QDEL - NASDAQ

Good morning or good afternoon. Welcome to the QuidelOrtho Fourth Quarter and Full Year 2025 Financial Results Conference Call and Webcast. [Operator Instructions] Please note this conference call is being recorded. An audio replay of the conference call will be available on the company's website shortly after this call. I would now like to turn the call over to Juliet Cunningham, Vice President of Investor Relations. Thank you.

Thank you. Good afternoon, everyone. Thanks for joining us. With me today are Brian Blaser, President and Chief Executive Officer; Jonathan Siegrist, Chief Technology Officer; and Joe Busky, Chief Financial Officer. This conference call is being simultaneously webcast on the Investor Relations page of our website. To assist in the presentation, we also posted supplemental information on our IR page that will be referenced throughout this call. This conference call and supplemental information contains forward-looking statements, which are made as of today, February 11, 2026. We assume no obligation to update any forward-looking statement, except as required by law. Statements that are not strictly historical, including the company's expectations, plans, financial guidance, future performance and prospects are forward-looking statements that are subject to certain risk, uncertainty, assumptions and other factors. Actual results may vary materially from those expressed or implied in these forward-looking statements. Please refer to our SEC filings for a description of potential risk. In addition, today's call includes discussion of certain non-GAAP financial measures. Tables reconciling these non-GAAP measures to their most directly comparable GAAP measures are available in our earnings release and supplemental information on the IR page of our website. Lastly, unless stated otherwise, all year-over-year revenue growth rates given on today's call are on a constant currency basis. And now I'd like to turn the call over to our CEO, Brian Blaser.

Thank you, Juliet. Good afternoon, everyone. I'd like to begin today's call with a brief reflection on my experience since joining QuidelOrtho in May 2024 and then focus on how the work we've done positions the company for the future. And I'll highlight key progress from 2025, which includes strong mid-single-digit growth before turning the call over to Jonathan to discuss our recent progress in R&D. When I joined the business, QuidelOrtho was a company I knew well and respected with broad and differentiated portfolio spanning the entire patient care journey. It was clear that the opportunity ahead was not driven by structural issues, but more about optimizing our business model and executing more consistently and with greater discipline to unlock the full potential of the portfolio. Early on, I conducted a comprehensive review of the business with the leadership team across our portfolio, operations, commercial execution and talent. And from that work, we established 3 clear priorities: putting customers at the center of everything we do, strengthening operational and financial performance and accelerating product development to support long-term growth. In 2025, we did exactly what we set out to do. We realigned our cost structure, strengthened execution rigor and improved the way the organization operates day-to-day. To date, our actions have generated $140 million in cost savings, expanded adjusted EBITDA margins to the low 20s and increased our financial flexibility. And we did this while delivering strong growth in our labs business, supported by our recurring revenue business model. And importantly, we believe the changes we made in the business will be lasting in nature and designed to be sustained. And with that context, I'd like to turn now to our Q4 financial highlights, which will be in constant currency, unless otherwise noted. Joe will provide greater detail on our Q4 and the full year results as well as provide our 2026 financial guidance later in the call. Fourth quarter revenue was $724 million as reported with 7% growth in Non-respiratory, excluding Donor Screening. Our Labs business reported strong growth of 7% in Q4, driven by continued strength in clinical chemistry. Respiratory revenue declined as expected due to COVID-19. However, we saw strong flu revenue growth of 6%. For the full year, we achieved our 2025 financial guidance with $2.73 billion in revenue as reported. Excluding Donor Screening, Non-respiratory revenue grew 5%. Our Labs business had strong mid-single-digit growth at 6% for the full year and represented 55% of total company revenue, pointing to the strength of our underlying business. Respiratory revenue totaled $402 million as reported. Operating expenses decreased by 5% as a direct result of our company-wide cost savings initiatives. Adjusted EBITDA margin was 22%, in line with our 2025 guidance and representing a 240 basis point improvement over the prior year. Our full year results included a significant non-cash goodwill charge in our GAAP results that was recorded in Q3. And let me be clear that this was an accounting reset that reflects post-pandemic market valuations. It does not impact our cash, our operations or our ability to invest in the core business engine you see performing today. In closing, we're pleased with our 2025 performance and progress against our priorities. Looking ahead, our objective is to maximize the value of QuidelOrtho by delivering superior outcomes for our customers and over time, converting that value into attractive returns for shareholders. We are guided by a clear financial and operating framework, driving above-market growth, expanding margins through execution and mix, generating strong cash flow and strengthening the balance sheet. These are long-term objectives that reflect the earnings power of the business when executed consistently. And to support this, we have aligned the organization to optimize the customer experience and drive effective execution across every dimension of the business. We are sharpening our focus by prioritizing higher growth markets and being selective in how and where we deploy capital, while also continuing to build a strong leadership team and a culture grounded in quality, accountability and continuous improvement. Our progress this year would not have been possible without the dedication of our employees around the world. Together, we are rebuilding a culture that is grounded in continuous improvement and positioning the company for long-term success. And as teams evolve, leadership transitions naturally occur. Today, we announced that Joe Busky has decided to retire as CFO in June. We have initiated a search for his successor, both Joe and I are fully committed to ensuring a smooth transition. Joe has built a highly capable finance organization and has been instrumental in achieving our cost savings initiatives over the past 18 months. I want to sincerely thank Joe for his many contributions to QuidelOrtho and wish him all the best in his retirement. Thank you, Joe. Delivering on our ambitions requires a strong and disciplined R&D team. As I mentioned earlier, this was an area we identified as needing improvement, and we were pleased to welcome Jonathan Siegrist in late 2024 to lead these critical functions. Jonathan has played a key role in advancing our continuous improvement culture in R&D, and he has several important innovations underway. So, I asked him to join us today and provide a deeper look at what's ahead. Jonathan?

Thanks, Brian. It's a pleasure to be here today, especially as we share our strong results for both the quarter and the year. As Brian noted, QuidelOrtho has undergone a significant transformation, and R&D has been central to that journey. Over the past year, I've had the privilege of leading and advancing our overall R&D organization, including our regulatory and clinical teams. In a short time, we've upgraded talent, modernized our R&D processes and strengthened our product pipeline to support sustained growth, both in the near term and the long term. We reorganized the team to be more efficient and scalable, strengthened our regulatory and quality teams with external domain expertise and fostered a culture of scientific rigor, process excellence and deep cross-functional collaboration. By prioritizing the critical few programs with the greatest impact, we've built a much stronger and more productive R&D organization. That focus delivered tangible results in 2025. In Q4, we received FDA clearance for our high-sensitivity troponin eye assay on the VITROS platform and are preparing to begin U.S. shipments within the next few weeks. This extends a proven offering in the U.S., supporting timely clinical decision-making in emergency and acute care settings. We also received FDA clearance of our ID MTS Direct Antiglobulin Test Card, or DAT card on the Vision immunohematology platform. Combined with our recently cleared Ortho Elution kit, QuidelOrtho now offers the only complete gel-based DAT solution from polyspecific to monospecific. In addition, in 2025, we launched our new informatics middleware solution, QuidelOrtho Results Manager. Starting with our Labs business, Results Manager system brings significant value to our VITROS customers, enabling them to manage their laboratory workflow with an agile and user-friendly experience and sets the stage for us to expand Results Manager to the rest of our portfolio, with immunohematology and Point of care plan next. These are just a few of the exciting examples of momentum we generated in 2025, and it helps set the stage for what's next. Looking ahead, we're excited about new products that we expect to launch in 2026, including multiple platform launches enabled by a smart mix of organic R&D and inorganic strategic partnerships. We believe these new platforms spanning systems, informatics and automation will deliver strong customer value and drive meaningful assay menu pull. In Clinical Labs, we plan to launch VITROS 450, the first new VITROS platform since 2019 as the successor to the VITROS 350. Built on our novel waterless dry slide chemistry, it's a fully modernized system designed for key OUS markets. We expect to launch later in the first half of this year and early feedback has been very positive. We're also partnering to offer new innovative immunoassay platforms for OUS markets that will expand our menu with more than 25 new assays on these systems not currently available on VITROS today, within a total menu of over 70 assays on these new partner systems. Together with VITROS 450, this will create a combined offering that provides us with opportunities to compete for additional full menu tenders in attractive OUS segments. In molecular, we're excited for LEX to wrap up the final stages of their 510(k) and CLIA waiver FDA review for the LEX molecular diagnostics platform and are looking forward to commercializing this technology for the benefit of our customers. LEX is designed to deliver speed and sensitivity with true PCR chemistry and a fully automated swab to result system for point of care. This will make it one of the fastest and most intuitive PCR platforms on the market. Overall, we've made rapid and steady progress improving the R&D organization and the strength of the product portfolio we're building for the future and remain focused on continuous improvement as we go forward to deliver on the exciting product pipeline ahead. Now, I'll turn the call over to Joe to cover the financial results.

Okay. Thanks, Jonathan. It's been a great pleasure working with you, Brian, and the entire QuidelOrtho leadership team. I'm honored to have been a part of this team. While my retirement is still months away, I remain fully committed to the company. I will sincerely miss the teams I've had the privilege to work so closely with over the past 6 years. We've made great strides over the past 18 months, and I fully expect that we'll continue to make progress on our revenue growth, margin expansion and cash flow generation going forward. So now let me take you through our fourth quarter and full year 2025 results, which are detailed on Slides 3 and 4 of our earnings presentation on our website. Total reported revenue for the fourth quarter of '25 was $724 million, compared to $708 million in the prior year period. This 2% year-over-year increase was achieved even as COVID and Donor Screening revenue declined. Excluding COVID and Donor Screening, our reported revenue growth for the quarter was 7%. Breaking down business unit and regional results for Q4 and the full year on a constant currency basis, our Labs business continued to demonstrate durable underlying demand, growing 7% in the fourth quarter and 6% for the full year, underscoring the strength and stability of our largest business. Immunohematology also delivered steady growth of 3% for the full year, while maintaining its leading global market position. Our Triage business performed very well in '25 with revenue up 16% in Q4 and 7% for the full year, reflecting strong execution and expanding adoption. And respiratory revenue declined 14% in Q4 and 20% for the full year due to lower COVID testing. We saw a strong start to the '25, '26 flu season with a 6% increase in the fourth quarter, bringing our full year flu growth to 3% year-over-year. Now from a regional perspective, excluding COVID revenue, our North America region was up 4% in Q4, but down 2% for the year as expected due to the wind down of the U.S. Donor Screening business. Excluding Donor Screening, North America was up 2% year-over-year. Europe, Middle East and Africa growth for the quarter was flat and up 4% for the year, while impressively increasing their adjusted EBITDA margins by more than 900 basis points. Latin America and Japan and Asia Pacific growth excelled in '25. Latin America increased 17% in Q4 and 18% for the year, while Japan, Asia Pacific improved 4% for the quarter and 6% for the year. And finally, China grew 5% in Q4 and 3% for the full year. Now moving further down the P&L. Fourth quarter adjusted gross profit margin was 44.9% compared to 46.8% in the prior year period, a decline of 190 basis points due to tariffs, higher instrument placements and product mix. For the full year, though, our adjusted gross profit margin was 47.4% versus 47%. The 40 basis point increase was primarily driven by cost mitigations, offset by tariff impacts. Fourth quarter non-GAAP operating expenses of $229 million, comprised of SG&A and R&D slightly increased year-over-year due to the timing of sales and marketing expenses. Non-GAAP operating expenses for the full year were $894 million, which reflects a 5% or a $52 million decrease resulting from our cost savings initiatives. Fiscal year '25 GAAP results included a $701 million noncash goodwill impairment charge recorded in Q3 related to prior acquisition accounting. This charge cleans the slate with goodwill now reset, our forward GAAP earnings should more closely track our operational value. In Q4, adjusted EBITDA was $153 million and adjusted EBITDA margin was 21%, which was flat to the prior year period. For the full year, adjusted EBITDA was $597 million with a 22% margin, which is a 240 basis point increase compared to the prior year. Adjusted diluted EPS was $0.46 in the fourth quarter and $2.12 for the full year, representing growth of 15% year-over-year. Turning now to the balance sheet on Slide 6. We finished the year with $170 million in cash and $80 million in borrowings under our $700 million revolving credit facility. We generated $87 million in free cash flow in Q4. Excluding one-time cash items, we generated $135 million in recurring free cash flow. For the year, we used $77 million in free cash flow. Excluding one-time cash items, we generated $100 million in recurring free cash flow or 17% of adjusted EBITDA. This fell short of our 25% conversion goal, primarily due to $15 million to $20 million of ERP system issues and $20 million of sales that occurred late in Q4. Both of these receivables were collected in January of 2026. At the end of the year, our net debt to adjusted EBITDA ratio was 4.2x, which was above our target due to cash collection timing just mentioned. Now I'll provide our full year 2026 financial guidance, which is summarized on Slide 7 of our earnings presentation. Based on our current business outlook, we expect the following. Full year '26 reported revenues of between $2.7 billion and $2.9 billion, with quarterly revenue phasing similar to '25. Foreign currency exchange to be neutral from the full year based on currency rates as of January of '26. The Labs business continues to grow in the mid-single digits, immunohematology to grow in the low single digits and the U.S. Donor Screening business wind down to be substantially complete by midyear '26. Point of care growth is assumed to be relatively flat at the midpoint of our guidance, which is based on a typical flu season of $50 billion to $55 billion annual market tests. We also anticipate that COVID revenue will be flat at $8 million for the full year '26. We expect Triage cardiac growth to continue in the high single digits. For Molecular growth to decline slightly with the discontinuation of the Savanna business given our planned acquisition of LEX Diagnostics. We anticipate minimal revenue contribution from LEX in 2026 and have factored in the expected dilutive impact in our guidance. We expect China to grow in the low single digits based on current market information. Adjusted EBITDA is anticipated to be between $630 million and $670 million, which equates to adjusted EBITDA margin of approximately 23.3%, a 130 basis point improvement compared to full year 2025. We expect gross profit margin to be relatively flat to full year '25 and adjusted diluted EPS between $2 and $2.42. Included in this range is approximately $20 million in higher depreciation versus '25 related to growth in our instrument reagent rental agreements, as well as 2025 incremental investments in systems. For the full year, we expect $250 million in depreciation. We expect strong free cash flow between $120 million and $160 million, which factors in $50 million to $60 million in onetime cash use associated with our New Jersey facility consolidation and direct procurement cost savings initiative. Interest expense to be approximately $200 million based on current debt structure, CapEx to be between $150 million and $170 million and an effective tax rate of approximately 24% for the full year. So, by the end of '26, we expect net debt leverage to be approximately 3.8x as we progress towards our goal of between 2.5x and 3.5x. To conclude, we achieved our 2025 financial goals. Our cost savings initiatives meaningfully strengthened our results as reflected in our year-over-year EBITDA margin expansion. Looking ahead, we will continue to aggressively pursue further margin and cash flow improvement in '26, while also investing in our future top line growth. So, with that, I'll ask the operator to please open up the line for questions.

Of course. [Operator Instructions] Our first question comes from the line of Tycho Peterson of Jefferies.

I want to hit on free cash flow, the guide here because it did come in lower than expected in the quarter. And you guys had kind of messaged, I think, at several different venues that you're confident in recouping the cash flows. So, can you maybe just talk on -- did anything happen in November and December when it seemed like most of those cash flows will come back? And then you talked about a step down in onetime outlays in '26 and the end of the ERP conversion. So maybe just all seemingly good guys in flight. So why are we not seeing better conversion in the timelines that you've laid out here for cash flow?

Hey, Tycho, it's Joe. So as just mentioned in the script, the Q4 cash flow came in a little lighter than expected. We came in at 17% as a percent of full year EBITDA versus the 25% of adjusted EBITDA that I mentioned earlier for really the 2 reasons that I mentioned in the script, and that is we had about $15 million to $20 million of that system-related AR that we had assumed we were going to collect in Q4, but unfortunately, it spilled into January. We collected that in January. And then the second item that I mentioned was that we had some very late revenue in the quarter of about $20 million that, again, I had originally anticipated we would see that revenue a little sooner in the quarter and would have a chance to collect it in Q4. But given the way the flu season unfolded, that revenue came in very late, and therefore, we collected that cash in January. So, there's about $40 million, $45 million of cash that we thought originally would be collected in Q4 that slipped into Q1, January. We've already collected it, to be clear. So, it's timing with Q1 only. And that difference, if we had collected that $40 million, $45 million in Q4, we would have been right at our target. And then as you move to '26, we had talked about -- it's in the script, when I talked about the cash flow, the midpoint of our cash flow range was $140 million. And I want to be clear, Tycho, that's real cash flow. That's not adjusted cash flow. And so, when you factor in the onetime items for the New Jersey facility consolidation and the direct procurement, this is the $50 million to $60 million that I've been messaging for several months now. And that puts our, if you will, recurring free cash flow at around $200 million, which according to that same metric would be a little over 30% of our EBITDA at the midpoint. So, we -- I think we are making really good progress with cash flow. We just had some timing between Q4 and Q1.

Okay. That's helpful. And then maybe to dig into the strong performance in Lab, you had a nice acceleration even on a multiyear comp there. Can you maybe just talk a little bit about how sustainable you think these trends are? And any kind of delineation on chemistry versus immunoassay, how you're thinking about that for the year?

Yes. Thanks for the question, Tycho. Yes. So, if you look at our underlying growth rates really across the business, I think things look strong. Labs was at 7% for the quarter, 6% for the year, Point of care 7%. We had strong Triage growth at 16% in the quarter. The IH business was rock solid at 3% growth for the year. And if you look across our regions, I think we have really nice regional performance as well. I would point specifically to EMEA and LatAm, where in EMEA, we grew 4%, but we did it at the same time as we improved the margins by 900 basis points. LatAm growth was at 18%. JPAC very solid at 6%. So, as I think about the ability to sustain our growth moving forward, I think about a few things. First of all, we've got really solid market positions in all of our segments. We have excellent brand recognition. We're winning new business. Our renewal rates are high. We -- as you pointed out, in the Labs business, we continue to benefit from being underpenetrated in immunoassay generally in the Lab segment, where our historical strength has always been more in clinical chemistry. So that's a nice growth opportunity for us. And our low OUS market penetration continues to be a growth opportunity for us just generally. And I think moving forward, we've got -- we'll have LEX coming into the business. We are strengthening our competitiveness here with the VITRO 450 and the OUS system partnership that Jonathan discussed. So, just generally, I'm thinking -- I'm bullish on our growth rate moving forward. I think we're well positioned kind of across our business units to perform well.

Okay. That's great. And just last one quickly on China. What are you assuming in the guide for the year? And then I'll hop off.

Low single-digit growth in '26. Same as '25.

Our next question is from the line of Jack Meehan of Nephron.

I wanted to pick up where Tycho left off there on China. Since the press release you had a couple of weeks ago, I was wondering if there was any update that you could share in terms of dry slide and VBP?

Yes. Hi, Jack, nothing really new there. We did put out a pretty extensive statement on the website that kind of covers all the angles of that. But just to recap, the Jiangxi provincial HSA had made a statement that it was going to explore launching a nationalized VBP program, value-based procurement program for dry chemistry test strips in 2026. And as far as we know, there still has been no detailed proposal on that. There's been no indication of what products would be included in that or if our products would be included. So, we're waiting to hear details at this point. Just to reiterate, we think that if our products were included, the estimate of the impact might be between 0.5% and 1% of total company revenue, and that's something that we would look to offset somewhere else in the business. So still waiting to hear more on that, but no new news to share at this point.

Okay. Appreciate it. I wanted to see if I could get a mark-to-market update on Sofia. I was wondering, just as I was looking at the flu and COVID trends, specifically, how much of the flu sales in the quarter were ABC. I was just wondering if maybe conversion from legacy COVID to ABC might have driven any of the shift you saw in the strength in flu versus the COVID decline?

Jack, it's Joe. The revenue from the combo product or ABC, as you referred to it, is still continuing strong, well over 50% of the total flu revenue. And actually, it's been very consistent for the last 2-plus years. And so, it's -- the combo test has proven to be very durable. Now whether there's some transition, as you mentioned, from stand-alone COVID to that, I can't really speak to that. But I do know that the combo test as a percentage of the total has been very consistent now for 2-plus years.

Our next question is from the line of Andrew Brackmann of William Blair.

And Joe, I'll save my farewell until next quarter. But maybe I'll start with you on a question on the guide and particularly EPS guidance. So, I think the low end of your range is actually below your 2025 EPS actual. Obviously, you've got interest expense that's going to be higher for the full year. But as you sort of think about the lower end of the range, can you maybe just talk to us about some of the assumptions that are embedded here to get you closer to that $2 versus maybe that higher end?

Yes. Hey, Andrew, the guide that we put out just now for '26 has a wide range just like it did the guide for '24 and '25. We -- unfortunately, because of the respiratory portion of our business and the sort of a bit of uncertainty that we have in that business, we have to have a wide range for respiratory. And so, if you think about the range for revenue, it's pretty tight on the Non-respiratory business. As I've been saying to you guys for a long time now, that business is super predictable, and we don't need a lot of range on that. So, most of the range on the guide is respiratory. And so again, the midpoint is where we want everyone to go to the midpoint of the guide I just gave is where I think everyone should look to go. And so, what is going to drive it to the low end or the high end? Well, the midpoint for respiratory guide is going to be, like I said, that $50 million to $55 million test market. And if it drops down to maybe $40 million, $45 million, you're going to go to the low end of the range, if you up to $60 million, $65 million, you're going to go to the high end of the range. And again, you guys know this, we've seen flu markets of all those sizes over the last several years. So, that's why we have to pick up all sizes of the market in that range. And when you have that wide of a range for revenue, it just drops down. So, the EBITDA guidance and the EPS guidance just fall right from those revenue numbers. Now again, I don't think it's probable we go to that low end. I think, and again, I want everybody to look at the midpoint of the range. I think that's where people should be. But I also want to call out what I said in the script a few minutes ago is that we do have depreciation and amortization going up about $20 million year-over-year from $25 million to $26 million. And so that is -- that's about a $0.21 -- $0.22 impact to the adjusted EPS. And so, as you think about where that EPS range is for '26 relative to '25, that's a big impact. There isn't as much of an impact on interest expense. Interest expense is going up, I would say, slightly from '25 to '26. I wouldn't say it's going up tremendously. Most of that where you might be thinking why is this EPS so low? It's because of the increase in depreciation.

Okay. That's very helpful. And then, Brian, maybe a question for you. You started the call sort of with a reflection of your time in the CEO chair. As you sort of think about the future here, the next couple of years of that continuous improvement sort of outlook that you outlined there, can you maybe sort of talk to us about some of maybe the future areas you're focused on for driving that improvement, specifically as it relates to maybe some cost savings?

Well, yes, if you consider cost savings specifically, I'm still very focused on getting the company to the 25-plus EBITDA range, 25% EBIT margin range. And I'm pretty confident in our ability to project into that range for a number of reasons. First, starting in the middle of the year, I think we're going to see a 50 to 100 basis point improvement just from exiting the Donor Screening business that we've announced for a long time. We've got a very rich pipeline of projects in place. We've been working on these direct and indirect procurement projects for some time now. We've got a nice portfolio of projects that span multiple years, as well as our plans to optimize our manufacturing footprint further. We still have a lot of opportunity to optimize profitability in a number of regions. I pointed to the 900 basis point improvement we made in EMEA. We've got other opportunities as we look globally. And we do benefit not only from a growth standpoint, when we place integrated systems, because of the immunoassay volume, but that improves our product mix as the immunoassay margins are higher than our clinical chemistry margin. I think we'll see the benefit of margins in LEX as we start to achieve molecular level margins from that platform as it comes online. And so, I think we get probably to the mid-20s with a lot of our procurement initiatives, continued staffing optimization, the Raritan New Jersey footprint optimization. I think the high 20s come as LEX becomes a bigger component of our product mix. And we still do have some work to optimize staffing. We've done a lot of work there. So, those are the things I'm thinking of on the sort of the cost side of the coin. On the growth side, we're really turning to how can we optimize our portfolio with new menu additions for our existing products, and we're starting to create the financial flexibility that we can start contemplating what our new systems will be that will allow us to project into higher volume segments and drive additional growth for the company. So, a lot of great things ahead of us here, and I think very positive on both the top and the bottom line.

Hey, Andrew, before we go to the next question, operator, Andrew, hang on, Juliet, just reminded me on your first question that I left out a piece of information that I probably should have informed you on that when I talked about the higher depreciation in '26 versus '25, the $20 million. I probably should have mentioned that, that's driven by really 2 main things. It's the reagent rental capitalization in '25 was about 14% higher than in '24. And so, we had a -- this is a good thing. We're placing more boxes in instrument location or customer locations. And so that's part of it. And then the other big piece is the systems, the capitalization. You guys have heard me talk a lot about the ERP system conversions, and we spent a lot of money on the system conversions that are done. And so, we had to transfer and that's all been capitalized in late Q3, early Q4. And that's -- those 2 things are really driving that higher depreciation when you look at '26 versus '25. So, sorry, I missed that [indiscernible].

Our next question comes from the line of Patrick Donnelly of Citi.

Joe, maybe one for you just on the margin front. Can you talk about the gross margin? They were a little bit soft relative to what we were looking for. I know you called out the tariff piece, maybe a little bit of mix. It would be helpful if you talk through that. And then just the right way to think about the go forward, I guess, those gross and op margins as we work our way through '26, maybe just a little bit of progression and cadence on that front would be helpful.

Yes. Hey, Patrick, so the gross margins in Q4 were down and I would say that it was down due to, I mean, 3 main things. There definitely was some tariff impact. When you think of -- and again, I'm talking about Q4 '24 to Q4 '25, we're down. It's the tariff impact. We had more instrument revenue in Q4 '25 versus the previous year. And then we also had some other, I would say, negative product mix impacts for Q4. When you look at the full year '25, we were actually up 40 basis points for the full year '25 versus '24. And then as you look forward to '26, I would say that we're going to be relatively flat on the GP margin line. And again, we've got some additional tariff impact in there in '26 that you didn't have early in '25 and also some product mix impact. As a good guy, we definitely have some direct procurement initiatives. But I think those direct procurement initiatives are going to start hitting more robustly as you move through '26 and into '27. As I've been saying, these direct procurement initiatives take a little time. They're very complex. So, I do think we're going to get over the short term, as you move from '26 into '27 and '28 even, we're going to see more gross margin improvement. And Brian and I have a goal to get our gross margin really up much closer to 50% as we move through the next couple of years. And that's going to be a combination of the direct procurement initiatives that I just mentioned, as well as you think about LEX. And once we get through the dilutive stages or the early stages of LEX, molecular margins do typically have higher margins than antigen. So, we do expect LEX over time is going to benefit our gross margins.

Yes. Maybe on that point, we left off on LEX, Joe. It might be one for Brian. Just in terms of any milestones we should be keeping an eye out. I know it sounds like dialogue with FDA is continuing to move forward on LEX. Just what we should be looking out for confidence on the time lines and when we should expect to start to see some revenue there.

Yes, I'll ask -- yes, I'll actually ask Jonathan to comment on that since he's in the middle of it.

Yes, sure. Happy to. Thanks for the question, Patrick. Yes, with regards to LEX, we had talked about LEX back in May. We certainly would have hoped to have clearance right about now, but it's not unexpected, especially given it's a brand-new platform, which take a little bit longer through its first FDA cycle. A reminder that this is a CLIA waiver as well. So, we're looking at not only assay, but the hardware, the software, cybersecurity, the usability as well. All indications we have right now is that it's really going according to plan. And I know from our own FDA review submissions, we've seen FDA taking their deep review of the process. So, everything is going according to plan. No issues we see at the moment, just kind of waiting for that to work its way through the rest of the process with the FDA. And then as we spoke about before, once we get the other side of that, we'll be continuing with all of the acquisition activities and timing and processes that are associated with that.

Our next question is from the line of Lu Li of UBS.

Maybe just following up on some of the R&D pipeline that Jonathan just mentioned. I guess like maybe on the VITRO system, it seems like all the new product launches are OUS opportunity. So, I wonder like any plan for the U.S. side? And then also, how should we think about the assay pull for opportunity in the coming years?

Yes. So, we're going to be issuing a press release with more details on this agreement that Jonathan discussed in his remarks. But basically, our OUS markets are becoming a larger part of our business and more important for our growth profile. And we've recognized that we need to strengthen our portfolio to take advantage of the growth opportunities in those markets, and that's what this partnership is designed to do. It provided us a way to move quickly with really some very high-quality solutions for the benefit of our customers. So more to come on that. We'll get some details out in the next few days on that. As for systems based focus on our U.S. markets, they take a little longer to develop. As I mentioned, we now have some financial flexibility to start investing in those new systems that will -- that are at this point, probably years away. Our near-term focus, though, is going to be on really heavily focused on content and menu addition for our current systems.

Yes. And I think, Brian, this is Jonathan. I would add on the U.S. side, obviously, with adding our high-sensitivity troponin assay, that rounds out our offering on the menu side here in the U.S. really well. Brian mentioned earlier in the call and reiterated here our OUS opportunities both on the immunoassay side to round out the menu offering, which is what that partnership helps us with on tenders. And then on the VITRO's 450 that I spoke about earlier, that's really hitting those lower volume segments, but it's also important on that design to hit a particular COGS target that we've done. So, from an OUS perspective, it's fundamentally and strategically about tenders and hitting with a lower piece -- lower cost capital, some of those lower volume segments, which is why you'll hear us continue talking about all the OUS opportunities in front of us.

Got it. And then maybe I will squeeze my 2 short questions into one. On the Lab side, the 7% growth, how much of that is coming out from the instrument? It seems like you have a good instrument quarter. So, I'm wondering how much is coming from that? And then also one on leverage. Any initiative in terms of like the debt refinancing in 2026 that could potentially lower the interest expense?

Hey, Lu, I can take the instrument revenue piece of that. For Q4, the instrument revenue was relatively flat to prior year. So, really, none of that growth is being driven by instrument revenue.

And the leverage.

I'm sorry, what was the -- I...

The question was around leverage.

We just went through a pretty extensive debt refinancing. And at this point, no plans for further refinancing the debt.

Our next question comes from the line of Andrew Cooper of Raymond James.

Maybe first, I just want to drill in on free cash flow a little bit more again. I appreciate guiding to the reported metric. I think that makes it a little bit clear. But even if we add back that $50 million or $60 million you called out of sort of onetime that drags against it, you're still looking to get to like 30% conversion in '26. So, obviously, a little bit shy of that 50-plus longer-term goal. Is that 50-plus still the right bogey? And if so, when should we think about bridging towards that number?

Hey, Andrew, we've been pretty clear that the target there is 50%. I don't think I said over 50%. It's 50%. And I've also -- I thought we've been saying pretty clearly that it's not -- it was never going to be a '26 goal. It was more going to be a run rate within '27 once we get further along with the direct procurement initiatives. And the cash flow goals are really kind of tethered pretty closely to the margin goals. And that's more a mid-'27 thing. So, what we had said was that we would make progress in '26. And so, I think we came in a little bit less than I thought in '25 at 17%. When you look at -- again, that's a recurring free cash flow metric, but we are making progress from that 17% to the 30%. And obviously, as I said, we're going to be -- there's a full core press within the organization on cash flow right now. And we're going to be looking under all rocks to try and find ways to increase cash flow and get ahead of that and do better than that 30%. But that -- right now, that's the bogey we're putting out there for '26.

Yes. I would just add that cash flow is -- yes, I would just add that cash flow is a company-wide focus for us and including incentive -- executive compensation incentives that will directly be tied to cash flow targets for the first time this year. So, it's a major focus for the organization.

Okay. That's helpful. And then maybe just one more on the partnership. I appreciate we'll get some more details, it sounds like relatively soon. But when we think about really what's being solved for there, I know Jonathan just talked about some of kind of getting where you need to on margins or being able to get into tenders. How much of this is, hey, here's the 25 assays that are not available on your existing system and those have kept you out of tenders versus bringing a solution that maybe makes a little bit more economic sense in some of these settings.

Hey, Andrew, this is Jonathan. I'll take that one. So, yes, it's a good read behind the question. A good chunk of it is going to be that tender gap fill if you will. I think the other important thing here is, again, we'll be talking more soon about the specific of the partnership. But one other detail, it's a couple of different systems we're partnering on. So, the other element of this partnership is it's going to get us a little bit higher throughput systems that the partner has. So, it's a big part of tenders for sure, but it's another part of us being able to go upstream a little bit from a customer and a throughput perspective in those OUS markets as well.

Our next question is from the line of Casey Woodring of JPMorgan.

And first, Joe, congratulations on retirement. Maybe following up on Patrick's earlier question on margin progression. How should we think about the direct procurement initiatives hitting the margin line in '26? It doesn't sound like a lot of that's baked in this year unless I misinterpreted your comment there. And I would also be curious to hear what the guide assumes for free cash flow in 1Q. It sounds like you have about $40 million in the bank already that was carried over from last year. So, I guess, how do you see the free cash flow progression from 1Q over the course of the year to get to your guidance range?

Hey, Casey. Thanks. So, we definitely have some direct procurement savings built into the '26 guide, but there are definitely some offsets within GP. Like I said, there's tariff impacts, there's product mix. There's some LEX dilution built into the guide, not significant, but that's definitely an offset. And so that's why we're guiding GP margin to be relatively flat even though there is direct procurement savings into -- or built into the guide for '26. I do think there'll be more direct procurement savings that will go into the '27 guide, but obviously, more to come on that. And as far as free cash flow, and again, just to be clear, we are -- this quarter and for '26, we're now guiding to real cash flow and not this adjusted metric anymore, but we will be providing more color on the onetime cash. Like I said, we're -- the midpoint of our guide for '26 is $140 million of real free cash flow, and there's about $50 million to $60 million of onetime, which gets you to that $200 million for recurring. And I would say that similar to the last 2 years, despite that some of that timing difference between Q4 '25 and Q1 '26 that I mentioned in the script, I still think that the majority of our cash flow is going to be generated in the second half versus the first half of the year. And that's consistent with the last 2 years. I don't think there's really any change there. And so, yes.

Okay. Got it. And maybe as my second question, I just had a few on the high-sense troponin approval on VITROs that you guys called out. Any thoughts on if that could be a meaningful contributor this year to revenue? And I would also just want to ask on the Point of care piece, too. I think you guys had targeted a launch on high sense troponin in Point of care, I think it was in '24. So, any thoughts on potentially getting into that space anytime soon? And then maybe just lastly, across VITROs and Point of care, just curious what the TAM is in high sense troponin and if this could be a real growth area for you guys over the next several years.

Yes. I think -- well, first of all, as it relates to the Point of care high sense troponin, I'm not sure what was communicated there, but it's something that in theory, we'd really like to do. We're still working on a number of technology challenges there to be able to provide that in the United States. We are seeing a strong contribution with the high-sense troponin assay outside the United States. And so, we would like to pursue a pathway to commercialize the assay here in the U.S. As it relates to the Labs high-sense troponin that we launched, by itself, I don't -- it's not really going to have a huge impact on our short-term growth rates. I think over the long-term, it would have become a competitive factor for us. But that said, it will help us compete a little better in the higher volume segments where that particular assay is growing in importance. And so, we're happy to get it on the system. And it will -- it's certainly going to help. It won't hurt, but I don't think we can point to major step function growth there as a result of a single assay.

Our last question for today's call is from Bill Bonello of Craig-Hallum Capital Group.

I just want to go back once more to the cash flow guide and outlook. So, you talked about the onetime uses of cash that are going to occur this year and gave us sort of a proxy for what sort of recurring cash flow could look like. I guess as you consider your plans beyond 2026, it would be helpful to get a sense of whether you're going to have additional sort of what you might consider onetime cash investments that you're going to have to make? Or is $200 million or so the right starting point to be thinking about 2027 free cash flow?

Yes. Bill, it's Joe. So, we have said already that the onetime cash would come down significantly. And you go back to 2024, we had over -- well over -- it was probably like $210 million of onetime cash in 2024. It came down to about $175 million in 2025. And then like I said, the $50 million to $60 million in '26 guide. For '27, I would expect it to be a similar number, probably around maybe $40 million to $50 million of onetime cash in '27. And it's the same 2 topics. It's the Raritan, New Jersey facility shutdown that takes into '27 to complete. And it's the direct procurement initiatives, which will require some onetime resources in the areas of R&D and quality and regulatory. That is also going to go into '27. And so -- but beyond that, I don't have a lot of visibility to other onetime cash at this point that we would utilize. And so, that's all good news. As you think about our free cash flow expanding, and I do think that the free cash flow will expand as our EBITDA margin continues to go up, and we continue to look at the working capital. I do think there is opportunity in inventory in '26 and '27 that we will go after. And then, of course, the onetime cash starts to really go away. And so, as you think about those areas as well as starting to whittle down the interest expense as we either refinance the Term Loan B, which I anticipate us doing at some point this year because it does look like rates are going to come down, that brings down interest expense. And we'll do everything we can to limit reagent rental cash and try to flip customer's cash instrument sales. We've got some initiatives in place to flip that mix a little more. We'll look to limit CapEx. And so, through all those things, all those levers, that's how we get up to that 50% conversion rate of adjusted EBITDA. So, that's sort of the path forward, if that makes sense, hopefully?

Yes. No, that does. And then I guess I just wanted to revisit your comments on gross margin. I thought that as part of your answer and maybe you were talking about full year and not Q4 sort of year-over-year decline in gross margin. But I thought in answer to Patrick's question, you had cited more instrument revenue as one of the factors impacting gross margin. But then later in response to a question that somebody asked about what was instrument -- how much of the -- to what degree was -- were instruments contributing to the higher Lab growth, you said that instrument was kind of flat year-over-year. So, I'm just trying to reconcile the 2.

Yes, you're right. It is -- for Q4 on its own, Bill, it's mostly product mix and tariffs. That's right. It's offsetting.

That will conclude today's Q&A session. So, I'll now pass it back over to Brian Blaser to close us off.

Thank you, operator, and thank you, everyone, for your time and continued interest in QuidelOrtho. To wrap things up, we delivered on our 2025 commitments, executing against the priorities we outlined, strengthening our business, expanding margins and driving solid growth across our portfolio. Looking ahead, our focus remains clear, accelerating growth, expanding margins and strengthening cash flow while further improving the balance sheet. So thank you again, and we look forward to updating you next quarter.