Quest Diagnostics Incorporated
Q1 2010 Earnings Call Transcript

Published: 21 Apr 2010

[Operator:]

Welcome to the Quest Diagnostics first quarter conference call. At the request of the company, this call is being recorded. The entire contents of the call including the presentation and question and answer session that will follow are the company right property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission, or rebroadcast of this call in any form without the expressed written consent of Quest Diagnostics is strictly prohibited. Now I'd like to introduce Kathleen Valentine, Director of Investor Relations for Quest Diagnostics. Go ahead please.

[Kathleen Valentine:]

Thank you, and good morning. I am here with Surya Mohapatra, our Chairman and Chief Executive Officer; and, Bob Hagemann, our Chief Financial Officer. Some of our commentary and answers to questions may contain forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speaks only as of the date that they are made and which reflect management's current estimates, projections, expectations, or beliefs, and which involve risks and uncertainties that could cause actual results and outcomes to be materially different. Risks and uncertainties that may affect the future results of the company include but are not limited to adverse results from pending or future government investigation, lawsuits or private actions, the competitive environment, changes in government regulations, changing relationships with customers, payers, suppliers, and strategic partners, and other factors described in the Quest Diagnostics 2009 Form 10-K, and current reports on Form 8-K. A copy of our earnings press release is available and the text of our prepared remarks will be available later today in the quarterly updates section of our Web site at www.questdiagnostics.com. A PowerPoint presentation and spreadsheet with our results and supplemental analysis are also available on the Web site. Now, here is Surya Mohapatra.

[Surya Mohapatra:]

Thank you, Kathleen. Our business remained strong despite being negatively impacted by severe weather and softness in the market place. During the first quarter, revenues were $1.8 billion, earnings per share were $0.89, and cash from operations totaled $239 million. Our full-year EPS guidance remains unchanged after adjusting for the first quarter charge and the impact of severe weather. We saw continued growth in gene-based and esoteric testing, and we are taking actions to accelerate revenue growth and manage our costs. I'll review our progress after Bob discusses out financial performance. Bob?

[Bob Hagemann:]

Thanks, Surya. During the quarter, we saw a slowing in our growth due to severe weather, softness in the market place and reduced reimbursement for Medicare. Despite these challenges, our business remained strong. It has continued to grow on the line earnings and generated strong cash flow. Earnings per share from continuing operations were $0.89 equal to the prior year. The earnings comparison is impacted by a $0.06 charge recorded in the quarter associated with work force reductions, and $0.05 associated with the estimated impact of severe weather across much of the country. Revenues for the quarter were $1.8 billion in line with the prior year. Revenue growth was reduced by an estimated 1% due to the impact of severe weather. Our clinical testing revenues, which account for over 90% of our total revenues were within 0.5% of the prior year and grew about 1% adjusted to the impact of weather. Reported volume was 2.6% below the prior year end level and reflects an estimated 1% reduction due to weather. Drug testing volumes have stabilized and are no longer impacting revenue and volume comparisons. Overall, volumes are being pressured by a general slowdown in traditional office visits. We are aggressively addressing this challenge. We have increased our focus on effective sales execution and are expanding the capabilities of our sales force. In addition, we are adjusting our cost structure to match volume levels. Revenue per requisition increased 2.3% with the increase continuing to be primarily driven by a positive mix partially offset by the 1.9% Medicare fee decrease, which went into effect January 1, and served to reduce revenue per requisition by about 0.5%. Revenue in our non-clinical testing businesses, which includes risk assessment, clinical trials testing, point-of-care testing and health care IT, and it contains most of our international revenues grew 3% in the quarter principally due to favorable foreign exchange. Operating income as a percentage of revenues was 16.5% compared to 17.8% last year. The charge recorded in the quarter and the impact of weather combined to reduce the year-over-year change in operating income as a percentage of revenues by 1.6%. We continue to see strong performance in our billing and collection metrics. Bad debt expense, as a percentage of revenues, was 4.2% compared to 4.5% a year ago. DSOs at 41 days improved two days for both year end and a year ago. Our cash flow continued to be strong. Cash flow from operations was $239 million and compares to $273 million in last year's first quarter. The decrease is principally due to the timing of annual incentive things. Capital expenditures were $40 million in the quarter. During the quarter we repurchased $4.5 million of our shares at an average price of $56.21 for a total of $251 million under the accelerated share repurchase we announced in January. Our cash balance, coupled with our unused credit lines, provides us with a significant liquidity and positions us extremely well to capitalize on growth opportunity and take other actions like share repurchases to drive shareholder value. Now, let's turn to our full year outlook from continuing operations. We now expect revenue growth of between 1% and 2%. We expect operating income, which now reflects the first quarter charge and weather impact to approximate 18.5% as a percentage of revenues. We continue to expect cash from operations to approximate $1.3 billion and capital expenditures to approximate $200 million. And lastly, diluted earnings per share are expected to be between $4 and $4.20 on a reported basis, and between $4.10 and $4.30 adjusted for the impact of charges in weather in the first quarter. We are taking actions to accelerate our growth and we expect these efforts to lead to improvement as the year progresses and we continue to be very excited about the prospects for our business. Now, I'll turn it back to Surya.

[Surya Mohapatra:]

Thanks Bob. During the quarter, we saw positive growth from innovative tests such as vitamin D and ImmunoCAP allergy testing. Our esoteric laboratory saw stronger growth in our routine testing. Additionally, over the course of recent month, we have extended a number of contracts with the health plans increasing visibility to our forefronts. In this environment, it is important to increase our sales effectiveness and have a higher level of customer engagements. We are putting plans in place to achieve that by upgrading our sales talent and adding refs in some markets. We continue to pursue our strategy of rising differentiation through innovative tests and services that create competitive advantage and will drive future growth. In March, we and Vermillion launched OVA1, the first blood test cleared by the FDA for pre-surgical evaluation of an ovarian mass for cancer. The response has been very positive. We are pleased that Medicare is covering this test. AccuType CP is our new blood and saliva test, which helps to assess the patient's response to the anti-clotting drug, PLAVIX. We have seen an increase in interests from physicians and patients in this important test. We continued to expand usage of our connectivity solutions. By the end of the first quarter Care360E prescribing users ordered at the rate of more than 16 million drugs a year, up about 30% from year end. We formally launched our Care360 EHR solution with less physician's ad hoc connectivity features like electronic ordering and prescribing at their own pace without incurring large capital cost or changing their office workflow. We are seeing a positive response. In addition, we're collaborating with Surescripts to make lab results and prescription history more accessible to physicians. During the quarter, healthcare reform legislation was passed. The new law will provide coverage for more Americans, especially children, and request coverage on prevention and wellness benefits without any cost sharing. Beginning in 2011, we will see a reduction in Medicare reimbursement. On balance, we believe health reform will be positive for our company and our industry over the long term. Our underlying business is strong. We are implementing plans to accelerate growth and further manage our costs. We are well-positioned for the future. Thank you. We will now take your questions, operator?

[Operator:]

(Operator Instructions) First question comes from Ricky Goldwasser, your line is open

[Ricky Goldwasser:]

Good morning.

[Surya Mohapatra:]

Good morning, Ricky.

[Ricky Goldwasser:]

A couple of questions, first of all, in the volume trends, obviously, you were saying that you're seeing continued weakness in physician office visit. When do you expect we are going to start seeing stabilization of these volumes in 2010? And is it going to be on the second half or do you expect it to be more of a 2011 event? And then, second of all, on the cost cutting opportunities, can you quantify the run rate savings from the headcount reductions? And how much more cost cutting opportunities do you have?

[Bob Hagemann:]

Okay. Ricky, first let me comment on the volumes. Yes, we said – yes, we did saw volume softness in the quarter. It was down to 2.6%. A point of that we just estimated to be weather. And yes, we have seen some general softness in the marketplace. We believe it's driven by physician office visits. It's also consistent with what you see in drug prescribing at this point as well. In terms of when that general softness will turn around, we're not expecting it to turn around any time in the near future. We expect that the market will continue to be soft for a little while. Although, yes, we think about our business we are expecting based upon the guidance that we put out there for revenue growth for our business to pick up over the remainder of the year. Essentially, if you looked at the guidance that we have out there now for revenue growth and you compare that to the 1% underlying revenue growth that we had in the first quarter, it would imply that it's going to accelerate certainly over the back half of the year. And there're several things for us to point to here. First, we're very excited about the opportunity for new tests to continue to grow. Surya mentioned vitamin D. We continue to see that growing strong. He mentioned the ImmunoCAP allergy testing. Both of those will contribute to our growth. And additionally, there're a number of new tests that we've either recently launched or planned for launch, which we see accelerating growth, whether it be the ColoVantage test, which is a receptor 9 biomarker; the test we have for Fragile X, which is XSense; OVA1; and of course, the active type test, which is the one for PLAVIX response. So those, in addition to the items that Surya mentioned in terms of us increasing our sales effectiveness, getting more sales reps in certain markets, and increasing the level of customer engagement, those are the things that we see accelerating our growth in the back half of this year, not necessarily a pick up in the underlying market.

[Surya Mohapatra:]

Cost?

[Bob Hagemann:]

And on the cost side, we're not going to provide specific cost savings associated with specific actions that we take. But what you should be comfortable with is the fact that this is a business because of the number of times, and you probably say this before, that we have to do rework either in reprocessing bills, recollecting samples because they were insufficient quantities, things like that, that there are – continue to be significant opportunities for us to improve the efficiency of our operations. And that program that we put in place several years ago is continuing. And they continue to be big opportunities for us. We're driving execution against those plans that we've had in place for a while, and feel very good about our ability to continue to manage the cost structure. And certainly, if we need to do more to adjust it to volume levels, we'll be doing that.

[Ricky Goldwasser:]

Okay. Thank you.

[Operator:]

Tom Gallucci, your line is open. Please state your company name.

[Tom Gallucci:]

Lazard Capital Markets. Thank you, a follow-up on the volume, if I could, and then one other. I was just wondering if you're seeing anything unique in terms of geographic trends or payer mix trends on the weaker volumes.

[Bob Hagemann:]

Yes, other than – Tom, other than the impact of weather, no. You have the general softness that we saw was pretty much across the board and no significant swings between pairs either.

[Tom Gallucci:]

Okay. And then on – and then you talked to varying degrees over the last couple of years about your sales force related initiatives and maybe look into your take of market share over time. So could you give us an update there? And also maybe on the competitive landscape, we saw a blur recently about maybe you're all winning the Texas BlueCross BlueShield on an exclusive basis. So you see more deals out there that could be exclusive or can you give us an update on that environment?

[Surya Mohapatra:]

Sure, Tom. This is Surya. Well first of all, we believe that we are maintaining our market share of 15%. This industry is highly fragmented, and there are ups and downs in the competitive – in the marketplace. But no, that's the way the business has been. But as you've heard from us that we see a general softness maybe related to the people visiting the doctor's office. For our esoteric business group, our esoteric laboratories grew stronger than our routine sales. And that's the reason why we have been diversifying our business. Now, 36% of our business is esoteric gene-based and anatomic pathology. So we will be investing more and more towards creating and introducing more gene-based testing, more esoteric testing for cancer, cardiovascular design, and (inaudible). So that's actually our value proposition. Now, as far as the minus [ph] care contract – and again, I mentioned that over the last quarters, few quarters, we have really extended most of our contracts. And that takes away the volatility of our – there is exclusive and unexclusive. We try to really work with the payers as they want. Some payers would like to really reduce their number and being exclusive. But the advantage is that once you have an open field, you can compete on the value proposition rather than the price. So we go back to our Six Sigma technology and Six Sigma quality, and esoteric testing. So at first, the health under concern, I'm very comfortable that we can see the top line visibility and performance. Now there's one other thing about – people talk about the competitors and what we are doing with sales effectiveness. There're always a couple of competitors in a couple of areas. They will do little bit different than what we do. But whenever the market slows, and this has happened in '03, and what we are doing is basically increasing our sales effectiveness and increasing our customer engagement, whether putting specific reps in the marketplace or upgrading our talent. We have no shortage of value propositions. So we need to be in the field, getting engaged with the customers, and call on our customers more often than the competitors. So that's what we are going to do.

[Bob Hagemann:]

And Tom, I'll just add one thing. Surya said, yes, with respect to the payers, we respond to what they're looking for. The BlueCross, BlueShield Texas contract that you mentioned is really an exclusive, only one product in that marketplace. And it's not a trend that we see moving towards exclusive. In fact, we think open contracts are better for patients, for employers, for payers, and for providers at the end of the day. And that's what we hoped we'll see more of.

[Tom Gallucci:]

When you say one product, you mean one of their health plan-type of products?

[Bob Hagemann:]

Yes.

[Tom Gallucci:]

Okay. Thank you.

[Operator:]

Shelley Gnall, your line's open. Please state your company name.

[Shelley Gnall:]

Goldman Sachs. Thanks for taking my question. I was just wondering if we could get a sense of, just broadly speaking, a way to characterize the types of tests that are seen the greatest weakness, obviously from the volume issue – I'm sorry, the weather-related issue. Try the ambulatory surgery centers for example, it's creating colonoscopies. They're the areas then I guess mostly – most deferred in the current recessionary environment. Is there just a broad way to characterize the type of testing other than just saying routines? Is there a way that we can think about what types of business has been the weakest? And for the flip-side, what is relatively the strongest?

[Bob Hagemann:]

Yes, Shelley, first I would say weather doesn't differentiate. It impacts all of our business, whether it be routine or esoteric. But as we – as Surya said, in the quarter we saw a stronger growth in the esoteric business than in the routine business. And I would say the general market slowdown is probably impacting the routine business more than the esoteric business. But the weather is having nothing to do with mix.

[Shelley Gnall:]

I was wondering if there's any way you could just broadly characterize – I mean, absent the weather effect, to just the general weakness we've seen. And it's a trend that we've been seeing for several quarters now throughout this recessionary environment. Is there a way to characterize the types of testing that are being most impacted?

[Surya Mohapatra:]

Well, first of all, I think it's very difficult to characterize a particular type of test because we got 3,000 tests. But if you think about the disease process, there's a chronic disease and there's acute disease. And then, there's a cancer and cardiovascular disease, and infectious disease. I think what Bob and I were saying is that the esoteric business is growing because there are some tests which are very specific to a particular disease, which is important, basically, cancer diagnostics for cardiovascular disease. So that's the – not the – people are not giving up. But as far as the general softness, we have to be really careful because this industry – all the trends for this industry is positive. People are getting older. There're more tests. There're more technology coming in. So what we are seeing is probably a temporary softness in the marketplace. But having said that, when the softness comes, what we are doing actually, apart from managing costs, we would increase our competitiveness via self-effectiveness and customer engagement. When you are 15% market share, there's plenty of room to grow even though there might be softness in the marketplace.

[Shelley Gnall:]

I guess the questions that I'm getting – thank you for that color. But what I'm wondering is if we start to see strengthening in the economy, and maybe it's not this year, maybe it's not even in 2011, at this point, you're taking cost reduction steps to manage the slower volume. If we start to see a rebound, how quickly can you scale back up? And how much – how much of a visibility will you have? And how will you get visibility or maybe strengthening demand for some of the tests that have some weakness – weakest?

[Bob Hagemann:]

Shelley, with respect to the cost and our capacity, we're really not doing anything that's going to limit our capacity to take on additional volume. So we can scale up essentially at a moment's notice, dear. This is a very scaled business. And if you look at the impact of weather, you see that because there's a disproportionate impact on the bottom line when you see the revenues drop off because of weather. Because there's not a lot other than the direct variable costs that you could pull out in that short period of time. But again, in terms of visibility, we can respond very quickly to increases in volumes of just about any sort of test. So I don't see that as an issue for us in ramping up. And that will be a very good issue to deal with.

[Shelley Gnall:]

Yes, fair enough. Thanks so much.

[Operator:]

Adam Feinstein, your line's open. Please state your company name.

[Adam Feinstein:]

Yes, Barclays Capital, just – maybe just a follow-up. Pricing was pretty good in the quarter. And you talked about the favorable mix shift. But clearly, there was a small headwind from the Medicare pricing. So I just want to get some clarity there. And I know you said, Bob, there wasn't any big change in contracting, but I just want to get some clarity on pricing, and a quick follow-up after that.

[Bob Hagemann:]

Adam, as I said, we continue to see mix shift and the number of tests ordered per requisition as the things that will continue to drive revenue per rec as we go forward. As Surya has said, we've got good visibility now into all of our major contracts, so there's clarity there. And we understand what the Medicare impact is going to be this year. We don't quite know exactly what it's going to be next year. But again, keep in mind that that's about 15% of our business. And we know what range we're talking about next year for Medicare. There'll be a CPI increase that will be offset by a productivity adjustment, which can't bring it down below zero. And then there's the 1.5% – 1.75% reduction, which is part of the healthcare reform package. So from a Medicare prospective, I think our greatest risk is a 1.75% reduction next year at about 15% or so of our business. But yes, I think we'll continue to see positive growth in revenue per acquisition, again, driven by the esoteric tests, the mix, and the number of tests ordered.

[Adam Feinstein:]

Okay. And then just a – maybe a quick follow-up question here. So again, clearly, the growth is doing much better in esoteric than in other core business. It's obvious this has been the case for a number of years such as the magnitude – certainly, to a greater magnitude now. So I guess, two questions, one, how do you think about acquisitions going forward so to the extent that you guys do stuff will be permanently focused on the esoteric side? And then two, how do you think about the competitive landscape because is there more than – more resources towards that – towards esoteric now, and once again, since there hasn't been any growth from the core market? So just how are you guys thinking about that?

[Surya Mohapatra:]

Adam, we have – this is not a new strategy for us over the last four or five years. So we said that we're going to diversify more and more toward esoteric, gene, and anatomic pathology. And that's what we have done. And as I told you last quarter, you will see more and more investment in esoteric and gene-based testing. And how do you really combine molecular diagnostics with anatomic pathology? So when we look at competitive landscape, we are looking at the value proposition. How do we really combine this capability that we have of molecular diagnostics with anatomic pathology and using our connectivity to provide the costumer a unique value proposition that they don't have. Now, when you look at the acquisitions space, we have a very strong pipeline of acquisitions. But as I said many times that we are not going to be anxious buyers. So we are looking at companies, which is going to help us to get more market share, whether it's cancer or cardiovascular disease. We're looking at companies, which is going to improve our science and innovation and lead us to that early stage of introducing new tests like we did with OVA1 and other stuff. So I'm very positive about how we utilize our cash to grow by investing in these higher end esoteric testing and gene-based testing.

[Bob Hagemann:]

And Adam, that would include both laboratory testing as well as point-of-care testing.

[Adam Feinstein:]

Okay, great. Okay. Thank you very much.

[Operator:]

Lester Thirks [ph], you're line's open. Please state your company name.

[Lester Thirks:]

WellQuest [ph]. Do you hear me?

[Bob Hagemann:]

Yes.

[Kathleen Valentine:]

Can you state your name again, please.

[Lester Thirks:]

Oh, I'm sorry, Lester from WellQuest. My question is basically this, how is the new passage of the healthcare bill going to affect Quests' revenues in relationship to Quests' strategic alignment with Google Health? That's question one. Question two is, is Quest going to continue with different online initiatives? And is there any interest in reviving? Because now the healthcare bill is passed, is there any interest in reviving the original initiative that it had in 2000 with this trademark named Quest Direct to open store fronts where people would proactively care for their health?

[Surya Mohapatra:]

Well, first of all, the healthcare reform bill does include tests and preventive measures, and without cost lifting. So obviously, this is really helping people to do – take care of themselves. But as far as our relationship with Google Health and Microsoft, and Keas, we're very positive about these relationships because at the end of the day we need to really empower patients. They need to really work with the doctors. And they have to really take some accountability for their own disease. So we are working in a number of ways to help them to stay healthy and get healthy by working with some of these Web 2.0 companies. And at the same time, we have our own initiatives where we are helping patients to get their results, and our wellness initiatives, which a number of companies and a number of health plans use for the employer base. So we're pretty excited about it. Now as far as the store front and other things, you can still go to Google Health and buy a blueprint for wellness. And that's what the patient empowerment is all about.

[Lester Thirks:]

Okay. Thank you very much.

[Surya Mohapatra:]

Thank you.

[Operator:]

Kevin Ellich, your line's open. Please state your company name.

[Kevin Ellich:]

Thanks. It's Kevin Ellich from Royal Bank of Canada. I was wondering if you guys can talk about – provide a little bit more color on the drugs of abuse testing. It sounds like it's stabilized. And I'm just wondering if you think – what's really going on in that market? Is that the easy comps or are we starting to see some improvement?

[Bob Hagemann:]

Kevin, as I indicated, that business has stabilized. It's a little too early to say that we're seeing a big uptick there, but the fact that it stabilized I think is good news.

[Kevin Ellich:]

Okay. And then it's good to see the esoteric mix at 36%. Have you guys ever provided the type of growth rate? I know it's growing faster than the core or routine test mix. But have you ever provided the growth rate or are you willing to do that now?

[Kathleen Valentine:]

Kevin, this is Kathleen. We don’t provide the growth rate on our test product breakdown quarterly. We do provide it annually. And as we indicated today that we did see in Q1 that our gene-based and esoteric testing did grow faster than our overall and in our routine business, so we're pleased with that.

[Kevin Ellich:]

Okay. And are you seeing any pressure from hospital internalization. I think some segments like histology might be – or I guess that's in office internalization. Are you seeing pressure on that front?

[Surya Mohapatra:]

We continue to see some internalization as the doctor said on the person for leading their own revenues. And we see the TCP, the technical component some of the people are doing. And that’s one of the concern we have. But again, this is, hopefully, temporary. As far as the hospital is concern, the way this business operates that there are separate tests when they become routine or become easy, some of the hospitals internalize it. But I’m happy to tell you that we are doing well with the hospitals because we're providing them with some value propositions, which are beyond just the test.

[Kevin Ellich:]

Okay. And then Surya, I was wondering if you could talk a little bit about the international markets. And I recently saw then that it looks like the Ireland psychology contract is no longer going to be exclusive. Is that business going to be split evenly? Or how is that going to work out for you guys?

[Surya Mohapatra:]

Well first of all, we don’t know how it is going to split. But we did encourage getting another player there. Because first of all, we are there to stay and we are – we have done a very good job in providing services. (inaudible) have extended our contract for two more years. Now that will open the door for other businesses. But as far as how this is going to split and what is the charity of those things, we don’t have any information. But I will tell you that we have a good value proposition, working with the doctors and working with health authority. So I’m very encouraged that we could extend our contract for two more years.

[Kevin Ellich:]

Okay. And then, does that segue into a bigger contract in Ireland is going to be tendering?

[Surya Mohapatra:]

You have read and we have read, obviously, that there is a bigger contract. And that's another reason why we are there. And hopefully, that will give us an opportunity to also sell the bigger contract. But this question about exclusive in a country, there's a positive side and negative side because first of all, there are no competitors. And second thing is actually how do you really train and educate people. So I encourage to have more than one player in some of these countries because it helps the industry and also it helps the healthcare providers. Now going back into international again, if you look at our strategy, as everybody knows, we said, "Look, the testing is moving to near patients." So that is why we invested in focused diagnostics too, and also enterics. And we'll more and more look at the platform where we can do testing near the patient that's applicable to the US and abroad. We have a modest investment in India. And we continue to do that because I think Indian market has the largest opportunity at the moment for us. And it takes – it does take a little bit of time, but I'm very positive. So when I look at our company in the next three, or four, or five years, in the short term, obviously, the esoteric, gene-based testing, and anatomic pathology going along with our routine businesses. But when you go to the mid-term, we're (inaudible), along with the point-of-care testing, cancer diagnostics in India, and (inaudible) healthcare ID.

[Kevin Ellich:]

Okay. And then lastly, I was wondering, are you willing to provide the pricing on the OVA1 test?

[Surya Mohapatra:]

Do we have the pricing of the OVA1 test?

[Kevin Ellich:]

Yes.

[Kathleen Valentine:]

Our published list price, Kevin, is $650.

[Kevin Ellich:]

Okay, sounds good. Thanks, guys.

[Surya Mohapatra:]

Thank you.

[Operator:]

Darren Lehrich, your line is open. Please state your company name.

[Seidi:]

Hi, it's actually Seidi [ph] sitting in for Darren and I'm with Deutsche Bank. I just wanted to go back to workforce reductions. I guess the first question is, was that always part of the original $500 million cost reduction initiative or is this part of a new initiative?

[Bob Hagemann:]

No, it’s not part of a new initiative at all. And it wasn’t part of the previous initiative. It was in response to the lower volume levels that we saw.

[Seidi:]

And could you comment at all in terms of where – in what part of the company those reductions were, or just what area just to get a sense for the size or the magnitude?

[Bob Hagemann:]

It was broad-based in terms of administrative functions and functions that are directly affected by volume.

[Seidi:]

Okay. And then on the revenue guidance, going down from 3% to 4%, the 1% to 2%, is there something – because you mentioned that weather impacted volumes by 1%, yet you're bringing down your revenue guidance by more than 1%. So how should I be thinking about that?

[Bob Hagemann:]

Yes, as we said, the weather impact was only 1% in the quarter. We saw a general softness across the board that we’re expecting to continue. And that's the principal reason for bringing down the volume and revenue guidance – actually, the revenue guidance.

[Seidi:]

Okay. Great. Thanks a lot.

[Operator:]

Ralph Giacobbe, your line's open. State your company name.

[Ralph Giacobbe:]

Thanks, Credit Suisse, just a couple here. Bob, was there anything else that impact the volume in the quarter besides weather, any lost contracts, or anything that we need to be aware of? I know typically break that out and see – I just wanted to make sure that wasn’t the case. And then along those lines, can you maybe talk about the progression of volume through the quarter just given the softness. I know you typically don’t do that. But anything better in March because we did see a little bit of bounce back in some of the physician office visit data.

[Bob Hagemann:]

Okay, well yes, let me repeat it again. There were no significant contracts or customer changes to point to in the quarter. And yes, we – you’re right. We typically don’t talk about how the business is performing within the quarter. But certainly, we looked at how we ended up, how we were doing as we entered the month of April as we established our guidance.

[Ralph Giacobbe:]

Okay. And then, just going back to actions to accelerate revenue growth, can you maybe expand on that a little bit? Is that really just sales force driven or what else is–?

[Surya Mohapatra:]

No, no. Well first of all, I think when we look at the market and we look at the area, and then we want to – the sales force is a bigger thing that we have to put to some reps in some marketplaces to penetrate more. We have to really upgrade some of these sales people to go towards the molecular diagnostics and the genetic testing, and also to launch the products appropriately. So it's just sales and marketing, along with the service we have. So it’s mainly outdoor-focused, getting onto the areas, and calling on people most.

[Ralph Giacobbe:]

Okay, and then just my last one. The margin expectation changed for trade outlook, 18.5% versus the 19%. Is that just the softer top line coming into play or is there something else?

[Bob Hagemann:]

No, as I said, it's really the impact of the first quarter charge and the weather impact. Otherwise, margins were holding. And it’s really a function of us – two things, continuing to manage our costs. And yes, as you heard, we are seeing more of the softness on the routine side of the business. So the mix is continuing to improve and that helps margins of course.

[Ralph Giacobbe:]

Okay. Thank you.

[Operator:]

William Quirk, your line's open. Please state your company name.

[William Quirk:]

Piper Jaffray. Thanks. Good morning. Bob, appreciated the color on the physician (inaudible) trends. Any comment here in terms of the somewhat recent, call it, past three years or so trend towards physician specialties and sourcing the technical component of pathology, and you can add any color on that versus the (inaudible). That'd be great. Thanks.

[Bob Hagemann:]

Surya already referenced that to some degree. But I would tell you that that's not the driver of the softness that we’ve seen. This softness is across the board. Yes, it's very consistent with what you're seeing in drug prescriptions and the like. So no, I wouldn't attribute it to in-sourcing.

[William Quirk:]

Okay. Great, and then, one big picture question and one housekeeping one. First off, Surya, we're starting to see what looks like it could be some fairly significant lab consolidation over in Europe in this – actually probably over the next three to five years. To what extent is there an opportunity for Quest here. And then just on the housekeeping side, about 38% tax rate, that’s the right number to use going forward? Thanks.

[Surya Mohapatra:]

Well, with regards to lab consolidation, as you know, when we look at almost all the opportunities that’s ahead of us, and the moment we are focused in the United States and as far as international is concerned, you know we're in India and Ireland, if there is an opportunity country that makes sense, we'll – we will consider that. But there is no immediate plan for having any large international laboratory acquisition for the time being.

[Bob Hagemann:]

And Bill, on the tax rate issue, we don't give specific guidance on that. But yes, I wouldn't expect it to be significantly different from what we saw on the first quarter.

[Bill Quirk:]

Very good. Thanks, guys.

[Operator:]

Robert Willoughby, your line's open. Please state your company name.

[Robert Willoughby:]

Bank of America/Merrill Lynch. Bob, can you give us some run rate for the other revenues, your non-lab testing businesses? That's been over the board and the variability. To that, as well as the other income and expense line item, has been somewhat confounding?

[Bob Hagemann:]

Yes. In terms of the other pieces of our business that are outside of the clinical testing business, yes, they continue to be about 9% or so of our revenues. And as I said, yes, they do fluctuate a little more because they're more impacted by foreign exchange in a particular quarter. And certainly you should think about the point of care business. Yes, that's impacted by many of the same things, position office visits and the like, that our laboratory testing business is impacted by. So there is some general softness there as well. In terms of the other income expense line, yes, there's a couple of things in there, there's a – I believe it's detailed in the footnotes to the earnings release. There's a $4 million gain on an investment this quarter. But also in that line, I think we spoke about this at year end. Here are the gains and losses on the investment in the supplemental deferred comp plan. The important thing to remember about those is, to the degree that there is a gain or loss in that line, they're offset by a gain or loss that goes up in the operating income line and goes to compensation expense. So, those don't have an impact on the operating income percentage.

[Robert Willoughby:]

Okay.

[Bob Hagemann:]

And that creates some of the volatility in the quarters. For example, last year we had a loss on the assets and supplement deferred comp plan. This year we had a gain. But again you have the offsets, we're up above the line, no impact to operating income.

[Robert Willoughby:]

Okay. And I think you mentioned, Bob, the e-prescribing volume's up 30% or so. Did you mention EMR placements? I know it's early, but is there any metric you can give us going forward?

[Bob Hagemann:]

At this point, there are over 1,000 users of the EMR product. That is not placements, but that's users.

[Robert Willoughby:]

Okay. And maybe, for certain I know you were recently at the White House. You were touting that you were actually hiring as a company and quite happy about that. And now we do see some cutting of the work force here. It's fairly quickly after that White House visit. Should I be worried a little bit more about your forecast and view of the future here? There seems to be an abrupt turn?

[Surya Mohapatra:]

No, no, this is not really an abrupt turn. This is nothing unusual – you are used to these kinds of things. We have to do that all the time, whenever there is value up and down. But the positive trend is that we have still have a lot of jobs open. We're hiring people in science and technology and innovations. And we would hire people in sales. So we have to re-organize. We've got 42,000 people and we still have 600 vacancies. So I'm not really worried about whether we're going to hire people or not. We know this industry is competitive and whenever there's a little bit of softness we need to really adjust our cost accordingly, and that's basically what we are doing.

[Robert Willoughby:]

How many people did the reductions touch?

[Bob Hagemann:]

About 500.

[Robert Willoughby:]

Okay. Great. Thank you.

[Bob Hagemann:]

Thank you.

[Operator:]

Anthony Vendetti, your line is open. State your company name.

[Anthony Vendetti:]

Maxim Group. Can you talk about the plan for repurchasing, particularly here in the second quarter? And then, if you can just comment on whether or not you have been approached or by any suitors or what your – if you can comment on that, what are your acquisition plans are going forward?

[Bob Hagemann:]

Okay. First, with respect to share repurchases, we don't give specific guidance on that. Yes, we tell folks that you should expect were going to deploy our cash first into growth opportunities with the degree that they're not available then into share repurchases. And to your second comment, we don't comment on rumors or speculations. We're focused on growing our base list.

[Anthony Vendetti:]

Okay. But on acquisitions that you would make, is it – is this pretty much status quo what it's been going forward or any change to your acquisition plans?

[Bob Hagemann:]

No, none at all. I mean Surya says earlier that, yes, we'd be looking at domestic acquisitions or regional esoteric, potentially with hospital laboratories. Point of care is an opportunity. But yes, we're also looking at investments that give us access to new testing methods and technology, so on the science and innovation side as well.

[Anthony Vendetti:]

Okay. Great. Thanks.

[Operator:]

Kemp Dolliver, your line is open, state your company name.

[Kemp Dolliver:]

Thank you. It's Avondale Partners. First question relates to molecular diagnostic testing and health plans. It looks like the plans are starting to pay more attention to billing for molecular diagnostics given the growth rate of the – of this area, and then also just their shortcomings in terms of billing. How are you working with your plans in contracting to have clear – provide adequate clarity on what the nature of the test packages that you're providing?

[Bob Hagemann:]

Kemp, yes, first I would say is I'm not sure that we've seen any significant trend at all in terms of molecular diagnostics being reimbursed differently than any other testing that we do. And in fact, some of those molecular diagnostics are critically important. Yes, we talked about PLAVIX earlier. Well you can have diagnostics that help identify whether or not persons don't respond to a particular therapy. In cases like that, we're seeing significant interest on the part of health claims. So we have not seen any issues in terms of getting reimbursed for molecular diagnostics.

[Kemp Dolliver:]

Okay. Great. The second question relates to all the commentary regarding the sales force effect (inaudible). And you gave a little bit of color with regard to the types of changes you're making. But could you just – is there a way you could give just a little more specifics with regard to what you're trying to do because when I – when I hear things such as upgrading people, et cetera, et cetera, after a while, it just becomes somewhat cliché. And understanding a little bit more about what exactly you – as a large organization, you think will change will be helpful. Thank you.

[Surya Mohapatra:]

Okay. Well first of all, we have been building up a good sales organization. And we are, as you know, two years ago or two-and-a-half years ago, we went into very focused sales organization for putting on a customer base, whether it's the physician, whether it's a hospital, whether it's (inaudible) or anatomic pathology, so instead of the organization just was based regionally. And that all the (inaudible) on the regional organization, we went into focused organization with sales and marketing with various customers. Now, what we're doing is taking that organization, which is already strong, to build the next one because the – our business is changing more towards esoteric and anatomic pathology. And that's actually nothing new. But what we're doing now is to accelerate that plan. And the other additional thing when we say occurring challenge is actually making sure that we have the trained people. And then we are also going to add some of the reps in the marketplace, which we're not planning. But we're going to do that because of the softness in the market. And we'll work harder to maintain our market share. And we can all of us do better. So this is actually the next phase of going into the sales organization, which we've been building over the last two years.

[Kemp Dolliver:]

Just quickly, the closed loop on that, pharma has been shedding jobs. Are some of these hiring people from, say, pharma to have expertise in particular areas such as on oncology–?

[Surya Mohapatra:]

Right.

[Kemp Dolliver:]

–causing them and–?

[Surya Mohapatra:]

You're absolutely right. There are good people available. And we have a lot of good people here, too. And we want to make sure that we have the right talent. And pharma have good people on (inaudible) concern. We're also adding some young people who are coming from other industries. The key is we need to have a very engaging self-organization, along with superior surveys. And what you are seeing now is a little bit of (inaudible) and because of the slowness in the marketplace.

[Kemp Dolliver:]

Great. Thank you.

[Operator:]

Gary Taylor, your line's open. State your company name.

[Gary Taylor:]

Hi, good morning, Citigroup. Just a few questions, one, on the severance charge, which I think grosses out to about $18 million. How much of that in cost of goods versus G&A, just for modeling?

[Bob Hagemann:]

Yes, Gary, the way to think about that is the majority of it is in SG&A, unlike the weather impact where the majority of that was in cost of sales. And when you look at them combined, there's maybe slightly greater impact in SG&A, but they're pretty close. There's some discussion in the footnote in the earnings release.

[Gary Taylor:]

Okay. I might have missed that. So that puts the SG&A number for the quarter in the low $270 million. Can you help us think about that dollar progression as you move through the year on G&A?

[Bob Hagemann:]

Look, as we've told you repeatedly in the past, we don't think about managing it either as a cost of sales line or at the SG&A line. We're managing it at the operating income line. And yes, that's the result of – some of the decisions that we made drive costs in one line item, but save significant costs elsewhere. So that's the way we manage it. And that's also why we don't give guidance on either cost of sales or SG&A.

[Gary Taylor:]

Okay. It looked like depreciation was down about $5 million sequentially. Could you talk about that and that run rate, I assume?

[Bob Hagemann:]

Generally, it is – there're no adjustments in the depreciation line. I think if you'll look at our capital spending over the last couple of years, a few years back, we had some pretty heavy investments, which we have anniversaried at this point, so. Yes, I think you can assume that we're at a pretty good run rate in there. Although, I would tell you, in order to hit the CapEx guidance that we have for the full year, you'll see some increased capital spending later in the year and some increased depreciation attached to that.

[Gary Taylor:]

And then finally, I think Tom asked this and I just missed the answer, but just going back to the drug of abuse testing, which was a big drag through most of last year becoming less of a drag and no mention in the release today. Are we assuming, just year-over-year, no impact on overall volume?

[Bob Hagemann:]

Well I did mention it in my prepared remarks that there is no impact on the year-over-year revenue volume at this point.

[Gary Taylor:]

Okay. Great. Thanks.

[Operator:]

Thank you for participating in the Quest Diagnostics first quarter conference call. A transcript of the prepared remarks on this call will be posted later today on Quest Diagnostics Web site at www.questdiagnostics.com. A replay of the call maybe accessed online at www.questdiagnostics.com/investors or by phone at 866-428-3803 for domestic callers, 420-369-0904 for international callers. No access code will be required. Telephone replays will be available 24 hours a day beginning at 10