Laboratory Corporation Of America Holdings (LH) Earnings …s.t.st/media/xtranscript/2015/Q1/13053596.pdf · 2015-04-10 · diagnostics, and healthcare delivery. This merger creates

CompanyName:LaboratoryCorpofAmericaHldgsCompanyTicker:LHSector:HealthCare

Industry:HealthServicesEventDescription:Q4 2014 EarningsCall

©2014TheStreet,Inc.AllRightsReserved Page1of 23

LaboratoryCorporationOfAmericaHoldings(LH)EarningsReport:Q42014ConferenceCallTranscriptThefollowingLaboratoryCorporationofAmericaHoldingsconferencecalltookplaceonFebruary20,2015,09:00AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

StephenAnderson;LaboratoryCorporationofAmericaHoldings;VP-IRDaveKing;LaboratoryCorporationofAmericaHoldings;Chairman,CEOGlennEisenberg;LaboratoryCorporationofAmericaHoldings;EVP,CFOJoeHerring;Covance;CEO

OtherPart icipants

LisaGill;JPMorgan;AnalystRobertWilloughby;BofAMerrillLynch;AnalystBillBonello;Craig-HallumCapitalGroup;AnalystGaryLieberman;WellsFargo;AnalystMichaelCherny;EvercoreISI;AnalystNicholasJohnson;RaymondJames&Associates;AnalystWhitMayo;RobertBaird;AnalystGlennSantangelo;CreditSuisse;AnalystRickyGoldwasser;MorganStanley;AnalystA.J.Rice;UBS;AnalystDavidClair;PiperJaffray;AnalystIsaacRo;GoldmanSachs;AnalystDarrenLehrich;DeutscheBank;AnalystBryanBrokmeier;MaximGroup;AnalystGaryTaylor;Citi;AnalystBrianTanquilut;Jefferies&Company;AnalystAmandaMurphy;WilliamBlair;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator:

Goodday,ladiesandgentlemen,andwelcometothefourthquarter2014LaboratoryCorporationofAmericaHoldingsearningsconferencecall.MynameisKatina,andIwillbeyourcoordinatorfortoday.

(OperatorInstructions)

Asareminder,thisconferenceisbeingrecordedforreplaypurposes.

Iwouldnowliketoturnthepresentationovertoyourhostfortoday'scall,Mr.StephenAnderson,VicePresidentofInvestorRelations.Pleaseproceed.

StephenAnderson(VP-IR):

Goodmorning,andwelcometoLabCorp'sfourth-quarterandfull-year2014conferencecall.




WithmetodayareDaveKing,ChairmanandChiefExecutiveOfficer;GlennEisenberg,ExecutiveVicePresidentandChiefFinancialOfficer;JayBoyle,ChiefExecutiveOfficerofLabCorpDiagnostics;JoeHerring,ChiefExecutiveOfficerofCovanceDrugDevelopment;andPaulSurdez,VicePresidentofInvestorRelations.

Thismorning,wewillrecapour2014performance,discussour2015priorities,provideanupdateonourCovanceacquisition,introduceProjectLaunchPad,ourenterprise-widebusinessprocessimprovementinitiative,andissueour2015guidance.Beforewegetstarted,IwouldliketopointoutthattherewillbeareplayofthisconferencecallavailableviatelephoneandInternet.Pleaserefertotoday'spressreleaseforreplayinformation.

Thismorning,theCompanyfiledaForm8-Kthatincludedadditionalinformationonourbusinessandoperations.Thisinformationisalsoavailableonourwebsite.Analystsandinvestorsaredirectedtothis8-Kandourwebsitetoreviewthissupplementalinformation.

Additionally,wereferyoutotoday'spressrelease,whichisavailableonourwebsiteforareconciliationofnon-GAAPfinancialmeasuresdiscussedduringtoday'scalltoGAAP.Thesenon-GAAPmeasuresincludeadjustedEPS,freecashflow,andadjustedoperatingincome.

Iwouldalsoliketopointoutthatwearemakingforward-lookingstatementsduringthisconferencecall.Theseforward-lookingstatementsinclude,amongothers,statementsaboutourexpectedfinancialresults,theimplementationofourbusinessstrategy,andtheongoingbenefitsfromacquisitions.Thesestatementsarebaseduponcurrentexpectations,andaresubjecttochangebaseduponvariousfactorsthatcouldaffecttheCompany'sfinancialresults.

Someofthesefactorsaresetforthindetailinour201310-KandinoursubsequentfilingswiththeSEC,andwillbeincludedinour201410-KandsubsequentfilingswiththeSEC.Thecompanyhasnoobligationtoprovideanyupdatestotheseforward-lookingstatements,evenifourexpectationschange.

Now,I' llturnthecallovertoDaveKing.

DaveKing(Chairman,CEO):

Thankyou,Steve.

I' llstartbyrecapping2014.Wedeliveredastrongoperatingperformance,exceeding$6billioninrevenueandgeneratingtotalvolumegrowth,includingacquisitions,of5.3%.Afterachallengingfirstquarterduetoextraordinaryweather,ourperformanceimprovedsequentiallythroughouttheyear.Inthefourthquarter,revenueincreasedby5.3%overthefourthquarterof2013,andwepostedyear-over-yearimprovementinadjustedoperatingincome,adjustedoperatingincomemargin,andadjustedEPS.

Wealsoachievedstrongorganicgrowthinthefourthquarterandfortheyear.We'reverypleasedwithour2014performance.

Latelastyear,wemadeaveryimportantstrategicmovewiththeCovanceacquisition.ThistransactionistheculminationofyearsofthinkingabouthowtobestpositionourCompanyforthefuture,andI'mveryproudofourteamforitsdedicationandtenacityincompletingtheacquisition.WehavemadeatransformationalmoveforourCompany,andovertime,thecombinedCompanywillenhancedrugdevelopment,laboratorydiagnostics,andhealthcaredelivery.

ThismergercreatesuniquecombinationofcapabilitiesthatpositionsthenewLabCorptobringinnovativeandhighervaluesolutionstoclientsofbothpredecessorcompanies.WeclosedtheCovanceacquisitionyesterday,andwe'reofftoastrongstartontheintegrationofthebusinesses.

Goingforward,wewilloperateintwosegmentsLabCorpDiagnosticsandCovanceDrugDevelopment,which




weexpecttobecloselyalignedinfurtheringourcoremissionofimprovingpatients'livesbyprovidingworldclassdiagnosticsandknowledgeservices.JayBoyle,who'sbeenanexceptionalChiefOperatingOfficerofLabCorpoverthelastfiveyears,isnowChiefExecutiveOfficerofLabCorpDiagnostics.JoeHerring,whohassuccessfullyledCovanceforoveradecadeandhasbeenagreatpartnersinceweannouncedthetransaction,isnowChiefExecutiveOfficerofCovanceDrugDevelopment.JoeandJaywillreporttome.

AlthoughtheflawlessintegrationofCovanceisofutmostimportance,Iwanttoemphasizethatitwillnotcauseustolosefocusonthe2015prioritiesforLabCorpDiagnostics,whichincludethesethreeclearinitiatives.

First,wewillcontinuetofocusonopportunitiestogrowinbothcoreandesoterictesting.Wewillbuildonourstrong2014performanceinorganicgrowth,managedcarecontracting,newtestintroductions,andstrategicacquisitions.Weremainoptimisticaboutthelong-termprospectsofthelabindustryandourlabindustrybusiness.

Second,wewillcontinuetomakeprogresswithourinnovativeproductsandservices.TheBeaconLBSteamispushingtowarditsgoaloffullimplementation.EnlightenHealthcontinuestoexpand,havinglaunchedExomeRevealagenomewideinterpretationservice,andrecentlyintroducedaninnovativepatientfriendlydiabetesreportthatgraphicallydisplaysresults.

Third,tocomplementourfocusontoplinegrowth,wehavesystematicallyreviewedourbusinessandoperatingmodeltoseewherewecanimproveourperformance.

ProjectLaunchPadistheCompany'senterprise-widebusinessprocessimprovementinitiative.ItconsistsofprojectsdesignedtoreengineertheCompany'ssystemsandprocesses,leveragetechnologicaladvancements,andmakesustainablereductionsinourcostbase.

LaunchPadisnotashort-termcost-cuttingmeasure.Itisalong-termstructuralchangeinhowwedeliverourservices.WearepursuingprojectsthatwillfundamentallyimprovetheexperienceofeveryoneinvolvedintheLabCorpDiagnosticsvaluechain,fromprovidertocustomertopayertoourvaluedemployees.

Weexpectthisinitiativetodrivenetsavingsinexcessof$150millionoverthenextthreeyears.GlennwillprovideadditionaldetailsonLaunchPadinafewminutes.

Now,letmeupdateyouontheCovanceacquisition,whichwilldelivernewservicestothepharmaceuticalindustry,drivesharegainsinboththediagnosticsanddrugdevelopmentbusinesses,andbenefithealthcarestakeholdersandourshareholders.Ournewcombinedcompanyhasastrongmanagementteam,relationshipswithnearlyeverymajorplayerinthehealthcareindustry,aglobalfootprint,andauniquewealthofdata.Withtheseassets,weexpecttowinagreatershareofclinicaltrials,enhanceandgrowourmarket-leadingcentrallabbusiness,deliveranexpandedrangeofdiagnosticofferings,andaccelerateprofitablegrowthintheyearsahead.

Iwillnowdiscussthreeimmediategrowthopportunities.First,wewilluseouruniquecombinationofassetsanddatatodeliverfasterclinicaltrialenrollment.Patientrecruitmentisaninefficientprocess.

CombiningLabCorp'sdatabaseofmorethan70millionuniquepatientrecordswithCovance'sinvestigatordatabaseandanalyticcapabilitiespositionsustodeliverfaster,higher-qualityclinicaltrials,significantlyreduceclinicaltrialcycletime,eliminatenonviablesiteswhichcansignificantlydelayrecruitment,reducecosts,andultimatelyenableourBiopharmaclientstoreachpeakrevenuefortheirnewproductsfaster.

Second,wewillbecomethepartnerofchoicetodevelopandcommercializecompaniondiagnostics.Thereover100companiondiagnosticsonthemarkettoday,versus13in2006.Morethan20%of2014drugapprovalswerepersonalizedmedicines,andtherearedozensofdrugsinphase3developmentthatwill




requirecompaniondiagnostics.

CombiningCovance'sstrengthincentrallabandearlydevelopmentwithLabCorp'sstrengthinassaydevelopmentandtestcommercializationwillcreatetheonlycompanyintheworldthatcanoffercomprehensiveend-to-endsupportforcompaniondiagnosticsdevelopment.

Third,wewillenhancethephasefourtrialexperienceandpostmarketsurveillance.Approximately30%ofphasefourpatientsdropoutduetoinconvenienttrialproceduresandalimitednumberoftrialsites.LabCorp's750patientservicecenters,approximately5000phlebotomistandphysicianoffices,andconvenientpatientwebportalforschedulingcanimprovethephasefourpatientexperience.

LabCorp'sinfrastructurewillserveanotherimportantfunction:allowingtheorganizationtocollectpost-approvalsafetydataonnewdrugs.Morethan25approveddrugshavebeenwithdrawnfromthemarketinrecentyears,thevastmajorityduetotoxicity.Ourcombinedanalyticscapabilitieswillgiveusthepotentialtoidentifyearlysafetysignals,avoidextensiverecalls,andfindgenotypiccharacteristicsofpatientswhoexperienceadversedrugreactionssothatthedrugcanbegiventopatientsforwhomitissafe.

HowourorganizationswillalsobeabletousethesecapabilitiestoassistBiopharmacompaniesthroughpost-marketstudiesinunderstandinghowdrugsarebeingusedbyphysiciansandidentifynewlocations--newindicationswherethosedrugsshowefficacy.Weexpectthesethreeopportunitiestogenerateover$300millioninincrementalrevenueby2018.

Inaddition,weseeexcitingopportunitiestoexpandourfoodsafetyandnutritionalchemistryservices,andlonger-term,togrowthroughinternationalexpansionandpredictiveanalyticsforprovidersandpayers.We'reofftoastrongstart,asevidencedbyabiotechclientthatrecentlyawardedasizableclinicalstudytoCovance.

ThisawardwasbasedinpartonthepotentialofdeployingLabCorptestingdatatoidentifypatientswithraregeneticmutations,speedingenrollmentintheclinicaltrialforitspersonalizedoncologydrug.ThereanumberofnewopportunitieswhereLabCorptestingdataisbeingusedtosupportaCovancebid,andweexpectourpatientdataandconnectivitytocontinuetoenhanceandfurtherdifferentiateCovance'sdrugdevelopmentcapabilities.

BeforeIturnthecallovertoGlenn,IwanttoexpressmyappreciationtoLabCorp's36,000employeesfordeliveringanoutstandingyearin2014despitedifficultcircumstances.Ourseniorleadershipteam,includingouroperationalleadership,oursalesandserviceteam,ourphlebotomist,ourcouriers,andourtechnicalstaffarethebestinourindustryanditisaprivilegetoleadthem.Ithankeachofyouforyourhardwork,yourdedicationtopatientcare,andyourperformancein2014andeveryyear.

IalsowanttowelcomeCovance's12,500talentedemployeestoourcompany,asIknowtheywilljoinwiththeLabCorpteaminmakingimportantcontributionstoourfuturesuccesses.

ThisisanexcitingtimetobeatLabCorp,andIamconfidentthatourteamwillenhancedrugdevelopment,diagnosticservices,andthedeliveryofhealthcaretobetteraddresstheneedtoimprovepatientoutcomesatlowercosts.

Now,I' llturnthecallovertoGlenn.

GlennEisenberg(EVP,CFO):

Thankyou,Dave.

I'mgoingtostartmycommentswithareviewofourfourth-quarterresultsand2015guidance,followedbyanupdateonourCovanceacquisitionandProjectLaunchPadinitiative.




Salesforthequarterwereapproximately$1.5billion,anincreaseof5.3%overlastyear.Theincreaseinsaleswastheresultofvolumemeasuredbyrequisitionsandacquisitions,partiallyoffsetbypricemixandcurrency.Thegrowthinsaleswasduetoorganicvolumeof5.3%,partiallyoffsetbyadeclineinrevenueforrequisitionsof1.1%andnegativeimpactofcurrencyof0.5%.Inadditionacquisitionsadded1.6%tosales.

Totalvolume,includingacquisitions,increased6.4%.Thedeclineinrevenueperrequisitionwasprimarilyduetocoretestinggrowthoutpacingesoterictestinggrowth,andlessrevenuegeneratedfromuninsuredpatients.

Grossprofitforthequarterwas$546million,or36.1%ofsales.Thiscomparestogrossprofitof$526million,or36.6%ofsales,lastyear.Theincreaseingrossprofitdollarswasduetovolume,productivity,andacquisitions,partiallyoffsetbypricemix,costinflation,anddepreciation.ThedeclineingrossmarginwasprimarilyduetothechangesintestandpayermixthatImentionedearlier.

SG&Aforthequarterwas$310million,or20.5%ofsales,comparedto$286million,or19.9%,lastyear.Duringthequarter,weincurred$13millionofspecialchargesinSG&ArelatingtoProjectLaunchPadandtheCompany'sacquisitionofCovance.Theremainderoftheincreasewasprimarilyduetopersonnelcosts,acquisitions,andanincreaseinbaddebtexpense.Whilebaddebtincreasedduetosalesgrowth,therateimproved10basispointsoverthefourthquarterof2013.Weexpectthisratetobelowerin2015.

Duringthequarter,wehad$2millionofrestructuringandspecialitems,comparedto$4millionlastyear.Thedecreasewasprimarilyduetoreducedseverancecosts,partiallyoffsetbyanincreaseinfacilityrelatedcosts.Operatingincomeforthequarterwas$219million,or14.5%ofsales,comparedto$215million,or15%ofsales,lastyear.Excludingrestructuringandspecialitemsof$16million,adjustedoperatingincomewas$235million,or15.5%ofsales,comparedto$219million,or15.2%ofsales,lastyear.

Interestexpenseforthequarterwas$32million,comparedto$24millionlastyear.TheincreasewasprimarilydrivenbyCovancerelatedfinancingcostsofapproximately$6million.

Thetaxrateforthequarterwas36.1%,comparedto34.8%lastyear.Theincreaseinthetaxrateoverlastyearwastheresultofbenefitsrelatedtodiscreteitemsrealizedinthefourthquarterof2013.Asaresult,netearningsforthequarterwere$120million,or$1.39perdilutedshare,comparedto$126million,or$1.43perdilutedshare,lastyear.Excludingamortization,restructuring,andotherspecialitems,adjustedEPSwas$1.65inthefourthquarter,upfrom$1.61inthefourthquarterof2013.

Duringthequarter,operatingcashflowwas$214million,comparedto$249millionlastyear,asweuseworkingcapitaltosupportstrongtoplinegrowthandincurredcashcostsrelatingtoProjectLaunchPadandtheCovanceacquisition.Capitalexpenditurestotaled$46million,comparedto$60millionlastyear.Asaresult,freecashflow,oroperatingcashflowaftercapitalexpenditures,was$167millioncomparedto$189millionlastyear.

Duringthefourthquarter,werepurchased$39millionofourstock,bringingour2014totalsharerepurchasesto$269million.WiththeNovember3rdannouncementoftheCovanceacquisition,wesuspendedoursharerepurchaseprogramuntilwereachourtargetedleverage.

NowI' llcoverourguidancefor2015.Totalrevenueisexpectedtogrow40%to44%,inclusiveofCovanceasofFebruary19thandafteradjustingforapproximately160basispointsofnegativecurrencyimpact,aswe'veassumedthatforeignexchangeratesstayatJanuary31,2015levels.

OurLabCorpDiagnosticbusinessisexpectedtogrow3%to5%.Covance'srevenueisexpectedtoincreaseapproximately4%to6%versusfull-year2014afteradjustingforapproximately330basispointsofnegativecurrencyimpact.




Givenourexpectedtoplinegrowth,ProjectLaunchPadinitiative,andtheacquisitionofCovance,our2015adjustedEPSguidanceand$7.35to$7.70,anincreaseof8%to13%versustheprioryear.IncludedinthisestimateisexpectedaccretionfromCovanceofapproximately$0.35to$0.40.Weexpecttohaveapproximately102millionweightedaveragesharesoutstandingin2015afterissuing15.3millionsharesfortheCovanceacquisition.

In2015,weexpecttheCompany'sinterestandamortizationexpensetobeapproximately$220millionand$165million,respectively.Inaddition,weexpecttheCompany'staxratetobeapproximately35%.

2015operatingcashflowisexpectedtobebetween$1.075billionand$1.1billion,withcapitalexpendituresbetween$325millionand$350million.Asaresult,freecashflowisexpectedtobebetween$725millionand$775million,upfrom$536millionin2014.Theincreasedfreecashflowreflectshigherearnings,theCovanceacquisition,andimprovedworkingcapital.

Inaddition,freecashflowisburdenedbyapproximately$90millionofnetnonrecurringitemsrelatingtotheCovanceacquisition.Theseitemsincludeadvisoryfees,themake-wholepaymentonCovance'snoteandchangingcontrolpayments,partiallyoffsetbypayingonlyoneofthesemiannualinterestpaymentsontheacquisitiondebtin2015.

Now,I' lltalkabouttheCovanceacquisition.ThetransactionallowsustobringdecadesofexperienceinlaboperationsandefficiencytoCovance'sglobalcentrallaboratorynetwork,whileunlockinggreatereconomicvaluefromourpatientdatabase,customerrelationships,andcommercialinfrastructure.

Thecombinationalsocreatesnewsourcesofrevenueandearnings,andexpandsourcustomerbaseandinternationalpresence.Thisacquisitionprovidesuswithbothnear-termandlong-termstrategicandfinancialbenefits.Atclosing,wepaidapproximately$5.7billionforCovancenetofcashacquired.Tofinancetheacquisition,weraised$3.9billioninlong-termdebtandissued15.3millionsharesofLabCorpcommonstocktoCovanceshareholders.

Werecentlyissuedthe$3.9billionofacquisitionrelateddebtatablendedinterestrateofapproximately3.2%,withaweightedaveragematurityofapproximately12years.TheseattractivetermsreflectstrongdemandforLabCorpcreditaswellasafavorableinterestrateenvironment.

Weremaincommittedtomaintaininganinvestmentgradebalancesheet.BothS&PandMoody'shaveratedourdebtasinvestmentgradeatBBBandBAA2,respectively.Wehavetemporarilysuspendedoursharerepurchaseprogramuntilwereachourtargetedleverageof2.5timesdebttoEBITDA,andexpecttoallocateourfreecashflowtowardsthepaydownofdebtandtuck-inacquisitions.

TheintegrationofCovanceisalsowellunderway.Wecreatednumerousfunctionalandbusinessunitteamstofostercrosscompanycommunication,andtofacilitateasmoothintegrationprocess.

Weexpecttoachievenetcostsynergiesinexcessof$100millionwithinthreeyears,primarilythroughcentrallabconsolidation,eliminationofredundantpubliccompanycosts,andprocurementsavings.Withassociatedone-timecosttoachievethesynergiesofapproximately$50million.Netcostsynergiesin2015areexpectedtobeapproximately$35million,withassociatedone-timecostsofapproximately$20million.

I'mgoingtoendmycommentsonourProjectLaunchPadinitiative.AsDavediscussed,LaunchPadisdesignedtoreengineeroursystemsandprocesses,improveproductivity,anddeliversustainedmarginimprovementovertime.ProjectLaunchPadsavingswillfavorablyimpactbothgrossprofitandSG&Athroughimprovedcustomertocashprocesses,baddebtreduction,outsourcing,procurementsavings,andlaborefficiency.

Weexpectthisinitiativetodrivenetsavingsinexcessof$150millionoverthenextthreeyears,with




associatedone-timecostsofapproximately$30million.In2015,weexpectnetsavingsofapproximately$50million,withassociatedone-timecostsofapproximately$15million.

Thisendsourformalremarks,andnowI' llturnthecallbackovertoDave.


Thankyou,Glenn.

IwanttoannouncethatafterfiveyearsofbleedingLabCorpinvestorrelations,SteveAndersonwilltransitionafterthiscalltoanoperationalroleinourfoodsafetybusiness,oneoftheareaswhereweseegreatopportunity.StevehasbeenaterrificIRleader,andhasworkedtirelesslytomeettheneedsofouranalystsandshareholders.Iwillmisshimgreatlyinthisrole,butIknowheismovingintoanareaforwhichhehasgreatandenduringpassion.

PaulSurdez,whohasledCovance'sinvestorrelationsprogramsince2002willserveasVicePresidentofInvestorRelationsforLabCorp.IgreatlylookforwardtoworkingwithPaul,whoisalreadyrecognizedasoneofthetopIRleadersinhealthcareservices.

Now,wearereadytotakequestions.

QUESTIONS&ANSWERS

Operator:

(OperatorInstructions)

RobertWilloughby,MerrillLynch

Robert Willoughby(Analyst-BofAMerrillLynch):

Hi,Dave.IguessSteveAndersonandfoodsafetydoesn'treallyjivewithhisbiscuitbillfocus,butIdefertoyouonthatdecision.

YoumentionedsubstantialsavingsfromtheProjectLaunchPadinitiatives.Canyouspeaktoany--thereseemedtobeareferencetobaddebtcomingdown,butwhataretheworkingcapitalopportunities?Canweseereceivablebalancesshrinkmeaningfullythere?AndanykindofCapExsavingswemightexpectoverthenextfewyearstoaddtowhateveryouaredoing,fromanincomestatementperspective?


Yes,Rob.Goodmorning.

FromaCapExperspective,thefocusoftheLaunchPadinitiativeswilllargelybearoundimprovingoursystemsandoperationsthroughtechnologicalinvestments.So,althoughIwouldn'texpecttoseeextraordinaryCapExinvestments,IwouldexpecttoseetransitioningsomeofourongoinginfrastructureCapExintomorestreamlinedandefficientprocessesandsystemsovertime,andsomeofthatwillalsobereflected,asImentioned,inlaborefficiency.

IwillletGlenntaketheworkingcapitalpartofthequestion.


Sure.Toyourpoint,workingcapitalhasbeen,callitauseofcashforus,butprimarilyduetothestronggrowththatwe'veexperiencedintheCompany.Whenyoureferenceourreceivablesontheabsolutelevel,weactuallyfeelwebeenmanagingitquitewell.It'sstayedatroughly49daysoverall.



©2014TheStreet,Inc.AllRightsReserved Page8 of 23

Havingsaidthat,abigpartofLaunchPadinitiativeisourworkingcapitalimprovement,inclusiveofbaddebt.But,effectivelywe'relookingatreallyaredesign.So,we'regoingtostepbackandlookatwhatprocessescanweputinplacethatwouldbepreferred?Andthen,asDavesaid,toputsystemstoenablethattohappen,asopposedtojustamarginalimprovementinthat.

Fromourperspective,weexpecttoseeimproveworkingcapitalmanagement,weexpecttoseealsoareductioninourbaddebtexpense,andparticularlyourbaddebtrate,whichwesawsomefavorablemovementalready,butweexpecttoseemuchgreaterimprovementaswegothroughtherestof2015.


Glenn,youquantifiedthesavings,though.Fromtheincomestatement,canyouquantifyanypotentialfreecashflowrunratethatwemightbenefitfrom,orjusttooearlytoputanumberaroundtheCapExandworkingcapitalopportunity?


Well,again,wewouldn'tnecessarilydoitaspartofthoseprograms,aspartofitisembeddedintheoverallguidancethatwehavegiven.So,whenyoulookatourcashflownumberfor2015,whenyoutakethemidpoint(inaudible),we'relookingasacombinedcompanyof$750million,andwetalkedaboutthefactthatthat'salreadybeingburdenedbyaround$90millionofone-timecosts.

So,youcanseethestrongimprovementinourfreecashflowisinpartduetothesynergiesoftheacquisition,inpartduetotheimprovementinworkingcapitalbecauseofLaunchPad,andbecauseoftheimprovedreductioninbaddebtexpenserelatingtothatLaunchPadinitiative,aswell.So,that'sallencompassedinthatnumber


AndBob,thisisDave.Iwouldjustalsosay,overtime,whatwewouldliketoseeistheinvestmentsthatwemakeinsystemsnowallowingustoreduceCapExintheoutyears.So,IdoexpectsomepositivebenefittotheoveralllevelofCapExasaresultofLaunchPad.


Right.Okay,thankyou.

Operator:

BillBonello,Craig-Hallum.

BillBonello (Analyst-Craig-HallumCapitalGroup):

Twoquickquestions.One'sjustasimplenumbersquestion.Youtalkedaboutcurrencyreducingrevenuebyabout160basispointsin2015.HowshouldwethinkaboutthehittoEPS?


Obviously,reflectedintheguidancethatwehaveaswell.Thebiggestcurrencyheadwinds,ifyouwill,obviouslywithCovancehavingoverhalfoftheirbusinessoverseas.That'swhereweseeit.WhenweprovidedtheguidancerangeofCovanceyear-over-yearasifwewould'vehadthemforbothyears,youcanseeitwasaround3.3points.Sothatwouldcallitinthemid-$70millions,ifyouwill,ofheadwindonsales.

Historically,Covancehasleveragedatarounda20%[degridential]totheirearnings.Soagain,aspartofLabCorp,thattranslatestoaround,callit,1.5%headwindonthetopline.Andagain,ifyouusethatroughly




20%margindegradation,youcouldprobablygetagoodproxyfortheearningsimpact,whichagainisreflectedintheguidancethatweprovided.


Okay,perfect.Great.Andthenontherecentcontractthatyoutalkedaboutbeingawarded,andCovancetalkedaboutthisaswell.Dave,I'mwonderingifyoucouldjustgiveusalittlebitmorecolorabouttheprocess?

So,youmentionedthatyou'regoingtouselabdatatoidentifypatientsbut,maybeyoucouldjustelaboratealittlebitonhowdoesthatactuallyplayoutandhowbeneficialthatcanbe?BecauseIthinkit'sanareawherethere'sstillsomeskepticismabouthowthatreallycandriveimprovementinpatientrecruitment?


Okay,soI' llstartandIwillaskJoetocommentaswell.InthespecificcasetheBiopharmaclientwaslookingforaveryspecificsetofpatientswithaveryspecificcharacteristictotestapersonalizedoncologydrugintheirtrial.

WewentintoourdataofthetestingthatwehavedoneIbelieveoverthelastcoupleofyearsandlookatthenumberofpatientsthatwehadseenthatmetthoseveryspecificcriteriaandweshowedtheclientthatthisisabuiltinrecruitmentsetwhereweknowwhothesepatientsareandweknowwheretheyareandIwanttobeclearBillthatwaspartoftheclient'sdecisiontheCovanceteamhadpositionustobeingreatshapeatthefinalstages.Ithinkitwasdownto2CROstheywereconsideringsothiswaspartofthecalculation.Thiswasnotalast-minuteHailMarypassintotheendzonethatbroughtusbackfromthebrinkofnotbeinginvolved.

Wewereverywell-positionedthiswasincrementallysomethingthatwasconsideredtobeofvalue.Howwewouldthenexecutethisisforthosepatientswhowehaveadirectrelationshipwithwhohaveconsentedtoberecontactedforwhateverreasonwewouldbeabletorecontactthem.

Forthosepatientswhohavenotconsentedtoberecontactedorwhowedon'thaveadirectrelationshipwithwewouldgotothephysician-IndicatetothephysiciantheyhaveXnumberofpatientstheyaretreatingwereeligibleforthisveryimportantstudyandleaveittothephysiciantorecruitthepatientsarestatethepatientswhetherthepatientsareinterestedinbeingrecruited.Sothat'skindofhowitworksinpractice.Joefurthercomments?

JoeHerring(CEO):

IthinkDavehasdoneaprettygoodjobdescribingthat.IwasactuallymetwiththeCEOofthisclientduringtheJPMorganconferenceandasDavesaidthisisahighlyspecializedpersonalizedmedicinedruginnon-smallcelllungcancerandtheCEOwasveryconcernedaboutfindingpatientsforthisstudy.

AndwehadtalkedaboutthehistoricsortofCovanceapproachtothisandheedseemreadycomfortablebutacompetitorhadanequallycompellingsortofofferbutwhenweunderstoodthegeneticmarkerhewaslookingforwesaidletusseeifwecanlookintotheLabCorpdatabaseandgiveyouanideahowtofindthepatientsforthisstudyandtheywerelookingforalittleover100patients.

Andhesaidthistrialhastoberecruited.Hesaidwe'regoingtomakeadecisionnextweekandI'dbehappytohearwhatyouhavetosayabouttheLabCorpdata.Ihadourchiefmedicalofficerwithus.HeworkedwithLabCorpand12hourslaterweassuredtheclientandsaidthereareover1,000patientintheLabCorpdatabasethatfittheinclusionexclusionandgeneticmarkerforthisstudy.

Andtheycalledthenextdayandawardeda$45millionstudy.Iwouldsaytherewasroughly50-50percentchanceweweregoingtowinitaweeklatertogetitbackthenextmorningwasprettyawesomeandwehave




aboutfiveotherclientsrightnowthatweareworkingwithonasimilarbasis.SoIguessasoftodayweareoneforoneutilizingthecombinationofLabCorpdataandCovanceclinicaltalents.


ThatwasasgoodasanexplanationasIcouldhavepossiblyhopefor.Thankyou.

Operator:

LisaGill,JPMorgan

LisaGill(Analyst-JPMorgan):

GoodmorningSteveIreallyenjoyedworkingwithyouandIappreciateallyourhelpoverthelastfewyears.SomyquestionreallyisfirstDavewhenyoutalkedabouttheseuniqueopportunitiesinthe$300millionrevenueopportunityby2018andclearlyJoetalkedaboutthismostrecentoneat$45millioncanyoumaybegiveusanindicationuponyouexpectthe$300millionoverthenextseveralyearsareyouexpectinganythingin2015?

Unident if iedCompanyRepresentat ive :

WellLisagoodmorningandthanksforthenicecommentsaboutSteveandobviouslyIknowmanyanalystsandshareholdershaveenjoyedworkingwithhimI'veenjoyedworkingwiththemintheteamhasaswell.

HeisnotdisappearingisjustgoingovertofoodsafetyandwearethrilledtohavePaultostepinandIthinkyouwillreallyenjoyworkingwithPaul.Sowiththatsaidwhatweanticipatefor2015isbuiltintotheguidanceandasyouknowwedon'tbreaktheguidanceoutintospecificpartsandpieces.

IwouldexpectthistobeasJoesaidweareoneforoneweregoingtohavetoprovethecasethatnotonlycanwemarshalthedatabutthatitactuallyincreasesthespeedofpatientrecruitment.SoIwouldexpectjusttostartrelativelyslowlyandthenifwearerightwewouldexpectittobuildin2016and2017andcomeoutof2018aswe'veidentified$300millionasthetargetforallthreeoftheinitiative'scombinedbutIthinkthattheopportunitythereisrealandifweprovethecaseit'ssignificant.


Andthenmysecondquestionisreallyaroundyourcorelabbusinessandtheguidancethatyougavefornextyeartalkingaboutthisyeartheoffsetswithpricemixcurrency,etc.Butaswethinkabout2015canyoumaybejusttalkaboutwhatyouareseeingrightnowfromourreimbursementenvironment,especiallyinthecommercialmarket.

Doyouhaveanythingthatwasupforrenewalandgenerallyspeaking?Whatareyouseeingfromareimbursementperspective?


IwouldsayLisaintermsofyear-over-yearreimbursementwhatweareassumingintheguidanceistheMoPathremainsaboutthesame,thatwehavesomeincrementalopportunitywithBRCAparticularly.

IthinkeverybodyknowsthattheuncertaintynowisaroundreimbursementfortheclinicaltoxicologysothePalmettolimitedcoveragedecisionwhichhasbeendelayeduntilAprilbutisstillit'sfairtosaybeingvigorouslydebatedbetweenthelabindustryandthepayercommunity.Andthenhowthatwillripplethroughwithmanagedcarecombinedwiththeimpactofnewtoxicologycodesmanyofwhichhavestillnotbeenloadedinthepayersystem.




Sogenerallythereimbursementenvironmentlooksbetterthanithasthelastcoupleofyearsbutasalwaysweareinarapidlychangingregulatoryandreimbursementenvironmentandweneedtotakethatintoaccountinhowwethinkaboutthebusiness.


AndjustsoIunderstandthatshouldweassumethatwithintheguidancerangetherearevaryingassumptionsastohowthesethingswillplayoutin2015?


Yestheguidancecontemplatesawiderangeofoutcomesandwe'veattemptedtoincorporatethesevariouspotentialoutcomesintotherangewehavegiven.

Operator:

GaryLieberman,WellsFargo.

GaryLieberman(Analyst-WellsFargo):

Goodmorningthanksfortakingthequestion.Steve,thankyouforallthehelpovertheyears.It'sbeengreatworkingwithyou.IguessmyfirstquestionisaroundLaunchPadandthe$150millioninsavingsthatequalsabout175basispointsofmarginexpansionsowouldyouexpecttoseethatmarginexpansionorshouldweconsiderthattheremightcontinuetobesomeheadwindsthatwouldoffsetatleastpartofthat?


ThisisGlennletmetakethefirstandDavemaywanttochimeinaswellwhenwetalkabouttheinitiativewetalkaboutitonanetsavingsbasisandwhenwesaytheyareone-timecostsifyoubackthatoutwelookattheinitiativewelookedatwhatitwouldtaketoeffectivelytakethatkindofcostoutofthecompanynetofthecostthatweneedtosupportitsoifyoulookatitinisolationobviouslythat'sabenefitthatwillaccruetothecompany.

SoaswegoforwardthoughourgoalistocontinuetodriveourtoplinetocontinuetomanagethebusinesstodriveoperatingimprovementaswegoforwardandLaunchPadiscurrentlyoneoftheinitiativesthatwehavethatwillhelptodrivethatincomeandmarginimprovement.


Garyit'sDavetheonlythingIwouldaddtothatiswe'reveryfocusedonmarginimprovementandLaunchPadisasignificantopportunityforustoimprovemarginsovertime.ThethingthatobviouslywecannotpredictisgoingbacktoLisa'squestionwhatisthereimbursementenvironmenttwoyearsoutthreeyearsout.

Andsoyes,allofthethingsbeingequalyesIwouldexpectLaunchPadtotranslatetomarginimprovementbutwecan'tguidetowherewearegoingtobebasedonfactorsthatwedon'tknowaboutyet.


Okaythat'shelpfulandthenmaybejustupdateusonthereceptionofthedealandtheclosingofthedealbytheCovanceemployees.Youcharacterizeditpreviouslyasortofbeingalmosttransparenttothemanddoyoustillviewitthatway?


YesIhavespentalotoftimewithboththeCovanceexecutiveteamandwiththeemployeesattownhallsand




inmeetingsandgettingtoknowthemandmyperceptionisthereceptionhasbeenterrific.Peopleareveryenthusiastictheyseetheopportunityheretheyseethelong-termpotentialforbothourcombinedcompanytoExcelandIwouldsaymysenseisthatisexactlythesamereceptiononthelabcoreside.PeopleareveryenthusiasticaboutthisdealJoeanyfurthercolor?

JoeHerring(CEO):

YesIwouldcharacterizeitasoverwhelminglyforCovanceemployeesit'sbusinessasusual.Certainlyintheshort-term.Butwithveryexcitingstrategicprospects.

TheLabCorpassetsmakebrandsastrongerandmoreresourcefulcompetitorwhichmakesusabettercompanysoifyouthinkaboutourcentrallabnowallofasuddenwehavemorethan$100millioninnewrevenuefromLabCorpandlargelyesotericteststhatmakeourbusinessstrongerandthecombinationmakesusthemostresourceful,mostcapablecompaniondiagnosticscompanyinthehealthcareindustry.

Andouremployeeswhowanttoimprovepatientcareseethatasaniceopportunity.Forclinicalthere'snooverlapwithLabCorpsoit'sbusinessasusualexceptnowyouhaveaccesstolongitudinaldatabaseof$70millionofpatientsandwealreadytalkedaboutthat.

AndCovancemarketassesswherenumberoneissueishowtokeeppatientsandpostmarketingstudiesonstudytoachievetheresultsthe1700centersintheUSforLabCorpwillmakeitmucheasierforthosepatientstocompletetheirtherapyandcompletethestudy.

Forfoodservicethisisgoingtobeadisruptiveofferingandjustincrediblyexcitingandyouwillhearmoreaboutthatinthefuture.Andtheninearlydevelopmentwepickupaverynicebioanalyticalbusinessintermsoftandemandmakesusamuchstrongerbiomarkerdevelopmentcompany.

Sothere'snotalotofoverlapsothisisnotterriblydisruptivebutwherethereisoverlapthereisexcitingstrategicadvantage.IguesswhatIwouldclosewithisjustacommentsaboutDave.DaveandIhavetraveledaroundtheworldofCovancehavebeeninfrontofthousandsofemployeesinmultiplesitesaswellassmallworkinggroupsandIthinkIcanrepresenttheCovanceemployeessayingthattheylovetoseeDave'spassionaroundimprovingpatientcareandhealthcare.

TheyareexcitedtoseehowcomfortableheisinalabenvironmentandfinallyIthinkhisinterpersonalapproachhasbeenverywellreceivedbyCovanceemployeesaroundtheworld.IpersonallyheldatownhallmeetingyesterdayinPrincetonwithabout1000employeesandIcantellyoutheatmospherewaselectric


Great.Finalquickquestion.IntheexampleyougaveforyousaidyoucouldgotothephysicianandsaytheyhadXnumberofpatientsthatmetthecriteria.Canyouactuallygivethephysicianthenameofthespecificpatients?


Iwilldeferthattolegalconsideration.IbelievethatyeswecanbecauseIbelieveitfitswithintheHIPAAexceptionforhealthcaretreatmentbutobviouslybeforewewoulddothat--andbythewaythishasbeendoneinsituationsinthepastbeforewewoulddothatwewouldmakesurewehadlegalapprovaltoactuallyprovidethepatientnames.

JoeHerring(CEO):

IwasgoingtosaythegoodnewsinthisasIwalkedawayfromthisexcitingwinIkeepscratchingmyheadthinkingwhatotherorganizationontheplanetcanbringtheseresources?It'shardtocomeupwithone.Ilike




ourchances.

Operator:

MichaelCherny,EvercoreISI.

MichaelCherny(Analyst-EvercoreISI):

Goodmorningeveryone.Steve,firstofallgoodluckinthenewroleandPaullookforwardtocontinuetoworktogether,sohappytoseethattransition.IntermsofthinkingaboutthecombinationIknowthisisstillearlydaysgivenitwasjustdisclosedyesterdaybutmaybeaquestionforJoe.Youtalkedabouttheemployeereactionyoutalkedaboutthenewdealyouwonwhichisgreattosee.Howhasbeentherestofthecustomerreactiontothisdeal?

Intermsofhaveyouspenttimeswiththemoverthelastfewmonthsasyougonethroughtherenewalorsaleprocesses.ObviouslyCovancedeliveredstrongQ4resultsingoodbook-to-bill.CanyouqualitativelywhatthePharmasponsorshavebeentellingyoutothepowerofthedealoutsidetheonecustomerthatyoudidwin?

JoeHerring(CEO):

Iguesstwowordscometomind.Thefirstisintrigue.Thisisacombinationthatveryfewpeoplehavethoughtof,andinitiallyit'swheredidthiscomefrom,butwhentheythinkaboutthecombinationtheystartaskingusquestionscanyouhelpuswithadherenceprograms?Canyouhelpuswithcompaniondiagnostics?

Itseemslikeyouguyshaveveryuniqueassets.IthinkintriguedandIthinkthesecondpointiscomforted.Becausewhatwecansayisthereisnotalotofoverlapheresoyouhavethesameprojectmanageryouaregoingtohavethesamestudydirectorit'sgoingtobethesamebillit'sstillgoingtosayCovancesothere'snodisruptionhere.

Ifacompetitortriestoshowupandsaythisisgoingtobereallydisruptivewehavepre-trainedourclientstosaywhatyoumeandisruptordietthesamestudyrecordthesamesalespersonthesameeverythingandfranklytheyhavesomeprettyexcitingnewthingstotalkabout.Ilikeourchances.


ThanksJoeandthenonequickquestionIguessforGlennandmaybeDaveaswellwhenyoufirstannouncedthedealIthinkyoutalkedaboutthecapitalappointmentobviouslyyouhadadebtpaydownbutthatwouldn'tstopyouorprecludeyouinanywayfromdoinganysmalltalkandyoumaycomeacrossthatareanicefittoeithersideofthebusiness.Isthatcorrect?IwanttomakesureIunderstandthecapitalplanpriority


Michaelit'sDaveIthinkweindicatedacoupleplacesinourpreparedremarksweintendtodeployourcapitaltowardpaydownofdebtandacquisitionseeyouareexactlyright


Perfect.Imissedthetuck-inthingsothankyou.

Operator:

(OperatorInstructions).GaryTaylor,Citi.

GaryTaylor(Analyst-Citi):




IjustwanttowalkthroughtheguidanceandgetyourresponsetosomethingjusttoseeifIamthinkingaboutitcorrectly.Sobasicallythecashearningsguidance$735millionto$770million.Covanceaccretionis$0.35to$0.40.Thatgetsyoukindof$7.00orto$7.30.LaunchPadissupposedtobe$50million.That'sabout$0.30.

SoIwouldputthecorelabbusinessatkindofa$6.70to$7versus$6.80thisyear.Obviouslythere'snosharerepurchaseincludedinthatandthere'ssoitfeelsrelativelyflattishforthecorelabbusinessbutobviouslyvolumesorganicvolumeandrevenuehaspickedup.AndasyousaidyouwerelappingsomeofthelargestMedicarereimbursementcuts.SoamIthinkingaboutthatcorrectlyandifsowhysuchaconservativetakeonthecoreearningspowerinthelabbusiness?


ThisisGlennletmeatleaststartofftoyourpointwhenyoubackoutthemidpointsoftheaccretionthatweexpecttogetfromCovanceyoukindofgettothat$7.15-ishnumberforwhatwould'vebeenourbasementascomparedto$6.80sogrowingataround5%consistentwithwhatwesaidthetoplinegrowth.

Fromourperspective,aswegointo2015withourbasebusinesswearelookingatgoodtoplinegrowthorganicallywe'relookingandanimprovementinoperatingincomewe'relookingatanimprovementinouroperatingmargins.

Andagaintoyourpointweredrivingthat15%or5%EPSgrowthwhichagainisfastergrowthandjustthetoplinewithoutanycapitalredeploymentsothesignificantamountoffreecashflowthatwehavethatwouldnormallyhavegoneintooursharerepurchasesobviouslygoneintotheacquisitionofCovancethat'saddingthatcallat35%to40%ofaccretion.

SofromourperspectiveLaunchPadinanintegralpartoftheongoingcontinuousinitiativeimprovementofourbusiness,butitshouldbeviewedaspartofourbasebusiness.Andwethinkactuallytheimprovementinourprofitabilityaswellastheimprovementinourcashflowin2015onthebasebusinessisquitestrong.


That'sfair.Iunderstandit'spartofthebasebusiness,butitisnewandfairlymaterialandhighlightedinaverymaterialportionofthegrowthinthelabbusinessyear-over-year


Garyit'sDave.IthinktheotherthingtomentionandIjustwanttobeclearwearenotgoingtobreakdowneverybitandpieceoftheguidancebecausetherearemany,manymovingpieceswetalkedaboutcurrencyearlierbutalsorememberwithinthe$6.80wehadan$0.11one-timegainfromthesharesaleofsomesharesofacompanyweowned.

Therearemany,manythingsthatareincorporatedintothenumberthatweturningandtheguidanceweproduceandIwanttobecautiousabouttryingtobackouteverypieceofitandfigureoutwhat'supwhat'sdownandwhat'snotchanging.


That'sfair.Justkindofbigpicturingwhatyourthinkinglab.MyonefollowupwouldbewhenyouannouncetheCovancedealyousuggested$100millionincostsynergiesoverthreeyears.Iknowyoudidn'tcarvethatouttodaybutwouldyoubewillingtosaywhat'sembeddedfor2015intermsofcostsynergies?


GarythisisGlennweactuallydidbreakitout.Wetalkedaboutinexcessof$100millionofsynergysavingsoverthethreeyearperiodsoconsistentwithwhatwesaidwhenweannouncedthetransaction.




Whatwe'veaddedfurtherisweexpectthatthe2015pieceofitwouldgeneratearound$35millionofnetsavingswhileincurringaroundone-timecostofaround$20million.Andthemaincomponentsagainconsistentwithwhatwewould'vesharedatthetimeoftheannouncementwasacombinationofsynergiesthroughthelabconsolidationthroughtakingouttheredundantpubliccompanycostsaswellasleveragingthepurchasingpowerofthecombinedcompany.


OkayI'msorryImissedthatthankyou.

Operator:

AmandaMurphy,WilliamBlair.

AmandaMurphy(Analyst-WilliamBlair):

Hi.Thanks.Goodmorningguys.Justasafollow-uptoLisa'squestionontherevenuesynergynumbersthatyouguysputtogether.JustcuriousifyoucangivealittlemoredetailaroundIknowit'searlybutthemethodologywentthroughtogettothosenumbersjusttryingtothinkthroughwhattheriskmightbethereotherthanobviouslytheramp.

Andthenalsonottogetgreedybutwherewemightpotentiallyseesomeupsidetothosenumbersgiventhegreaterthansignthatyouincludedthere.


Amanda,it'sDave.Themethodologywasthatwewentthroughthethreeopportunitieswelookedatwhatwethoughtbasedonhistoricaltrendsandhowwesizetheopportunitieswasanappropriatebreakdownandthenwesaidwethinknumberoneisalargest.Wethinknumbertwoisinthemiddleandwethinknumberthreeisthesmallestandthenumberisapproximatelyaroundthatare150,100,and50youhadthosetogetherandtheyare300.

Obviouslywewouldnotputthegreatersignupwedidn'tfeeltherewasupsidetothe300butwe'vegivenanumberthat'sveryrealistic.Wegivenabreakdownofhowwethinkthoserevenueopportunitieswouldmaterializeandwherewethinkthegreateropportunitiesare.WediditallwithfinancialanalysisofpastresultsofourcompanyandCovanceandmarketsizeandmarketshareandopportunitiesforgain.Ireallydon'tknowhowtobreakitdowninmuchmoredetailthanthatbutIhopethatanswersthequestion.

AmandaMurphy(Analyst-WilliamBlair):

Yesthankyouandjustonemorehere.It'salittlemorespecificIguess.ObviouslyLabCorphashadanincreasedgrowthandopportunityinNextGendoing-basedtestetc.JustcuriousIknowthere'ssomeeffortstosetsomereimbursementthereviaMedicare.Haveyouguysthoughtthroughtheirwhattheriskmightbegivensomeoftheissueswith[MoPasCo]ayearagoorso.IstherearisktothereimbursementforNextGen?Iknowit'searlytheinfrastructurenowbutjustcuriousyourthoughtsthere?

JoeHerring(CEO):

Ithinkit'sveryearlytocommentonthat.TherearealotofdiscussionsgoingonwithMedicarewithPalmettospecificallyaboutNextGensequencinganappropriatereimbursementforNextGensequencingandwe'reverymuchengagedinthosediscussionsasourbythewayalotofothercompaniesthathaveasignificantinterestinhowNextGensequencingwillbereimbursed.

NextGen'ssequencingprovidesrevolutionaryopportunitiestodelivergreaterknowledgetophysiciansandpatientsandtoimprovepatientcareanditwouldbeashameifweshortsightedlysetreimbursementinsuch




awaythatwediscouragepatientsandphysiciansfromusingthebesttoolsavailabletodeliveroptimaloutcome.

Operator:

(OperatorInstructions).NicholasJohnson,RaymondJames&Associates.

NicholasJohnson(Analyst-RaymondJames&Associates):

Heyguysnicequarterandgoodguidance.Justwantedtogetyourthoughtsontheregulatoryoutlook.Wehaven'theardanythingmuchonthetimingofthe2017regscomingoutalsowithLDTregulationandwiththeDocFixupcomingjustwanttogetyourbroaderthoughtsonthemacrofromaMedicareperspective.


BackinmylegaldaysIwould'veobjectedtothatasathree-partquestionwithinonequestionbutIwillanswerit.GoodmorningNicholashowareyoudoingit'sDave.[Tamma]stillverymuchengagedwithCMSonhowthesurveyswillbedone.Ithinkwemadesomeconstructiveprogresswiththemonthinkingabouthowthesurveyswouldbedonetheinclusionofhospitalsinthesurveydata.

Don'thaveanyupdateonthetimingofwhenwemightexpectthattocomeout.IthinktotheircreditCMShasrecognizedthecomplexityofthetaskandisworkingveryhardtodeviseafairprocess.Labdevelopedtestswecontinuetohavethesameviewthatwehavepreviouslyarticulated.

ThatwedonotbelieveFDAhaslegalauthoritytoregulateLDTsasmedicaldeviceswedon'tbelievetheyaremedicaldeviceswethinktheyareextremelyimportanttothepracticeofmedicineandtomeetingpatientneedsandwethinkwithFDAhasproposewouldbecontrarynotonlytothepublicinterestandthelanguagesofthestatutebuttosoundpublicpolicy.

FDAhashadalisteningmeetingIthinktherewerearideFridayofviewsexpressedabouttheLDTguidanceanditcontinuestobeanareaofhighinterestinhighfocusfortheclinicallabindustry.AnditcontinuestobesomethingthatweatLabCorpfeelvery,verystronglyabout.SothosearethetwomajorregulatoryissuesthatIthinkwehaveonthetableinfrontofusandIhopethatresponseofficiallytoyourquestion.

Operator:

WhitMayo,RobertBaird.

Whit Mayo (Analyst-RobertBaird):

IjustwantedtogobacktothesynergytopicforasecondandlookingatCovancefilingsitlookliketheyhavehistoricallyhadNorthof$40millionaloneandjuststockcompexpensebeforethinkingaboutotherpubliccompanycostandyouareguidingtoonly$35millionandIknowthatnotallofthestockcompgoesawayayoulockeddownsomeofthekeyCovanceemployeessothere'snotabucketwhereeverythinggoestozero.

Butnonetheless$35millionsoundsalittlebitontheconservativesidewhenwelookatsomeoftheopportunitiesouttheresocouldyoumaybegiveusasenseofwherethemajorityofthe$35millioncomesfromthisyear?


SurewitthisisGlenn.AndIthinkthekeypointthatyousaidthisyear.We'relookingatsynergysavingsonthecostsideinexcessof$100millionaswegothroughtheprocessandthatdoesn'tincludeanyoftherevenuesynergiesthatDaveandJoehadalreadyspoketo.




Whenyoulookwegavethefirstyearpieceofitsofranklyitwillprobablytrendtobecallitroughlyaroundathirdyearaswegetoverthat$100millionnumberbutinthecurrentyearifyouwouldimaginethebiggestpieceofthosecostsavingswillcomefromtheredundantpubliccompanycostswehadbecausewecantakethatoutrightaway.

Willgetsomebenefitfromleveragingofthepurchasingpowerofourcombinedcompanyaswellaswiththelabconsolidationwillgetsomethatthelattertothepurchasingthelabconsolidationandbenefitsthatwillaccrueandtakealittlebitlongertoachieveoverthenextcoupleofyears.Weviewthatoverallthesynergiesofthecombinationaregoodonthecostsidetherevenuesideletalonetheexpectedgrowthinbothofourbusinesses


AndWhitit'sDavetofollow-uponthat.Ithinkyouarerightthatthestockcompexpenseisanareawecontinuetolookat.Obviouslyallthestockcompisnotgoingtogoawaybuttherearelikelytobesomechangesinstockcompissuanceforthisyear.Ijustwanttoremindeverybodythatisanon-cashsavingssoitdoesn'ttranslateintocashflowanditdoesn'ttransposecashflowguidancebutit'sstillasavingsintermsofoverallexpensenonetheless.

Whit Mayo (Analyst-RobertBaird):

Isthereanumbertothinkaboutforwhatthenewstockcompexpenseshouldbefortheentirecompany?


Wedon'tguidestockcompexpenseandsonothereisnonumbertothinkabouttheir

Operator:

GlennSantangelo,CreditSuisse.

GlennSantangelo (Analyst-CreditSuisse):

GlennIwanttofollow-uponsomeofthecommentsyoumadeearlieraboutFXcauseifwelookatthetoplineguidanceforCovanceyouobviouslycalledoutspecificallyhowbigthatwas,butsortofgiventhemanymovingpartsandgeographiclocationswereCovancecanyouhelpusthinkabouttheoperatingprofitgrowthparticularlyasitrelatestoanyFXheadwindsortailwindswithinthatnumber.

Andobviouslythere'sapieceoftheSantaFedealthat'sgoingawaylateinthefourthquartersoinjusttryingtodirectionallythinkingaboutthatoperatingprofitgrowthrelativetotherelativenumberyouprovided.


AndagainIthinkwemayhavealreadyaddressedthatinanearlierquestionwedidgiveyouthetoplineimpactfromthecurrencyheadwind.

AndCovancehasthreeprincipalareasofcurrencyexposureobviouslythereand60countriesbutbetweentheEurozonetheSwissandtheUKifyouwillisprimarilywherethatexposurecomesin.Sowetalkedaboutitroughlycallit330basispointsofnegativeimpactgiveortakethat'sinthemid-70sifyouwillattherevenuelinenegativelyimpactingwhatwebelieveCovancewillseeinsalesisatthecurrentsealevelstayatbasicallythecurrentlevelstoday.

AndwetalkedabouttheimpactonoperatingincomeatleasthistoricallyforthemwouldbeplusorminusaroundGPoralittlebitlowerthatsowesay20%isprobablyagoodproxywhereyou'dwanttomodelthat.



©2014TheStreet,Inc.AllRightsReserved Page18 of 23

Operator:

RickyGoldwasser,MorganStanley.

RickyGoldwasser(Analyst-MorganStanley):

HigoodmorningandStevecongratulationsonnewroleit'sreallywelldeservedandPaulcongratulationstoyouaswell.IhaveaquestionandIhaveafollow-upaswell.DavecanyoujusttalktousalittlebitaboutwhenyouthinkaboutthetoplineguidanceforLabCorpstandalone.

Howdoyouthinkabouttheutilizationenvironmentin2015andkindeffectedpricetovolumemixthatisembeddedintheguidance?

Unident if iedCompanyRepresentat ive :

Ithinktheutilizationenvironmentjustbasedonthenumbersthatwesawsequentiallyin2014Rickyhasimproved.Obviouslyverypleasedwith5%plustoplineheadlinegrowthinthefourthquarter.Howdowethinkaboutpricevolumenextyear?Ithinkwethinkaboutrelativelysimilarvolumenumbers.

Maybetoberealisticweobviouslyhadaverystrongyear-over-yearperformance.Sowhilewedon'tguidespecificallytopriceandvolumeIwouldthinkareasonableassumptionisvolumegrowthstaysaboutwhereitisandpricingisrelativelyflatmaybedownalittlebitjustdependingonthefactorsthatwe'veidentifiedwhicharefortestinginthefourthquarteroutpacingesotericandmovementfromuninsuredpatientsbucketintoinshortorexchangebuckets.

Idon'tthinknextyearwouldlookalotdifferentfromthisyearinsummaryalthoughtheremaybealittlebitofkindinup-and-downbetweenvolumeandprice.

RickyGoldwasser(Analyst-MorganStanley):

OkayandIwillusemyfollow-upquestionwithaquestiontoJoe.Joewhenyouthinkaboutthepatientrecruitmenttimelineinthenewcontractthatyousignedhowlongwillittakebeforeyoucancomebacktoyourclientsandbacktouswithsomeproofofconceptdatapointsthatwillshowhowmuchtimeyousavedyourclientsintheenrollmentprocess?

JoeHerring(CEO):

Rickykeepinmindwejustclosedyesterdayandwehavetobecarefulandhavebeenverycarefulofnotjumpingandgettingaheadofourselves.Butasyouknowclinicaltrials,fromthetimeyouwinituntilitstartstorampuptorevenue,is6to9to12toasmuchas18months.

Wewillbetalkingaboutthisinthefutureandgivingyouanideaofhowwe'redoing.Rightnowit'slargelymanualagain.Sowedon'twanttogettoofaraheadofourselves,butultimatelywewanttomakethisindustrial-strengthbringthisassortofanunparalleledofferinginadifferentiatorforourbusiness.Again,weareoneforonerightnow.

Operator:

A.J.Rice,UBS.

A.J.Rice (Analyst-UBS):

HelloeverybodymaybeIwilljustfocusinonthisyear'slayoutofnumbers.Iknowyoudon'tguidetothequartersbutaswethinkthenormalseasonalpattern,canyougiveusanythingweshouldkeepinmindaswelayitoutwhetherit'sweatherinthefirstquarterortheprogressionofsynergiesoverthecourseoftheyear




anythingalongthoselines?


AJit'sDaveyesweatherinthefirstquarter.ObviouslythefirstquarterfromtheLabCorpdiagnosticperspectivetendstobealowerquarterthesecondandthirdquartersbeingstrongerbutwedon'tguidequarterbyquarterandthebestwayyoucangaininsightintothatislookatprioryearsandseehowthequartershaveshapedup.

A.J.Rice (Analyst-UBS):

OkayIjustwasthinkingintermsbecauseit'sacorporatesynergy,forexample,doyouthinkthat$35millionlaysoutprettyevenlyacrosstheyearyou'vegotthatprettymuchupfrontisthereanyhelponthenontraditionalseasonalthingsthatyouwouldgiveus?


ThisisGlenn,AJ.AndIalmostechoDave'scomment.Asyoulookatbothcompaniesorthebutcombinedcompanywearetodayyouwouldexpecttoseearamp-upinthesavingsovertime.Soit'snotnecessarily[firrab],butwhenyoulookatthetotalityofourrevenuewhenyoulookatthetotalityofourearningsyouseethesamepatternifyouwill,whichagainisthestrengthmoreorlessinthesecondandthirdbeingstrongerthanthefirstandthefourth.

Butevensoit'snotmaterialbutifyouwanttomodelthatcloselyobviouslyyouwouldgolighterinthefirstandthefourthandalittleheavierinthesecondandthethirdtofollowhistoricalpatternspartiallyoffsetmaybebyaramp-upinthecostcominginbutagainit'snotgoingtodrivethenumbersthatmuchfromamagnitudestandpoint


Clearlythesynergieswillaccelerateaswegothroughtheyearwearenotgoingtohaveatonondayonebuttheywillaccelerateaswegetintolaterquarters


RealquickontheCovancesidethefirstquarterdoeshavesomeseasonalityinearlydevelopmentbusinesssojustmakeanoteofthat.

Operator:

DavidClair,PiperJaffray.

DavidClair(Analyst-PiperJaffray):

Higoodmorningeverybodythanksforlettingmeinthequeuehere.JustcuriousDaveyoumentionedthatcoretestingactuallygrewfasterthanesotericjustkindofcuriouswhythathappenedinthequarter?


Wellit'salittlebitofatoughquestionwhyithappened


WhatsloweddowninesotericIguess.





Nothinghassloweddowninesoteric.Coretestingoutpacedesotericiswhatwesaid.Soesotericgrewconsistentwiththeoverallgrowthofthebusinesscoretestinggrewfasterthanthegrowthofthebusinessandthereareprobablymanyaboutwhythathappened.

Butwehavepeoplecominginthroughtheexchanges.WehavepeoplecominginthroughMedicaid.Wehavepatientswhohavepreviouslybeenuninsuredhavingcoveragethelikelihoodisthattheirinitialencounterswithpositionsandwouldbeingcoveredlivethattheyaregoingtoruna[highpanic]panel,alipidprofile,thingsthatwecharacterizeasbeinginthecoreasopposedtobeinginesoteric

Sothatwouldbemybestassessmentofwhythecoregrewfaster.ButagainIdon'twanttoleavetheimplicationthattheesotericdidn'tgrow.Theesotericgrewnicelythecorejustoutgrewit


Okaythanksandjustarealquickfollow-upintermsofCovanceitsoundslikethefeedbackfromtheexistingcustomersisprettysolidtherewhatisthereanythingbakedintheguidanceintermsofcustomerattrition?


Theguidanceincorporatesawiderangeofoutcomesandsoyoucanassumewethoughtaboutthatandincorporatedintoourthinking.

Operator:

IsaacRo,GoldmanSachs.

IsaacRo (Analyst-GoldmanSachs):

Goodmorningguysthanks.SoontheguidanceforCovanceIthinkyoucalledfor4%to6%growthandIwanttodealwithwetalkedaboutlonger-termgrowthandthat7%to8%range.AndjustIwanttogetasensewhatyouguysthinkitwilltakeforthatsortofaccelerationtohappen.Isthereatimeframehereyouthinkoverseveralyearsorcoulditbesomethingthat'ssortofhockeysticksintotheER2yearthreepostedthedeal?Justtryingtogetasensehowyoulookatacceleratingthegrowth.


Isaacit'sDave.Forto6burdenby330basispointsofnegativecurrency,whichifIhad3.3to4Iget7.3to9.3.Soit'sexactlywhatwesaidatthetimewedidthedealintermsofthegrowthperspectiveandwethinkthatopportunitiesisthereforthelong-term.

IsaacRo (Analyst-GoldmanSachs):

Okayandintermsofpricingforthisyearacrossthecompanycanyoumaybegiveusasensegivenyourcontextonthecorebusinessforlabthetotal?


No.Aswesaidbeforeweguidetorevenuewedon'tguidetovolumeorprice

Operator:

DarrenLehrich,DeutscheBank.

DarrenLehrich(Analyst-DeutscheBank):

ThanksgoodmorningeverybodyandcongratstoSteve.Imayactuallygobacktoeatingchickennow.My




questionnowisforDaveandadjustrelatestoACAandjustwantedtogetaquickthoughtfromyouDaveabouthowyouthinkreformimpacted2014.Andthenasyouthinkaboutthe2015outlookisreformatailwind?Isitaneutral?Canyoujustgiveusanupdatedthoughtortwothere?


IthinktheimpactDarrenfor2014wasithelpedvolumeandifIthinkbacktowhatwesaidwhenweinitiallygaveguidanceithelpedvolumeprobablybymorethanwethoughtitwasgoingto.ItwasadragonpricebothbecauseofthethingsthatwementionedthecoretestinggrowingfasterthantheesotericpatientsmovingfromuninsuredintocoveredcategoriesandexchangesandthegrowthwhichisonthefirsthalfofmanagedMedicaid.Sonetpositiveforvolumeslightlynegativeforprice.2015Isawthesestatisticsthatthere'sbeensomegrowthinenrollmentandreenrollmentforhealthplansIdon'tthinkthere'sanythingthat'sgoingtobematerialintheir.

TheresomestatesthataretalkingaboutMedicaidexpansionbuthadn'texpandedMedicaidpreviouslythatwouldlikelybenetpositivetovolumeand-2priceforthereasonsthatwehavespokenabout.There'sobviouslysomeoverhangwiththeSupremeCourttakingtheKingversusBurwellcase.Ifthatweredecidedadverselytothegovernment'sposition,therewouldbesignificantimpactonpatientsreceivingsubsidiesandwewouldhopetherewouldbeaconstructivepoliticalresponsetothatasopposedtosortofchaosforpeoplewhohadinsuranceonedayanddon'thaveitthenext.ThatatahighlevelisprobablyhowwethinkabouttheACAfor2014and2015.

DarrenLehrich(Analyst-DeutscheBank):

OkaybutjusttobeclearIcanhearwhatyou'resayingvolumeandpricewasitmoreorlessapushonEBIT?Isthatwhatyouaretryingtosay?


Ithinkitwasprobablyslightlypositive.

Operator:

BryanBrokmeier,MaximGroup.

BryanBrokmeier(Analyst-MaximGroup):

Tofollow-uponGary'squestionfromquiteawhileagoonthecorebusiness.YougenerallydriveefficiencyimprovementsandtakecostsoutofthelabCorp.businessandthat'snormallyincludedinyourguidance.

ArethereothermarginexpansionopportunitiesincludedwithintheguidanceorshouldwethinkofthoseisbeinglumpedinwiththeLaunchPadthoughamuchsmallerpiecethanthat$0.30?


TomakesureIunderstandthequestion.Firstofall,wewouldagreethatthenormalcourseofoperationsiswehavecontinuousimprovements.Sowe'realwayslookingatleveragingandmanagingourcoststructure.

WhenwetalkaboutLaunchPadyouhavetothinkaboutitalittlemorethanthatit'snottheannualimprovementtodrivecostsoutandtheleveragebuthowcanwereengineerprocessesanddeploysystemstoenablethattohappenwhereyoucan'tdothatonthemargin

Soaswethinkabouttakingoutaround$150millionplusofcostoverthenextthreeyearsyeswehavetheimpactof$50millionarguablywouldbegreaterthanwhatwouldhavebeenthenormalreductionsinourcostfocusinaparticularoneyearperiod.Sowearegettingtheadditionalbenefitofit,butpartofwhatwe'redoing




isalsoconsideredthenormalcoursethemorestructuralchangesinwhatwedo.

Obviouslywe'llaccrueaswegototheoutyearsbutwe'relookingattakingcostsout.Wearelookingatimprovingbaddebtexperience,collections,gettingpaidforteststhatwe'reperformingthatwemightnothavebeeninthepastandthenthemoretraditionalthingssuchasoutsourcinglaborefficiencysoit'sallpackedintotherebutthat'swhyyouseeprobablyagreaterimpactin2015thaninthenormalordinarycourseofjustourcontinuousimprovement


IfIunderstoodthequestionitwasarethereothermarginopportunitiesthatareoutsidemarginimprovementsthatareoutsidetheguidance.Theguidancecontemplatestheoperationofthebusinesssimilartothewaythebusinessoperatedlastyear.

Wehadsignificantgrowthinesotericoverandabovethegrowthincoreobviouslythat'samarginimprovementopportunity.Sothat'swhywegivearangeofguidanceisthattherearemanythingsembeddedinitthatcanmoveonewayoranother.

BryanBrokmeier(Analyst-MaximGroup):

RightmyquestionwasjustwhenthequestionwasaboutthecorebusinessbeingflatIwaslookingatmorenotflatthosewasmarginexpansionopportunitiesthatnormallyweseeeveryyeararenotincludedinthat$0.30.

JoeHerring(CEO):

Actually,again,aswethinkthroughthe$50millionofsavingthefirstyearthat'scorrect.We'relookingatthetotalprogram.Someinitiativeswould'vebeendonewithoutcallingitLaunchPadbutthatispartofwhatwe'recallingLaunchPadaspartofourcallitimprovementinitiative.Butthebiggerpartofitisthatasyouthinkthroughthethree-yeartotalyoustarttoseemoreofthestructuralchangesbutit'sallinclusive.


Andwedon'tagreethatthecorebusinessesflatIdon'tthinkthat'sanaccurate.characterization.

Operator:

BrianTanquilut,Jeffries.

BrianTanquilut (Analyst-Jefferies&Company):

SoDavegoodvolumeperformance5%organic.Soifyoudon'tmindjustgivingusyourviewsrightnowonthemarketsharedynamicsandhowthehospitalmarketshareshiftisplayingoutandwhatyourstrategyisandwhatyouguysaredoingforthatasyoulookouttothenext3to5years?


Idon'tspendalotoftimetalkingaboutmarketshare.Ithinkit'sahardthingtocharacterize.Ouroperationalteamhasperformedexceptionallywellintermsofgeneratingorganicvolumegrowthwhetherthat'sthroughcontractwinds,whetherthat'sthroughsales,whetherthat'strueserviceimprovements.

Youknow,everydayIgetemailsfromcustomers,lettersfromcustomersabouthowLabCorppeoplegoaboveandbeyondtodothethingsthatneedtobedonetoservethecustomersandforpatientcare.That'swhatwearegoingtocontinuetofocuson.That'spartofwhatLaunchPadisaboutiswedoagreatjobtodaybuttherearethingswecandobetterforthepatients,forthephysicians,forthepayerssolookIthinkwe'redoinga




greatjoboperationally.Iamveryproudofwhatwe'vedoneoperationally,andwe'regoingtocontinuetoexecuteontheoperationalopportunitiesthatareaheadofus.

Operator:

TherearenofurtherquestionsatthistimeIwouldnowliketoturnthecallbacktoDaveKingforanyclosingremarks


Thankyou.Inclosingandliketosayweappreciateyourtimeandyourquestionsthismorningandyourinterest.Andjustwouldsumupbysaying,aswehavesaidmanytimes,thehealthcaresystemisdemandingbetteroutcomesatlowercostsandwe'renowtheworld'sleadinghealthcarediagnosticscompanyandwehaveunmatchedcapabilitiestoserveeverystakeholderinthehealthcaresystem.

Wehaveauniqueandcompletesetoftoolstodeliverwhatthesystemneeds.It'sanexcitingtimeforLabCorpandwelookforwardtoupdatingyouonourprogressaswecarryoutourkey2015priorities.Thankyouandgoodday.

Operator:

Thankyou.Ladiesandgentlementhankyouforyourparticipationintoday'sconference.Thisconcludesthepresentation.

Allrightsreserved(c)2014TheStreet,Inc.

Pleasefeelfreetoquoteupto200wordspertranscript.Anyquoteshouldbeaccompaniedby"ProvidedbyTheStreet"andalinktothecompletetranscriptandwww.thestreet.com.Anyotheruseormethodofdistributionisstrictlyprohibited.

THEINFORMATIONCONTAINEDINEACHWRITTENORAUDIOTRANSCRIPT(the"TRANSCRIPT")ISAREPRODUCTIONOFAPARTICULARCOMPANY'SCONFERENCECALL,CONFERENCEPRESENTATIONOROTHERAUDIOPRESENTATION.THETRANSCRIPTSAREPROVIDED"ASIS"AND"ASAVAILABLE"ANDTHESTREETISNOTRESPONSIBLEINANYWAYNORDOESITMAKEANYREPRESENTATIONORWARRANTYREGARDINGTHEACCURACYORCOMPLETENESSOFTHETRANSCRIPTSASPRODUCED,NORTHESUBSTANCEOFAPARTICULARCOMPANY'SINFORMATION.

THETRANSCRIPTSAREPROVIDEDFORINFORMATIONALPURPOSESONLY.THESTREETISNOTPROVIDINGANYINVESTMENTADVICEORENDORSINGANYPARTICULARCOMPANY.

Documents

Laboratory Corporation Of America Holdings (LH) Earnings …s.t.st/media/xtranscript/2015/Q1/13053596.pdf · 2015-04-10 · diagnostics, and healthcare delivery. This merger creates