奎斯特診斷 (DGX) 2005 Q1 法說會逐字稿

Welcome to the Quest Diagnostics first quarter 2005 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 the copyrighted property of Quest Diagnostics with all 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 am 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, change in relationship of customers, payors, suppliers and strategic partners, and other factors described in the Quest Diagnostics Inc. 2004 10-K and subsequent filings.

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

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 first quarter.

These include 5.1% and earnings per share grew 19%.

We have established our Company's strategy based on three simple words.

Patients, growth, and people.

I'm pleased with the progress we are making in each of these areas.

We continue to improve the level of services we provide with a special focus on the patient experience.

We are driving growth by continuing to (indiscernible) in the marketplace.

And we are investing in our people so their skill and market knowledge keep pace with the rapidly evolving needs of our (indiscernible) and patients.

Now Bob will share with you the analysis of our financial performance.

Thanks, Surya.

It was a strong quarter.

Our continued efforts to drive topline growth and margin expansion are driving earnings growth.

Revenue growth for the quarter of 5.1% was comprised of a volume increase of 2.8% and an increase in revenue per acquisition of 2.3%.

First quarter volume growth compared to the prior year was reduced by about 1%, due to the benefit from leap year in 2004.

Growth in revenue per acquisition was slightly higher than we experienced in the fourth quarter and continues to be principally driven by improvements in the number of tests for acquisitions, in addition to modest price increases.

Operating income as a percentage of revenue was 17.4%, an improvement of 80 basis points from the prior year.

Bad debt was 4.5% of revenues and consistent with the prior year's rate.

Our longer-term goal remains to achieve a bad debt rate of 4% more or less.

We are continuing to make investments in customer activity and improving service levels in our PSEs.

While these investments are (technical difficulty) cost of sales component we are confident in their ability to drive overall profitability and continued growth over the longer-term.

Topline growth has allowed us to leverage our expense base, which has reduced SG&A as a percentage of revenues and fuel margin expansion.

We expect to drive additional margin expansion at the same time we continue investing in our capabilities and service levels to further differentiate our Company.

Our goal remains to improve operating income as a percentage of revenues to around 20% over the next several years.

Cash from operations was excellent. $136 million compared to $111 million in the prior year.

Remember, our first quarter cash flows historically are lowest, due to the timing of several large payments.

Day sales outstanding were 46 days, 1 day lower than the year-end level.

Capital expenditures were $55 million for the quarter.

During the quarter, we paid dividends totaling $15 million and repurchased 628,000 common shares for $62 million at an average price of just over $99.

Also during the quarter, we completed a small lab acquisition in Pennsylvania for about $19 million.

You have heard this before but it is worth repeating.

When we think about how to deploy our excess cash flow, we view growth opportunities as our first priority and are excited about the longer-term prospects in this area.

However, as you have seen us demonstrate we will continue to use share repurchases as an alternative use of cash when growth opportunities are not available on appropriate terms.

Our outlook for the full year 2005 remains unchanged.

We expect revenues to grow between 5 and 6%, essentially all from organic growth.

Operating income, as a percentage of revenues, to expand to between 18% (technical difficulty).

Cash from operations will approach $800 million and capital expenditures of between $210 and $230 million.

And we expect earnings per diluted share to grow 14 to 16%, to between $5.45 and $5.55 compared to (technical difficulty) earnings per share of $4.77 before special charges.

Due to the recent deferral by the SEC of the effective date for the change in accounting for equity-based compensation, we will adopt the accounting change starting at the beginning of next year.

Now I will turn it over to Surya.

Thanks, Bob.

This is a brief update on the progress we are making on our strategy, patients, growth and people.

For most of our patients, the first point of contact is the phlebotomist.

We are servicing higher standards of service provided (technical difficulty) and have increased their level of training.

Our focus is on defect-free, timely, and caring service so that the patient has a pleasant and professional experience every time.

Increasingly, patients are visiting our patient service centers for their blood draws.

Nearly 40 million in 2004.

This creates a further opportunity to differentiate ourselves in the eyes of our patients and doctors.

Many PSEs now schedule patient appointments and have made changes in their work flow, using (indiscernible) principles to reduce wait times.

Our patient service centers are connected via the Web not only to our laboratories but also to the physicians' office through our Care360 product.

This gives the doctor an opportunity to verify that their patients have gone for diagnostic testing and expedites the process for patients.

The outcome of all these efforts is a patient who feels we care.

We are making progress but have more to do.

We also play an important role in educating patients about specific health issues that impact them.

While cancer and cardiovascular disease affect both men and women, these (indiscernible) are often underdiagnosed in women.

To help out on this issue we remind women and their physicians about the importance of always connecting to our website and education on (indiscernible).

We also do this through underwriting programming such as Art of Women's Health series that has started to be shown on public television around the country.

To drive growth, we are investing in service, sales and time.

One way we differentiate our service offerings is through our (indiscernible) information technology solutions we offer to physicians and hospitals.

Which helps them improve patient care and increase their efficiency.

Uses of this service continues to grow. 43% of orders and 64% of results are now being transmitted by the Internet.

Several large physicians' practices have recently subscribed to our Care360 premium services, which includes (indiscernible) and other features that will enable them to achieve clinical integration.

Care360 is now fully integrated with pharmacy benefit managers (indiscernible) and directly to retail pharmacies through (indiscernible) space.

Additionally, we have been named a certified vendor for the e-prescribing (ph) employee initiative launched by the Big Three auto manufacturers, aimed at improving health care quality and reducing costs.

As part of our focus on sales, we continue to expand our sales force and enhance the training they receive.

Since last year, all new sales representatives and large portion of the existing force have gone through our enhanced sales training programs.

Our investments in sales training have produced new results.

We have (indiscernible) announced program demonstrating higher levels of performance.

In the area of time, we continue to build intellectual categories to create a strong pipeline of new service and technologies.

One of our focused areas is cancer.

Last quarter, we announced the development of new leukemia and lymphoma blood tests.

Since then, we have some significant interest in the new plasma tests been developed.

Tests that eventually could replace many painful bone marrow biopsies.

We remain on track to introduce the first of these sales by the end of this year. are seeing growth in orders from the (indiscernible) to measure circulating tumor cells in patients with metastatic breast cancer.

This important test is now being performed at our Nichols Institute Lab on both coasts.

These cells along with our enhanced (technical difficulty) growing pathologist staff and specialized packaging and process for handling biopsies are strengthening up (indiscernible) pathology and cancer diagnostics.

Turning to our people's strategy, we are investing in our employees, offering training and tools that provide an opportunity to all employees to improve themselves as (indiscernible) service provide to patients.

We believe that only detection and prevention, coupled with wellness programs, reduce health care costs.

We encourage our 38,000 plus employees and their spouses to utilize one of our product offerings, a health risk assessment based on diagnostic tests called Blueprint for Women.

We sell this product to employers as a benefit to health employees to manage their health.

We continue to attract and recruit people from outside our industry who are bringing new talent and perspectives which are enhancing our existing watch force.

Our compensation structure pays people for performance, giving a balance both of final sale and nonfinal sale metrics.

We are further aligning the interest of senior management with those of shareholders.

Management is not required to hold a minimum investment in Company's stock.

Further we are linking a portion of management compensation to delivering long-term portfolios.

In closing, we are driving our strategy focused on patients, growth, and people. (technical difficulty) to meet our goals for 2005.

We'll now take your questions.

Operator.

+++ q-and-a.

(OPERATOR INSTRUCTIONS) Tom Gallucci, Merrill Lynch.

You mentioned more draws in your own PSEs.

Do you have a percentage approximately of how we can measure that from a year or two ago where that stands?

The draws right now coming in our PSEs are approaching 35% of our overall volume.

For 2004 we had (technical difficulty) patients have their draws performed in our patient services.

This is up from about 30% a year ago.

So it is up over 10?

And then I was just wondering if you could comment a little bit about the competitive landscape generally?

And then also specifically LabCorp talked about a few hospital customers that they had an issue with and we're hearing from some of the equipment suppliers that they are trying to be more proactive into the hospital to sell equipment to help hospitals do their own testing.

I know the controversy between hospitals and independent labs has been going on for 10 years or more and the pie hasn't really changed that much.

But are you seeing anything different there?

That's a good question.

First of all I think this marketplace is highly competitive.

As you know, it's a fragmented marketplace.

There is no independent data to know, really, how the market share is shaped.

But when I reflect on the last four or five years, I don't think the landscape has changed significantly.

There are always some hospitals doing a little bit more in outreach.

There are some hospitals getting out of the outreach.

As far as the certificate (ph) testings are concerned as you know -- the last five years there are a number of new tests that came to the pipeline and we actually helped making those health certificate tests routine tests so we actually post them to regional labs.

I expect some tests which will become common will go into the hospital but then there will be more tests which is esoteric and needs higher knowledge and also a low volume test from hospital is going to come to the reference lab like ours.

Now as far as equipment manufacturers. this is really interesting dilemma because, obviously, we buy the larger instruments to do what is vast volume but on the other hand is smaller portion can go to the hospital.

I think the total (ph) for me is that we see more patients than any hospital.

We have more experience on a particular test than any hospital because we see so many of them and having almost 400 MDs and 100 PSEs (ph) that gives us a competitive advantage.

Let me also tell you one other competitive thing that is happening which has nothing to do with manufacturers but everything to do with the patients.

You have just heard from Laure and Bob that the patients are now coming to patient service centers.

And I think that is the only time how the patients are going to play and that is the reason why.

We have really established our strategy based on patients, growth, and people.

And we are going to drive more and more patient experience to a state that they are going to be (indiscernible).

I told about the hospitals -- the same.

So when I look at the competitive landscape it's the same.

It's tough, but it is also a lot of opportunities.

David Lewis with Thomas Weisel Partners.

Bob, you mentioned the specific (inaudible) but as I look at gross margins now year over year and, obviously, SG&A from a leverage perspective down, but leverage up fairly dramatically at least in our opinion.

If you could talk more granularly about what is specifically happening in cost of service and SG&A that is either driving the depression GM's as well as G&A (ph)?

I will comment on that but first I want to bring you back to the fact that we think the most important thing for everyone to focus on is the operating income percentage and what direction that is going in over time.

We don't think we should necessarily or you should necessarily be focusing on quarter to quarters swings in it and certainly not quarter to quarter swings in separate components of cost of sales and SG&A.

Because that is not the way we manage the business.

We have expanded the operating income percentage by 80 basis points vs. the prior year.

For the full year, we are expecting to expand into 18 to (technical difficulty) compared to about 17.6% of revenues last year.

Now with that said, keep in mind that, as we look at the cost of sales percentage, that is an area that is impacted by some of the investments that you heard Surya talk about.

Certainly the quality and service, the improvement of turnaround times, improvement of wait times in our patient service centers.

The access and convenience that we provide.

The number of phlebotomists and PSEs that we opened.

The IT connectivity and the standardization of other systems that we have got going on in the investments in sciences and medicine.

Those things do have an impact on cost of sales but the other thing that you need to keep in mind is the impact is something that is not going to be a long-term negative.

Over time, we expect that cost of sales percentages and SG&A percentages will both improve as a percentage of revenue and that over time we're going to drive that operating income number to the 20% range of revenues.

Also, on the SG&A side given the investments you are making in CapEx, do you believe that the consolidation on the West Coast will have a material benefit on '06?

You are going to see some of that show up in the SG&A number, a little bit in the cost of sales number.

On that whole integration front we have already done a lot of the integration.

We have consolidated the sales force, we've consolidated the PSEs, we've consolidated the logistics, we have gotten some of the benefit on the bad debt side although there still more to go there.

But we will see, probably, another chunk of synergies come out in the back half of '06.

We will just be leading into that in the first part of '06.

Maybe beginning a little bit in the very end of this year but then it takes a little time to realize all the benefits after you've moved in.

What you see this year too, I think I mentioned on the last call that the modest increase that we got in CapEx over the prior year is principally related to that facility build out there.

Surya, in the past we've talked more about the hospital business unit.

I think last year was a $500 million unit.

Actually it was flat to slightly up.

Could you talk about trends you are seeing in your hospital unit within Quest?

Sure.

As you know when we acquired AML, we did two or three things.

First of all we created (indiscernible) on the East Coast.

That facility is now Nichols Institute.

We created a hospital business and Dr. John Miller on staff and we have dedicated sales and service.

We have also dedicated guest (indiscernible) in hospital.

We stabilized our business and I am really pleased at how they are doing.

Obviously, they can do a lot more but I think as a sector we have had a lot of opportunities.

I think that focusing on hospital is the right thing to do and, again, you will see more and more new products are going to be introduced by that sales force cost.

And in many areas, hospitals really call us to advise them not only their testings but also in the quality.

So, it's a long-term investment and this is a business unit which has a lot of opportunity.

And we are working with a number of hospitals and as you know that we elicit a number of contracts and mainly based on our quality service than anything else.

Last question.

You mentioned patient directed initiatives being important to Quest.

Obviously Diagen (ph) has launched their DTC campaign for HPV in two of your very important markets of Atlanta and Philadelphia.

Can you talk about trends that you have seen close to that marketing campaign beginning in March?

Yes, David, I think the most important thing to differentiate is that our presence initiative is not direct to consumer.

It is not really a marketing campaign.

It is not an ad campaign.

We are actually changing the mindset of our people.

We taught almost .5 million patients a night and 140 million patients a year and one of the things we are doing is that surely making this 38,000 people to have put patients first.

It's easy to say.

Difficult to do.

We are changing concepts like turnaround time which has been in this industry for 20 years going from TAT (ph) to AT (ph) and making them (indiscernible).

So what we are trying to do is to make sure that if we are a patient what kind of service we'd want to really get.

If we are patient what kind of tests we want to use?

And this is really a major campaign as far as we're concerned because I believe the end of the day is the patient and doctors and then the patients who decide where they're going to go for their tests and quality and service is going to add a lot to our signs.

We walk with the some of the vendors we are talking about but it is not actually advertising only.

It is actually educating people.

This is why we invested money in Women's Health Series on PBS.

You'll be hearing more and more what we are doing at our patient service center because we will have 14 million opportunities to talk to patients.

On a broad basis HPV, obviously, is showing nice growth on a year-over-year basis and that's an area that our sales force is out there educating physicians on that value of that testing.

Ricky Goldwasser.

UBS.

Couple of questions.

The first one.

What percent of volume growth is viewed to the Blue Cross contract in Florida?

Second one on the receivables and bad debt side.

Are receivables a little faster than in past periods and then also your bad debt on a sequential basis take that from 4.2 in the fourth quarter.

Can you provide us a little bit more color on that especially in the light of the fact that the patient coming to your drawing centers which should have a pass on collection I would assume.

(technical difficulty) With respect to the Blue Cross contract in Florida we (technical difficulty) obviously it has contributed to the volume growth as well as the revenue growth and the increase in profits.

On the AR side, the accounts receivable balance itself has grown with the business.

The day sales outstanding, which is the best measure of the collection efficiency that we've got, is actually down a day from where we were at the end of the year and consistent with where we were about a year ago.

So that's not moving much.

I think we continue to be the benchmark for DSOs in our business.

Our bad debt also at 4.5% is very consistent with where we were for the second half of last year as well as the full year of last year. (technical difficulty) 4%.

We're about 4.5% this quarter very consistent.

And we expect over time that we will be able to drive that down further.

And to your point as we get more and more patients coming through our patient service centers over time (technical difficulty) opportunity for us to get better billing information from them and drive bad debt down even further.

As you know the biggest driver of bad debt for us in this business is missing or incorrect billing information.

That is also going to be helped by the fact that we are announcing more and more of our orders come in electronically.

That is going to help us as well on the bad debt side over time.

So is there a specific account that due to data (MULTIPLE SPEAKERS)

I'm not sure I can say a tenth of a point is much of an inconsistent with where we have been over the second half of last year and all of the full year of last year.

In any given quarter I think you'll see some normal variation of a tenth of a point or so.

On the Blue Cross contract, I understand you are not providing any (indiscernible) contract.

Should we see in the contribution longer if this quarter is similar in mind to the contribution in the fourth quarter?

Generally.

I think we are continuing to see, have positive experience there in Florida with that contract but as you know that started late in the third quarter.

And we got the full benefit of it in the fourth quarter and we have a full benefit in this first quarter as well.

So the answer is, generally, yes.

The impact in this quarter is comparable to probably what it was in the fourth quarter.

Kemp Dolliver with S. G. Cowen and Company.

Could you elaborate some on the acquisition in Pennsylvania?

The rationale, the value and opportunity you see there?

Briefly it is a small acquisition.

We paid about $80 million for it.

It's going to contribute less than half a percent to revenue growth this year but as you know we talked about folding acquisitions like this as a way of continuing to build out our infrastructure, improve the access that we provide to patients and physicians.

And at the same time these small acquisitions, basically, we are not buying bricks and mortar.

We're taking that book of business that's there, we are running it through our infrastructure and we are realizing good synergies on that.

It makes the deal generally a very attractive one when they are that size and we can fold them in that quickly.

Maybe I should add something.

I know that somebody is probably wondering why we are not acquiring companies.

Growth has two components for us.

Acquired and organic growth.

Last year we really focused in improving and actually showing that we could grow on our own.

But on the other hand we will explore all the possibilities that is available to us for acquisition.

You know that we are a (indiscernible) and integrator and we are going to be very patient as far as acquisitions are concerned.

And it has to really meet our ground rules.

It has to be well rounded.

It has to be -- it has to make strategic sense and economic sense and we are always looking for opportunity to use our cash to grow in that way.

But we are not going to be inpatient to buy something just because of availability of cash.

Second question briefly.

Could you discuss the trends in the esoteric vs. routine testing business?

What's the mix of esoteric tests now vs., say, a year ago?

Kemp, if I look vs. a year ago, first for the quarter, gene based testing grew at a rate of over 10% on esoteric and histology grew above the Company average.

Right now gene based testing is up as a percentage of our revenue about a point vs. the prior year.

A little over 12% of our overall revenues.

Gene based and other esoteric is right around 17% of our revenues and is showing -- continues to show nice growth there.

And that 17% with compared to probably something just over 16% last year?

Yes.

It is about a point higher.

Sandy Draper with Draper Research.

Two quick questions.

One on the share count.

I may have missed this.

You said you repurchased $62 million worth of stock in the quarter.

Did you give either an average price or the number of shares that you repurchased?

Yes I did.

The average price was just over $99 and all the details are in the footnotes of the press release.

The second question I think probably is for Surya.

Following up on a lot of the previous questions.

When you are looking at where you are growing in terms of your revenues and what the market is doing.

With your longer-term target of growing above the market rate and 1, I guess I'd say, do you still believe 4 to 6% is the right target there?

When you're looking at that to grow above the rate, is it more focusing on regional areas, do you think, where you can find regions where you can expand?

Or it it more test oriented?

How would you direct us in thinking about why you're going to be able to sustain higher than market growth?

First of all, our goal is to grow above the market growth rate and we are assuming the market is growing 5% and we have given our guidance 5 to 6% growth.

I think the way we want to grow, there is no single way as you know.

But we feel very confident that we can grow by utilizing our value position which is superior count quality and (indiscernible) access and distribution.

Our science innovation and our technology.

More importantly, we have been working on strengthening our product line of tests and we have changed our business developing (indiscernible) getting involved in all the stage.

So you'll see in the future we will be getting more and more involved in new products and new technologies of (indiscernible).

After that obviously we need to look at new geography and as we said before that we started out working in the Carolinas and Ohio.

And we are doing well.

And then there are all these opportunities as far as how do you really utilize our assets to move in adjutant space.

Again we will be opportunistic and (technical difficulty) good company.

We want to make sure that when we acquire and we go to that adjutant space it helps the core business and it also helps the acquired business.

So in order of the three ways we are going to grow and we are confident that we can go grow at or above the market rate.

Robert Willoughby with Banc of America securities.

Matt Jackson in for Mr. Willoughby.

Can you give us an update on the acceptance of the connectivity solution, especially premium price services such as e-prescribing and also are you participating in the e-prescribing standards discussions going on at CMS?

Matt, we are very excited about how things are moving on our premium services.

As you know, it's early days but we had several hundred physicians that are using premium products currently.

They are particularly interested in the e-prescribing product and we are seeing nice month over month gross rates albeit on a smaller basis there.

Additionally we are seeing large physician practices that are interested in our premium product; and in fact, we have some subscriptions that have been signed in the past quarter for these services either or large group.

They are interested not just in the e-prescribing but these large groups are interested in its ability to do clinical integration, which is an important capability for them.

Additionals (technical difficulty) auto manufacturers in Detroit.

That is very early days at that plant, but we are starting to see some nice interest out of the Michigan-based physicians for this product.

I guess to pull it all together we are seeing good interest.

We are seeing new physicians sign up and we are excited with what we see there.

The (technical difficulty) are now both fully, they are integrated, and SureScripts is coming on market by market as we work with them.

And we are excited.

Just to answer the other question we are working with Dr. Braler's (ph) organization in Washington and we are part of that interoperability group.

So we are taking an active role.

In addition, there are a number of private groups that are forming to help develop standards for electronic medical records and other transactions that are patched electronically.

And we have representation on a number of those as well.

(OPERATOR INSTRUCTIONS) William Bonello with Wachovia.

Two questions.

One, are you seeing any change in pair behavior relative to their efforts to drive business in network?

In other words are they more proactively working to keep business in network with preferred providers such as yourself than they have in the past?

Then I will follow-up.

Depending on who is the payer we have been working with a number of them in different areas and I think that results are mixed.

Some people drive it more than the others but (technical difficulty) expensive with the hospitals.

I think there are some payers who do that on a data level and we work with them.

And some payers really are still struggling with the (indiscernible) but we have a product called QuestNet and that really helps to consolidate some of this activity and help the payer reduce (indiscernible) and at the same time help our business.

That sounds relatively status quo no?

I have not seen that.

It is something completely different.

For us, we have been working with them for quite a number of years.

And I think it is business as usual.

The other question is a little bigger picture but, obviously, a huge chunk of the market that's been completely unpenetrated are the tests generated within the hospital performed by the hospital itself.

Have you given any new thought to initiatives that may capture any of that share of the market?

Bill, you are absolutely right that in our almost $34 billion in the hospital.

And I think this industry has now done a great job improving their image in the eyes of the hospitals.

One part of this business is going to be in the hospital because that's subject to pathology.

That's (indiscernible) site testing but the other one-third which is outpatient and other one that is outreach.

If we can really improve as an industry our quality and our service and our total in time than we can convince the hospital that they can practice medicine and we can provide services.

That's basically what we are doing with our hospital business.

There's quite a lot to do but I think this feeling is that we have to penetrate this market as to based on quality and that is why we introduced Six Sigma and times.

And many times many hospitals still rely on us to provide them, at once, technology and also service.

Our goal is to convince the hospital that we can do testing.

Best way.

And they can practice medicine.

I'm showing no further questions at this time.

Thank you.

Thank you for participating in the Quest Diagnostics first quarter 2005 conference call.

A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics website at www.Quest Diagnostics.com.

Investors in the U.S. may listen to a replay of this call by dialing 866-457-6654.

The replay will be opened today at 10:30 AM Eastern time and will continue through 11 PM on May 20, 2005.

Investors outside the U.S. may dial 203-369-1302.

No password is required for either number.

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

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

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

Goodbye.