德維特 (DVA) 2002 Q4 法說會逐字稿

Good afternoon. My name is Debra and I will be your conference facilitator today. At this time I would like to welcome everyone to the DaVita fourth quarter and year end 2002 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key.

Thank you, Mr. Whitney, you may begin your conference.

Thank you, Debra. And welcome to all of you on the call. We appreciate your continued interest in our company. I have with me today Kent Thiry, our Chairman and CEO and Leanne Zumwalt, Vice President of Investor Relations.

Certain statements included in today's presentation, as well as in our press release and related supplemental information dated February 13th, 2003 are forward-looking statements. These statements relate to the company's operations, economic performance, financial condition, revenue, volume, growth, DSO, bad debt expense, expense growth, planned capital expenditures and earnings and cash flow guidance. They reflect management's current expectations and can be affected by numerous factors including the risk factors discussed in the press release and in our 10-K and 10-Q filings. These forward-looking statements are based upon information available to us at this time, and we do not have any current intentions to update the forward-looking statements, forecasts or guidance, whether as a result of changes to underlying factors, new information, future events, or otherwise.

Comments today will follow our standard template established in previous quarters. Once again, we have provided supplemental information attached to our press release. The four standard categories that we cover are; fourth quarter and year end results, key business metrics, important risk factors and other developments, and finally our financial outlook.

Starting with category number one, fourth quarter and year end results. EBITDA, excluding nonrecurring items was $97 million in line with our guidance of 95 to $100 million. Net earnings were $35 million and diluted EPS was 50 cents a share. The details of the quarter's nonrecurring items include the following, $42 million of pretax income related to cash receipts from prior period Medicare laboratory billings. .5 million of pretax income from 1999 accounts receivable, which were previously written off, and $2 million pretax loss related to net valuation impairments. The net after tax income related to these items in the quarter was approximately $24 million.

For the year, EBITDA, excluding nonrecurring items was $392 million, net earnings $148 million, and diluted EPS $1.85. The details of the nonrecurring items for the year are; $64 million of pretax income from prior period Medicare, lab cash, and accounts receivable recoveries. It is worth noting that our third quarter EBITDA of $99.8 million excluded approximately $27 million of prior period lab recoveries, of which $10 million were related to the first half of this year and, thus, while excluded from Q3 EBITDA are included in our full year EBITDA.

A $29 million after tax extraordinary loss resulting from our Q2 recapitalization transaction and finally $400,000 in net pretax valuation gains. Net after tax income related to the above items for the year was $10 million.

Category number two is our seven key business metrics. Please note these metrics exclude all the nonrecurring items just described.

Metric number one, volume and growth. For the quarter, treatment volume was up 1.4% sequentially reflecting slightly more treatment days in the quarter as well as a .6% increase in treatments per day. Year-over-year total treatment growth was 5.0%.

Non-acquired treatment growth was 2.9% down from 3.8% in Q3. As discussed previously, our Non-acquired treatment growth has suffered in the last two quarters from the loss of referrals from two large physician groups earlier in the year.

Acquisitions, this quarter we acquired fourth centers serving approximately 200 patients bringing our acquisition total for the year to 11 centers serving approximately 600 patients.

DeNovo centers, we opened eight new centers in Q4 bringing our 2002 total to 19, exceeding our guidance of 12 to 15 for the year. We continue to forecast annual, non-acquired treatment growth in the 3% to 5% range.

Metric number two is revenue. Dialysis revenue per treatment was essentially flat for the quarter and throughout the year. Total Dialysis revenue was up $6 million or 1.4% sequentially, corresponding with the increased volume.

Metric number three is expenses. Per treatment operating expenses were up $2.83 per treatment or 1.4% sequentially as a result of increased labor, pharma mix and DeNovos center opens. Total operating expenses were up 2.8% sequentially. General and administrative expenses up 4.7% per treatment sequentially.

Q4 2002 year-over-year labor cost was up 5.6% per treatment. Rate per hour was the primary driver, increasing 4.3% year-over-year. Year-over-year general and administrative cost were up 14% per treatment primarily related to increased operating and IT infrastructure spend and legal fees related to our ongoing government inquiries and our proactive compliance initiatives.

EBITDA margin for the quarter declined 100 basis points to 21.0%, primarily as a result of the increased operating expenses. Consistent with our previous guidance, we expect expense growth and margin pressure to continue as we move throughout 2003 and beyond. Primary drivers being labor costs and increased new center openings.

Metric number four is cash flow. Operating cash flow, excluding nonrecurring items for the quarter, was $42 million. This is below recent quarters' cash flow because of the timing of $20 million in cash tax payments and $24 million in working capital increases, primarily related to the timing of inventory buying. Maintenance Cap Ex was $17 million in the quarter, resulting in free cash flow, excluding nonrecurring items of $25 million.

Rolling four quarters operating cash flow, again, excluding nonrecurring items was $303 million compared to our guidance of 270 to 280 million. Free cash flow for the rolling four quarters was $247 million, compared to our guidance of 220 to 230 million. Operating cash flow and free cash flow as I have noted exclude the nonrecurring items. If you were to include the nonrecurring items, operating cash flow was $342 million for the rolling four quarters and free cash flow, 286 million.

Metric number five is accounts receivable. Net accounts receivable at the end the quarter were up $4 million with DSO unchanged at 70 days. For the year, DSO was down two days. We continue to expect DSO to fluctuate plus or minus several days as we begin the roll out of our new billing system.

Metric number six is capital structure. Net debt at the end of the quarter $1.2 billion consistent with last quarter. Our current leverage ratio which is net debt-to-EBITDA is 3.1 times, and that is in line with our long-term target of 3 to 3.5 times, although as we always say, we may be above or below this range for certain periods of time.

On January 27th, we drew down our $150 million term loan "A," because the funding commitment was set to expire. We haven't yet determined the use of the proceeds, but at the very least, we can use these funds to pay down our higher cost term "B" loans.

Metric number seven is clinical performance. A team of over 12,000 caregivers continues to provide outstanding clinical care for our 45,000 patients.

For Dialysis adequacy during the quarter, 88% of our patients had a URR greater than or equal to a benchmark level of 65. And 92% of our patients achieved a KT over V greater or equal to the benchmark of 1.2. With respect to hematocrit, a measure of anemia control, during the quarter, 82% our patients had a hematocrit greater than the benchmark level of 33. This concludes the review of the business metrics. And are now we will move continue to category number three, important risk factors and other developments.

First, legal; the subpoena: there is nothing new to report to you on this matter. We do remind you, however, that we expect that this process will take at least two to three years to unfold, and unfortunately will cost us millions of dollars of additional annual legal and administrative expenses and thousands of hours of executive time.

Second, the Florida Laboratory; again, this quarter, we received cash that related to prior period Medicare laboratory claims. Year to date, we received a total of $69 million, which had been previously suspended. The recoveries related to claims that the carrier had not previously paid while we were under payment suspension from January 1995 through June of 2002. There is still approximately $35 million of claims outstanding that the carrier has determined are not supported by proper documentation. We are uncertain when or if we will receive any additional payments on these claims. We have disputed the carrier's determination and are formally appealing their decision.

Onto the risk factors; first, risk factor is industry's reliance on private sector reimbursement. You may recall that we lose money on Medicare reimbursement and private patients contribute all of the industry profit, paying on average two to three times Medicare rates. If either the number of non-government patients relative to our total patient population or the rates of which we are paid their services decline, there could be a significant decline in revenue and profit.

Second risk factor is pharmaceuticals. As previously discussed reimbursement for pharmaceuticals represents a significant percentage of Dialysis, industry and profits. The key variables include reductions in pharmaceutical reimbursement rates, changes in reimbursement policies, changes in physician-prescribed practice patterns or changes in the prices we pay for pharmaceutical products we buy. As we have discussed, it is likely that Congress will look to reduce AWP drug reimbursement over the coming years, and the portfolio pharma issues generally remains a major project swing factor with more potential downside than upside.

Now on to category four, which is our financial outlook. Our 2003 EBITDA guidance, which is designed to capture a majority of the probable outcomes remain at $380 to $400 million. Our operating cash flow guidance is $185 to $235 million, and free cash flow, $130 to $180 million and that free cash flow number is before acquisition and development spending. The cash flow forecast will remind you is below 2002 actual numbers, primarily due to approximately 50 to $60 million more in anticipated cash taxes, slightly higher interest expense and working capital changes. Our capital spending guidance for 2003 is $60 million for maintenance, capital spending including IT spending, and $40 to $50 million for DeNovo and expansion projects.

As in previous years, the number of treatment days in the first quarter is lower than in quarter two through quarter four, and thus, EBITDA and operating margins will be negatively affected in Q1. Other key swing factors for 2003 and beyond are private pay mix and pricing environment, EPO reimbursement policies, Medicaid reimbursement rates, labor cost trends, Medical Director Retention and our ability to maintain and improve physician referrals and finally the availability of attractive acquisitions. In addition, we are anticipating significant legal and other expenses related to the subpoena and expect them to occur throughout 2003 and beyond.

This concludes our prepared remarks and we will now turn the call over to Debra to moderate the Q-And-A.

At this time, I would like to remind everyone, in order to ask a question, please press star and then the number one on your telephone keypad. We will pause for just a moment to compile the Q-And-A roster.

Your first question comes from Bill Bonello.

Hey, guys, I had a couple of follow-up questions. Actually a lot but I will only ask a couple.

Rich, you didn't mention EPO price increases as one of the factors that might be driving margin contraction. Does that imply that you don't have EPO price increases?

No. I think that our policy has been to not comment on the outcome of our contracting activities. We just don't think it is in anybody's best interest to do that. But certainly, the fact that EPO is a significant part of our cost structure; it remains a key potential cost driver for us.

Okay. And then -- just mentioning the legal expenses and DeNovo development. Is your expectation that G&A expense probably goes up sequentially from the fourth quarter levels?

I think -- as we think about G&A going forward in 2003, it will probably grow, but at a significantly lower rate than it has historically. And some of the drivers there are the IT -- rollout of our IT systems are continuing through 2003 and we do have a ramp-up of the legal expenses that began midway through last year.

Okay. And then just on the commercial rates, did -- do -- are there any rate increases that go into effect or went into effect at the beginning of January that were not in effect in the fourth quarter of last year?

Well, we have rate -- we have contract changes literally every month, Bill. Up and down. So I can't say there was any scheduled increase.

Okay, so there is no concentration of fee schedule increases at any one time during the year?

No.

Okay, thanks.

You are welcome.

Your next question comes from Chuck Russ.

Hi. I am wondering if you can tell -- be more specific on what you can expect for changes in your prices. Your reimbursement from Medicare and from commercial payers.

This is Kent, Chuck. With respect to Medicare, it's -- it is the obvious. It is always difficult to predict what Congress is going to decide.

Yeah.

And particularly so, given what's going on with the federal deficits and the President's current agenda. So on the Medicare front, we think there is an increased recognition that Dialysis providers lose money on Medicare, and, in fact, we are all closing some facilities, in those cases where we don't have enough private pay patients to subsidize Medicare.

Little by little, that awareness in the government is building and hopefully, ultimately lead up to an annual update formula. Until such time that we get an annual update formula, you can't be too optimistic that we are going to get a increase because in some case there is not even a Medicare bill like the case last year. On the government side, you have to be pessimistic of what's going on. In the short-term and hopefully things get righted on the long-term.

On the commercial side, also, no change in our long-term perspective, which is that we have a valuable product and we have some appropriate negotiating leverage, but at the same time, as you look over the long term, we expect there to be margin compression from pressure on the commercial rate side.

Okay, what were your rate increases for commercial pay in '02 versus '01?

Yeah, Chuck, we really haven't had a history of disclosing the actual rate increases, but it's -- it really -- it is a battle month by month and we have gotten increases in some cases and we have gotten decreases in some cases. And the net was certainly a positive this year.

And your earlier response regarding EPO, I am a little confused. For '03, how does it currently stand? Are you able to mitigate any of the -- I think it is 3.9% price increase put to you? Or how does it currently stand?

We have completed our contract for 2003. We will not experience the full amount of the price increase. And we just have had a past practice that we would like to continue of not disclosing exactly what the outcome of our negotiations are. It is not good for anyone to do that.

Okay, I am wondering if you can expand a little bit on -- maybe I just didn't get it all written down -- why the operating cash flow and the precash flow will fall this year versus last year.

Sure. The -- there is a couple of reasons. Number one, is that we are anticipating $50 to $60 million more in cash taxes next year than this year.

And why is that?

Because this year we were not a full taxpayer -- cash taxpayer for the entire year.

Okay.

Net operating loss, carry-forwards, we had a recapitalization transaction, et cetera. And then next slightly higher interest expense, and then finally working capital changes. Which just -- you know, natural from the growth of the business.

Sure. And lastly -- I will give someone else a chance. Last year at this time, you had predicted '02 EBITDA to be 350 to 380. You obviously blew through that.

Can you talk a little bit about what went right? What surprised you that turned out to be so much better than you had thought a year ago?

In fact, we ended up in our guidance -- this is Kent again. 350 to 380 assumed no start-up of lab reimbursement and we were explicit on that front. If you take out the lab reimbursement that we picked out -- picked up in 2002, we ended up at about 372 million absent that. So we actually ended up a tad above the midpoint of the guidance we provided a year ago once you exclude the lab, as we explicitly did a year ago.

Okay. So the lab generated 20 million in revenues in '02?

Correct.

Okay. Great. Thanks.

Your next question comes from Matthew Newman.

I was wondering if you could comment on the rumor that DaVita is buying National Nephrology Associates of Nashville?

This is Kent. I will say the obvious, no, we will never comment on that one way or the other, positive or negative. That just would never be appropriate. I say this with respect to any issue like this, any call, not a good idea.

Okay. Thank you.

The only thing to add to that is the minute we start commenting on those things, when we don't comment, it becomes some kind of signal. So we -- we have answered this kind of question the same way for the last three years.

Okay. Thank thank you.

Your next question comes from Huey Found.

Good afternoon. Thanks for having the call.

Just a quick question on -- you had some convertible note that is callable, I think, in July of this year. I was just -- any comments you would have on refinancing these notes?

Well, let's see. To clarify, it's callable now. Callable at a lower price.

Yeah, lower price.

And we -- we really couldn't comment on our intentions with that financing.

Okay. Would you rather see them mature? Or would you want to get rid of these for the balance sheet?

Depends on a lot of different factors. Sort of hard for us to sit here right now and tell you what might happen in the future, what we might decide to do or decide not to do.

Okay, great, thank you.

That is an unsatisfying answer but impossible for us to provide an answer at this time.

Great, thank you.

Your next question comes from Gary Brody.

Actually, Mitch Kuflif, chiming in for Gary. I wanted to ask you if there was any change in strategy or philosophy with result to share buybacks going forward?

Well, I think, Mitch, philosophy has not changed. It is probably worth repeating that is this business generates a fair amount of consistent free cash flow, and it is our intention to use that cash flow either to fund growth or to buy back shares or to pay down debt. Our capital structure philosophy remains the same and given the consistency and stability of the cash flows, we anticipate having a reasonable amount of financial leverage. We have quantified that as three to three and a half times, but, of course, it is not an exact science. And to the extent that excess cash flow, we are applying those guidelines, then share repurchase would be certainly one of those ways to utilize that cash flow. Our philosophy has not changed in any way.

Great, two other quick things. On -- is there any specific -- explicit EBITDA guidance on first-quarter '03?

No, we really try to stay away from providing quarterly EBITDA. And we want to remind folks that the change in treatment days that occur most times in the first quarter is a factor that we have to deal with in the first quarter that is different from Q2 through Q4.

True, since it was down last year seasonally as well, is there any directional guidance, whether you plan for it to be an up or down quarter year-over-year?

I am sorry, will you repeat that, Mitch?

Just asking. It was down seasonally last near in the first quarter as well. Are you willing to guide us to whether or not you expect Q1 to be an up or down earnings per share quarter year-over-year as opposed to seasonally?

No, -- I don't think we are prepared to give quarterly guidance other than to recognize -- we want you to recognize with lower treatment days in the first quarter, lower treatment volume, we will have lower -- all us being equal, have lower revenue to cover our fixed cost

Okay, understood. Just one last thing. It looks like there has been substantial buybacks and it looks like you have actually ramped up the growth Cap Ex somewhat in the plan for this year. And I just wanted to ask philosophically, it seems to be inconsistent with -- with the stated perspective on the business, outlining all of the risks and negatives and concerns, and yet investing more aggressively both in the business and in the shares. And I was wondering if you could comment just to help us reconcile the actions with the commentary.

This is Kent. With respect to the purchase of additional Dialysis centers, that's a function of the price at which they sell. And if the price is too high, it's unattractive and if the price is low enough, it's attractive, and that's taking into account one's assessment of the overall environment. That is a transaction-specific thing, and it is all driven by the number we are buy it at, and clearly we are finding a number of opportunities where the sales price for us is attractive, given our economics are so different than individual proprietors.

And then with respect to whether or not buying back shares is in some way intellectually inconsistent with the fact there is risk factors in the business, I just don't think it is. Again, it is a function of the specific analysis of what you think the ongoing economics are and the alternative uses of our shareholders capital, including taking into account taxes. Your taxes. So it's really -- the truth is in the numbers, and at a conceptional level, we don't think there is anything inconsistent at all.

Understood. And I just wanted to say, great job operationally in '02 and on capital allocation as well.

Thank you.

One follow-up question from Chuck Russ.

You gave us a lot of numbers for '03 guidance. I appreciate that. I am not sure if you gave us the revenue number. Can you give us that?

No, we don't have a revenue guidance number. We haven't historically got into revenue and have not at this time.

Okay. I know on previous calls you've talked about why '03 EBITDA is expected to be flat, can you reiterate, you know, beyond '03 what kind of -- what kind of growth rate you expect. I know you have covered this in the last quarter conference call, you about it might be helpful to revisit that, given what's going on with the stock.

Yeah, I don't think we have any specific change to anything we have said about the long-term. If you want to look at -- if you want to divide the world into what happens in any given three or four-month period given another three- or four-month period, certainly today things look a little tougher on the private health insurance pricing environment, and certainly government funding looks a little worse. And certainly the nursing shortage is no better. And fourthly, Congress's intent to do something about drugs is ever so clear although they have had that intent before and failed to end up doing anything.

If you want to see which way the breeze was blowing in the last few months, most of the breeze has been negative environmentally, if you have a multiyear outlook. However, it's a breeze, not a gale, and the wind can shift. But at this point, we are not making any declarative changes to our view of the future, but since you raised the issue, it is fair to say that the breezes have been blowing in the wrong direction the last few months.

Okay. And I believe your long-term view is EBITDA growth of somewhere around 5%?

No. The long-term guidance is EBITDA growth of between 3% and 8% on average over a three-year period.

Okay. Okay. Thanks.

Your next question comes from Andreas Grenal.

Andreas.

Yes. Richard, Kent, can you provide color in terms of your same-store treatment growth, specifically the 2.9%? Was that mostly if not all attributed to the loss of the two non-renewals of the contract and what would it have been if you just exclude the two contracts?

Yes, Andreas. The two physician group referral losses subtracted about .8% -- no, I'm sorry, .7% from the non-acquired treatment growth figure we gave you.

So same-store treatment without those two would have been 3.6% then?

Correct.

Just sort more detailed housekeeping question, can you sort of go through your action in terms of share repurchase for the quarter and what that means you have remaining under your current authorization.

Well, before I do that, Andreas, this is Kent, I want to help clarify for other folks who haven't been in the industry and the stock as long as you is when we think about that same-store growth, the non-acquired growth and the .7 subtraction that will live with us for a few quarters until it gets out of the year-over-year comparisons, we wouldn't necessarily ask I'm to add all of that back in because clearly we may have other contractual losses over time, although these are the two most material that have ever happened in our little history. So certainly adding something back would be consistent with the historical track record.

And in addition, I would like to emphasize that our guidance has been the non-acquired growth in the 3% to 5% range annually and year-over-year 2002 was up about 3.8% versus 2001. But now we will go on to the other question.

Actually, Kent, since you brought it up. Before you do go on, can I ask has there been any update to what you were providing in the analyst meeting of contracts that are most in danger, whether you have lost any or whether some of those have been signed?

No, I would say we wouldn't amend any of our words or numbers from November. I mean, it is always -- it is a lot of individual battles. A lot of dynamism, good days and bad days, the net effect, we are still in the range we talked about then.

Okay, great.

Andreas, did I answer the question?

Yes you did. And just a question -- some detail on the share repurchases.

Yeah, in Q4, Andreas we repurchased about 1.9 million shares. 1.890. And for a total aggregate dollars of just less than $45 million.

And therefore remaining under your current authorization?

I am sorry -- right around $50 million remaining under our board authorization.

Great. And just finally before I get off the line. Any quick update on the terrible trio?

No update at this time.

Thank you very much.

Thank you.

You have a follow-up question from Bill Bonello.

Yeah, two questions. One, can you explain the increase in inventories on the balance sheet sequentially?

Sure, Bill. It's really related to the timing of some year-end buying. The number of different -- a number of different contracts, and as well, sort of planning for the year-end holidays. And I think if you look at our history, there's been an increase in inventories in the fourth quarter just about every year. It is a timing thing.

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Okay. And then -- the only other question -- this is a housekeeping question, but the way you get to your annual EBITDA number of $391 million, does that assume that since you reported Q1 and Q2, part of your lab recovery, you are siding to EBITDA for one of those two quarters. If I just put what you reported as your EBITDA, excluding extraordinary items for the four quarters, I only get to $381 million.

Yeah, the delta -- there is a $10 million delta because of the cumulative amount of lab recoveries we reported. 10 million of them were for the first two quarters of 2002. When we received them, they -- they did not relate to the quarter we received them in, but they did relate to the year.

Perfect. Thank you.

You are welcome.

Your next question comes from Ryan Daniels.

Yeah, guys. Two quick questions on the legislative front. First of all, there is a federal register on February 10th, this Monday, that came out and proposed eliminating the cap on Medicare bad debt expense for the Dialysis providers. Have you looked at all what kind of effect that would have positively for you going forward?

Yeah, we looked at that time closely. And from the draft language, we can't tell yet. The language has to be clarified before we can determine what effect, positive or negative it will have on us.

Okay, so you don't know which direction it will be at this point?

Correct. It would not be a big negative. We can say that.

Okay.

But we can't say anything beyond that.

Okay. Also on the legislative front, have you heard any more on the CMS report which addresses the issue of the annual composite rate increases? I think we have been hearing about that for, you know, months now, it keeps getting delayed when they will actually publish that to the public.

They have delayed and delayed and delayed and some point release it and do a demo project with a comprehensive bundle of services and probably do a demo project with a more limited bundle of services, including, perhaps, pharmacy and lab on top of the composite rate, and then they are going to release their study on whether or not a market basket can be created for an annual update formula. So all three of those are going to come out. We have every indication that with respect to the market basket, they are going to tell Congress that, yep, we can do one. Of course it took a couple of years for them to answer that question, but that's probably what they are going to say there, that analytically it can be done like for every other segment of health care and that would be a very good thing for us because MedPac and Congress want that.

With respect to bundling things, they will come out and say that right now the government doesn't know you have to bundle and hopefully they will learn a bunch from the demos and at that point they will figure out whether or not they can do it.

Okay, great. Thank you.

Your next question comes from Blake Godner.

Can I just -- can I just ask you guys to give us a little more color in terms of the commercial pricing process? How often do these contracts come up for renewal? Is there -- is there a concentration of contracts at the beginning the year, the middle of the year, the end of the year? That's sort of the first question.

The second question is -- and maybe this a question for Kent. Can you give us a historical perspective of what you guys did with respect to the commercial contracts when you tack over the old Total Renal Care, if there was a dramatic change in the way you contracted with the commercial players? Thanks.

Okay, this is Rich. I will take the first part of that. There really isn't a contract renewal cycle. Most of our contracts are 90-day terms. And so either party can get out of the contracts at pretty short notice, and so it really is when we decide to discuss a price increase or when they decide to discuss a price increase is when we come to the table. Some contracts do have annual updates in them, but generally speaking, it is a decision that either party makes. That said, we try to get rate increases wherever we can on a regular basis.

The only exception to that is what Andreas referred to -- or the only material exception to what I just said is what Andreas referred to as the terrible trio, three large managed care contracts which are longer term. And the biggest one expires at the end of 2003.

And then after the other question, when we arrived a few years ago, I would say the only change really was that we paid a lot more attention to it than the predecessor company and, therefore, succeeded in getting increases in rates far beyond what they had accomplished in the previous years and that's been some other -- the wind in our sails the last couple of years where we have had a lot more victories than defeats in the contracting portfolio. And, of course, that -- the performance of the last three years cannot be replicated over the next three years in that regard.

And then on just the broader environment, it is sort of the classic cycle stuff as all the health insurance companies suffered through what they are suffering through now which is significant equity declines and employers putting more pressure on that then flows through to us.

And then in addition, the second order of fact is that as companies increase with their employees have to pay for deductibles and co-pays, et cetera, et cetera, you get a lot of people that shift into more restrictive plans. More restrictive PPOs and/or HMOs and in all those cases that hurts us because they are shifting from plans that pay us more to plans that pay us less, even holding all the existing contractual arrangements constant.

Did I answer the second part of your question?

Yeah, it was very helpful. Thank you.

Your next question comes from Jason Kessleman.

Actually my question was asked and answered. Thanks.

Your next question comes from Alan Seymour.

Kind of a theoretical question. Given your free cash flow characteristics and -- would you have to revisit the issue of how you allocate that if dividends became nontaxable?

The -- yeah, the answer would be, yes.

Okay. Thanks.

Your next question comes from Andrew Jones.

Hi, I wanted to ask on the competitive front, some health care providers have talked about the opportunity to provide Dialysis to nursing home residents, they don't have to pay for transporting, all that kind of stuff. I was wondering if you guys are seeing any of that or if you think that is a serious threat at all?

Could you just repeat the question for me, please, to make sure I answer it --

I've heard some other health care providers that are not specifically Dialysis companies talk about they serve the nursing home industry and talking about the opportunity to provide Dialysis within the nursing home to residents, and that it is cost effective because people don't have to travel and all that. I am somewhat skeptical of it, but I am just curious whether or not you have, in fact, seen people doing that in any significant way.

Yeah, over the last 12 years in this industry, about every third year either some Dialysis company or some sniff company or some other company announces with great enthusiasm the fact that they are going to experience spectacular growth and make money in the Dialysis nursing home market. And it has never worked because it is just tough. The reimbursement is tough, blah, blah, blah, blah, blah.

And so there will always be some of that, and maybe it will grow a bit, but I don't know of anything at this point that would lead to any significant material change from sort of a current mix. It would have to change the way some of the reimbursement works for that to happen.

Okay, and secondly, when do you guys for compensation do your share -- or option issuance. Can you tell us at all what size of option grants you would expect to see on an annual basis and maybe what your position is on expensing that?

Well, on the first thing, I wish I could tell you all about that, but it is the board's decision, not ours, and so historically, there's been options granted in each calendar year, the time of the year which they have been granted has differed somewhat, particularly during the turnaround phase, although it has tended to be in the first half of the year after the annual performance stuff is completed, both for the company and for the individuals. So I -- I think that's as far as I can answer the first one. Although feel free to come back at me if you think there is another element that I can add some value by saying more.

And then as to expensing, we have no intention of expensing options at this point. Neither we for the board nor our accountants, but, of course, if the world changes in some way, that could change.

Okay. I mean I guess I would assume that you have some input on compensation, and given that you have achieved quite a turnaround, I was wondering perhaps if on a more steady state basis if there was some kind of, you know, perhaps lower number of options with the stock price being up or just thinking about that in terms of, you know dilution that we might see given that things are much more stable than when you first came into the situation.

Yeah. That's a very fair comment, and there has been explicit discussions with the board on this, and they independently hired their own comp consultant to get the right benchmark data, and they have made some decisions about sort of a guidelines that they keep in mind in order to minimize shareholder dilution, while at the same time, retaining and incenting a executive group to deliver for the shareholders. They have been very explicit in their analysis, the use of external data, and the development of their own sort of internal guidelines.

I am not authorized to disclose the guidelines they have come up with. I can certainly -- I certainly will after this call and I am sure some of them are on this call will talk about whether they want to make any of that public. My guess is they wouldn't and tend to look at the track record as perhaps the best indicator, and I think I literally can't say anything beyond that because we will be finding out in the next several months what, if anything, they are going to do on this front this year.

Okay. Thank you.

The one thing I can assure you of is that there is really intense analysis of the cost to shareholders.

Your next question comes from Alex Converse.

Hi. I was wondering if you could provide an update of how much revenue from the Florida lab you are currently recognizing on present-day billings and whether you think there is any additional opportunity for recognizing higher levels going forward? Thanks.

Yeah, Alex, it is about five million a quarter that we are recognizing on Medicare laboratory revenue. And it really would be tough for us to speculate as to how that might change going forward, because the biggest thing as we mentioned back in November and it is still true, that they haven't clarified their own rules as to exactly what test they will pay, what frequencies and what documentation will be required going forward. So until we have that clarity, it's really impossible for us to comment on the future.

Okay. I assume there is no real indication of when that clarity may come?

Not really, no.

Okay. Thank you.

You are welcome.

Your next question comes from Seth Pike.

Hi, I was wondering what you could tell us the fully diluted share count was at the end of the December quarter, please?

$79 million.

That was at the end of the quarter?

That was at the end of the quarter. Oh, I am sorry. We are looking at it here. It is the average for the quarter. That is the weighted average. Is your question something different than that?

Yes, I was curious to know what your fully diluted share count was at December 31st.

I don't see it right in front of me, so -- so if you would call back to LeAnne Zumwalt, we will be sure to give you the number.

Okay, great. For '03, I was curious to know also if you could give us a little more color on what your expectations are for --

You have faded out -- we didn't get your question here.

I am sorry, curious to know for 2003, if you could give us a little more color of what your expectations are for interest expense.

Well -- I guess what we can tell as that, you know, our total debt is about 1,450,000,000, if you don't count cash. And the debt is made up of a little less than a billion dollars of senior credit facilities, and that debt is variable based on LIBOR. And then the balance of the debt is made up of the two convertible issues that total 470 million, and the bulk of those issues are fixed interest rates. The first traunch, 125 million at five and five-eighths and second traunch, 345 million at 7%.

Beyond that, it would be -- we would be speculating on the direction of LIBOR interest rates which we are not qualified to do.

Okay. The reason I was asking is there is quite a bit of variability on the EPS line given your EBITDA range depending on what those other assumptions were. I was just trying to get some senses to directionally where the EPS should be.

Yeah. You would have to make a prediction for LIBOR. The other piece that we can help you with is we can tell you that we are -- we do not have swaps or other derivative contracts that fix the LIBOR rates at senior credit facility.

Your spread over LIBOR is what?

Well, on ... I tell you what, we will come back to it.

Great. I will call back.

Your next question comes from Steve Lomas.

That's good. So you basically analyzed a lot of the health care -- everything in health care to see what's going on. The drug companies, everything, right?

Operator --

Mr. Lomas, please proceed with your question.

Probably you should move on.

You have a follow-up question from Mr. Chuck Russ.

I am curious as to why you haven't fixed your variable rate debt. How much of your rate is variable and I am curious as to why you are leaving it that way.

Sure. First I am going to answer the prior question, which is the spread over LIBOR for the term "A" traunch and the revolver at this time is two and a quarter if has a grid that fluctuates based on our leverage ratio. And then the spread over LIBOR on the term "B" loan is 3%. And that does not fluctuate based upon our leveraged ratio. So the weighted average spread is 2.95.

And then your question was, why don't we fix some of the senior credit facilities?

Right.

And the answer to that is that we may fix some over time, but as we sit here right now, we -- we do have $470 million out of our $1.45 billion of debt fixed. And the way we think about it is that we are really not qualified to make a bet on the direction of interest rates. And so what we would like to have is just a balance between fixed and variable rates, and right now our balance is -- is sort of less than 50/50, but I think the way we think about it is, we kind of range between, you know, 40% to 60%. We are a little lower than that right now. But the key thing is that we just don't -- we just don't feel that we are qualified to make a bet on direction of interest rates.

Yeah, I don't -- I don't either, but I guess I feel like you are making a bet because by having that much debt, that variable, you are basically betting that rates, you know, stay down here or go lower. And, you know, I think you are making a bet.

The other variable to consider if you want to adopt that sort of perspective, is that to the extent all sorts of people feel the same way, then you have to evaluate the cost of fixing.

Sure.

And at the point that the world cost -- at the point that the world prices the act of fixing more so high, then you have to evaluate what's the -- what's the upside of fixing versus the downside of fixing. And so there is a market price for moving to fixed. Then at this point -- we look at it very regularly. And at this point, the market price is to us implied that we have got the right mix right now.

Okay, thanks.

One other thing I would add to that is with the interest coverage levels that we have, which are north of six times. We have the cash flow cushioned to absorb short-term variation in rates.

At this time, there are no further questions.

Okay. Well, thank you very much for your interest in DaVita. And we will talk to you again soon.

This concludes today's conference call. You may now disconnect.