A PowerPoint presentation and spreadsheet with our results and supplemental analysis are also available on the website.

Transcription

1 Quest Diagnstics Incrprated Cnference Call Prepared Cmments Fr the Quarter Ended December 31, 2015 Cnference peratr: Welcme t the Quest Diagnstics Furth Quarter and Full Year 2015 cnference call. At the request f the cmpany, this call is being recrded. The entire cntents f the call, including the presentatin and questin and answer sessin that will fllw, are the cpyrighted prperty f Quest Diagnstics with all rights reserved. Any redistributin, retransmissin r rebradcast f this call in any frm withut the express written cnsent f Quest Diagnstics is strictly prhibited. Nw I d like t intrduce Dan Haemmerle, Executive Directr f Investr Relatins fr Quest Diagnstics. G ahead, please. Dan Haemmerle: Thank yu and gd mrning. I am here with Steve Rusckwski, ur president and chief executive fficer, and Mark Guinan, ur Chief Financial Officer. During this call, we may make frward-lking statements and als discuss nn-gaap measures. Actual results may differ materially frm thse prjected. Risks and uncertainties that may affect Quest Diagnstics future results include, but are nt limited t, thse described in Quest Diagnstics 2014 Annual Reprt n Frm 10-K, quarterly reprts n Frm 10-Q and Current Reprts n Frm 8-K. Our earnings press release is available, and the text f ur prepared remarks will be available later tday, in the Investr Relatins "Quarterly Updates sectin f ur website at A PwerPint presentatin and spreadsheet with ur results and supplemental analysis are als available n the website. Nw, here is Steve Rusckwski. Steve Rusckwski: Thanks, Dan. And thanks, everyne, fr jining us tday. This mrning, I ll prvide yu with highlights f the quarter, share a few cmments n industry dynamics, and review prgress n ur five-pint strategy. Then Mark will prvide mre detail n the results and take yu thrugh guidance. We cntinued t make prgress n ur path frward, delivering a strng year and psitining urselves very well fr Befre turning t the quarter, let me recap ur perfrmance fr the year: Revenues grew by 2% n an equivalent basis, Adjusted perating incme as a percent f revenue expanded by abut 110 basis pints and Adjusted EPS excluding amrtizatin grew by 6%. During the furth quarter: Revenues f $1.85 billin dllars grew by 60 basis pints n an equivalent basis 1

2 Quest Diagnstics Q Prepared Cmments Adjusted EPS excluding amrtizatin was $1.19. This was ur seventh cnsecutive quarter f year n year EPS grwth. Befre I get t ur strategy update, I d like t talk abut industry dynamics, staring with the recent CMS prpsal related t the PAMA legislatin, which as yu knw stands fr the Prtecting Access t Medicare Act. As yu have heard me say befre, PAMA needs t be built n a representative view f the market. The current prpsal limits the definitin f an applicable lab t exclude a large prtin f the market. We als believe that a 2017 effective date will be a significant challenge fr all parties. With strng supprt frm the American Hspital Assciatin, the American Medical Assciatin, and members f Cngress, we remain ptimistic that tgether, industry and gvernment can still achieve a reasnable utcme. Secnd, I wuld like t discuss the prpsed FDA Guidance n the regulatin f Lab Develped Tests. We understand the FDA s cncerns but we cntinue t believe that what the FDA has prpsed wuld result in labs being subject t bth CLIA and FDA regulatins that may be verlapping, duplicative and smetimes cntradictry in their requirements. This has the ptential t raise health care csts fr patients and ptentially hinder medical innvatin. The Huse draft legislatin is a gd first step in the legislative prcess. We share ACLA s gal f prmting and supprting diagnstic innvatins that prvide physicians with the insights necessary t advance patient care and save lives. We want t wrk with Cngress t get the right balance in legislatin right fr the industry, right fr physicians and right fr patients wh depend upn ur diagnstic insights t make infrmed health care decisins. Nw let me shift t the prgress we are making n ur five-pint strategy which is t: Restre grwth; Drive peratinal excellence; Simplify the rganizatin; Refcus n ur diagnstic infrmatin services business; and Deliver disciplined capital deplyment. Let s start with grwth. Just 3 years ag, this business was shrinking by mre than 4%. We slwed the rganic decline t 2% in 2014 and have nw grwn rganically n an equivalent basis fr the 5th cnsecutive quarter. We grew 2015 full year revenue by 2% n an equivalent basis and we are well psitined fr Our gene based and esteric testing business grew apprximately 5% t $1.8 billin dllars fr the year. We cntinued t see strng grwth in ur infectius disease testing and prescriptin drug mnitring. 2

3 Quest Diagnstics Q Prepared Cmments Additinally, in late 2015 we launched tw cmpanin diagnstic slutins fr nn-small cell lung cancer. This week we annunced anther cmplementary diagnstic test fr melanma. Quest's expertise, scale and cllabratins with tp rganizatins such as Dak and Bristl- Myers Squibb psitin us t prvide cmpanin and cmplementary diagnstic test services fr immuntherapies n a scale ther prviders can't match. We are encuraged by the prgress f ur clinical franchise teams and expect t cntinue t build mmentum ging frward. Secnd, ver the past few years, we have utlined ur strategy t partner mre effectively with hspital systems. We have shared ur view that hspitals will lk t partner with us t develp and execute their lab strategy. In Nvember, we annunced the acquisitin f Hartfrd Healthcare s utreach business. We have been wrking n detailed integratin plans and nw expect this relatinship t clse later in Q In December, we annunced a prfessinal labratry services relatinship with Barnabas Health, New Jersey s #1 health system. Under this relatinship, we will manage inpatient labratry testing services fr seven f their lcatins thrughut New Jersey. We are currently wrking thrugh the transitin plans. We expect clinical testing vlumes t be fully transitined by mid-year These are tw strng prf pints f an evlving market where hspitals are lking fr high value, wrld class partners. We cntinue t be encuraged by the rbust pipeline f pprtunities we have develped. In additin, we are building ur prtfli f health infrmatin technlgy slutins. Our capabilities help payers, prviders and patients t imprve care, lwer cst and manage ppulatins. We are rlling ut ur new suite f slutins called Quanum internally t ur sales frce this week. A gd example f a Quanum slutin is ur recent partnership with Invaln t deliver real-time insights at the pint f care, which we call Data Diagnstics. We launched this slutin in December, are seeing strng interest, and have already begun t sign business. We re very encuraged by the pprtunity. Yu will hear mre abut Data Diagnstics and ur Quanum slutins later this quarter at HIMSS. The secnd element f ur strategy is Driving Operatinal Excellence. At ur Investr Day in Nvember 2014, we utlined ur gal t increase ur cumulative run rate savings t $1.3 billin by the end f T achieve that, we needed t deliver an additinal $600 millin in run rate savings by the end f

4 Quest Diagnstics Q Prepared Cmments We made prgress n the majr bjectives f ur prgram which include building e-enabling services; standardizing ur prcesses, data and systems; and imprving cash cllectins. We delivered ver $200 millin dllars in realized savings in 2015, enabling us t deliver 10% grwth in pre-tax earnings fr the year as we cntinue t mve clser t ur Invigrate gal f $1.3 billin. We are imprving the custmer experience while at the same time lwering cst by remving waste frm the system. We cntinue t Simplify and strengthen ur rganizatin, which is the third element f ur strategy. During the year: We launched ur new Brand - Actin frm Insight. Our brand prmise is mre than a refreshed lg it s really abut recmmitting t a superir custmer experience. We recently launched Everyday Excellence, a new initiative that fcuses n ur custmers. Already we ve rlled it ut t mre than ne third f ur wrkfrce, but it s nt just fr ur frnt line. Everyday Excellence is fr all f ur emplyees, and it starts with me. We als invested and trained ver 150 senir leaders at ur Leading Quest Academy. And we deplyed ur Quest Management System t create a standard framewrk fr running ur business. Our 44,000 emplyees are the key t ur success. In a recent cmpany-wide survey we experienced a recrd rate f engagement frm ur emplyees, and the results put us n par r abve the perfrmance f high perfrming cmpanies in several key areas. There is a clear link between emplyee engagement and perfrmance at the mst successful cmpanies. Our emplyees are prviding us with valuable feedback, and we are listening. On a recent visit t ur facilities in Califrnia, as with s many visits with ur peratins, I came away bth impressed and grateful fr ur emplyees passin and cmmitment t ur custmers. The furth element f the strategy is t Refcus n ur Diagnstic Infrmatin Services business. During the year, we cntributed ur clinical trials testing business int the newly frmed jint venture with Quintiles, called Q Squared Slutins. The JV s perfrmance is n track with ur expectatins and we are excited t be part f this grwing business. And, finally, we remain cmmitted t the fifth element f ur strategy, delivering disciplined capital deplyment. In 2015, we returned ver $400 millin dllars t ur sharehlders thrugh a cmbinatin f dividends and share buybacks. We returned 80 percent f ur free cash flw t sharehlders in 2015 well in excess f ur cmmitment t return the majrity f free cash t sharehlders. 4

5 Quest Diagnstics Q Prepared Cmments During the quarter, we increased the Cmpany s share repurchase authrizatin by $500 millin. And earlier tday, we annunced a 5% increase in ur quarterly dividend. This is ur 5th dividend increase since We cntinued t invest in the business. We annunced the Hartfrd Healthcare utreach acquisitin in the quarter and clsed tw acquisitins earlier in These acquisitins are aligned t ur bjective f grwing revenues thrugh strategically aligned M&A. Nw, Mark will prvide an verview n ur furth quarter financial perfrmance and walk yu thrugh the details f ur 2016 utlk, which cnsiders several f the recently annunced relatinships I nted earlier. Mark Guinan: Thanks, Steve. Starting with revenues Cnslidated furth quarter revenues f $1.85 billin increased 0.6% versus the prir year n an equivalent revenue basis; that is, excluding the furth quarter 2014 clinical trials revenue. On a reprted basis, revenues were lwer by 1.8%. Revenues fr Diagnstic Infrmatin Services grew by 40 basis pints versus a year ag. Vlume, measured by the number f requisitins, grew by 30 basis pints versus the prir year. Vlume grew n an rganic basis by 20 basis pints. Revenue per requisitin was 10 basis pints better than the prir year. Reimbursement pressure was mderate in the quarter, and fr the year, which is cnsistent with what we shared at ur investr day in Bth test and business mix cntinued t have net psitive impact, reflecting ur strategy t grw ur esteric testing and drive prfitable grwth. Adjusted perating incme fr the quarter was $288 millin, r 15.5% f revenues, cmpared t $283 millin, r 15% f revenues, a year ag. The imprvement f 50 basis pints can be primarily attributed t efficiencies frm ur Invigrate prgram and business mix. Fr the quarter, adjusted EPS excluding amrtizatin was $1.19, r 80 basis pints better than a year ag. Furth quarter 2015 reprted incme frm cntinuing peratins includes a net benefit f $31 millin, r $0.21 per share, related t deferred incme tax benefits recgnized during the quarter partially ffset by charges primarily related t restructuring and integratin csts. In the furth quarter f 2014, reprted incme frm cntinuing peratins included a net benefit f $27 millin, r $0.18 per share, frm the favrable reslutin f tax cntingencies ffset by charges related primarily t restructuring and integratin csts. 5

6 Quest Diagnstics Q Prepared Cmments Bad debt expense as a percentage f revenues was 3.5%, 30 basis pints better than last year and 40 basis pints better than last quarter. This is primarily due t a ne time bad debt benefit in the furth quarter. It remains a challenging cllectin envirnment and we remain fcused n imprving ur peratinal activities. Our DSOs were 47 days, 1 day lwer than the prir year and 3 days higher than last quarter. Reprted cash prvided by peratins was $271 millin in the furth quarter f 2015 cmpared t $303 millin in the furth quarter f Cash prvided by peratins was lwer than a year ag largely due t an additinal payrll cycle. Excluding the net cash charges related t the recent debt refinancing, adjusted cash prvided by peratins was $899 millin fr the full year Capital expenditures were $94 millin in the quarter, cmpared t $89 millin a year ag. Ttal capital expenditures in 2015 were $263 millin. Befre mving t guidance, I ll share a few cmments t help yu think abut ur utlk. First, a few f yu recently asked abut the 8% t 10% earnings CAGR shared at ur investr day in Reflecting n 2015, we delivered 6% adjusted earnings excluding amrtizatin. Keep in mind that the cmpare in 2015 was negatively impacted by amrtizatin and a discrete tax benefit in These tw items reduced ur earnings grwth by abut 2%, mstly because we beat 2014 by abut a nickel. Taking these items int cnsideratin, we feel we are n track cmpared t ur bjectives utlined at investr day in Secnd, because f the newly frmed Q Squared Slutins JV we n lnger cnslidate the clinical trials revenue. Our clinical trials business reprted revenues f $85 millin in the first half f 2015 that yu shuld cnsider as yu update yur mdel. Finally, as yu think abut ur revenue prjectins, we have been n a favrable trajectry but ne that has been building ver time. We expect that we will cntinue t shw imprvement as we prgress thrugh the year. Specifically, yu shuld cnsider: The Barnabas Health pprtunity that will phase in ver the first half f the year; and The recently annunced utreach acquisitin which we expect t be cmpleted late in the first quarter. Mving t guidance, we nw expect full year 2016 results, befre special items, as fllws: Revenues are expected t be between $7.52 billin and $7.59 billin, an increase f 1.5% t 2.5% n an equivalent basis. 6

7 Quest Diagnstics Q Prepared Cmments Fr cmparative purpses, equivalent revenues will exclude the 2015 revenues assciated with ur clinical trials business. Adjusted diluted EPS excluding amrtizatin t be between $5.02 and $5.17. Cash prvided by peratins t apprach $1 billin. And capital expenditures t be between $250 millin t $300 millin. Nw, let me turn it back t Steve. Steve Rusckwski: Thanks, Mark. We have the right strategy t restre grwth and build value fr ur sharehlders. We delivered anther slid quarter and a gd year. We are building mmentum with ur fcus n esteric testing, hspital partnerships, and expansin f ur health infrmatin slutins. We have nw delivered adjusted EPS grwth fr 7 cnsecutive quarters. We are psitined well t deliver n ur cmmitments in STEVE: Thanks again fr jining ur call tday. We had anther slid quarter and finished the year strng. We appreciate yur supprt. Have a gd day. 7