Laboratory Corporation of America Holdings (LH)

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Laboratory Corp. of America Holdings (LH)

Q1 2018 Earnings Call

April 25, 2018 9:00 am ET


Scott Frommer - Laboratory Corp. of America Holdings

David P. King - Laboratory Corp. of America Holdings

Glenn A. Eisenberg - Laboratory Corp. of America Holdings

Gary M. Huff - Laboratory Corp. of America Holdings

John D. Ratliff - Laboratory Corp. of America Holdings


Ross Muken - Evercore Group LLC

Lisa C. Gill - JPMorgan Securities LLC

Jack Meehan - Barclays Capital, Inc.

Erin Wilson Wright - Credit Suisse Securities (USA) LLC

Patrick Donnelly - Goldman Sachs & Co. LLC

Amanda L. Murphy - William Blair & Co. LLC

Kevin Ellich - Craig-Hallum Capital Group LLC

Tyler L. Etten - Piper Jaffray & Co.

Ralph Giacobbe - Citigroup Global Markets, Inc.

Dan Leonard - Deutsche Bank Securities, Inc.

Ricky R. Goldwasser - Morgan Stanley & Co. LLC

Mark Anthony Massaro - Canaccord Genuity, Inc.

Brian Gil Tanquilut - Jefferies LLC

Rohan Abrol - KeyBanc Capital Markets, Inc.



Good day, ladies and gentlemen, and welcome to the Q1 2018 LabCorp 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, this conference is being recorded.

I would like to introduce your host for today's conference Scott Frommer, Vice President of Investor Relations. You may begin.

Scott Frommer - Laboratory Corp. of America Holdings

Good morning, and welcome to LabCorp's first quarter 2018 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 Financial Officer; Gary Huff, CEO of LabCorp Diagnostics; and John Ratliff, CEO of Covance Drug Development.

In addition to our press release, we also furnished 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 include 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, but are not limited to statements with respect to 2018 guidance and the related assumptions, the impact of various factors on operating and financial results, and the opportunities for future growth.

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 2017 Form 10-K and subsequent Forms 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 Dave King.

David P. King - Laboratory Corp. of America Holdings

Thank you, Scott, and good morning. We are off to an impressive start in 2018, once again demonstrating the power of our integrated growth platform. The combination of accelerating organic revenue growth and drug development, strong organic growth in diagnostics despite headwinds from PAMA and weather, and acquisition contributions from both businesses yielded year-over-year revenue growth of 18%.

This top line performance along with the benefits from our LaunchPad initiative and tax reform translated into adjusted EPS growth of 31%. We expanded margins significantly in Covance and held them for the enterprise. In addition, we fully deployed our free cash flow through share repurchases and a one-time bonus payment to non-bonus-eligible colleagues as a result of tax reform. We are very pleased with our operating performance during the quarter.

Our results reflect the adoption of the new revenue recognition accounting standard, ASC 606. Although ASC 606 has no impact on our cash flow, we estimate that it will lower our full year 2018 adjusted EPS by approximately $0.20 to $0.30, which Glenn will discuss in more detail.

I want to stress that we are nevertheless maintaining our full year guidance despite this development because our strong first quarter performance, outlook for the balance of the year and progress on key strategic initiatives give us confidence that we will overcome this impact, which is merely due to the accounting change.

As we said early in the year, to achieve our guidance, we are relentlessly focused on execution of three priorities: driving profitable growth, integrating key acquisitions and optimizing enterprise margins. We are driving profitable growth by capitalizing on strong customer demand for our differentiated capabilities and strategically investing in new offerings for future growth.

In Drug Development, our investments in people, solutions, technology, therapeutic expertise and infrastructure are resonating with our customers. The objective evidence is another quarter of strong net orders and book-to-bill. Independent evidence comes from a survey of biopharma customers conducted by the Life Science Strategy Group and William Blair, in which Covance was recognized as far away the most improved CRO over the past year. As John Ratliff memorably told me last year, quite simply, we are winning in the market.

In Diagnostics, our focus on women's health and medical drug monitoring as well as our strategic collaboration with 23andMe contributed to market-leading organic growth. The increased volume helped mitigate the impact from lower reimbursement rates related to PAMA. There are multiple growth opportunities in Diagnostics and we will continue to deploy capital judiciously to maximize the return on our growth investments.

Our second priority for 2018 is integrating key acquisitions flawlessly. The integration of Chiltern is largely complete, benefiting customers of both Chiltern and Covance. We have preserved the high-touch customized experience that Chiltern's biotech and emerging pharma customers require while strengthening both Chiltern and Covance's scale, therapeutic expertise and capabilities. In Diagnostics, we continue to demonstrate the value of our be selective and go deep strategy as partnerships with major health systems such as Mount Sinai and PAML expand to new services and initiatives.

Our third priority in 2018 is optimizing our enterprise margins. Besides profitable revenue growth and acquisition integration, our LaunchPad improvement process initiative in both businesses is critical to achieving this goal. LaunchPad centers on fundamentally reengineering service delivery to improve the customer experience while sustainably enhancing margins.

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