德維特 (DVA) 2012 Q1 法說會逐字稿

Good morning. My name is Laurel and I will be your conference operator today. At this time, I would like to welcome everyone to the DaVita Q1 2012 investors call. (Operator Instructions). Thank you. Mr. Jim Gustafson, you may begin your conference.

Thank you, Laurel, and welcome, everyone, to our first-quarter conference call. We appreciate your continued interest in our Company.

I am Jim Gustafson, Vice President of Investor Relations, and with me today are Kent Thiry, our CEO; Jim Hilger, our Interim CFO; and LeAnne Zumwalt, Group Vice President.

I'd like to start with our forward-looking disclosure statements. During this call, we may make forward-looking statements within the meaning of the federal securities law. All of these 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.

Our forward-looking statements are based on information currently available to us, and we do not intend and undertake no duty to update these statements for any reason.

Additionally, we'd like to remind you that during this call we will discuss some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our Form 8-K submitted to the SEC and available on our website. I'll now turn the call over to Kent Thiry, our Chief Executive Officer.

Thanks, Jim. Before I get going, I'd just point out I may be a bit more brief than usual. I'm under the weather. So that may be good news for some.

The first quarter was solid. It was solid clinically, it was solid operationally, it was solid financially. I'll cover two topics, clinical outcomes and our outlook, both specifically and more broadly.

On the clinical side, we will continue to present our clinical outcomes first because that is what comes first. We are a caregiver company now serving approximately 145,000 human beings each week.

First with respect to adequacy, which, as many of you know, is essentially how well we are doing at removing toxins from our patients' blood, this past quarter 97% of our hemodialysis patients had a Kt/V greater than 1.2.

Second, with respect to vascular access, 69% of our patients had fistulas, the preferred form of vascular access.

Third, with respect to phosphorus, 80% of our patients had phosphorus levels less than or equal to 5.5 milligrams per deciliter.

For these and virtually all other clinical measures, our patient outcomes compare very favorably to national averages. This quality clinical care not only results in healthier patients, but also drives reductions in hospitalizations and surgical procedures, and therefore significant savings to the U.S. healthcare system.

Next, our outlook. As many of you have heard, we are increasing our operating income guidance to a range of $1.23 billion at the bottom end to $1.31 billion at the top, and this range captures a majority of the probabilistic outcomes based on the swing factors that you're relatively familiar with and which you may ask questions about later in the call.

We periodically but regularly get asked, gee, your industry is awfully consolidated. What does that imply for growth in the core business? The fact is there is a reassuring answer. Even if one makes the entirely rational assumption that there can't be any more medium acquisitions by us or Fresenius because of the consolidation, so that's a very fair starting point, you still should consider the following.

A, basic demand, meaning increase in the number of treatments each year because of the increase in patients, 3.5% to 4%. De novos and other same-store growth, an additional 0.5 to 1.5%. Acquisitions, an additional one or two points above that. And then, financial leverage, which could come in the form of taking on additional debt and/or buying back stock. If you put all that together, and you end up in the 6% to 9.5% range of EPS growth without assuming any operating leverage, which we think over time is likely to happen and particularly will happen at the point that we become pessimistic about other sources of growth.

At this point, we've been feeling quite good and achieving quite a bit of growth in other spheres, and so it's been more appropriate to not achieve significant operating leverage in the fixed-cost line because we've been able to invest in superior alternative sources of growth. We hope that continues, whether it be internationally or through integrated care with a potential to do other U.S. healthcare verticals.

Thank you. I'll now turn the call over to our Interim CFO, Jim Hilger, who, as most of you know, has been with us as Controller and Chief Accounting Officer for almost a decade.

Thanks, Kent.

We experienced strong operating income and cash flow in the quarter. These were driven by strong treatment growth and improved revenue per treatment.

Here are some specifics on the quarter. Non-acquired growth was 5.3% when normalized for days of the week. The quarter did benefit slightly from milder-than-normal weather. Revenue per treatment was up about $4.00. The primary driver was the 2.1% annual market basket increase for Medicare rates.

Our commercial mix was down slightly from the fourth quarter, but it has been flat for four consecutive months. Dialysis patient care cost per treatment was up about $3.50 from the prior quarter. This was due to increased compensation expense, including seasonally-higher payroll taxes, and an increased unit cost for Epogen, due to lower rebates in our new contract with Amgen. Note that our EPO utilization was flat with the prior quarter, and based on conversations with physicians, we expect utilization to be at slightly higher levels going forward.

Our dialysis G&A per treatment was up about $2.00 from the prior quarter. This was primarily due to professional fees, including legal and compliance spending; IT projects; and spending on long-term growth initiatives.

International losses were $7 million in the quarter, flat when compared to the prior quarter. And losses in our other strategic initiatives were $11 million, which was $6 million more than the prior quarter. The main drivers for this increase were the timing of research projects at DaVita Clinical Research, increased investment in our direct primary care business, and seasonally-lower DaVita RX profits.

Looking ahead to the second quarter, it is likely that operating income will be flat to down sequentially. In particular, we anticipate pressure on dialysis patient care costs in a number of items, including increased pharma expense, increased wage and benefit costs, and increased travel costs due to our annual leadership meeting.

Now, turning to cash flow. Our operating cash flow was $332 million in the first quarter. We expect second-quarter operating cash flow will be lower due to the timing of cash taxes and our semiannual bond interest payments. We still anticipate full-year 2012 operating cash flow will be in the range of $950 million to $1.05 billion.

And finally, I want to point out that in order to comply with new accounting rules, in the first quarter we made a change to our presentation for bad debts relating to patient service revenues. Previously, we had reserved 3% of dialysis revenues for uncollectible accounts as an operating expense. We now are reflecting the 3% provision for bad debt as an offset in revenue. We have recast our prior quarters to reflect this new accounting presentation. And this change has no impact on our reported operating income.

With that, operator, let's go ahead and open it up for Q&A.

(Operator Instructions). Ben Andrew, William Blair.

Good morning. I wanted to just start by talking about integrated care briefly. There was a recent National Renal Administrators Association meeting where we had a chance to talk to some of the people from Medicare, and it sounds like they remain firmly committed to moving forward with the program. Has there been any progress in your perspective, Kent, with regards to the timing of the project or the potential scale?

Those are still, unfortunately, big question marks. And if we were to throw out an answer, it would count more as speculation and guessing, which is just not really, I think, that useful for you.

LeAnne, would you like to amend those words?

No, Kent.

Okay. Thinking through sort of the growth dynamics in the quarter, it sounds like most of the pieces were basically right on track with your targets. If you think about some of the moving pieces over the course of the year, where do you see perhaps making some larger investments, Kent? Would it be international as a primary target or domestic clinics, or is it sort of all of the above and to be seen and stay tuned?

Yes, unfortunately, I think in terms of a satisfactory answer, it's more the latter.

We continue to look at other segments of American healthcare where we think we can be on the right side of reform and driving some superior value propositions to patients and the taxpayer, but you never know when you're going to find something that strikes your capitalistic fancy in those areas as well as fitting the other strategic criteria.

Internationally, we're going to continue to grow, but it's not going to move the dial for you guys for quite some time, although we're excited. So I think it's same old, same old until we find the right thing to move aggressively on, and who knows when might come.

I would go back for one second because on the ICM question, the integrated care question, you asked a moment ago, despite the fact that we unfortunately have no basis for predicting, I just want to reiterate how bullish we are on the striking value proposition we think we can bring to patients and families on the quality side and to society on the reduced-cost side. So we are exceptionally bullish about that in the long term; we just don't know when the starting point is.

And I guess two quick follow-ups on that, Kent. Any idea when we might see more data from the demos?

And then, a quick question for Jim. You talked about commercial mix being down after four flat quarters. Can you give us a little bit more detail there? Thank you.

On the data on the demos, let's take that under consideration and see whether or not we should talk some more in the future about that.

We've typically been relatively sparse in our comments. And given we are collaborating with CMS, there are some restrictions on what we can share because the data is not just ours and often they would prefer to keep certain things quiet.

In addition, we continue to get better every single quarter, so we always kind of want to wait another quarter or two. So let us think about whether or not we should do more in the next call. That's a fair point. I'll turn it over to Jim.

Ben, your question on our commercial mix, so where these were at, our commercial mix was down quarter on quarter, but the last four months our commercial mix has been flat.

Oh, I misread that. Thank you.

Matt Borsch, Goldman Sachs.

Yes, could you just tell me about the -- your outlook on Medicare reimbursement as we go into next year? What type of calibration do you think we might expect, beyond obviously the budget sequestration that is already on the horizon?

Let me turn that over to LeAnne who is in a different location, so excuse any awkward telephonic handoffs, and then she may want to turn it back to somebody here, but Leanne is the best place to start.

Sure, two additional points beyond sequestration. One, we are, as you know, now scheduled to have an annual inflation adjustment to the bundled payment rate, and so we would continue to expect that to be probably in the 1.5% to 2% range, depending on the input factors.

And then, number two, I think there is concern about the deficit coming up in that many domestic programs, including healthcare, could be at risk. So no prediction there, but certainly something that we're working on and should be cautious about.

And just a point that you guys have made in the past, which is that there are significant components of the industry, the dialysis operators, who at the reimbursement today operate at pretty thin margins, implying there could be the risk of centers closing if reimbursement were squeezed. Is that -- can you give us any granularity on that and any information about how that may have changed over the last year or two?

Yes, the best source of information is really, or what people in DC look at, is really how MedPAC analyzes margins of the various healthcare sectors.

And you would see from their latest report that dialysis is operating at about a 2% margin, and that is before sequestration, compared to many of the other sectors who have higher margins. So I would direct to that. That is the best place for you to look for information that members of Congress might be looking at.

All right, thank you.

I would amend that answer in a couple of ways. First, there are a lot of centers that operate in a relatively precarious way because of the overall economics, and members of Congress and CMS are sensitive to that. So even if you look at their number, the 2%, and assume any kind of normal distribution of outcomes, that substantiates that assertion.

Second, their 2% margin is an incorrect calculation. Parts of it we think they actually know are incorrect, but they don't want to come out and admit that we actually, all of us, lose money on average in Medicare across the country as you look over time. And we now carry a whole lot of centers where we lose money that are non-de novos, just as part of being a good citizen, given we have healthy margins in other centers.

And so, what we refer to as somewhat of a reimbursement safety net, as long as we can operate more efficiently than small mom and pops, does in fact still exist. It's just difficult to quantify.

And can you point to what the main source of variation is between the MedPAC number and the way you think that it should be calculated more accurately?

There is a whole bunch of differences. It really cuts across significant parts of the cost structure, but I'll just give one example.

They put an arbitrary cap on the percentage of medical director compensation that applies to their calculation, which makes no sense given 90% of the patients and more than 90% of the medical directors' work is tied to Medicare and Medicaid patients.

Sure. Okay, thank you.

Kevin Fischbeck, Bank of America.

Thank you. Good morning. A quick clarification question, first. I just want to clarify that the normalized not-acquired treatment growth is adjusted for Leap Year as well. Is that correct?

Well, our NAG is not calculated based on the number of days in the quarter. It's on a per-day basis within the quarter, so essentially, yes. That is taken into account.

Good. I just wanted to make sure.

Okay, and then you said that you didn't see EPO rise in Q1, but you think that it's going to be increasing going forward, slightly. Why wouldn't it have increased in Q1 if it is going to be going up through the year?

I guess what it shows is that all we can do is listen to the consensus statements of our physician community, and sometimes they end up being wrong in predicting their own behavior, probably because in many instances they are answering our questions based on their prediction of what's going to be happening in their patient population over the subsequent couple of months based on what they did the last couple of weeks.

And so, if they're wrong in predicting exactly what the trends are in their near-term hemoglobin and hematocrit outcomes, then they may very well be wrong in telling us what they expect to see in changed dosages. So that's the most rational hypothesis for why we would have been a little off before, but nonetheless coming back with a similar prediction.

Okay, that makes sense. And then, I know that nothing has really been finalized yet, but at this point how do you think the integrated care demo is going to work?

I guess the original ones that you guys did a few years ago were more like a capitated product, but is this going to be similar to a capitated product or do you think it will be more similar to the ACO regs where your patients still have like a fee-for-service open network type access to other providers?

What I would say, and LeAnne would probably have more facts-based insight, that my hope is that we're far along the spectrum towards global capitation because that provides us with the greatest degree of operating flexibility and strategic flexibility, and we can really make some magic happen.

If, however, they opt for the more incremental shared-savings ACO-type approach, we ought to be able to put a lot of exciting improvements on the table as well and then use that as the fodder for moving further along the spectrum.

In either case, however, it's very important for us to emphasize that we think we can offer virtually a 100% open network, so that in our particular space, given how often we see the patient in an outpatient setting, some of the historical trade-offs around needing to start to close the network in order to achieve significant improvements don't exist.

And so, one of the reasons we should be one of the first scale pilots in new initiatives that they implement is because we offer this wonderful triangle of demonstrable and transparent clinical outcomes, saving money while retaining open networks.

Darren Lehrich, Deutsche Bank.

Thanks. Good morning, everybody. So I do have a question about G&A costs per treatment. Jim, I know you gave us, I guess, a few things that impacted that in the quarter. I guess just stepping back, would be curious to get some additional commentary on your view on G&A cost per treatment. We, I guess, had been tracking it the first half of 2011 at around $27 or $28 a treatment, and it's (technical difficulty) moved into the 30s at, call it, $32 a treatment range, and it adds up on 20 million-plus treatments a year.

So I guess the question is, what are you investing in there and can you help us just think about it a little bit more for the remainder of 2012 and going forward?

Darren, great question. We do believe that our G&A spend will be flat for the balance of the year, and into 2013 we would see G&A spend being flat to slightly up. We're hoping to get some leverage with it, but if we had to predict right now, that's what we would predict.

And so --

Darren, let me add that one of the things that's hurting us there is the increased spend on compliance and legal with private litigation and some of the investigations, and so, someday those are going to go away and there will be some nice pick-up there.

And if you could just help us think about, beyond compliance and legal, which may be there for many quarters to come, but is there any transient type of costs, DSI integration, anything that you could say about integrated care investment, whether that should shows up there or not, anything to help us really put it further into context because it is a fairly significant investment in G&A from how we're looking at it?

As we've said, we have a number of IT projects that we're currently investing in and we've also been investing in spending on a lot of long-term growth initiatives to hopefully drive future returns.

We have been spending a fair amount on the integration of DSI and we will continue to spend money on the integration of additional future acquisitions.

Okay (multiple speakers)

Darren, we're not trying to be difficult on this, but the fact is IT, integrated care, legal compliance, DSI, growth, that they're all kind of evenly weighted would suggest a level of analytical precision that is not reflected in my comments. But you've got four or five different chunks which add up to the hefty couple of dollars that has you appropriately uncomfortable.

Yes, no, I'm just trying to make sense of $40 million or $50 million of additional G&A in the dialysis segment, that's all.

My other question really is just more specific to the ancillary segment where I think you've moved some of the international investment. And if I heard you correctly, Jim, some of the loss there was related to the CRO business and the investment you're making in the primary-care business. But can you just talk more specifically about international and how that investment shows up in the segment results there?

Darren, our results for the quarter had a $7 million loss in international, and that was consistent with the prior quarter, and we expect that type of investment to continue for the balance of the year.

Okay, last question (multiple speakers)

(Multiple speakers). Darren, we do account for that outside of the dialysis segment. It's its own operated segment, so because it's not large enough to separately, really, support, it is recorded in our all other segment.

Okay, last question here. Just optimal leverage, you know, Jim stepping into the CFO role, are you or the team thinking any differently about what I think you've really characterized as your longer-term target leverage in the 3 to 3.5 range? Is that still the case? Are we underlevered at this point at 2.5?

We have not changed our long-term view of the appropriate levels of leverage for the Company in that 3 to 3.5 percent -- or 3 to 3.5 times range. You are correct. We are well below that range at the moment, but we're comfortable being below or being above for certain periods of time over the long term. But over the long term, we do expect to be within the 3 to 3.5 percent -- or 3 to 3.5 times range.

Gary Lieberman, Wells Fargo Securities.

Good morning. Thanks for taking the question. A number of post-acute providers have talked about their expectation that the Medicare rule making will just be final notices without receiving a proposed rule. Is that your expectation for dialysis or are you guys expecting to get to see the proposed rule also?

LeAnne, you're best to handle that.

Yes, we have no indication of any change, so we do expect to see a proposed rule that we'll be able to react to.

Okay, great. And then, for the first time there is an alternative ESA available for dialysis patients. Are you guys at all second-guessing the decision that you made to go into the long-term agreement with Amgen, or what are your thoughts there?

Boy, if we were, I don't know if we'd ever admit it. But with whatever credibility, I offer up the answer that we're not.

Our decision did include a likely scenario that there would be a competitive product, and some things have happened more quickly than anticipated. But if you recall, before they came out with their recent developments, we kind of ran through the gauntlet of the five or six filters that will ultimately determine whether or not we picked the right partner or not. And our partner always has the right to respond to any fundamental competitive steps taken by the other side.

So I could recast the filter perhaps, but we have not second-guessed it. What's happening now is not outside the range of scenarios that we contemplated. But once again, if it were not true, I don't know if we would admit it.

Okay. And then, I mean, just in terms of the filters, can you provide any more detail in terms of what some of the thought process was there?

Yes, I'll do it spontaneously, and then somebody can amend the mistakes I make, but filter one is, will another product come out, quality product? Filter two is, when will that be?

Filter three is, how will physicians respond when they are comparing it to the gold standard of longstanding duration? Fourth is, how will they price it? Fifth is for providers. How much of their purchase will they change, given what it might do to the pricing of the product they still buy from Amgen, the gold standard?

Number six is, what is the early data once you start using something more comprehensively in the real world, not in an artificial world? And then, seven, if a competitive product successfully clears all those hurdles with seriously differential (multiple speakers), what will our partner do to ensure that we don't want to go scurrying off big time in the other direction when the contract runs out?

That's a reasonable approximation of the filters.

And just on that last one, that's very helpful. In terms of what Amgen might do, I assume you're referring to any changes in price that they might have?

There's a lot of leverage to pull in a partnership like ours. That's certainly one of them, but not the only one.

Okay, great. And then, maybe my last question. It looks like the percent of patients with fistulas placed has remained fairly constant on a year-over-year basis. Should we think of that as sort of being the plateau of where it's going to go? Or do you think you can still drive that percentage meaningfully higher?

Number one, the percentage will go higher. I don't know how to calibrate meaningfully higher, so I'll stay away from that. But number two, a more important number has been moving down even while that number has plateaued, which is our capita rate has gone down.

The fistulas have gotten a lot more press just because of CMS's emphasis on them, but more leverage than increasing the fistula rate by a percent is reducing the catheter rate by a percent because you take someone off a catheter, they can go the fistula route or they can go the graft route. And while in many instances for many patients the fistula is superior to the graft, the graft is way superior to a catheter.

So our fistula -- our catheter rates continue to hit all-time lows every single quarter in the last four quarters during a period where the fistula rate has somewhat plateaued. And reducing catheter rates has an incredibly powerful correlation. It really goes beyond correlation -- cause and effect to reduced infection rate, reduced mortality, and improved effectiveness of dialysis, and if I didn't already say it, reduced hospital rates.

So it's incredibly clinically and economically powerful, and on that one we continue to get better every quarter.

Is there a number that you can share with us on that? On the catheter rates?

We haven't shared it publicly before. Why don't we talk about whether or not we start discussing it next quarter? We'll discuss that internally in between now and then.

Okay, great. Thanks for all the color.

Kevin Ellich, Piper Jaffray.

Good morning. Just a few quick questions here. Kent, I might have missed this, but what do you attribute the strong 5.3% normalized non-acquired treatment growth to? Is that patients getting more treatments per week or patients living longer now than previously?

No is the short answer. The primary driver of the improved non-acquired growth, and that is the question, right? What are the primary drivers of our increased in (multiple speakers)

Yes (multiple speakers)

The primary driver is we're getting more de novos done, and we're getting more same-store growth. And then, secondary from an analytical point of view would be the things that you cited, any growth from more frequent dialysis and any increases -- or decreases in mortality, increases in survivorship.

Now to some extent, depending on the time frame, the ranking of those four factors might differ this quarter versus the last six months versus the last 12 months, but it's a bit of a horse race across those four.

Okay, de novos was the first one. What was the second one? I'm sorry I missed that.

Just increased same-store growth.

Got it. Okay, that's helpful. Thank you. And then, just wondering (multiple speakers). Yes?

Let me add in one other point because they're furiously handing me notes. In this particular quarter, the warmer weather typically leads to fewer missed treatments, either because of people just missing a treatment or because of not going in the hospital. So for this particular quarter, you'd have to introduce that fifth variable into the mix.

Got it. And did you guys break that out, or if you normalized for the mild winter, what would same-store growth have been?

Yes, you can't normalize for that because it's impossible to come up with a metric that analytically codifies what is normal weather versus warmer. So I suppose somebody could if we allocated three astrophysicists to study it for a while, but we're not going to do that.

Okay, good use of time. And then, I was just wondering if you could -- is there any update on the status of the various government investigations?

There is really no developments. They're proceeding in the way that they normally proceed. We feel very good about the merits of our case in every single instance, but that, we hasten to add, does not mean that it might not be in your shareholders' best interest for us to settle in some cases. I repeat, however, on the merits of our cases we continue to feel very, very comfortable.

And I also, it appears, have to amend my smart-aleck comment about the three astrophysicists because it appears our finance department had three astrophysicists work on it and we do have a number. (Multiple speakers)

Okay.

This is Jim. It's between 20 and 30 basis points year over year because last year was an unusually cold and snowy winter and this year was unusually mild. So that year-over-year comparison is about 20 to 30 bps this quarter (multiple speakers)

Got it. Appreciate that. That's very interesting.

And then, just the last question and maybe I could shoot this over to LeAnne because I think she attended. But just wondering what your thoughts were on the home dialysis summit that was held in DC a few -- about a month ago or so. Do you think that's going to go anyplace or what -- I know you guys are big purveyors of both PD and home hemo, but just wondering what her thoughts were coming off of that meeting?

Go ahead, LeAnne.

Yes, that meeting was really to raise awareness about the [home dialysis], and as you mention DaVita is very much a leader in the industry in providing those to patients.

So creating awareness and options was a big part about what that meeting was, and we participated, as did most of the patient groups and manufacturers and providers, so we're really excited about insuring that patients have options.

Frank Morgan, RBC Capital.

Good morning. Two quick questions here. On the subject of increase in the EPO costs. I think one of the comments was EPO utilization going up, but also I think I heard pricing. I wanted to confirm that, that the pricing was higher because of lower rebates.

Frank, that is correct. We entered into a new agreement, a new contract with Amgen, and in that contract, as we publicly disclosed, some of our rebates are going down.

Okay, is there any -- and I guess that's costs went up year over year on a sequential basis, I guess if it -- sequentially, it would be reflecting the new contract, is that correct?

It would be the new contract and the transition from last year's pricing to this year's pricing.

Is there any other offset? I mean, obviously, lower rebates is not a good thing, but is there any other kind of offset here or is this pretty much -- this is the rate going forward?

This rate is generally reflective of the new pricing that we faced. We did have some transition from old pricing to new pricing in the quarter, and it will, of course, obviously is dependent upon utilization when you look at the total cost.

Okay, and it sounds like maybe the EPO utilization is going back up. So is it fair to say maybe the EPO cost is coming down a little bit incrementally?

No, you should not assume that, and right now we cannot tell you with certainty exactly what EPO pricing will be as the years unfold.

One other quick one here, on the flattening out of the commercial mix in the last several months. Do you have any early theories on that in terms of that actually developing into a trend or any reason why it could, at this point, just be a head fake? And I'll hop off. Thanks.

It is difficult to predict private mix. In general, if you look over 10 years, it tends to correspond in a very crude way to the healthy economy and employment.

However, as we all know, there's a lot of discontinuity showing up in macroeconomic data these days as we hover back and forth between recession and recovery and different things happen with respect to international economics.

So the fact that it has been flat, given there has been some flattening out of unemployment claims and some pickups in employment, flat versus down is not surprising. But exactly what happens depends so much on which sectors are growing or contracting and the confidence around growth or the flattening out of unemployment.

So, it's not surprising that it's flattened out given what's happened in America, and what happens in America will most likely continue to be the primary driver of which way it moves or doesn't move going forward. But we can't get any more precise than that. Is that responsive?

That's fine. Thank you.

Gary Taylor, Citigroup.

Good morning. Just a few questions. On the comments earlier about G&A being flat through 2012 and flat to up a little bit in 2013, was that on a dollar basis or percent of revenue basis?

That would be on a per-treatment basis.

So dollars per treatment.

Yes.

But it will fluctuate, hopefully within a narrow band.

And my other question is, is there any consideration of Sub-Q for EPO? I guess at one time, a few years ago, doctors were talking lots about targeting lower hemoglobin and using more iron and then eventually moving towards Sub-Q. We have seen a little bit of pickup with the small providers doing a little more Sub-Q. Is that something that you've completely ruled out or still unknown at this point?

We have not ruled it out or ruled it in. We've really followed the guidance of our physicians, and you can see how wrong a lot of the experts were who said that once the bundle went in there would be a wholesale move to Sub-Q.

These are the same people who said, oh, the reasons that Sub-Q wasn't used more before were economic, which is why, of course, they predicted with such certainty and such flair and drama that it was going to increase dramatically as soon as the bundle went in.

They were wrong in both counts. The clinical data around Sub-Q was unclear before, whether or not it led to sustained lower doses. You have the issue of patient preference, which tends to come down very soundly against Sub-Q, although you never know what changes there might be there with new technologies that make it less uncomfortable.

And then, you have the big clinical bogeyman of the occasional incidence, and I'm not going to get the right name, it's been too many years, of red blood aplasia or something like that, a very serious potential byproduct of Sub-Q, which in Europe X years ago led to some serious patient harm and made a lot of doctors uneasy about it.

And so, you put all that together, we don't know how many more physicians will start exploring it yet again and what the results will be, and our behaviors and actions will follow their decisions.

Got it. Last question. Ken, I heard your brief comments on the investigation update. I just wanted to ask specifically about Denver, only because on the last call you had mentioned that a few executives had been called to testify, I think, in front of that grand jury. Is that -- can you comment if that -- or if those testimonies have been completed, if that's still ongoing, is there still an active process happening in Denver?

They've done some and they're going to do some more.

(Operator Instructions). Chuck Ruff, Insight Investments.

Good morning. The $17 million operating loss for ancillary services, strategic initiatives, international, can you give us some idea of where we should expect that for the year?

Chuck, we would expect our international losses to stay in and around the results of the first quarter, and we would expect some improvement in our ancillary businesses over the course of the year.

Okay, so it won't be $17 million times four, about $68 million. Is $50 million a reasonable number for the year?

I don't think we're in a position to give a specific number, Chuck, but it should be less than four times $17 million.

And on the cash flow statement, there's a $7.1 million loss on disposal of assets. Is that loss in G&A or where is that on the income statement, and is it a recurring-type thing?

Let me get you an answer to that. I'll come back to that question in a minute.

Okay. And can you give us a feel for where we should expect CapEx to be for the year? And I don't know if you can put any kind of range on the acquisition use of cash for the year.

We don't typically give CapEx guidance, but we would expect our CapEx to be in line with -- well, maintenance CapEx to be in line with prior year.

Acquisition CapEx is somewhat driven by the opportunities that are presented to us, and at this point we really don't have the ability to give guidance on that figure.

Kevin Ellich, Piper Jaffray.

Hey, Kent, just one quick follow-up. You made a comment about DaVita Rx being seasonally lower this quarter, or at least the profit was. Just wondering why that is. Is there a lot of seasonality in that business or what drove the lower profitability this quarter?

I'll take a stab and other people will have to correct me if I'm wrong.

I think what we've found is that the first quarter with people having their co-pays and deductibles actually does influence their decision-making around adhering to the pharmaceutical prescriptions that their doctors have recommended. We have seen in DaVita Rx over the years how powerful microeconomic forces and incentives, in fact, are in determining what a lot of people with limited funds do on the pharmaceutical front.

I'm looking around the room now. Is that the right answer?

Yes, Kent, that's the primary driver.

Martin Brunninger, Nomura.

Hi, thanks. Good morning, guys, for taking my question. If you can just give us an update of what your plans are in international growth and expansion plans, and what you have achieved so far, thanks.

I will take a stab, and then you come back at me if it's unsatisfactory. We've been pleased and excited by what's happened so far, the fact that we are active in Germany, India, Saudi Arabia, and China, and also have a center in Singapore and a couple being built in Malaysia. So we are excited and encouraged by that.

We always hasten to remind ourselves, however, that we're new. We're going to make a lot of mistakes and hit a bunch of speed bumps. So, we are committed to continuing. We're going to get smarter, better, more efficient.

But at this point, there is such a wide range of potential outcomes as to exactly how many centers and what revenue and what operating contribution we're going to have at any given date and time ,that any alleged guidance that we would provide wouldn't really be very useful.

But could you maybe give us a broad sense of the strategy, whether you are pursuing a greenfield approach in various countries, or is there a difference in the geographies, whether you prefer a greenfield approach or an acquisition strategy? What do you think makes more sense mid- to long-term?

In almost all cases, we will do both acquisitions and de novos, and in many cases we'll be working with local partners to help facilitate our learning.

And with respect to Germany, what kind of market share do you think you can get to and what are the regulations there at the moment that give you the biggest pushbacks?

Yes, we just don't know since I think our market share right now is probably something like a 0.25%, and we've only been in the country a few months.

We're just -- you probably know more than we do about what to expect. We love the fact that it is such an open market in the sense there's a very, very little chain presence, as you know. But there's also a reason why the chain presence is so low compared to other countries, which is there have been a lot of obstacles, and we're hoping that we can prove with our outcomes and the way in which we collaborate with the government that some of those obstacles should be removed.

And then, there's an awful lot of open-field running opportunity in Germany over the next decade. So we're hoping to accelerate that change, but pretty impossible to predict at what rate that will happen.

Maybe the last question on European countries. I'm sure you've done a lot of research there. What's the typical profit margin on these dialysis clinics that you're looking at?

It varies so dramatically. I don't think there is such a thing as typical, not only across countries but within countries.

And for us, as important as the current margin is our assessment of the expected margins over the next 10 to 15 years, which creates even more variability in the forecast as you try to anticipate government reimbursement versus significant elements of the cost structure, including labor. So, I'm afraid there's no short way to answer that question because it varies across countries, within countries, and over time.

Thanks very much.

Thank you. Sorry we don't know more.

And I'd like to return to Chuck's question. Chuck, you'd asked about -- on our cash flow statement, our loss on disposal of assets of $7 million.

It's disposal of assets and other non-cash charges, and principally the answer to the question is -- it's the amortization of our deferred finance cost is the vast majority of that line item, and hopefully that is responsive to your question. If not, feel free to jump back in the queue and refine the question. Thank you.

(Operator Instructions). Matt Weight, Feltl and Company.

Thanks. Just quickly here, the sequential increase in patient care costs per treatment, about $3.50, was that predominantly due to the lower rebates or is that overstating it?

The patient care costs -- you know, there are a number of things -- a number of factors add to it, but in order of relevance, it's the compensation expense and higher payroll taxes would be the largest impact, and then increased costs for EPO.

Okay, thanks. And then, can you just say how much DSI integration costs were included in G&A this quarter?

It's about $5 million in the quarter.

Okay, and I think previously you thought that that integration would be complete by the second quarter. Is that still on track?

We're still on track with our integration plan.

Got it, okay, and just last question. When we start thinking about integrated care, is there any differences or challenges in how you would incorporate or manage a home dialysis patient versus in center?

Say that question again, please?

Within integrated care, are there any challenges or differences when you look at a home dialysis patient versus one that is in center? In center, I'm assuming, it's easier to monitor their weight, and then some just -- what other challenges there may be or differences?

Let me take a stab at it. There is a lot of differences in how you take care of a home patient versus in center, and it's because there is a lot of differences -- separate from patient preference, there's differences in which patients can do one of the two home modalities versus in-center modality, and then there's also the variable of which patients can and would prefer nocturnal.

And so, there are a bunch of differences. I don't know where to take it beyond that. Some things are easier about working with a home patient, some things are harder because you don't see them as often, and vice versa with the in-center.

The demonstration project, do you have home dialysis patients in that?

I'm not -- I presume so, I've always presumed so, and so I actually can't answer the question because I've never asked it, and maybe there is some bizarre fact that I'm not aware of where we don't have them in. I'm looking around the room. None of us knows, so presume the answer is yes, and if it's not, we'll get back to you.

Fair enough, thank you. That's all I had.

Thank you.

John Ransom, Raymond James.

Hi, some of the -- a couple of the private companies are particularly enthusiastic about the physician JV model. As you move forward, is it reasonable to expect five years from now you'll have more doctors under JV than you have now, and is that -- would that change be driven by your preference or just by the realities of the marketplace as people compete for your docs and new docs coming out of school?

If you're talking about joint ventures where both the physicians and we own -- we together own the equity in the dialysis center, is that what you're talking about?

Yes.

Yes. We already do more joint-venture dialysis centers with doctors than anyone else in America, by far. And that has been true for a long, long time.

We were leaders in that space. We think it's really good for the patient and the taxpayer, as well as for our shareholders, and we don't expect that to change going forward.

And has that percentage been increasing over the past five years?

The short answer is yes.

And have you ever disclosed what percent are JV versus medical director model?

We have at different times thrown numbers out, and we'll probably do it again at our next capital markets day.

So, I don't have the numbers at the tip of my fingers right now, but we'll disclose it, I would guess, at the next capital markets. For a reasonably up-to-date number, you could go to the transcripts for the last capital markets because, of course, in any given year it doesn't change that much.

Gary Taylor, Citigroup.

Alright, just coming back for one more. I just wanted to go to the seasonality of operating income this year.

You had made some comments about Q2 operating income probably being down sequentially, and you'd talked about a few different factors driving that. And I was just kind of looking back in my model as far as I can see, and I don't have a Q2 operating income number down sequentially. So is the biggest part of this that annual meeting is typically a Q1 event and this year it's a Q2 event? Is that the biggest factor or is there an extra treatment day or something? Could you give a little more color on your expectation there?

Our annual leadership conference has always occurred in the second quarter. We typically have fewer days in the first quarter. It's usually two days on average, sometimes three days on average than the rest of the year, and that is the principal reason why our first quarter typically is lower seasonally.

Of course, you also have payroll tax reset which occurs in the first quarter. This year, we have with our new -- with our expectations on utilization, our new EPO contract, and the leadership conference in the second quarter, we could be flat to down sequentially.

And the 2Q treatment days, do you know -- what will those be?

It will be more than -- I think it's one more day. People are shaking their heads here -- at least one more day in the quarter.

Got it. Okay, that's great. Thank you.

Let me go ahead and go back to the question raised by the previous questioner. In our 10-K, we reported 18% of dialysis revenues were generated from JV centers.

There are no further questions at this time. I turn the call back over to the presenters.

Alright, thank you all very much for your continued interest in our Company. We will work very hard between now and the next call to try to generate an attractive risk-adjusted short- and long-term return on your capital. Thank you.

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