Quest Diagnostics Incorporated

Welcome to the Quest Diagnostics second quarter 2023 conference call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and question and answer session that will follow, are the copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission, or rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited. Now, I'd like to introduce Sean Bevick, 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, Sean, and good morning, everyone. We had strong base business performance in the second quarter with nearly double-digit revenue growth year over year. Demand for our services remained strong across all regions, boosted by the collaborations we have formed with health plans, hospitals, and physicians amid an environment where people are returning to care. We are particularly encouraged by the revenue growth in our base business of nearly 10% from our health system customers. Also in the second quarter, we made substantial progress improving the profitability of our base business compared to the first quarter and prior year, despite persistently high employee turnover. Total adjusted operating margin improved more than 170 basis points, compared to the first quarter despite a decline of approximately $80 million in COVID revenue. This morning I'll discuss highlights from the second quarter, then Sam will provide more detail on our financial results and talk about our updated financial guidance for 2023. Now let's turn to some of the highlights from the quarter. As we shared at Investor Day, our strategy is to drive growth by continuing to meet the evolving needs of our core customers physicians, hospitals, and consumers as they navigate the changing landscape in healthcare. We will enable this growth with an intense focus on faster growing clinical areas, including molecular genomics and oncology. In addition, acquisitions will continue to be key drivers of our growth. Finally, our strategy includes driving operational improvements across the business with strategic deployment of automation and AI to improve quality, efficiency, and service. So, let's review progress we've made in each one of these areas. In physician lab services, we delivered strong base volume growth from physicians, largely through our partnerships with health plans, which have expanded our access to the market. A growing number of these involve value-based arrangements and are generating faster growth and share gains than the traditional relationships. These arrangements position us as a more strategic partner with health plans as we work together on leakage, shared savings, and redirection programs. In addition, New York Presbyterian's recently acquired outreach assets brought us new volume from the physicians. In hospital lab services, base revenue from health systems grew nearly 10% in the quarter. The professional lab services business had a very strong quarter as we saw solid growth from both new and existing PLS relationships. We are particularly encouraged by progress with our new PLS partnerships with Northern Light Health, Lee Health, and Tower Health. As hospitals continue to experience financial challenges, we are here to help, whether through professional lab services, reference testing, or purchasing the hospital's outreach assets. We are now seeing growing momentum with a significant pipeline of potential deals with large health systems. In consumer health, we had strong base business growth on questhealth.com. We continue to optimize our marketing efforts to target our customers more strategically and now expect consumer-initiated testing to be profitable through the balance of 2023. Also during the quarter, we launched Genetic Insights, our first consumer-initiated genetics health test on questhealth.com. This saliva-based test leverages our expertise in next-generation sequencing to analyze three dozen genes for inherited risk of conditions ranging from breast and colon cancer to carrier status for cystic fibrosis and Tay-Sachs. We are encouraged by initial demand for this new offering, which adds to our growing test options for health-minded consumers. As discussed at Investor Day in March, a key pillar of our strategy is to support faster growth across all customer segments through highly specialized advanced diagnostics. These offerings include molecular genomics and oncology tests, such as germline testing to assess prenatal and hereditary genetic risk, and somatic testing for tumor sequencing. Advanced diagnostics also encompasses other key areas, including neurology, women's reproductive health, and cardiometabolic health. In neurology, we continue to achieve strong growth from our innovative Quest-AD-Detect portfolio of Alzheimer's blood tests, which help identify early indications of beta-amyloid and APOE status. AD-Detect strongly physicians' quest to lead in this rapidly evolving Alzheimer's landscape. Emerging therapies for Alzheimer's represent a new era in treatment and testing for this disease. Like many diseases, early intervention in Alzheimer's may promote better outcomes. Our ADDETECT portfolio enables accessible and convenient evaluation of Alzheimer's risk, potentially at early stages, and the monitoring of progression. AD DETECT is now available to our physician customers in the U.S., and we believe it also has the potential to generate strong consumer demand. In addition, we continue to see strong growth in our cardiometabolic, endocrinology, infectious disease, and carrier and prenatal genetic screening services. In June, we completed our acquisition of Haystack Oncology, which positions us to enter the high growth area of minimal residual disease or MRD testing. Haystack has developed a highly sensitive technique for early detection of residual or recurring cancer with the potential to improve outcomes for patients being treated for cancer. The integration of Haystack is on track and we continue to expect to introduce our first MRD test in early 2024. We intend to launch this test from our Oncology Center of Excellence in Louisville, Texas, where we also recently introduced our solid tumor expanded panel for tumor sequencing and therapy monitoring. I'd like to say a little more about our M&A strategy. Haystack is a capabilities acquisition, and as we've said, it will initially be diluted for earnings per share. However, our primary focus in M&A continues to be on traditional hospital outreach purchases and tuck-in lab deals that are accretive to earnings in the first year. To underscore what I said earlier, our M&A pipeline is robust as hospital systems face continued margin pressures due to labor challenges and a shift from inpatient to outpatient care. Turning to operational and productivity improvement, our Invigorate program is well on its way to delivering our 3% annual productivity savings target. As we discussed at Investor Day, Invigorate includes deploying automation and AI to improve quality, efficiency, and service. In the quarter, we implemented our automated microbiology solution in Lenexa, Kansas. Next up is Lewisville, Texas. When complete, four of our major laboratories will use automated microbiology lines with embedded artificial intelligence, identifying positive and negative cases, leading to improved quality and productivity. We are also excited by results of a pilot in our Clifton lab that showed AI speeds data collection in specimen processing and expect to implement this AI solution across all of our major regional labs later this year. In genomics, we're utilizing AI in bioinformatics to improve and speed variant classification and prioritization. These are just a couple of the many examples of our use of AI in automation to continuously improve our operations. In addition, we believe generative AI has great potential to deliver insights and content, not only to better target and serve customers, but also to create innovations that help standardize our lab operations. We are encouraged by preliminary results of pilots that use generative AI in our customer service center to automate caller sentiment analysis and quality control, and in our marketing operations to improve market research and customer targeting. Now, before I turn it over to Sam, I'll close by saying that we always knew 2023 would be a challenging year as we transitioned away from COVID-19 testing and supported the nation's return to care. Our dedicated employees on the front lines and everyone else who supports them have done a magnificent job of bringing our purpose to life. Working together to create a healthier world, one life at a time. I'm really proud to be leading this Quest Diagnostics team. And now I'll turn it over to Sam to provide more details on our performance and our updated 2023 guidance. Sam?