Laboratory Corporation of America Holdings (NYSE:LH) Q3 2023 Earnings Call Transcript

Laboratory Corporation of America Holdings (NYSE:LH) Q3 2023 Earnings Call Transcript October 26, 2023

Laboratory Corporation of America Holdings beats earnings expectations. Reported EPS is $3.38, expectations were $3.37.

Operator: Welcome to the Laboratory Corporation of America Holdings Third Quarter 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]. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program. Christin O'Donnell, Vice President of Investor Relations, please go ahead.

Christin O'Donnell: Thank you, operator. Good morning and welcome the Labcorp’s third 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 GAAP financial measures discussed during today's call. Additionally, we are making forward looking statements.

A scientist wearing a lab coat and gloves handling a medical device in a laboratory.

These forward looking statements include but are not limited to statements with respect to the estimated 2023 guidance and the related assumptions, 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 and synergies, including from the launchpad initiative, acquisitions and other transactions 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. Today I'll cover our third quarter performance, and I'll discuss strategy which we reviewed at a recent investor day. In the third quarter Labcorp delivered strong year-over-year growth across the enterprise with acceleration or diagnostic laboratories and biopharma laboratory service businesses. Our growth is fueled by our ability to execute well and to deliver greater value for our customers, through our leadership in science, innovation and technology. We see strength in our businesses. We have enhanced financial flexibility, and a clear strategic focus, all of which enable us to end the year with significant momentum. Labcorp will continue to drive growth by expanding our base business, finalizing and integrating our hospital and health system and our local and regional laboratory transactions.

And by advancing our leadership and high growth strategic areas, including specialty testing. Moving to our third quarter results in the third quarter revenue totaled $3.1 billion. Adjusted earnings per share was $3.38. And free cash flow from continuing operations, excluding spin related items was $227 million. Enterprise revenue increased 7% compared to their prior year. Diagnostics laboratories based business revenue continued exceptional year-over-year growth with a 16% increase driven by organic growth and progress in our hospital and health system strategy, including retention. Biopharma Laboratory Services had a strong growth in the third quarter of 8%. Enterprise based business margin was down 50 basis points compared to the prior year, primarily due to the mixed impact of retention.

We continue to expect full year-base business margins to be flat to slightly up versus prior year, implying an increase in fourth quarter margins year-over-year. Then we'll provide more detail on our quarterly results, as well as a 2023 outlook in just a moment. Turning now to our Enterprise Strategy in the third quarter, we have significant momentum in our health system, and local and regional laboratory partnership strategy. I believe the momentum is due to our leadership in science and technology in our dedication to patients, and in our commitment to quality and efficiency. With the most recent partnership announcement, we strengthened our presence and scale in the Northeast and West Coast. In the Northeast, we advanced three partnerships during the quarter.

In July, we finalized a strategic relationship with Jefferson Health, one of the largest and most prominent health systems serving the greater Philadelphia area and southern New Jersey. In August, we forged a strategic partnership with Tufts Medicine, a leading health system in Massachusetts, patients and providers of Tufts Medicine now have improved access to standardized laboratory testing throughout the Tufts Medicine system. We recently finalized our initial agreement with Tufts Medicine, and we reached agreement to expand the relationship to manage Tufts Medicine in-patient hospital laboratories later this year. And earlier this month, we announced the strategic relationship with Baystate Health, in which we would acquire its outreach laboratory business and select operating assets, including laboratory service centers, operated throughout Western Massachusetts.

On the Northwest, we announced a comprehensive lab relationship with Legacy Health in Portland, we will acquire select assets of its outreach laboratory business, and manage its inpatient hospital laboratories. We also finalized our acquisition of Providence, Oregon's outreach laboratory business in September. The depth and the breadth of opportunity and the quality of our pipeline is robust, and we are optimistic about continued expansion. The partnerships meet our financial criteria, including being your creative in the first year, and return your cost of capital within three years. While the first-year margins are typically lower than Labcorp’s historical margin levels, there was a clear path to improvement. Turning now to our advancements in innovation in technology.

In late September Labcorp became the first company to broadly offer an ATN profile, a blood-based test that combines three well researched blood biomarkers to identify and to assess biological changes associated with Alzheimer's disease, Amyloid-Tau Alzheimer's and neurodegeneration targeted for patients who are being evaluated from mild dementia. This new test builds the Labcorp’s leadership in new neurodegenerative testing options, and gives physicians and easily accessible and interpretable blood test to assess pathologies associated with Alzheimer's disease and other neurodegenerative conditions. Turning to women's health, we announced the new consumer offering for menopause in the quarter. Lapcorp’s on demand menopause test, aims to help women understand symptoms and hormonal factors related to menopause so they can have more informed conversations with their providers.

Finally, our Biopharma Laboratory services team opened two new international facilities in China, a new kit production facility, and an immunology and immune toxicology laboratory. Before I turn the call over to Glenn, as we discussed at Investors Day, we are excited about the future of Labcorp and our strong financial outlook on a CAGR basis to 2026. We expect overall enterprise revenue growth of 5% to 8%, including 1.5% to 2.5%, from acquisitions. For Diagnostic Laboratories, we expect organic growth of 2.5% to 4.5%. We expect Biopharma Laboratory services to grow organically between 4.5% to 7.5%. We're focusing on two significant drivers of near-term growth and differentiation as we move towards those target ranges. The first is to be the partner of choice for health systems, and local or regional laboratories.

And the second is to develop to license and ultimately to scale specialty testing, including companion diagnostics. I mentioned the momentum that we have in our health system strategy earlier. We've announced five new agreements this year. Additionally, specialty testing, we are focused on four primary areas, oncology, woman cell, autoimmune disease, and neurology, which we anticipate will outpace the growth of other therapeutic areas. The development of Specialty Tests and Companion Diagnostics makes us attractive partners to health systems and biopharma as they continue to develop more therapies and highest specialty areas. Our scale and our geographic presence will be differentiators for both growth initiatives. We're also well positioned for long term success in Cell & Gene Therapy, expanding into consumer market and international growth through our innovative specialty testing and biopharma business.

All this will culminate the top line performance that we expect will exceed $14 billion by the end of 2026. To close, our team of over 60,000 global employees is executing Labcorp’s global strategy at scale, and then an exceptional pace repose. As we post 2023, we will continue to capitalize on the momentum that we've created, and drive further value creation for our shareholders. This year has been transformational for Labcorp. We're focused on our growth strategy. And we plan to finish strong as you pursue our mission to improve health and to improve lives. With that, I'll turn the call over to Glenn.

Glenn Eisenberg: Thank you, Adam. I'm going to start my comments with a review of our third quarter results, followed by discussion of our performance in each segment, and conclude with an update on our full year guidance. For reference, we've also included additional business information that can be found in our supplemental deck on our Investor Relations website. Revenue for the quarter was $3.1 billion, an increase of 6.6% 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 14% compared to the base business last year, while COVID testing revenue was down 87%. Organically in constant currency, the base business grew 10.8% benefiting from the Ascension lab management agreement, which contributed approximately 4% of the organic growth.

As a reminder, the Outreach business that we acquired from Ascension is treated as an acquisition while the lab management agreement is treated as organic growth, Ascension annualized on September 30th. Operating income for the quarter was $252 million, or 8.3% of revenue. During the quarter we had $56 million of amortization and $116 million of restructuring charges and special items due to the spin of Fortrea, COVID acquisitions and Launchpad initiatives. Excluding these items adjusted operating income in the quarter was $424 million, or 13.9% of revenue, compared to $491 million, or 17.1% last year. The decrease in adjusted operating income was due to lower COVID testing. The margin decline was also negatively affected by the mixed impact from the Ascension lab management agreement.

Excluding these items margins would have been flat as the benefit of demand and Launchpad savings were offset by higher personnel expense. Our Launchpad initiative continues to be on track to deliver $350 million of savings over the three-year period ending 2024. The tax rate for the quarter was 23.1%. The adjusted tax rate for the quarter was 24% compared to 19.4% last year. The increase in the adjusted rate was primarily due to higher R&D tax credits realized last year. We continue to expect the fourth quarter and full year adjusted tax rate to be approximately 24%. Net earnings for the quarter from continuing operations were $184 million, or $2.11 per diluted share, adjusted EPS were $3.38 in the quarter, down 16% from last year to the lower COVID testing earnings, as base business adjusted EPS was up approximately 10%.

Operating cash flow from continuing operations was $276 million in the quarter, which was burdened by approximately $56 million of spin related items. Operating cash flow of $276 million is up from $253 million a year ago due to higher cash earnings. Capital expenditures totaled $105 million, up from $83 million last year. For the full year we continue to expect that capital expenditures will be approximately 3.5% of base business revenue. Free cash flow from continuing operations for the quarter was $171 million, which was burdened by approximately $56 million of spin related items. The company invested $380 million in acquisitions, paid out $64 million in dividends and used $1 billion for an accelerated share repurchase program that we expect will be completed by year end.

At quarter end, we had around $725 million in cash, while debt was $5.4 billion. Our leverage was 2.7 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 6.2% compared to last year, driven primarily by organic growth of 3.4% and acquisitions of 3%. The base business grew organically by 12.8% compared to the base business last year, while COVID testing revenue was down 87%. The Ascension lab management agreement contributed approximately 6% of the growth. Total volume increased 2.3% compared to last year, as acquisition volume grew 3.4% primarily offset by organic volume of minus 1.1% due to COVID testing. Base business volume grew 7.2% compared to the base business last year, as organic increased 3.6% for volume, while acquisitions also contributed 3.6%.

Price mix increased 3.9% versus last year primarily due to an organic base business increase partially offset by lower COVID testing. Base business organic price mix was up 9.2% compared to bass business last year, benefiting from the Ascension lab management agreement of approximately 6%. Diagnostics laboratories adjusted operating income for the quarter was $386 million, or 16.5% of revenue compared to $440 million or 19.9% last year. The decrease in adjusted operating income was due to reduction in COVID-19 testing. While the margin was also affected by the mix impact from Ascension. Base business margin excluding the mix, impact of Ascension was up approximately 30 basis points as the benefit of organic growth and Launchpad savings were partially offset by higher personnel expense.

Now review our segment performance of Biopharma Laboratory Services. Revenue for the quarter was $719 million an increase of 7.9% compared to last year, primarily due to an increase in organic revenue of 4.9% and foreign currency of 3.3%. The 7.9% revenue growth was driven by continued strength in Central Labs which was up 9%, while early development was up 5.7%. While early development is no longer constrained by NHP availability, it has experienced higher than normal cancellations and lower orders, primarily due to small biotech funding. Biopharma Laboratory Services adjusted operating income for the quarter was $109 million, or 15.2% of revenue, compared to $105 million or 15.8% last year. The decrease in adjusted operating margin was due to stranded costs as a result of a spin of Fortrea which is timing related.

Excluding stranded cost margins were up in the third quarter. As the benefit of top line growth and Launchpad savings were partially offset by higher personnel costs. We expect margins in the fourth quarter to be up sequentially and year-over-year. We ended the quarter with a backlog of $7.8 billion, and we expect approximately $2.4 billion of this backlog to convert into revenue over the next 12 months. Trailing 12 months book-to-bill was 1.12. Now discuss our 2023 full year guidance which assumes foreign exchange rates effective as of September 30, 2023 for the remainder of the year. The Enterprise guidance also includes the impact from currently anticipated capital allocation with free cash flow targeted for acquisitions share repurchases and dividends.

In addition, the guidance includes the impact from the $1 billion accelerated share repurchase program, which was funded with proceeds from the spin. With regard to our 2023 full year guidance, we've narrowed the ranges but have maintained the same midpoint from our prior guidance for Enterprise revenue, earnings and cash flow. We expect Enterprise revenue to grow 1.9% to 2.7% compared to 2022. This increase reflects the base business growing 11.5% to 12.2%. While COVID testing is expected to decline 85% to 86%. We expect Diagnostics Laboratories revenue to be up 1.5% to 2% compared to 2022. This guidance includes the expectation that the base business will grow 14.1% to 14.6%, which includes approximately 5% growth from Ascension. The base business has improved from our prior guidance as acquisition related revenue that was forecasted at the enterprise level is now reflected in the segment as we've closed those transactions.

We continue to expect Diagnostics Laboratories base business margin to be up slightly in 2023 versus 2022 including the unfavorable mix impact from Ascension. We expect Biopharma Laboratory Services revenue to grow 3.1% to 4% compared to 2022. Excluding the change in currency translation at negative 20 basis points, the midpoint of the guidance range remains unchanged from our prior guidance, we expect the revenue growth rate to continue to improve in the fourth quarter. In addition, we expect margins for the full year to be flat to slightly up, while the fourth quarter is expected to see both sequential and year-over-year improvement. Our guidance range for adjusted EPS is $13.25 to $13.75, unchanged at the midpoint from our prior guidance.

Free cash flow from continuing operations, excluding spin related items is expected to be between $850 to $950 million. Also unchanged from our prior guidance at the midpoint. In summary, we expect to drive continued profitable growth in our base business, we expect to continue to use our free cash flow generation for acquisitions that supplement our organic growth will also returning capital to shareholders through our share repurchase program, and dividends. Operator we’ll now take questions.

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