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.

Thank you, Chris. Operator, at this time, if you'd give the instructions and open the line for our first question.

Thank you. As a reminder, to ask a question, you will need to press star, then the number 1 on your telephone keypad. To withdraw your question, please press the pound key. We have our first question from the line of Derrick. From Bank of America, your line is now open.

Hi. Good afternoon. Derek Brown. Hey, Derek. How are you doing? Good. Hey. So congratulations on a quarter. Really strong to see you come out of the gate so strong. Hey, you know, one of the things that sort of struck me, and I appreciate the slide eight you had on the immunoassay market, just was wondering on that one, it's like, you know, that is an opportunity there. How long until you sort of can see that shift? I guess, you know, can you remind, where are you sort of like soft in the, you know, assay market? What is sort of like the revenue opportunity to be gained and the growth there? A little bit more color when it's going to take to sort of do that shift.

Yeah, look, I think that shift continues to happen. I mean, if you think about it, if you look down in the right, you can see that we show what percent of our install base is integrated analyzers, and we moved up to 25%. percent in the quarter, and the total growth of our integrated analyzers for the quarter was 14 percent. And that really is the driver. And just to give you kind of a high level on dairy, like we had a great quarter really across the business. So, look, our clinical chemistry grew still 12 percent. So, that's kind of our slides and tips. But when you look at our IA business, it grew 60% and even 30 without COVID. So, obviously, you're going to say, look, Chris, your business is going to grow because of COVID in the IA. But our IA, just to give you an example, if you carve out COVID, our IA grew 30% and our Clint Camel Wing grew 12%. So, you can start to see that acceleration of the growth. And you start to see that reflected also in some of the gross margins with the big lift in gross margins. So... You know, for us, and I think we've talked about this with you all, as we look at our teams out in the marketplace, we really focus on shifting standalone analyzers to integrated and then pulling through that IA business.

Great. And just one follow-up question on that one. I mean, you know, the organic revenue growth target and upgrade there is a lot better than certainly what we anticipated and what you shared with us during the IPO process. But it does beg the question sort of how do we see the 22, you know, the comps basically creates really tough comps. And just sort of the thing is, like, I know it's too early as we're talking about this, but, I mean, are you comfortable with a mid-single-digit outlook for the core business in 22, even off of these comps?

Yeah, look, we believe – so, look, again, just use Q1 as an example of 19. I mean, we really had – we came out of the gates in January COVID hit early there and obviously we pulled back. But the business has historically been running at that 4% to 6% base business growth. And that's before we've added on more analyzers as far as moving share as well as other tests like things like PCT, pushing vitamin D farther across. So we do feel very comfortable with that mid-single digit growth outlook. And look, fortunately And as we start to share and talk about the business, I think that's the biggest difference. Look, we still have wonderful tasks we're getting pulled through, but the reality is we are winning more against competition than we've ever done in the history of the company. And that's really helping to drive that growth.

Got it. Thank you.

Sure.

Thank you. Our next question comes from the line of Tejas Savant from Morgan Stanley. Thank you.

Hey, guys. Good evening. So two questions on the geo front. To what extent, Chris, did the weather have an impact in February for you guys in the States, and was underlying strength even stronger than what the numbers suggest here? And then second, on the point you made around sort of India, and I'm not sure if you mentioned Brazil there as well, But given the resurgence there, can you help us think through, you know, the base business offset versus the COVID testing upside that you're benefiting from in those years and how much cumulatively those two markets represent for you?

Yeah. So, look, the weather, I think, like a lot of people, hurt us for about a week in February. America's in that time frame, February. I would say the team did a really good job of probably recovering all that in March. So by the time we closed out the quarter, I think you were pretty – I think it had worked its way through kind of the system, if that makes sense. Look, as far as India, look, we really are pleased with what's going on in India. You know, to give you an example, that business was up almost 30% for the quarter in just in India alone. And remember, India is about 60% of our business in Asia-Pacific. As India goes, so does Asia-Pac. Now, look, we're obviously concerned not only for the well-being of our teammates and all the people in India with what's going on, the research, but we're also a little bit concerned with where that business is. I will say, look, April has started strong in India, but I think, look, we need to keep an eye on kind of May and June and see what happens. But we have seen very nice recovery really at the end of Q4 and all through April. Q1. And again, Brazil, you know, very, very good market for us up, you know, they was probably up more than 40% in Q1. And so Brazil, again, our big Brazil and Mexico are two big markets where we need to win down in Latin America. Our team has done a fantastic job managing through the end again in the last year and this year. So those markets are doing, you know, I would say very well as far as recovering. We obviously need to keep an eye on COVID, but right now they're in very nice recovery mode. Did we lose you? Operator?

Okay. And our next question comes from the line of Vijay Kumar from Evercore. Your line is now open.

Hey, can you hear me? This is Paul on for Vijay.

Yes, we can hear you, Paul.

Thanks for taking the question. I was just hoping you could walk us through. more through the assumptions that are baked into the guide? What's the back half look like? Any color on the guidance by segment or geography?

Yeah, I'll let Joe take that one on the guidance. Yeah, Paul, we've got continued strong growth across all of the segments. In the second half of the balance of year, we've got, as I said on the last call, on the COVID front, We said we were going to do 40 to 50 million of full year COVID on the last call. So we did 29 million in Q1. So we're looking at about 20 million of COVID in Q2, somewhere in that range. And again, as I said on the last call, in the guidance, we don't expect to see much COVID at all in the second half. Although, again, we hope there's upside to that guidance. As far as moving down the P&L, I think I said this on the last quarter call as well. In terms of gross profit margin, we expect to see stronger gross profit margin and stronger EBITDA margin in the first half versus the second half. And that's really driven by you've got more favorable manufacturing variances rolling through in the first half than in the second half. And the COVID revenue in the first half comes through at a higher margin than some of our other immunoassay revenue. And so that's going to drive some higher gross margins in the first half versus the second half, too, as well as those EBITDA margins will be stronger first half versus second half for those same reasons. Yeah, I think the other thing, Paul, is when we look at the business and we try to get to the guidance, we look at obviously backing out things like COVID, but we also back out some things that we think are tests that kind of align a lot with COVID. So we really do dig in to get to where we think the forecast is going to be or the guidance. And I think what's really driving it is America, as I mentioned, but America is moving much faster – in the base business. And I think the second one is EMEA, and in particular Western Europe, continues to perform better, I think, a lot. So while we knew that China and the emerging markets would be doing well in the double digits, I'd say those two big developed markets are moving quicker, and that's why it would really help to lead our rise of the guidance.

Great. Thank you. And I don't know if you already mentioned it, but assumptions on antigen and serology for the rest of the year?

Yeah, so Joe mentioned that, and we did close to $30 million in Q1, and we're projecting to do about $20 million in Q2, and we have nothing built into our forecast for the second half of the year. So I think in COVID, I think it's still an unknown, but the way we've built our forecast, it's all front-loaded, and it's about $50 million on the front half of the year. Hey, one other thing on the guidance I do want to come back to is remember 93% of our business I think once we get into that flow, when we're building out our models, you really can look at the placement of analyzers and build that.

Got it. Thank you.

Thanks. Thank you.

Any other questions?

Thank you. Our next question comes from the line of Patrick from Citi. Your line is now open.

Hey, guys. Thanks for taking the question. Maybe to go back to the geographical front, you know, China's obviously been a big focus area for you guys going back to the IPO. Can you just talk through, you know, a little more detail the trends you saw in the quarter, the outlook for the remainder of the year? I know last quarter you guys talked through some disruption around the stocking by distributors. Things seem to be improving. And then also just where you are on the localization strategy there. I know it was a big focus for you.

Yeah. So, look, I would say that China has, I think, come back and rebounded incredibly well. You know, they grew about 11%. In the quarter, I think just as important to us is that integrated analyzers grew 14%. So, again, we want to see them growing at or above market on the integrated analyzers and saw that. So, you know, feel really good. I would say that's one of the places where we see the forecast continuing to rise throughout the year. I mean, obviously Q2 for every part of the world can be pretty low comparables, but we see China will continue to rise because we really see a nice bounce back. As far as the localization strategy, we feel really good about where we are on that. As you know, our first step was in two partnerships, one on the development of some assays and one on the development of a low-cost, lower-volume analyzer that we'll not only use in China, but we'll use in emerging markets. The reason we really like that product for China is that a lot of our press both of those are going incredibly well. So, you know, I would say that that's kind of where we are right now from a localization perspective. You know, look, when we look at M&A opportunities, I mean, obviously China, we believe, will be one of, if not the biggest market, one of the biggest markets in the next five years will potentially catch up to the Americas. So we have a keen eye to that part of the world as well.

Okay, that's helpful. And then maybe just one on the margin side, you know, certainly appreciate the first half being stronger than the second half given some of the comps. Can you just talk through, you know, how you guys are balancing the revenue strength and letting that flow through to the bottom line versus reinvestment in some key areas on the R&D side? And then, you know, following that, just what are the big focus areas in the organic investment side for you guys?

Yeah, look, maybe we talk about it two ways. Joe may get specific in the numbers, but I think, you know, Patrick, This is a business, if you go back to 17, 16, 17, and even 18, was growing 0% to 1%. And now you've got a business growing consistently in the high single digits. I think the question came up earlier from Derek about that mid-single digit, which we feel good at. Right now we're running really hot, and I think a lot of people think it's COVID. And one of the things we talk a lot about, And it's running incredibly well. And we believe that we are in a very unique position because, number one, we're the market leader in transfusion medicine. But the second thing, in that big market, we're the number five player from a market share. And we feel that our commercial excellence sales strategy is allowing us to move market share, especially against one or two of our competitors. So there is investment going into the global commercial organization because we believe that we can get in our analyzer, about we're going to take of that revenue and we're going to do a 1.2 to 2x down to the bottom line, so we're holding that. But right now, I'd say we're on the lower end of that. We're probably at around a 1.3 to 1.4 because we believe that the opportunity for investors is better in 22, 23, and 24 by investing in those dollars now because even a short contract is five years, right? So you win a deal today, it's going to be paying dividends. So I'd say one is the commercial. The second is that we... We've talked a little bit, I think, about this, about our next platform. You'll see the lift in R&D, and the majority of that additional lift is in advanced research in our next platform, which really allows us to take the technology from dry chemistry and move it into IA. That's going to be, we think, a game-changer, where no water... cycles, you know, four to five years, but that would be the other place that we believe there's the opportunity. So I would say that those are the two big places we're investing right now. I think you had a follow-on, and I'm sorry.

Yeah, I think you covered everything. I really appreciate it.

Great.

Ann?

Thank you. Our next question from the line of Tycho from J.P. Morgan. Your line is now open.

Hey, good afternoon. A question on transfusion. Just curious, you know, the CTS, since you've gone live there, you know, if that contributed anything, you know, in the quarter, how we think about that ramp. And then can you just talk a little bit about the swift launch, how you think about, you know, uptake there?

Yeah, so CTS did go live. Pretty big celebration around here at the end of January. And, you know, so we were running that pretty much as we went into February and March. And, look, it was, you know, like I think we've always talked about 2% to 3% growth to the total revenue, and it did represent that probably a little bit on the higher side of that because the initial is, you know, stocking and getting it going. But it definitely contributed, you know, to that. As far as SWIFT, excited about SWIFT rolling out. We haven't gone out and started to disclose orders, but I will say, We are starting to take orders for that. I think it's been very well received. I think there's really two strategies on that. One is making sure that we maintain our current base of business that are really customers that maybe had an auto view or had a vision that they're at six, seven years. I were the market leader, I will say that Grifols, Bio-Rad, in particular, are out, especially in the emerging markets, trying to grow their business. We think there's opportunities there as well. It's still really early days.

That's helpful. Then I was going to ask a follow-up on the dry, dry chemistry. You talked about it a minute ago. I know you initiated the feasibility work. Is that the right time frame to think about kind of four- to five-year development cycle, or are there things that we could see similar than that?

Yeah, no, look, I think we will – you could see donor screening earlier than that if it's depending on regulators and the timelines. But ClinLabs, I think you're probably playing with the right timelines.

Okay. Okay. Last one for me. I know you don't give segment level guidance, but, you know, with the increase from 7 to 9 to 9 to 11 for the core business, can you just talk about whether, you know, that's more weighted to one segment versus the other?

More weighted towards what? I'm sorry.

Yeah, just, I mean, if we think about the increase.

I'm sorry. It's probably more heavily weighted towards Clean Labs, if you think about that increase in guidance. Yeah.

Okay. Thank you.

Yep.

Thank you. Next question.

Thank you. Our next question comes from the line of Luke from Barclays. Your line is now open.

Hey, guys. Thanks for taking the question. So follow up here on Derek because it's an important point, I think. So when you guys place an integrated instrument or an automated, can you give us a sense of the amino assay ClinChem mix? And so it's just really about modeling when that kind of flips.

Yeah, Luke, maybe Mike's best one to take that kind of wholesale strategy and how the team takes it from a standalone to IA and how we start to roll out IA with the percentage and how it flips over time.

Yeah, thanks, Chris, and Luke. Chris, for the slide, when you look at the revenue split in the market, which is closer to 60-40 immunoassay, that pretty much holds true with the customer base as well. So when we have a a chemistry customer and we add on an immunoassay and you have your new total, about 60% of that will be on the immunoassay business compared to about 40% of the value in the clinical chemistry.

And over time, maybe just to help them, how long does that take over time? Let's say it was a standalone and we move it to an integrated. How long historically does it take to build to that?

Well, there's two things that happen. One, you tend to see that pretty quickly. Again, as you move to integrated, you're the mainframe analyzer. There's a lot of incentive for the customer to consolidate all of their testing onto those analyzers. But, again, what we also know is when you go back and look at market growth, the immunoassay side is not only, from a revenue point of view, larger, it's the faster-growing side of the business because that's where a lot more new menu is coming from as well. So, you know, ongoing, not just that initial bump there, but ongoing, that's a better growth driver for us, faster pace going forward as well.

That's helpful. As you think about the M&A landscape, I love that slide you guys put up there with two of the recent molecular companies off the table. Does that change your timing and strategy?

I would say we're going to be prudent and we're going to be optionistic. I think one of those was very interesting and the other I think went went above where we felt the value was so um but we were definitely i think we're you know we're looking at those type of businesses so i wouldn't say it changes our timing i think it depends a lot on the business and why molecular is there we think there's some interesting opportunities in ia we think poc you know look at transfusion medicine there's a couple categories that we like in the transfusion medicine side of the business and the other one is i think obviously um well. So, look, I wouldn't say it's changing our timing. You know, we're not running after it. I mean, I will tell you there's, you know, 5,000 people that work here, and there is definitely a group of people, a small group, though, of people focusing on where we can identify those opportunities. But, you know, 98% of the people or whatever work here, their focus is day-to-day placing integrated analyzers do whatever makes sense. I don't know if I answered your question.

You did, you did.

Okay. But I don't think we're chasing, it's not like we're out chasing because we feel like we need to do it. We think, you know, we think as you look at 23, 24, it'd be nice to have the right business to fold in because of our call point or 2,200 people in the field.

All right, thanks.

Thank you. Our next question comes from the line John from UBS, your line is now open.

Hi, congrats on the quarter and thanks for taking my question. I guess just building a little bit on the upgrade cycles, I think automation is small today, around 1%. Can you provide an update on just how automation was in the quarter and how does that mix look across for the year? And then did you provide a total placement number for the quarter?

No, we're only talking about growth, not total placement. You mean total units? I didn't know what you meant.

You mean total units? Yeah, I think you gave the integrated placement, but did you give the total units across, you know, all the time?

Oh, yes. We gave the integrated growth. So, integrated grew about 14%. Yeah. Look, on automation, look, I would say it was a good, you know, a good quarter as far as growth perspective. I'm just looking here, but pretty much double digits here. Yeah, you want to take that, Mike?

Yeah, so when we look at the quarter, good. Automation's been, as you guys know, a focus for us along with integrated. Our objective there is the drivers that support the need for automation are pretty prominent with our customer base. We're trying to make sure customers see the benefit of our flexibility, cost effectiveness, and we've been getting more and more traction bringing that in. We are up, as far as install base, up over 20%. on automation. So again, even faster growth there and in line with, you know, our strategy of how we want to grow our base. Overall, you know, installed base growth driven by integrated and then even faster with automation. So that held true for Q1.

Thanks. And I think leverage was around 4.4 times in the quarter, a little ahead of schedule. Any updates on the delevering plans for the year and year-end targets? And then I guess just with the current level of leverage, is there any target level where you'd be more comfortable on executing deals, or are you comfortable at the current levels?

Yeah, we are, John, we are a little bit ahead of schedule in the leverage ratio at 4.4 at Q1. And I would say for the full year, by the end of the year, we should be at 4, slightly below 4, without too much difficulty. We're definitely trending that way, and all of our internal forecasts say that. You know, I've talked before about getting to a target level around three and a half times, and, you know, we're going to be darn close to that by the end of this year. So we've got a lot of capacity, or we'll have a lot of capacity by the end of the year to do deals and, as I said, a much more balanced capital allocation strategy. We have a lot more ability to do investments, both inorganic and organic. Yeah, and I think it obviously depends on the deal. Yeah, look, I think one of the challenges, and I think you heard this earlier in the question about the two recent moleculars. I mean, I would say the one thing, I'm really proud of our team that's in business development. If you look at some of the innovative partnerships we've created along the way, like with IDEX and, you know, with Thermo and with Griffles, I would say that we, you know, the deals we like are the ones where before the bank book is out floating the street. And I think that's really, you know, some of those are going to be very different when you look at what they do to leverage.

Got it. Thanks for taking my questions.

Thank you.

Operator? Thank you. Thank you. Our next question comes from the line of Matt from Goldman Sachs. Your line is now open.

Hey, guys. Thanks for taking my questions. Just two quick ones from me. One just on, hey, guys, on pricing. I know, I think if my memory serves me, during the IPO you guys talked about to generally expect sort of 100 to 150 base points of price erosion over the course of the year, but I'm just wondering if I know it's only been a few quarters, but have you seen anything in the market to suggest that that's changed, maybe inflationary pressures in the supply chain or anything?

No, I would say, Matt, we're not seeing any change in that. We're still tracking right along to that same estimate we talked about in the road show. No changes.

Okay. And then just on going back to sort of M&A, on that slide you guys talk about not just M&A but also partnerships. But as your balance sheet continues to strengthen over the course of this year and next year, does your thought process in terms of whether you do M&A or whether you do partnerships change?

Boy, that's a really good question, Matt, and one that we have. Look, I think the partnership has to be the right way. I can tell you, just to give you an example, when COVID was going on and a lot of people were chasing – you know, point of care or lateral flow. Our view is we don't want to build someone else's business. So I think if we create a partnership, it has to be long. So I'll give you an example of the Gripples Partnerships 50-year partnership that we've been in. So I think we're 30 years into it. You know, I think it has to be a partnership where we believe that it makes sense, you know, long-term versus just something that's short-term. Because You know, I think, and the reason being, and we talk a lot about this inside our business, our runway, we believe, is so great with where we are and the market that we're in that we really want to stay within that area. So I think it's got to be good way for us to go.

Okay, great. Thanks, guys. Appreciate it.

Thank you. Our next question from the line of Steve from Wolf Research. Your line is now open.

Afternoon, guys. You've got Liza on for Steve. Hey, Liza. Hey. I just wanted to kind of understand a little bit more if you could talk about the barter contract that you won and how to kind of think about that kind of flowing through. That's the first one. And then just understanding kind of where you're seeing kind of, I know that it's a little bit different because it's an adjacent space, but some diagnostic players have obviously called out, and there's different dynamics here where the lease or age and rental model mix has shifted. If you've seen any shift in that, if you could just speak to that as well. Thank you.

Okay, so look, Mike was really instrumental in that BARDA, so you want to take the BARDA?

Yeah, sure. So the BARDA agreement, as you probably read through there, is funding, not just through BARDA, but DOD partnered in that to fund the expansion of manufacturing capabilities in Rochester, New York. That's for both COVID-related reagents. and an instrumentation, which is, you know, our immunoassay product lines there. And, you know, from our point of view, you know, we do some of that manufacturing on the reagent side in pencoid whales and XUS and some of the instruments. And so this is an opportunity for us, actually, as the need for increased manufacturing has existed, to bring that onshore to the U.S. and in partnerships. John, do you want to comment on how that's going to flow through?

Yeah, I just wanted to give 10 seconds on the accounting just so everyone's clear. Because we are booking some BARDA revenue now for a previous grant we got on assay development. But this grant's a little bit different in that it's a capital grant to build a line. So it'll come through essentially as an offset. on the balance sheet. So it won't come through as revenue like the grant we have now. It'll come through as an offset to an asset. Oh, and the other question you had, I think you had a question on the reagent rental versus cash. We're not seeing a big difference year over year in our cash versus reagent rental mix. It's pretty flat year over year.

Great. Thank you so much.

Thank you, everyone. That concludes our Q&A for the day. Chris, do you have any closing comments?

No, just thanks, everybody. We really appreciate you taking the time. I know we'll be talking to some of you throughout the day, and yeah, again, we appreciate it. It was a great quarter, and thanks for the time to be able to share it with you, and we'll look forward to talking to everybody soon.

And, Operator, I think you have some final instructions on the availability of the recording. Thank you again for joining.

Thank you. Ladies and gentlemen, this concludes today's conference call. Recording will be available after this call. Thank you for participating. You may now disconnect.