奎斯特診斷 (DGX) 2011 Q3 法說會逐字稿

Welcome to the Quest Diagnostics third-quarter 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 Kathleen Valentine, Director 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.

During this call, we may make forward-looking statements.

Actual results may differ materially from those projected.

Risks and uncertainties that may affect Quest Diagnostics' future results include, but are not limited to, those described in Quest Diagnostics' 2010 annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K.

A copy of our earnings press release is available, and the text of our prepared remarks will be available later today in the Investor Relations quarterly update section of our website at www.QuestDiagnostics.com.

A PowerPoint presentation and spreadsheet, with our results and supplemental analysis, are also available on the website.

Now, here is Surya Mohapatra.

Thank you, Kathleen.

We have a lot of news to share with you this morning.

In a moment, we're going to review our earnings news, and discuss our increased dividend and our push to capital deployment.

But first, let me tell you about today's succession announcement.

As we indicated in our press release earlier today, we have begun a CEO succession process.

I joined Quest Diagnostics in 1999, and have seen revenues grow 5 times, to $7.5 billion.

The Company has grown from a simple lab to the most advanced genomic and esoteric testing powerhouse for cancer, cardiovascular disease, infectious disease and urological disorders.

With unmatched assets in science and innovation, information technology, and access and distribution now in place, the Board and I have agreed that, after almost 12 years, this is the right time to transition to new leadership.

The Board is engaged in the thought process and will consider both external and internal candidates.

Importantly, nothing changes today.

I will continue to focus on executing our operating and strategic plan until I turn over leadership to a new CEO.

I have agreed to continue to serve as Chairman and CEO for up to 6 months to ensure a smooth transition to my successor.

I will be happy to take any questions you may have at the end of today's call, following our prepared remarks.

Turning to our performance in the third quarter, revenues grew 2.2%, adjusted earnings per share increased 4% and we generated strong cash flow.

We are beginning to see positive signs in a number of areas but we have more work to do.

The current market environment remains challenging, nevertheless, we are committed to increasing shareholder returns.

We have [prim] work that encompasses improving operating performance and a balanced capital deployment philosophy.

Our growth strategy is focused on 3 main elements.

Driving faster growing esoteric and gene-based testing for cancer, cardiovascular disease, infectious disease and urological disorders, enhancing self effectiveness and strengthening our relationships with health plans and other payers.

During the quarter we continued to see increased demand for our advanced diagnostic services.

Gene-based and esoteric testing revenues grew 14%, driven by the contribution of neurological testing from Athena and cardiovascular testing from Berkeley Heart, as well as women's health testing, specifically SureSwab.

Demand for esoteric and gene-based testing continued to grow faster than routine testing.

We continue to be focused on maintaining and expanding our access to insured lives.

We're working closely with health plans and employers to reduce costly out-of-network leakage by getting involved in benefit plan design and offering employers an extensive set of turn-key tools that channel employees to low-cost testing.

In addition, through our QuestNet lab solution, we build and manage lab networks for health plans.

As regards to the cost, we have had an ongoing focus on cost structure, both to ensure that our costs are aligned with volume in the short-term and to make needed changes to make us more competitive and profitable for the future.

Last quarter, we told you about our comprehensive initiative to reduce our cost structure by $500 million, over 3 years.

We are following a deliberate process to identify opportunities and ensure that we will not do anything to jeopardize patient care, medical quality or growth.

You will hear more details from Bob, who is leading the strategic initiative.

Now, let me share with our evolving capital deployment philosophy.

We are a strong Company.

We generate significant cash flows.

With the key assets and capabilities in place through recent acquisitions to drive long-term growth, we do not see large acquisitions in the next few years.

Our focus is on improving our performance and integrating businesses we have acquired.

As a result, we plan to return a majority of our future cash to shareholders.

This morning, we announced a 70% increase in our dividend to an annualized amount of $0.68 per share.

This demonstrates confidence in our continued ability to generate strong cash flow.

Starting next year, we are further aligning management's long-term incentives with increasing returns on invested capital.

Now, Bob will provide further analysis and then we'll take your questions.

Bob?

Thanks, Surya.

Revenues for the quarter were $1.9 billion, 2.2% above the prior year.

And adjusted earnings per share was $1.18, compared to $1.13 in the prior year.

Third-quarter results include a benefit of $0.05 per share in 2011, and $0.08 per share in the prior-year associated with the favorable resolution of certain tax contingencies.

Adjusted earnings per share for the 2011 third-quarter exclude $0.10 per share associated with restructuring and integration costs which are further detailed in footnote 2 to the earnings release.

The acquisitions of Athena and Celera contributed about 3% to revenue growth in the quarter.

Our clinical testing revenues, which account for over 90% of our total revenues, were about 1% above the prior year, and about 1.5% below the prior year before the contributions of Athena and Celera.

Volume in the quarter was 1.2% below the prior year, and compares to the approximate 1% decrease we saw in the second quarter.

The market, in terms of estimated physician office visits, continued to decline in the quarter and was down 6% compared to the prior year.

Drugs-of-abuse testing volumes have continued to rebound and grew about 5% in the quarter compared to about 6% last quarter.

Revenue per acquisition was 2.1% above the prior year with improvement due to the increased esoteric mix contributed by Athena and Celera.

Base revenue per acquisition has remained relatively stable sequentially throughout the year.

Organic revenue in our nonclinical testing businesses, which include risk assessment, clinical trials testing, products and healthcare IT, grew about 8% for the quarter.

Adjusted operating income as a percentage of revenues was 18.3% compared to 18.1% reported in the prior year.

Restructuring and integration costs, which are detailed in footnote 2 to the earnings release, reduced the reported operating income percentage by 1.4%.

These costs totaled about $27 million in the quarter and compared to our earlier estimate of $20 million.

The difference, principally due to additional costs associated with our plans to close our clinical testing operations in the UK which had not been contemplated in the earlier estimate.

In connection with Surya's transition, we expect to record charges in the fourth quarter and early part of next year totaling approximately $14 million associated with certain provisions contained in his employment agreement.

The portion we estimate to be recorded in the fourth quarter is approximately $5 million.

Separately, we expect to incur approximately $10 million to $15 million in the fourth quarter in connection with further restructuring and integrating our business.

Last quarter, we announced a multi-year initiative, the goal of which is to reduce our cost structure by $500 million by the end of 2014.

This effort is in its very early stages and we are not expecting to realize any meaningful benefits until 2012, with the bulk of the savings to be realized in 2013 and 2014.

However, we have made good progress since last quarter and remain confident in our ability to reach our goal.

The opportunities have been quantified, and organized into a number of areas with dedicated teams of subject matter experts and cross-functional support.

Each team has a very specific charter and financial target.

They are currently in the process of developing detailed implementation plans which will allow us to realize the opportunities identified.

Some of the areas around which the teams are organized are as follows -- specimen acquisition, which includes all the costs associated with obtaining and transporting samples; client support, which includes billing, and customer service; the labs themselves, and all the costs associated with operating them; IT, and customer connectivity costs; procurement and supply chain; and SG&A both in the field and at corporate.

As you would expect with a large-scale, multi-year project like this, some areas are more developed than others.

The areas where plans are furthest developed are in client support, and procurement and supply-chain, together, which we expect to provide about one-third of our savings.

In the client support area, we plan to leverage technology to eliminate manual processes, further standardize our systems and processes, implement more self-service options for customers and leverage Lean Six Sigma to further streamline activities.

In the area of procurement and supply chain, we plan to further consolidate suppliers, rationalize SKUs, standardize and optimize specs, and work more closely with our suppliers in sharing information and managing costs from design, to manufacture to distribution.

Other areas, like the labs themselves, and specimen acquisition, which we expect to contribute another one-third of the savings are more complicated and will take a little longer.

In these areas, we are addressing capacity utilization, including our lab footprint, service parameters, organization structure and supply consumption.

The final, roughly one-third of the savings is expected to come from SG&A, including IT.

There are several common themes that run through many of the opportunities we are working on.

They include standardizing systems, processes and databases, increased use of automation and technology and centralizing certain activities.

In addition, we have performed a comprehensive spans and layers exercise and are conducting activity value analyses across all of our functions which roll up into cost of sales and SG&A.

Where the opportunities reside and what we want to achieve is clear.

We are now in the process of finalizing the specific plans and timelines for how we will go about realizing those targets.

While I understand that there is interest in specifically how much savings will be achieved in each of the years, and what that means to margins, we are simply not far enough along in this effort to provide you much more.

In January, in connection with providing 2012 financial guidance, we intend to provide you with further information in that regard.

We continue to see strong performance in our billing and collection metrics.

Bad debt expense, as a percentage of revenues, was 3.6% in the quarter and reflected continued improvement from the prior year.

DSOs were 44 days, unchanged from the second quarter.

Reported cash from operations was strong at $338 million.

For the effect of restructuring and integration costs, cash from operations was $360 million.

This compares to $330 million reported in the last year's third quarter.

Capital expenditures were $39 million in the quarter, compared to $47 million a year ago.

During the quarter, we repurchased 1 million common shares at an average price of $47.79 for a total of $50 million.

We have now completed $885 million in share repurchases this year.

As Surya has indicated, we are firmly committed to driving increases in shareholder returns.

Clearly, the best way to do that is by improving operating performance.

And, as we've already discussed, we are taking actions to accelerate organic revenue growth and putting in place a more efficient cost structure.

We also intend to use our strong cash flows to enhance shareholder value.

Now that we've assembled a solid foundation of strategic assets and capabilities, it is unlikely we will complete any large, strategic acquisitions in the near term.

We will, however, continue to invest in our business in a very disciplined way to ensure we continue to differentiate Quest Diagnostics in an evolving marketplace, but, in a manner which should require significantly less capital than recent years.

Our investments in growth are likely to focus on smaller fold-in acquisitions, investments in science and innovation, in the form of licensing, collaborations and internal development and investments in technology which will improve quality and efficiency in our labs and other parts of our business.

We plan to use ROIC to guide these investment decisions and are committed to improving ROIC over time.

In support of that goal, management and our Board have agreed to make improving ROIC a major component of our long-term compensation program beginning next year.

We are committed to increasing shareholder returns and improving ROIC through a framework which encompasses improving operating performance and a capital deployment philosophy which includes dividends, share repurchases and investments in our business.

This philosophy will be grounded in maintaining a strong, triple-B credit rating which minimizes our cost of capital and provides us appropriate access to credit in support of our business.

In the near term, this will require us to delever to a leverage ratio in the range of 2 to 2.25 times.

Given how the Company is currently positioned, and our outlook for continued generation of significant cash, we believe now is an appropriate time to evolve our capital deployment philosophy, one which commits the majority of our free cash flow be returned to investors through a combination of dividends and share repurchases.

As such, today, we announced a significant increase in our dividend.

We are increasing the dividend by 70% to an annualized amount of $0.68 per share beginning with our next payment in January.

We expect that the dividend will grow over time, commensurate with earnings and cash flows.

In addition, share repurchases will remain an important tool for returning cash to shareholders.

In January, in connection with providing 2012 guidance, we will provide you with more specificity regarding our capital deployment plans and ROIC goals.

Turning to guidance, we now estimate results from continuing operations before anticipated fourth-quarter charges and other potential special items as follows -- revenue to grow 1.5%, unchanged from our previous outlook; we expect earnings per diluted share to be between $4.30 and $4.35 on an adjusted basis and between $2.74 and $2.79 on a reported basis; operating income, as a percentage of revenues to approximate 17.5% on an adjusted basis, and 13.3% on a reported basis; cash from operations to approximate $1.1 billion before special items and approximately $900 million after these items; and, capital expenditures to approximate $190 million.

Our outlook on an adjusted basis excludes the Medi-Cal charge, the first quarter impact of severe weather, restructuring costs, and transaction and integration costs associated with Athena and Celera.

Footnotes 2 and 8 to the earnings release reconcile the adjusted financial measures for the corresponding GAAP measures.

Now, I'll turn it back to Surya.

Thanks, Bob.

To summarize the quarter, while we see signs of progress in a number of areas, there is still much work to be done.

We are focused on increasing shareholder value and improving returns on capital.

We are taking a series of actions to improve our performance by driving organic growth and significantly reducing our cost structure.

In our recent -- with all our key strategic capabilities now in place through recent acquisitions, we plan to return the majority of our cash flow to shareholders.

This morning, we announced a 70% increase in our dividend, demonstrating confidence in our continued ability to generate strong cash flow.

Together, we believe these actions, over time, will unlock significant shareholder value.

Finally, I just want to say how proud I am of the Quest Diagnostics team of 42,000 colleagues and the work they have accomplished.

Now that we have established a solid foundation for our future, we have begun a process to transition to new leadership.

That concludes our prepared remarks; we are ready to take your questions.

Operator?

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions)

Dane Leone, Macquarie Capital.

Thank you for taking the questions.

Congrats, Surya.

My first question here is -- since you are making kind of a broad change with the management structure, for the next 6 months, are there any plans to pursue alternative strategies for Quest as a whole outside of just the management change?

Well, thank you, Dane.

No, there is no consideration of alternative strategies.

As you know, we have worked extremely hard over the last 4 years; we have really created a Company now which is more esoteric and gene-based testing, so our growth strategy remains the same.

We will leverage our science and innovation and chromosome technology and we have a very strong foundation of patient-centric culture for laboratory testing.

And on the top of that we are now building the 4 pillars of disease-focused growth strategy for cancer, cardiovascular disease, infectious disease and neurological disorders.

So, I am very happy and actually we are very capable executives and this is the right time to just execute what we have.

Great.

And, in terms of the sales force reorganization.

It's been several quarters since that's been implemented, outside of just the weaker, overall macro environment, when do you think that can actually start paying dividends in terms of growth?

On an organic basis, it does seem like Quest continues to grow below the rate of its peers.

So, I'm just kind of curious on your thoughts of when we could actually see the organic growth reaccelerate in the business?

Sure.

First of all, I just want to clarify when we say organic growth, we really mean organic growth.

There is absolutely no fold-ins, there is no acquisitions, nothing.

So, 85% of our business comes from patients visiting the doctor's office.

Year-to-date, our office visits are down by 6%.

For the year-to-date our growth is almost flat.

So we are seeing progress, but also I want to tell you that we have, over the last 2 or 3 years, reorganized our sales force to be much closer to our customers.

We have a cancer sales force, we've got a hospital sales force, we've got a physician sales force, and that really allows us to know what is happening in the marketplace.

But also, I am pleased to say that we have started seeing progress, even in the physician business with the new people and the productivity is growing.

It's not where I would like to be, but it is giving a lot of encouraging signals and I am really glad how they are becoming productive by every month.

All right, thank you very much.

Ralph Giacobbe, Credit Suisse.

Thanks, good morning.

Just going back to the succession plan.

Just wondering, is there any specific criteria that you guys have in place?

Is the person you are looking for somebody within the lab space?

Do they have to have previous lab experience?

And then, any other changes to kind of the current management structure related to the plan?

Well, first of all, succession planning is a very important topic for our Board and then we talk about that almost in every Board meeting as far as who are the internal candidates, how they are developing, and what we need to do for -- as going forward.

But as far as this process is concerned, as you know, the Board has a search committee, and we have -- I think we are actually adopting a better practice.

Usually the companies have either a successor inside and they announce or they do a search incognito and look for someone from outside and announce.

But, I think what we have done and our Board is doing, is having a very deliberate, short process which will include internal and external candidates and drive towards finding the best person who will drive this Company to the greater heights in the next 10 years.

So, I would not really comment on specific specifications, but we will let you know when the Board concludes their process.

But, it is a very attractive Company and this opportunity is really a great opportunity for our internal candidates and external candidates.

Okay.

And then, I may have missed it, but did you give the contribution in terms of volume and pricing from Celera and Athena?

We did not break out the components of volume and pricing, but you should expect, Ralph, that the vast majority of the impact did show up in revenue per req because of the mix there.

Pretty insignificant impact to volume overall.

Okay.

And then, just to go back to the $500 million savings plan, obviously margins this quarter, I think, showed some of your progress there and I know it sounds like you're going to be talking in more detail next quarter about some of that.

But I guess, how do we think about the ramp on kind of what's left?

Is there a way to quantify that either by giving sort of when you expect to get the full $500 million run rate?

So could we expect by the end of this year it's a $100 million ramp and a $300 million ramp and a $500 million -- is there any visibility you can give us in terms of near-term versus longer-term savings?

Well, Ralph, as I said earlier, we're still in the very early stages and we're not yet to the point where we can give you specifics in terms of how much will show up in each year.

But, as you think about the years, think about -- you have very little showing up in 2011.

We're really laying the groundwork this year.

We expect to have something meaningful show up in next year's results.

But, we expect that the bulk of it is really going to come in the 2 out years and as we exit 2014, we will be at a run rate of $500 million in savings.

Okay.

And then just my last one.

Just to clarify and I think you mentioned this in the prepared remarks -- when you say you're not making acquisitions, it doesn't sound like that's -- you're not making any deals, is that -- you're still going to go after small tuck-ins?

Is that (multiple speakers)?

As Bob said, we will always go after the small, fold-ins and -- but we are saying there is no major strategic acquisition like we have done in the past.

Okay.

All right.

Thanks very much.

Tom Gallucci, Lazard Capital Markets.

Good morning, thanks for all the background.

Surya, I appreciate your comments regarding the transition.

Just curious if you can give us any more insight on sort of the timing, why now?

And I guess you sort of alluded in your last answer, that it's sort of a public transition here.

What's the thinking behind announcing that there's going to be a change with still some uncertainty as if to who exactly is going to take over?

Okay, Tom.

First of all, I am not going anywhere.

The reason why the Board and I agreed to do it this way is because we want to find the best person for this Company, who is going to drive this Company to the greater heights.

I have been very fortunate, I came to the Company when it was $1.5 billion revenue, now it's $7.5 billion.

But more importantly, it has become a very strong healthcare company, with real focus in disease states.

So, we have a lot of capable executives inside and, we have invested in them but at the same time, we want to really adopt the better practice of internal candidates and external candidates.

We have a world renowned executive search firm and this process is very deliberate, but very short.

I am going to be in the Company for the next 6 months to make sure that there is good transition.

But, the most important thing is that we've got so much -- so many important assets and the Company is poised for growth, and we want somebody who will be here for the next 7 to 10 years.

And, that's the reason why it is now.

And is this just looking at your role and there being some transition there or are there any other implications elsewhere in management or otherwise?

No, as you remember, in the beginning of the year, we have done some management changes to strengthen our lines of businesses.

Cathy Doherty now runs the physician business, Dr.

Jon Cohen runs the hospital business, Dr.

John Miller runs the cancer business, and we've got some other people who are running the lines of businesses.

And we are very focused on that so there is no change in strategy, neither change in structure.

Now having said that, obviously, we have unmet assets and capabilities and depending on the person who comes here, he or she will have -- the person who is selected from inside, he or she will have the opportunity to refine.

But from my point of view, we have come to a stage where the Company has now become an esoteric and gene-based company, major tests in 4 business categories with information technology, and we need to really leverage those assets and we need somebody who will be in the Company for the next 7 to 10 years.

Okay, and then, on the returning money to shareholders, I was just curious what the thinking of the Board was between announcing a much bigger dividend versus maybe a bigger, new, buyback program?

Let me first of all -- the Board and the management have worked together on this strategy.

The 2 important things for the Board is the strategy of the Company and the CEO succession.

Now, over the last 4 or 5 years, we have diversified from a routine laboratory to esoteric and gene-based testing and to do that, the 4 pillars, we acquired AmeriPath, Focus Diagnostics, and then the 2 other pillars, Athena and Celera.

Once that is done, we have really completed our strategy for the time being.

And so capital deployment philosophy is an evolving philosophy and the Board and the management agrees that where we are today for at least the next 2 or 3 years, we don't see any major acquisitions.

And, so as Bob has always said and I have said, that if we don't invest our capital appropriately in acquisitions or we have additional cash, we will always return it to the shareholders.

And, over the years, we have returned almost $5 billion.

So, going back to the dividends, we increased it and that just shows our confidence in producing strong cash flow going forward.

And, also, as I mentioned, that for the next few years we will return the majority of our cash to the shareholder, in the form of share buybacks.

And we will talk more about this when we do our guidance in January.

Bob?

And, Tom, just to put it in perspective, as Surya indicated, we are going to be returning the majority of our free cash flow to shareholders.

When you look at the increased dividend, that represents about 13% or so of free cash flow.

So, that means share repurchases will continue to be an important element of how we return cash back to shareholders.

Okay, great.

Last question if I could.

Just wondering about the trends of the insourcing on the pathology side that have been a headwind for the last couple of years?

Well, you know, it has been a headwind a couple of years, Tom.

And, we see that in GI and GU it does moderate it, and DermPath, it is still there.

But having said that, cancer is a major area, growth area, and the AP is critical.

So, we expect although the rest of the year is going to be challenged, but eventually it is going to bottom out and we will get the benefit of our very strong anatomic pathology franchise.

And, Tom, we're working with ACLA on hopefully some regulatory reform down the road that will stem that trend in insourcing.

Because we think we'll be at least a higher utilization.

Okay, thanks a lot, guys.

Ricky Goldwasser, Morgan Stanley.

Hi, good morning.

A couple of questions.

First, on the acquisition front, it seems that the contribution from the acquisitions have outpaced your original guidance of 2%.

Can you walk us -- what's driving the strength?

And do you expect that to be sustainable?

Ricky, it's actually tracking very closely to what we had guided.

Remember, that 2% is a full-year impact and we only have those acquisitions in for part of the year.

So, what you see in the third quarter is a full quarter's impact of those acquisitions, which was about 3%.

But, again, for 2011, where we only have those transactions on board for part of the year, it's about 2%.

So, we should expect to see the same kind of trending in the fourth quarter?

Well, I'm not giving fourth-quarter guidance at this point, but, there's no reason that it will look much different in terms of the contribution in the fourth quarter than it looked in the third quarter.

Okay, great.

And then, you really showed very nice market improvement on both the gross profit and SG&A.

Does the improvement reflect any of the $500 million cost savings?

And if not, what are the drivers?

Yes, Ricky, it's a combination of a few things.

And, I would tell you that it is really not anything from the longer-term program at this point.

It's really a result of some of the short-term actions that we've taken to adjust the size of our workforce and reduce cost in light of the volume pressures that we've got.

And, also in this quarter, we did have some benefit which is unclear as to whether or not it will continue.

But, probably 50 basis points or so associated with the way we treat our supplemental deferred comp plan.

You may recall we've talked about this in the past.

But, losses associated with the investments in that deferred comp plan show up as reduce cost in operating income.

But, there's an offset below the line for those losses.

So, it nets in the P&L, but it shows up in different places.

And, this quarter, we did have about a 50 basis point benefit, year-over-year from that phenomenon.

Okay, understood.

And then, lastly, just following up on the pathology question.

I know you mentioned kind of like regulatory actions that would reverse the trend.

Can you update us on your expectation for the timeline on that?

You know, Ricky, we have been working with -- directly in DC and also with ACLA.

We've done some studies, we have given some data but I really don't have any specific timeline.

We know that utilization has increased when people try to do it themselves.

Okay.

Well, thank you.

Thank you.

Lisa Gill, JPMorgan.

Hi, this is actually Gavin Weiss in for Lisa.

First, I just wanted to be clear -- the charges related to the Surya's employment agreement -- those are not included in guidance, correct?

Correct.

Okay.

And then, I know you talked about AP insourcing trends but maybe could you talk about how you think the overall AP market is trending?

Well, the AP market -- the overall AP market is growing.

But, the share is shifting a little bit because it used to be the commercial laboratories and the pathologists and now actually you have the other specialists like GU, GU and derm and they are doing the technical components.

So I think the total market is now still growing with the growth of cancer.

And, I think you've seen, with the recent announcement of the acquisition of Caris by a Japanese firm, yes, that does point to and reinforces our view that AP is going to be an important and attractive space to be in over the long-term.

Okay.

Great.

And then, just lastly, you mentioned benefit plan design in your prepared remarks.

Are these programs that will be implemented in the future with health plans or are you seeing the effects of these plan design changes now?

Some of those programs are in effect now with some of the health plans, and we are seeing some changes and some results.

Some improvement, also.

Okay, great.

Thank you for the questions.

Gary Lieberman, Wells Fargo.

Thanks for taking the question.

I guess, first off, Surya, is there the potential for you to remain on as Chairman as you transition someone into the CEO role and then maybe ultimately the Chairman role, or are you guys looking to sort of effectuate the change of both at the same time?

You know, Gary, again, the Board will consider that.

What I have agreed with the Board, that once we find the CEO, I will remain as the Chairman if the Board wants.

But, I am going to be here up to 6 months and hopefully, it will take less than that to find the CEO.

But, after April 30, I will leave the Company and I will not be on the Board of Quest Diagnostics.

Okay.

And then, can you guys maybe comment about the transition of Athena and Celera and the integration with the existing sales force and the ability for the current Quest sales force to sell those products?

Yes.

You know, Gary, again, you want to visualize our Company, that the routine testing is the foundation for chronic and the 4 pillars of these, what I call the disease-based focus.

They can also consider like various specialized boutique, advanced, esoteric laboratories whether it is focus, whether it is anatomic pathology with AmeriPath and DermPath, or whether it is Berkeley Heart and Athena.

So, each of them will have and have specialized sales force to meet their customers.

But, along with the specialized specialist sales force we also have the general sales force who are selling to physicians and the hospitals.

And, they are there to provide leads and provide information and also become the channel for some tests.

For example, we had a weakness in women's health so we introduced SureSoft, but also, we have now have access to SMA through Athena and we are now gaining some of the accounts back.

The same thing is going to happen with the Berkeley Heart lab.

They will sell direct, but some of their test results are going to be sold to physicians and the hospital.

So, there's actually a double channel strategy to reach maximum customers.

Great, thanks a lot.

Thank you.

Kevin Ellich, Piper Jaffray.

Good morning.

Just a couple questions.

Could you tell us or remind us, does Athena and Celera have their own commercial contracts or have they been rolled onto Quest contracts?

Generally, they have their own contracts and in some cases they operate as out of network.

And, in other cases we will be rolling in some of the contracts, particularly on the Celera side, BHL in particular.

Got it.

And, Bob, would you care to tell us what percent of the revenue or how much is out of network?

No, not at this point.

Got it, okay.

Thanks.

And then, in your revenues, the other revenue segment grew, by my calculation, maybe 17% year-over-year.

Pretty strong growth.

Just wondering, what was behind that?

Well, as I said, the base business grew about 8%.

The added growth came from the products portion of Celera.

So, there is some acquired revenue growth in there.

But, if you look at the base business that grew 8% in that group of businesses, that was principally from the product side of the business as well.

Got it.

And I guess, going forward should we expect similar type growth out of the products business there?

The products business we continue to expect is going to grow at a nice clip.

Again, I don't want to give specific guidance for a small component of the business at this point.

But, we have been very pleased with the growth that we've seen there.

But you know, it's also of great strategic importance because there's not a lot of IVD companies have laboratory to introduce products and not a lot of lab companies -- frankly, there're probably no lab companies who have the IVD capability.

So, knowing that our central theme is diagnostic testing and information and services, I expect that some of the LDTs, laboratory developed tests, is going to become IVD through Focus Diagnostics and Celera, and will become a revenue stream for us.

Understood.

And then, you said drugs-of-abuse was up 5%.

Does your drugs-of-abuse include toxicology screens or is it just preemployment testing?

Well, it's principally preemployment testing.

But, yes, a lot of that is tox work

Understood.

And just maybe the last question I have is, Surya, could you give us any update on India and maybe just how -- generally how Care360 is performing?

Sure.

First of all, about India.

As we said, the Indian market, the laboratory market is growing 15% to 20% a year.

We are growing in India but it is not to my expectation.

So, we have a lot of opportunity in the growing market, especially in India, to make sure that we get our share.

We have started doing some esoteric tests and also some reference tests from India.

So, we still have to do a lot more in India for us to really get our return.

As far as the Care360 is concerned that is doing very well.

Not only the Care360 as the laboratory orders some results but also as an EHR.

And we have now got -- almost 3,800 people have adopted our Care360 EHR and this, again, will become a very important element we move forward to work with health plans and accountable care organizations.

ACOs want connectivity; ACOs want analytics; ACOs want informatics.

This is the only company who has not only the connectivity but also content.

So, again, another strategic asset which will really help us to grow.

Got it.

Okay.

Thank you.

Robert Willoughby, Bank of America.

Surya or Bob you may have mentioned it, but with a CEO search that's underway, is the Board also open to exploring or currently exploring other alternatives possibly to create some value here above and beyond what you have announced today?

Well, you know, Bob, first of all, the Board is fully engaged to find a successor to me.

And, as far as any alternatives and other things, obviously, there's something -- the Board looks at it, but at the moment it is -- the focus is looking for a CEO not really to any other alternatives for Quest Diagnostics.

And, Bob, we believe that executing against what we've outlined, particularly in terms of improving operating performance, will generate some real significant value for shareholders.

Thank you.

Brendan Strong, Barclays Capital.

Hey, good morning.

Maybe, first off, Surya, what exactly -- what are going to be your biggest areas of focus over the next 3 -- next 6 months there?

Well, first of all, nothing has changed.

We have a company to run and we have to deliver what we promised and we are going back to what the focus has been, to really grow the top line so that's basically sales effectiveness and driving the esoteric business, reduce cost.

And then the other thing what we are now focused on, improving ROIC.

Those are the 3 things.

But, I am going to work until the last day, making sure that not a single business from Quest goes anywhere.

It comes to Quest from the market.

Okay.

And then, look, with this type of a transition there's often a lot of soul-searching, what do we do really well, what do we not do so well.

Is there anything that you would say that maybe you would have done differently in recent years or that you'd recommend the Company do differently going forward?

And, that's maybe even a new opportunity at this point?

Well, again, you're absolutely right.

It's not even this transition -- almost every year we think about what is going well, what is not going well, we can do better.

But, if you know our Company, there are 3 words that have driven our Company over the last 10 years.

It's patients, it's a passion for patients and our desire to grow and our commitment to people.

So, as far as patients, growth and people, that's not changing.

The more important thing is that we have a lot of very capable people in the Company, not only at the executive level, but also in the Company.

And, that's why, actually, we could take a big jolt like losing the United contract, but recovering.

And, further, I am concerned that we are no longer a lab company, we are a healthcare diagnostics company and with a lot of assets, and with a lot of people in the Company with new ideas.

So, I'm pretty excited, actually, to see this Company and look for a person both internally and externally to drive the Company --

Sorry, about that.

That's me.

That's you?

So, I don't really -- again, we're not going to tie people's hands down whoever the new leader is.

But, whoever the new leader is, he or she will be very, very excited about the people and the assets and the customers we have.

All right, great.

And then, Bob, last question is for you.

I know, it's hard to give specifics on the $500 million in cost savings.

There's always been questions over the year as to whether or not there is some core differences in the cost structure between you and LabCorp.

And I'm just wondering, if you can comment on whether or not, at this point, you think there may be some specific differences that you are going to target with these savings, or if these savings are more just driven by what you believe are best practices?

Thanks.

Well, there likely are some differences in the way we operate our business with LabCorp.

But, frankly as we go through this process and we've identified the opportunities here, we're not using LabCorp as our model.

What we're looking at are the opportunities we had within our business to take our business to a different level, to do things differently.

And, I outlined a lot of those.

While I respect LabCorp for what they've accomplished, that's not necessarily what we're trying to emulate here.

Very good.

All right.

Thank you.

Thank you.

Bill Bonello, RBC.

Thanks.

Hey, can you tell us who the Board is heading up the CEO-transition search?

The Board is the search committee and we have -- as you know, we have a leading independent director but the Board itself is their search committee.

Okay, so in the press release it said you'd formed a search committee but there really isn't any separate search committee?

Frankly, it is -- the Board is the search committee; there are 7 people -- including me is 8.

So, obviously, I'm not in the search committee but I will participate.

Okay, that was could be my next question.

So, you will be an active participant in the search process?

Bill, in fact, my role will be to facilitate and provide all the information and obviously I will participate in the search process and -- but it is the Board's decision.

It is the Board's work.

Okay.

That makes sense.

And then, just one quick follow-up question for Bob.

In terms of the sequential increase in revenue per requisition of growth is that primarily just reflecting a full quarter of the acquisitions, or is there anything else that drives that?

That's probably the biggest piece of it, Bill.

As we indicated, as we got into the back half of this year, we would start to anniversary some changes that were made previously.

And, we're starting to see some of that as well.

As I mentioned, the absolute level of revenue per requisition has been pretty stable, ex the acquisitions this year.

Right.

Okay.

That was all.

Thank you.

Ashim Anand, Natixis

Thank you.

The first question is the bad debt expense went down significantly converse from that, I was wondering if you guys can comment on if there has been any payer mix -- significant payer mix change and how should we think about the trend, going forward?

There's been no significant payer mix change driving the bad debt improvement.

If you look at the bad debt quarter to quarter this year, it's been relatively stable.

We had some quarters last year where we had spikes, so the improvement that you're seeing is really the year-over-year improvement, not necessarily sequential improvement.

But, bad debt and billing is an area that we're constantly looking for ways to improve it.

You don't improve it overnight.

It generally takes lots of time and effort and you start to see small, incremental changes over time.

And, that's really what we've been doing here.

We've been applying Six Sigma in the billing and collections area for some time now and it's one of the areas where I think we have probably the best examples of how Six Sigma can work to drive continuous improvement.

And, that's really what you're seeing.

Okay.

And, in terms of the prospective restructuring plan, would it change your aggressive venture into developing countries in any way?

No, as we've said, we still do quite a bit of reference test from international, which includes some developing countries, but our major investment is in India because that's the one which is growing and we want to be successful there before we start doing any other venture anywhere else.

Okay.

And in terms of nonclinical revenues, they grew significantly.

I was wondering if you guys can comment on how the point of care part of that is doing?

And also, you don't break out but if you can generally comment on conserving, probably this is the highest ever, if I'm correct, how that had an effect on that segment, the total nonclinical segment's gross margins and SG&A?

Yes, just to clarify the non-clinical businesses their base revenues grew about 8%.

There was additional growth added as a result of the Celera acquisitions that brought with it a products business.

So, that's what drove the rest of the growth there.

Within the base business, much of that growth was driven by our products business.

Again, principally the point of care operations there which have been growing nicely.

But although we call it nonclinical, but remember the reason why we have this is this is all of our diagnostic testing whether you draw blood and bring it to the laboratory or take an instrument to the doctor's office.

So, it makes sense.

Okay, and finally, HHS recently proposed about direct patient access to clinical diagnostic tests done in labs.

In that regard it's not a done deal, but I just wanted to know how and if you are pushing for that reform?

And, what is the likelihood that CLIA/HIPAA's rule against it might be repealed?

Ad going forward, if it does go through, assuming that you guys like it, how sales and marketing practices might change in terms of the clinical diagnostics?

Okay, a lot of questions there.

But first of all, we are a very strong supporter of patient data rights.

It is the patient's blood, it is the patient data.

The other thing is that we don't believe that you can reduce healthcare cost and improve quality unless we educate people.

So, we've been working behind the scenes for the people who can make changes as far as giving the data to patient directly so that they can be educated.

If you know your blood sugar is going up, you know that you are not going to have that donut.

So it's all about patient accountability.

And, so, the patient data rights, we welcome it and we really applaud what the government is doing.

We have connectivity to physicians and now we have connectivity to patients through our Gazelle smart phones.

So if you have your blood sample coming to Quest Diagnostics, you will get your result in 48 hours.

Your doctor will get the results first.

And Gazelle was introduced a few months ago and now we have 80,000 users using this device to get their results and also use other applications.

So again, it's all about providing information, diagnostic information to doctors and now to the patients.

So, it's a good thing.

Thanks a lot, guys thanks for taking the questions.

Thank you.

Darren Lehrich, Deutsche Bank.

Thanks.

Good morning, everybody.

And Surya, I think your decisions about capital deployment are really great news for your shareholders.

Thank you.

I wanted to just ask a couple of questions here.

I think, first of all, when did the search begin, in other words, when did you engage the outside party?

Well, you know some of this thing I will not be able to give you, but remember one thing, leadership development and succession planning is a regular work in Quest Diagnostics.

So, this is not something new.

And we, many times we have different search firms trying to help us, our executive search firms -- so as far as this particular one, I will not be able to give you exact dates.

Okay, well the reason why I asked the question specifically is, I think, Surya, you've indicated throughout the call that it will be a short process and so it sounds like this has been something that has maybe been working behind the scenes for some time, so I just wanted to understand the basis for your comment about why you think it is such a short process or is it just that you think 6 months is a short period of time?

If you could maybe help define what you mean by short?

Okay, well you know, first of all as we've said, that we have a number of internal, capable candidates.

We also have been working for quite a while to looking at how the transition is going happen.

And the reason why I talked about short, because usually when -- we don't want to extend the period of uncertainty so I agreed to be here for 6 months to transition.

And, we believe that we'll find the right candidate for our Company.

And it's a very attractive Company with a lot of growth opportunities so, our goal in working with the executive search company, we believe it can be done within 6 months.

Okay.

That's helpful.

And then, my other question, maybe Bob if you could just comment a little bit more about some of the incentive changes that the Company is pursuing with regard to management compensation?

Just any broad strokes on the framework of how that will look for 2012 and what's changed?

We will have more details later, but as I indicated and Surya did as well, beginning in 2012, a significant portion of management's long-term compensation is going to be tied to improving ROIC.

What those targets are and the rate at which we're looking to improve it, there is really more to come on that.

But, those targets, for us, will be set as part of our annual planning process.

Okay, that's helpful.

And then, the last question I have is I wanted to make sure I heard something you said earlier, Surya, just about lab benefit and maybe I missed the comment.

But is Quest developing its own lab benefit management business?

Can you just maybe expand on what you were referring to in your prepared remarks?

Well, sure.

We have a product called QuestNet and we have it existing for the last 7 or 8 years.

And basically, it is a product where we manage and build networks and manage networks for health plans and already we have 2 health plans we are working -- they rely on us to really run their network.

And, we are talking to a number of other health plans who are interested in such a network.

It is called QuestNet.

Okay.

I just didn't hear your comment, clearly.

So, it's not necessarily -- I mean it is a network on that you've developed, but are you building it into a benefit management company, as well?

Is there anything -- any broader plan around that?

I just want to make sure I understand how you are framing that.

Well, first of all, QuestNet can be expanded.

It is not a separate company; it is part of Quest Diagnostics and it can -- we are working with various vendors to have a different kind of thing like pre-authorization.

And, so, it can go into the laboratory benefit management if we want it, but it is a part of Quest Diagnostics.

Thank you.

Okay.

Isaac Ro, Goldman Sachs.

Good morning, thank you for taking the question.

First off, I just want to talk about the co-pay on scenario out there.

I know obviously there's a lot of legislative events ahead in the next couple months but how are you guys looking at that in the current situation?

Our Washington folks have said that the Biden proposal could be one that takes shape, and within that potential for co-pays on the lab side.

Just wondering how you are managing the risk there?

Yes, Isaac, this is Kathleen.

Clearly, there's a lot, as we know, on the table in Washington as Congress is working on the deficit reductions part of the debt ceiling negotiations.

And, quite frankly, there's a lot on the table.

There is a co-pay possibility, that certainly AARP has formally indicated their opposition to; there's a coinsurance possibility; there is certainly reduction in the clinical lab fee schedule that are being contemplated.

So, there is a lot on the table.

We're certainly working directly and through ACLA to make sure that diagnostic testing and Quest Diagnostics is fairly considered in whatever they are contemplating.

And, we've already provided and absorbed quite a bit of the reductions from Medicare.

So, it's really too early to tell, quite frankly.

They are under the gun to get something negotiated by the end of the year and we're certainly staying close to what's going on there.

And Isaac, this is Bob.

Certainly we don't see a co-pay as something that's very attractive, not only for us, but for the people participating in the Medicare program.

Essentially you are shifting cost to seniors in a situation like that.

And you run the risk that it would deter them from getting appropriate testing and screening and preventing what might be more expensive procedures down the road.

So, we don't think it's necessarily good policy.

We're trying to make that case very clearly.

But also, if there is going to be a co-pay, we want to make sure that it's in situations where it's being collected by the provider that's actually seeing the patient, which is really important.

Got it.

Okay, that's helpful.

And secondly on Celera, in the past you guys have touched on the development capabilities you got from that asset.

Wondering if you could maybe comment on the progress you are making there as it relates to new products.

You touched on an interest in becoming more of a diagnostics company rather than just a lab service provider.

How those assets are helping you make that transition would be interesting.

Well, first of all the reason why we were interested in Celera apart from having the specialized Berkeley Heart lab, is their discovery capability and also their IDB capability.

We have Focus Diagnostics for infectious disease and with that, what we bring to our Company is how you deal with FDA, how do you deal with the regulatory stuff, plus the fact that a lot of test can be converted into IVD based on the work which is happening in our laboratories.

So, when I look at international markets or look at the hospital market, I really am pretty excited about some of the reagents, which we can do through Celera focus.

At the moment we are focusing more on molecular diagnostics, which is the top end of IVD.

So, this will be very important for us when we go towards personalized medicine and this is very important for us also as far as getting the benefit of testing in the hospital and international by just by sending reagents, and you don't have to really open up big laboratories to do this thing.

So it is good and we are combining some of the expertise; it's small at the moment but it has a very bright future.

And, Isaac, we're seeing a lot of interest from pharma in our capabilities at this point because, as they are thinking about companion diagnostics, particularly diagnostics that might have a very broad appeal, it's going to be very important for them that there be an IVD kit that's available.

We can work with them to take a laboratory developed test, convert it into IVD kit, which can then be distributed very broadly and widely.

So, we're seeing a lot of interest there.

And as Surya said, it's small today but it is an important capability that we think is going to help us as we go forward.

Got it, okay.

Thanks very much.

Gary Taylor, Citigroup.

Hi, good morning.

Good morning.

A lot of news today.

Appreciate it.

A couple of questions.

Did I miss the discussion of how the AP business is going?

And if I did, I'll just go back and look at the transcript.

No, I think we just mentioned about our AP business, Gary, that's still under pressure.

And, we still believe that the rest of the year, we will see pressuring dermatopathology, although GI and GU is moderating.

And we are working with the regulators.

We've collected some data, hopefully we could persuade the regulators to stop some internalization.

But, having said that, AP is a very important component of cancer diagnostics and once it has moderated we will benefit from our strong franchise of anodermic pathology.

Do you expect you might see growth in revenues there in 2012?

Or, still too soon to say?

We are not talking about 2012, as you know.

But, it's a very important element of our growth strategy.

And, AP is certainly growing faster than routine testing.

But unfortunately, at the moment because of TC and PC we are seeing some internalization.

Okay.

2 other quick questions.

One, I just wanted to -- I've asked this before, Bob, just asking about reporting basis and cash EPS obviously, LabCorp went there a couple quarters ago.

And in light of reevaluating a lot of shareholder-friendly things, is there any consideration or any new consideration they might change their reporting basis?

Look, Gary, we have no plans to do that.

I'm not sure how it's really shareholder-friendly.

It's not doing anything to create value.

It's just re-characterizing something.

The amount of amortization that is associated with our deals is clearly laid out on the P&L.

And, if people want to calculate that number, they certainly can.

But, I don't see how it creates any shareholder value.

I don't necessarily disagree with you, I just know it's generally shareholders that have liked it.

But, whether it creates value I'm not sure I disagree with you.

Thanks for that.

Last question is on the comment that you would look in the future to return the majority of the free cash flow generation to shareholders, dividend versus repurchase, and you did report a sizable dividend increase today but you're still -- your dividend payout ratio is about 10% or 12% of your annual free cash flow.

So, I guess, my question is, longer term, what are your thoughts around, on what that free cash flow payout ratio might look like or could look like?

Without giving you specific guidance, Gary, on the payout ratio, what you should expect regarding the dividend is it will grow over time as we continue to grow our earnings and cash flows.

But, I'm not prepared to give you a specific payout ratio.

At this point, also, the increase in the dividend brings us pretty close to about 13% or so of free cash flow.

Right.

And, is there any -- just my last follow-up -- when you consider dividend versus repurchase, any top of mind, I guess, rules of thumb or thoughts around how you are going to be skewed?

I mean, right now clearly much more free cash flow available for repurchase then there is being paid out in dividends.

In the future what are going to be some of the drivers about?

Well, certainly as we've said already, we feel very good about the outlook for us continuing to generate strong cash flows and feel good about the ability to increase the dividend at this point in time.

And, I think we want the dividend be something that's meaningful.

We've done that with this increase, and as I said, we expect it to grow over time.

And, share repurchases give us some added flexibility in that regard.

So, we want to maintain some flexibility here but, we want to make it very clear that we're committed to returning the majority of our cash to shareholders.

Okay, that's all I had.

Thank you.

Art Henderson, Jefferies & Co.

Hi, thanks for taking the question.

Surya, I know you guys have worked pretty hard on getting closer with your managed care clients.

You've talked about working to control leakage.

Can you talk just a little bit more about how that's progress?

And are we still in the very in the early stages there of what you can do?

And maybe if there's anything you could comment on, how that's going along would be helpful.

Sure, Art.

First of all, I wish it was going much faster than it is going at the moment.

However, having said that, as we mentioned, we have long-term relationships with a number of health plans.

And I think, as they evolve to becoming ACO or working with the employers, we are becoming a very strong partner with them, whether it is increasing their [hadeus] score or providing analytics and informatics about utilization or taking the leakage data, which the patients are going to the hospital, and the hospital is 2 or 3 times more than the commercial lab, and changing the employer benefit.

So, we are working in a number of areas and we are pleased to see some improvements in this area where the health plans are talking to employers.

And, health plans are talking to us and giving us the data to move -- to steer some leakage away from higher cost testing to us.

The other question about lab benefit management or lab network, and again, we had QuestNet for almost 7 or 8 years and we see some more interest now in managed networks.

We manage hospitals, we manage laboratories.

So, we will probably see some more work in QuestNet.

But I think the most important thing is probably going to be the application of our connectivity with the doctors and getting the data utilization and when the CEO comes in, the new [jaw] lab are actually accountable -- accountability of quality and improvement of quality and reduction of costs.

So, we are working with them and we've seen some progress, but it's a little slower than what I would've liked.

Sorry, just to prod this out a little bit more, why wouldn't commercial payers jump more on this, faster?

Why are they so leary to sort of get on board with controlling this leakage issue?

Well, first of all, as you know I have a lot of friends both in the hospital CEO and also in the health plans and they say it's a question of priority.

Laboratory testing, again, is still 3% to 4% of the total cost.

And when somebody is negotiating a heart transplant or a [revel] distance center, all those things laboratory test doesn't come in.

But, having said that, diagnostic test is going to play an important role on the total lifecycle cost during the hospital stay and the patient outside the stay.

And this is where we come in.

This is where the health plans are getting more interested because they want to know about the patient, when the patient is in the hospital and outside the hospital and also trying to reduce readmission to the hospitals.

Okay.

That's helpful.

On the managed care contracting front, you don't have any significant contracts that are up for renewal in the next couple of years, do you?

Can you just refresh my memory on that?

Art, this is Bob.

We've indicated that all of our national contracts have been renewed for multiple years.

We don't have anything coming up either this year or next year.

They start to come up in 2013 and beyond.

And, as I look at the next couple of years, while we always have contracts coming up whether they be, typically, a national, or regional or local one, the amount of contracts that are coming up -- the business that is coming up in total, tends to be a little less than it would be on average in a particular year for those upcoming years.

Bob, while I have you, was there any sort of hurricane impact, weather impact in the quarter?

I know Irene hit pretty hard.

Was that -- did that end up kind of being nothing?

Or, was there anything that you could talk about there?

Art, the impact of the hurricanes was really very modest for us.

As you know, they hit on a weekend, which is slower time for us.

So, while it did have some impact, it was pretty modest at the volumes and we chose not to break it out.

Sorry, one last thing.

Obviously, I know a lot of thought went into your succession plan, I just want to say thank you for all the good years of hard work, you really did build the Company up.

So, just wanted to mention that.

Thank you very much, Art.

And thank you all, actually.

You have supported me over the years but I'm not going anywhere for another 6 months.

That's good.

We'll look forward to more conversations.

Thank you.

Amanda Murphy, William Blair.

Hi, thanks.

I had just one quick follow-up on the cost savings initiative, that you're launching here.

So, I understand that you're going to be at that $500 million run rate sort of in 2 to 3 years from now.

But if you look at that number, it's sort of a big earnings number, potentially.

So, is that we should be thinking about in terms of how it flows to the P&L over the course of the next 2 to 3 years?

Amanda, as I said earlier, while I think everybody's anxious to understand how much exactly is going to flow through the bottom line, we're doing this for a number of reasons.

One, we see as we look forward, increasing pressure on reimbursement, we see rising costs in some places.

We think we just need to do this to make sure that we can continue to grow our business to be competitive and in doing that and also improve our margins.

And at this point, it's premature to give you specific guidance as to what the impact will be on margins.

I hope to give you some more clarity around that as we get into January and provide you guidance for 2012.

But, for right now, it's a little premature.

Okay, thanks a lot.

Steven Valiquette, UBS.

All right, thanks for squeezing me in here.

Just kind of ask that Medicare co-pay thing for a minute here.

It seems like if you think about the mechanics of it, at the end of the day, it would impact just your Medicare book of business which is a smaller part of your mix.

But, if you do get a broad Medicare cut that would seem to, over the course of a couple of years, maybe work its way into commercial pricing and impact your overall book of business.

So I guess just to confirm your views, have you run the math to say that this co-pay scenario is definitely worse financially than say a broad 2% to 4% Medicare cut?

Just to get a sense for how much worse this might be versus just a broad cut would be helpful to kind of put in context.

Thanks.

Well, look, as you could expect, a broad fee reduction is going to drop down to the bottom line with no opportunity to recoup it.

And while we're not in favor of a co-pay for the reasons that I mentioned earlier, you do have the ability to collect that, particularly if you are in the position where you are going to encounter the patient.

And as I said earlier if we do end up with a co-pay, that would be the sort of scenario that would make the most sense.

It would be -- the provider that is encountering a patient, that would be responsible for collecting the co-pay.

Or, that's what we would propose, in that regard.

But, certainly, like I said with a co-pay, we have the opportunity to collect it.

If it is a straight fee reduction, there's not much we can do about that.

There is an industry trade blurb that the cost of collecting it could be some are like in the $3.50 or $3.60 range, somewhere in there.

Do you share that view?

Do you think because of your scale it might be a lower cost for you?

What are your thoughts around that number and cost of collecting a co-pay?

That sounds like it's a relatively high number of this point.

And, look, we collect co-pays today.

So, we've got the infrastructure in place to do it.

We know how to do it, and while it would add cost to us, it's something that were certainly capable of accomplishing.

And, I believe, for less than what you have just quoted.

Okay, that's helpful.

Thank you for participating in the Quest Diagnostics' third-quarter conference call.

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

A replay of the call may be accessed online at www.QuestDiagnostics.com/investor or by phone at 888-673-3567 for domestic callers or 402-220-6430 for international callers.

No access code will be required.

Telephone replays will be available 24 hours a day until midnight Eastern time on November 22, 2011.

Goodbye.