Labcorp Holdings Inc. (LH) Q2 2008 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, welcome to the second-quarter 2008 Laboratory Corporation of America's earnings conference call. My name is Clarissa and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the end of this call. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. David King, President and CEO. Please proceed.

Thank you, Clarissa. Good morning and welcome to LabCorp's 2008 second-quarter conference call. Joining me today from LabCorp are Brad Smith, Executive Vice President, Corporate Affairs, Brad Hayes, Executive Vice President and Chief Financial Officer, Ed Doddson, Senior Vice President and Chief Accounting Officer, and Eric Lindblum, Senior Vice Price President, Investor and Media Relations. This morning we will provide a review of our second-quarter and year-to-date 2008 results, then talk about current and long-term growth drivers and how we intend to capitalize on them. Later in the call, we will review guidance for 2008 and cover a few anticipated questions. I'd now like to turn the call over to Brad Smith, who has a few comments before we begin.

Before we begin, I'd like to point out there will be a replay of this conference call available via the telephone and internet. Please refer to today's press release for replay information. This morning, the company filed an 8-K that included additional information on our business and operations. This information is also available on our website. Analysts and investors are directed to this 8-K and our website to review the supplemental information. Additionally, we refer you to today's press release for a reconciliation of EBITDA, which is non-GAAP financial information discussed during this call. I would also like to point out that any forward-looking statements made during the conference call are based upon current expectations and are subject to change based upon various important factors that could affect the company's financial results. These factors are set forth in detail in our 2007 10-K and subsequent filings. Now, Brad Hayes will review our financial results.

Thank you, Brad. Our second-quarter results are as follows. Net sales increased to 10% to $1,147.8 million, compared to the second quarter of 2007, testing volume measured by accessions increased 9% and price increased 1%. Excluding the consolidation of our Ontario, Canada joint venture, revenue increased 3.6% with volume increasing 1.3% and price increasing 2.3%. Before restructuring and other special charges recorded in the second quarter of 2008 and 2007, earnings per diluted share increased 13.8% to $1.24 versus $1.09 in the second quarter of 2007. During the quarter, we recorded pretax restructuring and other special charges of $16 million, primarily related to the closing of redundant and underperforming facilities. In addition, we recorded a $45 million increase in our allowance for doubtful accounts, due to the impact of the economy, higher patient deductibles and co-payments, and recent acquisitions on the collectibility of our accounts receivable balances. We have had and continue to have several key initiatives in place to improve our collection experience. But these efforts were not enough to offset the trend in the current quarter. We believe that our increase in the allowance, our increase in our bad debt rate to 5.28%, and these initiatives are sufficient to stabilize bad debt for the foreseeable future. We continue to believe that in the longer term, as a result of our initiatives and efficiencies we will gain from our 2010 plan, bad debt reduction is an opportunity for us to improve our industry-leading margins. EBITDA increased to just $301.1 million or 26.2% of net sales compared $279.6 million or 26.8% of net sales in the second quarter of 2007. The 60 basis point margin contraction reflects the impact of the consolidation of our Canadian joint venture business. Operating cash flow for the quarter was $194.7 million, net of $8.5 million in transition payments to United Health Care. In the quarter, the company was billed $9.1 million in transition payments. To date, the company has been billed $57 million in transition payments, with approximately $53.5 million paid. The $57 million billed represents the vast majority of claims activity through March, 2008. DSO at the end of June was 54 days. At the end of June, the company had cash and short-term investments of $155.3 million and no outstanding borrowings under our revolving line of credit. Capital expenditures in the quarter were $40.9 million. During the quarter, the company repurchased $10.8 million worth of stock, representing approximately 154,000 shares. Approximately $359.3 million of repurchase authorization remained under our approved share repurchase plan at the end of the quarter. Our year-to-date results are as follows. Net sales increased to 10.2% to $2.251 billion. Compared to the first half of 2007, testing volume measured by accessions increased 8.8% and price 1.4%. Excluding the consolidation of our Ontario, Canada, joint venture, revenue increased 3.8% with volume increasing 1.4% and price increasing 2.4%.Before restructuring and other special charges recorded through the end of June, 2008 and 2007, earnings per diluted share increased 15.5% to $2.38 versus $2.06 in 2007. EBITDA increased to $586.6 million or 26.1% of net sales compared to $540.1 million or 26.5% of net sales in 2007. The 40 basis point margin contraction reflects the impact of the consolidation of our Canadian joint venture business. Operating cash flow for the first half was $371.2 million, net of $21.5 million in transition payments to UnitedHealthcare. During the first six months of 2008, the company repurchased $66.5 million worth of stock, representing approximately 900,000 shares. I will now turn the call back over to Dave.

Thank you, Brad. As you can see, we had a very solid second quarter. Our US business grew 3.6% with volume increasing 1.3% in spite of a difficult comparable in the second quarter of 2007 which included significant growth from UnitedHealthcare and being in network with Aetna. Also as we have been saying, the economy has had an effect on our business which we believe is reflected in both, our volume growth and collection experience. Our view of volume growth in the second half as well as the impact of increasing bad debt are the drivers of our adjustment to guidance for the balance of the year. In spite of these near-term challenges, we firmly believe that the future of our company and the industry has never been brighter. In a moment, I will discuss what we see as the two greatest drivers of growth and margins, but I would first like to give you some additional information about our 2010 plan. LabCorp 2010 is a comprehensive initiative to drive service, quality, and operational improvements and to create a platform to allow us to fully realize the growth opportunities I am about to discuss. Our focus on improving quality and service will not only support growth, it will allow us to lower our expense base through greater operational efficiency. For example as we improve our logistics and testing infrastructure, we reduce the potential for error in sample handling and create savings from things like improved courier routes and a footprint with fewer, more efficient testing facilities. These improvements are already underway. Overall, we expect that the 2010 plan will generate net savings of at least $100 million from our current annual expense run rate by 2011. Our savings will come primarily from adjustments in our footprint, greater efficiencies in our logistics network, and improved supply chain management. Brad Smith will discuss more details on the timing of the savings in a few minutes. Now, let's turn to our key drivers of long-term growth, esoteric testing and personalized medicine. We have long been the leader in esoteric and genomic testing. These tests continue to generate almost 35% of our revenue and contribute significantly to our EBITDA margins. In this quarter, esoteric and genomic testing volumes grew by 5%, well above growth in the core business. A major driver of growth in esoteric testing is vitamin D. The understanding of the importance of vitamin D testing has vastly increased over the last two years, and we have seen the volume of this test grow exponentially. Many Americans are vitamin D deficient with significant negative consequences for their health. Study report that vitamin D deficiencies increase risk of prostate, colon, and breast cancer as well as osteoporosis. Here again the laboratory industry leads the way in improving patient care and patient outcomes. We continue to lead the industry in bringing new clinically relevant esoteric tests to our clients and their patients. We are very proud that in this quarter we introduced OvaSure, our ovarian cancer screening test for high-risk women. This test developed by researchers at Yale University is the first clinically reliable screening test for the approximately 10 million women who have a high risk for the development of ovarian cancer. Ovarian cancer is one of most lethal cancers because it is typically diagnosed at a late stage at which time the chances of survival are poor. This year it is estimated that more than 21,000 women will be diagnosed with ovarian cancer and more than 15,000 will die from the disease. An effective screening test will help improve early detection and patient outcomes. We have seen significant interest in the test from physicians, patients, and payers, and already see adoption. We look forward to additional publications on the Phase III trial. We lost the number of other noteworthy tests in the esoteric and genomic arena in the first half of this year. First a breast cancer prognosis gene expression assay developed in collaboration with Celera Diagnostics. This gene expression test predicts the risk of metastasis in breast cancer patients, helping physicians to select the right course of treatment and improving patient outcomes. Second, an assay for detecting the presence of a key tissue marker, GST-Pi in prostate cancer. LabCorp was the first full-service, national laboratory in the United States to launch this assay which helps physicians assess the risk of prostate cancer in men with consistently elevated PSA but repeatedly negative biopsies. Third we announced the availability of ColoSure, the most sensitive, in guideline, noninvasive colorectal cancer screening test available. ColoSure examines DNA in colon cells to enhance the potential for detecting and treating colorectal cancer in its early or localized stage when the chance of survival is greatest. We are pleased with our progress in esoteric and Genomic testing and continue to believe that it will generate 40% of our revenue in the next three to five years. We also see great opportunity in personalized medicine on at least two fronts. First serving as a catalyst for the creation of targeted therapeutics and companion diagnostics and second providing a comprehensive service to help physicians personalize care for diseases whose course of treatment is driven heavily by lab results. We believe we are the industry leader in both of these areas and that they will provide significant growth for us. In companion diagnostics, we led by introducing HIV viral load followed with HIV and HCV genotyping. In 2005, we were the first commercial laboratory to introduce the test for the HLA-B-57 mutation that identifies hypersensitivity to back of ear an Aids treatment drug. In this quarter we continued our leadership in companion diagnostics. We reached an agreement Siemens to discuss future possibilities to co-development new clinical diagnostics tests in companion diagnostics, metabolic syndrome, oncology, and diabetes. We entered into an exclusive alliance to develop and commercialize a series of diagnostic test for genetic markers identified by Vanda Pharmaceuticals in the course of its clinical development of a Fanapta novel, atypical, anti-psychotic drug candidate under review for the treatment of schizophrenia. We offered a genetic test to detect the K-ras mutation. As you know, mutations in the K-ras gene are common among patients with colorectal cancer and can better define which patients will benefit from particular drug treatment. At the recent ASCO meeting it was suggested that K-ras testing should routinely be conducted immediately after diagnosis of colorectal cancer to ensure the best treatment strategy for each individual patient. We continued our innovative collaboration with Medco to identify non-responders to tamoxifen before they receive the drug. This partnership involves performing a diagnostic test on each patient who is prescribed tamoxifen to determine whether they have the receptor that will make the drug efficacious. If this receptor is not present, tamoxifen therapy will not be successful. To further these initiatives, we will soon be breaking ground on a state-of-the-art biorepository in Kannapolis, North Carolina, that we will be developing in partnership with Duke University and several pharmaceutical manufacturers. This biorepository along with our newly acquired Tandem Labs ability to do rapid bio-marker identification are two critical components of our plan to create the most comprehensive companion diagnostic platform in the industry. The proof of our success in this area is the 71% year-over-year revenue growth in our clinical trials business. This platform has broad application including the ability to support drug rescue programs which we have been exploring in our work with Arca biosciences. We have recently seen exciting new data from Arca about bucindolol indicating that genetic testing allows U.S. to accurately identify patients who will benefit from the drug. We are leveraging our capabilities in assay development, data and informatics, physician and patient access, and distribution to become the partner of choice for development of companion diagnostics. The second important opportunity around personalized medicine is our outcome improvement programs. You have heard me talk about Litholink, our kidney stone management program that reduces stone recurrence by 80% and saves the healthcare system substantial costs in treating recurrent stone formers. This decision support model provides physicians with patient-specific information about how to treat disease and improve outcomes. And it has grown rapidly as physicians, patients, and payers adopt and embrace the model. We are pleased to announce that in August we will launch a new service to help physicians address a much larger crisis in the United States, Chronic Kidney Disease. There are more than 26 million Americans with stage-three or four Chronic Kidney Disease, and astonishingly, approximately 90% do not know they have the disease. CKD prevalence has increased by 30% in the past decade, driven by the co morbidities of diabetes, hypertension, cardiovascular disease, and obesity. CKD is a chronic progressive disease with exceptionally high morbidity and mortality. And it is a major health disparity issue. It is estimated that stage three and four CKD cost over $20 million per year with an additional $17 billion spent on dialysis patients. Yet in a seminal study of CKD treatment nearly 50% of patients did not receive a single intervention associated with optimal care in the year before going on dialysis. Our program has two goals, better patient outcomes and cost reduction. We will achieve better outcomes by identifying patients with stage three and four disease in time to treat them correctly and postpone or avoid dialysis. The savings will follow. I am pleased that we have recruited a pre-eminent advisory board to assist U.S. in designing our CKD program. We are both flattered and proud that 15 of the most prominent experts in the U.S. and Canada in Chronic Kidney Disease are working with LabCorp to attack this terrible condition. We are fully committed to the success of this program, with others like it to follow. Now I would like to update our guidance for 2008. Excluding the impact of restructuring and other special charges and share repurchase activity after June 30, our guidance is compared to 2007, LabCorp expects 2008 revenue growth of approximately 10.3 to 11.3%. EBITDA margins of approximately 25.0 to 25.3% of revenues, diluted earnings per share in the range of $4.54 to $4.66, operating cash flow of approximately $750 million to $770 million, excluding any transition payments to United HealthCare. Capital expenditures of approximately $140 million to $160 million, including capital dedicated to our 2010 plan, and net interest expense of approximately $70 million. Now Brad Smith will review anticipated questions and our specific answers to those questions.

Thank you, Dave. Can you update us on the mix of your business coming from esoteric testing? In the second quarter, approximately 35% of our revenues were in the genomic, esoteric and anatomic pathology categories. As Dave stated, our goal over the next three to five years is to increase our esoteric test mix to approximately 40% of revenue. Do you see additional increases in your allowance for doubtful accounts or for further increases in your bad debt rate? We believe that the $45 million increase in our reserve along with the 25 basis point increase in our bad debt rate and our ongoing collection initiatives, will sufficiently fund our allowance for doubtful accounts for the foreseeable future. What are your plans for uses of free cash flow during the remainder of 2008? We remain committed to returning value to our shareholders. First by using our free cash flow to grow our business through strategic acquisitions and licensing agreements, and second, through continuing our approved share repurchase program. The acquisition market remains attractive with a number of opportunities to strengthen our scientific capabilities, grow our esoteric testing franchise and increase our presence in key geographic areas. How has OraSure been received and what do you think is the upside potential? We are extremely pleased with the uptake of OraSure, our ovarian screening test for high-risk women. We are encouraged by physician interest today and expect that there will be further interest after Yale University publishes the data from its Phase III trials. How have economic conditions affected your volumes? We have been saying for some time that the economy has had an impact on our business. We believe that our industry and health care generally are less affected by economic downturns in other industries, but we are not immune. It is important to point out, that we grew volume in both the first and second quarters despite difficult comparables. The clearest impact we can point to is in our drugs of abuse testing business, which during the quarter saw a 7.9% decline in volumes compared quarter two of 2007. Excluding this decline, our increase in volumes for both the quarter and year-to-date would have been 2%. Can you tell us more about the LabCorp 2010 plan? As mentioned earlier, LabCorp 2010 is a comprehensive initiative to drive service, quality, and operational improvements and to create a platform for growth. To that end, we have identified that we will save at least 100 million net from our current run rate in 2011. We expect to see limited savings in 2008, approximately 35 million in 2009, growing to 75 million in 2010 and the full 100 million as we entered 2011. Again, these numbers are net savings after any incremental expense, reinvestment in the business and depreciation. In terms of capital, we anticipate spending approximately 85 million over the three years with 15 million to 20 million in 2008, 40 million in 2009 and 30 million in 2010. How is the M&A market? The M&A market is probably the most active it's been in recent years. We believe that a combination of factors has caused many lab owners to explore their options. Although asking prices are still on the high side, we see lots of opportunities for consolidation. To that end, we remain committed to our discipline of making strategic acquisitions at appropriate valuations. How are your partnerships with managed care progressing? We are pleased the volume has grown year-over-year for United, Wellpoint, and Cigna and Humana and that we have retained a significant part of the Aetna business. We are encouraged by conversations with the United, Wellpoint, Cigna, Humana and Aetna about enhancing our relationships. We continue to discuss with them how lab testing can help them improve patient outcomes and reduce health care costs. What is the status of your licensing relationship with Exact Sciences? Exact's recent announcement has not affected the status of our relationship or license agreement. In fact, our new in guidelines, noninvasive colorectal cancer screening test, ColoSure, is based in part upon intellectual property covered by our licensing agreement with Exact. What is the status of the Medicare competitive bidding demonstration project? The Medicare Improvement for Patients and Providers Act of 2008, enacted on July 15, 2008, repealed the competitive bidding demonstration project effectively immediately. We are very pleased with the passage of the Medicare act and the repeal of the demonstration program. The act preserves Medicare recipients' access to quality laboratory services and is an explicit recognition by Congress of the value that our industry brings to health care. What is the status of the proposed physician fee cut and clinical lab fee schedule? The 2008 Medicare act has also replaced a scheduled 10.6% cut in the physician fee schedule for doctors with a freeze for the remainder of 2008, and included a 1.1% increase in the physician fee schedule in 2009. The act also provides for a 0.5% reduction to the 5% CPI increase to the clinical lab fee schedule, effective January 1, 2009. Now I'd like to turn the call back over to Dave.

Thank you, Brad. In summary, we had a good first half of 2008. Through disciplined execution of our strategic plan and continued focus on the outstanding long-term opportunities for growth, we will ton deliver great value it our shareholder. Thank you very much for listening. We are now ready to answer any questions you may have. Question And Answer

(Operators Instructions). Your first question comes from the line of Adam Feinstein from Lehman Brothers. Please proceed.

Okay. Thank you. Good morning, everyone. Just maybe we're going to start on the bad debt expense. Maybe if you could provide more clarity there. In terms of just the additional reserves on the balance sheet. Can you talk about your process in terms of how you go about that? And then if you have any details, you know, in terms of what you're getting, in terms of the aging of your receivables in terms of the different buckets, and trying to better understand the process, you know, as we think about the impact there. And then secondly, maybe if you could elaborate more as you think about bad debt for the full year. I guess how should we think about that in terms of how it's impacting the new guidance. Thank you.

Sure, Adam. And I know you guys are going to want to talk about bad debt for a while. We'll talk about it for as long we need to, to get everybody comfortable. You know, I've been saying throughout the quarter that it would be disappointing if we had to raise bad debt again. And obviously we're not happy that we had to take the actions that we took. But I do want to put it in context. We've grown volume in both quarters of the first half over very difficult comps. We continue to have very, very strong EBITDA margins. And we continue to generate very strong cash flow. So while we're not happy with the bad debt increase and with the increase to the allowance, we have a lot of positives to talk about in addition to bad debt today. That being said, I'm going to ask Brad Hayes to address your specific questions and answer in detail.

Adam, this is Brad Hayes. You asked about the process. And in our 10-K there's a pretty good write up about the process. Basically we look at our cash collections. We look at our ageing, and we have a model that helps us determine the adequacy of our allowance. So that there's a pretty lengthy process that we've had in place for some time to look at the allowance. What we've seen in the second quarter and, you know, first half of the year as well is weakness in our patient billing experience. We've said for some time that about 17% of our revenue is collectible directly from the patient. About half of that is uninsured. And about the other half comes from co-pays and deductibles. And we've seen recently a 1% increase in that experience in terms of our total revenue from the patient arena go up by a full percentage point. We believe that in the second quarter that our collections have been lower than expected in patient. And our write-offs have been higher, which has been a direct result of what we think are the economic conditions and their impact on the consumer. Again, as we look at it and we think about the foreseeable future, the increase to the relative, our initiatives, and the increase to our bad debt rate going forward, we feel like are going to be enough to stabilize the situation there.

Okay. And then just with respect to what's incorporated into the guidance for bad debt expense?

Yeah. A quarter basis point increase from where it was in the first quarter. So in total, a 50 basis point increase this year. And that is in the guidance.

Got you. Okay. And then just a follow up, Brad. It's helpful just to have all the details here. So, you know, what are you getting from a pure self-pay patient so, you know, is it $0.20, $0.30, $0.10? You know, what can you give us in terms of as we think about the averages there?

Well, it's less from the, here's the way I'll break it down, Adam. About 75% to 80% of our bad debt experience is from the patient billing category. So you ask can back into the math that way. We generally see the worst experience in the uninsured category and better experience in the co-pay deductible category. But with the growth in the co-pay and deductible category and that experience would be worse than our average bad debt rate it puts pressure on the bad debt expense. The other thing that we've looked at is, we believe that directly this experience is tied to what individuals owe us. Because if we look at the categories of write-offs, it's pretty clear to us that 70% of those write-offs are clearly owed by the patient, either in the form of uninsured or in the form of co-pay deductible. The remaining 30% of write-offs are possibly related to missing or incomplete information, but it's very hard to know if a patient was covered or not covered on that date of service. So we believe that, that again tying back to the economy and the impact that we think that's having on our bad debt expenses, it's pretty clear to us where it comes from that it's owed by individuals, and that that's where our weakness is. And I might just elaborate for a moment on our initiatives. Our initiatives are also targeted at that particular part of our receivables, and are heavily focused on collecting from patients at the time of service in the opportunities where we have to do that. And we think that is a tremendous opportunity for us to do better going forward and has been improving for some time as we've worked those initiatives. So that -- that is the center of our initiative plan. We also look at our third-party denial process, look at sources of our bad debt by where it comes from in terms of physician accounts to address that portion of our bad debt that we don't see in our patient service centers or in-office lobotomists. So the initiatives are aimed directly at where the problems are. Adam Feinstein – Lehman Brothers: Okay, nice. And there is one minor housekeeping question and I'll get back in the queue here. Just -- I may have missed it. But did you quantify what the impact from the Aetna contract was on volumes for the quarter?

Adam, its Dave. We didn't -- we said in the first quarter that we thought it was about 1.5%. And based on the trend that we saw last year, we didn't start to lose really any significant Aetna volumes until the middle of June last year. So I would still think it would be in that 1.5% range.

Okay. Thank you very much.

Your next question comes from the line of Ralph Giacobbe from Credit Suisse. Please proceed.

Thank you. Just in terms of going back to the guidance, if we look at the EBITDA margins for the first half of the year it looks like they're tracking 26%. And, even if I assumed the low end of your top line guidance, the 5.3%, bad debt number, I guess I'm struggling to get to the 25% to 25.3% margin. Can you help me -- is there something else on the cost side that I'm missing? Or am I not doing the calc right?

Ralph, this is Brad. The margin -- I mean the revenue coming down obviously impacts the margin. We've looked at the first half versus second half total margins. And they are down and are implicit in our guidance. But we look back at several years of history. And it's clear that, to us that the second year is a lower margin than the first half of the year.

Right, but, I guess that -- what I'm saying, even incorporating your -- the low end of your guidance that you have out there on the top line and incorporating the low -- the new bad debt as a percentage of revenue number, if that sort of flows through, I guess I just struggle to see how you get the 25 to 25.3 after you did 26 in the first half, unless I'm missing something on another cost line item.

Ralph, it all gets -- it all makes sense in our model. And if there's a detailed modeling question we can help you with, we'll do that offline. But there aren't --

Okay. Fair enough. And then --?

I can say there aren't any other costs in our model that are driving any kind of interesting relationships there.

Okay. That's fair. I'm just trying.

All you need to do is look at the business pre and post the Canadian consolidation. Again, when we look at it close, and look at our model, at the Q3 and Q4 margin, we don't see it much different in the second half than we'd see in any second half that we look back at.

Okay. And again, just in terms of the earnings has to be clear, the 454 to 466 excludes the write-off from this quarter, regarding bad debt?

Yes.

Okay. And then, I guess just in terms of the bad debt continuing, you mentioned, higher co-pay, higher deductibles. But also you mentioned recent acquisitions. Can you break that out at all? Like is there some -- is there -- the receivables and a certain acquisition you did also contributing a significant portion of that increase?

Not significant. But it's a factor. I mean, generally our acquisitions have higher bad debt experience than our average. So until they are consolidated on to our centralized system that continues to weigh but it's -- we listed it third. It isn't a factor but not a significant factor.

Okay. And then the share repurchase number for the quarter was fairly low. Any comment on that and maybe in the context of acquisitions and if there's any update obviously there's been some trade regs that have talked about you being aggressive in the acquisition market. Any news that front and anything to expect there related to not just acquisitions but share repurchase?

Well, I think the -- this is Brad Smith. I think our -- we've haven't changed our philosophy at all. And that is that we're going to use our cash to look for strategic acquisitions and licensing agreements first. And then look at our pre-cash and pursue share repurchase second. And I think the implication is that there are a lot of opportunities out there. And the timing and how we use our cash is affected by what we see as it relates to acquisition and licensing opportunities.

And then --

Ralph, it's Dave. To answer the second part of your question about the M&A candidates, we don't discuss potential opportunities.

Ralph, it's Dave. To answer the second part of your question about the M&A candidates, you know, we don't discuss potential opportunities. I can tell you that we signed a definitive agreement with Stanford in July to acquire their outreach business and we expect that to close on August 1st.

Okay. And then, just my last one. Can you talk about your current leverage and any appetite to potentially increase that?

Ralph, this is Brad. I mean, we're about 1.4 times, I mean, we think we could do that for the right reason. I think we have some capacity again for the right reason.

Okay. Thank you.

Your next question comes from the line of Bill Bonello from Wachovia. Please proceed.

Hi, guys, I have a couple of follow-up questions. I guess the first is I do want to revisit the top-line guidance, and I guess the explanation of the economic weakness is quite frankly a little unsatisfying in that you reduce the guidance by like 300 basis points, and just given that you've got Quest out there saying they're seeing no impact and not seeing that kind of a reduction from other healthcare providers, I'm just trying to figure out if there's something more to it than the economy, if there's a chunk of business that you lost, if there's a pay cut that you had, if you just looked at your initial guidance and said, hey, that never made any sense to start with. It just doesn't seem like it could all be the economy.

Bill, it's Dave. Obviously, when we gave our initial guidance, we looked at what we saw at the time, and that was that we saw a number of growth opportunities, CIGNA, LabOne, various other things that we talked about, that we thought gave us significant opportunity to grow faster than the market and as you obviously know, based on our guidance and also based on consensus, the second half had a fairly large ramp in it. So, there isn't anything that-- there isn't any big piece of business that we have lost. There isn't any contract that we have lost. There isn't anything that's out there that we see as a major detriment to the business other than we see a pretty significant economic impact. Now, I know that our competitor has said that they are not seeing an economic impact. All I would point you to is that their volume, year-over-year, increased by about 1% in the quarter, ours increased by 1.3 and we had a tougher comp to go against, so if 1% volume growth is unaffected by the economy, then the industry is growing a lot slower than I think it is. I think the industry should be growing in the 5% range. I think on average the industry is growing in the 3 to 4% range and that's where we're seeing in my view the bulk of the differential, so I don't see anything out there that is -- we haven't lost a big chunk of business. We don't have any major -- we don't have any view that there is any major problem other than adjusting the top-line to what we see in the economy and taking account of the fact there was a pretty healthy ramp in the second half given the consensus, and we got to be realistic about what we can achieve.

Okay. And then just to clarify, that's very helpful, but just --- so I get that you haven't lost anything, no big changes there. Would it be fair to say that some of the share gains that you had anticipated for the back half, you might not be anticipating now or will you still gain that share but it just totally offset by this lower industry growth?

I think that we will -- I mean, again, if you look at guidance for the second half, it still implies volume growth at or above the industry to get to the revenue number. Now, the industry is not growing as fast as we thought it would, so there is still volume growth built into the guidance. Your statement though is an accurate one which is nobody is growing as fast as they thought that they were going to grow. And managed care membership is not growing and it looks like its declining and the number of insured people in the United States is not growing, it's declining. So I think all of those factors make us say, are we going to gain as much share, and are we going to --is there going to be as much opportunity as we thought there was going to be? No.

Okay. That's helpful, and then just on the bad debt deal, can you give us a sense of how much visibility you have into the amount owed by a patient when you're recognizing the revenue? I mean, do you have a pretty solid handle on -- of this $100 Bill, $80 of it is going to be due from the patient or $100 of it is going to be due from the patient because they haven't met their deductible, or do you not necessarily have a good read into that when you're recognizing the revenue?

Bill, this is Brad. We have a very good read into it.

Okay. That's what I figured. Thank you.

Your next question comes from the line of Robert Willoughby from Banc of America. Please proceed.

I guess just following Bill's question, we haven't really seen the variability and results. It's not just the Quest Diagnostics issue, it would be the medical suppliers as well whether it's drugs or Med Surg guys, their numbers have been on balance a bit stronger than where we would have thought they would be suggesting demand from at least physicians and hospitals are still relatively robust, so I don't know if I'm asking to you to answer the same question again, but it does seem that you are losing something somewhere.

Bob, it's Dave. All I can give you is the data that I and the information that I have seen out there. Clearly, it has high deductible plans have grown, the numbers that we saw were in 2007, about 37% of the population was in high deductible plans with a deductible of greater than $500 and now, in 2008, we expect that number to have increased significantly. That means there's more patient responsibility in a time when there's pressure on patients. So the numbers I see reported by IMS are that physician visits are down quarter-over-quarter and year-over-year with a significant decline in the particularly in the women's health area, IMS reporting visits down over 6%. Patients are delaying or deferring non-acute care per the report from the Kaiser Family Foundation in April, per a couple articles I'm sure you've seen in the Wall Street Journal about patients choosing to defer care and for our own insurance that esoteric growth is running at about 5% last quarter and the core basically was flat. Our own uninsured patient volumes, just the people who walk into have testing done and have no insurance so the original patient are down about 8%. Our pre-employment drug testing is down by about 8% in the Second Quarter. We did an internal survey of a thousand customers who confirmed that a significant percentage of them have skipped recommended care including physician visits to our lab tests and we did an internal survey physicians who confirmed year-over-year they've seen a decline in the number of visits so it's hard for me to compare our business to other peoples business but I don't see robust growth in people going to the doctor and going to get lab tests. And again, volume grew in the quarter. Price grew in the quarter, just didn't grow as fast as we thought it was going to.

Baffling. I guess I would ask, is there a different philosophy on share repurchase going forward given the extreme reaction of the stock today, would you be willing to drawdown much larger amounts under Credit Facilities to take advantage of a stock price here or is it balanced between acquisitions and share repurchases this year, you're not willing to be as quite as aggressive there?

This is Brad. I think Smith, we haven't changed, Bob, and as you know, we wouldn't, our strategy, we said we're going to be opportunistic and we said we're going to use our cash, we don't have good acquisition opportunities, but obviously we wouldn't want to talk about something like that before we decided to take a step like that.

But Bob, it's Dave. I mean historically, you have seen us be aggressive when we believe the stock has been, where there's been overcorrection or the stock has been under valued, so there's nothing that says to me that we would change our historical approach, which is that if we see the stock price declining or we see what we think is an overcorrection, we're going to be aggressive in repurchasing shares.

And can you comment on revenue multiples on acquisitions, two times forward numbers for core labs? Is that the metric or better or worse?

I think two times revenue is the high end of the range that we will be looking at. We tend to look at obviously multiples of revenue, multiples of EBITDA. We look at discounted cash flow. We look at the internal rate of return and our return, but two times revenue would have to be something that we thought was pretty strategic.

That's great. Thank you.

Your next question comes from the line of Matthew Borsch from Goldman Sachs. Please proceed.

Hi, thank you, this is Shelley on for Matt Borsch. A couple questions, first on the bad debt charges, just wondering if we could walk through I think it's a follow-up to Adam's question, a little bit more detail. Can you help us understand which of the buckets you had spoken to most of the pressure is coming from, so the buckets I'm thinking of are, are there higher dollars attributable to the uninsured population? Higher dollars attributed to co-pays and deductibles or is it more of a reduced collect ability and you're not really actually seeing growth in the amount of uninsured or is it reduced collect ability on co-pays and deductibles cause I think those are all very different situations. Can you comment on those buckets?

Shelley, this is Brad Hayes. To answer your questions shortly and I'll get into some detail, it's both. The biggest source is the uninsured. So that's where we see the most issue with collection and that's the biggest source of our write-off. Dave mentioned earlier that our volume in the quarter of those transactions is down 8%, but we still have to collect from past transactions. So, that's the source of a large part of our write-off. On the co-pay and deductible, we've seen that growing in terms of the dollars that are going through that bucket pretty rapidly recently and again, overtime I don't want to say that this is a new phenomenon. It's been going on since as far back as the late 90s but I think it has accelerated recently. It's clear from other sources that that has occurred. Combine those two things with again and we've got as many data points as Dave gave out on physician office visits, we've got a lot of data points on what we see externally happening to the consumer, so more dollars flowing through the bucket and the impact on the consumer from the economy, it's kind of both of those things in totality.

Okay, that's helpful and if I could shift gears on the top line guidance. Is it -- could it be part of the reduction in the top line growth as related to maybe reduced expectations on the hospital redirection initiative? I think what we heard at the last quarter is that this was kind of relying on health plan benefit design changes in order to sort of redirect the business there. Could this be a case of maybe misjudged timing and do you still expect benefit there? Maybe is it more of a 2009 issue?

It's Dave. While it would be convenient to blame it on the hospital redirection, I mean, I don't think that the reduction in the top line is really driven by our view of hospital redirection. Again, if you look at the statistics that have come out recently, one of the things I found interesting is that the Medicare trustees publish their Annual Report of where laboratory work is being done and between 2006 and 2007, which is the last year they reported, there was a decline of about 8% in the amount of Medicare work that was going through hospital outpatient and outreach facilities and an increase of about 8% in the amount that was going through independent labs and physician office labs. So, I think hospital volumes -- and remember Medicare pays everybody the same. No economic incentive for redirection of business there. I think hospital redirection is happening and will continue to happen as we move forward. Certainly, to the extent benefit designs of health plans are involved, that's going to be a 2009 event because you can't redesign benefits in the middle of the year.

Okay, I was just wondering if there was a change in your expectations and it doesn't sound like there was much of one. And then just finally a quick question on what's embedded in your guidance around supplies expense. I'm wondering if you've made any revisions to your outlook there, given the thermal electron announcement from a couple weeks ago, whether you are seeing anymore pressure from other suppliers raising their prices.

It's Dave. Suppliers always want to raise their prices. I think we've done a very good job holding the line of supply expense and the guidance does not imply that we'll see any significant difference in our supply expense for the balance of the year.

Okay, great. Thank you.

Your next question comes from the line of Art Henderson from Jeffries & Company. Please proceed. Arthur Henderson - Jefferies & Company, Inc: Hi, good morning. Looking out for the remainder of the year, I want to be clear. Excluding Canada, what are you seeing as your organic growth rate and if you have sort of thoughts on volume and price for the remainder of the year? That would be helpful.

Art, this is Brad Hayes. Arthur Henderson - Jefferies & Company, Inc: Hey Brad.

Excluding Canada, we see it at 4 to 5 in the revenue line, with probably the same contribution from price, maybe a little better in price because we annualize the Cigna price impacts in last year and then in volume, we also annualize in July the Aetna loss last year. So, we see it in the 4 to 5 range and this is excluding Canada and not much change in our Canadian experience. Arthur Henderson - Jefferies & Company, Inc: Okay, that's helpful and then looking at the earnings per share guidance, 454 to 466, what's gets you the low end, what gets you the high end? What's the swing factor there?

Art, its Dave. Arthur Henderson - Jefferies & Company, Inc: Hi, Dave.

I think a couple of things. The biggest swing factor there is going to be top line revenue performance and particularly volume performance. So, we have a number of specific initiatives directed at growing volume, given what we're seeing and since February, we've been targeting specific physician practices and specialties that we believe are less subject to the economy, so physicians who were taking care of patients with more acute issues, and I think that's what really is going to drive the -- where we end up in the range is what we do in terms of top line volume growth. Arthur Henderson - Jefferies & Company, Inc: Okay. That's helpful and then on the LabCorp 2010 initiative, I know you were pretty clear that we wouldn't see really much impact this year, but is there anything cost wise out there that you're looking at, that you feel like you could pull forward a bit, that you might be able to realize some savings in 2008?

Yeah. I mean, we already have a number of these things in place. For example, root optimization software for couriers. Now I'm sure everybody has read about the UPS and the right-turn philosophy. Not making left turns, I mean, so we're always tweaking what we have to look for cost savings opportunities. We're always focused on expenses and on sizing the business correctly and again, let me point out that we have 60 million out of the run rate from the second half of last year to now, due to the actions that we took in the second half of last year. And net of acquisitions, we're down about 1500 people in the organization on a base of around 27,000. So what we have to be careful about in terms of expense reduction is not overreacting to what we see as an economic impact that is causing us to have lower volume than we would like, and sufficiently staffing to maintain levels of service and quality. All that said, we're always looking at, is the business sized correctly for the volume and we'll continue to look at that and certainly if there's anything we can pull forward from 2010 in terms of facility rationalization, logistics and proven or otherwise we will do that in the second half. Arthur Henderson - Jefferies & Company, Inc: That's helpful. One last question and I'll get back in the queue. ColoSure can you talk about that a little bit more that strikes me as a bigger opportunity than maybe some people may think, and maybe I'm seeing this differently, but can you elaborate on what the opportunity there is and what that might contribute to you going forward?

Colorectal cancer screening, the competition for ColoSure in my view is not cyclical blood, it's not Colonoscopy its, not any test that is out there in the market. The competition is 50% of Americans age 50 who don't get screened at all. And they don't get screened because they don't want to go through Colonoscopy or virtual Colonoscopy which is an invasive and uncomfortable procedure. So what ColoSure is a non-invasive procedure, it's in the recent guidelines by the American cancer society for colorectal cancer screening, and, you know, the opportunity is I think is significant if we can reach into the marketplace to the people who were not getting screened and show them that there is a non-invasive way of getting screened that has pretty good sensitivity and specificity for the early identification of colorectal cancer. Arthur Henderson - Jefferies & Company, Inc: And right now 20 states roughly are mandating this? Is that right, 20 states are mandating this test or reimbursing for this test? I'm not quite clear as to what the landscape is there.

I think the reimbursement landscape, obviously a good bit this focuses on managed care reimbursement. At age 50, most of the patients who are going to be screened are going to be patients covered by managed care. And our general managed care reimbursement experience has been pretty good. And it's going to be better now that test is in the American Cancer Society guidelines. Arthur Henderson - Jefferies & Company, Inc: Okay. Great. Thanks a lot.

Your next question comes from the line of David McDonald from Sun Trust please proceed.

One question on the bad debt. I was wondering if you could just provide a little bit more on the collection initiatives. I know you mentioned obviously trying to collect more up front. What do you do there? I would assume most folks are paying cash in terms of the co-pay. Do you get credit card involved? Exactly, can you give more detail in terms of what behavior you can change-up front to alleviate this?

Yeah. Dave, this is Brad Hayes. To go into more detail, first of all, we have had for several days a cash register module embedded into our system that sits in front of our employees and patient service centers and in some cases physician offices. So it is getting better at building into their work process and work flow collecting from an uninsured transaction at that time of service or before that time of service. So that's part of it. And we recently started paying those people an incentive. Our own employees get incentives to collect that cash. And we think that's going to help move the needle. Second, and you mentioned it, is capturing the credit card at the time of service for the insured because we don't know. Because we don't have a real time claims adjudication system, it's difficult, it's not impossible for us to know at the time of service what the patient is going to owe after the third party adjudication. So if we can get a credit card swipe upfront we can go back to that with the patient's authorization and collect after a third-party adjudication. We've had very good success there. Then rolling those processes again through our and getting better at the time that we see the patients both in terms of our own patient service centers as well as our phlebotomists that are in doctors' accounts. So that's the meat of the patient initiatives of the patients that we see. For the patients that we don't see, it comes down to looking at the source of our write-offs by contributing physician account and looking at the root causes of those and seeing what we can do with it. For example, we have seen physician accounts that had a high contribution from the uninsured. We go to the physician account and say, for your uninsured, send them to our patient service center. So that then gives us an opportunity that we did not have before to collect that cash at the time of service. So I hope that helps.

Yes. That is helpful. Actually, can you also give us a sense of the timing, when these incentive payments for the employs start? I would assume it's over the last couple of quarters?

Dave, its Dave King, just a couple of other quick comments. One of the things I want to be -- I want to you to understand, as well, is part of the 2010 plan involves placing kiosks for self-service check-in and patient service centers and online scheduling of appointments. And we expect to -- those are in pilot. We've been very successful with them. And we expect to have them fully rolled out within the first quarter of'09. Both of those include billing and collection logic. So a patient who makes an appointment to come see us through the patient service center, is going to be asked to give us a credit card or other information to pay their past due bills as will patients in the patient service center at the kiosk. So, I think we are implementing this into the process for the longer term that will be -- that will help us to do an even better job collecting from patients. We also have started a policy in our patient service centers of verifying patient's names and addresses so that we actually are collecting information so that for some reason we they didn't give us an insurance card or we don't -- the managed care says they are not covered that we actually have verified their name and address, physically at the patients service center to make sure that we have good information about how to collect. The incentives have been in place. We started piloting the incentive payments late last year. But they've really been fully in place since early, I would say, the exact month, but mid -- ends -- just towards the end of Q1, I would guess. Its fully in place and the credit card collections have been fully in place since the -- in all patient service centers since the beginning of July.

Okay, and then, just one more housekeeping question. Can you guys remind us what percentage of your revenue, your drugs of abuse testing process is now?

Dave, there is Brad. 3%.

Okay. Thank you.

Your next question comes from the line of Amanda Murphy from William Blair. Please proceed. Amanda Murphy - William Blair & Company, L.L.C.: Hi, good morning. In terms of the impact of the economy to volume, now that we're halfway through the year, can you comment on how that impact has trended? Is it increasing, decreasing, or staying the same? And then also, is there a possibility that you could see that turn around if it is declining as patients burn through there -- I am sorry, if it is increasing, if patients burn through their deductibles throughout the year?

Amanda, it's Dave. I would say the economic trend got worse in the second quarter than it was in the first quarter, and so I think that obviously had a greater impact on volume. I think there are two potential opportunities. One, as you say is that if patient do use up their higher deductibles, that they will return to physicians. The other issue, which I hope will not be the case, but certainly one has to consider is, that if patients are deferring non-acute care that they may end up in a situation where they become acutely ill in the second half of the year, because they haven't -- they've deferred care in the first half of the year. And then, the third thing, obviously is if we start to see a turn in the economy, that that also has a potential positive impact. Amanda Murphy - William Blair & Company, L.L.C.: Okay. And also in terms of your ability to offset the impact of any volume -- or impact to volume from the economy, has anything offset that with, I guess, tweaking cost levers. Has that changed over the past quarter or so? Is there anything that's changed from your ability to do that to the first quarter to the second quarter?

The only thing that's changed is that we're -- with the increase in bad debt, obviously that is an additional expense for the balance of the year that we would have to offset before we get any benefit from expense reductions. So if volume were down and I shouldn't say down, if volume were below -- if volume growth was less than what we expected it to be but bad debt was flat, then that would give us levers to -- that would give us more opportunity to go after costs. With volume growing less than we expect it to and bad debt increasing, it just gives you a little less flexibility on the expense side. Amanda Murphy - William Blair & Company, L.L.C.: Okay, and then also in terms of the hospital redirection. I think you'd said in the past that you've been working on some pilots with health plans and employers. Is there any update there? Or any more pilots you're working on? Or can talk about how those are progressing?

I think we're in a similar situation which is we have a couple of large employers that are looking at this opportunity with us and that would like to help us pilot it. And we continue to talk to health plans about it, I think as was previously mentioned to the extent that this is done through benefit design, its -- it requires a change in benefit design which would really take effect in the 2009 year. Amanda Murphy - William Blair & Company, L.L.C.: Okay. Thank you.

Your next question comes from the line of Tom Gallucci from Merrill Lynch. Please proceed.

Hi, good morning. Thanks for taking all this time here. Just a couple of quick questions. First, just wondering, United's had some enrollment issues. So curious if the absolute amount of volume you're getting from United is what you thought of is that maybe one source of some shortfall on the volume front?

Tom, it's Dave. Without specific information about the type of member and the plan, it would be very hard for us to know what the impact of United membership is. Our United volumes have grown year over year so we're still seeing growth there, and they grew even before the -- even before the transition over from LabOne. So we are seeing growth in the United volumes. But whether membership loss has a direct impact on us or an indirect impact and what the size of that impact would be depends almost entirely on what kind of a plan it is, is it a cap plan, is it a fee for service, is it a senior plan?. And we just don't have that level of information to be able to tell.

Okay. And then -- I'm not sure if you answered this before. There has obviously been a lot of discussion about the bad debt side. Is the percent of your business coming from uninsured, or the percent of your business that's co-pay and deductibles growing year over year, or are just collecting less of it?

Tom this, is Brad. It is growing. I mentioned earlier, and I think the first question, that it's up a point recently.

Which is -- is it at the uninsured or the co-pay side?

It's coming from the co-pay.

Okay. So the actual number upon uninsured is not up a lot?

No. If you look at that percentage of our revenue overtime, it's not -- that percentage of revenue has not increased. The increase has come from -- I say co-pay. But deductible and co-pay.

Right. And then on -- I guess before you talked about sort of expectations. Historically you've talked about expectations of 3 to 4% sort of growth in the business. How do you sort of get to that number? I guess just curious because it seems like part of the issue is relative to that number, things are weak. But just wondering how do we sort of substantiate that number as the base case?

So I mean I think if you look at -- if you look at historically what you've seen is industry growth of around 5% and revenue combination of volume and price, I think what you're seeing now is you're seeing lower volume and still pretty significant contribution to price. So we were 1.3 for the quarter on volume. But we obviously had a healthy price increase of 2.3, and I think that's -- that's the range we should continue to think about until we start to see some improvement in the overall economic environment.

All right. Last question, does the economy impact us proportionally routine versus esoteric testing in your view?

I think the numbers for the quarter suggest that it did because the esoteric volume on the esoteric side was up 5% versus volume on the core side being basically about flat. So I think the esoteric testing is less affected by the overall economic impact.

What would you normally expect esoteric volume to grow?

Tom, we've seen it historically grow at about twice the rate of the core.

And by the way I should say, Tom -- it's Dave that when I say 5% that's the esoteric and genomic categories together for the quarter.

Right. Right. Right. Okay, thank for all the color.

Your next question comes from the line of Ricky Goldwasser from UBS. Please proceed.

Good morning. And thank you for taking my call. A number of questions. First of all, can you give us some color on the aging of patient receivables, and even more specifically what percent of patient receivables were in the over 90-day bucket? What percent was over the 120-day bucket, and how does that compare to where you were last quarter?

Ricky, this is Brad. I'm not going to give out specific aging information by payer bucket. But what I can say confidently is that our patient cycle -- we either collect it or it moves out to write-off. So it doesn't live a very long life there. And there had been nothing that's changed that experience. Again, our cash was lower from patient in the quarter than we expected. And our write-offs were higher from patients than we expected. So I would not expect in our gross AR [ph], the way we keep it moving, to see a significant deterioration in ageing. But again, that -- as it writes off, takes away from the allowance.

And at what point do you write it off, is it over 120 days, over 90 days?

I mean, our patient bucket, it goes out about six months internally before we send it to an outside collection agency. And that's the point in time that we write it off. And during that process, we are doing a lot of mailing. We are doing a lot of automated calling and trying to work that receivable to drive payment or resolution.

Okay. And then on the guidance, the top-line guidance, I know David you said that the swing factor is volume. So is the low end of the 454, are you assuming there that volumes will continue to deteriorate from current levels, or just continue at kind of a steady rate from where you are today?

I think at the lower end, Ricky, the -- we're assuming that volumes will stay about where they are today. And at the mid-to higher range, we're assuming that we'll -- that we'll see some volume growth. But again, remembering that in the second half of the annualization of the loss of Aetna, there should be some volume growth there's less of a difficult comp in the third and fourth quarters than there was in the first two where we were in with Aetna last year and now we're out.

And that factored into the mid-to end of

Yes.

Okay. And then lastly, follow up on Tom's question about the specialty business. Obviously from what you were seeing, specialties, is continuing to grow despite the economy. But would it be fair to say that within the specialty or acute area you might have these two bucket might be associated with higher bad debt expense, and potentially with just higher co-pays? Given the fact that you're talking about bigger ticket items?

Well, I think because these tests tend to carry a higher price that they would eat up more of the patient's deductible, and if the patient has a co-pay that's based on a percentage of the charge then they would lead to higher co-pays. So it's hard to generalize across all plans because some have a flat dollar amount of a co-pay, and some have a percentage of the charge. But for those that have a percentage of the charge, if the price per encounter of the Esoteric test is higher, then that's going to generate a higher co-pay.

So I guess what I'm trying to understand here is the 1% increase in co-pay that you're seeing, is that a factor of the fact that the high-end Esoteric business is growing faster for you also the fact that you're saying in the next six months you're really going to focus more on those kind of acute-type patients?

No, Go ahead.

Ricky, its Brad. We don't see it being test specific. The growth in that number.

So it's across the broad routine in specialty?

Yes.

Yeah. In the 1% increase is really driven by just more people in high deductible plans. And therefore, more responsibility going out to patients.

Ricky, one other thing to keep in mind is for the deductible and anything that's a patient's responsibility in terms of deductible co-pay co-insurance, it's at the managed care negotiated rate. So think about it that way too, as making the amount something lower than what the patient price would be.

Okay. Thank you.

Your next question comes from the line of Kemp Dolliver from Cowen. Please proceed.

Okay. Thanks. I am going to go back to bad debt. And the question is, is there any geographic variation that you're seeing in your collection experience -- I'm still trying to understand the Coke vs. Pepsi difference here. You know, given the relative stability of your largest competitors' collection trends?

Kemp, there is Brad. We do see variability. Based on where our business is, there are some states that have much bigger numbers than the other. I would say that when we look at our initiatives and how to roll out our initiatives, we go to the source of the biggest opportunity. So in terms of how we attack it, we're going to where it is the greatest. To your Coke vs. Pepsi question, apparently they're doing very well in this environment with the things that we mentioned, at least we see pretty clearly in our business, that it is owed directly by the patient. So they're apparently doing very well, and our hats are off to them. We aspire to lead the industry in every metric, and this is one where we don't. And we think it's a tremendous source of margin expansion opportunity when we do.

Okay. Just to extend on that, and then I have one other question. Is you're probably seeing more in the southern, southeast/southwest versus the northern half of the country in terms of collection problems?

That's fair.

Okay. Okay. That makes sense. Do you have your cash interest in tax payments for the quarter?

No, we don't have that. That will be in our queue.

All right. Thanks a lot.

Your next question comes from the line of Bill Quirk from Piper Jaffray. Please proceed.

Thanks. Just a quick question. Are any of the managed care contracts tied to the clinical lab fee schedule?

Bill, it's Dave. There is nothing that I know of significant that is directly tied to the managed care fee schedule. We tend to have separate fee schedules negotiated sorry, to the Medicare fee schedule. So we tend to have separate fee schedules negotiated.

All right. Perfect. Thank you.

Your next question comes from the line of Jason Gerdes from Lee rink Swann. Please proceed.

Thank you. Two quick questions. One just following up on the last question. Are there any of your managed care constructs that include a CPI based rate increase for next year?

We do have managed care contracts, let me start again. Almost all of our managed care contracts include some sort of cost escalators. Some of them are CPI based, some based on health care and disease. So the answer is yes, we do tend to have cost escalators and they do tend to have some relation to the CPI.

Okay. And then the final question is on the private pay patients which were down about 7.8% in the quarter, I know the comps are getting a little bit easier in the back half of the year. But do you have a sense of what the trend was intra-quarter -- was that trend was -- month by month was it picking up or sort of stable through the quarter?

I sure don't have the breakdown in front of me month-by-month.

Okay. All right. Thank you.

Your next question comes from the line of David Veal from Morgan Stanley. Please proceed.

Hey, thanks. Most of my questions have been answered. But just one very simple one. Can you just confirm that the 238 is the apples-to-apples number for the first half with respect to the new guidance?

238?

I mean, the diluted EPS, excluding the restructuring and other charges was 238?

That is excluding the restructuring and other charges. And that is comparable to the new full-year guidance.

Okay. So net -- if I just do the simple math, it's 216 to 227 for the back half. Is that right?

Yes.

Okay. Great. Thank you very much.

Your next question comes from the line of Gary Taylor from Citigroup. Please proceed.

Hi, good morning. Thanks for taking the call. I want to run through just a couple of issues you've already touched on. I'm probably just running slow today, but one question, a simple one. Looks like the CapEx guidance increased about 20 million. Any specific project or initiative behind that?

Yes. It's the increase from the 2010 plan.

Okay. And so that the majority of that then is that IT or is that actual new testing machines or?

Yeah. That is heavily IT driven.

And then I want to go to the guidance, I think I have the same math challenge as a few of us are having this quarter. But, your original guidance for the year, 474 to 490, you said 238 in the first half. So your -- if you take the original guidance plus the 238, it would have implied about 236 to 252 for the second half of the year. Your new guidance implies about $0.20 to $0.24 lower than that? If I look at the 50 basis points of bad debt, I get about $0.06. It looks like the revenue contribution is $0.05. So, I'm still kind of struggling to find, you know, the other dime that's coming out of the back half. And presumably, your original guidance would have, obviously assumed the weaker seasonal gross margins in the second half. So, does that making any expense at all, the numbers I've laid out, or why I'm still struggling for, it seems like guidance came down a bit more than would be implied by the bad debt increase and the revenue reduction?

Gary, the only thing I would ask you to go back and look at is where you got the $0.06 from the revenue. Because, the way we look at the guidance too, is that there was a ramp in both our expectation as well as consensus expectation in revenue in the second half of the year. So I think coming down from that ramp over what we saw in the first half is driving a bigger number than you contributed there.

Do you think the dollar amount's bigger or the contribution margin, would you assume is lower?

I think the dollar amount is bigger.

I got that the new guidance would imply about 32 to 72 million below the street. And then another 12% net income margin so I got to that so…

And we can spend some time after the call on more detailed model questions to help people work through that.

Sure. Then my last -- I'll take my shot at while beating the bad debt question. Is the $45 million charge, is that all related to the trailing 12 months? Or is there any component of that allocation?

No, that's based on an increase in our allowance given our experience in the second quarter. So, there's a part of that that applies to the second quarter and a part of that that applies to the collectibility of our gross AR at 630.

Part of it's -- so, is any part of that related to -- and does any part of that potentially related to forward revenue, I guess is what I'm getting at?

No, that would not be appropriate.

So if you take your 630 gross AR, then the 45 million only relates to trailing, so it's a question of how far of trailing that relates to?

Well, it's trailing based on the experience we had in the second quarter, again and what we expect to happen to our 630 AR.

Yeah. So the -- disproportionately of the collection rate of the 2Q is getting applied to that bucket.

Yes. And then again the increase in our rate going forward and our initiatives gives us confidence that that's the right number going forward.

Right. If you look at the balance sheet allowance, percent of gross AR, it's down 300 basis points in '07 and I think 600 basis points since 2005. And the charge I'm guessing would increase the allowance by 400 to 500 basis points. So, I guess -- I mean, it sounds like really what's happening here is first the historic reserving model you've used, you now believe you need to assume a lower collection rate on the co-pay portion.

Gary, that coverage statistic is an interesting one. But I think it completely ignores the quality of the gross accounts receivable.

Right. Which kind of gets to my next point which is you guys don't disclose the mix of gross AR. So it's difficult to run, you know, analytics or for us to get as comfortable as you are in the AR. I know you don't disclose it but maybe I will register my unsolicited vote that we see some additional disclosure. My last question on this then is since the adequacy of the allowance versus the gross AR is exactly the issue at hand here. Can you give us the allowance for the 2Q and the 1Q? I think you only disclosed those in the K.

We only disclose them in the K. That's correct.

So we're not going to the allowance percentage in the Q for the 2Q either?

No.

Okay.

And I would again go back to that is an interesting calculation, but again completely ignores the quality of the gross AR.

I couldn't agree more. I mean, if you follow the hospital stocks over the last few years, what they missed was they were watching ageing and not watching mix of AR. So we'd really love to be able to some of the mix so we can, have the same comfort level moving forward. But that will be it, I've spoken my peak. I appreciate it.

Thank you.

Thank you.

Your final question comes from the line of Balaji Gandhi from Oppenheimer. Please proceed.

Hey good morning guys and most of might have questions have been answered, too. I guess this is just a follow-up.

Hello? Hello? Operator?

Yes, sir. I am here.

Hello? We lost the caller.

We lost the caller.

Okay, just a moment. I can't find him. (Operator Instructions) Thank you. I'll transfer you. Please proceed.

Hello.

Hello.

A lot of time wait there just for one question and just a follow-up on what Gary said. Just on the revenue guidance you're taking down for the back half of the year. Any thoughts to kind of pricing strategies? You know, if the uninsured population is growing and thinking about maybe the list prices that you use, I assume there's a big gap between what your list prices are and negotiated managed care contracts. Is any of your revenue, changes in expectations reflect changes in pricing strategies?

We've given obviously a lot of consideration to pricing strategies. Not only with the uninsured but also with the managed care and as you can see, price is up nicely in the first half of the year and now some of that contribution through the mix. We continue to think about ways in which we can improve our collection experience from the uninsured, and we continue to think about whether there is some opportunity to some of the hospital's done, for example, offering a lower price but requiring payment at the time of service. And those are things that we're going to continue to think about and look at and test as we move forward.

Okay. That's kind of what I was getting at. It's safe to say that the new guidance for the back half of the year doesn't reflect those strategies?

It doesn't incorporate anything, because even to the extent that we pilot it and that it would be successful, I don't think we'd really see any major rollout and impact of it until, into Q4 if not the beginning of next year.

Got it. Thank you very much.

There are no further questions in queue. I would like to turn the call back over to Mr. David King for closing remarks.

We very much appreciate your joining us this morning. Hope you have a great day. Thank you.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.