Q2 2022 Laboratory Corporation of America Holdings Earnings Call

July 28, 2022

Ladies and gentlemen, thank you for standing by and welcome to the Lab Corp, second quarter 2022 earnings call.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time. Please press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press Star one. Thank you Chaz Coke head of Investor Relations you May begin your conference.

Thank you operator, good morning, and welcome to <unk> second quarter 2002 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 Dot Labcorp Dot com, we posted both in our press release and an Investor relations presentation with additional information on our business and operations, which includes a reconciliation of the non-GAAP financial measures to the GAAP financial measures discussed during today's call as well as the presentation on additional information.

On the spin off of the clinical development business. Additionally, we are making forward looking statements. These forward looking statements include but are not limited to statements with respect to the estimated 2022 guidance and the related assumptions. The proposed spin off of the clinical development business the impact on various factors of the Companys businesses operating and financial results.

Cash flows and our financial condition, including the COVID-19, pandemic and general economic and market conditions future business strategies expected savings and synergies, including from our Launchpad initiative and from acquisitions and opportunities for future growth. Each of the forward looking statements are subject to change based upon various factors many of which are beyond our control more information.

<unk> is included in our most recent annual report on Form 10-K, and subsequent quarterly reports on Form 10-Q and in the Companys 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 will turn the call over to Adam.

Thank you Chad and good morning, everybody today, we announced we are pursuing expanded our clinical development business and we released our second quarter results.

It's an exciting day for Labcorp and we have a lot to cover so I'll start with the spin.

We are pursuing the spin of our clinical development business to shareholders through a tax free transaction.

This transaction will create two leading independent and global public companies that will each be well positioned to innovate grow significantly and enhance shareholder value.

This announcement marks.

In March the beginning of an exciting new chapter for our businesses and is a testament to our team's growth mindset resilience and determination over the last several years.

The decision to spin up the clinical development business resulted from our board and management teams ongoing review of opportunities, including discussions with third parties.

Best position us for growth and success with our customers and shareholder value creation.

When we announced the conclusion of our strategic review in December of last year, we determined that the company structure was in the best interest of stakeholders at that time.

We reiterated that management and the board we are committed to continuing to evaluate all avenues for enhancing customer and shareholder value.

We have now determined that spitting off the clinical development business is the best path forward to achieve this objective.

The planned spin will position our businesses to thrive as two independent companies with greater strategic flexibility and operational focus to innovate to pursue their distinct priorities and to better meet customer needs and capture growth opportunities.

Each company will benefit from its own capital structure enhanced investor alignment through a more targeted investment opportunity and a differentiated value proposition.

Each will be well capitalized.

Listen to generate substantial top and bottomline growth with strong free cash flow and attractive returns.

We expect this transaction to drive significant value for shareholders as it will provide investors with the opportunity to participate in the significant upside potential of two leading global businesses in the health care sector.

This transaction allows <unk> to move forward as a strong global innovative laboratory services business with significant growth potential.

That business will include routine and esoteric labs Central labs, and early development research labs.

In 2021, these businesses supported testing, where 82% of the therapeutic submitted to the FDA.

Tested patients through over 100 countries.

And performed over 650 million tests globally.

Each is a leader in their respective markets.

The combination of these businesses creates a cohesive global provider of laboratory focused services with complementary resources significant scale and a diverse customer base poised to grow and our global addressable market of over $150 billion.

<unk> customers will continue to benefit from its deep scientific expertise.

Our innovative mindset.

Our vast health through data and insights as well as our advanced Global Laboratory network.

With a more focused platform for growth, we expect lab Corp will be able to capture upside as we advanced innovations to deliver on our customers' future needs.

Over the last four quarters the lab businesses delivered total revenue of $12 7 billion.

Or $10 5 billion, excluding co requested revenue.

These businesses grew at a five 5% CAGR from the second quarter 2019 to the second quarter of 2022, excluding Covid testing revenue.

Going forward Labcorp is expected to deliver mid single digit annual revenue growth.

We firmly committed to our capital allocation strategy and to maintaining an investment grade credit rating.

The clinical development business will continue to be a leading global provider of phase one to phase four clinical trial management market access and technology solutions segment.

Broad customer base, including pharmaceutical and biotechnology organizations.

It will be positioned to compete and to win in a growing and dynamic market.

Extending its leadership in oncology cell and gene therapy rare diseases and other emerging therapeutic areas.

The clinical development business will be able to implement a capital structure that is tailored to support its growth strategy and enhance stakeholder value.

Importantly, we expect the clinical development business, we will retain access to lap book Best Health and clinical dataset through an arrangement to support critical development customers with the ability to tap into labcorp to unique data and capabilities.

The clinical development business will be poised to capitalize on its innovation and technology platform to drive significant growth.

Over the last four quarters with clinical development business delivered total revenue of 3 billion.

This business grew at an 8% CAGR from the second quarter of 2019 to the second quarter of 2022.

Going forward the clinical development business is expected to deliver high single digit revenue growth, we will have a strong balance sheet and significant financial flexibility.

I want to emphasize that each business has delivered strong performance and we expect that labcorp and the clinical development business will be poised for even greater growth as independent more focused companies.

We expect to close the transaction in the second half of next year, and we look forward to sharing more about progress in the future.

I'll now move to cover the company's second quarter performance and provide an update on progress against our strategy before turning it over to Glenn.

The base business in the corner continued to perform well despite ongoing impact from Covid, the UK, Russia crisis and foreign exchange rates.

In the quarter revenue totaled $3 7 billion.

Adjusted earnings per share reached $4 96.

Free cash flow was $429 million.

In diagnostics base business revenue for the quarter was up three 9% versus the prior year due to increased demand for both routine and esoteric testing.

The base business CAGR was four 3% from 2019 pre COVID-19 demonstrating strong continued underlying performance.

Drug development revenue was flat in constant currency data in the quarter versus last year with growth in early development and clinical development offset by Central labs.

Central Labs was impacted by the significant slowdown in Covid related work in the Russia, Ukraine crisis.

On a CAGR basis in 2019 pre COVID-19 the drug development base business grew 9%.

Margins in drug development improved in the quarter to 14, 7% and are expected to continue to increase throughout the year.

Glenn will provide more detail on our second quarter results in a moment.

Now I'll provide a brief update on our efforts to address the COVID-19 pandemic and most recently assessed in the monkey pox outbreak.

Cobalt PCR volumes totaled $2 8 million for the second quarter, averaging 31000 per day.

Turning to results remained one day on average.

With respect to the Monkey pox outbreak in collaboration with the CDC and FDA, we became the first national laboratory to begin testing for multi parts using the CDC.

I'll now turn to progress against our strategy.

In addition, today's announcement, we've made significant progress against our strategy by putting science innovation and technology at the center of all we do.

The company introduced multiple innovative and high quality diagnostics to consumers and physicians in the quarter.

We continue to expand our at home test offerings to laptop on demand.

Our first of kind blood collection device for diabetes risk screening.

In addition, we launched an FDA approved managed rapid fertility test.

But brain injuries and neuro degenerative disease in July we were first to begin offering a test that can help physicians diagnose conditions, including precautions Alzheimers and Parkinson's.

Finally, we expanded our central labs could production capabilities to improve delivery and address growing demand across Europe , the middle East and Africa.

We announced the planned expansion of our central labs presence and drug development capabilities in Japan in collaboration with BMS.

Turning to oncology, we continue to deepen our leadership position by expanding our cancer related diagnostic screening and testing portfolio and by partnering with our pharmaceutical clients.

During the second quarter, we launched a new skin cancer test that gave factors actionable insights to help determine the best treatment options.

The test is also expected to be used to support clinical trials.

For patients with metastatic non small cell lung cancer, we're collaborating with Lilly and using lack of amnesty insight genomic tests to help physicians make more informed and personalized treatment decisions.

Moving now to new and ongoing partnerships and acquisitions.

During the second quarter, we acquired select outreach business assets and agreed to provide ongoing technical support to prisoners Health Hospital laboratories.

We completed our acquisition of select clinical outreach business assets from Atlantic There in New Jersey.

We reached an agreement to acquire the clinical outreach business and related assets of our WJ Barnabas Health also in New Jersey.

And the previously announced relationship with Ascension is progressing through normal regulatory approvals.

We continue to have a very strong pipeline of health system and regional acquisition possibilities and we look forward to announcing more in the future.

In summary, we continued to deliver solid results improve our performance and execute on our strategy to create long term value for all stakeholders. We're encouraged by our momentum heading into the second half of the year and the strategic opportunities for <unk> growth and impact in the future.

With that I'll turn the call over to Glenn.

Thank you Adam.

Going to start my comments with a review of our second quarter results followed by discussion of our performance in each segment and conclude with an update on our full year guidance for.

For reference was office included additional business information that can be found in our supplemental deck on our Investor Relations website.

Overall, the company performed well in the quarter.

Revenues for the quarter were $3 7 billion, a decrease of three 7% compared to last year due to lower COVID-19 testing and the negative impact from foreign currency translation.

This was mostly offset by organic base business growth and acquisitions net of divestitures.

Covid testing revenue was down 42% compared to Covid testing last year, while the base business grew one 2% compared to the base business last year Org.

Organically in constant currency the base business grew one 6%.

Operating income for the quarter was $526 million or 14, 2% of revenue.

During the quarter, we had $66 million of amortization and $64 million of restructuring charges and special items, primarily related to acquisition and integration cost facility rationalization and other launchpad initiatives.

Excluding these items adjusted operating income in the quarter was $656 million or 17, 7% of revenue compared to $840 million or 21, 9% last year.

The decrease in adjusted operating income and margin was primarily due to reduction in COVID-19 testing higher personnel expense and other inflationary costs, partially offset by organic base business growth and launchpad savings.

The tax rate for the quarter was 24, 7%. The adjusted tax rate was also 24, 7% compared to 25, 1% last year.

The lower adjusted rate was primarily due to the geographic mix of earnings.

We continue to expect the adjusted tax rate for the full year to be comparable with last year at approximately 25%.

Net earnings for the quarter were $359 million or $3 87 per diluted share adjusted.

Adjusted EPS were $4.96 in the quarter compared to $6 13 last year.

Operating cash flow was $572 million in the quarter compared to $487 million a year ago. The.

The increase in operating cash flow was due to higher cash earnings and favorable working capital.

Capital expenditures totaled $143 million up from $97 million last year, primarily due to timing.

As a result free cash flow was $429 million in the quarter.

During the quarter, we invested $100 million on acquisitions and paid out $67 million in dividends and repurchased $400 million of stock representing one 7 million shares.

At the end of the quarter, we had $1 1 billion of share repurchase authorization remaining.

Now I'll review, our segment performance beginning with diagnostics.

Revenue for the quarter was $2 3 billion, a decrease of four 7% compared to last year due to organic revenue being down five 7%, partially offset by acquisitions of one 2%.

Covid testing revenue was down 42% compared to Covid testing last year, while the base business grew three 9% compared to the base business last year.

Relative to the second quarter of 2019, the compound annual growth rate for base business revenue was four 3% primarily due to organic growth.

Total volume decreased two 7% compared to last year as organic volume decreased by three 1%, partially offset by acquisition volume up 4%.

Covid testing volume was down 45% compared to Covid testing last year, while base business volume grew three 4% compared to the base business last year.

We continue to see base business volumes improve as were narrow up 6% on a compounded basis compared to the second quarter of 2019.

Price mix decreased 2% versus last year, primarily due to an organic decline of two 6%, partially offset by acquisitions of <unk>, 8%.

Lower organic price mix was primarily due to COVID-19 testing as the base business was relatively flat base.

Base business price mix benefited from Esso chair rolling faster than routine testing, but was negatively impacted by payor mix.

Diagnostics adjusted operating income for the quarter was $516 million or 22, 9% of revenue compared to $663 million or 28% last year.

The decrease in adjusted operating income and margin was primarily due to a reduction in COVID-19 testing.

Covid testing margins were down compared to last year due to lower testing demand. While the company continued to make capacity. In addition margins were negatively impacted by Covid testing Payor mix.

Base business margins were lower due to higher personnel expenses and other inflationary costs, partially offset by organic growth and launchpad savings.

Going forward, we expect the second half base business margins to be up year over year due to improved demand and labor efficiency.

Now I'll review the performance of drug development.

Revenues for the quarter was $1 5 billion a decrease of two 9% compared to last year, primarily due to foreign currency translation of two 6% and lower COVID-19 testing of <unk>, 6%.

Organic base growth was negatively impacted by lower Covid related work, the Ukraine, Russia crisis, and lower pass throughs.

Excluding these impacts organic base business revenues grew in the mid to high single digits.

Base business revenues compared to base business last year declined two 3%.

Was up 4% on a constant currency basis.

Early development experienced good growth as did the clinical business, which was constrained by lower pass throughs.

Central Labs was down year on year, but up six 7% on a compounded basis versus the second quarter of 2019.

The decline year over year included the impact from lower Covid related work and Ukraine, Russia crisis.

We expect central labs revenue to be up in the second half year over year based on the strength of its backlog.

Drug development segment revenue was up 8% on a compounded basis relative to the second quarter of 2019, primarily driven by organic growth.

Adjusted operating income for the segment was $213 million or 14, 7% of revenue compared to $221 million or 14, 8% last year.

The decrease in adjusted operating income and margin was due to a reduction in COVID-19 related work, the Ukraine, Russia crisis and inflationary costs.

These impacts were partially offset by organic base business growth and Launchpad savings and in addition personnel expense was lower due to cost reduction actions and variable compensation.

In the second half, we expect topline growth and continued cost reductions to drive margin expansion such that the full year base business margin will be comparable to 2021.

We ended the quarter with backlog of $15 2 billion and.

And we expect approximately $4 8 billion of this backlog to convert into revenue over the next 12 months.

Now I'll discuss our updated 2022 full year guidance, which reflects our first half performance and outlook and assumes foreign exchange rates effective as of June 32022 for the remainder of the year.

The enterprise guidance also includes the impact from currently anticipated capital allocation with free cash flow targeted to acquisitions share repurchases and dividends.

We expect enterprise revenue to decline, 2% to 6% compared to 2021.

This was a decrease at the midpoint from our prior guidance of 50 basis points due to the change in currency.

This guidance now includes the expectation that the base business will grow 5% to seven 5%, while COVID-19 testing is expected to decline 50% to 60%.

We expect diagnostics revenue to decline, 9% to 13% compared to 2021.

This is an increase at the midpoint by 250 basis points, driven by our updated expectations for Covid testing.

Covid testing is now expected to decline, 50% to 60%, while our base business is expected to grow 4% to 6% unchanged from our prior guidance.

At the midpoint of our base business guidance the compound annual growth rate compared to 2019 is four 5% primarily driven by organic growth.

We expect drug development revenue to grow one 5% to three 5% compared to 2021.

This is a decrease at the midpoint of our prior guidance of 475 basis points.

The decline includes a 130 basis point change for foreign currency translation as well as the impact from lower Covid related revenues and lower cash through revenues.

Compared to last year, the guidance range of one and a half to three 5% growth includes the negative impact from foreign currency translation of 230 basis points.

This guidance also includes the expectation that the base business will grow 2% to 4% compared to 2021.

Excluding lower Covid related work in the Ukraine, Russia crisis, the constant currency growth rate would be in the high single digits compared to 2021.

At the midpoint of our base business guidance for compound annual growth rate compared to 2019 is nine 3% primarily driven by organic growth.

Our guidance range for adjusted EPS is now $19 to $21 25.

An increase at the midpoint of 50 compared to our prior guidance. This increase is primarily due to the impact from Covid testing.

Free cash flow guidance remains unchanged at $1 7 million to $1 9 billion.

In summary, the company had a solid quarter, we expect to drive continued profitable growth in our base business for the remainder of the year, while COVID-19 testing volumes are expected to decline relative to the first half of this year.

We expect to continue to use our free cash flow generation for acquisitions that supplement our organic growth. While also returning capital to shareholders through our share repurchase program and dividends.

Operator, we will now take questions.

At this time I would like to remind everyone. If you would like to ask a question. Please press star followed by the number one on your telephone keypad.

Your first question comes from the line of Ricky Goldwasser with Morgan Stanley . Your line is open.

Hi, Good morning, this is <unk>.

Barack Nichol Ochsner, Erin ranked from Morgan Stanley .

Congrats on moving forward with.

With element strategic.

Program Quest.

Question I have is when we think about it.

The clinical business can.

Can you give us some context as to margins that are associated with that business.

And how it compares to gain with this kind of like your core lab right.

Bob quick for central horses.

Christian from early development.

And then I have another follow up after that.

Sure Good morning, Ricky and Hello, Aaron.

First of all thanks for the question and I'll give you some context I'll ask Glen to give some additional context. The first thing is that the clinical development market is a very exciting market, it's probably about more than $25 billion.

In potential revenues, so it's a very large market and it grows very quickly and if you look at the business that we're spinning out historically it has about an 8% CAGR.

What we expect for the future is that we'll have high single digit organic growth. So it is a fast growing business and a very large market as part of the reason we think it makes sense to spin it out at this time when you look at the margins.

We don't give the exact margin yet and the reason why is because we still have a lot of shared services and we have to breakout those shared services to understand what the full margin picture will look like historically, what we've said is that we've seen margin improvement in that business year over year for multiple years now and as we look to the future and we said there'll be mark.

There'll be margin expansion, we've always said that the clinical development business has the greatest potential for additional margin.

Margin expansion.

Yes, the only thing I'd add.

Adam is that Ricky as you know when we've done the enhanced disclosures. So we provide a full drug development segment, obviously revenue down to margins. When we gave the enhanced disclosure of the three businesses that comprise obviously clinical being one of them.

Didn't provide the margins essentially for the reason that Adam had said that we have a lot of shared resources theyre not necessarily standalone businesses that are part of this segment.

I think directionally, it's fair to say that when you look at the.

The margins of the businesses they all have different characteristics.

And in the case of the clinical business. It is the one business that has frankly over 20% of its revenues that are cash flow revenues. So obviously would constrain the the margins of that business relative to the other businesses that wouldn't have that.

But as Adam said, it's a very profitable business and a business that each year, we've seen margin improvement continue and we expect that to continue going forward.

Your next question comes from the line of a J Rice with credit Suisse. Your line is open.

Hi, everybody congratulations on the deal announcement.

I might just ask you in the base business drug development.

One of the things throughout this year is how the margin.

This plan to step up over the course of the year and you had good margin improvement from I think 11 six in the first quarter 2014, seven in the second but Youre also reiterated that you think youll be similar to last year, which I think it's 52, implying further step up.

Allow judah.

So the 300 basis points.

Margin improvement from first quarter to second and what further gets you that back half margin improvement that's embedded in guidance.

Hi, a J its Glenn.

Start with that one when you look at where we were in the first quarter and the margins were low and we kind of explain where they were we felt pretty good that we made the comment that still for the full year, we would expect margins to be comparable year on year in part because of the run rate, where we were ending that quarter. So we did see you'll see what we saw towards the end of the.

The first quarter and again came in margins now comparable to last year frankly, what they would have been up compared with last year. If you took up the COVID-19 testing that we did.

Last year, so as we think about the second half we have still the expectation of continued topline growth, but also a lot of the cost reduction initiatives launch pad and so forth that.

That was call it late in the second quarter, we're going to now get the full quarter benefit as we go into the third and the fourth so between the top line between the.

The cost reduction initiatives that we have in place similar to the end of the first quarter. As we finished the second quarter, where frankly at a run rate now that supports a higher level of margins that we would need to see in the second half to continue to believe that our full year margins will be comparable on a base business level comparable to what we did last year.

Your next question comes from the line of Brian <unk> with Jefferies. Your line is open.

Good morning, this is patchy.

Brian Thanks for taking my question.

Just going back to your most recent news about the announcement.

Ill.

Can you provide some color on your thinking and our strategy moving forward.

Given that clinical basis, it's typically a strong pipeline for central lab work, how do you see that dynamic playing out between the two independent companies.

Thanks.

Yes, thank you for that question.

As we look at the strategy overall.

Isn't it makes sense to do the spending to do it now it really is going to give strength and strategic flexibility and operational focus so that we can pursue the specific market opportunities and customer needs in each of those areas.

The market for laboratory services is different than that of the clinical trials.

US to focus capital structures and capital allocation strategies to drive the growth that we're looking for and I think it also provides shareholders with more targeted investment opportunities. We are going to have arrangements between the companies that will enable that will enable us to make sure that the new business will have access to.

Some of the data and the insights that we get from the diagnostics, which is a big part of the advantage that I think the drug development business has in terms of looking at the.

Central Laboratory business, what's interesting is our central laboratory business. The vast vast majority of our business comes from companies outside of ours and in fact, it's only about 15% to 20% of the Central Laboratory business that comes from the clinical trials that we're running so I think we actually will have expanded opportune.

<unk> to do even more central laboratory work as we opened it up and we are no longer only related to one phase one through four organization.

Your next question comes from the line of Jack Meehan with Safran Research. Your line is open.

Good morning, guys at Big announcement. This morning, So I had two questions for you.

First is on the timing why announce it today versus back in December what's changed over the last seven months and then.

Second how do you decide where you wanted to draw the line Nike the rationale to hold on to that clinical testing piece, but specifically wanted to hear your thoughts on.

Why it makes sense to hold on the safety assessment.

Yes, no. Thanks, so much for the question Jack I appreciate it the first thing I'd say is we did the strategic review the majority of last year and at the end of last year in December we announced five things that we're going to do we're going to do a dividend large share buyback program of which we would accelerate part of that we announced the Launchpad initiative.

We gave long term guidance and we also announced that we would have increased disclosures and we gave timelines for each of those things.

And I Hope you see we met every deliverable that we committed to in the timeline that we've committed to but importantly in December we said that we decided that.

The current structure was in the best interest of stakeholders at that time, we were very clear to say at that time, because we knew that post to review the board was going to continue to evaluate avenues for enhanced value, including a potential transactions, we're going to talk to more external people at this.

We see strong growth in each of the businesses. So we feel really good about the business profiles, we've determined that a separation by spin will enhance value, but it's also going to give both companies the ability to get sustainable growth and to me having both focused capital structures is really important because there's a lot of business develop.

<unk> opportunities out there and I think the way you prioritize those could be very different between the two businesses and the last thing I would say is the COVID-19 environment. If you remember at the end of last year and the beginning of this year with Omicron was pretty dire and we were very focused on making sure. We can do all the tests, we could that we could draw the drug development studies.

We are involved in and it wasn't the right time for any type of distraction or disruption. So overall, we believe now is the right time to move forward.

Second part of your question was where do you draw. The line, it's very clear that the laboratory business has a very different capital structure equipment needs.

Very different needs than the structure for a clinical development business, which is basically people out on the street.

And there is no doubt that when you think about heavier global footprint for diagnostics. It will enable us to bring diagnostic testing around the world. The other thing. That's important is when you think about companion diagnostics and personalized medicine much of that is done very early in development. So as we think about having laboratory services, it's going to <unk>.

<unk> have a global footprint to do personalized companion diagnostics, which is becoming more important and to bring that out around the world and has a very very different growth profile, a very different cat.

Capital structure needs and so forth. So we were very thoughtful and make sure that we're making.

Three.

Bold decisions as to what we keep laboratory versus what we spin out with clinical development.

Your next question comes from the line of Kevin Kelly Endo with UBS. Your line is open.

Kevin Caliendo your line is open.

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

Thanks, very much and I apologize if I missed this early in the conversation had a hard time getting onto the call.

Late in the second quarter.

Yes.

As we as we kind of went into a quiet period there was.

A fair amount of market chatter about some realignments going on within drug development broadly.

I'd love to get your take on what what exactly happened reduction in force compensation realignment and things of that sort is that included in the launchpad savings characterization or was there something.

More specific to drug development that was in.

An additional action at the end of the quarter to help get the margin profile in line with what you were you were targeting.

Thank you for the question, Eric and sorry.

Getting on the call we're looking to that.

With regard to the drug development, we've put the launchpad initiatives in place back in December and we had a pretty strong understanding of what we were going to do we did accelerate some of the launchpad initiative, but a big part of what we did in the second quarter was we realized that in Central Laboratory, we were.

Not doing much new COVID-19 related work and because of that we were able to reduce the six big significant number of people, particularly those that were making kits by hand, and we had a lot of people doing that.

I've said before that we were keeping extra people in both drug development and in the diagnostic areas because we didn't know what we potentially need in the future for Covid, we've determined that for Central Laboratory, we do not believe we're going to have a lot of new COVID-19 related work moving forward and therefore, we didn't need to have those.

People that were making the manual kits. So that's probably a lot of what you heard as we move forward, we're going to continue to have other launchpad initiatives in place a lot of those are about how we can improve efficiency and effectiveness, but also we believe that we're going to continue to have margin expansion in that business as well based upon the run rate that we are at right.

Now.

Our next question comes from the line of Patrick Donnelly with Citi. Your line is open.

Hey, Thanks for taking the questions maybe just quick ones on the on the Covance business can you just talk generally about kind of the cancellation of an environment. It seems like it's been a little mix this quarter across across Crows, youre seeing any uptick there and then secondarily in terms of the spin would you guys consider strategic.

Over the next year in terms of.

Selling it to a larger player or is it kind of set on.

Kind of a tax free spin.

Yes, no. Thank you for the question Patrick when you look at the RFP environment in drug development. It remains very healthy and in fact, if you look even our central laboratory, we had a decline this quarter because of the COVID-19 related work, but we're confident in the growth in that business for the base business going forward because of the orders that we see and the book to Bill that.

We have so we have not seen an increase in cancellation environment. We continue to see a very strong environment for all aspects of the drug development business as we move forward with regard to the spin we've looked at all the different options and based on all of those options. We believe our spend is the right thing to do of course.

There may be other things that people come to us I think we've shown as a management team. We're open we listen we.

Really analyze whatever comes our way, but based upon everything we know as we sit here today, we think the spin is the best path forward for really capturing both customer and shareholder value.

Your next question comes from the line of <unk> Chickering with Deutsche Bank. Your line is open.

Hi, there this is Kieran Ryan on for Peter Thanks for taking the question.

Starting with the diagnostics business.

It looks like.

<unk> margins came down again, depending on what assumptions you want to use around co bid margins.

But your key competitor was talking about some margin contraction on COVID-19 revenues due to a higher mix of retail tests as well as some reimbursement pressure.

So I was just wondering is that something you're seeing as well and then also just how you think about that retail channel opportunity and balancing those.

Those extra volumes with with the margin side.

Yes, no. Thank you for the question Karen and the first thing I'd say is.

We think the diagnostic business is performing very well the base business revenue grew three 9% versus the prior year and the base business volume was up three 4% compared to last year and the growth was coming from both routine and esoteric testing in fact, if you look at the base business CAGR. It was four 3%.

Versus 2019, so you see good strong underlying performance when you look at the PCR testing you've seen the decline you saw decline from first quarter to now and in fact, we did about 31000 tests per day on average when you do last test. It has some impact on the margin. We've also seen our payer mix.

Switch we used to have the uninsured firm parser, we no longer have that that was higher margin business than the retail sector. We've seen more of our business moved to the retail sector. We are also at challenges our margins a bit margin right now for PCR testing is about 60%.

But we will continue to do everything we can to manage that and we see the retail sector as an opportunity, but frankly, we're really focused on our base business. We're really focused on the hospital and the local laboratory acquisitions that are before us and to me. That's the long term growth that we see so we will continue to do what we can and PCR testing, but <unk>.

Long term, we're really focused on getting that base business to perform well and I think you've seen that in the quarter.

The only thing I would add to that and Adam commented that it's still at a very attractive margins. So we commented in the past that last year, we were kind of in the 70% margins. So obviously very attractive but still be at 60% speaks to the fact that one volume levels are down we continue to keep the labor force to make sure that we have the capacity because.

We don't know if there will be future spikes so.

From a labor efficiency, we're absorbing that and obviously as Adam said too as we do more in the retail setting.

It has a mix, but again as we look to the outlook for the year and part of the reason for the.

Improved outlook in our earnings guidance that we have is that we're actually performing more COVID-19 testing than what we had expected and that's why we continue to keep the excess capacity available for the unknown.

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

Hi, Good morning, and thank you for taking my question.

Jumped on late so my apologies if.

If I repeat.

Can you talk a little bit about the embedded expectations on the current acquisitions do you have just with the M&A contribution is an emphasis for me just on performance.

You have these been any bigger drag that you saw on the margin I'm, particularly thinking of the personal Jim diagnostics business since you sort of ramp that up.

And take that through so just some incremental color on M&A contributions and just sort of like the margin environment today.

Yes, Eric.

I guess first to your comment when we announced <unk> and also when we announced Ascension, which obviously hasnt closed yet we commented at that both acquisitions were very strategic and we believe would provide a very attractive return on our investments.

However, both especially initially would be dilutive to our margins so with the with the advent of <unk>, having closed and part of the business.

Mostly impacting even though it's spread a little bit across both of our segments, mostly into the drug development side.

It does have a constraint on their margins. So as we think about margins year on year. When we talk about that we expect margins to be comparable.

A year ago, Thats, even with a little bit of press.

Pressure on the margin from the <unk> acquisition.

Within diagnostics.

Again, our margins most of the acquisitions tend to be a mix positive to us the large hospital systems, especially when youre doing the in hospital lab work.

Tends to put some pressure on the margins. So similarly, we would comment that for the year overall diagnostics diagnostics margins would be relatively flat kind of from that base organic but ultimately once.

Essentially is closed and then goes into the results in drug development, you will see some pressure on the margins. So the way that we look at margins overall for the company is that this year year on year from our base business margins call. It organically would be call. It flattish there'll be down a little bit because of the dilutive.

Impact on the margins from <unk> and Ascension.

But all the other acquisitions that we've announced and that are in the pipeline would be more of the traditional kind of tuck ins.

Even though theres still hospital systems that we have in there, but overall with the outreach being a component of that.

We expect it to not be as big of an impact on the return on our revenues. We have commented, though that with the impact on EPS really only <unk> was one that we acquired that we felt would be dilutive to earnings. This year, having said that the other acquisitions that we were doing essentially as well as the others would be off.

Setting that so from an EPS standpoint, relatively neutral from a margin standpoint, a little bit dilutive.

Your next question comes from the line of Rachel <unk> with Jpmorgan. Your line is open.

Hi, Thanks for taking my questions.

Digging deeper into that or are there margin question.

<unk> last public one slight margin side, it looks like clinical and central lab combined for roughly 23% EBIT margin.

Net central lab is materially higher clinical will also be around there given the expansion plan along with our acquisition.

And then also on the same side of that should we also think about how early stage margin has expanded from that call in the half EBIT margins in 2012.

Hi, Rachel.

Again, when with obviously the acquisition of Covance was a long time ago and since then a lot of changes from acquisitions to the growth of the businesses.

Again, the reason, we haven't broken out the individual components of it is the way we operate the business. It's integrated in a lot of shared resources and allocation of cost so that ultimately when we.

Carve out if you will to clinical development part of the business and make it a stand alone business, we'll be able to give you exactly the profitability of the margins that will be there and we'll actually do it going back for a three year period with audited financials. So I think what we're trying to say is directionally.

You've heard us say that the clinical side of the business, while very profitable is impacted by the impact of pass through revenues, which again when we acquired Covance. We were under 605 accounting were over 20% of the revenues today. They would not have had in their margins. So obviously that would constrain the margin, but again very profitable.

<unk> margins that continue to grow and will be in a much better position. Once we do the carve out financials and have it as a standalone business with the corresponding costs, specifically related to that business, we will provide it but again its at an attractive level.

Your next question comes from the line of Matt <unk> with William Blair. Your line is open.

Well good morning, just a quick two parter on the spend.

Maybe first just following up to Rachel's question.

Given the close is targeted for second half 'twenty three when do you think you might be able to untangle the lapping disclose more.

In terms of the margin profile in that business. That's one the second part is given market conditions and a strong balance sheet for next year. It seems that Mike it might be an active M&A environment, absolutely proactive from pasture as well Im talking about your process to prepare for and spend the asset with constrained capital deployment activity on.

Either side of the business.

So I'll go ahead and start met so.

Yes, again, the timing to effectuate the spin, we're calling call on what the second half of next year.

A lot of processes that you go through and spending a company.

Obviously, we're going to make sure that it's a tax free exchange and working with the IRS to again doing the audited financials, plus you're effectively standing up a company that has been part in an integrated into an overall organization I think what we've said at this point was we're announcing our intent to spin it strategically and that we will over the course of fluctuating.

The spin continue to communicate and provide you with additional information as we have it thats really more relevant at.

At the times once those decisions are made once the accounting.

In the standup of the margins I think directionally, we've given you a good sense of where it is.

The positive frankly from the company standpoint, especially as it relates to the balance sheet.

We have a very strong balance sheet, our commitment to continue is labcorp.

Investment grade with the same targeted leverage ratios that we've had before.

We are below those targeted ranges right now obviously, we've been increasing the amount of our share repurchase program and we've been increasing the amount of M&A that we've seen so we've purposely kept a very strong balance sheet to continue to be able to pursue all of our capital allocation initiatives, including the initiation of a dividend.

If you were to pro forma the company, even if we didn't have the clinical business, we would still be within the call. It the targeted range of our leverage right now so really speaks to the fact that.

We don't believe there will be a constraint on our ability to continue to pursue.

Acquisitions for the for both companies as they are both part of lab.

Labcorp today, but when we stand up the spin company, while we haven't commented specifically on its capital structure other than to say both businesses will be well capitalized such that there'll be in very good position to continue to pursue growth strategies, both through organic or internal investments as well as through acquisition opportunities.

Your next question comes from the line of Kevin Kelly <unk> with UBS. Your line is open.

Hi, guys. Thanks, I apologize for earlier.

First question.

I noticed a couple of things were larger this quarter the unallocated.

Cost of the corporate cost line was much higher than normal can you can you talk through that and also the capex number grew quite substantially this quarter.

Through what drove both of those.

Sure Kevin first on the unallocated corporate which was up.

$29 million, if you will year on year, we talked about there were two changes in kind of the methodologies of how we're treating corporate unallocated on our prior call. So the first is that for a drug development part of its bonus that is tied to enterprise results is reflected in corporate unallocated.

Or said differently all of the incentive compensation for drug development, that's tied to the drug development business is resident in the drug development segments. So that way as you look at our drug development business relative to the peers.

It's all related to that business. So that's part of the increase in until that annualize youll see an increase year over year and again. The reason why it's a big number is again the strong performance that we're seeing within the enterprise driven in part by higher than expected Covid testing.

The other methodology change was really including in corporate unallocated our investments in oncology in R&D, specifically thats not targeted are supporting current revenue streams. So it really had two impacts one so that is now centralized so we kind of manage and look at R&D as an enterprise.

But also with the acquisition of <unk>, which has a high component of it.

Cost structure, if you will much more of an R&D business than we've had historically, you'll also have the year over year impact because it was an acquisition. So those numbers wouldn't have been there. If you take those out you have explained virtually all of the increase year on year.

I guess another way of thinking about just modeling going forward is that our unallocated.

Corporate expense relative to call. It base business revenues will be in a call. It a one 5% to 2% kind of range as an ongoing normal kind of environment.

Relative to Capex, we've talked to it was a higher level of Capex spent this quarter versus a year ago. We do expect that for the year our capital spending we normally talk about around three 5% of our revenues on base revenues is still there so quarter to quarter, there's always some timing differences that affected but.

We are currently on pace with our expected capital spend for the year.

Alright, so I want to thank everybody who joined us today.

<unk> continues to be at the forefront of science innovation and technology and we've continued to deliver on our strategic priorities as always I also want to thank our more than 75000 employees around the world for their tireless work carrying out our mission to improve health and improve lives, we look forward to talking with Augustson.

This concludes today's conference call you may now disconnect.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Thank you.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

<unk>.

Okay.

Yes.

Okay.

Sure.

Yes.

Sure.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

[music].

Yes.

Okay.

Yes.

Okay.

Thank you.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Sure.

Okay.

Yeah.

Okay.

Yes.

Okay.

Yes.

Sure.

Yes.

Okay.

Yes.

Okay.

<unk>.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Sure.

Yes.

Sure.

<unk>.

Okay.

Yes.

Sure.

Okay.

Sure.

Yes.

Sure.

Okay.

Yes.

Sure.

Yes.

<unk>.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

[music].

Yes.

Sure.

[music].

Okay.

Right.

Yes.

Sure.

Yes.

Okay.

Yes.

Okay.

Sure.

Okay.

Yes.

Okay.

Yeah.

Yes.

Okay.

Great.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Thanks.

Yes.

Sure.

Yes.

Sure.

Yes.

Okay.

Yes.

Okay.

Yes.

Sure.

Yes.

Sure.

Okay.

Yes.

Sure.

Okay.

Yes.

Okay.

Yes.

Okay.

Sure.

Okay.

Yes.

Okay.

Yes.

Sure.

Yes.

Sure.

Please.

Yes.

Okay.

Thanks.

Sure.

Okay.

Yes.

Okay.

Yes.

Ladies and gentlemen, thank you for standing by and welcome to the Lab Corp, second quarter 2022 earnings call.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session.

If you would like to ask a question. During this time. Please press star followed by the number one on your telephone keypad. If you would like to withdraw your question again Crestar one thank you Chad.

<unk> Kak head of Investor Relations you May begin your conference.

Thank you operator, good morning, and welcome to Lab Corp, second quarter 2022 conference call as detailed in today's press release, there will be a replay of this conference call available via telephone and Internet with me today are Adam Schechter, Chairman and Chief Executive Officer, and Glenn Eisenberg Executive Vice President and Chief Financial Officer. This morning in the <unk>.

Bester relations section of our website at Www Dot Labcorp Dot com, we posted both in our press release and an Investor relations presentation with additional information on our business and operations, which includes a reconciliation of the non-GAAP financial measures to the GAAP financial measures discussed during today's call as well as a presentation on additional information on the <unk>.

Spin off of the clinical development business. Additionally, we are making forward looking statements. These forward looking statements include but are not limited to statements with respect to the estimated 2022 guidance and the related assumptions. The proposed spin off of the clinical development business the impact on various factors of the Companys businesses operating and financial results cash flows.

<unk> financial condition, including the Covid, 19, pandemic and general economic and market conditions future business strategies expected savings and synergies, including from our Launchpad initiative and from acquisitions and opportunities for future growth. Each of the forward looking statements are subject to change based upon various factors many of which are beyond our control more information is included in our.

Recent annual report on Form 10-K, and subsequent quarterly reports on Form 10-Q and in the Companys 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 will turn the call over to Adam.

Thank you Chad and good morning, everybody today, we announced we are pursuing a spin of our clinical development business and we released our second quarter results.

It's an exciting day for Labcorp and we have a lot to cover so I'll start with the spin.

We are pursuing the spin of our clinical development business to shareholders through a tax free transaction. This.

This transaction will create two leading independent and global public companies that will each be well positioned to innovate grow significantly and enhance shareholder value.

This announcement marks the beginning of an exciting new chapter for our businesses and is a testament to our team's growth mindset resilience and determination over the last several years.

The decision to spin off the clinical development business resulted from our board and management teams ongoing review of opportunities, including discussions with third parties.

Best position us for growth success, with our customers and shareholder value creation.

When we announced the conclusion of our strategic review in December of last year, we determined that the company structure was in the best interest of stakeholders at that time.

We reiterated that management and the board we are committed to continuing to evaluate all avenues for enhancing customer and shareholder value.

We have now determined that spitting off the clinical development business is the best path forward to achieve this objective.

Each company will benefit from its own capital structure enhanced investor alignment through a more targeted investment opportunity and a differentiated value proposition.

Each will be well capitalized and positioned to generate substantial top and bottomline growth with strong free cash flow and attractive returns.

This transaction allows that book to move forward as a strong global innovative laboratory services business with significant growth potential.

The glass business to include routine and esoteric labs.

<unk> labs and early development research labs.

In 2021, these businesses supported testing, where 82% of the therapeutic submitted to the FDA.

Tested patients through over 100 countries.

And performed over 650 million test globally.

Each is a leader in their respective markets.

The combination of these businesses creates a cohesive global provider of laboratory focused services with complementary resources.

Significant scale and a diverse customer base poised to grow and our global addressable market of over 150 billion.

<unk> customers will continue to benefit from its deep scientific expertise.

Our innovative mindset.

Our vast health data and insights as well as our advanced Global Laboratory network.

With a more focused platform for growth, we expect lab Corp will be able to capture upside as we advanced innovations to deliver on our customers' future needs.

Over the last four quarters the lab businesses delivered total revenue of $12 7 billion.

Were $10 5 billion, excluding co requested revenue.

These businesses grew at a five 5% CAGR from the second quarter 2019 to the second quarter of 2022, excluding Covid testing revenue.

Going forward Labcorp is expected to deliver mid single digit annual revenue growth and we remain firmly committed to our capital allocation strategy and to maintaining an investment grade credit rating.

The clinical development business will continue to be a leading global provider of phase one through phase four clinical trial management market access and technology solutions.

Broad customer base, including pharmaceutical and biotechnology organizations.

It will be positioned to compete and to win in a growing and dynamic market.

Extending its leadership in oncology cell and gene therapy rare diseases and other emerging therapeutic areas.

The clinical development business will be able to implement a capital structure that is tailored to support its growth strategy and enhance stakeholder value.

Importantly, we expect the clinical development business will retain access to Labcorp best health and clinical dataset to an arrangement to support clinical development customers with the ability to tap into last books unique data and capabilities.

The clinical development business will be poised to capitalize on its innovation and technology platform to drive significant growth.

Over the last four quarters.

On the development business delivered total revenue of 3 billion.

This business grew at an 8% CAGR from the second quarter of 2019 to the second quarter of 2022.

Going forward the clinical development business is expected to deliver high single digit revenue growth, we will have a strong balance sheet and significant financial flexibility.

We expect to close the transaction in the second half of next year, and we look forward to sharing more about progress in the future.

I'll now move to cover the company's second quarter performance and provide an update on progress against our strategy before turning it over to Glenn.

The base business in the corner continued to perform well despite ongoing impacts from COVID-19, the UK western crisis and foreign exchange rates.

In the quarter revenue totaled $3 7 billion.

Adjusted earnings per share reached $4 96.

And free cash flow was $429 million.

In diagnostics base business revenue for the quarter was up three 9% versus the prior year due to increased demand for both routine and esoteric testing.

The base business CAGR was four 3% from 2019 pre COVID-19 demonstrating strong continued underlying performance.

Drug development revenue was flat in constant currency David.

In the quarter versus last year with growth in early development and clinical development offset by Central Labs set.

Central Labs was impacted by the significant slowdown in Covid related work in the Russia, Ukraine crisis.

On a CAGR basis in 2019 pre COVID-19 the drug development base business grew 9%.

Margins in drug development improved in the quarter to 14, 7% and are expected to continue to increase throughout the year.

Glenn will provide more detail on our second quarter results in a moment.

Now I'll provide a brief update on our efforts to address the COVID-19 pandemic and most recently assists in the monkey pox outbreak.

Cobot PCR volumes totaled $2 8 million for the second quarter, averaging 31000 per day.

Turning to results remained one day on average.

With respect to the Monkey pox outbreak in collaboration with the CDC and FDA, we became the first national laboratory to begin testing for monkey pox using the CDC.

I'll now turn to progress against our strategy.

In addition, today's announcement, we've made significant progress against our strategy by putting science innovation and technology at the center of all we do.

The company introduced multiple innovative and high quality diagnostics to consumers and physicians in the quarter.

We continue to expand our at home test offerings to lap book on demand.

Our first of kind blood collection device for diabetes with screening.

In addition, we launched an SBA approved managed rapid fertility test.

So brain injuries and neuro degenerative disease in July with first to begin offering a test that can help physicians diagnose conditions, including concussions Alzheimers and Parkinson's.

Finally, we expanded our central labs could production capabilities to improve delivery and address growing demand across Europe , the middle East and Africa.

We announced the planned expansion of our central lab presence and drug development capabilities in Japan in collaboration with BMS.

Turning to oncology, we continue to deepen our leadership position by expanding our cancer related diagnostic screening and testing portfolio and by partnering with our pharmaceutical clients.

During the second quarter, we launched a new skin cancer test that gives doctors actionable insights to help determine the best treatment options.

The test is also expected to be used to support clinical trials.

For patients with metastatic non small cell lung cancer, we're collaborating with Lilly and using lack of amnesty insights gnomic tests.

Physicians make more informed and personalized treatment decisions.

Moving now to new and ongoing partnerships and acquisitions.

During the second quarter, we acquired select outreach business assets and agreed to provide ongoing technical support to Christmas Health Hospital laboratories.

We completed our acquisition of select clinical outreach business assets from Atlantic There in New Jersey.

We reached an agreement to acquire the clinical outreach business and related assets of our WJ Barnabas Health also in New Jersey.

And the previously announced relationship with Ascension is progressing through normal regulatory approvals.

We continue to have a very strong pipeline of health system and regional acquisition possibilities and we look forward to announcing more in the future.

In summary, we continued to deliver solid results improve our performance and execute on our strategy to create long term value for all stakeholders.

Cards by momentum heading into the second half of the year and the strategic opportunities for lack of growth and impact in the future.

With that I'll turn the call over to Glenn.

Thank you Adam.

Going to start my comments with a review of our second quarter results followed by discussion of our performance in each segment and conclude with an update on our full year guidance for.

For reference was off also included additional business information that can be found in our supplemental deck on our Investor Relations website.

Overall, the company performed well in the quarter.

Revenues for the quarter were $3 7 billion, a decrease of three 7% compared to last year due to lower COVID-19 testing and the negative impact from foreign currency translation.

This was mostly offset by organic base business growth and acquisitions net of divestitures.

Covid testing revenue was down 42% compared to Covid testing last year, while the base business grew one 2% compared to the base business last year Org.

Organically in constant currency the base business grew one 6%.

Operating income for the quarter was $526 million or 14, 2% of revenue.

Excluding these items adjusted operating income in the quarter was $656 million or 17, 7% of revenue compared to $840 million or 21, 9% last year.

The decrease in adjusted operating income and margin was primarily due to a reduction in COVID-19 testing higher personnel expense and other inflationary costs, partially offset by organic base business growth and launchpad savings.

The tax rate for the quarter was 24, 7%. The adjusted tax rate was also 24, 7% compared to 25, 1% last year.

The lower adjusted rate was primarily due to the geographic mix of earnings.

We continue to expect the adjusted tax rate for the full year to be comparable with last year at approximately 25%.

Net earnings for the quarter were $359 million or $3 87 per diluted share adjusted.

Adjusted EPS were $4 96 in the quarter compared to $6 13 last year.

Operating cash flow was $572 million in the quarter compared to $487 million a year ago. The increase in operating cash flow was due to higher cash earnings and favorable working capital.

Capital expenditures totaled $143 million up from $97 million last year, primarily due to timing.

As a result free cash flow was $429 million in the quarter.

During the quarter, we invested $100 million on acquisitions and paid out $67 million in dividends and repurchased $400 million of stock representing one 7 million shares.

At the end of the quarter, we had $1 1 billion of share repurchase authorization remaining.

Now I'll review, our segment performance beginning with diagnostics.

Revenue for the quarter was $2 3 billion, a decrease of four 7% compared to last year due to organic revenue being down five 7%, partially offset by acquisitions of one 2%.

Covid testing revenue was down 42% compared to cover testing last year, while the base business grew three 9% compared to the base business last year.

Relative to the second quarter of 2019, the compound annual growth rate for base business revenue was four 3% primarily due to organic growth.

Total volume decreased two 7% compared to last year as organic volume decreased by three 1%, partially offset by acquisition volume up 4%.

Covid testing volume was down 45% compared to Covid testing last year, while base business volume grew three 4% compared to the base business last year.

We continue to see base business volumes improve as we're now up 6% on a compounded basis compared to the second quarter of 2019.

Price mix decreased 2% versus last year, primarily due to an organic decline of two 6%, partially offset by acquisitions of <unk>, 8%.

Lower organic price mix was primarily due to COVID-19 testing as the base business was relatively flat base.

Base business price mix benefited from esoteric growing faster than routine testing, but was negatively impacted by payor mix.

Diagnostics adjusted operating income for the quarter was $516 million or 22, 9% of revenue compared to $663 million or 28% last year the.

The decrease in adjusted operating income and margin was primarily due to a reduction in COVID-19 testing.

Covid testing margins were down compared to last year due to lower testing demand. While the company continued to main capacity. In addition margins were negatively impacted by Covid testing Payor mix.

Base business margins were lower due to higher personnel expenses and other inflationary costs, partially offset by organic growth and launchpad savings.

Going forward, we expect the second half base business margins to be up year over year due to improved demand and labor efficiency.

Now I'll review the performance of drug development.

Revenue for the quarter was $1 5 billion.

A decrease of two 9% compared to last year, primarily due to foreign currency translation of two 6% and lower COVID-19 testing of <unk>, 6%.

Organic base growth was negatively impacted by lower Covid related work, the Ukraine, Russia crisis, and lower pass throughs excluding.

Excluding these impacts organic base business revenues grew in the mid to high single digits.

Base business revenues compare to base business last year declined two 3%, but was up 4% on a constant currency basis.

Early development experienced good growth as did the clinical business, which was constrained by lower pass throughs.

Central Labs was down year on year, but up six 7% on a compounded basis versus the second quarter of 2019.

The decline year over year included the impact from lower Covid related work and Ukraine, Russia crisis.

We expect central labs revenue to be up in the second half year over year based on the strength of its backlog.

Drug development segment revenue was up eight 8% on a compounded basis relative to the second quarter of 2019, primarily driven by organic growth.

Adjusted operating income for the segment was $213 million or 14, 7% of revenue compared to $221 million or 14, 8% last year.

The decrease in adjusted operating income and margin was due to a reduction in COVID-19 related work, the Ukraine, Russia crisis and inflationary costs.

These impacts were partially offset by organic base business growth and Launchpad savings and in addition personnel expense was lower due to cost reduction actions and variable compensation.

In the second half, we expect top line growth and continued cost reductions to drive margin expansion such that the full year base business margin will be comparable to 2021.

We ended the quarter with backlog of $15 2 billion and.

And we expect approximately $4 8 billion of this backlog to convert into revenue over the next 12 months.

Now I will discuss our updated 2022 full year guidance, which reflects our first half performance and outlook and assumes foreign exchange rates effective as of June 32022 for the remainder of the year.

The enterprise guidance also includes the impact from currently anticipated capital allocation with free cash flow targeted to acquisitions share repurchases and dividends.

We expect enterprise revenue to decline, 2% to 6% compared to 2021.

This is a decrease at the midpoint from our prior guidance of 50 basis points due to the change in currency.

This guidance now includes the expectation that the base business will grow 5% to seven 5%, while COVID-19 testing is expected to decline 50% to 60%.

We expect diagnostics revenue declined 9% to 13% compared to 2021.

This is an increase at the midpoint by 250 basis points, driven by our updated expectations for Covid testing.

Covid testing is now expected to decline, 50% to 60%, while our base business is expected to grow 4% to 6% unchanged from our prior guidance.

At the mid point of our base business guidance the compound annual growth rate compared to 2019 is four 5% primarily driven by organic growth.

We expect drug development revenue to grow one 5% to three 5% compared to 2021.

This was a decrease at the midpoint of our prior guidance of 475 basis points the.

The decline includes a 130 basis point change from foreign currency translation as well as the impact from lower Covid related revenues and lower cash through revenues.

Compared to last year, the guidance range of one and a half to three 5% growth includes the negative impact from foreign currency translation of 230 basis points.

This guidance also includes the expectation that the base business will grow 2% to 4% compared to 2021.

Excluding lower Covid related work and the Ukraine, Russia crisis, the constant currency growth rate would be in the high single digits compared to 2021.

At the mid point of our base business guidance the compound annual growth rate compared to 2019 is nine 3% primarily driven by organic growth.

Our guidance range for adjusted EPS is now $19 to $21 25.

An increase at the midpoint of <unk> 50, compared to our prior guidance. This increase is primarily due to the impacts from Covid testing.

Free cash flow guidance remains unchanged at $1 7 million to $1 9 billion.

Operator, we will now take questions.

At this time I would like to remind everyone. If you would like to ask a question. Please press star followed by the number one on your telephone keypad.

Your first question comes from the line of Ricky Goldwasser with Morgan Stanley . Your line is open.

Hi, Good morning. This is Derek co Ochsner, and Erin <unk> from Morgan Stanley .

Congrats on moving forward with.

With element strategic.

Program Quest.

Question I have is as we think about that.

The clinical business can.

Can you give us some context as to margins that are associated with that business.

How it compares to much caylee.

Great.

So central horses.

Firstly early development.

I have another follow up after that.

Sure Good morning, Ricky and Hello, Aaron.

First of all thanks for the question and I'll give you some context I'll ask Glen to give some additional context. The first thing is that the.

Our clinical development market is a very exciting market, probably about more than $25 billion in potential revenue. So it's a very large market and it grows very quickly and if you look at the business that we're spinning out historically it has about an 8% CAGR and what we expect for the future.

<unk> is that all have high single digit organic growth. So it is a fast growing business and a very large market as part of the reason we think it makes sense to spin it out at this time when you look at the margins.

We don't give the exact margin yet and the reason why is because we still have a lot of shared services and we have to breakout those shared services to understand what the full margin picture will look like historically, what we have said is that we've seen margin improvement in that business year over year for multiple years now and as we look to the future and we said there'll be marketing.

There'll be margin expansion, we've always said that the clinical development business has the greatest potential for additional margin expansion.

Yes, the only thing.

Sources theyre not necessarily standalone businesses that are part of this segment.

I think directionally, it's fair to say that when you look at the.

The margins of the businesses they all have different characteristics.

And in the case of the clinical business. It is the one business that has frankly over 20% of its revenues that are Castro revenues, So, obviously, which constrained the margins of that business relative to the other businesses that wouldn't have that but.

But as Adam said, it's a very profitable business and a business that each year, we've seen margin improvement continue and we expect that to continue going forward.

Your next question comes from the line of a J Rice with credit Suisse. Your line is open.

Hi, everybody congratulations on the deal announcement.

Can I just ask you in the base business drug development.

One of the things throughout this year is how the margin.

This plan to step up over the course of the year and you had good margin improvement from I think 11 six in the first quarter to $14 seven in the second but Youre also reiterated that you think youll be similar to last year, which I think is 52, implying further step up.

Allow judah.

So the 300 basis points.

Margin improvement from first quarter to second and what further gets you that back half margin improvement that's embedded in guidance.

Hi, a J its Glenn.

The first quarter and again came in margins now comparable to last year frankly, what they would have been up compared to last year. If you took up the COVID-19 testing that we did.

Last year, so as we think about the second half we have there's still the expectation of continued top line growth, but also a lot of the cost reduction initiatives launch pad and so forth.

That was call it late in the second quarter, we're going to now get the full quarter benefit as we go into the third and the fourth so between the top line between the.

Your next question comes from the line of Brian <unk> with Jefferies. Your line is open.

Good morning, this is patchy.

Brian Thanks for taking my question.

Just going back to your most recent news about the announcement.

Uh huh.

Can you provide some color on your thinking and our strategy moving forward, specifically given that clinical basis. It's typically a strong pipeline for central lab work, how do you see that dynamic playing out between the two independent companies after the spinoff.

Yes, thank you for that question.

As we look at the strategy overall I mean the real.

Isn't it makes sense to do expanding to do it now it really is going to give strength and strategic flexibility and operational focus so that we can pursue the specific market opportunities and customer needs in each of those areas.

The market for laboratory services is different than that of the clinical trials. It gives us the focus capital structures and capital allocation strategies to drive the growth that we're looking for and I think it also provides shareholders with more targeted investment opportunities. We are going to have arrangements between the companies that will.

Table.

That will enable us to make sure that the new business, we will have access to some of the data and the insights that we get from the diagnostics, which is a big part of the advantage that I think the drug development business has in terms of looking at the.

<unk> to do even more central laboratory work as we opened it up and we are no longer only related to one phase one through four organization.

Your next question comes from the line of Jack Meehan with Zaffron Research. Your line is open.

Good morning, guys at Big announcement. This morning, So I had two questions for you.

First is on the timing why announce it today versus back in December what's changed over the last seven months and then.

Second how do you decide where you wanted to draw the line Nike the rationale to hold on to that clinical testing piece, but specifically wanted to hear your thoughts on.

Why it makes sense to hold on the safety assessment.

Yes, no. Thanks, so much for the question Jack I appreciate it the first thing I'd say is we did distribute this strategic review the majority of last year and at the end of last year in December we announced five things that we're going to do we're going to do a dividend large share buyback program of which we would accelerate part of that we announced the Launchpad initiative.

We gave long term guidance and we also announced that we would have increased disclosures and we gave timelines for each of those things.

And I Hope you see we met every deliverable that we committed to in the timeline that we've committed to but importantly in December we said that we decided that it.

The current structure was in the best interest of stakeholders that we're very clear to say at that time, because we knew that post to review the board was going to continue to evaluate avenues to enhance value, including a potential transactions, we're going to talk to more external people at this <unk>.

We see strong growth in each of the businesses. So we feel really good about the business profiles, we have determined that a separation by spin will enhance value, but it's also going to give both companies the ability to get sustainable growth and to me having both focused capital structures is really important because there's a lot of business develop.

<unk> opportunities out there and I think the way you prioritize those could be very different between the two businesses and the last thing I would say is the COVID-19 environment. If you remember at the end of last year and the beginning of this year with Omicron was pretty dire and we were very focused on making sure. We can do all the test we could that we could do all of the drug development studies that.

We are involved in and it wasn't the right time for any type of distraction or disruption. So overall, we believe now is the right time to move forward.

Second part of your question was where do you draw. The line, it's very clear that the laboratory business has a very different capital structure equipment needs.

Very different needs than the structure for a critical development business, which is basically people out on the street.

And there's no doubt that when you think about heavier global footprint for diagnostics. It will enable us to bring diagnostic testing around the world. The other thing. That's important is when you think about companion diagnostics and personalized medicine much of that is done very early in development. So as we think about having laboratory services, it's going to enable.

To have a global footprint to do personalized companion diagnostics, which is becoming more important and to bring that out around the world and has a very very different growth profile are very different.

Our capital structure needs and so forth. So we were very thoughtful and make sure that we are making very thoughtful decisions as to what we keep laboratory versus what we spin out with clinical development.

Your next question comes from the line of Kevin Kelly Endo with UBS. Your line is open.

Kevin Caliendo your line is open.

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

Thanks, very much I apologize if I missed this early in the conversation had a hard time getting onto the call.

Late in the second quarter.

Sure.

As we as we kind of went into a quiet period there was.

A fair amount of market chatter about some realignments going on within drug development broadly.

I'd love to get your take on what what exactly happened reduction in force compensation realignment thing things of that sort is that included in the launchpad savings characterization or was there something.

More specific to drug development that was in.

An additional action at the end of the quarter to help get the margin profile in line with what you were you were targeting.

Thank you for the question, Eric and sorry.

Rob I'm getting on the call we're looking to that.

We did in the second quarter was we realized that in Central Laboratory, we were not doing much new COVID-19 related work.

And because of that we were able to reduce the six a significant number of people, particularly those that were making kits by hand, and we had a lot of people doing that.

Said before that we were keeping extra people in both drug development and in the diagnostic areas because we didn't know what we potentially need in the future for Covid, we've determined that for Central Laboratory, we do not believe we're going to have a lot of new COVID-19 related work moving forward and therefore, we didn't need to have those people.

Paul that we're making the manual kits. So that's probably a lot of what you heard as we move forward, we're going to continue to have other launchpad initiatives in place a lot of those are about how we can improve efficiency and effectiveness, but also we believe that we're going to continue to have margin expansion in that business as well based upon the run rate that we are at right now.

<unk>.

Our next question comes from the line of Patrick Donnelly with Citi. Your line is open.

Hey, thanks for taking the questions.

Maybe just quick ones on the Covance business can you just talk generally about kind of the cancellation of an environment. It seems like it's been a little mix this quarter across across Crows, youre seeing any uptick there and then secondarily in terms of the spin.

You guys consider strategic options over the next year in terms of kind of selling it to a larger player or is it kind of set on.

Kind of the tax free spin.

Yeah no. Thank you for the question Patrick when you look at the RFP environment in drug development. It remains very healthy and in fact, if you look even our central laboratory, we had a decline this quarter because of the COVID-19 related work, but we're confident in the growth in that business for the base business going forward because of the orders that we see in the book.

To bill that we have so we have not seen an increased cancellation environment. We continue to see a very strong environment for all aspects of the drug development business as we move forward with regard to the spin we've looked at all the different options and based on all of those options. We believe our spend is the right thing to do.

Of course, there may be other things that people come to us I think we've shown as a management team. We're open we listen we.

Really analyze whatever comes our way, but based upon everything we know as we sit here today, we think the spin is the best path forward for really capturing both customer and shareholder value.

Okay.

Your next question comes from the line of <unk> Chickering with Deutsche Bank. Your line is open.

Hi, there this is Ryan on for Pete Thanks for taking the question.

Starting with the diagnostics business it looks like.

These margins came down again, depending on what assumption you want to use around co bid margins.

Alright.

Key competitor was talking about some margin contraction on COVID-19 revenues due to <unk>.

Higher mix of retail tests as well as some reimbursement pressure.

So I was just wondering is that something you're seeing as well and then also just how you think about that retail channel opportunity and balancing.

Those extra volumes with with the margin side.

Yes, no. Thank you for the question Karen and the first thing I'd say is we think the diagnostic business is performing very well the base business revenue grew three 9% versus the prior year and the base business volume was up three 4% compared to last year and the growth was coming from both routine and assets.

Tara testing in fact, if you look at the base business CAGR. It was four 3% versus 2019. So you see good strong underlying performance. When you look at the PCR testing you've seen the decline you saw a decline from first quarter to now and in fact, we did about 31000 tests per day on average when you do that.

Test it has some impact on the margin. We've also seen our payer mix switch we used to have the uninsured firm <unk>, we no longer have that that was higher margin business than the retail sector. We've seen more of our business moved to the retail sector. We are also at challenges our margins a bit margin right now for PCR testing.

It's about 60%.

We will continue to do everything we can to manage that and we see the retail sector as an opportunity, but frankly, we're really focused on our base business. We're really focused on the hospital and the local laboratory acquisitions that are before us and to me. That's the long term growth that we see so we will continue to do what we can and PCR testing, but long.

Term, we're really focused on getting that base business to perform well and I think you've seen that in the quarter.

The only thing I'd add to that and Adam commented that it's still at a very attractive margins. So we commented in the past that last year, we were kind of in the 70% margins. So obviously very attractive but to still be at 60% speaks to the fact that one volume levels are down we continue to keep the labor force to make sure that we have the capacity.

Because we don't know if there will be future spikes. So obviously from a labor efficiency, we're absorbing that and obviously as Adam said too as we do more in the retail setting.

It has a mix, but again as we look to the outlook for the year and part of the reason for the <unk>.

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

Hi, Good morning, and thank you for taking my question.

Don late so my apologies.

If I repeat on the.

Can you talk a little bit about the.

Embedded expectations on the current acquisitions do you have just with the M&A contribution is and specifically address our performance.

<unk> been any bigger drag that you saw on the margin I'm, particularly thinking of the personal Jim diagnostics business since you sort of ramp that up.

And take that through so just some incremental color on M&A contributions and just sort of like the margin environment today.

<unk>.

Yes, Eric.

However, both especially initially would be dilutive to our margins so with the with the advent of <unk>, having closed and part of the business.

Mostly impacting even though it's spread a little bit across both of our segments, mostly into the drug development side.

It does have a constraint on their margins. So as we think about margins year on year. When we talk about that we expect margins to be comparable.

A year ago, Thats, even with a little bit of.

Pressure on the margin from the <unk> acquisition.

Within diagnostics.

Again, our margins most of the acquisitions tend to be a mix positive to us the large hospital systems, especially when youre doing the in hospital lab work.

Is closed and then goes into the results in drug development, you will see some pressure on the margins. So the way that we look at margins overall for the company is that this year year on year from our base business margins call. It organically would be call. It flattish that will be down a little bit because of the dilutive impact.

<unk> on the margins from <unk> and Ascension.

But all the other acquisitions that we've announced and that are in the pipeline would be more of the traditional kind of tuck ins.

Even though theres still hospital systems that we have in there, but overall with the outreach being a component of that.

We expect it to be.

The bigger impact on the return on our revenues we have commented, though that with the impact on EPS really only <unk> was one that we acquired that we felt would be dilutive to earnings. This year, having said that the other acquisitions that we were doing ascension as well as the others would be offsetting that so from an EPS stands.

Point relatively neutral from a margin standpoint, a little bit dilutive.

Your next question comes from the line of Rachel <unk> with Jpmorgan. Your line is open.

Hi, Thanks for taking my question.

Digging deeper into that or are there margin question.

Programs with last public one slight margin side, it looks like clinical and central lab combined for roughly 23% EBIT margin.

Net central lab is materially higher clinical will also be around there given the expansion plan along with our acquisition.

And then also on the same side of that should we also think about how early stage margin has expanded from that call in the half EBIT margins in 2012.

Hi, Rachel.

Again, when obviously the acquisition of Covance was a long time ago and since then a lot of changes from acquisitions to the growth of the businesses.

<unk> margins that continue to grow and we will be in a much better position. Once we do the carve out financials and Abbott as a standalone business with the corresponding costs, specifically related to that business, we will provide it but again its at an attractive level.

Your next question comes from the line of Matt <unk> with William Blair. Your line is open.

Well good morning, just a quick two parter on.

Maybe first just following up to Rachel's question.

Cause is targeted for second half 'twenty three when do you think you might be able to untangle the lapping disclose more.

In terms of the margin profile in that business. That's one the second party given market conditions and our strong balance sheet.

It seems that Mike it might be an active M&A environment, that's been proactive in the past year as well Im talking about your process to prepare for and spin the asset with constrained capital deployment activity on either side of the business.

So I'll go ahead and start Matt so.

Yes, again, the timing to effectuate the spin, we're calling call on what the second half of next year.

A lot of processes that you go through and spending a company.

From obviously wanted to make sure that as a tax free exchange and working with the IRS to again doing the audited financials, plus you're effectively standing up a company that has been part and integrated into an overall organization I think what we've said at this point was we're announcing our intent to spin it strategically and that we will over the course of.

Getting the spin continue to communicate and provide you with additional information as we have it thats really more relevant.

At the times once those decisions are made once the accounting.

In the standup of the margins I think directionally, we've given you a good sense of where it is the.

The positive frankly from the company standpoint, especially as it relates to the balance sheet.

We have a very strong balance sheet, our commitment to continue is labcorp.

Investment grade with the same targeted leverage ratios that we've had before we are a below those targeted ranges right. Now obviously, we've been increasing the amount of our share repurchase program and we've been increasing the amount of M&A that we've seen so we've purposely kept a very strong balance sheet to continue to be able to pursue all of our capital allocation.

<unk> initiatives, including the initiation of a dividend.

If you were to pro forma the company even as if we didn't have the clinical business, we would still be within the call. It the targeted range of our leverage right now so really speaks to the fact that.

We don't believe there will be a constraint on our ability to continue to pursue.

Acquisitions for the for both companies as they are both part of <unk>.

<unk> today, but when we stand up the spin company, while we haven't commented specifically on its capital structure other than to say both businesses will be well capitalized such that they will be in very good positions to continue to pursue growth strategies, both through organic or internal investments as well as through acquisition opportunities.

Your next question comes from the line of Kevin Kelly <unk> with UBS. Your line is open.

Hi, guys. Thanks, I apologize for earlier.

First question.

I noticed a couple of things were larger this quarter the unallocated.

Cost of the corporate cost line was much higher than normal can you can you talk through that and also the capex number.

Grew quite substantially this quarter.

Through what drove both of those.

Sure Kevin first on the unallocated corporate which was up.

$29 million, if you will year on year, we talked about there were two changes in kind of the methodologies of how we're treating corporate unallocated on our prior call. So the first is that true for drug development part of its bonus that is tied to enterprise results is reflected in corporate unallocated.

Or said differently all of the incentive compensation for drug development, that's tied to the drug development business is resident in the drug development segment. So that way as you look at our drug development business relative to the peers.

But also with the acquisition of <unk>, which has a high component of.

Cost structure, if you will much more of an R&D business than we've had historically you also have the year over year impact because it was an acquisition. So those numbers wouldn't in there. If you take those out you have explained virtually all of the increase year on year.

I guess another way of thinking about just modeling going forward is that our unallocated.

Corporate expense relative to call. It base business revenues will be in a call. It a one 5% to 2% kind of range as an ongoing normal kind of environment.

Relative to Capex, we've talked to it was a higher level of Capex spent this quarter versus a year ago.

Do expect that for the year, our capital spending we normally talk about around three 5% of our revenues on base revenues is still there so quarter to quarter. There's always some timing differences that affected but we're currently on pace with our expected capital spend for the year.

Alright, so I want to thank everybody who joined us today.

This concludes today's conference call you may now disconnect.

Q2 2022 Laboratory Corporation of America Holdings Earnings Call

Request a DemoDemo

LabCorp

Earnings