Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Quest Diagnostics Inc (DGX, Financial) reported a strong quarter with base business revenue growth of nearly 4% and total revenue growth of 2.5%.
- The company announced four strategic acquisitions, including LifeLabs in Canada, which will expand their market presence.
- Quest Diagnostics Inc (DGX) saw significant growth in advanced diagnostics, particularly in brain health, women's health, and advanced cardiometabolic health.
- The company's consumer-facing platform, questhealth.com, grew total revenues nearly 40%, with base business revenues growing more than 50% year-over-year.
- Operational improvements through automation and AI have enhanced productivity, service levels, and quality.
Negative Points
- The company's employer-based businesses, including employee drug testing and population health services, showed meaningful declines.
- The recent worldwide IT outage and Hurricane Beryl in Texas are expected to impact Q3 earnings by approximately $0.06 to $0.08 per share.
- Lower revenues from COVID-19 testing services partially offset the strong growth in base testing revenues.
- The integration of recent acquisitions may take time and involve significant effort from dedicated teams.
- The regulatory environment remains uncertain, particularly with ongoing issues related to PAMA and the new LPT rule.
Q & A Highlights
Q: I believe you said the total base volume was up 1.7%. But if you exclude employer base, it's up 3.2%. Can you give us more detail on what's happening in that business? And can you provide some details on the Canadian acquisition?
A: On the employer side, we have two principal businesses: employee drug testing and employee population health. Both showed meaningful declines due to shifts in the job market and changes in drug testing practices. Regarding the Canadian market, it has a population of roughly 41 million, growing faster than the US. LifeLabs is strong in British Columbia and Ontario, which account for about half of Canada's population. We see opportunities to grow the types of testing we bring into that market.
Q: You raised guidance by more than a beat in any particular quarter. Is that mostly driven by core business? Are you expecting margins to expand more than what we saw in the second quarter?
A: The majority of the revenue increase is driven by new M&A, including Alina Health and Ohio Health. The EPS increase is related to contributions from these acquisitions and the base business. We are absorbing the impact of the IT outage, but base volumes continue to be strong, and we have a positive pricing and reimbursement environment.
Q: Can you talk about the market utilization and your competitive position? How do you see utilization baked into the implied second-half guidance?
A: The 3.2% volume growth represents our core base business, translating into 5.1% revenue growth due to test mix and test per requisition increases. For the second half, we expect base revenue growth of about 5.3%, including acquisitions. Utilization continues to be strong, and we believe we are gaining share through outreach acquisitions and strong commercial execution.
Q: Can you expand on the utilization piece? How are you thinking about the trend?
A: We expect utilization to eventually level off to our long-term growth algorithm of around 3% organic growth. For the full year, we expect base revenue growth of around 5%, with the second half closer to 3.5% to 4% organic growth. The second half includes contributions from acquisitions, so the organic growth rate is slightly slower than the first half.
Q: How should we think about digital pathology in light of the PathAI acquisition? Can we see a more immediate path to incorporate it more broadly?
A: Digital pathology allows us to collapse the network of sites that prepare slides, route images to expert pathologists, and apply algorithmic analysis to improve quality. We believe there's a strong case for higher reimbursement using these algorithms. Additionally, it opens up new opportunities for technical-only solutions, where we handle the histology work for health systems.
Q: On value-based care contracts, how much did they benefit you last year? How should we model these contributions going forward?
A: Value-based care made positive contributions this year but were not as significant as last year. These payments are lumpy and difficult to model, as they depend on shared savings from acquisitions and movement of requisitions from high-priced labs. They continue to be a positive for us, but the timing and amount can vary.
Q: Can you provide an update on cost trends, wage costs, and turnover?
A: We expect wage increases to be in the 3% to 4% range for the year. Turnover for frontline positions has improved, coming down to the mid-18% range in the second quarter. We have some hotspots around the country, but we expect meaningful improvements in the back half of the year.
Q: How are volumes looking from your preferred network customers versus everyone else? Are you losing, gaining, or maintaining share in the physician and hospital markets?
A: Volumes from preferred network customers are higher, partly driven by Medicare Advantage. We believe we are gaining share in the physician and hospital markets, as evidenced by our revenue growth and new wins with large physician groups and reference business.
Q: What changed in the environment or strategy that led to the pickup in M&A this year? How sustainable is this?
A: No change in strategy. The M&A funnel has been full, and the timing of deals can vary. We are excited about the opportunities in Minneapolis, Columbus, and Canada. The emphasis continues to be on outreach tuck-in deals in markets where our share position is waning. All acquisitions meet our criteria for accretive growth and return on invested capital.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
