Welcome to the Quest Diagnostics Fourth Quarter 2019 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 copyrighted property of Quest Diagnostics with all rights reserved. Any distribution, retransmission or rebroadcast of this call in any form without written consent of Quest Diagnostics is strictly prohibited.I would now like to introduce Shawn Bevec, Vice President of Investor Relations for Quest Diagnostics. Go ahead.

Thank you and good morning. I'm here with Steve Rusckowski, our Chairman, Chief Executive Officer and President; and Mark Guinan, our Chief Financial Officer.During this call we may make forward-looking statements and we'll discuss non-GAAP measures. We provide a reconciliation of non-GAAP measures to comparable GAAP measures in the tables to our earnings press release. Actual results may differ materially from those projected. Risks and uncertainties that may affect Quest Diagnostics' future results include, but are not limited to, those described in our most recent Annual Report on Form 10-K and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K.For this call, references to reported EPS refer to reported diluted EPS from continuing operations and references to adjusted EPS refer to adjusted diluted EPS from continuing operations, excluding amortization expense. References to adjusted operating income for all periods excludes amortization expense. Finally, growth rates associated with our long-term outlook projections including total revenue growth, revenue growth from acquisitions, organic revenue growth and adjusted earnings growth are compound annual growth rates.Now, here is Steve Rusckowski.

Thanks, Shawn, and thanks everyone for joining us today. Well, this morning I'll discuss the fourth quarter and review progress on our two-point strategy. And then Mark will provide more detail on the results, then take you through our 2020 guidance. But we had a solid fourth quarter and ended the year by delivering record revenues, earnings and cash from operations. Strong volume growth from expanded health than planned network access, combined with outstanding execution of our operational excellence strategy helped us offset significant reimbursement pressure.For the fourth quarter, we grew revenues 4.8%, reported EPS was $1.86 and adjusted EPS was $1.67, up nearly 24% from the same period in 2018. Volume growth remained strong at 4.1%. For the full year of 2019, revenues grew 2.6%, reported EPS grew 16% to $6.13 and adjusted EPS grew 4% to $6.56 and volume grew 4.3%. In addition, we are increasing our quarterly dividend by nearly 6%. And this is the ninth increase since 2011.Before getting into the more details of the fourth quarter, I'd like to discuss how Quest is squarely within healthcare's AAA, as well as covered on PAMA and the recent passage of the LAB Act. So many providers within healthcare are focusing on healthcare's AAA, which is all about improving medical quality and the patient experience, while reducing the cost of care.Quest is dedicated to provide a great medical and service quality. One example is that we drive six input quality in our logistics performance by tracking specimen pickups. We're proud that our quality enables us to become a member of UnitedHealthcare's preferred lab network.Second, over the past several years we've made great strides on improving the patient experience. Investments in digital platforms and our patient service centers, as well as our partnerships with retailers such as Safeway and…

Thanks Steve. In the fourth quarter, consolidated revenues were $1.93 billion, up 4.8% versus the prior year. Revenues for Diagnostic Information Services grew 5.1%, compared to the prior year, driven by strong volume growth an easy compare and acquisitions, partially offset by higher reimbursement pressure.Volume measured by the number of requisitions increased 4.1% versus the prior year. Excluding acquisitions, volumes grew 3.4%. Importantly, we continue to see a sequential acceleration in organic volume growth in the fourth quarter after considering the benefit of the extra revenue day in the third quarter.Revenue per requisition increased 1.2% versus the prior year, primarily driven by an easy compare, partially offset by higher reimbursement pressure. Unit price headwinds were approximately 2.5% in the fourth quarter. This includes the impact of PAMA, which amounted to a headwind of nearly 120 basis points.As a reminder, the PAMA impact includes both direct cuts to the clinical lab fee schedule, as well as modest indirect price changes primarily from Medicaid. Reported operating income was $363 million or 18.8% of revenues, compared to $220 million or 12% of revenues last year.On an adjusted basis, operating income was $329 million or 17% of revenues, compared to $295 million or 16% of revenues last year. The year-over-year increase in adjusted operating margin was primarily driven by strong volume growth and ongoing productivity improvements related to our invigorate initiatives, partially offset by higher reimbursement pressure.Additionally, patient concessions were down approximately 40 basis points year-over-year. Reported EPS was $1.86 in the quarter, compared to $0.92 a year ago. Adjusted EPS was $1.67, up approximately 24% from $1.36 last year. Cash provided by operations was $1.24 billion in 2019 versus $1.2 billion last year and capital expenditures were $400 million in 2019, compared to $383 million a year ago.Now turning to guidance. Our outlook…

Well, thanks, Mark. Well, to summarize, we had a solid fourth quarter and ended the year by delivering record revenues, earnings and cash. Quest is well positioned in 2020 to grow revenues and earnings despite another year of meaningful reimbursement pressure. And then, finally, our guidance for 2020 is realistic and achievable.Now, we'd be happy to take your questions. Operator?

Operator?

Thank you. We will now open up for questions. At the request of the company, we ask that you please limit yourself to one question. If you have additional questions, we ask that you please fall back in the queue. [Operator Instructions] Our first question comes from Ricky Goldwasser, Morgan Stanley. Your line is open.

Hey, Ricky.

Yeah. Hi. Good morning. M&A, obviously, is an important component of your guidance. And when we think about the transactions that you announced recently. It seems the pace has slowed down in the last 12 months. What are you seeing in the environment that you think is driving the relative slowdown? Is it that you're seeing less in the pipeline? Or are the labs waiting to see what PAMA results is? Or is it more on your end?And then, one follow-up to that is, just, given the headwinds that you're going to see this year around reimbursement wage pressure in the additional investments, should we still assume that the cost cutting the integrate program would drive a net benefit to the top line – to the bottom line.

Yeah. So thanks, Ricky, for the question. So to remind everyone, we have a long-term goal of having 1% to 2% of growth through acquisitions as part of our five strategies to accelerate growth. What we have shared is that we made good progress against that over the last several years. And because of the three elements that we see at play in our marketplace, we do believe that it affords us an opportunity to consolidate the market.So last fall, we did increase our expectation and our goal to get to about 2% through acquisitions. And if you look at 2018, we beat that number. If you look at what we just reported for 2019, we're a little light. But if you look at 2018, 2019, we're about that 2% level. And that 2% is a CAGR, because as you know all acquisitions are somewhat lumpy. We're going to have some stronger quarters. We're going to have some weaker quarters in terms of acquisition growth, but we're shooting for that 2%. So what we just announced in the last several weeks we think are good indications that we continue to work on our pipeline. We play -- Blueprint Genetics is a good opportunity to invest in advanced diagnostics that will provide some growth and some capabilities to organizations that we think are helpful to accelerate growth.And then second is what we also announced around Memorial Hermann is a great example of what we have done in the past and we'll continue to do more of. And we're actively engaged with many other integrated delivery systems around that concept. And to remind you it's comprehensive where we're helping them with their hospital laboratory, making them more efficient. In that regard we're helping them with their reference testing for the hospital. And then finally in the Memorial Hermann case we bought their outreach business.And so what we have shared in the past our funnel is strong. But these deals become more complicated. They're big systems. They have many hospitals as many stakeholders. So this is just taking more time. So funnel is good. And we just announced two deals. And so we think we're starting 2020 with a good pop of acquisitions and we're also hopeful there will be more to come throughout the year. So Mark?

And on your integrate question, Ricky. Thank you. When you think about the pieces that are headwinds and tailwinds, you mentioned the headwinds certainly we've got the pricing pressure we talked about 200 basis points, we've got our typical way to inflation on about $3 billion wage bill and then we said there's incremental pressure on that. And then you've got the investments.So the 3% productivity, we drive in order of magnitude through our invigorate program alone would not be enough to offset all of that and drive bottom line growth. But importantly the other tailwind is organic volume growth and the contribution of other acquisitions between -- besides Blueprint. And so that's really -- it's all fungible. But that's how we're able to grow our bottom line.So invigorate alone about 3% productivity, it take 2% price, it take a couple hundred basis points against our wage bill of $3 billion, it take the advanced diagnostic investments. They're larger than just invigorate. So it's really the organic growth of our business and the contribution of the profitable outreach acquisitions that really help us to grow the bottom line.

Thank you.

Thank you.

Thank you. Our next question comes from Kevin Caliendo with UBS. Your line is open.

Good morning, Kevin.

This is actually Adam Noble in for Kevin. Thanks for taking the question. I know it's still pretty early in the year, but could you talk to what type of share gains, volume growth you're seeing from United and some of the other 2019 new access plans year-over-year so far in January? And are you still seeing them outcome the rest of your book? And if yes, do you have any visibility where those share gains are still coming?

Yeah, let me provide a little bit of color then Mark will add to it. So what we shared throughout 2019. Given our volume growth and what we just reported the volume growth we're picking up share. And, yes, we're picking up share from United as we had expected. And then second we'll we pick up share for United, we believe we're actually picking up share from other payers and other portions of the business.We also have managed our Aetna relationship quite well. It continues to be a strong partner of ours with them letting back into the network of one of our competitors -- as well. So we feel good about the progress made in 2019. And what I say it was implied in our guidance for 2020 is a continuation of that market share gain program and our acceleration of growth strategy. As we said back in Investor Day 2018, we believe that the new access changes that we now have afford us about $1 billion worth of opportunity.We have a good start on that in 2019. And clearly we have more opportunity in 2020 and beyond. Incumbent at all that assumes that we're going to pick up share. And as I said, there's a lot of aspects of that and we're just getting started with – for a lab network for United. And so therefore finding our guidance is picking up share again and some of that will come from the United. Mark?

Yes. So when you look at our performance last year, we would say that the typical non-network access piece was probably similar to our historic and historically over the last couple of years or get roughly 50 to 100 basis points of growth. And so the growth beyond that you can pretty much attribute to network access.And I want to remind is that it's not just United we also got into Horizon Blue Cross in New Jersey. We got into a portion of Anthem in Georgia. And as Steve mentioned, while the United and the other two plans access increased helped those, specifically it also helped us grow and other payers as well.So we are definitely growing share and that share is coming from multiple competitors not just our chief competitor. The other thing I'd say, you asked about January, well we're not going to comment on January, specifically obviously. we're almost 112 of the way through 2020. And if we were in any way concerned about that progress we certainly would have built that into our guidance. So we're considering January performance thus far as we communicate guidance today.

Got you. And if I could just sneak in one more. Is there anything you could share at this point with regards to the assay vendor consolidation any timing of that? And it would just be super helpful.

Yes, sure. We actually did a very thorough job of evaluating all the different alternatives. We have selected a vendor for that. And we've started the deployment of the systems that we have to deploy to allow us to achieve that eventual $35 million in savings. And so we've started to deploy those as some of our larger facilities.

Got you. Thanks for the questions.

Thank you.

Thank you.

[Operator Instructions] Our next question comes from Lisa Gill with JPMorgan. Your line is open.

Hi, thanks very much.

Hey, Lisa, good morning.

Good morning. I just wanted to follow back up on the comments around continued reimbursement headwinds. I know when I saw you a couple of weeks ago in San Francisco, you did talk about pressure on the commercial market as we think about that? And Mark, I think you talked about continued reimbursement headwind when being roughly $0.15. Can you maybe just give us a little bit more color around where you're seeing that from a commercial market perspective? And then I just wanted also just an update on how you're thinking about your retail strategy?

Mark do you...

Yes. So Lisa, I don't recall $0.15. I don't think that's something that would represent the reimbursement pressure. So when you're looking at non-PAMA related headwinds. As we've shared over the last 18 months or so, a lot of that is not coming from third-party, the traditional payer reimbursement but it's increasingly coming from the portion of our business that is direct to client bill. And the largest piece of that is hospitals, it's the high end testing we do what we typically refer to as reference work. And we've described how when you think of the set of criteria that a hospital like basis decision in terms of relationship, test, menu, quality, history and price there's been more of a shift to price over the last several years. And we're speculating a lot of that is driven by some of the pressure they're under.So, whereas, in the past you might extend the contract with the understanding that you had a good reasonable price and they had good quality and all those kind of things. More and more of these are going to RFP where there's an opportunity for price competitors to come in and compete on price very highly. So that's one of the dynamics that have definitely increased is the hospital-based client build.The other one we've talked about is in several states where there are no any markup laws. Physicians can actually send work to us. And build a third-party themselves. And you basically mark up the work that we do. And that is a direct build this an office that we compete. And you can imagine that if there's profit mode for those customers. Any nickel they can say from any lab is something that's attractive to them.So that is definitely a source of a lot of our pricing headwinds. And then there is a small piece in third-party payer as well as some older contracts are getting renegotiated and getting more in line with the current pricing environment.

That’s helpful.

Yeah, on the retail strategy, it goes back to as I outlined our five strategies to accelerate growth. And it's all part of our consumer strategy and the consumer strategy is those multiple strategies. And one piece of it is, we want to have better physical presence. And so we've been working on getting better physical presence for a number of years.To remind everyone we have about 2,100 patient service centers. We have over 4,000 lobotomists and physicians' offices, so in excess of 6,000 access clients. And with those patient service centers what we started on this strategy, we had about 20% and we're retail like settings, more strip walls convenient locations, not in medical office parts. And our goal is to get to 50%. So we want to have 50% of our centers in more retail like settings. And so to help us with that, we actually have formed some partnerships with Safeway, relationship has gone well. We're in about 150 stores. We then added to that our joint venture with Walmart. We continue to make progress there with their patient service centers. You also might see that Walmart is making some other loans in health care. We're engaged with them on that.And then finally as we continue to talk to you and have relationships with other retail like partners in health care as they continue to advance their strategies as well. So you're building at 20%. We're about 30% now with retail like settings. We've got more work to do to get the 50% but that's our goal.We believe it's important that we have more retail like settings, because as I said in my introductory remarks, this market is getting more and more consumer oriented every day. We believe that the consumer will look at the value proposition we'll look at the triple aim. So I remind you it's great health care, it's great experience at great pricing, and we think our strategy delivering really points us to the right direction.The physical presence and the convenience of walking into a Quest diagnostic facility, we think, is part of that. So progress made, but more work to do and we're really fortunate to have some of the partners we have and we think we're on the path of getting to that 50%.

Great. Thank you.

Thank you.

Thank you. Our next question comes from Derik de Bruin of Bank of America. Your line is open.

Hi. This is Ivy [ph] on for Derik today. Thank you for taking my question.

Hi. Good morning.

Good morning.

Good morning. I appreciate the color on the guide so far. While you talk about the incremental headwinds on the weight fill from the labor cost, can you help us size the pressure on margin from that labor cost? Thank you.

Yes. To give a little bit of color, operational mark, we view some of the -- than what's implied within our guidance within reason. First of all, it's a very strong labor market and separate our exempt workforce, our professional workforce from non-exempt.Our non-exempt workforce is where we feel the pressure. Non-exempt workforce, there's various areas of our value chain. We have about 12,000 lobotomist. We have over 3,500 couriers running our logistics operations in automobiles. We have thousands of what we call specimen processors. And so, if you look at the front end of our value chain, that's where we see some pressure.So what we're finding and it's all very local, is that we have pressure in some of those geographies to up our wages more than we have historically, because we have to be competitive with other competitors, if you will, for those resources. So that's putting pressure on our wage bill. So, Mark, do you want to give a perspective on what that means in terms of scale?

Yes. So we're not going to size it specifically. But as Steve mentioned, this competition for those areas doesn't just come from the lab industry or specifically for healthcare. Obviously, with lobotomist, it's healthcare. But when you think about couriers, people drive vehicles are desired by multiple industries.And then, the same thing for the specimen processing, which generally is, I don't like the term, but unskilled labor. And so, there's many, many other industries as well that might be a target for that labor. And so, we are not really responding. I'll answer a question that you didn't ask, but might be in people's mind to increases in minimum wage.We don't generally have people at minimum wage. It's really more responding to market forces in the specific markets where we were finding higher levels of attrition and finding it harder to attract the talent that they need. So, really, as we look at this in the near term, it's an increase to our annual wage inflation. But in the longer run we see the value coming back in lower turnover and higher quality employees.

Thank you. That's helpful. And then just on the $0.15 dilutive from the investments in advanced diagnostics, can you help us unpack that impact? And then, just a bit more details on how to think about the margin trends for FY 2020 and beyond? Thank you.

If I heard the question correctly, you're asking for some color around Blueprint Genetics of the $0.15. And just provide a little bit of strategic logic and operation and how this will work? So, again, we're investing in advanced diagnostics. We have shared that we want to continue to accelerate it.We just reported that if you look at our genetic and esoteric testing was up by about 5% last year. We continue to invest in that in a number of areas. And, specifically, we believe the acquisition of Blueprint Genetics bring some nice capabilities and a proven commercial organization into Quest. It brings us some nice capabilities atypically related to the variant interpretation that I talked about in my remarks. And then also specifically applying that to some of the specialty categories. They have over 200 panel tests today.And so, if you look at their coverage, okay and their depth of interrogation of the data. It provides us a nice capability to leverage what they've already done but also bring to that where we want to do more, typically around rare diseases where we like and interrogate the data to find the insight. So we're really encouraged about the capability we're just onboard. And Mark? We talked about the impact on our earnings in 2020. Want to provide some color to it?

Yes, sure. So I would differentiate these investments from the wage inflation and arguably the wage inflation has increased in our long-term cost structure all other things equal. And the reason we call these out is because we don't expect these to be long-term dilutive, certainly Blueprint not only will turn from being dilutive to accretive over a period of time but as Steve mentioned, the capabilities that it brings to us to actually create value in other areas including being more competitive winning more business but also reducing the cost structure and other work that we do in this space.The work we're doing on liquid biopsy is something that will come to a point within the next couple of years. And so either we will stop investing or hopefully self investing and be successful. So it will no longer be a drag on our earnings. And then certainly the work we're doing around low-cost sequencing is also a short-term investment and we're highly confident that that will be successful and certainly will no longer be a drag on our earnings. So these are really temporal investments, that doesn't mean that there won't be other things that we invest in in a couple of years. But these specific investments will be fairly short term.

Great. Thank you.

Thank you. Our next question comes from Erin Wright with Credit Suisse. Your line is open.

Good morning, Erin.

Hi, good morning. Are the preferred lab networks at this point really helping to steer volume? Can you describe some of the efforts that UNH is implementing to incentivize physicians and patients to actually use the lower cost preferred providers here under the PLN? And then my second part of the question would be, can you elaborate on your lab stewardship program and how that's helping to position yourself as a strategic partner with the hospital labs? And can you give us some metrics maybe how that traction is going with that program? Thanks.

Yes. So Preferred Lab Network, we've said in the past it really got started in the fall where UnitedHealthcare where their fully insured books starting to pull some of the principles of deferred network. And then beyond that it's really just getting started in 2020. And we're optimistic that that will provide us again to gain share. So Mark specifically to...

Yes I'd say thus far what's publicly shared by United and we've talked about is they're starting last August. They're really focusing on how to network usage. And they've done a number of things to try to reduce that including sharing that information with members of the PLN, where we can go out and target some of those accounts and explain to the physician why there's a benefit in steering that to a preferred lab member including importantly the quality and other things that really limited the number of people that were included in the preferred lab network.But they're also doing some other things with the physician directly that you probably should ask United about as they've shared with us that they're giving incentives for them to above and beyond what we might do when we go and call on them and explain why it's in the patient's best interest, we're also doing some things to make in the physician's best interest to move away from using out-of-network providers. And there's a fair amount of out-of-network amongst all of the major payers that is a source of higher cost and quite often not the quality that you'll find in the members of the PLN.In terms of the PLN itself as we shared there were a couple of states that were rolled out in their fully insured book. Beginning in January they're small accounts, they expanded more broadly. And in the middle of the year there's going to be pretty much a full rollout including their larger members and they're fully insured book throughout that time they still have to sell the members where ultimately even though it's fully insured over time have to agree because it could have implications for premiums and so on all of that takes time.And then there's the sponsored plans, which is the next step. So this is a long-term initiative that certainly is reaping some benefit. But it's not in terms of the step change where this is going to overnight move on dramatically. And that's why we talked about multiyear tailwind for a lot of the efforts because some of this is going to take some time. So all in the right direction, but something that is going to take a while to get to where its ultimate level would be.

So Erin you asked about the lab stewardship program. And let me bring it back to, again we're actively working our strategy to build relationships with health systems, hospital health systems. We've been actively working on this for a number of years. And when we go into a health system and it is at the C-suite. We talked about our ability to help them meet their hospital more efficient and effective in diagnostics.And then secondly, as part of that the sophisticated testing that is sending out, we could do more for them and we can do a better job of how we manage that.And then thirdly, when we always get into those conversations, we then now with PAMA. And with the pressure for commercial sales, we have conversations around their outreach business. Does that continue to make sense for them to have it? In the case of more there was an example where again a hospital services business. So as we get in there it's all about building a relationship. We help them manage their diagnostics.And our last stewardship program is being deployed through many of our good accounts, it's going quite well. And this is all about getting smarter about diagnostics. And it goes back to the notion of a triple lane, it's about better health care, it's about better experience that's at lower cost. And what we're finding is as you get more analytics like everything, what you find out is there's over utilization and we need to get rid of that to make them more efficient. But what we're also finding is there's under utilization. And so we become more of a consultative adviser in terms of diagnostics. And one thing that we like to talk about is there's nothing more expensive than a bio-diagnosis for a hospital setting.And so with their last stewardship program and where the relationships, we're working proactively with our partners to be able to deliver a better answer for the specialist. And again Memorial Hermann is a great recent example of the listening to our story, understanding what we're going to do for them and now we have a new partner in one of the largest cities in the United States. So we're really encouraged about the progress we've made over the number of years in the prospects in front of us.

Operator next question?

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

Hi, Bill.

Hi. Thanks. Good morning, everyone. I guess

Good morning.

I guess, a multipart question here, Steve. So first, we appreciate that there's considerable pullback by some providers, concerning the executive order around hospital pricing transparency. However, since this does include diagnostics, should we be thinking about this as a potential added risk from a long-term reimbursement standpoint? And then also, and separately, given the interest in the preferred lab networks by a number of payers, not just United, should we expect additional announcements in 2-20 concerning some of the new formation of these? Thanks, guys.

Yes. So, thanks, Bill. The first part of your question has to do with transparency and surprise bills and pushback from providers, about that, and its complex, as you know. But going back to my prepared remarks, we believe, if you just look at the value proposition we bring into marketplace, we'd like to get more and more exposure to the prices that are out there for us.Because as I said, with the full confidence, we believe, we're the best deal in town. And so, making sure consumers see that, making sure physicians see that, making sure that plans are working with us to move more of their laboratory services to a great value provider like Quest Diagnostics is what the strategy is all about.And so, the more visibility of that is a good thing for us. And we're doing this with the plans and the preferred lab network is part of that. We're also doing this with employers with the plans, because as those employers look at their employee cost of healthcare, they're looking at what they can do to help their employees out and we believe our category is a good example of where they can do that. But if they do it for us, they could do it also with other healthcare services like radiology and physical therapy. So, we think it's a good opportunity for us.And then, finally, you asked the question about preferred lab network. We continue to work with other partners. We have the nationals, but we also have a number of regionals. And as you know, we enjoy a large presence in Florida. If you look at Florida Blue Cross Blue Shield, even though they haven't announced a preferred lab network, we are very strong in Florida and we have a great relationship with them.So in essence, you could say they are our preferred labs, even though we haven't announced it. So as we work through where we go with this long-term, you'll see what others are willing to provide publicly. But this will continue to be a trend that we'll keep on working. Mark?

And when you think about the preferred lab network, whether or not another major payer is very overt in announcing a preferred lab network or not, you will see. But some of the elements within the preferred lab network, we already had for some payers before our relationship with United. And some of them have actually expanded some of those.So when you touch on what are some of the advantages of the preferred lab network, one of them is, when I described the out-of-network usage and having the payer actually partner with us to educate physicians around the cost of prescribing high -- the high price out-of-network labs and how that impacts our patients with deductibles and how it could impact denials and so on and so forth. So we're doing that with a number of payers.There's also a plan, a very large managed Medicaid plan that had put in some pre-authorization requirements for certain test categories, where they were concerned about the size of the panels and the appropriate clinical appropriateness of some of the offerings. And because we -- and then, some others, it's not us alone, do it appropriately, they've actually created, in essence, what they call a gold card, which means that we're exempt from that pre-authorization.So not only does that avoid a headwind for us, so that’s the second thing, is it makes it easier for physicians to order from us. They don't have to go through perhaps. So actually in essence it should steer more work to us. And then finally another one I'd comment is in the past as we described it what we do outreach acquisitions. It was a huge windfall for everybody. Other than us, certainly we would still get great economic benefit as I've laid out in the past at Investor Day is about how they're very, very accretive despite the pricing dissynergies.And so what we've partnered with a number of payers on is that actually we share in some of that price savings initially. So it's not all a windfall for the payers and others. But actually some of that value comes to us. So a less severe pricing dissynergy headwind for the first couple of years.So that's just a couple of examples that you may not hear a very, very over an announcement about a preferred lab network and where the payers are partnering with us in the areas that they know we bring critical value to really drive more volume towards us.

Operator, next question?

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

How are you, Donald?

Great. Good morning. Thank you for taking my question.

Good morning.

Good morning.

Yes. So on the heels of this sizable Memorial Hermann PLS deal. I just was hoping to maybe get a sense kind of maybe looking back and looking forward of kind of the momentum you're seeing in the PLS business? I think a couple of years ago, you loosely sized it for the investor community saying it would be maybe 50 basis points of top line growth that might be just question I'm wrong but that was a couple of years ago. Maybe can you update kind of what your thinking there and the current conditions?

Yes, yes. So, thank you for the question. And our professional lab services business is something we've built over time. We've got a nice referenceable book of business and clients that we continue to build on. We actually did say in our prepared remarks that we announced another relationship in Tennessee.Memorial Hermann is yet another example. And what I'll share with you – you'll hear more about more professional and lab services business going forward. In our 2019 results we did have some growth from it. I'll Mark comment on the specifics around that.But we believe it's an important element of again walking in and having an engaged conversation with good delivery systems around their lab strategy. And helping them make their hospital laboratory better, more efficient and more effective as an important part of that. And so now we have a proven trucker being able to do it. We have augmented that with their lab stewardship program and then we also have logged with that with our clear ability to be able to acquire outreach businesses. It will provide more of the sophisticated testing, particularly around advanced diagnostics. So it's moving along nicely and it's becoming a real stand for us and delivering the growth that we expected. Mark?

And I think the 50 basis points is plus or minus a reasonable number. Certainly as we look at the last couple of years the contribution that could accelerate because we do do some PLS deals, as we mentioned this morning state of Tennessee that are just PLS deals stand-alone. But then as part of what we really still believe will be increased indices broad deals with hospital partners around selling the outreach around getting that reference work and doing the PLS deal, especially if some of these are larger systems.And we have a very deep pipeline. PLS contribution could grow to be larger than that. Certainly we'll talk about that as we see that happening. So yes, the 50 basis points is reasonable, very happy with it and that's something that we're hoping and certainly could see accelerating down the road.

Yes the interesting thing too that we mentioned in the press release for Memorial Hermann, but many of these systems also have their own plans -- their own health plan. So what we're finding is kind of a secondary benefit has become their preferred or their exclusive provider laboratory service within their plans, and Memorial Hermann is a good example of that. So it's an added benefit of having these relationships.

Operator, next question.

Our next question comes from Matt Larew with William Blair. Your line is open.

Hi, Matt.

Hi, good morning. Thanks for taking the question. I wanted to ask on the retail side. As that footprint continues to grow, could you characterize with that volume in terms of just site shift versus incremental market share shift as you alluded to on the network access side?And then in the past you've described potential opportunities to expand the relationships with some of those retail providers in terms of the services that you're involved in any progress that you anticipate there?

Yeah absolutely. So first of all if you think about our value chain. We actually do the draws for about 40% of our volume, okay? That's not through our true bottoms that are even each in service centers or in physician offices. That trend is actually moving more to our site. So we're doing more and more to us. It's a small gradual shift to us, which says 60% is still provided by physicians or our clients and hospitals. So think about the our front end if you will of the value chain that way.What we believe is if we have a better experience and in better locations, we're going to be able to get share. And so we believe that we're we are growing the front end that we deliver ourselves faster than our overall growth because of this shift in the marketplace and also the experience being good as well.And as far as other relationships all -- this is a health care service providers are looking at their strategy. We mentioned Walmart earlier, they're a big player in health care. They're getting bigger with the opening of some clinics. We have great partnership with Aetna, and onwards with CVS, CVS Health is building up pumps, which is an extension of what they've done with their MinuteClinic. We were a partner of theirs with MinuteClinic.And as that strategy evolves we'll have a presence with them and others as we go forward. So -- and also we will continue to organically to do some of the retailization if you will of our fleet of patient service centers, because we do see opportunities within local druggists to do some of it ourselves. So it is a multiyear strategy that we keep on making progress against and partnerships continue to be an important part of it.

Operator, next question.

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

Hey good morning, guys. Yeah, so my question is on Memorial Hermann. So do you think that with this it's one of the largest hospital systems out there? Do you think this is finally the proof that outside of UMASS you're starting to get traction on the hospital side?And then I guess if you guys don't mind just giving us kind of a view on what the tail benefit is from these comprehensive PLS deals where you're buying the outreach, you're getting the reference and basically the whole lab business for the whole hospital system?

Yeah. So first of all as we said, I think we have a lot more interest today than we did two or three years ago with integrated delivery systems. But what we just announced with Memorial Hermann is complex and so these deals just take a longer period of time.We do already have over the years a number of significant systems. If you remember when we bought the outreach business from Dignity, which is a major player on the West Coast. PeaceHealth is another example. I'll remind you we have a long-standing relationship with UPMC in Pittsburgh. We have a long-standing relationship with INTEGRIS in Oklahoma City.So we have a long history of working actively with these great delivery systems long before the deal before -- with UMass. And I would argue this is a good example of a large system in a large city coming in our direction. And a good proof point that there will be more like this to come.And the reason why Memorial Hermann chose us is because we have this proven history of being able to pull it off. We can help them with their hospital. We can help them with the reference work, we can buy their outreach business. We can integrate it. We could tie in to their physicians, we can help them with their health plan. So we have a long-standing history and credibility with a referenceable book of clients that serves us well.Because laboratory testing is an essential part of running an integrated delivery system, it's 2% of costs, 70% healthcare decision-making. It's critical that we're working with a partner, they get it right. So, Brian, I think, we do continue to see this as a good indication that there will be more to come. And this is a major system that we're happy to be able to announce.

Operator, next question.

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

Thanks.

Hi, Ralph.

Good morning

Hi, Ralph.

Just, I was hoping you can give a little bit more on sort of the underlying volume and pricing mix assumptions just embedded in guidance? And then, secondly, just quickly, I wanted to clarify the wage pressure comment. I though, Mark, I heard you say a couple of hundred basis points higher, just want to make sure I heard that right? Thanks.

Yeah. So let me address the wage piece and then I'll turn it back to Steve on the volume of the guidance. So no, a couple of hundred basis points of the total wage pressure. So what we're saying is that, historically, it was at a given level. And we were pretty consistent with how we did our annual merit increases. And then, this year we're funding more increases. So, in total, it's several hundred basis points.

Yeah. And so, if you look at our initial guidance of 1 to 3, contemplated in 1 to 3 growth are the acquisitions that we've talked about, which we historically have done, which says that there's organic growth in there. We've also said that we have less reimbursement pressure in 2020 than we had in 2019. We've sized that to be about 200 basis points of an idea of the scale. That helps us some. Okay?We then have these new deals that we just talked about, they're going to provide PLS. As we said, they're going to start to ramp particularly in the second quarter. So that will help us with some of the growth. And so, therefore, when you go through all the math, we have to have volume growth. And we have to pick up share and that's implied in our guidance.So entirely consistent. Okay? What we've told to you before, is that 2019 was a good start. But it doesn't start with 2019. We're going to continue to build on that momentum. And we will continue to see access improvement of gains and share with the preferred lab network, with the other payers that we brought into it, our full last year and that implied in our guidance as grow through acquisition. And growth through market share gains related to work with the payers and other parts of our strategy.

Operator, next question.

Our next question comes from Mike Newshel with Evercore. Your line is open.

Thanks. Can you just comment on seasonality for 2020? We obviously have the extra day from leap year in the first quarter, but are there any other calendar effects or comp issues just to call out?

Yes. I mean, it gets a little bit complicated. So there's an extra calendar day in Q1. But it's actually not really a full day because of the data we could it is. So it gets a little bit complicated. So there's – in the year there's definitely an extra day. There's a chunk of that in the first quarter. If you recall in 2019 we called out an extra day in Q3. So you should think about that when you size Q3 because that will not repeat the way the calendar is falling.And then there's the typical seasonality around some of the floating holidays. And then the last thing I'd point out is that some of the fixed holidays in terms of the day of the week matters. So when you look at where things like the 4th of July and Christmas and New Year's fall, there can be a difference, the worst being if those are a Tuesday, Wednesday and the best thing if those are weekends. So I'd point to those being some of the things. But you – I'm sure you can imagine that within a 200 basis point range of revenue guidance we've contemplated all the scenarios that might play out there.

Operator, next question?

Our next question comes from Stephen Baxter with Wolfe Research. Your line is open.

Hi, thanks for the question. So obviously a lot of moving parts in the guidance today including the investments you're making. I was hoping you could help us understand a little bit more explicitly what the guidance is embedded from an op margin perspective? If I looked at this year and took out the United out of network impact, I would have seen margins I think roughly stable year-over-year. So do you think that's achievable again as we go into 2020? And if you can add on any expectations for below the line items, the interest expense, tax rate anything we should be considering there that would be different than 2019 in our models? Thank you.

So let me address the latter. Interest expense and tax rate will be pretty consistent. The other area where we've had a number of people ask questions recently as equity earnings. And that growth has been certainly largely driven by our JV with IQVIA our Q Square JV that we set up several years ago that have been continuing to drive earnings growth.One of the investments that we called out our liquid biopsy investment actually comes to us through an investments that we have with a third party. And the accounting rules dictate that we have to take our share of those losses and even months an investment in this company. That will be in the equity earnings line so that will dampen somewhat the equity earnings growth but it's all again in that $0.15 that I called out earlier. So I'll turn it back to Steve for the other part of your question margins.

Yes, margins, we've been consistent where we haven't guided around margins because we have a mix of businesses. We're driving growth and we're driving a return on invested capital. And we had provided outlook around growth and earnings per share. We think that's the best way for us to drive shareholder value. So we're not going to really comment on what the margins will be year-on-year. But we go through the math, you can get it from private markets could be based upon the top line growth and what we have guided as far as our EPS growth.

And the other thing is that margins are not given. So if we're at the low end of that revenue guidance versus the high end, it will have the impact on margins because as we've shared previously that organic revenue growth comes through a higher drop-through than our fully loaded margin. And we're depending on that as I shared with Ricky with her initial question. Our invigorate program alone can offset in a large proportion of the headwinds. But really the bottom line growth and the margin -- any margin expansion will come through that organic revenue growth.

Operator, next question.

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

Thank you. Good morning.

Good morning, Jack.

Hi. One clarification and one strategic question. Clarification on the fourth quarter, I was curious if you could weigh in on how much you might have contributed? I know that Hooper Holmes acquisition last year had a little bit of that?And then strategically just given the dilution associated with the Blueprint acquisition that's, obviously, unusual in terms of the framework of deals that Quest has done in the past. I'm curious if you could just weigh in just the appetite for deals like that versus -- I guess what we're accustomed to in terms of tuck-ins on the outreach side?

Yeah, the Blue was a small competitor. As we've shared in the past in this point of care, we certainly get some flu testing when the flu season spike. So yeah it was a little bit of tailwind, but not anything notable.In terms of our strategy, I want to ask Steve…

So Jack we're always looking at aligning our adjustments around our strategy and having a balanced approach. And related to acquisitions we shared, typically what you're seeing for us is acquisitions falling in one of three categories. One is regional laboratories. We've talked about Boston Clinical Labs that’s a small regional laboratory we just acquired. We did one in Missouri last year. So we'll continue to pursue those.Second hospital outreach business is Memorial Hermann is a good example of that. We like those deals are accretive to our earnings. They provide real growth. We really like the stickiness if you will of the customer relationships we take on board and it keep capability building. And so Blueprint Genetics is an example of capability building.We thought it would be prudent for us to make an investment there. We think it's very consistent with our strategy. It's modest in size, but it's going to give us a nice capability around bioinformatics, around the variant, interpretation that I spoke to. It'll allow us to achieve that strategy of accelerating growth in advanced diagnostics, which is a category we shared in the past, our definition in genetics and molecular we do over $1 billion. And we believe that that is prospectively a great opportunity for us to continue to invest and that's why we made it.So we will continue down that path of a balanced approach consistent with our strategy with deals that we can make money for shareholders and trust that will make any deal including the ones we just announced, we have a path to value creation for our shareholders.

And just one final comment. I mean typically Jack with our acquisitions the value creation has to come directly from the book of business we're buying. And while certainly the book of business we're buying from Blueprint will become better from a profitability standpoint. Really the value creation goes well beyond that book. And as we've mentioned earlier capabilities it brings will benefit everything we do in that space. And so the capability, a description that Steve gives really means that it's going to create better margins and better competitiveness in space outside the specific test menu and book of business that we're acquiring.

Thank you.

Operator, last question.

Yes, our last question comes from Ann Hynes with Mizuho Securities. Your line is open.

Hi, Ann. Good morning.

Hi, good morning. So, I just want to ask about cash flow beyond 2020? I know your CapEx is a little higher, just because of the new facility, should we assume that CapEx run rate goes down after 2020?

Typically, I don't give any kind of guidance beyond the current year, Ann. But what I will say is that, this is the largest year for Clifton, 2020, we're expecting to be operational in 2021. The Clifton facility has been the driver certainly this year, last year and even back into 2018 and the increase in our relative level of capital spending. We haven't announced any similar plans like that. So you might infer from that that capital spending might come down a little beyond 2020.

Have you disclosed how much you've been investing in CapEx for Clifton?

We haven't by year, what we have disclosed that it was about $0.25 billion investment over three years.

Okay.

You might have seen as well that we recorded a gain on the property sale with self focus…

Yes. So we sold our Teterboro property and we're going to lease back right now until we exited and moved to Clifton and that was a big contributor to the year-over-year GAAP earnings gain. We adjusted that out of our adjusted income, but it was a nice cash inflow.And as you know, Ann, that goes into financing, not into operating cash flow. And actually the tax on the gain actually goes against operating cash flow in 2020. So from an accounting perspective, it's a little bit disconnected. But we actually got quite a bit of cash from the sale of Teterboro at the end of fourth quarter of 2019.

Yes. So when we built the business case on Clifton investment, we assumed a certain sell price for the Teterboro facility. We really exceeded that expectation. So we feel good about the business case and what we're putting our capital budget against.

All right. Great. Thank you.

Thanks, Ann.

Sure. So thank you very much. Appreciate your engagement. We appreciate your support and look forward to seeing you in our travels. Have a great day.

Thank you for participating in the Quest Diagnostics fourth quarter and full year 2019 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 assessed online at www.questdiagnostics.com/invest or by the phone at 866-357-4210 for domestic callers or 203-369-0125 for international callers. Telephone replays will be available from approximately 10:30 AM Eastern Time on January 30, 2020, until midnight Eastern Time on February 13, 2020. Goodbye.