奎斯特診斷 (DGX) 2004 Q4 法說會逐字稿

Welcome to the Quest Diagnostics fourth-quarter and full-year 2004 conference call.

At the request of the Company, this call is being recorded.

The entire contents of the call including the presentation and question-and-answer session that will follow are copyrighted property of Quest Diagnostics with all the rights reserved.

Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Quest Diagnostics is strictly prohibited.

Now I'd like to introduce Laure Park, Vice President of Investor Relations for Quest Diagnostics.

Go ahead please.

Thank you and good morning.

I'm here with Surya Mohapatra, our Chairman and Chief Executive Officer and Bob Hagemann, our Chief Financial Officer.

Some of our commentary and answers to questions may contain forward-looking statements that are based on current expectations and involve risks and uncertainties that could cause actual results and outcomes to be materially different.

Certain of these risks and uncertainties may include but are not limited to competitive environment; changes in government regulation; changing relationships with customers, payers, suppliers and strategic partners; and other factors described in the Quest Diagnostics Incorporated 2003 Form 10-K and subsequent filings.

As we have previously indicated, beginning this quarter we are no longer providing quarterly guidance and will provide financial guidance for the full year only.

A copy of our earnings press release together with any information that is required under Regulation G are available and the text of our prepared remarks will be available later today in the quarterly update section of our website at www.QuestDiagnostics.com.

Additionally, a downloadable spreadsheet with our results is also available on the website.

Now here is Surya Mohapatra.

Thank you Laure.

We reported strong financial results for the fourth-quarter and the full year.

For the fourth quarter, revenues grew 6.6 percent and earnings per share grew 21 percent.

For the full year revenue grew more than 8 percent and earnings per share grew 18 percent.

And in 2004 cash from operations was $800 million.

We have made significant progress in many areas and I am pleased with the direction in which our Company is heading.

We had demonstrated that we can drive strong organic growth, 6.7 percent in 2004.

Six Sigma is playing an important role in driving growth by improving the overall experience of patients and customers while helping us become more efficient.

Our focus and innovation is giving us a competitive edge in science, medicine and information technology.

We have increased the value we return to our shareholders.

In 2004, we returned $800 million to our shareholders through share repurchases and dividends while continuing to invest to drive growth for our Company.

We expect 2005 to be another strong year with earnings per share increasing 14 to 16 percent.

Now Bob will share with you the analysis of our 2004 financial performance and 2005 guidance.

Thanks Surya.

We reported strong results for the fourth quarter with improvement in all of our key financial metrics.

Revenues grew 6.6 percent; volume increased 4.1 percent, the fifth consecutive quarterly increase.

The investments we've been making in sales, service quality, innovation and access for customers are differentiating us and driving growth.

In the quarter revenue per requisition grew 1.9 percent over the prior year, an increase consistent with the third quarter.

Improvements in test mix and the number of tests per requisition remain the principal drivers of the increase.

We continue to expect that these factors in addition to modest price increases will drive further improvements in revenue per requisition and contribute about 2 percent to revenue growth in a given year.

The rest of the revenue growth for the quarter, about half a point, was contributed by our nonclinical testing businesses.

For the quarter, operating income was 17.2 percent of revenues, an improvement of 80 basis points from the prior year.

Half of that improvement was due to a lower bad debt rate which improved to 4.2 percent of revenues in the quarter.

We reported a modest increase in our cost of sales percentage compared to the prior year.

However, our overall profitability which is what we focus on, showed strong improvement due to our Six Sigma efforts and continued profitable growth.

Two factors principally impacted the cost of sales percentage in the quarter.

The larger of the two which has to do with incentive payments is one of timing and not something we see as continuing.

We incent essentially all our employees based on a balanced score card which includes financial, operating, customer service and quality metrics.

In the fourth quarter, we accelerated progress in a number of these areas which required us to accrue additional incentive payments.

The other factor has to do with growth in clinical trials testing.

This operation which carries a higher cost of sales than our core business experienced strong growth in certain business which while profitable raised its cost of sales percentage even further.

Profitable growth, Six Sigma and increasing use of electronic connectivity by our customers will drive further margin expansion at the same time we continue investing to further differentiate our Company.

Our strong operating performance translated into strong earnings growth.

During the quarter we grew diluted earnings per share at 21 percent from the prior year level.

EPS growth benefited modestly, about 2 percent, from a lower tax rate in the fourth quarter which brought our full year effective tax rate to 40.2 percent and is consistent with the effective tax rate we expect going forward.

Reduction in the rate is principally related to state taxes.

Cash from operations was outstanding, totaling $264 million for the quarter.

Days sales outstanding improved to 47 days, one day lower than last quarter and a year ago.

Capital expenditures during the quarter were $42 million and totaled $176 million for the year.

During the quarter we repurchased 3.8 million common shares for $353 million at an average price of $93.47.

Included in these totals is 2.7 million shares purchased from GlaxoSmithKline in December.

Our strong cash flow enabled us to complete the fourth quarter repurchases with no incremental borrowings at quarter end.

For the year we repurchased a total of 8.3 million common shares for $735 million.

We have now repurchased 12.3 million shares for a total of $1 billion at an average price of $80.54 since initiating our share repurchase program in May, 2003.

This morning we increased our dividend and expanded the share repurchase authorization reflecting confidence in our ability to continue generating strong cash flows.

We continue to view growth opportunities as our first priority for deploying excess cash flow and are excited about the longer-term prospects in this area.

However, as we've previously demonstrated, we will continue to use share repurchases as an alternative use of cash when growth opportunities are not available on appropriate terms.

As you know in December we called for redemption of our $250 million in convertible debentures.

Essentially all the holders elected to convert their debentures into common shares and as a result approximately 2.9 million shares were issued in connection with the call.

Turning to 2005 guidance, we expect revenues to grow between 5 and 6 percent essentially all from organic growth; operating income as a percentage of revenues to expand to between 18 and 19 percent; cash from operations to approach $800 million and capital expenditures of 210 to $230 million.

And we expect earnings per diluted share to be between $5.45 and $5.55.

This reflects an increase of 14 to 16 percent compared to 2004 earnings per share of $4.77 before special charges.

Estimates for 2005 earnings per diluted share, operating income and cash from operations are before the impact of the accounting change for equity based compensation which takes effect in July.

We've now finalized what if any changes may be made to our equity compensation plans in light of the accounting change and therefore are not yet in a position to quantify its impact.

We expect to share the impact with you in connection with reporting our second-quarter financial results.

Now I'll turn it over to Surya.

Thanks Bob.

I'm excited about 2004 financial performance, what we accomplished goes well beyond the numbers.

We have built a strong foundation for future growth.

It all starts with patients.

Increasingly patients and their doctors have a choice when it comes to selecting a health-care provider and we are giving them new and compelling reasons to put their trust in Quest Diagnostics every day.

We want to ensure that our patients and doctors have an excellent experience whenever they track (ph) with us from beginning to end and that includes everything; not just ordering tests and getting results, it also covers our (indiscernible) collecting samples, phlebotomists drawing blood, medical staff (indiscernible) including the tests and providing consultations and interaction during the billing cycle.

Further, we are focused on reducing anxiety time for patients by assuring that the results are given to the physicians even faster.

We are investing and focusing Six Sigma resources to improve this overall patient experience.

After all, we processed (ph) Six Sigma in the first place because 140 million patients and their families rely on us each year to determine whether they are ill or well.

While acquisitions should always play an important role in our growth strategy, we have successfully transitioned into organic growth as a more significant contributor.

We continued to expand our sales force particularly in high-growth specialty areas.

We are giving them better tools and training as well as new products to sell.

Our sales reps' knowledge of new and innovative products is also an invaluable source of information for doctors to improve patient care.

Our campaign to inform doctors about the benefits of various tests, such as (indiscernible) primary service of cancer screening, the use of ImmunoCAP for allergy testing, and tests to determine (indiscernible) are improving patient sales and driving growth.

Recently two studies and an editorial in the annals of Internal Medicine exposed the inaccuracy of cycle (indiscernible) blood tests using physical (ph) rectal exams.

In contrast, our InSure colorectal screening test is more patient-friendly than the conventional test and has higher selectivity (ph) and is included in their American Cancer Society guidelines for recommended screening.

We are making specimen collection more convenient for patients and reducing wait time by adding phlebotomists and expanding the hours of operations of our patient service centers.

We are improving customer satisfaction and loyalty by continuously improving service levels and are consistently using Six Sigma.

Our focus and innovation continues and will benefit patients, doctors and payers.

Each year we add over 100 tests developed by our scientists at Nichols Institute to our comprehensive menu of more than 3000 (ph) tests.

We also work with academic institutions and biotechnology companies to bring new tests and technologies to market quickly.

For example, earlier this week we announced -- we announced a collaboration with the University of Texas and the Anderson Cancer Center to develop a series of new blood tests to replace the need for painful bone marrow biopsies for patients with a range of leukemias and lymphomas.

We have accelerated our ability to bring products to market.

We recently introduced a CellSearch test to help oncologists better care for patients with metastasic breast cancer and were able to do so within one month followed by the (indiscernible) in the New England Journal of Medicine.

The investments we have made in health-care information technology have also contributed into growth.

Our connectivity solutions help doctors spend more time with patients and less time searching for test results.

New (indiscernible) services continues to grow and has announced customer loyalty.

We are currently transmitting 60 percent of all tests results to doctors and 40 percent of all test orders via the Internet.

We are also starting to see usage grow for our new premier services such as e-Prescribing.

Additionally, physicians value the new anatomic pathology reports that we are introducing.

These reports include (indiscernible) and organ mass along with the diagnosis to specialists, particularly in communicating about cancer with their patients and referring physicians.

Increasingly (indiscernible) recognizes the value of early detection and prevention.

By example, (indiscernible) health plan, quality metrics and (indiscernible) program include relevance elected to the appropriate use of screening tests.

To summarize, we are playing an increasingly important role in improving the health of patients. 2004 was a strong year and we anticipate another strong year in 2005.

And we are well positioned to continue providing superior returns to our shareholders.

We will now take your questions.

Operator?

(OPERATOR INSTRUCTIONS) David Lewis.

Good morning.

Bob, a quick question on CapEx.

If you look at the run rate off the fourth quarter it was roughly 160, 170 and that's going up to 210 to 230.

I wonder if you'd walk through more granularity specifically where that money is going to get allocated in '05?

Sure.

When you think about, first of all our CapEx typically you can think of it in about three buckets; about a third of it that goes into information technology, about a third of it that goes into our equipment in the laboratories; and about a third of it that goes into facilities and related areas.

This year we had anticipated to spend between 180 and $190 million.

We spent a little less than that this year.

Some of the spending actually will move over into '05.

But the biggest difference between '04 and '05 in terms of CapEx is really the increase associated with the California facility that we're building in the L.A. area.

But capital in total is still about 4 percent of revenues which I think is probably a pretty good benchmark for us as you think about us going forward -- 2 to 3 percent of that is typically replacement capital with the rest of it investments, as I said, in IT, tested equipment and facilities.

Bob, is it safe to say that the California facility could be a $30 million item?

I'm not giving any specifics on what that facility will cost us.

But that is the biggest driver of the difference between the two years.

To quick financial ones, Bob, as well.

One was, was the effect of the (indiscernible) Blue Shield more significant impacter on price in the fourth quarter than the third quarter and I guess pricing was flat sequentially.

Does that imply that you saw some pricing benefit from other areas?

There is not a significant difference between the impact in the fourth quarter and the third quarter quite frankly.

And when we think about revenue for requisition, this is about where we'd expect it to be going forward in about the 2 percent range or so.

Remember there are 4 components really to revenue per acquisition, the test mix, the payer mix, the test per req and pure price.

And as we said last quarter, shifts in our business related to certain new business growth in capitation and in our drugs-of-abuse testing business slowed growth by about half a point or so.

But we still generated good profit contributions in each of those areas that we grew.

The test mix and the test per req continued to be positive factors for us.

Pure price continues to generate modest increases and we continue to believe that what we are seeing in the fourth quarter is a good representation of what you might see in any given year, around that 2 percent.

And Bob, the 2005 number is predicated on roughly a 39.5 percent tax rate and what is forecasted for buybacks?

The 2005 number we haven't given any specific guidance with respect to tax rates.

But I did say in my earlier remarks that the tax rate for the full year of 40.2 percent is pretty reflective of what we expect going forward.

And we've not given any specific guidance with respect to buybacks.

As you know, we expect to deploy the excess cash flow that we generate either into growth opportunities or into share repurchases and the EPS number that we have here is really all in number assuming that we deploy that cash in one of those two ways.

Last question for Surya.

I apologize, I'll jump back in queue.

But Surya, I wonder if you could talk about these patient-directed initiatives and what do you think will be the first one or two significant patient-directed initiatives that we see from Quest?

We believe that the patients and the doctors play an important role in selecting the health-care provider.

And as you know that we have approximately 2000 patient service centers and almost 40 million patients (indiscernible) patient service centers.

So we have a number of initiatives to really putting the patient first, that goes from training the phlebotomists, that goes from adding phlebotomists, increasing the hours of operations of our (indiscernible) and at the same time using connectivity in all of our patient service centers.

One of the interesting things we are not finding that the consumer, the patient can find out via our Website and can schedule some of their drugs as they do their normal business.

We have really taken a very strong stance how to really leverage our patient confidence (ph).

And we believe that will be our next phase of improving customer loyalty and sticking to their doctors.

Thank you very much.

Adam Feinstein with Lehman Brothers.

Good morning everyone.

I have 2 questions.

First, can you just give us some more details about the guidance?

Does the '05 guidance include the additional share buyback here?

Just what are you factoring in for that?

And then secondly, just wondering whether you have seen any impact so far in the first quarter from the weather?

Certainly in the Northeast and the California or any other markets?

Thank you.

Adam, as I said earlier the guidance that we put out there for next year assumes that we will be deploying the excess cash flow that we generate either into share repurchases or through acquisitions.

And at this point we haven't given a specific number with respect to either of those.

But what you should keep in mind though is that the revenue growth number that we have out there for next year is exclusive of acquisitions, that is essentially all organic growth.

With respect to the weather, the first quarter particularly the months of January and February are always subject to weather.

And to date we haven't seen anything that is unusual for this time of year, quite frankly.

Thank you.

One thing we would want to mention, Adam, I guess to link back to patients and putting patients first is in California where there was the flooding and there were issues related around our Nichols Institute from access, and we really made sure that we put patients first using air transportation, as appropriate, to get the specimens and employees in there to do the testing to make sure patients were served on time, every time.

Thank you.

One follow-up question here.

On the bad debt relative to the third quarter we saw it come down.

We're just curious where you could provide some more details about what drove the improvement in bad debt and what you think the opportunity is going forward?

Thank you.

As you may recall we actually saw a small spike in bad debt, rating (ph) up to 4.6 percent of revenues in Q3.

We pointed out that was really due to two business units that had some process issues.

Since then we've made very good progress in addressing those issues at these business units and we've seen improvement in both bad debt in DSO's.

There's more work to do, quite frankly, there at these business units.

But now the bad debt in DSO's are more in line when looked at over the last two quarters.

The average bad debt rate for the last two quarters now is about 4.4 percent, which is very much in line with the full year rate and is about 4/10 of a point below where we were last year.

As you may know, our goal longer term for bad debt is to drive that down to less than 4 percent.

But the rate of improvement that we expect to see going forward is going to be a little slower than the rate that we've experienced in the past.

Thank you.

Tom Gallucci with Merrill Lynch.

Thank you.

Just wondering about the acquisition front and if you could describe that landscape a little bit more in terms of what you are seeing.

I think a lot of '04 you talked about there being a lot of potential opportunities but maybe pricing not exactly where you wanted it to be.

What types of things are you looking at routine, esoteric?

And would you think a little bit outside the box and add a new leg of growth to the story, potentially, to deploy that cash flow for growth purposes?

Tom, as I told you that acquisition is an important part of our growth strategy.

We are a patient buyer and we have some ground rules and the ground rules are that the Company must be reasonably well run and is fully compliant with the law.

It has to add to our capability of capacity and it has to be accretive to our earnings.

Now having said that, we have changed our goal in our business development.

We are actually putting a lot more emphasis on getting new products and licensing new products quickly and getting involved with companies in our (ph) state.

We are evaluating companies which can add either to our geographical expansion or can add to our science and medicine.

But we are going to be a patient buyer and we are not willing to acquire just to (indiscernible) .

Now with regard to creating other platforms, you have heard from me that we want to put our cash to use and we want to utilize our core competencies and our assets and (indiscernible) patient conductors.

If we can find an appropriate business which will really improve our Company's growth rate by adding an additional space, whether it is for expansion or our whether it is national or selective international expansion, or whether it is diagnostic reading, we will look at it but our goal remains growing at or above the market growth rate in the core business first.

Thank you.

Bob Willoughby of Banc of America.

Bob, what are the plans for the short-term debt there?

When does that come due?

Will we see any payments?

And secondarily, any drug testing or clinical trials testing updates or commentary we can get on those businesses?

First let me start with the second piece which is the clinical trials testing.

That, actually that business reported nice growth in the fourth quarter and for the full year.

We expect that it will continue growing nicely.

Back to the debt question, at this point with the convert actually converting in the month of January on us here, that is now paid off and the other debt that we have outstanding is principally associated with our revolvers that we've got outstanding.

And they run for several years, quite frankly, and then the five-year and ten-year notes that we have out there which run through '06 and 2011.

There is nothing beyond today that is coming due anytime soon.

Robert, keep in mind the convert because the call was put out at the end of the year and needed to be classified as short-term debt.

So that is the bulk of what is sitting in that short-term debt line on the balance sheet.

I got you.

Secondarily, if you look at -- if there's a situation where Glaxo wants to come up you with another million or 2 million shares or something like that, I mean -- based on that kind of purchase price on that, can you do the acquisitions and make those types of block purchases of stock as well or is it a chance we' see some of that hit the open markets?

First of all should Glaxo decide that they want to sell some additional shares, they would generally come and talk to us about that and provide us an opportunity.

Should we decide to go forward with another transaction with them like we have in the past, I don't see that in any way impacting our flexibility to do any sort of acquisitions or invest in growth.

As you know our leverage right now has been reduced pretty significantly over the last couple of years.

And quite frankly there's a lot of room in there for us to lever up if we needed to.

That is great, thank you.

Ricky Goldwasser with UBS.

Good morning.

A couple of questions.

The first one, does the reimbursement cuts for Flow Cytometry announced earlier in the year, did they have an impact on your business in '05?

And secondly, just a clarification on the share buyback and what's included in the guidance, does the guidance include the whole 350 million?

Thank you.

I'll take the Flow Cytometry piece and then turn it over to Bob for the share repurchase and guidance impact.

The Flow Cytometry change and reimbursement does impact us, obviously we do perform Flow Cytometry testing.

The impact is relatively small.

And also keep in mind that the physician fee schedule updates were positive and those have a positive impact on our business.

Taken all together, it's a limited impact.

Ricky, with respect to share repurchases and the guidance for '05.

As I said earlier, we haven't given any specific guidance on how the excess cash will be deployed between either share repurchases or acquisitions but you should assume that all of our excess cash is being deployed into one of the two.

Thank you.

Gary Lieberman with Morgan Stanley.

It's Stacey Rich for Gary.

Just a question about the gross margin in cost of services -- it came in a bit lower than I guess the prior few quarters and I'm wondering if there is anything unusual in it or if it somehow sort of reflects text mix shift?

I'm not sure if you heard the prepared marks that I made earlier but -- (multiple speakers)

I missed a little bit at the beginning.

I'll step back for you.

First, what I'd like to do is focus your attention on the operating income percentage and the direction of that over time, not necessarily quarter-to-quarters swings, and certainly not quarter-to-quarter swings in the components of that.

Yet keep in mind that the operating income percentage increased by 80 basis points for the quarter and for the full year.

And we expect to continue expanding that over time up into the 20 percent range or so.

With that said, there were two things that we called out in the prepared remarks that impacted cost of sales in the quarter.

The smaller of the two items mentioned had to do with growth in our clinical trials testing business which carries the higher cost of sales in our core business.

And think of that as sort of a business mix shift and will have some recurring impact to us as we go forward.

The larger though, had to do with the timing of certain incentives.

We made some excellent progress on a number of important measures on which we incent folks and as a result needed to increase our accruals during the quarter.

Most of those areas that we made progress on had to do with Six Sigma, whether it be getting Green Belt certified, completing Lean Six Sigma projects and the like.

And we needed to make sure we reflected that progress in the way we calculated our incentive things.

Last with the payoff on those type things isn't typically realized in the same quarter or essentially even in the next quarter but these are the type of things that will continue to differentiate us over time and allow us to drive continued top-line growth and margin expansion.

So I guess any of the compression sort of from -- more drugs-of-abuse testing or potentially these -- the payer shift towards to more computated contracts that should not have any impact on the COGs (ph) line?

No, the impact on the cost of sales line was essentially the two things that I talked about in the quarter.

Thank you.

Kevin Berg with Credit Suisse First Boston.

Can you talk a little bit about volume growth?

It seems that you are solid in the last couple of quarters and growing much faster than hospital admission growth or physician visit growth.

What's going on in that area?

Do you expect that to continue at these type of levels in the 4 percent range?

Kevin, as you know we have been investing in our value proposition and also we're investing in our sales and marketing and we are seeing some results and it is really going back to basics, training the salespeople, providing them the tools and also bringing new product to the market.

All those things have really improved our sales productivity.

We're also investing and making our service superior than before.

So as the service excellency improves and the sales productivity improves, we are actually growing at or above the market growth rate.

You are growing above the market growth rate?

That was my next question.

I think we are growing slightly above the market growth rate.

We think the market is growing 5 to6 percent and we're growing a little higher and I have told you before that our goal is not to gain market share but our goal is to have profitable growth at or above the market rate.

Can you talk about, Bob, a little bit about working capital, your expectations there?

It seems like you are not really using your working capital anymore.

Should we expect that to continue on go forward basis?

I think as you think about us going forward you will see working capital probably increase modestly as the business grows.

When you think about cash from operations, this year we had some terrific benefits from the tax benefits associated with stock option exercises and deferred taxes and we actually had a reduction in DSOs with essentially no growth in working capital.

As we go forward and in the guidance that we provided for '05, we're expecting cash flow to continue to be very strong approaching $800 million cash from operations but we are not expecting the same benefits from deferred taxes and stock option exercises as we've seen this past year.

Thank you very much.

Kemp Dolliver with SG Cowen.

Thanks.

I'm going to start with a comment.

I have 30 inches of snow in front of my front door so I find the idea that it's unusual to be very disheartening.

Second, my question relates to margin expansion.

Given your comments about bad debt and also the flattening of pure pricing, what would be the two or three main drivers of margin expansion in 2005?

Thanks.

I think what you are going to see is the drivers of margin expansion in 2005 are going to be principally the same drivers that we saw in 2004.

It will be top-line growth.

It will be what we're doing with Six Sigma and it will be increasing electronic connectivity with our customers that are driving down cost.

And as you know we are moving Six Sigma to the next level to the Lean Six Sigma.

It is really going to improve our efficiency and reduce our waste also.

And Kemp, 30 inches of snow might be unusual for you, but when we look at it across the Company, and we look at the average impact to our business, there is really nothing unusual there.

Thanks for your perspective.

Bill Bonello from Wachovia.

Just a couple of questions.

On the volume side, are you seeing faster growth in any particular testing segment or customer segment for instance, the drugs-of-abuse testing or any particular customer segment?

Bill, as we've seen in previous quarters, the gene-based testing does continue to grow above the average.

We're seeing that.

That's doing about a 10 percent growth in the gene-based and the esoteric.

Additionally we're seeing some nice growth in our tissue pathology area as well as we continue to increase our focus in that area.

That being said, we are seeing growth across all geographies and across all parts of our business.

An area, Bill, of particular growth is in women's health, testing around women's health and we've seen some nice growth there on a number of those tests.

With respect to drugs-of-abuse testing, I'm actually encouraged by the fact that that business has now started to turn around and grow.

As you know, for several years it was declining pretty dramatically but the growth in that business really at this point is not significantly different that our overall growth for the Company.

And then, as I mentioned in our noncore operations, we're seeing very nice growth in our clinical trials testing business.

I think that all of diagnostic testing is really evolving and becoming stronger as we move forward.

You see almost every week somebody's bringing out a paper on a rollout for a diagnosis, not only for a diagnostic -- not only for a diagnosis but also for monitoring and prevention.

I feel that this industry is going to grow at 5 to 6 percent, or sometimes it will be higher, but most importantly people are now realizing the role of diagnostic for their health care; and actually that is helping the whole industry and that is helping us.

Great.

Thanks.

In terms of just sort of sustainable operating growth, two questions there.

Am I -- just trying to put the pieces of your top line and guidance and operating margin guidance together, am I correct in assuming that you believe sort of ex acquisitions that a realistic operating income growth would be in sort of the 10 percent range or so?

Bill, I think you'd have to look at again the way we provided you the guidance.

We provided you with top line growth, what we feel we'll be able to do.

And we expect to continue expanding the operating margin percentage.

We're looking for the sort of increase next year in line with the increase that we experienced this year.

And I haven't done the math to see if that translates into 10 percent growth in operating income but you should expect that we'd be expanding operating income at a faster rate than we'd be expanding the top line.

Just as you look out beyond '05, you mentioned 20 percent.

How high can operating margins get, I mean at what point do we sort of hit a wall on the operating margin front?

As we told you, we believe that we can drive that into sustainable 20 percent range.

I think once you start looking beyond that you've got to ask yourself whether or not you're appropriately investing in your business, continue driving top-line growth and at this point that's the point -- we can see out that far.

Frankly when we get there, we'll come back to you again and let you know whether or not we can see further from there.

Great, that is very helpful.

Thanks.

David Lewis with Thomas Weisel Partners.

Two quick follow-ups.

Surya, should we expect any incremental volume traction for Quest in 2005 as a result of changing premier contract structure?

We don't really comment, David, on a specific contract.

We are assuming to grow 5 to 6 percent revenue of next year and we are going to get it from the customers.

Premier contracts or any other contracts, they actually give us a license to really go and do the business.

But I don't think there is anything specific or any specific change for us.

We will keep on focusing on providing new products and new services and really make shareholder, we provide value to our managed care and the GPO organizations.

Lastly, something we haven't talked about the last several years, but has your view on international expansion, Surya, changed at all from Quest's perspective -- whether it is Latin America, or abroad or Europe?

Is that a realistic opportunity for Quest, or more of an opportunity in the next 18 months than it was the prior three years?

I think it's a realistic opportunity for us to really think about international and we look at international time to time.

But we wanted to make sure that we go with the industry leader and when we go to international we will select selective countries and as I've told before, it is Central or South America, maybe some part of Asia-Pacific and some selected countries in Europe.

But in our focus, in our core business here, when you look at the world, there's 6 billion people there, and have so many sales and at the moment we get so many requests from around the world so it is just natural for us to think about international and I have not changed my mind.

Thank you.

(OPERATOR INSTRUCTIONS) At this time I am showing no further questions.

Thank you for participating in the Quest Diagnostics fourth-quarter and full-year 2004 conference call.

A transcript of the prepared remarks on this call will be posted later and Quest Diagnostic's web site at www.QuestDiagnostics.com.

Investors in the U.S. may listen to a replay of this call by dialing 866-481-6893.

The replay will be opened today at 10:30 AM Eastern time and will continue through 11 PM on February 25, 2005.

Investors outside U.S. may dial 203-369-1572.

No password is required for either number.

In addition, registered analysts and investors may access an online replay of the call through StreetEvents at www.streetevents.com.

The call will also be available to the media and individual investors at Quest Diagnostics' web site.

The online replay will be available 24 hours a day beginning at noon.

Goodbye.