Ortho Clinical Diagnostics Holdings plc (OCDX) Q3 2021 Earnings Call Transcript

Ortho Clinical Diagnostics Holdings plc (OCDX)
Q3 2021 Earnings Call
Nov 03, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Everyone, welcome to the Ortho Clinical Diagnostics third quarter 2021 earnings conference call and webcast. At this time, all participant lines are in a listen-only mode. For those of you participating on the conference call, there will be an opportunity for your questions at the end of today's prepared comments. Please note that this conference is being recorded.

An audio replay of the conference call will be available on the company's website within a few hours after this call. I would now like to turn the call over to Bryan Brokmeier, vice president of investor relations. Bryan, you may begin.

Bryan Brokmeier -- Vice President of Investor Relations

Thank you, operator. Good afternoon, everyone, and welcome to the Ortho Clinical Diagnostics third quarter earnings conference call. With me today to discuss our financial results are Chris Smith, Ortho's chairman and CEO; and Joe Busky, Ortho's chief financial officer. Mike Iskra, our EVP of commercial excellence and strategy, will join us on the Q&A portion of the call.

This conference call is being simultaneously webcast on the Investors section of our website, and a version of today's presentation can be downloaded there. Before we begin, I will cover our safe harbor statement. Some of the statements we will make during this call about the company's future expectations, plans and prospects constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, which provides a safe harbor for such statements. Our use of forward-looking statements is subject to a number of risks, uncertainties, and other factors that could cause actual results to differ materially from our current expectations.

These risks and uncertainties include, but are not limited to, those factors identified on Slide 2 of today's presentation and our other filings with the SEC. Please refer to our SEC filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. We cannot assure you that the forward-looking statements we make today will be realized. We undertake no obligation to update any forward-looking statements to reflect future events, developments, or changed circumstances or for any other reason, except as required by law.

Also during today's call, there will be a discussion of some items that do not conform to U.S. generally accepted accounting principles, or GAAP. Please see Slide 3 for a list of these non-GAAP measures, including, but not limited to, core revenue, constant currency, EBITDA, adjusted EBITDA, adjusted free cash flow, and adjusted diluted earnings per share. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the appendix to the investor presentation and the press release issued this afternoon, both of which are available in the Investors section of the Ortho website.

In addition, on today's call, we will refer to our core and our noncore business, our clinical laboratories, also known as clinical labs. The transfusion medicine businesses represent our core business. Our noncore business is comprised of our contract manufacturing and licensing revenue. Lastly, unless stated otherwise, all year-over-year revenue growth rates, including revenue growth ranges, given on today's call are given on a comparable constant currency basis.

Now I'd like to turn the call over to Chris Smith, Ortho's chairman and CEO. Chris?

Chris Smith -- Chairman and Chief Executive Officer

Thanks, Bryan, and good afternoon, everyone. It was another great quarter for Ortho and excited to be able to share our results. I always love to start all our presentations with this slide which talks about the mission and the credo of the company, Because Every Test is a Life, and this is why we do what we do on a daily basis. We embrace this, and it's a critical role in the role that we play in the healthcare system every single day.

To give you an example, today we'll help about 800,000 patients around the world. And I just want to thank our teammates around the world for everything they do every day to make a difference in those patients' and those clinicians' lives. With that, let's get into the third quarter results. We'll start with Slide 5.

Core revenue grew 13% in constant currency to $509 million, with the strength in both our clinical labs and our transfusion medicine business. Our base business was up 16%, excluding 3 percentage points of headwind from COVID tests, reflecting underlying strength in our base business. Therefore, we have raised our full year revenue growth guidance to 14% to 15% from the prior 10% to 12% for the full year revenue. In addition to strong revenue growth, adjusted EBITDA grew 17% to $140 million, representing a margin expansion of 25 basis points to 26.7%.

And adjusted earnings per share is up 50% year over year to $0.21. We are very pleased with our continued resilience over the last couple of years, even now as COVID tests have shifted to growth headwind. This continued momentum in our business is a clear result of our dedication to customers and the patients that they serve. We talk about the importance of lifetime customer value and the long-term relationships that we build with our customers, and I'm even more confident now that this is resonating in the marketplace and is reflected in our results.

I'll get into more of that later on in the call. Continuing with our third quarter performance, let's look closely at our geographies, on Slide 6. The Americas, our largest geography, grew 15%. EMEA grew 13%, with Western Europe up 9%.

Greater China grew 10%. And the other, which is really made up of Japan and Latin America -- I mean, excuse me, Japan, and Asia Pacific, grew 16%. In the U.S., commercial growth excluding COVID assays was up 13%, driven by strong instrument placements, especially of our integrated systems, our menu expansion, and our revenue reoccurring pull-through, as well as our CPS partnership in our transfusion medicine business. In EMEA, growth excluding COVID assays was up 14%, driven by strength across our clin labs business.

This is the fourth consecutive quarter of growth in Western Europe, following five years of declines. We remain encouraged by the continued strength in Western Europe, which continued to regain ground in the market as a result of leadership changes we implemented over the last few years and our commercial excellence program. Greater China grew double digits for the third quarter in a row, with particular strength in our immunoassay business. While our immunoassay business was up 20%, we have not seen full recovery in the routine clinical chemistry testing.

Our install base grew 6%, and our integrated systems' growth was 13%, and these are very good indicators for future accelerated growth. In addition, our distributor inventory levels are at or below historic levels. We are incredibly pleased with the growth in both the developed and the emerging markets, which grew 12% and 19%, respectively, and growth was particularly strong in India and Latin America. In summary, our team around the world continues to successfully execute on our growth strategy that we launched in 2019.

Next, on Slide 7, we remain steadfastly focused on executing against our three strategic priorities to drive profitable, sustainable growth and shareholder value. These priorities are product innovation, commercial excellence, and operational efficiencies. We continue to make progress against each during the third quarter and let me cover just a couple of the highlights. Beginning with product innovation, as we discussed last quarter, we received Emergency Use Authorization in the U.S.

for our quantitative COVID spike antibody assay. We're the only company at this point that has that EUA. Multiple studies are underway to advance our understanding of COVID-19 immunity at individual levels, not just at populations and segments, and we believe these studies will support further recommendation from regulatory bodies around the world. Turning to our second priority, global commercial excellence, our commercial excellence program continues to improve our execution.

In the third quarter, we delivered 16% growth in the integrated install base. This is driving strong growth in our immunoassay business, which was up 14% excluding COVID-related revenue. We continue to lead with service as a key differentiator. And as an example, in the recently published ServiceTrak awards, and ServiceTrak, as you may recall, is a third-party independent agency that surveys hospital customers, our net promoter score was 22 points higher than the next closest competitor, a true reflection of where we stand in the eyes of customers around the world.

And finally, our third priority, operational efficiency. As part of our follow-the-sun approach, we're expanding our global footprint in India. Through this investment in the future, we continue our steadfast focus on innovation, customer excellence and emerging market expansion, while also bringing efficiency, scale, and cost savings to our organization. Establishing shared service centers in different geographies and time zones around the world allows us to operate around the clock and, thereby, innovate faster.

It will also position service and support teammates closer to our customers. This center in India will allow us to anticipate and quickly meet customer needs with innovative products and industry-leading services. It is designed to guide our organization to be more agile and adaptive company and also enable continuous reinvestment in our growth. Returning to the big picture, on Slide 8, I would like to highlight our strong growth trajectory and our integrated install base growth, as well as our lifetime customer value which underpins our strategy.

As illustrated in the top chart, the growth trajectory of our core business reached an inflection point in 2019 when we pivoted from a value-based strategy to a new growth strategy as our integrated systems penetrated the market and pulled through reoccurring revenues and our commercial excellence programs began their execution. The key driver is very clear-noted in our integrated install base growth found in the bottom chart. Our integrated install base growth accelerated with the launch of our XT7600 and the concurrent sale of refurbished 5600s in emerging markets. This sustained double-digit growth in our integrated install base drove the overall growth of our clinical lab install base.

We see a significant opportunity to carry this strength forward as we continue into the fourth quarter and into 2022. That integrated install base growth is important because of our lifetime customer value, which is illustrated on Slide 9. Lifetime customer value is all about building long-term relationships with our customers through the strong clinical performance of our assays, our instruments' ease of use, and our reliability of our instruments. It's also part of our best-in-class customer service and our low total cost of ownership.

It is this focus on lifetime customer value that allows us to have an average customer relationship of greater than 13 years and leveraging these long-term relationships to replace our install base of stand-alone systems with integrated systems, and that's a key source of growth for the company. The penetration of the market with our integrated analyzers is fundamental to our growth strategy, and that's because our integrated systems pull through 65% more revenue than our stand-alone systems. Our integrated install base continues to grow double digits. Given that our integrated install base is still just 26% of our total Clin Labs install base, we believe we still have a lot of room for growth in the coming years.

Lastly, Slide 10 illustrates how we are able to pull through so much reoccurring revenue on these integrated systems compared to a stand-alone. In 2020, our clinical labs' revenue mix was weighted heavily toward clinical chemistry, with a 62%-38% split, while the broader market was the complete reverse, with 68% of the revenues from immunoassays. We believe this mismatch between our revenue mix and the proportion of the broader market represents a significant growth opportunity for us as we continue to expand our market share within IA and as we penetrate the market with our integrated instruments. This allows us to leverage our recently expanded test menu and execute on our commercial excellence program globally.

In the third quarter, our immunoassay revenue was up 14%, excluding COVID-related revenue. With that, I'd like to turn the call over to Joe to further discuss our Q3 financial results and our 2021 outlook. Joe?

Joe Busky -- Chief Financial Officer

Thanks, Chris, and good afternoon, everyone. I'll begin with a bit more detail on our operating results for the quarter, starting with a breakdown of our revenues, on Slide 11. In the third quarter, we had total revenue of $523 million, an increase of 14.3% in constant currency. Currency translation increased sales growth by 150 basis points, resulting in 15.8% reported sales growth.

Core revenue, which excludes contract manufacturing and collaboration revenue, increased 13% on a constant currency basis to $509 million. Note that the COVID-19 pandemic has impacted our quarterly seasonality, and therefore, third quarter core revenue was up 5% sequentially from the second quarter. The substantial revenue growth in the third quarter was primarily driven by the strong recurring revenue pull-through on the instruments we placed over the last couple of years across our geographies in both Clin Labs and Transfusion Medicine. Our clin lab business generated $12 million in COVID assay-related revenue, which was down from $21 million in Q3 of last year, representing approximately a 200-basis point headwind on total company core growth.

And COVID assay revenue was actually down $5 million sequentially from Q2 of this year. Turning to our Q3 performance by line of business, clin labs revenue grew 10% in the quarter, largely driven by double-digit growth across all major regions, excluding COVID assay revenue. In transfusion medicine, we grew 21%, driven by strong growth in the Americas, China, and other Asia Pacific countries. And as a reminder, the third quarter benefited from our new partnership with CTS, which went live in Q1 of this year.

Noncore revenue in the third quarter grew to $13.6 million from $7.8 million. This noncore revenue in the quarter includes the benefit of an $8.5 million final arbitration award related to one of our collaboration agreements in the U.S. Now turning to our performance by geography, on a constant currency basis Americas revenue grew 15%, including 14% growth in the U.S.; EMEA grew 13%, including 9% growth in Western Europe; and Greater China grew 10%; and other, which again includes Japan and other Asia-Pac countries, grew 16%. Looking at our revenue by category, recurring revenue, which includes reagents, service, and other consumables, grew 14%, driven by strength in both clin chemistry and immunoassays, excluding COVID assay revenue, as well as donor screening.

Instrument revenue grew 15% in the quarter, driven by placement of our integrated clin lab instruments and our immunohematology instruments. Now turning to Slide 13, I'd like to comment briefly on our third quarter financial performance versus the prior year. We delivered another solid quarter of performance below the top line, with improvements in gross margin, opex, and free cash flow in the quarter. Gross profit margin for the quarter was 51.7%.

This is a 360-basis-point increase versus Q3 '20, 80 basis points of which is due to the impact from the previously mentioned arbitration award and the remaining 280 basis points is made up of currency translation, volume, lower manufacturing costs, partially offset by a negative impact from mix, primarily from the lower high-margin COVID-related revenue. Additionally, within both cost of sales and operating expenses we have seen higher spot air freights, as we've previously discussed. This trend continues, but we are actively managing and monitoring the situation, and we've included these higher costs in our guidance. Moving down the P&L, sales, marketing and administrative expense as a percentage of revenue was flat year over year, at 27% of revenue.

Adjusted EBITDA grew 17% to $140 million, and adjusted EBITDA margin expanded 25 bps year over year, to 26.7%, primarily driven by positive mix and our placement of integrated systems, efficiency improvements, and the successful execution of our value capture program. Now if you exclude the arbitration award I mentioned a minute ago, which was recognized in noncore revenue, but we back out of adjusted EBITDA, our adjusted EBITDA margin would have increased approximately 50 basis points in the quarter. Net interest expense for the period was $36 million, a decrease of $13 million, as anticipated, due to lower average outstanding debt balance and lower interest rates. Our provision for income taxes was $6 million, compared to a benefit of $10 million in the year-ago period.

We continue to expect cash taxes for the year to be approximately $20 million. Our adjusted earnings per fully diluted share for the third quarter increased 50% year over year to $0.21, driven by our solid operating performance, as well as lower interest expense. And on a GAAP basis, we reported EPS of $0.06 per share, compared to a net loss per share of $0.20 in Q3 of last year. And positively, this was our first quarterly GAAP profit since 2019.

Now turning to free cash flow, capital deployment, and balance sheet, on Slide 14, in the third quarter we generated $56 million in adjusted free cash flow, after funding $8 million in capital expenditures. Our days sales outstanding came in at 41 days, an improvement of 20 days compared to the third quarter of last year. Now this includes the securitization of $75 million in the U.S. that we talked about last quarter.

And without the benefit of this financing transaction, our DSO still would have improved by seven days compared to the third quarter of last year. And as I said on the second quarter call, we expect cash generation in the second half of the year to be greater than $100 million. Our strong cash generation enabled us to continue to deleverage our balance sheet and reduce our net debt-to-EBITDA ratio to 3.7 times, down from four times at the end of Q2. Given the strength of our business performance, we continue to expect to reduce this leverage ratio by at least a half-turn per year, going forward, as we move toward our more normalized leverage range of 2.5 to three times, while maintaining flexibility for strategic M&A opportunities.

We ended the quarter with cash and cash equivalents of $256 million and total debt of $2.3 billion. Turning to Slide 15, let me remind you that continued debt reduction is just one facet of our balanced capital deployment strategy. We are actively evaluating organic and inorganic growth opportunities that would complement our core business, further increase operating leverage and give us new or additional exposure to high-growth markets. While we are guided by our focus on the continued deployment of industry-leading and innovative solutions for patients around the world, we believe that our expertise gained through our highly collaborative partnerships, coupled with our market-leading position in the attractive IVD space and a healthy balance sheet following our January IPO, provide us with an excellent platform to pursue mostly bolt-on acquisitions to accelerate profitable growth, going forward.

Now turning to our outlook for the remainder of the year, on Slide 16, first, I want to provide some broader context on our fourth quarter and the full year '21 guidance. We saw very strong demand through the first three quarters of this year. And given positive utilization trends, as well as leading indicators, including forecasted inpatient admissions, we expect continued strength in the fourth quarter of this year. We expect minimal COVID assay revenue in the fourth quarter of '21, compared to $26 million in the fourth quarter of last year, representing up to a 500-basis point headwind on our total company growth, core growth, in Q4.

The fourth quarter 2020 included an extra week under our fiscal period, which we estimate positively impacted sales growth by approximately 2 percentage points. Now consequently, we are raising our '21 guidance as follows. Core revenue is expected to grow 14% to 15% on a constant currency basis to $2 billion to $2.020 billion, compared to our prior guidance of 10% to 12% constant currency growth to $1.95 billion to $1.98 billion. At current rates, currency translation is expected to increase our full year sales growth by approximately 2 percentage points.

Adjusted EBITDA is expected to grow 19% to 20% on a reported basis to $542 million to $547 million, an increase from our prior range of $526 million to $534 million. Adjusted diluted EPS is now expected to be $0.76 to $0.78 per share, an increase from our prior guidance of $0.67 to $0.72, based on a full year of diluted weighted average share count of 235 million. Now before turning it back over to Chris, I'd like to discuss supply chain disruptions. Global supply chain challenges, combined with the strength of our business over the last several quarters is putting increased demand on our supply chain.

Our teammates have done a fantastic job implementing many initiatives in early 2021 to mitigate our exposure caused by the global pandemic, as well as our accelerated growth in our core business. We have factored in expected supply chain challenges into our guidance. With that, I'll turn the call back over to Chris to make a few summary comments. 

Chris Smith -- Chairman and Chief Executive Officer

Thanks, Joe. Great update on the quarter. And look, we've shown this slide before, but it really is the investment thesis. And we continue to believe that Ortho is a fantastic investment.

Number one, because we are a pure-play IVD, and it is a highly attractive and growing market. Obviously, the second thing, we think we have very unique and clear differentiators in the market, especially around our lifetime customer value, our service, and our reoccurring revenue stream, which is now approximately about 93%. And we have strong momentum, with renewed focus on profitable growth, which we continue to show in the quarterly results. On that, let me take the call back to Bryan, and we will turn it into Q&A.

Bryan Brokmeier -- Vice President of Investor Relations

OK. Operator, we'll take the first question. 

Questions & Answers:

Operator

Thank you. Our first question comes from Tycho Peterson of J.P. Morgan. Your line is open.

Tycho Peterson -- J.P. Morgan -- Analyst

Hey, Mike. Hey, Chris, I want to start with China. Last quarter, you talked about it being slower to return. I know you were still up 10% in Greater China.

But obviously, there's a lot of focus on procurement, tenders, local competition. Kind of two things. China 2025 and the local competitors and then kind of these volume-based tenders where they're trying to capture some of the high-value, low-volume tests, similar to what they did with pharma and four-plus-seven. So maybe can you touch on those dynamics? Are you viewed as a local competitor in China at this point? And then how do you think about the tender process?

Chris Smith -- Chairman and Chief Executive Officer

You know, we're still not, Tycho, viewed as a local, and I think that's one of the reasons we've created our two partnership agreements, our localization strategies, one around instrument and one around assay development. We're now about, I don't know, six to nine months into those partnership agreements, which we think will help us. As far as the tender, you're exactly right. I mean, that is starting to occur.

As you probably know, we did participate in really kind of the first tender that was out there. And you know the interesting thing, Tycho, everything has been tendered always. I mean, hospitals in the United States are tendered; Europe is tendered; Middle East. But China, this was relatively new.

Too, as you probably know, two major multinationals chose not to participate. Now for us, it actually worked out quite well. We didn't see a significant decrease in price, and we believe because we were awarded, we'll pick up share there. And so we do think that will continue, but we feel like we're learning a lot as we went through that process.

And we believe that our ability that so much of our business is outside the United States and has been part of tenders across the world, that we feel pretty well-positioned there. But as you know, it grew double digits again. We base a lot of where we think the business is going on install base growth and integrated install base growth, and both of those were really robust for the quarter. And I think the other thing that's nice is that, look, we had gone through a situation where distributors were really starting to destock, and we're now at kind of a place where we're at or below where distributor stocking was.

So we still feel really comfortable with where our growth is and that we'll continue to be in double digits, going forward. I don't know if I answered all your questions, but you had a couple of [Inaudible] I hope I got them all.

Tycho Peterson -- J.P. Morgan -- Analyst

That's great. And then I want to follow up with Joe on the supply chain comments. Realistic about your ability to pass on higher freight costs and things to customers if they're under multiyear contracts, can you maybe just touch on that? And then any kind of input, you know, shortages or things you're going to have to deal with on the other end?

Joe Busky -- Chief Financial Officer

Yeah. Tycho, you know, we are passing on price increases to our customers where possible. And you're right, we can't do it in all cases, but certainly, where possible we are doing it. And as far as what are the areas that we're seeing shortages, it's no different than what others have said on calls: microchips, resins, plastics.

And so we've got a lot of initiatives in play that I mentioned in the prepared remarks. We're strengthening our relationships with our instrument contract manufacturing partners. We're taking over portions of the distribution network. We're bringing in additional key suppliers for key components.

So there's a lot of activity going there, and we feel that there really wasn't a significant impact in our Q3 results.

Tycho Peterson -- J.P. Morgan -- Analyst

OK. I appreciate it. Thanks.

Joe Busky -- Chief Financial Officer

Thanks, Tycho.

Operator

Thank you. Our next question comes from Vijay Kumar of Evercore ISI. Your line is open.

Chris Smith -- Chairman and Chief Executive Officer

Hey, Vijay.

Vijay Kumar -- Evercore ISI -- Analyst

Hey, guys. Hi, Chris. Hi, Joe. Congrats on a good print here.

Just on the Q itself, we had 16% core growth. That's about 8 points above street models. I'm curious, were there any one-offs in the quarter? I mean, this is really, really strong. It doesn't seem like COVID had a big role here.

Maybe talk about the underlying trends here on what drove the 16%.

Chris Smith -- Chairman and Chief Executive Officer

Joe, do you want to take that and maybe talk about just what happened in the quarter?

Joe Busky -- Chief Financial Officer

Yeah. Vijay, I think, as I noted in the comments, included in noncore revenue, which obviously rolls up in the total revenue, we had an arbitration award, which was $8.5 million. Clearly, that's something that wouldn't have been planned or forecasted. And then, yes, the COVID assay-related revenue in the quarter was $12 million.

So probably maybe a little bit stronger than maybe what some had expected.

Chris Smith -- Chairman and Chief Executive Officer

And, you know, Vijay, we had originally put none in the second half. And so obviously, we're getting some, depending on where your model was built, but COVID coming around $12 million. Joe mentioned the one-off. But really, that's just -- I always talk about this and this being a portfolio of business, but right now we're just really performing well everywhere across the world.

And so I think what you're seeing is that strong execution being pulled through all regions at the same time.

Joe Busky -- Chief Financial Officer

But Vijay, just to be clear, I mean, excluding that noncore collaboration revenue that I spoke about and the COVID, the core revenue is up. It's up 16%. So it's just a strong quarter. And again, as Chris said, it was across all regions.

Vijay Kumar -- Evercore ISI -- Analyst

I guess, and that segues to my next question, right? Because, I mean, 3Q, clearly, execution was above trend. That Q4 guidance, I understand some of the comp issues. Was there any timing element? Because I'm getting a sequential step down of almost 14%, right? I think the implied is closer to [Inaudible] revenues in Q4. Was there any pull-forward of revenues from Q4 into Q3? Or like, why shouldn't we see sustenance of these trends? Because the comps don't seem that hard.

They seem to be about 5, 6 points harder in Q4, sequentially. Why shouldn't Q4 be a high-singles, double-digit core growth quarter for Q4?

Joe Busky -- Chief Financial Officer

Vijay, if you take the -- we gave the full year guidance and, obviously, just sort of imply the Q4 numbers out of that. You're going to get in the range of a 2% to 6% total. But excluding COVID, it's going to be 6% to 9%. That's the range.

So the midpoint of that range, I mean, you're in 7% to 8% growth on the top line, excluding COVID. So it is very much in the high-single-digit range in Q4. So we do feel like that growth is continuing.

Chris Smith -- Chairman and Chief Executive Officer

I think, Vijay, we also -- remember, we have pretty significant headwind in Q4. I mean, look, we're -- this COVID is always moving. We had a very strong COVID quarter of Q4 last year. There's not a lot in the Q4 forecast for us right now.

It's minimal. So I think that would be obviously one factor to take in. But we've built in, for example, challenges in the supply chain and stuff into our numbers, if that makes sense. So think about it probably as 4%-ish-plus total; and ex COVID, 8%-ish.

Joe Busky -- Chief Financial Officer

Yes, high single digit. Yeah.

Vijay Kumar -- Evercore ISI -- Analyst

That's helpful. You bet. Thank you.

Operator

Thank you. Our next question comes from Derik De Bruin of Bank of America. Your line is open.

Chris Smith -- Chairman and Chief Executive Officer

Hey, Derik.

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Good afternoon. Hi. So, really impressive 14% to 15% constant currency revenue growth. Obviously, for this year.

I mean, this obviously begs the question on, you know, thinking about trends as we go into 2022. And, you know, you're tracking well above where we had you in the deal model, and certainly, the outlook seems to be very good. I mean, can you give any initial thoughts on how else were you thinking of puts and takes onto 2022? Mid-single digits sort of like core growth still in the cards when you sort of like do all the puts and takes? Just any high-level thoughts would be appreciated.

Chris Smith -- Chairman and Chief Executive Officer

Yeah. Obviously, we won't do guidance for a bit, but kind of to give it to you high level, Derik. I mean, look, I will tell you a couple of things are happening. We continue to believe we should be growing at or above market and I think because we believe we're moving share and we're winning more than we've ever won before.

And I think that's reflected in both the install base growth, as well as the integrated install base growth. And remember, integrated installs could be first-time wins. But if we're changing a stand-alone and moving to an integrated, it's a net zero. So when you see 4% or 5% on the stand-alone growth or the install base growth, that's really market share wins.

And then where I think you see the rest of the business coming, I think people have really underestimated our ability since we expanded this menu on the IA side to pull through a lot more revenue when we convert a stand-alone to an integrated. That's why you hear in my statements and Joe's everything is around integrated. We were really excited about where the integrated growth was because it lets us pull through so much more revenue. So I think when you take that, combined with winning market share, that's why I think you're seeing the wins that you're seeing across the globe.

And part of this has been this pivot in our strategy to not only go out and win accounts but really expand our field organization globally with lab specialists or med techs that are in the hospital working for us to focus on pulling through that IA menu, which we really hadn't done as much until a couple of years ago. And I think we're really starting to see that gain traction.

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Got it. Yes, that was high level. Thanks.

Chris Smith -- Chairman and Chief Executive Officer

[Inaudible] soon and give you guidance.

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

So just out of curiosity, I mean, when you sort of think about the China tenders and just the competing products there, I mean, obviously, you have the dry slide technology, which is technologically differentiated from a lot of the other clinical chemistry and immunoassay technologies out there. Is that seen as an apples-to-apples sort of like compare product? Or is it differentiated because the technology really is not substitutable for the other technologies? I'm just sort of curious, like, is that a competitive advantage [Inaudible] some of these arguments, some of these tenders?

Chris Smith -- Chairman and Chief Executive Officer

I think it is. I'm going to let Mike take this one in a second, who runs our global commercial, but I definitely think it is an advantage because we get differentiation. Historically, we've gotten better reimbursement. I mean, obviously, you don't have the water issue.

So I do think that having that differentiation helps us. I'll also say that our leadership team there, in particular, the woman who runs China for us, is very astute and, I will say, deep into the understanding of the market dynamics and helping as we go through tenders. But Mike, do you want to -- I know you've been pretty close to Iris as we've gone through this. You want to share just some views on that around the dry chemistry and then also how they're handling the tender situation there?

Mike Iskra -- Executive Vice President of Commercial Excellence and Strategy

Derik, it is a differentiator. I think Chris hit on the main reasons why. The other thing when you think about the China market, we have -- what's a little bit different for us in that market is we have a very large presence in the stat lab market in China. And a big part of that is the dry slide, the reliability of the slides.

And actually, on chemistries, it's pretty fast turnaround time compared to our competitors. And so all those things combined are what helps with the differentiation. Chris did mention there is reimbursement benefits that we do see in China. But again, globally, customers, particularly customers that have used dry slide and see the benefits, those attributes and the benefits they get can be written sometimes into tenders, which makes it very difficult for wet systems to compete.

Chris Smith -- Chairman and Chief Executive Officer

Another thing, by the way, Derik, is to participate in those tenders. I know some of our competitors are viewing it differently. But look, we believe it's the real world, it's going to happen, and you've got to play ball. And so our view is we're going to participate because we believe our share upside is significantly better than whatever pricing downside we would face. 

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Great. Thank you very much.

Chris Smith -- Chairman and Chief Executive Officer

Thanks.

Operator

Thank you. Our next question comes from Matt Sykes of Goldman Sachs. Your line is open.

Matt Sykes -- Goldman Sachs -- Analyst

Hi, everybody.

Chris Smith -- Chairman and Chief Executive Officer

Hi, Matt.

Matt Sykes -- Goldman Sachs -- Analyst

Hey! Thanks for taking my question. I just want to focus on the commentary in the slide you have on the integrated install base growth. It obviously continues to be impressive, and it's great to see in that teens. It's also gone from 14% to 15% to 16% over the last three quarters.

Is that a trend that we should expect? Are you seeing accelerating growth in that integrated install base? I mean, I think being mid-teens is great, but I'm just wondering if there's any additional trends that you could highlight that maybe is resulting in the accelerated growth of the integrated install base.

Chris Smith -- Chairman and Chief Executive Officer

Yeah, Matt, I think that's been an interesting phenomenon. If you look back at '17 and '18, I think a lot of that would have been a conversion from a stand-alone to an integrated. I think the difference you're starting to see now and why we're seeing some of that growth is we're winning with integrated. So I was at a large hospital system in Florida, I don't know, three weeks ago, four weeks ago, a big system.

You're talking a system that's doing 2.5 million-plus a year. And we won that from a competitor, but we only did integrate it. So they had never had a stand-alone of our analyzer. And so when you look at that, that would be not only increasing our install base, but it also increased our integrated install base.

And so I think some of that is that tip of the spear and why you're seeing it. I would say that our demand is higher for integrated. As we manage the supply chain, that's one of the things that we're staying close to with our instrument manufacturer, is trying to make sure that we stay out in front of it because the business has been good. So I think it's a little bit of both.

Mike, again, do you want to comment any more that maybe you see?

Mike Iskra -- Executive Vice President of Commercial Excellence and Strategy

No. Chris, I think you're on it, right? One of the things when you listen to the narrative, you hear we keep saying some of the same things over and over, but it's really the playbook. And I think when you see this, we're now executing that globally. So what was happening in the U.S.

and a few other markets, now you see globally? And it is both using integrated to move stand-alone instruments up to win new business. And so it's not just one market either. I think that's what's helping some of the pacings that you see. It's broad application.

Matt Sykes -- Goldman Sachs -- Analyst

Great. Thanks for that helpful color. And then just you continue to take down the net debt and you've put yourself in a position for M&A. You've talked about exploring the market in the past.

Just anything involved in your thinking. How does the landscape pipeline look? How are you thinking about valuations here? Just any thoughts on M&A at this point.

Joe Busky -- Chief Financial Officer

Matt, I don't think a lot has changed since we talked about this last quarter. I mean, we're still looking primarily in the areas of specialty IA, molecular and point of care, and we're still primarily looking into the areas of bolt-on niche acquisitions, nothing transformational here. We are getting pretty darn close to our desired leverage range of 2.5 to 3.5. You know, we're at 3.7 now.

We're going to probably tick down a little more as we move to the end of this year. So we're getting pretty close. So it's just a matter of continuing to look and find the right deal at the right valuation. So I don't think there's been a whole lot of change in philosophy here.

Matt Sykes -- Goldman Sachs -- Analyst

Great. Thanks very much. Appreciate it.

Joe Busky -- Chief Financial Officer

Yeah, sure. 

Operator

Thank you. And next, we have Patrick Donnelly of Citi. Your line is open.

Chris Smith -- Chairman and Chief Executive Officer

Hey, Patrick.

Patrick Donnelly -- Citi -- Analyst

Hey, guys. Thanks for taking the questions. Joe, maybe one for you on the margin side. You continue to put up pretty good performance there, guidance suggesting it's going to continue.

Obviously, we keep hearing about inflationary pressure, supply chain logistics issues, etc. Can you just talk about the moving pieces there and dynamics as we go through 4Q and into 22? I mean, it feels like expansion should continue, but I just want to talk through the different pieces there.

Joe Busky -- Chief Financial Officer

It's actually a very good question. We did have a good quarter in Q3 from a gross profit margin expansion perspective and laid out by the factors I talked about in the prepared remarks. I just want to remind you that 80 bps of that was driven by that arbitration award of $8.5 million that we put in noncore revenue. But, you know, the rest of it was a combination of some FX tailwinds and mostly operational.

As we move, though, into Q4, and this is something I've been talking about on every quarter call, Q4 tends to be a quarter where we do more heavy mix of instrument revenue, which is typically lower margin than the recurring reagent revenue. So built into the guidance is an expected decline in gross profit margin for the fourth quarter. And that's -- again, we've seen that every quarter for several years now and wouldn't expect anything different this year. But when you think about full year, you know, for sure, we're still, you know, very much in line with the guidance that we put out of the increase in gross profit margin of at least 30 to 60 basis points annually.

Patrick Donnelly -- Citi -- Analyst

OK. That's helpful color. And then Chris, maybe just on Europe, EMEA. I mean, Western Europe has been a really good story for you guys.

Can you just talk about what you're seeing there? Expectations, going forward? Just general trends there would be helpful.

Chris Smith -- Chairman and Chief Executive Officer

Yeah. Look, I think when we got into this business, you know, and we kind of went through our leadership change a couple of years ago, I think our view was Europe had been going backwards consistently for five years. So our first view was we'd get it to flat to 1% growth. But I will say that that team has really done a nice job of changing out not only the leadership but the team that we have there.

And I would say in our countries where we did have strong leadership, like in Italy, where we didn't make changes, they continue to perform a little bit above the market. And I think we're -- again, I come back to it. I think we're just winning more. And part of this goes back to this philosophy that we've kind of had this will to win.

And I think under J&J, it just wasn't a desire. And so we continue to feel really good there. I will say that, you know, one of the nice things [Inaudible], for example, we saw in the Middle East, Russia, Eastern Europe, all up double digits in the third quarter, you know, that would have been -- that's a change and a new leader in the last 12 months. And if you look at places like where we have to win in places like the U.K., Spain, where we had not won before, again great -- close to double-digit growth type of thing.

So I think we're seeing it not just coming from one place. It's really coming from that whole region under Joan Martin's leadership.

Joe Busky -- Chief Financial Officer

Hey, Patrick, it's Joe again. Kind of go back to your margin question for a second, I addressed the sequential impacts to the gross margin, Q3 to Q4, but I probably should have mentioned also the year-over-year impacts to Q4. I mentioned this in the prepared remarks. But again, we did $26 million of COVID assay revenue in Q4 of last year.

And as Chris said a minute ago, we have minimal COVID revenue in our guidance for the remainder of the year. So you are going to see a headwind on gross margin year over year due to mix, dropping that COVID assay revenue, which is fairly high-margin revenue. So year over year, we will see a headwind.

Patrick Donnelly -- Citi -- Analyst

Right, yeah. That makes sense. Thank you, guys.

Joe Busky -- Chief Financial Officer

OK. Thanks.

Operator

Thank you. And next, we have Tejas Savant of Morgan Stanley. Your line is open.

Tejas Savant -- Morgan Stanley -- Analyst

Hey, guys. Good evening. Joe, maybe to stick with the margin theme here, you know, as Patrick was just mentioning, there's a bunch of moving pieces here with inflation and freight costs and the mix of cash versus reagent rentals in the instrument front and the supply chain issues, etc. And then there's the COVID comp, as well.

I mean, you have some COVID revenue this year, less than last year. But presumably, as you guide for next year, you'll assume sort of 0 COVID contributions, like you have here in the fourth quarter. So as we look at sort of margins in 2022 is 30 to 40 basis points of margin expansion still a fair way to think about it? Or should we be considering some incremental downside from some of these dynamics?

Joe Busky -- Chief Financial Officer

Yeah. You know, Tejas, I think you'll definitely see the tailwinds continuing that we've talked about all year, and that is the value capture program that targets $25 million of savings annually, most of which end up in gross margin. You'll still see the tailwinds of gross margin coming through from the strategy of shifting customers to integrated, which drives more immunoassay higher-margin revenue. But the drop in the COVID assay revenue is going to be likely significant, in our view.

To your point, you just said if you assume it's zero, we're going to go from roughly, you know, call it, mid-60s of COVID assay revenue this year to zero. You know, that's 3 points of top-line growth and a lot of headwind on the gross margin. So I think the best way to think about the gross margin expansion and that 30 to 60 basis points annually for next year is ex COVID. If you exclude COVID, for sure, given the value capture program and the tailwinds we get on the integrated, you know, strategy we can get there.

Tejas Savant -- Morgan Stanley -- Analyst

Got it.

Chris Smith -- Chairman and Chief Executive Officer

[Inaudible]. Look, I think we're at -- we talked about it on the quant assay, and we're not -- there's not a lot of movement going on with quant assay. Yet, we're the only ones that have something that will measure your immunity level. I will say researchers are really interested, and there's a lot of clinical trials that are going on.

And I think if that ends up getting some traction with regulatory bodies and the ability to identify immunity levels before you get your booster -- to give you an example, I got my booster on Monday, and I didn't know -- I should have tested with our own device to know where my immunity level is, and I didn't. But I think we may see some opportunity with that test with COVID next year that we just don't have built in yet.

Tejas Savant -- Morgan Stanley -- Analyst

Got it. And then a quick one on emerging markets for you, Chris. Can you share some incremental color on the strength you've seen in India and Brazil? In the past, I think you've noted at least for India that a lot of it is in the base business and not so much from COVID testing upside. Just curious as to how you see those two geos evolving for you heading into '22.

Chris Smith -- Chairman and Chief Executive Officer

Sure. Look, I think when we look at like, I would say, kind of our big three on the emerging and not including something like China, that would be Mexico, Brazil, and India. And again, those are all up high-double-digit growth in Q3, continuing like they were. And it's not COVID, especially in those markets.

And I think there's a couple of things happening. I would say, if you look at Mexico and Brazil, which report to the same leader, you see he's done a fantastic job of leading with integrated, probably before we did it anywhere else in the world, except for maybe the U.S. So you're seeing great reagent revenue pull-through there. They're doing a fantastic job of selling the full menu, as opposed to just chemistry.

And that's why we've seen consistent, I think, growth like that coming out of there. If you look over in India, I think the thing that's really started to play incredibly well is that we've always been the No. 1 service provider, but I don't think that was as important to hospitals until we started to go through the challenges with COVID and some of the challenges large multinationals had servicing their customers. And our field engineers are direct, our field organization is direct.

We have seven distribution centers in India. It's a high-presence market for us. And I just think that the [Inaudible] situation, we're selling the menu, but I think it's more about we're winning more than we won before. And the team has just done a really nice job there.

So I see all three of those markets continuing with very nice growth as we go into next year. And it's about how do you take some of those lessons learned and put it into other of those emerging market countries.

Tejas Savant -- Morgan Stanley -- Analyst

Got it. Very helpful, and congrats on the prem, guys.

Chris Smith -- Chairman and Chief Executive Officer

Thanks.

Operator

Thank you. And next is John Sourbeer of UBS. Your line is open.

Joe Busky -- Chief Financial Officer

Hey, John.

John Sourbeer -- UBS -- Analyst

Hi. Thanks for taking my questions. I guess, just maybe digging a little deeper on supply chain, you know, I think previously, you know, some of the highlight was maybe 100 to 150 bps of pricing pressure there. You know, given the supply constraints and inflation, is that still the right way to think about the diagnostic market? And then I think that Ortho also might use more contract manufacturing than some of your competitors.

Anything to highlight there?

Chris Smith -- Chairman and Chief Executive Officer

Yeah. I'll let Joe take the first one kind of around pricing, and then I'll take the second one kind of around contract manufacturing.

Joe Busky -- Chief Financial Officer

Hey, John, I would say that the typical annual price erosion we're seeing has not changed. It's still in that 150-basis point range. No change there. Yeah.

Chris Smith -- Chairman and Chief Executive Officer

John, I think as Joe mentioned earlier, there are places in contracts where we are able to push through some, pass along some price increases, you know, looking at things like, you know, COVID surcharges and things, but I think that's a good model. Look, you are right that we use contract manufacturers, but on our instrument. We don't do it on any of our assays. And we believe that that's one of our key differentiators, is our assays.

It's core competency in the development and manufacturing of that. On the instruments, the decision was made at the carve-out to outsource that, but I feel really good about the partner we chose. It's one of the largest in the world with deep relationships. To give you an example, because of supply chain challenges they're doing stuff for Tesla and airlines, but I have a call every single week with the CEO of that company and talking about where we are in the process because we've raised our demand significantly with them because our business has grown.

But look, I think it's something like any business. You're probably -- I probably spend a lot more time on it now than I probably would have two or three years ago. But I think you go to where the opportunities are or where the issues may lie, and you try to manage those. And I think our team has done a fantastic job putting things in place to manage through it, but we're spending time doing it.

And I think there's a lot of things that we continue to do, like taking over our distribution center in Memphis from K&N. We had outsourced that to K&N, Kuehne+Nagel, but we believe that's part of the customer experience, the shipping of our product. So we wanted to own that. And we took that over, and we'll do it for less than we were paying them to do it.

And so back to Joe's point, next year we'll just probably -- that will improve margins, but it also improves service levels. So I think the things that we think are core competencies, we want to own those and do them ourselves. But other things that we think aren't, we have outsourced some of that.

John Sourbeer -- UBS -- Analyst

And maybe just one follow-up. Just on the assay menu expansion, is the target there still eight to 10 assays per year? Is that the right way to think about it? And any area to discuss on where you may be focused on menu expansion?

Chris Smith -- Chairman and Chief Executive Officer

Yeah. Mike? So I think we've talked about 20 to 30 new or improved assays in the next three years. But Mike, do you want to give a little more color around that?

Mike Iskra -- Executive Vice President of Commercial Excellence and Strategy

Yeah. I think that's right, the right number to think about, 30 assays over the next three to four years. It's a combination of menu expansion, new items, some enhancements, and improvements. I think we're -- as you see, we have some assays that we've released in parts of the world, but we have yet to release in other places.

So as an example, HIV combo, we're just getting through the regulatory approval in China. Procalcitonin, which we've launched worldwide with the exception of China, we're targeting for next year. So there are things like that that have been big drivers of growth for us in many parts of the world that we still have markets to open. We have a few assays we're working on.

For instance, hemoglobin A1c on a micro slide we think will be a difference-maker, we're pretty excited about for a launch early next year. Things like that. 

John Sourbeer -- UBS -- Analyst

Got it. Thanks for taking my questions.

Bryan Brokmeier -- Vice President of Investor Relations

Operator, we have time for one more question.

Operator

Thank you. Our last question comes from Yi Chen of H.C. Wainwright. Your line is open.

Yi Chen -- H.C. Wainwright and Company -- Analyst

Thank you for taking my question. Could you comment on whether the supply chain issue is limited to a certain geographic area or present in your worldwide markets and whether the issue is primarily related to manufacturing or shipping logistics?

Chris Smith -- Chairman and Chief Executive Officer

Yeah. Listen, I think it's, look, a good question. I would say I think there's challenges in both. I would say that the logistic issues are readily manageable with price.

So as you probably know, spot rates have gone up significantly, and I think you have the ability to get the products where you need the products to go based on what you're paying. And I would say one of the things I think we've done a good job of is that we do have a pretty broad distribution network across the world. We use two primary distribution points, one in Memphis and one in Strasbourg, but then we go as close to the customer as possible. And so I think that's helped us a lot.

I don't know if you picked this up, but we're carrying more inventory than we have carried, and I think that's one of the other reasons we're being able to do that, is to make sure that we do not have logistic issues. So I'd say that's one, but we've managed that pretty well. If you look at the manufacturing one, look, I think it's the same thing. I think what you're seeing, at least with us, and I don't know about all the companies you follow, but our view has been to get as far in front of it as possible.

So Joe mentioned this. For example, we have relationships with suppliers that we have felt very good with for years. And we may have a primary and a secondary, but we historically maybe wouldn't have carried a third. We are now engaging that.

And look, I think our view has been that we think we again have to be out in front of it. And so I would say there's a lot more contracting going on, a lot more vendor fairs or we go out and see our vendors. So I think it's actually impacted both parts, candidly, of our business, but I think they're all manageable as long as we think we're out in front of them.

Yi Chen -- H.C. Wainwright and Company -- Analyst

Thank you. And just a quick follow-up. Do you believe the COVID-related revenue could continue to decline in the coming quarters?

Chris Smith -- Chairman and Chief Executive Officer

You know, I'm trying to think where we did Q2. What did we do in Q2?

Joe Busky -- Chief Financial Officer

Seventeen.

Chris Smith -- Chairman and Chief Executive Officer

Yeah. So we did $17 million, and we did $12 million. Look, I think we see it's minimal. So we're planning for less in Q4.

I think a lot depends here on what happens with the quant and how quickly we can get some of those innovative clinical trials published and getting some government bodies to look at that. It's interesting. A lot of people like it. They just don't know what to do with it yet.

And so what we need is we're working pretty close, candidly, with the CDC and NIH on some things around the quantitative test. But I would say that as we look at next year, I would say that our COVID projections are to be significantly less than they were this year currently.

Yi Chen -- H.C. Wainwright and Company -- Analyst

OK. Got it. Thank you.

Chris Smith -- Chairman and Chief Executive Officer

Yeah. Hey, listen, guys, it kind of brings us to the end of the time on the call, but I did want to let you know one other quick point is that we know that you probably -- look, we have never had an Investor Day kind of as a public company. So we're going to do an investor Day. We know people want to do it in Rochester in January, but we have chosen to do it in New York City on March 21.

So we'll send out more information, but we're really excited about that. Because what we want you to do, one, is Palani Chockalignam is here with me. He's our chief innovation officer. Palani is going to really give you some insight into where our new technology is going.

We've got some exciting stuff that will release at the end of next year from an instrument perspective, as well as some things that we're working out on four to five years. And then we're going to have a couple of regions. In particular, we're looking to have China if, hopefully, China is open, and Iris Lin, who runs that market for us, and Warren Stone, who runs the Americas, be able to spend some time with you to give more color into those. And then Mike and his team will really kind of focus around the business units and giving you really nice insights in how we're running the business in the transfusion medicine and clin labs.

And then, finally, we'll let Joe bring it home and give you more insight on the financials. So we think it's going to be an exciting day. We probably will provide lunch. So you're going to want to definitely get there.

But look, we'll send out more information as it gets closer. And again we appreciate you taking the time today on the call, and we look forward to seeing you guys out in the market. Take care.

Operator

[Operator signoff]

Duration: 58 minutes

Call participants:

Bryan Brokmeier -- Vice President of Investor Relations

Chris Smith -- Chairman and Chief Executive Officer

Joe Busky -- Chief Financial Officer

Tycho Peterson -- J.P. Morgan -- Analyst

Vijay Kumar -- Evercore ISI -- Analyst

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Mike Iskra -- Executive Vice President of Commercial Excellence and Strategy

Matt Sykes -- Goldman Sachs -- Analyst

Patrick Donnelly -- Citi -- Analyst

Tejas Savant -- Morgan Stanley -- Analyst

John Sourbeer -- UBS -- Analyst

Yi Chen -- H.C. Wainwright and Company -- Analyst

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