Jan 26, 2009
Executives
Surya Mohapatra – President & CEO Robert Hagemann – SVP & CFO Laure Park – VP IR
Analysts
Amanda Murphy - William Blair Jason Gurda – Leerink Swan Ricky Goldwasser - UBS Adam Feinstein - Barclays Capital Darren Lehrich – Deutsche Bank Gary Taylor - Citigroup Arthur Henderson - Jefferies & Co. Robert Willoughby - Banc of America Securities Ralph Giacobbe - Credit Suisse Bill Quirk – Piper Jaffrey [Shelly Noll] – Goldman Sachs
Operator
Welcome to the Quest Diagnostics fourth quarter 2008 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 expressed written consent of Quest Diagnostics is strictly prohibited.
Now I'd like to introduce Laure Park, Vice President of Communications, and Investor Relations for Quest Diagnostics; you may proceed.
Laure Park
Thank you and good morning. I'm here this morning with Surya Mohapatra, our Chairman and Chief Executive Officer; and Bob Hagemann, our Chief Financial Officer.
Some of our commentary and answers to questions may contain forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date that they are made and reflects management’s current estimates, projections, expectations, or beliefs and which involves risks and uncertainties, that could cause actual results and outcomes to be materially different.
Risks and uncertainties that may affect the future results of the company include, but are not limited to adverse results from pending or future government investigations, lawsuits, or private actions, the competitive environment, changes in government regulations, changing relationship with customers, payers, suppliers and strategic partners and other factors described in the Quest Diagnostics 2007 Form 10-K, 2008 Quarterly Reports on Form 10-Q, and current reports on Form 8-K. A copy of our earnings press release is available, and the text of our prepared remarks will be available later this morning in the Quarterly Updates section of our website at www.questdiagnostics.com.
Additionally we have posted a power point presentation and a spreadsheet with our results and supplemental analysis on the website. Now here is Surya Mohapatra.
Surya Mohapatra
Thank you Laure, we delivered another quarter of solid performance completing a year of strong revenue and earnings growth. During the fourth quarter earnings per share increased 10% to $0.87, revenues increased to $1.8 billion, and cash flow increased to $363 million.
For the full year the earnings per share increased 14% to $3.23, revenues increased 8% to $7.2 billion and cash flow exceeded $1 billion. I am pleased with our continued progress.
We are able to exceed our commitment for earnings growth in 2008 despite the current economic environment. The fourth quarter and full year results represent outstanding performance.
We are in a recession while the rate of our growth could temporarily slow as a result of external economic factors, we expect continued growth in revenues and earnings. To the extent that economic impact is more severe then we anticipate, we are also prepared to take actions necessary to further adjust our cost structure.
For 2009 we expect revenues to grow approximately 3% approaching $7.5 billion and earnings per share to grow 8% to 15% to between $3.50 and $3.70. Also our dividend policy remains unchanged and our Board of Directors has approved an additional $500 million for future share buybacks demonstrating confidence in our performance and commitment to increasing shareholder value.
In any economic environment diagnostic testing is an essential healthcare service. As the industry leader we are well positioned to benefit from a range of future opportunities and diagnostic testing becomes evermore important within the healthcare world.
The opportunities include the following, the demographics of the growing and ageing populace are a positive for our industry and our company. As people age they require more testing and we are seeing an increasing number of tests ordered for each patient.
The advent of personalized medicine enables targeted tests to help doctors guide assistance and therapy and monitor their effectiveness of treatment. The pace of innovation in this important area is accelerating with the frequent development of new biomarkers.
Expanding access to screening tests for wellness and early detection of disease for the healthcare theme during the Presidential election and it remains a stated objective of the Obama administration. Diagnostic testing is a large and still fragmented industry.
We are the industry leader but we have only 15% of the market leaving plenty of room to grow. In 2009 we will grow revenues largely by driving increased sales of [inaudible] tests particularly cancer diagnostics, for physicians and hospitals.
We will grow earnings through top line growth combined with further improvements in operating efficiencies. I will give you a brief summary of our progress after you hear from Robert on the analysis of our fourth quarter results.
Robert Hagemann
Thanks Surya, as you heard our business is strong and performing well. Despite challenging economic conditions, revenues, earnings and cash flow have all grown and we remain confident in our prospects for continued growth.
Turning to results for the fourth quarter, earnings per share from continuing operations was $0.87, 10% above the prior year with the increase principally driven by strong operating performance. This brings full year EPS to $3.23, an increase of 14% from the prior year.
In the quarter we recorded a charge of about $16 million primarily associated with workforce reductions which reduced earnings by $0.05 per share. This $0.05 was fully offset by the favorable resolution of several tax contingencies which increased earnings per share by $0.05.
During the quarter costs incurred related to the continued development and deployment of standard systems were approximately $0.02 per share and start-up costs for our India operation were $0.01 bringing the full year amounts to approximately $0.11 and $0.04 respectively. Revenues were $1.8 billion, 1.7% above the prior year.
Revenues for our clinical testing business which accounts for over 90% of our total revenues were 2.3% above the prior year and about 3% above before the impact of our pre employment drug testing business. Volume was 40 basis points below the prior year driven by a 16% decline in drug testing volumes.
Before the impact of drug testing volumes grew about 1% inline with the rate through the first three quarters. Our drug testing business and our risk assessment business which serves life insurers are our two businesses most subject to a slowing economy.
Combined they account for less then 10% of our total revenues and both tend to be lower priced business. Therefore their impact on revenues and profitability tends to be less significant.
We have taken, and will continue to take, if necessary, aggressive actions to manage the costs of these businesses in order to mitigate their impact to our earnings growth. Revenue per requisition increased 2.8%, with the increase continuing to be primarily driven by a positive mix, and is generally in line with what we saw through the first three quarters.
Operating income as a percentage of revenues was 17.6% for the fourth quarter, and reflects continued improvement, despite a reduction of almost a full percent associated with the $16 million charge discussed earlier. Before the impact of the charge, operating income as a percentage of revenues is up almost one percent versus the prior year, principally due to revenue growth and the progress we are making with our cost reduction program.
That program, which we committed would reduce our cost structure by $500 million is on track and has now delivered over $300 million in annualized savings, with the balance expected in 2009. We are making good progress across all elements of the program, particularly in billing and collections, where we continue to see excellent performance in bad debt, days sales outstanding and the cost of our billing operation.
Bad debt expense as a percentage of revenues was 4.3%, 10 basis points improved from the third quarter and the prior year. DSOs were reduced to 44 days, down from 45 days at the end of Q3 and 48 days at the end of last year.
With our disciplined approach we expect to see continued strong performance in our billing and collection metrics, despite a slowing economy. Our cash flow continued to be outstanding.
Cash from operations increased to $363 million for the quarter, compared to $355 million last year. During the quarter we fully utilized our remaining share repurchase authorization, and repurchased 5.5 million shares at an average price of $46 for a total of $254 million.
Scheduled debt repayments were $45 million, and capital expenditures were $73 million in the quarter. Cash and cash equivalents totaled $254 million at quarter-end.
In addition during the quarter we successfully replaced the expiring $125 million portion of our receivables credit facility with a new $225 million facility, bringing the total receivables facility to $500 million. This, coupled with the $750 million available under our revolving credit facility, brings our unused credit lines to $1.3 billion and positions us extremely well from a liquidity standpoint.
Consistent with our positive outlook, and in order to provide us with multiple options and continued flexibility to deploy excess cash, our Board has authorized an additional $500 million of share repurchases. There is no specific timeframe over which the additional share repurchase authority will be utilized.
Throughout 2009 we will remain prudent and generally conservative in how we deploy our capital, with excess cash used to retire debt, invest in growth, and repurchase shares. Now, let’s turn to our 2009 outlook for continuing operations, we expect revenue growth to be approximately 3%.
We expect operating income as a percentage of revenues to approach 18%. We expect cash from operations to approximate $1 billion, before the expected payment of the $316 million reserve established for NID, or approximately $700 million after such payment.
Capital expenditures are expected to approximate $200 million. And lastly, we expect diluted earnings per share to be between $3.50 and $3.70, excluding potential special charges.
As we discussed last quarter, these are challenging economic times, and no company is totally immune. Yet we have continued to consistently deliver strong operating performance, and are confident in our ability to deliver further improvement.
The investments which we have made provide us with unmatched assets and capabilities. Our program to reduce costs is well underway and has excellent momentum.
And our strong financial condition, cash flow, and investment grade credit rating provide us the flexibility to take advantage of growth opportunities more freely than others. Clearly we are positioned to not only weather this difficult economic climate, but to further strengthen our competitive position.
Now I’ll turn it back to Surya.
Surya Mohapatra
Thank you, Robert, 2008 was a year of significant achievements. We made progress in executing our plans and differentiating ourselves from the competition.
The factors that clearly differentiate us and drive growth include our superior patient experience, Six Sigma quality, innovative science and medicine, unparalleled assets and capabilities and expansion into new markets and geographies. Here are some examples of our progress.
We continue to empower patients through expanded use of appointment scheduling and Google Health, which enables patients to take control of their own health information. We used lean Six Sigma to drive efficiencies and further reduce our cost structure.
During the year our productivity improved more than 5% within certain areas of our labs. And we launched an advanced tracking system so we can identify the location of a specimen en route to our laboratory.
We have been diversifying our business to higher value esoteric, gene-based, and anatomic pathology testing, which now account for 36% of all revenues. In 2008 gene-based, esoteric, and anatomic pathology revenues increased 20%.
Our medical and scientific staff of 800 MDs and 100 Ph.D.s is unmatched. Many of these people are internationally recognized experts in their specialty, from dermatopathology to anatomic pathology, from cardiac to cancer diagnostics and from infectious to genetic diseases.
Our doctors diagnose more patients a day than some hospitals do in months. We are the leading provider of cancer diagnostics, offering physicians and their patients access to the most complex molecular tests, the finest anatomic pathologists and leading histology and cytology services.
We are expanding our pipeline of innovation. We nearly doubled the number of assays in our Leumeta family of plasma-based Leukemia and lymphoma tests to 22.
We introduced the new FDA-cleared HE-4 blood test for ovarian cancer recurrence, and we are the only national reference lab to offer it. We introduced a gene-based test to determine an individual’s risk of age-related macular degeneration, a common form of visual impairment.
We are developing a blood test for colorectal cancer based on the Septin 9 DNA methylation biomarker. This innovative test will be a supplement to conventional methods of colorectal cancer screening.
We are developing companion diagnostics for new therapies that will enable personalized treatment. We recently acquired additional biomarker capabilities to advance our efforts in this area.
We introduced K-RAS genetic analysis to determine which patients with metastatic colorectal or lung cancer would benefit from targeted therapy. When it comes to HCIT, healthcare IT, we added 15,000 physician users to Care360, bringing the total to 140,000 doctors.
This enables them to order lab tests, prescribe drugs, and share clinical information with other healthcare providers quickly and securely. The number of medications ordered through Care360 more than doubled to an annual rate of 4.5 million.
We are expanding into new markets and geographies to provide longer-term growth opportunities. We launched our HemoCue CLIA-waived MicroAlbumin Point of Care test in the US and a white blood cell testing platform in Europe.
We became one of the few laboratories in India to receive triple accreditation from CAP, NABL and NGSP. In Ireland, we have significantly reduced the waiting time for Pap tests for women through a contract with the Irish government.
In summary we are the clear leader in an attractive industry that provides an important and essential healthcare service. No company is immune to economic challenges, but we believe the opportunities before us far outweigh the challenges.
We are differentiating ourselves from our competitors through our superior patient-centric service, Six Sigma quality, science and innovation, and our unparalleled assets and capabilities. We are bifocal, doing what is right for the business in the short-term and planning for the long-term.
Our company remains strong operationally and financially. This enables us to execute our strategy without distraction through the current economic environment and to take advantage of opportunities that may arise in the future.
We expect revenue growth of about 3% and EPS growth of between 8% and 15% in 2009. And, we remain committed to driving superior returns for shareholders.
Thank you. We will now take your questions.
Operator
(Operator Instructions) Your first question comes from the line of Amanda Murphy - William Blair
Amanda Murphy - William Blair
Regarding 2009 guidance, in terms of volume growth I know you probably don’t want to guide specifically but can you help us think about how volumes have trended, maybe in 2008 in the core business, so ex drugs of abuse, are you seeing a slowdown in test for rec or lower physician office visits and then how does that extrapolate into next year.
Robert Hagemann
As I said in the prepared remarks when you adjust for the drugs of abuse testing business which obviously is most impacted by the economy, we’ve seen about 1% growth in each of the first three quarters in our underlying physician and hospital reference testing business. And although we’re not giving guidance in terms of revenue per rec and volume for 2009, we tend to give it in just terms of total revenues, we’re not expecting a dramatic change in that.
Amanda Murphy - William Blair
So when you are thinking about the economic environment were you assuming status quo or did you anticipate some worsening or how did that work.
Robert Hagemann
I think like everybody else, its really difficult to estimate when the economy might reach bottom and how quickly it will rebound but as we’ve said while we might be impacted somewhat in terms of the physician office visits or volume, we’ve not been significantly impacted and I think you can see that in our results through all four quarters of the year where underlying volume was steady at about 1%.
Amanda Murphy - William Blair
In terms of share repurchases and acquisitions did you include those in the guidance or would that be incremental?
Robert Hagemann
No, our EPS guidance is always all in so whether we’re doing share repurchases, acquisitions or debt repayments, you should consider that reflected in our EPS guidance. While its all in for EPS guidance, our revenue growth is organic revenue growth and not anticipating acquisitions.
Operator
Your next question comes from the line of Jason Gurda – Leerink Swan
Jason Gurda – Leerink Swan
Can you give us an update on what’s going on with the Ameripath business and how the integration of the sales effort is going there?
Surya Mohapatra
Well Ameripath is now fully integrated into the company and the specialty partners in the hospital and we see growth in our outpatient anatomic pathology and dermatopathology and there is a slowness in the inpatient but it is fully integrated in the company and we are not separately [inaudible].
Jason Gurda – Leerink Swan
I just meant from, are sales acceleration pretty much where you expected it to be.
Surya Mohapatra
As I had said last quarter we are doing some cross selling and we are in the early stage of how to sell to the primary care doctors and we feel that that will help us grow the anatomic pathology business but we are in the early stages of integrating both the cross selling activities.
Jason Gurda – Leerink Swan
On the numbers that you reported for the quarter, your cost of goods sold was down pretty significantly sequentially and just to clarify, the charge the $16 million charge, what line item was that expense recognized in?
Robert Hagemann
That was probably split almost evenly between cost of sales and SG&A with about a half a percent impact in each of them.
Jason Gurda – Leerink Swan
Just looking at the overall cost structure since it is down so significantly, its definitely a sign of your cost cutting program, but is there anything unusual in the quarter or should we assume that this is pretty much the run rate going forward except for some seasonal difference.
Robert Hagemann
Again, I’d caution you to take the percentages in any one quarter and try and extrapolate them through the year. As we’ve done since the beginning of the year we’ve been very, very deliberate in the way we’ve managed cost and as we’ve mentioned, the cost reduction program which we’ve launched well over a year ago now has very good momentum and we feel very good about what that’s delivering and what it will continue to deliver in 2009.
I think when you look at the guidance that we put out there for 2009 we are expecting to expand the margins further beyond what we’ve got this year but yes, I want to caution you to try, in taking one quarter, and extrapolating that to the full year.
Operator
Your next question comes from the line of Ricky Goldwasser - UBS
Ricky Goldwasser - UBS
On the volume side, obviously throughout 2008 volumes were positive if we exclude drug abuse, what other trends are you seeing January to date, I know its early in the year, but just curious to know that.
Robert Hagemann
We don’t comment specifically on any one month but obviously what we’re seeing in January has been built into our outlook for 2009.
Ricky Goldwasser - UBS
And is it overall similar to what you’ve seen throughout 2008?
Robert Hagemann
As I told you we don’t comment on a specific month particularly a two-week period. Its really tough to try and interpret too much from that.
Ricky Goldwasser - UBS
And then as far as the investment in IT in the India expenditure included in guidance and also what’s the bad debt as a percent is embedded in guidance.
Robert Hagemann
We haven’t given specific guidance on the amount of the investment in India or the investment in systems for 2009 but you should expect that they’re not going to be significantly different in the amount of investment that we had in India this year, was about $0.04 a share. We’re closely managing that to make sure that we don’t get too far ahead of the ramp up in revenues there.
Ricky Goldwasser - UBS
And as far as the debt expense?
Robert Hagemann
Bad debt expense, obviously again we don’t give specific guidance on that but we don’t see any reason for it to be significantly different then it was this year. We continue to see opportunities there to improve our processes, work more closely with payers, etc.
and we’re continuing to work those opportunities and those are the things that have allowed us to continue reducing bad debt and DSO’s over the course of this year despite the fact that the economy has been slow.
Operator
Your next question comes from the line of Adam Feinstein - Barclays Capital
Adam Feinstein - Barclays Capital
With the drugs of abuse testing did you give a percent decline for revenues for that business the way you have in prior quarters?
Robert Hagemann
Yes, that business, the volumes were down about 16% in the quarter so that was an acceleration of what we had seen in the earlier part of the year where it was down 10% or so and if you look at the table that we have, footnote six, to the earnings release, you see that the revenue impact in the quarter was about 0.50%.
Adam Feinstein - Barclays Capital
Last quarter you highlighted that even with the decline in volumes in that business you still saw margins go up in that business because of cost cutting did you see a similar trend here?
Robert Hagemann
We did not see them go up this quarter but I will tell you that that business and the risk assessment business as a result of the things we’ve done to manage the cost structure continue to be profitable businesses for us.
Adam Feinstein - Barclays Capital
Just thinking the impact just from the economy and such, just trying to better understand trends, are you seeing any significant differences in different regions, just curious in terms of just trends as you look at your business on a regional basis.
Robert Hagemann
We don’t typically comment on how our business is performing region by region. But what I can tell you is generally we’ve not seen dramatic differences across the company in what’s happening as a result of the economy.
Surya Mohapatra
You know in any economic environment diagnostic testing remains an essential service and with the Obama administration’s emphasis on expanded coverage and wellness, I think that diagnostic industry is going to do better then some other industry in this slowdown. So we are projecting that we will grow 3%, more or less in line with the market and, but our earnings is going to grow because we’re going to grow some on top line and also by reducing our costs and improving our efficiencies.
Adam Feinstein - Barclays Capital
And the managed care contracting, it seems like the environment is definitely much better then it was a couple of years ago, we’ve seen pricing improve, so as you look at the contract renewals in 2009 any major ones as you’re thinking about it, and was there any impact in the fourth quarter from annualizing any prior contracts?
Robert Hagemann
There was no significant impact in the fourth quarter of any [annualization] of new contracts and as you know over the course of the last year plus, all of our major managed care contracts have either been renewed or expanded with most of those into 2010 or beyond. So the pricing on those is set and should be very clear to us over the course of that time.
Adam Feinstein - Barclays Capital
As we think about the inflationary updates, does the reduction in CPI have any impact on you as you build in inflationary updates in the contracts?
Robert Hagemann
Not in the contracts so much. We don’t have a lot of contracts that are pegged to CPI or medical CPI’s.
In some cases we do obviously, in other cases we have set fee increases and in some we have further discounts for increased volumes. So its kind of all across the board but nothing significant as a result of what the CPI might be doing.
Laure Park
Medicare fee schedule is one that is CPI based and that’s based on CPI as of June 30 so obviously what happens here could impact the next CPI adjusted—
Robert Hagemann
Right, but for 2009 that’s set. We know that and that’s going to contribute about a half a point to our revenue growth in 2009.
Operator
Your next question comes from the line of Darren Lehrich – Deutsche Bank
Darren Lehrich – Deutsche Bank
Regarding the buyback and wanted to hear from you about how the Board contemplated that buyback in comparison to perhaps and enhanced yield with the dividend policy and if you could just talk a bit about the thought process there.
Robert Hagemann
As you know, we’ve been paying a dividend now for some time and its been what I would characterize as a relatively modest dividend and the principal way that we have looked to drive shareholder value at this company is by growing earnings and a lot of that has been as a result of us continuing to invest the cash flow that we have, in growth whether it be acquisitions or other opportunities for growth and when those opportunities weren’t readily available at reasonable prices, you saw us deploy excess cash into share repurchases to drive shareholder returns. And as I mentioned in the prepared remarks the Board has now provided us again with the flexibility to deploy cash into multiple areas since we had used up the previous share repurchase authority, we restored that and now have the ability to not only pay down debt but repurchase shares and continue to invest in growth.
Yes, I think you need to be somewhat opportunistic here. We’re going to have as a priority in 2009 certainly some further debt reduction and after that really when you think about the priorities for cash it would first be growth, and then share repurchases.
Darren Lehrich – Deutsche Bank
Regarding the cost structure, you’ve restated your goal of $500 million by the end of 2009, with the remaining $200 million I guess that’s left if you’ve taken $300 million out thus far, could you just talk a bit more about the various buckets that you’ve previously described and where you see the cost opportunities being in 2009.
Robert Hagemann
Its going to be very much a continuation of what we’ve done over the course of the last year plus. The opportunities continue to be in our laboratory, in our logistics, in our billing areas.
This about where the cost resides and the way we’re going about this is such where we believe these are going to be sustainable cost reductions because we are reorganizing processes, we’re using lean Six Sigma to actually take work out of the system. We’re not just asking people to do more with less, we’re actually reducing work here.
And its not only reducing costs for us but as you reduce the effort that complete a process you simplify the process, you also improve your quality along the way and that’s essentially what we’ve been doing over the course of the last year and a half. Pretty much the same thing will continue in 2009 and in each of the areas where we’re expecting further savings, we’ve already go very good momentum.
Darren Lehrich – Deutsche Bank
In the lab, is there any productivity gain goal or target that you may have 2009 over 2008.
Robert Hagemann
Absolutely in every laboratory and every department within a laboratory, we have productivity targets that we’ve established.
Darren Lehrich – Deutsche Bank
I mean in the aggregate, if you just maybe share with us what—
Robert Hagemann
I’m not prepared to do that right now.
Operator
Your next question comes from the line of Gary Taylor - Citigroup
Gary Taylor - Citigroup
On the incremental cost savings here anticipated in 2009, should we be modeling that ratably, is there any lumpiness to that through the year?
Robert Hagemann
Generally no, as I said we’re already well underway with this program and it will continue pretty much at the same pace that we’ve got it running now so there’s not lumpiness necessarily in those savings. Now that doesn’t mean that as you think about our performance quarter to quarter that its going to be exactly the same.
There are a number of things either timing wise from a revenue perspective, or from a cost perspective, seasonality principally that caused the quarters to be a little different from each other.
Gary Taylor - Citigroup
On the $8.8 million investment charge or impairment, did you describe what that was for?
Robert Hagemann
That was Q3, that was an investment that we had, that we were required to write down as a result of the accounting rules, non-cash charge. But that was Q3.
Gary Taylor - Citigroup
Finally, my question is about your vitamin D program, The New York Times was writing about some issues you’ve had with that testing, some letters you’ve had to send out to docs, so one what’s happened to your vitamin D volumes and secondly how are you managing any PR impact there might be in the pathologist community.
Surya Mohapatra
Well let me first take the question about quality, we practice Six Sigma and we strive for perfection so obviously we’re not happy when we see a quality suit. But when we found that there is some quality issue we investigated it, we fixed it, and we informed the people.
We did less then 7% of people were affected and what a good company, a Six Sigma company does. So we did that in October and in many instances we got good response and good feedback from the health plans and also the doctors about our process and you know, sometimes these kind of activities even build creditability.
As far as reduction in volume or losing customers we have not seen anything significantly, in fact I haven’t seen anything which modestly even and vitamin D continues to grow. But it is very important to know that a company who practices Six Sigma, this is the right culture for the employees to do, to find the mistake, to self-report, to fix it, and then let all the people know.
So I’m pretty proud actually of the process we went through and I don’t see there is any significant impact on our PR.
Gary Taylor - Citigroup
Just going back to the $8.8 million, it was in the other expense net?
Robert Hagemann
In the third quarter, yes.
Gary Taylor - Citigroup
I’m looking at three months ended 12/31/08 but I’ll follow-up off line.
Robert Hagemann
Are you asking what’s in there now?
Gary Taylor - Citigroup
Yes.
Robert Hagemann
Okay just to be clear the investment loss was in the third quarter. In the fourth quarter what’s really driving the variance in that line versus the prior year are the losses associated with our deferred compensation plan, those assets get marked to market and that’s what’s in there.
Operator
Your next question comes from the line of Arthur Henderson - Jefferies & Co.
Arthur Henderson - Jefferies & Co.
Would you mind explaining maybe what the difference is between the low end of your guidance on the earnings per share number and the high end, what’s the delta there that would cause that swing?
Robert Hagemann
Principally revenue growth.
Arthur Henderson - Jefferies & Co.
Are there any acquisitions out there, with the economy sort of declining I didn’t know whether there might be some things that are opening up for you that you’ve been keeping your eye on but could you kind of talk about what the acquisition environment looks like and what you might be thinking about?
Surya Mohapatra
Well first of all like Robert said, we are in a good position to have enough liquidity and enough cash flow and the first thing we look at is the growth and if we can get some acquisitions which is a reasonable price to improve our business, we’ll do that. But what we’re not going to do is to acquire something to boost or revenue or earnings if it doesn’t have the appropriate value.
We monitor what is available and we have a very active program of looking at acquisitions both from capability and from growth point of view and when it comes to fruition and at appropriate value we will do it.
Robert Hagemann
I think some of the sellers still have a little bit to go in terms of adjusting their expectations for value.
Arthur Henderson - Jefferies & Co.
Just in terms of the point of care business, any sort of update on that and then on the government front, I know you touched on this, what should we be looking for there that would be possibly an opportunity for you or something that you might be concerned about.
Surya Mohapatra
Well first of all we really believe that the point of care and new patient testing is the way to go and as you know last year we introduced the MicroAlbumin and that’s selling. We were expecting to get the clear waiver on white blood cell device which is really a growth driver and has been delayed but I think that’s the trigger point which you look at when we get the approval of the white blood cell, it will accelerate the point of care, our [inaudible] business.
Now having said that we have a number of point of care innovations in the pipeline over the next two or three years so we are going to add to that business as we go forward.
Laure Park
And were you also asking about our costs were on the government side? Arthur Henderson - Jefferies & Co.
Yes, sort of your outlook, I know you’re talking about it favorably from wellness testing and things like that but is there anything else that we should be thinking about there?
Laure Park
When we look at what’s sitting out there in the landscape, obviously the expanded access at [shipping] so the pieces there are positive, more people who have coverage is always positive as it relates to access to care, the other things that we see for positive trends are obviously the discussion around healthcare information technology. We think successful and appropriate utilization of that is important and its good to see the discussion around that including potentially in the stimulus package as well as wellness prevention and expanded evidence-based medicine protocols which we think are all positive for us.
Operator
Your next question comes from the line of Robert Willoughby - Banc of America Securities
Robert Willoughby - Banc of America Securities
Can you comment on what you did do in the fourth quarter from an acquisition standpoint and any deals that you’ve done to date.
Robert Hagemann
In the fourth quarter there was a very small deal that was done and you can see it in the change in the cash flow statement, where we acquired some biomarker capabilities, but that was it in the quarter.
Robert Willoughby - Banc of America Securities
And nothing to date, nothing this quarter?
Robert Hagemann
No.
Operator
Your next question comes from the line of Ralph Giacobbe - Credit Suisse
Ralph Giacobbe - Credit Suisse
Going back to sort of the margins, can you talk a bit more about the leverage and the model in the face of declining or decelerating volume trends and sort of put that in the context of the cost savings plan if you could, in other words should we think that this business in the face of declining volumes should see some margin deterioration but your ability to circumvent that is largely related to your cost savings plan, is that the way to think about it?
Robert Hagemann
Yes, I think that’s fair. Any business in the face of declining volumes is going to have pressure on their margins, right.
That’s pretty straightforward but if you look at what we’ve done, we’ve been pulling some of the fixed costs out or some of the, even the variable costs have gotten adjusted as we’ve gone through this cost reduction program and that’s what’s caused us to be able to expand margins even in the fourth quarter when revenues grew 1.7%. We had very strong margin expansion versus the prior year when you adjust for that charge that we took for workforce reductions.
Ralph Giacobbe - Credit Suisse
In terms of the, I think you talked about a focus on the esoteric business, how does that differ from previous years if at all, and is that more just mainly a function of the economy.
Surya Mohapatra
No, I think first of all we have been focusing on bringing new products and services to the market and over the last two years we have introduced a number of gene-based testing, we grew Ameripath now we are the leading cancer diagnostics company so 36% of our revenue now in gene-based esoteric anatomic pathology and now with that product and offering we are focusing through the sales channel to get those services to our doctors to benefit the patients. So we think even though the economy is slow that there will be demand for these kinds of tests to solve patients’ problems.
Ralph Giacobbe - Credit Suisse
In terms of going back again to the acquisition side, you seeing anything more in the hospital outreach side just given the challenges in the hospital industry?
Robert Hagemann
Yes, I think that’s certainly an opportunity that we might have going forward. Hospitals I think are continuing to look for ways to raise capital and certainly looking at whether or not they could sell and outreach business is an opportunity to do that.
Ralph Giacobbe - Credit Suisse
CapEx was a little bit lower then previous years, anything going on there that we should be thinking about?
Robert Hagemann
No, just very prudently managing the capital that we’re spending there. Just like everybody else, we’re watching every dollar that we spend and making sure that its spent on the most productive things that we can possibly spend it on and the other thing I would point out is if you look back over the years, we’ve heavily invested in this business so for us to ratchet back a little bit now in terms of capital spending, we can do that without impacting our business or its prospects and feel very good about that.
So we’re not starving the business even though we’re ratcheting back capital a little bit.
Operator
Your next question comes from the line of Bill Quirk – Piper Jaffrey
Bill Quirk – Piper Jaffrey
I just wanted to go back to the margins, if we look at the year-over-year improvement in cost testing services, how much of this would you say is mix versus the impact from the cost savings program?
Robert Hagemann
That’s tough to split out. Certainly mix helps us because it’s the higher margin business that you’re selling there and certainly the cost reduction program is helping us but its tough to split those two out but they’re certainly both contributing to it.
Bill Quirk – Piper Jaffrey
So there wouldn’t be any one-time impact in there, presumably mix and rather the shift to esoteric testing is something that’s obviously been going on for many, many years.
Robert Hagemann
Again the one-time that’s in there is actually a negative which is the impact of the reduction in force which is around half a point or so.
Bill Quirk – Piper Jaffrey
As we think about the 2009 growth and specifically you called out oncology in terms of one of the drivers should we be thinking about established testing franchises here akin to HPV or is this going to be perhaps more weighted towards some of the more recent tests you brought out, KRAS for example.
Surya Mohapatra
Its all in there, some of the tests which are already established whether its HPV, or whether it is gonorrhea and Chlamydia and all those things, they’re all growing. But also we have now a portfolio of tests to solve whether it is ovarian cancer recurrence or whether it is cancer of unknown origin or whether it is looking at [inaudible] the tumor cells, whether the therapy is working or not.
So when you look at the tests, not only we have the tests for diagnosis, but also now we have test for monitoring therapy and the whole idea of having Ameripath and Quest Diagnostics together is to really solve the cancer patients and as you know, unfortunately the prevalence of cancer is growing and the good thing is that the tests can give people testing and therapy and better outcome.
Robert Hagemann
And as these new tests ramp up generally they are ramping up over several years. Its not all in one year and then you have to look for something else to replace the growth.
These are typically ramping up over several years and contributing to accelerated growth over an extended period.
Operator
Your final question comes from the line of [Shelly Noll] – Goldman Sachs
[Shelly Noll] – Goldman Sachs
As we look at the overall volume growth for 2008 can you break out for us how routine testing faired versus esoteric testing?
Laure Park
As you would expect the routine testing grew at a slower rate then our gene-based esoteric and anatomic pathology on an overall basis so and that’s as you would expect and as we’d anticipate going forward.
[Shelly Noll] – Goldman Sachs
On the CapEx guidance can you give us some way to think about a short-term maintenance CapEx number or a percent of revenue.
Robert Hagemann
As I’ve said in the past, I believe that replacement capital in this business is between 2% and 3% of revenues and if you go back several years we were spending at the rate of about 4% as we were making some pretty heavy investments in technology and a number of other things. This past year we were right at about 3% of revenues and next year we’re projecting in that range as well.
[Shelly Noll] – Goldman Sachs
On the NID settlement, it looks like we’ve seen a modest tweak up $2 million, is there anything that you can update us with there?
Robert Hagemann
That’s the accrued interest on that payment, and that’s why we’ve added it to the reserve. But nothing else has changed relative to that.
Operator
There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments. Thank you for participating in Quest Diagnostic’s fourth quarter conference call.