Q3 2022 Laboratory Corporation of America Holdings Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Okay.
Good day, ladies and gentlemen, and thank you for standing by and welcome to the Lab Corp. Third quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star.
One one on your telephone keypad at this time I would like to turn the conference over to Mr. Chaz Cook Sir please begin.
Thank you operator, good morning, and welcome to Lab Corp, 's third quarter 2022 conference calls as detailed in today's press release there'll 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 our press release and in the Investor Relations presentation with additional information on our business and operations, which include a reconciliation of the non-GAAP financial measures to the GAAP financial measures discussed during today's call. Additionally, we are making forward looking statements.
These forward looking statements include but are not limited to statements with respect to the estimated 2022 guidance and the related assumptions. The proposed spin off of the clinical development business the impact of various factors on the Companys businesses operating and financial results cash flow and our financial condition, including the COVID-19, pandemic and general economic and market conditions.
Business strategies expected savings and synergies, including from the launchpad initiatives acquisitions, and other transactions and opportunities for future growth. Each of the forward looking statements are subject to change based upon various factors many of which are beyond our control more information is included in our most recent annual report on Form 10-K, and subsequent quarterly reports.
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 good morning, everyone. It's a pleasure being with you today to discuss our progress and our performance in the third quarter.
I'll start with a few high level comments about the quarter then provide a brief update on the planned spin of our clinical development business before turning to our quarterly results and progress against our strategy.
Diagnostics performed very well with base business revenue growth of three 7% over the last year and a 4% CAGR versus 2019.
With ascension in the fourth quarter, we expect full year revenue growth of 6% to 7%.
Drug development base business fundamentals remained strong.
And our expected full year CAGR of almost 8% since 2019 is consistent with how we expect the business to perform.
There are what we believe to be temporary issues that impacted our drug development performance in the quarter, which I'll discuss in more detail when outlining our results.
Turning now to the spend of our clinical development business.
We are off to a strong start since announcing the planned spend back in July .
We were quick to establish a spend management office made up a dedicated people and external advisors with significant spend at transaction experience.
In addition, working with advisors, we are in the process of identifying members of the executive team the CEO and the board of directors of the New company.
And finally, we're making good progress defining their transition service agreements and preparing the audited financial statements.
With the progress to date, we are targeting completion of the spin with an accelerated timeframe of mid 2023.
Subject to satisfaction of certain customary conditions, including those related to the tax free nature of the separation and the <unk>.
SEC process.
Upon completion, we will create two strong independent companies through a tax free transaction.
We are excited by the opportunities to spend represents for the clinical development business.
The new company will have the enhanced strategic flexibility and operational focus to grow invest pursue its priorities and address market opportunities.
Further we believe both lab Corp, and the new clinical development business will emerge from this transaction with the ability to better meet customer needs drive sustainable and profitable growth and deliver attractive shareholder returns.
We plan to provide more information on our progress, including key leadership appointments in the coming months.
I'll now turn to third quarter performance.
In the quarter revenue totaled $3 6 billion.
Adjusted earnings per share was $4 68.
And free cash flow was $270 million.
Base business organic revenue for the enterprise, excluding Covid testing revenue is up one 4% year over year on a constant currency basis.
This demonstrates the strength of our underlying business, particularly in diagnostics and a very challenging operating environment marked by rising labor costs labor shortages.
Other inflationary pressures.
And diagnostics base business revenue increased about 4% year over year due to an uptick in demand in both routine and esoteric testing.
We continue to see momentum in our hospital system business and later I will give an update on the expansion integration, which is off to a very good start.
A drug development quarterly base business revenue in constant currency is flat versus the prior year.
This is driven by a tough year over year comparison with less COVID-19 related work and the impact from the conflict in Ukraine.
And central laboratories, there were timing related challenges when looking at kits out those that we send to investigator sites.
Kicks return those that investigators sent back to us to be analyzed.
We believe investigators ordered significantly more kicks the normal in the third quarter last year to overcome supply issues.
This was in addition to the kits for Covid trials.
The pace of investigators returning kits has not rebounded as quickly as we expected.
We believe this is largely due to COVID-19 related impacts and the macro environment and then it will return to normal levels over time.
Both demand and orders in central laboratories continue to be very strong.
And early development, we have strong demand for trial work as well as adequate capacity.
However, the impact from our business was due to labor constraints were.
We are hiring as fast as we can but like in many parts of the economy, finding labor has been difficult.
Drug development base business margins for the quarter were 15% and expansion from last quarter, but lower than anticipated due to the revenue in central laboratories, and labor shortages in early development.
We continue to see a healthy order flow and backlog in drug development in the segment ended the quarter with a 125 trailing 12 months book to Bill.
Across diagnostics and drug development, our margins were negatively impacted by rising labor cost and other inflationary pressures.
We're taking cost actions and we're focused on improving margins.
In addition, launchpad savings continue to help offset the impact of mirror and expected mid term headwinds.
Glenn will provide more detail on our quarterly results in just a moment.
Covered PCR testing volumes continued their decline during the quarter totaled $2 2 million tests performed and average in 2004 thousand per day.
Also our scientists stand ready to respond as new variance arise.
Earlier this month, we announced the completion of transactions that established our comprehensive laboratory relationship with Ascension.
Our strategic collaboration includes an agreement for Labcorp to manage hospital labs in 10 states and to acquire certain lab assets.
At its core the collaboration expands access to Labcorp comprehensive capabilities and laboratory services for community served by Ascension.
This was a big undertaking and I'd like to thank employees and leadership from Ascension, and Labcorp, who make the changeover as seamless as possible.
Our hospital and local lab acquisition or investment pipeline is very robust and we see major opportunity now through 2023.
Turning to oncology, we're furthering our position as the leader in this space through the addition of new testing and screening capabilities.
We continue to see benefits from the personal genome diagnostics and <unk> portfolios.
<unk>, the leading liquid biopsy tissue based diagnostics and kitting solutions, we have the broadest portfolio and capabilities in oncology diagnostics today.
We are well positioned for growth.
We are also pursuing relationships that accelerate our growth and enhance our portfolio.
This quarter the company formed a strategic partnership with MD Anderson Cancer Center Foundation in Spain to increase access to early phase oncology clinical trials.
We also entered a collaboration with Becton Dickinson and company to help match patients were critical and potentially life changing treatments for cancer and other diseases.
In addition to our progress in oncology Labcorp is relentlessly focused on innovating and delivering our customers value valuable solutions across all areas to help them achieve their goals.
We enhanced our neurology offering in the quarter. So the large of a pan neoplastic and other neuro autoimmune panels together.
Together with our previously announced Tesla brain injuries, and neuro degenerative disease. These panels round out our portfolio and gives us a leadership position in neuro biomarkers to support customers.
The company has seen growing demand for our advance testing collection options through laptop on demand in our consumer product pipeline is strong.
Our FDA authorization combination COVID-19 flu RSV a home collection test continues to be important with the rise of respiratory virus space is expected this fall through the winter.
Lastly, ladbrokes commitment to its employees continues to be recognized.
We recently were named by Forbes to it.
List of world's best employers and we also earned a top score on the 2022 disability equality index.
In summary, our base business fundamentals remained strong.
And we are well positioned to deliver sustained long term value and growth.
With that I'll turn the call over to Glenn.
Thank you Adam.
Im going to start my comments with a review of our third quarter results followed by a discussion of our performance in each segment and conclude with an update on our full year guidance for.
For reference we've also included additional business information that can be found in our supplemental deck on our Investor Relations website.
Revenue for the quarter was $3 6 billion of.
A decrease of 11, 2% compared to last year due to lower COVID-19 testing and the negative impact from foreign currency translation.
This was partially offset by organic base business growth and the impact from acquisitions.
Covid testing revenue was down 70% compared to Covid testing last year, while the base business grew 7% compared to the base business last year.
Organically in constant currency the base business grew one 4%.
Operating income.
Income for the quarter was $469 million or 13% of revenue during.
During the quarter, we had $65 million of amortization and $54 million of restructuring charges and special items, primarily related to acquisitions. The proposed spin of the clinical development business facility rationalization and other launchpad initiatives. Excluding these items the adjusted operating income in the quarter was $589 million.
Or 16, 3% of revenue.
Compared to $907 million or 22, 3% last year.
The decrease in adjusted operating income and margin was primarily due to a reduction in COVID-19 testing and the impact from acquisitions and the benefit from organic base business growth and Launchpad savings were essentially offset by higher personnel expense and other inflationary costs.
The tax rate for the quarter was 16, 2%.
The adjusted tax rate was 22, 8% compared to 24, 4% last year.
Lower adjusted tax rate was primarily due to benefits from increased R&D tax credits. We now expect our annual adjusted tax rate going forward to be approximately 24%.
Net earnings for the quarter were $353 million or $3 90 per diluted share adjusted EPS were $4 68 in the quarter compared to $6 82 last year.
Operating cash flow was $374 million in the quarter compared to $767 million a year ago.
The decrease in operating cash flow was primarily due to lower cash earnings.
Capital expenditures totaled $104 million down from $118 million last year.
We continue to expect full year capital expenditures to be approximately three 5% of base business revenue.
Free cash flow was $270 million in the quarter.
During the quarter, we invested $459 million on acquisitions and paid out $65 million in dividends and repurchased $400 million of stock representing one 5 million shares.
At the end of the quarter, we had over $800 million of share repurchase authorization remaining.
We continue to believe that our shares are undervalued and our share repurchase program is an important part of our capital allocation strategy.
At quarter end, we had $400 million in cash while jet was $5 3 billion.
Our leverage was one seven times gross debt to trailing 12 months EBITDA.
Excluding COVID-19 testing earnings our leverage was two five times in line with our targeted range of two five to three times.
Now I'll review, our segment performance beginning with diagnostics.
Revenue for the quarter was $2 2 billion.
A decrease of 15, 7% compared to last year due to organic revenue being down 16, 4%, partially offset by acquisitions of <unk>, 9%.
Covid testing revenue was down 70% compared to Covid testing last year.
While the base business grew three 7% compared to the base business last year.
Relative to the third quarter of 2019, the compound annual growth rate for base business revenue was four 3% primarily due to organic growth.
Total volume decreased 10, 3% compared to last year as organic volume decreased by 10, 9%, partially offset by acquisition of <unk>, 6%.
The decline in volume was due to Covid testing as base business volume grew three 1% compared to the base business last year.
Price mix decreased five 4% versus last year, primarily due to an organic decline of five 5%, partially offset by acquisitions of <unk>, 3%.
The lower organic price mix was due to COVID-19 testing base.
Base business price mix was up <unk>, 6% compared to base business last year benefiting from higher esoteric test mix.
Diagnostics adjusted operating income for the quarter was $440 million or 19, 9% of revenue compared to $775 million or 29, 6% last year.
The decrease in adjusted operating income and margin was due to a reduction in COVID-19 testing as lower COVID-19 volumes caused margins to decline to approximately 50% for the quarter.
We expect this margin level to continue through the rest of the year, which would put full year margin at approximately 60%.
Base business margins were flat versus last year as organic growth and launchpad savings were offset by higher personnel expenses and other inflationary costs.
Now I'll review the performance of drug development.
Revenue for the quarter was $1 4 billion a decrease of three 7% compared to last year, primarily due to foreign exchange translation of minus three 4%.
While acquisitions contributed 5% of growth organic base business revenues declined 7% compared to last year due to the negative impact from lower covered related work in the Ukraine, Russia crisis.
Excluding these impacts organic base business revenue grew three 8%.
The Central lab business continues to be the most impacted by lower COVID-19 related revenues and the impact from Ukraine, Russia crisis.
Central Lab based business revenues were down nine 8%.
However, excluding these items organic constant currency revenue was up four 1% while on a comparable basis early development was up eight 6% and clinical development was up two 3%.
In addition, clinical development was impacted by the loss of an FSP contract outside the U S earlier, this year affecting third and fourth quarter revenue growth.
However, recent wins, including a large phase for market access program will support a return to higher growth in 2023.
Reported drug development revenues grew 346, 1% on a compounded annual basis compared to 2019.
Adjusted operating income for the segment was $211 million or 15% of revenue compared to $226 million or 15, 5% last year.
The decrease in adjusted operating income and margin was due to the reduction of Covid related work in the Ukraine, Russia crisis. Excluding these issues margins would have been up approximately 100 basis points compared to last year as the benefit from organic growth and launchpad savings were partially offset by inflationary cost and the negative mix impact from acquisitions.
We ended the quarter with backlog of $15 2 billion and we expect approximately $4 7 billion of this backlog to convert into revenue over the next 12 months.
Now I'll discuss our updated 2022 full year guidance, which reflects our year to date performance and fourth quarter outlook and assumes foreign exchange rates effective as of September 32022 for the remainder of the year.
Enterprise guidance also includes the impact from currently anticipated capital allocation with free cash flow targeted acquisitions share repurchases and dividends.
We expect enterprise revenue declined 6% to seven 5% compared to 2021.
This is a decrease at the midpoint from our prior guidance of 275 basis points, primarily due to the slower pace of Central lab kits shift and catch received early development labor constraints lower COVID-19 testing the delay in the ascension transaction and currency.
This guidance now includes the expectation that the base business will grow 3% to 4%, while COVID-19 testing is expected to decline 57% to 59%.
We expect diagnostics revenue to decline 10 to 11, 5% compared to 2021.
This guidance reflects a 25 basis point increase at the midpoint.
As the benefit from Ascension will be mostly offset by lower COVID-19 testing demand.
Diagnostics base business revenue is expected to grow 6% to 7% an increase of 150 basis points at our mid point due to ascension now being reflected in the segment outlook. While it was in our enterprise guidance prior to closing the transaction.
At the midpoint of our base business guidance, the compound annual growth rate compared to 2019 as 5%.
Note that assumption will be dilutive to diagnostics AOI margin of approximately 100 basis points in the fourth quarter, while we expect margins to improve going forward as they are fully integrated.
Covid testing is now expected to declined 57% to 59%.
We expect PCR volume to be between 15% to 20000 tests per day in the fourth quarter we.
We are currently tracking at approximately 15000 PCR tests per day.
We expect drug development revenue to decline one five to two 5% compared to 2021.
This is a decrease at the midpoint from our prior guidance of 450 basis points, primarily due to the slower pace of kits shipped and catch received in central labs labor constraints in early development and further currency translation headwinds.
We expect the base business to decline, 1% to 2% compared to 2021.
Foreign currency translation negatively impacts our growth rate by 280 basis points in.
In addition, the growth rate is constrained by lower Covid related work in the Ukraine, Russia crisis.
At the midpoint of our base business guidance the compound annual growth rate compared to 2019 is seven 7%.
Our guidance for adjusted EPS is $19 25 to $20 25.
I'd narrowing of our prior guidance range of 19 to $21 25.
Okay.
At the midpoint, our guidance is lower by 38.
Due to lower Covid testing.
In the base business the decreased revenue outlook for drug development is being offset by additional cost control measures and the lower effective tax rate.
Free cash flow guidance is now one five to $1 4 billion.
Down from our prior guidance of $1 seven to $1 9 billion.
The decline in the cash outlook is due to lower projected cash earnings and higher working capital requirements.
The lower cash earnings include the expected decrease in adjusted net earnings the proposed spin and acquisition related costs as well as the timing of cash tax payments.
The higher working capital requirements, which are timing related primarily rates to drug development receivable collections as the company continues to work to improve days sales outstanding.
Said differently Dsos remained flat over the past quarter, but our guidance had assumed improvement in the second half of the year.
In summary, our diagnostics business continued to perform well, while our drug development business fundamentals remained strong in a challenging environment.
We expect to drive continued profitable growth in our base business for the fourth quarter, while Covid testing volumes are expected to decline from the third quarter.
We expect to continue to use our free cash flow generation for acquisitions that supplement our organic growth. While also returning capital to shareholders through our share repurchase program and dividends.
Operator, we will now take questions.
Ladies and gentlemen, if you have a question or comment at this time. Please press star one one on your telephone keypad.
Again, if you have a question or comment at this time. Please press star one one on your telephone keypad.
Please standby, while we compile the Q&A roster.
Our first question or comment comes from the line of Jack Meehan from Northland Research. Mr. <unk>. Your line is open.
Thank you good morning.
Good morning, Adam.
Good morning.
Need to dig into the drug development business and just could you talk about what's changed in terms of the business trend since the second quarter labor shortages has come up a lot.
Discussion just talk about.
I don't know, if there's a way to quantify or some metric around the level of pressure youre seeing today versus back in July .
And then Glen you called out an FSP cancellation, just when did that take place is there any color you can give around the size of that.
Yes, Hi, Jack I'll go first so.
First of all if you look at drug development overall, and you look at our new guidance at the midpoint for the full year growth were represented seven seven almost 8% CAGR since its 2019, so thats about what you would expect for the business, but what's changed frankly is that we're seeing a larger than expected impact from kits and central laboratory.
The most significant change what happened last year was investigators ordered more kits than they typically would because there was some supply issues. So for example, butterfly needles were in short supply for a period of time some of the test tubes that we need to act on those kits, where in a short supply and typically when an investigator.
Our kit, we would be able to get it to them in two or three days with the supply issues, sometimes it was taking quite a bit longer than that so once we had supply of kits. The investigators were ordering many more than what they actually need. It. It was on the reporting of the kit that is very difficult to track its very difficult to know exactly how much.
They are using at any period of time versus the number of kits that they have at the same time, we were sending out a lot of kit because of the Covid trials and the Covid trial kits were coming back to us very quickly because they were enrolling very fast we are sending them out to massive numbers of investigators because everybody is focused on those COVID-19 trials.
So it kind of mask the return rates of the kits for non COVID-19 related trials.
As we sit here today, what we're seeing is the kitchen going out in the third quarter of this year, we're about 30% lower the number of kits that we sent out in the third quarter of last year. So it's pretty significant and we get paid for each kit that goes out.
But even more significant the number of kits coming back to us are not at 2019 levels, yet and we actually made most of our money on the kitchen to come back to us because that's when we perform all of the tests on the samples that come back to US now we believe that's temporary we think it's.
When this COVID-19 issues like in Europe, and so forth it slows down the kits coming back there could be some labor issues at the sites that are slowing down the kids coming back to us the kits will come back to us the trials will enroll so we think it's a temporary timing issue. The reason we didn't flag. It before now is when we looked at the beginning of this summer.
The kids coming back to us we're actually starting to increase so we felt like they would continue to increase unfortunately, they leveled off very quickly and if not increased again since that time. So again, we believe it's temporary and we are working on it but its certainly something thats new based on what we've seen in the third quarter than we'd expected.
To continue on our guidance and fourth quarter at the same time. The other issue we have with just labor maybe finding labor is hard right now, particularly for frontline and other important personnel that you need in your laboratories, and it's not only hard to find them, but once you find them training for something of laboratory takes a lot longer than most.
Other workers and it takes them a while before they become fully productive.
And it looked at our early development business that book of business looks great in terms of orders in terms of our capacity in terms of Rfps. The issue that we're facing there is we just can't get all the studies up and running as fast as we'd like because we are meeting more personnel and we're doing everything we can if you look at Madison, Wisconsin, We have a large lab, we actually have.
Buses wrapped with Labcorp talking about from <unk>.
One of our Ah career centers, because we're trying to hire as many people as we can as fast as we can and then ill turn it to Glenn for the other question.
Hey, Jack.
Commented that the FSP.
Is impacting or the loss of the contract impacted our results in the quarter.
A lot of it was actually earlier in the year.
And but the impact of it winding down really didn't impact our first half results. So really more of a third quarter fourth quarter impact.
For the quarter it was around call it $22 million that we would've had in there a year ago for the contract so it negatively or call. It was around a 3% headwind for the clinical development business and roughly half of that would be a headwind for the for the drug development segment, but again as we commented as well we've been really pleased with the recent awards that we have.
So as we think about going into 2023, the loss contract there will be replaced by other orders that we're getting.
Overall, we feel good about the business fundamentals in both diagnostics and drug development. The RFP inflow as Tom our wings are strong even our ability to offset as Glenn just said the loss of that FSP with new wins and a large market access wins that we have so the fundamentals are strong.
We believe these are temporary issue.
Great.
And then as a follow up.
It's that time of year everyone's focused on 2023. So I was wondering if you could just talk about puts and takes on EPS for next year I think the Covid math at 60% margin suggests that could be a five dollar headwind not sure. If you agree with that.
I think Theres also probably some good guys with growth and ascension.
I look at the street forecasting $18, just any color on forecasting would be helpful.
Yes, I'll give you some color I'll ask Glenn to jump in and we'll provide more complete guidance. Obviously in February but first of all what we're focused on we want to execute the spin as fast and as effectively as we possibly can so we are focused on that we've accelerated to the middle of next year and we're doing everything we can to move quickly there.
Second when you think about ascension and not just essentially some of the other hospital deals are really big and important to us we're focused on integrating them and theyre going to represent strong growth opportunities and it's going to represent significant revenue growth opportunities. What we're focused on and diagnostics is the inflationary pressures that will remain and we've got.
To find ways to reduce cost and to improve our margins. These hospital deals are going to impact our margins negatively in the beginning and over time, we'll be able to take cost out when you do these hospital deals. The most important thing is business continuity for the hospitals at that time and.
In addition to that we have Panama headwind obviously.
We're working to see if there is a new way to think about Panama, which is saucer, we're not putting out our base case at the moment by February we should have a very good idea of where we are there and then we have other things.
That Glenn can talk about.
Overall, maybe first to kind of at a high level Jack when you think about kind of the headwinds as we go into 2023, and Adam alluded to and you did as well in your opening comments, but COVID-19 testing.
We'll know more obviously when we give our guidance in February but the assumption is is that it's going to be down pretty materially next year and following the trend that we've seen but again, we will have a better assessment.
When we give our guidance but to your point.
We did around 60% margin on Covid testing this year.
And again, we've talked about this going forward of 24% tax rate now.
A big variable again as Adam commented on is Panama.
We've looked at around $80 to $200 million, if you will range of an impact.
But again by the time that we give our guidance, we should know whether or not panel will be in the numbers for next year or not.
We'll see and then just the additional headwinds from the current inflationary environment in the labor constraints, having said that we really see a lot more positives than the headwinds that we're seeing the demand levels, especially the momentum that we've seen in the diagnostics business not only have we seen volume levels pick up sequentially each quarter.
But even through the months of the quarter. So the expectation is that that will continue into the fourth quarter and continue.
Into 2023 and also when you think about the correlation while we're while we're giving up high margin Covid testing normally when we if the expectation is that that will be down to low levels bodes better for the base business within diagnostics as well.
<unk>.
Adam commented on.
The level of demand in drug development isn't the issue per se.
It's more of the kits issue that we've said really hasnt come back to 2019 levels and this really the only aspect of even drive development and its really just the kits that are being returned and so the expectation is the demand is there the backlog strong the conversion there.
That kits return should come back to more normalized levels and.
And then hopefully with the labor capacity issue abates, a bit as well and then you add to that another strong year of focus on cost measures launchpad initiatives. Another strong year of free cash flow generation that will add to our good pipeline for acquisitions, let alone returning our capital. So when you start altogether, we're actually.
Pretty optimistic for 'twenty, three and where we sit today.
From a topline perspective from our ability to drive margin improvement realizing that will have headwinds from Panama potentially as well as the annualized <unk> of ascension will be a little bit of a margin headwind as well, but those combined with capital allocation, we feel actually pretty optimistic as we go into 2023.
Next question. Thank you.
Ladies and gentlemen.
And in an effort to get to as many.
People in the queue as possible we ask that you. Please limit yourself to one question. One question only please if you have additional questions you may jump back into the queue.
Our next question or comment comes from the line of Erin Wright from Morgan Stanley just standby Ms. Wright Your line is open.
Great. Thanks.
So where are we now in terms.
Thanks, Dave utilization across the diagnostics segment compared to the pre Covid baseline and what are you seeing right now in terms of mix or are there any sort of structural changes that we should be thinking about longer term and just follow up on 2023, and how youre thinking about based organic diagnostic volume heading into.
At that time period, do you anticipate that we see a complete normalization and utilization trends.
Bill to that end and why or why not would that happen.
Aaron This is Glenn I'll start on that and so again one of the really positive things that we have seen is that the volume levels have recovered within diagnostics that we continue to see good growth. This year, obviously over last but also compared to 2019 and we're tracking from a volume stands.
Point call it a little bit over 1% kind of kgs compared to where we were so clearly more room for growth, which is why as we enter into 2023.
Feel that volumes will continue to pick up.
We will go through more of the recovery.
When you look on the price mix side, which again has also been positive tracking to kind of more historical levels, plus or minus kind of 1% growth. We talk about there's always kind of the pricing pressures that we see but we get positive on price mix because of mix, we continue to see our esoteric and routine business is growing.
<unk> growing at a faster pace, which which helps our mix acquisitions have tended to help our mix as well and actually when we think about now the large <unk>.
<unk> Hospital Matt.
Management agreement, we have with essentially as you know, we treat that as price as opposed to volume. So youll see a pickup from that aspect as well as that becomes in the numbers and annualize, but acquisitions overall, we continue to see a slight improvement in our test per session. So a lot of positive momentum on the price mix.
Side as well as the volume side.
And Eric This is Adam so I feel very good about the diagnostics volume.
We're heading into next year with real strength. Our focus next year is going to be a lot of how can we.
<unk> margins and reduce cost.
That'll be a big focus for us because we realize that the volume is going to grow extraordinarily well with these hospital deals.
And we just have to make sure we get the margins to improve as fast as we can there.
Okay. Thank you.
Thank you.
Our next question or comment comes from the line of Patrick Donnelly from Citi. Mr.
Mr. <unk> your line is open.
Hey, guys. Thank you for the question.
Maybe you don't want to drive development side.
Specifically on early development you guys saw a sequential step down there I don't think thats happened in a couple of years.
Just wanted to dive into that a little more specifically, what youre seeing there where their supply chain issues.
Maybe talk about the demand environment, and again kind of the outlook on that piece because I don't think we've seen the sequential step down a little bit there.
Yes, thanks for that question Patrick.
We feel really good about our early development demand in fact.
Our orders are good our book to Bill is good rfps or Greg one of the biggest issues is that if a customer comes to US right now we can't start with study as fast as we'd like we're we're into next year well in for next year already the biggest issue. We're facing an early development as this labor and trying to get enough people. So that we can get as many studies.
<unk> been running as possible is the real fundamental issue and we're facing it in early development laboratories around the world, It's not specific to United States. So we have huge efforts underway to try to hire as many people as we can the second issue with labor is that bringing people into early development laboratories takes time.
They have to be trained really well so even as you hire people it takes them longer than typical for them to be productive in a way that somebody thats been in our lab per year is so the issue that we're facing in early development is a labor issue.
Thank you.
Our next question or comment comes from the line of Eric Coldwell from R. W. Baird just a second.
Mr. <unk> your line is open.
Thank you good morning.
Following several similar questions, so maybe a bit redundant, but hoping we can get more specific.
On drug development could you talk about the overall cancellation rate and then parse that out across each of the segments could you actually give some demand metrics I know you've talked about good.
Good orders wins, Rfps et cetera, but do you have any metrics you could actually share in terms of dollar volume increases across the segments or pipeline comments and then is it possible. When you talk about cancellations could you parse out cancellations that you're seeing due to actual client decisions not.
To go forward with the drug at all versus possibly.
Share loss contract losses things like the FSP. So just wanting to get to more of a market cancellation rate versus a share cancellation rate if thats all.
Possibility, thanks very much.
Eric and good morning, I'll ask <unk> to add some context. So we've not seen an increase in cancel rates cancellation rates across any of the three segments. In fact, we're seeing the number of rfps increasing as.
As a percent year over year across the different segments so demand.
Pretty good.
In terms of share loss, we lost the one FSP that we're going to more than offset with wins that we have things come in and come out of our book to Bill all the time.
But it's been impact us in the third and fourth quarter, and then were more than offset that as we go into next year with the wins that we have if you look at the backlog, it's relatively flattish the order growth in the quarter was offset by currency due to the strength of the dollar book the cancellation rates are in the low single digits and it's been that way.
For very very long time.
So Glenn if you want to add anything no I mean, I think that hits. It we do provide Eric is obviously some key metrics that we think addresses that the level of orders that we have per quarter. The book to Bill again, we talk about kind of the one two or greater is really what we look for in order to hit kind.
Mid to high single digit growth rates and obviously, they're trailing 12 is it a one to five so that continues to do well the backlog as Adam said.
6% year on year, the cancellation rates overall remained fairly steady again as Adam said kind of a low single digits is a normal process we have.
Gibson takes if you will the.
The issue with the FSP contract and why we highlighted it for this quarter was not that it really had an impact kind of on the book to Bill because we had stopped coming in and stuff coming out but it was an existing contract. So that we lose the revenues. If you will on a year over year basis, even though new orders coming in would offset let's say the cancellation.
But the startup for those revenues will will be.
In the current quarter.
Is it possible if I can just do one follow on is it possible to give us some sense of how understaffed to are in early development.
What what number of people or are you looking to hire globally and is it more technician or is it more.
Mr. What area is that are these vets are these pathologists are these what type of people are you looking and how many are you looking to hire.
Yes.
I'd say two things one is it's mostly entry level positions, it's not necessarily pathologists are veterinarians, although we're always having turnover.
But the big issue is an entry level position. The reason I am not going to give you a percent is because it's not just the positions that were failing its how long, it's taking us to get people up to speed and trained.
What I can say is that with the work that we've done to increase our hiring rates. We've seen huge increases in the number of people that we're able to interview with the number of click rates on our sites because we've been doing a lot more.
Through social media to try to hire people. So we are seeing that we are able to pick up demand, but it's going to take us some time to train and you have to get a really good laboratory technicians fully trained could take up to four months, sometimes even longer depending on how scale they need to be.
Got it thanks very much.
Thank you Eric.
Thank you. Our next question or comment comes from the line of a J Rice from credit Suisse standby Mr. Rice. Your line is open.
Okay. Thanks, a lot.
How are you guys.
We talked a couple of times about the inflationary pressures.
It's something we've been talking about all year, but it sounds like you think that might be an incremental.
Headwind next year, I guess I'd love to just flesh out because I mean I could see you think it's persistent but persisting next year, which you've seen this year, but.
To describe it as an incremental headwind I'd be interested nowhere that's adds and it sounds like.
The offset.
One of the offsets has been the launchpad initiatives is it tougher to to come up with those kind of savings programs are you finding it.
That's been going for a while are you finding a little more challenging to find.
<unk> savings opportunities under that program.
Yes, thanks for the question a J.
First of all I'd say, it's just continued inflationary pressure.
But we're seeing a lot of areas of our cost structure, youre, saying materials people related expenses supply chain and a tight labor market. So we're just focused on maintaining operational continuity. While also managing through these headwinds so theres not like this new issues that we're facing we just believe theyre going to be continued.
Issues that we're facing the Launchpad program as you said.
Hoping us mitigate these.
These costs, we have plans in place we have a path forward, we know how we're going after the land potent the launchpad initiatives. When we give you a number we gave that number with knowledge of how we're going to go after and how we're going to get the key now that we're working on is how can we accelerate some of those savings not doing or wherever they are we know where.
They are and some of them are in process improvement some of those automation some of those take time and we're trying to find ways to accelerate all of them.
Okay, great. Thanks, a lot.
Thank you.
Our next question or comment comes from the line of Kevin Caliendo from UBS.
Mr. Kelly Ann Your line is open. Thanks. Thanks for taking my question can we talk a little bit about the impact of sanctions, making and how to think about it you gave us some numbers for <unk> in terms of the volumes and then also the margin pressure.
Is the are the costs related to starting.
Is that onetime in nature or is it just the lower margin business, that's going to have an adverse effect on the margins going forward.
And I know it closed in October so is that a full quarter.
Should we think about that as a full quarter or would it be more.
Magnified going forward like how should we think about the impact.
I'll give you some context, Kevin and I'll ask Mike to jump in and so forth.
First of all we just closed the deal at September 30.
Typically that business is lower margin business to start with when we take over these laboratory is the most important thing that we do is ensure that the physicians can order and we can perform this past seamlessly if not better than what they had before so we don't.
Out cost, we don't change systems, we don't change supply chain in the beginning we just transition over the work with minimal disruption.
And then over time, we use our scale and our capabilities to reduce their cost and improve the margins. So this is more about making sure that we do this the right way. This is a massive undertaking and we want to make sure that there's no disruption to the patients and the physicians first and foremost so the margins are.
Our very low at the beginning and then over time, they get better they never reached our historical margins in diagnostics, because it's just always going to be to some degree lower but it will certainly get better over time, and then I'll ask Glenn has any additional context, yes, no the only thing.
I'd add to that is that when we think about the hospital system deals that have kind of alluded to it very attractive deals financially. When we look at kind of return on invested capital just a different profile. The in hospital lab management agreements that we have are really a fee based so as a percent of revenues, it's a headwind to the overall revenues.
Outreach labs that we acquire.
Margin profile similar to or enhance the overall margin for.
The diagnostics group, but given the size of Ascension and the size of it in hospital Lab management agreement at times. This is a higher percentage of in hospital and a typical even hospital hospital system deal we would do.
We commented that it would be around 100 basis points negative.
The impact to us in the fourth quarter, and then as Adam said with the expectation that margins will grow as we integrate it into 2023 and beyond but it'll have less of a headwind.
In 2003, as the margins pick up above what the first quarter would affect us.
So then the net effect.
You didn't really call it out as a headwind or a tailwind for 'twenty three it should we assume that from a EBIT perspective net net it's neutral then.
Yeah.
So from an EBIT perspective call. It the first quarter. So the fourth quarter first time, we have it is kind of neutral.
It will be positive from a profitability standpoint next year. So again as you look at our financial criteria for acquisitions in the slab partnerships. We look for the accurate for them to be accretive to earnings year, one or cost of capital by year, three and have a very attractive IRR and essentially is no different the first full year of owners.
Positive to earnings and cash flow accretion, we will earn our cost of capital at least by year three as an overall transaction. So we're excited about it but with the acknowledgment that from a return on revenues.
Will be dilutive to diagnostics margins.
Got it okay. That's helpful. Thank you guys.
Yes, thanks, Kevin.
Thank you. Our next question or comment comes from the line of Rachel <unk> from J P. Morgan Chase Mr. <unk>. Your line is open great.
Great.
Question <unk>.
So just following up on the development side can you talk a bit about the stocking dynamic last quarter. You said that that was a $30 million revenue headwind. So can you just quantify how much of a headwind. It was this quarter and then what's assumed within guidance for kit stocking heading into <unk> in early next year as well.
Yes, I'll take the second part first so we're assuming that the kits coming back to us do not improve for the rest of this year, we've not seen improvement therefore for the rest of this year.
No additional improvement from where we are which is slightly lower than the 2019 levels in terms of kits out the door theyre actually at 2019.
As we sit here today and when I say 2019, I think 2019, I put projected 4% to 5% growth on that each year and when you get to this year, where you would expect us to be if we grew up four 5% CAGR since 2019, so kits out the door look good and they are back to where they need to be we want to get some more time on.
They're about see as the kick start to come back towards faster and we will provide more information for 2023, when we give 2023 guidance, but for the rest of the year, we've taken out significant growth and gets back to us.
So Rachel.
Obviously, it continues to be at roughly that level.
What we would call COVID-19 related so roughly half of the cost impacting us from a revenue standpoint would be the kits so call it around $25 million impact during the quarter year on year and similarly, the lower vaccine therapeutics related to Covid would have the same amount of impact on the revenues for the quarter.
Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press star one on your telephone keypad. Our next question or comment comes from the line of Mr. Derik de Bruin from Bank of America. Mr De Bruin Your line is open.
Meyer.
Hi, Good morning. This is John on for Derek.
Yes, you did a good amount of share buybacks in the quarter and Youre continuing to target hospital deals in local lab deals.
Are there any additional areas that youre looking to prior to the call Dan Stan and also I wanted to ask.
If you're seeing any trends or churn and bad debt.
Kevin expectations there. Thank you.
Yeah I'll answer the first part so.
You look at our capital allocation, we continue to be committed to our dividend. We continue to look at these hospital and local laboratory deals are they.
US with our growth in our core they are accretive first year to return to cost of capital quickly and then we continue to believe we are undervalued. So share buybacks will continue to be a big part of our capital allocation and we still have over 800 million that are available to us.
And John on the bad debt again, not seeing really any change again drug development.
Normally you don't have any bad debt issues in the.
Diagnostics side, it's been at a fairly steady state.
I would say, we probably see a little bit of an increase now that the horse for the Covid testing. So when you look at our 50% margin that we did in the quarter, let alone expected in the fourth theres a little bit of that.
Associated with it but as a general rule of their debt continues to be here.
Consistent with what we would have experienced in the past.
Gotcha, Thank you for that and.
Just one more how has the turnover frontline worker and stabilized where do you see any additional need to reinstate retention program bonuses or anything like that.
I would say it continues to be an issue with labor almost everywhere that I look in the economy.
Frankly around the World I don't think it's getting worse I just think it continues to be the same. So at this point in time, we're doing a lot of work on what we can do to retain people attract people, but we're facing very similar issues that other health care companies, but also even more broadly than that are facing.
And John when you look at our.
Difference between a reconciliation in our financial statements that we said, we do breakout retention and Youll see as Adam said, we continue to use that were needed, but overall not a material issue.
Alright, thank you.
Yes. Thank you I want to thank everybody for joining us today.
I believe that we have a lot to be excited about when we look at the future in the coming year and then we're going to make continued progress we have to get done and we're going to get it done I want to welcome our associates from Ascension and I want to once again, thank our employees around the world for carrying out their critical mission to improve health and improve lives. Thanks for joining us today everyone.
Okay.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.
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