DGX-Quest Diagnostics Inc Q2 Earnings Call Transcript

Quest Diagnostics, (DGX)

Q2 Earnings Call

July 21, 2010 8:30 am ET

Executives

Kathleen Valentine - Director of Investor Relations

Surya Mohapatra - Chairman and Chief Executive Officer

Bob Hagemann - Chief Financial Officer

Analysts

Ralph Giacobbe - Credit Suisse.

William Quirk – Piper Jaffray

Tom Gallucci - Lazard Capital Markets

Amanda Murphy - William Blair

Ricky Goldwasser - Morgan Stanley

Darren Lehrich - Deutsche Bank

Kevin Ellich - Royal Bank of Canada

Anthony Vendetti - Maxim Group

Adam Feinstein - Barclays Capital

Robert Willoughby - Bank of America/Merrill Lynch

Gary Leeberman - Wells Fargo

Gary Taylor - Citigroup

Kemp Dolliver – Avondale Partners

Adam Feinstein – Barclays Capital

Presentation

Operator

Welcome to the Quest Diagnostics Second Quarter Conference Call. At the request of the company, this call is being recorded. The entire content 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, retransmissions 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 Kathleen Valentine, Director of Investor Relations for Quest Diagnostics; go ahead please.

Kathleen Valentine

Thank you and good morning. I’m 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 speak only as of the days 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 investigations, 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, quarterly report on form10-Q 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 update section of our website at www.questdiagnostics.com.

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

Now here is Surya Mohapatra.

Surya N. Mohapatra

Thank you Kathleen. As you saw in our press release this morning, we saw a further slowdown in physician office visits and our revenues declined. Still, we are able to grow our earnings in this environment.

During the quarter, earnings per share increased 7% to $1.07, revenue decreased 1.4% to $1.9 billion, cash flow was $209 million.

While our business continues to perform well in a number of areas including gene-based and esoteric testing, revenue softness experienced in the first half has made us cautious in our outlook for the full year.

We now expect full year revenues to decline by approximately 1% and earnings per share to be between $3.90 and $4.00.

Revenue growth continues to be a top priority; we have implemented a number of targeted plans and I will share some elements of these plans later.

As you know, we generate significant cash. We continue to explore acquisitions to strengthen our business in the areas of cancer, cardiovascular and infectious disease. We also pursue opportunistic deals which can add scale and be immediately accretive.

When acquisitions are not available, we’ll buy back shares as a means to drive shareholder value, which along with dividends is what we have done historically to return cash to shareholders.

Now Bob will discuss our financial performance and I will return with additional comments. Bob?

Robert A. Hagemann

Thanks Surya. As you’ve heard, revenues during the quarter were impacted by continued softness in the market place. Despite this earnings per share grew 7% in the quarter to $1.07. Revenues for the quarter were $1.9 billion, 1.4% below the prior year.

Our clinical testing revenues which account for over 90% of our total revenues were 1.6% below the prior year compared to our first quarter decline of 0.4%.

Note the first quarter growth was reduced by an estimated 1% due to weather.

Revenue per requisition was 0.3% below the prior year. Year-over-year revenue per requisition continues to benefit from an increased mix of gene-based and esoteric testing and increases in the number of test quarter per acquisition. This benefit has been offset by some business and pair mixed exchanges, the Medicare fee decrease and pricing changes in connection with several large contract extensions.

Typically, we will comment just on the year-over-year change in revenue per requisition. But in this quarter it is also important to understand how it has performed sequentially.

Revenue per requisition was approximately 1% below the first quarter level with about half of the change due to business and pair mixed exchanges including a rebound in drugs-of-abuse testing and a decline in anatomic pathology testing and about half due to the contract changes referenced earlier.

All these contract extensions have involved price adjustments. They have provided us with multi-year visibility in reimbursement rates and have reduced the uncertainty associated with contract expirations.

In comparing the year-over-year increase in revenue per requisition reported in the first quarter of 2.3% to the decrease of 0.3% in the second quarter. About 1% of the difference is accounted for by the change from Q1 to Q2 which I just explained. The remainder is principally due to easier comps in the first quarter than in the second.

We expect changes in revenue per requisition will continue to be modest for the first half of next year with an anniversary of the business mix, pair mix and contract changes which are currently offsetting the benefits of the increasing proportion of gene-based and esoteric testing.

Volume in the second quarter was 1.3% below the prior year and continues to be pressured by the general slowdown in the provisional office business. This compares to a 2.6% decrease in the first quarter.

Again, note that weather contributed an estimated 1% to the first quarter decrease. Excluding the first quarter weather impact, volume performance reflected modest improvement in the second quarter principally due to drugs-of-abuse testing which has began to rebound and grew approximately 5% in the quarter.

Revenue in our non-clinical testing businesses which includes risk assessments, clinical trials testing, point-of-care testing and healthcare IT was comparable to the prior year level.

Operating income as a percentage of revenues was 19.5%, a 60 basis point improvement from the prior year. Margin improvement was realized despite the slower revenue growth due to progress we are continuing to make in managing our core structure and driving quality improvements.

Contributing to the year-over-year margin improvement are reduced costs for performance-based compensation, improved experience associated with professional liability claims and continued progress in reducing bad debt.

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