Christin O’Donnell :

Thank you, operator. Good morning, and welcome to Labcorp’s Second Quarter 2024 Conference Call. As detailed in today’s press release, there will be a replay of this conference call available. With me today are Adam Schechter, Chairman and Chief Executive Officer; and Glenn Eisenberg, Executive Vice President and Chief Financial Officer. This morning, in the Investor Relations section of our website at www.labcorp.com, we posted both our press release and an Investor Relations presentation with additional information on our business operations, which include a reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures both of which are discussed during today’s call. Additionally, we are making forward-looking statements. These forward-looking statements include, but are not limited to, statements with respect to the estimated 2024 guidance and the related assumptions, the spin-off of Fortrea Holdings, Inc., the impact of various factors on the company’s businesses, operating and financial results, cash flows and/or financial condition including the COVID-19 pandemic and global economic and market conditions, future business strategies, expected savings, benefits and synergies from the LaunchPad initiative and from acquisitions and other strategic transactions and partnerships, the completed holding company reorganization and opportunities for future growth. Each of the forward-looking statements is subject to change based upon various factors, many of which are beyond our control. More information is included in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and in the company’s other filings with the SEC. We have no obligation to provide any updates to these forward-looking statements even if our expectations change. Now I’ll turn the call over to Adam Schechter.

Glenn Eisenberg :

Thank you, Adam. I’m going to start my comments with a review of our second quarter results, followed by a discussion of our performance in each segment and conclude with an update on our full year guidance. For reference, we’ve also included additional business information that can be found in our supplemental deck on our Investor Relations website. Revenue for the quarter was $3.2 billion, an increase of 6.2% compared to last year, primarily due to organic base business growth and the impact from acquisitions, partially offset by lower COVID testing and foreign exchange. The base business grew 6.9% compared to the base business last year, driven primarily by organic growth of 4.5%. Operating income for the quarter was $295 million or 9.2% of revenue or 14.9% on an adjusted basis. During the quarter, we had $100 million of restructuring charges and special items, primarily related to acquisitions and LaunchPad initiatives. In addition, we had $23 million of expense for the transition service agreements related to the spin of Fortrea with the corresponding income recorded in other income. Excluding these items and amortization of $62 million, adjusted operating income in the quarter was $480 million or 14.9% of revenue. compared to $448 million or 14.8% last year. The increase in operating income and margin was due to the benefit of demand and LaunchPad savings that were partially offset by higher personnel expenses. Our LaunchPad initiative continues to be on track to deliver $100 million to $125 million of savings this year, consistent with our long-term target. The adjusted tax rate for the quarter was 23% compared to 23.9% last year. The lower adjusted tax rate was primarily due to the geographic mix of earnings and additional R&D tax credits. We continue to expect the full year adjusted tax rate to be approximately 23%. Net earnings from continuing operations for the quarter were $206 million or $2.43 per diluted share. Adjusted EPS were $3.94 in the quarter, up 15% from last year. Operating cash flow from continuing operations was $561 million in the quarter compared to $162 million a year ago. The increase in cash flow was due to cash earnings and working capital. Capital expenditures totaled $128 million in the quarter or 4% of revenue. This compares to $103 million or 3.4% in the prior year. For the full year, we continue to expect capital expenditures to be approximately 3.5% of revenue. Free cash flow from continuing operations for the quarter was $433 million. During the quarter, the company invested $34 million in acquisitions, paid out $60 million in dividends and repurchased $100 million of stock. The Board of Directors has approved an increase in its share repurchase authorization by $1 billion to a total of $1.4 billion. At quarter end, we had $265 million in cash, while debt was $5.1 billion. Our leverage was 2.4x gross debt to trailing 12 months adjusted EBITDA. We have $2 billion of debt maturing over the next 12 months, and we expect to refinance it later this year. Now I’ll review our segment performance, beginning with Diagnostics Laboratories. Revenue for the quarter was $2.5 billion, an increase of 7.9% compared to last year, with organic growth of 4.7% and acquisitions net of divestitures contributing 3.2% and partially offset by foreign currency translation of 0.1%. The base business grew 8.9% compared to the base business last year, driven primarily by organic growth of 5.7%. Total volume increased 5.7% compared to last year. Base business volume grew 6.3% compared to the base business last year as organic volume increased 3.5% while acquisitions contributed 2.9%. Price mix increased 2.1% versus last year due to an organic base business increase that was partially offset by lower COVID testing. Base business organic price/mix was up 2.2% compared to the base business last year. Diagnostics adjusted operating income for the quarter was $442 million or 17.5% of revenue, compared to $410 million or 17.5% last year. Adjusted operating income was up due to organic demand, acquisitions and LaunchPad savings, partially offset by higher personnel costs. Operating margins were flat but would have been up approximately 20 basis points, were it not for the impact of a cyber event that affected a large partner. Now I’ll review the segment performance in biopharma laboratory services. Revenue for the quarter was $707 million, an increase of 1.1% compared to last year due to an increase in organic revenue of 1.2%, partially offset by foreign currency translation of 0.1%. The revenue growth was driven by continued strength in Central Labs, which was up 9%, while early development was down 15% due to the higher than normal cancellations and lower orders in prior periods. However, we did see a sequential improvement in early development, gross orders and cancellations, which we expect will lead to higher revenues in the second half of the year and deliver year-over-year growth beginning in the fourth quarter. Biopharma adjusted operating income for the quarter was $107 million or 15.2% of revenue compared to $105 million or 15% last year. Adjusted operating income and margin increased due to organic growth and LaunchPad savings, partially offset by higher personnel costs. We ended the quarter with a backlog of $7.9 billion and we expect approximately $2.5 billion of this backlog to convert into revenue over the next 12 months. The trailing 12 months book-to-bill held at 1.00 compared to last quarter and is expected to increase in the second half. Now I’ll discuss our updated 2024 full year guidance, which assumes foreign exchange rates effective as of June 30, 2024, for the remainder of the year. The enterprise guidance also includes the impact from currently anticipated capital allocation, with free cash flow targeted for acquisitions, share repurchases and dividends. The acquisition of select assets of Invitae, which is expected to close next week, is now included in our guidance for 2024. For the remainder of the year, we expect Invitae to add approximately $120 million in revenue. lower adjusted earnings per share by approximately $0.40 and reduced cash flow by approximately $150 million, primarily due to onetime costs related to retention, severance and integration as well as an increase in working capital. We expect Enterprise revenue to grow 6.4% to 7.5% compared to 2023 versus prior guidance, we are increasing the midpoint 135 basis points with Invitae contributing approximately 100 basis points of the growth. We continue to perform well in Diagnostics. We expect Diagnostics revenue to be up 6.9% to 7.9% compared to 2023. This is an increase at the midpoint from our prior guidance of 200 basis points due to stronger base business demand and invite, which is expected to contribute around 130 basis points of the growth. We expect Biopharma revenue to grow 3.7% to 5% compared to 2023. The decrease at the midpoint from our prior guidance of 35 basis points is due to early development, partially offset by continued strength in central labs. We expect early development to have a slower recovery than previously anticipated, but with year-over-year growth still expected to begin in the fourth quarter. We expect enterprise margins to be flat versus the prior year despite the negative impact from Invitae of approximately 40 basis points. Diagnostics margins are now expected to be down due to the inclusion of Invitae of approximately 60 basis points. We continue to expect margins in biopharma to be up year-over-year. Our guidance range for adjusted EPS is $14.30 to $14.90. We have decreased the midpoint of guidance by $0.30, driven by the expected dilution from Invitae of approximately $0.40 and partially offset by a $0.10 increase in the underlying business. The free cash flow guidance range is now $850 million to $1 billion and includes approximately $150 million of a cash use from Invitae, which is primarily due to onetime costs. Excluding Invitae, the free cash flow guidance range is unchanged from prior guidance. In summary, LabCorp is well positioned for profitable growth, both organically as well as through acquisitions. We’re excited about the acquisition of Invitae from both a strategic and financial perspective. Strategically, this strengthens our position in key long-term specialty testing growth areas of oncology and select rare diseases. From a financial perspective, while it’s dilutive in 2024, we expect it to be accretive in 2025 and deliver a very attractive return on investment as we profitably grow the business. In addition, Labcorp continues to generate strong free cash flow that will be used for acquisitions while returning capital to shareholders through our dividend and share repurchase program. Operator, we’ll now take questions.

Michael Cherny:

I’m going to ask 2 questions in one, just to make things easier. First, just can you give a little more color on what you’re seeing in terms of the new awards and early development and how you should think about at least from a category disease state perspective, where they should translate into the better growth in the back half of the year? And then just quickly on the Invitae accretion estimate for ‘25, I think that’s a little faster than anticipated. Can you just give us some of the qualitative dynamics behind what you’re doing to get that to be such a strong EPS contributor next year?

Operator:

Our next question comes from Andrew Brackmann of William Blair.

Adam Schechter :

Yes, absolutely. It’s an exciting time, and we spent a lot of time with our colleagues that will be coming over for Invitae. And first and foremost, the sales organization is very excited. They’re excited because they now have a broader portfolio of products. It’s one thing to go into an office and talk about inherited cancers. It’s another thing to say, but you can also test for all the other things that you may want to test that patient for. And ultimately, we’re going to try to bring that all together so the physician can order directly through one tool and get whatever they need for the patients. So the sales organization is very excited about the breadth of what they’ll bring into those customers. In addition to that, we have such strong partnerships that are abroad at LabCorp. We’re hoping to be able to use those partnerships and have discussions with them about our new offering through Invitae. So although we’ve not built in significant upside for the future with the new customers, we may be able to bring additional tests to. We believe that this market is going to grow significantly faster than other markets that we compete in, and we believe that there’ll be more than 10% growth in this market versus other markets as we go forward. So we think it’s a very exciting opportunity as we go forward. We’re excited about welcoming our new colleagues. They’re excited about being part of Labcorp, and we’re going to move extraordinarily fast but thoughtful.

Glenn Eisenberg :

Yes, Andrew. Yes, it’s our expectation that we will refinance all of the debt. We’re not going to look to pay it down. We have around $1 billion of it due between now and the end of the year, starting actually in September and then $1 billion that’s due in February. We expect to refinance all of that this year. Obviously, the markets have improved nicely. So we’ll have that done. For modeling purposes, if you wanted to look at kind of the net interest expense line, we will refinance, obviously, at a light higher rate than what’s maturing. Our net interest expense this year directionally will come in at around $210 million. And then obviously, once it’s annualized for next year, that will tick up to maybe around $240 million. Again, we’ll see ultimately when we go into the markets. But right now, the markets look pretty attractive.

Eric Coldwell :

So 2 questions. First one is -- should be pretty quick here. Early development positive to hear about the order flow and the lower cancels, and I can see your revenue guidance for the fourth quarter, if you’re expecting growth, that one is pretty easy to get to. But I am curious what is the ramp of the phasing of the ramp from 2Q to 4Q? Is it split the difference between [ 213 ] plus in the fourth quarter and what you did here in the second quarter? Or is it more of a hockey stick into the fourth? Maybe just I don’t know if you could parse out your revenue expectation between early development and Central Lab for the full year. That might be another way of doing this. And then I’ll come back on my second.

Eric Coldwell :

Okay. Great. And then just a quick one, I almost am reluctant to bring it up since you didn’t bring it up, but your competitor had a bit of an update on the employer market, drug testing and being testing for employers. You did not call that out today, but I am curious if you could give any additional comments on your business, there may be a little bit of sizing data and what you’re seeing in those respective markets on the employer side.

Operator:

Our next question comes from Elizabeth Anderson of Evercore ISI.

Adam Schechter :

Yes. Elizabeth, I’ll take the second question first, and I’ll ask Glenn to comment a bit about the first question. It’s good to see the orders coming back and the cancellations being reduced in early development. That’s what’s giving us confidence in revenue growth as we go throughout the year. I would say the biggest difference in pricing that we’ve seen is the price of the NHPs. They were much more expensive last year than they are this year. when the price went up, that was largely passed through to the customers. So we weren’t making margin on that business. Now that the price is lower, it actually helps with the margin a bit, but that’s the biggest difference.

Glenn Eisenberg :

Go ahead, Elizabeth.

Adam Schechter :

Yes, I would say it’s relatively stable. I mean it’s always under pressure. There’s always pressure there. But I’d say continued pressure relatively stable.

Operator:

Our next question comes from Jack Meehan of Nephron Research.

Adam Schechter :

Sure, Jack. First of all, when we first made the announcement, we very quickly put an integration team together of very competent, qualified people across all parts of Labcorp, and we match them with equally confident people across all parts of Invitae. So we’ve had an integration team that has been working really hard to ensure that we have a very smooth transition. I feel very good about the work that they’ve done. As we look at their monthly sales, they’re relatively stable. And we feel good about the way in which they’ve managed their business through what I would say, some pretty difficult turmoil. And their team has done, I think, an extraordinary job of trying to hang on to customers and hang on to business. So the question I’m asking the integration team is where do we see upside? What else can we go after with the new portfolio that they’ll have, the increased relationships and partnerships that we have. So I’m actually less concerned about the leakage and I’m more focused on where the growth opportunities are.

Glenn Eisenberg :

Jack, so on the -- our partner that had a cyber event, again, it did not affect Labcorp, but did affect our partner. We commented that it was around a 20 basis point headwind during the quarter from the margin of diagnostics. That’s roughly around $5 million of, call it, operating income that would have been foregone. A little bit of some timing delay in cash as well that we’ll get that just delayed from the second quarter to the third. But obviously, we had a very strong free cash flow number overall for the quarter in any event. We didn’t comment on the CrowdStrike or frankly, even the hurricane impact in our results. Obviously, it happened after the second quarter. So when you think about the magnitude of those you’re also looking probably around $0.05 a share impact to earnings. So when you look at the change in our guide other than Invitae, where we took the underlying business guide up $0.10 that’s even after absorbing the impact from that IT outage event and the weather impact.

Kevin Caliendo :

The diagnostic revenue rec, the mix, the organic growth in general was better than we had modeled. And I’m just Wondering if you can talk through if there’s any changing dynamics or anything that was surprising there that if there’s something happening in the market that’s affecting mix in a positive way, or are you guys taking share? Or are you seeing volumes coming from a different place because they have been strong and the revenue rec was better. I just would love to understand what’s actually happening in the marketplace there.

Kevin Caliendo:

Is this specialty test and the additional test per rec, is that a Labcorp’s specific, like are you guys increasing your capabilities to be able to do that? Or is that something that’s just happening in the marketplace, and that’s the way the market is moving and you guys are benefiting from it?

Glenn Eisenberg :

Yes. Also, Kevin, just to kind of reinforce what Adam had said that when you look at the volume growth that we’re now experiencing. And again, organically, our base business was up 3.5%. Obviously, it’s higher than what our historical growth is, and we attribute that in part, as Adam said, to some of the sheer growth around the hospital outreach labs that we’ve acquired as we penetrate those markets even stronger than maybe they had as well. But overall, when we look at the comps now to 2019, the CAGRs are stronger than historical averages. So where last year, we saw some of the improved growth rates, really more a function of a softer comp year-over-year, we actually think now we’re comping to a more normal period a year ago and that the growth rates are now more sustainable. And as Adam said, as we give our guidance and what’s implied is that we will continue to see -- we expect that strong level of both volume growth but also favorable mix along the lines that Adam had commented on.

Glenn Eisenberg :

Yes. No. Overall, we continue to be very pleased with the LaunchPad activities. We talk about around $100 million to $125 million per year of savings. We comment that, that’s what we look to do to help offset the inflationary expenses primarily related to personnel, which would fall within that, call it, $100 million to $125 million level. So we are able to offset that. We do normally expect to see good leverage on the incremental volume and revenues that we have. And obviously, you saw in the case of biopharma, good leverage on modest top line growth with margins that were up, benefiting from LaunchPad. And even within Diagnostics, while margins were flat during the quarter, we commented about the cyber event. We’re still dealing with a little bit of a headwind from lower COVID as well. But as we think about the full year, the leverage, ideally, we’d leverage at around a gross profit margin for the business that we’re approaching that level for the full year when you take out the unusual items or the discrete items that could be a headwind. So that we think, as Adam commented earlier, the business is performing well from a top line standpoint and from an operational standpoint.

Lisa Gill :

Just quickly, can you maybe just comment on the LDT rule? It came out since you last reported, any impact? How are you thinking about that for your business? I understand that the industry overall is in some way disputing it, but I just want to hear your thoughts around it.

Lisa Gill:

Adam, just as I think about D.C., any updated thoughts from your side on either PAMA or SALSA or the opportunity for SALSA to primary pass?

Operator:

Our next question comes from Erin Wright of Morgan Stanley.

Adam Schechter :

Yes. So what I’d say, Erin, is that we’re obviously not giving 2025 guidance today. But as I look at the trends, and I look at the things that I am considering as we go into 2025, the market dynamics continue to be strong. And what’s interesting about the Diagnostics business in particular, is that regardless of Republican President, [ Democratic President], resessions, nonrecessions. The business is very durable and has shown its durability over time. So I feel very good about our Diagnostics business, the underlying performance. I would say the biggest headwind/tailwind is going to be what we just talked about, which is does PAMA occur or does it not occur. As I think about the Biopharma Laboratory businesses, we have momentum, we have strength I feel good about our orders and our order book as we go into the end of this year. And I expect that our book-to-bill is going to continue to improve even from where it is today, which is strong as we go through the rest of this year, and that would bode well as we go into 2025. And again, the biggest headwinds/tailwinds there is just what happens with the smaller biotech companies in the marketplace as well as pharma and what they decide to do based upon their environment.

John Kim :

This is John Kim on for Mike. Speaking of the small biotechs and pharmas has there been any improvement in the client mix -- or sorry, not improvement, but rather a shift in the client mix, I think you talked about targeting the midsized pharmas as well. And I guess is that why there is a confidence in that the early development business going further in the second half. I know you mentioned the cancellations have lowered, the bookings are improving, but also just interested to know if there’s been any trend there?

John Kim:

Got it. And then in terms of margins, I hear you on the top line doing well and the team is executing well. What about in terms of the employee turnover, he has the labor cost inflation tracked within expectations?

Operator:

Our next question comes from Stephanie Davis of Barclays.

Adam Schechter :

Sure. So Stephanie, when we look at the environment. I’m going to start off first with the hospitals, local regional laboratories. I think during COVID, they realized quickly, particularly the hospital systems that the laboratories weren’t necessarily fully up-to-date with their equipment, that the cost for capital was very expensive and high and they realized that they can take that money and use it for other things in a hospital versus running a laboratory. Historically, I think people were worried could Labcorp bundler laboratory without having an impact to the patient care or the physicians getting the test as quickly as they wanted to. But when you do as many deals as we’ve done recently, there’s so much proof that we can do these extraordinarily well and then we can actually run the hospital laboratories extraordinarily well without interrupting patient care, actually giving them better data analytics, better tools, better equipment. And I think that, that’s kind of reached a plateau where most hospital systems don’t argue anymore on that point. They also appreciate getting some capital, and they can use that capital by selling a laboratory or selling the outreach business to us. And I think that they look to do that. I would say that as hospital systems were struggling more right after COVID, I think they were looking to move quicker than they are today. But at the same time, today, our pipeline remains very, very strong for those hospital deals. The local regional laboratories, I think, are struggling a bit after COVID. And therefore, there’s an opportunity there that we’ll continue to look after. I would say Invitae is not our typical deal. Our typical deal, we want to be accretive in the first year, return this cost of capital in 2 or 3 years and be something that we readily integrate all the time. Invitae, I feel good about our ability to integrate it, but obviously, it wasn’t accretive in the first year. It will be accretive in the second year. That was a strategic decision for us because we believe the inheritant cancer area and the other areas that they’re working on in terms of smaller disease areas will grow so much faster in the future. and we’ve already begun to focus on those areas. We believe that this could be an important add to our portfolio. And I think of it more as a strategic acquisition than the routine acquisitions that we typically do.

Stephanie Davis :

So shifting gears a bit then to more of the hospital business. I know you’ve given some color on the immediate margin and cash flow impacts of the extension cyber attack. But have you thought about any follow-on impact to that business, such as volumes slipping to another player in the region or maybe the need to shore up some of their offerings.

Operator:

Our next question comes from Patrick Donnelly of Citi.

Glenn Eisenberg :

Patrick, so obviously, for the quarter, we feel very good. We commented a little bit earlier that when you think about it from an organic standpoint, our volume base to base business was up 3.5%. And Adam went through kind of some of the reasons why we feel that we’ve seen some improved growth there and share that’s actually been pretty consistent in that volume growth supplemented, if you will, by favorable mix as we’re growing our esoteric business and the benefit of some of those hospital deals or TSAs as well as the test per session. When you look at the implied outlook for the year, you get to that diagnostics revenues are still looking from a top line at around 9%. So obviously, in the second half, we expect to see continued growth with now invite and part of that guidance for Diagnostics, you’re still looking at an implied, call it, organic growth in the second half of around 5% and then 4% aided by M&A. And of that 5%, we continue to expect to see a similar mix with utilization being the higher part of that growth. So we’re kind of averaging, call it, maybe a trend of 3:1 from the benefit of organic volume versus the favorability from mix that aids there. So we do expect this trend in utilization to continue.

Glenn Eisenberg :

Sure. Just again, from an overall standpoint, margins for the year, as you think about Labcorp, we’ve now commented all in, including the impact of Invitae, our margin should be flat this year. year-over-year in that the impact of Invitae will be around 40 basis points. So forgetting even other headwinds, we expected for the company to see a nice 40 basis point plus margin improvement. When you look at Diagnostics, we commented that prior to Invitae that margins for the year would be flat to slightly up, even absorbing the impact of less COVID business, if you will. Obviously, with now Invitae, it will have around a 60 basis point headwind to Diagnostics. So expect that in the second half of the year, Diagnostics margins will be down year-over-year again, excluding Invite, second half margins in Diagnostics would have been up year-over-year. So positive leverage within the Diagnostics business. And again, we commented that the margins within the Biopharma side, our expectation for the year is for margins to be up and that the margins in the second half for Biopharma will be higher than what it is for the first half. Year-over-year, there will be some differences, but overall, assume a higher second half margin profile for BLS than the first half. So again, we feel we’re getting good top line. We feel we’re leveraging it well. LaunchPad is an integral part of helping our margins help offset some of those inflationary costs. And then obviously, we’re adding on top of that just the near-term dilutive impact from it. When you think about 2025, the only thing I’ll comment really on the Invitae is that assuming the close later on or call it next week, even with Invitae, we’ll still have the headwind in the first half with margin impact being negative from Invitae in the first and second quarters. But what’s interesting is as you move to -- once it’s annualized, you’ll obviously start to see favorable contributions from margins from Invitae because we’re now comping off of positive and growing margins versus the first half of this year with negative margins.

Adam Schechter :

Thank you. Thanks, everybody, for joining us today. We’re going to continue to focus on our customers, our business, shareholders and employees as we move forward, and we look forward to sharing our progress with you next quarter. Have a great day.

Jack Meehan:

So I wanted to focus on the Invitae deal here. Let's start with Adam. Can you talk about the strategic value of these assets why you're excited to acquire them out of bankruptcy? And how does the oncology business complement? What you're doing already internally?

Glenn Eisenberg:

Yes, Jack. So again, as Adam commented, we're very excited about the acquisition. And frankly, going out of acquiring the select assets through bankruptcy from a purchase price, obviously, relative to other deals that we see of similar focus in our therapeutic areas is quite attractive. As we think about long-term value creation, you heard in the opening comments that we expect this to exceed our cost of capital in year 3 and have a very attractive overall return on our investment.

Operator:

And our next question comes from Erin Wright of Morgan Stanley.

Glenn Eisenberg:

When we talk about the 3 acquisitions that we announced in the quarter, that's adding obviously to the change in the guidance we did for diagnostics. So when you look at the change, just use the midpoint of our guidance, it improved 140 basis points, I assume roughly half of that is from those 3 acquisitions.

Erin Wilson Wright:

Okay. That's helpful. And then switching to the Biopharma segment, what are you expecting for the balance of the year at this point? What are you seeing in terms of RFP flow and cancellations? And how would you just characterize the underlying health, particularly across that early development business?

Patrick Donnelly:

I want to pick up kind of right where you left off there on the Biopharma piece. Can you just dive a little bit deeper into early development. Obviously, again, the book-to-bill softened a little bit there on the BLS side. There's a lot of focus on the early development piece. Can you just talk about the visibility on that front? And again, the expectations as we work our way through the year, maybe both on orders and the revenue side would be helpful.

Unknown Analyst:

Maybe just one quick clarification on Invitae. You talked about the financial impact in the first full year post close. Is there any financial impact currently embedded in the guidance?

Glenn Eisenberg:

Yes. So overall, we normally talk about our growth weighted to volume versus price mix and kind of 3:1 ratio, if you will. Obviously, it was a little different during the quarter, but strength, frankly, on both volume and on price mix. The price/mix frankly is mix related. We would normally say unit price is relatively flat. But the improvement that we saw in the quarter from a mix standpoint was the live management agreements, was the -- our test per session.

Operator:

And our next question comes from Ann Hynes of Mizuho Securities.

Adam Schechter:

Yes. So and I'll give you -- broadly speaking, and then maybe Glenn can add some details. But broadly speaking, if you look at the hospital deals that we're doing, there's a significant number of them that we had last year, at the end of the quarter, going into this year. And when you do those, those are, by definition, getting some market share. And then when you think about what's happening in the marketplace around those hospitals, you expect that you'll pick up some market share there as well.

Glenn Eisenberg:

Yes. No, the only thing I'd add is just that we had a good quarter, and we took our full year outlook up to reflecting the stronger demand than we've been seeing. We also look back to pre-pandemic, and we're tracking well within the range that we would normally expect to be. So some of the year-over-year improvement arguably has driven a bit about and not fully recovered year -- the prior year. But to see that kind of growth, we feel very good about and expect that to continue.

Adam Schechter:

Yes. So the first thing I'd say is that the LabCorp was supportive of the Valid Act, which we thought was the right way to provide oversight of the FDA of LDTs. It was legislation that was fit for purpose for our industry. We're not supportive of the current rule, although we haven't seen the final rule. We still have to see that in a whole judgment until we see exactly what's in there. What I worry about most -- and we have great quality organization. We have terrific scientists, and we do so many -- so much research and need to [indiscernible] marketplace. What I worry about is speed to market of LDTs. And patients that need these LDTs, they're typically smaller groups of patients. Other people aren't necessarily developing tests for them and they need to test as quickly as possible.

Operator:

Our next question comes from Elizabeth Anderson of Evercore ISI.

Adam Schechter:

Yes. So we've gotten quite good at being able to efficiently and effectively run the lab management agreements that we have. When you do 100 hospitals with one organization quickly, you become an expert pretty fast. So what I would say is we take our time because the most important thing is to ensure that there's no patient disruption. The second thing is to make sure that the physicians are very satisfied with the way in which they can order and the speed in which they get their results. And then over time, we find ways to use our size, our scale and our ability to synergize to reduce cost. And we've learned that the most important thing is to do it really well. And although the margins never get to our average margins, they start off low and they increase over time. I think you've seen with the announcement of several deals closing in the first quarter, multiple deals closing at the end of last year. There's a slight impact on our margin in the beginning. But over time, the margin is going to improve. And that's why we believe our Diagnostics margin will increase when you look at the totality of '24 versus '23.

Adam Schechter:

Yes. So what I would say is that there's no longer a supply issue with NHP. The only thing that we're seeing with NHP is a bit of a revenue drag because the cost of NHPs when there was a supply issue were much higher. We were charging the higher price, but we weren't making a margin on that higher price. So now that the prices have come down, the actual revenue for those studies come down with the price. So you're seeing less revenue growth in that area, which I would say is probably a bit artificial because of the price of the NHPs coming down.

Adam Schechter:

Yes. I would say that dynamics in the non-NHP portion you're seeing growth rates that would be a bit higher than the NHP. But again, that's more -- they're both less than what we have seen historically because of what's happening in the biotech world. We are beginning to see signs of recovery in the biotech world. So both of those parts of the business should recover over time.

Kevin Caliendo:

I want to talk or ask a little bit about...

Kevin Caliendo:

I'm sorry, is it better?

Kevin Caliendo:

I'll try to ask you again, why don't you talk a little bit about margin expectations in the DX segment, specifically around your expectation of labor trends and actual margin in the DX business going forward, like in the first quarter as we're jumping off [indiscernible].

Kevin Caliendo:

Diagnostics, sorry.

Glenn Eisenberg:

Yes. The only thing I'd add too is, as Adam said, margins up even despite COVID and weather and lab management agreements for the full year margins to be up slightly but also to see that expected beginning in the second quarter where you'll see nice growth year-over-year. We'll have the normal seasonality. So when you look at the absolute margins, they'll fluctuate based on seasonality, but the year-over-year improvement, you'll see pick up nicely beginning in the second quarter that gives us the confidence that the margins will be up for the full year.

Andrew Brackmann:

Maybe just to piggyback off some of those margin questions on the Diagnostics front, but more specifically on the specialty diagnostics side of things. I guess, how should we be thinking about moving, the moving pieces there moving forward? Obviously, you gave some color around Invitae, but just as that entire specialty business grows, how are you thinking about its impact on total segment margins here?

Adam Schechter:

Yes. What I would say right now, it's not a large part of our business. It's a very small part of our business. But it's an important part because there are new therapies that we believe will become available over time, it's such an important disease and it's growing in the United States and around the world. So we want to have the broadest portfolio for physicians to use to help with the diagnosis and monitoring of Alzheimer's patients. But once again, many of those patients not only need these Alzheimer's tests, but they'll use a lot of routine tests as they learn to diagnose these patients and monitor them over time.

Operator:

And our next question comes from Eric Coldwell of Baird.

Glenn Eisenberg:

Yes. Eric, with regard to NHP pricing, we've not given what the step down in the pricing has been. And obviously, it impacts the mix and where we get the [ primates ] from and where they're used in the studies. What we've commented is that it's been a nice reduction in the price from when we were capacity constrained and obviously, the prices were significantly higher. And I think Adam referenced this earlier as well that from our perspective, while it impacts our revenues, it's really not impacting our profitability because most of the step down in the price of NHPs were pass-through. So the positive is it shows us a lower cost for our customers to get their studies done. So they're seeing the benefit of it without a negative impact from us overall. To your point, roughly half of the studies that we do are in HP based with the other half that are not, that mix really hasn't changed very much.

Adam Schechter:

Yes. I'll let Glenn answer that question, Eric, but before you guys, I think it's important to note that no two hospital deals are exactly the same, and it really it's three pieces to them, right? There's a lab management part where you run a hospital's labs. There's the outreach business and there's the referral business. Ascension was kind of an outlier to most of the deals that we do because so much of it was the lab management part of the business, and that has by far the lowest margin that starts out low and improves over time. Most of the deals that we do, they start out with a lower margin. But overall, with the kind of portfolio of the three types of business, they get to about or average margins over time. So that's the typical deal. Ascension is a bit of an outlier, but maybe you can talk about Ascension, Glenn.

Adam Schechter:

And the revenue for that looks very strong. It's slightly above what we had guided to originally.

John Kim:

This is John Kim on for Mike. So you've done a lot of deals. You have Invitae, BioReference and the 3 health system agreements that you closed in the first quarter. And Glenn, you talked about how, given the range that Invitae would be included in the top end of the guidance. So could you just update us on your thoughts on the deal funnel and your capital allocation priority, are there any other larger deals, independent labs or health systems that are still coming our way?

John Kim:

Got it. I appreciate that. And if I could ask one on the Biopharma early development. So you talked about the cancellations coming down still a little high. But I wanted to ask, you previously talked about targeting perhaps medium-sized clients. Any -- has there been any shift or your win rates are good and at least in the Central Labs, has there been any shift in that direction in terms of garnering attention or RFP from the medium-size clients?

Operator:

And our next question comes from Brian Tanquilut of Jefferies.

Adam Schechter:

Yes. No, it's a good question, Brian. And it's good news that the systems are doing better and that the hospitals are performing better. I think that's good for all of health care, frankly. So I'm pleased that they are beginning to rebound and do better. The interesting thing was before the issues with the health systems, a lot of the discussion was can you do it and can you do it well? And should we take the risk that things aren't going to go well.

Operator:

And our next question comes from Pito Chickering of Deutsche Bank.

Adam Schechter:

Yes. So I'll start with turnover. And I'll give a sense, overall, across LabCorp, our turnover is better now than it was last year or the year before that. In our Biopharma business, I'd say it's back to pre-COVID levels, maybe even a little bit better. So the turnover there has really improved. In our Diagnostics, we see in certain areas, there's still a higher turnover than what we would have seen prior to the pandemic, particularly in frontline employees, where they have not only other choices in health care, but in other industries. But even there, we start to see less turnover than what we've seen in the past. There's been a significant inflation of cost due to retaining employees in the past as we go forward, I think it will move back more towards the level of inflation of about 3% or so.

Adam Schechter:

Yes. I would say that we're seeing what we would expect at this point is slightly higher, we give a range because there's a range of different things that may or may not occur. But overall, we think that the environment is healthy.

Operator:

And our next question comes from Stephanie Davis of Barclays.

Adam Schechter:

Yes. So as I think about the early development business, I don't think that it's a share shifting. I think our share is remaining consistent within the parts of the market that we compete, we don't compete in all aspects of our -- we don't have a contract manufacturing organization, for example. But in the areas that we compete. Our win rates look good, our RFPs look good. So I believe that our market share is being maintained. I think we're seeing more that there's still a higher level of cancellations than what we've seen in the past. And in some instances, it's taking a bit longer for the companies to make their final decisions because they're still managing what I would say is a rather restricted budget even with the funding being better than it has been before.

Operator:

Thank you. I'd now like to turn it back to Adam Schechter for closing remarks.

Operator:

This concludes today's conference call. Thank you for participating, and you may now disconnect.

Christin O'Donnell:

Thank you, operator. Good morning and welcome to Labcorp’s fourth quarter 2023 conference call. As detailed in today's press release, there will be a replay of this conference call available via telephone and internet. With me today are Adam Schechter, Chairman and Chief Executive Officer and Glenn Eisenberg, Executive Vice President and Chief Financial Officer. This morning in the Investor Relations section of our website at www.labcorp.com we posted both our press release and an investor relations presentation with additional information on our business and operations, which include a reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures, both of which are discussed during today's call. Additionally, we are making forward-looking statements. These forward-looking statements include, but are not limited to statements with respect to the estimated 2023 guidance and the related assumptions, the recently completed spinoff of Fortrea Holdings Inc., the impact of various factors on the company's businesses, operating and financial results, cash flows and/or financial condition, including the COVID-19 pandemic and general economic and market conditions, future business strategies expected savings, benefits and synergies, from the launchpad initiative and from other acquisitions and other transactions and partnerships and opportunities for future growth. Each of the forward-looking statements is subject to change based upon various factors, many of which are beyond our control. More information is included in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and in the company’s other filings with the SEC. We have no obligation to provide any updates to these forward-looking statements even if our expectations change. Now I’ll turn the call over to Adam Schechter.

Glenn Eisenberg:

Thank you, Adam. Going to start my comments with a review of our fourth quarter results, followed by a discussion of our performance in each segment and conclude with our 2024 full-year guidance. For reference, we've also included additional business information that can be found in our supplemental deck on our Investor Relations website. Revenue for the quarter was $3 billion, an increase of 3.5% compared to last year, primarily due to organic-based business growth and the impact from acquisitions; partially offset by lower COVID testing. The base business grew 7.4% compared to the base business last year, while COVID testing revenue was down 73%. Organically in constant currency, the base business grew 5.2%. Operating loss for the quarter was $123 million due to an impairment charge of $334 million related to our early development research laboratory's business, as we've experienced soft biotech markets. In addition, we had $125 million of special charges related to acquisitions, COVID and the spin of Fortrea. Excluding these items in amortization, adjusted operating income in the quarter was $395 million or 13% of revenue, compared to $413 million or 14.1% last year. The decrease in adjusted operating income and margin was due to lower COVID testing. Base business margins were in line with last year, as the benefit of demand and launch pad savings were offset by higher personnel and stranded costs and the mixed impact of recently completed hospital partnerships. Our launch pad and stranded cost reduction initiatives delivered around $125 million of savings this year, consistent with our long-term target of $100 million to $125 million per year. The adjusted tax rate for the quarter was 19.5% compared to 25.4% last year. The lower adjusted tax rate was primarily due to the geographic mix of earnings, and the benefit from increased R&D tax credits. We expect our adjusted tax rate for 2024 to be approximately 23%. Fully diluted EPS for the quarter was a loss of $1.95 due to the early development impairment charge. Adjusted EPS were $3.30 in the quarter, up 8% from last year. Operating cash flow from continuing operations was $580 million in the quarter, compared to $607 million a year ago. The reduction in cash flow was due to lower COVID testing. Capital expenditures totalled $165 million in the quarter. For the full year, capital expenditures were 3.7% of revenue, and we expect this to be approximately 3.5% in 2024. Free cash flow from continuing operations for the quarter was $414 million. The company invested $155 million in acquisitions and paid out $61 million in dividends. While we did not use any cash for share repurchases during the quarter, we completed the accelerated share repurchase program, which reduced our share count by approximately 1.1 million shares in the quarter. At the end of the year, we had $530 million of share repurchase authorization remaining. For the full year, free cash flow from continuing operations, excluding spin-related costs, was $888 million. The company invested $672 million on acquisitions, paid out $254 million in dividends, repurchased $1 billion of stock, and paid down $300 million of maturing debt. We continue to have a robust pipeline of potential acquisition opportunities that will supplement our organic growth. In addition, we continue to believe that our share repurchase program is an important part of our capital allocation strategy. At year end, we had $537 million in cash with debt of $5.1 billion. Our leverage was 2.5 times gross debt to trailing 12 months adjusted EBITDA. Now, review our segment performance, beginning with Diagnostics Laboratories. Revenue for the quarter was $2.3 billion, an increase of 2.6% compared to last year, with organic growth of 0.8% and acquisitions contributing 1.8%. The base business grew organically by 5.7% compared to the base business last year, while COVID testing revenue was down 73%. Total volume increased 2.4% compared to last year, as organic volume grew 0.3%, which was constrained by lower COVID testing, while acquisition volume contributed 2.1%. Base business volume grew 5.2% compared to the base business last year, as organic volume increased 3.1%, while acquisitions contributed 2.2%. Price mix increased 0.2% versus last year, due to an organic base business increase that was mostly offset by lower COVID testing. Base business organic price mix was up 2.6% compared to the base business last year. Diagnostics' adjusted operating income for the quarter was $354 million, or 15.1% of revenue, compared to $387 million, or 16.9% last year. The decrease in adjusted operating income was due to a reduction in COVID testing. Base business operating income was up due to the benefit of higher organic demand, acquisitions, and launchpad savings, which were partially offset by higher personnel costs, including healthcare related costs. The decrease in margin was due to the reduction in COVID testing and the mixed impact from recently closed hospital partnerships, which we expect to improve over time. Now review our segment performance of Biopharma Laboratory Services. Revenue for the quarter was $695 million, an increase of 7.1% compared to last year, due to an increase in organic revenue of 4% and foreign currency translation of 3.1%. The 7.1% revenue growth was driven by continued strength in Central Labs, which was up 12%, while early development was down 2% due to higher than normal cancellations. Biopharma adjusted operating income for the quarter was $109 million, or 15.7% of revenue, compared to $95 million, or 14.7% last year. Adjusted operating income and margin increased due to organic growth and Launchpad savings, partially offset by higher personnel and stranded costs. We ended the quarter with a backlog of $8.2 billion, and we expect approximately $2.5 billion of this backlog to convert into revenue over the next 12 months. Book-to-bill for the quarter was $1.26 billion, with the trailing 12 months at $1.04 billion. Now I'll discuss our 2024 full year guidance, which assumes foreign exchange rates effective as of December 31, 2023, for the full year. The enterprise guidance also includes the impact from currently anticipated capital allocation, with free cash flow targeted for acquisitions, share repurchases and dividends. We expect enterprise revenue to grow 4.7% to 6.5% compared to 2023. This includes the favourable impact from foreign currency translation of 60 basis points. We expect Diagnostics revenue to be up 3.2% to 4.8% compared to 2023. The impact from lower COVID testing of around $130 million is expected to be offset by the annualization of acquisitions that were completed in 2023. We expect biopharma revenue to grow 5.5% to 7.5% compared to 2023. This guidance includes the positive impact from foreign currency translation of 220 basis points. We expect central labs and early development to both grow within the segment guidance range. We expect margins in diagnostics and biopharma to be up in 2024 versus 2023, driven by top line growth and Launchpad savings. Our guidance range for adjusted EPS is $14.30 to $15.40, with an implied growth rate at the midpoint of approximately 10%. While we do not guide the quarterly performance, it's worth noting that first quarter earnings will be below typical quarterly seasonality, due to weather disruption in January that we expect will impact earnings by $0.10 to $0.15 in the quarter. Free cash flow is expected to be between $1 billion to $1.15 billion, with an implied growth rate at the midpoint of approximately 21%. In summary, we expect to drive continued profitable growth and strong free cash flow generation that will be used for acquisitions that supplement our organic growth, while also returning capital to shareholders through our share repurchase program and dividends. Operator, we will now take questions.

Jack Meehan:

I wanted to start with a question on capital allocation. So last year was obviously pretty active year for you guys, integrating Ascension, doing the spin. It feels like you have a little bit more bandwidth and the cash flow has been strong. I was wondering if you thought there could be any larger deals available either in the independent lab or health system space. Like I know it's tough to come up with something that's Ascension size, but what does the funnel look like?

Glenn Eisenberg:

Yeah, Jack, the only thing I'd also add to your comment earlier is that our guidance assumes that, again, we're going to generate between $1 billion to $1.15 billion of new free cash flow this coming year, and that we'll redeploy that for capital allocation of M&A buybacks and dividends, but the balance sheet is also strong. We ended the year at 2.5 times gross debt to trailing 12 months adjusted EBITDA, and we have a targeted range of 2.5 times to three times. So to your point, if there were attractive opportunities out there on the M&A front, obviously share repurchases as well in addition to the free cash flow, we also have additional financial flexibility to pursue those opportunities.

Adam Schechter:

Yeah, so, Jack, let me first talk about margins just in general. So if you look at 2023, the margins were basically flat versus prior year. If you look at some of the things that we had to overcome, they were pretty significant, like COVID work that was significantly less this year than the prior year, but in addition to that, the hospital deals that we've done, in particular in the fourth quarter, had an impact on our margins, because although there are freedom in the first year, they're dilutive in the first couple of months as we do the integration until we have the ability to reduce costs to a level that makes sense over time. So we saw some impact from that in the fourth quarter as well. I feel really good about our margin accretion as we go into 2024 and we've said that we expect the margins to increase, but we also expect them to increase in each of the businesses, not just diagnostics, but also biopharma. Within biopharma, we expect them to be increased not just in Central Laboratories, but also in early development. So we continue to look for ways to reduce costs through a launchpad initiative. We're committed to reducing costs by $100 million to $125 million this year and each year for the next several years. In addition to that, our volume growth is helping us significantly. In particular, as we see growth in biopharma, that's going to help us with our margins. Despite the fact that we still have COVID overhang in 2024 versus '23, that we're continuing to improve the margins in our hospital deals, we're expecting to see the margins being accretive and growing this year, which to me is just a good sense of the underlying growth. With, particular focus on price, I would say price is net neutral when you look at overall price. There is some benefit to mix, and we continue to see mix helping us there.

Operator:

Our next question comes from Kevin Caliendo with UBS. Your line is open.

Adam Schechter:

Yeah, I'll talk a little bit, and I'll ask Glenn to provide some additional context. Our Biopharma laboratory service business, remains a leader in both segments. We're a leader in Central Laboratory. We're also a leader in early development. Central Laboratory performed very well in the fourth quarter, and we expect is going to continue to perform well as we look at 5.5% to 7.5% growth in 2024 across the segment. But early development, we expect to continue to improve as we go through the year and we also expect early development to grow about the same amount as the overall guidance that we're giving for biopharma. A lot of the early development growth we expect will be in the second half of the year as we continue to see improvement and ramp up. Our RFPs look good in both segments. The largest segment, obviously, by far, is the Central Laboratories. The RFPs look good. Our win rate looks good. Big Pharma is continuing to send us a lot of RFPs that feel great. If you look at early development, the RFPs look good. The win rate looks good. What we've faced are some cancellations that are well above normal levels and we expect as we go through 2024 that, that will normalize and get us back to the RFPs and the win rate being positive for us, and therefore providing us with growth.

Kevin Caliendo:

Great. If I can ask a quick follow-up to that; just the outlook for NHP pricing and sort of your reliability of supply, how does the -- what's happening in the marketplace there? We've heard, pricing is coming under pressure a little bit. How does that -- how do you anticipate that helps or hurts on the margin front? Like how should we think about that impact?

Operator:

Our next question comes from Erin Wright with Morgan Stanley. Your line is open.

Adam Schechter:

Sure Erin. So first of all, I would say, we came into 2024 with significant momentum. The diagnostics-based business grew 8% in the fourth quarter. Biopharma grew 7.1% in the fourth quarter. So I feel good about the guidance that we're providing for each of those businesses. So for diagnostics, it's 3.2% to 4.8%, midpoint of 4% growth. Biopharma, it's 5.5% to 7.5%, and midpoint of 6.5% growth. So very strong revenue growth. We are comfortable also saying that there'll be margin improvement in each of those businesses. That's despite the fact that there is going to be an impact in Diagnostics from weather and we expect it to be $0.10 to $0.15 in the first quarter and, therefore, the first quarter will be the hardest quarter for us of 2024, but the numbers I just gave you and the ranges that I gave you, midpoints, already, we already know what the weather was in January. So it already contemplates what happened in January.

Erin Wright:

Perfect. Thanks and just your quick thoughts on sort of the regulatory environment as it stands now, whether it's LBT, PAMA and SALSA. Do you think PAMA just continues to be pushed out at this point? What are your thoughts there? Thanks.

Operator:

Our next question comes from Stephanie Davis with Barclays. Your line is open.

Adam Schechter:

Yeah, so what I would say, Stephanie is, number one, we have momentum in the diagnostics business and the momentum is coming from our base core business. We see it in both routine and esoteric testing. We have four therapeutic categories that we focus on that have higher growth in other specialty areas and we're going to continue to focus on those areas, oncology, women's health, autoimmune disease, and neurology and I believe that those are going to help us continue to grow because those parts of the market should grow disproportionately as we continue to go into the future. At the same time, there's no doubt that the acceleration of the hospital and local laboratory partnerships has enabled us to grow faster than what we've grown in the past and the good news is we have a strong pipeline of those as we go into the future. That's why we've raised the longer-term guidance for inorganic growth to 1.5% to 2.5%. Historically, we would have said 1% to 2%. So I think all those things combined give us momentum when it comes to the diagnostic volume.

Adam Schechter:

Yes. So if you look at what we've done with Ovia, we think it's a terrific way for us to have a digital capability in a very important core therapeutic area that we're focused on, women's health. And it really is what they've offered a first of its kind fertility family building benefit that we will be bringing to customers. The service offers care navigation and concierge services that helps individuals throughout their family building journey. And, we can offer it directly to patients if they like. We can offer it to employers. We have a very strong employer group, Laboratory Employer Services and this is just one of many offerings that we're going to be bringing to the marketplace, but because women's health is so important and because we are so focused on it, this is just another avenue for us to help in the women's health arena.

Patrick Donnelly:

Thanks for taking the question. Maybe on the biopharma booking side, the book-to-bill picked up a little bit from last quarter. I know last quarter you guys were flagging, maybe some elevated cancellations and on the emerging biotech side. Can you just kind of let us know what the environment looks like now? How you're feeling about that backdrop? Again, just given a little bit of volatility there and we've seen some biotech IPOs trickle out. How are you feeling about the backdrop and how should we think about bookings this year?

Glenn Eisenberg:

Yeah, Patrick, just one other thing to think through as well. Again, we had a strong fourth quarter, which obviously is very encouraging, but it was still driven more on the Central Lab side. So while the orders and the RFPs and our win rates for even early development are doing well, it's those cancellations that have impacted it. So as you think about the cadence too for next year, when you look at the biopharma, you expect to be kind of a second half-weighted year on the revenue growth. So both businesses, again, within that 5.5% to 7.5% growth, but because of those cancellations, we do expect to see early development growth rate be much stronger in the second half than the first. We're on the Central Lab. Given the continued strength of its backlog, we expect that normal cadence of improvement each quarter as we go.

Glenn Eisenberg:

Sure. Again, expect to see margins in both businesses that are up, but specifically in diagnostics. We do expect margins to be up in total diagnostics, albeit slightly up because of the impact, to your point, of COVID still being a headwind and the underlying base business margins doing well, but overall, we would say that we're going to be down around $130 million due to COVID. From a margin standpoint, call it 20 basis points to 30 basis points of kind of headwind that we're going to get. That, again, will be more than offset by the growth of the business and our Launchpad initiative. When you look at the interest expense, you can effectively take the run rate or where we ended the fourth quarter and kind of annualize that and then we do have around $1 billion of debt that's due late in 2024. So we're on $600 million in September, another $400 million in December. So we'll look to refinance it. The absolute debt levels that we have at that $5 billion, $5.1 billion, we expect to maintain. So we'll just refinance it, obviously, slightly higher rates than what will be maturing. So if you wanted to add 10% to the annualized number on top of that to reflect the refinancings at the end of the year, that would be a decent ballpark to be in. And again, the debt load from where we stand, we'll look for refinancing. We commented a little bit earlier that the leverage that we have as a company is still within our targeted range of kind of the 2.5 times to three times, but we're at the lower end. So obviously, we could potentially use additional leverage, additional debt, as we see potential other opportunities to deploy capital above the billion plus free cash flow that we'll generate this year, plus, we're sitting on a little bit of excess cash.

Brian Tanquilut:

So I guess my question, Glenn, as I think about the P&L lines, the cost of sales and G&A and factory and labor and obviously Launchpad, seeing that both of those lines outpace revenue growth in Q4, how are we thinking about the -- I hear you about margin improvement this year. So just curious, how you think about the labor environment and how that factors into driving margin improvement in terms of like actual dollars and the growth in those P&L lines?

Brian Tanquilut:

Understand. And Glenn, maybe just housekeeping, maybe I just missed this, but share buybacks, how much are -- how much share buyback activity is based into the guidance?

Operator:

Our next question comes from Pito Chickering with Deutsche Bank. Your line is open.

Adam Schechter:

I'll give some context on that, and I'll ask Glenn to add on. So if you look at the diagnostic business, I'd say the first thing is if you look at fourth quarter, you saw very strong revenue growth, about 8%. If you look at margin versus prior year, it was down slightly, about 30 basis points. What drove that primarily was that there were some minor things like increased health care costs and so forth, but it was driven primarily by the hospital deals that we did, that although they're accretive in the first year, in the first several months, they're typically diluted and we did several of those deals at the end of last year. As we come into this year, we're confident in the margin accretion for several reasons. One is obviously PAMA's been delayed. So that would have been a real headwind that we're not facing this year. We pushed that off into 2025. If you look at our volume increases, that's going to help us. The volume is going to be strong. If you look at the hospital deals, that we said extension would continue to give us some margin improvement over the next several years. Each of the hospital deals get a bit better as you go year-over-year. So we'll get some improvement from the hospital deals continuing to improve. We're also going to be looking to reduce costs across the enterprise, but a significant amount because of the size is in diagnostics of $100 million to $125 million and when you look at all those things together, we're expecting inflation to be about 3%, which is more than a typical rate than it's been in prior years. So if you put all that in, that's for our inflation of our people costs and so forth, should be around 3%, 3.5%. You put all those together and that's why we're confident that even though we have a headwind from COVID, that's fairly significant, about $130 million, we'll still be able to get some margin improvement in the diagnostic business.

Pito Chickering:

Okay, great. And then back on for fourth quarter on the early stage cancellations, is it the color of why you saw that spike? Was that just a single customer or is that sort of a swath of customers? And why do you think that should normalize 2024? Thanks so much.

Operator:

Our next question comes from Elizabeth Anderson with Evercore ISI. Your line is open.

Adam Schechter:

Yeah, sure. So as I came up with early development business, I've been saying for quite some time that we would like to see a shift towards more mid to larger size and I want to be clear, it's not significant. It's still more in the smaller biotech than it is to the mid to larger size. It's been something that we've been working on for multiple years now and we're seeing some progress, but also a part of it is that cancellations are occurring more often in the smaller biotech companies. So we were purposely moving that direction. There is a reason that we're able to move a little bit faster, but we still have work to do there. But over time, I would like to see that mix move more towards mid-size to larger format.

Elizabeth Anderson:

Got it. And maybe just one quick follow up. Anything that you can comment on the expected 2024 tax rate?

Operator:

Next question comes from Eric Coldwell with Baird. Your line is open.

Glenn Eisenberg:

Yes. So, Eric, when you think about the focus of the company, one of the key areas of target is an oncology. And obviously with PGX, OmniSeq, other areas that we've acquired as well are more R&D driven than historically Labcorp was. So each year we continue to make more investments, more opportunities and with that increased investment come the tax deductibility of that. Obviously, there's still some pending tax laws that are out there right now, where you can advertise that benefit over a number of years. From a cash standpoint, we're kind of pre-funding it. So hopefully we'll get -- that will change and we'll get more. There's obviously the impact of potentially global minimum taxes that really don't affect us that much, given as we look at where, again, geographically we generate our earnings. Really not going to have any meaningful impact. So from a sustainability standpoint, we think that 23% plus or minus rate is a reasonable rate to go forward, but obviously, the more we grow, the more we grow internationally gives us an opportunity to structurally change that maybe a little bit more favorably as well.

Glenn Eisenberg:

Yeah, it's across the board. We have investments that span the entire company. I think the increase that we've been seeing that has been driving the more favourable amount has been driven more on the diagnostic side, but frankly, our oncology spans the enterprise. So everything that we work on and where we work on it and who's working on it, again, we would say is across the enterprise, but more weighted to diagnostics.

Glenn Eisenberg:

No, sure, Eric. So from the stranded costs, we commented that we had around $45 million of stranded costs and that our initial target was to take out that $25 million at a run rate this year, which, again, we've achieved. So there's more to come. So in the fourth quarter, call it around a $6 million headwind that we had due to stranded costs that obviously impact margins. As we go forward with the TSA support, so what we're doing to support Fortrea, IT and other areas, that's effectively a pass-through, right? We're providing the service. They're paying us for that service. Once they're fully sustainable on their own and the TSAs would go away, our costs go away because, frankly, most of the costs are contract labor-related on the IT side. So when the job's done, those costs are gone overall, but we continue to tackle the other stranded costs as well. So when you look at it, the goal was, to have all the TSAs completed within two years. I can tell you Fortrea and Labcorp are both very motivated to see and incentivized to see that transition happen as soon as possible. The good news is that both are focused on it. We're making good progress. Fortrea is making very good progress and we would expect to hopefully see those TSAs expire earlier than what we had planned or at least what we had planned for, but again, the costs will go with that.

Lisa Gill:

Thanks for taking my question. I first wanted to start with the guidance range. Glenn, can you help us understand, it's a pretty wide range. What's in the low end of the range and what gets you to the upper end of the range would be my first question. And then secondly, I just want to understand managed care contracting and pricing for 2024. You talked about volume and pricing mix, but just curious as to do you have many contracts that are up for renewal? Is there anything that's different when we think about contracting with managed care entities?

Glenn Eisenberg:

Yeah. And Lisa, I think on Adam's comment that when you look at the profile of Labcorp now that we've spun the clinical development business, it has taken out some of the volatility and variability, if you will. So the guidance ranges really across the businesses and the enterprise are actually a little bit tighter than what we normally do. Obviously, we're just starting out the year. The midpoint, obviously, our guidance is our best expectation that we have, realizing obviously higher demand would promote more on the upper end or softer demand down below, but needless to say as we go through the year, we'll continue to tighten the ranges with less time left in the year.

John Kim:

Hey, good morning. This is John Kim on for Derek. I think a lot of the key questions I had have been answered, but I wanted to ask about the esoteric versus routine testing you laid out or you reaffirmed your focus on the four therapeutic areas and it seems like the esoteric had a pretty good growth in the fourth quarter. But going forward, can we continue to expect that high single digit, low double digit growth in the esoteric and then the rest of it would be made up in routine?

John Kim:

And then in terms of pricing, you mentioned that you're expecting mostly flat pricing in 2024. There are no major contract renewals coming up and PAMA has obviously been pushed out, but if I look at the margins between biopharma and diagnostics, biopharma had a pretty strong margin compared to the diagnostics in the fourth quarter and you mentioned that there's going to be a slight expansion in diagnostics. What's going to be the dynamic between the two for the full year 2024? Can we -- is the fourth quarter a good jumping off point for the biopharma margins?

Adam Schechter:

Okay. So in closing, I know we're at the end of the hour. I just want to thank everybody for joining us today. I want to thank our team here at Labcorp for their focus and dedication and everything that they do to serve the patients that we all are trying to do the best we can to improve health and to improve lives. And we look forward to sharing more with you as we go through the year. Thank you.

Christin O'Donnell:

Thank you, operator. Good morning and welcome the Labcorp’s third quarter 2023 conference call. As detailed in today's press release, there will be a replay of this conference call available via telephone and internet. With me today are Adam Schechter, Chairman and Chief Executive Officer and Glenn Eisenberg, Executive Vice President and Chief Financial Officer. This morning in the Investor Relations section of our website at www.labcorp.com we posted both our press release and an investor relations presentation with additional information on our business and operations, which include a reconciliation of the non-GAAP financial measures to the GAAP financial measures discussed during today's call. Additionally, we are making forward looking statements. These forward looking statements include but are not limited to statements with respect to the estimated 2023 guidance and the related assumptions, the impact of various factors on the company's businesses, operating and financial results, cash flows and or financial condition, including the COVID-19 pandemic and general economic and market conditions, future business strategies expected savings and synergies, including from the launchpad initiative, acquisitions and other transactions and opportunities for future growth. Each of the forward-looking statements is subject to change based upon various factors, many of which are beyond our control. More information is included in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and in the company’s other filings with the SEC. We have no obligation to provide any updates to these forward-looking statements even if our expectations change. Now I’ll turn the call over to Adam Schechter.

Glenn Eisenberg:

Thank you, Adam. I'm going to start my comments with a review of our third quarter results, followed by discussion of our performance in each segment, and conclude with an update on our full year guidance. For reference, we've also included additional business information that can be found in our supplemental deck on our Investor Relations website. Revenue for the quarter was $3.1 billion, an increase of 6.6% compared to last year. Primarily due to organic based business growth and the impact from acquisitions, partially offset by lower COVID testing. The base business grew 14% compared to the base business last year, while COVID testing revenue was down 87%. Organically in constant currency, the base business grew 10.8% benefiting from the Ascension lab management agreement, which contributed approximately 4% of the organic growth. As a reminder, the Outreach business that we acquired from Ascension is treated as an acquisition while the lab management agreement is treated as organic growth, Ascension annualized on September 30th. Operating income for the quarter was $252 million, or 8.3% of revenue. During the quarter we had $56 million of amortization and $116 million of restructuring charges and special items due to the spin of Fortrea, COVID acquisitions and Launchpad initiatives. Excluding these items adjusted operating income in the quarter was $424 million, or 13.9% of revenue, compared to $491 million, or 17.1% last year. The decrease in adjusted operating income was due to lower COVID testing. The margin decline was also negatively affected by the mixed impact from the Ascension lab management agreement. Excluding these items margins would have been flat as the benefit of demand and Launchpad savings were offset by higher personnel expense. Our Launchpad initiative continues to be on track to deliver $350 million of savings over the three-year period ending 2024. The tax rate for the quarter was 23.1%. The adjusted tax rate for the quarter was 24% compared to 19.4% last year. The increase in the adjusted rate was primarily due to higher R&D tax credits realized last year. We continue to expect the fourth quarter and full year adjusted tax rate to be approximately 24%. Net earnings for the quarter from continuing operations were $184 million, or $2.11 per diluted share, adjusted EPS were $3.38 in the quarter, down 16% from last year to the lower COVID testing earnings, as base business adjusted EPS was up approximately 10%. Operating cash flow from continuing operations was $276 million in the quarter, which was burdened by approximately $56 million of spin related items. Operating cash flow of $276 million is up from $253 million a year ago due to higher cash earnings. Capital expenditures totaled $105 million, up from $83 million last year. For the full year we continue to expect that capital expenditures will be approximately 3.5% of base business revenue. Free cash flow from continuing operations for the quarter was $171 million, which was burdened by approximately $56 million of spin related items. The company invested $380 million in acquisitions, paid out $64 million in dividends and used $1 billion for an accelerated share repurchase program that we expect will be completed by year end. At quarter end, we had around $725 million in cash, while debt was $5.4 billion. Our leverage was 2.7 times gross debt to trailing 12 months adjusted EBITDA. Now review our segment performance beginning with diagnostics laboratories. Revenue for the quarter was $2.3 billion, an increase of 6.2% compared to last year, driven primarily by organic growth of 3.4% and acquisitions of 3%. The base business grew organically by 12.8% compared to the base business last year, while COVID testing revenue was down 87%. The Ascension lab management agreement contributed approximately 6% of the growth. Total volume increased 2.3% compared to last year, as acquisition volume grew 3.4% primarily offset by organic volume of minus 1.1% due to COVID testing. Base business volume grew 7.2% compared to the base business last year, as organic increased 3.6% for volume, while acquisitions also contributed 3.6%. Price mix increased 3.9% versus last year primarily due to an organic base business increase partially offset by lower COVID testing. Base business organic price mix was up 9.2% compared to bass business last year, benefiting from the Ascension lab management agreement of approximately 6%. Diagnostics laboratories adjusted operating income for the quarter was $386 million, or 16.5% of revenue compared to $440 million or 19.9% last year. The decrease in adjusted operating income was due to reduction in COVID-19 testing. While the margin was also affected by the mix impact from Ascension. Base business margin excluding the mix, impact of Ascension was up approximately 30 basis points as the benefit of organic growth and Launchpad savings were partially offset by higher personnel expense. Now review our segment performance of Biopharma Laboratory Services. Revenue for the quarter was $719 million an increase of 7.9% compared to last year, primarily due to an increase in organic revenue of 4.9% and foreign currency of 3.3%. The 7.9% revenue growth was driven by continued strength in Central Labs which was up 9%, while early development was up 5.7%. While early development is no longer constrained by NHP availability, it has experienced higher than normal cancellations and lower orders, primarily due to small biotech funding. Biopharma Laboratory Services adjusted operating income for the quarter was $109 million, or 15.2% of revenue, compared to $105 million or 15.8% last year. The decrease in adjusted operating margin was due to stranded costs as a result of a spin of Fortrea which is timing related. Excluding stranded cost margins were up in the third quarter. As the benefit of top line growth and Launchpad savings were partially offset by higher personnel costs. We expect margins in the fourth quarter to be up sequentially and year-over-year. We ended the quarter with a backlog of $7.8 billion, and we expect approximately $2.4 billion of this backlog to convert into revenue over the next 12 months. Trailing 12 months book-to-bill was 1.12. Now discuss our 2023 full year guidance which assumes foreign exchange rates effective as of September 30, 2023 for the remainder of the year. The Enterprise guidance also includes the impact from currently anticipated capital allocation with free cash flow targeted for acquisitions share repurchases and dividends. In addition, the guidance includes the impact from the $1 billion accelerated share repurchase program, which was funded with proceeds from the spin. With regard to our 2023 full year guidance, we've narrowed the ranges but have maintained the same midpoint from our prior guidance for Enterprise revenue, earnings and cash flow. We expect Enterprise revenue to grow 1.9% to 2.7% compared to 2022. This increase reflects the base business growing 11.5% to 12.2%. While COVID testing is expected to decline 85% to 86%. We expect Diagnostics Laboratories revenue to be up 1.5% to 2% compared to 2022. This guidance includes the expectation that the base business will grow 14.1% to 14.6%, which includes approximately 5% growth from Ascension. The base business has improved from our prior guidance as acquisition related revenue that was forecasted at the enterprise level is now reflected in the segment as we've closed those transactions. We continue to expect Diagnostics Laboratories base business margin to be up slightly in 2023 versus 2022 including the unfavorable mix impact from Ascension. We expect Biopharma Laboratory Services revenue to grow 3.1% to 4% compared to 2022. Excluding the change in currency translation at negative 20 basis points, the midpoint of the guidance range remains unchanged from our prior guidance, we expect the revenue growth rate to continue to improve in the fourth quarter. In addition, we expect margins for the full year to be flat to slightly up, while the fourth quarter is expected to see both sequential and year-over-year improvement. Our guidance range for adjusted EPS is $13.25 to $13.75, unchanged at the midpoint from our prior guidance. Free cash flow from continuing operations, excluding spin related items is expected to be between $850 to $950 million. Also unchanged from our prior guidance at the midpoint. In summary, we expect to drive continued profitable growth in our base business, we expect to continue to use our free cash flow generation for acquisitions that supplement our organic growth will also returning capital to shareholders through our share repurchase program, and dividends. Operator we’ll now take questions.

Kevin Caliendo:

Sure. Guess I want to go into the book-to-bill in the sequential -- the commentary about Biopharma and cancellations. When did you start to see that? How meaningful is it? Is it across multiple customers? Any more color around what's happening with the orders in the Biopharma business cancellations, as much color as you can provide would be super helpful?

Kevin Caliendo:

And just the confidence that it gets better next quarter, is that visibility? Is that just basically writing off some of the stuff that the cancellations are going to improve? Like what gives you that sense? Obviously, you can see more than we can, I'm just wondering what that is, that we can sort of rely on?

Kevin Caliendo:

Thanks so much. Super helpful.

Lisa Gill:

Thanks very much. Good morning. The other side of the business. Good morning when I think about the diagnostic side of business and the strong core growth. Just two questions there one, can you talk about where you are on managed care contracting and, you know, in helping them and the shift inside of care go into lower cost? Lab services like Labcorp versus, you know, and have inpatient etcetera. And then secondly, as we think about routine testing, are you seeing an increase in metabolic testing specifically, like A1c, as you think about the GLP, one praise?

Lisa Gill:

It’s very helpful.

Patrick Donnelly:

Hey, guys, thanks for taking the questions. Good morning, just a follow up on the early development side, you know, interesting to hear kind of maybe shifting towards a little bit new, newer of a customer base more towards the midsized. Does that, I guess, what does that entail? You just have to cater the offering a little bit more towards that customer base? And is there a little bit of disruption as that happens? Maybe just talk through how you think about moving the portfolio more towards that client base?

Patrick Donnelly:

Understood, thanks. And then maybe just on the margin piece, you know, obviously, you guys gave a pretty detailed guidance at the Analyst Day, maybe just near term, if you could talk through the moving pieces that sounds like you know, pricing relatively stable, but just the moving parts as we work our way into the end of the year, and then ‘24. And then just think high level about the margin piece. Thank you.

Glenn Eisenberg:

Yeah, Patrick, just I guess, as you look to the two businesses, we feel good about where we are with the margins, they continue to improve on a base business level. As we think about going into the fourth quarter. We commented that within the biopharma side, we expect margins to be up in the fourth quarter and year-on-year, such that for the full year, there'll be flat to slightly up. In diagnostics, obviously, we have seasonality that impacts margins of fourth quarter sequentially, margins will be down, but they'll still be up year-over-year. So, that we expect diagnostics margins for the full year, to be up slightly, even after absorbing the negative impact from the Ascension mix. As Adam commented in the 100, to call it 150 basis point margin improvement that we expect over the next three years. We commented that the first-year margins would be relatively flat, we have around a 70-basis point headwind, if you will, between the combination of lower COVID testing, as well as the PAMA headwind that that Adam commented, but that's reflected still in the three-year expectation that margins would grow that 100 basis points to 150 basis points.

Operator:

And our next question comes from the line of Jack Meehan from Nephron Research. Your question please.

Jack Meehan:

Good morning, want to stick with the macro environment on the diagnostic lab side, Adam, are you seeing any recessionary signals at all in terms of the testing getting ordered? And then maybe on the flip side, hearing any change in the tenor of your hospital conversations around consolidation opportunities?

Jack Meehan:

Great. And, Glenn, at the Analyst Day for 2024. You laid out some initial thinking it would be slightly below the 8.5% to 11%. EPS CAGR range. Just curious if anything, you know, in terms of the orders on the biopharma lab side or just anything else changes the way you're thinking about that? Thanks.

Operator:

And our next question comes from the line of Eric Coldwell from Baird, your question, please.

Adam Schechter:

Thanks for that clarification, we're seeing a similar thing that primarily with NHP trials that were, when there was supply issues, people started to get in line much earlier than they typically would to ensure that they could run their trials as fast as they could. Now that we have supply and so forth, as those clients studies are ready to go, they're not necessarily ready to go. Or they're thinking about their pipeline and other priorities, and so forth, because they booked these spots so far ago. So, that's the primary reason that we believe we're seeing these cancellations in early development.

Adam Schechter:

So, if you look, overall, if you just look at the quarter would have been below one. But as again, with early development, I don't think book-to-bill is really a good way to look at that business. Because when it comes to early development, they're one month trial, three months trials, maybe six-month trial, so you can burn through those in the same year. Very quickly, I look at the book-to-bill, you know, because I think it's a historical way to look at the business. But EPS is very small compared to Central Laboratory and the vast majority of our Accentual laboratory work remains very strong. So, that's why I feel confident, as I look at the numbers of the future, because of the size of our Central Laboratory, the mix of customers and Central Laboratories more towards pharma, and big biotech and the book-to-bill it remains pretty good.

Adam Schechter:

Yep, absolutely. So, you know, we were supportive of legislation called valid last year that would have given FDA oversight for laboratory developed tests. And it was unfortunate that it didn't get passed last year, had bipartisan support, we were supportive. It's disappointing that legislation didn't go through. So, we're supportive of working with the FDA to find ways for them to give appropriate oversight. We think that our science or innovation or technology capabilities actually differentiate us. And if you look at the rigor that we go through with our laboratory developed tests, we think we do the vast majority of what they would be asking for anyway. Working with ACLA, our trade organization, what we're worried about is if you take legislation that had an intended purpose, for one thing, and then you try to apply it to another thing, you have to be very thoughtful about that. The good news is the FDA has asked for comments, and we're going to provide comments and thoughts. At the end of the day, if it's fairly done, meaning that all laboratory developed tests have to do the same thing across big labs, small labs and everything else, as long as they can get these filings done quickly so that people have access to new innovations in a timely manner, like they do today. We believe that it will be minimal impact to us in terms of the amount of money or spend because we do a lot of that work anyway. With that said, it's less than 10% of our volume. So, laboratory developed tests are not a significant portion of our volume. But sometimes they are the most important test for new specialty areas. And trying to get those to patients quickly is what's most important for them.

Adam Schechter:

It's less than 10% of the dollars to when I say less than 100% of the value is. It's less than 5%, frankly. And then the dollar is less than 10%.

Operator:

And our next question comes from the line of Tim Daley from Wells Fargo, your question please.

Glenn Eisenberg:

Sure. Hey Tim, this is Glenn. That's right, we would agree that your 320 is in line with the, call it the organic price mix favorability excluding the impact that we would get from Ascension. You know, from a pricing standpoint, we continue to say pricing is kind of flat, maybe a little bit of a headwind. You heard Adam earlier in the future with the renewals of the managed care contracts, you know, that actually is a positive for us. But most of the time that favorability in our price mix continues to be on the mix side, we continue to see favorability in our tests per session, you know, whether the payer mix test mix with a lot of things esoteric relative to routine. So, we continue to experience good favorable price mix, but more on the mix side.

Adam Schechter:

Yeah, no problem, Tim. So, direct to consumer advertising remains important. Wait for us to enable consumers to monitor and take care of the health. If you look at the dollar volume, especially if you take out the testing for COVID is still very small, and it's not worth it's not material enough to actually break out the numbers. We see it growing very substantially. But it's not necessarily at a point where we would break it out and give specific numbers for it. I think when it comes to consumer testing, we're going to see a lot more rope as we go through the years. At some point, if it reaches that material threshold, Tim will certainly start to break it out.

Adam Schechter:

Yeah. Thank you.

Erin Wright:

Thanks. Hi, good morning. I know you mentioned the base margin improvement sequentially in the fourth quarter. But are you seeing the need in one of your competitors, as mentioned in that mentioning this, but stepped-up investments in labor? And just the current utilization environment? Maybe that some of the seasonality you were talking about in the fourth quarter, but how are you just thinking about the labor environment right now? Thanks.

Erin Wright:

Okay, thanks. That's helpful. And then on the early development business, just to enlighten the environment in some of the volatility you've been there. And what you've been talking about in terms of the Biopharma landscape, but you know, has anything changed in terms of your commitment to the business at this point? Is that an area that you'll continue to evaluate? Thanks?

Operator:

And our next question comes from the line of Pito Chickering from Deutsche Bank. Your question please.

Adam Schechter:

Yeah. All right. So, we're on target, we said we have this 25 million by the end of this year. So the runway next year, that would be taken out. But I think the most important piece is that that's not enough. And if we're going to do that, plus, we have to do more. So, as I said, we're on track for a $350 million Launchpad initiative. And we've committed to 100 million to 125 million per year, in the outer years, as we look at a long term forecast that includes $25 million of stranded costs, but it just tells you we've got to do a lot more.

Adam Schechter:

Yeah, I like to that answer question. In general, I don't see that there'll be a significant shift, in terms of we've always had some seasonality. And if you look at like Central labs, for example, they always start off a little bit slower in the first quarter, because a lot of pharma are starting to get their studies running in third quarter, sometimes a little slower as Europe comes back after vacation. But net-net, you know, there shouldn't be any significant changes to what we've seen in the past.

Operator:

And our next question comes from the line of Derik de Bruin from Bank of America, your question, please.

Adam Schechter:

Yeah, we're going to push for the vast majority of it to come down to margin. I mean, there might be some incremental minor investments, but we've got almost $80 million into the plan, and I would expect the vast majority of that to come down.

Adam Schechter:

Yeah. So, at this point, we don't think there'll be any disruption to the ATN profile, we've launched it into the marketplace. You know, some managed care organizations are starting to reimburse others we're in discussions with, but a lot of the reimbursement in that area is from providers and the health systems and so forth. So, we expect we'll have good reimbursement from those areas as we go forward. It's still relatively new tasks, we’re still have physicians, learning about the panel and so forth. So, it will take time, but over time, we expect it to be reimbursed well.

Operator:

And our next question comes from the line of Brian Tanquilut from Jefferies. Your question, please.

Adam Schechter:

Yeah, absolutely. Brian. So, you know, we've renegotiated the majority of our contracts were really, really finished. And, really close on one last one. But they ended up being very good negotiations, very good discussions, we think that ultimately, it will be flat, maybe slightly positive. So, I feel really good about that.

Glenn Eisenberg:

Well, again, a lot of the, the expectation is that we're looking at good top line growth. So, we would expect to leverage off of that Launchpad savings that we've identified as well, and then being offset by labor and potentially continued inflationary environment. You know, for us, we talk a lot about labor, because it represents around 50% of our cost structure. So, we're very focused on it. And as Adam said, we are seeing some improvement in the attrition levels, but it's still higher than where it's been in the past. And there's a cost to that, let alone just the labor wage rates inflation, if you will, but all that's been factored in. So, to the extent we can continue to drive the top line that we feel confident about, and realize the Launchpad savings, which we feel confident about, we equally expect to see that margin improvement.

Operator:

Thank you. This does conclude the question-and-answer session of today's program, I'd like to hand the program back to Adam Schechter for any further remarks.

Operator:

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Chas Cook:

Thank you, operator. Good morning, and welcome to Labcorp’s Second Quarter 2020 Conference Call. As detailed in today’s press release, there will be a replay of this conference call available via telephone and Internet. With me today are Adam Schechter, Chairman and Chief Executive Officer; and Glenn Eisenberg, Executive Vice President and Chief Financial Officer. This morning, in the Investor Relations section of our website at www.labcorp.com, we posted both our press release and an Investor Relations presentation with additional information on our business and operations, which include a reconciliation of the non-GAAP financial measures to the GAAP financial measures discussed during today’s call. Additionally, we are making forward-looking statements. These forward-looking statements include, but are not limited to, statements with respect to the estimated 2023 guidance and the related assumptions, the impact of various factors on the company’s businesses, operating and financial results, cash flows and/or financial condition, including the spin-off of Fortrea and its treatment as discontinued operations and general economic and market conditions, future business strategies, expected savings and synergies, including from the LaunchPad initiative, acquisitions and other transactions and opportunities for future growth. Each of the forward-looking statements are subject to change based upon various factors, many of which are beyond our control. More information is included in our recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and in the company’s other filings with the SEC. We have no obligation to provide any updates to these forward-looking statements even if our expectations change. Now I’ll turn the call over to Adam.

Glenn Eisenberg:

Thank you, Adam. I’m going to start my comments with a review of our second quarter results, followed by a discussion of our performance in each segment and conclude with an update on our full year guidance. For reference, we’ve also included additional business information that can be found in our supplemental deck on our Investor Relations website. With the spin completed on June 30, we have treated Fortrea as discontinued operations in the second quarter. All of my comments will reflect the current business and have been adjusted to exclude Fortrea in prior periods for comparative purposes. Revenue for the quarter was $3 billion, an increase of 3.8% compared to last year, primarily due to organic base business growth and the impact from acquisitions, partially offset by lower COVID testing. The base business grew 12.7% compared to the base business last year, while COVID testing revenue was down 88% and as we performed an average of 3,000 PCR tests per day in the quarter. Organically, in constant currency, the base business grew 10.8% and benefiting from the Ascension lab management agreement, which contributed approximately 5% of the organic growth. As a reminder, the outreach business that we acquired from Ascension is treated as an acquisition, while the lab management agreement is treated as organic growth. Operating income for the quarter was $266 million or 8.8% of revenue. During the quarter, we had $52 million of amortization and $131 million of restructuring charges and special items, primarily related to the spin of Fortrea acquisitions and LaunchPad initiatives. Excluding these items, adjusted operating income in the quarter was $448 million or 14.8% of revenue compared to $548 million or 18.7% last year. The decrease in adjusted operating income was due to lower COVID testing. The margin decline was also negatively affected by the mix impact from the Ascension lab management agreement. Excluding these items, margins would have been up slightly as the benefit of demand and LaunchPad savings were partially offset by higher personnel expense and increased R&D investments in oncology. Our LaunchPad initiatives continues to be on track to deliver $350 million of savings over the three-year period ending 2024. In addition, the company is implementing actions in the third quarter to take out $25 million of annualized stranded costs throughout the enterprise as a result of the spin. The tax rate for the quarter was 24.3%, the adjusted tax rate for the quarter was 23.9% compared to 25.3% last year. The lower adjusted rate was primarily due to R&D tax credits. We continue to expect our full year adjusted tax rate to be approximately 24%. Net earnings for the quarter from continuing operations were $155 million or $1.74 per diluted share. Adjusted EPS were $3.42 in the quarter, down 15% from last year due to lower COVID testing earnings as base business adjusted EPS was up approximately 18%. Operating cash flow from continuing operations was $280 million in the quarter, which was burdened by approximately $65 million of spin-related items. Operating cash flow of $280 million is down from $548 million a year ago, primarily due to lower COVID testing earnings and spin-related items. In addition, higher working capital requirements that are timing related were partially offset by higher base business earnings. Capital expenditures totaled $103 million, down from $140 million last year. For the full year, we continue to expect that capital expenditures will be approximately 3.5% of base business revenue. Free cash flow from continuing operations for the quarter was $177 million, including approximately $65 million of spin-related items. The company invested $137 million in acquisitions and paid out $65 million in dividends. While the company did not repurchase shares in the second quarter, we announced a $1 billion accelerated share repurchase program that we expect to put in place in the third quarter and be completed by year end. At quarter end, we had $1.9 billion in cash, including the $1.6 billion dividend from Fortrea spin, while debt was $5.3 billion. Our leverage was 2.6 times gross debt to trailing 12 months adjusted EBITDA. Now I’ll review our segment performance, beginning with Diagnostics Laboratories. Revenue for the quarter was $2.3 billion, an increase of 3.8% compared to last year, driven primarily by organic growth of 1.8% and acquisitions of 2.2%. The base business grew organically by 13.5% compared to the base business last year, while COVID testing revenue was down 88%. The Ascension lab management agreement contributed approximately 7% of the growth. Total volume increased 1.4% compared to last year as acquisition volume grew 2.5%, partially offset by organic volume of minus 1.1% due to COVID testing. Base business volume grew 8.1% compared to the base business last year, including the benefit from acquisitions of 2.7%. The strong year-over-year growth rate was also aided by lower-than-normal volume in the second quarter of 2022 due to Omicron. Price/mix increased 2.4% versus last year, primarily due to organic base business growth of 6.8%, partially offset by lower code testing of 3.9%. Base business organic price/mix was up 8% compared to base business last year, benefiting from the Ascension lab management agreement of approximately 7%. Diagnostics Laboratories adjusted operating income for the quarter was $410 million or 17.5% of revenue compared to $516 million or 22.9% last year. The decrease in adjusted operating income was due to lower COVID testing, while the margin decline was also negatively impacted by the mix impact from Ascension. Base business margin, excluding the mix impact of Ascension was up approximately 40 basis points as the benefit of organic growth and LaunchPad savings were partially offset by higher personnel expense. Now I’ll review our segment performance of Biopharma Laboratory Services. Revenue for the quarter was $699 million, an increase of 3.1% compared to last year, primarily due to an increase in organic revenue of 2.1% and foreign currency of 1.5%. The increase in organic revenue was negatively impacted by approximately 5% due to the previously communicated NHP related supply constraints in our Early Development Research Laboratories business. Adjusted operating income for the segment was $105 million or 15% of revenue compared to $93 million or 13.7% last year. The increase in adjusted operating income and margin was due to organic demand and LaunchPad savings, partially offset by higher personnel expense. We ended the quarter with backlog of $8 billion, and we expect approximately $2.5 billion of this backlog to convert into revenue over the next 12 months. Now I’ll discuss our 2023 full year guidance, which assumes foreign exchange rates effective as of June 30, 2023, for the full year. The enterprise guidance also includes the impact from currently anticipated capital allocation, with free cash flow targeted for acquisitions, share repurchases and dividends; in addition, the guidance includes the $1 billion accelerated share repurchase program with proceeds from the spin. Excluding Fortrea, our current enterprise guidance for revenue, earnings and cash flow remains unchanged from our prior guidance given in April. Enterprise revenue is in line with Diagnostics Laboratories slightly up while Biopharma Laboratory Services is slightly down. We expect Enterprise revenue to grow 1.5% to 3% compared to 2022. This increase reflects the base business growing 11.3% to 12.6%, while COVID testing is expected to decline 85% to 89%. We expect Diagnostics Laboratories revenue to be up 0.5% to 1.5% compared to 2022. This is a 25 basis point increase at the midpoint from our April guidance as the base business outlook has improved, partially offset by lower COVID testing. This guidance includes the expectation that the base business will grow 13.2% to 14.2%, which includes approximately 5% growth from Ascension. The base business has improved from our April guidance based on stronger demand. We continue to expect Diagnostics Laboratories base business margin to be slightly up in 2023 versus 2022 and including the unfavorable mix impact from Ascension. We expect Biopharma Laboratory Services revenue to grow 3% to 4.5% compared to 2022. This guidance includes the positive impact from foreign currency of 150 basis points. The midpoint of our guidance range is down approximately 75 basis points from the midpoint of our April guidance, but implies around 9.5% growth in the second half of the year as we expect favorable growth in both Central Laboratories and Early Development Research Laboratories. We also expect that the segment margin will be flat to slightly up in 2023 compared to 2022. Our guidance range for adjusted EPS and is $13 to $14, which is consistent with our April guidance, excluding Fortrea and including the impact from the accelerated share repurchase program. Free cash flow from continuing operations, excluding spin-related items, is expected to be between $800 million to $1 billion, in line with our prior guidance, excluding Fortrea. In summary, we expect to drive continued profitable growth in our base business. We expect to continue to use our free cash flow generation for acquisitions that supplement our organic growth, while also returning capital to shareholders through our share repurchase program and dividends. Operator, we’ll now take questions.

Jack Meehan:

Thank you. Good morning.

Jack Meehan:

My questions are on the new Biopharma Lab Services segment. So number one, was curious if you could comment on just how much visibility you have into the improvement you’re looking for in the second half of the year for Early Development Research Labs? And just give us an update in terms of the supply situation for NHPs.

Jack Meehan:

Great. Okay. And then maybe for Glenn, just for the segment overall, could you talk about expectations for the second half margin ramp in Biopharma Lab Services and just how we should be – if you can hear me any thoughts on the leaping off point for 2024?

Jack Meehan:

Thank you, Glenn.

Adam Schechter:

Good morning, Lisa.

Adam Schechter:

Yes. I'll let Glenn answer the first question. I'll take the second one. Lisa, if you look at the reimbursement trends, what I would say is that it continues to be a relatively stable environment. And I feel good about our interactions with the payers, I feel good about our contracts that we have in place. I wouldn't say yet we're there for value-based contracts and so forth. I think there's still a lot of experimentation that happens, but we don't see a lot of significant progress. With all that said, I believe that we're in a very good position moving forward with the payers, and there's nothing that I would expect to be unexpected. What we're watching closely obviously is PAMA to see what happens there and government reimbursement on certain areas. But overall, it remains a pretty healthy environment.

Lisa Gill:

That's helpful. Thanks so much.

Adam Schechter:

Good morning, A.J.

Adam Schechter:

Yes. So I'll start with labor, A.J. I mean, obviously labor has been an issue that I think all of health care has been struggling with a bit since COVID. What I would say is if we look at our turnover rates, although they're still higher than they were prior to COVID, they actually look better this year than they did last year, and we're seeing some improvement. Wage inflation continues to be an issue, and we continue to use LaunchPad savings to offset that as best we can. As we look at the $25 million stranded costs that we're going to be removing, it's enterprise-wide. By the end of this year we'll be on the run rate to remove that for next year. But importantly, we're still committed to the $350 million of LaunchPad savings that we've talked about in the past despite the fact that we no longer have the clinical business, where some of that cost savings obviously would have come from. So we are going to continue to look for ways to reduce costs across the enterprise to offset some of the other pressures that we've talked about.

A.J. Rice:

Okay. Thanks a lot.

Adam Schechter:

Eric, good morning.

Adam Schechter:

Yes. There's about $45 million of stranded cost, give or take a couple of million. And we're going to – we have a path forward, and we've identified the $25 million of that.

Adam Schechter:

Yes, Eric. First thing I'd say is as we look at the studies that we have for the back half, we already have the NHPs that we need to support the studies. When we first realized this issue, we immediately began to look for alternative suppliers to ensure that we would have capacity. The reason it took us through the first half of this year is because even when you receive the NHPs, there's an acclimation period before you can utilize them in study. So we've worked through that and based upon what we have today, we feel confident in NHP trials going through the second half of the year, which is why at the midpoint of the guidance, we feel comfortable of 9.5% for the Biopharma Laboratory business.

Adam Schechter:

Yes. So what I would say is it is more costly today for NHPs than it was in the past. Much of that cost can be passed on to the customer. With that said, however, the margin on that cost is not able to be passed along. So it does impact margin a bit, but it doesn't impact us negatively. We can pass upon the increased cost.

Adam Schechter:

Yes. Thank you, Eric.

Brian Tanquilut:

Hey good morning, guys. Just one question. I really appreciate the color that you've shared on the – on your progress or success with hospital partnerships. Just curious what those incremental conversations are with, and what the pipeline looks like? And what are hospitals looking for now as they try to figure out lab strategy and who to partner with because obviously you're not just the only one looking for deals in this space? Thanks.

Brian Tanquilut:

Awesome. Thank you, guys.

Operator:

Thank you. [Operator Instructions] And our next question comes from Kevin Caliendo with UBS. Your line is open.

Kevin Caliendo:

Good morning guys. Thanks for taking my question. I just want to make sure I understand the bridge. You said that your guidance is unchanged, excluding Fortrea and excluding the ASR, which is going to start sometime in the third quarter. But that also includes $45 million of stranded costs, $25 million of which are going to come out, and maybe higher labor expenses. I guess is there anything else? Is there any contribution from Enzo or lower COVID or anything else that's changed from your assumptions when you provided it in April? Just trying to bridge to get to where we are and if those are the only inputs that we should be thinking about?

Glenn Eisenberg:

Yes. So, hi, Kevin. So you're right. So as we went back and obviously looked at the current outlook, we said that overall at the enterprise level consistent at the midpoint with revenues, earnings, cash flow and we obviously talked a bit about some pluses and minuses within the businesses that made up that at the enterprise level, where we were excluding Fortrea, when you work down to the earnings similar. So we had the earnings that we would have had in our outlook. We backed out the earnings in April, if you will, taking out Fortrea, but obviously we had the cash from the spin that we added back in there. And so from an earnings and then similar cash flow at the $900 million free cash flow from continuing ops, again, excluding spend, excluding Fortrea; so all of those would have been in line with the expectations that we had in April. When you look at acquisitions to Enzo in particular. So Enzo, we talked about that free cash flow in our guidance, the free cash flow we generated in the year is between M&A, share repurchases and dividends. So there's a portion of that capital, that's an M&A that we include in the enterprise revenues and that we don't include it in the segment revenues until those transactions are actually completed and then we move them down, wouldn't change the enterprise number, but it will affect if you will kind of a segment. Similarly, with lower COVID than what we were expecting in April, that's being absorbed by stronger base business demand in diagnostics. So favorable diagnostics on the upside, a little softness within the biopharma services and a little softness in COVID, but netting out to the enterprise. So that's how we kind of come back to the consistency, if you will, if they're in lines with the pluses and minuses. And LaunchPad again we talked about is continuing on track. So when we think about the labor markets, really no change in our viewpoint from labor. I mean, frankly, our attrition rates are tracking better than they have been a year ago, even though it's still higher than what we would have seen pre-pandemic. The cost – the inflationary costs really haven't changed much from where we were thinking they would be in April. So that's, frankly, we would say kind of in line with where we would have thought. So overall, we feel, again, good about what we thought our businesses were going to do this year continues to be that same pace.

Adam Schechter:

Yes. So let me give you some context, and I'll start broad, but then I'll narrow it down to the exact answer your question. Broadly, if you look across Biopharma Laboratories, we feel good about the book of business that we have. We have a book-to-bill of 1.22 trailing 12-month book-to-bill of 1.22. And it's important to note with the new mix of business that we have, having early development and having our essential laboratories, a book-to-bill 1.1 to 1.2 is healthy. So the book-to-bill is healthy. If we look at our central laboratory business and orders and RFPs, it continues to be very strong and robust. If we look at our early development, we still continue to have a significant number of RFPs about the same as what we've seen before. But in the very emerging and smaller biotechs, we are seeing some pressure particularly as some of them are canceling studies and so forth. Overall, we continue to see very good demand as we walk into next year. When we look at our trailing 12-month book-to-bill, it gives us significant confidence as we go into next year. And the good news is that if you look at the business overall, we are very much skewed towards large pharma, large biotech when you look at the overall laboratory business.

Operator:

Thank you. [Operator Instructions] Our next question comes from Derik de Bruin with Bank of America. Your line is now open.

Unidentified Analyst:

Hey. Good morning. This is actually John on for Derik.

Unidentified Analyst:

Hey. Good morning. So you talked about your capital allocation. Of course, there's a share repurchase of $1 billion, there are dividends to be paid, and you've talked about the outreach labs and inpatient hospital labs that you've acquired. I wanted to ask what other kinds of assets you're looking at, perhaps in terms of the field in advanced diagnostics beyond PGDx.

Unidentified Analyst:

I appreciate that. And you briefly mentioned PAMA. So wanted to ask what your expectations for PAMA for the forthcoming years? And any updated thoughts on SALSA as well?

Unidentified Analyst:

Appreciate it. Thank you.

Adam Schechter:

Good morning, Patrick. Thanks for the question.

Adam Schechter:

Yes. So I'll start, and then Glenn can add some commentary. So we're very pleased with the relationship that we have with Ascension and how the deal is progressing. In particular, the integration is going very, very well. We've given kind of a sense of $550 million to $600 million is what we expect the revenue to be. I would say it's probably contributing more towards the higher end of that than the lower end of that. And if you look at the margins, we said it was going to start up at the low-single-digits and then get to the mid-single digits after the first year, and it's certainly on track to do that. And then we expect next year and the following years for the margin to continue to improve. Ultimately, because of the mix of Ascension being heavily towards managing their laboratories, the margin will never get to our average margin, but it will continue to improve over time.

Patrick Donnelly:

Okay. That's helpful. Thank you, guys.

Adam Schechter:

Good morning, Pito.

Adam Schechter:

Yes. So if you look at our trend in 12 months, it's 1.23; and that's a very healthy book-to-bill, particularly for the businesses that we have. Early development typically would have a lower book-to-bill because the studies burn much faster and you can actually have studies that start and finish within a given year. So anything between a 1.1 and a 1.2, we consider to be healthy. And as we look forward, we continue to feel that there's plenty of opportunities, the RFPs continue to look good, so we're optimistic about where we're seeing the book to-go.

Operator:

Thank you. [Operator Instructions] And our final question comes from the line of Tim Daley with Wells Fargo Securities. Your line is now open.

Tim Daley:

Hey, thank you. Hi, everybody. Just wanted to get a bit more detail on the capital deployment strategy, specifically related to international. So highlighted the Biopharma Lab services expansion in Japan and China, adding footprint on central lab and early development there. I think just using some of the previous disclosures, I know it's tough to get to, but it does seem like a lot of the Asia exposure went with the clinical business. Is this a pointed strategy that try to gain some footprint back in Asia? Is this longer term, where – what do you – how do you think about the international footprint of the Bio segment; where you want to be capability-wise and scale?

Tim Daley:

All right. Got it. And then just a kind of housekeeping one here. Now that we've got the new structure for the segments, how should we be thinking about communication guidance for the two thinking about growth, sub-segments, margins, any – any color kind of regular KPIs for us going forward?

Tim Daley:

Alright. Great. And congrats, Chas. I look forward to working with you, Christen [ph].

Adam Schechter:

All right. Thank you, everybody for joining us today. And we really do look forward to sharing more with all of you at our Investor Day in September. So we look forward to that time. We wish you, in the meantime a very happy and healthy summer, and we'll see you in September.

Chas Cook:

Thank you, operator. Good morning, and welcome to Labcorp’s first quarter 2023 conference call. As detailed in today’s press release, there will be a replay of this conference call available via telephone and Internet. With me today are Adam Schechter, Chairman and Chief Executive Officer; and Glenn Eisenberg, Executive Vice President and Chief Financial Officer. This morning, in the Investor Relations section of our website at www.labcorp.com, we posted both our press release and an Investor Relations presentation with additional information on our business and operations, which include a reconciliation of the non-GAAP financial measures to the GAAP financial measures discussed during today’s call. Additionally, we are making forward-looking statements. These forward-looking statements include, but are not limited to, statements with respect to the estimated 2023 guidance and the related assumptions, the proposed spinoff of the clinical development business, the impact of various factors on the company’s businesses, operating and financial results, cash flows and/or financial condition, including the COVID-19 pandemic and general economic and market conditions, future business strategies, expected savings and synergies, including from the LaunchPad initiative, acquisitions and other transactions and opportunities for future growth. Each of the forward-looking statements are subject to change based on a use factors, many of which are beyond our control. More information is included in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and in the company’s other filings with the SEC. We have no obligation to provide any updates to these forward-looking statements even if our expectations change. Now I’ll turn the call over to Adam Schechter.

Glenn Eisenberg:

Thank you, Adam. I’m going to start my comments with a review of first quarter results followed by a discussion of our performance in each segment and conclude with an update on our full year guidance. For reference, we have also included additional business information that can be found in our supplemental deck on our Investor Relations website. Revenue for the quarter was $3.8 billion, a decrease of 3.1% compared to last year due to lower COVID testing and the negative impact from foreign currency. This was partially offset by organic based business growth and the impact from acquisitions. COVID testing revenue was down 84% compared to COVID testing last year, while the base business grew 9.8% compared to the base business last year. Organically in constant currency, the base business grew 9.2%, benefiting from the Ascension lab management agreement, which contributed approximately 4% of the organic growth. As a reminder, the outreach business that we acquired from Ascension is treated as an acquisition while the lab management agreement is treated as organic growth. Operating income for the quarter was $341 million or 9% of revenue. During the quarter, we had $69 million of amortization and $83 million of restructuring charges and special items, primarily related acquisitions, LaunchPad initiatives, and the proposed spin of Fortrea. Excluding these items, adjusted operating income in the quarter was $494 million or 13.1% of revenue compared to $794 million or 20.4% last year. The decrease in adjusted operating income was due to lower COVID testing demand. The margin decline was also negatively affected by the mixed impact from the Ascension TSA and NHP related constraints. Excluding these items, margins would’ve been up slightly as the benefit of demand and LaunchPad savings were partially upset by higher personnel expense, inflationary costs, and increased R&D investments in oncology. Our LaunchPad initiative continues to be on track to deliver $350 million of savings over the three year period ending 2024. The tax rate for the quarter was 23.2%. The adjusted tax rate for the quarter was 22.9% compared to 23.4% last year. The lower adjusted tax rate was primarily due to the benefit from increased R&D tax credits. We continue to expect our full year adjusted tax rate to be approximately 24%. Net earnings for the quarter were $213 million or $2.39 per diluted share. Adjusted EPS were $3.82 in the quarter, down 37% from last year due to lower COVID testing earnings as base business adjusted EPS was up 10%. Operating cash flow was $121 million in the quarter compared to $356 million a year ago. The decrease in operating cash flow was due to lower COVID testing earnings and spin related costs, partially offset by higher base business earnings. Capital expenditures totaled $94 million down from $117 million last year. For the full year, we continue to expect that capital expenditures will be approximately 3.5% of base business revenue. Free cash flow for the quarter was $27 million and the company paid out $64 million in dividends. The first quarter is generally the company’s softest quarter for free cash flow. We continue to expect our full year free cash flow to be between $1 billion to $1.2 billion. Now review our segment performance beginning with diagnostics. Revenue for the quarter was $2.4 billion, a decrease of 2.9% compared to last year, driven by organic revenue being down 4.7%, which was due to COVID testing, partially offset by acquisitions of 2%. COVID testing revenue was down 84% compared to COVID testing last year, while the base business grew organically by 17.5% compared to the base business last year. The Ascension lab management agreement contributed approximately 7% of the growth, while the impact of weather and revenue days benefited growth by approximately 2%. Total volume decreased 3.3% compared to last year, as organic volume decreased by 5.6%, partially offset by acquisition volume of 2.3%. The decline in volume was due to COVID testing. Base business volume grew 11% compared to base business last year, including the benefit from acquisitions of 2.6% and favorable weather and revenue days of approximately 2%. The strong year-over-year growth rate was also impacted by lower than normal volume in the first quarter of 2022, due to Omicron. Price mix increased 0.4% versus last year as the base business improved 6.6% and was partially offset by lower COVID testing of 5.7%, currency of 0.3% and acquisitions of 0.2%. Base business price mix was up 8.8% compared to base business last year, benefiting from the Ascension lab management agreement of approximately 7%. Diagnostics adjusted operating income for the quarter was $442 million or 18.5% of revenue compared to $683 million or 27.8% last year. The decrease in adjusted operating income and margin was due to a reduction in COVID testing, which carried a margin of approximately 50% for the quarter. Going forward, we expect a lower margin for COVID testing, but still above the segment average. Base business margin was up approximately 80 basis points driven by organic growth and LaunchPad savings, partially offset by higher personnel expense and the mix impact from the Ascension TSA. Now review the performance of drug development. Revenue for the quarter was $1.4 billion, a decrease of 4% compared to last year, primarily due to decreased organic revenue of 2.4% and foreign currency of 1.5%. The decrease in adjusted organic revenue was negatively impacted by approximately 8% due to NHP related constraints, reduced COVID vaccine and therapeutic work, and the previously mentioned FSP contract loss. The early development business was the most constrained by these items. Excluding these impacts, organic base business revenue for the segment grew approximately 6% with early development up 17%, central lab up 6% and clinical development up 3%. Reported first quarter drug development revenues on a compounded annual basis grew 6.9% compared to the first quarter of 2019. Adjusted operating income for the segment was $124 million or 8.8% of revenue compared to $169 million or 11.6% last year. The decrease in adjusted operating income and margin was due to NHP-related constraints, reduced COVID vaccine and therapeutic work and the FSP contract loss, which negatively impacted margins by approximately 350 basis points. Excluding these items, margins would have increased primarily due to demand and LaunchPad savings being partially offset by higher personnel expense, inflationary costs and a write-off of receivables related to small biotech customers. We ended the quarter with backlog of $16.6 billion, and we expect approximately $4.9 billion of this backlog to convert into revenue over the next 12 months. Now I’ll discuss our updated 2023 full year guidance, which assumes foreign exchange rates effective as of March 31, 2023 for the full year. The enterprise guidance also includes the impact from currently anticipated capital allocation, with free cash flow targeted for acquisitions, share repurchases and dividends. Also, our guidance assumes that Fortrea will be part of Labcorp for the full year. Following its spin currently anticipated in the middle of the year, we expect to provide updated guidance. We expect Enterprise revenue to grow 1.5% to 4% compared to 2022. This is an increase at the midpoint from our prior guidance of 25 basis points. This increase reflects the base business range increasing to 9.5% to 11%, while COVID testing guidance range has been lowered to minus 80% to 90%. We continue to perform well in diagnostics and are taking up our full year guidance range. We expect diagnostics revenue to be down 0.5% to up 2% compared to 2022, this is an increase at the midpoint from our prior guidance of 100 basis points, primarily due to stronger base business volume. This guidance includes the expectation that the Base Business will now grow 12.5% to 14%, which has approximately 5% growth due to Ascension. We expect Diagnostics Base Business margin to be up in 2023 versus 2022, including the unfavorable mix impact from Ascension. We expect drug development revenue to grow 3.5% to 5.5% compared to 2022. This is a decrease at the midpoint from our prior guidance of 150 basis points due to slower-than-expected backlog conversion, primarily due to investigator site constraints and lower-than-expected first quarter orders. This guidance includes the positive impact from foreign currency of 60 basis points. At the midpoint of our guidance, the compound annual growth rate compared to 2019 is 6.8%, primarily due to organic growth. We also continue to expect that the drug development margin will increase slightly in 2023 compared to 2022. Our guidance range for adjusted EPS is $16.25 to $17.75. This is a tightening of the range from our prior guidance, while the midpoint is unchanged. This guidance reflects lower earnings from COVID testing; while Base Business adjusted EPS is expected to increase 15% at the midpoint. Free cash flow guidance is $1 billion to $1.2 billion, unchanged from our prior guidance. In summary, we expect to drive continued profitable growth in our Base Business, while COVID testing volumes are expected to continue to decline through the year. We expect to continue to use our free cash flow generation for acquisitions that supplement our organic growth, while also returning capital to shareholders through a share repurchase program and dividends. Operator, we will now take questions.

Ann Hynes:

Hi. Good morning.

Ann Hynes:

Good morning. Can you just provide some more color on the NHP issue? I think you said in your prepared remarks, you think it would get better in the second half or maybe the CRO in general improvement in the second half. Maybe what gives you that confidence? And when do you think we get some type of resolve with this NHP issue? And if it doesn’t resolve by year-end, when do you think it could impact maybe late-stage business? Thanks.

Ann Hynes:

Great. Thank you.

Adam Schechter:

Good morning, Jack.

Adam Schechter:

Yes. So Jack, first of all, I’d say we’re very pleased with the performance in diagnostics, every which way you look at it whether you look at esoteric, routine, look at our hospital, ex-hospital, if you look at our mix, we’re looking very, very strong in the diagnostic business, and that enabled us to up the guidance range for that base business. If you look at volumes, specifically, the base business last year compared to this year, we’re up 11% this year versus last year. About 2.5% of that was acquisitions, and then it was favorable weather and revenue days that was about 2%, but also remember comparing to last year where Omicron was impacting our business. So when you look, it’s still very, very strong but it’s a little bit more typical to what you would expect. As we look at the sequential difference, I feel really good about where we are with Ascension and things that are happening with not just the TSA, but also the acquisition part of Ascension in the business that we bought. But I’ll see if Glenn wants to add some additional color.

Jack Meehan:

Great. And then on the margin front in the Diagnostics segment, can you share like what was the Ascension business margin in the first quarter? How is that trending? And can you quantify how big the TSA is?

Glenn Eisenberg:

Yes. Just, and it speaks a little to the early – the earlier question two [ph] on the sequential. We continue to see revenues within Ascension continue to grow. So it grew sequentially. We’re still, as you’ll recall when we announced the transaction, expected around $550 million to $600 million in revenue based upon our current guidance, our revenue would be at the upper end or maybe even slightly above it. It’s going to contribute around 5% of our growth this year, and as you know, it will annualize after the third quarter. So the fourth quarter comp will have it in both periods. So we’re seeing good growth. Obviously, it impacted our revenue in the first quarter, call it around 7.5% year-on-year. So the revenues are coming in nicely. And as Adam said, while we talked about mid-to – we’re low-to-mid-single digit margins, we’re kind of at the upper end of that range right now with the expectation that margin growth or improvement will continue as we go forward through the year, but especially beyond that.

Operator:

Thank you. [Operator Instructions] Our next question comes from the line of Kevin Caliendo with UBS. Your line is open.

Kevin Caliendo:

Good morning, guys. Thanks for taking my question. I guess I want to understand the margin progression on the CRO business. I understand sort of what you’re guiding for year-over-year margin expansion a little bit. How do we get there? What’s the cadence of that? Like what drives that? Can you just talk through sort of the execution of how we get the year-over-year margin expansion in that segment of the business?

Glenn Eisenberg:

Yes. I’d say the other thing, too, Kevin, if you look at the first quarter, and again, it goes back a little bit to the seasonality question; first quarter margins for drug development are historically the lowest. And if you looked at what we did last year, we did around 11.6% in margin. But for the full year, we delivered 14% margins. When you look at this year, obviously, we have a low first quarter margin. But our expectation is that it will be slightly above next year, in part, the constraints that I have said, but the top line growth that we expect in the business that’s implied in our revenue guidance would get you roughly around 7.5% for the remaining nine months. So, top line growth, LaunchPad savings, not having the constraints will drive the margin improvement.

Adam Schechter:

Yes, I would say, in general, if you look at early development, we do much more of our backlog in small to medium biotech business, less as a percent in pharma. If you look at our clinical business, we do more in pharma, less in small biotech than we do in our fully development business. And then if you look at our Central Laboratory, it’s pretty evenly split, but it’s much more – I mean it’s in between the two, but it’s more towards large pharma than it is to small, medium-sized biotech. So I would say large pharma, middle-sized pharma is the majority of our book-to-bill in the clinical business as well as the central lab business. And it’s much more skewed to small to medium-sized biotech in the early development business. And overall, the book-to-bill was 1.27 for the trailing 12 months.

Adam Schechter:

Yes, we don’t really break it out that way. Obviously, as we get closer to spin, we will be breaking out differently than we do today. But at this time, we really haven’t broken it out by the different business segments.

Glenn Eisenberg:

Yes, thank you.

Adam Schechter:

Good morning, Brian.

Glenn Eisenberg:

So no, we have seen the trend go down. If you look at the fourth quarter, we were rounding around 30% backlog conversion where this quarter, we’re kind of at the 29.5%. So, we have seen kind of the trend down. We’d assume that this level going forward. So, when you look at the call down in our revenue outlook for the year, that effectively was half of the reason for the decline with the other being a little bit of softer orders that we had in the first quarter that, as you know, we still need roughly around 20% of current year revenues to come from new orders as we did see a little bit of a softness there. But overall, we’re looking at the backlog, we’re looking at the contracts that we have, the burn rate that we currently see from those contracts, and we feel comfortable with the current expectation. Frankly, there’s always a range that you can say that we can see it pick up a bit. There were a couple of large contracts in particular that caused the conversion to come a little bit lower. So once those burn through a little bit or the mix improves, hopefully, we’ll see a little bit of a pickup. But for right now, that kind of 29.5-ish kind of percent conversion is what we’re assuming.

Operator:

Thank you. Please standby for our next question. Our next question comes from the line of Patrick Donnelly with Citi. Your line is open.

Patrick Donnelly:

Hey good morning. Thank you guys for taking the questions. Maybe one on the Diagnostics business, just on the price mix that continues to be a pretty nice story for you guys. Can you just give a bit more color there in terms of how we should expect that to trend the remainder of the year? Any change to the tone with payers? I know things have improved a bit there, but would love to kind of give a bit more color in terms of payer conversations? Any change there? And again, what we should be thinking for the rest of the year on that front?

Glenn Eisenberg:

Sure, Patrick. When you look at the – we talked about the 7.5% kind of growth this year organically in diagnostics. The price mix benefit from that was a little over 9%, 9.2%. We commented that extension the TSA we treat as all price. So that was 7.5%, if you will. So we did around, call it 1.7% in price mix, which is not too dissimilar when you back out the ascension to where we’ve done – where we’ve been. We continue to track well. When you look at even our guidance for the full year, which will help kind of convey what we continue to expect, at the midpoint of our revenue guidance, we have around 13.25% growth. We’re picking up around close to 5% from Ascension as well as probably around 1.5 points from M&A. So overall, call it, that midpoint, excluding Ascension and acquisitions, we’d be up around 7%. So we’re tracking similarly. We expect roughly around 6% of it from volume, 1% of it from price, again, now that it doesn’t include the Ascension. So historically, we would have said organic revenue or volume of, call it, around 2%. You pick up a point from a price mix of 3%. So where we see price right now continues to be pretty consistent with that. And as Adam said, the payer mix has helped. We continue to see a positive trend in our tests per Ascension. We continue to see a positive trend with our esoteric growing faster than routine. We also picked up a little bit on the draw fee, but we continue to do headwinds from unit pricing. So the fact that we continue to see price mixed favorable is really the mix impact of our business more than offsetting any pricing headwinds.

Adam Schechter:

Yes. What I would say there is overall, they represent a smaller part of our business, obviously than the mid to large size pharma and biotech. Some small companies are struggling a bit right now with cash, and you hear that a little bit, but it hasn’t really impacted the flow of our RFPs or the dollar amount of our RFPs at the moment. But that’s something that we’re watching very closely. And obviously in the market environment that we’re in, it’s harder for these very small startup companies which represent a pretty small amount of our business frankly.

Patrick Donnelly:

Okay. That’s helpful. Thank you, guys.

Operator:

Thank you. [Operator Instructions] Our next question comes from the line of Derek DeBruin with Bank of America. Your line is open.

Derek DeBruin:

Hey, good morning. Thank you for taking my question. Hey, just want to follow-up on Patrick’s question there. You talked about 6% volume, 1% price this year, historically 2%, 1%. How do we think about that in going forward? Does it revert back to historical levels? Is the 6% volume – is that a high – is that just off of the easier comps? Just sort of like some color on how to think about it going forward?

Glenn Eisenberg:

And the only thing I would add to that is, with the health systems that we’re winning and the pipeline that we have, I do believe that there’s spillover that occurs in the surrounding geographies when you win those health systems. It’s very hard to quantify. But I believe that it helps with our underlying demand.

Adam Schechter:

At this point, we have not, but we’re in a lot of discussions.

Operator:

Thank you. [Operator Instructions] Our next question comes from the line of Tim Daley with Wells Fargo. Your line is open.

Tim Daley:

Hey, thank you. Just quickly on their class question there, the supply NHP potential share gains. Are you guys seeing any customers pushing back? I know that supply was prob – I think it was domestically bread and probably at elevated levels. Is pricing still an issue or is we in the situ – are we in the situation where supply being available is overcoming any price headwinds for price concerns on the customer angle?

Tim Daley:

All right. No, appreciate that. And then just the obligatory SALSA question here. With the noise in Washington, not really looking to calm down anytime soon. How can you give us an update of PAMA, SALSA progress there? That’d be great.

Tim Daley:

All right. Thank you.

Operator:

Thank you. [Operator Instructions] Our next question comes from the line of Eric Coldwell with Baird. Your line is open.

Glenn Eisenberg:

Yes. This is I think we commented on – I believe on the last question or two, the $12 million that we took was both a write-down of a receivable from a customer that went bankrupt as well as a buildup of reserves. So the $5 million exposure we did have to a small biotech customer that obviously had gone on for a while before they obviously went bankrupt. And so that was the write-off. The other $7 million again, which is unusual to your point, we normally don’t speak about bad debt with regard to our drug development business, but in the current environment, we felt it was appropriate to build up an additional reserve just given what’s going on rather than just do it once and then if something occurs later, we do it again. So we feel we’re adequately reserved in the current environment, but again, which is unusual, but that’s the – extent is the $12 million is a total and the $5 million is unique to that one customer.

Eric Coldwell:

Thanks. Yes.

Eric Coldwell:

I’m sorry, I missed the follow-up on that. I was – I’m juggling a couple of calls here.

Eric Coldwell:

So the – I had a couple of quick follow ups, hopefully. First on COVID PCR, you mentioned the adjusted margin around 50% in Q1 I believe, and again signaled it would be lower the rest of the year. Can you give us a sense on directionally where you’re thinking this COVID margin plays out in LCD? And is there any phasing we should be aware of 2Q may be better than 3Q given make quarter timing on PHE, et cetera. I’m just curious if you could give us a bigger ballpark of what you think a sustainable COVID operating margin might be particularly in the back half of the year when everything’s perhaps more normal on the reimbursement front.

Eric Coldwell:

Okay. That’s helpful. And then last one for me, I know there’s – it’s been hit on a few times, but could you be more specific on clinical development net book-to-bill in Q1? Just – was it above one? Was it significantly below the overall average? Just trying to get a sense on what kind of a hole it might be digging out of if you progressed towards the spend.

Adam Schechter:

Yes. The only thing I would add, Eric, is that the customers I’ve spoken to are pleased with the work we’re doing. They’re actually excited about the increased focus that will occur after the spin. It’s temporary. They’re just saying, you’ve said the spin is mid-year, get that done and then come back. So I think there’s this short-term issue that we’re facing. I don’t get any sense that there’s anything other than a short-term issue. In fact, the customers are excited about overall the spin.

Adam Schechter:

Thank you.

Adam Schechter:

Good morning, Erin.

Adam Schechter:

Thank you, Erin, for the question. I mean, the pipeline is robust. I would say, it’s better today than it was a year ago. I mean, there’s not too many deals the size of Ascension. But when you look at the number of deals and the number of health systems that we’re talking to, I’m very pleased with where we are. We’ll have more to announce as we move forward this year, so stay tuned. But it’s a very robust pipeline of health systems and local laboratories that we’re looking at.

Adam Schechter:

Yes. It was a renewal of a large pharma FSP. And the reason I think it’s important is because as we’re going through the spin, I mentioned that some customers are excited about the spin, but they’ve said, let’s wait until after the spin, we’ll talk about more business. This large pharma company said, no, we’re so pleased with the work that you’ve done that we want to renew that FSP now. So it just gives you a sense that we are continuing to have good momentum as we go into the spin and through the spin, despite some short-term pressures there.

Adam Schechter:

Thank you.

Adam Schechter:

Well, thank you for joining us today. We’re continuing to drive performance across our businesses, while we’re making great progress towards completing the planned mid-year spin of clinical development. We look forward to updating you further at our upcoming Fortrea Investor Day in June. And I can’t wait to provide you with additional information about Labcorp and the bright future, I believe we have in September. Talk to you soon.

Chas Cook:

Thank you, operator. Good morning, and welcome to Labcorp's fourth quarter 2022 conference call. As detailed in today's press release, there will be a replay of this conference call available via telephone and Internet. With me today are Adam Schechter, Chairman and Chief Executive Officer; and Glenn Eisenberg, Executive Vice President and Chief Financial Officer. This morning, in the Investor Relations section of our website at www.labcorp.com, we posted both our press release and an Investor Relations presentation with additional information on our business and operations, which include a reconciliation of the non-GAAP financial measures to the GAAP financial measures discussed during today's call. Additionally, we are making forward-looking statements. These forward-looking statements include, but are not limited to, statements with respect to the estimated 2023 guidance and the related assumptions, the proposed spinoff of the clinical development business, the impact of various factors on the company's businesses, operating and financial results, cash flows and/or financial condition, including the COVID-19 pandemic and general economic and market conditions, future business strategies, expected savings and synergies, including from the LaunchPad initiatives, acquisitions and other transactions and opportunities for future growth. Each of the forward-looking statements are subject to change based upon various factors, many of which are beyond our control. More information is included in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and in the company's other filings with the SEC. We have no obligation to provide any updates to these forward-looking statements even if our expectations change. Now, I'll turn the call over to Adam.

Glenn Eisenberg:

Thank you, Adam. I'm going to start my comments with a review of our fourth quarter results, followed by a discussion of our performance in each segment and conclude with our 2023 full year guidance. For reference, we've also included additional business information that can be found in our supplemental deck on our Investor Relations website. Revenue for the quarter was $3.7 billion, a decrease of 9.4% compared to last year, due to lower COVID testing and the negative impact from foreign currency. This was partially offset by organic base business growth and the impact from acquisitions. COVID testing revenue was down 79% compared to COVID testing last year, while the base business grew 4.8% compared to the base business last year. Organically in constant currency, the base business grew 4.7%, benefiting from the Ascension lab management agreement, which contributed approximately 4% of the organic growth. While the outreach business that we acquired from Ascension is treated as an acquisition, the lab management agreement treated as organic growth. Operating income for the quarter was $91 million or 2.5% of revenue. During the quarter, we had $61 million of amortization and $88 million of restructuring charges and special items, primarily related to acquisitions, LaunchPad initiatives and the proposed spin of Fortrea. In addition, the company recorded $270 million of goodwill and other asset impairment primarily related to the early development business, due to short-term labor and supply constraints. This impairment represents approximately 2% of Labcorp's goodwill and intangible assets. Excluding these items, adjusted operating income in the quarter was $510 million or 13.9% of revenue compared to $902 million or 22.2% last year. The decrease in adjusted operating income and margin was due to a reduction in COVID testing. The benefit from LaunchPad savings and lower personnel expense were essentially offset by lower COVID-related demand and inflationary costs. Our LaunchPad initiative continues to be on track to deliver $350 million of savings over the 3-year period ending 2024. The adjusted tax rate for the quarter was 20% compared to 24.6% last year. The lower adjusted tax rate was primarily due to the geographic mix of earnings as well as the benefit from increased R&D tax credits and year-end true-ups for completed tax returns. We expect our 2023 full year adjusted tax rate to be approximately 24%. Net earnings for the quarter were $76 million or $0.86 per diluted share. Adjusted EPS were $4.14 in the quarter, down from $6.77 last year due to lower COVID testing earnings. Operating cash flow was $654 million in the quarter compared to $698 million a year ago. The decrease in operating cash flow was due to lower COVID test and earnings, partially offset by higher base business earnings. Capital expenditures totaled $118 million, down from $150 million last year. For the year, capital expenditures were 3.5% of base business revenue, and we expect that to continue into 2023. Free cash flow in the quarter was $536 million, bringing our full year free cash flow generation to $1.5 billion. During the quarter, we invested $150 million on acquisitions paid out $64 million in dividends and repurchased $300 million of stock, representing approximately 1.4 million shares. At the end of the quarter, we had $532 million of share repurchase authorization remaining. The Board recently approved an additional $1 billion for share repurchases, taking our total available authorization to approximately $1.5 billion. For the full year, we invested $1.2 billion on acquisitions, paid out $195 million in dividends and repurchased $1.1 billion of stock. We continue to have a robust pipeline of potential acquisition opportunities that will supplement our organic growth. In addition, we continue to believe that our shares are undervalued and that our share repurchase program is an important part of our capital allocation strategy. At year-end, we had $430 million in cash, while debt was $5.3 billion. Our leverage was 1.9x gross debt to trailing 12 months EBITDA. Excluding COVID testing earnings, our leverage was around 2.5x, in line with our targeted range of 2.5 to 3x. Now I'll review our segment performance, beginning with Diagnostics. Revenue for the quarter was $2.3 billion, a decrease of 12.8% compared to last year, primarily due to organic revenue being down 14.3%, which was due to COVID testing, partially offset by acquisitions of 1.7%. COVID testing revenue was down 79% compared to COVID testing last year while the base business grew organically by 8.6% compared to the base business last year. The Ascension lab management agreement contributed approximately 7% of the growth while the negative impact of weather and fewer revenue days constrained growth by approximately 1.2%. Relative to the fourth quarter of 2019, the compound annual growth rate for base business revenue was 6.9%. Total volume decreased 11.8% compared to last year as organic volume decreased by 13.8%, primarily offset by acquisition volume of 2%. The decline in volume was due to COVID testing. Base business volume grew 3% compared to base business last year, including the benefit from acquisitions of 2.4% but was constrained by unfavorable impact from weather and fewer revenue days of approximately 1.2%. Price/mix decreased 1% versus last year due to lower COVID testing of 6.4%, currency of 0.3% and acquisitions of 0.2%, partially offset by base business growth of 5.9%. Base business price/mix was up 7.6% compared to base business last year, benefiting from the Ascension lab management agreement of approximately 7%. Diagnostics adjusted operating income for the quarter was $387 million or 16.9% of revenue compared to $776 million or 29.6% last year. The decrease in adjusted operating income and margin was due to a reduction in COVID testing as the COVID margin was approximately 50% for the quarter, down from approximately 70% last year. We expect the COVID margin to be approximately 50% through the duration of the public health emergency, at which point we would expect the margin to decline but still be above the segment average. Base business margin was down approximately 30 basis points due to the impact from Ascension, higher personnel expense and other inflationary costs, partially offset by organic growth and LaunchPad savings. Excluding Ascension, margin would have been up approximately 50 basis points. Now I'll review the performance of Drug Development. Revenue for the quarter was $1.4 billion, a decrease of 4.1% compared to last year, primarily due to foreign currency of 3.1%. Organic base business revenues declined 1.4% compared to last year, due to the negative impact from lower COVID-related work and the Ukraine-Russia crisis. Excluding these impacts, organic base business revenue grew 3.7%. The central ad business continued to be the most constrained by these impacts. Central ad-based business revenues were down 11.5%. However, excluding these impacts, organic constant currency revenue was up 4.7% and -- while on a comparable basis, early development was up 3.4% and clinical development was up 3.2%. Reported fourth quarter Drug Development revenues on a compound annual basis grew 5.1% compared to the fourth quarter of 2019. Adjusted operating income for the segment was $209 million or 15% of revenue compared to $206 million or 14.2% last year. The increase in adjusted operating income and margin was due to LaunchPad savings and lower personnel costs, partially offset by lower COVID-related demand, the Ukraine-Russia crisis and inflationary costs. We ended the quarter with backlog of $16.3 billion, and we expect approximately $4.9 billion of this backlog to convert into revenue over the next 12 months. Now I'll discuss our 2023 full year guidance, which assumes foreign exchange rates effective as of December 31, 2022, for the full year. The enterprise guidance also includes the impact from currently anticipated capital allocation, with free cash flow targeted for acquisitions, share repurchases and dividends. Also, our guidance assumes that Fortrea will be part of Labcorp for the full year. Upon its spin currently anticipated in the middle of the year, we expect to provide updated guidance. We expect Enterprise revenue to grow 1% to 4% compared to 2022. This guidance includes the expectation that the base business will grow 8.5% to 10.5% and while COVID testing is expected to decline 75% to 90%. This assumes a PCR volume range of 5,000 to 12,000 tests per day on average for the year. We expect Diagnostics revenue to be down 2% to up 1.5% compared to 2022. This guidance includes the expectation that the base business will grow 10.5% to 12.5%, which has approximately 5% growth due to Ascension. At the midpoint of our base business guidance, the compound annual growth rate compared to 2019 is 6.4%, including the benefit from Ascension of approximately 2%. We expect Diagnostics base business margin to be slightly up in 2023 versus 2022, including the unfavorable mix impact from Ascension. We expect Drug Development revenue to grow 5% to 7% compared to 2022. This guidance includes the positive impact from foreign currency of 20 basis points. At the midpoint of our guidance, the compound annual growth rate compared to 2019 is 7.2%, primarily due to organic growth. While we have increased the number of NHP vendors with multiyear agreements to secure supply, lead times are projected to negatively impact drug development revenue between $80 million to $100 million early in the year. As a result, we expect drug development first quarter revenue growth to be lower than the average for the year. We also expect drug development margin to increase in 2023 compared to 2022, with the first quarter coming in comparable to the first quarter of 2022 due to the early development supply constraint. Our guidance range for adjusted EPS is $16 to $18 compared to $19.94 in 2022. Adjusted EPS is expected to be lower compared to 2022 due to COVID testing while base business adjusted EPS at the midpoint of guidance implies approximately 13% growth. Free cash flow guidance is $1 billion to $1.2 billion compared to $1.5 billion in 2022. The decline in cash flow was due to lower COVID testing. In summary, we expect to drive continued profitable growth in our base business. While COVID testing volumes are expected to continue to decline through the year, we expect to continue to use our free cash flow generation for acquisitions that supplement our organic growth, while also returning capital to shareholders through our share repurchase program and dividends. Operator, we will now take questions.

Kevin Caliendo:

There's a lot to unpack here. I guess I'll start with a couple. Is there any cost being built into the business right now ahead of the spin? I don't want to say the stranded costs or IT costs, but there's a couple of line items. It looks like corporate has been higher. The intersegment eliminations are -- seem to be a lot higher as well. I'm just trying to understand what's driving that, and if there's any investment being made there, that would show up there in a way that we can't necessarily see? And then secondly, I guess, -- this is such a wide range of earnings. Can you tell us, is it all just based on COVID? Is it based on the spin timing? It's unusual to have such a wide range. And I'm wondering what would be sort of low end versus high end, what would be driving that?

Glenn Eisenberg:

Yes. No, just to follow-up on that. When you look at the guidance ranges for both of our base businesses, we keep those rates within, call it, 2 percentage points. And it's really the COVID given the volatility in COVID, we provide a wider range, which causes that overall EPS number to be a little bit wider. Kevin, when you talk about the spin costs, you'll see that we treat that as kind of an unusual item. Obviously, we're going through a spin. These are onetime costs. You'll see that in the reconciliation between, call it, our GAAP and our adjusted earnings, you'll see in the footnotes that we incurred around $29 million of cost during the quarter related to the spin. So again, those would be backed out of our adjusted numbers when you look at our enterprise and segment performance.

Adam Schechter:

Yes. So again, when we gave our range, we're -- 2 things. One, for diagnostic business, 10.5% to 12.5% growth, I think is pretty extraordinary. But if you look at PAMA, we've included when we talk about margins, that we expect margins to be slightly to improve even with the impact of Ascension. And if you just look at fourth quarter, for example, our margins were down 30 basis points. Ascension was a negative 80 basis point hit. So you can see the impact from Ascension -- for us to be able to offset that impact on margins, it's due to the lack of PAMA being implemented this year as well as some of the benefits from the draw fees.

Jack Meehan:

My question is on just commercial payer negotiations. We're coming up on the 5-year anniversary of UnitedHealth announcement. I don't know if you want to address that directly, your national payers kind of broadly speaking, but are there any notable shifts you're seeing in the structure of your contracts? And just how do you feel about the ability to maintain price?

Glenn Eisenberg:

Jack, just to add on that, too, is that when we think about price/mix, we've always talked about unit pricing being a headwind, but the favorability of our mix of esoteric growing faster than routine or test per Ascension. And so when you look at the growth rate that we have in vision for '23 in our guidance, it assumes both -- and mostly by favorable volume appreciation but also favorable price/mix even with unit pricing headwinds.

Glenn Eisenberg:

Yes. It's interesting. If you go back and look to even pre-pandemic levels, 2023, even though we have some pluses and minuses, the trend in the earnings would come in similar. So I think that will give you roughly a good approximation. Interestingly enough, plus or minus, it comes in fairly quarter each time, but you'll see it's a little bit different in the first quarter, a little bit lower, a little bit higher throughout the rest of the year, but I think it will give you a good proxy.

Erin Wright:

Great. Could you give us a little bit more of a breakdown of what you're seeing across the different subsegments at Covance, the central lab business in terms of volume trends, RFP flow at the clinical level. And then on the early development side, what's your level also of commitment to early development business as you kind of retain that as part of your spin process here?

Erin Wright:

Oh, no, go ahead. Go ahead.

Erin Wright:

And I guess, just my follow-up, as you prepare for the spin, how we should be thinking about the priorities around capital deployment, the M&A pipeline as well as buybacks and how we should be thinking about that?

Operator:

Our next question will come from Tim Daley of Wells Fargo.

Glenn Eisenberg:

Tim, this is Glenn. As you know, we break out the 2 segments and then with that, revenue, OI and margins. So for drug development, we provide that. We haven't broken out the pieces, if you will, because, again, of all the interrelationships and shared services and so forth. So part of the issue of doing the spin, obviously is now we're standing an independent company with where we have a lot of direct costs, but then we also have a lot of indirect costs. And we're working through, obviously, all those costs and including transition services that we would be providing for a period of time. So we're currently in the process of getting all the numbers done once we're complete with that, we'll obviously be sharing kind of the spinco view, both on the top line and the bottom line at the appropriate time, including in an anticipated investor Analyst Day, if you will, prior to the spin. And obviously, to the extent we have those financials done prior to that, we can also share them. But at this point, we've talked in the past about here's the segment average and that the businesses are for the plus or minus in line before you get to those independent standup costs.

Adam Schechter:

So the short answer is yes, it would be growing for the year with the $80 million to $100 million in there, growing nicely. And what was your second question, the...

Adam Schechter:

In terms of the pricing -- so first thing I'd say is that we expect the priming pricing to go up significantly because of the supply issues. And I think, therefore, there you would expect to have better pricing overall. Yes. And just to be clear, that pricing, especially primary that does get passed on to customers -- so it doesn't impact our margins and -- it affects the margins because we don't get a margin on that, but the pricing can be passed on to the customers.

Chas Cook:

Thank you, operator. Good morning and welcome to Labcorp's Third Quarter 2022 Conference Call. As detailed in today's press release, there will be a replay of this conference call available via telephone and Internet. With me today are Adam Schechter, Chairman and Chief Executive Officer; and Glenn Eisenberg, Executive Vice President and Chief Financial Officer. This morning, in the Investor Relations section of our website at www.labcorp.com, we posted both our press release and an Investor Relations presentation with additional information on our business and operations, which include a reconciliation of the non-GAAP financial measures to the GAAP financial measures discussed during today's call. Additionally, we are making forward-looking statements. These forward-looking statements include, but are not limited to, statements with respect to the estimated 2022 guidance and the related assumptions; the proposed spin-off of the Clinical Development business; the impact of various factors on the company's businesses, operating and financial results, cash flows and/or financial condition, including the COVID-19 pandemic and general economic and market conditions; future business strategies; expected savings and synergies, including from the LaunchPad initiative, acquisitions and other transactions; and opportunities for future growth. Each of the forward-looking statements is subject to change based upon various factors, many of which are beyond our control. More information is included in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and in the company's other filings with the SEC. We have no obligation to provide any updates to these forward-looking statements even if our expectations change. Now I'll turn the call over to Adam.

Glenn Eisenberg:

Thank you, Adam. I'm going to start my comments with a review of our third quarter results, followed by a discussion of our performance in each segment and conclude with an update on our full year guidance. For reference, we've also included additional business information that can be found in our supplemental deck on our Investor Relations website. Revenue for the quarter was $3.6 billion, a decrease of 11.2% compared to last year due to lower COVID testing and the negative impact from foreign currency translation. This was partially offset by organic Base Business growth and the impact from acquisitions. COVID testing revenue was down 70% compared to COVID testing last year, while the Base Business grew 0.7% compared to the Base Business last year. Organically, in constant currency, the Base Business grew 1.4%. Operating income for the quarter was $469 million or 13% of revenue. During the quarter, we had $65 million of amortization and $54 million of restructuring charges and special items, primarily related to acquisitions, the proposed spin of the Clinical Development business, facility rationalization and other LaunchPad initiatives. Excluding these items, the adjusted operating income in the quarter was $589 million or 16.3% of revenue compared to $907 million or 22.3% last year. The decrease in adjusted operating income and margin was primarily due to a reduction in COVID testing and the impact from acquisitions. The benefit from organic Base Business growth and LaunchPad savings were essentially offset by higher personnel expense and other inflationary costs. The tax rate for the quarter was 16.2%. The adjusted tax rate was 22.8% compared to 24.4% last year. The lower adjusted tax rate was primarily due to benefits from increased R&D tax credits. We now expect our annual adjusted tax rate going forward to be approximately 24%. Net earnings for the quarter were $353 million or $3.90 per diluted share. Adjusted EPS were $4.68 in the quarter compared to $6.82 last year. Operating cash flow was $374 million in the quarter compared to $767 million a year ago. The decrease in operating cash flow was primarily due to lower cash earnings. Capital expenditures totaled $104 million, down from $118 million last year. We continue to expect full year capital expenditures to be approximately 3.5% of Base Business revenue. Free cash flow was $270 million in the quarter. During the quarter, we invested $459 million on acquisitions, paid out $65 million in dividends and repurchased $400 million of stock, representing 1.5 million shares. At the end of the quarter, we had over $800 million of share repurchase authorization remaining. We continue to believe that our shares are undervalued, and our share repurchase program is an important part of our capital allocation strategy. At quarter end, we had $400 million in cash, while debt was $5.3 billion. Our leverage was 1.7x gross debt to trailing 12 months EBITDA. Excluding COVID testing earnings, our leverage was 2.5x, in line with our targeted range of 2.5 to 3x. Now I'll review our segment performance, beginning with Diagnostics. Revenue for the quarter was $2.2 billion, a decrease of 15.7% compared to last year due to organic revenue being down 16.4%, partially offset by acquisitions of 0.9%. COVID testing revenue was down 70% compared to COVID testing last year, while the Base Business grew 3.7% compared to the Base Business last year. Relative to the third quarter of 2019, the compound annual growth rate for Base Business revenue was 4.3%, primarily due to organic growth. Total volume decreased 10.3% compared to last year as organic volume decreased by 10.9%, partially offset by acquisition of 0.6%. The decline in volume was due to COVID testing as Base Business volume grew 3.1% compared to the Base Business last year. Price/mix decreased 5.4% versus last year, primarily due to an organic decline of 5.5%, partially offset by acquisitions of 0.3%. The lower organic price/mix was due to COVID testing. Base Business price/mix was up 0.6% compared to Base Business last year, benefiting from higher esoteric test mix. Diagnostics adjusted operating income for the quarter was $440 million or 19.9% of revenue compared to $775 million or 29.6% last year. The decrease in adjusted operating income and margin was due to a reduction in COVID testing as lower COVID volumes caused margins to decline to approximately 50% for the quarter. We expect this margin level to continue through the rest of the year, which would put full year margin at approximately 60%. Base Business margins were flat versus last year as organic growth and LaunchPad savings were offset by higher personnel expenses and other inflationary costs. Now I'll review the performance of Drug Development. Revenue for the quarter was $1.4 billion, a decrease of 3.7% compared to last year, primarily due to foreign exchange translation of minus 3.4%. While acquisitions contributed 0.5% of growth, organic Base Business revenues declined 0.7% compared to last year due to the negative impact from lower COVID-related work and the Ukraine-Russia crisis. Excluding these impacts, organic Base Business revenue grew 3.8%. The central lab business continues to be the most impacted by lower COVID-related revenues and the impact from Ukraine-Russia crisis. Central lab Base Business revenues were down 9.8%. However, excluding these items, organic constant currency revenue was up 4.1%. While on a comparable basis, early development was up 8.6% and Clinical Development was up 2.3%. In addition, Clinical Development was impacted by the loss of an FSP contract outside the U.S. earlier this year, affecting third and fourth quarter revenue growth. However, recent wins, including a large Phase IV market access program, will support a return to higher growth in 2023. Reported Drug Development revenues grew 3 -- or 6.1% on a compounded annual basis compared to 2019. Adjusted operating income for the segment was $211 million or 15% of revenue compared to $226 million or 15.5% last year. The decrease in adjusted operating income and margin was due to the reduction of COVID-related work in the Ukraine-Russia crisis. Excluding these issues, margins would have been up approximately 100 basis points compared to last year as the benefit from organic growth and LaunchPad savings were partially offset by inflationary costs and the negative mix impact from acquisitions. We ended the quarter with backlog of $15.2 billion, and we expect approximately $4.7 billion of this backlog to convert into revenue over the next 12 months. Now I'll discuss our updated 2022 full year guidance, which reflects our year-to-date performance and fourth quarter outlook and assumes foreign exchange rates effective as of September 30, 2022, for the remainder of the year. The enterprise guidance also includes the impact from currently anticipated capital allocation with free cash flow targeted to acquisitions, share repurchases and dividends. We expect enterprise revenue to decline 6% to 7.5% compared to 2021. This is a decrease at the midpoint from our prior guidance of 275 basis points, primarily due to the slower pace of central lab kits shipped and kits received, early development labor constraints, lower COVID testing, the delay in the Ascension transaction and currency. This guidance now includes the expectation that the Base Business will grow 3% to 4%, while COVID testing is expected to decline 57% to 59%. We expect Diagnostics revenue to decline 10% to 11.5% compared to 2021. This guidance reflects a 25 basis point increase at the midpoint as the benefit from Ascension will be mostly offset by lower COVID testing demand. Diagnostics Base Business revenue is expected to grow 6% to 7%, an increase of 150 basis points at our midpoint due to Ascension now being reflected in the segment outlook, while it was in our enterprise guidance prior to closing the transaction. At the midpoint of our Base Business guidance, the compound annual growth rate compared to 2019 is 5%. Note that Ascension will be dilutive to Diagnostics AOI margin of approximately 100 basis points in the fourth quarter, but we expect margins to improve going forward as they are fully integrated. COVID testing is now expected to decline 57% to 59%. We expect PCR volume to be between 15,000 to 20,000 tests per day in the fourth quarter. We are currently tracking at approximately 15,000 PCR tests per day. We expect Drug Development revenue to decline 1.5% to 2.5% compared to 2021. This is a decrease at the midpoint from our prior guidance of 450 basis points, primarily due to the slower pace of kits shipped and kits received in central labs, labor constraints in early development and further currency translation headwinds. We expect the Base Business to decline 1% to 2% compared to 2021. Foreign currency translation negatively impacts our growth rate by 280 basis points. In addition, the growth rate is constrained by lower COVID-related work in the Ukraine-Russia crisis. At the midpoint of our Base Business guidance, the compound annual growth rate compared to 2019 is 7.7%. Our guidance range for adjusted EPS is $19.25 to $20.25, a narrowing of our prior guidance range of $19 to $21.25. At the midpoint, our guidance is lower by $0.38 due to lower COVID testing. In the Base Business, the decreased revenue outlook for Drug Development is being offset by additional cost control measures and the low effective tax rate. Free cash flow guidance is now $1.25 billion to $1.4 billion, down from our prior guidance of $1.7 billion to $1.9 billion. The decline in the cash outlook is due to lower projected cash earnings and higher working capital requirements. The lower cash earnings include the expected decrease in adjusted net earnings, the proposed spin and acquisition-related costs as well as the timing of cash tax payments. The higher working capital requirements, which are timing-related, primarily relates to Drug Development receivable collections as the company continues to work to improve days sales outstanding. Said differently, DSOs remained flat over the past quarter, but our guidance had assumed improvement in the second half of the year. In summary, our Diagnostics business continued to perform well, while our Drug Development business fundamentals remain strong in a challenging environment. We expect to drive continued profitable growth in our Base Business for the fourth quarter, while COVID testing volumes are expected to decline from the third quarter. We expect to continue to use our free cash flow generation for acquisitions that supplement our organic growth while also returning capital to shareholders through our share repurchase program and dividends. Operator, we'll now take questions.

Jack Meehan:

Adam, wanted to dig into the Drug Development business. Just could you talk about what's changed in terms of the business trends since the second quarter? Labor and shortages has come up a lot in the discussion. Just talk about -- I don't know if there's a way to quantify, or some metric around the level of pressure you're seeing today versus back in July. And then, Glenn, you called out an FSP cancellation. Just when did that take place? Is there any color you can give around the size of that?

Glenn Eisenberg:

Jack, yes, we commented that the FSP is impacting -- or the loss of the contract impacted our results in the quarter. The loss of it was actually earlier in the year and -- but the impact of it winding down really didn't impact our first half results. So really more of a third quarter or fourth quarter impact. For the quarter, it was around, call it, $22 million that we would have had in there a year ago for the contract. So it negatively -- recall, it was around a 3% headwind on for the Clinical Development business, and roughly half of that would be a headwind for the Drug Development segment. But again, as we commented as well, we've been really pleased with the recent awards that we have. So as we think about going into 2023, the lost contract there will be replaced by other orders that we're getting.

Jack Meehan:

Great. And then as a follow-up, it's that time of year, everyone is focused on 2023. So I was wondering if you could just talk about puts and takes on EPS for next year. I think the COVID math, that 60% margin, suggests that could be a $5 headwind. I'm not sure if you agree with that. I think there's also probably some good guys with growth in Ascension, I look at The Street forecasting $18. Just any color on forecasting would be helpful.

Glenn Eisenberg:

Yes. No, overall -- maybe first kind of at a high level, Jack, that when you think about kind of the headwinds as we go into 2023, and Adam kind of alluded to and you did as well in your opening comments, but COVID testing, we'll know more, obviously, when we give our guidance in February. But the assumption is that it's going to be down pretty materially next year and following the trend that we've seen. But again, we'll have a better assessment when we give our guidance. But to your point, we did around 60% margin on COVID testing this year. And again, we talked about the going forward 24% tax right now. A big variable, again, as Adam commented on is PAMA. We've looked at around an $80 million to $100 million, if you will, range of an impact. But again, by the time that we give our guidance, we should know whether or not PAMA will be in the numbers for next year or not, we'll see. And then just the additional headwinds from the current inflationary environment and the labor constraints. Having said that, we really see a lot more positives than the headwinds that we're seeing. The demand levels, especially the momentum that we've seen in the Diagnostics business, not only have we seen volume levels pick up sequentially each quarter but even through the months of the quarter. So the expectation is that, that will continue into the fourth quarter and continue into 2023. And also, when you think about the correlation, while we're giving up high-margin COVID testing normally when -- if the expectation is that, that will be down to low levels, bodes better for the Base Business within Diagnostics as well. Similarly, Adam commented on the level of demand in Drug Development isn't the issue per se. It's more the kits issue that we said really hasn't come back to 2019 levels. And this is really the only aspect of even Drug Development, and it's really just the kits that are being returned. And so the expectation is the demand is there, the backlog is strong, the conversion that kits returned should come back to more normalized levels, and then hopefully, with the labor capacity issue abates a bit as well. And then you add to that another strong year of focus on cost measures, LaunchPad initiatives, another strong year of free cash flow generation, that will add to a good pipeline for acquisitions, let alone returning our capital. So when you stir it all together, we're actually pretty optimistic for '23 where we sit today. From a top line perspective, from our ability to drive margin improvement, realizing that we'll have headwinds from PAMA potentially as well as the annualization of Ascension will be a little bit of a margin headwind as well. But those combined with capital allocation, we feel actually pretty optimistic as we go into 2023.

Erin Wright:

So where are we now in terms of business utilization across the Diagnostics segment compared to the pre-COVID baseline? And what are you seeing right now in terms of mix? Are there any sort of structural changes that we should be thinking about longer term? And just a follow-up on 2023 and how you're thinking about base organic diagnostic volume heading into that time period. Do you anticipate that we see a complete normalization in utilization trends? Or is it a build to that? And why or why not would that happen?

Adam Schechter:

And Erin, this is Adam. So I feel very good about the Diagnostics volume, and we're heading into next year with real strength. Our focus next year is going to be a lot of how can we improve margins and reduce costs. So that will be a big focus for us because we realize that the volume is going to grow extraordinarily well with these hospital deals. And we just have to make sure we get the margins to improve as fast as we can there.

Patrick Donnelly:

Maybe another one on the Drug Development side, just specifically on early development. You guys saw a sequential step-down there. I don't think that's happened in a couple of years. Just wanted to dive into that a little more specifically, what you're seeing there. Were there supply chain issues? Maybe talk about the demand environment and again, kind of the outlook on that piece because again, I don't think we've seen a sequential step-down a little bit there.

Operator:

Our next question or comment comes from the line of Eric Coldwell from R. W. Baird.

Adam Schechter:

Yes. I'll start, Eric, and I'll ask Glenn to add some context. So we've not seen an increase in cancellation rates across any of the 3 segments. In fact, we're seeing the number of RFPs increasing as a percent year-over-year across the different segments. So demand feels pretty good. In terms of share loss, we lost the one FSP that we're going to more than offset with wins that we have. Things come in and they come out of our book-to-bill all the time. But it's going to impact us in the third and fourth quarter, and then we'll more than offset that as we go into next year with the wins that we have. If you look at the backlog, it's relatively flattish. The order growth in the quarter was offset by currency due to the strength of the dollar, but the cancellation rates are in the low single digits, and it's been that way for a very, very long time. I don't know, Glenn, if you want to add anything.

Eric Coldwell:

Is it possible -- if I can just do one follow-on. Is it possible to give us some sense of how understaffed you are in early development? Like what number of people are you looking to hire globally? And is it more technician? Or is it more -- what area is it? Are these vets? Are these pathologists? Are these -- what type of people are you looking? And how many are you looking to hire?

Operator:

Our next question or comment comes from the line of A.J. Rice from Credit Suisse.

Adam Schechter:

Yes. No, thanks for the question, A.J. First of all, I'd say it's just continued inflationary pressure. But we're seeing it in a lot of areas of our cost structure. You're seeing it in materials, people-related expenses, supply chain and a tight labor market. So we're just focused on maintaining operational continuity while also managing through these headwinds. So it's not like there's new issues that we're facing. We just believe they're going to be continued issues that we're facing. The LaunchPad program, as you said, it's helping us mitigate these costs. We have plans in place. We have a path forward. We know how we're going after the LaunchPad initiatives. When we give you a number, we give that number with knowledge of how we're going to go after it and how we're going to get it. The key now that we're working on is how can we accelerate some of those savings, not do we know where they are. We know where they are. And some of them are in process improvements, some of those automation. Some of those take time, and we're trying to find ways to accelerate all of them.

Kevin Caliendo:

Can we talk a little bit about the impact Ascension's making and how to think about it? You gave us some numbers for 4Q in terms of the volumes and then also the margin pressure. Is the -- are the costs related to starting? Is that onetime in nature? Or is it just a lower-margin business that's going to have an adverse effect on the margins going forward? And is -- I know it closed in October. So is that a full quarter? Should we think about that as a full quarter? Or would it be more magnified going forward? Like how should we think about the impact?

Glenn Eisenberg:

Yes. No, the only thing I'd add to that is that when we think about the hospital system deals, and Adam kind of alluded to it, very attractive deals financially. When we look at kind of return on invested capital, just a different profile. The in-hospital lab management agreements that we have are really a fee-based. So as a percent of revenues, it's a headwind to the overall revenues. The outreach labs that we acquire have margin profiles similar to or enhance the overall margin for the Diagnostics group. But given the size of Ascension and the size of the in-hospital lab management agreement, it tends to -- this is a higher percentage of in-hospital than a typical even hospital system deal we would do. We commented that it would be around 100 basis points negative impact to us in the fourth quarter. And then as Adam said, with the expectation that margins will grow as we integrate it into 2023 and beyond, but it will have less of a headwind in '23 as the margins pick up above what the first quarter would affect us.

Glenn Eisenberg:

So from an EBIT perspective, call it, the first quarter. So the fourth quarter, first time we have it is kind of neutral. It will be positive from a profitability standpoint next year. So again, as you look at our financial criteria for acquisitions and these partnerships, we look for them to be accretive to earnings year 1, earn cost of capital by year 3 and have a very attractive IRR. And Ascension is no different. The first full year of ownership, positive to earnings and cash flow accretion. We'll earn our cost of capital at least by year 3 as an overall transaction. So we're excited about it, but with an acknowledgment that from a return on revenues, it will be dilutive to diagnostics markets.

Rachel Vatnsdal:

So just following up on the Drug Development side. So you talked a bit about the kit stocking dynamic. Last quarter, you said that, that was a $30 million revenue headwind. So can you just quantify how much of a headwind it was this quarter? And then what's assumed within guidance for kit stocking heading into 4Q and early next year as well?

Glenn Eisenberg:

Yes. So Rachel, to your comment, obviously, it continues to be at roughly that level on what we would call COVID-related. So roughly half of the cost impacting us from a revenue standpoint would be the kits. So call it, around $25 million impact during the quarter year-on-year. And similarly, the lower vaccine and therapeutics related to COVID would have the same amount of impact on the revenues for the quarter.

John Kim:

This is John on for Derik. You did a good amount of share buybacks in the quarter, and you're continuing to target hospital deals and local lab deals. Are there any additional areas that you're looking to prior to the Covance spin? And also, I wanted to ask if you're seeing any trends or -- trends in bad debts and then if you have any expectations there.

Glenn Eisenberg:

And John, on the bad debt, again, not seeing really any change. Again, Drug Development, we normally don't have any bandwidth issues in the Diagnostics side. It's been at a fairly steady state. I would say, probably see a little bit of an increase now that the HRSA for the COVID testing. So when you look at our 50% margin that we did in the quarter, let alone expected in the fourth, there's a little bit of that associated with it. But as a general rule, bad debt continues to be consistent with what we would have experienced in the past.

Adam Schechter:

I would say it continues to be an issue with labor almost everywhere that I look in the economy, and frankly, around the world. I don't think it's getting worse. I just think it continues to be the same. So at this point in time, we're doing a lot of work on what we can do to retain people, attract people. We're facing very similar issues that other health care companies, but also even more broadly than that are facing.

Adam Schechter:

Okay, so I want to -- yes, thank you. I want to thank everybody for joining us today. I believe that we have a lot to be excited about when we look at the future in the coming year. And then we're going to make continued progress. We know what we have to get done, and we're going to get it done. I want to welcome our associates from Ascension, and I want to once again thank our employees around the world who are carrying out their critical mission to improve their critical mission to improve health next day for everybody.

Chas Cook:

Thank you, operator. Good morning, and welcome to Labcorp's Second Quarter 2022 Conference Call. As detailed in today's press release, there will be a replay of this conference call available via telephone and Internet. With me today are Adam Schechter, Chairman and Chief Executive Officer; and Glenn Eisenberg, Executive Vice President and Chief Financial Officer. This morning, in the Investor Relations section of our website at www.labcorp.com, we posted both a press release and an Investor Relations presentation with additional information on our business and operations, which includes a reconciliation of the non-GAAP financial measures to the GAAP financial measures discussed during today's call as well as a presentation on additional information on the spin-off of the clinical development business. Additionally, we are making forward-looking statements. These forward-looking statements include, but are not limited to, statements with respect to the estimated 2022 guidance and the related assumptions; the proposed spin-off of the clinical development business; the impact of various factors on the company's businesses, operating and financial results, cash flows and/or financial condition, including the COVID-19 pandemic and general economic and market conditions; future business strategies; expected savings and synergies, including from the LaunchPad initiative and from acquisitions; and opportunities for future growth. Each of the forward-looking statements are subject to change based upon various factors, many of which are beyond our control. More information is included in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and in the company's other filings with the SEC. We have no obligation to provide any updates to these forward-looking statements even if our expectations change. Now I'll turn the call over to Adam.

Glenn Eisenberg:

Thank you, Adam. I'm going to start my comments with a review of our second quarter results, followed by a discussion of our performance in each segment and conclude with an update on our full year guidance. For reference, we've also included additional business information that can be found in our supplemental deck on our Investor Relations website. Overall, the company performed well in the quarter. Revenues for the quarter were $3.7 billion, a decrease of 3.7% compared to last year due to lower COVID testing and the negative impact from foreign currency translation. This was mostly offset by organic Base Business growth and acquisitions net of divestitures. COVID testing revenue was down 42% compared to COVID testing last year, while the Base Business grew 1.2% compared to the Base Business last year. Organically, in constant currency, the Base Business grew 1.6%. Operating income for the quarter was $526 million or 14.2% of revenue. During the quarter, we had $66 million of amortization and $64 million of restructuring charges and special items, primarily related to acquisition and integration costs, facility rationalization and other LaunchPad initiatives. Excluding these items, adjusted operating income in the quarter was $656 million or 17.7% of revenue compared to $840 million or 21.9% last year. The decrease in adjusted operating income and margin was primarily due to a reduction in COVID testing, higher personnel expense and other inflationary costs, partially offset by organic Base Business growth and LaunchPad savings. The tax rate for the quarter was 24.7%. The adjusted tax rate was also 24.7% compared to 25.1% last year. The lower adjusted rate was primarily due to the geographic mix of earnings. We continue to expect the adjusted tax rate for the full year to be comparable with last year at approximately 25%. Net earnings for the quarter were $359 million or $3.87 per diluted share. Adjusted EPS were $4.96 in the quarter compared to $6.13 last year. Operating cash flow was $572 million in the quarter compared to $487 million a year ago. The increase in operating cash flow was due to higher cash earnings and favorable working capital. Capital expenditures totaled $143 million, up from $97 million last year, primarily due to timing. As a result, free cash flow was $429 million in the quarter. During the quarter, we invested $100 million on acquisitions, paid out $67 million in dividends and repurchased $400 million of stock, representing 1.7 million shares. At the end of the quarter, we had $1.1 billion of share repurchase authorization remaining. Now I'll review our segment performance, beginning with Diagnostics. Revenue for the quarter was $2.3 billion, a decrease of 4.7% compared to last year due to organic revenue being down 5.7%, partially offset by acquisitions of 1.2%. COVID testing revenue was down 42% compared to COVID testing last year, while the Base Business grew 3.9% compared to the Base Business last year. Relative to the second quarter of 2019, the compound annual growth rate for Base Business revenue was 4.3%, primarily due to organic growth. Total volume decreased 2.7% compared to last year as organic volume decreased by 3.1% partially offset by acquisition volume of 0.4%. COVID testing volume was down 45% compared to COVID testing last year, while Base Business volume grew 3.4% compared to the Base Business last year. We continue to see Base Business volumes improve as we're now up 0.6% on a compounded basis compared to the second quarter of 2019. Price/mix decreased 2% versus last year, primarily due to an organic decline of 2.6%, partially offset by acquisitions of 0.8%. The lower organic price/mix was primarily due to COVID testing as the Base Business was relatively flat. Base Business price/mix benefited from esoteric growing faster than routine testing, but was negatively impacted by payer mix. Diagnostics adjusted operating income for the quarter was $516 million or 22.9% of revenue compared to $663 million or 28% last year. The decrease in adjusted operating income and margin was primarily due to a reduction in COVID testing. COVID testing margins were down compared to last year due to lower testing demand while the company continued to main capacity. In addition, margins were negatively impacted by COVID testing payer mix. Base Business margins were lower due to higher personnel expenses and other inflationary costs partially offset by organic growth and LaunchPad savings. Going forward, we expect the second half Base Business margins to be up year-over-year due to improved demand and labor efficiency. Now I'll review the performance of Drug Development. Revenue for the quarter was $1.5 billion, a decrease of 2.9% compared to last year, primarily due to foreign currency translation of 2.6% and lower COVID testing of 0.6%. Organic-based growth was negatively impacted by lower COVID-related work, the Ukraine-Russia crisis and lower pass-throughs. Excluding these impacts, organic Base Business revenues grew in the mid- to high single digits. Base Business revenues compared to Base Business last year declined 2.3%, but was up 0.4% on a constant currency basis. Early development experienced good growth as did the clinical business, which was constrained by lower pass-throughs. Central labs was down year-on-year but up 6.7% on a compounded basis versus the second quarter of 2019. The decline year-over-year included the impact from lower COVID-related work and the Ukraine-Russia crisis. We expect central labs revenue to be up in the second half year-over-year based on the strength of its backlog. Drug Development segment revenue was up 8.8% on a compounded basis relative to the second quarter of 2019 primarily driven by organic growth. Adjusted operating income for the segment was $213 million or 14.7% of revenue compared to $221 million or 14.8% last year. The decrease in adjusted operating income and margin was due to a reduction in COVID-related work, the Ukraine-Russia crisis and inflationary costs. These impacts were partially offset by organic Base Business growth and LaunchPad savings. And in addition, personnel expense was lower due to cost reduction actions and variable compensation. In the second half, we expect top line growth and continued cost reductions to drive margin expansion such that the full year Base Business margin will be comparable to 2021. We ended the quarter with backlog of $15.2 billion, and we expect approximately $4.8 billion of this backlog to convert into revenue over the next 12 months. Now I'll discuss our updated 2022 full year guidance, which reflects our first half performance and outlook and assumes foreign exchange rates effective as of June 30, 2022, for the remainder of the year. The enterprise guidance also includes the impact from currently anticipated capital allocation with free cash flow targeted to acquisitions, share repurchases and dividends. We expect enterprise revenue to decline 2% to 6% compared to 2021. This is a decrease at the midpoint from our prior guidance of 50 basis points due to the change in currency. This guidance now includes the expectation that the Base Business will grow 5% to 7.5%, while COVID testing is expected to decline 50% to 60%. We expect Diagnostics revenue to decline 9% to 13% compared to 2021. This is an increase at the midpoint by 250 basis points driven by our updated expectations for COVID testing. COVID testing is now expected to decline 50% to 60%, while our Base Business is expected to grow 4% to 6%, unchanged from our prior guidance. At the midpoint of our Base Business guidance, the compound annual growth rate compared to 2019 is 4.5%, primarily driven by organic growth. We expect Drug Development revenue to grow 1.5% to 3.5% compared to 2021. This is a decrease at the midpoint of our prior guidance of 475 basis points. The decline includes 130 basis point change from foreign currency translation as well as the impact from lower COVID-related revenues and lower pass-through revenues. Compared to last year, the guidance range of 1.5% to 3.5% growth includes the negative impact from foreign currency translation of 230 basis points. This guidance also includes the expectation that the Base Business will grow 2% to 4% compared to 2021. Excluding lower COVID-related work and the Ukraine-Russia crisis, the constant currency growth rate would be in the high single digits compared to 2021. At the midpoint of our Base Business guidance, the compound annual growth rate compared to 2019 is 9.3%, primarily driven by organic growth. Our guidance range for adjusted EPS is now $19 to $21.25, an increase at the midpoint of $0.50 compared to our prior guidance. This increase is primarily due to the impact from COVID testing. Free cash flow guidance remains unchanged at $1.7 billion to $1.9 billion. In summary, the company had a solid quarter. We expect to drive continued profitable growth in our Base Business for the remainder of the year, while COVID testing volumes are expected to decline relative to the first half of this year. We expect to continue to use our free cash flow generation for acquisitions that supplement our organic growth while also returning capital to shareholders through our share repurchase program and dividends. Operator, we will now take questions.

Rivka Goldwasser:

This is Ricky Goldwasser and Erin Wright from Morgan Stanley. So Adam and Glenn, congrats for moving forward with elements of the strategic sort of program. Question I have is, as we think about sort of the clinical business, can you give us some context as to the margins that are associated with that business and how it compares to what's staying with sort of kind of like the core Labcorp or central versus early development? And then I have another follow-up after that.

Glenn Eisenberg:

Yes. The only thing I'd add, Adam, is that, Ricky, as you know, when we've done the enhanced disclosures, so we provide the full Drug Development segment, obviously, revenue down to margins. When we gave the enhanced disclosure of the 3 businesses that comprise it, obviously, clinical being one of them, we didn't provide the margins essentially for the reason that Adam had said, that we have a lot of shared resources. They're not necessarily stand-alone businesses. They're part of the segment. I think directionally, it's fair to say that when you look at the margins of the businesses, they all have different characteristics. And in the case of the clinical business, it is the one business that has, frankly, over 20% of its revenues that are pass-through revenues. So obviously, would constrain the margins of that business relative to the other businesses that wouldn't have that. But as Adam said, it's a very profitable business and a business that each year, we've seen margin improvement continue, and we expect that to continue going forward.

A.J. Rice:

Congratulations on the deal announcement. I might just ask you, in the Base Business, Drug Development, one of the things throughout this year is how the margin is planned to step up over the course of the year, and you had good margin improvement from, I think, 11.6% in the first quarter to 14.7% in the second. But you're also reiterating that you think you'll be similar to last year, which I think is 15.2%, implying further step-up. What allowed you to show the 300 basis points of margin improvement from first quarter to second? And what further gets you that back half margin improvement that's embedded in guidance?

Operator:

Your next question comes from the line of Brian Tanquilut with Jefferies.

Adam Schechter:

Yes. Thank you for that question. And as we look at the strategy overall, I mean, the reason it makes sense to do the spin and to do it now, it really is going to give strength and strategic flexibility and operational focus so that we can pursue the specific market opportunities and customer needs in each of those areas. The market for our laboratory services is different than that of the clinical trials. It gives us the focused capital structures and capital allocation strategies to drive the growth that we're looking for. And I think it also provides shareholders with more target investment opportunities. We are going to have arrangements between the companies that will enable -- that will enable us to make sure that the new business will have access to some of the data and the insights that we get from the diagnostics, which is a big part of the advantage that I think the Drug Development business has. In terms of looking at the central laboratory business, what's interesting is our central laboratory business, the vast, vast majority of our business comes from companies outside of ours. And in fact, it's only about 15% to 20% of the central laboratory business that comes from the clinical trials that we're running. So I think we actually will have expanded opportunities to do even more central laboratory work as we open it up and we're no longer only related to one Phase I through IV organization.

Jack Meehan:

Big announcement this morning. So I had two questions for you. First is on the timing, why announce it today versus back in December? What's changed over the last 7 months? And then second, how did you decide where you wanted to draw the line? I see the rationale to hold on to the clinical testing piece. But specifically, I wanted to hear your thoughts on why it makes sense to hold on to safety assessment.

Operator:

Your next question comes from the line of Kevin Caliendo with UBS. Your next question comes from Eric Coldwell with Baird.

Adam Schechter:

Yes. Thank you for the question, Eric. And sorry you had a problem getting on the call. We'll look into that. With regard to the drug development, we put the LaunchPad initiatives in place back in December, and we had a pretty strong understanding of what we were going to do. We did accelerate some of the LaunchPad initiative. But a big part of what we did in the second quarter was we realized that in central laboratory, we were not doing much new COVID-related work. And because of that, we were able to reduce a significant number of people, particularly those that were making kits by hand. And we had a lot of people doing that. I said before that we were keeping extra people in both drug development and in the diagnostic areas because we didn't know what we potentially need in the future for COVID. We've determined that for central laboratory, we do not believe we're going to have a lot of new COVID-related work moving forward, and therefore, we didn't need to have those people that were making the manual kits. So that's probably a lot of what you heard. As we move forward, we're going to continue to have other LaunchPad initiatives in place. A lot of those are about how we can improve efficiency and effectiveness, but also, we believe that we're going to continue to have margin expansion in that business as well based upon the run rate that we are at right now.

Patrick Donnelly:

Maybe just quick ones on the Covance business. Can you just talk generally about kind of the cancellation environment? It seems like it's been a little mixed this quarter across CROs. Are you seeing any uptick there? And then secondarily, in terms of the spin, will you guys consider kind of strategic options over the next year in terms of kind of selling it to a larger player? Or is it kind of set on kind of the tax-free spin?

Operator:

Your next question comes from the line of Pito Chickering with Deutsche Bank.

Adam Schechter:

Yes. No, thank you for the question, Kieran. The first thing I'd say is we think the Diagnostic business is performing very well. The Base Business revenue grew 3.9% versus the prior year, and the Base Business volume was up 3.4% compared to last year. And the growth was coming from both routine and esoteric testing. In fact, if you look at the Base Business CAGR, it was 4.3% versus 2019. So you see good, strong underlying performance. When you look at the PCR testing, you'd see the decline. You saw a decline from first quarter to now. And in fact, we did about 31,000 tests per day on average. When you do less tests, it has some impact on the margin. We've also seen a payer mix switch. We used to have the uninsured firm, HRSA. We no longer have that. That was higher-margin business than the retail sector. We've seen more of our business move to the retail sector, where also it challenges our margins a bit. Margin right now for PCR testing is about 60%, but we'll continue to do everything we can to manage that. And we see the retail sector as an opportunity. But frankly, we're really focused on our Base Business. We're really focused on the hospital and the local laboratory acquisitions that are before us. And to me, that's the long-term growth that we see. So we'll continue to do what we can in PCR testing, but long term, we're really focused on getting that base business to perform well, and I think you've seen that in the quarter.

Operator:

Your next question comes from the line of Derik De Bruin with Bank of America.

Glenn Eisenberg:

Yes. I guess, first, to your comment, when we announced PGDx and also when we announced Ascension, which obviously hasn't closed yet, we commented that both acquisitions were very strategic and we believe would provide a very attractive return on our investments. However, both, especially initially, would be dilutive to our margins. So with the advent of PGDx having closed in part of the business, mostly impacting, even though it's spread a little bit across both of our segments, mostly into the drug development side, it does have a constrain on their margins. So as we think about margins year-on-year when we talk about that we expect margins to be comparable to a year ago, that's even with a little bit of pressure on the margin from the PGDx acquisition. Within Diagnostics, again, our margins -- most of the acquisitions tend to be a mix positive to us. The large hospital systems, especially when you're doing the in-hospital lab work, tends to put some pressure on the margins. So similarly, we would comment that for the year overall, Diagnostics margins would be relatively flat kind of from that base organic. But ultimately, once Ascension is closed and then goes into the results in Drug Development, you will see some pressure on the margins. So the way that we look at margins overall for the company is that this year, year-on-year from our Base Business margins, call it, organically would be, call it, flattish. They will be down a little bit because of the dilutive impact on the margins from PGDx and Ascension. But all the other acquisitions that we've announced and that are in the pipeline would be more of the traditional kind of tuck-ins even though there's still hospital systems that we have in there. But overall, with the outreach being a component of that, we expect it to not be a big impact on the return on our revenues. We have commented though that with the impact on EPS, really only PGDx was one that we acquired that we felt would be dilutive to earnings this year. Having said that, the other acquisitions that we were doing, Ascension as well as the others, would be offsetting that. So from an EPS standpoint, relatively neutral. From a margin standpoint, a little bit dilutive.

Rachel Vatnsdal:

So digging deeper into that earlier margin question, when Covance was last public and would split margins out, it looks like clinical and central lab combined for roughly 23% EBIT margins. So should we assume that central lab is materially higher and that clinical will also be around there given the expansion since then and the Envigo acquisition? And then also on the same side of that, should we also think about how early stage margin has expanded from that 12.5% EBIT margin level in 2014?

Operator:

Your next question comes from the line of Matt Larew with William Blair.

Glenn Eisenberg:

So I'll go ahead and start, Matt. So again, the timing to effectuate the spin, we're calling -- call it, look, the second half of next year and a lot of processes that you go through in spinning a company from -- obviously, we're going to make sure that it's a tax-free exchange. We're working with the IRS to again, doing the audited financials plus you're effectively standing up a company that has been part and integrated into an overall organization. I think what we've said at this point was we're announcing our intent to spin it strategically and that we will, over the course of effectuating the spin, continue to communicate and provide you with additional information as we have it that's really more relevant at the times. Once those decisions are made, once the accounting and the standup of the margins, I think, directionally, we've given you a good sense of where it is. The positive, frankly, from the company standpoint, especially as it relates to the balance sheet, we have a very strong balance sheet, a commitment to continue as Labcorp, investment grade with the same targeted leverage ratios that we've had before. We are below those targeted ranges right now. Obviously, we've been increasing the amount of our share repurchase program, and we've been increasing the amount of M&A that we've seen. So we purposely have kept a very strong balance sheet to continue to be able to pursue all of our capital allocation initiatives, including the initiation of a dividend. If you were to pro forma the company, even as if we didn't have the clinical business, we would still be within the, call it, the targeted range of our leverage right now. So it really speaks to the fact that we don't believe there will be a constraint on our ability to continue to pursue acquisitions for the -- for both companies as they're both part of Labcorp today. But when we stand up the spin company, while we haven't commented specifically on its capital structure other than to say both businesses will be well capitalized such that they'll be in very good positions to continue to pursue growth strategies, both through organic or internal investments as well as through acquisition opportunities.

Kevin Caliendo:

I apologize for earlier. First question, the -- I noticed a couple of things were larger this quarter. The unallocated cost or the corporate cost line was much higher than normal. Can you talk through that? And also the CapEx number grew quite substantially this quarter. Can you just talk through what drove both of those?

Adam Schechter:

All right. So I want to thank everybody who joined us today. Labcorp continues to be at the forefront of science, innovation and technology, and we continue to deliver on our strategic priorities. As always, I also want to thank our more than 75,000 employees around the world for their tireless work carrying out our mission to improve health and improve lives. We look forward to talking with all of you soon.

Chas Cook:

Thank you, operator. Good morning, and welcome to Labcorp's first quarter 2022 conference call. As detailed in today's press release, there will be a replay of this conference call available via telephone and Internet. With me today are Adam Schechter, Chairman and Chief Executive Officer; and Glenn Eisenberg, Executive Vice President and Chief Financial Officer. This morning, in the Investor Relations section of our Web site at www.labcorp.com, we posted both our press release and an Investor Relations presentation with additional information on our businesses and operations, which include a reconciliation of the non-GAAP financial measures to the GAAP financial measures discussed during today's call. Additionally, we are making forward-looking statements. These forward-looking statements include, but are not limited to, statements with respect to the estimated 2022 guidance and the related assumptions, the impact of various factors on the company's businesses, operating and financial results, cash flows and/or financial condition, including the COVID-19 pandemic and the general economic and market conditions, our response to the COVID-19 pandemic, future business strategies, expected savings and synergies and opportunities for future growth. Each of the forward-looking statements is subject to the change based upon various factors, many of which are beyond our control. More information is included in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and in the company's filings with the SEC. We have no obligation to provide any updates to these forward-looking statements even if our expectations change. Now I'll turn the call over to Adam Schechter.

Glenn Eisenberg:

Thank you, Adam. I'm going to start my comments with a review of our first quarter results, followed by a discussion of our performance in each segment and conclude with an update on our full year guidance. For reference, we've also included additional business information that can be found in our supplemental deck on our Investor Relations Web site. Revenue for the quarter was $3.9 billion, a decrease of 6.3% compared to last year due to lower organic revenue as the negative impact from foreign currency translation was offset by acquisitions. COVID testing revenue was down 43% compared to COVID testing last year, while the Base Business grew 4.5% compared to the Base Business last year. Operating income for the quarter was $688 million or 17.6% of revenue. During the quarter, we had $67 million of amortization and $39 million of restructuring charges and special items. Excluding these items, adjusted operating income in the quarter was $794 million or 20.4% of revenue compared to $1.2 billion or 28.4% last year. The decrease in adjusted operating income and margin was primarily due to a reduction in COVID testing, higher personnel expense and other inflationary costs, partially offset by organic Base Business growth and LaunchPad savings. The tax rate for the quarter was 23.1%. The adjusted tax rate, excluding restructuring charges, special items and amortization, was 23.4% compared to 24.5% last year. The lower adjusted rate was primarily due to the geographic mix of earnings and stock compensation. We continue to expect the adjusted tax rate for the full year to be comparable with last year at approximately 25%, excluding any impact from potential tax reform. Net earnings for the quarter were $492 million or $5.23 per diluted share. Adjusted EPS, which exclude amortization, restructuring charges and special items, were $6.11 in the quarter compared to $8.79 last year. Operating cash flow was $356 million in the quarter compared to $1.2 billion a year ago. The decrease in operating cash flow was due to lower cash earnings, primarily impacted by COVID testing and higher working capital requirements, which were mostly timing-related. Capital expenditures totaled $117 million compared to $95 million last year. As a result, free cash flow was $239 million in the quarter. We continue to expect to generate between $1.7 billion and $1.9 billion of free cash flow for the full year. During the quarter, we invested $455 million on acquisitions. We were also in the market repurchasing approximately 600,000 shares as part of our $1 billion accelerated share repurchase program, which was completed April 1. At the end of the quarter, we had $1.5 billion of share repurchase authorization remaining. Now I'll review our segment performance. Given the enterprise-wide strategic focus on oncology, we are reclassifying our oncology investments in R&D spending. These investments that are not supporting current revenue are being reclassified from our segments to corporate unallocated. This represented $4 million of corporate unallocated expense in the quarter. In our supplemental deck, we have also included additional business information for both segments. For Diagnostics, we provided a breakout of Base Business esoteric versus routine testing revenue as well as payer mix. For Drug Development, we included revenues for its three businesses

Unidentified Analyst:

This is , on for Brian. Thanks for taking the question and nice job on the quarter. So as I look at this, acknowledging some of the specific headwinds and appreciate all the color you gave around the numbers for Covance. When we look at it, can you just give us a little more color on how we think about the progression there throughout the year? And can you remind us on -- large pharma has been a point of focus for you in addition to oncology. Can you remind us of exposure there and how that might impact growth rates beyond '22?

Operator:

Our next question comes from Jack Meehan with Nephron Research.

Adam Schechter:

As I mentioned this before, we saw some of that pressure starting in the beginning of the year. When we were here in February, we mentioned that. But we have a very large CTTS business, central laboratory business, larger than most others. And we saw the largest impact from Omicron in that business. And I'll give you two examples. One is, if you look at our CTTS, central laboratory business, you saw that the growth rate for that business now that we're providing by segment growth rates, was less than the other segments. That's because we had such a strong first quarter of last year. We were prepared with Omicron to do as much central laboratory work as we did in the first quarter of last year this year, because we saw the impact of Omicron in December and January, and we kept as many people as we could prepared in case the boosters caused a huge amount of volume. It did not cause a huge amount of volume as the boosters came out this year. In fact, it was a lot less than what we saw with the initial vaccines in the beginning of last year. And then the second thing is we have a early development business, ED business, and we saw some impact on inflation in that business, particularly as you think about utilities and research and product costs. We're going to offset that with price reduction -- or price increases but also by cost reductions. And as I said at the beginning of the year, the inflationary pressures hit you all at once and it takes you time to LaunchPad to get the cost out. We saw improvements across all the businesses as we went through the quarter, month-over-month. So therefore, we are confident that we're on a good run rate as we're going through the rest of the year.

Adam Schechter:

If you look at our business in China, first of all, I want to let all of our employees know that we're thinking of them. We're here to support them and doing everything we can to help them. In fact, we have some employees that are basically living in the laboratories right now so that they can continue to keep the work going while the lockdowns are occurring. We have not seen a significant impact on our business due to the lockdowns at the moment but we're going to continue to monitor that very closely. It has not inhibited our ability to do the studies that we need to do at this point in time, Jack.

Ricky Goldwasser:

So a couple of questions here. First on and just kind of like thinking, you talked about kind of like these headwinds in the quarter, sort of COVID, Ukraine and then inflation. Can you just maybe either quantify each of these areas of headwinds? I think that's going to be really helpful for us as we think about it for the rest of the year. And then on the lab side, I think in the supplemental packet, you compare lab volumes to 2019 baseline, which is very helpful. Can you just give us a little bit more color on the core volume performance versus 2019 by market? I think is down 50 basis points on volume 1Q '22 versus 1Q '19. If you can talk about what you're seeing versus baseline by market or on an organic basis as well.

Glenn Eisenberg:

I guess just to follow up a little bit on that, too. So the 8% decline that we saw in January was not compounded. So it was the total decline. But as Adam said, the progression in February and March got us on a compound annual growth rate to be just down to 0.5%, so relatively flat with the expectation as we continue to go through the year. That obviously will become a positive number as we continue to experience the recovery there on a volume basis. So pleased with what we're seeing there. On the Drug Development side, quantifying, call it, the vaccine and the impact of Ukraine were probably the two more meaningful ones that impacted us for the quarter. From a vaccine standpoint, probably around $30 million of headwind from that. And Ukraine probably closer to rounding to around $10 million. So when we think that both of those primarily impacted the CTTS business, obviously affected others as well. But while we were, call it, flat in revenue on a constant currency basis in that business, if you backed out the vaccine related and the Ukraine, we'd be 7% to 8%, call it, organic constant currency growth rate, which would be more in line with what we would have expected the business to do.

Glenn Eisenberg:

So we don't break out the margins for the businesses. As you saw in the additional material that we provided, we went out and looked, obviously, at our peers and what's provided and just looking at what additional information. And we felt the revenue breakout by business was important and beneficial because you get to see the magnitude that it is for each of the pieces as well as now tracking the growth profile. From a margin standpoint, our belief, and obviously, our peers that do similarly, look at it on a segment basis because there's so much that are shared assets between the businesses that we feel that providing it as a trend, if you will, on the segment is a more meaningful number. And then as you look at the growth rates of the different pieces, you can kind of get a sense of how we're leveraging overall in the businesses.

Eric Coldwell:

I feel like we're falling a bit short on the disclosures on why the lab -- or the CRO margin is as poor as it is this quarter. I'm hoping we can get into some details on that. I guess the first question, you talked about early development having some inflation costs, and it sounded like maybe some research model supply access pricing issues. Are you at a -- suffering from being at a disadvantage for not having your own animal model business? Is that one of the bigger issues in early development that you don't have the same supply that perhaps some of your larger peers have?

Eric Coldwell:

And if I could just stay on the same vein and one follow-up, same topic, it's related to central lab. Obviously, shipping, freight transports gone up. I'm not sure to what extent you've been able to pass on those costs, but we also heard this morning from that in their lab operations, they did have some supply component issues, more particularly around complex oncology components in central lab kits. I suspect you've faced a similar experience, but I was hoping you could give some color on that experience, what you're seeing. If it had an impact, how long you might expect that to continue if so?

Glenn Eisenberg:

And Eric, just one last thing on just the supply issue. What we've seen is because we run -- primarily have on a just-in-time inventory level within our CTTS, our central lab business. And obviously, when we started to see the global supply chain issues, it had an impact on us. We've now built up those level of inventories now for three to six months given the -- still the uncertainties of what's going on globally. So we'll carry that higher inventory to obviously make sure we can be focused on meeting the customers' demand and doing it efficiently.

Operator:

Our next question comes from Rachel Vatnsdal with JPMorgan.

Adam Schechter:

First of all, I'd say that the RFPs that are coming through are very strong. And if you look at our cancellation rates, they're very low. So we feel very good about the flow of business and the flow of RFPs and the flow of the trials coming. Our trailing 12-month book-to-bill was strong at 1.23. As you may recall, I say that we need to be at 1.20 or slightly higher and we remain at that number. And then if you look at our backlog, we have $15.2 billion, which was almost a 9% increase versus the prior year. Our net orders were $7.2 billion. If you look across the businesses, the breakdown by customer type is a little bit different. So for example, in early development, we have more biotech and smaller to midsized biotech than we do large pharma. If you look at our CTTS, which is our central lab, or CDCS, which is our clinical business, we tend to have more pharma than we do the small biotechs or the middle-sized biotechs. But I would say across the three businesses, we feel good about the RFPs that we're seeing. We feel good about the backlog that we're seeing. And we're confident that the backlog supports the long-term guidance that we provided.

Adam Schechter:

Yes, I expect that to continue, that we'll continue to have a strong book-to-bill that will continue to be above the 1.2 threshold that we anticipate to be. So I feel good about that.

Unidentified Analyst:

This is Jon, on for Derik. Appreciate the new disclosures, but I wanted to ask what your underlying assumptions are for the full year in your ED, CTTS and CDCS. We know that your early stage and late stage should be going faster than central lab. But yes, wanted to look into your assumptions there. And also in mid-April, FDA issued a warning about the possibility of false results from NIPT. I was wondering what sort of exposure you have there through Sequenom, that'd be great.

Operator:

We have a question from Patrick Donnelly with Citi.

Adam Schechter:

As we said, for the first quarter, we averaged 70,000 tests per day. And by the end of the quarter, that was down significantly than where it was at the beginning of the quarter. And we expect there's going to continue to be a decline through the year. The reason that we give a range, and we've given a range of down 60% to 70% versus last year, is because there's a whole range of possibilities on how you can get to that range. So one of the possibilities is, as you say, there's a uptick in November around the flu season. But at that point in time, if there's not the emergency declaration, the price might be lower. If the emergency declaration continues, but there's not an uptick in November, the price would be at where it is now. So the bottom line is the 60% to 70% range that we've given has a whole bunch of ways that you can stay within there. My assumption is that the emergency declaration will continue through this year. We'll see if that occurs or not and I think volume will continue to decline throughout the year.

Adam Schechter:

Thank you, Catherine. So first of all, thank you again for joining us today. I'm really encouraged by our progress and the important work of our more than 75,000 employees around the world. I can tell you they are our greatest asset and we're focused on supporting our employees that are facing additional complexities and difficult situations. We have people in Shanghai, Ukraine, Russia, and we're really making sure that we're thinking about them as they face these complexities. We look forward to speaking with you soon and we appreciate your time today. So thank you.