Q4 2023 Quest Diagnostics Inc Earnings Call

Welcome to the quest diagnostics fourth quarter and full year 2023 conference call at.

At the request of the company this call is being recorded.

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

I'd now like to introduce Sean Bezeq, Vice President of Investor Relations for Quest Diagnostics. Please go ahead Sir.

Shawn Bevec: Thank you and good morning, I'm joined by Jim Davis, Our Chairman and Chief Executive Officer, and President 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.

Sean Bezeq: Our results may differ materially from those projected.

Risks and uncertainties 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.

Sean Bezeq: For this call references to reported EPS refer to reported diluted EPS and references to adjusted EPS refer to adjusted diluted EPS any references to base business testing revenues or volumes referred to the performance of our business, excluding COVID-19 testing.

Sean Bezeq: 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.

Sean Bezeq: Finally revenue growth rates from acquisitions will be measured against our base business.

Sean Bezeq: Now here's Jim Davis, Thanks, Sean and good morning, everyone.

James E. Davis: Full year 2023, we delivered strong revenue growth of 7% and our base business and delivered on our earnings commitment as we transitioned away from Covid testing.

James E. Davis: The results, we announced this morning reflect a strong fourth quarter and full year for our base business in which we made substantial progress on our strategy to drive top line growth across our core customer channels and improve profitability.

James E. Davis: Throughout the year, we advanced our growth strategy with innovative testing solutions, new and expanded relationships with health systems, and a robust pipeline of M&A and professional lab services opportunities. We also delivered double digit revenue growth in several clinical areas, including advanced cardio metabolic <unk>.

James E. Davis: NATO and hereditary genetics in neurology.

James E. Davis: We also strengthened our oncology offering with a strategic investment in higher growth minimal residual disease testing.

James E. Davis: In addition, our efforts to improve quality and productivity delivered our invigorate goal, which helped us offset the cost headwinds we faced throughout the year.

James E. Davis: This morning, we issued guidance for 2024 that reflects a return to overall revenue growth, while balancing the earnings tailwind and headwinds we see for the year.

James E. Davis: Looking beyond 2024, we are well positioned to deliver our long term financial outlook to drive mid single digit revenue growth and high single digit earnings growth.

I'm grateful to our dedicated quest colleagues for making this happen.

James E. Davis: Every day, they bring our purpose to life working together to create a healthier world one life at a time.

James E. Davis: Before discussing the highlights from 2023 I'd like to share some recent regulatory updates.

First as you know Congress once again delayed Medicare reimbursement cuts in the next data collection process under a hammer that were scheduled to take place in 2024.

James E. Davis: While we are pleased with the delay we continue to work closely with our trade association to seek a permanent fix to Panama through salsa.

James E. Davis: Having access to laboratory services Act I close highest priority. This year is to secure passage of salsa.

James E. Davis: Decade, Aqua and nearly 7000 other individuals and groups submitted comments last quarter on a rule proposed by the F. D. A to regulate laboratory developed tests as medical devices lab developed tests are essential medical innovations that are already highly regulated under federal legislation.

James E. Davis: One is clear.

James E. Davis: In addition to the oversight by states accrediting bodies and Medicare as it makes coverage determinations.

If enacted the Fda's proposed rule would compromise patient access to our central lab testing. It would also slow diagnostic innovation and add unnecessary health care costs, we agree with that go up that the FDA does not have the statutory authority to unilaterally regulate L D Ts and believed that.

James E. Davis: Resuming discussions with the FDA Congress Act law and other stakeholders on a legislative solution is the most prudent path forward now I'll recap our strategy and discuss highlights from the fourth quarter, then Sam will provide more detail on our financial results and talk about our financial guidance for 2024 hour.

James E. Davis: Our strategy to drive growth is focused on delivering solutions that meet the evolving needs of our core customers physicians hospitals and consumers, we enable growth across our customer channels through advanced diagnostics with an intense focus on faster growing clinical areas, including molecular genomics and oncology in it.

James E. Davis: Acquisitions are a key growth driver with an emphasis on accretive hospital outreach purchases as well as smaller independent labs. Our strategy also includes driving operational improvements across the business with strategic deployment of automation and AI to improve quality and efficiency.

James E. Davis: Workforce experience and service here are some updates on the progress we have made in these areas in the fourth quarter and position lab services, we delivered mid single digit base business revenue growth.

James E. Davis: We attribute this growth to return to care overall market growth and share gains driven by the competitive strengths of our scale and innovative offerings.

James E. Davis: We continue to execute hospital outreach and independent lab acquisitions, which generate volume for our physician channel.

James E. Davis: In January we entered into a definitive agreement to acquire a select assets of Blanco and independent New York based Laboratory company and expect to complete the transaction later this quarter.

James E. Davis: In addition, we acquired outreach assets of Steward health care, which will deepen our reach to patients in Massachusetts, Pennsylvania, and Ohio, as we said earlier our acquisition pipeline is very strong and we expect to complete additional transactions in 2024, our strong relationships with health plans were.

James E. Davis: Also a key driver of growth in 2023, as we grew revenues from health plans by high single digits versus the prior year.

James E. Davis: As we've indicated we successfully completed negotiations for all our strategic health plan renewals that were scheduled in 2023.

James E. Davis: Plans and self insured employer clients recognize the clinical and economic value, we deliver to them and their members.

James E. Davis: To date more than half of health plan revenues now come from value based contracts, which enable faster growth compared to our traditional health plan contracts. In addition, working with health plans, we continue to reduce so called lab leakage to high cost out of network labs.

James E. Davis: Lead by redirecting the volume to quest.

James E. Davis: Importantly, this is good for both patients as well as employers, which pay for the majority of health care costs.

James E. Davis: In Hospital Lab services, we drove high single digit base business revenue growth in the fourth quarter with strength in both reference and professional laboratory services Hospital reference testing in particular grew much faster than historical trends and well above our estimated growth for the market increasingly health systems recognize that.

James E. Davis: Our innovative laboratory testing and collaborative lab management solutions can help them improve quality productivity affordability and care.

James E. Davis: They also continue to face labor and cost pressures, prompting more of them to reach out to us to help with their lab strategy.

James E. Davis: Our professional lab services help manage a hospital lab supply chain and workforce. We also provide insights from our analytical solutions to help hospitals manage utilization to deliver the right test to the right patient at the right time.

James E. Davis: In the fourth quarter, we completed two pls relationships that will contribute modest growth in the first quarter of this year.

James E. Davis: We also provide health systems, the opportunity to transition their noncore outreach laboratory assay to us through acquisitions by selling their outreach assets to quest. These hospitals are better able to redeploy scarce capital to areas of their business that have a greater impact on patient care.

James E. Davis: Consumer initiated testing service Quest health Dot com generated revenues of approximately $45 million in the full year 2023 with strong base business growth.

James E. Davis: Our return on AD spend and customer acquisition costs remain favorable in the fourth quarter.

James E. Davis: Another element of our strategy is to drive revenue growth through channel partners in 'twenty to 'twenty, three we generated more than $30 million through this channel. We are also excited about new product releases in 2024, including blood testing for P. Fahs for forever chemicals via Quest helped dot com.

James E. Davis: <unk> chemicals had been used in industrial and consumer products for decades, and May contaminate food and water.

James E. Davis: In late January the CDC issued new guidelines that recognize the value of P. Fast blood testing for individuals that may have elevated exposure levels, which may increase risk of kidney cancer high cholesterol and other health conditions.

James E. Davis: According to a study in the journal of Endocrine Society, DFAST chemicals accounted for approximately $22 billion in U S health care costs in 2018.

James E. Davis: Advanced diagnostics, we experienced double digit growth across several clinical areas in the fourth quarter, including advanced cardio metabolic prenatal and hereditary genetics and neurology.

James E. Davis: In neurology was driven largely by our all timers disease portfolio of tests, which is among the most comprehensive in the fast evolving field of all timers care.

James E. Davis: Our innovations include our 80 detect blood tests for early risk assessment based on amyloid beta proteins and <unk> genetic risks. This week. We also added P. Tau 181 to our 80 detect blood test line to complement insights from amyloid beta testing.

In addition, our all time highs disease test portfolio includes several CSF tests for diagnosis and monitoring based on amyloid Beta P. Tau 181 in April we.

James E. Davis: We intend to add additional Biomarkers later, this year and continue to expand our menu.

James E. Davis: In molecular genomics in oncology, we are on track to launch our haystack minimal residual disease tests to physicians later this year from our oncology center of excellence in Lewisville, Texas.

James E. Davis: We also believe haystack M. R. D can help support clinical research and recently announced clinical trial collaborations using this innovative technology with the Rutgers Cancer Institute Alliance Foundation trials and try and sell US life Sciences in the fourth quarter, we announced a collaboration with Universal Dx.

James E. Davis: Which has developed an innovative blood test for screening for colorectal cancer, including Precancerous lesions, we look forward to supporting Universal's effort to gain regulatory approval for this test.

James E. Davis: Through our collaboration with <unk>, we are expanding patient access to the prism or a test for aiding treatment selection for rheumatoid arthritis.

James E. Davis: Turning to operational excellence, our invigorate program delivered our targeted 3% annual cost savings and productivity improvements here are three examples of how we're improving operations.

James E. Davis: First we continue to make progress in using front and automation to enhance specimen processing in 2023, we completed front end automation upgrades in our Pittsburgh, and Dallas laboratories, which will improve quality and productivity. This year will add five additional sites second we also.

James E. Davis: And at the use of AI to improve quality efficiency and workforce experienced in several clinical areas AI can quickly identify patterns that signify possible disease and digital images of patient cultures and slides.

James E. Davis: In 2023, we expanded the use of AI in microbiology to help identify bacteria as well is in cytogenetics to identify chromosomal abnormalities looking.

James E. Davis: Looking forward, we are encouraged by the opportunities to use AI in several additional critical areas, including cytology pathology in parasitology.

James E. Davis: Third in 2023, we deployed an AI tool at our Clifton lab that helps laboratory staff continuously identify ways to be more productive in their daily routines and we look forward to introducing this AI job helper and other labs and support processes.

James E. Davis: Finally, we made significant progress improving the margins of our base business in 2023 I'd like to personally. Thank our quest colleagues who've efforts have helped make this possible.

James E. Davis: With that I'll turn it over to Sam to provide more details on our performance and our 2024 guidance Sam Thanks, Jim.

Sam: In the fourth quarter consolidated revenues were $2 9 billion.

Sam: Down one 9% versus the prior year.

Sam: Base business revenues grew four 7% to $2 25 billion.

Sam: While COVID-19 testing revenues declined approximately 80% to $37 million.

Operator: Welcome to the Quest Diagnostics fourth quarter and full year 2023 conference call. At the request of the company, this call is being recorded.

Revenues for diagnostic information services declined 2% compared to the prior year, reflecting lower revenue from COVID-19 testing services versus the fourth quarter of 2022.

Operator: The entire contents of the call, including the presentation and question and answer session that will follow, are the 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. I'd now like to introduce Shawn Bevec, Vice President of Investor Relations for Quest Diagonal. Okay, let's go ahead. Thank you, and good morning.

Sam: Partially offset by strong growth in our base testing revenue.

Sam: Total volume measured by the number of requisitions increased one 9% versus the fourth quarter of 2022.

With acquisitions, contributing 50 basis points to total volume.

Sam: Total base testing volumes grew five 2% versus the prior year.

Sam: Revenue per requisition declined three 5% versus the prior year, driven primarily by lower COVID-19 molecular volume.

Shawn Bevec: I'm joined on this call by Jim Davis, our Chairman, Chief Executive Officer, and President, and Sam Samad, our Chief Financial Officer. During this call, we may make forward-looking statements, and we'll discuss non-GAAP measures. We provide a reconciliation of non-GAAP measures to comparable GAAP measures in the tables to our earnings press release. The actual results may differ materially from those projected. Risks and uncertainties 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, subsequent filed quarterly reports on Form 10-Q, and current reports on Form 8-K. Recall that references to reported EPS refer to reported diluted EPS. References to Adjusted EPS; preferred to Adjusted Diluted EPS.

Sam: Base business revenue per req was up 2% unit price reimbursement was positive and consistent with our expectations.

Sam: Reported operating income in the fourth quarter was $267 million or 11, 7% of revenues.

Sam: $235 million or five 8% of revenues last year.

Sam: On an adjusted basis operating income was $338 million or.

Sam: Or 14, 8% of revenues.

Sam: <unk> to $330 million.

Sam: Or 14, 2% of revenues last year.

Sam: The year over year increase in adjusted operating income is related primarily to growth in the base business.

Shawn Bevec: Any references to base business, testing, revenues, or volume refer to the performance of our business-excluding COVID-19 test, growth rates associated with our long-term outlook project, including Total Revenue Growth and Revenue Growth from Acquisition. Organic revenue growth and Adjusted Earnings Growth are Compound Annual Grosses. Finally, revenue growth rates from acquisitions will be measured against our base... Now, here's Jim Davis. Thanks, Shawn. And good morning, everyone

Sam: Actions taken in 2023 to reduce support costs.

Sam: Lower performance based compensation, partially offset by lower COVID-19 testing revenues wage increases higher employee health care costs and higher deferred compensation expense.

Sam: Reported EPS was $1 70 in the quarter compared to 87 a year ago.

Sam: Adjusted EPS was $2 15.

James E. Davis: For the full year 2023, we delivered strong revenue growth of 7% in our business and delivered on our earnings commitment as we transitioned away from COVID testing. The results we announced this morning reflect a strong fourth quarter and full year for our base business, in which we made substantial progress on our strategy to drive top-line growth across our core customer channels and improve profitability. Throughout the year, we advanced our growth strategy with innovative testing solutions.

Sam: Compared to $1 98 last year.

Sam: Cash from operations was $1 $2 7 billion for full year 2023 versus $1 $72 billion in the prior year, driven primarily by lower COVID-19 testing revenue.

Sam: Finally, our board of directors has authorized a five 6% increase in our quarterly dividend from <unk> 71 cents to.

Sam: The 75 per share or $3 per share annually.

James E. Davis: New and expanded relationships with health systems and a robust pipeline of M&A and professional lab services opportunities. We also deliver double-digit revenue growth in several clinical areas, including advanced cardiometabolic, prenatal, and hereditary genetics, and neurology. We also strengthened our oncology offering with a strategic investment in higher growth minimal residual disease testing. In addition, our efforts to improve quality and productivity delivered our Invigorate goal, which helped us offset the cost headwinds we faced throughout the year.

Sam: With the dividend payable in April 2020 for.

Sam: The company has raised its dividend annually since 2011.

Sam: Turning to our full year 2024 guidance revenues are expected to be between $9 35 billion and $9 $45 billion.

Sam: Reported EPS is expected to be in a range of $7 69 to $7 99.

Sam: And adjusted EPS to be in a range of $8 60.

Sam: To $8 90.

Sam: Cash from operations is expected to be approximately $1 3 billion.

James E. Davis: This morning, we issued guidance for 2024 that reflects a return to overall revenue growth while balancing the earnings tailwinds and headwinds we see for the year. Looking beyond 2024, we are well positioned to deliver our long-term financial outlook to drive mid-single-digit revenue growth and high-single-digit earnings growth. I'm grateful to our dedicated Quest colleagues for making this possible. Every day they bring our purpose to life, working together to create a healthier world, one life at a time. Before discussing the highlights from 2023, I'd like to share some recent regulatory updates. First, as you know, Congress once again delayed Medicare reimbursement cuts and the next data collection process under PAMA that were scheduled to take place in 2024. While we are pleased with the delay, we continue to work closely with our trade association to seek a permanent fix to PAMA through SALSA.

Sam: And capital expenditures are expected to be approximately $420 million.

Sam: We have posted a presentation on the Investor Relations page of our website that includes an adjusted earnings bridge, which shows some of the key elements to bridge from our 2023 adjusted EPS. So the 'twenty 'twenty four adjusted EPS guidance, we shared today, our 2024 guidance reflects the following.

Sam: Iteration.

Sam: We are no longer providing detailed base business and Covid revenue guidance. However, note that we are assuming that COVID-19 revenues will decline at least $175 million in 2024, which will partially offset the growth we expect from the base business.

Sam: Most of the Covid headwind in 2024 will occur in the first quarter as we generated $119 million of Covid revenue in Q1 last year.

In terms of M&A, our guidance only contemplates acquisitions that have been announced or closed to date, including the outreach acquisitions from New York Presbyterian and Steward health care.

James E. Davis: The Saving Access to Laboratory Services Act. ACLA's highest priority this year is to secure passage of the SALAS Act. Second, ACLA and nearly 7,000 other individuals and groups submitted comments last quarter on a rule proposed by the FDA to regulate laboratory-developed tasks as medical devices. Lab-developed tests are essential medical innovations that are already highly regulated under federal legislation known as CLIA, in addition to oversight by states, accredited bodies, and Medicare as it makes coverage determinations. If enacted, the FDA's proposed rule would compromise patient access to a central lab test.

Sam: As well as Blanco, the independent lab, Jim mentioned earlier.

Sam: We will absorb the full year of dilution from our acquisition of Haystack oncology with an incremental.

Sam: It'll impact of approximately 22 adjusted EPS in 2024.

Sam: We made strong progress improving our base business operating margins in 2023 and expect margin expansion in 2024.

Sam: We anticipate net interest expense to increase to approximately $190 million in 2024 as a result of higher borrowings following our debt issuance in November.

James E. Davis: It would also slow diagnostic innovation and add unnecessary health care costs. We agree with ACLA that the FDA does not have the statutory authority to unilaterally regulate LDTs and believe that resuming discussions with the FDA, Congress, ACLA, and other stakeholders on a legislative solution is the most prudent path forward. Now, I'll recap our strategy and discuss highlights from the fourth quarter. Then, Sam will provide more detail on our financial results and talk about our financial guidance for 2024. Our strategy to drive growth is focused on delivering solutions that meet the evolving needs of our core customers, physicians, hospitals, and consumers. We enable growth across our customer channels through advanced diagnostics with an intense focus on faster growing clinical areas, including molecular genomics and oncology. In addition, acquisitions are a key growth driver with an emphasis on accretive hospital outreach purchases as well as smaller independent labs.

Sam: We assume a roughly flat share count compared to the end of 2023.

Sam: We are expecting adjusted EPS in Q1 to be roughly 21% of our full year earnings.

Sam: This was slightly below the typical seasonality and reflects the significant amount of weather disruption we've experienced in January.

Sam: At this point, we anticipate a weather headwind of five to seven in Q1.

Sam: And finally as Jim mentioned earlier, we are well positioned to deliver our long term financial outlook to drive mid single digit revenue growth and high single digit earnings growth.

Sam: With that I'll now turn it back to Jim.

James E. Davis: Thanks Sam.

James E. Davis: Finally, I'd like to take a moment to remember Dr. Paul a brown, who passed away in January of this year and 1967, Dr. Brown founded met power the predecessor company of Quest diagnostics, providing basic lab services from his apartment in New York City Dr.

James E. Davis: Dr. Ron was a pioneer who invented the blueprint for our industry that today is recognized as essential to quality health care and we are grateful for his vision and leadership.

James E. Davis: Our strategy also includes driving operational improvements across the business with the strategic deployment of automation and AI to improve quality, efficiency, workforce experience, and service. Here are some updates on the progress we have made in these areas during the fourth quarter. In Physician Lab Services, we delivered mid-single-digit base business revenue growth. We attribute this growth to return to care, overall market growth, and share gains driven by the competitive strengths of our scale and innovative offerings. We continue to execute hospital outreach and independent lab acquisitions, which generate volume for our physician channels. In January, we entered into a definitive agreement to acquire select assets of Lenco, an independent New York-based laboratory company, and expect to complete the transaction later this quarter.

To summarize we delivered strong base business revenue growth in 2023 and achieved our EPS commitments.

James E. Davis: Our guidance in 2024 reflects a return to total revenue growth, while balancing the earnings tailwind and headwinds we see for the year.

James E. Davis: Looking beyond 2024, we are well positioned to deliver our long term financial outlook to drive mid single digit revenue growth and high single digit earnings growth.

James E. Davis: And I'm grateful to our dedicated quest colleagues, who bring our purpose to life every single day working together to create a healthier world one life at a time.

Speaker Change: Now we'd be happy to take your questions operator.

Speaker Change: Thank you we will.

Speaker Change: I'll now open it up to questions at the request of the company. We ask that you. Please limit yourself to one question.

James E. Davis: In addition, we acquired outreach assets of Steward Health Care, which will deepen our reach to patients in Massachusetts, Pennsylvania, and Ohio. As we said earlier, our acquisition pipeline is very strong, and we expect to complete additional transactions in 2020. Our strong relationships with health plans were also a key driver of growth in 2023, as we grew revenues from health plans by high single digits versus the prior year. As we've indicated, we successfully completed negotiations for all our strategic health plan renewals that were scheduled in 2023. Health plans and self-insured employer clients recognize the clinical and economic value we deliver to them and their members. Today, more than half of health plan revenues now come from value-based contracts, which enable faster growth compared to our traditional health plan contracts.

Speaker Change: If you have additional questions. We ask that you. Please fall back in the queue.

Speaker Change: To be placed in the queue. Please press star one from your phone.

Speaker Change: Withdraw press star two.

Speaker Change: Again to ask a question please press star one.

Speaker Change: And our first question today will come from Patrick Donnelly of Citi. Your line is open.

Patrick Donnelly: Thanks for taking the questions probably one for Sam just on the margin outlook for 2004 can you just expand a little bit on expectations, there, including maybe the cadence for the year and then just on the margin front with hammer.

Patrick Donnelly: Obviously, the push out it's not a function of you getting any windfall by any means but just that potential headwind being alleviated were there investments that you guys were kind of holding off on until you got more clarity on the outcome. There and then as you plan the budget agreement some more of those as Pam I got pushed out just wondering how you thought about that expense piece, there and it's been a bit more color on margins.

James E. Davis: In addition, working with health plans, we continue to reduce so-called lab leakage to high-cost, out-of-network labs, partly by redirecting the volume to Quest. Importantly, this is good for both patients as well as employers, which pay for the majority of health care costs. In hospital lab services, we drove high single-digit base business revenue growth in the fourth quarter with strength in both reference and professional laboratory services. Hospital reference testing, in particular, grew much faster than historical trends and well above our estimated growth for the market. Increasingly, health systems recognize that our innovative laboratory testing and collaborative lab management solutions can help them improve quality, productivity, affordability, and care. However, they also continue to face labor and cost pressures, prompting more of them to reach out to us to help with their lab stress.

Speaker Change: Thank you guys.

Speaker Change: Yeah. Thank you Patrick and good morning so.

Speaker Change: Listen we've made a lot of great progress in 2023 in terms of expanding our margins and offsetting the COVID-19 headwind that we saw in 'twenty three in terms of 24 expectations. As we mentioned on the prepared remarks, we're looking to expand margins to continue to expand margins in 'twenty four with again the key drivers of that are going to be.

Speaker Change: Volume growth the expectation of volume growth that we have in the plan that's going to be the biggest impact in terms of driving margins.

Speaker Change: We're going to be looking at continuing the great work that we're doing on invigorate and offsetting any cost headwinds.

We're assuming.

Speaker Change: The labor inflation to be in line with what we saw in 2023, so somewhere in that 3% to 4% growth range not necessarily expecting it to get worse, but not necessarily expecting it to get better.

James E. Davis: Our professional lab services help manage a hospital's lab, supply chain, and workforce. We also provide insights from our analytical solutions to help hospitals manage utilization to deliver the right test to the right patient at the right time. In the fourth quarter, we completed two PLS relationships that will contribute modest growth in the first quarter of this year. We also provide health systems the opportunity to transition their non-core outreach laboratory assets to us through acquisition.

Speaker Change: In terms of your question on Panama, Patrick Youre, absolutely right its not a positive it's the absence of a negative so essentially the delay it gives us.

Speaker Change: No certainty now for 24 that were not going to see a decline and had Panama occurred or have Panama come back in 2024, Youre right in the sense that we would've had to potentially defer certain investments we would have had to make some.

James E. Davis: By selling their outreach assets to Quest, these hospitals are better able to redeploy scarce capital to areas of their business that have a greater impact on patient care. Our consumer-initiated testing service, QuestHealth.com, generated revenues of approximately $45 million for the full year 2023, with strong base business growth. Our return on ad spend and customer acquisition costs remain favorable in the fourth quarter. Another element of our CIT strategy is to drive revenue growth through channeled partners.

Speaker Change: Potentially difficult cuts to offset some of that impact and the fact that we have a delay affords us the ability now to make certain investments and two.

Speaker Change: So avoid some of those difficult cuts that I referenced but I think the key punch line for 2024 is that we continue to expand operating margins. Jim do you want it to make it yeah. So Patrick you heard me discuss in our prepared remarks, we're going to continue to invest in our Alzheimers portfolio of tests are so one important blood based biomarker that we will.

James E. Davis: Bring up later this year and that will complete our investments in our all timers testing from a blood based standpoint, you heard me mentioned that P. Fast testing, we're bringing that test up we'll be launching that here in the first quarter.

James E. Davis: In 2023, we generated more than $30 million through this channel. We are also excited about new product releases in 2024, including blood testing for PFAS or forever chemicals via questhealth.com. PFAS chemicals have been used in industrial and consumer products for decades and may contaminate food and water.

James E. Davis: We have gotten significant consumer and physician demand to bring that test up and then finally, we're upgrading some of our laboratory information systems and in a couple of our esoteric labs and so you know the law.

James E. Davis: In late January, the CDC issued new guidelines that recognize the value of PFAS blood testing for individuals that may have elevated exposure levels, which may increase the risk of kidney cancer, high cholesterol, and other health conditions. According to a study in the Journal of the Endocrine Society, PFAS chemicals accounted for approximately $22 billion in U.S. healthcare costs in 2018. In Advanced Diagnostics, we experienced double-digit growth across several clinical areas in the fourth quarter, including Advanced Cardiometabolic, Prenatal and Hereditary Genetics, and Neurology. Growth in neurology was driven largely by our Alzheimer's disease portfolio of tests, which is among the most comprehensive in the fast-evolving field of Alzheimer's care.

James E. Davis: Lack of this Pam was cut gives us the ability to continue to make those investments.

James E. Davis: Thank you. The next question comes from Elizabeth Anderson with Evercore ISI. Your line is open.

Elizabeth Anderson: Hi, guys. Thanks, so much for that question I haven't.

Elizabeth Anderson: Related to part combo one.

Elizabeth Anderson: One can you talk about sort of the progress you're making on haystack I know, it's sort of you ended up you talked about the higher end of the dilution is that because you're sort of accelerating test push out and have seen incremental progress on that side and then secondarily can you remind us on your thoughts about share repo for the year I know that's not in your current base guidance assumption, but just wanted to hear your update.

Speaker Change: Just thoughts on that for capital appointment date Gail.

Gail: Okay, Let me address the progress on Haystacks, Sam will take the second question. So here's Jack is proceeding as we expected there's no incremental investment versus what we thought we said last year, 15% to 20 cents.

James E. Davis: Our innovations include our AD-detect blood tests for early risk assessment based on amyloid beta proteins and APOE genetic risk. This week, we also added P-Tau 181 to our AD-DETECT blood test line to complement insights from amyloid beta testing. In addition, our Alzheimer's disease test portfolio includes several CSF tests for diagnosis and monitoring based on amyloid beta, p-tau 181, and 8-p

Gail: For the half year, and then likewise 15 to 20.

Gail: Incremental this year.

Sam: We are bringing the assay up in our Lewisville, Texas Cancer Center of excellence, it's proceeding as we expected.

Sam: We announced.

Sam: You heard in my prepared remarks discussions of three clinical trials. So we are doing testing right. This moment, obviously, we're not getting paid for that testing as we continue to validate the assay.

James E. Davis: We intend to add additional biomarkers later this year and continue to expand our menu. For molecular genomics and oncology, we are on track to launch our Haystack Minimal Residual Disease Test to physicians later this year from our Oncology Center of Excellence in Louisville. We also believe Haystack MRD can help support clinical research and recently announced clinical trial collaborations using this innovative technology with the Rutgers Cancer Institute, Alliance Foundation Trials, and Tricellas Life Science.

Sam: But we expect to have it launched here in the first half of the year for commercial purposes.

Speaker Change: Yeah, and I'll take the second question Elizabeth and.

Speaker Change: Good morning first of all.

Speaker Change: Just to be clear the haystack dilution in 2023 was in line with our expectations. It was 15% to 20.

Speaker Change: What we have called and that's where it came in in that range of 15 to 20.

Speaker Change: With regards to share repo. So we did $275 million of share repo in Q4, our current expectations are to basically offset equity dilution sorry, I said in 2000 and for its 23 in Q4, and our expectations are to offset equity dilution in 'twenty four.

James E. Davis: In the fourth quarter, we announced a collaboration with Universal DX, which has developed an innovative blood test for screening for colorectal cancer, including precancerous lesions. We look forward to supporting Universal's effort to gain regulatory approval for this test. Through a collaboration with Cypher, we are expanding patient access to the PRISM-RA test for aiding treatment selection for rheumatoid arthritis.

Speaker Change: And that would work out to something in the similar range that we did in Q4, so somewhere around 250 to 275 million, that's the base assumption, which is to offset equity dilution.

Speaker Change: Yeah.

Speaker Change: The next question will come from Pedro Chickering of Deutsche Bank. Your line is open.

James E. Davis: Turning to operational excellence, our Invigorate program delivered our targeted 3% annual cost savings and productivity improvement. Here are three examples of how we're improving operations. First, we continue to make progress in using front-end automation to enhance specimen processing.

Pedro Chickering: Hey, good morning, guys. Thanks for taking my questions. There are a lot of moving pieces in the 'twenty 'twenty. Four bridge you provided if you look at operating margins, excluding asac dilution, how operating margins in 2024 versus 2023, and then four key margins missed the street by decent amount can you help US bridge the four key margins to what.

James E. Davis: In 2023, we completed front-end automation upgrades in our Pittsburgh and Dallas laboratories, which will improve quality and productivity. This year, we'll add five additional sites. Second, we also expanded the use of AI to improve quality, efficiency, and workforce experience in several clinical areas. AI can quickly identify patterns that signify possible disease in digital images of patient cultures and slides.

Pedro Chickering: You're guiding to for 'twenty 'twenty four.

Speaker Change: Sure why don't I take that Peter So first of all in terms of operating margin for 2020 for whats implied in the guide at the midpoint is expansion of operating margins. We're not we're not calling out specifically what the operating margin rates, but there is definitely growth in terms of the operating margin rates and operating margin dollars and 24 versus.

Speaker Change: 23, where we came in and that's what's implied in the guide that we gave.

James E. Davis: In 2023, we expanded the use of AI in microbiology to help identify bacteria, as well as in cytogenetics to identify chromosomal abnormalities. Looking forward, we are encouraged by the opportunities to use AI in several additional clinical areas, including cytology, pathology, and parasitology. Third, in 2023, we deployed an AI tool at our Clifton lab that helps laboratory staff continuously identify ways to be more productive in their daily routines. And we look forward to introducing this AI job helper in other labs and support processes.

Peter: With regards to the moving parts around Q4, and then how you bridge that into 2024 and listen there were three things that really impacted us in Q4 from an operating margin rate perspective, we came in at 14, 8%. It was still growth year over year significant growth year over year. Despite a significant drop in COVID-19 revenues, but in terms of <unk>.

Peter: As expectations, Yes, we missed in terms of operating margin for three key reasons number one was employee health care costs. So I would I would weigh these three reasons by the way equally so a third a third a third but basically employee health care costs was a third of that mess. They came in higher than expected in Q4, and we can talk a little bit about what we're doing in 'twenty four with <unk>.

James E. Davis: Finally, we made significant progress improving the margins of our base business in 2023. I'd like to personally thank our Quest colleagues whose efforts have helped make this possible. With that, I'll turn it over to Sam to provide more details on our performance and our 2024 guidance.

Peter: Regards to that.

Peter: Additional some additional investments that we made towards the end of the year and some higher costs that we may not necessarily related to labor cost, but some investments that we made targeted investments in Q4, namely it.

Peter: So that was a third of the Miss as well and then a third was deferred compensation expense, which came in higher now I remember that's not an EPS impact that's an operating margin impact that gets offset on the nonoperating expense line, but that impacted our margins again to the tune of a third of that Miss versus our expectations now if you look towards 24.

Sam A. Samad: Thanks, Jim. In the fourth quarter, consolidated revenues were $2.29 billion, down 1.9% versus the prior year. Based business revenues grew 4.7% to $2.25 billion, while COVID-19 testing revenues declined approximately 80% to $37 million. Revenues for diagnostic information services declined 2% compared to the prior year, reflecting lower revenue from COVID-19 testing services versus the fourth quarter of 2022, although partially offset by strong growth in our base testing revenue. Total volume measured by the number of requisitions increased 1.9% versus the fourth quarter of 2022, with acquisitions contributing 50 basis points to total volume. Total base testing volumes grew 5.2% versus the prior year.

Peter: The employee healthcare cost I mean, we've factored that into our guide. We've also taken steps to lower employee health care costs by I mean, we had frozen for the last three years the employee contribution part of our employee healthcare cost plans and you know, we're having now to pass some of that on back to employees in 2024, because we had as I said frozen.

Peter: Over the last three years, even with the significant inflation that you've seen in terms of health care.

Peter: That's already assumed in 2024 as I mentioned to Patrick What's assumed is also volume growth that's going to help us grow margins.

Peter: Third compensation, that's just noise, we don't really budget for that is if there's a headwind or tailwind in 'twenty. Four that's just gets offset on the nonoperating line and it shows up as neutral in EPS and then as I said, we made some additional investments in Q4, it's a position the business for 2024, and that's factored into the guide.

Sam A. Samad: Revenue for requisition declined 3.5% versus the prior year, driven primarily by lower COVID-19 molecular volume. Base business revenue per REC was up 0.2%. Unit price reimbursement was positive and consistent with our expectations. Reported operating income in the fourth quarter was $267 million, or 11.7% of revenues, compared to $135 million, or 5.8% of revenues last year.

Peter: Terms of any additional investments that we make in 24. So we feel we feel confident about our growth in terms of operating margins next this year, Yes, Peter Let me just go back to Q4 just.

Peter: To talk about the progress we made year over year. So as Sam indicated our revenue in Q4 versus <unk> versus 22 was down $45 million and if you look at the mix of that revenue Covid was down $145 million year over year and remember we were getting paid $100 a rack at that point our base business.

Sam A. Samad: On an adjusted basis, operating income was $338 million, or 14.8% of revenues, compared to $330 million, or 14.2% of revenues last year. The year over year increase in adjusted operating income is related primarily to growth in the base business and actions taken in 2023 to reduce support costs. And lower performance-based compensation, partially offset by lower COVID-19 testing revenues, wage increases, higher employee healthcare costs, and higher deferred compensation expenses. Reported EPS was $1.70 in the quarter compared to $0.87 a year ago.

Peter: This offset a 100 million of that which is why we were down $45 million, despite that bad mix and the lower revenue, we still improved our operating margin by 60 basis points. So we made significant progress.

Peter: In the quarter and that progress will continue as we March into 2024.

Peter: The next question comes from Jack Meehan of Nephron Research Your line is open.

Jack Meehan: Thank you good morning.

Jack Meehan: Jim I was hoping.

Jack Meehan: Jim I was hoping to hear from you like what are you assuming in terms of core utilization in terms of the guide you've had elevated rates. The last couple of years coming out of the pandemic.

Sam A. Samad: Adjusted EPS was $2.15 compared to $1.98 last year. Cash from operations was $1.27 billion for full year 2023 versus $1.72 billion in the prior year, driven primarily by lower COVID-19 testing revenue. Finally, our Board of Directors has authorized a 5.6% increase in our quarterly dividends from $0.71 to $0.75 per share, or $3 per share annually, effective with the dividend payable in April 2024. The company has raised its dividend annually since 2011.

Jack Meehan: Do you think that can.

Jack Meehan: Sustain or are you seeing moderation in any area.

James E. Davis: Yeah, so for the fourth quarter Jack.

James E. Davis: Jack we saw volume growth of five 1%.

James E. Davis: For the total year, we had volume growth of six 5% now I would tell you at the very beginning portion of this year. The first two to three weeks.

James E. Davis: With the weather that we saw across the U S volume growth was stunted.

James E. Davis: A bit but in the last week or so we've seen volume recover to the normal rates and expectations that we have for the year. So.

Sam A. Samad: Turning to our full year 2024 guide, revenues are expected to be between $9.35 billion and $9.45 billion, with reported EPS expected to be in a range of $7.69 to $7.99, and the adjusted EPS to be in a range of $8.60 to $8.90. Cash from operations is expected to be approximately 1.3 billion dollars, and capital expenditures are expected to be approximately $420 million.

James E. Davis: You've heard several of the health plans have reported higher utilization in the fourth quarter, we ourselves because of our own health care costs. We know there was higher utilization of our own employees. So we expect it to continue at slightly above the normal market rates, albeit the first one.

James E. Davis: Of the year has been tempered a little bit by weather.

James E. Davis: The next question will come from Brian <unk> of Jefferies. Your line is open.

Brian: Hey, good morning, guys and thanks for taking the question maybe.

Sam A. Samad: We have posted a presentation on the investor relations page of our website that includes an adjusted earnings bridge, which shows some of the key elements to bridge from our 2023 adjusted EPS to the 2024 adjusted EPS guidance we shared today. Our 2024 guidance reflects the following considerations. We are no longer providing detailed base business and COVID revenue guidance.

Brian: Thank you Sam as I think about all the comments from Jim on how it looks like the revenue outlook is good and you have all these tailwind potentially go forward with new tests and whatnot.

Brian: Help us bridge to getting back to that EPS in our earnings growth in the long term outlook that you've provided because obviously 24 as an aberration or are there some one timers here, but how.

How do you get us comfortable in that long term earnings growth 25 going forward.

Sam A. Samad: However, note that we are assuming that COVID revenues will decline at least $175 million in 2024, which will partially offset the growth we expect from the base. Most of the COVID headwind in 2024 will occur in the first quarter, as we generated $119 million of COVID revenue in Q1 last year. In terms of M&A, our guidance only contemplates acquisitions that have been announced or close to date, including the outreach acquisitions from New York Presbyterian and Steward HealthCare, as well as Lenco, the independent lab Jim mentioned earlier.

Speaker Change: Yeah, Thanks, Brian and good morning, So first of all let me say definitively that we are.

Speaker Change: Absolutely still confident about our long term growth guide that we gave which is essentially to grow revenues in the mid single digits to grow EPS in the high single digits. So long term growth is unchanged.

Speaker Change: As you yourself mentioned there are some headwinds in 2024 that I think are.

Speaker Change: Transient or temporary that we see this year so are we.

Speaker Change: We've got you know Covid revenue decline, which is approximately $175 million or roughly <unk> 50 year over year, you've got <unk> and we've called this before but you've got haystack dilution, which is now full year dilution versus a half year dilution that we saw in 'twenty three and then you've got interest expense, which is to the tune of about 25.

Sam A. Samad: We will absorb a full year of dilution from our acquisition of Haystack Oncology, with an incremental impact of approximately 20 cents to adjust the DPS in 2024. We made strong progress improving our base business operating margins in 2023 and expect margin expansion in 2024. We anticipate net interest expense to increase to approximately $190 million in 2024 as a result of higher borrowings following our debt issuance in November.

Speaker Change: Which is really.

Speaker Change: As a result of the additional debt that we took on and the higher borrowing costs driven by the macro.

Speaker Change: The environment that we're in.

Speaker Change: But that's really to fund acquisitions and to fund growth in the business as well in the base business. We've got a strong pipeline and we feel really confident about the M&A landscape in the M&A opportunities ahead of us and Upsized the issuance in November so basically partly pay for the acquisitions that <unk>.

Sam A. Samad: Assuming a roughly flat share count compared to the end of 2023, we are expecting adjusted EPS in Q1 to be roughly 21% of our full-year earnings. This is slightly below the typical seasonality and reflects the significant amount of weather disruption we've experienced in January.

Speaker Change: We made in 'twenty, three haystack and to some extent New York Presbyterian, but also to fund the future acquisitions. Some of which are not included in this guide. So I would say the punch line is we're definitely still confident about the long term growth of the business and the EPS guide that we gave.

Sam A. Samad: At this point, we anticipate a weather headwind of 5 to 7 cents in Q1. And finally, as Jim mentioned earlier, we are well-positioned to deliver our long-term financial outlook to drive mid-single-digit revenue growth and high-single-digit earnings growth. With that, I'll now turn it back to Jim.

Speaker Change: The next question comes from Kevin Caliendo of UBS. Your line is open.

Kevin Caliendo: Hi, good morning, everyone that sundry Alphonse already for Kevin. Thank you so much for taking my question.

Kevin Caliendo: Unfortunately in the enviable position of asking yet another question around margin expectations.

James E. Davis: Thanks, Sam. Finally, I'd like to take a moment to remember Dr. Paul A. Brown, who passed away in January of this year.

Kevin Caliendo: But I guess my question is you know when we think about just the expansion of margins you expect in thinking about the puts and takes into next year.

James E. Davis: In 1967, Dr. Brown founded MedPath, the predecessor company of Quest Diagnostics, providing basic lab services from his apartment in New York City. Dr. Brown was a pioneer who invented the blueprint for our industry that is today recognized as essential to quality health, and we are grateful for his vision and leadership. To summarize, we delivered strong based business revenue growth in 2023 and achieved our EPS commitment. Our guidance in 2024 reflects a return to total revenue growth while balancing the earnings tailwinds and headwinds we see for the year. Looking beyond 2024, we are well positioned to deliver our long-term financial outlook to drive mid single-digit revenue growth and high single-digit earnings growth. And I'm grateful to our Dedicated Quest colleagues who bring our purpose to life every single day. Working together to create a healthier world, one life at a time.

Kevin Caliendo: I guess I wouldn't isolate like what gets better.

Kevin Caliendo: I know that there's maybe some assumption in there around M&A you've absorbed so far is that mildly accretive or just sort of in line or maybe below the margin.

Kevin Caliendo: Some of your one of your slides I think there was some mention of you know.

Kevin Caliendo: GAAP charges around workforce reductions etcetera is that sort of just lingering on from 'twenty to 'twenty three or is that a new tranche just trying to get an understanding on those two items. Thank you.

Speaker Change: Yeah. So thank you for the question with regards to margin expansion I mean, as I mentioned earlier.

The big factor is going to be driven by volume growth that we see in 2024, that's really the key factor we're going to continue to invigorate. The actions that we have talked about to the tune of 3% cost reduction across our entire cost base and that's we actually met that target in 'twenty three we slightly exceeded it and in 'twenty four it is going to be.

Operator: Now, we'd be happy to take 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. To be placed in the queue, please press star 1 on your phone.

Speaker Change: With those initiatives.

Speaker Change: With regards to any.

Speaker Change: Forced reductions there arent any workforce reductions planned right now usually when we have when you look at the GAAP to non-GAAP, we just have a placeholder for potential workforce reductions there or potential restructuring charges, but there isn't anything that's related specifically to any head count cuts now we do have the cost reductions and 24 that we.

Sam A. Samad: To withdraw, press star 2. Again, to ask a question.., please press star 1. And our first question of the day will come from Patrick Donnelly of Citi, your line is, questions um probably one for Sam just on the margin outlook for 24 can you just expand a little bit on expectations there including you know maybe the cadence for the year and then just on the margin front with PAMA you know obviously the push out it's not a function of you getting any windfall by any means but just that potential headwind being alleviated were there investments that you guys were kind of holding off on until you got more clarity on the outcome there and then as you plan the budget you green lit some more of those as PAMA got pushed out just wondering how you thought about that expense piece there and a bit more color on margins. Thank you guys. Yeah, thank you, Patrick. And good morning.

Speaker Change: Continue.

Speaker Change: To see so in Q1 for instance, we have some benefit from some cost reductions that we didn't see any one of last year, but then we will continue to be very disciplined about our P&L as we go forward in 'twenty four.

Speaker Change: So.

Speaker Change: Yes, so that's really the key driver in terms of our margin growth.

Speaker Change: The next question will come from Lisa Gill of Jpmorgan. Please go ahead.

Speaker Change: Yeah.

Lisa C. Gill: MS. Gil please check the mute button on your phone.

Lisa C. Gill: Hi, Good morning. Thanks for taking my question you talked a lot about volume growth. This morning, but I'm just curious on the price side. So if I go back to the last couple of quarters, you talked about stabilizing pricing.

Sam A. Samad: So listen, we made a lot of great progress in 2023 in terms of expanding our margins and offsetting the COVID headwind that we saw in 23. In terms of 24 expectations, as we mentioned in the prepared remarks, we're looking to expand margins to continue to expand margins in 24, and again, the key drivers of that are going to be volume growth. The expectation of volume growth that we have in the plan, that's going to be the biggest impact in terms of driving margins. We're going to be looking at continuing the great work that we're doing on Invigorate and offsetting any cost headwinds. You know, we're assuming labor inflation will be in line with what we saw in 2023. So somewhere in that three to 4% growth range, not necessarily expecting it to get worse, but not necessarily expecting it to get better. In terms of your question on PAMA, Patrick, you're absolutely right. It's not a positive thing; it's the absence of a negative.

Lisa C. Gill: With health plan, you talked earlier about health plan leakage and the opportunity there.

Lisa C. Gill: So maybe can you put those two pieces together for US just as we think about the growth for next year of how much. It is volume and how much of that is on the price side.

Speaker Change: Yeah. So let me just recap two.

Speaker Change: 'twenty three and then we'll get into 2004 so.

Speaker Change: In 2023 price pure price price per test provided us a slight lift year over year. Okay. So our base Rev per req that we've reported.

Speaker Change: <unk> up one 2% and price was a positive contributor towards that.

Now going into 2024, we expect again price to be flat to slightly up for the year.

Speaker Change: We concluded.

Speaker Change: All of the significant health plan renegotiations in 'twenty three.

Sam A. Samad: So essentially, the delay gives us, you know, certainty now for 24 years that we're not going to see a decline. And, you know, had PAMA occurred, or had PAMA come back in 2024, you're right in the sense that we would have had to potentially defer certain investments; we would have had to make some, you know, potentially difficult cuts to offset some of that impact. And the fact that we have a delay affords us the ability now to make certain investments and to, you know, avoid some of those difficult cuts that I referenced. But I think that the key punchline for 2024 is that we continue to expand operating margins. Jim, you wanted to make a comment?

Speaker Change: Obviously, there is a new tranche that always comes about a third 25% to 33% renew every year.

Speaker Change: But we feel confident that prices will remain flat to slightly up as we enter 2024.

Speaker Change: The next question will come from Derek Brown of Bank of America. Your line is open.

Hi, good morning, Thanks for taking my questions, so changing tracked a little.

Derik de Bruin: Look the L. D T legislation it looks like its making more progress and it has it's like can you quantify what your exposure is to LD teas and sort of your thought process here I mean, you're you're introducing a bunch of new tests would qualify for that so how do you think about incremental investments if that goes through and would you discontinued test there.

James E. Davis: Yes. So, Patrick, as you heard me discuss in our prepared remarks, we're going to continue to invest in our Alzheimer's portfolio of tests. There's still one important blood-based biomarker that we will bring up later this year, and that will complete our investments in our Alzheimer's testing from a blood-based standpoint. You heard me mention that PFAS testing; we're bringing that test up, and we'll be launching that here in the first quarter. We have gotten significant consumer and physician demand for that test.

Derik de Bruin: And then as a follow up there's been some legal movement lately on the <unk> space Theres been some litigation that has happened that has blocked some other players from the market.

Derik de Bruin: Does he does haystack have freedom to operate.

Derik de Bruin: As you sort of look at what's changing in the IP landscape on that and.

Derik de Bruin: How do you think about your IP portfolio.

James E. Davis: And then finally, you know, we're upgrading some of our laboratory information systems in a couple of our esoteric laboratories. And so, you know, the lack of this PAMA cut gives us the ability to continue to make those investments. Thank you. The next question comes from Elizabeth Anderson with Evercore ISI. Your line is open. Hi guys, thanks so much for the question. I have a sort of unrelated two-part combo one.

On Haystack and.

Derik de Bruin: Being able to not get sued.

Speaker Change: Yes, So let me address your second question first we have no risk with respect to the IP on the underlying technology that we're using in haystack.

Speaker Change: We feel very confident about it how much of that IP comes out of John Hopkins University, and we're solid there. So no risk in terms of Ltte's I think we've said in the past about 10% of our task.

James E. Davis: One, can you talk about sort of the progress you're making on Haystack? I know that you ended up sort of on the higher end of the dilution. Is that because you're sort of accelerating test push out and have seen, you know, incremental progress on that side? And then, secondarily, can you remind us of your thoughts about ShareRepo for the year? I know that's not in your current base guidance assumptions, but just wanted to hear your updated thoughts on that for Capital Fund. Okay, let me address the progress on Haystack. Sam will take the second question.

Speaker Change: Are considered Ldp's, we'll wait to hear from the FDA in April what the final rule is and then we'll make decisions as an industry from there what I would tell you is that we do a significant amount of work for the pharmaceutical industry today, and we do a significant amount of work for.

Speaker Change: For International laboratories, both of those require us to be ISO certified and when Youre doing work for the pharmaceutical industry, especially for companion diagnostic you're essentially operating already.

James E. Davis: So Haystack is proceeding as we expected. There's no incremental investment versus what we thought. You know, we said last year 15 to 20 cents for the half year, and then, likewise, 15 to 20 cents incremental this year. We are bringing the assay up in our Louisville, Texas Cancer Center of Excellence.

Speaker Change: Under FDA regulation so.

Speaker Change: Well, it's not going to be anything radical that we don't know what we need to do well there'll be further investments and steps required to get all of our laboratories that do.

James E. Davis: It's proceeding as we expected. We announced, and you heard my prepared remarks, the discussions of three clinical trials. So we are doing testing right now. Obviously, we're not getting paid for that testing as we continue to validate the assay. But we expect to have it launched here in the first half of the year for commercial purposes. Yeah, and I'll take the second question. Elizabeth, so and good morning, first of all, just to be clear, the Haystack dilution in 2023 was in line with our expectations; it was 15 to 20 cents. That's what we had called it.

Speaker Change: That do <unk> accredited yes, there will be but.

Speaker Change: But it's not a heavy lift for quest diagnostics.

Speaker Change: Before we take our next question as a reminder, if you would like to ask a question. Please press Star then one the next question will come from Andrew Brachman of William Blair. Your line is open Sir.

Andrew Brachman: Hey, guys. Good morning, Thanks for taking the question I want to go back to the Alzheimer's offerings and the investments that Youre, making there can you maybe just sort of talk at a high level about the opportunity that you see for that category should we sort of think about this market kind of ultimately looking something like oncology, where you have screening therapy selection monitoring et cetera, or does this sort of take a different.

Sam A. Samad: And that's where it came in, in that range of 15 to 20 cents. With regard to share repo, so we did 275 million of share repo in Q4. Our current expectations are to basically offset equity dilution. Sorry, I said in 24. It's 23 in Q4.

Andrew Brachman: Path.

Andrew Brachman: Thanks.

Speaker Change: Yes. So thanks for the question. It's a great question. So first I would say that theres just broader awareness.

Sam A. Samad: And our expectations are to offset equity dilution by 24. And that would work out to something in, you know, the similar range that we did in Q4. So somewhere around 250 to 275 million, that's the base assumption, which is to offset equity dilution. The next question will come from Peto Chickering of Deutsche Bank. Your line is open.

Speaker Change: Of testing options that are now available to both consumers and to physicians in part. This is because of new therapeutics that have been introduced and has just created widespread awareness as you know the majority of testing today for all timers is conducted via Pep Cte which are expensive.

Speaker Change: $2500 to $4000 exams, or CSF testing cerebral spinal fluid.

Sam A. Samad: Hey, good morning guys, and thanks for taking my questions. If we look at operating margins, excluding haystack dilution, how are operating margins in 2024 versus 2023? And then 4Q margins missed the street by a decent amount. Can you help us bridge the 4Q margins to what you got into for 2024? Sure, why don't I take that, Peto?

Which is not inexpensive lab test however, the procedure to extract CFS out of the human body is an expensive procedure and likewise the total cost of that is roughly a $1000. We have brought up blood based assays for <unk>, which is a genetic risk for all <unk>.

Sam A. Samad: So first of all, in terms of operating margin for 2024, what's implied in the guide at the midpoint is an expansion of operating margins. We're not, we're not calling out specifically what the operating margin rates are, but there's definitely growth in terms of the operating margin rates and operating margin dollars in 24 versus 23, where we came in. And that's what's implied in the guide that we gave.

Speaker Change: <unk>, we brought up the blood based assay for what we call <unk> $42 40, which is generally considered the earliest indicator amyloid plaque the earliest indicator of dementia and <unk> onset and then we brought up one of the two protein markers that are also.

Speaker Change: <unk> involves the Tau markers, we brought up 181 and there is a second one to 17 that we wont be bringing up later this year that in essence completes our blood based <unk>.

Sam A. Samad: With regard to the moving parts around Q4, and you know, then how you bridge that into 2024. Listen, there were three things that really impacted us in Q4 from an operating margin rate perspective. We came in at 14.8%. It was still growth year over year, significant growth year over year, despite a significant drop in COVID revenues. But in terms of versus expectations, yes, we missed in terms of operating margin for three key reasons. Number one was employee health care costs. So I would weigh these three reasons, by the way, equally.

Speaker Change: <unk> and I think there is widespread consumer interest widespread interest amongst primary care physicians and we've had double digit growth all year long in both our blood based assays and CSF testing and we expect that double digit growth to continue on in 2024 and beyond.

Speaker Change: The next question will come from Stephanie Davis of Barclays. Your line is open.

Sam A. Samad: So a third, a third, a third, but basically, employee health care costs were a third of that mess. They came in higher than expected in Q4. And we can talk a little bit about what we're doing in 24. With regard to that additional some additional investments that we made towards the end of the year and some higher costs that we made, not necessarily related to labor costs, but some investments that we made targeted investments in Q4, namely So that was a third part of the myth as well.

Speaker Change: Hi, guys. Thank you for taking my question.

Stephanie Davis: So I was hoping to dig in a little bit more on <unk> question.

Stephanie Davis: Discussions about pad remarks.

Stephanie Davis: Could you tell me just a little bit more about what you were investing into anyhow.

Stephanie Davis: Yeah.

Stephanie Davis: The AI job help that will help you guys out and then I guess on a follow up to that one is it.

Sam A. Samad: And then a third was deferred compensation expense, which came in higher. Now remember, that's not an EPS impact; that's an operating margin impact that gets offset on the non-operating expense line. But that impacted our margins again, to the tune of a third of that miss versus our expectations. Now, if you look towards 24, the employee health care costs, I mean, we've factored that into our guide. We've also taken steps to lower employee health care costs. I mean, we've frozen for the last three years the employee contribution part of our employee health care costs plan. And, you know, we're having to now pass some of that on back to employees in 2024. Because we had, as I said, frozen them over the last three years, even with the significant inflation that we've seen in terms of health care.

Stephanie Davis: Right to assume that you'll have more investments to develop some of these AI solution that will then have more out your yield or your margin opportunity.

Stephanie Davis: Awesome.

Speaker Change: Yes, so good question.

Speaker Change: AI tool that we referred to with respect to our Clifton lab is really it.

Speaker Change: It was a tool that we used to analyze workflow.

Speaker Change: Within several departments and the Clifton laboratory that actually looked at.

Speaker Change: Fairly simple things like steps and movement between equipment loading and unloading of certain racks and we reviewed it and you find some really quick easy simplification efforts to adjust equipment move equipment to minimize.

Sam A. Samad: So, you know, that's already assumed in 2024. As I mentioned to Patrick, what's assumed is also volume growth that's going to help us grow margins. You know, the deferred compensation is just noise; we don't really budget for that. If there's a headwind or a tailwind in 24, that just gets offset on the non-operating line, and it shows up as neutral in EPS.

Speaker Change: Yeah.

Speaker Change: The human content or labor involved in each one of these steps.

Speaker Change: More broadly.

Speaker Change: We've deployed AI in two critical areas one is in microbiology.

James E. Davis: And, you know, as I said, we made some additional investments in Q4 to position the business for 2024. And, you know, that's factored into the guide, in terms of any additional investments that we make in 24. So we feel confident about our growth in terms of operating margins this year. Yeah, Peter, let me just go back to Q4 just to talk about the progress we made year over year. So, as Sam indicated, our revenue in Q4 versus 22 was down $45 million. And if you look at the mix of that revenue, COVID was down $145 million year over year. And remember, we were getting paid $100 a wreck at that point.

Speaker Change: <unk> Biology is you know you grow things in a dish you look at it under a microscope.

Speaker Change: But with one of our partners, we know well.

We can take digital images of whats growing in the dish in the system actually reviews, those images and makes the initial call of a negative or positive.

Speaker Change: We still review the positives.

Speaker Change: Bye bye I, but it's a digital image as opposed to doing it under a microscope.

Speaker Change: But it's a much quicker read because the system is generally indicate that this system has already indicated if it is positive.

Speaker Change: We're also in the process of deploying artificial intelligence and digitizing pathology. So as you know pathology is generally read under a microscope, where in the process of implementing digital systems that allow for one to read off.

James E. Davis: Our base business offset $100 million of that, which is why we were down $45 million. Nevertheless, despite that bad mix and the lower revenue, we still improved our operating margin by 60 basis points. So we made significant progress in the quarter, and that progress will continue as we march into 2024. The next question comes from Jack Meehan of Nefron Research. Your line is open. Thank you. Good morning, Jim. Jim, I was hoping to hear from you like what you are assuming in terms of core utilization in terms of the guide, you know, you've had elevated rates the last couple of years coming out of the pandemic. You know, do you think that? Thanks for watching!

Speaker Change: Also as a monitor versus under a microscope and once you digitize that slide you're now able to apply algorithms to again at least help with what we call region of interest pointing out to the pathologist, where they should look and inevitably help.

Speaker Change: The pathologist make the proper diagnosis.

Speaker Change: And the last question for today's call will come from Eric Coldwell of Baird. Your line is open.

Eric W. Coldwell: Thank you very much I have are actually going to have a couple here.

James E. Davis: Yeah, so for the fourth quarter, Jack, we saw volume growth of 5.1%. For the total year, we had volume growth of six and a half percent. Now, I would tell you that at the very beginning portion of this year, the first two to three weeks, with the weather that we saw across the US, volume growth was stunted a bit.

Eric W. Coldwell: The I missed this what was the M&A contribution to revenue growth in 2020 for guidance.

Eric W. Coldwell: So it's about 50 basis points right now is what's what's in the guide.

Eric W. Coldwell: Eric and it really reflects as we mentioned in the prepared remarks, the carryover that we have from the acquisitions that we did in 'twenty, three which is really New York Presbyterian.

Eric W. Coldwell: Steward health care.

James E. Davis: But in the last week or so, we've seen volume recover to normal rates and expectations that we have for the year. So you've heard several of the health plans have reported higher utilization in the fourth quarter. And we ourselves, because of our own health care costs, we know there was higher utilization of our own employees.

Eric W. Coldwell: The Lincoln acquisition that we signed.

Eric W. Coldwell: And really that's that's it so.

Eric W. Coldwell: So if I take midpoint revenue guidance at one six remove the COVID-19 headwinds you get to about three five.

Eric W. Coldwell: On the base and then take out 50 bps from M&A, you're at 3% organic on the base.

James E. Davis: So we expect them to continue at, you know, slightly above the normal market rates, albeit the first month of the year has been tempered a little bit by weather. The next question will come from Bryan Tanquilut of Jefferies. Your line is open.

Eric W. Coldwell: But that's yes, yes.

Speaker Change: Correct. Okay second question, a higher mix of hospital reference testing it sounds like you talked about.

Speaker Change: Trends in hospital reference being above plan being above long term history.

Speaker Change: What kind of an impact does that have on gross margin in the quarter.

Sam A. Samad: Hey, good morning, guys. And thanks for taking the question. Um, maybe Sam, as I think about all the comments from Jim on how it looks like the revenue outlook is good, right? You have all these tailwinds potentially going forward with new tests and whatnot. You know, help us bridge back to that EPS or earnings growth in the long-term outlook that you've provided, because, you know, obviously, 24 is an aberration or there are some one-timers here, but, you know, how do you get us comfortable with that long-term earnings growth, 25 going forward? Yeah, thanks, Bryan. And good morning.

Speaker Change: Yes, so in general our reference testing, which is more <unk> life in it.

Speaker Change: And then it is the routine testing as you know Eric in general that carries a higher test margin higher gross margin.

And in general right, we're not drawing specimens that are derived or taken in hospitals. So theres very little phlebotomy cost involved in reference work so.

Speaker Change: Generally the operating margin of our hospital based tests are going to be higher than the average in the business. So that business did grow at a faster rate than our overall book of business. Both in Q4 as well as for the total year. So it was good mix.

Sam A. Samad: So first of all, let me say definitively that we are absolutely still confident about our long-term growth guide that we gave, which is essentially to grow revenues in the mid single digits to grow EPS in the high single digits. So long-term growth is unchanged. As you yourself mentioned, there are some headwinds in 2024 that I think are transient or temporary like the ones we see this year. So we've got, you know, a COVID revenue decline of approximately 175 million or roughly 50 cents a year. You've got, you know, and we've called this before, but you've got haystack dilution, which is now full year dilution versus half year dilution that we saw in 23. And then you've got interest expense, which is to the tune of about 25 cents, which is really, you know, as a result of the additional debt that we took on and the higher borrowing costs driven by the macro environment that we're in.

Speaker Change: And that was our final question for today.

Speaker Change: Alright, well. Thank you everyone for joining our call and we look forward to further updates through the year, everyone have a great day.

Speaker Change: A replay of the call may be accessed online at Www Dot quest diagnostics dotcom forward slash investor or by phone at 2033693391 for international callers or 800.

Speaker Change: <unk> 93494 to one for domestic callers.

Sam A. Samad: But that's really to fund acquisitions and to fund growth in the business as well as in the base business. We've got a strong pipeline, and we feel really confident about the M&A landscape and the M&A opportunities ahead of us. And, you know, we upsized the issuance in November to basically partly pay for the acquisitions that we made in 23 Haystack and, to some extent, New York Presbyterian Hospital but also to fund future acquisitions, some of which are not included in this guide. So I would say the punchline is we're definitely still confident about the long-term growth of the business and the EPS guide that we gave. The next question comes from Kevin Caliendo of UBS. Your line is open. Hi, good morning, everyone. It's Sondra Alfonso, and for Kevin, thank you so much for taking my questions.

Speaker Change: Telephone replays will be available from approximately 10 30, a M. Eastern time on February one 2024.

Till midnight Eastern time February 15th 2024.

Speaker Change: You for your participation and you may now disconnect.

Sam A. Samad: Unfortunately, I'm in the enviable position of asking yet another question around margin expectations. But I guess my question is, you know, when we think about just the expansion of margins you expect and think about, you know, the puts and takes into next year, I guess I want to isolate what gets better. I know that there's maybe some assumption in there around the M&A you've absorbed so far, you know, is that mildly accretive or just sort of in line or maybe below the margin? Some of your slides, I think there was some mention of, you know, gap charges around workforce reductions, etc. Is that sort of just lingering on from 2023? Or is that a neutron?

Sam A. Samad: Just trying to get an understanding on those two items. Thank you. Yeah, so thank you for the question. With regard to margin expansion, as I mentioned earlier, a big factor is going to be driven by volume growth that we see in 2024. That's really the key factor.

Sam A. Samad: We're going to continue to invigorate actions that we have talked about to the tune of 3% cost reduction across our entire cost base. And we actually met that target in 2023. We slightly exceeded it.

Sam A. Samad: And in 2024, it's going to be continuing with those initiatives. With regard to any, you know, workforce reductions, there aren't any workforce reductions planned right now. Usually, when we have, when you look at that gap to non-gap, we just have a placeholder for potential workforce reductions there or potential restructuring charges. But there isn't anything that's related specifically to any headcount cuts.

Sam A. Samad: Now, we do have the cost reductions in 2024 that we continue, you know, to see. So in Q1, for instance, we have some benefit from some cost reductions that we didn't see in Q1 of last year, but then we'll continue to be very disciplined about our P&L as we go forward in 2024.

Sam A. Samad: Yeah, so that's really the key driver in terms of our margin growth. The next question will come from Lisa Gill of J.P. Morgan. Please go ahead. Ms. Gill, please check the mute button on your phone.

James E. Davis: Good morning. Thanks for taking my question. You talked a lot about volume growth this morning, but I'm just curious on the price side. So if I go back to the last couple of quarters, you talked about stabilizing pricing with health plans. You talked earlier about health plan leakage and the opportunity there. So maybe can you put those two pieces together for us as we think about the growth for next year of, you know, how much is volume and how much of that is on the price side? Yeah, so let me just recap 23. And then we'll get into 24.

James E. Davis: So in 2023, price, pure price, price per test, provided us a slight lift year over year. Okay, so our base rep correct that we've reported was up 1.2%, and price was a positive contributor towards that. Now, going into 2024, we expect price again to be flat to slightly up for the year. We concluded all of the significant health plan renegotiations in 23.

James E. Davis: Obviously, there's a new tranche that always comes about a third of 25 to 33% renew every year. But we feel confident that prices will remain flat to slightly higher as we enter 2024. The next question will come from Derek DeBrown of Bank of America. Your line is open. Hi, good morning.

James E. Davis: Thanks for taking my questions. So, changing track a little, you know, the LDT legislation looks like it's making more progress than it has. It's like, can you quantify what your exposure is to LDTs and your thought process here.

James E. Davis: I mean, you're introducing a bunch of new tests that would qualify for that. So how do you think about incremental investments if that goes through, and would you discontinue tests there? And then, as a follow-up, there's been some legal movement lately in the MRD space. There's been some litigation that has happened that has blocked some other players from the market. Does Haystack have freedom to operate as you look at what's changed in the IP landscape on that? And how do you think about your IP portfolio on Haystack and being able to not get sued? Thanks.

James E. Davis: Yeah, so let me address your second question. First, we have no risk with respect to the IP on the underlying technology that we're using in Haystack. We feel very confident about it. Much of that IP comes out of Johns Hopkins University, and we're solid there. So there is no risk.

James E. Davis: In terms of LDTs, I think we've said in the past, about 10% of our tests are considered LDTs. We'll wait to hear from the FDA in April what the final rule is, and then we'll make decisions as an industry from there. What I would tell you is that we do a significant amount of work for the pharmaceutical industry today, and we do a significant amount of work for international laboratories. Both of those require us to be ISO certified, and when you're doing work for the pharmaceutical industry, especially for companion diagnostics, you're essentially operating already under FDA regulation. It's not going to be anything radical where we don't know what we need to do. Will there be further investments and steps required to get all of our laboratories that do LDTs accredited? Yes, there will be.

James E. Davis: But it's not a heavy lift for Quest Diagnostics. Before we take our next question, as a reminder, if you would like to ask a question, please press star then 1. The next question will come from Andrew Brackman of William Blair. Your line is open, sir. Guys, good morning.

James E. Davis: Thanks for taking the questions. I want to go back to the Alzheimer's offerings and the investments that you're making there. Can you maybe just sort of talk at a high level about the opportunity that you see for that category? Should we sort of think about this market kind of ultimately looking something like oncology, where you have screening, therapy selection, monitoring, etc.? Or does this sort of take a different path for you guys? Thanks.

James E. Davis: Yeah, so thanks for the question. It's a great question. So first, I would say that there is just broader awareness of testing options that are now available to both consumers and to physicians. In part, this is because new therapeutics that have been introduced have just created widespread awareness. As you know, the majority of testing today for Alzheimer's is conducted via PET CT, which is expensive, $2,500 to $4,000 exams, or CSF testing, cerebral spinal fluid, which is not an expensive lab test. However, the procedure to extract CSF out of the human body is an expensive procedure.

James E. Davis: And likewise, the total cost of that is roughly $1,000. We have brought up blood-based assays for APOE, which is a genetic risk for Alzheimer's. And we have brought up a blood-based assay for what we call AB4240, which is generally considered the earliest indicator of dementia and or Alzheimer's onset.

James E. Davis: And then we brought up one of the two protein markers that are also involved, the tau markers. We've brought up 181, and there's a second one, 217, that we will be bringing up later this year. That, in essence, completes our blood-based offering, and I think there's widespread consumer interest, and widespread interest among primary care physicians. And we've had double-digit growth all year long in both our blood-based assays and CSF testing. And we expect that double-digit growth to continue in 2024 and beyond. The next question will come from Stephanie Davis of Barclays. Your line is open.

James E. Davis: Hey guys, thank you for taking my questions; I appreciate it. So I was hoping to dig in a little bit more on the AI questions that you were asking, discussions around the prepared remarks. Could you tell me just a little bit more about what you'll be investing in and how the rollout of things at the AI Job will help you guys out? The AI Job Helper will help you guys out. And then I guess in a follow-up to that one, is it safe to assume that you'll have more IT investments as you develop some of these AI solutions that will then have more out-year yield for your margin opportunity? Yeah, so good question.

James E. Davis: The AI tool that we refer to, with respect to our Clifton lab, is really a tool that we used to analyze workflow within several departments in the Clifton laboratory that actually looked at fairly simple things like steps and movement between equipment, loading and unloading of certain racks, and we reviewed it, and we found some really quick, easy simplification efforts to, you know, adjust equipment, move equipment to minimize, you know, the human content or labor involved in You know, more broadly, we've deployed AI in two critical areas. One is in microbiology. Microbiology is, you know, you grow things in a dish, and you look at them under a microscope.

James E. Davis: But with one of our partners, we can now take digital images of what's growing in the dish, and the system actually reviews those images and makes the initial call of a positive or negative. We still review the positives, you know, by eye, but it's a digital image as opposed to doing it under a microscope. But it's a much quicker read because the system has generally indicated if it is positive. We're also in the process of deploying artificial intelligence and digitizing pathology. So, as you know, pathology is generally read under a microscope. We're in the process of implementing digital systems that allow for one to read off of a monitor versus under a microscope. And once you've digitized that slide, you're now able to apply algorithms to, again, at least help with what we call the region of interest, pointing out to the pathologist where they should look and inevitably helping the pathologist make the proper diagnosis. Your line is open. Thank you very much. I am actually going to have a couple here.

Sam A. Samad: First, I missed this. What was the M&A contribution to revenue growth in 2024? So it's about 50 basis points right now is what's in the guide, Eric, and it really reflects, as we mentioned in the prepared remarks, the carryover that we have from the acquisitions that we did in 23, which is really New York Presbyterian, the Steward Healthcare, the LENCO acquisition that we signed, and really, that's it. So, if I take midpoint revenue guidance at 1.6, remove the COVID headwind, But that's, Okay, the second question.

Sam A. Samad: Higher mix of hospital reference testing, it sounds like. You talked about transient hospital reference being above plan being above long-term history. What kind of an impact does that have on gross margin? Yes, so in general, our reference testing, which is more LDT-like than the routine testing, as you know, Eric, in general, that carries a higher test margin, and higher gross margin. And in general, right, we're not drawing specimens that are derived or taken in hospitals. So there's very little phlebotomy cost involved in reference work.

James E. Davis: So generally, the operating margin of our hospital-based tests is going to be higher than the average of the business, so that business did grow at a faster rate than our overall book of business, both in Q4 and for the total year. So it was a good mix.

James E. Davis: And that was our final question for today. Alright, well, thank you everyone for joining our call, and we look forward to further updates through the year. Everyone have a great day.

Operator: A replay of the call may be accessed online at www.questdiagnostics.com forward slash invest or by phone at 203-888-4222 or 369-3391 for international callers or 800-934-9421 for domestic callers. Telephone replays will be available from approximately 10.30 a.m. Eastern Time on February 1st, 2024 until midnight Eastern Time on February 15th, 2021. Thank you for your participation, and you may now disconnect.