Welcome to the Quest Diagnostics Fourth Quarter and Full Year 2016 Conference Call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and question-and-answer session that will follow, are the copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Quest Diagnostics is strictly prohibited. Now, I would like to introduce Shawn Bevec, Executive Director of Investor Relations for Quest Diagnostics. Go ahead, please.

Thank you, and good morning. I am here with Steve Rusckowski, our Chairman, President and Chief Executive Officer; and Mark Guinan, our Chief Financial Officer. During this call, we may make forward-looking statements and also discuss non-GAAP measures. For this call, references to adjusted EPS refer to adjusted diluted EPS excluding amortization. Actual results may differ materially from those projected. Risks and uncertainties that may affect Quest Diagnostics' future results include, but are not limited to, those described in Quest Diagnostics' 2015 Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The text of our prepared remarks will be available later today in the Investor Relations page of our website. Now here's Steve Rusckowski.

Thanks, Shawn, and thanks everyone for joining us today. This morning I'll provide you with the highlights of the quarter and review progress on our strategy and then Mark will provide more detail on the results and take you through our 2017 guidance. We finish the year on a high node. We grew revenues, operating income, margins, and operating cash flow in the fourth quarter, capping a strong year in which we achieved our commitments and created value for shareholders. While Mark will take you through the fourth quarter, here are some key highlights for the full year 2016. Revenues were up 30 basis points on a reported basis and grew 2.6% on the equivalent basis. EPS was down 7.4% on reported basis, but grew 8% on an adjusted basis. And cash from operations increased 30% to $1.1 billion. 2016 was the third consecutive year of progress in delivering on our commitments and creating shareholder value. Before I describe the progress we have made what I would like to do is to talk about a few dynamics impacting our industry. First, we are waiting to see what the new Congress administration decides to do with the Affordable Care Act. As we said in the past we never realize the full benefit from ACA that we expected, so we wouldn’t expect any significant near-term impact if it were to be use repealed. We hope that any potential alternative will be recognizes the value of diagnostic information services and healthcare. Second, as you know CMS has begun to execute a process to re-flash its clinical laboratory fee schedule under PAMA. We are preparing to submit pricing data to the CMS later this quarter. Now, having said that, we are working with our trade association to understand the impact on PAMA of our…

Thanks, Steve. Starting with revenues. Consolidated revenues of $1.86 billion were up 0.7% versus the prior year on a reported basis, while equivalent revenues grew 1.9%. Revenues for Diagnostic Information Services, or DIS for short, grew by 2% compared to the prior year. Of this growth nearly 1% was organic. Volume measured by the number of requisitions increased 1.5% versus the prior year. Acquisitions contributed about 1% of volumes in the quarter. However, note that the impact of hurricane Matthew presented a headwind of approximately 30 basis points on organic growth in the fourth quarter. Revenue for requisition in the fourth quarter increased 40 basis points versus the prior year. As reminder revenue per req is not a proxy for price. It includes a number of variables such as unit price changes, business mix, test mix and test per req. Unit price headlands were slightly less than 50 basis points in the fourth quarter and approximately 70 basis points for the full year. While unit price headlands moderated in the second half of 2016, we know that price fluctuations can vary from quarter to quarter. We continue to believe that in 2017 unit price headlands will be consistent with last few years at approximately 1%. As we highlighted throughout 2016 our PLS engagements such as RWJ Barnabas Health and HCA carry lower revenue per requisition due to the nature of the work we are performing. The strength of our PLS engagements in the fourth quarter continue to impact our revenue per requisition. Other mix elements including test and payor mix contributed more than 2% to revenue per req in the quarter. Reported operating income for the quarter was $276 million or 14.8% of revenues compared to $239 million or 12.9% of revenues a year ago. On an adjusted basis operating…

Thanks Mark. Well, to summarize, we continued our success in 2016 and ended the year on a high note. We are laser-focused on our two-point strategy to accelerate growth and drive operational excellence. Our 2017 guidance is both reasonable and achievable. Now, I'd be happy to take any questions you have. Operator?

Thank you. We will now open it up for questions. [Operator Instructions] Our first question is coming from the line of Ricky Goldwasser of Morgan Stanley. Your line is now open.

Yes hi good morning.

Good morning.

I had some quick questions on the underlying assumptions for guidance. So, I think you're expecting 1% to 2% of topline growth from acquisitions. Can you give us some more detail on the price versus the volume? And whether you're assuming any buyback in guidance? I know that you have the authorization, but is it factored into the range you gave this morning?

Yes, sure Ricky, in terms of buybacks, the guidance is based on flat share count. So, there would be some buybacks necessary to prevent dilution based on our equity program for employees, but there's not any lift in EPS based on reduced share count in the guidance that I'm providing. In terms prices, as I mentioned in my prepared remarks, while we're not giving specific number saying that 2017, we would expect some continued price erosion and we expect that apples-and-apples price erosion to be similar to the last couple years which was somewhere 100 basis points or less.

Okay. And--

And again when we talk price erosion that's pure price freezing all other variable's one revenue per rent basis, we haven’t really provided specific guidance.

Okay. And I know you mentioned that you submitted the data to CMS this quarter on PAMA, any updates to your thoughts of how we should think of that PAMA impact and how kind of like the new cost-cutting -- or the updated cost-cutting program could help offset that?

So, first of all, Ricky, we have not submitted the data yet, we're preparing to do that in the first quarter by PAMA. As you're aware we're all going to submit data in 2017 for the goal of CMS to refresh the clinical lab [ph] reschedule for 2018. But what I said our remarks is, as trade association was spending some time to talk about where are we with PAMA, what has to with administration said. How is Congress digesting that? How that might affect CMS? So, we're not prepared to say anything about that, but we wanted to call that that out in my prepared remarks. And we're considering others might -- where we're right now with the new administration might affect this Bill. Also as we've talked about in the past, about 12% of our revenues, we're well prepared to absorb that given our progress and you see continued progress would invigorate. We have now good line of sight to that $1.3 billion goal in 2017. We haven’t provided exact expectations beyond that. But at our Investor Day in the fall, we clearly showed that there's more opportunity beyond that $1.3 billion run rate, which gives us confidence if, in fact, there's some price reductions on the clinical IP schedule to absorb that in the new course of running our business.

So, Ricky, I'd take you back to the Investor Day, where I talked about through 2020 view that we could grow revenues 3% to 5% and grow earnings mid to high single-digits. So, that takes into account some level of anticipated potential price reductions as Steve said still to be finalize as we go throughout the year and then our invigorate program and our ability to offset certainly a portion of that and grow earnings faster than revenue.

Okay. And just one clarification on the 2017 pricing, to your point, you expect continued erosion in organic pricing, but when we think about the revenue per requisition as it flows through the P&L. Should we assume positive price increase based on mix?

So, again, I wouldn't call it price, I'd call it mix. But if you're looking for revenue per req, you've got two different drivers. So, as we mentioned we got 2% lift in Q4 from test mix and other mix elements separate from our PLS. So, there's no reason at this point to not believe that we will continue to get positive mix as we innovate, bring new test offerings that tend to have higher value. We also have shared that there has been a trend with higher density on requisitions, so we've been seeing an increasing number of tests per requisitions, while it's hard to predict there's no reason at this point to believe we shouldn’t continue to get some minor lift from that as well. But then the one headwind on mix, again as we've explained is our professional laboratory services growing at a faster rate than our overall business and because of the nature of that work, it happens to have a routine testing, fewer tests per req, and therefore, a lower revenue per req. So, how those all come out, we're not providing a specific revenue per req number, but the trends that you've seen, we're not expecting those to change.

Okay. Thank you for the clarification.

Thanks Ricky.

Thank you. [Operator Instructions] The next question is coming from the line of Jack Meehan of Barclays. Your line is now open.

Hi.

Hi Jack.

Good morning guys. I wanted to just get your outlook on the pathology business for 2017 just -- and whether you thought that could be moderate a little bit?

Yes. Two sides of what we classify as anatomic pathology, one is on tissues, we would say that business is relatively stable for us. The second is with our path business, we've talked about in the past with the new guidance -- the new guidelines that were established number of years ago, we continue to see a decline in that business, albeit our -- the decline has slowed in 2016 and we expected that will continue in 2017. So, hopefully that's answering the question you asked.

And Jack just to add a little additional color, I'm sure you're familiar that there were some reductions in the physician fee schedule. So, in terms of our Medicare business for tissue that price headwind is built into our guidance and part of the 100 basis points or so that I mentioned. So, there were some reductions coming out of Washington.

Great. That's helpful. And then one more for you Mark, just you talked about the unit price expectations for 2017, just how do you think about the magnitude for PLS, the drag on revenue per req there, do you think that gets a little bit bigger in 2017 and how does the ancestry impact the optical numbers as well? Thank you.

Sure. So, ancestry is not a business that we're going to include in our revenue per req because it’s a separate business. And we're not actually receiving requisitions; it's more of client services business. So, that's going to be separate from revenue per req we share. And I'm not in position to provide a specific number Jack. All I can say its included in the guidance, our best guess of what PLS impact will be and quite frankly, somewhat dependent on additional PLS agreements that we might sign throughout the year. So, it would be hard even to find -- wanted to give you that kind of color, to give you a specific number because the timing and our ability to close these deals with a certain timeframe obviously to be determined. But, again, I want to remind people that revenue per req is not a proxy for profitability and quite frankly, PLS is good profitable business regardless of its revenue per req being lower than our core business and some of the higher revenue per req businesses such as our tissue business are not necessarily the most profitable and some of our lower revenue per req business like Wellness are quite profitable even though the revenue per req is well within our overall enterprise.

That all makes sense. Thanks guys.

Thank you. The next question is coming from A.J. Rice of UBS. Your line is now open.

Good morning A.J.

Thanks. Hello everybody. My first question I wanted to just ask about an update on the Optum relationship. I know the employee transition over to Optum from on your books was I think supposed to happen in November. Are we seeing now the cost benefit of that or is that still the common first to second quarter, and any update on the thinking about their ability to help you with your revenue cycle manage either bad debts or non-reimbursed test and the timing when you might see that side of the benefit?

Yeah, thanks, A.J. Let me start. First of all, we did transition those employers over in November as you said. We are off to a good start. We are very pleased with how that has gone. We are actually very pleased on both sides that's Quest as well as Optum worked on the change management with their employees. The people that moved over are now employees of Optum that are very much part of the team of Quest. So we feel good about that. We are off to a good start. Now we did this just to reminder everyone because we believe by working with Optum we are going to have a better capability of working on our bad debt, our denials, our reimbursement and we think -- we still believe there is a lot of opportunity in front of us. So Mark, would you like to respond to the specifics of what we might see that.

Sure. So, A.J. as we mentioned previously there are several elements to this, the billing savings start this year in 2017, we do not benefitted at all last year. And it -- we have tenure contract and may build over the life of the contract. Then the other element which is, you know, the gain sharing agreement around bad debt and now obviously Optum is just starting that work. So we're fully expecting significant benefit from that, but it’s going to take a little time for the additional things that they heading to what we were already doing to accelerate the reduction in denials and accelerator our improvement in bad debt. So yet to come as well.

Okay. If I am just might follow-up ask you about I know you mentioned on Safeway that you have ramped that up nicely and I know you are having discussions with other people about similar arrangements, some potentially where the nurses either an urgent care or mini clinic type of environment could help you on the drawing the blood. Two aspects to the question, one is, now as you got more of the Safeway's done can you start to quantify on a regular basis what your real estate savings would be? And there any update on the discussions with the other parties about possibly collaborating with them on a similar basis?

Yeah, so in terms of quantifying the real estate savings, it's not something I'm going to do. It’s another element of our Invigorate program. We don't tease out all the various pieces within Invigorate. What I did do, A.J., if you recall at the Investor Day was a frame for your total expenditures for draws and broke down what portion of that, you know, were impacting with the stately agreement which is less than 20% when you look at the real estate costs and some of the other things such as cleaning and property taxes and utilities and so and so forth. I kind of frame for, you know, kind of order of magnitude in total. Our largest elements of draws is obviously the labor and there is labor arbitrage currently with the Safeway agreement. We're basically paying the same phlebotomist just to do those draws in a different location. So I'm not going to providing specifics around the real estate savings over time, but it's meaningful enough that, you know, it’s helping us, get greater confidence in delivering that on Invigorate savings that we talked about $1.3 billion by the end of this year and then additional room beyond the end of 2017.

A.J., just to remind everyone that's this work with retailers is part of our strategy to accelerate growth. As I said in my remarks we are now laser focused on accelerating growth. And if you recall, you go back at the Investor Day we laid out our approach is to that one of which is to be the provider of choice for this industry. And we think what we're doing with Safeway is a good proof point of providing great -- a great experience for consumers in a different environment. The feedback has been very strong. When we talked about this at Investor Day there is a portion of requisitions or orders in this industry that go on fulfilled and we believe that having better access and very nice storefronts facilities like what we have with Safeway will benefits our business and benefit Safeway, benefits the patient by giving the testing done, they need to get done. So we see this is a growth platform for us not just a cash savings platform. And then finally is, as we have said at investor day, we continue to work with other potential retailers. Their health strategies, they are very focused on it. They see health as a major platform for their growth and then opportunity for them to get more traffic into their store. So more to come on that. But we are off to a good start. And again, it’s a key strategy for us around the consumer, there is other parts what we are doing around the consumer, Ancestry would be another example of that. What we are doing with MyQuest, a smart app and actually this year as we exited the year without even pushing it really hard. We have over 3.5 million registered users from MyQuest, getting access to the lab results. So a lot of different initiatives underway to build on this growth theme of Quest being the super choice in our space.

Okay. Great. Thanks a lot.

Thanks, A.J.

Thank you. The next question is coming from Lisa Gill of J.P. Morgan. Your line is now open.

Hi.

Hi, Lisa.

Good morning. I just had a couple of quick follow-up questions. First, Mark, as we think about the cadence of the revenue growth throughout the year, I know you talked about 1% to 2% coming from acquisitions. Can you maybe just talk about the visibility around the acquisition? Should we be thinking that that will perhaps be more towards the back half of the year?

Right. So 1% to 2%, as you recall, is a CAGR over a period of time. It is not necessarily any given year when. I talked about guidance for 2017 we don't have any unexecuted acquisitions within that guidance. The only M&A within the current guidance is the carryover from the CLP outreach purchase that we closed last February. So I think that should answer your question. So any other M&A without the CLP executed and would not more loaded towards the back half of the year because the benefit of CLP carryover ends in the first quarter and I'm not counting on any unexecuted M&A in my current guidance.

Great. So that 1.7% to 2% growth included no incremental M&A, I just wanted to make I am 100% clear on that.

That's correct.

Okay. And then secondly, as we talk about the consumer aspect of the business and Safeway relationship, is there a way to quantify the number of reqs or the number of patients that you are seeing, I mean, just to get an idea of the growth going from 56 to 200 stores and the potential opportunity, I know it’s probably pretty small today, but is there metric around this business that you can give us as we start to think to about the growth?

It’s interesting idea. And we will think about how and if we do that, because it is helpful to get some idea of how much flow we are getting. So we thank you for that idea.

Okay.

Lisa, I just want to make sure, look here, most of the volume that's being done in the Safeway was done previously in a patient service center. So it's not all incremental. It is a lower cost and we think a more consumer friendly environment, what Jim Davidson shared at the Investor Day was that the initial and it's early, the initial view was that we were seeing new patients, we're getting some incremental growth and it's hard to be precise and -- but as I pointed even a couple of basis points of difference in an industry that's growing 2% to 3%, we get to 1% to 2% left sound a lot, but all of the small things start to add up. So we said hey, it is really early, we are definitely seeing some incremental growth whether it's sustainable or not we don't know whether it will accelerate, we don't know; whether we will see it at every single site as we move from 50 some to 200 not sure. But we will certainly try our best to give you some color and give you a sense of quantifying that value beyond, you know, just directionally if we can. So as Steve said, appreciate the question and we will think about and see what we can do.

As we keep on saying the initial results are encouraging. So, in due course we will share more.

Okay. Thanks. Great.

Okay.

I am looking forward to it. Thank you.

Thank you. The next question is from Dan Leonard of Deutsche Bank. Your line is now open.

Hi, Dan.

Good morning. Thank you. So my first question, Steve, you mentioned in your prepared remarks that if there was any tax benefit from change in corporate tax rate, you would invest a portion of that, can you talk about you how much you will invest of any tax benefit and what some of the key areas are you would focused on?

Well, first of all, it is all if. So, we are very careful to say it could or if. And we are not going to provide specifics of what we would possibly do, because it’s very hypothetical. But our two strategies that we're focused on is accelerating growth and driving operational excellence and if we get some benefit that we will consider the best way of concerning what we do with that gain. But we're not providing specific clarity beyond that.

Okay. And just a quick follow-up, but I may have missed it. Did you provide tax guidance for 2017?

No. We did not. At this point there's no reason to believe that our effective tax rate should be significantly from 2016 or the last couple of years.

Got it. Thank you.

Thank you, Dan.

Thank you. Next question is from Isaac Ro of Goldman Sachs. Your line is now open.

Good morning, Isaac.

Good morning, guys. Thank you. So question on PAMA, as the data collection process goes through and we also to figure out what it mean, I imagine that there will be a lot of smaller labs that are going to struggle with the economics. And I am curious if you have seen any signs of opportunity to take some share smaller facility, you know, because they are looking partner with you guys or they are just not as competitive and can't provide good service. I am just curious if that's something is tangible right now, and if at all, is there anything baked in into your guidance this year, at least to share.

So, as you know, PAMA usage lands where the goal is which is for implementation in 2018. And if I gather the data and factors and price erosion against the clinical laboratory fee schedule, you know, the smaller laboratories that hospital outreach have a higher proportion of their revenues from the clinical laboratory fee schedule that we do, so they are much more exposed. So as we have talked about in the past we believe this is a good catalyst for Mark to continue to consolidate, and that's we still feel confident around that 1% to 2% growth through acquisitions. We demonstrated in the past four years we’re able to do that. We feel good about prospects or M&A funnel. And then also if you look at the competitiveness of our business going forward with this dynamic in place, I think it just speaks volumes than the opportunity we have in front of us, is a very strong player, they brings a lot of value to our industry, that's good start for years to come. Also as far as PAMA is concerned you probably a lot of seen Inspector General report that was published in the fall as trade association we continue to be concerned with the few facts there. First fact is that from what they have shared is small fraction of total laboratories they think will be gathered in the data collection about 5%. 5% the laboratories that are building in CMS now they represents about 69% of the total Medicare billings, but it is not -- close to 100% so this is not the intention of Congress. We're evaluating that as a trade association. And then second is, in that data I am assuming they make some assumptions around the gathering the data in hospitals knowing what they need to do around that provider number and whether there is an applicable lab or not. So the more data we get into CMS, the more representatives it is market-based pricing and that was always the full intent of Congress. So this is what I am referring to in my commentary that we're evaluating based upon what we heard from Inspector General, what we know is happening in Washington as we speak round reviews of the new regulation and we will decide in due course of what we need to do anything going forward as far as the position as a trade association.

Thank you. And then just a follow up on the higher tax question. I just want to make sure I understand conceptually if you guys were to get a tax break that the benefit of that would be deployed to reinvestment in the business to accelerate growth, is that sort of your prepared you are trying to say?

No. Not a portion of it. What we try do, Isaac, is -- we don’t want get out in front of ourselves because, although there's a lot of, you know, press about being a priority for Congress we yet to see when it is for sure and how. But there were a number of other healthcare companies recently that made some comments so we didn't want to be silent. And so in order to have people understand our thinking is as we mentioned any sort of statutory reduction since we earned basically all of our income in United States would be significant, obviously there could be other changes beyond the statutory production that could mitigate some of those savings. So we have to see that. And we just want people understand that we wouldn't necessarily crocked dollar for dollar to the bottom line that, you know, a significant reduction statutory rates when in fact give us an opportunity to look at as we balance short-term, long-term some opportunities potentially to invest. And if and when that happens we will give you more color. But we just wanted people to understand -- get ahead of themselves and do some math that we would necessarily drop every single dollar to the bottom line.

Okay. Understandable. Thank you.

Thank you. The next question is from Ann Hynes of Mizuho Securities. Your line is now open.

Good morning, Ann.

Thank you. I am going to ask one more question on tax because our analysis that we've done, it say, the statutory tax rate dropped from 35% just to 25%, that could imply a 14% increase in free cash flow. And that is such a big increase in free cash flow. So I know you don't want to give details on what the reinvestment would be, but would that actually change your strategy a little bit or I just feel like this is very significant. Would you look at the different business with that amount of more cash coming in?

So Ann, I wouldn’t say we change our strategy. As we mentioned is that as you said any sort of large statutory reduction would be significant for us. And therefore again as we balance short-term and long-term there could be a decision by us to take a portion of a portion of likely to be a small portion of the and invested in some longer term growth opportunities not a strategic shift, just really expanding some opportunities that maybe are just not making the cost right now because we have to balance short-term and long-term. So that was really all we're trying to imply not a strategic shift, but to your point if it did happen, it could be significant which is what I commented on in my prepared remarks.

We are going to take a step back and think about the use of that installed windfall for now to get the best shareholder return. As you expect we would do.

Okay.

It’s all very hypothetical, I don't want to speculate, but you can trust like we done in the past, we are going to carefully take the best use of any type of additional earnings to do the right thing to get a good return for our shareholders.

And, Ann, just to closeout we're going to stick to our capital employment synergy. So prior to my start back in our Investor Day in 2012 you have seen we inherent to that and this would not change our very disciplined approach to deploying our capital.

All right. Great. Can I ask about the UNH contract? I think -- and I could be wrong. I know LabCorp's in a long-term contract that ends in 2018. Do you expect -- since we're coming toward the end of that, do you expect that contract to come out to RFP? And if it does, do you expect maybe a potential opportunity, because I know that you have said in the past that you still process a lot of reqs for them out of network. So, how do you view that contract over the next couple of years?

Our relationship with United Healthcare Group continues to get stronger. We are a big provider today, already laboratory services. We do have a number of areas where we actually do have carve out if you will, providing services on contract. We have not got specific on that, but we do. And our work without Optum, our revenue services, revenue cycle services this reinforces our relationship. I was asked the question when we did this in the fall, does this help you with United and my answer is it doesn't hurt you, since it’s very visible and we are clearly a strategic partner of United Healthcare Group. And then also we had mentioned that we are partnering around wellness. We are the partner for Optum as they provide wellness solutions to their client base and we're happy about that. And what I will share is that obviously we are trying to get the best possible access as possible with these many healthcare insurers in our portfolio. We are not a national provider for United today and we're hopeful as we go forward we get strong with United as they work through their contract considerations, so we are hopeful that we could be more of a provider than we are today, but we don't have any specifics share with you at this time.

Okay. Thanks.

Thanks, Ann.

Thank you. Next question is from Bill Bonello of Craig-Hallum. Your line is now open.

Hey, good morning, guys. Just a question. There's some large properties I think up for sale and some that maybe should be. What is your appetite these days for larger scale acquisitions, but within the lab space? If things are presented, is that something that you would consider, or are you strictly focused on some of the more regional and hospital deals?

Yeah, first of all, what we said we will continue to do going forward is what we said in 2012. Our business is diagnostic information services. Anything we do in terms of potential acquisition into scope, so everything as pretty strategically align. And the reason why we are so committed to it, we have cleaned up our portfolio to support that. Because we think substantial opportunities in that scope of our market. So with that we said there are a number of smaller acquisitions we can do which are in that 1% to 2%, but we also said over the years is that if something were to come to us that make strategic sense that we could build value creation case for our shareholders, we wouldn’t rule it out. But what I will again share is that we're not do an acquisitions that we cannot have the value creation. And that has been something that we have delivered against in our capital deployment strategy service well. So no matter big or small everything we do is going to create value for our shareholders.

Okay. That makes sense. And I don't know if you are even allowed to comment on this. But is there a bigger pipeline of bigger opportunities out there than maybe there has been in the past?

Bill, what I would say is there's always a pipeline and we had -- when you say when we consider we have looked at some larger opportunities in the past that obviously we haven't shared and for various reasons and some of it being what Steve talked about, we have passed. So we're always looking at best path for shareholder value creation and it doesn’t mean a large transaction could not be the best path. So we evaluate those things regularly. I wouldn't say that in today's world there is any more opportunities and sometimes you create opportunities by reaching out the people having a conversation so it's not as if we sit on the sideline to see if somebody's declaring that, you know, they are looking for some sort of transaction. So, we're very actively engaged with a number of people in the industry and geographically around the world. And we are considering capital deploying options all the time. And what comes back to as Steve said as we have some very hard fast M&A metrics and that is our kind of litmus test for evaluation and if we found a larger transaction that make strategic sense and met those metrics and we felt good about the chemistry and integration path, you know, we certainly would seriously consider that.

Got it. Thanks a lot.

Thanks, Bill.

Thank you. Next question is coming from Brian Tanquilut of Jefferies. Your line is now open.

Good morning, Brian.

Good morning, guys. Hey, Steve, in the past you have talked about you gave a pricing outlook basically through 2017. And I know you are forecasting the 100 basis point decline this year. Where you sit today, take out PAMA, how are you thinking about pricing trends beyond this year?

Thanks for the question Brian. What I had mentioned is that, you know, through 2020 I would expect the pricing environment to continue to be similar to what has been in the last couple years, separate from PAMA and then if you also recall I did a slide kind of and if PAMA happens, you know, some of it -- especially at some of the lower end possibilities are kind of within the variability. As you look at this year we had about 50 basis points erosion in the back half, certainly higher than the first half, so if PAMA ends up contributing overall another 30, 40 basis points is almost within the variability of what we have seen, obviously if PAMA ends up being at high-end it would be a little more significant, but as you might expect we considered all of that in the guidance that we gave, this will be in the lookout that I gave and view in earnings growth relative to revenue through 2020.

I appreciate it. Mark, just a different question. Cash flow was pretty strong in Q4. As we think about capital deployment, you have said no incremental deals in the guide to buyback. Basically you just offset the dilution from the stock grants. So, is there anything -- number one, is there anything to call on the Q4 cash flow that drove that strategy? And then second, capital deployment for the incremental cash that you haven't baked into the guide being deployed, is that basically your upside driver for the rest of the year? How should we be thinking about that?

I want to make sure I am clear on the question Brian, so tell me if I am answering what you are asking. Cash flow was stronger than we anticipated this year. We did actually take that as an opportunity to accelerate a couple of capital investments into this year and our free cash flow still stronger than the guidance that I had provided, so we felt we did that responsibly. And that was some strategic decisions and try to accelerate some items that we're working on in our Invigorate program and so and so forth. Going into this year I am guiding to flat cash flow year-over-year. Obviously as you know there's various moving pieces, one time things that could impact positively, so net-net $1.1 million of operating cash flow, $250 million to $300 million of expected capital investment and then the rest of free cash flow, you know, half of that at least is going to be committed to our shareholders through our dividend which again we increased recently on by double-digits and then supplemented by some share buybacks. With the rest of free cash flow back to an earlier question I got it, it is dependent on executing M&A and it's not then we will buyback additional shares, so really that's to be determine.

Got it. That answers the question. Thank you, Mark.

Thank you. Next question is coming from Steven Valiquette of Banc of America Merrill Lynch. Your line is now open.

Good morning, Steve and Mark. Congrats on the results. So I think just for us, just a quick high level volume question. I guess just to the extent that some in the investment community, let's say rightly or wrongly, try to gauge lab industry volume growth by looking at things like physician office visit data, hospital volume data, it seemed like most of these data points were suggesting that lab providers could see some accelerating growth in volumes in the fourth quarter. I just forgot where you guys stand on how much you also look at these external data points, but also your latest thoughts on how much you think investors should focus on this external data. Since you guys had decent volume growth in the quarter, don't get me wrong. But it didn't correlate to that expectation of accelerating growth and that some investors may have garnered from that external data. Thanks.

So, let me start with that. We look at it all, Steven. We look at all the different matrices and leading indicators. And what we've mentioned in the past we have an internal measure we will take a look at 1,000 accounts that we know they are accounts and we do seeing how look year on year, and say what's going on with the underlying utilization of patients that those physicians are seeing. And what we have said in the past and we will continue to say because we looked at this in the fourth quarter it's been relatively stable. So -- and this is really good representation of utilization for the market we think. So it's relatively stable. So prospectively that's what we provide in our guidance, but on top of that what you see is everything that's driving the marketplace that is more innovation coming into marketplace, more tests per encounter in the marketplace and aging populations, so that is giving us the growth that we are seeing, but also the market perspective growth that we anticipated as well. So that's what we see. Now I will remind you that in the fourth quarter we did have a hurricane event which affected us in Q4, got up in October, October 4 lot of the industry does have an impact on the business. So Mark, any other color you would like add to volumes in Q4, but also prospectively?

So, as Steve mentioned and I said in my prepared remarks we got about a 30 basis headwind by our calculation from hurricane Matthew, we do have a significant business in Florida and although really only northern Florida was hit because of the preparations there were a lot fewer office visits and a lot fewer lab draws in the state of Florida while Matthew was going on and then certainly it hit to the Carolina as well significantly and so we have some impact there. So that certainly dampened growth would've been otherwise and without getting into too math there is a difference in the calendar and we don't always talk about this, but weekends we do less business, weekdays we do more, so any given quarter, you know, depending on how many weekends there, weekdays versus the prior year there can be some impact as well. We don't into too much detail, but you can take a look at the calendar to see how Q4 compared to 2015 and see that there were fewer weeks.

Okay. Got it. That's helpful. Thanks.

Thank you.

Thank you. Our last question is coming from Ross Muken of Evercore. Your line is now open.

Good morning, Ross.

Good morning, guys. It seems like your main competitor is mimicking or getting closer in its strategy on the hospital to what you have been doing. Is that a positive relative to maybe getting more of those types of transition over the goal line just because you have two, maybe forces pushing there, or how do you think about it in general in your ability to execute against what's been sitting in the pipeline?

Yeah, well, first of all, we have a strategy for years now focusing on what we believe supporting element of what's happening in healthcare in the U.S. that is hospitals of the big influence over laboratory strategy in general. We shared at our Investor Day it’s about 50% of the marketplace. If you look at all the laboratories that are part of inpatient acute care setting and to run those we can help them with those laboratories to make more efficient. And then second is there a big part of the non-hospitals of market were about roughly a third of the market is those hospital systems competing with us. So we three or four years ago -- this is core part of our strategy, back to 2012 we said it was one of our three focus areas. And so we've been investing. It is not something you can just put up a shingle and get it to the market easy. I remind you these three areas we work with hospitals on. One is providing the most sophisticated advanced testing sometimes called reference testing, we are the leader there. Second is we help them become more efficient with their inpatient hospital cost and the deal that we just announced today with Montefiore, is a good example, where they leverage on our efficiency and seems that money makes them more efficient, so they can focus on what they want to focus on is a system. And then finally is outreach. And in some cases we buy outreach businesses where we have an outright purchase. What we announced last year was the relationship of Hartford Hospital in Connecticut is an example of that. The best place for us to be is requesting side of the their lab strategy where we are helping them…

That's helpful. And maybe, Mark, just quickly on Q1 you obviously gave a bit of color. Could you also just remind us on SG&A cadence? I remember, while you did have a bit of a step up, obviously in volume in Q1, you also had maybe a bit more of your SG&A for the year. Just any color you could provide on how that OpEx cadence may look for how to consider what happened last year.

Sure. Ross, typically we don’t give any guidance -- quarterly guidance or SG&A, but I can assure you that different from last year. You shouldn’t expect a, you know, quarterly differential. Last year we were building some key capabilities, around our data diagnostics and other things, investing upfront, as necessary ahead of some revenues, but I don’t anticipate anything significant similar this year.

Thanks and congrats, guys.

Hey, thanks.

Thank you.

I think that was the last question and we thank all of you for joining the call. As we said at the beginning I'll close with this. We have strong quarter and a solid 2016. We're looking forward to accelerated growth and driving operational excellence this year in 2017. We thank you for all your support and you have great day.

Thank you for participating in the Quest Diagnostics fourth quarter and full year 2016 conference call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics' website at www.questdiagnostics.com. A replay of the call may be accessed online, at www.questdiagnostics.com/investor or by phone at 866-373-9234 for domestic callers or 203-369-0282 for international callers. Telephone replays will be available from 10:30 a.m. Eastern Time today until midnight Eastern Time on February 9, 2017. Goodbye.