Q4 2019 Earnings Call
Welcome to the Quest diagnostics fourth quarter 2018 conference call at the request of the company. This call is being recorded the entire content of the call, including the presentation and question answer session that will follow our copyrighted property of quest diagnostics with all.
Right reserved.
Any distribution retransmission or rebroadcast of this call. It in any form without written consent of quite stage diagnostics is strictly prohibited I would now like to introduce Shawn Bevec Vice President of Investor Relations for Quest Diagnostics go ahead.
Thank you and good morning, I hear what Steve Rusckowski, Our Chairman Chief Executive Officer, President and Mark Dine in our Chief Financial Officer.
During this call we may make forward looking statements and we'll discuss non-GAAP measures.
Right a reconciliation of non-GAAP measures to comparable GAAP measures in the tables to our earnings press release 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 our most recent annual report on Form 10-K , and subsequently filed quarterly reports on Form 10-Q , and current reports on form 8-K.
For this call references to reported EPS referred to reported diluted EPS from continuing operation and references to adjusted EPS refer to adjusted diluted EPS from continuing operations, excluding amortization expense.
References to adjusted.
For all periods excludes amortization expense finally growth rates associated with our long term outlook protection, including total revenue growth revenue growth from acquisitions organic revenue growth in adjusted earnings growth our compound annual growth rate.
Now here's Steve Rusckowski, Thanks, Sean and thanks, everyone for joining us today.
Well this morning, I'll discuss the fourth quarter and review progress in our two points strategy.
And then Mark will provide more detail in the results and take you through our 2020 guidance.
Well, we have a solid fourth quarter and ended the year by delivering record revenues earnings and cash from operations.
Strong volume growth from expanded health plan network access.
With outstanding execution over operational excellence strategy helped us offset significant reimbursement pressure.
For the fourth quarter, we grew revenues 4.8%.
Reported EPS was $1.86.
Adjusted EPS was a dollarss 67 up nearly 24% from the same period in 2018.
Volume growth remained strong at 4.1%.
Full year of 29 game revenues grew 2.6%.
Reported EPS grew 16% to $6 in 13 cents adjusted EPS grew 4% to $6.56.
And volume grew 4.3%.
In addition, we are increasing her quarterly dividend by nearly 6%.
And this is a nice increase since 2011.
Before getting into more detail as a fourth quarter I'd like to discuss conquest squarely within healthcare's tripling as well as comment on CMO and the reason passage of the lab apps.
So many providers within healthcare are focusing on health care is troubling.
It's all about improving the quality education experience, while reducing the cost of care.
Well first is dedicated to providing rate noted on service quality.
One example is that we drive superior quality in our logistics wireless let tracking specimen pickups.
We're probably better quality enabled us to become a number of Unitedhealthcares lab network.
So.
Several years, we've made great strides proven patient experience.
Investors and digital platforms, and our patient service centers as well as our partnerships with retailers such as safe way and Walmart offerings to drive patient satisfaction scores above 90%.
Also our net promoter score exceed 80%, which is very high particularly in healthcare services.
Finally, plus offers the best value in the lab industry.
Touched prices for many of our smaller Keith as possible competitors can be to the five turns harder than our prices and sometimes even more.
So taken together.
Medical quality.
Patient experience and competitive pricing delivers a value proposition that is second to none in our industry.
I'd like to update you on three fundamental changes in the marketplace, which I believe a request.
First Ken.
This is the largest cost in Medicare reimbursement this industry is overseas.
Second.
We see health plans focusing on the wide variation price for LCR delivery.
And they are looking at opportunities to work with fewer.
Higher value providers.
Our extended network access with that is healthier and the implementation of the from Latin network are perfect. Examples of this.
And then there are just increasing consumerization of healthcare.
Consumers, our shoulder and more and more of a cost of healthier and they're looking for the best value.
We believe quest diagnostics is the best deal in town.
I'd like to quickly comment on came up in the latest development regarding the passage of the Webex.
We were pleased to see glad that become law in late December .
And it is the first step in 15 CMS is deeply flawed via the question process.
The buybacks will delay the data reporting period for one year. So the first quarter 2021.
It will also require medpac to identify better ways to quite the data reflects private market rates as Congress initial lease incentives.
As many of you know a one year delay now means that CMS will delay on the existing schedule for the basis of question 2021.
Despite the increase in reimbursement <unk> reimbursement reduction caps from 10% in 2020.
The 15% 2021.
We expect so you have about headwinds in 2021 to be relatively consistent with 2019 and 20 Twond.
Additionally, AC delay our trade associations continues its legal challenge against HHS.
Both sides have submitted their brings to the course and the matters in the hands with the judge.
We expected decision sometime this year.
Now turning to our recent performance and progress.
The first core part of our two points strategies to accelerate growth, which just five elements.
More than 2% per year through accretive strategically aligned acquisitions.
Expand relationships with health plans and also health systems.
Offer the broadest access to diagnostic innovation.
The recognizes the consumer friendly provider of diagnostic information services.
And then finally support population health with data analytics and extended care services.
Now let me take you through a few highlights from our strategy to accelerate growth.
Our acquisition pipeline remains strong.
Fourth quarter, we announced the acquisition of Boston clinical laboratories, a small regional laboratory in Massachusetts.
We also recently announced two new acquisitions, the first blueprint genetics it strengthens our leadership position in advanced diagnostics through proprietary bio informatics, which is often a bottleneck in next generation sequencing.
Blueprints proven platform and specialty generics exceptionally various interpretation that reporting is expected to see definitely see the average raised eight the time of interpretation.
We also announced a multifaceted long term collaboration with Memorial Hermann Health system.
One of the largest nonprofit health systems in southeast Texas.
As part of the agreement West will far more burns offerings less services business and then it's all 17 of his inpatient hospital labs radar Houston on our professional services agreement.
The transaction is expected to close in the second quarter.
And then probably recently signed a professional laboratory services agreement with an eight hospitals health system in Tennessee.
We continue to see accelerating revenue and volume growth as a result of works the ended health plan network access.
The sequential acceleration in volumes demonstrates our ability to drive continued market share growth.
We look forward to.
Further rollout of United's preferred lab network, featuring zero dollar a pocket costs for members.
The test growth drivers in the quarter in full year include drug monitoring.
Tuberculosis testing both your quantify your on T spot.
Team pass our blood cancer tests and party what Q.
Each of these test categories posted solid contributions to revenue growth.
Overall, our GE base and esoteric testing grew approximately 5% for the year.
And the acceleration from low single digit growth a year ago.
And then our second part of that one strategies to drive operational excellence.
We delivered on our 2019 goal to reduce our cost base by 3%.
Well I continue to drive increases in productivity.
We see more opportunities ahead to drive further productivity gains while enhancing the customer experience. So irrs three examples.
First our immuno assay platform consolidation is expected to provide rid of throughput.
Tommy and more efficient footwear, while saving us approximately $35 million annually when fully implemented.
Second.
We are optimizing optimizing our lab network through investments in our new flagship laboratory and clips in New Jersey.
When operationally active in 2021, our new lab is expected to consolidate three regional hottelet's double our average throughput revised 30% more capacity.
And then third we're using digital technology to enhance the customer experience.
Nearly 9 million patients have downloaded the myquest digital platform, which enables them to make appointments and received the results now let me turn it over the Mark to go through the results Mark.
Thanks, Steve in the fourth quarter consolidated revenues were 1.93 billion up 4.8% versus the prior year.
Revenues for diagnostic information services grew 5.1%.
Paired to the prior year, driven by strong volume growth and easy compare and acquisitions, partially offset by higher reimbursement pressure.
Volume measured by the number of requisitions increased 4.1% versus the prior year.
Including acquisitions volumes grew 3.4%.
Importantly, we continued to see a sequential acceleration inorganic volume growth in the fourth quarter. After considering the benefit of the extra revenue days in the third quarter.
Revenue per requisition increased 1.2% versus the prior year, primarily driven by an easy compare partially offset by higher reimbursement pressure.
Unit price headwinds were approximately 2.5% in the fourth quarter.
This includes the impact of Tam up which amounted to a headwind of nearly 120 basis points. As a reminder, the permit impact includes both direct cuts to the clinical lab fee schedule as well as modest indirect price changes primarily from Medicaid.
Reported operating income was 363 million or 18.8% of revenues compared to 220 million or 12% of revenues last year.
On an adjusted basis operating income was 329 million or 17% of revenues compared to 295 million or 16% of revenues last year.
The year over year increase in adjusted operating margin was primarily driven by strong volume growth and ongoing productivity improvements related to our invigorated initiatives, partially offset by higher reimbursement pressure.
Additionally, patient concessions were down approximately 40 basis points year over year.
Reported EPS was $1.86 in the quarter compared to 92 cents a year ago.
Adjusted EPS was $1.67.
Approximately 24% from $1.36 last year.
Cash provided by operations was 1.24 billion in 2019 versus 1.2 billion last year.
And capital expenditures were 400 million in 2019 compared to 383 million a year ago.
Now turning to guidance our outlook for 2020 is as follows revenues expected to be between 7.8, and 7.96 billion, an increase of approximately 1% to 3% versus the prior year.
Hi, good EPS expected to be greater than $5.51 and adjusted EPS to be greater than $6.60.
Cash provided by operations is expected to be between 1.25, and 1.3 billion and capital expenditures are expected to be between 375 and 400 million.
There are several considerations that I will review as you think about 2020 and beyond.
First we will continue to face significant reimbursement pressure this year in large part due to ongoing headwinds for payment.
Total reimbursement pressure in 2020 is expected to be slightly more in 200 basis points.
Which teva and associated impacts are expected to be approximately 80 to 85 million.
We estimate similar impact from Teva in 2021.
Okay. It's no secret that the tightening labor market has resulted in a rising wage pressure to remain competitive we are investing employee pay and benefits. The incremental cost is included in our guidance.
Third despite the continued reimbursement headwinds, we are making disciplined strategic investments in our advanced diagnostics capabilities that we expect will be slightly dilutive to our earnings in 2020 by roughly 15 cents.
A portion is related to our acquisition of blueprint genetics, the remainder is related to investments and liquid biopsy and next generation sequencing automation.
Fourth our revenue guidance contemplates some M&A carryover plus the two deals we recently announced and finally, our revenue guidance includes contributions from the Pls relationships that Steve mentioned earlier.
Keep in mind that revenue and volume contributions from Pls typically take a couple of quarters correct.
I'll now turn it back to Steve well, Thanks, Mark low to summarize we had a solid water and ended the year by delivering record revenues earnings and cash.
Quest is well positioned in 2020 to grow revenues and earnings despite another year of meaningful reimbursement pressure.
And then finally, our guidance for 2020 is realistic and achievable.
Now we'd be happy to take your questions operator.
Operator.
Thank you we will now open up for questions at the request to the company. We ask that you. Please limit yourself to one question. If you have additional questions. We ask that you. Please fall back in the Q1 moment.
Our first question comes from Ricky Goldwasser Morgan Stanley Your line is open.
Good morning, Rick Hi, Hi, good morning.
At M&A, obviously is an important component of your guidance down when we think about the transaction that you announced recently seems to pace slowed down.
Last 12 months.
What are you seeing indeed, Simon do you think is driving do relative slowdown is it that you're seeing that pipeline or the labs waiting to see what Tim a result is weighted more on your end and then one follow up to that is just.
Given the feed the headwinds that you can CDC around reimbursement wage pressure in the additional investments how should we still assumes that the cost cutting program.
Try the net benefit to the top line to the bottom line.
So thanks, Rick you for the question so remind everyone we have.
Our long term goal every 1% to 2% of growth through acquisitions as part of our.
Five strategy is to accelerate growth.
What we have shared is that we made good progress against over the last several years and because of the three elements that we see.
Playing in a marketplace, we do believe that affords us an opportune consolidate the market so.
Last fall, we did increase our expectation or coal to get to about 2% through acquisitions and if you look at 2018, we beat that number if you look at what would just reported for 19 were little life, but if you look at 18 Nike were above that 2% level and then is that 2% as a CAGR reserves, you know all acquisitions and somewhat lumpy.
We're going to have some stronger quarters around.
Weaker quarters in terms of acquisitions.
What we're shooting for that 2%. So what we just announced the last several weeks when things are good indications that we continue to work our pipeline.
We believe blueprint genetics is a good opportunity to divest into the us diagnostics that will provide some growth at some capabilities to organizations that we think are helpful to accelerate growth.
Then socket is what we've also announced around memorial Hermann is a great example of what we have done in the past and we'll continue to do more of and we're actively engaged with many other integrated delivery systems around that concept.
To remind you its.
Comprehensive, where we're helping them with their hospital laboratory, making them more efficient.
In that regard with helping them with their reference testing for the hospital in that finally.
Moreover, a moral urban kids, we bought their outwards business and so what we have shown in the past our funnel strong but these deals become more complicated there big systems that many hospitals as many stakeholders. So this is taking more time, so well most good and we just announced two deals and so we think we're starting 2020 with.
Good pop of acquisitions, and we're also hopeful there'll be more to come throughout the year. So mark.
Okay, Great question, Rick Thank you.
When you think about the pieces that are.
Headwinds and Tailwinds you mentioned the headwinds certainly we've got the pricing pressure, we've talked about 200 basis points. We've got your typical wage inflation not about a 3 billion dollar wage Bill and then we said there's incremental pressure on that and then you've got the investments so the 3% productivity we drive.
Our baked into our invigorate program, a low that would not be enough to offset all of that and drive bottom line growth, but importantly, the other tailwind is organic volume growth and the contribution of other acquisitions between besides blueprint and so thats really it's all fungible thats, how were able to grow our bottom.
Okay, great alone about 3% productivity, it's a 2% price.
Couple hundred basis points against arc wage Bill a 3 billion it takes a.
Diagnostic investments there are larger than just a degree so it's really the organic growth.
Both of our business or the contribution of the profitable.
Each acquisitions that really help us to grow offline.
Thank you.
Thank you.
Thank you. Our next question comes and Kevin Caliendo would you be asked your line is open Marty Kevin.
This is actually Adam noble in for Kevin Another question.
I know, it's still pretty early in the year, but could you talk to what type of share gains volume growth you're seeing from.
And in some of the other 2019 new access.
Plans a year over year, so far in January and are you still seeing them outcome. The rest of your book or end of yes, do you have any visibility where those share gains or are still coming now let me just provide a little bit of Carlo them work will add to it. So now what we sure throughout 2019.
Given our volume growth and what we just reported the volume growth, we're picking up share.
Yes, we're picking up share from the United as expected and then such as when we picked up share as we noted we believe we actually picking up share from other payors and and other portions of the business.
We also have manage our ethanol relationship well it seems to be a strong partner of ours have done letting back in to the network or one of our competitors.
Not too as well so we feel good about the progress made in 19, and what I say with what's implied in our guidance.
For 2020 is a continuation of that market share gain program in our acceleration of growth strategy.
As we said back in investing 2018, we believe the new access changes.
No.
Florida Us about a billion worth of opportunity we have a good started on that in 19 and clearly we have more efforts in 2020 and beyond.
Incumbent at all that assumes that we're going to pick up share.
Yeah.
Says a lot of assets.
Just started for Latin network for United and so therefore applied in our guidance is picking up share again, so that will go from United Mark Yes. So.
And you look at our performance last year.
I would say that the typical non network access piece was probably similar to our historic and historically over the last couple of years or get roughly 50 to 100 basis points of growth and so the growth beyond that you can pretty much attribute to network access and I want to remind you that it's not just United we.
Also got into Horizon, Blue Cross and New Jersey, we got into a portion of anthem in Georgia, and as Steve mentioned, while the United.
The other two plans access increased help those specifically it also helped us grow and other payers as well. So we are definitely growing share and that share it's coming from multiple competitors not just our chief competitor. Yeah. I'd say you asked about January well, we're not going to common in January specific.
Equally obviously, we're almost 112 of the way through 2020 and if we.
We were any way concerned about that progress, we certainly would have built that into our guidance. So far apart. We're considering January performance, thus far as we communicate guidance today.
Gotcha, and if I could just sneak in one more is there anything you'd share at this point with regards to be asked a vendor consolidation and the timing.
Of that and.
Yes, we just the super helpful.
Yeah sure we.
We actually did a very thorough job and evaluated all the different alternatives.
We have selected.
US Thunder for that and we've started the deployment.
The systems that we have to deploy to allow us to achieve the eventual $35 million in savings.
So we've started.
For those as some of our larger facilities.
Got it thanks for the questions.
Thank you. Thank you.
Thank you and again, we ask that you limit yourself to one question. Our next question comes from Lisa Gill with JP Morgan. Your line is helping hi, thanks very much in payments are good morning, good morning.
I just wanted to follow back up on that the comments around continued reimbursement headwinds I know when I saw you a couple of weeks ago and San Francisco you did talk about pressure on the commercial market as we think about bad and Mark I think you talked about at continued reimbursement had worried with being roughly 15 cents can can you maybe just give us a little bit more color.
Around where you're seeing that from a commercial market perspective, and then I. Just wanted also just an update on how you're thinking about your retail strategy.
Yes, so so lease I don't recall 15 cents facing.
Thanks.
That's something that would represent the reimbursement pressure so when you're looking at non hamma related headwinds as we've shared over the last 18 months or so yes.
A lot of that is not coming from third party the traditional.
Payer reimbursement, but it's increasingly coming from the portion of our business that has direct client bill and the largest piece of that is hospitals. It's the high end testing, we do what we typically referred to as reference work and you know we've we've just described how when you think of the.
Set of criteria that a hospital like basis decision.
In terms of relationship test menu quality history, and price theres been more of a shift to price over the last several years and.
Speculating a lot of that's driven by some of the pressure there under so whereas in the past you might extend the contract.
The standing that had a good reasonable price and they had good quality and all those kinds of things more and more of these are going to RFP, where there's an opportunity for price competitors come in and compete on price very highly so that's one of the dynamics that has definitely increased as the hospital.
Thanks client built the other one we've talked about is in several states, where there are no and a markup laws physicians can.
Actually send work to us and build the third party themselves and then basically markup. The work that we do and that is a direct bill assistant office that we compete and.
You can imagine that if theres profit motive for those customers.
Any nickel they can say from any lab is something thats attracted to that so that is definitely a source of a lot of our pricing headwinds and then there is a small piece in third party payers as well as some older contracts are getting renegotiated and getting more.
Or in line with occurrence pricing environment.
Yeah, the retail strategy it goes back to those outlined our five strategies accelerate growth.
Part of our consumer strategy.
The consumer strategy is most multiple strategies and one piece of it is we want to know better physical presence.
So we've been working on getting both physical presence for a number of years. The remind everyone. We have about 2100 decent service offers will go for over 4000 will bottom us that physicians offices, so an excess of 6000 access points and with those patient service centers, what we started on this stretch.
Gee, we had about 20% that were retail like settings more strip malls can be a location as other medical office parts and our goal is to get the 50%. So we want to add 50% of our centers and more regional accidents, and so that help us with that we actually have formed some partnerships with Safeway relationship has gone well.
Well, we're at about 150 stores, we then added to that or joint venture with Walmart, We continue to make progress there with a patient service centers. You also might see that walmarts, maybe some other moves and healthcare umer gates with them on.
And then finally as we continue to talk to him have relationships with other.
Retail what partners in health care as they continue to advance their strategies as well so you're feeling about 20% were about 30%.
Help regional like savings, we've got more work to do to get the 50, but thats. Our goal. We believe it's important that we have more retail life because as I said in my introductory remarks. This market is getting more or consumer oriented every day, we believe that the consumer we'll look at the value proposition and we'll look at the AAA.
So I'll remind you it's good health care, it's great experience, great pricing than we think our strategy delivering good points is under option the physical presence and the convenience of walking into a quest diagnostics facility. We think is part of the up so progress made but more work to do and we're we're really.
We're really fortunate for us on the partners. We have when we think we're on the path of getting to that 50, great. Thank you. Thank you.
Thank you. Our next question comes from Eric to Brian of Bank of America. Your line is open.
Hi, this is.
Today. Thank you for taking my question good morning, Garnett Smith.
Appreciate the color on the Guy so far.
Talk about incremental headwind on.
Ill.
Okay.
Hello, guys.
Sure on margin from that labor cost. Thank you.
Yes.
A little bit of color operationally and mark use some of the what's implied in our guidance.
The reason.
First of all of its a very strong labor market.
Separate are exempt workforce of professional workforce from non subs are not exempt workforce. So is where we feel pressure.
Non mix up workforce.
There's various areas of our value chain, we have about 12000 Phlebotomist we have.
Over 3500 careers running around logistics operations automobiles, we have thousands of what we call spokesman processors and so if you look at the front end at our value chain Thats, where we see some pressure so what we're finding and it's all very local news that we have pressure in some of those geographies.
Two too.
Our wages more than we have historically, because we have to be competitive with other.
Other competitors, if you will for those those resources, so thats, putting pressure on a winning those mark you want to give a perspective on what that means in terms of scale. So we are yeah, we're not going to size it specifically.
But it's as Steve mentioned this this is the competition for.
Those areas doesn't just come from the lab industry, where specifically for health care, obviously with Phlebotomists its healthcare, but when we think about couriers you know people try vehicles are.
Desired by multiple industries and then the same thing for the specimen processing, which generally is I don't like to turn but unskilled labor and so there's many many other industries as well that might be a target for for that labor in so we are not really responding.
I'll answer a question that you didnt ask but likely in People's mind to increase as a minimum wage we don't generally have people at minimum wage, it's really more responding to market forces and specific markets, where we were finding higher levels of attrition in finding it harder to attract the talent that we need so.
Really because we look at this in the near term, it's an increase to our annual wage inflation, but in longer run we've seen the value coming back and lower turnover and higher quality employees.
That's helpful.
And then just on the.
Hello.
From.
Can you help.
Body.
Just.
On how to think about margin trends.
Thank you.
If I heard the question correctly, you're asking for.
Some color around blueprint for a blueprint genetics 15 cents and just provide a little bit of.
Strategic logic in operation to help US who were so again, we're adjusting and advanced diagnostics. We have shared that we want to continue to accelerate it. We just reported that if you look at our genetic and Thats whats your testings up by about 5% last year, we continue to invest in and out of the number of areas. Yes. This.
I agree we believe the acquisition of Luker generics bring some nice capabilities and a true a proven commercial organization into question.
Brings us some nice capabilities to typically related to.
The various interpretation of that we've talked about let me in my remarks.
And then also specifically applying that to some of the specialty got worse there of over 200 panel test today and so if you look at their coverage we get in the depth of interrogation of the data. It provides us a nice capability to leverage what they've already done but also brings.
Well, we want to do more took me Rob rare diseases, where we like to interrogate the did the fivea insight. So we're really encouraged about the capability would just onboard and mark we've talked about the impact on our earnings in 2020 month provide some color to it yes sure. So I would differentiate these investments from the wage inflation.
Arguably the wage inflation has increased in our long term cost structure.
Things equal and the reason we call. These out is because we don't expect things to be long term.
You know dilutive certainly blueprint not only will turn from being dilutive to accretive over a period of time, but as Steve mentioned the capabilities that it brings to us will actually create value in other areas, including being more competitive winning more business, but also reducing the cost structure in other work that we do in this.
Pace.
Work, we're doing it on liquid biopsy.
It is something that will come to a point within the next couple of years and so either we will stop investing or hopefully a stop investing to be successful. So it will no longer be a drag on our on our earnings and then certainly the work we're doing around low cost sequencing is also a short term investment.
And we're highly confident that that will be successful and certainly will no longer be a drag on earnings. So these are really temporal investments that doesn't mean that there won't be other things that we invested in a couple of years, but these specific investments will be fairly short term.
Great. Thank you.
Thank you. Our next question comes from Aaron Right with Credit Suisse. Your line is open.
Good morning, Eric.
Hi, good morning.
Our our preferred lab networks at this point really helping to your volume can you describe some of the effort.
In each of implementing to incentivize physicians and patients actually.
Lower cost preferred provider is here under the PLN and then my second part of the question would be can you elaborate on your lab stewardship program and how that's helping to position yourself strategic partner with the hospital labs and can you give us some metrics maybe how that.
Action is going.
With that program. Thanks, Yes, so the first last network.
No we've said in the past it really conservative.
Fall, we're United Healthcare, where they are fully insured bookstar to two foot.
So the principles of deferred them up network.
And then beyond that it's really just getting started in 2020 were optimistic that will provide us again to gain share. So mark specifically to I'd say that to thus far which you know.
Publicly shared by United and we've talked about is there starting last August they really focusing on out of network.
Usage and they've done a number of things to try to reduce that including sharing that information with members of the PLM, where we can go out and target some of those accounts that explain to the physician why there's a benefit in steering that to a preferred.
Member, including importantly, the quality and other things that.
In a really limited the number of people that were included in the preferred route network, but there were also doing some other things with the physician directly that you probably should ask United about they've shared with us that they're giving incentives for them to above and beyond what we might do we go in call on them and explain why to their patients does best interests are also doing some things.
As to making the physicians best interest to move away from.
Using out of network provider. So there's a fair amount of out of network and amongst all the major payers that as a source of higher cost and quite often not the quality that you'll find didnt.
The members of the Piolin in terms of the PLM itself as we shared there were couple of states that were rolled out in their fully insured book beginning in January they're small accounts.
Bid and more broadly in the middle to your there's going to be.
Pretty much a full rollout, including or larger members and they are fully insured book throughout.
That time, they still have to sell the.
And then first.
Ultimately, even though it's fully insured over time have to agree because it could have implications for premiums and so all in all of that takes time and then there's a sponsored plans which has the next step. So this is a long term.
You know initiatives that certainly is reaping some benefit but there is not.
In terms of a step change where this is going to overnight move volume dramatically and that's why we talked about a multiyear tailwind for a lot of the efforts because.
Some of this is going to take some time, so all in the right direction, but something that is going to take a while to get to where its ultimate level.
So we are already asked about the left stewardship program and let me bring it back to again, we're off we're actively working our strategy to build relationships with.
Health Systems Hospital health systems.
We've been actively working on as for a number of years then when we go into health system and it is up to cease we talk about our ability to help them make their hospital more efficient and effective in diagnostics and then secondly, as part of that so sophisticated testing that and send it out we could do more for them.
We could do better job of how we manage that and then thirdly, when we always give those conversations we've done with ammo and with the pressure for commercial rigs how conversations rather outreach business does it continue to make sense for them. The habit that gives memorial Hermann There was an example were again a hospital services business. So as we get in there.
It's all about building a relationship we will help them outage of diagnostics and our US less stewardship program is being deployed through many of our good accounts are good accounts, it's going quite well.
And this is all about getting smarter about diagnostics and it goes back to the notion of a AAA, it's about better healthcare, it's about their experience that's at lower cost and what we're finding as you get more analytics like every time, what's your find out as there's overutilization, we need to get rid of that to make them more efficient, but what we're also find new users other.
Utilization and so we've become more of a consultative advisor in terms of diagnostics and one thing about we'd like to talk about this there's nothing more expensive than that but diagnosis for hospitals that.
And so they are less stewardship program, where their relationships were working proactively with our our partners to be able to deliver better answer for the tertiary suffers and again were more department is a great. Recent example of the listening to our story understanding what we're going to do for us and now having a new partner and one of the.
The largest cities in the United States. So we're really encouraged about the progress we've made over the number of years the prospects it from us.
Operator next question.
Our next question comes from Bill Quirk with Piper Stanley. Your line is open there's no hi, thanks, good morning, everyone.
I guess.
My question here, Steve. So first we appreciate that there's considerable pushback by some providers on concerning the executive order around hospital pricing transparency whoever since this does include diagnostics.
Should we be thinking about this is a potential added risk from a long term reimbursement standpoint.
And then also in separately given the interest and the preferred lab networks by a number of payers not just United should we expect additional announcements in 20 concerning some of the new formation to these thanks guys. Yes, yes. So thats. The first part of your question has to do a transparency and surprise bills.
And push back from providers about that as complex as you know.
But going back to my prepared remarks.
We believe this look at the value proposition proposition with regional marketplace, we like to get more and more exposure to the prices that are out there for us because you know the said.
With with the full confidence we believe were the best deal Intel.
And so making sure consumers see that making sure physician to see that making sure that plans are working with us to more of their laboratory services to a great value for quite a bit quest diagnostics is one of the strategy is all though and so the more visibility of that Theres a good thing for us and we're doing this.
With the plans and the preferred.
Network as part of that we're also doing this with employers with the plans because those floors look at their employee cost of health care. The looking at what they can do the healthier employees, though and we believe our categories. As an example of world they could do that but if they do it for us. They could do is also other healthcare services like radiology.
The physical therapy. So we think it's a good opportunity for us that's why we ask the question buffer Love network up we continue to work with other partners. We have the national is what we also have a number of regionals and as you know we enjoy a large presence in Florida. If you look at Florida Blue Cross Blue Shield, even though they have the analysis for less network.
We are very strong, Florida, we have a great relationship with up so thats, what you could say their preferred lab, even though we haven't announced it so as we work through where we go with this long term you'll see what others are willing to provide publicly but this will continue to be a trend that will keep up working mark.
When you think about the preferred lab network, whether or not another major payer is very.
Over in announcing a preferred Latin network or not we will see but some of the elements within the preferred lab network, we already had with some payers before relation with United in some of that actually expanded some of those so when you touch on what are some of the advantage as deferred lab network. One of them is what I described the out of network usage.
And having the payer actually partner with us to educate physicians around the cost of prescribing.
Hi.
Hi price as a 100 network labs, and how that impacts our patients with deductibles and how could impact denials and saw a separate so we're doing that with a number of payers Theres also.
A plan very large managed Medicaid plan that had put in some preauthorization requirements for certain test categories, where they were concerned about.
The size of the panels in the appropriate clinical appropriateness of some of the offerings and because we and then.
Well there is not us alone do it appropriately is actually created essence, where they call a gold card, which means that we're exempt from that.
We optimization, so not only does that avoid a headwind for us but the second thing is it makes it easier for physicians to order from US I don't have to go through crop so actually in essence, it should still more work to us and then finally, another one I'd comment as in the past as we've described and what we do outreach acquisitions. It was a huge windfall.
For everybody other than US certainly we would still get great economic benefit as I've laid out in the past head of Investor base about how they're very very accretive despite the pricing dis synergies and so what we've partnered with a number of payers honest that actually we share in some of that price savings. Initially so it's not all the windfall.
For the payers and others, but actually some of that value comes to us so less severe pricing dyssynergy headwind for the first couple of years. So thats just a couple of examples you may not here a very very overt announcement about preferred lab network, where the payers are partnering with us in the areas that they know we bring critical value.
Really drive more volume towards us.
Operator next question.
Your next question.
From that Donald Hooker of Keybanc. Your line is open.
Great. Good morning, Thank you for taking the morning flood, yes on the heels of this sizable memorial Hermann Pls deal I, just was hoping to maybe get a sense.
Well, maybe looking back and looking forward of kind of good momentum you're seeing in the POS business I think a couple of years ago.
You loosely sized it for the Investor community, saying it would be maybe 50 basis points of topline growth, though is that might might be just wrong, but that was a couple of years ago, maybe can you update kind of.
Our thinking there in the current conditions.
Yes. So thank you for the question.
Our professional lab services business is something we've built over time.
We've got a nice referenceable book of business.
Clients that we continue to build on.
We actually did say in our prepared remarks that we.
So another relationship in Tennessee.
More urbans, yet another example, and what I'll share over you'll hear more about war.
And on lab services business going forward.
In our 2019 results, we did have some growth from it up or comment on the specifics around that.
We believe it's an important element of again walking in and.
Each compensation for delivery systems around the lab strategy and helping them make their hospital laboratory better more efficient more effective as an important part of that and so now we have a proven truck or being able to do it. We have augment is that where they're less stewardship program and then we also have log with that with.
Clear ability to acquire outreach businesses. It provides more of the sophisticated in testing typically run advanced diagnostics. So it's moving along nicely in its becoming real strength for us as delivering the growth of that we expected mark.
Yes, maybe 50 basis points is plus or minus a reasonable number certainly as we look at last couple of years the contribution that could accelerate because we do do some pls deals as we've mentioned this one is state of Tennessee.
That are just pls deals standalone, but then as part of what we really still believe will be increasing as these broad deals with hospital partners around selling the outreach around getting that reference work in doing the pls deal, especially some of these are larger systems.
And we have a very deep pipeline pls contribution could grow to be larger than that certainly we'll talk about that as we see that happened. So yes, the 50 basis points as reasonable very happy with it and Thats something that we're hoping certainly could see accelerating down the road the interesting thing too that.
We mentioned in the press release from more urban.
Many of these systems also other on plans other on health plan. So what we're finding is kind of a secondary benefit has become their preferred or they're supposed to provide or laboratory service within their plans and memorial Hermann is a good example of that so it's an added benefit of having these relationships.
Operator next question.
Your next question comes from that Matt Liberal with William Blair. Your line is open a map.
Hi, good morning. Thanks.
I wanted to ask on on the retail side.
As it footprint continues to grow.
Characterized would that volume in terms of just site shifts persons incremental market share shift. Thank you alluded to on the network access side and then in the past you you've described potential opportunities to expand relationships with some of those.
Retail providers, it's in the new services that you're involved in any progress we anticipate there yes, yes living had so first of all of you think about.
Our value chain of we we actually do that draws for about 40% or volume.
But some throw from bottomless that or even patient service centers or or in physician offices.
That trend is actually moving more to our side. So we're doing more and more draws its a small gradual.
Shipped to us so 60% so provided by physicians or clients in hospitals, So think about our our front end, if you will ever value chain that way.
What we believe is we have a better experience and then better locations, we're going to be able to get share.
And so so.
We believe that were we are growing of the front end that we deliver ourselves faster than our overall growth because of this shift in the marketplace and also the experience being going as well and up as far as other relationships all.
Let's just say healthcare service providers and look you've got their strategy.
We mentioned Walmart Mark earlier, other big player healthcare, they're getting bigger with the opening up some clinics.
Great partnership with.
Now merge with Cvs Cvs health is building up.
Pumps, which is an extension of what the thumb with their medically mix, we were partner of theirs with medical clinics and as that strategy evolves, we'll have a presence.
With them and others as we go for it so and also we will continue to organically to do some of the Retailization. If you will have our fleet of patient service centers as it because we do see opportunities within local geographies to do some with ourselves. So so it is a multiyear strategy that we keep on making progress against and partners.
Ships continue to be important part of it.
Operator next question.
Our next question comes and Brian Tanquilut with Jefferies. Your line is open.
Hey, good morning, guys.
Yes. So my question is on Memorial Hermann do do you think that with.
One of the largest hospital systems out there do you think that.
Finally, the proof that outside of your math you are starting to get traction in the hospital side and then.
I guess.
Mike.
Kind of view on what the hailed benefited from the comprehensive Pls deals where you are bind outreach forgetting the the the reference and basically the whole lab business for the whole hospital system.
Yes. So so first of all as we said I think we have a lot more.
Interest today than we did two or three years ago with integrated delivery systems, but.
What we just announced memorial Hermann is complex and so these deals just take on a period of time.
We do already have over the years a number of significance systems.
When we bought the average business JV, which is a major player on the West Coast help is another example.
Provide you a longstanding relationship that you see in Pittsburgh longstanding relationship within Texas, and Oklahoma City. So we have a long history of working actively with improved delivery systems long before.
Before with Umass and I would argue this is a good example of a large system and the large city coming in our direction and a good proof point that there'll be more like this column.
And the reason why memorial Hermann chose us.
As we have as proven history of being able to pull it off.
We can help there whether hospital, helping with the reference where we can buy their outreach business, we integrated tie into the physicians, we can help them with their health plan. So we have a longstanding history and credibility with the referenceable clients that serves us well.
The laboratory testing is an essential part partner running an integrated delivery system supersonic cost, 7% healthcare decision, making its critical that working with a partner they get it right. So right. We do continues to see this is a good indication that there will be more to come and this is a major system that we're happy to be over those.
Operator next question.
Next question comes from Ralph Jacoby with Citi. Your line is open.
Thanks.
All right Rob just just wanted it was hoping you can give a little bit more on sort of the underlying volume and pricing mix of Sun assumptions just embedded in guidance and then secondly, just quickly one of the clarify the wage pressure comment.
Thought Mark I heard just a couple of hundred basis points higher just want to make sure I heard that right. Thanks.
Yes, let me address the wage piece and then I'll turn it back to Steve on the volume in the guidance.
So no a couple of hundred basis points with the total.
Wage pressure so what we're saying is historically it was at a given the level that we were pretty consistent with how we did our annual merit increases this year, we're finding more increases so in total at several hundred basis points.
And so you look our initial guidance and one of the three.
Contemplated and one of the tree growth or the acquisitions that we've talked about was historically.
Which says that there is organic growth in there. We've also said that we have less reimbursement pressure 2020 than we had roughly 19.
So to be about 200 basis points.
You have the steel that helps us.
Okay. We then have these new deals that we just talked about visited by appeal us as we said they're going to start to ramp.
In the second quarter, so that will help us some of the growth and so therefore it when you go through all of them out we'd have to volume growth and we have picked up share and that's implied in our guidance. So tightly consistent what we told you before is that Nike was a good start those start with banking.
To build on the momentum and we will continue to see access improvement.
Of gains and share with the fruit lab network with the other payers that Weve broadens.
Our full last year and that implied in our guidance is growth through acquisitions and grow through market share gains related to work with payers and other parts of our strategy.
Operator next question.
Our next question comes and Mike can you salad with Evercore. Your line is open.
Thanks can you just comment on seasonality for 2020, we obviously the extra day from leap year in the first quarter, but are there any other talent or effects or comp issues just to call out.
Hi, Yes, I mean.
It's a little bit complicated so thats, an extra calendar day in Q1.
Actually not really a full day because the data we could it is so it gets a little bit of complicate. So theres in the year, there's definitely an extra day theres a chunk of that in the first quarter. If you recall in 2019, we called out an extra day in Q3, so think about that when you when you size Q3.
That will not repeat the way the calendar is falling and then there's the typical seasonality around some of the floating holidays and then the last thing I'd point out is that some of the fixed holidays on.
The date, if the data the week matters. So when you look at where things like the fourth of July and Christmas and New year's fall there can be a difference the worst being if those are Tuesday or Wednesday in the best thing. If those are weekend, so I'd point to those being some other things, but you I'm sure you can imagine that within a 200 basis point range of.
Revenue guidance, we contemplate all those scenarios that might play out there.
Operator next question.
Our next question comes from Stephen Baxter with Wolfe Research Your line is open.
Hi, Thanks for the question.
The obviously on moving parts and the guidance today, including the investments you're making I was hoping you could help us understand a little bit more explicitly what the guidance is embedded in from margin perspective, if I looked at this year and took out the United added that work impact I would have seen margins I think roughly stable year over year. So do you think that that.
Suitable again as we go into 2020, and if you can add on any expectations for below the line items interest expense tax rate anything we should be considering there that would be different than 29.
Good.
So let me address the latter.
Interest expense and tax rate will be pretty consistent.
The other area, where we've had a number of people ask questions recently as equity earnings and that growth has been certainly largely driven by our JV with at Q via our Q square JV that we set up several years ago that has been continuing to drive earnings growth.
One of the investments that we called out our liquid biopsy investment actually comes to us through a vessel, we have with third party and the accounting rules dictate that we have to take our share of those losses and even once an investment in this company that will be in the equity earnings line, so that what dampening somewhat.
Equity earnings growth, but it's all again in that 15 cents that.
I called out earlier.
So I'll turn it back to Steve for the other part of your question.
Margins.
Yes margins, we've been consistent where we haven't guided around margins because we have a mix of businesses.
We're driving growth.
Drug and return on invested capital.
We have provided outlook.
Around growth and earnings per share, we fitness the best way for us to drive shareholder value. So.
Really comment on what the margins will be year on year of mobile you go through the math you can kind of from club in the margins could be based upon the topline growth and what we guided as far as.
Our EPS growth and the other thing if that margins are not again so.
At the low end of that revenue guidance versus the high end, we'll have impact margins because as we've shared previously that organic revenue growth comes through higher truck through that are fully loaded margin and where depending on that as I shared with tricky with her initial question our degree program.
Loan can offset in a large portion of the headwinds but really the.
Bottom line growth in the margin any margin expansion will come to that organic revenue growth.
Operator next question.
Next question comes from Jack Meehan with Barclays. Your line is open.
Thank you good morning.
Hey, one clarification in one strategic question.
Clarification on the fourth quarter I was curious we could weigh in on how much flu might have contributed I know that Hooper Holmes App acquisition last year out a little bit of that and then.
Strategically just given the dilution associated with the blueprint acquisition that obviously unusual you know in terms of the framework of deals. The quest has done the past.
Curious you could just way in just the appetite for deals like bad versus I guess, what we're accustomed to in terms of tuck ins on the outreach side.
So yes, the flu it was a small contributor as we've shared in the past allows.
At this point of care, we certainly get some testing when the flu season.
Mike So yes, it was a little bit as a tailwind, but not anything notable in terms of our strategy right. Yes. It suggests we're always looking at.
Lining or investments runner strategy, and having a balanced approach.
And.
Related to acquisitions share.
Typically what you're seeing for us is acquisitions falling in one or three categories.
One is regional laboratories.
Well cost equipped labs small regional hub to resist acquire them one of the Missouri last year. So we'll continue to pursue those.
Second as hospital outreach businesses and Mark currently Good example that we like those deals are relative.
Our earnings that provide real growth really license business, if you will.
Customer relationships, we take on board and they capability building.
So blueprint you'd outages that example, bill sample capability building.
We thought it will be prudent for us to making investments there.
We think it's very consistent with our strategy is modest in size up it's going to give us these capability rough bio informatics around the variance interpretation that as spoke to it allows us to achieve the strategy of accelerating growth and advanced diagnostics, which as a category as we show the pass our definitions.
The molecular review over $1 billion, and we believe that is prospectively, a great opportunity for us to continue to invest and Thats why we made it. So we will continue down that path of a balanced approach consistent with our strategy with deals that we can make money for shareholders and trust that will make any deals including the ones. We just didn't.
Now we have a cup of acreage for our shareholders and just one final comment that typically Jack with our acquisitions the value creation has to come directly from a book of business, we're buying and well certainly the book of business, we're buying from blueprint will become better from a profitability standpoint really the value creation.
Goes well beyond that book.
In early our capabilities of brings will be will benefit everything we do in that space and so the capability.
Description that Steve gives really means that it's going to create better margins and better competitiveness in space outside of specific test menu and book of business that we're acquiring.
Thank you.
Your last question.
Yes. Our last question comes from on trains with Mizuho Securities. Your line is open.
Good morning, Good morning, I, just want to ask about cash flow be on 2020, I know your capex is a little higher on just because of the new facility should we assume that capex run rate goes down after 2020.
Hi, typically I don't give any kind of guidance beyond the current year end, but what I will say is that this is the largest year forklift in 2020, we're expecting to be operational in 2021 that Clifton facility has been.
The driver certainly this year last year and even back in to 18 in the increase in our relative level of capital spending we haven't announced any similar plans like that.
So you might infer from that but capital spending might come down a little beyond 2020.
Have you disclosed how much you've been investing in Capex for Clinton.
We havent by year, what we have disclosed that it was about a quarter billion investments over three years, Okay, yes, but you might have seen as well.
We recorded.
On the property sale.
Yes, so we sold our Teterboro property and we're going to lease back right now until we exited and moved to question.
As a big contributor to the year over year GAAP earnings gain we adjusted that out of our adjusted income but.
As a nice cash inflow and as you know and that goes into financing not into operating cash flow and actually the tax on the gain actually goes against operating cash flow in 2020, so from an accounting perspective, it's a little bit disconnected, but we actually got quite a bit of cash from the sale of teterboro at the fourth quarter.
Yes, so when we built the business based on this.
[music].
Investment we assumed the surge so.
For the Teterboro facility, we greatly exceeded the expectations. So feel good about the business case.
What we're putting our capital budget I guess.
Alright, great. Thank you. Thanks.
Sure. So so thank you very much appreciate your engagements. We appreciate your support for two senior in our travels have a great that.
Thank you for participating in the quest diagnostics fourth quarter and full year 2018 conference call a transcript of prepared remarks on this call will be posted later today on quest diagnostics website at Www Dot quest diagnostics dot com a replay of the call maybe.
On line at Www Quest diagnostics dot com forward slash invest or by the phone.
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13th 2020 Goodbye.