Hello, and thank you all for standing by. Welcome to the Quest Diagnostics First Quarter 2023 Conference Call. At the request of the company, this call is being recorded. All lines have been placed on a listen-only mode until the question and answer portion. 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. I would now 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 Jim Davis, our Chairman and Chief Executive Officer and President; and Sam Samad, our Chief Financial Officer. During this call, we may make forward-looking statements and 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 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. 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 Jim Davis.

Thanks, Shawn, and good morning, everyone. We’re off to a strong start in 2023. Our base business grew double digits compared to the prior year, driven by strong performance across physician and health system lab services. This morning we announced the acquisition of Haystack Oncology. Later in my remarks I’ll describe how this transaction is aligned to the molecular genomics and oncology strategy we shared last month at Investor Day and how it positions us well in the fast-growing category of minimal residual disease testing. Now, turning to the first quarter. Total revenues were $2.3 billion. Total base business revenue grew 10%, supported by base business volume growth of nearly 8%. Earnings per share were $1.78 on a reported basis and $2.40 on an adjusted basis. Now, let's look at some of the highlights from the quarter. The strong volume growth we experienced in our base business across all customer types points to a continued return to care in the quarter. We saw faster growth in the number of tests per requisition across a broad range of clinical test categories. This suggests more people are returning to the healthcare system for routine care after delaying care during the pandemic. Health plan volumes also continue to grow faster than the overall business. This trend is directly related to our ongoing efforts to partner with health plans to actively steer patients to high quality, lower-cost providers like Quest, thereby saving money for the health plan, employers and plan members. During the first quarter, base revenues from health systems grew approximately 7%. At Investor Day, we said this book of business would grow at about 5% to 6% CAGR, and we're having success across the board with new wins in our reference and professional lab services offerings. Some of these highlights include: in February, we announced that we're helping Tower Health in Pennsylvania manage its laboratory supply chain in addition to performing reference testing. Our Northern Light Health PLS relationship began to ramp up in the quarter. Northern Light is a large integrated health system in Maine, where we are providing services for all nine of its hospital labs and its cancer center. We also closed our acquisition of Northern Light's outreach lab assets. Finally, we completed our strategic laboratory services acquisition with NewYork-Presbyterian, with new test volumes starting to flow into our Clifton, New Jersey laboratory earlier this month. This is the third outreach acquisition we completed in the last six months. As we enter the second quarter, our pipeline of new health system business remains strong, including many additional PLS opportunities. Now I'd like to say a few words about our announcement this morning regarding our planned acquisition of Haystack Oncology. Haystack is an early-stage oncology company focused on minimal residual disease, or MRD testing. Haystack has developed a highly sensitive liquid biopsy technology that can detect circulating DNA from residual or recurring tumor cells. The technology was licensed from Johns Hopkins where it was developed by genomics and cancer pioneers. Most patients treated for cancer must be monitored for years following surgery and initial treatment. This is because there’s always the potential that some cancer was missed and may recur. At Investor Day, we talked about Quest’s strong position in the mature cancer areas of screening and diagnosis and that we will also play a leading role in therapy selection with our TSO500 assay. Haystack liquid biopsy technology, combined with our strengths in screening, pathology and sequencing will now position us to play a leading role in the fast-growing MRD category. We expect to focus initially on colorectal, breast and lung cancers and to start generating revenue next year. We are also encouraged by other recent developments in advanced diagnostics. In the area of brain health, we saw strong growth which we attribute largely to Quest AD-Detect Alzheimer's blood test. This proprietary test launched last year helps us assess the risk of Alzheimer's disease. We are now introducing additional tests to help us assess the inherited risk of Alzheimer's and provide personalized recommendations to lower risk. We also saw strong growth in our advanced cardiometabolic portfolio, prenatal genetics, our blood-based tuberculosis screening and hepatitis B and C testing. We are encouraged by the CDC's recent decision to recommend one-time screening for hepatitis B. In consumer health, we continue to add to our test menu with new services, including long COVID and menopause testing. We also generated strong year-over-year volume growth in allergy and general health testing, as consumers utilize our offerings as a complement to the care provided by their physician. In the coming months, we plan to launch a new consumer genetics panel as well. Turning to Invigorate. We are well on our way toward achieving our 3% annual productivity savings target. Here are some recent examples among the many contributors. We are improving the efficiency of our patient services network. In some cases, we're closing smaller draw sites and adding staff to larger, higher-volume locations. At the same time, we're making it easier for walk-ins to register and be seen through our schedule at check-in service. We are adding new features to the pre-registration process, which improves both collections and patient convenience. During the pandemic, we relied heavily on third-party logistics to supplement our own team's collections of COVID-19 tests and other specimens. As COVID-19 volumes have declined and the labor market eases, we are reducing our dependence on these vendors, which will generate savings for our logistics operations. Finally, we're continuing to enhance our labor staffing models across our lab network to reflect post-pandemic total volumes and drive productivity. As we have said before, we continue to closely manage the cost of our corporate and support functions. The actions we've taken will start to help margins beginning in the second quarter. Finally, I'd like to give you an update on where we are with Medicare clinical lab fee schedule cuts. As you know, PAMA cuts were suspended for 2023. We strongly support the recent bipartisan reintroduction of the legislation in Congress to fix PAMA through the Saving Access to Laboratory Services Act, or SALSA. We are working with our trade association on driving advocacy for SALSA through a campaign to stop lab cuts, aimed at congressional outreach on the importance of lab services. Now I'll turn it over to Sam to provide more details on our performance and our updated 2023 guidance.

Thanks, Jim. In the first quarter, consolidated revenues were $2.33 billion, down 10.7% versus the prior year. Base business revenues grew 10% to $2.21 billion, while COVID-19 testing revenues declined approximately 80% to $119 million. Revenues for diagnostic information services declined 11.1% compared to the prior year, reflecting lower revenue from COVID-19 testing services versus the first quarter of 2022, partially offset by strong growth in our base business. Total volume, measured by the number of requisitions, declined 3.8% versus the prior year with acquisitions contributing 10 basis points to total volume. In the quarter, total base testing volumes grew 7.9% versus the prior year. Recall, our base testing volumes in the first quarter of last year were negatively impacted by a surge in COVID-19 cases due to the spread of the Omicron variant. If we normalize for the impact of the easier comps due to the Omicron surge in Q1 2022, we estimate base volume growth at approximately 4%. COVID-19 testing volumes continued to decline during the first quarter. We resulted in approximately 1.3 million molecular tests in the quarter, down approximately 5 million tests versus Q1 of 2022. Revenue per requisition declined 7.7% versus the prior year, driven by lower COVID-19 molecular volume. Base business revenue per requisition was up 2.3%, due primarily to more tests per acquisition, as well as positive payer and test mix. Unit price was roughly flat, which was consistent with our expectations. Reported operating income in the first quarter was $305 million or 13.1% of revenues compared to $513 million or 19.7% of revenues last year. On an adjusted basis, operating income was $350 million or 15% of revenues compared to $554 million or 21.2% of revenues last year. 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. Reported EPS was $1.78 in the quarter compared to $2.92 a year ago. Adjusted EPS was $2.04 compared to $3.22 last year. Cash from operations was $94 million in the first quarter versus $480 million in the prior year period. The decline in operating cash flow was primarily related to lower operating income and an additional payroll cycle during the quarter versus the prior year. Now turning to our updated full-year 2023 guidance. Revenues are now expected to be between $8.93 billion and $9.08 billion. Base business revenues are expected to be between $8.78 billion and $8.88 billion. COVID-19 testing revenues are expected to be between $150 million and $200 million. Reported EPS is expected to be in a range of $7.52 to $8.02 and adjusted EPS to be in a range of $8.45 to $8.95. Cash from operations is expected to be at least $1.3 billion and capital expenditures are expected to be approximately $400 million. There are some things to consider for the remainder of the year. We have lowered our COVID-19 revenue guidance, which now assumes very modest COVID-19 revenue following the end of the public health emergency in May. COVID-19 molecular volumes have declined faster than we expected over the last several weeks. And we now expect minimal volume contribution from the retail channel post-PHE. We have raised our base business revenue guidance to reflect stronger base volume trends and the recent close of the NewYork-Presbyterian transaction. We expect the Haystack Oncology transaction to close in the second quarter. Our updated EPS guidance reflects the expected dilution from this transaction in 2023. We expect this deal to be modestly dilutive to EPS over the next three years and accretive to earnings by 2026. We anticipate Haystack Oncology to begin contributing revenue in 2024 and to have a positive ROIC by the end of 2025.

Thanks, Sam. To summarize, we're off to a strong start in 2023 and our base business grew double digits compared to the prior year. We are excited about our announced acquisition of Haystack Oncology. With Haystack, we expect to build on our strengths in cancer screening and diagnosis to play a leading role in the higher growth areas of MRD detection. And finally, we're well on our way toward generating our targeted 3% Invigorate savings and productivity improvements. Now, we'd be happy to take your questions.

Thank you. We will now open it up to questions. At the request of the company, we ask that you please limit yourself to one question. If you have additional questions, we ask that you please fall back in the queue. Our first question comes from Ann Hynes of Mizuho Securities. Your line is open.

Great. Thank you. My question is focused on the base volume growth, which was strong. In your commentary, you talked about health plans, and that you're gaining more market share there. You mentioned winning more market share with reference labs. Can you give us more detail on that? Is it with existing health care partners? Do you have new health care partners? Is your relationship with existing partners changing? I'm trying to figure out how much is a return to normal versus any actual market share you're gaining.

Yes. Thanks, Ann, and good morning. Our growth in the quarter, again, 10% base revenue growth was strong across all channels, our physician segment and our health systems segment. Now within the health systems segment, we look at our reference business and our PLS business. Our reference business was powered by growth from existing accounts, and we had several new big wins that we actually secured in previous quarters, but the start-up was in the first quarter. On the PLS side, our professional lab services, our growth at existing site same-store sales was very strong. We also added a couple of new PLS sites, both in the fourth quarter that were ramping up and in the first quarter. Those were Lee Health in Florida, as mentioned in the script, Tower Health, and Northern Light in Maine, a multi-hospital health system up in Northern Maine. So broad-based growth: physician business was very strong, health system business was strong, and PLS certainly helped the average growth rate in the quarter.

Thank you. Our next question comes from Patrick Donnelly of Citigroup. Your line is open.

Hey, guys. Thank you for taking the questions. This might be one for Sam. Just on the margin side. As we look at the base margins back in COVID, shaking out somewhere around 13%. Looking at next year, kind of approaching that 17% number, can you just talk about how you work your way towards that, particularly as COVID continues to transition out of the model?

Sure, Patrick, and good morning. Thanks for the question. We had 15% operating margins in Q1. I'll talk about some key drivers toward moving us towards that approximately 17% that we guided to on Investor Day, and we're still committed to that number for 2023. So, first of all, Q1 margins came in on the base business strong. Overall, as expected, we had a negative impact from COVID revenues. As we look forward, we expect Invigorate savings or productivity improvements to ramp up, and that has already started but will ramp up over the course of the year. We also anticipate reduced SG&A expenses, which will start to take effect more so in Q2. So that will help margins going forward. We're seeing solid base business growth and volume, as well as a modest benefit from pricing. Our pricing environment is the best it has ever been. We're seeing a modest benefit from pricing this year compared to the 50 basis point headwind that we faced last year. All these factors give us confidence about getting to that 17%.

Yes. The last thing I'd add, Patrick, is our test mix in the quarter was strong. Our investments in advanced diagnostics continue to pay off. We saw really nice growth in advanced cardiometabolic testing, prenatal genetics, hep B, hep C. So these are all margin-accretive types of tests. So we feel good about that.

Thank you. Our next question comes from Brian Tanquilut of Jefferies. Your line is open.

Hey, good morning, guys. Congrats on the quarter. I have a question for you. Regarding the call-out you made on tests per requisition being up in the quarter. Could you give us some color on what is driving that and how you think it will progress going forward?

I believe there's evidence of a strong return to care. Our advanced testing portfolio certainly was up in the quarter. We saw strong growth in routine testing like routine cardiometabolic, lipid panels, chemistry panels, and things like that. General health and wellness visits have high tests per requisition because you're testing across the entire human body.

Thank you. Our next question comes from Elizabeth Anderson, Evercore ISI. Your line is open.

Hi, guys. Thanks so much for the question. I was wondering if you could talk more about your visibility into pricing and contract renewals, particularly with payers this year. How far along are you in terms of the renewals and what incrementally have you been seeing? Is it similar to current trends?

Sure. As everyone knows, our contracts with commercial payers average three to five years. So every year, we renegotiate about 25% of our health plan contracts. We are now a third of the way through the year and have progressed nicely on two of the contracts that have been renewed. We have a few more to go throughout the rest of the year. We have a great value story and can consistently move requisitions from high-priced institutions and out-of-network labs into Quest Diagnostics, and we negotiate incentives for that. When we do that work, we get paid incremental value. These value-based contracts are on the rise. We stated that price was flat in this quarter, which we haven't been able to say in a long time. We were down 50 basis points in Q4, and we’re flat in Q1, so we continue to make improvements.

Thanks so much.

Thank you. Our next question comes from Kevin Caliendo of UBS. Your line is open.

Hi. Thanks for taking my question. Congrats on the Haystack acquisition. Can you talk through the process there, why now, why this company? What regulatory and commercial milestones does the company have coming up? How should we think about the dilution in terms of modeling it?

Yes. First, let's have Sam address the dilution first, then I’ll come back and talk about why Haystack, and why now.

Yes. This deal will be modestly dilutive this year and for the next three years and will be accretive for us in terms of earnings by 2026. We haven't disclosed how dilutive it is for 2023, but the overall guidance retains the same midpoint. We narrowed the guidance by $0.10 on EPS and the drivers were improved base business, lower COVID, and some modest dilution from Haystack. Overall, we still expect to be at the midpoint of the adjusted EPS guidance we provided last quarter. The annualized EPS dilution from Haystack next year is actually expected to be less than this year. It starts improving from 2024.

Now about why Haystack and why now. When looking to close a capability gap in our portfolio, we reach out to our IBD partners and have had many discussions over the past several years. Haystack has the lowest limit of detection of any MRD assay out there. They can detect one part per million, meaning they can find one fragment of cancer DNA per 1 million parts. That is an incredible low limit of detection. We think it's the right assay, the right time. CMS is reimbursing for these assays, and we think we can scale it and drive further commercial reimbursement. It is a tumor-informed assay and we believe that a tumor-informed assay is much stronger than an uninformed assay.

To add, we are committed to our Investor Day guidance, which stated mid-single-digit revenue growth and high single-digit EPS growth. The Haystack acquisition actually modestly improves that guidance.

Thank you. Our next question comes from Jack Meehan of Nephron Research. Your line is open.

Thank you. Good morning. I wanted to stick with the Haystack deal. Can you confirm if the plan is to go through Moldex? Do you think reimbursement will look similar to other MRD tests on the market? Are there any royalties attached to the deal?

Yes, we absolutely plan to go that route. We have to finish the commercialization of the assay. Limited coverage for Medicare and Medicare Advantage patients is dictated by CMS. Two companies have coverage for this today. There's also a handful of Blues plans that are reimbursing for the test. On the royalty question, some original IP came from Johns Hopkins. I'm not going to disclose royalty payments, but as you can imagine, there are modest royalties attached to it.

Thank you. Our next question comes from Erin Wright of Morgan Stanley. Your line is open.

Great. Thanks. Two-part question. Just first on basic routine testing. Where are we now relative to pre-COVID baseline levels? Are we fully back to normal? And then on capital deployment, is there a balance of capital deployment dedicated to innovation assets like Haystack? How rich is the pipeline for tuck-in deals around hospitals or local players? Have you seen any changes in the urgency around those deals?

Our routine testing levels are above pre-COVID levels. Whether you look at our volume versus all of 2019 or the first two months of 2020, we're substantially above that. So, the recovery is no longer a concern for us. In regards to opportunities on the health system side, namely outreach deals, the funnel is stronger than ever. Now that COVID is behind us, the deal completion will start to accelerate.

Thank you. Our next question comes from Pito Chickering of Deutsche Bank. Your line is open.

Hi, Kieran Ryan here for Pito. Thanks for taking the questions. I wanted to ask about margins, specifically regarding FTE wage inflation, hiring, and turnover. How did that run in Q1 compared to what you're seeing in the second half of 2022? How does that fit with getting back to a 17% margin by next year?

We expect wage inflation to be in the 3% to 4% range, and we still feel good about that guidance. Our turnover rates have improved from Q1 of last year. We've seen a trend back towards a normalized attrition rate. While it's not yet back to pre-COVID levels, it is trending in the right direction. Overall, we feel good about wage inflation in the first quarter and throughout the year.

Productivity through our Invigorate actions also helps offset that, contributing to our margin targets. Just to clarify, our guidance is to achieve approximately 17% this year in terms of operating margin.

Thank you. Our next question comes from Andrew Brackmann of William Blair. Your line is open.

Hi, guys. Good morning. Thanks for taking the question. Could you discuss any expectations for a halo effect from the Haystack acquisition? How are you thinking about changes to this commercial strategy, specifically between calling on pathologists and oncologists?

Absolutely, there's expectation of a halo effect from this acquisition. At Investor Day, we noted our revenue in cancer was $1 billion out of our total revenue of $8.4 billion in 2022 ex-COVID. The overall cancer strategy will be strengthened with this acquisition. Medical oncologists will naturally want to know if there are still cancer cells in a patient after treatment. We already have a mature oncology distribution channel, which we plan to enhance as we complete commercialization of this assay.

Thank you. Our next question comes from A.J. Rice of Credit Suisse. Your line is open.

Thanks. Hi, everybody. Two quick ones here if I could. With the strong rebound in the base business, did you see any outsized performance in the New York region contributing to that strong base business, or was the strength pretty much across the board geographically? Also, you didn't do anything on the buyback front this quarter. I wondered about your thoughts on additional share repurchases as we progress through the year.

Regarding the first question, we saw strong growth across all of our regions; the Northeast did grow at a slightly faster rate. However, there have been population shifts, and some population may not return to the Northeast. We continue seeing stronger growth in the Southeast and Southwest, which may reflect these shifts. Although this did not influence our Q1 numbers, we did mention the startup of our NewYork-Presbyterian outreach deal, which is performing well and will contribute strongly to the overall growth for the remainder of the year. Sam, do you want to address the buyback?

Regarding buybacks, we will offset equity dilution in share buybacks. We're still committed to returning the majority of our free cash flow to shareholders through dividends and buybacks. However, our capital deployment remains focused on M&A and growth strategies like Haystack. That's why we didn't engage in share repurchases in Q1.

Thank you. And our final question comes from Derik de Bruin of Bank of America. Your line is open.

Hi. Good morning. This is John on for Derek. I wanted to ask about the consumer-initiated testing business, in terms of contribution, if you're allowed to say how much contribution you saw monthly in terms of sales and how much of an impact that has made on the margins. Is this something I should look for regarding margin progression?

We're very pleased with our consumer-initiated testing performance in the quarter, showing considerable growth from Q4. COVID has obviously declined as part of this segment, and the majority of our CIT business now is routine base business. We saw a nice progression from Q4 to Q1. The general health and wellness offering in CIT performed strongly. One main reason consumers are coming to Quest and paying out of pocket is they struggle to schedule appointments with their physicians. We also saw strong growth in our STD category. The CDC has reported certain STDs at epidemic levels, particularly among the 15 to 24 age group, which tends to prefer anonymity, driving them to engage in self-pay for testing. Regarding margins, our CIT business will be less dilutive this year than it was last year, and you can reasonably anticipate improvement over the year.

Yes, to add context, while CIT is dilutive to margins in Q1, we expect it to improve throughout the year, which is expected to aid overall margin improvement.

Operator, are there any more questions?

I want to thank everyone for joining today, with some very exciting news here. To summarize, we're off to a strong start in 2023. Our base business performed stronger than we expected in the quarter, offsetting some COVID declines. Also, we are thrilled about our acquisition of Haystack Oncology. We believe this is the right technology at the right time, and we are very impressed with the team that will join Quest Diagnostics. We feel particularly optimistic about the MRD space as it is beginning to mature from both a physician ordering and reimbursement perspective. Finally, we are on track to generate the Invigorate savings needed to offset wage inflation. Thanks for joining, and we look forward to seeing you out on the road over the next few months, and joining us at our next earnings call in July. Have a great day.

Thank you for participating in the Quest Diagnostics First Quarter 2023 Conference Call. A transcript of prepared remarks will be posted later today on Quest Diagnostics website. A replay of the call may be accessed online or by phone. Goodbye.