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Laboratory Corporation of America Holdings (LH)

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Laboratory Corp. of America Holdings (LH)

Q4 2016 Earnings Call

February 16, 2017 9:00 am ET

Executives

Scott Frommer - Laboratory Corp. of America Holdings

David P. King - Laboratory Corp. of America Holdings

Glenn A. Eisenberg - Laboratory Corp. of America Holdings

John D. Ratliff - Laboratory Corp. of America Holdings

Analysts

Jack Meehan - Barclays Capital, Inc.

Robert Willoughby - Credit Suisse Securities (USA) LLC (Broker)

William Bishop Bonello - Craig-Hallum Capital Group LLC

Nicholas M. Jansen - Raymond James & Associates, Inc.

Lisa Christine Gill - J.P. Morgan Securities LLC

Elizabeth Anderson - Evercore Group LLC

Amanda Louise Murphy - William Blair & Co. LLC

Alexander D. Nowak - Piper Jaffray & Co.

Ralph Giacobbe - Citigroup Global Markets, Inc.

Steven J. Valiquette - Bank of America Merrill Lynch

Dan Leonard - Deutsche Bank Securities, Inc.

A.J. Rice - UBS Securities LLC

Gary Lieberman - Wells Fargo Securities LLC

Ashley Polmateer - Morgan Stanley & Co. LLC

Isaac Ro - Goldman Sachs & Co.

Brian Gil Tanquilut - Jefferies LLC

Mark Anthony Massaro - Canaccord Genuity, Inc.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the LabCorp Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, today's conference is being recorded.

I'd now like to introduce your host for today's conference, Mr. Scott Frommer, Vice President of Investor Relations. Sir, please go ahead.

Scott Frommer - Laboratory Corp. of America Holdings

Good morning, and welcome to LabCorp's fourth quarter and full-year 2016 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: Dave King, Chairman and Chief Executive Officer; Glenn Eisenberg, Executive Vice President and Chief Finance Officer; and John Ratliff, CEO of Covance Drug Development.

In addition to our press release, we also filed a Form 8-K this morning that includes additional financial information. Both are available in the Investor Relations section of our website at www.labcorp.com, and included a reconciliation of non-GAAP financial measures discussed during today's call to GAAP.

Finally, we are making forward-looking statements during today's call. These forward-looking statements include, among others, statements about our expected financial results, the implementation of our business strategy and the ongoing benefits from acquisitions. These statements are based upon current expectations and are subject to change based upon various factors that could affect our financial results. Some of these factors are set forth in detail in our 2015 Form 10-K. We have no obligations to provide any updates to these forward-looking statements even if our expectations change.

Now, I'll turn the call over to Dave King.

David P. King - Laboratory Corp. of America Holdings

Thank you, Scott, and good morning. LabCorp had a strong finish to an outstanding year. We delivered record revenue of $9.4 billion, record earnings per share of $8.83, and record free cash flow of $900 million, while driving margin improvement in both segments. We also reinitiated our share repurchase program, buying back $50 million worth of shares in the fourth quarter.

Our 2017 guidance contemplates another year of strong revenue and EPS growth as well as margin expansion, producing record free cash flow which we will continue to deploy toward return of capital to shareholders, strategic acquisitions, and debt reduction. We continue to drive these strong financial results through a combination of operational improvements and long-term strategic initiatives. I will highlight key activities in these areas in turn.

In 2016, we made significant progress on a number of initiatives designed to enhance quality of care, improve our patient and customer experience, and increase efficiency. Through process reengineering, the integration of new tools and technology and facility consolidations, our LaunchPad program continues to deliver long-term quality and margin improvement to our Diagnostics segment.

The LaunchPad portfolio currently includes over 100 projects at various stages of implementation. At LaunchPad's inception, we established a goal of sustainably reducing $150 million of expense from the business during the three years ending in 2017. Ending in the year three, we remain on track to achieve this objective, and our LaunchPad initiatives will generate additional savings extending into 2018 and beyond.

Let me review a few of these activities now. Project Phoenix involves deployment of new Revenue Cycle Management technology. Our nationwide insurance eligibility verification tool has improved our ability to capture accurate patient information at the time of service in our patient service centers.

We also recently introduced, in several markets, a patient responsibility estimator which provides patients with an advanced estimate of what they will pay for our services. We plan to introduce this offering to our entire PSC network throughout 2017, improving pricing transparency and point-of-service collections, and reducing surprises for our patients when they receive their bills.

Project Horizon consists of multiple activities to improve the patient service center experience. As part of this project, we will provide new self-service registration options at select sites later this year, improve the PSC selection and appointment scheduling experience, and incorporate advancements in technology to allow patients to access these tools seamlessly from multiple mobile devices.

We also implemented a workflow and workforce optimization tool as part of Project Liftoff, enabling us to implement scheduled adjustments and process changes on a site-by-site basis for our contact centers and PSCs.

These improvements, along with new employee shift options, will provide greater certainty for our employees about their schedules, and enhance the customer and patient experience by deploying staff based on the real-time needs of our sites. Our initial pilot is underway, and we will deploy this technology in other functional areas in the future.

In addition to LaunchPad, we continue to benefit from the ongoing implementation of lab automation such as our proprietary Propel robot. The Propel robot enhances quality and efficiency, and reduces waste by replacing the manual pre-analytical splitting and sorting processes with automated precision. At the end of 2016, the Propel robot was operational at five sites including our recent implementation at Birmingham, and we plan to deploy additional systems in our major laboratories during 2017 and 2018.

In our drug development business, we completed the integration of our central lab facilities in Singapore and China, and are on track for mid-2017 site consolidations in the U.S. and Europe. These consolidations are an integral part of the $100 million of cost synergies in the Covance Drug Development business that we are on track to achieve during the three-year period ending in 2017.

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