Q2 2023 Laboratory Corporation of America Holdings Earnings Call
Okay.
Good day and thank you for standing by welcome to <unk> Corp, 's second quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session you'll need to press star one on your telephone you will then.
Here, an automated message advising your hand this race to remove yourself from the queue. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to Chad Cook Vice President of Investor Relations. Please go ahead.
Thank you operator, good morning, and welcome to Labcorp second quarter 2023 conference call.
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 an Investor relations presentation with additional information on our business and operations, which include a reconciliation of the non-GAAP financial measures to the GAAP financial measures discussed during today's call. Additionally, we are making forward looking statements.
These forward looking statements include but are not limited to statements with respect to the estimated 20 to 23 guidance and the related assumptions the impact of various factors in the company's businesses operating and financial results cash flows and our financial condition, including the spin off of four true and its treatment is discontinued operations and general economic and market.
Conditions future business strategies expected savings and synergies, including from the launchpad initiatives acquisitions, and other transactions and opportunities for future growth each.
Each of the forward looking statements are subject to change based upon various factors many of which are beyond our control more information is included in our recent annual report on Form 10-K, and subsequent quarterly reports on Form 10-Q and in the company's other filings with the SEC. We have no obligation to provide any updates to these forward looking statements, even if our expectations change.
Now I'll turn the call over to Adam.
Thank you Chad good morning, everyone.
Before I cover our second quarter results I want to first thank Charles for his leadership in Investor relations over the last several years.
Charles will be moving into the role of Vice President of financial planning and analysis effective in August .
I also wanted to take this opportunity to welcome Christine O'donnell.
Complice leader in our finance organization, who has been appointed Vice President of Investor Relations.
Both trials and Kristin will be in attendance at our upcoming Investor day.
September 14th.
And we look forward to seeing many of you in person.
Beginning this quarter Labcorp is reporting results without the inclusion of <unk>, which is now an independent publicly held company as a result of our successful spin on June 30th.
Moving forward, we'll report our laboratory services business under two segments Labcorp diagnostics laboratories.
And Labcorp Biopharma Laboratory services.
Biopharma Laboratory services consists of two businesses are.
Our central laboratory business, which represents about 70% of segment revenue.
Early development research laboratories, which although smaller is also a leader in the market.
In the second quarter Labcorp delivered exceptional year over year growth in our diagnostics laboratory based business.
<unk> generated strong growth in central laboratories.
Early development research laboratories continues to be constrained by industry related supply chain issues that we expect to be resolved in the third quarter.
We entered the second half of the year with clear operational focus and enhanced financial flexibility to advance our strategy.
We see strong momentum in our base business and are excited about the growth opportunities before us.
Now, let's discuss our second quarter performance.
In the quarter revenue totaled $3 billion.
Adjusted earnings per share was $3 42.
Our free cash flow from continuing operations was $177 million.
Our business is performing well with overall revenue, increasing 4% compared to prior year.
Base business revenue grew 13% to prior year.
Diagnostics Laboratory based business revenue grew 16% driven by both strong base business volume and Ascension.
For Biopharma Laboratory services second quarter revenue grew 3% driven.
Driven by Central laboratories business, which grew 9%.
Partially offset by early development research laboratories, which was down 7% due to an HP supply constraints.
We expect early development research laboratories to grow in the second half of the year versus prior year, and we do not expect impact from any supply constraints for the rest of the year.
Enterprise base business margin was slightly down compared to the prior year due to the impact of Ascension, which we discussed previously.
Diagnostic laboratory based business margin increased versus prior year, if you exclude extension.
In Biopharma Laboratory services margins expanded benefitting from Central Laboratory strong volume increases.
Glenn will provide more detail on our quarterly results as well as our updated 2023 outlook in just a moment.
As we mentioned at the top of the call. We completed the spin Unfortunately business on June 30th.
Want to thank both the Labcorp. Unfortunately teams for their tireless effort in achieving this milestone that positions us to better meet customer needs and delivers immediate value to our shareholders.
We announced it will begin an accelerated $1 billion share repurchase program.
We'll pay off $300 million of maturing debt and well utilize the remainder of the $1 6 billion dividend to Labcorp from fortress.
To be returned to shareholders through additional future share purchases and our cash dividends.
The completion of the spin brings the growth opportunities of our laboratory business is it's a full focus.
We are poised to leverage our deep science technology, and innovative laboratory network to drive growth and to deliver superior solutions to our customers.
We're also in a very strong position operationally to advance our laboratory business.
Here are several recent examples where we've progressed our enterprise strategy in the second quarter.
We continue to drive growth through health care system partnerships.
Earlier this month, we finalized our strategic relationship with Jefferson Health, one of the largest health system, serving the greater Philadelphia area in Southern New Jersey.
This new collaboration will focus on future research and innovation to improve health outcomes.
In May we announced the next step in our long standing relationship with Providence Health and services to acquire outreach laboratory business and select assets in Oregon.
This transaction builds on our more than 20 year history with the provenance family of organizations.
Finally earlier in July we announced the comprehensive lab relationship with legacy health important Oregon.
Under this agreement laptop or acquire select assets of its outreach laboratory business, and putting laboratory facilities and equipment and manage legacy inpatient hospital laboratories.
These relationships create immediate value for hospital systems for patients for communities, while also providing significant growth opportunities for labcorp.
The partnership's meet our criteria of being accretive to earnings and cash in the first year.
Although the margins are typically lower than the company average early on.
To improve over time.
We are also pleased with our progress integrating hospital partnerships and acquisitions.
For example, with Ascension, which we announced in 2022, we continue to see reduced employee turnover and improved performance due to our partnership.
This scalable model connect our two mission driven organizations to provide care teams have information to make the best possible decisions for patients.
We continue to look for regional laboratory acquisitions in geographies, where we can increase access to diagnostics and expand capabilities.
As an example, this week, we completed our acquisition of certain assets of Enzo Biochem Clinical Laboratory Division in New Jersey, which serves the New York Tri State Health care communities.
We have a very robust pipeline of potential hospital local laboratory acquisitions, and we'll continue to focus energy and resources on its <unk>.
Important opportunity for growth.
Additionally, we're investing in innovation and technology that supports diagnostics and drug development testing across disease areas, including cancer Alzheimers and other diseases.
In May we commercially launched a new liquid biopsy tests, enabling target therapy selection for patients with advanced or metastatic solid tumors.
Lastly, our plasma focused SaaS allows oncologists to better evaluate tumor cells and manage the care of patients through a precision therapy plan.
Additionally, our portfolio of <unk> solutions from the acquisition of <unk> is gaining momentum with major health systems and academic centers.
Our solutions can enable operational and financial efficiencies that are making us a key partner for hospitals and health systems as they execute on our precision medicine programs.
Recently, we were first laboratory to lots of tests for <unk>, 181, and plasma and important blood test for potential alzheimers patients demonstrating symptoms of dementia.
Our teams are at the forefront of Alzheimer's testing as the number of people impacted by this disease is expected to double over the next two decades.
And in immunology, and immuno toxicology lab in Shanghai.
In addition, we delivered impactful digital solutions to help our customers understand manage and improve their health.
As part of our commitment to improving the customer experience, we launched an advanced e-commerce platform to improve consumer engagement with Labcorp.
Platform will support all of our businesses, including laptop on demand, which offers consumers access to many of Labcorp innovative tests online nationwide.
Lastly, I speak on behalf of the entire management team when I say that we are excited about our upcoming Investor day on September 14 in New York City.
This event will highlight our go forward strategy offer business overviews and provide a longer term financial outlook, we have a value creation roadmap that we are excited to share.
Today marks a new chapter in our company's history, we have a team of more than 60000 global employees with United focus.
Lastly, our space business is performing very well, we are executing on our growth strategy and we're leveraging labcorp financial strength as well as operational focus to improve health to improve lives, while also increasing shareholder value.
With that I'll turn the call over to Glenn.
Thank you Adam.
I'm going to start my comments with a review of our second quarter results followed by a discussion of our performance in each segment and conclude with an update on our full year guidance.
For reference we've also included additional business information that can be found in our supplemental deck on our Investor Relations website.
With the spin completed on June 30, we have treated for Korea as discontinued operations in the second quarter. All of my comments will reflect the current business and have been adjusted to exclude for trio in prior periods for comparative purposes.
Revenue for the quarter was $3 billion, an increase of three 8% compared to last year, primarily due to organic base business growth and the impact from acquisitions, partially offset by lower Covid testing.
The base business grew 12, 7% compared to the base business last year, while Covid testing revenue was down 88% as we performed an average of 3000 PCR tests per day in the quarter.
Organically in constant currency the base business grew 10, 8% benefiting from the Ascension Lab management agreement, which contributed approximately 5% of the organic growth.
As a reminder, the outreach business that we acquired from Ascension is treated as an acquisition while the lab management agreement is treated as organic growth.
Operating income for the quarter was $266 million or eight 8% of revenue during.
During the quarter, we had $52 million of amortization and $131 million of restructuring charges and special items, primarily related to the spin Unfortunately acquisitions and launchpad initiatives.
Excluding these items adjusted operating income in the quarter was $448 million or 14, 8% of revenue compared to $548 million or 18, 7% last year.
The decrease in adjusted operating income was due to lower Covid testing.
The margin decline was also negatively affected by the mix impact from the Ascension Lab management agreement.
Excluding these items margins would have been up slightly as the benefit of demand and launchpad savings were partially offset by higher personnel expense and increased R&D investments in oncology.
Our launchpad initiatives continues to be on track to deliver $350 million of savings over the three year period ending 2024.
In addition, the company is implementing actions in the third quarter to take out $25 million of annualized stranded costs throughout the enterprise as a result of the spin.
The tax rate for the quarter was 24, 3% the adjusted tax rate for the quarter was 23, 9% compared to 25, 3% last year.
The lower adjusted rate was primarily due to R&D tax credits, we continue to expect our full year adjusted tax rate to be approximately 24%.
Net earnings for the quarter from continuing operations were $155 million or $1 $74 per diluted share.
Adjusted EPS were $3.42 in the quarter down 15% from last year due to lower Covid testing earnings as base business adjusted EPS was up approximately 18%.
Operating cash flow from continuing operations was $280 million in the quarter, which was burdened by approximately $65 million of spin related items.
Operating cash flow of $280 million down from $548 million, a year ago, primarily due to lower COVID-19 testing earnings and spin related items in.
In addition, higher working capital requirements that are timing related were partially offset by higher base business earnings.
Capital expenditures totaled $103 million down from $140 million last year.
For the full year, we continue to expect that capital expenditures will be approximately three 5% of base business revenue.
Free cash flow from continuing operations for the quarter was $177 million, including approximately $65 million of spin related items.
The company invested $137 million in acquisitions and paid out $65 million in dividends.
While the company did not repurchase shares in the second quarter, we announced a $1 billion accelerated share repurchase program that we expect to put in place in the third quarter and be completed by year end.
At quarter end, we had $1 9 billion in cash, including the $1 $6 billion dividend from <unk> spin.
While debt was $5 3 billion.
Our leverage was two six times gross debt to trailing 12 months adjusted EBITDA.
Now I'll review, our segment performance beginning with diagnostics laboratories.
Revenue for the quarter was $2 3 billion, an increase of three 8% compared to last year, driven primarily by organic growth of one 8% and acquisitions of two 2%.
The base business grew organically by 13, 5% compared to the base business last year, while Covid testing revenue was down 88%.
The Ascension Lab management agreement contributed approximately 7% of the growth.
Total volume increased one 4% compared to last year as acquisition volume grew two 5%, partially offset by organic volume of minus one 1% due to COVID-19 testing.
Base business volume grew eight 1% compared to the base business last year, including the benefit from acquisitions of two 7%.
The strong year over year growth rate was also aided by lower than normal volume in the second quarter of 2022 due to omicron.
Price mix increased two 4% versus last year, primarily due to organic base business growth of six 8%, partially offset by lower COVID-19 testing a three 9%.
Base business organic price mix was up 8% compared to base business last year benefiting from the Ascension Lab management agreement of approximately 7%.
Diagnostics laboratories, adjusted operating income for the quarter was $410 million or 17, 5% of revenue compared to $516 million or 22, 9% last year.
The decrease in adjusted operating income was due to lower Covid testing, while the margin decline was also negatively impacted by the mix impact from Ascension.
Base business margin, excluding the mix impact of Ascension was up approximately 40 basis points as the benefit of organic growth and launchpad savings were partially offset by higher personnel expense.
Now I'll review our segment performance of Biopharma Laboratory services.
Revenue for the quarter was $699 million, an increase of three 1% compared to last year, primarily due to an increase in organic revenue of two 1% and foreign currency of one 5% the.
The increase in organic revenue was negatively impacted by approximately 5% due to the previously communicated and HP related supply constraints in our early development research laboratories business.
Adjusted operating income for the segment was $105 million or 15% of revenue compared to $93 million or 13, 7% last year the.
The increase in adjusted operating income and margin was due to organic demand and launchpad savings, partially offset by higher personnel expense.
We ended the quarter with backlog of $8 billion.
And we expect approximately $2 5 billion of this backlog to convert into revenue over the next 12 months.
Yeah.
Now I'll discuss our 2023 full year guidance, which assumes foreign exchange rates effective as of June 32023 for the full year.
The enterprise guidance also includes the impact from currently anticipated capital allocation with free cash flow targeted for acquisitions share repurchases and dividends. In addition, the guidance includes the $1 billion accelerated share repurchase program with proceeds from the spin.
Excluding for trio, our current enterprise guidance for revenue earnings and cash flow remains unchanged from our prior guidance given in April .
Enterprise revenue was in line with diagnostics laboratory slightly up while Biopharma Laboratory services is slightly down.
We expect enterprise revenue to grow one 5% to 3% compared to 2022.
This increase reflects the base business growing 11, 3% to 12, 6%, while COVID-19 testing is expected to decline 85% to 89%.
We expect diagnostics laboratories revenue to be up <unk> 5 million to one 5% compared to 2022.
This is a 25 basis point increase at the midpoint from our April guidance as the base business outlook is improved.
Partially offset by lower Covid testing.
This guidance includes the expectation that the base business will grow 13% to 14, 2%, which includes approximately 5% growth from ascension.
The base business has improved from our April guidance based on stronger demand.
We continue to expect diagnostics laboratories based business margin to be slightly up in 2023 versus 2022, including the unfavorable mix impact from ascension.
We expect Biopharma laboratory services revenue to grow three to four 5% compared to 2022.
This guidance includes the positive impact from foreign currency of 150 basis points.
The midpoint of our guidance range is down approximately 75 basis points from the midpoint of our April guidance, but implies around nine 5% growth in the second half of the year as we expect favorable growth in both central laboratories, and early development research laboratories.
We also expect that the segment margin will be flat to slightly up in 2023 compared to 2022.
Our guidance range for adjusted EPS is $13 to $14, which is consistent with our April guidance, excluding for Korea, and including the impact from the accelerated share repurchase program.
Free cash flow from continuing operations, excluding spin related items is expected to be between $800 million to $1 billion.
In line with our prior guidance excluding for Korea.
In summary, we expect to drive continued profitable growth in our base business. 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.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone.
Your question. Please press Star one again, please wait for your name to be announced we ask that you. Please limit your questions to one question. Please standby, while we compile the Q&A roster.
For your first question.
And our first question will come from the line of Jack Meehan with Nephron Research. Your line is now open.
Thank you good morning good.
Good morning, Mike.
My questions are on the new Biopharma lab services segment.
Number one.
Was curious if you could comment on just how much visibility you have into the improvement you're looking for in the second half of the year for early development Research labs.
And just give us an update in terms of the supply situation for NH piece.
Yes, so first of all I'll answer.
The second part first so we are good shape for the rest of the year with NH fee. We don't expect any additional impact as we go through the second half and then to answer. The first question. If you just look at the midpoint of our guidance. It would imply about a nine 5% increase year over year and that is going to come from both segments.
<unk> segment as well as from the clinical laboratory.
Early development Research laboratory as well as the clinical research laboratory segments.
Great. Okay, and then maybe for Glenn just for the segment overall.
Could you talk about expectations for the second half margin ramp in Viropharma lab services and just how we should be.
If you can humor me any thoughts on the leaping off point for 2024.
Yes, hi, Jack so when we think about margins again, specifically for Biopharma, obviously, we expect to see a second half margin.
Our improve over the first half and improve year over year. So again benefiting from the topline growth that Adam said was kind of in the implied revenue growth of nine 5% for the segment, we will get good leverage all over that as well as benefiting from launchpad.
We said that for the full year for Biopharma margins will be flat to slightly up again, consistent with frankly diagnostics margins being up a little bit for the enterprise as well, including the negative impact from Ascension. So we feel good about margins driven off of the top line.
When you look at the quarter, we felt actually very good.
With a 15% margin in the quarter for Biopharma, realizing that we had very strong growth coming from central lab that really helped it but also we had negative growth from early development research, which constrained. It. So we feel good about where we are kind of as a run rate and if we can maintain that level of margin that will get us again higher margins.
For the full year as well as year over year.
Thank you Glenn.
Great.
Our next question comes from Lisa Gill with Jpmorgan. Your line is now open.
Good morning, Good morning, Ed.
Nice to talk to you guys again, thanks for taking my question.
When I when I look at your expectations and I look at the revenue growth rates.
Talk about utilization trends do you think that there is still some level of pent up demand how do I think about this versus 2019 baseline, which would be kind of my my utilization question and then secondly, how do I think about reimbursement trends.
Especially on the managed care side.
Two years ago, we talked a lot about shift towards some type of value based economics are we finally, there and if so can you maybe talk about some of the things that youre seeing in the market.
Yes, I'll, let Matt answer the first question I'll take the second one.
Lisa if you look at the reimbursement trends, what I would say is that it continues to be a relatively stable environment and I feel good about our interactions with the payers I feel good about our <unk>.
Contracts that we have in place I wouldn't say, yet we are there for value base.
Contracts and so forth I think there's still a lot of experimentation that happens, but we don't see a lot of significant progress with all of that said I believe that we're in a very good position moving forward with the payers and Theres nothing that I would expect to be unexpected what we're watching closely obviously is paramount to see what happens there and government.
Reimbursement on certain areas, but overall it remains.
Pretty healthy environment.
Yeah, and Lisa on the utilization, so and as you think about the quarter, obviously from a base business organic standpoint, we were up 13, 5%.
So obviously very strong growth when you look year on year, but including the benefit from Ascension. So think about kind of the same store sales. If you will growth excluding the impact of ascension were up around 7% so higher than normal growth rates in part given the comp that we would have had a year ago and of that around five five.
<unk> of that is coming from our volume and the other point and a half call. It from favorable price mix. So as you think about it relative to 2019 kind of pre pandemic are we tracking at a more normal level. We would say we are now if you look at the compound annual growth rate compared to 2019 again.
At 7% year on year growth. This year would have been more like around a 4% compound growth rate compared to 2019 with volume and between call. It a one 5%.
Growth rate compared to 2019, so as we think about volume normally historically of one or two were kind of sitting squarely in the middle of that so it says we're tracking more normal but the year over year is benefiting from some softness last year.
That's helpful. Thanks, so much.
Okay.
Thank you one moment our next question.
The next question comes from the line of a J Rice with credit Suisse. Your line is open.
Good morning Ajay.
Hi, everybody.
Maybe just asking I know Scott.
Got some point over the last year has been labor.
Wondered if theres updated thoughts on whether the pressure points in the last year. So the same is there any updated thoughts on general average wage increases and I wanted to just make sure I understood on that 25 million of stranded costs is that in the biopharm lab services or is that how somewhere else and whats the timeframe for whittling that down.
I would say is if we look at our turnover rates, although they are still higher than they were prior to COVID-19. They actually look better this year than they did last year and we're seeing some improvement.
Wage inflation continues to be an issue and we continue to use launchpad savings to offset that as best we can.
As we look at the $25 million and stranded costs.
That we're going to be removing its enterprise wide by the end of this year will be on the run rate to remove that for next year, but importantly, we are still committed to the $350 million of launchpad savings that we've talked about in the past. Despite the fact that we no longer have the clinical business, where some of that cost savings.
Obviously would've come from so we are going to continue to look for ways to reduce costs across the enterprise to offset some of the other pressures that we've talked about.
Yes, a J just just adding to that and then more specifically the $25 million of annualized cost stranded costs that we'll take out this year to your point.
Well it'll be throughout the whole enterprise obviously.
A lot of it initially will come from the Biopharma segment. So this is the call. It the support that we have at the segment level that supporting what is all three of the businesses that included for Korea business now supporting the two so we will look to take out a lot of those stranded costs. In addition, we will take out some stranded costs thats in corporate unallocated that wouldn't have.
Then allocated to the any of the businesses having.
Having said that when you look at our corporate and unallocated remember, we did around $66 million.
In the quarter, we have been seeing an increase in that relative to the R&D investments, we're making oncology. So very targeted investments that will kind of be offset that growth by some of the costs coming out of corporate and unallocated due to stranded.
So as we think about the run rate of corporate unallocated at 66 should still hold true. So it's roughly around two 2% of our revenues. So as we think longer term. In addition to the 25 that we're taking at which is more of a short term cost to take out of the stranded we feel theres also some other opportunities to take out additional costs within the.
Corporate and unallocated.
As we go forward and then obviously look to see the company through organic growth as well as acquisition growth as we grow as a company will be able to leverage the infrastructure and the cost structure, we have there even more.
Okay. Thanks, a lot.
Thank you one moment for our next question.
Our next question comes from the line of Eric Coldwell with Baird. Your line is now open Eric.
Eric Good morning, Hey, Good morning, first first if you don't might've been asked to under $25 million cost action the incremental does that represent but what portion of the stranded cost does that represent I assume its not the full amount, but could you tell us how that stacks up compared to the total yes. There is about 45 million.
Of stranded costs give or take a couple of million dollars and we're going to we have a path forward and we've identified the $25 million of that.
Perfect and then my.
First question was really going back to DNA HP.
Surprising to hear you say you don't expect a headwind or have no issues there in the back half.
And I'm curious how that is is it due to new supply access that you've been able to.
To get your hands on is it is it pricing has something changed in the market.
Allowing you to work around the.
Obvious Cambodian issue just just curious more on the mechanics of how you do not see a headwind from <unk> in the back half.
Yeah, Eric Firstly, I'd say as we look at the studies that we have for the back half we already have the anh piece that we need to support the studies when we first realized this issue. We immediately began to look for alternative suppliers to ensure that we would have capacity. The reason it took us through the first half of this year is because even when you receive it.
NH fees Theres, an acclimation period before you can utilize them in studies. So we've worked through that and based upon what we have today, we feel confident and HP trials going through the second half of the year, which is why at the midpoint of the guidance, we felt comfortable of nine 5% for the Biopharma Laboratory.
Business.
Is there a.
Adam is there a pricing component on top of that that would be incremental year over year that perhaps.
Perhaps the volume is not quite equivalent to last year, but with additional pricing you are getting to.
Youre able to not have a year over year headwind yes.
Yes, so what I would say is it is more costly today for MH piece and it was in the past much of that cost can be passed on to the customer with that said however, the margin on that cost is not able to be passed along so it does impact margin a bit but it doesn't impact us negatively weakened.
To fund the increased cost okay.
Okay. Thank you very much.
Thank you Eric Thank you.
One moment for our next question.
Our next question comes from Brian <unk> with Jefferies. Your line is now open.
Hey, Good morning, guys. Just one question really appreciate the color that you've shared on the.
Progress or success with hospital partnerships, just curious what those incremental conversations are with and what the pipeline looks like and what our hospitals looking for now as they try to figure out that strategy and who to partner with because obviously youre not just the only one looking for deals in this space.
Yes, Thanks, Brian and good morning.
We're excited about the success that we've had with the hospital partnerships I mentioned the three just in this last quarter that we were able to move forward with Jefferson legacy an additional part of Providence.
And the pipeline remains very strong as I look at the pipeline of potential hospital <unk> I'm excited about the opportunities before us I think the hospitals are looking for several things first and foremost you have to be able to give them patient continuity they need to make sure that theres no impact for their patients.
<unk> do a laboratory agreement second thing is science innovation technology, they want to find ways to actually get better science get better information faster. So that they can get better patient care as we move forward. The third thing that they're obviously looking for is to ensure that there is the ability to kind of have a long term relationship.
Chips I mentioned provenance, a 20 year relationships. These are long term deals they take a long time to get up and running and you want to make sure you choose the right partner, that's going to be a long term partner and as I look forward into the future. This will be a significant area of focus for Labcorp as I think it represents a tremendous growth opportunity.
Awesome. Thank you.
Yes. Thank you.
Our next question.
And our next question comes from Kevin Kelly, Enzo with UBS. Your line is open.
Good morning, Kevin.
Good morning, guys. Thanks for taking my question I just wanted to make sure I understand the bridge you said that your guidance is unchanged, excluding <unk> and excluding the ASR, which is going to start some time in the third quarter.
But that also includes $45 million of stranded costs $25 million of what you are going to come out.
Maybe maybe higher labor expenses I guess is there anything else is there any contribution from Enzo or lower COVID-19 or anything else. That's changed from your assumptions. When you provided it in April just trying to bridge to get to where we are and if those are the only inputs that we should be thinking about.
Yes go ahead.
Yes, so hi, Kevin So you're right. So as we went back and obviously, we looked at the current out like we said that overall at the enterprise level.
Consistent with the midpoint with revenues earnings cash flow and we obviously talked a bit about some pluses and minuses within the businesses that made up but at the enterprise level, where we were excluding for Korea. When you work down to the earnings similar so we had the earnings that we would've had in our outlook, we backed out the earnings in April if you will.
Taking up portray it but obviously we had the cash from the spin.
Added back in there and so from an earnings and then similar cash flow at the $900 million free cash flow from our continuing ops again, excluding spin excluding fortress. So all of those would have been in line with the expectations that we had.
In April when you look at acquisitions, so Enzo in particular, so Enzo we've talked about that free cash flow in our guidance the free cash flow, we generate in a year is between M&A share repurchases and dividends. So theres a portion of that capital. That's an M&A that we include in the enterprise revenues and that we.
Included in the segment revenues until those transactions are actually completed and then we move them down wouldn't change the enterprise number but it won't affect if you will kind of a segment.
Similarly, with lower Covid than what we were expecting in April that's being absorbed by stronger.
Base business demand in diagnostics, so favorable diagnostics on the upside a little softness within the Biopharma services and level of softness in COVID-19, but netting out to the enterprise. So that's how we kind of come back to that.
The consistency if you will if they are in lines with the pluses and minuses and launch pad again, we've talked about is continuing on track. So when we think about the labor markets really no change in our viewpoint from labor I mean, frankly, our attrition rates are tracking better than they have been a year ago, even though it's still higher than what we would have seen.
Pre pandemic.
The inflationary costs really haven't changed much from where we were thinking they would be in April so thats frankly.
Would say kind of in line with where we would have thought so overall, we feel again good about what we thought our businesses. We're going to do this year continues to be that same case.
That's super helpful. If I can ask a quick follow up to Eric's question I understand that you have visibility on the second half.
<unk> an early stage.
And that May have been a run through from that from the first happen, but some of the delays in the supply I guess my question is what's happening to demand.
Going forward I know you had visibility on these contracts, but what's happening with demand beyond that as you look forward into 'twenty for the second half of the year for new business and what's happening with the pricing in that market now with the supply coming back online.
So let me give you some context on south broad bucket on narrow it down to exactly answer your question.
Broadly if you look across 500 laboratories, we feel good about the book of business that we have we have a book to bill of one to two.
Trailing 12 month book to Bill of one to two and its important to note is with the new mix of business that we have having early development and having our central laboratories, a book to Bill of one 1% to $1. Two is healthy. So the book to Bill is healthy if we look at our Central laboratory business and orders in Rfps.
Continues to be very strong and robust if we look at our early development. We still continue to have significant number of rfps about the same as what we've seen before but in the very emerging smaller biotechs. We are seeing some pressure, particularly as some of them are canceling studies and so forth or.
<unk>, we continue to see very good demand as we walk into next year. When we look at our trailing 12 months book to go it gives us significant confidence as we go into next year and the good news is that if you look at the business. Overall, we are very much skewed towards large pharma large biotech when you look at the overall labor.
Our laboratory business.
Thanks, guys.
Thank you.
One moment for our next question.
Our next question comes from Derik de Bruin with Bank of America. Your line is now open.
Good morning Derik.
Hey, Good morning, this is actually John on for Derek.
Hey, good morning.
You've talked about your capital allocation of course, there is a share repurchase of $1 billion our.
Dividends be paid and you talked about the <unk>.
Slabs and inpatient hospital lab that you've acquired.
I wanted to ask what other kind of assets Youre looking at.
Perhaps.
The field and advanced diagnostic beyond.
Pdx.
Yes, thanks for the question and you're exactly right our capital allocation, we focus right now we have a $1 billion accelerated repo program. We've got our dividend that we're committed to we're going to pay down some maturing debt and at the same time, we have significant opportunity with hospital laboratories.
Well as local hospital.
Local laboratories, as well and Thats the primary focus of what we see in the near term.
I don't see us doing anything.
It would be a significant deal outside of our core expertise, we're focused on our core and maximizing our core.
A good portion of what we need there doesn't seem to be anything strategically that we're missing so it's really going to be about the hospital local laboratories, primarily.
I appreciate that and <unk>.
You briefly mentioned, Panama, So wanted to wanted to ask what youre expectation for Pam.
Is that coming year.
Any updated thoughts on that as well.
Yes so.
So we are hopeful that there is a path forward on SASSA ACL as a trade organization.
Working on that but at the same time, we realized that we've got to be prepared in case Tam. It does get implemented again next year. So when we think about next year, we've built into the plan about $75 million of downside due to Panama.
Im hoping that we won't realize that but we have to create our business model assuming that does occur and have our cost base reflected what we would do if that does happen.
I am optimistic that people realize the importance of our industry and the importance of what we do and therefore, Pamela will not be implemented in a way it has in the past, but that's not what we're planning for as we move forward.
Yes.
I appreciate it thank you.
Thank you.
One moment for our next question please.
Our next question will come from the line of Patrick Donnelly with Citi. Your line is now open.
Good morning. Thanks, Thanks for the question Hey, how are you.
Maybe just a quick one on Ascension can you just talk about how thats tracking on both on the revenue side and then you mentioned obviously the margin piece I know, it's a big focus in terms of ramping that up.
Average and then some.
Yes, I would love just an update on ascension, how you're tracking in the cost side as well.
Yes, so I'll start and then Greg can add some contracts. So we're very pleased with the relationship that we have with ascension and how the deals progressing in particular, the integration is going very very well.
We've given kind of a sense of $550 million to $600 million is what we expect the revenue to be I would say is probably contributing more towards the higher end of that than than the lower end of that and.
And if you look at the margins. We said it was going to start at the low single digits and then get to the mid single digits. After the first year and it's certainly on track to do that and then we expect next year and the following years for the margin to continue to improve ultimately because of the mix of ascension being heavily towards managing there.
Laboratories, the margin will never get to our average margin.
It will continue to improve over time.
No the only thing I'd add.
Ed is that when you think about again, what's changed in our outlook a little bit part of that is the benefit of Ascension as Adam said, we're currently towards the upper or at the upper end of the expectations. We had so improved on the volume side and then in addition from a margin standpoint, while we were initially expecting call it that low to mid single.
Digits, we're tracking well there as we get that additional volume coming through with momentum.
Taking us into the rest of the year.
Okay. That's helpful. Thank you guys.
Thank you just one moment for our next one.
Okay.
Peter Your line is now open.
Good morning, Peter.
Are there you've got a carrying Ryan on for Pete Thanks for taking the question.
Just wanted to go back to the Biopharma book to Bill real quick it sounds like you're happy with where that metric is I know the quarterly number came in at one point out of six so up a little bit sequentially.
Still down versus kind of historical is but it sounds like from the commentary you gave that maybe we shouldnt expect much like a huge rebound in that metric in the back half even as early development starts to accelerate.
Yes. So if you look at our trailing 12 months, it's 123, and that's a very healthy book to Bill, particularly for the businesses that we have early development typically you would have a lower book to bill because the studies burn much faster and you can actually have studied that.
Start and finished within a given year so anything between one one and a $1 two we consider to be healthy and as we look forward. We continue to feel that there is plenty of opportunity. The rfp's continues to look good. So we're optimistic about where we're seeing the book to bill.
Thank you.
Thank you.
One moment for our next question please.
And our final question comes from the line of Tam Daily with Wells Fargo Securities. Your line is now open.
Tim Thank you hey, everybody.
Just wanted to get a bit more detail on the capital deployment strategy, specifically related to international so highlighted.
The Biopharma lab services expansion in Japan, and China, adding footprints on central lab or a development there.
Okay. Thank you.
Using some of the previous disclosures I know, it's tough to get through but it does seem like a lot of the Asia exposure with the clinical business.
Is this a pointed strategy to try to.
<unk> gained some footprint back in Asia.
Longer term, how do you think about the international footprint of the bio segment.
Where do you want to be.
Capability wise.
<unk>.
Yes, Thank you Kevin.
That we announced today, obviously, we had those underway for quite some time to plan and prepare for so that's irrespective of the clinical business Theyre not at the end of the day. When you think about China, Japan, that's the second and third largest market in the world for pharma. So you need to have a very strong presence too.
Have the capability to meet the needs of the pharmaceutical clients in the biotechnology clients. So it's just a way for us to continue to meet those customer needs and.
We've done a lot in the past in terms of ensuring that we have a global presence and I feel good about the global presence that we have today. We are significantly further ahead, particularly with our central laboratory business than we were before.
Alright got it and then just.
And a housekeeping one here now that we've got the new structure for the segments.
Should we be thinking about communication.
<unk> for the two.
Thank you Matt growth sub segments margins.
Any color kind of.
Regular kpis for us going forward.
Yes, Hi, Tim.
What youll see is that consistent with what we've done before so to.
The same metrics that we provided for the two segments will continue obviously Biopharma Laboratory services now consists of the two versus the three businesses, but you will see in the enhanced disclosures that we provided we continue to do a breakout of the individual businesses and that from the segment standpoint.
We give guidance for the top line for the year.
We provide obviously in our remarks, the trailing 12 months, which is really where we focus on book to bill and backlog in orders, but in the enhanced disclosures. We also provide that on a quarterly basis. So none of the changes from where we've been providing before.
Alright, great and congrats jazz and look forward to working with you Kristen.
Thank you.
I would now like to hand, the conference back over to Mr. Adam.
Sir for closing remarks please.
Alright, Thank you everybody for joining us today, and we really do look forward to sharing more with all of you at our Investor Day in September .
We look forward to that time, we wish you in the meantime, a very happy and healthy summer and we'll see in September .
This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
Okay.
Okay.
[music].
Okay.
Yes.
[music].
Okay.
Yes.
Okay.
Okay.
Okay.
[music].
Okay.
Yes.
Yes.
Okay.
Yes.
Okay.
Sure.
Yes.
Yes.