Labcorp Holdings Inc (LH) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Laboratory Corporation of America holdings first quarter 2003 conference call. During the presentation all participants will be in a listen-only mode. After that we will conduct a question and answer session. During that time if you have a question, please push 1 followed by 4 on your telephone. As a reminder this conference is being recorded Tuesday, April 29th of 2003. I would now like to turn the conference over to Mr. Thomas Mac Mahon, chairman and CEO. Please go ahead sir.

Thank you. Good morning and welcome to LabCorp's first quarter conference call. Joining me today from LabCorp are Bradford Smith, EVP, Wesley Elingburg, EVP, Ed Dodson, senior VP controller, and Pamela Sherry, senior VP IR .

As usual on this conference call, I will respond to what I think are the most frequently asked questions about the company. I'll also discuss LabCorp strategy and how we are implementing our strategy. That strategy is to nationally serve all major geographic areas and to continue developing as the leading gene-based testing laboratory in the United States. This approach has particular emphasis on the introduction of new cancer tests and specialized anatomical pathology services and is the foundation for what we believe will continue to be industry leading results over the next several years. I'd now like to introduce Brad who has a few comments before we begin.

Before beginning I'd like to point out that there will be a replay of this conference call available via the telephone and Internet. Please refer to our press release dated April 28th for replay information.

On April 28th, the company filed an 8-K that included additional information on its business and operations. This information is also available on our Website. Analysts and investors are directed to this 8-K and our website to review this supplemental information.

Additionally we refer to you our press release dated April 28th for a reconciliation of EBITDA, which is non-GAAP financial information discussed during this call. This can also be found on our Website and was filed as an 8 K yesterday. I would also like to point out that any forward-looking statements made during this conference call are based upon current expectations and are subject to change based on various important factors that could affect the company's financial results. These factors are set forth in detail in our 2002 10-K and subsequent filings.

Thank you, Brad. First quarter results outlined in our press release last night continue to be strongest in our industry. Revenues increased over 20% to approximately $712 million and reflect the negative impact of severe winter weather.

Volumes increased approximately 14.5%, and price was up 6.1%. Organic volume growth including the negative impact of severe winter weather was between 2.5 and 3%.

EBITDA was $165.7 million or 23.3% of revenues which represents a 20.4% increase in our first quarter over our first quarter 2002. Diluted earnings per share were 51 cents. DSO for the quarter was 55 days.

Cash flow from operations continued to be strong, increasing 20% to $135 million. At the end of the quarter, our cash balance was $50 million. During the quarter, we repaid $115 million in debt borrowed in connection with the acquisition of Dianon, and during the quarter, we repurchased $34 million worth of LabCorp stock representing approximately 1.2 million shares.

I'd now like to mention several important accomplishments that are directly related to the implementation of our strategic plan, a plan that continues to provide both short and long-term growth opportunities for LabCorp. First, our acquisition of Dianon. We completed this transaction on January 17th, and expect to achieve synergy savings of approximately $7.5 million in 2003, $25 million in 2004, and the full $35 million in 2005.

Even more compelling, however, than the savings are the revenue enhancing opportunities. A combined company is now in an exceptional position to nationally offer to both primary-care physicians and specialists such as oncologists, uriologists, and gastroenterologists, the broadest range of leading edge anatomic, genomic, and clinical testing technology for the large and rapidly growing cancer diagnostics market.

As I continue to emphasize, we believe at LabCorp that anatomical pathology and gene-based cancer testing are the most important growth opportunities over the next three to five years. Dianon is a key component in our cancer business strategy. Dianizeing(ph) LabCorp, as we call it, involves the conversion of conventional anatomical pathology processes to the procedures that include the highly regarded Dianon brand of pathology. As a result of this acquisition, we are redefining esoteric testing to include Dianon's and LabCorp's histology testing.

Esoteric testing under this new definition represented approximately 30% of our revenues in the first quarter. Additional details are available in the 8-K we filed last night. Those additional details will show a 46% increase in our pure genomic testing revenues for the quarter.

Diagnosing and treating patients require a combination of anatomical, clinical and genomic test. Today cancer like most diseases is often treated on an outpatient basis. The outpatient market is Dianon's strength and Dianon provides a standardized platform of anatomical pathology for LabCorpthat is not only information rich but highly efficient. Nearly 1.3 million Americans newly dying diagnosed with cancer in 2002, the addition of Dianon means LabCorp can now provide its clients with a breadth of capabilities unmatched in the industry.

Second, the integration of Dynacare. The integration to date has been highly successful and remains on schedule. We achieved $4 million in synergy savings by the end of 2002, and are still on track to have a savings of $36 million in 2003, and the full $45 million in 2004. The acquisition supports our position as the leading low-cost producer and provides us with significant cost savings opportunities.

Next, our acquisition of assets in northern California. In March we entered an agreement to pay $4.5 million in cash to purchase certain assets in northern California. The purchase price will be paid over a period of up to 18 months, and includes the assignment of four contracts with independent physician associations, as well as the leases for 46 patient service centers. Five of which also serve as rapid response laboratories. The assets include personnel needed to service the contracts and support other sales activities, provided through the facilities.

Including current LabCorp sites in the region we will ultimately have 65 service sites in this market. The IPAs have consented to the assignment of the contracts and are now in the process of transitioning over to using LabCorp. Please keep in mind that our plan is to carefully transition this business over three or four months beginning in July, and therefore we do not expect to contribute in any meaningful way to our 2003 financial performance.

Acquiring these assets provides LabCorp an immediate competitive presence in northern California for the very first time. We also obtained the infrastructure to immediately compete for important genomic business in the San Francisco market, something we have not had previously.

Next, LabCorp's licensing team continues to identify and help commercialize medically important new genomic tests, a solid advantage in executing our genomic strategy. In the licensing area we continue to prepare for the launch of Exact Sciences screening test for colorectal cancer. There are 80 million Americans over age 50 who are candidates for this non-invasive test.

Through our agreement with Correlogic Systems, we also plan to commercialize their protein pattern bloods test for the detection of ovarian cancer later this year. This test offers the prospect of accurate and early detection of ovarian cancer, a common disease often diagnosed too late to be effectively treated. If identified early it is readily treatable and often curable.

Last October we announced a collaboration with Celera to establish the clinical utility of laboratory tests based on novel diagnostic markers. The initial area of focus include improving a diagnosis -- diagnosing of Alzheimer's patients, identifying prostate cancer patients with aggressive tumors and determining the risk of breast cancer patients for metastasis.

The existing genomic tests continue to grow dramatically during the quarter. Cystic fibrosis testing continues to increase monthly as more physicians adopt CF testing, a standard of care. Our first quarter CF testing volumes significantly increased compared to the same period last year. And we are now performing in excess of 14,000 CF tests per month. You may recall that 20 months ago we were only performing approximately 1,000 CF tests a month. We also continue to see significant growth in HPV testing. HPV testing has increased 90% compared to the first quarter 2002.

I hope this brief summary of results and significant accomplishments demonstrates to you that at LabCorp genomics is a key strategy for our future growth.

Now, I'd like to review a few frequently asked questions and our specific answers to those questions. Can you provide an update on your efforts to stabilize the competitive situation in the Carolinas? As discussed in our year end call, we initiated a reinvestment program that included adding individuals, some 200 individuals, and facilities to better service our customers. As a result, since the end of last year, we have continued to see an improvement in the ratio of new to lost accounts in this region. Our goal has been to first stabilize the region, and then return to growth during 2003.

Two, are you noting any changes in industry trends, and what do you think are your organic volume growth rates? This is obviously a frequent question, and one that is on our minds. To date, we have not seen any meaningful changes in the competitive landscape. We do know that the severe weather during the quarter had a negative impact on volumes of approximately 2%, and that weather can affect our ability to estimate short-term volume trends. As a result, even though short-term volume trends may be more difficult to estimate, we still continue to expect long-term organic volume growth in 3 to 4% range.

Have you noticed any impact on your business as a result of the slowing economy? Yes, we have, somewhat. We can't point to any specifics yet, but we have noted that our volumes after severe weather have increased but not necessarily to the levels we've expected.

What makes up the 6.1% price increases in the first quarter? And what are your pricing assumptions for LabCorp this year? Between 2 to 2.5% of the increase is not related to mix shift. The rest is related to shifts in our test mix, predominantly in both our genomic business and in histology testing which is primarily Dianon related. For the full year, for LabCorp, price increases not related to mix are expected to be between 2 to 3%. Additional price improvements will come from shifts in our test mix associated with esoteric testing like cystic fibrosis and HPV and continued shifts in histology testing mix from Dianon.

What are your plans for use of cash going forward? As I mentioned earlier in my comments, we did repay $115 million in debt, and repurchased $34 million worth of stock in the quarter, utilizing our free cash flow. And we plan to continue executing our $150 million stock repurchase plan if prices are within an acceptable range. We plan to update you at the end of each quarter regarding the status of the program. We will also continue to pay down the remaining balance on our revolving line of credit utilized to help fund the Dianon acquisition.

Are you currently in the market for acquisitions? As we have said historically, we don't expect to pursue any large acquisitions over the next 18 months while we integrate Dianon and Dynacare. We do fully intend to continue to make selected acquisitions, small acquisitions. All of our acquisition activities will be conducted with the express objective of maintaining our investment grade rating as well as meeting our criteria of being compliant, having no billing problems, and being accretive to EPS within the first year.

What are your volumes for mono layered tests? We continue to see increased conversions to mono layer Paps. In 2002, LabCorp performed approximately 8 million Pap smears. The run rate for conversions to mono layer was approximately 72% at the end of March compared to 60% at the end of March 2002. Our conversion rate has slowed somewhat with the addition of Dynacare to our calculations. Dynacare has a much lower conversion rate compared to LabCorp.

When do you expect to launch the Exact Sciences screening test for colorectal cancer? We expect to launch this test sometime during the third quarter of this year.What has been the volume impact of LabCorp's drugs of abuse testing? For the first quarter of this year, drugs of abuse testing volume increase about 2.5% compared to 2002 first quarter.

Have you begun your negotiations with managed care contracts? We have many managed care contracts and are regularly renegotiating them. Managed care companies have made it clear that they are focusing on reducing lab costs, including out of network leakage. We do expect negotiations to continue, to continue to be challenging, particularly with large contracts.

What is your guidance for 2003? A core LabCorp strength is our proven ability to rapidly integrate new acquisitions and extract maximum efficiencies from those new combinations. During '03 we will focus on integrating our plans for Dynacare and Dianon. As a result we expect to incur some additional counter-synergy expenses in the first half of the year in order to achieve our 2003 synergy saving goals the bulk of which will hit in the second half of the year. We will also implement the commercialization of Exact's colorectal screening test and introduce the chorologic test for early stage ovarian cancer and we plan to strengthen our new footprint in Northern California working to enhance our testing opportunities in this lucrative market. So as you can see we are quite busy.

Our guidance for 2003 includes Dianon and is as follows. Compared to '02, we expect revenue growth of approximately 22%. EBITDA margins in the range of 24%. Diluted earnings per share of approximately 22.5%. Excuse me, diluted earnings per share growth of approximately 22.5%. Capex expenditures of $90 million. Free cash flow, net of capital expenditures, of approximately $380 million to $400 million, and a net interest expense of approximately $35 million. By any measure, LabCorp is stronger today than ever before whether it is revenue growth, profitability, cash flow, or most importantly, the wide array of tests we offer to physicians and patients. And the reason is simple. We continue to execute on our strategic plan. Thank you for listening. We are now ready to answer your questions.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge you. If the question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you are using a speaker phone please lift your hand set before entering your request. One moment please before the first question. Your first question comes from the line of Tom Gallucci with Merrill Lynch. Please go ahead.

Wanted to make sure we understand the volume trends in the quarter on an organic basis. I guess you would say they are 2.5 to 3% or so, weather impact of about 2%. As opposed to the fourth quarter where there is ice storms and things in North Carolina, could you just describe a little bit more where exactly the weather impacts were throughout the country in your book of business in the first quarter and also I guess you had mentioned on the last call about contract with the government, I guess an Army contract that would maybe boost testing before the war. Can you quantify or talk about the impact of that both on volumes and pricing, and then finally, just in terms of the holidays, did that have any impact negative or positive in the quarter in terms of comps?

I'll give it a shot, Tom. A lot in there. Weather all over the country we were particularly hit in the Midwest, in the Dallas area, in the Louisville, Kentucky area. In the Chicago area, in the St. Louis area. You're from New York so you know that the Northeast was hit significantly and many times and quite honestly was hit again in the month of April, the Northeast. And I can't of course exclude North Carolina. Because there were other ice storms in North Carolina during the month of January. So about the only place that I know that wasn't affected by weather was Florida and California. It was probably the most severe weather I've seen in the 15 years at least that I've been associated with the lab industry.

During the buildup for our conflict in Iraq, the United States government contracted with, which we've had a long-term contract with our Viro-Med facility to do testing like HIV for the troops that went overseas. That period has ended. The period, December through March, we had a rather significant, I'm not going to give the exact numbers, but it did contribute at a very low price to our session growth for the quarter. That is ended, and we see in the month of April already the impact of not having those ex sessions.

I forgot the third question. Tom, was there another one or did I cover both of them? The holidays, yes. Well, the holidays this year Passover and Easter were of course in April. And last year were in the month of March. So certainly, and I'm not sure it's the holidays, everybody seems to be on vacation in the month of April. But as I mentioned in my prepared comments, we have seen an increase coming out of the weather in the January-February-March period. We had a storm in April that impacted in North East and we had the Passover and Easter holidays. So we have seen an increase in volumes. But we have not seen the increase in volumes to the level that we have expected. And I think that it may be all of those things plus the economy. So as we get into May and June I think we'll have a better sense of what's going on with the volumes.

Okay. Just to clarify in the holidays portion specifically it made things a little easier in the first quarter maybe tougher in the second quarter normalizing the timing?

I think that's a fair statement. We got the benefit of the comp last year, we had the benefit this year and the comp against last year in the first quarter, and it probably hurts us in the second quarter.

Right, okay, thanks, Tom.

Thank you.

Your next question comes from the line of Angie Samfilippo from Piper Jaffray. Please go ahead.

Your total volume growth was a little lower than we would have expected and our math would suggest that either Dynacare or Dianon underperformed our expectation in the quarter. Can you comment on why this may have occurred?

I actually think maybe Angie, our volumes if we take out the weather, our volumes were exactly where we wanted them to be. I think obviously all three components of LabCorp, Dianon, Dynacare, and the old LabCorp, were affected negatively by the weather. But our data would suggest it was pretty much what we expected. Once we made the forecast on the weather. Wes, you want to comment?

You know, looking at our models and our forecast and you know basically the overall guidance we've given, the only thing that impacted us significantly in the first quarter was the weather from a volume perspective.

I guess our sense was that if we had gotten that 2%, which we're pretty sure was at least 2%, it would have been the volumes would have been quite outstanding for the quarter.

Okay. And then I just warranted to confirm that you're still comfortable with the previous estimate you had given us for the Dynacare add in '03 of about $300 to $320 million in revenue and also the $200 million for Dianon in 2003 as well?

I can't, Angie, any longer speak -- I'm not going to break that out. The only thing I can feel comfortable with is the guidance that I've given. In terms of Dynacare, we are so deep into the integration of Dynacare in most places in the country, that we have closed facilities, we've converted billing systems, we've converted the doctors' offices and we can't even differentiate any longer in our system where those revenues are coming from.

Okay. And then my last question is, you've mentioned a couple of times that volumes maybe have been a little bit lower, maybe haven't picked up as much as you thought they would coming into the second quarter, maybe part of that is the economy. And yet you are maintaining your guidance. Is that because the previous guidance was conservative, or is there something else that's offsetting that?

Well, I think what's going on here is our price is a strong one and two, we are three weeks into a quarter. So it's pretty hard, given all the activities that are bubbling around, whether it's the holidays, whether it's some bad weather in early April, whether it's the economy, it's very hard for me to understand. We've even done, quite honestly, surveys in doctors' offices here in LabCorp to try and figure out what's going on in the marketplace. So we don't have the benefit of enough information to make any decision now.

Okay. Thank you.

Your next question comes from the line of David Lewis with Thomas Weisel Partners. Please go ahead.

Good morning, guys. Wes, could you give us a further breakdown in gross margins, 200 basis points year over year, obviously that's if weather, break out the components of gross margins and where you saw the effects if possible.

No, we can't get into that level of specifics related Dianon. But suffice it to say as Tom mentioned earlier, the biggest reason and probably by far the most significant reason is the weather impact. You know, when you have a loss of revenues in the $10 to $15 million range related to weather with our high level of fixed expenses, it's going to negatively impact that cost of goods line. So that is the reason it's down sequentially versus first quarter of '02. There are some other things in there like contrasynergies that we talked about related to the Dianon acquisition. But it's by far related to weather.

Okay, fair enough. Wes, did you give updated bad-debt guidance for 2003?

No, we did not but we are booking at an 8% rate.

Okay. And then maybe lastly for Tom, Tom, you mentioned CF test 14,000 per month roughly. Do you have a sense what penetration race that implies, are you measuring that against maternal serum testing? What cycle are we in now?

The only thing we measured against is there are 4 million women in the United States and I can't tell you how many of those qualify as Caucasian for a cystic fibrosis test. That's what we measured against, in certain studies we do with Ob-gyns so we still think we have a long way to go. So when we look at some of the other models out there for our gene based testing we look at the number of people that have hepatitis C and that's several million and we run between 20 and 30,000 of those a month. We look at the number of people that have HIV and that's 4 to 500,000. We run over 30,000 a month. So we think we are certainly on the upside of growth there and we revisit that each quarter.

Tom, maybe as follow-on strategic question as well, obviously we are talking about [inaudible] the Dianon acquisition Exact Sciences coming in the third quarter, how does that change the way you view other emerging spaces or you're not focused on those spaces? Kind of help us understand that.

I think that we offer the -- a wide array of cardiology test, cardiology is an area of interest to us. It is an area that's clearly treated by the internist and cardiologist, although cardiology is a subspecialty of internal medicine and family practice. We have our 6 to 700 sales reps that are there poised. I think the difference, and this is where, you know, we have to kind of bet on LabCorp is I think the difference is that some of these cancer tests provide us a unique opportunity to get high value pricing for the kinds of information we get at an early phase. So we'll be there in cardiovascular. We just don't see as many, as many different kinds of unique tests out there. Although there are some as you know that are pretty exciting, and they're growing nicely.

All right, thank you very much.

Your next question comes from the line of Robert Willoughby with Bank of America Securities. Please go ahead.

Can we expect any material contribution from the exact tests, how large can these be and can you give us an update on the Myriad Genetics relationship?

Sure. I think we can expect both of these tests have very material impact on diagnostic testing in the 2004 to 2005 period. Both of these tests have opportunities to deal effectively with various -- very serious cancers. And one, particularly the ovarian, there is very little out there to assist in that. I'm not going to predict. I've learned that in new product launches it is very hard to know what goes on. So we're saying that you should not expect anything this year from either of those tests. But as we have historically, we will give you the numbers.

And I can say for example from pretty much the first quarter on with cystic fibrosis we've told what you our numbers are. And the average transaction price for cystic fibrosis test is well, well, well above our company average for gene-based testing. We'll update and keep you informed and that's the best we can do.

Your second question, Myriad continues to move along nicely. We continue to get revenues in terms of collection fees from Myriad. I would say to date, though, it has not made the material level yet at LabCorp and it's not on our list of very, very, very highly used test.

Any other major milestones this quarter in terms of shutting down facilities that we need to focus on from a merger synergies standpoint?

The next big one is early third quarter. And I'll update you on that at the end of the second quarter. No major facilities this quarter. We're pretty much finished with Dynacare and we have one more in the third quarter.

Robert Willoughby Okay. Thank you.

Thank you Bob.

Your next question comes from the line of Ricky Goldwasser from UBS Warburg. Please go ahead.

Good morning.

Good morning Ricky.

Could you quantify the impact on the new [inaudible] on the 2 to 2.5% pricing growth?

There were two events that occurred in the quarter I'll kind of let Brad take you through them. But it was the one-point-some percent, the CPI index in the beginning of the year and the second was the physician fee schedule as it related a lot to the whole anatomical area in March. And I think that's probably too early to measure that in March. Brad, do you want to comment?

Ricky, as Tom pointed out, that has been primarily on the negative impact of the physician fee schedule proposed changes which could have been as much as 12 or 14%. And those were largely reversed. But the net impact is a modest positive but not anything material. And then the fee schedule is what it is, it's the 1%, you know, or so increase.

Okay. And did you have to adjust to Dianon, the way Dianon accounted for acquisition or accessions, whether the way LabCorp accounts for accessions?

In terms of the way we count accessions, we claim both the same way. We count an accession, which is a sample coming into LabCorp, in precisely the same way as Dianon does.

And the same was for Dynacare?

Yes.

Okay.

Now, as I've said in other quarters and I'm not really prepared to quantify it yet, in the whole gene-based testing area, we're seeing an increase in the number of tests that we run per requisition that comes into the company. So that's having an impact on accessions and on price.

Okay. And as far as the long term organic growth rate that you talked about, the 3 to 4%, is this something that you're seeing for the second half of the year, excluding the second quarter, or are you comfortable with the 3 to 4% for the remainder of the year? What's the definition of long term?

Well, for me it's the next 18 months. So that's -- that would be, so I'm comfortable, and if we look at LabCorp's volume trends for the first quarter, negating out the severe weather, they would easily be within that range. And we backed them off, because we know they're going to come down, because we don't have that military contract, or the extent of that military contract.

Good, so -- and I apologize if you said that already -- so the revenue guidance would be off pricing increase of around 3 to 4%, and then organic growth rate of 3 to 4%?

No, our revenue guidance, I didn't get into detail on where exactly it's coming from. It's coming from a variety of areas. It is coming from our acquisitions, it's coming from real growth which I say in this industry is 3 to 4%, and it's coming from pricing. We're not breaking out -- we didn't break out in great depth the detail of that.

So -- and you're not going to?

No.

Okay. Thank you.

Thank you Ricky.

Your next question comes from the line of Sandy Draper from Robinson Humphrey. Go ahead.

I just want to make sure I'm understanding your comments on the pricing 2 to 2.5% not related to mix shift, are you suggesting with the Dianon acquisition that alone contributed to the price increase? Because historically acquisitions such as Dynacare don't necessarily change your pricing that much.

Yes. I want to make sure that everybody understands that there's really now three components at least for '03 that impact on price. One, is the real price increase that we're seeing in the company, based on the increases to the -- to our prices. Second, of course, is mix shift from our genomic business that has been running at a rate of about 35% of our price increase. And then now, we have adding to that the Dianon acquisition, where much of their business is astology, at much higher prices than other forms of test. To these three components that contribute to the pricing.

And what I'm saying is the real pricing increase is in the range of 2 to 2.5%. The remainder of the pricing whatever it will be will most likely be from mix shift from Dianon and from our genomic business.

Okay. So 2, 2.5% is real pricing and then the rest in this case in this quarter about little less than 4%, was between mix shift and the benefit of Dianon, correct?

Correct.

Okay, great, thanks a bunch.

Your next question comes from the line of Matthew Lewton(ph) from Argus Partners. Please go ahead.

Two questions. Tom, you mentioned you were still seeing potentially some volume degradation, I don't know potentially from the economy, and I'm wondering if you could find a little more granularity on that. And then also vis-a-vis the next quarter, and where consensus estimates are of $764 million in revenue and 64 cents in earnings, can you comment on your comfort level on achieving that consensus?

Okay. The first comment I'm not going to comment any more on, Matt. We're three weeks into a second quarter, and my point was that volumes have increased, so they are -- it is not a degradation, it's an increase in volumes as we always see in the month of April.

But I think there are a lot of activities out there that are going on that are impacting on volumes now. One is, potentially, the economy. And I can't say whether that's the case, because that's very anecdotal. Second is, there was some weather in early April, and third, there were a series of holidays in April that impact. And that's the information that I have, so that's the information that I've shared. I don't -- I don't historically as a company we don't give out quarterly guidance. So -- you know, we're giving the -- we're giving our -- we're giving you the information we have that's readily available based on where we stand, and I've already commented on what we -- what our guidance is for the year.

Okay. Thank you. I'm sorry about misclarifying the volumes.

Okay.

Your next question comes from the line of Gary Lieberman of Morgan Stanley. Please go ahead.

Would it be possible to get an accession(ph) number from Dianon contributed in the quarter?

We don't talk about that Gary.

Spectrum, sounds like you may be losing some share there, I thought the goal for the first quarter was to gain some share back. If that's the case do you expect to possibly have to spend some more money to get back on track there?

Right. Let me just make sure that -- I will answer that question because I want to make sure that that's clarified properly. Everything that we have seen would suggest that we are no longer losing share with Spectrum. We have achieved our budget, in the North Carolina region for the first quarter.

Our pricing is up rather substantially in the North Carolina area for the first quarter. And our volumes are where we expected them to be. We've added over 200 people in the North Carolina area between early November and the end of March. All of those people are directly related to servicing our customer. So we are comfortable at this moment that we have begun to turn the tide there. But the reality is that it's going to take longer than me making a comment that it looked like a good quarter, Gary. I think we need some time to determine how we're really doing down here.

Have you seen any increased competition from other outreach programs in any of your other markets?

Not any that I know about myself in this kind -- in this kind of way. We obviously see outreach competitors all over the country, but none to the extent that we have seen in North Carolina over the last two years. Would it have been as impactive as North Carolina.

Thanks a lot.

Thank you.

Your next question comes from the line of Kemp Dolliver with Wisconsin Investment Board(ph).

I guess I changed jobs without knowing it. Couple questions, one, what are you seeing or doing with regard to adding service levels in terms -- and you talk about adding 200 people in North Carolina but I think more broadly in terms of we've seen some comments in the trade press regarding adding Phlebotomists to physician offices. Can you give us a little more color with regard to what you're doing on that front?

Sure, sure. Adding Phlebotomists to draw specimens from a doctor's office has been something that is a standard in this industry as long as I've been around the industry and I'm sure many, many years before that,Kemp. So what we do is look at individual situations, not just in North Carolina but throughout the country. And if the amount of activity that goes on in the doctor's office warrants our supporting that activity, we add a Phlebotomists. We have many, many in doctors' offices as do our competitors and it is by no means just in the state of North Carolina.

Each year at budget time individuals come to management and they forecast how much of that goes on. They forecast how many Phlebotomists they think they need to add, how many routes they need to add, how many patient service centers they need to open and that's not done just in North Carolina because we had a problem with one company. It's a standard practice in this company and I suspect it's a standard practice in the industry. Certainly Phlebotomists in doctors' offices are a standard. There are specimens drawn outside of the doctors' offices than before. Less physicians are doing draws. Patient service centers, we need to open over the next several years if doctors continue to draw less specimens, and we concentrate a lot of focus at LabCorp on where our patient service centers should be locate, how many we need and how many draws need to go through that patient service center to be effective.

And to the extent that's a longer term trend, net-net how do the economics work for you if you send more volume through patient service centers, do you net come out ahead or behind at the end of the day?

I think it's probably neutral. But it would be -- it is much better from a collection viewpoint. The -- our ability to capture good insurance information, and get that bill paid coming out of a patient service center, is stronger than in a doctor's office.

Okay. That's great. Thanks. Could you give us a brief run down on the performance of your joint venture operations that are in the equity income?

I don't think we break them down. I think it's safe to say we only have a few, Canada, Milwaukee, Tennessee are the ones that come to my mind. They are all doing super.

Thanks.

Your next question comes from the line of Bill Bonello from Wachovia. Please go ahead.

You gave us the organic growth rate. Could you tell us what the total organic revenue growth rate was?

Total organic?

Price and volume together.

For the quarter?

Yeah.

Well, you mean breaking it out from the -- didn't we give you the total growth? Like 14.5 --

Nonacquisition volume growth, I'm just wondering if you could tell us how nonacquisition revenues increased.

Yeah, I think we did disclose the fact that organic volume growth was up 2.5 to 3%. But on price, we're not into the organic -- on price, all we're talking about is the part related to mix shift versus the part not related to mix shift and that's 2 to 2.5%.

You can't tell us how much of the price came from acquisitions?

No, I can't do that.

Okay. And then just a second question. You mentioned, Tom, you can no longer differentiate whether revenue came from Dynacare or not. You you've given organic growth rate, is that somewhat of a punt or --

That's exactly why we said it was 2.5 to 3% right, little bit of a range. That's exactly why we do it.

Okay. And just the final question, you used to tell us on your guidance sort of what you expected from pricing and volume, and now you don't seem to want to do that. Is that just so you don't get held too closely to specifics or, you know, what's the thinking there?

Well, I think the thinking is simple. You know, that we have a long history now. You understand the company, and we're a company that has been so communicative in terms of information that we feel, in the environment of the integration of the acquisitions, we have to see what happens. So we give you our best information available, which is revenues.

I think the other thing, Bill, is that I've been kind of saying now for over a year and a half that the best way to assess a company is based on its revenue growth. I know not everybody has listened to that, but that's really where we think we ought to be assessed from. Mix shift impacts, the number of accessions, the number of tests per accessions, impacts on the pricing and in the volume. So we think the most accurate way to look at the company is through revenue growth.

Well, I wouldn't disagree with that. I guess I think what a lot of us are trying to get at is to figure out the impact on growth, when the Dynacare acquisition annualizes in the middle of the year. And sort of what makes up the gap of that sort of, you know, the growth that that had been contributing.

That's all built into our guidance for the year.

Okay, thanks a lot.

Thank you.

Your next question comes in the line of Quentin White(ph) with Robert W. Baird. Go ahead.

Cystic fibrosis has had fantastic growth. Could you talk a little bit about what you see your current testing capacity and second question, we've seen the other companies are developing high through put technologies for CF testing. Are you happy with your current platform or are you also looking for new technology for high throughput capacity?

In terms of capacity we've recently transferred and opened up another CF testing facility at our Viro-Med facility in Minnesota. So when we made the Viro-Med acquisition several years ago, we indicated that there was excess capacity in that facility. So we've been fortunate because we have as you probably inferred, we have kind of run out of capacity at our center for molecular biology and have now introduced cystic fibrosis testing at Viro-Med also.

We are always looking for companies that have high throughput mechanisms to get them to LabCorp and to get -- get them implemented at LabCorp. We are never satisfied with the throughput of our systems. And over the years we've depended upon diagnostic manufacturers like Abbott, like Beckman, like Roche, to come up with high throughput, we bring them in, we assess them, tweak them a little bit and get them introduced. And clearly in the area of cystic fibrosis, we need enhanced mechanism.

Do you see that as a more of a long term thing or do you see that kind of on a near-term horizon?

I'm not close enough to it. I'd be happy if you called us on the side to have you talk to one of our specialists in that area. I suspect that there's a couple of companies working on it with various technologies. But I'm not close enough to it to answer that question.

Thank you.

Your next question comes from the line of Kip Oh with Haven Capital Management(ph). Go ahead.

Three questions if you don't mind the first regarding guidance. Are you including any effects from any further stock repurchases or continued good results from increased genomic testing. Second question is, you've alluded to possible post poor weather volumes that are not quite what they'd been that may be a result of some economically driven reduced health benefits from individuals. Are you concerned enough about that to have built it into the guidance or are you still watching it? And then question 3 would be regarding tuck-in additional business. Are you seeing any opportunities from some of these outreach programs that maybe have changed their strategy, and decided to pack it in and not compete with you any further?

Okay, first question, share repurchase, not in guidance. Second, volumes, and what was the question in volume? I'm sorry. I want to make sure I answer this correctly.

Continued success, you've had some good luck in increasing your genomic and esoteric testing in the first quarter. Is there any further tucked into that in guidance, my notes from the November meeting indicate that at the time it was not.

What I would say now is inherently in the growth rates over the past six months are the growth of these genomic tests. But we have not built in anything extra coming out of this quarter as a result of a, really what I think was a superb first quarter as it relates to genomics. We haven't altered our forecast as a result of that.

Okay.

Thank you.

Your next question comes from the line of Abe Brontine from Glennview Capital(ph). Please go ahead.

Hi, Abe.

What was the average price you paid for the repurchase shares?

You do the math. We haven't actually talked about that, have we?

It was $34 million and 1.2 million shares.

Okay. Secondly, how much -- how much did Canadian -- the change from Canadian to U.S. GAAP reduce the reported sales in this quarter? In other words, the movement of the JV to the equity line, can you give us that? Because I think a lot of the questions around volume growth probably are being impacted by that change.

The accounting for the Canadien ventures have been the same ever since the third quarter of last year. There has been no change at all from that.

Can you give us what Dynacare's first quarter U.S. volumes were so we can make the comparisons a little bit more cleanly?

We're just not breaking that out.

I'm not interested in the breakout now, I'm wondering could you give us last year before the acquisition?

Unfortunately, I don't have -- you'd have to go back and look at the Dynacare 10-Q. I don't have that with me.

Okay. I'm going to ask a question that several people have asked before in a little different way. If I -- if I take your estimates of volume growth Tom for the year and if I use 3.5 in the middle of your range of 3 to 4 and if I use the same 6% overall price increase and 5% roughly from Dianon, based on its run rate volume, that sort of adds up to about 14.5, and you've got a 22.5 for the year after a 20 first quarter. I think what everybody is trying to get to is, where the additional 8% comes from. And I know you talked about exact and correlogically although you said the biggest impact would be the following year. Can you give us some kind of feel of how we get to the 22 given that arithmetic?

This is Wes. I'm going to say that you know, this is the same guidance we gave two months ago when we did our year-end release. The components would be organic growth rate, price increases, incremental Dianon and Dynacare. Don't forget that the Dynacare acquisition happened last year in the third quarter. So you add all those components together, it should come up close to that. And have you to take into consideration, too, what we said about the organic growth rates of 3 to 4% going forward. But all those components come up to that. And we hadn't changed anything. Nothing's changed. There has been no change in guidance from what we did two months ago.

I hear you but I guess we're all making some kind of fundamental error in arithmetic that doesn't let us quite get there.

Send us your models.

I'm pretty good at arithmetic. Okay. Well, I'll take it up with you separately. Thanks.

Any questions?

Your next question comes from the line of Jennifer Pullman from Burgundy(ph) Asset Management.

This is more of a general industry question. If you could comment on how your company incentivizes physicians to make referral to referral to a specific LabCorp lab, what kind of practices go on between your sales force and the physicians?

Well, our sales force is compensated on base pay, and then they get a commission based on revenues they generate.

My question is more specifically at the physician end of that relationship. So what does your company do, or what do your sales reps do to incentivize physicians to refer their patients, specifically to a LabCorp lab?

We don't do anything to incentivize the physician. But Brad --

Yeah, yeah, it's clearly and this is been a lot of focus in the industry, the way we incentivize physicians and our salespeople do, is make sure they are aware of the quality of the testing, the quality of the service and the overall value that dealing with us and our genomic menu and the base testing that we can provide. The draw stations that help service their patients, all the things that go into service. And in fact, we have huge systems built up around compliance to make sure that that is the only thing we do to incentivize physicians, is really we encourage them to use us because of the quality of our service to them and their patients.

Do you consider the relationship between the sales force and physicians to be at all a legal liability to yourselves, to the whole industry for that matter? In other words, is there a potential that government or agency could crack down on industry practices in this regard?

I think that the focus upon the positive of the history that this industry has had is that we have been closely looked at, and now have really the federal government as a partner in terms of our compliance programs and practices. So no, I don't see that as a liability at all. I think our sales force helps to -- in this information age it's tough to get anybody to pay attention to anything. Appreciate the services and very comfortable with our practices.

Great, and congratulations on the quarter.

Thank you. One more question, please.

Your final question comes from the line of Eric Barris(ph) from KR Capital(ph).

I had a couple of questions that weren't asked. Could you give us more detail and how much of a benefit you got from that one-time Army contract?

No, we're not commenting on that and we've articulated that it was a strong accession, low price. But we're not breaking that out. An individual contract.

Okay. The other thing that you said was that in North Carolina in addition to growing volumes again, that pricing was up. And last time, we were talking about providing inducements to win back some of the lost business. Could you talk about the competitive market and pricing and in particular talk about what's happened to that private competitor that was gaining share?

Well, I think what I commented on was that our pricing was strong in North Carolina. Actually, of the eight regions, that we do business in the United States, the pricing in the North Carolina region was the strongest in the country during the first quarter. So our pricing is very strong down here.

But strong isn't the same as rising.

It was our -- okay, let me repeat that, then. The increase in pricing in the North Carolina region was more than any other region in the United States during the first quarter. Okay? So that's clear. In terms of your other question as it relates to North Carolina, what was the question?

Well, you had said that you were starting to grow volumes again. In other words --

What I had said is we had stabilized the market, and we achieved our budget for the first quarter of the year. So we were on target to reach the goal that we had established for ourselves. I didn't comment on the actual number of accessions, and that's not something I'm prepared to comment on.

Okay.

But we are reaching our goals.

Is the private competitor gaining share or have they started to lose share to you?

My impression is that the private competitor remains very competitive, but our new business versus lost business ratio is now strong. Which, from our perspective, means we're winning more accounts than we're losing in the North Carolina area.

Okay. Thank you.

Okay. Thank you all very much, and have you a great day.

Ladies and gentlemen, that does conclude your conference for today. You may all disconnect and thank you for participating.