Q3 2022 Quest Diagnostics Inc Earnings Call
Welcome to the Quest diagnostics third quarter 2022 conference call.
At the request of the company this call is being recorded.
The contents of the call, including the presentation and question and answer session that will follow are copyrighted property of quest diagnostics with all rights reserved.
Any redistribution retransmission or rebroadcast of this call in any form without the written consent of quest diagnostics is strictly prohibited now.
Now I'd like to introduce Shawn <unk>, Vice President of Investor Relations for Quest Diagnostics go ahead. Please.
Thank you and good morning.
Joined by Steve <unk>, our chairman and Chief Executive Officer, and President, Jim Davis, CEO elect and Samsung <unk>, our Chief Financial Officer.
During this call we may make forward looking statements and will discuss non-GAAP measures. We provide a reconciliation of non-GAAP measures to comparable GAAP measures in the tables to our earnings press release.
Actual results may differ materially from those projected.
Risks and uncertainties, including the impact of the COVID-19 pandemic that may affect quest diagnostics future results include but are not limited to those described in our most recent annual report on Form 10-K, and subsequently filed quarterly reports on Form 10-Q, and current reports on form 8-K.
The company continues to believe that the impact of the COVID-19 pandemic on future operating results cash flows <unk> financial condition will be primarily driven by pandemic severity and duration.
<unk> care insurer government and client payer reimbursement for COVID-19 molecular tests.
That mix impact on the U S health care system in the U S economy, and the timing scope and effectiveness of federal state and local governmental responses to the pandemic, including the impact of vaccination efforts, which are drivers beyond the companys knowledge and control.
For this call references to reported EPS refer to reported diluted EPS and references to adjusted EPS refer to adjusted diluted EPS.
Any references to base business testing revenues or volumes refer to the performance of our business. Excluding COVID-19 testing growth rates associated with our long term outlook projections, including total revenue growth revenue growth from acquisitions organic revenue growth and adjusted earnings growth are compound annual growth rates.
Finally revenue growth rates from acquisitions will be measured against our base business.
Now here is Steve risk Koski.
Thanks, Shawn and thanks, everyone for joining us today.
Well, we had a strong third quarter, we drove 5% growth in the base business. Despite the impact of Hurricane Ian.
We delivered strong earnings despite inflationary pressures and investments in growth areas.
Based on our performance we have raised our outlook for the remainder of 2022.
We also made very good progress on our leadership transition.
Adding management depth and expertise to help us grow in important areas.
As you know Jim will assume the responsibilities as CEO and President on November one.
And I will remain as executive chairman.
Before I turn it over to Jim I'd like to say a few words about savings access to laboratory services at <unk>.
Saucer.
If enacted so also would fixed pamela.
The Medicare clinical laboratory fee schedule back on a sustainable path.
Based on the efforts of our trade Association support for SASSA has broadened and continues to strengthen.
As you know we are currently planning for a Medicare fees schedule reduction under Pamela of $80 million to $90 million in 2023 <unk>.
If Congress does not intervene again this year.
However, the work we are doing is aimed at reducing or postponing that burden. Unfortunately.
<unk> is already active three times to stop further cuts from going into place.
It is therefore very important that we continue to build support for the enactment of SASSA When Congress returns to Washington after the election.
As I transition to the executive Chairman I will.
We will remain actively engaged on this issue working with ACL.
And other stakeholders.
Now I would like to turn it over to Jim Davis.
Thanks, Steve on behalf of our 50000 quest colleagues I would like to thank you for your leadership of Quest diagnostics over the last 10 years, you turned around a company that was struggling and build shareholder value and transformed request into a trusted healthcare partner with a strong foundation for future growth.
I am personally grateful for all the help and guidance and friendship that.
Third during the transition thanks, Steve.
Turning to our results our base business grew year over year in the third quarter with performance rebounding in August and September from the softer volume trends that we saw earlier in the year in fact before hurricane Ian hit in September we were seeing some of the highest base testing volumes, we have ever experienced.
Like to thank our employees for their incredible efforts to restore our labs and <unk> for our patients and customers in the wake of Hurricane Ian while also enduring personal loss of their homes and belongings I'm also grateful to our employees outside of the impacted areas, who stepped up to provide financial support to our call.
Leagues and need as many of you are aware, Florida is an important state for us.
During the quarter, we grew the base business revenues and continued to invest in advanced diagnostics and consumer initiated testing to help offset inflationary pressures. We have continued to pursue our operational excellence strategy and have been closely managing our cost structure through our invigorate initiatives.
In the third quarter total revenues were $2 5 billion earnings per share were $2 17 on a reported basis and $2 36 on an adjusted basis cash provided by operations was $502 million COVID-19 testing revenues were 300.
$16 million in the third quarter down, 55% from 2021 and down 11% from the previous quarter. After a plateauing in June and July our COVID-19, molecular testing volumes steadily decline, we expect COVID-19, molecular volumes to average $10000.
<unk> thousand per day in the fourth quarter.
In the third quarter, we continued to make progress executing our two point strategy to accelerate growth and drive operational excellence here are some highlights from the quarter.
M&A continues to be a driver of growth, we recently announced an outreach lab purchase from summa health, a large integrated healthcare delivery system in Ohio.
While this is a small acquisition. It's a positive indicator we are seeing that hospital systems are more open to discussions and before the pandemic, many large and small health systems face substantial financial and labor pressures.
Make our range of services very attractive we're pleased with the activity in our M&A pipeline and hope to share additional news with you later this year.
We also announced a professional lab services relationship with Lee Health Southwest Florida's primary community owned health system to provide supply chain expertise for five hospitals owned by the health and selected outpatient centers. We will also continue to perform reference testing for Lee health are.
Mentation plans have been slightly delayed by hurricane even though we expect this relationship will have a positive impact on revenue growth in 2023.
Turning now to health plans, both volumes and revenues continued to grow faster than our overall base business in the quarter.
Value based care relationships continued to gain traction not only does this yield benefit for health plans and their members, but also it enables us to gain share we've begun to renew some of our value based contracts with national health plans, while continuing to engage and expand our value based footprint with other plans value.
Based relationships are appealing to health plans because it helps them reduce the overall cost of care provides insights to better health outcomes and provides an exceptional value to members.
We're on track to meet our goal of realizing 50% of our health plan revenues from value based relationships by the end of next year.
Also as we continue to extend and renegotiate health plan agreements, we see increased volumes and pricing from these contracts were seeing a more favorable pricing environment and over the last two years. The majority of our renewals have included stable to positive reimbursement.
In advanced diagnostics, we saw growth from prenatal genetics in genomic sequencing services in the third quarter, we continued to make investments to strengthen our capabilities to accelerate growth in oncology and hematology hereditary genetics genomic sequencing services and pharma services.
Just last week, we announced the addition of Mark Gardner, our senior Vice President of molecular genomics and oncology in this new position Mark an established leader in molecular genomics next generation sequencing in oncology diagnostics is responsible for driving growth and expanding our offerings in these areas.
The investments, we're making in consumer initiated testing enabled us to recently launch a new E. Commerce platform. The new site is more powerful and consumer friendly with a compelling user experience and a number of enhancements. We're encouraged by the early success of the site and the first few weeks of its launch and we.
Spec to make further progress in the fourth quarter and in 2023 toward our goal of $250 million of annual consumer initiated testing revenues by 2025.
We also launched a new AD campaign to drive broader awareness of our consumer initiated testing offerings, which cover everything from women's health tests to allergy testing and sexually transmitted infections check out the new site at <unk> Dot com and look for the new ads.
The second part of our two point strategy is to drive operational excellence, we remain focused on improving our operational quality service and cost, thereby driving productivity gains and improving the customer experience here.
Here are a few examples as COVID-19 volumes have declined we've begun to repurpose some of our COVID-19 testing platforms to enhance our quality and reduce costs today, 75% of our patients are arriving at a PSC with an appointment compared to less than 25% just three years ago. This inquiry.
Number of appointments allows us to flex our workforce to meet demand within a particular geography, which enables us to serve our patients faster.
For patients who walk into a patient service center, our new schedule of checking program sets expectations in the waiting room and balances the load for our Phlebotomist walk ins now self register when they arrive and learn how long they'll need to wait.
Our average wait time is approximately five minutes, which is roughly half the level since 2019.
Finally, we continue to drive the use of automation and artificial intelligence to drive productivity gains to help offset inflationary pressures.
Now I'll turn it over to Sam who will provide more details on our performance and share more insights on our updated guidance for the remainder of 2022.
Thanks, Jim.
In the third quarter consolidated revenues were $2 $5 billion down 10, 4% versus the prior year base business revenues grew five 1% to $2 $1 7 billion.
COVID-19 testing revenues declined 55% to $316 million.
Revenues for diagnostic information services declined 10, 5% compared to the prior year.
The decline reflected lower revenue from COVID-19 testing services versus the third quarter of 2021.
Partially offset by solid growth in our base testing revenue despite the impact of hurricane in at the end of the quarter.
Total volume measured by the number of requisitions declined six 2% versus the prior year.
Acquisitions contributed 20 basis points to total volume.
Total and organic base testing volumes increased one, 6% and one 4% respectively versus the prior year.
The performance of our base business strengthened beginning in late July as Covid, 19 cases, and the positivity rate decline throughout August and September .
The impact of a hurricane and represented a headwind of approximately 30 basis points to volume growth in the quarter.
COVID-19 testing volumes continued to decline during the third quarter, we resulted approximately $3 1 million molecular tests.
Down approximately 4 million tests, and <unk> 4 million versus the prior year and second quarter respectively.
Our COVID-19 molecular volumes have averaged roughly 17000 tests per day, so far in October.
Revenue per requisition declined five 1% versus the prior year, driven primarily by lower COVID-19 molecular volume.
Base business revenue per req was up three 3%.
The more favorable pricing environment remained consistent with our expectations with unit price reimbursement pressure of less than 50 basis points in the quarter.
Reported operating income in the third quarter was $392 million or 15, 8% of revenues compared to $652 million or 23, 5% of revenues last year.
On an adjusted basis operating income was $423 million or 17% of revenues compared to $694 million or 25% of revenues last year.
The year over year decline in adjusted operating income is primarily related to lower COVID-19 testing volume and investments to accelerate growth in our base business.
We were also impacted by a higher portion of COVID-19, molecular testing volume from non traditional retail channels, which carry additional expenses.
Reported EPS was $2 17 in the quarter compared to $4 <unk> a year ago.
Adjusted EPS was $2 36.
Compared to $3 96 last year.
The impact of hurricane in reduced adjusted EPS by approximately <unk> in the third quarter.
Year to date cash provided by operations was $138 billion in 2022 versus $1 $75 billion in the prior year period.
Turning to our updated guidance revs.
Revenues are now expected to be between $9 72, and 986 billion.
Base business revenues are expected to be between $8 38, and $8 $45 billion.
COVID-19 testing revenues are expected to be between $1 34, and $1 $41 billion.
Reported EPS is expected to be in a range of $8 52 to $8 72.
And adjusted EPS to be in a range of $9 75.
To $9 95.
Cash provided by operations is expected to be at least $1 7 billion.
And capital expenditures are expected to be approximately $400 million.
As you think about our updated guidance. Please consider the following.
We are assuming COVID-19, molecular volumes to average roughly 10% to 15000 tests per day in the fourth quarter.
We also believe this is a reasonable assumption for run rates COVID-19, molecular testing volumes heading into 2023.
Last week, the public health emergency was extended another 90 days through mid January .
We therefore assume average reimbursement for COVID-19, molecular testing to hold relatively steady through the end of this year.
We expect reimbursement to decline when the phe expired, which we currently assume will happen in January .
Given the timing of hurricane and the impact on our business has continued in the first couple of weeks of the fourth quarter.
As a reminder, we are making investments this year to accelerate growth we.
We spent approximately $110 million through the third quarter.
And we expect to invest more than $50 million in the fourth quarter, primarily to support marketing and promotion of our new consumer initiated testing platform.
Finally, before getting to your questions I wanted to say a few words about 2023.
I know theres a lot of focus on EPS expectations for 2023 as you might expect we aren't prepared to provide detailed 2023 guidance today.
There are obviously, a number of assumptions and dynamics to consider but I see nothing that would prevent us from meeting the current consensus estimates for next year within a reasonable range of outcomes.
We will continue to review, our plans and assumptions and provide our full 2023 guidance in early February .
I will now turn it back to Steve Thanks Pam.
To summarize we accelerated growth in the base business year over year.
We grew our base business revenue, while continuing to make investments, which position us well for the future.
And we have raised our full year guidance based on our performance in the quarter.
And our expectations for the remainder of 2022.
As Jim mentioned earlier this will be my last earnings call as CEO and president.
I will remain as executive chairman.
I'd like to thank all of you on this call for your interest in the company.
Of enjoyed our many conversations over the last 10 years.
And I. Thank you for your time and commitment to understand our business.
Finally to the 50000 colleagues have quest diagnostics.
It's been the honor of my lifetime to serve as your CEO .
Together, we have empowered better health with our insights.
Growing the business.
And provided critical testing capacity through one of the most challenging health care crisis in our history.
I will always be grateful.
Done to serve our customers.
Thank you.
Now we'd be happy to take any of your questions operator.
Thank you we will now open it up to questions at the request of the company. We ask that you. Please limit yourself to one question.
If you have additional questions. We ask that you. Please fall back in the queue to be placed in the queue. Please press star one from your phone to withdraw press star two.
Again to ask a question please press star one.
The first question on the Qs from Ann Hynes with Mizuho Securities. Your line is now open.
Okay.
And in it and if you are there please check your mute button.
Oh can you hear me now.
Yes, okay, sorry about that.
Okay, Steve I, just wanted to say congratulations.
And that has been a pleasure working with you all these years.
Thanks Shannon.
So my first question and thanks for the color on 2023, obviously it was on top of Investor minds, but just for modeling purposes can you just maybe tell us what has changed to directionally on the positive side and the negative side. Since you provided that in 2019, and maybe with and that.
You know that the DTC program I know, it's a headwind to earnings this year do we expect it to become profitable in 2003, and maybe talk about the profitability profile in 2024 that would be great. Thanks.
Yeah, Thanks, and good morning, So let me start and I'll have Sam.
And some color here. So look there's there's a lot of changes since 2019 and I'll just talk about a few tailwind and headwinds.
From a tailwind standpoint.
Reimbursement has never been better right.
We were down approximately 50 basis points year to date.
That's much much better environment without.
Without <unk> in 2019 was where we were historically, losing over 100 basis points.
Pamela was on top of that so we feel much better about price going into 2023.
Our base volumes are back.
<unk> 2019 levels in fact at points during the quarter.
In September we exceeded the high point our February January point.
2020, so feel good about that.
You mentioned investments in CIP, yes that that'll be a tailwind going into 2023, we feel good about that and then as you know we've made investments in the business investing in our advanced diagnostics portfolio and we expect to get.
Above.
Growth above normal growth rates out of that side of our portfolio.
Now you know.
We are dealing with some headwinds as well as you know.
We built into our plan.
Third round of <unk> $80 million to $90 million next year.
Covid, which we Didnt obviously have in 2019.
We expect going into next year their early part of next year, we'll be at the 10 to 15 point.
And you.
We have some inflation that we certainly didn't see in 2019, that's running through our business, we estimated five to eight.
Our quarter and we expect that inflation to continue into the early part of next year.
Sam any other color.
Yes, I think I think you've captured it well.
Well, Jim I mean again we're.
We're going to give guidance in February we wanted to just capture some of these may be changed assumptions or at least varying assumptions, but listen there's nothing that I've seen so far that we've seen so far that prevents us from meeting the current consensus estimates again within a reasonable range of outcomes.
In terms of share repurchases, we have made share repurchases this year nine.
$950 million throughout the first three quarters of the year and that will provide a lift as well in terms of earnings next year.
Yes, let me just make.
We will make up another comment about some of the investments we've made because I think theres a little bit of a mess.
Misunderstanding about that adding to our cost.
So as we get into 'twenty, three and 'twenty, four and Andy alluded to that.
We've mentioned that this year, we'll be investing about $160 million.
As you recall in 2021, we started the investments we took some of the proceeds from Covid made roughly a quarter of a $1 billion worth of investments in two businesses, one advanced diagnostics and as Jim said, we've probably before we have already started to see have faster growth rates because of those investments and the second is <unk>.
Our consumer initiated testing.
And we will we will only make investments as you would expect if we expect to get a return and so what youre going to see in 2023 is particularly around the <unk> starting to get a return for that investment for <unk>.
And even though we don't report the financials, you'll see less of a drain on our earnings in 2023 because of the growth rate, we will get from <unk> and that will be a tailwind for 'twenty three and you asked about 2024.
To give exact details because we will we will throttle that investment to pay the good part of the how fast the market grows and where we have some capacity to accelerate growth and so we will hold back I'll give you an exact number about profitability, but we are going to get the return from that $250 million. Yeah. Let me this close by saying that.
$250 million some of it is permanent because we're building. These two businesses advanced diagnostics and C O T, but some of it was temporal.
And so when you think about modeling for 'twenty through 'twenty three.
Look up what you might expect expect for expenses from us for 2022 and these are total expenses R&D and SG&A.
What we have modeled and then working on is actually the expenses in 'twenty three coming down versus 2022.
So that's a change because some of these investments were temporal so I'll just leave it there. Thank you.
<unk>.
Thanks.
Next question is from Kevin Caliendo with UBS. Your line is now open.
Thanks, I actually wanted to expand on Steve's comment right, there because thinking through this thinking.
Thinking through the guidance and getting to the numbers first and sort of what the run rate is coming out there has to be a pretty meaningful amount of expenses coming out. So of the 160 should we be thinking about that is is like half of that goes away.
<unk>.
You know to get to sort of.
Including Panama, we're talking $80 million to $100 million of expenses that would need to come down unless you think volumes are really accelerate in the incremental margins on those so can you maybe give us a little bit more on on the expense side and how to think about modeling that is it just like percentage of that 160 that comes out.
Yeah, Hey, Thanks, Kevin and let me turn it to Sam and he can give some color on that.
Yeah. So.
Kevin as you think about next year I mean, yes, we are taking expenses down.
So there's going to be some reductions as we look at expenses given given the macro environment that we are in.
No I would not assume right now strategic investments necessarily coming down that's not an assumption that I would make and we also have our invigorate.
Program, where we expect that productivity in the business and that's an ongoing program that we do.
We have every year, but we are in a way reinvigorating invigorate to have further productivity from their business. So I think as you look at margins you have to consider those things we have maybe a consistent inflationary environment is the assumption wages increasing by salaries.
Salaries wages and benefits increasing by 3% to 4%, but we are taking expenses down next year in other areas and.
We are focusing on invigorate.
If maybe I can ask it a little bit different way your base margins. I know you don't think about base margins versus COVID-19 margins, but we all try to model. It that way. If we were to think about it would you then think that base margins could look or be better than what they were in a pre COVID-19 setting.
Yes.
We should talk about kind of the assumptions that we have right now for 2022, we're not going to comment right now on base margins versus total COVID-19 margins, but I think the way to think about it is the pricing environment is improving so we are seeing a less of an impact in terms of price reductions there as the Panama impact for next year, but we are seeing.
Historically low pricing pressure on our business, which as we said in the quarter was 50 basis points. So that's an improvement I talked about some of the cost reductions that we're going to make and I talked about the invigorate productivity savings that we're going to make so you know we.
Are going to definitely see some productivity improvement in the business, but I won't give a specific base margin number here.
I tried thanks, so much guys that's really helpful. Thank.
Thank you.
Next question is from Jack Meehan with Nephron Research. Your line is now open.
Thank you good morning.
I wanted to ask about utilization. So there was a lot of worry heading into the quarter because of the zythum data in your base growth actually accelerated to 5%. So I'm. Just curious what you think is going on here driving the relative outperformance versus what it looks like the market might be doing.
Yes, so thanks Jack.
As we mentioned in the opening comments our volumes improved every month through the through the third quarter. So July was weak August was better than September even with the hurricane impact.
Was obviously much better than the average that we reported in addition.
You know, we reported five 1% revenue growth in the quarter on the base business and a chunk of that did come from revenue per recognize revenue per rack.
Despite a 50 basis point headwind on price, our clinical mix and business mix improved in the quarter, which contributed to that strong base performance. So we were happy with the utilization levels.
[noise] offices appeared to be strong and even our health systems segment, which is a combination of our reference testing and Pls was also strong in the quarter.
Yeah.
Maybe just trying to dig in a little bit more I think everyone's trying to understand the market growth and share dynamics are you whats the whats your dialogue like with hospitals now around either outreach sales or more kind of reference work and then sent out.
Have you heard more about labor being an issue just any thoughts on all that would be great sure Jack.
So I can tell you that.
Our opportunities with health systems has never been stronger on multiple fronts. During the quarter, we announced the summa health outreach acquisition zoom as a health system in Akron, Ohio.
We announced our Pls, new Pls relationship with Lee Health in Florida.
And the funnel of opportunities continues to grow.
There's not a day that goes by that we don't read in one of the journals about health systems reporting.
Margin pressures and exacerbated by some of the pressures they have with wages, particularly on the nursing side. So.
It's a very opportunistic time for us to go into health systems and explain to them. How we can help them reduce their lab spend by upwards of 10 to 15% to 18%.
And so.
Or monetize their outreach book of business to provide some cash infusion to them. So it's it's a it's an opportunistic time for us.
Next question is from Erin Wright with Morgan Stanley . Your line is now open.
Hi, could you give us an update on your relationships and negotiations with the commercial payers and an offset in terms of pricing dynamics, there and where are we at in terms of those preferred relationships, helping to steer volume and through initiatives, such as United Laboratory benefit management, and often that was more of a.
Does that have any impact on your business at all I I believe it's targeting some over testing on the esoteric side. Thanks.
Yeah.
So thank you Erin.
So our relationships with commercial payers.
If you want to measure the output.
The relationship that I again will turn to the pricing environment and it's never been better we were only down 50 basis points.
In the quarter.
And you go back to 2018 2019, we were losing 100 basis points. We've also said that the majority of the negotiations we've had with payers over the last two years have resulted in either flat to positive price increases and so we consider that a victory.
We've also said that the number of value based relationships that we're entering into meaning that theres opportunities opportunities for us to create value for them and earn value back for us.
Working very closely with the likes of Unitedhealthcare and anthem, and we work together as teams and we target.
Physicians that are using out of network labs, we target physicians that are using health expensive health system labs and collectively our teams worked this day in and day out and yes, we've been able to move racks from high price institutions to two.
To better quality lower price labs like quest diagnostics.
Okay two comments on Jack's question in Aaron's.
First of all our plan is to gain share.
So what element of gaining share is the relationships with health plans and we do believe we're making progress and that progress will continue as we pick up more share, particularly with the nationals.
Just wanted to make sure we remind you that 50 basis points.
Exclusive to commercial payer pricing, but all prices.
So commercial payer prices with it and that has improved to Jim's comment vastly versus where we were but we have price pressure with client relationships with physicians. We have we are price concessions with hospital reference work. So there's other price concessions in that number but on the commercial payer side, it's less than 50 basis points.
Approved but where it was years ago.
Okay. Thank you so much.
Next question is from Brian <unk> with Jefferies. Your line is now open.
Hey, good morning, guys. Congrats on the quarter, so as I think about just yet.
The core testing you know, obviously COVID-19 is declining here.
Should we be thinking about your outlook here for <unk>.
2023.
Especially given the economic backdrop that we're seeing in the broader inflation trends that we're seeing and how that's impacting the consumer essentially the patient.
Yeah. So thanks, Brian for the question.
The way I would think about it is again COVID-19 continues to come down although we may be at an inflection point here on COVID-19.
Too early to tell but obviously these two new variants the BQ1 in DQ. One dot one are growing in terms of concern. It's now 11, and 12% of all new cases higher in the in the east reported to be over 20% in the New York City area.
But as of now.
Thinking 10% to 15000, a day as we go into and into next year.
We reported that our base business the volumes recovered as we move through the third quarter, we expect that trend to continue and you know, but remember physicians are only part of it again, we feel great about opportunities to help our health system partners, whether it's additional reference tag.
<unk> seen our Pls and then we feel great about our acquisition funnel and we're looking at several outreach opportunities.
We announced one that closed but.
Stay tuned there should be some more announcements as we get into the early part of next year.
And I'll just remind you all that there is a correlation between COVID-19 volumes with our base business.
And so as Covid improves we believe that could help our base business.
Clearly started to see that in Q3.
And to some extent as we've talked before we have somewhat of a natural hedge because of Covid goes up in base softens, we have seen that in the past.
Therefore, the improving COVID-19 situation and it should be a tailwind on our base growth going forward.
And as we said before you know most of our major markets have recovered we still have not seen full recover in New York City.
We still believe that will gradually step by step improve over over the next two.
A couple of years and it will go back to where we were in 2019. So that's the only.
The major metropolitan area that we haven't seen a full recovery. So so from from an overall perspective, the COVID-19 direction should be favorable debase.
Awesome. Thanks, guys. Thank you.
Next question is from a J rice with credit Suisse. Your line is now open.
Thanks, Hi, everyone and best wishes, Steve in the future there.
Working together.
Maybe just to talk a little bit about capital deployment, you're talking about obviously you did a lot of the share repurchase year to date as you mentioned.
So that continues to be part of the store you've got these hospital opportunities.
There are other.
M&A potentially tuck in deals out there and then and then some of the investments consumer direct and so forth.
Does that help.
How do you see capital priorities in capital deployment as.
As we exit this year and think about the next year or two.
Yeah. Thanks, a J for the question this is Sam.
You know as you think about our position right now we've generated $1 three 8 billion of operating cash flow through three quarters of the year, where.
We're sitting on a very.
Very healthy amount of cash of $700 million.
When you think about our capital deployment philosophy, its very consistent we said that.
We're going to return the majority of our free cash flow back to shareholders.
And we're going to focus on making sure that obviously, we invest in the business that we talked about the strategic investments. This year, we expect to make $160 million of strategic investments we have.
Net of the $400 million of capital whatever free cash flow that we have we're going to return back to shareholders.
In the form of dividends in the form of share repurchases and M&A now to the extent that I think we have a robust pipeline of M&A.
Transactions and opportunities as Jim mentioned to the extent that we were going to be very disciplined about M&A, though I mean to the extent that we don't have accretive deals that we believe really add strategic value to us and produce the and meet the ROIC threshold that we have and are accretive.
And then we're going to return back that cash in terms of share our share repurchases.
Okay. Thanks, a lot.
Thank you Youre welcome.
Next question is from Peter Chickering with Deutsche Bank. Your line is now open.
Hey, good morning, guys taking.
My questions and Steve Thanks for all your help over the years.
Thank you.
I'm just sort of a different question for the fourth quarter guidance.
The $1 91 annualized is to 764 and as a good guys for the improved based pricing business as well as strong pricing. So we put a few cents.
Panama and that one that would be the launch the launch pad into 2020 three is $7 13, which seems like a pretty big gap versus 850 consensus number. So could you give us some more color on how to bridge the gap between 713, <unk> hundred 50 between revenue growth and cost cutting.
Yeah.
Yes.
Thanks, Pedro and let me, let me start and then I'll have Sam pipe in here So first.
Our long term guidance on the growth rate of the company remains we expect to grow our top line on the base business, 4% to 5%.
And we expect to get nice margin accretion off of that 4% to 5%. So still feel good about that 4% to 5% next year. Obviously, we've said two percentage roughly two percentage points of that can come from acquisition. We've said, we've got a great lift.
A good funnel of both.
Tuck ins from outreach as well as a few what I would call deals that enhance our capabilities filling some gaps in our portfolio. So feel good about that we also feel good about our invigorate program and continuing to work that as Sam said reinvigorating, our invigorate program to offset some of the margin pressures.
That we've seen from inflation.
So we feel good about we feel good about the investments that we're making in AVX and we've said that consumer initiated testing next year should be a tailwind to us.
And then finally as salmon as Steve said.
We are fine tuning the cost structure and will make the.
Necessary about rebalancing the cost structure too.
Deliver what we need to deliver next year. So we feel good about it.
Yeah, maybe I'll add a couple of comments to gyms.
So just we're not going to give you obviously guidance right now, but just maybe directionally give you some things also to build into or to think about as you build your model for next year.
<unk> expense reductions is an important one Jim mentioned that the.
The fact that the <unk> investments.
We will drive growth in the consumer segment and so they will be less dilutive as you look at next year versus this year. The fact that when you think about pricing.
It's definitely improving environment for us as we've said 50 basis points in Q3, so that traditional number that maybe some of you used a 1% pricing negative pricing impact is.
It's no longer the case in terms of what we're seeing because of all the things that we talked about around value based contracts with the health plans.
And then when you think about Covid I mean, COVID-19 is obviously the assumption going into 2023 is that it's 10% to 15000, there's variability around that but that's our assumption right now and the 10% to 15000 is so it's coming down Covid testing is coming down there is an improvement in the base business as a result of that but also the fact that with the phe.
Ending at least our assumption is that it ends in January even though that average reimburse price comes down that's not a straight impact to margin because we have.
Cost that we incur in the non traditional retail channels right now that will no longer that we will no longer incur after the end of the phe emergency. So you can also take the margin on COVID-19 as being completely impacted by that.
Price reimburse or buy that reimbursement decrease.
And Peter.
Remember that our base business is growing.
23.
So when you think about modeling it off the fourth quarter remember the base.
We'll grow Okay, and then secondly, just to underscore Jim's comments as this company and will continue under Jim and Sam's leadership, there's a long track record of productivity improvements and so Jim in his prepared remarks talked about our operational excellence program.
We have a specific program called invigorate.
And that Invigorate program was to drive 3% productivity. So when you think about 2023, and you think about potentially giving our Panama caught you need to think about the expense reduction base growth as well as invigorate offsetting some of the inflationary pressure as well as potentially a payload.
Yeah, and I could tell you, we probably loaded this before in our Investor presentations. There is a lot more room for us to drive productivity, particularly around all the Ottomans Ottomans opposites.
Nation Digitization going forward, then Jim will be driving that as he leads the company.
Great. Thanks, so much guys. Thank you. Thank you.
Next question.
Is from Patrick Donnelly with Citi. Your line is now open.
Hey, guys. Thank you for taking the questions maybe.
Maybe one on a similar vein at least from a cost side just in terms of some of the labor retention and labor inflation that you guys have seen can you just talk about I guess, where we are in that process and then secondarily kind of on the back of that.
Supply chain as well I know, it's you know it's been a bit of a kind.
Kind of issues pop up and you guys handle them well.
Plateaued getting better maybe just a little bit of color there would be helpful.
Yeah. So thanks, Patrick So first on the labor inflation. So what we're seeing this year is between three and 4% and our plan next year is you know.
Is to have a merit increase of roughly 3% across the company.
But we would expect to have to make some other equity adjustments along the way. So I think from a planning modeling standpoint that 3% to 4% range still feels good from a labor utilization.
I'll tell you in our employee retention and attrition is that it has stabilized here in the third quarter, albeit it's stabilized at a higher level than we would like which obviously affects productivity. So we continue to work really hard on making class the employer of choice and it's not just us.
Wages Theres a lot of other things as you can imagine that go into that.
In terms of in.
Inflation on the supplies and materials front.
We purchased north of $2 billion worth of what we call pre analytical and analytical supplies.
And on that.
Roughly $2 billion about 80% of it is locked up in terms of its under contract.
And most of those contracts that we've entered into in previous years actually do not.
<unk> price.
Indexes or price going up if anything through.
Through the contract period, sometimes prices improve.
So we feel good about that but 20% of roughly 2 billion is a big number that is not completely locked up and that's where we do see some inflationary pressures.
In addition to the pre analytical analytical supplies.
We have a lot of you know we <unk>.
Have you know roughly $8 million to $900 million of other spend that is logistics professional services janitorial services.
Travel living expenses. So all of that is really not under contract and that's where we see the majority of inflation in our business today.
Tom.
Will it get better next year will it get worse next year.
Hard to predict but.
Everything that the.
The fed is doing well hopefully slow those inflationary pressures that we're seeing but again you know.
We're committed and we work real hard through our invigorate program to offset as much of this as we possibly can.
That's helpful. Thank you.
Yes.
Next question is from Derik de Bruin with Bank of America. Your line is now open.
Hi, Good morning, Steve Thanks for all your time and patience with me appreciate it over the years.
Thank you.
I guess, just a couple of questions a lot of might've been answered already but.
Are you expecting any sort of relief are.
You would expect sort of the past and sort of like your update in Panama and then the follow up on that or.
Or another one.
You know as we sort of head into a recession and inflation picks up I mean are you seeing any increase in bad debt from your customers any concerns on on people opting not to pay bills as they are struggling right now.
So well start with the sauce.
Pam comment so as we've said for many years now we should play into the Panama cuts in 2023.
We assumed and Toby of news, that's better than that we should assume that.
Number two is in my prepared remarks, we talked about the effort on this also.
What I'll add to those comments is the support congressional support and this is on both sides of the aisle and both in the house and the Senate.
It was very strong. So so there is alignment that we need to have a permanent fix to the implementation of Panama, but as you can imagine Washington is busy there's a lot of topics on the table and we are trying to find.
Vehicle that we can attach it to and I would expect if we were successful what's also it'll be late in this year that will no doubt.
Also it's going to cost money. So we're in the process of getting a score from CBO and there needs to be a pay for so we're working through that but I can tell you the alignment and the support of my colleagues throughout this industry has never been stronger and we are going do in grass roots efforts to sort of letters into Washington. So.
Really a full core press.
To get some salsa over the.
The goal one now.
If we don't.
Were not successful. It's also the question was could we get another year of relief, we got done in the past.
I'm not going to indicate that we're going to get that again, but if we don't get so also there obviously, you'll be a pivot to ask for another year of relief and we'll push on that but again, we're not planning on that in our 2023 planning.
Joe do you want to cover the second piece, yes.
Your question on are we seeing an uptick in our patient concession rate or patients Leslie.
No we're not seeing any impact.
As of yet on that in fact, our patient concessions have actually improved rate has actually improved year over year, and we're going to build an improvement into next year, we do a lot of things to to work this and we work real hard.
Have what we call real time adjudication, so a patient comes into our PSC, we take the requisition and we can literally adjudicate that claim.
Ex the payment coming to us. So we know real time, what tests on that acquisition are going to be approved or denied and we know what the patient balances and then we provide multiple ways for that patient to pay the bill or give us a form of payment.
So that when the claim is adjudicated.
How do we know how to charge the patient.
We're working on things to actually move that whole process upstream. So when the when the patient makes an appointment and that requisition is already been delivered to us because efficient and physician has send it to us electronically. We can do that pre adjudication, if you will as the.
As the patient is making an appointment online so even before they come into the PSC. We can pre adjudicate that claim we're going to build the capability to do that.
And so.
And so it improves our PSC productivity as well as gives the patient knowledge of what they're going to be build before it before they walk into the PSC.
Lots of things, we're doing to make it easier to pay to inform the patient and all of those things help our patient concession rate.
And the last question the cues from Eric Coldwell with Baird. Your line is now open.
Thanks, very much I'm going to come back to a topic that's been hit a few times, but maybe ask a different way the base revenue per requisition very very strong here.
I know, we've heard a lot of comments on pricing, improving or really being less bad down 50 bps.
Which would I think imply that your your mix component at another components must have been something more like 4% growth on a per test basis. So.
I'm curious if you can quantify for us or give us some qualitative color on what type of mix improvements you saw what what categories of testing, where you seen the number of tests per requisition go up this quarter more than normal.
Is there a changing impact from pls volumes in the numbers this quarter or were there some nuances with value based contracts that maybe aren't fully understood by the street that could have been driving some of this upside mixed driven revenue per req I know I'm throwing a lot at you, but it feels like that was a pretty big numbers.
So I wanted to dig into it.
So thanks, Eric.
So as you know theres a lot of things that go into the Rev. Rec calculation. So let's take price per test out because we already said that was down about 50 basis points. So your math is directionally correct. All other things were up about three 8% in the quarter Theres really three very different types of mix that enter into that there is clinic.
Mix business mix and payer mix and from let me just start with clinical next I'll just tell you that the investments we're making in advanced diagnostics are paying off we're getting a higher mix of molecular and other genetic and advanced base tasked hematology was good some of our cancer testing really good in the quarter from a business mix standpoint.
There's a lot of things are first from a commercial payer standpoint, there is a mix of pop and fee for service and.
We'll just tell you in the quarter fee for service was better and cap was was lots and have kept us last night, obviously, you've got a fixed payment so.
That certainly helped us.
Our health systems business was actually just appear reference was good in the quarter and that tends to mix up our rep correct and then finally, there is payer mix issues. What portion is coming from commercial what portion is coming from Medicare what portion is coming from Medicaid.
And that.
And that was favorable in the quarter and then finally.
Our consumer initiated testing business has a higher.
Revenue correct, the pricing is better in that market and we're getting some lift from our CIT business. So a lot of factors go into it.
But that's kind of the summary of it.
Thank you Jim.
Youre welcome.
I think that was the last question again. Thank you for your support over the years you added up the math and this is my 42nd call. It's been a pleasure working with all of you. Thank you for all your support and I'm sure you're going to be seen.
And in our travels so thank you and have a great day.
Thank you for participating in the quest diagnostics third quarter 2022 conference call.
A transcript of prepared remarks on this call will be posted later today on quest diagnostics website at www.
<unk> diagnostics dot com.
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