Quest Diagnostics Incorporated

Q1 2023 Earnings Conference Call

4/27/2023

spk05: Hello and thank you all for standing by. Welcome to the Quest Diagnostic 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 Diagnostic with all rights reserved. Any redistribution, retransmission, or rebroadcast of this call in any form without written consent of Quest Diagnostic is strictly prohibited. I would now like to introduce Sean Bevick, Vice President of Investor Relations for Quest Diagnostic. Go ahead, please.
spk08: Thank you, and good morning. I'm joined by Jim Davis, our Chairman, Chief Executive Officer, and President, and Sam Samad, our Chief Financial Officer. During this call, we may make forward-looking statements and we'll 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.
spk10: Now, here is Jim Davis. Thanks, Sean, and good morning, everyone. We're off to a strong start in 2023. Our base business grew double digits compared to 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%. And earnings per share were $1.78 on a reported basis and $2.04 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 a faster growth in a 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 New York Presbyterian with new test volumes starting to flow into our Clifton, New Jersey laboratory earlier this month. This is the third outreach acquisition we've 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 or 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's 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 our 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. 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. Sam?
spk08: 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 surging COVID-19 cases due to the spread of the Omicron variant. If we normalize for the impact of the easier comp, due to the Omicron surge in Q1-22, we estimate base volume growth at approximately 4%. COVID-19 testing volume continued to decline during the first quarter. We resulted 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 REC was up 2.3%, due primarily to more tests per requisition, 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 and $9.08 billion. Base business revenues are expected to be between $8.78 and $8.88 billion. COVID-19 testing revenues are expected to be between $150 and $200 million. Reported EPS 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. Here 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 New York 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 decretive 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. With that, I will now turn it back to Jim.
spk10: Thanks, Sam. To summarize, we're off to a strong start in 2023, and our base business grew double digits compared to 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. Operator?
spk05: 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. To ask a question, please press star 1 from your phone. To withdraw, press star 2. Again, to ask a question, please press star 1. One moment. Our first question comes from Anne Hines of Muso Securities. Your line is open.
spk03: Great. Thank you. My question is focused on the base volume growth, which was strong. And in your commentary, you talked about health plans that you were gaining more market share there and you were winning more market share, I think you said, with reference labs. Maybe can you give us more detail on that? Is it existing health care partners? Do you have a new health care partner? Is your relationship with existing partners maybe changing? And I'm just trying to figure out how much is a return to normal versus maybe actual market share you could be gaining. Thanks.
spk10: Yeah. Hey, thanks, Anne, and good morning. So our growth in the quarter, again, 10% base revenue growth was strong across all channels, our physician segment and our health system segment. Now within the health system segment, we look at our reference business and our PLS business. Our reference business was powered by growth from existing accounts, as well as we had several new big wins that you actually win those deals in previous quarters, but the startup was in the first quarter. On the PLS side, our professional lab services, our growth at existing sites, same-store sales, was very strong. But we also added, as you know, a couple of new PLS sites, both in the fourth quarter that we're ramping up and in the first quarter. Those were Lee Health in Florida, as I mentioned in the script, Tower Health, and then Northern Light in Maine, a multi-hospital health system up in northern Maine. continued to ramp up in the first quarter. So broad-based growth, physician business was very strong, health system business strong, and PLS certainly helped the average growth rate in the quarter.
spk05: Thank you. Our next question comes from Patrick Donnelly of Citigroup. Your line is open.
spk01: 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 backing out COVID, shaking out somewhere around 13%. I guess when you look at the go forward, even getting into next year, kind of approaching that 17% type number, can you just talk about, I don't know if it's a bridge or just the progression towards that, how you work your way towards that, particularly as COVID continues to come out of the model a little bit? I just want to focus on that base margin piece and how we think about the step up there.
spk08: Sure, Patrick, and good morning. Thanks for the question. So, listen, we had 15% operating margins in Q1. I'll talk about some of the drivers in terms of, to your question, looking forward and how we get to that approximately 17% that we guided to on Investor Day, and we're still committed to that approximately 17% number that we guided to. for 2023. So here are some key drivers. First of all, Q1 margins came in on the base business strong and overall as expected. We had a negative impact from COVID revenues both coming down more precipitously than expected, but also the mix on COVID. We saw more testing done at the PLS sites than at other sites which are lower cost for us. But in terms of Q1 came in as expected. As we look forward, we start to see a few things help margins. First of all, keep in mind, Q1 is usually our weakest quarter as well. But as we look forward, you expect invigorate savings to or productivity improvements to ramp up. And that has already started, but will ramp up over the course of the year. We said our SG&A reductions of approximately 100 million will really take effect more so in Q2 onwards. And so that will help margins going forward as well. You know, we're seeing, as I said, good, strong base business growth and volume that's going to help us. We're seeing, you know, good tailwind from pricing. Our pricing environment is the best that it's ever been. We're seeing modest benefit from pricing this year compared to, you know, the 50 basis point headwind that we saw last year. And before that, we used to have, you know, even more headwind than that. So all of those factors, as you look forward, you know, in terms of productivity, in terms of SG&A improvement, in terms of volume growth, you know, give us confidence about getting to that 17%.
spk10: Yeah, 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, as I said in the script, 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.
spk05: Thank you. Our next question comes from Brian Tanquillit, of Jefferies. Your line is open.
spk11: Hey, good morning, guys. Congrats on the quarter. Thank you. I got a question for you guys. As I think about the callout you made on tests per REC being up in the quarter, Maybe if you can give us some color on what is driving that and how you think that will progress going forward. Yes, that's correct. Thank you.
spk10: So I think there's evidence of a strong return to care. So I just said that our advanced testing portfolio was certainly up in the quarter. We also saw just strong growth in routine testing, you know, routine cardiometabolic lipid panels, chemistry panels, and things like that. Generally, a general health and wellness visit has high tests per rec because you're testing across the entire human body. So I think our tests per rec were really powered by that.
spk05: Thank you. Our next question comes from Elizabeth Anderson, Evercore ISI. Your line is open.
spk06: 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, or is it similar to what you've called out on current trends? Thank you.
spk10: Sure. So I think as everybody knows, in general, our contracts with commercial payers average three to five years. So on average, every year, we're going to renegotiate about 25% of our health plans contracts. We're now a third of the way through the year, and we've progressed nicely on two of the contracts that have been renewed. We have a few more to do throughout the rest of the year. So what I would tell you is, look, we have a great value story. You know, consistently, we're able to move requisitions from high priced institutions, health systems and out of network labs into Quest Diagnostics. And, you know, we try to negotiate incentives for doing that. And when we do that work, we get paid incremental value. So these value based contracts are on the rise. And we certainly make the case around inflation and things like that. But as I've said in the past, we don't lead with that. We lead with the fact that we offer great value and we want to get paid for that value. So negotiations are going well. We said in the quarter that price was flat, which we haven't been able to say in a long time. Q4, we are down 50 basis points. Q1, we're flat. So we continue to make improvement and expect to make improvement throughout the rest of the year.
spk05: Thanks so much. Thank you. Our next question comes from Kevin Caliendo of UBS. Your line is open.
spk02: Hi. Thanks for taking my question. Congrats on the Haystack acquisition. Can you maybe talk through the process there? You know, why now? Why this company? talk through any, I know there's some regulatory and commercial milestones this company has coming up, and also maybe just talk through how we should think about the dilution in terms of modeling it and where that would show up through the P&L.
spk10: Yeah, so let me just have Sam address the dilution first, and then I'll come back and talk about, you know, why Haystack and why now. Sam?
spk08: Yeah, so, you know, Kevin, first of all, thanks for the question. So we said, you know, this deal will be modestly dilutive this year and modestly dilutive for the next three years and will be actually accretive for us in terms of earnings in 2026. We haven't shared exactly how dilutive it is for 2023, but let me give you a couple of, you know, maybe nuggets or qualitative directional comments. You know, first of all, in terms of our overall guidance, as you saw, we kept our guidance midpoint the same. We narrowed the guidance by 10 cents on EPS. So I'm referring here specifically to adjusted EPS. And, you know, the drivers of that were improved base business, which is taking us higher, lower COVID, which is going the other way, and some modest dilution from the Haystack acquisition. But all in all, if you put all those together, we're still at the midpoint of the adjusted EPS guidance that we were last quarter. In terms of going forward, the annualized EPS dilution from Haystack next year is actually less than what we expect to see this year. So it starts to improve. Next year is the peak dilution for the deal. And in 25, the dilution is lower. So it's actually a year-over-year EPS improvement. And then in 26, as I said, it's accretive for us from an EPS perspective. ROIC-wise, as I said, it turns positive by the end of 25 and, you know, we expect it to have a, it definitely clears our hurdle for ROIC expectations in the next five years.
spk10: Yeah, so Kevin, let me talk a little bit now about why Haystack and why now. So first, as we talked about at Investor Day, when we are looking to close a capability gap, if you will, in our portfolio, the first thing we do is we reach out to our IBD partners. Um, and over the last several years, we've had deep discussions. We know what their roadmaps are. And, um, we didn't think that was a pathway to follow, um, to get into this space, at least in the, in the next, uh, several years, let's just say, um, over the last three years, we've had many discussions with many of the players in the MRD space. Uh, we got to know Haystack over the last year. We think they have the lowest limits of detection of any MRD assay out there. In terms of, you know, just raw numbers, they can detect one part per million, meaning you have a million floating, you know, dead cells as they die. They release DNA, fragments of DNA. And there's a lot of DNA in your bloodstream. And these guys with this assay can find one fragment of cancer DNA per a million parts. That is an incredibly low limits of detection. The sensitivity of the assay at Landmark is very, very high, 80 to 90%. And so we think it's a best in class assay. The work they've done on some of their preliminary trials, 450 patients, across 23 Australian centers. I'd refer you to the New England Journal of Medicine article in June of 2022. So we think it's the right assay, the right time. As you know, CMS is reimbursing for these assays. And we think we can scale it. We think we can drive further commercial reimbursement. The last thing I would say is, look, it is a tumor-informed assay. And when you're looking for a needle in a haystack, hence their name, when you're looking for a needle in a haystack, you actually want to know what the needle looks like. And hence, we believe that a tumor-informed assay is a much stronger assay than an uninformed assay.
spk08: Hey, one other thing just to wrap up on the financials. Kevin, back to your question around dilution. I do want to mention for the longer term, you know, we are committed to the investor day guidance that we gave around long range guidance, which said mid single digit revenue growth and high single digit EPS growth, the haystack acquisition actually modestly improves on that as well. So I just wanted to provide this for the long term guidance, given that we just shared it in investor day not too long ago.
spk05: Thank you. Our next question comes from Jack Meehan of Nefron Research. Your line is open.
spk15: Thank you. Good morning. Wanted to stick with the Haystack deal. Very interesting. Great tech. Pricing is pretty reasonable with other deals in the space. Had a few more questions for you. First is in terms of coverage, just wanted to confirm, I assume, is the plan to go through Moldex there? Then number two, do you think reimbursement looks similar to other MRD tests on the market? And then finally, can you just comment, are there any royalties attached to the deal? Thank you.
spk09: Yeah.
spk10: So, yes, Jack, first, thanks for the question. Yes, on Moldex. Absolutely plan to go that route. Look, what we have to do is... finish the commercialization of the assay. We'll be doing that for the rest of this year. We plan on bringing the assay up in one of our large oncology testing facilities. As you know, there is limited coverage for Medicare and Medicare Advantage patients as dictated by CMS. Two companies have coverage for that today. I would also tell you There's a handful of blues company, the blues plans that are reimbursing for the test. So, you know, similar to NIPT, remember NIPT started out very high risk women, very limited coverage. And we, as well as some other industry members drove that throughout the commercial payers. And that test is wide open to women today. So that's our plan. On the royalty question, look, as we mentioned in the comments, some of the original IP came out of John Hopkins. I'm not gonna disclose royalty payments, but as you can imagine, there's intellectual property that comes with this, and there's modest royalties that will come with it.
spk07: Operator, next question.
spk05: Thank you. Our next question comes from Erin Wright of Morgan Stanley. Your line is open.
spk04: 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 here? And then on capital deployment, I understand there's a balance of capital deployment dedicated to the innovation assets like Haystack, but how rich is the pipeline now for the tuck-in deals around hospitals or local players, and have you seen any changes in the urgency around those types of deals? Thanks.
spk10: Yeah, so our routine testing levels are above pre-COVID levels. Whether you look at our volume versus all of 2019 or you look at our volume versus the first two months of 2020, we're substantially above that. So the recovery is... is no longer really even a topic of discussion for us. In terms of the funnel of opportunities on the health system side, namely outreach deals, is stronger than ever. And I think now that COVID is behind us, the deal completion will start to accelerate. So we feel good about what's in the funnel. They generally take a while to negotiate. You got to get a lot of people on board, pathologists on board, referring physicians,
spk09: But once you get them all on board, it can move quickly.
spk05: Thank you. Our next question comes from Pito Chickering of Deutsche Bank. Your line is open.
spk14: Hi there. You've got Kieran Ryan on here for Pito. Thanks for taking the question. Just going back to margins, I was just wondering if you could talk a little bit about FTE wage inflation, hiring, and turnover, how that ran in 1Q compared to what you were seeing in the second half of 2022, and then just kind of how that fits into getting back to that 17% margin next year.
spk10: Yeah, so the guidance we gave for the year, we said our wage inflation would be in the 3 to 4% range. No surprises there. We still feel good about that overall guidance that we said for the year. You know, our turnover rates have improved from Q1 of last year. Sequentially, for most job categories, it improved from Q4 to Q1. and we continue to see the trend back towards a normalized attrition rate, when I say normalized, sort of pre-COVID levels. It is not yet back to those levels, unlike volume, but it is trending in the right direction, and we feel good about where our wage inflation was in the first quarter and for the year.
spk08: Yeah, and I'll just mention a couple of things real quick. I mean, productivity, in terms of the invigorates, actions that we have helps also offset that which is how we get to the margin target that we have and and you know i think you mentioned kieran that uh the 17 next year actually our our guidance is to get to approximately 17 this year in terms of operating margins so i just want to be clear on that thank you our next operator
spk05: Thank you. Our next question comes from Andrew Breckman of William Blair. Your line is open.
spk13: Hi, guys. Good morning. Thanks for taking the question. Maybe just to go back to Haystack for a minute and appreciate all the commentary today on that, but can you maybe just sort of talk about any expectations for a halo effect that this can create for you guys commercially? And I guess just as you sort of think about that, how are you thinking about any changes to the commercial strategy just between calling on pathologists and then the oncologists here? Thanks.
spk10: Yeah, so good question. Absolutely a halo effect. Remember at Investor Day, we said in 2022, ex-COVID, we had $8.4 billion in revenue. And of that $8.4 billion, a billion of that is in the cancer space. And we said about half of that, or a half a billion dollars, is in the screening space, routine screening, PSA, Pap smears, HPV, some common cancer markers. But we then said that the other half a billion is anatomical pathology. So we have the specimen. And once we have that specimen, it's only logical for the medical oncologist to start to, once it's declared cancer, the next question post-surgery is, you know, is there still, you know, cancer cells in this human being? Or the next question, if the answer to that is yes, and then there's therapy, the next question is, did the therapy work? Do we still see remnants of DNA from the tumor? So we think this absolutely fits in to our overall cancer strategy and quest diagnostics today. In particular, again, there is a halo effect. We will own the block, we will own the specimen, and doing the testing on that for both treatment monitoring as well as treatment selection we think is just a natural. Now, from a commercial standpoint, you know, we have a pretty mature oncology distribution today that calls on pathologists and medical oncologists. And yes, we are absolutely going to strengthen that team as we finish the commercialization of this assay and to have a more robust channel calling into the medical oncologist space. So, good question. Thanks.
spk05: Thank you. Our next question comes from AJ Rice of Credit Suisse. Your line is open.
spk00: Thanks. Hi, everybody. Maybe two quick ones here, if I could slip them in. The strong rebound in the base business line, we've talked for a while about the fact that the New York region had not come back as quickly as other regions. Did you see any outsized performance there that's contributing to the strong based business or was the strength pretty much across the board geographically and then you didn't do anything on the buyback front this quarter i know you've got haystack now and you've got hospital deals i wondered what's your thought about additional share repurchases as we progress through the year yeah thanks aj so um on your first question i'll let sam take the second part um
spk10: Again, 10% revenue growth on the base business in the quarter, 8% volume growth. I mentioned that health systems was seven, so our physician book of business actually grew higher than that, if you do that math. And the answer is we saw strong growth across all of our regions. Did the northeast grow at a faster rate? Slightly faster rate, yes. So we saw, you know, maybe a bit of a rebound there. But, you know, look, our comparisons now in the Northeast region are with 2022. You know, there's been population shifts that some of that population is just not going to come back to the Northeast. You know, now we see a, you know, stronger, you know, growth, continued stronger growth in the Southeast and the Southwest. And that very much could represent some population shift that we're seeing in the country. The last thing I'd mentioned, although it didn't influence our Q1 numbers, we did mention the startup of our New York Presbyterian outreach deal that's going well. It's going to be a strong contributor to growth in the east region and will be a strong contributor to our overall growth for the rest of the year.
spk08: So, Sam, you want to take it? Yeah. And thanks, AJ. On the buyback, so what's assumed in our guidance in terms of adjusted EPS is that we will offset equity dilution in terms of share buybacks. So we'll do enough to offset equity dilution. We are still committed to returning the majority of our free cash flow to shareholders through dividends and buybacks. So that's still our commitment. We communicated on our investor day. We're obviously still committed to it. But we also said that we're going to scale share buybacks up and down depending on also the M&A pipeline and the impact that might have on growth and driving, you know, our strategy and also our long-term growth. We had in the quarter, you know, we talked about or at least, you know, recently we talked about New York Presbyterian and the fact that that's a $275 million capital deployment. We talked about now today Haystack and that's an additional capital deployment of $300 million. You know, we've had good progress here on the M&A front, so that's also why we didn't do any shared buybacks in Q1.
spk05: Thank you. And our final question comes from Derek DeBrown of Bank of America. Your line is open.
spk12: Hi, good morning. This is John on for Derek.
spk08: Good morning.
spk12: Hey, good morning. 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 in terms of sales and how much of an impact it made on the margins. Just curious if that's something I should look out for in terms of the margin progression here.
spk10: Thank you. Yeah, so we're really happy with our consumer-initiated testing performance in a quarter. It showed nice growth from progressive growth from Q4. And so I'm going to talk about the growth. COVID obviously declined in that segment of our business as well. The majority of our CIT business now is our routine-based business. We saw a nice progression from Q4 to Q1. We are happy with that. We saw a nice progression Q1 to Q1, really nice progression there. We continue to be excited about a couple of growth categories within CIT. Number one, you've probably read allergy season has really taken off and taken off early, so seeing some nice growth there. You know, just our general health and wellness offering in CIT was really strong in the quarter. And, you know, we surveyed some of those general health and wellness customers and found some interesting things. One of the main reasons they're coming to Quest and paying out of pocket is because consumers' patients were having a hard time getting in to see their physicians. We're hearing about three-month delays to get to see their doctor. So rather than wait to see their doctor and get their lab testing, they just come in because they want to know. And then finally, I'd say, you know, our STD category continues to exhibit very strong growth. The CDC just declared again several types of STDs, gonorrhea, syphilis, at epidemic levels. They also indicated that 50% of all new cases that they're seeing across the country are age 15 to 24. And that's a segment that wants to remain anonymous and just pay out of pocket for lots of reasons. Finally, as we've said about margins, our CIT business is going to be less diluted this year than it was last year. And I think you can assume that each quarter through the year.
spk08: Yeah. So, John, just to add to that. It is dilutive in Q1 to margins, but as Jim said, it's going to improve throughout the year. So that's another aspect of why our margins overall improve, although this one is more modest.
spk07: Thank you. Operator, are there any more questions?
spk10: all right well i want to thank thank everyone for joining today some some really exciting news here but let me just summarize but look we're off to a really strong start here in 2023 our base business performs stronger than expected stronger than we expected in the quarter we feel really really good about that and it's certainly offsetting some of the covid decline that we saw in the quarter second hopefully you can tell we're really excited about the Haystack Oncology. We think that technology is the right technology, but more importantly, it's the right team. We're really impressed with the team that will join Quest Diagnostics. And as you know, in these types of acquisitions, it's not just investing in the technology, you're really investing in a group of people and a team, and we feel really, really good about that. We feel great about the MRD space. And we believe it's starting to mature from both a physician ordering perspective as well as from a reimbursement perspective. And then finally, we're well on our way to generating the invigorate savings that are needed to offset wage inflation. And we feel good about the progress we're making there. So again, thanks for joining in. 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. So thanks for joining and have a great day.
spk05: Thank you for participating in the Quest Diagnostics first quarter 2023 conference call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics website at www.questdiagnostics.com. A replay of the call may be accessed online at www.questdiagnostics.com forward slash investor or by phone at 203-369-0200 for international callers or 866-363-1835 for domestic callers. Telephone replays will be available from approximately 10 a.m. Eastern Time on April 25th, 2023, until midnight Eastern time, May 9th, 2023. Goodbye.
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