QuidelOrtho (QDEL) Q4 2025 Earnings Transcript

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Date

Wednesday, Feb. 11, 2026 at 5:00 p.m. ET

Call participants

• Chief Executive Officer — Brian J. Blaser
• Chief Financial Officer — Joseph M. Busky
• Vice President, Investor Relations — Juliet C. Cunningham
• Head of Research & Development — Jonathan Segrist

Takeaways

• Revenue -- The Labs business posted 7% growth in Q4 and 6% for the full year, pointing to ongoing demand.
• Regional growth -- LATAM delivered 18%, EMEA 4%, with a 900 basis point margin improvement, and JPAC 6%, while China is projected for low single digit growth in the coming year.
• Point of care -- The business grew 7% in Q4, with triage showing a 16% increase, and the immunohematology business advancing 3%.
• Adjusted diluted EPS -- Reached $0.46 in Q4 and $2.12 for the year, with guidance for 2026 set between $2 and $2.42, factoring in increased depreciation of $20 million, and incremental investments.
• Adjusted EBITDA -- Management projects $630 million to $670 million for 2026, equating to a margin of 23.3%, and a 130 basis point improvement over last year.
• Free cash flow -- Generated $87 million in Q4, and excluding onetime items, recurring free cash flow for the year totaled $100 million, or 17% of adjusted EBITDA, below the 25% target due to ERP issues and late sales collections.
• 2026 free cash flow guidance -- Forecasted at $120 million to $160 million, inclusive of $50 million to $60 million in onetime costs; recurring free cash flow midpoint is approximately $200 million.
• Gross margin -- Up 40 basis points for the full year, but Q4 gross margin declined year over year from adverse tariffs and product mix, with 2026 gross margin expected to remain relatively flat.
• Debt and interest -- Net debt to adjusted EBITDA ratio ended at 4.2x, above target, with interest expense expected at approximately $200 million for 2026.
• Capital spending -- CapEx for 2026 is guided at $150 million to $170 million, with $250 million in depreciation, and an estimated effective tax rate of 24%.
• Product pipeline -- FDA clearance was obtained for the high sensitivity troponin I assay (VITROS) and iDMTS direct antiglobulin test card, and U.S. shipments are expected to start within weeks.
• R&D organization -- The executive team highlighted modernization, increased cross-functional collaboration, and prioritizing programs with the greatest impact to strengthen the pipeline and support sustained growth.
• Lex platform -- The 510(k) and CLIA waiver FDA review for the Lex molecular diagnostics platform is nearing completion; commercialization will begin after clearance, but 2026 revenue contribution from Lex is expected to be minimal and dilutive.
• OUS strategy -- A new partnership expands the immunoassay offering for markets outside the U.S., with over 25 additional assays, supporting competition for large tenders, and a total menu exceeding 70 assays.
• Instrument sales & mix -- Q4 Labs instrument revenue was relatively flat year over year, so growth was driven by other sources; the combo flu/COVID test consistently accounted for over 50% of flu revenue during the past two years.

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Risks

• The low 17% recurring free cash flow conversion in 2025, versus a 25% goal, was due to ERP implementation issues and late sales, both of which affected cash timing and were collected in early 2026.
• Guidance for 2026 accounts for minimal and dilutive revenue from Lex Diagnostics, which management explicitly noted will impact results.
• Net debt to adjusted EBITDA of 4.2x exceeded the company's target leverage range as of year-end, principally due to cash timing on collections.
• A potential national value-based procurement (VBP) program for dry chemistry test strips in China may reduce total company revenue by 0.5%-1% if QuidelOrtho products are included; management currently awaits more details from Chinese authorities.

Summary

Management emphasized delivery on stated 2025 goals and highlighted progress in cost savings and margin improvement initiatives. Product portfolio strength was reinforced through FDA clearances and a strategic OUS partnership targeting tender-driven expansion in non-U.S. markets. Ongoing R&D upgrades were reported, including digital workflow advances and pipeline enhancements.

• Depreciation is set to rise by $20 million, attributed to increased reagent rental placements and ERP system investments, which management clarified as a $0.21-$0.22 EPS headwind.
• Recurring free cash flow in 2027 is projected to increase as onetime outlays decline, and procurement initiatives ramp up; the company maintains a 50% free cash flow to adjusted EBITDA conversion target by the mid-year point of 2027.
• Executive compensation for 2026 will, for the first time, be directly linked to cash flow objectives, underscoring management's intensified focus on this metric.
• Direct procurement and manufacturing optimization efforts continue, but tariff and product-mix headwinds are expected to hold gross margin flat in 2026, with more significant improvement anticipated beyond the current year.

Industry glossary

• VBP (Value-Based Procurement): A Chinese government policy that leverages centralized tenders to lower medical device and diagnostic prices, potentially influencing supplier revenues in affected product categories.
• CLIA waiver: U.S. regulatory designation permitting diagnostic tests to be performed at the point of care in non-laboratory settings based on ease of use and low risk of inaccurate results.
• OUS: Refers to markets outside of the United States, often distinguished by differing regulatory, tender, or reimbursement frameworks.
• Reagent rental: Instrument placement agreements allowing customers to use equipment for free or at low cost in exchange for a commitment to purchase specified quantities of consumable reagents.

Full Conference Call Transcript

Juliet C. Cunningham: Future. That is quite a day to day. To date, our actions have generated. We are pleased with our 2025 performance and progress against our priorities, looking ahead, into attractive returns for shareholders. We are guided by a clear financial and operating framework. Driving above market growth, ex the customer experience and drive effective execution across every dimension of the business. We are sharpening our focus account improvement and positioning the company for long term success. And as teams evolve, leadership transitions naturally occur. Today so for his many contributions to QuidelOrtho Corporation, 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 identified as needing improvement. And we were pleased to welcome Jonathan Segrist 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 is ahead. Jonathan? Thanks, Brian. It is a pleasure to be here today, especially as we share our strong results for both the quarter and the year. As Brian noted, QuidelOrtho Corporation has undergone a significant transformation, and R&D has been central to that journey.

Over the past year, I have had the privilege of leading and advancing our overall R&D organization, including our regulatory and clinical teams. In a short time, we have 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 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 I 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 iDMTS direct antiglobulin test card or DAT card on the Vision immunohematology platform. Combined with our recently cleared Ortho Illusion kit, QuidelOrtho Corporation now offers the only complete gel based DAT solution. From polyspecific to monospecific. Quidel Ortho Results Manager. In addition, in 2025, we launched our new informatics middleware solution, starting with our labs business, Results Manager system brings significant value to our VITROS

Brian J. Blaser: enabling them to manage their laboratory workflow within 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 excite

Juliet C. Cunningham: examples of momentum we generated in multiple platform launches enabled by a smart mix

Brian J. Blaser: strategic partnerships. of organic R&D and inorganic We believe these new platforms, spanning systems, informatics,

Juliet C. Cunningham: and automation will deliver strong

Brian J. Blaser: customer value and drive meaningful asset

Juliet C. Cunningham: been very positive.

Brian J. Blaser: We are 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. With 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 and attractive OUS segments. In molecular, we are 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 made rapid and steady progress in improving the R&D organization and the strength of the product portfolio we are building for the future. And remain focused on continuous improvement as we go forward to deliver on the exciting product pipeline ahead. Now I will turn the call over to Joe to cover the financial results.

Joseph M. Busky: Okay. Thanks, Jonathan. It has been a I am honored to have been a part of this great pleasure working with you, Brian, and the entire with our leadership team. of this team. While my retirement is still months away, I remain fully committed to company. I will sincerely miss the teams I have had the privilege to work so closely with them in the past. Six years. growth margin expansion We have made great strides over the past eighteen months, and I fully expect that we will continue to make progress on our revenue earliest presentation on our website. Total reported revenue for the fourth currency basis.

Our labs business continued to demonstrate durable underlying demand and growing 7% in the fourth quarter. And six very well in 2025. 2% year in the prior year period. A decline of 190 basis points due to tariffs for the full year, prior year. Adjusted diluted EPS was $0.46 in the fourth quarter and $2.12 for the full year, representing growth of 7,000,000 in cash and 80,000,000 in borrowings under our $700,000,000 revolving credit facility. We generated $87,000,000 in free cash flow in Q4. Excluding onetime cash items, we generated

Unknown Analyst: $135,000,000 in recurring free cash flow.

Joseph M. Busky: For the year, we used

Unknown Analyst: 77,000,000 in free cash flow Excluding onetime cash items, we generated $100,000,000 in recurring free cash flow or 17% of adjusted EBITDA. This fell short of our 25% conversion goal primarily due to $15,000,000 to $20,000,000 of ERP system issues and $20,000,000 of sales that occurred late in Q4 both of these receivables were collected in January 2026. debt to adjusted EBITDA ratio was 4.2x, collection timing just At the end of the year, our net which was above our target

Joseph M. Busky: due to cash

Unknown Analyst: continuation 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 $630,000,000 and $670,000,000 which equates to adjusted EBITDA margin of 23.3%, a 130 basis point improvement compared to full year 2025.

We expect gross profit margin to be relatively flat for the full year 2025, and adjusted diluted EPS between $2 and $2.42 Included in this range is approximately $20,000,000 in higher depreciation versus 2025 related to growth in our instrument reagent rental agreements as well as 2025 incremental investments in systems. The full year, we expect $250,000,000 in depreciation.

Joseph M. Busky: We expect strong free cash

Unknown Analyst: flow between $120,000,000 and $160,000,000 which factors in $50,000,000 to $60,000,000 in onetime cash use associated with our New Jersey facility consolidation, and direct procurement cost savings initiative. Interest expense to be approximately $200,000,000 based on current debt

Joseph M. Busky: structure

Unknown Analyst: CapEx to be between $150,000,000 and $170,000,000 and an effective tax rate of approximately 24% for the full year So by 2026, we expect net debt leverage be approximately 3.8x as we progress towards our goal of between 2.5 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 2026, while also investing in our future top line growth. So with that, I will ask the operator to please open up the line for questions.

Operator: Of course. We will now begin our Q&A session. So if you would like to ask a question, you may do so by

Tycho Peterson: Or if you would like to remove your question, please press 2. Our first question comes from the line of Tycho Peterson of Jefferies. Your line is open. Hey,

Unknown Analyst: Hey. Thanks. Wanna hit on free cash flow, you know, the guide here, because

Bill Bonello: it did come in lower than expected in the quarter. And you guys had kind of messaged, I think several different venues, that you were 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 know, you talked about a step down in onetime outlays. In 2026 and the end of the ERP conversion. So maybe just you know, all seemingly good guys in flight. So why are we not seeing better conversion, you know, in the time lines that you have laid out here for cash flow?

Unknown Analyst: Yeah. Hey, Tycho. It is 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

Joseph M. Busky: earlier

Unknown Analyst: for really the two reasons that I mentioned in the script, and that is

Joseph M. Busky: we had about 15 to 20,000,000 of the that system related AR

Unknown Analyst: that we had assumed we were gonna collect in Q4, but, unfortunately, the 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 20,000,000. And, 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 is about $4,045,000,000 dollars of cash that we thought originally would be collected in Q4 that slipped into Q1, January.

We have already collected it, to be clear. So it is timing with Q1 only. And that difference if we had collected that $4,045,000,000 in we would have been we would have been right at our target. Q4, And then as you move to 2026, you know, we have talked about it is in the script. You know, when I talked about the cash flow know, the midpoint of our cash flow range is was a $140,000,000. And I want to be clear, Tycho, that is that is real cash flow. That is not adjusted cash flow. And so when you factor in the onetime items for the New Jersey facility consolidation and the direct procurement.

You know, this is the $50 to $60,000,000 we have had been messaging for several months now. You know, that puts our, if you will, recurring free cash flow at around $200,000,000. 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.

Bill Bonello: Okay. That is helpful. And then maybe to dig in the strong performance in you know, 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 are thinking about that for the year?

Operator: Yeah.

Juliet C. Cunningham: Thanks for the question, Tycho. So if you look at our underlying

Unknown Analyst: growth rates really across the business, you know, I think things look strong. You know, labs was at 7% for the quarter or 6% for the year. Point of care

Juliet C. Cunningham: 7%. We had, you know, strong triage growth at 16% in the quarter.

Unknown Analyst: The IH business was, you know, rock solid at 3% growth.

Brian J. Blaser: For the year. And

Unknown Analyst: if you look across our region our regions, we I think we have really nice regional performance as well. I am would point specifically to EMEA and LatAm wherein EMEA, we grew 4%, but we did it at the same time as we improved the margins by 900 basis points.

Juliet C. Cunningham: LATAM growth was at 18%. JPAC or

Unknown Analyst: solid at 6%. So, you know, as I think about the ability to sustain our growth moving forward, you know, I think about a few things.

Brian J. Blaser: First of all, we have got really solid market

Unknown Analyst: positions at all of our segments. Have excellent brand recognition. We are winning new business. Our renewal rates are high. We as you pointed out in the lab business, we continue to benefit from being under penetrated in immunoassay generally in the lab segment, where our historical strength has always been more in clinical chemistry. So that is a nice growth opportunity for us. And our low OUS market penetration continues to be a growth offer. Opportunity for us, you know, just generally. I think, you know, moving forward, we have got we will have Lex coming into the business.

Brian J. Blaser: We are strengthening our competitive competitiveness here with the

Unknown Analyst: V VETROS 450 and the OUS system partnership that Jonathan discussed. So know, just generally, I am thinking, you know, I am I am bullish on our growth rate moving forward. I think, you know, we are well positioned kind of across our business units

Brian J. Blaser: to perform well.

Bill Bonello: Okay. That is great. And just last one quickly on China. What are you assuming in the guide for the year? And then I will hop off. Thanks.

Unknown Analyst: Low single digit growth at twenty six. Same as 25. Okay.

Bill Bonello: Thank you.

Juliet C. Cunningham: Thank you.

Operator: Our next question is from the line of Jack Mahan of Nephron. Your line is open.

Juliet C. Cunningham: Thanks. Good afternoon, guys. Wanted to pick up where Tycho left off there on China. You know, since the press release you had a couple weeks ago, was wondering if there was any update that you could share in terms of DriveFly and VBP. Yeah. Hi, Jack.

Brian J. Blaser: Nothing really new there. We did put out a pretty extensive

Unknown Analyst: statement on the website that kinda covers the

Brian J. Blaser: all the angles to that. But, you know, just to recap the

Unknown Analyst: the Jiangxi provincial H HSA had

Brian J. Blaser: made a statement that they it was gonna explore

Unknown Analyst: launching a nationalized DBP program, value based procurement program,

Juliet C. Cunningham: for

Unknown Analyst: dry chemistry test strips in 2026. They are And as far as we know, there has still has been no detailed proposal on that. There has been no

Brian J. Blaser: of what products would be included in that or if our products would be included. So we are

Unknown Analyst: know, waiting to hear

Brian J. Blaser: details at this point. You know? And just to reiterate, know, if we think that if our products were included the estimate of the impact might be between half a percent and a percent of total company revenue and know, that is something that we would look to offset somewhere else in the business. So

Juliet C. Cunningham: still waiting to hear more on that.

Unknown Analyst: But no new news to share at this point.

Juliet C. Cunningham: Okay. Appreciate it.

Unknown Analyst: When did the

Juliet C. Cunningham: 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, you know, how much the flu sales in the quarter were A, B, C? I was just wondering if maybe conversion from legacy COVID to ABC may have driven any of the shift you saw in the strength in flu versus the COVID decline?

Unknown Analyst: Yeah. Hey, Jack. It is Joe. You know, the revenue from the combo product or ABC as you refer to it, is still continuing strong, well over 50% of the total flu revenue. And, actually, it is been very consistent for the last two plus years. And so it is it is it the combo test has proven to be to be very durable. Now whether there is you know, some transition, as you mentioned, from stand alone COVID to that, I cannot really speak to that. But, I do know that the combo test as a percentage of the total has been very now for two plus years.

Juliet C. Cunningham: Sounds good. Thank you, guys. Yep.

Operator: Thank you. Our next question is from the line of Andrew Brackmann of William Blair. Your line is open.

Juliet C. Cunningham: Hi, guys. Good afternoon. Thanks for taking the questions. And Joe, I will say my farewell. Until next quarter.

Unknown Analyst: But maybe I will 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 have got interest expense going be higher for the full year. But as you sort of think about the lower end of the range, can you maybe just talk us about some of the assumptions that are embedded here to get you closer to that $2 versus maybe the higher end?

Juliet C. Cunningham: Thanks.

Bill Bonello: Yeah. Hey, Andrew.

Unknown Analyst: You know, the guide that we have put out just now for 2026 has a has a wide range just like it did the, you know, the guide for 2024 and 2025. We unfortunately, because of the respiratory portion of our business, and, you know, the, you know, sort of the 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 is pretty tight on the non respiratory business. As I have been saying to you guys for a long time now, know, that business is super predictable.

And, you know, they we do not need a lot of range on that. So most of the 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 gonna drive it to the low end or the high end Well, the midpoint for respiratory guide is gonna be, like, said, that 50 to 55,000,000 test market. And in the fifth you know, if it drops down to maybe 40, 45, you are gonna go to the low end of the range.

And if you if you veer up to 60, 65, you are gonna go to the high end of the range. And, you know, and, again, you guys know this. We have seen flu markets of all those sizes over the last several years. So that is 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 do not I do not think it is probable we go to that low end.

I think, you know, again, I wanted to look at the midpoint of the range. I think that is 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 $20,000,000 year over year from 2025 to 2026. And so that is you know, that is about a $0.21 $0.22 impact to the adjusted EPS. And so as you think about where that EPS range is for 2026 relative to 2025, you know, that is a big impact.

There is not as much of an impact on interest expense, interest expense is going up I would say, slightly from 2025 to 2026. I would not say it is going up tremendously. Most of that you know, where you might be thinking, is this EPS so low? It is because of the increase in depreciation. Okay. That is very, very helpful.

Juliet C. Cunningham: And then, Brian, maybe a question for you. You started the call sort of with a reflection of your time

Unknown Analyst: 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 the maybe the future areas you are focused on for driving that improvement, specifically as it relates to maybe some cost savings? Thanks.

Juliet C. Cunningham: Well, yeah, you know,

Brian J. Blaser: if you

Unknown Analyst: consider cost savings specific specifically, you know, I am still

Juliet C. Cunningham: you know, very focused on

Unknown Analyst: getting the company to the

Juliet C. Cunningham: you know, 25 plus EBITDA range, 25% EBITDA margin range. And, you know, I am pretty confident in

Brian J. Blaser: our ability to project into that range for a number of reasons.

Unknown Analyst: You know, first,

Juliet C. Cunningham: starting

Unknown Analyst: the in the middle of the year, I think we are gonna see

Brian J. Blaser: a 50 to a 100 basis point improvement just from exiting the donor screening business, know, that we have announced for a long time.

Unknown Analyst: We have got a very rich

Juliet C. Cunningham: pipeline of projects in place. We have been working on these direct and indirect

Brian J. Blaser: procurement projects for some time now. We have got a nice portfolio of projects that span multiple years, as well as our plans to optimize our

Juliet C. Cunningham: manufacturing footprint. Further.

Unknown Analyst: 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 have got other opportunities as we look

Juliet C. Cunningham: globally. And, you know, we do benefit

Unknown Analyst: not only from a growth standpoint,

Brian J. Blaser: when we place integrated systems,

Unknown Analyst: because of the immunoassay volume. But that improves our product mix as the immunoassay margins are higher than our clinical chemistry margins. Think we will see the benefit of margins in less as we start to achieve molecular level margins from that platform as it comes online. And, you know, so I think, you know, we get probably to the mid twenties with a lot of our procurement initiatives, continued staffing optimization, the Raritan New Jersey footprint optimization. Think the high twenties come as less becomes a bigger component of our product mix.

Brian J. Blaser: You know, we still do have, some work to optimize staffing. We have we have done a lot of work there. So you know, those are the things I am I am thinking of on the sort of the cost side of the

Unknown Analyst: the coin, know, on the growth side, you know, we are really turning to can we optimize our portfolio with new menu additions for our existing products and starting to create the financial flexibility that we can start contemplating what our new systems will be you know, that will allow us to project into higher volume segments, and drive, additional growth for the company. So lot of lot of, great things

Brian J. Blaser: you know, ahead of us here, and I think, you know, very positive on both the top and the bottom line.

Juliet C. Cunningham: Hey, Andrew. So let go to the next question, operator. Andrew Go ahead, Joe. Joe.

Unknown Analyst: Andrew, hang on. I Julia just reminded me on your first question that I left out piece of information that I probably should have informed you on that when I talked about the higher depreciation 2026 versus 2025, the $20,000,000, I probably should have mentioned that is driven by really two main things. It is the reagent rental capitalization in 2025 was about 14% higher than in 2024, and so we had a no. This is a good thing. You know, we are placing more boxes and instrument location or customer locations. And so that is part of it. And then the other big piece is the systems. Capitalization.

You guys have heard me talk a lot about the ERP system conversions, and we spent a lot of money on these system conversions. That are done. And so we had to transfer all, and that is all been capitalized. In late Q3, early Q4, and that is those two things are really driving that higher depreciation when you look at 2026 versus 2025. So sorry I missed that the first time.

Juliet C. Cunningham: Okay. Thanks for the color. Thank you.

Operator: Thank you. Our next question comes from the line of Patrick Donnelly of Citi. Your line is open.

Juliet C. Cunningham: Hey, guys. Thank you for taking the questions.

Unknown Analyst: Joe, maybe one for you just on the margin front. Can you talk about the gross margins? 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. Would you also please talk through that? And then just the right way to think about the go forward, I guess, gross and op margin as we work our way through 2026, maybe just a little bit of progression and cadence on that front would be helpful.

Bill Bonello: Yeah. Hey, Patrick.

Unknown Analyst: The gross margins in Q4 were down and I would say that it was down due to, I mean, three main things. There definitely was some tariff impact. When you think of and again, I am talking about Q4 2024 to Q4 2025, we are down. It is the tariff impact We had more instrument revenue in Q4 2025 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 2025, we were actually up 40 basis points, for the full year 2025 versus 2024.

And then as you look forward to 2026, I would say that we are gonna be relatively flat on the GP margin line again, we have got some additional tariff impact in there. In 2026 that you did not have early in 2025. 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 you know, more, robustly as you move through 2026. Into 2027. That has been say as I have been saying, these direct driven issues take a little time. They are very complex.

Juliet C. Cunningham: So I do think we are gonna get

Unknown Analyst: over, you know, the short term as you move from 2026 into 2027 and 2028 even we are gonna see more gross margin improvement. And Brian and I have a goal to get our gross margin really much closer to 50% as we move through the next couple of years. And that is gonna 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 marks is do typically have higher margins than antigen. So we do expect LEX over time is gonna benefit our gross markets. Yeah. Maybe on that point, we left off on Lexro.

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 has continued to move forward on Lex. Just what we should be looking out for comp on the timelines and

Juliet C. Cunningham: Thank you, guys.

Unknown Analyst: when we should expect to start to see some rev there? Yeah. I will ask yeah. I will actually ask Jonathan to comment on that since he is in the middle of it.

Brian J. Blaser: Yes, sure. Happy to. Thanks for the question, Patrick. Yes, with regards to you know, we had talked about Lex back in May. We certainly would have hoped to have Clarence right about now, but it is not unexpected, especially given it is a brand new platform.

Juliet C. Cunningham: Platform.

Brian J. Blaser: Which take a little bit longer through its first FDA cycle. You know, reminder that this is a CLIA waiver as well, so they are looking at not only assay, but the hardware, the software, cybersecurity, the usability as well. All indications we have right now is that it is it is really going according to plan. And I know from our own FDA, review submissions, we have we have seen FDA taking their deep review of the process. So everything is going according to plan. No issues we see at the moment. Just kinda 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 will be continuing with all of the acquisition activities in timing and processes that are associated with that.

Juliet C. Cunningham: Thank you. Thank you.

Operator: Our next question is from the line of Lu Li of UBS. Your line is open. Great. Thank you for taking my questions. Maybe just following up on some of the R&D pipeline that Jonathan just mentioned. Guess, like, maybe on the retail 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 pool for opportunity in the coming years?

Juliet C. Cunningham: Yeah. So we are we are gonna be issuing a press

Brian J. Blaser: release with more details on this agreement that Jonathan discussed in his remarks. But know, basically, our OUS markets are becoming a larger

Unknown Analyst: part of our business and more important for our growth profile. And, you know, we have recognized that

Brian J. Blaser: know, we need to strengthen our portfolio

Unknown Analyst: to take advantage of the growth opportunities in those markets

Brian J. Blaser: and that is what this partnership is designed to do.

Unknown Analyst: It provided us a way to move quickly with really a some very high quality solutions for the benefit of our customers. So

Brian J. Blaser: more to come on that. We will, we will get some details out in the next few days, on that.

Juliet C. Cunningham: You know, as for

Unknown Analyst: systems based focus on our U.S. markets, they take a little longer to develop

Brian J. Blaser: As I mentioned, you know, we now have some financial flexibility to start investing in those, you know, new systems that will that are, you know, at this point, probably years away. Our near term focus, though, is gonna be on

Unknown Analyst: you know, really heavily focused on content and menu addition for our current systems.

Brian J. Blaser: Yeah. And I think, Brian, this is Jonathan here. I would add you know, 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 on the immunoassay side to round out the menu offering, which is what that partnership helps us with on tenders. And then on the VITROS 450 that I spoke about earlier, that is really hitting those lower volume segments, but it is also important on that on that design to hit a particular COGS target we have done.

So from an OUS perspective, it is it is fundamentally strategically about tenders and hitting with a lower piece lower cost capital some of those lower volume segments, which is why you will hear us continue talking about all the OUS opportunities in front of us.

Operator: Got it. And then maybe I will squeeze, like, two 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 am wondering how much is coming from that. And then and then also one on leverage. Any initiative in terms of like the debt refinancing in 2026 that could potentially lower the interest expense? Thank you.

Juliet C. Cunningham: Hey, Lou.

Unknown Analyst: Can take the instrument revenue piece of that. For Q4, the instrument revenue was, relatively flat the prior year. So, really, none of that growth is being driven by instrument revenue.

Juliet C. Cunningham: K. And the leverage

Unknown Analyst: Oh, I am sorry. What was the I said the yeah. The

Juliet C. Cunningham: question was around leverage. We do not we just, went through our

Brian J. Blaser: pretty extensive debt refinancing. And then at this point, no plans for further

Juliet C. Cunningham: refinancing the debt.

Operator: Okay. Got it. Thank you. Okay.

Juliet C. Cunningham: Thank you.

Operator: Our next question comes from the line of Andrew Harris Cooper of Raymond James. Your line is open.

Juliet C. Cunningham: Hey, everybody. Hey, everybody. Thanks for the questions. Maybe first, just wanna drill in on free cash flow a little bit more again. You know, appreciate

Brian J. Blaser: guiding to the reported metric. I think that makes it a little bit clear. But even if add back that $50,000,000 or $60,000,000 you called out of sort of onetime that drags against it, you are still looking to get to, like, 30% conversion in 2026. So obviously, a little bit shy of that 50 plus longer term goal. Is that 50 plus

Juliet C. Cunningham: still the right bogey? And if so, when should we think about know, bridging towards that number? Hey, Andrew.

Unknown Analyst: We have been pretty clear that the target there is 50%. I do not think I said over 50%. It is 50% And I have also I thought we have been saying pretty clearly that it is it is not it was never gonna be a 2026 goal. It was more gonna be hit a run rate within 2027 once we get further along with, the direct procurement initiatives. You know, the cash flow goals are really kinda tethered pretty closely to the margin goals. And that, you know, that is more a mid 2027 thing. So what we had said was that we would make progress. In 2026.

And so I think you know, we came in a little bit less than I thought in 2025 at 17% When you look at again, that is a recurring free cash flow. Metric. But we are making progress on that 17% to the 30%. And, obviously, as I said, we are gonna be you know, there is a full court press within the organization on cash flow right now, and, we are gonna be looking under all rocks try and find ways to increase cash flow. And get ahead of that and do better than that 30%. But that right now, that is the bogey we are putting out there for 2026. Yeah. I would just add that Okay.

You know, cash

Brian J. Blaser: cash flow is yeah. I would just add that cash flow is a company wide focus for us, and you know, including

Unknown Analyst: incentive executive compensation incentives that will

Brian J. Blaser: directly be tied to cash flow targets for the first time this year. So it is a it is a major focus for the organization.

Juliet C. Cunningham: Okay. That is helpful. And then maybe just one more on the partnership. Appreciate we will get

Brian J. Blaser: some more details, it sounds like, relatively soon. But

Juliet C. Cunningham: we think about really what is 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.

Brian J. Blaser: How much of this is hey. Here is the 25 assays that are not available on your existing system, and those have kept you out

Juliet C. Cunningham: of tenders, versus

Brian J. Blaser: bringing a solution that maybe makes a little bit more economic sense in some of these settings.

Juliet C. Cunningham: Yeah. Andrew, this

Brian J. Blaser: Jonathan. I will take that one. So, yeah, it is good read behind the 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 will we will be talking more soon about the specific of the partnership. But one other detail it is a couple of different systems we are partnering on. So the other element of this partnership is it is gonna get us a little bit higher throughput systems that the partner has. So it is it is a big part tenders for sure, but it is another part of being able to go upstream a little bit.

From a customer and a throughput perspective in those OUS markets. As well.

Juliet C. Cunningham: Okay. I will stop there. Thank you. Thank you.

Operator: Our next question is from the line of Casey Woodring of JPMorgan. Your line is open.

Juliet C. Cunningham: Great.

Unknown Analyst: Thank you for taking my questions. 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 '20 It does not sound like a lot of that is baked in this year unless I misinterpreted your comment there. I would also be curious to hear what the guide assumes for free cash flow in 1Q. Sounds like you have about $40,000,000 in the bank already that was carried over from last year. So guess how do you see the free cash flow progression from 1Q over the course of the year to get to the year guidance range? Hey, Casey. Thanks.

So we definitely have some direct procurement savings built into the 2026 guide.

Bill Bonello: But

Unknown Analyst: there are definitely some offsets within GP Like I said, there is some there is tariff impacts. There is product mix. There is some, Lex dilution, built into the guide. Not significant, but there is that is definitely an offset. And so that is why we are guiding margin to be relatively flat even though there is direct procurement savings into built into the guide for twenty six. I do think there will be more direct procurement savings that will go into the 2027 guide, but, you know, obviously, more to more to come on that.

And as far as free cash flow, and again, just to be clear, we are you know, this quarter for 2026, we are now guiding to real cash flow. And not this adjusted metric anymore. But we will we will be providing more color on the onetime cash. Like I said, we are gonna midpoint of our guide for 2026 is a $140,000,000 of real free cash flow, and there is about $50 to $60,000,000 of onetime, which it gets you to that $200 for recurring And I would say that similar to the last two years, despite some of that timing difference between Q4 2025 and Q1 2026 that I mentioned, in the script.

I still think that the majority of our cash flow is gonna be generated in the second half versus the first half of the year. And that is consistent for the with the last two years. I do not think there is really any change there. And so yeah.

Juliet C. Cunningham: Okay. Got it.

Unknown Analyst: Maybe as my second question, I just had a few on the Hisense troponin approval on VITROS that you guys called out. Any thoughts on if that could be a meaningful contributor, this year

Bill Bonello: to revenue? And

Unknown Analyst: I would also just wanted to ask on the point of care piece too. I think you guys had targeted a launch on Hisense troponin in point of care. I think it was in 2024. So any thoughts on potentially getting into that space you know, anytime soon? And then maybe just lastly, across VITROS standpoint of care, just curious what the TAM is in Hisense troponin and if this could be a real growth area for you guys over the next several years. Thank you.

Juliet C. Cunningham: Yeah. I think

Brian J. Blaser: well, first of all, as it relates to the point of care, high sense proponent, I am I am not sure what was communicated there. But, you know, it is something that

Juliet C. Cunningham: in theory, it is

Brian J. Blaser: really like to do. We are still working on a number of technology challenges there to be able to

Unknown Analyst: provide that in the United States. We are seeing a strong contribution with the high sense troponin assay outside the United States And so, you know, we would like to pursue a pathway to commercialize the assay here in the U.S. As it relates to the labs, ISO and troponin that we launched, you know, by itself, I do not

Juliet C. Cunningham: it is not

Unknown Analyst: really gonna have a huge impact in our short term growth rates. I think over the long term, it would have become a competitive factor for us. But that said, you know, it will help us compete a little better in the higher volume segments where that particular assay is, you know, growing in importance. And so, you know, we are we are happy to get it on the on the system. And, know, it will it will it is certainly gonna help. It will not hurt

Brian J. Blaser: I do not think we can point to, you know,

Unknown Analyst: you know, major step function growth there as a result of a single assay.

Juliet C. Cunningham: Got it. Thank you. Thank you.

Operator: Our last question for today's call is from Bill Bonello of Craig Hallum Capital Group. Your line is open.

Juliet C. Cunningham: Hey, guys. Thanks.

Unknown Analyst: Just wanted to go back once more to the cash flow

Bill Bonello: guide and outlook. So you talked about the, you know,

Unknown Analyst: the one time, uses of cash that are gonna occur this year and gave us sort of a, you know,

Brian J. Blaser: proxy for, you know, what

Juliet C. Cunningham: sort of

Unknown Analyst: 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 are gonna have, you know, additional

Brian J. Blaser: you know, sort of what you might consider one time

Unknown Analyst: cash investments that you are gonna have to make, or is you know, $200,000,000 or so the right starting point

Bill Bonello: to be thinking about 2027? Free cash flow.

Unknown Analyst: Yeah. Hey, Bill. It is Joe. So we have we have said already that the, you know, the onetime cash would come down significantly. And you go back to 2024 we had over well over that was probably, like, $210,000,000 of onetime cash in 2024. It came down to about a $175 in 2025. expect it to be a similar number, probably around And then, like I said, the $50 to $60,000,000 in 2026 guide. For 2027, I would you know, maybe $40 to $50,000,000 of onetime cash and 2027. And it is the same the same two topics. It is the it is the Raritan, New Jersey facility shutdown that takes into 2027 to complete.

And I see direct procurement initiatives, which were require some onetime resource in the areas of R&D and quality and regulatory. That is also gonna go into 2027. And so but beyond that, I do not have a lot of visibility to other onetime cash at this point that we would that we would utilize. And so that is all good news as you think about our free cash flow expanding. And I do think that the that the free cash flow will expand as our EBITDA margin continues to go up. And we continue to look at working capital.

I do I do think there is there is opportunity in inventory in 2026 and 2027 that we will we will go after. And then, and then, of course, the onetime cash starts to 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 with because it does look like rates are gonna come down. That brings down interest expense and we will do everything we can to limit reagent rental cash and try to flip customers in cash instrument sales.

We have got some initiatives in place to flip that mix a little more. We will look to limit CapEx. And so and so through all those things, all those levers, you know, that is how we get up to that, you know, that 50% conversion rate of adjusted EBITDA. So that is that is sort of the path forward.

Juliet C. Cunningham: If that makes sense, hopefully.

Bill Bonello: Yeah. No. That does. And then

Unknown Analyst: I guess I just wanted to revisit your comments on gross margin. I

Juliet C. Cunningham: I thought that

Bill Bonello: as part of your answer, and maybe you were talking about full year and not the Q4 you know, sort of year over year decline in gross margin. But

Unknown Analyst: I thought in answer to Patrick's question, you had cited more instrument revenue as one of the factors impacting

Bill Bonello: the gross margin. But then later in response to a question that somebody asked about, you know, what words instrument how much of the, you know,

Unknown Analyst: to what degree was it were instruments contributing to the higher lab growth? You said that, you know, instrument was kinda

Bill Bonello: flat year over year. So I am I am just trying to reconcile the two.

Unknown Analyst: Yeah. You are it you are right. It is it is for Q4 on its own, Bill. It is mostly product mix and tariffs.

Juliet C. Cunningham: That is right. It is offsetting. Okay.

Bill Bonello: Okay. Yep.

Juliet C. Cunningham: Okay. That is

Unknown Analyst: all we had. Thanks.

Juliet C. Cunningham: Thank you, Bill. Thanks, Bill. Thank you.

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

Juliet C. Cunningham: Thank you, operator, and thank you, everyone, for your time and continued interest in Vital Ortho. To wrap things up,

Unknown Analyst: 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.

Juliet C. Cunningham: Thank you.

Operator: That will conclude today's call. Thank you for your participation. You may now disconnect your line.

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