Q2 2022 Quidelortho Corp Earnings Call
Including.
Including both quite El an ortho for the full quarter reached $898 $5 million supported by double digit growth in point of care and molecular diagnostics, along with solid high single digit combined growth for labs and transfusion medicine.
As we review our notable achievements in the quarter I would like to introduce our five strategic priorities, which are one integration and corporate culture.
<unk> product innovation.
<unk> global commercial excellence for operational excellence and five capital deployment.
And I'll start with the integration and our culture the.
The integration of the two organizations as our top priority as I emphasized on prior calls we started on the pre integration work almost immediately following the announcement of the signing of the business combination agreement in late December .
Enabling us to hit the ground running with the integration immediately after we completed the transaction at the end of May.
As we work through the integration we are focused on maintaining business as usual keeping our unrelenting focus on our employees and commercial excellence.
Preserving the best attributes of both cultures as we define our company going forward.
We made substantial progress since the transaction closed on may 27th.
We achieved over 240 critical integration milestones identified over 100 integration projects and are executing on over two dozen functional and cross functional work streams.
Ounce my leadership team as well as other senior executives developed business unit structures announced regional leaders and established systems integration Roadmaps, we appointed a strong integration leader, who is focused on cultural alignment combined.
Combining our operating models and monitoring plans for our specific G&A synergy targets.
To minimize customer disruption and maintain our industry awarded service levels Regional commercial leaders were announced soon after we close and we are organizing a joint commercial efforts as quickly as possible beginning with a U S lead sharing program that is expected to accelerate cross sales.
Through this process, we are finding that the two organizations balance each other quite well.
<unk> has proven to be agile and innovative.
Allowing it to take advantage of market opportunities to grow rapidly.
Though on the other hand with its long history in the diagnostics market has established a global infrastructure and processes that enable it's stable at 93% recurring revenue.
That balance of agility and stability is critical as we plan to drive market share gains by responding to the needs of the market more quickly and serving our customers better than some of our bigger competitors.
As discussed on prior calls, we expect to realize cost synergies from the transaction of $90 million and cross selling revenue synergies or $100 million by the end of the year three.
Following the transaction close, though we do expect the commercial momentum to continue beyond that timeframe.
While our integration is still in the early days the pieces are aligning and the chemistry is even better than expected, which is remarkable given our high expectations.
With this progress in mind, our leadership teams, even more excited now than when.
When we first announced the deal.
Moving on to product innovation.
In addition to executing against our integration plans. Our team is working to further advance our product pipeline we.
We will continue to make significant investment in R&D to advance savanna, our new molecular multiplexing platform, while supporting continued expansion of both our Sofia and <unk> test menus.
Cross the board.
Made good progress on the approximately 100 R&D projects, we currently have underway.
Long term, we plan to continue to invest in R&D to develop and broaden our portfolio.
We will leverage to accelerate worldwide market penetration.
As chairman early on I made the decision to establish the science and Technology Board Committee.
To oversee and advise management on innovation, new product development, and strategic R&D goals and objectives, which I think is critical at this point in time.
Led by our lead independent director, Dr. Ken Buechler, the cofounder of bio site and the creative genius behind the development of the triage product line the.
Members of this committee have incredible expertise that we will leverage.
Next while I won't talk about all the projects on this call I can provide you with a few updates on some of our key growth drivers starting with our point of care business unit.
We're driving progress and Sofia, which it's come a long way in a few short years since the pandemic began we grew the Sofia installed base by approximately 90%.
To 80000 instruments.
The majority of this installed base remains active and most of the instruments replaced during the pandemic included signed three year contracts around Covid flu strep and RSV test.
This is driving strong growth for all of these assets.
Joe will expand further.
Our non COVID-19 revenue per analyzer is up significantly over the last year, which justifies the many R&D projects underway to further expand our Sofia test menu or.
Our commercial team is focused on driving menu pull through on Sofia and supporting incremental per unit revenue growth.
Importantly, our significant leadership position in the food testing market has translated into significant demand for our ABC combo test.
That tests for both flu a flu b as well as COVID-19.
We are also excited about our progress towards delivering the first high sensitivity cardiac troponin solution for the point of care market.
Due to the pandemic the clinical validation has taken longer than originally planned our 18 clinical sites are continuing to enroll subjects with the expectation of meeting the FDA is performance criteria.
Later next year.
Expect the five 10-K submission will follow shortly after the completion of the clinical validation.
And we will utilize the combined cardiac expertise are both quite ill and ortho.
We expect that the review and subsequent clearance will occur in the normal timeframe, but there is no guarantee of the effects of the Pandemics and E rate filings will have resolved by the time of the submission we are selling in Europe and intend to increase the rollout once launched in the U S. We are confident that our current.
<unk> base.
Readily adopt the new assay.
Broadly our integration work has been covered greater potential cross selling opportunities for triage through our global sales team than initially anticipated and our synergy planning.
And our labs business unit, we launched seven new assets globally in the quarter.
Most notable was the O U S launch of hemoglobin <unk> C, which has seen very strong demand and significant opportunities in our sales funnel.
We expect to launch in the U S. In the second half of this year. Additionally, we have continued to support several studies with our current <unk> client assay demonstrating.
The correlation of our assets and neutralizing antibodies as well as a larger CDC study focused on population antibody levels and breakthrough infections.
We believe these studies could better our understanding of immunity and May help inform public health recommendations related to Covid vaccination and precautions in the future.
Turning to transfusion medicine.
We're seeing strong growth following the completed refreshment of our transfusion medicine portfolio last year.
We are pleased to announce that quite El ortho reached a major milestone vision placements by surpassing 5000 installations globally during the quarter.
This milestone is a testament to our technology service.
And thought leadership in transfusion medicine.
We are dedicated to providing best in class technology and solutions in this area.
Lastly in molecular diagnostics, we continue to March forward to secure global regulatory clearances for our savanna molecular multiplexing platform.
Our limited European launch of Savannah, with RB Pete for continues to go well with some early wins.
As manufacturing capacity ramps, we plan a full European launch in Q4.
By 2023 menu expansions state side, we completed the Savannah EUA submission with RVP four in May and continue to make progress toward a five 10-K submission expected. This year, we expect that submission.
We expect that that submission will be followed by 500 10-K submissions for four additional panels in 2023.
Looking at global commercial excellence, our third strategic priority.
Firing on all cylinders to advance commercial excellence across multiple channels.
With a relentless focus on base business execution, we are exceeding our revenue synergy targets at this time we.
We've kicked off cross selling of our combined product portfolio to our global commercial teams.
With a fresh prioritization.
U S opportunities crystallized through our expanded commercial team specifically, we have initiated go to market programs in both the U S and China to reflect our new combined capabilities overall, our commercial integration efforts are accelerating our near term value creation by identifying quick win opportunities by.
Country and region and ways to make the best use of our end market organizations, along with existing distributors at <unk>.
Such we believe we are on track to deliver on our 2023 revenue synergy target.
Implementation of Ortho is commercial excellence program across our entire quiet El Ortho organization is well underway.
Track multiple key performance metrics to enable us to deliver our products provinces and our customer experience.
That is second to none and the results we see are compelling.
We're driving market penetration of our integrated clinical lab instruments, and enabling the pull through recurring revenue and.
In the process our lab business has gone from low single digit to mid single digit growth in.
In the quarter, our vitro us integrated analyzer installed base grew by 12% year over year.
<unk> the double digit growth in Europe , Middle East and Africa, China and.
Our other U S regions and high single digit growth in North America.
Customer centered service and fall through our key components of our commercial excellence strategy and have been central to the <unk> and ortho cultures long before the combination our ability to provide quality and customer service is critically important and highly value across our customer base to this end.
I am pleased to announce that last week, we were ranked first for the seventh consecutive time in the service track Clinical Laboratory survey for integrated systems.
Which includes the top ranking in customer service and overall system performance. We were also recognized as number one in overall service performance for chemistry, and Immunoassay systems importantly, as part of the ranking service track.
<unk> recorded a net promoter score for each of the vendors quite ortho score was 20 points higher than our next closest competitor.
Highlighting that this is a first class service organization.
Which along with lengthy meantime between service calls of our Beatrice analyzers, as a competitive advantage, which portends well for quite else, although quite or those.
Growth in this category.
In terms of the OTC space, we continued to strengthen our positioning through our quick view at home OTC COVID-19 tests during the first two years.
Pandemic, we scaled our U S based manufacturing capacity exponentially and now have the automated production lines and trained personnel.
To produce millions of quick view at home tests, a month on the low end and ramp weekly output to tens of millions of tests in a matter of months.
While we have is <unk>.
Adjusted our capacity and contingent.
Employees to support softer demand that began in the first quarter. We have maintained capacity as part of our warm base manufacturing initiatives and recently began to ramp up production, giving us the ability to respond to demands of our customers in the U S. Government has case lids change.
We have the relationships in place with retailers. So that if these new variance become more prevalent we expect to have competitive shelf space we.
We are currently working with Cvs Walgreens, Amazon and other major retail distributors on ways to expand our availability and are excited that <unk> recently became available via Amazon Prime.
We also sell through over 5000 independent pharmacies via our partnership with Mckesson.
And are continuing to pursue additional partnerships with institutional and government agencies to advance testing accessibility.
We did complete the 108 million tests U S government contract in the second quarter discussions with the U S government are ongoing.
But we arent, including further government orders and our revenue expectations at this time.
Turning now to operational excellence.
This is a bit of a soup to nuts category, but point.
Due to a metric that is both a rollout and a single data point to watch.
We believe we are on track to deliver a third of our targeted 90 million cost synergies in 2023.
We are well on our way with competitively bidding insurance and audit fees technology agreements and indirect sourcing consolidation.
And eliminating duplicate costs as we bring the businesses together.
Our cost synergy target does not include the $45 million in interest expense savings that we have secured.
Achieving our cost synergies is critical to our integration planning and accordingly, the board decided to hire a chief administrative officer to run the integration and strategically build on our corporate culture.
We want to build our brand reputation. So that we are an employer of choice able to attract and retain talented people for all levels with engaging and rewarding careers keeping people happy and engaged and productive. These are all areas on which our chief.
Dave Officer.
Focus.
Strengthening our supply chain is another operational priority to help meet our customer commitments.
Given our experienced supply chain team, coupled with our strong balance sheet and cash flow our capacity to stabilize our supply chain and the inventories could become a differentiated capability that we would leverage to compete in the marketplace.
If we make it a priority and amongst how it could potentially make supply chain a competitive advantage all companies are facing supply chain challenges, but not all will be able to address them equally.
Regardless of location figuring out how to leverage our plants and equipment to drive our business for it is a priority.
Right now for a number of products there was more demand than we have been able to meet and.
And we are working to hire new teams throughout all of our factories to step up capacity. For example, we know there is more demand for clinical chemistry consumables <unk>.
Integrated instruments and Savannah than we have been able to produce and while production has ramped we are managing our customer contracts and expectations based on our ability to deliver instruments with the availability of semi conductor chips.
As well as the availability of consumables again building out redundancy across our supply chain is so important as we believe it could turn into a competitive advantage, allowing us to meet elevated demand when our.
When our key competitors may not.
Last but far from lease on our list of strategic priorities as cap capital deployment.
From the standpoint of our strong balance sheet and cash generation give us the flexibility to allocate funds towards several strategic priorities.
We look at our capital deployment opportunities in five buckets investing in R&D.
Manufacturing capacity expansion debt paydown share repurchases and strategic M&A.
Investing in our business is critical to our growth, which is why investing in R&D and in our manufacturing capacity are our top capital deployment priorities.
We are investing in R&D, both supporting menu expansion across our platforms, while also driving development of innovative new instruments and technologies.
We are also putting money into building additional manufacturing capacity to meet demand for our broad portfolio, including savanna and consumables for our VITAS analyzers.
The next item is debt pay down the combination of quite Delano Arthur was structured such that we have a very attractive debt profile, which we intend to improve over the coming years as we work through our current integration plans.
Also under consideration is returning capital to shareholders via a share repurchase program.
Strategic M&A is our lowest capital deployment priority, but we will consider the right opportunities as they present themselves and we will continue to be very selective and opportunistic.
Valuing the right organizational fit as our main criterion.
If we execute on all five of these strategic priorities, we believe that we will be better positioned to drive innovation.
Support long term growth and unlock shareholder value in closing.
Like to thank all of the quite ortho team for their incredible work and commitment to bring us to this point, we have many opportunities ahead of us to continue driving improved outcomes for our patients across the globe.
And as we expand our portfolio extend our reach and make progress in integrating our organization I look forward to advancing this mission to drive long term growth for our business.
With that I'd like to turn the call over to Joe to further discuss our Q2 financial results and 2022 guidance Joe.
Good afternoon, everyone I'll begin with a bit more detail on our operating results for the quarter.
<unk> previously to facilitate a comparison of the company's operating performance from the second quarter of 'twenty, one to the second quarter of 'twenty to all figure that I referenced are presented on a supplemental combined basis and just to put out an ortho had been combined for the applicable period and may be referred to as supplemental combined informed.
<unk>.
So starting with a breakdown revenue on slide 13 in the second quarter, we recorded revenue of $899 million, an increase of 38% in constant currency.
Currency translation decreased sales growth by 320 basis points, resulting in 34% total sales growth.
Revenue growth was primarily driven by the strong recurring revenue pull through on our broad instrument portfolio, serving the diagnostics continuum as well as quick few sales to government and retail customers.
In the second quarter of 2002, we generated $298 million COVID-19 related revenue.
So excluding the Covid related revenue total revenue increased 9% in constant currency driven by point of care and molecular diagnostics.
Looking at year to date total revenue was up 57% in constant currency to $2 4 billion.
Again, excluding COVID-19 related revenue total revenue increased 11% in constant currency.
Turning to our Q2 performance by business unit point of care revenue grew 181% in the quarter.
<unk> grew 19%, excluding COVID-19 related revenues.
This is largely driven by the pull through of our broad respiratory menu.
Labs' revenue, which includes ortho clinical labs, and noncore revenue as well as Codell specialized diagnostic solutions.
Grew 3% in the quarter and grew 6%, excluding COVID-19 related revenues largely driven by strength in quoting Ken and immunoassay revenue.
Transfusion medicine revenue grew 9% driven by strength in donor screening, notably plasma, which is a smaller market, but growing at roughly twice what blood market.
Molecular diagnostics revenue declined 40% in the quarter, but grew 45% excluding COVID-19 related revenues largely driven by strength in lira, Savannah, and Atlanta product lines.
Now turning to our quarterly performance by geography on a constant currency basis, North America revenue grew 59% EMEA grew 6%, China grew 25% and other regions, which include Latin America, Japan, and other Asia Pac market grew 2%.
Excluding COVID-19 related revenue North America revenue grew 16% EMEA grew 8%.
China declined 10% in other regions grew 5%.
North America, our largest geography by revenue delivered strong growth driven by point of care labs and transfusion medicine.
Point of care was particularly strong due to the shipment of the last $45 million test to the federal government pursuant to a 108 test contract.
However, we were still we still grew mid teens, excluding COVID-19 related revenue driven by pull through law respiratory revenue on our large Sofia installed base as well as strength in <unk> consumables and donor screening.
In EMEA strong.
Growth was driven by labs strength was particularly notable in Clinton camera across Western Europe , as well as eastern Europe and Middle East.
In China, our team executed exceptionally well despite the numerous macro challenges, including COVID-19, Lockdowns the continued longer than expected in the quarter as well as localization and more onerous important application requirements.
Looking ahead, we'll continue to monitor the monitor the situation closely for further outbreaks in regional Lockdowns, China is a very profitable market for us and is a big investment area for us as evidence of this we are in the process of expanding our footprint with both analyzer enact a partnerships with the goal of providing a local.
<unk> presence in the near term.
Now looking at our revenue by category.
<unk> revenue, which includes reagents service and other consumables grew 1% and was up 9%, excluding COVID-19 related revenue driven by across the board strength and menu pull through on our instruments.
Quick view revenue grew 756% largely driven by COVID-19, Intuit revenue grew 2%, which is an improvement from the first quarter, but opening labs instrument orders due to global supply chain challenges are relatively flat sequentially at approximately 600 instruments.
Now turning to slide 14, I'd like to call.
Comment on our second quarter financial performance versus the prior year.
Again on a supplemental combined basis, we delivered a strong quarter of performance below the top line with improvements in gross margin operating expenses and free cash flow in the quarter.
Gross profit margin for the quarter was 53, 6% which is.
As an 80 basis point increase versus prior year due to volume growth mix and positive pricing in both labs and transfusion medicine.
Partially offset by lower margins on Covid related revenue, including a $25 million quick view inventory reserve recognized in the quarter due to the timing of a government order.
Yes.
Moving down the P&L R&D expenses increased 2% year over year indicative of our investments and our instrument platforms and menu expansion, including for necessary global regulatory clearances sales.
Sales marketing and administrative expenses were flat as operational improvements offset distribution cost increases, including Covid related expenses.
As a percentage of revenue sales marketing and administrative expenses decreased.
500 basis points year over year to approximately 22%.
Adjusted EBITDA grew 75% to $291 million.
And adjusted EBITDA margin expanded 760 basis points year over year to 32, 4% largely driven by the previously mentioned drivers of gross margin and efficient operating spending.
Net interest expense for the period was $29 million, which is a decrease of $4 million as anticipated due to lower interest rates, partially offset by the increases in the average outstanding debt balances related to the combination.
Our provision for income taxes was $63 million compared to $13 million for the prior period.
And on our supplemental combined basis, our adjusted earnings per fully diluted share for the second quarter increased 123% year over year to $2 12, driven by the increase in our COVID-19 volumes and our solid operating performance as well as lower interest expense.
The previously mentioned inventory reserve.
We reduced adjusted EPS by <unk> 28.
Turning to cash flow and balance sheet on slide 15 in the second quarter and on a GAAP basis, we generated operating cash flow of $225 million.
After funding $26 million in Capex, and adding back $80 million in acquisition related costs, we estimate recurring free cash flow to be $279 million.
We ended the quarter with cash cash equivalents in marketable securities of $446 7 million and total debt of $2 7 billion.
We ended the quarter with a one one net debt to EBITDA leverage ratio on supplemental combined basis.
And as Covid revenue declines to an endemic level of revenue over the coming year, we expect leverage to increase to roughly two times.
Okay. So now turning to our outlook for the remainder of the year on slide 16, first I'd like to provide some broader context on our full year 'twenty two guidance.
The point of care market is showing signs of strength, which we expect to continue to translate into strong nine COVID-19 recurring revenue pull through on our large installed base Sofia instruments.
We expect our labs in transfusion medicine businesses, excluding COVID-19 related sales combined to grow mid single digits.
Savannah sales in Europe are expected to drive growth within our molecular diagnostics business.
China continues to be important growth driver for our business and we expect recurring revenues to grow mid single digits. However instruments are expected to be soft due to previously mentioned lockdowns is by local requirements.
Inflation.
<unk> global supply chain disruptions continue to be a challenge we are seeing greater access to semiconductor chips and expect challenges to further ease as we move through the back of the year and into 2023.
So in light of all these dynamics just mentioned we are introducing supplemental combined fiscal year 'twenty two guidance as follows first revenue excluding COVID-19 related sales is expected to grow 6% to 9% on a constant currency basis to $2 49 to $2.
$5 7 billion.
Next we expect Covid related revenue to be $1 209 to $1 34 billion in 2022, including 115 billion in the first half of the year.
And that compares to $1 3 billion recognized.
Recognized in fiscal 'twenty one.
Total revenue is expected to grow 3% to 6% on a constant currency basis to $3 $73 91 billion.
Adjusted EBITDA is expected to be $1 38 to $1 45 billion.
Representing a margin of 36, 5% to 37%.
And finally adjusted diluted EPS is expected to be $11 80 to.
To $12 75.
Just on full year diluted weighted average share count of $68 million.
In addition, I'd like to provide assumptions.
Likely will be helpful for modeling purposes.
At current rates currency translation is expected to decrease full year sales growth by 150 to 200 basis points.
We expect flu related revenue to be $200 million to $260 million in the full year 'twenty two.
Including 121 million in the first half of this year compared to 72 million in fiscal year 'twenty one.
And given the seasonality in our business.
<unk> are above expectations for flu.
Fourth quarter is expected to grow at least 20% over the third quarter.
I know that there are no differences in the number of billing days and 22 compared to <unk> 41.
Net interest expense is expected to be in the range of $118 million to $123 million with most of the decrease versus prior year from the fourth quarter run rate to be in the second half of 2002.
We are expecting a tax rate for the full year of approximately 25%.
And given our $1 $2 billion in Nols, we expect an approximate $20 million savings on cash taxes, this year and $40 million to $50 million on an annualized basis.
<unk>.
In the second half of the year, we expect.
Free cash flow to be $130 million to $180 million.
And with that I'll turn the call back over to Doug to make a few summary comments.
Thanks, Joe in summary, we had a strong quarter the integration is going well.
And we're even more excited about the growth opportunities ahead.
To provide investors with deeper insights into our business.
And our key growth initiatives I am pleased to announce that we plan to host an investor day on the afternoon of December 13th 2022 in New York City I look forward to engaging with you in that forum, which will include an in depth management presentations and opportunities for Q&A and formal <unk>.
Our action with the management team.
More details about that event will be forthcoming, but please save the date.
On your calendars and with that operator.
We are now ready to open the call for questions.
Certainly thank you.
To ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to turn that question. Please press star followed by tier again to ask a question star one.
I may ask that you limit your questions to one with one follow up as a reminder, if you are using a speaker phone.
Before asking your question all.
Alright first question is from the line of Brian Weinstein with William Blair. Please proceed.
Hey, guys.
Duston on the line for Brian .
I know you provide us with full year guidance and some color on the fourth quarter, but I'm wondering if you could provide a little bit more detail on the different business segments, obviously move to the third and the fourth quarter.
How should we expect those to move relative to the second quarter up or down sequentially.
Any additional insight there would be helpful. Thank you.
Yeah, I'll just start.
By saying, we're not going to provide a lot of detail here, but I think it's safe to say that for for both companies Q3 is typically.
A softer quarter.
And so we're looking more at kind of sharing with you what we expect for the total for the second half and I think thats the guidance that you've provided and what else would you.
And Joe I think.
Okay that covers it.
Got it great. Thank you.
I guess as you provide the guidance for 'twenty. Two just wondering how you guys are thinking about next year I know there is certainly a lot of variables with COVID-19 coming out of the business.
Dan.
Certainly have a lot of macro headlines on their hand, but if you could talk about the setup for next year.
Just where we should be thinking about numbers.
Business is kick out.
At this stage, where we see is that we should be able to deliver on the cost synergies that we suggested that does not include the $45 million.
Interest rate.
Interest expense excuse me.
Kind of reduction annually.
On the revenue side provided that we can manufacture the instruments that we have in our forecast.
We feel very comfortable both on the clinical chemistry and immunoassay systems.
As well as the Savannah.
And what I would point to I think generally as to the S. Four in those.
Forecasts suggest to that those are solidly intact what else.
I'd just add that.
It will reiterate what we said about 2023 and beyond that.
The top line number ex Covid will be in the high single digit to low double digit range and we believe that the COVID-19 revenue once it gets into an endemic stage as we move into next year, we'll be in that 150 to 200 million range or cohort revenue.
Which wouldn't necessarily capture the ABC combo revenue correct.
It would be additive to the $150 200 correct.
Great. Thank you for taking the questions.
Youre welcome.
Thank you.
The next question is from the line of Jack Meehan with Nephron Research. Please proceed.
Thank you good afternoon.
I really appreciate all the color in the DAC and <unk>.
At least today.
Start with.
A question for Joe or Doug on the guide here.
So.
The 11 80 to $12 75 EPS.
So you did two O four or I'm, sorry, 804 in the first quarter $2 12 in the second quarter.
My math.
About 64 to $2 59.
Second half of the year kind of annualized is that $3 28 to $5 18.
Is that am I thinking about it the right way in terms of like starting to build the 2023 and layering on some of the cost synergy is maybe growth.
Just like any color around starting to think about where 2023 EPS might come out.
Would be helpful.
Yes go ahead, Joe Hey, Jack It's Joe Yeah, I don't want to get too much into 2023.
What we just said to the previous question, but.
When you look at the guidance for <unk>.
'twenty two that we just gave keep in mind.
The comments I made about Q2, Q3, and Q4 seasonality Q3 is.
This is historically, a seasonally low quarter for both sides of the business.
<unk> as well as Codell.
So youll see the lion's share of that that second half EPS will fall into Q4.
Versus Q3.
<unk>.
Yes.
Again as far as 2023 as you think about the cost base.
So that you can use the cost base on our supplemental combined basis in the operating expenses that we've given to you in the information was born out of a month or so ago as well as within the release today you can read that as the guide for the second half operating expense and even as a jumping off point as you move into 'twenty, three and then pull it.
Synergies the impact of the synergies offset off that base.
We're running at right now for operating expense.
Okay.
And then.
Yes, it does.
Second question on so I'm, sorry, if I missed this during the script just what were the Sofia sales in the quarter and I know, Doug and Joe you talked about just confidence in kind of broader utilization.
Long term if there's color you can provide around just what youre seeing in the field on non COVID-19 testing on Sofia.
Updates would be great.
Yes, Thanks, Jack that's a really intuitive question when you back out COVID-19, and look at the Sofia business.
Does that look like and what we see on a.
A comparison year over year, and it's a difference of about 25%. So we're up 25% in revenue on a trailing 12 on.
The Sofia business about 25% over the prior year.
Jack If you will if you just take that a step further if I could Doug you break it into price and volume.
When you look at you look at price Jack it's the <unk>.
Rice is up slightly flat to up slightly which means that is primarily all volume when youre looking at the pull through ex COVID-19 its almost all volume.
Really good sign for us on that trailing 12 months basis basis.
Just one clarification on that 25% how much of that is coming from ABC are there any other tests that are standing out as you look at the utilization.
When you see some pull through with the other respiratory products for sure, but you are right in suggesting that the comparator.
A whole lot by by the flu product.
Which is even more individualized because remember last year Jack.
In the quarter very very low.
Yes.
And then last question.
Just to be clear on the Savannah timeline, it sounds like five 10-K approval.
Is that looking more like 2023 now.
Any comment on sales in the quarter there. Thank you.
Yes.
We're going to introduce the product in Europe .
Full launch basis. So obviously, we have EUA for the U S. We expect to be.
We expect to have the 500 cases mentioned that might have it here for sure.
Thanks, Doug.
Is that was that your question.
Sure.
The submission we told you.
Yes, we submitted the EUA for RVP four in May and then we've been working on a five 10-K. So we expect to have that and before the end of the year correct.
And then but then it's like a 90 day well historically, it's been like a 90 day review after that right.
Yes, but remember the pressure that the FCA is under with a huge workload.
We don't know exactly what the all of the requirements for fighting K pad.
Clarence.
Maybe at the end of the day until we get into interactive discussions with the reviewer.
You are right 90 days is typical I think the FDA is pretty darn good job.
On these high priority products.
But.
Business guys.
Sure.
Do you have a little attrition, but I don't think youre going to be greatly delayed approval right now.
Okay sounds good thank you guys.
Sure.
Thank you.
The next question is from the line of Andrew Cooper with Raymond James. Please proceed.
Okay.
Hey, everybody. Thanks for the questions maybe first on the financials, just thinking about the longer term targets you laid out when the deal was first announced a 30% EBITDA margin target. Obviously, some things have changed on the inflation side and just the overall cost side as well as the FX side. So how do we think about that that bogey changed at all.
And then if there is any different to the timeline to get there.
And related to that would be super helpful.
Well, Andrew your question and certainly timely we were talking about this a couple of hours ago.
Yes.
Yes, there are some moving things.
We're having to evaluate so then the question is can we achieve more cost synergies than we thought before I think what I would say is even if we can't get to greater than 30% EBITDA in 2023.
We cannot.
We're still not.
We're still not changing the target for the timeframe, we're still going to work to try to get back over 30%.
I don't think that Thats, an appropriate goal. So but you are right. There is a lot of factors, including how much product can we make when we can.
What if any regulatory hurdles in our way.
What's happening with on the supply chain side with costs.
Because of inflation. These are all factors that obviously were not known when we initially modeled all of it so.
But we still firmly believe we can get there we are as you say that's true Joe.
I agree I, certainly not coming off the 30% EBITDA margin and when you do the math on the guidance, we gave and Youll see in the second half.
Our margins are below that 30% target.
But that's because again the business is seasonally low in Q3.
Historically been the case for years for both businesses and then in Q4.
I remember you've got a heavier load of instrument revenue typically comes through in the fourth quarter that will move margins down a bit. So when you look at the second half for sustain a full year, that's probably going to be.
Most of our lowest EBITDA margin quarters, and as you move into 'twenty three not only do you get the cost synergy.
Tailwind with governments, but youre also going to get the.
The tailwind of the growth on Savannah.
That ramp on that launch continues in that revenue continues to grow that's going to drive some some GP and EBIT margin tailwind to mark just up closer to that 30% or 30%.
Thank you. Our next question is from the line of Casey Woodring with Jpmorgan. Please proceed.
Hi, guys. Thanks for taking my questions.
Estimates are sort of all over the place right now with pro forma numbers, but it looks like EPS came in below expectations.
<unk> for that inventory reserve dynamic.
I think that's likely to get a quick view margin assumptions. So can you maybe help us think about what the drop through is there now is likely pricing has come down versus where we may have been modeling prior.
So Casey.
To reiterate.
Suggesting EPS is coming yes. So the quick view inventory reserve that we mentioned the $25 million net of tax at $18 million.
So it's a <unk> 28 impact on the quarter. So obviously, if you remove that.
We would have exceeded expectations and a lot of fronts.
Now that that that reserve, depending on what happens with second half Covid revenue could come back.
I'm, not saying it will but it could.
Like is that we've covered both sides, we've said if it doesn't happen.
We've got a reserve.
Take care of the obsolete inventory.
On the flip side. We also said we were ramping up because.
We have been strongly encouraged to keep manufacturing product, which we will do so.
So in the event, we're going to be well placed as we as we move forward but.
There is a potential that we don't need that right Europe right correct.
Gotcha, and then just on the.
The clinical labs business, so just curious on it.
Headwinds in China on the non covered piece have subsided here in <unk>.
If anything is being contemplated.
For Lockdowns in the back half of the year and then on that open order comments 600 instruments I'm curious on what labs would've grown.
If you could have killed.
Open orders thank you.
Yes, so youre right, we do have.
A number of open orders I would say just generally before flipping over to Joe My impression is that the Chinese team is whether it's pretty nicely the lockdown and all of that.
And we also have plans in place to make sure that we can compete.
With the changes in.
And whenever a requirements for local manufacturing et cetera.
But have you done the math in your head.
I was just trying to give you enough of that.
Yes, I can try to hit both working quickly to the home run out of time.
We have in the guidance, we provided anticipated more caution on future Lockdowns in China as well as.
The buy in local.
In the country.
Potentially impacting instrument revenues. So all that's factored into the guidance. The other thing you need to keep in mind is that the.
Beckman deal is impacting revenue in our China market too. So if you look at the Q2 numbers.
And that we've just presented and we show that the Chinese the China market was down 10% constant currency in the second quarter. If you were to take out the beckman impact to execute the up.
Single digits, so that has a big impact assessment and again that has no impact on the margins is just a revenue play so just keep that in mind as well and when your installed base.
Instrument backlog question. It would have added about two points of growth.
And to the numbers.
Had we been able to get all this out.
Thank you. Our last question is from the line of Alex Nowak with Craig Hallum. Please proceed.
Okay.
Afternoon.
Going back to the agency combo <unk>. This is going to be the first potentially normal respiratory season in a long time, just how are the point of care customers approaching it. This year is the expectation that if they have a sofia, they're going to be ordering ABC combo.
Starting with standard purchases ahead of that season, yet and then maybe on the status of the ABC OTC product.
Yes, I think we see evidence Alex this is a viable product in that space.
Certainly.
Sales of the products.
We are building product now with that expectation.
Who knows with fluke.
But at the end of the day there is.
Considering that the government level or if theres going to be slow in the back half.
This year. So that's what we plan on and Thats, where were seeing early on in terms of demand.
All of them are returning to that crazy demand that we saw in Q4 2021 now.
But I do think theres realistic demand for the product.
Okay understood and then.
The R&D Challenge you mentioned all the systems you have got in the pipeline here. If you haven't named the top one or top two projects on menu expansion savanna menu expansion cardiovascular or.
Just what is the first or second projects, our main priority for the combined business.
Well there is.
There's a lot of priority forms.
For example, let's start on the transfusion medicine side, we know that to be competitive longer term in that space, we need to provide better solutions.
And so we've got a project internally that we've been calling Bam Bam minutes.
Progressing.
That's that's probably.
A third I think that R&D budget on that project alone.
Savannah clearly.
Spending what's necessary to make the transfer from R&D into.
And two manufacturing at scale.
It's a big lift and a big effort.
Well.
Don't forget also we've got project leapfrog running in the background to which is our next generation immunoassay platform.
Three or four big hitters tranches.
So I'll just stop there because I realized.
Again here.
What I would say.
Go ahead, please operator.
I was going to turn it back to Doug Bryant for closing remarks.
Alright, perfect timing.
So in conclusion Q2 was our first quarter report as a combined company.
That was certainly.
And putting the call together so this quarter for sure no matter, how you slice it stands out as a strong quarter across our commercial and corporate.
And cultural metrics, we came in with a roadmap.
These results underscore our ability to execute on strategic plans.
A lot of talent in this organization.
Achieving our expected cost synergies and revenue synergies will be a three year marathon, it's not a one or two quarters spreads.
But we believe our current pace is exceeding our plans.
Necessary pieces that are here and thats the fit that we anticipated.
As I had mentioned earlier, the cultural chemistry is even better than that.
As expected.
<unk> our team is excited.
We're moving forward with purpose and confidence happy in the knowledge that we are making a difference for human health.
Equally important our people on behalf of our entire management team I'd like to thank you for your continued support.
And interest in our new company quite El Arco, we look forward to sharing our journey with all of you. Thanks.
Have a great day.
That concludes today's call. Thank you for your participation you may now disconnect your lines.
Yes.