forward. I’m excited about the opportunity to engage with many of you in the coming months and answer your questions when I host our second quarter earnings call in August.
Joe, I’ll now turn it over to you.
Joe Busky: Thanks Brian. I would also like to welcome you to QuidelOrtho, and I look forward to the next chapter in our company’s growth story. Let’s begin with details of our first quarter results on Slide 4 of the earnings presentation. As a reminder, unless stated otherwise, all year-over-year revenue growth rates on today’s call are provided on a comparable constant currency basis. Our first quarter 2024 financial results were in line with our expectations and our underlying business trends remained solid. First quarter 2024 revenue was $711 million on a reported basis compared to $846 million in the prior year period. The year-over-year revenue decrease is primarily COVID-19 related. Therefore, excluding COVID-19 revenue, our total revenue grew by 6% in constant currency with solid growth across all regions.
And if you also exclude the one-time $21 million third-party collaboration settlement from Q1 of last year, total revenue growth was 10% in constant currency. From a regional perspective, in Q1, again, excluding COVID-19 revenue and in constant currency, we achieved revenue growth of 5% in North America, EMEA grew 6%, China growth of 12% and the Rest of the World growth of 6%, which includes Japan, Asia-Pacific and Latin America. First quarter 2024 non-respiratory revenue was flat compared to the prior year period of $574 million. Excluding the one-time third-party collaboration settlement in the prior year period related to our labs business, non-respiratory revenues grew 4%. First quarter 2024 respiratory revenue was $137 million, which included approximately $50 million in COVID-19 revenue.
Respiratory revenue decreased 48% year-over-year, primarily due to lower COVID-19 revenue. Excluding the government-only COVID-19 orders, respiratory revenue grew 6%. And as Mike mentioned, our first quarter respiratory growth was driven by strong Sofia sales in the professional setting. We leveraged our large global Sofia installed base with 70% of Sofia customers purchasing multiple tests. This includes our combo test, which accounted for greater than 50% of our flu testing revenue in Q1 and is consistent with the past several quarters, demonstrating the durability of this product. Moving down the P&L. Non-GAAP total operating expenses were essentially flat compared to the prior year period. Slide 5 shows that Q1 adjusted gross profit margin was 47.5% versus 53.8% in the prior year period.
The change was primarily related to lower COVID-19 product sales, which are high margin contributors as well as one-time items that made for favorable year-over-year comparisons. In summary, gross margin headwinds were comprised of three one-time items. 630 basis points related to the large government COVID-19 order in Q1 of last year, 140 basis points from the one-time third-party collaboration summit in Q1 of last year. And finally, 230 basis points tied to an inventory reserve related to the respiratory product expiration in Q1 of 2024. Those three items were partially offset by underlying base business performance and cost-saving actions within manufacturing and supply chain, which were approximately 400 basis points of benefit to the margin.
Adjusted EBITDA was $132 million compared to $245 million in the prior year period. Adjusted EBITDA margin was 19% compared to 29% in the prior year period. Adjusted diluted EPS was $0.44 compared to $1.80 in the prior year period. The year-over-year change in adjusted EBITDA and adjusted diluted EPS was primarily due to the lower COVID-19 revenue from the government order. Our first quarter effective tax rate was 23.5%, which was consistent with the prior year and in line with our full year expectations. In Q1 2024, we recorded a noncash goodwill impairment charge of $1.7 billion for the North America reporting unit due to the decrease in the estimated fair value which was consistent with the decline in the company’s market capitalization during the quarter.
Turning now to the balance sheet on Slide 6 of the presentation. We finished the quarter with $79 million of cash and $40 million drawn on the revolver. Note that during the quarter, we liquidated investments to avoid additional revolver borrowings. Recurring free cash flow of negative $13 million was driven by working capital needs. We do expect cash flow to improve in the second half of 2024 as margin restoration impacts take effect, along with seasonally higher revenue expected in Q4. We continue to focus on executing our cost savings and margin restoration initiatives which are designed to deliver improved performance and sustainable long-term growth. We expect the benefits from these initiatives to be realized in the second half of 2024 and in the first half of 2025 with minimal impact in Q2 of this year.
Taking all this perspective, we intend to maintain operating flexibility as we implement these initiatives. In light of this, and in an effort to be conservative, we did amend our credit agreement in April. To increase the maximum consolidated leverage ratio beginning in Q3 this year through the loan maturity in May of 2027. Importantly, we completed this amendment at a cost of 12.5 bps of the total loan commitment and the loan pricing is unchanged. During the first quarter of 2024, our consolidated leverage ratio was 3 times, including pro forma EBITDA adjustments compared to the 4 times maximum specified in the amended credit agreement for the first half of 2024. Based on current expectations, we expect our consolidated leverage ratio to be approximately 3.5 times by the end of this year, including pro forma EBITDA adjustments compared to the 4.25 maximum specified in the amended credit agreement.
Lastly, we want to provide some relevant updates based on our current visibility. Our prior expectation for COVID-19 revenue was approximately $225 million based on our current view, which is subject to change based on COVID-19 developments, we are now expecting approximately $150 million in COVID-19 revenue for the full year 2024. Second, we also expect that Savanna revenue will be immaterial in 2024 with no expected U.S. respiratory revenue contribution from Savanna in the 2024, 2025 respiratory season. And as a reminder, the COVID-19 public health emergency in the U.S. ended in May of 2023. However, we continue to see significant quick view COVID-19 cash sales in the retail setting in the second quarter 2023. Hence, we expect year-over-year COVID-19 revenue comparisons to again be challenging in Q2 of this year.
And as a result of these changes to the COVID-19 and Savanna revenue, our current expectations are to be at or slightly below the low end of our previously communicated 2024 guidance ratings for revenue, adjusted EBITDA and adjusted EPS. With our new President and CEO coming on Board this week, we’ve decided to suspend guidance to give Brian an opportunity to assess the business and evaluate our plans for the rest of 2024. We do intend to resume providing guidance later in the year when we are able to share our plans. I would now like to ask the operator to please open the call for questions.
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