QuidelOrtho Corporation Price & Performance (QDEL)

Actual results may vary materially from those expressed or implied these forward looking statements. Information about potential factors that could affect our actual results is available on our annual report on Form 10 ks for the 2023 fiscal year and subsequent reports filed with the SEC. Including the Risk Factors section Forward looking statements are made as of today, February 12, 2025, and we assume no obligation to update any forward looking statements except as required by law. In addition, today's call includes discussion of certain non GAAP financial measures. Tables reconciling these non GAAP measures to their most directly comparable GAAP measures are available in our earnings release and the supplemental presentation which are on the Investor Relations page of our website at quidelorzo.com. Lastly, unless stated otherwise, all year over year revenue growth rates given on today's are given on a comparable constant currency basis. And now I'd like to turn the call over to our CEO, Brian Blazer. Thanks, Juliet. Good afternoon, everyone, and thank you for joining us on the call today.

We finished the year with solid top line results that were in line with our 2024 financial guidance. And I'm encouraged by the progress that we're making in improving our cost structure and focusing the business to elevate profitable growth.

Today, I'll discuss our 2024 operational highlights, and key priorities for 2025 and then Joe will provide greater detail as we share our 2025 full year guidance. As I've mentioned in previous calls, I've been driving an Op [indiscernible] As part of this strategy, I made key changes to the leadership team to ensure we have the right mix of talent and expertise to move our vision forward. Having the right leadership in place is essential for driving innovation, improving operational efficiency and positioning the company for success. Our efforts to prioritize high impact opportunities are showing early signs of progress as reflected in our second half 2024 results. Turning to the fourth quarter of twenty twenty four, we saw ongoing contribution from our labs immunohematology and point of care businesses. Total reported revenue in Q4 was $7.00 $8,000,000 which decreased by 4% year over year due to the expected declines in COVID and flu testing revenues. Importantly, over 90% of our Q4 sales were recurring driven by reagents, consumables and service. And I'd mentioned that all growth rates I'm about to give are in constant currency. Our labs business, which is roughly 50% of our total the revenues achieved growth of 4% on a reported and constant currency basis excluding COVID, and non core revenue.

This performance underscores its durable and predictable business model with strong brand recognition, long term contracts and a loyal customer base. Within transfusion medicine, our immunohematology business continued to drive stable growth of 4% during the fourth quarter. And despite challenging year over year comparisons, from the decline of COVID testing, our point of care business continues its leadership position with Sofia's large global installed base at our Flu COVID combo test. And lastly, in our molecular diagnostics business, we initiated clinical trials for our Savanna Respiratory Panel last month. Which coincided with the ramp up of this year's respiratory season. We expect to complete our trials over the next few months as the season runs its normal course.

Adjusted EBITDA for the fourth quarter twenty twenty four was $150,000,000 which represents 21% adjusted EBITDA margin and adjusted diluted EPS of $0.63 As we continue to move our business forward, I've spoken about our three central priorities. Delivering the best experience from our customers, prioritizing execution on a small number of high impact programs and driving profitable sustainable growth. These priorities include improving R and D productivity, and the strength of our platform content as well as development of new systems that will enable us to strengthen our global market In addition, we continue to drive cost reduction initiatives that we started in 2024. Including realizing the remainder of our previously announced cost savings from the year and implementing new actions focused mainly on procurement and gross margin improvement.

We expect these programs to drive margin growth over the next few years that will achieve benchmark levels of profitability. In closing, I have been impressed with our team and grateful for their support as we made difficult but necessary changes this past year. Despite challenging circumstances, our team has been resilient and determined to build an innovative enduring company that's focused on supporting our customers and their needs. I look forward to sharing our progress on our operational and financial results as we move through 2025. And with that, I will hand it over to Joe to discuss our 2024 financial performance and guidance for 2025. Okay. Thanks, Brian, and hello, everyone. Begin with the details of our fourth quarter and full year 2024 results on Slides three and four of the earnings presentation which is currently available on our IR website. Again, unless stated otherwise, all year over year revenue growth rates on today's call are provided on comparable constant currency basis. During the fourth quarter and full year 2024, our business performed in line with our expectations and we expect continued momentum going into 2025. I'll start with some high level commentary on our full year 2024 performance and then drill down into fourth quarter results.

We'll also provide our estimated full year 2025 financial guidance and then of course we'll over the call for some questions. Total reported revenue for the full year 2024 was [indiscernible] including $2,300,000,000 in non respiratory revenue. Labs growth was 4% excluding COVID and non core revenue, which includes contract manufacturing, and our respiratory revenue was $5.00 $4,000,000 which grew 4% excluding COVID [indiscernible] Full year 2024 COVID revenue was $185,000,000 including $17,000,000 in government contracts Foreign currency exchange negatively impacted full year 2024 results by 60 basis points Adjusted EBITDA was $543,000,000 and 19.5% adjusted EBITDA margin and adjusted diluted earnings per share was $1.05 Moving now to fourth quarter twenty twenty four results. Total reported revenue was $7.00 $8,000,000 which decreased by 4% compared to the prior year period due to lower year over year COVID and flu revenues as discussed in our third quarter earnings call.

Foreign currency exchange negatively impact fourth quarter results by 30 basis points From a regional perspective, our fourth quarter twenty twenty four constant currency revenue performance was led by our other region, which again is comprised of Japan, Asia Pacific and Latin America and grew 13%. China grew 11% driven by labs Strong labs performance in China was partially offset by softness and cardiac point of care products resulting from timing of certain orders, and reimbursing changes in some Chinese provinces as we discussed on our third quarter call. I noted for the full year, China excluding respiratory grew in high single digits as expected. Our Europe, Middle East, Africa region declined by 6% due to a one time item and timing of revenue in the prior year period, For the full year 2024, Europe, Middle East, Africa region, revenue grew by 2% And then finally, North America declined by 11% compared to the prior year period due to the anticipated year over year decline in respiratory revenue the decline of U. S. Donor screening revenue, as we continue to wind down that business this year, and timing of cardiac sales. For the full year 2024, North America was down 3% excluding COVID.

Right now looking at our non respiratory business, which includes labs, transfusion medicine and cardiac point of care products, Fourth quarter twenty twenty four revenue was relatively flat year over year. However, underlying labs revenue growth was 4% excluding COVID and non core revenue. In transfusion medicine, immunohematology revenue grew 4% and donor screening declined by 40%. Cardiac revenue declined by 9% in Q4 primarily related to order timing in North America.

The full year Cardiac revenue was down approximately 2% or only $3,000,000 compared to the prior year. Our Q4 respiratory revenue declined 18% year over year. During Q4, we saw continued favorable product mix from our Sofia Flu combo test and we had $44,000,000 in COVID revenue. We saw a late start to this respiratory season, which is more in line with pre pandemic trends. And we have seen the season become strong in February.

Thus far.

More on our thoughts on the Q1 flu season in a bit. Moving down the P and L, Slide five shows for the quarter twenty twenty four adjusted gross profit margin of 47% versus 52% in the prior year period. The year over year decrease was primarily driven by higher COVID and flu sales in the prior year period, as well as bonus accruals in Q4 of twenty twenty four that did not occur Q4 twenty twenty three as mentioned on our Q3 earnings call. Non GAAP operating expenses of $226,000,000 including SG and A and R and D decreased by $16,000,000 compared to the prior year period, which reflected cost savings initiatives, partially offset by the previously mentioned Q4 twenty four bonds approvals. Adjusted EBITDA was $150,000,000 compared to $195,000,000 in the prior year period. Adjusted EBITDA margin was 21%, which reflects the cost savings actions we have taken. Partially offset by lower revenue from respiratory tests, which are high margin contributors. Adjusted diluted earnings per share was $0.63 compared to adjusted diluted EPS of $1.17 in the prior year period. This year over year change was primarily due to higher in the current period partially offset by our cost savings actions.

The full year effective adjusted income tax rate 2024 was 24% All right. Now turning to the balance sheet on Slide six, We finished the quarter with $98,000,000 of cash and as of the end of Q4, we had $198,000,000 of borrowings on our $800,000,000 revolver. Which is a decrease of $32,000,000 compared to Q3. Our capital allocation priority continues to be debt pay down Fourth quarter twenty twenty four adjusted free cash flow was $68,000,000 which represents 45 and our second half 2024 adjusted free cash flow was 59% of our second half adjusted EBITDA.

During the fourth quarter of twenty twenty four, our net debt to adjusted EBITDA ratio was 4.4 turns [indiscernible] consolidated leverage ratio including pro form a EBITDA adjustments was 3.5 times as permitted and defined under our credit agreement. Now I will provide our full year 2025 guidance, which is on Slide seven of the earnings presentation. We expect full year 20.5 total reported revenue of between $2,600,000,000 and $2,810,000,000 Note that we expect a negative impact of $55,000,000 related to foreign currency exchange which was estimated using currency rates as of January 31, 2025 and is subject to change as the year progresses. We expect adjusted EBITDA between $575,000,000 and $615,000,000 which equates to 22% adjusted EBITDA margin This is an expected two fifty basis point improvement off of four. We expect adjusted diluted EPS of between $2.07 to $2.57 Additionally, we do not see significant currency impact either adjusted EBITDA or adjusted Yes. Expectations are based on a set of assumptions as follows We assume that the full year 2025 position in growth profiles will be in line with the commentary we shared most recently in January the JPMorgan conference, including the labs business expected to grow in the mid single digits transfusion medicine excluding U. S. Owner's screen expected to grow in the low single digits Point of care growth excluding COVID is assumed to grow in the mid single digits.

And molecular diagnostics did And molecular diagnostics is expected to continue to develop during 2025 with limited sales. As a reminder, we are not assuming any sales from U. S. Savanna or respiratory products in 2025. And lastly, we assume mid to high single digit growth in China. Now for the respiratory revenue, in 2025, we assume a $50,000,000 to $55,000,000 overall test market with greater than 50% of flu product revenue coming from our flu COVID We are seeing strong flu trends in Q1, which are factored into our full year guidance presented today. In addition, we assume full year 2025 COVID revenue will be in the range of $110,000,000 to $140,000,000 which excludes approximately $17,000,000 in government contract we had in 2024 and do not expect to repeat as well as lower retail which accounts for less than 0.5% of our total company revenue. In addition, we assume typical quarterly seasonality with Q2 revenue being our lowest quarter and Q4 being our highest quarter for revenue and margins. We assume cost savings of approximately $50,000,000 in the first half of twenty twenty five as part of our previously implemented $100,000,000 in annualized cost savings actions. We expect incremental cost savings in 2025 between $30,000,000 to $50,000,000 primarily related to procurement.

The majority of the $100,000,000 in annualized that we implemented in 2024 was related to staffing reductions of 9% of the total workforce. Future staffing reductions are expected to be a part of our ongoing efforts to appropriately size our teams and we will continue to evaluate staffing reductions as part of our ongoing margin improvement efforts. However, we are now firming our attention to procurement and other categories of costs to improve margins. We assume positive adjusted free cash flow for the full year 2025 to be approximately 25% to 30% of adjusted EBITDA We expect higher cash flow in the second half of twenty twenty five, which is in line with seasonally higher revenue and our cost savings initiatives. And we continue to target free cash flow conversion of 50% of adjusted EBITDA on the same timeline as our market improvement. We expect our net debt leverage ratio to be down close to a half a turn in the first half of twenty five versus year end 2024. And we expect it to land between 3.5 to four times by the end of twenty twenty five.

We assume full year interest expense to be down slightly from 2024 in the range of $158,000,000 to $162,000,000 had expected interest expense to be approximately $5,000,000 to $7,000,000 lower than this range but higher than expected revolver borrowings at the end of twenty twenty four. Carry over in 2025. These higher borrowings are primarily related to one time cash used for employee severance costs, our system conversions as well as the delay in proceeds related to the sale of a facility. Again, our capital allocation priority continues to be paying down debt. We assume CapEx of approximately $160,000,000 to $170,000,000 in excluding instruments under reagent rental agreements and integration related expenses. And finally, we assume a full year effective tax rate of 24%. To summarize, we believe our second half 2024 performance demonstrate solid progress towards our adjusted EBITDA margin expansion goal of greater than 25% over the next couple of years. We remain focused on our execution and cost savings initiatives to achieve our margin expansion and profitable growth tolls With that, I'll ask the operator to please open up the line for questions.

Absolutely. We will now begin the question and answer session. The first question comes from Jack Meehan with Nephron Research. You may proceed.

Thank you. Good afternoon. First question was on the guidance beef the forecast for free cash flow conversion at 25% to 30% of adjusted EBITDA It wasn't that long ago that you were looking at something closer to 50% of adjusted EBITDA conversion. I know different time, different revenue base, I was wondering if you could just talk about Where you think that can go over time and what a more normalized level might look like? Yes. Hey, Jack, it's Joe. Thanks for the question. [indiscernible] Yes. The cash flow is certainly not where we want it to be. We ended 2024 at 20% recurring free cash flow as a percentage of EBITDA. And again, as you just stated, for 2025, we expect it to be between 2530% it's an improvement over 2024, but ultimately our goal is to be at at least 50% conversion of adjusted EBITDA to free cash flow conversion. And I believe that getting to that target will be over the same timeline as our margin improvement goals So I would say over the next couple of years, Okay. And then I was hoping you could also just talk about the China region. So So given some of the market uncertainty The fourth quarter actually looks like it was pretty good for you guys in the region.

So this mid to high single digit target you have for 2025, can you just give us an update on your view on pricing and exposure to any VBT programs that are taking place? Yes. Hi, Jack. This is Brian. China continues to be an attractive market for us, but it it is a complex market as you know. In the near term, we think that the risk of additional BBP Pressure has largely passed us by at least for 2025, but we have seen some smaller impacts to cardiac reimbursement there. That are mainly reimbursement versus broad VBP actions. I don't expect any more significant actions on either BBP or reimbursement. But I would say that the competitive intensity there just given what has happened has increased. And as a result of that, we're kind of tempering our view from kind of high single digit to to mid single digit moving forward given that the nature of the environmental Okay. That makes sense. If I could squeeze in one more, just quick clarification. I think there was a new disclosure in the [indiscernible] for the cardiac revenue, I just wanted to clarify, does that include [indiscernible] Triage and BNP and kind of the decline you had in order, was it entirely on the triage side, I assume?

Yes, that's right. Yes, we referenced that that Jack. So we had to put a slide in the PowerPoint deck that goes with the earnings call. And yes, when we talk about the cardiac, it's the combined triage revenue as well as the BNP revenue and really all of those the full year variance is in the triage business. That BNP business [indiscernible] Okay.

Thank you. The next question comes from Patrick Donnelly with You may proceed.

Hey guys, thanks for taking the questions. Joe, maybe one for you on the cost side.

It sounds like maybe some of the cost savings are coming a little earlier than expected. This year as well. Can you just talk about the levers you guys are pulling to preserve and drive EBITDA higher the key ones as we work our way through this year and then obviously the ones that remain out there to drive EBITDA back to where you guys want it on the margin side. Yes. So, hey, Patrick. So, yeah, the margins the overall EBITDA margins are going up two fifty basis points from 24 to 25. And at a high level, I would say that that the pieces are broadly $50,000,000 of the first $100,000,000 that we [indiscernible] Mid through 2024 which will benefit the first half of twenty twenty five. [indiscernible] I would say that that $50,000,000 is going to be split per evenly between OpEx and GP. And the second tranche that I would mention is the $30,000,000 to $50,000,000 of incremental savings for $25,000,000 that we mentioned on this call today, which we've defined as mostly procurement related. And most of those savings will occur within the OpEx line, because the a large majority of those savings as procurement savings are going to be indirect procurement savings As the direct procurement savings that will benefit GP, we'll take a little bit longer to realize and we'll probably start to see more of those move into twenty twenty six.

So those are the two main good guys benefiting margins. And then of course, you have a headwind of normal merit increase for employees and 1% to 2% inflation on materials that offset. And those are really the big, main pieces you think about how we go from '24 to '25 and then two fifty basis point improvement on EBITDA margins.

Okay, that's helpful. And then maybe just a range on respiratory. Can you talk about the different drivers there? Are we in the endemic? Is this the right number to think about forward and then inside of that, just Savannah, it's on the respiratory trial for now, not much this year, the contribution there as we work our way forward. [indiscernible] Go ahead. Yes, I can take that. Yes, so I'd maybe take the COVID revenue piece first.

We do believe that when you look at the COVID revenue for our cities going down 24%, 25% But really all of that dropped from twenty fourtwenty five and the COVID revenue is the government contract that won't repeat that we saw in 2024. And then the other piece is retail. Revenue, which is a really small piece of our business less than 0.5% of our total company revenue. And quite honestly, it's just not really a big focus of ours right now. The professional COVID revenue is relatively flat. In our guidance 24% to 25% and we believe that's really at I would describe as an endemic level As far as the rest of the respiratory revenue, it's growing, I'll in the guidance, it's growing roughly low single digits from 24% to 25%. You think about flu, RSV and strep.

Thank you. The following question comes from Bill Bonneo with Craig Hallum. You may proceed.

Hey, thanks guys. I just want to follow-up a a little bit on the first question that that Patrick asked, maybe slightly different. The margin expansion target is now a lot better than what you had said not long ago. And it would seem like you had anticipated additional cost savings. You've been talking about that. And procurement as an opportunity. So I'm just curious two things, sort of what's going better, what has you more in than 200 basis points? And then secondly, does it change your thing thinking about the total opportunity at all? Hey, Bill, this is Brian.

I think In terms of what's gone better, we can point to a lot of the accomplishments the organization has made this last year. First and foremost, [indiscernible] the staffing reductions that we made which were substantially were 90% of our workforce and probably monetized out closer to 12% to 13% of cost reduction there.

But we very quickly jumped on the procurement piece of that. And I think as we have gotten significant traction there, that enabling us to now talk about this additional $30,000,000 to $50,000,000 of incremental savings. So I still see I wouldn't want to get too far out of our skis there. I still see our pathway here to the 25% EBITDA range and higher over the sort of 25% to 30% range over the next two to three years. So That's our target. We keep trying to push that as hard as we can.

Okay. That's That's helpful. And you talked about the procurement being more on the indirect cost side, this year. Is there any color you can give on that at all? Like what types of things are you able to achieve there?

Yes. It's a lot of costs. It really cuts across the entire P and L. It's everything from supply chain and logistics cost, packaging to travel and entertainment costs, it really it just cuts across the whole P and L. It's a lot of our service cost in IT and quality, etcetera, and even some R and D expenditures. So it really is a broad based approach that we've taken to the indirect side. And the reason we're those are just a little bit more actionable in the short term the direct procurement, which are generally product related costs that require us to change in some cases the design or make regulatory submissions And so they just take a little longer for us to implement.

Yes.

Okay. That's helpful. And then if I can just one last one.

On the thanks for the color on the year over year decline in the adjusted gross margin. Can you just remind us the reason for the sequential decline?

From Q3 to Q4 in 2024, you're talking about Bill?

Yes. Yep. [indiscernible] It's going to be mix. Yeah. Product mix. It's product mix.

Okay. But talking about more respiratory in Q4 and isn't that higher margin? What No, it's actually less. [indiscernible] [indiscernible] Is what we had talked about on the Q3 call.

Okay. Okay. Well, I'll ask on our follow-up call. They don't look anymore stupid. Thank you.

Thank you.

Thank you. The next question comes from Lou Li with UBS. You may proceed. Great. Thank you. So two questions. So first one on the margin. Just wanted to get your updated thoughts on the tariff. Is your assumption right now including like any negative impact from the tariff? Or and then maybe just like any mitigation that you can talk about? [indiscernible] The tariff subject seems to be ever changing here over the last couple of weeks. And we're monitoring it very carefully. We were happy to see that Mexico and Canada are moving I think, toward a resolution To what was proposed by the administration And as you probably know, our industry continues to lobby for an exemption there because the bulk of medical devices and diagnostic products are manufactured in The United States. We do have some exposure there as we've got some instruments that are sourced from Mexico But given the changing nature and morphing of the subject right now, it's really just too early for us to provide any real view of potential impact at this point. So we're just going to monitor it very closely. And once we understand what the real impact is, we'll be able to provide additional guidance on that.

Got it. So one of the things, circle back on one of your comment on the China part. So you said the risk of additional EVP pressure largely passed for 2025. And you don't really expect any like significant action. I just can you just provide a little bit more detail in terms of like what have you seen on the ground and and why you believe that most of the impact should be gone in 2025?

Yes. Most of the VBP actions up to this point have been focused on liquid clinical chemistry products and immunoassay products Our Our dry slide technology has been exempt from those actions up to this point. And unlike most of our other competitors there, Our mix of clinical chemistry versus immunoassay is It is kind of reversed. We have less immunoassay exposure in the China market very little immunoassay placement in the China market and most of our volume there is clinical So based on the timing of how these actions roll out, we believe that [indiscernible] They're really we don't expect any sort of meaningful BVP impact for that would affect our products in 2025.

Okay, got it. If I can squeeze one more. So I just wanted to think about more the long term margin expansion opportunity. So we're talking about like two fifty basis point in 2025 Is that a right way to think about in terms of by 2026 as well, given that you do have more procurement opportunity that you can mentioned and then you also have the divestiture of the donor business. Just wanted to think about how you kind of like a little bit longer term? 2026. Yes. Hey, Lou, it's Joe.

We've been I think pretty consistent here since Brian joined the company back last May and that we are [indiscernible] adjusted EBITDA margins greater than 25% and then it would be a two to three year journey from when he started with the company. And the reason that it takes that long because it may be surprising to some as like why would it take so long is because we can do that actions fairly quickly, which we did can get to indirect procurement savings, which we will get to this year. It's the direct procurement savings that take a little bit longer because sometimes you're looking at bringing in restartifying new suppliers or actually swapping in and out new materials on existing products. And trying to avoid five ten new five ten filings with the FDA. So it does take a little time. So I think we're making good progress from 2024 to 2025.

We will make even more progress as we move into 2026 as we continue with the indirect procurement savings as well as start to see more of the direct procurement savings come through on the gross margin line. And then the final thing I would say is that we are going to get a bit of a tailwind as we fully exit from the donor screening business. The U. S. Donor screening business points And then the final thing I'd mention is the Savannah launch, that will provide some tailwinds to margins as well. As we start to move from dilutive impacts of the project to more accretive impacts of a molecular product margin. So all those things combined, will get you to that again that greater than 20%, 25% adjusted EBITDA margin. So we'll make progress this year. We'll make more progress next And I would think by the time you get to the end of '26, half of twenty twenty seven, we should be where we need to be Thank you. The next question comes from Andrew Cooper with Raymond James. You may proceed.

Thanks, everybody. Thanks for the question. A lot already asked, but maybe just one just to make sure on the $30,000,000 to $50,000,000 of savings this year, that's an in year number and I think you said second half weighted. So is it right to think about As we move into 2026, there is some flow through there on top of like you called out the incremental direct procurement work and so forth. So we should have again kind of another above fully normalized margin expansion year in 2026. Is that the right way to think about it? Yes. Hey, Andrew. Yes, the 30% to 50 that we talked about is incremental. We'll be in year. That's this year impacting you're right, it'll be mostly second half.

Impact and it will be mostly as I said earlier, it will be mostly in the [indiscernible] a lot of that is focused on indirect insurance.

And then for sure, we have many direct procurement projects and initiatives in flight which will start to benefit more in 2026 And obviously, if we move through 2025, we'll talk a little more about what those impacts might look like at 2026.

Okay, helpful. And then I'm going to sneak two together here. But Maybe just on Savanna and the timing, I think you said you started the trial last month.

That puts you a full kind of ten months from when you first withdrew the submission last year. It's a little bit later than we would have thought given a typical respiratory season of what we've seen of late would have kicked off a little earlier.

Luckily, there is kind of a big February surge, it appears, but just how do we think about the timing there and potentially being ready for this next flu season if all goes right? I know you don't have anything baked in but just kind of would love the thoughts there on what that could look like if it does. And then secondly, just very quickly, can you give us a little bit of color for the donor screening revenues assumed in the guide? Yes, sure.

So on Savanna in the start of the trial, we did start it in January. As you recall, the the flu season was ramping up a little later in December this year than we had expected. We were we tried to time the start of the trial with the increase towards the peak so that we would get the kinds of samples that we need to have a successful trial. The season will go on here for another couple of months, We'll be collecting our samples running our data. And then we would expect we go into a period where we analyze the data and make a submission with the idea of moving through a process for an approval that would put us into the market later this year. So we're really there's really no change in the timing of our expectation for Savannah And there's not much more that we can really say about it until we're well through our trial and into the regulatory process.

And then Andrew, the donor screening question you had, really no change from what we said on the Q3 earnings call that we expect that the donor screening business this year will be 40% to $50,000,000 in The U. S. Earnings will be $40,000,000 to 50,000,000 And that's down quite a bit from 2024 where we finished at roughly $115,000,000 So it's quite a a drag. But we'll get through most of the wind down this year. I think there'll be very little residual revenue that will fall into 2026. Should get through most of this year.

Great. I'll stop there. Thank you.

Thank you. The next question comes from Tietjal Peterson with Jefferies. You may proceed.

Yeah. Hi. This is Jack on for Tycho.

For taking our question.

I guess first thinking about the longer term margin target, how should we think about the trade off between building your longer term growth engine funding innovation beyond Savannah.

And sort of rightsizing the cost structure.

What gives you confidence in the ability to get back to consistent mid single digit growth while also driving this new operating model. Yes. Well, thank you for the question. What I would say is there's a direct correlation between the work that we're doing in margin expansion and our ability to invest in the future of the business with new product development both in terms of assays content on our platforms and new systems. So we view them as I view them as connected And our my initial focus was really around getting the organization focused on the things we had to do from a a cost improvement standpoint getting Savannah on the tracks and then we had a number of other important menu expansion and lifecycle management [indiscernible] We're very quickly here, I think, with the traction that we're getting in our Chairman initiatives turning the corner there to looking at what we can do now to further drive the robustness of our product portfolio, We're still in the early stages there, but we're in the process of finding innovation roadmaps for each of our businesses. That involve assays and new systems. And so so we'll share more about that in future calls as we develop our plans.

Also in terms of the underlying business model here, I would just point to the fact that this is a very solid stable mid single digit growth business. It's really supported by the underlying business dynamics long customer relationships, a positive win loss ratio, high renewal rates, And those dynamics really support kind of this underlying growth. And really anything we do with systems and new assays are things that we can layer on top of that.

Got it. Appreciate the color. I guess second real quick, Got it to mid single digits in labs for the year. Are there any swing factors in play that could drive that to either lower, mid single digit or higher end for instance, China. Yes. Well, China is a dynamic market. Things change there quickly. I would say, right now, I don't see anything again on the BBP front or the reimbursement front that would have a major impact there. And again, I kind of point to the the stable recurring revenue dynamic of our business model that wouldn't point to any major swings in our labs business. Yes, I think I would only add that as a tailwind, Menu is always going to drive incremental growth. So as we continue reprioritize the R and D group on menu expansion, I'd like to think that there would be potential upside going forward I wouldn't say this year because what we put out as a guide, we're comfortable with. But moving forward, as you expand the menu, especially on the IA side, that would drive additional growth.

Thank you. The next question comes from Casey Woodring with JPMorgan.

Great. Thank you for taking my questions. I guess my first one, can you give us a sense on what to expect for 1Q across your different business lines and specifically on respiratory and flu in 1Q?

What do you have baked in here, there, LII ILI has been picking up as you noted. So curious if respiratory in 1Q could come come in above where it was in 3Q?

Since inventories are lower or if some of that was just pulled forward in the fall? And then I guess if respiratory is expected to come in stronger here in 1Q. How are you thinking about the rest of the year just given the unknowns around the 2526 respiratory season? Yes, just maybe walk us through 1Q versus the rest of the year in respiratory. [indiscernible] Hi, Casey. This is Brian. We're seeing the same thing that you're seeing, which is the ILI really spiking up here and also the deposit [indiscernible] is also almost double what it was last year and I think it's [indiscernible] or as high as the 2017, 2018 flu season, which was a pretty robust season for us.

We got off to a late start, but now we've seen this peak and the question is how quickly the peak will come down. I think just given how high it is, there's a good likelihood that the tail from the coming down from the peak will stretch out a little bit further. I think that's supported to a certain extent by what we saw in the Southern Hemisphere. This last summer. So we're watching it. And you just don't know what the duration of this season is going to be. So So we assumed for our full year guidance an average flu season with a test size of 50,000,000 to 55,000,000 tests in 2025. Is kind of the average for us for the last three years.

And that's what we've got baked into our full year guide.

Thank you.

Following comes from Andrew Brackman with William Blair. You may proceed.

Hey guys, good afternoon. Thanks for taking the questions.

A lot has been asked. So, Brian, maybe one for you big picture.

I think you've been in the seat now eight months or so. So I think you've had some time to do sort of a full review of the business. Any sort of changes in how you're sort of thinking about collection of assets on the whole this being the right mix or any sort of changes in how you might be thinking about acquisitions, divestitures, cuts like that.

Thanks, Andrew. Our Our focus really is The improving the operational performance of the business, I like every one of these business They I think they fit together well. Again, giving us the capability to work across the entire patient care value stream and be in both centralized and decentralized testing. I think each of the businesses plays a different role in our portfolio. But largely speaking, our focus is on making each of them more profitable and each of them grow. More. So in the short term, I don't have anything really to say on business development opportunities we're really just focused on improving the operation of the business at this point. Great. I'll just stick to that one. Thanks, guys.

Thank you. The final question comes from Connor McNamara with RBC Capital Markets. You may proceed.

Hello. This is Jose Ricardo for Connor.

I just wanted to go back to the tariff conversation. Thank you for what I mean by that question. I know things have changed quickly since you spoke and administration has different approaches to tariffs depending upon the country. And you talked about some of the instruments that are sourced with parts from Mexico.

Have you also looked into the exposure on the secondary level suppliers that provide you with procurement of process materials that you also incorporate into your manufactured instruments?

Yeah, that's all factored into the analysis that Brian referenced earlier. It is all factored in there.

Yes. And again, we don't see a lot of exposure for China or Canada. If there's any one country more exposure, it will be Mexico, including all those layers that you mentioned.

Perfect. Thank you. You're welcome.

Thank you. There are currently no other questions in queue at this time. This concludes today's conference call.