QuidelOrtho Corporation (QDEL) Q3 2026 Earnings Call Transcript

Operator: Welcome to the QuidelOrtho Third Quarter 2026 Financial Results Conference Call and webcast. [Operator Instructions] Please note, this conference call is being recorded. An audio replay of the conference call will be available on the company's website shortly after this call. I would now like to turn the call over to Sanjeev Sharma, Vice President of Investor Relations. Sanjeev, please go ahead.

Sanjeev Sharma: Good afternoon, everyone, and thank you for joining us on our earnings call. With us today, we have Brian Blaser, our President and Chief Executive Officer; and Micah Young, our Chief Financial Officer. This conference call is being simultaneously webcast on the IR section of our website. To assist in the presentation, we also posted supplemental information on the Investor Relations page that will be referenced throughout this call. Please note that this conference call and supplemental information contain forward-looking statements, including the company's expectations, plans, financial guidance and various strategic initiatives. We assume no obligation to update any forward-looking statements, except as required by law. These statements are made as of today and are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied in these statements. Please refer to our SEC filings for a description of potential risks. In addition, today's call includes discussion 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 supplemental information on the Investor Relations page of our website. Lastly, unless stated otherwise, all year-over-year revenue growth rates given on today's call are on a constant currency basis. With that, I would like to turn the call over to our President and CEO, Brian Blaser.

Brian Blaser: Thanks, Sanjeev, and good afternoon, everyone. I'd like to begin with 3 important takeaways from the quarter. First, the underlying performance of our business remains resilient. Labs and immunohematology, which represents 70% to 75% of our revenue, excluding China, delivered low to mid-single-digit organic growth. Second, our reported results continue to reflect 2 significant near-term headwinds, the impact of China's now finalized nationwide IVD pricing guidelines and the softer respiratory testing environment in point of care. Third, we are acting decisively and launching a new cost transformation and enterprise restructuring program designed to improve profitability and cash generation while evolving our operating model around the distinct needs of our customers and markets. These actions are intended to strengthen execution today and position QuidelOrtho for sustainable, profitable growth over the long term. Turning to our third quarter results. Total reported revenue was $619 million, down 12% from last year. Revenue increased 3%, excluding China, respiratory and the prior year contribution from the U.S. Donor Screening business, which we are winding down. Labs revenue outside China grew 4%, supported by the strength and durability of our customer relationships and large global installed base. Immunohematology revenue outside China increased 3%, reflecting steady demand across key markets and our strong position in the segment. Together, these results reinforce an important point. The underlying fundamentals of our business remain healthy. We serve large and attractive diagnostic markets, hold leading positions across multiple categories and benefit from recurring revenue streams supported by long-term customer relationships and a substantial installed base. Point of Care revenue declined 27% year-over-year, including a 39% decline in respiratory revenue. As anticipated, respiratory demand remained below the prior year period. Given the inherent variability of respiratory trends, our outlook continues to reflect cautious assumptions for the balance of the year based on activity through the end of the third quarter. China revenue declined 45% year-over-year as distributors and customers continue to reduce purchasing and inventory levels related to the nationwide IVD pricing guidelines, which were finalized in mid-August. Implementation of the guidelines is expected to begin in 6 provinces by the end of this year with timing determined at the provincial level. The final guidelines were generally consistent with the second draft released in June and broadly removed pricing differentiation by methodology. Provincial implementation timing remains uncertain. Based on what we know today, we expect continued destocking throughout the remainder of 2026 and increased pricing pressure in 2027 as pricing changes are implemented throughout next year. We are managing this transition with urgency and discipline. We're working closely with our China team, customers and distribution partners to adapt our commercial model as the market evolves. Our priorities are clear: support customers, protect the installed base, align costs with expected business activity and preserve the long-term value of our China franchise. Today, we also announced a new cost transformation and enterprise restructuring program to position QuidelOrtho for sustainable long-term profitable growth. We are improving our cost structure and reshaping the organization around our customers, their needs and the economics of the business. Enterprise optimization and restructuring are the immediate parts of that work. The objective is not simply to reduce cost. It is to strengthen underlying performance. As part of this program, we are evolving our operating model around 2 focused businesses, core diagnostics and Point of Care diagnostics. The Point of Care diagnostics business will include our Sofia, Triage and NULEXA product lines aligned with near patient testing performed primarily in clinics, physicians' offices and emergency rooms. Core Diagnostics will bring together our labs, immunohematology and informatics portfolios, serving the needs of clinical laboratories, hospitals and blood banks. The new operating model is designed to increase customer focus, create clear accountability for business performance and better align technology development and investment priorities with the distinct needs of each business. We expect this program to deliver over $80 million in annual savings in 2027. These actions are intended not only to mitigate near-term China headwinds next year, but also to structurally improve QuidelOrtho's earnings profile and cash generation. Our priorities remain consistent: expand profitability, improve free cash flow and reduce leverage. Micah will provide additional details shortly. As we execute our cost and restructuring program, we plan to protect targeted investments in innovation and growth platforms where we see clear customer value, differentiated capability and attractive returns. We remain committed to making these focused investments to enable the next phase of QuidelOrtho's growth. For example, within our labs business, we are expanding the VITROS 450 launch to additional key international markets, empowering low-volume and community-based labs with our next-generation analyzer designed to deliver differentiated dry slide performance with high quality and consistent results at lower costs. NULEXA, our Point of Care molecular platform, is another example of our focused approach. Since closing the acquisition of LEX earlier this year, we have made meaningful progress building manufacturing and commercial launch capabilities. NULEXA remains in the early stages of launch, and we are balancing investment with disciplined cost management. Early customer engagement supports our view that its combination of molecular level performance, speed and workflow simplicity addresses an important unmet need in the Point of Care market. Beyond the initial respiratory menu, NULEXA provides a scalable platform with meaningful menu expansion opportunities. Combined with our broad commercial reach and deep customer relationships in Point of Care diagnostics, we believe NULEXA can become an important contributor to our long-term growth strategy. As we enter respiratory season, our focus is on building placements, driving utilization and expanding the installed base ahead of the 2027, 2028 season. And with that, I'll turn the call over to Micah. Micah?

Micah Young: Thank you, Brian, and good afternoon, everyone. Before reviewing our third quarter financial results, I want to provide additional perspective on the cost transformation and enterprise restructuring program announced today and how we expect it to strengthen our earnings profile, cash generation and financial position over time. Last quarter, I outlined 3 immediate priorities as CFO, strengthen operating discipline, improve cash conversion and reduce leverage. Since then, we have conducted a detailed review of the operating model, cost structure and portfolio to identify where we can simplify the organization, align resources with current market realities and preserve funding for the highest return growth opportunities. Consistent with those priorities, the program announced today is expected to deliver more than $80 million of annual savings in 2027. These actions are designed to align resources with the distinct needs of our customers and markets, strengthen financial discipline and improve the rigor of our investment decisions. We expect to record approximately $30 million to $35 million of onetime restructuring charges in the fourth quarter, with the majority of the related cash outflow occurring in the fourth quarter of 2026. Together, these actions are intended to create a more efficient cost structure that can absorb near-term headwinds, improve earnings and cash conversion and support sustainable profitable growth. Let me now review our third quarter results. Total reported revenue was $619 million, representing a 12% year-over-year decline on a constant currency basis. As expected, the quarter was affected by continued pressures in China related to changes in the nationwide IVD pricing guidelines and by a softer respiratory environment. Excluding China, respiratory and the donor screening wind down, revenue increased 3%. Labs and immunohematology represented 73% of total company revenue, excluding China and grew at a low to mid-single-digit rate. Outside China, labs grew 4% and immunohematology grew 3% on a constant currency basis. Growth was broad-based across several key geographies, including Latin America, Japan and Asia Pacific. China revenue declined 45% year-over-year as customers reduced purchasing and inventory levels in response to the nationwide IVD pricing guidelines. While provincial implementation schedules remain uncertain, we expect continued customer caution and destocking for the remainder of 2026 with the majority of the pricing impact expected in 2027. Based on our current assessment, we expect China to represent approximately 8% of total company revenue in 2026 and approximately 4% to 5% in 2027. Turning to profitability. Adjusted gross margin was 47.8%, down 90 basis points year-over-year, primarily reflecting lower revenue and unfavorable product mix, partially offset by cost actions. Third quarter gross margin included approximately 300 basis points of benefits from tariff refunds, vendor credits and cost savings that we do not expect to repeat in the fourth quarter. Non-GAAP operating expenses were approximately 34% of revenue, up 300 basis points year-over-year, primarily reflecting the impact of lower revenue. In absolute dollars, non-GAAP operating expenses declined 3% to approximately $210 million, reflecting continued cost discipline. Adjusted EBITDA was $148 million, representing a 24% margin and adjusted earnings per share was $0.31. Turning to the balance sheet and cash flow. Improving cash flow and reducing leverage remain among our highest financial priorities. Operating cash flow was $20 million, an improvement of $65 million year-over-year, reflecting improved working capital performance. Net capital expenditures were $19 million compared with $49 million last year, reflecting greater discipline around capital allocation. This resulted in approximately breakeven free cash flow compared with negative $95 million last year and negative $136 million in the second quarter. This represents a meaningful sequential and year-over-year improvement, but it is not yet where we need it to be. Our focus is on turning the improvement we saw this quarter into sustained cash generation through tighter working capital management, lower capital intensity and structural improvement in profitability. As I mentioned earlier, our fourth quarter free cash flow will be impacted by the restructuring charges related to the cost transformation and restructuring program we announced today. We expect the majority of the $30 million to $35 million to result in cash outflow in the fourth quarter this year. During the quarter, we proactively amended our credit agreement to provide additional covenant capacity as we execute the transformation and restructuring program. The amendment increases the maximum consolidated leverage ratio to 5.5x adjusted EBITDA through the second quarter of 2028, after which the covenant steps down over time. We believe securing this additional flexibility was a prudent step that supports our ability to execute the transformation while maintaining our focus on cash generation and deleveraging. At quarter end, net debt was approximately $2.8 billion and net leverage was 4.5x adjusted EBITDA, including the pro forma adjustments permitted under our credit agreement. This compares with 4.3x in the second quarter, primarily due to the revenue-driven decline in our trailing 12-month adjusted EBITDA. We ended the quarter with $166 million in cash. Turning to our outlook. Based on our current outlook, we are narrowing full year revenue guidance from $2.52 billion to $2.6 billion to a range of $2.52 billion to $2.54 billion. The change primarily reflects our updated view on China. Consistent with the revised revenue outlook, we now expect full year 2026 adjusted EBITDA of $540 million to $545 million, and adjusted earnings per share of $0.65 to $0.70. Our assumptions for labs and immunohematology are unchanged, and we continue to expect low to mid-single-digit growth in 2026, excluding China. Our guidance continues to incorporate a cautious fourth quarter respiratory assumption based on trends through the end of the third quarter. Finally, improving free cash flow conversion remains an important management priority. We are taking actions across working capital, capital expenditures and our cost structure to drive stronger and more consistent cash generation. The transformation announced today is an important step towards achieving this objective. While meaningful work remains, I'm encouraged by the strength of our underlying business and the progress we are making. We remain focused on disciplined execution and positioning the company to deliver sustainable long-term value for shareholders. With that, we will open the line for questions.

Operator: [Operator Instructions] Your first question comes from the line of William Bonello with Craig-Hallum Capital Group.

William Bonello: Hopefully, a follow-up that is related. I want to make sure I'm understanding the change in the operating structure. I think if I'm recalling correctly, you've been managed at kind of a geographic level. Is that correct? Is that the change? And then if so or from whatever you're going from, what's sort of the practical implications in terms of commercialization and cost of the restructuring, not the dollar amounts, but what sort of what actually improves?

Brian Blaser: Yes. Thanks, Bill. This is Brian. Yes, historically, we have had a regionally based model, and we recently modified that to be more of a business unit-led model that was matrixed across regions. This is an evolution of the model really designed first to improve profitability, cash flow, support our deleveraging efforts, at the same time, offset the headwinds that we have in China, but it creates additional customer focus on distinct sets of customers. And Point of Care diagnostics is really a business that's focused on physicians' offices, clinics and emergency rooms. The core diagnostics business is focused on customers and hospitals, reference labs and blood banks. And the new model just creates clear accountability for our business performance and at the same time, allows us to align our development and investment priorities with the needs of those businesses. As we mentioned on the call, we're expecting to generate over $80 million of savings in 2027. We'll incur about $35 million worth of costs in '26 to make this change. There are some dis-synergies associated with doing that, but we expect those to be fully offset by the savings. I would say a couple of additional comments there that we are taking care as we do this to minimize the customer-facing disruption associated with it. And in fact, from my point of view, this should result in more customer focus and not less. And so we're excited about the new leaders that we've appointed to those roles and the focus that this is going to bring to our business.

William Bonello: Okay. That's very helpful. And just as a follow-up to that, the $80 million cost saving program, is that just sort of a quantification of the efforts that you've been talking about over the last couple of quarters when you've talked about offsetting some of the industry headwinds? Or should we think of this as an incremental $80 million kind of above and beyond what you were already planning?

Brian Blaser: Yes. Bill, you should think of this as completely new incremental savings to the -- over $140 million that we have generated over the last couple of years in additional savings. Most of the savings is coming through staffing reductions initially, and this will be the first part of the effort. Beyond this, we are going to be looking at even more savings in terms of indirect spend across the P&L over the next several months as we get our heads around this.

Operator: Your next question comes from the line of Tycho Peterson with Jefferies.

Tycho Peterson: I want to probe on the labs. Ex China, you did have a bit of a decel from 9% last quarter to 4% this quarter. The comps were pretty similar. So maybe can you just touch on that? Was that attributable to Middle East dynamics, other items? What drove the softness there?

Brian Blaser: Yes. I would say there's a little bit of softness related to the Middle East. If you look across the P&L regionally, EMEA was kind of our softest region. There's also some order timing built into that. We had a couple of tenders that we were shifting across quarterly boundaries. But generally speaking, we're seeing still underlying solid business performance in terms of win rates, renewal rates on our existing business. And so I don't see that as any sort of real underlying trend there, Tycho.

Tycho Peterson: Okay. And then maybe just following up on the free cash flow. I mean, you've been in the seat over 100 days. I guess, could we get your frank assessment of the situation? I mean, understanding, obviously, there's always stocking dynamics around respiratory. But apart from that, what are the tangible items you found that are inhibiting greater free cash flow generation? And do you believe those things are actionable in the next 6 to 12 months here?

Micah Young: Yes. Thank you for the question. So the actions we're taking are designed to really -- we're trying to enhance profitability, improve cash conversion and also reduce leverage, as you know. The areas we're concentrating on are ones that are in our direct control. It's improving cost structure, driving working capital efficiency and reducing capital expenditures. And I think -- this quarter, we've made some progress, still not where we want it to be, but we saw a quarter of breakeven free cash flow when the first half of the year was negative $203 million of free cash flow. So we're seeing progress there. The cost actions we're taking today and the restructuring program is going to continue to structurally improve our ability to drive higher earnings and free cash flow over time. And we are expecting to see some impact, as we mentioned in the prepared remarks, on our fourth quarter free cash flow that's going to be impacted by onetime restructuring charges with the majority of that being impacting our cash flow in Q4. And we're still working through. I think if you recall in the last earnings call, I mentioned that with the lower -- or the demand headwinds with China as well as a softer respiratory season, we're still managing through some of those working capital impact this year. But all those areas I mentioned, those are the areas we're focused on. We're seeing improvement already in capital expenditures, and that's on top of working through some of the manufacturing transitions at our Raritan facility. So I think we're continuing to really focus in those areas and hopefully continue to show improvement as we move forward.

Tycho Peterson: Okay. That's helpful. And then just one last quick one. You're resegmenting LEX into Point of Care. I assume you don't want to sell that asset. So does that mean there is no deal happening? Are you able to comment on that?

Brian Blaser: Yes. Thanks, Tycho. I'm not going to comment on any specific rumors around that. All I will say is that cash flow improvement and deleveraging the company are our highest priorities. We are looking at every option that supports deleveraging and that creates shareholder value. But right now, our priorities for the business are clear. We're looking to improve profitability, increase cash flow, reduce leverage and this cost transformation and restructuring program that we announced today is an important step, frankly, to make the company more efficient as we work through those priorities.

Operator: Our last question comes from the line of Jack Meehan with Operon Research.

Jack Meehan: For my first question, I wanted to ask about your estimate for China going to 4% to 5% of total company sales next year. Is it possible you could just provide a little bit more color around what you're seeing from today or this year at 8% to go to that? And what -- are you comfortable that this could be a floor? Are there pieces like immunohematology that give you comfort around that? Just any color around how you came up with that estimate would be great.

Brian Blaser: Yes. So Jack, we have seen more accelerated destocking by customers than we originally expected when we originally put our estimates together for the Q2 call. There is still uncertainty around the provincial level implementation time line. We've got 6 provinces expected to begin by the end of this year, and then each province is establishing their own time line for next year. And as you think about this year, it's really mainly a destocking situation. As you look into next year, it's really 3 factors. You've got some continued destocking overlapping perhaps in the early part of 2026. But then we have the impact of lower reimbursement rates that are pressuring prices. And then on top of that, you've got increased competitive pressure that are impacting volumes. So we -- as you can imagine, we put together some ranges of how we are thinking about each of those factors impacting the business, both in 2026 and 2027. At this point, we're expecting China to be about 8% of total revenues this year and in that 4% to 5% for 2027. And of course, this drives the cost transformation and restructuring program that we've launched today to mitigate that. And that should mitigate not only the China headwinds, but also better position the company in the long term in terms of profitability, cash flow and deleveraging structurally.

Jack Meehan: Can you help us -- maybe just building off that, can you help us put in context the $80 million savings target kind of in context of the China headwind? I think you mentioned the expectation for 2027, it was going to evolve to be more of a pricing impact. Should we think of those 2 things as offsetting? Or do you think one could be bigger than the other?

Micah Young: Yes. No, I think as we look at the cost transformation, I mean, we're -- and we'll talk -- let me talk a little bit about the timing of that. But we expect over $80 million of savings in 2027. We expect that to start in the fourth quarter this year and then ramp throughout 2027 with slightly more weight in the second half than the first half. Based on our expectations of 4% to 5% of revenue mix of China next year, this program, as Brian mentioned, should more than offset those near-term headwinds, but also improve our cost structure and our earnings profile. So I think as we look at that and the timing, that's where a lot of this was focused on. And also, there's going to be some disproportionate amount also with China in that savings.

Jack Meehan: Great. If you don't mind me squeezing in one more question. I think you mentioned guidance assumes respiratory conditions as of the end of the third quarter. I have to ask because the -- me and family with the kids back-to-school has been sick a number of times in the past few weeks, and it looks like some of the CDC data is picking up. I was curious if you could comment at all around what you're seeing and whether you feel like maybe that's a conservative starting point?

Brian Blaser: Yes. Jack, well, hopefully, you guys are reliable customers for us. But yes, we're seeing an early start to the season. But as you know, an early season doesn't always mean a higher -- longer peak or a higher degree of illness, greater severity of illness. And so we continue to maintain a very cautious outlook based on the results that we saw through Q3. And I would also say that throughout the year, although the testing has been lower, we also haven't seen any changes in testing protocols. It's just a lower season up to this point, and our share at this point remains very stable.

Operator: Our final question comes from the line of Casey Woodring with JPMorgan.

Casey Woodring: I guess I wanted to just ask one on the China business and how you're thinking about the outlook kind of longer term. I mean, from the standpoint of value unlock and kind of a normalized growth profile, would selling that asset kind of and using that cash to pay down debt be, I guess, on the table? I think another analyst asked about the Point of Care sale earlier, but like would divesting China be on the table? I know another one of your peers has exited the region in diagnostics and has seemingly not looked back since. So would just be curious on that front.

Brian Blaser: Yes. Thanks, Casey. At this point, we still think that our economics are favorable in China even post these changes. And so our view is that we're going to do what we can to protect our business in China in the short term. Over the long term, again, I go back to what I said about the earlier question, which is we look at all different alternatives to optimize shareholder value and provide the ability for us to generate cash flow and delever the business faster.

Operator: There are no further questions at this time. I will now turn the call back to Brian Blaser for closing remarks.

Brian Blaser: Thank you, operator, and thank all of you for the questions today. Let me close with 2 final messages. First, China pricing changes and respiratory softness weighed on our third quarter and year-to-date performance, but continued growth in labs and immunohematology outside China reinforces the resilience and long-term value of our core franchises. Second, we are taking decisive action to accelerate QuidelOrtho's next chapter. The new cost transformation and enterprise restructuring announced today are not temporary responses to near-term pressure. They represent a broader operating model transformation designed to strengthen accountability, improve our cost structure and better align the organization with the distinct needs of our customers and markets. We are committed to disciplined execution. In the near term, our priorities are to improve profitability, increase cash flow and reduce leverage. Over time, these actions are intended to create a stronger, more focused and more competitive QuidelOrtho. Thank you for joining us today and for your support and interest in our business. We look forward to updating you on our progress next quarter. Thank you.

Operator: This concludes today's call. Thank you for attending. You may now disconnect.