Labcorp Holdings Inc. (LH) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 Laboratory Corporation of America Holdings Earnings Conference Call. My name is Janine, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. David King, Chairman and Chief Executive Officer. Please proceed.

Thank you. Good morning, and welcome to LabCorp's First Quarter 2013 Conference Call. Joining me today from LabCorp are Brad Hayes, Executive Vice President and Chief Financial Officer; Ed Dodson, Senior Vice President and Chief Accounting Officer; and Steve Anderson, Vice President, Investor Relations. This morning, we will discuss our first quarter 2013 financial results, reaffirm our 2013 guidance, highlight our progress on our Five Pillar Strategy and provide answers to several frequently asked questions. I'd now like to turn the call over to Steve Anderson, who has a few comments before we begin.

Before we get started, I would like to point out that 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 a Form 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 this supplemental information. Additionally, we refer you to today's press release, which is available on our website, for a reconciliation of non-GAAP financial measures discussed during today's call to GAAP. These non-GAAP measures include adjusted EPS, adjusted EPS excluding amortization, free cash flow and adjusted operating income. I would also like to point out that we are making forward-looking statements during this conference call. These forward-looking statements include, among others, statements about our expected financial results, the implementation of our business strategy and the ongoing benefits from acquisitions. These statements are based upon current expectations and are subject to change based upon various factors that could affect the company's financial results. Some of these factors are set forth in detail in our 2012 10-K and subsequent filings. The company has no obligation to provide any updates to these forward-looking statements, even if our expectations change. Now Brad Hayes will review our financial results.

Thank you, Steve. On today's call I will review 4 key measures of our financial performance: cash flow, revenue growth, margin and liquidity. I will also reaffirm our 2013 guidance. First, cash flow. Our cash flow remains strong. Free cash flow for the trailing 12 months ended March 31, 2013, was $661.2 million. DSO at the end of March was 50 days, an increase of 2 days year-over-year. During the quarter, our bad debt remained 4.3%. Second, revenue growth. Revenue increased 1.2% year-over-year in the first quarter. On a per-day basis, revenue increased 2.9% year-over-year. During the quarter, total company volume increased 1.1% or 2.7% on a per-day basis. We estimate that inclement weather reduced volume growth by approximately 50 basis points during the quarter, and that excluding weather, organic volume was flat year-over-year. Revenue per requisition increased 20 basis points year-over-year. Third, margin. For the first quarter, our adjusted operating income margin was 18.7% compared to 19.9% in the first quarter of 2012. The year-over-year margin decline was primarily due to the impact from weather, Medicare payment reductions and the number of days in the quarter. Fourth, liquidity. We remain well capitalized. At the end of March, we had cash of $185.8 million and $30 million of borrowings outstanding under our $1 billion credit facility. During the first quarter, we repurchased $113.9 million of stock, representing 1.3 million shares. At the end of March, $954.1 million of repurchase authorization remained under our share repurchase program. This morning, we reaffirmed our 2013 financial guidance. We expect revenue growth in the range of approximately 2% to 3%; adjusted EPS excluding amortization of $6.85 to $7.15, which includes a negative impact of approximately $0.35 due to Medicare payment reductions and which excludes the impact of any share repurchase activity after March 31, 2013; operating cash flow of approximately $870 million to $900 million; and capital expenditures of approximately $200 million to $220 million. Our capital expenditure guidance is higher than historical levels due to near-term investments in facility consolidation and replacement of a major testing platform. I will now turn the call over to Dave.

Thank you, Brad. We are pleased with our performance given the health care services utilization environment. During the first quarter of 2013, we grew revenue approximately 3% on a per-day basis and we grew volume 2.7% on a per-day basis. We generated strong operating cash flow of $198.2 million. We generated free cash flow of $156.5 million, which we invested in the business and returned to shareholders through the repurchase of $114 million of our stock, representing 1.3 million shares. And we continue to take keep a tight lid on expenses. We continue to make progress on each aspect of our Five Pillar Strategy. The first pillar of our strategy is that we deploy capital to investments that enhance our business and return capital to shareholders. The integration of MEDTOX continues to go well and has exceeded our expectations. This acquisition provides us with an excellent opportunity to diversify our payor and testing mix, and we remain excited about the opportunity to grow MEDTOX's specialized toxicology testing. Last quarter, we announced a target leverage ratio of 2.5x debt to EBITDA, which all other things being equal, we intend to achieve over time. We expect to continue to deploy our capital toward acquisitions and share repurchase. Over the last several years, we have deployed our free cash flow almost evenly between acquisitions and share repurchase. Going forward, we would expect to deploy our free cash flow similarly, and in the absence of sizable acquisition opportunities, we anticipate deploying our additional leverage towards share repurchase. The second pillar of our strategy is to enhance our IT capabilities to improve the physician and patient experience. Our Beacon Patient Portal is now available to all patients in right-to-know states, and we continue to see accelerated growth in patient registrations, adding more than 1,000 new…

Thank you, Dave. "Can you describe the impact of Medicare payment cuts in 2013?" The Affordable Care Act baseline for the 2013 update to the clinical lab fee schedule was negative 0.95%. And the Middle Class Tax Relief and Job Creation Act re-baselined the fee schedule an additional 2% lower. These fee schedule cuts -- reductions became effective on January 1, 2013. Due to mandatory sequestration, we received an additional 2% reduction to the clinical lab fee schedule and a separate 2% reduction to the physician fee schedule effective April 1, 2013. We are also experiencing a variety of other government payment reductions, including the reduction to CPT code 88305 and the full year impact of the TC Grandfather clause. Summed together, we continue to estimate that these payment reductions will lower our 2013 EPS by approximately $0.35. "Why are capital expenditures expected to be so high in 2013?" We typically spend approximately 3% of revenue on capital expenditures. As Brad previously mentioned, our capital expenditures increase in 2013 is driven by near-term investments in facility consolidation and replacement of a major testing platform. "Can you update us on the mix of your business coming from esoteric testing?" For the year, approximately 40% of our revenues were in the genomic, esoteric and anatomic pathology categories. As we reiterated last quarter, our goal is to increase our esoteric test mix to approximately 45% of our revenue within the next 3 to 5 years. Now I'd like to take -- turn the call back over to Dave.

Thank you, Steve, and thank you very much for listening. We are now ready to take your questions.

[Operator Instructions] Your first question comes from the line of Robert Willoughby with Bank of America Merrill Lynch.

It looked like the accounts receivable did rise a bit more expected on a slightly lower revenue base. Any dynamic going on there?

Hey, Bob, this is Brad. Just some timing of payments in one of our international businesses specifically. And I think the typical in the first quarter more going to patients in the form of co-pays and deductibles slowed things down a little bit.

Okay. And just the pace of M&A, Dave, it's slowed down here a bit of late. Is this just the kind of the eye before the storm? Or what do you anticipate over the remainder of the year from a transaction standpoint?

Bob, I think the pace continues to be about the same in terms of opportunities that are available. We've looked at quite a few things, a number of them we don't like the valuations and so we're biding our time and waiting for things to come along where we think the valuations are more reasonable for us. But there are still a lot of opportunities in M&A and we continue to be focused on doing the right deals that will be accretive, that will give us the target return on invested capital and that will contribute to long-term growth. And I would say, we think of MEDTOX as a terrific example of doing all those things. Accretive, good ROIC, long-term growth and expanding our capabilities and further diversification of our payor mix.

And anecdotally, on the MEDTOX, Dave, what's left to accomplish there from a consolidation standpoint?

There are still some integration and standardization activities, particularly around platforms, reagents and supplies. But the bulk of the work has been done. It's been a great team effort between the LabCorp team and the old MEDTOX team. And we're very pleased with the way that business has not only maintained the pace at which we acquired it, but has grown.

Your next question comes from the line of Tom Gallucci with Lazard Capital Markets.

I guess, just first on the volumes. Still good compared to some, but maybe a little bit lower than what you saw in the second half of last year from an organic standpoint. Do you have any thoughts about what we're seeing in terms of overall industry trend? Is there any sense that maybe the higher co-pays and deductibles that you mentioned a second ago, Brad, are they getting that much higher this year versus last year that maybe we're seeing a skewing of the seasonality a little bit in terms of when people are going to use health care? Or any thoughts you have about that would be interesting.

Tom, it's Dave. I think you've identified a couple of the major factors here. So if you look sequentially at organic volume growth last year, other than the first quarter, which was a little bit of an oddity because of the year-over-year comp and the lack of weather, basically was 50 basis points in the third quarter, 70 basis points in the fourth quarter and now we're back to essentially flat. And I'd attribute it to a couple of things. One, there is more patient responsibility. There is more going toward patient. We actually saw a little uptick in uninsured volume in the first quarter as well. And then the last thing I would say is the overall utilization environment, just what I'm seeing in terms of others reporting, whether it's hospitals, other health care services companies, does seem to have ticked down a little bit in the first quarter, and that's what I attribute probably the bulk of the difference between the fourth quarter organic growth and the first quarter organic growth. But we're doing the same things. I think we're executing well on our strategic priorities, and again, I think this is a very solid result in terms of what we see in the environment around us.

Can you just remind us what is the sort of percent of your business that's uninsured at this point?

Tom, I think it's about 7% of our revenue, plus or minus, in that range.

That's right, 7%.

Okay. And then Dave, I think in your prepared remarks, you mentioned some of the analytics tools that you're working with out there with some of the customers. Is this something that you get paid for separately? And if so, how? Or is it something more that's an additive benefit of doing business with you and it's ultimately more of a volume driver?

At this point, because we're in pilots with a couple of sizable IPAs and physician groups, we are not getting paid separately for the analytics tools. What we are doing is, in my view, demonstrating our ability to integrate clinical data with lab data and then provide analytics to physicians that will support improved outcomes and better care. I think over time, the development of the payment model around the analytics and the integration of clinical data will occur, and it remains to be seen how we will be compensated for that. But I think it's a very important value-added services -- service. It's a key component of our strategy. And I'm very pleased with where we are on it today, given how hard we've been working on it for the last 1.5 years.

Your next question comes from the line of Gary Lieberman with Wells Fargo.

I guess, with regards to pricing, can you talk about what you're seeing on that front? One of your competitors has talked about continued pressure and expecting pressure to continue through at least the next year. Can you give your perspective on that, please?

Yes, Gary, this is Brad. When we look at our price and what makes it up, there are a lot of variables. One is, obviously, the contractual agreements with commercial payors. We've talked about the government payment reductions. And then we get some changes also related to our payor mix, our test mix, the number of tests per requisition and even some of our international businesses. So we look at all that and how it ends up for the quarter, and we're pleased with our price. We think it demonstrates that we've exercised some pricing discipline. And yes, to your point, pricing is always under pressure. But we're pleased with our result and can't really speak to others.

Okay. And then as you head into 2014 with reform, can you give us your thoughts maybe around any volume benefit you would expect to get or other changes that you might expect in the business because of reform?

Gary, it's Dave. I think reform will be a net positive. I will say there are many, many moving pieces in that -- in the calculation of how we will benefit. So you have to make some assumptions about how many people will actually be insured or be added to Medicaid and so there are -- you got to make some assumptions about the exchanges. You have to make assumptions about Medicaid expansion. You have to make assumptions about state versus federal exchanges. So you have to make some assumptions about coverage. You have to make some assumptions about pricing. You have to make some assumptions about the number of encounters per patient per year. You have to make some assumptions about how much bad debt reduction there will be, the consequence of more people being covered with insurance. When you put all of those assumptions together, as best as we can see it now, we expect there will be a volume benefit for us, and we expect that there'll be a benefit from bad debt reduction at the end of the day. So all in all, we view reform as -- under, I think, some fairly conservative assumptions, we view reform as a net positive. And obviously, the more people who get insured, the more utilization, particularly around preventive care from the newly insured, the more the benefit to the lab industry.

Okay. Any thoughts on trying to quantify that even very broadly in terms of the benefit?

I think it's just there are just too many moving pieces to try to quantify it at this point.

Your next question comes from the line of Ricky Goldwasser with Morgan Stanley.

First question is just a clarification on the same-store growth number. I mean, obviously, Dave, you talked about flat volumes. But can you also give us the context of volumes in light of the day count? Because I think the organic number that you are giving us does not include the benefit from the days in the quarter. Is that correct?

No, that's incorrect, Ricky. This is Brad. We have taken the day into account when talking about our organic volume experience.

Okay. So can you just help me bridge that? Because you're starting -- if you can help with the reporting number and what acquisitions added. And were there additional acquisition aside from MEDTOX in that number?

Right. So we reported the 1.1. The day is 1.6% because we reported the per-day volume also of 2.7%. So add back weather 0.5%, you get to 3.2%. And then we're saying organic was flat, which means that acquisitions were the delta. MEDTOX is the majority of that experience.

Okay. So it's a majority of the benefit for the volume. And is it also -- does it carry a lower price per acquisition? Does it -- is it a headwind to price?

Right. That's exactly right.

Okay, okay. And then Dave, can you just give us some color on what type of conversations you're having in Washington these days? And when do you expect to see an updated lab fee schedule and the timing of any other data points that you are waiting for from Washington or CMS?

Well, we're having a lot of conversations in Washington these days on a number of fronts because, as you know, there are a number of fairly pressing issues. One is the suggestion in the President's budget that there be further fee schedule reductions, I believe, beginning in 2015 to our fee schedule. And the -- pointing out to the legislative and executive branch the amount by which our fee schedule has already been reduced in the last 5 years and the inequity of -- and will be reduced in the next couple of years and the inequity of continuing to make reductions. Second, particularly conversation with CMX (sic) [CMS] about the molecular coding issues that are significantly affecting some of the clinical laboratory industry, particularly those that are innovating around the area of molecular diagnostics. And then the general discussion of the value, the great value proposition that the laboratory industry brings and the importance of maintaining appropriate levels of payment, so that not only the large players but also those who serve the niches and the smaller laboratories will continue to provide beneficiary access and critical services for Medicare and Medicaid patients. So I don't think we're expecting any major updates to the fee schedule, but we continue to be very, very, very much engaged at both the legislative and the executive level in discussing all of these important issues for our industry and for patients and for health care services in general.

And does -- from time to time, we're getting asked about the lab co-pay. Is that something that still comes up in your conversations? Or do you think that that's more in the back burner now?

The general topic of a co-pay comes up more in discussions of the idea of a unified Part A and Part B co-pay than it does specifically with the lab co-pay. And I would say that's still very much a topic under discussion. Obviously, we continue to believe that a lab co-pay is not a saving to the government, it's a shift in cost from the government to Medicare beneficiaries and that it will have the perverse effect of actually reducing people getting the services they need and presenting to physicians in emergency rooms much more acutely, and therefore, costing the system money at the end of the day. So we have those discussions. I wouldn't say this is a front burner issue, but it's -- there are still discussion of it in Washington and particularly among the policy people.

Your next question comes from the line of Lisa Gill with JPMorgan. Lisa C. Gill - JP Morgan Chase & Co, Research Division: Dave, you talked earlier about some improved efficiencies around lab consolidation activities, et cetera. Is there a way for you or Brad to quantify what those potential cost savings could be?

Lisa, it's Dave. I think it's early for us to quantify that. So we will at an appropriate time, but now is not the appropriate time. Lisa C. Gill - JP Morgan Chase & Co, Research Division: Do you expect that it would be a material number? Or do you just think that this will be something that will offset inflationary kinds of cost?

I'm hesitant to put a number on it for the reasons I just stated. I will repeat what I think I said on our last call, which is without a lot of fanfare at LabCorp, we're consistently working on the cost structure. We're consistently taking out enough costs to make sure that we deliver great value to our shareholders, and we're going to continue to do that. Lisa C. Gill - JP Morgan Chase & Co, Research Division: Okay, great. And then I heard your comments around ACA, but again earlier in your prepared comments, you talked about emerging health care models. Can you maybe just give us an idea of how you're working with IDNs and accountable care organizations? I mean, we clearly have seen this trend where hospitals are taking more and more volume in-house as they're buying physician practices, et cetera. What are some of the things that you're doing to combat that and to work more closely with both IDNs, physician practices, accountable care organizations, whatever you want to call the new models?

I think the fundamental thing is to expand the range of services that we provide from just pure clinical laboratory services, which, make no mistake, are critical to patient care, but to expand those services beyond just providing a test result to helping the physician select the proper tests, interpret the test results, combine it with the clinical data available on the patient and help guide the physician to better outcomes. And so those are really primary activities. In terms of hospitals, in my view, the pressure on cost, the need for cost reduction, the changes in payment structure will lead hospitals ultimately to look for collaborative ways to work with people who can provide them high-quality services at a lower cost than they can provide it themselves. And if you look at things that hospitals have outsourced and are outsourcing, I think this will continue to be the trend. You've seen anesthesiology, radiology, emergency room being outsourced and I think that's going to continue. So we're really focused on developing collaborative business relationships with hospitals as opposed to just buying customer lists from them, and that's where we're going to continue to stay focused as we develop our capabilities inside this new care model. Lisa C. Gill - JP Morgan Chase & Co, Research Division: And just based on your comments around this new care model, do you think you get paid for not just the volume but it sounded to me like you're almost creating a lab benefit management type company? Is that the right way to think about it? And can you get paid in addition to just doing the lab itself for all of these other services you just mentioned?

I think we can get paid, for the reasons that I mentioned in answer to Gary's question. I don't think we get paid on day 1. I think we have to prove that our capabilities work, but I think we get paid over time. And I would describe it not so much as a lab benefit management system as I would as a care management system focused around making sure that the patient is getting the right laboratory tests, combined with the right other diagnostic and clinical interventions at the right time. And that -- those are the capabilities that we're developing.

Your next question comes from the line of Amanda Murphy with William Blair. Amanda Murphy - William Blair & Company L.L.C., Research Division: So I had a few follow-ups here. So I guess, first, to Tom's earlier question on underlying volume growth. So historically, we've talked about 2% to 3% volume growth, and now we're seeing it more like 0% to 1%. I guess I'm just curious, is there any evidence at this point that we're not -- we haven't just seen a fundamental reset there, just given higher deductible plans? Or do you still expect the volume growth ultimately -- putting ACA aside for a minute, but the underlying volume growth to come back to sort of pre-recession levels?

Amanda, it's Dave. Obviously, the environment has been persistently a low-growth environment. But there are a lot of reasons for that, many of which we've talked about and you've talked about on the -- you guys have talked about on the call already. So higher patient co-pays and deductibles, hospitals acquiring physician practices, generally muted utilization, even weather, all these things have an impact. I'm just not prepared to say that we're not going to return to the kind of typical 2% to 3% volume growth that we've seen historically. It's certainly taken longer than I thought it would. But I still feel very optimistic over time that we are going to see organic volume growth in our business because all of the tailwinds: the aging population, the development of new and more improved laboratory testing, the opportunity for a collaboration with hospitals to move testing to more efficient points of care. I just think over time, yes, we're going to see that historical growth rate that we saw in the past. Amanda Murphy - William Blair & Company L.L.C., Research Division: Okay, that's helpful. And then, you guys have talked about leverage and a desire to increase leverage over time. Is there any update on timing there and what you ultimately might do with those funds?

I think we spoke to that in the prepared remarks, that we do intend to increase the leverage to 2.5x over time and that we would expect, absent sizable acquisition opportunities, that the bulk of that -- those additional funds will be directed toward share repurchase. Obviously, how and when we get there will be determined by a large number of factors, and we can't give you specifics on what the timing will be or how it will play out over time. Amanda Murphy - William Blair & Company L.L.C., Research Division: Okay. And then last one on M&A and you've talked a lot about that already as well. But I'm curious, what type of assets are you seeing coming to market? Is it -- has it changed at all? Or is it still consistent? And in terms of your focus on specific targets, are you sort of still sticking to the core lab space? Or are you considering anything, moving outside of your core business?

I would say in terms of what's coming to market, as you might expect, there's a -- there has been an increase in the number of pathology labs, specialty pathology labs that have come to market. There's probably an increase in the number of labs that are serving nursing homes and long-term care. I attribute these mostly to reimbursement activities by the government. There continue to be a sizable number of opportunities that we think of as kind of being right in the fairway for us, which are core clinical business, specialized esoteric business. In terms of moving outside the core laboratory business, anything that we do is going to be based on our core laboratory capabilities, and I don't see us at this point making any significant moves away from what we've always done, which is be a superior provider of high-quality, low-cost lab services. There are plenty of acquisitions in and around the lab space that are attractive to us, and those are the things that we're going to be focused on.

Your next question comes from the line of Kevin Ellich with Piper Jaffray.

Just a few things, starting off with the issues that hit margins this quarter. I was wondering, Brad, maybe could you quantify the impacts of the weather and payment reductions and the fewer days in the quarter?

Yes. Kevin, I'm not going to break them out each one individually, but I'll give them to you in order of impact. First, the payment reduction was the biggest impact by far to that year-over-year comparison followed by an equally -- an equal impact of the 2 items of a day and weather. So that's kind of how we look at it. When we think about those 3 things, which we can quantify for ourselves, that is the primary difference between margins in the first quarter this year compared to last year.

Understood. And with the day, obviously, that has to do with leap year from last year. But was timing of holiday and the weightings of the days in the week, was that lower this quarter versus last year as well?

Well, we take all that into account when we compute our number of days. So any holiday impact would have been in our computation of the days, and we see about a day less this quarter compared to the first quarter of last year.

Got it, okay. And then not to drill down too much, but SG&A was up a little bit as a percent of revenue this quarter. Obviously, you guys have done a great job of keeping a tight lid on expenses. Just wondering if there was anything unusual this quarter and should we expect a similar types of cost savings over the next few quarters and long term.

Yes. So if I look at the SG&A as a percent of sales, Kevin, it's sequentially in line the first quarter compared to quarters 2 through 4 last year. And it also was impacted by payment reductions, weather and a day. If I look in terms of absolute dollars on a year-over-year basis between Q1 last year and this year, MEDTOX is obviously an impact item there in terms of absolute dollars. In terms of going forward, as tying back to Dave's comments of kind of what we do on an ongoing basis, we continue to look for ways to reduce our costs by doing things better and SG&A is definitely a focal point of a number of those activities.

Got it, okay. And then Dave, just kind of slipping over. In the wake of the Supreme Court's oral arguments for Myriad and BRCA, is there any change to your thoughts on commercialization plans?

Kevin, no, not at the moment. I think, obviously, everyone is very interested in what the outcome of that case is going to be. And when the decision is rendered, we'll make the decision about how we proceed in terms of new opportunities for commercialization of tests or there may not be opportunities. Again, it really is dependent on what the court tells us.

Got it, understood. And then just lastly, I was wondering, could you provide any more color on the Bristol-Myers clinical trials testing announcement that came out? Is that meaningful? And are there other big opportunities you guys are looking at with any of the other major pharma companies?

Sure. The clinical trial central lab business has been a very successful business for us over the last 7 years, and through a combination of acquisitions and organic growth, has basically tripled in size, which we're very pleased about. I think the -- being selected as a preferred partner by Bristol-Myers is a validation that the many things that we've done to grow the business, to create the bioanalytical capabilities, to expand internationally with our labs now in China, Singapore and Japan, we are a real contender in the central lab business, and we will continue to pursue these opportunities because they're great from a pricing perspective and they allow us to do a lot of development work of innovative testing and companion diagnostics in collaboration with our pharma partners.

Your next question comes from the line of Isaac Ro with Goldman Sachs.

First one had to do with market share trends. Just wondering if you would mind compare and contrasting what you're seeing from your larger lab competitors versus the in-source market as we get closer to ACA implementation. I'm just curious where you see the best opportunities to pick up a little bit of share.

Isaac, it's Dave. Obviously, the great majority of testing is still in the hospital environment and it's being performed in a high-cost environment and it's being billed at a high cost compared to our cost and our pricing. So I think the greatest opportunity for gain in share continues to be for the reasons that I've already stated and answered the previous question. The trends are going to drive laboratory services to more efficient and higher quality situses of care, and so I think we're going to see the opportunity to pick up share from hospitals over time.

That's great. And maybe just to follow up there. I mean, I guess what I should have said more clearly is, do you think there's a mindset in the marketplace that as we move closer to ACA, there's more willingness to sort of reassess where our testing gets done, whether it be through the payor side or with hospitals? Did you sense that conversations of that nature are starting to happen as we get closer to ACA?

Yes, I do. I agree with that.

Your next question comes from the line of Darren Lehrich with Deutsche Bank.

Just a few things left here. Wanted to just go back to volume performance in the quarter. And I guess, more specifically, can you give us some level of breakdown between the routine and the esoteric growth in Q1? And then any commentary about where you're seeing some strength or some softness in any particular areas? And Dave, it would be nice just to get your thoughts on hepatitis testing, given the guidelines always had some time for the physician community to react. Just curious to see how that's been trending.

Sure. So esoteric volume in the quarter was up about 2% per day, driven by, well, multiple factors going in different directions. So some nice growth in some of our new testing, offset by some decline in vitamin D and still the pressure on surgical pathology and histology. On the HCV, the year-over-year performance is very impressive in terms of the amount of HCV screen that we're requiring -- I'm sorry, that we're receiving. There has been a significant public relations campaign by the government through the CDC to get baby boomers screened for hepatitis C. So the screening test is not an expensive test, but the volumes are up nicely. And then, of course, for those that screen positive, it's very important that they get follow-up testing, including genotyping testing, viral load testing and, in many cases, the companion diagnostic testing for which drug the patient will respond to. So I continue to think hepatitis C is a big opportunity, and we've had the leading hepatitis C franchise for years, very much strengthened by the terrific work that our Monogram specialty lab is doing. And we look forward to capitalizing on that opportunity over time, Darren.

So you did provide the esoteric growth per day, sorry if I missed this, but the routine, how did that break down?

That would be a little over 3% on a per-day basis.

Okay. And then, Dave, do you care to just maybe size the level of growth for your hepatitis franchise, just to maybe give us some thoughts about how it is growing?

I don't think the -- I don't think it's meaningful to give you percentage increases in the screening volumes because they -- the percentages are going to be grossly disproportionate to the amount of screening that we do. Let's just say we've seen very nice year-over-year growth. And as we get that testing, again, our goal always is not to win tests but to win accounts, so it gives us the opportunity to provide a more comprehensive set of services, both to primary care and specialty physicians.

Okay, that's great. And then if I could, just, Brad, maybe a numbers question here. Income from JVs, not terribly outside of the band of what we'd expect, but definitely a little bit higher this quarter. Can you comment on that and maybe just give us some flavor for how it might look for the balance of the year?

I don't think it was very much different than what we expected and wouldn't expect it to be that much different on the year. So nothing significant that I could point to there.

Okay. And then just the last thing. Any update at all about the Canadian operations? I think there was, at some point, some discussion that you might seek out a partner. And where are you in that? And are there opportunities to go beyond the Ontario province?

There are a number of opportunities in Canada and we continue to spend time there. Very pleased with our businesses that we have, and we are continually looking for opportunities to grow there.

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

Just a couple of quick, last few questions. The first, on the fourth quarter, $49 million of acquisition spending. Can you -- was that an earn-out or was there actually something real in there that you could discuss?

Gary, this is Brad. I'm going to have to go back and look at that and get back to you on that.

But Gary, it's Dave. There was nothing sizable in the fourth quarter that would have contributed to first quarter performance. As Brad mentioned, I mean, MEDTOX is the driver of most of the nonorganic growth.

Got it. And then just my last question. We were reading about Aetna lowering pricing coming up this July in its standard lab fee schedule. Obviously, you don't have a lot of exposure to Aetna with Quest having the national contract. But would this -- is there any way that what they would be doing on the rate side, this particular payor, have any material impact on LabCorp?

I saw the same article that you did, I think, in one of the trade magazines. And we -- and that's the first that we were made aware of it. So I think we're not in a position to answer that question at this time. I don't think it would have a material impact on us given the relationship with Aetna, but I can't give you a definitive answer.

Okay. As -- I'll ask for this, but I expect I probably won't get it: Aetna, as a percent of revenue, broadly? I mean, this is, I would imagine, single-digit percentage of revenue?

Yes, we don't, obviously, specify how much percentage of revenue any of our customers is, so I'm going to make your prediction come true and not tell you the answer.

Your next question comes from the line of Sandy Draper with Raymond James. Alexander Y. Draper - Raymond James & Associates, Inc., Research Division: Most of my questions have been asked and I did have to drop off for a second, so if this question got asked, just tell me to go back to the transcript. Dave, I was curious if you could comment a little bit. I know Lisa had brought up the hospital trend and what's going on there. It's -- clearly, there may be some changes. Are you seeing any change in the marketplace now with the discussions that you're having with hospitals? Or is it sort of still the same in that you expect changes to happen as we get further into ACA and ACOs in further developments? Or are you already seeing more and differentiated discussions than you were seeing maybe 12, 24 months ago?

Sandy, I did comment on that, so I'll just reiterate briefly. I mean, I think that across all of health care services, there are discussions going on about how we can provide the highest quality care at the most efficient point of service. I think there's a greater willingness on the part of hospitals to talk about ways that they can collaborate with us and build a sustainable model over time in which we can work together to provide the highest quality, lowest cost of care with the best outcomes. So there's a lot going on in health care services. There's a lot of change happening, and I think the tenor of the conversations has been very positive. But as fast as change goes, change also go slowly in terms of the way that large organizations do business, and we're going to be -- we're going to continue to be very persistent in pointing out that we can improve the cost structure and the quality side of the way lab services are delivered to patients.

Your next question comes from the line of Frank Morgan with RBC Capital Markets.

I was wondering if you could provide a number on what you expect the consolidated charges and expenses to be on the year? I mean, obviously, you reported some in the quarter for the consolidation activity, but what do you think that number will be in aggregate for the year?

Frank, this is Brad. That's not typically a number that we would guide to.

Okay. Secondly, on the follow-up to Gary's question on -- are there any other major contracts that you have that are of significant size or coming up for renewal this year?

Frank, it's Dave. As we've said, we are in discussions with both Cigna and Humana about contract status, and we expect those to be resolved during the year this year.

Okay. And then one final question. Just in terms of number of tests per requisition, are you seeing any kind of pressure at all from commercial payors on that? Is that a lever that they might have to try to lower overall utilization and cost, and I'll hop off.

It's Dave. I don't think we're seeing pressure on test per requisition from commercial payors. And realistically, I think that would be a very hard lever to pull because the doctor is ordering the tests per requisition based on what he or she thinks is in the best interest of patient care. I think it would be awfully tough to tell doctors, "You're only allowed to order 1.0 tests per requisition."

Your next question comes from the line of A.J. Rice with UBS.

Just a couple of quick ones, if possible. I know we've talked a lot about your discussions with hospitals and others on ACOs and to some degree, exchanges. Any pressure or any offering to -- on their part to ask you to take on any kind of risk-based contracts of any sort? And do you have any openness to that?

A.J., it's Dave. That was a pretty broad introduction, covering everything from hospitals to ACOs to exchanges. So yes, certainly, there are people we talk to who are interested in risk-based contracts. And in the appropriate circumstance, certainly, we would consider that. I mean, if you think about our UnitedHealthcare contract, certainly, it was a risk-based contract in that we agreed to cover some leakage as part of the initial contract. So in the appropriate circumstances, with the right parameters and with us having confidence that we can execute, yes, we would be willing to think about risk-based contracts, but that would certainly be the exception rather than the rule.

So that -- but that's not the way you sort of see this evolving? That, that becomes a meaningfully more significant portion of your business or anything?

Not in the near term, absolutely.

Okay. On the comment about bad debt being one of the places where you'd see some benefit, I guess, one potential, at least to narrow it down, you're running 4.3% bad debt today. How much of that is co-pays and deductibles, and how much of that is uninsured? I'm assuming that the opportunity under ACA would largely be on the uninsured side as opposed to the co-pays and deductibles. Am I right in thinking that way?

A.J., this is Brad. You're right. Most of that 4.3% is driven by our uninsured experience, so that's where we see the potential benefit as a result of ACA.

Okay. So you would say most of the 4.3% is uninsured? There's not a big...

I'd say 70% to 80% -- 70%, 80%.

Okay. All right. And then lastly, and I think you guys certainly spent some time on it last quarter, you mentioned it again today. This upgrade that you're doing of the 10-year testing platform, it sounds like that's sort of unique to this year. Can you give us any sense, is that -- is the cost associated with doing that -- or I don't know if there's any disruption, is that in any way impacting the numbers this year? Is it meaningful enough to do that, that we should be aware that there's a cost that you're incurring for that?

No, I mean, we've called it out as being part of the capital that we're incurring, but it's not meaningful from an expense perspective.

Okay. It's the top of the hour so we have a couple more people in the queue and I'm just going to ask you, unless it's something that really has not been asked before, please, let's try to wrap up the call.

Your next question comes from the line of Anthony Vendetti with Maxim Group.

Just real quickly. Over the last 5 years, can you just give like an estimate of how much the clinical lab fee schedule has been cut? And do you think future cuts will be more driven by specific CPT codes?

Anthony, it's Dave. We -- the clinical lab fee schedule over the last -- I'd say, this year, obviously, it was a 5% cut. I don't have the number right in front of me of what the 5-year impact was, but obviously we can provide that to you. In terms of future cuts, I think the President's budget just talks about an across-the-board fee schedule cut. I understand, though, that individual codes can be reviewed from time to time as the 88305 was this year. So I don't think there's any way of predicting where the pressure will be. But to go back to the discussion with Ricky, we're spending a lot of time through ACLA and individually, in Washington, explaining the value of laboratory services, how they drive physician decisions and support better patient care and why these cuts are really detrimental to Medicare beneficiaries, Medicaid beneficiaries, access and receipt of quality care.

Okay. And esoteric volume, I know it was up 2% per day, but what was it up in total in the quarter?

On an absolute basis, it would have been 0.2%.

Your next question is a follow-up from the line of Kevin Ellich with Piper Jaffray.

Just a quick follow-up. On the uninsured, I think you said that you saw an uptick in Q1. Was that just related to the flu? Or I guess, what drove this uptick?

Kevin, it's Dave. We don't really have any way of knowing. The patients come to the patient service centers or the tests come from the doctor's office. We don't have any way of knowing what's causing the uptick. As we've said many times, flu is not a big driver of clinical laboratory testing, so it would be surprising if that were the reason.

And at this time, we have no further questions. I would now like to turn the call back over to Mr. David King for any closing remarks.

Thank you. I do just want to close with a personal observation, and that is that, as I think you all know, Bob Hagemann is leaving Quest and so this is our opportunity to say something about Bob. And what I would say is there's a lot of respect at LabCorp for Bob. I think he's been around for more than 15 years. And when he started in this industry, the industry was flat on its back with DSOs over 100 and bad debt over 10%. And it's guys like Tom McMahon [ph] and Ken Freeman, West Allenberg [ph] and Bob Hagemann who really had the discipline to help put this industry back on its feet and turn it into what it is today, which is a tremendous value and a great driver of exceptional patient care. So as I said, there's a lot of respect here for Bob Hagemann. The industry will miss him, and we wish him well in all of his future endeavors. And with that, we wish you good day, and thank you for listening to our call.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.