Labcorp Holdings Inc (LH) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Laboratory Corporation of America Holdings' third-quarter results conference call. During the presentation, all participants will be in listen-only mode. Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Thursday, October 23, 2003. I would now like to turn the conference over to Tom MacMahon, Chairman and CEO.

Thank you, Kathleen. Good morning and welcome to LabCorp's third-quarter conference call. Joining today from LabCorp are Brad Smith, Executive Vice President Corporate Affairs; Wes Ellenburg, Executive Vice President and CFO; Ed Dodson, Senior Vice President and Controller; and Pam Sherry, Senior Vice President, Investor Relations.

During this call I will review our financial results and recent accomplishments and then answer the most frequently asked questions about the company. I would like to emphasize that in every respect it is LabCorp's strategic plan which is the framework for our success. As you think about our consistently solid financial performance and scientific leadership, remember that our actions to date, as well as future initiatives are based upon the strategic plan. This plan leverages our national infrastructure, which is supported by routine testing by combining it with our expertise and offering high-value genomic and esoteric tests, particularly in the area of cancer.

The result is a leading gene based and esoteric testing lab in the United States and a highly profitable company generating significant amounts of cash. I would now like to introduce Brad Smith to make a few comments before I begin.

Before we begin, I would like to point out that there will be a replay of the conference call available via the telephone and Internet. Please refer to our press release dated October 23 for replay information. Additionally, I would like to announce that LabCorp will be hosting a meeting for analysts and institutional investors on October 28 at the North Carolina biotechnology center in Research Triangle Park North Carolina near our CMBP facility.

The purpose of the investor day is to discover current and future efforts in new tests, not to have any discussions of financial performance. A full day of presentations by LabCorp executives and scientists as well as a presentation by the CEO of Correlogic Systems will demonstrate how LabCorp executes on its strategic plan to continually strengthen our performance and market position. Interested analysts and institutional investors should contact Pam Sherry in Investor Relations at 336-436-4855.

This morning the Company filed an 8-K that included additional information on its business and operations. This information is also available on our Web site. Analysts and investors are directed to this 8-K and our website to review the supplemental information.

Additionally we refer to our press release dated October 23 for a reconciliation of EBITDA, which is non-GAAP financial information discussed during this call. But 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 upon various important factors that could affect the Company's financial results. These factors as set forth in detail in our 2002 10-K and subsequent filings.

Thank you, Brad. Our third-quarter results are as follows. Revenues increased 14.8 percent to $752 million. Volume increased approximately 9.3 percent and price was up 5.5 percent. Estimated organic volume growth was about 4 percent. With the anniversary of our acquisition of Dynacare, which occurred last year at the end of July, organic growth can now be estimated with more precision.

EBITDA was $183.9 million or 24.5 percent of revenues, which represents a 26 percent increase over third-quarter '02. Before a third-quarter restructuring charge of $3.3 million in connection with the integration of DIANON and Dynacare, diluted earnings per share were 59 cents, an increase of 28 percent. Restructuring charge impacted EPS by approximately one cent. We have estimated that our EPS would have been the 60 cents for the quarter without the effect of the hurricane and the charge.

DSO for the quarter was 53 days. During the quarter we lowered our bank debt rate approximately 0.5 percent to seven percent. Cash flow from operations continued to be very strong, increasing 34 percent to $161.9 million.

During the quarter, we repaid the $60 million in debt borrowed in connection with the acquisition of DIANON and during the quarter we completed our previously announced $150 million share repurchase program by repurchasing approximately $63 million worth of LabCorp stock, representing approximately 2.1 million shares.

Now for our nine-month results. Revenues for the period of approximately $2.2 billion increased 18.9 percent as a result of a 13.2 increase in volume and a 5.7 percent increase in price. EBITDA for the period increased 22 percent to 537 million or 24.3 percent of revenues. This compares to margins of 23.7 percent in the 2002 period.

Before the third-quarter restructuring charge, nine-month diluted earnings per share were $1.69, a 15 percent increase over the same period in 2002. Cash generated from operations increased 28.7 percent to $420.1 million. During the first nine months of 2003, we have repaid 225 million of the $250 million in bank borrowings used to finance our acquisition of DIANON. We have also completed our $150 million share repurchase program. All of this has been funded by cash generated from our operations. At the end of the period our cash balance was 30 million.

I would now like to mentioned several important accomplishments that are directly aligned with the objectives of our strategic plan. First, our acquisition of Dynacare. The Dynacare integration is nearly complete and performing as expected, including the achievement of our anticipated synergy savings. Dynacare continues to strengthen our national network of routine testing, one key element of our strategic plan. Since we are now beyond the first year and we will achieve the expected $45 million in total synergies, we will now consider the Dynacare integration to be complete.

DIANON continues to be a key component of our plan and enables us to nationally offer the broadest menu of specialized anatomical pathology and gene-based cancer testing in the United States. DIANON continues to meet and in some cases exceed our synergy savings expectations. We are on target with the integration and satisfied with the recent resolution of our lawsuit against Diapath and certain former employees of DIANON. We plan to begin applying DIANON standardized anatomical pathology processes to LabCorp in the early 2004. This dionization of LabCorp will take approximately three years.

During the past few days, we renewed our multiyear national contract with United Healthcare, one of the largest health benefits companies in United States. We are pleased we were able to enter into a new multiyear agreement with our largest customer. As a result of this new contract, LabCorp will continue to provide national clinical laboratory testing and additional related services to over 18 million people who participate in the United Healthcare's health benefits program.

Our recent launch of the EXACT Sciences PreGen-Plus tests for colon cancer screening supports our statistic objective to introduce new high-valued genomic tests. In mid-August we launched at this breakthrough non-invasive DNA based test for colon cancer screening in the average risk population. Since then, the daily number of specimens received continues to increase and we are now preparing to expand our production capacity to handle higher daily volumes.

We are also focusing much of our resources on obtaining reimbursement for PreGen-Plus from a more payers. We are being reimbursed by some employers and other payers; however, we are well aware that obtaining reimbursement from all major payers is key to the successful offering of this important breakthrough test.

Recently a summary of the results of EXACT's large multicenter study were presented. Let me say that the marketplace, meaning physicians, has been very positive regarding the results of this study, which demonstrates a fourfold increase over the sensitivity of FOBT, a very good outcome for PreGen-Plus.

LabCorp's licensing team continues to support our goal of offering new genomic and esoteric tests. Earlier this week we announced an exclusive relationship with BioPredictive to offer their non-invasive blood test for Liver Fibrosis under LabCorp's brand-name of HCV FibroSURE. We expect to begin offering this test in the first half of 2004.

HCV FibroSURE further expands our vast menu of tests for HCV and has the potential to use as an alternative to in invasive liver biopsy to evaluate the extent of fibrosis, an active inflammation in patients with chronic hepatitis C liver disease.

Through our agreement with Correlogic Systems, we plan to commercialize their protein pattern blood tests for the detection of ovarian cancer in November. There currently is no accurate blood test available to detect early stage ovarian cancer. If diagnosed early, this common disease is readily treated and often incurable. We initially plan to offer the test to those women at increased risk for ovarian cancer.

Existing genomic and esoteric tests also continue to grow dramatically during the quarter. Esoteric testing including genomics represented approximately 30 percent of our revenues through September 30. Additional details are available in the 8-K we filed this morning. These additional details will show a 40 percent increase in our highly specialized genomic revenues, which included third-quarter revenues for PreGen-Plus.

Some of our faster growth areas, human papilloma virus and cystic fibrosis testing continue to increase monthly as more physicians follow the new standard of care guidelines for use of these tests. Our third quarter testing volumes form bowls significantly increased compared to the same period last year.

I hope this summary of results and significant strategic accomplishments demonstrates to you that at LabCorp our strategic plan is actively working to generate growth opportunities.

Now I would like to review a few frequently asked questions and our specific answers to those questions. Were your volumes in the quarter where you expected them to be? I believe they were, with the exception of the hurricane in September, which we estimate reduced third quarter EPS by approximately one cent. By everything we see today, our volumes were before present level.

Two, what are your pro forma results? Since our conference call for the second-quarter results, we have been frequently asked about our pro forma growth. Although we believe organic growth is a better way to measure our performance, we have had so many questions that we feel we should answer this question.

For the quarter on a pro forma basis, our revenues grew 4.3 percent over the third quarter of 2002. Further details about our pro forma results will be provided when we file our 10-Q for the quarter.

Given your experience during the quarter, have your long-term revenue volume or price expectations changed? No, at this time we expect long-term organic volume growth of 3 to 4 percent and price increases in the range of 2 percent.

Can you provide an update on the co-pay proposal and its potential impact on your business if it becomes reality? There is really nothing new to report today except to say that we have been working very hard to make sure our representatives on Capitol Hill understand what bad policy the co-pay is for both patients and providers. We plan to continue focusing our efforts on making certain this does not become law and do expect the matter to be resolved by Congress during the next few weeks.

What makes up the 5.7 percent pricing increase for the nine months of the year and what are your pricing assumptions for LabCorp this year? Approximately 2 percent of the increase is an increase in rates. The rest is related to the shifts in our text mix, predominantly in both are genomic business and in histology testing, which is primarily DIANON-related. For the full year for LabCorp, rate increases are expected to be approximately 2 percent. Additional price improvements will come in shifts in our text mix associated with esoteric tests like cystic fibrosis and HPP, and from continued shifts in histology testing mix from a DIANON.

Can you provide an update in competitive landscape? This has always been a highly competitive industry with various markets experience heightened competition from time to time. Because of the attention drawn to the big labs as a result of isolated competitive issues in select markets as well as recent consolidation in the industry, we have seen increased competition. We do think we have the tools, resources, and management focus to effectively address these competitors. We do not see them as long-term threat to the successful execution of our strategic plan. In fact, I believe our results demonstrate our ability to effectively compete and deliver improved margins.

Has your acquisition strategy changed now that you have nearly completed integrating Dynacare and are well into the DIANON integration? As I said before, we have not been seeking to make large acquisitions during the year 2003. However, we do believe that good deals of all sizes are still available, both large and small. One of the best ways to execute our growth strategy is through appropriate acquisitions. Look at what we have accomplished over the past year. Dynacare integration is essentially complete and we will be close to completing DIANON by the end of this year with the exception of the dionization of LabCorp. Our results for the third quarter improved margins and significant growth demonstrate our success with these transactions and it is crystal clear that achieving expected 24 percent EBITDA margins on sales of approximately $3 billion this year is a substantial improvement over 22.5 percent on 2.5 billion last year. Good strategic acquisitions have been and will continue to the important part of LabCorp's growth strategy.

Eight, how do you plant to use on your cash? First we must continue to invest appropriately in our core business, which is a substantial generator of cash for the company. We have done this over the past few years within our capital expenditure budget and will continue to do so. For example, our efforts here include continuing to standardize our lab and billing systems as well as our lab equipment to optimize efficiencies.

Over the last six years, we have spent more than $100 million standardizing our billing and lab IT system and have since achieved record low DSOs and bad debt rates for our company. Several years ago we also spent $20 million to upgrade our chemistry analyzers and we are now in the process of replacing all of our hematology analyzers.

Focusing on the core business also includes small fold-in acquisitions and selective large acquisitions such as Dynacare. All of these activities strengthen our core business, increase market share, and improve our financial performance.

Second, we must continue to invest both in appropriate acquisitions and in higher value genomic and esoteric tests that make strategic sense, including expanding our commitment to cancer and anatomical pathology. This involves internally developed new tests such as HIV resistance testing, HCV genotyping, and West Nile. It also includes making selective esoteric acquisitions such as National Genetics Institute, ViroMed, and DIANON, as well as making the required investments to dionize LabCorp and it involves developing stratetic partnerships to offer new leading-edge tests such as those we have with Myriad Genetics, EXACT Sciences, Correlogics, and most recently BioPredictive.

Finally we also plan to announce a new share repurchase program in the next few weeks during the fourth quarter which will permit us to opportunistically repurchase our shares. We will also continue to consider a dividend, but please remember that any dividend will be evaluated in terms of retaining as a priority our flexibility to support our strategic growth plan.

Nine, what is your guidance for '03 and '04? Our guidance for 2003 is unchanged except for cash flow. Compared to 2002, LabCorp expects 2003 revenue growth of approximately 18 to 19 percent with EBITDA margins in the range of 24 percent of revenues. Diluted earnings-per-share in the range of $2.20 to $2.25.

Capital expenditures of approximately $90 million. Free cash flow net of capital expenditures of approximately 400 to $420 million, and net interest expense of approximately $35 million.

For 2004, our preliminary guidance is as follows. Compared to 2002, LabCorp expects 2004 revenue growth of approximately 4 to 7 percent and diluted earnings-per-share growth in the range of 11 to 15 percent compared to the first call 2003 consensus EPS estimate of $2.22.

We expect to achieve this EPS growth through the following initiatives; increasing revenues and further shifts in our test mix, particularly in our esoteric and genomic business, which generate higher profits than the core business. Recognizing Dynacare synergy savings and continuing the integration of DIANON, which will lead to our achievement of anticipated DIANON synergy savings; continued for the reduction in our bad debt rate, and four, identified cost efficiencies which are a standard part of our business management process. And finally contributions from small accretive acquisitions.

We expect to provide more definitive guidance for 2004 after we complete the internal budgeting process for next year. As I stated at the start at the beginning of this call, LabCorp's strategic plan has been and continues to be the framework for our success as a company. All of our initiatives are designed to support this plan, which has consistently delivered not only the strongest financial results in the industry, but tremendous value for physicians and patients, as well as our employees and shareholders. Thank you for listening to my comments. We are now ready to answer any questions that you may have.

Thank you. (OPERATOR INSTRUCTIONS) David Lewis of Thomas Weisel Partners.

Tom or Wes, I wonder if you could address the Q3 gross margin. It was significantly below expectations. It looks like there was some SG&A offset to try to make up the difference and there was a significant differential in the tax rate. Were some of these related to specific profitability issues or the weather or the hurricane? Walk-through that?

As far as the gross profit, gross profit margin for the quarter was 41.3 percent and last year was 41.7 percent. I don't know about your numbers on that, David, but that was totally in line with our expectations for gross margin for the quarter.

In SG&A, the SG&A percentage was 21.6 percent, compared to 23.4 percent last year. The biggest difference in that would be the reduction in the bad debt rate and also related to synergies from the DIANON acquisition.

Okay and the tax rate?

We had a onetime recovery of some state income taxes in the third quarter which caused the tax rate to be lower in the third quarter but will go back to the normal 41 percent in fourth quarter.

Okay, so this is a onetime issue. Is it fair to say that without the tax rate the EPS would have been a couple of cents lower?

No, it had an impact of one cent.

Okay. And then, Tom, you mentioned 2004 in terms of the co-pay, it is obviously too early to tell, but the numbers you provided for 2004 guidance, would they include any potential impact from the co-pay?

They do not include any impact the co-pay. We're obviously hopeful that the co-pay goes away shortly. And these numbers do not include a co-pay impact.

So if there was a co-pay theoretically there could be some impact to those numbers but we don't know what that could be yet? Nor do we know that the co-pay is going through?

Correct.

And then, Tom, I have one scientific question on HPV traction. Obviously our (indiscernible) indicates that HPV traction for your specific issue with (indiscernible) is going particularly well. Other of your competitors have not opted to push HPV as aggressively. Maybe you could talk about your strategy and why you're so focused on HPV, any concerns you may have about long-term degradation of your path business?

I will give my comments. Number one, I know it is semantics but we don't push products. What we do is we educate physicians and there is guidelines out there which ACOG issued which clearly indicates that for certain types of patient populations, female populations, it is appropriate to have an HPV test along with the Pap smear. So all that we are doing as a company is following guidelines that have been issued out there and making available the kinds of tests that the American College of Obstetrics and Gynecology and others have recommended. So we don't see ourselves as -- what we see ourselves just doing is just following what the FDA and ACOG is saying. We think that will increase utilization of the papilloma virus.

On EXACT Sciences, obviously an important growth driver for next year, you are saying volumes are increasing. Are there any metrics you can provide either on pricing the level of reimbursement you are receiving to date, margins, or even when some of these metrics on volume margins or pricing may start to be disseminate to us on quarterly calls?

Yes, by the way I was pretty clear on our guidance. EXACT Sciences tests are not in our guidance for next year nor Correlogic. So the guidance that we provided this morning did not include revenues associated with either Correlogic tests, which hasn't been launched or the EXACT tests. I think we will do what we always do at LabCorp. We will wait six to nine months. We will see how the reimbursement goes, and they will begin to provide you with absolute numbers on how it is going. The only thing I can say is that physicians throughout the United States are using this test. They are ordering this test. And there does not seem to be any issues surrounding the way that the doctors collect the sample, excuse me, the patient and the doctor collect the sample for this test.

The main issue which was talked about now for a few years associated with the launch of this test is reimbursement. We have to get more and more reimbursement for that and we will keep you updated on each quarterly call.

Thanks. I will jump back in queue.

Bill Bonello of Wachovia Securities.

Just a couple of questions. I think you clarified this Tom, but I want to make sure. Your 4 percent internal growth, that is what volume growth is, or is that what total internal revenue growth is?

I'm not understanding your question. Our estimate of organic growth for the quarter, Bill, was 4 percent.

That is all in price and volume?

That is just organic, non-price.

Okay.

The growth for the quarter I think was nine point something percent.

Okay, we just think of organic a little differently. Then in terms of next year, the 4 to 7 percent revenue growth, do you have any sense of -- not to hold you to specific numbers, but what you think pricing might be like next year in that 4 to 7 percent?

I think, Bill on that we have always been pretty consistent. We think that our volumes are going to grow in the four to five percent range and we think price is in the 2 to 3 percent. So we are saying that pricing next year from everything we see is two percent.

Okay, and then just for this year, your revenue guidance implies that you expect a little bit of accelerating revenue growth in Q4 even though you still had one month of DIANON contributing to growth in Q3. Can you give us some clarity on -- and I assume a month into the quarter you feel pretty confident. What is giving you that confidence?

The only thing that we have, Bill, is we have a couple of new contracts that we signed. There are some new contracts that came in in September, October period.

And when you say new, they're not renewed but they're totally new?

Totally new.

That's fabulous. Then the final thing on your EPS guidance for '04, which I actually thought was pretty encouraging, does that include the additional share repurchase that you talked about?

No, it does not.

And how about acquisitions?

It includes small acquisitions.

And just finally, still some bad debt improvement?

Yes, Bad debt improvement. We're not giving you a number now, but we expect to take the bad debt down more.

Great, thanks a lot.

Gary Lieberman of Morgan Stanley.

If you could just clarify a couple numbers for me. I think you said that the pro forma revenue growth was 4.3 percent and that the organic volume growth is 4 percent, which I guess the rest would be price, of sort of 0.3 percent. But I thought you said the price was 2 percent, so can you just reconcile those numbers for me?

The pro forma revenue growth of 4.3 percent. We don't disclose the makeup of volume and price on that and you are comparing apples and oranges in looking at the organic growth rate. The only thing we have talked is the organic (technical difficulty) 4 percent, but we don't give any guidance or haven't made any statements about what the organic price and growth is.

Okay, can you explain to me how it is an apples to oranges comparison?

We told you pro forma takes into consideration. You know what pro forma is. It is taking the entire activities of DIANON and Dynacare last year and trying to compare that to the first nine months of this year.

When they were not a part of us.

Right and so the organic is an attempt to back out acquisitions, period. So as we have shown over the last couple of quarters, your pro forma comparisons and organic volume growth comparisons are not the same type of comparisons.

And then if you could comment a little bit on the volume growth, it looks like it was pretty good in the quarter. Do you think some of the economic issues have put pressure on volumes for the industry or are subsiding? Are there other things that helped the volumes in the quarter?

A couple things. Number one is that we've always felt that our volume growth at LabCorp has been in the 3 to 4 percent range and we have been consistent now for multiple years in saying that we think our volume growth is in the 3 to 4 percent area.

The other is that we did benefit from a new contract that kicked in for LabCorp and was an important contract for us on September 1.

Okay and just a final question. Can you talk about what is driving the bad debt expense lower? A number of companies, specifically some hospitals have been taking bad debt charges associated with higher costs or higher bad debt from uninsured. Can you talk about how that may or may not be affecting?

The reality is LabCorp has continued to reduce its bad debt over the last four to five years, and so our new management team has been put in place. What we did number one, Gary, if we standardized our billing system. So greater than 80 percent of all the volume that comes through LabCorp now comes through a standardized billing system and that is very important in the way that we send bulls out and in the way that we can track information that is out there.

Number two, is we put an enormous amount of emphasis on our front-end process in terms of new information systems that are in the doctor's office, in terms of account management, the way we look at accounts, making sure that we have appropriate information on our request forms before we process the tests. So this company in this industry has put an enormous effort behind reducing bad debt, and we think it needs to go down even further. We are not happy with our bad debt rate at 7 percent. We think this bad debt rate has to get down well below six percent and we spend an the inordinate amount of time in this company on a variety of different activities to reduce the bad debt.

And you are not seeing any negative impact from a higher number uninsured or higher co-pay's or anything?

We're seeing significant, ongoing progress at LabCorp in reducing bad debt. We don't see any and issues in collectibles as it relates to co-pay or things of that nature. We see improvement as we go on.

Thanks a lot.

James Starr (ph) of Henry Crown & Co.

Tom, if you look out over the next couple of years, what share of your free cash flow do you think will go toward the new tests joint ventures and arrangements such as you have with EXACT or Correlogics and how would that vary overtime versus the opportunities of share repurchase, depending if your stock is as low as it is now or high in future years?

I think what we're going to do, and I've said this at the two conferences I spoke at during the month of September, is we wanted to, number one, finalize the repurchase program we were on, and we are trying to forecast now how best to initiate a repurchase plan and to determine how much of the money will be used for repurchase and how much of the money will be used for acquisitions and licensing deals. And what I have said consistently to shareholders at these conferences is we will be prepared in late November or early December, and we will try and move that ahead because of the amount of cash that we're generating to announce the size and the scope of the new repurchase plan.

So I am not prepared today to say how we are going to break that down, because many of these acquisitions that come up over time are opportunistic, and you cannot necessarily plan that you're going to make an acquisition of a genomic company or a specialized esoteric company today. What you do is you target them and hope that that comes around, and what we want to do is we want to be able to set aside enough money to make sure that we are able to do those, and then spend the remainder of our money, at least at this point in time it looks like, on the large share repurchase plan.

Let me just follow up. If I limit my question to just what I call almost the more venture capital oriented part of the investing, how do you see that?

I see very little of that. I see very little venture. LabCorp doesn't do venture capital investing, Jamie. What we do is we wait until the product is proven; then we take it. Or obviously, we wait until a company has demonstrated some success in their area. So I don't think you should be thinking that we're going to put any money out there which is subjected to any risk at all.

Ricky Goldwasser from UBS Warburg.

One question on the guidance. I understand that the '04 guidance does not include the co-pay, but does it include any payments, fees, and even if it doesn't include it directly, let's say we are going to hear that there is payment freeze on testing. Does that mean that you will still be comfortable with the guidance you provided today?

No, it doesn't mean that, Ricky. Clearly, the guidance we provided today is business as normal. The industry continues to vigorously oppose to co-pay, and we are hopeful that the message is getting through. So for today, our assumption is that business is as normal, moving into the year 2004. When we provide updated guidance, once we go through our budget process, we will be able to understand more clearly what is going on as it relates to Medicare co-pay. There are a variety of ideas that it is my understanding that people have put forth related to alternatives to co-pay. And I think it is merely speculation now on what really is going to go on down there.

So we are not going to speculate right now. What we're going to do is we are going to hope that the co-pay goes away because we have made strong arguments that it has gone away.

So just another point of clarification when you're saying price increase 2 percent, increase in rates, does that 2 percent include a CPI increase on Medicare similar to what you received this year?

Ricky, this is Brad. As Tom said, we're fighting one battle at a time, and we are hopeful that the co-pay message has gotten through, and we are not willing to concede on any freeze or any other proposal and we will fight them as they come, because we think it's tremendously unfair that the clinical laboratory industry should bear a disproportionate burden of trying to pay for this pharmaceutical benefit.

But in forecasting Medicare revenue for next year, we've taken it steady-state this year. We have not assumed a co-pay was going to come in, and we haven't assumed that we were going to get a CPI increase.

Great, that really answers my question. And lastly, usually you do a price increase in November. Are you expecting to implement a similar price increase this November, and what are your thoughts on whether the price increases will be -- how they will be received in the market, especially by the patient side?

Ricky, this is Wes. One thing that we have done this year and we're trying to incorporate a new methodology in price increases. In the past, it has been heavily weighted toward the fourth quarter in October timeframe, November timeframe. This year we have tried to space it out a little bit more during the year. There is still this year a more heavy weighting toward the fourth quarter, not as much as last year, however. And starting next year, we're going to try to spread that out even more throughout the year.

And we have seen this from a PPA perspective. We've seen those increases go through consistent with what we have seen in prior years, not -- we are not getting a whole lot more price increase than we have seen historically, but we're not getting any less either. So I would say it's a pretty constant state, is what our experience has been this year.

Okay, thanks.

Abe Bronchteim from Glenview Capital.

Tom, to ask a favor. You've got your volume revenue growth for us for next year. I am just trying to build a long-term model. If you are looking for revenue growth somewhere in the five, six percent range, your EBITDA before the equity earnings is just under 23 now. You used to have a target achievable of 25 plus. I want to make sure that that is still the case with the new acquisitions, and so does that translates into five or six percent top line, six to eight percent from leverage and then anything we do in share buybacks or acquisitions in addition?

I cannot today, because I'm just not prepared, Abe, to talk about pre- or post-equity earnings. We defined EBITDA a certain way. And when we do it, you have to -- I would appreciate at least if you keep in mind that some of these equity earnings are coming out of significant relationships that we have and when we acquired Dynacare we fully understood the fact that we were entering into these joint ventures where it was appropriate to treat them financially as we do.

For example, it is possible that one of our fastest growing markets is the Canada market, and that does not come through in our revenue line. It is possible that some of the joint ventures that we have in the United States in areas like Tennessee or in Wisconsin, where we have very, very strong relationships do not come through on the revenue line or the way you look at the EBITDA line.

So the way we look at it as a company, we look at these as very important business relationships and very important to the growth of the company. So we do not break it out the way that you break it out. Suffice to say, that it's certainly our desire to get the EBITDA margin above 25 percent. I think I have said pretty consistently over the last 18 months, when you get the margin to that level, it becomes very difficult to increase it unless you have opportunities in places like bad debt reduction, which we do, mix shift, where we get higher valued tests, and revenue increases.

And that is really what we seek to do now at LabCorp is to get our growth in those areas in those ways and to do a better job in the whole area of managing bad that.

And one think to keep in mind, EBITDA margins that we have given guidance for this year would be close to 24 percent and last year at the end of '02 it was 22.5 percent, so we have again demonstrated the ability to expand margins as we have done consistently over the years.

I'm not arguing and certainly not devaluing the equity earnings. I'm just trying to understand what is left in EBITDA. And the EBITDA margins at these joint ventures, we don't see that. Are those at or below or above the corporate average?

I can not discuss that, Abe. I can not go into deeper details on those kind of things. I think suffice to say that our ability to grow margins as we move forward is directly related to our ability to reduce bad debt over the next several years even more, and to shift our products to higher margin areas like EXACT, like Correlogic, like human papilloma virus.

That is where the margin expansion is going to come from. And then like all clinical laboratory companies, we spend a lot of time looking at efficiencies, and we often buy new analyzers or new pieces of equipment that really are more efficient and can help us reduce cost. And at LabCorp we have a concerted effort of a large group of individuals who spend all day long doing that. That is where we're going to get to our margin expansion and it is not as easy today as it was three years ago.

Tom Stern (ph) of Tea Steam Capital (ph) .

I wonder if you could just clarify again your guidance for earnings for next year does not include use of free cash flow other then for these small little tuck-in acquisitions?

That is correct.

Could you give us a sense, order of magnitude what you anticipate the free cash flow to be next year and the percentage of that or how much would be allocated to these small acquisitions?

I'm not going to be able today to you what our free cash flow is next year. We will do that when we give you a further update later in the year on our complete guidance. In terms of acquisitions, small acquisitions, we run historically in the range of 40 million to 75 million worth of those. And that varies depending upon the year, but I think that is probably a good number.

Okay. Would it be unreasonable to assume that free cash flow next year would approximate this year's plus the increment of earnings next year over 2003?

I'm not going to go there, but I hope so.

Could you also talk a little bit about what the appropriate level of leverage is for the business?

We have talked about that and we have always said and continue to say that we're going to carry in the range of 800 to $900 million in debt and as you know we have out there is bond LYONS that may or may not become available next September so our minds have not changed as it relates to that. That is the kind of debt at least today that we plan on having, at least in the year '04.

Okay and then one last question. You seem to have a mindset towards strategic acquisitions or preserving some cash for strategic acquisitions. Can you talk a little bit about what some of those opportunities might be?

I'm not going to do that because of competitive reasons but I think you're right, Tom, that we see in the year 2004 and 2005 opportunities out there -- and as by the way there were in '03, and we just stayed away them for strategic acquisitions.

Thank you.

Bob Willoughby of Banc of America.

It's Frank Pinkerton sitting in for Bob. Earlier you discussed that you saw acquisition opportunities both small, medium and large. Can you put some color behind what size a large acquisition would be and how many of those you see out there? Thank you.

I think I will put color behind it, but subject to change, it is a forward-looking statement. I think probably anything over $100 million in purchase price to me is large for LabCorp. And I have always felt there is acquisition opportunities both small and large out there and our mindset really has not changed as it relates to that.

Thank you.

Lee Cooperman of Omega Advisers.

Just some housekeeping questions, if I may. What was the average price you paid for the shares you purchased 63 million in Q3? Then all relate to repurchase, what is the average price you paid for the $150 million on the program you just completed. And just refresh me since I am not familiar, what was your timeframe that the $150 million was repurchased? I have some other questions, but let's stick with that one first.

I will start with the last one. I think we announced the share repurchase plan early in '03, I think, so I think it was mainly over a nine-month period I believe.

So you basically spent 150 million this year, you're saying?

Correct.

Lee Cooperman Very good and what was the average price you paid?

We don't talk about the average price. We don't give that information out and it's not our (multiple speakers)

We will tell you within 2.1 million shares in the third quarter and the total share repurchase buyback was 5.2 million shares.

So if I take 150 and divide by 5.2 that is the answer to my question, is it not?

We have always disclosed the number of shares that we one back, so --

Lee Cooperman You have to. It's basically $28.85.

Probably, I just don't have on the tip of my hand.

What was the actual shares outstanding at the end of the quarter? I know the weighted average was 145.4. What was the actual shares outstanding?

We are searching for it, Lee. Do you have another one?

Yes, I realize you don't want to put a bracket for the moment -- we don't want to put a number on the repurchase program, but the debt is being paid down, the company is larger, the earnings are greater. The stock price is nominally unchanged. I assume given all those factors, if we're willing to spend 150 million this year we ought to be willing to spend more if we continue to believe the forces behind that 150 repurchase program are still present. Is that a logical view to have?

Yes.

So just the actual shares outstanding?

It around 148 million.

It's interesting. Why would that be higher than the weighted average since you were buying back stock? Shouldn't it be actually lower than the weighted average?

I am going too put Ed Dodson on, our Controller.

We've got 148.5 outstanding and a little over five in treasury. That would bring it down to the 143 --

Exactly. It's not 148 cents, it is basically the actual shares outstanding were roughly 143. If I wanted to make the wild-ass guess that would spend $175 million of stock repurchase and we paid $32, it's not inconceivable we could buy back about 3 percent of the company next year, something like that? That is just me talking out loud.

Andrew Bhak of Goldman Sachs.

Tom, I think on the last quarterly conference call you had indicated that the monthly volume trend and all analysis was particularly difficult given the nature of the June quarter. I think you had indicated that this quarter was probably a more important quarter in terms of feeling where the business is going and maybe with the month of September as kids return to school etc. I was wondering if you would be on the broader comments if you would expand upon your comments and give us some sense of even from a gut feel standpoint how things are trending.

I think what I said historically, Andrew, and I appreciate the question, during the process of integration which we were going to heavily even today, but less so than we did in the first and second quarter. It is very difficult to predict -- to actually tell you what the volume growth is for the company. But we have been consistent to say that that we felt it was 3 to 4 percent, and I will go through the reasons why it is difficult to do that.

In the third quarter of this year, we had very little Dynacare volume that was not also in the previous year, so we were comparing apples-to-apples, with the exception of just a few weeks in July. As it relates to DIANON, DIANON is something that we can handle pretty easily because we have not begun to dionize LabCorp yet. So what I said it is it was complex to really understand the volume growths and in the third quarter we were hopeful that we would see volume growths in the 3 to 4 percent range once we annualized Dynacare and we were happy to see that.

The challenge, of course was that in the September period our results were clearly affected by the hurricane, and those of you that are familiar with the hurricane, it hit in the northern part of North Carolina, all through Virginia, up through Washington, Maryland and Delaware, which are the strongest markets for LabCorp in the country. We feel we were able to estimate that and understand the impact that it had.

So we have always said and we will continue to say that we do not believe in the looking at pro forma when the large acquisitions occur because we are implementing a plan on how to integrate these acquisitions. And sometimes you walk away from business because of price, sometimes you eliminate business in places like nursing homes, so we don't think it is a fair comparison to look at the business on a pro forma basis. We think it is better for us to try and understand what the volume growth is the way that we wanted.

And as we come through the third quarter, we continue to see volume growth for this company in the 3 to 4 percent range.

That is very helpful. If I can ask a separate, brief question, in terms of the company's internal plan for capacity expansion and the ramp of the EXACT test, I think you had indicated that there was a two phase plan that you had in place, as it was launched an end a fall timeframe ramp with additional space, additional people. I was wondering if you could give us an update on that?

Yes, Andrew, we plan in November to significantly increase the capacity for PreGen-Plus. We hope to have that finished by year-end and that will satisfy everything that we anticipate in terms of volumes over the next few years.

Great, thank you very much.

Thank you. Tom Gallucci of Merrill Lynch.

Thanks for staying on long enough for us to ask a few more questions. I guess a couple of quick ones. One, you gave the EPS impact of the hurricane. Did you quantify that at all in terms of volume in the quarter?

No we didn't, Tom. Actually we did but we're not really announcing what that is.

Just to make sure I understand on the revenue guidance you're saying next year about 2 to 3 percent in price and consistently 3 to 4 percent terms of volumes, plus may be some small acquisitions. What it would look like to me anyway that probably the low end of the range is fairly conservative and higher end of the range based on the metrics you threw out there looks much more realistic. Did I get the buildup of that correctly?

I'm not sure you did, Tom. The small acquisitions are not incremental. We are saying that the small acquisitions are within that 4 to7. And I'm not sure you said that to me at least the way I wanted you to hear it.

No, I was thinking 2 to 3 on price, 3 to 4 for volume, and you also have small acquisitions in there which would make the low end of the range seem fairly conservative to me.

What I said is that I feel as it relates to next year that we are more confident in the lower end of that pricing. I do not think we should be thinking of three. We hope we get it, but we're much more confident now in the 2 percent side.

Okay, and finally in terms of cash flows in the 8-K and as your talked about a little, you had priority one, strengthen the core business and standardizing the lab and billing IT systems. You said you spent over $100 million to date to do that. Where are we in terms of the overall standardization of those systems and how much more do you think you need to spend on that?

Okay, excluding DIANON, we are at about 85 percent. Including DIANON, we are slightly below 80 percent, so I think, Tom, you should expect the company to be spending in the range of 8 to $10 million a year over the next three to four years to continue to standardize our billing. The problem is probably three years from now when you ask this question we will have done another acquisition, so I think of this as an ongoing process that will never end.

We are focused on the $10 million year range, which by the way is in our budget and is in our forecast and that is probably never going to end unless we completely stop doing acquisitions down the road.

All right and finally before when you were talking about share repurchase programs and the size, you mentioned other cash uses like the acquisitions and potential licensing deals. That -- mostly trying to estimate what you think you will spend on current licensing deals or other ones in the works that we should be expecting?

I think you should expect more. I think you should expect over the next two to three years expansion of our current deals as well as new licensing deals for special tests.

Great, thank you.

Kemp Dolliver of SG&A Cowan Securities.

First on PreGen, any thoughts with regard to where the process stands with Medicare reimbursement and any comments on the strategy? Also in terms of the detailing effort to doctors, who are you really targeting at this point?

I will take the second question and then I will ask Brad to answer the Medicare questions. Nice to the Medicare question that's not co-pay. We are heavily moving toward the OBGYN, the internist, the family practitioner in terms of the launch of this product as well as the gastroenterologist. We have continued to say now for quite a period of time that we believe the OBGYN really has a profound impact on many different tests for LabCorp and we are finding the same kinds of issues as it relates to PreGen-Plus. They are leaders. They are thoughtful. They are interested in these new tests out there, as we expect they will be with the ovarian cancer test that we launch later this year. Brad, do you want to talk about the reimbursement issue?

Sure. The whole process of reimbursement as we talked about in the past it evolves and the pieces rely upon one another. From Medicare's perspective, they want to be able to establish that a test is the standard of care in whatever relevant medical community that the test is being offered for. And so we have provided key Medicare medical directors with information and continue to provide that information, but we always expected to have more success on the private side first because as you might expect each private carrier employee can make their own decisions about what they think is good for their enrollees, their employees or their patient.

We have had some initial successes in terms of obtaining reimbursement, but as Tom mentioned in his comments, we need to expand that success in order for the test to really reach its potential. We didn't expect Medicare coverage yet. We're hoping we can get it is soon as we can but it is an ongoing process.

That is great, thanks. And Tom, you made the comment in your remarks regarding seeing increased competition, yet you have been able to contend with that fairly well for the last three or so quarters. Could you just talk about briefly one or two things you've done that have been successful in countering that?

Well, we are now beginning to spend a very significant amount of effort on retention of our business. I am not sure I'm going to put numbers out there today, but I have put numbers out historically on the fact that LabCorp as well as this industry turns over accounts on an annual basis that are much too high, so we have a concerted effort at LabCorp to retain customers. We also have had to move towards the utilization of phlebotomists in the doctors office to ward off some competition out there, and I think it is clear at least to us as we move into the year 2004 that service opportunities like more account managers, which we have implemented in many places in the country, increasing phlebotomists in physician's offices for the appropriate reasons, as well as retention of the places that we are emphasizing, and I do wanted to much further because it does put our plan out there for our competitors.

That's great, thank you.

Matt Ripperger of J.P. Morgan Securities.

Just a couple questions. First of all when you announced the DIANON deal you said you could expect to have synergies in the first year of '03 of 7.5 million and increase to 25 million in '04. Are you still comfortable with that expectation?

Yes, that is built into our guidance for next year on the EPS increase.

And that incremental improvement in synergies is solely related to cross-selling DIANON into the LabCorp core book of business?

That is totally related to just the integration. That has got nothing to do with dionization of LabCorp. That is just the integration of business, overlapping functions etc.

Okay, great. The second question I had is just when looking at the histology revenues, it looks like it was down sequentially. Was that just seasonality in the business or was there any attrition in the DIANON book of business that contributed to that?

To be honest with you, I don't have an answer to that question and we are looking at the numbers now as we speak. When you say year to year and --?

Sequentially.

Oh, I'm sorry. Sequentially the second quarter will always be stronger than the third quarter and I think you are correct. We have stated there was some lost business from DIANON that has affected our results, so it is probably a combination of both.

Okay, great. And the last question I had is when you into a long-term commercial contract like the one you stated, do you generally have an annual escalator in that contract?

Some we do, some we don't. In general, yes. Generally we do.

Thanks very much.

Andrew Sidoti of William Smith and Company.

Most my questions have been answered, just a couple of quick ones. Now that the litigation against the former DIANON salespeople who are setting up a competing business, how has that been settled? I was just wondering if you have been able to recapture any lost accounts there?

I don't think we can talk about that. I would think it's probably fair to say generally speaking when you lose accounts you don't get them right back. It takes a long time to get them back.

Okay. The last question would just be on without specifics are you seeing any opportunities for acquisitions from hospitals outreach programs that have decided that competing against you just doesn't make sense anymore?

I'm not going to comment on that.

Okay, fair enough.

I am going to take three more questions if they're there. We will try to keep us to one hour and 15, or an hour and twenty minutes.

Dennis Turco of Haven Capital Management.

Tom, it's Chip Oat with Dennis. For guidance for next year do you have any assumptions about improved continuing to have improved mix or are we talking status quo?

Our guidance requires us to improve mix as it relates to this business and I think if you look at our results for the first nine months, and I may be a little bit off on this, but about half -- a little less than half of the increase in revenues from LabCorp for the first nine months of the year came from the genomic esoteric business, which of course is heavily influenced by DIANON. And about half of the increase, a little more than half of the increase came from our core business. So we need to continue to have shift mix along the lines of historical levels pre-'03 in order to achieve these numbers. So we do and we stated in our opening comments, that shift mix is an important part of improving the profitability of this company.

Thank you.

A follow-up from Bill Bonello, Wachovia Securities.

Great. And just in terms of thinking of the growth going forward and I know you don't want to get overly focused on the pro forma, but the number you gave for this quarter is substantially higher than the numbers you have reported for the previous couple of quarters. Is it safe to say that the Dynacare acquisition attritioned from the Dynacare acquisitions was a fairly significant drag on that pro forma growth number? And that maybe Dynacare didn't contribute as much revenue as you had initially expected it would?

I will give you this, Bill, and I am not going to comment on it. But I think I have said on every conference call this year in terms of revenues that all aspects of LH, as you may it want to look at them, DIANON, Dynacare, and LabCorp were softer than we expected as the year went on, so I guess that means yes to your question.

That is just encouraging for growth going forward. I don't suppose you can give us any more color on the new contracts that you mentioned?

No, I wouldn't. Final question.

David Lewis from Thomas Weisel Partners.

Just one for Wes and one for Tom. Real quick, Wes, nice improvement on bad debt from 7.5 to 7. How much of that was truly organic or was there any piece still related to incorporation of DIANON business?

No, none of that has to do with DIANON. The DIANON, when we brought that on, we have not changed their bad debt rate at all. It would be a change (indiscernible) DIANON.

One more question about next year's growth. The 4 to 7 percent, what component of 4 to 7 percent would be related to DIANON or can you give that kind of detail?

No, I'm not going to give that kind of detail.

Perfect.

Thank you very much for listening and have a nice day.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.