Welcome to the Quest Diagnostics Fourth Quarter and Full-Year 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. I'd now 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 will discuss non-GAAP measures. For this call, references to reported EPS refer to reported diluted EPS, and references to adjusted EPS refer to adjusted diluted EPS excluding amortization expense. 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. This quarter we have included a 2018 adjusted EPS bridge on the Investor Relations page of our Web site. The text of our prepared remarks will be available on the site later today. Now here's Steve Rusckowski.

Thanks, Shawn, and thanks everyone for joining us today. This morning I'll provide you highlights for the fourth quarter and full-year 2017, and review progress on our strategy. And then Mark will provide more detail on the results and take you through our 2018 guidance. Well, we finished the year on a high note by delivering a strong fourth quarter. Revenues grew 4%. Reported EPS grew 67%, and adjusted EPS grew nearly 7%. For the full-year 2017, revenues were up 2.6% on a reported basis, and up 2.9% on an equivalent basis versus 2016. EPS was up 22% on a reported basis, and more than 10% on an adjusted basis. Cash provided by operations was up by nearly 10% from 2016. 2017 was a good year. I'm pleased to announce we are increasing our quarterly dividend by 11%. This is the seventh increase since 2011. Before I describe the progress we have made, what I would like to do is to talk about two dynamics impacting our industry, PAMA and Tax Reform. PAMA represents a significant headwind. In November, we said that we expect the impact of the final rates on the PAMA to be approximately 4% of our revenues from the clinical IP schedule in 2018, and approximately 10% in both 2019 and 2020. As you know, in December, we fully supported ACLA's lawsuits charging that incentives from Medicare and Medicaid services, failed to follow our congressional directive to implement a market-based laboratory payment system, and we believe we could have a decision from the judge by midyear. In the meantime, our trade association will continue to work with Congress to secure a legislative solution. Now turning to tax reform, Quest is a significant beneficiary of lower corporate tax rates, which will enable us to grow earnings per share…

Thanks, Steve. Starting with revenues, consolidated revenues of $1.94 billion were up 4.1% versus the prior year. Revenues for Diagnostic Information Services or DIS for short grew 4.5% compared to the prior year, with approximately 210 basis points attributed to acquisitions. Volume measured by the number of requisitions, increased 2.4% versus the prior year with acquisitions contributing approximately 150 basis points in the quarter. The impact of hurricane Maria on our operations in Puerto Rico presented a headwind of approximately 20 basis points to volume in the fourth quarter. Revenue per acquisition in the fourth quarter grew by 2.1% versus the prior year. As a reminder, revenue per acq is not a proxy for price; it includes a number of variables such as unit price variation, business mix, test mix, and test per acq. Unit price headwinds remained less than 100 basis points in the fourth quarter, consistent with the trends we observed throughout 2017. Excluding the impact of PAMA, we would expect unit price headwinds in 2018 to remain less than 100 basis points, with PAMA adding an additional headwind of approximately 50 basis points on our DIS segment. After many changes to PAMA, Medicare reimbursement pressure will step-up in 2019 as we have indicated previously. Beyond unit price that we impacted growth in our POS partnerships other mix settlements including test mix was strong contributing more than 200 basis points in the quarter. This trend has remained consistent over the last couple of year. Reported operating income for the quarter was $269 million or 13.9% of revenues, compared to $276 million or 14.8% of revenues a year ago. On an adjusted basis, operating income was $317 million or 16.4% of revenues compared to 305 million or 16.4% of revenues last year. Reported EPS was a $1.82 in the…

Thanks Mark. Well, to summarize, we delivered a strong fourth quarter. In 2017, we made great progress accelerating growth and driving operational excellence. Our guidance for the full-year 2018 reflects expectations with this continuation of acceleration of the top line and bottom line growth. Quest benefits from tax reform. And we are investing in our business and our people. Now we will be happy to take your questions. Operator?

Thank you. We will now open it up to questions. [Operator Instructions] And our first question is from Amanda Murphy with William Blair. Your line is open.

Hi, thanks. Good morning.

Good morning, Amanda.

Just a question on guidance, so from a top line perspective, it's little difficult obviously given all the moving parts sort of compared to consensus, but it feels like the numbers or the top line growth rates are sort of pretty strong relative to expectations. And I was just curious so you have obviously given a lot of information around M&A and the unit pricing dynamics, but what are you thinking in terms of at least maybe qualitatively how to think about the various dynamics around organic growth? They are just underlying volume growth? The POS contribution that we might expect, is it similar to this year? And then also, I guess, last year technically. And then also how to think about mix particularly given some of the comments you made around investment in new tests et cetera?

Okay. Amanda, thank you. Well, we are pleased to be able to provide the guidance for 2018 we just did which is 4% to 5% growth. We feel good about that. Our strategy historically remains in 2018 is a balance between acceleration of our organic growth and also to achieve at least 1% to 2% growth through acquisitions. And as what I said in my remarks, we have exceeded that high end and that range of 1% to 2% through acquisition, but what I will say in that 4% to 5%, you see both. You see an improvement in organic growth. And you also see an improvement in growth through acquisitions and that's in that 4% to 5%. As far as the growth drivers organically, we continue to see good growth in our professional lab services business. We continue to get good interest. And as we have talked about this - there is a couple of things, one is we have an acceleration in the number of conversations we having with C-suites of integrated delivery system with around their lab strategy. And that hits many aspects of our strategies for growth. First of all, they are quite interested in what we could do with them to make it more efficient and this is our professional lab services business. And so, that has impacted growth in '17 and will continue in '18. Second is we sell them our most sophisticated testing. And so, that acceleration advanced diagnostics will continue as well into '18. And then finally in some cases, like in example of PeaceHealth in 2017, they want us to buy their outreach business. So implied in our guidance is the continuation of that strategy which hits on three aspects of our growth strategy going forward. So, again, a balanced guidance that with both the acceleration of organic growth as well as an acceleration of growth through acquisition. Mark, anything you would like to add to that?

Yes, I appreciate the comment Amanda that there is lot of moving parts, but on the top line, the restatement of bad debt really should not change the growth in revenue because bad debt is not going to vary dramatically year-over-year. So, the 4% to 5% is a solid number that it doesn't have a lot of moving parts to it. And then in terms of your questions around the future, we would expect more of the same. Continued friendship towards advanced diagnostics, as Steve, said which should benefit our revenue per acq, but also continued strong growth in POS which will offset that - partially from that. And in price, I covered that pretty thoroughly which is more of the same; some headwinds on the non-government side and then the additional 50 basis points coming from PAMA.

Operator, next question?

Our next question is from Jack Meehan with Barclays. Your line is open.

Hey, good morning.

Thanks. Good morning. Could you elaborate on the volume dynamic in the fourth quarter? So, you delivered around 1% ex-M&A, but I there is probably some POS in there. So what are you seeing in terms of underlying volume and what's the expectation for 2018 there?

Mark, you want to take that one?

Yes, so we - never volume with requisitions. And what we have also reported is that we continue to see increasingly dense requisitions. So in fact, costs are growing faster than the volume reported. That's really what we do is we do test. So we don't fully understand the trend. We talked a little bit of this, but certainly there is things that are being added. When someone goes in for general healthy checkup whether it's a baby boomer getting the hep C test and that's certainly well back as adding Vitamin B. So, people getting more done when the y go in to get our services in the given encounter. So really we talked about a desire to give you better - inside of the volume was really test, we didn't - found a way to do it yet. So don't read too much into volume as reported by our requisitions. So certainly POS as we mentioned is a double digit grower, but volume trends continue to be solid. We don't see anything that suggests the market shift in utilization. We continue to accelerate our growth and that's what we are expecting during 2018 as well.

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

Good morning, Kevin.

Hey, good morning guys. Hey, guys, thank you for taking the question. Kind of two part here. Mark, you talked about test mix is strong, is there any specific tests that you can call out, or is it really just a function of the more tests per acquisition? And then, you know, manager contracting any updates there on the United and other contracts?

Yes. Well, Kevin as I mentioned in the remarks, we continue to make nice growth out of our Q-Natal testing and prenatal testing, number one. Number two is [indiscernible] continues to grow. We have got long ways to go as far as testing the baby-boomers in this country. That continues to grow nicely. Prescription drug monitoring continues to be a big grower for us. We are the market leader in that regard, and that's growing strong double-digits. So you look across the Board and many of our diagnostic testing categories, we're getting some nice growth.

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

Hi, good morning. Just going to take a couple of follow-up questions, so one, just kind of like on the pricing; obviously pricing trends look really, really good in the quarter, you are talking about little bit less than 100 basis points of headwind into next year. Is this odd, because of the mix of the acquisition, or how should we think about kind of affect the pricing environment? And then, on just kind of like [indiscernible] just kind of like more big picture, when we think about [indiscernible] deal and focusing on transforming retail pharmacy and healthcare hubs, how do you think about your role, as part of this overall strategy and any update? Yes.

Yes, the first part, Mark will take around what's in our guidance for price, and the second part I will take on where this is all going with transformation of healthcare. Mark?

Yes. And Ricky thanks for the question. So, on the pricing, I think you are referring to revenue per acq and - which includes mix. Pricing itself well is apples and apples, real price, and it will continue to be less than 100 basis points headwind as we mentioned. Obviously when we narrow the mixed elements, including PLS, including tests, payer mix, density of our acquisitions, we have seen an increase in revenue per acq in that space on mix. So we don't expect any change in trends in 2018 relative to what we have seen in the last couple of years in our business. Regarding M&A, there is really not a mixed element of the M&A for the most part, and in certainly the possible acquisition deal that we do, you know, book of business is very similar to our core book of business. Obviously the reimbursement is going to be somewhat different by payer type, but generally the same pricing. So M&A unless it's a very different business like in MedXM or something like along those lines, Med Fusion had a different mix, but generally our M&A will not change revenue direct dramatically. I will turn it back to Steve to answer your further part of your question.

Yes. News now on these consolidations and particular interest around sponsor health plans and what that segment of the population or the industry could do, we think it's very positive for - the strategy that we've been on for number of years now. So as we've talked about, we as one of our strategies want to be the most consumer-oriented laboratory, we talked about that in our prepared remarks, there are multiple aspects, there is an aspect around our experience, there is an aspect around data, around products, and around information. And I mentioned MyQuest app, and this is making a lot of progress, and 2018 will really be a watershed year of really fulfilling lot of our promises in that space. If we go there, then all of it - it is all about serving the consumer and the customer. And number of these mergers and discussions are all about what needs to do - what needs to happen to get better access for consumers or the consumers getting to be more and more involved in healthcare decision-making. And important to address is we partnered with a number of these players already. So we are in the middle of these discussions. So we are all waiting to see about the merger of CVS and Aetna. We have strong relationships with both. We work with both already. Second is relationship with Wal-Mart. We will continue to extend itself. We mentioned our patient service centers opening up in their stores. And also in that regard, we're going to provide health services. And then third is we have the employer business, we sell our [indiscernible] wellness products into large employers. And as we know, 170 million people roughly in this country get their insurance from their employers. And we've been all over this as an opportunity of working with these employers and working with our healthcare insurance partners to do a better job within the cost curve for those corporations, as well as for their employees. And we've actually done this at Quest. We've been working on this for a couple or three years. We've changed the organizational model. We've got more data, and we're working with a number of partners, and actually what we have seen is we have been their cost curves. So we're quite excited about these new developments, and we believe we're really strongly positioned to take advantage of those going forward.

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

Hi, thanks. Good morning everybody. Just a couple of quick ones here; first off; Steve; can you just talk a little bit about M&A deal flow and whether or not any valuations have been reset given PAMA or maybe it's just little too early to see those resets at this point? And then secondly, I know that flu doesn't have a big direct impact on the business, but is there any sort of ancillary testing that you tend to pick up just considering that the very severe season that we're going through right now?

Yes. So on M&A, we did seven deals. We're now seven deals. That's reflected in our guidance for 2018. That's beyond the 1% to 2% that we've stated as our strategy; we feel good about that. And as we said, the deal flow continues to be strong, and we're optimistic going forward. And there is a lot more interest in what integrated delivery systems will have in their lab strategy going forward, given potential pressure there will be either with PAMA or commercial rates on the ancillary services side. So that continues to be an opportunity for us. As far as resets, we already in our modeling are prudent as far as how we price things and work out our - in terms of what we've guided business and we restated for that business in our hands. We do take into consideration what might happen with Medicare rates. And we feel past deals and forward looking deals we will take that in consideration because that's a real consideration that we do consider in the model to make sure we are back any of us we make an acquisition for our shareholders. So, Mark you want to drill in the second part of the question.

Yes. Steve's points recalled that our valuation really is independent of what the business might look like in their hands. When we go back to Investor Day, we went through an example, so the revenue is still adequate because of commercial payers and then the cost, and even more the portion lower given the economies of scale, and that's how we create value. So really our pro forma P&L looks nothing like the P&L that it was in the hands of the seller. So have things changed? Absolutely. Because we're taking into account to change in government reimbursement which impacts both the seller and the buyer, we've been modeling some potential for that for several years now. So it's not lease, and will be taken that into account, but obviously with the new publication of rates, we're building those rates right now as an assumption and to what the future is, ensuring that we pay appropriately for any acquisition. And then on the full piece scale on…

Yes. We track a number of dynamics in the industry, and we do believe rate is up, that it would impact on - let's just call it activity or utilization into physician's offices. So there's some modest increase from it. But this, as you know, many variables, and as Mark said earlier, when we look at our same-store analysis, we feel that the market is stable. So it's not a big mover, but we did notice the change.

Our next question is from Donald Hooker with KeyBanc. Your line is open.

Great. Good morning. My question was - I'm interested in your comments around consumerism, and you referenced concierge services a few times or that buzzword at least, and then how that might dovetail with that recent acquisition you did have - I guess it's mobile, medical examination, and I know you have a life insurance business where you're going into people's homes as well. Can you maybe tie that together, does that fit into a consumer strategy or what are you thinking there with all those - maybe elaborate on those themes? Thank you

Absolutely, absolutely. So first of all, when we talked about concierge, we talked about advance diagnostics; there's a lot of science. And it is an innovation business. And we have a new leader that stared about a year ago, [indiscernible], and she's updated our strategy, we're putting more resources in it, and a portion of our incremental investment from tax reform benefit will be invested in our business. And as part of it, yes, there is more science, there is just more capability to do test that will bring to the marketplace but the large part of what you also deliver advanced diagnostics, particularly our genetics. It's that whole experience for the patient and making it seamless and easy for the physician that's ordering that test and so what if it's more resources in that part of it, it's the pre-authorization piece, it's the ordering piece, it's the resulting piece. So my comment in my prepared remarks had to do with that portion of what we describe is concierge services. The second part of your question had to do with a consumer strategy, we've been on this for a multiple years, we made excellent progress in '17 and in '18 I will tell you by the end of '18 we are going to be long ways along with what our vision was. First of all, it's around the whole experience, we are contemporizing bad experience free unit to this new world. So we enabled in a big way, I mentioned the kiosk and now in about half of patient service centers. We are going to that experiences are completely different experience in the old days and I would argue some portion as market where you have labs that are not nearly our size that can't make these investments so we…

Our next question is from Patrick Donnelly with Goldman Sachs. Your line is open.

Hi, Patrick. Good morning.

Hi, guys. Thanks. So with PAMA, I'll implement it, can you talk a bit about future pricing conversations with payers and the importance of price discipline from your end. It seems like this will give even more incentive to hold on price with private payer has given, your value proposition with smaller regional payers struggle a bit to deal with PAMA in their best in margin, so curious as to your perspective on that?

Mark, why don't you take that?

Yes, I appreciate the question. I can assure you with that plenty of motivation to be price disciplined for many years. So it doesn't change that. I think that PAMA gives as I described in JP Morgan is that the payers now are understanding that the market is involving and this world where somehow the commercial rates for though independent labs obviously for a lot of the hospitals and some of the physician mandatories and so on, the rates that are still well higher CMS rates but certainly for the independent lab it's been lower and there is full transparencies that we can go under them and say here is the data that was collected by CMS you know, where the market is and so there is no one certainly around where ratings are compared with the rest of the commercial market and therefore let's talk about what's there, let's talk about how we partner together in the long run you know, that we succeed and failed together. So I might feel good to try to get some sort of price concession in the short run, but you know, that's not your best long-term interest because we are part of the solution, we give the best value you know, that when you drive more volume through one of the national labs, it's much better than it's going somewhere else. Everything from the data we provide to the services that Steve mentioned, which differentiate as per many of the other providers and obviously to the cost. So, much more of an opportunity to talk partnership, get the conversation away from price or if anything, get the conversation towards, we need prices to migrate towards that need. You can't have a subset that's significantly lower and a subset significant higher getting to an average everyone is kind of be in a market price, which ultimately is what CMS wants to get to, so that enables the conversation to enhance the conversation that we've been having for several years. It doesn't change our motivation which has been very strong and if you look at what we've accomplished over the last couple of years, we did significantly mitigate the prices that we are facing four, five years ago through that discipline and when we talked about the fact that some prices aren't sufficient then we will walk away from volume if we don't feel that's appropriate. Not volume at any price it's like greater than therefore we have shown a desire, willingness and descended our value proposition to those payers and I think we are viewing the results.

Our next question is from Dan Leonard with Deutsche Bank. Your line is open.

Good morning. This is perhaps a somewhat related question, but can you talk about managed care contracting environment and what assumption you have in your guidance for 2018, is that any regarding a large managed care exclusive contracts in the industry and then also if no assumption baked in, what impact you would anticipate could occur? Thank you.

Yes, so for '18 I assume the continuation of our setup if you will with our access through the national players as well as through the regional players. I would argue that our access through healthcare insurance has gotten better over the years and obviously our objective which we talked about is to continue to get a better test 2018 to 2019. So what I'm saying in that regard is we can see you enjoy from a national exclusivity relationship with Aetna that's implied in our guidance for 2018 we feel good about that relationship is potential merger with CVS, we think it is an interesting development that might happen. We have a strong working relationship with CVS as well, so feel good about that and that's assumed in our guidance for '18. Second is we talk about that is how we know that a contract with United, with our largest dependent expires in '18. We love to get access through United as one of the national partners. We've described that we are working on that, we feel good about progress make. We have nothing to share there, but we continue to be hopeful that as we enter '19 we will have strong access and we do have access already with United Lives as another network provider in some states and for some carve-out plans that they have, and as I mentioned, the relationship continues to get stronger. We've announced a strategic relationship with Optum lifecycle management that continues to go well. Optum continues to buy physician practices that depending on our biggest customers in those physician practices so that will continue to build. And then, throughout the rest of our hundreds of contracts we have, you should assume in '18 that we have good expansion of those, and good - continuation of those and the price assumption that Mark talked about is the continuation of the access to our many partners we have throughout the United States.

And just to add to that specifically interesting question. We gave a pretty broad range 3% to 5%. So 200 basis points, so well I can't tell you explicitly what that means for getting that in the United or any other sort of potential changes. I can tell you that it's likely covered within that range whatever scenario might happen in within 2019 and beyond and then if we do get to appoint where there is something to share as Steve mentioned we will consider some change like that materially offset. We would communicate in a very time with fashion like you know, what's going on at that point and obviously give you some idea of what we think it might mean and then obviously as we got further in the year, we are planning another Investor Day in the call. We will give more detailed update on what the specs are as we near given everything we know at that time.

Our next question is from Ralph Giacobbe with Citibank. Your line is open.

Thanks. Good morning. I was hoping you can talk a little bit about expectations around, wage growth just given tight labor market. Do you expect pressures there and then maybe what you see is underlying wage growth over kind of the next couple of few years?

Yes. Ralph, we continue to look at our competitiveness of our wages to our broad workforce we employ about 45,000 people many of which are frontline employees. We believe we've been competitive in the past and the expectation for 2018 is the inflation we have on wage bill is about what we've been running at. Matter of fact, we track attrition of our employees and we put a lot of time in energy into retaining our employees. So we've actually spent a lot of time as a management team looking at the other aspects like people come to work around things like scheduling and the environment and their supervisors and so actually we've seen a slight reduction in our attrition of employees so forget about the value proposition we have on employees. And then prospectively, we think employees until has have better and better about working across diagnostics we run an engagement survey where we have a phenomenal participation rate about 90% of employees show up in a survey. And our engagement course for 2017 has never been higher; they are much higher than in '16. So we had nice pickup in engagements course and as you see in our announcement this morning we want to thank all those employees because these are the frontline employees in many aspects, so we have more attrition in other places that has helped us through this journey we've been on and so the $500 recognition that we are going to provide this year that's tagged to companywide initiatives. We think we will again get a lot of this people a good feeling about working at Quest, so we want to thank them for their hard work. So 2018 is above what you see in the past in terms of inflationary pressure on our wage though.

And to answer I think probably an impressive question, a many of our wage employees earn about, where at the middle of wages are targeted to end up, we also you know, obviously have many week employees who are not in the states or the cities that have this increase in minimum wage. So we are already above that market. If you are thinking about minimum wage and so when we look at the pressure on our wages certainly that's not a huge factor. But, the timing of the labor force is going to bring, unknown. But at this point, we've not experienced any dramatic pressure. To Steve's point certainly wages are one part of the equation, but we also provide health benefits for our employees and it's highly valued. And then the work experience itself is greatly improving. I'll give you one example, a lot of the investments we're making in our peaks and service as Steve referenced through enablement, we are also doing some of significant refresh to those centers, updating them et cetera. That makes phlebotomists work experience much more positive as well. They're really like not having to handle as many of administrative duties, they now can be done electronically and they can focus on phlebotomy, so there're other things that we're doing to offset some potential wage pressure but certainly we addressed where we needed to. So, market adjustments and we're not exposed heavily to inflation from general wage increases because we already generally pay a lot of our people at that minimum wage.

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

Hey guys, just a quick follow-up, Mark you made a comment in your prepared remarks about to-date in Q1, you have experienced nearly as much weather impact as you did last year, wondering I mean how should we think about that in terms of volume impact or on year-over-year comp, I mean is it just really due to the cold and minorities or cold throughout the country?

Yes, well, it's been nature's cold. I mean, we had precipitation events, you had [indiscernible] in Northern Florida, though certainly we had a number of weather events from ice to snow in areas which is unusual to some snow in Massachusetts and then some cold, although we know it's hard to really attribute cold, I mean, there are some times when it's been so cold where everything is closed, schools are shut down and so on. But generally cold, warm I guess some impact, we don't really calculate on our weather. So weather is more we see a day, weather is something going on that it have its travel to the extent that we look at that day's activity, we say, "Hey, there's definitely an impact, this is out of the norm," and so it's - there are some to that calculation, but we've been doing it long enough that we feel it's directionally crap. We just wanted people to be aware as they're thinking about the modeling from a various quarters that we don't know what the next couple months are going to blame, but last year January was pretty benign. We didn't get our weather until later in the quarter, and this year we've already had handful of weather events that kind of puts us already where we were for the full quarter last year.

At this time, we're showing no further questions on the phone line.

Okay. Well, thanks again for joining us today. We appreciate your support and interest, and have a great day.

Thank you for participating in the Quest Diagnostics fourth quarter and full year 2017 conference call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics Web site at www.questdiagnostics.com or replay of the call may be accessed online at www.questdiagnostics.com/Investor or by phone at 888-667-5784 for domestic callers are 402-220-6427 for international callers. Telephone replays will be available from approximately 10.30 am Eastern time on February 1, 2018 until midnight Eastern Time on February 15, 2018. Goodbye.