Q3 2024 Quest Diagnostics Inc Earnings Call
Speaker Change: Welcome to the Quest Diagnostics 3rd Quarter 2020 for a conference call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation, and the question and answer session that will follow, are the copyrighted property of Quest Diagnostics with all rates reserved.
Speaker Change: and any redistribution, retransmission, or re-blockcast of this call in any form, without the consent of course, diagnostics is strictly prohibited.
Speaker Change: I now like to turn the call over to Shawn Bevec, Vice President of Investor Relations for Quest Diagnostics. Sir, please go ahead.
Shawn Bevec: Thank you and good morning. I'm joined 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-gap measures.
Shawn Bevec: We provide a reconciliation to non-gap measures to comparable gap measures in the tables to our earnings press release.
Shawn Bevec: Actors also made different materially from those projected risks and uncertainties that may affect quest-by-agnostic future results include but are not limited to those described in our most recent annual report on Form 10K and subsequently filed quarterly reports on Form 10K and current reports on Form 8K.
Shawn Bevec: or this call references to reported EPS referred to reported diluted EPS and references to adjusted EPS referred to adjusted diluted EPS.
Shawn Bevec: has been the first time in the world. Growth rates associated with our long-term outlet projections, including consolidated revenue growth, revenue growth from acquisitions, organic revenue growth, and adjusted earnings growth are compound annual growth rates. Now, here is Jim Davis.
Jim Davis: Thanks, Shawn, and good morning, everyone. Before we get into the details from the third quarter, I want to recognize the quest employees who are working hard to serve our patients and customers, impacted by Hurricane Helene and Milton, while also contending with the effects on their personal lives.
Jim Davis: I'm inspired by their commitment to our values, especially customer focus, collaboration and care during this very difficult time. They bring to life our purpose, working together to create a healthier world one life at a time.
Jim Davis: Now, turning to our results, we delivered a strong third quarter with total revenue growth of 8.5% including 4.2% organic growth driven by new customer wins and expanded business with physicians and hospitals as well as acquisitions.
Jim Davis: During the third quarter, we completed three acquisitions.
Jim Davis: We finalized our acquisition of Life Labs a trusted lab leader serving millions of Canadians. Life Labs provides a strong foundation for us to expand in Canada and we are excited about the growth opportunities serving a population that is growing and with more favorable demographics than in the US.
Jim Davis: We also completed our transaction with Alina Health, a leading nonprofit health system serving Minnesota in Western Wisconsin. And at the end of the quarter, we acquired the laboratory business of three physician groups in New York.
Jim Davis: During the quarter, we also announced the plans to acquire select outreach lab assets from Ohio Health and University Hospitals to leading nonprofit health systems in Ohio.
Jim Davis: We completed the transaction with Ohio Health just last week and expect to complete the acquisition with university hospitals later this quarter.
Jim Davis: Our recent outreach acquisitions highlight our ability to attract top health systems, seeking to evolve their lab strategies to improve access and affordability.
Jim Davis: They also positioned us to expand in geographic areas of the U.S. where the influence of health systems had previously limited our reach.
Jim Davis: We are now on track to complete eight acquisitions this year that meet our criteria for growth, profitability and returns.
Jim Davis: Now we'll recap our strategy and discuss highlights from the third quarter.
Speaker Change: and then Sam will provide detail on our financial results and talk about our updated 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.
Speaker Change: We enable growth across our customer channels through advanced diagnostics, with an intense focus on faster growing clinical areas, including brain health and molecular genomics and oncology.
Speaker Change: In addition, acquisitions are a key growth driver with an emphasis on a creative outreach purchases, as well as other independent labs.
Speaker Change: Our strategy also includes driving operational improvements across the business with the strategic deployment of automation and AI to improve quality, service, efficiency, and the workforce experience.
Speaker Change: Here are some updates on the progress we have made in each of these areas. In physician lab services we delivered another quarter of high single-digit revenue growth. Our performance was driven by new customer winds and expanded business largely due to increased utilization of advanced diagnostics.
Speaker Change: Our acquisitions also contributed to growth within this core customer channel. And as a reminder, volumes from both hospital outreach and independent lab acquisitions originate in physician offices.
Speaker Change: We also continue to see strong volume and revenue growth within Medicare Advantage plans, where narrow network strategies direct testing to high quality, cost-efficient options, like Quest.
Speaker Change: During the quarter we also made progress to expand into new geographies through our health plan partnerships.
Speaker Change: We renewed a large national health plan agreement with Elevance Health that will extend our reach in Virginia, Georgia, Colorado, and Nevada. Markets in which we had previously limited access.
Speaker Change: We also brought our access in Virginia in Florida with our recently announced arrangements with Centera Health Plan.
Speaker Change: In hospital lab services, we grew revenues mid-single digits, which is above historical levels. Hospitals continued to struggle to fill specialized lab positions, including histology, cytotechnology, and microbiology.
Speaker Change: In addition, the range and scope of testing being ordered is increasing as hospitals take advantage of our expanding advanced diagnostics portfolio rather than building their own in-house capability. These dynamics contributed to strong continued demand for reference testing.
Speaker Change: Our expertise managing laboratories can help hospitals improve quality and efficiency in their core lab operations.
Speaker Change: During the quarter, we formed a professional lab services collaboration with a leading health system in New Jersey that includes reference testing as well as laboratory and supply chain management.
Speaker Change: Plus specializes in scaling diagnostic innovations to improve access, quality, and affordability. The stability enables us to help hospitals address the many challenges that they face. From workforce shortages to capital constraints to the demand for more affordable care from patients, health plans and employers.
Speaker Change: That's why Premier Health Systems continued to seek us out for a range of collaborations, ranging from reference testing to professional lab management to outreach acquisitions.
Speaker Change: sort of
Speaker Change: In Consumer Initiated Testing, our Consumer Facing Platform, QuestHealth.com, grew total revenues more than 40%. Our repeat customer rate has grown to 30% from less than 10% to 2 years ago, driven by demand for comprehensive health, chronic disease, and STI testing.
Speaker Change: During the quarter we also introduced micronutrient blood tests to help identify vitamin and mineral deficiencies. In addition we continue to expand our partner network with resellers and e-commerce providers.
Speaker Change: In advanced diagnostics, we drove double-digit revenue growth across several clinical areas.
Speaker Change: The growth was particularly strong in areas of brain health, especially for our AD detect blood-based Alzheimer's disease testing, as well as in women's health, cardio-medabolic health, and autoimmune disorders.
Speaker Change: Our investments in advanced diagnostics enable us to deliver and scale innovative services that improve patient care and drive growth.
Speaker Change: In Molecular Genomics and Ecology, we are pleased with the results today from our Haystack MRD Early Experience Program. Through which providers from many leading academic and community oncology centers have used our Haystack MRD blood tests to assess cancer recurrence and treatment response for solid tumor cancers.
Speaker Change: We are on track to make haystack MRD available nationally to providers in the fourth quarter.
Speaker Change: Our growth in women's health was largely driven by prenatal and hereditary genetic testing consistent with recent quarters. We also saw continued robust testing demand in genital track infections, which includes several STIs.
Speaker Change: This month we introduced a specimen self-collection option at our 2000 patient service centers that give women a fast, convenient, and discrete way to access GTI testing.
Speaker Change: In the area of autoimmune disorders, we saw strong demand for our testing solutions which help primary care physicians comprehensively screened for autoimmune disorders in order to speed diagnosis and care by specialists.
Speaker Change: Finally, we are pleased to be selected by the CDC to be one of a handful of diagnostic service providers to support the development of laboratory tests for each five and one avian flu and over-approved viruses.
Speaker Change: We plan to introduce in each five and one avian flute test later this month.
Speaker Change: Now, turning to operational excellence, our invigorate program aims to deliver 3% annual cost savings and productivity improvements driven largely through the use of automation in AI to improve productivity as well as service levels and quality.
Speaker Change: During the quarter we completed the build-out of full end-to-end automation for our core routine tests at our Lynx to Kansas Laboratory, making it to third fully automated lab in our National Network.
Speaker Change: We are now piloting automated specimen ascertaining in our Clifton Lab, which will help increase productivity in specimen processing and improved quality.
Speaker Change: Finally, we are pleased to extend our collaboration with Whole Logic.
Speaker Change: to include their automated psychology solution, the HoLogic Genius Digital Diagnostic System, which utilizes AI to help analyze cervical cell samples. We expect the solution will help us improve quality and efficiency in cervical cancer screening.
Speaker Change: Now, before he turned it over to Sam, I want to make a moment to recognize the decision by Congress to delay Medicare reimbursement cuts and data collection scheduled under Pamela for 2025.
Speaker Change: While we are pleased with the delay, we continue to collaborate with our Trade Association ACLA to encourage Congress to secure a permanent legislative solution that provides fair reimbursement.
Speaker Change: Now Sam will give board details on our third quarter performance and our updated guidance for 2024. Sam.
Sam Samad: Thanks, Jim. In the third quarter, consolidated revenues were $2.49 billion, up to 8.5% versus the prior year. Consolidated organic revenues grew by 4.2%.
Sam Samad: The revenues for diagnostic information services were up 9% compared to the prior year, reflecting strong growth in our key physician and hospital channels, as well as the contribution from recently closed acquisitions.
Sam Samad: As a reminder, our acquisition of lifelabs close towards the end of August, and our outreach acquisition from Alina Health closed in September.
Sam Samad: Total volume measured by the number of requisitions increased 5.5% versus the third quarter of 2023. With acquisitions contributing 5% to total volume.
Sam Samad: The impact of weather and the crowd strike, logo IT outage in July, negatively impacted volume by approximately 40 basis points in the quarter.
Sam Samad: Total revenue for requisition was up 3.3% versus the prior year. Driven primarily by an increase in the number of tests for wrecked.
Sam Samad: and favorable test mix driven by advanced diagnostics demand, partially offset by the impact of the recent lifelapse acquisition, which carries a lower revenue per acquisition than our typical average.
Sam Samad: Units rights reimbursements was stable, consistent with our expectations.
Sam Samad: reported operating income in the third quarter was $330 million or 13.3% of revenues compared to $342 million or 14.9% of revenues last year.
Sam Samad: On an adjusted basis, operating income was $385 million, or $15.5% of revenues, compared to $380 million, or $16.6% of revenues last year.
Sam Samad: The increase in adjusted operating income was due to strong organic revenue growth and the impact of recent acquisitions.
Sam Samad: Partially offset by the infected weather and the crowd strike outage, as well as wage increases and higher performance-based compensation.
Sam Samad: We estimate the impact of weather and the IT outage on operating margin to be approximately 50 basis points.
Sam Samad: Lifeflaps had a negligible impact on operating margin rates in the quarter.
Sam Samad: reported EPS was $1.99 in the quarter compared to $1.96 a year ago.
Sam Samad: and Justin EPS was $2.30 versus $2.22 for the prior year.
Sam Samad: We estimate the EPS impact of weather and the IT outage to be approximately 8 cents in the quarter.
Sam Samad: cash from operations was $870 million a year today through the third quarter versus $745 million in the prior year.
Sam Samad: In the third quarter, we issued $1.85 billion of senior notes, with an average coupon of approximately 4.8%.
Sam Samad: Turning now to our updated full year 2024 guidance.
Sam Samad: Revenue is our expected to be between $9.8 billion and $9.85 billion.
Sam Samad: reported EPS expected to be in a range of $7.55 to $7.65 and adjusted EPS to be in a range of $8.85 to $8.95.
Sam Samad: Cash from operations is expected to be approximately $1.3 billion, and capital expenditures are expected to be approximately $420 million.
Sam Samad: The following are key assumptions underlying our updated guidance for you to consider.
Sam Samad: The increase in our updated revenue guidance is related to recently announced and closed acquisitions with the majority being from lifelapse.
Sam Samad: As a reminder, new acquisitions are typically break even the slightly profitable initially, with profitability expanding over several quarters.
Sam Samad: Therefore, we are not expecting a material contribution to earnings from these acquisitions in 2024, but do expect increasing profitability next year. We are projecting the disruption from Hurricane Milton to negatively impact revenues by approximately $15 million, and EPS by approximately $8 in the fourth quarter.
Sam Samad: Operating margin expected to be down versus the prior year due to the integration of lifelapse and the combined impact of weather and crowd strike headwinds. Exclude in the impact of these items full year operating margin is expected to be up.
Sam Samad: and that interest extends expected to be approximately $200 million.
Sam Samad: Waded Average Share Count to be flat compared to the end of 2023. We have narrowed our just at EPS guidance and maintained the midpoint that $8.90, despite the impact of Hurricane Milton in the fourth quarter.
Sam Samad: While we aren't prepared to provide 2025 guidance today, I'd like to share some initial considerations as you think about next year.
Sam Samad: We are reaffirming our long-term outlook from 2023 through 2026.
Sam Samad: which assumes a mid-single-digit revenue cager with at least one to two percent growth from acquisitions and a high-single-digit earnings cager with approximately 75 to 150 basis points of margin expansion over the three-year period.
Sam Samad: Given the eight acquisitions we expect to complete in 2024, we will exceed our one to two percent revenue growth targets from acquisitions next year.
Sam Samad: Excluding lifelabs, we already expect to be towards the high end of this range due to the carry-over contribution from the other acquisitions that we'll be completed this year.
Sam Samad: is expected to increase next year as a result of our recent death issue.
Sam Samad: As I noted previously, we raised $1.85 billion of senior notes.
Sam Samad: with an average coupon of approximately 4.8% in August . And in March of 2025, we plan to retire 600 million dollars of senior notes with a coupon of 3.5%. Finally, as we consider all the moving pieces heading into 2025, we expect to deliver earnings growth consistent with our long-term outlook in the high single digits.
Speaker Change: with that I will not turn it back to Jim.
Jim Davis: To summarize, our business delivered strong, total and organic revenue growth driven by new customer wins and expanded business with physicians and hospitals as well as acquisitions.
Jim Davis: We are now on track to complete eight acquisitions by years end that meet our criteria for profitability, growth and returns.
Jim Davis: Our growing advanced diagnostics offering and increasing health plan access, position us to drive new customer business next year. Given the strength of our business and revenue from acquisitions, we are well positioned to drive accelerated revenue growth and earnings growth in 2025.
Jim Davis: and with that, we'd be happy to take your questions.
Jim Davis: Operator.
Speaker Change: Thank you. We will now open it up to questions. At the request of the company, we ask that you read limit yourself to one question.
Speaker Change: If you have additional questions, we ask that you please fall back into the queue. To be placed in the queue, please press star 1 from your phone. To withdraw, press star 2. Again, to ask the question, please press star 1.
Speaker Change: Our first question will come from Anne Hines of Mazuvo Securities, your line is open.
Speaker Change: Good morning. Thank you. Thanks for all the detail in 2025. When you think about next year, how do you think the organic growth profile of the business will do? And within that, can you remind us with haystack? Is there any change in your assumptions? Now that you've had the access for over a year on how you think you will do in 2025? Thanks. Thank you.
Speaker Change: Yeah, so good morning, man. So we just came off a very strong quarter of organic growth, 4.2% driven by, you know, good volume growth and really nice improvements in rep or rack. Those improvements in rep or rack coming with basically price being about flat, price for tasks, but really nice increases in test per rack and test mix.
Speaker Change: So, as we enter into 2025, you know, we would...
Speaker Change: put out there at this point, you know, approximately 3% I mean it's hard to judge what's going to go on with utilization but by all means and based on some of the payer report out earlier in the week and in last week it appears that utilization remains strong.
Speaker Change: So, I think, you know, an assumption of roughly 3% is solid.
Speaker Change: In terms of haystack, you know, we've said the dilution this year is approximately 20 cents. We said the dilution going into next year would be less and we're still on track to achieve that.
Speaker Change: Yeah, with regards to Haystack and the incremental delusion this year is 20 cents, so it's a total of 35 to 40 cents delusion and it will improve next year and we are preparing to launch the assay in the next few months here and expect to get reimbursement as we go forward as well.
Speaker Change: The next question, up right.
Speaker Change: Michael Terny, of Learing Partners, your line is open.
Michael Terny: Thanks so much for taking the question. Maybe if I can go back to just some of your commentary about the marketplace and your positioning, if I heard correctly, I think.
Michael Terny: You have some incremental share gains from L of Ants, obviously you have a combination of inorganic growth.
Speaker Change: As you think about, you know, building on, excuse me, Ann's question a bit relative to the organic side, how much do you feel like the growth profile is within your control relative to the share pickup relative to what you're doing on the pricing side versus market driven. If there's any way we can break that down, that would be great.
Speaker Change: Yeah, so first, thanks to the question Mike, would respect to Elevans, none of those changes take effect until the first of the year in 2025 and those changes which are allowing us to be in that work in the states of Colorado and in the states of Nevada with expanded access in Georgia and Virginia. But again, none of those changes had any impact on our third quarter results but we expect those to help fuel organic growth going into next year.
Speaker Change: and the next question. Yeah, maybe if I had also the regards to, um...
Speaker Change: You know, pricing and share games I think that in terms of pricing we still expect.
Speaker Change: Operator next question, please.
Speaker Change: The next question will come from Patrick Donnelly of City, your line is open.
Patrick Donnelly: Hey guys, thank you for taking the questions. Sam maybe want on lifelabs, you know, let's defeat that close early.
Patrick Donnelly: can you just talk a little bit about both the margin impact, you see, you need to turn there and I'll see a creative earnings, but just the margin impact.
Patrick Donnelly: and then the progression on the earnings accretion as we get into next year. I know there's some accounting stuff that maybe holds it back a little bit, and then it should step up, but we'll be helpful just to talk through that profile. And then lastly, just Jim on the M&A side, since we're on the topic. You know what the pipeline looks like? Should we expect continued smaller deals versus, I'm sure we'll sell it lifelapse, being a much larger one and what we're seeing there? Thank you, guys. Thank you.
Speaker Change: Yeah, you're welcome and good morning, Patrick. So, um...
Speaker Change: with regards to, I'll talk maybe briefly about operating margins first and then I'll talk about how life's lab.
Speaker Change: Lifelabs impacted it in Q3 and what the trajectory is going forward just at a high level. We won't go into too much details in terms of the actual specifics around the deal. But in Q3, operating margins were 15.5%.
Speaker Change: You know, I would say adjusted for weather that was closer to 16%. We had both weather and crowd strike impacted us by about 50 basis points. There was a slight negative impact from lifelabs as well in the quarter. You know, as you know, we had about five weeks worth of lifelabs revenues in there. The deal is scaling up in terms of profitability. There are some adjustments at the beginning as well in terms of some accounting adjustments as you mentioned, but really the margin profile of the deal is expected to increase as we go forward. Now we are going forward. We are going forward. We are going forward.
Speaker Change: We talked about, you know, potential 10 to 15 cents EPS accretion from the deal in year one and that was assuming that the deal with clothes.
Speaker Change: Basically, at the end of the year, so it had a full year in 2025, so you know, the deal closed a bit early, so we still will give more color.
Speaker Change: on the, you know, on the Q4 call in terms of what the expectation is for 2025 specifically. But listen, at a high level, Patrick, I would just say that the operating margin to start will be below our overall operating margin as an enterprise. So it's going to be a bit dilutive in terms of operating margin rates, but a creative in terms of operating margin dollars and EPS. And it's going to ramp up over the next two to three years to, you know, eventually be at the level of Quest operating margins, but that's going to take some time. So, you know, I'd say focus more on operating margin dollars and EPS accretion that we get from the deal as opposed to the operating margin rate in the short term.
Speaker Change: Yeah, Patrick, in terms of your question on the last part of your question on the funnel and the M&A pipeline. So it does remain strong and lots of discussions going on with various health systems around the country.
Speaker Change: But what I would say now is we're in this phase of integration and digestion of the deals that we've just completed, including the lab assets of path AI, align a health system, Ohio Health University hospitals [inaudible]
Speaker Change: the three physician office labs here in New York.
Speaker Change: and then obviously lifelapse. So we are hard at work at integrating these and getting the mark margin of cretions that we've talked about. Our appetite will continue for small outreach deals and we're always on the look for those.
Speaker Change: The next question. I'm breeder.
Speaker Change: The next question will come from Petal Chickering of Deutsche Bank, your line is open.
Speaker Change: Next question operator, the next question will come from Brian <unk> of Jefferies. Your line is open.
Speaker Change: Good morning, guys and congrats on the quarter. This is Meghan holds on for Brian just going back to guidance ex Hurricane mill in core EPS guidance is up slightly right. If I just check my math. The midpoint stayed at 890 that you you have to add back that eight central mill in wildlife should be a little less but can you just kind of break down that.
Speaker Change: EPS guidance.
Speaker Change: Yes sure.
Speaker Change: To talk about the EPS guidance.
Speaker Change: Let me talk a little bit about revenue as well because we took up revenue as you know by $285 million at the midpoint. The majority of that was really M&A and the majority of the M&A was really life labs.
Speaker Change: So in terms of the $285 million at the midpoint I would say the majority really is driven by M&A, which as we said scales up and profitability. So.
Speaker Change: Little little to no profitability in the initial term to your point around EPS, we tightened the range by a nickel on each side the midpoint remains unchanged to $8 90.
Speaker Change: We are absorbing an <unk> <unk> headwind from Milton in Q4. So yes, you are correct in the sense that.
Speaker Change: EPS, excluding the impact of Milton would've gone up and Thats driven by the strength of the organic business. We're seeing some as you saw in Q3, great Rep per rack at three 3% organic Rev per req was even higher than that we're seeing good utilization.
Speaker Change: So some of that strength is offsetting the impact of Milton.
Speaker Change: But largely kept the EPS unchanged at the midpoint.
Speaker Change: Thank you.
Speaker Change: The next question will come from David Westenburg of Piper Sandler.
David Westenburg: Hi, Thanks for taking the question and congrats on a good quarter. So I believe.
David Westenburg: Reduced pretty meaningfully I think youre still seeing wage inflation here above historical norms. So can you just talk about some of the pushes and pulls in terms of historically low unemployment rate.
David Westenburg: Are there actually maybe some tailwind you're seeing with insurance and other things may be even.
David Westenburg: Price increases that could help offset that and can you talk about maybe some of the headwinds in terms of wages wage pressures how long. They are expected to continue and if we do continue to see some of this wage inflation pressure are there any ways. Other ways you can get operating leverage say AI automation et cetera. Thank you.
Speaker Change: David just real quick you broke up there in the very beginning what did you start with.
I started there with turnover rates being reduced however, I still believe wage inflation is above historical norms can you just talk about the pushes and pulls with that.
David Westenburg: And then I think you've got the rest of the option right.
Speaker Change: Got it thanks.
Speaker Change: Yes, so as we indicated in the script our turnover rates.
Speaker Change: Have come down here in 2024, so last year they were in the low <unk> and we're now below 20%.
Speaker Change: In the 18% to 19% range some of it still depends on job category, but overall, we've seen a really nice improvement.
Speaker Change: The wage inflation of 3% to 4% I would say, it's slightly less than last year, but in terms of historical norms. If you want to go back to.
Speaker Change: 2012 to 2019 kind of pre Covid I would tell you it was in the <unk>.
Speaker Change: 2% to 3% range. So, it's a 100 basis points higher than it historically was.
As we walk into next year, it might be a bit early to tell but I would still think it's going to hang closer to 3% in that range and.
Speaker Change: You know I.
Speaker Change: You are reading the same articles we are the quit rate in America has certainly come down I think unemployment is relatively stable. So I think there'll be continued tightness in the labor markets, particularly at our frontline employees and by those employees, we mean, our phlebotomist our logistics.
Speaker Change: Our specimen processors.
It's actually those positions, where we see a more competitive labor environment, primarily because those three types of roles. They can.
Speaker Change: They can.
Speaker Change: Move from industry to industry, they don't need to stay in the lab industry now theres lots of things, we're doing to continue to offset that wage inflation, we've talked a lot about the use of automation and AI in our laboratories as we indicated in the script. We just went live with our third highly automated laboratory.
Speaker Change: <unk> full automation and our lenexa, Kansas.
Speaker Change: Our operation we've installed what we called <unk>.
Speaker Change: Front end.
Speaker Change: Specimen automation sorting.
Speaker Change: Dips of equipment in several of our laboratories, and we're getting nice use out of that.
And then we continue to expand some of our automated and AI driven platforms like the co pan.
Speaker Change: The co pack microbiology platform, which continues to give us a ton of productivity across our laboratories.
Speaker Change: If I just add a couple of things David with regards to just overall productivity and leverage in the P&L as both we look in 2024 and going forward and we were seeing a couple of positive dynamics there as well.
Speaker Change: Sure you are aware of in terms of Rev per req pricing is a modest favorable don't mean to say that there is it still isn't the challenging pricing environment and the health system space, but overall, we're getting flat to positive reimbursement.
Speaker Change: Seeing test per req continue to go up.
Speaker Change: Versus historically, we're seeing a nice step up in terms of <unk> as well as test mix, which are both giving us.
Speaker Change: A positive in terms of overall Rev per req utilization, we've talked about continues to be positive and also aided by the fact that we've gained share with some of the acquisitions that we've done. So overall all of these would drive us to additional productivity and improved leverage as we look forward and this year in 2024.
Speaker Change: Operator next question. Please the next question comes from Jack Meehan of Nephron Research. Your line is open.
Jack Meehan: Thank you good morning.
Jack Meehan: Wanted to follow up for Sam I have a couple of follow ups, just trying to dig into the quarterly revenue a little bit.
Jack Meehan: The first was could you just tell me what the carbon sales, we're trying to gauge what the base was doing within the 4% organic growth and then the second is.
Jack Meehan: It looks like M&A added about 100 million of sales in the quarter. How much was the initial five weeks from life lab versus everything else could it have been like 50 50.
Speaker Change: Sure Jack Yeah, So with regards to Covid I mean as you.
Speaker Change: I have noted we've we've stopped really reporting cover then we stopped reporting base versus total because its really become somewhat insignificant. All I would say is it was largely within our expectations in Q3, it's impacted from a year to year on a year to year basis, it impacted growth by about 50 basis points.
Speaker Change: That was the impact of Covid in terms of total impact on revenue growth now with regards to M&A I think your other question. So we grew by eight 5% in total.
Speaker Change: Our revenues for the quarter organic growth was about four 2%. So we had about a 4% contribution from M&A life labs over five five.
Speaker Change: Five weeks or so was.
Speaker Change: $70 million roughly in terms of revenues in the quarter. So that should give you. The census through the contribution of <unk>, obviously, it's a significant portion of the M&A growth.
Speaker Change: Operator next question. Please the next question comes from Elizabeth Anderson of Evercore. Your line is open.
Elizabeth Anderson: Hi, guys. Thanks, so much with your question.
Elizabeth Anderson: So long term question when can you guys confirm the DCP impact in the quarter does that create some unnecessary volatility.
Elizabeth Anderson: Due to the EPS and then longer term I think what you guys were saying was it sounds like you're saying in general.
Elizabeth Anderson: Unit pricing, we should think I'm sort of a stable to slightly positive for 2025 as well I think that's what you're saying.
Elizabeth Anderson: And that that'd be great. Thank you.
Yes with regards to DCP Elizabeth first thanks for the question. So on a year to year basis. It was up I would say close to $10 million in the quarter itself. So it was a negative impact on operating margin in the quarter.
Elizabeth Anderson: So that should give you the detail that you want.
It's going to it's going to ebb and flow depending on the markets, but this this quarter was a negative impact year over year.
Elizabeth Anderson: And then.
With regards to pricing I think the the current view and what we've been seeing in 2024 is that if.
Elizabeth Anderson: If I kind of bifurcate that health systems is definitely a net negative in terms of a challenging health systems environment in terms of the reimbursement and pricing dynamics health plans I would say modestly positive flat to modestly positive.
Elizabeth Anderson: So overall when you put the pieces together and we've got that the government business right now, we expect to be flat pricing as well since the pharma cuts were deferred so overall I'd say the expectation is flat to slightly positive as the current view, but we'll give you more information when we gave specific 2025 guidance on the Q4 call.
Speaker Change: Operator next question. Please yes. The next question is from Erin Wright of Morgan Stanley. Your line is open.
Erin Wright: Great. Thanks, So with the hospital outreach deals in the market share gains you've been talking about that a little bit more recently and.
Erin Wright: Are there specific geographies, where you're seeing that sort of halo effect around the deals has anything changed in terms of your strategy around kind of what your target or how you're approaching these hospital outreach deals I guess any way to quantify as well how much in terms of market share gains is contributing into Illinois just from that either.
Erin Wright: Either volume or revenue perspective. Thanks.
Erin Wright: Yes.
Speaker Change: Yes, so the three deals we announced our lineup in the Minneapolis market.
Speaker Change: And closed, Ohio Health in Columbus, Ohio, and University hospitals, which we expect to close later in the quarter in Cleveland, Ohio, All three of those markets had the characteristics of the majority of independent physicians were owned by Health systems Lab, our health systems and therefore using.
Speaker Change: The labs of those health systems. So it puts us into those three marketplace places our share in those markets was de Minimis.
Speaker Change: Before these acquisitions and so now we have a strong presence in those three markets all of which are big markets growing markets.
Speaker Change: And we will continue to look for other markets in the U S, where we have strong payer access by the way in all of those markets. We were in network with obviously, all the nationals and all the blues plans that play in those markets. So we had strong access, but our ability to sell given that the <unk>.
Speaker Change: <unk> were largely owned by the health systems was very limited. So those are the characteristics of the markets that we look for in terms of these outreach acquisitions, we look for markets, where we have strong access, which we do nationally and we look for markets where health systems.
Speaker Change: I'll have dominated in that space and they may be willing to get out of that market.
Speaker Change: Okay.
Speaker Change: Operator next question. Please the next question comes from Stephanie Davis of Barclays. Your line is open.
Stephanie Davis: Hey, guys. Thank you so much for taking my question.
Stephanie Davis: <unk> you had in the prepared remarks, some comments about volume and revenue benefits from narrower networks at the M&A plans. So.
Stephanie Davis: So I was curious given some of the challenges is clients are facing could you see a potential for an accelerated pace of adoption for this strategy.
Stephanie Davis: Forward benefits in the coming year.
Stephanie Davis: Well I think all of the Medicare advantage plans versus Medicare are going to have by definition more narrow networks Medicare as you know is any willing provider and if.
Stephanie Davis: If you look at.
Stephanie Davis: The Medicare work spread across the country that health systems, generally do fairly well in that space.
Stephanie Davis: Again by definition when ally a life moves from a Medicare plan to a Medicare advantage plan most of the Medicare advantage plans have networks that are more defined and more narrow so.
Stephanie Davis: There is generally good things that come from that.
Stephanie Davis: And.
Now.
Stephanie Davis: Going forward, the Medicare advantage plans, yet they seem to be under some.
Stephanie Davis: They're experiencing higher utilization that's generally good for us.
Stephanie Davis: But theyre experiencing profit pressures on that book of business as well so.
Stephanie Davis: To the extent more of that work comes to independent labs like Quest diagnostics.
Stephanie Davis: It means good quality, great service and generally lower cost. So we welcome the opportunity to work with all the Medicare advantage plans to continue to move work from high priced out of network labs to last night club diagnostics.
Speaker Change: Operator next question. Please the next question comes from Lisa Gill of Jpmorgan. Your line is open.
Lisa Gill: Alright, thanks, very much good morning, I just had a couple of follow up questions on lay flat. So Jim I think in your prepared remarks, you made a comment that the demographics are more favorable in Canada can you maybe just help us to understand what market growth looks like in Canada, and then secondly, you talked about the margins being below the corporate.
Lisa Gill: Average at quest today and that over two to three years Youll get there can you give us an idea of what the margins look like today for life labs.
Speaker Change: Yes, so first on the demographics of Canada. So the population growth of Canada is actually significantly higher than the U S. So it's been north of 1% for the last several years and so that's that's good news for us and for all those that participate.
Speaker Change: Second is the aging of the Canadian population.
He is also.
Speaker Change: The average age of the population there is north of what it is in the U S and the demographics of older people.
Speaker Change: What we see in the U S. Obviously, Medicare Medicare advantage. They there's more <unk> per life. They visit physicians more frequently generally higher acuity levels and so serving an older population is also beneficial to the industry to us. So that's why we like the demographics.
Speaker Change: Canada, there is some variation between that in Ontario, and British Columbia, the two major provinces that we serve but in total we think its a great place to operate.
Speaker Change: In terms of the margin the operating margin rate is lower than our company average.
Speaker Change: And we expect over the over the next couple of years through the synergies that we expect to get in through sharing of ideas best practices from us to them and them to us we expect to get the margin rate back to close to company average.
Speaker Change: Okay.
Speaker Change: Operator next question. Please the next question comes from Andrew Brachman of William Blair. Your line is open.
Andrew Brachman: Hey, guys. Good morning, Thanks for taking the question Jim I wanted to go back to your comment on integration digestion can you maybe just sort of talk about how your integration efforts or tactics have evolved over the last few years, just anything you can share, which maybe gives a little bit more on keeping up this accelerated pace of deals going forward. Thank you.
Jim Davis: Yes, so it very much depends on the deal I mean, let's start with life Labs life labs.
Jim Davis: It operates in Canada, obviously, we're here in the U S. So there's not what I would call.
Jim Davis: Big synergies across there's no we're not shutting down any laboratories, we're not changing the phlebotomy network are those logistics network at all.
Jim Davis: What we do look for in opportunities like that as we look for procurement synergies what are we buying things at what are they buying things at and then.
Jim Davis: We're going to take the best of the best price.
Jim Davis: And in general that it was on the quest diagnostics side.
Jim Davis: <unk> is we benchmark their operations versus our operations and phlebotomy that draws per FTE logistics, how many stops per cent and the laboratory, we benchmark not just the overall laboratory, but the departments within the laboratory microbiology auto chemistry.
Jim Davis: And really what it is it's a series of best practices shared from from each side and in some cases, we learned we obviously learn things from them that we bring back into our operations.
Jim Davis: So that's the nature of life labs now with the health system deals in general what we're acquiring is a book of business.
Jim Davis: Not acquiring laboratories, we're not acquiring.
Jim Davis: Logistics in many cases, we take on the Phlebotomist that we're serving that network. So really the integration is about number one integration integrating with all of their physicians, whether they are on epic or cerner or whatever EMR, they're on and then second it's about the movement of.
That work from the hospital lab into quest diagnostics. So we look for opportunities in logistics and again phlebotomy.
Jim Davis: Get synergies and productivity out of that.
Jim Davis: Generally what we bring to these these.
Jim Davis: These integrations are dedicated full time groups of people.
Jim Davis: They hit within the regional structure of class so depending on the region.
Jim Davis: We come in with a dedicated team that works the side the phlebotomy size logistics side in the laboratory side and as Sam said in his remarks, it will take several quarters to get these books of business up to the profitability rate that we expect but it's a lot of hard work and and the team has some.
Jim Davis: <unk> deep experience in doing this.
Speaker Change: Operator next question. Please the next question is from Kevin Caliendo of UBS. Your line is open.
Kevin Caliendo: Thanks, Thanks for getting my question I appreciate it.
Kevin Caliendo: I just wanted to go through some of these moving pieces.
Kevin Caliendo: I appreciate it.
Kevin Caliendo: Color that you gave on 2025, but if we just kind of tell.
Kevin Caliendo: Tell me I'm not thinking about this incorrectly.
Speaker Change: Revenue growth should probably be better.
Speaker Change: Given all the M&A that's maturing into next year, you talked about the organic growth is still estimated to be up 3% roughly the cost trends.
Speaker Change: Wages and the like three to four 3% hopefully invigorate is there to offset that plus you add in the benefit of the maturation of life Labs, which 10 to 15 is probably going to be more than that as youre getting an extra quarter than you anticipated and you'll have haystack dilution coming down.
Speaker Change: Isn't it.
Speaker Change: I'm not thinking about the impact or there is a negative impact to core margin Shouldnt EPS grow faster next year.
Speaker Change: <unk> your traditional CAGR, just thinking about all those moving pieces.
Speaker Change: Yes, so I think you've got the moving pieces.
Kevin.
Kevin Caliendo: As you said we've got.
Kevin Caliendo: And as we talked about in the prepared remarks, we've got M&A, excluding life labs growing at the high end of the range that we've given about 2% we've got.
Kevin Caliendo: Life labs, adding a full year worth of revenues in there so that will help revenues as well so yes revenue growth will be faster.
Kevin Caliendo: We've got.
Kevin Caliendo: The also the carryover from some of the M&A that we've done this year I mean in terms of the cost headwinds right now I'd say early to say that we're going to face lesser headwinds in general in terms of.
Kevin Caliendo: Inflation for instance, we're still assuming in general that 3% to 4% I wouldn't say that we're assuming that that's going to moderate significantly next year. So what we're seeing today is in that 3% to 4% range I think we're expecting that to be the same.
Kevin Caliendo: I think the pricing dynamics.
Kevin Caliendo: We will give more detail on that on the Q4 call but in general.
Kevin Caliendo: Fairly in line with what we're seeing right now which is flat to slightly positive although as I said before we are seeing competitive dynamics in the health system space and for now were saying EPS is growing in the high single digits. So.
Kevin Caliendo: To the extent that we provide more information on the Q4 call Thats, that's different and that we will but at this point with the visibility that we have with all the moving pieces.
Kevin Caliendo: Feel comfortable reaffirming that growth rate for EPS. So there isn't anything here. That's that's a negative that were that you are teasing out that's not.
Kevin Caliendo: Something that we're not disclosing its basically we feel comfortable that with all the moving parts that were at the high end of the guidance range that we gave before.
Speaker Change: Operator next question please.
Speaker Change: Our last question will come from Michael Riskin of Bank of America. Your line is open Sir.
Michael Riskin: Great. Thanks for squeezing me in guys.
Michael Riskin: I'll just close with one a lot of the stuff sort of been covered I want to ask a little bit on Panama, obviously its been delayed.
Speaker Change: You made some comments about the.
Speaker Change: Essentially working on a permanent a legislative solution.
Speaker Change: Could you expand on that a little bit of like what that could look like obviously panel has been delayed for a number of years now so we're kind of used to this but.
Yes.
Speaker Change: What the future could look like there.
Speaker Change: So we're not in a constant.
Speaker Change: Delay cycle again.
Speaker Change: Yes, so you're right.
Speaker Change: Pam has now been delayed five straight years and it is certainly a welcome relief to us and to our entire industry now having said that look salsa.
Speaker Change: Has continued to be on the legislative agenda.
Speaker Change: It's a complex task to get these things approved there is one Senate committee to house committees that you have to work through and as you know with the election coming up a lot of these committees can potentially change the leadership can change members can change.
Speaker Change: And so.
Speaker Change: Our trade Association and the members of it will be hard at work once the election is over and once the committee memberships are defined we'll be hard at work to figure out who on these committees are going to support us and to put forth a fix to this constant year over year.
Speaker Change: Sure.
Speaker Change: I would say battle that we have to defer these cuts.
Speaker Change: We were happy with the salsa solution, which called for if enacted called for another year of a delay followed by a new data collection process. There were agreed to reductions, but im not sure thats.
Speaker Change: I'm not sure that's the solution, we're going to put forth on the table. We've had five straight years of delayed cuts and while that sounds good in fact, it's not good because we've had five really heavy years of wage inflation and other inflation and we're going to press. The case that in fact, the Medicare rates should go up.
Speaker Change: <unk> gotten rates up through our commercial plans.
Yes, as Sam said Theres been.
Speaker Change: Pressure on our hospital reference pricing.
Speaker Change: But we believe given the inflationary environment that we've lived in from 2019 to 2024 that the rates need to go up and so that's the fix that we're going to propose we believe a new data collection process will indicate that when they benchmark our pricing.
Speaker Change: And across all the commercial plans, including what the commercial plans or pain Hospital labs, I think will find that the combination of those prices would lead one to believe that Medicare pricing should go up so that's what we're going to push for it going forward.
Speaker Change: Alright.
Speaker Change: Okay. So thank you very much for joining the call today. We appreciate your support have a good day everyone.
Speaker Change: Thank you for participating in the quest diagnostics third quarter 2024 conference call.
Speaker Change: A transcript of prepared remarks on this call will be posted later today on quest diagnostics website at Www Dot quest diagnostics Dot com.
Speaker Change: A replay of the call may be accessed online at Www Dot quest diagnostics dotcom forward slash investor or by phone at 808 395154.
Speaker Change: For domestic callers or 2033693358 for international callers.
Speaker Change: Telephone replays will be available from approximately 10 30, a M. Eastern time on October 22024 until midnight Eastern time November five 2024. Thank.
Speaker Change: Thank you for your participation and goodbye.