德維特 (DVA) 2004 Q1 法說會逐字稿

Good afternoon. My name is Lynn. And I will be your conference facilitator today.

At this time, I would like to welcome everyone to the DaVita first quarter 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 1 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, Lynn, and welcome everyone to our first quarter conference call. We appreciate your continued interest in our company. With me today Ken Thiry, our CEO; and LeAnne Zumwalt, our Vice President of Investor Relations.

I'd like to start with our forward-looking disclosure statements. Certain statements included in today's presentation as well as in our press release and related supplemental information dated May 3, 2004, are forward-looking statements. These forward-looking statements are based upon information available to us at this time. 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.

Additionally, our press release and related disclosures include certain non-GAAP financial measures which we believe provide useful information to investors. These measures should be considered in addition to the results prepared in accordance with GAAP and should not be considered as a substitute or superior to GAAP results. Also included in the press release is a reconciliation of these non-GAAP measures to the most comparable GAAP financial measures.

I will now turn the call over to Kent Thiry, our CEO.

Thank you, Rich.

I will address four subjects, two right now up-front, and then two more after Rich covers some of the quarter detail. The two that I will address up-front are our clinical results and our 2004 economic performance, and later on I'll cover public policy and our three-year outlook.

We will report our clinical results first as we have for a long, long time. We are first and foremost a care giving company. We'll provide the same two scores that we have provided also for a long time. First, adequacy. Which is essentially how well we're doing at removing toxins from our patients' blood. 94% of our patients had a KT/V greater than 1.2 in the first quarter, which is a very strong relative performance to our own past as well as to other participants in the industry.

The second measure, anemia management. The percentage of our patients with hematocrits greater than or equal to 33 was 85%, consistent with last quarter's strong results.

These numbers are especially noteworthy given our significant concentration of patients in inner city environments, Indian reservations, and other tougher geographic areas than the norm. And finally, although it's difficult, to be sure, that you're looking at apples to apples comparison, nevertheless these numbers strongly suggest that we compare very favorably to the industry as a whole, as well as other companies like ourselves.

On the issue of 2004 economic performance, our Q1 performance was rock solid. It was characterized by improving treatment growth 8.7%; improved operating income, up 22%; and increased 12-month rolling free cash flow up 18%, to $287 million. Therefore, we are increasing our 2004 operating income target to 370 million to 390 million.

Back to Rich.

Thanks, Kent. As Kent mentioned we had another good quarter financially, I'd like to start with a few key points about Q1 performance. Q1 operating income, or OI, was 97 million, up 22% versus the prior year quarter. You should note that Q1 did benefit by a couple million dollars related to the timing of some planned expenditures which were delayed and which we now anticipate will be incurred in Q2.

That said, Q1 net earnings were 52.9 million and diluted EPS was 77 cents, up 48% over the prior year quarter. Share count was down 13%, primarily due to the redemption of our 7% convert issue last year. As for cash flow, our rolling 12-month operating cash flow was 328 million; and for the quarter, operating cash flow was 115 million, maintenance capital expenditures were 6 million, giving us free cash flow for the quarter of 109 million. All these cash flow numbers exclude collections of the lab recoveries on an after-tax basis of $12 million.

Some other highlights for the quarter, starting with volume, our nonacquired treatment growth rate was 4.1%. And acquisitions contributed 4.6% to treatment growth.

Next, revenue. Dialysis revenue was 535 million for the quarter, up 16% versus the prior year quarter driven by the volume growth, and about a 5% increase in revenue per treatment. Revenue per treatment growth was primarily driven by improved contracting on the private side and increased intensities of physician-prescribed pharmaceuticals. Going forward, we continue to expect pressure on private rates in some cases, and expect that price increases will be more difficult to achieve in other cases. Overall it is our continued expectation that the private pricing environment is likely to be tougher in the next few years than it has been in the past few.

On to expenses. Operating margins were 18.1% for the quarter, down 30 basis points from last quarter. Primarily due to the lower number of treatment days in the first quarter. Patient care costs per treatment were up 1.5% sequentially, and 4.1%, or about $9 per treatment, versus the prior year quarter.

As for some specific operating expenses: first, labor. Overall labor cost per treatment was up 2.6% sequentially. Labor productivity showed slight deterioration and labor rate and skill mix also contributed to the increase. Going forward we expect normal labor rate pressures as well as some further deterioration in productivity due to a large number of planned de novo openings.

Pharmaceutical and supplies expense per treatment were up 3% sequentially, and 6.5% year-over-year, primarily related to the increased intensities and price increases on certain pharmaceuticals.

As far as general and administrative expenses they were up $1.50 per treatment sequentially, $1.23 per treatment over the prior year quarter. You should continue to expect G&A expenses to fluctuate from quarter to quarter, reflecting the timing of certain expenses. Specifically in Q2 we anticipate higher G&A because of our National Leadership Meeting and the delayed expenses mentioned a bit earlier.

Beyond Q2 we expect G&A to run at an annual rate of 8 to 8.5% of revenue, consistent with our last two years' performance. G&A will be growing more or less in line with revenue growth for the foreseeable future, due to our continued focus on three areas: clinical quality improvements, information system improvements, and increasingly extensive compliance programs. I also want to point out that included in other income this quarter, which is below the operating income line, is approximately $1 million of interest income related to last quarter's prior period lab recoveries. Of course, this item is not expected to recur.

Tax rate. Our tax rate for the quarter was 39%, and we continue to expect our near-term effective tax rate to be roughly at this level. DSO was 70 days for the quarter, up 1 day sequentially. Since we are still fine-tuning the new billing system and related processes, we expect to hold at this level plus or minus a few days for several quarters before we see DSO come back down.

Net debt at the end of the quarter was 1 billion, and our quarter-end net leverage ratio, calculated on a latest quarter annualized basis, was 2.1 times. At this time our senior credit facility represents virtually all of our outstanding debt. Our weighted average interest rate for the quarter was 3.8%. Of course, this rate is subject to fluctuation in LIBOR rates and changes in our debt levels and the impact of any further hedging transaction.

At this time we've entered into swap arrangements that have the effect of fixing LIBOR rates at approximately 24% of our outstanding debt for various periods of time. For these swaps our current weighted average LIBOR rate is fixed at 3.24% for an all-in rate of 5.24%. We anticipate somewhat higher weighted average rates going forward, either due to additional hedging transactions and/or anticipated increases in LIBOR rates.

Diluted share count was 68.6 million in the quarter, down from 78.8 in the prior-year quarter. Going forward we anticipate diluted shares to increase a couple of million, due primarily to exercises of options set to expire in early '05.

Turning now to growth we acquired five centers in the quarter. We continue to target treatment growth from acquisition of 2 to 4% per year on average for the next few years. As for de novo's, we opened five new centers in Q1, we also closed two facilities and discontinued providing management services at three others.

Now turning to outlook. As Kent mentioned, we are currently targeting our 2004 OI to be between 370 and 390 million. We are expecting Q2 OI to be down a few million sequentially, tied to the higher G&A previously mentioned, as well as a significant number of de novo openings expected in Q2. We have increased our operating cash flow target to approximately 300 to 350 million. We expect maintenance spending to be in the $40 to 50 million range, yielding free cash flow of 250 to 310 million. We expect new center development and expansion spending to be similar to 2003 levels, in the range of 50 to 60 million, and continue to target acquisition of centers with approximate patient census of 1500.

I will now turn the call back to Kent to discuss government policy and the three-year outlook.

On the government side, there are two near-term material issues. New EPO rules and the pharma add-back and case mix. Regarding EPO, we do not expect any material impact on our physicians usage or our economic. There is some speculation that many of you have heard that the, quote unquote, official hematocrit range may be increased. This is because there is evidence that the government is finally conceding what is a well accepted fact in the clinical world, namely that patients benefit from higher hematocrit levels than the government has historically been comfortable endorsing.

This is unlikely to affect us since in general our affiliated physicians have always prescribed within the higher range when they felt it was clinically appropriate. In addition, we could incur a modest hit if they do any restricting of EPO usage at the high end. We hope that the officially endorsed range is moved up. Patients will benefit immensely, and there appear to be strong correlations for reduced hospitalizations, so the taxpayer may very well be a winner as well.

Moving on to the pharma add-back and case mix, and this, just like with respect to EPO, is a situation where all our comments have to be heavily qualified, because it is just so difficult to predict what the government might do. Nevertheless, we feel it's our responsibility to add what clarity we can to help you make the decision that you must. There's a few things going on here. Let me first try to delineate again what they are.

A) in 2005, separately billable drugs and EPO will be reimbursed at cost. B) the current margin on these drugs is to be calculated and added back to our composite rate in a manner that is, quote unquote, revenue-neutral to the industry. Not to a company, but to the industry. Third, a new case mix adjustment system is to be developed and applied to the composite rate. And, lastly, the composite rate itself is to be increased by 1.6%.

So an awful lot of balls in the air. At our Capital Market Day in December, we did provide you with an appropriately qualified estimate of how the add-back and the case mix adjustment might impact our 2005 results. We said at that time it would be reasonable to estimate a $4 to 8 million hit to our operating income. An estimate, again, that is highly qualified but we provide this in an effort to help you with your models. We think we cover a large percentage of the probabilities with that range. Fortunately, that would be more than offset by the positive economic impact of the 1.6% increase.

We do remind you that the intent -- the explicit intent of the M&A provisions neither increase or decrease industry reimbursement separate from the 1.6 which is to be an explicit increase. So that's the quick summary on the government side, pending any questions or comments you have during Q and A.

With respect to our three-year outlook. At our Capital Markets session in December, we articulated it, as we have in the past, so it's now six months in the running, the three-year averages that we targeted for 2004 to 2006, were and are as follows: operating income growth of 3 to 8%. The primary drivers of that target are volume growth of 5 to 9.5%. Revenue per treatment increases of 0.5 to 2.0%, and expense per treatment increases of 1.5 to 3.5. So you see the continued wonderful steady growth in volume, offset a little bit by concern around declining margins as expenses creep up and we fight to keep revenues going up at the same level.

I should add that the outlook excludes any potential impact from the implementation of FAS 123 because of the continued uncertainty about exactly how those calculation will be flushed out.

Lynn, we're ready for Q and A, please.

At this time I would like to remind everyone in order to ask a question please press star then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q and A roster.

Your first question comes from Darren Lehrich with Piper Jaffray.

Hi, good morning, everyone. You alluded to some planned expenditures in the second quarter, and I'm just wondering if you can just remind us what exactly those are that you have planned that I guess rolled into the second quarter from the first quarter, then I have a couple of other follow-ups.

Sure. In Q2 the biggest single incremental expenditure is we do our annual leadership meeting, which involves bringing 1,000 people together and costs a lot of money, and the accountants won't let us spread it out any more even though it's an annual event scheduled over a year ahead of time. That's the single biggest one. In addition there's a bump from a lot of those de novo's opening up that ends up affecting a number of line items, the P&L as well.

How many de novo openings should we expect in the second quarter then?

We've historically not listed quarter by quarter forecasts of de novo's, so we'll probably stay away from that.

Okay. And then within the Kaiser business, I'm just wondering if you can comment on patient retention there. Did you see any steerage away from your facilities by Kaiser due to the contract? Maybe just get a little more specific for us as it relates to pricing, revenue per treatment growth that's implied in your new operating income guidance for the balance of the year. Thanks.

Let me answer the first part. And I may need you to restate the second part so I get the scope right.

With respect to our work with Kaiser, the relationship remains healthy and strong, and there has not been any significant patient movement away from us and there have been some new patients coming to join us.

And the second part of your question, could you repeat that one, please?

Basically just wondering, you've provided us a new range for your operating income guidance for this year, and I'm just wondering if you care to comment what the pricing is that you imply in that 5% growth in revenue per treatment for the first quarter, which was quite strong, and just wondering if we should expect that for the remainder of the year, if that's what's implied in your new guidance.

This is Rich. What's implied in the new guidance is that we're able to maintain these revenue per treatment levels that we achieved in Q1.

Okay. Thanks a lot.

Thank you.

Your next question comes from Andrew May with Jefferies & Company.

Good morning. Couple of things. First, on the hematocrit level change, do you anticipate that if there is an upward movement in the allowable range or the range described by CMS that there will be as a trade-off tighter regulation and more uniform national regulation around the consequences of exceeding the limit? In other words, with that carrot would there be likely some stick and is that why you think it won't change dosing? Love you to talk a little bit more completely about what you think those regulations are going to look like.

Andrew, it's a fair question, but unfortunately when you get into that level of parsing it through, you have to fall back on the fact that no one really knows what they're going to do, and so there's any number of scenarios that could emerge, and certainly some people have hypothesized that if they increased sort of the, quote unquote, normal range, they may get, quote unquote, tougher at the higher end.

What all that means, though, it gets very difficult. The devil's in the details because in the end, there are a lot of patients who unambiguously clinically benefit from higher end use and the physicians will assert to that with great vehemence, fervence and a fair amount of scientific reference. So no matter what the rules are, the FIs then have to decide if they're going to reject the clinical decision of the physician and how much they will do that or not do that and how tightly they will define their ability to do that. That's where it gets really difficult to predict what's going to happen.

Understood. When -- just -- when do you expect to see something, question one, when it emerges, will it emerge as a final rule with an implementation date, or will this be another proposed rule with a comment period?

Most likely the way it will unfold is that there'll be a draft EPO policy that will come out soon. It could happen as soon as this week, it might not happen for a month. And then, again, the most likely assumption is that there would be a couple of months for comments and discussion before the final rule was published.

Thank you. Another just quick thing. What's the number of patients acquired year to date -- I don't think you said that?

Approximately 250.

250. Then final question, I'll get out of the way, is, your leverage ratio at 2.1 times is lower than the long-term guidance you've provided historically. You warned us at the analyst day that that might stay there for sometime given opportunities you perceived. Is that still the way you're talking about that leverage ratio that's lower than what we've thought the company might pursue?

Andrew, you're exactly correct, we are lower than our targeted long-term range. We are still lower because there may be other things we want to do with that cash, and so right now we're holding it pending a decision as to how best to deploy it.

Thank you very much.

Thank you.

Your next question comes from John Ransom with Raymond James.

Hi, my question just got answered. I'm not clever enough to think of another one on the spot so I'll get back in the queue.

Thanks, John.

Your next question comes from Chuck Russ [ph] with Insight Investment.

Couple things here. When do you expect to know the final numbers for the '05 Medicare reimbursement changes that you talked about? You talked about the possible risk of being 4 to 8 million, but when will that kind of be nailed down?

There might be the publishing of some relevant study work by the OIG, again could be as soon as this week, could be a month. Then a lot of that stuff gets handed over to CMS, and they may reach a decision by August, September, but it's pretty complicated stuff, and when you get down to actually detailing procedures and rules, a lot of times something that's 90% done sort of screeches to a halt for awhile because it's so hard to get that final 10% covered.

But if you wanted to guess that some of the early work, some of the inputs into the decision-making process might emerge relatively soon, and then some drafts of what the ultimate rules might look like in the late summer, early fall, those would be the date that they have to get kind of close to if they're going to be ready to implement something in January of '05.

Right. Has that moved back a little bit? I seem to remember you expecting the first drafts more like, you know, late June, early July. Am I remembering that wrong, or has it just -- has your expectation moved back for the draft?

You may be right that it's moved back. We pretty much go by the estimates that they provide, because they're the ones doing the work. Then we typically try to bump them back a little because so often the deadlines get missed. Not because they're not trying. They've been handed a couple of tough tasks here on top of about 323 other tough tasks from the MMA bill, and so it's even hard for them to sort of predict how they're going to get stuff done. Because in many cases, they're predicting how quickly they're going to get something done when they don't really know much about it until they dive in and get started.

Forgive me if I missed this, did you give us the estimated maintenance cap ex for the year?

We did, yeah. It's in the range of 40 to 50 million.

Okay. And lastly, what are your expectations on California Medicaid and how you've been booking that revenue here in the first quarter?

Up to this point in 2004, there hasn't been any cuts. We think there will be one. And will most likely go into effect in the middle of the year, and it will most likely be in the range of 10%. And so that is a hit we expect to take.

Okay. So that's in your numbers. My understanding was there was originally a 5% cut scheduled for January 1, and then there was a lawsuit that got that delayed. Is that off the table, or is that still a possibility in a retroactive way?

This is LeAnne answering that question for you. You're correct about your assumption that the 5% cut that was scheduled to go into place on January 1 was delayed by a lawsuit. We do not believe that will be pursued by the state, and instead they'll address it in the new budget, which the budget year is July 1st, and we are concerned, of course, that the governor's original proposal had a 10% cut for health care, and we'd be impact by that, so that's what we're forecasting at this stage.

Okay. Obviously it might turn out to be a lot better than that, but we'll have to wait and see. Okay. Thank you, LeAnne, and thank you, guys.

Thank you.

Again, I'd like to remind everyone, if you would like to ask a question at this time you may do so by pressing star then the number 1 on your telephone keypad.

Your next question comes from Bill Bonello with Wachovia Securities.

Hey, just a couple of questions. First of all, Rich, I'm wondering if you can quantify how the increase in revenue per treatment broke out between increased ancillary utilization and price increases.

Yeah, Bill, believe it or not it's about equal between the two categories this quarter.

Okay. Perfect. And then you mentioned that you expect tougher payer contracting going forward. Can you tell us what's changing in the environment that will cause pricing pressure to increase?

Yeah, I'll take a crack at that, and, Kent, you can add if you'd like. I think what -- this is very consistent with what we've been saying for about 12 or 18 months right now, and it's really based upon the fact that the pricing environment for the last several years has been good for us, good for health care services in general. And it's our prediction that as increases pass on from payers to employers, moderate, which they will at some point, that that will directly impact our ability to continue to get price increase and also will create other situations where we might have downward pressure on higher rates.

The other thing I would point to, Bill, is the continued consolidation on the payer side.

Yeah, and has that really had much of an impact in terms of market share within local markets, and if not, you know, do you have contracts that sort of are, you know, negotiated for a greater area than a local market?

A very fair point. Only a subset of the consolidation events have affected local market shares in a material way, so that is a part of it but that's a fraction of the total consolidation. Second, we are running into some situations where we're negotiating on a multimarket basis. Still, a minority, but more so than the past.

Okay. And then just a question, I mean, with this OIG data that may or may not be made public in the next several days, it seems to me like we can't draw any conclusions from that because we don't know anything about the average drug utilization per treatment. Am I thinking about that right, or is there some value that -- in analyzing where the cuts may go or the changes, I should say, may go, is there anything we can extrapolate out of that OIG data?

Let me answer that Bill. First of all, the OIG per the MMA bill was charged with doing two things. Looking at the pricing and the utilization.

Oh, they are. Okay.

Right. And so if they have done some work, or if they do work in the utilization front, certainly that will be preliminary work, and I would caution that CMS will have to do probably a more extensive look at utilization, but I think there'll be some possibly some numbers there.

Okay. That's helpful to know. And then just a final question, I'm a little confused about your Epogen comments on the hemacrit levels. I understand the explanation for why Epogen would not increase if the allowable range of hemacrit levels are extended, but then Kent you made a comment about how extending that range would be very positive for patients. I guess if patients aren't going to end up getting any more epogen than they're already getting anyway, what's positive about it?

It would be positive primarily for patients that have not been taken care of by DaVita.

Ah. Okay. Thank you.

Your next question comes from John Ransom with Raymond James.

Hi. I know what I wanted to ask you. Could you comment about the -- more globally about the external growth opportunities I mean, we're almost getting down to the point where the only significant pockets of acquisition opportunity are in the hospital base area and also just, you know, wondering what your outlook is for the supply of nephrologists and where you start bumping up against practical external growth constraints, if we see that in the foreseeable future. Thanks.

On the acquisition front, of the remaining independent market, half hospital, half non-hospital, and we see opportunities in both, continued opportunities, and what was the second question again, John?

Outlook for the supply of nephrologists. We're growing demand, as you know, 4 or 5% a year. Just wondering when we get up against a supply issue to be able to keep up with that.

I've seen conflicting numbers on this recently, and the most recent ones I've seen had the same number of new nephrologists coming in that were going out, so that the absolute number was about flat, and of course, that's relative to whatever, a 5% increase in the number of patients per year, somewhere in that neighborhood, between five and six, so between five and five and a half.

I think in the near term, what that really means is increased use of nurse-practitioners to supplement the work of physicians in the practice. Which actually can be a great thing for patients because they end up getting more minutes of attention on top of the physician's discretion. So in the near term I think that's what you're going see more of.

And then as to whether or not four or five years from now there might be something more dramatic going on because of the cumulative impact, if these trends continue, that's kind of hard to speculate what form that might take. But it's not going to take it in the next year or two. Is that responsive?

Sure. I mean, we've just noticed continued take-down in med school applications, just at the point in time we're going to need all these people at the same time we're choking off a little bit the supply coming from other countries. So it is something that we pay attention to.

You're exactly right.

Thanks.

Thank you.

Your next question comes from Jim Lane with Argus Partners.

Hi, good afternoon. I just had a question about the guidance going forward.

I know we can't use the first quarter as a, you know, as a complete run rate or a final run rate for the year, because we've got some other challenges and some spending issues and so forth, but I was wondering if you could help us out a little bit with the range, particularly the low end of the range.

What are the things that could actually potentially get us to the low end of that range? It just seems like the first quarter would indicate a number, so substantially above that, what are the sensitivities that cause DaVita to want to have that low vend the range out there? Thanks.

Yeah, this is Rich. I'll take a cut at that.

A number of factors. One is the higher G&A that we mentioned in the prepared comments. Which makes the Q1 run rate maybe not as representative as you might otherwise assume.

Second, the labor situation. While we haven't talked about it as much, it remains challenging from a -- both from a productivity standpoint as well as a rate increase standpoint and even a skill mix standpoint.

And then third, would be the significant risk that still exists of Medicaid rate pressure both in California as we have mentioned, but also in several other states the budget situation remains tenuous at best, so we're anticipating that we will potentially have pressure in other states as well.

Okay. Thanks. Just one follow-on. I know we had the Kaiser contract, I believe, renewed, or the new rates went into effect at the beginning of the year.

Are there any other substantial payer contracts that have renewed and the new rates will kick in either in the second quarter or subsequently in 2004? Thanks.

Yeah, nothing that is both specific and material on the radar screen right now.

Okay. Thank you.

You have a follow-up question from Bill Bonello with Wachovia Securities.

Yeah, just another question regarding the cash uses going forward. You've mentioned that you're building up cash on the balance sheet just because there may be opportunities. Can you tell us, are there any meaningful, you know, sized acquisitions that are out there on the center front, or, you know, again, I guess as a question I've asked before, are you contemplating something that would at all be strategically beyond acquiring centers? Does that make sense?

Sure, Bill. There's a big drop-off after the M&A transaction that was consummated, or is in the process of being consummated, so it's quite a drop. But there are a lot of them.

So it isn't the highly concentrated set of independent centers out there, but it's still 30% of the market, and that's 90, 100,000 patients spread across those centers. And with all the churning, with all the issues associated with the new Medicare bill, with all the stuff going on with EPO, et cetera, et cetera, that it would not be surprising if more independents sort of threw up their hands and said, I don't want to carry all of this risk, and it's getting tougher and tougher to find nurses, so I'd like to look around.

Okay. And then on that front, are you seeing anything different in terms of competition for centers? Can you kind of give us a sense of what the three other -- you know, whether the three other chains are actively acquiring centers in the U.S. at this point?

The most active is the renal care group.

How about the other two?

They are less active than renal care group.

Are they doing anything?

Yes, they are doing something.

Okay. How does that compare to sort of what they've been doing in the past?

Bill, I don't think I can give a great answer because as you know we didn't get back into this game until a year and a half ago, two years ago, and we kind of moved -- we've moved up to the point where over the last 12 months we actually did more transactions by a good margin than anybody else.

Okay.

But I -- as far as really comparing what Gambro and FMC are doing this year with the past, I don't have a great feel for that.

Okay. And then just one final question on that front, which is what's sort of your capacity to integrate? I mean, is there -- I know it's going to depend on sort of the type of centers you acquire, et cetera, but is there sort of a maximum number of patients that you would feel comfortable integrating in a given year?

No more than 50,000.

That's very helpful. Thanks.

Your next question comes from Chuck Russ with Insight Investments.

Hello again. If I could go back to the California Medicaid issue again, is the 10% that's in the governor's budget, or proposed budget, is that looked at as a worst case scenario? That was my understanding, and obviously there's a whole lot of political wrangling that has to get done before something is actually signed.

Clearly we don't know what's going on. The state has financial difficulties, so I don't think I can answer that question for you.

Okay. Secondly, Kent can you talk at all about the search for a new CFO? Not that I'm trying to get rid of you, Rich, but we all know you're leaving.

The search is progressing. We've seen a bunch of quality candidates, and I guess that's the update.

At this point do you expect, you know, to be extending an offer reasonably soon?

I don't think it makes any sense to get into the details of any individual search.

Okay. Third, you talked again about the -- or you mentioned again kind of the long-term goal of your debt to EBITDA of 3 to 3.5. That's kind of what you want to average on a long-term basis, right?

Correct.

When is the last time you were there in that range?

I will guess that it would be 18 months or so. That's a guess. 18 months. And prior to that, one might ask how long we were above it before we got into it, and that could have been, I don't know, 15 months on the other end.

So if you look at the -- since the new company was started, so to speak, the percentage of time that we've been in it is a minority -- a significant minority of the total time we have been around, because that's -- the primary purpose of that is for you all to be able to understand how we think about our capital structure and the wonderful security around our free cash flow, but in any given year, it is not something that we try to achieve. It is not that kind of thing.

Right. I guess the way I look at it is, you haven't been there for two years, you were under that in '01. You were there in 2000 -- I mean, for you to -- for you to, you know, to get your long-term average to that, you're going to have to go above it. Does that make sense?

Yes, for the average to fall into it, we would have to be above it for some period of time, that's true.

And can you imagine that happening?

Well, at some point, we may need to amend the wording and say that that's what we think is a very good capital structure, because we're not really going to sit back after nine years and try to figure out if we averaged to that number, because at some point if you go three years above it, or three years below it, trying to get back to it as an average is a nonsensical concept because in the interim you must have decided to use that cash instead to do acquisitions, or maybe you were more or less aggressive with stock repurchases or more or less as aggressive with debt repayments, so in any given couple of year period it could be that it makes tremendously prudent sense to be outside it, and then you don't try to make up for that average and move back to it. It's just not that kind of thing.

I guess based on what you just said, I would -- my own suggestion would be to reword it because the way you've worded it now sounds misleading. That's just my two cents.

Fair point, fair point. Thank you.

Thank you.

Your next question comes from Darren Lehrich with Piper Jaffray.

One more thing, Kent. You guys recently announced the addition of Tom Kelly. Just wondering if you can maybe expand a little bit more on that senior management addition, if you can give us a sense for what his focus will be. Just curious to know if we should expect any additional acquisition activity. On the ancillary side of your business in light of that just a little bit more color there.

Sure. Tom is going to help us accelerate our progress, improve our thoughtfulness in a number of areas tied to growth and our strategic initiatives. As you all know, we acquired Lifeline and some of the leading provider manager of vascular access centers. We have RMS, our disease management subsidiary, and we have a couple of other strategic ventures, and so Tom will help drive those, which we think are going to be key to driving our long-term growth in strategic security.

In addition, it will free up some of my time which then can be redeployed into accelerating conventional growth. So those are, I think, the two areas where Tom's emergence will have the most impact. Did I answer the question?

Yes. Thank you very much.

Your next question comes from John Ransom with Raymond James.

I'm sorry, last question. Could you tell us, from the fourth quarter to the first quarter how much -- approximately how much of the change in revenue per treatment you could attribute to your new and improved pricing on your Kaiser contract?

Yeah, John we've stayed away from disclosing the specifics of that contract, as you probably know, and so we're going to continue to do that. The one thing that you said earlier that I'll reiterate is that of the increase was about half due to pricing in general and about half due to the changes in the physician prescribed pharmaceuticals.

Okay. And were there any other maybe I'll ask it another way. Were there any other material moves in pricing that we should think about?

There was a lot that went on in pricing this quarter, like every quarter.

Okay.

And so Kaiser -- what went on with Kaiser was just a subset of it.

Thanks.

At this time there are no further questions, Mr. Whitney. Are there any closing remarks?

I don't have any. Mr. Thiry, do you have any?

Just like to say thank you for your continued interest, and we continue to treasure the strong recurring free cash flow that we are protecting. We'll talk to you again in three months.

This concludes today's DaVita first quarter earnings conference call. You may now disconnect.