奎斯特診斷 (DGX) 2005 Q2 法說會逐字稿

Welcome to the Quest Diagnostics second 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 would 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 in answers to questions may contain forward-looking statements that are based on current expectations that 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 regulations, changing relationships with customers, payers, suppliers, and strategic partners, and other factors discussed in the Quest Diagnostics Incorporated 2004 Form 10(K) and subsequent filings.

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.

A downloadable spread sheet with our results is also available on the website.

Now here is Surya Mohapatra.

Thank you, Laure.

We reported solid financial results for the second quarter reflecting continued strength in our business, revenues grew 6.2%, earnings per share grew 14%, and cash flow continued strong, more than $230 million.

Our business is performing well.

We are executing our strategy focus on patients, growth, and people.

Now Bob will share with you our financial performance.

Thanks, Surya.

I will start with some comments on our performance and then discuss our guidance for the full year.

It was a strong quarter.

Revenue growth accelerated and operating margin improved compared to the first quarter income last year.

Earnings per share increased 14% over the prior year.

Revenue growth, 6.2%, essentially all organic, reflects a volume increase of 5.3% and an increase in revenue per acquisition of 1.2%.

Our efforts to accelerate organic revenue growth are continuing to pay off.

The increase in revenue per acquisition continues to be driven by test mix and the number of test order per acquisition.

The increase over the prior year is somewhat lower than reported in the first quarter.

However, it compares to a very strong second quarter of last year.

We continue to expect that revenue per acquisition will grow approximately 2% in any given year with some fluctuations from quarter to quarter.

Operating income as a percentage of revenue was 19%. and continued to improve over the prior year.

Reflected in operating income and impacting cost of sales is a charge of approximately $3 million principally associated with a write-down of inventory and equipment stemming from a voluntary product hold instituted at our test kit manufacturing subsidiary, NID.

Bad debt at 4.3% of revenues and DSOs at 45 days, both improved from their first quarter levels.

As we discussed on the first quarter call, we are continuing to make investments in customer connectivity and improving service levels in our patient service centers.

While these investments increase our cost of sales component we expect them to drive overall profitability and longer term growth.

Top line growth has allowed us to leverage our expense base which is reduced SG&A as a percentage of revenues and driven margin expansion.

We continue to generate significant amounts of cash, cash from operations for the quarter was $234 million compared to $207 million in the prior year.

Capital expenditures were $68 million for the quarter, and we made several investments which will expand our pipeline of new tests.

During the quarter we paid dividends totaling $18 million repurchased 560,000 common shares for $30 million at an average price of $53.

Turning to guidance.

Our outlook for 2005 remains unchanged.

We expect earnings per share of between $2.73 and $2.78, adjusted for the recent stock split, an increase of 14 to 16% compared to 2004 EPS before special charges.

Revenues to grow between 5 and 6%, essentially all from organic growth.

Operating income as a percentage of revenue to expand to between 18 and 19%.

Cash from operations to approach $800 million.

And Capital expenditures of between 210 and $230 million.

Now I will turn it back to Surya.

Thanks, Bob.

Before I talk about the core business I want to say a word about our test kit manufacturing subsidiary, NID.

As you may know and as we communicated to our customers we implemented a voluntary product hold at NID. in connection with an additional quality review of all its products.

We have committed to ensuring that NID has a consistently high quality manufacturing process.

We sincerely regret the challenges the product hole has created for NIDs customers and the patients theirselves.

We believe the actions we are taking at NID will assure that NID delivers high quality products and services.

As of today a number of the products have been through the additional quality review and have been released to the marketplace.

NID is working diligently to complete the review and return NID products to the market.

In the core business we continue to differentiate ourselves in the eyes of our customers.

They increasingly recognize this as reflected in our regularly performed customer satisfaction surveys.

We have had steady improvement in traditional customer satisfaction scores.

We have also seen significant gains in the satisfaction of our hospital customers.

We have more work to do but are encouraged by what we are seeing.

We drove strong revenue gains during the quarter, esoteric and genomics testing continued to be the fastest growing part of our business with growth exceeding 10%.

As you know tests do not need to be gene-based to be (INAUDIBLE) and have high growth potential.

We have seen a significant increase in demand for ImmunoCAP allergy testing, more than 20 million Americans suffer from asthma; allergies that trigger for asthma patients who are diagnosed with asthma should be tested for allergy but most are not.

Now we are educating physicians about the benefits of ImmunoCAP testing for asthma patients.

We are building intellectual capital to create a strong pipeline of new tests and technologies.

We believe that proteomics will be important in patient care and an important growth driver.

We have established strategic alliances with three proteomic pioneers;

Cybergen, SomaLogic, and Correlogic and we are working closely with them to bring unique diagnostic tests to market.

In addition, we have taken a little approval in the use of innovative healthcare information technology.

While this will make us and providers emphasize the need to collect physicians electronically to improve patient care and increase efficiency.

The laboratory industry is already playing an important role in bringing this new technology to physicians.

We at Quest Diagnostics have made significant investments to develop our own technology solutions and usage by our customers continues to grow.

Currently we are processing more than 3 million electronic transactions per week.

Recently several IPAs, independent physician associations, consisting of hundreds of doctors have selected our Care 360 patient centric physician portal.

They understand that Care 360 is the first step toward clinical integration, enabling them to call in their patient care.

It also enables them to order lab tests and prescriptions electronically, view a patient's history on line, and share relevant information with colleagues.

We have been recognized for excellence in IT plus a healthcare idea research form which simply gave us the top rating for our ChartMaxx product which enables hospitals to activate patient records, streamlining processes, and increasing efficiency.

In addition, Computer World recently named us one of the best places to work for IT professionals.

These and other initiatives are enabling us to differentiate Quest Diagnostics and solidify relationships with our customers.

In summary our business remains strong and its industry trends are favorable.

We are executing our strategy to drive growth and profitability and we remain on track to meet our goals for 2005.

We will now take your questions.

Operator?

Thank you. [OPERATOR INSTRUCTIONS] Adam Feinstein of Lehman Brothers.

Good morning, everyone.

My question is on volumes.

Could you talk a little bit more about, we saw a major acceleration of volumes here.

Just wanted to get some more details about what drove that, were there any new tests that had any big impact on the quarter?

And then just wanted to see if you could break out just the percent of revenues coming from the core business during the quarter or some rough estimate.

Thank you.

Adam, let me give you my impression what is really happening here.

If you remember almost two years ago we put an emphasis on organic growth and we said that we were going to move the Company from service in addition to service oriented class, sales emphasis, and science orientation.

So we have invested significantly both in service, sales, and science and what is happening now that those investments are paying off.

We have expanded our sales force.

We have also added a number of products to our product pipeline.

But as regards to various components here is Bob.

Adam , a couple of things to keep in mind, one, the second quarter did have a slight benefit due to the timing of the holidays.

As we mentioned in the first quarter that hurt the first quarter comparisons principally because of the timing of Easter this year.

So we had a slight benefit in the second quarter.

But most of the volume increase is coming from what Surya just talked about, the fact that we have been selling more to existing customers and winning new customers as a result of many of the things that we've been doing over the last several years or so.

You also asked the question about the core business and how much that contributed to the revenues.

Our core business contributes about 97% or so of consolidated revenues.

Our other businesses are in the 3 to 4% range of total revenues.

Okay.

And just that one quick follow up, if I may, in terms of just acquisition opportunities, you guys are doing a lot of free cash and so far this year you haven't really been in the acquisition market.

There's been a lot of chatter recently about lab assets being under the market.

Just how should we think about acquisitions going forward, any commentary?

Thank you.

Well, acquisitions have always played an important role in our growth strategy as Bob and I have always mentioned that we are going to be a patient buyer.

We have our ground rules.

I know there are a number of companies out in the market, but they have to meet our ground rules, it has to make economic sense, it has no make strategic sense.

We are not going to be impatient to buy a company just because we have cash.

Adam, our cash for loan, our capital structure position has to be opportunistic when those opportunities present themselves and as you've seen over the course of the last year or so as well when they don't we are generally at the point and the majority of our free cash flow then into share repurchases.

Robert Willoughby, Banc of America Securities.

Hi, maybe adding to that question, Bob.

The cash flow certainly remains the story, the latest result was good but the deployment frankly looked a little less inspiring than we've seen in recent quarters anywhere.

Are you changing the focus to one more of technology investment and acquisitions than share repurchases which we've seen historically?

Are you waiting for Glaxo to come with additional shares and it just didn't happen in the quarter?

What really is going on with the deployment in the latest period?

Is this just a hiatus or will we be back in business over the next couple quarters?

I think that you should expect to see us regularly repurchasing shares.

We are not necessarily going to have a flat amount each particular quarter.

Remember last year we did have some choppiness in the share repurchases because of the repurchases from Glaxo.

Right now we are sitting with about $200 million in cash on the balance sheet, not an unreasonable number for a company our size.

As you can see we were in the market in the second quarter.

I would expect that we would be in the market in the second half of the year.

I wouldn't read too much into any one quarter's repurchase level.

And just a follow up, can you hazard a guess?

Maybe you addressed it in the comments, from a revenue and earnings perspective the NID hit in the quarter, what was that?

We did not disclose what NID specifically contributes to our revenues and our profits in the quarter although we have said that NID accounts for about 1% of consolidated revenues.

And in the quarter we did take a charge of $3 million associated with NIDs product hold and it relates principally to inventory and equipment there.

Robert, this is Surya.

One thing I wanted just to add, that we have taken an aggressive approach to get involved in science and medicine and science and technology in all their states, so if you see what we have done over the last 18 months is to bring a lot of new products to a lot of strategic alliance and I believe that our sustainable growth and our leadership depends on how many new products we have in our pipeline.

So we are utilizing some of our cash making sure that we bring products to market very quickly.

Okay.

Thank you.

Thomas Gallucci of Merrill Lynch.

Good morning, a couple of quick follow-ups here.

On the volume, obviously Blue Cross/Blue Shield of Florida has been contributing.

Was there any ramp up in that contract or has that been fairly steady over the last couple of quarters?

Can you point to any other major contracts that you've won or is it just bits and pieces around the country that's helping the growth?

Tom, the bulk, the Blue Cross/Blue Shield contract in Florida is anniversaried -- or actually will anniversary in the fourth quarter, I believe, and, yes, as you know that did contribute to some of our volume growth since then although it hasn't ramped up.

For the most part the business that we expected to get from that contract we've gotten.

We haven't spoken about any other specific contracts at this point that have moved volumes one way or another.

In your prepared remarks, Bob, I think that you mentioned on the pricing front or the price per accession mix and number of tests per requisition, can you talk about what absolute price increase trends are out there?

I think they continue to be very modestly positive in terms of pure price.

One of the things that has impacted our growth in revenue per acquisition has been payer mix over the course of the last year or so.

When you think about payer mix don't just think about it in terms of capitated versus fee for service.

There are all types of different plans that we participate in, PPO, point of service, et cetera, and there are all different types of customer groups that we get business from that impact the payer mix as well, whether it be physician, employer, hospital, and all those thing play a role.

But principally what's continued to drive the improvement in revenue per acquisition has been test mix and the number of test orders per requisition with very modest pure price and then the payer mix has actually moved against us a little bit.

But again, you got to keep in mind there we are adding profitable business and that's really the key it that you continue growing your business by adding profitable business and that's what has allowed us to continue expanding the margins.

Great.

And then just the final one was, can you talk about the hospital side of the business at this point, maybe how big it is and any trends you are seeing there?

Thanks.

Well, hospital business is doing well, the most important thing we have done is to improve our customer satisfaction.

And it represents--.

About 5 to 10% of our total revenues -- actually the--.

12 to 13%.

But having a dedicated sales force and calling on the customers and meeting the needs of the GPOs have really helped us and I'm very encouraged with the new customer satisfaction rating for the hospitals coming as far as our service is concerned and we really look forward to getting more market in that sector.

Maya Levy of UBS.

Hi, I'm sorry, I think I was on mute.

Good morning, this is Maya for Ricky.

You recently announced your relations with Assay Development Company.

We just want to know if you are also interested in technology that will give you access to physician offices and point of care testing?

Yes.

In fact as I have indicated earlier that we are getting involved with small biotech companies and small innovative companies.

We bring our core competencies of distributions, validation, and peer relationships so we are looking at a number of products that will be useful for our physicians in their offices.

Okay.

Thank you.

Just one other question.

You've -- have you picked up any additional new businesses?

Or is a lot of this coming from penetration in your Blue Cross contract in relation to your volumes?

I think actually you had mentioned you didn't pick up new business.

So is a lot of this coming from just penetration from the Blue Cross contract.

As I mentioned earlier Blue Cross contract in Florida has contributed some to the volume growth and we continue to see good volumes in Florida.

But there's no one contract that is significantly swinging either our volumes or our revenue per acquisition.

We are basically selling more to existing customers and winning new customers across the board.

It is the strategy we put three years ago to really go in three different directions to make sure that we don't miss anything, getting new products, getting into new markets, providing new services.

And we see growth all over the United States rather than just one specific geography.

Thank you.

[OPERATOR INSTRUCTIONS] Thank you for participating in the Quest Diagnostics quarter 2005 conference call.

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

Investors in the U.S. may listen to a replay of this call by dialing 1(800)310-4919.

The replay will open today at 10:30 a.m.

Eastern time and will continue through 11:00 p.m. on August 19, 2005.

Investors outside the U.S. may dial (402)220-3847.

No password is required for either number.

In addition registered analysts and investors may access an on line 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 on line replay will be available 24 hours a day beginning at noon.

Thank you and good bye.