Ortho Clinical Diagnostics Holdings plc

Good day, and thank you for standing by. Welcome to the Ortho Clinical Diagnostics Quarter 1, 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that time, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your first Our first speaker for today, Mr. Jan Sanders, Vice President of Finance Thresher and Head of Investor Relations. Thank you. Please go ahead.

Thank you, Anne. And good afternoon, everyone. With me today to discuss our financial results are the Chairman and CEO of Ortho Clinical Diagnostics, Chris Smith, and Joe Buskey, Ortho's Chief Financial Officer. Mike Eskra, our EVP of Commercial Excellence and Strategy, will join us on the Q&A portion of the call. This conference call is being simultaneously webcast on the investor section of our website, and a version of today's presentation can be downloaded there. Let me remind you that the presentation and remarks made today include forward-looking statements as defined in Section 21E of the Securities Exchange Act. Except for historical information, all of the statements, expectations, and assumptions discussed in today's call are forward-looking statements that involve a number of risks and uncertainties. Actual results might differ materially from the results discussed in the forward-looking statement. These risks and uncertainties include, but are not limited to, those factors identified on slide two of today's slide presentation. In our form 8K for the quarter filed today and other filings with the Securities and Exchange Commission. Except as expressly required by the securities laws, the company undertakes no obligations to update those factors or any forward-looking statements to reflect future events, developments, or change circumstances, or for any other reason. During today's call, there will also be a discussion of some items that do not conform to U.S. generally accepted accounting principles, or GAAP. Please see slide three for a list of these non-GAAP measures, including, but not limited to, core revenue, constant currency, adjusted EBITDA, adjusted free cash flow, and adjusted diluted earnings per share. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the appendix to the investor presentation and press release issued this afternoon, both of which are available in the investor section of the Ortho website. In addition, on today's call, we will refer to our core and our non-core business, our clinical laboratories, also known as clinical labs, and transfusion medicine businesses represent our core business. Our non-core business is comprised of our contract manufacturing and licensing revenue. Our base business excludes sales of COVID-19 antigen and antibody tests. Now I will turn the call over to Chris Smith, Chairman and CEO of Ortho. Chris?

Thanks, John, and good afternoon, everyone, and welcome to Ortho's first quarter 2021 earnings call. I'm pleased to be sharing with all of you Ortho's first quarter results, and we'll start on slide four. I always really like to start all our presentations, whether they're with investors or customers or our teammates, with their mission statement. It really is why we do what we do, because every test is a life. We embrace this credo, and it's a critical role we play in the global healthcare systems every day. I also want to take a second just to thank our global teammates around the world for everything they do every single day to deliver on this promise. Shifting to our Q1-21 highlights on slide five, our financial momentum has continued from Q4 into Q1, and we're very proud of our results and the hard work by our teammates around the world to achieve these results. During the first quarter, as compared to last year's first quarter, we grew our core revenue to $499 million, an increase of 23.5% in reported currency. We increased our operating income by 382%, 49% as compared to the first quarter of last year. Just importantly, we reduced our debt by $1.4 billion and improved our cash position, and we IPO'd the company in the first quarter. I'm pleased with our performance in the first quarter, which really reflects our team's dedication and focus on growing the business, and we've talked about this often as shifting a company that was once managed just for value to one that's managed for growth. If we move to slide six, it illustrates our top-line growth. These results are indicative of the considerable momentum we are seeing as we start 2021 with core revenue growth of 21% in constant currency. 14% of this is in the base business, which excludes COVID revenue. And Joe will get into more detail on this in a second, but we'll see significant opportunity as we carry this strength as we move out throughout the year and into 2022. Lastly, I'm pleased to report that we've raised our guidance for our full year 2021 financial performance based on the momentum we're seeing in the base business. Our top line estimate for the full year was 7% to 9% growth for the core, and we're now lifting that guidance to 9% to 11% of revenue growth. As you may recall, COVID-19 is a headwind for us in our planning cycle. We're also raising our full year projected adjusted EBITDA growth guidance as previously reported, to 14% to 16.5% growth. So, while we'll increase the growth of the revenue, we'll also increase the growth of our earnings. In our current update guidance, we see COVID-19-related sales slowing in the second half of 2021. However, as the pandemic continues to evolve worldwide with differing rates of infection, we may see additional benefit from COVID-19 products which are not reflected in our updated guidance. On slide seven, we identify the key drivers of strong, sustainable results in long-term shareholder value creation. We continue to make investments and devote energy to delivering on these initiatives. Fiscal 2021 has started very strong, driven by our continued focus on following our strategic priorities to drive growth and shareholder value, which are around product innovation, commercial excellence, and operation efficiency. One of the areas of our product innovation focus and our organic growth opportunity that I want to highlight today is around the MUSA market. In each quarter, we'll highlight different growth drivers in our business. Please turn to slide eight. Ortho has historically been a leader in the ClinLabs business and we're the only company in the world to have dry slide technology which does not require access to water and is designed to make quality critical chemistry testing accessible. The CleanLabs business has an addressable market of approximately $26 billion, and we compete in the largest IV markets here with our clinical chemistry offering and our MU assay solutions. As you see on this slide, in 2021, our mix of revenue was very heavily weighted towards clinical chemistry with a 62% to 38% split. The market, however, is the reverse. With our increasing focus on lifetime customer value and expanding our install base of integrated analyzers, chemistry. That opportunity can easily be seen clearly in the chart on the right, which shows that IE has made up a 67% of the 2019 market, which is really pre-COVID, and we believe that split is reflected in the market today as we head out of COVID. Thus, we believe we have a significant room for solid, more profitable growth as we continue to expand our strategy around placing integrated analyzers and automated install systems. And we believe that this ultimately will create more value for our customers. Again, this quarter, we grew our integrated install-based double digits. So to give you an example, we grew it 14% in the quarter. So we've talked about the opportunities for organic growth, but it's important from an improved balance sheet to now also focus as we head out of the IPO and expanding our cash-generating power of our business that we believe that there are unique M&A opportunities ahead of us. Slide 9 outlines a number of those at a high level for you. As the only publicly traded pure play company in the attractive IVD market with truly global reach, we believe we have an excellent platform for bolt-on acquisitions to accelerate profitable growth. Ortho has a very successful history of partnerships with several fine companies like Riffles, Idex, Thermo, and many others. And we have an increasing balance sheet that provides flexibility. and this will allow us to continue to build on this partnership's success. In addition, we are targeting high-growth, high-margin products that we can sell through our existing global call points and distributors, including molecular specialty IA and point-of-care diagnostic systems. We also believe there will be additional opportunities to bring more value to our customers and patients over time through digital informatics solutions. We see those opportunities playing across both the ClinLabs and the transfusion medicine businesses where our leadership position promises even greater synergies in deal economics. In terms of financial criteria, our focus remains primarily on bolt-on niche opportunities where we can add growth with creative earnings and deliver an increase on return-invested capital. Finally, on Monday, we filed an 8K announcing the departure of Chad Dale, our Chief Operating Officer. Chad is leading to pursue another opportunity. as we pivoted to ortho and return the organization to growth and becoming a public company. I will now turn the call over to Joe to further discuss our Q1 financial results, and then we'll come back with Q&A later on. Joe. Thanks, Chris. As Chris noted, financially, we've had a really good start to 2021. We saw a meaningful recovery in our base business that surpassed our own expectations and fueled solid growth across all of our geographies and segments. Now, let me provide a bit more detail on our operating results for the quarter and full year, starting with a breakdown of our revenues on slide 11. Please note that all comparisons are versus the prior year period unless otherwise mentioned. First quarter total revenue was $506.8 million compared to $407.9 million in the first quarter of 2020, which represents a 24.2% increase or 21.8% growth on a constant currency basis. Quarter revenue $499.3 million, which excludes contract manufacturing and other licensing revenue, grew 21.1% on the constant currency basis, which exceeded our initial estimate for Q1 provided last quarter. The substantial revenue growth in the first quarter was primarily driven by higher volumes within ClinLabs, including $29 million of COVID-related revenue and transfusion medicine, as well as continued recovery in the Americas and ASPEC regions. Excluding that $29 million of COVID-related revenue, reported core revenue growth would have been 14%. As a trusted partner of hospitals, hospital networks, blood banks, and labs around the world, our base business bounced back fairly well from the pandemic-induced low points we saw in the second quarter of 2020. I'm pleased to say our base business has continued its trajectory of year-over-year growth. ClinLabs' revenue grew to $338 million from $256.4 million, which is a 29.9% increase on a constant currency basis, largely driven by healthy growth in the Americas region, but with really all geographies showing double-digit growth on a reported currency basis. In transfusion medicine, we saw 6% growth on a constant currency basis, or 161.4 million in revenue for the quarter, compared to 147.9 million in the prior year period. Within transfusion medicine, We experienced growth in the Americas region and the other region, primarily Japan. In the first quarter of 21, our new partnership with CTS went live. We continue to ramp the new CTS business and value the relationship we are building with them. Non-core revenue grew just under $4 million to $7.5 million for the first quarter as compared to $3.6 million a year ago, and this is primarily due to an increase in some contract manufacturing revenue. Okay, now on to slide 12, which outlines our geographic region results for Q1. While the developed markets were a clear, strong spot again, we saw a meaningful recovery in many of our emerging markets as well this period. America's revenue in the first quarter grew to $321.4 million from $250.5 million in the prior period, or 28.8% on a constant currency basis. This is due to pronounced growth in ClinLabs and transfusion medicine within the region. Excluding COVID-19 growth, the Americas' year-over-year growth was still an impressive 18%. The EMEA segment revenue of $68.5 million was up 8.2% on a constant currency basis compared to the prior year quarter. Our Greater China segment revenues of $55 million increased just under 11%. on a constant currency basis as we pass the anniversary of the initial impact of the pandemic last year in the region. We're very pleased to see both EMEA and Greater China return to a strong growth trajectory during the first quarter and believe our base businesses will continue to rebound in these regions. Our other segment, which includes the Japan and Asia-Pacific regions, have revenue of $61.9 million, which was up on a constant currency basis by 15.1%. This region also includes strong contribution from India where we had a strong uptick in revenues as well. We're happy to be a part of the solution in the region and our thoughts are with our teammates and their family members who are working through the recent COVID-19 surge there. Now turning to slide 13, we delivered another solid quarter performance below the top lines. We continue to make strides in value capture and increased productivity. First quarter gross margin came in at 51%. an increase of 330 basis points due to favorable product and segment mix, as well as lower manufacturing costs. Operating income for the first quarter increased 382% to $57.4 million from $11.9 million in the year-ago period, primarily driven by higher gross profit partially offset by higher SG&A and R&D spend. Our non-GAAP adjusted EBITDA for the first quarter was $152.4 million, increasing 49.4% compared to $102 million in the comparable period last year. The net loss for the first quarter was $39.1 million, or $0.19 per share, compared to a net loss of $101 million, or $0.69 per share, benefiting from lower interest expense, largely due to the debt paid in with our IPO proceeds. Non-GAAP adjusted net income which excludes intangible amortization and other one-time costs, increased to $54.9 million. All right, let's turn to slide 14 now to discuss the balance sheet and liquidity position. As of the end of the first quarter of 21, our total cash and cash equivalents totaled $153.8 million, which is up 16% from the $132.8 million at year-end 2020, while total debt stood at just under $2.4 billion. Net proceeds of our initial public offering, which included the exercise by the underwriters of the full over allotment option, reduced net debt by approximately 1.4 billion. Our net debt to EBITDA ratio fell to 4.4 times as of quarter end, driven by stronger EBITDA Q1, higher cash balance, and favorable foreign exchange impacts on the Euro term loan debt. Due to the sustainable cash flow we were able to generate, we remain very confident in our ability to reduce this leverage ratio by at least a half a turn a year. And we typically have had seasonality in our cash generation in the first quarter where we see cash outflow in Q1. So looking at our adjusted cash flow in Q1, we used $13.1 million of cash in operations, which is a $15 million improvement over Q1 2020. We do, however, expect it to generate over $100 million of adjusted free cash flow in the second quarter, Further, we still expect significant adjusted free cash flow generation for the full year of approximately 50% of adjusted EBITDA. Now let me remind you that continued debt reduction is just one facet of our balanced capital allocation strategy. As Chris mentioned, we're actively evaluating organic and inorganic growth opportunities that would complement our core business, further increase operating leverage, and give us new or additional exposure to high growth markets. Our healthy cash position, reduced interest burden, An improved financial position as a result of the IPO will allow us to continue to pursue this strategy over the coming years, while we are guided by our focus on the continued development of industry-leading, innovative solutions for patients all around the world. In other positive news, as discussed on our last call, both Moody's and S&P upgraded our credit rating after the receipt of our IPO proceeds. We also upsized our revolving credit facility by 150 million, resulting in total borrowing capacity of 500 million in this facility. This is supporting the strongest liquidity position that Ortho has seen in many years. With that in mind, I'd like to now turn to slide 15 for our outlook on 2021. With the very strong momentum across our portfolio during the first quarter and continued strength through the early part of Q2, we are raising our guidance as follows. Full year 2021 core revenue will be within a range of 1.93 to 1.96 billion, growing between 9 and 11% on a constant currency basis. That's up two full percentage points of growth from our original projections, as Chris noted earlier. 2021 adjusted EBITDA has also increased to between 520 and 532 million, or 14 to 16.5% growth on a reported basis, and correspondingly, The adjusted diluted EPS will now be in the range of 64 cents to 69 cents per share for the full year 21 based on a full year average share count of 234 million shares. We remain confident in our ability to model our business as the recurring nature of 93% of our revenue gives us substantial visibility in the future. We expect to continue to grow the top line across our core business and all of our various segments. We also expect to see continued margin expansion and operating leverage growth as a result of our value capture program and ongoing shifts to the increased placement of integrated analyzers, which leads us to believe that for every percentage point of revenue growth, we expect our non-GAAP adjusted EBITDA margin to grow by 1.2 to 2 times that, depending on our investments for that period. I'm very pleased with Ortho's financial performance in the first quarter of 21 and confident that we're building a platform for continued growth. Thanks to all of our associates worldwide that have delivered these fantastic results. With that, I'll turn the call back over to Chris. Thanks, Joe. Before opening the line for Q&A, I'd like to just spend a few minutes on our final slide, 16, which really talks about the investment thesis for Ortho. You know, we continue to believe it's an amazing opportunity from an investment with Ortho. If you think about it, we really are the only pure plate IBD company, and more and more this IBD market is becoming a highly attractive market and growing, and we'll talk about this as we go through Q&A, but while we definitely saw some uplift due to COVID, we really see significant growth in our base business, which is exciting. The second one is really around the differentiators that we offer our customers, and it really focuses on occurring. And finally, it's about momentum. And as you can see from the results in Q1, we've continued excellent momentum coming out of Q4 into Q1. And while we had very strong growth in several places coming out of Q4, we're seeing across the globe really in the Q1 nice growth in places like And on that, John, I'll turn it back over to you, and we'll move on to Q&A.