Quest Diagnostics Incorporated
Q1 2015 Earnings Call Transcript

Published: 23 Apr 2015

[Operator:]

Welcome to the Quest Diagnostics, First Quarter 2015 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 copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Quest Diagnostics is strictly prohibited. Now I’d like to introduce Dan Haemmerle, Executive Director of Investor Relations for Quest Diagnostics. Go ahead please.

[Dan Haemmerle:]

Thank you and good morning. I’m here with Steve Rusckowski, our President and Chief Executive Officer, and Mark Guinan, our Chief Financial Officer. During this call we may make forward-looking statements and also discuss non-GAAP measures. Actual results may differ materially from those projected. Risk and uncertainties that may affect Quest Diagnostics' future results include, but are not limited to those described in Quest Diagnostics 2014 annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Our earnings press release is available and the text of our prepared remarks will be available later today in the investor relations quarterly update section of our website at www.questdiagnostics.com. A PowerPoint presentation and spreadsheet with our results and supplemental analysis are also available on the website. Now, here is Steve Rusckowski.

[Steve Rusckowski:]

Thanks Dan, and thanks everyone for joining us today. This morning I’ll provide you with highlights of the quarter. We’ll share industry trends and also review progress we are making executing our 5-point strategy. Then Mark will provide more detail on the results and take you through guidance. Before we get into our performance, I want to highlight the joint venture we announced last month with Quintiles in clinical trials testing. Together our two companies will create the new business that will be one of the leading global providers of central laboratory services to support drug developments through clinical trials. The creation of a joint venture allows Quest and Quintiles to bring together the complementary capabilities in scale of our two organizations in an agile way with a laser like focus on serving customers. The new company will enable biopharmaceutical customers to enhance their drug development process, support precision medicine through companion diagnostics and biomarket discovery and build value by creating more efficient, effective organizations through leveraging the scale, scientific expertise and operational excellence of the parent organizations. We expect that over time that JV will have an accelerated growth rate, achieve cost synergies and to be accretive to what our clinical trials testing business would have been on a standalone basis. The JV structure addresses three of our five strategic points. First, it will help us accelerate growth in the near term for our clinical trials business and explore opportunities related to our longer term strategies on precision medicine, companion diagnostics and creating value from our data. Second, it enables us to refocus on our core Diagnostic Information Services business without distraction. And third, with minimal capital that enables us to participate in expected synergies in a way that lets us deliver disciplined capital deployment. Mark will provide some more color later on this exciting partnership. For now, both entities will continue to operator separately until the closing of the transaction, which is anticipated to be no later than the third quarter of 2015. Turning to our first quarter results, we continue to make progress on our path forward, delivering solid revenue, EPS and operating income growth. Revenues grew 5.3%, $1.84 billion. On an organic basis consolidated revenues grew almost 1%. Adjusted cash EPS increased 13% to $1.05 and adjusted operating income increased 14%. Our performance reflects improved execution and a stable business environment and we are able to grow despite a harsh winter that while is somewhat less severe than a year ago was particularly difficult in the Northeast portion of the United States where we have a strong presence. Before I get into our strategy update I’d like to talk about industry dynamics for utilization, reimbursement and regulation. Through the first quarter we continue to see stability in test volumes on a same provider basis. We are encouraged by the process of adding more insured lives to the healthcare system as a result of the Affordable Care Act. More states have been expanding their Medicaid programs, including Pennsylvania during the quarter, and we continue to see growth in our Medicaid volumes. Medicaid expansion will bring new people into the healthcare system with the goal of identifying issues earlier to improve outcomes and reduce overall costs. We actually saw this ourselves on a recent Quest Diagnostic Health Trend study. This peer review publication in diabetes care, found a significant double digit increase in diabetes diagnosis in states that expanded Medicaid coverage, and no increase in states that did not. On reimbursement we see less government pressure on the Clinical Lab Fee Schedule in 2015, than we have seen in the previous two years. I’ll start with the Doc-Fix. Last week the President signed historic legislation titled the Medicare Access and CHIP Re-authorization Act to primarily reform the Medicare Physician Payment Methodology. We are pleased that cuts to laboratory payments under Medicare were not included as part of the package. This legislation also encourages payments based upon quality and encourages us to make the healthcare systems smarter without dining access. This legislation is also directionally aligned with the HHS goals announced at January to tie traditional Medicare payments to quality or value through alternative payment models. Both the legislation and HHS have outlined specific measurable goals and timelines for these value based reimbursement models. We believe these emerging payment models will favor providers with scale that are more effective and efficient like us. Next, I’d like to provide a status update on the Protecting Access to Medicare Act of 2014 or PAMA, which calls for an orderly review of the Clinical Lab Fee Schedule. Our industry continues to work constructively with CMS on effectively implementing PAMA legislation. Just a few weeks ago I met with leaders at CMS and a delegation from our industry trade association to discuss the rule making progress that will govern any reimbursement changes. During that meeting we reviewed our view of the industry and its participants. We also discussed our shared goal of delivering an accurate, complete and efficient data collection process. We remain hopeful the rule making progress will be defined in 2015. It will establish an approach to building a representative view of the market. As this industry continues to evolve and mature, we have the right strategy and team and are well positioned to continue to lead. We continue to execute the company’s 5-point strategy. As a reminder, our strategy is to restore growth, drive operational excellence, simplify the organization, refocus on the core Diagnostic Information Services business, and deliver disciplined capital deployment. Now what I’d like to do is to share a few comments on each of the elements of the strategy. Well, this was the second consecutive quarter of organic revenue growth on a consolidated basis. We continue to focus on our core growth opportunities. First, we continued to focus on sales effectiveness. Second, we are getting traction on the Professional Laboratory Services agreements we signed last year; and third, gene based esoteric testing revenues grew in the quarter at a faster rate in more than a year. We continue to grow BRCA revenues which clearly benefited from Angelina Jolie‘s ongoing public advocacy. One way we differentiate ourselves is by advocating for open access for BRCA data for patients and clinicians. In collaboration with our French research consortium Inserm, we led the creation of BRCA share and open data share initiative. Its goal is to accelerate research on BRCA and gene rotations, particularly a variance of uncertain significance to improve the ability to predict which individuals are at risk of developing inherited breast, ovarian and other cancers. The Inserm collaboration is an example of how we are using our unmatched data and information assets to deliver insights to our customers that demonstrate the value that Quest provides. Last quarter we told you about some new population health, data analytics decision support tools we are developing. We have been piloting our population health tools with several physician, ACOs and health plans to evaluate disease states for their patient populations, monitor compliance with specific testing protocols and identify gaps in care. In this pilot our customers our now engaging with patients and healthcare professionals proactively, encourage the appropriate use of screening and monitoring test to drive better health. In addition to population and health tools we are making progress to delivering on what we call interactive insights to providers and patients. Our interactive insight offer providers trendy data interactive features such as customizable reports and additional content such as videos and articles specific to conditions and disease. IntelliTest Analytics is a web based secure portal that provides hospitals, integrated delivery networks and physicians practices with data driven insights about test utilization patterns, so they can adhere to clinically appropriately testing norms. Care360 revenue cycle management helps customers manage denials of billing claims with a focus on improving patient and payer collections. In November 2012 we established a new vision that spoke to the impact we have on peoples’ lives. Our vision is empowering better health with diagnostic insights. Our vision was in a central part of becoming more external and customer focused. Since then we’ve made tremendous progress bringing the vision to life. Well, we are not just a lab; we are more than a lab. We are a trusted partner and we provide deep clinical insights. Our vision was the first step. Next we needed to turn it into a compelling customer facing brand, a simple consistent way to talk about Quest, who we are, the value we bring; in short, what is the Quest difference. Our new core brand idea is a powerful one. It is action from insight. Our brand strategy is based on three pillars; the idea that we inspire action from the work we do, that we have limited answers or patients and healthcare providers and that we advocate better health for patients and communities. This is a powerful idea, that notion that from data comes insight, from insight comes action, the action that transforms lives. Well, as you can tell I’m excited about what our new corporate position, it means for Quest. It translates our vision into a concise, clear and actual brand that gives us an opportunity to reshape our place in the industry, allowing us to continue to differentiate ourselves and not compete solely on price. Brand is more than a logo, and we’re tag lined. To bring our band to life, we have to change the way we think and talk of what we do. Additionally, we are engaging all of our 45,000 people with the direct impact on delivering this brand promise. You will start to see the new brand in action in the coming weeks and months. Next is our strategy for driving operational excellence. We are well underway with planning the next phase of Invigorate, which will extend our cost savings to $1.3 billion by the end of 2017. As in the past we continue to update you on the progress as we go. The third element of our strategy is to simplify against and strength our organization. We’ve been focusing on execution and building a performance oriented culture. We are very pleased to be included recently as one of the Fortune Magazine’s Worlds Most Admired Companies. Over the past year we have introduced a number of new management tools as part of the Quest management system. We are rolling out a new leadership development initiative this month and as I visited more than a dozen of our major facilities in conjunction with our new brand rollout, I found employees at all levels to be highly engaged and excited about the challenges ahead. The fourth element of our strategy is to refocus on our core Diagnostic Information Services business. We continue to make good progress and the joint venture with Quintiles is the most recently example of doing this. After considering a broad range of options for our clinical trials business, we found the joint venture was the best option to enable us to focus on the core while unlocking the value of this important business. We’ll continue to review our portfolio and look at options for non-core assets and we always strive to build value for our shareholders. And then finally, we remain focused on the fifth element of our strategy, delivering disciplined capital deployment. During April we completed the refinancing of more than $1.2 billion of our debt that will lower interest rates for the year to come. We paid our dividend at the increased rate and as noted earlier, we think the joint venture with Quintiles will enable us to share in our future value creation without requiring significant capital outlays. Now Mark will provide an overview on the first quarter financial performance, walk you through the details of 2015 outlook, which is based on our strength in the operational performance and in improving business environment. Mark.

[Mark Guinan:]

Thanks Steve. Starting with revenues, consolidated revenues of $1.84 billion increased by 5.3% versus the prior year and grew organically by 70 basis points. Revenues for Diagnostic Information Services or DIS for short grew by 4.9% compared to the prior year. Volume measured by the number of requisitions increased 5.6% versus the prior year, while revenue per acquisition was lower than the prior year by 0.7%. For DIS, acquisitions contributed nearly 5% to revenues. Excluding acquisitions DIS revenues volumes and revenue per acquisition were all essentially flat for the quarter. I would like to share some addition context on these underline volumes and revenue per acquisition metrics. First let me touch on the impact on the harsh winter. As we have shared in the past, our analysis is based on changes in volume versus trend for given geographies related to specific weather events. Additionally we provide guidance based on historical weather patterns. For the past two years we’ve experienced unusually severe winters, however in 2012 we had a mild weather, which resulted in upside to our expectations. This year volumes were negatively impacted in the quarter by a harsh winter throughout much of the country and in particular the northeast. While the impact was not as severe as a year ago, it was worse than we anticipated. We believe the impact of weather on the quarter was approximately $0.08 of EPS. As a result, we are pleased with the quarter and we were planning on better performance. Turning to underlying revenue per acquisition, we saw modest reimbursement pressure in the quarter that was in line with our expectations. That reimbursement pressure was offset by favorable test and business mixtures. Moving to our diagnostic solutions business which includes risk assessment, clinical trials testing, healthcare IT and our remaining products businesses, revenues grew by 11% compared to the prior year. We enjoyed strong growth during the quarter from our clinical trials products and risk assessment businesses. Adjusted operating income for the quarter was $269 million or 14.6% of revenues compared to $236 million or 13.5% of revenues a year ago. With comparable volumes essentially flat, the improvement can be primarily attributed to the benefits of our business mix, Invigorate program and M&A related impacts including synergies. These factors enabled us to improve gross margins and further leverage SG&A. As a result, our adjusted operating income and earnings grew faster than revenues. For the quarter adjusted EPS excluding amortization was $1.05, 13% better than a year ago. Amortization was $0.09 in both 2014 and 2015. The company recorded after tax charges totaling $80 million in the quarter, primarily associated with the debt refinance in the first quarter. The charges also included restructuring and integration costs associated with our Invigorate program and recent acquisitions and combined to reduce reported EPS by $0.54. Last year’s first quarter included after tax charges of $18 million, primarily associated with restructuring and integration charges which reduced reported EPS by $0.13. Let me share a few comments on special items. As you think about special items, because of their nature they do fluctuate from period to period. This quarter we incurred a charge related to the first tranche of debt retire. A second tranche of debt was redeemed in April which will result in a similar charge in the second quarter. We expect to incur a total pre-tax charges of nearly $115 million related to our debt refinancing. In addition to charges our special items also include benefits. For example, we anticipate recognizing a gain related to the joint venture with Quintiles at the time of closing. This gain will occur when we contribute our clinical trials business into the joint venture which is expected to take place no later than the third quarter. This gain is expected to be in the similar magnitude to the total charges associated with the debt retirement. We will adjust this one time gain out of our earnings. To put this in perspective, since the beginning of 2012 the benefits adjusted out of earnings have been approximately the same amount as the charges adjusted out of earnings. Bad debt expense as a percentage of revenues was 4.3% flat to a year ago. As a reminder, bad debt expense is typically highest in the first quarter due to increased patient responsibility associated with coinsurance and deductable requirements. Our DSOs were 45 days, three days lower than last quarter and four days lower than a year ago. This is a testament to our operational excellence, continuously demonstrated by our billing operations and patient service centers teams that continue to be effectively engaged with patients and payers to ensure that we get paid for the work we do. Reported cash provided by operations was $52 million in the quarter; however, excluding the $78 million of cash charges associated with the retirement of debt, cash provided by operations would have been $130 million in the quarter versus $84 million a year ago. Capital expenditures were $56 million in the quarter compared to $68 million a year ago. Moving to guidance, we expect full year 2015 results from continuing operations before special items as follows

[Steve Rusckowski:]

Thanks Mark. Well, to summarize we delivered solid top and bottom line growth and improved profitability in the first quarter. This is our second consecutive quarter of reported organic consolidated revenue growth. We continue to make good progress executing our strategy and we’re excited to share more details on the joint venture with Quintiles when we close. Thanks for your support. Now we’d be to take any of your questions. Operator.

[Operator:]

Thank you. We will now open it up to questions. [Operator Instructions]. Our first question is from Mr. Mike Cherny from Evercore ISI. Sir, your line is open.

[Mike Cherny:]

Hi, can you hear me?

[Steve Rusckowski:]

Yes, good morning. Yes, we’re here.

[Mike Cherny:]

I apologize for that. So a question about volume growth. It seems to be – you talked about an improvement from a market outlook perspective. Obviously weather across the board is pretty nasty this year. If I recall correctly, I think your still rolling off the comp related, some of the lower margin business that you guys decided to walk away from last year. Is there any way you could provide us with a number of terms of what you think that took away from organic volume growth, so we can try and get to a true number, particularly one that correlates with the positive market competitor you’ve had.

[Steve Rusckowski:]

Yes, well first of all your right. We are rolling off some of these businesses. In the past we haven’t given you specifics on that. Marks would you like to shed some light on sequentially our continued improvement?

[Mark Guinan:]

So Mike, thanks for the question. We have referenced at one point 150 basis points of volume differential. Obviously we don’t want to get into the habit of every single quarter reconciling that, but directionally it’s the order of magnitude and what you might think of in terms of the impact on our volume. We did also reference that we would annualize that at some point in the second quarter, but also to be clear, we took those actions in the second quarter, so you shouldn’t be expecting the year-over-year comp to be fully positive until the end of that quarter. So it’s a similar level of volume as we also said, although we continue to regularly look over our portfolio and ensure that all the volume is value creating volume. That discreet set of actions we took during the second quarter of last year was kind of a one-time event and you shouldn’t expect those kind of things to happen again at any sort of regularity.

[Steve Rusckowski:]

Yes, so Mike, let me just add to Mark’s comments. What we’re doing is continuing to focus our energy on parts of the market that aren’t growing and defocusing on those parts that aren’t and that’s related to our earlier remarks about what we are doing with our resources and accounts. But the things we wanted to see grow are growing in the quarter. We did mention that we saw the highest growth rate in our gene esoteric testing business this quarter, we are happy about that. We continue to see good growth in our wellness business, our prescription drug monitoring business, Hepatitis C. All the areas that we focused on for growth are progressing nicely and as you know, I mentioned in my commentary BRCA as well. So the focus is good. Sequentially we are seeing improvement and the momentum continues to build, so we feel good about that.

[Mike Cherny:]

No. Thanks guys. That’s really helpful in understanding the underlying dynamics. And then just quickly on BRCA specifically, I know you called out about esoteric, which is quite strong in the quarter and BRCA is a particular driver. Is it possible at this point given that it’s been a number of quarters since you first launched that test, to give a sense of the sizing of that business roughly to at least the esoteric base and over the course of this year how important you think the growth specifically there could potentially be?

[Steve Rusckowski:]

We’re not going to spell out the business. I mean obviously as you look at it, its magnitude relative to the overall size of the class. We don’t get into that detail and business of that size and certainly its growing. It’s one of the areas we called out previously and it continues to be a growth area along with prescription drug monitoring and certainly HCB, our special laboratory services there. So BRCA continues to provide growth that we’re not going to give any granularity at this point of sharing the actual revenues.

[Mike Cherny:]

No, that’s fine. I’d figure I’d try anyway. Thanks guys.

[Steve Rusckowski:]

Thank you.

[Operator:]

Thank you, sir. Our next question is from Mr. Isaac Ro from Goldman Sachs.

[Steve Rusckowski:]

Hi Isaac

[Isaac Ro:]

Very good morning guys, thank you. First question was just on the weather commentary you had. I was wondering if you could maybe try and ballpark the volume impact. I think I missed that, and then the second question had to do a little bit with the financial.

[Steve Rusckowski:]

That’s great. Mark you want to give some more color. We gave you an EPS impact of relationship to last year.

[Mark Guinan:]

Yes. So from a volume perspective and revenue, it’s probably in the area of around 150 basis points. So last year we talked about a 2% headwind due to weather. This year as I said, not quite as severe, but a fairly large differential from kind of what we would expect to be an average weather based on looking at historical patterns.

[Isaac Ro:]

Sure, that’s helpful, thanks. And then just in terms of market share I simply sort of my square out your commentary on volume and some of the benefits your seeing from your growth initiatives. How do you feel about your market share and then just last one was on tax rate, obviously a bit low this quarter. You had some one-timers, but how should we think about tax rate for the rest of the year?

[Steve Rusckowski:]

We continue to feel good about where we are focused in the market and where we are focusing we are picking up share, we feel good about that. As we mentioned in the past, we are deciding in some portion of our portfolio to not participate and so in those areas obviously we’re losing some share. But overall we’re trying to manage our business and the portfolio of resources we have to get the best of earnings growth. What you see in the quarter and we’re happy to show is that we actually reported nice operating income growth and I think it’s a good indication of our business mix and our focus on those areas of growth and how it’s driving some portion of our margin expansion which we called out in the script. So you want to mention Mark what’s going on with tax?

[Mark Guinan:]

So obviously periodically you can get some discreet items in your tax line and you can always anticipate those. So we did have a couple of small items actually, they we’re that large in Q1, but the direction we gave going to the year was that our tax rate will be higher than it was in 2014 and it would be more in line with historical levels and so I think that’s what your expectation should be for the balance of the year.

[Isaac Ro:]

Got it. Thanks so much guys.

[Steve Rusckowski:]

Thanks Isaac.

[Operator:]

Thank you, sir. The next question is from Mr. Ricky Goldwasser from Morgan Stanley.

[Steve Rusckowski:]

Hey Ricky.

[Ricky Goldwasser:]

Hi, good morning. I have two questions here. So first of all, now that you’ve refinanced the debt, any thoughts about buybacks and acquisitions for the remainder of the year. I think it wasn’t included in the original guidance. Do you see it at this point representing upside to numbers?

[Steve Rusckowski:]

Yes. So I’d say obviously there was kind of cash required Ricky. I’m sure that’s why your tying it to what are the implications for buybacks and I think at this point the guidance we gave is consistent, which is you shouldn’t assume any significant reduction in shares outstanding based on repurchases we committed to targeting to insure there is no dilution from the share account, but not any significant buyback to reduce shares. Now with that said, we have a strategy of deploying some of our cash every year to target 1% to 2% of growth through M&A and we’ve also said that if there was not some value creative M&A that we can identify that we will do more share repurchases. So I don’t want to completely rule out share repurchases, but at this point as part of our strategy we’re continuing to look and we’d like to believe that we can add some businesses, tuck in, hold in type businesses we’ve done in the past and that would probably be our priority for cash in the balance of the year. But should we find that there’s nothing that’s executable, certainly we would use that cash for more share repurchases.

[Ricky Goldwasser:]

Okay. And then one follow-up question on ACH, because obviously we are seeing this kind of like more and more lines joining the exchanges, but I think we are still not quite seeing that kind of like pull through on the volume side. Could you share with us your thoughts? What do you think is kind of like causing it? Is it that this population is consuming healthcare through kind of like hospital systems router the ambulatory space? Is it that you think that they don’t still know how to utilize healthcare and we’re going to see the opportunity kind of like later in the year. I mean any insight would be very helpful there.

[Steve Rusckowski:]

Yes, like you and everyone else in this market was trying to digest, the resorting if you will for the system and as we mentioned in our commentary, we are seeing an increase in Medicaid volumes, so that’s for sure and we see that. As far as the rest, it’s hard to understand where people have come from, went to and how they are entering the healthcare system. So we have seen like you some of the volume reports coming out of some hospitals, not all. Its mixed views on that, so we are still trying to understand how this will all sort out with you. But again, we’re starting to see the impact of more lives in the system. We’re hopeful. From the beginning of ACA we said we believe that the Affordable Care Act should be net positive for the industry and for us. We believe more people in insurance is a good thing. The diabetes studies that we showed shows that by having people with insurance it can have a positive impact on population health and we think that’s a good example of how more people in the system will serve the industry well, but also us as we go forward, so we’re hopeful.

[Ricky Goldwasser:]

So then just – last one, because you mentioned the population health. You highlighted the pilot that you’re doing with some physician offices on your population health tool. Should we think about – kind of how should we think about that business model? Should we think about it as a potentially longer term revenue opportunity or is it just kind of like needed aid value to create stickiness with the physician and potentially connect also with the hospital provider space.

[Steve Rusckowski:]

Yes, we’re thinking of both actually and we haven’t totally sorted it out, how this might work in terms of the business model. Clearly where we could show more value with accounts, we believe that does offer value in terms of our business, but secondly as we provide more and more value to integrated delivery systems and those organizations that are managing populations, we do have valuable assets here, information assets and this application we think is actually very valuable in terms of managing that population and we’re thinking our way through. May there be an opportunity for us actually to have a revenue business model for this, but we haven’t concluded on that yet.

[Ricky Goldwasser:]

Thank you.

[Steve Rusckowski:]

Thank you.

[Operator:]

Thank you ma’am. The next question is from Ms. Lisa Gill from J.P. Morgan.

[Steve Rusckowski:]

Good morning Lisa.

[Lisa Gill:]

Thanks very much. Good morning. Can you just maybe two things around the new JV. First off, I think that Steve I heard you say that clinical trial testing was about 2% in 2014. So should we think about that as being a 50 basis point headwind for the back half of this year? It sounds like the volume actually won’t go through your volume, but will come from a below the line items for the JV.

[Steve Rusckowski:]

Right. Mark, why don’t you walk through how this will get sorted out on a go forward basis?

[Mark Guinan:]

Yes, that’s correct. Depending on the timing, if you want to call it a headwind, it will be an adjustment, so obviously we won’t be the controlling interest as the minority owner. We have a fair amount of involvement in the JV; we have a number of our senior leaders who are involved with clinical trials moving into that business; we’ve got an executive we talked about in the past. John Heins [ph] who is actually going to be sitting on the board and involved in this JV, so while for accounting purposes we are no longer going to be recording it as a revenue and we’re no longer going to be reporting the income on the operating margin line. It’s not as if we’re completely distancing ourselves from the clinical trials business. In fact through the partnership we’re looking to drive even more in this relationship as we referenced in the earlier companion diagnostics and then potentially using our data for clinical trial enrollment as well. So yes, in terms of engineering, it will be a headwind on revenue, but from an earnings standpoint, we’re really just in 2015 moving it from one line to the other and then most importantly we believe it’s going to be significantly accretive to what we would have done otherwise with clinical trials in 2016 and beyond.

[Lisa Gill:]

So Mark, the way that I’m trying to think about it just from a modeling perspective and your guidance today of reiteration of your revenue expectations for 2015 and just given your comments around the weather in the first quarter, I’m just trying to square that up with how to think about the next three quarters and your expectations around both volumes as well as revenue growth and did you see something that you feel confident to maintain that number, because if I remember correctly, you gave that guidance before you announced the Quintiles JV?

[Mark Guinan:]

Right, so Lisa my apologies, let me make sure I’m clear. So despite whether we still believe the 2% to 3% top line guidance is attainable; however, as I said in my prepared remarks, I will be adjusting that for the JV once I know the timing. So we will be reducing that 2% to 3% revenue growth guidance impacted by the JV, nothing related to weather.

[Lisa Gill:]

Okay great. And then just Mark, my second follow-up question is also for you. It’s just around SG&A in the quarter and where you are on the cost saving initiatives. The SG&A came in a little bit higher than we anticipated, but your gross profits are a little bit higher. I’m just wondering around the timing aspect of that again. How do we think about the cost savings initiatives coming in over the next year or so?

[Mark Guinan:]

Sure. So again, I don’t look at any one specific model, so not sure why we may have been different than what you were expecting, but I can talk about SG&A. Obviously Invigorate contributes to build our cost of sales as well as SG&A. We continue to make progress on Invigorate. If you look quarter-to-quarter, SG&A was fairly flat in dollar terms. We do have that headwind every year at the beginning of the year from bad debt, so we did get about 30 basis points of increase from bad debt. That is typical cycle of bad debt at the beginning of the year. It tends to be higher than the end of the year, so we are very comfortable with managing of SG&A. You can see that we’ve leveraged it significantly versus last year and as part of our Invigorate program we expect to continue the leverage there.

[Lisa Gill:]

Okay, very helpful. Thank you.

[Operator:]

Thank you, ma’am. The next question is from Mr. A.J. Rice from UBS. Sir, your line is open.

[Steve Rusckowski:]

Good morning A.J. You there?

[Operator:]

Mr. Rice, your line is open.

[Steve Rusckowski:]

A.J. are you on mute.

[Operator:]

It looks like we lost Mr. A.J. Rice, but next question comes from Mr. Bryan Brokmeier from Maxim Group. Sir, your line is open. You may proceed.

[Bryan Brokmeier:]

Hi, good morning. Did you say that the organics volume was flat and is that excluding any business that you’re walking away from or is that just M&A?

[Steve Rusckowski:]

Mark, you want to take it?

[Mark Guinan:]

Yes, so I didn’t make any adjustment before. As we talked about the business we sort of walked away from. That is an actual number, so we were just talking our results and we’re adjusting for M&A to get to that figure.

[Steve Rusckowski:]

So the walk aways we talked about in the past are not adjusted out of that. So that would be based on the earlier comments of lift if you want to look at that.

[Mark Guinan:]

Yes, we would have shown growth and I adjusted for that.

[Bryan Brokmeier:]

Okay, and NIPT is another large market that you’re currently participating in for a partnership. Can you provide any color on when you’re planning to launch your own test?

[Steve Rusckowski:]

Well, first of all its going well. So as I mentioned earlier, we’re quite pleased with our growth rate in advanced and esoteric testing and our non-evasive testing is – pre natal testing is going quite well, so we’re hopeful about that. We continue to work through our own test as you say. We haven’t announced a specific data on that, but we’re making very good progress.

[Bryan Brokmeier:]

Okay, thank a lot.

[Operator:]

Thank you, sir. Our next question is from Mr. Darren Lehrich from Deutsche Bank. Sir, your line is open.

[Dana Nentin:]

Hi, good morning. Its Dana Nentin in for Darren.

[Steve Rusckowski:]

Hey Dana.

[Dana Nentin:]

Hey. So just going back to your DSOs being down through your four days from last year, I was wondering if you could provide any color there as it relates to the [inaudible] payment recoveries and I guess if not can you update us on the status of those non-payments?

[Mark Guinan:]

Yes, it’s not related in any way to that. Largely it points to UMass, the acquisition of that business. Last year as we were transitioning the billing system from them to us there was some complexity in that and it slowed some collections down a bit and inflated our receivables, I’d say relative to what they would have been otherwise last year. So now that we’ve gotten that behind us, I’d say that’s probably the biggest probably year-over-year. So it’s really nothing at all related to molecular.

[Dana Nentin:]

Okay. And can you update us on the size of those non-payments?

[Steve Rusckowski:]

Yes, we’re making progress. We’re judiciously going after our payments for what we do. We’re working with all the health plans to do that and I could share with you that if you did that we are progressing through doggedly working through test by test, payer by payer to make sure we get paid for the good work we provide, so you feel like we’re making progress.

[Mark Guinan:]

But I do want to clarify, because if we’ve taken this question a number of times in the past and consistently given our response, we are not expecting any sort of significant windfall. While certainly this is a headwind and I think you’ve heard from maybe other people in the laboratory area about significant reductions in payments based on some of the changes, whether its CBT 2013 or now CBT 2015 or other changes in the reimbursement requirement. So while there’s certainly been a headwind, it’s not material to our performance this year and it should not be something that you expect at some point we’re going to come back and say, hey, we solved a bunch of issues and here’s a big good bag.

[Dana Nentin:]

Okay great, that’s helpful. Thanks.

[Steve Rusckowski:]

Thank you.

[Operator:]

Thank you. Next question is from Mr. Robert Willoughby from Bank of America Merrill Lynch. Sir, your line is open.

[Robert Willoughby:]

Hi Steve and Mark. Your approaching a year of ownership now of solicitors. Can you speak to retention rates of the business there, what synergies have been captured, what’s left on the table there?

[Steve Rusckowski:]

Yes, so we’re making excellent progress with the inspiration of solicitors. What we did in that geography is to really combine both of our businesses together and so we’re integrating operations, we’re integrating our G&A functions, some portion of the improvement you see in our SG&A. This quarter is related to that good work we’re doing there. We also have integrated the sales force. As you know when you buy any organization, we had planned on some attrition related to clients that we know that would not move over to us and have planned that in our model and we’re tracking to make sure that we did have it planned. So we feel good about the progress that we made and we feel good about what we’re delivering in terms of creating value for our shareholders.

[Robert Willoughby:]

Okay, thank you.

[Steve Rusckowski:]

Thank you.

[Operator:]

Thank you, sir. The next question is from Ms. Amanda Murphy from William Blair. Ma’am your line is open.

[Amanda Murphy:]

Hi, good morning guys. I guess just a couple of follow-ups on the reimbursement side. So you mentioned the growth on the esoteric front and BRCA specifically, but just curious as you think forward. Obviously there is a lot of opportunity, particularly in sequencing based diagnostics. What’s your view on the reimbursement environment there specifically? I know there has been some work to establish some coding there, so curious just thinking about that this year and then longer term?

[Steve Rusckowski:]

We deliver a lot of value. As you know the average market price has come down over the last year and a half, two years. We believe where we are right now is supporting the plan we have going forward. We feel good about that and we’ll continue to as we’ve done with everything in our business; continue to have the data that justifies that we’re putting a lot of value here and we need to make sure we get back in our reimbursement, the value it delivers. So we’re going to be careful before we do anything. In terms of pricing changes we believe that defending and continuing to differentiate ourselves in the marketplace is important for us. We think it’s important for the industry to continue to defend and get our value back for the marketplace. There’s a great value we deliver and that’s position we continue to take going forward. So Mark, anything you’d like to add?

[Mark Guinan:]

Yes, Amanda, I’m sure as you fully appreciate, especially in the gene based area, reimbursement is related also to your offering. It’s not an independent decision. So look at our onc [ph] advantage product and the fact that we have a panel of actionable genes, 34 actionable genes and as we engage with the payers, I think the response is the dialog with our medical professionals and so on is you know fairly positive because of the fact that we are moving forward with the limited panel that is actually all around the action. So as Steve talked about earlier, data brings insights, insights to drive actions and I think the payers are much more willing to pay for things, where clearly there is a path towards actions. So again, not commenting on anybody else’s offerings, it’s not the same for the all of it. Certainly the choices we make around our product offerings and the size of the panels and the action ability of those panels also influences our ability to get paid.

[Amanda Murphy:]

And one follow-up to that, is there any way that you can give as an idea as how big that business is for you now. Obviously esoteric encompasses quite a lot, but if you think about just sequencing, I guess as a bucket how big that is and how much of your growth on esoteric is coming from that side of the world. I know you mentioned BRAC again, but...

[Steve Rusckowski:]

Mark and Dan should talk a little bit about how we breakup things in our 10-K.

[Mark Guinan:]

Amanda we break out the gene based and esoteric in the 10-K we shared on the supplemental analysis on the website. So overall gene based esoteric and Anatomic Pathology is about $2.5 billion business, but in terms of specifics sub-segments and different cuts of the data at the level of granularity you are looking for, we haven’t share that at this point.

[Amanda Murphy:]

Okay, thanks guys.

[Steve Rusckowski:]

Thanks.

[Operator:]

Thank you. Our next question is from Mr. Nicholas Jansen from Raymond James. Sir, your line is open.

[Nicholas Jansen:]

Yes, Mark this one is for you on free cash flow. I think the guidance this year is $550 million, but that certainly excludes some things like the debt restructuring charges and some of the project Invigorate 2.0 charges. So I’m just trying to get a sense of actually how much true free cash flow is available this year. I know you have a dividend payment, I know you guidance includes kind of 1% to 2% revenue growth from M&A. So maybe just walk me through the cash flow dynamics.

[Mark Guinan:]

The only thing that I’m excluding is the debt refinancing, so I’m not adjusting for any of the Invigorate expenses. So as we talked about it was $78 million in the quarter. We talked about the fact that we’d have a somewhat similar charge in the second quarter. So that should guide you. I mean at the end of the day, we are expecting somewhere a little less that $100 million of expense from the refinancing. So the $550 million less that will be kind of I guess the free cash flow number that you are looking for that takes the new account to cash expenditures for other adjustments. And again, we have some positive guys that we adjust out, but actually they are cash positive as well. So when you net all those out, normally we don’t many adjustments, but just given the size and I guess the unusual nature of the debt refinancing, I decided to adjust that just to make the year over year comparison what I thought was a little more meaningful and comparable.

[Nicholas Jansen:]

Okay, that’s helpful. And then regarding the $0.08 weather headwind. I’m just trying to reconcile that relative to what you reported. So I guess on the previous conference call you talked about having 1Q earnings only slightly better than 2Q to 4Q. If we were added $0.08 back to the $1.05 that would be meaningfully better than slightly. So I’m just trying to reconcile kind of the quarter relative to your internal expectations that you gave back in January and kind of how that proceeds to the guidance that was reiterated today.

[Steve Rusckowski:]

Thank you for the question. Obviously when we spoke to you in January we hadn’t incurred the February weather, but we had incurred some January weather. So we were trying at that point with the knowledge that we had at that point, we just wanted to make sure that people didn’t get overly exuberant about the potential of the first quarter given the easy compare with the weather in 2014. So yes, a couple of things. One is we probably formed a little more stronger than we expected in the first quarter adjusting for the weather, so had the weather not been there, it would have been a really, really strong quarter. There is various reasons for that. However I’ll go back and say the guidance that I gave today is something that we are very confident in and whatever the performance in the first quarter, you just assume that guidance is reasonable and that’s where we are going to land.

[Nicholas Jansen:]

Thanks for the clarification.

[Steve Rusckowski:]

Thanks.

[Operator:]

Thank you. Next question is from Mr. Brian Tanquilut from Jefferies. Sir, your line is open, you may proceed.

[Steve Rusckowski:]

Good morning.

[Brian Tanquilut:]

Hey, good morning guys. Just a quick question for you on the hospital side. So I know we’ve talked about in the past how the opportunity is for these hospitals to look to outsource their labs. We are hearing more and more about payer pressure on commercial pricing for the hospital based labs and also narrow network strategies specifically you know Anthem, Indiana, Kentucky and Ohio. So are we seeing more of that or is the pressure accelerating in the hospitals that you are starting to see more conversations with hospital CEOs.

[Steve Rusckowski:]

As I mentioned in the past Brian, the discussions we’re having and the opportunity list that we have and that we are working is larger than we ever anticipated. Most CEOs and CFOs have lab strategies as part of their shortlist were encouraged by all that. The dynamic you mentioned we think is a very positive dynamic. As we’ve talked about, we offer great value. We have some of the best pricing for the quality we deliver in this market place and therefore in terms of value we are in the strongest of the choices people have. And yes payers are now starting to look at every tightening their network further, but wide variation in prices from what we have here versus hospital outreach are notable and yes, it’s from the payers, but I also mentioned two other dimensions to that. Employers are spending a lot more time on their healthcare costs and seeing wide variations, so they are starting to ask questions. And most importantly consumers with a higher co-pay in deducible have now started to ask questions. Why would their bills go up, just because physicians are now working for integrated Delivery Systems verses when those physicians used to send the work to independent laboratories like ourselves. So all this is coming together and in a good way. Most hospitals we talked to realize with payment models moving away from fee for service to population health and bundle payment models that no longer is an incentive to – or they are no longer incentives to drive volume and activity, but look at how they deliver the best quarter to healthcare with the lowest possible cost, that’s what we saw at the University of Massachusetts. And then second, some do see and realize that they do have a melting ice-cream cone with some of the differential commercial rates that they enjoy today on their hospital outreach. Therefore they are taking to us and thinking about what their options should be. So it’s coming together nicely. We actually applaud what’s happening with Anthem. We think it’s a positive change for the industry and a positive indication that there is a catalyst out there in the system to start to get the discussions started and move this at an accelerated pace.

[Brian Tanquilut:]

Got it. Thanks Steve.

[Steve Rusckowski:]

Thank you.

[Operator:]

Thank you. Our next question is from Mr. David Clair from Piper Jaffray. Sir your line is open. You may proceed.

[David Clair:]

Yes, good morning everybody. So I’m just curious, given the timing of the PAMA final rule, it sounds like they are going to miss the initial June proposed rule deadline. So how would you handicap the odds of the clinical lab fee schedule reprising happening by 2017?

[Steve Rusckowski:]

Well David, I’ll leave the odds giving to Las Vegas. Hard to handicap CMS, hard to handicap anything that happens in Washington. As I mentioned, we were down there last month; we being myself and some members of our industry. We had a very good conversation. Its complex and they are working through all that complexity. With all the different entities that we have to give them their data, all the different codes they have to look through, all the different tax IDs and so they are digesting all of that. So with all that said, it is still their goal and that’s how they say it, still their goal to have the rule making out in 2015 for collection in the ’16 for ’17 a refresh to the clinical lab fee schedule. So that’s the gold they are still working at.

[David Clair:]

Okay. Thank you and then I was wondering was the debt refinance included in your original EPS guidance and if it wasn’t, what’s the offset to the interest savings that we are going to see in the year.

[Mark Guinan:]

And so, I’m sure as you appreciate when put guidance together you got a number of items to consider and various ranges I know for modeling purposes, you always need a discreet entry, but we are considering ranges of potential outcomes and inputs. So certainly we had a reasonable expectation we might do the debt refinancing, we didn’t know exactly the timing, we didn’t know exactly what the new interest rate might be and hence the interest savings. So at this point since I reaffirmed guidance and EPS, assume that the interest savings is in there and I can’t really call out an offset, because we still have $0.15 of range within the guidance. So its within the parameters of all the different contributors to how the EPS was driven and so I couldn’t tell you exactly what the offset was, because there isn’t necessarily, because we are still within a range that’s quire broad.

[David Clair:]

Okay, thank you.

[Operator:]

Thank you, sir. The next question is from Mr. Jack Meehan from Barclays. Sir, your line is open. You may proceed.

[Steve Rusckowski:]

Hi Jack.

[Jack Meehan:]

Hi, good morning guys. I want to sort of just ask about the new BRAC data sharing initiative you announced earlier this week and just the background, how it came together. And then timing wise, just curious why now? Obviously you’ve been on the market 18 months and I think there is a lot of differing thoughts on the merits of the U.S. So just in terms of it being a metric, what are you seeing on the market?

[Steve Rusckowski:]

First of all we responded quickly to the opportunity to enter the BRCA market. After the Supreme Court ruling, we entered the market about four months afterwards. So we entered into the market. And as we approach all businesses Jack, we continue to look at ways that we can get better at what we do. So we’ve been improving our offering in terms of our capabilities, of our sales force, capabilities of our generic counselor, capabilities of the quality of our reporting and the look and feel of our interactive insights as I talked about it in my remarks. But also we are looking at how do we get the actually results to be of higher quality and we only have so much data. We believe it would be the right thing to do, to take our data, combine it with other people’s data. The inserm being the French Institute for Health has 16 labs that report their data gain. We are also happening to have LabCorp participate in this. So we are going to put in both of data that’s into Inserm and we believe that this is just the beginning, there will be others to follow. In the outcome of this, we believe it will be an outcome of the curation and also the analytics around that data to produce better sensitivity and specificity around the testing for BRAC and we think that’s a good thing for the industry and a good thing for us. So we think this is the next step of improving and delivering a great solution to the market place at a better way. We will continue to differentiate ourselves and everything I just described, how we sell it, how we support it, how we present it and how we explain it’s in our solution to the market place which we think will allow us to continue to differentiate ourselves versus the other options that our customers have. So we think its progress in the right direction.

[Jack Meehan:]

Yes, got it. And then just maybe off that; is there a way to gauge a sense for just collectively the contribution in terms of volumes and just you know where you think it needs to be in order to have similar VUS rates and if that’s a good metric to consider?

[Mark Guinan:]

So we are not going to see any sort of detail on the volumes that are contributed. In the French the institute has been collecting data for 10 years. So there is a fair amount of data. Obviously you’ve got us and LabCorp who have decided it’s in the best interest of patients to contribute, come out to better data information. We are going to compete on other aspects of our product offering than anything around the science. And again back to the VUS, this is not about VUS. This is really about insuring we have the best ability to provide information to patients and therefore we won’t get into sort of the medical comparisons or anything like that; that’s not why we are doing this. We are not doing this for competitive reasons. We are doing this because it’s in the best interest of patients.

[Jack Meehan:]

Got it and if I can squeeze in one more maybe just for Mark, curious if you are seeing anything on the deductable side and any changes to start the year in terms of the prevalence of high deductible health plans. A - Steve Rusckowski1 I mean it’s still early for us to know whether there has been a large hit. I mean obviously we’ve built into our assumptions that continued trend towards more high deductable plans for a reported based provider insurance. We did have the usual first quarter lift in bad debts like our efforts in some of it and so forth, so nothing I can share of detail at this point.

[Jack Meehan:]

Okay, thanks guys.

[Operator:]

Thank you and our last question is from Mr. A.J. Rice. Sir you line is open you may proceed.

[A.J. Rice:]

Thanks. Hi everybody, sorry about earlier. Just two quick areas of question; first on the upcoming JV with Quintiles, is it generally in the ballpark to think of the operating margins. Thank you that you gave us to revenues. The operating margins on the clinical trial business you are contributing are somewhere close to the corporate average and then as you think about the JV on an ongoing basis, will there be either cash commitments on your part going forward after the JV setup or will you be taking – have opportunities to take cash out. What are the cash flow implications of the JV?

[Mark Guinan:]

Right so, A.J. I won’t get into the specifics, but the clinical trials businesses is not materially different from its order of magnitude; its margin is similar the overall enterprise. Obviously you get a lot more granularity on that when you start seeing the changes in our equity earnings line going forward. In terms of cash, there is just some initial cash from a working capital standpoint that’s not significant, because we are going to continue to kind of wean down the receivables of our business and keep that as opposed to contributing that to the venture. So at the end of the day that’s going to about a wash. We have an annual – and it’s part of the contract. We have an annual ability to take out cash dividend as will Quintiles as well. So we are expecting to get cash contributions out of the JV going forward. And in terms of any sort of future cash needs, it’s part of this agreement. We have the ability to both, to contribute cash if you want to do more M&A through the partnerships or there some other investment opportunity that going forward agrees make sense. There is an ability to bring cash into the entity. So we feel it’s pretty flexible in terms of cash, but we certainly are expecting to get our fair share of cash out of this entity going forward as well.

[A.J. Rice:]

Okay and then maybe just one other follow-up. I think you had said this before, and I think it’s my sense of the industry overall, but when you think about the larger contracts with payers and others, that this is a relatively benign year that doesn’t have a lot of re-contracting activity, but I just wanted to put that out there and confirm that that is indeed the cash, if it’s true.

[Mark Guinan:]

So independent of whether we had a lot of re-contracting. What we have said is that the pricing pressure, the price erosion in 2015 is to be more similar to ’14 and in ’14 it was less than a 100 basis points and I’m not going to get into the specifics of how close is it going to be ’14, but more like ’14 and I also said that as part of the Investor Day that I would expect ’16 and ’17 to also be more like ’14.

[A.J. Rice:]

Okay, all right, thanks a lot.

[Steve Rusckowski:]

Sure.

[Dan Haemmerle:]

Okay, no further questions. Thanks again for joining the call today. As you can see, we are making good progress executing our strategy. We are excited about the clinical trials opportunity. We appreciate your support and you have a great day. Thank you very much.

[Operator:]

Thank you for participating in the Quest Diagnostics’ first quarter 2015 conference call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics website at www.questdiagnostics.com. A replay of the call may be accessed online at www.questdiagnostics.com/investor or by phone at 866-430-5847 for domestic callers, or 203-369-0933 for international callers. Telephone replays will be available from 10