德維特 (DVA) 2005 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the DaVita fourth-quarter 2005 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 session. (OPERATOR INSTRUCTIONS) Ms. Zumwalt, you may begin your conference.

Thank you, Toni, and welcome, everyone, to our fourth-quarter conference call. We appreciate your interest in our Company. I'm LeAnne Zumwalt, Vice President Investor Relations; and with me today are Kent Thiry, our CEO, and Acting CFO Tom Kelly.

I will start with the forward-looking statement disclosures. During this call we will make forward-looking statements, which can generally be identified by the content of such statements or use of forward-looking terminology and include 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 these risks and uncertainties, please refer to our SEC filings, including our most recent annual report on Form 10-K and our most recent quarterly report 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 measures. I will now turn the call over to Kent Thiry, our CEO.

Thank you. I will address six items. Number one, the clinical results; number two, the Gambro acquisition and integration; number three, public policy; number four, a tax election; number five, our Q4 performance; and number six, the '06 outlook. Pretty much the same outline we typically use.

Category number one, clinical results. We will provide the same two scores we did before. For the first time, these scores will relate to the new patient population, the combined Company, the 96,000 dialysis patients.

First, adequacy, which is essentially a measure of how well we are doing at removing toxins from our patients' blood. 94% of our patients had a Kt/V greater than 1.2 in the fourth quarter. The second measure is the percentage of our patients who had fistulas placed for the access to their bloodstream and dialysis. As of December, we have 45% of our patients receiving their dialysis treatments through a fistula. This is a lower number than before, because Gambro's numbers were lower than ours.

The clinical stats I have presented relate to patients who have been with DaVita for 90 days or more. We continue to always present our clinical outcomes first, because that is what comes first. We are first and foremost a caregiver company.

Number two, the Gambro integration. Last quarter we listed six of the biggest challenges, although not in order of importance or risk. But to repeat them, they are IT; the corporate integrity agreement, a.k.a. CIA; revenue operations; private contracting; general operating policies and procedures; and clinical protocols. Rather than bore or overwhelm you with detail regarding each, I will go ahead and take a cut at a few cryptic questions that we might guess would be on your mind.

Namely, number one, which area scares worries you the most? Number two, which areas are virtually done with from an integration point of view? And number three, overall how is it going versus expectations?

With respect to the first question -- what keeps us up at night, or me up at night, or scares or worries us? -- I think the number one item there is revenue operations, perhaps also known as billing and collecting. The DaVita billing and collecting systems platform is simply not yet ready to absorb the Gambro transaction. So we are going to have to keep running them in parallel for a bit longer.

Question number two -- which material integration areas are virtually completed? The short answer is none. None were supposed to by now, either. But we will keep you posted as we start checking them off quarter by quarter.

Finally, the big question -- overall, how is it going versus expectations? Answer, about as expected, except for the fact that our clinical protocol work is actually going a bit better than we had expected or hoped. And as already indicated, the revenue operations are a bit behind.

Let me provide a few more facts about that integration that will just give you more of a flavor and hopefully help you assess it, and/or ask additional questions during Q&A.

First, we can report good success in consolidating our financial reporting systems. The 2006 budget was prepared on a common platform; that is a big deal. And we've integrated Gambro and DaVita data into a single data warehouse also, also a big deal.

Second, on the corporate integrity agreement we had a piece of very, very good news. We submitted our first annual report to the government, and that included our first postpayment claims review, which is one of the most significant parts of the corporate integrity agreement. A whole bunch of claims get reviewed to see if they were submitted correctly, and based on correctly documented and appropriate care, etc. etc.; and the results were excellent. Just excellent.

Third, with respect to private contracting, it will be a lively year. As we have always indicated, we're going to get some victories; we are going to take some hits. It now appears that we are going to take more hits than we expected, not necessarily having anything to do with the integration, but just the evolution in our segment. From an integration point of view, this operation is working fine. It's just that they have got some serious headwinds in the marketplace.

Netting it all out, our forecast for year one net integration economics remains where it was before, roughly speaking, a negative $50 million of net integration economics. Our historical statements regarding EPS impact remain in place, which is to say, dilutive in year one; EPS neutral in year two; accretive in year three. Our calendar years almost match up, since we closed the deal in October.

In addition, we said last quarter that we anticipated spending an incremental $25 million on IT related equipment in '06. We still intend to do that. In fact, if things go well, we will actually pull $10 million of '07 expenditures into '06. So it's about a 50-50 chance that that will happen.

And if it is happening because we are getting more done and more centers more quickly, that will be a good thing. If we do spend more, we will be sure to let you know whether that is the reason, as opposed to just spending more on the originally scheduled body of work.

Subject number three, public policy. 2005 was a distinctively successful year for the kidney care community. Two examples would be the 1.6 increase to the composite rate in a year where many got zippo or had cutbacks. Second example, we did achieve an appropriate drug add-back in an environment where an erroneously low one could very easily have emerged.

In 2006 we will once again be advocating for our industry consensus bill, the Kidney Care Quality and Improvement Act. That legislation has 130 sponsors in the House and 20 in the Senate, significant bipartisan representation, by far the most ever. But it's going to be a tough year. We won't give up, because we still lose money on every Medicare treatment.

Subject number four, the Gambro acquisition tax step-up election. We have referred to this in the past. We may move forward with an election to have a tax basis step-up for the Gambro deal. This would require an approximate $170 million cash payment early in this year. However, the net cash outlay would drop to about $120 million by the end of the year, because of the near-term tax savings associated with reducing the taxable gains from our divestitures. If we do it, this approximate $170 million investment has an IRR of about 19%; and the full tax benefit is received over 15 years.

Fifth subject, the Q4 economic performance. I will simply say that it was for the combined Company, solidly on plan.

Subject number six, 2006 outlook. We have revised our guidance, our operating income guidance, to be 630 to $700 million, excluding the impact of FASB 123R. The three largest swings factors are not surprisingly the integration, private rates, and treatment growth. As always, these and other risk factors have been incorporated into our guidance on a probabilistic basis. Collectively, if they are skewed one way or the other, they could cause us to be above or below the range.

What about cash flow? What about the all-important cash flow? A reasonable scenario consistent with our operating income guidance is as follows. Operating cash flow excluding proceeds from the exercise of stock options, somewhere between 410 and $480 million captures a significant majority of the probabilistic outcomes.

Number two, proceeds from the exercise of stock options, 30 to $50 million reasonable scenario.

Item number three, maintenance CapEx including that $25 million of IT would be 125 to $135 million.

Combining those three leaves you with a net free cash flow of 305 to $385 million, in that ballpark. Then, if we are fortunate enough to identify a bunch of new growth opportunities, we should subtract acquisition and development capital in the neighborhood of 130 to $150 million; leaving a net cash amount available for additional growth or debt repayment of 155 to $255 million. Just a reminder; our mandatory principal payments are $60 million.

Before I flip the call over to Tom Kelly, I would like to cover two other subjects that would probably otherwise come up in Q&A. First, the outstanding U.S. Attorney investigations. On those investigations there have been no major developments. There is the normal back and forth on document production with respect to the St. Louis subpoena. We are in the process of complying with some supplemental data requests there.

Second subject, this past weekend -- and this is kind of on social issues, but just trying to preemptively give you some sense of the karma of the integration -- we held our first physician partnership meeting of the new combined Company just a week ago. It was an excellent meeting. I will now turn it over to Tom Kelly.

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

First, what about operating margins in the quarter and going forward? Operating margins for Q4 were about 14%, reflecting the effects of the Gambro Healthcare acquisition, and about $11 million of integration costs. The $11 million was slightly above our forecast of $10 million.

Also as noted in last quarter, it is our expectation that 2006 combined dialysis operating margins will be in the range of 14%, plus or minus.

What are the likely near-term drivers of dialysis revenue per treatment? Our Q4 combined average dialysis revenue per treatment was about $311. Kent discussed the key drivers, with the exception of the EPO HMO, which will likely be negative by about $1 per treatment on overall treatments.

What about treatment volume trends this quarter? Q4 nonacquired growth was up 2.8%, which was negatively impacted by Hurricane Katrina. Going forward, a reasonable scenario is in the 2% to 3% range. With respect to acquired growth, we expect to acquire centers with 800 to 1,400 patients in 2006.

What about collection performance and DSO? Our Q4 bad debt provision is simply a weighted average of the two Companies combined. The two Companies have different policies regarding the classification of estimated uncollectible amounts. The old DaVita policy recognized a higher share of potentially uncollectible amounts as a reduction to revenue, rather than as an increase in the bad debt provision. As we integrate the billing and collection functions of the two operations, we will likely standardize these policies.

For your information, DSO by the end of January was 69.

What would you expect for G&A going forward? You should expect G&A to increase over the course of the year. A reasonable target range is 9% to 9.5% of revenue, which includes integration expenses.

What about the tax rate going forward and the tax credit in Q4? The lower effective income tax rate reflected in our year-end numbers primarily resulted from tax valuation adjustments. We currently project the 2006 effective income tax rate will be in the 39% to 40% range, higher than 2005 due to those favorable tax valuation adjustments in 2005, some higher effective state income tax rates, and lower levels of tax-exempt interest income.

Regarding cash flow in the quarter, free cash flow in the quarter was $152 million, which includes the benefit of timing of interest payments totaling about $55 million. $28 million was related to the notes, where interest is payable biannually, semi-annually, on March 1 and September 15. $27 million was related to the credit facility, all of which was paid in the first week of January.

What about your capital structure? Outstanding debt includes subordinated notes totaling $1.365 billion, with weighted average rates of 6.91%; a term loan A borrowing of $350 million, which bears interest at LIBOR plus a margin of 2%; a term loan B borrowing of $2.45 billion, which bears interest at LIBOR plus a margin of 2.25%.

$1.58 billion of the term loans has been economically fixed through swap agreements which have blended average rates of 3.87 plus 2.25% for an average effective rate of 6.1%. As a result of our swap agreements and the notes issued last quarter, about 70% of our total outstanding debt is fixed.

Interest expense for the quarter was $73 million, which included $2.8 million paid to Gambro Healthcare as part of the purchase price and $2.8 million of non-cash amortization expense related to debt financing fees. The weighted average interest rate for the quarter was approximately 6.58%.. Required principal payments are $60 million per year for the next few years.

Our Q4 leverage ratio was 4.4 times EBITDA. This compares to the pro forma of 5.2 when we announced the deal. As a result of the lower leverage as of March, the margins on both the term A and B loans will decrease by 25 basis points, effectively decreasing interest expense by about $5 million in 2006.

Additionally, as you think about building your 2006 quarterly models, you should consider the following. In Q1 of 2006, we will implement FASB 123R. Hence, discussions of our 2006 results excluded the impact of expensing stock options, which we anticipate to be in the 20 to $30 million range. Q1 and Q2 have only 77 treatment days, compared to Q4 which had 79.

Q2 as with past years will include the costs associated with our national leadership training meeting. Finally, integration costs will likely be weighted more heavily towards midyear.

Before we go to Q and A, I will turn it back to Kent for a discussion of the longer-term outlook.

Thanks, Tom. I will make three points on the longer-term outlook. The first is with respect to a negative fact, and that is the high probability of private rate compression.

The second is a neutral fact, and that is the tremendous [shrink] factor that government policy represents potentially in either direction or flat.

Third, a positive fact, which is that we will continue to grow our treatment volume, and we will continue to generate very substantial free cash flow and operating cash flow.

So in closing, a very solid quarter. Lots of stuff going on this year. However, we are only in about mile 10 of the integration marathon. We hope a bunch of you will join us in New York on May 3 for our capital markets day, where we will attempt to provide a very thorough analytical and qualitative assessment of the prospects for your equity dollars. Operator, could you please take us over to Q and A?

(OPERATOR INSTRUCTIONS) Darren Lehrich.

Just a couple things here with regard to the revenue per treatment trends. I know you talked about a few things that may have impacted the revenue per treatment in the quarter. It was a little lower sequentially and I guess a little lower than what the pro forma combined numbers would have suggested.

If I just look at your third-quarter number, I guess my math would imply that Gambro's revenue per treatment was about $304. I'm just wondering, first, can you confirm that? Or was there any other changes that have happened to the DaVita book of business that would make that math incorrect?

Secondly, I am just trying to get a sense of where you are in your opportunity to get better rates in the Gambro book; and how much some of those increases might be offset with the increases in contractual allowances as Tom may have alluded to in his prepared remarks.

To answer your first question on revenue per treatment trends, really two impacts in the fourth quarter. There were slightly lower EPO intensities, and there probably were some onetime adjustments in quarter three that did not occur again in quarter four, for Gambro. Otherwise the numbers are entirely comparable.

Could you remind me of the second question?

Yes, I guess, Kent had alluded to, with his last conference call, that there were some near-term opportunities to get better rates in the Gambro book of business. I want to know where you are in that process. Whether you still feel that there are those kinds of opportunities; and how they might play out over the course of '06; whether we saw any of that in the fourth quarter.

Then to the extent that you will be a little more aggressive -- or maybe conservative is the right way to describe it -- in recognizing contractual allowances in your revenue operations for Gambro, how that might impact some of those rate increases on the net revenue per treatment line?

The issue of how we're doing on private rates, it is just too soon to tell. It will emerge as the months go by, and pretending to have perfect visibility into how it will unfold is just not a service to you.

With respect to contractual allowances, I want to emphasize that there is a difference in sort of methodology, not necessarily in accuracy. Whereas we tended to do more contractual allowances at the time we were sending out an invoice, so to speak, whereas they tended to realize it as a bad debt expense on the back-end.

So there is not necessarily any difference in the ultimate economic impact on revenue per treatment. It is just two different ways to getting to the same spot.

The other point that I will make is you just have to be careful taking Gambro's numbers for the first three quarters of the year, not only because of the GAAP conversions from Swedish stuff to American. But they were running a company to sell it, and so it was starved in many overhead areas. On the revenue side, in some cases, they made -- they were making onetime adjustments that were appropriate but not recurring.

That is part of what Tom was referring to in their Q3 numbers. So you just got to be careful extrapolating from what you have on them before we bought them.

Sure. Maybe just one more thing if I could with regard to clinical metrics. Maybe could you comment a little bit more on the opportunity to add vascular access services in Gambro markets? Is there any development there on your part planned?

Then as far as the anemia management metrics go, what were they? I guess, are you downplaying their importance now by not disclosing them in the last couple quarters? Because you, I think, it's my recollection, had disclosed them for about four or five years straight.

First with respect to vascular access, there will be additional opportunities to do more vascular access centers because of this combination, and we are taking action in that regard. So that is a good thing, and it is happening.

With respect to anemia management, we just displaced it because the fistula metric is more significant.

Matthew Ripperger.

Just a couple questions. Can you give the blended Medicare rate per treatment in the fourth quarter for the combined Company?

We typically have not broken out Medicare versus private revenue per treatment, and it's probably not a good time to start.

Okay, asked another way if possible, given the 1.6% increase and the EPO adjustment, off of whatever benchmark, what will the incremental increase in Medicare reimbursement be in the first quarter, versus sort of what your run rate is right now?

The value of the 1.6% is a tad short of $20 million annually.

And the Epogen add-back?

I don't know exactly how to answer that question as asked. There was a general drug add-back that gets recalculated each year. It is not an EPO-specific add-back. It involves all the different drugs.

Let me just check and see if that is something we have publicly disclosed. That add-back was in the neighborhood of 35 to $40 million, somewhere in that ballpark. Is that the answer to the question you're asking?

That's perfect. I just wanted to clarify. Were those two Medicare changes included in your last quarter's guidance for 2006?

They are included in our current one.

Okay, so if there is an offset to that increase, we should assume it is related to either a change in private pay trends or treatment volume trends?

Right, that's correct. The fact that those two things had a chance of happening was probabilistically incorporated into the guidance we gave last year, last quarter. So as point number one, they were not excluded; nor were they assuming we happened. They were probabilistically incorporated.

Second, in addition to that, since that time we have concluded we are going to take more private rate hits than we thought at that time. So those are the two facts which would explain why you can't take the two numbers I just provided you a moment ago and add them to the old guidance, which is -- my guess is what you're getting at.

It was, yes. Thank you.

No, thank you.

The second question I had is given your very strong cash position right now at the end of the quarter, with over $400 million, and your projected strong free cash flows for next year, is there a specific strategy in terms of deleveraging at this point?

I don't know about the word specific. But let me just sort of characterize the cash position with a little bit of parsing here. We do have a bunch of cash right now, which is a good thing. I will add to that the fact that we ended up borrowing $100 million less to do the deal than we had originally told you.

So the cash story has just been unambiguously positive so far, although as we have already indicated we have a bunch of work to do to keep it that way.

But we are going to have to pay about $90 million of tax on the divested centers. Then if we do the step-up election, that's another $170 million in the short-term, reduced by $50 million within about nine months because of the tax benefits of doing that. So that 430 very quickly becomes about 170.

Then from that point, what we do with debt paydown versus growth, we are not sure. It depends on how attractive the growth opportunities are; and of course in part, on any extreme movements in the variable portion of our debt. Variable as far as interest rates, that is.

Okay, great. The last question I had is -- there is a $153 million liability related to the Gambro AG supply agreement. I just wanted to see if you could give a little more explanation as to what that number means, and how that is going to trend going forward.

This is Tom Kelly. The liability reflected on the Gambro supply agreement really reflects our expectation of a loss of pricing flexibility over the 10-year period of the agreement, because the agreement will result in somewhat higher costs for many of the products covered under the agreement, prices that might otherwise be available to the Company.

As a result of that, we established the liability, and it will be amortized over the 10-year term of the supply agreement.

On a straight-line basis?

Yes.

Okay, great. Thanks very much.

Bill Bonello.

I have a couple of questions. The $2.8 million interest payment to Gambro, is that a non-recurring expense?

That is nonrecurring, but you think of it as the first five days of October's interest.

Okay.

The credit facility was taken out on the fifth.

Right, okay.

Just to explain that, Bill, because we were going to be getting all the cash during that period, from the time we announced the deal till the time the deal was done, we essentially had to pay them interest on that. That is why it goes away once we actually own the asset.

Yes, got it. Then the estimated IRR on the tax step-up, I assume that is based on the assumption that you use cash from the balance sheet, not that you borrow?

Correct.

Okay. Then you put out an 8-K the other day that you had signed a new contract with Amgen. I'm just curious. Without disclosing any specifics, which I know you won't do, can you let us know whether the discounts you will be getting are similar to the discounts that you have had in the past? In other words, should we expect any cost pressure or benefit on the EPO side?

Just hold one second, Bill. It's a fair question. I think for now, the best thing for us to do is just to say that our new Amgen contract is incorporated into our guidance. If there was some dramatically new truth, that prices were up 15% or down 15%, we would of course talk about it. But as it is, I think we will just say we have incorporated it into our guidance.

Good enough. The Gambro manufacturing problems that they are having, does that have any impact on your ability to obtain equipment or on your equipment pricing in the near term?

Well, with respect to inability to get equipment, no. That the agreement we signed with them took into account the fact that a situation like this could emerge. So we have access. We have the ability to go elsewhere for equipment.

As to price, that is something that will need to be sorted out. So I can't represent anything on that score until we figure it out. So what we're doing right now is just working collaboratively with Gambro to try to sort through this.

Okay. Then on the volume growth, the expectation of 2% to 3%, obviously lower than where it's been historically; is that kind of an assumption that at the acquired Gambro centers there could be some attrition as you integrate? Or is there something else that would cause volume growth to be lower than where it has been?

Yes, there three things going on, Bill. One is that we used to get some of our growth from Gambro. We were growing much, much faster than them and in part at their expense; and so that is gone.

Number two is we are going to have some leakage because there is some situations where noncompetes expired with a change of control and stuff like that. All of which, of course, you recall we disclosed. But nevertheless, it does impact that number. Kind of memories going back to 2000, 2001 with the Total Renal Care turnaround, some of that same leakage.

Third, just the distractions and the integration mean that there's some de novos that old DaVita would have built that we won't get to now, because we are too busy trying to do a good job for our patients and the existing [P&O] to be able to build as adroitly as we had in the past. Is that responsive?

Yes, very responsive. Just two more questions. Your nondialysis revenue went -- I think if I am looking at it right, it went down just a little bit sequentially, about $3 million or something. How do we think about that going forward?

Well, it's going to move around a bit. There's a number of different business categories and product lines represented there.

I take it -- and I said that wrong. It actually went up $13 million; it was $3 million per treatment decline. But maybe that is not the right way to think about it.

Yes, we were all scrambling on this end, trying to figure out what number you were talking about. I think there's nothing material for us to say about it at this point. I just don't think I can say anything useful. It is sort of a potpourri of different strategic initiatives and business lines, etc.

The Gambro lab is in there, and we had some significant operating issues inherited. Some very significant operating issues for the Gambro lab. So it was a bunch of stuff that moves around a bit. I don't think there's anything you have to be overly focused on, with respect to how we are going to do this year vis-a-vis our guidance.

Great, then just the last one. As we think about Q4, were there already some of the negative synergies that you expected? So is that -- are you sort of tracking along at a sort of pro forma pace towards that 50 million? Or is Q4 a number that would have had more or less cost than what might be happening in future quarters?

The answers are yes and yes. Meaning yes, Q4 had a representative amount; and yes, we are tracking.

Okay, perfect. Thanks a lot.

Gary Liberman.

A couple questions. Which expense line is the amortization of that supply contract included in?

The amortization line.

Okay, fair enough. Then in addition to that 2.8 million fee that was paid to Gambro, I believe you said there was an additional 2.8 million debt finance fee.

The amortization of non-cash financing fees, yes.

It is that piece of it recurring?

Yes.

Okay. Then finally, you made a couple comments about pricing deterioration. Compared with last quarter, could you maybe give us a little bit more detail? Is it pricing deterioration that you are seeing in the historic DaVita business? Or is it pricing deterioration from something you found out about Gambro once you had acquired it?

It is primarily in the old DaVita book of business, although it gets kind of difficult to separate out. Because in some cases, just as we said would happen, the combination means that we're doing a much larger book of business with some individual payers.

If it was a book where DaVita had a small number of patients and a very healthy rate, something when it is combined with a larger Gambro book of business, you end up with some serious rate pressure on the old DaVita portion of it.

Of course you get other situations which are just the inverse. On average, DaVita private rates were higher; but that is the answer to your question.

But there was nothing materially different than what you had expected in the Gambro, on the pricing side with Gambro, once you got in and actually owned the assets, than what you expected?

Correct.

Thanks a lot.

Walter Branson.

Regiment Capital. Just a couple cash flow questions. Does your cash flow from operations guidance for 2006 include the $90 million tax payment on the divestitures and the $170 million step-up payment potentially?

Also what is your expectation for working capital changes that is incorporated in your 2006 guidance?

The information you have seen previously on operating cash flow did not include the tax on the divested centers or the cost of the 338 election. So both those would have to be deducted out to get to cash available for incremental growth or debt repayment. The second question again?

What is incorporated in your guidance with respect to working capital changes?

No significant changes in working capital are expected. Guidance post the effects of the combinations of the two balance sheets.

Thank you.

John Ransom.

A couple things. Is the fourth-quarter fully diluted share count, is there anything -- given that your stock price is higher -- is there anything that will change materially in '06 relative to that 105 million share count number?

No.

Okay. Is the fourth-quarter depreciation and amortization, just trying to take into account all the things you said, is that a good proxy for '06 as well?

The '06, we'd probably run around plus or minus 180 million (multiple speakers) count for growth spending, etc.

For D&A? Okay. Thank you. Thirdly, a lot of moving parts obviously with revenue per treatment given the rate pressure you mentioned, and the accounting change, and the Medicare change. Is the fourth-quarter number incorporated in your guidance? What sort of change do you assume around revenue per treatment in your '06 number relative to fourth quarter?

We are not really opining on that as a separate discrete element of guidance.

Do you expect it to trend positively, negatively, or flat, or more flat?

We just are not commenting. If you had to bet a dollar the way whether it was more likely to go up a tad than go down a tad, if you were forced to bet on one versus the other, you would bet that it is more likely to go up than down.

Okay.

But we would advise you be careful about placing that bet.

Well, a dollar is about what I could probably afford to wager. The final thing, and this is probably a big sloppy public policy pronouncement from you, and so we're not -- there is not black and wide. But if you had to bet a dollar looking at the Bush budget and the 60-month proposal, and some of the hostility toward Congress toward the Bush budget, and the possibility of bundling, what is your intermediate-term outlook for public policy?

I know you said it's neutral earlier, but if you had to look at the totality of all the things as we move through the decade, where do you think we're headed in totality?

Wow. Let me take a stab and see if add any value with an answer. The words I should have used in characterizing the longer-term outlook is that probably neutral is not a fair term.

With respect to government reimbursement, I think a rational person would have to conclude that that is a negative with the five-year outlook, for all the reasons that everybody knows. Just as for much of American healthcare it was a negative in '05.

So you sort of have the reality of an environmental negative, versus the probability that we can outperform other segments, in demonstrating that our arguments are meritorious and educating them that money on outpatient dialysis is an investment that saves them money through reduced hospitalizations and surgical procedures. Which is an empirical fact but is not sufficiently appreciated there.

So overall, if you had to be optimistic or pessimistic about government reimbursement over the next five years, the classic bet a dollar either way you've got to do it, it comes down on the opposite side of the other one. Which is, you have to bet negative.

The good news is that we are working hard to outperform within that general environment.

With respect to the 30 to 60, the President's budget is already dead, and they knew it. So it is as much political theater and positioning on issues. It's actually more that than it is a substantive piece of legislative ideas. However, the fact that the 30 to 60 was included validates the concept in a way that would otherwise have taken a lot of work. So it's a very nice feature of a dead budget.

All right, thank you very much.

Gary Taylor.

I just had a few questions. First, on the options expense guidance for '06 of 20 to $30 million, I'm assuming that is a pretax number.

Yes.

On the potential tax step-up, I have two questions. Given the IRR, one, why wouldn't you do it? Two, if you did, what impact would that have on your '06 reported tax rate?

Let me answer the first one and get back in a moment on the second one. Why wouldn't we do it is the classic thing. You can say something is going to have an IRR of 19, but we're just staring for the 18th time at any risk that in fact it would not happen.

Under what scenario would it not happen? What tax laws would have to change? What interpretations of existing laws would have to change? What changes in the Company's condition would have to happen?

So we're just staring for the umpteenth time as to whether or not there is any significant risk of our getting a very substantive hard dollar cash-on-cash return on a timely basis. So that is the answer to the first question.

On the second question, there is no impact on the book expense.

It would just be a cash tax benefit for you?

Cash tax benefit, that is correct.

My final question, on the same store treatment, I wanted to make sure I understood. Your guidance for 3%, I'm sorry, is that a nonacquired treatment guidance for '06, which excludes Gambro? Or is that a blended type number?

The 2% to 3% nonacquired growth is a blended number. Does that answer your question?

That includes what you will do with Gambro, what your treatment growth would be with Gambro?

Correct, that is the new combined Company number.

Okay. Then lastly on the fourth quarter, the 2.8%, obviously you had indicated you got some centers you closed; and people may not have seen that your prior-year comparison jumped pretty substantially in the fourth quarter as well. I suppose those two items make up the majority of why the numbers slowed. Did I miss anything else that might have impacted this quarter?

Let's just say the combination -- you get the year-over-year, you get Katrina, and the get the combination itself. Those are the three drivers of the drop.

Okay, thanks.

Balaji Gandhi.

I had four questions. The first one is related to G&A expense. I think you had mentioned that you thought it would go up and probably peak in the middle part of the year. But you also mentioned that operating margins would stay at about 14%. So were should we -- what other line would help balance that out?

We didn't -- the peaking in midyear was actually with respect to integration expenses, not with respect to G&A. So we would expect fairly stable G&A performance through the year; and similarly fairly stable operating margins.

Okay, but I guess the range you would use was 9% to 9.5%, right?

Yes.

That would imply an increase from the fourth quarter. So I was just wondering how you would still -- if one of the other lines would come down as a percentage of revenue.

Yes, there is purchasing synergies, so you will see that in the operating costs line.

Got it, okay. Then CapEx, 130 to $150 million. Would that suggest that a decline in development then? Because it looks like that number is consistent with the pre-Gambro DaVita number for CapEx.

Yes.

It would reflect a drop-off most likely in acquisitions more so than on the de novo side. But to some extent we, of course, do not know exactly what's going to happen this year in those two categories.

Okay, so the 130 to 150 would be maintenance CapEx plus some development?

No, it's development and acquisition. It would be based on kind of what Tom indicated, buying the range of centers with patients in the kind of 800 to 1,400 range; and doing about 40 de novos. Something like that. As Kent said, those numbers will change based on opportunities and [real] activities.

Okay. Have you see any changes in valuations for smaller acquisitions since the two big deals have gotten done?

Let me just (indiscernible). The 130 to 150 is just development CapEx. It's just de novos and acquisitions and stuff like that. Maintenance CapEx is elsewhere.

Then your next question was, do we notice any change in the valuations on small acquisitions? Was that it?

Yes, exactly.

We're still -- I think the short answer is no. What we reported three months ago or six months ago, I can't remember, is that we were consistently being significantly outbid by FMC. While that is still happening, it is not as dramatic as it was five months ago. But it is too soon to say anything more definitive.

Okay. Then minority interest, how should we think about that going forward? It looks like it dropped a little bit in the fourth quarter.

Yes, it did drop a little in the fourth quarter. So if you want to start your model more with the levels of the third quarter and grow that, assuming that we will grow our joint ventures, and our joint ventures started in the last couple years will be maturing, you can take that trend.

Okay. The last question, are share repurchases at all part of the strategy going forward for the next couple years?

We will always evaluate them compared to our alternatives. Right now, if you had to bet, you would say we are more likely to use free cash flow to either pay down debt or to do growth, in the form of de novos or acquisitions.

But we will stare at the share purchase alternative regularly, just to make sure that we notice, if the world has changed in some way, that it is prudent.

Okay, great. Thanks.

Justin Lake.

This is actually [Kevin Grone] in for Justin Lake. I had two questions for you. Can you speak at all to the number, give us a percentage of Gambro physicians that may have been lost due to noncompetes going away?

Secondly, has there been any meaningful employee turnover at Gambro? Thank you.

As for the first one, no; we don't disclose it. It is incorporated into our guidance.

As to the second one, we have been very pleased that we have retained -- I actually don't know the precise number, but something in the neighborhood of 95% of the executives and managers that we have made offers to. So, so far, the data says it has gone well from that perspective. Of course, there is a lot of year left.

Very good, thank you.

Gary Taylor.

Sorry, I had to jump back in. On the net integration economics, the guidance of about negative $50 million for the first year, I recall, I guess, the thought that at the capital markets day you would be providing a more detailed breakdown of that. So I guess, one, should we still expect to see that?

Two, will there be any ongoing attempt on a quarterly basis to help us gauge what type of numbers are flowing through the quarterly numbers? Or do you anticipate just sustaining sort of the annual outlook on that number?

We have not decided. So we will, between now and the capital markets day, and then you will see it on that day. But we don't have a strong position on that right now, Gary.

Okay, thanks, I will wait and see.

[John Alexander].

Congratulations on a great Q4; certainly keep it up. Just one quick question. I wanted to know if you could comment on the possibilities for rollout of the vascular access centers. I know that there are 12 right now, plus San Antonio that is due to open relatively soon. Any plans for additional centers?

Yes, there are 19 centers open.

Yes, but we don't disclose numbers at that level of detail on our vascular business.

Okay. Thank you.

[Blake Goodner].

Kent, just one question. Kind of zoning in on the comments about the Gambro revenue operations, it sounds like you said that DaVita is just not really ready to take on the Gambro operations. So they are going to run in parallel for a little while.

Can you maybe just give us a little more color in terms of what is being done, and what background infrastructure you're putting in place, and the timing on that? Because it sounds like any meaningful working capital improvements on the Gambro side and whatever remains on the DaVita side might not happen until that occurs. So just a little color there, thanks.

I think probably the best way for me to respond is just to agree with your conclusion that any working capital improvements will be deferred, and spare you any detail on exactly what we're doing in that area. But you have drawn the right conclusion. I would not push back at all on that.

But just from a timing standpoint, do you have sort of a plan set as to when you are hoping to sort of stop running in parallel and put it all on one system?

I think I would rather discuss it at capital markets day. In aggregate, the overall IT plan is going to take a solid three years to roll out, since we're changing systems in 1,300 small locations, as well as billing offices etc., etc. So how we're going to sequence some of this stuff we have yet decided.

So we could say we are going to do something in the third and fourth quarter this year, and then move it to '07; and that would not be a negative, because we're flipping from '07 into '06, which is why we are reluctant to go into any detail right now.

But we will provide some more at the capital markets day. The overall IT integration plan will take three years, which is very similar to the IT plan we executed with Total Renal Care from 2000 through the end of 2002.

Great, sounds great. Thanks.

Andreas Dirnagl.

Actually just a quick question for Tom. Tom, you were talking about the, in effect, doubtful accounts expense; and how it is a blended rate between Gambro and DaVita. Then you talked about the fact that you're going to standardize that. Can we assume your going to standardize it to the way that DaVita has been doing it all of these years?

I think, Andreas, that we're going to work through what is the best of both policies, and we will let you know.

Okay, thanks.

Do you have a preference, Andreas?

No, I realize it is sort of the same number at the end of the day, by the time you get below that line. I'm just trying to be as accurate as I can when you're trying to model it out.

Yes, I think net between the two line items, whether it's net of revenue or bad debt expense, so net of expense, you're going to come out in the same place. So you can just pick your model terms and your net margin will end up being accurate.

Okay, thanks.

(OPERATOR INSTRUCTIONS) At this time, there are no further questions.

All right. Thank you all for your interest. We look forward to seeing a bunch of you on May 3, where we will try to do an excellent and thorough job in helping you understand the upsides and downsides with respect to your equity investment in DaVita. Thanks.

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