The Quest Diagnostics Second Quarter 2023 Conference Call began with Shawn Bevec, Vice President of Investor Relations, introducing Jim Davis, Chairman and Chief Executive Officer, and Sam Samad, Chief Financial Officer. They discussed forward-looking statements, non-GAAP measures, and Quest Diagnostics' most recent annual report on Form 10-K. Jim Davis reported that the company had a strong base business performance in the second quarter with nearly double-digit revenue growth year-over-year. This was due to collaborations with health plans, hospitals, and physicians as people return to care.

In the second quarter, the company saw revenue growth of nearly 10% from health system customers and improved profitability, with a total adjusted operating margin increase of 170 basis points. The company's strategy for future growth includes continuing to meet the needs of their core customers, focusing on faster-growing clinical areas, and making acquisitions. They have also been partnering with health plans to expand their access to the market and are working with them on value-based arrangements. Finally, they are using automation and AI to improve quality, efficiency, and service.

Quest Diagnostics saw strong growth in its Hospital Lab Services, Professional Lab Services, and Consumer Health divisions during the quarter. Professional Lab Services saw growth from both new and existing partnerships, and Consumer Health saw growth on questhealth.com and the launch of Genetic Insights, a saliva-based test that analyzes 3 dozen genes for inherited risk of conditions. The company also plans to support faster growth across all customer segments through specialized advanced diagnostics, such as molecular genomics and oncology tests, neurology, women's reproductive health, and cardiometabolic health.

Quest Diagnostics has achieved strong growth with their AD-Detect portfolio of Alzheimer's blood tests, which help identify early indications of beta amyloid and ApoE status. Additionally, they recently acquired Haystack Oncology to enter the high-growth area of minimal residual disease or MRD testing. Their focus for future M&A is primarily on traditional hospital outreach purchases and tuck-in lab deals that are accretive to earnings in the first year.

The M&A pipeline is robust due to margin pressures, and the Invigorate program is on track to deliver 3% annual productivity savings. AI and automation are being used to improve quality, efficiency, and service, as well as to provide insights and content for better customer targeting. Generative AI is being used for sentiment analysis, quality control, and market research. 2023 will be challenging as the nation returns to care.

In the second quarter, Quest Diagnostics' consolidated revenues were down 4.7% compared to the prior year, with base business revenues growing 9.5% and COVID-19 testing revenues declining 88%. Total volume was up 0.2%, with base testing volumes growing 7.4%. Reported operating income was $348 million or 14.9% of revenues, and on an adjusted basis, operating income was $389 million or 16.7% of revenues. The year-over-year decline in adjusted operating income is related primarily to lower COVID-19 testing revenues, partially offset by growth in the base business.

The company saw strong progress in improving profitability in the second quarter, with adjusted operating margin expanding 170 basis points. SG&A costs increased due to a market value increase in the deferred comp plan, but this had no effect on EPS. The company has taken steps to reduce support costs, but employee turnover has not met expectations. Reported EPS was $2.05 and adjusted EPS was $2.30 compared to the prior year. The updated full year 2023 guidance is for revenues between $9.12 billion and $9.22 billion, reported EPS between $7.52 and $7.92, adjusted EPS between $8.50 and $8.90, cash from operations of at least $1.3 billion, and capital expenditures of approximately $400 million.

In the second quarter, the company had strong base business performance with almost double-digit revenue growth due to collaborations with health plans, hospitals, and physicians. Profitability of the base business improved compared to the first quarter and prior year, with an adjusted operating margin of 16.5% expected for the full year. Cost actions taken in the first half of the year and improvements in unit price reimbursement and CIT business are expected to be accretive to revenue and earnings in the second half of the year, though higher frontline turnover and a tight labor market have had an impact on productivity and wages.

The company has seen a combination of share gain and strong return to care in terms of revenue growth, and is working to ensure that tests ordered by physicians are appropriate and follow payer policies. The updated guidance reflects expectations of revenue growth and improved profitability.

Sam Samad reported that the company is expecting an operating margin of 16.5% for the year and that the Invigorate program and SG&A savings of $100 million are helping to improve the margins. James Davis added that the company is pleased with the margin improvement from Q2 of last year to Q2 of this year, and from Q1 of this year to Q2 of this year.

Sam Samad explains that the expenses related to the increase in the market value of obligations in the company's supplemental deferred comp plan have a net neutral impact on EPS but do affect operating margin. This quarter, it impacted the company's operating margin percent by 30 basis points. Last year, the company actually had a benefit in terms of expenses related to deferred compensation. Liz asked about the company's assumption in terms of what's embedded in their guidance for the back half of the year and how they think about investing more in wages versus the productivity gains they could potentially receive from that. Jim will address the trade-offs related to productivity.

Operating margins for Q2 2023 are flat compared to Q2 2022, despite a $300 million drop in COVID revenues. Deferred compensation plan is assumed to have a net neutral impact on the P&L, EPS, and operating margin. The first half of the year saw a 30 basis point decrease in operating margin due to the DCP. Additionally, the turnover rate for frontline roles has increased from 14% pre-COVID to 23%, and each turnover can cost between $8,000 and $10,000, potentially resulting in a $20 million impact in the second half of the year.

The Health System Business saw growth of just under 10% in the quarter, with strong growth in the PLS side due to deals with Tower Health, Lee Health, and Northern Lights. PLS has slightly lower operating margins than the normal physician office book of business, but has a strong return on capital, making it an attractive opportunity for the company. The funnel of opportunities for the Health System Business remains strong.

Sam Samad states that the 16.5% operating margin is the launching point for the 3-year outlook, and that there is a 75 to 150 basis point improvement. He also mentions that the DCP, which was more significant in Q2 and the first half of the year, is considered a recurring but onetime item that can be either a benefit or a negative depending on the year.

The company has seen good momentum with health plan value-based contract arrangements and expects the pricing environment to improve in the second half of the year. However, there is still some uncertainty for 2024 due to the PAMA bill, and the company has given long-term targets for operating margin improvement over the next three years. Additionally, they have outlined $100 million of corporate savings that will become part of their run rate in 2021, and the 16.5% operating margin becomes the launching point for the future.

James Davis is optimistic that the growth in their business will continue into the second half of the year, as July has been strong and consistent with what was seen in June. He notes that they are continuing to invest in the business for the future, while also looking for ways to be more efficient with their spending. He also mentions that they are seeing organic growth from the PLS transactions, though it is unclear how much of the second quarter organic growth was from those transactions.

In the first half of the year, PerkinElmer experienced close to 10% revenue growth, however, this growth is expected to be lower in the second half due to some easier comparisons in the first half, the negative impact of the COVID flu panel, and the lapping of some PLS wins. Despite this, PerkinElmer is still seeing higher than traditional utilization in July.

Kevin Caliendo asked how to quantify the impact of labor trends and whether it will continue going forward. James Davis responded that their attrition rate had increased from 14% pre-COVID to 23% in December, costing them $8,000 to $10,000 per employee. Sam Samad then added that they are being conservative in their guidance for the second half of the year, but they are confident in the margin outlook of 16.5% for the year.

In Q2, the company's margins expanded despite an $80 million drop in COVID-related revenue. In the second half of the year, the CIT business will become accretive, pricing will be net accretive, SG&A will achieve $100 million in annualized savings, and DCP will not be a headwind. Additionally, Invigorate improvements and Haystack dilution will factor into the outlook. Price is typically considered in terms of commercial payers, Medicare and Medicaid.

James Davis explains the difference between value-based care and value-based incentives, and how LabCorp is contracting directly with ACO REACH organizations and large physician groups. He also mentions the pipeline of Health Systems, but does not provide any information on its size.

United Healthcare updated their Preferred Lab Network in July, removing Mayo but not making any other notable changes. Quest Diagnostics remains part of this preferred plan network, and they are looking for more opportunities to narrow networks and move National Labs like themselves and LabCorp into more preferred roles.

Sam Samad and James Davis discussed the reduction in investment spending seen in the second quarter of the year, as well as the portion of the $100 million cost action that was captured in the same quarter. They also mentioned that they have been investing in CIT and that they are seeing positive returns on ad spend.

James Davis believes that with the combination of Haystack, an MRD testing product launching in 2024, and their own internal assay for therapy selection, they are well positioned for future growth in the oncology field. They are continuing to invest in their Alzheimer's portfolio of tests, as well as their molecular and oncology businesses, which will ensure their long-term outlook.

Quest Diagnostics had a strong quarter and increased their revenue guidance for the second half of 2023. They are continuing to invest in their genetics business, focusing on cancer diagnostics, hereditary genetics, family planning, and prenatal genetics. They are also looking to make accretive investments through hospital outreach deals and small tuck-ins. A transcript of the conference call is available on the Quest Diagnostics website and a replay of the call can be accessed by phone or online until August 9, 2023.

This summary was generated with AI and may contain some inaccuracies.