Good day, and thank you for standing by. Welcome to the Labcorp's First Quarter 2022 Earnings Conference Call . Please be advised that today's conference is being recorded. I would now hand the conference over to your speaker today, Chas Cook, Vice President, Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to Labcorp's first quarter 2022 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 Web site at www.labcorp.com, we posted both our press release and an Investor Relations presentation with additional information on our businesses and operations, which include a reconciliation of the non-GAAP financial measures to the GAAP financial measures 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 2022 guidance and the related assumptions, 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 the general economic and market conditions, our response to the COVID-19 pandemic, future business strategies, expected savings and synergies and opportunities for future growth. Each of the forward-looking statements is subject to the 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 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, Chas, and good morning, everyone. Thanks for joining us today. In the first quarter, we continued to advance our strategy through science, innovation and technology. We delivered a solid first quarter despite Omicron, which had a significant impact across both businesses in January and continue to impact drug development outside the US throughout the quarter. We remain focused on growth opportunities while continuing to take actions to mitigate inflation. In the Base Business, each month of the quarter was progressively better than the previous one. This positions us well for continued success throughout the year. In the quarter, revenue totaled $3.9 billion, adjusted earnings per share reached $6.11 and free cash flow was $239 million. Diagnostics Base Business volume increased 4.4% versus last year as both routine and esoteric testing saw a significant uptick after an initial slowdown in January. In Drug Development, our book-to-bill remains strong at 1.23 on a trailing 12 month basis. Our backlog increased to $15.2 billion, an increase of 8.7% compared to last year. COVID-related vaccine work was lower versus a year ago across the segment, with the largest impact in clinical trial testing solutions, or CTTS, which primarily consists of our central laboratories operations. While we continue to see some impact from Omicron and the conflict in Ukraine throughout the quarter, overall Drug Development recovered nicely in March, giving us confidence in our 2022 performance and guidance. Turning now to COVID-19. Our PCR volume was approximately 70,000 per day for the quarter. Testing rates have since declined and we expect the decline to continue for the remainder of the year. Time to results for COVID PCR tests is currently one day on average. We are maintaining our ability to process 300,000 PCR tests per day, pending supplies and labor, to help the…

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 Web site. Revenue for the quarter was $3.9 billion, a decrease of 6.3% compared to last year due to lower organic revenue as the negative impact from foreign currency translation was offset by acquisitions. COVID testing revenue was down 43% compared to COVID testing last year, while the Base Business grew 4.5% compared to the Base Business last year. Operating income for the quarter was $688 million or 17.6% of revenue. During the quarter, we had $67 million of amortization and $39 million of restructuring charges and special items. Excluding these items, adjusted operating income in the quarter was $794 million or 20.4% of revenue compared to $1.2 billion or 28.4% last year. The decrease in adjusted operating income and margin was primarily due to a reduction in COVID testing, higher personnel expense and other inflationary costs, partially offset by organic Base Business growth and LaunchPad savings. The tax rate for the quarter was 23.1%. The adjusted tax rate, excluding restructuring charges, special items and amortization, was 23.4% compared to 24.5% last year. The lower adjusted rate was primarily due to the geographic mix of earnings and stock compensation. We continue to expect the adjusted tax rate for the full year to be comparable with last year at approximately 25%, excluding any impact from potential tax reform. Net earnings for the quarter were $492 million or $5.23 per diluted share. Adjusted EPS, which exclude amortization, restructuring charges and special items, were $6.11 in…

Our first question comes from Brian Tanquilut with Jefferies.

This is , on for Brian. Thanks for taking the question and nice job on the quarter. So as I look at this, acknowledging some of the specific headwinds and appreciate all the color you gave around the numbers for Covance. When we look at it, can you just give us a little more color on how we think about the progression there throughout the year? And can you remind us on -- large pharma has been a point of focus for you in addition to oncology. Can you remind us of exposure there and how that might impact growth rates beyond '22?

So a few things. If you look at the business in general for our Drug Development, we had a good quarter despite some of the headwinds that we knew were occurring. So back in February, you may recall, we discussed that we expected the first quarter to be the toughest because we already have seen some impact from Omicron, and we saw it in both our Drug Development and our Diagnostics business. But the good news is that each month of the quarter got progressively better for both of the businesses. And the interesting thing is if you look at the impact, it impacted parts of our business differently. So for example, our CTTS or our central laboratory business was the most impacted by Omicron, and we saw it there first. And then for Drug Development, we saw -- for Diagnostics, we saw the impact, obviously, in the United States where our business is and that went away very quickly. After January, we saw the Base Business and Diagnostics bounce back very fast. Drug Development, CTTS, was a little bit different because it's a global business, and we saw continued impact from Omicron in parts of Europe. And then as we got to the end of the quarter, we saw some due to Ukraine. As we look at the rest of the year, we're confident because as we looked at March, we saw strength versus January. We saw strength in March versus February and we're on a good run rate now. We believe that there'll be some continued impact from Ukraine in particular in the second quarter. So the second quarter will be a little bit more difficult in the third and fourth quarter, but we expect to continue to see progress as we go through the year.

Our next question comes from Jack Meehan with Nephron Research.

So I have a couple of questions on the Drug Development business. The first is on margins. So understand some of the pressures you talked about at the start of the year. But when I look at some of the peer reports so far this earnings season, it does look like your Drug Development margin pressure was more pronounced than others have reported. So was curious to get your thought as to what might have been unique to the Labcorp business that drove kind of more pressure than others.

As I mentioned this before, we saw some of that pressure starting in the beginning of the year. When we were here in February, we mentioned that. But we have a very large CTTS business, central laboratory business, larger than most others. And we saw the largest impact from Omicron in that business. And I'll give you two examples. One is, if you look at our CTTS, central laboratory business, you saw that the growth rate for that business now that we're providing by segment growth rates, was less than the other segments. That's because we had such a strong first quarter of last year. We were prepared with Omicron to do as much central laboratory work as we did in the first quarter of last year this year, because we saw the impact of Omicron in December and January, and we kept as many people as we could prepared in case the boosters caused a huge amount of volume. It did not cause a huge amount of volume as the boosters came out this year. In fact, it was a lot less than what we saw with the initial vaccines in the beginning of last year. And then the second thing is we have a early development business, ED business, and we saw some impact on inflation in that business, particularly as you think about utilities and research and product costs. We're going to offset that with price reduction -- or price increases but also by cost reductions. And as I said at the beginning of the year, the inflationary pressures hit you all at once and it takes you time to LaunchPad to get the cost out. We saw improvements across all the businesses as we went through the quarter, month-over-month. So therefore, we are confident that we're on a good run rate as we're going through the rest of the year.

Sticking with Drug Development. Can you talk about what impacts the lockdowns in China may be having on the business? Just how are you managing your labs in the region? And has it impacted your access to large molecules -- or large models at all?

If you look at our business in China, first of all, I want to let all of our employees know that we're thinking of them. We're here to support them and doing everything we can to help them. In fact, we have some employees that are basically living in the laboratories right now so that they can continue to keep the work going while the lockdowns are occurring. We have not seen a significant impact on our business due to the lockdowns at the moment but we're going to continue to monitor that very closely. It has not inhibited our ability to do the studies that we need to do at this point in time, Jack.

Our next question comes from Ricky Goldwasser with Morgan Stanley.

So a couple of questions here. First on and just kind of like thinking, you talked about kind of like these headwinds in the quarter, sort of COVID, Ukraine and then inflation. Can you just maybe either quantify each of these areas of headwinds? I think that's going to be really helpful for us as we think about it for the rest of the year. And then on the lab side, I think in the supplemental packet, you compare lab volumes to 2019 baseline, which is very helpful. Can you just give us a little bit more color on the core volume performance versus 2019 by market? I think is down 50 basis points on volume 1Q '22 versus 1Q '19. If you can talk about what you're seeing versus baseline by market or on an organic basis as well.

I'll start with the lab volumes, and then I'll ask Glenn to jump in with regard to some of the quantifications that you asked for. So with regard to Diagnostics, you saw revenue for the quarter was strong. It was about $2.5 billion. The Base Business revenue grew about 5.6% versus last year and then in a compounded rate versus 2019, it grew 3.9%. And if you look at our Base Business volume, it's up about 4.4% versus last year. But I think what's important is if you look at the volume versus 2019, you saw we were about flat. And as you may recall, Ricky, in February, we said that what we saw in January for our Base Business versus 2019 was down 8%. So that tells you the strength that we had in February and March in the Base Business and how we saw it come back so strong, which gives us the confidence. We really didn't see a difference between esoteric -- our non-esoteric business. We didn't see a big geographic change. I mean there are certain breakouts that were happening with Omicron in the northeast of the country for a period of time and then it might have moved to the Southeast. But nothing that I think is important for you know to note. I'd say overall, across esoteric, non-esoteric, across the regions, we've seen a very strong bounce back in our Base Business in February and March. And you see that by the fact that we were flat for the quarter versus 2019 when January was down 8% versus January 2019.

I guess just to follow up a little bit on that, too. So the 8% decline that we saw in January was not compounded. So it was the total decline. But as Adam said, the progression in February and March got us on a compound annual growth rate to be just down to 0.5%, so relatively flat with the expectation as we continue to go through the year. That obviously will become a positive number as we continue to experience the recovery there on a volume basis. So pleased with what we're seeing there. On the Drug Development side, quantifying, call it, the vaccine and the impact of Ukraine were probably the two more meaningful ones that impacted us for the quarter. From a vaccine standpoint, probably around $30 million of headwind from that. And Ukraine probably closer to rounding to around $10 million. So when we think that both of those primarily impacted the CTTS business, obviously affected others as well. But while we were, call it, flat in revenue on a constant currency basis in that business, if you backed out the vaccine related and the Ukraine, we'd be 7% to 8%, call it, organic constant currency growth rate, which would be more in line with what we would have expected the business to do.

And can you just remind us, wwhen we think about the margin, it's kind of like a preclinical central lab versus clinical.

So we don't break out the margins for the businesses. As you saw in the additional material that we provided, we went out and looked, obviously, at our peers and what's provided and just looking at what additional information. And we felt the revenue breakout by business was important and beneficial because you get to see the magnitude that it is for each of the pieces as well as now tracking the growth profile. From a margin standpoint, our belief, and obviously, our peers that do similarly, look at it on a segment basis because there's so much that are shared assets between the businesses that we feel that providing it as a trend, if you will, on the segment is a more meaningful number. And then as you look at the growth rates of the different pieces, you can kind of get a sense of how we're leveraging overall in the businesses.

Our next question comes from Eric Coldwell with Baird.

I feel like we're falling a bit short on the disclosures on why the lab -- or the CRO margin is as poor as it is this quarter. I'm hoping we can get into some details on that. I guess the first question, you talked about early development having some inflation costs, and it sounded like maybe some research model supply access pricing issues. Are you at a -- suffering from being at a disadvantage for not having your own animal model business? Is that one of the bigger issues in early development that you don't have the same supply that perhaps some of your larger peers have?

And obviously, the 11.6% margin, obviously, it's down from where we've been. So when you look at the pieces of it, so the research product is a meaningful part of it. So we're incurring much higher cost for that. And so as Adam commented earlier, from a timing standpoint, we now have to go through change orders. But effectively, we believe that we can pass on those higher costs to the customers and a lot of contracts that's explicit with the research products to do that. So one of the reasons why we're constrained in the quarter was that higher expense without being able to transfer over. We also talked about utility costs. So just general inflationary, but wouldn't diminish as well just the impact from the Ukraine, from the vaccine. And also the first quarter historically has been a lighter quarter relative to how we end the year. And then each quarter, we pick up. So as we commented that first of all, our expectation for the full year continues to be that we'll see margins higher than the prior year. Our expectation, frankly, is that margin should be higher year-on-year beginning in the second quarter and going forward. And what gives us the confidence, and Adam alluded to this earlier, is that when you look at the run rate that we ended in March, even though we still have some of those headwinds passing on some of those costs, we're, frankly, at a margin level that gives us high degree of confidence even for the next quarter, but let alone for the full year that you'll start to see margins back to -- comparable to the prior year would hopefully up a little bit from each of the quarters as we go forward.

And if I could just stay on the same vein and one follow-up, same topic, it's related to central lab. Obviously, shipping, freight transports gone up. I'm not sure to what extent you've been able to pass on those costs, but we also heard this morning from that in their lab operations, they did have some supply component issues, more particularly around complex oncology components in central lab kits. I suspect you've faced a similar experience, but I was hoping you could give some color on that experience, what you're seeing. If it had an impact, how long you might expect that to continue if so?

So if you look at the supply, there were issues in supply chain, I'd say, for the last six months or so, but we were able to find other ways to meet the demand in those kits, but it didn't mean at times there were higher impact to margins because, for example, if it's not a typical kit, you have to do some additional work to get it approved and sometimes you have to do those manually. So we were doing a lot more kits manually than we typically would, particularly if you have to put a replacement piece in there. But the good news is we were able to keep up with the demand from our pharma customers. We're able to meet their needs, which was important to us. But there certainly was some short-term impact as we're doing a lot more kits manually than we historically would do. And when you do more kits manually, then you put in more quality assurance where you check more of the kits to ensure if they're going out appropriately. So there is some expense that's incurred with that, but it didn't impact our customers. And what I would say, Eric, the most important thing to me is that we saw the progression in the margin month-by-month. We don't provide monthly margins, but we look at it very closely. So it's that, that gives me the confidence that we're on the right track and that we're able to meet the commitments that we've set forth.

And Eric, just one last thing on just the supply issue. What we've seen is because we run -- primarily have on a just-in-time inventory level within our CTTS, our central lab business. And obviously, when we started to see the global supply chain issues, it had an impact on us. We've now built up those level of inventories now for three to six months given the -- still the uncertainties of what's going on globally. So we'll carry that higher inventory to obviously make sure we can be focused on meeting the customers' demand and doing it efficiently.

And having our Diagnostic business where a lot of the tubes and the things that you need are very similar, we're able to use supplies across the businesses when appropriate as well.

Our next question comes from Rachel Vatnsdal with JPMorgan.

This is Noah on for Rachel. I just wanted to dig in a little bit more into the backlogs. And could you maybe provide any additional color on your current customer base and as well as your backlog and sort of the composure by end market for like pre-revenue biotech versus pharma companies? And then maybe any additional metrics that you can think of, of how we should think about that percent trending throughout the year and going forward?

First of all, I'd say that the RFPs that are coming through are very strong. And if you look at our cancellation rates, they're very low. So we feel very good about the flow of business and the flow of RFPs and the flow of the trials coming. Our trailing 12-month book-to-bill was strong at 1.23. As you may recall, I say that we need to be at 1.20 or slightly higher and we remain at that number. And then if you look at our backlog, we have $15.2 billion, which was almost a 9% increase versus the prior year. Our net orders were $7.2 billion. If you look across the businesses, the breakdown by customer type is a little bit different. So for example, in early development, we have more biotech and smaller to midsized biotech than we do large pharma. If you look at our CTTS, which is our central lab, or CDCS, which is our clinical business, we tend to have more pharma than we do the small biotechs or the middle-sized biotechs. But I would say across the three businesses, we feel good about the RFPs that we're seeing. We feel good about the backlog that we're seeing. And we're confident that the backlog supports the long-term guidance that we provided.

And you're seeing that sort of continue …

Yes, I expect that to continue, that we'll continue to have a strong book-to-bill that will continue to be above the 1.2 threshold that we anticipate to be. So I feel good about that.

Our next question comes from Derik De Bruin with Bank of America.

This is Jon, on for Derik. Appreciate the new disclosures, but I wanted to ask what your underlying assumptions are for the full year in your ED, CTTS and CDCS. We know that your early stage and late stage should be going faster than central lab. But yes, wanted to look into your assumptions there. And also in mid-April, FDA issued a warning about the possibility of false results from NIPT. I was wondering what sort of exposure you have there through Sequenom, that'd be great.

So I'll start with the NIPT. It's a very small -- very, very, very small amount of revenue. It's a test that we do for screening and it's utilized in the United States, but it's not very large at all. So we'll continue to make sure that we have the test available, that we are making it available to physicians that are looking to use those tests, but it's not -- there's no impact in terms of our overall total business. With regard to the individual segments, we believe the fastest growth segment in revenue is going to be clinical, the CTTS -- or the CDCS business because we're not necessarily the market leader there and we have the ability to grow fastest there. If you look at the slowest growing business of the three, it will be CTTS because we are the market leader there. We have a large market share in that business. So there's not as much room for growth. And then the ED business is somewhere in between because we're number one to two. And then sometimes ED grows a little bit faster than the CDCS, and it goes back and forth.

We have a question from Patrick Donnelly with Citi.

Obviously, a lot covered on the CRO piece. So maybe I'll ask on the lab side. Just on the COVID assumptions, appreciate the transparency on the range there. Can you just talk about the cadence through the year? Are you assuming kind of a bump near the end of the year around flu season? How are you thinking about that kind of as we go out even in the endemic phase in terms of seasonality? I'm just trying to figure out the best way to model that piece.

As we said, for the first quarter, we averaged 70,000 tests per day. And by the end of the quarter, that was down significantly than where it was at the beginning of the quarter. And we expect there's going to continue to be a decline through the year. The reason that we give a range, and we've given a range of down 60% to 70% versus last year, is because there's a whole range of possibilities on how you can get to that range. So one of the possibilities is, as you say, there's a uptick in November around the flu season. But at that point in time, if there's not the emergency declaration, the price might be lower. If the emergency declaration continues, but there's not an uptick in November, the price would be at where it is now. So the bottom line is the 60% to 70% range that we've given has a whole bunch of ways that you can stay within there. My assumption is that the emergency declaration will continue through this year. We'll see if that occurs or not and I think volume will continue to decline throughout the year.

Thank you. And there are no other questions in the queue. I'd like to turn the call back to Adam for closing remarks.

Thank you, Catherine. So first of all, thank you again for joining us today. I'm really encouraged by our progress and the important work of our more than 75,000 employees around the world. I can tell you they are our greatest asset and we're focused on supporting our employees that are facing additional complexities and difficult situations. We have people in Shanghai, Ukraine, Russia, and we're really making sure that we're thinking about them as they face these complexities. We look forward to speaking with you soon and we appreciate your time today. So thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.