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Operator: Good day and thank you for standing by. Welcome to the Q4 and Full Year 2022 Labcorp Conference Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Chas Cook, Head of Investor Relations. You may begin.

Chas Cook: Thank you, operator. Good morning and welcome to Labcorp’s fourth 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 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 proposed spinoff of the clinical development business, 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 general economic and market conditions, future business strategies, expected savings and synergies, including from the LaunchPad initiatives, acquisitions and other transactions and opportunities for future growth. Each of the forward-looking statements are subject to 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 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 Schechter: Thank you, Chas. Good morning, everyone. It’s a pleasure to be here with you today to discuss our fourth quarter results as well as the progress that we’ve made towards our strategy. 2022 ended strong for Labcorp with accelerated revenue growth in Diagnostics and continued strong underlying fundamentals in drug development. Drug development continued to have a tough year-over-year comparison, mostly due to less COVID-related work. In 2022, we took decisive actions to navigate a challenging operating environment. We advanced our strategy with the announcement of the planned spin of our clinical development business and we closed several important hospital laboratory partnerships. I’ll now discuss our fourth quarter performance.

In the quarter, revenue totaled $3.7 billion. Adjusted earnings per share was $4.14 and free cash flow was $536 million. The base business remains strong. On a constant currency basis, excluding COVID testing revenue, enterprise base business revenue grew 6% in the fourth quarter versus prior year. Growth and diagnostics based business revenue in the fourth quarter was strong due to both routine and esoteric testing and revenue from the Ascension partnership. COVID PCR testing volumes declined during the quarter as expected, totaling 1.4 million tests performed and averaging 16,000 per day. Looking forward, our Diagnostic business will accelerate with 10.5% to 12.5% base business growth, benefiting by around 5 percentage points with a full year of our Ascension partnership.

For Drug Development, fourth quarter base business revenue in constant currency declined 1% versus prior year. Early development and clinical development both grew but were offset by lower central laboratory revenue due mostly to COVID-related work. Drug Development ended the quarter with a strong trailing 12-month book-to-bill of 1.27. Looking forward, we expect the momentum to continue in drug development orders and we expect that site enrollment in kids returns will continue to increase throughout the year. We also anticipate the drug development business to return to 5% to 7% growth with a stronger second half than first half due to early development and the annualization of an FSP contract loss. Finally, in the quarter, the Board authorized a $1 billion increase to the company’s share repurchase program bringing our remaining total share repurchase authorization to $1.5 billion.

Glenn will provide more detail on our quarterly results and will review full year 2023 guidance in just a moment. Moving now to an update on the planned spin of our clinical development business. We have been pleased with the positive response from customers and employees and we remain on track to complete the spin in mid-2023, subject to satisfying certain customary conditions. Recently, we unveiled Fortrea as the name of the clinical development business post spin. You can learn more by visiting fortrea.com. Also, in January, Tom Pipe joined Labcorp as President and CEO of our Clinical Development business. Tom will serve as Chief Executive Officer and Chairman of the Board of Fortrea, upon completion of the spin. Tom brings significant CRO experience, including serving as CEO of a public CRO.

He has worked with many of our customers and he knows the business well. We welcome Tom and look forward to working with him as we continue making progress towards the completion of the spin. Upon completion through a tax-free transaction, we will have 2 strong independent companies Labcorp and Fortrea which will emerge to the transaction with the ability to better meet customer needs to drive sustainable and profitable growth and deliver attractive shareholder returns. In the coming months, we plan to announce the Board of Directors of Fortrea, including the lead independent Director and other members of the executive leadership team. We also intend to host an Analyst Day in advance of the spin and I look forward to working with Tom on timing.

I’ll now move to our enterprise strategy. We made significant advances on our strategy in 2022. We accelerated and closed several hospital and health system partnerships and acquisitions during the year. Most recently, we completed the integration of certain Ascension assets and operations. Labcorp now provides laboratory management services for nearly 100 hospitals across the Ascension hospital system. We are pleased with the smooth transition and we want to thank our partners at Ascension for enabling our teams to help deliver the best patient care possible. In addition to Ascension, we entered strategic relationships with RWJ Barnabus Health, AtlantiCare, Prisma Health and St. Dominic’s during the year. The pipeline for hospital and local laboratory acquisition and investment is robust and will be a key area of opportunity for growth in 2023 and beyond.

We also made progress in using digital technology and data to deliver better outcomes for patients. By significantly improving our web, mobile and digital channels, we’ve made it easier for customers to access critical data and health information. Using digital technology and artificial intelligence, we are reimagining our result reports to provide deeper insights, scientific expertise and clinical information to guide patient care. Additionally, we’re encouraged by increased customer adoption of Labcorp’s Diagnostic assistant, a tool that eclipse positions with the information they need to improve tariffs. Also, our investment in call center automization is improving the customer experience by enabling patients and providers to get answers faster through self-service features.

Turning to oncology. We continue to expand our oncology capabilities to serve clinicians and drug development customers. In the fourth quarter, we launched a liquid biopsy test called Labcorp Plasma Focus. This test is used to match cancer patients with FDA-approved therapies using the patient’s circulating tumor DNA taken from a blood draw. This is the first new product coming from Labcorp’s acquisition of Personal Genome Diagnostics in 2022. Today, Labcorp offers customers and patients access to the most comprehensive oncology portfolio in the market. Our teams are evaluating and executing our growth opportunities in areas such as neurodegenerative, autoimmune and liver disease as well as cell and gene therapy and more. In 2022, our team supported over 5,000 clinical trials work at over 90% of new FDA approvals and launched over 130 new tests.

In the area of neurodegenerative disease, for example, we launched new tests to assist the diagnosis and treatment of Alzheimer’s, multiple sclerosis and Parkinson’s disease. We anticipate more innovative launches in 2023. Finally, we made progress in our direct-to-consumer business. In 2022, we introduced Labcorp On-Demand, a platform aimed at providing consumers with easy and convenient access to our leading diagnostic tests. We now offer over 45 tests that cover over 100 biomarkers to help consumers monitor their health, stay current with wellness screening, plan for families and manage a broad range of chronic culturation. The progress we made this year is a direct result of the commitment of our employees who fuel our confidence in the outlook for 2023.

We are recognized by Forbe’s list of the world’s best large employers in 2022 and we also earned the top score into 2022 Disability Equality Index. Attracting and retaining the best talent is key to our success and we remain focused on being an employer of choice and destination for talent. As I look to 2023, I’m optimistic about the growth and strategic opportunities before us. Our business fundamentals remain strong and we are well positioned for the future. With that, I’ll turn the call over to Glenn.

Glenn Eisenberg: Thank you, Adam. I’m going to start my comments with a review of our fourth quarter results, followed by a discussion of our performance in each segment and conclude with our 2023 full year guidance. For reference, we’ve also included additional business information that can be found in our supplemental deck on our Investor Relations website. Revenue for the quarter was $3.7 billion, a decrease of 9.4% compared to last year, due to lower COVID testing and the negative impact from foreign currency. This was partially offset by organic base business growth and the impact from acquisitions. COVID testing revenue was down 79% compared to COVID testing last year, while the base business grew 4.8% compared to the base business last year.

Organically in constant currency, the base business grew 4.7%, benefiting from the Ascension lab management agreement which contributed approximately 4% of the organic growth. While the outreach business that we acquired from Ascension is treated as an acquisition, the lab management agreement treated as organic growth. Operating income for the quarter was $91 million or 2.5% of revenue. During the quarter, we had $61 million of amortization and $88 million of restructuring charges and special items, primarily related to acquisitions, LaunchPad initiatives and the proposed spin of Fortrea. In addition, the company recorded $270 million of goodwill and other asset impairment primarily related to the early development business, due to short-term labor and supply constraints.

This impairment represents approximately 2% of Labcorp’s goodwill and intangible assets. Excluding these items, adjusted operating income in the quarter was $510 million or 13.9% of revenue compared to $902 million or 22.2% last year. The decrease in adjusted operating income and margin was due to a reduction in COVID testing. The benefit from LaunchPad savings and lower personnel expense were essentially offset by lower COVID-related demand and inflationary costs. Our LaunchPad initiative continues to be on track to deliver $350 million of savings over the 3-year period ending 2024. The adjusted tax rate for the quarter was 20% compared to 24.6% last year. The lower adjusted tax rate was primarily due to the geographic mix of earnings as well as the benefit from increased R&D tax credits and year-end true-ups for completed tax returns.

We expect our 2023 full year adjusted tax rate to be approximately 24%. Net earnings for the quarter were $76 million or $0.86 per diluted share. Adjusted EPS were $4.14 in the quarter, down from $6.77 last year due to lower COVID testing earnings. Operating cash flow was $654 million in the quarter compared to $698 million a year ago. The decrease in operating cash flow was due to lower COVID test and earnings, partially offset by higher base business earnings. Capital expenditures totaled $118 million, down from $150 million last year. For the year, capital expenditures were 3.5% of base business revenue and we expect that to continue into 2023. Free cash flow in the quarter was $536 million, bringing our full year free cash flow generation to $1.5 billion.

During the quarter, we invested $150 million on acquisitions paid out $64 million in dividends and repurchased $300 million of stock, representing approximately 1.4 million shares. At the end of the quarter, we had $532 million of share repurchase authorization remaining. The Board recently approved an additional $1 billion for share repurchases, taking our total available authorization to approximately $1.5 billion. For the full year, we invested $1.2 billion on acquisitions, paid out $195 million in dividends and repurchased $1.1 billion of stock. We continue to have a robust pipeline of potential acquisition opportunities that will supplement our organic growth. In addition, we continue to believe that our shares are undervalued and that our share repurchase program is an important part of our capital allocation strategy.

At year-end, we had $430 million in cash, while debt was $5.3 billion. Our leverage was 1.9x gross debt to trailing 12 months EBITDA. Excluding COVID testing earnings, our leverage was around 2.5x, in line with our targeted range of 2.5 to 3x. Now I’ll review our segment performance, beginning with Diagnostics. Revenue for the quarter was $2.3 billion, a decrease of 12.8% compared to last year, primarily due to organic revenue being down 14.3% which was due to COVID testing, partially offset by acquisitions of 1.7%. COVID testing revenue was down 79% compared to COVID testing last year while the base business grew organically by 8.6% compared to the base business last year. The Ascension lab management agreement contributed approximately 7% of the growth while the negative impact of weather and fewer revenue days constrained growth by approximately 1.2%.

Relative to the fourth quarter of 2019, the compound annual growth rate for base business revenue was 6.9%. Total volume decreased 11.8% compared to last year as organic volume decreased by 13.8%, primarily offset by acquisition volume of 2%. The decline in volume was due to COVID testing. Base business volume grew 3% compared to base business last year, including the benefit from acquisitions of 2.4% but was constrained by unfavorable impact from weather and fewer revenue days of approximately 1.2%. Price/mix decreased 1% versus last year due to lower COVID testing of 6.4%, currency of 0.3% and acquisitions of 0.2%, partially offset by base business growth of 5.9%. Base business price/mix was up 7.6% compared to base business last year, benefiting from the Ascension lab management agreement of approximately 7%.

Diagnostics adjusted operating income for the quarter was $387 million or 16.9% of revenue compared to $776 million or 29.6% last year. The decrease in adjusted operating income and margin was due to a reduction in COVID testing as the COVID margin was approximately 50% for the quarter, down from approximately 70% last year. We expect the COVID margin to be approximately 50% through the duration of the public health emergency, at which point we would expect the margin to decline but still be above the segment average. Base business margin was down approximately 30 basis points due to the impact from Ascension, higher personnel expense and other inflationary costs, partially offset by organic growth and LaunchPad savings. Excluding Ascension, margin would have been up approximately 50 basis points.

Now I’ll review the performance of Drug Development. Revenue for the quarter was $1.4 billion, a decrease of 4.1% compared to last year, primarily due to foreign currency of 3.1%. Organic base business revenues declined 1.4% compared to last year, due to the negative impact from lower COVID-related work and the Ukraine-Russia crisis. Excluding these impacts, organic base business revenue grew 3.7%. The central ad business continued to be the most constrained by these impacts. Central ad-based business revenues were down 11.5%. However, excluding these impacts, organic constant currency revenue was up 4.7% and — while on a comparable basis, early development was up 3.4% and clinical development was up 3.2%. Reported fourth quarter Drug Development revenues on a compound annual basis grew 5.1% compared to the fourth quarter of 2019.

Adjusted operating income for the segment was $209 million or 15% of revenue compared to $206 million or 14.2% last year. The increase in adjusted operating income and margin was due to LaunchPad savings and lower personnel costs, partially offset by lower COVID-related demand, the Ukraine-Russia crisis and inflationary costs. We ended the quarter with backlog of $16.3 billion and we expect approximately $4.9 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 December 31, 2022, 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.

Also, our guidance assumes that Fortrea will be part of Labcorp for the full year. Upon its spin currently anticipated in the middle of the year, we expect to provide updated guidance. We expect Enterprise revenue to grow 1% to 4% compared to 2022. This guidance includes the expectation that the base business will grow 8.5% to 10.5% and while COVID testing is expected to decline 75% to 90%. This assumes a PCR volume range of 5,000 to 12,000 tests per day on average for the year. We expect Diagnostics revenue to be down 2% to up 1.5% compared to 2022. This guidance includes the expectation that the base business will grow 10.5% to 12.5% which has approximately 5% growth due to Ascension. At the midpoint of our base business guidance, the compound annual growth rate compared to 2019 is 6.4%, including the benefit from Ascension of approximately 2%.

We expect Diagnostics base business margin to be slightly up in 2023 versus 2022, including the unfavorable mix impact from Ascension. We expect Drug Development revenue to grow 5% to 7% compared to 2022. This guidance includes the positive impact from foreign currency of 20 basis points. At the midpoint of our guidance, the compound annual growth rate compared to 2019 is 7.2%, primarily due to organic growth. While we have increased the number of NHP vendors with multiyear agreements to secure supply, lead times are projected to negatively impact drug development revenue between $80 million to $100 million early in the year. As a result, we expect drug development first quarter revenue growth to be lower than the average for the year. We also expect drug development margin to increase in 2023 compared to 2022, with the first quarter coming in comparable to the first quarter of 2022 due to the early development supply constraint.

Our guidance range for adjusted EPS is $16 to $18 compared to $19.94 in 2022. Adjusted EPS is expected to be lower compared to 2022 due to COVID testing while base business adjusted EPS at the midpoint of guidance implies approximately 13% growth. Free cash flow guidance is $1 billion to $1.2 billion compared to $1.5 billion in 2022. The decline in cash flow was due to lower COVID testing. In summary, we expect to drive continued profitable growth in our base business. While COVID testing volumes are expected to continue to decline through the year, 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.

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Operator: And our first question will come from Kevin Caliendo of UBS.

Kevin Caliendo: There’s a lot to unpack here. I guess I’ll start with a couple. Is there any cost being built into the business right now ahead of the spin? I don’t want to say the stranded costs or IT costs but there’s a couple of line items. It looks like corporate has been higher. The intersegment eliminations are — seem to be a lot higher as well. I’m just trying to understand what’s driving that and if there’s any investment being made there, that would show up there in a way that we can’t necessarily see? And then secondly, I guess, — this is such a wide range of earnings. Can you tell us, is it all just based on COVID? Is it based on the spin timing? It’s unusual to have such a wide range. And I’m wondering what would be sort of low end versus high end, what would be driving that?

Adam Schechter: Yes. Kevin and I’ll take the second question first. I’ll ask Glenn to provide some impact on the — your first question. So the range that we gave is $16 to $18 a midpoint of $17. And we kind of focus and targeting on that midpoint. But there are things, particularly around COVID, that could still happen where we’ve given a pretty broad range of COVID coming down between 75% and 90% is still very difficult to predict that. The second thing is we gave a range for NHP of $80 million to $100 million. Good news is we’ve started to receive supply and we started to receive shipments but it’s still early as we get those shipments in and it takes time to get the steady starts up. And then the third thing I would say is, while we’re waiting for supply, we’re still hiring people.

As you recall, last quarter, we noted that in early development, we needed to hire more people. So I’m not slowing down the hiring process, while waiting for some of the supply shipments that we have. So we’re going to hire people while we can’t yet run some of those trials. So those are some of the pushes and pulls but I would focus on the midpoint more so than the lower end of the range, I think, is highly unlikely.

Glenn Eisenberg: Yes. No, just to follow up on that. When you look at the guidance ranges for both of our base businesses, we keep those rates within, call it, 2 percentage points. And it’s really the COVID given the volatility in COVID, we provide a wider range which causes that overall EPS number to be a little bit wider. Kevin, when you talk about the spin costs, you’ll see that we treat that as kind of an unusual item. Obviously, we’re going through a spin. These are onetime costs. You’ll see that in the reconciliation between, call it, our GAAP and our adjusted earnings, you’ll see in the footnotes that we incurred around $29 million of cost during the quarter related to the spin. So again, those would be backed out of our adjusted numbers when you look at our enterprise and segment performance.

Kevin Caliendo: Great. Can I ask a quick follow-up just on PAMA, the benefit you saw from PAMA and also the change in the code that occurred in December. That was obviously a positive benefit to the company. Did you reinvest those dollars? Or is all of that sort of you’re letting that fall to the bottom line? How should we think about that in terms of the way you accounted for it or thought about it?

Adam Schechter: Yes. So again, when we gave our range, we’re — 2 things. One, for diagnostic business, 10.5% to 12.5% growth, I think is pretty extraordinary. But if you look at PAMA, we’ve included when we talk about margins, that we expect margins to be slightly to improve even with the impact of Ascension. And if you just look at fourth quarter, for example, our margins were down 30 basis points. Ascension was a negative 80 basis point hit. So you can see the impact from Ascension — for us to be able to offset that impact on margins, it’s due to the lack of PAMA being implemented this year as well as some of the benefits from the draw fees.

Operator: And our next question will come from Jack Meehan of Nephron Research.

Jack Meehan: My question is on just commercial payer negotiations. We’re coming up on the 5-year anniversary of UnitedHealth announcement. I don’t know if you want to address that directly, your national payers kind of broadly speaking but are there any notable shifts you’re seeing in the structure of your contracts? And just how do you feel about the ability to maintain price?

Adam Schechter: Yes. So obviously, we work with the payers all the time. Whether it’s a year we have a negotiation with them or not. We’re constantly in contact and working very closely with them. And we’ve seen continued pressure over the last 5 years and I think that pressure will continue but it’s not accelerating. It’s kind of very steady. And where we can get price concessions, we do — but in general, I would say that there’s continued pressure but no different than what we’ve seen in the past.

Glenn Eisenberg: Jack, just to add on that, too, is that when we think about price mix, we’ve always talked about unit pricing being a headwind but the favorability of our mix of esoteric growing faster than routine or test per Ascension. And so when you look at the growth rate that we have in vision for ’23 in our guidance, it assumes both — and mostly by favorable volume appreciation but also favorable price/mix even with unit pricing headwinds.

Jack Meehan: Got it. And I heard your commentary, Glenn, on some of the revenue pacing to start here. So a finer point you can draw on EPS, just either expectations, percentage of the full year or — just any color to help on that would be great.

Glenn Eisenberg: Yes. It’s interesting. If you go back and look to even prepandemic levels, 2023, even though we have some pluses and minuses, the trend in the earnings would come in similar. So I think that will give you roughly a good approximation. Interestingly enough, plus or minus, it comes in fairly quarter each time but you’ll see it’s a little bit different in the first quarter, a little bit lower, a little bit higher throughout the rest of the year but I think it will give you a good proxy.

Operator: Our next question will come from Erin Wright of Morgan Stanley.

Erin Wright: Great. Could you give us a little bit more of a breakdown of what you’re seeing across the different subsegments at Covance, the central lab business in terms of volume trends, RFP flow at the clinical level. And then — and then on the early development side, what’s your level also of commitment to early development business as you kind of retain that as part of your spin process here?

Adam Schechter: Sure. Thanks for the question. So I’ll start with drug development and performance. What you saw for the fourth quarter was early development grew 5% on a constant currency basis. And I always give the CAGR as well from 2019 because that’s before all the COVID-related work, it was about 6% CAGR from fourth quarter of 2019. If you look at the clinical business. We saw about 2.5% growth in the quarter on a constant currency basis. If you compare that to the fourth quarter CAGR of 2019, it was about 5% but both of those were offset by a 9% decline in the central laboratory business versus prior year. That’s, again, constant currency. But if you look at the business for the central laboratory on a CAGR basis in 2019, it actually grew about 5%.

So it sums you that, that business remains healthy. It’s just as you recall, in the fourth quarter of 2021, we were doing a huge amount of — for boosters for vaccines because that was right when the Omicron variant hit. So that’s why you see such a tough year-over-year comparison for the central laboratory business. As I look at RFPs across the segments, meaning I look at them in total, the RFPs remain very strong and very consistent. So we haven’t seen a change. As I look through last year on cancellation rates, I haven’t seen a change. The cancellation rates remain low. They’re up a little bit from 1 quarter down a little bit in the next quarter but relatively flat and remain very low. And then to me, the most important thing is the book-to-bill.

And as you see, the book-to-bill was very strong. It was a 1.27. And if you were to look at each of the individual segments for the quarter, although we don’t typically give individual segment book-to-bill, you would see that they are all above the 1.2. So we feel good about each of the segments about the book-to-bill as we move forward. In terms of — I’m sorry, go ahead, I’ll answer the second question after you follow-up.

Erin Wright: Oh, no, go ahead. Go ahead.

Adam Schechter: Okay. And then in terms of — if you look at the ED business, we think it’s a good business. It’s a global business. We’re looking to bring our innovative diagnostic test globally and we think that they’ll be able to help us do that with their global laboratory footprint. So we remain committed to that business and we think it’s a good business.

Erin Wright: And I guess, just my follow-up, as you prepare for the spin, how we should be thinking about the priorities around capital deployment, the M&A pipeline as well as buybacks and how we should be thinking about that?

Adam Schechter: Yes. So we’re — after the spin which we are on track for the middle of this year, we will continue to provide a dividend. We expect to get dividends approved moving forward for Labcorp. And then we would continue to look to do these hospitals and local laboratory deals, of which our pipeline is very full. And there’s a significant number of those that we’re looking at evaluating it, we will win some of those this year. And then we believe our shares are still significantly undervalued. So we have now $1.5 billion of authorization for share repurchases and we’ll use those as appropriate.

Operator: Our next question will come from Tim Daley of Wells Fargo.

Tim Daley: Great. On the first one, I’m not trying to step on Tom’s toes or anything here but just isolating the drug development assets that will stay part of RemainCo. Could you just give us some color directionally as live magnitude, anything here on the EBITDA margins for early development in central lab, just how they looked at ’22, not trying to ask for stranded cost adjustments or anything like that?

Glenn Eisenberg: Tim, this is Glenn. As you know, we break out the 2 segments and then with that, revenue, OI and margins. So for drug development, we provide that. We haven’t broken out the pieces, if you will, because, again, of all the interrelationships and shared services and so forth. So part of the issue of doing the spin, obviously is now we’re standing an independent company with where we have a lot of direct costs but then we also have a lot of indirect costs. And we’re working through, obviously, all those costs and including transition services that we would be providing for a period of time. So we’re currently in the process of getting all the numbers done once we’re complete with that, we’ll obviously be sharing kind of the spinco view, both on the top line and the bottom line at the appropriate time, including in an anticipated investor Analyst Day, if you will, prior to the spin.

And obviously, to the extent we have those financials done prior to that, we can also share them. But at this point, we’ve talked in the past about here’s the segment average and that the businesses are for the plus or minus in line before you get to those independent standup costs.

Tim Daley: All right. Appreciate it. I thought I’d give it a shot. And then secondly, on the — just sitting here on the early development business, so if we were to exclude the $80 million to $100 million NHP headwind you guys are baking into the guidance would be growing in FY ’23? And what’s the price assumption embedded in there for the year?

Adam Schechter: So the short answer is yes, it would be growing for the year with the $80 million to $100 million in there, growing nicely. And what was your second question, the…

Tim Daley: The pricing assumption embedded in the EB business for ’23?

Adam Schechter: In terms of the pricing — so first thing I’d say is that we expect the priming pricing to go up significantly because of the supply issues. And I think, therefore, there you would expect to have better pricing overall. Yes. And just to be clear, that pricing, especially primary that does get passed on to customers — so it doesn’t impact our margins and — it affects the margins because we don’t get a margin on that but the pricing can be passed on to the customers.

Operator: And our next question will come from Patrick Donnelly of Citi.

Patrick Donnelly: Maybe one on the NHP side. Certainly, it was expecting a headwind, maybe a little bit higher than we were thinking. Can you just remind us, I guess, kind of your full exposure there? Just thinking about that $80 million to $100 million, what the supply disruption looks like currently? And then again, I guess, visibility into that normalizing? I’m just trying to figure out, I guess, that $80 million to $100 million, is that kind of fully grappling it? Is that a conservative number? Maybe just kind of walk us through your thought process and again, maybe what the sizing was and what that looks like. I appreciate it.

Adam Schechter: Yes. We’ve said before that the NHP as part of our total revenue. It was less than 2%. And the $80 million to $100 million — and we have also said that it will not be a full year impact. So you can see that $80 million to $100 million is within those guidelines that we’ve said previously. The majority of the impact will be in the first quarter and there will be some impact into the second quarter. Over the past 3 months, we’ve contracted with multiple organizations to secure supply for the near but also importantly, for the longer term. And as I just said, that we believe that these are going to be temporary because we’ve already begun to receive the beginning of the shipment. So I feel that $80 million to $100 million is a realistic range. But we’ll hopefully be more towards the lower end of that but we’ll know with time.

Patrick Donnelly: Okay. But you’ve got decent visibility into things normalizing by call .

Adam Schechter: Yes. We have visibility that we have the contracts in place that we started to begin to receive some of the shipments. So I feel good about those things.

Glenn Eisenberg: Also, Patrick, when you think about the growth rate for ’23, the 5% to 7% growth within Drug Development, that $80 million to $100 million or obviously the midpoint gets you to around 1.5 points of headwind. That’s captured within that growth rate. But similarly, we expect to have less COVID-related vaccine and therapeutic work in ’23 versus ’22 which is at a similar number. So you’re looking at around 3 percentage points of headwind from those 2 issues that are reflected in that 5% to 7% growth which obviously would have been greater without those constraints but both of which we would expect to then be done with through 2023.

Operator: And our next question will come from Brian Tanquilut of Jefferies.

Brian Tanquilut: Glenn, as I think about guidance, obviously, COVID is rolling off here. But as I think about margins, I mean, anything you can share with us in terms of what drives your confidence in the margin, especially in the core lab business going forward?

Glenn Eisenberg: Yes. No, we actually feel good about how the business is performing. We obviously give guidance to the revenues within diagnostics. So that 10.5% to 12.5% overall. Again, the interesting part is part of that growth, a little less than half of it, call it, with Ascension which will mix down our margins. But the underlying business growth is very strong in ’23 in part due to the fact that ’22 wasn’t a full year. So the recovery is coming in. And with that incremental demand, mostly driven by volume, we’re going to get good leverage on it. helpful again that we don’t have PAMA but we believe that we can drive margin improvement slightly in ’23 versus ’22 with the headwind of Ascension. But again, without the headwind coming in from PAMA. But overall, LaunchPad continues to be on track, good expense control and good — again, fundamentally good growth in the business.

Operator: And our next question comes from Eric Coldwell of RW Baird.

Eric Coldwell: So yes, I’m going to come back to the NHPs but hopefully pretty quick. Are the only supply constraints that you’re seeing today related to the 1 Cambodian manufacturer in the news as the original source and your suppliers that received some or all of their volume from that source? Or have you seen supply constraints from other existing partners that you used to work with?

Adam Schechter: Yes. So again, some of the partners use that same supply source. So we might have some issues with that specific source. But what I can say with the contracts that we’ve signed and the suppliers that we have, we’re confident that we’ll be able to use that supply moving forward. So, I feel good about the contracts that we put in place, Eric.

Eric Coldwell: And then on margin in Drug Development. I thought I heard you say you expected flat margin here in Q1. Can you confirm that, so something around 11.5%? Is that reasonable?

Adam Schechter: Yes. So we’re assuming that the margin will be flat versus this margin last year. So I think that’s about right. The big issue there is the fact that we are not going to have the supply of the NHPs in the first quarter. And therefore, we won’t be able to — we’ll have most of that $80 million to $100 million impact because a lot of it flows through because we still have all of the people and hiring net for that group. We have the facilities and so forth. So we’re not making any changes to try to manage that margin because we know the supply is coming in. So that will be the toughest quarter. There might be a little bit slow over the second quarter. But overall, we expect that we’ll have some margin appreciation for the Drug Development business for the full year with the second half certainly being better than the first half.

Eric Coldwell: Great. And then last one for me, if I can. Central lab has apparently one more tough quarter on last year’s activity. Q1 ’22 was pretty solid. Are you expecting central lab to be back to growth by the second quarter? And can you give any updates on how those past kits that were sent didn’t come back? Are you seeing any changes in dynamics in terms of order flow on kits or returns on kits? Just trying to get a better sense on when we can expect the central lab business to resume year-over-year growth?

Adam Schechter: Yes. So the first quarter of 2019, we were still doing a lot of COVID-related work, particularly for the booster shots for Omicron. So that will be the toughest quarter of next year will be the first quarter. As I look at quarters in that business, they look great. And I’m actually very optimistic about our central laboratory business moving forward. I think we’re just overlapping tough comparisons. But book-to-bill orders I mean everything I look at for the business is good. We are not yet at the kit return level that we were at in 2019. I still think that some sites are struggling to enroll as many patients that they have in the past. But we are seeing the kit returns increase month-over-month. And I feel confident that we’ll continue to see that as we go through this year.

Glenn Eisenberg: Eric, the only thing I’d add to that is, to your point, the first quarter will be the one that would be down year-on-year before things annualize and then we’ll look at good growth throughout the remainder of the year but we’ll still have that constraint. We’ve talked about that we’re still going to see — while the supply chain issues which was really more of a ’21 issue. So we were down in ’22 from the supply, ’22 supply levels were more normalized. So the year-on-year COVID-related impact will still be with us doing less vaccine and therapeutic work in ’23 than we did in ’22. Even with that headwind, that again, we sized up at around $90 million, so call it 0.5 points for the overall segment. Obviously, it’s a bigger constraint when you just look at it because it’s mostly within our central lab business. But even with that headwind, we still expect to see very good top line growth throughout the 3 quarters, second, third and fourth quarter of ’23.

Operator: Our next question comes from Derek DeBruin of Bank of America.

Unidentified Analyst: This is John on for Derik. I wanted to ask about the free cash flow guide. Obviously, the last few years, you’ve benefited from the COVID testing but even when I look at the 2019 level, it was around over $1.3 billion. So I was wondering if you could dig into what sort of factors are in there. Maybe there’s some large spend expenses that you’ve mentioned before?

Glenn Eisenberg: Sure, John. Well, first of all, obviously, we wrapped up the year of 2022 on a very strong level of $0.5 billion of cash flow in the quarter, getting us to $1.5 billion for the full year. When you look at the midpoint of our guidance at the $1.1 billion, the decline from 22% to 23% is all attributable to lower COVID testing earnings. In fact, we’re looking at good growth in base business earnings. We’ve talked about earnings per share on a base business being up around 13% in our guidance. So we’re getting good cash generation from our base business and that’s going to be partially offset by increased spending in CapEx. We kind of talked about around a 3.5% rate in revenues that are growing. So we continue to see good investments for capital investitures.

And in addition, working capital will be a use of cash a bit supporting the growth in the base business as well, albeit we do expect to see an improvement in our DSOs which will help mitigate the cash needed for working capital. But overall, we feel a good year of free cash flow generation.

Unidentified Analyst: Great. And I wanted to ask what the site access level is looking like. You’ve talked about a lot of puts and takes of the clinical lab and the ED but compared to this quarter past, has there been any improvement? And also on labor constraints. If you could comment on that, that would be great.

Adam Schechter: Yes. I mean I would say there’s still a difficult labor environment in health care in general. We have made some progress in acceptance rates that we make offers. We’re getting more people that are accepting our offer that we have in the past. We’re working hard on retention because what happens is once you get somebody in your chain and it takes time, you have to find a way to retain them over time and we’re working hard on that. I would say that there’s no doubt that it’s getting a little bit better but it’s still not where it used to be and there’s still a lot of issues in terms of the labor market across all of health care, frankly.

Operator: And our next question comes from A.J. Rice of Credit Suisse.

A.J. Rice: I know you’ve given some very specific information about your assumptions around COVID testing and we can develop our estimates around that. But I wondered in the capacity that you’ve had historically in the last 3 years devoted to COVID testing. Is that redeployment into other areas pretty seamless? Is there any drag that you’re dealing with? Is that been coming down that will then become a tailwind for you? Is that fully gets redeployed. Can you talk about that a little bit?

Adam Schechter: Sure, A.J. So just to give a sense, in the fourth quarter, the volume was about 16,000 per day. We’re giving a bit of a wide range because it’s difficult to tell but we’re giving somewhere between 5,000 and 12,000 per day as guidance. If you just look at the month of January, just to give you a it was about 11,000 per day. And what we’re trying to do is make sure that we have capacity to do more than what we think we need but we have nowhere near as much capacity as we had historically, when we used to be able to do over 300,000 tests per day. We brought that capacity down. We can redeploy some of that equipment. We don’t expect to have any large write-offs from equipment or anything like that. The equipment return its cost of capital very quickly, as you can imagine.

So, I don’t think it’s neither a headwind or a tailwind. I think it’s basically — we’ve done what we can do for COVID, whatever we need to do for the tail end of coat we will do but now we’re really focused on driving our base business. And that’s where we’re excited because the base business looks really strong in the diagnostic area.

Glenn Eisenberg: A.J., the only thing that I’d add to is we commented that the coated business obviously was still at a very attractive margin at 50%. And we’ve said that we’ve kept excess capacity available as long as we continue to be within the public health emergency. When that expires which at least is anticipated in, call it, the middle of May, the assumption is that the pricing or reimbursement will come down. And then from our perspective as well, we’ll manage our cost structure appropriately and take out some of that excess capacity still leaving enough to hopefully handle if there would be an increase but that will result obviously in the margins coming down a bit as well but still COVID should continue to be at a margin greater than what the segment average would be.

A.J. Rice: Okay, that’s great. And then maybe just on the hospital business. I think, if I remember right, you had assumed that Ascension really wouldn’t contribute much on the bottom line in the fourth quarter as that was sort of ramping up but that maybe as you get everything working well, you make sure the customer is happy, et cetera, you would see gradual margin improvement over the course of ’23. Can you give us any more flavor for how much of that is baked in and with Ascension and some other high-profile deals announced. I know you guys mentioned the pipeline looks good. I wondered if sometimes deals get more deals, are you seeing even an acceleration in activity behind the scenes and people that are interested in perhaps taking a look at this.

Adam Schechter: Yes. So to answer the second part of the question. First, yes, we are seeing an increased number of people that are interested in looking at us running and acquiring parts of the hospital business. If you look at 2023, Ascension revenue is going to be about 5% of the base business growth. So if you do the math, it’s approximately $550 million to $600 million in 2023. That’s consistent with the initial guidance that we gave at the time of the acquisition. So we feel good about where we are and how we’ve been achieving the goals of that deal. The margin is expected to be in the low to mid-single digits in the first year but it will improve over time. It will never get to our average margins because the hospital business margins never get as high as our average diagnostic testing but it certainly will improve as we go through this year and into next year and beyond.

I want to thank everybody for joining us today. Looking ahead, we are on track to achieve important milestones on the spin. We’re looking to deliver on enterprise strategy and commitments and we feel great about the future business. So I want to thank you for joining us and we look forward to talking to all of you soon.

Operator: I would now like to hand the conference back to Adam Schechter for closing remarks.

Adam Schechter: Thank you, everybody. It’s been a pleasure to spend time with you. We appreciate that. Looking ahead, we’re on track to achieve important milestones on the spin and we’re excited about 2023 and beyond. So have a great day and we’ll talk to you all soon.

Operator: And this concludes today’s conference call. Thank you for participating. You may now disconnect.