Good day, and thank you for standing by. Welcome to the Q4 and Full Year 2022 Labcorp Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chas Cook, Head of Investor Relations. You may begin.

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.

Thank you, Chas. Good morning, everyone. It's a pleasure to be here with you today to discuss our fourth quarter results as well as the progress that we've made towards our strategy. 2022 ended strong for Labcorp with accelerated revenue growth in Diagnostics and continued strong underlying fundamentals in drug development. Drug development continued to have a tough year-over-year comparison, mostly due to less COVID-related work. In 2022, we took decisive actions to navigate a challenging operating environment. We advanced our strategy with the announcement of the planned spin of our clinical development business, and we closed several important hospital laboratory partnerships. I'll now discuss our fourth quarter performance. In the quarter, revenue totaled $3.7 billion. Adjusted earnings per share was $4.14 and free cash flow was $536 million. The base business remains strong. On a constant currency basis, excluding COVID testing revenue, enterprise base business revenue grew 6% in the fourth quarter versus prior year. Growth in diagnostics-based business revenue in the fourth quarter was strong due to both routine and esoteric testing and revenue from the Ascension partnership. COVID PCR testing volumes declined during the quarter as expected, totaling 1.4 million tests performed and averaging 16,000 per day. Looking forward, our Diagnostic business will accelerate with 10.5% to 12.5% base business growth, benefiting by around 5 percentage points with a full year of our Ascension partnership. For Drug Development, fourth quarter base business revenue in constant currency declined 1% versus prior year. Early development and clinical development both grew but were offset by lower central laboratory revenue due mostly to COVID-related work. Drug Development ended the quarter with a strong trailing 12-month book-to-bill of 1.27. Looking forward, we expect the momentum to continue in drug development orders, and we expect that site enrollment in kids returns will continue…

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…

[Operator Instructions] And our first question will come from Kevin Caliendo of UBS.

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?

Yes. Kevin, and I'll take the second question first. I'll ask Glenn to provide some impact on the -- your first question. So the range that we gave is $16 to $18, a midpoint of $17. And we kind of focus and targeting on that midpoint. But there are things, particularly around COVID, that could still happen where we've given a pretty broad range of COVID coming down between 75% and 90% is still very difficult to predict that. The second thing is we gave a range for NHP of $80 million to $100 million. Good news is we've started to receive supply, and we started to receive shipments, but it's still early as we get those shipments in and it takes time to get the steady starts up. And then the third thing I would say is, while we're waiting for supply, we're still hiring people. As you recall, last quarter, we noted that in early development, we needed to hire more people. So I'm not slowing down the hiring process, while waiting for some of the supply shipments that we have. So we're going to hire people while we can't yet run some of those trials. So those are some of the pushes and pulls, but I would focus on the midpoint more so than the lower end of the range, I think, is highly unlikely.

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.

Great. Can I ask a quick follow-up just on PAMA, the benefit you saw from PAMA and also the change in the code that occurred in December. That was obviously a positive benefit to the company. Did you reinvest those dollars? Or is all of that sort of you're letting that fall to the bottom line? How should we think about that in terms of the way you accounted for it or thought about it?

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.

And our next question will come from Jack Meehan of Nephron Research.

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?

Yes. So obviously, we work with the payers all the time. Whether it's a year we have a negotiation with them or not. We're constantly in contact and working very closely with them. And we've seen continued pressure over the last 5 years, and I think that pressure will continue, but it's not accelerating. It's kind of very steady. And where we can get price concessions, we do -- but in general, I would say that there's continued pressure, but no different than what we've seen in the past.

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.

Got it. And I heard your commentary, Glenn, on some of the revenue pacing to start here. So a finer point you can draw on EPS, just either expectations, percentage of the full year or -- just any color to help on that would be great.

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.

Our next question will come from Erin Wright of Morgan Stanley.

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?

Sure. Thanks for the question. So I'll start with drug development and performance. What you saw for the fourth quarter was early development grew 5% on a constant currency basis. And I always give the CAGR as well from 2019 because that's before all the COVID-related work, it was about 6% CAGR from fourth quarter of 2019. If you look at the clinical business, we saw about 2.5% growth in the quarter on a constant currency basis. If you compare that to the fourth quarter CAGR of 2019, it was about 5%, but both of those were offset by a 9% decline in the central laboratory business versus prior year. That's, again, constant currency. But if you look at the business for the central laboratory on a CAGR basis in 2019, it actually grew about 5%. So it sums you that, that business remains healthy. It's just as you recall, in the fourth quarter of 2021, we were doing a huge amount of -- for boosters for vaccines because that was right when the Omicron variant hit. So that's why you see such a tough year-over-year comparison for the central laboratory business. As I look at RFPs across the segments, meaning I look at them in total, the RFPs remain very strong and very consistent. So we haven't seen a change. As I look through last year on cancellation rates, I haven't seen a change. The cancellation rates remain low. They're up a little bit from 1 quarter down a little bit in the next quarter, but relatively flat and remain very low. And then to me, the most important thing is the book-to-bill. And as you see, the book-to-bill was very strong. It was a 1.27. And if you were to look at each of the individual segments for the quarter, although we don't typically give individual segment book-to-bill, you would see that they are all above the 1.2. So we feel good about each of the segments about the book-to-bill as we move forward. In terms of -- I'm sorry, go ahead, I'll answer the second question after you follow-up.

Oh, no, go ahead. Go ahead.

Okay. And then in terms of -- if you look at the ED business, we think it's a good business. It's a global business. We're looking to bring our innovative diagnostic test globally, and we think that they'll be able to help us do that with their global laboratory footprint. So we remain committed to that business, and we think it's a good business.

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?

Yes. So we're -- after the spin, which we are on track for the middle of this year, we will continue to provide a dividend. We expect to get dividends approved moving forward for Labcorp. And then we would continue to look to do these hospitals and local laboratory deals, of which our pipeline is very full. And there's a significant number of those that we're looking at evaluating it, we will win some of those this year. And then we believe our shares are still significantly undervalued. So we have now $1.5 billion of authorization for share repurchases, and we'll use those as appropriate.

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

Great. On the first one, I'm not trying to step on Tom's toes or anything here, but just isolating the drug development assets that will stay part of RemainCo. Could you just give us some color directionally as live magnitude, anything here on the EBITDA margins for early development in central lab, just how they looked at '22, not trying to ask for stranded cost adjustments or anything like that?

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.

All right. Appreciate it. I thought I'd give it a shot. And then secondly, on the -- just sitting here on the early development business, so if we were to exclude the $80 million to $100 million NHP headwind you guys are baking into the guidance would be growing in FY '23? And what's the price assumption embedded in there for the year?

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...

The pricing assumption embedded in the EB business for '23?

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.

And this concludes today's conference call. Thank you for participating. You may now disconnect.