Ortho Clinical Diagnostics Holdings plc

Today's conference is scheduled to begin shortly. Please continue to stand by. Thank you for your patience. Thank you. Welcome to Ortho Clinical Diagnostics fourth quarter and fiscal year 2021 earnings conference call and webcast. At this time, all participant lines are in listen-only mode. For those of you participating on the conference call, there will be an opportunity for your questions at the end of today's prepared comments. Please note, this conference is being recorded. An audio replay of the conference call will be available on the company's website within a few hours after this call. I would now like to turn the call over to Brian Brockmeyer, Vice President of Investor Relations. Brian?

Thank you, Operator. Good afternoon, everyone, and welcome to the Ortho Clinical Diagnostics fourth quarter and fiscal year 2021 earnings conference call. With me today to discuss our financial results are Chris Smith, Ortho's chairman and CEO, and Joe Buskey, Ortho's chief financial officer. Mike Iskra, our EVP of commercial excellence and strategy, will join us for 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. Before I begin, I will cover our safe harbor statement. Some of the statements we will make during today's call about the company's future expectations, plans, and prospects constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, which provides a safe harbor from such statements. Our use of forward-looking statements is subject to a number of risks, uncertainties, and other factors that could cause actual results to differ materially from our current expectations. These risks and uncertainties include but are not limited to those factors identified on slide two of today's presentation and our other filings with the SEC. Please refer to our SEC filings for more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. We cannot assure you that the forward-looking statements we make will be realized. We undertake no obligation to update any forward-looking statement to reflect future events developments, or changed circumstances, or for any other reason except as required by law. Also during today's call, there will 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, EBITDA, 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 ORTA 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. Lastly, unless stated otherwise, all year-over-year revenue growth rates, including revenue growth ranges given on today's call, are given on a comparable constant currency basis. Now I'd like to turn the call over to Chris Smith, Ortho's chairman and CEO. Chris? Chris?

Thanks, Brian, and good afternoon, everyone, and thanks for joining us for the call today. It's great to be with you and to be able to share the fourth quarter results as well as the full year results for 2021. We're going to start on slide four, and I always love to start with this slide because it's the mission statement. It's our credo, because every test is a life. This is why we do what we do every single day, and we embrace this credo as a whole leadership team and our company worldwide as we go to work every single day. Just to give you an example, today we'll help over 800,000 patients around the world. I just want to thank our teammates in particular and all our professional customers out there that we partner with. With that, let's get into the fourth quarter results, which starts on slide five. First off, we have broad diagnostics portfolio. So COVID assays have not been a meaningful factor on our business throughout the pandemic as it has been for some companies. That said, we only generated $68 million of COVID assay revenue in 2021. Consequently, COVID was approximately 4 percentage point headwind on the growth in the fourth quarter and 1 percent headwind for the full year results. Given that, today we will largely focus on the underlying base business, which excludes COVID assay revenue. Core revenue excluding COVID assay revenue grew 8 percent, with particular strength in our clinical labs business, including a 4 percent headwind from the COVID test. Our core revenue grew 4 percent in constant currency. to $519 million. In addition to the underlying strength of our revenue, adjusted EBITDA margins of 24.6% is down about 130 basis points, reflecting an estimated 230 basis points of headwind from the decline of this high margin COVID assay test revenue compared to prior year. Looking at the full results on slide six, core revenue excluding the COVID assay revenue grew 16%, With strength in both our clinical, lab, and our transfusion medicine businesses, including a one percentage point headwind from COVID tests for the year, our core revenue grew 15% in constant currency to just over $2 billion, a huge milestone for the company. Adjusted EBITDA grew 20% to 548 million, representing margin expansion of 100 basis points to 26.8%, despite an approximately 60 basis points of headwind from the decline in this high margin COVID assay revenue. In summary, we concluded the year with another excellent quarter demonstrating the strength and stability of our reoccurring revenue business model in our base business. This continued revenue momentum in our business is clear result of the strong execution by our global commercial teammates and their dedication to customers and patients they serve. We talk about the importance of lifetime customer value and the long-term relationships that we build with our customers. We believe this is resonating in the marketplace and continues to be reflected in our results. Continuing with our fourth quarter performance review, let's look more closely at the core geographies excluding COVID assay revenue on slide eight. The Americas, our largest geography, grew 8%, with the U.S. commercial growth excluding COVID assays being up 7%. This was driven by strong clinical lab integrated system placements, menu expansion, and reoccurring revenue pull-through, as well as our CTS partnership in our transfusion medicine business. In EMEA, the growth, excluding COVID, was 6 percent, driven by strength across our clinical lab business, with particular strength in Eastern Europe and Middle East in the fourth quarter. Greater China grew 8 percent, with strength in reoccurring revenues, including both immune assay, clinical chemistry, and immunohematology consumables. However, Due to timing of distributor instrument placements, we had several instrument orders that did not ship in the fourth quarter. I'll expand on this more broadly in a moment. We believe our install-based growth in China of 6% and our integrated system growth of 14% are very good leading indicators for future growth. In addition, during the fourth quarter, our MU assay business grew over 30%. We're pleased with the growth, excluding COVID assay, in both our core developed markets as well as our emerging markets, which grew 6 percent and 12 percent, respectively. Growth was particularly strong in India, Latin America, and the Middle East. Looking at our core geographies for the full year, excluding COVID revenue, the Americas, our largest geography, grew 18 percent, with the U.S. up 16 percent. EMEA grew 10 percent, which is a significant result how that business has continued to perform incredibly well over the last 12 months, with Western Europe up 7%. Greater China grew 12%, and the other regions, which include Japan and Asia Pacific, were up 17%. So really strong performance from all regions. Next on slide 10, we remain steadfastly focused on executing against our three strategic priorities to drive probable growth and shareholder value, These priorities are product innovation, global commercial excellence, and operational efficiency. We continue to make progress against all these areas in the fourth quarter. Let me cover some of the highlights. Beginning with product innovation, as we discussed last quarter, we received emergency use authorization in the U.S. for our quantitative COVID spike antibody assay. We're seeing emerging adoption for testing convalescent plasma, which has created an incremental growth opportunity beginning this year. Though we still expect COVID-related revenue to be a headwind on our 22 revenue growth, we believe this new growth avenue is meaningful. Longer term, there are multiple studies underway to advance our understanding of COVID immunity, including immunity from infection, immunity from vaccination, as well as immunity from different variants. Notably, we're collaborating with academics and government agencies to develop studies to enable broader clinical utility of our quant assay. Turning to our second priority, global commercial excellence, we continue the implementation of our commercial excellence program and our growth strategy, which is driven by the penetration in the market with our integrated analyzer systems and the pull-through of this reoccurring revenue. Our integrated install base continued to grow double digits through 2021, and our reoccurring revenues ended the year of 93 percent of our total revenue. And finally, our third priority, operational efficiencies. Thanks to the strong revenue performance and the execution by our entire team throughout 2021, we further reduced our net leverage in the fourth quarter to 3.6%, and this is from 7.9% at the time of our IPO last February, an incredible result. Lastly, I'd like to comment on industry-wide supply chain disruption. Global supply chain challenges combined with the strength of our business over the last several quarters are putting increased demand on our supply chain. Like most diagnostic companies, these challenges include shortages of microchips, resins, and certain plastics, as well as freight and logistics costs, and pressure on pricing. Our management team is working diligently on adding additional suppliers, managing the ongoing flow of raw materials, and the distribution challenges, including spot rates. Though our financial performance has remained strong, we are managing instrument allocation at a regional level, and this has pushed out delivery of our instruments to some customers. We closed the fourth quarter with our install-based growth of 3 percent. However, if we had shipped all the open orders on instruments, it would have been 5 percent. Turning to slide 11, I'm really excited to talk to you about the proposed transaction with Quidel as announced on December 23rd. The HSR waiting period recently expired, and other regulatory approvals and closing conditions are progressing. And we believe that the transaction remains on track to hold our shareholder votes and close in the first half of 2022. As we said at the time of the announcement, we believe bringing Quidel and Ortho together creates a leading global diagnostics company with the ability to offer long-term value to patients, customers, teammates, shareholders, and the communities in which they serve. While the transaction is structured as an acquisition of Ortho, these are two similar-sized companies, and the leadership and the employee base will be a mix of both companies. So strategically, we're coming together more as a merger of equals structured in a way that enhances growth. Since the announcement, we've spent a lot of time talking with key stakeholders and are confident as ever this exciting combination represents the best path forward for Ortho and its shareholders. I'd like to take this opportunity to share some insights from the combination of the two companies. First on revenue visibility, excuse me, first on the revenue visibility of the combined company, as you know, Ortho has a very stable and predictable business model. driven by reoccurring revenues of 93%, usually five- to seven-year contracts, and our lifetime customer value that represents our 98% plus revenue retention rates. As you know, Quidel currently realizes a significant amount of their revenue in the U.S. Quidel's business has historically been heavily tied to the U.S. seasonal flu and more recently to the COVID trends. even as it's added new menu and test platforms such as their Savannah molecular platform that would drive a new leg of diversified growth. Like many experts and analysts are predicting, we expect COVID to be endemic and be managed much like seasonal flu going forward. So while the need for COVID testing will go away, we're projecting a more conservative view of COVID testing volumes, and we're anticipating these volumes will stabilize at a level that is meaningfully lower than where we are today. When the volumes do stabilize, we expect testing to consist mostly of respiratory panels that includes COVID and flu. And we also believe that the global diversification of Quidel's revenue stream through the global reach of Ortho's commercial team and the penetration of hospital segment with the new Savannah molecular product will provide further visibility and stability in the combined company's revenues. Second, on the growth potential. We believe shareholder value will be enhanced by the combination of Quidel and Ortho, establishing a diagnostic company with enhanced competitive position, expanded global presence, and robust product offering, serving a wide range of customers and markets with a total addressable market of approximately $50 billion. We believe the company's highly complementary world-class products and service offering will provide opportunities to capture significant growth globally through Ortho's commercial footprint in 130 countries, and approximately 2,300 field teammates, while enhancing cross-selling opportunities across a diversified customer and channel mix. Let's look at Quidel's new Savannah Rapid Multiplex Molecular Platform, for example. This is a differentiated product that is easy to use, one of the fastest times to results, has a small laboratory footprint, has significant cost advantages compared to competitors, and has a range across point-of-care and clinical labs, particularly in the mid- to high-throughput labs that are already Ortho's sweet spot where our commercial accident program has driven ongoing growth. By using our global regulatory expertise and putting that platform into the hands of our global commercial team and supporting those placements with our broad service engineers, we believe we will accelerate the launch of this compelling rapid testing platform in both hospitals and point-of-care call points. The transaction is expected to generate substantial synergies on both top and bottom lines, We estimate that the combined company will realize 90 million run rate cost-related synergies, excluding one-time costs, by the end of year three, driven primarily from operational efficiencies, supply chain optimization, and shared administrative functions, including public company costs. In addition, given Ortho's enhanced global commercial reach and expansive product portfolio, Quidel expects to drive cross-selling synergies, in excess of $100 million by the end of fiscal 2025, and a meaningful adjustment to EBITDA. Third, the combined company will have broad product portfolio and a pipeline which is best-in-class from a technology perspective. Ortho is well-positioned in the clinical lab and transfusion medicine markets with our dry-slide technology. Quidel is a leader in point-of-care and was very successful during the COVID pandemic, delivering significant growth in their install base of the SOFIA instruments. Their quick view COVID over-the-counter test is sold and drug stores all across the country is making a significant impact as we treat this pandemic. And I just discussed their Savannah rapid multiplex molecular platform. The combination of these portfolios position us to be a provider of choice for both centralized and decentralized labs and testing looking for clinical chemistry, immuacity, and molecular solutions. Fourth, we're making great progress on the integration planning. I've been able to spend a lot of time with Doug, Quidel's President and CEO, over the last eight months, and he has been in this diagnostic industry for 40 years and knows the space incredibly well. In addition to Doug, other key executives of the combined organization have already been identified, including Ortho CFO Joe Buskey and Mike Iskra, who will be the Chief Commercial Officer in the new business. The integration process will be complex. However, we're purposely delineating roles between focus group-driving integration planning and the majority of our business leaders and colleagues who will stay focused on the execution of our standalone strategies. We've engaged a well-known third-party consultant to support pre-closing integration planning, and we'll be tapping into the expertise of employees from both Quidel and Ortho to help plan and execute the integration through functional integration teams. There is little integration required of the commercial organizations, given that the U.S. focus of Quidel and the global focus of Ortho. which should minimize our commercial disruption, especially to our customers. There currently aren't areas with known integration complexity, like manufacturing, consolidation, or closing plans, et cetera. While we are currently operating as completely separate organizations, we feel confident in the clear integration path that these two complementary companies have, and we will move swiftly to execute the integration once we have closed the transaction. I look forward to continue to advise the executive team as a member of the board of directors of the new company, as well as being a special advisor to Doug and the board. Lastly, the combination of the two companies creates a great business going forward. It'll have 9% to 11% growth profile, ex-COVID, greater than 30% EBITDA margins, and more than $700 million in annual cash flow generation, and a very, very strong balance sheet with pro forma net-to-debt adjusted EBITDA of about two times at closing. after accounting and financing for the transaction. And looking at the largest IVE companies in the world, this combination of these two companies make us one of the most competitive and financially strong companies in the industry. And as you can tell, we're really excited about it. With that, I'll turn it over to Joe to further discuss some of our financial results. Joe? Okay.