Laboratory Co. of America Q2 2023 Earnings Call Transcript

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to Labcorp's Second Quarter 2023 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to Chas Cook, Vice President of Investor Relations. Please go ahead.

[Chas Cook, Vice President - Investor Relations at Laboratory Co. of America]

Thank you, operator. Good morning, and welcome to Labcorp's second quarter 2023 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 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 2023 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 spin-off of Fortrea and its treatment as discontinued operations, and general economic and market conditions, future business strategies, expected savings and synergies, including from the LaunchPad initiative, acquisitions and other transactions 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 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.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Thank you, Chas. Good morning, everyone. Before I cover our second quarter results, I want to first thank Chas for his leadership in Investor Relations over the last several years. Chas will be moving into the role of Vice President of Financial Planning and Analysis effective in August. I also want to take this opportunity to welcome Christin O'Donnell [Phonetic], an accomplished leader in our finance organization, who has been appointed to Vice President of Investor Relations. Both Chas and Christin will be in attendance at our upcoming Investor Day on September 14th and we look forward to seeing many of you in person.

Beginning this quarter, Labcorp is reporting results without the inclusion of Fortrea, which is now an independent publicly-held company as a result of our successful spin on June 30th. Moving forward, we will report our Laboratory Services business under two segments: Labcorp Diagnostics Laboratories and Labcorp Biopharma Laboratory Services. Biopharma Laboratory Services consists of two businesses: our Central Laboratories business, which represents about 70% of segment revenue; and Early Development Research Laboratories, which although is smaller is also a leader in the market.

In the second quarter, Labcorp delivered exceptional year-over-year growth in our Diagnostics Laboratories Base Business and generated strong growth in Central Laboratories. Early Development Research Laboratories continued to be constrained by industry-related supply chain issues that we expect to be resolved in the third quarter. We enter the second half of the year with clear operational focus and enhanced financial flexibility to advance our strategy. We see strong momentum in the Base Business and are excited about the growth opportunities before us.

Now, let's discuss our second quarter performance. In the quarter, revenue totaled $3 billion, adjusted earnings per share was $3.42 and free cash flow from continuing operations was $177 million. Our business is performing well, with overall revenue increasing 4% compared to prior year. Base Business revenue grew 13% to prior year. Diagnostics Laboratories Base Business revenue grew 16% driven by both strong Base Business volume and Ascension.

For Biopharma Laboratory Services, second quarter revenue grew 3% driven by Central Laboratories business, which grew 9%, partially offset by Early Development Research Laboratories, which was down 7% due to NHP supply constraints. We expect Early Development Research Laboratories to grow in the second half of the year versus prior year. And we do not expect impact from NHP supply constraints for the rest of the year.

Enterprise Base Business margin was slightly down compared to the prior year due to the impact of Ascension, which we discussed previously. Diagnostic Laboratories Base Business margin increased versus prior year, if you exclude Ascension. And Biopharma Laboratory Services margins expanded, benefiting from Central Laboratories' strong volume increases. Glenn will provide more detail on our quarterly results, as well as our updated 2023 outlook in just a moment.

As we mentioned at the top of the call, we completed the spin of Fortrea business on June 30th. I want to thank both the Labcorp and Fortrea teams for their tireless effort in achieving this milestone that positions us to better meet customer needs and delivers immediate value to our shareholders. We announced that we'll begin an accelerated $1 billion share repurchase program. We'll pay off $300 million of maturing debt and we'll utilize the remainder of the $1.6 billion dividend to Labcorp from Fortrea to be returned to shareholders through additional future share purchases and/or cash dividends. The completion of the spin brings the growth opportunities of our laboratory businesses into full focus. We are poised to leverage our deep science, technology and innovative laboratory network to drive growth and to deliver superior solutions to our customers.

We are also in a very strong position operationally to advance our laboratory business. Here are several recent examples, we progressed our enterprise strategy in the second quarter. We continue to drive growth through healthcare system partnerships. Earlier this month, we finalized our strategic relationship with Jefferson Health, one of the largest health systems serving the greater Philadelphia area and Southern New Jersey. This new collaboration will focus on future research and innovations to improve health outcomes.

In May, we announced the next step in our long-standing relationship with Providence Health and Services to acquire its outreach laboratory business and select assets in Oregon. This transaction builds on our more than 20-year history with the Providence family of organizations.

Finally, earlier in July, we announced a comprehensive lab relationship with Legacy Health in Portland, Oregon. Under this agreement, Labcorp will acquire select assets of its outreach laboratory business, including laboratory facilities and equipment and manage Legacy's inpatient hospital laboratories.

These relationships create immediate value for hospital systems, for patients, for communities, while also providing significant growth opportunities for Labcorp. The partnerships meet our criteria of being accretive to earnings and cash in the first year. Although the margins are typically lower than the Company average early on, they do improve over time.

We are also pleased with our progress integrating hospital partnerships and acquisitions. For example, with Ascension, which we announced in 2022, we continue to see reduced employee turnover and improved performance due to our partnership. This scalable model connects our two mission-driven organizations to provide care teams with information to make the best possible decisions for patients.

We continue to look for regional laboratory acquisitions in geographies where we can increase access to diagnostics and expand capabilities. As an example, this week, we completed our acquisition of certain assets of Enzo Biochem's Clinical Laboratory division in New Jersey, which serves the New York Tristate healthcare communities. We have a very robust pipeline of potential hospital and local laboratory acquisitions and we'll continue to focus energy and resources on this important opportunity for growth.

Additionally, we are investing in innovation and technology that supports diagnostic and drug development testing across disease areas including cancer, Alzheimer's and other diseases. In May, we commercially launched a new liquid biopsy test, enabling target therapy selection for patients with advanced or metastatic solid tumors. The Labcorp plasma-focused test allows oncologists to better evaluate tumor cells and manage the care of patients through a precision therapy plan.

Additionally, our portfolio of kit solutions from the acquisition of PGDx is gaining momentum with major health systems and academic centers. Our solutions can enable operational and financial efficiencies that are making us a key partner for hospitals and health systems as they execute on their precision medicine programs.

Recently, we were the first laboratory to launch a test for pTau-181 in plasma, an important blood test for potential Alzheimer's patients, demonstrating symptoms of dementia. Our teams are at the forefront of Alzheimer's testing as the number of people impacted by this disease is expected to double over the next few decades.

In April, we broke ground on the expansion project of our new central laboratory facility in Japan. When completed at the end of 2024, the facility will enhance our central laboratory testing capabilities to support drug development. We also opened two new facilities in China, a new kit production facility in Suzhou and an immunology and immunotoxicology lab in Shanghai.

In addition, we delivered impactful digital solutions to help our customers understand, manage and improve their health. As part of our commitment to improving the customer experience, we launched an advanced e-commerce platform to improve consumer engagement with Labcorp. The platform will support all of our businesses including Labcorp OnDemand, which offers consumers access to many of Labcorp's innovative test online nationwide.

Lastly, I speak on behalf of the entire management team when I say that we are excited about our upcoming Investor Day on September 14th in New York City. This event will highlight our go-forward strategy, offer business overviews and provide a longer term financial outlook. We have a value-creation roadmap that we are excited to share.

Today marks a new chapter in our Company's history. We have a team of more than 60,000 global employees with united focus. Labcorp's Base Business is performing very well. We're executing on our growth strategy and we're leveraging Labcorp's financial strength, as well as operational focus to improve health, to improve lives, while also increasing shareholder value.

With that, I'll turn the call over to Glenn.

[Glenn A. Eisenberg, Executive Vice President and Chief Financial Officer at Laboratory Co. of America]

Thank you, Adam. I'm going to start my comments with a review of our second 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 have also included additional business information that can be found in our supplemental deck on our Investor Relations website.

With the spin completed on June 30, we have treated Fortrea as discontinued operations in the second quarter. All my comments will reflect the current business and have been adjusted to exclude Fortrea in prior periods for comparative purposes.

Revenue for the quarter was $3 billion, an increase of 3.8% 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 12.7% compared to the Base Business last year, while COVID testing revenue was down 88% as we performed an average of 3,000 PCR tests per day in the quarter. Organically, in constant currency, the Base Business grew 10.8%, benefiting from the Ascension lab management agreement, which contributed approximately 5% of the organic growth.

As a reminder, the outreach business that we acquired from Ascension is treated as an acquisition, while the lab management agreement is treated as organic growth.

Operating income for the quarter was $266 million or 8.8% of revenue. During the quarter, we had $52 million of amortization and $131 million of restructuring charges and special items, primarily related to the spin of Fortrea, acquisitions and LaunchPad initiatives. Excluding these items, adjusted operating income in the quarter was $448 million or 14.8% of revenue compared to $548 million or 18.7% last year.

The decrease in adjusted operating income was due to lower COVID testing. The margin decline was also negatively affected by the mixed impact from the Ascension lab management agreement. Excluding these items, margins would have been up slightly as the benefit of demand and LaunchPad savings were partially offset by higher personnel expense and increased R&D investments in oncology.

Our LaunchPad initiatives continues to be on track to deliver $350 million of savings over the three-year period ending 2024. In addition, the Company is implementing actions in the third quarter to take out $25 million of annualized stranded costs throughout the enterprise as a result of the spin.

The tax rate for the quarter was 24.3%. The adjusted tax rate for the quarter was 23.9% compared to 25.3% last year. The lower adjusted rate was primarily due to R&D tax credits. We continue to expect our full-year adjusted tax rate to be approximately 24%.

Net earnings for the quarter from continuing operations were $155 million or $1.74 per diluted share. Adjusted EPS were $3.42 in the quarter, down 15% from last year due to lower COVID testing earnings as Base Business adjusted EPS was up approximately 18%.

Operating cash flow from continuing operations was $280 million in the quarter, which was burdened by approximately $65 million of spin-related items. Operating cash flow of $280 million is down from $548 million a year ago, primarily due to lower COVID testing earnings and spin-related items. In addition, higher working capital requirements that are timing-related were partially offset by higher Base Business earnings.

Capital expenditures totaled $103 million, down from $140 million last year. For the full year, we continue to expect that capital expenditures will be approximately 3.5% of Base Business revenue. Free cash flow from continuing operations for the quarter was $177 million, including approximately $65 million of spin-related items.

The Company invested $137 million in acquisitions and paid out $65 million in dividends. While the Company did not repurchase shares in the second quarter, we announced $1 billion accelerated share repurchase program that we expect to put in place in the third quarter and be completed by year-end.

At quarter-end, we had $1.9 billion in cash, including the $1.6 billion dividend from Fortrea spin, while debt was $5.3 billion. Our leverage was 2.6 times gross debt to trailing 12 months adjusted EBITDA.

Now, I'll review our segment performance beginning with Diagnostics Laboratories. Revenue for the quarter was $2.3 billion, an increase of 3.8% compared to last year, driven primarily by organic growth of 1.8% and acquisitions of 2.2%. The Base Business grew organically by 13.5% compared to the Base Business last year, while COVID testing revenue was down 88%. The Ascension lab management agreement contributed approximately 7% of the growth.

Total volume increased 1.4% compared to last year as acquisition volume grew 2.5%, partially offset by the organic volume of minus 1.1% due to COVID testing. Base Business volume grew 8.1% compared to the Base Business last year, including the benefit from acquisitions of 2.7%. The strong year-over-year growth rate was also aided by lower-than-normal volume in the second quarter of 2022 due to Omicron. Price mix increased 2.4% versus last year, primarily due to organic Base Business growth of 6.8%, partially offset by lower COVID testing of 3.9%. Base Business organic price mix was up 8% compared to Base Business last year, benefiting from the Ascension lab management agreement of approximately 7%.

Diagnostics Laboratories' adjusted operating income for the quarter was $410 million or 17.5% of revenue compared to $516 million or 22.9% last year. The decrease in adjusted operating income was due to lower COVID testing, while the margin decline was also negatively impacted by the mix impact from Ascension. Base Business margin excluding the mix impact of Ascension was up approximately 40 basis points as the benefit of organic growth and LaunchPad savings were partially offset by higher personnel expense.

Now, I'll review our segment performance of Biopharma Laboratory Services. Revenue for the quarter was $699 million, an increase of 3.1% compared to last year, primarily due to an increase in organic revenue of 2.1% and foreign currency of 1.5%. The increase in organic revenue was negatively impacted by approximately 5% due to the previously communicated NHP-related supply constraints in our Early Development Research Laboratories business.

Adjusted operating income for the segment was $105 million or 15% of revenue compared to $93 million or 13.7% last year. The increase in adjusted operating income and margin was due to organic demand and LaunchPad savings, partially offset by higher personnel expense. We ended the quarter with backlog of $8 billion and we expect approximately $2.5 billion of this backlog to convert into revenue over the next 12 months.

Now, I'll discuss our 2023 full-year guidance, which assumes foreign exchange rates effective as of June 30, 2023 for the full year. The enterprise guidance also includes the impact from currently anticipated capital allocation with free cash flow targeted for acquisitions, share repurchases and dividends. In addition, the guidance includes the $1 billion accelerated share repurchase program with proceeds from the spin. Excluding Fortrea, our current enterprise guidance for revenue, earnings and cash flow remains unchanged from our prior guidance given in April.

Enterprise revenue was in line with Diagnostics Laboratories slightly up, while Biopharma Laboratory Services is slightly down. We expect Enterprise revenue to grow 1.5% to 3% compared to 2022. This increase reflects the Base Business growing 11.3% to 12.6%, while COVID testing is expected to decline 85% to 89%. We expect Diagnostics Laboratories revenue to be up 0.5% to 1.5% compared to 2022. This is a 25 basis point increase at the midpoint from our April guidance as the Base Business outlook has improved, partially offset by lower COVID testing. This guidance includes the expectation that the Base business will grow 13.2% to 14.2%, which includes approximately 5% growth from Ascension. The Base Business has improved from our April guidance based on stronger demand. We continue to expect Diagnostics Laboratories Base Business margin to be slightly up in 2023 versus 2022, including the unfavorable mix impact from Ascension.

We expect Biopharma Laboratory Services revenue to grow 3% to 4.5% compared to 2022. This guidance includes the positive impact from foreign currency of 150 basis points. The midpoint of our guidance range is down approximately 75 basis points from the midpoint of our April guidance, but implies around 9.5% growth in the second half of the year as we expect favorable growth in both Central Laboratories and Early Development Research Laboratories. We also expect that the segment margin will be flat to slightly up in 2023 compared to 2022.

Our guidance range for adjusted EPS is $13 to $14, which is consistent with our April guidance, excluding Fortrea and including the impact from the accelerated share repurchase program. Free cash flow from continuing operations, excluding spin-related items, is expected to be between $800 million to $1 billion, in line with our prior guidance, excluding Fortrea.

In summary, we expect to drive continued profitable growth in our Base Business. We expect to continue to use our free cash flow generation for acquisitions that supplement our organic growth, while also returning capital to shareholders through our share repurchase program and dividends.

Operator, we will now take questions.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] And our first question will come from the line of Jack Meehan with Nephron Research. Your line is now open.

[Jack Meehan, Analyst at Nephron Healthcare Investment Research]

Thank you. Good morning.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Good morning, Jack.

[Jack Meehan, Analyst at Nephron Healthcare Investment Research]

My questions are on the new Biopharma Lab Services segment. Number one, I was curious, if you could comment on just how much visibility you have into the improvement you're looking for in the second half of the year for Early Development Research Labs and just give us an update in terms of the supply situation for NHPs.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Yeah. So, first of all, I'll answer the second part first. So we're in good shape for the rest of the year with NHP. We don't expect any additional impact as we go through the second-half.

And then, to answer the first question, if you just look at the midpoint of our guidance, it would imply about a 9.5% increase year-over-year. And that's going to come from both segments, the NHP segment, as well as from the clinical laboratory -- the Early Development Research Laboratory, as well as the clinical research laboratory segments.

[Jack Meehan, Analyst at Nephron Healthcare Investment Research]

Great. Okay. And then, maybe for Glenn, just for the segment overall, could you talk about expectations for the second-half margin ramp in Biopharma Lab Services and just how we should be -- if you can, humor me any thoughts on the leaping off point for 2024?

[Glenn A. Eisenberg, Executive Vice President and Chief Financial Officer at Laboratory Co. of America]

Yeah. Hi, Jack. So when we think about margins, again, specifically for biopharma, obviously, we expect to see a second-half margin year improve over the first-half and improve year-over-year. So again benefiting from the topline growth that Adam said was kind of in the implied revenue growth of 9.5% for the segment. We will get good leverage over that, as well as benefiting from LaunchPad. We said that for the full-year for Biopharma, margins will be flat to slightly up, again consistent with frankly Diagnostics margins being up a little bit and for the Enterprise as well, including the negative impact from Ascension. So we feel good about margins driven off of the topline.

When you look at the quarter, we felt actually very good, with a 15% margin in the quarter for Biopharma, realizing that we had very strong growth coming from Central Lab that really helped it, but also we had negative growth from Early Development Research, which constrained it. So we feel good about where we are kind of as a run rate. And if we can maintain that level of margin that will get us again higher margins for the full year, as well as year-over-year.

[Jack Meehan, Analyst at Nephron Healthcare Investment Research]

Thank you, Glenn.

[Operator]

Our next question comes from Lisa Gill with J.P. Morgan. Your line is now open.

[Lisa Gill, Analyst at J.P. Morgan Securities]

Hi. Good morning.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Good morning, Lisa.

[Lisa Gill, Analyst at J.P. Morgan Securities]

Good morning. It's nice to talk to you guys again. Thanks for taking my question. When I look at your expectations and I look at the revenue growth rate, can you talk about utilization trends? Do you think that there is still some level of pent-up demand? How do I think about this versus 2019 baseline, which would be kind of my utilization question?

And then secondly, how do I think about reimbursement trends, especially on the managed care side? I know two years ago we talked a lot about shift towards some type of value-based economics. Are we finally there? And if so, can you maybe talk about some of the things that you're seeing in the market?

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Yeah, I'll let Glenn answer the first question. I'll take the second one. Lisa, if you look at the reimbursement trends, what I would say is that it continues to be a relatively stable environment, and I feel good about our interactions with the payers, I feel good about our contracts that we have in place. I wouldn't say yet we are there for value-based contracts and so forth. I think, there's still a lot of experimentation that happens, but we don't see a lot of significant progress.

With all that said, I believe that we're in a very good position moving forward with the payers and there's nothing that I would expect to be unexpected. What we are watching closely, obviously, is PAMA, to see what happens there, and government reimbursement on certain areas, but overall, remains a pretty healthy environment.

[Glenn A. Eisenberg, Executive Vice President and Chief Financial Officer at Laboratory Co. of America]

And Lisa, on the utilization, so as you think about the quarter, obviously, from a Base Business organic standpoint, we were up 13.5%. So, obviously, very strong growth when you look year-on-year, but including the benefit from Ascension, so think about kind of the same-store sales if you will, growth, excluding the impact of Ascension were up around 7%, so higher-than-normal growth rates in part given the comp that we would have had a year ago. And of that around 5.5% of that is coming from our volume and the other 0.5% call it from favorable price mix.

So as you think about it relative to 2019 kind of pre-pandemic, are we tracking at a more normal level, we would say, we are now. If you looked at the compound annual growth rate compared to 2019, again, with that 7% year-on-year growth this year would have been more like around a 4% compound growth rate compared to 2019, with volume between, call it, 1%, 1.5% growth rate compared to 2019. So, as we think about volume normally historically of one to two, we're kind of fitting squarely in the middle of that. So it says, we're tracking more normal, but the year-over-year is benefiting from some softness last year.

[Lisa Gill, Analyst at J.P. Morgan Securities]

That's helpful. Thanks so much.

[Operator]

Thank you. One moment for our next question. Your next question comes from the line of A.J. Rice with Credit Suisse. Your line is open.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Good morning, A.J.

[A.J. Rice, Analyst at Credit Suisse Group]

Hi, everybody. Maybe just asking, I know a discussion point over the last year has been labor. I just wondered, if there is updated thoughts on whether the pressure points of the last year is still the same, is there any updated thoughts on general average wage increases? And I want to just make sure, I understood on that $25 million of stranded cost, is that in the Biopharma Lab Services or is that held somewhere else and what's the timeframe for whittling that down?

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Yeah. So I'll start with labor, A.J. I mean, obviously, labor has been an issue that, I think, all of healthcare has been struggling with a bit since COVID. What I would say is if we look at our turnover rates although they're still higher than they were prior to COVID, they actually look better this year than they did last year, and we're seeing some improvement. Wage inflation continues to be an issue and we continue to use LaunchPad savings to offset that as best we can.

As we look at the $25 million stranded costs that we're going to be removing, it's enterprise-wide. By the end of this year will be on the run rate to remove that for next year. But, importantly, we're still committed to the $350 million of LaunchPad savings that we've talked about in the past despite the fact that we no longer have the clinical business, where some of that cost savings obviously would have come from. So we are going to continue to look for ways to reduce cost across the enterprise to offset some of the other pressures that we've talked about.

[Glenn A. Eisenberg, Executive Vice President and Chief Financial Officer at Laboratory Co. of America]

Yeah, A.J., just adding to that, and more specifically, the $25 million of annualized cost -- stranded costs that we'll take out this year, to your point, while it will be throughout the whole enterprise, obviously, a lot of it initially will come from the Biopharma segment. So this is the, call it, the support that we have at the segment level that's supporting -- was all three of the businesses that included the Fortrea business, now supporting the two. So we'll look to take out a lot of those stranded costs.

In addition, we'll take out some stranded costs that's in corporate unallocated that wouldn't have been allocated to the -- any other businesses. Having said that, when you look at our corporate unallocated number, we did around $66 million in the quarter. We have been seeing an increase in that relative to the R&D investments we're making on oncology, so very targeted investments that will kind of be offset that growth by some of the costs coming out of corporate unallocated due to stranded. So as we think about the run rate of corporate unallocated that $66 million should still hold true. So, it's roughly around 2.2% of our revenues.

So as we think longer term, in addition to the $25 million that we're taking out, which is more of a short-term cost to take out of the stranded, we feel there's also some other opportunities to take out additional costs within the corporate unallocated as we go forward and then obviously look to see the Company through organic growth, as well as acquisition growth as we grow as a company, we will be able to leverage the infrastructure and the cost structure we have there even more.

[A.J. Rice, Analyst at Credit Suisse Group]

Okay. Thanks a lot.

[Operator]

Thank you. One moment for our next question. Our next question comes from the line of Eric Coldwell with Baird. Your line is now open.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Eric, good morning.

[Eric Coldwell, Analyst at Robert W. Baird]

Hey, good morning. First, if you don't mind, I'm going to ask two. On the $25 million cost action, the incremental, does that represent -- or what portion of the stranded cost does represent? I assume, it's not the full amount, but could you tell us how that stacks up compared to the total?

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Yeah, there's about $45 million of stranded costs, give or take couple of million and we're going to -- we have a path forward and we've identified the $25 million of that.

[Eric Coldwell, Analyst at Robert W. Baird]

Okay. Perfect. And then my first question was really going back to the NHP. Surprising to hear you say, you don't expect a headwind or have no issues there in the back-half. I'm curious, how that is? Is it due to new supply access that you've been able to get your hands on? Is it pricing? Has something changed in the market that's allowing you to work around the obvious Cambodian issue, just curious more on the mechanics of how you do not see a headwind from NHPs in the back-half?

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Yeah, Eric, first, I want to say is as we look at the studies that we have for the back-half, we already have the NHPs that we need to support the studies. When we first realized this issue, we immediately began to look for alternative suppliers to ensure that we would have capacity. The reason it took us through the first-half of this year is because even when you receive the NHPs, there's an acclamation period before you can utilize them in studies. So we've worked through that. And based upon what we have today, we feel confident in the NHP trials going through the second half of the year, which is why at the midpoint of the guidance, we feel comfortable of 9.5% for the Biopharma Laboratory business.

[Eric Coldwell, Analyst at Robert W. Baird]

Is there a -- Adam, is there a pricing component on top of that, that would be incremental year-over-year that perhaps the volume is not quite equivalent to last year, but with additional pricing, you're getting to -- you're able to not have a year-over-year headwind.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Yeah, so what I would say is, there -- it is more costly today for NHPs than it was in the past, much of that cost can be passed on to the customer. With that said, however, the margin on that cost is not able to be passed along. So it does impact margin a bit, but it doesn't impact us negatively. We can pass upon the increased cost.

[Eric Coldwell, Analyst at Robert W. Baird]

Okay. Thank you very much.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Yeah. Thank you, Eric.

[Operator]

Thank you. One moment for our next question. Our next question comes from Brian Tanquilut with Jefferies. Your line is now open.

[Brian Tanquilut, Analyst at Jefferies & Company, Inc.]

Hey, good morning, guys. Just one question. Really appreciate the color that you've shared on the -- on your progress or success with hospital partnerships. Just curious what those incremental conversations are with and what the pipeline looks like and what are hospitals looking for now as they try to figure out lab strategy and who to partner with, because, obviously, you're not just the only one looking for deals in this space? Thanks.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Yeah. Thanks, Brian, and good morning. We're excited about the success that we've had with the hospital partnerships, I mentioned the three just in this last quarter that we were able to move forward with Jefferson, Legacy and an additional part of Providence, and the pipeline remains very strong. As I look at the pipeline of potential hospital deals, I'm excited about the opportunities before us. I think the hospitals are looking for several things.

First and foremost, you have to be able to give them patient continuity. They need to make sure that there is no impact to their patients if they do a laboratory agreement. Second thing is science, innovation, technology. They want to find ways to actually get better science, get better the information faster so they can get better patient care as they move forward. The third thing that they're obviously looking for is to ensure that there is the ability to kind of have a long-term relationship. So I mentioned Providence, the 20-year relationships, these are long-term deals, they take a long time to get up and running and you want to make sure you choose the right partner that's going to be a long-term partner. And as I look forward into the future, this will be a significant area of focus for Labcorp as I think it represents a tremendous growth opportunity.

[Brian Tanquilut, Analyst at Jefferies & Company, Inc.]

Awesome. Thank you, Adam.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Yeah. Thank you.

[Operator]

Thank you. One moment for our next question. And our next question comes from Kevin Caliendo with UBS. Your line is open.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Good morning, Kevin.

[Kevin Caliendo, Analyst at UBS Group]

Good morning, guys. Thanks for taking my question. I just want to make sure I understand the bridge. You said that your guidance is unchanged, excluding Fortrea and excluding the ASR, which is going to start sometime in the third quarter. But that also includes $45 million of stranded costs, $25 million of which are going to come out, and maybe higher labor expenses. I guess is there anything else? Is there any contribution from Enzo or lower COVID or anything else that's changed from your assumptions when you provided it in April? Just trying to bridge to get to where we are and if those were the only inputs that we should be thinking about.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Go ahead, Glenn.

[Glenn A. Eisenberg, Executive Vice President and Chief Financial Officer at Laboratory Co. of America]

Yeah. So, hi, Kevin. So you're right. So as we went back and obviously looked at the current outlook, we said that overall at the enterprise level, consistent at the midpoint with revenues, earnings, cash flow, and we obviously talked a bit about some pluses and minuses within the businesses that made up at the enterprise level, where we were excluding Fortrea. When you work down to the earnings, similar. So we had the earnings that we would have had in our outlook, we backed out the earnings in April, if you will, taking out Fortrea, but obviously we have the cash from the spin that we added back in there and so from an earnings and then similarly cash flow at the $900 million free cash flow from a continuing ops, again excluding spin, excluding Fortrea. So all of those would have been in line with the expectations that we had in April.

When you look at acquisitions, so Enzo, in particular, so Enzo, we talked about that free cash flow in our guidance. The free cash flow we generated in the year is between M&A, share repurchases and dividends. So there is a portion of that capital that's in M&A that we include in the Enterprise revenues and that we don't include it in the segment revenues until those transactions are actually completed and then we move them down. It wouldn't change the Enterprise number, but it will affect, if you will, kind of a segment.

Similarly, with lower COVID than what we were expecting in April that's being absorbed by stronger Base Business demand in Diagnostics. So favorable diagnostics on the upside, a little softness within the Biopharma Services and little softness in COVID, but netting out to the enterprise. So that's how we kind of come back to the consistency, if you will, if they're in lines with the pluses and minuses. And LaunchPad again, we talked about is continuing on track.

So when we think about the labor markets, really no change in our viewpoint from labor. I mean, frankly, our attrition rates are tracking better than they have been a year ago even though it's still higher than what we would have seen pre-pandemic. The cost -- the inflationary costs really haven't changed much from where we were thinking they would be in April. So that's frankly, we would say, kind of in line with where we would have thought. So overall, we feel again good about what we thought our businesses were going to do this year, continues to be that same case.

[Kevin Caliendo, Analyst at UBS Group]

That's super-helpful. If I can ask a quick follow-up to Eric's question, understand that you have visibility on the second-half for NHP in early stage. And that may have been a run-through from the first-half, and with some of the delays in the supply. I guess, my question is, what's happening to demand going forward? Like I know you had visibility on these contracts, but what's happening with demand beyond that as you look forward into '24 or the second half of the year for new business and what's happening with the pricing in that market now with the supply coming back online?

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Yeah. So let me give you some context [Indecipherable] narrow it down to exactly answer your question. Broadly, if you look across Biopharma Laboratories, we feel good about the book of business that we have, we have a book-to-bill of 1.22 trailing 12-month book-to-bill of 1.22. And it's important to note, with the new mix of business that we have, having Early Development and having our Central Laboratories, a book-to-bill of 1.1 to 1.2 is healthy. So the book-to-bill is healthy.

If we look at our Central Laboratory business, and orders and RFPs, it continues to be very strong and robust. If we look at our Early Development, we still continue to have significant number of RFPs, about the same as what we've seen before. But in the very emerging and smaller biotechs, we are seeing some pressure, particularly as some of them are canceling studies and so forth. Overall, we continue to see very good demand as we walk into next year. When we look at our trailing 12-month book-to-bill, it gives us significant confidence as we go into next year. And the good news is that if you look at the business overall, we are very much skewed towards large pharma, large biotech, when we look at the overall laboratory business.

[Kevin Caliendo, Analyst at UBS Group]

Thanks, guys.

[Operator]

Thank you. One moment for our next question. Our next question comes from Derik de Bruin with Bank of America. Your line is now open.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Good morning, Derek.

[John, Analyst at Bank of America Merrill Lynch]

Hey, good morning. This is actually John on for Derek.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Hi, John.

[John, Analyst at Bank of America Merrill Lynch]

Hey, good morning. So you've talked about your capital allocations. Of course, there is a share repurchase of $1 billion, there are dividends to be paid. And you talked about the outreach labs and inpatient hospital lab that you've acquired. I wanted to ask, what other kinds of assets you're looking at perhaps in terms of in the field, in advanced diagnostic beyond PGDx?

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Yeah, thanks for the question. And you're exactly right. Our capital allocation, we focus right now, we have a $1 billion accelerated repo program. We've got our dividend that we're committed to. We're going to pay down some maturing debt, and at the same time, we have significant opportunity with hospital laboratories, as well as local hospital -- local laboratories as well. And that's the primary focus of what we see in the near-term.

I don't see us doing anything that would be a significant deal outside of our core expertise. We're focused on our core and maximizing our core. And as I look at the other parts of our business, I feel like we have a good portion of what we need. There doesn't seem to be anything strategically that we're missing. So it's really going to be about the hospital, local laboratories primarily.

[John, Analyst at Bank of America Merrill Lynch]

I appreciate that. And you briefly mentioned, PAMA. So wanted to ask what your expectation for PAMA for this upcoming year is and any updated thoughts on SALSA as well.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Yeah. So, we are hopeful that there is a path forward on SALSA. ACLA, the trade organization is working on that. But at the same time, we realize that we've got to be prepared in case PAMA does get implemented again next year. So when we think about next year, we've built into the plan, about $75 million of downside due to PAMA. I'm hoping that we won't realize that, but we have to create our business model assuming that does occur and have our cost base reflected what we would do if that does happen. I am optimistic that people realize the importance of our industry, the importance of what we do and therefore, PAMA will not be implemented in the way it has in the past, but that's not what we're planning for as we move forward.

[John, Analyst at Bank of America Merrill Lynch]

Appreciate it. Thank you.

[Operator]

Thank you. One moment for our next question please. Our next question will come from the line of Patrick Donnelly with Citi. Your line is now open.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Good morning, Patrick.

[Patrick Donnelly, Analyst at Smith Barney Citigroup]

Yeah. Thanks for the question. Hey, how are you? Maybe just a quick one on Ascension. Can you just talk about how that's tracking up, both on the revenue side and then, you mentioned obviously the margin piece? I know, it's a big focus in terms of ramping that up to corporate average and then some -- so yeah, I would love just an update on Ascension, how you're tracking and the cost side as well?

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Yeah, so I'll start and then Glenn could add some commentary. So we're very pleased with the relationship that we have with Ascension and how the deal is progressing. In particular, the integration is going very, very well. We've given kind of a sense of $550 million to $600 million is what we expect the revenue to be. I would say it's probably contributing more towards the higher end of that than the lower end of that.

And if you look at the margins, we said it was going to start out at the low-single digits and then get to the mid-single digits after the first year and it's certainly on track to do that. And then we expect next year and the following years for the margin to continue to improve ultimately because of the mix of Ascension being heavily towards managing their laboratories, the margin will never get to our average margin, but it will continue to improve over time.

[Glenn A. Eisenberg, Executive Vice President and Chief Financial Officer at Laboratory Co. of America]

Yeah, no, the only thing I'd add is that when you think about, again, what's changed in our outlook a little bit, part of that is the benefit of Ascension. As Adam said, we're currently towards the upper -- or at the upper end of the expectations we had, so improved on the volume side. And then, in addition, from a margin standpoint, while we're initially expecting, call it, that low-to-mid single-digits, we're tracking well there as we get that additional volume coming through with momentum taking us into the rest of the year.

[Patrick Donnelly, Analyst at Smith Barney Citigroup]

Okay. That's helpful. Thank you, guys.

[Operator]

Thank you. One moment for our next question. [Technical Issues] Pito, your line is now open.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Good morning, Pito.

[Kieran Ryan, Analyst at Deutsche Bank Aktiengesellschaft]

Hi, there. You've got Kieran Ryan on for Pito. Thanks for taking the question. I just wanted to go back to the biopharma book-to-bill real quick. It sounds like you're happy with where that metric is. I know the quarterly number came in at 1.06, so up a little bit sequentially, still down versus kind of historicals. Bt it sounds like from the commentary you gave that maybe we shouldn't expect much like a huge rebound in that metric in the back-half even as Early Development starts to accelerate.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Yeah. So if you look at our trailing 12 months, it's 1.23. And that's a very healthy book-to-bill, particularly for the businesses that we have. Early Development, typically would have a lower book-to-bill, because the studies burn much faster. And you can actually have studies that start and finish within a given year. So anything between a 1.1 and a 1.2, we consider to be healthy. And as we look forward, we continue to feel that there's plenty of opportunities, RFPs continue to look good. So we're optimistic about where we're seeing the book-to-bill go.

[Kieran Ryan, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you.

[Operator]

Thank you. One moment for our next question please. And our final question comes from the line of Tim Daley with Wells Fargo Securities. Your line is now open.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Good morning, Tim.

[Timothy Daley, Analyst at Wells Fargo Securities]

Yeah, thank you. Hi, everybody. Just wanted to get a bit more detail on the capital deployment strategy specifically related to international. So highlighted the Biopharma Lab Services expansion in Japan and China, adding footprints on Central Lab and Early Development there. I think just using some of the previous disclosures, I know it's tough to get to, but it does seem like a lot of the Asia exposure went with the clinical business. Is this a pointed strategy to try to gain some footprint back in Asia? Is this longer term, where -- what do you -- how do you think about the international footprints of the Bio segments? Where you want to be capability-wise and scale?

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

Yeah. Thank you, Tim. The things that we announced today, obviously, we had those underway for quite some time to plan and prepare for. So that's irrespective of the clinical business or not. At the end of the day, when you think about China, Japan, that's the second and third largest market in the world for pharma. So you need to have a very strong presence to have this capability to meet the needs of the pharmaceutical clients and the biotechnology clients. So it's just our way for us to continue to meet those customer needs. And I -- we've done a lot in the past in terms of ensuring that we have a global presence and I feel good about the global presence that we have today. We are significantly further ahead, particularly with our Central Laboratory business than we were before.

[Timothy Daley, Analyst at Wells Fargo Securities]

All right. Got it. And then just a kind of housekeeping one here. Now that we've got the new structure for the segments, how should we be thinking about communication guidance for the two, thinking about growth sub-segments margins, any color kind of regular KPIs for us going forward?

[Glenn A. Eisenberg, Executive Vice President and Chief Financial Officer at Laboratory Co. of America]

Yeah. Hi, Tim. What you'll see is that consistent what we've done before. So the same metrics that we provided for the two segments will continue, obviously, Biopharma Laboratory Services now consists of the two versus the three businesses, but you'll see in the enhanced disclosures that we've provided, we continue to do a breakout of the individual businesses, and that from the segment standpoint, we give guidance for the topline for the year. We provide obviously in our remarks, the trailing 12 months, which is really where we focus on book-to-bill and backlog and orders, but in the enhanced disclosures, we also provide that on a quarterly basis. So, none of the changes from where we've been providing before. All right. Great. And congrats, Chas and look forward to working with you, Christin.

[Operator]

Thank you. I would now like to hand the conference back over to Mr. Adam Schechter for closing remarks, please.

[Adam H. Schechter, Chairman, President and Chief Executive Officer at Laboratory Co. of America]

All right. Thank you, everybody, for joining us today. And we really do look forward to sharing more with all of you at our Investor Day in September. So we look forward to that time. We wish you in the meantime a very happy and healthy summer. And we'll see you in September.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Chas Cook, Vice President - Investor Relations
• Adam H. Schechter, Chairman, President and Chief Executive Officer
• Glenn A. Eisenberg, Executive Vice President and Chief Financial Officer

Analysts

• Jack Meehan, Nephron Healthcare Investment Research
• Lisa Gill, J.P. Morgan Securities
• A.J. Rice, Credit Suisse Group AG
• Eric Coldwell, Robert W. Baird
• Brian Tanquilut, Jefferies & Company, Inc.
• Kevin Caliendo, UBS Group AG
• John, Bank of America Merrill Lynch
• Patrick Donnelly, Smith Barney Citigroup
• Kieran Ryan, Deutsche Bank Aktiengesellschaft
• Timothy Daley, Wells Fargo Securities