使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
Good morning. My name is Theresa, and I will be your conference Operator today. At this time, I would like to welcome everyone to the DaVita fourth quarter 2006 Conference Call. [OPERATOR INSTRUCTIONS] Ms. Zumwalt, you may begin your conference.
- VP IR
Thank you, Theresa, and welcome, everyone, to our fourth quarter conference call. We appreciate your continued interest in our Company. I'm LeAnne Zumwalt. With me today is Kent Thiry, the CEO, and Mark Harrison, our CFO. I'm going to start with the forward-looking statement disclosures. 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 these risks and uncertainties , please refer to our SEC filings included in the most recent annual report on Form 10K 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 the underlying factors, new information, future events or other development. 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'll now turn the call over to Kent Thiry.
- CEO
Thank you, LeAnne, and good day to our shareholders and other interested parties. Our Q4 operating performance was rock solid. I will provide a review of the usual agenda items which are five. Number one is clinical results. Number two is the fourth quarter and '06 year-end results. Number three is the operating income outlook. Number four is the Gambro integration status and number five is the Philadelphia investigation. First, clinical results. We continue to present our clinical outcomes first because that is what comes first. We are first and foremost a caregiver Company with responsibility for over 100,000 human beings. I'm proud to report that for the sixth year in a year, DaVita and its affiliated positions have improved the clinical outcomes of our patients, so once again we can say we did better in '06 than we ever had before in our history.
I'll just quickly reference two important measures. First adequacy, which is essentially how well we're doing at removing toxins from our patient's blood. This quarter 93% of our patients had a KT/V greater than 1.2 and second, albumin, a key indicator for accessing mortality risk and nutritional status, 84% of our patients met or exceeded a standard of greater than or equal to 3.5 for both of these measures. Our patient outcomes compared very favorably to the rest of the nation. And these clinical numbers do relate to patients who have been with DaVita for 90 days or more. Second subject. What about the quarter and the '06 year-end from a financial point of view? We ended the year with solid operating momentum. Our operating income from continuing ops was 189 million, 189 for the quarter, and 701 million for the year. Operating cash flow was 519 million.
We exceeded all of our cash flow goals in '06, although '06 did benefit from some onetime factors. Even excluding those onetime factors, we were pleased with our operating cash flow performance in the year. Subject number three, the operating income outlook. We are raising our operating income guidance. Previous guidance, as many of you know, was for operating income to be in the range of 680 to 750. The new guidance moves both the bottom and top end of the range a bit. The new range is 700-760. The most important swing factors both in '07 and beyond '07 remain as they have been in recent years. Private rates, Medicare reimbursement, potential for an extension of the Medicare secondary payer provision, pharmaceutical trends, and billing and collection integration risks and opportunities, which lead us to question number four, how is the Gambro integration going? The short answer remains that it is on track and a whole bunch of it is done.
'07 is still a big year for us because the continued rollout of two of our major systems, billing and collecting and clinical documentation. A full five other clinical system implementations are done. These two are still very much in process. And they are difficult, expensive, and distracting to our center operations and to management. As of today, 800 of our 1,000 training centers are on the new clinical management/documentation software. We continue to predict that the entire project will take well into 2008 to complete, but then we will be blissfully done. And from an operating point of view, as you assess economic risk, most of that is in '07 more so than '08, even though there will still be work to be done. With respect to the Gambro corporate integrity agreement, we just completed our second year of the CIA and are pleased to report that it was another successful year. One important aspect of that process is the assessment of a financial error rate, an assessment by the independent review organization, the IRO. For our year two, our financial error rate was again well below the CIA required 5% threshold. In fact for the second year in a row, it was very close to a zero financial error rate.
The fifth subject that I'll cover is the Philadelphia/ Pennsylvania subpoena. We are literally thrilled, or were literally thrilled because we reported this a week or two ago, that the U.S. Attorney decided to close their investigation of DaVita without taking any action against the Company. This investigation started in early 2001, was very broad in scope, including review of our billing and other operating procedures, our financial relationships with physicians, our pharmaceutical practices and relationships. So we are very proud that after their thorough, six year review, they've closed it without any finds or any mandatory actions. We would also like to remind you that our early laboratory investigation, which also went on for four years, had the same favorable outcome, meaning no finds or penalties. We believe this highly differentiated set of outcomes is not a coincidence, but rather a product of our strong and relentless committment to regulatory compliance.
For both of these closed investigations, of course, the many many millions of of dollars we spent in outside attorneys and the many millions of dollars we spent in internal time and thousands of hours of leadership time will not ever be reimbursed. And we do, unfortunately, still have two remaining federal investigations, which we refer to as St. Louis and Brooklyn, which unfortunately, are likely to continue to consume the same kind of amounts of dollars and management time going forward as these other two did in the past. I'll now turn the call over to our Chief Financial Officer, Mark Harrison.
- CFO
Thanks, Kent. I'll begin by addressing a few key questions about our quarter results. Regarding the major drivers in the quarter, operating income results were primarily driven by improved revenue per treatment and strong treatment volumes. The revenue increase relates primarily to changes in intensity of physician prescribed pharmaceuticals. Non-acquired growth in the quarter was 5.5%. This quarter's non-acquired growth benefited by approximately 0.4% as a result of the Q4 2005 negative Katrina impact. Year-over-year growth was 4.4%, excluding the impact of Katrina, and we expect non-acquired growth to be in the 4% range in 2007. What about cash flow for 2007? First, cash flow in 2006 was exceptionally strong due in part to a one-time catch up on collections from old Gambro receivables as well as from the timing of certain working capital items, including accounts payable, accrued compensation and bonuses, and normal cash taxes. Excluding these items, operating cash flow would have been approximately 500 million in 2006.
We expect operating cash flow to be 440 to 510 million in 2007, which reflects our assumptions that certain working capital items may be a use of cash in 2007. The key component of 2007 cash flows are as follows -- Operating income in 2007, 700 to 760 million; operating cash flow in 2007, 440 to 510 million; free cash flow, defined as after maintenance capital, in 2007, 320 to 400 million; and growth capital in 2007, 200 to 220 million. The primary drivers of operating cash flow range for 2007 reflect -- number one, the $60 million operating income range; the inherent investment in working capital as the Company grows; an expectation that DSO could fluctuate approximately 2 to 3 days related to the billing system integration and collection performance, or about 30 to 45 million; and the likelihood that the relative timing and payment of AP and certain liabilities could fluctuate by 30 to 50 million. We would expect stock option exercises to generate approximately 75 million in 2007, leaving approximately 175 to 275 million available for debt repayment or additional growth activities.
Regarding our 2007 guidance, as you update your models, you should take into consideration the following items which will impact quarterly OI -- Q1 has lower treatment days than other quarters, 77 days in Q1; on April 1, 2007, the Medicare 1.6% increase will take effect; Q2, as in prior years, will include our national leadership meeting; and it is our current expectation that private rate compression will be weighted toward the later part of the year. G&A is expected to be in the range of 9.5% to 10%, finally. Our guidance ranges for 2007 incorporate key swing factors on a probabilistic basis and collectively they could cause us to be above or below our stated range. What about our capital structure? Debt payments for the year totaled 400 million. At year-end, total debt was 3.7 billion and our current leverage ratio is 3.66.
I am sure that many of you saw our announcements regarding our intent to refinance our credit facility and to issue an additional 400 million of 6.625 senior notes due in 2013. These transactions are expected to close on or about February 23 and the proceeds of senior note offering will be used to repay a portion of the outstanding credit facility. The objectives of these two transactions are to reduce interest expense, provide additional covenant flexibility and, to a minor extent, extend maturities. Following the transactions, approximately 80% of our debt will be at fixed rates. As a result of the transactions, we will be writing off a portion of our existing deferred financing costs. We will not be able to finally determine the exact amount until the closing of the current financing, however, the noncash write-off could be as much as 28 million and costs associated with the new financing will be several million. I will now turn the call back to Kent for closing remarks before we move on to Q&A.
- CEO
Just a couple quick thoughts. It was another in a string of rock solid quarters. We feel strategically, despite the fact that we face many challenges, we are very well positioned. And, as I've said before, the fundamental stability of both cash flows and demand in this business are and remain unusually attractive. Operator? Could you please turn it over to Q & A?
Operator
[OPERATOR INSTRUCTIONS] Your first question comes from the line of Gary Lieberman with Stanford Group.
- Analyst
Thanks, good morning.
- CFO
Good morning.
- Analyst
Question for you in terms of the strengthen in the revenue per treatment. If I heard correctly, I think you talked about, or at least mentioned, one of the drivers being an increase in the intensity of physician prescribed pharmaceuticals. Can you talk about that a little bit?
- CFO
The Q3 to Q4 increase was due in changes to intensity and physician prescribed pharmaceuticals. That intensity fluctuates normally in the business and that's the extent of our comment on that topic.
- Analyst
Okay. And can you give anymore color around it?
- CFO
No.
- CEO
I mean, do you have a more specific question? Perhaps we can be -- .
- Analyst
I guess, has something changed that it will change ongoing? I mean, or are doctors using more of one drug versus another drug that is less expensive? What's the change there?
- CFO
Yes, this is within the normal band of fluctuations, so to do any extrapolating would just be inappropriate and the normal fluctuations incorporated into our guidance.
- Analyst
Okay, and then the underlying trend, I guess, in terms of commercial pricing, was that materially different than it had been throughout the rest of '06?
- CFO
The trends in commercial pricing are reflected in our guidance on a probabilistic basis.
- CEO
And nothing dramatically different happened in Q4 versus other times.
- Analyst
Okay. And then just a quick follow-up. G & A was up to about 9.4% of revenue in the fourth quarter, which was higher than it was in the rest of the year, it sounds like, based on your guidance, you expect it to be in that range. Can you just give a little bit more color regarding the increase there?
- CFO
The Q3 to Q4 increase was primarily due to higher IT costs associated with our integration, as well as labor and professional fees. As we continue to move forward with the integration and as we continue to invest more in the clinical systems that support our patient care efforts, we expect G&A to be in the guidance range that we quoted earlier.
- Analyst
Okay, great. Thanks a lot.
Operator
Your next question comes from the line of Darren Lehrich with Deutsche Bank.
- Analyst
Hi, it's actually [Sadip Singh] calling in for Darren. A couple quick ones here. Just wondering kind of what DaVita's appetite is to evaluate international opportunities within the next two to four years and should we consider this a possible growth opportunity?
- CEO
We have taken a look at one or two, but with the acquisition integration going on, that was a big sort of shadow over the reflections. Going forward, we will look at the stuff much more seriously but don't know how we'll come out. So yes, it's a possibility but it would be wrong to say it was a likelihood. It's pretty much, at this point, a totally open question where we have interest but it depends on a bunch of stuff.
- Analyst
Okay, and just going back to the revenue per treatment. It looks like in the past, you guys have disclosed that excluding lab revenue and I think this quarter it includes it. Is there any way we can kind of -- you can reconcile for us sort of the last four quarters what that number looked like including lab and excluding?
- CFO
That information will be in our 10K when it's released.
- Analyst
Okay, perfect. And then just a final housekeeping question here. I think you've told us in the past that a cash balance of about 150 million is considered normalized but I think you ended up the year with 310 million. Should we be expecting any additional de-levering in the first half of '07 given the higher cash balance?
- CFO
First of all, our year-end cash balance is not unusually high and it's at a level what we consider to be a normal range for DaVita given the swings in working capital, etc. And we always -- we are always evaluating the use of those proceeds and de-levering is one of the options.
- Analyst
Okay, thanks very much.
- CFO
Thank you.
Operator
Your next question comes from the line of Matthew Ripperger with Citigroup.
- Analyst
Hi, thank you. Just a couple questions. The MSP extension has been something that's been on the table for a number of years. Is there anything that's changed in Washington that makes it more likely to be addressed this year as opposed to the previous one?
- CEO
Well, it's a tough one, because, of course, anyone's opinion can be different and you'll never know for sure who is right. The fact that the deficits are getting more intense and both the republicans and the democrats want to create a strong fiscal face to present to the public between now and the presidential election, incrementally increases the probability that the MSP will be extended. Having said that, I'm not trying to inspire any inflated confidence, but the question was about relative probabilities and the fact is in the current environment for the reason I stated, the probability is incrementally higher. An offset to that push upward of the probability is the fact that in general, there is some democrats who don't want more of the healthcare system to be in the private sector. On the other other hand, some other democrats would be more inclined to say go ahead and increase the employer burden for healthcare, so there's a bunch of puts and takes. The biggest factor is the first one I said, which is that both sides are trying to present a fiscally conservative face to the public to increase their chances of winning the Presidential election and that pushes us, pushes the probability slightly up.
- Analyst
Great. Thank you. The second question I had is just on Epogen, K/DOQI is revisiting the guidelines. Can you comment on what the timetable is for getting some clarity on that and secondly, if there is any kind of fundamental change, will that have any effect on the commercial part of your business?
- CEO
The answer to the first question is they're talking about coming out with a K/DOQI update in the next couple of months and we'll see if that, in fact, happens. Don't know, that's not a process that we're administering at all but that's what the they are trying to do and that's what they're saying. Second, anything they come out with, if it's materially different from what they've said in the past, our physician council and the entire physician community will take a real serious look at it. And if there are changes that we then decide for our protocol or our physicians decide to change in their own individual practices, that could lead to changes in Epo use. The private payer community can't really step in and start mandating the prescription behaviors on such a therapeutically important drug. If they try to do that independent of solid evidence based science, there will be quite the controversy. So I'm sure some private payers are looking at this because of all the hullabaloo in the press, but change will not be led by them but by changes in the perspective of the nephrology community.
- Analyst
Great. Thank you. And then the last question I had is looking at your allowances for doubtful accounts as a percent of gross receivables, over the last year or so that's increased pretty meaningfully. Has there been any change in your reserving methodology or is there anything fundamentally affecting that that we should consider?
- CFO
No. That's totally attributable to the fact that the bad debt experience at Gambro was higher.
Operator
Your next question comes from the line of Justin Lake with UBS.
- Analyst
Thank you. Just two questions here. First, on commercial pricing, you're talking about some potential for moderation there in the back half of the year. Can you give us anything more specific, such as contracts you might have entered into that are going to moderate your pricing in the back half of the year?
- CEO
No, Justin, I think it's pretty impossible to get anymore granular. We'll be renegotiating lots of contracts this year and obviously fighting as hard as we can and it's always so difficult to predict when they will be resolved because some of the negotiations go on for a year and which way they're going to come out. And there's always the issue of the immediate rate and the downstream rates and CPI definitions and other things, so we take a look at the whole portfolio. We make a weighted average prediction and off we go and there's nothing that's going on now that's any different qualitatively than what we've been talking about for awhile, as you know.
- Analyst
Maybe I could ask the question a different way then. Maybe you can just give us some color around what your typical contracting structure is right now with managed care and what you think you're going to be going to, both in regards to what you might have to, sounds like you're going to have to give up something now on the rates and what you think you'll get back over a multiple year period, whether that's inflationary, or just there's more visibility, less out of network, things like that?
- CEO
Yes. There's just no typical. In 2006, we got rate increases in a lot of places and we had rates stay the same in someplaces and we had rate decreases in someplaces. So we have some of all flavors. We had some contracts that are still just 90 day outs. We have a lot of those. We have other contracts that are multi-year with annual inflation updates. So I'm afraid it's quite -- it's sort of an even distribution with a lot of different data points and there's no clear trend. It would be nice if I could say it's trending this way, trending that way, this is clearly what happened in '06 and then it's going to extrapolate into '07, but it just doesn't work that way. It's a highly differentiated portfolio of big payers, little payers, etc. I mean, keep asking questions so we can be as useful as we can be, but the fact is, it's a highly varied portfolio.
- Analyst
Well, then, I'll take your advice, I'll just ask one more question on this and then -- can you just, what's going to be different about '07 than '06? If you're going into this expecting your rates to be lower than they were in '06 is it that because you are not get -- were your increases abnormally high or are you expecting -- it sounds like you're expecting to take some rate cuts or not get increases. I'm just wondering, what ar you -- I can't imagine you're just giving up on trying to get better pricing because your costs are increasing every year. What are you getting on the back end of that?
- CEO
Correct, we're not giving up, rest assured. So every year we look at all the contracts that are likely or definitely going to be renegotiated and try to predict how it's going to come out and incorporate that into our guidance. And so, if one year has lower revenue per treatment or equivalent revenue per treatment than the previous year and you hold all else constant, what that means is we're either losing more than we're winning or we're tying on average, although again in any given year, we have lots of victories and lots of defeats and it's the net number of course that matters to you. So the only thing that would be different is just our won loss record or the size of, the relative size of the victories or the defeats.
- Analyst
Okay, and just a quick question on uses of cash then. As you sit there and look at your managed care portfolio and if you are expecting to take some defeats or if there is some markets where you don't feel like you have as good a position as others, do you take that into account when you're -- looks like you're spending something like $220 million you're looking for in growth CapEx when you have a tremendous amount of debt on the balance sheet, is there ever a time when you sit down and think maybe you should be reinvesting less in the business and deleveraging more until you get some better visibility on what your managed care rates are going to look like given how important they are?
- CEO
We go through that all the time, absolutely. We have intense debates about the five year forecast and of course, theoretically we would think of it longer than that, but pragmatically it gets a little bit difficult at some point. But when we spend growth capital, it's with a maniacal focus on the expected cash on cash return.
- Analyst
So the fact that you're looking to spend what looks like as much growth capital as you've ever spent, that's a combination lead us to believe that you certainly see a lot more opportunity out there, despite all of the discussion around commercial reimbursement? Would that be a fair statement?
- CEO
Correct. We think when we invest capital, we're going to get a sustainable cash on cash return. So if we're in a world where historically we've gotten a return that's above sustainable, that is nicer than that, then returns could go down, but still be absolutely sustainable and attractive from a capital markets point of view. In addition, our ability to add value to the assets that we purchase is increasing and therefore holding rate constant. In some cases we might assume that we will gain differential volume at those lower returns on assets we acquire than we would have historically. Or a third category whereby purchasing a particular asset, we in fact effect our forecast of rates, of what rates will be accomplished as we can offer higher value and more geographic coverage to payers in that area. So those are three different paths to the same conclusion that despite the fact that we think margins are going to decline, there will be risk adjusted, sustainable cash on cash returns on incremental growth capital. Is that more responsive?
- Analyst
Are you going to just tell us what you think the sustainable returns in this business are?
- CEO
Well, first of all, we have got to give someone else a turn. So if you could hop out and let some other people throw some questions in just because it doesn't seem fair, but then, Justin come on back later on and ask the question?
- Analyst
That's fair. Thank you.
- CEO
Okay, but thanks a lot.
Operator
Your next question comes from the line of Belaji Gandhi with Oppenheimer.
- Analyst
Good morning. Just one question on CapEx. If I understand you correctly, you're basically guiding to maintenance CapEx of about a wide range of 40 to 190 million, is that right?
- VP IR
No, 110 to 120 million.
- Analyst
Okay, maybe I -- so just to be clear then, so operating cash flow of 440 to 510 and then free cash flow of 320 to 400?
- CFO
That's correct.
- Analyst
Okay. And then on minority interest, I mean, I've always thought about that as moving up and down with your operating income. Is that the wrong way to think about it because it looks like it's kind of diverging, at least this last quarter.
- CFO
Yes, minority interests are moving up because of growth in our JV's, the number of JV's we do, and also because of the improving financial performance of those JV's.
- Analyst
Right, so I guess -- but this most recent quarter, your operating income was up but your minority interest was down as a dollar amount sequentially.
- CFO
Just timing.
- VP IR
Yes, it was -- you should expect it to return to Q3 levels and move up from that, there was some onetime adjustments in the quarter.
- Analyst
Okay, great. Thank you.
Operator
Your next question comes from the line of John Ransom with Raymond James.
- Analyst
Hi. Good morning. Your debt to EBITDA is marching down pretty nicely and I assume with the new bank facility, will there be some flexibility vis-a-vis share repos and where are you in terms of your sustainable debt to EBITDA, where you might consider that? Thanks.
- CFO
We've discussed in the past that our sweet spot is 3 to 3.5 times+ and our track record is I think speaks for itself.
- Analyst
Okay, and then I guess my other question, and I'm sorry if I missed this, but absent inclusion of the lab, what's a good proxy for year-over-year growth in revenue per treatment and I was just curious about the rational for moving that metric this quarter. Changing it from one way of reporting to another.
- CFO
We don't comment on that.
- VP IR
On the revenue per treatment trend, we haven't guided on a specific increase. It's just baked into our overall operating income.
- Analyst
No, I'm talking about the actual reported number year-over-year. If you backed out the inclusion of the lab, can you give us a sense of what the growth in revenue per treatment was if you did not include the lab?
- VP IR
Yes, we can give you the items there.
- Analyst
That's what I was asking
- VP IR
Yes, there's several items in there which would have included the Medicare price increase at the beginning of '06, certain private or commercial price increases in that portfolio and changes in intensity, those were the primary drivers. Lab revenue throughout the year, I think is maybe what you're asking about, was relatively constant, didn't have a significant impact and like I said, we'll have the detailed numbers restated in our 10K so you can see the trends with dialysis and lab revenue put together.
- Analyst
Okay. And finally, I guess maybe Kent can speak to this. The Nextstage deal, could you just talk about the rational for the structure of that deal versus a typical sort of vendor-customer type relationship and then what's your outlook is for dialysis at home, thanks. I'll stop there.
- CEO
Sure, but first I just want to make sure that you're getting a clear answer to the prior question, that very little of the increase in revenue per treatment was due to changes in lab revenue. So just you have that takeaway and then LeAnne listed the primary drivers of the change in revenue per treatment, but very little was due to the lab. On to Nextstage. We decided to do it the way we did because it's a new technology and a new therapy and we did not want to make a committment to have to buy a particular number of machines. At the same time, we wanted to enter into a collaborative working relationship and therefore, decided to make the equity investment instead. And the equity investment, we assume from the way the discussions went, was something that they regarded as quite valuable and in exchange for it and still having the freedom of only buying the number of machines that our physicians and patients want, we were able to get some things that we liked, in terms of pricing and other deal features, so is that responsive? Evidently not or it was so persuasive that you're stunned. So, Operator, can we go on to the next question and we can come back to the gentleman?
Operator
Your next question comes from the line of Bill Bonello with Wachovia.
- Analyst
Hi, a couple of questions. One just on this whole contracting situation again. It seems to me that maybe some of the large commercial payers are becoming a lot more sophisticated in their contracting strategies and that the old axiom that all contracting is local and has to do with local market power may not necessarily apply as much going forward. Is that consistent with some of your thinking on the pricing going forward?
- CEO
That's exactly correct, Bill. One of the lines we've written in our SEC documents for some time is that payer consolidation is leading to increased margin pressure. The world doesn't change overnight, but you do have more payers acting in a unified way across a broader geographic area than the past.
- Analyst
Okay, and then secondly, on the growth CapEx, should we assume that that's mostly focused on hemodialysis or might it be more focused on some of the new ventures like home dialysis or vascular access or disease management or something else?
- CEO
The former. In other words, it's primarily focused on our current vanilla incenter hemodialysis business.
- Analyst
Okay, and then just the last question, if I can. The non-acquired treatment growth continues to be above 5%. Any thoughts on why that growth is so high and then I guess why you wouldn't see that level of growth as sustainable?
- CEO
Yes. The reason it's high is things have gone really well in that area for awhile. We did a very good job on de novos, we've done a very nice job in working with some of our old centers in same-store growth and the reason that we don't think it will stay that high is because we're not persuaded that we're sustainably that good. In addition we're running into a lot of delays in getting de novos certified because of just staffing shortages and other bureaucratic obstacles in many, many states. And please do remember that the year-over-year number was 4.4 Katrina adjusted. I wouldn't jump too much up and down about a single quarter number.
- Analyst
Okay, thanks.
- CEO
Thanks, Bill.
Operator
Your next question comes from the line of Gary Taylor with Banc of America.
- Analyst
Hi, good morning. I just had two questions. Can you remind us now that you're bringing your internal lab revenue up into your revenue per treatment, what that other 27 million is? Is that primarily lab services provided to external?
- VP IR
It's a combination of things. It's management fees. It's the DaVita clinical research. It's the vascular access business. It's all that small other items that we've talked about before.
- Analyst
Okay. And just going back to the Nextstage question and I was stunned by the answer, no, just kidding.
- VP IR
[LAUGHTER].
- Analyst
You have talked a little bit about, Kent, before about kind of the growing body of clinical research, talking about the benefits of more frequent dialysis and maybe that's not new, it's just becoming a little louder. And I think we probably all understand some of the difficulties, perhaps, in getting private and public payers to acknowledge that and pay for it . So as you've made this small, incremental move here, is it saying anything broader, sort of longer term of where you think that's headed or did you just believe this was a great piece of equipment and it's very beneficial to a small subset of your commercial population and that's why you made the investment?
- CEO
All right, Gary, let me take the best cut I can at it, because we, perhaps it's important to state unequivalently, we're a service Company, not a product Company. We're not a manufacturer, we're not good at that stuff, we're not even good at thinking about it, and the only reason we made an equity investment was because it was more prudent given the questions around therapy than committing to buy a whole bunch of machines. At the same time, we do think there's going to be more patients on home hemodialysis a year from now than there are today, and we wanted to have a good relationship with Nextstage as well as a good relationship with FMC with respect to the products that serve that area. So is that helping?
- Analyst
I guess the question is more how fast do you see that growing and do you see the commercial side of the equation being receptive somewhat to that or still primarily a barrier?
- CEO
Yes, and the question of how fast will it grow, that's kind of the $20 million question, isn't it? And if we knew the answer to that, we would have instead committed to buy machines, which we're used to doing, instead the uncertainty meant that the working relationship got solidified through putting money in this other way, which is to say through an equity investment. And clearly we wouldn't have done that if we thought this therapy was going to go away. But both Nextstage and FMC and others think that the segment is here to stay. It's just a question of how big and how fast and we don't think we're particularly good at answering that and in fact we think anyone who says they are good at answering it should be, well let's just say that their bullishness might extend beyond the data. We think this segment will grow, that's why we did what we did.
And we think Nextstage has a nice piece of equipment and is a good Company, we're looking forward to working with them. But we simply do not have anything that we think is particularly impressively insightful to say about the rate of growth. It's just too many unanswered questions right now and again, anyone who indicates a lot more certainty, you just have to worry about what they're basing it on.
- Analyst
Certainly not the last ten years or 20 years of growth there, so -- .
- CEO
Had this technology used different from this stuff in the past and we got a couple of high quality companies doing some high quality stuff, so I want to go back to my very first statement. There's going to be more patients on home hemo, but boy, trying to put a number on that and tie it to a particular calendar year is just not a place where we're comfortable to go because we're too worried that we'll be wrong.
- Analyst
Okay, fair enough. Thanks.
Operator
Your next question comes from the line of Paul Li with Brown Advisory.
- Analyst
Hi. I just want to follow-up on the home hemodialysis question. What is the economics of the treatment done in home versus done in the centers? Is it different from profit margin or return capital perspectives?
- CEO
There's no simple answer to that question, unfortunately. It's highly driven by what piece of equipment, number of treatments per week, co-morbidities of the patient, local scale, blah blah blah blah, what the FI does in terms of reimbursement. So we've got a very complicated grid with about 30 different cells on it so it ranges from economics being much better to them being the same to them being much worse, depending on those inputs. So unfortunately, there's no way we can give you an answer right now that's going to help you at all.
- Analyst
To put it another way, for example, what's your assessment of the patient pool right now that can be done in home settings that are not done? I mean, are you, given the agreement now, are you going to maybe do more, make more efforts in terms of capture that market in that segment? I mean, just maybe having more patients done in the home?
- CEO
Well first I do want to welcome all the Nextstage shareholders to our --
- Analyst
No, no, actually -- And it's very very legitimate. I'm just trying to understand whether this is going to increase the productivity of your business. That's what I'm trying to get at.
- CEO
Yes. I appreciate that. It's now about 0.001% of our patients and it could grow a lot and be up to 1 or 1.5% of our patients. So with respect to your question about if this is going to dramatically change the productivity of our business, the answer is no. With respect to whether or not our arrangement with Nextstage means that we're going to be probably growing faster in this segment then we would have otherwise, I think the answer to that is an ambiguously, yes, because we're going to work together quite coherently, so we'll be doing more with Nextstage than we would have otherwise and might very well be doing more with FMC and their product in this offering than we would have otherwise, so I think it will grow at a faster clip than it would have otherwise.
- Analyst
Okay, great. Thank you very much.
- CEO
Okay, thank you.
Operator
Your next question comes from the line of Justin Boisseau with Gates Capital Management.
- Analyst
De novos were a little bit higher than we expected in '06, what do you expect them to be in '07 and secondly what do you expect the new term loan interest rate to be?
- CFO
Justin, could you repeat the question? We didn't hear the front end of it.
- Analyst
The de novos were a little higher in '06 than we expected and was wondering how many you expect in '07 and secondly, what you expect the new term loan rate to be.
- CFO
We expect approximately the same number of de novos. That's provided that the certification issues don't affect us negatively, as Kent alluded to those earlier, and then our hope is that on the credit facility that we will achieve a LIBOR plus 150 rate.
- Analyst
Okay, great. Thank you.
Operator
Your next question comes from the line of Andreas Dirnagl from JPMorgan.
- Analyst
Good afternoon, Kent. I'm just -- you offered so I'm going to try to keep beating this horse that is commercial pricing. The question basically is, let me just figure out what I'm thinking of this correctly. Are you saying that by back end loading your assumption for decreases in commercial pricing in '07, that's based on your expectation at this point, it's not based on any actual contracts you've signed to date ?
- CEO
Correct. We have not signed a contract where a sort of discontinuity reduction is locked and loaded for the third or fourth quarter. That is correct.
- Analyst
Okay, therefore, how do I kind of reconcile the idea then that you talk about having all of these different contracts and its a blend of all different types of contract and I assume that their renegotiation period sort of extend throughout the year. If that's the case, why back end load it?
- CEO
Just because a lot of the negotiations are under way and so we have some visibility into when they might end and what they might look like.
- Analyst
Okay, and just two more brief ones then. The first of which is I just want to again confirm sort of what LeAnne was saying in terms of revenue per treatment. LeAnne, you were talking about that a part of the increase was due to pricing outside of the 1.6% increase. So for '06, in general, you saw pricing increase on your commercial pay?
- VP IR
Well, again, as Kent said, there's certain contracts where we got price increases and there's certain contracts where we saw decreases. So on an aggregate portfolio basis, yes, the private revenue was up.
- Analyst
Okay, and then finally, Kent, just in response to Bill's question, talking about some of the payer consolidation, I found it interesting that you said that that's now something that you worry about because I recall asking you about 12 or 18 months ago sort of how pricing is effected in the various markets and at that time you said it makes absolutely no sense for DaVita, and for that matter any other provider, to sort of take a price in one market in order to get a certain price in another market and I'm trying to figure out whether some things changed there.
- CEO
Well let's step through this to make sure I understand what I said or what you think I said back then. What I've consistently said is that we're in a low fixed cost, almost pure variable cost business with a fair amount of short-term stickiness in terms of referral flows, and therefore, any provider, service provider who thinks that they can move market share in some advantageous way through offering unusual price discounts is almost certainly wrong. That's just the path towards competitors matching price share not moving and potentially patients being at risk. So that's typically been my little paragraph. So, Andreas, come back at me again and tell me where I'm confusing you.
- Analyst
Yes, I'm just trying to figure out, historically what we've always said about the dialysis industry is that much of the strength negotiating power of the provider, vis-a-vis the payers, is based on local market dominance and therefore, it doesn't make sense, even if a payer is sort of " National", to contract on a national level, you're going to contract on a local level and I want to make sure that dynamic isn't changing.
- CEO
Yes, okay, thanks a lot. I would say, and we have talked about this explicitly in our capital markets, that there is a slow but sure movement towards broader geographic areas. So if we go back ten years, Andreas, 95% of contracting was almost city based. And then it changed to where there's more multiple city and then it changed to where there's more state based and now you have some people who are doing it across three states together, that they've consolidated their management infrastructure. And so there has been and will continue to be in all areas of American healthcare a continued trend towards broader geographic areas being managed by one contracting group.
Now, in some cases, even when they change the management umbrella, they are still going to do local contracting. But you are going to get in situations, and we have, where three years ago, we would have had three different contracts for three different states and now we have one contract across the three states, typically with exactly the same rate. Now, that doesn't mean that we come out with a lower number than if we had the three different ones, so it doesn't necessarily correlate to compression in and of itself, although I would guess that over time, there probably would be some correlation but administratively and from a business management point of view, there is a steady, and this has gone on now for a decade, a steady and I would submit continuous trend towards these bigger geographic areas of contracting. Was that reasonably clear, Andrea?
- Analyst
Yes, Kent, thank you, we actually dropped out for a minute. This is Dawn, thank you.
- CEO
And feel free to come back at it again here if you want to put some more color on it.
Operator
Your next question comes from the line of Mark Arnold with Piper Jaffray.
- Analyst
Most of my questions have been answered. I just wanted to follow-up on the debt financing. Given the amount of your secured debt that's already fixed with swaps, is the interest expense savings, if you get to LIBOR plus 150, is that really that material for 2007?
- CFO
Yes, yes, it is. It is material.
- Analyst
Okay, and in terms of the amount of debt that would actually benefit from that interest rate savings, given that you're going to pay down, maybe I could just walk through the numbers so you're looking at currently about -- approximately 2.4 billion in secured debt, which should be reduced by the bond offering proceeds. Your swaps, I think you have about 1.6 billion in swaps in place, so we're looking at about 400 million there, that's truly floating. Is that the right way of looking at it?
- CFO
Yes. First of all the swaps are at LIBOR and we're pricing to the spread above LIBOR.
- Analyst
Okay.
- CFO
So that benefits us.
- Analyst
Okay.
- CFO
I can just tell you that if we achieve our objectives, that we will say that our interest rate savings on an annual basis will be approximately $8 to $10 million.
- Analyst
Great. Thank you.
- CFO
From the total package.
- Analyst
Great. Thank you very much.
- CFO
Sure.
Operator
Your next question comes from the line of Maryann Hennessey with Credit Suisse.
- Analyst
Hi, yes, just sticking with the credit facility. You had said in your comments that you were looking for some covenant flexibility and I wondered if you could be more specific in what exactly you're looking to relax?
- CFO
No, we can't be more specific about that at this point.
- Analyst
Okay. We'll look for it later. Thanks.
- CFO
Sure.
Operator
Your next question comes from the line of John Ransom with Raymond James.
- Analyst
Just for the record I wasn't stunned. Your Operator muted my line which is probably the best decision.
- CEO
[LAUGHTER].
- VP IR
I'm going to have to remember that trick.
- Analyst
[LAUGHTER]. So my last question before I was so rudely muted, obviously, you were about $70 million above your guidance this year, when we look at your operating income versus what you said. Kind of taking down in order one, two, three, what happened this year that was better than you thought and my other question was, you were doing about 21% margins before you bought Gambro. I know you probably will resist this question, but is there a structural reason that would prevent you from at least getting within the neighborhood of those old margins at some point? Thanks.
- CEO
Yes, on the second one, John, and if you want to you can mute me half way through.
- Analyst
[LAUGHTER] I would never do that.
- CEO
On the second one, what we said when we bought Gambro is that our margins were not sustainable and their's were improvable and so we were going to meet somewhere in the middle and there's a lot of upside if we could meet closer to ours than theirs and make them more sustainable at that level at the same time. And so far, after 18 months, the economics of the combination have been a bit better than we expected. And so the margin improvement thing has worked. And then on your first question, which was, gee, you've ended up doing better than your original guidance in '06. What were the primary drivers of that. Was that the first question?
- Analyst
Yes, sir.
- CEO
Yes. I think the number one driver was we did better on private rates than we expected and, as LeAnne pointed out, they were up year-over-year. And the number two driver would probably be the volume increase was more than we expected.
- Analyst
Okay. And then I promise lastly, I lied, this is lastly. If we annualize your fourth quarter operating income, we kind of get to a 750 millionish number and again, that's closer to the top-end of your range than the middle of your range and I assume there will be growth, etc, from there. Other than the IT rollout next year, is there anything from a cost standpoint that's going to be different in '07 that was not in place in the fourth quarter of '06 and your annual meeting, of course?
- CEO
John, I apologize but could you ask that again to make sure I don't screw up the answer?
- Analyst
If we annualized your operating income from the fourth quarter, we get a number around $750 million. So if we look at that, that's close to the top-end of your entire 2007 operating income guidance, it's close to 760, and so assuming there will be some growth from that annualized number, what's going to happen in '07 from a cost standpoint or an earnings standpoint that's different than what we would have seen in the fourth quarter of '06? Thanks.
- CFO
Yes. Again, our guidance is based on a probabilistic assessment of the key swing factors that affect operating income. And one of those factors is payer compression, that's in there. There are factors around increases in compensation costs and supply costs and so all I can tell you is that our guidance incorporates our best assessment of all those factors.
- CEO
And just to clarify the facts, well, go ahead. Is that enough, John, rather than -- ?
- Analyst
Yes. I'm open to additional clarification because it sounded interesting but yes, that's fine.
- CEO
Okay. Operator, is there another question?
Operator
There are no further questions at this time.
- CEO
Let me just clarify one thing for anyone who is left and John, if you're still on, that you mentioned that we did $70 million better than our guidance in '06. I just want to make sure that people are clear on the facts that it was in February of '07 we provided guidance of an OI of 630 -- February of '06, excuse me, we provided an update to our guidance and we made it 630 to 700. And so in fact, we came in basically right within our guidance, just at the very high end of the range. And that February guidance was an update to the guidance from three months earlier which had been a tad lower. So, just so we get the facts right that from February on, it was not 70 million above the guidance, it was at the high end of the actual guidance, just so everybody has the facts. And thank you, very much, for your interest and we'll look forward to talking to you again in a few months, and also at our Capital Markets Day in New York. Thank you.
Operator
This concludes today's conference. You may now disconnect.