Operator:

Welcome to the Quest Diagnostics Second Quarter 2024 conference call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and question and answer session that will follow, are the copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission or rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited. Now I’d like to introduce Shawn Bevec, Vice President of Investor Relations for Quest Diagnostics. Please go ahead, sir.

Jim Davis:

Thanks Shawn and good morning, everyone. We delivered another strong quarter, with base business revenue growth of nearly 4% and total revenue growth of 2.5% as well as continued improvement in productivity and profitability in the base business. This performance is due to growth of new physician and hospital customers, more favorable test mix that includes greater adoption of advanced diagnostics and continued strength in healthcare utilization. We also made progress improving our operational quality and efficiency through greater use of automation and AI. In addition, we are excited to announce four acquisitions that meet our criteria for growth, profitability and returns, and that will enable us to expand in strategic growth areas. Our planned acquisition of LifeLabs, a trusted name in laboratory services for millions of Canadians, will enable us to grow in Canada, which has a population that is growing, and aging faster, than in the U.S. LifeLabs is especially strong in two of Canada’s largest and fastest growing provinces, British Columbia and Ontario, which collectively account for about half of the country’s population. We are familiar with the Canadian market, having delivered reference testing to many providers there for over 20 years. LifeLabs has been one of those reference partners for about a decade, so we know firsthand that their business, team and reputation is strong, and provides a solid foundation for growth. We expect to complete the transaction by the end of the year. Our recently announced acquisition of Select Lab Assets of Allina Health, a leading non-profit health system, will enable us to extend our reach in Minneapolis and throughout Minnesota and Wisconsin. We also announced our plans to acquire the outreach lab assets of OhioHealth, a nationally recognized charitable health system in Ohio. Both transactions will broaden our presence in geographic areas of the United States where we’ve had limited access to providers due to the predominance of health systems. These acquisitions show our ability to attract and partner with top, growing health systems that share our commitment to expanding patient access to innovative and more affordable testing. We expect to complete both transactions in the third quarter. We also completed our acquisition of PathAI Diagnostics, which provides a readymade platform on which to scale digital pathology and AI to help health systems and other providers improve quality, speed and efficiency in cancer diagnosis. These acquisitions take time and involve teams of dedicated individuals. I want to personally thank my Quest colleagues for delivering on our M&A strategy, and we will now turn our attention to the hard work of integrating these deals. Now, I’ll recap our strategy and discuss highlights from the second quarter. Then Sam will provide detail on our financial results and talk about our updated financial guidance for 2024. Our strategy to drive growth is focused on delivering solutions that meet the evolving needs of our core customers, physicians, hospitals and consumers. We enable growth across our customer channels through advanced diagnostics, with an intense focus on faster growing clinical areas, including within brain health and molecular genomics and oncology. In addition, acquisitions are a key growth driver, with an emphasis on accretive outreach purchases as well as other independent labs. Our strategy also includes driving operational improvements across the business, with the strategic deployment of automation and AI to improve quality, service, efficiency, and the workforce experience. Here are some updates on progress we have made in each of these areas. While we grew total volumes from Diagnostic Information Services 1.1% with base business volume growth of 1.7%, volumes from our base clinical business grew 3.2% in the second quarter, due to the strength among physicians and hospitals. In Physician lab services, we delivered another quarter of high single-digit base business revenue growth. This growth was driven by continued strength in healthcare utilization, as well as overall market growth, and share gains due to new customer wins. We drove favorable test mix as well as growth in test per requisition, which we attribute to greater utilization of our expanding portfolio of advanced diagnostics. Finally, we also saw strong volume and revenue growth within Medicare Advantage plans, where narrow network strategies direct testing to high quality, cost-efficient options like Quest. Our broad health plan access, which extends to approximately 90% of covered lives in the U.S., enabled us to take advantage of high demand for lab services, consistent with recent quarters. Health plans value our ability to improve access, scale innovation and drive costs out of healthcare. We are also working to develop opportunities to serve new geographies with our health plan partners. In Hospital lab services, we grew base business revenues by nearly 4%. Growth of reference testing remains higher than historical levels as hospitals struggled to fill open positions, especially in technical fields, such as histotechnology, microbiology and cytotechnology. Our advanced diagnostics portfolio provides a compelling alternative for hospitals to send us more reference work. Hospitals face several challenges, including high supply costs, high wages and decisions about how and where to deploy their capital. Patients want better value from lab services as well as easier access. Plus, diagnostic innovation is evolving at a fast pace. These dynamics are contributing to an accelerating trend of outreach acquisitions and professional lab service arrangements with the national labs. Our specialization and scale empower us to deliver a breadth of quality, innovative and accessible services that are often far more affordable for the patient. That’s why top hospitals are choosing Quest for reference testing, professional lab services and outreach asset sales that deliver quality and efficiency. In consumer-initiated testing, our consumer facing platform, questhealth.com, grew total revenues nearly 40% while base business revenues grew more than 50% versus the prior year. As we learn more about our customers as our portfolio expands, we are improving growth and marketing productivity. Today, about 25% of our revenues are from existing customers and 20% of our revenues are from tests we introduced in the past year. In Advanced Diagnostics, several key clinical areas drove double-digit revenue growth, continuing the trend in recent quarters. This growth was particularly strong in brain health, women’s health, particularly prenatal and hereditary genetics, and advanced cardiometabolic health. Our Alzheimer’s disease portfolio was the primary driver of growth for our brain health offering. Demand was strong for our AD-Detect blood tests which assess risk based on amyloid, p-tau and APOE biomarkers. Demand was also strong for our CSF test options for aiding treatment decisions. Yesterday, we introduced our Neurofilament Light Chain test, which helps assess neuronal damage that may signify Alzheimer’s disease as well as multiple sclerosis and other neurodegenerative conditions. In molecular genomics and oncology, we are encouraged by early results of our Haystack MRD Early Experience program prior to the broad national launch later this year. Physicians from leading cancer institutions are using the Haystack MRD blood test to assess cancer recurrence and treatment response for a range of cancers, including colorectal, lung and breast. We also grew the body of evidence on the clinical and economic value of ctDNA blood testing in cancer care. A study published in JAMA Health Forum in June found that MRD testing could reduce costs for health plans, particularly commercial payers, by identifying patients that would benefit from chemotherapy after stage II colon cancer surgery. In addition, research presented at the June ASCO conference showed that Haystack MRD testing identified complete clinical response to immunotherapy for patients with colorectal cancer earlier than standard assessments, such as PET,MRI and endoscopy scans. Finally, we recently expanded our Haystack research collaborations to include Lisata Therapeutics, which will use Haystack MRD to study an investigational treatment for advanced pancreatic cancer. Turning to advanced cardiometabolic testing, we are seeing interest in several biomarkers that improve early detection of cardiovascular and metabolic diseases like diabetes and kidney disease. These include insulin resistance, which can identify pre-diabetes risk before AIc tests, and ApoB, a more precise marker of heart attack risk than traditional lipid panels. They also include Lp(a), which is an inherited marker of heart disease risk found in up to 20% of the population and for which several therapies are now in development. Turning to operational excellence, our Invigorate program aims to deliver a targeted 3% annual cost savings and productivity improvements. During the quarter, we expanded our use of automation and AI in order to improve productivity as well as service levels and quality. For instance, we advanced our use of automation in front-end specimen processing to now include five of our labs, freeing more of our processors to focus on value-added work. We also expanded our AI capabilities in microbiology to include the ability to segregate out specimens with no evidence of microbial growth so our medical scientists can concentrate on reviewing those with the greatest likelihood of disease. In addition, we broadened our use of AI in customer service to help our representatives access answers more quickly, improving their efficiency and service quality. Now, I’ll turn it over to Sam to provide more details on our performance and our 2024 guidance. Sam?

Jim Davis :

Thanks, Sam. To summarize, our business delivered strong total and base revenue growth across our core customer channels, due to strong commercial execution, innovative offerings and ongoing strength in healthcare utilization. We announced four acquisitions that meet our criteria for growth, profitability and returns and position us for growth in new geographic and service areas. We improved productivity as well as service levels and quality, through greater use of automation and AI. Finally, I’d like to personally thank my nearly 50,000 Quest colleagues for our strong performance this quarter, which is largely the result of the dedication, care and collaboration that they show patients, customers each and every single day. This commitment was exemplified by the tireless efforts of our teams to restore outstanding service for patients and customers this past weekend following the global IT outage. I’m proud to work with so many talented people committed to living our purpose, working together to create a healthier world, one life at a time. With that, we’d be happy to take your questions. Operator.

Ann Hynes :

Hi, good morning. I just had a follow-up question on volume. I believe you said the total base volume is up 1.7%. But if you exclude employer base, it's up 3.2%. Can you just give us more detail on what's happening in that business? Is it just the overall job market? And maybe if you can provide some like profitability versus staff position-based business versus the employer-based business and whether or not it was in line with your estimates? Then my second question just has to do around the Canadian acquisition. Can you just give us more details on that market? How is it different than the U.S.? Why you view it as attractive? Maybe some long-term growth revenue algorithms versus the U.S. business? Is it growing in line with the business? Is it higher growth? That would be great. Thank you.

Sam Samad:

Maybe a couple of comments to add on the services businesses Ann, just to give you some financials behind them or at least some percentages. I mean, the Workforce Health Solutions businesses, Employer Population Health, and the Employer Solutions are less than 5% of our overall revenues. So just to give you a sense of bucketing of how much those businesses are. So they are not that material or not material to our overall revenues, but as Jim said, they have been impacted post-COVID somewhat significantly and with some of the market dynamics in the drug testing business, so they are impacting our growth rates. And then ExamOne is on top of that, but it's also impacted by some of the dynamics that Jim said coming out of COVID. So these businesses are down significantly year-over-year, but we don't expect further deterioration as we look forward. So there is a year-over-year impact, but we don't expect that to further amplify as we go forward.

Operator:

Yes, the next question will come from Kevin Caliendo of UBS. Your line is open.

Sam Samad:

Yeah, so maybe I'll start Kevin, and Jim can add comments. First, let's kind of talk about the details in terms of what we shared. We said we're going to take up revenues by $100 million. We said we're going to take up EPS – and this is at the midpoint. We're going to take up EPS by $0.05 to $8.80 to $9. Within the $100 million that we talked about, the majority of that is really new M&A. So essentially M&A that we have signed, that we expect to close sometime between mid Q3 and the end of the year, and those reflect the M&A related to, or the transactions which are Allina Health, OhioHealth. We have some upside from PathAI as well, which we closed in Q2, but wasn't in our original guidance. So the revenue has a majority – the majority of the revenues is really driven by the M&A that we expect to close. The EPS increase is related to contribution from this M&A, although as we talked about in the prepared remarks, M&A ramps up in terms of profitability, so 2024, in the second half, very little contribution in terms of profitability from M&A. The remainder, I would say is contribution from the base business and some M&A, but little. And we are absorbing as you said, the impact of the IT outage, which is $0.06 to $0.08 in Q3 that we expect to, that we have now sized. This is preliminary. We'll get better detail as we go, but we are absorbing that impact. So, in terms of what's driving this improvement or the raise of EPS, we're basically continuing with a lot of the productivity work and the cost reductions that we have talked about. We have a lot of the AI and productivity improvements that Jim mentioned, a lot of the focus on improving margins. Importantly, base volumes continue to be very strong, and that's the biggest, I would say driver in terms of improved margins in the business. We continue to see base volumes be strong, utilization be strong. So really, that's the key driver. It's strength of volumes. It's continued productivity and cost improvements. It's also the fact that we have, as we've talked about many times over previous calls, a positive pricing and reimbursement environment, which is now stabilized, which is now flat to improving, as opposed to a negative price impact that we used to see in prior years.

Shawn Bevec:

Operator, next question.

Michael Cherny :

Good morning and thank you so much for taking the question. Maybe if I can just dive a little bit into the market. I know there's still some small moving pieces. I appreciate the color you've given so far on some of the employer testing. If I sort through all of the data points you have, the $3.2 billion base business volumes, (A) I just want to make sure I got that number correctly. And then (B) as you think about that number, how do you think about that in terms of translating where you see the health of broad-based market utilization versus where your competitive position is allowing you to take share? I guess just trying to understand fully where you see utilization baked into the implied second half guidance versus what we've seen over the last six to 12 months on a baseline business. Thanks so much.

A - Sam Samad:

And Mike, good morning. Maybe I'll add a couple of comments just in terms of utilization. I mean, as we have been mentioning, utilization continues to be strong. We've seen it strong in Q1. We've seen it strong in Q2. The year-over-year compare in Q2 was maybe a little bit tougher versus Q2 of 2023. We had some lapping of some wins, and just overall we saw more of a resurgence in the base business in Q2 of last year. But in terms of the dynamics there, we do believe that both in terms of – there's strong utilization out there. We think some of it is return to care, but also just general strength of utilization by just additional testing, and that's reflected in the higher number of tests per req that we're seeing, but also we are gaining share. We do believe that we are gaining share, and we're gaining share through some of these also outreach acquisitions that we're doing that help us direct more testing to Quest.

Operator:

The next question comes from Patrick Donnelly of Citi. Your line is open.

Sam Samad:

Yeah, I mean, as we've talked about before Patrick, we do expect eventually utilization to level off to essentially what we've talked about in terms of our long-term growth algorithm, which is roughly around 3%-ish in terms of organic growth. And then as we said before, in terms of long-term growth, we expect 1% to 2% contribution from acquisitions. So we still think longer term, if you are thinking over the next, let's say, longer period. I'm not going to necessarily bracket it with a time period, but I think that's the right algorithm to be thinking about. In terms of for us, our current guide, right now at the midpoint we're saying total growth is close to 3%, 3.1%. Our base revenue guide is somewhere around 5% for the full year. Our second half, if you think about second half, that's essentially on the base revenue growth. It's about a 5.3% second half growth. Now recall the 5.3% in the second half, and this is revenue. It includes as we said, the majority of the $100 million take up of the guide is acquisitions. So in that 5.3% second half, there is a significant portion which is acquisitions. So in effect, if you look at just organic as Jim just alluded to, it's actually a slightly slower second half than what we saw in the first half. So embedded in that is the expectation Patrick, that this utilization doesn't continue at the same level, but starts to slow down a bit. So again, total growth, first half base – or sorry, full year base is 5%, second half base is 5.3%, but within that there's some acquisition, so the second half is closer to something between 3.5% to 4% in terms of base.

Operator:

The next question comes from David Westenberg of Piper Sandler. Your line is open.

Jim Davis:

Yeah, we said in the past, just on our revenue from anatomical pathology, that it was – and this was pre-PathAI diagnostics, said it was roughly a $500 million book of business. But we're excited about the digital pathology opportunity on numerous fronts. On the surface, unlike radiology, digital pathology does not naturally lower your cost, because you're actually, you still need to create the slide. Once you've created the slide, then you digitize the slide, okay, so there's actually an extra step in the process. Now here is where it creates productivity and as you said, we think better quality. Number one, we do anatomical pathology in over 20 locations across the country, because you want the pathologist to sit right near where you are preparing the slide, so that you don't have to move slides and vehicles and things like that. So we believe that it's going to – digital pathology will allow us to collapse the network of sites that actually do what we call the histology work or the preparation of the slides. So there will be cost savings when we collapse that network. Second is, it allows us to route the image to expert pathologists wherever they sit in the country. So if our guru for breast pathology sits on the west coast, you move those slides out there. If the prostate guru sits on the east coast, you move those slides there. So, and yes, we believe once you've digitized that slide, there's many companies out there that are working on algorithms. There's one or two that have been FDA approved that allow you to apply algorithmic analysis to the digital image in order to improve the quality of the read. In terms of reimbursement, we absolutely believe there's a strong case to be made for a higher reimbursement using these algorithms. The final thing I would tell you is that, with digital pathology, it opens up a realm of new just histology-only types of operations. Meaning, we will take on the histology work for a health system. They'll still keep the pathologists, but they'll shut down their histology operations. We'll do the slide preparation, digitize it, and send that back to the hospital pathologist for them still to do the reading. We call this a technical-only solution, and it's a solution that's starting to take off and the margins on the technical component of histology are quite good. So we're bullish on the overall market opportunity here.

Operator:

The next question comes from Erin Wright of Morgan Stanley. Your line is open.

Jim Davis:

All right, so let me start with your value-based care comment. I'll ask Sam to add some color, and then I'll come back and address PAMA and SALSA. So, on the value-based care, it made positive contributions in the second quarter of this year. They just weren't bigger than the second quarter of last year. Last year we had a meaningful gain. We acknowledged that last second quarter. Again, this year it was positive, but the delta between last year and this year was a headwind for us. It is very difficult for us to give you guidance on how to model these things. There's really two principal components to these value-based payments. One is from shared savings from acquisitions, and those are lumpy. They are based on the acquisitions they do. And in some cases, payments can be six months post-deal closure. In some cases it could be a year post-deal closure. It just depends on the contract. The other type of value-based incentive payment that we have with some of our payers is around the movement of requisitions from high-priced, either out-of-network laboratories or high-priced health system laboratories. And again, that could be a once-a-year true-up, and depending on when we sign that contract, it could be in June, it could be in January, it could be in April, so very, very hard to model these things. So Sam, any other color on this.

Jim Davis:

Yeah, in terms of PAMA in SALSA, while we continue to, we and our trade association and other independent labs continue to push the case for SALSA, we acknowledge it's going to be difficult to get that through in a year with an election year, especially now given many of the changes that occurred in the last week. Having said that, we will continue to push very hard for another one-year delay in PAMA. The recent CBO scoring on this was actually bigger than it was last year. They projected it would save the government over $3 billion. And in addition, the committee in the House that overlooks this is looking for a pay for program to pay for continued telehealth benefits. So this becomes a really nice pay for program that can satisfy the requirement to fund the telehealth. So we're confident that at a minimum that would be a one-year delay in PAMA, and hopefully we can get this done and figure it out in the October-November timeframe as opposed to waiting for the December timeframe like we've seen in the past.

Operator:

The next question comes from Brian Tanquilut of Jeffries. Your line is open, sir.

A - Jim Davis:

Yeah, sure. Good morning, Brian. So as we said in the prepared remarks, Haystack dilution this year will be somewhere in the $0.35 to $0.40 range, which is about a $0.20 increase in terms of dilution from prior year. For 2025 Brian, the way we see it is, it's still going to be dilutive, but it's going to be less dilutive than we see in 2024, because we will start to recognize revenues on the assay as we launch later this year. In 2026, we expect this – we expect Haystack to be slightly accretive. And we expect by the end of 2025 also to get to a positive return on invested capital from this acquisition. In terms of all the things that we've seen, the early launch has been really successful. We've had a very, very high interest in terms of number of key thought leaders and cancer centers that have signed up for this. So everything that we see today is really encouraging. And you touched on the partnerships that we've made as well. We continue to sign new partnerships in terms of cancer centers that are, or companies that are partnering with us to evaluate the use of the assay and MRD in a specific type of cancer. So really excited about the upcoming launch. I think the early launch has been very positive, and hopefully this gives you a sense as to the, you know the financial impact in terms of accretion dilution.

Operator:

The next question comes from Lisa Gill of JP Morgan. Your line is open.

Jim Davis:

Yeah, thanks Lisa. So as you know, our trade association filed a lawsuit in the Federal Court of Texas, District Court of Texas, and work by outside counsel that the trade association has retained. It continues – we expect movement in the case in the latter part of this year, November, December, and probably into January of next year. Having said that, the rule is in place. We are running the company and operating the company with the rule in place. There's certain requirements that we need to have in place by May of next year, including a complaint handling unit up and running, as well as the ability to report adverse events. And these capabilities, some of which we had in the company, some of which we have to add are ongoing as we speak. We continue, we've launched training for the organization, in particular our R&D teams, our product marketing teams around design controls. And again, we're living with the rule and implementing things for the directive of the FDA. We've said this year, it's not going to add a material cost into the business, but we continue to evaluate what we need to be fully compliant, especially if the lawsuit is not successful.

Operator:

The next question comes from Michael Ryskin of Bank of America.

Jim Davis:

Well, it certainly doesn't hurt the case that we believe is in front of, again, the Federal District Court in Texas. I'm not a legal expert by any means, but as you know, look, Congress is the one that sets the operating parameters for various departments that exist like the FDA. We believe what Congress authorized the FDA to do, is to regulate medical devices. Congress also authorized the CLIA Act of 1988 that talked about the regulation of clinical laboratories. So we believe it's very clear what Congress intended. Obviously, others don't see it that way, but we do believe that yes, what has come out of the Supreme Court recently is favorable and clearly dictates what should occur within the four walls of regulatory bodies.

Operator:

The next question comes from Jack Meehan of Nephron Research. Your line is open, sir.

Jim Davis:

Yeah, so from a wage standpoint, we said at the beginning of the year that we expected wage increases to be in that 3% to 4% range. We're still operating within that 3% to 4%, so we're comfortable with that estimate for the back half of the year that it'll play out in that range. In terms of turnover, last year all-in for our frontline physicians, patient services, logistics, specimen processing, our laboratory workers, we were north of 20%. In the first quarter we came down below 20% into the mid-18s, and we kind of hung there in the second quarter. So we feel good that generally you can see an uptick sometimes after your first quarter, after bonus payments and things like that, but we've maintained a relatively flat position. We obviously have some hot spots around the country in certain job categories that tend to be competitive-related, either with health systems or with other industries. So we address those hot spots and we expect to make meaningful improvements in the back half of this year.

Shawn Bevec:

Operator, next question.

Andrew Brackmann :

Hi, guys. Good morning. Thanks for taking the questions. Sam, maybe one for you, just on the balance sheet and the upcoming debt maturities. Anything that you can sort of share in terms of your expectations for timing or interest costs associated with those refinancing? And I guess just related to that, any color that you can provide on the debt assumptions for the LifeLabs acquisition. Thanks.

Shawn Bevec:

Operator, next question.

Pito Chickering:

Good morning, guys. Thanks for fitting me in. A multi-part question here. How are volumes looking at from your preferred network customers versus everyone else? Looking at both the physician market and the hospital market, are you losing, gaining, or maintaining share? Any quantification of any of those would be helpful?

Shawn Bevec :

Operator, next question.

Stephanie Davis :

Hi guys. Congrats on the quarter, and thank you for fitting me in. I was just curious if there's anything that's changed either the environment or maybe in strategy that had this pick up in M&A so much this year. And how sustainable is this or how much of this is to kind of strike them while the iron is hot? Thank you.

Sam Samad:

One other thing I'd add, Stephanie, is all of these acquisitions that we announced meet our criteria. They basically hit the mark on all of the criteria that we have. Accretive in the first year, they meet our return on invested capital threshold. They meet our MPV criteria. So again, the activity would depend also that these acquisitions are going to hit our profitability criteria and our heroic hurdle rate, and they do.

Operator:

Thank you for participating in the Quest Diagnostics second quarter 2024 conference call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics' website at www.QuestDiagnostics.com. A replay of the call may be accessed online at www.QuestDiagnostics.com/investor or by phone at 866-363-1805 for domestic callers, or 203-369-0193 for international callers. Telephone replays will be available from approximately 10.30 a.m. Eastern Time on July 23, 2024 until midnight Eastern Time, August 6, 2024. Thank you for your participation, and you may disconnect.

Operator:

Welcome to the Quest Diagnostics First Quarter 2024 Conference Call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and question-and-answer session that will follow, are the copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission or rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited. Now I’d like to introduce Shawn Bevec, Vice President of Investor Relations for Quest Diagnostics. Sir, please go ahead.

Jim Davis:

Thanks, Shawn, and good morning everyone. In the first quarter, we delivered nearly 6% base business revenue growth, continuing the strong momentum of recent quarters. We also grew total revenues for the first time since the height of the pandemic nearly three years ago. Our strong commercial focus on physicians and hospitals, combined with our broad health plan access, enabled us to take advantage of sustained high rates of healthcare utilization and drive new customer growth. Our investments in advanced diagnostics also enabled double-digit growth within multiple key clinical areas, including brain health, women's health, and advanced cardiometabolic health. In addition, our Invigorate initiative, which includes ongoing investments in automation and AI, continued to improve productivity as well as service levels and quality. Given the strength of our business, we are raising our guidance for the full year. Before turning to highlights from the quarter, I'd like to briefly discuss the FDA's proposed rule to regulate laboratory-developed testing services. We still encourage the administration to withdraw the proposed rule and engage in advancing appropriate legislation that preserves the critical role of laboratory diagnostics. We are disappointed that the FDA continues to move forward with this regulation, which we believe, if enacted, will compromise patient access to critical lab testing, slow diagnostic innovation, and add unnecessary healthcare costs. We also believe that the rule raises serious legal issues, including that the FDA lacks the statutory authority to unilaterally regulate these services. While we will be prepared to comply with the rule, we will continue to work with our trade association, ACLA, on potential next steps. Now I'll recap our strategy and discuss highlights from the first quarter. Then Sam will provide detail on our financial results and talk about our updated financial guidance for 2024. Our strategy to drive growth is focused on delivering solutions that meet the evolving needs of our core customers, physicians, hospitals, and consumers. We enable growth across our customer channels through advanced diagnostics with an intense focus on faster-growing clinical areas, including brain health and molecular genomics and oncology. In addition, acquisitions are a key growth driver, with an emphasis on accretive hospital outreach purchases as well as smaller, independent labs. Our strategy also includes driving operational improvements across the business, with the strategic deployment of automation and AI to improve quality, service, efficiency, and the workforce experience. Here are a few key updates on the progress we've made in each of these areas. In Physician Lab Services, we delivered high single-digit based business revenue growth driven by sustained high healthcare utilization, overall market growth and share gains. This growth also reflects new customer wins and our strengthening relationships with physician practices of all sizes, including large multi-specialty physician groups and those owned by large retailers. A significant driver of our success in the physician channel is our broad health plan access, as approximately 90% of health plan members in the U.S. have access to laboratory services at Quest Diagnostics. Health Plans value our size, scale, and innovation. We partner closely with them to reduce laboratory costs through programs that redirect volume from hospital outreach labs and out-of-network labs, which often charge significantly higher prices than we do, raising healthcare costs for patients and employers. We also remain disciplined in our pricing strategy as we increase our investments in improving the customer experience, such as through digital platform enhancements and adjustments to Frontline Pay. As we highlighted previously, we successfully renegotiated our large health plan contracts that were up for renewal last year. In addition, more than 50% of our health plan revenues now have some type of value-based incentive. In Physician Services, our recent acquisition of Lenco, an independent lab in New York, also contributed to growth in the quarter. Our M&A pipeline continues to be robust, and we are making progress with several promising opportunities. In Hospital Lab Services, we grew base business revenues by mid-single digits. Hospital reference testing, in particular, continued to grow faster than pre-pandemic trends, maintaining the momentum from last year. Hospitals are sending us more reference testing, largely because of our innovation, our quality, and our value. They also face persistent challenges with staffing certain roles in specialized fields like histology, microbiology, and cytotechnology, which we can more easily fill with our talent and our technology. In general, as hospitals face both staffing and cost challenges, they continue to reevaluate their lab strategies. Additionally, as the cost of capital continues to rise, some are revisiting their investment priorities and are directing more capital into other clinical areas that generate better returns. Quest provides hospitals with a range of ways to help optimize lab operations, whether through reference testing, savings and efficiencies through professional lab services, or access to capital by selling their outreach programs. Many hospitals and health system leaders are approaching us with a heightened sense of urgency for help with their lab strategies. As a result, our pipeline of both PLS and outreach opportunities remains very strong. Consumer-initiated testing revenues grew double digits, while base business revenues nearly doubled, building on the gains that we delivered last year from our consumer-facing platform, questhealth.com. Some of our most popular test categories included general health panels, STDs, and tuberculosis testing. We also continue to expand our test menu, such as with our launch of PFAS testing for assessing potential exposure to dangerous forever chemicals, and are extending our reach through various channel partners. In Advanced Diagnostics, we generated strong double-digit revenue growth within several key clinical areas, including brain health, women's health, particularly prenatal and hereditary genetics, and advanced cardiometabolic health. Growth in brain health was driven largely by our Alzheimer's disease portfolio of tests, which includes our Quest AD-Detect blood tests for early risk assessment of Alzheimer's disease and our CSF Tests for diagnosing and monitoring. We are launching our Quest AD-Detect pTau-217 blood test to providers this week, and we intend to add additional biomarkers this year to further expand our menu. In molecular genomics and oncology, we completed the validation of our Haystack MRD test in March and have oversubscribed our Haystack MRD Early Experience Program with nearly 20 leading cancer institutions as participants. The Early Experience Program is the final step to prepare for our broad national launch of the clinical test later this year. We are also excited about the opportunities in early blood-based cancer screening. This quarter, our Lewisville, Texas site received the first specimens for the PROMIS Clinical Trial on a liquid biopsy screening test for colorectal cancer from our partner, Universal DX. We look forward to supporting Universal's efforts to gain U.S. regulatory approval for this test. Lastly, our STEP500 somatic tumor sequencing service, which helps providers select therapy for late-stage cancers based on tumor mutation profiles, is generating interest from large cancer centers. Our investments in cancer screening, treatment selection, and monitoring are positioning us to be a leader in the MRD space and other fast-growth molecular genomics and oncology markets. Turning to operational excellence, our Invigorate program aims to deliver a targeted 3% annual cost savings and productivity improvements. During the quarter, we continued to deploy automation and AI to improve productivity as well as service levels and quality. For instance, we made progress creating what we term a digital front door, which will use AI in our website and service center kiosks to answer basic questions from patients, reducing workload on Phlebotomist and calls to our customer service team. We also recently automated elements of the specimen preparation process in several labs and expect to deploy these systems across other sites in 2024. These systems make our front-end operations more efficient and improve quality while also freeing our employees to focus on other value-added work. Finally, I'd like to personally thank my Quest colleagues for delivering a superior customer experience. Our industry just celebrated Lab Week, which reminds us of the key role labs play at the heart of healthcare. I'm proud that our nearly 50,000 employees bring Quest's purpose to life every day. Working together to create a healthier world, one life at a time. And with that, I'll turn it over to Sam to provide more details on our performance and our 2024 guidance. Sam?

Jim Davis:

Thanks, Sam. To summarize, our business delivered strong revenue growth across our core customer channels, physicians, hospitals, and consumers, building on trends from 2023. Our strong customer relationships, broad health plan access, and investments in advanced diagnostics are enabling us to take advantage of sustained high healthcare utilization and drive new customer growth. We are steadily improving productivity as well as service levels and quality, giving us confidence in improved profitability in 2024. Now we'd be happy to take your questions. Operator.

Patrick Donnelly:

Hey guys. Good morning. Thanks for taking the question. I want to focus on the margins Sam. Obviously, a big story throughout last year. Nice to see them come in a little bit better than expected this quarter. Can you talk about the moving pieces? It sounds like Haystack was as expected in terms of the dilution for the year. You are kind of maintaining that expectation. But can you talk about the better performance this quarter and then expectations as we work our way through the year, the right way to think about the cadence there? I just want to make sure we have that metric kind of ironed out as we think about the progress as we work our way through 2024 here.

Operator:

Yes. The next question will come from Ann Hynes of Mizuho Securities. Your line is open.

Sam Samad :

So let me start, Ann. Thank you for the question by the way. This is Sam, and Jim if you want to add anything as well, by all means. We beat in Q1, both in terms of versus external expectations, but also versus our own internal expectations. So we came in better. We had called out at the beginning of the year on the Q4 earnings call that we expect to see a $0.05 to $0.07 headwind from weather, in terms of EPS headwind from weather. That was at the time driven by the fact that really the first two weeks, three weeks of January were quite tough for us in terms of utilization and in terms of weather. We offset a significant portion of that. I mean, you heard on the prepared remarks that we had a 30 basis point headwind impact as a result of weather, but really we offset most of the headwinds in terms of the EPS impact. So the $0.05 to $0.07, largely we feel good that that's behind us and that's essentially taken off the table. So we felt comfortable increasing our EPS by $0.10 at the midpoint. Now, we're only in the second quarter here. We still have three quarters to go. Utilization was really strong, especially base business utilization in the first quarter. We're expecting in the next three quarters that we go back to, I would say, more normal utilization, not what we saw in Q1. So that's what our EPS range is also driven by. But I would say very pleased with the beat that we had in Q1 and taking the weather headwind off the table.

Ann Hynes :

Great. Thanks.

Kevin Caliendo :

Hey, thanks for taking my question. So, I wanted to ask a little bit about LDT. I'm sure you’re hoping that the ruling was going to come out before you reported, so that you can actually address it. But maybe talk a little bit, now that you've had some time to go over the initial proposal and maybe what you are expecting in the final proposal? Maybe can you let us know about the scope of the tests that you think are going to be included, and any sort of financial implications that you might have for fiscal ‘24? Did it change the way you were guiding? Is there anything in the guidance for this? And maybe how you think it plays out with regards to, are you going to try to get an injunction or anything like that through an ACLA?

Operator:

The next question will come from Brian Tanquilut of Jefferies. Your line is open.

Jim Davis :

Well, if we don't do any other acquisitions this year, then yes, the 50 basis point trend will continue for the following quarters. But, as we mentioned in the script, our funnel is good, it's robust and we would expect to close some additional transactions this year. But timing is involved and these things do take time. We're cautiously optimistic.

Operator:

The next question will come from Erin Wright of Morgan Stanley. Your line is open.

Jim Davis :

Yeah. So, from an advanced diagnostic standpoint, it certainly met and even exceeded our expectations here in the quarter. So, let me talk about brain health first. The uptake of our AB 42/40 test, which is a blood-based test for amyloid plaque has again exceeded expectations. We're really, really pleased with how that test is doing. We announced yesterday in a press release that we've added a p-tau217. We had already introduced p-tau181. So we feel like the brain health blood-based portfolio is in great shape. The CSS side of the portfolio continues to do well as well. On the women's healthcare side, prenatal genetics and carrier screening are doing very well. We continue to see double-digit growth there. With respect to Haystack, as you know, it's still pre-revenue, but we are about to embark on what we call our early experience program. We said in the script that we were oversubscribed. We saw it somewhere between 15 and 20 partners to start the program with, and we filled that up a lot more quickly than we thought and had to cut it off at 20 customers. So, feel good about that. We're going to run that early experience program for the next several months, which will position us for a broader national launch later in the quarter. So, feeling good about the contribution of advanced diagnostics across our portfolio of tests.

Michael Cherny :

Good morning. Thanks so much for taking the question. Maybe, Sam, if I can turn back to the guidance you talked about, the dynamics of utilization and the expectation that it will be a slightly more normal environment. As you think about that, how does that factor into your expectations for organic volume, not only on the total number, but also on mix and how that...

Michael Cherny :

Is this better?

Michael Cherny :

Okay, I'm going to try to fix my headset after this. Apologize for that. So, it's a question just on the dynamics of what's ingrained in the organic volume expectations, is included both from a normalization of the market, but also a mixed perspective and how that factors into your expectations for margin expansion, and where are the push and pull points that will allow you to make sure you hit the margin expansion versus areas that you could potentially fall short?

Jim Davis :

Yeah, I would just say, the mix in the quarter was really good. On a total basis, so all in, even with COVID we still had 10 basis points of growth from a rev-per-rec standpoint, pricing relatively flat. So it suggests that test-pa rec and test-mix were really, really strong. Remember, that offset, as Sam said in the script, $90 million worth of COVID decline. COVID that last year was at $100 per test. So, we completely offset that from a mix standpoint and still saw growth in rev-per-rec. So, really happy with the mix that we saw in the quarter.

Jack Meehan :

Thanks. Good morning, guys. I was hoping you could unpack the core growth a little bit more. So, nearly 6% that was a 3% beat versus what I was looking for. Historically, the lab has been a pretty steady business. So, to post a beat like this, it's pretty notable. Can you just lay out the factors for why maybe outside of core utilization growth came in a lot stronger in the quarter? Any thoughts on share gains? Was that a dynamic? Thanks.

Sam Samad :

Yeah, and Jack, this is Sam. I'll mention one other thing as well. If you're looking at overall base business growth, I mean, the Quest Health Consumer-Initiated Testing business as well was a very good strength and tailwind in the quarter. Basically, that base business excluding COVID almost doubled in the quarter – year-over-year.

Elizabeth Anderson :

Hi guys. Maybe a slight two-parter for me. First just to pick up Sam, what you were just saying about the consumer business. Can you talk about when you sort of think about, how you think about the margin progression of that and sort of like what your expectations are for that to get more towards the corporate average? And then secondarily, could you just comment on the continued labor environment? How are you seeing sort of wages and turnover versus the prior quarter? Thank you.

Operator:

The next question comes from Lisa Gill of J.P. Morgan. Your line is open.

Jim Davis :

Yeah. So we call it value-based incentives is what we're talking about here. Generally there is two types. So, one is related to acquisitions. So when we acquire an outreach book of business, and let's say the health plan was paying that health system 200% to 300% of Medicare, it is not going to come down to the rates that we are contracted with that health plan with on day one. It will step down over time. In fact, there's – again, since it doesn't step right down to our rate, we're getting paid a higher price for that work over some period of time. The second incentive types are broad-based or types of incentives are really related to volume movement. So, movement of high-priced requisitions from health system laboratories or from out-of-network laboratories into Quest Diagnostics. In essence, you're getting paid for share gains at that health plan that are tied to share gains coming from, moving those requisitions from, again, health systems and out-of-network labs. So, really those are the two types of value incentives that we get.

Jim Davis :

No, less than 2% of our requisitions were ever moving through those pipes from an adjudication standpoint. There's somewhere between a $15 million and $20 million cash impact, but no revenue impact in the quarter.

Lisa Gill :

Okay, great. Thanks for the comment.

Michael Ryskin :

Hey, guys. Thanks for the question and congrats on the quarter. I want to follow up on an earlier point you touched on, the COVID headwind that you overcame in the quarter and just how to think about price for the rest of the year. So as you said, impressive that you saw revenue for requisition growth, despite some of that headwind. How should we think about that through the rest of the year? I mean, and again, that's kind of a two-parter in terms of COVID headwinds and fading as you go through the year and then the pricing benefit. You had some major health plan renegotiation that concluded last year. Is that what's driving some of that growth and anything else in that arena that we should be thinking of for the rest of the year? Thanks.

Sam Samad:

Yeah, I mean, I'll add maybe a couple of things. First of all, the COVID point, Michael, COVID is not really material for the rest of the year. We said for the full year, it's going to be a $175 million decline. We've had $90 million of that decline happen in Q1. So, the biggest impact really was going to be felt in Q1. But yeah, there is a price impact related to it, given the fact that – a small, minor price impact, actually, because the price went down middle of May last year. So really it's a minor price impact. Then just a little bit of color on the pricing dynamics. As Jim said, it's flattish for the full year in terms of price impact. If you look at the ingredients within that, the health plans, we expect them to be, modestly up in terms of price. The health systems is a negative impact in terms of price. Then we have some other businesses where we've had some price increases that helps. So overall, I think the net neutral in terms of price impact for the year.

Operator:

[Operator Instructions]. Our next question comes from Stephanie Davis of Barclays. Your line is open.

Jim Davis:

Well, Stephanie, we've always said that about 50% of the cost structure in the company is wages, labor and within the laboratories, it's obviously higher than that. Within the Phlebotomy, it's mostly a people expense, although there's supplies and rent for our patient service centers. I would say in the laboratories, much of the automation efforts continue in the specimen processing area, what we call sorting, aliquoting, pouring off tubes of urine, and things like that. That's where our automation efforts continue to pay dividends for us. On the Phlebotomy side, as I mentioned, yes, it's a highly labor-intensive operation. Now, in a typical 10 to 12 minute draw time, there's still probably five to six minutes of that time doing manual paperwork, computer entry type of stuff. The biggest opportunity there to improve that is still the movement from paper requisitions to electronic requisitions. What still comes into our patient service center today is 35% to 45% paper that we end up having to input that information into our Quest system. So we work back through the physician offices that send us that paper and try to convert that. I would tell you also, we're working on some other kits that could allow for some self-draw. So these are early stages, early stage development. But, we continue to work on some other things that should make our Phlebotomy staff even more productive.

Stephanie Davis :

Thank you.

Andrew Brackmann :

Hi, guys. Good morning. Thanks for taking the questions. Maybe just following up on some of the questions related to advanced diagnostics from earlier. I guess it's been about a year since you guys announced that Haystack acquisition. So, can you maybe just talk about how your views on the MRD segment or that asset in particular may have evolved since then? I know you mentioned no change in dilution or spending related to it this year, but how so we'll be thinking about potential additional investments here in the future to drag some of those share wins. Thanks.

Sam Samad :

Andrew, just to add, this is Sam from a dilution standpoint. So our expectations this year have not changed. It's still in total 35% dilution, which is $0.20 of incremental dilution versus last year. For next year, we expect less dilution from Haystack. So on a year-over-year basis, it's actually a tailwind, and then we expect to be basically to start being neutral to a creative as we look towards ‘26. So, nothing has changed from a dilution or financial expectations, and we're really thrilled about the interest in the early experience program that Jim referenced.

Jim Davis :

All right, thanks, operator. And thanks again for joining our call today. We really appreciate your continued support. Have a good day, everyone.

Operator:

Welcome to the Quest Diagnostics Fourth Quarter and Full Year 2023 Conference Call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and question-and-answer session that will follow, are the copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission or rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited. I’d now like to introduce Shawn Bevec, Vice President of Investor Relations for Quest Diagnostics. Please go ahead, sir.

Jim Davis:

Thanks, Shawn, and good morning, everyone. For the full-year 2023, we delivered strong revenue growth of 7% in our base business and delivered on our earnings commitment as we transitioned away from COVID testing. The results we announced this morning reflect a strong fourth quarter and full year for our base business, in which we made substantial progress on our strategy to drive top-line growth across our core customer channels and improve profitability. Throughout the year, we advanced our growth strategy with innovative testing solutions, new and expanded relationships with health systems and a robust pipeline of M&A and professional lab services opportunities. We also delivered double-digit revenue growth in several clinical areas, including advanced cardiometabolic, prenatal and hereditary genetics and neurology. We also strengthened our oncology offering with a strategic investment in higher growth, minimal residual disease testing. In addition, our efforts to improve quality and productivity delivered our invigorate goal, which helped us to offset the cost headwinds we faced throughout the year. This morning, we issued guidance for 2024 that reflects a return to overall revenue growth, while balancing the earnings tailwinds and headwinds we see for the year. Looking beyond 2024, we are well-positioned to deliver our long-term financial outlook to drive mid-single-digit revenue growth and high single-digit earnings growth. I'm grateful to our dedicated Quest colleagues for making this happen. Every day, they bring our purpose to life, working together to create a healthier world, one life at a time. Before discussing highlights from 2023, I'd like to share some recent regulatory updates. First, as you know, Congress once again delayed Medicare reimbursement cuts and the next data collection process under PAMA that were scheduled to take place in 2024. While we are pleased with the delay, we continue to work closely with our trade association to seek a permanent fix to PAMA through SALSA, the saving access to Laboratory Services Act. ACLA's highest priority this year is to secure passage of SALSA. Second, ACLA and nearly 7,000 other individuals and groups submitted comments last quarter on a rule proposed by the FDA to regulate laboratory developed tests as medical devices. Lab-developed tests are essential medical innovations that are already highly regulated under federal legislation known as CLIA. In addition to the oversight by states, accredited bodies and Medicare as it makes coverage determinations. If enacted, the FDA's proposed rule would compromise patient access to a central lab testing. It would also slow diagnostic innovation and add unnecessary health care costs. We agree with ACLA that the FDA does not have the statutory authority to unilaterally regulate LDTs and believe that resuming discussions with the FDA, Congress, ACLA and other stakeholders on a legislative solution is the most prudent path forward. Now I'll recap our strategy and discuss highlights from the fourth quarter. Then Sam will provide more detail on our financial results and talk about our financial guidance for 2024. Our strategy to drive growth is focused on delivering solutions that meet the evolving needs of our core customers

Jim Davis:

Thanks, Sam. Finally, I'd like to take a moment to remember Dr. Paul A. Brown, who passed away in January of this year. In 1967, Dr. Brown founded MetPath, the predecessor company of Quest Diagnostics, providing basic lab services from his apartment in New York City. Dr. Brown was a pioneer who invented the blueprint for our industry that today is recognized as essential to quality health care, and we are grateful for his vision and leadership. To summarize, we delivered strong base business revenue growth in 2023 and achieved our EPS commitments. Our guidance in 2024 reflects a return to total revenue growth while balancing the earnings tailwinds and headwinds we see for the year. Looking beyond 2024, we are well positioned to deliver our long-term financial outlook to drive mid-single-digit revenue growth and high single-digit earnings growth. And I'm grateful to our dedicated Quest colleagues who bring our purpose to life every single day, working together to create a healthier world, one life at a time. Now we'd be happy to take your questions. Operator?

Patrick Donnelly:

Probably one for Sam, just on the margin outlook for '24. Can you just expand a little bit on expectations there, including maybe the cadence for the year. And then just on the margin front with PAMA, obviously, the push out, it's not a function of you getting any windfall by any means, but just that potential headwind being alleviated. Were there investments that you guys were kind of holding off on until you got more clarity on the outcome there? And then as you plan the budget, you green lit with some more of those as PAMA got pushed out. Just wondering how you thought about that expense piece there and a bit more color on margins?

Jim Davis:

Yes. So Patrick, you heard me discuss in our prepared remarks. We're going to continue to invest in our Alzheimer's portfolio of tests. There's still one important blood-based biomarker that we will bring up later this year. And that will complete our investments in our Alzheimer's testing from a blood-based standpoint. You heard me mention that PFAS testing. We're bringing that test up. We'll be launching that here in the first quarter. We have gotten significant consumer and physician demand to bring that test up. And then finally, we're upgrading some of our laboratory information systems in a couple of our esoteric labs. And so, the lack of this PAMA cut gives us the ability to continue to make those investments.

Elizabeth Anderson:

I have a sort of unrelated two-part combo one. One, can you talk about sort of the progress you're making on Haystack? I know sort of you ended up sort of on the higher end of the dilution. Is that because you're sort of accelerating test pushout, didn't have seen incremental progress on that side? And then secondarily, can you remind us on your thoughts about share repo for the year? I know that's not in your current base guidance assumptions, but just wanted to hear your updated thoughts on that for capital deployment.

Sam Samad:

Yes. And I'll take the second question, Elizabeth. Just to be clear, the Haystack dilution in 2023 was in line with our expectations. It was $0.15 to $0.20. That's what we had called and that's where it came in, in that range of $0.15 to $0.20. With regards to share repo, so we did $275 million of share repo in Q4. Our current expectations are to basically offset equity dilution -- sorry, I said in '24, it's '23 in Q4. And our expectations are to offset equity dilution in '24. And that would work out to something in the similar range that we did in Q4. So somewhere around $250 million to $275 million. That's the base assumption, which is to offset equity dilution.

Pito Chickering:

There are a lot of moving pieces in the 2024 bridge you provided. If we look at operating margins, excluding Haystack dilution, how are operating margins in 2024 versus 2023? And then 4Q margins missed a street by a decent amount. Can you help us bridge the 4Q margins to what you're guiding to for 2024?

Jim Davis:

Yes. Pito, let me just go back to Q4 just to talk about the progress we made year-over-year. So as Sam indicated, our revenue in Q4 versus '22 was down $45 million. And if you look at the mix of that revenue, COVID was down $145 million year-over-year. And remember, we were getting paid $100, a record at that point. Our base business offset $100 million of that, which is why we were down $45 million. Despite that, bad mix and the lower revenue, we still improved our operating margin by 60 basis points. So we made significant progress in the quarter and that progress will continue as we march into 2024.

Jack Meehan:

Thank you. Good morning. Jim, I was hoping to hear from you, like what are you assuming in terms of core utilization in terms of the guide? You've had elevated rates the last couple of years coming out of the pandemic. Do you think that can sustain? Or are you seeing moderation in any areas?

Operator:

The next question will come from Brian Tanquilut of Jefferies.

Sam Samad:

Yes. Thanks, Brian. So first of all, let me say definitively that we are absolutely still confident about our long-term growth guide that we gave, which is essentially to grow revenues in the mid-single digits to grow EPS in the high single-digits. So long-term growth is unchanged. As you yourself mentioned, there are some headwinds in 2024 that I think are transient or temporary that we see this year. So we've got a COVID revenue decline, which is approximately $175 million or roughly $0.50 year-over-year. You've got -- and we've called this before, but you've got Haystack dilution, which is now full year dilution versus a half year dilution that we saw in '23. And then you've got interest expense, which is to the tune of about $0.25, which is really as a result of the additional debt that we took on and the higher borrowing costs driven by the macro environment that we’re in. But that’s really to fund acquisitions and to fund growth in the business as well in the base business. We’ve got a strong pipeline, and we feel really confident about the M&A landscape and the M&A opportunities ahead of us. And we upsized the issuance in November to basically partly pay for the acquisitions that we made in ‘23, Haystack and to some extent, NewYork-Presbyterian, but also to fund the future acquisitions, some of which are not included in this guide. So I would say the punchline is we’re definitely still confident about the long-term growth of the business and the EPS guide that we gave.

Andrea Alfonso:

It's Andrea Alfonso in for Kevin. Unfortunately, I'm in the enviable position of asking yet another question around margin expectations. But I guess my question is, when we think about just the expansion of margins you expect and thinking about the puts and takes into next year. I guess I want to isolate like what gets better? I know that there's maybe some assumption in there around the M&A you've absorbed so far? Is that mildly accretive or just sort of in line or maybe below the margin. Some of your -- in one of your slides, I think there was some mention of GAAP charges around workforce reductions, et cetera. Is that sort of just lingering on from 2023 or is that a new tranche? Just trying to get an understanding on those two items.

Operator:

The next question will come from Lisa Gill of JPMorgan. Ms. Gill, please check the mute button on your phone.

Jim Davis:

Yes. So let me just recap '23 and then we'll get into '24. So in 2023, price, pure price, price per test provided us a slight lift year-over-year, okay? So our base rev per req that we've reported was up 1.2% and price was a positive contributor towards that. Now going into 2024, we expect, again, price to be flat to slightly up for the year. We concluded all of the significant health plan renegotiations in '23. Obviously, there's a new tranche that always comes about one-third -- 25% to 33% renew every year. But we feel confident that prices will remain flat to slightly up as we enter 2024.

Derik de Bruin:

So changing track a little. Look, the LDT legislation looks like it's making more progress than it has. It's like -- can you quantify what your exposure is to LDTs and sort of your thought process here? I mean, you're introducing a bunch of new tests would qualify for that. So how do you think about incremental investments if that goes through? And would you discontinue to test there? And then as a follow-up, there's been some legal movement lately on the MRD space. There's been some litigation that's happened that has blocked some other players from the market. Does Haystack have freedom to operate as you sort of look at what's changed in the IP landscape on that? And how do you think about your IP portfolio on Haystack and being able to not get sued?

Operator:

[Operator Instructions] The next question will come from Andrew Brackmann of William Blair.

Jim Davis:

Yes. So thanks for the question. It's a great question. So first, I would say that there's just broader awareness of testing options that are now available to both consumers and to physicians. In part, this is because of new therapeutics that have been introduced has just created widespread awareness. As you know, the majority of testing today for Alzheimer's is conducted via PET-CT, which are expensive $2,500 to $4,000 exams or CSF testing, cerebral spinal fluid, which is not an expensive lab test. However, the procedure to extract CFS out of the human body is an expensive procedure. And likewise, the total cost of that is roughly $1,000. We have brought up blood-based assays for ApoE, which is a genetic risk for Alzheimer's. We brought up a blood-based assay for what we call AB42/40, which is generally considered the earliest indicator amyloid plaque, the earliest indicator of dementia and/or Alzheimer's onset. And then we brought up one of the two protein markers that are also involved, the Tau markers. We brought up 181 and there's a second one 217 that we will be bringing up later this year. That, in essence, completes our blood-based offering. And I think there's widespread consumer interest, widespread interest amongst primary care physicians. And we've had double-digit growth all year long in both our blood-based assays and CSF testing, and we expect that double-digit growth to continue on in 2024 and beyond.

Stephanie Davis:

So I was hoping to dig in a little bit more on to the AI question you're having and discussions around the prepared remarks. Could you tell me just a little bit more about what you'll be investing into and how maybe the rollout of things of the AI job, the AI job helper will help you guys out? And then I guess on a follow-up to that one, is it safe to assume that you'll have more IT investments as you develop some of these AI solutions that will then have more out year yield for your margin opportunity?

Operator:

And the last question for today's call will come from Eric Coldwell of Baird.

Sam Samad:

So it's about 50 basis points right now is what's in the guide, Eric. And it really reflects, as we mentioned in the prepared remarks, the carryover that we have from the acquisitions that we did in '23, which is really NewYork-Presbyterian, The Steward Health Care, the Lenco acquisition that we signed. And really, that's it.

Sam Samad:

Yes, that's correct.

Jim Davis:

Yes. So in general, our reference testing, which is more LDT like than it is the routine testing, as you know, Eric. In general, that carries a higher test margin, higher gross margin. And in general, right, we're not drawing specimens that are derived or taken in hospitals. So there's a very little phlebotomy cost involved in reference work. So generally, the operating margin of our hospital-based tests are going to be higher than the average of the business. So that business did grow at a faster rate than our overall book of business, both in Q4 as well as for the total year. So it was good mix.

Jim Davis:

All right. Well, thank you, everyone, for joining our call, and we look forward to further updates through the year. Everyone, have a great day.

Operator:

Welcome to the Quest Diagnostics Third Quarter 2023 Conference Call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and question-and-answer session that will follow, are the copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission or rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited. I would like to introduce Shawn Bevec, Vice President of Investor Relations for Quest Diagnostics. Go ahead, please.

Jim Davis :

Thanks, Shawn, and good morning, everyone. We grew our base business nearly 5% in the third quarter, largely by driving growth in our physician and hospital channels. Our consumer channel also continued to produce solid base business revenue growth. In addition, we are pleased that we have now successfully completed negotiations for all our strategic health plan renewals that were scheduled for this year. These strength and collaborations will position us to build on growth opportunities going forward our Invigorate program is on track to deliver 3% annual productivity improvements and savings. In addition, the productivity of our base business improved sequentially and year-over-year. Given the strength of our business and a robust pipeline of professional lab services and M&A opportunities, we are well positioned for continued growth. This morning, I'll discuss highlights from the third quarter, then Sam will provide more details on our financial results and talk about our updated financial guidance for 2023. Now let's turn to some of the highlights from the quarter. Our strategy is to drive growth by continuing to meet the evolving needs of our core customers, physicians, hospitals and consumers. We are enabling growth across our customer channels through advanced diagnostics with an intense focus on faster-growing clinical areas, including molecular genomics and oncology. In addition, acquisitions remain a key driver of our growth with an emphasis on accretive hospital outreach purchases as well as smaller independent labs. Finally, our strategy includes driving operational improvements across the business with strategic deployment of automation and AI to improve quality, efficiency and service. Here are a few key updates on the progress we have made in these areas. In Physician Lab Services, we delivered mid-single-digit base business revenue growth driven by the strength in our cardiometabolic and general health and wellness testing. Our strong relationships with health plans were also a key driver in the quarter. As I mentioned earlier, we successfully completed negotiations for all our strategic health plan renewals that were scheduled for this year. Our success is a result of the clinical and economic value we deliver to health plans and their members. Today, more than 50% of the health of the health plan revenues are generated from these value-based contracts, which are fueling double-digit growth compared to our traditional health plan contracts. Together with the health plans, we have a renewed focus on initiatives to reduce leakage to high-cost out-of-network labs. In addition, we are working together to redirect volume from high-cost labs to Quest. Importantly, this is good for both patients and employers which are paying for the majority of health care costs. In hospital lab services, base revenues grew high single digits in the quarter as we saw strength in hospital reference testing and continued progress with our most recent PLS relationships, including Northern Light Health, Lee Health and Tower Health. Our hospital strategy is to help health systems improve productivity and patient care by delivering innovative laboratory testing that is high quality, accessible and affordable. We continue to manage a robust pipeline of professional lab services and hospital outreach acquisition opportunities. Health systems continue to face labor and cost pressures, which are prompting more of them to reach out to us for help with their lab strategy and in some cases, monetize their hospital outreach business. Our professional lab services can help manage hospitals labs, supply chain and workforce. We are also providing insights from our analytical solutions to guide hospitals to deliver the right test to the right patient at the right time. In addition, hospital outreach acquisitions enable health systems to focus their expertise and capital on the areas of their business that support patient care and drive growth. In Consumer Health, we generated solid base business revenue growth from our consumer-initiated testing channel in the quarter. In addition, our consumer channel was again profitable this quarter. We attribute the strong performance to continuing demand for our expanded test menu, including STIs, comprehensive health and tuberculosis blood testing. Underpinning each of these key channels, physician, hospital and consumer is our advanced diagnostics. These highly innovative higher-growth test areas include molecular genomics and oncology as well as several other key areas. During the quarter, we grew revenues double digits in multiple clinical areas including neurology, women's and reproductive health, cardiometabolic and infectious disease and immunology. We are particularly encouraged by growth in our Alzheimer's disease portfolio, which features our AD-Detect blood testing services. These innovative services use highly sensitive mass spectrometry technologies to provide insight into Alzheimer's risk based on amyloid proteins and the APOE genetic risk marker. During the quarter, we saw strong demand for our Alzheimer's cerebral spinal fluid panel as well, which helps providers identified levels of both amyloid and tau proteins as well as the APOE status. We also grew significantly in women's and reproductive health, especially in non-invasive prenatal and carrier screening tests. During the quarter, the FDA granted breakthrough designation for our adeno-associated virus called AAV companion diagnostic, which we developed in collaboration with Sarepta Therapeutics for the Duchenne muscular dystrophy gene therapy. This FDA designation places us at the forefront of AAV test innovation in the growing area of cell and gene therapies and positions us to build collaborations with other biopharmaceutical companies. Finally, the integration of Haystack Oncology remains on track. The acquisition positions us to enter the high-growth liquid biopsy area of minimal residual disease or MRD testing. We expect to launch our first MRD test in early 2024 from our Oncology Center of Excellence in Lewisville, Texas. Now turning to operational and productivity improvement. Our Invigorate program is well on its way to delivering our targeted 3% annual productivity improvements and savings. I'd like to share 3 examples of how we're improving operations. First, we are deploying front-end automation to enhance specimen processing in our Pittsburgh and Dallas laboratories, which will improve quality and productivity. More sites are planned to receive front-end automation during 2024. We are expanding the use of optical character recognition, or OCR, to scan in data from samples coming into our labs. By freeing up specimen processors from this manual data entry, we will improve our productivity of paper-based recs coming into all of our regional labs by 30%. Finally, we continue to optimize our real estate footprint. Post pandemic, we need less space for some of our call center and administrative functions. We've reduced our real estate footprint by nearly 250,000 square feet by consolidating functions into existing spaces. Before I hand it over to Sam, I'd like to offer our perspective on the rule recently proposed by the Food and Drug Administration that would regulate laboratory developed tests as medical devices. Lab developed tests are essential medical innovations that providers use to guide care for patients every day. These services are highly regulated under federal legislation known as CLIA. In addition to the oversight by states, accredited bodies and Medicare as it makes coverage determinations. If enacted, the FDA's proposed rule would impact patient care by compromising access, slowing diagnostic innovation and adding unnecessary cost to our health care system. We agree with the long-standing assertion of our trade association, ACLA, that the FDA does not have the statutory authority to unilaterally regulate LDTs under its existing medical device authority. Now I'll turn it over to Sam to provide more details on our performance and our updated 2023 guidance.

Jim Davis :

Thanks, Sam. To summarize, we delivered solid base business revenue growth of nearly 5% in the quarter. We successfully completed negotiations for all of our strategic health plan relationships that were scheduled for this year. We also drove improved productivity in our base business as we have done throughout 2023. Finally, given the strength of our base business, combined with a robust pipeline of professional lab services and M&A opportunities, we are well positioned for continued growth ahead. And now we'd be happy to take your questions. Operator?

Ann Hynes :

Can you just comment on progress on what's happening with the turnover? And do you still feel good about your 16.5% margin goal for 2023?

Sam Samad:

Yes, sure. Ann, thanks for the question. So as you recall on the Q2 call, we talked about operating margin expectations being approximately 16.5%. As Jim mentioned, we're seeing slight improvements in terms of turnover. We have made some investments and are going to be making some investments in terms of frontline phlebotomist in anticipation of volumes coming into the winter season here, but also the strong utilization that we've seen. And with regards to margins, we now expect to be slightly below the approximately 16.5% for the year. We're making really good progress on all the cost initiatives and also the productivity improvement initiatives. Volumes have been strong, but we -- especially in light of volumes, we have to make some targeted investments in terms of frontline staff and phlebotomist.

Operator:

And our next call is David Westenberg with Piper Sandler.

Jim Davis:

Yes. I think your last statement is accurate. It's largely theoretical at this point because we don't know what it's going to look like. And the FDA certainly opened this up to commentary and response back from industry and ACLA and other associations. Look, having said all that, LDTs are not the most significant part of our operations. In fact, it's -- on a volume basis, it's less than 10% of what we do. And the 3 labs that we do are LDTs, most -- the majority of our LDTs in are actually ISO certified. We do companion diagnostics, which is a regulated form of testing, right? You're on label for a pharmaceutical drug, so it's just not -- it's not a huge deal for us right now. Now having said all that, we're going to work with our trade association. We don't believe the rule makes sense. We don't believe it's fair. And we'll continue to work to arrive at something that we do think is good for everyone.

Lisa Gill:

I'm just curious if you have an update as to how we should think about PAMA or SALSA going into 2024 given the current environment in DC.

Operator:

Our next question comes from Pito Chickering with Deutsche Bank.

Sam Samad:

Yeah, Kiran, this is Sam. Thanks for the question. So I think some of the drivers that you would expect in Q4 are, you know, what we've been executing and seeing in Q3 and earlier in the year. I mean, Jim talked about the sequential improvement in operating margins despite the fact that COVID is coming down significantly. So what we would expect in Q4 is the following that helps our margins, which has been playing out so far over the course of the year. One is price. We continue to see a healthy positive environment around price and we, in fact, saw positive price in Q3, and we expect to see positive price in Q4. And that's driven by all the work that we're doing around the strategic plan, the third-party plan renewals and some of the value-based contracting that we're doing there. So definitely, the healthiest pricing environment that we've seen in a while. CIT, as you said, is a factor. It was dilutive in the first quarter. It turned profitable in the second quarter. It was profitable in the third, and we expect it to be profitable again in the fourth. We continue to do the cost -- I mean, we see the benefit of the cost reductions in Q4. We talked about $100 million of annual impact of cost reductions on the SG&A line, and we expect to see that at least 1/3 of that be in Q4 as well because those savings started in Q2 and then we're taking a lot of actions as well around improving productivity. Invigorate is one of them that you mentioned, but that's also factoring into margin. So all of that is driving the better than pre-pandemic trends that you've talked about. Now as I said earlier, we are still seeing turnover in -- higher than what we would expect. It has improved slightly in Q3, but it is still trending higher than where it was pre-pandemic. And as I said, given the strong utilization that we're seeing across the business, and we saw that in Q3 as well, we're having to make some targeted increases across frontline staff and phlebotomists to help service some of these volumes. And we expect that to be an impact in Q4 and offsetting more of a headwind of an impact.

Elizabeth Anderson :

I guess I just want to double click on the gross margin a little bit more in the third quarter. I think in different answers, you've given us bits and pieces. But if you could just talk either sequentially or on a year-over-year basis, sort of rank or either if you have dollar amounts or sort of rank order the biggest contributing factors? And then secondly, it sounds like you have some good sightline into the Invigorate savings in fourth quarter and some continued productivity initiatives. How do we think about the flow-through on sort of that -- as we start to think about 2024 and sort of what we might be expecting from those sort cost saving in Invigorate programs?

Jim Davis:

Yes, certainly, Elizabeth. So we're going to set targets going into 2024 that are similar to what we've done in the past. So we expect to generate approximately 3% variable cost productivity throughout our entire operations. That's phlebotomy, logistics, the front end of our lab and then actually all of the processing. We've talked broadly about the use of automation. We're Driving that as fast and furious as we can. We've talked about the use of artificial intelligence to do some of the manual work that our lab text, this could be automated reading of curves. We've talked about in the past, the use of artificial intelligence and microbiology, hematology, urinalysis, and then we continue to work the standard things that we always work as a business, reimbursement and denials is always a big bucket of opportunity for us. Paper [reqs], I talked in the prepared remarks about implementing OCR technology to read all of these paper [reqs] that still come in. We work them down every single year, but there's still a fair number. Even if it's 15% to 20%, when you do the math on that, close to 200 million rec, there's still a ton of opportunity there. So we feel good about our productivity efforts going into next year. We invest in it. We put talented teams around it, and we'll continue to drive it hard.

Derik De Bruin :

I've got two. The first one, just going back to PAMA. In 2023, it got delayed, and I think it will probably get delayed in '24. But in '23, we didn't see a lot of the savings dropped down to the bottom line because of Haystack and some of the other investments that you're doing. I guess, for '24, does that drop down, if we're to get delayed, i.e., is it accretive to what your plans would be is that you're going to do it? Or does it get offset by that? So that's the first one. And then I've got a follow-up.

Derik De Bruin :

And just a follow-up on the Alzheimer's diagnostics, are you going to seek FDA approval for that? I'm just sort of curious on reimbursement, patient cost, what's the test cost in doing it? I'm just curious on sort of what your strategy is there given that it is a new diagnostic category.

Sam Samad:

And Derek, maybe just to come back to the PAMA question and add a couple of points there for you and others that are on the call. Given the uncertainty around PAMA, we will plan today as if PAMA is going to come back and will not be delayed in 2024. I'd say that's the prudent thing to do. That's the only thing we can do at this stage given the uncertainty. So we will plan as if prices will come down next year because PAMA will come back. Now if -- as we -- I would say, on balance, I'd say there's a likely chance that PAMA will get delayed. And if that were to happen, and as we've talked about before, we could see an $80 million to $90 million benefit as a result of that delay, not benefit versus this year, but benefit versus our planning. And when that -- and if that happens, I should say, then we will assess how much we invest in the business to everything that Jim said earlier to how much potentially could drop to the bottom line to EPS. But that decision is not made yet. We'll make that decision when we set guidance. And will evaluate investments that we can make and then evaluate what we can drive as EPS improvement.

Andrew Brackmann :

Jim, I want to go back to your comments around reducing leakage to high cost labs. I think you talked about in your opening remarks. I know that's sort of part of the strategy here, but can you maybe just sort of talk about that opportunity broadly and just sort of quantify how big that could be for your growth going forward?

Operator:

Our next caller is Kevin Caliendo with UBS.

Jim Davis:

Yes. We generally don't talk about the terms, duration and things like that. But what I will tell you is that the trend continues. We seek to establish a fair price first and foremost. And then second, as I just mentioned in the previous question, where we can move these requisitions and improve our share of the commercial payer spend. We try to design incentives around that. In addition, we try to design incentives, when we do a hospital outreach acquisition and the prices go from 300% of Medicare as an example down to our rates, we try to step those rates down over a period of time so that we derive benefit and the commercial plan derives benefit. So we work hard to build those types of incentives into the agreement and I think the trend just continues in the direction we want.

Jim Davis:

Well, I separate again, value-based care from value-based contracts. These are what we call value-based contracts, meaning when we deliver value back to the commercial payer, there can be incentive payments involved in that. When we talk about value-based care, these are really our arrangements with some of these ACO reach organizations and some of the other large physician groups that have taken on risk from Medicare Advantage plans. And we continue to embed ourselves when these within these ACO reach programs and continue to work closely with large physician groups that take on this risk. And as we said in the past as we said in the past, when these types of relationships are really good for the lab industry, they -- if you're managing risk, you're managing the cost of health care to a fixed number every year, you're generally going to be incented to provide early care and early diagnostics so that you don't let disease progress into more expensive inpatient care and we continue to work towards that.

Jack Meehan :

I have a couple of cleanup questions for Sam. First is on collections. So seeing a little AR build? I know you called it out, but anything -- any color you can add on that? And then second is on the base growth, 5% pretty good. I was just wondering if weather weekdays had any impact could have actually been better on an underlying basis?

Jim Davis:

Yes, weather and days and things like that, versus last year, weather was a slight help I mean, not significant at all, Jack, but it was a slight help because last year's hurricane in September was worse than this year's hurricane. The only other comment on days that I would make is early in the quarter in July. The fourth of July fell on a Tuesday this year versus a Monday last year. So in essence, your Monday and Tuesday are really, really bad days versus a year ago. You only had one bad day called a Monday because the fourth fell on a Monday. But again, that's one day out of 90. So yes, I mean, a little bit of an impact there, but not that significant.

Patrick Donnelly :

Maybe a couple of follow-ups on Haystack. It sounds like still a 24 time line there. Can you just talk about I guess, any more specific timing and the catalyst set there when we could expect to see some data? And then just also the spend expectations related to getting that through the approval process as we work our way through ‘24 would be helpful.

Sam Samad:

Yes, sure. I mean with regards to spend, I'll talk in dilution terms and EPS terms here this year, and then I'll talk -- address your question around '24, Patrick. So again, very pleased with the progress that the team is making. This year, we're expecting EPS dilution to be in the $0.15 to $0.20 range. We talked about that on the Q2 call. It's still in the same range, $0.15 to $0.20. If you look towards '24, what we've said and this still applies, is that the annualized dilution in 2024 is going to be less than what we expect to see -- what you see this year. So the $0.15 to $0.20, if you annualize that, that's $0.30 to $0.40 next year. So we expect on an annual basis next year to be less than where things are trending this year. So improvement just on an annual basis. And then as we look forward, we expect 25% dilution to be lower than 24%, and then we expect 26% to actually be accretive. So that's consistent with what we said when we announced the deal consistent with what we said on the Q2 call.

Erin Wright :

You laid out some of those key profit drivers for the fourth quarter. And as we think about what kind of continues into 2024, I think you mentioned in the previous question kind of -- or a previous question, productivity gains should continue, and I understand there's PAMA dynamics as well that are somewhat unknown. But should we anticipate a deviation from the long-term profit guidance is like 50 to 100 basis points operating margin expansion next year?

Jim Davis:

Yes. Erin. The last thing I'd say is we're encouraged by the volume trends. And as you know, incremental volume coming into the business in a business that has lots of fixed costs certainly mixes up the existing margin rate. So we feel good about the volume trends in our physician office. We feel good about the volume trends in health systems. And as I mentioned in the script, we feel good about our funnel of M&A opportunities that are in front of us as we march through the fourth quarter and early next year.

Brian Tanquilut :

I guess, Sam, just to follow up on Erin's question really quickly. If we think about the composition of margin between gross profit and G&A, is this the right baseline to build off of factoring all the things that you mentioned, such productivity gains and maybe PAMA. And then maybe just, Jim, a quick follow-up. Hospital deals. Obviously, you've had some growth there. How should we be thinking about the pipeline and your ability to sustain the growth rate given what's in the pipeline today?

Jim Davis:

Yes. Brian, as I said in the script, we're encouraged by the breadth and depth of our funnel of opportunities in hospital outreach as well as PLS. And I say that our teams are working them very hard. And the trends are pointing in our direction, right, with the cost of capital going up for health systems, their investments, I think, are truly focusing on the things that will drive growth for health systems, whether that's investments in neurology, cardiology, cancer, obstetric, those are the things that drive growth in health systems. And so when you make all those investments, albeit now at capital costs that are significantly higher, they can turn to us to make the investments they need in laboratories. When you see institutions like New York Presby sell their outreach book of business and really focus their investments on the things that are driving their growth. I think that's a good sign of how health care systems, they're really good strategic ones are really thinking today.

Jim Davis :

All right. Everyone, thanks again for joining our call today. We certainly appreciate all your continued support. I also want to thank the Quest Diagnostics team who, as we've transitioned away from COVID, have really done a magnificent job in continuing to drive growth in our base business, drive productivity and continue to satisfy our patients, providers and all those that use Quest Diagnostics. So thanks, everyone, and have a great day.

Operator:

Welcome to the Quest Diagnostics Second Quarter 2023 Conference Call. At the request of the company, this call is being recorded. [Operator Instructions]. Now I'd like to introduce Shawn Bevec, Vice President of Investor Relations for Quest Diagnostics. Go ahead, please.

James Davis:

Thanks, Shawn, and good morning, everyone. We had strong base business performance in the second quarter with nearly double-digit revenue growth year-over-year. Demand for our services remains strong across all regions boosted by the collaborations we have formed with health plans, hospitals and physicians amid an environment where people are returning to care. We are particularly encouraged by the revenue growth in our base business of nearly 10% from our health system customers. Also in the second quarter, we made substantial progress improving the profitability of our base business compared to the first quarter and prior year despite persistently high employee turnover. Total adjusted operating margin improved more than 170 basis points compared to the first quarter despite a decline of approximately $80 million in COVID revenue. This morning, I'll discuss highlights from the second quarter, then Sam will provide more detail on our financial results and talk about our updated financial guidance for 2023. Now let's turn to some of the highlights from the quarter. As we shared at Investor Day, our strategy is to drive growth by continuing to meet the evolving needs of our core customers, physicians, hospitals and consumers as they navigate the changing landscape in health care. We will enable this growth with an intense focus on faster-growing clinical areas, including molecular genomics and oncology. In addition, acquisitions will continue to be key drivers of our growth. Finally, our strategy includes driving operational improvements across the business with strategic deployment of automation and AI to improve quality, efficiency and service. So let's review progress we've made in each one of these areas. In Physician Lab Services, we delivered strong base volume growth from physicians, largely through our partnerships with health plans, which have expanded our access to the market. A growing number of these involve value-based arrangements and are generating faster growth and share gains than the traditional relationships. These arrangements position us as a more strategic partner with health plans as we work together on leakage, shared savings and redirection programs. In addition, NewYork-Presbyterian's recently acquired outreach assets brought us new volume from the physicians. In Hospital Lab Services, base revenue from health systems grew nearly 10% in the quarter. The Professional Lab Services business had a very strong quarter as we saw solid growth from both new and existing PLS relationships. We are particularly encouraged by progress with our new PLS partnerships with Northern Light Health, Lee Health and Tower Health. As hospitals continue to experience financial challenges, we are here to help whether through professional lab services, reference testing or purchasing the hospital's outreach assets. We are now seeing growing momentum with a significant pipeline of potential deals with large health systems. In Consumer Health, we had strong base business growth on questhealth.com. We continue to optimize our marketing efforts to target our customers more strategically and now expect consumer-initiated testing to be profitable through the balance of 2023. Also during the quarter, we launched Genetic Insights, our first consumer-initiated genetics health test on questhealth.com. This saliva-based test leverages our expertise in Next-Generation Sequencing to analyze 3 dozen genes for inherited risk of conditions ranging from breast and colon cancer through carrier status for cystic fibrosis and Tay-Sachs. We are encouraged by initial demand for this new offering, which adds to our growing test options for health-minded consumers. As discussed at Investor Day in March, a key pillar of our strategy is to support faster growth across all customer segments through highly specialized advanced diagnostics. These offerings include molecular genomics and oncology tests such as germline testing to assess prenatal and hereditary genetic risk and somatic testing for tumor sequencing. Advanced Diagnostics also encompasses other key areas, including neurology, women's reproductive health and cardiometabolic health. In neurology, we continue to achieve strong growth from our innovative Quest AD-Detect, portfolio of Alzheimer's blood tests, which help identify early indications of beta amyloid and ApoE status. AD-Detect strongly positions Quest to lead in this rapidly evolving Alzheimer's landscape. Emerging therapies for Alzheimer's represent a new era in treatment and testing for this disease. Like many diseases, early intervention in Alzheimer's may promote better outcomes. Our AD-Detect portfolio enables accessible and convenient evaluation of Alzheimer's risk potentially at early stages and the monitoring of progression. AD-Detect is now available to our physician customers in the U.S., and we believe it also has the potential to generate strong consumer demand. In addition, we continue to see strong growth in our cardiometabolic, endocrinology, infectious disease and carrier and prenatal genetic screening services. In June, we completed our acquisition of Haystack Oncology, which positions us to enter the high-growth area of minimal residual disease or MRD testing. Haystack has developed a highly sensitive technique for early detection of residual or recurring cancer with the potential to improve outcomes for patients being treated for cancer. The integration of Haystack is on track, and we continue to expect to introduce our first MRD test in early 2024. We intend to launch this test from our Oncology Center of Excellence in Lewisville, Texas, where we also recently introduced our solid tumor expanded panel for tumor sequencing and therapy monitoring. I'd like to say a little more about our M&A strategy. Haystack is a capabilities acquisition. And as we've said, it will initially be dilutive for earnings per share. However, our primary focus in M&A continues to be on traditional hospital outreach purchases and tuck-in lab deals that are accretive to earnings in the first year. To underscore what I said earlier, our M&A pipeline is robust as hospital systems faced continued margin pressures due to labor challenges and a shift from inpatient to outpatient care. Turning to operational and productivity improvement, our Invigorate program is well on its way to delivering our 3% annual productivity savings target. As we discussed at Investor Day, Invigorate includes deploying automation and AI to improve quality, efficiency and service. In the quarter, we implemented our automated microbiology solution in Lenexa, Kansas. Next up is Lewisville, Texas. When complete, 4 of our major laboratories will use automated microbiology lines with embedded artificial intelligence identifying positive and negative cases leading to improved quality and productivity. We are also excited by results of a pilot in our Clifton lab that showed AI speed data collection in specimen processing and expect to implement this AI solution across all of our major regional labs later this year. In genomics, we're utilizing AI in bioinformatics to improve and speed variant classification and prioritization. These are just a couple of the many examples of our use of AI and automation to continuously improve our operations. In addition, we believe generative AI has great potential to deliver insights and content not only to better target and serve customers, but also to create innovations that help standardize our lab operations. We are encouraged by preliminary results of pilots that use generative AI and our customer service center to automate call their sentiment analysis and quality control and in our marketing operations to improve market research and customer targeting. Now before I turn it over to Sam, I'll close by saying that we always knew 2023 would be a challenging year as we transitioned away from COVID-19 testing and supported the nation's return to care. Our dedicated employees on the front lines and everyone else who supports them, have done a magnificent job of bringing our purpose to life, working together to create a healthier world, one life at a time. I'm really proud to be leading this Quest Diagnostics' team. And now I'll turn it over to Sam to provide more details on our performance and our updated 2023 guidance. Sam?

James Davis:

Thanks, Sam. To summarize, we had strong base business performance in the second quarter with nearly double-digit revenue growth as our collaborations with health plans, hospitals and physicians enabled us to benefit from strong demand amid a broad return to care. We made substantial progress improving the profitability of our base business compared to the first quarter and prior year. This was slightly offset by persistently high employee turnover, which weighs on productivity and increases cost. And finally, our updated guidance reflects our expectations for revenue growth and improved profitability in the base business. Now we'd be happy to take your questions. Operator?

Jack Meehan:

I wanted to start and ask about kind of the health plan commentary. Is it possible to tease out how much of this growth could be share gain related versus just strong underlying demand and somewhat related, we have heard more discussion about national payers being more active around payment integrity. I was just curious if you're seeing that at all, could that be a positive or negative for Quest?

Jack Meehan:

Super. Sam, one question on margins. Sorry if I missed this. What is the guide now assume for margins for the year? And can you just talk about what you're assuming in terms of the pace of productivity improvement?

James Davis:

Yes. Jack, I would just add, obviously, you can see the base -- you can see the margin improvement from Q1 to Q2. That comes through pretty clear. You can do the math on the base margin improvements from Q2 of last year to Q2 of this year, when you make the assumptions on the drop-down of the COVID revenue, which you've -- you're in the range with the numbers you've used in the past. So we're really pleased with the base margin improvement from Q2 of last year to Q2 of this year and very pleased with the improvement from Q1 of this year to Q2 of this year.

Elizabeth Anderson:

Congrats on a good quarter. My question is, I realized there was a ton of noise this quarter on the deferred comp and how that nets out. How -- could one -- what is your assumption in terms of what's embedded in your guidance for the back half of the year? I appreciate that it can be different based on what happens to the future stock price. But I just want to understand whether it's sort of continuing the forecast of last year's trajectory into this year or 2Q going forward or what have you? And then secondarily, how do you think about you mentioned the labor productivity and sort of the still elevated turnover. So how do you think about sort of the cost benefit of analysis of perhaps like investing more in wages or something like that versus the productivity gains that you would -- you could potentially receive from that?

James Davis:

Yes. And Liz, on the labor front, at Investor Day, we showed a chart that said pre-COVID, our turnover of what we call our frontline roles, which is phlebotomy, logistics, specimen processing, our call centers, was in the 14% range, our total turnover. We showed a chart that said in the fourth quarter, it was upwards of 23%. It's come down modestly in the first part of the year, but still hasn't come down to the levels, obviously, pre-COVID or to where we would like them. Now you're right. It's a trade-off between increasing wage rates and the price -- and the cost you pay for this turnover. We've estimated that each turnover, each person can cost us upwards of $8,000 to $10,000 depending on the role. And that's simply the lost productivity or the time it takes to get somebody from day 1 to as efficient in that role as a person who's been in the role for 2-plus years. So it's about $8,000 to $10,000 which if you do the math on that, could have upwards of a $20 million impact in the second half of this year. Now we're at the high end of our wage rate guidance that we gave. We said 3% to 4%. We're certainly at that high end. And if we need to make adjustments, we obviously look at the ROI on that. And we're faced with those decisions. And in certain markets, we will make adjustments to get the turnover to a place that we're comfortable with.

A.J. Rice:

Maybe just to pivot over and ask you about your Health System Business. I think last quarter, you said in aggregate, it was growing about 70%. And this quarter, the press release says it's just under 10%. And I suspect with NewYork-Presbyterian and so forth coming online fully in the back half, it might be even higher than 10%. When you think about your margin targets and what you're shooting for, can you comment on how the growth in that side of the business is impacting margins and the opportunity? And if there's any updated thoughts on the pipeline that you're seeing, maybe give us that as well.

Sam Samad:

Yes. And one additional comment, A.J. So with regards to the expectations in the second half on PLS, as Jim said, we are seeing strong growth in that business. In the second half, from a year-over-year perspective, we had some big wins in the first half of last year as well that ramped up in the second half of last year. So from a year-over-year perspective, we do lap some of those PLS wins and that mutes our revenue growth to some extent. But we're seeing really great momentum on the PLS side of the business.

Patrick Donnelly:

Sam, again, that 16.5%, is that now the right number to work off in terms of the long-term guide? And you talked about a few of the moving parts, the unit pricing, maybe looking a little better, labor hitting it. Any of these things onetime that would wear off? And then on that pricing, I know you guys negotiate kind of 1/4 of the contracts annually. Can you just talk about the pricing environment at the moment?

Operator:

The next question is from Brian Tanquilut with Jefferies.

Sam Samad:

Yes. So with regards to -- thank you, Brian, first of all, for the question. So with regards to 24, we didn't guide 24. We gave some long-term targets around what we expect our operating margin to look like over the next 3 years as we continue to execute on productivity improvements, Invigorate and apply cost savings into the business. The $100 million that you referred to, which, by the way, next year will be part of our run rate. So we wouldn't expect to see an improvement year-over-year in '24 versus '23 because we're -- except for maybe 1 quarter. But I would say the 16.5%, as I mentioned to Patrick, becomes the launching point for the future. And we do expect with continued Invigorate offsetting inflation with the cost reductions in the business that we've applied and now will continue and that are generating the expected improvements, we do expect to drive improvement in our operating margins long term. There is the uncertainty about PAMA, which is what drives the range of either 75 to 150 basis points improvement over the 3 years.

Operator:

The next question is from Pito Chickering with Deutsche Bank.

James Davis:

Yes. So we're optimistic that the growth will continue here. In the second half of the year, July to date has been strong consistent with what we saw in June. We generally don't break apart our PLS growth from the growth in our core business. We've said externally that our PLS growth is -- our PLS business is about a $600 million franchise. We said the health system market grew at 10%, PLS grew north of that, reference grew less than that. So I think you can get a sense for what that contributes to our total growth. But we're optimistic on the prospects with our health systems. The funnel of PLS opportunities remain strong. Health systems need our help, and we think we've got a great offering that helps meet their needs.

Operator:

The next question is from Andrea Alfonso with UBS.

James Davis:

Yes, Kevin, let me take the labor piece, and then I'll turn it over to Sam here. So on a previous question, we talked about pre-COVID, our attrition rate of our frontline positions was in the 14% range. In December, Q4 it was 23%. The chart we showed at Investor Day in March, it's slightly better than that. We have quantified it. We've said it's about $8,000 to $10,000 per employee. And in the second half of the year, we think it can be upwards of a $20 million impact versus where we would want it to be at this point in the year. So now, is the labor market is easy? Unemployment rate sits at 3.6% right now. The Fed has signaled that they're trying to actually get the unemployment rate back upwards of up to 4.1%, 4.5%. The interest rates are going to take a notch up again today. So we think there's going to be easing in the markets going forward, but it's hard to predict. And so right now, I think we're being appropriately conservative on the guidance in the second half.

James Davis:

Kevin, the last thing I'd add is when you think about price in this business, we tend to always think about commercial payers, Medicare and Medicaid. You have to remember that there's another $2.5 billion on an annual basis where we price directly to Health Systems, to Physicians. And then we have $800 million worth of other businesses between employer solutions, our drug testing business, our wellness business, and our ExamOne business, which serves life insurance companies. So we are getting price in those segments of our business. And as Sam indicated, our price performance will be better in the second half than it was in the first half primarily from the lift we're getting on that side of our portfolio.

Lisa Gill:

I just want to go back to your earlier comments around value-based care where you talked about leakage out-of-network opportunities. But can you maybe just talk about how you see this over time and how you see the evolution of value-based care as it pertains to lab. Is this a margin-enhancing opportunity or just more of a volume opportunity? One, how do I think about that? And then just secondly, I've heard you talk about the pipeline of Health Systems. Is there any way to size what that current pipeline looks like?

Operator:

And our last question is from Eric Coldwell with Baird.

James Davis:

Yes. So on the first part of your question, we did not note any other notable changes with respect to the preferred lab network. We still remain part of that preferred plan network, and that's our plan going forward. In terms of narrowing networks, when we speak to all our commercial payers, we always think it's better, from their perspective, to have both independent labs in network that actually improves their ability to make sure that requisitions are going to lower cost, lower price environments, which is good for the payer. It's good for the employer, and it's good for the patient. And so we don't see any change in that trend to narrow networks that restrict access to independent laboratories. Now having said that, there's laboratories that play on the fringe that could be expensive single-type test environments. And I think the payers are always looking at specialty labs versus independent labs that can do some of that specialty work as well.

Sam Samad:

Yes. Sure, Eric. So no, we didn't quantify the reduction in investment spend. We did have lower investment spend in Q2 versus Q2 of last year, but we haven't quantified how much it is. With regards to the SG&A benefits and the $100 million, I think the assumption that you can make is it's about 1/3 of that $100 million that was realized in Q2 and we expect the same to occur in Q3 and Q4.

Operator:

We did have one more question come in. Our last question is from Derik De Bruin with Bank of America.

James Davis:

Well, we think with the combination of Haystack, which, as you noted, is centered on minimally residual disease testing post cancer diagnosis. And we brought up our own internal assay for therapy selection. So from a therapy monitoring and therapy selection standpoint, we believe we're very well positioned for future growth. We continue to invest on the genetics side of our business, hereditary genetics, genetic offerings for diagnostic purposes and then the family planning and prenatal genetics is also an area that continues to receive focus. So we believe we're well positioned on the cancer side. We continue to make some investments on the genetic side and that's where the -- we think we're well positioned. Now again, our focus right now, we'll continue to focus on hospital outreach deals and other small tuck-ins that are accretive to our business.

James Davis:

All right. Well, thank you, everyone. We -- again, I believe we had a strong quarter here. The outlook for the second half. We've taken up our revenue guidance, feel good about that, and thank you for supporting Quest Diagnostics. Have a great day.

Operator:

Hello, and thank you all for standing by. Welcome to the Quest Diagnostics First Quarter 2023 Conference Call. At the request of the company, this call is being recorded. All lines have been placed on a listen-only mode until the question and answer portion. The entire contents of the call, including the presentation and question-and-answer session that will follow, are the copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission or rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited. I would now like to introduce Shawn Bevec, Vice President of Investor Relations for Quest Diagnostics. Go ahead, please.

Jim Davis:

Thanks, Shawn, and good morning, everyone. We’re off to a strong start in 2023. Our base business grew double digit compared to prior year, driven by strong performance across physician and health system lab services. This morning we announced the acquisition of Haystack Oncology. Later in my remarks I’ll describe how this transaction is aligned to the molecular genomics and oncology strategy we shared last month at Investor Day and how it positions us well in the fast-growing category of minimal residual disease testing. Now, turning to the first quarter. Total revenues were $2.3 billion. Total base business revenue grew 10%, supported by base business volume growth of nearly 8%. And earnings per share were a $1.78 on a reported basis and $2.4 on an adjusted basis. Now, let's look at some of the highlights from the quarter. The strong volume growth we experienced in our base business across all customer types, points to a continued return to care in the quarter. We saw a faster growth in number of test per requisition across a broad range of clinical test categories. This suggests more people are returning to the healthcare system for routine care after delaying care during the pandemic. Health plan volumes also continue to grow faster than the overall business. This trend is directly related to our ongoing efforts to partner with health plans to actively steer patients to high quality, lower-cost providers like Quest, thereby saving money for the health plan, employers and plan members. During the first quarter, base revenues from health systems grew approximately 7%. At Investor Day, we said this book of business would grow at about 5% to 6% CAGR, and we're having success across the board with new wins in our reference and professional lab services offerings. Some of these highlights include

Jim Davis:

Thanks, Sam. To summarize, we're off to a strong start in 2023 and our base business grew double digits compared to prior year. We are excited about our announced acquisition of Haystack Oncology. With Haystack, we expect to build on our strengths in cancer screening and diagnosis to play a leading role in the higher growth areas of MRD detection. And finally, we're well on our way toward generating our targeted 3% Invigorate savings and productivity improvements. Now, we'd be happy to take your questions. Operator?

Ann Hynes:

Great. Thank you. My question is focused on the base volume growth, which was strong. And in your commentary, you talked about health plans that you're gaining more market share there and you are winning more market share, I think you said with, reference labs. So maybe can you give us more detail on that? Is it existing health care partners? Do you have a new health care partner? Is your relationship with existing partners may be changing? And I'm just trying to figure out how much is a return to normal versus maybe actual market share you could be gaining? Thanks.

Operator:

Thank you. Our next question comes from Patrick Donnelly of Citigroup. Your line is open.

Sam Samad:

Sure, Patrick and good morning. Thanks for the question. So listen, we had 15% operating margins in Q1. I'll talk about some of the drivers in terms of -- to your question, looking forward and how we get to that approximately 17% that we guided to on Investor Day, and we're still committed to that approximately 17% number that we guided for 2023. So here are some key drivers. First of all, Q1 margins came in on the base business strong. And, overall, as expected, we had a negative impact from COVID revenues, both coming down more precipitously than expected, but also the mix on COVID. We saw more testing done at the PLS sites that at other sites, which are lower cost for us. But in terms of Q1, came in as expected. As we look forward, we start to see a few things help margins. First of all, keep in mind, Q1 is usually our weakest quarter as well. But as we look forward, you expect Invigorate savings to or productivity improvements to ramp up, and that has already started but will ramp up over the course of the year. We set our SG&A reductions of approximately $100 million will really take effect more so in Q2 onwards. And so, that will help margins going forward as well. We're seeing, as I said, good strong base business growth and volume that's going to help us. We're seeing good tailwind from pricing. Our pricing environment is the best that it's ever been. We're seeing a modest benefit from pricing this year compared to the 50 basis point headwind that we saw last year. And before that, we used to have even more headwind than that. So all of those factors, as you look forward in terms of productivity, in terms of SG&A improvement, in terms of volume growth, give us confidence about getting to that 17%.

Operator:

Thank you. Our next question comes from Brian Tanquilut of Jefferies. Your line is open.

Jim Davis:

So I think there's evidence of a strong return to care. So I just said that our advanced testing portfolio was certainly up in the quarter. We also saw just strong growth in routine testing, routine cardiometabolic, lipid panels, chemistry panels and things like that. Generally, general health and wellness visit has high test per req, because you're testing across the entire human body. So I think our test per req were really powered by that.

Elizabeth Anderson:

Hi, guys, thanks so much for the question. I was wondering if you could talk more about your visibility into pricing and contract renewals, particularly with payers this year, should have -- how far along are you in terms of the renewals and sort of what incrementally have you been seeing? Or is it sort of similar to what you called out on current trends? Thank you.

Elizabeth Anderson :

Thanks so much.

Kevin Caliendo :

Hi. Thanks for taking my question. Congrats on the Haystack acquisition. Can you maybe talk through the process there, why now, why this company? Talk through any -- I know there's some regulatory and commercial milestones this company has coming up? And also, maybe just talk through how we should think about the dilution in terms of modeling it and where would show up through the P&L.

Sam Samad:

Yes. So, Kevin, first of all, thanks for the question. So we said this deal will be modestly dilutive this year and modestly dilutive for the next three years and will be actually accretive for us in terms of earnings in 2026. We haven't shared exactly how dilutive of it is for 2023. But let me give you a couple of, maybe, nuggets or qualitative directional comments. First of all, in terms of our overall guidance, as you saw, we kept our guidance midpoint the same. We narrowed the guidance by $0.10 on EPS, so I'm referring here specifically to adjusted EPS. And the drivers of that were, improved base business, which is taking us higher, lower COVID, which is going the other way, and some modest dilution from the Haystack acquisition. But all in all, if you put all those together, we're still at the midpoint of the adjusted EPS guidance that we were last quarter. In terms of going forward, the annualized EPS dilution from Haystack next year is actually less than what we expect to see this year. So it starts to improve. It's -- next year is the peak dilution for the deal. And in 2025, the dilution is lower. So it's actually a year-over-year EPS improvement. And then in 2026, as I said, it's accretive for us from an EPS perspective. ROIC wise, as I said, it turns positive by the end of 2025. And we expect it to have a -- it definitely clears our hurdle for ROIC expectations in the next five years.

Sam Samad:

One other thing, just to wrap up on the financials. Kevin, back to your question around dilution. I do want to mention, for the longer term, we are committed to the Investor Day guidance that we gave around long-range guidance, which said mid-single-digit revenue growth and high single-digit EPS growth. The Haystack acquisition actually modestly improves on that as well. So I just wanted to provide this for the long-term guidance, given that we just shared at an Investor Day not too long ago

Jack Meehan :

Thank you. Good morning. Wanted to stick with the Haystack deal. Very interesting, great tech, pricing is pretty reasonable with other deals in the space. I had a few more questions for you. First is in terms of coverage, just wanted to confirm, I assume, is the plan to go through Moldex there? Then number two, do you think reimbursement looks similar to other MRD tests on the market? And then finally, can you just comment, are there any royalties attached to the deal? Thank you.

Shawn Bevec:

Operator, next question.

Erin Wright :

Great. Thanks. Two part question. Just first on basic routine testing. Where are we now relative to pre-COVID baseline levels? Are we fully back to normal here? And then on capital deployment, I understand there's a balance of capital deployment dedicated to the innovation assets like Haystack, but how rich is the pipeline now for the tuck-in deals around hospitals, or local players and have you seen any changes in the urgency around those types of deals? Thanks.

Operator:

Thank you. Our next question comes from Pito Chickering of Deutsche Bank. Your line is open.

Sam Samad:

Yes. So the guidance we gave for the year, we said our wage inflation would be in the 3% to 4% range. No surprises there. We still feel good about that overall guidance that we set for the year. Our turnover rates have improved from Q1 of last year. Sequentially, for most job categories, it improved from Q4 to Q1. And we continue to see the trend back towards a normalized attrition rate. When I say normalized, sort of, pre-COVID levels. It is not yet back to those levels unlike volume, but it is trending in the right direction, and we feel good about where our wage inflation was in the first quarter and for the year.

Operator:

Thank you. Our next comes…

Operator:

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

Jim Davis:

Yes. It’s a good question. Absolutely, a halo effect. Remember at Investor Day, we said in 2022, ex-COVID, we had $8.4 billion in revenue. And of that $8.4 billion, $1 billion of that is in the cancer space. And we said about half of that or $0.5 billion is in the screening space, routine screening, PSA, Pap Smear, HPV, some common cancer markers, but we then said that the other $0.5 billion is anatomical pathology. So we have the -- and once we have that specimen, it's only logical for the medical oncologists to start to, once it's declared cancer -- the next question, post surgery is there still cancer cells in this human being, or the next question, if the answer to that is yes, and then there's therapy. The next question is, did the therapy work? Do we still see remnants of DNA from the tumor. So we think this absolutely fits into our overall cancer strategy and Quest Diagnostics today. In particular, again, there is a halo effect. We will own the block, we will own the specimen and doing the testing on that for both treatment monitoring as well as treatment selection, we think, is just a natural. Now, from a commercial standpoint, we have a pretty mature oncology distribution today that calls on pathologists and medical oncologists. And, yes, we are absolutely going to strengthen the team as we finish the commercialization of this assay and to have a more robust channel calling into the medical oncologist space. So good question. Thanks.

A.J. Rice:

Thanks. Hi, everybody. Maybe two quick ones here, if I could slip them in. A strong rebound in the base business line. We've talked for a while about the fact that the New York region had not come back as quickly as other regions. Did you see any outsized performance there that's contributing to the strong base business? Or was the strength pretty much across the board geographically. And then you didn't do anything on the buyback front this quarter. I know you've Haystack now and you've got hospital deals. I wondered what's your thought about additional share repurchases as we progress through the year.

Sam Samad:

Yes. And thanks, A.J. On the buyback, so what's assumed in our guidance in terms of adjusted EPS is that we will offset equity dilution in terms of share buybacks. So we'll do enough to offset equity dilution. We are still committed to returning the majority of our free cash flow to shareholders through dividends and buybacks. So that's still our commitment. We communicated it on our Investor Day. We're obviously still committed to it. But we also said that we're going to scale share buybacks up and down depending on also the M&A pipeline and the impact that might have on growth and driving our strategy and also our long-term growth. We had -- in the quarter, we talked about -- or at least, recently, we talked about NewYork-Presbyterian and the fact that, that's a $275 million capital deployment. We talked about now today, Haystack and that's an additional capital deployment of $300 million. So we've got good progress here on the M&A front. So that's also why we didn't do any share buyback in Q1.

Unidentified Analyst:

Hi. Good morning. This is John [ph] on for Derek.

Unidentified Analyst:

Hey, good morning. I wanted to ask about the consumer initiated testing business. in terms of contribution, if you're allowed to say how much contribution you saw monthly in terms of sales and how much of an impact has made on the margins. Just curious if that’s something I should look out for in terms of the margin progression here. Thank you.

Sam Samad:

Yes. So, John, just to add to that, it is dilutive in Q1 to margins. But as Jim said, it's going to improve throughout the year. So that's another aspect of why our margins overall improve, although this one is more modest.

Jim Davis:

All right. Well, I want to thank everyone for joining today, some really exciting news here, but let me just summarize. Look, we're off to a really strong start here in 2023. Our base business performed stronger than expected, stronger than we expected in the quarter. We feel really, really good about that. and it's certainly offsetting some of the COVID decline that we saw in the quarter. Second, hopefully, you can tell, we're really excited about the Haystack Oncology. We think the technology is the right technology, but more importantly, it's the right team. We are really impressed with the team that will join Quest Diagnostics. And as you know, in these types of acquisitions, it's not just investing in the technology, we’re really investing in a group of people and a team, and we feel really, really good about that. We feel great about the MRD space and we believe it's starting to mature from both a physician ordering perspective as well as from a reimbursement perspective. And then, finally, we're well on our way to generating the Invigorate savings that are needed to offset wage inflation, and we feel good about the progress we're making there. So, again, thanks for joining in, and we look forward to seeing you out on the road over the next few months and joining us at our next earnings call in July. So thanks for joining, and have a great day.

Operator:

Welcome to the Quest Diagnostics Fourth Quarter and Full Year 2002 conference call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and question and answer session that will follow are copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution of retransmission of the rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited. Now I’d like to introduce Shawn Bevec, Vice President, Investor Relations for Quest Diagnostics. Please go ahead.

Jim Davis:

Thanks Shawn, and good morning everyone. Quest had a strong year in 2022 with base business revenues growing more than 6% in the fourth quarter and 5% for the full year. As we expected COVID-19 testing revenues declined but still exceeded $1.4 billion in 2022. Our strong performance over the last several years would not have been possible without the commitment and compassion of our nearly 50,000 colleagues who rose to the challenge of COVID-19 while growing our base business. I am incredibly proud of how this team has worked together during an unprecedented period in the lab industry to deliver insights to help create a healthier world. This morning, I’ll discuss our performance for the fourth quarter and full year 2022, then Sam will provide more detail on our financial results and discuss our 2023 guidance. In the fourth quarter, total revenues were $2.3 billion, earnings per share were $0.87 on a reported basis and $1.98 on an adjusted basis, cash from operations was $334 million. For the full year 2022, total revenues were $9.9 billion, including more than $8.4 billion in base business revenue. Earnings per share were $7.97 on a reported basis and $9.95 on an adjusted basis. Cash from operations was $1.7 billion. As you saw this morning, we increased our quarterly dividend approximately 8% to $0.71 per share and increased our share repurchase authorization by $1 billion. Before discussing additional highlights for 2022, I’d like to share some recent positive regulatory updates. First, Congress delayed Medicare reimbursement cuts under PAMA that were scheduled to take place in 2023, which would have impacted our revenue between approximately $80 million and $85 million. While we are pleased with the delay, we continue to work closely with our trade association to seek a permanent fix to PAMA. Second, CMS increased Medicare reimbursement for specimen collection fees for the first time in nearly 40 years. This could provide Quest with a benefit of approximately $35 million to $40 million this year. Regarding COVID-19 testing revenues, while we did see a steady ramp upward in COVID-19 volumes throughout Q4, our volumes have steadily declined since late December. We expect our COVID-19 revenues to be significantly lower in 2023 compared to 2022. We have lowered our prior COVID-19 volume expectations in 2023 from 10,000 to 15,000 molecular tests per day to 5,000 to 10,000 tests per day. In addition, we continue to negotiate coverage and reimbursement policies with commercial payors following the end of the PHE in May. I will now share some recent highlights in how we are growing this business. In the fourth quarter, we completed our acquisition of the outreach laboratory services business of Suma Health, a large integrated health system serving communities in northeastern Ohio. We also entered into an agreement to acquire select assets of Northern Light Health’s outreach laboratory services business located in Maine. We will also provide professional laboratory management services for nine of Northern Light’s hospital laboratories along with its cancer center lab. Our M&A pipeline is strong, including potential deals with health systems, small regional labs, and other capability-building assets. In particular, the funnel of opportunities with health systems, which are facing major margin pressures due to labor challenges and mix shift from inpatient to outpatient care, is very active. Quest can help through lab management, population health analytics, mobile services, and/or by monetizing their outreach business. In health plans, we continue to gain traction with value-based contracts where we see meaningfully higher growth than with traditional contracts. Also, we’ve started to benefit from incentives related to these value-based contracts which helps demonstrate the value of these strategic relationships. With CMS’ recent increase in Medicare reimbursement for specimen collections, we’ve begun discussions with our health plan customers about getting paid appropriately for the phlebotomy services we provide to their members. Higher specimen collection fees enable us to make continuous investment in patient services so their members continue to have the broadest access to high quality and low cost lab testing. In advanced diagnostics, we generated strong double-digit growth in prenatal genetics and pharma services in 2022. In 2022, we also launched a solid tumor expanded panel as a laboratory-developed test. This 523 gene test relies upon the Illumina TruSight Oncology 500 assay to help oncologists with therapy selection by providing comprehensive genomic profiling of a patient’s tumor. This test extends our capabilities beyond tissue pathology to offer faster turnaround time from cancer diagnosis to therapy selection. Throughout 2022, we continued to make investments to strengthen our bio-informatics capabilities which support some of the faster growing opportunities of our portfolio, like genomic sequencing services, prenatal and hereditary genetic testing, and pharma services. We also invested in our women’s health sales force which will position us well for continued strong growth in prenatal genetics. We continue to make progress executing our consumer initiated testing strategy. Last year, we recorded approximately $96 million of both base and COVID-19 consumer testing. In the fall of 2022, we launched our new digital platform, QuestHealth.com. Consumers have found this to be a simpler, more intuitive way to order lab tests. Following the launch of our new consumer sight, we began ramping up marketing spend through the fourth quarter. We saw some of the strongest order volumes to date following some Cyber Monday promotional advertising, and we are encouraged by the acceleration of growth in base testing in December. Shifting to operational excellence, in 2022 we approached our goal of 3% productivity improvements and savings through our Invigorate program. Those savings and productivity improvements did not completely offset the inflationary pressures in our business, as well as the impact of a modest unit price decline. Following the pandemic, we like many companies have faced significant inflation and wage pressures. We are increasing our efforts to drive productivity and expand margins in our base business. We continue to drive additional productivity improvements with lab platform consolidation and greater use of automation and artificial intelligence. Last year, we began a new automation conversion project in our Lenexa laboratory. This new project builds on what work we’ve done in our Marlborough and Clifton labs. We’ve introduced a new microbiology platform that is highly automated and makes use of artificial intelligence to assist with sample analysis. Finally, we’ve begun to realize savings from the urinalysis platform conversion that we announced early last year. Filling and retaining our frontline positions continues to be a key priority for us. Although we have experienced higher than average turnover in some of our job categories, we have taken actions to stabilize our workforce and improve frontline employee engagement and retention. We expect these actions to help enhance our productivity in 2023. We have also taken actions to reduce our SG&A by approximately $100 million in 2023, including workforce reductions of approximately 1.5% primarily in corporate support functions. With that, I’ll turn it over to Sam to provide more details on our performance and our 2023 guidance. Sam?

Jim Davis:

Thanks Sam. To summarize, we delivered strong growth of 5% in our base business in 2022. COVID testing revenues as expected declined last year and will represent a significantly smaller portion of our business going forward. We are increasing our efforts to drive productivity and expand margins in our base business. We look forward to sharing more of our strategy during our upcoming investor day on March 16 at the New York Stock Exchange. Look for an announcement soon with more details on this event. Now we’d be happy to take your questions. Operator?

Ann Hynes:

Hi, good morning. Thank you. Maybe if we talk about major assumptions in the low end of guidance versus what’s embedded in the high end of guidance. Can you also discuss the incremental $115 million to $125 million that is now benefiting 2023 versus when you reiterated that mid-$8 range back in Q3 earnings? How much has fallen to the bottom line, and how much do you expect to reinvest in the business? Thanks.

Sam Samad:

Yes, so maybe I’ll add a couple of comments, Ann, and thank you for the question - this is Sam. Versus what we shared back when we talked about in Q3 of 2022 around the fact that we were somewhere in that 850 range, obviously some positives that you mentioned, which is I think what you are referring to as the $115 million to $125 million, which includes the PAMA delay, which includes also the reimbursement of the specimen collection fees, which we now benefit from. But there are a couple of things also that have changed to the negative, really the key one being--or just one thing, really, that’s changed to the negative, I should say, which is COVID. The COVID assumptions that we had back then were, as Jim just said, 10,000 to 15,000 a day. Now we’re seeing volumes, as we mentioned on the prepared remarks, 17,000 a day in January, and January is typically around the peak of the respiratory season and then it starts to come down from there, so our expectations of 10,000 to 15,000 a day for the year are, I would say, realistic. But in terms of the range itself and what differentiates the bottom versus the top, I think it’s going to be really around the COVID assumptions. But again, keep in mind we’ve taken COVID down by $150 million in terms of total revenues versus what we really shared back in October, when we expected 10,000 to 15,000. We’ve also--from the benefit itself, you know, the $115 million to $125 million that you referenced, we’ve also carved out a small amount for investments in the business, strategic investments that, as we said a couple of months ago, we said we will reserve some of that benefit to invest in the business for long term growth.

Operator:

Our next question is from Patrick Donnelly with Citi. Your line is now open.

Sam Samad:

Sure Patrick, yes, and thank you for the question. Let me talk a little bit about Q4 and the margin rate in Q4, the 14.2%. Here are some of the headwinds, some of which we were seeing throughout the year, but obviously we also had a drop in COVID revenues in Q4 which was significant versus Q3, at least sequentially, which impacted the margin as well. In terms of the margin rate itself, we had inflation, I would say per expectations but still elevated. We had growth investments of roughly about $40 million that impacted Q4, which were fairly in line with Q3, what we had in terms of investments, so not necessarily a sequential driver. One driver in Q4 that impacted our margin rate was higher employee healthcare cost. That was higher than our expectations and some of it driven by higher utilization, especially towards the end of the year after employees have met their deductibles, but also higher cost of healthcare in general. That was about 80 basis points of impact on the quarter in terms of negative rate impact, so that was another thing. I talked about--obviously if you’re looking at things sequentially, you have to factor in that COVID revenues were $184 million roughly versus approximately $313 million in Q3, so a big drop in COVID revenues. Now if you look prospectively in 2023, here are some of the things that obviously give us confidence that we can achieve the rate that we have in our projections and that’s factored into the guidance that we gave. We have taken $100 million in SG&A reductions, and I would say 90% of those have already been implemented. Now, you won’t see the benefit starting in Q1, you’ll probably see it in the latter part of Q1 and really taking effect in Q2 more fully, but that’s $100 million in SG&A reductions that we expect to see over the course of this year. In terms of investments, you referenced that, we expect investments to be less dilutive in 2023 versus 2022, because we start to see the benefit from some of these investments towards the growth of our business. Then finally, obviously the margin rate is going to benefit from the specimen collection fee reimbursement that we have, and we have a volume growth assumption as well and a revenue growth assumption that at the midpoint of the guidance range is, on base business, approximately 3%, and so that’s going to drive also additional margin improvement based on the drop-down from those revenues.

Sam Samad:

You’re welcome.

Jack Meehan:

Thank you, good morning. I had a few questions on Quest Health. First, of the $96 million you talked about of sales, is there a breakdown you can share of COVID versus base; then second, on the base sales, how did that ramp after the fall push? Then finally, just what are your expectations for consumer initiated testing revenue and investment for 2023?

Jack Meehan:

Great, and then one follow-up on COVID. If we do a look back on 2022, is it possible to call out how much of the sales came from serology, your CDC contract or anything outside of the core molecular, and just what you’re assuming there for 2023?

Jack Meehan:

Super, thank you Jim.

Operator:

The next question is from AJ Rice with Credit Suisse. Your line is now open.

Jim Davis:

Yes AJ, thanks for the question. I would tell you no, there’s no real change in the competitive dynamic in terms of pursuit of these hospital outreach deals or professional lab services types of engagements. What I would tell you is the funnel is as big as it’s ever been. We expect to close several deals here in the first half of the year, so still feel very good about that. In terms of small regional labs that are out there, first I’d say there’s not that many left out there that are of significant size. Certainly those that participated in COVID testing, and now that that volume is declining, yes, we are seeing a few raise their hands and put up the retirement flag and potentially sell out, so we look at each and every one of them. If we think it adds to our competitive position in a certain geographic marketplace, we’ll look at it. If we don’t think we need it from a competitive standpoint, then we take a bye on those.

Jim Davis:

You’re welcome.

Pito Chickering:

Hey, good morning guys. Thanks for taking my questions. Quest has a very long track record of finding cost efficiencies through Invigorate, so I’m curious how the SG&A cost cutting of $100 million compares to what Invigorate usually finds in SG&A, or most cost savings via Invigorate usually done and cost of services and fixed cost leverage on volume.

Sam Samad:

At the risk of being redundant here, I’m still going to repeat something from what Jim said at the beginning, because it’s really important for all your assumptions. The productivity improvements and the Invigorate actions, which is the 3% that we expect to get, that’s in addition on top of the $100 million of SG&A reductions that we’ve already taken for the most part.

Jim Davis:

Yes, so our phlebotomy rates vary by region of the country. What I would tell you is our increase in wages for phlebotomy were certainly in line with the 3% to 4% wage impact that we saw last year. It’s what we’re planning for 2023, and as I indicated, our retention has improved. Our attrition has certainly stabilized and declined, so we feel good about that.

Jim Davis:

Yes, I’m sorry, the supply inflation. Again, 70% of what we purchase each year is under contract. When those contracts come up, they generally represent an opportunity for deflation, meaning we’re going to run a competition between the vendors and we look for improvements from a cost, quality and turnaround time perspective. Where the inflation hit us in 2022 is really on some of the non-supplies, the reagents and things like that. Some of that could have been pre-analytical supplies, masks, gowns, things like that, as well as just the normal inflation that you all see in your businesses, which could be hotels, air travel and things like that. Now again, we think that’s softening here as we get into 2023, and we certainly put guardrails on travel and living expenses and things like that.

Operator:

The next question is from Brian Tanquilut with Jefferies. Your line is now open.

Jim Davis:

Yes, I think we said in the prepared remarks that our pricing was down about 50 basis points, which actually represents the best that I’ve seen in my time with Quest Diagnostics, so we feel good about that. We’ve also said that as we renegotiate new contracts, and every one of these contracts is four to five years in length so you can expect that 20% to 25% will renew this year, which they will, and the preponderance of those contracts we’ve seen rate increases at a minimum rate--you know, holding rate flat to prior contracts, so we view that as a very positive. What we’ve also said is, look - we’ve got a $35 million to $40 million rate increase through Medicare draw fee increases, and today we get reimbursed on roughly 25% of the commercial draws that we do. We’re going to push hard not only to expand that 25% but those that do reimburse us to take those rates up as well, so we are pushing hard at every turn to increase prices across this business. The last thing I’d say is, look, there’s a portfolio of $700 million to $800 million of other businesses in Quest Diagnostics - that can be our Exam One business, our employer solutions business, our employee population health business, and we’ve pushed for 2% to 3% price increases on that portfolio of business and we’ve largely gotten those in place for 2023. Again, this is the most optimistic price outlook that we’ve put forward since I joined Quest in 2013.

Jim Davis:

The other thing I want to mention is we’ve talked about these value-based contracts, and over 30% of our health plan contracts have some type of incentive for us to earn additional value, which we actually don’t put into the price equation, but it’s really good payor mix. These incentives could be based on share of spend with Quest Diagnostics, it could be based on leakage, it could be based on the movement of requisitions from high priced hospital labs into laboratories like Quest Diagnostics, so those value-based incentives are an important part of our business, and as we succeed in achieving that value for the health plans, there’s rewards that come back to us.

Brian Tanquilut:

Got it. Very helpful, thank you.

Kevin Caliendo:

Hi, thanks for taking my question. I’m really just trying to understand all these puts and takes a little bit. I guess my first one is, is the $100 million of SG&A, it’s incremental. Is that--you know, Invigorate typically offsets some other inflationary pressures, labor costs and the like. Is this $100 million incremental such that it drops to the bottom line, or are there other offsets there? Two, is there any change with the pricing benefit that you’re talking about, better pricing is certainly a tailwind, I would think for ’23, so how do we think about that in terms of--or is there an offset there on mix on the margin for, basically, your volume mix, something to that effect? I’m just trying to understand the puts and takes.

Kevin Caliendo:

And if I can just ask one quick follow-up, should we assume in our models the billion dollar buyback gets used in 2023?

Kevin Caliendo:

Very helpful, thank you guys.

Andrew Brackmann:

Hey guys, good morning. Thanks for taking the questions. Maybe as it relates specifically to COVID test reimbursement with the PHE ending, maybe just give us a little more detail on how those conversations with commercial payors are trending and how we should be thinking about expectations there. Then I guess just related to that, how are you thinking about any permanent changes to your respiratory testing portfolio broadly, now that we’ve lived through three years of COVID? Thanks.

Operator:

The next question is from Derik de Bruin with Bank of America. Your line is open.

Sam Samad:

Yes, so I’ll handle the questions, but I missed the part on the expense. What type of expense?

Sam Samad:

Oh, net interest expense - okay. That’s roughly flat, I’d say year-over-year in terms of ‘222 to ’23, Derik, is the assumption to take there. In terms of M&A, what we have assumed in our guide for 2023 is really no material prospective M&A, so essentially what’s closed already, what was included in ’23 in terms of deals that have been made - any outreach, for instance, hospital deals that have already closed in ’22, those you’ll see a benefit from in ’23, but there is no prospective M&A included. When you think about our long term target that we had talked about, around 2% contribution from M&A, we have not assumed any prospective M&A in ’23 on top of our base revenue growth.

Sam Samad:

It’s not significant. We’re not going to give the exact contribution, but it’s really not that material in terms of what we have this year that carries into next year.

Derik de Bruin:

Great, thank you.

Elizabeth Anderson:

Hi guys. Thanks so much for the question. I had a question about advanced diagnostics and your assumptions for ’23, including contribution and then more specifically on the positive impact in pricing, and any kind of incremental investments that you think specifically for 2023 will be necessary to sustain that growth, accelerate it.

Operator:

There is one more question that popped in the queue from Rachel Vatnsdal with JP Morgan. Your line is open.

Sam Samad:

Yes, thank you, Rachel, for the question - this is Sam. In terms of the geography, I think it’s consistent with what we said before, and let me repeat what we said because we haven’t seen really a major change in the dynamic yet. We are back to pre-pandemic levels and above across most geographies, the notable exception being the east, where New York City, I think we’ve seen roughly 3% to 5% outflow from the city in terms of population, 3% to 5% of the population leaving the city. We haven’t seen that fully come back yet, even though the city is much more vibrant and there’s more activity. But I don’t think in terms of people coming back and getting health care in New York City, I don’t think it’s back to where it was pre-pandemic by any means. The other thing we look at is ridership on public transportation as an indicator, as a key metric to see how is that also coming back, and it’s still about 35% or so below pre-pandemic levels in terms of ridership, based on the last data points that we got. The punch line here being that the east is still lagging, but everywhere else is above pre-pandemic levels in terms of utilization.

Operator:

I’m showing no further questions in the queue.

Sam Samad:

Thank you everybody.

Operator:

Welcome to the Quest Diagnostics Third Quarter 2022 Conference Call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and question-and-answer session that will follow, are the copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission or rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited. Now I’d like to introduce Shawn Bevec, Vice President of Investor Relations for Quest Diagnostics. Go ahead, please.

Steve Rusckowski:

Thanks, Shawn and thanks, everyone, for joining us today. While we had a strong third quarter, we drove 5% growth in the base business despite the impact of Hurricane Ian and we delivered strong earnings despite inflationary pressures and investments in growth areas. Based on our performance, we have raised our outlook for the remainder of 2022. We also made very good progress on our leadership transition, adding management depth and expertise to help us grow in important areas. As you know, Jim will assume the responsibilities of CEO and President on November 1, and I will remain as Executive Chairman. Before I turn it over to Jim, I’d like to say a few words about savings access to Laboratory Services Act Salsa. If enacted Salsa would fix PAMA and put the Medicare clinical laboratory fee schedule back on a sustainable path. Based on the efforts of our trade Association, support for Salsa has broadened and continues to strengthen. As you know, we are currently planning for a Medicare fee schedule reduction under PAMA of $80 million to $90 million in 2023 if Congress does not intervene again this year. However, the work we are doing is aimed at reducing or postponing that burden and unfortunately, Congress has already acted three times to stop further cuts from going into place. It is therefore very important that we continue to build support for the enactment of Salsa when Congress returns to Washington after the election. As I transition to the Executive Chairman, will remain actively engaged on this issue, working with ACLA and other stakeholders. Now I’d like to turn it over to Jim Davis.

Sam Samad:

Thanks, Jim. In the third quarter, consolidated revenues were $2.5 billion down 10.4% versus the prior year. Base business revenues grew 5.1% to $2.17 billion, while COVID-19 testing revenues declined 55% to $316 million. Revenues for diagnostic information services declined 10.5% compared to the prior year. The decline reflected lower revenue from COVID-19 testing services versus the third quarter of 2021 partially offset by solid growth in our base testing revenue despite the impact of Hurricane Ian at the end of the quarter. Total volume measured by the number of requisitions declined 6.2% versus the prior year. Acquisitions contributed 20 basis points to the total volume. Total and organic base testing volumes increased 1.6% and 1.4% respectively versus the prior year. The performance of our base business strengthened beginning in late July as COVID-19 cases and the positivity rates declined throughout August and September. The impact of Hurricane Ian represented a headwind of approximately 30 basis points to volume growth in the quarter. COVID-19 testing volumes continued to decline during the third quarter. We resulted approximately 3.1 million molecular tests down approximately 4 million tests and 0.4 million tests versus the prior year and second quarter respectively. Our COVID-19 molecular volumes have averaged roughly 17,000 tests per day so far in October. Revenue for requisition declined 5.1% versus the prior year driven primarily by lower COVID-19 molecular volume. Base business revenue per rec was up 3.3%. The more favorable pricing environment remained consistent with our expectations with unit price reimbursement pressure of less than 50 basis points in the quarter. Reported operating income in the third quarter was $392 million or 15.8% of revenues compared to $652 million or 23.5% of revenues last year. On an adjusted basis, operating income was $423 million or 17% of revenues compared to $694 million or 25% of revenues last year. The year-over-year decline and adjusted operating income is primarily related to lower COVID-19 testing volume and investments to accelerate growth in our base business. We were also impacted by a higher portion of COVID-19 molecular testing volume from non-traditional retail channels, which carry additional expenses. Reported EPS was $2.17 in the quarter compared to $4.02 a year ago. Adjusted EPS was $2.36 compared to $3.96 last year. The impact of Hurricane Ian reduced adjusted EPS by approximately $0.05 in the third quarter. Year-to-date, cash provided by operations was $1.38 billion in 2022, versus $1.75 billion in the prior year period. Turning to our updated guidance. Revenues are now expected to be between $9.72 billion and $9.86 billion. Base business revenues are expected to be between $8.38 billion and $8.45 billion. COVID-19 testing revenues are expected to be between $1.34 billion and $1.41 billion. Reported EPS expected to be in a range of $8.52 to $8.72 and adjusted EPS to be in a range of $9.75 to $9.95. Cash provided by operations is expected to be at least $1.7 billion and capital expenditures are expected to be approximately $400 million. And when you think about our updated guidance, please consider the following. We are assuming COVID-19 molecular volumes to average roughly 10,000 to 15,000 tests per day in the fourth quarter. We also believe this is a reasonable assumption for run rate COVID-19 molecular testing volumes heading into 2023. Last week, the public health emergency was extended another 90 days through mid January. We therefore assume average reimbursement for COVID-19 molecular testing to hold relatively steady through the end of this year. We expect reimbursements to decline when the PHG expires, which we currently assume will happen in January. Given the timing of hurricane Ian the impact on our business has continued in the first couple of weeks of the fourth quarter. As a reminder, we are making investments this year to accelerate growth. We spent approximately $110 million through the third quarter and we expect to invest more than $50 million in the fourth quarter primarily to support marketing and promotion of our new consumer initiated testing platform. Finally, before getting to your questions, I wanted to say a few words about 2023. I know there’s a lot of focus on EPS expectations for 2023. As you might expect, we aren’t prepared to provide detailed 2023 guidance today. There are obviously a number of assumptions and dynamics to consider but I see nothing that would prevent us from meeting current consensus estimates for next year within a reasonable range of outcomes. We will continue to review our plans and assumptions and provide our full 2023 guidance in early February. I will now turn it back to Steve.

Operator:

Thank you. We will now open it up to questions. The first question in the queue is from Ann Hynes with Mizuho Securities. Your line is now open. Ann if you’re there, please check your mute button.

Steve Rusckowski:

Thanks Ann.

Jim Davis:

Yes, thanks and good morning. So let me start and I’ll have Sam fill in some color here. So but there’s a lot of changes since 2019. And I’ll just talk about a few tailwinds and headwinds. from a tailwind standpoint reimbursement has never been better. We were down approximately 50 basis points year-to-date. That’s a much better environment without PAMA in 2019 was where we were historically losing over 100 basis points. And then PAMA was on top of that. So we feel much better about price going into 2023. Our base volumes are back above 2019 levels. In fact, it points during the quarter. In September, we exceeded the high point February, January of 2020. So feel good about that. You mentioned investments in CIT. Yes, that’ll be a tailwind going into 2023. We feel good about that. And then as you know, we’ve made investments in the business, investing in our advanced diagnostics portfolio, and we expect to get above normal growth rates out of that side of our portfolio. Now we’re dealing with some headwinds, as well as you know. We’ve built into our plan, a third round of PAMA cuts $80 million to $90 million next year COVID, which we didn’t obviously have in 2019. We expect going into next year there. Early part of next year, we’ll be at the 10 to 15 point. And we have some inflation that we certainly didn’t see in 2019 that’s running through our business. We estimated $0.05 to $0.08 a quarter and we expect that inflation to continue into the early part of next year. Sam, any other caller?

Steve Rusckowski:

Yes let me just make another comment about some of the investments we’ve made, because I think there’s a little bit of a misunderstanding about that adding to our cost, and not helping us as we get into ‘23 and ‘24. And Ann you alluded to that. So we’ve mentioned that, this year, we’ll be investing about 160 million. And as you recall, in 2021, we started the investments. We took some of the proceeds from COVID and made roughly a quarter of a billion dollars worth of investments in two businesses. One advanced diagnostics and as Jim said, we probably four we have already started to see have faster growth rates because of those investments. And the second is our consumer initiated testing. And we will only make investments as you would expect if we expect to get a return. And so what you’re going to see in 2023, is particularly around CIT are starting to get a return for that investment for CIT. And even though we don’t report the financials, you’ll see less of a drain on our earnings in 2023 because of the growth rate we will get from CIT and that will be a tailwind for ‘23. And you asked about 2024, we’re not going to give exact details, because we will throttle that investment at that a good part of the how fast the market grows, and where we have some capacity to accelerate growth. And so we’ll hold back on give you an exact number about profitability, but we are going to get to return from that $250 million. And let me just close by saying that $250 million, some of it is permanent, because we’re building these two businesses, advanced diagnostics, and CIT but some of it was temporal. And so when you think about modeling for through 23, and you look at what you might expect for expenses from us for 2022. And these are total expenses R&D and SG&A what we have modeled and working on is actually expenses in ‘23 coming down versus 2022. So that’s a change because some of these investments were temporal. So I’ll just leave it there. Thank you.

Operator:

Next question is from Kevin Caliendo with UBS. Your line is now open.

Sam Samad:

Yes. So Kevin, as you think about next year, I mean, yes, we are taking expenses down. So there’s going to be some reductions as we look at expenses given the macro environment that we are in. I would not assume right now, strategic investments necessarily coming down. That’s not an assumption that I would make. And we also have our invigorate program where we expect up productivity in the business and that’s an ongoing program that we do, that we have every year. But we are in a way reinvigorating and invigorate to have further productivity from the business. So I think as you look at margins, you have to consider those things. We have maybe a consistent inflationary environment is the assumption wages increasing by salaries, wages and benefits increasing by 3% to 4%. But we are taking expenses down next year and other areas. And we are focusing on invigorator.

Steve Rusckowski:

So that’s we should talk about kind of the assumptions that we have right now for 2022. We’re not going to comment right now on base margins versus total COVID margins. But I think the way to think about it is the pricing environment is improving. So we are seeing a less of an impact in terms of price reductions. There’s the PAMA impact for next year. But we’re seeing historically low pricing pressure on our business, which as we said in the quarter was 60 basis points. So that’s an improvement. I talked about some of the cost reductions that we’re going to make. And I talked about the invigorate productivity savings that we’re going to make. So we are going to definitely see some productivity improvements in the business but I won’t give a specific base margin number there.

Operator:

Next question is from Jack Meehan with Nephron Research. Your line is now open.

Steve Rusckowski:

Yes. So thank Jack. As we mentioned in the opening comments, our volumes improved every month through the third quarter. So July was weak, August was better. And September, even with the hurricane impact was obviously much better than the average that we reported. In addition we reported 5.1% revenue growth in the quarter on the bass business. And a chunk of that did come from revenue per rack. Despite a 50 basis point headwind on price, our clinical mix and business mix improved in the quarter, which contributed to that strong base performance. And so we were happy with the utilization levels. Physician offices appeared to be strong and even our health system segment, which is a combination of our reference testing in PLS was also strong in the quarter.

Steve Rusckowski:

Sure, Jack. So I can tell you that our opportunities with health systems has never been stronger on multiple fronts. Now in the quarter, we announced the Summa health outreach acquisition. Summa as the health system in Akron, Ohio. We announced a PLS new PLS relationship with Lee Health in Florida. And the funnel of opportunities continues to grow. There’s not a day that goes by that we don’t read in one of the journals about health systems reporting, margin pressures and exacerbated by some of the pressures they have with wages, particularly on the nursing side. So it’s a very opportunistic us to go into health systems and explain to them how we can help them reduce their lifespan by upwards of 10% to 15% to 18%. And so, or monetize their outreach book of business to provide some cash infusion to them. So it’s an opportunistic time for us.

Erin Wright:

Hi, could you give us an update on your relationships in negotiations with the commercial payers and offsets in terms of pricing dynamics there? And where are we at in terms of those preferred relationships helping to steer volume? And do initiatives such as United laboratory benefit management that was more recent, does that have any impact on your business at all? I believe it’s targeting some over testing on the esoteric side. Thanks.

Jim Davis:

Yes to comments on Jack’s question and Erin first of all, or plan is to gain share. And so one element of gain share is that relationships without plans and we do believe we’re making progress to that progress will continue as we pick up more she are particularly with the Nationals. Just want to make sure we remind you that 50 basis points is not exclusive to commercial payer pricing, but all pricing. So commercial payer pricings within it and that is improved to Jim’s comment vastly versus where we were. But we have price pressure with client relationships, with physicians we have price concessions with hospital reference work. So there’s other price concessions in that number. But on the commercial payer side, it’s less than 50 basis points that much improved of where it was years ago.

Brian Tanquilut:

Hey, good morning, guys. Congrats on the quarter. So as I think about just the core testing, obviously COVID is declining here. How should you be thinking about your outlook here for 2023 especially given the economic backdrop that we’re seeing and the broader inflation trends that we’re seeing? And how that’s impacting the consumer, essentially, the patient?

Jim Davis:

Just to remind you all that there is a correlation between COVID volumes that are based business. And so as COVID improves, we believe that could help our base business. And we’ve clearly started to see that in Q3 and to some extent, as we’ve talked before, we have somewhat of a natural hedge, because of COVID goes up and base softens. We have seen that in the past. And therefore the improving COVID situation should be a tailwind on base growth going forward. And as we said before, most of our major markets have recovered, we still have not seen full recovery in New York City. And we still believe that they’ll gradually step by step improve over the next couple of years. And we’ll go back to where we were in 2019. So that’s the only major metropolitan area that we haven’t seen full recovery. So from an overall perspective, the COVID direction should be favorable to base.

A.J. Rice:

Looking to working together. Maybe just to talk a little bit about capital deployment. You’re talking about obviously, you did a lot on the share repurchase here today, as you mentioned. So that continues to be part of the store. You’ve got these hospital opportunities. There are other M&A potentially talking deals out there. And then some of the investments consumer direct and so forth. Does that, how do you see capital priorities and capital deployment as we exited this year and think about the next year or two?

Operator:

Next question is from Pito Chickering with Deutsche Bank. Your line is now open.

Steve Rusckowski:

Yes. Thanks, Pete. Let me start and then I’ll have Sam, pipe in here. So first our long term guidance on the growth rate of the company remains. We expect to grow our top line on the base business 4% to 5%. And we expect to get nice margin accretion off of that 4% to 5%. So we still feel good about that 4% to 5%. Next year, obviously, we’ve said to percentage, roughly two percentage points of that can come from acquisition. We’ve said we’ve got a great list, a good funnel of both tuck ins from outreach, as well as a few what I would call deals that enhance our capabilities, fill in some gaps in our portfolio. So feel good about that. We also feel good about our invigorate program and continuing to work that, as Sam said, reinvigorating our invigorate program to offset some of the margin pressures that we’ve seen from inflation. So we feel good about. We feel good about the investments that we’re making in ADX and we’ve said that, consumer initiated testing next year should be a tailwind to us. And then finally as Sam and Steve said, we are fine tuning the cost structure, and we’ll make the necessary rebalances in the cost structure to deliver what we need to deliver next year. So we feel good about that.

Steve Rusckowski:

Pito remember that our base business is growing in ‘23. Guys when you say think about modeling it off the fourth quarter remember the base will grow. Okay. And then secondly, just to underscore Jim’s comments is this company and we’ll continue under Jim’s and Sam’s leadership has a long track record of productivity improvements. And so Jim, in his prepared remarks talked about our operational excellence program. We have a specific program called Invigorate. And that Invigorate program is to drive 3% productivity. So when you think about 2023, and you think about potentially getting a PAMA cut you need to think about the expense reduction, base growth, as well as Invigorate offsetting some of the inflationary pressure, as well as potentially. And I can tell you we’ve highlighted this before, in our investor presentations, there’s a lot more room for us to drive productivity, particularly around automation, and digitalization going forward, and Jim will be driving that as he leaves the company.

Patrick Donnelly:

Hey, guys, thank you for taking the questions. Maybe one, on a similar vein, at least on the cost side, just in terms of some of the labor retention, labor inflation that you guys have seen us talk about against where we are in that process? And then secondarily, kind of on the back of that the supply chain as well, I know, it’s been a bit of a kind of issues pop up and you guys handle them well. Has that plateaued getting better? Maybe just a little bit of color, that would be helpful.

Operator:

Next question is from Derik De Bruin with Bank of America. Your line is now open.

Steve Rusckowski:

So let’s start with the Salsa PAMA comment. So as we said, for many years now, you should plan on PAMA caught in 2023. That’s what we assumed. And until we have news that’s better than that, we should assume that. Number two is, in my prepared remarks to talk about the effort on Salsa. What I’ll add to those comment is the support congressional support. And this is on both sides of the aisle. And both in the House and in the Senate is very strong. So there is alignment that we need to have a permanent fix to the implementation of PAMA. But as you can imagine Washington is busy. There is a lot of topics on the table. And we’re trying to find a vehicle that we can attach it to. And I would expect, if we were successful with Salsa, it’ll be late in this year, that will know that. And also, it’s going to cost money. So we’re in the process of getting a score from CBO. And there needs to be a pay for so we’re working through that. But I can tell you the alignment and the support of my colleagues throughout this industry has never been stronger. And we’ve going doing grassroots efforts to send letters into Washington. So really a full court press to get set Salsa over the goal line. Now, if we don’t, or if we’re not successful with Salsa the question is, can we get another year of relief. We’ve got that in the past. Again, I’m not going to indicate that we’re going to get that again. But if we don’t get Salsa there, obviously will be a pivot to ask for another year of relief. We’ll push on that. But again, we’re not planning that during our 2023 planning.

Operator:

And the last question in the queue is from . Your line is now open.

Jim Davis:

Yes. So. Thanks Eric. So as you know, there’s a lot of things that go into the calculation. So let’s take price per test out, because we already said that was down about 50 basis points. So your math is directionally correct. All of the things that were up about 3.8% in the quarter. there is really three very different types of mix that enter into that. There is clinical mix, business mix and payer mix. And from let me just start with clinical mix. I’ll just tell you that the investments we’re making in advanced diagnostics are paying off. We’re getting a higher mix of molecular and other genetic and advanced based tasks. Hematology was good. Caner testing really good in the quarter. From a business mix standpoint there’s a lot of things there. First, from a commercial payer standpoint, there’s a mix of cap and fee for service, and we’ll just tell you in the quarter fee per service was better and cap was lost. And if cap was less than, obviously, you got to fix payments. So that certainly helped us. Our health systems business was actually just a pure reference was good in the quarter and that tends to mix up our rep per and then finally there’s payer mix issues. What portion is coming from commercial? What portion is coming from Medicare? What portion is coming from Medicaid? And that was favorable in the quarter. And then finally, CIT, our consumer initiated testing business has a higher revenue per rack. The pricing is better in that market, and we’re getting some left from our CIT business. So a lot of factors go into it. But that’s kind of the summary of it.

Operator:

Thank you for participating in the Quest Diagnostics Third Quarter 2022 conference call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics website at www.Questdiagnostics.com. A replay of the call may be accessed online at www.Questdiagnostics.com/investor or by phone at 203-369-3609 for international callers, or 888-566-0462 for domestic callers. Telephone replays will be available from approximately 10:30am Eastern Time on October 20 2022. Until midnight, Eastern Time, November 3, 2022. Thank you and goodbye.

Operator:

Good morning. Welcome to the Quest Diagnostics Second Quarter 2022 Conference Call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and question-and-answer session that will follow, are the copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission or rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited. Now I'd like to introduce Shawn Bevec, Vice President of Investor Relations for Quest Diagnostics. Go ahead, please.

Steve Rusckowski:

Thanks, Shawn and thanks, everyone, for joining us today. We performed well in the quarter, growing our base business year-over-year while increasing our share of COVID-19 molecular testing since March. As we have said before, we believe demand for COVID-19 molecular testing is not going away anytime soon. It will continue into 2023. Based on our overall performance in the quarter and our expectations for the remainder of 2022, we have raised our full year guidance. We also made very good progress on our leadership transition. Jim will give you an update and take you through our second quarter highlights and then Mark will take you through our financial performance in more detail before we get into your questions. But before I turn it over to Jim, I'd like to say a few words about the saving access to Laboratory Services Act, now called Salsa, the important new federal laboratory legislation recently introduced in Congress as well as the U.S. Court of Appeals for the D.C. Circuit's recent ruling on our trade associations PAMA lawsuit. We're grateful for the efforts of Senate and House members who introduced this legislation on both sides of the aisle. In our view, Salsa could fix PAMA permanently, setting the Medicare clinical lab fee schedule back on a sustainable path. In 2014, the intent of Congress when passing PAMA was to reform the Medicare clinical lab fee schedule to a single national fee schedule based on private payer rates for the clinical laboratory services. Unfortunately, the first round of data collection failed to collect the data from large significant segments of the marketplace. The result was billions of Medicare cuts over 3 years, with more on their way if Salsa is not passed. Our trade association is coordinated to Congressional Meetings along with public advocacy efforts that involves collaboration with the provider and patient communities. Last week, the D.C. Circuit Court issued a decision in the PAMA lawsuit filed in 2017 by our trade association, ACLA. In short, the court sided with ACLA and called the CMS's exclusion of hospital price data "arbitrary and capricious." Importantly, this case has been rejected for procedural reasons and this is the first opinion based on its merits. Unfortunately, the court is not requiring CMS to recalculate the flawed payment amounts. While disappointing, we believe this favorable ruling will give Congress additional strong grounds to finally fix PAMA's mini flaws by passing Salsa. Now, I'd like to turn it over to Jim Davis.

Sam Samad:

Thanks, Jim. It's an honor to join the Quest Diagnostics team. In previous roles, I had the opportunity to observe the many contributions Quest is making to health care. Just arriving less than 2 weeks ago, I've been impressed by the passion and dedication of everyone that I've met so far. I'd like to thank Mark Guinan for his partnership during this transition. I'm excited to be here. Jim, I'll turn it back to you.

Mark Guinan:

Thanks, Jim. In the second quarter, consolidated revenues were $2.45 billion, down 3.8% versus the prior year. Base business revenues grew 2.9% to $2.1 billion, while COVID-19 testing revenues declined approximately 31% to $355 million. Revenues for Diagnostic Information Services declined 3.6% compared to the prior year. The decline reflected lower revenue from COVID-19 testing services versus the second quarter of 2021, partially offset by growth in our base testing revenue. Total volume measured by the number of requisitions declined 1.4% versus the prior year. Acquisitions contributed approximately 100 basis points to total volume. Total base testing volumes increased approximately 2% versus the prior year. Excluding acquisitions, total base testing volumes grew less than 1%. As we have seen in prior COVID surges, we experienced some softening of base testing volumes beginning in April as COVID-19 cases began to rise again throughout the spring. COVID-19 testing volumes were stronger than expected during the second quarter. Together with our JV partnership, Sonora Quest, we resulted approximately 3.7 million molecular tests. Quest alone resulted roughly 3.5 million molecular tests, down approximately 1.3 million tests and 2.8 million tests versus the prior year and first quarter, respectively. Our July COVID-19 molecular volumes have been consistent with the volumes we reported in June, averaging roughly 40,000 tests per day, excluding Sonora Quest. Revenue per requisition declined 2.6% versus the prior year, driven primarily by lower COVID-19 molecular volume. Base business revenue per req was up modestly. As we have highlighted in recent quarters, the pricing environment has improved with unit price reimbursement pressure of less than 50 basis points in the quarter. Reported operating income in the second quarter was $388 million, or 15.8% of revenues compared to $533 million or 20.9% of revenues last year. On an adjusted basis, operating income was $435 million or 17.7% of revenues compared to $584 million or 22.9% of revenues last year. The year-over-year decline in adjusted operating income is primarily related to lower COVID-19 testing volume, a higher portion of COVID-19 molecular testing volume from nontraditional retail channels which carry additional expenses and logistics costs, investments to accelerate growth in our base business and slightly lower average reimbursement for COVID-19 molecular tests. In the quarter, approximately half of our COVID-19 molecular volume came through our retail partners versus roughly 1/3 last year. We expect the mix of COVID-19 molecular volumes through this channel to continue to grow in the third quarter. Reported EPS was $1.96 in the quarter compared to $4.96 a year ago. Adjusted EPS was $2.36 compared to $3.18 last year. Year-to-date cash provided by operations was $882 million in 2022 versus $1.2 billion in the prior year period. Given the limited M&A activity, we repurchased $200 million in stock during the second quarter. Now, turning to our updated guidance. Revenues are now expected to be between $9.5 billion and $9.75 billion. Base business revenues are expected to be between $8.35 billion and $8.45 billion. COVID-19 testing revenues are expected to be between $1.15 billion and $1.3 billion. Reported EPS expected to be in a range of $8.24 to $8.64 and adjusted EPS to be in the range of $9.55 to $9.95. Cash provided by operations is expected to be at least $1.7 billion and capital expenditures are expected to be approximately $400 million. Before concluding, I'll touch on some assumptions embedded in our updated 2022 guidance as well as some additional considerations. Our guidance assumes COVID-19 molecular volumes to average approximately 15,000 to 25,000 tests per day for the rest of the year. As we look toward 2023, we continue to assume our COVID-19 molecular testing run rate in the second half of 2022 continues into next year. Last week, the public health emergency was again extended another 90 days through mid-October. We assume average reimbursement for COVID-19 molecular testing to hold relatively steady through this period. While the public health emergency could be renewed beyond October, additional extensions are not captured in our guidance. As Jim noted earlier, we have successfully grown our share of COVID-19 molecular testing through our retail partners which accounted for approximately 50% of our COVID-19 molecular volume in the second quarter. As these retail partnerships continue to expand, we expect the mix through this channel to continue to grow throughout the remainder of the year. We continue to incur incremental costs to serve this channel. As COVID-19 positivity rates remain in the double digits, our ability to pull specimens for COVID-19 molecular testing continues to be limited. As a reminder, we are ramping investments to accelerate growth this year. We spent approximately $70 million in the first half of the year and we expect these investments to continue to ramp in Q3 to support the launch of our new consumer site later this year. A portion of these stand-up IT costs are temporary but variable marketing costs will increase following the launch of the new site. We'll also be adding additional headcount this year to support our consumer offering as well as bioinformatics capabilities within advanced diagnostics. I will now turn it back to Steve.

Mark Guinan:

Thanks, Steve. Quest is a special place and it has been an honor to serve as CFO for the last 9 years. Thanks to the analysts and investors on this call. I have enjoyed working with all of you. My family and I are excited for what lies ahead.

Operator:

Our first question comes from Brian Tanquilut with Jefferies.

Steve Rusckowski:

Yes, sure. So thanks, Brian, for the question. So as we indicated, we were a little softer in the second quarter where the base business than what we expected in the second quarter. And we do believe there's a relationship, as we have said before, between pickup in COVID infections and the amount of people that are going into their physicians and to some extent, what's happening with hospitals, even though that's a secondary slowdown, if at all. And the second part of your question is longer term with worries about a potential slowdown in our economy and approaching recession. What's our view on that and we're taking a hard look at what happened over the last 10 to 15 years of our business. And things did change quite a bit over the last decade, as you know. The first -- over the last recession, the big -- Great Recession, 2008, we have in parallel with that, the Affordable Care Act. We also had changes with health care policy and we had PAMA, so there's a lot of other effects. And so yes, we do believe there may be some impact in our business related to a slowdown in the economy and the recession. We do believe that we're so essential through the delivery of health care and the need for health care going forward that we believe that utilization will continue to be reasonable throughout any up and down in an economic cycle. So -- but we're taking a look at it and we're seeing if there's any differences this time around, as you know, maybe people were saying this is an unusual set of circumstances given what's happened with health care and what's happened in the economy over the last 2 to 3 years. So Jim, anything you'd like to add to what we see with our base business?

Operator:

Our next question is from A.J. Rice with Credit Suisse.

Mark Guinan:

Thanks, A.J., for the questions. Let me start with COVID. So as I mentioned in my prepared remarks, when you look at our COVID business, the good news was a lot more volume, a lot more revenue, a lot more dollars of operating margin. However, with that also goes less pooling, a larger mix shift towards the retail outlets which have higher expenses. And then we have had some slight erosion versus last year on average reimbursement a couple of dollars, not anything super significant. So the margin percentage was less but still, its contribution to the bottom line from COVID was much higher. As we look into the back half at this point, we don't know where the positivity rates are going to go but we've not assumed a material change in the amount of pooling. We would expect to continue with the current mix or potentially grow that as a proportion of our total COVID volumes. So within the ranges, that's kind of how we're seeing the balance of the year play out on COVID. So if the positivity rate drops down and the positive rate, I'm looking at Jim here, has been as high as we've seen through the pandemic, now a lot more people are doing rapid antigen testing and so on, we believe that the cases are underreported. But we believe that the prevalence of COVID right now is extremely high. And so in the earlier answer that we provided to Brian around the base business, there has been a historical negative correlation between those. And we do believe that the base business has absolutely been impacted by the surge in COVID. We just aren't sure how long it will last. On the base business, we've shared that as we built our plan and the ranges for 2022, we built in a higher SWB, salary work benefits assumption that was in our guidance. And certainly, that's something we control and that's really within expectations. We have a couple of billion dollars that we have long-term contracts. And so really not exposed to inflation in a short window for that. But then we have some other costs where we don't have long-term contracts and there are things that everybody is familiar with and you've heard from other companies as well, things like fuel, things like housekeeping, security, temporary labor. And so those areas have been a little more inflationary than we would have anticipated going into the year. The good news is those are in our results year-to-date during our guidance. We're not expecting that to go away immediately. We certainly hope it's not long-term inflation unlike where if you have wage inflation, you generally expect will continue. If you add contractual inflation with your key suppliers around reagents and other things that might be longer term as well or certainly a couple of years. We don't know how long this spike is going to last. But I can tell you, it's probably like $0.05 to $0.08 a quarter in the first half and we're not expecting that to change. We hope it might but in the guidance that we provided. So hopefully, that's helpful, A.J.

Jim Davis:

Yes. So A.J., as we've talked in the past, there's still certainly a lot of opportunity around automation of manual processes in the laboratory. I touched on in my comments around some of the automated check-in procedures. So we've long had appointment scheduling. What we've added recently is when a patient walks into the PSC without an appointment, you actually go to the check in and you -- and if the wait room is full, you schedule an appointment at that point. And what we've seen is it really does help productivity in the PSC, as well as if the patient leaves, they may not come back to Quest. If they make an appointment to come back in 2 hours or the next day, we feel like the patient retention is better. But automation, the use of artificial intelligence in terms of readouts of manual curves and laboratories, all of that work continues. And then I'd tell you, the other thing that will help continue to drive productivity is our work around retention of our employees. So our productivity, like all companies, we're seeing a much higher increase in turnover. We feel like it is stabilized, albeit at a higher point. So as we now drive retention higher and turnover lower that will certainly help our productivity efforts in the back half of the year.

Operator:

Our next question is from Jack Meehan with Nephron Research.

Mark Guinan:

Let me go otherwise, Jack, Thanks.

Mark Guinan:

Yes. So Jack, as you know, we don't provide specific margins on subsegments of our business. But what I can give you directionally is I referred to half of our volume coming from retail channels or nontraditional channels and we talked about dollar-wise, what the incremental cost per counter is there. A year ago, in the second quarter, it was about 1/3 of our volume. So you can see that's pretty significant. In the second quarter last year, we did quite a bit of pooling and that's varied in the interim quarters between that and now but there was quite a bit of pooling last year because the positivity rate had fallen -- very well. I think many of us by June of last year were thinking this might have been behind us before Delta hit us. And this quarter, we expected in our plans to do quite a bit of pooling but in reality, it was not a large amount. So that should give you a little bit of idea. The other thing I did mention a couple of dollars erosion on the average reimbursement. So I think you got all the pieces, not going to provide a specific number but that should help you understand. But I think the key thing is that the dollars we earned off COVID was much better than our plans. And that's -- and we expect it to continue and that's why we're rising guidance. So while the percentage was worse, the dollar bottom line was better.

Jack Meehan:

Got it. If I can squeeze in one more on the core business. What are your expectations for merit increases and SW&B this year? Have that changed at all?

Jim Davis:

No, it hasn't changed at all, Jack. We said 3% to 4% for the year. We're still within that guidance. We've already provided the merit increase for the year. We do that annually in the April time frame. So it's already in the Q2 numbers for sure.

Steve Rusckowski:

Jim and I actually in a couple of financial conferences try to dimensionalize what's going on with our wage bill. And we talked about of the 50,000 people that the most pressure we see is what there really are real frontline people and they're primarily what we call specimen processors. When the specimens come into our laboratories, they do the sorting, it's a tough job. It's at night and we're paying them, we think, fairly and we've increased that for their hourly wages. And the second is couriers. And to give you an idea because it is the area of most pressure, roughly, it's about 10% to 11% of our workforce salary, okay? So -- and at the same time, it represents a larger percentage of our workforce count of the 50,000 people. So that's where we have the most pressure. So even if that number went up, considerably, you get an idea of the impact that would have on our margins. So that's where we see the most pressure, okay?

Patrick Donnelly:

Sam, looking forward to continue to work with you and not to put you on the spot on your first call here. But I'm sure on the way in, as you know, there's a lot of questions as you've seen on this call already in terms of the margin and the margin profile going into kind of next year as we work our way through kind of the high margin COVID coming out, some of the expenses around DTC and retail, wage inflation. I guess when you came in and Mark, feel free in to chime in obviously but Sam, I guess how did you get comfortable with that? It would just be helpful maybe to hear your perspective on that as I'm sure it was a key consideration, something you dug into on your way in and I know investors are hyper focused on that piece as well. So if you're willing, I would love to hear your general thoughts on kind of how we work our way through the margin side as we kind of work our way into next year.

Mark Guinan:

Yes. So Patrick, appreciate the question. We know where people's heads are at right now around the business and that's where ours are as well. So I can assure you we're spending a lot of time on that. We've spent a lot of time on that. There's a number of things that we generally control. And then there are some things that are a little bit less in our control. So we do our best to forecast those things. We put together ranges. And then we -- I think and believe we're very transparent with you about how those things play out. So you get a sense of, okay, well, what really is going on in the business? And because of that, I believe that, generally, we've not surprised people. And we've given you delivered on your expectations. We've given you timely updates. We've given you interim information. And based on my time with Sam and I think the team here, I would expect that to continue. So you would expect that with my departure that we're not going to change the way we talk to, the way we share, give all those updates. I think everybody appreciates what a great job Shawn does and know they can call them any time, any place and get him and he'll be as transparent as possible. So really, I think what it comes down to is, I believe we're focused on the right things. And also, I believe we do our best job of being as transparent as possible around all those key drivers.

Steve Rusckowski:

Yes. So thanks for the question. And we are very pleased with the progress we have made with all payers and where we are today versus when I started which was over 10 years ago. We've got a network now that is the strongest network that we've ever had. And I would say our relationship with all the significant payers, national and regional is very strong. And they are increasingly realizing that it's good for their membership and good for their competitiveness in the market to have us in the network and we bring a lot of value. And so we're entirely focused on what we call powering affordable care which is consistent with what Jim has driven in the company around making sure that we have great quality, great service and a great experience. And you heard earlier from Jim as we continue to push on just working smarter and by working smarter, we're getting more productivity but we're also going to have a better product. And payers understand that. And so as Jim mentioned, we have gotten some increases from the payers over the last several negotiation rounds. We continue to believe that is something we're going to continue to push for because we do bring a lot of value in the marketplace. And we're very competitive in the marketplace. And so if you look at the price effect that we saw in the quarter and what we have typically said in the past historically, remember, historically, we said you should plan at about 100 basis points with the price effect. Well, in this quarter, in the last quarter, we've actually saw less than that. And that's the best position we bet in. And I will share within that envelope, the commercial payer portion of it is significantly less than where we've been historically. But we still see pressure with price, with our hospital business, with our client bill business and that's in that envelope as well. But on the commercial payer side, we're in a very different place than we were before. And I'll share with you a part of Jim and I on my transition is Jim and I are going into the nationals and the regional payers and we're talking about what we've done in the past and more importantly, what we're doing in the future. We just had a meeting last week with one of the national payers and they see us as a much more significant player in the marketplace than what people think about us as which is a laboratory. We're much more of the lab. We actually help them improve the value of health care going forward. So a much better place than where we were in a good place right now.

Operator:

Our next question is from Pito Chickering with Deutsche Bank.

Mark Guinan:

Well, thanks for all the questions, Pito. I'll start with 2023. We've not locked down our plan. And if we did, we generally don't give specific guidance until our fourth quarter earnings call. And I'll leave it to the management team. I'll be leaving exactly when they decide to do that but we're not going to comment any specifics around 2023. In terms of the amount of the increases, again, I'm not going to dimensionalize. We don't have a planned lockdown. But we have enough contracts that are already set for next year and enough progress on some that are either, as we referenced like Florida Blue or some others that are getting close to being locked down for renewal that I have confidence to say what I said which is, this is not going to be a next year for us on a price perspective...

Mark Guinan:

And yes, so I was going to continue that what you're hearing from us is what's happening now, Pito. And the $0.05 to $0.08 is more inflation than we would have anticipated. However, other things have changed as well. Most notably, we did a lot more COVID. So we delivered a lot more earnings. So just like we don't expect the high level of COVID and we could be wrong to expect and continue into 2023. Also, we'd be really disappointed if the inflation we're seeing in the noncontracted areas were to carry to 2023. But even if it does, we've got multiple pieces that are moving, including a better pricing environment in the commercial book. So in no way, shape or form, are we saying that when you put all these together, that, that $8.50 or in that range is not something we're still confident in.

Ricky Goldwasser:

Mark, wishing you best of luck in the future and really enjoyed working with you. So thank you for all the color always and your patience. In terms of the question, I just want to go back to the utilization environment. I mean you gave some color there but what we're hearing from the managed care companies is that the softness that they're seeing is the ER visits and inpatient admissions which shouldn't really have an impact on lab testing, right, if it's more outside the four walls of the hospitals. So can you maybe give us color on where are you seeing softness in utilization by geography and maybe by end market, i.e., what type of test? And how do you think about it, right, sort of 2.5 years into the pandemic? What's structural in the software utilization versus transition in your view?

Steve Rusckowski:

And the second part is, remember COVID and we're 2 years into it. And every time COVID infections go up, our base business comes down some. And if you think about a physician and what they need to do to run their offices and as you know, a large portion of our business is through physicians in their offices, if there's call outs of their staff or if their patients are missing their appointments because they are now infected, it affects volume. So there's no question there's a correlation. And the good news for us is when that happens, our COVID business goes up, right? So Jim, why should...

Operator:

Our next question is from Derik De Bruin with Bank of America.

Jim Davis:

Yes. So in terms of 2023, as Mark said, there's a lot of moving parts at this point. We're committed to investments in advanced diagnostics. We're committed to investments in our consumer direct consumer initiated testing business. Obviously, we can modulate those things if we see inflation getting worse. But at this point, we can't give you any further guidance than what we've given you around those. We're committed to advanced diagnostics, we're committed to our clinical -- our consumer direct -- consumer-initiated testing business. In terms...

Jim Davis:

Yes. You asked about PAMA. And we've said that it's in our 2023 guidance outlook that we provided at this point and we've said it's about a $90 million headwind.

Operator:

Our next question is from Matt Larew with William Blair.

Mark Guinan:

Sure. So let me take part of it, then I'm sure either Steve or Jim will jump in. So first of all, inflation really hasn't impacted the level of investment in a material way. And we're on track to spend about what we told you previously. As I referenced a minute ago, we haven't put our final plans together. But at this point, I would expect we're going to spend more next year. And we're going to spend more in marketing but we're going to spend a lot less and not much at all in the IT platform creation. So it's really going to be tied a very high variable cost and highly tied to revenue growth and we'll monitor, as Jim says and I'm sure Sam and Jim will be all over is to make sure we're making the progress and to make sure we don't get the spending ahead of ourselves. But if we do what we expect to do and we need to do to get to $0.5 billion by 2025, the spending will continue to go up. The only other dimension I want to mention here is because when we talk about investments in the base business, there's a little nuance here. Advanced diagnostics absolutely is the base business. But really this consumer business is new. So while a lot of the work we do is similar to what we've done historically in our base business, it's really a new business category or opportunity. And some of it may cannibalize what would have otherwise come through our traditional channels. But we do believe that a lot of it is actually incremental to the overall amount of volume that we perform. Jim or Steve, you want to...

Jim Davis:

And just to clarify, the target that we outlined at the Investor Day for the direct-to-consumer business was $250 million by 2025.

Operator:

Our last question will come from Rachel Vatnsdal with JPMorgan.

Steve Rusckowski:

Jim will handle that.

Rachel Vatnsdal:

Great. And then in line of the environment, can you just walk us through some initial color on how you're considering use of cash between share repurchases, dividends and then M&A?

Steve Rusckowski:

Okay. So thank you, everyone. And again, thank you, Mark, for your time here at Quest. We're going to miss you and we wish you well. So thanks, everyone, for joining the call. We appreciate all your questions and support and we'll see you in our travels. Have a good day.

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Shawn Bevec:

00:23 Thank you and good morning. I'm joined by Steve Rusckowski, our Chairman and Chief Executive Officer and President; Jim Davis, CEO-Elect; and Mark Guinan, our Chief Financial Officer. 00:34 During this call, we may make forward-looking statements and we'll discuss non-GAAP measures. We provide a reconciliation of non-GAAP measures to comparable GAAP measures in the tables to our earnings press release. Actual results may differ materially from those projected. Risks and uncertainties, including the impact of the COVID-19 pandemic that may affect Quest Diagnostics' future results include, but are not limited to those described in our most recent annual report on Form 10-K and subsequently filed quarterly reports on Form 10-Q, and current reports on Form 8-K. 01:08 The company continues to believe that the impact of the COVID-19 pandemic on future operating results, cash flows and/or its financial condition will be primarily driven by the pandemic severity and duration, health care insurer, governments and clients payer reimbursement rates for COVID-19 molecular tests, the pandemic's impact on the U.S. health care system and the U.S. economy, and the timing, scope and effectiveness of federal, state and local governmental responses to the pandemic, including the impact of vaccination efforts, which are drivers beyond the company's knowledge and control. 01:40 For this call, references to reported EPS refer to reported diluted EPS, and references to adjusted EPS refer to adjusted diluted EPS. Any references to base business, testing, revenues or volumes refer to the performance of our business, excluding COVID-19 testing. Growth rates associated with our long-term outlook projections, including total revenue growth, revenue growth from acquisitions, organic revenue growth, and adjusted earnings growth, are compound annual growth rates. Finally, revenue growth rates from acquisitions will be measured against our base business. 02:14 Now, here is Steve Rusckowski.

Jim Davis:

03:19 Yeah, thank you Steve. We are making very good progress on the transition. Yesterday, we announced a series of organizational changes and leadership appointments of seasoned executive designed to help us accelerated growth and drive operational excellence. First category is a Senior Vice President of the regional businesses. Kathy has deep knowledge of our business gained through three decades of leadership at Quest. She will oversee the regional and enterprise operations, the commercial organization and marketing. She will also be responsible for driving operational excellence, including for company's quality and productivity initiatives. 04:01 Next, Carrie Eglinton Manner is taking on an expanded role as Senior Vice President, , Advanced and General Diagnostics Clinical Solutions. For more than five years, Carrie has been responsible for bringing innovative solutions to the market through Quest clinical franchises. Before joining Quest, Carrie had nearly two decades of leadership experience in healthcare and medical technologies. 04:25 Patrick Plewman, who has led our West region and has been with Quest Diagnostics for more than nine years is named Senior Vice President, Diagnostics Services, which is a portfolio of data driven analytics and services businesses, which enabled employers, providers, pharma companies, and others to deliver healthcare more effectively and efficiently. This portfolio includes employer population health, employer solutions, ExamOne, Healthcare Analytics Solutions, and Quest HealthConnect. And before joining Quest, Patrick had over 20 years of leadership experience in the biotech and molecular diagnostics industries. 05:09 Mark Delaney has joined Quest as Senior Vice President and Chief Commercial Officer. Mark has responsibility for the commercial team, including sales and sales operations. Previously, he helped senior sales and marketing leadership roles over his 30 year career at GE Healthcare and Hillrom. 05:29 And finally, Richard Adams has joined Quest as Vice President and General Manager of our Consumer Initiated Testing Business, a new role. Richard has two decades of varied leadership experience in e-commerce, digital marketing, and customer experience, and will lead our rapidly growing direct-to-consumer testing business. These appointments demonstrate the investment strength of our management team and we're really excited about the leadership and expertise that both Mark and Richard Adams will bring to us. 06:00 Additionally, we're making very good progress on our CFO selection process and are on track to name a leader in the next several months. The management transition is going very well and the changes we've announced yesterday are an important step in positioning us for the future. 06:16 Steve, I'll now turn it back to you.

Mark Guinan:

12:59 Thanks, Steve. In first quarter, consolidated revenues were 2.61 billion, down 4% versus the prior year. Base business revenues grew 6.3% to more than 2 billion, while COVID-19 testing revenues declined 27.6% to approximately 600 million. Revenues for Diagnostic information services declined 3.9% compared to the prior year. The decline reflected lower revenue from COVID-19 testing services versus the first quarter of 2021, partially offset by strong growth in our base testing revenue. 13:39 Total volume measured by the number of requisitions increased 1.3% versus the prior year and was roughly flat under an organic basis. Total base testing volumes increased more than 6% versus the prior year. Excluding acquisitions, total base testing volumes grew nearly 5%. We experienced some modest softening of base testing volumes in January during the peak of the Omicron surge. The volume has rebounded in February and March. 14:11 COVID-19 testing volumes surged during the spread of Omicron variant during the winter and volumes peaked in January, but declined through the month of February and into March. Together with our JV partners in our Quest, we resulted approximately 7.2 million molecular tests. 14:30 Quest resulted roughly 6.3 million molecular test, down approximately 2 million tests and 1 million tests versus the prior year in fourth quarter respectively. We also resulted nearly 450,000 serology tests in the first quarter. Our COVID-19 molecular volumes have generally stabilized and the average of roughly 30,000 tests per day over the last four weeks, excluding similar request. 14:59 Revenue per acquisition declined 5.2% versus the prior year, driven primarily by lower COVID-19 molecular volume. Base business revenue per rep was up modestly. Importantly, we continue to see an improving price environment. Unit price reimbursement pressure was less than 100 basis points in the quarter. 15:21 Reported operating income in the first quarter was 513 million or 19.7% of revenues compared to 660 million or 24.3% of revenues last year. On an adjusted basis, operating income was 554 million or 21.2% of revenues, compared to 708 million or 26% of revenues last year. The year-over-year decline in adjusted operating income was primarily related to lower COVID-19 testing volumes, a higher portion of COVID-19 molecular testing volume from non-traditional channels, which carry additional expenses or logistics costs, investments to accelerate growth in our base business and lower average reimbursements for COVID-19 molecular tests. These were partially offset by strong growth in our base business. 16:16 As many of you have heard, the health resources and services administration or HRSA, stopped accepting claims to pass and treat uninsured patients on March 22, due to insufficient funding. runs the program to provide funding for COVID-19 testing vaccination and treatment for uninsured patients. Approximately 14% of our COVID-19 molecular testing volume has come from uninsured patients, which is much higher than the 1% to 2% we typically see in our base business. 16:50 As a result, we were unable to build HRSA to over 20 million in COVID-19 testing work that was performed just prior to the March 23 HRSA cut-off date. Moving forward, we are now dealing uninsured patients for COVID-19 testing directly upfront. As a result, we've seen a decline in our uninsured COVID-19 molecular testing volumes in late March and into April, and this is reflected in trends I shared earlier. 17:19 Reported EPS was $2.92 in the quarter, compared to $3.46 a year ago. Adjusted EPS was $3.22, compared to $3.76 last year. Cash provided by operations was $480 million in Q1 versus $731 million in the prior year period. And we repurchased 350 million of stock during the first quarter. 17:47 Now, turning to our updated guidance. Revenues are now expected to be between 9.2 billion and 9.5 billion, a decline of approximately 12% to 15% versus the prior year. Base business revenues are expected to be between 8.35 billion and 8.5 billion, an increase of approximately 4% to 6%. 18:10 COVID-19 testing revenues are expected to be between 850 million and 1 billion, a decline of approximately 64% to 69%. Reported EPS is expected to be in a range of $7.88 and $8.38, and adjusted EPS to be in a range of $9 and $9.50. Cash provided by operations is expected to be at least 1.6 billion and capital expenditures are expected to be approximately 400 million. 18:43 Before concluding, I'll touch on some assumptions embedded in our updated 2022 guidance, as well as some additional considerations. Our guidance assumes COVID-19 molecular volumes to average approximately 10,000 to 20,000 tests per day for the rest of the year. This reflects modest continued declines in Q2 from the roughly 30,000 tests per day we are seeing in April. And some degree of stabilization during the second half of the year. 19:12 As we look toward 2023, our expectation for COVID-19 molecular and serology testing volumes assumes that the COVID-19 testing run rates in the second half of 2022 continues into next year. 19:27 Last week, the public health emergency was again extended another 90 days through mid-July. We assume average reimbursements of COVID-19 molecular testing to hold relatively steady through this period, while the public health emergency renewed beyond July, additional extensions are not captured in our guidance. 19:47 We remain prepared for additional future surges collecting COVID-19 testing volume from a range of customers. While the PHE is in effect, we continue to incur incremental costs from non-traditional channels for supplies, special logistics and channel expenses for this volume, which can represent roughly $30 in incremental cost per test. Therefore, you should not assume the higher reimbursement due to the PHE extension drops right to the bottom line. 20:16 As Steve noted earlier, we're already seeing some returns in our investments to accelerate growth, particularly in the areas of advanced diagnostics and direct-to-consumer testing. And would expect a margin tailwind on these investments in 2023. 20:33 As a reminder, we are planning to spend approximately 160 million on these investments this year. We spent approximately 30 million in the first quarter and are looking for these investments to ramp up in Q2 to support the launch of our new consumer site later this year. A portion of these stand-up IP costs are temporary, but variable marketing costs will increase launch of the new site. 20:58 We’ll also be adding additional headcount this year to support our consumer offering, as well as bioinformatics capabilities within advanced diagnostics. 21:08 Finally, we know there's a lot focus on expectations for 2023. While it’s clearly too early to provide specific guidance for next year based on everything we know and see today, we expect to deliver topline and earnings consistent with our long-term outlook that we provided at our 2021 Investor Day. I’ll now turn it back to Steve.

Operator:

21:54 Thank you. Our first question comes from Ricky Goldwasser from Morgan Stanley. Your line is open.

Mark Guinan:

22:33 Yes. Ricky thanks for the question. As you look at the way the quarter played out, Omicron was more severe than we had anticipated, which drove higher COVID revenues, but we also saw the base business impacted by that. So, definitely in January as we mentioned the base business was softer, so relative to our expectations in Q1 more COVID, less base business, but as we exited the quarter and certainly as we talked about in February and March the base business bounced back to our expectations. 23:08 So, while we're very pleased with where we see the base business, growth for the year, it would have been even higher had it not been for Omicron. And the margin is really were what we were expecting. So, we walked through in the last call how some of the margin impacts in Q4 was really temporary around annual incentive plan and some costs related to some special things that we needed to do for COVID testing in that quarter, some over time that we're having in fair amount of and some things that we really saw as temporary. 23:44 Look is that once we got the Omicron, those costs, generally did go away and we anticipate further reduction in some of the special expenses related to COVID safety and protection for employees that we continue to advance hopefully and get into the endemic and end of the pandemic. So, I'd say other than the higher COVID revenue and a little lower base in January, generally the is expected, and that's why we're comfortable raising the bottom and upper end of our guidance at the midpoint.

Mark Guinan:

24:56 One additional comment on that. When you look at the compares, the easiest compare on the basis was Q1. So, to Steve's point, we've credited that even better. We would have done it better than the 6.3 of January not been impacted by Omicron, but as we go through the balance of the year, it compares to get a little tougher because lot the recovery from other pandemic, occurred late in 2020 and early in 2021. So, the growth going forward is more going to be driven by share and less about utilization and the market recovery.

Mark Guinan:

25:47 Yes. So, the business continues to perform at a high level as it was happening in Q1. So, it wouldn't be updated in our guidance if we weren't confident that what we saw in terms of the performance early is continued. So, we’re more focused on overall growth as opposed to the percentage year-over-year because obviously the compare makes it complicated. So, we're very happy as we get into April and we see the performance of our base business. And as we mentioned, COVID is kind of stabilized. We're not sure how long that will continue. We certainly took a little bit of a volume hit from the change in HRSA. 26:25 And because there's been a little bit of a spike I'd say some of that was partially offset by the market growing a little bit recently. So that's probably the way you get to a reasonably flat level of COVID testing over the last month.

Operator:

26:47 Our next question comes from Patrick Donnelly from Citi. Your line is open.

Patrick Donnelly:

26:53 Hey, good morning. Thank you guys for taking the questions. Maybe just another one on the margins. You touched on a little bit there in the first question. Can you just talk about, I guess given the ongoing growth investments, wage inflation, can you just talk about, kind of your thoughts as we work our way through this year and into 2023. Obviously, the PHE extension should help on that front in terms of kind of the margin side. So, again, I guess, when we look at the earnings raise, how should we think about the base margin piece again ex-ASP as we work our way through this year and again into 2023?

Mark Guinan:

28:22 Yes. And I’ll try to answer your questions Patrick. So, on inflation, we talked about building in an extra 100 basis points or so in our wages costs. And that was in our original guidance. And through 3.5 months of the year we haven't seen anything that suggests that wasn't a reasonable assumption. So, basically, inflation was about where we’re expecting. And I'd say, our non-wage items, such as materials and supplies and so on, surely fuel costs have been bouncing around, but nothing has deviated significantly from our critical assumptions coming into the year around inflation. 29:03 The PHE is significant revenue and from a dollar margin perspective, it certainly is helpful, but from a percentage margin and perspective, I want to be clear that it's not significantly higher than the post PHE world because those costs go away that reference, that are more than $30. So, the people are focused on percentage margins, the base is not a big change in terms of what you will see. 29:03 And I guess the important thing is that as the base volume grows, we've always shared that incremental organic growth in the base business as a very high level of drop through. So, the other margin consideration as we grow as we expected and as we've signaled in our guidance, that that will help drive margin expansion. And then finally, just a reminder that we are in a much better place in price than we've been historically. And so, therefore, a lot of the productivity savings that in the past help pay for inflation, inflation is a little bit worse. Certainly the pricing environment is better. So, there's more of that to cover that inflation and also to drive bottom line margin expansion.

Patrick Donnelly:

31:15 Okay. That's helpful. And then maybe just on the balance sheet, cash flow obviously has been pretty strong for the past few quarters here, capital allocation is in focus for investors, can you just talk about your priorities there? What the M&A pipeline looks like, what the funnel looks like? And then maybe compare that to kind of the share repo opportunities?

Steve Rusckowski:

32:29 Yes. Yes. So, we feel good about again, our commitment of 2% growth through acquisitions. As you know, we've delivered that consistently. We feel good about our ability to – on a routine basis to deliver the consolidation strategy we've been executing against. We've got a few step we are working on and we still feel that we will be able to get to a number close to that 2% in 2022. So, as I have said in the first quarter, we're lighter than that. This is lumpy, but we do expect that we'll be moving on a few in the second quarter and into the third quarter to deliver what we expect.

Shawn Bevec:

33:10 Operator, next question.

Steve Rusckowski:

33:16 Good morning, A.J.

Steve Rusckowski:

33:56 Yes. So, let me start and then I'll ask Mark and Jim to kind of add to this. As we have said in our strategy here and health plan access change there is a big opportunity for us, number one. Number two is, we do plan that gaining share. And number three, we are gaining shares. So, our health plan revenues are growing faster than overall revenues and we believe growing faster in the markets. So, we're making progress. So, in that regard, the second question is the environment has gotten better. 34:29 We've indicated in prior calls and prior quarters, and it's proven to be true as we go throughout this year. As we get into renegotiations with the plans, we believe we have stronger position to negotiate and in some cases, modest prices because we're delivering more and more value. Our quality is improving, service performance is better, and we have an opportunity to help them narrow the network and narrow the number of providers they have with the number of these programs. 34:59 So, it has gotten better and we indicated that less than 100 basis points overall. I'll remind you that when we talk about price, there's a lot of focus around the plans, but we have price pressures in the hospital business and our client build business, but at least on the health plan side, it has gotten better and we have gotten modest increases for some of the contract renewals that we've had. 35:21 In terms of value-based contracting, the biggest opportunity we have, which you indicated in the past is around United. And United is a very different relationship for us and what we had years ago. It is clearly a relationship that we're working different aspects to be able to pick up share. And as part of that, now it's indicated in my remarks, we do have shared savings opportunities and we have opportunities together to do a better job with their membership than their clients. And then beyond United, we have extended that thinking to other parts of our health plant portfolio with other concepts, they’re not all identical. But they have similar characteristics in general where we have better alignment between what they're trying to accomplish and what we're trying to accomplish. 36:13 In the end, we’re all trying to achieve what's been described as the , which is better quality, better experience, at lower cost, and that's resonating very well in the marketplace. Overall, as you know, this is an entirely focused organizations on that plan for the greater delivery systems as well. So, Mark you like to add something to…

Mark Guinan:

37:55 Yeah. The only thing I'll add, A.J. is, there’s elements in those contracts, that Jim just described. The one I'll add is also we've talked about in the past, when we do an acquisition of hospital outreach, and instead of the rates immediately dropping to our rates, there's a step down a majority of our large contracts right now. So, we kind to share the value of movement network through an acquisitions, which aligned our incentives and really the greatest value is, is it moves the conversation around away from price being the way they create value and more towards which Jim talked about and partnering and working together to get connections of work to better price, but also there's things that come with it that benefit the patients, the physicians, it's our tools and our technology, it's our quality. 38:50 I mean, you know that in the , it's not about the price, it's really about a couple of the metrics around quality and tools and I mean what is their experience in the patient drop center to how we feed the data to the payer and the frequency in quality. So, there’s a lot beyond price that determines space and that's where we've been successful in moving the conversation. 39:16 And yes, then within the contracts themselves, there will be shared savings and these other value driven parameters that can get us a better price or more value as we demonstrate to them where we’re creating value for them as well.

Operator:

39:34 Our question comes from Pito Chickering from Deutsche Bank. Your line is open.

Pito Chickering:

39:40 Very good morning, guys. my questions. Back to the guidance question, previously, it didn't assume any share repo besides offsetting dilution, what does your current guidance assume? Back into net income guidance, you know from the previous guidance using 124 million diluted shares in fourth quarter, versus the current guidance at 121 million shares backing into the midpoint range and net income, essentially flat despite revenues up $200 million or at the low-end. So, it’s got us into a margin compression of about 10 basis points. So, a long way of saying, is margin guidance down today versus previous guidance and any ?

Steve Rusckowski:

40:52 And as you see in our results, Q1 with about $700 million worth of cash. And obviously, we're going to put that to use to a good way. We're looking at acquisitions as we talked about. And we'll handle that in due course throughout the remainder of the year.

Mark Guinan:

41:38 Yes. So, I would not want to take away an implication of margin compression Pito. And remember that we don't do point estimates. We do ranges. So, there's a lot of moving parts, everything from topline mix, clinical mix, exactly, precisely, how much COVID testing we get going forward. And share obviously deployment of cash. 42:04 So that's why we give a range. So, we feel very good about the margins. We would expect that the margins would improve on the base business going forward. Certainly, the COVID elements and everything from the PHE to the volume we have could impact margins as well. 42:21 I’ll give you one example if you're looking at income margin, certainly some of the JVs where specifically some of our Quest where they have done a lot of COVID testing, we have no revenue, but we get their earnings contribution from that. So, there's a lot of things that they kind of skew margins, but I think what people really want to understand is the base business. 42:41 So, what’s going to happen going into 2023? We're very comfortable with the base business, we’ll be at or above pre-pandemic levels and we'll have a larger base business in 2023 with some level of COVID testing and in the margin performance that you saw in Q1, we're not expecting it to erode, even despite the factor, we did talk about raising up some of our CIT investments in Q2. So, it's also been contemplated, it’s all in that range of guidance and so it’s kind of hard to pin down specific margin at this point, but it's not bad news.

Operator:

43:19 Our next question comes from Kevin Caliendo from UBS. Your line is open.

Kevin Caliendo:

43:28 Good morning. Want to follow-up on the guidance question just a little bit, so you'd beat in the quarter by roughly $0.25 and you raised your COVID revenues by 150 or so, which depending on what margin you use could almost equate to that same sort of $0.25, was the guidance range, was the guidance range raise related to the first quarter beat? Was it related to the COVID increases there an overlap there? How should we think about that?

Steve Rusckowski:

45:20 Yes. As we enter the year, what we indicated for COVID is around 700 to 1 billion and obviously we're delivering 600 million in the first quarter. We have more certainty around what is left within that initial guidance. 45:37 Obviously going into the year, there's a lot of uncertainty of what would happen now, how fast would decline, and how each testing would go on in the back half of the first quarter. So, the timing up of the range, the asset range is hit by this, as Mark indicated there’s puts and takes of this in terms of the impact on our bottom line. But I'll just reiterate, we feel good about our start with our based business and we're tracking well for a strong year based on our initial guidance.

Steve Rusckowski:

47:02 Remember, we're vesting $160 million, we’re vesting sixty million because we have a strong business piece to get the returns. So, what we had indicated, we are ahead of our plan to get the returns in advanced diagnostics and we feel bullish about the opportunities of the consumer. And the results on both of those fronts have been good news. And so, when we talk about the second part that you mentioned of putting in place a new platform, also where a consumer business we're investing in some marketing to get the growth we expect, and we are getting the results so far and we'll continue to see the results in the back half of the year. 47:43 What we also said is that as we come out of 2022 into 2023, when you think about a year-on-year compare, with the returns we expect from Advanced Diagnostics and the returns we expect from the consumer, that a year-on-year improvement in those businesses will be tailwinds for our margins in 2023. 48:10 So, again, we're investing to grow, we're investing to get a return. We feel good about getting those returns actually quicker than expected, and next year, the year-on-year compare related to that 160 million will be a net tailwind for us in terms of our earnings in 2023. Mark anything you like to add?

Steve Rusckowski:

50:15 And as Mark said, as we go through thinking by the way, we indicated in our Investor Day, and we're not going to give you 2023 guidance, so Mark indicated is when we think about 2023, we're still believing we're comfortably in the range we would expect in 2023 in terms of EPS in growth. And the second half sets its up nicely and what we've implied in our guidance for the full-year implies a set-up, so we would be able to deliver what Mark indicated in 2023 and a view that we indicated in our Investor Day in spring of 2021. 50:57 So, we're consistent and we believe we're on track to delivering what we expect and what you would expect in 2022 and 2023.

Steve Rusckowski:

51:09 Thanks.

Mark Guinan:

51:15 Hey, Jack.

Jack Meehan:

51:17 Hello, and happy to say, Nephron Research. So, Steve, on 2023, I know still premature to give a specific number, but at the Analyst Day, you talked about 7% to 9% earnings growth, kind of off of an $8 number you were gearing us to at that point? Now, talking about some tale of COVID here too, can you just like make sure we're doing the math right? Can we take 8% grow it, add some COVID on top? There's obviously some other moving parts, but is that the right way to think about it or where am I wrong?

Mark Guinan:

52:02 Yes. So at that point, we said $7.40 to $8 and then 7% to 9% CAGR from 2022 and beyond. And then as we got further along past Investor Day we started to signal that we would expect it would be closer to the $8 or on the upper end of the range and because 2022 has more COVID revenue, I would just remind everybody, the growth rate in 2023 is going to be below that CAGR, but the absolute number we're saying should still be where you would have calculated it back in March of 2021. So, just happens to be that the pandemic hung around for a little bit longer. 52:47 I also mentioned at Investor Day that we did not assume COVID would go away. So, in that outlook, I had a level kind of a sustained COVID testing, we do expect that COVID testing will be around part of our portfolio. And certainly nowhere here the levels of 2020 and 2021 or even what we're projecting this year, but not insignificant. So, I did not take COVID as upside for that. We certainly have some COVID built into that outlook.

Jack Meehan:

54:25 Great. As a follow-up, wanted to ask you about the consumer directed testing. You talked about the growth rate; how much revenue did that area generate in the quarter? And can you also talk about interest beyond COVID? Is there any specific areas of menu that you're targeting or you think are resonating and where that investments getting directed?

Jim Davis :

55:00 Yes. So, Jack, we've talked into the past, there's various segments since consumer initiated testing business. I'll touch on two. One is, we call them watchful warriors, people that have product conditions like diabetes, like cancer, but their insurance company they only pay for, let's just say two A1c test a year and these people worry about the disease that they may come in once the and get testing. So, it just makes more sense that they do it through us directly rather than have to go to a physician office pay an expensive bill just to get an A1c test. 55:38 So, there's a lot of demand from these types of patients. The second is, we’ve talked about . People who don't want their insurance company to know they are getting tested, they may not want their doctor to know, they may not want their spouse, they may not want their mother or father, you know, some of this is in relation to STD testing. So, it is a big segment for people that value privacy. 56:05 Finally, there's a generation, a much younger generation that may not want to go to the doctor. They don't have a doctor, but they may want to get lab testing done once a year just to check the underlying health of their body. And so, call it the 20 to 26 year old segment that they don't have primary care physicians, but they are concerned about their health. And they come in and get these once a year comprehensive for overall health. 56:35 There's other areas as well Jack, physical fitness offset, check one more level before marathons and things like that, but those are the primary ones.

Steve Rusckowski:

57:31 Yeah. As Mark said, to, it's a small business particularly on the base business and that number is growing strong double-digits. And what we said is, we're committed to the business dealing of about $250 million in size by 2025. Well, needless to say with the investment that we're making, the new leadership we brought in that Jim indicated and really a very focused organizational model that we have in place. 58:04 We're getting good traction and we believe you're going to start to see acceleration of the revenues we get from it, which should be a net tailwind for us for our growth overall as we go into 2023 and beyond tracking to that $250 million number in . 58:23 If you just kind of go through the math, you can see this is going to be accretive to our growth in 2023 and 2024 beyond what we've seen so far because the numbers get much more substantial year-on-year to give us a nice lift in our growth rate going forward.

Operator:

58:42 Our next question comes from Brian Tanquilut from Jefferies. Your line is open.

Mark Guinan:

59:23 Yes. So, that payroll is actually a fee we pay to a partner and that relationship that we have is only permissible during the PHE. So there's absolutely guarantee that when PHE goes away that that payment goes away. So, it's directly 100% correlated to that in addition to some other costs, I mentioned like logistics and so on and so forth. But obviously if we stopped a relationship and stopped the payment, we don't have the logistics cost as well because we're not making those special runs to areas that normally we wouldn't go to pick up specimens. 60:02 So, I think you probably have other pieces Brian, go through it. So, we've talked about a level of testing that’s been averaging about 30,000 here early in the quarter, we talked about a lower level in the second half. So that's one consideration for COVID, you know the PHE is due to the full second quarter. Certainly that's much more of a revenue impact and dollar margin versus percentage margin. 60:29 A change from Q2 to the back half of the year. And then most importantly, we're back to growth mode and every week, every quarter, gives an opportunity to go out and do what we're doing before the pandemic, win over more work with offices grow organically, and all of that will benefit the back half relative to where we were in Q1 and certainly expect to be in Q2. So, COVID rent continue to ramp down, the base business continued to grow, PHE at least that’s in our guidance, but then also importantly that those incremental costs with the COVID testing will go away with the PHE ending.

Brian Tanquilut:

61:52 Appreciate that. Thank you, guys.

Derik de Bruin:

62:00 Thank you and good morning. So I want – couple of questions on advanced diagnostic testing. First of all, one of the other public labs that does the oncology testing, talked about weaker volumes, so we're coming out of the pandemic. Could you talk about what you have sort of seen in oncology testing through that market and are you gaining share there? And then as a follow-up to that, your other main competitor has been doing a number of acquisitions and things like with biopsy and the other ones, how are you sort of thinking about building out your pipeline for the advanced market, booking for potential acquisitions feel better area to enhance or is it all ? Thank you.

Jim Davis:

65:44 Yes, Derik you asked about our oncology performance. And when we think about our oncology business it is hard to say a solid tumor holding to that basic pathology work that then fold off needed. That business is doing well. And has recovered from 2019 levels. And then there's a core hematology business, which has always been a real, real strength of Quest Diagnostics and that business continues to expand. 66:12 So, our oncology portfolio is in good shape. You mentioned liquid biopsy, there certainly is a market and what we referred to is the MRD side that’s Minimal Residual Disease side. We're working on an assay that’s also commercially available assays from our suppliers and we’re considering both. 66:37 In terms of pre-cancer or cancer spring assays, that's a bit more out there. Something we watch as you know, there's 63, 65 start-up companies with the name liquid biopsy that received a of venture capital money last year. And we're certainly keeping an eye in the space on the space as Steve indicated. If we find one that meets all of our criteria, we’ll look closely at it.