Labcorp Holdings Inc (LH) 2005 Q4 法說會逐字稿

Welcome to the Laboratory Corporation of America 2005 fourth quarter results conference call. During the presentation all participant lines will be in a listen-only mode. Afterwards there will be a question-and-answer session. [OPERATOR INSTRUCTIONS]. As a reminder this conference is being recorded Thursday, February 16, 2006. I would now like to turn the conference over to Tom Mac Mahon, Chairman and CEO. Please go ahead, sir.

Thank you, George. Good morning and welcome to LabCorp's fourth quarter conference call. Joining me today from LabCorp are Brad Smith, Executive Vice President Corporate Affairs; Brad Hayes, Executive Vice President and Chief Financial Officer; Ed Dodson, Senior Vice President and Chief Accounting Officer; and Scott Fleming, Vice President Investor Relations. Brad Hayes will provide a review of our fourth quarter and year-to-date financial results. I will then update you on achievements in key strategic areas during the quarter and discuss 2006 guidance. And Brad Smith will then cover a few anticipated questions. I'd now like to introduce Brad Smith, who has a few comments before we begin. Brad?

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 February 16th 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 February 16th 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 fourth quarter results are as follows: Revenues increased 7.3% to $822.3 million. Price increased 6.3%, and volume increased 1%, compared to the fourth quarter of 2004. During 2005, there was one less revenue day in the fourth quarter than during 2004. On a per-day basis, volume increased 2.6% in the fourth quarter of 2005, compared to the fourth quarter of 2004. During the fourth quarter, the Company recorded pretax restructuring and other special charges of $6.9 million in connection with the integration of US LABS and Esoterix, as well as losses realized as a result of Hurricane Katrina. Before the charges, earnings per diluted share increased 15.5% to $0.67 for the fourth quarter, compared to $0.58 in the fourth quarter of 2004. The charges negatively impacted EPS by approximately $0.03. EBITDA was $199.5 million, or 24.3% of revenues. Operating cash flow for the quarter was $161.2 million. During the quarter, the Company repurchased $387.8 million of stock, representing 7.5 million shares, and DSO for the quarter was 54 days.

Our year-end results are as follows: Revenues increased 7.9% to $3,327,000,000, price increased 6.8%, and volume increased 1.1%, compared to 2004. During 2005, there was one less revenue day than during 2004. On a per-day basis, volume increased 1.5% in 2005, compared to 2004. Before the restructuring and other special charges in the third and fourth quarters, and a second quarter nonrecurring investment loss, earnings per diluted share increased 14.3% to $2.80, compared to $2.45 in 2004. EBITDA was $845.8 million, or 25.4% of revenues. During 2005, the Company generated operating cash flow of $574.2 million. Also during 2005, the Company repurchased $589 million of stock, representing 11.6 million shares. Reducing our shares outstanding at the end of 2005 to approximately 126.5 million. We are very pleased with our performance during the fourth quarter, and for the year 2005. We believe that our performance is due to sound planning, attention to cost control, and the execution of a focused strategy. Now, I will turn the call back over to Tom, who will provide an update in connection with the progress the Company is making towards achievement of our key strategic initiatives.

Thank you, Brad. First of all, I would like to take a moment to talk about LabCorp's generation and use of free cash flow in 2005. During 2005, LabCorp generated $480.6 million in free cash flow. As you know, our stated priorities for the use of excess cash and free cash flow are, first, to use free cash flow to help grow the Company by pursuing our strategic objectives, including acquisitions and licensing opportunities. And second, to continue to repurchase our shares under our Board-approved share repurchase programs. An accomplishment of our first priority, we completed and funded the acquisition of US LABS and Esoterix during 2005 using free cash flow. Also during 2005, we repurchased a total of $589 million of stock, representing 11.6 million shares. We accomplished this significant repurchase activity with a combination of $339 million of free cash flow and $250 million in financing to the recent issuance of Senior Notes. The Senior Notes offered was used to fund the $250 million overnight share repurchase transaction that we announced in early December. This transaction allowed us to complete a significant share repurchase at one-time, while maintaining our investment grade credit ratings and a solid balance sheet. Our first priorities for the use of free cash flow for 2006 remain unchanged. We will continue to look first for strategic investments that will help grow the Company. Then we plan to continue to repurchase shares of LabCorp stock under our Board-approved share repurchase programs. The generation of free cash flow is made possible through focused efforts towards the achievement of sound, strategic plan. 2005 we continued to build on our strengths in science and made significant progress in expanding our managed care relationships. Progress made during 2005 in these key focus areas will allow us to continue our growth and profitability in 2006 and beyond.

I would now like to review several of these important accomplishments from the fourth quarter. Business Integration Activities: During 2005, we significantly added to our leadership position in cancer and specialty testing through the acquisition of US LABS and Esoterix. These successful acquisitions, in addition to our earlier acquisition of DIANON, have made LabCorp the leader in anatomical pathology and esoteric testing. A clear indication of our progress in growing our share in these strategically important testing categories, is how our revenue mix has changed over time. At the end of December, approximately 35% of our revenues are now in the genomic, esoteric and anatomic pathology categories. By comparison, just three years ago at the end of 2002, 23% of our revenues was derived from these testing categories. As I have stated previously, the acquisition of US LABS, Esoterix and DIANON bring us not only expanded capabilities and anatomic pathology and other esoteric testing, but also the opportunity to provide these services in a more efficient manner. In connection with these acquisitions, LabCorp's stated objective is to achieve cost reductions of approximately $30 million on a pretax basis by mid-2007. During the third and fourth quarters, we have made significant progress in our efforts to integrate these acquisitions and to eliminate any redundant functions and costs wherever they may exist throughout the combined organization.

Cytyc ThinPrep Imaging System: We continue to experience rapid growth in the adoption of the Cytyc ThinPrep Imaging System as the Pap testing method of choice of our physician clients. We expect the adoption rate to continue to increase as more physicians become aware of this service, and the benefits that it provides to them and to their patients. This new service offers both enhanced quality to our clients, and their partners, and their patients, as well as enhanced efficiency to our labs. By the end of the fourth quarter, the ThinPrep Imaging System was being requested for approximately 31% of all liquid-based Pap smears ordered. On an annualized run rate basis we are now performing approximately 2.3 million image-guided Pap tests versus essentially zero at the end of 2004. This significant adoption rate clearly indicates that when given the choice, physicians recognize the benefits to their patients of this Pap screening technology advancement. We are pleased with the continued increase in adoption, and view this as a key growth driver in 2006.

HPV Testing: It is well-documented that human papillomavirus, or as we call it "HPV" is the cause of almost all cases of cervical cancer. HPV testing uses advanced molecular technology to determine if one of the HPV virus types that causes cervical cancer is present. HPV testing has been incorporated into treatment guidelines by ACOG and other organizations as an important cervical cancer screening tested for women over 30 years of age. While adoption of this testing as a primary screening test has been relatively slow, we've experienced a growth in both reflex and primary screening HPV testing of approximately 77% in the fourth quarter of 2005 versus the fourth quarter of 2004. On an annualized run rate basis, we are now performing slightly less than 1 million HPV tests per year. As more physicians become aware of this testing as a primary screening tool, and its importance in the early detection of cervical cancer, we expect adoption of HPV testing to continue to accelerate.

Beyond these two important tests to focus on cervical cancer, we remain excited about other opportunities. For example, during the fourth quarter we announced the introduction of an enhanced HIV screening assay that can help identify newly infected HIV patients up to six weeks sooner than standard HIV antibody screening. Using a proprietary pooling of approach developed at our National Genetics Institute, this new test can be performed very efficiently on a large scale, resulting in cost savings to our customers versus competing testing methodologies. Also, during the fourth quarter we announced the availability of P450 Genotyping and Phenotyping Assays, using the Roche Diagnostics’ AmpliChip. P450 genes metabolize 40 to 45% of all prescriptions, including antidepressants, pain relievers, and cardiovascular agents. This testing identifies variance in the P450 genes that can help healthcare providers select optimal drug doses for their patients and avoid potentially serious drug intersections. This testing is a significant tangible step forward to a truly personalized healthcare and we expect it to grow significantly as physicians and managed care and other payers begin to understand its value to patient care.

In January '06 we announced that we had entered into an agreement with Seryx to offer their Signature Genetics drug response interpretation service. This service can be used in conjunction with clinical and CYP450 genetic test information, and it is intended to help physicians take the trial and error out of selecting the most appropriate drug and establishing the most effective dosage for a given individual. The end product of this service is a comprehensive actionable and personalized report that will help the physicians making dosing and treatment decisions, that will have the greatest impact on improving patient health. We have not included specific volume information for P450-related testing. Volume-to-date is low. However, internal and external expectations are that there is a significant market over time for P450-related testing. We at LabCorp are well-positioned for the arrival of this market. These activities clearly demonstrate that we remain focused on identifying and commercializing novel testing technologies where we see a diagnostic need. This process can be both challenging and time-consuming. However, we remain optimistic about the long-term prospects for the introduction of new testing technologies that will improve patient care.

Now, let's move to Managed Care. In addition to identifying and commercializing new testing technologies, our relationships with managed care is a key strategic focus for LabCorp. Expanding and strengthening our relationships with our managed care partners now will provide revenue and profitability growth for the future. First, I would like to summarize our relationship with WellPoint as it is expanded during 2005. As I mentioned during our third quarter conference call, beginning in October, we became the exclusive national laboratory provider for WellPoint's PPO fee-for-service plans in Georgia, and for their HMO and PPO fee-for-service plans in Nevada. Additionally, during the fourth quarter we were awarded the exclusive national provider contract for WellPoint's PPO and HMO in Colorado, effective March 1, 2006. We are very excited about these additional opportunities to service WellPoint's members. And we are pleased with our expanding relationship with WellPoint. We expect this partnership to continue to expand through the awarding of additional exclusive arrangements, and you should expect to hear more about these additional arrangements during future conference calls.

We are equally excited about our partnership with United Healthcare. We continue to work closely with United as they evaluate different options for achieving their objective of reducing their overall spending on lab services. We believe we have all of the capabilities necessary to be a strategic partner in helping them achieve this objective and are excited about the opportunity to expand our relationship with United. Whether working with WellPoint, United, Aetna, Cigna or any of our managed care partners, our objectives remain the same; to be a valued business partner and helping managed care companies reduce costs and improve patient care. We believe we are well-positioned to realize revenue growth for LabCorp while delivering favorable economics to managed care companies. This allows for a strong foundation of cooperation and alignment at the very top levels of these organizations.

Over the past year, we continued to demonstrate this partnership approach through three major initiatives. First, by helping managed care companies understand how we can reduce their overall lab spend, not through a reduction in the rates paid to LabCorp, but by helping to limit the amount of work performed and build by noncontracted or other healthcare providers. Control of this kind of leakage remains a major theme of cost-reduction opportunity for managed care companies. I believe a good example of this is United Healthcare's RFP where their stated objective is a reduction in their overall lab spend through a lab network management model. Second, by providing managed care companies with unique value-added scientific capabilities, and traditional clinical testing and anatomic pathology services, as well as in nontraditional areas, such as, wellness. A good example of this is our relationship with WellPoint where we are working with them on DNA-based wellness testing and locating one of our lab facilities in one of their wellness centers. Third, by delivering unique connectivity and information aggregation and analysis solutions that will help our managed care partners deliver value, derive -- excuse me, derive value from the wealth of information contained in laboratory results data. A good example of this is the patient outcome management service we are currently developing for our large managed care partners.

I consistently talk about our relationships with managed care partners, and I will continue to talk about this because our success in executing on a managed care strategy has been possible through a partnership approach. Providing solutions that make our managed care partners successful in turn makes LabCorp successful. In summary, LabCorp continues to be successful by following a simple and consistent business philosophy, select the most important 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 those goals. We believe that by applying this simple philosophy to our three strategic focus areas, scientific leadership, managed care, and customer retention, we will continue to deliver outstanding results.

Now I would like to review our guidance for '06. Before the required change in accounting for stock-based compensation, guidance for 2006 is as follows and assumes completion of the $500 million share repurchase authorization announced on December 7, 2005. Compared to 2005, LabCorp expects 2006 revenue growth of approximately 6.5 to 7.5%. EBITDA margins of approximately 26 to 26.5% of revenues. Diluted earnings per share in the range of $3.15 to $3.25. Operating cash flow of approximately 600 to $620 million. Capital expenditures of approximately 100 to $115 million. We also expect net interest expense of approximately $47 million and a bad debt rate of approximately 5.3% of sales. Today we estimate that the implementation of the required change in accounting for stock-based compensation will have an EBITDA impact of approximately $25 million, and a diluted EPS impact of approximately $0.11. Now, Brad Smith will review anticipated questions and our specific answers to those questions. Brad?

Thank you, Tom. The first question: Can you provide some insight into your margins? Due to the investment in our sales force and call center consolidation, we knew that for a period of time our margins would be impacted. For example, our overall selling-related expenses increased by approximately $39 million in 2005 compared to 2004. 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 provide any details regarding your response to the United Healthcare RFP? As Tom mentioned in his remarks, we are excited about this opportunity and have responded to the RFP with several ideas that we feel would help them, United, achieve their objectives. We can tell you that we're in the second round of the proposal process and we continue to have meetings with United Healthcare. However, for competitive reasons, we will not discuss the details of our discussions.

Is there anything new on the reimbursement front? We continue to monitor developments on both the federal and state levels. As healthcare costs continue to rise we know that we need to remain on guard for reimbursement, as well as regulatory change that could impact us negatively. As you may be aware, Congress has recently enacted legislation holding the conversion factor for the Medicare physician fee schedule flat in 2006. While this and the previously announced freeze and flow cytometry-related RVU is not the outcome we had hoped for, it is beneficial compared to the previously legislated 4.4% reduction to the conversion factor. The impact of this legislation and the freeze and flow-related RVUs is included in our guidance for 2006. We are aware of suggestions designed to limit the number of services that can be provided on the same date of service. We feel that these suggestions are misguided and medically inappropriate and we'll continue to monitor this situation closely.

What impact do you think the president's budget proposal will have on your business? We have been focussed on the possibility of the adoption of competitive bidding for the last few years and feel that past efforts have not adequately considered issues, such as, patient care and access. As you may know, Congress has directed that a competitive bidding demonstration project be developed and we agree that we should participate to help evaluate competitive bidding. However, we feel that the demonstration project will show that competitive bidding is not in the best interest of Medicare beneficiaries or the Federal Government. We also feel that the current demonstration project should be completed and evaluated before the Government implements any broader scope competitive bidding requirements.

What are your thoughts regarding the market for acquisitions? Do any attractive candidates remain? The clinical lab industry remains highly fragmented and consolidation will continue. We remain focused on identifying acquisition candidates that further our strategy of strengthening our scientific leadership and enhancing our national core infrastructure. Our acquisitions over the past several years have further differentiated LabCorp from others in the clinical lab industry by significantly enhancing our capabilities in the high-value, high-margin, esoteric testing arena.

Can you provide some additional insight into the next steps that may be taken to address the FDA's letter regarding EXACT's PreGen-Plus test? We don't have anything new to report except that we plan to meet with the FDA to gain an understanding of their position and work to ensure that this medically beneficial testing is available to patients in a manner acceptable to the FDA.

Do you feel that the FDA has changed its position regarding lab-developed tests? While there is clearly more activity at the FDA related to the clinical laboratory industry, we do not believe that this indicates a change in the FDA's position regarding regulation of lab-developed tests.

What is the status of the Metabolite case? This case is to be argued at the U.S. Supreme Court on March 21st. While we cannot predict the outcome, we are encouraged that the Court agreed to hear the case, and we are hopeful that the Court will reverse what we feel is an incorrect ruling by the lower Courts.

Are there factors that impact your business quarter-to-quarter? While we do not provide quarterly guidance, we'd like to point out that certain factors do influence earnings between quarters. For example, our new arrangement with WellPoint in Colorado becomes effective in March and will continue to ramp-up during 2006. Also, the earnings impact from the integration efforts that Tom mentioned earlier in the call will build as the year progresses. And finally, the EPS impact of our remaining open-market share repurchase activity will also build throughout 2006. Now, I'd like to turn the call back over to Tom.

Thanks, Brad. We are very pleased with our 2005 results. Investments made and relationships built during 2005 position us well for significant growth in 2006 and beyond. We remain fully committed to our strategy of leveraging our core national infrastructure to deliver industry-leading scientific expertise and excellence in patient care to physicians and their patients. Thanks for listening, we're now ready to answer any questions you may have.

[OPERATOR INSTRUCTIONS]. Our first question comes from the line of Adam Feinstein with Lehman Brothers. Please proceed with your question.

Hey, thank you. Good morning, everyone.

Good morning, Adam.

First question, that just would be on the volumes, just wanted to get some more color there. I know you guys annualize the negative impact from the Blue Cross contract back during the third quarter, so I just wanted to see in terms of what was driving volumes in on the quarter and just how much did the hurricanes impact volume growth in the quarter?

Adam, I'll turn that over to Brad. I think our volumes in the fourth quarter on a per-day basis were up 2.6, which does show progress compared to the other quarters. Hurricane did impact Will -- there was one in October, Wilma, that did have an impact on us in Florida. Brad, why don't you speak to that.

Adam, Brad Hayes. One other thing that is still weighing in 2005 that we'll annualize in 2006, and we talked about it in early 2005, was the loss of a low-priced contract in the hospital contract in the Texas market. So that's one thing that was still an impact in 2005 that, again, will annualize in early 2006.

In terms of weather, we had at our last call, anticipated some lingering impacts from Katrina and Rita. And then I think on our last call, Wilma was actually out there in the Atlantic, but we weren't sure what was going to happen at the time. All-in-all, weather cost us probably $0.01 to $0.02 more in the quarter than we anticipated on our last call.

Okay and --.

I don't have that broken down to the volume and price component, but it was definitely an impact in the fourth quarter.

Sure. Okay, great. And just my follow-up question would just be on the competitive bidding. Do you have anymore details or senses from your lobby in terms of the timing, the budget was very vague in terms of when a demonstration project would potentially start. Do you have any sense -- is that something you would look for in 2006 or do you think something would happen in 2007 with a demonstration project related to competitive bidding?

I'll ask Brad to answer that, he's pretty close to it, Adam.

Hi, Adam. If you look in the President's budget proposal, and as you may know, the President's budget proposals, historically, they're sort of an inside-the-beltway strategy, things that go on, as what is proposed and what actually gets adopted by Congress. But if you look at even their proposal, it doesn't show any savings until 2008. If you look at the expected time frame for the congressionally mandated demonstration project, there was an expectation that it would take longer than that. Currently, the expectation is to complete that project and you would anticipate to consider and review the results and then to come up with a legislative recommendation would, again, be beyond -- clearly beyond 2006, and I would expect 2007. So I think it would even be beyond 2008 before you'd see something.

But, again, we feel strongly that once they -- that the demonstration project will demonstrate that clinical laboratory services don't lend themselves to this type of a competitive bidding project like a durable medical equipment and that the Government, in fact, won't save money and patients will, in fact, be harmed. So we're hopeful that they won't adopt it.

Okay. And then I just have one final question, and thank you for the detail there. Just with respect to -- you had mentioned the -- well, two things. One, the United Healthcare RFP, are you guys hoping to hear back something soon or do you think that will be something that we won't know anything about until later in the year? Then you had mentioned the WellPoint Colorado business coming on throughout 2006, but I just wanted to make sure I had the specific start date correct. Thank you.

The start date for WellPoint in Colorado is March.

Okay.

And I really would prefer not to comment further on United. I think we've given you everything we know, and we're continuing to talk to United.

Understand. Thank you very much.

Our next question comes from the line of Ricky Goldwasser with UBS. Please proceed with your question.

Yes, hi, good morning.

Good morning.

I had a couple of questions. First, just a follow-up on Adam's question regarding the impact of the hurricanes on the numbers. Just starting to reconcile the different data points. I think that back in the third quarter when you provided the financial guidance for the fourth quarter you said that the EPS impact is going to be about $0.02, and today when you reported, I think you said that you had some special charges of about -- the impact amounted to about $0.03, and Brad now you mentioned that the cost was about $0.02 higher than what you originally estimated. So if you can just walk us through what's in continuing and what's excluded?

Yes, Ricky, this is Brad Hayes. One thing is that in our results today we reported a $0.03 impact from restructuring and other charges, and some of that are losses related to the hurricanes. Those charges would be for inventory losses, accounts receivable losses and those types of things. In the third quarter, we talked about the $0.02 from loss of volume, and that would just be reflected in our revenues being lower than they would have been otherwise without the Katrina and the Rita lingering effect. So that $0.02 is intact from the third quarter, and I estimate that we lost another $0.01 to $0.02 from Wilma on top of what we anticipated losing from Katrina and Rita.

Going forward, we don't -- we believe we're now through the lingering impact of Katrina and Rita, and that there is no lingering impact from Wilma. So if I look at, I believe, in the third quarter call we talked about volumes being impacted 1% from the lingering impact, I think they're impacted another 1% from Wilma, which we did not know about at our last call. So I think volumes in the quarter in total were impacted by 2%, due to weather.

Okay. No, that clarifies it. So basically, $0.03 to $0.04 of negative impact on the operating side from the weather, and then $0.03 just related to AR and inventory?

Yes.

Okay.

Well, and severance and others -- severance related to the integration activities are also included in the $0.03.

It's not all hurricane restructure. [multiple speakers].

Right, right, but that's -- okay. No, that clarifies that. The other question is around guidance, and again, if you talked about this before, I apologize for that. But just if you could walk us through the different components in guidance, again, back in the third quarter, flow cytometry, I think, was contributing about $0.05 to $0.06 reimbursement there at income and is expected, that was offset by the share buyback of the 250 million [block] that you've done in December, but now you're also including in guidance another 250 million that you expect to complete sometime in '06. So I guess just kind of what's in, what's out of the $0.10 of increase in guidance, what accounts for past and future share buybacks? And what is from just the strength that you're seeing in the business?

Ricky, this is Brad. I don't know if I can provide that kind of -- the breakout that you're looking for, other than to point back and say that in Brad Smith's comments, he said that we know now what the Medicare impact is that we were expecting at the end of the third quarter, so we did not get that. We obviously have completed the overnight share repurchase in early December, and that our guidance includes, back to Tom's comments about guidance includes the completion of the entire $500 million program, which was 250 overnight done in December, and the other 250 to be done open market that will, at the end of our quarters report progress on. So there's not much else to consider other than those things.

I guess I'm not quite clear why, kind of you changed it from the third quarter because I think in the third quarter and historically you did not include future share buybacks. And it just seems that the guidance is getting a little bit more aggressive there now that you're factoring future share buybacks. And I guess the thought there is, does that also include kind of future acquisitions?

Well, we typically include a small amount of acquisitions that we expect, nothing that I wouldn't classify as major. And I think if you look at our entire transaction in December it was probably, unlike anything we had done in the past. So I mean 250 of the 500 is done. I mean we know that. And then the other 250 we, again, assume in our guidance will be completed.

Okay. So we should basically take that as a signal assuming that that could be completed in the near-term?

We'll keep you posted as we report earnings throughout this year.

Okay. Thank you.

Our next question comes from the line of Bill Bonello with Wachovia. Please proceed with your question.

Good morning, I just have a couple of questions. Just on the quarter, if I did my math right, it looks like the tax rate ended up at, excluding the charges, at about 38.5% which was down a little bit sequentially and a little lower than we would have expected. So I guess my first question would be, Am I doing the math right? And the second question would be, If so, why was it low and where would you expect it to go?

Bill, this is Brad Hayes, you're doing the math right. And in the fourth quarter, our JV performed better, which is mostly made up of the Canadian asset that we acquired with Dynacare, it performed better. That brought with it in 2005, we had the dividend exclusion from foreign operations that we were able to take advantage of. So that helped in the fourth quarter. We don't guide on tax rate going forward, but it would be a good time to remind everyone that 2005 was positively impacted by that one-time dividend exclusion that does not go forward into 2006.

Okay, that does not continue. Okay. And do you have any estimate on how much of an impact that had?

It was most of what you saw in the fourth quarter, and again, probably most of what you saw in 2005 compared to prior years.

Okay, that's helpful. And then you talked about the ThinPrep ramp, are you getting any pushback at all from commercial pairs regarding making incremental payments for imaging slides?

Bill, this is Tom. We submit these as per the rules, and we, to date, have been paid in an appropriate manner from the -- from all of our providers, over all of our pairs.

Okay, so you're not seeing any change in that?

I haven't seen any.

Great. And then the -- on the medically unbelievable addeds, I understand you think their recommendations are inappropriate, as most people seem to. Can you give us any kind of an estimate of the impact that they would have if you're not successful arguing against them and they become implemented?

I don't know how much detail you want us to get into, Bill, but this concept of a medically unbelievable edit curtails what doctors can do and what they can order at certain limits. I wouldn't even begin to estimate the impact that something like that would have on LabCorp. I can only say that as an industry -- as a company and as an industry organization, and I think beyond the clinical laboratory industry, people are quite vigorous in their expression of their concern about the impact that this could have on doctors treating patients; well beyond clinical testing. So we have not done anything to estimate an impact of something like that.

Okay. And then just the final question, are there any large pairs besides United and WellPoint that are taking specific initiatives to control leakage in a way that maybe they haven't in the past?

Well, I think it's fair to say that the "big four," as I call them, United, WellPoint, Aetna and Cigna, all have expressed their concern about leakage. Obviously, United is clearer in some of the things they want to do, but I can assure you it's on the minds of all of the big managed care plans.

Okay. Are they actually doing -- are the Aetnas and Cignas of the world actually doing anything differently than they have in the past?

Well, they're encouraging laboratories, such as, LabCorp to make sure that we have appropriate coverage so they can be more -- they can be clearer with the possibility of ultimately denying payments to the non-par providers. Their approaches are more toward the lab to aggressively convince us to put more patient service centers in to have more coverage so at some point they can -- maybe they can take further action.

Okay, that's helpful. Thank you very much.

Okay.

Our next question comes from the line of Gary Lieberman with Morgan Stanley. Please proceed with your question.

Good morning, thanks. I was hoping you could give a little bit more detail around your revenue growth guidance for 2006, and it is specifically, in '05, the majority of the growth came from pricing, and I would guess that if some of the acquisitions anniversaried that the pricing growth would slow, which would indicate that you expect the volume growth to pick up? So if you would just talk about those two components in a little more detail that would be helpful.

Right, what I'm not going to do -- and we've been pretty clear on this now for the last year, we're not going to give guidance on volume and we're not going to give guidance on price because we see that -- we see the real possibilities, and the real issue here, How much can we grow revenue? Now, having said that, the health options contract had an anniversary -- anniversarized in -- if that's a word -- in August, right? So we saw some pick up in volume on a per-day basis in the fourth quarter. Our per-day basis, I believe, was 2.6. We also, during the quarter, continued to have lingering effects of Katrina and we had the impact of Wilma. And Brad has talked about those as being about a percent each. So, Gary, there's some information, number one, if you put that math together.

Then in January, we had another major loss from 2004 come up as an anniversary also. So the volumes, as it relates to that, are now neutralized because we're comparing year-to-year. So when you look at all this, you can do the math. Esoterix we acquired in May of 2005, USL we acquired at the end of January or the first couple of days of February 2005. So what you're seeing happening here is a reversal. You'll see the price come down to a more normal industry price level, and you'll see the volumes go up, probably in the range of what I described a minute ago.

Okay. What would you characterize this sort of a normal industry pricing growth level?

I think people are saying in the 1 to 2, 2.5% range.

Okay, great. Thanks a lot, that was helpful.

Our next question comes from the line of Bob Willoughby with Banc of America Securities.

Good morning. Tom, can you comment on your Canadian operations? We haven't heard much since you bought Dynacare a few years ago. How did they do in '05 and do you think the government will let you expand your presence there?

What a loaded question that is, Bob. [Laughter].

Wait until you hear the next one.

Wait for the next one? [Laughter]. Canada is important to us. We have done well in Canada. We continually make our numbers in Canada, which I won't tell you what they are. And we're happy with our relationship with the government in Canada. Our Canada business is called Gamma-Dynacare, it's a joint venture of which we own a certain percentage of. And, generally, we're very pleased with it. I don't have a clue if the government would allow us to expand our business up there.

What do you estimate your market share there is?

The only thing I could say is that it's a virtually capitated business up there. So it's a -- as the Government of Canada would think, it's a perfectly capitated business. They have -- it's a government program, the healthcare system, mainly in Ontario, where most of our business is, it's in Ontario. And historically, there's been three major providers of services to the Government of Ontario, and they, within the rules of Canada, divide it up amongst those three people in an orderly way.

Okay. That is helpful.

A consistent way -- I should say also orderly and consistent. It's pretty much dividing by three.

I guess the other area, you've expressed an interest in growing with the big four managed care plans and clearly two of the four of them have really made a push into New York here recently through acquisitions. This is not an area where you've traditionally been strong, Tom. I mean, are there deals -- or how do you get bigger in this market to grow with those customers here?

I think that's really simple. It's simple for me to answer the question, it's not very simple for me to implement the strategy. We will not be successful in the New York City market unless we secure a major managed care deal. To pro-LabCorp, given our competitive position in the New York City market, for LabCorp to build an infrastructure without the benefit of a commitment on a major managed care deal, would probably make no economic sense.

So all of our efforts over the past years, which have been unsuccessful to date, have been trying to get a successful major managed care company to give us an entry point into the New York City market. If we had that opportunity, we would build quickly a major infrastructure in the city.

Okay. Thank you, Tom.

Our next question comes from the line of David MacDonald with SunTrust. Please proceed with your question.

Yes, guys, just a couple of quick questions. First of all, can you -- Tom, can you talk a little bit about the expanded sales force? I know that a couple of things we were looking for was better customer service, decreased churn. As we go into '06, are you starting to see some of that? Has the churn started to slow? And I was wondering if you could give any anecdotal feedback you've gotten from either customers or physicians in terms of the traction from the expanded sales force? And then I just have a follow-up.

Well, Dave, a couple things, number one is, for the first time since we've been talking about this today we indicated that all of our activities related to sales, which would include customer services, account executives, salespeople, we increased by $39 million last year. So that was, I believe, the biggest single increase in our expenses for the year of '05. And we made our numbers with that major increase.

Customer retention continues to be a major focus in this Company. We continue to make progress in the area of customer retention. We measure that. We have programs and information systems. We have interactive systems in the doctors' office. So I'm not going to give out anymore information other than to say it's a slow, deliberate process, this whole area of customer retention. And it's an industry phenomena. It's not a LabCorp phenomena and we will continue to pursue it with vigor. We expect our guidance in the year 2006, we think demonstrates the productivity of the sales force that we have brought on in the last six to eight months. They need to be productive in the manner that we want them to be productive for us to make the numbers that we've laid out today.

And then, Tom, just one other follow-up, just on the earlier comments about the New York market. I would assume from a strategic standpoint, would it make sense to be very aggressive on a contract where you're willing to take a contract that is certainly maybe a little bit below margin that you'd normally go after because the importance of that market strategically would make sense longer term?

I'll -- having grown up in the New York area, Dave, and living in the Great State of North Carolina, I don't want the world to think that the only market that's critical to the success of LabCorp is New York City. We do pretty well and there's hundreds of millions of people that don't live in New York City. Now, having said that, I really can't talk about what we would do if we were ever put into that position. But we would be delighted to have the opportunity to have everybody on this call that's from New York to see a LabCorp milk box outside of a doctor's office just so you all could not ask that question anymore. So if we're given the opportunity, we'll try and figure out a way to do it.

Okay. Thanks very much.

Our next question comes from the line of Kemp Dolliver with SG Cowen. Please proceed with your question.

Hi, thanks, and good morning. Could you all give some color as to the drivers of the margin improvement in '06 versus '05? I imagine you're planning on leveraging the sales force expansion for one, but I just wanted to get a better sense of the other things you're looking to contribute.

Well, first, we annualize an awful lot. So we annualize a sales force expansion that, as we've indicated, cost us $39 million. So on a comparable basis, we will not have that kind of a significant increase. Secondly, we talked in our prepared comments about the $30 million expectation in cost reductions really that come from the combination of Esoterix, USL, LabCorp, and DIANON. And we are rigorous in our desire to do that. The other thing that we need to do in terms of margin expansion is we need to continue to shift the mix upward now, and it's a tougher number, but up beyond 35%. So that's really the main things that I think about in managing the Company.

We need to get those cost reductions out of the acquisitions, plus LabCorp. We need to get shift mix continuing to move. We need to make sure that our increases in cost this year are less than our increases in costs last year, and I'll call the old LabCorp. And we need to, we need to continue to figure out a way to reduce our bad debt. So there are the ways that we highlight here. Brad Hayes, I don't know if there's anything that you want to add to that.

I think you covered them all, Tom. And I'd just like to add, just the regular growth in the business, Kemp, because in 2005, we did late in the year and then again early in 2006, annualize some losses that I think are -- were drags on margin, and are going to help improve margin just in addition to what Tom said.

That's very helpful. In 2006, what is your Medicare mix look like given the change in the -- or the growth in the anatomic pathology test -- area in particular?

I'm going to estimate this, Kemp, and we'll have to get back to you on it, but I'm thinking that about 20% of our business is Medicare and Medicaid.

Okay.

But we'll kind of hone that because I don't want to - I want to make sure I'm right on that, I think it's in that range.

Okay, that's helpful. And the last question is, just to be clear as it relates to the guidance, you talked about how some of the activities you're engaged in will build up over the year in terms of their impact, but is it fair to say that still the historical seasonality of the business is still going to be the -- a dominant, the most dominant factor in driving your earnings pattern on a quarterly basis, and some of these initiatives you're doing will make some difference at the margin but not really disrupt your quarterly progression?

Kemp, this is Brad Hayes. I do think that the historical seasonality is normal, but I believe that some of the ramping that Brad Smith talked about earlier in new contracts and share repurchase activity will push some more of that then historically into the second half as compared with previous years. So if we didn't have those things going on, I think the historical patterns would be intact, but I think we've got some things that we'll build towards the second half.

And this is Brad Smith. I think what we're -- if you just took the normal, compared the old guidance to the new guidance and just spread it in the normal fashion, what we're trying to say is we don't expect to see it in the first quarter, much of the increase. But the rest of the seasonality, the fourth quarter being the weakest and all that, we do see.

That's very helpful. Thank you.

Our next question comes from the line of Eugenia Shen with Thomas Weisel Partners. Please proceed with your question.

Yes, hi. First, could you give us a quick update on the percentage completion of the call centers consolidation ? And then, have you seen any evidence of customer wins given your leadership with the ThinPrep Imaging System? Thanks.

We continue to reduce the number of call centers that we have. I don't have the exact number, but we reduced multiple, multiple call centers last year, and will continue to move over the next couple years towards our efforts to reduce it to two to three call centers. In terms of the second question was, Are there wins as a result of image-guided Pap?

Right, just competitively?

I'm sure there are. I don't have that information right in front of me, but we certainly have competitive wins in all areas, and I'm sure that the availability of this method has been helpful.

Okay, great. Thank you.

Our next question comes from the line of Steve Hamill with Piper Jaffray. Please proceed with your question.

Good morning. I was wondering, in terms of the decision to borrow 250 million to finance that last buyback, that took your debt-to-cap ratio up to 38%. Is that something you would consider doing again in the future to borrow to finance stock buybacks, or is this a high watermark right now for debt-to-cap?

Well, I think we'd consider anything. I mean, there's nothing we wouldn't at least consider. Whether we do it, Steve, I really couldn't comment. Now, Brad, do you want to comment?

Yes, Steve, I would just add, this is Brad Hayes, that back to what we say we want to do with our free cash flow, is grow our business, number one; and number two, buy back shares under our authorized program. So I think it would be just an assessment of annually or even more frequently of where we are and what opportunities are available to us. But it's very important to us that we maintain our rating, our credit rating, being investment grade. So I think it's just something that we continue to monitor and assess and see what the opportunities are to grow the business first and repurchase shares second.

Is there a target range for debt-to-cap that we should be thinking about for you guys?

I don't think -- I don't have a target in mind. But, again, if you look at your models and we do not do anymore, we would come down from where we are today, obviously, in some of the credit metrics. So I don't know that we would state a number that we're absolutely fixated on to be at.

Okay. And then the second question is with regard to Esoterix and US LABS, I was wondering if you could comment about the customer retention there, and if you have a sense as to whether there has been any significant attrition in those businesses since the acquisition?

Steve, the only significant attrition that I'm aware of out of those businesses have been twofold. One, where Esoterix was servicing large -- excuse me, was servicing clinical laboratories that were competitors to LabCorp, we lost most of that business, and we knew we were going to lose that business when we made the acquisition. So we factored that in. There are many -- because of the esoteric nature of Esoterix, they service some of the competitive clinical laboratories, and we predicted, and it did happen, that we would lose those customers.

Secondly, in the anatomic pathology area, we have all lost business to some of these new groups called "PODS" that we are doing our best to compete against. It's not a level playing field and we have real issues with these PODS, but LabCorp, USL, Esoterix, have all lost business over the past year to these PODS.

So nothing unusual, though, in your mind in terms of the rest of the customer base, more of the physician-based customers?

Yes. I mean, I don't like the pod thing, that's not usual but that's what's happening.

Okay. And then lastly, in terms of your comments on the P450 chip and the pharmacogenomics market, I was curious, Tom, you used the word "you're prepared for the arrival of that market." And my question is basically this: Do you think that market is going to arrive or is it something you're going to have to pull? Because my sense is that at this point pharmaceutical companies still are not going to encourage it, and I'm not sure that physicians really know what to do with it.

I think it's going to arrive, but I don't think it's going to arrive overnight. And I don't think it's going to -- we're going to snap our fingers and it's going to be a huge test. I think it is slowly going to be adopted as physicians get more information, read scientific papers. I do think at some point that this is a forward-looking statement. I do think at some point some drug companies will recognize that they need to educate doctors on the usefulness of these kinds of methodologies. But I do think as you suggested, it's going to be a slowly developing process over a period of time.

On the other side, these are appropriately priced tests that provide very useful information and we feel it's really important in our position in the lab industry, that we have these tests ready when they really start to take off. We don't have the experience to pull through, as you describe. We don't have the experience as a sales force to discuss those kinds of issues with physicians.

Okay. I appreciate that. Thank you.

I'll take one more question. If there is any.

Our last question comes from the line of Tom Galluci with Merrill Lynch. Please proceed with your question.

Thanks for letting me slip in there under the wire. I just had a handful of quick follow-ups. The first one, just to make sure I get some housekeeping right here, Brad Hayes, you mentioned the share repurchases before. That, obviously, you had the 250 overnight, and there was 500 in that total authorization. You did 300 in change so far. Did that extra over the 250 eat into the rest of the authorization or was that from a prior authorization that I'm kind of forgetting about?

I would think of it in just terms of total authorizations, so I don't know that we inventory them -- talk about the way they're inventoried.

How much is left, I guess is, at this point?

Tom, we don't give our progress under those until we report the next quarter.

No, I don't mean as of today, I mean even as of the quarter. So the 388 or so during the quarter, what was the total authorization then so I can just get back into what was left as of the end of the quarter?

I think combined, if we looked at -- because we had an active one before December 7th, and then the December 7th, 250, we'd be looking at 250 to 300 remaining at the end of the year.

Okay. That's perfect, I just wanted to see where we are on the old one versus the new one. And then, I guess in some of the prepared remarks you mentioned enhanced margin potential in the future. Obviously, it's a high fixed cost business so there should always be some element of margin expansion there on the topline growth. Where are we in terms of potential longer term? Because the factors that you list to see improvement in '06, anniversarying a sales force expansion, getting more synergies from the acquisitions, some of those are kind of -- they anniversary at some point. So what should we expect long-term for your ultimate margin potential?

Well, I think, Tom, and I've said this for a couple years, and we've been in the 24 to 25% range, unless we get our mix shift up into the 40 to 45 to 50% range, the only place we really can go to expand margin is by reducing bad debt, in my mind. So I don't think you should be putting into your models that we're going to go from 26 to 27 to 28%. I think we're -- without a significant -- a continued, let me say, significant mixed shift, we're talking about margins in the 26 to 27% range for this Company.

Great. And then the final question, just coming back to the competitive bidding, I understand your hesitancy about the concept. But just assuming for a second ultimately something does happen there, I guess people seem concerned about it, but it seems to me that as a larger player with scale at the end of the day, you would probably have an advantage. Is there something else that we're missing should it ultimately come to fruition?

Yes, number one, let me make it clear, Tom, that we don't like it. We think it impacts on the quality of the delivery. We think it impacts on the logistics in terms of how you get testing done. We will vigorously, vigorously oppose this and we will present to legislators why this makes no sense. At the end of the day, which we still think is years away, if we have to participate, I guess we have to participate. As we do with other big, big customers, right?

And then just in terms of -- I mean just conceptually, I understand you don't like the concept, but if it were to happen, it would be wrong to think that a bigger lab with bigger scale should be in a position to compete effectively in a bidding-type situation?

I think, Tom -- this is Brad -- I think the question is, part of the reason that we don't think it's in the best interest of patients or Medicare is because when you actually design the system often it's not what you would think of as a truly competitive bidding situation. The rules and -- it becomes a -- often a very bureaucratic situation. I think what you're saying, you can't disagree that we think what we can -- we think we can effectively compete if we're given a fair chance to do it, no matter what the model.

But we don't think -- we think the best thing for patients is take advantage of the free market system. Don't let Medicare patients be treated the same as all other patients and get service determined by who the best service providers are in the market. So we -- I can't disagree with what you say, but we feel so strongly that it's not in the best interest of patients or the business, that we don't even want to say that we're taking as a hypothetical that it's going to happen.

Okay, fair enough. Thanks a lot.

Thank you all, and I wish you a good day. Bye. Thank you, George.

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. Have a good day.