Laboratory Corporation of America Holdings (NYSE:LH) Q4 2023 Earnings Call Transcript
Laboratory Corporation of America Holdings (NYSE:LH) Q4 2023 Earnings Call Transcript February 15, 2024
Laboratory Corporation of America Holdings beats earnings expectations. Reported EPS is $3.3, expectations were $3.29. Laboratory Corporation of America Holdings isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and welcome to the Laboratory Corporation of America Holdings Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation there will be a question-and-answer session. [Operator Instructions] Please be advised, today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Christin O'Donnell, Vice President, Investor Relations, please go ahead.
Christin O'Donnell: Thank you, operator. Good morning and welcome to Labcorp’s fourth quarter 2023 conference call. As detailed in today's press release, there will be a replay of this conference call available via telephone and internet. With me today are Adam Schechter, Chairman and Chief Executive Officer and Glenn Eisenberg, Executive Vice President and Chief Financial Officer. This morning in the Investor Relations section of our website at www.labcorp.com we posted both our press release and an investor relations presentation with additional information on our business and operations, which include a reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures, both of which are discussed during today's call.
Additionally, we are making forward-looking statements. These forward-looking statements include, but are not limited to statements with respect to the estimated 2023 guidance and the related assumptions, the recently completed spinoff of Fortrea Holdings Inc., the impact of various factors on the company's businesses, operating and financial results, cash flows and/or financial condition, including the COVID-19 pandemic and general economic and market conditions, future business strategies expected savings, benefits and synergies, from the launchpad initiative and from other acquisitions and other transactions and partnerships and opportunities for future growth. Each of the forward-looking statements is subject to change based upon various factors, many of which are beyond our control.
More information is included in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and in the company’s other filings with the SEC. We have no obligation to provide any updates to these forward-looking statements even if our expectations change. Now I’ll turn the call over to Adam Schechter.
Adam Schechter: Thank you, Christin. Good morning, everyone. It's a pleasure to be with you today to discuss our fourth quarter 2023 results and our guidance for 2024. Labcorp delivered a strong finish to what was a transformational year for the company. Looking back, we executed well on our strategic priorities. We successfully integrated the lab operations of Ascension, one of the largest health systems in the United States. We completed the spin of Fortrea, our former clinical development and commercialization services business. We announced six new laboratory partnerships, reinforcing our position as a partner of choice for health systems and regional local laboratories and we launched new innovative tests in our focus specialty areas across the business.
As we begin 2024, we have momentum in both diagnostic laboratories and biopharma laboratory services. We expect to drive continued growth by expanding our base business, finalizing and integrating acquisitions and partnerships, by advancing our position in science, technology and innovation. We will continue to focus and lead in oncology, women's health, autoimmune disease, and neurology. Now, let's turn to the fourth quarter results. Labcorp performed well, driven by strong base business revenue growth in both diagnostics and bioparma. In the fourth quarter, revenue totalled $3 billion. Adjusted earnings per share was $3.30 and free cash flow from continuing operations excluding spin-related items was $422 million. Enterprise revenue increased 4% compared to fourth quarter of 2022, with diagnostics growing 3%, led by base business growth of 8% and bioparma growing 7% due to strong performance in central laboratories more than offsetting softness in early development research laboratories.
Enterprise-based business margin was flat compared to the prior year despite being constrained by the mixed impact from recently closed hospital partnerships. Looking forward to 2024, we expect strong enterprise revenue growth of 4.7% to 6.5%. We expect margin improvement across both diagnostics and bioparma and we expect a adjusted EPS of $14.30 to $15.40, and applied growth rate at the midpoint of 10%. We also expect free cash flow to grow in excess of earnings. In a moment, Glenn will provide more details on our results and 2024 guidance. Turning to our enterprise strategy; in the fourth quarter, we continue to see positive momentum from our health systems and regional local lab partnership strategy. Labcorp continues to demonstrate that we are a partner of choice with several new health systems and regional local laboratory relationships.
This is primarily due to our leadership in science and technology, our dedication to patients and our commitment to quality and efficiency. We announced a strategic partnership with Baystate Health in Western Massachusetts, to acquire its outreach laboratory business and select operating assets. We completed the acquisition of select assets from Legacy Health. Labcorp now manages Legacy's inpatient hospital laboratories, serving patients throughout Oregon and Southwest Washington State and we entered into an agreement to acquire Ambulatory [indiscernible] from Providence Medical Groups in California. Looking ahead, our M&A pipeline is robust and we remain focused on integrating and expanding our health system and regional local laboratory partnerships.
These partnerships are typically accretive in the first year, with margins expanding over time during integration, and they return their cost of capital within just a few years. Turning now to our progress in science, technology and innovation; in the fourth quarter, Health [ph] by Labcorp, announced they will offer fertility and family building benefits. This benefit is the first of its kind that will allow employers and health plans to offer customizable solutions to employees and members to support their family building needs. Labcorp announced the availability of an ATM profile, the first blood-based test that combines three well-researched blood markers to identify and assess biological changes associated with Alzheimer's disease. Last month, we announced the launch of the new FDA-cleared blood test for risk assessment and clinical management of severe preeclampsia.
Labcorp and Hawthorne Effect announced a strategic collaboration to advance decentralized clinical trial capabilities for pharma, biotech and medical device sponsors. The collaboration is expected to increase patient diversity and inclusion to decrease site burden and to accelerate enrolment and clinical study timelines. Finally, for our Central Laboratory customers, we introduced a new sample testing application to provide enhanced near real-time visibility of specimens within the Central Lab. This phase is the first of many that will be launched for Labcorp customers. The application allows users to view events in the Central Lab's specimen sample journey for each assigned protocol and to customize how their data is structured. Turning now to the year ahead, we are focused on advancing our growth drivers that are outlined in our September 2023 Investor Day.
We plan to continue to be a partner of choice for health systems and regional local laboratories. We will continue to develop, license and ultimately scale specialty testing, including Companion Diagnostics. We will work to bring our specialty testing to other parts of the world, which increases our global reach by leveraging our scale. For example, we're enabling our central laboratories in China and Geneva to perform liquid biopsy tests for clinical trials and we are well positioned for long-term success in cell and gene therapy and consumerism. We see tremendous opportunity for growth as we continue to focus on bringing new innovation, technology and products to market. In closing, 2023 was a strong and transformative year for Labcorp. We executed our strategy at exceptional scale and pace.
I want to thank our more than 60,000 employees for their hard work and dedication to customers around the world. This enabled us to enter 2024 with considerable momentum that we intend to capitalize on to drive further value for our customers, our shareholders and our employees as we pursue our mission to improve health and to improve lives. With that, I'll throw the call over to Glenn.
Glenn Eisenberg: Thank you, Adam. Going to start my comments with a review of our fourth quarter results, followed by a discussion of our performance in each segment and conclude with our 2024 full-year guidance. For reference, we've also included additional business information that can be found in our supplemental deck on our Investor Relations website. Revenue for the quarter was $3 billion, an increase of 3.5% compared to last year, primarily due to organic-based business growth and the impact from acquisitions; partially offset by lower COVID testing. The base business grew 7.4% compared to the base business last year, while COVID testing revenue was down 73%. Organically in constant currency, the base business grew 5.2%.
Operating loss for the quarter was $123 million due to an impairment charge of $334 million related to our early development research laboratory's business, as we've experienced soft biotech markets. In addition, we had $125 million of special charges related to acquisitions, COVID and the spin of Fortrea. Excluding these items in amortization, adjusted operating income in the quarter was $395 million or 13% of revenue, compared to $413 million or 14.1% last year. The decrease in adjusted operating income and margin was due to lower COVID testing. Base business margins were in line with last year, as the benefit of demand and launch pad savings were offset by higher personnel and stranded costs and the mixed impact of recently completed hospital partnerships.
Our launch pad and stranded cost reduction initiatives delivered around $125 million of savings this year, consistent with our long-term target of $100 million to $125 million per year. The adjusted tax rate for the quarter was 19.5% compared to 25.4% last year. The lower adjusted tax rate was primarily due to the geographic mix of earnings, and the benefit from increased R&D tax credits. We expect our adjusted tax rate for 2024 to be approximately 23%. Fully diluted EPS for the quarter was a loss of $1.95 due to the early development impairment charge. Adjusted EPS were $3.30 in the quarter, up 8% from last year. Operating cash flow from continuing operations was $580 million in the quarter, compared to $607 million a year ago. The reduction in cash flow was due to lower COVID testing.
Capital expenditures totalled $165 million in the quarter. For the full year, capital expenditures were 3.7% of revenue, and we expect this to be approximately 3.5% in 2024. Free cash flow from continuing operations for the quarter was $414 million. The company invested $155 million in acquisitions and paid out $61 million in dividends. While we did not use any cash for share repurchases during the quarter, we completed the accelerated share repurchase program, which reduced our share count by approximately 1.1 million shares in the quarter. At the end of the year, we had $530 million of share repurchase authorization remaining. For the full year, free cash flow from continuing operations, excluding spin-related costs, was $888 million. The company invested $672 million on acquisitions, paid out $254 million in dividends, repurchased $1 billion of stock, and paid down $300 million of maturing debt.
We continue to have a robust pipeline of potential acquisition opportunities that will supplement our organic growth. In addition, we continue to believe that our share repurchase program is an important part of our capital allocation strategy. At year end, we had $537 million in cash with debt of $5.1 billion. Our leverage was 2.5 times gross debt to trailing 12 months adjusted EBITDA. Now, review our segment performance, beginning with Diagnostics Laboratories. Revenue for the quarter was $2.3 billion, an increase of 2.6% compared to last year, with organic growth of 0.8% and acquisitions contributing 1.8%. The base business grew organically by 5.7% compared to the base business last year, while COVID testing revenue was down 73%. Total volume increased 2.4% compared to last year, as organic volume grew 0.3%, which was constrained by lower COVID testing, while acquisition volume contributed 2.1%.
Base business volume grew 5.2% compared to the base business last year, as organic volume increased 3.1%, while acquisitions contributed 2.2%. Price mix increased 0.2% versus last year, due to an organic base business increase that was mostly offset by lower COVID testing. Base business organic price mix was up 2.6% compared to the base business last year. Diagnostics' adjusted operating income for the quarter was $354 million, or 15.1% of revenue, compared to $387 million, or 16.9% last year. The decrease in adjusted operating income was due to a reduction in COVID testing. Base business operating income was up due to the benefit of higher organic demand, acquisitions, and launchpad savings, which were partially offset by higher personnel costs, including healthcare related costs.
The decrease in margin was due to the reduction in COVID testing and the mixed impact from recently closed hospital partnerships, which we expect to improve over time. Now review our segment performance of Biopharma Laboratory Services. Revenue for the quarter was $695 million, an increase of 7.1% compared to last year, due to an increase in organic revenue of 4% and foreign currency translation of 3.1%. The 7.1% revenue growth was driven by continued strength in Central Labs, which was up 12%, while early development was down 2% due to higher than normal cancellations. Biopharma adjusted operating income for the quarter was $109 million, or 15.7% of revenue, compared to $95 million, or 14.7% last year. Adjusted operating income and margin increased due to organic growth and Launchpad savings, partially offset by higher personnel and stranded costs.
We ended the quarter with a backlog of $8.2 billion, and we expect approximately $2.5 billion of this backlog to convert into revenue over the next 12 months. Book-to-bill for the quarter was $1.26 billion, with the trailing 12 months at $1.04 billion. Now I'll discuss our 2024 full year guidance, which assumes foreign exchange rates effective as of December 31, 2023, for the full year. The enterprise guidance also includes the impact from currently anticipated capital allocation, with free cash flow targeted for acquisitions, share repurchases and dividends. We expect enterprise revenue to grow 4.7% to 6.5% compared to 2023. This includes the favourable impact from foreign currency translation of 60 basis points. We expect Diagnostics revenue to be up 3.2% to 4.8% compared to 2023.
The impact from lower COVID testing of around $130 million is expected to be offset by the annualization of acquisitions that were completed in 2023. We expect biopharma revenue to grow 5.5% to 7.5% compared to 2023. This guidance includes the positive impact from foreign currency translation of 220 basis points. We expect central labs and early development to both grow within the segment guidance range. We expect margins in diagnostics and biopharma to be up in 2024 versus 2023, driven by top line growth and Launchpad savings. Our guidance range for adjusted EPS is $14.30 to $15.40, with an implied growth rate at the midpoint of approximately 10%. While we do not guide the quarterly performance, it's worth noting that first quarter earnings will be below typical quarterly seasonality, due to weather disruption in January that we expect will impact earnings by $0.10 to $0.15 in the quarter.
Free cash flow is expected to be between $1 billion to $1.15 billion, with an implied growth rate at the midpoint of approximately 21%. In summary, we expect to drive continued profitable growth and strong free cash flow generation that will be used for acquisitions that supplement our organic growth, while also returning capital to shareholders through our share repurchase program and dividends. Operator, we will now take questions.
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