Welcome to the Quest Diagnostics Second Quarter 2017 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 written consent of Quest Diagnostics is strictly prohibited. Now, I'd 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 reported EPS refers to reported diluted EPS and references to adjusted EPS refers 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 our most recent annual report on Form 10-K, and subsequently filed quarterly reports on Form 10-Q, and current reports on Form 8-K. The text of our prepared remarks will be available later today in the Investor Relations page of our Web-site. 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. Then Mark will provide more detail on the results and take you through updates to our 2017 guidance. We turned in another strong quarter and are delivering on all five elements of our strategy to accelerate growth. Here are some highlights. Revenues grew approximately 2% on a reported basis and 2.3% on an equivalent basis. Reported EPS of $1.37 was flat from 2016, and adjusted EPS grew approximately 16% to $1.55, which includes an increase of $0.08 over the prior year of excess tax benefit associated with stock-based compensation. Based upon our progress in the first half, we have raised our outlook for revenues, EPS, and cash from operations for the full year 2017. Before I describe the progress we've made to accelerate growth and drive operational excellence, what I'd like to do is briefly discuss PAMA. This month, a number of ACLA Board members met with the executive branch as well as key members of the Senate Finance Committee, that means energy and commerce held subcommittees, reiterating our belief that the current regulation effectively excludes hospital outreach labs, which are a significant segment of the laboratory marketplace. Last month our trade associations sent a letter to CMS recommending postponing the calculation of publication of the new clinical and fee schedule redefining the definition of then applicable laboratory to ensure in a good hospital outreach laboratories and upon gathering data from hospital outreach laboratories publishing new clinical and fee schedule rates effective not earlier than July 1, 2018. While we support reform of the Medicare payment system, we believe any modification should be market based and appropriately include all applicable independent and hospital outreach…

Thanks, Steve. Starting with revenues, consolidated revenues of $1.94 billion were up 1.9% versus the prior year on a reported basis, while equivalent revenues grew 2.3%. Revenues for Diagnostic Information Services grew by 2.5% compared to the prior year, with approximately 40 basis points attributed to the PeaceHealth outreach acquisition which was completed in May. Volume, measured by the number of requisitions, increased 1.8% versus the prior year, of which 1.4% was organic. Revenue per requisition in the second quarter grew by 70 basis points versus the prior year. As a reminder, revenue-per-req is not a proxy for price. It includes a number of variables such as unit price variation, test mix and test per req. Unit price headwinds in the second quarter were less than 100 basis points. While price fluctuations can vary from quarter-to-quarter, we continue to expect that unit price headwinds will remain moderate in 2017 and consistent with the last few years. Beyond unit price and the impact of growth in our POS partnerships, other mix elements including test mix contributed between 100 to 200 basis points, which is consistent with the trends we've observed for several quarters. Reported operating income for the quarter was $319 million or 16.4% of revenues, compared to $422 million or 22.1% of revenues a year ago. Keep in mind, our reported operating income in 2016 included a one-time gain related to the divestiture of our Focus Products business. On an adjusted basis, operating income was $343 million or 17.6% of revenues, compared to $324 million or 17% of revenues last year. Our Focus Diagnostics Products business contributed approximately $4 million of adjusted operating income in the second quarter of 2016, which adversely impacted the growth in our operating income year-over-year by approximately 1% point. Excluding the impact to Focus Diagnostics,…

Thanks Mark. We turned in another strong quarter and are delivering on all five elements of our strategy to accelerate growth. Based on our progress in the first half, we have raised our outlook and are well positioned to meet our expectations. So with that, we'd be happy to take your questions. Operator?

[Operator Instructions] Our first question comes from Amanda Murphy from William Blair. Your line is now open.

I had few questions on the volume side if I may, so I know that you have said in the past in terms of organic volume growth that you're not going to kind of parse out the specific drivers, but I was just curious as we've seen some weakness in pharma scripts and whatnot, so what are you guys seeing just in terms of basic utilization patterns at this point if you think about per capita usage if you will at this point?

First of all, as we said in the past, we look at a lot of different external measures. Then we do an internal measure where we look at our same account measurement where we do a measurement where we know we have a good account and we look at year-on-year comparison of volumes. And what we've said in the past remains this quarter, we think the underlying volume in the market is stable, is the best way to summarize it. And then to your second point about volume in the quarter, as you know we don't guide on volumes, we do guide on revenues and it's important that we continue to drive revenue growth, it's what we are entirely focused on. So I'll turn it over to Mark to provide a little bit of color around what's in the mix. Mark?

So Amanda, as Steve said, I think we test in our imperfect fashion through the tools we have but the market is pretty stable. We haven't seen significant utilization declines and we certainly have not seem anything significant in terms of [indiscernible]. So, we are pleased with our volume, our advanced diagnostics, as Steve mentioned in his prepared remarks. Certainly volumes, and importantly revenues, wer4e up strong, our general diagnostics was solid, and then certainly POS is giving us some lift.

And then I thought I could follow up actually on the POS side, so maybe a bit early to ask this, but you talked about the opportunity potentially to leverage from the POS agreement to sort of expand the relationship beyond that and maybe some reference work and things like that, so wondering if you have any insights there again, recognizing maybe a bit early, but…?

I appreciate that. As we've talked about and raised the case, when we engage with a healthcare system integrated delivery network, we talk about three things. First of all, what we can do to help them with their in-patient laboratory, and that's what we refer to as professional laboratory services engagement. The second part of this is the inside diagnostics that I referenced, testing, and we believe we could be very effective provider of more and also help them with what they do, so a significant part of the discussion. And then the third case is that we are in that discussion to decide what their strategy is from hospital outreach, and [indiscernible] is a good example of that where we bought their operating [indiscernible], we're helping them with 11 of their hospital in-patient laboratories. And to your specific question, in that relationship we are also helping them with the reference work as well. So, in all these engagements, we typically become a stronger presence in that account for reference work.

Our next question comes from Kevin Ellich from Craig-Hallum. Your line is now open.

Just wanted to kind of follow up on the hospital outreach comments, you guys announced a number of good deals. The one that is more interesting to me is the [indiscernible] has gotten wide. I think you are in 12 hospitals now with kind of partially due to the U.S. [Oncology's] announcements. What potential to expand that since they are still big down in Texas and do you see additional sales in any of those markets?

Thanks for asking. We are quite excited about it as well. There are a lot of different reasons. That goes down there last week, we had our date one [indiscernible] with a town hall meeting and spent some time with the management team. So this acquisition actually kicks four elements of our accelerated growth strategy. First of all, obviously it's part of our growth through acquisition, so that's good news. Second is in terms of innovation, it brings to us a nice [indiscernible] up our portfolio around what we could do around oncology and precision medicine, so we are encouraged about that. Third is to your point, it brought it to present in the second largest state in the country, Texas, where we already have a strong presence. And then with this, it's all about providing better health care at better cost levels, and we think with some of the work they've done in the engagement for instance with U.S. Oncology, we can help with the data and understanding what we would do to form better cancer care, so four elements of our strategy. So we are encouraged by that. And the relationship in Texas is strong, and so we are deeply engaged how we continue on what they built with that engagement and continue to grow from that given our broader presence now with us at Quest Diagnostics. So we're excited about it and we think it's a great acquisition as well. So thanks for the question.

Great. And then just a follow-up on Walmart, I might have missed some of the commentary, Steve, but what measures or metrics will you be looking at to [indiscernible] how quickly you want to expand and what other [indiscernible] clients do you guys plan to add as I think it's going to be more toward the more [indiscernible] patient service centers [indiscernible] in the Walmart stores?

Absolutely. So first of all , we study with two of the largest states, Texas and Florida. We also have a strong presence in Florida, so two nice states, second and third largest state now in the country for us to make progress in the large states. Yes, we will look at some of their sectors for our patient service centers, but as importantly, what I said in my introductory remarks is, we are actually going to use this strong metric to provide some of the basic healthcare services that help with what we could do with population [indiscernible] to cost curve. So what are some of those things? Now can we help with people dealing with hypertension and do blood pressure checks, can we make sure that people are staying out their [indiscernible] beyond a diuretic suffering, congested heart failure, that we help you with that by periodically taking your weight, making sure you stay in your diuretic staying range. We can also help with diabetes management. We're also working with some of the healthcare insurance companies where we could close gaps in care to help them with their quality scores so they get reimbursed by the healthcare that we all know is the best healthcare. So those are the basic healthcare services, and fortunately at Quest, we have the world's largest laboratory, so we'll be, absent for the last five years, we are in the field of diagnostic information services. We have over 20,000 health care workers, 10,000 [indiscernible] with 10,000 other health care workers that provide services already for wellness services from Florida that help insurance companies. We are also providing health checks for life insurance pre-qualification physicals and checks. So, we are leveraging those resources and its relationship as well. So, we are excited about it. We think it's a great opportunity for us to just expand our already unsurpassed access to the marketplace, but also engage with the ecosystem healthcare with some of these basic customer services that can in our mind really help them to cost curve for healthcare in populations that are difficult to get access to.

Our next question comes from Lisa Gill from JPMC. Your line is now open.

I just had a follow-up question on your comments on PAMA. As far as timing goes, when would we learn that they have decided to postpone this as an incremental data on the hospital outreach?

So the current schedule as you know, we submitted the data already. That was delayed by two months because their portal was not available and so we recognized they'd listen to us and postpone it. We have put it in our data. Those people that are submitting the data have done that by the end of May. The current schedule thereon is to publish tentative rates in September, so the schedule that they currently have published. However, we have shared with them that we believe that several things are going on with the data they had collected. One is they haven't included all the data from those laboratories that they are buying from, typically hospital outreach. We believe their approach still limits the size of the sample, and we shared that. And also this has been reinforced by the officer and Inspector General that [indiscernible] that only 5% of the laboratories are being asked to submit data will submit data, which is about 69% of what they actually buy from. The second is what we have heard from some of the smaller laboratory association that affect some of the data input. So we have shared this with them because some of the smaller laboratories did not have good access to retrospective data. And while our concern is that they use that data for the basis of publishing at tentative [indiscernible] fee schedule in the fall, it won't be right. So our strong recommendation to them, and we have got word from Congress broadly, many different leaders of Congress as well as the center [indiscernible], we believe the best thing for us all is to take some time to get it right. So our recommendation is to postpone it. We have made a recommendation of how we believe they could collect the data. That will take some time. We think if they work in that aggressively, they possibly could publish the due clinical and fee schedule no earlier than July of 2018. So that's the path we are on, but the current schedule we have is that they are going to extend the schedule to get out some rates in the fall with the refresh clinical and fee schedule in the first of next year, and as we said in our introductory remarks, we are prepared for that but working hard because we believe it does not reflect the impression or intent to get a full sampling of the marketplace and get that data in a good form and get good quality data to establish a rate for itself. So we are pushing that in a big way across the trade association.

I think the key is there still remains a lot of uncertainty around PAMA. I'm sure you drew that from Steve's comments. And fortunately, we don't have the data to determine what the projected outcome will be, whether it's the timing or the impact. I do think it's good to go back to the final rule periodically and just remind everybody that the methodology is that CPT code by CPT code calculation, and so weighted median based on the data that they have collected compared to the rates that they are currently paying, and that any CPT code can be cut as much as 10% per year for the first three years and then beyond that for 2021 to 2023 the final rule dictates that any CPT code could be changed by as much as 15%. So that is the final rule in terms of the application of the rule and the outcome. I'm sure as you drew, there's still a lot to be answered.

Our next question comes from Donald Hooker from Keybanc. Your line is now open.

Just kind of a broader question on the POS deals, which seemed to have great momentum over the past year or so, I understand they are all structured differently. I guess on the one hand you have the full service outsourcing where you takeover all the employees and supervisors, and then on the other hand I guess it's just maybe one or two people one side and they are buying off your contracts. How do the deals break across that continuum and maybe can you talk about the different revenue that generates across that continuum for these deals and is there evidence that maybe over time as you add more and more of these that people start on the low end and kind of move up towards the higher end, if you will?

We continue to be excited about the prospect here. And again, to start at the highest level of possible systems, and I have shared in the past their lab strategies are on the shortlist of strategic things they are talking about. And so they welcome meetings with us to help them think through this. And in that context, a big part of this is how we can help them become more efficient with their hospital in-patient laboratory, and it is that spectrum. The broadest capability is we help them manage it, the leverage of our procurement. They also learn from our best practices of running the world's largest laboratory. And to answer your question about across that spectrum, where is that set, I would say it's equally distributed across the lowest level of involvement, the most no predominant necessarily of one end of that spectrum. But to your last question, once we get in the account and we begin to develop the relationship, we do see increased levels of engagement by the customer with us and we do broaden our services broadly and we do spend more time on what we'd do to help with them their reference work, and then also in that context, we do continue the conversation about their outreach strategy if they are in the outreach business. So, the way we see it is we start with an engagement but that's just the beginning of engagement. And then we also use this as a discussion broadly of what we could do for them in terms of what their mission is and their strategy, which gets us into discussion about population health and what we could do in data analytics. We've got a lot of capabilities there, we have talked about that in the past, we've seen a nice value-added. These new extended care services are of great interest, particularly those integrated delivery system, that are taking on risk [indiscernible] they are quite interested and probably can leverage these access points for putting in place with our two [indiscernible] with Walmart is one example. So, this strategy is really a strategy of how we serve possible systems in a bigger way, and one aspect of what we could do with them is around their professional answers is engagement in their in-patient laboratory, but it's much broader than that.

And I would just add, Don, you asked about the revenues and as you implied, directionally, the deeper the relationship, the higher the revenues before actually on-site running their in-hospital laboratory and having those employees work less than we have to build that out for them. So that would be a higher revenue type arrangement. But I'm sure as you can imagine, there's not a lot of margin in that stop. So a greater part of the margin is really driven around rationalized and test menu, moving a subset of that off-site where we can drive not only better costs but shorter cycle time because we are running those tests every day. That's one of the [indiscernible] when we have a POS type arrangement, it's not just about cost, and that's where preponderance of the revenue and the margin comes. It's really just driven by I'd say hospital preference. As you have heard Steve say in the past, we have seen one hospital, lab strategy we have seen one. It's really nothing endemic to the particular hospital structure that dictates the POS arrangements. It's really just our comfort level.

Our next question comes from Brian Tanquilut from Jefferies. Your line is now open.

Congratulations. Steve, when you first came on board, you guys first started the hospital strategy and that was sort of new for the industry and now you're doing the retail strategy with Safeway and Walmart. So, do you think this is the wave of the future in terms of where the lab will be and what do you think, as you look down your pipeline in terms of other retailers or other opportunities to get closer to the end user or the consumer, I mean how should we be thinking about the future strategy as you pull from your traditional [indiscernible] into more retailer or consumer-oriented settings?

Now what we talked about five years ago just for the world's largest laboratory, but the business that we want to focus on is Diagnostic Information Services. And so, the information and the services portion of our portfolio is the big portion of what we've really put our shoulder into over the last several years, and you are seeing some of the contributions in the way of business in the last few years. So let me just walk through what that means and where do we see this going. So in that strategy, we believe that hospital systems were becoming stronger. We knew that hospitals were acquiring physician practices. And therefore it was quite important for us rather than thinking about the hospitals as primarily a competitor, we thought [indiscernible] partner with them with their lab strategy, and that has worked well. They are all over trying to become more efficient. They are trying to understand how they can provide better patient care. And then finally, they are realizing that being in the outreach business is not necessarily something that they all want to focus on and therefore they can team up with us and we're a good provider of that. So it's a nice service [indiscernible]. And then as we get in, similar to what I said to Donald in the last question, it's all about their strategy and their strategy is to be a broader provider of integrated health services within a geography, and we could help them with that. So we have brought out a broad line of information products. We launched this a couple of years ago with the [indiscernible], we call it Quanum. And in that portfolio of products, we offer capabilities to take a look at your utilization for diagnostics, allows the data to…

I really appreciate that. Mark, just a quick follow-up, what are your assumptions and guidance for the back half in terms of tax rate and buybacks or capital deployment?

So in terms of capital deployment, it's really dependent on whether we have strategically appropriate deals that create value for our shareholders. So really that will depend on our deal pipeline and what might come to closure. In terms of your expectations for share buybacks, we talked about keeping our way, so pretty flat to the extent that we wouldn't execute more M&A. You've seen more share buybacks but I think you shouldn't consider pretty much flat share count. And certainly from a tax rate, as we mentioned it's impossible for me to predict option exercises. So outside of the stock base comp piece, you should expect the effective tax rate that's pretty much on the historical level that we've seen in the upper 30s as opposed to the rate we saw this quarter in the low 30s, really driven by the stock based comp. Now if we were to have significant exercises in the quarter, that obviously could depress it, but that's why we've been very intentional in calling out what that impact is year-over-year so that you can understand that it's really not operational.

Our next question comes from Isaac Ro from Goldman Sachs. Your line is now open.

Wanted to come back to PAMA for a minute, I appreciate your comments around the idea to caution process. I'm interested in the commercial side of it, in particular how you think the competitive landscape is going to evolve as we approach implementation, whether it's delayed or not? And specifically about sort of overall battle between the in-source labs within hospitals and sort of the commercial labs, is there a material tug of war starting to brew here between where a lot of that volume gets done, I'm interested in what's happening out there in the commercial and [indiscernible]?

Part of our discussion with these hospital systems were on their lab strategy, they see pressure on rates broadly. They are feeling pressure from their commercial insurance relationships, but they also are looking forward and realizing that the clinical and fee schedule will be refreshed. And as we talked about in the past, they have more exposure than we do to that. Roughly 12% of our revenues is a much more meaningful percentage of their laboratory revenues. So, when we engage in these conversations, one aspect of their consideration of what they are going to run [indiscernible] is they are going to be under pressure both on the commercial side as well as on Medicare. But the other aspect as you know is related to what their strategy is, do we want to put more capital and increasing more complicated area, and in some cases they decide not to. Second is they realize that our scale is significant and as we move away from a fee-for-service model to a much more value based reimbursement model, it's still longer to be in activity, it's going to be making sure we have the best cost per service unit and our cost structure is far superior than any other cost structure. So, in many of the cases we are engaged around this and in some cases where we have bought their [indiscernible] business, it's because they see reimbursement changing and they believe that they have to move to team up with someone like Quest that has a very efficient model delivering the necessary diagnostic services, so as part of that overall strategy for the integrated delivery system, a part of this is looking at pressure and range, but it's more comprehensive than that as well, Issac.

That's helpful. And then maybe as a follow-up to that, if we look at sort of the rest of the commercial market, clearly the majority of your competitors are very, very small. How do you think they are going to react to PAMA over the next say 12 months, is there a meaningful opportunity there to consolidate more share from commercial labs?

Yes, so we shared this at our Investor Day. Look at the market we compete in, ourselves and the nearest competitor, less than 25% share. We have a very compelling value proposition where we offer some of the best pricing and we believe best service and quality on the planet, and we believe we should have more share. We're working hard at gaining that organically but we are also believing that we can consolidate more of this marketplace and that's why we have the strategy of 1% to 2% growth through those strategic [indiscernible] acquisitions. We have announced a number this year with [indiscernible], we're moving forward down with Med Fusion and also we also announced recently [indiscernible] in Massachusetts. So our march continues to drive that strategy. So we think the commercial rate pressure on the rest of the marketplace will help accelerate the strategy we are on and we should over time take up more share both organically and through acquisitions.

Our next question comes from Bill Quirk from Piper Jaffray. Your line is now open.

So I hate to keep coming back to PAMA but obviously it remains a pretty hot topic. I guess, Steve, certainly understand [indiscernible] position here, help us think about as we get closer to the initial implementation date, or the initial preliminary rate date, how do you handicap the likelihood of [indiscernible] at this point given all your conversations with folks up [indiscernible]?

I can't handicap it, but I will share that we are actively working the communication with CMS, and when I say we, it's the Board of Directors and all members of ACLA are actively talking to our Congress members both on House side as well as the Senate side. We have also met a couple of times with the leadership at CMS. The leadership at CMS understands this well, understands that the current approach has issues associated with it, and our simple messaging on this is take the time to get it right. We continue to support the idea of paying or having CMS pay market-based pricing. To get the right data, take the right approach to bringing on those rates is important for all of us. And what we remind them of is the reason why we have PAMA is reflective of the work that's to protect access to Medicare Act, and it's important for Congress and it's part of their congressional [intent] [ph] not to just pay at the lowest rates but to make sure that they pay for what they use, and the reason for this is there's many parts of this country that are not served by the large national laboratories. And the concern that they are now aware of is if in fact, if this is not done in the right way, rates could be cut, smaller labs that are very necessary in smaller rural areas, in some segment of the marketplace the majority of what the testing is has provided the Medicare marketplace could be substantially cut, and the example of that is what's happening in nursing homes where a majority of their single testing is basically the most routine tests that are done for many small laboratories all over this country. So we remind Congress and we remind CMS of where we started and why we believe paying market based price is quite important. So, what I'll share is we think they are very, very responsive to listening to our concerns. We realize there is an element of administration. They realize that what was put in place was put in place over the last couple of years. They realize there is an opportunity to work with us to get it right. So we remain hopeful but I can't handicap it.

Got it. And then just as a follow-up, the pace of deals has increased and obviously you talked quite a bit about that here in the Q&A today. Can you talk to us a little bit about how much capacity both your deal and integration teams have?

We have been at a point where we don't have the capacity to do deals that make sense and we spend a lot of time looking at deals, we say no to more deals than we say yes to. It's important. We continue to go back to our philosophy on doing acquisitions. They have to be strategically aligned and also we have to make money on those deals. And a key part of making money on those deals is making sure we have the right integration plan. And so, as we integrate this, we have a small structural team that helps us with the integration but also a large part of the integration happens in our regions as well. And so, if you look at the distribution of some of these deals, they have been distributed throughout the United States. We have done a number up in the north. [Indiscernible] being one example of that, Harvard Health Care being another example, but most recently we are doing this deal out in our western region with PeaceHealth and we are working on that with enough capacity to pull that off. So, our capacity has not been [indiscernible] at all. It's more the [indiscernible] factor to making sure we have deals that we believe are strategically aligned and we could make money on.

Our next question comes from Ricky Goldwasser from Morgan Stanley. Your line is now open.

The first one, if you can elaborate a little bit more on your relationship with Walmart, you talked about 50 stores by the end of the year, so how should we think about the revenue contribution and your earnings contribution between volume and price? And then does the relationship with Walmart preclude you from entering additional partnerships with others and do you think that over time will the market split in two verticals, you have the relationship with Safeway and Walmart and potentially others where your competitor has a relationship with Walgreens?

I appreciate that. First of all, the relationship is getting nowhere near. We said we are going to focus on two largest states, Florida and Texas, and we're going to pick 15 sites that will be our initial pilot sites. And what we'll provide at those sites are some of our patient service center capabilities like we've done with Safeway, but we believe there's more we could do on those sites with basic healthcare services. And what will specifically get done is really dependent upon where we forge relationships with healthcare insurance companies, their integrated delivery systems for ACOs within those geographies where we think there could be some value of providing with basic healthcare services in those great access points that Walmart has. This will be a joint venture. We are the majority holder of ownership in that joint venture. We have not provided visibility or guidance of how large this will be, but we are hopeful that this year we'll be off to a good start and we'll share more in due course as we get into it. The second part of your question, as we said when we announced Safeway, Safeway was an excellent relationship. We are proud of what we have done. We are half way into what fully we can realize, about 100 stores, we've got another 100 to go to get to 200. What we are doing with Walmart we think is complementary and every one of the retail strategies that are – retail companies that are in our space have a different strategy. So we continue to enjoy a nice good working relationship with [CBS] [ph] [indiscernible]. We believe Walgreens has a different strategy as well. And what we will do is – Walmart and what we will do with Safeway, we believe there are other ways we could work with other retailers that could be complementary to what we agree to do with these two that we have announced so far.

Just to add, Ricky, the impact this year is immaterial. I mean as you can imagine, it's 15 stores where we're really just going to be ramping up over the balance of the year. The value creation is well in front of us and it goes beyond just having a blood draw center. It's really those additional services that Steve talked about. So Walmart certainly has the foot traffic, millions of people every day. We have not only got the ability to do the laboratory testing, but as Steve mentioned earlier, we've got the on-call specialist and actually do a lot of in-home assessments, biometrics and things well beyond laboratory testing that can supplement our ability to provide additional services. So more to come on Walmart, it's not exclusive. We mentioned that the links with Safeway was not exclusive. There are many, many retail centers available. Even though we have over 2,000 patient service centers, approximately a little over half would kind of be candidates for retail outlook. So it wouldn't be all of our patient service centers, and so if you look at 1,000-plus potential patient service center opportunities, certainly between Safeway and Walmart and potentially somebody else, we are going to barely cover a small portion of their footprint. So this is not looking at blocking up and excluding other people, it's really just partnering and finding a way to get more efficient on our capital deployment and where we will [indiscernible] and other services.

Okay, thank you. And then one follow up just on your second-half guidance. So when we kind of like look at the contribution from acquisition, is it fair to say that second half acquisition will contribute around 100 basis points, and if so, it seems that you're looking for an acceleration in organic growth rate in the second half of the year, I mean based on our back of the envelope second half is over 3% top line growth, so are we in the ballpark and how do you think about where is the acceleration on the organic side is coming from?

So yes, Ricky, you are correct, the increase in guidance on the revenue side is almost exclusively from M&A. We're very pleased with our organic revenue performance for the first half. It's certainly not out of our original guidance range. So the increase in revenue guidance is really driven by the deals. As I mentioned on the earnings side, we actually strongly enough from the first half that there is some organic impetus in the increased guidance, and then the other piece is really around the stock-based comp reducing our effective tax rate in the first half. M&A, our new deals, is not expected to contribute anything meaningful on the EPS side in the back half of the year. So it's really driven by organic health and by this tax benefit. And then back to the question that was asked earlier about assumptions for the back half, right now that guidance assumes a tax rate that is more in the going-in rate in the high 30s. We shared that there was $0.06 of excess tax benefit last year. That was in our original assumptions and guidance for this year. Obviously we have exceeded that greatly in the first half but I am not counting on any extraordinary excess tax benefit from stock based comp in the back half. So should that happen and it's not really forecast, something we can forecast, then that could lower the tax rate.

The final question on today's conference comes from Steven Valiquette from Bank of America. Your line is now open.

So most of my good questions have been asked already, but just curious on that retail strategy, what is the right number of partners over time just from a retail co-branding perspective and is that critical, is this a situation where you might be comfortable having 5 to 10 retail partners over time or do you want to keep the numbers smaller to maximize the co-branding awareness?

We are working our way through that. The Safeway relationship is different than what we're going to do at Walmart and we already have working relationships with some other retailers. I mentioned CBS and Walgreens, different strategies, all these have different strategies. And frankly, I think we'd like to have a handful of strong national brands that we work with. We'd like to make some progress with those before we expand too broadly. So we have two now and working relationships with others. So, we are totally focused on executing against what we've said we would do with Safeway. We feel good about that. We just launched this new relationship with Walmart. We want to make sure we make progress in 2017. And as far as others, in due course we will talk about that as we work with them on their own trend, [indiscernible] how we could be helpful, but a good way of thinking about this, we started with one, we've now moved to two and a handful will be a good number that we could then manage over time to provide what we do and help them with their health strategy.

Were you ever in deep discussions with Walgreens? You just mentioned Walgreens and CBS, but was that one kind of a tossup at the end and who would be the partner or is there still a possibility that you could still also partner with Walgreens in addition to the lab provider based in North Carolina?

So we are open to working with others. We want to make sure that what we do doesn't in any way contradict what we are doing with some other partners. But as you know, Walgreens continues to broaden their health presence. They have a working relationship as you know with Med Express. Med Express will provide healthcare services and that strategy will change over time. And as you know, most of these retailers work with all different brands, no matter what category and laboratory services are going to be different. So, they are selling all different bands in their stores, so therefore they are open to different brands and we believe that this strategy is good for us to think about how we could team up with different people in the ecosystem in healthcare and every one of these players has different strategy. So, we think there is an opportunity here as well.

Okay, so that concludes our day. We had a strong first half in 2017. We look forward to continue to meet our commitments by executing our two-point strategy, which is to accelerate growth and drive operational excellence. We appreciate your time on this call and we hope you have a great day. Take care.