LABORATORY CORP OF AMERICA HLDGS (LH) Earnings Report: … · 2016-04-25 · Good morning. Welcome...
Transcript of LABORATORY CORP OF AMERICA HLDGS (LH) Earnings Report: … · 2016-04-25 · Good morning. Welcome...
CompanyName:LaboratoryCorpofAmericaHoldingsCompanyTicker:LHSector:HealthCareIndustry:HealthServices
EventDescription:Q1Conf EarningsCallMarketCapasofEventDate:12.31BPriceasofEventDate:124.0
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LABORATORYCORPOFAMERICAHLDGS(LH)EarningsReport:Q1ConferenceCallTranscriptThefollowingLABORATORYCORPOFAMERICAHLDGSconferencecalltookplaceonApril25,2016,09:00AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
PaulSurdez;LaboratoryCorpofAmerica;InvestorRelationsDaveKing;LaboratoryCorpofAmerica;Chairman&CEOGlennEisenberg;LaboratoryCorpofAmerica;CFO
OtherPart icipants
DeborahKeller;Covance;AnalystRobertWilloughby;CreditSuisse;AnalystBillBonello;Craig-Hallum;AnalystLisaGill;JPMorgan;AnalystJackMeehan;BarclaysCapital;AnalystRossMuken;EvercoreISI;AnalystAmandaMurphy;WilliamBlair;AnalystNicholasJansen;RaymondJames;AnalystWillQuirk;PiperJaffray;AnalystRickyGoldwasser;MorganStanley;AnalystIsaacRo;GoldmanSachs;AnalystWhitMayo;R.W.Baird;AnalystRyanHalsted;WellsFargoSecurities;AnalystA.J.Rice;UBS;AnalystBrianTanquilut;Jefferies;AnalystDonaldHooker;KeyBancCapitalMarkets;AnalystMarkMassaro;CanaccordGenuity;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
WelcometotheQ12016LaboratoryCorporationofAmericaHoldingsearningsconferencecall.
(OperatorInstructions)
Asareminder,thisconferencecallisbeingrecorded.
IwouldnowliketoturntheconferenceovertoMr.PaulSurdez,VicePresidentofInvestorRelations.Pleasegoahead,sir.
PaulSurdez (InvestorRelations):
Goodmorning.WelcometoLabCorp'sfirst-quarter2016conferencecall.Asdetailedintoday'spressrelease,therewillbeareplayofthisconferencecallavailableviatelephoneandInternet.
WithmetodayareDaveKing,ChairmanandChiefExecutiveOfficer;GlennEisenberg,ExecutiveVice
CompanyName:LaboratoryCorpofAmericaHoldingsCompanyTicker:LHSector:HealthCareIndustry:HealthServices
EventDescription:Q1Conf EarningsCallMarketCapasofEventDate:12.31BPriceasofEventDate:124.0
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PresidentandChiefFinancialOfficer;andDeborahKeller,CEOofCovanceDrugDevelopment.
Inadditiontoourpressrelease,wealsofiledaForm8-Kthismorningthatincludesadditionalfinancialinformation.BothareavailableintheInvestorRelationssectionofourwebsiteatwww.labcorp.comandincludeareconciliationofnon-GAAPfinancialmeasuresdiscussedduringtoday'scalltoGAAP.
Finally,wearemakingforward-lookingstatementsduringtoday'scall.Theseforward-lookingstatementsincludeamongothersstatementsaboutourexpectedfinancialresults,theimplementationofourbusinessstrategyandtheongoingbenefitsfromacquisitions.Thesestatementsarebaseduponcurrentexpectationsandaresubjecttochangebaseduponvariousfactorsthatcouldaffectourfinancialresults.Someofthesefactorsaresetforthinour201510-K.
Wehavenoobligationtoprovideanyupdatestotheseforward-lookingstatementsevenifourexpectationschange.
NowIwillturnthecallovertoDaveKing.
DaveKing (Chairman&CEO):
Thankyou,Paul.Goodmorning.
WehadanimpressivequarterinwhichwecontinuedtodemonstratethepowerofourtransformedCompanythroughouroperatingperformanceandprogressonkeystrategicpriorities.First-quarterproformarevenuegrowthwasnearly9%withstrongorganicgrowthinbothLabCorpDiagnosticsandCovanceDrugDevelopment.
Thisgrowth,coupledwithreengineeringourbusinessprocessthroughProjectLaunchPadandcapturingadditionalcostsynergiesfromtheCovanceacquisition,droveanotherquarterofmarginexpansionanddouble-digitadjustedEPSgrowth.
Ourexcellentfirst-quarteroperationalperformanceandbusinessmomentumgiveusconfidencetoincreaseour2016revenueandEPSoutlook.Ourongoingsuccessisduetosustainedfocusonourmissiontoimprovehealthandimprovelivesandexecutiononourthreekeystrategicinitiatives:beingtheworld'sleadingproviderofdiagnosticsolutions,bringinginnovativemedicinestopatientsfaster,andusinginformationtochangethewaycareisdelivered.
Iwillnowupdateyouonourprogressonthesestrategicguideposts.
First,wearedeliveringdiagnosticsolutionsthroughacombinationofenhancedofferings,complementaryacquisitionsandtechnologicalinnovation.Wecontinuetoleadinofferingcutting-edgetesting,introducingover75newteststomarketduringthepastyear.Weareincreasinglydeployingourintegratedtestingcapabilities,industry-leadingscienceandinnovativetechnologyofferingstoestablishstrategicpartnershipswithproviders.
Hospitals,healthsystemsandlargephysiciannetworksseekusoutforourcomprehensivecapabilitiesinreferencetesting,supplychainmanagement,ITandinformatics,decisionsupportandclinicaltrials.
Wearealsofocusedonourrelationshipswithmanagedcareorganizations,abackboneofourbusiness.Wehavethestrongestmanagedcareportfoliointheindustryandareproudofourdeeppartnershipswiththeseplans.
Inaddition,weareincreasingourfocusonpartneringwithgovernmentandquasi-governmentpayersastheytakeonbroaderrolesindevelopingnewpaymentstructuresandcaremodels.
Underpinningourcorediagnosticstrategyisourinnovationindataintegrationandintoolstosupport
CompanyName:LaboratoryCorpofAmericaHoldingsCompanyTicker:LHSector:HealthCareIndustry:HealthServices
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enhancedconnectivity,reportinganddecisionsupport.Wedifferentiatefromourcompetitorsbyprovidingthesetools,aswellasthehighestquality,mostcostefficientlaboratoryservicestohelpawidearrayofpartnersastheymovetomoreextensivemanagementofpatienthealthandbroadersharingofrisk.
Wecomplementourorganicgrowthinitiativeswithcarefullyconsideredacquisitionsandpartnershipsthatdrivelong-termprofitablegrowth.Duringthequarter,weinvestedapproximately$100millioninstrategictuck-indeals,predominantlyfocusedonesoterictestingsuchasanatomicpathology,whichprovidescriticaldiagnosticinformationinthedeterminationoftheappropriatecourseofcancertreatment.
Lookingaheadouracquisitionpipelineremainsrobust,andweseeattractiveopportunitiestoenhanceourtestmenuandexpandourgeographicfootprint.
Inadditiontoourrevenuegrowthinitiatives,wearecommittedtoincreasingefficiencyandimprovingthecustomerexperience.ProjectLaunchPadisintroducingnewtoolsandsystemstoreengineerourprocesses,aswellasenhancethepatient,employeeandcustomerexperience.Withidentifiedprojectsunderwaysuchasimprovingourbillingsystemandpatientservicecenterworkflow,LaunchPadwillsustainablyreducecosts,benefitingthelong-termmarginsofLabCorpDiagnostics.
Weremainontracktodeliver$150millioninnetsavingsthroughthethree-yearperiodendingin2017.AlthoughLaunchPadisafiniteprogramaimedatprocessreengineering,wewillalwayshaveopportunitiestodriveshareholdervaluethroughfurtherproductivityandefficiencyprograms.
OurcultureofcontinuousimprovementbeganlongbeforeLaunchPadandwillremainafterweachieveourstatedLaunchPadgoals.Initssecondyear,LaunchPadhastransitionedfromshorterdurationinitiativestosystemreengineering,whichentailslongertimelinesforexecutionandlonger-termsavingsimpact.
Oursecond-quarterobjectiveisbringinginnovativemedicinestopatientsfaster.Weexecutethatobjectivebyofferinguniquecapabilitiesandsolutionstosolveproblemsforourcustomers.Inefficiencyintheclinicaltrialrecruitmentandstartupprocesspersistsasthemostsignificantpainpointforourbiopharmacustomers.Weareintroducingsolutionsthatnoothercompanycanreplicatetoaddressthischallenge.
WearecommercializingthecombinationofLabCorp'sproprietarypatientdataandCovance'sproprietaryinformaticsandinvestigatordatabaseinsupportofenhancedstudyplanning,aswellasinformedclinical--improvedclinicaltrialplacementandrecruitment.
Duringthequarter,theuseofLabCorpdataplayedakeyroleinwinningalargePhaseIIIoncologystudy,whichincreasedourcumulativeordersfromuseofLabCorpdatatoover$190million.Wehavebeguntoconvertthisbacklogintorevenueandremainontracktodeliver$150millioninincrementalrevenuethrough2018.
Inaddition,thenumberofpatientsthatprovidedconsentthroughourpatientportaltobecontactedaboutclinicaltrialssteadilyincreasedthroughoutthequarter.Webelievepatientswillwanttobepartofaprocessthatimprovesthespeedatwhichcutting-edgetherapeuticsaredeliveredtothemarket,andwe'reexploringpartnershipstoexpandourreachwiththisinitiative.
Overtimewebelievethatthisdatabasewillfurtherdifferentiateourstudy'sstartupandrecruitmentcapabilitiesinsupportofbetterdrugdevelopment.
Wecontinuetodevelopcomprehensivesolutionsinkeytherapeuticareas,capitalizingonourunique
CompanyName:LaboratoryCorpofAmericaHoldingsCompanyTicker:LHSector:HealthCareIndustry:HealthServices
EventDescription:Q1Conf EarningsCallMarketCapasofEventDate:12.31BPriceasofEventDate:124.0
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end-to-endcapabilitiesacrossallaspectsofdrugdevelopment.
ThescientificandclinicalexpertisethatCovanceDrugDevelopmentandLabCorpDiagnosticsofferincombination,ourcombinedlaboratoryexpertiseandourabilitytodeliverallofourserviceswiththehighestqualityandatscaleputussignificantlyaheadofourcompetitors.
Togiveyouacoupleofspecifics,ourindustry-leadingcentrallab,aproductofourcombinedcapabilities,reportedanotheroutstandingquarterofdouble-digitorganicrevenuegrowth.
WerecentlyintroducedautomationtoourGenevacentrallabtoimproveproductivityandexpandedittodoublecapacity,allowingustobetterservethegrowingdemandforourenhancedmenuoflabtestinginEurope,Africaandaroundtheglobe.
Ourcompaniondiagnosticfranchisecontinuestothriveandisanotherexcellentexampleofthepowerofourcombinedoffering.Companiondiagnosticsaregrowinginimportancetoourcustomerstohelpthemsecureregulatoryapproval,reimbursementandmarketadoptionfortheirmedicinesinanincreasinglydemandinghealthcaresystem.LabCorpandCovanceuniquelyoffercompaniondiagnosticcapabilitiesfromdiscoverythroughcommercialization.
Thesecapabilitiesincludedevelopment,validation,supportforinvitrodiagnostickits,abilitytoresponsiblylaunchlaboratorydevelopeddiagnostics,marketanalysis,reimbursementsupport,lifecyclemanagementandtimelycommercializationofdrugsandtheircompaniondiagnosticstooursizablebaseofprovidersandtheirpatients.
Weseestrongrevenuegrowthincompaniondiagnosticservicesacrossmanytherapeuticareas,includingoncology,inflammationandcentralnervoussystemdisorders.Weremainconfidentthatwewilldeliver$100millioninincrementalrevenueinthisareathrough2018andhighlightourdifferentiatedcapabilitiesfromourcompetitors.
Forourthirdobjective,wearechangingthewaycareisdeliveredthroughtheuseofinformationandtechnology-enabledsolutions.Indiagnostics,asnoted,weareexpandingourmenuofdecisionsupporttoolsandintegratedcontenttoassistpayers,physicians,healthsystemsandpatientsinbetterunderstandingandmanagingmedicalconditions.
Wealsorecentlymarkedtheone-yearanniversaryofBeaconLBS'scommerciallaunch,andwearepleasedwiththetechnology'sclearfinancialandclinicalbenefits.
Inaddition,weareseeingincreasedprovidersatisfactionwithBeaconLBS'stestandlabselectionfunctionality,aswellasitsease-of-use.WeintendtoaddnewcapabilitiestoBeaconLBSthisyearandremainoptimisticaboutitsintroductioninnewmarkets.
Indrugdevelopment,weareenhancingCovance'sacceleratedsuiteofservicestoenablefasterpatientenrollment,moreefficientsitemonitoring,andimprovedstudyplanning.Xcelleratehelpsreducethetimeandcostoftrialsbyprovidinganeasy-to-use,replicabletooltoimproveinsightintotrialsiteperformanceandtrialsuccess.
Wewillalsoimplementnewapproachestolowerthepatientburdenandimprovethepatientjourneythroughclinicaltrials.Werecentlylaunchedasuiteofmobilecapabilitiesdesignedtohelpbiopharmaceuticalandtechnologycompaniesnavigatetherapidlyevolvingmobilehealthlandscape.Throughthisnoveloffering,wewillprovideregulatoryconsultingandvalidationservicestohelpcompaniescertifytheaccuracyandconsistencyofmobiledevicesandapplicationsforuseinclinicaltrials.
Throughallofthisactivity,wehavebeenandwillbeexcellentstewardsofcapital.Wehavemadesteady
CompanyName:LaboratoryCorpofAmericaHoldingsCompanyTicker:LHSector:HealthCareIndustry:HealthServices
EventDescription:Q1Conf EarningsCallMarketCapasofEventDate:12.31BPriceasofEventDate:124.0
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progressinourcommitmenttodeleverthebalancesheet,andwearenowatapproximately3.5timesleverageapproachingourtarget.Wecontinuetodeploycapitaltowardstrategicacquisitionsandexpecttobeinapositiontoreturncapitaltoshareholdersinthesecondhalfoftheyear.
Byvirtueofourinvestmentsininnovation,talent,science,quality,operationalexcellenceanddistinctivetechnology,LabCorpisincreasinglywell-positionedtoprofitfromglobalopportunitiesacrossour$200billionaddressablemarket.
Iamproudofmycolleagueswhoeverydayreflectourcorevaluesofexcellence,integrity,teamwork,courage,inspirationandownershipastheyworktirelesslytoimprovethehealthandlivesofpatientsaroundtheglobe.
Ourteamseffortsarethereasonforoursuccessthisquarter,andtheywillcontinuetobeLabCorp'sgreatestcompetitiveadvantage.Ithankthemfortheirgreatworkandtheresultstheycontinuetodeliver.
NowIwillturnthecallovertoGlenn.
GlennEisenberg (CFO):
Thankyou,Dave.I'mgoingtostartmycommentswithareviewofourfirst-quarterresults,followedbyadiscussionofourLabCorpDiagnosticsandCovanceDrugDevelopmentsegmentsandconcludewithanupdateonour2016guidance.
Revenueforthequarterwas$2.3billion,anincreaseof30%overlastyear.Covancecontributed24%year-over-yeargrowthduetostrongdemands,aswellastheinclusionofafullquarterofresultscomparedtoapartialquarterlastyear.Theremainderoftheincreaseof6%wasdrivenbyLabCorpDiagnosticsstrongorganicgrowthandtuck-inacquisitions,partiallyoffsetbycurrency.
Grossprofitforthequarterwas$777millionor33.9%ofrevenuecomparedto$625millionor35.3%lastyear.Theincreaseingrossprofitwasdueprimarilytostrongdemands,productivityandacquisitions,partiallyoffsetbypersonnelcosts.ThedeclineingrossmarginwasprimarilyduetothemiximpactfromafullquarterofCovanceresults.
Onaproformabasis,grossmarginwouldhaveincreased50basispointsoverlastyear.
SG&Aforthequarterwas$412millionor17.9%ofrevenuecomparedto$442millionor25%lastyear.Specialchargesinthequarterwere$10million,primarilyrelatedtotheintegrationofCovanceandexecutivetransitionexpenses,comparedto$119millionayearago,whichwereprimarilyrelatedtotheacquisitionofCovance.
Excludingspecialcharges,SG&Ainthequarterwas$402millionor17.5%ofrevenuecomparedto$322millionor18.2%.TheincreaseinadjustedSG&Awasprimarilyduetoacquisitions,personnelcostsandbaddebt,whilethepercentageofourSG&AbenefitedfromafullquarterofCovance'slowerrate.
Onaproformabasis,adjustedSG&Awouldhaveimproved10basispointsoverlastyear.
Duringthequarter,werecorded$19millionofrestructuringcharges,primarilyrelatingtotheclosureofredundantfacilitiesandgeneralintegrationinitiatives.Amortizationexpenseforthequarterwas$44million,upfrom$31millionayearagoduetotheimpactofacquisitions.
Operatingincomeforthequarterwas$302millionor13.2%ofrevenuecomparedto$132millionor7.5%lastyear.Excludingamortization,restructuringandspecialitemsof$74million,adjustedoperating
CompanyName:LaboratoryCorpofAmericaHoldingsCompanyTicker:LHSector:HealthCareIndustry:HealthServices
EventDescription:Q1Conf EarningsCallMarketCapasofEventDate:12.31BPriceasofEventDate:124.0
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incomewas$376millionor16.4%ofrevenuecomparedto$302millionor17.1%lastyear.ThedeclineinmarginwasprimarilyduetothemiximpactfromafullquarterofCovanceresults.
Onaproformabasis,adjustedoperatingmarginwouldhaveimproved60basispoints.
Interestexpenseforthequarterwas$55millioncomparedto$104millioninthefirstquarterof2015.Thedecreasewasduetononrecurringacquisitionrelateditemsof$53millionrecordedlastyear,partiallyoffsetbyhigherdebtbalancesfollowingtheacquisitionofCovance.
Thetaxrateforthequarterwas37.3%.Excludingspecialchargesandamortization,theadjustedtaxrateforthequarterwas36.5%,upfrom35.4%lastyear,primarilyduetothegeographicmixofearnings.
Forthefullyear,wecontinuetoexpectouradjustedtaxratetobecomparabletolastyear'srateof35.3%.
Netearningsforthequarterwere$160millionor$1.55perdilutedshare.Excludingamortization,restructuringandotherspecialitems,adjustedEPSwere$2.02inthequarter,up15%from$1.76lastyear.Theseresultsincludedanetgaininthequarterof$0.05perdilutedshareonthesaleofinvestmentsecuritiesfromourventurefund.
Duringthequarter,operatingcashflowwas$123millioncomparedtonegative$87millioninthefirstquarterof2015.Lastyearcashflowwasnegativelyimpactedby$154millionofone-timechargesrelatingtotheacquisitionofCovance.Excludingthesecharges,operatingcashflowwasup$57millionoverlastyear,dueprimarilytoimprovedearnings.
Capitalexpenditurestotaled$71millionor3.1%ofrevenue,upfrom$34millionor1.9%lastyear.Capitalexpendituresinthequarterwereinlinewithtypicalspendinglevels,whilelastyear'sCapExwaslowduetothedelayedspendingrelatedtotheacquisitionandintegrationofCovance.
Asaresult,freecashflowwas$52millioninthefirstquarter,anincreasefrom$33millionlastyear,excludingthenonrecurringitems.
Atquarterend,ourcashbalancewas$696millioncomparedto$716millionattheendof2015.Totaldebtwasapproximately$6.4billion.
Duringthequarter,weinvested$97millioninacquisitions,andourleveragedeclinedto3.5timesdebttolast12monthsproformaEBITDA.
NowIwillreviewoursegmentperformance.Forcomparativepurposes,segmentresultsarepresentedonaproformabasisforallperiodsasiftheacquisitionofCovanceclosedonJanuary1,2015,andexcludeamortization,restructuring,specialitemsandunallocatedcorporateexpenses.
Reconciliationsofsegmentresultstohistoricallyreportedresultsareincludedintoday'spressreleaseandthecurrentreportfiledtodayonForm8-K.
NowIwillreviewtheperformanceofLabCorpDiagnostics.Revenueforthequarterwas$1.6billion,anincreaseof7.2%overlastyear.Theincreaseinrevenuewastheresultoforganicvolumegrowthmeasuredbyrequisitions,BeaconLBS,pricemixandtuck-inacquisitions,partiallyoffsetbycurrency.TherevenueincreaseincludesabenefitfromBeaconLBSof1%andunfavorablecurrencytranslationof0.6%.
Revenueperrequisitionincreased2.7%,benefitingfrompricemixandtuck-inacquisitions.
Inaddition,esoterictestingrevenuegrewatafasterratethancoretestingrevenue.
Totalvolumeincreasedby4%,ofwhichorganicvolumewas3.4%andacquisitionvolumewas0.6%.
CompanyName:LaboratoryCorpofAmericaHoldingsCompanyTicker:LHSector:HealthCareIndustry:HealthServices
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VolumebenefitedfromtheimpactofweatherandtheadditionaldaythatwaspartiallyoffsetbythetimingoftheEasterholiday.
LabCorpDiagnosticsadjustedoperatingincomeforthequarterwas$310millionor19.5%ofrevenuecomparedto$290millionor19.5%lastyear.Theincreaseinoperatingincomewasprimarilyduetovolume,pricemixandproductivity,partiallyoffsetbypersonnelcostsandbaddebt.Althoughtheoperatingmarginwasconsistentwithlastyear,itwasconstrainedbythemixedimpactfromBeaconLBSandanincreaseinthebaddebtrateofapproximately25basispointsduetoanincreaseinpatientresponsibility.
Fortheremainderoftheyear,weexpectourbaddebtratetoimprove,benefitingfromourLaunchPadinitiatives.Weremainontracktodeliverour$150millionLaunchPadsavingsgoaloverthethree-yearperiodending2017.
NowIwillreviewtheperformanceofCovanceDrugDevelopment.Revenueforthequarterwas$703million,anincreaseof12.6%overlastyear.Excludingtheimpactfromapproximately160basispointsofnegativecurrencyandtheexpirationoftheSanofisitesupportagreement,revenueincreased17.9%overlastyear.Thestrongrevenuegrowthwasbroadbasedacrossourearlydevelopment,clinicalandcentrallabbusinesses.
Adjustedoperatingincomewas$103millionor14.7%ofrevenuecomparedto$74millionor11.9%lastyear.Theincreaseinoperatingincomeandmarginwasprimarilyduetodemand,productivityandcostsynergies,partiallyoffsetbytheexpirationoftheSanofisitesupportagreementandpersonnelcosts.Weremainontracktoachieveourthree-year$100millioncostsavingsgoalthrough2017relatedtotheacquisitionofCovance.
Netordersduringthequarterwere$830million,representinganetbooktobillof1.18,whilebacklogattheendofthequarterwas$6.9billion.Thetrailing12-monthnetbooktobillwasalso1.18.
NowIwillupdateour2016guidance,whichassumesMarch31foreignexchangeratesfortheremainderof2016.Weexpectrevenuegrowthof8.5%to10.5%aftertheimpactfromapproximately40basispointsofnegativecurrency.Thisisanincreasefromourpriorguidanceof7.5%to9.5%duetostrongorganicgrowthanda60basispointimprovementincurrency.
WeexpecttheLabCorpDiagnosticssegmenttogrow4%to5.5%over2015aftertheimpactfromapproximately20basispointsofnegativecurrency.Thisisanincreasefromourpriorguidanceof3.5%to5.5%duetoorganicgrowthanda30basispointimprovementincurrency.
WeexpecttheCovanceDrugDevelopmentsegmenttogrow6%to9%over2015proformarevenueaftertheimpactfromapproximately50basispointsofnegativecurrency.Thisisanincreasefromourpriorguidanceof2%to5%duetostrongorganicgrowthand150basispointimprovementincurrency.
ExcludingtheimpactfromcurrencyandtheexpirationoftheSanofisitesupportagreement,wenowexpectnetrevenuetoincreaseapproximately9%to12%.WeexpectadjustedEPSof$8.55to$8.95,whichimpliesgrowthof8%to13%over2015andisanincreasefromourpriorguidanceof$8.45to$8.85.
Asareminder,ouradjustedEPSguidanceincludesanincreaseinoursharecountduetostockcompensationandoptionexercises,butdoesnotincludeanysharerepurchases.Weexpectfreecashflowof$900millionto$950million,unchangedfromourpriorguidance.
Thisconcludesourformalremarks,andwewillnowtakequestions.Operator?
QUESTIONS&ANSWERS
CompanyName:LaboratoryCorpofAmericaHoldingsCompanyTicker:LHSector:HealthCareIndustry:HealthServices
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Operator :
(OperatorInstructions)
RobertWilloughby,CreditSuisse.
RobertWilloughby(Analyst-CreditSuisse):
DaveandGlenn,wonderingwhymaybenotabitmoreprofitmarginleverageonthequarterbasedonhowwellthelabvolumes,aswellasrevenuesperaccession,trended,andthenmaybeaquickcommentonjustthedealpipelinerobust?Isitrobustforsmallerkindsoftuck-ins,oristhefocusmoreonsomelargertransactionsadditivetosomeofyournewerplatforms?
GlennEisenberg (CFO):
Okay.Letmegoahead--andthisisGlenn--IwillcoverthemarginquestionandthenpassovertoDave.Firstofall,obviously,wehadgoodmarginsoverallfortheCompany.At16.4%margins,wewereuparound60basispointsyearoveryearonaproformabasis.
Iknowyourcommentwasprobablymoredirectedtothediagnosticssideofthebusinesswherewemaintainedour19.5%marginsyearoveryear.AsIcommentedinouropeningremarks,ourfirstquarterwasconstrained.Sowereitnotforsomeofthoseissues,wewouldhaveseenmarginexpansion,andreallytherearethreeprimaryreasons.ThefirstisourBeaconLBSbusiness,whichwehadafullquarterthisyearwithnonelastyear.Itanalyzesactuallynowbeginningintothesecondquarter.Sogiventhatmostofitrightnowisstillpass-through,thatputsconstraintonourmargins.
Wealsodidhavebaddebtrateincreaseforthefirsttimegiventhehighpatientresponsibility.But,again,aswesaid,weexpectthatratetocomedowngoingforwardthroughLaunchPadinitiatives.Soitwon'tbeaconstraint,webelieve,goingforward.
Andthen,finally,worthnotingisthatwithourmeritincrease,wedidhaveagoodmeritincreaseyearoveryear.ThatwillannualizeinJulyofthisyear.So,forthefirsthalf,wewillseesomeconstraintonthemarginfromthat.Butoverallatover7%top-linegrowthmaintainingverystrong19.5%marginsstillmeansouroperatingincomegrewbyover7%,despitethoseconstraints.
Dave?
DaveKing (Chairman&CEO):
Thanks,Glenn.Bob,ontheacquisitionpipeline,Iwouldsaytheacquisitionpipelineisrobustacrossthebroadest--acrossthewholespectrum.Ourfocus,asevidencedinthequarter,isonthetuck-instrategicdealsthatonthediagnosticsidewouldenhanceourgeographicfootprintorexpandourtestmenuandonthedrugdevelopmentsidewouldprovidespecificareaseitheroftherapeuticexpertiseorotherassetsthatwouldcomplementourcurrentsetofofferings.
RobertWilloughby(Analyst-CreditSuisse):
Thankyou.
Operator :
BillBonello,Craig-Hallum.
BillBonello (Analyst-Craig-Hallum):
So,particularlygood-lookingquarterontheCovancesideofthebusinessandoverall.I'mjustwondering
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ifyouwouldbewillingtocommentatallatthispoint,withCovanceonboardformorethanayearnow,howyouarethinkingaboutgrowthoverthelongerperiodoftime?Doyouthinkyoucanbeasustainable10%plusEPSgrower,ordoyouhaveanykindofinternalobjectives?Anythingthatyoucangiveofcoloronthatfrontwouldbegreat.
DaveKing (Chairman&CEO):
Goodmorning,Bill.It'sDave.Thanksforthecomments.Ithinkwehaveasenseofwherewethinklong-termrevenuegrowthshouldbe,andthat'swiththediagnosticsbusinesslowtomid-singledigitsandwiththeCovancebusinessmidtohighersingledigitsconsistentlyovertime.HowthattranslatestoEPSobviouslyisafunctionofcapitaldeploymentandsomeotherthings.
So,Ithinkyoucanexpectusthisyeartosetsomeinspirational--aspirationaltargetsforEPSgrowthovertime.Ithinkifyoulookbackhistorically,obviously,beforethemajorreimbursementcutsof2013and2014,wehadaverynice,Ibelieveitwasafive-yearEPSCAGRof13%plus,andwehadacoupleofyearsofflattodecliningEPSsimplybecauseofdecliningpricingandthecutsattendanttothat.
ButIthinkit'sanexcellentquestion,andasIsay,Ithinkyoucanexpectusduringthisyeartosetoutsomelong-termEPSgrowthexpectationsthatweexpecttoachieveovertimeasthesebusinessesarefullyintegrated.
BillBonello (Analyst-Craig-Hallum):
Okay.Thanksalot.
Operator :
LisaGill,JPMorgan.
LisaGill(Analyst-JPMorgan):
Dave,canIjustfollowuponacoupleofyourcommentsthatyoumade?Justfirst,whenyouthinkabouttheacquisitionstrategyandyouthinkabouthowwellCovanceisdoingrightnow,canyoumaybejustgiveusalittlemorecolorastohowyouthinkabouttheacquisitionstrategythere?Youtalkedabouttuck-inmoreonthediagnosticside.But,onthedrugdevelopmentside,isthereareasthatyoufeelthatyouneedtoreallytrulycompeteinthemarket?
And,aswethinkaboutthebetterresultsinthequarter,wastheresomethingspecificthatdrovethatversusyouroriginalexpectations?
DaveKing (Chairman&CEO):
Morning,Lisa.Intermsoftheacquisitionstrategy,specificallyforthedrugdevelopmentbusiness,whatIwouldsayisthereis--Iwoulddivideitintotwoparts.Thefirstpartisjustcontinuingtolookatforrightnowthetuck-insandthethingsthatareadditivetoparticularpartsofthebusinessthatwewouldliketoexpand.So,therapeuticexpertise,marketaccess,theareaswherewefeelthatthereisaninterestingopportunitytoeitherexpandcapabilitiesorenhancecapabilitieswiththingsthatwouldbeadditivetotheoverallend-to-endcapabilitiesofthebusiness.
Overtime,aswehavesaid,weneed--wefeelthatweneedtobelargerintheclinicalbusiness,andsomeofthatwillcomefromorganicgrowthandtheinitiativesthatwehaveunderway,therapeuticexpertiseandintegrationwithLabCorpDiagnostics.Butitismyexpectationthatsomeofthatwillalsocomefromacquisition.
Iwouldsaythatnowourfocusisnotonanothersizabledeal.Ourfocusisoncomplementarycapabilities
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thatareadditivetowhatwehave.Although,obviously,weevaluatealotofthings,andwe'regoingtolookatanythingthatlooksliketherightopportunityforusgivenpricemultiplesandlong-termreturnoninvestedcapital.So,that'showIwouldsummarizetheacquisitionstrategyaroundtheCovancebusiness.
Intermsoftheperformance,itishardtosingleoutanyparticularareabecausetheyalldidsowell.Thebusinessisclickingalongextremelywell.DebisdoingagreatjobasCEO,andontopofthat,theleadershipmovesthatshehasmadehavecreatedterrificstabilityandsenseofpurposeintheorganization.
SoIcomplementeverybodyatCovancefromearlydevelopmentinpreclinicalallthewaythroughclinicalforaverystrongperformanceinthequarter,justasIcomplementeverybodyonthediagnosticsidefromphlebotomisttoseniorexecutiveforaverystrongperformancethere.
Wejustdidreally--wereallyexecutedwellonthestrategicinitiatives,andweperformedwelloperationallyinthequarter.
LisaGill(Analyst-JPMorgan):
Iwouldagree.Congratulationsonthatnicequarter.
Operator :
JackMeehan,Barclays.
JackMeehan (Analyst-BarclaysCapital):
IwantedtostartwiththestrengthatCovance.IcaughtsomeofGlenn'scommentaryaroundcentrallab,butIwascuriousifyoustackedupearlydevelopmentandlate-stagehowtheyfaredrelativetothat,oriftheywerereallycloseintermsofthegrowthratesinthequarter?
DeborahKeller (Analyst-Covance):
Goodmorning.ThisisDeb.So,Icangiveyoualittlemorecoloronthat.Earlydevelopment,asDavesaid,hadanotherstrongquarter.Themarkethasbeenrecoveringoverthepast18to24months,andourdemandremainsstrong.Theutilizationinthemarketistightening,whichresultsinslightpriceincreases,andithasinthelastsixquarters.
Sowecontinuetomanageourcapacityveryefficientlyandeffectively.
Asfarascentrallabs,wehavehadfantasticgrowth.WehavehadstrongvolumesandstrongdemandthathasbeenfueledbythebreadthofassaysthatwehavebecauseofthecombinationofLabCorpandCovance.
Wehavealsoseenaniceconversionofthestudiesthatwehaveincentrallabs,sothat'sbeendrivingvolume.Andclinicaltrials,astheygetmoreandmorecomplex,thenumberofesotericassaysareincreasing,andthatallowsustobeaone-stopshopforourcustomers,whichtheytendtovaluethat.
Whenyoulookatclinical,thisisthelargestmarketthatweserveandoneofthelargestopportunitiesthatwehaveforgrowth,bothforCovanceaswellasforthecombinedentity.Wehadstrongresultsthisquarter,andwecontinuetoinvestintalentandtools.
InJanuaryweaddedanewsalesleaderwhowaspreviouslytheheadofsalesforbothcentrallabsandearlydevelopment,andthen,asyouknow,werecentlyannouncedthatJonathanZunghasjoined,andhebringsawealthofexperienceinclinicaldevelopment,aswellasaperspectivefromthevoiceoftheclient.
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So,thesehires,plusourinvestmentininformatics,asDavehadtalkedaboutearlier,andthecombineddataisgoingtoallowustoaddressourclients'biggestpainpoints,whichisdecreasingthetimeforstudystartups,identifyingpatientsandsites.Sowewereverypleasedwiththeresultsthisquarter.
JackMeehan (Analyst-BarclaysCapital):
Great.That'sreallyhelpful.Andthenmaybejustonemoreonpersonnelcost.Itwasmentionedafewtimesinthepreparedremarks,justanareaofmodestpressure.Iwaswonderingifthatwasanythingincrementalthatyouareseeingandthenjustwhattheoutlookisfortherestoftheyear?Thankyou.
GlennEisenberg (CFO):
Jack,thisisGlenn.Onthepersonnelcosts,Ithinkwespoketojustobviouslythegrowthofthebusinessandthepeople,obviously,thatareneededtosupportthegrowth.Butwealsohavetheadditivepartofthehighermeritthatweprovidedlastyear,reflectiveoftheperformanceofthecompanythatwillannualizeinJuly.Butmorejustnormalgrowthinthebusinesssupportingthehighergrowthinourpersonnelcosts.
Operator :
RossMuken,EvercoreISI.
RossMuken (Analyst-EvercoreISI):
Youhighlightedthemomentumthathasbeenbuildingonthecross-sellopportunitywithutilizingthedatasetstocontinuetodrivereallynicenetordersatCovance.Iguessifyouthinkaboutcompaniesthatdothingsthatareoutsidethenormandaregroundbreaking,itusuallytakessometimeandnetworkeffectamongstthecustomerstogainmomentum.Howdoyoufeellikethattranslatedintoconversationsthataregoingonamongstyourdifferentcustomerbaseandunderstandingthevaluepropandhowyouaredifferentiatedandhowthatcanleadtoimprovedeitherenrollmenttimesorpatientqualityorwhathaveyouintermsofthemreallystartingtounderstandandseesomereferencestowhereyouarehavingmaybeadifferenteffectandapointofdifferentiationversusyourcompetitors?
DaveKing (Chairman&CEO):
Ross,thisisDave.IwillstartandthenaskDebifshehasanyfurthercomments.
Icantellyoufrommydirectinteractionswithseniorexecutivesatthebiopharmacompanies,Imeantheyinstinctivelyunderstandthevalueofthedata--andoftheLabCorpdataandthepatientdataandthepatientengagementandintimacythatwebring.
Aswesaid,thenumberonepainpointintermsofgettingtrialsstartedisfindingsites,findinggoodinvestigatorsandparticularlyfindingpatients,andyoulookatthestatisticsmosttrialsareunderenrolled.Alargemajorityoftrialsitesneverenrollapatient.Oncologytrials,inparticular,sufferfromalackofpatientenrollment,whichmakesithardtogetthedrugsapprovedandbroughttomarket.
So,myexperiencehasbeenthisisreadilyunderstood.Itissomethingthatourcustomersareveryenthusiasticabout,andwehavealotofdemand,notonlyforhelpusfindpatientsfortraditionaltrials,butalsohelpusfindpatientsforobservationalstudies,helpuscreateadatabaseofpatientsforregistrystudies.Ithinkthisisjustaterrificanduniquetool.
DeborahKeller (Analyst-Covance):
Yes,theonlyotherthingthatIwouldadd,Ross,isIthinkthiscombinationhasallowedustochangetheconversationwithclients.Ispentquiteabitoftimeontheroadmeetingwithclients,andtheyarevery
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interestedaboutthedifferentcapabilitiesandsolutionsthatareuniquetoCovanceandLabCorp.AndIthinktheclientshave--Ithinkifyoulookatsomeoftheresearchthathasbeenoutthere,theyfeelthatwearemakingtherightinvestmentstomeetnotonlytheirneedstoday,buttheirneedsasclinicaltrialstransform.
RossMuken (Analyst-EvercoreISI):
Great.Thanks,guys.
Operator :
AmandaMurphy,WilliamBlair.
AmandaMurphy(Analyst-WilliamBlair):
Iactuallyjusthadafollow-uptoRoss'squestion.So,itseemslikeintermsoftheconsentdatabasethatthatisquiteavaluableassetandprobablyquitedifficulttoreplicatewithouthavingthediagnosticpiece.Butitalsoseemslikethat'saUSfocusedasset.SocanyoujusttalkthroughhowthecombinedLabCorpisworkingtoleveragetheincrementalpatientdatathatyouhaveoutsideoftheUStodelivervaluetopharma?
DaveKing (Chairman&CEO):
Yes,Amanda,goodmorning.ItisDave.Obviously,partofthechallengethere,particularlyinEurope,istheprivacyregulationsaremuch,muchmorecomplicated.So,weareworkingwithpartnerstoexpandcapabilitiesbeyondtheUSdatabase,aswellastoexpandengagementwithintheUSdatabasetootherpatientssets,andwewillcontinuetoexplorethatasawaytomakethisanevenmoreglobaltool.
DeborahKeller (Analyst-Covance):
Amanda,theonlyotherthingIwouldaddisstillamajorityoftheclinicaltrialsaredoneintheUnitedStates,soitdoesgiveusanadvantageforourclients.
AmandaMurphy(Analyst-WilliamBlair):
Gotit.AndthenjustonBeacon,alsocuriousaboutyourperspectivelonger-termintermsofexpandingtoadditionalpayersandthenalsoshiftingthepricingmodelawayfrompass-throughtomaybeincorporateinsomefashionthevalue-addthatyouareproviding?Justwaslookingforyourthoughtslonger-termthere?
DaveKing (Chairman&CEO):
Yes,IthinkthefirstthingtorememberaboutBeaconisthisissomethingthatwasinvented.ImeanliterallyinventedandbuiltbytheBeaconteam.Theyhavedoneafantasticjobbringingthevisiontomarket,andIthinkweshouldbe--weshouldunderstandandappreciatehowharditistostartsomethinglikethisupfromscratch,buildit,buildthesoftwaretools,getclientadoption.
So,we'rethrilledwithwhereBeaconistoday.AndIthinkit'sveryimportantaswecontinuetobuildadditionaltoolslikegeneticandmolecularcapabilities,furtherdecision-supporttoolsforphysiciansthatweexpandthescopeofBeacontoincludemorecapabilities.
IremainveryoptimisticthattherewillbeadditionalmarketopportunitiesforBeacon,andmyhopeisthatwewillhavesomepositivedevelopmentsonthatintheyear.
AndtheotherthingIwouldsayintermsoftheprofitabilityisIdoexpectBeacontobeprofitableinthe
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nearertermasopposedtojustpassthrough,howeverrecognizingthatitwillnotbeasprofitableeverasthecorebusinessbecauseitisjustabusinessofadifferentnature.
AmandaMurphy(Analyst-WilliamBlair):
Gotit.Thanksverymuch.
Operator :
NicholasJansen,RaymondJames.
NicholasJansen (Analyst-RaymondJames):
Nicejobinthequarter.JustwantedtogetabettersenseoftheCovancerevenuesynergies.Ithinkyoumentionedover190millionordersasitpertainstothat$150millionbucketthatyoupreviouslycommunicated.
So,whatdoesthatordertranslateintorevenuedollars,sowegetabettersenseofwhereweareonthatfront,andsittinghere12monthsposttransaction,howcomfortableareyouwiththeotherphasesoftherevenuesynergies?Wehaven'theardtoomanyspecificupdatesontheotherpieces?Thanks.
DaveKing (Chairman&CEO):
Morning,Nick.It'sDave.So,obviouslytherateatwhichtheorderstranslatetorevenuedependsontheprogresswiththepharmacompaniesintermsofwhentheyreachfinalityonwhattheywantthedrugtobedevelopedandwhatthestudyparameterslooklike.So,that'sprobablya12-to18-monthtimeframetoactuallygetthoseorderstranslatingintorevenue,andwedon'tintendtoupdatethedollarsthataretranslatingintorevenue.Wewilljustkeepyouadvised,notspecificorderbyorder,butgenerallyagainstthe$150milliontarget.
Onthe$100millionthatwetalkedaboutforcompaniondiagnostics,ImeanIthinkwehavebeenveryclearthatwehavedoneextremelywell,andIthinkweinalllikelihood,ifIhadtohandicapitnow,Ithinkwewillexceedthat$100millionoverthethree-yearperiod,justbecausethatbusinesshasbeenthrivingwiththecombinedtools,andIcommentedonthatIthinkatsomelengthinthepreparedremarks.
Ithinkonwhatwehadidentifiedasthelast$50million,whichisthereal-worldevidence,thatisprobablyalonger-termimpactjustbecauseofthenumberofareasinwhichreal-worldevidenceislikelytobeapplicable.ButnetnetIfeelveryconfidentthatwhatweidentifiedasthe$300millioninrevenuesynergiesby2018willbeaccomplished.
NicholasJansen (Analyst-RaymondJames):
Thanks.Andthenjuston--maybeforGlennonthebaddebtside,wehaveseenyourpeeralsocalloutbaddebtfromanaccelerationfromayear-over-yearperspective,andIknowyouguysareworkinghardonLaunchPadtooffsetsomeofthat.Butjustmaybegointowhatwewereseeingfromapatientcollectabilityfrontandhowweshouldbethinkingaboutbaddebtoverthenext12to18months?Thanks.
GlennEisenberg (CFO):
Yes,again,someofitisjustseasonal.Wealwaysseeourhigherbaddebtrateinthefirstquarterandthentaperoffthroughouttherestoftheyear.Butwhatwasuniqueforthisfirstquarterwasthatonayear-over-yearbasis,insteadofseeingtheprogressthatwehavebeenexperiencing,weactuallysawtherategoupforthefirsttime.So,similarto,again,anindustryissuewherewehavehigherpatientresponsibility,higherdeductibleplans,earlieronintheyear,aswelookgoingforwardwhileitisstill
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expectedtobeachallenge,wedoexpecttheratetocomedown.Wethinkitwillbemorecomparablewhatweexperiencedyearoveryear,sowedon'texpectittobeaoverallconstraintonthemargins.ButdrivenbythesuccessthatweareexperiencingonourLaunchPadinitiatives,thatwillonlycontinuetoaccruefavorablygoingforward.
So,anissueinthequarter,don'texpectittobeonegoingforward,butwereitnotfortheLaunchPadcouldbe.
DaveKing (Chairman&CEO):
And,Nick,it'sDave.Justaddalittlecolortothat.Obviously,weareseeingmoreandmorepatientsinhighdeductibleplans,whetherthroughexchangesorthroughcommercialandemployerplans.So,morepatientsinhighdeductibleplansmeansmoredollarsoutofpocketbeforethereisanyinsurancepaymentwhatsoever.
Whatthatmeansiswithhigherdeductibles,higherpatientresponsibilityattheonsetoftheyear,andthenwe'realsoseeingplanswithhigherco-paysandwithagreaterincidenceofnoncoveredservices.So,betweenthosethreefactors,youareseeingmoredollarsofexposureflowingtopatient.Andalthoughourpatientcollectionrateisgenerallyverygood,itstillhasmoredollarsflowingtopatientsandjustputsmorepressureoncollectingtheoverall--thatoverallcomponent.
And,asGlennsaid,someupwardmovementinthequarter,butwestillfeelconfidentthatfortheyearwewillbeinthesamerangeaswewerelastyear.
NicholasJansen (Analyst-RaymondJames):
Thanksforthecolor.
Operator :
(OperatorInstructions).WillQuirk,PiperJaffray.
WillQuirk(Analyst-PiperJaffray):
Firstquestionhere,onBeacon,Dave,aswethinkabouttheexpansionoftheprogram,doyouthinkthatwe'regoingtoendupgoingthroughtrialingperiodsasthisexpandsbeyondFlorida,ordoyouthinkthatyoucantakealloftheexperienceslearnedfromtheinitialrolloutandthetrialingprogramthereandputafullprograminforcewhenyouexpandit?
DaveKing (Chairman&CEO):
Morning,Bill.IthinkBeaconisreadilyscalable,andIthinktherehavebeensomeverygoodlessonslearnedforusinFlorida,astherealwaysiswhenyoudosomethingnew.
So,Idon'tanticipatealotofdifficultyinscalingtheprogramtonewmarketsortwonewpayers.Remember,itisasoft--itisbasicallyasoftwaretool,andsothewholeideaofBeaconwasbuildoneandusemanytimes,nothavetobuildabunchofcustomizablesolutions,andIthinkwehavedoneaverynicejobachievingthat.
WillQuirk(Analyst-PiperJaffray):
Gotit.Andthenasafollow-up,justthinkingalittlebitaboutacoupleofthemacrotopics.ObviouslyalothasbeensaidabouttheFDAregulationofLDTs,butcanyoutalkalittlebitabout--kindoftwistingthisalittlebit--ImeantheremightbeapotentialopportunityhereforCovance.Haveyouguysthoughtaboutthat,andifso,isthereanywaytosizethatpotentialmarket?Thanks.
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DaveKing (Chairman&CEO):
Well,Ithink--IguessIwouldsayaswethinkaboutFDAregulationofLDTs,ourpositionhasbeenprettyclear.TheremaybesomeopportunityforCovancethere,although,again,rememberthatincompaniondiagnosticsdevelopment,wehavesupportedbothLDTlaunchesandkitsdependingonthepreferenceofthepharmaceuticalpartnerandwhattheywanttheoutcometobe.
So,Idon'tthinkofitas--Ithinkofitasthereisaverylargeincrementalmarketforcompaniondiagnostics,butIdon'tknowthatthatwouldtranslateintoLDTsversus--Iwouldn'tbreakitdownLDTsversuskits.Iwouldjustthinkaboutitaswhatdoestheglobalcompaniondiagnosticsopportunitylooklike,andasweknow,that'svery,veryrobust.
WillQuirk(Analyst-PiperJaffray):
Gotit.Thanks,Dave.
Operator :
RickyGoldwasser,MorganStanley.
RickyGoldwasser (Analyst-MorganStanley):
Goodmorningandcongratsonaverygoodquarter.Ihavetwofollow-upquestions.One,onthevolumeside,inthepreparedremarks,youtalkedabout3.4%increaseinorganicvolumewithsomemovingpartsaroundtheweatherandleapyearandobviouslyEaster.
So,canyouhelpjustquantifyforuswhatwereorganicvolumeexcludingthosemovingparts?
GlennEisenberg (CFO):
Hi,Ricky.ThisisGlenn.That'sright.Fromanorganicvolumestandpoint,the3.4%includedthenetbenefitsofthosethreeitemsthatwewouldsaywouldberoughly,callit,1.5%to2%benefitoutofthat3.4%.
RickyGoldwasser (Analyst-MorganStanley):
Okay,great.Soweareactuallyseeingvolumecontinuetobeinlinewithwhattheywerelastyearonanorganicbasis,itseems.
GlennEisenberg (CFO):
That'sright.
RickyGoldwasser (Analyst-MorganStanley):
Okay.So,thenmynextjustfollow-uprelatestoCovance.So,itseemsthatCovance'smarginhasexpandednicelybyabout[280]basispointsinthequarteronayear-over-yearbasis.So,howdoesthat14.7%marginforCovancecomparetoyourinternalgoals,andwhatisyourlong-termmargintargetforthesegment?
GlennEisenberg (CFO):
Ricky,thisisGlenn.IwillstartandDebmaywanttoprovidesomecoloraswell.Butobviouslyfirst200wewouldsayitwasup280,sowewanttogivethemfullcreditforaverystrongquarterinmarginimprovement,drivenoffofobviouslyaverystrongtop-linegrowthfortheCompany.
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Thereisseasonalityintherate,sowewouldalwaysexpectthefirstquarterrateforthesegmenttobelowinthefirstquarterandthenpickupfortheyear.So,fromourperspective,itiscontinuedgrowthinmarginyearoveryear.Giventhestrongdemand,giventheproductivity,giventhesynergiesthatwearestillcapturing,wedoexpectanotherstrongmarginimprovementyear,andIwouldberemissifDebdidn'tcomebackandsayherexpectationisalwaystocontinuetodrivethosemarginsgoingforward.But,Deb,youmaywanttoaddsomecolor.
DeborahKeller (Analyst-Covance):
TheonlycolorIwouldadd,Ricky,isthatwehadstronggrowthinbothcentrallabsandearlydevelopmentdemand,andbothofthosehavenicedropthroughonanincremental,andtheywerethebiggestdriverofourOMexpansionandthatcoupledwithourcostsynergies.
Andusuallyfirstquartertendstobeasofterquarter,butwedidwell.Sowecontinuetoexpectthefull-yearmarginstoimprove.
RickyGoldwasser (Analyst-MorganStanley):
So,wasthereanypullforwardinthequarter,orshouldwejustexpectthebusinessfortheremainderoftheyeartocontinueatkindofthatpace?
GlennEisenberg (CFO):
Thereisnothingpullforward,Ricky.Thesynergyplanisobviouslyclearlylaidoutinternally,andwedidn'tpullanythingforward.
RickyGoldwasser (Analyst-MorganStanley):
Okay.Great.Thankyou.
Operator :
IsaacRo,GoldmanSachs.
IsaacRo (Analyst-GoldmanSachs):
Aquestiononfreecashflow.YouguysraisedguidanceforrevenueandEPS,andIwaswonderingifyoucouldmaybebreakdownsomeofthekeymovingpartsthatwouldexplainwhythefreecashguidanceisnotalsogoingup?
GlennEisenberg (CFO):
Hi,Isaac.ThisisGlenn.First,obviously,theguidancewehavemaintainedatthecallit$900millionto$950million.Whenyoulookattheimprovementintheearnings-per-shareguidance,whichwehavetakenupto$0.10,wecommentedaround$0.05ofthatwasfromthegainonthesaleofsecuritiesfromourventurefund.Whilewedidpickupplusorminusaround$15millionincashfromthesaleofthosesecurities,thatdoesnotshowupinfreecashflow.Itisbelowtheoperatingline,sothatcashwouldnotbeincluded.
So,it'sreallyjusttheoperatingimprovementimpactingEPSthatwouldbecashrelated.Givenwhereweareintheyearandwehavea$50millionspreadbetweenthe$900millionand$950millionandthefactthatthefirstquarterisseasonallylow--wedidaround$52millionofourfreecashversusour$900millionplusfortheyear--wefeltitappropriatetomaintainthecurrentlevelofourguidance,andthenobviouslyafterthesecondquarterwithsixmonthsremaining,wewillgoaheadandrevisitit.
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IsaacRo (Analyst-GoldmanSachs):
Sure.Thatmakesense.Appreciatethat.Andthenafollow-upontheone-timegains,couldyoumaybewalkusthroughtheprocessthatyoutypicallygothroughtodeterminewhenyoumonetizethoseinvestments,andtowhatextentmightwewanttokeepinmindthepossibilityformoreofthattocomethisyear?Thankyou.
DaveKing (Chairman&CEO):
Isaac,it'sDave.Wehaveafundthatmakesventureinvestments,andthoseinvestmentsaretypicallyinareasthatwethinkareofeitherlong-termopportunityorthingswewouldliketoknowmoreaboutorthingsthatmightbeadditivetoourbusinessordisruptivetoourbusiness.Andanytime--so,forexample,oneofourearlierinvestmentswentpublic.Wearenotinthebusinessofowningpublicsharesinpubliccompanies,andsoatthatpoint,wemadethedecisiontomonetizeit.
Welookatourreturn,thecontinuedvalueofourinvestmentoverthelong-term,whetherwearebeingaskedtoinvestmoreatthetimethatwechoosetomonetize,andeachoneonacase-by-casebasis,wemakeadeterminationofwhatmakessense.
So,thereisnowaytopredictwhentheseeventswilloccur,andperiodicallywehavesomelosersaswellassomewinners,andit'snotsomethingwecanreallybuildintoanymodel.
IsaacRo (Analyst-GoldmanSachs):
Gotit.Understand.Thanks,Dave.
Operator :
WhitMayo,RobertBaird.
WhitMayo (Analyst-R.W.Baird):
Ihavereallyjustgotonequestion.IjustwantedtogobacktotheCovancecostsynergies.Justcuriouswhereyouarefindingmostoftheopportunities?Isthismostlyprocurementsavingsandwhetherornotyouhaveconsolidatedanythingonthecentrallabatthispointandifthatisanopportunitygoingforward?
GlennEisenberg (CFO):
WehaveconsolidatedtheSingaporecentrallabs,andwe'reintheprocessobviouslyofevaluatingotherappropriatefacilityconsolidations.SomeofthesavingsthisquartercomefromconsolidationofdatacentersofCovancedatacentersintoLabCorpcapabilities.
Ithinkitisverybroadlybasedacrosspubliccompanycosts,procurementcosts,personnelcosts,duplicativecapabilitiesthatcanbestreamlined.So,thereisn'tanysingleareatopointout,otherthantosaythatwecontinuetoevaluatenotonlytheCovancebusiness,buttheintegratedbusinessesandthecorporateinfrastructuretoidentifyadditionalopportunities.
WhitMayo (Analyst-R.W.Baird):
Great.Thanksalot.
Operator :
(OperatorInstructions).GaryLieberman,WellsFargo.
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RyanHalsted (Analyst-WellsFargoSecurities):
ThisisRyanHalstedinforGary.Justmyonequestion.Ontherevenueguidanceupdate,excludingthecurrencyimpact,Covancerevenueguidanceisforabout--increasedby250basispoints.Iwaswonderingifyoucouldcalloutwhereyouexpecttoseethemajorityofthatgrowth?Isitprimarilyfromthecentrallab,orhowshouldwethinkaboutthat?Thanks.
GlennEisenberg (CFO):
Ryan,thisisGlenn.Iwillatleaststartwiththecommentthat--andIthinkitwasalludedtoinopeningremarksaswell--thatwehavebeenverypleasedwiththebroad-basedviewofhowCovanceisperformingacrossallthemajorbusinesslines.Whenyoulookattheimpliedguidancefortherestoftheyearthatare,callit,around6%growth,webelieveitisbroadbasedandconsistentwithwhatDavecategorizedbeforeasnormal,callit,historicalgrowthwithinthesegment.
DaveKing (Chairman&CEO):
AnditisDave.We'renotgoingtoproviderevenueguidancebysegmentwithinsegment,soIagreewithGlenn.Thinkofitasjust--itisbroadbasedacrosstheentirebusiness.
Operator :
A.J.Rice,UBS.
A.J.Rice (Analyst-UBS):
Justtwopricing-relatedquestions.IfI'vegotmycalculationright,yourrevenueperrequisitioninthequartersteppedupfromthefourth-quarterratetoabout50basispointsto2.7%yeartoyear.Isthatmix,oristhereunderlyingpricetrendandhowmuchyoufactorthatintotheupdatedguidance?
AndthenIguesslonger-termpricing,anyupdateontheclinicallabfeescheduleresetandyourdiscussionswithCMSandCongress?
GlennEisenberg (CFO):
A.J.,Iwillstartwithjustthepricemixcomment.Itisprimarilymixrelated.Obviously,webenefitedfromacquisitionsthathavemixedusup.Plus,wetalkedaboutinthemixwithinourtestgroup.Pricinghasbeenrelativelystable,whichisapositive.WealsodohavesomeLaunchPadinitiativesthataretargetedtothepricingside,butoverallwewouldsaythattheincreasethatyousawwithinthepricemixisprimarilymixrelated.
DaveKing (Chairman&CEO):
AndA.J.,itisDave.OnPAMA,asyouprobablysawthisweek,the--anoticewasfiledintheFederalRegisterindicatingthatthefinalrulehasgoneovertoOMBforreview.
SothereobviouslyhasbeenastepforwardbyCMS.Wedon'thaveinsightintowhatisinthefinalrule,buthopefullyithasaddressedacoupleofthemajorissueswiththedefinitionofapplicablelabsandsomeoftheotherthingsthatwehighlighted.
WecontinuetoworkwithCMSandobviouslywithalloftheconstituenciesinCongressonboththedefinitionalandthetimelineforimplementationand,again,highlighttheletterfromSenatorHatchandSenatorWyden,aswellastheletterfrom26,Ibelieve,membersoftheHouseandothermembersoftheSenate,indicatingthataJanuary2017implementationdatewas--isnotpractical.Wefullyagreewiththat,andwehopeandexpectthatCMSwillbetakingapracticalandreasonableapproach.
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A.J.Rice (Analyst-UBS):
Okay.Thanks.
Operator :
BrianTanquilut,Jefferies.
BrianT anquilut (Analyst-Jefferies):
Thanksfortakingthequestion.Glenn,justreallyquickonG&A,ittickedupquiteabitsequentially.Howshouldwethinkaboutthatoverthecourseoftheyear?
GlennEisenberg (CFO):
Justtoyourpoint,itisobviouslygoingtofluctuatequartertoquarter,butasyouthinkaboutitforthefullyear,wedoexpecttoseeleveragefromG&A.Webenefitedonaproformabasisyearoveryear,eveninthefirstquarter,butfairlynominally.Sowedidseeatick-upinunallocatedcorporateexpenses,whichwasoneoftheconstraints,ifyouwill.Butaswetarget,callit,theroughly1.5%ofourrevenuesforthatcategory,wewerehighforthequarter,butforthefullyear,weexpecttobeatthat,callit,plusorminus1.5%level.
BrianT anquilut (Analyst-Jefferies):
Gotit.Thanks.
Operator :
DonaldHooker,KeyBanc.
DonaldHooker (Analyst-KeyBancCapitalMarkets):
Great.MaybejustonegeneralquestionwhilewehaveDebhere.Whenyoulookat--whenyoutalkaboutmobiledevicesinclinicaltrialsandregulatoryissuesaroundthat,whereexactlyareweinusing--broadlyspeaking,usingmobiledevicesindifferentwaysinclinicaltrialsandmaybeoneortwoareaswhereyouthinkwouldbethebiggestsourceofupsideusingtheseinternet-enabledmobiledevices?
DeborahKeller (Analyst-Covance):
Well,that'saverybroadquestion,soIwillgiveyouacouplespecificanswers.One,theyareusedinclinicaltrialsmainlyaroundpatientcentricity,makingiteasierforapatienttoparticipateandadheretotheprotocolandtodosomemonitoring.Butrightnowwhatweareworkingwithclientsistodevelopthat,becausethedatahastocomeinfromthesedifferentdevicesandthenbeputintoasystem,whichthencouldpotentiallygointoafiling.So,that'swhatweareworkingonvalidatingforourclients.
So,therearealotofopportunities,butIwouldsaythefirstpriorityisprobablyaroundpatientcentricity.
DaveKing (Chairman&CEO):
AnditisDave.IfullyagreewithDeb.Ithinkalsoaswethinkaboutthemobilesuitethatwelaunched,oneofthecriticalcomponentsistomakesurethatthedevicesthatarebeingusedarevalidatedandaccuratebecausethere'snothingworsethanpatientsusingmobiledevicesandprovidinginformationobviouslythatiseithernotvalidatedorthatvariesfromdevicetodevice.So,that'sgoingtobeanimportantcomponentofuseofmobiledevicesinclinicaltrialsaswegoforward,andwearepleasedthatwehavelaunchedthetoolstobeabletohelpourclientswiththat.
CompanyName:LaboratoryCorpofAmericaHoldingsCompanyTicker:LHSector:HealthCareIndustry:HealthServices
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DeborahKeller (Analyst-Covance):
Itisaniceadjacencytoourcorecompetencyofclinicaltrials,so,andwedosomanyvalidations.Sowehavetheregulatoryexpertise,aswellasthevalidationexperience.So,ithasbeenaniceofferingforus.
DonaldHooker (Analyst-KeyBancCapitalMarkets):
Thankyou.
Operator :
MarkMassaro,Canaccord.
MarkMassaro (Analyst-CanaccordGenuity):
Thanksforthequestion.AquestionforDave,howdoyouprioritizeM&Abetweendiagnosticanddrugdevelopments?Andthenmorespecifically,asyouthinkaboutyourcorediagnosticsbusiness,recentlyyouhadadealinthewomen'shealthspace,butagainhowdoyouprioritizewomen'shealthoveroncologyorNGS?Andthenmaybeafinalcommentonmultipleswouldbegreat.Thanks.
DaveKing (Chairman&CEO):
Well,wehavearigorousprocessforlookingatacquisitions,anditdoesn'tcenteronwhetheritisadiagnosticsoradrugdevelopmentacquisition.Itcenterson,firstofall,doesitfitoneofourthreestrategicpriorities,whichiswehavetalkedaboutisbeingtheworld'sleadingproviderofdiagnosticsolutions,numberone;numbertwo,bringingnovelmedicinestopatientsfaster;andnumberthree,usingtechnologyandtoolstotransformthewaythatcareisdelivered?
So,anythingwedohastofitwithinthosethreebasicparameters.Thenextthingwelookatis,doesitenhanceourcapabilitiesinameaningfulway,whetherthoseareexistingcapabilities,whethertheyareadd-oncapabilitiesthatweneedtobebetteratthebusiness.Andthenisit--orgeographiccapabilities.So,itcouldbefootprint.Itcouldbetestmenu.Itcouldbeincrementalcapabilitiesthatsupportoneortheotherofthebusinesses.
Thenwelookatprice,multiples,returnoninvestedcapital,IRR,discountedcashflows,allthebasicacquisitionmetrics.And,so,thequestionwhatareweprioritizing,thenicethingaboutourpositionnowisthattherearemany,manyopportunitiestodeploycapitaltowardsacquisitions,andyetourbusinessesareperformingextremelywell.Andsothereisnomajorgapthatweneedtofill.
And,so,Idon'tthinkIcananswerthequestion,whatisthehighestpriority.Thehighestpriorityishighvalue,highreturndealsthataregoingtofitourstrategicframework.
MarkMassaro (Analyst-CanaccordGenuity):
Thankyou.
Operator :
Thatconcludesourquestionandanswersessionfortoday.IwouldliketoturntheconferencebackovertoMr.Kingforclosingremarks.
DaveKing (Chairman&CEO):
Thankyou,all.Asyouareaware,JayBoylerecentlyretiredasExecutiveVicePresidentandCEOofLabCorpDiagnostics.IwouldliketosayafewwordsinappreciationofJay'smanycontributionstoLabCorp'ssuccessesoverthepastdecade.
CompanyName:LaboratoryCorpofAmericaHoldingsCompanyTicker:LHSector:HealthCareIndustry:HealthServices
EventDescription:Q1Conf EarningsCallMarketCapasofEventDate:12.31BPriceasofEventDate:124.0
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IhaveknownandworkedwithJayformorethan15years.Hehasbeenanexceptionallawyerandcolleague,butalsoatrustedadvisor.JayservedwithgreatdistinctioninallofhisrolesatLabCorp,includinglegal,managedcare,ChiefOperatingOfficer,andmostrecentlyCEOofLabCorpDiagnostics.AmongJay'smanyachievementswashisinstrumentalroleinnegotiatingourindustry-changingcontractwithUnitedHealthcare,whichwasacriticalstepforusinbecomingthelargestlaboratorycompanyintheworld.
UnderJay'ssteadyleadership,LabCorpexecutedbrilliantlyonourstrategicprioritiesofgrowingthebusiness,establishingdeeperpartnershipswithmanagedcareandimprovingcustomerservice.Asoutstandinganexecutiveashehasbeen,Jayisatthesametimeanexceptionalperson.TherearelegionsofLabCorpemployees,includingme,whohavebenefitedfromJay'swisecounsel,hisextraordinarygenerosityandhisbigheart.
Onbehalfofallofour50,000employeesaroundtheglobe,IwouldliketothankJayforhiscontributionstoLabCorpandwishhimwellinhisretirement.Andwiththat,wethankyouforjoiningourcallthismorningandwishyouagreatday.
Operator :
Ladiesandgentlemen,thankyouforparticipatingintoday'sconference.
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