Welcome to the Quest Diagnostics Third Quarter 2022 Conference Call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and question-and-answer session that will follow, are the copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission, or rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited. Now I’d like to introduce Shawn Bevec, Vice President of Investor Relations for Quest Diagnostics. Go ahead, please.

Thank you and good morning. I’m joined by Steve Rusckowski, our Chairman, Chief Executive Officer and President; Jim Davis, CEO elect; and Sam Samad, our Chief Financial Officer. During this call, we may make forward-looking statements and then we will discuss non-GAAP measures. We provide a reconciliation of non-GAAP measures to comparable GAAP measures in the tables to our earnings press release. Actual results may differ materially from those projected. Risks and uncertainties, including the impact of the COVID-19 pandemic that may affect Quest Diagnostics’ future results include but are not limited to, those described in our most recent annual report on Form 10-K and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K. The company continues to believe that the impact of the COVID-19 pandemic on future operating results, cash flows, and/or its financial condition will be primarily driven by the pandemic's severity and duration, healthcare insurer, government and client payer reimbursement for COVID-19 molecular test, the pandemic's impact on the U.S. healthcare system and the U.S. economy; and the timing, scope, and effectiveness of federal, state, and local governmental responses to the pandemic, including the impact of vaccination efforts which are drivers beyond the company's knowledge and control. For this call, references to reported EPS refer to reported diluted EPS and references to adjusted EPS refer to adjusted diluted EPS. Any references to base business, testing revenues, or volumes refer to the performance of our business excluding COVID-19 testing. Growth rates associated with our long-term outlook projections, including total revenue growth, revenue growth from acquisitions, organic revenue growth and adjusted earnings growth are compound annual growth rates. Finally, revenue growth rates from acquisitions will be measured against our base business. Now, here is Steve Rusckowski.

Thanks, Shawn and thanks everyone for joining us today. While we had a strong third quarter, we drove 5% growth in the base business despite the impact of Hurricane Ian and we delivered strong earnings despite inflationary pressures and investments in growth areas. Based on our performance, we have raised our outlook for the remainder of 2022. We also made very good progress on our leadership transition, adding management depth and expertise to help us grow in important areas. As you know, Jim will assume the responsibilities of CEO and President on November 1, and I will remain as Executive Chairman. Before I turn it over to Jim, I’d like to say a few words about savings access to Laboratory Services Act Salsa. If enacted, Salsa would fix PAMA and put the Medicare clinical laboratory fee schedule back on a sustainable path. Based on the efforts of our trade association, support for Salsa has broadened and continues to strengthen. As you know, we are currently planning for a Medicare fee schedule reduction under PAMA of $80 million to $90 million in 2023 if Congress does not intervene again this year. However, the work we are doing is aimed at reducing or postponing that burden and unfortunately, Congress has already acted three times to stop further cuts from going into place. It is therefore very important that we continue to build support for the enactment of Salsa when Congress returns to Washington after the election. As I transition to the Executive Chairman, I will remain actively engaged on this issue, working with ACLA and other stakeholders. Now I’d like to turn it over to Jim Davis.

Thanks, Steve. On behalf of our 50,000 Quest colleagues, I would like to thank you for your leadership of Quest Diagnostics over the last 10 years. You turned around a company that was struggling and built shareholder value and transformed Quest into a trusted healthcare partner with a strong foundation for future growth. I’m personally grateful for all the help and guidance and friendship that you shared during the transition. Thanks, Steve. Turning to our results. Our base business grew year-over-year in the third quarter with performance rebounding in August and September from the softer volume trends that we saw earlier in the year. In fact, before Hurricane Ian hit in September, we were seeing some of the highest base testing volumes we have ever experienced. I’d like to thank our employees for their incredible efforts to restore our labs and PSCs for our patients and customers in the wake of Hurricane Ian while also enduring personal loss of their homes and belongings. I’m also grateful to our employees outside of the impacted areas, who stepped up to provide financial support to our colleagues in need. As many of you are aware, Florida is an important state for us. During the quarter, we grew the base business revenues and continued to invest in advanced diagnostics and consumer-initiated testing. To help offset inflationary pressures, we have continued to pursue our operational excellence strategy and have been closely managing our cost structure through our invigorate initiatives. In the third quarter, total revenues were $2.5 billion. Earnings per share were $2.17 on a reported basis and $2.36 on an adjusted basis. Cash provided by operations was $502 million. COVID-19 testing revenues were $316 million in the third quarter down 55% from 2021 and down 11% from the previous quarter. After plateauing in June and July, our COVID-19 molecular testing volumes steadily declined. We expect COVID-19 molecular volumes to average 10,000 to 15,000 per day in the fourth quarter. In the third quarter, we continued to make progress executing our two-point strategy to accelerate growth and drive operational excellence. Here are some highlights from the quarter. M&A continues to be a driver of growth. We recently announced an outreach lab purchase from Summa Health, a large integrated healthcare delivery system in Ohio. While this is a small acquisition, it’s a positive indicator. We are seeing that hospital systems are more open to discussions compared to before the pandemic. Many large and small health systems face substantial financial and labor pressures that make our range of services very attractive. We’re pleased with the activity in our M&A pipeline and hope to share additional news with you later this year. We also announced a professional lab services relationship with Lee Health, Southwest Florida’s primary community-owned health system to provide supply chain expertise for five hospitals owned by Lee Health and selected outpatient centers. We will also continue to perform reference testing for Lee Health. Our implementation plans have been slightly delayed by Hurricane Ian, though we expect this relationship will have a positive impact on revenue growth in 2023. Turning now to health plans. Both volumes and revenues continue to grow faster than our overall base business in the quarter. Value-based care relationships continue to gain traction. Not only does this yield benefits for health plans in their members, but also it enables us to gain share. We’ve begun to renew some of our value-based contracts with national health plans while continuing to engage and expand our value-based footprint with other plans. Value-based relationships are appealing to health plans because it helps them reduce the overall cost of care, provides insights to better health outcomes, and provides exceptional value to members. We’re on track to meet our goal of realizing 50% of our health plan revenues from value-based relationships by the end of next year. Also, as we continue to extend and renegotiate health plan agreements, we see increased volumes and pricing from these contracts. We’re observing a more favorable pricing environment. Over the last two years, the majority of our renewals have included stable to positive reimbursement. In advanced diagnostics, we saw growth from prenatal genetics and genomic sequencing services in the third quarter. We continued to make investments to strengthen our capabilities to accelerate growth in oncology and hematology, hereditary genetics, genomic sequencing services, and pharma services. Just last week, we announced the addition of Mark Gardner, our Senior Vice President of molecular genomics and oncology. In this new position, Mark, an established leader in molecular genomics, next-generation sequencing, and oncology diagnostics, is responsible for driving growth and expanding our offerings in these areas. The investments we’re making in consumer-initiated testing enabled us to recently launch a new e-commerce platform. The new site is more powerful and consumer-friendly, with a compelling user experience and a number of enhancements. We’re encouraged by the early success of the site in the first few weeks of its launch, and we expect to make further progress in the fourth quarter ending in 2023 toward our goal of $250 million of annual consumer-initiated testing revenues by 2025. We also launched a new ad campaign to drive broader awareness of our consumer-initiated testing offerings, which cover everything from women’s health tests to allergy testing and sexually transmitted infections. Check out the new site at Questhealth.com and look for the new ads. The second part of our two-point strategy is to drive operational excellence. We remain focused on improving our operational quality, service, and cost, thereby driving productivity gains and improving the customer experience. Here are a few examples. As COVID-19 volumes have declined, we’ve begun to repurpose some of our COVID-19 testing platforms to enhance our quality and reduce costs. Today, 75% of our patients are arriving at PSC with an appointment compared to less than 25% just three years ago. This increased number of appointments allows us to flex our workforce to meet demand within a particular geography, enabling us to serve our patients faster. For patients who walk into a patient service center, our new schedule-a-check-in program sets expectations in the waiting room and balances the load for our phlebotomists. Walk-ins now self-register when they arrive and learn how long they’ll need to wait. Our average wait time is approximately five minutes, which is roughly half the level since 2019. Finally, we continue to drive the use of automation and artificial intelligence to drive productivity gains to help offset inflationary pressures. Now I’ll turn it over to Sam who will provide more details on our performance and share more insights on our updated guidance for the remainder of 2022.

Thanks, Jim. In the third quarter, consolidated revenues were $2.5 billion, down 10.4% versus the prior year. Base business revenues grew 5.1% to $2.17 billion, while COVID-19 testing revenues declined 55% to $316 million. Revenues for diagnostic information services declined 10.5% compared to the prior year. The decline reflected lower revenue from COVID-19 testing services versus the third quarter of 2021, partially offset by solid growth in our base testing revenue despite the impact of Hurricane Ian at the end of the quarter. Total volume measured by the number of requisitions declined 6.2% versus the prior year. Acquisitions contributed 20 basis points to the total volume. Total and organic base testing volumes increased 1.6% and 1.4% respectively versus the prior year. The performance of our base business strengthened beginning in late July as COVID-19 cases and positivity rates declined throughout August and September. The impact of Hurricane Ian represented a headwind of approximately 30 basis points to volume growth in the quarter. COVID-19 testing volumes continued to decline during the third quarter. We resulted in approximately 3.1 million molecular tests, down approximately 4 million tests and 0.4 million tests versus the prior year and second quarter respectively. Our COVID-19 molecular volumes have averaged roughly 17,000 tests per day so far in October. Revenue per requisition declined 5.1% versus the prior year driven primarily by lower COVID-19 molecular volume. Base business revenue per requisition was up 3.3%. The more favorable pricing environment remained consistent with our expectations with unit price reimbursement pressure of less than 50 basis points in the quarter. Reported operating income in the third quarter was $392 million or 15.8% of revenues compared to $652 million or 23.5% of revenues last year. On an adjusted basis, operating income was $423 million or 17% of revenues compared to $694 million or 25% of revenues last year. The year-over-year decline in adjusted operating income is primarily related to lower COVID-19 testing volume and investments to accelerate growth in our base business. We were also impacted by a higher portion of COVID-19 molecular testing volume from non-traditional retail channels, which carry additional expenses. Reported EPS was $2.17 in the quarter compared to $4.02 a year ago. Adjusted EPS was $2.36 compared to $3.96 last year. The impact of Hurricane Ian reduced adjusted EPS by approximately $0.05 in the third quarter. Year-to-date, cash provided by operations was $1.38 billion in 2022, versus $1.75 billion in the prior year period. Turning to our updated guidance. Revenues are now expected to be between $9.72 billion and $9.86 billion. Base business revenues are expected to be between $8.38 billion and $8.45 billion. COVID-19 testing revenues are expected to be between $1.34 billion and $1.41 billion. Reported EPS is expected to be in a range of $8.52 to $8.72 and adjusted EPS to be in a range of $9.75 to $9.95. Cash provided by operations is expected to be at least $1.7 billion and capital expenditures are expected to be approximately $400 million. When you think about our updated guidance, please consider the following. We are assuming COVID-19 molecular volumes to average roughly 10,000 to 15,000 tests per day in the fourth quarter. We also believe this is a reasonable assumption for run rate COVID-19 molecular testing volumes heading into 2023. Last week, the public health emergency was extended another 90 days through mid-January. We therefore assume average reimbursement for COVID-19 molecular testing to hold relatively steady through the end of this year. We expect reimbursements to decline when the PHG expires, which we currently assume will happen in January. Given the timing of Hurricane Ian, the impact on our business has continued in the first couple of weeks of the fourth quarter. As a reminder, we are making investments this year to accelerate growth. We spent approximately $110 million through the third quarter and we expect to invest more than $50 million in the fourth quarter primarily to support marketing and promotion of our new consumer-initiated testing platform. Finally, before getting to your questions, I wanted to say a few words about 2023. I know there’s a lot of focus on EPS expectations for 2023. As you might expect, we aren’t prepared to provide detailed 2023 guidance today. There are obviously a number of assumptions and dynamics to consider but I see nothing that would prevent us from meeting current consensus estimates for next year within a reasonable range of outcomes. We will continue to review our plans and assumptions and provide our full 2023 guidance in early February. I will now turn it back to Steve.

Thanks, Sam. Well to summarize, we accelerated growth in the base business year-over-year. We grew our base business revenue while continuing to make investments which position us well for the future. And we have raised our full year guidance based on our performance in the quarter and our expectations for the remainder of 2022. As Jim mentioned earlier, this will be my last earnings call as CEO and President and I will remain as Executive Chairman. I’d like to thank all of you on this call for your interest in the company. I’ve enjoyed our many conversations over the last 10 years and I thank you for your time and commitment to understanding our business. Finally, to the 50,000 colleagues of Quest Diagnostics, it’s been the honor of my lifetime to serve as your CEO. Together, we have empowered better health with our insights, grown the business, and provided a critical testing capacity through one of the most challenging healthcare crises in our history. I will always be grateful for what you’ve done to serve our customers. Thank you. Now we’d be happy to take any of your questions.

Thank you. We will now open it up to questions. The first question in the queue is from Ann Hynes with Mizuho Securities. Your line is now open. Ann if you’re there, please check your mute button.

Okay, Steve, I just want to say congratulations and it has been a pleasure working with you all these years.

Thanks Ann.

So my first question thanks for the color on 2023. Obviously, it was on top of investor minds, but just for modeling purposes. Do you just maybe tell us what has changed directionally on the positive side and the negative side since you first provided that in 2019 and maybe within that the DTC program. I know it’s a headwind to earnings this year. Do we expect you to become profitable in 2023? And maybe talk about the profitability profile in 2024? That would be great. Thanks.

Yes, thanks and good morning. So let me start and I’ll have Sam fill in some color here. So but there’s a lot of changes since 2019. And I’ll just talk about a few tailwinds and headwinds. From a tailwind standpoint, reimbursement has never been better. We were down approximately 50 basis points year-to-date. That’s a much better environment without PAMA in 2019, where we were historically losing over 100 basis points. And then PAMA was on top of that. So we feel much better about price going into 2023. Our base volumes are back above 2019 levels. In fact, at points during the quarter. In September, we exceeded the high point of February, January of 2020. So feel good about that. You mentioned investments in CIT. Yes, that’ll be a tailwind going into 2023. We feel good about that. And then as you know, we’ve made investments in the business, investing in our advanced diagnostics portfolio, and we expect to get above normal growth rates out of that side of our portfolio. Now we’re dealing with some headwinds, as well, as you know. We’ve built into our plan a third round of PAMA cuts of $80 million to $90 million next year. COVID, which we didn’t obviously have in 2019. We expect going into next year there. Early part of next year, we’ll be at the 10 to 15 point. And we have some inflation that we certainly didn’t see in 2019 that’s running through our business. We estimated $0.05 to $0.08 a quarter and we expect that inflation to continue into the early part of next year. Sam, any other colors?

Yes, I think you’ve captured it well, Jim. I mean, again, we’re going to give guidance in February, and we wanted to just capture some of these maybe changed assumptions, or at least varying assumptions. But listen, there’s nothing that I’ve seen so far that prevents us from meeting the current consensus estimates again, within a reasonable range of outcomes. In terms of share repurchases, we have made share repurchases this year totaling $950 million throughout the first three quarters of the year, and that’ll provide a lift as well, in terms of earnings next year.

Yes, let me just make another comment about some of the investments we’ve made, because I think there’s a little bit of a misunderstanding about that adding to our cost, and not helping us as we get into ‘23 and ‘24. And Ann you alluded to that. So we’ve mentioned that, this year, we’ll be investing about $160 million. And as you recall, in 2021, we started the investments. We took some of the proceeds from COVID and made roughly a quarter of a billion dollars worth of investments in two businesses. One advanced diagnostics, and as Jim said, we probably four we have already started to see have faster growth rates because of those investments. And the second is our consumer-initiated testing. And we will only make investments, as you would expect, if we expect to get a return. And so what you’re going to see in 2023, is particularly around CIT are starting to get a return for that investment for CIT. And even though we don’t report the financials, you’ll see less of a drain on our earnings in 2023 because of the growth rate we will get from CIT and that will be a tailwind for ‘23. And you asked about 2024, we’re not going to give exact details, because we will throttle that investment at a good part of how fast the market grows, and where we have some capacity to accelerate growth. And so we’ll hold back on giving you an exact number about profitability, but we are going to get a return from that $250 million. And let me just close by saying that $250 million, some of it is permanent, because we’re building these two businesses, advanced diagnostics, and CIT, but some of it was temporal. And so when you think about modeling for through ’23, and you look at what you might expect for expenses from us for 2022. And these are total expenses R&D and SG&A what we have modeled and working on is actually expenses in ‘23 coming down versus 2022. So that’s a change because some of these investments were temporal. So I’ll just leave it there. Thank you.

Thanks.

Thanks, actually want to expand on Steve’s comment right there because thinking through this, thinking through the guidance and getting to the numbers, versus sort of what the run rate is coming out, there has to be a pretty meaningful amount of expenses coming out. So of the 160, should we be thinking about that as is like half of that goes away to get to sort of, including PAMA we’re talking $80 million to $100 million of expenses that would need to come down unless you think volumes are really accelerating and the incremental margins on us. So can you maybe give us a little bit more on the expense side? And how to think about modeling that? Is it just like a percentage of that 160 that comes out?

Yes. So Kevin, as you think about next year, I mean, yes, we are taking expenses down. So there’s going to be some reductions as we look at expenses given the macro environment that we are in. I would not assume right now, strategic investments necessarily coming down. That’s not an assumption that I would make. And we also have our invigorate program where we expect to drive productivity in the business and that’s an ongoing program that we do, that we have every year. But we are in a way reinvigorating invigorate to have further productivity from the business. So I think as you look at margins, you have to consider those things. We have maybe a consistent inflationary environment; is the assumption for wages, which is increasing by salaries, wages, and benefits increasing by 3% to 4%. But we are taking expenses down next year in other areas. And we are focusing on invigorating.

Maybe I can ask it a little bit different way. Your base margins. I know you don’t think about base margins versus COVID margins. But we all try to model it that way. If we were to think about it, would you then think that base margins could look or be better than what they were in a pre-COVID setting?

So that’s we should talk about kind of the assumptions that we have right now for 2022. We’re not going to comment right now on base margins versus total COVID margins. But I think the way to think about it is the pricing environment is improving. So we are seeing a less of an impact in terms of price reductions. There’s the PAMA impact for next year. But we’re seeing historically low pricing pressure on our business, which as we said in the quarter was 60 basis points. So that’s an improvement. I talked about some of the cost reductions that we’re going to make. And I talked about the invigorate productivity savings that we’re going to make. So we are going to definitely see some productivity improvements in the business but I won’t give a specific base margin number there.

I tried. Thanks so much, guys. That’s really helpful.

Next question is from Jack Meehan with Nephron Research. Your line is now open.

Thank you. Good morning. I wanted to ask about utilization. There was a lot of concern going into the quarter because your base growth actually accelerated to 5%. I'm curious what you think is driving this relative out-performance compared to what it seems the market might be doing.

Yes. So thank you, Jack. As we mentioned in the opening comments, our volumes improved every month through the third quarter. So July was weak, August was better. And September, even with the hurricane impact was obviously much better than the average that we reported. In addition, we reported 5.1% revenue growth in the quarter on the base business. And a chunk of that did come from revenue per requisition. Despite a 50 basis point headwind on price, our clinical mix and business mix improved in the quarter, which contributed to that strong base performance. And so we were happy with the utilization levels. Physician offices appeared to be strong and even our health system segment, which is a combination of our reference testing and PLS was also strong in the quarter.

Maybe just trying to dig in a little bit more. I think everyone’s trying to understand the market growth and share dynamics, are you, what’s your dialogue like with hospitals now around either outreach sales or more kind of reference work getting sent out? Or have you heard more about labor being an issue? Just any thoughts on that would be great.

Sure, Jack. So I can tell you that our opportunities with health systems have never been stronger on multiple fronts. Now in the quarter, we announced the Summa health outreach acquisition. Summa is the health system in Akron, Ohio. We announced a PLS new PLS relationship with Lee Health in Florida. And the funnel of opportunities continues to grow. There’s not a day that goes by that we don’t read in one of the journals about health systems reporting margin pressures, exacerbated by some of the pressures they have with wages, particularly on the nursing side. So it’s a very opportunistic time for us.

Next question is from Erin Wright with Morgan Stanley. Your line is now open.

Hi, could you give us an update on your relationships in negotiations with the commercial payers and offsets in terms of pricing dynamics there? And where are we at in terms of those preferred relationships helping to steer volume? And do initiatives such as United laboratory benefit management that was more recent, does that have any impact on your business at all? I believe it’s targeting some over-testing on the esoteric side. Thanks.

Yes. So thank you, Erin. So our relationships with commercial payers, if you want to measure the output of the relationship, again, we’ll turn to the pricing environment. It’s never been better. We are only down 50 basis points in the quarter and you go back to 2018, 2019, we were losing 100 basis points. We’ve also said that the majority of the negotiations we’ve had with payers over the last two years have resulted in either flat to positive price increases and so we consider that a victory. We’ve also said that the number of value-based relationships that we’re entering into means that there are opportunities for us to create value for them and earn value back for us by working very closely with the likes of United Healthcare and we work together as teams and target physicians that are using out-of-network labs. We target physicians that are using expensive health system labs, and collectively our teams work this day in and day out, and yes, we’ve been able to move requisitions from high-priced institutions to better quality lower-priced labs like Quest Diagnostics.

Yes, to comments on Jack’s question and Erin’s. First of all, our plan is to gain share. And so one element of gaining share is that relationships without plans, and we do believe we’re making progress. That progress will continue as we pick up more share, particularly with the Nationals. Just want to make sure we remind you that 50 basis points is not exclusive to commercial payer pricing, but all pricing. So commercial payer pricing is within it and that is improved to Jim’s comment vastly versus where we were. But we have price pressure with client relationships, with physicians we have price concessions with hospital reference work. So there are other price concessions in that number. But on the commercial payer side, it’s less than 50 basis points. That much improved from where it was years ago.

Next question is from Brian Tanquilut with Jefferies. Your line is open.

Hey, good morning, guys. Congrats on the quarter. So as I think about just the core testing, obviously COVID is declining here. How should you be thinking about your outlook for 2023 especially given the economic backdrop that we’re seeing and the broader inflation trends that we’re seeing? And how that’s impacting the consumer essentially, the patient?

Yes. So thanks, Brian, for the question. The way I would think about it is again, COVID continues to come down. Although we may be at an inflection point here on COVID. Too early to tell, but obviously, these two new variants, the BQ1 and BQ 1.1 are growing in terms of concern, they’re now 11%, 12%, of all new cases, higher in the east, reported to be over 20% in the New York City area. But as of now, we’re thinking 10,000 to 15,000 a day as we go into next year. We reported that our base business, the volumes recovered, as we move through the third quarter, we expect that trend to continue. And but remember, physicians are only part of it. Again, we feel great about opportunities to help our health system partners whether it’s additional reference testing or PLS and then we feel great about our acquisition funnel and we’re looking at several outreach opportunities. We announced one that closed, but stay tuned. There should be some more announcements as we get into the early part of next year.

Just to remind you all that there is a correlation between COVID volumes and base business. And so as COVID improves, we believe that could help our base business. And we’ve clearly started to see that in Q3 and to some extent, as we’ve talked before, we have somewhat of a natural hedge because if COVID goes up and base softens. We have seen that in the past. And therefore the improving COVID situation should be a tailwind on base growth going forward. And as we said before, most of our major markets have recovered. We still have not seen full recovery in New York City. And we still believe that they’ll gradually step by step improve over the next couple of years. And we’ll go back to where we were in 2019. So that’s the only major metropolitan area that we haven’t seen full recovery. So from an overall perspective, the COVID direction should be favorable to base.

Next question is from A.J. Rice with Credit Suisse. Your line is now open.

Looking to work together. Maybe just to talk a little bit about capital deployment. You’re talking about obviously, you did a lot on the share repurchase here today, as you mentioned. So that continues to be part of the story. You’ve got these hospital opportunities. There are other M&A potentially talking deals out there. And then some of the investments consumer direct and so forth. Does that, how do you see capital priorities and capital deployment as we exited this year and think about the next year or two?

Yes, thanks, A.J. for the question. This is Sam. So as you think about our position, right now we’ve generated $1.38 billion of operating cash flow through three quarters of the year. We’re sitting on a very healthy amount of cash of $700 million. When you think about our capital deployment philosophy, it’s very consistent. We said that we’re going to return the majority of our free cash flow back to shareholders. And we’re going to focus on making sure that obviously, we invest in the business that’s, we talked about the strategic investments. This year, we expect to make $160 million of strategic investments net of the $400 million of capital. Whatever free cash flow that we have, we’re going to return back to shareholders in the form of dividends, in the form of share repurchases and M&A. Now, to the extent that I think we have a robust pipeline of M&A transactions and opportunities, as Jim mentioned, to the extent that we, we are going to be very disciplined about M&A though. I mean, to the extent that we don’t have accretive deals that we believe really add strategic value to us and produce the meet the ROIC threshold that we have in our accretive, then we’re going to return back that cash in terms of share repurchases.

Next question is from Pito Chickering with Deutsche Bank. Your line is now open.

Hey, good morning, guys. And Steve, thanks for all your help over the years. Different questions for the fourth quarter guidance of $1.91 analyzes to 764. And as the good guys, the improved base pricing business as well as strong COVID pricing. So if we put of PAMA in that one, that would be the launch pad in 2023. Is 713, which seems like a pretty big gap versus 850 consensus numbers. So can you give us some more color on how to bridge the gap between 713 and 850 between revenue growth and cost-cutting?

Yes. Thanks, Pete. Let me start and then I’ll have Sam pipe in here. So first our long-term guidance on the growth rate of the company remains. We expect to grow our top line on the base business 4% to 5%. And we expect to get nice margin accretion off of that 4% to 5%. So we still feel good about that 4% to 5%. Next year, obviously, we’ve said that roughly two percentage points of that can come from acquisition. We’ve said we’ve got a great list, a good funnel of both tuck-ins from outreach, as well as a few what I would call deals that enhance our capabilities and fill in some gaps in our portfolio. So feel good about that. We also feel good about our invigorate program and continuing to work that, as Sam said, reinvigorating our invigorate program to offset some of the margin pressures that we’ve seen from inflation. So we feel good about that. We feel good about the investments that we’re making in ADX and we’ve said that consumer-initiated testing next year should be a tailwind to us. And then finally, as Sam and I have said, we are fine-tuning the cost structure, and we’ll make the necessary rebalances in the cost structure to deliver what we need to deliver next year. So we feel good about that.

Yes, maybe I’ll add a couple of comments to Jim’s. So just we’re not going to give you obviously guidance right now, but just maybe directionally give you some things also to build into or to think about as you build your model for next year. Expense reductions is an important one; Jim mentioned that. The fact that CIT investments will drive growth in that consumer segment. And so they will be less dilutive, as you look at next year versus this year. The fact that when you think about pricing it’s a definitely improving environment for us as we’ve said, 50 basis points in Q3. So that’s an additional number that maybe some of you use the 1% pricing negative pricing impact is no longer the case in terms of what we’re seeing, because of all the things that we talked about around value-based contracts with the health plans. And then when you think about COVID, I mean, COVID is obviously the assumption going into 2023 is that it’s 10,000 to 15,000. There’s variability around that. But that’s our assumption right now. And the 10,000 to 15,000 is so it’s coming down. COVID testing is coming down, there’s an improvement in the base business as a result of that. But also the fact that with the PHE ending, at least our assumption is that it ends in January, even though that average reimbursement price comes down, that’s not a straight impact on the margin because we have costs that we incur in the non-traditional retail channels right now that we will no longer incur after the end of the PHE emergency. So you can also take, you know, the margin on COVID as being completely impacted by that price reimbursement or by that reimbursement decrease.

Pito remember that our base business is growing in ‘23. Guys when you say think about modeling it off the fourth quarter remember the base will grow. Okay. And then secondly, just to underscore Jim’s comments is this company, and we’ll continue under Jim’s and Sam’s leadership has a long track record of productivity improvements. And so Jim, in his prepared remarks talked about our operational excellence program. We have a specific program called Invigorate. And that Invigorate program is to drive a 3% productivity. So when you think about 2023, and you think about potentially getting a PAMA cut you need to think about the expense reduction, base growth, as well as Invigorate offsetting some of the inflationary pressure, as well as potentially. And I can tell you we’ve highlighted this before, in our investor presentations, there’s a lot more room for us to drive productivity particularly around automation and digitalization going forward, and Jim will be driving that as he leaves the company.

Next question is from Patrick Donnelly with Citi. Your line is now open.

Hey, guys, thank you for taking the questions. Maybe one, on a similar vein, at least on the cost side, just in terms of some of the labor retention, labor inflation that you guys have seen us talk about against where we are in that process? And then secondarily, kind of on the back of that the supply chain as well, I know, it’s been a bit of a kind of issues pop up and you guys handle them well. Has that plateaued getting better? Maybe just a little bit of color, that would be helpful.

Yes, so thanks, Patrick. So first, on the labor inflation. So what we’re seeing this year is between 3% and 4%, and our plan next year is to have a merit increase of roughly 3% across the company. But we would expect to have to make some other equity adjustments along the way. So I think from a planning modeling standpoint, that 3% to 4% range still feels good from a labor utilization. But I’ll tell you on our employee retention and attrition is that it has stabilized here in the third quarter, albeit, it’s stabilized at a higher level than we would like, which obviously affects productivity. So we continue to work really hard on making classes the employer of choice, and it’s not just about wages, there’s a lot of other things, as you can imagine that go into that. In terms of inflation on the supplies and materials front we purchase north of $2 billion worth of what we call pre-analytical and analytical supplies. And on that roughly $2 billion, about 80% of it is locked up in terms of it’s under contract. And most of those contracts that we’ve entered into in previous years actually do not contain price indexes or price going up. If anything through the contract period, sometimes prices improve. So, we feel good about that, but 20% of roughly 2 billion is a big number that is not completely locked up. And that’s where we do see some inflationary pressures. In addition to the pre-analytical and analytical supplies we have a lot of, we have roughly $88 million, $900 million of other spend, that is logistics, professional services, janitorial services. Travel living expenses. So, all of that is really not under contract. And that’s where we see the majority of inflation in our business today. We will it get better next year, will it get worse next year. Hard to predict. But everything that the Fed is doing will hopefully slow those inflationary pressures that we are seeing. But again, we’re committed, and we work real hard for our Invigorate program to offset as much of this as we possibly can.

Next question is from Derik De Bruin with Bank of America. Your line is now open.

Hi, good morning, Steve. Thanks for all your time and patience with me, appreciate it over the years. I guess a couple of questions. A lot of might have been answered already. But are you expecting any sort of relief from you’d expect to solve for the past and sort of like your update in PAMA and then the follow-up on that, or another one you know, as we sort of head into a recession and inflation picks up, I mean, are you seeing any increase in debt from your customers? Any concerns on people opting not to pay bills as they’re sort of struggling right now. Thanks.

So let’s start with the Salsa PAMA comment. So as we said for many years now, you should plan on PAMA caught in 2023. That’s what we assumed. And until we have news that’s better than that, we should assume that. Number two is, in my prepared remarks to talk about the effort on Salsa. What I’ll add to those comments is the support congressional support. And this is on both sides of the aisle. And both in the House and in the Senate is very strong. So there is alignment that we need to have a permanent fix to the implementation of PAMA. But as you can imagine, Washington is busy. There is a lot of topics on the table. And we’re trying to find a vehicle that we can attach it to. And I would expect, if we were successful with Salsa, it will be late in this year, that we’ll know that. And also, it’s going to cost money. So we’re in the process of getting a score from the CBO. And there needs to be a pay for so we’re working through that. But I can tell you the alignment and support of my colleagues throughout this industry has never been stronger. And we’ve been doing grassroots efforts to send letters into Washington. So really a full court press to get Salsa over the goal line. Now, if we don’t, or if we’re not successful with Salsa, the question is, can we get another year of relief. We’ve got that in the past. Again, I’m not going to indicate that we’re going to get that again. But if we don’t get Salsa there, obviously, will be a pivot to ask for another year of relief. We’ll push on that. But again, we’re not planning that during our 2023 planning.

Yes. This is a very good question regarding whether we are observing an increase in patient concession rates or patients choosing not to pay. As of now, we are not seeing any impact in that area. In fact, our patient concessions have actually improved both in rate and year-over-year, and we plan to continue this trend into next year. We put a lot of effort into this, utilizing what we call real-time adjudication. When a patient comes into our Patient Service Center, we take their requisition and can directly adjudicate that claim against the payment we expect to receive. This allows us to know in real-time which tests on that requisition will be approved or denied, and what the patient balance will be. We then offer multiple options for the patient to pay their bill or provide a form of payment, ensuring that when the claim is adjudicated, we know how to charge the patient. We are also working on advancing this entire process. When a patient schedules an appointment, and the requisition has already been sent to us electronically by the physician, we can perform a pre-adjudication while the patient is booking their appointment online. This means that even before they arrive at the Patient Service Center, we can assess the claim. We are going to enhance our capability to achieve this, which will increase our Patient Service Center productivity and provide patients with clarity on what they will be billed prior to their visit. We are implementing numerous strategies to simplify the payment process and inform patients, all of which contribute to improving our patient concession rate.

And the last question in the queue is from . Your line is now open.

Thanks very much. I’m going to come back to a topic that’s been hit a few times but maybe ask a different way. The base revenue per requisition very, very strong here. I know we’ve heard a lot of comments on pricing improving or really being less bad down 50 basis points, which would I think imply that your mix component and other components must have been something more like 4% growth on a per test basis. So I’m curious if you can quantify for us or give us some qualitative color on what type of mix improvements you saw? What categories of testing, were you seeing the number of tests per requisition go up this quarter more than normal? Was there a changing impact from PLS volumes and the numbers this quarter? Or were there some nuances with value-based contracts that maybe aren’t fully understood by the street that could have been driving some of this upside mixed-driven revenue? I know I’m throwing a lot at you, but it feels like that was a pretty big number. So want to dig into it.

Yes. So, thanks, Eric. So as you know, there’s a lot of things that go into the calculation. So let’s take price per test out, because we already said that was down about 50 basis points. So your math is directionally correct. All of the things that were up, about 3.8% in the quarter. There are really three very different types of mix that enter into that. There is clinical mix, business mix, and payer mix. From let me just start with clinical mix. I’ll just tell you that the investments we’re making in advanced diagnostics are paying off. We’re getting a higher mix of molecular and other genetic and advanced based tests. Hematology was good. Cancer testing was really good in the quarter. From a business mix standpoint, there’s a lot of things there. First, from a commercial payer standpoint, there’s a mix of cap and fee for service, and we’ll just tell you in the quarter fee for service was better and cap was lost. And if cap was less than, obviously, you got to fix payments. So that certainly helped us. Our health systems business was actually just pure reference was good in the quarter and that tends to mix up our rep per and then finally, there’s payer mix issues. What portion is coming from commercial? What portion is coming from Medicare? What portion is coming from Medicaid? And that was favorable in the quarter. And then finally, CIT, our consumer-initiated testing business has a higher revenue per requisition. The pricing is better in that market, and we’re getting some lift from our CIT business. So a lot of factors go into it. But that’s kind of the summary of it.

Okay, I think that was the last question. I again, thank you for your support over the years, we added up the math and this is my 42nd call. It’s been a pleasure working with all of you. Thank you for all your support. And I’m sure you’re going to be seeing me around in our travels. So thank you and have a great day.

Thank you for participating in the Quest Diagnostics Third Quarter 2022 conference call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics website. A replay of the call may be accessed online at the Quest Diagnostics website or by phone at 203-369-3609 for international callers, or 888-566-0462 for domestic callers. Telephone replays will be available from approximately 10:30am Eastern Time on October 20, 2022. Until midnight, Eastern Time, November 3, 2022. Thank you and goodbye.