Labcorp Holdings Inc (LH) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Laboratory Corporation of America Holdings 2006 second-quarter results conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Tuesday, July 25, 2006.

I would now like to turn the conference over to Mr. Tom Mac Mahon, Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you and good morning. Welcome to LabCorp's second-quarter conference call. Joining me today from LabCorp are Dave King, Executive Vice President and Chief Operating Officer; 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 second-quarter and year-to-date results. Dave King will then update you on achievements in key strategic areas during the quarter. Then I will discuss updated 2006 guidance, and Brad Smith will cover a few anticipated questions.

I would now like to introduce Brad Smith who has a few comments before we begin.

Before we begin, I would 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 25 for replay information.

This morning the Company filed an 8-K that included additional information on our 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 25 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 2005 10-K and subsequent filings.

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

Thank you, Brian. Our second-quarter results are as follows. Revenues increased 5.9% to $903.7 million. During the second quarter on a per test -- per accession basis, price increased 4.1% and volume increased 1.8% compared to the second quarter of 2005. On a per test basis, price increased 1.5% and volume increased 4.4% compared to the second quarter of 2005. Earnings per diluted share increased 14.5% to $0.87 for the second quarter versus $0.76 in the second quarter of 2005, excluding the $0.02 impact of a non-recurring investment loss recorded in the second quarter of 2005. Excluding the impact of the required change in accounting for share-based compensation, earnings per diluted share increased 17.1% to $0.89 for the second quarter versus $0.76 in the second quarter of 2005. EBITDA was $247.1 million or 27.3% of revenues. Excluding the impact of the required change in accounting for share-based compensation, EBITDA was $252.5 million or 27.9% of revenue compared to 26.4% of net sales in the second quarter of 2005. Operating cash flow for the quarter was $128.5 million compared to $86.5 million in the same period of last year. At the end of June, the Company had cash and short-term investments of $202.3 million and had no outstanding borrowings under its revolving line of credit.

As a reminder, on September 11, 2006 holders of our zero-coupon subordinated notes could require the Company to purchase in cash all or a portion of their notes. In the event the holders decide to put the notes to us on September 11, we believe that we will be able to satisfy the obligation with cash on hand, borrowings available under the revolving credit facility and additional financing if necessary.

DSO at the end of June was 53 days. During the quarter, our bad debt rate improved to 4.8%.

Our year-to-date results are as follows. Revenues increased 7.9% to $1,782,200,000. On a per accession basis, price increased 4.7% and volume increased 3.2% compared to the first half of 2005. Earnings per diluted share increased 13.3% to $1.62 for the first half of 2006 versus $1.43 in the first half of 2005, excluding the $0.02 impact of a non-recurring investment loss recorded in the second quarter of 2005. Excluding the impact of the required change in accounting for share-based compensation, earnings per diluted share increased 16.8% to $1.67 for the first half of 2006 versus $1.43 in the first half of 2005. EBITDA was $470.9 million or 26.4% of revenues for the first half of 2006. Excluding the impact of the required change in accounting for share-based compensation, EBITDA was $482.2 million or 27.1% of revenue compared to 26.2% of net sales in the first six months of 2005.

Year-over-year margin expansion has been realized due to the leveraging of our existing infrastructure, reducing our bad debt rate and realizing synergy opportunities which we will discuss later in the call. Operating cash flow for the first half of 2006 was $307.1 million compared to $241 million in the same period of last year. During the first half of 2006, the Company repurchased $185.1 million of stock representing 3.3 million shares. We're pleased with our financial results for the first half of 2006.

I will now turn the call back over to Tom.

Thanks, Brad. I would now like to introduce Dave King who will succeed me as Chief Executive Officer on January 1 to discuss the progress the Company is making towards achievement of our key strategic objectives. Dave has played an instrumental role in the development and achievement of these objectives over the past several years, first as head of the strategic planning in our Esoterix and U.S. Labs business and most recently as our Chief Operating Officer. Dave?

Thank you, Tom. You may have noticed that Brad provided some new information about volume and price using tests as the measurement of volume. As we continue to refine our information systems, we continue to further develop our understanding of the importance of the number of tests performed when we evaluate our business. Much of the activity in our testing facilities is impacted more significantly by the number of tests performed rather than the number of accessions received. We have already begun to analyze our business based on test volume. While no unit of measurement is perfect, we feel that test volume is a more precise measurement of how our business is growing. Over the next several quarters, we will begin to speak less about accession volume and more about the volume of tests performed.

We continue to produce strong financial results through a consistent focus on the three key elements of our strategic plan -- scientific differentiation, managed care and customer retention. Our focus on developing what we believe to be the broadest menu of services in the industry, combined with our national service capabilities, makes LabCorp a key strategic partner for managed care companies that want to deliver consistent service to their members from coast-to-coast.

I would now like to bring you up-to-date on our progress with several strategic initiatives. First, esoteric test mix. As Tom has discussed on previous conference calls, esoteric testing makes a substantial contribution to earnings and is a key focus area for future earnings growth. Over the next few years, our goal is to increase our esoteric test mix to approximately 40% of LabCorp's revenues. At the end of June, approximately 35% of our revenues were in the genomic, esoteric and atomic pathology categories.

Second, business integration activities. During the second quarter, we continued to meet our internal expectations toward achieving targeted cost reductions related to the acquisitions of U.S. Labs, Esoterix and DIANON. As discussed on previous conference calls, these acquisitions brought us not only expanded capabilities in anatomic pathology and other esoteric testing, but also the opportunity to provide these services in a more efficient manner. LabCorp's stated objective is to achieve cost reductions across the entire organization of approximately $30 million on a pretax basis by mid-2007. We remain on schedule toward achieving these cost reductions.

In addition to our progress in achieving these cost savings, we have begun to combine the operational and sales and marketing aspects of these entities into a comprehensive cancer testing business. We feel that further implementing this strategy will be a key to growing this important business segment.

Third, Cytyc ThinPrep Imaging System. We continue to be pleased with the adoption of the Cytyc ThinPrep Imaging System by our physician clients. LabCorp offers a full menu of pap testing services, allowing the physician to chose which best suits the needs of his or her patients. We believe that the Cytyc ThinPrep imaging system delivers the highest quality results to our clients and their patients. By the end of the second quarter, the ThinPrep Imaging System was being requested for approximately 43% of all liquid-based pap smears ordered. On an annualized run-rate basis, we are now performing approximately 3.6 million image guided pap tests. 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. When given an informed choice, physicians recognize the benefit to their patients of this pap screening technology advancement.

Next, HPV testing. As you're likely aware, there has been a great deal of publicity surrounding the new vaccines for HPV or human papilloma virus, the cause of almost all cases of cervical cancer. Increasing awareness of HPV as a cause of cervical cancer and incorporation of HPV testing into treatment protocols continues to drive growth in our HPV testing volumes. Using advanced molecular technology, HPV testing can determine if one of the HPV virus types that causes cervical cancer is present.

We have experienced a growth in both reflex and primary screening HPV testing of approximately 64% in the second quarter of 2006 versus the second quarter of 2005. On an annualized run-rate basis, we are now performing more than 1.3 million HPV tests per year. We expect continued acceleration as more physicians become aware of this testing as a primary screening tool and its importance in the early detection of cervical cancer. The introduction of HPV vaccines is not expected to change the need for regular examinations and recommended tests for cervical cancer such as periodic pap and/or HPV tests in the foreseeable future.

Beyond these two important women's health-related tests, we remain excited about other opportunities. We continue our focused efforts to educate our physician clients about advanced testing related to cardiovascular disease. Cardiovascular disease is the leading cause of death in the United States, outpacing all forms of cancer. With recent advances in testing, more useful information is available to the physician to diagnose patients who are at risk and to monitor patients currently under treatment. Advanced lipid testing technologies such as Atherotech's VAP test and the NMR test from LipoScience offer the physician insight into a patient's cardiac disease risk that has never been possible before.

We have experienced growth in VAP and NMR testing of approximately 80% in the second quarter of 2006 versus the second quarter of 2005. We are excited about these technology advancements and look for tests like these to be future growth drivers. Over the past few months, we have seen an increased interest in clinical trials business relating to pharmacogenetic testing such as P450. We are hopeful that clinical trials may lead to companion diagnostics and possible label changes to existing drugs which could lead to increased demand for this type of testing. While it will take time for this testing to build the meaningful levels, awareness of pharmacogenetic testing is increasing.

We remain focused on identifying and commercializing novel testing technologies where we see a diagnostic need. We remain optimistic about the long-term prospects for the introduction of new testing technologies that will improve patient care. However, this process continues to be both challenging and time-consuming.

Managed care. During the second quarter, we continued to see acceleration of growth in revenues from our major managed care partners. Strengthening our relationships with managed care partners is a key strategic focus for LabCorp. As we have mentioned previously, continued consolidation in the managed care marketplace enhances our ability to drive future revenue and profitability through strong partnerships with the leading managed care organizations. We continue to work closely with United by providing innovative new ideas 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.

We continue to work with WellPoint to expand our relationship through the awarding of additional arrangements to provide services to their members. Although we are disappointed that we did not receive the WellChoice contract, it will not deter us from our plan to significantly expand our presence in the New York market. You should expect to hear more about our progress with WellPoint during future conference calls.

Growth in managed care revenues and profitability will come only by being a valued business partner, helping managed care companies reduce their costs and improve patient care for their members. Having built strong foundations for cooperating at the top levels of organizations such as United, WellPoint, Aetna, CIGNA and Humana, we believe we are well positioned to realize revenue growth for LabCorp while delivering favorable economics, value-added scientific capabilities and unique laboratory information analysis tools to all of our managed care partners.

In summary, LabCorp's continued success comes from 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 toward achievement of these 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 turn the call back over to Tom to discuss our guidance for the remainder of 2006.

Thanks, Dave. Excluding the impact of the required change in accounting for stock-based compensation, any share repurchase activity after June 30 and any accounting impact related to my retirement as CEO, our guidance for 2006 is as follows.

Compared to 2005, LabCorp expects 2006 revenue growth of approximately 6.5 to 7.2%. EBITDA margins of approximately 26.5 to 27% of revenues. Diluted earnings per share in the range of $3.28 to $3.33. Operating cash flow of approximately $610 to $630 million. Capital expenditures of approximately $95 to $110 million. We also expect net interest expense of approximately $43 to $45 million and a bad debt debt rate of approximately 4.8% of sales for the remainder of this year.

We estimate that the implementation of the required change in accounting for stock-based compensation will have an EBITDA impact of approximately $22 to $23 million and a diluted EPS impact of approximately $0.10.

As you may also be aware, CMS will suspend payments to all providers over the last half of September. As a result, we expect operating cash flow to be negatively impacted by approximately $13 million in the third quarter. Operating cash flow in the fourth quarter will be positively impacted by an equal amount when claims payments are resumed on October 1.

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

Thank you, Tom. Can you provide any details regarding your response to the United HealthCare RFP?

As Dave mentioned in his remarks, we continue to be excited about this opportunity and have responded to the RFP with several innovative ideas that we feel would help United achieve its objectives. We can tell you that we continue to have meetings with United; however, for competitive reasons we will not discuss the details of our discussions.

Is there anything new on the reimbursement front? With the continuing rise in health care costs, we realize that legislative action on both the federal and state levels could impact us negatively. We continue to monitor developments and work with our trade association, ACLA, to develop appropriate responses.

As you are likely aware, CMS has proposed changes to the Medicare physician fee schedule that would be effective on January 1, 2007. The changes as proposed taken by themselves would be favorable to us; however, the final rates could be impacted by a number of factors, including a potential reduction in the conversion factor used to calculate reimbursement under this fee schedule. Until the legislative and regulatory process related to the 2007 Medicare physician fee schedule is complete, we are not able to provide a quantification of any potential impact.

In the interim please keep in mind that this fee schedule impacts reimbursement only for anatomic pathology services provided to Medicare beneficiaries, a relatively small percentage of our total revenues.

Can you update us on the status of competitive bidding for lab services?

On April 21, CMS published a notice in the Federal Register requesting comments in connection with their proposed competitive bidding process. CMS has announced they plan to run two three-year demonstration projects, the first to begin in April 2007 and the second to begin in April 2008. Working through our trade association, ACLA, we have provided detailed comments to CMS about why we feel the current CMS proposal is unworkable. We will continue to follow this project closely and to provide updates as appropriate as part of our earnings calls.

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 laboratory industry by significantly enhancing our capabilities in the high value, high margin esoteric testing arena.

Can you predict whether your zero-coupon subordinated notes will be put to the Company on the September 11 put date?

While we cannot predict whether holders will choose to put their notes to us on September 11, we can say that we continue to be pleased with this debt as part of our capital structure. We are also planning to be in a position to use cash on hand and available borrowings to satisfy a put in cash should it be necessary.

What are your plans for the use of free cash flow? Our priorities for the use of free cash flow remain unchanged, and we don't expect them to change in the foreseeable future. First, we will seek opportunities through strategic acquisitions and licensing opportunities that will grow our business within our current core competencies.

Second, we plan to continue to repurchase our shares under our board approved share repurchase program.

Now I would like to turn the call back over to Tom.

Thanks, Brad. We are more than satisfied with our results for the second quarter and the first half of the year and feel that we are positioned well for a successful 2006. 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 very much for listening. We're now prepared to answer any questions that you may have.

(OPERATOR INSTRUCTIONS). Tom Gallucci, Merrill Lynch.

Two questions. First, on the per test metrics that you offered, those were interesting. I just wanted to see if we could get any more detail. On the pricing side, the 1.5%, I'm assuming that there is also a mixture of two things there. One would be the mix of testing, and then the other would be absolute price increases. Is that right, and can you be any more specific on the impact of the two?

This is Brad Hayes, and you are exactly right. Those two components do exist within the 1.5%. I'm not ready to share with you today what those two components are, but I think it does narrow that number when we were looking at and when we continue to look at on a per accession basis you have then the added variable of the number of tests per requisition. So this certainly whittles away one of the variables that exists in looking at it on an accession basis. So we still do have pure price and mix in the 1.5%.

Okay. And then the volume, the 4.4 or the number of tests per requisition, can you talk about what is driving that, and that incremental test, is that usually an esoteric testing attached to a routine, or can you talk a little bit more about the general trends there?

Sure. One thing that is going to drive that obviously, and I touched on it in price, is the increase in the number of tests per requisition. Probably the best example would be from Dave's comments, HPV. That is going to come in on one retrocession requisition and especially in the reflex situation is going to reflex to an additional HPV. So I think that is a good example of what you talked about, potentially an esoteric or genomic test coming in on a core test. So that is probably the best example and the one we see the most.

Okay. Just turning briefly to WellPoint. Can you talk about some of the recent wins that you have talked about in the last few quarters, the ramp-up of related business? And then you noted that you were a little disappointed on the WellChoice contract. To the extent you can, can you give us any color on maybe what you could do differently in the future or what you were lacking that did not allow you to get into that contract? Thank you.

Well, I think the record of success began in Georgia with taking over the Georgia market, and then earlier this year at the end of February, we became exclusive to WellPoint in the Denver, Colorado market. And we have I think been extremely successful in winning and converting and retaining that business.

With respect to the WellChoice contract, we feel that we should have received that contract based on our proven record of execution with WellPoint and based on our strategic national partnership, which we continue to value very highly. But we have to recognize that these are local decisions. We had a plan that had a historical relationship at the local level with a competitor. That plan was in a transition as a result of WellPoint's acquisition, and they chose to continue with a known provider.

And as much as we would like to, we're not going to win them all. We're disappointed about this, but it does not change our plan to enter the New York market, and it does not change the nature of our national strategic partnership with WellPoint.

Adam Feinstein, Lehman Brothers.

Very strong quarter here. Just a quick question on guidance just to start here. So the guidance does not include any conditional share repurchase after June 30. I guess could you just refresh for me, how much authorization do you have left under your share repurchase now?

This is Brad Hayes. About $100 million.

About $100 million, okay. Great. Okay. The thing that really stands out the most in the guidance is just the margins. So you guys are definitely seeing the margins come in higher than originally anticipated. Can you talk a little bit more about just managing the costs just in terms of you spoke before about the tests and the pricing, but certainly I just want to think in more on the cost side in terms of where the leverage is there?

Well, I will say and I have kind of been saying this for a long time now, when revenues are good, it is a great business to be in. Most of this revenue growth or virtually all this revenue growth this quarter was real revenue growth at LabCorp because we get very few accession from the esoteric business. So now we are beginning to see the value of these acquisitions from a cost basis. They are both the Esoterix and USL acquisitions now over a year old, and we are realizing and recognizing the synergies that come out of those businesses.

So the first place that we get improved margin is from the synergies from the acquisitions of those businesses. Obviously the second place that we get improved margin is from the improvement, and some of that is coming out of the acquisition also of the reduction of the bad debt levels. So we continue to see that.

And then the third is the strategy of LabCorp, which we are pretty proud of, which is moving more of our business toward the esoteric business. In the appropriate way, we get better value for those tests, which hopefully continues to improve our margins.

So to summarize it, it is esoteric business, it is reduction of bad debt and it is synergies from acquisitions.

Okay, and just one quick follow-up question if I may. I apologize. I missed the very beginning of the call, so if you spoke about this -- but I just want to say congratulations to Tom on your retirement and to Dave on your expanded role.

I just wanted to get you maybe just to elaborate a little bit more there in terms of the timing in terms of just what exactly, Tom, your responsibilities will be over the next couple of years? Thank you.

Okay. Well, LabCorp's succession planning is absolutely critical, and it is absolutely important to what I have done in my job in this company. We have been at it for a very long time.

As far as the future goes, effective January 1, 2007 or I guess December 31, 2006, I will step down as Chief Executive, and Dave, who is more than qualified, will step up as Chief Executive. I will remain as Chairman of the Board until the annual meeting of 2008, but I will not have any day to day responsibilities at LabCorp.

So we are ready, we are willing, and we are able for a smooth transition at LabCorp, and both Dave and I look forward to it.

And maybe, Dave, could you just spend a minute just giving us your outlook on the business and just any comments in terms of how you view your new role? Thank you.

Is that to Dave or to Tom?

Dave, please.

Okay. Dave?

Thanks, Adam. Well, first of all, there will be plenty of opportunity to talk about what a phenomenal Chairman and CEO Tom has been, but we would be remiss if we did not acknowledge what a phenomenal job he has done in leading this company. We will talk more about it in later calls, but it is important to say that.

It is also important to say that I'm personally gratified that Tom will remain as Chairman and that Brad Smith will be joining the Board. These are in my mind very important from the standpoint of having stability and also of a wealth of knowledge and industry expertise to assist me as we go through this transition.

In terms of the business, Adam, there is not any reason to change what we have been doing so successfully for the past year, which is, as I said in the earlier remarks, we focus on the things that are important. We develop metrics to measure them and we execute them. And we will continue with the strategy of managed care partnerships, scientific differentiation and customer retention. We will always try to look at the business in different ways, for example, with test volumes rather than accession volumes so that we can improve our measurements and our metrics. But I don't see any reason why there should be any fundamental change in what LabCorp has done and done so successfully over the past several years.

Thank you very much and good luck to both of you.

Bill Bonello, Wachovia Securities.

Just a handful of questions. First of all for Brad, I just want to clarify the volume numbers reported in the press release and the supplemental 8-K, those were still accessions and not tests, right?

That is correct.

And then secondly, can you give us any more color on sort of what is causing the pretty dramatic improvement in bad debt expense?

Bill, this is Brad again. We consistently have been working to reduce bad debt expense. So I would say to characterize it, we look at root causes, we implement processes and improvements to eliminate the root causes of bad debt, which for the past few years we have been fairly focused on patient responsibility. So down to what do our bills say, how many do we send, when do we send them, how do we make outbound calls? We implement workflow software to help us better manage managed care exceptions. So just a host of things that we have consistently worked on and we continue to work on.

As we have said in the past, we're getting closer and closer to the point where it begins to become difficult. But I still think as I look around and look at the root causes and the plans we have in place, that we still have some improvement to make there.

Okay. And then on the operating cash flow, is there anything that would make the year-over-year comp not normal, any differences in things of cash flow?

Not significant. I think we have -- the second quarter is historically a two tax payment quarter, and it was last year and this year. So there might be some slight changes in working capital that have occurred, but nothing fundamental.

Nothing extraordinary? Okay. And then I'm wondering if there is any way you can be a little bit more specific about how much of the 30 million of synergies were already reflected in Q2 results? I'm just trying to understand how much that is going to be a growth driver going forward versus how much it has already been a growth driver.

Bill, we just set that out as a target we will achieve by the time we have achieved it, and we are not going to report along the way.

Okay. So --

Bill?

Yes.

Bill, I want you to know that I will be energized in the last two conference calls, but you're going down on my list as the digger, the guy that really digs into the information.

I think I appreciate that.

That is a compliment.

Just two more questions. One was, it looked like -- and we may have our have numbers wrong -- but it looked like you had some pretty meaningful declines in the identity and gene probe and histology volume. First of all, are we looking at that right, and if so, what is going on there?

Are you looking at the 8-K?

Yes.

Bill, I think it is isolated to one line.

I don't see that. We're looking at it for you, Bill.

Bill, I don't know of anything that I could say that is a fundamental driver of that, and I think it is one line that you're focusing on.

(multiple speakers) -- gene program and the histology. They both look to us like they were down, but again we can follow up. Maybe my numbers are off.

Yes, take a look at that and call if it is still when you go back and check if you still have that question.

If I am looking at identity, Bill, and I'm looking at it from a perspective of don't forget we are comparing year-to-date 2006 to full year 2005. So if I double identity, I am higher than last year and the price is up, right?

Okay, maybe. I thought we had it all on a quarter by quarter basis.

I'm on page 17. If I double histology, I'm about the same as last year in accessions I believe.

Okay.

Take a look at that. That is the way I look at it. Year-to-date 2006 was just six months versus full-year 2005, and then we will talk off-line. But I think -- I am not sure they are growing dramatically, but I don't think they are off.

Okay. That sounds fine. Just a final question. Would you enter the New York market and intend to enter the New York market even without or in advance of some kind of a big contract win?

We are in the process of entering the New York market now, and it is an area in which we have traditionally not been as strong as we would like. We recognize that we need more access points and more infrastructure there, and we are in the process of creating those access points and building the infrastructure.

So a simple answer, Bill, is yes. And we want to be in a position in the future not to be excluded because somebody says we don't have enough infrastructure.

Right, okay. Sort of the chicken and egg issue?

Right, exactly.

Thank you very much.

Robert Willoughby, Banc of America Securities.

I guess Bill touched on two of my questions. If you look at WellChoice's platform to get into the New York market rather cost effectively and capital efficiently for you, I guess the alternative now is an internal growth strategy or an acquisition. I mean should we not be looking at our free cash flow numbers which would reflect either a bigger CapEx number or a free cash -- or an acquisition of some sort? Should we not be looking at that number a little bit more critically now?

I don't think so. I don't think so, Bob. I think that we have decided I would say in the last six to eight months to move our activities in a more vigorous way into the Northeast, and all of our forecasts have reflected that, including our spending for the year '06.

I would say this, we don't ever include CapEx or acquisition numbers in our CapEx. So if we were to make an acquisition, which is not something we ever talk about on these conference calls, that would be outside of the CapEx forecast we have given you. Right?

Okay. And if I look, Bill, it also mentioned histology. I mean the volumes were essentially you mentioned, Tom, were flat year-over-year. Why would there not be a little bit more of a growth rate to those numbers?

I wish there were. That's the only thing I can say to you. The histology business, the tissue business, the area that we kind of pioneered three or four years ago getting into a large lab is probably our most competitive area. Much of the industry focus now is on anatomical pathology and things like pods and doctors recognizing the value of that business. So I would say that while we will see modest growth in that area, it is pretty fierce right now.

Can you point to anybody who is doing a better job of late? Is that a risk that somebody can get in there more meaningfully than the physicians, or is that still not on the horizon?

I do not see -- our competitors in this area to a large degree are physician practices. We think and are comfortable that we are the leader in this area and are quite capable of what we do.

That is great. Thank you. (multiple speakers)

I would also point out, Bob, that we -- as Tom mentioned pods, we are working to get some relief because we think for some of the smaller pathology laboratories that they are using practices that we don't think are fair from a business perspective and a regulatory perspective, and they are using loopholes to compete. We think once those are closed and we believe they will be closed, that if we can compete on a fairer footing, that we will be more successful.

That is great. Thank you.

(OPERATOR INSTRUCTIONS). Mr. Mac Mahon, there are no further questions at this time.

Great. Thank you very much, and everybody have a great day. Appreciate your listening. Bye.

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.