Good day. And thank you for standing by. Welcome to the Labcorp’s Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Chas Cook, Vice President of Investor Relations. Please go ahead.

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.

Thank you, Chas. Good morning, everyone. Before I cover our second quarter results, I want to first thank Chas for his leadership in Investor Relations over the last several years. Chas will be moving into the role of Vice President of Financial Planning and Analysis effective in August. I also want to take this opportunity to welcome Kristin O’Donnell, an accomplished leader in our finance organization, who has been appointed to Vice President of Investor Relations. Both Chas and Kristin will be in attendance at our upcoming Investor Day on September 14, and we look forward to seeing many of you in person. Beginning this quarter, Labcorp is reporting results without the inclusion of Fortrea, which is now an independent, publicly held company as a result of our successful spin on June 30. Moving forward, we’ll report our laboratory services business under two segments, LabCorp Diagnostics Laboratories and Labcorp biopharma laboratory services. Biopharma laboratory services consists of two businesses: our Central Laboratories business, which represents about 70% of segment revenue and Early Development Research Laboratories, which although smaller, is also a leader in the market. In the second quarter, Labcorp delivered exceptional year-over-year growth in our Diagnostics Laboratories base business and generated strong growth in Central Laboratories. Early Development Research Laboratories continue to be constrained by industry-related supply chain issues that we expect to be resolved in the third quarter. We entered the second half of the year with clear operational focus and enhanced financial flexibility to advance our strategy. We see strong momentum in the base business and are excited about the growth opportunities before us. Now let’s discuss our second quarter performance. In the quarter, revenue totaled $3 billion, adjusted earnings per share was $3.42, and free cash flow from continuing operations was $177 million. Our business is…

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…

Thank you. [Operator Instructions] One moment for our first question. And our first question will come from the line of Jack Meehan with Nephron Research. Your line is now open.

Thank you. Good morning.

Good morning, Jack.

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.

Yes. So, first of all, I’ll answer the second part first. So, we’re in good shape for the rest of the year with NHP. We don’t expect any additional impact as we go through the second half. And then to answer the first question, if you just look at the midpoint of our guidance, it would imply about a 9.5% increase year-over-year. And that’s going to come from both segments, the NHP segment as well as from the Clinical Laboratory – the Early Development Research Laboratory as well as the Clinical Research Laboratory segments.

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?

Yes, hi Jack. So, when we think about margins, again, specifically for Biopharma, obviously, we expect to see a second half margin year improve over the first half and improve year-over-year. So, again, benefiting from the top line growth that Adam said was kind of in the implied revenue growth of 9.5% for the segment, we’ll get good leverage over that as well as benefiting from LaunchPad. We said that for the full year for Biopharma, margins will be flat to slightly up, again, consistent with, frankly, Diagnostics margins being up a little bit and for the enterprise as well, including the negative impact from Ascension. So, we feel good about margins driven off of the top line. When you look at the quarter, we felt actually very good with a 15% margin in the quarter for Biopharma, realizing that we had very strong growth coming from Central Lab that really helped it, but also we had negative growth from Early Development Research, which constrained it. So, we feel good about where we are kind of as a run rate. And if we can maintain that level of margin, that will get us, again, higher margins for the full year as well as year-over-year.

Thank you, Glenn.

Our next question comes from Lisa Gill with JPMorgan. Your line is now open.

Good morning, Lisa.

Good morning. It’s nice to talk to you guys again. Thanks for taking my questions. When I look at your expectations and I look at the revenue growth rate, can you talk about utilization trends? Do you think that there is still some level of pent-up demand? How do I think about this versus 2019 baseline would be kind of my utilization question? And then secondly, how do I think about reimbursement trends, especially on the managed care side. I know two years ago we talked a lot about shifts towards some type of value-based economics. Are we finally there? And if so, can you maybe talk about some of the things that you're seeing in the market?

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.

Yes. And Lisa, on the utilization; so as you think about the quarter, obviously from a base business organic standpoint we were up 13.5%, so obviously very strong growth when you look year-on-year, but including the benefit from Ascension. So think about kind of the same-store sales, if you will, growth, excluding the impact of Ascension we're up around 7%, so higher than normal growth rates in part given the comp that we would have had a year ago. And of that around 5.5% of that is coming from our volume and the other 1.5%, call it from favorable price mix. So as you think about it relative to 2019 kind of pre-pandemic, are we tracking at a more normal level, we would say we are now. If you look at the compound annual growth rate compared to 2019, again that 7% year-on-year growth this year would have been more like around a 4% compound growth rate compared to 2019, with volume in between, call it, 1%, 1.5% growth rate compared to 2019. So as we think about volume normally historically at 1% to 2%, we're kind of sitting squarely in the middle of that. So it says we're tracking more normal, but the year-over-year is benefiting from some softness last year.

That's helpful. Thanks so much.

Thank you. [Operator Instructions] Our next question comes from the line of A.J. Rice with Credit Suisse. Your line is open/

Good morning, A.J.

Hi everybody. Maybe just asking, I know a discussion point over the last year has been labor. I just wondered if there is updated thoughts on whether the pressure points in the last year are still the same. Is there any updated thoughts on general average wage increases? And I wanted to just make sure I understood on that $25 million of stranded cost; is that in the Biopharma Lab Services? Or is that how somewhere else? And what's the time frame for winding that down?

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.

Yes. A.J., just adding to that and more specifically, the $25 million of annualized cost, stranded costs that will take out this year to your point, while it will be throughout the whole enterprise. Obviously, a lot of it initially will come from the Biopharma segment. So this is the, call it the support that we have at the segment level that's supporting was all three of the businesses that included the Fortrea business now supporting the two. So we'll look to take out a lot of those stranded costs. In addition, we'll take out some stranded costs that's in corporate unallocated that wouldn't have been allocated to any of the businesses. Having said that, when you look at our corporate unallocated number we did around $66 million in the quarter, we have been seeing an increase in that relative to the R&D investments we're making in oncology. So very targeted investments that will kind of be offset that growth by some of the costs coming out of corporate and allocated due to stranded. So as we think about the run rate of corporate unallocated, that $66 million should still hold true, so it's roughly around 2.2% of our revenues. So as we think longer term, in addition to the $25 million that we're taking out, which is more of a short-term cost to take out of the stranded, we feel there's also some other opportunities to take out additional costs within the corporate unallocated as we go forward and then obviously look to see the company through organic growth as well as acquisition growth. As we grow as a company, we'll be able to leverage the infrastructure and the cost structure we have there even more.

Okay. Thanks a lot.

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

Eric, good morning.

Hey good morning. First, if you don't mind, I'm going to ask two. On the $25 million cost action, the incremental does that represent – what portion of the stranded cost does that represent? I assume it's not the full amount, but could you tell us how that stacks up compared to the total?

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.

Okay. Perfect. And then my first question was really going back to the NHP. Surprising to hear you say you don't expect a headwind or have no issues there in the back half. I'm curious how that is? Is it due to new supply access that you've been able to get your hands on? Is it pricing? Has something changed in the market that's allowing you to work around the obvious Cambodian issue? Just curious more on the mechanics of how you do not see a headwind from NHPs in the back half?

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.

Is there a – Adam, is there a pricing component on top of that, that would be incremental year-over-year that perhaps the volume is not quite equivalent to last year, but with additional pricing you're getting to, you're able to not have- a year-over-year headwind?

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.

Okay. Thank you very much.

Yes. Thank you, Eric.

Thank you. [Operator Instructions] Our next question comes from Brian Tanquilut with Jefferies. Your line is now open.

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.

Yes. Thanks Brian and good morning. We're excited about the success that we've had with the hospital partnerships. I mentioned the three just in this last quarter that we were able to move forward with Jefferson legacy and an additional part of Providence. And the pipeline remains very strong. As I look at the pipeline of potential hospital [indiscernible], I'm excited about the opportunities before us. I think the hospitals are looking for several things. First and foremost, you have to be able to give them patient continuity. They need to make sure that there's no impact to their patients if they do a laboratory agreement. Second thing is science innovation technology; they want to find ways to actually get better science, get better information faster so that they can get better patient care as they move forward. The third thing that they're obviously looking for is to ensure that there is the ability to kind of have a long-term relationship. So I mentioned Providence, a 20-year relationships, these are long-term deals. They take a long time to get up and running and you want to make sure you choose the right partner that's going to be a long-term partner. And as I look forward into the future, this will be a significant area of focus for Labcorp as I think it represents a tremendous growth opportunity.

Awesome. Thank you, guys.

Yes. Thank you.

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

Good morning, Kevin.

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?

Yes, go ahead, Glenn.

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.

That's super helpful. If I can ask a quick follow-up to Eric's question. I understand that you have visibility on the second half for NHP in early stage and that may have been a run through from the first half and with some of the delays in the supply. I guess my question is what's happening to demand going forward? Like I know you had visibility on these contracts. But what's happening with demand beyond that as you look forward into 2024 or the second half of the year for new business? And what's happening with the pricing in that market now with the supply coming back online?

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.

Thanks guys.

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

Good morning, Derik.

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

Hello John.

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.

Yes. Thanks for the question. And you're exactly right, our capital allocation, we focus right now we have a $1 billion accelerated repo program. We've got our dividend that we're committed to. We're going to pay down some maturing debt. And at the same time, we have significant opportunity with hospital laboratories as well as local laboratories as well. And that's the primary focus of what we see in the near-term. I don't see us doing anything that would be a significant deal outside of our core expertise. We're focused on our core and maximizing our core. And as I look at the other parts of our business, I feel like we have a good portion of what we need. There doesn't seem to be anything strategically that we're missing. So it's really going to be about the hospital, local laboratories primarily.

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?

Yes. So we are hopeful that there's a path forward on SALSA. ACLA, the trade organization is working on that. But at the same time we realized that we've got to be prepared in case PAMA does get implemented again next year. So when we think about next year, we've built into a plan about $75 million of downside due to PAMA. I'm hoping that we won't realize that, but we have to create our business model, assuming that does occur and have our cost base reflected what we would do if that does happen. I am optimistic that people realize the importance of our industry, the importance of what we do. And therefore, PAMA will not be implemented in the way it has in the past, but that's not what we're planning for as we look forward.

Appreciate it. Thank you.

Thank you. [Operator Instructions] Our next question will come from the line of Patrick Donnelly with Citi. Your line is now open.

Good morning, Patrick. Thanks for the question.

Hey. How are you? Maybe just a quick one on Ascension; can you just talk about how that's tracking both on the revenue side? And then you mentioned, obviously the margin piece, I know it's a big focus in terms of ramping that up to corporate average and then some. So I would love just an update on Ascension, how you're tracking and the cost side as well?

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.

Yes. No, the only thing I'd add is that when you think about, again what's changed in our outlook a little bit, part of that is the benefit of Ascension. As Adam said, we're clearly towards the upper or at the upper end of the expectations we had, so improved on the volume side. And then in addition from a margin standpoint, while we're initially expecting, call it that low-to-mid-single digits we're tracking well there as we get that additional volume coming through with momentum taking us into the rest of the year.

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

Thank you. [Operator Instructions] [Technical Difficulty] Pito, your line is now open.

Good morning, Pito.

Hi there. Hi there. You've got Kieran Ryan on for Pito. Thanks for taking the question. Just wanted to go back to the biopharma book-to-bill real quick; it sounds like you're happy with where that metric is. I know the quarterly number came in at 1.06, so up a little bit sequentially, still down versus kind of historical. But it sounds like from the commentary you gave that maybe we shouldn't expect much like a huge rebound in that metric in the back half even as early development starts to accelerate?

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.

Thank you.

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

Good morning, Tim.

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?

Yes. Thank you, Tim. And the things that we announced today, obviously we had those underway for quite some time to plan and prepare for, so that's irrespective of the clinical business or not. At the end of the day when you think about China, Japan, that's the second and third largest market in the world for pharma. So you need to have a very strong presence to have the capability to meet the needs of the pharmaceutical clients and the biotechnology clients. So it's just our way for us to continue to meet those customer needs. And we've done a lot in the past in terms of ensuring that we have a global presence, and I feel good about the global presence that we have today. We are significantly further ahead, particularly with our central laboratory business than we were before.

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?

Hi, Tim. What you'll see is that consistent with what we've done before. So the same metrics that we provided for the two segments will continue. Obviously, Biopharma Laboratory Services now consists of the two versus the three businesses. But you'll see in the enhanced disclosures that we provided, we continue to do a breakout of the individual businesses. And that from the segment standpoint we give guidance for their top line for the year. We provide, obviously in our remarks the trailing 12 months, which is really where we focus on book-to-bill and backlog and orders. But in the enhanced disclosures, we also provide that on a quarterly basis, so none of the changes from where we've been providing before.

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

Thank you. I would now like to hand the conference back over to Mr. Adam Schechter for closing remarks, please.

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.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.