Quest Diagnostics, Inc. Q3 FY2024 earnings call

• Recognized Quest employees working during Hurricanes Helene and Milton, commending their commitment to values. - Delivered strong third quarter with 8.5% total revenue growth, including 4.2% organic growth, driven by new customer wins, expanded business with physicians/hospitals, and acquisitions. Completed three acquisitions during the quarter, including LifeLabs, Allina Health, and lab business of physician groups in NY, with plans to acquire more. - Strategy focuses on delivering solutions to core customers (physicians, hospitals, consumers), advanced diagnostics in faster-growing areas, acquisitions as growth driver, and operational improvements via automation/AI. - Operational highlights: Invigorate program aims for 3% annual cost savings/productivity improvements; completed full end-to-end automation at Lenexa, KS lab; piloting automated specimen accessioning; collaborating with Hologic on automated cytology solution.

Diagnostic Information Services: Revenues were up 9% compared to the prior year, driven by strong growth in key physician and hospital channels as well as contributions from recently closed acquisitions. Physician Lab Services: Delivered another quarter of high single-digit revenue growth, driven by new customer wins, expanded business, and acquisitions. Hospital Lab Services: Grew revenues mid single digits, above historical levels, due to hospitals struggling with specialized lab positions and increased use of advanced diagnostics. Consumer Initiated Testing: QuestHealth.com grew total revenues more than 40%, with a repeat customer rate of 30% from less than 10% two years ago. Advanced Diagnostics: Drove double-digit revenue growth across several clinical areas, including brain health, women's health, cardio-metabolic health, and autoimmune disorders.

• 2024 revenues expected between $9.8 billion and $9.85 billion. Reported EPS expected in range of $7.55 to $7.65, adjusted EPS in range of $8.85 to $8.95. Cash from operations expected ~$1.3 billion, capital expenditures ~$420 million. - Impact of Hurricane Milton expected to negatively impact Q4 revenues by ~$15 million and EPS by ~$0.08. - Long-term outlook: mid single-digit revenue CAGR with at least 1%-2% growth from acquisitions, high single-digit earnings CAGR with margin expansion over 2023-2026.

• Disruptions from hurricanes (e.g., Hurricane Milton) impacting revenues and EPS. - IT outages (e.g., Crowdstrike outage) affecting volume and margins. - Integration challenges of acquisitions impacting operating margins. - Labor market tightness leading to wage inflation. - Reimbursement challenges in the health system space.

Q: How do you think the organic growth profile of the business will be in 2025?

A: Jim Davis mentioned an assumption of roughly 3% organic growth, with utilization remaining strong. Sam Samad added on Haystack dilution, stating incremental dilution this year is $0.20, improving next year.

Q: Can you talk about margin impact of LifeLabs near term and earnings accretion progression?

A: Sam Samad said Q3 operating margins were 15.5%, adjusted for weather closer to 16%, with LifeLabs having a slight negative impact in Q3, but trajectory to improve as it scales. Jim Davis discussed M&A pipeline, stating pipeline remains strong with focus on smaller deals and continued acquisitions.

Q: Why weren't you in contracts with Elevance and Sentara previously, and who was servicing those patients?

A: Jim Davis said with Elevance, they were out of network in Colorado, Nevada, and had limited access in Georgia and Virginia; with Sentara, previously served by other laboratories. They feel good about opening up access and gaining market share.

Q: Talk about LifeLabs margin impact, earnings accretion, and M&A pipeline.

A: Sam Samad discussed Q3 operating margins and LifeLabs' slight negative impact, with trajectory to improve. Jim Davis talked about M&A pipeline, focusing on smaller deals and continued acquisitions.

Q: On EPS guidance, can you break it down?

A: Sam Samad said revenue guidance increased due to M&A, midpoint of adjusted EPS remains $8.90, absorbing $0.08 impact from Hurricane Milton in Q4 but strength in organic business offsets some.

Q: Talk about wage inflation, unemployment, and operating leverage via AI/automation.

A: Jim Davis mentioned turnover rates improved, wage inflation still above historical norms but expected to stay around 3%, with automation/AI (e.g., fully automated lab in Lenexa, KS) helping offset wage inflation. Sam Samad added on rev per req and utilization contributing to productivity and leverage.

Q: COVID sales impact and M&A contribution?

A: Sam Samad said COVID impact on revenue growth was about 50 basis points, M&A contributed ~4% to Q3 revenues, with LifeLabs contributing ~$70 million in Q3.

Q: DCP impact and pricing outlook?

A: Sam Samad said DCP had negative impact on operating margin in Q3, pricing expected to be flat to slightly positive, with health plans modestly positive and health systems challenging. Detailed guidance on 2025 pricing on Q4 call.

Q: Hospital outreach deals, market share gains, and geographies targeted?

A: Jim Davis said deals in Minneapolis, Columbus, OH, and Cleveland, OH, where previously de minimis share, now strong presence in big growing markets, targeting markets with strong payor access and health systems dominating lab space.

Q: Narrow networks at MA plans and adoption pace?

A: Jim Davis said Medicare Advantage plans have narrower networks, moving work to independent labs like Quest, with good things from more narrow networks for Quest.

Q: LifeLabs demographics and margin outlook?

A: Jim Davis said Canada's population growth and aging demographics favorable, LifeLabs' operating margin rate lower than Quest's average, expected to improve to company average over 2-3 years via best practices sharing.

Q: Integration efforts and tactics for acquisitions?

A: Jim Davis said for LifeLabs, focus on procurement and best practices sharing; for health system deals, IT integration and moving work to Quest, with dedicated teams for integration.

Q: Revenue growth, cost trends, and EPS outlook for 2025?

A: Sam Samad said revenue growth should be better with maturing M&A, cost trends around 3%-4%, Invigorate program to offset, LifeLabs maturation contributing, and Haystack dilution coming down, feeling comfortable with high single-digit EPS growth.

Q: PAMA delay and permanent legislative solution?

A: Jim Davis said PAMA delayed 5 years, trade association working on permanent solution to get Medicare rates up, pressing for rates to increase based on commercial plan pricing benchmarks.