The operator introduces the Quest Diagnostics Fourth Quarter and Full Year 2023 Conference Call and states that the call is being recorded. Shawn Bevec, Vice President of Investor Relations, introduces the speakers, Jim Davis (Chairman, CEO, and President) and Sam Samad (CFO). They may make forward-looking statements and discuss non-GAAP measures. Actual results may differ from projections, and risks and uncertainties may affect the company's future results. References to reported and adjusted EPS, base business, testing, revenues, and volumes are explained. Jim Davis then begins his presentation.

Quest had a strong year in 2023, with 7% revenue growth in their base business and a successful transition away from COVID testing. They made progress on their growth strategy through innovative testing solutions, new partnerships, and investments in higher growth areas. They also improved quality and productivity, offsetting cost challenges. The company has issued guidance for 2024 and is well-positioned for long-term growth. The CEO thanks their team for their dedication and shares recent regulatory updates, including a delay in Medicare reimbursement cuts and the next data collection process under PAMA.

The company is pleased with the delay in implementing PAMA and is working with their trade association to secure a permanent solution through SALSA. They also submitted comments on a proposed FDA rule that would regulate lab-developed tests, which they believe would compromise patient access and slow innovation. The company's growth strategy focuses on delivering solutions to meet the needs of their core customers, with a focus on advanced diagnostics and acquisitions. They also aim to drive operational improvements through automation and AI.

In the fourth quarter, Physician Lab Services saw mid-single-digit revenue growth due to increased return to care, market growth, and share gains. The company also completed acquisitions and has a strong acquisition pipeline for 2024. Revenues from health plans grew by high single-digits, with over half now coming from value-based contracts. The company has also successfully reduced lab leakage to high-cost out-of-network labs. In hospital lab services, there was high single-digit revenue growth in both reference and professional laboratory services.

Hospital reference testing has grown significantly due to the recognition of the benefits of our laboratory testing and management solutions by health systems. These solutions help improve quality, productivity, affordability, and care. In addition, our professional lab services help manage hospital labs, supply chains, and workforce. We also offer insights to help hospitals manage utilization and provide the right tests to patients. We completed two partnerships in the fourth quarter and also acquire non-core outreach laboratory assets from hospitals. Our consumer-initiated testing service, questhealth.com, generated strong revenue growth and we are expanding through channel partners. In 2024, we will release a new product for testing PFAS chemicals.

The CDC has issued new guidelines recognizing the value of PFAS blood testing for individuals with elevated exposure levels. PFAS chemicals have been linked to health conditions and have accounted for billions of dollars in healthcare costs. In the fourth quarter, Advanced diagnostics saw double-digit growth in several clinical areas, including neurology and Alzheimer's disease testing. They have added a new biomarker to their AV detect blood test and plan to expand their menu later this year. In molecular genomics and oncology, they are on track to launch a new minimal residual disease test and have announced collaborations for clinical trials. They have also announced a collaboration for a blood test for screening for colorectal cancer.

In this paragraph, the speaker discusses the company's collaboration with Scipher to expand patient access to the PRISM-RA test for rheumatoid arthritis. They also mention their Invigorate program, which delivered cost savings and productivity improvements. The company has made progress in using automation and AI to improve operations, and they have seen growth in their base business revenues. The speaker thanks their colleagues for their efforts and turns the discussion over to Sam for more details on the company's performance and guidance for 2024.

In the fourth quarter of 2023, revenues for Diagnostic Information Services declined 2% compared to the prior year, with lower revenue from COVID-19 testing services offset by growth in base testing revenue. Total volume and base testing volumes increased, while revenue per requisition declined. Operating income and EPS also increased compared to the prior year. Cash from operations was lower due to reduced COVID-19 testing revenue. The company has also announced a 5.6% increase in its quarterly dividend and has provided guidance for full-year 2024 revenues between $9.35 billion and $9.45 billion.

The company has provided a range for reported and adjusted EPS for 2024, as well as expectations for cash from operations and capital expenditures. They have also shared their adjusted earnings bridge and discussed their guidance for 2024, including the impact of COVID revenue, M&A, margin expansion, net interest expense, and share count. They also mention a weather headwind for the first quarter.

In summary, Quest Diagnostics delivered strong base business revenue growth in 2023 and achieved their EPS commitments. Their guidance for 2024 reflects a return to total revenue growth while balancing earnings tailwinds and headwinds. Looking beyond 2024, the company is well positioned to deliver their long-term financial outlook for mid-single-digit revenue growth and high single-digit earnings growth. The company also paid tribute to their founder, Dr. Paul A. Brown. During the Q&A session, they addressed a question about margin outlook for 2024, with Sam providing more details on expectations and potential headwinds being alleviated due to the push out of PAMA.

In response to a question about investments and margins, Sam Samad explains that the company is expecting to expand margins in 2024 by focusing on volume growth and continuing their work on Invigorate. They are also assuming labor inflation to be in line with 2023 and are relieved that PAMA has been delayed, as it would have required difficult cuts if it had been implemented in 2024. Jim Davis adds that they are committed to expanding margins in 2024.

The company is continuing to invest in their Alzheimer's portfolio and will be launching a new blood-based biomarker test in the first quarter. They are also upgrading some of their laboratory information systems. The progress on their Haystack project is on track and there is no additional investment needed. The company is also conducting clinical trials for the assay. The company has not made any changes to their capital deployment plans for the year.

The speaker, Sam Samad, addresses a question about the launch of a product, stating that it is expected to happen in the first half of the year for commercial purposes. He then responds to a question about Haystack dilution in 2023, stating that it was in line with expectations and that the company plans to offset equity dilution in 2024 through share repurchases. Another question is asked about operating margins, and Samad explains that the company is expecting growth in both operating margin rate and dollars in 2024 compared to 2023. He also addresses the lower-than-expected operating margin in Q4, stating that it was impacted by a drop in COVID revenues.

The company missed its operating margin expectations for Q4 due to three main reasons: higher employee health care costs, additional investments made towards the end of the year, and higher deferred compensation expenses. These factors accounted for one-third of the miss each. In 2024, the company is taking steps to lower employee health care costs and is factoring in volume growth to help improve margins. The deferred compensation expense is considered to be noise and does not significantly impact the budget.

In the paragraph, Jim Davis discusses the progress made in Q4 and the company's confidence in its growth and operating margins for the year. He also mentions that despite a $45 million decrease in revenue, the company was able to improve its operating margin by 60 basis points. When asked about core utilization, Davis reveals that volume growth was 5.1% in Q4 and 6.5% for the total year. He also notes that while the recent weather may have temporarily stunted volume growth, it has since recovered to normal rates. He acknowledges that other health plans have reported higher utilization in Q4 and that the company's own employees also experienced higher utilization.

The speaker states that they expect the company's growth to continue at a slightly higher than normal rate, despite some challenges in the first month of the year due to weather. They are confident in their long-term growth outlook, with plans to increase revenue and earnings in the mid to high single digits. However, there are some temporary headwinds in 2024, such as a decline in revenue due to COVID, Haystack dilution, and increased interest expenses. They are confident in their strong pipeline and M&A opportunities for future growth.

The company upsized its issuance in November to pay for recent acquisitions and future ones. They remain confident in long-term growth and EPS guide. A question was asked about margin expectations and the company responded that volume growth will be a key factor, along with continued cost reduction initiatives. There are no planned workforce reductions, but a placeholder for potential restructuring charges exists in the GAAP to non-GAAP comparison.

The speaker discusses the lack of headcount cuts and cost reductions in the company, as well as their focus on volume growth and stabilizing pricing with health plans. They mention a slight lift in price for the next year and their expectation for it to remain flat to slightly up in 2024. They also mention the progress of LDT legislation and their exposure to it, as well as their plans for introducing new tests that would qualify under it.

The speaker addresses a question about incremental investments and discontinuing testing in a certain area. They also discuss the legal landscape for the MRD space and the company's freedom to operate in that market. They feel confident about their IP and are waiting for FDA regulations on LDTs. The speaker also mentions their work with the pharmaceutical industry and international laboratories. In terms of Alzheimer's offerings, they see a significant opportunity and are making investments in that area.

The speaker is discussing the current state of the market for Alzheimer's testing and mentions that there is increased awareness of testing options due to new therapeutics being introduced. They have brought up blood-based assays for genetic and protein markers, which have seen double-digit growth this year and are expected to continue growing in the future. The speaker also mentions discussions around AI, but does not provide further details.

The company is investing in AI tools to improve workflow and minimize labor in their Clifton lab. They have also deployed AI in microbiology and are in the process of implementing it in pathology, using digital images to make initial calls and allowing for reading off a monitor instead of a microscope.

During a recent conference call, a question was asked about the impact of digitizing slides on the diagnosis process for pathologists. The response highlighted the use of algorithms to help identify regions of interest and assist in making proper diagnoses. The next question asked about the contribution of M&A to revenue growth in 2024 guidance, which was estimated to be around 50 basis points. The discussion then shifted to the impact of a higher mix of hospital reference testing on gross margin, with the response indicating that this type of testing generally carries a higher gross margin and can contribute to a higher operating margin.

Jim Davis thanks everyone for joining the call and looks forward to providing further updates throughout the year. The operator provides information on how to access a replay of the call and the availability of telephone replays. The call ended at approximately 10:30 a.m. Eastern Time on February 1, 2024.

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