Ortho Clinical Diagnostics Holdings plc

Welcome to the Ortho Clinical Diagnostics First Quarter 2022 Earnings Conference Call and Webcast. At this time, all participants' lines are in a listen-only mode. 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 the 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 first quarter 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. 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 we begin, I will cover our safe harbor statement. Some of the statements we will make during this 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 for 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 a 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 discussion of some items that do not conform to U.S. generally accepted accounting principles or GAAP. Please refer to 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 Ortho website. In addition, on today's call, we'll refer to our core and 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. 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. Lastly, due to the pending transaction between Ortho and Quidel, I would like to point out that we will not be conducting a Q&A session following our prepared remarks today. Now, I'd like to turn the call over to Chris Smith, Ortho's Chairman and CEO. Chris? Great.

Thanks, Brian, and welcome, everyone. Thanks for joining us this afternoon to go through our Q1 earnings update. We're going to start on slide four, and I always love to begin with every presentation I do, whether it's to our teammates or customers or obviously to investors, because it really is our credo and the mission of what drives a company, because every test is a life. And it's why we do what we do. And we play a critical role today in the healthcare system around the world. To give you an example, today we'll help over 800,000 patients with our products and our technologies. And I just want to thank our teammates for everything that they do around the world every single day. Now let's move to slide six and get into the first quarter earnings. First off, as you know, we have a broad diagnostics portfolio, so COVID assays have not been a meaningful factor on our business throughout the pandemic, as it has been for some other companies. That said, we only generated $12 million of COVID assay revenue in Q1 2022, compared to $29 million a year ago, representing an approximate four-point headwind on sales growth and a corresponding impact to the profitability. Given that, today we will largely focus on our underlying base business, which excludes COVID assay revenue. Our core revenue, excluding COVID assay revenue, grew slightly over 4% in constant currency in the quarter, with solid growth in both transfusion medicine and non-COVID mu assays. Including the headwind from the COVID tests, our core revenue grew approximately 1% in constant currency to $495 million. Market demand continues to be very strong, though, as we discussed last quarter, global supply chain disruptions continue to be a challenge, particularly on our analyzer placement. We are pleased with our 3% install-based growth during Q1, and even more so driven by the 14% integrated instrument growth. However, we ended the quarter with open orders of approximately 600 instruments due to semiconductor chip and other supply chain challenges. If we had shipped those open orders for new instrument placements, our total installed growth would have been closer to 5%, and we believe our revenue growth would have been an additional 2 to 3 percentage points higher. I'll further discuss this in a moment. Turning to our profitability, our adjusted EBITDA margin of 27.9% is down 220 basis points due to manufacturing variants that benefited margins by approximately 200 basis points a year ago, and an estimated 210 basis points of headwinds from the decline in that high margin COVID assay revenue compared to last year. Let's now look at the regions and how we performed around the world. If you turn to slide seven, you'll see the highlight of each region. The Americas, our largest geography, grew 4%, with the U.S. commercial growth excluding COVID assays up 3%, driven by strong immune assay business and transfusion medicine. In EMEA, growth continues to go quite well. If you look at Our growth, excluding COVID assay, it was 12%, driven by strength in our immune assay and our transfusion medicine business, and particularly in Northern Europe, as well as the Middle East and Africa. Russia comprises less than 1% of our global sales, so while we are paying close attention to the developments and impacts relating to the Russian-Ukraine war, the direct impact on our business during Q1 wasn't meaningful. Greater China declined 3% due to COVID lockdowns in key regions. However, our immune assay business still grew greater than 20% in the quarter. While instrument placements were negatively affected by instrument availability in the quarter, our install base still grew in China a solid 6%, driven by the integrated system growth of 12%, and underlying demand remains strong. We still think China will grow high single or low double digits for the year. Looking at our developed markets versus emerging markets, excluding the COVID assay revenue, our developed markets grew 3% and emerging markets grew 5%. While emerging market growth is below the recent trend, this is largely due to instrument supply chain challenges. But the underlying demand remains solid, and we continue to see double-digit growth in our integrated install base in China, Latin America, and ASPAC. Next, let's move to slide eight and talk about our strategic pillars. We continue to remain steadfastly focused on executing against these strategic priorities to drive profitable growth and shareholder value. These three priorities are product innovation, global commercial excellence, and operational efficiency. We continue to make progress against each of these areas in the first quarter, and let me cover just a few of the highlights. Beginning with product innovation, a turbocharger for growth, we discussed last quarter that we received emergency use authorization from the U.S. government for the quantitative COVID spike antibody assay. I'm excited to announce that Ortho has been selected as a partner in a large CDC-funded study to further our understanding of individuals' immune response to infection and vaccination. In addition, CTS and the American Red Cross recently began testing donors with our assay to determine if antibody levels were detected at levels high enough for an individual's plasma to be used for convalescent plasma therapy. And finally, our quant assay recently won the Gold Edison Award in the 2022 Innovations category. This is our second win in a row in this category, demonstrating our commitment to supporting our customers and our patients around the world. Turning to our second priority, global commercial excellence, we continue implementation of our commercial excellence programs in our growth strategy, which is to continue to drive double-digit growth and integrated install base. I'm also pleased to announce that we were awarded a Stevie Award for sales and customer service for the year. The award further recognizes our commitment to excellence through ortho care service and support, which we believe is a key differentiator to our business. And finally, our third priority, operational efficiency. Thanks to the strong revenue performance and the execution by our entire team around the world, we continue to maintain a strong balance sheet and with a healthy net leverage ratio of 3.7 times. Lastly, I'd like to comment today on the industry-wide supply chain disruptions. Market demand continues to be strong for our products through the first quarter, but was impacted by supply chain inflationary challenges. As I stated earlier, the limited supply of chips negatively affected our install base growth, and we ended the quarter with open orders of approximately 600 analyzers. We believe, however, that we're well-positioned to weather this environment. We are raising prices and adding surcharges where possible. We have strategic partnerships with leading contract manufacturers who have significantly more buying power, enabling them to reduce the impact on our business more than we would have on our own. And additionally, we foresaw some of these challenges coming, and our team has done a fantastic job adding additional suppliers and implementing many initiatives since early 2021 to mitigate the impact on our business. We are prioritizing delivery of analyzers to customers that need an instrument to meet testing demands, as well as to new customer installations over replacement of existing install-based customers, followed by shipments of integrated analyzers that provide greater and more profitable revenue. We are also exploring alternative components to reduce our dependency on specific chips, which are a key component in our analyzer. We anticipate this will allow us to further diversify our supply and reduce our costs. Of course, this will take some time, but we're confident in our strong R&D time that they will allow us to quickly deliver analyzers redesigns to the market. With that, I'd like to turn the call over to Joe to further discuss our Q1 financials. Joe?