Q4 2022 OraSure Technologies Inc Earnings Call
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Good day, and thank you for standing by walking through the Orasure technologies 2022 fourth quarter earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question answer session.
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To withdraw your question. Please press star one one again please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Scott Gleason head of Investor Relations. Please go ahead.
Thanks, Victor Good afternoon, and welcome to Orasure Technologies' fourth quarter 'twenty two earnings call I'm, Scott Gleason, SVP of Investor Relations and communications and presenting with me today for our shares currently Carrie Eglinton manner, our President and Chief Executive Officer, and Ken Mcgrath, Our Chief Financial Officer.
As a reminder, today's webcast is being recorded and the recording can be found on the Investor Relations section of our website before.
Before we begin you should know that this call may contain certain forward looking statements, including statements with respect to revenues expenses profitability earnings or loss per share.
Other financial performance product development.
Performance shipments and markets business plans regulatory filings approval expectations on strategy.
Actual results could differ significantly.
Factors that could affect results are discussed more fully in the company's SEC filings, including its registration statements.
The annual report on Form 10-K for the year ending December 31 2021.
One of the reports on Form 10-Q, and its other SEC filings.
Forward looking statements help to provide complete information about our future prospects, let's say I should keep in mind that forward looking statements are based solely on information available to management as of today.
We undertake no obligation to update any forward looking statements to reflect events or circumstances. After this call with that I'm pleased to turn the call over to Gary.
Thanks, Scott and thank you to everyone for joining us today.
In the fourth quarter, we once again delivered strong topline results, which exceeded our prior financial guidance generated cash of $9 million in the quarter and made further progress in our strategic transformation journey as we look to important aspects of how we are transforming we have predominantly been focused on strengthening our core.
Foundation, expanding our cost reduction program today, we announced a reduction in our non production workforce of 11%.
These changes better align our organizational structure with the realities of our business. We believe the restructuring allows us to utilize our COVID-19 cash generation to support incremental growth, while targeting to achieve cash flow breakeven for the core business that is not in pellet plant revenue by end of 2012.
For.
2023, we are focused on elevating growth across our core portfolio.
And the reach of our current products expanding segments and further enhancing our enterprise capabilities to drive.
And Greg as an early proof point in our strategy, we signed a deal with quest diagnostics to serve as a preferred provider of saliva collection kits for quest genomic sequencing services groups test offerings. We also have several co clearances in sample collection devices underway with partner companies for Darren.
Novel assets similar to our recent grip hold it out there as we gain momentum across our business. We will also look for opportunities to further accelerate growth through our own innovation pipeline, along with enhanced strategic partnerships as well as potential acquisitions.
Order to provide more detail on our strategic progress I'll begin with our organizational restructuring and efforts to drive core business profitability.
First we consolidated our two business units into one orator and have just announced the reduction of our non production workforce by 11%.
Streamlining our organization makes sense for our size and further potential to unlock significant efficiencies.
And here <unk>.
Collaboration while simplifying our leadership structure increased revenue synergy opportunities and improve resource allocation across the company.
Also allow us to leverage our enterprise functions, such as manufacturing operations, R&D quality and regulatory along with our digital IC asset enterprise wide, we anticipate the restructuring along with other process improvements and cost reductions well deliberate deliver operating expense saving.
<unk> of approximately $15 million per year, when fully implemented at the end of the first quarter as we lay the groundwork here for long term cash generation.
We have also made announcements.
Alright.
Also made enhancements to our enterprise capabilities and manufacturing operations I am pleased to announce that our new packaging and labeling configuration for and tell us what has been authorized by the U S food and drug administration and we expect this new configuration to begin shipping by the end of this March these changes have been.
Major undertaking by our team and will drive per test cost savings of approximately 47. This includes the impact from lower shipping costs based upon the smaller packaging configuration, which will reduce total truckload by approximately 50%. Furthermore, it will reduce our environmental impact.
These changes will save on the order of 90 tons of plastic and 1500 tonnes of paper from entering the waste stream. We are looking to apply these learnings to other portfolio products as well such as our HIV self test as we believe we can unlock additional savings through further standardization and process enhancements.
Contributing to our continuous process improvement I'm pleased to share. The addition of trades Custer to our executive team, leading quality and regulatory traces of highly experienced life sciences industry veteran with leadership experience across numerous health care companies, having joined US in Q4 trades has now helped us.
<unk> implemented a number of improvements to help lead and our restructuring and is evaluating further areas for efficiency such as within our recent implementation of an electronic quality management system.
I would also highlight that we have now fully launched salesforce dot com across our commercial teams.
The standard CRM enables better monitoring and improvement of our sales kpis, including in areas like pipeline growth and conversion success I am a strong believer in operating rigor and every one of our teams at Orasure now has established a leading and lagging key performance indicators to drive visibility.
To accelerate our success each of which along with those we rollout across the enterprise. We believe will drive results and deliver shareholder value as I mentioned repeatedly our organization has strengthened our foundation and is increasingly focus now on elevating our core growth in our strategic transformation.
This quarter, we established some early proof points that we believe help set the tone for our longer term roadmap as we look to establish the company as a leader in self testing on point of care diagnostics as well as an effortless sample collection and services.
First within our diagnostics segment, we are working to expand our respiratory assay portfolio building on our success with COVID-19 lateral flow testing, we believe that <unk> will transition to become part of our core and combination influenza test will become an important diagnostic for two of the most.
Widespread clinically actionable I'm serious respiratory viruses as such we are working internally and in partnership externally to address this health care needs around the flu. While we are not yet prepared to share details. We do believe in the important role of this test as a part of the commercial expansion of our respiratory portfolio.
Also and then tell us while this quarter, we won two additional contracts from the U S. Federal government on the first contract. The U S Defense Logistics agency agreed to purchase an estimated 18 million test of <unk> COVID-19, with a maximum award of 36.
6 million tests, and a guaranteed minimum award of $3 6 million tests.
The contract runs from November 2022 through November 2023. Additionally, we were notified by the government of an incremental award of $3 2 million tests in December fulfillment of both of these awards has been running concurrently with our existing government contract that is supporting the schools.
Testing program under our federal government contracts, we have shipped approximately 46 million test as of the end of the fourth quarter and have up to $64 million additional test, which can be purchased assuming the government orders the target number of tests under our second RFP win. Additionally.
In December we were one of a group of companies awarded a tender for the state government of Connecticut, which also allows us to compete up to 6 million additional tests.
As we think about growth drivers for diagnostics in 2023, we have also been notified that we will receive our first orders from Emory University supporting outreach testing under the let's stop HIV together initiative.
Furthermore, our or a quick in home HIV test.
<unk> now offered on Amazon Dot com directly with prime fulfillment.
Our online sales via Amazon are relatively relatively small they are increasing as we fulfill more customer orders and have moved up in terms of search algorithm. We are also encouraged by recent U S government funding and future potential funding focused on health care conditions, we serve.
Moving to our molecular tests Douglas the headwinds we've discussed have continued as some of our key customers have taken a more cautious stance on their near term business outlook that said, we believe the fundamental backdrop supporting genetic sample collection remains very attractive as the number of applications continues to.
Band and precision health is key to the future of healthcare. Examples of these trends include the increase in high value diagnostic and precision therapeutics, along with clinical laboratories increasingly working to reach patients in lower acuity settings, such as in home and retail and liked the deal I mentioned la <unk>.
First as we think about expanding our collection kits business. We would also highlight progress with colleague.
This quarter, we launched four new CE IBD products in women's health and beyond. Additionally, we have multiple clinical research and commercial co clearance collaborations kicked off in an effort to continue establishing first void volumetric urine as a validated sample type for HPV screening went.
Men's health therapeutics, and the detection of oncology Biomarkers finally, I would point out the recent FDA approval of the first microbiome based therapeutics to prevent C. Difficile and adults with recent data is showing that these therapeutics improve health outcomes. This approval pace paves the way.
Way for other biotherapeutics, and we believe will serve as a positive catalyst for microbiome based investments and New research studies in conclusion, we have made significant progress strengthening our foundation by resetting our cost structure and operating rigor this progress will facilitate future.
Growth investments and sets the stage for us to achieve cash flow breakeven by the end of 2024.
As we look forward here in 2023, we are increasingly focused on elevating core business and increasing our innovation pipeline to accelerate profitable growth with that I am pleased to turn the call over to Ken to discuss our financial results and guidance. Thanks Kerry.
Pleased to discuss our financial results for the fourth quarter.
Updates on the financial outlook.
First from a top line perspective, we delivered total revenue of $123 1 million in the fourth quarter, which was another new record for the company representing year over year growth of 94%.
Our diagnostics business unit delivered total revenue of $107 3 million in the quarter growing 228% versus last year the.
The majority of this growth was driven by Intel a swap which increased almost six fold year over year.
At our core diagnostics business was up 3% in the quarter.
Core growth was negatively impacted by the timing of international orders, which were down on a year over year basis. However, many orders were pushed out until the first quarter of 2023.
Consequently, we expect a strong first quarter for our international diagnostics business.
Additionally, as Carey mentioned, we will begin seeing our first orders under the let's stop HIV together program in the first quarter bolstering our domestic HIV business.
Our molecular solutions business unit delivered revenue in the quarter of $15 8 million.
Declining 49% relative to the fourth quarter of last year, excluding COVID-19 revenue the business declined 32%.
While we continue to add new accounts two of our large consumer oriented customers and one large clinical lab order significantly less product when compared to Q4 of 2021.
We believe this was due to a work down of excess of inventory within these accounts.
As they respond to macroeconomic factors impacting the segments in which they compete.
We will also we also cycled against a significant research study purchase in 2021 that despite ongoing needs did not repeat in Q4 of 2022.
Going forward, we expect to see continued volatility in this segment as some of our largest customers continue to deal with these macroeconomic factors.
Despite this expected volatility volatility we remain optimistic about the potential to expand genetic testing through partnerships such as the deal with quest diagnostics tend to support novel diagnostic assays, while we also onboard new customers.
From a gross margin perspective, our non-GAAP gross margins in the quarter were 47% compared to 40.0% last quarter and showing meaningful positive progress on a sequential basis.
The sizable mix shift in revenue towards our diagnostic business unit continued to create some margin headwinds with 87% of the revenue in the quarter coming from diagnostics versus 84% last quarter.
We continue to make plans to boost our longer term gross margin profile, including opportunities for further packaging improvements plus standardization across products moving our legacy test automation as well as site consolidation based upon future volume contingencies.
As Carey mentioned earlier in the call we plan to Joseph transitioned to our new packaging configuration for Intel swap late in the first quarter of 2023, which we believe will save approximately <unk> 40 per.
<unk> Swab test.
And have a meaningful impact on our gross margins. However, it is important to remember that given lower pricing under the new Rfps, we expect to have some pricing headwinds in the first quarter.
Therefore, we anticipate some pressure on gross margins in the first quarter, followed by improvements throughout the year has mix and manufacturing efficiencies improve our cost structure.
Moving onto our operating expenses, our non-GAAP operating expense in the quarter of $31 $8 million decreased by $3 5 million relative to the third quarter.
The decline in operating expenses is attributable to time attributed attributable to timing and lower bad debt along with our focus on cost controls.
Looking forward, we believe to expect we believe the expected $15 million in annualized operating expense savings highlighted by Carrie will be fully recognized beginning in the third quarter of 2023.
As part of achieving these savings from our workforce reductions, we expect to recognize one time severance expense of $2 million in the first quarter.
In anticipation of antenna swab tapering in the second half of 2023, we will deliver further cost reductions and manufacturing operations.
All of our cost reduction efforts, we are targeting to achieve cash flow breakeven in our base business, excluding Intel swap revenue by the end of 2024.
Our operating expense savings will allow us to make targeted investments with attractive returns utilizing the significant cash we generated from the telescope in coming quarters.
From a cash perspective, we ended the quarter with total cash and cash equivalents of $111 million, a $9 million increase from last quarter.
Working capital increased significantly in the quarter, which the company believes will convert to cash as <unk> revenues taper in the future.
We also continue to expect to generate positive cash flow from our $109 million Department of defense contract to build out on Telus swap capacity.
The majority of the cash tied to this expansion has now been spent and we will see positive cash flow as we complete milestones under the contract going forward.
Given the continued volatility within Telus swab, we are only providing quarterly guidance for the fiscal year.
In the first quarter of 2023, we are guiding to revenues of $125 million to $130 million representing year over year growth of 85% to 92%.
Regarding the cadence of revenue throughout the year, we are expecting continued strength in <unk> revenues in the first half of the year, while we deliver on our government contracts followed by significantly more modest and tell a swap revenue in the third and fourth quarters.
As Carey mentioned, we are focused on driving momentum in our core business as we exit the year.
By implementing our planned cost savings and looking for opportunities to drive core growth throughout 2023.
With that I am pleased to turn the call back over to Kerry for concluding remarks. Thanks, Ken we continued to make meaningful progress on our transformation journey. This quarter as the company focuses on innovating and operating with disciplined execution and accountability. We have now firmly positioned the company on a strong finance.
You'll footing and expect to see our balance sheet improve through 2023, creating the opportunity for future growth investments.
As we look forward core growth is our predominant focus as an organization and our team is motivated to deliver this year. We continue to believe that our capabilities can help power where health care delivery is going meeting people patients, where they are providing innovation and care at the lowest.
Possible level of acuity. Therefore, we are excited about the opportunities in front of us and with that I'm pleased to turn the call back over to Scott for Q&A.
Thanks, Carey operator, we're now ready to begin the Q&A portion of the call. We would ask that you limit your questions to one question and one follow up to ensure broad participation.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Please standby, we compile the Q&A roster.
Yeah.
Our first question comes from the line of Vijay Kumar from Evercore ISI. Your line is open.
Hey, guys. Thanks for taking my question.
Just on the base business here I'm not sure all the color.
Hum.
Is the base business now at a place where it should grow or are we still looking at <unk>.
<unk> three is a transition year.
And any color I know you spoke about the consumer genomics market macro but you also.
Signed some new partnerships. So maybe just help us understand ex COVID-19, what the base business revenues trajectory should look like.
Yes, great question and thank you for that.
And our guidance of 125 million to $130 million for Q1, while we're guiding towards is that and tell us what revenue will be roughly the same roughly flat.
A little bit quarter over prior quarter. So implied in that is that our core business is roughly flat versus Q4.
And I'd add on molecular you know, while we don't expect a snap recovery on the first half of 2023, we do remain optimistic about the long term fundamentals of that segment and that we shared some positive signals.
Like the like.
Like the deal with quest.
It really is about those and the segments, we are adding customers and we are staying closely connected with with them. So well again I'd just reiterate we don't expect sort of the.
The snap recovery, we do expect.
The strength in the long term growth in that attractive market, which are which we continue to to meet the needs of.
Understood and then maybe my follow ups here, one on gross margins and free cash flows.
Gross margin slight improvement sequential.
From Q2 levels.
But again I think long term, we were looking at 50 plus itself the gross margins good business.
Any any comments on what the gross margin trajectory should look like.
And you've also mentioned free cash.
The base business.
Cash.
Past due by end of fiscal 'twenty four.
Is the cash balance that you have on hand, right now that 80 plus is that enough.
For you to hit that achieve that free cash positive.
Hey, Vijay Thanks for thanks for that question there.
Couple of things as we think about the margin profile of the business. Obviously, we've seen a very significant mix shift from molecular diagnostics over the last 12 months.
Eventually we're going to get to the point, where we would expect to see until <unk> starts.
Starts to taper. Some we obviously made the comments in the press release, where we talked about we expected the first half of the year to have a much higher weighting towards <unk> Bob.
Second half as that mix transition occurs you will start to see some margin benefits because of the molecular business has a higher underlying margin structure to it yes. The other things that Ken mentioned that we're focused on is when you look at the manufacturing side, we still have some significant changes that we're looking at in terms of site consolidation standardization.
And across products and then also looking at things like some of the learnings from Intel swap transferring that to the additional tests, which we think will drive margin improvements over time and so it's something we're focused on we kind of see this as a marathon not as something thats going to happen in any single quarter and so it's something where we're going to make continual process.
But we have a new director of operations.
SVP of operations Zach worked was highly focused on driving efficiencies across our business and it's something we're going to keep working on throughout the year here.
From a cash perspective, as we mentioned, we increased cash quarter over quarter one.
One thing we did highlight is that our working capital increased.
Hoover during Q4, a lot of that was ramping up for some of the government.
Business as well as for the packaging changeover that we're doing.
And if you look at it there was significant I think our inventory quarter over quarter went up about $17 million and our accounts receivable on about $9 million. We believe that's highly convertible to cash given the government contract and the business that it's serving.
Understood. Thanks, guys.
Thanks P J.
One moment for your next question.
Our next question comes from the line of Patrick Donnelly from Citi. Your line is open.
Hi, This is lizzie on for Patrick Thanks for taking my questions. So I guess first I think you mentioned for some of the consumer oriented customers.
They were ordering loss this quarter I guess, how quickly do you suspect that theyre going to work through this inventory is this more of like a two quarter.
Or is it more like the second half of the year and I have one follow up.
Yeah.
Yes.
The guidance that we provided is that we're not going to see kind of a snap recovery here.
In the first half of the year that said when we look at the end market growth for our core customers. Most of them are continuing to grow and you can see that among a lot of other clinical laboratories that you guys cover that.
The end markets remain growing that's what makes us confident that some of the softness that we've seen is tied to inventory rebalancing we are seeing some lab.
Having some financial challenges and so theyre trying to preserve cash and so that activity as we believe translates to the business and so that gives us confidence in longer term, but I think the bigger thing that Terry mentioned is the fundamental backdrop received for the market overall is exceptionally strong and we're seeing an increased interest in people reaching paid.
<unk>, where they are we have the Griffin deal last quarter, we have the quest deal this quarter I.
I think thats it.
Strong example of the types of demand that we're seeing from customers and we expect that to continue and it's something that we're going to be focused on heavily this year as we focus on growth.
Sure.
Great. Thank you and then I guess just on your priorities when it comes to investing back in the business you talked about titanfall site consolidations generalization.
And APAC the new packaging.
Or are there what are the other areas I guess that youre looking at whether it's cutting costs or just investing internally. Thank you.
Yes, as you mentioned our focus areas.
First it's around <unk>, which was delivered on over the past couple of quarters and continue to with significant reductions in cost.
In Q1, you will see reductions as we mentioned in the packaging.
And then the other area of focus will be around our facility site.
Rationalization and really looking to optimize the footprint that we have as well as Scott mentioned, taking the capabilities that we've developed with Intel a swab and transferring those to other product lines and those efficiencies and those are the primary focus areas.
In addition to as Carey mentioned earlier, the restructuring that we announced earlier today. Those are the primary areas that will be focused on going forward.
Thank you.
One moment for our next question.
Yeah.
Our next question comes from the line of Brandon Couillard from Jefferies. Your line is open.
Hey, Thanks, good afternoon.
Hey, Brandon.
In terms of the restructuring, 11% head count reduction in non production areas.
Were any of those positions I mean should we think about those as mostly non revenue generating positions and when you consolidate molecular diagnostics together will that change. How you report. This segment revenues externally lastly, the 15 million of savings should we think about that as a gross or net number and I think you've kind of mentioned simply desired.
Maybe reinvest some of that growth is up more than 24.
Should we see that.
Yes.
And then I'm going to let can start on the segment reporting and then I'll hit the restructuring piece, yes, Brandon we are planning on starting in Q1 of 2023 to change our reporting to one to one segment.
Recognizing the changes that we've made in the organization structure and how we run the business as we go forward.
As far as the cost savings of $15 million annualized cost savings that we quoted.
What are the way to think of it is.
Coupled with the cash that we've generated from Intel's hub and are generating from the Tulsa hub.
And then layering on the cost savings what we are doing is building up a cash base to then further invest in the business, whether it's organic investments or inorganic obviously you can't talk about any specific examples on this call, but that's the approach that we're taking is deliver on entellus mob.
Buildup that cash base.
And then get become more efficient with the core business and use that savings and to reinvest in the business going forward and again that reinvestment will be organic areas as well as inorganic depending on the best opportunities Terry do you want to add.
They are focusing.
On strategic partnerships, where those make sense now we've talked about that from the beginning and you will see us increasingly focusing on delivering growth through strategic partnership on the restructuring.
Very clearly we have restructured to generate growth.
So as to not impact that moving forward and I would say when you look at the cost cutting and started with simplification.
Really focused around consol.
Consolidating functions across the enterprise.
We're to a smaller business to to have sort of these distinct business units and so on.
Eliminating redundant management positions.
Focusing on value creation.
<unk>, but that consolidation of functions for a business our size just really.
Makes a lot of sense and so.
Now that we have done a lot of the work on strengthening the foundation. It really is about elevating our core growth and.
To reiterate the innovation internally plus strategic partnerships as we rebuild our cash base.
To be even stronger and Gary as you mentioned a couple.
Coupled with the restructuring is also a focus on process improvements within the organization to help drive our efficiency as we go forward.
Got it okay.
And then on Entellus Ravi chance you could give us a feel for the magnitude of the sequential gross margin improvement you may have seen just for that product and where does the 40 cents of savings from the new packaging.
Due to the gross margin profile of that product.
I don't I don't think we've given that level of detail out in our numbers, but I'll tell you how to think about it so.
So right now I think we mentioned there was 46 million tests delivered through December of last year and about 64 7 million tests remaining going forward on the three contracts that we have now one element as some of those contracts have lower price points than the extend the original price contract. So thats one headwind.
However to your point as we offset that you can think of the <unk> 40 per test being implemented by the end of this quarter and then based on the remaining volume of those tests.
Well math there.
Scott I think that's about what we've said publicly correct, yes, Ken obviously, Brian when you said the preponderance of our revenue is to honor those government contracts, which the pricing is meant to close disclosed so when you think about 40.
Relative to that test pricing, obviously, a very significant increase in the gross margin structure for that business sequential.
Sequential basis, why we didn't give the gross margins, we did see a meaningful improvement in terms of Intel's swap on a sequential basis as well.
Got it thanks, I'll re queue.
One moment for our next question.
Our next question comes from the line of Jacob Johnson from Stephens. Your line is open.
Hey, good evening everybody.
Just maybe the other side.
The restructuring you announced today in the one or two or initiatives Cary you mentioned the potential for enhanced collaboration and revenue synergies can you just talk about some of the opportunities you see as do you.
Unite the segments.
Absolutely Yeah Jacob.
I think we've shared at some of the restructuring and expanded upon it in this quarter that we brought together our product office.
<unk> brings together, our commercial teams and sales and marketing and product management and R&D under Kathy Weber.
Whom you all know and the opportunity spans from our collection kits where we.
We have tremendous relationships and can expand and through areas like new.
Occasions for those kits microbiome services building on our services capability.
Of what you know is our diverse adjourn business.
Let me be clear that while we think there is opportunity to cross sell.
We also through this restructuring are very much maintaining the specialized strengths within our portfolio. So even though we're creating one product office, which allows for collaboration. There's also this element of best practice sharing and it's not that the sales teams are being mashed together to sell both products.
More maintaining specialization leveraging best practices and sharing sort of strict strategic account focus across the business to increase our hunting, while maintaining all of our service capabilities.
Okay. That's helpful. Thanks, Gary and then just for my follow up I think last quarter, you mentioned inorganic growth opportunity as Ken just mentioned I think in the.
Answer previously.
I certainly understand you're not going to tell me, what youre going to buy it but in terms of maybe and your appetite for M&A do you think.
We've accomplished a lot and maybe some of the operational internal organic initiatives as sort of blocking and tackling.
Now you can start looking or do you feel like there's still some more things you need to do before you before you looked at M&A.
There to your point Jacob there are still things internally, we can and will do to increase our innovation pipeline and so this.
Focus on strengthening our foundation.
Like puts us on very solid financial footing, while we simultaneously increased our internal pipeline and all of the process rigor around that and then I've said it before but I'm going to emphasize again strategic partnerships are the way, where we get momentum.
Before we have the cash because you know what.
We're going to be very judicious and not gotten any aspect of our liquidity.
Strategic partnerships give us that way to think about how we can expand our value chain capabilities within each of our portfolios and then potentially position for the right M&A is as it's available. So while we're not talking specific M&A I'd focus on strategic partnerships and value.
Expansion in the segments in which we play.
Understood. Thanks for taking my questions.
Thanks Jacob.
Our next question.
Our next question comes from the line of Andrew Cooper from Raymond James Your line is open.
Hey, everybody. Thanks for the question.
Maybe first just thinking about the gross margins I know a couple of already sort of attack this a little bit but.
Do you think about and tell us what margins being up sequentially.
Talked about the core being down a bit quarter over quarter and that seems like it's what played out but can you give us a sense for other than the mix what some of the moving parts are there did things performed more or less as you expected and maybe just on a constant mix basis. What has that good core gross margin really looks like and how should we think about it trending through the course of 'twenty three.
Yes, I think you're thinking of the right elements as you go through it.
Mix as Scott mentioned.
As we as we mix towards more diagnostic which has a overall lower margins than molecular over the past couple of quarters, that's kind of a headwind to overall gross margins. However, the team for their great work has offset a lot of that with the improvements in efficiencies in particular from Telefonica and they will continue to do that as we mentioned with the packaging.
<unk> and freight reductions of about 40 per test.
As we go forward, so I think youre thinking of the right elements in there. The other area that we've made improvements in margin is as we bring on more volume, we do better with our overall absorption in the facilities that we have but thats an area that we focused on as well as a significant reduction in scrap along the way. So I think youre thinking of the right areas.
Mix and then there is overall operational efficiencies that we're driving and if you think long term one of the areas that we mentioned on a prior question was around our facility footprint and really looking at leveraging our facility footprint going forward to take best advantage of it and then in addition to that to leverage the capabilities, we've developed and built.
<unk> with Intel a swab.
Leverage I don't know other platforms. So those are the areas that that's how we're thinking of it going forward. So I think youre thinking that the right way.
Yes.
Brian I would just highlight two other areas.
One thing we did see this quarter is we had a higher international mix. When we look at our diagnostics segment, yes. The international diagnostics business has a lower gross margin profile than our U S domestic based diagnostics.
The other.
Keith as we think about our margin structure.
That we saw in the quarter is remember the Covid molecular kits had a very high margin profile of those.
Higher margin product.
For the company.
So as Thats tapered. Some that also has created some headwinds as well for the business overall.
Okay helpful and maybe following up on one of those things just in terms of the facility's footprint and how you think about that obviously the government's funding a lot that can probably be used beyond <unk>. So should we be thinking about that as likely being some of the legacy facilities moving moving into that cheaper factor you've talked about before.
For what a timeline sort of looked like for that.
Also we should think about from that footprint perspective.
Yes, so at a high level, yes, you are right. That's how we're thinking of it we haven't quoted any timelines at this point you can imagine it's an urgency of US we have a facility we have a capability. We've built now we want to leverage that to its fullest extent, so thats there thats the analysis and approach we're looking at right now I.
I can't give you a timeline, but we are that is a sense of urgency that site consolidation as a priority absolutely and those capabilities. We have built the Super factory, Andrew that you appropriately remember can be translated across our <unk> platform.
And leverage more broadly in the portfolio.
Yeah.
Okay, Great I'll stop there thanks for the questions.
One moment for our next question.
Once again.
Once again as a reminder, that star one for questions.
Okay.
Our next question is from the line of Casey Woodring from Jpmorgan Chase Your line is open.
Hi, guys. Thanks for taking my questions.
Okay stocking destocking in giant.
Genomics is that a one quarter dynamic here in.
In 2023 or is it perhaps something that you see lasting into the second half of the year.
You see stocking playing out through the course of this year and do you see this business growing in 2023.
Yes Casey.
I think as we talked about from a guidance perspective, obviously, we don't provide specific business unit guidance.
Said.
We have seen kind of a general trend a lot of companies right now are in cash preservation mode and so when we looked at.
Companies across our customer spectrum, we think that many are bringing down inventory levels from a cash preservation standpoint.
I think it's tough to predict exactly when that's going to end our guidance that we gave roughly on the call was that we would expect relatively similar trends here in the near term, but we're very optimistic longer term and so.
We're hoping to see some improvement as we go throughout the year for that business.
We haven't provided specific business unit guidance.
Okay Fair enough and then my.
Follow up is just on the <unk> partnership how much upside does this provide a 2023 can you give us a sense of how many tests a year you'd be providing products for and how we should be modeling the impact to margins there. Thank you.
Yeah, Casey, while we're while we're not sharing specific details of it what we would say is that as the preferred provider for class genomic sequencing services test group.
It's for all saliva collection for that for that business. So we're obviously.
Hoping and ends are cheering for their launch.
They will be.
It will be hoping that.
That grows and I think we'll be staying tuned the opportunity though is.
For customers like Quest and I'd say, just the theme of moving to meet patients where they are the beauty of our effortless sample collection is that we can power the entire industry in doing that.
So our strategy is to increasingly be the go to sample collection innovator across sample types. So I think while it's a great example, and where.
Rooting for them.
We're really looking to be that partner across the whole industry.
Okay.
Thank you and I'm not showing any further questions in the queue I'd like to turn the call back over to Carey for any closing remarks.
Great. Thank you.
Each of you for joining we appreciate the interest.
And.
While we look here to 2023, we just emphasize that the shift from our strengthening the foundation and a very solid reset for our financial footing to elevating our core growth and allowing us to accelerate in the profitable growth. So more to come. Thank you again and have a good.
Right.
This concludes today's conference call. Thank you for participating you may now disconnect everybody have a great day.
Okay.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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