Q4 2021 Quest Diagnostics Inc Earnings Call

Yes.

[music].

Welcome to the quest diagnostics fourth quarter and full year 2021 conference call at the request of this company the call is being recorded.

The entire contents of the call, including the presentation and the question and answer session that will follow are copyrighted.

Property of quest diagnostics with all rights reserved.

Any redistribution retransmission or rebroadcast.

This call in any form without written consent of quest diagnostics is strictly prohibited now.

Now I'd like to introduce Shawn <unk>, Vice President of Investor Relations for Quest Diagnostics go ahead. Please.

Thank you and good morning.

I'm joined by Steve <unk>, our chairman and Chief Executive Officer, and President Mark <unk>, Our Chief Financial Officer, and Jim Davis, Our executive Vice President General Diagnostics, and Chief Executive Officer elect during this call. We may make forward looking statements and will discuss non-GAAP measures. We provide a reconciliation of non-GAAP measures to comparable GAAP.

Measures in the tables to our earnings press release.

Actual results may differ materially from those projected.

Risks and uncertainties, including the impact of the COVID-19 pandemic that may affect quite diagnostics future results include but are not limited to those described in our most recent annual report on Form 10-K , and subsequently filed quarterly reports on Form 10-Q .

Current reports on form 8-K.

The company continues to believe that the impact of the COVID-19 pandemic on future operating results cash flows and towards financial condition will be primarily driven by the <unk>.

Pandemic severity and duration healthcare insurer government and clients payer reimbursement rates for COVID-19 molecular tests.

That mix impact on the U S health care system in the U S economy, and the timing scope and effectiveness of federal state and local governmental responses to the pandemic, including the impact of vaccination efforts, which are drivers beyond the companys knowledge and control.

For this call references to reported EPS refer to reported diluted EPS and references to adjusted EPS refer to adjusted diluted EPS.

Any references to base business testing revenues or volumes referred to the performance of our business, excluding COVID-19 testing.

Growth rates associated with our long term outlook projections, including total revenue growth revenue growth from acquisitions organic revenue growth and adjusted earnings growth are compound annual growth rates.

Finally revenue growth rates from acquisitions will be measured against our base business now.

Now here is Steve Rostowski.

Thanks, Shawn and thanks, everyone for joining us today and over the past two years, our 50000 quest employees.

We have risen to the challenge of COVID-19.

Persevering and remaining committed to the patients and customers we serve.

Well I'll do them. So they also grew our base business by more than 19% in 2021 achieving record levels.

I am extremely proud of what we have accomplished as a team.

So we have a lot of news to cover this morning, and I want to get into that so we can have for your questions. So let's get started.

Yes.

So first I'll start by sharing some color on the leadership transition we announced this morning.

David will review our performance for the fourth quarter and the full year of 2021.

And then finally, Mark will provide more detail on our financial results and talk about our financial outlook for 2022.

So as you have seen and are.

Announcement. This morning, we've begun implementing a gradual leadership succession plan under which Jim Davis.

Executive Vice President of General diagnostics or.

He will succeed made you become chief Executive Officer on November one 2022.

At that time, we will continue to serve on the Quest board of directors as executive Chairman.

Quest diagnostics is a great company that is well positioned to continue to deliver shareholder value.

As I approached the decades in the role the board and I determine that now is the right time to begin to turn it over to Hal.

Our new leader.

Jim Davis is extremely well qualified to be CEO , having managed a large part of it is tough in his role as executive Vice President.

He has deep knowledge of quest.

The healthcare industry.

And the corporate world gained through more than 35 years of business experience.

<unk> is widely respected it wont be a strong CEO .

You don't want it.

This role nearly 10 years ago.

It was not growing.

We're realizing its potential.

We launched a new strategy, our new quest to drive transformational change.

To drive that change, we built a new leadership team and.

Jim has been a key member of that team.

We built the business strategy to accelerate growth and drive operational excellence.

To drive growth, we focused on improving relationships with health plans and hospital health systems and.

They are expanding SaaS growing businesses in advanced diagnostics and consumer tested.

In addition, we've added about 2% revenue growth on average through accretive strategically aligned acquisitions over the last several years.

We have driven operational excellence and our invigorate program has consistently improved quality.

Customer experience.

While generating 3% productivity each year.

And we've made more inclusive, but increasingly the diversity on our board and amongst our management ranks.

Finally, we have established a quest for health equity in 2020.

Over $100 million committed to reduce healthcare disparities.

Among underserved in the United States, particularly in communities of color.

I am very proud of what we've accomplished together and if you consider the opportunities in front of us in many ways. We're just getting started.

We have a strong team.

Jim has been a key leader in our transformation.

He runs our general diagnostics business, which accounts for more than 80% of revenues in.

Three quarters of our employees.

He manages operations, including sales and marketing patient services logistics laboratories billing and customer services.

He also oversees the drive operational excellence strategy, which includes our invigorate program.

He has provided an enterprise oversight for our pandemic response, and if that wasn't enough. He is also letters develop enough quest ESG strategy. So Jim Congratulations I'll look forward to working very closely with you through this transition.

Hey, Thanks, Steve and I really look forward to working closely with you over the next eight months and ensuring a very successful transaction.

It's a tremendous honor to have the opportunity.

See you in Boston lead <unk> into the next phase of our growth we had a very powerful vision and class of empowering better health and diagnostic insights our business strategy is straightforward and well understood and our company has never been more central to patients and to the healthcare system as we have seen during this pandemic.

I really look forward to working with the management team and all 50000 employees to build on the strong foundation that quest has put in place.

<unk> future is really bright and we're extremely well positioned to continue to create value for our shareholders and all of that we serve.

Thanks, Jim now at the same time, Mark is planning to retire this year.

Mark Yes. It has been in this role for more than eight years and help navigate us through the strong position. We're in is to that.

We have begun a process, which I will be working closely with Jim to identified plus new CFO and Mark will participate in the selection process. It will remain in the role through the transition.

Mark I wanted to thank you for your many contributions your partnership and your friendship.

Been a key member of our leadership team and we have transformed quest and accelerate its growth.

Thanks, Steve I appreciate the kind words.

I just wanted to take a minute to say that I'm proud to be part of an important company that makes a positive contribution to the country and I have enjoyed being part of it.

Now it's time for me to step back and retire I'm looking forward to participating in the process to identify my successor, who can support Steve and Jim and Quest next phase of growth.

Now turning to our results.

Closed out 2021 with another record year of revenues earnings and cash from operations.

Our base business recover throughout the year.

And we experienced.

Strong demand for COVID-19 testing services.

So for the full year of 2021.

Total revenues grew by more than 14% to 10 8 billion.

Earnings per share increased by nearly 49% on a reported basis to $15 55.

And more than 27% on an adjusted basis to $14 24.

Cash provided by operations increased by more than 11% to $2 2 billion.

And for the fourth quarter total revenues were $2 7 billion, a decrease of roughly 9% versus 2020, when COVID-19 volumes where surgeons.

Earnings per share were $3 12 on a reported basis and $3 33.

On an adjusted basis.

<unk> down approximately 26% versus the prior year.

So I'd like to share some perspective on the role of COVID-19 testing going forward.

A lot of progress has been made in the battle against COVID-19.

We believe it isn't going away anytime soon.

Our larger volumes began this year strong.

With volumes, peaking in <unk>.

Mid January .

Testing will continue to play an important part of managing COVID-19, and we believe that molecular testing remains the gold standard.

We have continued to perform well throughout this surge maintaining average turnaround times of two days or less workover.

Molecular testing.

We will continue to maintain appropriate testing capacities and staffing levels to be prepared for any additional surges throughout this year as they emerge.

We also continue to believe there will be a bigger role for serology testing and how we measure COVID-19 protection going forward.

Ultimately, we expect COVID-19 testing to eventually more flu like and become a permanent part of our portfolio going forward.

Sure.

Now turning to our base business, we continue to make progress executing our two point strategy.

To accelerate growth and drive operational excellence.

While we delivered 2% revenue growth on our base business from acquisitions again last year.

In the fourth quarter, we acquired the assets of <unk> diagnostics, a regional independent Laboratory survey physicians and patients primarily in South and North Carolina, Georgia and Florida.

This is the first full service laboratory owned by Quest in South Carolina.

We also recently announced our acquisition of <unk> health.

Patient engagement company that helps individuals adopt healthier behaviors to improve outcomes.

This acquisition will bolster our extended care capabilities.

20.

12, we have completed more than 40 acquisitions, including outreach laboratories.

Regional independent laboratories, and capability enhancing deals and over the last 40 years, we've achieved our target of greater than the average of 2% revenue growth on our base business each year from acquisitions.

And then finally, our M&A funnel remains strong.

In 2021, we took full advantage of our strong health plan access, which is approximately 90% of all commercially insured lives in this country.

We also made good progress working together with our plans to help companies and their employees save money by reducing denials.

And the out of network leakage.

Co plants also recognize the value of working with us and we have grown our health plan revenues faster than our overall revenues to the best level, we've ever seen.

Hospital health system revenues have grown more than 20% compared to 2019 levels, excluding COVID-19 testing.

Driven largely by the strength of our professional laboratory services contract.

Our performance in 2021 benefited from our two largest pls contracts to date.

Zach Meridian health and Memorial Hermann.

Altogether.

Other Pos business will now COVID-19 exceeded a record $501 million in annual revenue last year.

Hospitals have could seriously face pressure throughout the pandemic.

Post pandemic, we believe the same will be true.

We believe there will be a continued consolidation and ongoing challenges for quest and opportunity to implement our flexible solutions to help hospitals become more effective and productive.

Advanced diagnostics is critical to the future healthier.

We're building strong momentum in our key growth drivers, which include consumer and regulatory genetics.

Collagen and pharma services.

And 2021 these test categories accounted for several hundred million dollars of advanced diagnostics portfolio.

And they are growing more than 25% versus 2020, and nearly 33% versus 2019.

We are investing aggressively in areas with potential for future differentiation too.

To grow our advanced diagnostics value proposition, including automated test Nextgen sequencing bioinformatics, the sales force and customer service.

We're leveraging our scale and expertise to give patients and providers greater access to important innovations such as liquid biopsy and digital pathology.

Advanced diagnostics is one of the faster growing areas of our portfolio.

Our strategy and investments in this area will enable us to achieve high single digit revenue growth going forward.

And our equally excited about the opportunities we see in our direct to consumer testing business.

Revenues for request direct services nearly doubled to more than $17 billion in 2021, driven by both the base business growing our COVID-19 testing.

We.

The non COVID-19 slower diagnostic market will experience double digit growth over the next several years.

We're on track to build the $250 million direct to consumer business by 2025.

We're ramping up our investments in the business launching a new and improved digital experience later this year and we're also investing in enhancements to the in person customer experience at our patient service centers.

So we're off to a good start in 2022, we're building on our long term relationships with Walmart.

Recently launching a consumer initiated laboratory tested on Walmart dot com through our solution powered by quest reps.

And the my Quest platform that is nearly 23 million users up more than $3 million in the past quarter.

We're very excited about our longer term growth opportunities in advanced diagnostics and direct to consumer testing.

And our increasing investments we made in 2021 to strengthen our business and accelerate growth beyond the pandemic.

These investments were made possible with the record cash generative as we generated over the past two years.

Now the second part of our two point strategy is to drive operational excellence.

We remain laser focused on improving both operational quality and efficiency, which go hand in hand.

There are 2021, the invigorate program exceeded our goal of 3% productivity improvement.

We made good progress last year in procurement supply savings as well as reducing health plan denials and improving patient collections at the time of service.

Yes.

While we faced modest inflationary wage pressure in 2021.

On the supply cost side, we have more than offset any increases with cost savings from our suppliers.

Historically, our invigorate productivity savings has been net of any inflationary increases.

Beyond that we continue to drive additional productivity improvements with platform consolidation and greater use of automation and artificial intelligence.

Now turning to our sales force excuse me now turning to our workforce.

Quest employees are highly engaged based on results of our quarterly surveys.

In a challenging labor market, we are focused.

And our.

Are still seeing improvement in engagement and retention.

Our team has done a lot to create inspiring workplace and we continue to do everything we can to attract recruit and retain talent.

We're entering 2022, and our strong position within the lab industry and more broadly through all of health care.

Our base business is poised to build off the record revenues between last year, and we're investing to accelerate growth.

We expect to see continued demand for COVID-19 testing services.

Albeit at lower levels through the last two years.

The delay of the 2022 camera cuts announced last year was a good outcome for our industry and Medicaid beneficiaries.

However, we will continue to be hard at work in 2022, with our trade Association and members of Congress with the goal of arriving at a permanent fix to PMO.

We remain committed to our capital deployment strategy of returning the majority of our free cash flow to our shareholders.

This morning, we raised our dividend for the 11th time since 2011.

We expect to have more than $1 billion in cash available this year for M&A and share repurchases.

So putting it altogether.

2022 guidance reflects strong momentum in.

And investment in our base business.

<unk> will enable but expected decline in COVID-19 testing revenues.

Before turning it over to Mark.

I'd like to recognize and thank once again all of our employees, who really have been the front lines of the pandemic and.

And continue to serve.

The healthcare needs of patients.

So it depends on quest everyday.

Now Mark will provide more detail on our performance and our 2022 guidance Mark.

Thanks, Steve in the fourth quarter consolidated revenues were $2 74 billion down eight 6% versus the prior year.

Revenues for diagnostic information services declined eight 5% compared to the prior year the decline reflected lower revenue from COVID-19 testing services versus the fourth quarter of 2020, partially offset by continued growth in our base testing revenue.

Compared to 2019, our base <unk> revenue grew approximately 6% in the fourth quarter and was up more than 1% excluding acquisitions.

Volume measured by the number of requisitions increased one 3% versus the prior year with acquisitions contributing 1%.

Compared to our fourth quarter 2019, baseline total base testing volumes increased more than 10% <unk>.

Excluding acquisitions total based testing volumes grew approximately 5% versus 2019 and benefited from new Pos contracts that have ramped over the last year.

The progress we made in our base business throughout 2021 continued in the fourth quarter and based testing volumes remained consistent with our prior outlook.

As many of you know COVID-19 testing volumes moderated early in the fourth quarter. Following the peak of the Delta wave in September , but then surged again in early December as Dom across various spread across the U S.

Together with our JV partners into a request we resulted approximately $7 9 billion molecular tests quest alone resulted roughly $7 $3 million molecular tests and nearly 730000 serology tests in the fourth quarter.

In January our COVID-19, molecular volumes averaged approximately 120000 tests per day and over 139000 per day, including Sonora Quest with volumes, peaking in the middle of the month.

Revenue per requisition declined nine 8% versus the prior year, driven primarily by lower COVID-19 molecular volume.

In the fourth quarter increases in our base revenue per requisition were more than offset by the impact of recent pls wins modest unit price headwinds remained consistent with our expectations.

Reported operating income in the fourth quarter was $536 million or 19, 5% of revenues compared to $795 million or 26, 5% of revenues last year.

On an adjusted basis operating income in Q4 was $579 million or 21, 1% of revenues compared to $860 million or 28, 6% of revenues last year.

As you May recall, the updated 2021 guidance, we shared in October contemplated a lower adjusted operating margin both year over year and versus <unk>.

The year over year decline was primarily driven by lower COVID-19 testing revenue and higher COVID-19 testing cost head count and wage increases and ramping strategic growth investments. It's important to note that over time, a growing portion of our COVID-19, molecular testing volumes have come from non traditional.

Additional channels, which carry additional expenses and logistics costs.

Also spiking COVID-19, positivity rates across the country in December eliminated our pooling capability, which further increased COVID-19 testing costs late in the quarter.

In addition, we also experienced higher than anticipated employee health care costs in the fourth quarter, primarily related to COVID-19.

Reported EPS was $3 12 set to the quarter compared to $4 21, a year ago adjusted EPS was $3 33.

Compared to $4 48 last year.

Cash provided by operations was $2 $2 3 billion in 2021 versus $2.01 billion in the prior year, we completed our $1 5 billion ASR in November and repurchased an additional $310 million in stock in the fourth quarter. This brings total share repurchases to more than two.

$2 billion in 2021, and we ended the year with $872 million on the balance sheet.

Before turning to guidance I'd like to comment on recent trends, we've seen in our labor costs as Steve noted, we've been managing through a challenging labor environment while.

While wage inflation, including our annual Merit increase is expected to be between 3% to 4%. This year the increase in our total salaries wages and benefits is expected to be below 3% in 2022, given the reset of our annual performance compensation and lower expected over time as it.

Fiber all of our employees are eligible for annual performance.

Now turning to guidance, we estimate full year 2022 results as follows revenue is expected to be between nine and $9 5 billion.

A decline of approximately 12% to 17% versus the prior year.

Business revenues are expected to be between eight three and $8 5 billion, an increase of approximately $3, 5% to 6%.

COVID-19 testing revenues are expected to be between $700 million and 1 billion a decline of approximately 64% to 75%.

<unk> EPS is expected to be in a range of $7 63.

And $8 33 and.

And adjusted EPS to be in a range of $8 65.

To $9 35 cash.

Cash provided by operations is expected to be at least $1 6 billion and capital expenditures are expected to be approximately $400 million.

Before concluding I will touch on some assumptions embedded in our 2022 guidance as Steve said, we're entering 2022 in a strong position our guidance assumes COVID-19 molecular volumes to average between 65 to 80000 tests per day in Q1, representing a decline from Janney.

Larry levels, and approximately 20% to 35000 tests per day for the full year for COVID-19, serology volumes. The guidance assumes approximately 3000 tests per day for the full year.

While our guidance does not currently anticipate another COVID-19 wave will remain ready from an operational standpoint to handle any future searches.

Last month, the public health emergency was again extended another 90 days through April we assume average reimbursement for COVID-19, molecular testing to hold relatively steady through this period, while the public health emergency could continue to get renewed beyond April additional extensions are not captured in our guidance.

The earnings we've generated from COVID-19 testing have afforded us an opportunity to continue to increase investment in our business as Steve noted earlier, we continue to ramp investment here, our growth pillars, particularly the advanced diagnostics and direct to consumer testing opportunities. We are planning to invest approximately 160 million.

And our growth initiatives this year, which represents an additional $90 million in investments in 2022 versus 2021.

We also continue to incur higher cost to manage our business through the pandemic, including expenses to comply with CDC guidelines address ongoing supply chain challenges and maintain adequate staffing levels. We currently forecast these expenses to be approximately $50 million in 2022.

As a reminder, we originally expected Panama cuts of approximately $80 million in 2022. These cuts were delayed one year until 2023.

Finally, we ended 2021 with approximately 124 million diluted shares outstanding our guidance assumes no change in our share count in 2022, and only enough share repurchases to offset our employee equity programs and to meet our commitment of the majority of our free cash flow to our shareholders I will now turn.

It back to Steve Thanks, Mark well to summarize we had another record year of providing critical COVID-19 testing for countries and delivered record revenues earnings and cash from operations.

We also grew our base business to a record level up 19% versus the prior year.

Quest is well positioned in 2022 to deliver on its commitments.

I am proud of the incredible accomplishments of our 50000 quest employees throughout the pandemic.

And finally, our team is strong.

Business has good momentum and quest future is bright as well.

We did a gradual transition to new leadership.

Be happy to take your questions.

Thank you we will now open it up to questions at the request of the company. We ask that you. Please limit yourself to one question.

If you have additional questions. We ask that you. Please fall back into the queue to be please thank you Chris.

Press Star one on your phone.

To withdraw you May press star two again.

Please press star one.

And the first question is coming from Jakafi.

<unk> research your line is open.

Hey, Jack Good morning, Jack.

Good morning.

First I know this isn't the end, but congrats Stephen Mark in our retirement and Jim Congrats on turning the Big seat agreed this is very well deserved for Ya.

Thank you Jack.

Thanks, Jack Thanks, Ken So first question.

There's been a lot of anxiety around pressures on the lab industry, which I personally find very interesting because historically, that's actually been the bull case request. So we would just be great to get your thoughts on what Youre hearing from hospitals around outsourcing have you picked up any new contracts and potential for share gain versus <unk>.

Some of these regional and independent labs.

Yes, Thanks, Jack for the question and there is more pressure.

Pressure in our industry and specifically.

Hurting hospitals and so.

We are seeing continued interest and are working with hospital systems.

Open them become more efficient and productive with our professional lab services business.

That continues to be a big opportunity you saw in our prepared remarks that grew nicely.

For the last couple of years, we have $1 billion business and therefore as that moves it moves our enterprise a significant level. So that's number one number two is we are very strong and we continue to drive operational excellence as you. All know this is not new it's institutionalized and quest.

We believe we have the cadence and the capabilities to continue to offset any inflationary pressure, we have and we've done that we did it last year, we'll continue to do that going forward.

I said in my introductory remarks already included an invigorated when we talk about inflationary pressures on our cost of sales.

Provider invigorate savings.

Savings that's a net number so any increases offset by the savings and that's always been positive for us getting more savings than cost increases and so despite some pressures that we see because of the current times, we're offsetting that.

And going forward, we do see that smaller laboratories will have a tougher time keeping up with some of these pressures and therefore, we do have an advantage and we saw the acquisition. We just did with <unk> Tec in South Carolina.

Our achieving that 2% growth through acquisitions. So therefore, we believe our strategy has positioned us nicely going forward to take advantage of.

The changes in front of us given this different time that we've ever seen.

Would you like to add to that yes, I think the other thing Thats evolving Jack that you Didnt mentioned, but I'm sure. It's on your radar is moves towards transparency on pricing whether its surprise billing.

It certainly is complicated so even for us its not simple it depends if you got commercial insurance and depends on who you are carriers and so on so it's not simple to tell people exactly what their cost is however, it's absolutely an advantaged for the national absent specifically for class. So we're encouraged by some of this.

It's kind of one of those secrets that a lot of people are aware, how much better our value as compared to others and so we really see that together with some of the other things. You mentioned is another reason that we're going to continue to pick up share and really return to those growth rates, we were having before the pandemic started.

With greater access and then all the tools and value that we bring well beyond our price, including our real time estimation tools, including our my quest App and all the other things that really enhance.

Enhance the patient experience.

Great and as a follow up on the disclosures around the fourth quarter detection testing. So $7 9 million total seven three resulted by quest of 600000 through the referral network.

Can you talk about just the profitability on the tests that go through the referral network versus those resulted by quest because people just trying to figure out the relative margin upside versus revenue I'm wondering if maybe that was a factor we werent considering.

Yes, so to be clear it is factual referrals.

Sure.

Yes.

Have a JV with Sonora quest and so.

Wanted to make sure that people were aware they were doing some math around rent per rack on the testing volumes that we don't actually record that revenue because we have a minority ownership stake. So we get a proportional share of the earnings from Sonora Quest as we do with our other minority holdings as we do with our majority holdings through equity earnings. So we just wanted to Brian .

Transparency, but in terms of that pricing and so on and so forth I won't comment.

Common specifically in Sonora quest, but its not dissimilar, it's not a totally different profit structure than the things that we do ourselves.

During the surge less than 5% of our total volume out to refer.

Wow.

And at this point in time.

Back down to zero so its only during the surge is that we have to rely on these external.

Partner Labs to help yes, what I did refer to Jack and maybe that's what you were asking about was non traditional channels. So that's not where we're sending the work it's actually how we're getting the specimens.

A lot of the work, especially early.

Through our traditional channels, our hospital partners, where we were going any ways to collect specimens.

And we would leverage all of the quest logistics all in cases, where we had people going to our trough centers. We're leveraging that in this case, we're actually getting it from other providers Cvs is the most notable one and as we do that we have to have incremental logistics structure, we have.

To have incremental logistic runs and then we do pay a fee you kind of should think about it kind of like phlebotomy, but with all the work they do to collect the specimen into engaged and administrative costs of the patient to give them. The results and so there is I think a cost that maybe people aren't aware of when we're not getting that specimen through our tradition.

Infrastructure.

Great. Thanks for clearing that up.

Operator next question.

And the next question is coming from Ann Hynes Mizuho Securities. Your line is open.

Morning Ann.

Good morning, Congratulations to Steve Marc and Jim Thank.

Thank you good morning Ann.

So I just wanted to ask about margins, because obviously, the stock's down or underperforming year to date versus some peers and I think there's a debate.

On the street about the margin profile for quest ex Covid.

I know your guidance assuming merger pressure in Q4, it was it worse than expected.

Follow up to that is again.

2022 people really focused on what your margin profile will be in 2023.

And in your prepared remarks, Mark you did talk about that.

Growth initiatives that are in 2020 to the 160 million I think you said $50 million of incremental cost.

There are so many moving parts with.

Extra labor cause extra supply cost you had these growth investments.

If we look out to 2000 joined <unk> not given guidance like what do you think in two weeks.

And what is not and maybe if you can just comment on just the health of how you view your base margin.

And the base business that'd be great.

Yes. So thanks for the question and I think it's important one so first off we're not deviating from our long term outlook. So we shared our long term outlook.

In March of 2021, and while the categories are going to change.

Because we're going to have a stronger year in 2022, and the CAGR I quoted at that time were put in 2022 forward. The absolute numbers, we're not deviating from because they are largely the base business. So we still assume that COVID-19 will materially declined time will tell and at.

At that point, it's really all around our base business. So when people are looking at the current profitability of the base business and I can understand how this happens one of the flaws in that is that they're really you can't really do the two in isolation. So let me give some examples because we've had such a surprisingly strong year this year relative to what we.

Spec driven by Covid, we're paying a significantly higher incentive performance bonus and thats across the whole employee base and right now that would not be expected to repeat in next year, so that inflated our cost and so to assign all of that cost against the base business, which is what implicitly is done.

When you do Covid revenues times, a certain margin drop through and then you assume backing into the base business.

Thats just not accurate. The other thing is we have significant incremental costs related to the pandemic, which I mentioned in the prepared remarks around $50 million of costs. If COVID-19 really goes away. We would expect those costs will largely go away and those costs are really be assigned to COVID-19 not not the biggest.

Business, we had quite a bit of over time.

During the year and that was related to employee absences, driven by the Covid surge and we spent about $25 million more in 2021, then we historically spend over time and we would expect that would go away as well as COVID-19 starts to step back and so again that is implicitly.

It against the base business when you do the high level math that I've seen a lot of people do and so the way to think about the base business is obviously from our guidance. We are hundreds of millions of dollars above where we were in 2019, we expect to be back to the growth that we were experiencing pre pandemic I know it seems like a long time.

But if you look at the first two months and we mentioned this several times of 2020 before the pandemic started even after a full year of the network access gains. We had in 2019, we were still growing mid single digits, we're going to get back to that growth in the base business and the profitability of the base business.

It's going to be similar to what it was before 2019, so hopefully that puts all the pieces together for you obviously, if theres anything I didn't clarify I'd be happy to take a follow up.

No that's very helpful and just.

As a follow up just to your growth initiatives like the $90 million incremental.

In 2022, how should we view that for 2023.

Right so.

Some of those will ramp down.

There are discrete investments to get us, where we need to get to so for instance, a big piece of that is building, what we need for our consumer initiated testing.

And to move from where we were two eh.

More Amazon like and that that will get completely there, but experienced or patients who want to find testing order it.

Pay their bill et cetera is expensive it takes a lot of work with marketing analytics to do.

Do the appropriate marketing and understanding of customer preferences and respond to customers and appropriate way. There's a lot of investment in the near term to get us to that future state now as we're growing that business to a core 1 billion, which is what we said we would get to by 2025, there aren't going to be some ongoing task because we are at.

Adding people to support that business. It is an incremental business and there aren't going to be some variable cost with that however, as we grow those businesses, we're going to grow faster and so some of those ongoing costs are going to get paid for that faster growth and then I would say similarly on advanced diagnostics as we accelerate that growth some of the resources, we're adding today.

We're calling out pre that growth are going to be in the run rate and profitability going forward. So the costs don't go away completely but they will ramp down because some of this is kind of startup expenses and then that revenue obviously in the margin is going to pay for those incremental cost over the next several years.

Let me just add to that remember.

When we talk about the issues this year.

Investments really started in the back half of 2020.

We talked about an exceptional year in 2020, we talked about an exceptional year in 2021, and therefore, we took advantage of the opportunity investing in accelerated growth entirely consistent with what we shared with you is our.

Gross portfolio portfolio.

And what Youre seeing in our results our revenues the benefits of those investments you are seeing great growth in our focused areas of advanced diagnostics up highlighted those areas of our portfolio that we're focused.

And these are not insignificant portion of our portfolio I can share with my introductory remarks. These are several hundred millions of dollars of focus for us.

Owing strong double digits versus last year versus 2019.

And then secondly, as our consumer initiated testing business.

One considerably we talked about $70 billion of staff into could there be.

And so therefore, we're already starting to see the benefits of <unk>.

With any investment we expect the business return, we're getting some of that business returns already in 'twenty. One we will expect more of it in 'twenty two.

So when you get into 'twenty three you've got to trust that will not start at the beginning.

Putting our izod is exactly what we laid out at Investor day.

We have a baseline coming out of 'twenty two that we believe in what we just shared in our 'twenty two guidance is entirely consistent with that.

We will continue to grow our earnings.

Good day bigger growth, we highlighted supplement to 9% and that will continue into 'twenty three 'twenty four so we feel what we've done so far and what we deliver is entirely consistent with what we believe the prospects of we do believe the opportunities in front of us or even more.

More attractive than before because we've had the proceeds was about this of course has accelerated the growth that we believe is real.

Yes, just one clarification, so the 7% to 9% was when we thought we would do $7 40 to $8 in 2022.

And we said we'd be at the upper end of that so you can pick your number between sub 48 carried forward seven to 823 and 'twenty four and that dollar level of Etfs is what we're saying we can still do obviously since 2022 is turning out based on our guidance a lot higher than we said in March that CAGR is going to be lower but the absolute numbers.

We're still committed to at this point.

Operator, we're going to go to the next question, but I just want to let everyone know we won't go past the bottom of the hour. We have a lot of folks in Q1, we want to get to all your questions operator.

And the next question is coming from AJ Rice of Credit Suisse. Your line is open.

Good morning.

Hello, everybody.

Best wishes on the transition to all.

And maybe just to ask it.

M&A pipeline.

Any update on what Youre seeing out there with the opportunity set looks like B does the management transition.

Cause you in any way to pull back or to pivot in a different direction.

Inorganic growth prospects and then just maybe finally on the pack health deal that was obviously not a huge deal but interesting one does that suggest a pivot and what sort of the opportunity there.

That acquisition.

Thanks, and I will continue to.

We believe that we can continue to deliver that 2% growth of our base business going forward, we've delivered that in the past.

Every reason to believe that we will continue to move forward.

As I mentioned earlier, we continue to see hospitals looking at what we've done with other hospitals, an opportunity for them to rely on us with the testing and our funnel of opportunities continues to build and we continue to look at some outreach purchases with hospitals and then as I mentioned <unk> was a good example of what regional laboratory and a good piece of.

Of the United States that we picked up as well and we continue to look at acquisitions that build on our portfolio remember we have this lens of focusing on general diagnostics and Jim Davis.

That business and.

In addition to that advanced diagnostics, but the third piece is that are those services.

The information that we generate we provide services and we do this employer population health and we've built on that business to work with health plans and helping them manage the risk with the data and providing services that help them with that so Pac health fits into that direction for the company and we've done some other acquisitions that help us with.

That direction, as well and youre going to hear more about our continuing to invest in that space going forward and also in your question does the management changed slow us down in any way impair what we might do an acquisition I would say to the contrary, yes, Jim's good part of the management team for over eight years, who is highly engaged in all.

<unk> he has been instrumental in executing a lot of our acquisitions and all of the businesses that <unk> participated as are always part of the funnel building that we have so Jim in your remarks about the 40 acquisitions, we've done and your team to find more opportunities now AJ as Steve said.

I've been a part of all 40 of those acquisition and it's not going to slow down we're not going to do we're going to do smart deals.

We're going to be selective, but we're going to continue to build our base business. We're going to continue to find niche applications to build out our advanced diagnostics portfolio and we're going to continue to focus on the hospital outreach yields and those that are willing to get out of the business. We're right there ready to help them.

Okay, great. Thanks, so much.

Yes.

The next question is coming from Patrick Donnelly.

Your line is open.

Patrick.

Thank you for the questions.

Maybe just one on some recent payer negotiations obviously you guys have talked a lot about inflationary pressures and supply chain things how much does that come up and kind of the negotiations with payers are you able to pass it along I know you guys are in a pretty good place with payers relative to historic levels. So maybe just talk through some of those conversations and ability to pay.

Price along with price increases.

And those payer contracts, yes, thanks Patrick.

So there's a lot of attention these days on inflationary pressures and we think we've.

Handled those questions, we think its all very manageable for us.

Our operational excellence programs and finally, the productivity, we need to offset it. So that's one piece of the equation. The other pieces, what you're bringing up is around pricing and we feel good about what we delivered in that regard, but if you look at the results for 'twenty. One what you find is that our unit price changes and this is.

Freezing everything from volume and mix and just looking at your price changes is below the flow of that 100 basis points that we typically have guided you to dial into expectations going forward.

That's not just for our commercial insurance contracts, it's all of our businesses our hospital business as our client business.

Independent who those clients might be physicians or some other organization we work with so.

We continue to make progress on that and we're particularly encouraged by the discussions we're having with health plans, we have shared in the past that actually in the past.

Several negotiations, we've actually introduced price increases.

It is actually helping us.

That in fact, there is inflationary pressure across all of healthcare. So therefore, we are not alone.

This is where our labor based business to pass along some of those costs to them. So we're making good progress and I would say the other piece of this Patrick is we continue to deliver great value.

Polity gets better our service gets better and we do that in a very competitive price already and many of these plans believes the best Suntrust of them in their membership of growing share is to make sure. They rely on a handful of top flight laboratories in the case of <unk>.

<unk> healthcare they called out the preferred lab network, we have applied for that and we had to demonstrate with evidence that in fact, we have great quality, we have great service and we're doing that at very competitive prices. So that trend will continue when you talk about value.

We're going to eventually keep a portion of that to deliver more and more value, which helps you in terms of managing our network.

In many cases are going to start looking at some price increases going forward. So good progress there. Thanks for asking the question Mark as we think about that yeah, I just want to.

To remind people of what we've talked about over our tenure we have this invigorate program drives about 3% productivity and we call it productivity because some of it is topline enhancing its not all around cost and we've mentioned the fact that we have these pay for us.

And one of them has been price erosion one of them has been annual labor inflation and then we talked about the fact that as we've got price in a better place that actually it was helping with margin expansion. So we had enough productivity to do more than the pay for us. So now you look at where we are today and as Steve mentioned a much.

Better position I can't specifically say, it's related to inflation, but I can ensure you that that is part of the conversation in addition to Panama and the value that we bring and so and so we've really moved the conversation dramatically from when we started here to more about value and Fortunately for us I can share that.

In the last three national payer contracts all three of them. We've got an increase that was modest but you compare that to where we've been historically.

Great News and that also means that even if we have a little more inflation in that I think we've talked about this quite a bit we've got plenty of invigorate and invigorate now.

Doesn't need to cover as much of the price erosion that we had historically and that price erosion that Steve shared it's really heavily in the client bill and as we've talked over the last number of earnings calls that comes from both our hospital clients, who were under tremendous pressure and we've shared the reasons for that and also in some states where physicians can do client Bill Maher.

We have that pressure as well, but really with the commercial payers. We are in a really good place on pricing lately.

Yes.

That's really helpful. I appreciate it and then just a quick follow up on Covid, maybe pricing and volume you mentioned no expectation for the phe to continue to be extended in the second half or at least does not baked in sorry.

How do you think about the pricing piece, both commercial will they follow kind of wait for the Phe and then the volume side are you expecting it to be endemic a lot of the diagnostic players have obviously talked about multiple years of Covid revenues going out just curious on your take there. Thank you.

Yes, so what we're assuming in our guidance as we gave them some ranges of what we could cope with testing will be and obviously, it's going to start higher in the first quarter and it's going to go down.

As we are hopeful that this.

Current surge will decline throughout the spring and into the summer as you mentioned, we did get the 90 day extension and we're not planning in the guidance that that will be extended but we just don't know so therefore, we're always assuming on the <unk>.

Worst case, if that if that were to come down yes, we do believe there will be some.

Some price changes if you will with silver.

Some of our partners.

Again, what we've implied in the guidance is a decline in volumes and some decline in pricing and also the assumption that we're not going to get a renewal via emergency order, but again, we don't know about so yeah. Just a reminder, that I need to remind you all but the rate that CMS determined is $51 and so while we don't assume.

Post phe that everything falls immediately there, there's a pretty steep ramp down and then so for the volume that is in our guidance beyond the phe in late April we are assuming a significantly lower reimbursement than we've experienced to date and that we're expecting to get through really April .

Operator next question.

The next question is coming from Ricky Goldwasser with Morgan Stanley . Your line is already over.

Good morning, and best wishes.

All of you.

Okay, we're going to be my fourth.

Right.

Working with some very exciting.

Thank you.

Yes.

Dating all the way back to Ken Friedman's days.

Yeah.

So.

I just wanted to go back to sort of what the 2022 based on is it seems that this is kind of like really the bulk of the questions. We're getting from investors how should we think about.

The 2022 normalized baseline that we can build off for 2023.

Thank you kind of said in response to one of the questions in terms of absolute EPS.

Or where you expect it to be.

Last year, but if maybe you can give us a range of where we're getting to somewhere between $7 60 to 780.

As a normalized based on chart four.

Starting point.

Just wanted to see if we're in the ballpark and then often side maybe.

Maybe just qualitatively what are the headwinds and tailwind that we should think about as we think about modeling out to 2023.

Mark Yes, so I'm sure you understand Rick EBIT.

Even if I was willing I can't really give you an EPS from the base business. So I think the best thing I can do is pointing.

<unk> Q2, pre pandemic revenue and earnings and tell you that if you look at the growth in the base business based on what we are giving a guidance. The profitability is not dissimilar. So you can you can kind of directionally place where that business might be and the reason I can't really give us back to what I talked about earlier.

So where do I assigned the <unk>.

<unk> million dollars of.

Pandemic expense.

Arguably if we didn't have COVID-19 testing, we would still have that cost and you'd say, okay, well actually go back to your base business, but.

Truth is that we also have the COVID-19 testing and revenue. So we should go against the covered revenues. So you've got to go into the base business and then importantly, when you talk about headwinds of tailwind, we would expect that cost to go away should be temporary because it is specifically tied to CDC guidelines and other things we talked about some of the other.

Some of the things, including their like supply disruptions I don't know how long that's going to last and we all know it's not just in our businesses.

Across all aspects of life today and.

It's going to go away Tomorrow is going to go away in 12 months not sure. That's certainly something we want to absolutely make sure that we have what we need and so we are paying premium cost spread now relative to what we did pre pandemic to make sure our suppliers get to our patient service centers and laboratories have everything they need and that's really kind of our insurance, which fortunately.

We can afford to do right now because we also do have that COVID-19 revenue in Covid margin.

So really I think thats the best color I can give you which is the base business is in good shape.

We exited Q4 organically back to where we were in 2019, we've done significant M&A over the last couple of years, we built the pls business.

So beyond the organic critical business, where hundreds of millions of dollars higher and while the profitability at all that may not be precisely the same directionally people can feel confident that the profitability has moved.

The revenue growth.

Mind, you our base business in 'twenty what was <unk>.

Larger than what we had in 2019, so it has grown.

It has recovered.

We're going to grow on top of that and Thats implied in our guidance for base business that we intentionally broke out base business from corporate assumptions for 'twenty two so.

Dissect, what's going on with that business.

Keith I'll remind you that these investments that we're making here are part of our base business and we've started those divestments in 'twenty one they contributed in 2000.

Two.

And therefore, that's going to help us accelerate growth and as Mark said, we feel very confident about the profitability of our base business and Oh by the way what I said in my introductory remarks.

We do not believe Covid is going to entirely go away is can be a permanent part of our portfolio. So you should assume.

Covid testing in 23 years as well.

We'll continue to see it play a role with our PCR testing.

We believe there is a growing role for serology, particularly related to our ability to be able to provide some insight around the protection that individuals have.

In their bodies and we're going to have more on that to come but you put it together, we believe the prospects for 'twenty three and beyond are quite price. So thank you.

Ricky I would add one other thing and Thats.

Despite mark saying that the base business has recovered to 2019 levels. There is still evidence to suggest in terms of a headwind that theres still pent up demand for routine clinical care. If you look at the.

The studies around HIV infection rates hepatitis C infection rates the data still indicates that there was a lack of routine clinical care. During this pandemic and we do think that should provide some headwinds going into the later part of this year and next year.

I'll start.

Operator next question.

And the next question is coming from Brian Tim Quillin of Jefferies. Your line is open.

Hey, good morning, guys and congratulations all around.

I guess I'll follow up to that last answer that you gave you yes. So as we think about COVID-19 , becoming more endemic rather than what it is today.

It probably more correct to think of this opportunity or this part of your business is something like say the flu the.

The flu tests were so thats, where most of it.

Point of care and then.

A big small chunk of it that over to you guys and then how should we be thinking about the economics and if that was the case.

Well, let me start and then my colleagues will round it out I'm sure. So so this isn't going away anytime soon I think all of US believe that we're going to open in 'twenty, three and we're going to provide testing around that.

And as you know.

As you are living with it every day like the rest of us when somebody has some symptoms.

Youre rolling out Covid and in many cases that is a PCR test and that will continue and so therefore, you don't think about just the flu, but it's anytime a respiratory illness and that could be a common cold or with other respiratory elements. So so there'll be a continuation of that going forward and also we can.

On highlighting the value of serology, we think there is going to be increased role for us to provide insight about how much protection people have from from vaccines are from natural immunity.

As we know that's changing over time and people want to have that been said too.

We manage the risk and work with their physician on that so we think there is going to be increased value in that so so we do believe 23. This is going to be a permanent part of our portfolio. It's hard right now to scale that.

And we will learn more as we get into 'twenty, two but when we think about it we actually think of as the digital portion of our product lines that we didnt have before the pandemic. So we actually price it is.

Helpful too.

The value, we think we have in them.

Jim said the base business continues to be a really strong shape, we cross the growth of 19 sooner.

'twenty, one we're entering 'twenty to enrich momentum.

Our growth prospects there continue to be ones that we continue to work so that should continue to be a good opportunity for us. So so we're feeling it fits together well and COVID-19 is going to provide more fuel for us to make these investments in our base business that help us in 'twenty three.

So yes, we're focused on where the cost of our book, we only make these divestments. If in fact, we expect to get the returns and Youll see those returns both the 'twenty two but also in 'twenty three and beyond so so mark do you want to add to that yes, I think Brian . It's a great question and we can predict with any <unk>.

Certainty, what's going to happen I think the two unknowns or how comfortable will physicians be with.

Taking the specimen sample themselves in the office going forward and maybe there'll be very comfortable with their with the flu where maybe there will be like no I'd, rather I'd, rather not handle that I'd, rather not do that point of care tests in all of the risks that come with that I'd, rather just send it to a lab, but then the other one really importantly, as the economics. So the payers are going to have a lot.

Influence on whether this is Doug yes.

Point of care testing arguably some people do it.

Faster turnaround times, but a lot of it is done because they make money off of it so that depending on what the Payors decided around point of care reimbursement that will have a largest once on how much of this work comes to us and how much of it stays in the office is let me just ask Jim to comment on this is if you look at our volumes are impressive.

We've had.

A challenge this year, because it's because of the infection rate and therefore, not our ability not to be able to speak.

To be able to deliver a cooling which is it's more capacity at a lower cost so that will come back as infections rich drop but.

Go forward with this when we start to see this becoming more of an epidemic or pandemic then there's a lot of players in this marketplace and Jim and his team are entirely focused on what do we have for sure today.

What we can do going forward to gain some share going forward. So when you think about the opportunity around <unk>, but if you look at that market do you think about quest diagnostics. If you think about the dynamics of the short run where theres been some opportunistic players were not opportunistic this is going to be part of our permanent prototypes of our portfolio and therefore, we also are push.

<unk> hard and making sure that we get what we believe we should have for sure in the short term, but also in the long term, we think there might be an opportunity to pick up some share Jacob.

Yes, what we did find during this flat surge is we had a series of 10 to 12 partners that we've referred workout too when we couldnt handle the volume, especially during peak thanks, turning to work and at least 50% of those partners.

Had gotten out of the business and decided they just didnt want a rebrand of our capacity. So while there may be the physical capacity out there some of that physical capacity, especially on the PCR Pcr cycle.

Return to the clinical kinds of work that those firms are doing other molecular work so.

So that is I think advantages us in the future.

If there is another surgery.

Operator next question.

And the next question is coming from Peter Chickering of Deutsche Bank. Your line is open.

Hey, good morning, guys. Thanks for taking my questions, Steve a market has been a pleasure working with you over the years.

<unk> Jim on this promotion.

<unk>.

A lot of questions around the space business. So let me ask this a different way I believe you generally blast serving each $50 EPS range for 2023 with her limited Cobot earnings can you talk about EBIT margins in 2023 versus the 17% range seen in 2019 without Covid I sort of beliefs are within.

That guidance range, youre, implying essentially flat margins.

It'd be great offsetting the inflationary pressures is that just the right takeaway that we should be leading todays call with.

Yes, so we intentionally don't really target or comment on margins, because we believe value creation can come at different levels of margin than we've talked about specifically our pls it.

Where it's great growth great return on invested capital and those are the two biggest correlated to shareholder value creation, but they come at a lower margin. So we don't worry about margin per se, so, but I understand others do and so to answer your question there is a pretty broad range.

Obviously, one year less than over multiple years, when you put a CAGR with a couple of hundred basis points differential on the topline and bottom line. So there's a lot of different combinations. So what I would say is.

Core EPS number that you mentioned is not unreasonable and you can figure out the revenue based on what we said.

At.

Investor Day, and then what we're guiding to this year in terms of the base business and yes.

At this point.

We're not counting on COVID-19 to be significantly larger than maybe our flu business or something like that but certainly we don't know and there is a chance that it could be larger than that and that will be determined over the next 12 months or so so that's about it.

Strongest color I can give you right now is back to what we said we feel really good about our base business going forward, we're going back to that growth level and I want to remind everybody that when we grow organically the dropdown is much higher than that 17% or.

19, 5% that we delivered in Q4 and so on it drops down at a level.

50% or more depending of it's an existing customer where we're expanding the menu or it's a new customer where we do have to invest a little maybe in logistics and in it for the interfaces, but gross brings with it margin expansion. In addition to invigorate and that's why we're confident we can grow earnings faster than top line.

From that period forward.

Okay.

Ask the question just a different way and not in the margin side. It means that you're sort of thinking about 2023 EBIT.

Versus 2018 sort of cleaner for non Covid numbers, we should be modeling sort of a low teens EBIT increase in 'twenty three relative to 2018.

Yes, I mean, you can yes, you can do the math yes.

Uh huh.

Okay.

Youre welcome.

Our earnings per share okay.

As Mark just said, we will repay and as we've always we've always provided our outlook and guidance rotor mix per share because we do have a mix of business.

We do have some lower margin business that might be.

A good value, creating opportunity for us that we're going to go after it like a pls business. So I think the best guidance diluted EPS would've be expansion vps overtime Rebase to get if you will for these changes that we've seen for the last two years and.

Mark.

As we iterate our belief that our base business will fuel good opportunities for us to continue to deliver against that and Oh by the way as we continue to gain share variable gross margin is quite good and as I said. We also believe there is going to be some COVID-19 into 'twenty, three and it's hard to size it right now but.

Im going to go away anytime soon.

Yeah, and then the other thing is I mean.

No.

Im not any position to provide guidance in 2023. So that's why we're focusing everyone on the base business. However, when you think about what could happen COVID-19 could be larger we don't know and we're not counting on at this point and then we did mentioned we've got a bit we expect that $1 billion of cash this year so between.

The opportunity to do quite a bit of M&A, and we will see or do share repurchases.

Those also arent specifically contemplated so thats why like locking down to a specific number is really difficult and probably not productive. So I would point you to what we said at Investor day, and kind of assuming that that's reasonable. If these things don't play out significantly differently from our current view of what 2023 Mike.

Great.

Great. Thanks, so much guys.

Operator next question.

And the next question is coming from Matt Larew of William Blair. Your line is open.

Hi, good morning.

3%, Okay, great target has been aided in recent years as you've consolidated volume onto your two new labs and consolidate into one immunoassay platform I'm curious what are the keys.

Going forward here to keep driving that those gains and then maybe the second piece on cost would be separate from some of the extra costs, you've called out today related to Covance.

You built up some infrastructure, both personnel and instrumentation pork over that and just curious how much of that.

It goes away.

As clothing moves to an endemic congrats you need less.

Extra capacity.

Great. Thanks for the question I'll start and turn it to Jim to the absolute but.

We've been working on operational excellence for over a decade.

Become institutionalized in our company culture and embedded enough, we do things and it is.

It is a platform for how we're going to continue to grow. So your comment was around cost and we don't talk about costs, we talk about productivity.

Because there's a lot of aspects of what we do around invigorate and some actually helps the top line. So that helps getting more output with less labor and yes. Some helps us become more efficient by less input from some of the some of the materials that we use so we looked at it in aggregate.

And we continue to be bullish on our prospects.

We believe that it is the ingredients for us to continue to deliver great value.

When we do this we improve our quality our service gets better at all by the way, we become more and more productive to to be able to make the investments to fuel the growth. So it all fits together.

And then when we talk about this and we've talked about in Investor day, we see an enormous opportunity for us to continue to digitize and innovate and operational excellence and so some of you have had the opportunity to tour through our latest lab of the future and that's our new facilities facility in Clifton New Jersey.

And sometimes if you come and you'll see what we've done we've taken some of the learnings out of our Barbara facility up in the Boston area, we brought that down to the cliff that we built on it.

Also lose it uses the advantages of some consolidation with some of our new platforms, but Jim and team are now taking that and thinking about okay. What's next.

So when you think about the innovation in our space. Yes, there is innovation in terms of testing and as far as diagnostic information services, but we equally think theres a lot of innovation and opportunity for us to move forward. So we continue to invest in when you talk about investments we talked about a use of cash as you notice we have been putting about four and a $1 million a year.

Air into our capital budget, which is investments and frankly, a lot of our innovation that will allow us to fuel this productivity gains so Jim.

Yes, I think Steve touched on the three key themes of automation use of artificial intelligence and then the continued digitization of stope any from manual processes. So.

Mark Hurley and Clifton are terrific examples of that but as you know, they're all brand New laboratory. So you've got 20, plus other laboratories in our network and Theres opportunities in every one of those laboratories without building new Greenfield sites to continue that automation journey and <unk>.

Particularly in our assessment processing area, and what we call our fluid handling system handling of blood and urine.

On the artificial intelligence side.

Youre going to see us move.

Apologies mycology microbiology, we've got some great examples in each of those departments today.

Deploying artificial intelligence systems to help with the readout of those images.

And then as Steve mentioned is just the continued digitization of our beyond the.

The immunoassay platform, where we consolidated around the <unk> there are still other opportunities like that in our laboratories. We recently ran a competition in your analysis, so likely to new vendors as mix for that.

Platform and.

Rolling out those new platforms across all 23, plus laboratories is going to generate a lot of productivity year over year. So.

As long as we have healthy third party vendors that continue to innovate those innovations will come to our labs, and we will continue along that 3% productivity journey.

Bullish on the prospects of continuing to drive productivity.

Always react to this as a cost cutting goal and this is not about cost cutting goal. This is about working smarter and this has been a key part of our strategy and it fuels growth.

Jim mentioned some of the areas I mentioned in my introductory comment also digital pathology, which will revolutionize our ability to diagnose and treat and do that more productively and.

In fact this week, Jim is going out to another laboratory, we take a look at where we are we're going to make our next investment. This year. So we're going to continue to invest in this space and with Theres a lot more opportunity in front of us So it's exciting.

I just wanted to add that remember this is not just in the lab. So theres a lot of productivity thats driven outside and specifically I'll give I'll give two examples logistics. So we really have an incredible ability to be efficient with logistics and it's continuing to improve so we have.

Some cases, where we have empty pickups, where we have some customers that don't give us specimens all the time. It's periodic now we have the ability of technology to not do that empty pickup. So that's an efficiency. We also get requests for what we call stack pickups, where somebody needs something quickly quick turnaround et cetera, and so the ability to most efficiently get one.

Of our vehicles, there has been enhanced through our technology and the other one is in our patient draw centers, we really.

Increasingly move the administrative burdens off the phlebotomist allow them to do phlebotomy.

By getting people to.

Go to our website put in their insurance information everything and so peripheral vitamin is concerned a couple.

Minutes with each patients doing administrative work doing phlebotomy, we drive up the productivity in our draw centers. So those are just a couple of examples of productivity gains and arent really cost reductions, but enhance our ability to do more with the same resources and drive up our quality and everything else outside the laboratory.

Operator next question please.

The next question is coming from Tycho Peterson of Jpmorgan. Your line is open.

Hi, guys. This is Katie on for Tycho congratulations to all.

Can you can you maybe talk towards the percentage of Covid testing that was consumer initiated <unk>, whether through my quest director other nontraditional avenues, and how do you see that trending in 2022.

You mentioned that there are different costs associated with non traditional IV and some testing. So maybe can you quantify the difference in margin profiles between traditional and non traditional.

Yes, I can.

<unk> share is it.

Go back to what we said in the prepared remarks, our consumer business was about $70 million last year between the base and Covid, we did $2 7 billion.

Covid revenue so you know.

The consumer initiated testing was very small.

At this point.

And.

Strengthening and again as I said, we continue to enhance.

Our website will give go for that order rate and testing and so on but there is still more to come in terms of enhancing that.

Experience for consumers and driving awareness for people.

As you know, we're competing with a lot of people who see these standup operations in parking lots and so on and so forth which draw their attention. So we're.

Working on making sure that they know we can do this initiate themselves as opposed to go into a doctor or hospital for this and we expect to get stronger and stronger moving forward as we enhance our overall consumer business through these investments. We just mentioned in terms of the margin profile, it's really not it's not all that different between the consumer and consumer can add any different ways. They can come.

To our patient draw center and have it done there we do have home collection kits, where they can be sent to their home.

So a little different structure, but not materially different than profitability.

Operator next question.

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

Great. Thank you for squeezing me in and I'll just make this quick.

Can we talk a little bit about.

Sort of like the real Pam outlook. So you would assume $80 million, yet again and comes back in 'twenty three I mean, what are the chances that this actually does get resolved.

But the lobbying efforts pay off for me is the current ministration, a little bit more in Congress, a little bit more willingness of whats minutes and so we're doing that I mean, there's a chance that it gets.

That.

There is actually some.

Reversion, just given what happened.

Yes, before Steve addressed that I, just want to remind everybody that that $80 million was built into our long term outlook. We just assumed it would happen. This year. So again, although it will be a year on year hit to us.

Incrementally in comparison in the long term outlet outlook. It was assumed that we would get that in 2022. So it's already built that go ahead.

So thanks for the question.

As we said we were thankful that it was delayed again.

Youre offset as Mark indicated to 'twenty three.

We think thats good for us because it will gain us some time this year to keep on working on a permanent fix with Congress.

We have.

Very active working with Congress last year.

And as you know Congress was very busy with the infrastructure Bill is.

In other business.

Therefore, we were fortunate enough to get us.

The postponement of him, but as it allows us part of this year to keep up working on this to get appropriate effects.

We are encouraged by the level of support that is about to hit him with his broad swap and some of the importance of trucks through the importance of having a strong industry.

Strong <unk>.

Partisan support both of them.

The house and from the Senate.

Made a proposal.

Of what we think should be change to improve the data collection process. The sampling of of market based data we've continued to support the notion.

The philosophy of PMO, those we should be paid at commercial rates, but we believe that CMS, Scott Roth and in parallel with the work we're doing with Congress. We continue to help our lawsuit against CMS as a trade association the <unk>.

<unk> heard the arguments we will see if we get some indication of a decision on that or to call that but that's still so works as well. So our work right. Now this year is to push for a permanent fix to Panama and we're better positioned now because of the pandemic than before the pandemic because of the strike.

The street in full awareness and appreciation of what we've done is a need for a strong laboratory industry going forward.

Operator last question please.

And our last question is coming from Eric Coldwell of Baird. Your line is open.

Hey, good morning, Thank you.

Masterful job clearing up some of the overriding concerns on core more extra day. So thank you.

When you went through your list of things that don't repeat or go down significantly as COVID-19 incremental cost over time staffing challenges et cetera and go away.

You mentioned bonuses and I think it was the one number.

The list of callouts that I didn't hear you quantify I'm curious if we could get.

The incremental bonus.

Due to the Covid upside.

<unk> profitability in 'twenty, one how you think that bonus will normalize weather.

It's 22 or 23.

And then my follow up I'll just throw it in here.

Hoping we could get.

Average weighted to reimbursement in the fourth quarter I know you said it would be relatively similar to the phe, but if you could give us a little more specificity on where AWS came out in <unk> <unk> PCR testing that would be helpful. Thanks.

Sure. So let me let me start with that one because I think there were some questions around maybe what their turnaround time suffered and we didn't get the $25.

Fee that comes with some of the government payers, coupled with commercial Payors and actually not really AWS are in Q4 was absolutely similar to what it has been in the previous quarters and our turnaround time performance was outstanding we did.

In January when the search came we did a little bit.

We did have a little bit of.

A hit to our turnaround time, but.

Obviously, that's all contemplated the guidance that we just provided and everything it wasn't a huge amount.

When you.

Back to the earlier question bonuses on the bonuses when you when you look at the bonuses.

Most of it is really our 50000 employees. So people think about bonuses, let's be senior management, but most of the cost is really we paid 3% bonus to.

Even our wage workers and then obviously we have other staff members that have higher targets and every year, we budget for what we call onex whatever that targeted so for most of the people would be 3%.

Based on performance.

Performance and when we feel we've had reasonably stretch performance is when you look historically, we have not paid significantly above onex and we've had a number of years, where it's below onex, but the COVID-19 unpredictability in the surge in revenues.

<unk> enabled us to pay our employees significant bonuses in.

In 2020, and again in 2021, and so if you look at without getting too specific we have shared a number in the past the $3 billion wage bill.

Gone up in the last couple of years as we've grown the company. So you can kind of as a floor say, 3%, obviously, a little higher because there's people werent higher bonus that's about onex and then.

Paying a bonus that's substantially higher than that in 2021 like we did in 2020. The other thing is we did payout.

$500.

Payment to the majority of our employees to compensate them for Covid expenses in 2020, we adjusted out of our adjusted earnings because we were seeing COVID-19 as temporal and extraordinary but once you get to your second time doing it even though I still think it's extraordinary we just decided not to adjust it out so we did have over it.

$20 million payment.

Late in the year of $500 to our wage employees and some of our lower compensated professionals as well. So those are a couple of things that.

It would go away and not be repeated unless somehow we had another surprise and COVID-19 year in 2022, like we had in 2020 one.

Okay.

Great Great response, I'm not sure I'm smart enough to do one next 3% plus an insignificant increase is there any chance you could frame that is.

Incremental 50 incremental $100 million, just directionally can we get a little closer.

Yes.

Say, let's say, it's less than 100, but substantially more than 50.

That's about what I thought okay. Thank you very much guys congrats to everyone.

Thank you. Thank you.

Very good well thanks.

It's been a good session with you all thanks for all the great questions.

And again, thanks for joining the call today and we appreciate your support you guys have a great day.

Thank you for participating in the question.

Fourth quarter and full year 2021 conference call.

Great to have her prepared remarks on this call will be posted later today on quest diagnostics website.

Www Dot Questdiagnostics dot com.

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Diagnostics dotcom forward slash investor.

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February 17, 2022 goodbye.