Good day, and thank you for standing by. Welcome to the Laboratory Corporation of America Holdings' First Quarter 2024 Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Christin O'Donnell, Vice President, Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to LabCorp's First Quarter 2024 Conference Call. As detailed in today's press release, there will be a replay of this conference call available via telephone and Internet. With me today are Adam Schechter, Chairman and Chief Executive Officer; and Glenn Eisenberg, Executive Vice President and Chief Financial Officer. This morning, in the Investor Relations section of our website at www.labcorp.com, we posted both our press release and an Investor Relations presentation with additional information on our business and operations, which include a reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures both of which are discussed during today's call. Additionally, we are making forward-looking statements. These forward-looking statements include, but are not limited to, statements with respect to the estimated 2024 guidance, and the related assumptions, the recently completed spinoff of Fortrea Holdings, Inc., the impact of various factors on the company's businesses, operating and financial results, cash flows and/or financial condition including the COVID-19 pandemic and global economic and market conditions; future business strategies, expected savings, benefits and synergies from the LaunchPad initiatives and from acquisitions and other strategic transactions and partnerships, the planned holding company reorganization and opportunities for future growth. Each of the forward-looking statements is subject to change based upon various factors, many of which are beyond our control. More information is included in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and in the company's other filings with the SEC. We have no obligation to provide any updates to these forward-looking statements even if our expectations change. Now I'll turn the call over to Adam Schechter.

Thank you, Christin. Good morning, everyone. It's a pleasure to be here with you today. We look forward to sharing our first quarter 2024 results and progress on our strategy. But before I do that, I want to address the recent announcement that LabCorp was selected as the winning bidder for select assets of Invitae. This transaction will advance our strategy to launch and scale specialty testing in areas such as oncology and rare diseases. These are strong assets in important disease areas, and they fit strategically with our focus on specialty testing. Invitae has strong science, a great NGS platform and strong talent. Upon completion of the transaction, LabCorp expects approximately $275 million to $300 million in annual revenue, with the vast majority in specialty areas, such as oncology and rare diseases. The purchase price for the transaction is $239 million. We expect the transaction to be dilutive to adjusted earnings by approximately 2% to 3% in the first full year. We expect the transaction to be accretive in year 2 and to exceed our cost of capital in year 3. Now I'll move to the quarter. LabCorp delivered strong top line performance in the first quarter driven by growth in both of our businesses, Diagnostic Laboratories and Biopharma Laboratory Services. We continue to execute well on our strategic priorities through being a partner of choice for health systems and regional local laboratories through launching key new tests in important therapeutic areas and by harnessing science, technology and innovation to bring new tests, services and capabilities to our customers around the world. Let's turn now to our first quarter financial results. In the first quarter, revenue totaled $3.2 billion and adjusted earnings per share was $3.68. Enterprise revenue for the quarter increased 5% compared to the first quarter of 2023, with Diagnostics revenue up 4% and Biopharma revenue up 8%. Biopharma's growth was driven by strength in central laboratories, partially offset by early development research laboratories. Enterprise-based business margins are up compared to the prior year. Higher margins in Biopharma were partially offset by Diagnostics margins. We expect margins in both businesses to be up for the full year. The overall strength in our business enabled us to narrow the range and raise the midpoint of our EPS full year guidance to $14.90 despite a negative impact from currency. Glenn will provide more details on our results and 2024 outlook in just a moment. In the first quarter, LabCorp advanced key growth initiatives that support our strategy. We began 2024 with positive momentum, reinforcing our position as a partner of choice for health systems and regional local laboratories. We continue to be active on the acquisition front. We closed three transactions in March, including health system agreements with Baystate Health in Massachusetts and Providence in California and a regional lab acquisition in California. In March, we also entered into an agreement to acquire select assets of BioReference Health's diagnostic business. This transaction will increase access to LabCorp's high-quality clinical laboratory services. These new assets are focused on clinical diagnostics and reproductive and women's health. Our business development pipeline remains strong. Building on the success of our acquisitions and strategic partnerships, we continue to incorporate the power of science, technology, and innovation across the organization. This commitment is demonstrated by how we've expanded our test menu this quarter. We advanced our leadership in neurodegenerative disease with the launch of the pTau217 blood-based biomarker test that aids in the diagnosis of Alzheimer's disease and the monitoring of patients undergoing treatment with new therapies. It's also available to be used in clinical trials. In addition, earlier this month, we announced the launch of our GFAP blood biomarker test for the early detection of neurodegenerative diseases and neurological injuries. Following the launch of our ATN profile last fall, these two significant advances in the company's testing portfolio extend our leadership in a rapidly accelerating field of blood-based biomarkers for neurodegenerative diseases. We continue to accelerate our leadership in oncology. We launched LabCorp plasma detect, the first clinically validated whole genome sequencing MRD solution for early-stage colon cancer to identify patients at increased risk of reoccurrence after surgery or adjuvant chemotherapy. LabCorp plasma detect developed by our PGDx laboratory is a significant achievement that enhances our liquid biopsy portfolio and strengthens our position at the forefront of driving better patient outcomes in oncology. We introduced a weight loss management test portfolio in the quarter, a suite of tests that supports individuals and physicians with accessible and convenient testing options to guide weight loss management decisions and treatment, including lifestyle modifications, GLP-1 medications, or bariatric surgery. LabCorp OnDemand introduced a magnesium test and a micronutrient test to measure key vitamin and mineral levels to support individual wellness. We also announced an STI pass for Mgen. Mgen can be as widespread as chlamydia and gonorrhea. This test includes a reflex to identify resistance to macrolides, a commonly used treatment addressing high antibiotic resistance and treatment failures associated with the infection. In April, we received emergency use authorization from the FDA for our Mpox PCR test, a home collection kit. The test is the first at-home collection kit authorized by the FDA to aid in the diagnosis of infection with Mpox. Physicians can order for patients 18 years of age or older who are suspected of Mpox infection. In addition, we launched our electronic requisition digital capability to help Biopharma customers and investigator sites, improve protocol compliance by reducing errors, queries, holes, and data revisions. Earlier this month, we released our latest corporate responsibility report, which highlights the significant progress that we're making as we pursue our mission to improve health and to improve lives in a sustainable way. We invite you to take some time to review the report that can be found on our Investor Relations website. As part of our earnings release this morning, we also announced our intention to create a new holding company named LabCorp Holdings Inc. to more closely align with our brand and better position us as a global organization. I'd like to thank our team of more than 67,000 employees around the world. Their ongoing commitment has once again earned us recognition on Fortune's World's Most Admired Companies list. We're extremely proud of this recognition. In summary, we continue to make progress against our strategy and to achieving both near-term and longer-term goals. We remain focused on our position as leaders in science, technology, and innovation, and driving further value for our customers, our shareholders, and our employees. With that, I'll turn the call over to Glenn.

Thank you, Adam. I'm going to start my comments with a review of our first quarter results, followed by a discussion of our performance in each segment and conclude with an update on our full year guidance. For reference, we've also included additional business information that can be found in our supplemental deck on our Investor Relations website. Revenue for the quarter was $3.2 billion, an increase of 4.6% compared to last year, primarily due to organic Base Business growth and the impact from acquisitions, partially offset by lower COVID testing. The Base Business grew 6.7% compared to the Base Business last year, while COVID testing revenue was down 70%. Organically, in constant currency, the Base Business grew 4.3%. Operating income for the quarter was $321 million, 10.1% of revenue or 14.3% on an adjusted basis. During the quarter, we had $49 million of restructuring charges and special items, primarily related to acquisitions and LaunchPad initiatives. In addition, we had $22 million of expense for transition service agreements related to the spin-off of Fortrea, with the corresponding income recorded in other income. Excluding these items and amortization of $60 million, adjusted operating income in the quarter was $453 million or 14.3% of revenue compared to $448 million or 14.7% last year. The margin decline was due to lower COVID testing. Base Business margins were up as the benefit of demand and LaunchPad savings were partially offset by higher personnel costs. Our LaunchPad initiative continues to be on track to deliver $100 million to $125 million of savings this year, consistent with our long-term target. The adjusted tax rate for the quarter was 23% compared to 22.1% last year. The higher adjusted tax rate was primarily due to a stock-based compensation benefit in the prior year. We continue to expect the full year adjusted tax rate to be approximately 23%. Net earnings from continuing operations for the quarter were $228 million or $2.69 per diluted share. Adjusted EPS were $3.68 in the quarter, up 7% from last year. Operating cash flow from continuing operations was a use of $30 million in the quarter compared to $186 million generated a year ago. The reduction in cash flow was due to lower cash earnings, primarily related to deferred taxes and the timing of working capital requirements. Capital expenditures totaled $134 million in the quarter or 4.2% of revenue. This compares to $78 million or 2.6% in the prior year, which was impacted by the pending spin of Fortrea. For the full year, we continue to expect capital expenditures to be approximately 3.5% of revenue. Free cash flow from continuing operations for the quarter was a use of $164 million. The first quarter is seasonally the company's lowest quarter for free cash flow. We continue to expect free cash flow for the full year to be between $1 billion to $1.15 billion. During the quarter, the company invested $259 million in acquisitions and paid out $62 million in dividends. At quarter end, we had $99 million in cash, while debt was $5.1 billion. Our leverage was 2.5x gross debt to trailing 12 months adjusted EBITDA. Now I'll review our segment performance, beginning with Diagnostics Laboratories. Revenue for the quarter was $2.5 billion, an increase of 4.1% compared to last year, with organic growth of 1.8% and acquisitions net of divestitures contributing 2.2%. The Base Business grew 6.8% compared to the Base Business last year, while COVID testing revenue was down 70%. Organically, in constant currency, the Base Business grew 4.4%. Total volume increased 3.4% compared to last year. Base Business volume grew 4.9% compared to the Base Business last year as organic volume increased 2.7%, while acquisitions contributed 2.2%. Price/mix increased 0.6% versus last year due to an organic base business increase that was partially offset by lower COVID testing. Base Business organic price/mix was up 1.7% compared to the base business last year. Diagnostics adjusted operating income for the quarter was $418 million or 16.9% of revenue compared to $442 million or 18.5% last year. The decrease in adjusted operating income was due to a reduction in COVID testing, while Base Business income was up as the benefit of demand and LaunchPad savings were partially offset by higher personnel costs. The decrease in adjusted operating income margin was due to the reduction in COVID testing, the negative impact from weather and the mix impact from lab management agreements, which we expect to improve over time. Now I'll review the segment performance of Biopharma Laboratory Services. Revenue for the quarter was $711 million, an increase of 7.5% compared to last year due to an increase in organic revenue of 5.1% and foreign currency translation of 2.4%. The revenue growth was driven by continued strength in Central Labs, which was up 13%, while early development was down 4% due to continued higher-than-normal cancellations and lower orders. While cancellations are higher than normal, we have seen a sequential improvement from last quarter. Biopharma adjusted operating income for the quarter was $100 million or 14.1% of revenue compared to $74 million or 11.1% last year. Adjusted operating income and margin increased due to organic growth and LaunchPad savings, partially offset by higher personnel costs. We ended the quarter with a backlog of $7.9 billion, and we expect approximately $2.5 billion of this backlog to convert into revenue over the next 12 months. The trailing 12 months book-to-bill was 1.00, which we expect to increase throughout the year. Now I'll discuss our updated 2024 full year guidance, which assumes foreign exchange rates effective as of March 31, 2024, for the remainder of the year. The enterprise guidance also includes the impact from currently anticipated capital allocation, with free cash flow targeted for acquisitions, share repurchases, and dividends. We expect Enterprise revenue to grow 4.8% to 6.4% compared to 2023. Compared to prior guidance, this is a narrowing of the range with the same midpoint despite a 50 basis point headwind from currency. We continue to perform well in diagnostics and are narrowing the full year guidance range and increasing the midpoint. We expect Diagnostics revenue to be up 4.8% to 6% compared to 2023. This is an increase at the midpoint from our prior guidance of 140 basis points, primarily due to stronger base business demand as well as acquisition revenue that is now forecasted in this segment, where it was previously only included in the enterprise guidance prior to the closing of the transactions. We expect Biopharma revenue to grow 3.7% to 5.7% compared to 2023. The decrease at the midpoint from our prior guidance of 180 basis points is due to currency. This guidance includes the year-over-year positive from foreign currency translation of 40 basis points versus 220 basis points in the prior guidance. An improvement in the outlook for Central Labs is expected to be offset by early development. We continue to expect margins in Diagnostics and Biopharma to be up in 2024 versus 2023, driven by top line growth and LaunchPad savings. Our guidance range for adjusted EPS is $14.45 to $15.35. We have narrowed the range and increased the midpoint of guidance by $0.05, driven by improvement in Diagnostics, partially offset by the change in currency. The free cash flow guidance range is $1 billion to $1.15 billion, unchanged from prior guidance. In summary, we expect to drive continued profitable growth and strong free cash flow generation that will be used for acquisitions that support our strategy and supplement our organic growth, while also returning capital to shareholders through our share repurchase program and dividends.

We will now take questions.

So I wanted to focus on the Invitae deal here. Let's start with Adam. Can you talk about the strategic value of these assets and why you're excited to acquire them out of bankruptcy? And how does the oncology business complement what you're doing already internally?

Yes, Jack. So they're strong assets, and we've always said that oncology is one of our core therapeutic areas, and they have a very big hereditary oncology business, much bigger than the business that we have in that area. So it certainly augments what we're doing and accelerates it in a fairly significant way. They also have quite a bit of rare disease work that they've done, and that augments our focus on specialty testing. They have a very good NGS platform. We have a platform, but we're going to look to see what we can use that they have and use what we have to get the best platform we can possibly get. They have very good talent, and I think we're able to do it at a reasonable deal. It's a company that people have looked at for years and years; their valuation you could never get past. But the science was always very good. Their capabilities were always very good. So strategic, that feel fits very well for us.

Yes, that makes a lot of sense. Glenn, could you discuss the strategy for reducing dilution? Before the bankruptcy, I believe Invitae aimed for a burn rate exceeding $200 million. While some of that relates to acquisitions you're not making, your goal seems to suggest a burn of around $30 million to $50 million based on my calculations. Can you explain why we should be confident it won't exceed that and the steps being taken to achieve positive growth by year two?

Yes, Jack. So again, as Adam commented, we're very excited about the acquisition. And frankly, going out of acquiring the select assets through bankruptcy from a purchase price is, obviously, relative to other deals that we see of similar focus in our therapeutic areas, quite attractive. As we think about long-term value creation, you heard in the opening comments that we expect this to exceed our cost of capital in year 3 and have a very attractive overall return on our investment. But to your point, in the near term, it will be dilutive. This is a business that has a high-cost structure. And from our perspective, like other acquisitions that we've done of similar ilk, we'll be able to leverage the cost structure within LabCorp to leverage. It's a business that has a very high gross margin, which is, again, very attractive to us. Obviously, we'll continue to instill LaunchPad disciplines that we have, which will benefit them as well. But the big opportunity to improve their profitability is on the cost side. They spend a fair amount on R&D, which we would expect to continue, obviously, the value of what we're acquiring. But from sales, marketing, and especially general administrative costs, where we can leverage our infrastructure, we'll be able to get it profitable, as Adam said, within the first year. So it's all about integration. We'll do it on a very disciplined and timely manner, but we expect it to ultimately be accretive in the second full year of our ownership.

Could we talk a little bit about what's embedded in guidance as it relates to the acquisition contribution versus organic growth and base business strength in the Diagnostics segment? I just want to make sure kind of can you remind us what's embedded in the enterprise level guidance versus the segment level guidance as well.

When we talk about the 3 acquisitions that we announced in the quarter, that's adding obviously to the change in the guidance we did for diagnostics. So when you look at the change, just use the midpoint of our guidance, it improved 140 basis points. I assume roughly half of that is from those 3 acquisitions. And again, those were already incorporated in our enterprise guidance but not until the segment, until the deals were closed. So half of it is due to the acquisitions, and then the other half of the growth is demand. The strength that we saw in the first quarter that we also expect to see continued through the year.

I want to pick up kind of right where you left off there on the Biopharma piece. Can you just dive a little bit deeper into early development? Obviously, again, the book-to-bill softened a little bit there on the BLS side. There's a lot of focus on the early development piece. Can you just talk about the visibility on that front? And again, the expectations as we work our way through the year, maybe both on orders and the revenue side would be helpful.

Sure. So I'll start with the book-to-bill. So the book-to-bill was 1.0 that's lower than we would typically like. However, we've got insight to the book-to-bill for the second quarter already and insight to the rest of the year. I expect the book-to-bill to continue to grow starting next quarter throughout the rest of the year. The health of the book-to-bill still looks good across the business. It's the early development part of the book-to-bill, which frankly, is a little bit less relevant because early development, a lot of the studies start in the year and finish in the year. Typically with the book-to-bill, you look for things that go more than a year or over time. So as I look at the early development book-to-bill, it's not where we would like it at the moment, but the RFPs are good. The win rate looks good. It's the cancellations that are driving the majority of the issues. But that can correct itself faster typically because the burn rate is so much quicker. As we go through the rest of the year, we expect that the early development business starting in the second half will begin to be stronger than the first half.

Maybe just one quick clarification on Invitae. You talked about the financial impact in the first full year post-close. Is there any financial impact currently embedded in the guidance?

So Michael, this is Glenn. When you look at the guidance that we've given, and we always kind of say the midpoint of the range is what our expectation is, and then there's always going to be pluses and minuses, which is why we put a range. So at the midpoint of our guidance, the answer is Invitae is not in those numbers. But when you look at the guidance range, so relative to the revenues of Invitae or the potential dilution in the first year, that would be incorporated, if you will, sizing it within the range we've given. So I guess the answer is it's not in the explicit guidance, but it's captured within the range that we've provided. We're looking to close this and it will obviously depend when we do, but let's say it's in the third quarter. Obviously, when we have our announcement of our quarterly call, we will update our guidance to reflect, obviously, a half a year left. But obviously, acquisitions that would have been completed as well which, again, we may see Invitae over that time frame.

I was wondering if you could comment on the pacing of the lab management deal integration. Anything to pick up on proceeding as sort of as you guys thought, any learnings you would say in terms of others as you continue on that path?

Yes. So we've gotten quite good at being able to efficiently and effectively run the lab management agreements that we have. When you do 100 hospitals with one organization quickly, you become an expert pretty fast. So what I would say is we take our time because the most important thing is to ensure that there's no patient disruption. The second thing is to make sure that the physicians are very satisfied with the way in which they can order and the speed in which they get their results. And then over time, we find ways to use our size, our scale and our ability to synergize to reduce cost. And we've learned that the most important thing is to do it really well. And although the margins never get to our average margins, they start off low and they increase over time. I think you've seen with the announcement of several deals closing in the first quarter, multiple deals closing at the end of last year. There's a slight impact on our margin in the beginning. But over time, the margin is going to improve. And that's why we believe our Diagnostics margin will increase when you look at the totality of '24 versus '23.

Our next question comes from Kevin Caliendo of UBS.

I want to talk or ask a little bit about margin expectations in the DX segment, specifically around your expectation of labor trends and actual margin in the DX business going forward, like in the first quarter as we're jumping off.

Yes. Are you talking margins in CLS or Diagnostics? I couldn't tell.

Diagnostics, sorry.

Okay, in Diagnostics. What I would say is that if you look at the Diagnostics business, the business performed very well. We had basically 7% growth in the Base Business and volume was good at almost 5%. The margin was down versus prior year, driven by three things. It was driven by COVID, there was some impact from weather, and as I previously mentioned, there was some impact from the lab management agreements as we begin to roll those out in the fourth quarter of last year. So in the first quarter, we'll see the margins get better as we go through the year. Overall, we expect the diagnostic margins in '24 to be higher than the margins in '23.

Yes. The only thing I'd add too is, as Adam said, margins up even despite COVID and weather and lab management agreements for the full year margins to be up slightly but also to see that expected beginning in the second quarter where you'll see nice growth year-over-year. We'll have the normal seasonality. So when you look at the absolute margins, they'll fluctuate based on seasonality, but year-over-year improvement, you'll see pick up nicely beginning in the second quarter that gives us the confidence that the margins will be up for the full year.

Maybe just to piggyback off some of those margin questions on the Diagnostics front, but more specifically on the specialty diagnostics side of things. I guess, how should we be thinking about moving, the moving pieces there moving forward? Obviously, you gave some color around Invitae, but just as that entire specialty business grows, how are you thinking about its impact on total segment margins here?

Yes. So the first thing I would say is as we look at the businesses, they're both strong right now are routine testing as well as our specialty testing. We are seeing specialty testing grow at a slightly accelerated rate versus the routine testing, but routine testing is still the vast majority of the business that we do. A big part of the reason that specialty testing is important is, number one, they're typically very serious diseases. Number two, when people get specialty testing, they get a lot of routine tests around those specialty tests as well. And then third of all, they typically or show how strong you are in science and innovation, and it's got a good kind of overhang of the company because we are a scientifically based organization. So for those three reasons, you'll see specialty testing growing faster than routine testing, but routine tends to go with the specialty testing to some degree.

I feel bad asking about early development because I said we're all focusing on this as a really small part of your business. But I have to ask because you did talk about some risk of potential share shifts when I saw you in March. So I think about the cut, is this more a function of higher-for-longer environment that could be impacting biotech funding? Is it something defensive early on, just in case maybe there are some potential share shifts? And how do we think about the underlying assumptions in terms of how they may have changed in use on cancellations and biotech funding in order to kind of enter new numbers?

Yes, when I consider the early development business, I don't believe it's about losing market share. I think our share remains stable in the segments we compete in, although we don't participate in all areas; we don't have a contract manufacturing organization, for instance. In the sectors where we are involved, our win rates and requests for proposals are looking favorable. Thus, I am confident that we are maintaining our market share. However, we are observing a higher rate of cancellations than in the past, and sometimes companies are taking longer to reach final decisions due to managing relatively tight budgets, even though funding has improved compared to before. On a positive note, the central laboratory segment, which is the largest part of our business, continues to perform very well, and we expect that strength to persist, helping to offset the ongoing weaknesses in early development that may last a bit longer. Even if those weaknesses continue, we believe the robust performance in the central laboratory sector compensates for it. I want to thank you all for joining us today. And hopefully, you can see we continue to advance our strategy and make significant progress, and we're going to continue our mission to improve health and improve lives around the world. Hope everybody has a good day.

This concludes today's conference call. Thank you for participating, and you may now disconnect.