奎斯特診斷 (DGX) 2014 Q2 法說會逐字稿

Thank you for standing by and welcome to the Quest Diagnostics second-quarter 2014 conference call. At the request of the Company, the call is being recorded. The entire contents of the call, including the presentation and question-and-answer session that will follow, are the copyright 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 Dan Haemmerle, Executive Director of Investor Relations for Quest Diagnostics. Go ahead, sir. Thank you, you may begin.

Thank you. Good morning. I am here with Steve Rusckowski, our President and Chief Executive Officer, and Mark Guinan, our Chief Financial Officer.

During this call we may make forward-looking statements and also discuss non-GAAP measures. 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 2013 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 Steve Rusckowski.

Thanks, Dan, and thanks, everyone, for joining us this morning. This morning what I will do is provide you with highlights of the quarter, share industry trends, and also review progress we are making against our five-point strategy. And then Mark will provide more detail on the results and take you through the guidance.

This quarter we did restore growth. Revenues grew 5% to $1.9 billion, adjusted EPS increased 2% to $1.08, and then finally, cash from operations was strong at $280 million, which is up 34% from 2013. So let me start with the industry trends where actually reimbursement outlook has been improving.

First, we saw some signs that healthcare utilization improved during the second quarter. Also in April, the Congress passed the so-called [dot six] legislation that delayed adjustments to the clinical [IAP] schedule until 2017. This provides for a rulemaking process to define new rates based on a market-weighted medium of commercial rates from a broad range of labs, which includes both large and small independent labs, as well as hospital outreach labs.

And it also restricts the authority of CMS to make discretionary cuts. Right now we are working through the rulemaking process.

Earlier this month CMS released a proposal for the 2015 physician fee schedule. That proposal provides a modest improvement from the current fee schedule, which is much needed after the significant cuts experienced over the past few years. Then last week we learned that Tricare committed to restoring payment for 40 molecular codes that had previously been denied in some cases.

Finally, our trade association has been getting the message out about the value of diagnostic information to healthcare. We are making progress as an industry, but reimbursement dynamics continue to evolve and there is much more to do.

As we have said, diagnostic information is a powerful lever for transforming healthcare and we are determined to be paid appropriately for the value we provide. We did see continued sequential progress on reimbursement during the quarter.

Being appropriately reimbursed for the value provided is critical to our success. We compete on a compelling value proposition, not solely on price. You will hear more about this later in the call from Mark.

Regarding the Affordable Care Act, enrollment through the exchanges ramped up late in the first quarter. While it is still early, we did see modest shifts from the uninsured patient volumes at certain payer types during the second quarter. We continue to expect that the Affordable Care Act will be neutral to slightly positive for our business in 2014 and net positive over the long run.

I expect to update you further on our views on the market and the competitive landscape at our investor day which will take place on November 5 in New York City.

Now let's take a look at the progress we are making to execute against our five-point strategy. Our top priority is restoring growth and we made solid progress in the quarter. The investments we have made and efforts to improve our sales effectiveness are starting to yield positive results. We are seeing continued improvement in sequential trends in revenues, organic volume, and organic price.

We are seeing continued improvement in sales productivity. We saw strong revenue growth in several product categories, driven by our clinical franchises including prescription drug monitoring, health and wellness, and infectious disease. In addition, the clinical franchises are positioning us for future growth. What I would like to do is to share a few comments on two partnerships that we established during the quarter.

First, we are very pleased to be partnering with Memorial Sloan-Kettering to use molecular testing in next-generation sequencing to improve physicians' capability to treat patients with a variety of solid tumor cancers, which account for about 90% of all cancers diagnosed in the United States every year. The goal is to give local community-based oncologists access to these strengths of Quest and Memorial Sloan-Kettering to improve their ability to treat their cancer patients.

Initially, physicians who order Quest OncoVantage tumor panel will benefit from the Memorial Sloan-Kettering data through a co-branded clinical annotation report to have access to a patient's prognosis, guide treatment selection, and monitored disease progression. Over time, the goal is to build on this partnership to develop new diagnostic solutions in addition to more research in clinical trials.

Second, we also partnered with Sequenom to offer national access to its MaterniT21 PLUS noninvasive prenatal test. Beyond these two collaborations our clinical franchises are also delivering insights from our extensive database to improve health. Let me show you a couple brief examples.

You may have seen that The Wall Street Journal covered our latest health trends report showing that about half of the patients complied with their prescriptions for pain medication. In addition, we continue to empower patients to manage their health information through what we call our MyQuest application, which is powered by our Care360 which now has nearly 1 million users. These are great examples of how we are delivering on our vision of empowering better health with diagnostic insights.

We are also continuing to focus on opportunities to work collaboratively with hospital systems and integrated delivery networks. Last quarter we announced our fourth professional lab services relationship, all of these are now operational and generating revenues. Our pipeline of new opportunities continues to expand in this area.

Additionally, our M&A program enabled us to restore growth in the quarter. We completed the acquisition of Summit Health to bolster our growing wellness business. We also completed the acquisition of Steward Health's outreach business and made progress on Solstas integration.

In total, acquisitions added approximately 7% of revenues during the quarter and also has been a way for us to add some very talented people to the organization.

We are also making progress on other key areas of our strategy. We made a number of advances in our effort to improve our customer experience by driving operational excellence. We opened our two new national operations centers, one in Kansas City and one in Tampa, to enhance and extend customer services for clients and employees throughout the United States. We have added jobs in each of these markets and put in state-of-the-art technology to enable these teams to deliver a superior customer experience.

We also began moving into our new state-of-the-art facility in Marlborough, Massachusetts, which we used advanced automation technology to improve the quality and efficiency of diagnostic testing for the New England healthcare community. Finally, overall our Invigorate program remains on track to deliver the expected cost savings this year. We plan to provide you additional details on our plans to not just meet, but also exceed, our longer-term goal of $1 billion in cost savings at our investor day later this fall.

The third element of our strategy is to simplify the organization to enable our top priorities of growth and operational excellence. Our simplified strategy extends well beyond our organizational redesign. It also includes organizational capabilities, culture, and processes.

We continue to imbed capabilities in our organization aimed at building a high-performance culture. We have been driving transformational change for about 18 months, and we have made a lot of progress, but this type of work, as you all know, actually takes time. And we are still in the early stages of the process.

We have strengthened capabilities in our management ranks and also we are building capabilities on our Board. We've recently welcomed Vicky Gregg as a new director. She recently retired as CEO of Blue Cross Blue Shield of Tennessee. She also has held a series of senior roles at Humana and serves on the board of Blue Cross Blue Shield Association. Her healthcare insurance perspective and also her deep experience in healthcare information technology will strengthen our board.

Finally, we continue to deliver disciplined capital deployment and refocus on our core diagnostic information service business. We generated $200 million of cash from operations in the quarter, which reflects progress in our approach to delivering and managing working capital. In line with our plan, we made investments in our business, made two acquisitions, and continued to return cash to our shareholders through dividends and share repurchases.

We are on track to meet our commitments for 2014. Now Mark will provide you with an overview on our second-quarter financial performance and update you on our latest view on guidance. Mark?

Thanks, Steve. Starting with revenues, consolidated revenues of $1.9 billion were 4.8% ahead of the prior year. Our diagnostic information services revenue, which account for over 90% of total revenues, grew by 5.3% compared to the prior year.

Revenue per requisition in Q2 was down 2.3% compared to the prior year. The impact of recent acquisitions negatively impacted revenue per requisition by approximately 1%. The remainder is attributed to changes in our business mix and price erosion. Pure price erosion was less than 1% in the quarter.

We recognize that price erosion has been a challenge for our business. We will remain focused on receiving appropriate reimbursement for the value that we provide. Part of my focus will be on ensuring a disciplined approach to pricing, and along those lines, we will, and have already begun to make, prudent portfolio decisions as we move forward.

Volume for the quarter was 7.7% favorable to the prior year. Recent acquisitions added approximately 8.5% to volumes. As I mentioned, we have already begun to make prudent decisions regarding pricing and in some cases that means walking away from existing business.

During the quarter such decisions reduced our underlying volumes by approximately 1%. Excluding acquisitions and these deliberate portfolio decisions, our underlying volumes were slightly favorable in the quarter compared to a year ago. Again, we are making sequential improvement on volume.

Q2 revenues in our diagnostic solutions businesses, which include risk assessment, clinical trials testing, healthcare IT, and our remaining products businesses, were down 1.1% compared to the prior year. The decline is entirely due to the divestiture of Enterix last year. Excluding the impact of this divestiture, our Diagnostic Solutions business would have improved by approximately 1%.

Adjusted operating income at 15.5% of revenues was about 1.4% below the prior year with the decrease due principally to reimbursement pressure and recent acquisitions which carry lower initial operating margins. Of note, this was the first full quarter of integration for Solstas. As we shared previously, we expected Solstas to be dilutive in the first half of the year. Given the magnitude of that business and the fact that we haven't yet fully realized the synergies, it had an impact on our margins. We estimate that Solstas eroded our margins by more than 50 basis points during the second quarter.

Additionally, we continue to make progress on our Invigorate program, which offset increases in our wage bill as well as price erosion. As we indicated on our last call, we continue to expect to achieve approximately $200 million in realized savings during 2014 and approach approximately $700 million in run rate savings as we exit 2014, with a longer-term goal of greater than $1 billion over time.

Adjusted EPS of $1.08 was 1.9% better than a year ago. As a result of the Company's ongoing efforts to restore growth, drive operational excellence, and simplify the organization, reported operating income was reduced by $34 million, principally restructuring and integration costs. This reduced reported operating income as a percentage of revenues by 1.7% and reported EPS by $0.16.

Last year's second quarter included $19 million of costs associated with restructuring and integration charges, which reduced reported operating income as a percentage of revenues by 1% and reported EPS by $0.07. As expected, bad debt expense as a percentage of revenues improved 40 basis points from the prior quarter and increased 20 basis points from the prior year to 3.9%. Our DSOs improved by two days from last quarter to 47 days.

Cash from operations was $280 million in the quarter compared to $208 million in the prior year. Capital expenditures were $49 million in the quarter compared to $56 million a year ago.

During the quarter we repurchased $25 million of our common shares at an average price of $57.74. We plan to meet our capital deployment commitments by returning the majority of our free cash flow to shareholders through a combination of dividends and share repurchases, as well as meet our debt repayment commitments which we discussed on the last call.

Turning now to guidance, we expect full-year 2014 results from continuing operations before special items as follows. Revenues to increase 2.5% to 3.5% compared to a year ago versus prior guidance of an increase of 2% to 4% compared to a year ago. Adjusted diluted earnings per share to be between $4 and $4.10 compared to prior guidance of $3.95 to $4.15. Cash provided by operations to approximate $900 million and capital expenditures to approximate $300 million.

We took another positive step forward to restoring growth this quarter and continued to make nice progress against our Invigorate targets. With that in mind, we remain committed to providing guidance that is realistic and achievable. Finally, I would like to remind you of some data points to help put our guidance into perspective.

Regarding reimbursement, certain commercial contracts will anniversary later this year. On volumes, we anticipate that our focus on pricing discipline will create some additional headwinds that will continue through the remainder of the year. Ensuring that we are paid appropriately for the value we provide will enable us to build value over the long run.

Regarding acquisitions, you should assume Solstas will continue to benefit our revenues in the back half of the year by approximately 5%. But also keep in mind that we have two acquisitions, Dignity Health and ATN, that anniversaried in the second quarter. With that said, we expect our recent acquisitions to begin to benefit EPS gradually through the year as we realize synergies.

As a result of these items, we now expect third-quarter adjusted EPS to be better than the 2013 level and closely approximate our second-quarter performance. Now I will turn it back to Steve.

Thanks, Mark. So to summarize we restored growth in the quarter. Trends improved across the board in pricing, volume, and revenue. We continued to make good progress executing our strategy and have more to do. Then, finally, we are on track to meet our commitments for 2014.

Now we would be happy to take any of your questions. Operator?

(Operator Instructions) Lisa Gill.

This is actually Gavin Weiss in for Lisa. You talked about seeing some positive benefit from ACA volumes and I just wanted to get some more color on what type of payer mix you are seeing there. I assume it would be Medicaid, but can you talk about how that is impacting revenue per requisition and the profitability on those tests.

First of all, your guess on that is correct. We did see an increase in Medicaid activity in volume in the quarter and we are trying to track this, as I said in my remarks. It is early. We are trying to understand the ins and outs of what is happening with our volumes and where the lives are going.

Let me turn it to Mark and Dan to go through the revenue per req affect as well, because there is a mix change here as well.

At this point, Lisa, it is still early. There is small changes. I wouldn't say there was anything material enough to impact revenue req in a quantifiable fashion.

As Steve mentioned, we saw some increase in Medicaid, though not in all of the states that you would have expected, so it still is early. We also saw a slight decrease in our uninsured volumes. So there are some early signs of the ACA, but certainly not anything materially enough to give you the kind of depth that you are probably looking for at this point.

Okay, that is actually helpful. Then in terms of the business that you are walking away from that is not profitable, is there a specific type of test or is it certain payors that you are walking away from?

It is more of the client bill area. We have some client bill accounts where, as we look at it, we have decided, like you do in your products portfolio and other things as we have to make business decisions around how we create value, that it doesn't make sense continuing with those clients.

We understand and agree that there should be a lot of focus on volume, but also want to make sure people understand not all volume is created equal. And just like we needed to reshape our portfolio along our products and businesses, we also need to do some cleanup of our portfolio around our customer base.

Okay, great. Thank you very much.

We have also taken a look at some of our practices and a variety of our businesses. Pathology would be a good example. We are taking a look at some of the practices given the substantial changes that we have had in reimbursement, as you know, in the last year and made deliberate choices to reduce some in some areas that we thought were not in the best interest of building value over time. So that is what we are referring to in our remarks.

Okay, great. Appreciate the color, thank you.

Bret Jones.

Good morning. Thank you for taking the questions. I want to start with the organic price comment where you said you saw some organic price improvement. Was that primarily managed care contracts, which to me sound like they were going to anniversary in the second half, or was that really around the client bill as you were talking about walking away from clients?

We saw a sequential improvement in what we define as real price erosion and so sequential improvement is the decline in our price erosion is better in the second quarter versus Q1. We have indicated going into the year we expected to have less price erosion in 2014 than we experienced in 2013.

We are still standing behind the guidance we provided in the fall of 2012, which said on it we believe our price erosion over a three-year period would be 1% to 2%. And we feel good now that in fact what we believe would happen is happening and we have reasonable visibility. So I will turn it again to Mark and Dan to give you a little more color on exactly what has happened with the price erosion in the quarter.

And just to build on what Steve shared, Bret, the price erosion, we are looking at it from a sequential perspective; some things anniversaried for us. A good example sequestration, which I think we all knew was going to anniversary April 1. The year-over-year comparisons are getting better, now less than 1% if you thought about it more from an absolute basis. On a sequential basis, revenue per requisition is in line with what it had been running at but that year-over-year compare is getting better.

And just on your question about the customer portfolio decisions, we would not capture that in price, that would be in mix. And any decision to move away from a certain business would be in the revenue per req mix rate and not in the price calculation.

Great, that is helpful. On volumes is there any way to tell if there was a rebound in volumes due to weather that you saw in the first quarter? Were there regions that were hit hard in 1Q that were especially strong this quarter?

That is a great question and it is something that we constantly ask ourselves is when weather happens is it a deferral or is it actually a reduction. There is not a lot of evidence to suggest that Q2 benefited greatly from the decline in Q1 and we picked that up. I really think, as we look at the quarter, we feel it is a true run rate of demand in that quarter versus being some sort of a pickup from the depression in Q1.

And a lot of that Q1 weather happened fairly early. Some was January, some was February, but March wasn't all that bad of a weather month so you would have expected probably, if you got some pickup, it may have been in March.

Great. Thank you very much.

Bob Willoughby.

-- brought the high end of the revenue range down despite a pretty healthy beat here on the second quarter. Can you give us any indicator as to what kind of fell out of the high end of the expectation there?

Bob, you got cut off in the beginning. Could you repeat your question, please?

Yes, you had a healthy revenue beat here in the second quarter, yet you brought that revenue range, the high end of the range down for the year. Was there anything in particular that kind of fell out of your expectation for the year?

No, Bob, and as you know the beat was against external, I guess, projections, not necessarily against what we were expecting. So we feel pretty good about Q2, it is pretty much on plan. I think your take away should be based on the updated guidance what we are really saying is the year is tracking as expected.

Obviously, we had some disruption in the first quarter with the weather, but once we have gotten beyond that we feel like we are on track to the guidance we gave at the beginning of the year. We are comfortable and, therefore, we are hoping you will feel confident that things are looking good. So I wouldn't read too much quote into the beat in the first quarter. We really pretty much landed right about where we expected, which is good.

Okay. And you referenced possibly exceeding the $1 billion of cost savings numbers here and I just kind of compare that with the comment that you are walking away from some business that is poorly price or that isn't paying you well. We have heard about that since about the mid-'90s for the lab companies. I am always amazed that this business finds its way into your portfolio.

And if you are cutting the cost as dramatically as you can, why aren't retaining that business or, frankly, poised to grow faster here if those cost savings do come through?

We are doing this in a prudent way, Bob. There is some business, they obviously might've been on the margin in the past and because of our strong cost improvements it is highly attractive for us. So, to your point, we are looking at this in a rigorous way.

But at the same time, we transact a lot of activity in a variety of businesses and so what we are making sure we do is prudently go through our business portfolio by regions and price appropriately. In some cases if we decide to, decide that it is not in the best interest to continue with a client. So that is what we are doing.

But our price opportunities, along with the opportunities to retain business, have been helped, as you are pointing out, with our Invigorate program. We are ahead of our plan. The initial goal was $500 million. We increased it in the fall of 2012 to $600 million. We have said this year that is going to approximate $700 million.

We are teeing up or sharing with you a glimpse of the future. We see actually more opportunity, so we are deliberately going after that to make sure that we stay in the marketplace as aggressively as possible and make money and build value as much as we can.

Bob, as you know, not all volume is created equal and it is both on the revenue and the cost side, so the difference between a capitated payment and a fee-for-service arrangement can be dramatic. The other thing is the cost to serve can vary dramatically depending on what kind of payor situation it is, whether it is in bad debt or is it is in billing or it is in logistics. So I think what we are doing is we are doing a detailed rationalization to try to figure out where we can create shareholder value and focus and then some other areas where maybe we are better off moving our focus away from that business.

That is what we are talking about, not giving up on volume growth. This is kind of a short-term get the portfolio right and then really focus from that new base going forward.

Mark, what is a reasonable share repurchase assumption for the second half?

As I have said previously, with our $900 million of guided operating cash flow and $300 million of capital spend leaves us about $600 million in free cash flow and that we are committed to returning a majority to our shareholders. Now we have done a couple of acquisitions that were funded out of our operating cash flow, most recently Summit and Steward. And then I also have a commitment to repaying some of the debt we took on incrementally for Solstas.

At this point what I have really talked about is doing enough share repurchases to prevent dilution and not gotten specific, but certainly with our dividend a little less than $200 million and our commitment to delivering at least half of our free cash flow, you can back into something north of $100 million in share repurchases. But I have said we are going to do anything near the level we did in 2013 and probably not significantly more than just preventing dilution.

That is great. Thank you.

Isaac Ro.

Good morning. Thank you, guys. So on the ACA, I know we are obviously still early stages trying to figure out all the moving parts, but I would be curious if you could maybe try and tie in the impact that you got from ACA relative to the trends that you saw in bad debt. Was there a direct benefit to bad debt because of ACA coverage?

No, on bad debt, again I don't think the movement yet is significant enough for you to see it. It is less than rounding at this point so it is very, very early. When I look at bad debt, historically there is a seasonal variation as you are very aware so as you progress throughout the year you expect some sequential improvement. We referenced that.

In terms of the year-over-year increase on bad debt, it actually was driven really by Solstas. So we took on a business that had a higher bad debt rate than our rate and we consider ourselves, and I'm sure you look at the numbers, to be one of the best in class, if not best in class. And part of those synergies we are going to drive to the Solstas business is improving the rate of bad debt.

So initially that mix drove it up a little bit, but if you look at the core organic bad debt, the work that we are doing on improving that area -- and some of that is within Invigorate -- really the organic business bad debt rate would have been down as a percent of revenue year over year. But really through our efforts and our work, not through the benefit of the ACA.

Okay, thanks. And just a follow-up on your cost savings targets. You guys raised the goals there, but I don't think we got a lot of color on exactly, first of all, where you expect those cost savings to come from. And then secondly, if you could maybe venture if in fact the pricing and volume environment tracks in line with your expectations, what kind of a margin benefit we should expect from these incremental savings over the next couple years. Thank you.

So thanks, Isaac. We will provide you more color on this at our investor day in November, as we said, in New York City so hopefully you will be there for that.

You should expect that what we will get out of the new forward-looking goal is a continuation of some of the work we already have done. We have more opportunities to do more work related to the streams we have talked about before, what we do around procurement, what we do around functional excellence, what we are doing around just across the board looking at improvement opportunities and how we do our work and all the different complicated areas of our operations. So some of it is a continuation.

But I have shared in the past, and a matter of fact we shared it at our first investor day in 2012, is that there will be a second tranche of improvement that we see an opportunity to really take a harder look at reengineering our processes, streamlining activities, and then enabling them with the right IT to allow us to get to the next level. And that is what we are going to provide more color in the November investor day and that is where a second piece of the improvement we see will come from.

Got it, guys. Thanks so much. See you in November.

Mark Massaro.

Good morning. Thanks for taking the question. So you had a nice job lifting the volumes organically on a sequential basis. Could you help us kind of walk through when you see that kind of more meaningfully lifting?

I know you talked about certain aspects that helped your organic volumes, but could you maybe just walk through what you think some of the largest contributors to that would be?

Yes, sure. So if you go through and think about what we are doing as far as our strategy for restoring growth, the first improvement we are gradually seeing and you have to see the sequential, is what we are doing with our salesforce. Last year we actually put in place a new organizational structure. We put in place better tools. We are building capabilities in that organization.

And we feel much better today than we did a year ago with our go-to-market organization and we are starting to see some results from that. That is across the board.

We have a very comprehensive salesforce. They call on primary care physicians. They call on the variety of specialty areas that we call on. They call on hospitals. They call on integrated delivery networks and across the board we are much stronger today than in the past.

In the service business, as you know, Mark, this takes time and you gradually get new accounts. And we are starting to see some of that in what we called sales productivity.

Second is part of our change as a company is we created clinical franchises. We actually made a modest investment in those clinical franchises which has allowed us to introduce products and solutions in a different way than we have ever done before.

Probably the most notable example of that is what we have done with BRCA which we introduced in the fall of last year. It is a good example. We are bringing solutions to the marketplace and then commercializing them and selling those in a much better way than ever before. And so we are seeing improvement in our volumes from those solutions starting to take hold as we sell these solutions in the marketplace.

Third is we have built laboratory professional services business and I said in my introductory comments that is building momentum. We announced in the first quarter that we had four deals that were operational and we are executing against those.

I will share with you that we have significant conversations going on with significant systems throughout the United States. I am often in front of hospital CEOs and integrated network CEOs and hospital chain CEOs about what we can do to help them with their lab strategy and how we can partner. And that is helping show the sequential improvement we saw as well in the second quarter.

So all three add up to the improvement we are seeing and that will continue to help us as we go into the second half. Let me pause there. Anything else, Mark, you would like to add to that?

I think you recognize that when you look at the overall growth rate really what it is is a mathematical calculation of many sub businesses that are growing and that are in some cases declining. When you look at some of the drivers that have been headwinds for us over the last several quarters, we felt utilization was certainly an issue. So the marketplace overall was down and we are starting to see some positive signs.

Again, we have imperfect information. Like you, we look at many things -- hospital admissions, physician office visits. I know some of you look at scripts. What we have started to do is look at what we call a same-store sales or equivalent where we look at accounts that have some sort of stability, so they are not accounts where either dramatically they are up or down which is probably driven by changes in membership or something like that, and try to look at the overall volume year over year to get a feel for how is utilization, how is the market.

And as we look at that it looks like we have some stability, maybe some slight growth, and certainly not the decline that we felt like we experienced last year. So that is one of the drivers certainly that we feel the market is improving and we all hope that the ACA will accelerate that, if anything.

The other big headwind we have had obviously is in the area of Paps guidance. Guideline changes has really impacted that; that has not gotten completely behind us. That has been a major headwind for us.

But on the other hand, the guidelines change in HCV, while it doesn't offset the Pap guideline, certainly is a tailwind. We have talked about our prescription drug monitoring business being a growth engine. Our wellness business being a growth engine, certainly in the tox area we are seeing some uplift. And then certainly in the gene-based areas, most notably our BRCA business we are seeing growth. So when you look at that mix that is where we are feeling optimistic about growth in volumes moving forward.

Thanks. Just one quick follow-up. You mentioned prescription drug monitoring. Do you know what your drugs of abuse volumes were in the quarter and do you think that that could accelerate going forward?

We did see nice growth in the drugs of abuse area this quarter. I believe overall it was near double-digit growth for the quarter, but haven't provided any guidance really to that business going forward though.

Great, thank you.

A.J. Rice.

Maybe just to ask a little bit more about the comment you made on being pleased that Tricare has come out with this announcement. Have you had any feedback from them as to when you actually might start seeing some payments from them or whether -- confirmation on the comments about retroactive catch ups?

Then I guess I would broaden that out and my sense is there are some states that have been dragging their feet on paying for some of the molecular diagnostic testing. Have you had any positive discussions there? Maybe just some update on that general area.

Sure. A.J., thanks for the question on Tricare. The first part of your question was related to when we will see payments and any details related to the retro. Don't have a lot of detail on that front, so it's a little bit of wait and see. We are having dialogue on that front though and working with the trades association. As soon as we know we will be sure to talk more about it.

We would say, though, that on Tricare and molecular coating we have seen some reimbursement in the past on certain codes. So when we do see some lift we expect to see some lift, but keep in mind we have seen some payment for some testing.

With respect to different states, we have seen some progress and we saw some progress last year with different states and I think a couple of states that had not been paying specific tests. One state in particular was not paying cystic fibrosis testing for all of their population. So they have put some edits around that.

We continue to work through that with different states, but it is one at a time. We continue to have dialogue and hope to get to a better place than we are today.

Okay. And then maybe just broadly re-contracting. You are talking about some of the things you are doing proactively on price. But can you just remind us, are you pretty much done with the major contracts that need to be renewed for this year, however you define major? Are there any opportunities out there that you are bidding on that may be things that you could potentially pick up?

Hundreds of contracts out there, so there is always some level of dialogue going on. In terms of major contracts, we shared earlier this year that we did renegotiate and extend our relationship with Humana, the one major contract that we have spoken to.

As Steve said earlier, we feel very comfortable with the guidance we have given on price, the 1% to 2% over the three-year period of time, which obviously implied something lower in this year and next year given the 3% that we experienced in 2013. So we certainly have contemplated all of the contracts we need to renegotiate.

The other thing is that the last call I mentioned, and we reaffirmed, that I expected pure price erosion to mitigate and decline throughout the year. So hopefully that will give you an envelope for confidence of where price might play out for the balance of the year.

Okay, great. Thanks a lot.

Gary Taylor.

Couple questions; one, we have been hearing about some pretty significant Aetna out-of-network lab cuts and some renewed efforts to on the (inaudible) side. And I wondered if you had seen any benefit from that or expected to.

First of all, we don't comment on specific relationships we have, but we are working proactively with Aetna. As you know, we are their national provider for lab services and they have an ongoing active program to drive as much volume into our business as possible, given what we offer in terms of value to them. So we feel good about that and they are helping us making sure that we do the right thing for their membership.

Would you like to share anything beyond that, Dan?

Gary, not sure exactly which price points you are referring to. I did see some trade publications that put some news out there. I think it was limited to non-contracted providers and certain subspecialties in certain smaller geographies is our understanding on some of what we had read on some of those cuts.

The pricing that was out there, to the extent people had a question about, did not impact us, but it was pretty limited from our understanding.

Second question, I think people tried to dig into this a little bit. I am just going to ask it a little bit different.

I had followed Mark's comments kind of walking through the total volume and the acquisition impact and then the deliberate contract exits to getting to a statement where organic volume was up slightly year over year, which is certainly better. What do you guys think when you see a Labcorp reporting a plus 3 organic volume number?

Certainly part of that answer is probably mix of services, but what does that make you think about just kind of how you are performing in the marketplace and share gains, share loss? Or do you think that is purely a mix differential driving the apparent reported difference?

I appreciate the question, Gary. I am obviously not going to comment on anybody else, so I will talk about how we think we are doing. The other thing to note is not everyone calculates organic volume consistently and I'm sure you guys work to try to tease that out and get an apples-to-apples comparison.

So when we offer up organic volume, it is true organic volume. We don't make any exceptions no matter the size of the deal, so you can feel comfortable that when we call it organic it is organic.

In terms of share, it is very difficult because of the lack of market data. So as I mentioned, one of the things that we are really trying to figure out ourselves is how is the market growing and to both assess ourselves how we are doing and also be able to share with you. We have started to look at -- what I mentioned was our same account sales levels.

But there is also mix differential, so some of the businesses that have been impacted by guideline changes and by other changes in demographics might disproportionately impact various labs and providers differently. And as we have mentioned in the past, we have the largest pathology business and certainly those pathology cuts disproportionately impacted us.

We don't think we are losing share overall. Obviously the national labs and even independent labs have a subsegment. There is an awful lot of providers out there, including hospital outreach, so it is kind of hard to just look at the small segment and the national labs and look at each of those two and determine where the share might be coming from, if there are share changes and differential.

Not trying to be evasive, but it is a very difficult question to answer, and I think the best answer I can give you is we don't feel like we are losing share. We feel like last year a lot of the impact was utilization in the market and some of the impacts that were driven by the guideline changes and by the pathology business being really hit by those cuts and that this year we are starting to recover some of that. So that is how we view our performance.

As we committed, we want to return to growth. And as several people have noted and as we have said, we are not there yet but we feel like we are making progress.

So let me just add to that. We feel good now that we are making sequential improvement and in our services business it builds. What he outlined is what we are doing to restore growth has started to show its merits so step-by-step we will see progress.

As we have said, it is complicated when you look at the volumes. We had noted that we actually took some actions that affected that. When you adjust for that we saw a slight improvement in organic volumes and that is an improvement versus the prior quarter, which is good.

I will also share with you that we noted some clinical franchises that are growing, but if you look at broadly when we take a look at our volumes for gene-based and esoteric testing it did grow. We already talked about drug of abuse growing. Even when you look at the routine volumes, and some of it gets back to Mark's comment about the same account or same-store analysis we do, we actually have started to see some improvement in that as well.

The other thing that we need to think about there is continued to have softness in TAP volumes given the guideline changes that have been in place for a few years now. And we continue to see softness in TAP volumes what offsets these improvements we see in the big areas that we are focused on, genetic testing and then the core platform business of what we called routine.

So across the board we feel good about progress made in the quarter. We are building on all the work that we have done in the past and we have more opportunities in front of us. It is a big market out there, so we focus on the entire market. We compete with hospital outreach. We compete with regional labs. We compete with many laboratory providers.

So when we look broadly at this industry we think there is plenty of opportunity to grow in this market. We are focused on the right areas that are growing and we will continue to restore growth as we go forward. And I think this quarter is a good example as we are proving that we are showing sequential improvement this quarter and we will show more sequential improvement as we go forward.

Sure. That is a pretty comprehensive answer, so I appreciate that. One last quick question for me.

Certainly you have achieved some success in the cost cutting. You can look at either COGS or G&A per a session and see that is declining over the last couple of years. But along with that obviously you have had to spend a fair amount on restructuring and integration. Just quick count, I think roughly $115 million in 2012 and 2013 and on pace for over $100 million of restructuring charges this year, so there is kind of $0.40, $0.50 of earnings impact that we have routinely been excluding from normalized results.

So the question was just do you have some visibility? I know Invigorate is expected to continue in the next few years. Do you have some visibility on the trajectory of the restructuring and the integration expense?

We will quantify that to some extent in the investor day. Certainly as we are developing our detailed plans that we are intending to share later this year and obviously start implementing, we are looking at the savings side but obviously we are also quantifying the investment. So we certainly will be sharing that later this year.

I will just add that one of the strategies of our five-point strategy is to deliver on disciplined capital deployment. And so any place we put money on the table we, and Mark and I in particular, look through the business case that justifies it. That is included in what we do around capital investments, it includes what we do around Invigorate savings, and it also includes, as you would expect, a business case that will give us good shareholder return for any acquisitions we will do.

So everything is well underpinned with good returns based upon the goals that we have for the Company.

Okay. I will wait for some more detail on that, thanks.

Gary Lieberman.

Good morning. Thanks for taking the question. Steve, you mentioned hospital outreach in part of the answer to the last question. Could you maybe characterize the overall hospital outreach environment? Are hospitals increasingly getting to the business? Are the managed care payors doing anything incremental to try to steer physician volumes away from the hospitals and to you guys?

Gary, it is interesting. The reason we are so optimistic about our dialogue with hospitals and integrated delivery networks and hospital chains is, as we thought would happen, is there becomes a larger patient responsibility with a high-deductible client when we have. And patients are starting to look at their out-of-pocket cost.

Then with the dynamic of physicians joining the integrated delivery networks. And as we all know in the past two or three years some portion of our volume has moved to hospital outreach, and as we all know, their prices -- in the industry their commercial rates are higher than ours. It is drawing some attention from patients, from physicians, and also the systems that are evaluating is this going to be sustainable.

So we have engaged with many different systems. You see one lab strategy, you see one lab strategy. In some cases they decided to rely on us for those services, so we bought University of Massachusetts, we bought Dignity Health, we bought Steward Outreach; examples where in fact they decided that it is in the best interest to rely on us as Quest to provide them with their laboratory services.

I would say that the momentum on that topic continues to build. I think the strongest dynamic that is helping force this is transparency around price and the patient starting to feel the impact of price increases because of decisions that have been made in the healthcare system. The most notable is they are going to a physician for a number of years, their physician sold their practice to a hospital, and lo and behold instead of coming to price they are coming to Quest with some of the great value we offer.

They get told to go to the laboratory inside the hospital and what they find is a much bigger bill than they had in the past and they have to pay for it themselves. So this is getting back to the systems and getting back to the physicians, and in general that is starting to turn. And that is part of our dialogue with these systems.

Okay, thank you. Then I guess just going back to your comments in terms of the business that you exited. It wasn't clear if there was sort of a characteristic that applied to that business. Was it more fee for service, was it more capitated? Maybe a little bit more color on it.

Actually you are correct; I didn't provide that. All I said was it is in the clients' bill area, but really didn't provide any more on that. I'm not going to get into any more detail.

Okay. Then maybe finally if you could just give us some color on the progress you are making with BRCA and maybe any challenges or early successes there?

First of all, we are encouraged. We keep on building. We introduce the products, as you know, in the fall of last year. We think there is a tremendous market in front of us.

We have a compelling value proposition. We have good reach with our channels. We are putting in place an even more comprehensive salesforce to go at the market, getting to the right call points. We feel good about commercial contracts that we have. So encouraged by the progress we made and also this is a part of where we expect to get some growth in the second half.

Okay, great. Thanks very much.

Nicholas Jansen.

Quick question regarding your net cost savings year over year. Did you provide that? And if I missed it, I apologize.

But I'm just trying to get a sense of adjusted EBIT was down about $12 million year over year. I know about half of that is higher bad debt. You acquired Solstas and a couple of other acquisitions over the trailing 12 months, so I am just trying to get a sense of how much the underlying business is down when we normalize for the cost-cutting savings? Thanks.

We didn't provide that reconciliation. And just to remind you that we also have a cost headwind this year that we mentioned going into the year, which is really restoring our management incentive accruals at this point with the hope and expectation that we are going to achieve our objectives.

Last year, unfortunately, given the year, we ended up not spending a lot in that area and so that was a headwind this year. Certainly don't take the margin change as being an indication that Invigorate is not delivering its cost savings. It is just that this year, as we mentioned upfront, there were a couple of things in addition to the wage increase, the annual low single-digit wage increase that we give, and then the price erosion we also had this management incentive headwind.

Okay, that is helpful. And maybe just kind of a broader speaking question. Maybe this is an analyst day type question, but are you guys able to grow EBIT when rev per req is flat to down? Is it too much of an uphill battle given cost inflation?

I'm just trying to get a sense of, if there was no cost-cutting programs going on, would this be an industry that can grow EBIT if test mix and payor mix remain under pressure from a rev per req standpoint. Thanks.

Appreciate the question and we will provide a little more color on the industry and what is going on with our margins going forward. The interesting part of the revenue per req calculation is that it is an interesting aggregation of a lot of different aspects of our business. We do provide visibility on what we call our price erosion where we try to freeze all variables and say what is the real price change year on year related to commercial contracts and what we are getting from CMS. And that is one aspect.

As you know, there is other aspects. There is payor mix, there is business mix, there is geographic mix. You put that all together, so when you look at revenue per req you get some -- you can draw some conclusions that aren't necessarily the conclusions that are quite clear directly related to margins.

You can actually have a high revenue direct business that has low margins and you can have a lower revenue per req business that has high margins. And so it is an industry metric that we have used and there is a lot of variables within it and we have seen a decline in it. But I think going forward, as we think about describing where we are going to get our margin lift, we also need to talk about the real margins embedded in a variety of businesses, geographies, payors as we go forward.

Mark, would you like to share any more around that?

I think you have captured it well Steve, which I understand why revenue per req is used as a proxy for profitability and margin. But to Steve's point, it is not true in all cases and actually, as we have talked about some of the mix impact, that should not be deemed to be a hit to profitability. We have done some acquisitions in the past, including one about a year ago, that had a lower revenue per req but is quite profitable.

Again, I know you guys have less than perfect information but don't always take revenue per req, either an increase or a decrease, as necessarily an indicator of an increase or decrease in profitability. There is more to it than that.

Thanks for the details, guys.

Amanda Murphy.

I just had a follow-up to something you mentioned earlier on the pathology side. I am just curious; it sounds like maybe that is becoming a benefit for you just given some of the reimbursement challenges there.

I guess I'm curious, just given the exposure you have to AmeriPath, is that something that could become a more meaningful tailwind for you going forward? And then just how are you thinking about that market from an M&A perspective now?

Thanks for the question. First of all, with all the reimbursement cuts that we saw last year in pathology we have gotten a lot of questions about does this help you. And I would say this: we haven't seen a meaningful change in hospitals systems thinking about potentially outsourcing or redirecting some of their work.

Second is we do characterize our Pap volumes as part of our AP business and pathology business. As you know, Pap continues to decline. I mentioned that as part of the offset to some nice growth we saw in some product categories and categories of our testing.

So Paps, given the guideline changes, continue to decline. We haven't bottomed out yet in terms of Pap volumes based upon the new cycling of when those exams should happen. I would say, Amanda, overall we haven't seen anything meaningful yet but we are watching it because the reimbursement changes were significant.

It is a completely different business and it is in the area that we do see and we expect nice growth, which is in our whole oncology and clinical franchise. And so, therefore, in the future there will be more volume related to the tissue business and we expect that that would be a nice opportunity for us to take advantage.

But the example that we brought up of working with Memorial Sloan-Kettering is a great example. We are trying to leverage our presence in pathology, leverage that over to genetics and also molecular diagnostics to really have an effect on oncology and cancer care. And we think that is promising as we go forward, but in the short run we haven't seen a notable change.

Got it, okay. Then just a question on the Medicare side. Obviously there is a lot of uncertainty just in terms of how they might implement the private-pay side of things going forward, and you mentioned a bit about this. But how do you think about this in terms of how it impacts Quest and the larger labs? What are the puts and takes there and how should we -- I guess what should we be looking for from an investor perspective about how you guys might be positioned long term in Medicare reimbursement?

So we are right in the middle of what we are calling -- what they call the rulemaking process. And I will share with you the trade association that I am now the chair of is actively engaged in this, so I will tell you my colleagues that sit on the Board with me are also very actively engaged in this. I feel very good about what we are doing as a trade association to make sure that we are quite involved in how they will eventually develop which will be a median market-based price approach to the clinical lab fee schedule.

So rulemaking is happening as we speak. They eventually do the sampling in 2016 to reevaluate codes in 2017. To support this as a trade association we actually had a third-party do a sampling of the marketplace, which goes back to the wide variation we have around prices in this industry.

In fact, what we showed for a variety of codes that CMS pays for that if you look at the wide variation they include hospital outreach, which is the highest price, and then you have large nationals, like ourselves, which are, in most cases, some of the lowest prices and best value in this industry. CMS is actually in the middle of the fairway from that early sample that we did.

So we have to do the rule-making first. We want to make sure we have a representative sample of the market, which will include large players like ourselves and our nearest competitor, second is regional players, and then finally outreach. We have had public hearings on this. We are doing our fair share of lobbying to make sure that we approach it with a realistic pragmatic sampling technique that has a true representative sample of the market. And then we will gather that data.

In some cases, yes, there might be some market adjustments done. We don't know until we get the data. But actually in some cases we believe that we are under-reimbursed by CMS and let the facts demonstrate this; there might be some modest increases as well.

We are in the middle of the process. We feel good about that. We are going to make sure it is done in the right way. We are trying to help CMS come up with the right approach.

We will get the sampling done in 2016 and then we will see how that affects the clinical lab fee schedule in 2017, so that is where we are. But we are on top of it and we think it is a good approach that we are actively engaged in.

Okay, thanks very much.

Thanks.

Thank you. Thank you for participating in the Quest Diagnostics second-quarter 2014 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 888-673-3572 for domestic callers or 402-220-6435 for international callers. The telephone replays will be available from 10 AM Eastern time on July 24 until midnight Eastern Time on August 23, 2014. Thank you. Goodbye.