Dan Haemmerle - Executive Director of IR Steve Rusckowski - President and CEO Mark Guinan - SVP and CFO.

David Clair - Piper Jaffray Bill Bonello - Craig-Hallum Darren Lehrich - Deutsche Bank Michael Cherny – Evercore Bret Jones - Oppenheimer Amanda Murphy - William Blair Isaac Ro - Goldman Sachs Bryan Brokmeier - Maxim Group Brian Tanquilut – Jefferies.

Welcome to the Quest Diagnostics fourth-quarter and full-year 2014 conference call. At the request of the Company this call is being recorded. The entire contents of the call including the presentation and question-and-answer session that will follow are the copyrighted property of Quest Diagnostics with all rights reserved.

Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Quest Diagnostics is strictly prohibited. Now I would like to introduce Dan Haemmerle, Executive Director of Investor Relations for Quest Diagnostics. Go ahead please..

Thank you. Good morning. I am here with Steve Rusckowski, our President and Chief Executive Officer, and Mark Guinan, our Chief Financial Officer. During this call we may make forward-looking statements and also discuss non-GAAP measures. Actual results may differ materially from those projected.

Risk and uncertainties that may affect Quest Diagnostics' future results include but are not limited to those described in Quest Diagnostics 2013 annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Our earnings press release is available and the text of our prepared remarks will be available later today in the investor relations quarterly update section of our website at www.QuestDiagnostics.com. A PowerPoint presentation and spreadsheet with our results, supplemental analysis are also available on the website. Now here is Steve Rusckowski..

Thanks, Dan, and thanks everyone for joining us today. This morning I will provide you with highlights of the quarter. We will share industry trends and also we will review our progress that we are making executing on our 5-point strategy. Then Mark will provide more detail on the results and take you through guidance.

We continue to make progress on our path forward delivering solid revenue and EPS growth in the fourth quarter and the full year. In the quarter, revenues grew 7% to $1.9 billion, adjusted EPS increased 5% to $1.08 and cash from operations was strong at $303 million. For the full-year 2014, revenues grew 4% to $7.4 billion.

Adjusted EPS increased 2.5% to $4.10 a share and we generated $938 million in cash. Our performance reflects improved execution and a stable business environment. That combined with our ability to generate substantial and predictable cash flow has enabled us to raise our quarterly dividend 15% to $0.38 a share.

This is the fourth time we have raised the dividend since 2011. Before I get into our performance, I would like to talk about industry dynamics, specifically utilization, reimbursement and regulation. To start with in utilization, we continued to see signs of modest increase in utilization.

We are encouraged by the progress on exchange enrollment as the result of the Affordable Care Act. During the fourth quarter, we continued to see stability in test volumes on what we are calling a same provider basis.

On reimbursement, we will see less government pressure on the clinical lab fee schedule in 2015 than we have seen in the previous 2 years.

At this time our industry is focused on effectively implementing the Doc Fix legislation also known as Protecting Access to Medicare Act of 2014 or PAMA, which calls for an orderly review of the clinical lab fee schedule.

Our industry trade association, the American Clinical Lab Association, ACLA, continues to work closely with the centers for Medicare and Medicaid services on the rulemaking process. We are hopeful the rulemaking process will be defined in 2015 and will establish an approach to building a representative view of the market.

The market view that will be used to update the fee schedule should include participants from the entire market including large and small independent commercial labs, boutique labs as well as hospitals.

The current timetable calls for data to be collected from the market participants in 2016 and any revisions to the fee schedule would therefore go in place no sooner than 2017. We will continue to update you on the progress as we know more in the coming year.

Another important issue facing the industry is the FDA's proposal to extend regulatory oversight to laboratory developed tests.

The American Clinical Lab Association is actively opposing the FDA's proposal and has engaged 2 highly respected experts in constitutional law in the administrative procedure, Laurence Tribe From Harvard Law School and Paul Clement, the former Solicitor General of the United States.

The FDA's proposal is regulatory overreach at its worst and is bad for patients and the healthcare industry. For that reason, the American Medical Association, the American Hospital Association and other leading healthcare providers have urged the FDA to withdraw its proposal. Now for an update on our performance.

We continue to improve on our ability to execute the Company's 5-point strategy. As a reminder, our strategy is to restore growth, drive operational excellence, simplify the organization, refocus on the core diagnostic information services business and deliver disciplined capital deployment.

Let's start with our highest priority, growth, and reviewing our progress. In 2014 we executed our strategy and restored growth. First, we improved our sales effectiveness on how we call on the market.

As you have heard me say before, our go-to-market team is better led, better managed, better staffed, better trained, better equipped, better motivated compared to 2 years ago. We have seen continued improvement on our underlying revenue trends this year. In the fourth quarter, organic revenues grew 60 basis points versus last year.

This is the first quarter of organic revenue growth since I joined the Company in May of 2012. Second, our professional lab services business has announced and implemented 6 new relationships in 2014 which are on track to deliver $40 million in annualized revenues. The most recent contract was finalized in the fourth quarter.

Third, part of our improving performance is a result of our strategy to focus on esoteric testing through our clinical franchises. We saw sequential improvement in gene based and esoteric testing for the third consecutive quarter.

Some specific tests that are growing faster are our BRCAdvantage breast cancer testing, noninvasive prenatal testing, and hepatitis C. I am also proud of a growing list of strategic partnerships with healthcare leaders that include Memorial Sloan-Kettering and the University of California San Francisco.

In addition, we have continued to see notable growth in the quarter in prescription drug monitoring, wellness and infectious disease franchises. We are also making progress on some of the longer term goals to realize the promise of precision medicine and the value of our information assets.

During Investor Day, we spoke about our new capabilities we are developing that leverage our connectivity solutions and build on Quest's strong history of healthcare IT innovation. We are developing tools that focus on population health as well as improving provider and patient engagement. I would like to say a few words about each of these.

First in regards to population health, our Quest analytical tools will help health plans, ACOs, health systems and care coordinators identify clinical risk, target and close gaps in care, review performance from our clinical performance scorecard tools, monitor quality metrics and query patient test information using a new self-service capability that provides on-demand access to their patient data.

We have actually seen strong interest in these tools from our customers and you will hear more about them over the course of 2015. In addition to population health tools, we are making progress delivering what we call interactive insights to providers and patients.

Our interactive insights for providers deliver trended data, interactive features such as customizable reports and additional content such as videos and articles specific to specific conditions and diseases. In the back half of 2014, we launched pilots with providers in women's health and prescription drug monitoring.

And then finally, about 1.3 million patients have engaged with our new MyQuest patient application which lets them access and control their own health information. The value of our information assets reaches well beyond our providers and patients.

A good example of this is the recent commercial expansion of our relationship with the Centers for Disease Control to improve the surveillance of hepatitis C. This demonstrates the value of not just our data but also our diagnostic insights in helping to manage significant public health issues.

The CDC relationship builds on the vision we established just 2 years ago that speaks to the impact we can have on people's lives. Our vision is to empower better health with diagnostic insights.

Our vision was in a central part of becoming more external and customer focused and over the past 2 years we have made tremendous progress bringing that vision to life. We are more than a lab. We are a diagnostic information services company and a trusted partner. Finally, our strategy calls for a 1% to 2% growth through acquisitions.

During the past year, we closed 3 acquisitions Solstas, Steward and Summit. Next is our strategy for driving operational excellence. The Invigorate program delivered significant cost savings. Our original 2011 savings target was $500 million.

We raised it to $600 million at our 2012 Investor Day and I'm pleased to say we finished 2014 at more than $700 million in run rate savings. We are well underway with the planning of the next phase of Invigorate which will extend our cost savings to $1.3 billion by the end of 2017. As in the past, we will continue to update you on our progress.

Well beyond cost excellence, our efforts to drive operational excellence has always focused on quality and building a superior customer experience. This is a fundamental principle of quality improvement. We track actually 150 medical quality and service metrics. We continue to make progress broadly on many of those metrics.

In particular, we delivered 6 Sigma quality on our specimen delivery metric. We have achieved record availability for our order entry results and reporting application called Care360, which puts us at world-class service levels and we have reduced the time it takes us to install EMR interfaces.

We are improving service levels while also building a more efficient operation. Our progress on service levels are actually a testament to the commitment of 45,000 employees who help us deliver excellent service each and every day. They really are the Quest difference.

As you can see, we have made strong progress restoring growth and driving operational excellence. A key driver of this has been our third strategy, building a stronger organization to improve our performance. We now have a stronger team and a more simplified organization than last year.

The fourth element of our strategy is to refocus on the core business. We continue to review our portfolio and look at options for non-core assets and we are always striving to build value for our shareholders. Finally, we remain focused on the fifth element of our strategy, delivering disciplined capital deployment.

We returned the majority of our free cash flow to our shareholders in 2014. We just raised our dividend 15%. This is the fourth increase in 3 years and in the quarter, we paid down debt and repurchased shares consistent with our commitment earlier this year.

Now Mark will provide you an overview of our fourth-quarter financial performance and walk you through the details of our 2015 outlook which is based upon our strengthening operational performance and improving business environment.

Mark?.

revenues to increase between 2% to 3% compared to 2014; adjusted diluted earnings per share excluding amortization expense to be between $4.70 and $4.85; cash provided by operations to approximate $850 million, and capital expenditures to approximate $300 million. Now let me turn it back to Steve..

Thanks, Mark. Well to summarize, we delivered solid top and bottom line growth in the fourth quarter. In doing so, we reported organic revenue growth as we continue to build momentum. We have made good progress executing on our strategy.

As a result, we have met our commitments for 2014, raised our dividend once again and have provided guidance for 2015 that shows continued improvement. We thank you for joining us this morning and we would be happy to take any of your questions.

Operator?.

Thank you. We will now open it up for questions. [Operator Instructions]. Our first question or comment comes from David Clair from Piper Jaffray. Your line is open. .

Hi. Good afternoon, guys. Thanks for taking my question. .

Good morning, David. .

Good morning, Dave..

So first question from me, you mentioned looking at non-core assets during your commentary.

Can you give us any details on areas that you would potentially be interested in?.

Sure. Well, in 2012, we laid out those businesses that were core and those things we would consider our options for. One of those categories were our drug assets. We actually monetized one of those as you will recall with ibrutinib. We still have one remaining. That is something we would consider.

And then also we talked about our products business, Celera products is a product line if you will that we talked about. So those are 2 that we would consider our options for..

If the FDA LDT regulations go through, do you have any estimates in terms of what it might cost you guys and is any of that built into estimates for 2015?.

No, first of all, we don't believe it should go through. We believe it is not good regulation. We already have regulation with CLIA. If we need to do a better job with quality and regulatory approvals, then we should improve CLIA. In that regard, the FDA has heard some of the feedback through their panels, is reviewing what we have been talking about.

So we will see where this evolves but we have no estimate of what it would cost us at this point if in fact it were to go through..

Thanks. Congratulations on a nice quarter..

Our next question or comment is from Lisa Gill from JPMorgan. Your line is open. .

Hi. This is actually (inaudible) in for Lisa. .

Hi, there. Good morning. .

Good morning, Gavin [ph]. .

Good morning. I just wanted to get some more color on your expectations for market growth. I think you said at Investor Day that you thought the market would be growing 2% to 3% and that you would be growing faster than the market because you are targeting prior growth areas.

Can you just walk me through what you are expecting for market growth in 2015?.

What we said is that we believe the market - when we do our models - this is mid- to long-term market growth - would grow 2% to 3% and this is for the independent commercial lab market so it excludes commercial outreach businesses from hospitals.

In that number we have anticipated growth in population, we have anticipated growth in insured lives, gradual build in lives that have insurance from the Affordable Care Act. We have also considered the advancements of what we do is also going to provide some growth in the marketplace. So that is what we believe the growth to be.

We also shared in the fall that we said back to years ago what we will do is show gradual improvement in our organic revenues. We needed to first stop the decline. We needed to flatten out and what you've seen in the back half is that actually we do believe we have underlying organic growth. In this quarter we actually did show organic revenue growth.

So we are progressing with our improvement step-by-step. We need to next grow with the market and then finally start growing faster than the market gaining share. So that is the progress we are making. What we laid out today for guidance for 2015 is consistent with that view..

And then just touching on core business and some of the business that you walked away from this year when you saw the improvement in volumes in the quarter, is there any expectation to exit other business lines or customers in 2015 or do you feel like you have lapped that trend?.

There always could be exceptions. Obviously we are continuously evaluating our portfolio of business relationships. But as we said, that was kind of a one-time exercise to look across the broad portfolio and you should not expect that kind of volume impact certainly going forward into the future.

So yes, we will continue to look at every relationship, make sure that they all make sense but I think you would consider what we did in the second quarter somewhat extraordinary and not a normal procedure that you should continue to see going forward..

Okay, great. Thank you very much..

Thank you. .

Our next question comes from Bill Bonello from Craig-Hallum. Your line is open..

Hey. Great. Good morning, guys. .

Hey. Good morning, Bill..

I have a question I guess on sort of operating leverage here. Essentially I am struggling to understand maybe why you haven't been showing more leverage on the income statement. It seems like pricing pressure was actually pretty moderate, the cost savings you are recording are huge.

I guess I'm just wondering A, what we are missing in terms of offsetting factors? And then two, what changes that you start to show EPS growth significantly outpacing revenue growth in 2015?.

So a couple of things, Bill. In 2014, we talked about the fact that we had 3 things that really were impacting our ability to leverage Invigorate. One was price which was less severe than 2013 but was still there.

The second one is our annual wage inflation and then the third piece was this management comp issue which really is hopefully a one-time year-over-year bad guy compare because of the underperformance in 2013. So when you add all those pieces up as I mentioned in the prepared remarks, those certainly were a headwind to leveraging the P&L.

The other thing is we are still early in some of the acquisitions while we have made progress and certainly they are more profitable than when we acquired those businesses, we are not fully synergized.

We just have some of that in front of us so you are adding a fairly significant book of revenue that is not at our going operating margins and therefore based on math, it shows some deleverage.

As we laid out the plan in the Investor Day, tried to make clear that going forward we expect that leverage so we are giving a view that certainly we are going to grow income faster than the top line and that is really going to come from 3 things. One is to complete those synergies.

The second thing as we return to growth and I think you've seen, we are making continued progress and we said it is going to grow in strength over the 3 years of that horizon. So we expect more organic growth and getting up to market growth toward the latter part and not immediately in 2015. That drop through will help us to leverage.

And then the third piece maybe most importantly is that Invigorate will be large enough that it will offset any pricing and wage inflation headwinds and contribute to the bottom line which we have not been able to do in prior years..

Okay, thank you. That was very helpful. Just for a related follow-up then on that.

Can you at this point - the acquisitions that you did over the last year, are they at this point additive to net income would you say? Maybe just some sense of maybe what their contribution would be relative to the rest of the business?.

Yes, they are contributing to EPS as I said not at a margin ratio of the organic book of business. When we executed the deals, we talked about in the first half them being fairly breakeven and then contributing in the back half.

So we haven't given a specific EPS contribution number, Bill, but it is positive and it will continue to improve throughout 2015 as well..

Thank you very much..

Thank you..

Thank you. Our next question or comment is from Darren Lehrich from Deutsche Bank. Your line is open..

Okay, thanks. Good morning, everybody..

Hi, Darren..

So I just wanted to come back to your commentary about the 3-year outlook in the context of the 2015 guidance. And specifically just I want to better understand the cash flow dynamic in 2015. Mark, you alluded to management comp and the extra payroll cycle in 2015 as being the year-over-year factors.

Can you just size those so we can understand the number CFFO number being down somewhat? And are you still thinking that high single-digit cash flow growth is possible over the 3-year outlook period?.

Yes, certainly we expect cash flow to grow commensurate with our earnings growth going forward. You know the calendar, there is not even weeks in a calendar so every 7th year you end up with this payroll cycle issue. It is tens of millions of dollars so it is significant.

And then the management comp piece which you will be able to see within the proxy and so on and so forth is also tens of millions of dollars.

So really the $80 million decline that we are implying based on the guidance is more than covered by these 2 items so without these items we would be growing our operating cash flow and really these 2 items are explaining why it is down..

Okay, that is helpful. I just wanted to follow-up if I could, Mark, on a comment you made around buyback and I guess the take away is that there isn't really much buyback in your outlook for EPS.

But I just want to make sure I understand how you are framing it, is your buyback philosophy any different or are you just basically stating that your guidance doesn't contemplate a lot of buyback? I just want to understand if you have changed your stance on how you are going to deploy capital toward buyback in 2015?.

No change. In our 5-point strategy, we talk about the fact that we are committed to a majority of our free cash flow returning to shareholders and then above and beyond that we weight the best use of cash or the most critical need for that cash and typically we say we balance that between M&A and additional share buybacks.

Given the M&A we executed last year, we did take on some significant debt and we have been paying down that debt. So really this comment is more of a short-term - the guidance that we are giving, it includes a flat share count.

At the Investor Day, I just for simplicity sake, I gave you earnings growth without share reductions, that does not imply that going forward there could not potentially be buybacks to reduce our shares outstanding. But it was really just to make it a little clearer in terms of what we were suggesting.

For 2015, we have not in our guidance we have not assumed a reduction in our share count and we wanted to make sure that was clear..

And so the guidance basically suggests about 6.5% EBIT growth, is that fair to say at the midpoint?.

Yes, I think that is reasonable. As I am sure you understand when you have amortization fall off $0.04 approximately from 2014 to 2015, it actually makes the cash EPS look less favorable, I wouldn't expect that kind of a change every single year going forward. So it kind of confounds the comparison a little bit.

So that is why we thought it was important to make clear that we started with the 6% to 10% on the old basis and then we kind of did the math and bridged to the cash. And so instead of $0.40 which it was in 2014, it is actually $0.36 in 2015 the amortization that we are adjusting out..

Okay, thanks, guys..

Thank you..

Thank you. Our next question comes from Mike Cherny from Evercore. Your line is open. .

Good morning, guys, and thanks all the details. .

Good morning, Michael..

So Steve, you made a pretty impassioned statement as I would view it relative to what is going on with the long-term review of the clinical lab fee schedule. And I keep coming back to this concept and topic of I think I tend to agree with you that the entire market should be represented in this testing basket.

And so when you are having our conversations with CMS, what is the pushback as to why they say that at this point or why they are not jumping up and saying that this will be all the participants? Why are they holding back given the fact that this is still a pretty full market as you mentioned with all of the various different segments that are represented?.

I will share with you - I wouldn't say that they are holding back. What we are doing is we're trying to work through this rulemaking process with them and if you think of about gathering all the data that they need to gather to get a real thorough reflection of the market, it is very complex.

So you are dealing with all the independent commercial labs, big and small. You are dealing with all the contracts we all have with our commercial payers. And then you are dealing with all the different diagnostic tests that we have. And then also you are dealing with hospitals.

And so part of this is trying to understand how they are going to require the reporting for a representative view of the market. It was always in the intention of the bill, it is in a bill that hospitals are part of the market and therefore they need to report.

And what they are working through is how they are going to be able to accomplish what was intended by the bill from Congress and that is what they are working through. With anything, it just takes time. We haven't seen where they are with it.

We continue the dialogue so as we said in our remarks, we are hopeful that we will see the rules in 2015 as we should so we can collect the data in 2016 and we shouldn't see an adjustment to the clinical lab piece scheduled sooner in 2017.

And that is still the timetable we are working with and we are doing everything we can to help them to make sure they do realize that they will get our market representative view including all participants of the markets - the market including hospitals..

Thanks, Steve.

Just quickly relative to the M&A comment, have you seen any change in the attitude of sellers over the last 3 to 6 months in terms of their willingness to sell either more willing or less willing given some of the changing market dynamics, given some of these questions you have brought up such as what is going to be included with the clinical lab fee schedule, what is going to happen with regards to FDA legislation, of LDTs, anything different when you go out and talk to potential acquisition targets?.

I would say this is we have a right strategy. We have always had the strategy of getting a portion of our growth from acquisitions. We said 1% to 2%. As you know, we are higher than that number in 2014. We believe we will have some opportunities that as Mark said are not in our guidance in 2015.

If you look at what we have acquired in the past, we think that's some hospital outreach businesses that we believe will be accretive to us.

We picked up some regional laboratories, 1 big one with Solstas and then we bought a couple of business that are in a faster growing part of the market, this is Summit in wellness and also a business in drug for our solutions testing business which is quite strong for us.

So we are optimistic that we do have a reasonable pipeline for acquisitions and we believe we will meet again our commitment of that 1% to 2% topline growth in acquisitions in 2015. As far as is there more interest or less interest, I won't comment on that. I would just say it is consistent with what we have seen so far.

But healthcare in general is going to consolidate and we will be a consolidator and therefore we think for the mid- to the long-term this is the strategy..

Thank you very much..

Thank you..

Thank you. Our next question or comment is from Bret Jones from Oppenheimer. Your line is open..

Hey, Bret..

Hey. Good morning..

Hey. Good morning..

Hey. Good morning. Thank you. I was wondering if you could talk about, we have been talking about M&A quite a bit this morning.

Can you talk about what happened with the Summit Health deal in terms of reversing the contingent consideration? Was this relative to kind of volume expectations, was it cost synergies a little bit behind schedule or anything along those lines?.

This is Mark. It was completely revenue based and nothing to do with cost. And I'm sure you are familiar with some of the ways that you work through differences between buyer and seller over the projection of the business going forward is setting up some of these contingent considerations or earn outs.

And without getting into too much detail, you might assume that the seller have a view and we have a little different view and so that is the way we came to an agreement on the purchase price. So we are happy with the performance of Summit. It is meeting our expectations.

It may have fell short from some potential upside that would have given the seller some upside in the purchase price..

Okay, great. Then I just wanted to follow-up on the reimbursement side of the equation for next year within your guidance. Are you still assuming a 1% to 2% pressure? I wasn't quite clear.

I know you said lower government pressure but I didn't know what you were contemplating on the private pay side?.

Dan, do you want to handle that one?.

Sure. The 1% to 2% is really the range that we have given at our 2012 Investor Day and it related to the period 2013 to 2015. So if you look at that period, that 1% to 2% range we still feel pretty good about what we said for next year.

No specific guidance but we would expect that reimbursement pressure will be more along the lines of what you saw in 2014..

Yes, so the 1% to 2% included 3% in 2013 and so that was not 1% or 2% every year. It was a CAGR and then to be clear as Dan said, we said 2015 should be more like this past year..

And then can you just….

And then one….

I’m sorry. .

Lab fee schedule - the effect that we know of. Yes. .

Yes. So the clinical lab fee schedule on the Medicare side has been reduced for 2015.

It is a combination of a couple of different factors but it is going to be a reduction of about 25 basis points and on the physician fee schedule that is one where there is some codes - some codes that have moved up, some codes that have moved down and net net it is really essentially neutral in rounding in terms of how you think about overall impact..

So those 2 pieces are less than what we have seen for the last 3 years..

That's very help.

Lastly, any big commercial renewals that you have coming up?.

Nothing that is notable that we would share at this point..

Okay. Thank you very much..

Thank you..

Thank you. Our next question or comment is from Amanda Murphy from William Blair. Your line is open..

Hey. Good morning, guys. .

Good morning, Amanda.

Good morning..

Just a quick question on the mix. I think you mentioned that the mix benefit was positive this quarter and I am thinking if we do the math it is around 50 basis points.

I wasn't sure about that but can you just talk a little bit about what is driving that? And then how you think about that going forward because I think mix has been a pretty - it has been at least a headwind for a long time here so just curious about next year if you can give any commentary there? Thanks..

Yes, it was a help. As we introduce new offerings like BRCA that tend to have a higher value per requisition, certainly that helps.

Some of the headwinds that we have had in the past as we have always shared has been really in the pathology part of our business which does also have a high value per requisition and some of these reimbursement cuts in that space which certainly has impacted overall revenue per requisition.

And again, I want to stress that you should not assume there is a direct relationship between higher revenue per requisition as a higher margin and lower revenue per requisition as a lower margin. It can be a little bit misleading at times depending on whether it goes up or down and making an assumption on that impact on the bottom line.

So we really expect as we continue to go forward overall to see favorable mix as we introduce some of these new higher value service offerings..

And Amanda, we saw, as Mark said, some growth in esoteric, we also saw overall continued progression and improvement in our overall test per requisition as well..

So is the right way to think about it kind of in that 50 basis points ballpark? It used to be higher than that at one point I think..

Yes, it used to be higher. If you look at what we said, the reimbursement pressure was less than 50 basis points, the business and test mix offset that to get us from a revenue per requisition perspective essentially flat. So it is something less than 50 basis points is a fair way to think about it..

And just last one. I don't think you mentioned the Mopath situation.

Has there been any change there in terms of payments from some of the legacy - ?.

No changes at this point, Amanda, nothing really worth mentioning on the call..

Okay. Thank you..

Thank you..

Thank you..

Thank you. Our next question or comment is from Isaac Ro from Goldman Sachs. Your line is open..

Good morning, guys. Thank you. .

Good morning, Isaac..

Good morning, Isaac..

Hey. I just want to ask a question on free cash flow. You had a nice improvement year-on-year but we are still off the high from 2012.

So would you be willing to offer a little bit of guidance on what you think free cash flow could look like this year and what some of the key levers are to driving it?.

The guidance that we provided is $850 million in operating cash flow and $300 million approximately in capital. Certainly 2012 when you look back 2012, the EPS was again higher than 2013, 2014. We are starting to get back to that relative level. We do have some - as I said, some headwinds this year.

Again back to that payroll cycle again, it is the same amount of expense flowing through the P&L. It just happens that if you cut the checks on December 31 instead of January 1, it happens to hit your operating cash flow in 1 year versus the next year.

So that is really the anomaly that I think distorting our cash flow both operating and free cash flow in 2015 relative to really the performance trend. So we are very focused on cash. Hopefully, Isaac, you see that. We have said that we expect cash to grow commensurate with earnings.

As we move forward and get the high single digits to potentially 10% compound earnings growth over the next several years, you should expect cash to be in that ballpark..

Isaac, one other comment just on the 2012 strong performance. Keep in mind there were some tax payments that got deferred into 2013 related to Hurricane Sandy and some benefit related to some interest-rate swaps so a couple of items there that helped that 2012 performance..

Sure, understand that. Thank you. Just secondly on portfolio rationalization, I think you mentioned a little bit kind of your thoughts around progressing there.

Wondering if you could maybe put some criteria out for us in terms of what you are using to evaluate some of those moves?.

We use similar financial metrics that we would use for an acquisition so we look at kind of the standalone. If we continue to hold onto that asset and what kind of value creation we think would take place if we held onto it and then we would look at what the market might offer us for that same cash flow.

Or potentially in the cases where we monetize where they may have a better view of cash flow and think they can do better with the assets than we could. And that is where you can end up finding a deal. So it is really back down to the financial metrics around NPBs and looking at the return on invested capital and things like the earnings impact.

That is the evaluation we use..

Got it. Thanks so much, guys..

Thanks, Isaac..

Thank you. Our next question or comment is from Bryan Brokmeier from Maxim Group. Your line is open..

Hi. Good morning. Thanks for taking the questions. .

Hey, Bryan. Good morning..

Looking at the impact ACA had on your business in 2014, could you provide some color to help us anticipate how volumes and revenues may impacting 2015? Should we start to see it happen somewhat quickly in the first quarter, maybe a quarter or 2 later? Sort of some color around what you saw last year..

So what we have said in 2014 is we started to see some modest underlying improvement particularly around Medicaid lives with the expansion of Medicaid in many of the states. That was probably the most notable lives that we saw entering the system.

And as I said earlier as far as our market projections, we do believe there is going to be gradually more insured lives in this country going forward and when those matured lives enter the system they are going to need what we do and that is a good fact. We think the Medicaid volume dynamic we saw in 2014 will continue.

We think the exchanges will continue to build and then we also think the employer mandate will help us as well. So this will be a gradual build. We haven't given specifics but it is already assumed in our view of the market and assumed in our view of our guidance or outlook for 2015..

Okay, thanks. Mark, fuel prices have been cut in half. I know it is not a large expense for you but if 1% of your cost decline by 50% that translates into $0.03 or $0.04 in EPS or 2% to 3% in EPS growth by my estimates.

Is a 1% of your total cost a fair estimate of what you fuel costs were and now they are about 0.5% of your total cost? And the $0.03 to $0.04 a fair estimate?.

Yes, what I will tell you Bryan, is it is significantly less than 1% so it is not at the 1%. It certainly is helpful and I was asked this question at the previous call that it is small millions. It is not several pennies but it is certainly helpful to our cost at this point..

Okay, thanks..

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

Hey. Good morning. This is Zach [ph] for Ricky. I just wanted to ask a follow-up on ACA a little bit.

And if you look at the actual lives from the ACA whether it is Medicare exchanges, are you seeing from the individuals any commentary you can give on the actual utilization of those individuals versus the total number entering? And then what you are seeing from pricing on exchanges versus utilization or versus Medicaid?.

First of all, what we said before, we are doing every quarter we do a dipstick reading on what is going on with our underlying volumes and you heard in my remarks to start this call, we actually are calling it now on a same provider basis.

So we are taking good existing customers, we are comparing year-on-year assuming that whatever volume increases we see there are really truly utilization increases.

What we said last what are we will continue to say this today, we are seeing some slight improvement in underlying utilization and we think that is a good indication of what could be happening in the marketplace but that is what we have seen so far.

As far as pricing on the exchanges, we actually have said in the past we think it is consistent with what we see in general in our commercial contracts so we feel okay about that for now..

Okay, cool. Thank you.

Then just on your market share growth versus the hospital labs, I know earlier you talked about excluding hospital outreach, any changes in the dynamics of what you are seeing from hospital-based testing?.

What we saw happening in the last 2 or 3 years is hospitals buying physicians and as they bought physicians their trying to direct a lot of the laboratory services to their outreach businesses and that did have an effect on this industry.

The overall acquisition of physicians by integrated delivery systems continues but they are running out of some room.

Obviously in the specialist areas, most of the specialists in some specialist areas are already working for integrated delivery services or integrated delivery networks like cardiologists but there is still some primary care practices that are starting to pull in.

With that said, we believe it is less of a dynamic than we have seen in the past but it is still a dynamic, they do compete with us in the marketplace and that is why it is so important that when we look at this market based view on prices that we will use for the refresh of the clinical lab fee schedule that we include them in the market..

Great, thank you..

Thank you..

Thanks..

Thank you. And our last question comes from Brian Tanquilut from Jefferies. Your line is open..

Hey. Good morning, guys. Hi. Good morning. So just a follow-up to that last question. As you talk to your hospital partners and some of your targets, how are they viewing the potential changes to reimbursement because it could be a pretty significant cut for them.

So is this starting to drive the conversation of them wanting to pursue or explore strategic alternatives or options for those hospital-based labs?.

This is why we have focused on this as one of our 3 platforms of growth in our restore growth strategies.

We built a laboratory professional services business and what we are doing is having a dialogue with the CEO and CFO of integrated delivery systems around their labs strategy which would include how we can help them run their inpatient plan which we call laboratory management and what we can do to be a bigger strategic supplier for their more advanced testing we call reference testing.

And then finally is what are their plans around outreach. And in those dialogues and I will share with you that our funnel and our prospect list of those conversations has built to a higher level than we would have anticipated.

The interest of having the dialogue has increased and very rarely do we find a C-suite of an integrated delivery system not interested in that discussion. So what you are talking about and what you are asking is right in line with our strategy and we are still very optimistic about the prospects on this part of our strategy..

The follow-up question for you, obviously congratulations on finally getting the organic growth same-store positive.

But what gives you guys the confidence that we can get to 2% to 3% number considering that we are coming off of a positive 40 basis point number for Q4?.

Remember the 2% to 3% does include the carryover on acquisitions. It doesn't contemplate new acquisitions. And what you have seen is our progress on the underlying organic volumes over the last several quarters and particularly in the back half, we are tracking at a better level than we did in the first half.

So that is why we feel good about our outlook for 2015..

Got it. Thanks, guys..

With that, I want to thank you all for joining the call. As you can see we are making good progress executing our strategy. We met our commitments for 2014 and we raised our dividend once again. We appreciate your support. And I would like to wish you all a good day.

Operator?.

Thank you for participating in the Quest Diagnostics fourth-quarter 2014 conference call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics website at www.QuestDiagnostics.com.

A replay of the call may be accessed on line at www.QuestDiagnostics.com/investor or by phone at 866-498-3465 for domestic callers, or 203-369-1791 for international callers. Telephone replays will be available from 10:30 AM Eastern time until midnight Eastern time on March 1, 2015. Goodbye..