Quest Diagnostics Management Discusses Q2 2012 Results - Earnings Call Transcript

Quest Diagnostics (DGX)

Q2 2012 Earnings Call

July 19, 2012 8:00 am ET

Executives

Kathleen Valentine - Director of Investor Relations

Stephen H. Rusckowski - Chief Executive Officer, President and Director

Robert A. Hagemann - Chief Financial Officer and Senior Vice President

Analysts

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Dane Leone - Macquarie Research

Ricky Goldwasser - Morgan Stanley, Research Division

Gavin Weiss - JP Morgan Chase & Co, Research Division

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Ralph Giacobbe - Crédit Suisse AG, Research Division

Isaac Ro - Goldman Sachs Group Inc., Research Division

Amanda Murphy - William Blair & Company L.L.C., Research Division

Gary P. Taylor - Citigroup Inc, Research Division

Alexander Y. Draper - Raymond James & Associates, Inc., Research Division

Darren Lehrich - Deutsche Bank AG, Research Division

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Lisa C. Gill - JP Morgan Chase & Co, Research Division

Presentation

Operator

Welcome to the Quest Diagnostics Second Quarter 2012 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 expressed written consent of Quest Diagnostics is strictly prohibited.

Now I'd like to introduce Kathleen Valentine, Director of Investor Relations for Quest Diagnostics. Please go ahead.

Kathleen Valentine

Thank you, and good morning. I am here with Steve Rusckowski, our President and Chief Executive Officer; and Bob Hagemann, our Chief Financial Officer. During this call, we may make forward-looking statements. Actual results may differ materially from those projected. Risks and uncertainties that may affect Quest Diagnostics' future results include, but are not limited to, those described in Quest Diagnostics' 2011 Annual Report on Form 10-K 2012, quarterly report on Form 10-Q and current report 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 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.

Stephen H. Rusckowski

Thanks, Kathleen, and thanks, everyone, for joining us today. Over the last 2 months, I've had an opportunity to meet with many of you. And for those of you that I have not had an opportunity to meet, I'd like to spend just a minute explaining why I joined Quest Diagnostics. First of all, this is a company that has an impact on healthcare. We touch about 150 million patients each year, and I believe there's an opportunity to touch more lives.

Second, this is the high-quality company in many ways. Healthcare professionals, particularly have high regard for Quest Diagnostics. And then finally, and most importantly, I believe there is a significant opportunity to drive shareholder value. So over the past 2 months, I've met with many of our stakeholders. I've met with employees, customers and investors. I visited many of our operations, and I'm rounding up my perspective on Quest Diagnostics, where the company is today, and how it can grow stronger. I really appreciate the feedback I've received. Now I'd like to share the results for the second quarter.

In our Q1 call, we cautioned that despite our positive volume performance, the underlying market conditions remain sluggish, and that it was premature to conclude that the market was recovering. Our caution was warranted. In the second quarter, our volume growth slowed. Sluggish market conditions continue to affect our business, and we see -- saw softness across many of our businesses. We also could have executed better in the quarter. For example, we did not see the benefits we expected from the actions we have taken to drive revenue growth in the areas like women's health and the benefit from the narrowing of certain health plan networks. As a result, we intensified our actions to manage our costs, allowing us to deliver bottom line growth and margin expansion in the quarter and maintaining our earnings outlook for the year.

Specifically, despite essentially flat revenues, we increased adjusted earnings per share by $0.05 or 4.5%. We expanded adjusted margins by 70 basis points to 18.4%, and we generated $251 million of operating cash flow. Clearly, it is imperative that we continue to be vigilant in improving productivity, reducing costs and improving quality. We are executing a plan in this regard, and we now call it invigorate. It is expected to deliver $500 million in run rate cost savings versus 2011 as we exit 2014. And I will share with you that we are firmly on track. Well, this is a top priority for me. From my first week on the job, I've been personally involved in Invigorate. I've shared with the organization that I'm personally chairing this effort. I've met with the teams focused on the biggest priority, the areas like lab operations, procurement, general administration, IT, to name a few. We will continue to meet on a regular operating rhythm. Each of these teams are required to manage our projects with structured, disciplined and rigorous program management approaches, and I am assuring that proper resources are properly deployed to these efforts. Finally, I am challenging the teams to additional -- look for additional opportunities and to accelerate the pace at which we implement the program.

An opportunity we've already acted on was to accelerate the launch of a voluntary retirement program offered to certain qualified employees. We expect this program to deliver $40 million in annualized cost savings, a portion of which will be realized this year, with the former realized as we exit the first quarter of 2013. Now as we look at the market, we continue to see weakness in the near term. We believe that this industry will grow 45% in a normal economy, and that Quest Diagnostics should be able to grow at or above the market growth rate. One thing that we believe will enable growth is the Affordable Care Act, which we expect will have a positive net impact on the company in the industry's growth rate beginning in 2014. The act will increase covered lives, which will drive diagnostic testing volume. But at the same time, many of the newly insured will be covered by insurance products with lower price points, and therefore, the full impact on our business is still unfolding.

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