QuidelOrtho Corporation

Welcome to the second quarter 2026 financial results conference call and webcast.

At this time, all participant lines are in listen only mode. For those of you participating in the conference call, there will be an opportunity for your questions at the end of the prepared remarks. Please note this conference call is being recorded. An audio replay of the conference call will be available on the company's website shortly after this call. I would now like to turn the conference over to Juliet Cunningham, Vice President of Investor Relations. Please go ahead.

Good afternoon, everyone, and thanks for joining us today. With me are Brian Blaser, President and Chief Executive Officer, and Micah Young, Chief Financial Officer. This conference call is being simultaneously webcast on the Investor Relations page of our website. To assist in the presentation, we also posted supplemental information on our Investor Relations page that will be referenced throughout this call. This conference call and supplemental information contain forward-looking statements which are made as of today, August 6, 2026. We assume no obligation to update any forward-looking statement except as required by law. Statements that are not strictly historical, including the company's expectations, plans, financial guidance, and future performance and prospects, are forward-looking statements that are subject to certain risks, uncertainty, assumptions, and other factors. Actual results may vary materially from those expressed or implied in these forward-looking statements. Please refer to our SEC filings for a description of potential risks. In addition, today's call includes discussion of certain non-GAAP financial measures. Tables reconciling these non-GAAP measures to their most directly comparable GAAP measures are available in our earnings release and supplemental information on the investor relations page of our website. Lastly, unless stated otherwise, all year-over-year revenue growth rates given on today's call are on a constant currency basis. Now, I'd like to turn the call over to our CEO, Brian Blaser.

Thanks, Juliet, and good afternoon, everyone. Before I get into our second quarter results, I'd like to welcome Micah Young, our new chief financial officer. Micah brings extensive experience from the medical technology industry and a strong track record of financial and operational leadership. We are excited to have him on the team and look forward to the contributions he will make as we continue executing our strategy and creating long-term value for our shareholders. Let me begin with the central takeaway from our second quarter. While we are navigating significant headwinds in China and a softer respiratory environment, The underlying performance of our business remains strong. Total revenue in the quarter increased 2%. Excluding China, revenue grew 6%, reflecting broad-based strength across our core franchises and regions. Labs revenue outside of China grew 9%, immunohematology revenue outside of China increased 5%, and triage expanded by 9%. These results demonstrate the underlying strength of customer demand and solid commercial execution across our portfolio. Our geographic revenue performance in the quarter was strong and broad-based. North America, our largest region, grew by 6% with strong contributions from labs and our triage point of care business. JPAC revenue grew 10% driven by strong performance in Japan and India. Latin America grew 8% with notable strength in Brazil and Central America. adjusted EBITDA increased 21% to 129 million, while EBITDA margin expanded 310 basis points to 20% of revenue. This level of margin expansion during our seasonally weakest quarter of the year demonstrates that our operational improvement initiatives are delivering tangible results. We are driving better productivity throughout the organization, exercising disciplined expense management, and focusing our resources on the highest return opportunities. We also continue to invest in innovation and growth opportunities that will strengthen our competitive position and expand our addressable markets over time. One of the most significant of these opportunities is the commercialization of the Lex point-of-care molecular platform now branded as Nulexa. Since completing the Lex acquisition in April, we have made substantial progress. Our teams have moved quickly to advance manufacturing scale-up, supply chain readiness, and commercial launch capabilities. I'm pleased with the progress to date and we remain on track against these objectives. Early customer engagement has been very encouraging. We believe Nulexa addresses an important need in the market by combining molecular accuracy and rapid turnaround time with a simple, efficient workflow at the point of care. Just as importantly, Nulexa is more than a single product launch. It provides a scalable platform for future menu expansion and allows us to leverage our established commercial infrastructure, broad customer relationships, and deep expertise in point of care diagnostics. Based on our current plans, we expect customer placements and test utilization to gain steady momentum as we progress into the respiratory season later this year. Our objective is to enter the 2027-2028 respiratory season with a growing install base, a productive commercial engine, and a strong foundation for continued expansion. Turning back to the results for the quarter, the notable performance exception was China, where revenue declined 23% year over year. Uncertainty related to the proposed IVD pricing guidelines has impacted buying behavior as customers reduced their inventories pending the issuance of the final nationwide guidelines. The second draft of the IBD pricing guidelines, which was released for comment in late June, differs meaningfully from the preliminary draft issued in March. The second draft of the guidelines eliminates methodology and use case differentiation and includes a broader range of products. And the scope has changed with the pilot implementation increasing from three to six provinces. While the guidelines and their implementation timelines are not yet final, We believe the uncertainty regarding the guidelines is already impacting customer behavior. As we reviewed market performance data that became available after quarter end, we observed customers adjusting their purchasing and inventory levels more quickly and significantly than we had anticipated. We are working closely with our team, customers, and distribution partners in China to adapt our commercial and operating plans. Our near-term actions are focused on protecting our install base, maintaining customer engagement during the transition period and aligning commercial resources with the evolving reimbursement environment. While we remain confident in our ability to manage through these changes, the timing, extent, and pace of implementation continue to create uncertainty around near-term demand. The respiratory market also remained softer as we moved into the summer season. Test positivity rates are down markedly compared with 2025. The timing and severity of respiratory seasons are inherently difficult to predict, and while historical patterns would indicate we are due for a stronger 2026-2027 flu season, early indicators are pointing to a below average season ahead. Rather than assume a typical uptick in ILI visits, we are assuming the first half softness continues and have modeled our second half respiratory revenues accordingly. Given the collective impacts of China and our respiratory season forecast, We are revising our full year guidance for revenue, adjusted EBITDA, adjusted EBITDA margin, and adjusted ETS. We are taking a measured approach to our guidance in view of these factors. We also made the decision to withdraw free cash flow guidance until we have greater clarity of the combined working capital implications of these developments. This is a prudent response to the information available to us today. It does not change our confidence in the strength of our core business. and importantly, withdrawing free cash flow guidance does not change our commitment to improving cash performance. Improving our cost structure, strengthening cash flow and reducing leverage remain top priorities for the company. The revised outlook reflects the impact of ongoing market pressures in China and a prudent approach to respiratory season assumptions in the second half. At the same time, our second quarter and first half results outside of China demonstrate the underlying strength of our business The durability of our customer relationships and the benefits of our diversified portfolio. Our focus remains on executing with discipline, responding appropriately to current conditions, and positioning Quidel Ortho for stronger, more sustainable performance over the long term. So with that, I'll turn the call over to Micah.

Thank you, Brian, and good afternoon, everyone. Since this is my first earnings call as CFO, I want to start with the perspective I've developed over the past several weeks. I've been reviewing our operations, financial performance, capital structure, and cash generation profile with a fresh lens. Quidel Ortho has a highly attractive global diagnostics franchise, a large installed base, and leading market positions. At the same time, I see clear opportunities to improve execution and strengthen cash conversion. From that perspective, let me turn to our second quarter results. Total revenue for the quarter was $631 million, representing 2% growth on a constant currency basis. While the headline growth rate was affected by continued weakness in China in the first half of 2026, the underlying Q2 performance of the business was stronger than the consolidated result would suggest. While China is an important market for Quidel Ortho, our broader global business continued to perform well during the quarter. Revenue outside of China, which represents nearly 90% of total company revenue, increased 6% year-over-year in Q2. That performance reflects healthy demand across our core end markets, strong customer retention, and continued commercial execution across our diagnostics portfolio, even as a consolidated result was pressured by China. As Brian mentioned, China remained a significant headwind during the quarter, with revenue declining 23% year-over-year. The market continues to experience uncertainty related to healthcare policy changes, pricing dynamics, and customer purchasing patterns. While we do not expect market conditions in China to improve in the near term, our teams remain focused on supporting customers, preserving our install base, and positioning the business to compete effectively as the market adjusts. Taken together, the strength of our business outside of China highlights the value of our diversified global footprint, even as the China and respiratory headwinds require a more cautious full-year outlook. Turning to profitability, Q2 adjusted gross margin was 44.4%, down 130 basis points year over year. The unfavorable geographic mix associated with lower China volumes negatively impacted our results in the quarter. Non-GAAP SG&A and R&D operating expenses combined increased 2% to $219 million. As a percentage of revenue, operating expenses improved 40 basis points year-over-year. Adjusted EBITDA was $129 million and adjusted earnings per share was $0.13 for the quarter. Turning to the balance sheet and cash flow. We ended the quarter with $123 million in cash and $250 million in borrowings outstanding under our revolving credit facility. Operating cash flow for the quarter was negative $111 million and free cash flow was negative $136 million. Second quarter free cash flow included a $25 million payment to Griffles associated with the termination of the joint business arrangement. The remaining payments of $25 million and $15 million associated with the termination of that agreement will occur in 2027 and 2028 respectively. In addition, we deployed $97 million in cash for the LECS acquisition, which was reported in investing activities this quarter. At the end of the second quarter, net debt leverage was 4.3 times adjusted EBITDA, including the pro forma adjustments permitted under our credit agreement. As I evaluate the business, among my top priorities are improving cash conversion and reducing leverage. As part of my initial review, we're evaluating opportunities to improve our cost structure, optimize returns on our instrument investments, enhance working capital efficiency, and maintain a disciplined approach to capital allocation. I'm confident that our actions can and will improve cash conversion, but we do not have sufficient clarity today on the evolving market dynamics and the timing and impact of our mitigation efforts with a degree of precision appropriate to provide updated free cash flow guidance for 2026. Rather than provide a wider guidance range reflecting potential cash flow outcomes for the remainder of the year, which I don't believe would be helpful or meaningful to investors, we made the decision to withdraw free cash flow guidance. We are taking a disciplined approach to external cash flow guidance while remaining intensely focused on execution and strengthening the balance sheet. Turning to our outlook, based on current market conditions and the trends we see across our business, we are updating our full year 2026 guidance. We now expect revenue in the range of 2.52 billion to 2.60 billion. The downward revision reflects two primary factors. First, we expect the challenges in China to persist through the remainder of the year, including continued pressure on demand and ongoing uncertainty related to the China IVD pricing guidelines. Second, we are taking a prudent approach to respiratory season assumptions in the second half. At the midpoint of our outlook, we are assuming a respiratory environment that is generally consistent with the more muted loose activity experienced during the first half of this year. Importantly, the adjustment to our outlook is not being driven by changes in expectations for our core laboratory and immunohematology businesses outside of China. Performance in these franchises remains stable, and we are assuming approximately 3% to 5% aggregate growth for those businesses in the second half of the year. The revised outlook primarily reflects our expectation that China-related challenges will persist and are more cautious assumptions regarding respiratory season demand. Turning to profitability, we now expect full year 2026 adjusted EBITDA of $540 million to $560 million, representing an EBITDA margin range of 21% to 22%. And we now expect adjusted EPS of $0.65 to $0.90. One of my priorities as CFO is to ensure that the guidance and commitments we make externally are grounded in a high level of competence. Given the current operating environment, we have decided to withdraw free cash flow guidance. This decision is not a change in our view of the long-term quality of the business. It reflects continued uncertainty around factors that can significantly influence cash generation, including the current market environment in China, the ultimate strength and timing of the respiratory season and the related working capital impacts. As I step into this role, I see significant opportunities to strengthen financial performance beyond the income statement. My priorities are clear, improving cash conversion, reducing leverage and maintaining a disciplined capital allocation framework focused on returns and balance sheet strength. While the environment remains dynamic, I am encouraged by the resilience of the underlying business, the strength of our market positions, and the opportunities we have to improve execution. Ultimately, my objective is to improve the consistency with which our operating performance converts into cash flow, supports deleveraging, and drives sustainable long-term shareholder value. With that, we'll open the line for questions.

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from Jack Meehan with Opron Research. Please go ahead.

Thank you. Good afternoon. I was wondering if you could talk about what proactive steps you're taking to improve the balance sheet leverage.

Yeah, absolutely, Jack. So first, thank you for your question. You know, let me step back a bit. The reason I joined Quidel Ortho is because I saw an opportunity to help drive the next phase of value creation. As I've evaluated the business, as I mentioned on the prepared remarks, improving cash conversion, reducing leverage, and increasing returns on invested capital are priorities. Where I'm focused with this team is on improving working capital, reducing the capital that's tied up into inventory, optimizing the returns on our instrument investments, Rationalizing Capital Expenditures and Directing Capital Towards the Geographies and Businesses Generating the Highest Returns.

Okay, and at the end of June, there was a FT article that was reporting that Quidel Orto was considering selling its point of care business. I was wondering if you had any comment on that, and if you were to consider something like that, just talk through the rationale.

Hey, Jack. This is Brian. We saw the article, of course, and have seen some of the speculation. I'm not going to comment on that. Just as a general matter, we don't comment on market rumors like that. But I will say that our highest priority is maximizing long-term shareholder value. And just as a matter of good governance, our board and our management team is regularly evaluating a broad range of opportunities, including portfolio opportunities to strengthen the business and improve shareholder returns. But our current focus right now is on executing our strategy, as Micah said, improving cash conversion, reducing leverage and driving operational performance across our portfolio. And as always, you know, we take actions that we believe are in the best interest of shareholders.

Okay, thanks, Brian. If I could squeeze in one more, you mentioned the reduced respiratory forecast for the year and you were seeing some early indicators that might suggest kind of a lower season. I was wondering if you could elaborate on that. Is it Australia data or something else? Any color would be great. Thank you.

Yeah. So our approach for the respiratory season here has changed a little bit. So, you know, as you know, the respiratory market is variable year to year. And really what's changed here is is More than anything is our approach to forecasting for it. So historically, and I know you're familiar with this, we have used kind of an average respiratory season as a baseline for creating our annual guidance. And, you know, this year we are assuming that the respiratory testing market is going to be consistent with more of the lower end of the historical seasons. And I think moving forward, We intend to take a more conservative approach and align our cost structure accordingly. We have seen up until now, you know, our positivity rates in the US are significantly lower than they were this time last year. We have seen lower strength of data coming out of the southern hemisphere, which at a minimum suggests either a later season or could indicate a softer season. So we think that taking a more prudent approach here to respiratory season, given what we're seeing as early indicators, is the right way to position the business.

That makes sense. Thank you, Brian.

Your next question comes from Bill Bonello with Craig Hallam. Please go ahead.

Hey, thanks a lot. So I appreciate the commentary about, you know, what growth looks like excluding China this quarter. But I think, you know, we find ourselves lots of times in a quarter where, you know, if you don't count something that's not growing, then growth looks pretty good. I'm just curious sort of how you're thinking about the business as a whole, maybe how the board and the management team thinks about risk mitigation strategy. How do you get to a point where you can absorb portions of the business that are underperforming without having it be sort of a major problem for the company as a whole?

Yeah, so Bill, I'd answer that a couple of ways. First, I would point to the strength of the underlying business here. When you step back and look at the business excluding respiratory and China, which is basically our labs and immunohematology business, it's about 75% of the company last year. Those are really strong, predictable businesses that are supported by really nice underlying business model attributes. They have long contracts, very durable recurring revenue streams, large base of instruments, and so on. Have very strong brand recognition, solid market positions. And those businesses continue to demonstrate very solid growth in the mid single digits. and if you point look at our first half results you know without China we grew six percent in the second quarter and had very nice performance across all of our geographies and our business units. You know as it relates to you know significant impacts like the one we're seeing in China you know all I can tell you is that we are taking very aggressive mitigation steps in China and across the business to better position the company and our cost structure to be able to manage through that and emerge on the other side of that stronger. So we have a lot of, as you know, we have a lot of cost improvement opportunities underway. We're taking additional steps. I have already taken additional steps and we're gonna continue to augment those as we go through the back half of this year.

Okay, that's really helpful. That's all I wanted to know. Thank you. Thanks, Bill.

If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. There are no further questions at this time. I will now hand the call back to Brian Blaser for closing remarks.

Thanks, operator, and thank you all for joining us today and the questions. I'd like to close with the following points. First, that despite the pricing changes in China, and the uncertainty surrounding the upcoming respiratory season, our Q2 results demonstrate that the underlying health of our core business remains strong. And secondly, we recognize the challenges in front of us and we are addressing them head on with aggressive mitigation actions. We believe that revising our outlook is a prudent and responsible course based on what we know today. And lastly, our priorities have not changed. We remain intensely focused on serving our customers Thank you all for joining us today and we look forward to updating you on our progress next quarter. This concludes today's call. Thank you for attending. You may now disconnect.