Q2 2021 Ortho Clinical Diagnostics Holdings PLC Earnings Call
[music].
Welcome to the Ortho clinical diagnostics second quarter 2021 earnings conference call and webcast. At this time all participant lines are in a 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 remarks. Please note. This conference is being recorded in audio.
A replay of this 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.
Good afternoon, everyone and welcome to the Ortho clinical diagnostics second quarter earnings Conference call with me today to discuss our financial results are Chris Smith, Ortho as chairman and CEO and Joe Buskey Ortho as Chief Financial Officer, Mike <unk>, Our EVP of commercial excellence and strategy will join us on the Q&A portion of the call.
<unk>.
This conference call is simultaneously webcast on the investors section of our website and a version of today's presentation can be downloaded there.
We will start with our Safe Harbor statement and then proceed with the call.
Some of the statements we will make during this call, which represent our expectations or beliefs concerning future events are forward looking statements within the meaning of section 21 E of the Securities Exchange Act of $19.34, 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 2 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 forward looking statements, we will be making.
We make will be realized we undertake no obligation to update any forward looking statement to reflect future events developments or changed circumstances.
Or any other reason, except as required by law.
During today's call. We will also be will also be a discussion of some items that do not conform to U S. Generally accepted accounting principles or GAAP. Please see slide 3 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 investors section.
The ortho website.
In addition on today's call, we will refer to our core and our noncore business, our clinical laboratories, 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.
Now I'd like to turn the call over to Chris Smith, Ortho as chairman and CEO Chris.
Good afternoon, Thanks, Brian and welcome to Ortho as Q2.2021 earnings call before diving in I would like to welcome Brian Brockmeyer as our new VP of Investor Relations and especially thank John standards, Our treasurer, who has been leading our Investor Relations program during the IPO process and our first 2 quarters of a public traded company.
With that let's dive into the second quarter results.
If you look at slide 4 I always love to begin with our mission statement and it briefly states because every test as a life. This is why we do what we do we embraced this credo in this critical role that we play in the global healthcare system every single day and I want to thank all our global team mates around the world for all they do every single day to deliver on that promise 2.
Today, we will help over 800000 patients through this promise and thanks to those teammates.
Shifting to Q2 'twenty 1 highlights on slide 5 the company has continued to perform extremely well with our 3 quarters in a row of strong growth.
During the second quarter of 2021 as compared to last year's second quarter. We grew our core revenue, 23% in constant currency to $488 million our base business. Excluding COVID-19 was up 27% further demonstrating the strength of this core business.
The agenda it generated adjusted EBITDA of $128 million, an increase of 27% as compared to the second quarter of last year and very importantly, our adjusted cash flow in the quarter was $144 million up $191 million year on year, which benefited from a $75 million of receivables securitization in the quarter.
Overall, we had very strong first half of 2021 performance, which is largely reflected in our team's dedication to growing and improving our business with innovation and commercial expansion.
As you know we shifted our strategy in 2019 to diligently manage this business for growth as opposed to value and this is a clear testament to those efforts.
Slide 6 illustrates this growth trajectory seen in our core business over the recent years and in particular the strength in the last 3 quarters. We also delivered solid growth in our installed base, which is a great leading indicator of future revenue growth and this includes the consistent double digit growth of the all important integrated system shown here will.
<unk> in more detail in a few slides.
We see a significant opportunity to carry this straightforward as we continue into the second half of this year and well into the future.
Lastly, I'm pleased to report that given our strong first half performance and sustained momentum we are raising our full year guidance across all key metrics our outlook for the full fiscal year is now 10% to 12% core revenue growth up from 9% to 11%, which we shared last quarter.
Please note that we expect the contribution of COVID-19 testing sales in the back half of last year to impact our year on year growth rates in the remaining quarters for the year.
Given our expectations for declining Covid assay sales in the second half of the year, which is fully embedded in our guidance.
For adjusted EBITDA, we are now forecasting growth of 15% to 17% up from 14 to 16, 5% Joe will touch on these changes on the remaining metrics shortly.
Moving on to slide 7, which really outlines our 3 strategic priorities to drive profitable sustainable growth and shareholder value.
These priorities our product innovation commercial excellence and operational efficiency and they are integral to our long term sustainable growth and we will continue to invest in devote energy into each I do want to touch a couple of highlights on each 1 if you look under product innovation, we launched the first high throughput quantitative test and all important test.
As we continue to understand the Covid pandemic and what it's doing to immunity. While this is early days, we're excited about the opportunity to partner with clinicians and leading researchers to understand immunity levels and we think this test will be key.
If you shift over to global commercial excellence, we were again ranked number 1 by service track for service. This is the sixth year in the award year that we've been earned that award and to give you. An example, this year was the best performance we've ever had service tracks all the manufacturers and 37 categories and we were first in 35 of the 30 <unk>.
7 categories in particular, 1 that we think is all important to talk about service levels, which is NPS, we are over 20% higher than our next closest competitor a true Testament to our team and how important services to our customers and finally, if you look at operational efficiency, many highlights, but I do want to call out the deleverage we've got Dow.
Now to 4.0 and were well ahead of what we forecasted at the beginning of the year and again, Joe will spend a little more time on that later on.
Moving on to slide 7 which outlines our strategic priorities for driving.
Excuse me.
On slide 8 we highlight the opportunity for organic growth that immunoassay market represents.
<unk> has historically been a leader in the clinical lab business and we have strong market share with many different products that Glenn lab business has an addressable market of approximately $26 billion and we compete in the largest IBD markets here with our clinical chemistry and immunoassay solutions.
As we discussed in the past moving customers from a standalone analyzer to an integrated analyzer is fundamental to our growth strategy in 2020, our clinical labs revenue mix was weighted heavily towards clinical chemistry with a 62% to 38 split while the broader market was reversed with 68% of revenues coming from the IAA business.
We believe this mismatch between our revenue mix and the proportion of the broader market represents a significant growth opportunity for us to expand our.
Market share and to grow our revenue.
This gap can fill through our increasing focus on lifetime customer value and expanding our menu and our install base of integrated analyzers.
We are already seeing greater integration penetration with each passing year and believe automated placements will continue to gain momentum and to give you. An example for the quarter. We registered an impressive 17% growth in our <unk> business IAG testing for infectious disease in advanced diagnostics is typically the highest revenue and highest margin business in the in the clinical <unk>.
Lab side of the business, which will help us continue to drive our revenue going forward and improve our margins.
If you shift to slide 9 I'd like to talk about the regions and the results activities in each of these groups.
In the Americas, which represents Canada, the U S and Latin America is now 60% of our total business and it grew 21% for the quarter, 30% without COVID-19.
Driving this continued double digit growth as placements, especially of our integrated systems, our menu expansion, which is all important because of the pull through that we can see in the labs as well as Cts, which was a new agreement that we entered into in the first quarter.
In EMEA, which represents 14% of our total business. The team is gaining traction and we saw growth of 24% in Q2 with Western Europe, leading the way with 28% growth in the quarter and as you know when we went public we talked a lot about the importance of growing western Europe and that continues to deliver its rebounded nicely as a result of the leadership.
Changes that we put in place over the last couple of years and our continued focus on expanding commercial focus.
While greater China represents 12%, we had nice growth of 23% in Q2, and we but we continue to see a slower recovery from the pandemic than other markets. This recovery has been slower in our slide in chemistry business due to slow recovery and routine patient business and testing, which is weighted really towards <unk>.
History.
A highlight is the growth of 7% installed base and 15% in our integrated systems, which will be a good indicator for future growth and to give you. An example of how we shifted this integrated system, we actually saw a 40% growth on the IAA side of the business in China in Q2.
Other which includes Japan, India and other Asia Pac countries grew 24%. In addition, we're incredibly pleased with the rebound in our most of our emerging markets, which combined grew 48% led by Latin America and India.
I'll now turn the call over to Joe to further discuss our Q2 financial results and our.
And our outlook through the rest of the year, Joe Alright. Thank you Chris as Chris Just noted Q2 builds on our momentum since we became a public company compared to the pandemic impacted Q2.2020, we saw a meaningful recovery in our base business that fueled robust revenue growth across all of our geographies and segments.
Now, let me provide a little 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, we posted total revenue of $492.5 million. This is up 26, 1% on a reported basis and up 22, 4% on a constant currency basis.
Core revenue, which excludes contract manufacturing and other licensing revenue grew 22, 5% on a constant currency basis to 480 them than a half million dollars.
The substantial revenue growth in the second quarter was primarily driven by the continued recovery across our geographies in both <unk> labs and transfusion medicine.
Our business generated $17 million in Covid related revenue, which was down from $27 million in Q2 of 2020, representing approximately a 450 basis point headwind on total company core revenue.
In our guidance no COVID-19 related revenue is in the second half of 'twenty, 1 representing an approximately 570 basis point headwind on total company core revenue growth.
As a trusted partner of hospitals hospital networks blood banks in labs around the world our core business bounced back fairly well from a pandemic induced low points, we saw in the second quarter of 2020.
Pleased to say our base business has continued its trajectory of year over year growth clean labs revenue grew $325 million from $260 million.
21, 1% increase on a constant currency basis, largely driven by all geographies showing double digit growth on a constant currency basis.
And our <unk> business, we saw 25, 3% growth on a constant currency basis or $162.4 million in revenue for the quarter.
Compared to $126 million in the prior year period.
Within transfusion medicine, we experienced growth in the Americas, EMEA and other aspect primarily Japan.
Q2 benefited from our new partnership with Cts, which again went live in Q1 of this year.
Non core revenue grew to $4.9 million from $4.3 million for the second quarter, primarily as a result of timing.
Now onto slide 12, which outlines our geographic region results for Q2, the Americas revenue in the second quarter grew to $296.3 million from $241 million in the prior year quarter or 21, 3% growth on a constant currency basis due to pronounce.
Both in <unk> labs, and transfusion medicine within the region.
EMEA revenue of $67.8 million was up 24, 3% on a constant currency basis from $51 million in the prior year quarter.
Our greater China segment revenues of $58.5 million, an increase from $43.3 million or 23, 2% on a constant currency basis.
And finally, our other segment, which includes Japan and Asia Pacific markets had revenue of $69.9 million up from $55.2 million, which was up.
24, 7% on a constant currency basis.
Now turning to slide 13, we delivered another solid quarter, our performance below the top line with improvements in gross margin and free cash flow in the quarter.
Gross margin for the quarter was 49, 6%, which is a 160 basis point increase primarily due to lower manufacturing costs.
Within both cost of sales and operating expenses, we've seen higher spot air freight rates as we've previously discussed this trend continues but we are actively managing and monitoring the situation and we have included these higher costs in our outlook.
Our Q2 SG&A expense is higher year over year versus Q2, 'twenty by $29 million due to higher stock compensation expense distribution freight expense public company operating costs and finally foreign exchange impacts.
Adjusted EBITDA for the second quarter was $128 million up 27% compared to $100.9 million in the second quarter of 2020.
Primarily driven by the strong gross profit as well as improving operating leverage.
Our adjusted earnings per fully diluted share for the second quarter increased to 16 in comparison to just <unk> last year, driven by our solid operating performance as well as lower interest expense as a result of our debt paydown in the IPO.
Interest expense for the period was $33 million compared to $47.5 million in the year ago period.
Our provision for taxes was $15.1 million compared to $3.8 million in the year ago period on.
On a GAAP basis net loss for the second quarter was $20 million or <unk> <unk> per share compared with a net loss of $41.3 million or <unk> 28 per share in Q2.2020.
Now, let's turn to slide 14 to discuss our free cash flow capital deployment and balance sheet.
In the second quarter, we generated $144.1 million and adjusted free cash flow after funding 5 million for Capex.
This number includes the securitization of $75 million of our U S accounts receivable and an off balance sheet transaction, our global DSO at the end of Q2 stood at 42 days or 22 days favorable to the prior year and without the benefit of the off balance sheet financing transaction, our DSO would have been 56.
Phase 8.
8 days operationally better than the prior year.
The receivables financing transaction created a shift between operating cash flow and financing cash flow and did not result in additional cash on the balance sheet.
We expect cash generation in the second half to be in excess of 100 million with Q4, making up about 80% of our free cash flow in Q3, contributing about 20% due primarily to working capital seasonality.
Our strong cash flow generation in the accounts receivable securitization enabled us to continue to deleverage our balance sheet and reduce our net debt to EBITDA ratio down to 4 times down from 4.4 times Levered at the end of Q1, which again is ahead of our leverage improvement target for the year.
Given the strength of our business performance, we remain confident in our ability to reduce this leverage ratio by at least a half a turn a year going forward as we move towards a more normalized leverage ratio of 2.5 to 3.5 times, providing additional capacity for M&A opportunities.
We ended the quarter with cash and cash equivalents of $200.9 million and total debt of $2.3 billion.
Turning to slide 15, now let me remind you that continued debt reduction is just 1 facet of our balanced capital deployment strategy.
We are actively evaluating organic and inorganic growth opportunities that would complement our core business further increased operating leverage and give us new or additional exposure to high growth markets.
To date, we have established a successful track record of partnerships with industry leaders, including cripples, IDEXX thermal and many others, which truly sets us apart from the competition.
While we are guided by our focus on continued development of industry, leading innovative solutions for patients around the world.
We believe that our expertise gained through these highly collaborative partnerships, coupled with our market leading position in the attractive IBD space and healthy balance sheet. Following our January IPO provide us with an excellent platform to pursue bolt on acquisitions to accelerate profitable growth.
Our targets are high growth high margin products that we can sell through our existing global call points and distributors, including molecular specialty IAA and point of care diagnostics systems.
We also see an increasing opportunity to bring more value to our customers and patients over time through digital and informatic solutions. We see this playing across both our clean labs and our <unk> businesses.
In terms of financial criteria, our focus remains primarily on bolt on and niche opportunities, where we can see revenue growth accretive earnings and deliver an increase in return on invested capital or.
Our balance sheet has considerably improved since our IPO and as we continue to reduce debt and generate cash our capacity for these types of acquisitions will expand.
Now turning to our 2021 outlook on slide 16, with the very strong momentum across our portfolio. During the first half of the year and continued strength in the early part of Q3, we are raising our guidance as follows full year 2021 core revenue within a range of 1 billion $9.50 to $1.900.
<unk>.
And core revenue to grow between 10% and 12% on a constant currency basis Thats up a full percentage point of growth from our prior guidance.
Second 2021, adjusted EBITDA has also increased to between $526 million and $534 million or 15% to 17% growth on a reported basis.
And then finally adjusted diluted EPS will now be in the range of 67 to 72 per share for the full year 'twenty 1 based on full year diluted weighted average share count of $244 million.
Note that in the back half of the year, we expect our diluted weighted average share count to increase approximately 500000 shares per quarter.
We're confident in our ability to model our business as the 93% recurring nature of our revenue gives us substantial visibility visibility into the future. We expect to continue to grow the topline across our core businesses and all of our various segments and at the same time drive margin expansion and operating leverage through our value capture pro.
Graham and increased placement of integrated analyzers.
Given this we continue to believe that for every percentage point of revenue growth, we expect our non-GAAP adjusted EBITDA margin to grow between 1 to 2 times debt, depending on our investments back into the business for that period.
I couldn't be more pleased with oracle's performance in the second quarter of 2001, and I'm confident that we're building a platform for continued growth. Thanks to all of our teammates worldwide, who have delivered on these results and with that I'll turn it back over to you Chris.
Thanks, Joe before opening the line for Q&A I'd like to spend a few minutes on slide 17 outlining the core tenants of R&D investment thesis that we talked about during the IPO that allows us to create long term shareholder value the.
The first tenant here is that we are now 1 of the only publicly traded pure play IBD companies. This is important because while a number of our peers have a presence in IBD market. Many of them are part of large conglomerates and have several areas of focus outside diagnostics next.
Next we have clear differentiation that creates this lifetime customer value, which is really driven by a reoccurring revenue stream.
Our strong reoccurring and predictable revenue allows us to consistently invest in our R&D and innovation efforts and support our strong operating model and finally, we have built strong momentum over the last 2 years, which Joe has just outlined and it's carried us forward into the first half with strong topline growth and profitability. We believe our core growth is sustainable and we have numerous opportunities.
<unk> expand our business and drive long term shareholder value now.
Now I'll throw the call back to Brian and we'll begin the Q&A process operator, we'll take the first question.
Thank you.
We will now begin the question and answer session. If you have a question. Please press Star then 1 on your Touchtone phone if you wish to be removed from the queue. Please press the pound sign or the hash key if youre using a speakerphone you may need to pick up the handset first before pressing the numbers once again for any questions on the line Thats Star then 1 on your Touchtone phone standing by.
Questions.
And our first question online comes from Mr. Vijay Kumar from ISI. Please go ahead.
Hey, guys. Thanks for taking my question and congrats on not the Princeton Guide raise here Chris.
Chris maybe on.
Hi, Chris.
On the Americas.
The sequential declines maybe I'm not looking at this the right with it seemed a little light.
Was this just the timing of Cts contract here when Im looking at the sequential trends or perhaps could you talk about the underlying.
Immunoassay clinical chemistry markets.
Anything thats going on an underlying basis.
The Delta ovarian spread your chart Vijay you're talking about from Q1.
Correct.
Yes, So look I think when you look at sequentially. So yeah. As you know the base business is really important to us which is really that day to day business and so when you back out things like Covid.
Which is going now, it's really becoming a headwind every quarter, we actually had sequential total growth as a company of around 3% to 4%.
So.
Well, we call our base business, which is really that that reoccurring things and when you back out stuff like COVID-19 or or contract manufacturing, but Joe do you have anything else to add now, particularly in the Americas. It's the same theme Vijay on Americans. If you were to back out the Covid revenue the base business was actually up sequentially here.
Okay.
Thanks for clarifying that.
Joe maybe 1 on the guidance here Chris.
If I look at the back half correct me, if I'm wrong, but ex the COVID-19 headwinds at the base business implied is high singles and when I look back up comments around.
Integrated installed base growing mid teens.
That's 25% of your mix of the business is growing 4% just based on your integrated installed base growth.
What youll remaining rest of the portfolio growing low to mid singles I think.
I'm getting to.
Something 6.7 for the outlook, maybe peg it back by a little bit of pricing, but why shouldnt.
This business be a solid pipeline.
I expect some of the comp issues on Covid is that yes. When I look at these installed base numbers up is that the right math Chris.
Yeah, well look we think we definitely think this is a 5 plus growth business and look I think Vijay. So you have to remember COVID-19 is a huge headwind as we move into the second half of the year. So why we're guiding to 10% to 12% revenue growth. It's higher when you back out COVID-19 for the year right. When we think about our year from a COVID-19 perspective it was.
Significant so I think that maybe when we catch a 100 watt or Joe do you want to throw more because at the end of the day. The business is pretty robust and that integration is driving and especially around the IAA side of the business.
I think 1 of the challenges you have for example in comps as you didn't have.
Covid is going backwards.
And I think Thats, an important component of that and then I think from a positive perspective as we move into the second half will have Cts, where we didn't have cts.
Second half of last year.
Yeah, Hey, Vijay just to add on to that remember that the.
Covid revenues going to be almost a 600 basis point headwind on our revenue in the second half.
So it is it is fairly significant so if you exclude that I think youre going to see the core business growing.
In the area that Youre expecting.
Operator, our next question.
Thank you. Our next question on line comes from Mr. <unk> from Morgan Stanley. Please go ahead.
Hey, guys. Good evening. So just just 1 more on the Covid situation here, Chris and Joe can you, perhaps elaborate a little bit on trends in July I mean are you starting to see any cracks appear in terms of.
The situation on Covid reversing.
And on that note I know you've excluded everything on a contribution basis in the back half of the year.
Is that starting to change I mean, given the delta there and your launch of the quantitative antibody test.
Yes look I think it's a great question I would say every part of the world right now is a little bit different and I think it's been interesting. So we are being conservative on the revenue as Joe said, we're guiding to zero revenue.
Covid in the second half of the year. However, we did spend money in R&D dollars in the first half developing a couple of products that we just brought out so the nuclear capsid and the Quants are huge for us and that was really around if COVID-19 does start to take off so the quantity is still too early we just we just rolled that out in United.
They just got approval the only ones out there right now that has approval I think our challenges is right now the world Health organization and CDC is struggling to find out what does your number mean and so I think what we're what youre probably seeing early days with us on that test is working with clinicians and researchers around clinical trials to be able to.
To create studies.
Studies that shows what that number actually means so we can give you what the number means but.
The market and the clinicians have not yet said, so I think that we're going to see in the second half how important that becomes I think his research starts to come to market and people understand the importance of that that I do think that test will take off but I think it's more around us just it's an unknown. It's kind of like we talked about last year, we want to be available to provided to our customers but it.
At the same time, we think it's we're building from a conservative revenue perspective.
Got it.
And then 1 quick follow up for me on 'twenty..2 I know you probably don't want to guide just just yet.
As we think about the comp here.
<unk> taken up your guide for the core constant currency growth number by about 100 bps or so at the midpoint and so.
For next year I mean, how comfortable are you getting to sort of mid single digit plus growth on a year over year basis.
Yes, so a couple of things so I love your first comment that we're probably too early to guide into next year, but a couple of things that I think you can refer back to.
We kind of talked about what we thought this business look like on the IPO. So we believe that we should be growing at or above market. So I think that that kind of helps guide you I would say the other thing a couple of things have happened I think 1 is western Europe. In particular is performing really well and you have to remember we had 5 years of backwards growth there and that's really been a shift.
US and I think it's it's been an incredible positive I'd say the second 1 is is that our key emerging markets, Mexico, Brazil, India are performing significantly better.
Than they had in the past as has the U S. So if you look at all of our markets are actually all performing better than we had projected I would say the 1 caveat is China and why China is growing in the mid 20% our business. There had primarily been chemistry dry slide chemistry, and we are seeing a slower rebound there because.
That's mainly around routine testing now I'm really pleased I announced as the China that the IAA business grew 40%, so thats important as replacement and our integrated analyzers in China grew 15%.
But other than China, which is still growing nicely, we're seeing great things from from all the other areas. So I think we feel pretty confident that we can grow at or above market.
Okay.
Thank you our next question.
Thank you. Our next question on line comes from Tycho Peterson from Jpmorgan. Please go ahead.
Hey, Tiger, Hey, I'm actually going to pick up where you left off on China, because Europe, 23%, but then you did comment slower to return. So can you maybe touch on those dynamics and what youre thinking for the back half of the year.
Yes, so look I would say that.
China was impacted much more than anywhere else in the world for us last year, and I think a lot of that.
As you start to get to know this COVID-19 and you understand whats flowing through the hospitals, we really started to understand that this has been a lot around this routine testing and folks that would go to the hospital on regular things and Youre, just not seeing that bounce back yet in China like Youre seeing it for example in the United States or in some other markets and so look we still feel really good about the <unk>.
Outlook double digit growth in China for the year.
<unk>.
I think they were on where they were on our internal projections, but I'm just but its just taking slower to bounce back on that chemistry side of the business that I think that we probably thought.
Okay on the.
The transfusion side you highlighted.
Ex leader and in the presentation can you just talk about how meaningful that is in terms of the overall portfolio there.
Yes look it's incredible meeting because a rounded out our portfolio, we've got Mike on the call, Mike who runs kind of the product group, Mike do you want to comment a little bit more on the optics reader.
Yes, we.
We will do Chris Thanks, and Hi, Tycho.
<unk> for us really does round out the portfolio gives us a little more automation at the low end of the market, which should help us in some of the smaller markets lower volume sites, but it also helps us where we have a high degree of presence in.
The larger hospitals when they need a backup solution the optics will help us there and again all of that's rounded out we did not just launched the optics, but we launched division Swift product line.
Which is which is growing pretty much in line with expectations. So.
A complete offering now with immuno hematology platforms and 1 that we think makes us even more competitive than we were already in our market leading position.
Okay last 1 from me I appreciate the commentary on Covid as it relates to guidance and the headwinds. There you do have the BARDA contract $54 million is that baked into the back half of the year or how should we think about that flowing through.
Yes, Joe you want to take that yes, so tycho, it's Joe so just to be clear of that.
That 53 million BARDA contract that we did a press release on that for Capex. It is not revenue and so we're going to be building, a manufacturing line and Rochester to help with future hopefully not future Pandemics if there wasn't 1 in the future.
So it is not revenue that's capex that where we get reimbursed for Capex spent over the next 12 months.
Thank you.
Our next question on the line comes from Derik de Bruin from Bank of America.
Hey, Derik.
Hi, good afternoon.
Hey.
So your slide 8 where you have got to 30% spread between EMEA will assays and which you sell in currently in the market. What do you have to do to close that gap anymore right.
Are you still building menu do you have to wait for existing contracts to roll off that people move. This platform. There can you just give a little bit more about what you need to sort of shift that.
Yes look I think the first big shift of a Derek is moving.
Our standalone to an integrated and so when you think about our business reviews with our teams that has a high high level of focus and why we always talk about we run our overall installed base to grow 4.5%, we need that integrated growing double digits and so the first thing is placing the analyzer I will say the second thing is continue to bring out menu and.
As you know because of regulators around the world menu drops at different times in different parts of the world. So I'll use PCT, which is launched in the United States, but hasn't launched yet in China. For example, which we think will be great. There and I talked earlier that we're in a partnership with Chinese local manufacturer to develop some assays that will start in China.
And then roll the other way so without question menu is important we have about 25% to 30 menu items that will roll out at different places over the next 3 years, so pretty significant introduction, we've I think brought 4.5 to market. So far this year. So menu. Obviously is a key component and then I'd say the third 1 is.
Commercial excellence and I think that really gets under discussed in this industry, but we have made a huge pivot in our field organization of hiring lab specialists people that were med techs in the hospital and basically keeping them in the lab to focus on pulling through menu and theres been a lot of focus on that and that's why you've seen this big lift in IAA inputs.
So where China is up 23% there is up over 40% so.
So I would say, it's all 3 of those levers and that and I think look without question. The last part of your question.
Contracts are key and Thats. Unfortunately, when you have them. They are great because they are long lasting when you don't you have to move them in the other pivot. We made on commercial was about 18 months ago, starting in the Americas and now moving across the world as hunters versus farmers and our hunters, which our business development people are now in contracts 2 years before they are <unk>.
And so we are winning a lot more than we've ever won and I think thats, helping us to keep that growth going and I think it's reflected when you look at slide don't know what it was but that quarterly growth you can just see that were continuing to accelerate so it's all of those things.
Yes, as a follow up to that question I mean, theres a lot of debate in the molecular side of the market about what does the molecular diagnostics industry market look like share look like once you sort of get past COVID-19 and you've given a lot of with lot of labs bought incremental system.
And they've got multiple platforms and those are going to be consolidated.
I'm curious do you think any of sort of the.
Expansion and some can be doing better in the molecular space and doing like that will have any sort of like downstream implications on.
The IBD side of the space.
Yes, we got asked that a lot when we're just coming out in the IPO about these these idle boxes for molecular I think Mike's talked a lot about that and how he's viewed his team from a commercial excellence, Mike do you want to add a little more color about that.
Yes, sure Hi, Derek.
So I think Theres, a couple of things 1 within molecular today.
The test and the needs that are being served tend to be more.
More specific assays, where that level of sensitivity detection is critical they tend to be higher cost more complex tests that.
That needs to be operated differently slightly differently in the laboratory and so I would say here in the near term mid term not much of a threat to the immunoassay part of the business, where we are today, but I think this ties back in actually more I'd say more of an opportunity for us.
And then a threat in that as Joe shared with you.
Based on where we are from a balance sheet point of view and what we can now do with capital.
This is an area that we're not in but we believe is coming to our sweet spot rate.
Mid to high volume hospital.
There is a need.
That exist and 1 that we think we can serve.
With our commercial organization that Chris talked about and that of course are.
Number 1 service capability. So in our minds I think we see that far more as a near and mid term opportunity than kind of a threat.
Thank you. Our next question on the line comes from Mr. Luca <unk> from Barclays.
Great guys. Thanks for the questions. How are you guys doing.
Can you just talk about the step up here in integrated.
It's been ticking up over $14, 15% growth can you give us a sense of the mix there between the 70.650 600 and the implications there from a mix standpoint.
Yeah, Great question, Mike do you want to talk about what's been going on with that on the $56.76, and kind of the way we're thinking about the refurb program for emerging markets and stuff.
Yes look.
So that 7600 is the <unk> 600 <unk>.
As the newer platform is the driver right. We are seeing far greater growth, we're seeing far greater absolute number of placements with the 7600.5600.
And so that part is not surprising I think what is surprising that we're benefiting from is really the legs on the 5600 that analyzers very proven and established customers love It and we're placing still a large amount of 56 hundreds new in the market, but to Christmas point.
The successful route with the extra 7600 is also giving us as we replace some of our older 56, hundreds it's putting it into a.
Our reefer program that integrated placement that we're now starting to move and use for more adoption in.
Emerging markets. So right now the situation is being led by <unk> 7600, but it's still a lot of strength.
The 5600.
Yeah, and maybe a follow on to that look real quick as you think about this we really talk about this lifetime customer value you may remember this slide from the IP from the IPO, but we.
Keep customers 30, 40 years and what it allows us to do is upgrade of 5600 customer to a 7600 and mainly right now may be developed markets referred that 5600, which already has been depreciated and take it into the emerging markets and I will tell you. That's why you're seeing this high growth in places like in Latin America.
Any example, Latin America grew 70% in the quarter I mean, it's and it's really being driven by the ability to place and pull through these referred 5600. So for US I think it's a really nice strategy as we look to our next platform it'll be right about when when that 7600 hits the timeline that the 56 it hit and so we'll be able to continue to.
Build on this and keep these customers really throughout a lifetime.
Okay. That's helpful.
And then more on the back half guidance here just can you give us a sense of how you guys are thinking about the gross margins where you have.
Increased supply and logistics cost, but you've maintained your EBITDA margin expectations. There just give us a sense of the puts and takes that you guys have at your at your hand.
I'll take that Joe Yes, sure Luke.
As I said on the last the Q1 call that we would have stronger.
Margins in the first half of the year compared to the second half of the year, primarily related to 2 things and that is the.
<unk> <unk>.
Favorable manufacturing absorption variances were seeing in the first half because volume stepped up starting to step up in the back half of last year and we saw a lot of those variances hit the P&L in the first half of the year. In addition, you've got higher Covid assay revenue in the first half of the year versus the second half and again that a COVID-19 assay revenue for us it's an immunoassay.
It carries a higher gross margin than some of them.
The more common clinical.
Clinical chemistry assays. So we are going to see a lower gross margin in the second half versus first half by about 100 basis points.
And I still think that that guidance holds true.
What we're seeing now and this is a comment I made in the prepared remarks is the spot rates on airfreight, a remaining stubbornly high.
In the in the guidance that we've provided earlier in the year, we had assumed that some of those are spot rates would come down in the second half of the year and there is still remaining stubbornly high. So as you think about the second half guidance that we just gave.
It does include a little more pressure on both in both the Opex and the GP margin for those higher spot rates, because <unk> got inbound freight hitting GP and you have got outbound freight hitting SG&A in the distribution line.
So there will be a little more pressure, but its all built into the guidance, but again I think it's.
It's all very consistent with the guidance that we gave earlier in the year that we're going to have the second half margins be a little lower than the first half margins.
Yes.
Thank you. Our next question on line comes from Mr. Patrick Donnelly from Citi. Please go ahead.
Hey, Patrick Thanks for taking the questions guys.
Maybe 1 on the capital deployment side, you know certainly appreciate all the color in the prepared remarks on the slide deck for that matter on the M&A opportunities can you just talk about the pipeline how it certainly seems seems quite active but how youre thinking about valuations in the market currently.
And what I guess, the most pressing gaps in the portfolio again, you highlighted some good ones in the slide deck, but just wondering if any feel more near term than others and how we should expect the activity. Given you guys got down the leverage to 4 times ahead of schedule here.
Yes look I think that we.
We really are looking at it 3 levers that we're trying to pull I would say the first 1 is organic and thats really.
I would say the R&D pipeline and I'd say, there's 2 big things going on there I mean, obviously you saw that we're investing considerably our spend in R&D. Because 1 is we can things, we obviously bring our menu, but we think we can bring a lot of innovation to the marketplace. So that continues to move incredibly well well into we talked about this on the.
On the IPO well into dry dry, which is really the ability to take dry <unk> assay and combine it with multiplexing.
And also on the chemistry side, and we think that's a big investment and well underway look I'd say the second 1 and I think a lot of people.
Move away from it for us anyways as partnerships and we've spent a lot of time, creating I think pretty innovative partnerships for both products and services and we'll continue to do that but finally to slide you really saw was the acquisitions look I think we come back to it's really comes down to our call point. We now have almost 2300 people in the field. We believe it's a huge strength in the markets where <unk>.
We compete kind of in that 250 to 500 bed.
Community hospital or those type of sizes, when you get outside and that's a place where more and more molecular has been moving downstream and it accelerated really through COVID-19 and the desire for them to have that testing in house. So I would say that that's an obvious place for us I think the second place for US is that we really believe that we can expand our menu on.
And places.
That we liked there or are things like neuro.
Obviously also on the molecular side would be things around infectious disease and oncology and then look I'd say the third 1 would be point of care and why it is not really in our in our distribution point, we believe its a nice extension of the technology, we're bringing in the future through dry dry in some of the innovations and so we think that that would be the next 1.
Your point around valuation I know that they have been a little bit crazy.
Of them out there and I think look our view is that we work every day for our first our clinicians and our teammates and our investors and we want to make sure. We're prudent in the way that we do deals and so that's why getting that leverage down as fast as possible is important to us. Because then it allows us to do deals and we're looking for things that will be accretive.
That's really helpful.
Then maybe just 1 on EMEA, obviously strong performance in the quarter can you just talk about the pockets of strength you saw there it seems like Western Europe, obviously, it's coming back pretty nicely, but just some color there and expectations in the back half as well.
Yes look I think we did when you go back a couple of years ago, we were not winning in a lot of places candidly, but 1 of them was the middle East and then I would say as we started to turn this business. It was an area where candidly we were challenged we changed out that leader. It was the last leader changed in the EMEA region, our new leader went in.
About <unk>.
9 months ago kind of writing Covid was a person that was working for us, but doing kind of eastern Europe countries and I think has done a fantastic job getting in there and winning some tenders that were really important that I think that our local team really had had built those relationships. So continues to be a really key market sometimes we.
Sidetracked with the Mexico's in the Brazil, and the India's but.
It really isn't important to us and the team continues I think now the perform well and really proud of that hole.
EMEA team because it's completely different than it would've been 3 years ago, but they've come in they've learned the business they changed out the team. So much of this is around people. It's a people business and I think getting the right people in the right seats of the bus has made a huge difference out there.
Thank you. Our next question on line comes from Jon <unk> from UBS.
Hi, congrats on the quarter.
Digging a little bit more into the compelling upgrade cycle that you had presented earlier I think automation is pretty small today around 1% can you maybe provide an update on what you think.
The placement outlook is for those instruments over the next 12 months and when does this become more of a meaningful part of the overall portfolio.
You sound like you were just in our management meeting last week.
It's John.
John I think there's so many levers to pull and I think automation, sometimes gets lost look at the end of the day. The team has done a really nice job in partnering with thermal and that we really are the only 1 with the good modular system. So you don't.
Bolted to the floor.
<unk>, that's up 20%, so it's growing significantly, but its still 1% to 2% of our total business. What we are finding is that more and more of these these hospitals do want to bring in automation, but it is a longer sale process. Then I think you see in a normal cycle and so part of our process, especially around things like that.
7600 is being able to tie us into automation, we don't guide on the number of systems that will put out but I will tell you that we're up 20% and we see that continuing to accelerate as we go through the second half of the year and into next year.
Thank you operator next question on line comes from Matt <unk> from Goldman Sachs. Please go ahead.
Hey, guys. Thanks for taking my questions. My first 1 just if we go back to the IPO and you guys were talking about the value capture program.
Targeted sort of a 25% to $35 million annual savings per year, and I know, we're only partway through the year, but I'm just wondering in terms of how you. How you look at that and how do you measure yourself or are you still sort of on track to be realizing those types of cost savings or something change either up or down in your ability to take our costs.
Yes, it's a good question, Matt and as a reminder, that program has delivered over $200 million of cumulative savings since we implemented the program back in 2015, and we do target $25 million a year annually in additional savings and I'm happy to say that we are right on track this year to achieve the <unk>.
$5 million as we're halfway through the year.
I will tell you I've got a monthly meeting with a large group of people, where we go through in a lot of detail all of the projects that are in flight and as well as our projects that are in the funnel that will become part of the value capture program for 'twenty, 2 and beyond so yes, I mean, the project is alive or the program is alive and well and we're right on track this year.
Sure.
Great Thanks for that color.
And just just a follow up question.
When you guys take a look at.
Some of the opportunities around the world, there's sort of greenfield and displacement and there's a lot of.
Some greenfield and in the U S. Just a little bit more competitive perhaps in and when you look at your target market. You guys have had a lot of long relationships, where we've been able to increase revenues in your existing customer base, but you've also talked about your win rate, where youre kind of winning in displacement opportunities could you talk a little bit about what your win rate has been and when you go up against the competitor and there is displacement opportunity.
So you've been over the course of this year.
Yes.
I don't think we give the exact win rate.
Haven't kind of disclose that but Mike and kind of talk about our strategy and how we're executing that because it really is a very rifle shot strategy than a shotgun and Mike you want to talk about kind of the sweet spot and how we're going about that and what we're using to win when we are winning.
Yes will do.
Matt So so you're right. It does vary on when you do think about emerging markets I think we see both that opportunity for greenfield and to take <unk>.
<unk> away from the competition and.
So that's important so we do we do both there.
We are seeing in general our competitive win rate increase that's been consistent now for the last couple of years.
And.
Christians point, where we've seen that rates shoot up has been in some of these markets, where we've executed on our commercial excellence program that we call commercial edge.
And that comes back to defining the market being very focused on where we best fit where we provide the greatest value proposition and then therefore have the.
Best competitive offering.
We are deploying that now and so by nature, we would expect our win rates to go up I can tell you actually in a few regions and 1 that comes to mind is Latam for us that's performing very well.
In fact, I think 1 of the challenges there for that for US in that region is how do we go out and take more flights because we're seeing a very good win rate very good consistent improvement and now thats a market that I think we now have to look at how do we expand our presence and get into more opportunities and so.
We're taking this market by market team by team.
But in general I think things are tracking in line and the best evidence of that obviously as the installed base growth.
Operator, we have time for 1 more question.
Thank you and our last question comes from E. Chen from HC Wainwright.
If your line is muted please on mute.
Alright. Thank you. Thank you for the question. So could you comment about whether it'd be COVID-19 related products.
<unk> driven your relationships with customers around the world to purchase your non Covid products.
Yeah. Thanks for that Mike you want to talk about that you were pretty instrumental in the rollout of those products.
Yes.
It's a great question and I would say probably the short answer is no.
No not not tremendously the truth is it had some impact there are.
Some competitive accounts that that may have brought us in to augment.
What test they can offer.
That's because we were <unk>.
First with many of the assays that are hospital laboratory would need.
And so we came in at that point in time, and we had some wins, but most of our our wins as you look throughout has been due to sort of our core offering.
Where I do think it's been highly beneficial is actually protecting our base in that because we have a complete offering of COVID-19 tests, both through the antibodies.
That we offer and the antigen and in fact, we're first and many of those are customers never had to turn to somebody else to fulfill that need because we've met it right out of the gates and led the way and so I think that what it did do for US is really reassure our current customers.
When needed ortho can be innovative can be faster to market and can give them what they need so a little bit for competitive, but not major impacts, but definitely I think very very impactful very valued by our customers.
And thank you.
We have no further questions I would like to turn the call over to Mr. Smith for closing remarks.
Thanks, and hey, thanks, everybody for joining us and look in conclusion, we really do believe we have the right strategy with these clearly differentiated.
Kind of pillars around innovation commercial excellence in operation, our operating efficiency and the right team thats, allowing us to execute and deliver the results going forward. So we feel really great and look on behalf of the management team and all of our teammates around around the globe. We just want to thank you for your continued support and interest in an ortho and we'll look forward to sharing our journey with you.
As we go forward take care everybody.
And thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.