德維特 (DVA) 2005 Q2 法說會逐字稿

Good morning, my name is Angelique, and I will be your conference facilitator. At this time, I would like to welcome everyone to the second quarter investor 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. [OPERATOR INSTRUCTIONS] Ms. Zumwalt, you may begin your conference.

Thank you, Angelique, and welcome, everyone, to our second quarter conference call. We appreciate your interest in DaVita. I'm LeAnne Zumwalt, vice president of investor relations, and with me today are Kent Thiry, our CEO, and Tom Kelly, our acting chief financial officer.

I'll start with the forward-looking statement disclosure. During this call we may make forward-looking statements, which can generally be identified by the content of such statements or the use of forward-looking terminology and includes statements that do not concern historical facts. All such forward-looking statements are subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those described in the forward-looking statements. For further details concerning the risks and uncertainties please refer to our SEC filings included our most recent annual report on Form 10-K and our most recent quarterly reports on Form 10-Q. Our forward-looking statements are based on information currently available to us, and we undertake no obligation to update these statements whether as a result of changes in underlying factors, new information, future events or other developments. Additionally, our press release and related disclosures include certain non-GAAP financial measures. These measures should be considered in addition to the results prepared in accordance with GAAP and should not be considered a substitute for GAAP results. Also included in the press release is a reconciliation of these non-GAAP measures to the most comparable GAAP financial measure.

I will now turn the call over to Kent Thiry.

Thank you, LeAnne. In the next few minutes, we'll cover six subjects. Number one, our clinical results; number two, update on the Gambro acquisition; number three, public policy; number four, the second quarter performance; five is the 2005 outlook; and number six is an '06 outlook.

So, number one, clinical results -- as we are first and foremost a caregiver, we'll provide two scores. First, adequacy, which we have provided for a long time, and is essentially how well we are doing at removing toxins from our patients' blood. Ninety-four percent of our patients had a Kt/V greater than 1.2 in the second quarter.

The second measure, which we reported last quarter for the first time, is the percentage of our patients who have had fistulas placed for their access to their bloodstream and dialysis. This is important because fistulas have a lower rate of infection and require less frequent revision and any type of vascular access, and the importance of this area is affected by the fact that CMS has made it one of its primary areas of focus and has, in fact, launched a program called "Fistula First." As of June, we now have 45% of our patients receiving their dialysis treatments through a fistula, the highest percentage in our history. And all the clinical stats that I have presented relate to patients who have been with DaVita for 90 days or more.

Subject number two -- the Gambro acquisition. Let's try to cover a few things that we think are very likely to be on your mind. When will you sign the definitive divestiture agreement? The fact is, we did sign it a couple of hours ago, and it will close contemporaneously with the larger Gambro deal. So it was signed, the definitive agreement, a couple of hours ago. That is a very good thing.

When do we expect to reach agreement with the FTC regarding the consent decree? It appears we have reached an agreement on all material points. There are some details that still need to be worked out, and then has to go up the final chain review, and so things could change. But, absent any change or reversal, we will work out the details, obtain the necessary consents, work the up-the-chain approvals, and be done within 30 to 60 days. So on both those issues, very material progress over the last 30 to 45 days.

With respect to the divestitures, how much EBITDA are we selling and how much do we expect to receive when all is said and done? For the 70, seven-zero, centers, fully loaded EBITDA is approximately $40 million, and the pretax sale proceeds should be approximately $320 million in cash plus we will retain our receivables, and that's about another $40 million or so.

Because a bunch of the facilities were de novo units and/or quite old, their taxes basis was relatively low, and therefore we do expect to pay taxes in the neighborhood of $90 million on the transaction.

Next -- how are things going with respect to the integration planning and execution? The answer is we are absolutely on track, and then, at the same time, we want to emphasize that these are the early laps of a very long race.

Next -- please walk us through again why the EPS impact of this transaction is clearly dilutive in year one in our minds? Let me walk you through a reasonable scenario. First, assume the operating income of DaVita and Gambro is basically flat with '05, which is quite reasonable, although in the case of Gambro that might be a tad optimistic, given their volume trends.

Next -- subtract about $50 million in OI because of the OI we lose through the divestitures. This is not a fully loaded number, because it's not possible to separate out any G&A reductions tied to the divestiture of this tiny number of units to what's going on within the broader integration. You're not going to go into an area and eliminate half a person because the divestiture when you're simultaneously merging and doubling the size of that geographic area. So 50 million or so is the right practical number to use in that first year.

Then assume we repay debt with the after-tax proceeds of about 225 to 230 million. Then subtract the interest on the new credit facility, $190 million is a reasonable scenario. It takes into account the current LIBOR yield curve and our historical mix of free cash that's used for growth versus debt. Then subtract the net integration economics of $50 million, five-zero -- so that is the net number taking into account both the economic benefits in year one and the economic costs in year one of the integration yielding a net negative of 50 million. Next take into account a slight reduction in our normal profit growth from acquisition and de novos as well as the potential loss of some medical directors because of contractual issues triggered by the acquisition or normal life. And if you put all that together, you do end up with clear EPS dilution in year one. We'll talk a little bit more about '06 in a minute.

Before doing that, let's cover subject number three, which is public policy. For that, I'd like to turn it back to LeAnne Zumwalt.

Okay. I'll discuss three topics -- number one, 2006 pharmaceutical reimbursement; number two, the EPO HMA and, lastly, the ESRD bill. First, with respect to 2006 Medicare pharmacy reimbursement -- the 2003 Medicare legislation allows the Center for Medicare and Medicaid services team up to make additional changes in 2006 to how we're paid for our pharmaceuticals. We would expect to see their recommendation within the next few weeks.

How will our reimbursement change? We cannot say with any certainty. Many people are predicting that will go to an ASP + 6 system. If reimbursement goes to ASP +6 next year, and CMS implements that change in a manner consistent with their 2005 drug pricing assumption of budget neutrality, the change will negatively impact the independent centers by further shifting some of our drug margin to the hospital-based facilities.

You may recall that last DaVita lost about $8 million in the shift. This is not what Congress intended, and CMS is inappropriately shifting reimbursement between the two settings.

So how negative will this be for DaVita stand-alone in 2006? It could be only slightly negative -- $1 million to $2 million annually to much more, depending on the assumptions used in their calculation. Again, the bottom line is our Medicare drug pricing is likely to change in 2006, and, most certainly, our reimbursement will be cut by a few million dollars, but it could be more.

Second, on EPO -- we've been hearing for some time that the new national coverage policy will be published later this year for implementation in January of 2006. As indicated last quarter, the industry has worked together to present scientific data and evidence as well as current clinical practice and judgment to CMS regarding appropriate [inaudible] management and has told CMS representatives that the new policy will be very -- excuse me -- and we have been told by CMS executives that the new policy will be very close to industry practice and our collective recommendation.

As we are operating without a formal CMS policy, we must work with our individual FIs [ph] regarding EPO administration and practice patterns. One of our larger FIs is currently requiring additional documentation in this area. At this point our FI reviews have not had a material impact on our cash collections or revenue. That said, we cannot predict what could happen in the months to come regarding the anticipated EPO policy, we have not changed our operating income down by an estimate of $5 million to $10 million annually.

Third, with respect to the ESRD bill -- in March, the dialysis industry coalition reintroduced our ESRD legislation in both the House and Senate. The primary objective of this bill is to improve quality of care, CKD and ESRD patients, as well as securing an annual update similar to the update that the majority of other health care providers receive. We now have 88 sponsors in the House and 12 in the Senate, and we continue to gain positive momentum.

Kent?

Okay, I'll give a quick summary of the second quarter and then Tom Kelly will talk a bunch more about it. It was a solid quarter. Key metrics volume, up over 15% last year's quarter -- that's strong, very strong. Operating income, up 11.6% year-over-year -- that's very solid. Operating margins, down to 16.7% for the quarter, decline in margins is significant and consistent with what we have been predicting to people for some time. Rolling free cash flow was strong at $321 million, excluding the tax benefits from option exercises and the after-tax benefit of prior years Medicare recoveries. If you include those items, it's 373 but it's not appropriate to include those items for evaluating the recurring economics of the business as for the 321 number.

In addition, this quarter we did benefit from a delay in interest payment, because the new notes pay interest semiannually rather than quarterly.

On to '05, the fifth of our six opening subjects -- as you saw, we slightly revised our guidance for the balance of '05. That was indicated in the press release. The floor had been 2%; it is now 4. The operating cash flow guidance remains unchanged, as expected, to be in the 340 and 360 million range, and free cash flow, which is after maintenance spending of approximately 50 million, is still expected to be in the 290 to 310 range.

Subject number six -- our outlook for 2006. Here, in order to be useful to you, we needed to give you data so you could help separate out what's going on with the integration versus what's going on in the respective base businesses versus what's going on in the dialysis market overall. So in the spirit of being useful in that regard, what we can do is provide some guidance as if DaVita was going to be stand-alone in '06 -- as if the transaction was not taking place. So you can separate out DaVita's stand-alone economics from all the incremental impacts, positive and negative, from the integration. And the fact is, for 2006, if we were to look at it on a DaVita stand-alone basis, it would look like a tough year -- a tougher year than most by a good margin.

You should expect zero to 3% operating income growth and a lot of work to achieve that. The key underlying assumptions in that guidance would be no Medicare rate increase and, in fact, a slight hit as a result of the '06 drug pricing changes. Implementation of the EPO HMA policy with a $5 million to $10 million negative hit, as we've discussed for some time.

Private rate pressure, in particular, from national insurers, we are experiencing more rate pressure than we have in the past ever. Labor and operating trends would be consistent with the last few years; pharma and supply costs would have no material change; acquisitions would represent about 2% of our patient count; and there would be about 50 units opened up on a de novo basis, and minority interest would grow by 4 million to 6 million as a result of the good news of maturing centers and an increase in the number of new partnerships.

So the bad news is that it is becoming clearer and clearer that we cannot do well without Medicare increases in a world where our labor costs go up, and the private side is tightening up. The good news is we still expect a healthy return on the incremental capital, which we are deploying, and we still enjoy distinctively healthy and secure free cash flows.

Please note that the SEC has delayed the requirement to expense stock options in accordance with FASB 123 are -- we plan to implement at this point, absent any changes in the outside world, in Q1 of '06, and the impact of this was not factored into anything that I said about '06.

I'll turn it over to Tom Kelly now.

Thanks, Kent. As Kent mentioned, we had another solid quarter financially. Our key financial data is summarized in our press release. I'll address a few questions regarding financial performance factors and trends.

First, what about operating margins in the quarter and going forward? Operating margins declined 70 basis points from the first quarter to 16.7%. Primary drivers were, one, a 30-basis-point increase in G&A costs and, two, a 30-basis-point increase in minority interests associated with maturing joint ventures and the absolute number of partnership centers.

Going forward, and as we have stated for several years, we expect some long-term decline in operating margins. With respect to minority interests, it will continue to increase as we do new deals with partners and partnership de novos mature. The rate of increase depends on many factors, but minority interests in the balance of the year are expected to be higher than the Q2 level by 10% to 20%.

What are the current and likely near-term drivers of dialysis revenue per treatment? Dialysis revenue per treatment was up $1.60 per treatment this quarter driven primarily by changes in intensities of physician-prescribed pharmaceuticals.

What about treatment volume trends this quarter and going forward? Q2 treatments per day were up 15.2% year-over-year with 5.5% from non-acquired growth and the balance of 9.7% from acquisitions.

What are the key trends in patient care costs? This quarter there were no material changes in historical trends. Operating costs, overall, were relatively stable and were consistent with trends experienced over the last several quarters.

Next -- why was absolute general and administrative higher than last quarter and what is the outlook for G&A spending? The increase this quarter related to the Gambro integration, our annual national leadership meeting, CFO severance, and increased subpoena-related costs. As noted last year, we expect G&A will be in the 8.5% to 9% range for the year excluding integration costs. You should also expect G&A to fluctuate from quarter-to-quarter due to timing of certain expenses.

On to a financing update -- we have arranged for a new credit facility, which will provide commitments for a revolving line of credit of $250 million, a term A loan of $350 million, and a term loan B of $2,550,000,000 for total borrowings of up to $3.15 billion. The new credit facility will bear interest at LIBOR plus a margin of 2.25%; $1,595,000,000 of this has been economically fixed through swap agreements, which have blended interest rates of about 6.12%. As a result of our swap agreements and the notes issued last quarter, approximately 70% of our total outstanding debt, post merger, will be fixed.

That concludes our formal remarks, and we are now available for questions and answers.

[OPERATOR INSTRUCTIONS] Justin Lake of UBS.

Can you go into a little bit further color on the pricing environments, specifically what you're seeing from those national payors as far as -- is it consolidation in the industry that's driving that or more fixed contracts versus percentage of charges? And in regards to that, we're hearing a lot about ESRD as being a focus of disease management both in commercial and from employers. Can you talk about how that's affected your business over the last year or two?

Yes. For the first time, national insurers are seeking to enter into national contracts. Historically, these contracts have been entered into by regional entities of national insurers. Certainly, consolidation has contributed, I think, to the onset of these discussions, although none have been formalized on a national basis as of yet.

So, again, I do think consolidation contributes to that. I also believe that the identification of renal disease as a significant cost and an interest in national insurers of integrating renal patients into their disease management programs is a significant contributor.

Great, thank you, and just on the acquisition of Gambro -- you didn't really mention much about the possibility of facility closures or consolidations. We've heard a little bit through the industry that there's possibilities of some closings in the D.C. area [inaudible]. Can you talk a little bit about your plans for taking costs out from consolidation?

We have no intention of closing any centers. We're a low fixed-cost business, and each of the companies on their own would have eliminated any centers that needed to be closed ahead of time. We have a competitor who recently announced the closures of about four or five different units, and my guess is that's for the same reason that we've had to close some units historically, which is that when you don't have enough private patients to subsidize Medicare, at some point you have to close the center.

We also have to look at our centers again because of the Medicare case mix adjustments that have been made and whether or not in some of our own centers that's moved us over the line where the private sector can no longer subsidize Medicare patients.

Great, that's helpful.

I want to go back to the national contracting issue for a moment. The bottom line is that there is more pressure than ever before. That's not saying that suddenly there's going to be a bunch of nationwide contracts. There's tremendous logistical and pragmatic issues that stand in the way of that. So right now what you're just seeing is more nationwide rate pressure and, from our point of view, there would be no sense in our adopting a strategy to give up anything on price to try to gain market share. That's not a prudent strategy in this business whatsoever. So what we're talking about is just pure rate pressure not any imminent onset of nationwide contracting and particular not any strategy to use price to gain share. The follies of that strategy were amply demonstrated in this segment and others back in the 1990s.

John Ransom of Raymond James.

Could you talk about inherent in your guidance what you're assuming next year for managed care increases and perhaps overall revenue per treatment compared to where you've been over the past three years?

I don't think that's a good idea to do on a conference call. After we close the deal, we'll be doing a big capital markets day, whereas we have in the past, we'll parse through the microeconomics of the business in systematic detail. Right now you've got the aggregate guidance that can allow you to make your risk/reward calculations, but it's not appropriate for us to start parsing through the microeconomics until after we close.

Okay, I'll try it another way -- you can't blame me for trying, Kent. Do you think that your revenue for treatment will be up, down, or flat next year?

I think I'll hold off on that and say aggregate guidance is a product of our assessment of the relationship of revenues to expenses.

Gary Lieberman of Morgan Stanley.

I was just hoping maybe a follow-up a little bit on some of the comments on pricing. If you were to look at the pricing growth or the relative flatness in pricing year-over-year in the first and the second quarter, could you quantify for us how much of that was impacted by the change in Medicare reimbursement versus what you're talking about on terms of increasing pressure on the commercial side?

Say the question again, please. What number do you want us to compare to what number?

I'm not sure if I'm asking you to compare a specific number to a specific number, just in terms of additional quantification on looking at the overall pricing growth, which has been pretty flat in the first half of the year, and if you were to break out and quantify what's causing that. Is that being caused by changes on the Medicare reimbursement side downward, or is that being caused or equally less by lower increases on the commercial side, as it sounds like you're alluding to?

The reason I'm hesitating is that the answer to your question would literally differ by whether or not you're going to talk about the second quarter versus the first quarter versus the fourth quarter before --

So if we talked about it year-over-year -- so second quarter of '05 versus second quarter of '04?

Well, let me go down a different path, and then you can come back if it's not satisfactory. Within this period, we've got three things going on. We've got the impact of the Medicare changes, which, in general, over the last nine months has been a slight net negative in the end because of the way they handled some stuff that was supposed to be budget-neutral versus the rate increase that we received.

Second, we had some changes in pharmaceutical intensities, and those have been going up and down, depending on the drug and depending on the quarter over the last six to nine to 12 months, and so that's why, literally, the answer to your question will differ a little bit depending on what you want to be comparing to what.

And then, lastly, with respect to managed-care pressure -- on a net basis, we've still been -- in the periods up until now -- experiencing net increases. So that's the answer. If you look back over the last three quarters as to what's led to some of the puts and takes around revenue per treatment -- slight negative on Medicare, some up-and-down volatility on pharmaceutical intensities, and a slight net increase on the private side.

So if we just discuss, then, the private side, would your increases this year -- let's say are they significantly less or how much less are they than they were, say, in the year-ago period?

I don't think we've really broken that out that way and, again, that never would move around quarter by quarter by quarter. I don't know how, after six months of '05, how our rate increase is compared to after six months of '04.

Last year we had a very big pickup from one particular large contract. So if you would include that, then the rate increases this year would definitely be lower, but we pointed out at the time a year ago that that was a nonrecurring blip, as a five-year contract that was way under market came up for renewal. But the assets that you're looking at -- and that's what's skewing the analysis that you're staring at.

Well, I guess, from another perspective, going forward, what would you expect managed care rate increases to run in a range, if you could give us?

No, we wouldn't, because the range would be too large to be satisfactory, and we've incorporated the full distribution of outcomes of probabilities into the aggregate guidance we've provided, and during our capital market today we can provide more color, but it wouldn't be productive and isn't really possible to establish a range that would be useful to you right now. The fact is, it's tougher now than it was a year ago. It may be tougher in a year than it is today, and all this is consistent with what we've predicted for a couple of years.

Okay, thanks a lot.

Thank you, and feel free to come back and go at it again if I'm still not giving you the value you need.

Balaji Ghandi of Pacific Growth Equities.

I'm not sure if you had a chance to look at this, but I was wondering what your thoughts are about Genzyme's announcement this morning regarding some positive results from a hemodialysis trial they did comparing mortality and morbidity outcomes for patients receiving Renagel versus those receiving calcium-based phosphate binders.

I have not seen it yet, and I'm looking around the room here. The other folks around the table, even those who have seen it, don't feel comfortable commenting on it. We'll just point out historically that we were one of the first companies to work closely with Genzyme to support the use of Renagel and the studies of its efficacy. So it sounds like there's good news in there for patients.

Yes, they just used the term "positive," so if you guys have any color in the future it would be helpful.

I'm sure we do, just not around this table, not this morning -- so just follow-up with this.

Gary Taylor of Banc of America Securities.

A few questions, I guess. I wanted to start just with the guidance on '03, and I think we all appreciate the level of detail and conservatism you put into that, but I guess given your history of dramatically exceeding your guidance, should we assume that you've taken the usual cut at conservatism in what you've laid out for '06 and for the Gambro acquisition as well?

Yes, Gary, I think it's an unanswerable question. We've had the wind in our sails in many instances in the past, in some cases in a way that would not have been able to have been predicted. We go to bed at night committed and worried about meeting the numbers that we talk about. If anyone wants to think that we're being too conservative, they can go to bed at night worrying about higher numbers. The fact is the market has gotten tougher, and I don't know what else to say. It's a real -- the guidance is real, and I would not hang up and say, "Oh, the guidance is exceptionally conservative, and they're probably going to beat it." I would think that's an inappropriate takeaway, just as I would have in some instances in the past. I don't know, LeAnne or Tom, if you want to add anything?

No one wants to add anything.

When do you expect to provide some details around the integration spend? Obviously, after the acquisition closes, but do you anticipate doing that at your capital markets day or doing some sort of conference call and release ahead of that?

I'm sorry, Gary, could you repeat the question?

When do we get to see details that go into that net integration spend number of 50 million that you provided?

Oh, that will be shortly after the close, probably at our capital markets day.

Okay, and then just my last question -- on the potential impact of the move from average acquisition price to average sale price, I guess you're saying 1 million to 2 million hit if CMS makes the usual or typical errors or whatever you want to call it, as they did last year, even though it was supposed to be budget-neutral. What is the possibility that CMS may take the opinion that they don't have to make that change budget-neutral and have you thought about what that impact would be?

They absolutely could take that approach. It would not be in accordance with the law, and so I would be surprised if they didn't update the add back, but that said, they could certainly take that approach, and then we would be having to fight it and, no, we don't have an economic analysis for you on that number.

Let me clarify what the question was -- were you asking what if they decide to -- last year they skewed the allocations towards hospital-based centers. Were you asking the question what if they don't do that this year instead they do give independent centers the right amount of money? Or were you asking a different question?

No, I was asking what's the possibility that they would take the interpretation of MMA that it does not have to be budget neutral and, too, if you could quantify that. So I think LeAnne answered the question.

Maybe my last point, just in terms of thinking around possibility if ever in the future doing larger contracting areas whether regional or national, do you find -- as we've looked at the industry historically, we felt like there's not national contracts because there are few payors that have sizable numbers of patients on a national basis. It seems to me it wouldn't be in your best interest to move in that direction. Do you agree with that?

We do not think it is inherently good or bad to have national contracts. The pragmatic reality is that in most instances they're totally un-implementable because a nationwide payor can't suddenly impose one rate across all the general managers of all the different areas because some dialysis contracts are long term and some are tied to hospital contracts and some are tied to physician multi-specialty groups, et cetera, and some have great rates and some pay high rates. And so the practical reality is that nationwide contracting is basically un-implementable by the nationwide payors at rates that would make any sense for them.

Now, having said that, the word is evolving, and as Tom indicated, sort of the nature of the conversation is changing. Right now that just takes the form of crude rate pressure as opposed to any sophisticated, monolithic, nationwide contract.

Tom, would you like to go back?

Yes, I think we do believe that there is some substantial opportunity to the extent we can get disease management in an integrated format in these contracts. So we have been ready and willing to discuss how that might occur. Again, it's hard to deliver even a consistent disease management program across enterprises that are still -- many of whom are in the consolidation phase themselves and most of them continue to have substantial independent regional operating entities with some ability to make their own decisions both around pricing and disease management.

Bill Pinello of Wachovia.

Just a couple of questions, actually -- first of all, just on the guidance, excluding synergies and integration costs, would you expect Gambro growth in 2006 to be similar to what you expect for DaVita on a stand-alone basis?

Oh, I said what a reasonable scenario would be flat operating income for Gambro and then added that might be a tad optimistic, since they've got negative treatment volume trends. So that's what I said. So, Bill, can you help me out here? What do you want me to do?

No, it's just me not having heard what you said, that's fine. And then I don't know if you're willing to answer this one yet or not, but can you give us any [inaudible] on the timing of the integration cost versus -- or the timing of the benefits -- in other words, are you think those costs may be front-loaded over the first year, or should we think of them as kind distributed evenly across the entire first year?

We will have a much better answer once we actually own the company. I would guess that the operating expenses impacts will be pretty evenly distributed because it isn't as if there is some big consolidation that takes place or the closing of some major operation that takes place. Our process of integration from a shareholder point of view is dominated by the systems integration and that, in fact, is going to take three to four years, and a lot of the expenses are for the extra resources that one must employ and/or deploy in order to just get everyone on the same systems platform, having the right functionality, having the right training, and having it all work. And so I think along a spectrum, we'd be much closer to the part of your question, which said spread out than we would be to "Oh, there's going to be a big charge in the first or second quarter and then it's business as usual." Is that responsive?

Yes, that's very responsive. And then is it possible for you to just walk through your comments on the most recent debt financing one more time?

Sure, are you looking for the details of the financing?

I got the components, but I just -- what you said about the cost, the LIBOR plus 225 and then how much was fixed?

Yes, about 70% of all of our debt is fixed, and of the new issue, almost 1.6 billion has been fixed through a swap, which would bear an interest rate of about 6.12%.

Okay, and so are you saying that the remaining non-fixed debt is at LIBOR + 225 then?

Not entirely. There's a little bit that's less than that, but if you use LIBOR + 225, it will be -- the preponderance of the debt will be at that rate.

The preponderance of the non-fixed debt.

Yes, the Term A loan and the line of credit are slightly less, but the term loan B, which is the largest component of that financing is at LIBOR + 225.

Okay, I just want to make sure I'm crystal clear -- it's not that it blends out to LIBOR + 225 across the whole, it's a component at LIBOR + 225 and a component at the higher cost.

That's correct.

Matthew Ripperger of Smith Barney.

Just a couple of questions -- can you help us lay out in terms of the non-Gambro-related growth for the latter part of this year, how many additional smaller or tuck-in acquisitions do you expect to do in the third and fourth quarter? And also how many de novo centers do you expect to open?

We would expect to open, in total this year, 40 to 45 de novo centers, and we've done, what, 25 so far -- so probably about 20 in the back half. All that depends, really, too, upon the timing to which we get certification. So that's what we plan, and it could be a few more or less.

With respect to acquisition, we historically haven't been that specific, and it will depend on opportunities, and we will keep you posted as we move forward.

And then just related to that -- given that you've been able to do acquisitions with this deal pending, obviously, the FDC doesn't have a problem with that in some markets. Is it preliminary to say if there are divestitures related to the Fresenius Renal Care acquisition that you potentially could be a bidder for some of those divestitures if they become available?

Yes.

You could become a bidder?

Yes, we could, in the government's eyes, we don't know if FMC has any interest in selling any to us. We will find out.

Okay, the second question I had is you commented that you expected minority interest to be 10% to 20% higher next year. Is that related to just new partnership growth or is that at all related to restructuring the deals that you currently have with your positions?

It's almost entirely due to maturing performance of existing partnerships and new partnerships.

And this has been an area of DOJ focus with some of the previous settlements, so should we read into the fact that you're still growing these partnership deals to lead us to believe that this isn't a concern for you, going forward?

Correct. We know the government will scrutinize them, and we think our joint ventures have been done in a thoughtful, careful, compliant way, and so while you can never be sure, because there's no black-and-white rules out there. We've worked very, very hard to be compliant, both in the spirit and the letter of all the laws around joint ventures and hope that we are able to persuade the government that that's exactly the case.

Okay, great, and the last question I had -- I know there's been a lot of talk about guidance for '06, but I wanted to just focus maybe on '05, if we could. It seemed like you highlighted a number of potential risks for '06 related to Medicare, commercial pricing, labor, et cetera. But when you look at your guidance for this year, which is sort of in the operating income growth of 4% to 6%, year-to-date it looks like operating income is up 12% through the first half of this year. So to get to your near-year guidance, it would imply the latter half would be down about 2%.

Given that Medicare isn't going to change anything in the latter part of this year, I guess I'm just trying to understand what fundamentally could change for you so dramatically from what you're currently seeing to what you expect to see in the latter part of this year?

I think it's one of those answers that's going to be tough, because it's got four or five things happening all at the same time and also it's difficult at this point to separate out some of the expenses we've added because of integration. You see the G&A numbers in the second quarter because we are spending a bunch more money on the deal. But one of the primary components of the change in trajectory is our expectation of what's going to be happening on the private rate side, which then leads right into the '06 forecast.

Okay, and do you, as a combined entity, do you expect your commercial pricing leverage to be better or worse as a combined entity than now, going forward?

I don't think there will be any difference. The fact that the players are still very, very big, and we're very, very small. The big advantage that the combination gives us is we're going to be a higher value-added player, and hopefully that will get us superior rates when they see the demonstrated differentiation and the value we put on the table. But, for right now, I just want to go back and make sure I was clear on the answer -- that one of the reasons that the second half of '05 will not be like the first half of '05 is because of some lower private rates.

Andreas Dirnagl of J.P. Morgan.

A couple of questions sort of all over the board -- most of my others have been answered -- just to get back to this question of commercial pricing, specifically on contract, I don't know if Kent or Tom wants to take this -- in the past, you've given sort of a general idea as to how many contracts you have, and then also how many active patients you have, on average, under those contracts. Can you sort of update us on that?

No, I think we should just wait for capital markets day for that, Andreas. There hasn't been any dramatic change in that area. So the old numbers would not mislead you in any way. All that's happening is that some of them are at lower rates than they were before.

Okay, then, again, just a couple of things -- on the divestiture, now that you've signed a definitive agreement, is it a single buyer for all 70 assets?

Yes. There's one or two that are one-offs, but essentially the answer is 97% yes.

Okay, you've stated that you would have interest potentially in looking at anything that came out of Fresenius Renal Care. Can you comment as to whether or not they had interest in your assets and whether they're the buyer?

No, I don't think it's a good idea to comment at that level of detail.

Okay, and then two things -- one, just on the financing, specifically on the bank financing, can you just tell us what the exact status of that is? Is that deal closed at this point and you have a delayed funding commitment? Or is it basically just agreed, and you still need to sign everyone up?

The deal is agreed and allocated, and we'll close as a matter of course with the closing of the Gambro transaction.

Okay, great, and then my last one would be for LeAnne -- LeAnne, I was hoping you'd help me try and reconcile something on your comments for the national coverage policy for EPO. Specifically you said that you're hearing that the government is very close to putting something together that pretty much mirrors industry practice and your own recommendations, and then you commented that potentially a $5 million to $10 million negative hit. Is that $5 million to $10 million negative hit based on your current experience with your FI, i.e, would that change if the government did institute a national policy that was close to your current practices?

It's a little more complicated, as you might imagine. What we are looking at is from a CMS perspective -- restrictions on EPO dosage for high-hematocrit patients, and how your protocol in their world might need to change when a patient's hematocrit got up to about 37 or somewhere in that neighborhood, which will, by definition, restrict some of our physicians, if you want to say, or they will attempt to restrict physician behavior. And so this is our best estimate of taking that policy into consideration, and it's really not productive, I don't think, to say too much more than that.

Okay, and then this is the final one, Kent, maybe just one quick comment -- to the extent -- just from a theoretical basis, to the extent that payors were to start moving to a disease-management type of structure, wouldn't that theoretically be beneficial for providers from the point of view that things like more frequent, less duration dialysis, higher EPO dosing, would lead to lower hospitalization where you can save an awful lot of money?

Yes. So over the long term, justice will prevail. In the near term, you face naked rate pressure is the early manifestation of more attention being paid, and the enlightened disease management, which reduces total costs, comes second.

There are no further questions.

All right, thank you all very much for your interest in DaVita. We will do our best to serve you well between now and our next call. Thanks again.

This concludes the conference. You may all disconnect.