Labcorp Holdings Inc (LH) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Laboratory Corporation of America 2005 second quarter results conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded Thursday, July 21st, 2005. I would now like to turn the conference over to Mr. Tom Mac Mahon, Chairman and CEO at Laboratory Corporation of America. Please go ahead, sir.

Thank you. Good morning and welcome to LabCorp's second quarter conference call. Joining me today from LabCorp are Brad Smith, EVP Corporate Affairs; Brad Hayes, EVP and CFO; Ed Dodson (ph), SVP and Chief Accounting Officer; and Scott Fleming, VP, Investor Relations.

We'll start by having Brad Hayes review our financial results. I will then update you on our key strategic initiatives and Brad Smith will go over a few anticipated questions. I'd now like to introduce Brad Smith, who has a few comments before we begin.

Before we begin, 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 July 21st for replay information.

This morning 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 you to our press release dated July 21st for a reconciliation of EBITDA, which is non-GAAP financial information discussed during this call.

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 are set forth in detail in our 2004 10-K and subsequent filings.

Now I would like to introduce Brad Hayes, who will review our financial results.

Thank you, Brad. Our second quarter results are as follows. Earnings per diluted share increased 15.2% to $0.76 for the second quarter, excluding a $0.02 per diluted share impact of a non-recurring investment loss, compared to $0.66 in the second quarter of 2004.

EBITDA was $225.2 million or 26.4% of revenues. Revenues increased 8.8% to $853.3 million. Price increased 7.7% and volume increased 1.1% compared to the second quarter of 2004.

Operating cash flow for the quarter was $86.5 million. Second quarter operating cash flow was impacted by income tax payments that were $48.5 million higher than in the second quarter of 2004.

During the quarter, we reduced our bad debt expense rate by 25 basis points. DSO for the quarter was 53 days, excluding Esoterix. Including the impact of the Esoterix acquisition, which took place midway through the quarter, DSO was 55 days.

Our 6-month results are as follows. Earnings per diluted share increased 15.3% to $1.43 for the first 6 months, excluding the non-recurring investment loss, compared to $1.24 in the first 6 months of 2004. EBITDA was $432.6 million or 26.2% of revenues.

Revenues increased 7.5% to $1.7 billion. Price increased 6.8% and volume increased 0.7% compared to the first 6 months of 2004.

During the first half of the year, the company generated operating cash flow of $240.9 million. During the second period, the company completed the acquisitions of US Labs, Esoterix and other small acquisitions for $323.2 million, repurchased $122 million of stock, representing 2.5 million shares, repaid $78 million in borrowings under its revolving line of credit, made capital expenditures of $45.7 million and paid income taxes of $134.9 million. At the end of the second quarter, the company had cash and short-term investments of $34.2 million and an outstanding balance of $57 million under its revolving line of credit, which is expected to be repaid during the third quarter.

Now I will turn the call back over to Tom, who will provide a business environment and an update in conjunction with the progress the company is making towards achievement of our key strategic initiatives.

Thanks, Brad. As pleased as we are about our financial performance during the quarter, what is most exciting as we move forward are several accomplishments in support of our key strategic initiatives. Scientific leadership, managed care and customer retention form the foundation of our strategic plan and it is the achievement of strategic initiatives in support of these areas that will be the key drivers of our near and long-term growth.

I would now like to review several important accomplishments achieved during the quarter. First, acquisitions -- During the quarter we completed the acquisition of Esoterix, which as its name implies, specializes in the offering of highly esoteric and highly valued tests. This acquisition complements our US Labs business, which we acquired during the first quarter of 2005, our DIANON business and our existing cancer and esoteric testing businesses.

The addition during 2005 of these two highly esoteric testing businesses significantly advances us towards our goal of becoming a company with a higher percentage of more highly profitable esoteric tests. For example, at the end of June, about 34% of our revenues are now in the genomic, esoteric and cancer testing categories. We believe this clearly establishes us as the leading cancer and specialty testing company in the United States.

These acquisitions not only offer us great revenue and earnings potential, they also offer significant efficiencies by eliminating redundant costs from the entire enterprise. In connection with these acquisitions, we believe that over the next 2 years we will be able to achieve synergies of approximately $30 million annually on a pretax basis.

Second, Cytyc ThinPrep imaging systems -- During the quarter, we completed our national rollout -- by the way, which was begun about 6 months ago -- of the Cytyc ThinPrep imaging system. This new service offers both enhanced quality to our clients and their patients, as well as enhanced efficiency to our labs.

The launch of this system has been an outstanding success. By the end of the quarter, ThinPrep imaging systems was being request for approximately 12% of all liquid-based PAP smears ordered. This significant adoption rate clearly indicates that clients recognize the benefit of this PAP screen technology to patients.

New tests and technology -- Beyond our major new offering this year, imagine-guided PAP, we are excited about other opportunities that we see. We are aware, however, that bringing new tests to market always provides unique and challenging business, scientific and regulatory hurdles and takes longer than we might sometimes like. We recognize this and continue to deal with these issues.

For example, with respect to the market acceptance of PreGen Plus, we have undertaken a number of initiatives. First, we are continuing our joint effort with EXACT to follow up with patients to increase the rate of patient compliance after a clinician has ordered a PreGen Plus test. Second, by identifying ways to reduce the cost of running the test, on July 1st, we were able to significantly reduce the price of this test that we now charge to our patients. Third, we will be participating shortly with our partner in studies to evaluate a new generation of PreGen Plus, which should provide significantly higher rates of sensitivity.

Managed care -- During the quarter we continued to work to strengthen our relationships with the nation's leading managed care companies. Our efforts included helped managed care companies understand how we can reduce their overall laboratory spending, while still allowing us to be fairly paid for the services we provide.

We also have been working hard to make sure that they understand how we can differentiate the services we provide by bringing unique connectivity solutions and scientific expertise to our relationships. As a direct result of this effort, we have a number of positive managed care developments to announce today.

I am pleased to announce that during the quarter we completed a new and expanded agreement with the new, post-merger, WellPoint. Specifically, this expanded agreement designates LabCorp as WellPoint's sole national strategic partner and extends the agreement signed late last year to cover both merged WellPoint companies.

In connection with this new agreement, we were recently the exclusive national provider contract for the PPO in the entire state of Georgia. This is a fee-for-service contract. This follows our implementation of the Georgia HMO contract in December 2004. Additionally, we have been awarded the exclusive national provider contract for the WellPoint HMO and PPO service plans for the state of Nevada. Both of these contract awards are effective in October.

You should expect more of these kinds of arrangements between LabCorp and WellPoint as we move forward. These new agreements, as well as those with other large managed care organizations, are excellent examples how LabCorp can help managed care organizations reduce their overall lab spending by taking advantage of LabCorp's efficiency, scientific capabilities and more sophisticated IT solutions.

Sales force expansion -- As discussed earlier, we are in the process of significantly expanding our sales force. We recognize that short term this will negatively impact our profitability, but are convinced because of the competitive nature of our business, that this will help accelerate our growth next year.

Web-based solutions, connectivity -- We also continue to provide our clients with practical connectivity solutions which meet their many and often varied needs in an open architecture approach. In other words, we're designing our IT solutions to be flexible, allowing our clients to work with the systems they prefer. Specifically, we are working with key industry leaders and are very close to launching a web-based order entry and report delivery tool that meets the needs of our clients.

As I have said often, LabCorp's business philosophy is simple and consistent. Select the major areas of focus that we believe are critical to the future success of our company. Develop plans, metrics and goals for each area and then monitor progress towards achievement of these goals. We believe that by applying this simple philosophy to the three focused areas -- scientific leadership, customer retention and managed care -- we can continue to deliver outstanding results.

Now Brad Smith will review anticipated questions and our specific answers to those questions. Brad?

Thank you, Tom. The first question, price seems to make up most of your revenue growth. Can you provide more detail on the volume price results and what could be expected going forward?

As we discussed in last quarter's conference call, several factors have helped our improved pricing including -- one, our emphasis on pricing discipline, which has been an area of focus since early last year when price was flat; two, a continued shift in our test mix to more genomic and esoteric testing as demonstrated this quarter by our growth in these testing categories; and three, the loss of the Florida capitated contract and a large hospital lab management agreement, which work against volume by help price.

Additionally, the acquisition of both US Labs and Esoterix positively impacted price during the first half of the year. As we have previously said, accession growth will be negatively impacted until the loss of the Florida capitated contract analyzes late in the third quarter. Consistent with our efforts to improve pricing, other low-priced business has also been consciously terminated, which has positively impacted price while lowering volumes.

Can you provide some insight into your margins?

Due to the investment and sales force expansion and preparing for call center consolidation, we knew that for a period of time our margins would be impacted. You also know that US Labs and Esoterix both had lower margins than ours. At the same time, we do, however, continue to have industry-leading margins and will continue to do so.

Our guidance for the year was clear that we expected margins to be flat due to the investments we are making in the business, but that we expected these investments to provide the opportunity for enhanced margins in the future.

Can you describe the investment loss that occurred during the second quarter?

The loss relates to a reduction in the value of warrants to purchase common stock of EXACT Sciences Corporation. These warrants were acquired as part of our licensing agreement with EXACT and were set to expire during the second quarter. However, the expiration date has been extended under an amended agreement with EXACT. A reduction in the market value of EXACT's common stock necessitated the write-off of the warrants.

What are your plans for the use of excess cash?

Our policy with respect to the use of our free cash flow has not changed. Our first priority will be to use free cash to help grow the company by pursuing our strategic objectives including acquisition and licensing opportunities. Second, we will pay down the balance remaining under our revolving line of credit and after that we will continue to repurchase our shares under our board-approved share repurchase program.

Is there anything new on the regulatory front?

We continue to monitor developments on both the federal and state levels and to our knowledge, there is no specific to report. As health care costs continue to rise, we know that we need to remain on guard for reimbursement as well as regulatory changes that could impact us negatively.

On a positive note, our trade association, ACLA, has been working hard and expects CMS to soon announce a proposal for a significant restoration of the 2004 fee cuts related to flow cytometry tests. Implementation of this proposal would have a significant positive impact on both US Labs and Esoterix.

On pods, we continue to be encouraged by reports that the OIG is investigating certain pod anatomical laboratory arrangements as we believe these labs are competing unfairly.

Also, as we noted in our 8-K filing of June 7th, we have received a subpoena from the U.S. Attorney's Office for the District of New Jersey. We have been informed by a representative of the U.S. Attorney's Office for the District of New Jersey that the company is not the target of the investigation and that similar subpoenas have been sent to a number of other lab and non-lab companies seeking information.

Has there been any change in the competitive landscape? Is there a trend toward hospitals bringing more testing in house?

The clinical laboratory industry remains intensely competitive. We see no significant change in the market place and expect that competition for business will continue to be tough. Hospitals do, from time to time, try both bringing more testing in house and taking over management of their existing laboratories. At the same time, other hospitals will consider outsourcing more of their testing. This has always been the case with hospitals and we do not see this as an indication of a significant change in the market place.

When will you provide guidance regarding the impact of the adoption of FAS-123(R) related to expensing the value of stock-based compensation?

We will incorporate the impact of this pronouncement on 2006 EPS and other financial performance measures when we issue guidance for 2006.

Now Tom will review our updated guidance for 2005.

Thanks, Brad. Guidance for the remainder of 2005, including the effect of Esoterix acquisition is as follows. Compared to 2004, LabCorp expects 2005 revenue growth of approximately 8.5% to 9%, including in-year revenues of $25 to $35 million from small acquisitions and/or new managed care contracts.

EBITDA margins of approximately 25.5% of revenues. Diluted earnings per share in the range of $2.75 to $2.80, including the $0.02 per diluted share impact of the non-recurring investment loss. Capital expenditures of approximately $110 to $125 million. Free cash flow, net of capital-- capital expenditures, of approximately $440 to $465 million.

We also expect net interest expense of approximately $32 million and a bad debt rate of approximately 5.3% of sales for the remainder of the year.

Note that this guidance does not include possible significant contributions from new tests or the impact of new accounting for stock-based compensation or any potential restructuring charge as a result of the US Labs and Esoterix acquisitions or future share repurchases beyond the end of the second quarter.

We are very pleased with our results for the first 6 months of this year. The additions of US Labs and Esoterix firmly position LabCorp as the scientific leader in clinical diagnostics. We continue to make strategic investments in LabCorp through acquisitions-- excuse me, through acquisitions, as well as organic growth initiatives that will position the company to be even more successful as we move forward.

As we look to the future, we continue to firmly believe that LabCorp's strategic plan makes sense -- complement new technology and scientific leadership with a national core infrastructure. We remain firmly committed to this strategy.

Thank you for listening. We are now ready to answer any questions you may have. Operator?

[OPERATOR INSTRUCTIONS] Bill Bonello, Wachovia Securities.

A question on the expanded WellPoint contract. I'm just wondering if you can give a little more definition around what you mean by sole national provider status? Does that imply that in no markets will WellPoint have a contract with Quest or does it just imply that you're the only lab that is in every market across the U.S.?

Well, Bill, the WellPoint-- the new WellPoint, as you would understand, is a very complex organization with a variety of rollup acquisitions over a very long period of time. So what this new contract clearly implies is that WellPoint is committed on a national basis, most likely, plan by plan, over a period of time, to work with LabCorp as it relates to clinical laboratory services.

It also implies and it's fairly important that you should expect to hear over time that technology that we have developed internally or acquired will become available to WellPoint for use in certain markets that they have. They are very interested in some of our technological advances and that's what's really driven this new relationship.

So expect, over time, more and more WellPoint programs to come to LabCorp and expect, over time, that LabCorp and maybe WellPoint together will be making announcements related to new technologies, particularly in the genomic and proteomics area.

OK, but then for other than the markets where you specifically mentioned, do not assume that it's not an exclusive-- that you are the only national lab providing service to them?

That's probably a good statement, but I think WellPoint is best to answer that. But probably now that's a fair statement.

OK, that's great. And just-- the second question, I don't know if you can quantify at all the impact that some of our call center and sales force initiatives had from a cost standpoint on the quarter, just so we can get some sense? I mean, obviously, this will be recurring for a short period of time, but we can get some sense of what cost came from those initiatives?

I'm going to ask Brad Hayes to answer that.

Bill, this is Brad. I was going to say we're not going to break out specifically sales force from call center activities, but I think in our anticipated questions you can think of those 2 things, in addition to our acquisitions that have lower margins, really having an impact on our margins, especially compared to last year. But, again, back to our original guidance on EBITDA percentages, that was baked in by us.

The other thing to think about on the sales force, I think, that's important is they are expenses ahead of revenues. I mean, it takes a certain amount of time to train and have someone become effective. So much like when we invested ahead of revenues to get into the Georgia HMO, you could think of sales force like that, too, and we've been very active in the first half of the year on the sales force expansion plan.

Sure. Absolutely clear on that. I was just trying to get a sense of whether we thought that was-- and I knew we expected it, but whether it was a 50 basis point impact or if there was any sort of way to quantify the impact of those 3 items.

It's probably more than what you just said. I can say that.

OK. That's very helpful.

Tom Gallucci, Merrill Lynch.

I had 2 questions. The first is just on the tax rate. It seemed a little bit lower and I was wondering if you could give any color there and if that's what we should expect going forward?

Brad?

Tom, this is Brad. We do have a lower effective tax rate. We have a deduction that's available to us this year and this year only, so we don't guide specifically on tax rate. It's included in our EPS guidance, but it is one thing that's this year and this year only a deduction that we have available.

OK. Then the other one was just trying to get a little bit more understanding of the volume trends in the quarter. I think in the first quarter you talked about the Easter holidays creating a more difficult comparison given the timing this year versus last. Would it have been a little bit easier this quarter from that perspective?

Probably. Yes, I think that the fact that-- that the religious holidays were-- at least Easter was in March, that probably helped us a little this quarter.

OK. And then you were talking about a couple of the specific new states with respect to WellPoint. Any way to size those in terms of opportunity there? Georgia and Nevada?

I think probably what we will do -- not today, because the contracts don't kicks, Tom, until October 1st -- as we get near guidance for next year and we're into those contracts for a period of time, we'll probably try and tell you the impact of those quite honestly, just like we told you the impact of the loss of the Blue Cross/Blue Shield of Florida. So I think we need to balance ourselves, but I think we need a little more experience.

I could add that in the Georgia, that was particularly good news for us because we have been in Georgia now since very late last year, early this year, and we've built an infrastructure down there and, as you would expect, regardless of the kind of pricing you're getting you have to build the infrastructure and that infrastructure has been built to support HMO capitated kinds of business. Now we, hopefully, in October 1st, we'll get the opportunity to get fee-for-service business attached to this. So we're pretty excited about that.

A lot better leverage, I guess, is what you're implying on the cost structure?

Right.

And then just in terms of looking at the volume, still, what would-- can you guys estimate the impact or the contribution of the acquisitions on volume in the quarter?

Here's what I would say and I'll try and only say it once so that everybody on the call hears. Because I figured that question would come pretty quickly.

If-- if I took -- and I don't want to use an improper word. But if I took all the noise out of LabCorp -- and to that I mean taking out USL, taking out Esoterix and, Tom, taking out the Blue Cross/Blue Shield loss which, in terms of volume was fairly significant to this company, take out the Midwest that, as you may recall, we talked about that also, two large losses that have impacted on our volume and helped our price during the course of the year -- I think we're probably growing this company in the range of 6% and I think it's probably in the high 2s in price and in the low 3s in volume and somewhere in that kind of a range.

Adam Feinstein, Lehman Brothers.

Just wanted to ask a couple things. Number one, just on the cash flow statement you mentioned the cash tax payments being up by about $48 million. I want to get some more color there. Were cash tax payments abnormally low in that same period last year? And just wanted to get some more color.

And then just second question, you mentioned $30 million in synergies earlier. I wanted to make sure I heard that right and I wanted to see how you were getting there. Thank you.

OK. I will answer the synergy question and I'll ask Brad Hayes to answer the-- the tax question.

In terms of synergies, Adam, the way we look at it now, we have created a new LabCorp and that LabCorp pretty much was-- was begun to be created with our acquisition of DIANON. So if we go back a couple of years, we bought DIANON because we emphasized our desire to be in cancer. We've now added to the DIANON acquisition, US Labs -- heavily flow cytometry and cancer testing -- followed by Esoterix, heavily flow, cancer, as well as several other areas like endocrinology and coagulation and clinical trials.

Now we really need to build the organization around this strategy and as I-- as we look at the organization, because of potential redundancies throughout the system now -- and that would mean throughout USL, throughout Esoterix, throughout LabCorp -- we believe we can reduce the run rate on expenses going into the year 2006 by $30 million.

Now-- now it will take a couple years to get there, because these are synergies. But we-- our goal, to make clear, that we can reduce our expenses by $30 million and I think we said, Brad, over a 2-year period, right?

Right.

And, Adam, this is Brad on the taxes. It was fairly similar in the first quarter. In the second quarter it did step up to the $48 million more and we've had in our models all along we're going to be paying more cash taxes this year compared to last year, in general. So it's really ramped up in the second quarter and continues for the rest of the year.

OK, but--

And it is included in our forecast and models.

OK, great.

Kemp Dolliver, S.G. Cowen & Company.

A couple items. With the Esoterix and US Labs acquisitions, what's your Medicare mix or government mix now?

Hold on one second, Kemp. I'm going to guess it's probably in the low 20s, but it may be a little higher. Did you have a second question, Kemp, while they're looking at that?

Sure. There's been some commentary in the trade press about a company in Texas coming up for sale. You all, obviously, have a large presence there. Do you think you're precluded from looking at significant geographic acquisitions of that nature? Or is that-- or are you just done with acquisitions now, given the 2 deals you've done this year.

I'll ask Brad Smith to answer that question, Kemp. OK. The question, Brad, was there's a large lab that Kemp feels in the South, Texas, that rumors suggest is for sale. Could we be precluded from that because of anything?

I'm sorry. If-- Assuming-- If I assume-- I think I know what you're talking about.

Starts with the letter C.

Pardon me?

It starts with the letter C.

Yes, I think I knew that's what you're talking about. I-- knowing how competitive that market is for more than just one company, I don't think that we would be precluded from an anti-competitive or anti-trust perspective.

Now, having said that, Kemp, we don't discuss at all any of our activities related to acquisitions.

No, that's fine.

Medicare?

Yes, Kemp, this is Brad. On the Medicare/Medicaid mix it hasn't changed the number meaningfully. USL was kind of DIANON-like in that mix comparison. Esoterix was a little lower than that, so just given their size, they really haven't moved the needle for that much for LabCorp in total.

OK. So only a slight increase?

Very slight.

James Starr (ph), Hedwe Crown and Company (ph).

Tom, in the past you-- in discussing the retention initiatives you talked about how there were hard metrics, which, of course, were not shared. My question for you is as you've traveled down the road on implementing some of these things, do you have a sense as to whether your original estimates of what you might be able to achieve with respect to retention rate changes are better than you originally expected or, perhaps, worse?

Jamie, we're 6 months into the process. I see a monthly report related to metrics and I think it's fair to say, while early, it's pretty much right on what we had predicted.

OK.

But it is early in the process.

[OPERATOR INSTRUCTIONS] David Lewis, Thomas Weisel Partners.

Just on Cytyc here, actually 2 questions. First, that 12% you quoted, where would you like to see that at the end of the year? And I guess the second question, Tom, would be you're offering Cytyc for customers to better test the imager product. One of your competitors is, obviously, not offering it. At what point can this actually become an opportunity for you to up sell customers or take share in certain markets because you're offering a higher quality test versus someone who's not?

I really haven't thought very much, David, about where I expect it to be at the end of the year. If you look at it, kind of what it's done, now that it's national -- see, what we've done is we've ramped it up. So it was only in the May-June period that it became national. So I do hope that we see the kind of increases that we've seen in the first half of the year continue in the second half of the year, but I don't think I'm prepared to give a specific estimate, because I really just haven't thought about it.

In terms of this product, we are offering it in all markets throughout the country now. We believe the product that we are offering provides consistently better quality than anything else on the market and that's what we're telling our customers. We are emphasizing presenting this product to our current customers and now we're beginning to talk to, hopefully, new customers about the availability of this product.

So we are nationally presenting it. We are presenting it to both our current customers and potential new customers and we'll just see how-- how it works.

OK. And then just another question for you and then maybe one more for Brad. But in terms of this sale force ramp, Tom, you've given us some detail here before, but as we-- it's a pretty dramatic increase in the sales force and I guess I wanted to know if you can provide some color in terms of, these reps, are they being added specifically to focus on managed care? Are they being added more with sort of a geographical focus? Or are they being added more to focus on a particular product offering like oncology or pathology? Could you kind of give color around those 3 items?

Sure. Well, first, of course, we've added sales people from both our new companies -- USL and Esoterix -- that have a particular focus on what those companies do well, which may be cancer or flow cytometry, which, of course, is cancer, or endocrinology or coagulation or clinical trials, for that matter.

I would say, generally speaking, the sales force ramp up, which is very big in the second quarter of this year, was directed at our retention efforts at LabCorp, which is to increase our presence with our current customer base of core testing doctors. That's heavily focused in the OB/GYN, internal medicine, family practice area. So the great effort on LabCorp's part in the expansion of our sales force is to support our core testing business.

OK and then just last question for, I guess maybe, either Brad, but on Esoterix's guidance, you sort of took up the company guidance for the company mostly because of Esoterix. If you looked at sort of the theoretical revenue of Esoterix as a private company and sort of reverse integrated it appears that the guidance should have come up a little bit more and I'm wondering, does that reflect simply conservatism, some attrition at Esoterix or some other volume offset within the core business?

David, this is Brad. I think while it's a good exercise to go at what people think numbers were for a company, we do have lost business as a result of our acquisition of that company. So we estimate that. I think Tom spoke about the way we think the business is growing, without all of those factors, so I'll just fall back to what he said on that.

Bill Bonello, Wachovia Securities.

On Esoterix, what's your plan in terms of-- right now they're operating out of a number of different facilities. Down the road is that a possible synergy opportunity, as well? Is there a possibility to consolidate some of those labs or is the business structured such that it's really most efficient out of separate facilities?

Well, I think, generally speaking, generally speaking, Bill, as it relates to the whole network, now, we do see opportunities for consolidation of facilities throughout the system, throughout the LabCorp system now. And I think what it also does is it provides us that added opportunity where both Esoterix and USL have strong capabilities in the western part of the United States to look at all of our facilities and figure out where business should be sent. So we could add in to Esoterix, we could subtract out of Esoterix and I won't go any further than to say that in all areas we're looking for efficiencies.

OK. And then just as a reminder, it's been, what, several years, really, since consolidating facilities has been a driver for you. Is that correct?

It's been a while.

OK, great.

It's been since-- really since Dynacare, Bill, so if you go back to Dynacare and I can't remember whether it was '01 or '02, that's really where we closed an awful lot.

Gary Lieberman, Morgan Stanley.

In prior quarters you've talked about in-sourcing and seeing some hospitals keep an incremental amount of some of the esoteric tests. I think you might have touched on that, but could you give us a little bit more detail in terms of what you're seeing on that front?

Sure, Gary, it really hasn't changed. And I like to start by kind of talking about the big picture. This is, say, a $40 billion business. Half is hospitals, say $20 billion. I think of the $20 billion that's out there at hospitals, LabCorp has a legitimate opportunity to probably sell into $5 to $6 billion of that. The rest is hospitals doing what they want to do.

In terms of our strategy with hospitals, our strategy, really, is heavily focused on getting the esoteric business out of those hospitals, the-- the business where they don't have the equipment or maybe even the skill base to do those kinds of tests. I haven't seen a change. I think you will see, periodically, hospitals that make a decision to exclude LabCorp or other major labs that they've used and take it inside. On the same side-- same time you'll see other institutions decide that they want to outsource all of theirs.

So it's a real mixed bag in the hospital market, but I have not seen, in years now, any dramatic shift in the way that they want to do business.

There are no further questions at this time, Mr. Mac Mahon.

Great. Thank you very much and I wish everybody a happy day. Take care.

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