Quest Diagnostics' CEO Hosts Investor Day (Transcript)

| About: Quest Diagnostics (DGX)

Quest Diagnostics Incorporated (NYSE:DGX)

November 16, 2012 9:00 am ET


Kathleen Valentine - Director of Investor Relations

Stephen H. Rusckowski - Chief Executive Officer, President and Director

John Haydon - Senior Vice President of Operations

Everett V. Cunningham - Senior Vice President of Commercial

Jay G. Wohlgemuth - Senior Vice President of Science & Innovation

Jon R. Cohen - Chief Medical Officer and Senior Vice President of Hospital Services

Robert A. Hagemann - Chief Financial Officer and Senior Vice President

Catherine Doherty


Darren Lehrich - Deutsche Bank AG, Research Division

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Sumanta Biswas - Polaris Capital Management, LLC

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Ricky Goldwasser - Morgan Stanley, Research Division

Lisa C. Gill - JP Morgan Chase & Co, Research Division

Isaac Ro - Goldman Sachs Group Inc., Research Division

Dane Leone - Macquarie Research

Bryan Brokmeier - Maxim Group LLC, Research Division

Kathleen Valentine

Good morning. I'd like to welcome you to Quest Diagnostics' Investor Day for those of you joining us here in the room and also those of you joining us on the webcast. I'm Kathleen Valentine, Director of Investor Relations at Quest. And before we get started, I'd like to cover a few items with you.

First, the safe harbor disclosure. During the presentations, we will be making forward-looking statements. These statements reflect management's view as of today, and we undertake no obligation to update these statements. It is possible that actual results may differ materially from those projected. Some of the risks and uncertainties that may affect future results are described in our SEC filings. Reconciling information for non-GAAP financial measures will also be available on the Investor Relations page of our website.

Second, I'd like to briefly review our agenda for today. First up, you'll hear from Steve Rusckowski, who will provide our perspective on the market and share our company's new vision, goal and strategy. He will be followed by senior members of our management team, who will discuss our plans to drive operational excellence, restore growth and deliver disciplined capital deployment. We'll wrap up the day with a Q&A session. So please hold your questions until the end. We expect to conclude the meeting at around 12:30.

Now I'd like to introduce Steve Rusckowski, our President and Chief Executive Officer.

Stephen H. Rusckowski

Good morning to everyone. Good morning, and thank you for joining us this morning. And we were just saying at the coffee break, it was fortunate that we didn't have this scheduled during the hurricane. So it's great to be here and great so many of you have shown up. It's an exciting time for us at Quest Diagnostics, because this is the first ever Investor Day. So it's great to have you here and we're excited about that. We're also excited because we are actually launching a fresh new look at Quest Diagnostics; to you this morning, but also in parallel with that, we are launching that for our entire organization, our entire Corporation, and all 42,000 people. So it's exciting for us as we launch it. As you see in the graphic, and you see you on the slide, what we're calling it is "Our New Quest." So it's an exciting launch, more to come.

I, as you know, joined this company about 6 months ago, on May 1. And I joined for 3 reasons. One is I wanted to continue my work in healthcare. Some of you know I spent a considerable amount of time in healthcare in the past. I want to continue to do that. Second, is I believed, at that time, I was joining a company I respected and a company that had tremendous capabilities and was a high-quality company, but a company that had opportunities to take advantage of what they have to be able to create value. And I believe that, as you go through the course of this morning, you'll see some of that and some of what I've seen. I'd like to share with you, after 6 months under my belt, what I felt coming into this job and what I believe now is my judgment was correct.

The impact we have on healthcare is impressive. We touch around 150 million people every year with what we do. That's about 500 million tests, about 2.5 billion specific measurements that we provide to the healthcare system. And if we go through the math, it's about 1 out of 5 Americans are affected by Quest Diagnostics. An impressive number of our impact on healthcare.

Now today is an interesting time, as we all know. We're coming out of an election, we're crossing the calendar year, and the theme of today is "Grounded in today's realities while building for the future." What you'll hear today is on this slide. It's quite simple. It will illustrate what I've shared with you and what I believed when I joined this company: That this is high-quality company in many ways. It has a strong reputation. It has many capabilities operationally, from innovation, from information systems, and we have a lot to build on. And that is a major part of what we believe we can do going forward.

You'll also hear that we're going to be focused. We're going to be focused on 2 things that you know, and I know, deliver value. Sustainable value creation. Number one is restoring growth, and second is driving operational excellence. And we'll do this in our, primarily, our core business. As you know, strategies and visions are all interesting, but the end of the day, you have to deliver it through a team, and you have to have superb execution. To me, those are even more important than a good strategy. So what you'll also going to be seeing in the course of this morning is the strengthening of a team. You'll meet some of the new individuals, we'll talk about what we're doing with the organizational structure we just announced in October, and also, different approaches that become much more rigorous, disciplined and structured as we go forward with their execution.

And then finally, at the end of the day, as I said in my introduction, it's all about delivering shareholder value. We think we can do that, and we'll talk about how we will do that with a combination of earnings growth and disciplined capital deployment.

So let's start with the market, to give you our perspective and views of the overall marketplace. Well, in this slide, its -- and its title, I think, it's -- represents what many of us in this industry have said for some time. This is an industry that has substantial impact on healthcare decisions. And we'll speak to that through the course of this morning. Despite that significant impact in healthcare decisions, if you look at the slide, you'll see the $2.4 trillion we spent in healthcare here in United States. We only represent about 3% of the cost. And if you look at that, we believe that as time goes on, with all the emphasis on quality and cost in the healthcare system, that is an important statistic for all of us to keep in mind. 70% of healthcare decisions, 3% of the cost. We believe we can bring more to this market to be able to help with the quality/cost equation of healthcare and its challenges as we go forward. Second, we're going to talk some about the future of healthcare. We believe that what we do in this market and what we do specifically at Quest Diagnostics will participate in what we all talk about with personalized healthcare, precision medicine, more disease orientation that will allow us to bring more value to the marketplace, and we'll be rewarded for that value. So if you look at the numbers of what we believe the marketplace is, it's, in our mind, based upon the latest data we have -- and it's a little different than what you have seen from us in the past. We've done a lot of work to really refine our views of the market. We believe this is about a $72 billion market in size, which really can be broken into 2 portions of the marketplace. On the left of the slide you see the hospital marketplace, it's about 39%, $28 billion of the $72 billion. On the right, you see everything outside of the hospital marketplace. We also believe that within outside of the hospital marketplace you have 2 segments, if you will. You have the hospital playing in the outreach portion of the market -- we believe that represents around 20% of the total market -- and then you have independent laboratories, about 34% of the market.

If you move to the right, you'll hear our views that in fact, we think this market has grown, in the past, about 4%. This market has grown in the past at 4%. So it's important for you to know, that we also understand, in our review of the business, that we have not grown to market rates. And therefore, we have lost share. And that's part of the opportunity for us as we go forward. This is our building capabilities to address where we've not executed well in the past, to understand what we need to do to take advantage of all our capabilities, to begin to grow again and eventually get to market growth rates and hopefully, in the future, starting to gain share as we go out in time. We also believe, and you know this, that there is an interesting dynamic happening in that out-of-hospital marketplace, and that is with hospitals buying physicians and then taking advantage of the opportunity to move some of our work inside their 4 walls. We think they have picked up volume share. We also believe that they have affected the value of the overall market, because of their higher reimbursement rates. We also believe, and we shared this in our call, that the Affordable Care Act will benefit this market. We believe that will start to take hold in 2014. We believe that there will be more people in the system, there will be more insured lives in the system, and that will benefit this industry. We also believe that what is going on in the hospital marketplace will continue in the near term, but over time, we think it also presents a fabulous opportunity for us, because we believe that reimbursement differential that the hospitals now enjoy will start to erode, and there'll be pressure on it. And hospital CEOs and integrated delivery networks will start thinking about their alternatives. So you put all this together, and we believe the overall marketplace will grow about 4%, approximately 4% on the go forward basis, in the future.

So if you then take what I just described and break it down into 3 big pieces, then you can look at how Quest Diagnostics plays in that overall market. What you see on the left is the total market, again, the $72 billion. You see what's in the hospital, you also see 61% is outside of the hospital, and in the total marketplace, you see Quest Diagnostics at 9% of the total $72 billion market. The largest share of that is outside of the hospital, but we do have some hospital business, so you need to understand that with this pie chart. Second is, if you look at outside of the hospital, if you go into the middle of this slide, you see the outside of the hospital marketplace, where 60 -- excuse me, 55% of the market are independent labs. We are the leader at 13% of that defined market. And the hospital has a significant presence, about 33% of that total market. And then if you go to the far right, and you look at the independent labs segments, you see that ourselves and our nearest competitor have 43% of the market. The other way of looking at it is 57% of the market is not with the 2 leaders. This, to me, defines a fragmented marketplace, a marketplace that fundamentally is in an industry that's looking for higher quality and lower cost, and therefore, as we go forward I think there's an opportunity as you start to consider where the best place is for what we do at Quest Diagnostics.

So if you summarize some of the dynamics in this market, and we try to summarize it on this slide, according at 3 categories -- what's happening with volume, what's happening with reimbursements, what's going on with stakeholders and then finally what's going on with innovation or technology. First of all, I spoke earlier, this market will grow and volume will grow. We know there's going to be more people in the system, specifically here in the United States and clearly outside of the United States. Second is more testing will be done, so therefore, that is a good driver for overall growth in our market. Second, with the Affordable Care Act, there's no question in our mind, in many people's minds that follow the healthcare marketplace, more people will have insurance, and therefore people will have access to the system. We believe in 2014 that we will have an increase in the overall market because of that effect.

We also believe, and we're going to speak to this today, that more sophisticated testing, esoteric testing will increase volumes. And that is a dynamic that has -- we have enjoyed in the past, and when we're going forward, we will continue to enjoy, and we want to make sure we do everything we can to develop that market. In reimbursement, you and I both know the whole healthcare industry is going to be under pressure. There's pressure on the government side, there's pressure on the commercial payer's side, and we're planning for it. We have to plan for it. It's an important part of our plan. Second is we're primarily here in the United States, as you know, in the fee-for-service industry. There's some portions of the marketplace that have already moved to the capitated payment model. An interesting dynamic in this industry, specifically for us within Quest Diagnostics, we think there will be some transition, but it won't be a substantial or revolutionary transition. It will be an evolutionary change as we go forward. And then finally, there'll be different insurance products, as you know. There will be exchanges, there'll be an expansion of Medicaid. This is still not clear. What's happening in the United States is still unfolding. It will take some shape in the next 2 or 3 years, and we need to be nimble and aware of what's happening so we're taking advantage of the opportunities and adjusting with the marketplace.

And then if you just look at stakeholders. We believe about 65% of physicians today now work for integrated delivery networks or hospitals, roughly. We believe the majority of specialists now work for integrated delivery systems or hospitals. We believe primary care physicians are -- about 35% now work for those systems, and that number is increasing. We believe that number will increase, the 65% will, we believe will approach 80% in the future, and that has a profound effect for what happens here in the United States on healthcare.

We also note in our discussions with hospital systems, with payers, with large physician practices, that everyone is trying to understand how they will put together some form of an ACO, or Accountable Care Organization. As you know, you see one ACO, you've seen one ACO. They're all different, they're taking form, they're all trying to understand how they could work and also get ready for changes of reimbursement as we go forward. So this is a dynamic that we are aware of and participating in because it will affect our business.

And then finally, benefit design has had a substantial effect on healthcare here in the United States, as you know. Our deductibles, our co-pays, narrower networks by payers have affected who goes to see whom, and also the consumer is much more involved in the healthcare decisions than ever before. And in the future, we believe, consumers are going to be very interested in the value/cost equation. And we think we have a good product to be able to represent to them, as they go forward and have a more -- they have more input, if you will, on their choices in healthcare. And then finally, evolution of technology or innovation, the advances in genomics, proteomics. The approach of applying that to specific disease, and we'll speak to that today, is important. Because see, that's where the rubber meets the road, and how you could really make a contribution to healthcare is attaching the diagnostics to what eventually gets done in treatment, in management of care. And it can only be done, not just with the test but also with insight and information systems that allows us to be able to help our physician in making those choices. And we'll speak to that today. So those are the dynamics we believe are happening for this market.

And if you go through all that, and we've done this in the course of the last 6 months, we believe 2 of the biggest opportunities we have are on this slide. I started with, we have a lot of capabilities. We have incredible capabilities in esoteric testing, lab-developed tests, combining it with insight to be able to deliver value to the healthcare industry. We believe we need to do a better job of bringing this to the marketplace and understanding how we sell it and how we develop those marketplaces over time. And we've spent some time on that. So we believe that's a good growth driver for us. Second, as I know the hospital interest in the lab industry has been around for some time; however, there is a different industry today. Healthcare is going through change. If you look at what we put together for a graphic, it starts with the acquisition of hospital -- physicians by hospitals, up on about 10:00, if you will. If you move to the right, you see that what we believe there will be pressure on those hospitals systems in reimbursement. We are starting to have and are having more conversations today than we did a year ago, and we believe that this is a trend that will continue going forward. When that happens, what we're finding happens, hospital CEOs are starting to turn to strategic suppliers, companies like Quest, to be able to have a conversation with them and put together a plan of how they can take advantage of their assets and what they do well and rely on partners like Quest for laboratory diagnostic information services going forward. And we think this will have a significant effect on the framework of the hospital -- of the overall marketplace and an opportunity for us to go. And we'll speak to that later on in the course of this morning.

So with that, with a backdrop of the marketplace, as I said, we have refreshed the view of our company. We have put together a new vision. And the new vision is empowering better health with diagnostic insights. It speaks to what I was just sharing with you before. Yes, we are a clinical testing business, but beyond that, we need to bring information to the table. We have a substantial investment in information systems, of how we bring that information to physicians, and we'll speak to how we believe that, going forward, we will continue to deliver that value in the past but also more value going forward. We also have a strong heritage of strong values. You see the 6 values that are outlined on the slide, we're building on them. Because those are good. There's nothing wrong with those values. But actually, we're getting our senior management team together this month, the top 200 in this company, and we will have a conversation and a discussion about new behaviors we need to have in our new Quest to be able to execute better than what we've done before. And it's an important part of driving change with a stronger team and getting better execution in our overall company going forward. And then we believe we do have to have long-term goals that speak to what this company is all about and what we do in healthcare. Number one is we need to make a contribution to healthcare, we believe that's important. Because when we do that, we can grow profitably, we can expand return on invested capital and we can deliver superior shareholder returns. And when we do those 2, we believe, and I know from experience that, in fact, we'll have a more inspiring work place, we'll have a better set of employees working for us, and then they all feed on themselves to build a stronger, more profitable, more valuable enterprise.

To help with this, as I said, we're launching our new vision for the company today. We put together a short video to bring it to life. Let's run the video, please.


So it gives you a different view of this industry. We believe it really presents what it's all about. We believe this is where we're going. We believe it's important for us to bring insights to this marketplace in a different way. We actually, if you have some time, at the break you'll see some of our exhibits out front where we bring this to life and show you what we really mean by what we say in this video. We'll be launching this video throughout the company in back of the vision with our aspirational goals. But from that, it's underpinned with a 5-point strategy. And let me walk through the 5-point strategy with you. First is we will refocus our business on Diagnostic Information Services. It's our core business. It's a substantial piece of our company, and it's an important business that we continue to build on as we go forward. Second is the biggest opportunity we have in the short run, you've heard me say this in the past, is to drive operational excellence. You see a lot of opportunities with all the rich heritage of this company in the past to do a better job of managing our operations. And we have plans in place to do that, and we'll describe those for you and what we've already done, what we have yet to do and what kind of opportunity we see for that. Third is we haven't been growing. As I shared with you in the past, this market is growing. We have lost share. We need to start growing. And then we'll need to eventually grow with the market. And we need to eventually start gaining share. That will not happen overnight. It will take some time, in my experience, to build better sales capabilities, better marketing capabilities than what we've had in the past, trying to find that balance of what we do specifically in front of a customer is important. As we go forward, we'll speak to this today, but it will take us some time to get back on our growth track. To do that, we need a different organizational structure. We announced in October that we're going through a substantial reorganization. I'll speak to that, what we're doing. But frankly what we're doing is to align ourselves around those 2 goals. We need to drive operational excellence and we need to restore growth. We need a structure that supports that, that's accountable, that's clear and that has quicker decision-making within it, and we believe we have the design for that, and we're right in the middle of implementing them. And then finally, at the end, it's all about delivering value, it's all about delivering disciplined capital deployment. We believe there are opportunities in this fragmented marketplace to do fold-in acquisitions that are strategically aligned and are accretive, and it's an important part of our plan as we go forward.

So let me walk through each of the 5 points of this strategy. First, refocused on Diagnostic Information Services. So I've shared with you that we have gone through a thorough portfolio review of everything in the company. And what I'll share with you today is some of the conclusions from that review. Obviously in managing the company you're always looking at your portfolio, and things do change, but this is where we are today. On the left, Pathology services are core. Core to be in the diagnostic information services businesses, we are committed to it, and we are working out further integration of our acquisition of AmeriPath in the company and making sure that we align our pathology presence with our oncology future as a company, and you'll hear about that today. Second, there are many parts of Celera. The first piece that we will continue to take advantage of is our acquisition of Berkeley HeartLab. It's an important part of our cardiology presence. We believe we need to take advantage of those capabilities, and we are, so we'll continue to get leverage from that.

Also, there's been a lot of interest in international. And specifically, what my view on international is, given I have a strong global set of experiences. My view is it is an opportunity, but it's not one of the best opportunities we have in the short run. We have about 4% of our business, less than 5% of our business outside of the United States. The majority of that is for our products business. About 1 -- roughly 1% of our revenues is Diagnostic Information Services outside of the United States. I've taken a look at those businesses by country, by activity. What I'll share with you is, in that portfolio of geographic presence for us, that portfolio, which is small, is growing faster than the company and is profitable. And, yes, this does include India. And know that there's a lot of interest in the investment in India in the past; I do have experience in emerging markets. India is improving. And you need to be assured that this is in good hands and we have a detailed plan that continues to show improvement in every one of those geographies. But we do see an opportunity to continue to take advantage of our capabilities here in the U.S. and bring those outside. But as I said, we do not think, in the short run, this is one of the best opportunities we have. So we're going to take it in time and look at it more carefully and make sure, when we do make those investments, we do it by opportunity, by country going forward.

Over to the right. Where are we evaluating our options? There's been a lot of interest in the Celera drug assets. And what I'll share with you is this is a financial asset. It is not as a distraction. And it's in good hands. Clearly, there is some uncertainty about its value and we're considering all our options for all of our shareholders. And we will continue to do that. Second is we're exploring strategic options for 2 of our products businesses, our HemoCue business as well as the products business within Celera. And we are redirecting our EHR Information Systems business. We believe that business needs to be focused on helping Diagnostic Information Services. We believe there is an opportunity for that business to complement enterprise EMR strategies that companies like Cerner and Epic and that McKesson have, and we need to participate in helping them with them and be with them when they present their strategy to integrated delivery networks in hospital systems. And therefore, we're focusing the plan in the business around that segment in the marketplace and having a proactive program to work with the enterprise EMR companies going forward. So that's portfolio.

Operational excellence. As I said, this is the biggest opportunity in the short run we have. We have 4 imperatives, strategic imperatives, for driving operational excellence. You'll hear more about this today. It starts with understanding that what we do begins with a blood draw and ends with cash. And understanding how we can do that better is what we're up to in making our business better. Sounds simple, it isn't. There's a lot of complexity and, that's the opportunity. And then it needs to be supported with IT. We've taken a look at our IT architecture, our investments in IT and what our plan is going forward. And we need to think about that in its entirely. We also believe it can't wait, because some of these things will take more time, and I've said in my earlier remarks, in the course of the last 6 months, that we do have some low hanging fruit, opportunities for us to take advantage of savings today, and we put some of those already for the bottom line; we'll continue to do that going forward. But also, we need to take a longer view and we see some longer-term opportunities. We'll share with you specifically what we'll do this year and also what we're going to sign up for, for our goal in 2014. So I'm happy to say, and I've shared with you, that if we have asked the management team, despite the goal of $500 million cost savings, run rate cost savings by 2014 versus the 2011 baseline, is we've asked the organization for more, and we asked for more sooner. And I'm happy to say that we have responded, and now we are sharing with you, based upon what we have seen and the confidence that I have in that plan, that we can actually bring that $500 million goal up to $600 million, and we will actually deliver $500 million in savings in 2014. There's been some questions about what we mean by these savings. This should be absolutely clear, and we'll give you more transparency on this as we go forward in the course of today.

Growth. We see a lot of opportunities for growth. As I've said, there's a lot of capabilities and a lot of assets that we want to continue to build on and build on. Part of the challenge in this company is to make some choices. We have made choices. We see 7 themes or platforms for growth. We see 3, only 3 priorities in the short run to help us restore growth. We see 7, and 4 others, that will help us in the long term and, yes, we'll put some bets there, but they won't be nearly as large as what we put on the first 3. And let me talk briefly, because we'll spend some time talking through each of these 3. One is we need to bring sales excellence into this company. I would share that I believe that the company has been too internally focused in the past. We need to be much more external. It starts with me, and I've been much -- very external in my first 6 months and I continue to do that. For along with operational excellence, the way we restore growth is to bring sales excellence into the company, and we believe we can do that. Second is we believe there's a tremendous opportunity for us to continue to develop our capabilities in esoteric testing and how they specifically relate to disease and specific patient problems. And then finally, as this opportunity around hospitals and integrated delivery networks and our ability to partner and bring professional services in different relationships to them as a trusted partner is one of the biggest opportunities we see. So those are the 3 priorities that we'll be focused on. Yes, there are others and you see international there, but they're secondary to these primary goals that we're going to be focused on going forward.

Now in order for us to make some progress on driving operational expenses and restoring growth, we have announced an organizational change. And we tried to depict exactly how this company was organized in the past and how we will organize ourselves going forward. And to summarize it simply, if you look in the left-hand side of the slide, the before and after, we had multiple line of businesses within Quest Diagnostics. Some large, our largest being the physicians lines of business, and some small, like Athena. These were verticalized P&Ls in separate businesses. We did not get the advantages of being together from a sales and marketing perspective or from an operational aspect perspective. And as you would expect, there was more overhead associated with running separate businesses this way. So if you move to the new structure, what we'll move to within Diagnostic Information Services is much more of a functional organization. We'll have value creation capabilities with science innovation, a business organization, a business clinical franchise organization that I'll describe in a few minutes. And then you need to be able to sell and deliver those solutions in the marketplace. And that will be supported on shared infrastructure for all of us. Whether that would be finance or it would be HR or whether it's IT, it's at one platform. And that would be much more efficient and effective as we go forward.

Now there is a lot of change. What I'll assure you, okay, I assure you, is that we're not taking this organizational change lightly. This is a big change. We've spent a lot of time socializing with the senior management team, rolling it out to the organization. We're continuing to manage our company the way we've managed it in the past, and we will not move from one hand to the next on that trapeze until you're securely on the next trapeze in terms of the organizational change. We also are building a program, a 2-year program, to manage this over time. Yes, there'll be new boxes and yes, there'll be new names. And we're using this as an opportunity to strengthen our management team throughout the company. But it's not just the boxes. It's not just the names. It includes how we work. It includes incentives. It includes the culture I talked about earlier. And so we have a plan and we have staff that planned for a multiyear change management program to drive this change, institutional change throughout Quest. I've also talked about when that happens, there'll be a few management layers. When I joined the company 6 months ago, if you took myself, and you went to the people that draw blood, people that sell, people that are in our courier operations, there were 10 layers in some portions of those chains. 10 layers. That clearly is not a way to be able to be quick and nimble in an organization of this size. We're taking out 3 of those layers. In the new change going forward, we'll have 7 layers at the maximum, many of the pulls between myself and the people doing real work, I call it, would be of less than 7 layers. It'll also cost us less. We think we can save about 15% of our management cost going forward. That is a considerable number for us. We've sized that to be about $65 million. We think that might be on the low side, there might be more opportunity and an opportunity as we go forward to get more efficient. And yes, it will save us money, but more importantly, it will allow us to be quicker with decisions and more focused on the accountabilities we need to have to drive operational excellence and restore growth.

Now to bring it to life, this is our new organization. Let me walk through this and introduce some of our key people and some of the new people that have joined Quest in the last 6 months. So Diagnostic Information Services is on the left. It's about 90% of the company, it's a large part of the company. On the left, we have an innovation team. We have elevated that to be an important part of my team, reporting directly to me. Jay Wohlgemuth, who's been with us for several years, is here today. Jay is a doctor. He is a trained cardiologist. He worked for Genentech before joining Quest several years ago. And he'll be speaking today. Thank you, Jay.

Moving from left to right, Cathy Doherty. Cathy, please stand up. Cathy has been with Quest for over 20 years. She's been in a variety of roles. She managed our hospital business in the past, our physicians business in the past, and what we've asked Cathy to do is to build a new general management clinical franchise capability to do a much better job of conceptualizing how we're going to take advantage of the science innovation, bring it through a product management structure and a commercialization plan and a life cycle plan to be able to introduce and then manage that over time. That's something that was not in place and, I believe, one of the reasons why we have not taken advantage of all the opportunities, and one of the biggest growth opportunities we do see within this company.

Then next box is our Senior Vice President of commercial. We are consolidating all our sales in external or downstream marketing activities with one person, one Quest sales and marketing organization or commercial organization. I'm proud to say that we've gone through a very thorough process of finding the best person we could and, we found the best person. And that's Everett Cunningham. Everett, please stand up. Everett joins us from Pfizer. He has over 20 years of experience in sales and marketing, strong background in leadership, strong background in running sales organizations and knows sales and marketing quite well. And Everett will be speaking later on today.

And then to the right, you need to sell it, you need to deliver it. One of the biggest short-term opportunities we have is operational excellence. I'm happy to introduce John Haydon. John, please stand up. John joins us as our Senior Vice President of Operations. John has worked his whole career in operations at all different aspects of operations, and if you look at Quest Diagnostics and what's in operations, it is a very complicated operational machine that day after day produces what we do. John joins us from Philips. He worked for me in Philips healthcare. I know John well. I know what John can do. John is the strongest operation person we can find. Also a person that, in this new model, needs to collaborate with his colleagues, the front end, the sales organization, and will do that in an extraordinary way going forward. So John will be speaking later on today.

And then to the right, we have what we call Diagnostic Solutions. We have our products business there. Some other diagnostic businesses. Information systems business, that's managed by Kathy Ordoñez, who's not with us today. And over to the right, we all know Bob Hagemann. Bob, our CFO, will be speaking later on today.

And then also doctor John Cohen is with us. John is our Chief Medical Officer, but in addition to that, I've asked John to manage driving this big opportunity we have in the hospital marketplace, and John will speak to that today. He will also take advantage of what we brought together with our pathology practices -- as I said, we are committed to that in our portfolio -- but bring to the marketplace the realities of what we can do in Oncology care. And this is an opportunity, with those assets and those capabilities, to take advantage of those capabilities going forward. And John will describe how we think we can do a better job at that in the future. We also have a new Chief Of Human Resources. Jeff Shuman, please stand up. Jeff joined us several weeks ago. He comes to us from Harris Corporation. He was the Chief of Human Resources there. It's a pleasure to have Jeff, because we need someone senior to drive all this change with us as a team. We've got a lot going on, and Jeff is well prepared to do that.

We also have our Head of Strategy and Ventures, Dermot Shorten is here. Dermot -- and let's see, have I forgotten anyone? I think that's everyone. Good. So that's the structure and these are the people that you'll see.

Some of these people have been with the organization before, but the 3 people that I mentioned that have joined us are new. We're taking this as an opportunity, with the organizational change, to strengthen the team at the top. And what we're looking at, and we're looking at that as we are speaking, is we're making sure that all levels of management gets strengthened. First of all, looking at what the jobs are, how we're going to organize the company, how do we get the right spans and layers within the company, but making sure we have the best possible team going forward to be able to deliver the strategy with superb execution. And it's an important part of our strategy.

With that, it's all about creating value. We believe, and I know you believe, the way we're going to be able to deliver sustainable value creation is by restoring growth. You'll hear plans of where we think -- what we'll do to do that. I outlined the 3 areas that we're focused on to do that in the short run. Second, in the short run, the best opportunity we have to deliver value is operational experience. We've delivered some already, we've committed some more, and we'll continue to drive this into the future.

We will continue to honor our commitment of delivering the majority of our free cash flow back to our shareholders. We believe we will do this for disciplined capital deployment, and to underscore our belief in the strong cash production of this company and our commitment to our shareholders, we are happy to share this morning that we are increasing our dividend. We are moving it from $0.17 a share to $0.30 a share. It's a meaningful change, I hope you agree. It's a 76% increase. It's also a threefold increase since 2011. And that is $1.20 on an annual basis per share. Meaningful, underscoring our commitment as a management team to the cash generation of this business and the security of it on a go-forward basis.

So with that as an introduction, I'd like to now ask members of my team to come up, give you more content, give you more transparency, so you can see, in fact, there is capabilities, plans and also energy in back of what I just described. John, come on up.

John Haydon

Thanks, Steve. Good morning, everybody. Good morning. I love operations. Okay. I have the privilege to talk about operational excellence at Quest Diagnostics. It's point #2 on our five-point plan. So before I launch into that, maybe I'll just talk a little bit about my background. As Steve mentioned, I've got 30 years in operations. I had the privilege to work for some fantastic companies, Nortel Networks as well as Philips Electronics. I've had the opportunity to pretty much do every role in the operations value chain. I've been a CPO, looked after management, lots of time in logistics, manufacturing, a lot of background in IT and a considerable background in process management and business excellence. I had the opportunity to live around the world, in Asia as well as North America, both in Western Canada, here on the East Coast, as well as the West Coast of the U.S. and through Europe in Paris and London. So I do bring a lot of excitement and a deep background around operations, and this assignment is just right in the sweet spot for me.

So why Quest? I think first and foremost, I like working for a market leader and, as I did my research on Quest, I liked what I saw. I also saw lots of opportunities, and I felt it would be a good fit for my knowledge and experience as well. Second is the healthcare industry. Working for Steve at Philips Healthcare for a number of years, I got the bug. This is a great way to sort of give back. It's also a great way to help improve the healthcare system here in the U.S. and around the world. And then last but definitely not the least, the opportunity to work with Steve again. We worked our magic together at Philips. And the team that he's assembled is just first class. So I'm just really, really pleased to be here.

Okay. I'm 30 days into the role, so I thought maybe I would open up and sort of give you my report card. I found quite a few strengths and a couple of areas where I feel we have some opportunity. So first and foremost, what I found in the first 4 weeks is a very strong focus on all aspects of quality. And if you took a look at our values and our behaviors, quality was number one, so extremely pleased with that. Number two is we are a machine every single night, processing 500,000 test results. The focus around the customer and the patient in the service level is fantastic. Number two, a very strong Lean Six Sigma foundation of about 100 black belts in the company along with some master black belts, 3000 green belts, very good continuous improvement. This is not new to the company, it's probably been around over a decade. The technical laboratory experience, super. I've walked quite a few of the labs, and I'm very impressed with the people, the commitment, the technology. And really, what I like here is the operations team wants to win. We want to beat the competition. We want to deliver okay for everybody in the sales team each and every night. So pretty good base.

On the improvement side, first and foremost, the organization is complex. So I came to the same conclusion that Steve and the rest of the team came to. It's driving a lot of competing priorities. We need to be a lot more on the horizontal side versus the vertical side. And we start taking a look at the business units, we've created some complexity in the organization. So one of the things that we absolutely need to do, and I'll talk about this a little bit later in the presentation, is really to develop an end-to-end architecture, right from the customer all the way through the billing, including the suppliers and our enabling processes. The next area of improvement is really around cost excellence, and Steve mentioned that we're upping our number from 500 to 600. I'll talk through the details around cost excellence, but we want to embed cost excellence, or cost innovation, into the DNA of the company.

And the last but definitely not least is one around standardization. So as we move from business units to more of a horizontal value chain, the 2 areas here that I'm most pleased about is one, we want to make it easy for our customers to do business with us. And two, with Everett in the sales team, we want them out selling, not trying to sort out issues or problems or challenges in the value chain. So the more time we can put out the sales team in front of customers and patients, the better. So that's 30 days in. Pretty balanced view. I think there's some really good things that I found on the operations and a number of opportunities. It's really about renewing our focus on operational excellence.

So operational excellence as derived customer satisfaction, employee engagement and shareholder value. And we've tried to build a plan around these 3 focus areas. 4 strategic imperatives that I'll walk through here in a second, 2 real key goals. One is to close the competitive gap that we have in the marketplace right now. And number two is really to strengthen the foundation for growth.

So first and foremost is around enterprise architecture. And coming from a siloed load or a vertical organization to one that needs to be horizontal, as I mentioned, we need to start thinking this one through from end-to-end. So a little bit later, I'll talk about the master data, the business process framework, as well as the standard IT systems plans we've put in place. This will be a multiyear program that will go across the enterprise. Number two is the end-to-end customer value chain. And Steve went through the organization model. When I show you the process framework, our organization model and our processes match together. So we're truly end-to-end. And we'll talk about simplification, optimization, standardization and of course, automation. Number three is really something for employee engagement. Putting the tools in the hands of our employees so they're more active in our business. So as I said, there's been a lot done here at Quest around Lean Six Sigma and continuous improvement, but we want to add much more around project management, breakthrough management as well as change management. And then the last area, the fourth imperative, is really around our cost excellence program, also known as Invigorate, that we announced

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And we have 6 flagship programs. And I will walk you through a lot of details, a lot of numbers and a lot of transparency. So you'll see the detail over the next couple of years in cost excellence. So again, operational excellence is just not about the shareholder value piece. That's foundational, but we're trying to drive OE to influence the customer satisfaction as well as the employee engagement.

Okay. Strategic imperative number one. And as I said, this will be a multiyear program and it's very foundational. It really starts with building a standard framework around data, around your business processes and around your IT systems. So you can see on this slide, that we've put it into 3 focus areas, or 3 building blocks. First and foremost, you can imagine the amount of data that comes through the company. With up to 500 million tests on an annual basis, we have a lot of customer data, patient data. And we spend about $2.2 billion with suppliers, and I'll talk about that. So there's a lot of supplier data, and of course, the enterprise data. At this point, we have pockets of excellence around data in the company, but we don't have an end-to-end data approach.

Number two is really our business process framework, and, you know, this is something that we can draw from the industry. APQC, which is the American Productivity Quality Council, has a framework of how you think about your business processes. So we've adopted that. It's standard. You can take a look at standard business process and do your value stream mapping.

Then last but not least is really standard IT systems. And we've been heavily customized for a period of time, and that drives your IT costs up. So we would like to try to standardize where we can in a number of areas and continue to sort of improve in some of the custom areas that we put together.

So when you put these 3 together and you really have an end-to-end enterprise architecture, you can see some of the benefits. First and foremost, it's going to allow us to move things around the company to manage capacity. We're going to have one view of customers, patients and suppliers. Improve business continuity, especially here on the East Coast, the last couple of weeks, we've had to juggle things around, making sure that patients get their results, as our facilities were down for a period of time. Probably the last one is the -- really the cost and quality, and you'll see a little bit later when I talk about the Invigorate program, this one here is really about Phase II of Invigorate. And if done properly, has big benefits, okay, for customers, has big benefits for employees and big benefits for shareholders. So strategic imperative number one.

Number two is all about the customer value chain or the patient value chain. And this goes back to that APQC framework that I spoke about. If you look at our organization model, we're really focused around value creation, value delivery, and some enabling processes. So the way that we're looking at our processes in the company right now starts off with our management processes. So Steve has introduced our new vision and strategy. That's the backbone, okay, that goes across the complete enterprise. And then when we look at our operating processes, we put them in 3 operating areas. First and foremost, the value creation. It's the way I look at Jay and John and Cathy; those are the 3 colleagues that really pulled together our value creation, and you can take a look at the subprocesses, starting with generating ideas to managing the life cycle. Number two is with Everett, the value proposition, starting with developing channel strategies through to how we service customers. And the third piece is, where I come in, is on the value delivery, starting with collecting the specimen and moving through to servicing the customer. This is vitally important, and the organization model and the business process framework now come closer together. So as we sort of look at the architecture, we now understand that we have 3 operating processes and 16 subprocesses that we can go through and start to standardize and automate. Below that is our enabling processes, which play a huge part to make our operating processes function, of legal, HR, finance, IT, procurement and quality. So we've done this before in our past. We know how to do it. It does take time. The organization model needs to be aligned to your business processes. So this is our customer value chain or our patient value chain.

Strategic imperative number three, key in terms of getting our employees involved in the business. As I mentioned, we've talk a lot about Lean Six Sigma over the course of the last decade. And as we look at Lean Six Sigma, a lot of it's been process oriented. We need to bring Lean Six Sigma across the enterprise and make sure our Black Belts and our Green Belts are working in finance, working in HR, working in IT, working in the labs, working in our patient service centers. We need to do much more around Kaizen events. Kaizen events need to be on a daily basis. We'll continue to drive, plan, do, check, act into the organization. Value stream mapping. This allows our employees to get involved each and every day in our business.

The second area is around project management. You need a good plan as you drive continuous improvement. There's several project management methodologies in the industry. Lots of companies use numerous. We're going to standardize in one, which is PMI, which is the Project Management Institute, and drive a structured way of how we deliver our projects, especially with our Invigorate program. Steve spoke about the change over the next couple of years around the processes as well as the organization model. Change management communications is absolutely key. We're going to adopt the John Kotter model, the 8 Step Process Model, in terms of how you drive change in an organization. So we'll partner very heavily with Jeff and the HR team to drive that across the complete enterprise.

And then last, but not least, is really breakthrough management. And we've adopted the Hoshin Planning or strategic planning system. And what we'll do is agree on what the breakthrough objectives are. And you'll see a lot of those fitting in our Invigorate program alongside with our sales excellence program. So 4 areas that we want to focus on for business performance tools. This allows our employees to get more involved in the business. It's a structured way to drive continuous improvement throughout the enterprise.

Okay. Strategic imperative number 4 is the Invigorate program. As I mentioned, it was launched in the summer of 2011. So we're a little over 18 months or so into the program. So let me talk about the 2 phases and talk a little bit about some of the numbers. So as Steve mentioned, we're very pleased to move to a 500 realized rate over a 3-year period and also a $600 million run rate. So we're going to refer to that as our Phase I. And again, the baseline is 2011 and I will walk you through what the cost base was at the end of 2011. The 6 flagship programs that I spoke about are the programs that drive the improvement here in our business. So the end-to-end value chain, as well as the business performance tools, are critical alongside the 6 flagship programs. Now today, we're announcing Phase II, and Phase II -- one of the things I want to make sure I'm clear on here is we changed the baseline for Phase II. And the baseline will be at the end of 2014 versus Phase I, which is at the end of 2011. And we can see opportunity for a further $400 million. So between Phase I and Phase II, there's $1 billion worth of improvement to our cost base.

We'll spend a little time on this slide, and we're going to be very transparent in terms of how our cost structure is put together. So if you take a look at our 2011 cost base at the end of December, it was $6.2 billion. And we've got 4 pieces of the pie that I'll walk you through. So first and foremost is our salary wages and benefits for the 42,000 employees. That's about 51% of our cost base, $3.1 billion. And this is an area that we're focused on around driving more productivity, getting our employees more involved in the business. So by far it's the largest piece of our cost base. The second area is our procurement spend, about $2.2 billion. And this is for the whole enterprise, DIS as well as DS. And I'll share with you the largest portion of that is with our IBD equipment vendors. And we've been spending quite a bit of time over the past 90 days, meeting with them, talking about more of a strategic relationship, more of a focused spend. But by far, that is the largest piece of our external spend. We've talked in the past about our bad debt, which is a little under $300 million. And then of course, in the other, you have what I would call the G&A spend, everything from marketing through to some real estate, as well as HR. So $6.2 billion is the baseline for 2011.

Invigorate. 6 flagship programs. Let me sort of walk you through each one, and I'll give you some insight in terms of how the dollars fit together, both from a realized perspective as well as from a run rate perspective. So first and foremost is the organizational excellence program, and there's been quite a bit of discussion around that. So this is really to simplify the organization structure

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2014, and we also believe from a run rate perspective, okay, by the end of 2014, we can be at 80. There's other opportunities as we put shared services together, especially in the G&A space. Steve talked about reducing the number of management layers to 7 as well as increasing the spend by about 20%. Based on what I've done in the past, I'm very confident, from an organizational perspective, that we can get there. This will take a little bit of time. We need to do it in a very structured way, making sure that we can still deliver our business. So $65 million realized and $80 million in terms of a run rate number.

IT excellence, which is really focused around standardizing, simplifying and reducing our fixed cost. 55 and 65. When I walk you through the detail, I'll come back, because IT also is part of the Phase II Invigorate savings. Third program is around procurement excellence. It's really about reducing the unit costs that we're paying today, so year-over-year savings, 125 and 150. Again, realized and run rate. The fourth program is around service excellence, targeting 55 and 65

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So the range there is 125 to 150. And of course, billing excellence, and we've been at improvements in our billing process for quite some time, but we still see other opportunities, so 75 to 90. So when you add up the realized numbers, that's where the 500 is, and when you add up the run rate numbers, that's where the 600 is. So these are the 6 flagship programs. Now what I'll do is I'll walk you through each one of the programs. Again, share the numbers with you and talk about how we're going to go after 3 or 4 initiatives in each program.

Okay. Organizational excellence. And just as I launch into this, I also want to mention that our Voluntary Severance Program that we've also announced is not necessarily fitting in this particular box, it's spread over the 6 boxes. So that's one that's a little bit more challenging to sort of pull out. We've announced the number, I believe, about 3 months ago. So as I walk through that, it's already included in some of these 6 areas. So the first one, operational excellence, 65 and 80. But you can see the targeted savings there. Again, I've talked about the layers and the spans. There's also great opportunity around shared services. So we're working very closely with the legal function, the IT organization, HR and finance, to see if we can come together in some common areas and really drive a shared services strategy. So in full flight, very well detailed, we know what we need to do here on the organizational excellence.

IT excellence, I've had a look at IT over the last 4 weeks. We are approaching 6% of revenue in IT and based on experience and based on some benchmarking, I feel that we should be below 4%. So if you look at the opportunity, roughly, it could be around $150 million over a period of time. So for Phase I, we believe the opportunity is 55 to 65, and as we go through the enterprise architecture, you'll see possibly another 100 which is part of the 400 in Phase II that I spoke about. So how do we go about getting that? So first and foremost, we're going after infrastructure costs. So you can see some of the initiatives I listed there around mobiles and PCs and landlines and servers as well as getting more things into the cloud. Number two is making sure that our applications are well-managed. Today, we have about 335 applications throughout the company. We'd like to take that down by 50. And I think some of the work that we do can be done in other areas. India, as we all know, is a big area for software development. So the IT excellence program is in 2 phases, Phase I and Phase II. So you can look at about 100 million for the Phase II, IT excellence

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Procurement excellence. So as I mentioned, our spend is about $2.2 billion. And when I speak about the numbers, the 125 and the 150, one thing I want to make sure I'm clear on, this is net savings. Okay? So it's not gross, and we strip out certain things, this is what we can take as savings. So first and foremost, we need to build a better global sourcing program. And we are now investing in that. We've been looking around the world. We see several opportunities to buy things at a more competitive and cost-effective price. I also talked about our largest spend being in the IBD space. And we've been meeting with the teams from our suppliers, talking about how we can change the game here, how we can develop more strategic suppliers and really consolidate the spends with a handful. So fairly confident that over time, we'll see some benefits here. And then probably one of the biggest ones that we can do a better job at is really engaging with our suppliers around their R&D spend and innovation spend. So John and Cathy and Jay are going to spend much more time with the suppliers trying to align technology roadmaps

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To make sure that we could put things together and also the benefit here would be a much more powerful relationship between our suppliers and Quest Diagnostics.

So, got a lot of experience in this area. I'm very confident that we can change the game around procurement. As I say, I think the IBD

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Opportunity that we have and it's one of working strategically with the suppliers.

Okay. Service excellence. So this is an area that starts with our patient service centers, it goes into logistics and how we service the customer. So by far, one of our largest spends. So that part of the value chain is about $1.3 billion, and as you can see there, we do about 150 million patient client encounters a year. So if you take a look at the number of patient service centers we have, it's above 2,000. We also have another 3,000 employees in offices, drawing fluids. And we also have access to another 9,000 points, okay, for third parties. So a very large network, over 14,500 ways that we can actually acquire the specimen. So you can see the key initiatives here. First and foremost is really around logistics. So we have a number of things around technology that we're looking at to become more effective and efficient. Number two is making sure, as we plan out our network with the 14,500 access points, we're doing in a very disciplined way, and making sure that we're not across the street or around the corner from another PSC facility. So we're using analytics based on that, taking a look at patient traffics and whatnot. And then of course, another large opportunity for us is in call centers. And I'll share with you that we have over 20 call centers. And we see an opportunity here to, as we bring the company together, to streamline that and bring that down. So 55 to 65 is the realized savings to run rate. This is a big portion of our business, but we do sense and see quite a bit of opportunity in the service excellence program.

The lab excellence program is a big piece of our savings rate here, 125 to 150. As I mentioned, we process about 500,000

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About 500 million a year. We have a national network. We're in about 38 states around the U.S. We probably have over 250 labs of one size or another, so there is an opportunity there for consolidation. The largest piece of our network is with rapid response labs, which is about 160. And we have a number of esoteric labs, our AP labs and of course our main labs. So if you take a look at the initiatives, first and foremost, there's opportunities for consolidating in the automated testing. Also taking a look at the sample and the handling and the testing in each one of our labs, we don't have a standard way of doing that. We have lots of pockets of excellence or centers of excellence, but we need to standardize it across the company.

The operating model is very, very important. This is where a lot of our salary wages and benefits costs occur, and getting our employees more involved in the business, okay, is going to drive productivity. So we're looking to drive productivity by 10% to 15%. So that sort of ties back to the business performance tools that I spoke about, a lot around continuous improvement, the project management and the change management, and of course, the Hoshin Planning.

And then the final one is around billing excellence. And as I mentioned, we've been improving our billing process for a number of years. I think we really are best-in-class around billing. We still feel that we do have opportunities on the bad debt side but more on the cost of the organization and the number of billing locations. So you can see from the number here, it ranges 75 to 90. We feel that we can reduce the billing cost by 15% to 20%. Three sort of key initiatives in terms of electronic billing, making sure that we have a standard billing system. We've made a lot of improvement on that. And of course, partnering with payers and also the productivity side.

So those are the 6 programs under the banner of Invigorate. They will deliver the $500 million with the savings and the $600 million run rate, keeping in mind that the IT one touches Phase I as well as Phase II.

Okay. Key takeaways. I think first and foremost, we need to strengthen the foundation. And through the enterprise IT architecture, the customer value chain and the business performance tools, we start to tie a lot of things together. On the cost excellence, Invigorate program, we are delivering results today. Confidence is extremely high that we're going to hit the $150 million exit run rate this year. As you can see, we have plans in place to achieve the $500 million by the end of 2014 realized and $600 million exit run rate. Now we're targeting an additional $400 million beyond 2015 that will bring us to the billion. So if there's one message I could leave everybody with today, it is our operational excellence program is all about driving customer satisfaction, improving employee engagement and delivering shareholder value. So thank you very much. Kathleen?

Kathleen Valentine

Great. Well, thank you. We are now going to take a break, a 15 minute break. So for folks on the webcast, if you could be back at 10:30, and for all of you in the room here , I encourage you to go out and visit our display booths. We're showcasing some of our terrific capabilities. So we'll see you back at 10:30. Thanks.


Stephen H. Rusckowski

So thank you, and welcome back. We're onto the second portion of our time with you this morning. I introduced this morning our new Head of Commercial. I mentioned that we brought him from the outside, the best person we could to restore growth through sales excellence. And I'd like to introduce Everett Cunningham to join me on the stage. Everett?

Everett V. Cunningham

Thank you, Steve. I appreciate it. And good morning, everyone. I'm very excited to be here at Quest's first Investors Day. And I want to take just a couple of minutes -- as Steve said in his presentation, I have over 21 years of experience in sales and marketing, and I think it's important to kind of break the 21 years down that I have, because it will show you why I was picked for this role. The 21 years was actually spent at 1 company, Pfizer Pharmaceuticals, and in those 21 years, I actually carried a bag. I had the opportunity to actually sell our pharmaceuticals to physicians, hospitals, health plans, sophisticated customers in the California market, very sophisticated market. And I loved it. I got the bug. Of the 21 years, 18 years have been spent on the commercial side, sales and marketing positions both domestically and internationally. So again, it's in my DNA. I've done different positions, not only selling and carrying the bag, but I've actually lead sales and marketing teams in the United States in complex areas where we sold to health plans, IDNs, ACOs, hospitals and have had the opportunity to influence customers at all levels, at the individual physician level, but probably more importantly, the way health care is moving at the C-Suite level also. So again, I bring that experience to this organization, to Quest. Now the couple of years that were outside of the Commercial business, I actually spent leading a human resources group in Pfizer at our corporate level, of which at the time when I was leading it, back in 2008 to 2010, we were going through a major reorg in the Pfizer organization, moving from a monolithic, big pharmaceutical organization into business units. So I led in that process. So I have some organizational design work, which will be important in terms of restoring growth to Quest. I've been here for a month. One of the common questions that I get is, "Why did you come to Quest?" And very similar to John, I came here because I have the bug for healthcare. I've been doing it my entire adult life. I love talking to healthcare professionals. I loved what our diagnostic insights and solutions can do to millions of patients worldwide. To me, that mission is something that I wanted to continue in my career. So that's one reason. The second reason is just this bold vision of restoring growth to the company. We've been flat. And we're not shying away from that, and the whole vision and mission of growing this company, to me, it's bold, but Steve and the senior leadership is giving us the tools and license to actually put in plans to restore growth. So that is -- it's inspirational for me. It's something that gets me out of bed and gets me excited. And the third reason is the people. The people within Quest that I've met throughout my interview process, through the month that I've been with the company. You talk about the excitement that is in this company today. To me, those 3 -- putting those 3 important things together is the reason why I'm here.

Before my corporate days, I had a very unusual career. I played professional baseball. I played 4 years for the Texas Rangers organization. I don't mention that because I don't want you guys to Google my mediocre win-loss record. I mentioned that because it talks -- it tells you a little bit about me. I actually have this competitive spirit. I love to win and hate to lose, and that's something that I'm going to carry over into the Quest commercial team, in terms of having a winning spirit, and I bring that over from my athletic days.

So let me talk to you a little bit about -- as Steve said earlier, we have 3 near-term areas of focus, and one near-term area of focus is restoring growth. And to do that, because we're getting ready to roll this out to thousands of employees within Quest, we have to have a simple vision. Something that people can latch onto, something that is motivational and something that can be executed within the marketplace. So what is that vision? We want to be the preferred partner for Diagnostic Information Services for key segments and subsegments through sales and marketing excellence. And how are we going to do that? We want to be #1 in key physician and hospital call points. We feel that, that's a big bulk of the business, and we need to make sure that not -- we not only focus our tools and resources, but we focus our selling strategies towards physicians and hospitals. We also have to win in the health plan space. And I'll say that we need to become less reactionary to contracting and more proactive in building relationships at key decision-makers with health plans, and also their employer segment. As Steve said, and Dr. Cohen will say shortly, we have this ever-changing place in terms of ACOs, and they're ever-evolving. And we need to make sure that we deliver

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recognize [ph] #1 one by our target patient segment. And all of this, collectively, will revitalize our customer-focused culture. And I want to come back to that because that's key to mention in terms of customer-focused culture. Being external and less internal, and I'll come back to that in a second. So we have 3 keys to success, and I want to touch on the first one. And as I say to all my internal colleagues and I'll say to you today, I didn't come here with the bare cupboard. There were some things that were put in place a couple of years ago that was actually motivating in terms of the recognition for sales and sales importance. They also recognize that, again, in a growing market, we were flat. So there was some underperformance. So it's different from today strategy that we're going to put in place. And I would say a major difference is the way in which we're structured and we go to market. Today in Quest, we have 6 decentralized commercial businesses through inorganic acquisitions. We have the physician and hospital businesses, we have AmeriPath, we have Dermpath, we have BHL, we have AmeriPath. In those different businesses -- Athena, excuse me. In those different businesses, we have separate management structures, separate incentive programs, separate strategies that we go to market with, we have separate ways in which we measure our sales productivity, and we have separate P&Ls. Now I state that because it's complex. And with that complexity, we actually do more business internally than externally. And that's why I go back to say that revitalized customer focus is going to be critical to our new structure, our new commercial model moving forward.

So let me touch on a couple of things that I think are really important with our new commercial model. First, we will have a single management structure that will report directly in to me, and I will sit on the SMT, our senior management team, reporting in to Steve. Now that's critical, why? Because every single day, we will remove complexity in our marketplace and not allow for our business, again, to do business with ourselves, being in 6 different business models or business units. We're also going to have incentives to actually collaborate. Now I say this because before, having the 6 different businesses, sometimes, we had incentives to not collaborate, and we were actually competing with ourselves in the same call point.

Today, we're going to actually incent people to work within that same call point. We're going to have a speed to execution, and Steve said this earlier, we are going to have a lean management structure, of which, what it will allow our representatives to do is focus on the customer and react quicker to customer needs. So I think that lean management structure, again, evening out our management structures, single management, will allow us to just be quicker. We will not get beat by our competitors in terms of acting to local opportunities. And then lastly, we've got to put our resources where we know the profits are. And we think that critical mass and focus on specialty call points are going to be critical moving forward, so we're going to be actually deploy accordingly. Now those channels that will drive our business, like I said in the vision, the physician and the hospital segment, they're blending together. It's evolving as we move, but we will focus on both the physician and hospital segment like Quest has done in the past. We have to get health plans right. So we will make sure that we invest and deploy in health plans. In addition to that, and what I feel is a really important change, is ensuring that I am a player coach, along with Steve and other senior leaders of our team. We're not just going to be back in Madison, developing strategies. We're actually going to get out, get on planes and visit our health plan customers. Not reacting to contracts, but ensuring that we're developing a value-add strategy that benefits the health plans, but at the same time benefits Quest. And then ACOs, and Dr. Cohen will talk more about the opportunity in ACOs, but we need to make sure that we're deployed very appropriately in this ever-changing marketplace.

Now within these different channels, there's different segments. And we've done a great job, since I've been here in the past month, of getting more detail, more data, more analytics around how these different segments want to be sold to. And we need to make sure that we have a deployment that actually has individual accountability and collaboration, so we can drive as much of our opportunities, as much of our solutions with the different segments. And then lastly, we're going to have a local focus. We're going to make sure that we are deployed within the geography, because everyone knows health care is local. So we're going to have a local focus in terms of taking advantage of our strategy.

Now with these multiple independent teams, today, there's also multiple processes, multiple tools, and multiple ways that we measure the business, measure representative kind of daily activities and daily metrics. And while individually, there's good intentions there, collectively, there's chaos.

So moving forward, we will instill that we have world-class management discipline around processes, tools and measurements. Going from 6 to 1, we think that there's opportunities to grow there, but it's going to take discipline. Now we're going to identify best practices. And as I said on the previous slide, we're going to have a local structure that we're going to really be able to study the local market dynamics. In each independent geography, there's going to be best practices. This new deployment will allow us to not only identify, but act on those best practices and share them across the different regions in the United States. In addition to that, with this new structure, I'm excited to work with Cathy Doherty. She's going to own the franchises in terms of thinking of go-to-market strategies, go-to-market solutions in essence, and then throw them over to us and therefore, we'll be able to identify and execute on her best practices. Now in rolling out these standards, and I know that they're easier said than done from going from 6 different ways of doing business to 1, we have to instill discipline. And it has to start at my level. And we have to tell people the reason why this will benefit our business. And tell it often.

Next, tools. I know that John touched on some of the tools on how we're going to upgrade. And when I think about tools, especially from a sales standpoint, it's not just having shiny BlackBerrys or cloud tools on your belt, but it's about getting to know the customer better, right, and quicker and more reliable. So we're actually going to take some of the antiquated tools that we have, and we're going to be able to upgrade through investments that Bob will talk about later. We're going to have improved CRM tool. We're going to have cloud -- cloud-based tools. We're going to have mobile connectivity that will allow us to respond to customer needs on a much quicker basis.

Call planning. And I've been in call -- been involved in call planning all throughout my 18 years in the commercial business, both domestically and internationally in many different regions of the country. And this is critical. And while it sounds basic, it actually moves the dime, and it creates growth. We, in Quest, we have to call on profitable customers. And some of those customers, just through analyzing the market, we're missing today. So we're going to make sure that we're much more directive in telling our commercial business where to go to grow the business, where the opportunities are. So you're going to see a much more rigorous process and plan in terms of call planning. And then all of this allows for us to just gain deeper customer and market insights, and working with Dermot's group and analytics, we're going to be able to get there.

Now the one common theme about sales folks, we're a little quirky, but the one common theme that -- we love to look at measuring ourselves, box scores, what I call it is kind of this healthy competition. So we're going to set up a way, in a very frequent basis -- on a weekly basis, monthly basis, quarterly basis, yearly basis -- that we're actually measuring our performance. We're going to put out stretch goals and we're going to make sure that we measure people's performance so they know exactly how they're doing on a daily basis. You know, there's an uncanny similarity between athletics and commercial or Quest. And I always try to link my athletic days to what we're trying to do here. And what we're trying to do, what we're going to successfully do, is we're going to build what I would call a winning team. But the similarities are this. In athletics, you need a coach that's credible, right? A coach that stands in front of you and when they're talking about their game plan, you actually -- you believe in them. Right? So that's the first thing. Second thing is, and I talked about this earlier, you need a game plan that everyone understands, every player understands, whether they're the second base man or -- they understand kind of what you're trying to do as a team. It's the same in Quest. We're getting ready to roll this out to thousands of employees, and our game plan has to be understood by everyone. The third piece is, and they talk a lot about this in athletics, but it's chemistry, right? You need to have a good locker room. You need to have people with -- that believe in the winning spirit. We're going to carry that over, too, to Quest. We're going to have a good locker room. We're actually going to work together to make this happen, and the only way we're going to do that is through getting out and talking to people through every corners of the United States. And Steve and I have already -- in our first month, we've already done a global -- we've done a United States webcast, we made a visit to Boston, where we had a chance to talk to some customers, but also I had the chance to talk to 75 of the commercial colleagues there. And that's the only way you're going to build the winning spirit is we got to take it and drumbeat it throughout the organization. And then lastly, in athletics and also in this new business that we're going to have here in Quest is, we got to have great players. You got to have, actually, players that are out and out there executing on the strategy. And that's the last area of focus. And that is -- if you could go to the next slide. We're going to build this virtuous circle of talent acquisition and retention and instill a winning culture. We're going to make sure that we have the right players. And it's good to know that there are a lot of quality employees in the commercial space today in Quest. But what we have to do is we have to put them in the right position. We have to find the right job fit for those folks. Again, part of the strategy is, is we want a strategy of growth, of going and knocking on the doors of new customers so we can grow. So we have to find people that actually want to do that, that are wired to do that, and that's in the -- we're in the process of doing that today. Now when we do that, we got to train and develop those folks, and ensuring every single day, you're developing the skills so people can get even better. We have to retain the best, and when we retain the best, we got to promote them into bigger positions. And in the process of us making our management structure more lean, one of the byproducts of that is, we have larger spans of control. We're creating bigger jobs; we need to make sure that we promote the best. And then we feel that, when we do all of this, we're going to actually build on some success stories that we have. That will motivate, and as John said, we're going to increase colleague engagement. We're also going to ensure that our success stories get out there externally so people want to join Quest and they want to join these new commercial team moving forward.

Now building a winning culture. That's something you just have to focus on. You got to think about it every single day. Because you can do all of this, have the best plans and have analytics and tools, but if you don't focus on the people, you kind of create turnover. We don't want to do that. We want to make sure that every single day, we're out there talking about our plans. So we're going to focus not only internally, but we're going to focus on patient care. We're going to tell our folks that the clients, our customers, need to be first. We need to understand and understand key customer segments and subsegments. That's the only way that we're going to be able to introduce our Diagnostic Solutions and be credible at all levels of the behind [ph] stream. The individual level, and also that c-suite level. We're going to incent our people to collaborate together, to work together. It's not going to be easy to take 6 to 1, but we're going to have a plan that we're going to incent people to work together. And then we're going to instill drive, motivation and a winning spirit.

So let me talk about some key takeaways. And I'm proud to say that, sitting at the senior leadership level, there will be a daily focus on commercial excellence, growing the business through excellent sales and marketing. And we feel very confident that's going to take Quest to a new level, to new heights. So how will our customers benefit from this? Because this plan is all about the customer. First of all, with a fully integrated sales organization, we feel that that's going to have a higher degree of focus on the individual customer needs. That's the first thing. This world-class management structure, externally, will help us because it will have our representatives more focused on the customer and not focused on the management structure and the red tape. They'll be able to focus and do what they do best, and that is meet customers’ needs. We're going to have this circle of talent acquisition and retention and development. We need to focus ourselves on how do we grow our internal colleagues and make them better. And then we're going to have this energized culture. We're going to have people sprinting out there to new customers to grow the business. And the way in which we're going to do that is we're going to get out, we're going to be externally focused not only with our customers but with our internal colleagues. And we feel all of this in combination if we combine these elements, is going to result in physicians, hospitals, health plans, ACOs, sophisticated customers. They're actually want to -- they're going to be more eager to partner with Quest more now than ever. And I'm proud to just introduce this strategy to you, and we will deliver. Thank you.

So now, I want to introduce Dr. Jay Wohlgemuth, and Jay is going to take us through the growing esoteric business through disease focus. Jay?

Jay G. Wohlgemuth

Thank you, Everett. Okay. I'm going to save you all a little time, I did Google Everett, actually. And what you'll find is he looks good in his uniform. He had a good career as a pitcher. I think you were selling yourself a little short there, Everett. But it's worth a look. My name is Jay Wohlgemuth, I'm a physician and scientist. I was trained in internal medicine and cardiology. And I've been working at Quest for the last 4 years overseeing research and development activities for the laboratories. And we've done a lot of good work, and I've been very gratified with the clinical impact that we have and we have had as we've introduced new tests and solutions to our customers. That being said, I'm extremely excited about what Steve outlined as the strategy, about Cathy Doherty's position in driving disease-area-focused solutions, in the changes in programs and operations from John and the commercial focus from Everett, because I think those changes and those programs are going to significantly increase the impact of what we do in R&D and also increase the growth that we see from our new products and solutions.

So let me start with an -- the orientation of our value creation in research and development activities. This is very important. We are organizing ourselves around clinical areas shown here. And so as we've mentioned, Cathy Doherty will oversee a business and a marketing organization that is oriented toward these specific clinical areas, and my research and development organization will also be oriented in that way. We think that's very important because it will allow us to be focused on providing holistic solutions for the actual problems and clinical challenges that are seen in these different fields. So we think that, that orientation is very important. Furthermore, within these areas, we've identified specific patient population and clinical opportunities that share some features. First of all, we believe that these areas are places where we can add a lot of value clinically and where we can find growth. We also feel that these opportunities are -- for value creation are -- exist both in the short term and a longer term. And finally, because of our skills, capabilities, assets, acquisitions that we've made, we feel we're very well-positioned in these specific areas to provide valuable solutions for our customers. So as we approach development of solutions for those specific areas, there are a few themes that run throughout. I'm going to share a couple of those with you.

One is that when a physician is approaching a patient or a clinical problem, they want to make the best possible clinical decision for their patient. And in order to that, they may need a lab test result. But more often, they'll probably need multiple lab test results. They may also need clinical information which is not derived from the clinical laboratory. They may need results from imaging tests or other diagnostic procedures. So when we're thinking about providing solutions for these clinical areas, we want to provide all of the information which is required to make the best possible clinical decision. And so what we will be doing is integrating clinical information and providing a more holistic solution beyond individual lab tests as we bring the solutions forward. The other theme has to do with the overall quality of medical practice out there, and there are guidelines, clinical guidelines, which exist in all fields of medicine. And these guidelines are in place because there is evidence that, by practicing medicine per those guidelines, that you will improve outcomes for patients. And there's also expert opinion in those fields that says, if you practice in this way and you do these diagnostic tests and these interventions, that's the best possible standard of practice in the field. What we know is it's very challenging for a physician to know and comply with all of these guidelines. The guidelines are very specific to patient groups. They're constantly changing with medical progress. So, particularly in the area of primary care, it's incredibly difficult to practice at this guideline level of care. And we know that there are very significant gaps in the practice of medicine, relative to these guidelines. In most of the areas we're looking at, the compliance with the guidelines is at the level of 50% or less. So as we're creating our solutions, we intend to create them in a way which enables the provider to practice the guidelines, and makes it easier for the provider to practice based on the way we deliver the offering, the way it's ordered, the way it's reported, the way the information is provided. And we think that adds a lot of value. We think for the providers, that will help them improve the quality of the care that they're delivering. We also feel that it will help them manage a real issue they have in medical liability risk. And then finally, as we go forward, physicians are more and more being compensated and reimbursed based on meeting certain care standards. And so there's definitely a growing incentive for the providers to meet certain guideline practice standards. Of course, the payers want their physicians to meet those standards and provide the highest-quality care. And then the patients are the ultimate beneficiary of this in receiving the highest possible quality of care. And so again, as we orient ourselves toward providing solutions for these very specific clinical problems, we will deliver those solutions in a way that supports physicians in practicing these guidelines.

Okay, so I'm going to give you a sense of how this works on a program level. And basically, what we have is a continuum of care, which you will find in all of these areas -- in all areas of medicine, but I have some specific examples that we're focused on here. And on the left-hand side, what we tend to have are decisions around, "How can I best manage my patient's risk and reduce the likelihood of progression to disease, reduce the onset of diabetes, cardiovascular disease, cancer and so forth?" So it's wellness and prevention, it's screening, it's often practiced by primary care physicians. There are guidelines in place there that those physicians are trying to comply with. And then, of course, when a disease is detected, there are other clinical questions that come up, like, "Which therapy should I use for this patient? Is it likely to be effective? Is it being effective? What is the risk of complications? Can I present -- can I prevent those complications from occurring?" And that's the space over here. That -- these questions are often approached by specialists, and the solutions often involve esoteric testing. And then, of course, you can see there's this obvious link in these fields, as we improve compliance here with screening and detection, patients are identified who need specialty care, esoteric testing, to manage their disease and prevent long-term complications. So this is our framework, and I'm going to just give you 3 of these with a little more detail.

Dementia. We believe there are at least 25 million people in the U.S. who would benefit from guideline-supported testing to rule out treatable causes of memory loss and dementia. And of course, that number is growing with our aging population. There -- the CDC recently announced a guideline that all baby boomers should be screened for hepatitis C virus. That involves 78 million people in the United States, and most of those people have not been screened today. So there's a major opportunity there to screen those patients, and that's both a clinical opportunity and a growth opportunity for Quest. In the metabolic syndrome, diabetes and cardiovascular arena, there are over 90 million people where guidelines apply to testing that should be done to identify risk, manage that risk and reduce the onset of diabetes and cardiovascular disease, and we know from our data internally, and also from published literature, that compliance with those guidelines is not so good. So again, in that area, there's a significant opportunity to enable appropriate testing, identify patients at risk, and that's both a clinical opportunity and a growth opportunity for Quest.

Then in all these areas, as patients are identified with disease, we have in place now a substantial esoteric menu which helps with those clinical decisions I was talking about earlier. We have seen really positive growth in esoteric in these segments over the last few years. Our capabilities and our proprietary menu in these areas has been significantly improved through the acquisitions that have been made over the last few years. Focus in infectious diseases, and then, last year, Athena in Neurology and Celera and BHL in cardiovascular disease. And so our program involves delivering solutions here to enable closure of that compliance with guidelines gap that I mentioned, and further growth and development of our esoteric solutions for those patients identified with disease to the right. Underneath all this, of course, is technology. A couple of points on that. One is that we have a tremendous technology capability at Quest and can develop an assay on any platform which is applicable to the clinical laboratory. And that's very important because we want to approach our value creation in a way which is focused on solving those clinical problems, and that we don't want our hands tied based on technology. We need to use whatever the appropriate technology is to address that question. So we like to say we're agnostic as to which technology is used to address it. Furthermore, though, there are advanced technologies, and we have a significant program in development of advanced technologies. We've had many industry and world firsts which are mentioned here, with respect to these. Advanced technologies add value in that they either add sensitivity to detection of disease or they add specificity in finer mapping of the biological underpinnings of disease, which might help you select the right drug for the right patient, as one example. And so we will continue our significant investment in these advanced technologies. But importantly, of course, all of these activities will be oriented towards those clinical franchise areas that I mentioned in alignment with Cathy Doherty's organization, and then will flow downstream through the operation and commercial organizations that you heard about previously.

So let me summarize. We are focused on delivering holistic solutions for very specific clinical needs and clinical segments. And I showed you some detail on that. We think that, that orientation toward clinical areas will allow us to really provide solutions that helped the clinical decision that are faced by clinicians. There's a significant guidelines gap, as I like to call it. And that involves both routine and esoteric testing. And we believe, for the reasons I told you, that by developing our offerings in a way which address or help support the implementation of those guidelines, we'll add value for providers, patients and payors, but also by doing that, we'll have a platform whereby, when new technologies come into the standard of care and come into the guidelines, we will have the best possible mechanism to deliver those to our physicians and caregivers. And then finally, we continue to invest in esoteric. We've had some very good success in delivering new solutions, esoteric solutions, and seeing growth there. Of course, we will continue to do that, but most importantly, I feel that with the -- again, the strategy that's been discussed, the changes in operations that will make us faster and more effective and cost-effective in what we do, the commercial focus that Everett is bringing, that we will have a much greater impact as we roll out these esoteric solutions, and we will drive much more growth for Quest in this new Quest that we have.

So with that, I'd like to introduce Dr. Jon Cohen. Jon and I have worked together last 3.5 years at Quest, done some great work together. He's going to give some more color and detail to how we are going about value creation and delivery in oncology and pathology.

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Jon? Sir? All right.

Jon R. Cohen

Thanks. Good afternoon. It may surprise you, but I did not play major ball. I played a lot of stick ball, but it just doesn't -- so let me tell you a little bit about my background. As Jay said, I arrived at Quest 3.5 years ago. So I'm a vascular surgeon by training, and I've been out of training for actually 27 years, which shocks me to no end. So for 21 years, I was, I believe, like to say, a real doctor, actually practiced for 21 years. But during that, I had an academic career, eventually I was Chairman of Surgery of a large academic medical center. And then actually for 2 years, ran a large medical center, the Long Island Jewish Medical Center here in New York, as the Executive Director, which is about a 600-bed, $800 million enterprise. And then, actually, had the honor and privilege of helping to orchestrate, and then as Chief Medical Officer, designing the clinical integration of the North Shore LIJ Health System, which many of you may know is $6.5 billion, 16-hospital health system and probably one of the most successful clinically integrated health systems in the country. One of the other things I ended up doing is I've been very involved for many years in health policy. And actually, as a result of that, I spent a couple of years in government. But the reason I tell you that is with what's going on in the recent election, I have a fairly deep understanding of the impact of the Accountable Care Organization. How that $680 billion will be spent over the next 10 years to cover another 30 million people.

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states and territories around the country. So it's another issue we'll address in a couple of minutes.

So, like the rest of -- some of the other executives that you've heard is -- why did I come to Quest? Why Quest 3.5 years ago? And I would tell you that there was 3 major reasons. The first is, "What's the role of diagnostics in medicine?" And for a second I want to take you back to what most physicians learn to do and what's important -- one of the most important things, if not the most important thing you learn in medical school, is when you see a patient, how do you make that diagnosis?

And there are 4 things that every physician does. They take your history, they do a physical examination, and then they do 1 of 2 things: they either get an x-ray or they run a diagnostic test. So many of you have heard that the impact of the diagnostic test, that blood draw, influences somewhere between 60% and 80% of decisions made to how you treat your patients and making that diagnosis.

So if you look at Quest, then the question is, if it has such a central part in medicine and how you treat people, what's the assets of a company like Quest when I was looking to first come here? And let me give you some examples.

So approximately 90 million people in this country need to be tested for the drug that they are on called Plavix. Plavix is actually the most common drug that's prescribed. But a lot of them -- in many patients, actually Plavix doesn't work. So 90 million people need to be tested. We actually have a test for that called AccuType.

85 million people in this country need to be tested for colon cancer. We have a blood-based test called ColoVantage to test those 85 million people.

6.5 million women get pregnant each year and need to have thyroid testing. Quest has probably the most in-depth endocrine and thyroid testing menu ever.

40 million people in this country have significant pain and need to be better managed in terms of their pain management. And as you've probably seen in the last 2 years, we've launched a very vigorous pain management program.

And then if you look at tuberculosis testing, 11 million health care workers in this country need to have TB testing every single year, and Quest has a test that's called QuantiFERON.

So if you just look at the assets that we have, it's close to 220 million people and encounters need to be done each year, just relative to those 5 assets of the company.

So the third reason is, if you look at what I just said relative to how physicians are trained, is "What is the future of medicine?" And the future of medicine really lies in the ability to predict disease so that you can intervene early. But the problem is that to intervene early and to predict disease, patients don't show up with the symptoms that I talked about, all right, because they don't have symptoms. So if you have cardiovascular disease, it's years and years and years before you show up at your physician's office with chest pain. If you're a woman who's developed some breast cancer, it's probably many years before that woman's going to feel that mass or be identified by mammography. If you have bleeding -- rectal bleeding that identifies a colon cancer, it's years before that symptom manifests. So the problem is that people show up very late in the stage of most diseases.

So to counter that, you need to be able to -- to intervene earlier, is you need to do the test earlier and identify patients earlier. And that's where diagnostics has its potentially biggest impact, because it's really by a diagnostic test that you'd be able to identify patients earlier, screen them, figure out what the treatment is and then watch patients for ongoing monitoring.

So those are the 3 reasons that I made the decision that this is an unbelievable company and amazing opportunity to have an impact on so many people.

So having said that, things are changing. The world is changing. You've heard from Steve and some of the other people about what I'll say is these 3 -- the biggest trends in medicine that will have an impact for the next, certainly, decades to come.

And that's -- the first is the disease focus and centers of excellence concept. The days of when patients would go from a -- to get a breast biopsy, to the radiologist, to the radiation oncologist, to then to the medical oncologist; patients aren't going to do that anymore if you can compete effectively by giving them one comprehensive care, either a center of excellence or comprehensive care at the same location. So the movement in medicine towards disease focus is very clear, and it's happening as we speak.

The second, of course, is the whole issue around hospitals. And hospitals, as many of you know, have become, really, the center of power in this country in terms of the health care delivery system. And how do we, at Quest, actually deal with that? And the third issue I'll address is, of course, the change from fee-for-service to being paid for the total accountability of care.

So let me address the first issue. And the first is what we are going to do around the cancer diagnostics. So as many of you know, the company purchased AmeriPath in 2007, but we really have much more assets than just AmeriPath to deliver a comprehensive solution for cancer services. So we have AmeriPath with over 300 physicians. We have Dermpath which is the largest collection of dermatopathologists in the country, over 100 -- 100 dermpaths. And we also have physicians that were doing -- that are doing pathology in the Quest business units that have been here for years, doing a majority of women's health services around cancer diagnostics.

So if you look at those 3 entities combined, we have over 700 pathologists who work for Quest delivering cancer services. And then if you layer on top of that, a more significant issue is making the molecular diagnosis relative to just making the tissue diagnosis. So what I mean by that is that most times, a patient has a biopsy, the pathologist looks at it under the microscope, makes the diagnosis. But in addition, the molecular diagnosis -- diagnostics adds an enormous amount of information relative to prediction of the disease, how that patient could possibly get treated, risk analysis, et cetera.

So when I look at the 4 major pillars, for the first time at Quest, we are putting them together under one organization. We have not done that in the past. AmeriPath, Dermpath, Quest and the Molecular Diagnostics, to be able to deliver predisposition, screening, diagnosis, prognosis, therapeutics and monitoring.

Next year, again, in this country, there'll be 1.6 million new cancers, and cancer will still be the #2 reason for death in this country. So the enormity of the impact of cancer cannot be understated. And we have what I believe is probably the best menu of comprehensive services to be able to deliver that solution.

If you look at breast, colon, leukemias, lung, skin, to give you an idea of what I'm talking about, if you look at the check marks, it gives you an idea of the testing and diagnostic capabilities we have to deliver those solutions to each one of these disease in a comprehensive fashion. So as I spoke to before, the solutions need to be comprehensive. And we're close to having those in every single one of the major disease cancers.

So let me move on to the second trend. The second trend is around strategic partnerships with hospitals and what we're doing with integrated health care networks. So as I said earlier, the hospitals are at the center of the universe now in terms of health care.

The -- let me -- let me dig a little bit deeper here. The offerings around what hospitals can do relative to what they need to do in terms of taking cost out is on a spectrum. So let me show you a little bit about some of the things that we do for hospitals today. And it goes from, obviously, a relationship where we do reference testing for 50% of all of the hospitals in the country, and that's where they send us tests, records tests, that they don't actually do now. Again, we're in 50% of the hospitals.

The second part of that would be outsourcing a portion of their laboratory. So many hospitals now send us their microbiology lab. They actually take the microbiology lab out, and we do complete comprehensive microbiology testing for certain hospitals around the country.

The third part of that would be what I'm going to call lab management, which is where I'm going to dive deeper in a couple of minutes, where hospitals actually outsource their entire laboratory. And we'll talk about why they would do that in a second.

And right now, we do that

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there's management around the country. It's about 3,500 beds that we're running currently.

The next part of it would be totally buying their total outreach business. Where the hospital will not only give us their lab to outsource but sell us their outreach business, all right? We have done 3 of those in the next -- in the last 24 months.

And then there's the total joint venture. Now we have 6 joint ventures around the country currently, Oklahoma, Pittsburgh and Phoenix and Erie, Indianapolis and Dayton, Ohio. And of course, if you've seen recently the recent press release, you'll know that, recently, we struck up a partnership, which is a very significant issue for everybody in the lab business, with the University of Massachusetts for the western part of the entire state. And this is what we think is what's coming to a very big degree as we move forward, is these kinds of relationships with different hospitals.

So then if you're a hospital executive and you're looking to decrease your costs, now what is it that you should be looking at? So if you're a sitting CEO or chief operating officer, there are 2 things that drive you every day, mostly. One is, "How do I increase my revenue?" Which usually means, "How do I increase my number of admissions?" because the revenue is significantly based on admissions. The second is, "How do I decrease my costs? What else can I take out and outsource?"

Now I can tell you as a prior hospital executive, we were always looking at what could we begin to outsource. And if you look at what's happened over the years, it's been IT, it's been a lot of supply chain issues. And actually, during my time as an executive, we actually outsourced many of the food services. And in fact, I actually took out the usual restaurant or the dining hall that was in the lobby of most hospitals, we actually outsourced to Au Bon Pain, if you know. It turns out that the Long Island Jewish Medical Center Au Bon Pain, in the lobby, is the second busiest Au Bon Pain in the country. It's open 24 hours. So we did a lot of outsourcing.

So the question is, "What's the next outsourcing opportunity for hospital executives? What is it that they don't need to do anymore?" And what we believe, and what we know, is the opportunity to actually outsource their laboratory. So let me take you through what that looks like.

There are, right now, approximately 2,700, a little bit more than 2,700 of hospitals in this country, between 100 and 500 beds, where we believe is the -- most of the opportunity will lie. It is a multibillion dollar opportunity. And what these look like is, we go in, by outsourcing the lab to us, we reduce their fixed costs, we reduce their variable costs. We actually can increase their revenue as we move toward the delta of what it costs them and what they could collect. And we improve their cash flow.

And we do it, if you look at the chart on the right, by 3 big mechanisms. One, we decrease their equipment costs, we decrease their supply costs and we obviously take the personnel off their payrolls by taking on their employees. I will tell you that, generally, it's about an 8% to 20% savings for hospital executives, all right? About 8% to 20%. So we believe that the hospital lab management outsourcing is an enormous opportunity for us.

And there's one other small issue. There's no one that does this better than we do. Our core business is running laboratories. And they know that and we know that. So we think, again, it's an amazing opportunity for us.

So if I move on to the third trend, and the third trend, which has been alluded to by Everett and Steve, is the issues around the future of how everybody gets paid. Now we all know it's not going to be tomorrow, but on the other side, there's an enormous amount of discussions around accountable care organizations. And of course, that means moving it from price-per-test to managing the total cost. And that's where the conversation is beginning to head. So again, accountable care, total cost for taking care of, in the Medicare ACOs, about 5,000 patients.

So imagine that you're running this ACO. So your critical issues to running the ACOs for 5,000 patients are: One, how do you prevent patients from being admitted, and then how do you prevent them from being readmitted? Because those are the big costs. The third is what do your -- what does the rest of your cost structure look like? Well, you've got to pay for radiology services, you got to pay for laboratory services, and then there's going to be some after discharge care relative to nursing and home care, et cetera.

So how do we play a role on that? Well, there are several different ways to do that. First is you could [indiscernible] cost curve, deliver better insights, assess the population, drive patient engagement and data aggregation. Those are the 5 big areas that we look like -- look at what we could contribute in an ACO model as a partner with a hospital who's running -- hospital or others who are running ACOs. But let me be more specific around that. And that is -- the 3 big areas to accomplish those 5 goals are consolidating data, delivering insights and actually helping them manage high-risk patients. So I'll give you an example of how that works.

So if we were looking to deliver insights, one of the largest cost spends in any ACO model will be genetic testing. We know an enormous amount about who should be tested, who should not be tested and how that works on a physician-to-physician basis when you look at the aggregation of data.

The second is lab utilization. We know what lab utilization should look like for any group of patients: 2,000; 5,000; we know what an aggregated utilization should look like. So we will be able to tell an ACO you're either spending too much, you're spending too little. We also could tell them about their inconsistencies in specific physician ordering. Doctor X looks like he's ordering too much. Doctor Y is ordering too little. Those insights will be incredibly invaluable for ACOs.

And the third is we can actually help an ACO manage their -- or identify high-risk patients through high-risk assessments. So we, as many of you know, have a very extensive and large experience in our employer solutions basis -- business, in actually going out, mobile phlebotomists, nurses, and actually doing high-risk assessments in our insurance business. We can provide that asset to an ACO to specifically identify who their high-risk patients are.

So the final is if you look at ACOs and you look at what I look -- talked about in terms of lab management, there's an entire spectrum of services that we offer in terms of how we can partner with hospitals and large IDNs. What we need to do, which we're convinced we need to do and which we're out there doing now, is moving away from the traditional vendor relationship and moving towards the partner relationship. And that includes some of the things I just talked about, which is: lab management; tuberculosis testing; in terms of human resources, lab efficiency; broad IT support; ePre; Care360; EMR; ACO support; private label -- many of you have seen out in the lobby is the Gazelle, we actually co-brand with hospitals relative to delivering patients' own data to patients that are aligned with that hospital -- cancer diagnostic centers; microbiology outsourcing, I mentioned; and specific molecular testing, which is critical to hospitals how they will be evaluated in the future based on certain quality measures, 2 big ones of which are -- called MRSA testing and C. difficile testing, are in the Medicare quality management issues in terms of how they're going to get paid, which we can help provide them.

So the 3 takeaways are as follows: One is, we believe we have a comprehensive cancer diagnostics solution that we will be able to offer to the market. Second is a strategic partnership with hospitals and IDNs around specifically the entire spectrum, running from reference testing all the way up to lab management, to joint venture, to ACOs.

And finally, we know that we could -- we have a huge opportunity to leverage all of those relationships and develop additional strategic relationships with hospitals as we move forward.

So it's now a privilege for me to introduce Bob Hagemann, our Chief Financial Officer. Bob?

Robert A. Hagemann

Thanks, John. Good morning, everyone, and thank you for coming out to hear about the plans that Quest Diagnostics has. We, as a management team, you can tell, are very excited about those plans. And we believe that investors, our customers and our broader employee base should be excited as well.

Most of you, if not all of you, know me. I've been with the company now for 20 years, the last 14 as the Chief Financial Officer. And I will tell you that I'm very proud of the company that we've built over that period. As Steve described it, it's a high-quality company.

But I'd also tell you that I've never been more excited about the opportunity that we have before us than I am today. And that excitement stems from the plans that you've heard and the team that we've assembled to execute against those plans.

Now as you can imagine, there's a lot of change going on at the company right now. But what I'd like to talk to you about is something that we don't see changing. And that is our ability to deliver significant and sustainable cash flows. And also, I'll talk with you about how we expect to deploy those cash flows to drive value for our shareholders.

This first slide here gives you some sense as to how significant those cash flows are. The orange line that you see there represents the free cash flow that we've generated over the years. And generally, you've seen it range between $800 million and $1 billion of free cash flow.

Now as you can also see from this chart, we've returned the majority of that to investors through a combination of dividends and share repurchases. And that's consistent with the commitment that we've made, going forward now, to return the majority of free cash flow to investors. And with the dividend increase that we announced today, a much more significant portion of that is going to be returned in the form of dividends.

We have very clear priorities for how we expect to deploy that cash flow. It's a very disciplined approach with its underpinning as a capital structure, a capital structure that we believe should enable shareholder value creation. One that's grounded in maintaining a strong BBB credit rating. We've spoken to you about this before, where we've done a lot of analysis. We believe that maintaining a strong BBB credit rating provides us a lot of advantages.

First and foremost, it provides us with the lowest overall cost of capital. Secondly, it provides us appropriate access to capital despite whatever market we might be in. And lastly, it provides us appropriate operating flexibility to execute our plans.

We've indicated also that, to achieve a BBB credit rating, solid BBB credit rating, we'd expect our debt-to-EBITDA ratio to range between 2x and 2.25x. And we indicated that, that would require us to pay down between $500 million and $700 million of debt this year. We're well on our way to doing that. We expect to have that completed this year, behind us, and provide us much more flexibility as we go forward.

So as we go forward and we think about deploying that cash, we think about it in 2 principal buckets: commitments that we've made and discretionary capital. Let's talk about commitments for a second.

The first commitment, the first area in which we need to spend, is to improve our operating performance. Improving operating performance is clearly the best way to drive value for shareholders. And we expect to do that by driving operations excellence and restoring growth.

You heard John Haydon talk earlier about operations excellence. You heard Everett and Jay talk about restoring growth. Each of those is going to require investments. Our Invigorate program, clearly, will require some investments.

We've indicated that it could cost us as much as $200 million in charges over the next several years, the majority of that being cash charges. John spoke about what we need to do with our systems to standardize them, what we want to do in our laboratories to further automate them, what we want to do with our laboratory footprint to further optimize that. That's all going to require an added level of capital spending. And over the next several years, we do anticipate that our capital spending will increase, probably in the range of about 1% of revenues or so each year for the next several years.

Additionally, Everett spoke about the investments that we expect to make in restoring growth and providing the commercial organization with the tools they need. And, while those investments will be far smaller than what we need to drive operations excellence, they're critically important investments that we intend to make.

Jay spoke to us about the opportunities that we have to drive diagnostic innovation and the investments that we plan to make there, which will continue to accelerate growth in esoteric testing, which is our most profitable and fastest-growing piece of our business. Those are the things that we need to do first to drive operating performance.

But additionally, we've made some other commitments. We've committed to shareholders that we plan to return the majority of our free cash flow to them through a combination of dividends and share repurchases. And as part of that, we expect to maintain a meaningful dividend, one which can grow over time. And with this morning's announcement of our dividend, we believe we have achieved that.

The dividend today represents about a 2% yield on our share price. It's in line with the broader S&P 500, yet we expect that it has opportunity to grow over time. Additionally, as we round out that commitment to return the majority of our free cash flow to investors, we expect to supplement those dividends with share repurchases as we've done in the past.

So after meeting those commitments, we then think about the rest of the cash flow as generally discretionary but situational. We have opportunities to invest in growth and opportunities to return additional cash to shareholders.

And the investments in growth we're excited about. Steve talked about the opportunity that we have to do value-creating fold-in acquisitions, those that are driven by synergies, are much more manageable in size and that we've executed well against historically. We have a very disciplined approach for evaluating those, and I'll speak to that in a moment.

But additionally, we have further opportunity to return cash to shareholders, certainly out of the strong cash flow that we generate, and additionally, there'll be opportunities for incremental returns to shareholders as a result of the portfolio actions that we're taking and the cash that we expect to generate from that.

As I think about those investments in growth, first, let me step back and say, clearly, there've been some question about our approach to acquisitions in the past. And I think it's important for you to hear today the approach that we're taking at this point so that you can have confidence that what we'll be doing in terms of investing in growth will be one that's strategically aligned and will drive value for shareholders.

First, you've already heard we're not anticipating doing large acquisitions at this point. Our focus is on smaller fold-in acquisitions that generate most of their value from cost synergies, something that we know how to execute against very well, and we've demonstrated that.

But additionally, as we look at this, clearly, we want to make sure with everything we do, even the smallest acquisitions, that there's good strategic fit, that they're aligned with that refocused organization that we have, that they're consistent with the core assets that we've got, that it will strengthen our capabilities, improve our market presence and, additionally, that we're operationally ready for it so that we can then execute effectively.

Certainly, as it comes to creating value, net present value is a terrific way to measure how much value you create. And as a general guideline, we are expecting that there will be material value creation, from an NPV perspective, in terms of every deal that we do.

We'll calculate that NPV by using a conservative discount rate, one that reflects our long-term weighted average cost, as opposed to now what might be viewed as an artificially lower cost of capital that most companies are enjoying today because of where interest rates are. We feel as though it's much more appropriate to evaluate these in the context of a longer-term cost of capital. Think of it as high single-digits.

Clearly, returns on investment capital are something that are important for us and should be important for shareholders. A lot of work has been done to correlate returns on investment capital with increases in shareholder value. And clearly, they correlate. We, as a management team, are clearly focused on driving improvements in return on invested capital. We're measured against it, and we're very heavily incented against it. And we see these fold-in acquisitions as an opportunity to drive increases in ROIC.

What we're targeting is a mid-teens ROIC for each of these transactions within a reasonable time frame. And we also expect that it will be ROIC accretive to the plans that we've laid out for ourselves.

And lastly, earnings per share, a metric that everybody watches and can be also considered a driver of value. We want any transaction that we do to be accretive in the near-term there as well, from both a GAAP basis and a cash basis. And we believe that these guidelines will keep us disciplined and ensure that the acquisitions we do will not only be successful, but successful in driving shareholder value.

And a terrific example of that is our UMass Memorial transaction, one that -- it's a transaction that we're very excited about. It's one which we hope to close right around year-end this year. As we've indicated, we expect it to add about 1% in revenues next year. And as we think about further fold-in acquisitions, we believe that there is an opportunity there for them to contribute, on an annual basis, about 1% in revenues. But this particular transaction is very exciting for us. As John said, this clearly is one of those strategic hospital relationships that we think there will be more of.

It's clearly a value-creating transaction for our investors. It gives us improved market access in Massachusetts. It's really a relationship which has been spurred by the evolving market dynamics that Steve spoke about earlier.

Hospitals in UMass, in particular, are recognizing that the price differential they have on their lab services business isn't something that can be sustained. And as a result, they're asking themselves, "Is this really strategic?" And when you conclude that it's not, that's the point at which you say, "We should think about monetizing this so that we can invest in something that is more strategic, like acquiring physician practices or investing in information technology," which is where many hospitals are thinking today.

This is a transaction where we are purchasing the hospital outreach business of UMass. It's one that we expect to deliver significant cost synergies as we bring the 2 businesses together. And this is one, while we still see an opportunity to accelerate revenue growth as a result of this transaction, the real value creation is in the cost synergies. And as I said earlier, something that we've got a proven track record of executing very well against.

It's also a long-term relationship, one that's going to lower the cost of testing in the marketplace for the patients and the payers in that area and position both companies for sustained growth in the state, because now we'll each be focused on what we do the best, really, at this point.

We expect that UMass will be taking a financial interest in the operation. And together, we're going to be jointly developing a highly efficient state-of-the-art laboratory that we're both very excited about. I know John Haydon is very excited about the opportunity to use this as our first example of what our lab of the future will be.

And again, because of the evolving market dynamics, we expect that this transaction is one that can serve as a model for other health care systems around the country and will help us fuel our growth.

So you've heard a lot today. I'm the last person up here, so I'm sure that you're very anxious for us to wrap it up and get to Q&A. But what I'd like to do is try and put into perspective what you've heard so far.

I think the best way to do that is to describe for you what we've shared as a plan to unlock significant shareholder value. It's a plan with 2 principal components. The first is to improve our operating performance by restoring growth and driving operations excellence.

The second is to -- disciplined capital deployment. You heard a lot about restoring growth. You heard from Everett and John Cohen about our opportunity to grow volumes through commercial excellence and strategic partnerships. You heard from Jay about our opportunity, through our disease-state focus, to accelerate growth in esoteric testing, our fastest-growing and most profitable piece of our business. Steve talked about the market dynamics that will fuel value-creating fold-in acquisitions for us, again, which we think can contribute in the range of about 1% revenue growth per year. Together, we think these things can contribute low-single-digit revenue growth for us through 2015 and actually accelerating during the period.

I'll come back to one of Steve's earlier slides, though. It started by saying we're grounded in the realities of today, and we are. We recognize that we've not been growing and that it is going to take some time to restore and accelerate that growth. So as we think about this period between now and 2015, while we expect to deliver low-single-digit growth during each of those years, we expect it to be slower in the beginning and accelerating as we move through the period.

Part of that is because we need to offset continued reimbursement pressure. That's not going away. It's something that we have to deal with. For planning purposes, we're anticipating that to be in the range of 1% to 2% a year.

So while we're very confident in our plans to restore growth, we recognize that it's going to take some time. And in the short term, we see the best way to drive value for shareholders as driving operations excellence. We expect that as a result of our Invigorate program, we can continue to expand margins despite the fact that we expect to have continued reimbursement pressure and despite the fact that we expect to see cost increases on that wage and health care bill, that $3.1 billion salaries, wages and benefits bill that we've got. We do expect that that's going to be inflating between 2% and 3%, on average, in a given year.

So those are the things, the reimbursement pressure and the inflation on the wage bill, that we need to offset. And clearly, we feel as though we have a solid plan in place to do that. We've raised the target for our Invigorate program. We now expect it to deliver $500 million in savings through the P&L in 2014, exiting the year with a run rate of $600 million and a goal to achieve $1 billion over time.

Clearly, as we think about Invigorate, it's all about doing more sooner. In fact, John, I thought about it, I'm going to get you t-shirt that says that, so you can walk around wearing "more sooner." Your home team, we'll have one for them.

But beyond driving improvements in margins in the short term, longer term, this is a terrific opportunity for us, because as we do ultimately restore growth, this is going to provide us with significant operating leverage. So when growth is ultimately restored, we should expect significant improvements in earnings at that point.

So this all comes together, basically, as a driver of increased shareholder value. Improving operating performance through restoring growth and driving operations excellence through disciplined capital deployment. We expect that it's going to result in sustained improvements in return on invested capital, again, something that we're all heavily incented on and measured against. We expect to be able to achieve sustainable double-digit earnings per share growth by the time we get to 2014, with that growth contributed by not only improvements in operating earnings but continued share repurchases as well.

We expect to maintain a meaningful dividend, one that can grow over time with earnings and cash flows. And we expect that there's an opportunity to not only meet those minimum requirements of returning the majority of free cash flow to investors but, at times, return significantly more than that as a result of proceeds from some of the portfolio actions that we anticipate.

So stepping back, I hope that you recognize, as we do, the significant opportunity that is here. I know, we, as a management team, are very excited about it, and we hope that you will be as well.

And at this point, that concludes our prepared remarks. And before we turn it over and open it up for Q&A, I'd like to hand it over to Kathleen Valentine so that she can make a few administrative comments for us. Okay, Kathleen?

Kathleen Valentine

Okay, great. So while we get set up for the Q&A session up here on the stage, just want to cover a couple of housekeeping things with you. First, the presentation slides that you saw here this morning, they will be posted on our Investor Relations web page on our website. Additionally, for those of you that are here in the room, we will have a take home bag for you, and in that it will be a few things. One, a thumb drive of all of the presentations that you saw here today. So I'm sure you'll all be anxious to open that up.

And then in addition, there's also information on the displays that you saw outside, and I hope you were able to take advantage of visiting with those displays. But there's some great information on those capabilities in the bag, including an offer for you to personally have a Blueprint for Wellness screening done on yourself. So we hope that you'll take advantage of that. Okay?

So we'll invite our management team up on to the stage and we'll get going with Q&A. There will be 2 microphones available on the aisle. Please raise your hand when you would like to ask a question. And remember, please wait for the microphone before you begin asking the question, so that everyone will be able to hear. Thank you.

Question-and-Answer Session

Stephen H. Rusckowski

Right. So as we get seated here, there's microphones in the audience. Again, when you get a microphone, and you have a question, I'll handle the questions. Please introduce yourself, tell us where you're from, and we'll pass it to the right people. So this is good. On my right and left, I have my guards, CFO and Chief of Operations, I have 2 strong ends here with my 2 physicians and then my 2 growth people here in sales and value creation here as my tackles. So I feel good as a quarterback. So who would like to start?

Darren Lehrich - Deutsche Bank AG, Research Division

It's Darren Lehrich with Deutsche Bank. So you talked a lot about the opportunity with hospitals and you spent a lot of time throughout many presentations on that opportunity. Hospitals have been very quick to move in employing doctors, and we're seeing just a very rapid pace. Yet they're slow to move when it comes to making strategic decisions about changing ancillary partners and whatnot. So I guess I want to start with the question of how do you expect to move to market to get hospitals to alter that, really, just kind of ingrained strategic response to changing up their ancillary partners?

Stephen H. Rusckowski

Well, great question, Darren. Well, first of all, I think most of you would agree, we're like -- we're at a time no -- very different than other times, in the time I've been at healthcare, where there's so much change going on that there's clearly a catalyst for decisions being made at a more rapid pace than ever before. The fact that hospitals are buying physicians is changing a lot of what's happening in the dynamics of healthcare. First of all, the power of what happened strategically will be directed by administration over time. And you saw how we've changed our views around information systems. And in the past, there was difficulty in driving an EMR for an enterprise because it was very difficult to get the cats herded, if you will, to do the right thing in terms of driving information systems into healthcare. The same will be true for other decisions. So as physicians now become employees, like the rest of us as employees, we listen to the plans for the organization and we get directed on what we do within an organization. So that is changing, and that's a substantial change. And because of that, the administrative organizations that we have talked to, and those CEOs in those organizations, are starting to rethink what is really strategic and what do they do and what should they consider in going forward. And they are considering, more so today than ever, of what they need to rely on others to do and where they need to focus. Some also need some capital. They have to make some investments to compete. They will be competing in the future, more so than in the past. They need capital for enterprise EMRs, they need capital to buy physician practices. And some are looking at this as an action that they can take to raise some of the cash they need to go forward. So the time is different today than ever before. Now with all that said, the theme of today is grounded in the realities. Many of us have been in this field for some time. Healthcare does move at a different pace, okay? But I would argue it is moving at a faster pace than before. These relationships and engagements with systems and hospitals do take some time. But we are building that funnel and we're building those and then, as we get to a more substantial cadence, we believe we can build on the momentum to build the substantial business going forward. But it will take us some time to get there. So Jon, would you like to add to that?

Jon R. Cohen

Yes. A couple of things. As the power sort of moved to hospitals, you talked about, but it's important to also remember that the majority of the hospitals, the margins are very, very low. In fact, the rough data is 2/3 of the hospitals in this country actually are still in the red. 2/3 on the not-for-profit side. So if you look at the Northeast, the margins in the Northeast of most hospitals is like 2%. It’s very, very low. It's higher in the South and in the Midwest because of their cost of, actually, the salaries and benefits are significantly lower. So having said that, if you -- again, if you're a hospital executive, you need to take out cost and there's, as Steve said, there's enormous pressure now to take out even more cost. So I will give you this as truly back of the envelope, just an estimate so you have an idea of the scope and size. The average 200- to 300-bed hospitals spends about $10 million to run their labs, roughly. If you look at what we've talked about, you can take out roughly $1 million, $1.5 million in cost by a lab -- by outsourcing a lab, that's a big deal for a hospital in that level. So I think that the price compression issues, the issues about their reimbursement, which is changing on the lab side, I think will force people actually to begin to look at this in a very, very different way than they have in the past.

Stephen H. Rusckowski

Darren, you asked a question that had 2 parts to it. One was the opportunity, second is how do we go to market. And I want to answer that because I think it's important. And part of the change we're making with our sales force is to, frankly, bring together 2 separate organizations. We had a physician organization and we had a hospital organization. In today's world, what we just described, it makes no sense to have 2 separate organizations, but to bring those together as one. And a lot of what we'll be selling to is integrated delivery networks and hospitals, particularly as they get more directed, if you will, by administration. So let me turn that to Everett. To talk about how you think about this change and how will the new organization we have in place change with that.

Everett V. Cunningham

Sure. I think it's all about incenting our people and putting them in the right place to influence that ever-emerging customer base. Today, in our current structure within Quest, again as Steve said, we have 2 different groups, and they're delineated. They call on separate customers. But yet, healthcare is not delineated. So what we're going do is we're going to incent our physician groups and our hospitals groups to actually work together. So as those customers kind of -- what I would call, kind of encroach on each other's spaces, we're going to actually encroach with them and send people to call on it. The only other thing I would add is, in terms of the call point, who we call on that makes decisions. So today, a lot of our organization calls on lab technicians, people that run the labs. And when you talk about us being better in that space and being able to better run labs than hospitals, they might feel that there could be some competition there. But as John said in his presentation, we need to call on the C-Suite level of these hospitals, people that actually make decisions that think about lowering cost and increasing revenues. And then we can have that financial discussion with them, and at that level, we feel that, if we can deploy myself and Steve and other senior leaders, call on the right decision-makers, we're going to get more opportunities to partner without people feeling like we're encroaching in their space.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Robert Willoughby at Bank of America Merrill Lynch. As it relates to some of the hospital outsourcing initiatives, you're very upbeat on it. But how should be view Roche's interest in some of that technology companies that serve to disintermediate the central laboratories. Of all the people out there, Roche knows more about central lab models than just about everybody but you.

Stephen H. Rusckowski

That's interesting. John -- talking to the operational opportunities, and John said in our $2.2 billion spend, a lot of that goes through IVD companies. So we're changing our procurement and we're changing our philosophy about IVD companies. And that is, we work with all of them, frankly, and that's part of the opportunity. We have about 8 to 10 different suppliers. You mentioned Roche, you know all the others. In most cases, we're one of their, if not the largest, customer they have. And so part of the work to improve operational excellence, but also think about what you described, is we are having a very strategic conversation with all of them to talk about what we do together, how they could help us with cost structure and operational excellence, but at the same time, how do we go to market and how do we take advantage of what we see as an opportunity to be able to drive efficiency and effectiveness in the organization going forward. And we also shared with them -- we have a wide group today. To be able to do this, we can't do it with this many. So we're going to start narrowing the field to those that will work with us over time. And so from a procurement perspective, it will be more efficient. Should be more effective for us. But from a strategic perspective, we also will look at ways of how we can work together with them.

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Tom Gallucci from Lazard. Thanks for all the color today. I was hoping maybe you can help us put it all together a little bit from an income statement perspective. I think one thing we've struggled with a little bit, Bob, you mentioned some of the pressures in the business. So as you talk about Invigorate, $500 million, $600 million, maybe $1 billion, how do we think about that on a net basis relative to some of the pressures in the business? And in the past, you've talked about a 20% operating margin goal. I didn't hear any specific goals today, so how are you thinking about margins? Has that changed? And maybe any idea you can give us on the trajectory?

Robert A. Hagemann

Tom, as I said in the prepared remarks, despite the reimbursement pressure that we anticipate, which we -- for planning purposes, we're thinking that it's going to be about 1% to 2% a year. On a $7.5 billion revenue base, it's a sizable number. We see inflation on the wage base that we have to offset as well. And frankly, much of the savings associated with Invigorate go to offset that, clearly. But we do think that we can continue to expand margins during this period of relatively slower growth. And then, as the growth picks up over time, clearly, see the leverage in the business take hold and drive some substantial gains in margin at that point. With respect to operating margin, we had -- historically had out there a target of 20% operating income as a percentage of revenues. And, while I would tell you that that's no longer a stated goal, we do have a goal of improving margins. But I would tell you that's not the primary goal. The primary goal is to really drive top line and bottom line growth so that we increase value for shareholders, driving ROIC. For example, some of the lab management agreements that John talked about, you can imagine that the margins on those wouldn't necessarily be as high as the margins on some of our esoteric testing, but by the same token, in a lot of cases, there's very little capital that gets deployed against that, and the returns on that capital can be very significant, which, again, we think is what's going to be a big driver of shareholder value. So that's the way we're thinking about it.

Stephen H. Rusckowski

And I think we've -- what we tried to do today is to lay out all the different aspects of what we think about in building our operating plan going forward to be able to drive the earnings growth that we've described. So we do have headwinds on a price erosion, 1% to 2%. We're modeling that. We're not planning on that not happening. It will happen. And so therefore, we need to plan on it. Also, in talking about our value proposition, we do enjoy a premium today. We believe that premium will decrease over time, but we'll continue to justify, in the marketplace, a premium in the future as well with the value we bring to the table. We're working on that portion of our value proposition. So that will be the headwinds. We've also laid out for procurement is net. So in the numbers that John presented, that will offset any price increases we see in that $2.2 billion. So that's embedded in the plan, and John and his team are held accountable for making sure it's net, okay? So it's absolutely certain. We've also laid out what we think the wage bill will be. Okay, so you see the wage bill increase that we've talked about. And so, in looking and working through each of those dynamics, we still believe, with the tailwind we expect from Invigorate, and we are asking for more in sooner, coupled with restoring growth, it will give us both dimensions of the P&L to be able to deliver the earnings growth that we described.

Sumanta Biswas - Polaris Capital Management, LLC

Sumanta Biswas from Polaris Capital. Along the same lines, I was just curious, in your ROIC target, if there's an impairment in any one year, how does ROIC get affected, if at all?

Robert A. Hagemann

Well, clearly, if there's an impairment in a particular year, that runs through the P&L and would generally impact the ROIC capitalization in that year. But frankly, in subsequent years, as a result of then having reduced the asset base, it allows you to drive further improvements in ROIC. And frankly, the way that I think about it is impairment charges tend to be non-cash and don't drive economics. And really, what we're all about is trying to drive the economics here, which will be the thing that drives shareholder value, ultimately.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Kevin Ellich, Piper Jaffray. So we've heard a lot from the managed-care companies about narrowing networks, and Everett talked a little bit about changes with the health plans and focus there. Could you give us some detail or some color on what you plan to do and how it's going? How you plan to like get more volume and show more value given the changing landscape?

Stephen H. Rusckowski

Absolutely. Well, we see this is a positive effect, actually. We work actively with health plans. And the dynamic we talked about of hospitals buying physicians and moving some of what we did before inside their organization has actually increased their cost. And we talked about benefit design and I talked about narrowing of networks. So this is where we're working together, together, because our incentives are aligned, with health plans to be able to narrow the work and be able to bring it to the best quality, lower cost, which is us in most cases. I'm actually going to pass this one to Cathy because she's been right in the middle of this in her current responsibilities, working with the health plans and understanding what we need to do together with each of these plans. Cathy?

Catherine Doherty

So again, there's a lot of effort that's going on within Quest Diagnostics in working with Cigna and Aetna to take advantage of them narrowing the network. And it's really about having a disciplined approach to kind of go after it, day in and day out. The health plans have been very generous with their data, and we've been taking that data and mining it and identifying the top priorities and directing our sales force exactly on where to go each and every day, and we've seen some early successes relative to that. It's not something that happens overnight. It's a lot of blocking and tackling. But it's about getting the data and making sure that that rep goes to where that opportunity lies.

Ricky Goldwasser - Morgan Stanley, Research Division

Ricky Goldwasser, Morgan Stanley. Going back to your market growth assumptions, when you think about the impact from health care reform, how does that form your thought process on your growth? I think you talked about single-digit growth going back to these levels by 2014, 2015. So what percent of it is coming from share gains versus just the growth in the market as the result of that? And similarly, on the cost side, right, because there's obviously opportunity on the billing, and from health care reform, we do expect to see lower bad debt rate. So is that included in that incremental $400 million in cost savings that you can see in the future?

Stephen H. Rusckowski

Well, in the last 6 months I have been part of this company, part of building a strategy is to really understand how big your market is and what are those opportunities. So we spent a lot of time in modeling this. And it is a dynamic process. So we played with all the different variables. I mentioned in my introductory comments, there would clearly be more people, because the population is growing. More people are...

[Audio Gap]

[indiscernible] if you will in 2014, that I spoke of. So that will have a positive dimension. But also, there is a shift of the product to different price points. And we're trying to build sensitivity on our models of just, well, who will move to exchanges with the expansion of Medicaid, what does that mean in terms of price points. We are modeling in the price erosion we talked about. We are assuming there'll be price declines in our government business as we've described in the past. So we have put that all into the model. And we're also assuming that, that shift that's happened in the near-term to hospitals, the higher price points, will start to move back to independent labs, because it's not sustainable. And so if you go through all that calculation, and there's a lot there, you come up with where we ended, which is about a 4% growth market. And that's the best of our knowledge at this point of where we think it'll be through the future, 4%. Which is about how well we believe the market's been growing, and obviously there's different segments that have been following at different rates. Now what we have shared is we have not grown at that rate, and we have lost share. And this won't happen overnight that we change that. And we're not going to ground a plan based upon changing things overnight. As a matter of fact, to the contrary, we're building a plan based upon building our capabilities with sales excellence, getting more out of esoteric, and taking advantage of this hospital plan. And we'll start showing sales growth and accelerate it over time, it will be low-single-digits, and we'll eventually get to market growth rates and, as I said, longer term, we hope to start gaining share, but we're not going to bank our plan on it today. So that's our perspective on it. Bob, would you like to add to it?

Robert A. Hagemann

I think that wraps up.

Lisa C. Gill - JP Morgan Chase & Co, Research Division

Lisa Gill, JPMorgan. As we think about accountable care organizations and we think about lab associated with that, there's been some talk about trying to manage lab costs and that actual lab volume could go down as we start thinking about this. Can you talk about where you would fit in? Is there a way for you to help to manage lab overall? What ways could you possibly be paid for that, would be my first question. And secondly, around formularies, do you think that we'll see more lab formularies as we move towards accountable care?

Stephen H. Rusckowski

Yes, great question. I'm going to look to both of my doctors. Jon, why don't you start, and I'll pass it to Jay in terms of formularies?

Jon R. Cohen

Well, on the accountable care, we've talked about it. I think the model will be -- is going to have to be on on a shared risk for the total cost, right? Because we're not getting paid -- as you say, we're not getting paid for lab services. The question is how do we help those accountable care organizations manage it? And so it won't be, as I mentioned earlier, it will -- a lot of it will be around utilization review and how do you manage that. And because of what you've heard certainly Everett talk about and Jay talk about on the insight side, meaning providing insights, once you -- once we're able to provide them, which we can provide insights today, to help manage those costs, that's an incredibly important issue for the ACOs. The model will be, though, sharing in the cost savings. So Jay?

Stephen H. Rusckowski

Formulary, Jay. Talk about what's there today, what will happen as we go forward.

Jay G. Wohlgemuth

Right, I would just add to what Jon said that in the ACO environment, that's one of the environments where the dynamic I was talking about, with respect to meeting certain parameters for quality care, become very, very important to the profitability and the sustainability of that ACO. And I showed you some examples of where there are very large gaps in that care. So in the area, we think that the ACO will be incentivized to increase testing, not decrease. On your comment, though, on the sort of limiting lab spend, we -- beyond those gaps in care on the esoteric side, we're focused on those tests where we have a very strong and solid argument toward adding clinical value and reducing overall healthcare spend, and with Cathy, as we're developing these solutions, we're highly focused on adding -- in the esoteric side, though, is where that argument is very strong -- so that an ACO can take that in and know they're going to be managing their overall cost.

Unknown Analyst

[indiscernible] and how do you get paid for that? So if you're talking about sharing risk, ultimately, I mean, Bob, maybe your perspective on how do you get paid for that? Is it a relationship, and in the overall equation, you're going to get x amount of the savings? Are they still going to pay for lab tests in the same may? How should we think about that as we go forward?

Jay G. Wohlgemuth

I would tell you, it's first still evolving, right, very new. And while Steve talked about a shift from fee-for-service to capitation, fee-for-service isn't completely going away, so we should keep that in mind. And capitation, we're going to need to think about differently, too. So it won't just be the capitation payment models that we've got today. Capitation is going to be very segmented, very targeted. Linked, I'm sure, to delivering care in the proper fashion. And it's -- some of the investments that we need to make on the commercial side are going to be in just that area, understanding the population demographics so that we can understand what the risks are, how we can help manage those risks, and then price accordingly.

Catherine Doherty

But I would just add one other thing. On the value creation side, and to add to what Jay said, one of the things that we haven't done, but we will be doing as part of value creation, is being able to demonstrate the value that we bring to the entire healthcare value chain. So when we bring a test like ColoVantage to the table, it's not just about kind of managing that lab spend, but it's about early detection of colon cancer so that you manage that spend over the life of that patient to be a lot less than if you didn't have that test.

Stephen H. Rusckowski

Yes, so bringing clinical evidence into the conversation is important. As you start to move from a "we do more work, we get more money" model to "we get fixed payment and we need to think about the resources we bring to the table to get the best quality of care and lowering cost," you have a whole different discussion. It's no different than the discussion that all of us have, whether we put 6% in IT, or 5%, and what we expect in investing there, we're going to get for the benefit of our business. If you look at holistically now, we think it's actually positive, because we think we bring a lot of value to the equation. Next question?

Isaac Ro - Goldman Sachs Group Inc., Research Division

Isaac Ro from Goldman Sachs. Two questions. One on market share. Could you maybe put a little color around how you expect to gain the market share and where you think it's going to come from. And then secondly, on -- John, I think you had a nice slide regarding genetic testing. And as we looked at all the different categories, I thought it was kind of interesting that in predisposition there's sort of a lot of white space. At the same time, that's where a lot of the innovation is in the technologies that are coming to market in genetics. So I'm wondering, what kind of economic value do you see there? Is that an area of white space where you want to invest? I'm just wondering where you see predisposition tests.

Stephen H. Rusckowski

Let me start with market share. First of all, we need to make this absolutely clear. We say the market's going to grow 4%. We say that we're going to grow low-single-digits. It's going to start low because we need to recover from essentially flat performance where we've lost share to where we need to be and, eventually, gaining share. And as Bob said, we will accelerate and that's what we're planning for. That's what we're planning for. So we need to fundamentally make improvements. And part of those fundamental improvements are what we call bringing sales excellence to Quest Diagnostics. And that's a lot of small things that add up to better performance, and Everett outlined some of those. In that, it's -- this whole discussion we're having around how do we call now, how do we call a completely different healthcare customer than we had in the past. In the past, we called primarily on physicians, yes, we had a hospital organization. In the future, it is coming together and we need to call at a completely different level. And Everett will address that with the sales force. Second is we clearly need to have access and we need to work proactively with health plans. And I can share you, in the last 6 months, I visited about 10 health plans, and I need to be engaged in it along with Everett. And in addition to this is what Everett described: along with those plans, we need to have the best organization we can and the best people we can on a go-forward basis. And all those small things add up to better performance as far as how we go out and market. So Everett would you like to add?

Everett V. Cunningham

Yes. The only thing I'll add to add to that, because Steve captured it very well, is the mindset. I mean, you asked about how we're going to grow share? You have to have the mindset of growing share. And to grow share in this new marketplace, because there's competitors out there, you've got to do a couple of things. First of all, you have to have the mindset of -- in some areas, we're going to be able to steal share from some of our competitors, right? Otherwise, we're just going to have to be able to very -- diagnose the market, have new tools to find out which customers will give us the opportunity because we have access to them. But we're not calling on them today to go get shares. So we're going to have a commercial team that's out there, locally-based, that will have that mindset of not just servicing customers, which Quest does very well now. We're not going to lose that, but we're going to actually go out and get new customers. You have to hustle to do that. That's the only thing I would add.

Stephen H. Rusckowski

You couple that with what we talked about of growing a very strong aspect of our company around esoteric testing, which has a lot more value than routine testing, and you align that with their orientation, with our clinical franchises, we feel that, that would allow us in a value share perspective, not necessarily volume, to take up value share. And then as this hospitalization effort starts to continue to gain -- to gather steam and momentum, we think that will allow us to pick up a piece of the marketplace that we weren't enjoying in the past. But again, we're going to plan on a ramp, we're going to build our play out based upon a reasonable improvement in 2013 and build on that as we go forward. Okay?

Dane Leone - Macquarie Research

Dane Leone, the Macquarie Group. In the context of the discussions in Washington, continued issues with the budget and looking for ways to reduce costs especially in the medical field. How can you take a fresh look at the ACLA and the lobbying groups that Quest is a part of, to hopefully strengthen our relationships in Washington going forward so that you realize the value proposition that you talk about so much of being so little to spend but having such a clinical impact? Clearly in the past, or the past several years, that strategy has not been working that well. And I would just be curious to get your thoughts on how that could change going forward, and how Quest can kind of be a leader in that?

Stephen H. Rusckowski

Absolutely. First of all, you mentioned that we need to have a seat at the table, and we have in the past, and we will continue as we go forward. I am on the board of ACLA. I have started to participate in that. In my 6 months, I have gone to Washington and done my walks on the Hill. To show you the, I think, the credibility that this industry has with Congress, in a full day, I had the opportunity -- and they did show up -- to meet with 6 U.S. Senators and 4 Congressman, all very engaged in the discussion about healthcare. And they were very interested in this industry, in the discussion we're having here, about the impact of what we do. First of all, there is a lot of employment from what we do as well, and they care about employment. And second is we provide an opportunity to look at improving quality and lower cost. So there was a lot of discussion on that. Second is that we're not alone. So this dynamic around -- if you look at the marketplace and this fragmented marketplace, you look at in industry, overall healthcare industry, that's worried about quality and cost, and if you look at the leader, and we know we have the best quality and we will have even better cost as we go forward with Invigorate, that you would think in a normal market that volume would move in our direction in a much more substantial pace. And we talked about the payers and we talked about their costs going up because of the shift, and they're all over that as you would imagine. And if you look at some of those changes, one could start to question, and people that are looking at this issue are starting to question -- hospitals have bought physicians for a lot of reasons. But we all know part of the reason is to feed what they already have, right? So some of the references will go to their specialist, their referrals, missions will go to their hospitals and some of this insourcing, if you will, laboratory services will go inside. If you look back as a payer on that dynamic, you can only understand, okay, I'm sure, that the cost could potentially go up, because it's staying within their network, not necessarily doing the right thing for the total cost of healthcare. So the payers are there much on the same script with us. And so we're actively engaged in that. I'm going to play an active role on this. But as an industry, we need to take much more of a leadership role of showing our value, highlighting the cost differentials that exist across the industry and how we should be moving to fewer but better suppliers in this industry, one of which is the leader. That's our view.

Unknown Executive

I want to just -- a gentleman I know, he wants to get the second part of his question answered about genetic testing. So I actually want Jay to answer that question about predisposition, but genetic testing comes in a lot of flavors. There's screening, there's prognosis, there's companion diagnostics. And as you probably know, we have a very extensive menu in genetic testing at process. But the issue I'll ask Jay to answer is one is on -- you've asked about the predisposition, and the other he may want to mention is where we are in next gen sequencing, which is a pretty huge issue and opportunity for us.

Jay G. Wohlgemuth

With the sequencing in the human genome and all the genetic studies that have gone on the last 10 years, there are many different associations out there between a genetic polymorphism and risk and a predisposition. And the reason we care about predisposition in certain areas is so that you can either detect -- identify people who are at risk and detect cancer before it occurs, or as it's occurring, colon cancer predisposition being a good example, or we can intervene in some ways to prevent progression. So not all of the genetic predisposition markers that are out there are of equal value, because in some cases, I have an intervention. If I know you're at risk, hereditary risk for colorectal cancer, you're on a more intensive screening regimen to detect the cancer. So the answer to your question is absolutely yes. We are focused on and will be delivering solutions in the predisposition space, but with the limitation that I said, that it has to be linked to an intervention which will actually improve outcomes. And we do see a lot of opportunities for that.

Unknown Executive

Just the incredible example is actually today's New York Times, if you've read -- saw the article about Alzheimer's disease. Now, what Jay is referencing is what we have to be careful is the more you test for a disease that doesn't have a treatment, the question is just going to be well, who wants to know that? And that's what that article is about today is, well, if you knew tomorrow that you're going to have Alzheimer's disease with no treatment, do you really want to get tested for it? So what we are trying to do is make sure that we link what we do for -- to where there is a therapy, because that's the win.

Stephen H. Rusckowski

Any questions on operations? I have John to my left, he's anxious to [indiscernible]. Who has an operations question? Operational excellence. We shared a lot of transparency. We gave a lot to you today. We've -- I hope that's helpful. Any questions of anything John had to say? I guess it was crystal clear -- John, this one's for you, I hope.

Darren Lehrich - Deutsche Bank AG, Research Division

Darren Lehrich, with Deutsche Bank again. You mentioned about the competitive gap you have, and you did talk about IT and moving from 6% to 4%. I guess, having followed the company for a long time and seeing the history, IT capabilities and then trying to move in one standard direction has been on the agenda many, many times in the past. So I guess, John, just a question for you just about what capability is you think you need to close the fastest, where there's a competitive gap? And then in terms of the just the goal of being more standardized, Bob, can you talk a little bit about the cost of that and how we should be thinking about that in the P&L if there is a real cost to that process?

Robert A. Hagemann

John, you want to start?

John Haydon

Yes, I'll start, sure. It's a journey. And it's not only about IT, it comes back to the master data. Comes back to your business processes and IT. And I think as I've look at Quest, and I've got 4 weeks under my belt, unfortunately, I don't think the business and IT have been joined together. I think the IT organization has been trying to do a good job for the business. Now when you have 6 businesses, with 6 different agendas, competing priorities, it's difficult for IT. So the difference this time is with our business processes and our master data and our IT systems coming together. So as we look at Invigorate, this will become one of our Invigorate programs, it's probably multiyear. Now if we take a look at the IT spend, I think what we're doing is on infrastructure and projects and applications, it's not synced up. So the low hanging fruit starts with the infrastructure, and we can definitely do a better job around infrastructure. The second thing is where do we invest? And at this point right now, I think we need to pause a little bit, take a look at the blueprint and then target the investment, whether it's Care360, whether it's in the financial area, whether it's in the lab area. But it starts with that blueprint. And the third area, if you look at 335 applications, on the slide, I talked about taking 50 out, and this goes back to the blueprint. A lot of companies have this challenge, and I think one of the advantages I see here is the organization model built around the value chain. So when I sit with my colleagues across the value chain here, we will have one blueprint for the company that touches businesses, that touches the sales and marketing organization and touches the enabling functions.

Robert A. Hagemann

And let me go back to the first part of the question before I answer the second part, and that is what's different? We've been talking about standardization for a long time. And I would say, from my perspective, the thing that's going to make one of the biggest differences is what we've done with the organizational structure. Before, with the silos that we had, everybody was for standardizing, as long as you standardized on what they had, right? This is a function organization now. We're going to be much better able to make decisions across the enterprise that are in the best interest of the enterprise and then drive it forward quickly. So to me, that's one of the biggest differences.

John Haydon

Maybe, Bob, I'll just plug in here. So you take a look at one slide that I showed with the 16 processes. We're going to have process owners in the company that speak for that process. So when we talk about acquiring the specimen, we will have a disciplined way of acquiring the specimen. We talk about transporting the specimen, we'll have a complete end-to-end logistics organization. We've done a pretty good job around billing, but it's still spread around the U.S. We need to bring that together in more of a consolidated approach. So again, 3 operating processes and 16 subprocesses owned by the people on the stage here.

Robert A. Hagemann

And in terms of the cost, Darren, you have to think of it in the several buckets, right? There's systems conversion cost, there's development cost, et cetera. Much of that systems conversion cost we've anticipated in the onetime charges that we anticipate, the up to $200 million, a lot of that is going to be cash costs, which will flow through the P&L over the next several years or so. But in addition, I commented that there's going to be an increased level of capital spending, probably to the tune of about 1% of revenues for the next several years, as we make some of the investments to drive operations excellence, and certainly IT, standard systems and the like is going to be a component of that.

Stephen H. Rusckowski

Let me just to take this opportunity to make a couple of points. One is we wanted to, today, to give you some reasons to believe. Reasons to believe that there is a big opportunity in operational excellence. And we shared with you our IT cost being approximately 6%. And those of us that have been in other industries, and I've been in this industry for some time, that is a very high number and we can do a better job than that. That is good news, because there's only an opportunity to make it better. We'll also share with you, that's an examples of the gap we know we have in terms of what we have today for cost structure and what we believe we can get to. And this is, as you know, have been benchmarked versus others we compete with. And we know we have an opportunity and so do you. And so we're going at it. In the past, we didn't have to have the different organizational structure, we also did not have this as a core to our strategy. This is core to our strategy, its center of lead. And I'll also add that, in addition to the what in the team, the strengthening of the team, how we'll go at it will be in a much more disciplined, structured and rigored approached than before done. And so we're bringing in a whole new system, if you will, of how we execute against this plan in terms of the deployment of the plans. John talked about breakthrough deployment, I'm a practitioner of these types of tools. How you execute rigorous process and breakthrough improvement throughout the organization, how it cascades, how there's ownership, how there's resources. This is hard work, but it can be done, and the how -- how we're going to get at it is different as well. Okay? I think we have time for one last question. So...

Bryan Brokmeier - Maxim Group LLC, Research Division

It's Bryan Brokmeier from Maxim Group. You provided a lot of valuable information on your long-term vision of how you're turning around the company and providing greater shareholder value, but kind of looking in a near-term perspective of what your impact was from Sandy, and both an operational as well as the financial impact?

Stephen H. Rusckowski

Yes, absolutely, good question. Bob, you want to take that?

Robert A. Hagemann

Yes, clearly, the storm has impacted us, just like it's impacted every person and every business in this region here. I would tell you that the impact is still unfolding at this point. But our best estimate at this point is for the volumes to be affected probably in the 1% range for the quarter. Obviously, during the week of the storm, it was a much more significant impact, but on average for the quarter, roughly 1% or so. But the other thing to keep in mind, is given the area which was impacted, this New York, New Jersey area, we tend to have a much richer revenue per requisition here. So the revenue impact will be greater than the volume impact. And as you heard from John, some of our facilities were actually shuttered during that period of time. We had to move some specimens around the network. So we did incur some additional cost. All of that's still being pulled together at this point. The good news is we're back up and running. Most of the physician offices that we serve are sending us samples again. Essentially all of our patient service centers are open. We didn't have any employees that were seriously injured, although there were some, obviously, that lost property. We're trying to help them as best we can at this point. But as we step back, when we look at this, these are things, unfortunately, that we have to deal with on a regular basis. We do our best to deal with them to make sure that the patients and the other customers that we serve are least impacted as possible, and then we move on, because we know that it doesn't have a permanent impact on our business.

Stephen H. Rusckowski

Okay. I think we have had a great morning. Hopefully, you've found this beneficial. I ask you just to stay here. Can you bring up my last slide?

So you've heard a lot, and we started with the theme of today is "grounded in the realities of today but building for the future." And hopefully, what we've shared with you this morning gives you that perspective of why what we shared with you is grounded in the realities of today, but also building perspective of the future and building for the future.

I started with the reasons why I joined Quest Diagnostics. You've heard from a number of us up here of the other reasons why people on this stage have joined. This is as a company that has a lot to build on. We have a strong reputation, we have a strong brand, we have incredible impact in the United States, we have an opportunity to build on capabilities that haven't been taken advantage of in the past and we've exposed some of those to you and given you the transparency so you could see what we see.

We also know that this is an incredibly strong, cash-generating business. We are returning with our confidence around that continuing larger dividend to our shareholders. Let's built on that confidence we have on what we need to build on.

This plan is not based upon dreams. It's based upon the reality of how you build fundamental value over time. It's that simple. It's based upon the principles for us to build its fundamental value over time. We need to restore growth and we needed to improve our operations. That simple.

Now, plans are one things, execution is another type of thing. We presented our vision, our goals, our 5-point-strategy, but it only could be done with the best people that we can find, and what you have also heard from is a much stronger team today than we had when I joined, and that will continue. Because I'm a believer, good strategies are important, great teams are more important.

And the last part of it, which I just touched on, it also has to the combined with superb execution. And so, along with the strategy you've heard about, you've seen some of team, we've talked a little bit about how we're going to execute differently in the future than we've done in the past. And we think that we'll, in the end, do what we say we can do, and that is to deliver shareholder value.

As Bob said in his comments, we believe that shareholder value will come from earnings growth and disciplined capital deployment. It's a clear plan, it's a sensible plan, it's grounded in the realities of today but also building for the future of an industry we believe that has a lot of opportunity as we go forward.

So thank you for joining us. We appreciate your time. We found it helpful to hear your questions. Hopefully, you found it helpful as well. Have a great afternoon.

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